Upbound Group Inc (UPBD) 2002 Q4 法說會逐字稿

Good morning, and thank you for holding.

Welcome to Rent-A-Center's fourth quarter and year end 2002 and earnings release conference call.

At this time all participants in a listen-only mode.

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

If you have a question, you will need to express star, 1 on your push-button phone.

As a reminder, this conference is being recorded Tuesday, February 11th, 2003.

Your speakers today are Mr. Mark Speese, Chairman and Chief Executive Officer of Rent-A-Center;

Mr. Mitch Fadel, President and Chief Operating Officer;

Mr. Robert Davis, Chief Financial Officer; and Mr. David Carpenter, Director of Investor Relations.

I would now like to turn the conference over to Mr. Carpenter.

Please go ahead, sir.

Thank you, Tomia.

Good morning, everyone, and thank you for joining us.

You should have received a copy of the earnings release distributed after the market closed yesterday that outlines a significant operational and financial achievements that we made in the fourth quarter as well as the full year 2002.

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

Finally I must remind you that some of the statements made in this call such as forecasts, 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 10Q for the quarterly period ended September 30th, 2002, as filed was SEC.

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

I would now like to turn the conference call over to Mark.

Mark?

Thank you, David.

Good morning.

As always we appreciate everyone's time and interest in joining us this morning and we are very pleased and excited to report to you our results for the fourth quarter of '02 as well as for the fiscal year ending December 31st.

Additionally we'll share with you our goals and objectives for 2003, which I think you'll find exciting as well.

Also, as I think most of you are not' wear, we have announced the completion of the acquisition of the 295 stores from Rent-Way over the weekend.

So we'll also share some insight with regards to that acquisition in terms of expectations.

First, I am pleased to report that the demand for our business remains strong, even in this continued soft economy.

As our press release mentioned, we've enjoyed both record revenues and profits for the quarter and the year as a whole.

The fact is many of the initiatives that we began implementing over a year ago have been successful and we continue to see the benefits of those.

We're seeing strong customer traffic, the pricing initiatives that we implemented a year ago, along with the new store openings and the acquisitions have all led to revenue increases, and that, coupled with the realization of the cost containment initiatives that we implemented, such as the regional pay plans, some of the marketing and advertising synergies and leverage that we spoke of, as well as the general cost controls, have all led to improved margins and earnings.

All the while, we continued to invest in and solidify our human resource and other support functions and departments to ensure an environment that creates opportunity for growth and success.

The bottom line is we've made significant advances and we've enjoyed strong operating and financial results for the year.

As you saw in the press release, our total revenues for the year exceeded $2 billion, increasing 11% from 2001.

Net earnings increased 43% to $175 million.

Of equal importance, we generated nearly $295 million in cash flow from our operations.

Not only did that allow us to fund all of our growth which we'll speak of, but it also allowed us to pay down over $180 million of debt and repurchase over $65 million of our common stock.

All in all, we're very pleased with the successes that we've generated this past year, the improvements that we've made, and how we positioned ourselves going into 2003.

Having said that, let me share a little bit about the recent acquisition.

Again, as we mentioned, we have purchased 295 stores from Rent-Way.

The purchase price was $100.4 million, or slightly under ten times monthly revenue.

That transaction was closed over the weekend after receiving the necessary government approval and was funded entirely from cash on hand. $90.4 million was paid at the time of closing with a $10 million holdback, $5 million for 90 days, the remaining $5 million for 18 months.

Now, this transaction was appealing to us for several reasons.

First, it is consistent with our strategy for growth.

As most of you know, we have done a significant number of acquisitions over the years and have done so with good success.

This acquisition allows us to solidify our presence in many areas, as well as enter new areas for the first time.

Another reason this transaction works for us is our ability to consolidate a number of these unprofitable locations.

Eliminating duplicate expenses while maintaining the benefit of the additional revenue stream.

On that front, our plan is to keep approximately 40% of these stores open and to consolidate the remaining 60%.

We'll be assuming only the leases of those locations which will be kept open and it's for these reasons that we believe this acquisition will be neutral to earnings during the remainder of the first quarter and add approximately 15 cents in earnings for the year.

The fact is we don't view this any different than the past acquisitions.

There's not inherently different about these locations, or our belief as to what the improvements and enhancements that we can make to them over the next 18 to 24 months.

From an assimilation or integration standpoint, we view it very positively.

These stores are scattered throughout the country from the west coast to the east.

It is not a significant drain on management or the infrastructure we have to roll these stores into our business model.

In fact, the conversion will begin Thursday of this week and over the next 30 to 45 days, we expect all of the stores to be converted to the Rent-A-Center business model, information system and so forth.

We're excited about the opportunities again present in these stores, but again, we don't view it as a significant drain.

We plan on continuing our other new store initiatives, our expectation is to continue opening new stores.

We expect to add 80 to 100 denovo openings throughout the course of the year and once we get beyond the assimilation period of again 90 to 120 days, we will then begin looking at other opportunist I can acquisitions that make sense for us.

Let me turn it over to Mitch.

I know he wants to provide some more detailed information on the results and then we'll have Robert give some other financial information.

Thanks, Mark.

Certainly was a good quarter in many ways.

Our phenomenal growth numbers continue to be driven by new stores, acquisitions, comp store growth, and the margin enhancement that comes from comp growth in a predominantly fixed cost business.

As you probably already know, our accounts were 4.7% for the fourth quarter with pricing being about 4 1/2 and customer growth being about .2%.

We grew our customer base sequentially by about 1.2% over the third quarter, which was key in achieving the 4.7% overall comp.

A little reminder on how we calculate our comps.

Stores are not in the quarterly comp until their fifth full quarter in our system.

And if we buy that you have our comp calculations again until its fifth full quarter with the acquired and merged accounts.

The same philosophy goes for our annual comps, our yearly comps.

No stores are in there until their second full year, or their second full year with acquired or merged accounts.

