Conn's Inc (CONN) 2017 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Conn's Inc conference call. As a reminder, this conference call is being recorded. The Company's earnings release dated December 6, 2016, distributed before market opened this morning, and slides that will be referenced during today's conference call, can be accessed via the Company's investor relations website at IR.Conns.com.

I must remind you that some of the statements made in this call are forward-looking statements within the meaning of federal securities laws. These forward-looking statements represent the Company's expectations -- present expectations or beliefs concerning future events. The Company cautions that such statements are necessarily based on certain assumptions which are subject to risks and uncertainties, which could cause actual results to differ materially from those indicated today.

Your speakers today are Norm Miller, the Company's CEO; Mike Poppe, the Company's COO; and Lee Wright, the Company's CFO.

Good day ladies and gentlemen, and welcome to the Conn's Inc third-quarter FY17 earnings conference call.

(Operator Instructions)

As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Norm Miller, President and Chief Executive Officer. Please go ahead.

Good morning, and welcome to Conn's third-quarter FY17 earnings conference call. I'll begin the call with an overview, and then Mike Poppe will discuss our retail and credit performance for the quarter. Lee Wright will complete our prepared remarks with additional comment on the financial results.

Conn's FY17 third-quarter results reflect the continued implementation of our turnaround strategies aimed at transforming our credit operation by improving underwriting and collection performance, increasing yield on new originations, and lowering the Company's borrowing costs. These goals are aligned with our core focus on profitability while creating a sustainable business model that appropriately manages credit risk and retail growth, and produces long-term shareholder value.

Our progress during the quarter demonstrates these actions are taking hold and beginning to produce the intended results. The underwriting refinements implemented in FY17 are benefiting underlying credit performance. During the FY17 third quarter, Conn's experienced reductions in early-stage delinquency and first-pay defaults. The rollout of our Texas direct loan program was completed ahead of schedule, and successfully implemented across all 55 Texas locations by the end of October.

In addition, we further reduced our cost of funds through another positive ABS transaction, and sold the 2016 A Class C Notes at a premium. Finally, Conn's retail operation continues to perform well, despite the impact underwriting refinements have had on sales and during the third quarter, retail gross margins demonstrated further year-over-year and sequential improvement.

With these highlights, let me provide some additional color on our progress we are making to position Conn's for a significant improvement to profitability next year. The tenure and experience of Conn's management team continues to increase, which enhances our ability to execute our strategies. Nowhere is this more apparent than in our credit operation.

The new credit leadership team has been adding resources and enhancing capabilities aimed at improving performance, which include investments in systems, analytics and personnel. The team continues to proactively monitor performance and make adjustments as needed to improve results.

Our credit operation is already benefiting from many of these investments, as well as the FY17 underwriting refinement and enhancements to our underwriting scorecard. Adjustments where necessary to align Conn's risk model with changes in customer behavior, the regulatory environment and the composition of our portfolio specifically associated with new customers. While these underwriting enhancements reduced retail sales as anticipated, the long-term benefits of improving credit quality and performance will meaningfully increase Conn's profitability in the future.

Mike will provide a more detailed overview of our credit results and portfolio trends in his prepared remarks, but let me review several examples of why I am optimistic the Company is starting to experience improving credit performance.

Early performance trends for FY17's originations are encouraging. First-payment default balances related to accounts originated since April are 10% lower than in the prior-year period, with new customer originations showing the largest improvement. This is contributing to improvements in the 1-to-60-day delinquency rate, which at October 31 was at its lowest point since the end of tax season in April. In addition, the percentage of repeat customers continues to increase, and was up 430 basis points in the third quarter compared to the prior-year period.

Losses in the portfolio are expected to decline as a result of accelerating runoff and improving static pool delinquency trends. As we have stated previously, FY14 originations are expected to experience cumulative losses of approximately 14%. FY15 is expected to be in the low 14% range, FY16 is expected to be in the upper 13% range, while FY17 is expected to show even further improvements. We continue to believe our credit model can produce long-term static loss rates at or below 12%, and as you can see, we are making progress towards achieving this goal.

Increasing the yield on our portfolio is the next component of our credit turnaround strategy. Our Texas direct loan program was implemented ahead of schedule across all 55 Texas locations before the end of October. The implementation was complex and impacted nearly every aspect of both our retail and credit operations. I'm extremely pleased with our team's ability to successfully roll out this program for the holiday season. Implementing strategies to improve losses and increase yields before the holiday season was important and are expected to help accelerate our turnaround.

