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Edited Transcript of PGOLD.PS earnings conference call or presentation 13-Nov-19 7:00am GMT

Q3 2019 Puregold Price Club Inc Earnings Call

Ermita, Manila Dec 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Puregold Price Club Inc earnings conference call or presentation Wednesday, November 13, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony G. Sy

Puregold Price Club, Inc. - President of S & R Membership Shopping

* John Marson T. Hao

Puregold Price Club, Inc. - VP of IR

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Conference Call Participants

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* Angelo Torres

Nomura Securities Co. Ltd., Research Division - Research Analyst

* Carissa Mangubat

Deutsche Bank AG, Research Division - Research Analyst

* Frederick Evan Chua;Abacus Securities;Analyst

* Hannah Le

Hansabay Pte Limited - Investment Analyst

* Jody Santiago

UBS Investment Bank, Research Division - Head of Philippines Research, Executive Director and Philippines' Strategist

* Karisa Garcia Magpayo

Macquarie Research - Analyst

* Maria Victoria Tabora;Campden Hill Advisors;Analyst

* Renzo Louie Candano

Daiwa Securities Co. Ltd., Research Division - Research Analyst

* Selviana Aripin

HSBC, Research Division - Consumer Analyst, ASEAN

* Utkarsh Mehrotra

JP Morgan Chase & Co, Research Division - Analyst

* Van Linh V.

Albizia Capital Pte Ltd - Investment Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to Puregold's Third Quarter 2019 Results Briefing. John Hao, please begin.

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [2]

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Good afternoon, everyone, and thank you for joining us in the 9 months results briefing. I have here with me Mr. Levi Labra, our Board Consultant; and Mr. Anthony Sy, the President of S&R. So we have sent out the presentation earlier around lunchtime. So I hope everybody got their copy of the presentation. It's also disclosed to the Philippine Stock Exchange for you to download, if you want.

So going to Slide 4. It shows you the rapid expansion that we had over the last 20 years. We ended 2018 with 409 stores, and in the first 9 months of 2019 -- going to Slide 6, we have opened 17 new Puregold store, 1 S&R warehouse, and we closed down 2 Puregold store and 1 S&R QSR. We're currently operating 423 stores with a consolidated net selling area of around 550,000 square meters.

For our financials, I would like to take note that we have already restated our quarterly numbers through PFRS 16 since the first quarter. Consolidated net sales expanded by 10.3% in the first 9 months to PHP 109.8 million. Puregold store sales accounted for 77% of consolidated net sales while 23% is coming from S&R. Consolidated gross profit grew by 7.6% to PHP 18.22 billion with GPM of 16.6

Consolidated operating income increased by 6.8% with operating margin of 6.9%. Consolidated net income improved by 2.9% in the first 9 months with the consolidated margin at 4.1%. Without the onetime gain in Lawson last year, consolidated core net income grew by 12.1% to PHP 4.55 billion with a net margin of 4.1%. For Puregold only, the net margin is at 3% while S&R net margin is at 7.5%. Excluding the onetime gain, Puregold only core net income is up 1.8% with a net margin of 3% or lower by 0.2% versus last year.

Slide 7 will show you that our same-store sales growth for Puregold is at 5.6% while for S&R it's 8.4%. For Puregold, the same-store traffic is at negative, but same-store ticket size or basket is growing quite fast at 9.3 For S&R, both traffic -- same-store traffic and same-store basket is growing positive.

So Slide 8 and 9 will show you the breakdown of our stores per format, per region. We now have 423 stores, 53% are hypermarkets stores, 24% supermarkets, 10% are the extra or the smallest ones and around 13% of the store count is coming from S&R and its QSR.

Slide 10 will show you our net sales growing 10.3%, our GP growing 7.6%. Slide 11 will show you our other operating income growing 9.4% to PHP 2.3 billion, which is roughly around 2.1% of our sales.

OpEx. We've managed to control our OpEx in the first 9 months, so it's growing less than revenue at 8.4%. We're doing around PHP 12.9 billion in OpEx for the first 9 months or 11.8% to sales, which is lower by 0.2% versus last year. For Puregold only, we have reduced our OpEx as a percentage to sales by 0.3% from 11.4% last year to 11.1% in 2019. While for S&R, the reduction was 0.1% from -- coming from 14% last year to 13.9% this year.

