PriceSmart Inc (PSMT) 2003 Q3 法說會逐字稿

Welcome to the PriceSmart third-quarter audio presentation. On the line we have Mr. Robert Price and Mr. Allan Youngberg. Gentlemen, you may begin.

Welcome. Robert Price, the Company's Chairman, interim CEO and President, will join me in presenting the results of operations for the third quarter of fiscal 2003 (technical difficulty) 31, 2003 and recent significant events. We will also respond to questions submitted at the end of this presentation. Before we begin I'd like to remind listeners that this presentation contains statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties. I encourage you to review the factors that may affect future performance in our 10-Q, recently filed with the SEC, for additional information concerning risk factors that could cause differences from our actual performance stated today. I would now like to turn the presentation over to Robert Price.

Hello, everyone. It has been almost four months (technical difficulty) appointed interim CEO of PriceSmart. These past few months have given me an opportunity to become better acquainted with our employees, to more fully understand the challenges and opportunities that we have, and to gain more insight into PriceSmart's financial operating characteristics. First, regarding personnel, our company is fortunate to have many highly skilled and extremely dedicated employees. That being said, we have identified certain people needs. Regarding the CEO, my position as interim CEO should not (technical difficulty). Even though the Company has not established a formal search, there are informal efforts taking place to identify potential candidates. Also we feel there is a need to strengthen our financial and U.S. merchandise (technical difficulty). Second, results from the third-quarter clearly point out that we have major challenges in PriceSmart location performance.

The Dominican Republic alone was $1.4 million on the bottom line this year's third quarter versus last year's third quarter. Much of this decline is attributable to currency issues and the DR economy. The Philippines is another market where PriceSmart's sales have declined significantly versus the year ago. For the past few weeks we have been unable to ship U.S. products to the Philippines because of financial problems involving our local importers. Management is directing a great deal of effort to solving the import problem and to addressing the overall need to improve performance in the Philippines. In Central America sales are trending slightly below a year ago in all markets. The operations and buying teams have spent a lot of time in Central America upgrading operations, sharpening prices, and bringing in more U.S. products. Costa Rica is receiving special attention, including a planned remarketing campaign of PriceSmart beginning August 1.

We hope that by concentrating on the basics, pricing and product selection, sales will improve over time. The Caribbean market is the one area where the company is actually realizing positive comparative sales. We believe sales are a result of stronger location management and lower prices. Sales in Mexico continue to be flat. Egante (ph), our Mexico partner (technical difficulty), have recently developed a number of initiatives to more fully leverage the merchandising resources of our two companies with the expectation of improved better product selection. It remains to be seen whether this effort will result in sales improvements. Another challenge that has been identified is a decline in same location membership (technical difficulty ). This decline (technical difficulty) but nevertheless the issue has our attention.

Also as related to membership, we have recently raised annual membership fees in markets where the fees have been too low. During the third-quarter PriceSmart location expenses increased significantly compared to a year earlier. The good news is that payroll (technical difficulty) are improving. The major increases occurred in utilities, supplies, repairs and bad debt expense. The best opportunity for improvement is reducing merchant credit card charges which average 2 percent of sales for major credit cards. Our goal is to transfer as much business (technical difficulty) to PriceSmart's co-branded credit card (technical difficulty) and merchant fees.

As previously reported, PriceSmart has closed locations in Santo Domingo and Manila. We continue to evaluate a few more locations for possible closings. For the two locations which have been closed, we have already started to market these sites for either sale or lease. Successful disposal of these sites would be a very positive contribution to PriceSmart's financial results. Concerning PriceSmart's balance sheet and cash flow, as previously announced, my family and some related trusts and a foundation recently invested $22 million in PriceSmart. We did this because the Company's cash position was low. It is important that PriceSmart management has the ability to operate the business in the right way in terms of people, merchandise and (technical difficulty). Some of these funds are needed for working capital (technical difficulty) and the balance will be used to reduce short-term borrowings or invested in short-term liquid instruments.

The new PriceSmart in Managua, Nicaragua will open on Friday, July 25. Membership signings have been excellent and people are very excited about the new PriceSmart. Also another location in Manila is on track to open in the fall of 2003. Because my family and I own a significant amount of PriceSmart stock, we understand that other stockholders are concerned about the Company's current financial performance and the price of the stock. I believe that the best and really only prudent way to increase the price of the stock is through better management of the Company's business. On behalf of all PriceSmart employees, please be assured that we are working diligently to that end. Now it is my pleasure to turn the presentation back to Allan.

Hello and thanks for listening. The information that I am presenting compares the third quarter of fiscal 2003 to the third quarter of fiscal 2002. The net loss to common shareholders in the third-quarter was 7.8 million or $1.14 per share compared to a profit of 956,000 or (technical difficulty) impacted by lower warehouse sales, aggressive pricing markdowns, increased operating costs, significant devaluation in the Dominican Republic, and other charges totaling 4.3 million that I will discuss in a minute. Sales from our 28 warehouses in operation in the third-quarter totaled 163.8 million. Including 15.2 million in phonecard sales (technical difficulty) in our Philippines operation that were discontinued in May. Excluding these phonecard sales in the current quarter, sales actually decreased 4.9 percent compared to sales (technical difficulty) warehouses in operation in the prior year third-quarter.