November and December typically historically represent about 22% of full-year originations. 100% of November and December originations will be under our current underwriting model, and approximately 80% of originations are expected to be at APRs approaching 30%. FY18's performance is expected to benefit as this pool seasons and the portfolio continues to benefit from improved underwriting and higher yields.

As a reminder, the State of Texas represents approximately 70% of our recent originations. Which, under our previous offering, had a maximum interest rate to the customer of approximately 21%, compared to an interest rate of up to 30% under our new direct loan program -- which also allows us to charge an administration fee at origination.

Early observations of the direct loan program in Texas are encouraging. Conn's in-house credit offering provides customers affordable payment options to purchase quality products for their homes, especially compared to other options. In addition, our extensive retail assortment and valuable customer service is unlike many retailers serving this customer base.

As expected, we have not seen a material impact to retail sales from charging a higher rate to customers in Texas, while our yield on Texas originations has improved. All Texas sales financed through Conn's in-house credit offering in the month of November benefited from the new direct loan program. From September to November, the Company's APR on loans originated during these months increased over 500 basis points as a result of our Texas direct loan program and other strategies recently implemented to enhance the Company's yield.

With the success of our Texas direct loan program, we are working to raise our interest rates as well in Louisiana, Oklahoma, Tennessee and North Carolina. These four states represent an additional 14% of our originations, and we expect to have new lending programs implemented by the end of FY18. In states where regulations do not generally limit the interest rate charged, we have already increased our rates to 29.99%.

Earlier this fiscal year, we implemented changes to our no-interest program, to improve portfolio yield and returns on capital. As of early February, long-term, no-interest programs are offered predominantly through Synchrony, and sales underwritten by Synchrony represented approximately 16% of Conn's FY17 third-quarter retail sales, compared to nearly 10% in last year's third quarter. This change is not expected to have a significant impact on long-term profitability, but it will improve returns on capital as we recapture the capital invested in similar accounts on our books today.

Additionally, we removed no-interest eligibility for certain higher-risk customers under Conn's in-house no-interest programs. We are not anticipating a meaningful negative impact on sales as a result of these changes. The benefits from our new direct loan program, the plan changes in the four additional states, and the changes to our no-interest programs are expected to increase our yield in total by 600 to 900 basis points on new originations by the end of FY18.

Lowering the Company's cost of capital is the final piece of the strategy to help improve the profitability of the credit operation. We continue to believe the ABS market provides the Company with an attractive source of financing and since 2015, we have issued three ABS transactions. The performance of each ABS transaction is in line with our internal projections.

As our ABS notes have performed as anticipated and investors' experience with our receivables has increased, we have successfully lowered the cost of transaction, with our latest transaction in October, 2016 having a blended all-in cost of funds for our A and B Notes of 6.9%. In addition, we also sold our 2016 A Class C Notes at a premium, further demonstrating increasing demand for Conn's securitized notes.

As we reduce losses and increase yields, we are optimistic further reductions to our ABS cost of funds is achievable, even in a potentially rising rate environment. In addition, with slower growth and improved cash flow, we expect to finance more of our receivables with cash from operating activities and our ABL facility, further reducing our blended cost of capital.

We are executing our strategy to reduce losses, increase yields and lower borrowing costs, with the overall goal of significantly improving the profit contribution of our credit business. While it will take time to fully realize all the benefits of these strategies, Conn's made meaningful progress on all three fronts during the FY17 third quarter. I am pleased with the direction our credit operation is headed, while we ensure our retail business is operating at a high level.

Total retail sales reflect the impact of our credit turnaround strategies, and were down 4.5% for the third quarter, the first year-over-year decline in total retail sales since the FY12 second quarter. We opened one new store during the quarter compared to six in the same period last year. In addition, same-store sales declined 10.1%, primarily due to the implementation of this year's underwriting refinements, which impacted same-store sales by approximately 1,000 basis points.

Since underwriting adjustments primarily focused on improving new customer credit performance, it is important to look at same-store sales across our three store categories, including core stores, single stores in new markets, and new stores in new markets. Core stores represent about 60% of our store base. Single stores in new markets represent about 20% of the same-store base. The remaining 20% of our same-store base represents new stores and new markets with existing locations, resulting in the cannibalization of sales in these locations.

