Upbound Group, Inc. (UPBD) Q2 2017 Earnings Report, Transcript and Summary

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 27th, 2017. Your speakers today are Mr. Mark Speese, Chief Executive Officer; Maureen Short, Interim Chief Financial Officer; and Daniel O'Rourke, Vice President of Finance, Investor Relations and Treasury. I would now like to turn the conference over to Mr. O'Rourke. Please go ahead.

Thank you, Jack. 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 2017. 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 undertakes no obligation to publicly update or revise any forward-looking statements. These factors are described in our earnings release issued yesterday, as well as in the company's SEC filings. I'd now like to turn the conference call over to Mark.

Thank you, Daniel. Good morning everyone, and thank you for joining us. Today we'll discuss our second quarter results, and go into detail on the progress we are continuing to make on our strategic plan. Needless to say, our focus remains on the key elements of this plan, which are strengthening the Core U.S. business, optimizing and growing the Acceptance Now business, and leveraging technology investments to expand distribution channels and integrate our retail and online offerings. We're encouraged by the results we are seeing. We implemented a number of new initiatives during the quarter to drive our business forward. While it will take time to fully realize the benefits of the actions that we have taken, given the portfolio nature of the rent-to-own industry, we remain on track and reiterate our expectations to achieve the 2018-2019 targets that we laid out as part of our strategic plan. Let me remind everyone, we have said it would take several quarters before these results showed up on the top and bottom lines. And from a portfolio standpoint, the second and third quarters historically perform lower. That said, we believe the monthly key operating metrics reports will continue to provide visibility into our progress, and we are committed to holding ourselves accountable for our performance. Now, I'd like to review the results of the second quarter. Our Core U.S. business showed solid progress in the second quarter. We continue to enhance the value proposition of the business through these targeted initiatives. As I mentioned last quarter, we implemented a new competitive offering, in February, with the goal of increasing customer satisfaction and retention, increased ownership to shorten terms, and an increase in the early purchase discount, all while improving the lifecycle of inventory and enhancing our return on investment. As a result, we saw further improvement in Q2, including a 9% decrease in returns year-over-year. We are also starting to see an increase in ownership as well, but the full impact of this initiative will take some additional time. As we continue to increase ownership levels our inventory turns will accelerate, and in turn our cash flows will improve. In Q2, we also continued our focus on optimizing our inventory mix to better meet the demands of our customers and grow the portfolio. As a matter of fact, over 65% of the products we shipped to our stores during the quarter were higher-end aspirational products as the portfolio balance improved. In addition, the year-over-year change in merchandise on rent improved by 380 basis points. While this will continue to take time, shifting the mix towards the higher-end aspirational better and best products will drive stronger economics for Rent-A-Center. In fact, as noted in the June's monthly metrics report, delivery APU, again this is the average monthly rate of new agreements, improved 5.7% year-over-year as a result of the continued optimization of the value proposition and higher-end inventory in our system. We've also reduced the overall amount of Acceptance Now return product in the Core by over 30% this year as a result of our efforts to increase sell-through rates through targeted sales initiatives. These include a reduction in the remaining inventory value of these products when they're transferred into the Core, and an overall reduction in Acceptance Now returns. We also enhanced the quality of the portfolio against the prior period. This was part of our improvement in account management practices, and is a key part of our overall strategy. Delinquencies improved by 410 basis points over the prior year period. In order to optimize or to continue to optimize our business we are stabilizing and upgrading our talented workforce. To reaffirm our commitment to the co-workers, we also implemented a profit sharing program in April to align the co-workers with the ultimate goal of enhancing stockholder value. This new plan captures the full P&L, and in addition profit sharing now includes the assistant managers. We strongly believe that this plan will decrease turnover and increase engagement. Further, our focus on P&L management and training for managers will improve our overall business. I'd also like to highlight our new mystery shopper program; this is designed to improve the customer experience. This program will provide the sales force critical feedback on in-store, web, and phone-based customer interactions. Importantly, detailed training is integrated into the tool to help co-workers significantly improve their interactions. In regards to our poor store footprint, we continue to employ targeted initiatives for our underperforming stores. As we have shared with you in the past, we expect underperforming stores to show signs of a turnaround by the end of 2017. We are continuing to evaluate individual store performance and rationalization. And as part of that, we have engaged a third-party to help us better understand the potential role of franchising and what it would take to become a world-class franchisor. Now this work is well underway, and we believe it can play an integral role in the future of Rent-A-Center. Turning now to the Acceptance Now segment, we saw strong same store sales in the quarter. To be clear, there are now only approximately 500 locations in the Acceptance Now same store sales calculation due to the remainder having been removed from the calculation due to receiving accounts and the revenues from the closed Conn's and HH Gregg's stores, while delinquencies were unfavorable compared to the prior quarter primarily due to seasonality and the transferred agreements from those closed stores, same store sales remained higher than last year due to a larger portfolio in those respective locations. This growth is being driven by maturing store base and stronger average ticket as a result of the initial actions that we've taken to date optimized the value proposition in this segment as well. We also continue to improve our decision engine and the risk analytics increased our return on investment through improved ownership by implementing consistent risk assessment policies and strategies across all the A Now locations. The overarching goal is to reduce returns, increase ownership, and increase the return on capital. This increase in inventory -- the increase in inventory help for Rent in the A Now segment, and you will see that in the segment reporting that the [indiscernible] not. This was temporary or is temporary and it was intentional as we worked to lose the excess inventory in the quarter, which we have done. And at the same time, we opened two regional resale locations to sell excess products through. Those are now operational and inventory is once again flowing through all channels. Turning to the third pillar of our strategy, we are focused on leveraging our technology investments to expand our channels to reach new customers. As part of this, we are focusing on opportunities to capitalize on strong growth prospects in emerging rental channels, particularly in Acceptance Now and e-commerce. We are in the late innings of developing and deploying a mobile application which will bring Rent-A-Center to our consumers anytime and anywhere. Rent Mobile will provide more choices to our consumers with the ability to make payments and manage their accounts while allowing us the opportunity to engage and improve customer retention and satisfaction. With respect to the balance sheet, we are focused on improving the return on our inventory investments. And we continue to pay down debt and position the company for growth and value creation. We were pleased to have closed the amended credit facility during the quarter, which we believe provides us with sufficient liquidity and flexibility to execute on our initiatives and drive value for stockholders. We are pleased with the good progress we've made on our strategic plan during the quarter, delivering sequential improvements in same store sales in both the Core U.S. and Acceptance Now businesses. As we laid out when we announced this plan, our transformation of the business will take several quarters and our work is not yet done. However, I am optimistic about what we have achieved so far and we remain on track with our plan. Finally, I also want to thank all of our 20,000 co-workers for their hard work and all that they continue to do to stay focused and execute on our strategy. And with that, I'll turn the call over to Maureen.

