Upbound Group, Inc.
Q4 2008 Earnings Call Transcript

Published: 3 Feb 2009

[Executives:]

Mark Speese - Chairman & Chief Executive Officer Mitch Fadel - President & Chief Operating Officer Robert Davis - Chief Financial Officer David Carpenter - Vice President, Investor Relations

[Analysts:]

Arvind Bhatia - Sterne Agee Laura Champine - Cowan and Company John Baugh - Stifel Nicolaus Jason Traheo - Barclays Capital David Burtzlaff - Stephens Inc. Mike Smith - Kansas City Capital John Curti - Principal Global Investors David Schmookler - Kingsland Joel Havard - Hilliard Lyons Gina Matsuyama - Post Advisory Group

[Operator:]

Good morning and thank you for holding. Welcome to Rent-A-Center’s fourth quarter and year 2008 earnings release conference call. At this time all participants are in a listen-only mode. Following today’s presentation we will conduct a question-and-answer session. (Operator Instructions) 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, Vice President of Investor Relations. I would now like to turn the conference over to Mr. Carpenter, please go ahead sir.

[David Carpenter:]

Thank you, Elisa. 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 outlined our operational and financial results that we made in the fourth quarter as well as the year end 2008. If for some reason you did not receive a copy of the release, you can download it from our website at www.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 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 most recent quarterly report on Form 10-Q for the quarter ended September 30, 2008. 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 Mitch. Mitch.

[Mitch Fadel:]

Thanks, Dave and good morning everyone and thanks for joining us on our fourth quarter earnings call. We were pleased with the fourth quarter as our financial results were within our guidance and while ahead of consensus estimates. Traffic was good, even a little bit better than we had forecasted. We didn’t wrap more lowered priced items things we call Super Value and this lowered our average per unit or APU resulting in same-store sales being flat. Overall, this worked pretty well and we are going to keep the Super Value’s concept. While at the same time, we’ve been adjusting somewhere other pricing, which will positively impact APU over the first half of 2009. We believe we can do that without affecting demand as week rates the price on some of these other items by approximately 4% by adding just $1 a week and we believe this Super Value have helped us retain and attract more of the lower income consumer that we’re previously losing. Overall, we continue to see a higher income consumer relative to average income levels in a few years ago, most likely driven by the credit tightening in traditional retail. So, to summarize demand is strong, APU is a little weak and we believe we can get that back up over the next six months without effecting our Super Value or demand which again that the key metric strong demand so, a good quarter and one of the reasons that we’re raising guidance for 2009. Our collection efforts remained solid as 2008, the average weekly delinquency number was the lowest that it’s been in the six years. That translated the losses due to customers’ skips and phones for the year down 30 basis points from 2007. Again, a key point of our business model especially in a tough economic environment like this is because equity doesn’t transfer until ownership was taken at the end of the agreement or the primary purchase option if the customer is struggling. Unlike traditional retail, we can pick up the item and of course we have an outlet for it. As well as the original customer can come in and virtually pick up whether left off when they get the feedback on the ground. In other words the transaction works even in tough economic environments like the one we are in. Inventory management remained solid, as our inventory held for rent came down from the third quarter as expected and we remained comfortable with our inventory levels. We continue to work on our new inventory purchasing initiative that I mentioned in last quarter that will rollout in phases throughout 2009. We remained excited about the potential that there is with this more centralized approach, as we believe enhanced inventory management will help us to take advantage of a higher percentage of their rental opportunity. Besides working at increasing demand, we are always working on expense reduction initiatives. I will give you one current example; we are working on lease expense. In this tough real estate market, we believe that we are ready to renegotiate some leases especially those expiring within the 12 to 24 month. We believe in doing so, we may be able to limit any future rent increases and in some cases get rent reductions. Additionally, we continue to work on the integration of our financial services kiosk and about 350 stores and Mark, will talk more about that in a moment. So, in summary it was a good quarter and we have a lot of good things in the worse for 2009. We remained focused on driving traffic to targeted advertising and marketing programs, maintaining our control of delinquencies, properly managing our inventory, enhancing the overall customer experience as well as improving efficiencies and maintaining tight expense controls. So, I’m extremely proud of the job our 18,000 coworkers are doing and I thank them for the commitment and solid performance. So, with that I’ll turn it over to our Chief Financial Officer, Robert Davis.

