PriceSmart Inc (PSMT) 2018 Q1 法說會逐字稿

Good day, and welcome to PriceSmart, Inc.'s Earnings Release Conference Call for the First Quarter of Fiscal Year 2018, the 3-Month Period Ending on November 30, 2017. (Operator Instructions) After remarks from Jose Luis Laparte, PriceSmart's President and Chief Executive Officer; and John Heffner, PriceSmart's Executive Vice President and Chief Financial Officer, you will be given an opportunity to ask questions as time permits. (Operator Instructions)

As a reminder, this conference call is being recorded on Friday, January 5, 2018. A digital replay will be available through January 12, 2018, following the conclusion of the call by dialing (877) 344-7529 for domestic callers or (412) 317-0088 for international callers, and entering replay access code 10114245.

I would now like to turn the conference over to John Heffner. Please go ahead, sir

Thank you, Austin, and welcome to our earnings call for the first quarter of fiscal year 2018. We will be discussing the information that we provided in our earnings press release and our 10-Q, both of which we released yesterday, January 4, 2018. This morning, we also released our report on December warehouse sales. You can find both press releases and the 10-Q filing on our website, www.pricesmart.com.

Please note that statements made during this call may contain forward-looking statements concerning the company's anticipated future plans, revenues and related matters. These forward-looking statements include, but are not limited to, statements containing the words expect, believe, will, may, should, estimate and similar expressions.

These statements are subject to risks and uncertainties that could cause actual results to differ materially, including the risks detailed in the company's annual report on Form 10-K for the fiscal year ended August 31, 2017, filed with the Securities and Exchange Commission on October 25, 2017. We assume no obligation and expressly disclaim any duty to update any forward-looking statement to reflect the occurrence of events or circumstances which may arise after the date of this call.

Now I'll turn this over to Jose Luis Laparte, PriceSmart's President and Chief Executive Officer.

Good morning, everyone. Happy New Year, and thank you for joining us today. We finished the first quarter of our fiscal year 2018 with net warehouse sales of $745.4 million, an increase of 4.1% compared to the first quarter last year.

We saw a reduction in consolidated operating profit in the quarter compared to the first quarter a year ago, resulting from lower merchandise gross margins and higher operating expenses from both the addition of our new warehouse club and the ongoing investments, which we recorded in corporate SG&A associated with specific initiatives that add near-term costs, but we believe will help drive additional growth and efficiencies in the future.

As reported, net income for the quarter was $22.5 million or $0.74 per share compared to $24.9 million or $0.82 per share a year ago. Colombia continued to have good operating results with double-digit sales growth, improved margins, more membership accounts and $1.2 million additional operating profit compared to a year ago.

Let me provide some further details on sales from this quarter. I will speak to our December sales results later in my remarks. Our 4.1% sales growth for the quarter was an improvement over recent quarters, resulting from a 4.6% increase in transaction and a 0.5% decrease in average ticket.

We have positive sales growth in each of our segments. Warehouse sales in our Central America segment grew to 3.1% to $443 million with the addition of the new warehouse club, which opened on October 5, 2017, and good merchandising. Costa Rica, a very large and important market for us, returned to positive sales growth after several quarters of negative growth and exceeded plan.

Panama, our second largest market for -- from a sales perspective was essentially flat with last year. We are seeing a general slowdown in the Panama economy after several years of robust growth. All other Central America countries saw sales growth, including Honduras, which has experienced some political unrest in recent weeks.

The Caribbean had an sales increase of 3.7% when compared to the first quarter of last year, a good result after recording a 0.7% increase in Q4 for fiscal year 2017 and a 0.6% the quarter before that.

Trinidad, our largest market in that segment, was essentially flat, reflecting the ongoing difficult economic conditions of that country, although this too was an improvement from a 2.1% decline in Q4 fiscal year 2017 and an overall decline of 4.8% for last fiscal year in total. All the other countries in the Caribbean region showed sales growth with Jamaica and USVI recording double-digit growth in the quarter.

USVI, as you may be aware, got hit by 2 hurricanes that swept across the Caribbean in early September. This was a very difficult period for the people of St. Thomas and our employees who live on the island. We sustained some damage to our facility, mostly cosmetic, and an interruption of business for multiple days in September, resulting in a 16.5% decline in sales for September the year before.

However, the dedicated efforts of our USVI employees, many of whom were dealing with damage to their own homes, along with the help of several key individuals from our other warehouse clubs, allow us to resume operation ahead of many other retailers and support our members' basic needs. Business rebounded during October and November, resulting in 15% overall sales growth for the quarter.

