Upbound Group, Inc. (UPBD) Q4 2012 Earnings Report, Transcript and Summary

Good morning, and thank you for holding. Welcome to Rent-A-Center's Fourth Quarter and Year-End 2012 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, Tuesday, January 29, 2013. Your speakers today are Mr. Mark Speese, Chairman and Chief Executive Officer of Rent-A-Center; Mr. Mitch Fadel, President and Chief Operating Officer; Mr. Robert Davis, Chief Financial Officer; and Mr. David Carpenter, Vice President of Investor Relations. I would now like to turn the conference over to Mr. Carpenter. Please go ahead, sir.

Thank you, Andrea. Good morning, everyone, and thank you for joining us. You should have received a copy of the earnings release distributed after the market closed yesterday that outlines our operational and financial results that were made in the fourth quarter. For some reason you did not receive a copy of the release, you can download it from our website at investor.rentacenter.com. In addition, certain financial and statistical information that will be discussed during the conference call will also be provided on the same website. Also in accordance with SEC rules concerning non-GAAP financial measures, the reconciliation of EBITDA is provided in our earnings press release under the Statement of Earnings Highlights. Finally, I must remind you that some of the statements made in this call, such as forecast growth in revenues, earnings, operating margins, cash flow and profitability and other business or trend information are forward-looking statements. These matters are a core subject to many factors that could cause actual results to differ materially from our expectations reflected in the forward-looking statements. These factors are described in the earnings release issued yesterday, as well as our annual report on Form 10-K for the year ended December 31, 2011, and our quarterly reports on Form 10-Q for the quarters ended March 31, 2012, June 30, 2012, and September 30, 2012. Rent-A-Center undertakes no obligation to publicly update or revise any forward-looking statements. I'd now like to turn the conference call over to Mark. Mark?

Well, thank you, David. Good morning, everyone, and thank you for joining us for a review of our fourth quarter 2012 and year-end results. Let me begin by saying that I am generally pleased with our overall results for the year, with total revenue growing 7%, exceeding $3 billion in annual revenue for the first time in our history, and an over 6% increase in earnings per share to $3.09. Now Mitch will provide more detail on the quarter itself, but total revenues grew 2.8% with the RAC Acceptance segment growing 51% and our International segment more than doubling. Speaking of the growth initiatives, I remain very excited. I'm very pleased with the continuing execution and excellent results from our RAC Acceptance business. As I mentioned, revenues were up 51% in the quarter from a year ago to $95 million, and up over 77% for the year to $343 million. Likewise, operating profits continue to grow and were $11 million in the quarter and $28 million for the year, a strong performance for both the quarter and the year and still plenty of opportunity for additional expansion in the future. In fact, as was noted in our guidance in 2013, given the current pipeline for demand, we are now expecting to open approximately 425 additional kiosks, expecting revenues to approximate $540 million or a 57% increase year-over-year. This new rent-to-own touch point is proving to be very beneficial to our domestic U.S. rent-to-own business. When combining the Core U.S. and RAC Acceptance business together, revenues grew 6.2% for the year, while our operating profits also increased 6%. And we expect that type of growth to continue even with more leverage on the operating profits as the RACA scores continue to mature. Regarding our International, we remain very excited about Mexico and the long-term opportunities that, that country can provide for us. For that reason, we are focusing our resources there. And as noted in the January 2 press release, we have sold half of our Canadian stores as part of a trade for the U.S. operations of the buyer, easyhome, Canada. We will continue to operate the remaining stores, while also exploring other long-term options. At the end of the day, we believe that the opportunities there were limited and that our resources and efforts are better served focusing on Mexico and beyond. We have also updated our new store economics with what we have learned over this past year, and those are now available on our website. The Core rent-to-own and RAC Acceptance models remain essentially the same. While we have seen solid demand from our customers in Mexico, on the whole the revenue ramp ends a little less in the first year or so and we have made those adjustments to the model, including some additional adjustments to our expenses and a lower upfront investment. The return on the business is now actually higher than before. I believe that we are well positioned and I remain excited about the opportunities that we have there. For 2013, we expect another good year and to grow our revenues between 5% and 8% and our EPS between 5% and 10%. This still includes an approximate $0.25 earnings drag from our international initiatives as we continue to invest for the future. I do want to thank all of our coworkers for their continued hard work and contribution this past year. And as always, we appreciate your support and interest as well. With that, let me ask Mitch to provide you a little more color around the quarter itself. Mitch?

