Good morning and thank you for holding. Welcome to Rent -A-Center's second quarter earnings release conference call. At this time, all participants are in a listen-only mode. Following today's presentation, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, Thursday July 28, 2016. Your speakers today are Mr. Robert Davis, Chief Executive Officer of Rent -A-Center; Guy Constant, Executive Vice President, Finance, and Chief Financial Officer; and Ms. Maureen Short, Senior Vice President, Finance, Investor Relations and Treasury. I would now like to turn the conference over to Ms. Short. Please go ahead, ma'am.

Thank you, Regina. Good morning, everyone, and thank you for joining us. Our earnings release was distributed after market close yesterday, which outlines our operational and financial results for the second quarter of 2016. All related materials are available on our Web site at investor.rentacenter.com. As a reminder, some of the statements provided on this call are forward-looking statements, which are subject to many factors that could cause actual results to differ materially from our expectations. Rent-A-Center takes no obligation to publicly update or revise any forward-looking statements. These facts are described in our earnings release dated yesterday as well as the company's SEC filings. I would now like to turn the conference call over to Robert. Robert?

Thank you, Maureen. Good morning, everyone, and thank you for joining us. As you know, we have been very focused on our multi-year transformational strategy and I am pleased with the progress that we’re making in several areas as we focus on profitable growth. However, I am extremely disappointed in our top line performance in the short-term revised outlook. Our operational execution needs to improve and we're going to capitalize on opportunity areas to rebuild the top line, while continuing to capture the revenue and productivity benefits from our key initiatives. First, let me touch on a few of the items that impacted our top line performance this quarter and the steps we’re taking to improve the business. After our initial delay, in Q2, we completed the roll out of our new POS system in the Core business. Last quarter, we had said that the new system would be installed in all stores by Q3. However, given the dependencies of other critical initiatives and future anticipated benefits from those initiatives, on completing the implementation, we decided to accelerate the roll out, which was completed in its entirety in Q2. Despite our team's efforts to mitigate the negative impact of accelerating the implementation of the new system, the decline in Core top line results was more significant than we expected, making up over half of the second quarter decline in Core same-store sales. Although the system performance and usability issues identified in the first quarter were fixed, the distraction of the new system impacted our Core portfolio and took time away from collections efforts, which resulted in a hit to revenue. Given the impact to the portfolio, we expect it to be a few quarters before we fully recover. That said, the distraction of a major system rollout is now behind…

Thanks, Robert. Good morning, everyone. This morning, I'll walk you through the highlights of our financial results for the second quarter. I'd also like to mention that, as I refer to our second quarter performance, either this year or last, all numbers will be presented on a recurring basis excluding special items. As outlined in the release, consolidated total revenues were $749.6 million, which represents an 8.1% decrease versus last year. The decrease was driven by a 0.5% decline in our Acceptance Now segment, a Core same-store sales decline of 6.7%, and the impact of the continued rationalization of our US retail store base. In June, we completed the most recent round of store closures in our Core system, closing 174 stores. As has been the case in previous rounds of store closures, we expect a positive P&L impact as a result of our ability to retain a significant percentage of the accounts that are merged into nearby stores, while saving the costs of operating these poor-performing locations. Our total US same-store sales, combining the Acceptance Now and Core US segments, decreased 5.1% versus a year ago. But on a two-year basis, the US same-store sales increased 2.4%. As Robert already mentioned, our Texas market continues to be negatively impacted by the macro-environment in that region. Looking at sales performance in our Core US segment more closely, total revenues were down 10.6%, driven by a same-store sales decline of 6.7% and an 11.5% reduction in store count from the prior year. The same-store sales decline was primarily due to the accelerated rollout of our point-of-sale system, as Robert described earlier, and the top line impact associated with the recast of our smartphone category. In the Acceptance Now segment, we saw a 0.5% revenue decline as our same-store sales decline of…

[Operator Instructions] Our first question will come from the line of Budd Bugatch with Raymond James. Please go ahead.

Good morning, everyone. This is David Vargas on for Budd. I hope you're all doing well.

Good morning, David.

I'll start off – you've done a pretty good job driving costs out of the Core business. But I'm wondering, this quarter, lower levels of labor in the store and the staffing had an adverse impact on the ability to convert sales and do the collections?