[Robert Davis:]

Thank you, Mitch. I’ll spend just a few moments here updating you on our financial highlights during the quarter and then I’ll turn the call over to Mark. I would like to mention that much of the information I provide whether it’s historical results or forecasted results will be presented on a recurring and comparable basis. So, as outlined in the press release, total revenues were $699.8 million during the fourth quarter down $17.2 million, as compared to the fourth quarter of last year. Now, this slight decline of 2.4% is primarily the result of having approximately 10% fewer stores in the period. That is a result of the consolidation plan that we announced last fall. Our same-store sales comp came in flat for the quarter and net earnings and diluted earnings per share as adjusted were $31.4 million and $0.47 respectively, increases of close to 12% in both cases. Our fourth quarter EBITDA came in around $83.3 million with the margin of 11.9%, a 40 basis points increase over the fourth quarter of last year and for the full period the 12-months ended 12/31/‘08 we posted EBITDA of approximately $364 million in a margin of 12.6%. We continue to post strong results in both actual EBITDA and margins and these results ultimately lead to our strong recurring cash flow generation. As you all know in todays macro-environment there is a heightened focused and awareness placed on cash and liquidity in the strength or weakness of a company’s balance sheet. We continue to believe that our ability to generate strong recurring cash flows is a true strength of our company and business model and ultimately allows us to continue to enhance our balance sheet going forward In fact, our positive operating cash flow is close to $70 million during the fourth quarter alone and has now equated to approximately $385 million during the full year of 2008. As a result and particularly in this uncertain economic environment, we have been focused primarily on continuing to strengthen our balance sheets as I have alluded. During the fourth quarter, we sought and secured waver from our bank syndicate allowing us to tender for our outstanding tranche B term loans for less than par amounts. This waver along with our cash flow generation allowed us to reduce our senior indebtedness during the quarter, by approximately $32.3 million on a net basis and it was the primary driver behind the $4.3 million gain on the extinguishment of debt recorded during the quarter, which along with other items have been backed out of our pro forma results for the quarter and year ended December 31. Additionally, we were able to reduce our subordinated debt by $15 million during the quarter. So, all combined this fourth quarter debt reduction amounts now bring the total reduced indebtedness during 2008 to over $312 million. Now, as a result of this debt reduction, our leverage at year end was lower to 2.43 turns down from 3.08 turns, since the prior year-end of 2007 and this positions us comfortably below the floor on our covenant requirement of 3.25 turns, as well as allows us to step down our spread 25 basis points on the term loan A and revolver facilities going forward. At quarter end, net debt to book cap equated to 42.4%, down over a 1,000 basis points since the prior year-end 2007 and so at year-end 12/31/’08 our debt levels now equating to less than $950 million, were made up with the following amounts. Approximately, $722 million in senior-term debt and approximately $225 million in our 7.5% subordinated notes, while ending the quarter with a cash balance of over $87 million. These efforts we believe have positioned us well to manage through these continued challenging times. Additionally, during 2008 the company has expanded over $61 million in CapEx, as well as deployed close to $16 million in the acquisition of stores and accounts and over $13 million in share repurchases. In fact, we purchased over 800,000 shares in the fourth quarter alone at an average per share cost of less than $13. So in conclusion, our cash flow remains strong; leverage levels are healthy and continue to improve. We feel comfortable with where we are in regards to our leverage, liquidity, cash flow and generally our overall capital structure in this period of economic uncertainty. As always, we will continue to prudently utilize our cash resources going forward. In terms of guidance as outlined in the press release, we anticipate for the first quarter of 2009, total revenues to range between $721 million and $741 million with diluted earnings per share ranging between $54.60. For all of 2009, our total revenues are expected to be within a range of $2.83 billion and $2.89 billion. With diluted earnings per share estimated in the range of $2.15 and $2.32 which is an increase from our previous guidance provided for fiscal 2009 and is largely the result of the operational improvement as Mitch spoke about as well as the strengthening of our balance sheet. As always this current guidance excludes any potential benefits associated with potential stock repurchases or acquisitions completed after the date of this press release. So with that, let me turn the call over to Mark.

[Mark Speese:]

