Good morning and thank you for holding. Welcome to Rent -A-Center's Third 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 October 27, 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'd now like to turn the conference over to Ms. Short. Please go ahead, ma'am.

Thank you, Shelbie. 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 third 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 in the company's SEC filings. I’d now like to turn the conference call over to Robert. Robert?

Thank you, Maureen. Good morning, everyone, and thank you for joining us. As previously announced, our third quarter operating results were negatively impacted by unexpected capacity related system outages following the full implementation of our new store information management system within our Core U.S. stores. Consequently, I’m terribly disappointed in the results for the quarter, both top and bottom line. Before we discuss our financial performance, I would like to first explain more about the system issues we had experienced, what we’ve done to fix the issues, and where we stand today. First, I think it's important to note that the new point -- the new system supports all key functions in our stores, including not just taking payments like a traditional point-of-sale system, but also managing collections, customer records, inventory management, pricing, customer relationship management to name a few. If you recall, we paused the rollout of the system in Q1 so that we could address opportunity areas related to the functionalities of the system and its ease-of-use by our coworkers, because we were seeing a greater than expected impact to operating results. As previously stated, those modifications were successfully implemented, giving us the confidence to proceed with the rollout in Q2. During this transition period, prior to the third quarter, expansive training was conducted in order to ensure coworkers were adequately trained on the new system. However, as with any major system change, during the training and while coworkers were getting up to speed on the new system, there was an absorption period, which took time away for performing sales and collections activities. Around the time that the last stores went live on our new system, we experienced unexpected capacity related system slowness and outages, which we attributed to the increased usage of the system. When the system…

Thanks, Robert. Good morning, everyone. This morning, I'll walk you through the highlights of our financial results for the third quarter. I'd also like to mention, as I refer to our third 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 $693.9 million which represents a 12.3% decrease versus last year. This decrease was driven primarily by a Core same-store sales decline of 12%. Our total U.S. same-store sales combining the Acceptance Now and Core U.S. segments decreased 8.7% versus a year-ago, and on a two-year basis, U.S. same-store sales decreased 3.5%. Looking at sales performance in our Core U.S. segment more closely, total revenues were down 16.3% driven by a same-store sales decline of 12% and an 8.5% reduction in store count from the prior year. The same-store sales decline was primarily due to the accelerated rollouts of our point-of-sale systems, the unexpected capacity related system outages, and weakness in our electronics categories. In the Acceptance Now segment, revenue was down 1.1% driven by our same-store sales decline of 0.9% and a 6.5% reduction in our staffed store locations offset by results from our direct locations. Consolidated gross profit was $457.2 million and gross profit margin was 65.9%. While all three of our company-owned operating segments experienced increases in gross margin year-over-year, on a consolidated basis, this number was lower due to the higher mix of business coming from Acceptance Now. In the Core U.S. segment, gross profit margin was 71.2%, 10 basis points better than a year-ago. The gross profit margin was positively impacted by the continued growth in the mix of more efficiently sourced product in the Core portfolio, improved merchandise sales margins as a result of fewer…

[Operator Instructions] And your first question comes from Bradley Thomas of KeyBanc Capital.

Yes, thanks. Good morning and thank you for taking my question. I wanted to just ask in terms of the same-store sales in the Core, appreciate all the color around what’s going on with the new systems that you’ve in place. You may not know this for sure, but I guess if you tried to figure out what’s going on with the underlying health of the business and health of the customer, what do you think trends look like in that respect? Thank you.

Hey, Brad. It's Guy. I think of the Core same-store sales decline, about two-thirds of it, call it 7% to 8% of the decline we think was related to the rollout of the new point-of-sale system. Some of that was the absorption factor that we expected as a result of coworkers getting used to the new system and the resulting impact of the portfolio of that absorption, but the remainder is related to the outages that both Robert and I referred to in our comments. As for the broader marketplace, we still feel like some of the same issues are impacting our customer. The availability of credit continues to be probably the biggest headwind that the business faces as we also believe the ongoing shift of some of the business from the Core channel to the Acceptance Now channel continues to be an impact to the Core business as well, as well as some other factors that are maybe more specifically related to our business or at least to the unique aspects of our business, some being our footprint in Texas and what's happened there related to oil markets, and then the ongoing recast of our smartphone category that probably faced its most difficult year-over-year lap, because last year in the third quarter, this was the peak of sales for the smartphone category just before we took the write-down at the end of the quarter. So I don’t know if that helps, but that’s the additional color on what's going on outside the point-of-sale systems.