For the third quarter, we saw same-store sales of our core stores down 5.4%. Single stores in new markets were down 10.1%, while new stores in cannibalized markets were down 25.3%. All markets were impacted by underwriting refinements, but a greater proportion of the 1,000-basis point total impact was in new markets.

Despite the headwinds, underwriting refinements are having on retail sales, I'm pleased with our retail performance. And Conn's experienced favorable retail trends across many categories, including furniture and mattress, appliances and consumer electronics. In addition, third-quarter retail gross margin increased 40 basis points, both sequentially and year over year as a result of improving product assortment, and warehousing and delivery efficiencies.

SG&A expenses in our retail business continued to de-lever in FY17 third quarter as a result of lower sales. But disciplined expense management and recent cost mitigation initiatives reduced retail SG&A by 2.1% over the same period last year, and 6% from FY17 second quarter. We remain focused on carefully managing retail SG&A to align with expected sales volumes.

For November, same-store sales were down approximately 8%, while total sales were down approximately 5%. Despite headwinds from stricter underwriting, total sales during the six days surrounding Black Friday were up 1.5%. The implementation of Conn's direct loan program in Texas did not have a meaningful impact to November's retail sales, while the APR in Texas originations increased.

Our transformation is well-underway, and I'm encouraged by progress we're making. I remain confident Conn's is headed in the right direction. Now I will turn the call over to Mike.

Thank you, Norm. Starting with our retail performance, we continue to be pleased with the performance of our retail operations. Favorable product mix and improved efficiency for warehouse, delivery and transportation costs helped retail gross margins improve 40 basis points from both the FY16 third quarter and FY17 second quarter.

From a sales standpoint, as we show on slide 4, total retail sales for the third quarter were down 4.5% compared to the same period last fiscal year. Sales trends were impacted largely by underwriting changes made during FY17. Same-store sales for FY17 third quarter were down 10.1%.

Furniture and home office categories were the primary drivers of the lower third-quarter sales, while home appliance sales were down less than 1%, driven by higher unit volume. Furniture sales in new markets were impacted significantly by FY17 underwriting changes. It is also important to highlight the increase in home appliance sales, as they have a lower rate of delinquency and losses than the other categories.

During the third quarter, we opened one new store in North Carolina, with no additional openings planned for the remainder of the year. For FY18, we have committed to only three new locations.

Moving on to credit segment, slide 5 is the annual and quarterly breakout of the average FICO score of originations and the portfolio. The FICO score of all originations in Q3 of FY17 was 610, compared with 613 in Q3 of the prior year, and 611 in the FY17 second quarter. The year-over-year change was driven largely by our decision to use our program with Synchrony to offer long-term, no-interest financing promotions.

We have continually refined our underwriting model to reduce credit risk, largely related to new customers. Additionally, earlier this year, we implemented our new origination scorecard and strategy, as well as moved to a new decision platform. These changes, combined with the refinements we made in the fourth quarter last year, included modifying our credit limits, down payments and cash option eligibility, to reduce risk for some customers while declining other unprofitable customers. Enhancements to our origination scorecard, improvements to our credit analytics, and increased customer segmentation, have offset some of these headwinds to sales and helped us identify profitable segments of customers that we have started approving.

The performance of recent originations reflects the benefits of the investments we have made to our credit infrastructure and the adjustments we have made to our underwriting strategy. Originations since the late March 2016 underwriting changes account for approximately 44% of the portfolio as of October. A primary emphasis of our underwriting refinements has been to reduce the amount of first-pay defaults and their impact on charge-offs.

As Norm stated, first-payment default balances related to accounts originated beginning in April are 10% lower than in the comparable prior-year period, with new customer originations showing the largest improvement. This is contributing to improvements in the 1-to-60-day delinquency rate, which at October 31, was at its lowest point this year since the end of tax season in April.

As we have slowed sales and adjusted underwriting standards, we have experienced a meaningful increase in the number of repeat customers, as shown on slide 6. This is important, because existing customers historically have had meaningfully lower loss rates than new customers. Customer originations with more than five months since their first credit transaction at Conn's were nearly 55% of total originations during the recently completed quarter. This is the highest percentage of repeat customers since FY13.