It is clear that we were able to capture incremental business due to the fact that other competitors in the island either lost their building, like Cost U Less, who were closed for many days in the quarter. These strong results continued into December as a result of PriceSmart taking a bigger share of the market, which we think will continue for the next several quarters.

Colombia again recorded total sales growth of 10.1% and a 13-week comp growth of 11.3%. The Chia warehouse club entered the comp calculation in November [Q]. The currency has remained relatively stable moving in only a small band around the COP 3,000 to the dollar level. Warehouse sales in the current quarter were translated back to U.S. dollar at an average rate of 2,966 compared to 2,984 a year ago.

Comparable warehouse club sales for the 13-week period ending December 4 was 2.2%. The successful opening of Santa Ana warehouse club in Costa Rica led to unexpected transfer of sales, primarily from our Escazu warehouse club. We estimate that this transfer of sales negatively impacted the Central America comps by 150 basis points and the overall company comps by 95 basis points.

In terms of merchandise categories, we saw good results in the fresh and the soft lines area, with departments like gourmet deli and fashion apparel showing double-digit growth. In hard lines, tires, batteries, automobile and hardware show also solid comp growth. Seasonal candy had double-digit growth, showing the acceptance of our seasonal programs in that category. Some challenges and slight decreases were seen in areas like juices, snacks, electronics, small appliances and liquor.

Warehouse margins in the period were generally in line with the prior 3 quarters, but down 51 basis points from Q1 a year ago, a somewhat unusually high-margin quarter. The decrease of 51 basis points is driven by a decrease of 31 basis points in Central America and 26 basis points in the Caribbean and some additional costs in our U.S. distribution operation compared to a year ago.

Colombia's margin increased 62 basis points. The reduction in margins at the segment level is primarily related to aggressive pricing targeting our Central America and Caribbean markets to drive sales, along with some reduction in endcap promotional funds compared to last year. In markets like USVI, we had restrictions to change prices in items due to a government regulation to maintain prices for all consumers in the island. That applied even for categories like produce or fresh, where price changes happen often.

On membership, we had a good result this quarter. We finished the quarter with more than 1,543,000 accounts, up 3% from a year ago, and membership income was up by 5.7%. The 12-month renewal rate at the end of November was 85%. Excluding Colombia, the renewal rate was 87%. We are encouraged by the steadily improving trends in the renewal rate for Colombia. We finished with a renewal rate of 78% compared to 68% for the same quarter a year ago.

As I mentioned in the last earnings call, we launched our Platinum membership card in 2 additional markets, Panama and Dominican Republic, both of them during this first quarter. And so far, we're seeing a good acceptance of this program and seeing upgrades of existing members to this new level of membership ahead of our expectations.

Let me say a few words about the initiative that I spoke on our last call. As mentioned, the board has authorized $3 million to $5 million of bonds during this fiscal year, specifically focused toward the future growth and success of the company. The innovation area, as we call it, is working on different initiatives to better serve our members on the online space and create a seamless omnichannel experience for our members. There will be additional investments for those efforts in the upcoming quarters.

In addition, we continue with our efforts in the selection of a new global enterprise resource planning system, ERP, which will also require additional investment, once the decision is made on the right tool to help us with our long-term initiatives. During the quarter, these efforts resulted in expenses of approximately $735,000.

Let me highlight a few other items associated with the quarter before I address our December sales results, which we released this morning. Despite the unfortunate events in the month of September with the storms that affected the Caribbean region, other than USVI, all our other locations came out okay from that, included our Miami DC, which only suffers some minor damage. We saw some interruptions of flow of merchandise a few weeks after the storms. But again, we are happy to report that we didn't experience any other significant damage.

As we continue with our plans on expansions of buildings in some of our countries, we are making progress in Pradera location in the city of Guatemala and also in our Kingston location in Jamaica. Both of those expansions will be completed during Q3 of this fiscal year. And although we have some challenges with the parking lots during the expansion, we are still seeing good results out of those clubs.

Our construction in the city of Santo Domingo in the Dominican Republic is moving as planned, and our San Isidro location should be open during spring 2018. Although we don't have anything to officially announce today, we continue to push forward on sites for additional clubs in a few of our markets. The timeline for permits and approvals for which are taking longer than we would like, but we feel optimistic about the projects that we have in the pipeline for future warehouse club openings.