And your next question comes from Laura Champine of Roe.

Good morning. Guy, you mentioned that you expected skips and stolens to shift higher in Q4. If you could walk us through why that would happen, and then just give us the charge-off rates for both Core and Acceptance Now, that would be great in Q3.

Yes, Laura, the -- if you -- I think, I could hear you. I think you were referring to the Acceptance Now losses. No, we’ve seen quite a bit of improvement as a result of some of the work we had done over the past quarter and the changes we made to the approval engine back earlier in the year. And so, we still expect that to have a positive impact and we don’t see ourselves at all getting back to the levels that we saw in the second quarter. We do think they will be a little bit higher than they were in the third quarter. Some of that is seasonal. As you know, Laura, we tend to have higher losses in our Acceptance Now business in the fourth quarter versus other quarters, simply because the timing of when we charge-off after 150 days. On the Core side, we're encouraged. Robert talked about some of the improvements we've seen in collections metrics and, of course, a positive by-product of that will be the eventual losses that we will recognize. And while the system challenges cause those losses to go up in the third quarter, we’re encouraged of what we’ve seen that the absolute charge-off rates in October are back to levels that you would typically expect to see for a fourth quarter.

And your next question comes from Kyle Joseph of Jefferies

Hey, good morning, guys and thanks for taking my questions.

Good morning.

Just at Acceptance Now, it looked like during the quarter, you closed some of the Acceptance Now Directs, whereas the Acceptance Now staffed store account was relatively flat. Can you just give us an outlook for your growth between those two going forward?

Sure. As I mentioned in my prepared comments, the manned locations, I think, through the third quarter we had opened around a 100 plus new locations, and that’s indicative of the pipeline we continue to see. That is separate and apart from our national account pilots that are marching forward as we speak. So as it relates to the store closures, particularly on the manned side, we’re very adamant about making sure we focus on profitable growth. And we had one of our larger retail partners propose to us some different ways of partnering that for us we felt like was unprofitable and unsustainable. In fact, we had not made money with that partner to date and so we decided to close a number of those locations, and we’re just not going to participate in the irrational behavior that we’re seeing in the marketplace from a sustainable business model perspective. As it pertains to Acceptance Now Direct, we're not going to be opening any additional locations other than one-offs for the time being as we stand up these national account pilots. Now there might be some conversions of existing manned that volumes are low enough that we will convert to a Direct, but in terms of a robust attempt to grow the Acceptance Now Direct, we’re going to pause on that for right now until we get the national accounts stood up.

And your next question comes from Darla Casella of JPMorgan.

I think, it's Carla Casella. Right, Carla?

Holy cow. Never heard that one. That’s great though. Glad you are taking my question even as Darla. Let me just ask a question about the -- just see if you can clarify, can you talk about the changes you made to your credit facility covenants. What’s your ability now to either buy -- at what point could you buy back shares again and what’s your ability to buy back bonds?

So, we have got the same flexibility that existed before the amendment, Carla, exists now, after the amendment in terms of buying back bonds. So as long as we’re under 2.5 times total leverage, then we’ve the complete flexibility to repurchase junior debt. So that remains unchanged from where we were before. In the previous -- prior to the credit agreement, we had some ability to buy back shares that we were under 2.5 times on all of the facilities. Of course, we were close to that on the credit agreement. We’re still some ways away on some of the junior debt covenants. Now with the amendment, we actually have no ability to buy back shares if we remain at the 1.5 times covenant. We do have the ability to elect to go back to the 1.75 times, which then would open up the ability for us to do share repurchase. But at least, at this point right now, we'd be restricted from repurchasing shares.