On slide 7, you can see the increase in existing customers as a percentage of originations for the Company overall, for Houston, a legacy market, and Phoenix, a newer market. The Phoenix trend shows the impact of our underwriting changes have had on new markets, with a sequential increase of 300 basis points for repeat customers, on top of the 520-basis point sequential increase in the second quarter. The underwriting changes and reduced store-opening pace have resulted in the portfolio contracting $53.6 million or 3.4% since January 31, 2016.

While slower growth and changes to our credit strategies are benefiting the underlying performance of the portfolio, they continue to have a negative effect on the portfolio metrics, including delinquency, provision and charge-off rates. For example, slower portfolio growth, combined with the decision to shift long-term no-interest programs to Synchrony, impacted the reported 11% 60-day delinquency rate for the quarter. The 60-day delinquency rate at the end of the FY17 third quarter, adjusted for these items, was 10.9% of the total outstanding loan balance, compared to 10.8% for the same period last fiscal year.

Seasonality and a cohort of late-stage delinquency from originations prior to our underwriting changes are expected to challenge credit results in the fourth quarter, resulting in elevated provision expense. As these legacy accounts charge off, the portfolio should benefit from a greater volume of new accounts originated under our refined standards.

Slide 8 shows the static pool delinquency rate for FY14, FY15 and FY16. As you can see, FY16's originations are demonstrating improving delinquency trends compared to prior years. As the FY16 fourth-quarter vintage seasons, we expect delinquency for this period will show year-over-year improvement similar to the prior quarters that year.

Shown on slide 9 are static pool losses for the last 12 quarters. As you can see, we have experienced higher initial loss rates in recent vintages, but the trend is flattening sooner.

The improving static pool delinquency trends and accelerating portfolio runoff shown on slide 10 are the basis for our static pool loss expectations. We are expecting a static pool loss rate of approximately 14% for FY14, which has less than 1% of the original balance remaining.

The FY15 loss rate is expected to be in the low 14% range, there is only 8.5% of this vintage remaining, compared with 9% for the FY14 vintage at the same point in its life. The expected loss rate for FY16 is in the upper 13% range. Compared to FY15, there is 50 basis points less of the balance remaining, and the static pool delinquency trends we looked at on slide 8 indicate less future potential loss remaining.

Lastly, with the significant underwriting changes we have implemented this year, we still expect FY17 to be better than FY16. While the 60-plus delinquency rate has not improved on a year-over-year basis yet, we believe losses are headed in the right direction as a result of our underwriting refinements, better static pool delinquency trends and accelerating portfolio runoff.

Our turnaround efforts are well-underway, and we are seeing the signs of improving credit performance. In addition, the performance of new originations is encouraging and are expected to benefit next year's credit results.

Now I will turn the call over to Lee Wright. Lee?

Thanks, Mike. I am pleased to present that we were able increase our retail gross margin both sequentially and from the prior year. In addition, our proactive management of expenses has allowed us to maintain our retail operating margin from the second quarter despite lower revenues, as well as improve our credit operating margin sequentially. Finally, I was very pleased with the overall execution of our most recent ABS transaction.

With that, let me get into the numbers. Conn's reported a loss for the FY17 third quarter of $0.12 per share, compared to a net loss of $0.07 per share for the prior-year quarter. On a non-GAAP basis adjusted for certain charges and adjustments, diluted loss for the quarter was $0.08 per share, compared to adjusted earnings for the prior-year quarter of $0.02 per diluted share.

For the retail segment of the business, total revenues for the third quarter of FY17 were $308.4 million, which decreased $14.7 million or 4.5% versus the same quarter a year ago. Despite reduced retail sales, retail gross margins increased by 40 basis points versus the prior year, to 37.5%, and were also up 40 basis point sequentially. As shown on slide 11, this is the second highest retail margin in the last [several] quarters. We continue to believe that we can enhance our retail gross margin as a result of increasing the mix of sales of furniture and mattresses, which have a higher margin, decreasing the share revenues from lower-margin home-office products and in improving warehouse and distribution utilization, and optimizing our transportation and delivery expenses.

Compared to the prior-year period, we reduced retail SG&A expense in the quarter by approximately 2%, to $79.8 million, despite having an additional 12 stores. As shown on slide 12, even with a 120-basis point increase in occupancy expense as a result of these new stores, SG&A as a percent of retail sales in the quarter only increased 70 basis points year over year, to 25.9%.