Thanks, Mark. Good morning everyone. Now I'll walk through the financial performance for the second quarter of 2017 and will present the results including special items compared to the same period of the prior year or to the first quarter of 2017 as we measured sequential improvement against our strategic plans. Consolidated total revenues for the second quarter were 670 -- sorry, 677.6 million, down 9.6% versus prior year. Adjusted EBITDA was 28.9 million and EBITDA margin was down 20 basis points versus the first quarter. Net diluted loss per share excluding special items was $0.1. In our Core U.S. segment, total revenues were down 13.9%, driven by same store sales decline of 10.2% and a 5% reduction in average store count. The same store sales decline is primarily due to a lower portfolio balance versus prior year. As Mark mentioned, we continue to make progress on the portfolio. Same store sales improved sequentially by 230 basis points, driven by value proposition changes and the higher monthly rate of new agreement which was 5.7% above prior year in June. The year-over-year change in merchandized on rent improved sequentially by 380 basis points, which shows that we are making up ground versus last year on the portfolio, we continue to expect sequential improvement in same store sales every quarter of 2017 and to achieve positive same store sales in the fourth quarter when the benefits of our initiatives become more significant. Gross profit margin in the Core U.S. business was 69.6%, 260 basis points lower than last year due to value proposition changes and targeted pricing action to right size the inventory mix. These changes will continue to return products in the Core stores. Store labor expense was down 19.4 million versus last year, driven by lower store counts and lower insurance expenses. Other store expenses were down 17.6 million, driven by lower store count and lower skip/stolen losses. Skip/stolen losses in the Core business were 2.4% in the quarter compared to 2.9% last year. Our expectation is that losses will remain at lower levels given the improvements made in delinquency rates and the quality of the rental portfolio. While store expenses benefited in the first half of the year from stores that closed in 2016, we will have fully lapped closures in the second half of the year. On a sequential basis, Core EBITDA dollar improved 21% and EBITDA margin 210 basis points. Now turning to the Acceptance Now business, total revenues increased by 1.9% due to higher same store sales of 6.7%, which was partially offset by store closures. In Q2, 262 Acceptance Now fact locations were closed and merged into existing locations primarily due to the closures of Conn's and remaining HH Gregg location. The company also opened 70 new staff locations within the quarter. Acceptance Now revenue for the full year is expected to be similar to 2016 revenue since the growth in the first half of 2017 will be offset by the store closures. Gross margin was 51.1%, down 170 basis points from last year, driven by lower gross profit on merchandized sales due to a focus effort to encourage ownership and reduced return products by negotiating a buyout amount in lieu of picking up product for select customers. We expect this gross margin trend to continue going forward and will likely build aspects of this into our future value proposition changes. Skip/stolen losses for Acceptance Now were 9.4%, which was a 70 basis point improvement versus prior year. Acceptance Now EBITDA was 25.6 million in the second quarter, and sequentially EBITDA margin decreased by 60 basis points. Corporate expenses increased compared to last year, primarily driven by incentive compensation approved at a higher rate than last year and higher depreciation resulting from the implementation of our new POS system. Corporate expenses for the remainder of the year are expected to be flat to slightly above prior year. Now turning to the balance sheet, last month, we announced the completion of an amended credit agreement with our existing bank group. Under the new agreement, maintenance covenants will replace with a monthly fixed charge covered test. If our fixed charge is covered is less than 1.1 time, we must maintain 50 million of excess availability on the revolver. The revolver size is 350 million with an expansion feature of an additional 100 million. Pricing is substantially the same with an additional pricing tier above four times leverage. The amended credit facility provides us with more than adequate liquidity and flexibility needed to execute on our strategic plans. At the end of the second quarter, we had $73.8 million in cash and cash equivalents, and reduced total debt by approximately $16 million during the quarter. Our total debt balance was $647.4 million, with $55 million drawn on the revolver. For the quarter, the company's fixed charge coverage was 0.8 times, leaving approximately $140 million of available capacity on the revolver, taking into account the additional $50 million necessary give the fixed charge coverage rate. Year-to-date, we have generated approximately $112 million of cash from operations, and continue to expect to end the year with a lower debt balance. With that, let me turn the call back over the Mark before we open up the line for your questions.