And your next question comes from Karru Martinson of Jefferies.

Good morning. Just to follow-up on Darla's -- I mean, Carla's question. When we look at that $130 million of cash on the balance sheet and that 2.5 times leverage test, I mean, how should we think about your capital structure going forward here? How will you take advantage of kind of the bond market here where your prices are, and how should we think about if we go forward, let's say, a year of where you feel this Company should be at?

Karru, we still are focused on getting the overall debt ratio under 2.5 times. That gives us the incremental flexibility we need and would like to have with the business. We do think there is an opportunity to repurchase junior debt, but we do have to be under that 2.5 times to be there. I think, long-term, in sort of the normal course of business, we'd like to be under 2.5 times, call it in the 2.25 times leverage, would be an optimal place for us to be. But we also recognize that if there are opportunities for us to improve the business, we'll certainly take advantage of those. Like for example, national accounts, that Robert talked about. If we see an opportunity with one or more of our national account partners, that could require some investment of working capital to stand up a revenue stream that would result in a lot of growth for the business moving forward, we certainly would want to take advantage of that. And with the completely undrawn revolver, we’ve the flexibility to do so. But on a steady state, we'd like to be under that 2.5 times so that we have complete flexibility to do national accounts, repayment of junior debt, other investments in the business or share repurchase in the long-term.

And you next question comes from William Reuter of Bank of America Merrill Lynch.

Good morning.

Good morning.

Good morning.

I guess, I was curious given all the challenges that retailers are having to generate traffic, whether you guys are hearing of increasing opportunities for the Acceptance Now segment in terms of, I guess, looking forward the next 12 months to 18 months kind of new partnerships?

Yes, I think that as we’ve built the pipeline, there are a number of retailers that are becoming more and more aware of this opportunity to serve financially constrained or credit constrained consumers, an offering like Acceptance Now being introduced into their environment and serving their customers is certainly something very appealing to them. And so from my perspective, that awareness level and that appreciation for serving customers that maybe they traditionally weren't able to, is growing more and more by the day. And I think that just speaks to the opportunity that we’ve discussed before on prior calls about this marketplace within traditional retail environments being a $20 billion to $25 billion opportunity, and certainly we’re positioning ourselves for that opportunity, and poised to take advantage of it starting very soon.

And your next question comes from Hale Holden of Barclays.

Good morning. Thanks for taking the call. I just had two quick ones. The first one is, with the downdraft in sales in the Core and the inventory on rent down, can you just remind us kind of how the model works? And how many quarters it would take for you to kind of work back through to growth in inventory on rent, and kind of where -- like how far out EBITDA would trough from kind of the missteps this quarter? And then the second question I had is on the new Internet sales initiative. With your comment on getting new customers there, can you give us a sense of if there is a difference in credit quality from those customers who are kind of new to the offer, if they’re different from the Core, better or worse, or kind of the same? Thanks.

Okay. On the inventory on rent, as Robert mentioned, one of the key aspects of the clearance event that we did in the third quarter was to set us up to take advantage of the opportunity to rebuild the portfolio of inventory on rent as quickly as possible. In the business, typically, it's in the fourth quarter, early in the first quarter where we’re able to capture that portfolio growth opportunity best. And as a result, we wanted to be in a position where our inventory was in -- as strong as it could be, with as high a percent of new product as we could, and we’ve made progress on both those fronts as a result of moving on a lot of previously rented inventory during the clearance. How long it will take to rebuild the portfolio? We’ve seen for stores that received the new system late last year, by the end of the second quarter on the last call, Robert talked about how some of those stores had seen our portfolio grow back now to being where it was in the prior year and even up a little bit. So, we certainly feel like it will take, call it, two to three quarters for us to rebuild the portfolio. But clearly, the fourth quarter here and the start of the first quarter is very important, that’s why we wanted to put our inventory in the best position possible and we feel like we’ve done

As it pertains to the e-commerce initiative, from a credit quality perspective, from the end consumer, we certainly believe that they’re a little bit better quality than our Core customers that’s being served inside of our rent-to-own brick and mortar environment for a couple of reasons and some metrics I'll share with you. One, this is a required transaction from an electronic payment standpoint, and we do serve customers within the brick and mortar environment that are cash-only customers and don’t have access to any form of electronic payment. So, by virtue of that, we believe that the quality of the customers are a little bit higher. And we're seeing the average price per ticket be a little bit higher than the Core business too. And so, perhaps they’ve a little bit more ability to pay a higher amount. And so those couple of reasons, we believe the quality of customer we’re serving through the e-commerce platform is just a tick above what we see in a traditional environment.

