Upbound Group Inc (UPBD) 2002 Q2 法說會逐字稿

Good morning.

Thank you for holding.

Welcome to the Rent-A-Center's second quarter 2002 earnings release conference call.

At this time, all participants are on the listen-only mode.

Following today's presentation, we will conduct a question-and-answer session.

If you have a question, you will need to press * and then the number 1 on your telephone keypad.

As a reminder, this conference is being recorded, Tuesday, July 30th, 2002.

Your speakers today are Mr. Mark Speese, chairman and chief executive officer of Rent-A-Center;

Mr. Mitch Fadel, president;

Mr. Robert Davis, chief financial officer; and Mr. Carpenter, director of investor relations.

I will turn over to Mr. Carpenter, please go ahead, sir.

Thank you.

Good morning and thank you for joining us.

You should have received a copy of the earnings release distributed after market close yesterday that outlines significant operational and financial achievements we made in the second quarter.

If for some reason you did not receive a copy of the release, download it at www.Rent-A-Center.com.

Finally, I must remind you, some of the statements made in this call, such as forecast growth and revenues, earnings, operating margins, cash flow and profitability and other business or trend information are forward-looking statements. These matters are, of course, subject to many factors that could cause actual results to differ materially from our expectations, reflected in the forward-looking statements.

These factors are described in our most recent 10-Q for the quarter ended march 31, 2002, as filed with the SEC.

Rent-A-Center undertakes no obligation to publicly update or revise forward-looking statements.

I would like to turn the conference all over to Mark.

Mark.

Thank you and good morning.

I certainly appreciate everyone joining us this morning.

Let me start by saying how pleased and excited I am about our operating results.

The initiatives we began putting in place late last fall are taking hold and we are seeing the results.

Higher revenues, reduced costs and of course, higher earnings.

I also believe that we have positioned the company for continued long-term sustainable growth.

As you saw in the press release, our revenues, comps and earnings exceeded the high end of our original guidance, as well as street expectations.

Our total revenues for the quarter were $494.7 million, an 11.7% increase over the same period last year. That was driven by the 6.6% comp or same-store sales we reported, couple wide incremental revenue from the recently opened and acquired stores.

Of course, earnings per share of $1.22 before the 8-cent charge, which I will speak to in a moment. us net earns of $1.14.

All areas at or above expectations. Overall, our business demand remains pretty strong.

We did see a slow down in late May and June, which is not unusual.

In fact, even expected.

Most of you will recall we have mentioned in the past, as we get into the summer months, there is somewhat of a softening in demand, school gets out and more time outdoors, etcetera.

We are in a good position going into summer.

The head wind we had been facing, again, I will remind you some of the previous calls and when I speak of head wind, the discounting program, in particular, that was taking place last summer, is now essentially behind us.

In fact, we begin the normalize on that front and we are very well positioned.

I will go as far as to say the third quarter as started out pretty strong.

During the month of July, we ran a (inaudible) promotion that started in mid-July and was free until August 3, on select merchandise. The early indication is that that worked well for us.

I say early indication.

The real measurement of success will be over the next several weeks as we see how many units stay on rent and begin generating revenue.

The fact is, we delivered a few more than anticipated.

So, we are encouraged by that.

Additionally, we are following that up with August promotion.

This is a scratch and win promotion that actually started yesterday.

Customer comes in and gets a game card and can win a free week or weeks, up to three weeks, on rental of a new product.

Additionally, they can win merchandise, be it a big screen television, stereo and so forth.

Early into it, coupled with the strength of July promotion, we believe this will give us additional boost.

We feel good with where we are.

I will go as far as to say we have modest consideration for both of those in projections and feel very good.

Please wide how we are positioned going forward. I mentioned the charge of 8 cents and the press release stated that included two items.

One, because of strong cash flow, we strengthened our balance sheet by paying down 128 million in bank debt during the quarter.

Associated with that pre-payment is the required write-off of financing fees of $2.9 million.

In addition, the company reported charge of $2 million for legal pertaining to settlement of the class action discrimination lawsuits.

In the connection with the negotiations and settlements, you will recall Bunch was the original case we pre-announced settlement on late last fall and global settlement this year.

There were approximately 100 people who raised concern requested the adr, the alternative dispute resolution, in connection with the Bunch case.

That process was not in (inaudible).

We determined it was appropriate to commit $2 million to the process, rather than run the risk of them opting out and have individual claims to deal with. In connection with that, we have their commitment, as well as the (Bunch) counsel commitment to support the (inaudible) settlement, which the ports have approved.

That is moving forward as expected.

We expect it to be finalized and funded sometime later this year. I think it is also to mention that we are making significant progress in putting new policies and procedures in place to minimize and eliminate many of these types of claims or issues in the future.

We have hired a senior HR professional and two other experienced HR persons to help improve and manage that aspect of the business.

I am encourage about where we are today. With regard to our cash flow and uses.