I think I understood your question. You're wondering if we believe that our flexible labor model is having an impact on driving top line sales. We don't think that's the case. Obviously, as we've been going through the process of implementing the flexible labor model, we actually have more co-workers available. Instead of having five full-time co-workers, now you have seven to cover off-hours and peak times and things of that nature. Certainly, there is some transition period that occurs as co-workers are coming into the new role. It requires some additional training and things of that nature. However, it was evident to us as we move through the second quarter, as we’re rolling out the POS system, our deliveries were down as compared to prior periods during the rollout phase as well as our collection efforts. So we believe that primarily – the portfolio and the revenue is primarily impacted by the POS acceleration of the rollout.

Okay. That's what I was trying to get at is, did the pendulum swing too far and have an adverse impact on the top line. And then, could you walk through your thought process on driving revenue growth, especially in the Core business; and to the same extent, Acceptance Now going forward?

Well, I think, as we indicated, the smartphone category that's been recast is now making its way into the portfolio. We do believe that will have some benefit in the back half of the year. However, just not having that product category throughout the first quarter did have an impact. So it's going to take some time to rebuild the portfolio. We do believe the eCommerce initiative is going to play a large role in helping drive incremental sales to the Core business in the back half of the year. And then, as I mentioned in my prepared comments, just making sure, from an operational execution standpoint, ensuring that the co-worker talent, the customer experience, the value proposition, all resonates for our consumer in this competitive marketplace, that was a big portion and rationale as to why we moved Jim York into this role. His experience and background and areas of focus, we believe, are a right fit to address the weakness in our Core business. And so, from our perspective, the Core business, we've got the right ideas, strategies, and programs in place now to rebuild the portfolio. From an Acceptance Now standpoint, the national accounts is certainly something that's provided a lot of optimism around the office here. We've got great conversations and opportunities with a number of large retail partners. As I mentioned, none of that’s taken into consideration in our forward outlook. And so, to the extent those pilots prove successful and we win those accounts, there's significant upside potential. So from the Mexico side, obviously, revenues are down just given the lower store count from a year ago, but the same-store sales growth has been very impressive – mid-teens over mid-teens last year. And we're optimistic and excited about the future for growth in Mexico as well.

Okay. And in Acceptance Now, on the national accounts, how many accounts are you piloting with now versus last quarter? How does the pipeline look and are they skewing more towards a staffed model or to the Acceptance Now direct model?

Good questions. We have not quantified that. And I'm not going to do that here today either. However, I will just mention that the number of folks that we’re talking to and the progress that we have made throughout this quarter is larger than it was last quarter. We are not piloting with anyone currently, but we are in final negotiations with a few of the folks that I'm referring to. And so, we're, obviously, very optimistic about what the outcome can be from that.

Okay.

Stations are largely centered around the manned model. However, there's some consideration for the virtual as well. It's, obviously, not our preferred option just given the significant upside from a manned presence to drive incremental sales for our retail partners and the value we can deliver to them, as well as just the revenue associated with that for our own business. So largely centered around manned, some consideration for virtual, but our preference, I think, you know, David, would be the manned.

Sure. And then two more for me and then I'll get back in the queue. You mentioned you lost or you stopped doing business with a large account – or a large national partner this quarter. Is that in the Acceptance – was that an Acceptance Now selling partner or is it a partner that you buy from in the Core business?

It was an Acceptance Now partner that asked us, and we agreed, to have a manned presence, but the volumes were just too low to allow for us to be profitable. So we’d decided to exit.

Got it. And what category was it, furniture, electronics?

Multi-line.

Multi-line, okay. And then, Guy, one for you. And I'm sorry if I missed it. Skips and stolens in the Acceptance Now channel, what were they this quarter?

They’re up 240 basis points. They were 10.1% this quarter. They did, however, improve sequentially throughout the quarter, if I'm not mistaken. I think June may have been higher, but through April to May, it did improve.

Okay. All right, great. Thanks a lot for taking my questions.

Thanks, David.

Your next question will come from the line of John Baugh with Stifel. Please go ahead.

Thank you for taking my question. I apologize if you've addressed this already. But I was just curious around the store or staff closings in Acceptance Now. You've, I think, called out 100-plus closures. Could you maybe tell us what types of stores those were and maybe elaborate a little bit on the rationale or strategy going forward there? Thank you.

Yeah. John, it was primarily one relationship that volumes were too low to justify the operating costs that we had invested in to drive sales, and so it was a manned presence primarily at one large partner. Obviously, the outlook going forward from the national account perspective is where our focus is. We're investing in people and talent to drive those relationships and we're optimistic about the future and what that can mean for the business.

