Good morning and thank you for holding. Welcome to Rent-A-Center's Second Quarter 2014 Earnings Release Conference Call. At this time, all participants are on listen-only mode. Following today's presentation, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded today, Tuesday, July 22, 2014. Your speakers today are Mr. Robert Davis, Chief Executive Officer of Rent-A-Center; Mr. Mitch Fadel, President and Chief Operating Officer; Guy Constant, Executive Vice President, Financial, and Chief Financial Officer; and Mr. David Carpenter, Vice President of Investor Relations. I would now like to turn the conference over to Mr. Carpenter. Please go ahead, sir.

Thank you, Keith. Good morning, everyone. Thank you for joining us. You should have received a copy of the earnings release distributed after the market close yesterday that outlines our operational and financial results that were made in the second quarter. If for some reason you did not receive a copy of the release, you can download it from our website at investor.rentacenter.com. In addition, certain financial and statistical information that will be discussed during the conference call will also be provided on the same website. Also, in accordance with SEC rules concerning non-GAAP financial measures, the reconciliation of EBITDA is provided in our earnings press release under the statement of earnings highlights. Finally, I must remind you that some of the statements made in this call, such as forecast growth in 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 the earnings release issued yesterday, as well as our annual report on Form 10-K for the year ended December 31, 2013, and our quarterly report on Form 10-Q for the quarter ended March 31, 2014. Rent-A-Center undertakes no obligation to publicly update or revise any forward-looking statements. I'd now like to turn the conference call over to Robert. Robert?

Thank you, David. Good morning, everyone, and thank you for joining us. Before getting started, I would like to welcome our new CFO, Guy Constant, to the call. Guy is an excellent addition to our management team and he will be instrumental to our success going forward. He is already having an impact and I look forward to partnering with him in our journey. Now, I will be providing a high-level overview of where we are in our multi-year transformational journey, as presented at our Investor Day earlier this year, after which Mitch and Guy will be diving deeper into our current results and future outlook. However, to be frank, our second quarter results were disappointing. While it is a challenging retail environment, that is not justification for our results. We need to perform better and we will. Despite the results for the quarter, I am excited and optimistic about the future. As you may recall as presented at Investor Day, our future is about meeting customers where they are, getting them exactly what they want, and providing them the service they need and deserve. To be sure, we are well on our way to fulfilling these desires. To start with meeting customers where they are, last quarter I announced to you that we had just launched our new Acceptance Now technology, and our expectations at the time were to roll out this new technology accelerator to 50 new unmanned retail locations and convert 100 existing manned locations to an unmanned model, given the lower volumes. However, the results that we have witnessed thus far in testing this new technology within an existing Acceptance Now manned environment have caused us to adjust those plans. Instead, we will be accelerating the rollout of this new technology into a total of approximately…

Thanks, Robert, and good morning, everyone. In the core segment, our deliveries were down year-over-year, due to softer demand, driving the negative 4.7% comp in the core segment. Now that was a 140 basis-point improvement from the first quarter. In addition to the improvement that we are already seeing, we will see even more improvement from the rollout of our new smartphone lineup. As you can see in our guidance, we expect to see a negative same-store sales number in the current quarter, albeit improved again on a sequential basis, and then we expect the fourth quarter to be flat to slightly positive range in the core segment. Now in addition to focusing on improving our sales trends, we're also analyzing our expenses as the store level and more specifically at our labor line. We are currently testing some ways to build flexibility in our labor models so that we can flex up and flex down based on business trends. More to come on that in the coming months, but suffice it to say, the expense line is under just as much evaluation as the revenue line. On the collection side, our weekly performance metrics remain generally in line with our goals and our core U.S. rent-to-own skip and stolen losses came in at 2.7% for the quarter, a 10 basis point improvement from last quarter. Our inventory held for rent at the end of the quarter was skewed up by the buildup of our smartphone inventory for rollout this month. Excluding those smartphones, our held-for-inventory percentage was 24.1%, another 10 basis-point improvement and better than we ended the last quarter, by 10 basis points. Regarding Acceptance Now, we remain very pleased with the growth in this segment. Overall, our revenue grew close to 33% and our same-store sales were…