Thank you, Maureen. Yes, before we open the line for questions I want to discuss a few other items related to our business. We've made a number of exciting personnel additions to further strengthen the leadership team. In May, Joel Mussat rejoined the team as Executive Vice President, Chief Operating Officer. Many of you know or have met with Joel in the past, having spent 11 years working here at Rent-A-Center. It's great to have Joel return, and we look forward to his contributions as we enhance our operational capabilities. We also appointed Martin Evans as Executive Vice President, Chief Human Resource Officer. Martin brings an outstand people skill set, and more than 20 years experience shaping high-performance cultures at Fortune 500 companies. Most recently, Martin was Head of HR at Exeter Corporation, where he reshaped and defined a new mission, brand, and values for the company reducing turnover, restructuring benefits, and cultivating a unified values-based culture. I also want to reiterate my personal commitment to my role at Rent-A-Center. As a founder of the company and CEO, I have the utmost confidence in our strategic plan and future prospects. As I've outlined this morning, the initiatives underway as part of our plan are already delivering substantial progress in key performance metrics, including improved same store sales and reductions in delinquencies. I look forward to continuing to share our progress in the quarters ahead. I also want to briefly address recent media reports regarding the company, and unsolicited indications of interest. The Rent-A-Center Board and management team are focused on maximizing value for all stockholders. The Board is well-advised, remains open-minded, and regularly reviews Rent-A-Center's strategic priorities and opportunities, and is committed to acting in the best interest of the company and all stockholders. Beyond that, we won't be commenting further on this topic, and I'd refer you to our previous public statements. As I've shared with you this morning, my focus is on expeditiously executing our strategic plan to restore growth and improve profitability. So with that in mind, and this being our quarterly call, we ask that you limit your questions to items pertaining to the results that we've reported today. With that, I would like to now go ahead and open the call for questions.

Thank you. [Operator Instructions] Your first question comes from the line of Budd Bugatch with Raymond James. Your line is open.

Good morning, Mark, good morning, Maureen. Thank you for taking my questions. I guess first question is regards the gross margin, the value proposition that you talked about, what would be the normal, and how do I think about the gross margin versus what you've done to eliminate some unproductive inventory. How do we think about the quantification of that differential and gross margin?

Want to make sure I understand your question. You're saying, how should we think about relative to what it might be in the future the way the value proposition was positioned compared to how it's been reported today given the discounting and acceleration of moving through the prior promotional inventory, in other words.

Yes, give us a flavor of what the two parts were in the results just reported, and then how does it look going forward, what's kind of a target margin for the Core and for Acceptance?

Yes, Budd, so today the 260 basis point change year-over-year within the Core business is driven by two things, the value proposition changes which are recurring, and aggressively trying to older idle product in order to make way for the new more aspirational products. So the margins should improve going forward given that we won't need to be as aggressive in moving through idle inventory because we've already started buying the new inventory and we've moved through a lot of that inventory already. So going forward, we will see margin improvement from the second quarter. However we will still see some pressure year-over-year given the changes that we made within the value proposition.