Slide 12 will show you our consolidated operating profit or EBIT, which is up 6.8% to PHP 7.6 billion, while net income is up 2.9% to PHP 4.55 billion.

Slide 13 and 14 will show you the key financials for Puregold and S&R only. So revenues for Puregold only is up 9% while for S&R, it's around 14.9%. GP margin for Puregold declined by 1% at 14.8% versus last year 15.8%, while S&R improved its GPM from 21.4% last year to 22.6% this year. For the third quarter of this year, Puregold GPM is at 14.4% versus 15.3% in the third quarter of 2018. We continue to experience lower supplier support versus last year, but the company sees that the trend of the rate of decline is already improving. So coming from the second quarter of 2019, there was a decline of around 1.5% in the GPM. But coming to the third quarter, the rate of decline is only 0.9%. So we're hoping that the -- that this will continue to improve coming in the fourth quarter as we see things doing better this fourth quarter as we hit our volumes and sales targets.

So next will be EBITDA. For Puregold only, it's down 1.1% to PHP 6.4 billion while for S&R it's up 23.3% to PHP 3.97 billion. For the net profit, Puregold is down 11.2% in the first 9 months to PHP 2.5 billion. But for core net income, excluding the one-off gain last year, net profit increased by 1.8% for Puregold only. And for S&R, the net profit increased by 28.3% to PHP 2 billion. So the net margin of S&R is at 8.1%.

So Slide 15 will show you our inventory days coming down by 2.9 days in the first 9 months of 2019 versus 2018 numbers -- 9 months 2018. Puregold only inventory days is at 59 -- 56 days versus 60 days 9 months last year while S&R is at 72 days this year versus 70 days last year 2018. Trade payable days is at around 16 days. We continue to avail of continued early payment discounts coming from supplier, but we're also looking to increase our trade terms of payment with our new supplier going forward from the current normal of 30 days to around at least 45 days.

So Slide 16 will show you the CapEx guidance, and Slide 17 will show you our guidance for 2019. What has changed for Slide 17 would be the SSSG guidance. So for Puregold, it's at 4% to 6%. And for S&R, we've increased it to 6 -- between 6% to 7% for the full year. We continue to open our -- we are looking to open 25 new Puregold stores for 2019. And for S&R, we are opening 2 new S&R this year. The first one in -- it was opened already in Lipa in the early part of this year and the second store will open next month. And so the other 2 stores will be pushed back to 2020 opening -- store opening.

So just to recap, Puregold's business strategy is to grow our revenues, market share and achieve economies of scale, to make money by selling products to consumers who recognize that supplier support is coming late. Our company is trying our best to provide long-term shareholder value by trying to improve on 2 key areas. The first one being strengthening and improving efficiency in our supply chain. And number two, improving our product and pricing mix going forward. With those 2 strategies, we believe that we can improve our GPM sustainably going forward and at the same time continue our good relationship with suppliers. In a challenging retail industry such as ours, we're always balancing or playing a balance between GP margin with our sales volume and net profit for the benefit of all shareholders. This has been our key success since the beginning. Despite the softness in our GP margin, Puregold continues to be the industry leader in terms of consolidated net margin. We're currently at 4.1% while the industry is between 2% and 3%.

So now we open the floor to Q&A. Please feel free

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question, Selviana from HSBC.

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Selviana Aripin, HSBC, Research Division - Consumer Analyst, ASEAN [2]

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Can you hear me? Hello?

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [3]

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Hi, Selviana.

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Selviana Aripin, HSBC, Research Division - Consumer Analyst, ASEAN [4]

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Just one question for me. With regards to your commentaries around the fact that the supplier support appears to be coming late, how confident is the management that the trend for supplier support decline is sort of bottoming at this particular point? And should we expect some sort of improvement as early as 4Q of '19?

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [5]

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Okay. So going on a per quarter, let's say, first quarter 2019, the decline in the GPM was 0.5%. While in Q2, I think that was the lowest point already, we -- the decline was around 1.5%. And then going into Q3, the GPM decline was 0.9%. So we're looking to hopefully improve this coming through the fourth quarter of this year. So maybe the rate of decline would be less compared to what we have experienced in the third quarter. I don't know if that answered your question.