Thank you, Mitch, and good morning, everyone. I'm very fortunate to join the leadership team here at Rent-A-Center at this exciting time in our company's history. I look forward to working with everyone on the call and I thank those with whom I've already spoken for your genuine welcome to our future partnership. This morning, I will first walk you through our financial results for the second quarter, after which I will spend a few moments reviewing the updated guidance for 2014. We will then open up the call for your questions. I would also like to mention that as I refer to our second quarter performance, either this year or versus a year ago, as well as our outdated full year guidance, all numbers will be presented on a recurring basis, excluding special items such as the $0.05 restructuring charge related to the closing of 150 stores in the second quarter and the $0.03 charge related to our senior credit facility refinancing in Q1. As outlined in the press release, total revenues were $773.2 million, an increase of 12.7 million as compared to a year ago. This represents a 1.7% increase, driven by revenue increases of $38.3 million in our Acceptance Now segment and $6.4 million in our Mexico segment, offset by a revenue decrease of $30.4 million in our core U.S. retail segment. Same-store sales increased 0.6% in the second quarter, as compared to a year ago, driven by an increase of 25.1% in Acceptance Now and a 17% increase in Mexico, partially offset by a 4.7% decrease in our core U.S. retail segment. As Mitch outlined earlier, our total U.S. revenues, when you include all of our U.S. formats, was up 1.1% versus a year ago, despite the challenging retail environment. We are encouraged that our second…

(Operator Instructions) Your first question comes from the line of Budd Bugatch from Raymond James. Your line is open.

Good morning, everyone. Welcome, Guy, to the call and thank you for taking my questions. I guess, Mitch, you had said something about merchandise held for rent and that's my area of focus. I was a bit spooked by the growth in that – in the core, and you gave a number, I think, of 24.1%. Can you go over what that means and give me a better read on that? And I have a few more questions about that as well.

Sure, Budd, good morning. We had – to build up for the rollout of smartphones this month, in July – most of them, probably all of them, were in by the end of the June. It was close to $60 million of inventory in smartphones for the rollout, and that's what drove that number up. When you back it out, it's about 24.1%, which was a 10 basis point improvement from last month. So our inventory didn't go up; it was just building up the smartphone – for the smartphone rollout.

24.1% of what, total inventory between on rent and held for rent?

Yeah.

In the core? 24.1% of the core inventory?

Yes, compared to the overall core inventory, 24.1% was in held for rent when you back out the smartphones.

Okay. And then 60 million, because I calculated about 43 million, if I use that number, so I'm just trying to figure out where my difference is on that.

Well, you got to add – you add the held for rent and the on rent together, if you take 60 out of the held for rent, you'll be in that 24% range.

That's what I did.

And you got to take 60 out of the held for rent and 60 out of the total.

Okay. All right. You've got to take it out of the numerator and the denominator. [Okey-doke] (ph) on that, and so on the held for rent, can you give us a feel of how much of that is in store and how much of it is in DC, and also, what is the – how much of it has been previously rented and how much of it is new, other than the 60 million of smartphones?

Pretty much other than the smartphones, it's all in the stores, because we don't have DCs. Those smartphones were held primarily at our service centers around the country for distribution out to the stores in July, so it is pretty much all in the stores, except for the smartphones. The new-to-use mix is consistent with where it's been in the past. In fact, at the end of the quarter with smartphones, it was actually higher than it was a year ago. Backing out the smartphones, it was slightly below where it was a year ago, but pretty much in line, similar to numbers we normally run. So, it is staying pretty consistent. Again, it was higher if you figure in the smartphones, but without the smartphones, it is very similar to where it's been.

And what is that mix that you usually run?

It's in the range of 75%/25%. 75% being used and 25% being new is a normal mix for a weekly rent-to-own store.

Okay, that's what I was hoping to hear. Can you – on the – and if you can go now just to the new kiosks going in, any change, Robert, in the thought about pricing, then, for Acceptance Now to the customer? I think you average around, what, 2.3 and some competitive dynamics we see are in the 1.9 range and 2.1 range?

I will let Mitch take that question.