Taking a look at the credit segment, finance charges and other revenues were $68.4 million for the third quarter of FY17, down 5.2% versus the same period last year. The decrease in credit revenue was the result of lower credit insurance commissions, due to higher claim volumes in Louisiana after the flood, and lower average rates in new states, as well as the yield rate of 15%, 80 basis points lower than a year ago, partially offset by growth in the average balance of the customer receivable portfolio of 3.9%.

SG&A expense in the credit segment for the quarter grew 7.8% versus the same period last year. This increase was driven by additional collections personnel needed to service the year-over-year increase in the average customer portfolio balance, as well as investments we're making to improve the performance of our credit business. Credit SG&A as a percentage of the average total customer portfolio balance de-levered by 30 basis points versus last year, and improved 10 basis points from the FY17 second quarter.

Provision for bad debts in the credit segment was $51.3 million for the FY17 third quarter, a decrease of $6.8 million from the prior-year period. The decrease in provision for bad debts was primarily the result of smaller growth in the allowance. As a result, the provision as a percent of the average portfolio balance was 13.3% for the FY17 third quarter, compared to 15.6% in the third quarter of last year.

Looking at our liquidity on slide 13, as of October 31, 2016, we had $59.1 million in cash, and approximately $146 million of immediately available borrowing capacity under our $810 million revolving credit facility. With an additional $659 million that could become available upon increases in eligible inventory and customer receivable balances under the borrowing base.

For the FY17 third quarter, interest expense increased by $3.8 million year over year to $23.5 million, driven largely by our re-entry into the ABS market. However, interest expense in the third quarter was the lowest quarterly amount since the prior-year period, reflecting reduced borrowing costs and slower growth. For the quarter, annualized interest expense as a percentage of the average portfolio balance was 6.1%, with average net debt as a percent of the average portfolio balance of approximately 77%.

Since the beginning of the year, we have made significant progress in improving our payable-to-inventory rate. Accounts Payable as a percent of inventory was approximately 57% at October 31, 2016, compared to 43% at January 30, 2016. We are focused on improving our working capital requirements, liquidity position and operating cash flows.

Our 2015 and 2016 ABS notes are performing in line with our expectations. On October 7, 2016, we announced the closing of a $700 million securitization transaction, our third ABS transaction in the last 14 months. The face amount of the Class A and Class B Notes issued in the securitization was approximately $504 million, with an aggregate advance rate of approximately 72%, and an all-in cost of funds of approximately 6.9%. This compares favorably to the prior two securitizations, which had all-in cost of funds of the Class A and Class B Notes of approximately 9.2% and 7.8%, respectively.

In addition, in October 2016, we sold our 2016 A Class C Notes at a premium, which provided approximately $71.5 million of net proceeds. We are encouraged by this transaction, as it enhances our liquidity position and demonstrates investor demand for the subordinated tranches of our ABS transactions.

At October 31, 2016, approximately 23% is remaining on all 2015 A Class A and B Notes, and approximately 51% is remaining in our total 2016 A, B and C Notes. We remain focused on completing two to three ABS transactions a year, which is important as we continue to build a track record, not only with investors, but also with the rating agencies. However, as the time between ABS transactions has increased, we are able to warehouse more receivables through our lower-cost ABL facility. The should enable us to lower our blended cost of funds.

We are pleased with the reduction of our ABS funding costs, and expect further reductions will occur as prior deals perform in line with expectations and investors' experience with our receivables increases. Furthermore, as we improve the spread of our portfolio by increasing the yield on our originations and lowering our losses, we expect to continue to reduce our cost of funds from our ABS transactions, even in a rising rate environment. Our turnaround strategies are well-underway, and we are making progress towards our near-term focus of returning to profitability.

I will now turn the call back over to Norm.

Thanks, Lee. Before we open the call up for questions, I wanted to reiterate my optimism in Conn's long-term potential. The strategies we've developed this year to improve our performance are well-underway, and I'm pleased with the progress we made in the third quarter. We have significantly transformed our credit business and improved its profit potential by implementing programs to reduce losses and increase yield, which are expected to also lower our borrowing costs.