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Selviana Aripin, HSBC, Research Division - Consumer Analyst, ASEAN [6]

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Okay. Sure.

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Operator [7]

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Our next question, Renzo from Daiwa.

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Renzo Louie Candano, Daiwa Securities Co. Ltd., Research Division - Research Analyst [8]

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John, I just wanted to ask how you guys are being affected by the African swine fever outbreak, and if ever there are lower pork sales, are chicken sales making up for it?

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [9]

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Yes. So everybody is affected with the African swine flu. So people get scared buying pork products or consuming pork products. But at the same time, we see a pickup in terms of our chicken sales. But let's say, for some provinces or cities that totally banned processed meat, so let's say they will ban hotdogs or longganisa, then alternate products would be the chicken-based hotdogs, but I haven't heard of chicken longganisa yet. So yes. There would be some slowdown on some of these pork-based products.

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Operator [10]

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Our next question, Jody Santiago from UBS.

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Jody Santiago, UBS Investment Bank, Research Division - Head of Philippines Research, Executive Director and Philippines' Strategist [11]

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So aside from the fact that the decline is slowing on supplier support, what makes you confident that we could see this improving in succeeding quarters? Basically, the question is, what do you think drives the supplier support? And what are you doing to ensure that the decline is arrested or we start seeing it move up going forward? That's the first one.

And then the second one is the number of stores for S&R. So 2 stores will open when next year? And what would be the total number of stores opened next year?

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [12]

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Jody, so for the big suppliers, we're already locking it in with them for the fourth quarter. So hopefully, that can improve the situation on the level of marketing and promo support coming from the supplier.

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Anthony G. Sy, Puregold Price Club, Inc. - President of S & R Membership Shopping [13]

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New stores. Two new stores.

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [14]

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Oh, new stores. For 2020, S&R will open 2 new stores for 2020. So the 2 stores this year was pushed to 2020 opening.

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Anthony G. Sy, Puregold Price Club, Inc. - President of S & R Membership Shopping [15]

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First quarter.

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [16]

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In the first quarter of 2020.

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Jody Santiago, UBS Investment Bank, Research Division - Head of Philippines Research, Executive Director and Philippines' Strategist [17]

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So -- sorry, just to follow up. So the 2 stores have been moved to 2020. So that means in terms of the rollout of S&R stores, we're looking at maybe just 2 stores a year instead of -- I think I -- well, I got the impression that the rollout was going to be faster than 2 stores a year moving forward.

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Anthony G. Sy, Puregold Price Club, Inc. - President of S & R Membership Shopping [18]

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Yes. We were looking at -- we were actually looking at opening a few, maybe 3 to 4 this year. But unfortunately, due to construction challenges, we have to push back the 2 into the first quarter of next year. Having said that, we also have secured 2 new sites, but we haven't broken down -- broke ground on these 2 new sites that we -- the 2 new leases that we recently signed. So as of today, we cannot fix the opening date of the 2 new stores, whether it would be Q4 2020 or Q1 2021. So once we have more visibility, we would be advising this information at a later date.

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Operator [19]

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There are currently no questions in queue. (Operator Instructions) Our next question, Angelo from BDO Nomura.

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Angelo Torres, Nomura Securities Co. Ltd., Research Division - Research Analyst [20]

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John, I just want to clarify. What's driving the margin expansion for the S&R segment and how sustainable is this? And my next question is, can you comment on your M&A pipeline, especially since last quarter you mentioned that the process of looking for a target or an acquisition has begun?

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Anthony G. Sy, Puregold Price Club, Inc. - President of S & R Membership Shopping [21]

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Okay. A couple of factors that impact our margin improvements. One factor is the U.S. dollar versus Philippine peso exchange rate. We were fortunate that the exchange rate moved in our favor. So that, in effect, lowered our pricing -- our cost price. Secondly is, as we continue to build scale, we're able to improve on our -- both our buying cost and our logistics cost. Improvements in our logistics also afford us to slowly gain a few basis points in our GM. So basically, these are the -- the exchange rate, the scale and improvements in our logistics are the 3 main contributors to having us have better margins.

With regards to your second question on the M&A, so we're still on the lookout, but we currently don't have any update nor disclosure. But we will make necessary disclosure once things have been signed or firmed up already. But yes, we cannot discuss anything about these M&A at the moment.