Yes. And of the 260, what was the value proposition portion and what was the discounting portion move through the inventory.

I think -- well, yes, no I understand what you're trying to ask. So I know I've said before, I think everyone recalls, the average piece of inventories is our system, about 18 months. So I think where you really got to start is how long is it going to take to move through it. And then where does this ultimately settle. To Maureen's point, third quarter will show some pressure compared to last year fourth quarter likely will. As we get into '18 and beyond is when you're going to start to see that settle into where it could be or should be on a normalized basis. Now you're asking, is that 100 points lower or 200 points lower or what from where it is right now, and the answer is yes, it's somewhere in between there.

Okay, thank you. And my next question is regarding inventory productivity. Inventory on rent per store continues to move down, although it looks like the deceleration may be at least moderating sequentially. But that's kind of the future revenue basis for the Core. Where are we in that process? How should we think about that going forward? And if you talk about Core expectation for revenues, I apologize I was a little tardy in getting on the call as I was on another call, if you can help us for the balance of this year?

So are you asking with the on-rent inventory what our expectations are going forward within the Core business?

No, Maureen. That inventory on rent per store, per average store, it looks like it continues to fall, which is the basis of additional revenues or recurring revenues going forward. So that's kind of the fuel for the engine. Where are we in that process? When does that start to rise? What's the expectation for Core revenues?

Yes, you're right. It's a portfolio business. Everyone should recall that the first quarter, although it looks really good on the top line, you have all of these payouts, you generate all this additional revenue from the payout, but that's at the expense of the portfolio shrinking, the contracts have left the system. And that shows up in the second quarter, which is to your point that the portfolio shrunk a little bit. And again, that's the portfolio nature of the business. In the first quarter the implications of all the payouts, which is why I said the second and third quarters tend to be the softest. So in that comment that I made about second and third quarter tend to be the softest, you might see something similar in the third quarter in terms of the portfolio performance. We've said all along that we felt that the fourth quarter is when the comps were going to turn positive, and that the results of these initiatives were going to start to show themselves. That would suggest that you would also then start to see that turnaround in Q4 and beyond.

Okay, that's great. Thank you very much.

Thank you.

Your next question comes from the line of Laura Champine with ROE Equity Research. Your line is open.

Good morning, it's Laura Champine with Roe Equity Research. Wanted to ask about key rate, because I think a higher keep rate is part of the strategic plan. Can you give us where that was in Q2, and where it needs to be in 2018 to hit your margin expectations as laid out in the strategic plan?

Yes, we've said as part of our strategic plan, our goal is to drive it ultimately up to approximately 40%. Historically it's ranged in the mid-20s. We are approaching 30%. Part of that's driven through the account management, the value proposition change. I will be clear, and we said then it's going to take a little more than what we've done in the past to drive it to 40. And we recognize that, and we are going to do things to do that. I'm going to give you a specific example. We're working on enabling technology to give a greater visibility at the store level to help them make decisions around account management. Today, everyone knows that all the account management is handled at the local level. They do a great job, but they have somewhat limited visibility on the customers' lifecycle. They have visibility on to that customer's current agreement and their behavior, and their payment, and length of time on rent. They don't have full visibility into the customers' life history with us. And that's a critical piece that's missing, because we need to understand more about the customer, and have that form our decisions around account management. And we believe by introducing that as one example that'll help us move closer to that number.

Got it. Thank you.

Your next question comes from the line of Kyle Joseph with Jefferies. Your line is open.

Morning guys, and thanks for taking my questions. Actually just a follow-up to the prior question, I was just wondering if you ever discuss the keep rates between segments, so at A-Now versus other stores, and is that 40% target for both segments?

No, it is not. And I think we have talked about the Acceptance Now in the past. The numbers are almost inverted. So if it's 25 or so in the Core, it's 75-plus in the Acceptance Now. And again, we've mentioned earlier this year as part of our strategic plan, we felt and still feel that there are some value proposition enhancements that could be made in that business model also, and we are driving to increase that keep rate something closer to 85%. And we believe there is opportunities to do that following the same rationale that we described in the Core in terms of pricing and terming coupled with consumer insights, and analytics, and underwriting, and so forth.

That's very helpful, thanks. And then Maureen, I know you gave some commentary about corporate expenses. I know they were up sequentially. Was there anything one-time there? I did hear your guidance for sort of FY '17.

Yes, it's mainly driven by the fact that we're more on track this year versus our bonus plan than we were last year. And so we're still accruing at 100% bonus for the year, that's driving the overwhelming majority. There were a couple of small, I would call, nonrecurring items and some true-ups, and lower insurance expenses, which can be choppy from time to time. But generally it's driven by that incentive compensation change year-over-year.