Thanks, Mark, and good morning, everyone. As Mark mentioned, overall we are pleased with our 7% revenue growth for the year and our 6-plus-percent earnings growth in 2012. Our fourth quarter same-store sales decline of 0.2% was the continuation of revenue being pulled forward in our Core U.S. segment. With the revenue pulled forward earlier in the year by larger-than-historical use of our early purchase options, the Core segment was minus 3.3% for the quarter, although for the year they have 1% revenue growth and a positive 0.1% comp. That revenue pull forward into early 2012 we believe will continue to keep the Core in negative territory for the first quarter of 2013. However, with the trends we are currently seeing, we still expect the Core to be flat for the year, with our 5% to 8% revenue growth coming from our growth initiatives, namely our expansion into RAC Acceptance in Mexico. Speaking of trends in the Core segment, demand in the fourth quarter itself was solid. In fact, when compared to 2011 in terms of agreement growth, it was the best comparable quarter of 2012. We didn't make up for the pulled forward revenue in the earlier quarters, but from a growth standpoint the trend was very positive. That is what gives us confidence that we'll get the Core even in 2013 despite the first quarter being a negative revenue quarter for this segment. In addition to the favorable demand trend in Q4, we've hired a new Chief Marketing Officer. Rita Bargerhuff has joined us after a long-standing stints at 7-11 and Greyhound and we're very excited about having this additional dimension to our growth plans. From a collection standpoint, our Core metrics remain in line. In fact our average weekly collections number in 2012 was the lowest it's been in 3 years. Our Core customer losses came in at 2.4%, down from 2.5% last year. So positive collections results both in Q4 and for the year in the Core segment. In the inventory in the Core [Audio Gap] was in great shape also with our Held for Rent ratio in line with our goals and [Audio Gap] down approximately 350 basis points from last quarter. As Mark was talking about, we're very pleased with the financial performance of RAC Acceptance. The previously mentioned revenue of $343 million for the year exceeded our expectations, as did the $28 million in profit. This segment had over a 34% comp in the quarter, while positively impacting our overall same-store sales by 2.9%. And we opened over 100 more kiosks in the quarter, 325 for the year. And the demand, as Mark was talking about, remains high as we intend to open 425 in 2013. We're in the process of adding hhgregg and Bob's Furniture to our stable of top partners like Ashley, Value City Furniture, Rooms To Go and Conn's. Delinquency metrics in customer key plays [ph] continue to perform at our expectations in the segment and we remain very excited about this current and future growth vehicle. On the international growth front, we remain excited about Mexico and our Mexico expansion. We ended our second year there with 90 stores, and as you read, we plan to open an additional 60 in 2013. This segment had over a 50% comp in Q4 and it's already positively impacting our overall comp by 20 basis points. Operationally, we're happy with the progress in Mexico and we believe that we'll achieve four-wall breakeven, four-wall breakeven by the end of 2013. Overall a very good year for us, as our 7% revenue growth is the most growth we've had in many, many years, to go along with the highest EPS we've ever recorded. The investments we are making in growth are paying off and we thank our 20,000-plus coworkers for their efforts in making this happen. And with that, I'll turn it over to our CFO, Robert Davis.

Thank you, Mitch. I will spend a few moments updating everyone on our financial highlights during the quarter and recap our annual guidance for 2013 as outlined in our press release. After which we'll open the call for questions. I would like to mention that most of the information that I do provide, whether it's historical results or forecasted results, will be presented on a recurring and comparable basis. As outlined in the press release, total revenues were $758.4 million during the fourth quarter of 2012, an increase of approximately $21 million or 2.8% as compared to the fourth quarter of last year. This increase was primarily the result of an increase in revenue from our growth initiatives, RAC Acceptance, and international expansion, partially offset by reduction in our Core RTO revenue. Given our largest and most mature segment is the Core RTO our same-store sales declined 0.2% in the quarter. Net earnings were at $47.5 million, while diluted earnings per share... [Audio Gap] Our record revenue in which we exceeded $3 billion for the first time was supported by growth in all segments for a total topline growth of 7%, our largest increase in 5 years, and the second consecutive year with revenue growth in excess of 5%. Our fourth quarter EBITDA came in at $98.5 million, which equated to a margin of 13% in the period. For the year, EBITDA increased over $10 million to $397.7 million. We ended the year with nearly $218 million in operating cash flow. As such for the year, we have returned value to shareholders by paying out approximately $100 million between dividend and share repurchases, while reducing indebtedness by over $53 million. And we ended the year with $61 million in cash on hand and a leverage ratio of just 1.64x. Needless to say, we believe we've had a very successful year overall, one in which during continued challenging macroeconomic conditions, we achieved our annual revenue and earnings guidance. We have strategically diversified our revenue and earnings stream in multiple markets and multiple channels. We have recorded record revenues and record earnings per share. We have returned $100 million in cash to shareholders. We have reduced our risk with lower indebtedness. We announced an increase to our dividend of over 30%, all while we continue to invest for growth in the business for the long term, whereby we expect to continue to post record revenues in net earnings each year. As such, we intend to continue on a similar path in how we look to utilize our cash. Turning to guidance for a moment, and as a reminder this will be the second year the company offers annual guidance only. So for 2013, we currently expect total revenues to increase between 5% and 8%. We expect our same-store sales for 2013 to range between a positive 2% and positive 4% and, as it was mentioned in the press release, we're changing our methodology in how we calculate this metric to more closely align with other major retailers. Overall diluted earnings per share for 2013 are expected to be in the range of $3.25 and $3.40, which includes an approximate $0.25 drag on EPS related to our international growth initiatives. As a result of the continued growth and ramp-up of RAC Acceptance, we expect our gross profit margin to decrease approximately 50 basis points on a consolidated basis in 2013, although we expect total gross profit dollars to be up approximately 7% as compared to 2012. We expect both our operating and EBITDA margins to remain relatively flat for the year with total EBITDA expected to range between $415 million and $435 million. Now as always, this current guidance excludes any potential benefits associated with potential stock repurchases, changes in our outstanding indebtedness or acquisitions, dispositions or store closures that may be completed or occur after the date of the release. With that update, I'd now like to open the call for questions.

[Operator Instructions] Your first question comes from the line of Brad Thomas with KeyBanc Capital Markets.

This is Jason Campbell actually standing in for Brad today. I realize it's still early, but what impact have you seen from the expiration of the payroll tax credit thus far in January?

Nothing noticeable on our end. We haven't seen anything different in trends in our business at all in January based on that.

