Good morning. My name is Laurel and I will be your conference operator today. At this time, I would like to welcome everyone to the Costco Wholesale Conference Call. Thank you. Mr.
Richard Galanti, Chief Financial Officer, you may begin your conference.
Thank you, Laurel, and good morning to everyone. Certain statements contained in this discussion constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1990 5. For these purposes, forward looking statements are statements that address activities, events, conditions or developments that the company expects or anticipates may occur in the future. Such forward looking statements involve risks and uncertainties that may cause actual events, results or performance to differ materially from those indicated by such statements. These risks and uncertainties include, but are not limited to, domestic and international economic conditions, including foreign exchange rates, the effects of competition and regulation, uncertainties in the financial markets, consumer and small business spending patterns and debt levels, conditions affecting the acquisition, development, ownership or use of real estate actions of vendors rising costs associated with employees, including healthcare costs energy and certain commodities geopolitical conditions and other risks identified from time to time in the company's public statements and reports filed with the Securities and Exchange Commission.
Okay. With that out of the way, as was announced in the press release this morning, we are acquiring the 50% ownership position in Costco Mexico that we currently do not own. We will acquire the 50% interest for ARS 10,650,000,000 that's approximately US760 $1,000,000 based on the exchange rate of roughly US14 dollars to the US dollar. Additionally, each current 50 percent owner in COSCO Mexico that would be COSCO Wholesale Corporation and Comercio Mexicana will receive a cash dividend of approximately ARS 2,380,000,000 or about $170,000,000 each. So total cash to Comercio Mexicana that's a combination of the sales proceeds plus the cash dividend will total approximately $930,000,000 From a transaction funding standpoint for Costco Wholesale, the roughly 760 $1,000,000 to be paid to Commercial Mexicana by us for Commercial's 50% ownership position will be funded by Costco's $170,000,000 dividend payment from Costco Mexico plus existing Costco cash from the U.
S. So that would be an additional roughly $590,000,000 The relationship in Mexico between Costco and Comercia Mexicana dates back to the early 1990s with our 1st membership warehouse club opening in Satilite, which is near Mexico City in February 1992. Costco Wholesale has always been responsible for the management of the venture and the operation of the warehouse clubs in Mexico will not change the result of this transaction. Today, Costco Mexico operates 32 membership warehouses throughout Mexico. I believe 2 of those have opened in the past 5 years.
Also as stated in the press release, Guillermo Gonzalez and Carlos Gonzalez, currently Chairman and CEO of Commercial respectively, will continue as members of the Board of Directors of Costco Mexico. Also Jaime Gonzalez will continue as CEO of Costco Mexico. Jaime is a longtime Senior Officer of Costco Wholesale Corporation. In terms of our financial statements, the Cosco Mexico operations are already consolidated into our income statement with a line item near the bottom of the income statement entitled net income attributable to non controlling interests. That includes as an offset to our consolidated P and L, the 50% of Cosco Mexico's after tax earnings that are not currently ours.
In terms of how this transaction impacts our income statement, there are two things to note. First, because the federal income tax rate in Mexico is lower than our effective income tax rate in the United States, the $170,000,000 dividend payment to Costco will cause us to incur in Q4 an after tax income tax charge of somewhere in the range of $12,000,000 to $14,000,000 or about $0.03 a share. Excluding the impact of this one time $12,000,000 to $14,000,000 income tax charge that we would incur in Q4, the transaction will be accretive to our earnings per share. While we don't provide earnings guidance and we can't be assured that future performance will mirror or exceed prior performance, I can say that based on the current year results in COSCO Mexico combined with a very low amount of interest income, well less than 1% per annum currently being earned on our incremental cash balances, this transaction will be about 3% accretive to our earnings per share. With that, I'm happy to answer any questions, but will limit my responses related to the financial questions to the items I mentioned above.
With that, I'll turn it back over to Laurel.
Thank you. And your first question comes from the line of Adrienne Saffira with Goldman Sachs. Your line is open.
Thank you. Richard, could you help us think about what if any changes should we be thinking about in terms of growth plans for Mexico in light of this transaction?
Well, we don't provide guidance about where what our growth plans will be, but I did mention that in the last 5 years, we've opened only 2 locations down there.
And when you think about long term opportunity in Mexico?
I think like the other countries that we're in, we think that there's more opportunities down there.
Okay. And then secondly, help us think about capital prioritization. Obviously, you've got you're rich with cash on the balance sheet. How do we think about prioritizations going forward?
