Upbound Group Inc (UPBD) 2016 Q4 法說會逐字稿

Good morning and thank you for holding. Welcome to Rent-A-Center's fourth-quarter earnings release conference call.

(Operator Instructions)

As a reminder this conference is being recorded Tuesday, February 14, 2017. Your speakers today are Mr. Mark Speese, interim Chief Executive Officer and Chairman of the Board of Rent-A-Center; Maureen Short, interim Chief Financial Officer; and Daniel O'Rourke, Vice President of Finance. I would now like to turn the conference over to Mr. O'Rourke. Please go ahead.

Thank you, Shannon. Good morning, everyone, and thank you for joining us. Our earnings release was distributed after market close yesterday which outlines our operational and financial results for the fourth quarter of 2016. All related materials are available on our website at investor.rentacenter.com.

As a reminder, some of the statements provided on this call are forward-looking statements which are subject to many factors that could cause actual results to differ materially from our expectations. Rent-A-Center undertakes no obligation to publicly update or revise any forward-looking statements. These factors are described in our earnings release issued yesterday, as well as in the Company's SEC filings. I'd now like to turn the conference call over to Mark. Mark?

Thank you Daniel. Good morning, welcome, and thank you for joining us. Today we will discuss in greater detail our fourth-quarter results, share more about what we have assessed over the last several weeks and months, and more importantly, where we believe our opportunities lie and the actions that we are and will be taking to improve operations and drive greater shareholder value.

As we mentioned in the pre-announcement call last month, the fourth quarter proved to be much more challenging in our core stores than we anticipated. To put it plainly, we are not satisfied with these results. As we outlined, the POS system outages during the third quarter, the heavy promotional activity and the quarter's historically high delinquencies, as well as other challenges impacted the results. On a more positive note, however, we are encouraged that we have not experienced performance issues with the POS system in more than three months.

Now, that said, we have been taking a hard look at the business and recognize that urgent action is necessary to improve our performance and the results. With that, I would like to first address where we believe we went wrong and what we are doing to fix it. First and to be frank, many decisions over the recent past were driven primarily by a drive to manage costs. What made Rent-A-Center an industry leader was delivering high-quality products and services, a best-in-class customer experience at a fair price, and hiring and retaining great talent. We lost our focus in these key areas and execution at the store level suffered as a result.

Today we are focused on resetting the business by returning to these differentiators to meaningfully improve our core business. We will accomplish this by improving our product mix, delivering a better value proposition, stabilizing our workforce and improving our account management. I would like to spend a few minutes detailing how we intend to achieve each of these objectives.

Regarding our inventory management or product mix, over the past year or so the Company gradually shifted away from offering higher-end aspirational products to renting more, less expensive or promotional products. This caused our mix of products on rent and our in-store inventories to shift towards lower priced merchandise. Now while we have always offered a selection of good, better and best products, historically we know that many of our customers want and will select the aspirational, better or best products in a category. This provides more value to the customer and drives a higher ticket for us.

However, in our current inventory there simply is not enough of the better and best product offerings. As we work through our inventory in the near term we will remain focused on achieving the optimal mix, which historically had better and best products at approximately 60% of our mix, while today better and best comprise only 45%. To provide you with some sense of the impact our shift to these lower-priced products has had, our average monthly rate is down about 8% from just a few years ago. We believe reversing this trend in our inventory will deliver a better customer experience, better results for the Company and drive value for our shareholders.

Now the value proposition, over the past couple of years we have moved away from our traditional two-by-two pricing formula and introduced more variability into how and at what level we price our products. While some of these changes made sense, the details show that there are pricing opportunities that would provide a more compelling value proposition for our customers, and at the same time enable us to recoup our product investments sooner in the life cycle.

For example, today, products are in our system, our rented more often yet they are on rent less time on average and generate less rental income over their useful life. The ROI on our product investment is down almost 10% over the last two years. Where we had collected an average of 3 times our inventory costs over the life of the product historically, it has slipped to 2.7 times today.