Right now, we are not making any changes. The technology, as Robert explained, the new technology is going into our manned locations because what we saw in the first number of sources a lift by adding that technology into our manned locations, so we still have the overhead in those locations of the manned kiosks. If there is any need to take the pricing down, it will be when we are in unmanned kiosks where we don't have the overhead of the labor in the manned kiosks. For right now, the pricing is staying consistent. You are right; some virtual competitors have a little lower turn, if you will, in their number. But again, that's without having the manned support there to help. So just by adding this technology, we wouldn't be looking at any pricing changes. If there is any, it will come down the road when we are in unmanned, if there is a need then or not. We certainly haven't seen a need to change our pricing at this point.

Okay. And my last question just goes on Mexico. You opened up all the stores, but you opened up a bunch of stores in Mexico City, and I kind of expected a faster ramp in Mexico with the Mexico City stores. What's been the experience in Mexico City in the international planning?

They have ramped up – they have ramped up there is only 12 of them in Mexico City out of the 30. They have ramped up a little bit faster than in the rest of the country. We have been happy with the ramp-up. We are trying to figure out other issues as far as doing business in the city that's that densely populated and so hard to get around. So we're still trying to figure that out. But they have ramped up a little faster. I don't know that you would see 12 stores ramping up, I don't know, 20% or 30% faster than the other ones. I don't know that you would be able to tell that in a model within three or four months anyhow, but they are ramping up a little bit faster than the rest of the country.

But the cost of business is doing higher in a metropolitan area, is that what you are finding?

Slightly, yes. Yes, a little bit higher. Not…

Thank you very much. I will let others. Thank you very much. I will let others speak and good luck on the balance of the year.

Thanks Budd.

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

Thank you. Good morning, and Guy, welcome to the call.

Thanks, Brad.

Just to follow-up on some of Budd's questions, I wanted to ask a few follow-ups about the unmanned kiosks. And first, just from an approval and application standpoint, could you tell us if there any differences?

Well, in the technology that we are adding into the manned kiosks right now, and we will eventually use in an unmanned space, it is an automated approval, and that would be the biggest difference is having a risk engine in the technology versus the coworkers approving. And that's probably one of the reasons we are seeing the lift in the manned kiosks; it's faster. The approval process is a matter of seconds versus what the coworkers used to have to do. So that helps us, especially during peak periods. So it's a risk engine versus a manual approval, if you will, Brad.

Great. And then from a collections standpoint, who is doing the calling on the customer from a collections standpoint?

That hasn't changed. In our manned kiosks, it -- the coworkers in the store, and then there is some outside support for pickups, but the coworkers in the store do the initial calling. And then, like I said, there is what we call a collection center that supports multiple stores that will go to the consumer's house when they need to, but that hasn't changed.

Okay, great. And then just lastly on Acceptance Now, I know earlier in the year there was explicit revenue guidance. Any update to the total revenue expectation?

Yeah, we decided to put same-store sales in there. It seemed to be more what everybody was focused on is the same-store sales number, rather than just a gross number that is so dependent on how many stores we open and when we open them. And as Robert pointed out, how we're going to -- our plans changed as we saw what this technology did in the manned kiosks. So, as those changes take place and the numbers of stores change and closures change, we've got the same-store sales is the primary focus. Instead of trying to keep updating people on the gross number, we decided same-store sales was what everybody wanted to focus on.

All right, great. Thank you so much and I will turn it over to somebody else.

Thanks Brad.

Your next question comes from the line of Laura Champine from Canaccord. Your line is open.

Good morning. Could you give us the reason that - or the way that you have almost doubled the number of kiosks that you're looking to open this year, relative to your April release?

Well, pretty much, it has been demand. And we wanted to - Laura, we went into this year with opening less stores than we had in the past, 400 a couple of years in a row, and we're only going to open 100 this year. And we're focused on getting the new technology done. But we also said that we would support our existing retail partners and not say no to them on any stores they want to go into. And – so a lot of it's been our existing partners adding stores that weren't in the plan and we don't want to say no to them. So it really hasn't been a change of strategy as much as just the demand within our existing partners and some relationships we don't want to affect negatively by saying, no, we said we're only going to do 100 this year and we're going to stick to 100. So we are letting it go up to take care of our current – the current demand with our current retail partners. Laura Champine – Canaccord: And just so I understand the plan so far, so for now you are putting unmanned kiosk technology into manned locations, and it sounds like there is a plan to eventually convert all the locations to unmanned? Am I hearing you right on that?