Another part of our growth here at Rent-A-Center, of course is our new store plan.

We opened 31 in the fourth quarter alone and have opened 176 in the last 27 months since we started our de novo opening plan.

As many of you have heard before, our first year model is $400,000 of revenue, and EBITDA losses of about $85,000 due to the ramp-up period.

While the 106 have hit their one year anniversary averaged $462,000 in their first year versus the 400 and EBITDA losses are up $68,000 versus the $85,000 in their first year.

Our second year model is to do $650,000 in revenue and about 80,000 of EBITDA profit.

While the 33 that have hit their second year anniversary averaged in their second year $711,000 versus the $650,000 in revenues, and over $115,000 of EBITDA versus the $80,000.

So these stores are running well ahead of our model for new stores.

I've got to tell you, the ones we opened in 2002 that have not hit their one-year anniversary yet are actually off to even a better start than the ones I just reviewed for you.

The other part of our phenomenal growth comes from margin enhancement.

Really it comes from two places.

Our cost control initiatives we've put in place in the fall of 2001, as well as the flow-through from the strong counts.

Our pre-tax earnings in the fourth quarter, even with the delusion of the expanded new store plan, were 14.4%, pre-tax earnings of 14.4% versus 9 1/2% a year ago in the fourth quarter.

So we're growing revenues through our strong comps, a better than modeled new store plan, opportunistic acquisitions and putting more on the bottom.

Pretty darn good combination we believe.

A couple of other quick points.

Our collection efforts remain very consistent.

As most of you know, we have a goal of no more than 6 1/2% of our customers' past due one day or more at the end of the week.

The 13 weeks in the fourth quarter we averaged 6.1%.

Our losses from product that is written off on or before the 90th day of delinquency also remained very consistent at 2 1/2% for the quarter.

On the employee front, as Mark mentioned, the enhancements were making through our HR department are starting to pay dividends.

Our turnover has trended down during the past few months when compared to historical numbers.

Some of that has to do with the job market out there but a lot of it has to do with some very good programs that are being accomplished already by our newly formed HR department led by Jennifer wisdom.

So in summary we've got a great business model, we got the best people in the industry and the results continue to prove it.

Robert?

Thank you very much, Mitch.

Speaking of those results, I'm going to provide some more detailed financial information after which my conclusion, we can open up to questions.

Again, the total revenues for the quarter increased $43.2 million, or 9% to $522.2 million during the fourth quarter of 2002 as compared to 2001.

This revenue growth was driven by revenue from new and acquired stores as Mitch mentioned, as well as the growth in our same-store sales of 4.7%, which is before 70 basis points higher than our guidance range of 2% to 4%.

This revenue growth translated into nearly 45% growth in our diluted earnings per share for the quarter of $1.26 which compared to 2001.

EBITDA was a margin of 19.4%.

An increase of 340 basis points from the same period.

Prior year.

Illustrating the margin enhancement that Mitch alluded to earlier.

We would expect this number to remain flat to slightly up for all of 2003, primarily the result of our goal of continuing to open new store locations.

As a matter of fact, we expect to open 80 to 100 in 2003 versus the 70 we opened in 2002.

As well as the fact that the acquired stores frb Rent-Way are starting at a lower margin than our existing stores.

Again, this speaks to the leverage and flow-through associated with our business model.

From a cash flow perspective, the company generated $294.5 million in cash flow from operations for all of 2002.

And nearly $198 million in free cash flow before financing activities during the same period.

After giving effect and consideration for the funding of litigation settlements that occurred during the fourth quarter of 2002, the company generated over $84 million in operating cash flow for the quarter ended 12-31-02.

The strong cash flow allowed us to finance the Rent-Way acquisition on hand.

We had the financing to approximate $150 million, still allowing us to achieve all stated business objectives without incurring additional indebtedness.

Our cash flow has provided the following benefits in 2002.

We opened 70 new store locations, 31 of which occurred in the fourth quarter.

We acquired 209 stores of which 83 we kept open.

We reduced debt by nearly 26% since January 1st of this year, or $181.2 million.

We repurchased $65.6 million of our outstanding common stock and had capex of $37.6 million for the year, 9.9 million of which came in the fourth quarter.

And still ended the year with $85.7 million with cash on hand.

So while I'm talking about debt and cash flow, I would like to take a moment to elaborate on the comment in the press release regarding the amendment to our senior credit facility.

Specifically during the fourth quarter, we amended our senior credit facility to provide, among other things, additional flexibility for stock repurchases, subordinated debt repurchases, as well as potentially paying a dividend.

We now have an initial restricted payments basket of $130 million.

In addition, the basket builds at the rate of 25% of consolidated net income each quarter.

Therefore, after giving effect for the fourth quarter of 2002, we now have a basket of approximately $141 million without the dollar-for-dollar obligation for debt paydown as was the case before.

We certainly view this as a significant positive, particularly in light of the weakness in our stock price from time to time, as the short sellers look to create opportunities for themselves.

As was the case late last week.

Specifically, as we understand, rumors of accounting irregularities associated with our company began to circulate last Friday, which cost significant pressure on our stock.

I can tell you those rumors are totally false and unfounded as we have recently finalized our 2002 year end audit, all numbers associated with our earnings announcement are final audited numbers.

That being said, however, with our amendments to the credit facilities and our restricted payments basket, we are now in a position to capitalize on any future opportunities such as this.

Turning to some credit statistics, our consolidated leverage ratio at the end of the year was 1.25 times.

Interest covered was 6.35 times.

And debt outstanding at the end of the year was split between term debt of about $249.5 million and high yield debt of $271.8 million.

In terms of our earnings guidance, as mentioned in the press release, we expect diluted earnings per share of $1.34 to $1.37 for the first quarter of 2003.

And $5.45 to $5.60 for all of 2003.

This is 15 cents higher than our original guidance that we issued last quarter.