By providing a better value to our customers, we intend to turn over the inventory faster, at the same time extend the average time on rent. The shorter inventory cycles and improved agreement retention will improve cash flow and increase the ROI on our product investment. And overall, as you will hear me say throughout my comments today, we need to and will be more customer centric in our offerings.

Regarding people, we must also stabilize our store level workforce. As you may know we implemented a new flexible labor model intended to pull overtime out of the core business by adding part-time coworkers. Under the original flexible labor plan, one full-time coworker position was eliminated in exchange for three part-time employees, and the remaining full-time coworker labor hours were reduced. While this did reduce our labor costs it also substantially increased turnover and negatively impacted our customer service.

Our business has always been built on strong relationships our coworkers have with our customers. The increased turnover and lack of time and continuity to obtain the necessary proficiency in the job negatively impacted our sales, our collection skills and our overall customer experience and relationships. In short, we believe the fewer consistent interactions between customers and tenured, experienced and highly trained coworkers adversely impacted sales and caused higher delinquencies.

To address these challenges, beginning in September, we began adding back a full-time coworker to most stores while reducing, but not eliminating, our use of the part-time coworkers. These changes will add some labor costs back to the stores, but those costs will remain lower than they were before we introduced the original, flexible labor model two years ago. In any event, we believe that investing in our front-line coworkers can only improve customer satisfaction and business results. In fact, we have already begun seeing a positive impact on our store level turnover already.

The quality of the portfolio itself. As we previously shared, delinquencies were at record highs throughout 2016. More delinquencies means more time allocated to collections and less time to sales activity, which in turn hurts our deliveries. By consistently executing our proven collection processes and improving our coworker training, including more thorough verification and approval processes, as well as accountability, we will reduce the percentage of customers that are past due and collect more of our potential revenue.

Doing better at collections alone is not enough, and an immediate and significant opportunity I see is to improve the quality of our portfolio. Providing higher-quality products and an improved value proposition for customers, for more tenured coworkers will improve collections. We have already begun seeing improvements in our delinquencies over the last 30 days as well, and that should gradually translate to improved collection results as well as revenue.

Now, as you have heard, many of these changes have already been put in place or will be over the next 30 to 60 days. We're moving forward with urgency but also recognize that the rent-to-own portfolio is a portfolio business, the nature of what we do, and that it takes time to turn over the agreements currently on rent and the inventory that is currently in the system, before we will see the improvements in the bottom-line financial results. While we see progress being made, to do it takes time and we intend to do it right.

Now in addition to these near-term operational initiatives we are committed to taking aggressive actions over the longer term and are evaluating a number of cost-saving and revenue-driving opportunities to further enhance shareholder value and drive our turnaround. As an initial action, yesterday we announced and executed a headcount reduction that impacted approximately 6% of our field support center workforce.

Importantly, these reductions will enable us to make the corresponding investment in full-time store coworkers, which we expect will improve the business results as I just outlined. We're focused on evaluating additional opportunities as well to make Rent-A-Center a stronger and more profitable organization and we look forward to sharing more of those details about the plans in the future.

Let me now just spend a few minutes detailing the results of our Acceptance Now business. A Now posted top-line results during the fourth quarter that were generally in line with our expectations, although our account management results were disappointing. Similar to the core, A Now delinquencies were higher than expected for much of 2016, and that translated into elevated losses in the fourth quarter. The A Now operations team are focusing their efforts on executing proper collection practices.

In addition, we continue to implement decision engine enhancements driven by our data analytics competency that will help reduce the skip/stolen losses as well as increase, potentially increase revenues. Like the core, there are certainly some opportunities to improve the customer experience through enhanced pricing and terming, which we believe will also lead to more profitable growth.

Looking ahead to 2017 and beyond, the Acceptance Now team has developed a strong pipeline of future growth opportunities that we are very excited about. In fact, I am pleased to announce that for the first time we have signed test agreements with two separate retailers with national store footprints. Both of these pilots should begin sometime in March and run for approximately six months. And include, approximately a dozen locations in the one case and approximately two dozen locations in the other. We look forward to sharing more about these exciting agreements as time progresses.

Let me spend a few minutes on our digital strategy. This is an important element of our transformation because it enhances the way our customers engage with us and accelerates growth across all of our channels. You will hear more about our digital capability expansion in the coming months, but today I would like to share some ongoing actions in this space.