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Operator [22]

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Our next question, Utkarsh from JPMorgan.

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Utkarsh Mehrotra, JP Morgan Chase & Co, Research Division - Analyst [23]

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John, I have 2 questions. Firstly, on the same-store sales growth for -- both for Puregold and S&R. There was slight slowdown in the third quarter, especially for Puregold only. Just wondering what has caused that. Are there any one-off factors, probably the typhoon last year or something in particular, maybe the African swine flu that caused this? Or are you seeing something structural? Because I noticed the traffic has been declining.

And secondly, I wanted to also check on a similar question asked earlier on the supplier support. So I want to understand whether it is supplier support which is probably coming back leading to higher gross margins? Or is it that you're taking pricing much higher given the fact that your ticket has been quite not steady? That's all.

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [24]

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So some of the challenges that we're currently facing are the following: number one, ASF; number two, ban on sugary drinks in schools, and a lot of snack foods also is banned in schools, both public, private schools; and then third, there's currently a liquor ban within a certain radius from schools in Manila, the City of Manila. So that affects around 20 stores for us. Those are big stores. So yes, that kind of contributed, in some ways, a slowdown in our SSSG for the third quarter.

And then -- sorry, what's the second question?

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Unidentified Company Representative, [25]

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For S&R's SSSG.

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Anthony G. Sy, Puregold Price Club, Inc. - President of S & R Membership Shopping [26]

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For S&R's SSSG, we have an SSSG of 8.4% compared to last year's 8.8%. Well, one of the newest stores that we opened in 2019 was in Lipa. And as we opened the new store, we expected that there would be some cannibalization to our existing store, which we foreseen and we've foreseen that there will be some cannibalization, but we feel comfortable at the rate that we are -- with that we have in terms of our SSSG.

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Utkarsh Mehrotra, JP Morgan Chase & Co, Research Division - Analyst [27]

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And just on the margins, gross margins, wanted to understand where you've seen the quota coming -- or maybe the decline -- the rate of decline slowing down in fourth quarter. Is it the supplier support coming back? Or is it the pricing which should help you gain back some of the lost count?

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Anthony G. Sy, Puregold Price Club, Inc. - President of S & R Membership Shopping [28]

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Just a moment.

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [29]

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Utkarsh, so for the improvement in the GPM, there's not much price increases. So it's really more of the level of support coming from the supplier that we see is coming back, and it will -- is improving compared to the earlier part of the year.

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Operator [30]

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Our next question, Frederick from Abacus Securities.

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Frederick Evan Chua;Abacus Securities;Analyst, [31]

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Two questions for me. The first one on SSSG, just wanted to know if the -- you're confident that Q4 would sustain the high SSSG for both Puregold and S&R? Because sequentially, quarter-on-quarter, since Q1, it's been decelerating for both Puregold and S&R.

And then second question is on Puregold. I see that the traffic has been going down for quite some time, but it's also accelerating. So could you give more color on that?

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [32]

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Yes. So on the Puregold side, yes, the same-store traffic is coming down, negative 3.3%, but you also have to acknowledge that the basket size or ticket growth is also growing faster at 9.3%. So in the store, it's probably due to traffic situation in Metro Manila. So people come less often. And at the same time, when they come, they just buy more items that they put in the basket so that they don't need to come every other day or come often to the Puregold store. I think we're -- in terms of our guidance, we're doing between 4% to 6%. So hopefully, we'll be in that range, hopefully in the higher end of that range. But as I said, there are challenges that we're currently facing, the 3 that I mentioned earlier, that's why the guidance is a little bit wider compared to S&R, which is around 1% difference only in their guidance.

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Operator [33]

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Our next question, Carissa from Regis.

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Carissa Mangubat, Deutsche Bank AG, Research Division - Research Analyst [34]

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I just wanted to ask -- so I noticed that your OpEx has also been coming down proportionately as a percent of sales. So I just wanted to check what exactly are you doing to -- which cost items are coming down? Or are -- is there any conscious effort to bring down certain costs? If you could just elaborate a bit on that.