We expect total revenues between 550 and $500 $55 million for the first quarter of '03 and between $2.1995 billion and 2.23 billion for the entire year.

This guidance after giving effect for the Rent-Way acquisition and the anticipated new store openings but prior to any other acquisitions completed after 2-10-03, and as Mark mentioned, we will be pursuing additional opportunistic acquisitions in another 90 to 120 days.

We expect a comp of 2-4%.

With that guidance update, we would now like to open the call to any questions.

If you would please fill the queue for questions.

Thank you.

At this time I would like to remind everyone, if you would like to ask a question, you will need to press star, 1 on your push-button phone.

We'll pause for just a moment to compile the Q-and-A roster.

Your first question comes from Arvin Mateea of SWS Securities.

Morning, guys.

Great quarter.

Good morning.

Morning.

Just a couple of questions.

One, I guess starting with the customer traffic tends, .2% I think you mentioned, Mitch.

Is that a concern to you or do you just think that that's more within the range of what you would expect?

And then a couple of questions on the Rent-Way deal.

I guess looking out later this year in, you know, future quarters, how do you think the Rent-Way top line growth is going to be for the stores that you are going to keep open?

What's your expectation there?

And, you know, what are the collection trends of these Rent-Way Stores?

Let me take a stab at the first part of the question anyhow.

The fourth quarter count, not overly concerned about it.

I mean, the 4.7 is still a strong count.

We had good sequential growth.

We're comping over some big numbers from last year in the fourth quarter.

So no, we're not concerned about traffic.

I mean, in this environment, to have customer growth, you know, we're not overly concerned with it.

Our deliveries in the fourth quarter were above last year's deliveries.

There is a few more people paying out than last year to make up for that, to kind of wash it out.

So no, we're not concerned about that.

Traffic remains strong.

On the Rent-Way front, as far as growth in the stores that we're keeping open, you know, we would anticipate them being, you know, stores that they are small stores.

So they are going to grow once we asimulate them into our system and grow better than probably the typical comp rate.

You know what our new store model looks like, they would be stores that I would say would pick up in about the second year of the model.

Yeah, the average kept store, if you will, is starting with a revenue stream of about $36,000 a month in revenues, and so when you get out a year from now when they come into the comp rate, certainly to expect double digits is acceptable and that would be consistent with the past.

And I don't see anything with these stores, either, that would allow us to do that.

Your other comment about the collections, you know, their standards are frankly a little different than ours.

Their stated objective has been to close at 10% when in fact this past Saturday or for that matter the last six weeks, we've been getting data on these stores during this period, if you will, before the closing, they have been averaging week endings of about 11% and of course their openings at the beginning of the week are significantly higher, as you would expect and, you know, it's consistent with many of the other acquisitions that we've done in the past.

It's not unusual for them to have higher [INAUDIBLE] and that is part of the modeling that we have to do.

We don't expect to bring that down in line in the near term -- well, certainly in the near term but when I say near term, I'm talking 30-60 days and it's a case of working with those customers, establishing proper due dates, and so forth.

But they are starting out higher but pretty consistent with a lot of the other acquisitions we've done I think is the key takeaway there.

So how long, do you think as you complement your standards, may be tighten up the standards over time, do you think it's going to take about a year to get to your 6% level?

No, no.

Again, historically it's about a 60-day period.

Okay.

And you don't want to be overaggressive on it.

It's not the intention.

We don't want to lose the customer but it's not as timely as you might think it is, either.

You know, again keep in mind when you are talking a store that's doing $36,000 a month in revenue, you are dealing with on average maybe 300 customers.

The 10% delinquency implies 30 past dues.

Well, to get the customers, to get down to 6%, you are talking 24 past dues.

So again when you break the numbers down, we're not talking astronomical hurdles, if you will.

And so, you know, over the course of each week, you get a couple of customers on track, you know, six, eight, ten, twelve weeks out, you're within the standard.

Yeah, we'll be there in 60 days like most of our acquisitions, Arvin.

Just a couple of P&L type questions.

The franchise sales and income level was a little bit below what I was looking for.

Anything to be concerned about there?

And then also the depreciation of merchandise percentage was a little bit higher than what we were looking for.

Do you want to take the franchise?

No, nothing to be concerned about on the franchise side.

They do have a few less stores than we had last year in the fourth quarter.

And so on a per-store basis, the sales are strong.

I guess they have got about 20 or 25 less stores than they had last year in the fourth quarter and because of stores that we've bought over the years and I think as you know, at the beginning of the year, the financing for the franchise, was capped out so to speak and they had to get new lines -- or they had to get new lines.

So that's in place and they are really poised to have a great growth year and get those stores back up there.

So no concern there.

I think they are going to get those stores back and be, you know, the stores that they were down this year.

Of course, as you know, you know, you look over -- you look at [INAUDIBLE] over seven years that we've owned it and they are fluctuated between 300 and 330 stores, you know, for the seven years, they opened anywhere from 25 to 40 a year and, of course, you know, we end up buying some every year, people wanting to retire and exit the business.

So, you know, you pretty much stay in a pretty tight range but they are down a few stores this year compared to last year and I think we'll get those back in 2003.

So nothing really to be concerned about there.

I think the other [INAUDIBLE] on the margin on that business for us is very small.

When you look at the sales and the cost of the sales, it's not a big component.

Your other comment about depreciation expense, it has gone up a little bit, which frankly is what we've modeled all along given some of the pricing changes that we did over a year ago.

And again, we'll remind you that it was part of the initiatives was raising the rental rate $1 or so a week and at the same time reducing the term.

So essentially we're depreciating the unit quicker because the term has been shortened and that does cause depreciation to go up a little bit as a percentage.

But the offset is you are generating more revenue.

More gross margin dollars, slightly less percentage, Arvin, but more dollars based on the way we handled pricing.

Exactly.

So overall we consider that a good thing with more dollars.

And finally, care to comment about the trend so far for same-store sales in the month of January and in the first week of February?