As I always do during the month of December, I had a chance to visit 4 different countries on a trip that I plan every year with senior members of our buying and operations team. This is to assess our readiness for the holiday season and to identify together opportunities to continually improve our sales and member service. I always come back excited after seeing how hard our teams are working on serving our members, which resulted in a good month of December.

Let me now spend a few minutes covering a difficult situation in Honduras. During December, we saw significant unrest in the country as a result of the presidential elections that occurred during the last days of November. There initially was uncertainty regarding the outcome of the elections followed by a disputed result. Street protests that turned violent in many cases were the byproduct. These protests resulted in road closures and government-mandated curfew hours, which limited the hours of operation of our clubs over a number of days early in the month and created hardships for our employees and our members.

In addition, the shipping of merchandise from the ports and the delivery of local merchandise to our clubs was curtailed, as roadblocks made the transportation of goods too dangerous due to the [lock in]. Towards the middle of December, we saw a calming of tensions and a return to some political semblance of normalcy, which we hope will remain, although there is still political uncertainty which could fuel further unrest.

Now December sales. As announced earlier this morning, total sales for the month of December were $344.2 million, an increase of 4.9% from a year ago. All of our warehouse clubs, including Honduras once things settled down, performed well during this important month. And I wish to recognize not only the club personnel who make good things happen on a daily basis, but also the efforts of our merchandising and distribution teams who skillfully work to ensure we have sufficient levels of exciting merchandise and make the holiday season a success for our members and our company.

The comparable warehouse club sales for the 4 weeks ending 12/31/2017 for the 39 clubs open at least 13.5 months was 6.4%. It is important to highlight that this 4-week period had an extra day of sales compared to last year's 4-week period due to the timing of New Year's Day, which fell into our December comp period last year, but will be in our January comp period this year. All of our warehouse clubs are closed on New Year's Day. We estimated that this provided an additional 240 basis points to our comps in the month. We will see the turnaround effect of this when we report our January comps.

Thanks again for joining us today. After John's remarks, we will take your questions. Thank you.

Thank you, Jose Luis. Let me cover a few additional items, including our initial assessment of the impact of the recently enacted U.S. tax reform legislation and what that will have on our financials going forward as we understand it.

Selling, general and administration expenses in total increased $6.4 million or 7.7% to 11.6% of net warehouse sales from 11.2% a year ago. Warehouse club operation expenses of $69.5 million increased 6.2% and included the new warehouse club in Costa Rica as well as extraordinary operating costs associated with the post-hurricane efforts in USVI.

While Colombia operating cost decreased as a percent of sales, expenses increased $544,000 to support that growing business. As Jose Luis mentioned, we record expenses associated with our future focus investments in general and administrative expenses, which contributed to growth in that area from a year ago.

Foreign exchange transactions and revaluation of monetary assets and liabilities resulted in a $278,000 currency gain in the quarter compared to a $928,000 loss in Q1 last year. We are beginning to see some positive sales trends in Trinidad, although the illiquidity conditions and lack of availability of tradable currencies, which we have spoken about over the past year, remains.

Unlike last year, we did not limit shipment to Trinidad to any great degree and had good sales results in December. However, we continue to be mindful of the situation and are carefully managing our exposure to the negative impact of any sudden devaluation of the TT dollar. That exposure at the end of November was $12.1 million.

The effective tax rate for the period was 31.0% compared to 31.5% a year ago. The improvement was largely related to Colombia due to improved operating performance and the reversal of valuation allowances on intercompany transactions between Colombia and the U.S.

From a balance sheet perspective, the company ended the quarter with cash and equivalents of $129.2 million, a decrease of $33.2 million during the quarter. Operating activities, including the buildup of inventory for the holiday season and the related trade accounts payable, added $29.9 million. Inventories grew $61.5 million offset by merchandise related accounts payable of $21.4 million for a net cash use of $40.1 million.

We invested $19.7 million in various capital projects, including the construction activity associated with the Santa Ana, Costa Rica club and the Santo Domingo, Dominican Republic club and the work we are doing to expand our Pradera warehouse club in Guatemala and our Kingston, Jamaica club, among other projects. Finally, we had a net cash use of $5.3 million in financing activities and a positive plus $2 million effect of exchange rates on our cash balances.

Let me speak now about U.S. tax reform legislation. We've been analyzing the impact of the U.S. tax reform legislation. We have more work to do in conjunction with our external tax advisers to fully understand the various elements to ensure we are in compliance. However, I want to provide some basic information as we best understand it.