Well, I think our prioritization is hasn't changed from yesterday. It's still expanding our operations. We hope to prove that to you as we go forward. As I mentioned on the Q3 earnings conference call a few weeks back, while we have 6 openings planned between now and the end of our fiscal year at the end of August, which would only put us at I think 16 net for the fiscal year that we're currently in. I'd also mentioned on that call that we have 13 planned for the last 4 months of this calendar year, which will be the 1st 4 months of fiscal 2013, which is again, if 1 or 2 of those slip into the early calendar 2013, that's not an believe.
We believe. As members of the Board of Directors of Costco Mexico. Also Jaime Gonzalez will continue as CEO of Costco Mexico. Jaime is a long time Senior Officer of Costco Wholesale Corporation. In terms of our financial statements, the Costco Mexico operations are already consolidated into our income statement with a line item near the bottom of the income statement entitled net income attributable to non controlling interests.
That includes as an offset to our consolidated P and L, the 50% of Cosco Mexico's after tax earnings that are not currently ours. In terms of how this transaction impacts our income statement, there are two things to note. 1st, because the federal income tax rate in Mexico is lower than our effective income tax rate in the United States, the $170,000,000 dividend payment to Costco will cause us to incur in Q4 an after tax income tax charge of somewhere in the range of $12,000,000 to 14,000,000 dollars or about $0.03 a share. Excluding the impact of this one time $12,000,000 to $14,000,000 income tax charge that we would incur in Q4, will be accretive to our earnings per share. While we don't provide earnings guidance and we can't be assured that future performance will mirror or exceed prior performance, I can say that based on the current year results in COSCO Mexico, combined with a very low amount of interest income, well less than 1% per annum currently being earned on our incremental cash balances, this transaction will be about 3% accretive to our earnings per share.
With that, I'm happy to answer any questions, but will limit my responses related to the financial questions to the items I mentioned above. With that, I'll turn it back over to
And your first question comes from the line of Adrian Zafira with Goldman Sachs. Your line is open.
Thank you. Richard, could you help us think about what if any changes should we be thinking about in terms of growth plans for Mexico in light of this transaction?
Well, we don't provide guidance about where what our And when you think about long term opportunity,
And when you think about long term opportunity in Mexico?
I think like other countries that we're in, we think that there's more opportunities down
there. Okay. And then secondly, help us think about capital prioritization. Obviously, you've got you're rich with cash on the balance sheet. How do we think about prioritization going forward?
Well, I think our prioritization is hasn't changed from yesterday. It's still expanding our operations. We hope to prove that to you as we go forward. As I mentioned on the Q3 earnings conference call a few weeks back, while we have 6 openings planned between now and the end of our fiscal year at the end of August, which would only put us that I think 16 net for the fiscal year that we're currently in. I'd also mentioned on that call that we have 13 planned for the last 4 months of this calendar year, which would be the 1st 4 months of fiscal 2013, which is again, if 1 or 2 of those slip into early calendar 2013, that's not an issue in my mind.
But certainly we that's a ramp up relative to what we saw last year in those 4 months quite a bit about a double I believe. So that's our first priority is to continue to expand. I think in the last year we've also shown that we have some we expanded the rate of expansion in some of the countries where we have much fewer locations like Asia and Australia and what have you. So the first and foremost, we'll be expanding our operations. We continue we in May, we paid I think our increased level of quarterly dividend, which we've done each spring for the last many years.
We've also continued to be a buyer of our stock on a relatively regular basis.
Okay.
And lastly
Yes, that would be the level that would be the priority levels.
Got it. And then just lastly, could you help us think about it sounds as if Mexico opportunity, kind of contextualize if that grows to be a bigger part of the expansion plans, how we should be thinking about margin and mix opportunity? Thank you.
Well, I can't be completely specific on Mexico. As you know, we consolidated Mexico just a couple of years ago. And at that time, by consolidating it versus using the equity method prior, it indicated trend wise, I think it indicated that our margins once we consolidated, we showed you in that year how margins went up a little and SG and A went down a little. That would imply that margins are a little better and SG and A is a little lower down there. So that's good relative to the company as a whole.
But there are other countries like that as well.
Thank you. Best of luck.
And your next question comes from the line of Charles Grom with Deutsche Bank. Your line is open.
Thanks. Good morning, Richard. The 3% accretive, is that net of the $0.03 charge that you're going to incur in the Q4?
No. That's a one time that's just a one time charge for income taxes.
Okay. So it's excluding that? Okay. And then when you look at your minority interest line in 2011 and in the 1st 3 quarters of this year. Could you give us the exact amount that's related to Mexico?
Or is it entirely related to Mexico?