It had our expectation.

Nothing surprised us.

You know, we have a payout this is time of year with income tax returns and they are coming in just like every other year, but no surprises at all in the business the first six weeks of the year.

Great.

Great quarter.

Thanks.

Thank you.

Your next question comes from Allen Raskin of Lehman Brothers.

Congratulations, gentlemen, on an outstanding quarter and year.

Thank you, Allen.

I have a couple of questions.

With respect to the regional pay plan, in hindsight as you look at 2002, can you maybe quantify what the impact was either in terms of a decrease in dollars or even as a percent of your salary line?

On the implementation of that plan?

And looking forward to 2003, can you maybe just give us an update as to what the incremental savings will be?

Yeah, I'll take that, Allen.

At the end of the year, we had expected to be on a run rate of about $10 million in annualized savings throughout 2003.

We are about a little ahead of that, about a million dollars a month.

So about a $12 million run rate as of the end of the year.

Given kind of how we began that program, earlier in 2002, that benefit of $12 million was probably equally spread during the course of the year, maybe about $6 million is what we realized in 2002, but $12 million is what the run rate we're on currently for 2003.

Okay.

Yeah, and I think in terms of your expectations for '03, I don't know that there will be much difference going forward, and I say that as Mitch alluded to, the turnover has improved over the last couple of months and quite frankly hope it continues to do so and think it will.

Again, everybody was grandfathered in.

Those original employees, and they will remain there, and, you know, frankly there's, as you would expect, there's a little bit of offset, not to say we won't get agents bit more this year, but the offset is, you know, there will be some annual probably some pay increases, you know,.

We've got those in our model for those that are there anyway.

So I certainly think we'll continue to run at that $12 million run rate I guess is the bottom line.

Yeah, any future enhancements in our model, Allen, are really offset by having, you know, cost of living raises and so forth.

Okay.

But just so I make sure I understand, but the guidance that you've given, though, is still predicated on a $10 million run rate even though you are trending at $12?

We've got current consideration for what our run rate is.

Initially it was $10 million.

At the end of the year we figured we were slightly ahead of that, factored that into our estimate before we gave guidance for the year.

Okay.

And then one more question, if I may.

With respect to the Rent-Way deal, with you maybe take us through some of the dynamics as to where you see, you know, the $36,000 number going in the next year or two and exactly how you get to the 15 cent secretion in '03?

Let me start that, Allen.

The $36,000 number, this transaction made a lot of sense for us because it gives us about, as Mark said, about 40%.

It's about 120 new stores that at $36,000 are dilutive by themselves, but with the 60% of stores, the other 175 or so that we can merge into our stores, those are very accretive and they will more than make up for the difficult Lucian of the ones kept, kept open because you take the revenue stream and you have a little bit more expense, maybe another employee in the store and so forth but you've got good revenue stream and good flow-through with only the product cost and maybe one more employee in the store coming off of that.

So the accretion from the -- if we were keeping them all open, they would be for us similar to the competitor we bought them from.

But since we consolidated about 60%, it becomes accretive for us in the last three quarters and that 15 cents is really going to be -- it's going to grow a little bit over the year in round number.

It's more like, as Mark said, break-even the first quarter and then about a 4, 5, 6 trend over the second, third, and fourth quarter is how we get to 15 cents.

The kept stores will grow, I think as Mark mentioned, double-digit growth per year for a few years until they are up to our run rate is what we would expect out of the kept stores.

Okay.

We know historically that these stores are down, what, 30% fr their historical highs?

Yeah, yeah.

Down 30?

Okay.

Yeah, it might be actually a little north of the 30% from their historical high, you know, a couple of years ago, and, you know, I think most people know that Rent-Way, you know, had some misuse and, you know, product availability and the store was a little scarce for a period of time and what not, and obviously as we go in and with the infusion of capital and being able to bring in new products, more products, supporting it with marketing and advertising and, you know, all the other things that we do with an acquisition, again, don't view this one any differently, then there's no -- there doesn't appear to be any differences, if you will, and so as we introduce those products, put our pricing model in place, support it with the marketing and advertising, replace the existing units, we have to let them work themselves through the system and as you know, 80% of this inventory is on rent.

So like before, it will take 18-24 months before we've essentially reinventoried the entire store, if you will.

And so over that period of time, we'll get the ramp-up as we do that.

Okay.

And one more question, if I may.

I'm not sure if you can even answer this, but from an ROIC standpoint, how much greater is it as opposed to acquiring stores?

I mean, is there any sort of, you know, benchmark difference that maybe you can shed some light on?

Well, it's certainly higher from when you are buying accounts versus buying the store, but I don't know that we've got those kind of numbers in front of us.

We looked at it on a combined basis for Rent-Way, and any acquisition that we do, particularly larger acquisitions, we want to make sure we're getting a 20% return, and certainly this transaction until total is going to give us a return of 20% or better, and to have broken that out between the two, you know, scenarios of key versus open, we just don't have that calculation with us right now, Allen, but, you know, if you want to call off-line some other time and see if we can't figure it out and work through it, that's certainly open.

Okay.

Thanks, Robert.

Thanks, Allen.

Your next question comes from Dennis Spenselfden of SunTrust Robinson Humphrey.

Good morning, everyone.

Morning, Dennis.

Mark and Mitch, I would have thought -- I guess going back to the split in comps in the fourth quarter, between units and price, I would have thought that since we have now anniversaried the price increase or different pricing formula that the breakdown would have been more like 50/50.

Am I incorrect in that assumption or are we going to be looking at that for 2003?

Well, I think that, you know, the pricing was put in place in the fourth quarter.

So I mean that pricing, that pricing comp was going to build over time.

Our average units are on rent for about four months.

So I think it's not surprising that we had good pricing counts for the fourth quarter.

We would anticipate more of a 50/50 mix going forward in 2003.

Okay.