Sales were negatively impacted in the third-quarter by .7 million from the currency devaluations in the Dominican Republic and general weakness in sales in our Central America and Philippines (technical difficulty) as a result of many factors including merchandise out of stock, improved selection of the right U.S. merchandise, and general continued weakness in the economies in which these warehouses are located. In additional items negatively (technical difficulty) is an increase in loss from our unconsolidated Mexico operations to a loss of (technical difficulty) 13 cents per share compared to a profit of 83,000 primarily from interest income as operations have not (inaudible). Comparable warehouse sales declined 9.9 percent in the third-quarter after removing the Philippine phonecard sales, and declined 5.3 percent for the year excluding these phonecard sales.

Warehouse gross margins declined to 10.8 percent from 14.6 percent were negatively impacted by (technical difficulty) Charge of 2 million related to an inventory write-down to clear out slow-moving merchandise, aggressive pricing markdowns, and by the low margin phonecard sales in the current quarter that did not exist (technical difficulty) Membership revenues declined 290,000 to 1.3 percent from 1.5 percent of warehouse sales, consistent with a full year trend reflecting a lower renewal rate of 63 percent to a plan of 80 percent and lower average fees at $18 (technical difficulty) We believe that lower prices, reduced out of stock, continued emphasis on value such as the (indiscernible) program, and providing more U.S. items at better prices will increase the value to our members. As such we recently increased our average members (technical difficulty) market to an average of $23 from the current average of 18. Total membership accounts increased to 465,000 from 460,000 at the end of the third-quarter last year.

Effective this quarter we've reclassified vendor rebates (technical difficulty) presented in cost of goods sold and also (technical difficulty) of the adoption of the emerging issues task force issue number 1202-16 titled Accounting By a Customer for Certain Considerations Received By a Vendor. This results in a reclassification of 246,000 in the current quarter and 808,000 in the prior year third-quarter from other income to a reduction to cost of goods sold. Warehouse expenses were 12 percent of warehouse sales compared to 12.1 percent or an increase of 1.8 million. The increase was a result of two new warehouses of 1.3 million and a $500,000 increase in operating expenses on existing warehouses. General and administrative expenses (technical difficulty) 73,000, primarily from a charge of 350,000 related to a short-term (technical difficulty) penalty on the Company's foreign property insurance program that was canceled April 21, 2003, in favor of a new policy with better coverage and lower deductibles.

This new policy (technical difficulty) premium savings of 1.2 million over the old policy. Severance cost of 1.2 million related to the Company's former CEO and Executive Vice President of Operations and Senior Vice President of Marketing who all departed in the third-quarter. An $833,000 stock option to repricing charges reported separately is an operating expense related to the Company's previously announced repricing of all existing employee options with the weighted average of $36.19 (technical difficulty) price. Depreciation and amortization expense included in warehouse and general administrative expenses were 3.8 million compared to 3.2 million. Minority interest add back or share of losses were 838,000 compared to 119,000 in those countries where we have joint ventures.

Income taxes in the third-quarter were a benefit 2.1 million compared to an expense of 268,000 as a result of tax benefits from pre-tax losses in most of the countries in which we operate. We did realize tax benefits on losses in several countries that could require evaluation allowance should losses continue in the future. We are near completion on a year-long IRS and transfer pricing audit which is expected to be closed next week with no material changes. The Company's consolidated cash including any marketable securities (technical difficulty) declined at the beginning of the fiscal year. Management believes that merchandising and operational changes, closing of unprofitable warehouses will improve warehouse performance and profitability. (technical difficulty) additional 22 million from the recent preferred stock proceeds will allow management to focus on operational improvements rather than near-term cash issues in efforts to return the Company to profitability.

Year-to-date the Company has incurred capital expenditures of 29.3 million with 9 million contributed to its Mexico venture, an increased net bank borrowing of 17.9 million. Cash generated from operations was 12.5 million year-to-date compared to a -9.1 million in the first nine months last year. Additional capital expenditures in Q4 related to two warehouses under construction of approximately $5 million. Short-term debt is expected to decline 8 million and a $5 million long-term loan for the new Nicaragua facility is being negotiated and expected to disperse this quarter or in early 2004. This concludes my presentation. We'll now reply to questions submitted.

We had one question that was submitted and it relates to the longer-term outlook for PriceSmart. The question is, where can the Company be five years from now (technical difficulty) the one or two biggest barriers to overcome? And the question goes on, has growth hit a wall and does this current quarter's performance point to problems incurred during the last few years of growth? And can PriceSmart not only grow as it has in the past but grow (technical difficulty)? These questions are generally forward-looking and I am not comfortable making any

first, the size of the markets we are in. We generally are in rather small countries, other than the Philippines and Mexico, and these countries don't offer opportunity for many more locations, so that's a limitation. Second, competition in other more developed markets where we might consider opening locations could pose a major barrier to entry. And third would be our (technical difficulty) volume to get the best prices on merchandise and to be competitive against major multinational retailers in larger markets.

Any major future growth will be predicated on our ability to successfully operate our existing PriceSmart and build a base that really would allow us to begin a serious growth program in the future. This ends our presentation. I'd like to thank you for your attendance.

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