First, the reduction of the U.S. corporate tax rate. As you all know, the U.S. corporate tax rate will decrease from 35% to 21% starting in January 2018. There are 2 elements of this for us. There's a onetime impact. We will likely take a onetime, noncash expense, currently estimated to be approximately $1 million to be booked in the second quarter of fiscal year 2018, to reduce the value of certain deferred tax assets, which we have been carrying at 35%, which are now valued at 21%. There's also an ongoing impact. On an ongoing basis, this rate reduction is expected to have a favorable impact on the company's overall effective tax rate.

However, substantially all of the company's revenues are from foreign sources, much of which attracts foreign withholding taxes. In the past, the company has generally been able to recover all of these foreign tax credits, or FTCs, generated by these withholdings against our U.S. taxes payable at the 35% rate. The company currently estimates that foreign tax credits will be higher than 21% of our U.S. taxable income, resulting in a need to expense some of the FTCs.

Therefore the company expects to benefit from the reduction of tax rates, but not to the full extent of the rate reduction, as excess foreign tax credits will have to be expensed. We currently estimate that the net impact of the reduction in rates, less the unused and expensed FTCs, will result in an effective tax rate in the U.S. of somewhere between 25% and 30%, and an overall improvement of approximately 1% to 2% in our consolidated effective tax rate.

There's also a onetime tax on accumulated foreign profits. This onetime tax on accumulated foreign profits will result in a tax expense being recorded for the full amount of that tax in our second quarter of fiscal year 2018, while the cash payment will be spread evenly over 8 years.

The calculation of this tax is quite complex and the measurement dates and requirements subject to further IRS guidance. We are working diligently with our tax advisers to refine this calculation in accordance with the regulations as they are released.

We currently estimate the charge to tax expense in our fiscal second quarter to be between $10 million and $20 million for this item. However, from a cash perspective, the company expects to be able to offset some of this charge by FTCs accumulated prior to January 1, 2018. We currently estimate we will have approximately $5 million of FTCs, which will reduce the cash payment we will be required to make over the 8-year period.

Again, let me reiterate, this is all new information, and our current understanding may not be 100% correct. And/or the final reg may be different than what we are currently working with. But we think we have a pretty good handle on the basic elements. With that, we'd be happy to take your questions. Austin?

(Operator Instructions) And our first question comes from Ronald Bookbinder with IFS Securities.

One, the comps over the past several months seem to be picking up momentum, ending with December up that 6.4% or even 4% on the adjusted basis. So no matter how you look at December, it's still the best comp you've had in years. So what macro events do you think is driving this? Is it the improving U.S. economy? Is it improving oil prices? Is it both? What are your macro thoughts on your regions?

Okay, Ronald, a couple of comments on that regard because we obviously have been noticing the same thing. I think there are a lot of variables, I guess, that where we have seen improvement.

First of all, I think, obviously, in the last couple of years, we keep working on, I guess, improving our merchandising efforts, improving our merchandising excitement, trying to figure out how to keep our members back in the clubs and buying merchandise. So I have to definitely credit some of those results to that effort.

On the other hand, I think what you mentioned, oil, I mean, there are a couple of countries where we have, in the last couple of years, some challenges. Trinidad being one, where we saw a very soft economy. We saw a little bit of that in Costa Rica. In the last year, 1.5 years, Costa Rica was pretty soft. So little by little, some of these countries are recovering and definitely, we are taking advantage of that.

In addition, I think, obviously, Colombia is playing a good role in helping push compared to last fiscal year where Colombia didn't actually pull us down. This year, it's pulling us up in the general results.

So when we look at how we ended the quarter at 2.2% and with the results this December, we definitely didn't have any -- only with the exception of Q3 in fiscal year 2017 that we have a 2.2% increase. The rest of the quarters last year were 0%, 2.1% and 1.9%.

So I think we are following a good trend. And hopefully, other things will continue in terms of the economies being help -- I guess helping us, no. With the exception of Honduras, where we have a little bit of uncertainty right now with what's going to happen, we think that the rest of the country will probably have a good performance during the calendar year.

Okay. And so if we back out the Costa Rican new store impact on comps, was there any country or territory this past quarter that was negative? Or was everything flat to up?

Everything was flat to up. We have a slight -- actually, yes, everything was flat. Panama, I think I mentioned in my report, had a flat growth for the quarter. Other than that, all the other countries actually resulted in a positive -- Panama and Trinidad were the only 2 flat. But we didn't have any country with a decrease on sales versus last year for the quarter. They were all positive.