But probably not totally 50/50 until, what, the second quarter or so?

Probably.

Probably, yeah.

Yeah, yeah.

Okay.

Where is the $1.1 million in renegotiating the credit line expenses booked?

Part of it is in G&A for legal costs and and part of it's in interest expense for amendment fee.

Like 50/50, $500 in one and $600 in the other.

Mark, can you update us on the lawsuit situation?

Something came across the tape, oh, a month ago maybe about the Oregon overtime issue?

Yeah.

Certainly.

The case you are referring to is in Oregon.

It is a claim for overtime, as well as working off the clock, lunch breaks, et cetera.

That case had been out there for quite a while.

So everybody knows, we have a total of 19 stores in Oregon.

It is not a large number.

There is a two-year statute of limitations on those claims and it really goes back to, I think it was filed in mid of 2001.

Bottom line, the state trial court allowed the trial case to proceed as a class.

We don't believe the case has merit and again when you think about it conceptually working off the clock, to say that an individual did that, it probably happened.

But to suggest that everyone there did it, and/or is doing it, was condoned or whatever, I think is without merit and certainly we anticipate pursuing an interim appeal on that case.

We don't believe it has a material or will have a material adverse effect on us, but the Court, the trial court there, the state trial court at least at this point has allowed it to proceed as a class and that's where it is.

I do want to point out, I know that when that came out, they also referenced Washington and California.

It's probably important to note there, the reason being, the plaintiffs' attorneys in the Oregon case and probably not surprising, are the same plaintiffs' attorneys that filed the case against us in Washington and California, similar claims.

Those cases are both in much earlier stages of development.

Frankly, there's nothing really knew to report at this time.

But there are similar claims and just happens to be the same plaintiffs' attorneys, which is why they were referenced with regards to Oregon.

We certainly, Dennis, don't see any merit in them and will obviously vigorously defend all three of those and we've got policies all over the place about, you know, not working off the clock and all that kind of stuff and have had for many years.

So to consider it a class, as Mark mentioned, is, at least in my opinion ridiculous.

You know, I won't tell you that out of 13,000 employees I wouldn't argue if somebody worked off the clock or a manager made a bad decision and of course we would fire that manager for doing it, but, you know, for working off the clock but to say a whole state worth of people working off the clock is without merit in our opinion.

Okay.

And then lastly, Mark, can you just give us your thoughts about stock buybacks versus dividends, as you mentioned in your press release?

Is there a preference for one over the other?

Or is everything --

Well, certainly we're obviously looking at both and we've done the stock repurchase program and Robert alluded to, we'll continue to evaluate and deal with that in the future.

I think with regards to the dividends, certainly there's been a lot of discussion of it and as we all know, the president has it under review about not having a double tax and certainly if that passes, it would give more credence, I think, and we would look at it even further, which was one of the reasons again we wanted to go back to the banks to give us more flexibility with regard to the stock repurchase.

It obviously made perfect sense at that time in conjunction with that to get the dividend opportunity as well so that we'll have that flexibility when and if we think it is the right thing to do.

I can't tell you that as we sit here today we've made that decision, but we've obviously had discussion about it or given it consideration, would want to wait and see what happens from the taxing perspective and then at the same time, we'll have to look to see what our stock's doing at that point in time and decide which one makes more sense but I think it's certainly fair to say that, you know, we're considering all of our options.

Okay.

Thanks, everyone.

Your next question comes from Joe Feldman of Bear Stearns.

Hi, guys.

Congratulations on the quarter and the year.

Thank you, Joe.

Good morning.

A couple of quick questions.

First on the amending of the credit facility.

I know you guys alluded to having about a 2 cent impact in the quarter.

Is that something that would continue going forward?

You know, is there, like, a fee that you guys have to pay for that or is that just like a one-time thing?

Joe, that was a one-time amendment fee of 2 cents.

That's not a recurring impact.

Got it.

And then any impact on the credit rating from this change or anticipated impact?

Not as a result of the amendment or currently a result of the Rent-Way transaction.

Certainly the company feels like, you know, we performed very well over the years in our credit rating.

At the current time, you know, we feel like that we should be able to go back to the rating agencies and make a case for a better rating.

And generally every spring we do go to the credit agencies and give them a general update on the operations and some of the significant events that have span spider since the last time we visited with them.

We'll certainly be transpired.

We'll certainly be doing that again this year.

Currently they both came out, I believe, when we originally announced the Rent-Way deal back in the fall and maintained that the rating currently would not be impacted by that transaction.

Got it.

Okay.

And then another question on the new "Get it now" stores.

I know you guys broke it out in the financials and just kind of curious as to what kind of growth you would anticipate and that the margins are a little lower.

I mean, I have some suspicions as to why, but maybe you could explain why?

I think the initial margins of that business, keep in mind of what we're doing there.

It's taking the rental customer and then we really switch to that concept to have a vehicle, one, to be able to collect accounts that are due us through the settlement with the AG, and also have an outlet for the products as those rental products in return.

So we're selling used products and the margins as we turn over that product and then get in the new product would improve.

A lot of the, a lot of the initial business was conversion business where people that had been renting converted to a purchase agreement.

So we would expect the margins to get better having gotten over that hump in the fourth quarter.

You know, globally how is it doing?

It's kind of about where we expected.

It's really too early to tell a whole lot about it.

Things are working the way we would anticipate them.

We are collecting the revenue due us under the settlement with the AG, we've got an outlet for the product, you know, instead of it piling up, we have a way to sell it.

Where the whole "Get it now" concept stands, it's certainly too early to evaluate it.

But it's hitting our initial goals is to keep the stores open, collect those rental payments and then have an outlet for the merchandise.

The future of "Get it now" is just way too early to evaluate as far as where that concept ends up.

Got it.

And then another question about just your anticipated debt levels through the year.

I know that later in the year, there is a chance that you might remove some of the debt.

Is that still on plan or--

Yeah.