Got it. And then just there are some moving parts in Acceptance Now, so just a little help modeling there. Can you give us sort of like the average remaining term on the legacy Conn's and the HH Gregg contracts?

Yes, don't have the exact number in front of us. And I think what you're getting at, Kyle, understandably, is how do you think about the revenue falloff, right. And so we closed down those floors. We've transferred the accounts. There's an annuity associated with the accounts. How long is that annuity going to run, and what does it look like. I know Maureen said in her comments that you felt that -- well we feel strongly that the revenue portfolio out of match last year or…

Right. No, we understand it's challenging to model this, and so we are giving some more color around what we believe 2017 revenue within Acceptance Now will be. And we are saying that it will be very similar to 2016 levels. We've seen higher revenue growth in the first half, however because of the falloff of the store closures, in the back half it will be -- we won't see that year-over-year growth. And so overall for the year, Acceptance Now revenue will be fairly similar to 2016 revenue.

Got it, that's helpful. And then last question. Apologies, but I also hopped on a little late. Did you give the write-offs by segment in your commentary earlier?

We did, but I can give that again.

2.4 in the Core…

And 9.4 in Acceptance Now.

Great. Sorry for missing that. And thanks very much for answering my questions.

Thanks, Kyle.

Your next question comes from the line of Bradley Thomas with KeyBanc Capital. Your line is open.

Yes, good morning, Mark and Maureen. Thanks for taking my question. I also got a little bit late here, so apologize if I'm repeating anything. But just a quick follow-up on what you said on Acceptance Now, Maureen, so your guidance for 2018 Acceptance Now revenue is to be similar to 2016, to around the $818 million that you posted that year?

Yes, this is guidance for 2017. Yes, so we had $818 million in '16. We expect to be similar to that in 2017.

Got you. And then in '18 we'd likely have a big falloff or at least a falloff from the loss of HH Gregg and Conn's. Is that still a reasonable expectation?

In 2018, we typically see more of the falloff upfront, so there will be less falloff from those accounts in 2018 than there was in '17. We also have opened 70 new Acceptance Now staff location this year, and we should continue to see benefit from those even more so in 2018.

Coupled with any others that we continue to open throughout this year and or next year for that matter.

Right, perfect. And so Mark, just a question on the Core, it's been about six months that you've been back in the CEO role. You're clearly helping to drive an impact on the business scenarios that you can control. But it's still tough out there. Where are you seeing the greatest signs of encouragement, and where are you seeing the biggest challenges? How confident are you today that you can actually get this business back to comping positive, and when might that occur?

I will tell you I've been very pleased with what we've accomplished year-to-date in Core. It is, as I said, reiterated our belief in the outlook for the balance of this year, 2018 and beyond. We said initially, and I reaffirmed again today that we believe the fourth quarter is when you're going to see the positive comps come. The team has done a remarkable job managing all the account management in you think about the portfolio. There's been a heightened sense of urgency around the P&L. We've introduced some additional new training, the introduction of the secret shoppers, our selling skills, and customer retention. And clearly we're doing a better job satisfying the customer. Products are staying on rent longer. Returns have gone down. Ownership has gone up. So I'm very encouraged on what we're seeing on that front. The opportunities that are still in front of us, and it addresses maybe some of the things outside of your control or what's going on in the broader market, how are consumers going to market, how and where do you meet the customer where they want to be met. And we're very mindful. We've got -- as we think about emerging technologies, and whether it's the mobile wall at ecommerce. Ecommerce is new for us. I'm excited to say and pleased to say we've actually extended our aisle. I think we nearly doubled the SKUs that we're now offering through ecommerce in the second quarter. And that'll continue to expand as we get -- there's things that have to be further developed into or worked out. But those types of initiatives are going to be important for us to execute and put in place in order to do the things that we believe we're capable of doing. As we sit here today, there is nothing to suggest we won't be able to do that. And we're taking steps. So I do feel really good, Brad, and as I sit here today reaffirm that based on everything we're seeing today and where we are positioned today would expect the comps to turn positive in the fourth quarter in the Core.

Got you. And then one last question if I could, Mark. And you may have addressed a little bit of this in your prepared remarks. But obviously the company and the media have disclosed at least interest from outside parties in buying the company. Obviously the Board has a different composition today than it did when you joined back in the CEO role. I guess could you give us some more insight into the Board's view today on maybe why a review of strategic alternatives isn't appropriate at this time?

I would tell you that, again, the Board does regularly evaluate opportunities to drive and enhance value. It assesses them against a wide range of strategic options. They are well-advised. And based on where we are today the Board believes that it is not the right time to conduct processes we execute on our plan. But at least the Board strongly believe will drive greater shareholder value.

Thank you much, Mark. I appreciate it. Okay.

Your next question comes from the line of Anthony Chukumba with Loop Capital. Your line is open.