It will take time for these changes to completely season into our portfolio, but with every passing month, better-performing and higher APR originations are supplanting legacy receivables. Meanwhile, our retail business continues to perform well and increase margins, despite the impact underwriting changes and slower unit growth have had on the retail sales. This is extremely encouraging, and demonstrates the competitiveness of our differentiated business model.

While there still is a lot of work in front of us, I'm increasingly confident Conn's is headed in the right direction, and we expect to achieve profitability in the coming year. With that, operator, please open the call up to questions.

Thank you.

(Operator Instructions)

John Baugh, Stifel.

Thank you for all the information and for taking my questions this morning. If you could start with the origination fee, I know it's amortized through time, so it won't have a big impact immediately. But I was wondering if you could discuss how that will impact numbers out into the future? If that's separate from the 600- to 900-basis point improvement in the yield you talked about, or included in that? And are you finding any resistance from customers as it relates to that fee?

Hey, John, this is Mike. So I will take first shot at the answer, and then Norm will add on. So we aren't -- starting from a sales point, we are not seeing a big impact or resistance from a sales standpoint. Our customers, as you know, are mostly payment-focused, and this is still a great purchase and monthly payment option for them to buy the goods they need. So we have not seen a meaningful impact on sales.

The fee is charged on every transaction. It is not something that is negotiable or waivable, so we are getting it in every transaction. And it is included in the 600- to 900-basis point improvement that we expect to see in the yield as all of these changes season into the portfolio, and will impact the APR 150 to 200 basis points. But again, all of that benefit is already baked into the 600- to 900-basis point improvement that we are expecting.

And John, it is Norm. One other comment I would make. You heard our November sales. So the November sales trend was actually better than the third quarter, with similar underwriting -- the underwriting changes in place. And all of November had Texas with direct loan higher APR, as well as the origination fee. And again, that highlight the fact that for our core customer, even with the higher APR and the origination fee, it is still by far, from a value standpoint, the best retail option and the best retail opportunity that they have in the marketplace.

Thanks for that, Norm. And is Texas -- was the comp in Texas similar to the 8%? Or, I know it was a little worse, and I guess that's not just relating to the origination fee and APR. But maybe a commentary on Houston or the oil patch in general? Just curious what you are seeing, specifically in Texas.

As Norm noted in his comments, the core markets -- what we're talking about 3Q, we're down 5%. And we saw a similar trend for the core markets relative to the Company overall, which, Houston is in that core market total.

So Texas would actually out of the 8%, and that down 5.4%, which we shared the detail of the three breakouts, down 5.4% of the 10% on the core market. And all of those are Texas markets, if you will. So down 8%, the core markets performed similarly. So it would have been even better than that in the month of November, even with the APR and the origination fee, and the challenges from an oil market standpoint that we are seeing in the State of Texas.

That's helpful. I know you're not providing out your guidance, but I'm curious on credit SG&A. With the portfolio essentially flattening out, shouldn't we get some fairly material leverage on that number in 2017? Or how are we thinking maybe sequentially about dollar run rate of credit SG&A?

Yes, John, we would expect to see some benefit, from a leverage standpoint, as the portfolio performance continues to improve. And with our primary operating expense in credit being the collections staff, the staffing and labor costs relative to the balance should go down as delinquency and losses decline.

And in addition to that, John, with the removal of -- from a Synchrony standpoint, that portfolio out, that is a huge driver of what's causing the portfolio to be smaller. And as that seasons and those move off the portfolio, it absolutely will give us the opportunity to leverage at a much greater degree our credit SG&A.

Okay. And I'll defer to others, but maybe one last quick one. The residuals -- I think I added up about $35 million on the first securitization you did at $1.4 billion. I believe it was around $132 million of original value. I guess just asking, what, if anything, to read into that with the amount remaining, which I think you broke out in the low 20s? Is there anything to read through on residual values going forward? I know that was a different pool from the recent two you have done. Any color would be great. Thank you.

Yes, hey, John, it's Lee. With regards to the residuals, probably nothing to read into it. Obviously as we have charge-offs, that residual continues to decrease. But with regards to if you were asking about potential sales, there's nothing on the horizon from that perspective.

And as Norm and Lee pointed out in the prepared comments, the ABS transactions, to date, are still performing fairly in line with expectations. I don't think there's anything really newsworthy there. And when you calculate the service or fees that we've generated over the lifetime of the 2015 A deal, and the residual payments as well, they are certainly in line with what we had projected or expected.