So ticket and everything is still -- you haven't seen anybody trading down or more delinquencies or anything like that coming to your business?

No, we have not. Nothing.

All right. And then secondly, I believe this is the time that we're coming up on the refund anticipation checks. I was wondering if you guys can just remind us how that played out last year and then what you're kind of expecting the impact to be this year.

Well the tax refunds are a little bit delayed this year, but they should start -- I think people can start filing tomorrow to make it to the 30th. The IRS was about a week later than last year. It's not so much any more refund anticipation loans as it is our customer getting their refunds pretty quickly because they'll file as early as tomorrow and have their refunds very quickly. There is some refund anticipation loans out there, although there's -- the laws around those have changed and there's not as many as there used to be. But they will have their tax refund money, a lot of them in February and certainly by March. So we see a lot of people in the first quarter exercise early purchase option. Our job is to re-rent to them and give them something else. Last year we saw a record number from a historical standpoint. And that's what pulled the revenue forward last year and made the future quarters, especially as they ran high all year until the fourth quarter, made it tough in the fourth quarter because we lost a lot of that recurring revenue. As you saw in our guidance, we don't expect to have as many this year, and we expect it to be in negative comp territory in the Core business in the first quarter. But of course, if you don't have as many of them, then the recurring revenue is going to get better as the year goes on, and we still expect it to be flat for the year. So we'll see the early purchase options come in the next 2 months. We don't anticipate having as many as last year based on the current trends and the trends that we saw in the fourth quarter and based on promotional activity over the last 18 months. When you're trying to gauge that stuff, Jason, you got to go back and think about your promotional activity, really, over the last 2 years, what you rented, for how much, and when. And everything we're seeing trend-wise, we feel like we're going to see a few less than the historically high numbers last year, which although that'll make for a negative first quarter, that will help us be flat for the year, that trend.

Okay. And then just to clarify, you said there is some timing shift. That's timing shift within in the quarter. So it's nothing that we'll see results shift between quarters or anything, it's just internally you guys will see that, correct?

That is correct.

Your next question comes from the line of Arvind Bhatia with Sterne Agee. Arvind Bhatia - Sterne Agee & Leach Inc., Research Division: A couple of questions for you guys. One question that I get a lot, and I think this would be a good opportunity to maybe address this, when people look at your Core business and they see the strength in the RAC Acceptance business, the natural question that I get a lot is, is there any kind of cannibalization going on? And, Mitch, you explained how the Core business recently has seen some good trends. But conceptually can you talk about in more detail why you don't believe there is any cannibalization going on? Then I have a couple of other questions.

Well certainly, Arvind. This is Mitch. Certainly when we know who the customers are in each store, and we know the RAC Acceptance customer by name and Social Security number, so we know if they've done business with us before. And there's certainly some overlap, but it's very, very small. Although, small meaning in the 1% range when the Core business -- when 2% is good for the Core business, then you could -- I guess you could call 1% a lot of cannibalization. But really it's pretty de minimis. We are attracting a different customer in the RAC Acceptance business. Although you're right in looking at the 2, as Mark mentioned in his prepared comments, in looking at the 2 together last year, the United States business grew 6.2%. So we look at it both ways. We watch the cannibalization. It's not a dramatically high number in that 1% range when we look at customer names. Of course, you're losing some opportunity costs, too, when they -- when someone rents a RAC Acceptance, we don't know that they wouldn't have walked out of there and then went to a Rent-A-Center across the street. We're not overly concerned with that because the margins -- the overall margins of RAC Acceptance are the bottom line margin even though the gross profit margin is not as good as Rent-A-Center, the overall margin's higher. So we don't mind if they're in RAC Acceptance instead of Rent-A-Center. And so we're not seeing a lot name overlap, it's in the 1% range, but certainly there's some opportunity loss in the Core business because we don't know how many of them of those hundreds of thousands of customers we have in the RAC Acceptance would of went to Rent-A-Center. And that's why it is appropriate to look at how well the United States is growing rather than just one or the other segment. Obviously we look at both and -- but we do feel good about what's happening in the United States with 6.2% growth for the year.

And just as a reminder, we breakout those separately per segment reporting based on the accounting rules. So to some extent, the segment data and the segment detail is driven by accounting literature more so than evaluating the overall rent-to-own business in the United States. Arvind Bhatia - Sterne Agee & Leach Inc., Research Division: Yes. The other thing I was thinking is RAC Acceptance customer is more a monthly customer and your rent-to-own customer tends to be more weekly. But what percentage of your Core business is done on a monthly basis? Because that's probably where the overlap is. Can you update us on those numbers?

It's still running right around 15% I don't have the exact number in front of me, but it hasn't changed in years. And it's in that 15% range.

Yes. We look at the segment or the overlap, we have not gotten that granular to see if it was -- when they were a previous customer in the other business, were they weekly or monthly, I think is your follow-on question. And the fact is, we don't have that information. You could surmise, I suppose, that more likely than not, they may have been. But we don't know that actually. Arvind Bhatia - Sterne Agee & Leach Inc., Research Division: Couple further small ones. On the early purchase option front, one question I've been getting is, is there any change in pricing in early purchase options? I mean is it less attractive now? Have you done anything there on the pricing front that makes it less attractive for customers to exercise the early purchase option and therefore continue to rent? Is there any push from your side? Or are you just -- or whatever happens, happens. Just wondering how that's going.