It has been strong.

I expect a similar program going forward.

Number one, we will continue to invest in growth.

When I say that, I am speaking of new store openings and acquisitions.

We believe that there is significant opportunities on both fronts.

We know that the economics and returns are favorable on both and we will look to continue capitalizing on our position and expanding.

In a moment, I will have Mitch provide additional operational updates and he will talk to the new stores, as well. We will continue to look at deleveraging.

Needless to say, I am comfortable with our current levels, particularly in light of the recent pay-down.

We will continue to look at and evaluate that, as well, going forward.

I will ask Robert to give you additional financial highlights in a moment.

We will begin looking at buying back company stock.

I will remind you, that the Board had previously authorized the repurchase of $25 million in stock.

In fact, we have repurchased approximately 240,000 shares or roughly $12 million worth over the last 10 days or so.

We will continue to evaluate that going forward.

Our strong cash flow gives us flexibility on all of those fronts and we will continue to manage them going forward. I think it is worth noting many of you may recall with regard to the outstanding preferred stock, the company has a call provision as of August 5,th, next Monday, converting those shares to common.

We expect that to happen, given the current stock price, the conversion price of the preferred was $28 a share, roughly.

We expect that to take place.

There are approximately 7.1 million shares outstanding.

Going forward, that will save the company pains in future picks and dividends at that point.

Needless to say, we have good things going on.

I feel good about our position and the outlook.

At that time, I will turn over to Mitch to share additional operational highlights.

Thanks, Mark.

We had great revenue and profit quarter and good quarter in terms of adding store fronts.

We added 51 stores in the first quarter.

We opened 16, which was acceleration from the 6 in the first quarter.

We also purchased 38 store fronts in eight different transactions, as well as we bought accounts in 40 stores where we didn't need the additional location, but bought the revenue stream and eliminated a competitor.

For the year, we opened 22and bought 41 store fronts, which is 60 to 80 for the year.

We add in acquisition initiatives, we will grow 5 to 10% this year.

This store base growth is something we can do for many years to come.

This is underpenetrated industry and potential for growth is fantastic.

In fact, we expect to increase (Denova) openings to 100 to 120 stores.

Along with campaigns, we will continue to add 5 to 10% to store count every year. couple of points.

The accessions come from the new store program that (Denova) opening program.

By that, I mean we go into a market and expand to look at a location, if a competitor has a location we want, we will contact that competitor.

A lot of times, many times, a competitor will contact us once they know we are looking for a location.

They feed on each other.

A lot of times a store ends up in acquisition.

They feed on each other.

Those acquisitions are coming at attractive multiples, depending on the revenue of the store, we have been paying 6 to 9 times the monthly revenue of the store.

Very attractive multiples on the acquisition front. Few comments about new store openings.

We started opening stores in late 2000 and in the 15 months from late 2000 through all of 2001, we opened 107 stores.

Those 107 stores are on average about a year old and performing pretty well, better than planned.

In the second quarter, that group of 107 new stores had a store operating income of 11% and are well on their way to being at 25% of the level by the time they are four years old.

The 22 we opened so far this year are performing better in early stages. great results out of the new stores.

They are doing well. The only problem we have had in new stores is finding them fast enough.

The growth of commercial space, where we look to open in the lower and middle income areas has not been tremendous.

Growth has been in higher income areas.

We won't open some part of our locations.

I think I mentioned, operating results of new stores, obviously is paying off.

Holding it at standard is paying off in operating results, so we need to continue to work on strategy to expedite new locations, but won't compromise our standards and that is showing up.

Over the long haul, with our comp store growth and the continued addition of 5 to 10% square footage, that translates to high single digit revenue growth a year.

The 5 to 10 square footage takes time to ramp up new stores.

As they ramp up and you add comps we are looking at high single digit growth, 10 to 15% EPS growth per year. As far as the business is concerned, as Mark mentioned, the demand has been strong and deliveries are running ahead of last year and that translates to good comps.

In terms of collections, they remain consistent.

Our goal is to close out at 6 and a half percent or less, one date or more past due.

We are achieving that number.

Last week we were at 6.3%.

Very consistent.

Collections are steady.

Demand is great. I guess lastly, update on personnel.

You will recall we put in geographical pay plan in February.

We grandfathered our current employees, but lowered starting pay at cost of living areas.

I am pleased to report, we continue to recruit and hire candidates needed in all areas of the country.

Moral is good.

You know, when things are going well, everyone is happy.

It is fun to succeed.

We are having a lot of success now.

I will turn over to Robert Davis.

Few more quick comments on detailed financial information and then we will turn back to Mark for closing comments.

Little bit redundant here, but again, revenues rose 51.9 million or 11.7% in the quarter to $494.7 million, again supported by strength in the same-store sales comp of 6.6%.

This revenue growth translated into EPS growth of 34.1% on comparable quarter over quarter basis.