Joe, right now of the $249 million of term debt outstanding, we have a mandatory payment of about $1 million in September of this year.

No other mandatory debt reductions, either on the term debt or the high-yield notes.

What you are referring to is the fact that the $271 or $272 million of high-yield notes are callable for the first time in August of this year, 2003, at 105 1/2. 50% of the coupon.

Certainly our view right now is we feel like the coupon rate of 11% is higher than we would like, and so during the course of this, you know, the first half of this year, we'll be evaluating our options to see if there is a way to restructure our balance sheet and provide a capital structure that's a lower cost of capital and will allow us to continue to have the flexibility that we need to grow the business.

To say that there's anything set in stone or any exact expectations at this point is too early to tell.

Certainly not in our guidance, either, as far as any -- that's correct.

Enhancement that could provide.

And then the one last thing, I don't know if you guys have mentioned or I may have missed it.

Your capex and G&A plans for '03?

Yeah, for 2002 it was $37.6 million. $10 million of that came in the fourth quarter.

We expect about $40 million, maybe a little bit more than that next year.

And I say maybe a little bit more just because these Rent-Way Stores that we're keeping open, we would need to, you know, rebrand those locations.

That's not a significant drain on capital but we would expect it to be somewhere in the similar range of $35 million to $40 million, maybe slightly higher than.

Got it.

Thanks very much, guys.

Thanks, Joe.

Your next question comes from Dennis Kelsrow of Stephens, Incorporated.

A great quarter to say the least.

Thanks, Dennis.

Robert, could you help me?

I should understand as you referenced the basket, it's available under the debt covenants, can you explain what the basket can be used for and also as part of that, could you update us on where you stand in a share repurchase, how much is left and what's authorized?

Sure.

What I was referring to in my prepared comments in regards to the basket is last year we had a restricted payments basket of $54 million that we could use to repurchase subordinated notes.

We also had a 25% of consolidated net income basket that grew each quarter for stock repurchases with a required dollar-for-dollar paydown on debt anytime we did repurchase stock.

What we have done is we have created or amended the facility to allow us to have a total initial restricted payments basket of $130 million.

That $130 million can be utilized to repurchase subordinated notes, repurchase common stock, pay dividends, et cetera.

In addition to that $130 million initial basket, we also have the opportunity for that basket to grow 25% a quarter after we report each quarter net income numbers.

The fact that we had $45 million or so of net earnings in the fourth quarter, take 25% of that, about $11 million gets added to that, $130 million initial basket.

So we have $141 million going forward that can grow each quarter to allow us the flexibility to purchase stock, subordinated notes, pay dividends, et cetera.

In terms of where we are in the stock repurchases --

excuse me.

Without the dollar for-dollar paydown.

Correct.

Without the dollar-for-dollar paydown on the debt.

Right.

In terms of stock repurchase, now we have the flexibility in the credit agreement.

We also have a $50 million level that's been approved by the board.

Out of that $50 million that the board has approved, we repurchased $30.8 million.

So we have about $19 million or $20 million left on the board-approved levels to get us to the $50 million.

And that was a total of 661,000 shares during the course of 2002.

Excluding, excluding the shares we repurchased from the former chairman.

Okay.

Thanks a lot.

All right, Dennis.

Your next question comes from Bill Baldwin of Baldwin Anthony Securities.

Good morning.

Good morning, Bill.

A couple of quick housekeeping items there.

How many stores are actually open at the end of the calendar year?

At the end of the year, we had 2407.

And could you -- .

And that includes the 23 stores from "Get it now."

So if you back that out, 23 stores, then that gets you to 2384 Rent-A-Center stores.

Okay.

But in total stores it would be 2407 then?

At 12/31, that's correct.

Right.

And Robert, tell me one more time.

How much money was spent last year on acquisitions, on store acquisitions?

It was $57, between $57 million and $58 million on acquisitions last year.

It was $57.6 million.

Now, did I hear you correctly saying that operating cash flow for this coming year would be around $150 million versus the $295 it was last year?

Yes, you did.

And the primary reason for that is this year we've had the benefit of not being fully obligated to pay cash taxes as we've had some NOL's and operating losses that we acquired in the thorn America acquisition in 1998.

They are running their corresponds this year.

For the year of 2002, we've paid about $30 million in cash taxes.

We expect that number to grow next year, somewhere in the neighborhood of $120 million or so.

So you've got about a $100 million swing from last year to this year, get you down to the $174 or so and then with the additional new stores we're opening and the incremental working capital investment in the Rent-Way Stores, we would expect that to come down the range of $150 million or so.

Okay.

Thank you, Robert.

And lastly, Mitch, anything going on that you want to talk about that could affect, you think, customer traffic or demand as far as product trends you are going to be seeing next year, you know, new products you are putting in your stores or products you put in towards the latter part of last year that you are seeing some real good response to?

Well, yeah.

I think that's also part of the pricing comp.

You know, Dennis had asked the question earlier about the pricing comp being from the price changes from about a year ago, but the other thing that's helping that is some of the new products, the high-definition big screen TVs that are running for more than the analog ones are really starting to take over.

You know, computers with LCD monitors versus computers with the old style monitors are more popular.

Lap-top computers that rent for higher than the PCs.

So the new products we're putting out there are all on the, the majority of them are on the higher end and that's helped driving the comp, too, and, you know, everything -- you heard me say this before, Bill.

Everything that's going on in the digital world of electronics is a positive.

Right.

Because people will be replacing analog TVs over the next -- I mean, I think the government says next four or five years.

I would say the next seven or eight years because that keeps getting pushed back every year but the next seven or eight years everybody's going to be switching to digital and certainly it's a more expensive television.

So there's more people that are going to have to rent it than buy it.

You know, I'll remind you this business really started with color TVs replacing back-and-white TVs, you know, 30-40 years ago and we really have the same phenomena coming up over the next five years.

It's really going to help from a pricing stand point and a traffic standpoint.