Good morning, and thanks for taking my question as well. Just had a quick question for you, any update on the CFO search?

I'm sorry, you broke up, Anthony. Any update on, I'm sorry, what?

Sorry, the CFO search?

CFO search, I'm sorry. Yes, I can give you a brief update. We haven't -- obviously, first of all I want to reiterate, Maureen has done a wonderful job. And I mean that in all sincerity. Obviously there's been an awful lot moving on over the last several months. No work had really been done at that point. Now with the on-boarding of Martin, the new Chief Human Resource Officer, with some of these other things behind us, if you will, that process will begin in the near future.

Okay, just a little follow-up; aside from the CFO, I guess with this on-boarding of these new executives that you mentioned, are there any other major sort of opening from a senior management perspective?

I'm considering to evaluate a couple of areas. I feel very comfortable where we are. There's nothing pressing. I'll put it that way. Having said that, there's one or two areas that I'm continuing to evaluate whether they're necessary and how they may fit in and so forth. But I'm not -- and I really don't have anything I'm willing to share or any strong view. I think the important takeaway is with Joel rejoined, and then Martin joining, and so forth, and some other realignment that we've don't internally, I feel really good about where we're positioned, and the team that we have here. And I will share with you, because I think it's an important note. There's not been any turnover in the senior team in the last four-plus months, five months. So people are aligned, committed, and focused.

Okay, that's helpful. Thank you.

You bet.

Your next question comes from the line of John Rowan with Janney. Your line is open.

Morning, guys.

Hi, John.

You guys spent a lot of time talking about better decision analytics both in the Core and in Acceptance Now driving better keep rates. Just give me an idea though, how do you guys see those strategies changing your approval rates? And is that kind of embedded in, Maureen, the guidance that you gave for flat Acceptance Now revenue in '17 versus '16?

The decision engine changes, we continue to make and enhance the approval process within Acceptance Now. And so yes, we consider any kind of enhancements that we're making to our decision engine into any guidance or results that we show. We do believe that we will continue to make those enhancements. Will they necessarily mean more restrictive approval rates? I don't think necessarily it has to mean that. What we're really focused on and what you can see in the results in the second quarter within the Acceptance Now channel is that we've started really looking at select customers, those that have paid in quite a bit on their agreements. And is there some kind of negotiation or discounting that we could do to hold on to that customer and provide a positive customer experience without taking the returned product. So we're continuing to make more decisions around how we'd best go about doing that. And we'll continue to do so going forward.

So let me just get this straight to make sure I understand. So the decision analytics are not necessarily when someone comes up and once an Acceptance Now occasion to buy something whether or not they approve that customer, it's more so about customer outreach, and getting through to people who might be a few days delinquent or whatever it might be, and renegotiating the terms of their rental agreement?

No, it's kind of all the above, John. It is on the front end. So when you come in we're getting smarter and smarter. I mean the more customer data points that we have as the portfolio grows and as the channel grows, you just get that much more intelligence in terms of customer behaviors that does feed what is their likelihood to pay, what their likelihood to keep and so forth. And so all of that does just like any lending institution all of those things go into (A) Do we want to underwrite you and for how much. And so, it will play a role in the approval process. To Maureen's point, it can also further play a role in behave -- or managing the account after the fast. And so we are trying to come at it from both angles. The big opportunity and I'll -- we've talked about this, but I think it's an important point to drive home here, we obviously initially a lot of time focus an effort around the Core given the size and what happened last year. And we talked a lot about the value proposition and all the initiatives and really getting things stabilized there. And again, I compliment, they have done a wonderful job of doing that and the results speak to it. We've made good progress in the Acceptance Now segment, but our work there is not done. And we've talked about opportunities that we believe still exist in that segment, specifically around the value proposition and how do we think about the terms and the pricings. And I believe that there are some structural things that we can do that will actually give us a greater return on our investments while improving the value proposition to the customer which will also reduce our losses and our risk and the downstream effect whether that's return back into the Core or write off and so forth. But like the Core, this is a portfolio business. So these things will take a little bit of time also, but the decision engine -- we make enhancements -- we think we have a small committee that once a month gets together and we get out. So we get learning and behaviors and that influences and turn the dial little tighter to the left or can you go a little looser to the right based on these scenarios and so forth and -- but -- there's a lot of opportunities still to be had in the Acceptance Now channels.

Okay, all right. Thank you very much.

Your next question from the line of Carla Casella with J.P. Morgan, your line is open.

Hi, one follow-up on the Acceptance Now just to understand so the sales are actually better than we expected. That was great. Inventory is lower than expected. So is it just managing the inventory within that channel? Or, is there is less -- and actually this is merchandize on rent or is it pricing? There is disconnect doesn't make to me completely.