This EPS growth speaks of the success of the significant flow from the business model, as well as benefits of the cost control program we introduced last fall. This flow through in the business model and our ability to continue to leverage the incremental revenue will continue to lead the margin enhancement.

On recurring basis, the second quarter EBITDA margin was 20.3%, that is up from 18.9% in the second quarter of last year, and up 50 basis points from the 19.8% for the first quarter of this year.

As we begin to ramp up new store initiatives that Mitch mentioned earlier, we would expect the margin to remain flat to slightly down for the remainder of 2002.

However, our goal internally remains to drive the core store EBITDA margin to 22 to 23%, over the next 18 to 24 months.

We did reach 21.2% in our core stores on EBITDA margin basis for the second quarter of this year.

That is up from 19.7% in the first quarter of this year. So, continuing to make improvement in core stores, helping to offset the new store ramp-up period and making significant improvements in core stores.

From a cash flow perspective, the company generated 172.9 million in cash flow from operations for the first six months of '02.

And $130 million in free cash flow from financing after new stores and acquisitions.

The strong recurring cash flow allowed the company to fund growth internally, which is a significant benefit, as well as continue to strengthen the balance sheet.

For the first six months of the year, again, highlighting Mitch's comments, we opened 22 locations.

We acquired 41 store fronts and had a 59 additional account buys, for a total of 27.2 million over the course of the first six months of the year.

Capex for the first six months was 16.8 million. We reduced dent by $128 million or 20% of the total debt outstanding that we began the year with.

We ended the quarter with $94 million on hand.

Since the end of the quarter, June 30th, we further reduced debt by another $11 million and made stock repurchases of approximately $12 million.

As a result of the growth in EBITDA and the significant reduction in debt, the company's credit ratios are stronger than ever.

As of 6-30, our consolidated debt ratio was 1.64 times, while interest coverage has grown to 5.6 times. As of today, we currently have 564 million in debt outstanding. 289 million in term debt, and 275 million in senior subdebt.

The near-term amortization on the term debt is about 1.2 million in September of '02 and September of 03 at 15 million in 2004, before it ramps up.

We have significant flexibility in our capital structure at no near-term debt amortization that would cause the company to view our current position as inflexible.

We feel it is a strength enable to grow internally and continue to pay down debt. Again, that current debt balance is down 20% from where we began the year with.

With that financial update, I will turn back to mark for closing comments.

Thank you.

Let me cap by saying things are coming together nicely.

We are seeing continued growth in core stores. initiatives and cast controls are working.

As Mitch eluded to, new stores and acquisition plans are on track and performing well.

Our overall operating margins and financial condition are very strong.

Our management team in the industry are poised for growth.

We believe we will be in the forefront of that.

We will be happy to open up for questions.

If you will do that please? 00:33:10

At this time, I would like to remind everyone in order to ask a question, please press * and the number 1 on your telephone keypad.

We will pause for a moment to compile the Q and A roster. Your first question comes from Dennis Selfo. question-and-answer session

ANALYST:

Hello, Dennis.

From other stores ready concentrate d with particular entity or spread across -

We apologize.

Start over.

The question was did you acquire 40 accounts from one entity or spread across various areas?

The 40 accounts or -

40 accounts.

It was spread out.

The largest account buy was 15 stores.

It was spread over a number of transactions.

Okay.

Last year at this time, you had a big increase in insurance costs.

I suspect we are getting close to the anniversary.

Any update on whether we will get relief there or some comment in that area?

Dennis, as you recall, our insurance portfolio, which is comprised of corkers comp, auto liability and general liability, had annual renewal date of August 5.

We have completed our renewal process.

We initially had projections of total increase of $300,000 per month in the projections we had given earlier in the year.

The actual cost has come in $500,000 per month.

It is about $200,000 more than originally projected or a penny per quarter.

However, we feel good about some of the structures and policies we have put in place to mitigate that risk going forward. The current additional $200,000, if you will, that the renewal came in above, is in the projections and we have consideration for the remainder of the year.

Was that increase due to general insurance environment or specific to your claims history?

Little bit of both.

Most of you are aware we are generally self-insured on the insurance as it relates to claims themselves.

However, the premiums for the insurance provider themselves did go up, as well.

So, kind of a component of both issues that we were faced with.

I might add, it is slightly higher.

One of the things that kept it from being a big increase like last year, you know disaster, if you will, like last summer's renewal, is the initiatives we have put in place.

The light duty program is starting to reduce the amount of the claims of the new claims.

Claims are higher than we would like them to be, but the average length of people being out on Workmen's comp is (inaudible).

The amount of the claims coming down, we continue to put more in to reduce them.

Slight increase as Robert said, not near the disaster of last year because of the initiatives in place.

You probably won't see any benefit from that in the near term in terms of the policy of the procedures in place.

On average, the general life of a work comp payment is 5 to 7 years.

It takes time for policies to take significant hold before they begin to benefit the company in a positive way.