Mitch, do you pretty much have these products you just talked about, are they pretty much rolled out into most all your stores now?

Yeah, they are in all the stores except for the Rent-Way Stores we just bought.

Okay.

Thank you.

Thanks, Bill.

Your next question comes from Scott Miller of Wachovia Securities.

Good morning.

Hi, Scott.

Hi.

I was wondering if you could touch on looking back to the thorn Americas acquisition what you paid for that acquisition in terms of a multiple or monthly store revenue.

Thorn Americas we paid 12.3 times monthly revenues.

Okay.

And what were those acquired stores doing in terms of monthly revenue?

Close to $50,000 a month on an average at the time of acquisition.

Okay.

And what was the progression in terms of getting those stores up to, I guess the $70,000 level or whatever the, you know, your corporate average would have been at that time?

Was that a two-year process or shorter, longer than that?

It is, like many other acquisitions, is about a two-year process because I'll remind you, our products generally last in the system about two years, 22-24 months and therefore any acquired inventory takes that long to flow through the system, getting 100% turnover in that regard.

A lot of the agreements that we acquire are on rent and you can't change prices for on-rent agreements until the customer returns the product and you have an opportunity to send it out under a new rental agreement and so it takes about a two-year process to get up there.

In terms of the ramp, they were pretty significant in the 17-20% range.

The first full year on the comp, I'll remind you if you look back in the year 2000, our total comp was 12.6%.

That was the first full year comp for -- that thorn Americas was in the base and so the 20% or so thorn was doing with the 7 or 8% that we were doing as a company blended to about 17 -- or 12 1/2% for 2000.

We would expect, you know, similar results from Rent-Way, double-digit comps, you know, and taking about a two-year time frame just like it did in thorn Americas.

Okay.

Great.

Thank you very much.

Your next question comes from Ed Antonion of Chart Well.

Just real quick, guys.

What do you think you could refinance if you went out to the market now?

What would you have to play coupon to replace your sub debt?

Well, we, of course, during the period between the time we announced Rent-Way and us closing, we did have very, very premature conversations with some of the investment banks.

They were indicating to us that we could get high yield, between 8 1/2 and 9%.

Certainly we knew that the cash flow from operations, as well as our existing revolver at the time gave us the flexibility that we weren't required to go out and raise that capital.

So if we went out to the market today at 11%, it could get replaced with 8 1/2 to 9%.

Now, on the term debt side, right now we're paying one and a half plus a spread of 2-2 1/2%.

So it's about 4-5 1/2% on the term debt side.

Our view is initially -- and again it's too premature to talk about expectations, but our view is we would prefer term debt as opposed to high yield for the lower cost of capital.

Also, coupled with benefit and the flexibility of being able to pay the debt down instead of being locked into a term where you can't repurchase the notes.

So I could come up with a scenario where you take, you know, under $600 million of long-term debt and come August, assumably it could be a little bit lower than that but some $600 million and kind of put that out at under 5%.

I mean, you've got $50-$60 million in your interest expense.

We could see getting into a run rate of, you know, closer to $30 million versus $50-$56 million.

Yeah.

Conservatively speaking, our term debt, the current spreads we're paying is not where we would be able to get a price.

The banks these days aren't giving spreads as low as ours currently are because we raised that capital in an environment where LIBOR was 5 1/2-6% at that point in time with the spread that we had of, you know, 1 1/2-3% depending on the [INAUDIBLE].

Certainly LIBOR now being 1 1/2%, the spreads would have to increase but conservatively speaking, if we -- as an example, if we refinance just the bonds, the $270 million or so from 11% to call it 7%, that's about a 15-20 cents add to earnings which is not forecasted. 15-20 cents addition to earnings.

We don't have any consideration for that because it's way too early to tell but that's kind of the back Toth envelope numbers.

Thanks.

Your next question comes from Berna Barshay of ACI Capital.

Hi, guys.

Great quarter.

Congratulations.

Thank you.

I just wanted to focus a little bit on the inventory numbers and, you know, the way you've been able to control your inventory per store, you know, with the growth in sales.

I'm looking at rental fees up 8% year over year and inventory down almost 4%.

So, you know, the key metric I look at for you guys is dollar of sales per inventory.

So it's been improving, you know, sequentially every quarter for about seven quarters now.

So, you know, I guess part of it was from the pricing increase but that's starting to anniversary.

I'm wondering how much this has to do with the migration to the digital products or, you know, is there something else going on in the store level that's allowing you to run leaner?

The majority of what you are seeing is because of the pricing changes we made.

We're depreciating faster because we shortened the terms, which brings down the value of the inventory on the balance sheet, which you are referring to but yet, because the price went up, the weekly or monthly price went up, it's driving the revenue, yet depreciating faster and that was Arvin's question earlier.

So the depreciation% anal by doing that is slightly higher but the gross margin dollars are not even slightly.

They are much higher.

But it's really, 90% of what you are seeing, maybe 95 is because of those changes.

I do think we are controlling the inventory better.

Our idle numbers, we've really stressed in the last year refurbishment of the product.

Our operators are doing a much better job getting, you know, an extra month or two out of product that maybe they would have just sold out in the past that was, you know, reinvesting in the product, really doing a good job through our service department and improving those margins.

Got it.

So I guess, you know, your comment about increasing the depreciation methodology as well as these improving sales for inventory would probably be the refute to say that you are depreciating too slowly?

Yeah, I would think.

So I think that's a good argument.

That, as well as the, we always point out, the -- well, cash flow, I guess we've been talking about quite a bit this morning.

I don't know how we make the cash, if you believe some of these short reports.

I don't know where the cash comes from, but the other thing is the margin on the cash sales product at the end of its life when we sell it to bring in new product or a customer buys it at the end of the agreement, we're averaging 20-25% and that's been very consistent over the years.

So you think if we're underdepreciating and manufacturing numbers that you wouldn't be selling product.