And on the merchandise price cuts, is that just part of your ongoing strategy that you've been using for the past couple decades to drive volume? Or was that to clear merchandise?

No, it is definitely one of our continuous efforts to keep, I guess, driving the volume. We'd rather see it on the sales line versus on increasing our margin. And I don't recall anything in particular with markdowns. Like any other year, we definitely will have some that we will do in this Q2, especially between December and January, to clear I guess some seasonal merchandise. But for the most part, we don't expect anything drastic on those markdowns. And again, it's more our trend to try to push the top line, Ronald.

Okay. And just lastly, sort of (inaudible) and then I'll jump back in queue, Trinidad. Trinidad seems to really be improving faster than you guys can convert out of the TTs. And so -- but with the improvement in oil prices, is there any talk of the government loosening the constraints on currency conversion into dollars?

As far as we know or we have heard, we haven't had that kind of signal from the government. I think they will -- they are still concerned on the amount of the -- obviously the lack of U.S. dollars in that market and are actually pushing hard on exports and other initiatives to try to get more dollars in the country. So it's going to probably be another rough year in terms of getting those dollars in our hands.

In the meantime, as you are saying, yes, things are improving little by little on the sales. And the economy, in general, seems to have a better flow right now with oil and everything going on in the country. But I think we were still a little worried that it will still be hard to get our hands on the dollars, Ronald.

(Operator Instructions) Our next question is from Thomas Vester with LGM Investments.

Can you talk a little bit about, Jose Luis, in terms of your operating leverage, I mean, you have seen, as also the question just asked, indicated an uptick in your revenue growth. You also mentioned that in your opening statement and in the same-store sales. When do you expect that to start converting into a pickup in your operating margin up to the more historic level of around 500 to 550 basis points? If you can give any indication on that or point to anything to observe or anything like that, that'll be very helpful.

Then on the Miami distribution, do you still carry the full rent of the old facility? And can you remind us how much that is and when you expect that to be sublet? And then you made the comment on new sites. Much appreciated. That's difficult. Is there any updates on if you have increased your search in new markets on top of the countries you're already in? Or is that still focusing on mainly new sites and, I guess, Colombia and some of the other more successful markets you're in?

Okay, I'll try to remember all your questions, Thomas. Happy New Year, first of all. I guess on the first one, I think if I understood the question, I think between -- Q2 will probably be a -- we'll see a slight recovery on our margins and, by the way, we're used to pretty much getting much more leverage. Definitely, this is a year of investment in a lot of initiatives. So it will probably be more until Q3 or Q4 when we will get more of that leverage.

I think -- I believe we're doing the right investments in different areas. And again, as I mentioned this on the online channel, it's on the -- definitely on ERP. It is on buying where we also did some important investments to add some people and to add some resources to get better results on sales.

So we believe that all the things are the right things to do and hopefully, will get us back in the -- I guess, in the way we would like to see the results and not only increasing the top line but at the same time, getting the leverage we need on our expenses. So hopefully, that will happen. In terms of the Miami distribution center I believe, John, we still are -- we are still carrying some...

Yes, we've sublet some space. However, we do have some underutilized space. And I think in the quarter, it was about $300,000 of space that we're carrying. And so that's sort of the operating amount, I think, in -- on a quarterly basis, of underutilized space that we've got at this point.

Yes. So hopefully, we'll get that [over us]. As we start the new year, we're looking forward to trying to get that space completely subleased so that we can stop that expense.

And then on opening new clubs, we're obviously busy, busy working on getting the approvals. I think hopefully by our next call, we will be able to announce more sites and more things going on in that respect. We definitely have a lot of efforts going on in every -- you mentioned Colombia. We have efforts going on in that country in particular. We have efforts in a lot of different countries, not only Colombia.

So we're not stopping that. We really believe there is a good opportunity in those markets, especially, again, Colombia where we are having double-digit growth and we're seeing good results and a good acceptance of our concept. We want to go back and keep adding warehouse clubs in that country and at the same time, other countries in the region. So we definitely haven't stopped our efforts, and we're working as hard as ever on trying to get more clubs open and keep adding to the pipeline.

Great. That's most appreciated. And are you -- in terms of the efforts you're doing with the investments you mentioned to enhance revenues, are you testing anything also in terms of any add-ons in clubs? Because I mean, clearly, one of the, I guess, key difference still to PriceSmart from the established U.S. clubs is probably a bigger offering around the club in terms of other add-ons, optical offering, et cetera. Is there anything you're testing? Or is it -- that is not in the pipeline?