Great, thanks. Good luck.

Thank you.

Peter Keith, Piper Jaffray.

Great, thanks, guys. This is actually John on for Peter today. So first off, we've seen several stories in the news recently of sub-prime auto delinquencies continue to be on the rise, and at their highest level since going back to the housing boom. Are you concerned that this is going to start impacting your existing portfolio further in the coming quarters? And then also, do you feel that your recent tightening will help you maybe avoid some of those higher delinquency rates?

Hey, John, it's Norm. Yes, part of the reason that we did the significant underwriting changes that we did earlier in 2017 was exactly for some of the reasons that you are articulating. As we saw, even back then, even before we were seeing the sub-prime auto and some of the delinquencies rising, we were looking at the availability of credit that was being put out there within the sub-prime market. And that was a concern to us and contributed on our efforts to tighten it as strongly as we have. And that is certainly playing out with what we are seeing from a delinquency standpoint with the sub-prime auto market.

But it's something we continue to monitor. Obviously we can't predict what will happen in the future. We feel confident that what we've done now and what we're seen in early buckets and first-pay defaults, that we have taken the appropriate steps. But I will say, with our enhanced credit team and the sophistication that we have from an analytics and a modeling standpoint, we look at it literally on a daily basis, and are constantly on the watch. So that if we have to do something to ensure that we don't have issues down the road, we're prepared to do that.

Okay, great. And then is there any change in thinking on where you guys are thinking your FY16 vintage static loss charge-off rate will eventually settle?

No, John. And in fact, in the call slides on page 10, we give the estimated range. And for FY16, we are still expecting it to be in the upper 13% range. And that's based on what we are seeing from a static pool delinquency trend, as well as how fast the portfolio is paying down. And the fact that there's only about a-third of that portfolio remaining.

And one thing that's important about that is that we gave a little bit tighter guidance of where we thought 2016 was going to come in at. But if you go back to the previous several earnings calls, we have not changed our position on where we expect the FY14, FY15 and FY16 static loss pools to come out at. And part of the reason we gave some additional color on early delinquency trends and static loss delinquency trends, as well as first-pay default, is to give better clarity of why we have a confidence level of where we continue to think the static pool loss rates are going to come in, similar to what we've communicated in the past.

Okay, thanks. And then just one last quick one, just as far as some of the weakness in the furniture and mattress category in Q3. I know that's been an out-performer for a very long time, but it was a little weaker this quarter. Is that a result of just some the tightening you've done, and that customer tends to be a little bit higher default customer than the rest of your business? Or was there something else going on you would like to call out in Q3?

Yes, John, first of all, there's nothing underlying, we believe, with what's going on with the furniture and mattress business, at all. It is not a -- from a delinquency standpoint, they are not a higher-credit risk customer. In fact, they're not our best, from an appliance standpoint, but they're not that far behind, from an appliance standpoint.

But what has driven the softening there is completely the underwriting changes. If you recall, the majority of our underwriting changes were focused, number one, on new markets. And our new markets have a much higher percentage of furniture penetration and mix than our core markets do. And then number two, we also impacted credit limits to mitigate delinquencies there. And the higher credit limits typically skew toward furniture and mattress purchase versus appliances and electronics. So it's really those two drivers.

One of the things I will say at the same time, even with -- and I wanted to reiterate -- is, the profitability of our retail business continues to be extremely strong. Although we're experiencing the tightening of our sales that we've self-inflicted, and the reduced store growth assists our efforts to turn around the credit business, our retail stores, on average, even with the reduction of the 4.5% in total sales, are extremely profitable. And to put in context, our retail stores would still be very profitable for us with 50% less revenue, as we sit here today.

So although we don't like that, long term, that is certainly not what our expectations are. In the short term, while we get the credit business performing where it needs to be, it's necessary for us to see that tightening. But it doesn't shake at all the underlying profitability and strength of our retail business.

And I would add just one comment. It also doesn't change our long-term expectation for the potential for revenues into stores either. And we don't think this is a continuous decline. This is a -- we need to make this change to get credit right. And then the retail stores, especially in the new markets, we think the long-term potential is still where we originally thought.

Great, thanks a lot, guys. Good luck in the fourth quarter.

Thank you.

Rick Nelson, Stephens.