You are talking the inventory on rent within the A Now segment, it's…

Yes, it's down about 30 million from the last quarter.

That's a fall off of HH Gregg and Conn's, so Maureen said -- we closed all those stores, right?

Right, right.

[Indiscernible] stores, so you've got the portfolio shrinking and yet at the same time because you are not in those stores, you don't have the new growth coming on. That was…

Got you.

…offset by an increase, it is important. So, yes, it's come down for that reason. But, we have been driving the pricing up a little bit. So -- but beyond rent just the value is because of HH Gregg and Conn's closure is coming out, the annuity running down.

Okay, great. And then as you look at business for Acceptance Now, are you seeing any change in kind of competition or the manner of competition to get the new accounts?

In Acceptance Now?

Yes.

Well, we had a successful second quarter. We opened 70 new locations.

Yes, that's great.

Despite the decisions that we made and what happened with HH Gregg [indiscernible] in Conn's, but we were able to add some of the additional. So we continue to have interest out there. We're continuing to open new store fronts.

I guess I am trying to -- in the sense that are you having to get -- you have to be more aggressive with your pricing or contract terms in gaining those? Or has the market stayed about the same? You're just having more success given the initiatives that you've put in place on the merchandizing front?

It's the later. We have not enhanced the deal so to speak to get the deal. So, no it's just the folks doing a job of selling our value proposition and so forth to the retail partner and what it can mean to them with our manned solution and those types of things.

Okay, great. Thank you.

Thank you.

Your next question comes from the line of Budd Bugatch with Raymond James. Your line is open.

Yes, I had a couple of follow-ups if I could. Just labor -- you've changed the labor model in the Core. I am just curious now how to model. What do you think about modeling the labor in the Core going forward? And how to think about that now that you've made those changes and have we fully implemented them?

Yes, from a labor perspective, we've been benefiting in the first couple of quarters of the year from the closures that were made in the second quarter of last year. So that no longer will be of benefit going forward. We talked about investing in our frontline co-worker earlier in the year and trying to minimize turnover and increase the talent within the workforce at the store level. And so in the back half of the year, you'll start to see that investment that we made since we're no longer comping over the store closure benefit. And so from a run rate perspective, we will see an increase versus what you've seen within the second quarter.

So, I think it was like 30.4% in the second quarter. So do you think the level rate is going to be higher as a percentage of sales as you go down and maybe what you think is the quantification of that, Maureen?

Yes, it will be above 30. We talked about the third quarter from a sales perspective is typically one of the lower quarters. So it maybe a little bit higher than that versus the fourth quarter which will be more in line with the second quarter, given the higher sales primarily.

Okay. You've also talked -- and you've given in the monthly metrics which I think is great that the fact that the monthly rate is up 5.7% I think in the third month of the quarter, can you give us what rate is? What is the agreement rate now on a monthly basis?

I don't think we provided the actual amount before, Budd, and I don't…

I understand. I was hoping you would. Don't want to stop you Mark.

I don't have the exact number in front me, so let me give a thought and see if I can find it and then share with everybody when we decide to.

Okay. And my last question is the A Now sales effort that was regenerated about a year or so ago. I guess the 70 locations are a bit of a process of that or product of that, what looks -- what's the pipeline going forward for new locations for A Now?

It's little harder to quantify, right. I mean when you think about opening de novo brick and mortars you can very much -- or certainly more so control that. In this case, it's not just finding, it's going through the whole. So it's really hard to put an exact number on it. I can tell you and I will say comfortably that we have a pretty active pipeline going right now. And so, I feel confident that you will continue to see nice numbers on new stores being added throughout the rest of this year.

Any thoughts about the direct versus staff, you are still just…

These are still manned solution and we continue to make progress on the unmanned, and that -- again that's an important opportunity or that's a big opportunity for us. And we are committed to having a very viable user-friendly scalable unmanned solution at some point in the future. And -- but what we are talking about here is manned.

Okay. And just you went to a 50:50 proposition in the Core versus 70:30 for EPO, I think -- can you talk about what that's doing to help you your keep rate?

Well, we are very early into it. But as I said, that we are pleased that our returns. The pickups are down 9% year-over-year. The keep rate or the time on rent, so there is a lot of ways that we measure this. But the time on rent has in fact extended. So they are staying out longer. Our purchase options are those that are willing to ownership, that percent is actually up. And I said we were historically -- I already answered, we were historically 25% and we will push 30% in the second quarter. So, now there's a lot of things moving in there. And we will try to move through some older products or those in shorter terms. And I don't -- I just want to be clear. We are 90 days into that, so like directionally all the leading things. Number of weeks on rent, returns all of those are trending in the right direction gives us -- makes us feel good about all that.