Thank you very much.

Thanks, Hale.

Your next question comes from Dillard Watt of Stifel.

Thanks. Guy, I was wondering if you could just give us what the skip/stolens were for both Core and Acceptance Now during the quarter? And then, you mentioned that October was improved, last six weeks have been improved. Maybe in just the Core, maybe, how much better in terms of, maybe basis points are we now versus where you peaked out, say, two months ago?

All right. The third quarter skip/stolen, I think I referred to it in my prepared comments, that it was 4.7%, which is of course higher than we typically run in that corridor of somewhere between 2.5% and 3.5% is where we typically run. So, that’s up quite a bit over last year, but not entirely unexpected given some of the collections challenges we had. The fourth quarter, at least -- historically has performed similarly to Q2 in absolute levels, maybe slightly higher. And so, in terms of where we think it will normalize, we think it will be similar to maybe slightly higher than a typical fourth quarter might be, which last year the fourth quarter was 80 basis points better than the third quarter was. So, in terms of absolute specifics, I don’t think we want to share those right now other than just to say that I think when we look at the fourth quarter number, it won't look much different than typical fourth quarters do when we end up getting to the number at the end of the day . On the Acceptance Now side, the charge-offs were 8.4%. That’s probably the best number we’ve put up since the third quarter a year-ago, and up only 20 basis points from where it was last year. So we feel really good about the progress that we’ve made there. Again, the fourth quarter at least for the last four years now, even five years, has always been the highest quarter for Acceptance Now losses in absolute terms just because of seasonality, and we certainly expect that will be the case again this coming year. And we do expect to still be up on a year-over-year basis from the 10.5% we were in the fourth quarter last year. Maybe not quite as good as it was in the third quarter, but nowhere near approaching where we were on a year-over-year basis in the second quarter. Hopefully that helps.

[Operator Instructions] Your next question comes from Grant Jordan of Wells Fargo.

Good morning. Thanks for taking the questions. Just some follow-ups on the systems. Can you give us some specific examples of how the POS system is weighing on same-store sales, like what’s happening on the stores? And then, two, what is the specific system that you upgraded to?

So, Grant, I'll do the second one first. It's a proprietary in-house developed system. There just simply isn't really off-the-shelf products for the rent-to-own industry like there might be in other retail industries. So, we developed the system ourselves. In terms of how things affect same-store sales specifically, again, we’re a little bit different business than typical retail where you simply make the sale at the time of sale and then you don’t have to worry about any ongoing revenue stream. We do, and our ongoing revenue stream is part of our sales in addition to new agreement origination. And so, when we struggle with collections or get behind on collections, it's very difficult for our customers to catch up. And so, when they fall behind and don't make a payment, that impacts our sales, because that’s a decline in the ongoing revenue stream. And then, if they get so far behind that we end up having to pick up the product as we tend to do sometimes when customers can't pay, we also then lose the ongoing revenue stream of that product, and until we’re able to put that product back on rent or another product back on rent, we lose the revenue stream moving forward. So, that’s the biggest impact to sales. The initial collections that we’re not doing and then the loss of the revenue stream when the product comes out of the portfolio.

So, like -- specifically like when the customers tried to make their payment, they weren't able to or like how were they not able to make their payments?

Yes, that certainly happened on occasion, Grant. But it often was the case that for the hundreds of calls that happen during any given week in our stores were on collections, whether it's to get customers back on track or to remind them to make a payment. If we have system challenges that don’t allow us to make all those calls in a given day or to be not as productive making those calls as we might otherwise be, that components of customers that don’t get that call on a regular basis start to fall behind and then it becomes very difficult for them to catch up. And so that’s really what causes then a customer to have to pay two weeks or three weeks when they fall behind, they struggle doing that. They end up having to give us back the product and as a result, the sales are impacted. That’s the primary reason why we were in the situation that we were in.