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [35]

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So if you look at the cost year-on-year for, let's say, old stores, it's fairly flat, like very minimal, plus 1%, plus 2%. The additional OpEx are mainly coming from the new stores that were opened last year and the new stores that opened this year. So those were the -- the increases were mainly because of those new stores that we are expanding.

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Carissa Mangubat, Deutsche Bank AG, Research Division - Research Analyst [36]

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So basically, what you're saying is that you're seeing very minimal OpEx inflation for the older stores? So the incremental OpEx we're seeing now is almost all related to your -- to the new stores that you've opened?

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [37]

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Yes, correct.

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Operator [38]

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Our next question, Karisa Magpayo from Macquarie.

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Karisa Garcia Magpayo, Macquarie Research - Analyst [39]

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Yes. Just a follow-up to the earlier question. Are you -- is Puregold undertaking some cost-containment efforts? You mentioned earlier that OpEx growth was contained in the first 9 months, so just wanted to ask if there are any cost saving efforts or initiatives being undertaken by the company.

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [40]

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Just a moment. So there are 2 factors. The first one is, for our Vis-Min stores, the OpEx to sales is coming down already compared to when they first -- during their first year or first 2 years of operation. (inaudible) sales is growing already in those Vis-Min stores.

The second one is we are trying to manage our controllable cost. I mean, Mr. Co is very good in doing that. So yes.

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Karisa Garcia Magpayo, Macquarie Research - Analyst [41]

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Also on Puregold, what's the reason for those 2 store closures that were disclosed -- that was disclosed? And which formats are these? Are these supermarket type, hypermarket or discounted stores?

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [42]

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They're both hypermarket stores. The first one is in Puregold Imus because the store already -- the lease already expired and the owner of the store doesn't want to renovate, and we always have flooding in that area. The second one is Puregold St. Francis Square near Megamall. So that one, the building is being renovated. So a few floors of the building is being renovated. And we are in the basement level, so we don't see people coming in if there's construction. And when the lease expired last July, we opted not to renew anymore because there's -- we feel that there's no one going to go in the basement level of St. Francis Square when this building is renovated.

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Karisa Garcia Magpayo, Macquarie Research - Analyst [43]

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All right. And then lastly, on S&R, may I know the membership count and growth year-on-year on a consolidated basis and a same-store basis?

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Anthony G. Sy, Puregold Price Club, Inc. - President of S & R Membership Shopping [44]

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For consolidated basis, our membership is around 864,000. And on a -- so that's a growth of 0.5% same time -- same period last year. And then for our like-for-like, it's 762,000, which is -- when compared to the same period last year, it's negative 5.7%.

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Karisa Garcia Magpayo, Macquarie Research - Analyst [45]

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Are there initiatives to bring up the like-for-like membership count moving forward? I noticed that it's been declining this year.

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Anthony G. Sy, Puregold Price Club, Inc. - President of S & R Membership Shopping [46]

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We also see that, but what we -- more importantly, when we analyze the data, it's not in the number of members that we have, but I would say in the quality of members that we have. As you can see in our increasing revenue, our increasing SSSG and increasing basket size, we would say that as our membership numbers does not grow at the same rate -- as our membership numbers are -- may not be accelerating as fast as we wish it to be, our revenue continued to grow at a faster clip than the membership count. So that would translate to better-quality members that we have. But it's always the drive to increase our members. There's always that conscious effort to do that.

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Operator [47]

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Our next question, Linh Vo from Albizia Capital.

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Van Linh V., Albizia Capital Pte Ltd - Investment Analyst [48]

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(inaudible) Just with regards to -- but can I just check again on your supplier rebates, especially on the Puregold side? So you've been seeing quite a bit of decrease over the past few quarters, has that recovered in the current quarter or in the fourth quarter so far?

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [49]

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Sorry. I cannot hear the question clearly. Can you repeat the last line?

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Van Linh V., Albizia Capital Pte Ltd - Investment Analyst [50]

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So on the supplier rebates, has it recovered in the third quarter or fourth quarter?

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [51]

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Sorry, Linh.

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Operator [52]

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Sorry to interrupt, Linh. Linh Vo, can you actually speak -- can you at least distance away from your microphone or from your headset so that your voice is clear rather than muffled?