Great. All right. Thank you, Mark, very much.

Thank you.

Your next question comes from the line of Anthony Chukumba with Loop Capital. Your line is open.

Hi, thanks for taking my followup question. I just wanted to make sure I heard correctly. Did you say that you opened two facilities for Acceptance Now to dispose a return product? I just wanted to clarify that.

Yes, what I was alluding to is that if you happen to look at the segment reporting on the balance sheet, you would have noticed that the health for rent inventory in the Acceptance Now segment went up sequentially. And I would say in that that was intentional and temporary. And that we were kind of -- normally what happens is that product gets picked up almost immediately within a matter of two weeks it's dispersed into the Core stores, moved through that channel, if you will. Given the influx of inventory we had and some other things we wanted to work through, we slowed down the process of moving that product into the Core so that we could address some immediate issues in terms of the quantity that we had. We were opening up I said those two clearance centers to relieve pressure. And so we let it back up a little bit intentionally in the A Now to put some other things in place. All of that's been done so that channel is back open. What I am trying to just is that you can expect to see that number come back down to its historical. And hopefully over time even below historical as we improve some of the other outcomes and so forth.

Okay. So these sort of Acceptance Now clearance -- just short of a temporary, it's not going to be sort of like an ongoing strategy?

I want to -- you are breaking up a little bit, Anthony, but I think you were questioning the clearance centers and if those are ongoing strategy. It's to be determined. We went in there with a temporary, so we have short-term leases. They have options to renew. We like what we are seeing at this stage. Again, we have really only been into it about six weeks on average. We have two standing. We are considering maybe a third. I don't think it would be any more than that. And then, whether there -- it all depends; if it proves to be this another successful way to move product more quickly and get the return on the investment and so forth, then perhaps it's got a longer life. On the other hand if we can solve some of these other issues and the demand or the need is not as great, then they very well go away. So it's right now we went to it with a more of a temporary mindset, i.e., a year or less kind of on the onset.

Got it. That's helpful. Thank you.

Your next question comes from the line Bradley Thomas with KeyBanc Capital. Your line is open.

Good morning again. A lot of follow-up questions here this morning clearly. Thanks for taking mine. I just wanted to clarify, I think there were some comments that you'll made about Core same store sales expectation for the third quarter. And if heard you right, did you say that you thought that it was going to be similar to how 2Q played out, down 10%. Did I hear you right there?

No, we didn't -- no, what we said, well, we didn't say anything about third quarter that it was going to continue improve and that we felt by the fourth quarter, you would see a positive number. And candidly for us to get a positive in the fourth quarter has to imply that there's going to be -- we are going to continue step down, right? So the first quarter, I don't remember the exact -- there's 13 I think. And then we improved 300 basis points in the second quarter. Is it going to be similar? Again, we haven't given specific numbers or guidance on it, but what we have said is that we believe and still believe that we will turn a positive comp in the quarter during the fourth quarter. So to do that, one would have to assume that it will continue to improve between here and there.

Got you. That was what I had thought you would have said, but I misheard you earlier. And then just to then try and connect the dots to operating income in the Core and really for the whole company, the margin comparison do get easier here. The sales comparisons get easier as well. Clearly if you are comp positive in the fourth quarter, one would think your operating income would be up in the fourth quarter, I mean how are you feeling about the likelihood that you might be able to actually increase operating income dollars and EBITDA dollars in 3Q?

In Q3?

Yes.

Yes, I think Maureen, didn't you say that you expected it to be somewhat similar; I said earlier that, you know, Q2 and 3 seasonally have always been our most difficult. You can go back and look at all the prior years, there may have been a year exception when they rolled out cell phones, but otherwise Q2 and 3 have always been the most challenging given the portfolio nature, and they tend to slip a little bit, and then it's the fourth when it springs.

Yes, in the third quarter we will see more of that labor increase that I spoke about earlier with the investment that we've made within the store base, trying to stabilize the turnover. So we will see, and still continue to see a challenging third quarter, but the fourth quarter is when many of the initiatives that we have rolled out will become a more substantial piece of the portfolio, and so the fourth quarter is really when we expect to see that revenue growth and the profit growth.

Very helpful, thank you all so much.

Thank you.

We have reached the allotted time allowed for the question-and-answer session. I would now like to turn the call back over to CEO, Mark Speese for closing remarks.

Thank you, and thank you all for your time and interest. Let me reiterate that we are pleased with the progress and the results. We believe that we are positioned to continue to execute our plan, and we reaffirm our belief in 2018 and beyond. Thanks again for your support. We look forward to providing you our monthly metrics reports, and we look forward to visiting with you again next quarter. Thanks. Have a great day.

This concludes today's conference call. All participants may now disconnect.