So, Robert, would that be mean we shouldn't expect more or if this particular retailer maybe has more to come or how do we think about that number moving forward?

No. We're completely out of that relationship, so there's no more to come from that.

Okay. That's helpful. And then, what are you doing, if anything, with turn and pricing within Acceptance Now? I know you've been a little more focused on margin there than revenue. What would the changes be either sequentially or year-over-year in pricing and turn?

Nothing extraordinary. Obviously, we always continue to look at opportunities to tweak the value proposition, to ensure we're capturing sales. As you know, we had been working on economics related to the 90-day cash option. And so, that largely has made its way into the portfolio and you see the resulting impact on the margin – the positive impact on the margin, but there's nothing of an extraordinary nature going forward that we're considering or tweaking currently.

Okay. And then, again, I apologize if you've addressed this already. But I was curious, on the Core business, in terms of store count there and potential further consolidation, as you look out, do you feel like you have the right number of stores now and you just need Texas to come back or would there be plans to further reduce footprint and maybe reduce cost in the Core business? Thank you.

Yeah. John, as you know, to predict that precisely or with precision is very, very difficult. Obviously, the changing marketplace and the dynamics that occur into the future, obviously, play a large role in those outcomes. Having said that, we felt like, this quarter, that a larger number of closures than we originally anticipated was necessary to return – to improve the return profile of the business. We believe that the recast of the smartphone category, obviously, as well as the eCommerce initiative are going to play a large role in helping improve the sales for the Core business and the leadership change that we made, we believe, obviously, will be a positive step in that direction as well. We'll continue to evaluate the fleet of stores as we move through the balance of this year, next year and into the future, but to predict with any precision around what the ultimate final store count would look like is just not quite possible.

And, Robert, has there been any change in sort of the comp, if you will, to existing store to stay open in a nearby location to a Core store that was closed? In other words, how much the account business is transferring down the street over, say, the next 12 months? Have you seen any change, improvement/deterioration, in that number as you close stores?

As it relates to the overall portfolio, when stores merge into nearby locations, the curve, if you will, has not materially changed from our historical performance. Having said that, John, you may know that the fact – or the way in which we report our same-store sales comps does have a negative drag as a result of mergers. In fact, this quarter, six-tenths of an impact on our same-store sales is a result of stores that merged in existing locations a year ago coming back into our comp. So we actually hurt ourselves given the way that we report comps with merged accounts. And we do anticipate and expect, as we move into 2017, to modify our reporting around same-store sales, so that we're not reporting a negative number when, in fact, it's a positive outcome by improving the revenue and return profile of the surviving location.

Yeah. Yeah, I'm aware of that. And in my mind, you're really comping an existing store fairly dramatically when you transfer those accounts, but I get the comp calculation. Is there finally – and if you don't want to answer this, it’s fine. But is there a rough revenue per month – these stores that you're closing, what kind of – is that hurdle the same or is that actually coming down as well?

Not sure I understand your question, John. Can you clarify what you mean?

Yeah. Obviously, you're closing your weaker stores in the Core business. And I'm just curious whether the revenue per store closed is, say, different from what you were doing two, three, four years ago when you were closing stores?

Yes, I understand your question now, John. Clearly, we try to address the weakest performers first. So, on balance, as we've gone through this process, closures that happened some time ago were probably, on balance, on average, weaker than ones we're closing now. But we're also trying to manage against when leases are expiring too. So we're trying to manage the potential ongoing dead rent expense that we would manage. So as the approximately 20% of our system comes due for lease renewal every year, that does give us an opportunity to look at stores. But as we've gone through the process, I think now the stores we're closing are probably less poor performers than the ones we closed a couple years ago.

Understood. Thanks for answering my questions and good luck.

Yeah. Thanks, John.

Your next question will come from the line of Bradley Thomas with KeyBanc Capital Markets. Please go ahead.

Yes, hi. Good morning, guys. I wanted to ask a couple of questions on the outlook for sales, first of all. Maybe, first, starting with the Core segments and thinking about maybe same-store sales. Obviously, you end the quarter with a lower level of agreements, partly given the accelerated POS rollout. As we think through the second half, can you talk a little bit more about your expectations for same-store sales and the major initiatives that may be able to help you and any risks that we should consider as we look out through the balance of the year?