Based on the early success of the e-commerce operational pilot and rollout in 2016, we are expanding the number of products we offer to our online customers. We are pleased to report that approximately 60% to 70% of our e-commerce customers are new Rent-A-Center customers, and we believe that digital channels such as this one will be key to expanding the customer base for the rent-to-own industry as a whole.

We recently enabled new electronic payment solutions that increase the predictability and consistency of payments from our customers, and we will launch an additional payment innovation in the coming months that we believe will lead to higher ownership levels. Of course, our customer decision models and the underlying technology continue to evolve, allowing us to enhance access to the RTO services across multiple channels.

Our goal for the technology investments we make is to accelerate competitive advantage for the Company, while delivering a differentiated experience for our customers. We will continue to develop our digital capabilities and you will see a richer, digital engagement from Rent-A-Center in the next three 3 to 6 months. I look forward to discussing the positive impact to our customers and out shareholders in our future conversations throughout this year.

Some other opportunities. Like just about every retailer today with a brick-and-mortar business channel, we are and will continue to evaluate the strategic value and role of our core store base in our evolving customer marketplace. While we will have an ongoing need to rationalize the store base in over-penetrated markets, the regular hygiene so to speak, we also recognize the value that many of our customers place on having Rent-A-Centers in convenient, easily accessible locations in their neighborhood.

Given the challenges that we faced this past year in the core, there's clearly room for operational improvements that we believe can and should diminish the number and scope of potential store closures. At the same time, we plan to evaluate the possible expansion of our franchise network, of which there is a fair amount of interest as well.

Looking to the south, I am happy to report that our results in Mexico improved significantly last year. In fact, our Mexico operation is now generating positive EBITDA and positive free cash flow. Our in-country manager, Federico Fidalgo, and his team have made great progress in the 18 months he has been in position. We're pleased with the growth and direction that we have seen recently, and we believe there is opportunity in Mexico and we are evaluating the best path forward.

As I mentioned on our call last month, the Board has started its process to find a highly qualified, permanent CEO and CFO that have all the required skills and are the right cultural fit. The key will be finding the best match with the Company and its strategies in order to fix the business and position us for long-term success. While we will not provide interim updates on the search until the progress is complete, what I can say is that the search will be thorough and that the Board is committed to hiring the best-suited candidates. In the meantime, my focus remains on improving the business and driving Rent-A-Center's turn around.

As we execute on the turnaround of the business we will provide an increased level of transparency on key leading indicators to measure our progress. As noted in the release last night, these measures will replace the revenue or EPS guidance for 2017. On a monthly basis we plan to update you on the following critical business drivers.

For our core stores, we will provide same-store sales, the average weekly percentage of customers that are 7-plus days past due versus the prior periods. Coworker turnover versus the prior year, and the average monthly delivery rate per agreement versus the prior year. For Acceptance Now, we will provide same-store sales and the average weekly percentage of customers that are 32-plus days past due versus prior periods. As a reminder, the Acceptance Now is a monthly pay business and the core is primarily a weekly pay business.

Through these monthly updates we hope to improve transparency and build confidence in the business, although we expect that it will take a couple of quarters before the actions we're taking begin to appear in the financial returns. I started this Company with the simple belief that we can make our customers' lives better by providing them with great products and services and much-needed financial flexibility.

As I have said before, I truly believe in this Company, its coworkers and its future prospects. I am passionate about what we do as an industry and our important role of serving the credit-challenged and cash-constrained consumers. As one of the Company's founders, the former CEO and a large shareholder with a strong vested interest in growing shareholder value, I am highly committed to improving our performance and driving long-term success.

We are in a tough patch, but our business is sound and I am confident that the actions we are taking will drive both near-term and long-term improved results in the core and Acceptance Now, and enhance shareholder value. I do want to acknowledge and thank our 20,000 coworkers for their dedication and efforts, particularly over these past 30 days. With that, I will now have Maureen provide you with more detailed results on the fourth quarter. Maureen?