Well thank you, Robert and Mitch and good morning everyone and thank you for joining us. Suffice it to say, I’m pleased with our overall performance during the quarter, particularly in light of the current economic environment. As you just heard from both Mitch and Robert, the demand for our products and services continues to be favorable and financially, we believe we are sound and well position to execute our strategies. As Mitch mentioned, while there were some reduction in the average monthly rental rate due to trading down and/or favoring more of the Super Value products, traffic is measured by deliveries was up. As consumers find themselves with fewer options and faced with the uncertainty of the future, we believe more and more come to appreciate the flexibility and convenience of our program. All the while, our delinquency and losses continue to run at or below historic levels. Operationally, I’m pleased with our team has performed and financially as Robert mentioned, the company is in good shape. Having reduced our indebtedness approximately 25% in the last year alone and with our leverage ratio at 2.43 turns, I believe we are well positioned financially. Again, I’m pleased with how we’ve performed. Having said that, we are mindful of the macroeconomic environment we are in. Including the instability and uncertainty of consumer spending, rising unemployment and the impact that may have on-demand, while currently low compared to last year the instability of oil and energy cost and the impact that may have on demand as well as our own cost, in the financial and banking markets and continued tightening of credit and access to financing. At the same time, again, I believe we are well positioned to execute on our strategies and plus given these factors our outlook for 2009 remains cautiously optimistic. Let me spend a moment on financial services. When we spoke last, we mentioned that we would not open any additional stores until and unless, we improve the operating results of those locations including in top line losses and ultimately the bottom line results. We also discussed some of the work streams that were being completed as it related to the IT and back office support systems. I’m pleased to say, that all of the work streams are completed and while we are not yet ready to open additional stores, I can say that we have and continue to make progress in the results of those stores. The top line is growing and more importantly, we have made meaningful improvements in our delinquencies and losses. In fact January was seasonally better anyways. Our losses are in the low 20% range, quite an improvement from the prior months. We still have work to do and as I stated previously, the next couple of quarters will tell us a lot about our ability to execute that model, but I remain optimistic that we’ll be successful as we continue to work and improve our operating results in the near-term. All in all, it was a good quarter in a very difficult environment and as previously stated I believe we’re well positioned as we began 2009. We continue to work hard educating and enlightening potential customers of the benefits of our products and services, as well as enhancing the overall experience for those currently doing business with us. I appreciate all of the hard work and commitment of our coworkers and your continued support as well. With that, we’d like to go ahead and open the call up for questions.

[Operator:]

Your first question comes from Arvind Bhatia - Sterne Agee.

[Arvind Bhatia - Sterne Agee:]

Couple of questions, first I’m wondering if you can comment on the rentals being slightly weaker than you had projected. Is that the APU factor that you were talking about or there something else? I’m wondering if you have any latest thoughts on the regulatory environment particularly on the payday loan business, Mark, what you see as developing and how you guys will confront that in the next quarter or two.

[Mark Speese:]

Sure. Mitch, do you want to talk on the first one, the APU?

[Mitch Fadel:]

Actually the demand, Arvind, in the fourth quarter was a little better than we expected and by metric of deliveries, it was stronger than we’ve been expected. So, the good quarter from a traffic standpoint, the overall revenue was slightly off because the APU went down and that's what I mention, where we’re going to maintain the Super Value’s approach because we think it is helping us with the lower income consumer primarily, but there are some other prices we can tweak up a little bit to make up with that. We think we’ll get that APU back in the first half of '09 and when I say some of the other prices it certainly as I mentioned, you can get a dollar. If you raise the dollar you get a 4% increase, so that’s how we taken the price from $25 a week to $26 a week and what we’ve seen over our history of the dollar doesn't matter much and on some items to be competitive. We also have the ability to bring down the term. So, we can get the APU up, but take a month or two or three off the overall rental term as the competitive an overall place. So, there is a lot we can do with pricing and how they doing with pricing to get that APU back in the first half of the year. Sticking with the hot deals for those will confirm demand was strong and we’ll get the APU back by tweaking some of the other pricing in the first half of '09.

[Mark Speese:]

On the regulatory question and I know you said primarily financial services, certainly as it results to rent-to-own, we were comfortable, there are 47 states anyone knows that they’ve got environment is pretty good and we continue to work on others. From the financial standpoint, there has been a lot of commentary around it. Again, there are approximately 35 or so states today that have enabling legislation. We’re in about half of those, we’re very mindful. Well, again. We’re not opening any stores right now anyways and to extent we do began to start opening additional stores and all would be in those states and have the enabling legislation and frankly, we’ll just continue to fill out the states that were in. I think we’ll know a lot more over the next probably several quarters. I know the administration, the new administration there’s been some talk about not just financial services, but anything around financial and the cost and how they may want to rein that in. It will just be part of anything. It’s frankly way too early to say, but I know the industry much like rent-to-own is working to hard in terms of educating and making the case or the need, I mean certainly I think we can demonstrate that the consumers like and want the product and service and what can or needs to be reached form a regulatory standpoint that makes the option available to the consumer and allows the provider to be able to do. So, with that probably we’ll have to be debated and I’m sure at some point in the future will come up, but at this point its more grass roots educating and informing and we hope we’ll have an opportunity at the right time to show the need and the value of the transaction and I will tell you for what it is worth, the FDIC just recently did a study and showed the cost of NSF checks as an example and comparing it to the financial service with the payday lending business. I know some might criticize what might be employed to be 400% interest rate. If you were trying to calculate that on a payday loan and again that’s not because it’s a short-term loan, but if you were trying to compound rate that’s the number you come up with the FDIC study, which was done independent and compared to that NSF and the checking in the banking. The fee there is close to a 1100% and I share that because the point there again as the consumer knows that as well and I know what works that’s for now than the cost and so forth and so, again hopefully as time goes on, there will be more in data that will come out that will help support the argument and again we hopefully we’ll have an opportunity to be able to show and demonstrate, but nothing going on at the moment obviously the new administration is settling in and time will tell on sure over the next six to twelve months.