One last question.

Any material change in competitive environment one way or the other?

Not from a negative standpoint.

No.

I don't - you know, there is some out there that are growing.

The smaller operators.

But, if anything, I think from our standpoint, we would view it more positively than anything.

Our ability to continue to acquire other operators be it store fronts or accounts, so forth.

So, nothing on negative side, at all.

Thank you very much.

Your next question comes from Robert Owen.

Hey, guys.

Can you hear me all right?

Good.

Couple of quick questions.

I think my first question is - I noticed that the inventory on rent year-over-year, the growth had slowed pretty dramatically from what it had been the last several quarters.

Could you comment on that and what the impact on same-store sales might be from that slowing?

After that, I have one or two quick follow-ups.

Thanks.

I think you are referring to selected balance sheet data.

The merchandise on rent, net value and merchandise held for rent.

With regard to what is held for rent, the increase there is us going back to the desired inventory levels.

When I say that, I think most of you know we have said why would like to maintain approximately 160 pieces of available inventory on-hand in the stores.

In fact, the end of last year, it was about 150 or so.

The end of the first quarter, it was about 145.

The second quarter, it is back up to the desired range, 165. With regards to the merchandise that is on-rent and the decline there, there is a couple of things going on.

I view both of them as good things. When I say that, one of the other things we did last year when we kind of revisited the business model and put the various changes in place.

We looked at certainly not just the current product offerings, but rates and terms that we charge or set for the products.

One of the things we did is I lowered a lot of the terms and raised the rates.

It really creates a win-win situation.

By way of example, I will use a big screen.

In the past was $29.99 a week for 36 months.

We lowered it to 30 month, but raised the rate to $32.99.

For the customer, it is a couple more dollars a week.

It is affordable.

We don't lose business because of it.

They see total less cost, if you do the math.

The total cost is actually less to them.

Of course, cash price is less.

We think it drives additional business.

What it does for us, we are bringing in medium revenue. Let me speak to the comps. 6.6% comps, two components there.

Customer growth is about 1.5%.

Pricing is about 5%.

And again, that is driven partly higher-end products and pricing initiatives we did to the consumer.

What happens, as we depreciate that unit quicker.

The other benefit to that, - there is a couple things.

The other place you will see it.

If you will look at gain on sale of merchandise sold, historically, you will notice that was 15 to 20% range.

It is now 25 to 30%. So, what you are seeing is as we sell the product at the end of its life or selling it for the same price, but over a lower cost because it is depreciated quicker.

The other thing we have done is put a big emphasis on reinvestment in inventory.

When I say that, product comes back off rent and it has cosmetic damage or whatever the case is, as opposed to trying to sell it or putting it on reduced term because of condition, we are spending money up front, $50 or $100, to put it in better condition.

When I say that, that expense is not capitalized.

That is actual expense write-down.

That allows us to - we are not having to - we are not selling at a discount and replacing it with a brand new expensive unit.

We are able to put it back out on rent and extend its life and essentially get more out of inventory.

It is really inventory management issue.

Again, it is working extremely well for us. I think we will probably to some extent, expect it to continue going forward.

Those are really the two things driving it.

If you look at that and you ask about the comps going forward and - it is not less merchandise on rent, obviously from what Mark was talking about.

It is a different term.

As Mark talked about, I refer you to the second quarter rental and fee revenue versus the first quarter and it was up by $12 million, $12 to $13 million, second quarter over first quarter.

The rental and fee revenue climbed and you wouldn't do that with less items on rent.

In this case, we are doing it with slightly more items on rent and to Mark's point, the value of the items coming down because we are managing the inventory better, longer life, reduced terms and so forth.

That rental and fee number for the second quarter should get you comfortable there, as well as that gets us comfortable, the guidance in the third quarter being 46%.

Another thing I might add.

We reduced term and it is win-win.

Obviously, we are generating a couple of dollars a week more.

What we are not giving up is I think we have said this time and again. 25% of contracts go to term the first time up.

So, if we lower the term and 75% don't go there, we don't give anything up.

It comes back and again, we put it back out on rent and so, over the life, we are getting it in particular because of refurbishment we put in place.

Depreciation are lower (inaudible) percentage is in line and allows us to accomplish the best of both worlds.

So, going forward, so I can understand the impact of what you think this will have.

Would you be looking for the kind of same-store sales break-out for the rest of the year to be more ticket-driven than traffic driven because of this?

Also, should we start to think that the gain on sale of merchandise sold to the gross margin on merchandise sold, because of this program, along with reinvestment in inventory, will be sustainably higher than we are used to seeing?

The gain on sale is hard to predict at the end of the day.

It is a small piece of our business.

It is certainly improved from the historical levels - I suspect it will stay somewhere in those ranges.

In terms of our growth going forward, there is still upside benefit from the pricing initiatives that will help drive the comps.

I also think there are opportunity in terms of customer growth.