Yeah. Brad, as you saw in the revised guidance for the full year comps, you can easily back into the math of what that means for an expectation for the balance of year. You're right. The primary impact that we're expecting for the balance of the year comes from the deterioration of the portfolio that you experience as you go through the transitions of this new point-of-sale system. So that is the primary driver as we look forward, not to mention some of the broader macro issues that are impacting the business, like credit availability, that don't appear to be lessening in any way. But as you look forward to some of the things that we can do to address the business, Robert, touched on a couple of them. The recap of the smartphone category that we believe will be complete here in this quarter, so we should get back to more normalized run rate on smartphones. The year-over-year decline in smartphone revenues will lessen pretty dramatically here in the back half of the year. We have the eCommerce initiative that's coming on. We're piloting right now more from an operational point of view just to make sure that it works and it functions properly when a customer does a transaction online. We expect to be able to roll that out fully to the system in the fourth quarter. And then, I think the one that, perhaps not as obvious, but could be very meaningful, is Robert's point about how we are now past some of the major change that we've asked our operators to undergo in the last year or so. We've asked them to do a lot and to absorb a lot to put the business in a better situation. And now that we're through that distraction, once we start to pour some sales into this model, the resulting profitability of it will be much better. We now believe our store co-workers will be able to focus much more so on the customer experience than they ever could before, now that we're through the supply chain, labor, point-of-sale rollout, store closure changes that we've made over the last 6 to 12 months.

Great. And to that point, is there a cohort of stores that you could look at that maybe was earlier in the rollout of flexible labor, earlier in the rollout of the POS that may be trending a bit better as of late? And any evidence out there that you could cite for better performance as the level of change starts to moderate at the store level?

Yes. Certainly, we think that the second quarter was – and where we’re now in the third quarter, certainly, it's a trough. In fact, the one data point I can point to is, our first region that went through the POS implementation is ahead of the company performance and actually up on its portfolio on the year. And so, that provides us some level of expectation that, as we get through this distraction, the POS is now fully implemented, that there is a bounce back. So that's one data point I could share with you, Brad.

That's great. And then, just one last maybe higher-level question. You've pushed for a lot of change over the last year, year-and-a-half. And it's clearly yielded great benefits on the cost side and will continue to do so. I guess, Robert and Guy, as you think about the next 12 to 24 months, what's your appetite to take on other cost opportunities versus perhaps letting the chain digest some of the changes and trying to see what a more normalized run rate looks like?

Yeah. I think it's a fair question and a great one actually. No doubt, a lot of the productivity gains that we have implemented over the last 12, 18 months have started to bear fruit. But your point’s a valid one, and one which the organization is keenly focused on and that's allowing us to just really focus on operational execution and delivering on sales. While there's still opportunities out there that we'll continue to evaluate and pursue, our near-term and immediate focus is certainly on the top line.

Great. Thank you so much. Good luck.

Thanks, Brad.

Your next question comes from the line of Laura Champine with Roe Equity Research. Please go ahead.

Good morning. I wanted to talk a little bit about what drove the decision to accelerate the POS rollout. And then, as you think about the disruption there, what exactly is causing it because I know this is something that Rent-A-Center has been working on for years now, this rollout, and trying to make sure it went smoothly? So what went wrong and why did you make the decision to step it up in Q2?

Yeah. I think you've sort of alluded to it a little bit, part of the rationale. We've been working on this system for a number of years. And as I mentioned in my prepared comments, there's a number of capabilities that we’re unlocking by getting the POS system fully implemented in place. And so, it's really a two-part answer. One is, just getting it behind us and eliminating the distraction and not allowing it to drag on throughout the balance of the year. So that's part of the answer. The second part is, unlocking the pricing capabilities and opportunities that we have around tweaking our value proposition by market, by category, by region, by store that we've never been able to do before, as well as the eCommerce initiative, the fact that we're up in pilot in Q2 as a result of getting the POS system implemented allows us to learn sooner rather than later. And with eCommerce being a long-term benefit and revenue driver and providing the right experience for consumers who like to shop online, we wanted to get the distraction behind us and get going sooner on these new capabilities. Those are the two reasons.

And then, what has led to this? Because when we talked about it in the past, we thought there'd be a few days; hey, maybe a week of sales disruption. It looks like it's a lot worse than that. So what has led to the significant sales drop-off associated with the POS?