[Arvind Bhatia - Sterne Agee:]

Is there any more clarity on the stimulus package, what they’re hopes for the rent-to-own business particularly Robert, on the depreciation side and also just in general, what is the new guidance from you guys implying for free cash flow? Can you refresh us on that?

[Robert Davis:]

Yes, obviously Arvind, as it relates to 2008 part of one of the drivers that led to our cash flows issue as well as the net debt reduction was the benefit of accelerate depreciation on our rental products and that benefit us in 2008. We do expect that charge of deferred taxes to turn in 2009 and so, as we think about current guidance what we know today. Irrespective of what’s currently being contemplated to a new stimulus package, what we know today is we’re estimating operating cash flow around $170 million this year, CapEx were about $60 million, so free cash flow around $110 million and obviously that’s well below last year, but again part of that is the turn of some of those deferred taxes that we benefited from an ’08. Having said that, our understanding is the current draft of the economic stimulus package does contemplate similar type accelerates depreciation. Know we’re not factoring that in our guidance right now or any of our forecasts to extent that happens that only enhances, what I’ve just spoke of and so, as we sit here today, albeit we could benefit in '09. We’re not going to speak to it until we know for certain.

[Arvind Bhatia - Sterne Agee:]

What’s all you can tell it could be a similar benefit, not any less?

[Robert Davis:]

We’re estimating $30 million to $40 million benefit in ’09 and so that free cash to go from $110 million to $150 million.

[Operator:]

Next question comes from Laura Champine - Cowan and Company.

[Laura Champine - Cowan and Company:]

I just have a question as a little more detail on where you think you might be able to take prices up or there is specific product categories that you’re targeting on that and are any of those pass along the price increases you’re seeing from vendors?

[Mark Speese:]

It’s really within each category Laura, within the each category looking at products within those categories, if not any one particular category as much as looking product-by-product. As far as price increase were some of this passing on price increases in appliances, but on other products with deflation of electronics mostly when we want to raise our APU there as I mentioned earlier, we’ll bring down the term because the cost continued to go down and by bringing down the term we can lower the cash price in the total rent-to-own price or someone wants to take it ownership, even though we get more for month. So, on the electronic side overall the price is come was down not up.

[Robert Davis:]

Furniture, we’re not seeing any increase in furniture and accessories cost, just appliances and it’s wasn’t huge it 2% to 3% on the appliances and we had to pass that one, but on the other one is a little bit of margin enhancements on certain products, a lot of cases, it is a matter of raise in the APU, so you’ll get that monthly revenue, but not really changing the overall margin, because we bring down the number of month to acquire ownership.

[Operator:]

Your next question comes from John Baugh - Stifel Nicolaus.

[John Baugh - Stifel Nicolaus:]

Thanks, could you give a little more color on the delivers we’re up. Is that sequential year-over-year? Does that mean tick ups were net in original BOR whatever? Just some more color on actual customer accounts contracts outstanding. In the third quarter, you alluded to some, I guess increased pick ups on our struggling customers and you don’t seem to have experienced that, so some commentary there, thank you.

[Mark Speese:]

Sure John. The deliveries were up sequentially over the third quarter and year-over-year. We grew in customers and in the overall BOR. Pick ups were about flat year-over-year, a little more on the payout side, but the primary driver deliveries were up year-over-year and sequentially. The revenue would have been higher had the APU not gone done and that’s what we are trying to fix going forward, that I’ve already talked about, without affecting that demand of the hardest product. So, our demand was strong sequentially and year-over-year.

[John Baugh - Stifel Nicolaus:]

Do you think it was your super value product? I know it’s hard, but what would you pinpoint is the reason in an obviously worsening environment, you seem we did better on deliveries?

[Mark Speese:]

I think two primary things, the Super Values were part of it and I also think the worsening environment, less and less options for the consumer drive them in a rent-to-own store and obviously we prefer they come in rent-a-center, but I think rent-to-own becomes more of an option for that tightening credit out there. From an advertising standpoint we tweaked that a little bit. We did a little more advertising gear towards that consumer that’s going to turn down for credit; we call www.creditfreelife.com for any of you who want to take a look at it and we explain the rent-to-own transaction there. We do some of that kind of advertising and again we call www.creditfreelife.com and we did some television around that with Mark in a commercial. In addition to our normal advertising, so targeting that, what we call a shoulder customer that has maybe had access to credit a year ago and doesn’t any more and more targeting of that customer. So, I think it’s the Super Value is getting to the lower income consumer in our credit free life push on that consumer that is being affected by the head credit a year and is now being affected by the tightening of it.