Again, I have to refer back to the head wind I mentioned.

All of those accelerated paid-outs we faced in the first and second quarter because of the discounting program.

That is essentially behind us.

We are normalized in terms of the number-pay-outs per month. I am saying that because I think that gives us a opportunity to grow - we would have grown at a faster rate in the first and second quarter if we didn't have so many pay-outs.

If all things remain constant and nothing indicate its won't, we will continue to see customer growth side of it, as well.

There is further price enhancements just as more and more of the product in the system gets to all of the new rates and terms.

Great.

Before I let you go, can you update the regulatory front?

It is actually going quite well.

I say that, again, the industry introduced HR 1701.

That had gone through the house subcommittee and came out strong.

It went to the full floor of the house or came out of subcommittee 24-4 or so.

Strong support. 24-4 on subcommittee. 29-9 out of the full committee.

Goes to full floor.

It has come out of the committee and will go to full floor.

That is moving along. The other piece of good news, we now have a sponsor, a democratic sponsor, on the Senate side, to introduce the bill there.

So, we have got obviously, a few more steps or hurdles to go across t. is advancing rather well.

It did get side-tracked a little bit, with a lot of the things going on.

As you know, the president has put a lot of pressure on some of the governing corporate issues, as well as security issues.

I am saying that because the bill has been pushed aside, like many bills have, to address those two pressing items first. But, we still feel good about where we are.

Again, we continue to pick up more and more support as evidenced by the senator that will sponsor the bill on the Senate side for us.

The house is going to recession for August.

When they come back in September, we expect a floor vote in September and feel confident on the house side.

As Mark says, it is moving well.

Great.

Thanks a lot.

Your next question comes from Dennis Denzelton.

Good morning, everyone.

Mark, let me do sucking up here and say that I think you have been very successful in your strategy of getting back to underpromising and overdelivering since your return last November.

You have done a great job.

Continuing on. Has your terms been impacted due to this pricing and term strategy that you implemented?

No.

When you say term.

Four times cost.

No.

In fact, it is actually improved a little bit.

That may sound kind of stupid.

We originally price something and I think you have heard us say this, we work around four times cost.

In theory, if the first customer rents it and it goes through to term, we will get four times.

That doesn't happen most of the time.

On subsequent rentals, you may extend it and so forth.

What we have seen is even though again we lowered the term and raised the rate, implied term to start with, it may not be 4.2.

It may be 3.9.

Over the life of the product, because of partly driven by refurbishment part, we are generating - we are actually higher than we ran this time last year. The overall term of the products left the system within a defined period of time has gone up 10 basis points.

If you reduce term and 75 to 80 percent will come back anyhow, you increase revenue before it leaves the system.

Right.

That is what I was hoping for.

That is what happened.

It is truly a win-win and again, what the customer sees is the total cost is lower.

My cash price is lower.

It makes us look more competitive and we are.

We get more business out of it.

At the same time, we are generating more revenue up front.

As we refurbish it and keep it in the system, it is better utilization of inventory and what-not.

It has a lot of benefit.

Mitch, a question for you, can you estimate what percentage of employees are on this new regional pay plan?

Yeah, it is around probably 15%, about 2000 employees, 15%.

Given the turnover at these stores, what would you estimate it to be at the end of the year?

Probably in the 40 to 50% range by the end of the year.

Which is in line with what we have mentioned before, that if we have 50% of employees or new-hires, if you will, on the regional pay plan, that would generate a run rate of $10 million savings annually.

On the labor side.

Right.

Okay.

We are on track to do that.

I know we.

I still feel we will realize on a go-forward basis, $10 million in savings.

There might be some offset staying competitive and what-not.

At current level, we will realize that kind of savings.

I guess, how much of the savings from this pay plan are baked into the current estimates that are out there?

For the balance of this year or -

Yes.

Take the logic we used before, which is between the low and high point of the range, it is about $4000, from a new employee.

In the higher income or higher cost of living areas, we didn't change anything.

Lower cost of living areas, disparity is $4000.

Taking the mid-point, about $2000 on average, annually.

Taking into consideration approximate $2000 Made mention of earlier, that would imply savings for the remainder of the year, up from the million and half in savings we spoke of in the first quarter conference call.

Okay.

Last question.

Next year talking about opening up 100 to 120 stores, I think.

You haven't given guidance for next year in terms of earnings, can you still grow the bottom line by say 13%, including the dilution from these stores?

I think it will be 10 to 15% certainly.

There is obviously a couple of things that is driving that.

On the expense side, it is fair to say that we are realizing a lot of the cost savings sooner than maybe we thought we would.

To some extent, just more dollars than we thought.

I am saying that because you can't comp on an expense savings. The acquisitions, you know, Mitch mentioned, I don't remember the exact number, but account buys.

Those have been working very well for us.

You know, those are pretty accretive deals.

We are not really getting more incremental expense.