Thanks, Mark. Good morning, everyone. As I walk you through the financial results for the fourth quarter, all numbers will be presented on a recurring basis excluding special items for both this year and last.

As outlined in the press release, consolidated total revenues were $684.1 million, which represents a 13.8% decrease versus last year. Driven by the core same-store sales decline of 14.2%. Within our core US segment, total revenues were down 17.6%, driven by the same-store sales decline of 14.2% and an 8% reduction in store count from the prior year. The same-store sales decline is primarily due to the recovery challenges from the POS system outages that took place in previous quarters -- in the previous quarter, heavy promotional activity and historically high delinquencies.

In the Acceptance Now segment, we saw 1.7% revenue decline due to lower store count, which was partially offset by higher same-store sales which were up 1%. Consolidated gross profit was $442.7 million and gross profit margin was 64.7%, 160 basis points lower than a year ago, primarily driven by higher core promotional activity.

In the core US segment gross profit margin was 69.7%, 140 basis points lower than a year ago, driven by heavy promotional activity. In our Acceptance Now segment fourth-quarter gross margin was 53.2%, down 50 basis points from last year. This decrease was driven primarily due to lower gross profit margin on merchandise sales.

Consolidated store labor, which includes the expenses associated with coworkers at our stores and at the district manager level, increased 160 basis points to 28.5%. Other store expenses, which include expenses related to occupancy, losses, advertising, delivery costs and utilities, increased 250 basis points to 28.3%. In our core US segment, store labor expense was down approximately $17.3 million versus the prior year, but worsened by 250 basis points due to sales deleverage.

Other store expenses were also down $16.1 million but worsened 260 basis points due to sales deleverage and higher skip/stolen losses. Our core skip/stolen losses were 3.7% in the quarter compared to 2.6% last year. Given the collections issues associated with the new POS system. Sequentially, charge-offs improved 100 basis points.

In our Acceptance Now segment, labor as a percentage of revenue was flat to last year. Other store expenses increased 350 basis points, driven by higher skip/stolen losses, which were 12.5%, up from 10.5% last year. As Mark mentioned, there are a number of opportunities we are working on that we believe will improve skip/stolen losses going forward in both segments. On a consolidated basis, our operating margin was negative 1.4%, representing a decline of 820 basis points, and consolidated EBITDA was at 1.5% or down 780 basis points from a year ago.

Now, turning to the balance sheet, we ended the quarter with consolidated inventory on rent down approximately 12.4% or $113 million versus a year ago. This decline was primarily due to a drop in inventory on rent in the core US segment, which was down 20.9% or $113 million. The key drivers were lower same-store sales, an 8% reduction in store count, and lower product cost from the benefits of our sourcing initiative.

In the Acceptance Now segment, inventory on rent increased $4.4 million or 1.3% due to higher purchase volumes in our retail partner locations. Consolidated inventory held for rent was down approximately $22 million or at 9.6%. This was driven by the core US segment which was down $23 million or 10.5% due to lower store count, actions taken to move through older inventory and more lower-cost promotional products.

At the end of the fourth quarter, we have approximately $95 million in cash and cash equivalents, we were undrawn on the revolver and we have reduced our total debt by approximately $234 million this year. Our leverage ratio for the quarter was 3.58 times and the fixed charge ratio was 1.5 times. Both meeting our covenants. In addition, we have been proactively working with our lead bank to evaluate options to address our capital structure needs for the long term, and believe we will have flexibility to pursue our strategy.

Lastly, I would like to touch on the goodwill impairment that was taken in the quarter. As a result of the decline in our stock price that occurred following the earnings pre-release on January 18, the completion of our annual testing process was extended. Ultimately the process resulted in the recognition of a $151.3 million impairment of our goodwill in the fourth quarter, thus writing off all of the remaining goodwill in the core US segment.

The impairment is a non-cash charge and does not affect liquidity, debt covenants, or the Company's ability to declare and pay dividends. Because of the delay in completing the impairment analysis, we are still in the process of finalizing the income tax effect of this impairment charge and certain deferred tax items, and expect to include this information in our 10-K. As a result, we are unable to report diluted loss per share for the fourth quarter for 2016 on a GAAP basis at this time.