It's not entirely related to Mexico. We won't disclose that, but needless to say in Q4 and Q1, Q4 because it's a partial quarter in Q1, it's a full quarter on a year over year comparison. You'll probably get a sense of it. But no, there's other aspects of our we consolidate Taiwan where we are a 55% owner. Okay.
Part of Taiwan's earnings offset to earnings would be down there as well.
Okay, great. And then just when you look ahead, does this kind of open up an avenue for growth as you kind of move into Latin America, South America for you guys? I know you've got some current thoughts on Europe, but is there some opportunity for growth down below Mexico?
When we know, we'll let you know. At this point, we're just buying this and we've got a lot going on right now.
Okay, great. Thanks a lot.
Your next question comes from the line of Peter Benedict with Robert Baird. Your line is open.
Hey, Richard. Just can you give us a sense of maybe just how business has been in Mexico, maybe local currency comps or just conceptually how that market has performed for you guys relative to the rest of your regions? Just trying to get a sense of how it's trending. Thanks.
Yes. I think overall Mexico has been a little better than our company average over the last few years. There are no giant outliers mind you other than in a country where we in Australia where you have 1 unit comping or getting ready to comp or 2nd and third that's a whole different story because it's brand new. But generally speaking kind of like Canada has been a little bit stronger in the last couple of years. Mexico too has had a for us at least a decent economy down there for us.
Okay. And I apologize if I missed this if you already mentioned this. But in terms of why now, like why did this transaction occur now? Was there any particular catalyst that you could call out?
No. I mean we've had a very good long time relationship with our partners at Commercial. Ultimately, it took a buyer and a seller to agree on something here. And we again, it was a good relationship when we were 50% owner and manager of this process. And we think is a good use of our cash and it happened now.
Okay. Well, we agree. Thanks.
Thank you.
Your next question comes from the line of Heinbockel with Guggenheim. Your line is open.
Hey, Richard. Philosophically, when you look at the swinful, the accretion, do you look at it independently of the things you want to do in the business elsewhere meaning you've got 3% coming in that you might not have had before? Is that an opportunity to invest elsewhere? Or are they solely independent decisions?
I would say it's independent. Needless to say, we have some would argue a very strong cash balance and we thought this is a good use of our cash. And certainly, we are comfortable with our operations in Mexico. And so using these funds to make this investment is by no means precludes anything else that we're doing.
Well, I guess I was thinking less in terms of a capital investment more in terms of investment in the business I. E. Pricing, labor, etcetera. Since you have that accretion to play with, are those independent decisions would you say?
I would say those are independent as well.
Okay. So just the fact that you've got whatever coming in the door doesn't mean you look at that and say, well, we can now invest a little more in U. S. Or Canada or wherever. That has no bearing on what you want to do operationally?
I think everyone knows generally that we're going to do what we want to do with investing in pricing independent of this accretive accretion.
All right. Thanks.
Your next question comes from the line of Michael Eckstein with Credit Suisse. Your line is open.
Thank you very much. Richard, quick question. How much did Comercy's financial problems impact the opening rate down there?
I think you'd have to ask them.
Okay. Thank you.
Your next question comes from the line of Faye Lamb with Consumer Edge. Your line is open.
Hi. Just a little question, what's the when you say 3 percent accretion, I just want to understand what time horizon you're talking about? It wasn't clear to me.
I'm sorry, could you repeat the question?
3% the 3% accretion is over what time horizon?
Well, that will be over any basically over the next year going once the transaction is closed, which we anticipate no sooner than the end of this month could drag on a little depending on certain regulatory agreements.
Okay. All right. All right. I just wanted to make sure. And also just assume since things there have been going well, I mean, how should we think of are there still synergies going forward after this after the initial period?
I mean, are there synergies in the operational synergies now that you own all of them?
No, I mean, it has been run, not really. I mean this is it's run by us. And of course there has been relationship, a long time relationship with Commercial and we've done some real estate things together. And but no, I don't think anything really changes operationally. It's just who owns the shares.
Okay, terrific. Thanks.
Your next question comes from the line of Andrea Teixeira with JPMorgan. Your line is open. Hi, good morning. Thanks for taking my question. Richard, I'm a colleague of Chris Rivers here at JPMorgan and Covelina America.
Would you say that you plan to accelerate the 1st space in Mexico now that you have full control of the business plan? And if you can also comment on how same store sales has been behaving in Mexico so far? Thank you.
Well, we don't comment on our future expansion plans other than overall showing you what we've done over the last couple of years as it relates in terms of our whole company. As I mentioned, our comps in Mexico have been pretty decent relative to our company as a our consolidated company as a whole. And hopefully that will continue.