We are getting the revenue stream and depreciation associated with it.

There may be small operating cost.

There is obviously no consideration for acquisitions be it account buys or store fronts.

You know, what we are throwing out next year, when we say 10 to 15%.

But, you know, if you want to pick the mid-point, I would start in that range.

That is sustainable.

I am comfortable with that number in the range. So, you know, on the expense side, we are getting a lot now.

There are a few areas.

Regional pay is one example.

We may be halfway there.

The advertising front, we have taken cost out already.

It hasn't been a detriment to the business in the least bit in terms of synergies and so forth.

Other general operating costs.

You know, frankly another opportunity area is to some extent on the legal side.

Again, we are putting programs and processes in place and will continue to improve that, also.

There is areas of opportunity, but you know, kind of your opening comment, my conservatism or underpromising and overdelivering - I guess I prefer to stay with that and say 10 to 15%.

Your point about new stores, including the dilution from the 100 to 120 new stores.

Okay.

Thanks, everyone.

Your next question comes from Richard Demung.

Good morning.

Could you tell me in your mature stores, did you gain or lose (inaudible ) in May or June.

By mature, I am defining stores older than two years, let's say.

In June we went a little backward, as Mark (inaudible) in the mature stores, May was - about break even.

May -

We were down a couple.

To complete the quarter, April was up just a little bit.

Very much on anticipation of our expectation.

Again, the third quarter has gotten off to a good start.

In the core stores and new stores.

Could you give us an idea boundaries of magnitude on account decline for June, May and account growth in April?

Well, for the quarter - let me look at the numbers, down just a couple of stores over the quarter.

On the mature stores.

To give you an idea, we are down 3000 BOR at the end of June, from where we ended December with.

That is in the face of all the pay-outs from the first quarter.

All that happened in the second quarter.

And, on the account loss, you know, how long does it take you in the mature stores to sort of recoup the lost accounts, either through promotions, maybe having special terms or something of that sort?

What is the typical lag?

With what we are down so far this year, we can make up in one month.

As Mark said, July is off to a great start.

It looks like we will finish up very strong.

I mean, we are down the numbers you get back in one month.

The 3000 bor accounts we are down from December 31st, again, significant pay-outs in the first quarter from discounting program, that 3000 bor is .2 of 1% of our total accounts that are on rent today.

Very, very, very minimal impact.

In fact, we came out at the end of the first quarter and raised our same-store sales guidance because of the success we were having in the conversions of the pay-outs to new agreements.

Mark made mention the second quarter was softer than the first quarter, which is generally the way it happens.

It was expected.

It is not unusual in this business.

To only be down 3000 accounts from the end of the year, we feel good about, typically in regard to where we started third quarter.

One more question on the 3000 accounts you are down, is that just specifically mature stores or is that in general?

In general.

Thank you very much.

Your next question comes from Bob Pool.

Hi, guys.

Couple of quick capital structure questions.

You guys are in the debt pay down mode here.

When does that stop?

You know, what is the appropriate amount of leverage for you guys to have some

We are comfortable at 1.6 times leverage.

I will make mention of the fact that we currently have the 289 million in term debt that 250 of that is locked up in interest rate swap agreements that do not expire until August of next year.

So, we are cautiously analyzing our options.

There is 39 million dollar amount that we would feel no hesitation of paying down, but, again, that will be analyzed and managed based on the rate of new stores coming on, the amount of acquisitions available, as well as given the current stock price levels, our continued evaluation of whether or not the stock repurchase makes sense to the company.

Okay.

You say you are comfortable at 1.6 times.

What would you say is - have you thought through what you believe is optimal?

In my mind, 2 times or less is fine. 2 times or under.

Obviously, we are throwing off a lot of cash and frankly, we are trying to spend it as fast as we can in terms of openings and acquisitions and if we could do more, we will.

Okay.

So, substantial amount of incremental releveraging is not sort of what you are after here?

No.

Okay.

Then, the debt you are paying down, what is the rate on the debt you are paying down, the term loan?

7.2 weighted because of interest rate swaps we have and are locked in.

The initial outset of our term debt facility in 1998, in regard to all the interest rate cuts, Mr. Greenspan has put in place, we are paying higher than we would like to given the current environment.

Okay.

The preferred stock has a rate of what?

3.75 annually.

All pick?

All pick right now.

The company has the option to buy either in kind or cash, in the preferred stock agreement.

However, our bank covenance do not allow us to pay in cash, so have been paying in kind.

We will continue until August 5, when we expect to convert to common.

At that point, the dilution from the pick on the equity front is mitigated.

Okay.

Kind of funny you can't buy the preferred back, but can convert it to common and buy common back.

If you can talk those guys into selling it that price.

Right.

Okay.

The 11 million shares difference between the basic and diluted shares.

It sounds like 7.1 million plus or minus is from preferred, is that right?

In the quarter, about 10 million difference related to preferred.