Thanks, good morning. I would like to ask about the guidance for 4Q. It calls for a pretty steep increase in the provision. If you could provide some color around that, and how we should think of the provision rate for the next fiscal year?

So as far as the fourth quarter goes, we see a cohort of charge-offs coming through from originations prior to this year's underwriting changes. So they will have a -- the underwriting changes will have a bigger benefit next year. They are not really benefiting us this year. So we're seeing that lag come through in higher charge-offs in the fourth quarter.

Along with this is typically when we see growth in the portfolio, which will also put upward pressure on the provision in a higher-growing period for the portfolio. And that is what is really driving the guidance for Q4 for the provision. We haven't given specific guidance for FY18 for provision yet, other than just to say we would expect to start seeing the benefit of the underwriting changes in next year's losses and provision.

Got you. Same-store sales declined for November, down 8%. You are guiding to a 10% decline for the full quarter. I'm curious if you're seeing a downdraft in same-store sales here in December, or just what is leading into that 10%, at this point? Or just a desire to be conservative?

Yes, Rick, we're not seeing any fundamental difference yet in December. Very early obviously, with only four or five days. And frankly, the story in December will be written the last two weeks of the month, frankly. So when everything is said and done, I would say -- and our guidance says approximately 10%.

From a conservative standpoint, we're taking a little bit more conservative approach. We're certainly doing everything we can within our control, from a retail execution standpoint. We haven't changed anything underwriting as a result. But just in an effort to be more transparent and a little more conservative, is why we put the guidance where it is.

Yes. And finally, if I could ask you about the timeline to raise the APRs in those four states that you called out, that represent 14% of the originations?

We are targeting to have them all done by the end of next year. But they will come in, in stages, as we will knock off the higher-potential states earlier in the year and work our way through each of the four states.

And even though we've been through it once -- so in that sense, from a retail execution standpoint, we feel very comfortable with it. The issue is, it affects so many things from a back-of-the-house standpoint and a resource standpoint and a compliance standpoint. That's why we have to do it in a staggered manner, to ensure that we can do it appropriately and without risk. So by the end of FY18, we would expect to have all four states rolled in.

Okay, fair enough. Thanks a lot, and good luck.

Thanks, Rick.

David Magee, SunTrust.

Hi, good morning, and congrats on the stabilized numbers.

Thank you.

I had a question on the higher underwriting hurdles now. If the customer is not able to complete the transaction in the store, I guess I'm surprised I'm not seeing more RTO transactions take place as a result of that. Are you not seeing the transfer as efficiently as it could be, in that regard?

What I would say is, that's a good catch, something we're very focused on. Because even before the changes, frankly, we recognized that's an area that we have, we believe, significant opportunity down the road. And with the significantly increased number of declines, that opportunity has only grown.

We have seen improvement over the last 90 days. But at the end of the day, where we ultimately think it can be is significantly higher than where it is. And it's an area strategically that we think provides us an opportunity for some material retail sales growth going forward into the future. And we're very focused on it.

Okay, thank you. Secondly, how would you characterize the promotional environment around you thus far in the holiday season?

I would say similar to last year. We're not seeing -- it's typically a very high-promotion timeframe, and we're certainly seeing that from a category standpoint. But as you heard, over Black Friday, our total sales were actually up on the six days, from basically Wednesday through Cyber Monday, that we calculate. So even in a comparatively competitive environment, we were able to certainly have a better performance than what our trend rate has been.

Right. Well, good. And then with regards to the residuals on the ABS transactions, it sounds like to me that you guys are choosing to retain those just because of the economics involved, as opposed to a lack of buyers, perhaps? Is that fair?

David, it is Lee. No, that is fair. We're definitely choosing to retain those, from an economic perspective. Again, it makes more sense for the Company to hold onto them at this point.

Okay. And then lastly, when you start to lap on the comp side, just in terms of having a similar underwriting hurdle year over year, and some of that headwind may dissipate in that regard?

Late first quarter.

You may recall, the first big changes were made at the end of March, so it started in April, to some extent. And certainly second quarter, we'll have to see the first big impact.

Great. Thanks, and good luck.

Thank you.

Thank you. And I am showing no further questions at this time. I would like to turn the conference back over to Mr. Miller for closing remarks.

Thank you. We appreciate everybody's participation and support of the Company. We look forward to speaking with you again in the fourth quarter. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Have a great day, everyone.