Yeah, I think – Laura, good question. I think, with any large major system implementation, these things happen from time to time. But I think, from our perspective, obviously, with the benefit of 20/20 hindsight, the early-on pilots and the approach that we took to learn in the early stages had a lot more care and feeding, if you will, and handholding and oversight from multi-levels of management. And as we accelerated the pilot, that opportunity to have that kind of care and feeding dissipated. And so, just the distraction at the store level, our multi-unit managers were not able to focus on their entire portfolio of stores and really focused on the conversions of the store that was transitioning to the new system. It really was a big burden. And that resulted in the result that we're reporting and the outlook that we have for the balance of the year. Having said all that, that distraction is behind us and the opportunities that we have, moving forward, we're optimistic about it and excited for. So it's unfortunate, but we're looking into the future and making sure that we're addressing the needs of the business and learning from these new capabilities.

Got it. Thank you.

Thank you, Laura.

[Operator Instructions]. Our next question will come from the line of Carla Casella with JPMorgan. Please go ahead.

Hi. I had a few cash flow questions. First, I'm wondering what you expect to spend in cash taxes this year?

I don't have that number at my fingertips, Carla.

Okay. I can always follow-up later. But it looks like you're running well below last year in the kind of – with the deferred tax payments?

Yeah. Again, I'll have to get back to you on that. I don't have that at my fingertips.

Okay. And then for the CapEx side, are you still targeting $75 million, which makes it looks like it's a big ramp-up in the back half, or you think that could be lower this year?

Yeah. We've been projecting $70 million to $80 million. I still think that's our range. If there is a bias, it's maybe to the lower end of the range, Carla. But we still think it's in that $70 million to $80 million range.

Okay. And then you paid down – the $20 million debt pay-down in the quarter, I'm assuming that was all the revolver?

Yes.

Okay. How aggressive – now that the revolver is fully paid down, will you still continue to go and pre-pay term loan or potentially look to buy back bonds. I'm wondering how aggressive you would be with your debt pay-down, now that you've taken out the easy pay-down?

Yeah. Obviously, now, we have much more flexibility that we’re under the 2.5 times. As you know, Carla, we couldn't really do anything other than pay down the revolver of the term loan until we were in that position. Now, we're in that position. So that does give us a little more flexibility. We're not yet at the position where we can start share repurchase, but we're not far away from that. So as both Robert and I commented, the opportunities are starting to open up for us now to use our capital.

Okay. And your cash flow is a lot better than we expected in the quarter. Can you give us just some insight in terms of any of the key items that drove it? I'm guessing a lot of it was the purchase of rental merchandise, given how much you brought down your inventory levels. Is that a safe assumption?

Yeah. That's a safe assumption. We've really been managing our working capital much more tightly. Some of it – as every item we're purchasing, we're purchasing at a lower cost because of our sourcing initiatives. So it's not entirely a reduction in the actual units on inventory, sum of the average cost per unit. But there's no question we're doing a much better job of managing our inventory more tightly.

Okay. And then just two quick business questions. Did you – I may have missed it. Did you give the percentage of sales that are cell phones at this point?

We didn't give that, Carla. But with the category being recapped, it's probably not an ongoing run rate, what we've seen in the last couple of quarters. I think our expectation was that once fully re-casted that the mix of smartphones would probably be down a little bit from where it was before. I think we peaked out at almost 9%. But, no, it's at a much lower level than that right now, but that's partly because we have not got the category fully re-casted yet.

Okay. That's very helpful. And then one business question on the Acceptance Now side. Can you talk a little bit about the new terms for reimbursement and what percentage of the retailers are taking the new terms for reimbursement?

Are you speaking directly to the 90-day transaction?

Yeah.

Yeah. We're probably about half – about half the retailers, we've gone back to and spoken with and have a new economic arrangement as it pertains to the 90-day transaction.

And you expect to get them all over to that or there's some that just doesn't – it doesn't fit the model?

No. I think it fits the model for all the retailers, but we're working closely with all of them. And our discussion is centered more around just the 90-day transaction. Obviously, that's one piece that's got a lot of attention because of the impact it had on the business. But, no, when you think about whether it's a hybrid model or the virtual model or what we're trying to do with the staff model, the discussions with the retailers are more broad than that. So we would expect to continue to talk to all of our retailers about how we can make the business better for them and for us.

Okay, great. Thanks for taking all the questions.

At this time, I will turn the conference over to Mr. Robert Davis for any closing remarks.

Thank you, Regina. And thank you, everyone, for joining us. We appreciate your time and your support. We look forward to reporting back next quarter. And we'll talk to you then. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you all for joining. You may now disconnect.