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Van Linh V., Albizia Capital Pte Ltd - Investment Analyst [53]

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Oh sorry. Yes, yes. I'm currently in the basement. So sorry for that. So just want to get an idea of the supplier rebates that were down quite significantly over the past few quarters. Has that kind of picked up in the third quarter to support your profitability?

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [54]

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Yes. Yes, it has picked up. So looking at it, as I earlier mentioned, looking at it from Q1, Q2, Q3, Q1 decline was 0.5% on the GPM. Q2, it was 1.5% decline. But Q3, we recovered a little bit already. So the decline was only 0.9%. So we're hoping to improve on it come Q4.

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Van Linh V., Albizia Capital Pte Ltd - Investment Analyst [55]

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You mentioned -- sorry, it's down 0.5% in first quarter, minus 1.5% in second quarter and minus 0.9% in the third quarter. Is that correct?

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [56]

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Yes. Correct.

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Van Linh V., Albizia Capital Pte Ltd - Investment Analyst [57]

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Okay. So the losses are still there, although it's just narrow a bit quarter-on-quarter, this is what you are saying?

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [58]

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Yes.

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Van Linh V., Albizia Capital Pte Ltd - Investment Analyst [59]

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Okay. Then can I also check on Aling Puring sales. Is this (inaudible) sales per customer? How has that grown over the past couple of years?

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [60]

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Well, the Aling Puring sales is around 1/3 of our business. So it's still growing.

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Van Linh V., Albizia Capital Pte Ltd - Investment Analyst [61]

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Right. I mean do you have visibility? I mean it's growing from additional base of customers? Or are we kind of seeing some of that customers transition on potentially to more than mom-and-pops or to other competitors?

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [62]

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Well, our members is around 400,000 card members for the Tindahan ni Aling Puring. This has been growing. I remember a few years ago, that's probably 300,000 members. But overall, on a national basis, the mom-and-pop store in the Philippines is roughly around 1 million to 1.1 million members. So more or less, we account for around 40% of these mom-and-pops stores.

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Van Linh V., Albizia Capital Pte Ltd - Investment Analyst [63]

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Right. Okay. And then on S&R, can you talk a bit about what Landers or other potential competitors are doing that you've seen? And what could derail very high growth rates that you posted so far in the coming quarters?

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [64]

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Just a moment.

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Anthony G. Sy, Puregold Price Club, Inc. - President of S & R Membership Shopping [65]

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By name, Landers is a membership shopping. It has -- compared to other retailers, it has a higher proportion of imported items compared to the other retailers. However, that's -- there's -- it may seem to be similar to our business model, but in reality, it's a -- we probably attract different types of customers. Our market positioning is very different from theirs, where we have a lot more loyal members. Our membership model is sustainable. And I would say we -- they are able to -- we don't see it as a competitive threat to us. However, they -- for their locations, they -- with the traffic situation in Manila, I would say they have their own clientele around their areas. So as we move along, I would see they're becoming more of a regular hypermarket than a warehouse club in terms of their SKU count, their SKU discipline and their amount of local products is very different from the way we position our business practices or our business model.

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Van Linh V., Albizia Capital Pte Ltd - Investment Analyst [66]

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Right. Sorry. Last question on that. I mean for their SKU business then, as you mentioned, is that a function of they're trying to position it differently, or is it something along the supply chain that (inaudible) very difficult to replicate?

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [67]

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Linh, sorry. Can you repeat the question?

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Van Linh V., Albizia Capital Pte Ltd - Investment Analyst [68]

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I mean the difference in SKU discipline between S&R and Landers, is that because of your supply chain intricacies? Or is it because you think Landers is just trying to position themselves very different from S&R?

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Anthony G. Sy, Puregold Price Club, Inc. - President of S & R Membership Shopping [69]

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We definitely have very different supply chain practices. And I would probably say that they're trying to continually define their model right now. So it's -- their model seems to be very fluid as of the moment, so we have a very clear differentiation with them.

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Operator [70]

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Our next question, Jody Santiago from UBS.

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Jody Santiago, UBS Investment Bank, Research Division - Head of Philippines Research, Executive Director and Philippines' Strategist [71]

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John, just wanted to follow up on the lower membership at S&R. What factors would you attribute that to? Because I know we want higher-quality members, but at the same time, we also want to be growing the members. So this decline, is it due to cannibalization? Is it due to competition? What would you attribute this to?