That will change in the third quarter because of offering that the preferred stockholders did in May of this year.

They converted 3 and a half million shares into common in May and the company went out and organized fashion to sell that stock in May of this year.

So, 7.1 remaining is not the total amount that is in, it is 10 or 10 and a half million, between the basic and diluted.

The other impact is just the options.

Right.

Great.

Okay.

Thank you.

Your next question comes from Verna Barshay.

Hi.

Congratulations on a great quarter.

I had a question about the third quarter guidance and was trying to make sense of it.

In terms of the range you gave for revenue, it seemed flat revenues, while you have guidance of positive comps and new store openings.

So, what is the offset to that to keep the revenue flat?

The guidance that we give, we have given for the quarter, given the trends that we talked about in terms of being down 3000 accounts at the end of June from the end of the year, there is some consideration for that.

Mark made mention in opening comments the advertising plan and promotions we put in place so far in the quarter only slight consideration for that in the model.

And, you know, we view it as potentially conservative.

It is a (inaudible) promotion.

We are not generating revenue.

Again, we will test the two weeks or so from now and see how many rents are paying us.

The fact is we don't know how many, so it is consideration for that.

I am sorry, when you said down 3000 accounts since June 30th?

No, when we ended June 30th.

Wouldn't that be included in the comps?

not necessarily.

You lost some of the new stores not in the comp pool, you are saying?

Exactly.

I know you have addressed this in previous presentations.

You have got sort of big plans in terms of store openings this year and next year and you know, at what - what kind of models are you using in terms of how to get to how many stores?

Is full penetration of this market?

I know you talked about it being not fully penetrated and being plenty of room to grow.

In terms of demographic studies or other real estate studies, how big do you think you can get in terms of numbers of stores before you start (inaudible) yourself?

There is a couple of ways we look at it.

We know - again, some of the things we have thrown out in the past, when you look at penetration today.

There are approximately 8000 stores in the industry and Dallas-Fort Worth is an example.

There is one industry of rent-to-own store for approximately 25,000 people.

We are in markets or state more penetrated.

The city of Indianapolis is an example, one to 17,000.

Conversely, there are markets or areas where California is an example or New York, that relationship is one to 120,000 plus.

So, part is driven by looking at what do we think is a duplicable model.

One to 25,000.

If you use that as starting point and look at the population and density in towns and so forth.

That in itself is support about 4000 more store fronts and it is important to note, when we talk about a successful store, and that is a store doing $800,000 a year in revenue and 20% EBITDA margin, plus, we are doing that serving a base of approximately 12 or 1500 customers, of which only 4 or 500 are absent at one time.

They are rotating in and out of the transaction.

If you have the segment or population of 20,000 people, what we are looking for is that small group that fits the demographic profile in terms of age, income levels and so forth that needs this product or service. Again, we are talking 12 or 1500 people.

Very much a neighborhood store.

They live within two to three miles in the urban areas.

Some of the other statistics.

Look at who is this customer we serve?

Low to middle income, blue color, cash or credit constrained.

We target household incomes in the $20 to $50000 range.

There are approximately 40 million plus households in the U.S. that fit that.

Not to suggest they are all in a rent-to-own store.

There are 40 million.

The entire industry served 3 million of those.

Significantly opportunity there.

Look at the unbanked sector.

The number is 30 million households unbanked.

Certainly we would view those as potential customer that is need our products or services. I was going to add, if you are familiar with Family Dollars or Dollar Generals, I throw them out because of similar demographics in terms of the customer they serve and the environment and so forth.

I believe it is Dollar General in 35 states and has 5000 locations or thereabouts.

Family Dollar in 28 states with (inaudible) locations.

So, again, when we look at who else is providing similar products and services, we look at the population, density and so forth.

We believe this industry has potential of doubling in size before it reaches penetration.

When you pick that 25,000 person demographic area, which might be right for a store, is that 25,000 people who live within a certain number of miles and are in that economic category?

Again, in urban areas within a 5 or 10 mile radious.

Get into rural areas and expand to a 20 mile radious.

Okay.

Thank you.

Your next question comes from Joe Feltman.

Hi, guys.

Congratulations on the quarter.

Just most of the questions have been answered.

One more about your outstanding litigation and just if you can update where that stands now?

Well, the global settlement on (Wilfoam), the gender settlement, we anticipate being complete by the end of the year.

It has been approved in the courts.

And, should be finalized by the end of the year.

Wisconsin, we are still in negotiation with the attorney general trying to get that settled.

Not much new to report.

We are in negotiations with the ag about business up there and the negotiations are going pretty well.

The line of communications is open and having good conversation with the attorney general. So, -

That should be handled before the end of the year, in the next quarter, is my guess.

The only two we see as significant.

I don't have the queue in front of me to recall exactly.

You will recall that is a case we assumed when we bought (inaudible) outstanding for quite sometime.

There were two claim necessary Felone.