No, the plan is to get this technology into all of the manned kiosks, because we're getting a lift when we combine the technology with our manned kiosks. We'll have 600 of them done by the end of this year. Actually, going into the fourth quarter, we'll have 600 of them done, and then next year we'll finish that, as well as be able to go into unmanned kiosks with that same technology. But the focus this year, because of the lift, has switched over to putting the technology into the manned kiosks, and starting with the first quarter of 2015 is when we'll start to do actually unmanned kiosks in lower volume stores.

Got it. And then, lastly, on the smartphone rollout, how many locations did you test that in? And what was your experience on skips and stolens for smartphones?

Great question. We did – we actually phased a few different tests. Total, it was about 200 stores, and it went – it goes back about from the very first stores we tested, in about nine months, so we had plenty of testing time in store, and we saw no – nothing out of the ordinary from a skip and stolen standpoint compared to our normal business. Laura Champine – Canaccord: Got it. Thank you.

Thanks, Laura.

Your next question comes from the line of John Baugh of Stifel. Your line is open. John Baugh – Stifel: Thank you and good morning. Welcome, Guy. I wanted to follow up on the smartphone, the 10% guidance you thought. Could you give us sort of the building blocks to how do you get to that number?

Yes, we – based on the test that Mitch just helped Laura understand, the nine month testing timeframe, we have seen enough demand for us to believe that over time, it can become 10% of our business. And really, that's backing into how many agreements are on rent. The pricing is about the same from an APU perspective on smartphones as other categories. And so, from a number of agreements on rent compared to the total agreements in the store, we believe we're going to get up to that approximately 10%, and that will ramp over the course of 12 to 15 months. John Baugh – Stifel: Were those 200 stores you test – I am sorry, those weren't all Mexico or – I wasn't clear. Were those U.S. stores, some Mexico?

Those were U.S. stores. We tested it in the Kansas City market, the San Antonio market, as well as Oklahoma market. John Baugh – Stifel: Great, thank you. And no new additional stores in the back half of the year in Mexico. Is that just temporary or I mean, how do we think about that in the broader context of this could be a 1,000 store market?

I think what you – well, the short answer, John, is that for the back half of this year, we've got 180 stores now that are open. We've opened them very swiftly in a market that was new to us and new to the consumer. Guy alluded to it some in his prepared comments about becoming returns focused and an efficient allocator of capital. We want to make sure before we make any longer-term decisions on stores in Mexico, Acceptance Now, share repurchase, and the likes that we understand the different levers that are available for us to pull. We still are excited about Mexico, but our intent is to utilize the back half of this year to fortify the ranks and make sure that those stores are delivering the results we expect.

And that was our plan at the beginning of the year was to open 30 and get them all done in the first half of the year, to give ourselves some time to do what Robert just spoke about on the back half of the year.

Right.

So that hasn't changed from the beginning of the year. John Baugh – Stifel: Great. And then, on Acceptance Now, I may be in error here, but I think the EBIT percentage margin is down, and I guess there's infrastructure build-out or whatever. Just help me, is that correct? And sort of how do we separate between the underlying organic model, if you will, versus the incremental one-time expenses in that segment?

It is – the percentage is down. A lot of it is building the infrastructure, John; you're right. Although, as I mentioned briefly, at least in my prepared comments, we are looking at some of that overhead that we've built on how we can take it down, looking at the labor in that model also. Is there a few hours here or there we can take out of the model? Quite honestly, our losses, we are running slightly higher than we'd like and we need to get that down. Not that they're charging off more than they have been or more than we charge off in the core, but the percentage is higher because of the cost of the product. So how do we reduce that number and do even better on collections? So there's a wide range of whether it's overhead, store labor, working on the losses, very focused on the expenses both in the core and in Acceptance Now. But again, most of it is just because of the ramp-up, but that doesn't mean we're satisfied with that. We are looking at some ways that – to improve that over the back half of the year. John Baugh – Stifel: So Mitch, if we were able to look at just Acceptance Now and look at that EBIT line and look at totally organic – in other words, eliminate the infrastructure build, the margin would have deteriorated slightly meaningfully year-over-year and it would have done so because losses are higher, and not a lower revenue turn or – help fill in those blanks. Thanks.