And then secondly, there was a question earlier on same-store sales growth actually declining on a quarterly basis. But then your guidance next year on same-store sales growth -- or sorry, for the full year, you actually increased it. What gives you the confidence that it will be stronger? So why did you increase your guidance when the quarterly numbers have been declining?

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Anthony G. Sy, Puregold Price Club, Inc. - President of S & R Membership Shopping [72]

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Okay. With regards to our membership count, I just want to clarify. My -- our membership count is actually increasing. Last year, year-to-date September, our membership count is 860,000. While this year, it's 864,000. So it's a 0.5% increase. Now when I say that the SSSG -- we have currently 17 warehouses. When I say the SSSG is declining, the 14 warehouse membership is declining, but what we see is, for the convenience of the members, they may originally buy their membership from the 14 existing old warehouses, but when they renew their membership cards, they go to a closer or a newer membership warehouse and that's where they renew their membership number -- their membership. So when we count the SSSG, we only count the -- when we look at the SSSG, it's only the old 14 versus 14. So we may see a decline in the membership number because they move and renew their card in the new warehouses, wherein we don't count that. So it -- in some ways, it's cannibalization. But it's how -- it's our methodology of tracking the members. When they move to a new warehouse, we count it as a member of the new warehouse and not a member of the old warehouse anymore.

What's the second question?

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [73]

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(foreign language) SSSG guidance (foreign language)

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Anthony G. Sy, Puregold Price Club, Inc. - President of S & R Membership Shopping [74]

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(foreign language) We can see already.

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [75]

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Jody, so we're just updating the guidance on Slide 17 because when we do the forecast, the SSSG will not go below this number anymore even if we assume a certain low SSSG number in the fourth quarter for S&R. That's why we increase the S&R's SSSG guidance to between 6% and 7%.

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Jody Santiago, UBS Investment Bank, Research Division - Head of Philippines Research, Executive Director and Philippines' Strategist [76]

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And then you increase Puregold also?

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [77]

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For Puregold, no, it's the same, 4% to 6%.

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Operator [78]

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There are currently no questions in queue. (Operator Instructions) Our next question, Hannah from Hansabay.

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Hannah Le, Hansabay Pte Limited - Investment Analyst [79]

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I have very quick questions on the margins of Puregold stores. Can I just review? So you're saying Puregold store gross profit margins in the fourth quarter this year would improve? And is it improve quarter-on-quarter or is it improve year-on-year? And is it okay if I check again in the payables days? Because I noticed it actually has come down significantly in the third quarter, yes. So how should I look at this?

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [80]

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Sorry. The first question is you would like to ask what our...

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Hannah Le, Hansabay Pte Limited - Investment Analyst [81]

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So the gross profit margins for Q4 for Puregold stores.

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [82]

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Oh, Puregold.

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Hannah Le, Hansabay Pte Limited - Investment Analyst [83]

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It's going to be slower decline? Or is it going to be an improvement quarter-on-quarter or year-on-year?

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [84]

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We're hoping that the rate of decline is slower compared to the third quarter. So third quarter, it's down 0.9%. So we're hoping that fourth quarter the rate of decline is less than 0.9%.

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Hannah Le, Hansabay Pte Limited - Investment Analyst [85]

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All right. And how about the payable days?

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [86]

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Payable days. Well, we estimate that once it is -- in the full year, usually, the last 2 weeks of Decembers, we stop -- we do a partial freeze payment to suppliers. So we anticipate these trade payable days to go up in the low 20s level come full year number, which is normally the case.

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Hannah Le, Hansabay Pte Limited - Investment Analyst [87]

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Okay. And would this gross profit margins extend in 2020 considering -- or provided that your payables days will remain the same?

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [88]

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Okay. Usually, the first quarter, second quarter and third quarter is usually a lower trade payable days because we don't do any freeze payment to suppliers. While in the last 2 weeks of December, we do a partial freeze payment to suppliers. That's why it normally shoots up in the end December number. So it has nothing to do with our GPM.

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Hannah Le, Hansabay Pte Limited - Investment Analyst [89]

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Okay. It has come down quite significantly over the year? So -- and why is that so?