With that, I will turn the call back over to Mark to make one more comment before opening up the line for questions.

Thank you, Maureen. Before we open the line for questions I want to briefly address the recent filing by Engaged Capital. Our Board and leadership team valued the views of all of our shareholders and welcome constructive input towards our goal of improving results and driving shareholder value. We have met with and spoken to Engaged Capital several times and hope to maintain a constructive dialogue as we work towards the objectives that we have outlined here today.

That is all I am prepared to say on the matter. I would remind you that the purpose of today's call is to discuss the earnings results and the initiatives that we have mentioned. I would ask that you please keep your questions focused on those topics. With that, Shannon, if you would please open the line for questions, we would appreciate it.

(Operator Instructions)

Budd Bugatch from Raymond James.

Thank you very much, good morning Mark, good morning Maureen. First I want to commend you for the decision to put out the monthly metrics, I think that is the right thing to do, I wish more retailers would do it. I hope that is a long-standing regime.

My questions I guess go to inventory, because I think that is a metric that we can see and maybe see some improvement in sequentially as we go forward. Can you talk a little bit first of all about in the core inventory, what is now in Acceptance Now inventory inside the core? Can you give us a feel of how that inventory is trending?

I don't have the exact numbers, Budd, in the terms of number of pieces or mix of inventory if you will, it is an opportunity. As I said during the preannounce and I think I repeated again this morning, we know that we have excess inventory, we don't like the mix of the inventory, again, that is really more of the core inventory being more of the good and less of the better and best.

The distribution that is coming from Acceptance Now is a couple of basis points higher than it had been or I think that we might have liked in the past, so again I view that as an opportunity, as I said I think there is some chance to improve. When you look at their delinquencies the offset of that is there is more returns and so it is not an unmanageable number by any stretch, but it is an opportunity that we need to focus on.

Okay. Since the end of the year can you give us any feel of how rent -- how inventories have trended for rent or own rent?

Generally in line with our expectation, January historically you know the first quarter has proven to be challenging for the company. What is interesting and it makes it a little hard to evaluate at this point is the delay in the income tax refunds, right? Normally those would've already begun to hit, and in fact all indications are now it's going to be the latter part of February, so it's really hard to predict at this stage what that means for the business. You have some false positives, I would probably leave it at that,.

Okay. The reduction of 6% of the field, can you give us an idea of how many people that is and what the savings might be, or when does that go into effect?

That 6% again was not in the field it, that were here at the field support center, or the corporate office if you will, 6% of the workforce here and that all took place yesterday.

And how many people Mark, any way to put numbers to it in terms of dollars?

Well, from a headcount standpoint it's approximately 70 people. Then again as I said, we look at those dollars are really being reallocated back into the field, facing the customer if you will.

I see. We should see probably severance charge next quarter or something like that, is that true? Will there be a one-time on that, that we will have to account for?

Yes there will be severance expenses that hit next quarter related to that. We had severance that hit this quarter for executive departures but the action that took place yesterday will hit in the first quarter.

Okay. And last question for me, is in Acceptance Now, I thought we were testing some centralized collection effort to reduce some of those delinquencies for that and take some of the burden off of the in-store people, is that still going on in and is that having any impact?

It's being stood up; they candidly are very early into the process. Our expectation is, is that it will have a positive impact but so early into it and it's a small test at this particular point. Directionally I think it is going to be good but, we don't have enough there yet to give you any specifics on it.

All right. Thank you very much and good luck on the turnaround.

Thank you.

Brad Thomas from KeyBanc.

Yes, thank you Mark and Maureen for taking my question. I think first a question on the initiative around the good, better, best, mix mark. The company's mix from a product category perspective has changed a lot over the last 10 years, how much has that been a factor and which categories if any maybe stand out as having the best opportunity to increase their mix of better and best?

Well, there's opportunities across the continuum. I think from what I've seen at this point, furniture, I would put at the higher end in terms of opportunity but I wouldn't limit it there. Some of the product inflation has had a little bit of an impact when you look at the electronics but at the same time there is still opportunities within that SKU. I would say furniture probably has the biggest category opportunity across the mix. Was there another part of your question, did I miss a second?