Yeah. No, not a lower revenue turn. It would have been down probably on the mature stores less than 100 basis points, so it would have been down slightly, I believe, John, being pretty familiar with the numbers. Losses are running a little bit higher than last year, and that would have been the biggest component of that less than 100 basis point change that you'd see if you're able to split it out. A little bit, also, in store labor. We need to focus on store labor and over time. It would be between those two areas. John Baugh – Stifel: Great. And my last question quickly is just to clarify. The new technology that we're talking about, that's specifically a software program that makes automated approvals?

Yes, yes, but it starts with a customer adding their information into the program versus a manual form, pencil and paper form, and goes all the way through the process of payment and so forth. So, it's more than just a risk engine. A risk engine is built in, but it takes the whole process and automates it. John Baugh – Stifel: Great. Thank you very much for that color. Good luck.

Thanks, John.

Your next question comes from the line of Carla Casella from JPMorgan. Your line is open.

Hi. One guidance housekeeping question. Do you still – I didn't hear whether you reaffirmed the free cash flow guidance of negative 65 million?

Yes, Carla, our expectation would be that we would come very close to that number still for the balance of the year. So that's unchanged.

Okay. And then on the competitive standpoint, can you talk about whether you are seeing a larger number of competitive openings or more stores offering installment sales that may also be just dampening the same-store sales?

Relative to the core, no, we are not seeing more rent-to-own stores open. The trends have been pretty similar or more stores installment sales. There is certainly more activity in the retail partners around the Acceptance Now kind of model. There is competitors in that space, although, again, other than our one competitor, Progressive, that Aaron's owns, there really isn't – everybody else is very, very, very small in that space.

Okay. And then as you are looking to add new retail partners for that, are you finding that process more competitive in terms of what you have to offer to attract the retailers?

Not really, no. The demand is very high.

Okay. Great. And then one smartphone question. The margins built in, in the smartphone, would they – what products would they be most similar to?

The core business model. I think Robert had mentioned the AP will be similar and the margins are similar to the core business model.

Okay.

Although to the extent there is a higher propensity for those to pay out early, particularly during tax season, the margins will be slightly lower because we have taken the cash price to be a little bit more competitive with retail, as compared to our core products. So to some extent, the cost of goods sold on merchandise sales may be slightly lower.

Okay. But would it be more like an electronics purchase versus, I guess, a furniture…

Well…

Margin, I guess?

It's hard to land on that as a final answer, just because of all the pricing initiatives that we have going on right now. We have several pricing tests that are in flight. Some will address your question longer term and we have not solidified ultimately which of those tests are successful and which ones we need to tweak. The retention on the smartphones are more like appliances, though, so ultimately the way we have priced it is similar from an AP perspective with every other category, but for now the cash price is slightly lower.

Okay. And then, just one last one, how much of the deferred tax now have you paid through the year?

The vast majority of it we have now paid through the year, so most of that we did in the second quarter.

Okay. Great. Thank you.

Your next question comes from the line of Karru Martinson from Deutsche Bank. Your line is open.

Good morning. My apologies if I missed it but I didn't hear if you guys broke out how much was actually spent on the transformational initiatives in that kind of salary and expense line?

We did not. At Investor Day, we mentioned it'd be about 25 million over the course of the year. Some of that's OpEx; some of it's CapEx. We do anticipate for 2014 approximately 18 million to 20 million, the majority of which would be in salaries and other and a smaller amount, a few million dollars, in G&A.

Okay. And when I look back kind of at that expense line, we started to kind of see that ramp up in the third quarter last year. I mean, as we go forward, do you feel that those comparisons will get easier and the rate of increase that we've been seeing will be slowed, or do you feel these are the kinds of increases we should be modeling in going forward?

I think the former. It should moderate, to your point, as opposed to have a continued ramp over time, particularly given that the majority of some of the new growth initiatives have been put in for the year, particularly in Mexico. There is still some slight ramp in Acceptance Now in the back half of the year, but as a growth rate, it should moderate over the back half of the year.