A good question, Arvind. We're constantly looking at all the different levers. As you know, there's the weekly payment amount, a monthly payment amount, and then there's a term that becomes the total rent-to-own amount. So those are different levers that become a total. Then you can -- then you have a 90-day-same-as-cash price, that's a lever. Then you have, if they don't pay out within 90 days, what discount are you going to give them if they need to pay out going forward. So there's a lot of different levers. And we look at them differently by product category, too, whether it's in electronics or furniture or appliance. So we're always looking at all those levers. And then it's -- and then what's your promotional activity been? Because the lower the price on a promotion, that might drive earlier payouts rather than later depending how aggressive we were from a promotional standpoint. The good news is over the last 4 months now, we are seeing products staying in our system a little longer before they payout. And I think as you know it, it's been trending down for years because of deflation. And we're seeing it go the other way now for about 4 months, and those are very positive things for us. We certainly want the consumer to take ownership, but if it's in our system a little longer before someone does, that's a good trend for us. So it's hard to answer your question specifically because there's so many levers we look at constantly, and we do it by product category. One product, yes, we've made the payout longer before you get there, but on another one shorter. But the overall trends are positive in that direction, Arvind. Arvind Bhatia - Sterne Agee & Leach Inc., Research Division: Great. One last one for me. You mentioned hhgregg. They have more than 200 locations. In the 425, can you give us some sense of what you're thinking in terms of the expansion with that change with that chain?

Yes. I don't have those numbers in front of me, Arvind. But it's not half of that, but it's close. On the hhgregg, how much of the 425 is hhgregg it's -- I don't have that in front of me. And it's probably in that 200 range out of the 425. That's a ballpark.

Your next question comes from the line of Budd Bugatch with Raymond James. Thomas J. McConville - Raymond James & Associates, Inc., Research Division: This is actually TJ filling in for Budd this morning. The first question I have goes to the guidance. I'm trying to get my head around the 5% to 8% total growth and see maybe where you're thinking the wider ranges might be. If we assume that you get to the RAC Acceptance level that you get to, I think that gives you just about 6.5 points of growth right there, and if the core business is flat and the international grows even modestly, I'm just -- should we be building a little bit bigger range maybe around that Core business revenue? Is it more around the RAC business? Can you help me square that if you wouldn't mind?

Well I think you got to the numbers right if that's about 6.5% and we've forecasted the Core is flat and call it 1% or something in Mexico. But then you got 1% either way on either one of those, right? Not so much Mexico because it's pretty small. But the Core is minus 1% to plus 1%, if RAC Acceptance is 5% to 7% instead of 6.5%, that's how we end up in that range of 5% to 8%. Thomas J. McConville - Raymond James & Associates, Inc., Research Division: Okay, so it was kind of evenly -- I just didn't know if you had a better feeling one way or other on one of the segments. I mean, obviously, the growth in RAC Acceptance would lead you to believe there might be a bigger range around Core. But it sounds like it's more balanced.

That's correct. You're getting to the numbers the right way, the way you just added them up. Thomas J. McConville - Raymond James & Associates, Inc., Research Division: That's good, Mitch, because a lot of times I don't do that very well. The second question I had goes to the Mexico segment. Now I've gone through the new store slides on the site, and thank you for those. It still looks like the four-wall and the EBITDA per average store is below some of these even year-1 targets from what we saw in 2012. And maybe this goes to your point earlier, Robert, about the accounting issues. But what is it that gives you the confidence to sort of reaccelerate that growth back up to 60 this year and that we're performing to the plan that you've laid out here?

Yes, so as you indicated and Mark in his prepared comments, the new store models are up on the website. And what he was alluding to in regards to the changes we made, they do ramp a little slower than our original expectation. However, from a customer and BOR standpoint, still ramp faster than the Core U.S. store. But as you know, the revenues per contract is less in Mexico. What we've seen now with 90-plus stores and some in the system for 2-plus years or more, is we're seeing overall success in some of our earlier stores in the way they're trending. And so that's what gave us the -- towards the directional forecast in terms of years 3, 4 and 5. At the end of the day, Mark indicated the returns are higher, primarily due to just the lower working capital investment on the front end. As it's ramping a little bit slower, you have less inventory to buy. But ultimately as you get out in years 4 and 5 in some of the expenses that we've also changed, we're seeing actually higher margins in -- we're projecting higher margins in years 4 and 5. So that's what's driving the change in the returns. But ultimately, what we've seen in the fourth quarter, Mexico had its best quarter as the people are starting to gel and getting some tenure. I mean the operation is really coming around and so we're excited about that. I don't know if, Mitch, you want to add some more.

Yes, yes, I do. Because, TJ, one of the reasons that the ramp-up is a little longer than the U.S. store, that you can ramp up longer before you level off and you can get more growth in year 3 than you might see in the Core business is a couple of reasons. One, Robert mentioned the ramp up is faster as far as customers, but it's a much smaller ticket because what the consumer can afford down there. Of course, you have a smaller ticket. Think about our other lever is the term, so to get our returns on the product, we have a longer term down there than in the U.S. So though it's on rent longer and we're seeing a higher keep rate, people keeping it for longer period of time, so -- and not returning it. So the runway's just a lot longer from a growth standpoint because we start off on the longer term and have a higher keep rate. And that's what's making the runway longer. Because again, with the low monthly payment based on how many pesos they can afford, we have a longer-term down there. So the runway gets a little longer. Thomas J. McConville - Raymond James & Associates, Inc., Research Division: Okay. That's really helpful, guys. Last one for me, 325 net new RAC Acceptance kiosks gets you right into that 1,300-plus kind of level. And I know we've talked about 1,400 as being sort of the market size, but that was furniture stores. So any numbers that you'd like to provide or that you can offer as to what your thinking is as to the total size of the potential RAC market at this time?