[John Baugh - Stifel Nicolaus:]

Yes, and Mark I guess you are the [Inaudible] of the RTL industry, but I was impressed by that add and I thought it made a lot of senses. Is there any way of tracking the success of that message which as you said is more towards the transaction and the flexibility and the like.

[Mark Speese:]

The main way we are tracking it John is looking at the website hits when the commercial is running and when they don’t run, but the websites given a tremendous amount of activity. So, we do see at a successful based on a number of people that are going through the website and how many pages they look at when they are on the website. For anybody who looks at that kind of business, it’s not just a matter of going there, but how long they are there is another key metric to that. So, based on the traffic to that we see the successful.

[Operator:]

Your next question comes from Emily Shanks - Barclays Capital.

[Jason Traheo - Barclays Capital:]

Hi, good morning. This is actually [Jason Traheo] and for Emily. First, regarding the debt pay down just wanted to confirm something, so you have repurchased $42 million of the term loan B, but senior debt is down $32 million, so was there a revolver draw or something else going on?

[Robert Davis:]

Yes, 12/31/08 we also have a $20 million line of credit with one of our treasury banks cash management banks that was drawn about $12 million at year end and that has since been paid down since 12/31/08. So, in the first quarter we’ve already reduced our debt another $12 million since year end, but that was what’s going on there.

[Jason Traheo - Barclays Capital:]

And then along with the same lines, can you speak to what your debt pay down plans is for 2009? Do you expect a similar level as 2008?

[Robert Davis:]

Well, certainly not the similar level, just given some of the comments I made earlier in regards to our forecast for free cash flow in this year, again as we sit here today around $100 million to $120 million of free cash. The majority of that we anticipate being focused on debt reduction and then to the extent is further economic stimulus act that’s passed this year that enhances that free cash flow $30 million to $40 million. Again, a portion of that would look to reducing indebtedness. Obviously, as you think about our debt payment schedule from a mandatory standpoint. In 2009 we’ve only got $22 million of mandatory payments and then next year that number ramps up considerably, primarily due to the maturity of our subordinated notes that matured in May of 2010. So, we’ve got about 15 months there to look at how we’re going to address that situation, but coupled with 2009 and 2010 cash flow. If we focus 100% of those dollars to debt reduction, we could essentially pay down our mandatory debt for the next two years, without any further needs for cash above and beyond that. So, there will be a continued focus on that, but not at the level of 08 just given the deferred taxes that we were able to recognize this year.

[Mark Speese:]

Along that wide Robert, you may want to remind that we do have a revolver that has above $260 million of availability under it.

[Robert Davis:]

Right, so when Mark, alluding to is albeit the $25 million sub notes that matured May of next year, but theoretically we’ve got $270 million available under our revolver as well as the $20 million of the other line of credit. So, close to $300 million of availability or liquidity dropped harder if you well, could utilize in regards to those notes as well.

[Mark Speese:]

Those notes are all callable at par in May of this year.

[Robert Davis:]

That’s correct.

[Jason Traheo - Barclays Capital:]

That detail helps that a lot and then just lastly, can you give us CapEx and cash taxes for the quarter?

[Robert Davis:]

Cash taxes for the quarter essentially zero and then CapEx for the quarter was about $20 million, so $60 million and $61 million for the year, $20 million of that came in the fourth quarter.

[Operator:]

Your next question comes from David Burtzlaff - Stephens, Inc.

[David Burtzlaff - Stephens Inc.:]

Few questions; one, retail sales seem to be pretty strong and gross margin was much better than your guidance. Is there anything in there that they caused that?

[Robert Davis:]

Yes, Dave, this is Robert. What you’re referring to is the margin on merchandise sales, I think came in around 70%; our guidance was 75% to 79%. The primary driver behind that is the fact that we sold about a dozen stores in the fourth quarter and so, the products received for that inventory those accounts were booked in merchandize sales and then the RV or remaining value of those were in the merchandize cost of goods sold line. However, that enhancement of that improvement over the guidance was offset by an increase in our amortization of intangibles. We saw that, we did write-off goodwill associated with those stores. So, that deal essentially broke us even on the transaction. There was some benefit on the gross margin line, but that was offset by amortization on the bottom line and so, if you think about the first quarter guidance we gave on that line. We’re taking that backup, but we don’t anticipate further sales going forward on stores and accounts.

[Mark Speese:]

Although, having said that Robert, we were in our guidance range, if the low-end of that guidance range on the actual to you

[David Burtzlaff - Stephens, Inc.:]

Robert, do you have the payday loss rate for the quarter and you said it was around mid 30s in the third quarter?

[Robert Davis:]

In the fourth quarter, it was in 30% to 35% range and so, when Mark, in his prepared comments, he talked about January thus far are to be in low 20s as the significant improvement from what we’re running in the fourth quarter.