No, it is actually, I mentioned it on my last call, I didn't put it again on my script this time but we have an optical. Actually we launched it at the opening of our Santa Ana club in Costa Rica. We then added another one in Escazu, and we're now expanding that to all our clubs in Costa Rica. So that's one of our first intentions of adding some add-on services, I guess, to our clubs.

We also have an initiative on travel that we're final -- we actually -- we are recently going to be launching on travel. And we did a small kiosk on café in -- we started with a test in Colombia in our Salitre club in Bogota City. And we're looking at expanding that one to 2 more locations.

So there are some different initiatives that I referred to in my last earnings call. And they are still small, obviously, in the scheme of things but definitely are getting our members -- we're trying to become more of our members -- membership -- part of their membership life. So there are different efforts in that respect, Thomas.

That's great. Sorry, I was not on your last call so apologies for that (inaudible).

No, I'm glad you brought it up.

I heard from the last call that you're retiring, John. So I'm not sure when it is, but best wishes for that, and I guess congratulations when the day comes.

Good. Thank you, Thomas.

Thank you, Thomas.

Your next question is a follow-up from Ronald Bookbinder with IFS Securities.

On your online strategy, will the online be focused on the larger, more mature markets, like Costa Rica and Panama first where you've been building out regional DCs to support it? And then from there, would you build out to sort of ancillary countries?

That's -- we are working on that, the strategy. But you are kind of describing it, Ronald. That's exactly what we are looking at doing obviously between Costa Rica, Panama, Colombia, some of the bigger markets, obviously, to start. And then as we learn on those markets, we will be able to expand it in the other islands I guess, or smaller markets.

But that's a little bit what we're trying to put together in our strategy. And hopefully, we will be launching something in the next -- probably towards the end of the year so that we can explain more in detail what we're doing. But that's a little bit the effort we are looking at doing.

Okay. And John, on your retirement, is there any update as to timing? We're all going to miss you. How many more quarters are we going to have with you onboard? How's the transition going?

Well, I should probably let Jose Luis speak to the process that he's intimately involved in at this point in terms of the recruiting effort and the sourcing of some good candidates.

Yes, we're actually working, Ronald, on that transition, and we don't have anything to announce yet. But we're thinking that probably during the month of January, we will finish the decision of the transition and the new CFO. And obviously, we'll work with John on the exact date and try to have a smooth transition. So hopefully, it won't be later than the end of January when we will come up with a name and find someone for that new role.

Okay. Well, John, we all wish you the best as you move into retirement, but I'm sure we'll be talking more in the future.

Yes. It's not happening in the next 2 weeks, so there's still more time here.

Our next question is from Jon Braatz with Kansas City Capital.

Online competition. Are you facing any online competition or any significant online competition at this moment in your markets?

It varies by market, Jon, but we are obviously -- I would say first of all, in some of our markets, or pretty much in every market, we face the competition of all the U.S. online retailers. You name either Amazon, Target, Walmart. All of those are, in some way, competing in our country because members can actually purchase some goods and use postal service addresses.

And there are different ways that members in Costa Rica -- we know members in Costa Rica and the Caribbean, in Panama, in different countries use these postal service addresses and get goods, mostly from Amazon probably and obviously other -- any other retailer that they want. They pay the duties when they have to, and they get them and pick them up in their country. So that's one competition that we know we have that exists over there.

And then in addition, there are some countries more developed. I would say probably Colombia is the one that is most developed with Éxito, Falabella, retailers that have been working on that. And obviously, they have more offerings.

In every -- in the other countries, there is some online competition, more, I will say, on the grocery shopping. There are a lot of, I guess, apps and a lot of retailers that are getting into that grocery shopping mood. And they basically buy -- you can buy the groceries and get them delivered either in 2, 3 hours. It's becoming very popular, similar to what is happening in the U.S. with some supermarkets and using Instacart or other applications like that.

So that is happening, but we don't see a lot of online shopping yet from, I guess, other retailers. I would say Colombia is the one that has the most, although we see little by little an increase in every country. And everybody's trying to get some efforts or putting together some plans to get in that space. That's why we're working on the same token.

Okay. Do you envision PriceSmart having grocery shopping apps and delivery capabilities?

We're discussing that, but not necessarily. We're not sure that's going to be our focus right away, the grocery shopping. I mean, we do have a -- eventually, we may have that ability, but I don't think we're going to get in that space.