No, I was just asking about the categories and if that had any importance as you thought about the good, better, best initiative that you have. I guess, moving on to talk about cost, you talked about how in recent years the company's been focused on cost, you will reinvest the savings from the headcount reduction at the headquarters. I guess Mark and Maureen, as you think about the company's cost structure overall moving forward this year, do you need to on a net basis reinvest? Or will you still be bringing costs out when we think about labor and other operating expenses?

We are continuing to evaluate other cost-saving or revenue-generating opportunities as we speak, Brad. I mentioned a little bit on the store rationalization plan, again, that needs to be worked, I think there may be some opportunity to bring cost down. We're continuing to do some of that work.

Candidly I think the bigger opportunity we have is some of the revenue driving, things that we have spoken of as we think about the value proposition, the product offerings, the pricing, the lifecycle of the inventory that is in the system. The customer facing staff in the stores, the collection activities and so forth. There are a number of things that I believe we can do that will have a much greater positive impact on driving the top line. At the same time, we continue to evaluate other cost-saving opportunities.

Great. Then from a modeling standpoint, I know you don't want to provide earnings guidance but could you share some details with us, Maureen, and where you think maybe CapEx and depreciation and interest expense and such might come in?

We're not providing any guidance for 2017, just the monthly progress forward on the turnaround. We want to make sure that we are showing that progress in the near-term, knowing that the financial benefits of the changes that we have already made and will make in the near future is visible and transparent to our investors.

Got you. And then, just lastly, could you give us an update on conversations with your lenders and any color on how you might be thinking about the dividend that you are paying today and if that would continue?

As I mentioned in the prepared remarks, we are proactively working with our lead bank to determine the optimal go-forward capital structure on a longer-term basis and will provide updates once we know more about what that looks like.

All right. Thank you and good luck.

Thank you.

Laura Champine from Roe Equity Research.

Thank you. Just wondering since we are in the middle of February, can you give us some of the metrics that you spelled out for the month of January?

Laura, we will be providing an update to our January metrics here in the coming weeks. We have started working on those numbers, but we were not able to provide that with the release last night.

Okay. Can you give us a sense of the direction of January same-store sales since so those should be in the books at this point?

Trending positively, sequentially they are trending positively. Again, as Maureen said, unfortunately we do not have the specific numbers to provide, we will do so in the near future and I am pleased with what I've seen on the metrics that have been put out there.

Great. Thank you.

John Baugh from Stifel.

Thank you, good morning Mark and Maureen. I was wondering, could you clarify when you talk about value proposition, are we that net raising prices in core and Acceptance Now, or is that not the plan?

No, John, you may recall there are a number of different levers that you can pull in this business, so when we talk about pricing there is the weekly or monthly rental rate, there is the term in which to acquire ownership, the number of weeks or months. And then there is the EPO formula that goes into that to the extent the customer wants to exercise. And you can pull a combination of those levers, one of those levers, and so forth.

Candidly when I talk about opportunity to enhance the proposition, I think we can lower the terms which will enhance the value to the customer without increasing the rate, because they allowed those terms to go out quite a ways trying get margin. And it has devalued the proposition and it's had a negative impact on sales. So, part of it is right-sizing -- reevaluating the inventory that's in there and setting the proper rates and terms and then the bigger opportunity is the mix as we go forward. That is where we are going to have a bigger opportunity to enhance the value proposition for the customer.

Yes, talk to me about mix improvement, again, be as specific as you can be on what that means.

Well, as I said in my prepared remarks, looking historically, if you think of good, better, best and that is how we kind of describe our products and that may have to do with the quality of the merchandise, the features and benefits of the merchandise, the material that is in the merchandise, i.e., leather versus vinyl, a refrigerator with an ice-maker versus one without, et cetera.

Historically, and again those are the aspirational products, when customers, any of us buy we have needs and wants. The emotional side of a purchase is fulfilling the want, not the need, and I believe that is where our opportunity lies is to put a greater focus on fulfilling the emotional side, the want, which is a higher mix of the better and best.