No, TJ, you're right. When we talked about 1,400, that's been furniture stores only. Of course, there's a lot of electronic stores in there now. We didn't -- we could mention TigerDirect, Computer City stores are also in there. So it's much more than 1,400. We're working on it internally to try to come up with a more definitive number, but it's -- we will be nowhere near done at 1,300 at the end of this year.

Your next question comes from the line of Laura Champine with Canaccord.

Looking over the new store economic slides, the Core economics changed more than what we would expect for what's a really a mature chain. The revenue and the margin numbers are much lower. What's the source data for the new store economics slides and why are we seeing that deterioration in the core business?

The source data is obviously our stores that we opened ourselves and more along the lines of stores we've opened more recently over the last 2 to 3 years. And as you think back to 10 years ago and before, with a much smaller store base and less presence in all the markets around the country, and as we talk about in our Ks and Qs, as we open more stores, in the U.S., we do cannibalize ourselves but we want to grow the overall market. So to some extent you're seeing the effects of, on a unit level basis, some cannibalization or the impact of more stores in the market but growing the overall market.

What's surprising to me is that the last slides were from April. These are just a few months later and the numbers are so much lower. Does that just mean that the most recent class of new core stores, which would be small, that you opened are not doing as well as the year before? Or is there something there that I'm not aware of?

No, there's nothing that you're not aware of. I'm not sure that we updated the core store slides in April. They may have been legacy data. But to your point, our most recent store openings are what this is based off of.

Your next question comes from the line of John Baugh with Stifel, Nicolaus. John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division: Could you just elaborate? I'm trying to -- I don't have all the numbers in front of me, I apologize. But talk about the customer agreements, the trends there through '12, the average price per agreement, just some metrics on the core business?

Sure, John. As I mentioned, the fourth quarter, when we look at the agreement growth and customer growth relative to the year before, relative to 2011 with the best quarter of the year, the trends are very positive. Our ticket for the year was up slightly, again positive. And that mostly has come, John, because our units per agreement or per customer, actually per agreement with the running, the units continue to trend up. In fact, it's at the highest level it's been in, in years. So that helped the ticket, the add-on unit, part of it's gone very well. We've done promotions around the adding-on units and made it easier for people to add on units and it's worked. So our packaging, if you will, has worked and that drove ticket up a little bit even in this era of deflation on the -- on electronics. So the trends in the fourth quarter were very good from an agreement standpoint and the trends all year, really, have been good on the units per customer. As I mentioned earlier, we think we'll still be negative in the fourth quarter because we haven't made up for the really historically high level of early purchase options through the first 3 quarters of 2012. But as we forecast going forward, based on prior promotions and so forth, we think after that one negative quarter, we'd flatten out in the second quarter and then get flat for the year with obviously some plus numbers in the third quarter and fourth quarter. John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division: And Mitch, the product mix for the year, I guess, will be in the K. Will there be any notable change? And how do you think about that influencing your business this coming year?

No, you won't see any recognizable change in the core business. And we're always looking at new products. Certainly, on the television side, LED and connected TVs are kind of taking over. Appliances continue to grow for us pretty steadily as does furniture. Computers, they're getting smaller and thinner and the ultra thins and the ultra lights and all that kind of stuff. So it's certainly the latest and greatest technology, but there's not any -- anything in there that's not like a new product in there that's going to take over any big shifts by product category that we're seeing. John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division: And I think you mentioned that you hope to be four-wall breakeven in Mexico by the end of the year, what does that mean as we enter '14? In other words, you described a $0.25 drag still here in '13. But if we're on that kind of trend by the end of this year, what does that imply for a drag? And you can range it pretty wide if you want, but I assume we narrow that gap meaningfully in '14. And then also if you could just discuss what specific expenses you found in Mexico that allows you to make it more profitable?

Regards to four-wall breakeven, what that means is, on a monthly basis, by the end of the year, we will achieve four-wall breakeven, which excludes overhead, middle and senior management, things of that nature, so at the store unit level, breaking even on a monthly basis by the end of the year. Now that trend obviously is positive one. How it impacts '14 and beyond in large part is a by-product of how many stores we expect to open in 2014, '15, '16 and so forth. And so if we stopped opening stores at the end of 2013, yes, there would be a meaningful shift in the dilution going into '13 or go into '14. However, we expect to ramp our growth beyond the 60 that were forecasted in '13 when you get into '14 and beyond. And so there's not a meaningful shift. There's still some dilution, but less than what we're forecasting for 2013 as you get beyond '14 and '15. It will be... John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division: If you were to open the same number of stores, 60, in 2014, would the EPS loss be cut a dime? I know -- I hear you saying it's going to go up again, which is fine and then your losses continue. But any kind of feel for the leverage and the rate of gain and the profitability there?

Yes, I think if we were to open the same amount, John, it'd be at least a nickel of earnings and maybe as much as $0.10. It would be in that range, between $0.05 to $0.10 if we open the 60 again in 2014. John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division: And what have you found down there in expenses that you've been able to pull back on?

Well, primarily labor. As you think about the ramp being a little slower, that means less customers are served and less BOR [ph] on the front-end, and therefore less coworkers needed to manage the portfolio. So that's one area. We've also, similar to what we've been doing here in the U.S., looking at consolidating some of our buying across all stores to get better rates and terms from our vendors that we ramped up the purchasing down there, whether it's store supplies, furniture and fixtures, things of that nature. So it's really across the domain in terms of the operating costs.