[David Burtzlaff - Stephens, Inc.:]

Okay, seasonally that should come down anyway?

[Mark Speese:]

It was trending better throughout the quarter and as gotten better still in January. You’re right seasonally expected, but trending better throughout the quarter.

[David Burtzlaff - Stephens Inc.:]

Okay, and then last question. How much do you think gas prices coming down helped you on the operating expense line?

[Robert Davis:]

Well, it helped us marginally if you will maybe a penny and I will say that we’ve got a chart here that show you that for the quarter our gas in terms of our vehicles offset by our utility increases is about a $1 million benefit for the quarter, so that helped us a little bit in and gas prices are coming down and how much of that also benefited the consumer may impact. So, there is two sides of that.

[Operator:]

Your next question comes from Mike Smith - Kansas City Capital.

[Mike Smith - Kansas City Capital:]

Most of my questions have been answered, but in terms of the APU, what percentage decline are you experiencing there or did you experience in the fourth quarter?

[Robert Davis:]

I don't have that right in front of me, Mike but somewhere over the last four or five months, primarily the fourth quarter 2% to 3%.

[Mike Smith - Kansas City Capital:]

So, is it fair then guess the traffic was up 2% to 3%, so you have the flat comes?

[Mark Speese:]

Yes, I think certainly I couldn't disagree with that observation.

[Mike Smith - Kansas City Capital:]

And then, when is your new store program going to look like in 2009 and 2010?

[Mitch Fadel:]

In 2009 we are going to add. 30 to 40 new stores and then look to 2010 ample. We are going to continue to open. We’ve had square footage decline the last couple of years with the consolidation program and closing some of the nonperforming stores, but I think those 30 to 40 new stores opening will give us maybe a little bit of growth was continue to close some as leases expired once that are underperforming, but that will give us a little bit of growth. I think as we get into 2010, we will be able to take that 30 to 40 year up to 50 to 60 year range and have some square footage growth area. I think what, we should have in plus of few acquisitions along the while I think we have a little bit square footage for this year and then more in 2010. I think decline in square footages will stop.

[Operator:]

Your next question comes from John Curti - Principal Global Investors.

[John Curti - Principal Global Investors:]

Good morning, in terms of the ability to negotiate better terms on leases. How many stores do you have coming up in '09 and '10? And what do you think you can do there in terms of getting those rent rates down?

[Robert Davis:]

If you think about the 3,000 stores, we are primary in five year leases. So, we pretty much turned the leases every five years. So, in that 600 range per year expire. We’ve as far as forecast what we can do is that we certainly think this is the right environment where we can get any some increases knocked out, knocked in and at least keep it flat going forward any reductions beyond that will be greatly on top at least keeping a flat. We really haven’t forecasted how much we think, we can say we haven’t put it in our model, pretty much anything there will be upside to the model and Mark, I don't know if any thoughts.

[Mark Speese:]

We are having a little bit of success. I wouldn’t consider material at this point. We started this a couple of months ago again in light of what’s going on and knowing that some interest point as we renegotiate these leases. We are looking out a little bit further where normally you may be required to give us six or nine months advance notice. Certainly those will be in work like might we reach out a little further, 12 or 15 months and we feel confidence and comfortable with that store and its results and its location. It’s an opportunity to go to that landlord and daily give them a little peace of mind. No one will give you a five year, you have got a good tenant, but in doing so we won extra Y and that’s either no increase or can we possibly negotiate the decrease. As you might imagine many of those landlords certainly sensitive to what’s going on and were businesses are struggling may have a more warm year. So, the first thing they ask whoever send your financials and the store is doing pretty good. It’s a little hard to what you might be able to do is negotiate the no increase and we’ve had some success without question and its not a material number, but when you think about doing 600 to 800 leases a year and again we are pretty early in doing if we can pick a number of its 20%, but it’s not an increase even. Yes, not so much of a benefit today, but just as we sit here and think about how we manage our business and manage cost and frankly try to take advantage of the situations and I’ll mean it that way, but the fact is real estate values have depressed and so make sure we’re paying fair real estate prices today. Irrespective of why it is, what it is and so we’ll see benefit as just hard to quantify at this point, but we’ll see some of that.

[John Curti - Principal Global Investors:]

On your financial services business, how much of maybe the improved guidance for this year, is a reflection of maybe improved results out of that business?

[Robert Davis:]

No, we’re still assuming. Again, what we’ve said, we were going to open it more until we enhance the results. We believe last quarter I’ve stated that at the time they were losing $1 million a month and the expectation was that we would be able to get those breaking even and performing as we expected or that we wouldn’t go further. We have modeled that assumption as we sit here today that will be able to accomplish that that will get them to hold their own and do a little bit, but that was consistent with our expectation when we talk last quarter. That haven’t changed and so in breakeven later in the year after a couple of quarter there is a lot in the beginning of the year and $1 million dollars of operating loss going into 2009 per month. Later in the year, breaking even means their model as to the loss on the front end about $0.05 to $0.6 range for year and that hasn’t changed for since the last time we gave guidance, but this still in there that $0.05 to $0.06 loss in ’09.