And, as I said in my prepared remarks where we had been historically about 60% or so between the better and best, today it is only 45%. So a much greater shift at a lower cost value if you will, and again that's had the 8% decline on our pricing, the APU. So it is not about charging more for the same, it is about increasing the value proposition for the customer. As you know, we are in a fixed cost business so to the extent you can drive or increase the rental associated with any agreement, the flow through could be pretty significant to the bottom line because of the fixed cost nature of the business.

Mark, could you talk to us about where the current core store mix of used versus new inventory for rent on the store floor is and compare that to history. And then assuming that is lower than you want it or more used than you want it would imply some level of inventory investment. Is that the plan, and I know that cash flow is dear, but I'm just curious as to how you're going to walk that tight line?

That is a good, good question, John, and in fact the mix is not materially different than historical, i.e., 25% or so new and 75% previously rented. So it is not so much a new use it is the mix. Part of the reason they have the new is it because, again the amount of buys that were made in the fourth quarter, the promotional, if you will and as we said, the fourth quarter was not as good as the company had hoped, and so there is plenty of new inventory in the system.

I think that we can work through it in the ordinary course of business. You know we've been trying to take advantage of the income tax season when it comes and so how we might be able to move inventory quicker than you would have otherwise, given the time of the year but this is not a used inventory problem.

Okay and then my last question is, and I appreciate you not wanting to give 2017 guidance, but, as we exit [2016], what would be your broad, high level, two or three either metrics or things you want to see that in your mind that are crucial that would tell investors we've right-sized the business or turned to improving results in 2018. I assume 2017's still be a challenging year, just curious how you're thinking about that broadly?

Thank you John, I will be honest, the metrics that we picked directionally will tell you everything. So, we are in a relationship business having stability and continuity in customer facing coworkers is critical, hence the reason that we want to provide the turnover. So as we can make improvements and strengthen the workforce, improve the customer relationships or selling skills and collection skills, that is going to show there.

The delivery APU, this notion of our value proposition and going to more of the better, best from good is why, again you should see the delivery APU, so what our customers wanting to rent today? Are they in fact coming in and getting the aspirational products? And again, fixed cost nature we drive the revenue per agreement, that's going to show the positive impact to the top line and then the flow through to the bottom line.

Collections, again the quality of the portfolio it does no good to put a lot of products on rent if you cannot then collect on them or manage the accounts when they are out there. So, the delinquency is an important characteristic and also how much time is being spent on that aspect of the business versus being able to spend additional time on the sales side. So any of these that we team up with really they are leading indicators and given the portfolio nature, you want to see those kinds of trends first because it's going to draw the picture, the road map, of where you're going to end up six or nine months down the road.

Thank you and good luck.

Anthony Chukumba, Loop Capital Markets.

Thank you for taking my questions. I guess my question was about the higher delinquencies in Acceptance Now. I understand that the point-of-sale system issues on the core business was one of the main factors for the increase in the delinquencies and maybe some our your promotional activity. I'm just trying to figure out what drove the higher delinquencies in Acceptance Now given that I don't believe that those point-of-sale issues in the core were an issue in Acceptance Now.

I think there's a couple of things, as they continue to have -- the mix of partners, meaning as you get into more multi-line partners rather than a furniture only, some of the behaviors are little bit different across the product lines. So, as we expand into multi-line partners that are introducing the other SKUs, they have historically performed a little less, and so as that mix shifts you're starting to see some of that in the overall results.

There are opportunities, as I said I think some of the -- it is fair to say much like the core, that there are some executional opportunities as we think about across all of the businesses, whether that is collections and sales or so forth. So part of it is a mix of the relationships that we have and the products that we're putting through that pipeline. And then the other part is we need some further enhancements in our risk engine and the training and accountability inside the coworkers.

Okay. That is helpful. Then, one quick follow-up, you mentioned this test of these two national retailers and I certainly understand that you probably don't want to give out information about who these retailers are, but can you give us any color whatsoever even just in terms of what products these retailers carry, for example are either of them multi-line retailers?

I'm not going to get into the specifics, they are narrow test and they will run for six months and then we will be in a position to share more as we get further down the road.