Your next question comes from the line of James Allman [ph] with System Capital [ph].

Let's see. If we could start with, do you expect there to be any impact from the military shutdown from the sequester and/or them letting go of at least temporarily lots of their contract workers? And are you changing your underwriting for military workers at this time?

No, we don't anticipate any impact there nor are we changing any systems in the way we approve anyone for that matter or certainly the military. No, we're not changing any of our processes there.

Okay, and you had mentioned that you had not seen any impact from the 2% drop in payroll for your customers yet. Do you expect that you will over the course of the year?

No, we don't. That's certainly money out of the people who can -- out of the pocket of people who can afford it the least. But at the same time, gas prices are lower than they were a year ago. So no, we're not anticipating that to be an issue. We didn't see it be a positive when we did it 2 or 3 years ago or however many years we had that in this country, but we certainly don't see it being a negative going forward again, because there's a lot of things that play there, it's not just that 2%, right? I mean, gas prices are at play. And obviously the consumer's under pressure. I mean, make no mistake about that, we just don't see that 2% putting [indiscernible] meaningful. That it'll be any meaningfully different than it has been.

All right. And then on the late tax refunds, we've also heard that -- I believe it came out today that up to 3 million Americans won't be able to file their returns until March due to the IRS not being ready to prepare for the returns if they were taking a student loan credit. And also we've heard that the IRS might be a little slower in tax refunds this year due to all the identity theft last year and they want to be more careful this year. If tax refunds are a bit slower, what sort of impact does that have on your business? And do you get all that business back in the second quarter if you lose some in the first quarter?

Well, any delay from our standpoint we would see as a positive as -- because it does translate to a lot of people exercising early purchase options. So if items stay on rent longer before that's exercised, that's a positive thing for us. We don't see that piece about those 3 million consumers affecting our customer a whole lot. The majority of our customers are short form filers. I mean, we'll certainly have some, but the majority of our customers will be able to file next -- this -- I think tomorrow or whenever they want to starting tomorrow. That won't have as big impact on our customers maybe a customer as you move up the scale a little bit.

All right. And just finally, with Mr. Cordray at the Consumer Financial Protection Bureau potentially getting thrown out by the courts and the CFPB not being able to engage in enforcement actions for much of this year, do you see that as reducing any regulatory risk on your business? Is there anything you can do differently if they are not in the picture?

No, we don't view what's going on currently any differently than what has taken place over the last couple of years. And again, as a reminder, our belief when you look at the description, the CFPB and financial instruments and so forth, we are carved out, we believe, and there's the parenthetical that alludes to that. And whatever changes may take place in terms of the administrator, we don't view that as having any implications on us either at this point. So no, no difference.

Okay, good. Finally, could you just help us understand that, I didn't quite catch why you have the pull forward into 2012 of business from Core out of 2013 and what caused that, and will it continue?

James, the higher level of early purchase options coming in the first 2 to 3 quarters really in the core business pulled the revenue forward. If you go back, you'll see a 7.1% same-store sales number, a comp in the first quarter and then it waned as the year went on and that's overall but the Core went the same way. And then you got to build those agreements back up. And when we look at our current trends, it's going to take one more quarter to build those agreement levels back to when you're looking year-over-year that you're on flat ground.

James, a good way to sort of track that is look at the on-rent inventory by segment and we ended the year in the RTO Core business with on-rent inventory of $598 million. That's the highest level it's been all year. That on-rent inventory is the portfolio that's generating the revenue. That was the highest it had been all year. But we ended 2011 with $619 million of on-rent inventory, so our inventory levels in terms of what's on rent and generating revenue are less than [ph] 2012 and 2011, and that's indicative of all the early payouts that we experienced in the first quarter. And so we were fighting all year long to get back up to that level. So when we talk about revenue softness in the first quarter of '13, we're still trying to get back that revenue that was pulled forward in 2012.

And then once you've comped over that, you're back to flat ground as well, right, once you get past that first quarter?

I think the other way that shows, Robert, is if he was to look at the income statement, sale of rental merchandise in the first quarter last year as I recall, in the first quarter of '12, it was $20 million or $30 million higher than historical years in the first quarter, which speaks to, again, all of these additional early purchase options. So that speaks to the revenue that dissipated because they paid out, but then it also speaks to the number we've got to comp over in the first quarter. And I think Mitch's comment earlier, if we have lower payouts, that's actually a good thing for us in the future quarters. But in the first quarter, it's going to show considerably less cash sale or sale of rental merchandise, which is going to have an adverse impact on the comp. So we're going to actually view it positively because we're going to have agreements on-rent longer paying in future periods.

Your next question is a follow-up from Arvind Bhatia with Sterne Agee. Arvind Bhatia - Sterne Agee & Leach Inc., Research Division: A couple of small ones here. One, I think, Mitch, you mentioned that your charge-offs were in pretty good shape. I think you said 2.4%. Is there anything to talk about among the different segments and the trends for charge-offs, whether it's RAC Acceptance or Core versus International? And then I didn't hear you guys say anything on Sandy, wonder if you could talk about that if that had any impact on the quarter? And then lastly, on the accelerated depreciation you'll be able to get now this year, what impact that could have on free cash flow and if that impacts how you're thinking about buybacks at all?