[John Curti - Principal Global Investors:]

You mentioned the opportunities on centralized purchasing. Is that in terms of just keeping the inventory levels down or also getting a little better price through the centralized purchasing?

[Robert Davis:]

I think it’s both, as well as reducing the number of times in any retail business, there is time to your out of the product that our consumer wants and if we can reduce those times, we don’t have the product with the highest demand in that particular way because we have better data in a better IT system giving you historical results and so forth you do more business. So, it’s a matter of better pricing and we’re lowering the inventory primarily, as well as doing more rentals because you’re not out of key products at any part in time.

[Mark Speese:]

Right products at the right time, yes.

[John Curti - Principal Global Investors:]

With oil prices coming down, how much of a benefit maybe this year prices would it more or less hold at these levels for your delivery expense or fuel expenses?

[Robert Davis:]

Well, in our guidance we certainly have some assumptions about future prices of gas and oil and so, those assumptions are a little bit ahead of where we currently are, but it’s not they weighted-average price for the year is the ahead of where we are today, but that ramps up throughout the course of the year. So, I’m always assumes the current price of oil, but that’s going up in the summer time to what we think pricing will be. So, to the extent it stayed at these levels and doesn't go up then there might be upside.

[John Curti - Principal Global Investors:]

Lastly, what’s kind of the environment for acquisitions at this point?

[Robert Davis:]

It’s still active out there, there are smaller certainly than we’ve done in the past. Primarily, you see it in the press release it was 38 last year account purchases, where we bought only five stores for the year in 2008. We brought 38 stories then we call the comforts is where we call the competitive store above the accounts and just put them in our stores, which as you get chance more accretive, right because you just you’re buying the revenue and that taken on the expense when others storing the same town, so because our saturation level or penetration level is pretty high. We get open more stores, but certainly not like we used do. Most of what we see an acquisition that the account purchases, which again helped the revenue in a very accretive. You won't see big deals, where is a big store account increase, but we do another 38 and I predict in that 50 range this year of account purchases. The activities, there again another 50 of those that they will certainly help revenue and by accretive just bringing the revenue with all of the expenses. In a little bit on the store account of acquisitions, but I don’t think you will see any big there.

[John Curti - Principal Global Investors:]

Anything or consequence or any developments on the ColorTyme operation in terms of either possibly repurchase stores from franchisees or commitments by franchisees to step up store openings?

[Mitch Fadel:]

Well, they have last year, they opened in the, I don't have it in front of me, but in the 30 store range of course we did buy some also from them and I think they broke close to even from a store accounts standpoint. So, you buy them up, they continue to open. I mean if you look our last five years, we have probably averaged 30 to 40 year and we buy 30 to 40 year and so I think those continues to grow. We will continue to get acquisitions of them and some of them will be the account purchases as I mentioned earlier because in some we are in same town so, ColorTyme continues to be an accretive subsidiary for us, but also one that continues open stores and gives us acquisition opportunities as going forward.

[Mark Speese:]

I think what’s interesting Mitch correct me if I am wrong John. They are growing the franchise fees there’s been increased interest and growth in the number of franchisees. So, whether it is new folks coming in, we’ve had other that may have had another brand or been in dependent that have switched to the ColorTyme brand and so that’s been kind of exciting frankly. Whether that's given the market and/or the strength of that business model, the point is that what we are seeing, which is really where you to want to start from many ways if you think about from a franchise perspective, it’s your ability to attract and get operators and they’ve had a pretty good year on that front last year.

[Operator:]

Your next question comes from David Schmookler - Kingsland.

[David Schmookler - Kingsland:]

Did you guys say earlier that you repurchased shares of stocks in the fourth quarter?

[Mitch Fadel:]

Yes, just over 800,000 shares in the fourth quarter.

[David Schmookler - Kingsland:]

And how much did you spend on that?

[Mitch Fadel:]

I think it was around $13 million.

[Robert Davis:]

That was about $13 a share.

[Mitch Fadel:]

It was about 10 million or 11 million, yes roughly $13 a share.

[David Schmookler - Kingsland:]

Got it and then would you be able to break out the balance of the secured debt between the term loan A, B and the revolver at the end of the year?

[Robert Davis:]

At the end of the year, the break out was about a 175 million on A and the balance of the senior debt was term loan B. We did have 12 million outstanding under our line of credit and then the 225 million on our subordinated debt.