Okay, fair enough. Thank you for taking the questions. Good luck.

Kyle Joseph from Jefferies.

Hey, good morning guys and thank you for taking my questions. Most of them have been answered but I just wanted to dig down a little bit deeper towards a potential recovery in the core business. Can you remind us to kind of average duration of a rental agreement in recent periods, just to kind of give us a sense of when comps could ease for that segment?

I'll make sure I understand the question there, the average length of time that an agreement is on rent, is what you're asking?

Correct, so you missed a lot of sales in the third quarter because of outages and I'm just trying to get a sense of when we will lap more challenging comps in that segment?

Okay, the average rental agreement in the core businesses is on rent approximately 4 to 5 months on average.

Okay. Got it, that is helpful.

The average piece of inventory is in our system approximately 18 or 19 months on average.

Okay. Got it.

Okay.

And then, just on Mexico it looked like things deteriorated a little bit sequentially, was that mostly currency related?

Some of that was currency related, yes, there was also a bit of an uptick in the skip stolen losses within Mexico. But overall for the year we were EBITDA positive which was the goal we outlined at the beginning of the year.

Got it. Thanks, one last one just more macro based, given we've had some rate increases has there been any change to sort of the competitive environment and the amount of credit available to this customer base that you have seen at all?

No, again, my lens is narrow if you will, compared but Maureen, I don't have -- if anything appears maybe be a little bit of a tightening?

I think just since the recent change I don't know if we've seen any further impact but it is a challenging competitive environment. We do feel that our customer base has more access to credit than they had historically, and that is impacting our business. But as far as the recent changes with interest rates, I don't believe we've seen any material changes.

Great, thank you very much for answering my questions.

Carla Casella of JPMorgan.

Hi, I'm wondering if you could just clarify, make sure got this right, the Acceptance Now two test cases. One, you are testing with 12 stores and one you are testing in 24, and what was the timing of the rollouts there?

Those are approximate numbers, a dozen and two dozen. We are expecting, anticipating both of those tests starting sometime in March, the agreements have been signed and the test periods are six months in both cases.

Okay. And do you target additional Acceptance Now adds aside from those this year, like in your existing customers?

I'm not sure I understand your question.

Do you think that you will see additional new Acceptance Now locations from your existing customers this year?

I'm sorry, yes, I think there are some opportunities to continue to expand the manned store locations that we have with our current partners.

Where would you say that you're in terms of penetration level with your current partners, you in 80% of their stores or?

Where we want them or where we have agreed, is probably higher than that, I think we're pretty close. But I will tell you, and again, Acceptance Now even beyond these two national tests, they continue to work potential new partners also. So not just what we already have, but there's other smaller regional state partners, if you will, that we are continuing to develop also.

Okay, great that is helpful. Then I guess I am wondering on the consumer side are you seeing, I mean, with consumers relying more on smart phones and their computers for even watching TV, do you think there is just a shift away from renting TVs and other AV?

Well, there has certainly been cannibalization within product categories. Advancements in technology, you know we see it. The computer is going from the desktop to the laptop to now the smart phones, and so there has certainly been some cannibalization across product categories. At the same time, I don't think any of us don't have a TV in our house, so there's still plenty of opportunity.

Okay and then in terms of where you are in the smart phone, just on what percentage of your product is smart phones?

It's about 5% of our revenue.

Then just one housekeeping, can you give us a sense of where rental merchandise purchases or depreciation for rental merchandise was for the quarter or for the year? Just in terms of calculating or figuring out our cash flow statement.

I will have to follow with you later on that, Carla, I don't have that in front of me. But it is posted on our website, we have all of the segment financials that were posted last evening that should have that number.

Okay.

Yes it is there, we just don't have it.

Okay that's great, that's all I have, thank you.

Thank you.

We have reached the conclusion of our Q&A session. I would now return the conference to Mr. Mark Speese for closing remarks.

Thank you. Ladies and gentlemen, thank you all for your support and your interest this morning. Please know that we are keenly focused and we are taking aggressive actions to improve our operations and results and to drive overall shareholder value. I look forward to reporting on our progress in the coming months as we move forward. Thank you again and have a great day.

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