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [90]

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Yes, it has come down, let's say, if you compare it 5 years ago, 2014, 2015. Why? Because during those years, 2014, 2015, the -- in the last 2 weeks of December, it's a full freeze payment to all suppliers. While starting 2016, we do a partial freeze payment only to suppliers in the last 2 weeks of December.

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Hannah Le, Hansabay Pte Limited - Investment Analyst [91]

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Sorry. So in the last weeks of December, recently, you do a full payment to your suppliers, but previously, you only do a partial payment in the last 2 weeks?

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [92]

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No. No, no. Freeze. Full freeze payment. Meaning in 2014, starting December 15, I do not pay any of my suppliers. And then, let's say, starting 2015, 2016, 2017, I only pay some suppliers during the last 2 weeks of December.

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Hannah Le, Hansabay Pte Limited - Investment Analyst [93]

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I see. Okay. And so should I expect these payables days to remain in this level in the next few years?

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Unidentified Company Representative, [94]

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Year-on-year. (inaudible)

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [95]

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You mean the year-end number of around 20 something days? Yes. Year-end number, yes. And then the quarterly number is usually below 20.

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Hannah Le, Hansabay Pte Limited - Investment Analyst [96]

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Yes. Okay. Could you give more color in your potential acquisitions? Would it be -- what kind of sites or any estimated size of the targets that you're looking for?

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [97]

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It will be bigger than what we have been normally acquiring before. So the last 3 acquisitions that we did are -- those are between 5 to 10 stores. So this one that we're looking at is more than 10 stores. That's the only information I can give. Because if you ask me about the area or what region, it's like giving the name already of the -- yes, so...

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Operator [98]

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Our next question, Vicky from Campden Hill Advisors.

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Maria Victoria Tabora;Campden Hill Advisors;Analyst, [99]

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John, in line with efficiency in operating expenses, do you still continue to rationalize the sizes of your Puregold stores to help make the OpEx more manageable? And in line with that, can you give more color on how your in-house brand sales are doing? And last, for S&R. Normally, when you're about to open a store, you have big pre-operating expenses before. How are you able to control these now? That's it.

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [100]

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Oh, okay. So for the first one -- oh, yes, the sizes of the store, yes, we're rationalizing the stores. So if you would notice, most of the new stores now are smaller stores compared to before, like the hypermarket stores before were -- in Metro Manila was 3,000, 4,000 square meters. The new ones we're opening around 1,500 square meters, especially when we go to provincial areas. The -- your second question is on...

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Maria Victoria Tabora;Campden Hill Advisors;Analyst, [101]

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In-house brands.

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [102]

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So currently, our house brand, it's around 1.2% of sales for Puregold. So hopefully, we can grow this to around 5% in the next 3 years.

And then the third question is S&R.

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Anthony G. Sy, Puregold Price Club, Inc. - President of S & R Membership Shopping [103]

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Well, S&R, we -- there is a certain disciplines in terms of our training of our employees because we're focused on a very small niche of our members, the type of members that we have, so we have a lower headcount. We tried to -- over the years, we tried to lower our headcount, so that would help us control our OpEx moving forward. We also front load a lot of our new employees so that they would be well trained and at the same time there will be less turnover over time. So that's what happens. But we still continue to front load our -- the training of our employees as we believe that will be a long-term value for us.

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Operator [104]

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There are currently no questions in queue. (Operator Instructions) As there are no further questions, I will now hand the session back to John Hao. Please go ahead.

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John Marson T. Hao, Puregold Price Club, Inc. - VP of IR [105]

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Yes. So thank you for calling in today's results briefing. We just like to clarify because there's this question earlier regarding the -- why we increased S&R's SSSG guidance.

So originally, when we made the guidance in the early part of this year, it was 4% to 6%. And we assumed that there will be 4 S&R stores that will open and these 4 new stores will cannibalize sales coming from the existing stores. So now that we're already sure that we have 2 S&R stores to open only this year and the second store will open only in December, so very minimal cannibalization expected -- that we expect coming from this store. So when we do the computation, we feel that we will end the year maybe closer to the 6% to 7% SSSG for S&R.

So thank you very much. We hope to hear from you again during our full year briefing -- next full year results briefing next year around April. Thank you.

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Anthony G. Sy, Puregold Price Club, Inc. - President of S & R Membership Shopping [106]

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Thank you.

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Operator [107]

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Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.