I'll take the first couple of those. The, as I mentioned on the Core, 2.4% better than last year by 2 -- it was 2.5% in 2011 and the actual weekly collections average for the 52 weeks was the lowest it's been in 3 years. So real positive stuff on collections. RAC Acceptance and Mexico, we're not reporting those individually because as the stores grow, the numbers aren't as meaningful until they get to a certain size. But no surprises at all in any of their metrics, whether we're talking about RAC Acceptance or Mexico. So collections performance has been solid. Hurricane Sandy, we didn't talk about. When you look at revenue loss and some customer losses on the damaged waiver where we have to write-off the product if they had that damage waiver coverage with us, when you add everything together, it was almost $1 million or about $1 million in total, so we didn't call that out, but it did cost us about $0.01 in the quarter. So if you wanted to add $0.01 back into the quarter, we'd appreciate that. But all kidding aside, it was an impact. $1 million is still a lot of money and we feel more concerned for the people who lost what they lost up there than our $1 million, to be honest about it. And as far as the depreciation, I'll let Robert talk about that, the accelerated depreciation.

All right, okay. I was going to talk about cash flow and part of that being the impact of the fiscal cliff legislation that was signed into law on January 2, I believe. We will benefit from that in 2013. I think everyone knows we were expecting a large turn on our deferred tax liability in '13. That's now been extended out another year in '14. In terms of free cash flow, for 2013 this year instead of it being negative because of the tax liability turning, we're now expecting it to be positive in the $50 million to $60 million, and that compares to roughly $100 million free cash in 2012. So it's down slightly primarily due to our expected investment in working capital, increase in inventory purchases. We're continuing to grow and add more revenue to top line. So that impacts our view on stock repurchases going forward. As I indicated in my prepared comments, we expect to continue on a similar path as we've experienced the last year plus. And with leverage being where it is, we don't view temporary changes in our free cash flow. We don't view that as a barrier to us being in the open market for opportunistic share repurchases. We know as we look out 2 to 3, 4 years from now, our cash flow will be back to normalized levels around $200 million-plus. And so we're not going to be afraid to be in the market if necessary.

Your next question is from the line of John Barrett [ph] with Colombia Management.

Going back to the question on cannibalization from RAC Acceptance, understand that you're looking at a database and maybe the names don't match up. But of course, there's a big potential of those customers that would normally walk into your core stores are just going to RAC Acceptance, never going to the stores. What are your willingness to close more of your core stores as RAC Acceptance grows?

Well I mean if we have unprofitable stores, brick-and-mortar stores, when their leases come up, we look at consolidating them. We're not tied to a number. The RAC Acceptance returns on investments are as good or actually a little better than the Core business. So that -- wherever we get the business -- that's what Mark was talking about, looking at it together with 6.2% revenue growth last year. That's quite a bit of growth for the United States, 6.2%, no matter how you look at that consumer. So however we get there, and we continue to get 5% to 8% revenue growth every year, we're not married to any one way of getting it.

Yes, exactly. I don't -- in fact, I know when we got into this business initially a few years ago, we viewed it as an opportunity to expand the reach of the market we serve, to get in front of the customer we hadn't seen before either because of stigma or psychographics or physical location. And obviously, that's varying out. Now, Mitch said, not a lot of cannibalization today. You could argue there may be lost opportunity today that we might have gotten otherwise. We don't believe that to be the case based on, again, what we're seeing, although there is some. You've got to assume there's some implication of a customer that might have walked in otherwise. But to your point, if 5 years from now we were doing $4 billion in the U.S. as opposed to $3 billion, does it matter how we get there, I guess is the question, i.e. 3,000 brick-and-mortars and maybe then 2,000 RAC Acceptance, or is it 3,000 RAC Acceptance and 2,000 brick-and-mortar? I'm not suggesting either one. I don't think we have the answer to that. But on the other hand when we look at investing our money and how we can get a return on that money and expand and grow the market we're serving, that's how we're approaching this. And so we're very open to it and we'll take what we think is best, again, in terms of return on investments and reaching the most customers and things of that nature.

Okay, I mean I just would add investors focus on inflection points, and the hardline retail world has been littered with retailers like Barnes & Noble and OfficeMax and Best Buy, et cetera, that talk of current four-wall contribution profitability, but the market looks at inflection points looking out 3 to 5 years and current four-wall profitability isn't necessarily the best metric, it's the incremental change. So I mean this -- you're not going to get a lot of credit until the core improves. I guess I'm just going to throw that out there.

That's fair. That's fair. I think we're mindful of that. I think, yes, we believe we can do some things and are doing things that will improve and enhance the Core. At the same time, we're looking at how we expand the overall market and there are different ways that we can hopefully do that.

The CapEx jump, I think it's 102 to 120, that incremental growth. Could you just touch on that?

Yes, it's primarily related to continued investment in IT systems and platforms that we're looking to rollout in the near future, primarily related to our POS system that we're rewriting right now.

Okay, and when does that get rolled out or implemented?

It'll take place over the course of the next couple of years. It won't start until later this year, but...

Pilot later this year, and then based on pilot and roll that kind of stuff, we'll start ramping late in the year or sometime next year, more likely.

Okay. And if things -- let me just -- you guys have very excellent gross margins, your OpEx, I mean, gross to operating profit is a big differential. I understand there's a lot of cost to running your Core business. But say payment options continue to be a headwind and there are some macro, potentially macro headwinds, maybe even positively an improving economy that could be a macro headwind to your Core, is there any contingency on operating costs where you could react this year if the core sequentially continues to get worse as it did in Q4 versus Q3 on a cost standpoint?