Okay. And in terms of like being where you want to be with being able to make those calls. How would you describe that today?

Well, I think we’re now three months away from the rollout that we completed at the end of June. So our coworkers are much more familiar now with the system than they were before. I think that’s showing up in the numbers, as Robert mentioned that the improved collection metrics that we’ve seen. As we move forward, the key now will be to minimize or hopefully eliminate the outages that we’ve been seeing and it's something that Robert said we’re working very hard at in order to provide that sort of stability so that we can now capture this more productive coworker usage of the new system. If we can avoid some of the outages that we’ve seen, we believe that our coworkers are now at the point where they’re certainly much more productive on doing collections than they were previously.

Okay, great. Thank you.

Thank you, Grant.

And you have a follow-up question from Carla of JPMorgan.

Hi. Did you say how much the gross margin was impacted by the clearance specifically?

We didn’t.

And was that finished in third quarter or will it trail into fourth?

Yes, we didn't say that, Carla. Although, we had been tracking about 20 basis points of sequential improvement every quarter since the rollout of the new sourcing initiatives. So, we’ve been up 20 basis points in the fourth quarter, 40 in the first quarter, 60 in the second quarter, although in total we were up 120 in the second quarter, but about 60 of that was related to the sourcing event. So, I'd have expected that we'd have been, call it, 60 to 80 basis points up in the Core had it not been for the clearance of that. And so, it did have an impact on gross margins as a result. And of course now, some of those items are in our portfolio. So they certainly will continue to have an impact moving forward. But we’re also in a much better position in terms of percent new moving into the fourth quarter. So, items that we add to the portfolio now should have a disproportionally positive impact moving forward. So, I wouldn’t want to suggest that what happened in Q3 will carry over and be the case again in Q4. I think we also -- we’re well-positioned now as a result of the higher percent new to improve upon the gross margin number that we delivered in the third quarter.

Great. Thanks.

And your last question is a follow-up question from William Reuter of Bank of America Merrill Lynch.

Just a follow-up question on the retail partner that you noted was offering, I guess, a deal for you guys that would have been an unprofitable relationship. I was curious whether they have chosen to go alone or whether they’ve gone with other partners, and whether you guys are seeing an increase in retailers that might be trying to offer some of these services of rent-to-own on their own?

We have not seen instances of retail partners wanting to do this on their own. Certainly, there are other alternatives to Acceptance Now out in the marketplace. None that serves customers to the level and degree that we do by having human beings and coworkers in stores to help overcome objections and explain the rental transaction and really nurture the consumer from end-to-end on the process, as well as take the burden off the retail partner by being available to explain the transaction to the consumer. And so, from our perspective, albeit there is heightened competition in the marketplace, we still continue to believe in our manned model as we march forward. Having said that, not seeing retail partners doing this themselves, in this instance in the one case I referred to, that retail partner is issuing an RFP to other competitors and ourselves and we, frankly, just chose not to participate given the irrational requirements that they were asking for us to acquiesce to. And so, again, as we sit here today and we’re poised for growth in Acceptance Now, a firm proponent of the approach we’re taking, and I’m excited about our national accounts approach, as well as the other manned locations we’ve opened year-to-date.

Thank you.

Thanks, Will.

There are no further questions. Mr. Robert Davis, please go ahead with your closing remarks.

Thank you, Shelbie, and thank you everyone, for joining us today. Appreciate your interest, your time, your attention, and your support. Certainly, a challenging third quarter related to our systems issues that, unfortunately, had a material impact in Q3. As I indicated in my prepared comments, I’m encouraged by current tone of business trends we’re seeing. And this important fourth quarter, in my opinion, is going to be very productive for us. So, I look forward to reporting back those results next quarter. Thank you.

This concludes today’s conference call. You may now disconnect.