We know that some apps are using us. For sure in Panama, in Colombia, there are a couple of very popular apps that actually use PriceSmart. And we see the drivers shopping in our clubs and delivering merchandise to our -- to their customers. So it's kind of a virtual warehouse member -- warehouse business -- a virtual business member.

I guess in the past, we used to have supermarkets shopping from us and reselling merchandise in other places. Now it's just, I guess, these apps that basically shop and deliver to our -- some of our members or customers. So it is happening. I'm not sure we are going to get into that space of complicated deliveries in 2 hours or next-day delivery, some of that. Maybe not, but we're still studying how we approach that, Jon.

Okay. And then, Jose, could you refresh my memory again as to how much you'll be spending this year on the online development? And will it carry -- will there then be incrementally additional expenses in the following year? Can you give me a little sense on the spending program?

Yes. We are looking at maybe $3 million to $5 million, and we haven't figured out how much in the next upcoming year, but definitely, we will continue investing until we figure out how to get on that space and create that omnichannel experience. So we're looking at that as an investment for the future, John. And as our countries are getting more into this online concept, we definitely believe it's the right thing to do. But yes, this year is $3 million to $5 million in this fiscal year 2018.

How much did you spend this -- in the first quarter?

$733,000 -- $735,000, I think.

$735,000 is what I described. There is some money there from, I guess, our ERP efforts. But mostly, it's online initiatives or the innovation initiatives.

The next question is a follow-up from Thomas Vester with LGM Investments.

Yes, I just have a few more. Yes, yes, sorry for that, and I just had a few more. You mentioned the ERP a couple of times. Can you just talk a little bit about -- I mean, it's something that has, especially in, what can I say, more emerging jurisdictions caused a big number of companies problems when they change ERP systems. And clearly I mean logistics is everything to your operation. So just talk a little bit about the implementation there if you can. And if it's too early, it's fine.

And then I just had a question on the Colombia membership fee. And you raised it, but it's still below the -- sort of the USD 35 equivalent you target, correct? And if I am correct, what is the outlook for bringing it up to par? Because it seems like you were pretty successful bringing it up when you raised it and didn't see an impact on memberships.

And then I guess the last question would just be on the cost side. I mean, clearly, it's much pressure to spend where you should be spending also to develop these new lines and sort of the omnichannel and ERP, et cetera. And sometimes, clearly, you need to invest to harvest in the future.

But do you see any opportunity on the cost side that you're not capturing yet? Or is that just on a daily basis to squeeze efficiency where you can so there's no like [fractures] in the pipeline that could help bring back in or free up dollars to reinvest into prices for members or improve margin?

Okay, well, let me go. I'm going to...

We are out of order here.

I'm going to go out of order to answer your questions. I'm going to start with the middle question, and John will refer to ERP, the efforts on ERP. But I'm going to first take the one on membership.

We went from COP 65,000 to COP 75,000 a year ago. I believe we did that in March 2017. So yes, we do realize we're still at a lower level from the $35 mark, to call it that way, or average that we have in the other countries. It is due to the exchange rate.

I don't think right now, Thomas, we're considering raising it again this year. We definitely don't want to send a message to our members that this is an increase that we do every year. I think we will probably wait until next calendar year before we even do something on the membership.

Even though we do realize it is still low, we have to keep in mind that for the local Colombian consumer, it is -- they make Colombian pesos. So if we keep raising it, it will probably be a little bit out of control in terms of -- it will probably be a little expensive on pesos.

When we think in dollars, it doesn't matter if you think -- if you make dollars and you get it that way. But when you're thinking Colombian pesos, it will be hard to -- I don't think it will be the right thing to do to raise it again. So we are prepared to leave right now with a lower -- I believe at that exchange rate on that, we will be about $22, $23 depending on the exchange rate. But I think we are better off staying like that and obviously getting more members. And eventually, we'll get back to that price, no?

In terms of the cost, if I understood your question, there are different efforts where we're trying to keep lowering our prices. Obviously, the Miami -- the new Miami DC and initiatives we are doing there are important. We just started -- actually last December we started a new initiative where we are packaging -- we call it business development, and we're packaging a couple of items on our own with the intention of lowering our prices.

So we got a couple of Del Monte items that in the past we were buying in a pack that wasn't necessarily the appropriate package. So we're now doing the packaging ourselves and saving obviously some money for our members and reducing our prices, no? So that's one way we're looking at obviously increasing the top line and making sure we get some of those costs down.