Pretty difficult in the Core.

Yes, not overall. I mean we've obviously, over the last several years, as the market I mean, the macroeconomy in general had in 2008 and '09, over the last several years starting then and up to now, we've been very diligent how we managed our cost, putting in more of a focus on the way we procure our goods and services. And you're seeing some of that benefit over the last several years. Meaningful large-ticket items, to Mark's point, at the store level there's really not a lot of cost that can be removed. And we've talked about that in terms of the leverage as the incremental revenue grows the flow-through on that revenue just given the cost structure. But the reverse is true too, as revenue declines, there's some deleveraging, so...

The biggest expense at the store level, you've got an average 5 coworkers and so you go back to this past year that we have a slight negative comp with 1%. You're talking essentially 1 delivery a week. You don't have the ability to take 20% of your workforce, i.e. 1 coworker out of it without it having a much more adverse impact. Now you can get into the whole thing about hours and scheduling, which we have addressed over the last couple of years and always try to address given those kind of circumstances, but it's -- the low-hanging fruit's been frankly captured over the last couple of years and...

It will remain -- as to Robert's point, we'll stay diligent on our expenses whether we're, no matter what's going on with the revenue side, we'll stay as diligent as we have been in the last few years. Absolutely.

Okay. And last one. When you -- looking at some of your presentations over the last year, 1.5 years, you're targeting 6% to 7% long-term EBITDA growth and coming off of '12 versus '11, it was 2.7 and I understand there's a lot going on with Mexico, RAC, et cetera, and some headwinds in the Core. But is it -- when that growth is from 2000 -- I think through 2014 sort of a CAGR growth. So is it safe to assume, given the investments in RAC and in Mexico, that EBITDA growth of 6 to 7 target is going to be a sort of a 14, 15 thing when you just sort of look at some of the headwinds you're facing this year? And that's okay, if it's 2 to 5 in years 1 and 2 and you're back-end loading it a little bit just given the maturation of the investments, that makes sense. But is that a good way to look at it?

Absolutely. It think you're seeing -- you will see some acceleration in that growth when you get to '14, '15. Obviously the last couple of years it's been muted a little bit just given the ramp-up and our growth in terms of Mexico and RAC Acceptance. But as those -- that base matures and solidifies, you have a lot larger base to take on some of that dilution. So you'll see it accelerate in '14 and '15 for sure.

And John, I think the other way I'd ask everyone to think about that, and you make -- you raised good point by way of example. So what you're referring is an outlook that we gave a couple of years ago for 5 years. And there were some underlying assumptions with that by way of example. RAC Acceptance, I seem to recall that we said between 200 and 250, so RAC Acceptance each year over that 5-year look. Now in 2013, our expectation is to open about 425 of those. You can go to the new store economics slide, it's posted, and you'll see there's a significant -- when I say significant, it's more working inventory, but there's certainly dilution as you open up more stores and they ramp-up. And so what is the impact or the implications of that on '13's EPS guidance? Certainly, we're getting the benefit from a revenue standpoint that there is a cost or an implication of doing it, I think that's what you're alluding to.

It's still ramping up, Mark, from '12 I mean...

All the things we did in '12 and now we're adding even more in '13. Obviously believe it's the right thing to do from a long term, and I think that's again what you're alluding is, how does this play out when you get forward years? What is the impact of it in the near term.

And '12 is the low point on that CAGR that you're talking about, John. '12 was the low point.

Your next question is a follow-up from the line of Budd Bugatch with Raymond James. Budd Bugatch - Raymond James & Associates, Inc., Research Division: I apologize Arvind got to my question, guys. Maybe if I've got you here, you might address one of the points John just brought up about the improving economy maybe being a headwind for you this year. Can you talk about that a little bit more and just what the latest thoughts are as far as economic improvement versus credit market improvement, things like that and that'll be it for me.

Sure, TJ, I'll talk about that. I don't see that as a headwind for us. I think if consumer confidence goes up, that'll be a positive thing for us. I think the -- a big competitor of ours, if you go back to the mid-2000s, 2005 and '06 was EasyCredit [ph]. I don't see even in an improving economy with higher consumer confidence that the banks will take the risk they did in 2005 and '06. And we saw it grow from 2005 and '06, by the way. But I think an improvement in consumer confidence with a remaining relatively tight consumer credit market will actually be more positive for us than where we are today because people, first of all, have to have confidence. And so I see that as a positive not a headwind.

Well, you got to believe that an improving economy suggests a lowering unemployment. And we know that much of the unemployed today are customer based, if you will, that we did in fact serve in the past or could likely serve in the future which, again, goes into confidence. But if they're now employed and/or their earnings are going up, clearly that's going to be opportunistic for us. And I would advocate that a lot of that unemployed or underemployed today are customer opportunities for us tomorrow.

We have no further questions in queue. I'll turn the call back over to Mr. Mark Speese for any closing comments.

Ladies and gentlemen, thank you again for joining us today. We do appreciate your support and interest in the company. We've got some headwinds that we're continuing to deal with in the core business, but we feel that we're at a good place with regards to the core and how the year looks for us. Certainly we're very excited about the emerging businesses and the opportunities that they create for us. We're looking forward to being able to report back to you next quarter with our near-term results and look forward to a great year ahead. Thanks again, and we'll speak to you next quarter.

Ladies and gentlemen, thank you for your participation in today's teleconference. You may now disconnect.