Okay. Thank you. Congratulations on the transaction. Thank you.
Thank you.
And there are no further questions at this time. I turn the call back over to Mr. Galansky.
Well, thank you. We didn't expect a lengthy call here. I appreciate people listening in and have a good day. Thank you, Raul.
You're welcome.
Hey, Richard. Just can you give us a sense of maybe just how business has been in Mexico, maybe local currency comps or just conceptually how that market has performed for you guys relative to the rest of your regions? Just trying to get a sense of how it's trending. Thanks.
Yes. I think overall Mexico has been a little better than our company average over the few years. And then there are no giant outliers mind you other than in a country where Australia where you have 1 unit comping or getting ready to comp or second and third that's a whole different story because it's brand new. But generally speaking, kind of like Canada has been a little bit stronger in the last couple of years. Mexico too has had a for us at least a decent economy down there for us.
Okay. And I apologize if I missed this if you already mentioned this. But in terms of why now like why did this transaction occur now? Was there any particular catalyst that you could call out?
No. I mean, we've had a very good long time relationship with our partners at Commercial. Ultimately, it took a buyer and a seller to agree on something here. And we again, it was a good relationship when we were 50% owner and manager of this process. And we think that's a good use of our cash.
And of this process and we think this is a good use of our cash and it happened now.
Okay. Well, we agree. Thanks.
Thank you.
Your next question comes from the line of Heinbockel with Guggenheim. Your line is open.
Hey, Richard. Philosophically, when you look at the swin fall, the accretion, do
do you
look at it independently of the things you want to do in the business elsewhere, meaning you've got 3% coming in that you might not have had before. Is that an opportunity to invest elsewhere? Or are they solely independent decisions?
I would say it's independent. Needless to say, we have some would argue a very strong cash balance and we thought this is a good use of our cash. And certainly we are comfortable with our operations in Mexico. And so using these funds to make this investment is by no means precludes anything else that we're doing.
Well, I guess I was thinking less in terms of a capital investment more in terms of investment in the business I. E. Pricing, labor, etcetera. Since you have that accretion to play with, are those independent decisions would you say?
I would say those are independent as well.
Okay. So just the fact that you've got whatever coming in the door doesn't mean you look at that and say, well, we can now invest a little more in U. S. Or Canada or wherever that has no bearing on what you want to do operationally?
I think everyone knows generally that we're going to do what we want to do with investing in pricing independent of this accretive accretion.
All right. Thanks.
Your next question comes from the line of Michael Eckstein with Credit Suisse. Your line is open.
Thank you very much. Richard, quick question. How much did Commercy's financial problems impact the opening rate down there?
I think you'd have to ask them.
Okay. Thank you.
Your next question comes from the line of Faye Lamb with Consumer Edge. Your line is open.
Hi. Just a little question, what's the when you say 3% accretion, I just want to understand what time horizon you're talking about? Wasn't clear to me.
I'm sorry. Could you repeat the question?
3% accretion is over what time horizon?
Well, that will be over any basically over the next year going once the transaction is closed, which we anticipate no sooner than the end of this month could drag on a little could drag on a little depending on certain regulatory rules. Okay.
All right. I just wanted to make sure. And also just assume since things there have been going well, I mean, how should we think of are there still synergies going forward after this after the initial period, I mean, are there synergies in operational synergies now that you own all of them?
No, I mean, it has been run, not really. I mean, this is it's run by us. And of course there has been relationship, long time relationship with Commercial and we've done some real estate things together. And but no, I don't think anything really changes operationally. It's just who owns the shares.
Okay, terrific. Thanks.
Your next question comes from the line of Andrea Teixeira with JPMorgan. Your line is open. Hi, good morning. Thanks for taking my question. Richard, I'm a colleague of Chris Ruvers here at JPMorgan and Covala Latin America.
Would you say that you plan to accelerate the 1st space in Mexico now that you have full control of the business plan? And if you can also comment on how same store sales has been behaving in Mexico so far? Thank you.
Well, we don't comment on our future expansion plans other than overall showing you what we've done over the last couple of years. As it relates in terms of our whole company, As I mentioned, our comps in Mexico have been pretty decent relative to our consolidated company as a whole. And hopefully that will continue.
Okay. Thank you. Congratulations on the transaction. Thank you.
Thank you.
And there are no further questions at this time. I turn the call back over to Mr. Galansky.
Well, thank you. We didn't expect a lengthy call here. I appreciate people listening in and have a good day. Thank you, Laurel.
You're welcome.