In addition, in the next quarter, I will give a more accurate update. But we're going to open our next Costa Rica regional distribution center, which also is looking at doing some of those things on reducing costs, no? We're going to take some of our direct shipments from the U.S. or from Asia directly to Costa Rica, trying to save money on freight, potentially duties, and again, trying to reduce our prices.

We are also opening very soon -- in a couple of months, we will be opening a produce distribution center in Panama that will do exactly the same thing. Instead of buying through distributors, we are buying directly from the producers, the growers, and reducing our prices. We did a study, and we will probably reduce prices 20% to 25%, another effort again to reduce obviously costs and try to increase our prices and be more a price leader -- more of a price leader in those categories.

The same thing will happen in Costa Rica. We're a little behind in terms of the building we were looking at doing, but we're definitely pursuing that same effort in our big market. So that's -- those are some of the things that hopefully will give you some color on the different initiatives we have to increase our -- to reduce our prices and reduce our cost, no?

So let me -- Thomas, let me jump in on the ERP activity. We've been operating with a legacy system for quite some time now that we need to move forward to a new system for a number of reasons. One is it's costing us a lot to maintain that, which we have. In fact, it -- we're even finding it hard to hire people in our IT group who can support the languages behind the system we're operating right now.

And we are going through a pretty rigorous evaluation at this point, 3 different options. We haven't made a selection yet, but there's a dedicated team that has been focused on working with the 3 more significant vendors in the space. And we expect in the next 2 months or so to be able to make a selection and understand the implementation process and the return and the support that's required to make that happen.

So we're actively involved in it but not at the point of having made a selection. But it's clear we need to move forward, given where we are right now, and it needs to be something that can support these new initiatives that we're talking about going forward.

And to your point, Thomas, we are definitely aware of the challenge that is the implementation. And we're also talking to other, I guess, retailers and other clients or customers from the software companies to learn a little bit how much -- how is it that we can do an implementation without hurting our supply chain, without hurting obviously deliveries, without hurting our replenishment.

A lot of things that when you hear stories out there from ERP implementations, there are a lot of things happening, no? So we're trying to learn from the mistakes that other ones have made, no?

Your next question is from Charlie Carter with Ceredex.

Yes, just wanted to clarify the tax reform implications. I think, John, you had said it was, like, a go-forward corporate income tax would be somewhere between 25% and 30%. So I just wanted to confirm that.

You'd said something about a reduction in the consolidated rate of 1 to 2 percentage points. I was a little bit turned off by kind of what the go-forward corporate income tax rate might look like. And I understand that you're still working through the policy change, but I just wanted to clarify on what you were saying.

Sure, Charlie, yes. You have to keep in mind that of our total tax expense for the company, only about 20% to 25% is associated with the U.S. The majority of the taxes we pay are in the countries in which we operate, and they didn't undergo any U.S. tax reform. So they had their own tax regimes, such that we will see a benefit in our U.S. taxes, the tax we pay here, although not to the full extent of the 21%. It'll be more than that, what I said, 25% to 30%.

When you put that into the equation of all the taxes that we pay against the pretax income that we recognize across all of our jurisdictions, it'll have about a 1% or 2% impact on our consolidated results. So over at 31% this last -- this past quarter, we would expect once it works through, that we'd probably be at the 20% to 30% consolidated tax rate.

Understood. And would your strategy for repatriating cash, would that change with the new tax policy, just given -- yes, given there'd be more incentive to bring it back versus to maybe reinvest?

Well, there's a couple things I would say there. One is that in most of the countries we operate in, the -- any dividend that we would pay back to the U.S. parent, which is the structure we have in place, would result in a withholding tax in these countries of anywhere between 10% and 20% in most cases. So it may not fundamentally change. While it improved what the tax situation here is in the U.S., there are taxes that we might not be able to recover in that.

So still under review and understanding, but I think what's more behind our -- whether we bring -- repatriate cash back to the U.S. is we have our investments in our operations are really outside the U.S. And we use that cash for the -- for opening new clubs and expansions and growing our business in those markets, which is where we generate that cash.

And the -- so the dividend is funded by your U.S. earnings, in other words?

That's correct. The dividends are funded by the U.S., and we have mechanisms to bring cash back in the normal course to meet our dividend based upon whatever the board believes is the right dividend for the company.

This concludes our question-and-answer session. I would like to turn the conference back over to John Heffner for any closing remarks.

Well, thank you, Austin. I don't have any specific closing remarks. We'll end our call, and thank you for your participation today. Thank you.

Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.