And that's – as a growth rate, it would get easier, to your point, Karru, but also as we test around a more flexible labor model, we're going to take some of the pressure off that way and improve – not just have easier numbers to compare it to, but to also improve our expenses going forward with a more flexible labor model.

Okay. And just on the CapEx revision of 95 million, just a modest drop from the original 100 million, I mean, is that just timing, or was there any specific projects that were delayed or canceled?

No, it's just a minor change. I would probably more describe it as timing and just minor changes to our expectations.

All right. Thank you very much, guys. Appreciate it.

Thank you.

Your next question comes from the line of Hale Holden from Barclays. Your line is open.

Thanks. Thanks very much for taking the call. I had three quick ones. On the smartphone rollout, I was wondering how the payments there work for you? Do you capture in margin sort of ongoing payments to the carriers, is there a giveback from the carriers as you sign people up, or is it just simply the rental fee for the hardware?

We get a rental fee for the hardware, as well as we collect money for the carrier on the plans if the customer takes a plan and then end up with a commission off of that plan.

And is your commission dependent on the customer staying on the plan for a certain amount of months?

Yeah. For as long as they are paying, then we're getting our commission. It will depend on that plan.

They are prepaid and they're monthly, so it's not like a long-term contract where the customers have to commit to two years to pay. It's one month at a time, basically.

And we'll get a commission each month.

Great, thanks. And then, second question is your guidance seems to imply a decent sequential uplift in the fourth quarter, if I run your full year versus the third quarter you gave us. And I was wondering, kind of what's driving your confidence there?

Well, certainly the smartphones are a big part of it as those ramp up with the rollout in July. That would be the number one thing. Some of the other initiatives that we're rolling out that Robert referred to, especially around the price testing, would be the other one. But smartphones would be probably three quarters of that and then some of the other initiatives that we've been talking about would be the rest of it.

Okay. And then, last question from us is I was just wondering if you could walk through the difference, again, between the Acceptance Now customer, where only one in four customers don't take the contract to buy out, versus the core, where you see three in four customers give back the product before buyout. I was wondering what drives that delta?

Well, I think the – one, Acceptance Now is a monthly business model versus a weekly model. The consumer went into a retail store primarily to buy versus renting, in that case. Those would be the two main difference. Its a little bit higher income level customer, a little bit – a little bit higher when we go back, we don't check credit, but when we go back and look at the creditworthiness of the customers, in hindsight the credit scores are higher on the Acceptance Now. The income levels are a little higher. They went in to buy it versus renting in the first place, and hence monthly versus weekly would be the four main things, Hale.

Great, thank you very much. I appreciate it.

Thank you.

Your next question comes from the line of William Reuter of Bank of America. Your line is open.

Hi. I have a question following up on one of your responses to Carla's question. You talked about there being more activity in your retail partners in the Acceptance Now model. So I assume that this means some of your – some retailers that are offering some of these services themselves. I guess, is that the case, and then can you talk a little bit about what you're seeing there?

No, I'm not familiar with any retailers, certainly of any size, offering this themselves. Our competition in this space really is Progressive. We do share a lot of stores with them where we are both in the same stores and so forth. Of course, we're in there right now with a manned kiosk and they would be just a virtual solution. But I'm not familiar with any retailers doing it on their own versus either us or Progressive.

Okay. That's useful. And then, I was curious if your credit scores or any of the data on average income of your customers have changed over the last 12 months just kind of what you are seeing from that?

From the majority of information, we haven't looked at credit scores that recently, but all the other data appears to be the same. There hasn't been much of a change at all in income levels, average age, and all the other demographic stuff we look at. We haven't seen a change in the last 12 months. Certainly nothing.

Okay. And then one last one. I think you said that, you tested the smartphones over nine months in three different markets Kansas City, San Antonio, and one other. Did you say how many stores you tested it in those markets?

About 200 total.

Okay. That's useful. Thank you very much.

Thanks William.

There are no further questions at this time. I would like to turn the call back over to Mr. Robert Davis.

Thank you, Keith, and again, thank you, everyone, for joining us. Suffice it to say, as we opened the call, we are disappointed with our results. We understand the urgency to respond and are excited about the opportunities going forward. A lot of good things going on in the company, and we look forward to updating you on our progress next quarter. Thank you very much.

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