One dealt with interest rate disclosures and we have won summary judgment on that.

The other was price constantability, which the court has not ruled.

It has been laying there. The other, I guess, of course, would be the securities claim brought up at not quite this time last year, last fall, due to third quarter pick-up, if you will.

There is nothing related to report on that one.

It is being consolidated by the courts and we expect this fall we will have a opportunity to get into that.

Great. okay.

Thanks.

Your next question comes from Bill Faults.

Good morning, everybody.

I tell you what, I am just going to give you a call back.

This has gone on a long time.

I will get in touch privately with you guys, Bob, Mark and David.

Appreciate it.

Good quarter.

Talk to you in a bit.

Next question from John Emory.

This is more of observation maybe than a question.

But, relating to earlier point about decline in inventory on rent.

You also kind of related that had a spike in the percentage of depreciation as a rate of rental revenue, is that right, for the same reason you talk body?

Yeah.

Actually it didn't go up as much as you might have thought.

In other words, if you go back historically, back a year or so ago, our depreciation was approximately 20.6%.

That had climbed to 21% during the third and fourth quarter because of the discounting program, which we have since stopped, obviously.

It has now come down to 20.8%. 20.7 in the second quarter, excuse me.

The fact is, John, if I had left everything alone, if you will, in terms of rates and terms I talk body earlier, I suspect it would be lower than 20.7.

It might be down to 20.5.

On one hand, we had the benefit of discounting program, which frankly, I knew.

We were going to lower the terms, the rate might go up a little bit.

We had benefit of a discounting program and that coming down. - going away and rate coming down.

Yeah.

It worked well.

Thanks a lot.

Your next question comes from Allan Rifkin.

Good quarter.

When you run one of these typical promotions such as in July, can you quantify like of the incremental agreements that are added, how many are from new customers, as opposed to new customers taking out additional agreements?

We have looked at that, more than half are new customers. 50% new customers.

Given the success there, are you taking a hard look at possibly running even more of these going forward?

You do it at the slowest times, like July.

If we do it again, it won't be until next year, maybe January, to get over the January hump with a promotion like that.

You do it maybe once in January and once in the summer is all you do it.

Not obviously much of a need in the fall when they are coming in freely, if you will.

The other thing we know about promotions is that the success rate of them, when I say success rate, the key after the fact is pretty consistent with normal, also.

Given the success we have had thus far and assuming it runs the normal course, again, I am pretty encouraged about how it is working for us.

With a terrific cash flow you guys are generating, there are a number of things you can do with the money.

Can you prioritize, Mark, the level of importance between store openings, reducing debt, buying back stock, acquiring stores and acquiring accounts and maybe list them, if you will?

Yeah.

I touched on it earlier.

I am happy to recircle it.

First and foremost, we will continue to invest in business.

I say that, that implies openings and further acquisitions is very good use of funds.

Economics are strong.

We know results are good.

So, we are certainly going to continue on that front. In terms of deleveraging, again, I am comfortable with where we are now.

We are less than two times.

Robert said 1.7.

You know, given the amount of cash we are throwing off, certainly that is a use and we will continue to evaluate on that front. I mentioned - I don't know if you heard, in terms of stock buyback, the board authorized $25 million share repurchase in the last 10 days or so, we brought $12 million, 240,000 shares .

We will continue to look at that going forward.

While I don't have particulars at this point, given our overall strength in terms of operating results, our management team and so forth, you know, at some point, do we look at other products or services?

I don't have particulars, but I do think there are other opportunities for us.

Again, thinking of who the customer is what limited accesses they have for traditional things.

There may be other opportunities on that front, as well.

Okay.

One more question, if I may.

When you purchase accounts from locations in close proximity to existing stores, would I be correct in assuming accounts are automatically figured into the comp base of the stores in which they are added to immediately?

We pull them out of the comp until the first anniversary of the 12 months of being in.

Apples to apples. (inaudible) any time the stores or accounts are acquired, they are pulled out until they anniversary a year or five quarters later.

Comp is not artificially inflated.

Okay.

Quarter over quarter analysis.

Conservative way to approach it.

Okay.

Thank you very much.

Operator, we will take one more call and be available after the call to answer any questions for individual that is didn't happen to get through.

The final question comes from Noble goldberg.

Good morning.

Easy one.

Off the cash flow statement, can I get the rental merchandise purchased and the acquisitions?

The acquisitions was 27.2 million dollars and the -

For 6 months or the quarter?

For the quarter.

I don't have the quarter broken out separate.

The 27 is for the year.

The first six months of the year.

Then, the cash flow for merchandise purchased was about $175 million for the first 6 months of the year.

$175 million.

Thank you, gentlemen.

Folks, we appreciate everyone's time and interest.

We are certainly available for follow-up question that is anyone has don't hesitate to call us.

Thanks again.

We look forward to speaking to you next quarter.

This concludes today's conference. 01:18:38 You may now disconnect.