Really some margins at the end of their life that retailers would like to get at the beginning of the their life.

Right.

Well, I believe you.

I just wish everyone else would start.

Well, thanks very much.

Thank you.

Your next question comes from Carla Costello of J.P. Morgan.

Hi.

I'm wondering, I'm just trying to put together a cash flow statement.

I can't see.

Were there any payments for the Wilfong settlement or will that come in first quarter?

No, we funded two litigation settlements in the fourth quarter one was Wilfong, around the $50 million level.

The other was Wisconsin.

It was about $8 1/2 million and that was in my prepared comments I tried to allude to the fact that for operating cash flow in the fourth quarter we had about $28 million in operating cash flow after giving effect to those litigation settlements.

When you add that back in, it was over $84 million or so.

I missed that.

Sorry about that.

No problem.

The other thing that's new to me is the installment sales.

How should we look at that going forward?

Is that going to be continuing, or what is that business about?

Well, that's Compton's piece, Carla.

That's the alternative in Wisconsin, the "Get it now" stores.

It's not a material number.

It's only 23 stores and they are selling product up there.

So you have to book it as an installment sale because we're not in the rental business up there anymore until we can get something done, you know, legislatively, either in Washington or in Madison, Wisconsin.

So that's what we're doing with the product as it gets returned from the rental customers in Wisconsin that we've had to get away from the rental program, but we agreed to get away from in the settlement with the AG.

We're collecting out the rental payments from the customers, the war on rent and then reselling that product so it becomes an installment sale.

So you are not going to see that expand past Wisconsin.

We'll continue to do that in Wisconsin and see how it goes up there.

Is the fourth quarter run rate a good number to look at or does that include the entire quarter's worth of installment sales?

Could you repeat your question?

I'm sorry.

We didn't hear the full question.

Sure the fourth quarter run rate that we see on the income statement, that a full quarter of installment sales?

Or will that actually go up from the $6 million level?

That was the full quarter.

Okay.

That was a full quarter.

Okay.

Great.

And then on terms of the -- that's fine.

You answered the other question earlier.

Great.

Thank you.

Thanks, Carla.

Your next question comes from Phil Buchy of Zebra Fund.

Hi.

The 15 cents earnings addition that you guys have told us for this year, did they include the Rent-A-Center acquisition?

You are probably referring to the Rent-Way acquisition.

And that is the 15 cent guidance range that we raised our original guidance that we issued in the fourth quarter, $5.30 to $5.45.

We added the 15 cent accretion to the Rent-Way deal to our original range, to our new estimate of $5.45 to $5.60.

Okay.

Thank you.

Your next question comes from Amir of El Many Ridge Capital.

My question has been answered.

Thanks.

Okay.

Your next question comes from Ken Garson a of Mason Capital.

Hi.

I had a question concerning the inventory.

Maybe I missed it from the previous question, but the on rent inventory is not going up and your sales are going up tremendously.

It's very impressive year on year.

Can you explain that?

Well, the merchandise for rent, year over year is lower.

It went up sequentially if you go back and look at the third quarter, the merchandise on rent I should say went up about $4 million or $5 million and the the rent went up about a million the third quarter from the fourth quarter.

So it went up about $4 million or $5 million and it all goes back to, what we were talking about earlier, we reduced the length of the contract about a year ago, going forward.

I mean, new contracts put out.

We changed our pricing, raised prices a buck or two on the front end, a buck or two a week, four to eight on a monthly basis.

So we raised prices slightly, shortened the terms a little bit, which is depreciating the merchandise faster.

We're making more gross margin dollars monthly and we're also depreciating faster which, because it depreciates based on the term of the agreement.

So when you shorten them, you depreciate faster, make more margin dollars and reduce the cost of inventory even faster.

The help for rent generally speaking stays pretty consistent.

You know, frankly it's driven by -- we try to maintain approximately $150 to $100 -- 150 to 160 piece of inventory at any given piece in time and that will grow really more than anything just based on the number of stores that are in there.

There might be some slight fluctuation but, you know, the extent we're maintaining the 150 to 160 pieces, you are going to be in that same neighborhood.

Can you tell us what the rental merchandise acquisitions were in the fourth quarter?

Well, the 31 new stores that we opened, how many did we buy, Robert, in the fourth quarter?

Fourth quarter we purchased 19 stores and 42 account purchases.

So that's --

61.

That's about 90 stores worth of inventory and probably, I don't know, --

is that your question or are you wanting to know --

there's two parts.

You have two lines that are typically cash outflows.

One is the purchase of property and assets and the other is acquisitions of businesses.

Can you tell us what those two numbers were for the year?

Acquisitions of businesses for the year was $57.6 million.

Okay.

Which includes the inventory, and I don't have the inventory purchases for the year in front of me.

Well, it was $27.6 through the third quarter.

So I assume it's a little bit higher now.

No, that's capex, which is for PP&E.

Merchandise purchases was in excess of $500 million for the year.

I don't know the exact amount.

I'm talking about the middle part of the statement.

What did that aggregate to from investing activities?

What was that total number for the year?

We had $37.6 million in capital expenditures, about $500,000 add for sale of property assets, and $57.6 million in acquisitions.

So --

about $100 million.

Yeah, about $100 million.

And can you tell me on the top part of the cash statement where it says merchandise rental acquisitions, through the third quarter it was $238 million.

What was that number for the year?

For the year it's I think $342.9 million in inventory.

Okay.

Thank you very much.

Okay.

For the year?

Well, it's the net number after --

okay.

Thank you.

This concludes the question-and-answer session.

Gentlemen, are there any closing remarks?

As always again, we appreciate everyone's time and interest.

If you do have any follow-up questions, as always, we are available.

We look forward to talking to you again next quarter as we kick off 2003.

Thank you very much.

Thanks.

This concludes today's Rent-A-Center's fourth quarter and year end 2002 earnings release conference call.

You may now disconnect.