[David Schmookler - Kingsland:]

Correct me if I’m wrong, by I’m having in my notes that the term loan A matures in 2011 and that there is a rather sizeable amortization second half of 2010 if that’s the case and if it is, did your comments around turning enough cash this year and next year to meet the mandatory debt amortization, including debt amortization.

[Robert Davis:]

Yes, the term loan A matures in 2011, mandatory debt on A is 15 in ’08, 85 in 2010 and 75 in ’11. My comment around ’09 and 2010 is that between the revolver and our free cash flow we would be able to pay off our mandatory debt for the next couple of years. Obviously, we will be working on terming out the facility longer term as the environment improves in the next couple of years that would be our plan and our goal.

[David Schmookler - Kingsland:]

Okay and then just one other one around that topic. Does the credit agreement at this point limit you onto how many of the subordinated notes you guys can buyback in the market?

[Robert Davis:]

I think the question was in regards to bond repurchases in the open market, can you restate the question, you are breaking up a little bit.

[David Schmookler - Kingsland:]

Sorry about that. Is there a limit under the credit agreement at this point as to how many of the bonds you guys can buyback in the open market?

[Robert Davis:]

No, there is not. That falls under the restricted payments basket and given our current leverage ratios in terms of senior leverage, there’s currently unlimited amount available for restricted payment, be it share repurchase or bond repurchase.

[Operator:]

Your next question comes from Joel Havard - Hilliard Lyons.

[Joel Havard - Hilliard Lyons:]

One what I wanted a little color on, the sales lines have held in quite strongly over the course of ‘08, despite the disruptions. Is there something different going on with your existing customers behind that or is that possibly a different class of customers coming into the system?

[Mark Speese:]

Well, about the merchandise sales. Joel, it’s really a purchase option.

[Joel Havard - Hilliard Lyons:]

Yes, both of the sales lines? Well I guess the installment, that’s the customer that walked in normally, but merchandize sales particularly, is that a new customer coming in just to some meaningful degree?

[Mark Speese:]

I wouldn’t say to any meaningful degree, no. What’s encapsulated in the merchandize sales are the early purchase options where they come in and exercise the pay out early as well as the cash sales are off the floor and both of those are always taking place and it’s interesting. You probably heard us say in the past that the average products in our system, about 20, 21 months from the time we buy it, from the time it’s disposed off, are often than not to a rental transaction, that behavior hasn’t changed. Over the last couple of years it’s remained pretty consistent in terms of how long it’s in the system, how many times it’s rented and the average length of time it’s on rent in those periods and then how it behaves when it leaves the system. In other words over 90% leading to a rental transaction, the cash sales and so forth, but I couldn’t sit here and say that we’ve seen a material shift in what that customer looks like. We know the demographics of the customers have gone up a little bit over the last couple of years. The transaction as you mentioned Marc, the time in the system and how long it’s in our system is staying pretty consistent. Remember Robert mentioned earlier there’s a few million dollars in the fourth quarter selling from stores that were in there. That was offset by the amortization, so that’s part of it. I think payouts when products on our system on average 20 to 21 months; you’re about two years out from when you rented it on average, the average early purchase option. We had a good year in 2006, so we saw more payouts in 2008. The more you rent the more payouts you’re going to have in the next 18 to 21 months later. So, I don’t think it’s for the customer anything different, so.

[Joel Havard - Hilliard Lyons:]

Okay. One quick one and one other follow up. Do you guys have a sort of a rule of thumb you’ll be following say over the course of ’09 with regard to 8% of free cash flow that you’re willing to direct at the share repurchase effort or some other benchmark like that, that we could think of that.

[Mark Speese:]

No, not really. I think as we’ve indicated in some of the prepared comments and just our more recent history, well demonstrated in 2008 is the primary focus will be on continuing to strengthen the balance sheet and debt reduction. Having said that we did repurchase some shares in the fourth quarter given where the stock was trading at that point in time and what we though was a good use of capital. So to the extent that presents itself in ’09 we’ll balance it and look at that as an option as well, but we’re not going to go out and target necessarily share repurchase per say. All that will be taken into consideration of what’s going on in the environment, demand, cash availability and where the shares are trading at.

[Joel Havard - Hilliard Lyons:]

Last question, the Ohio payday loan initiative, how did that vote affect your view of that market in particular. Then more broadly I know you sort of addresses the regulatory environment, but maybe you could comment specifically on Ohio and how you may have adjusted.

[Mark Speese:]

Yes Joel, what you’re alluding to and most people will recall, Ohio the attorney general or I guess the governor had signed a bill back in the summer of last year that essentially would not permit payday lending as we knew it. Ohio has a procedure whereby if you meet certain criteria you can go onto a voter, a referendum or the citizens, the voters will decide whether or not that will take place. We were able to meet that objective and so it was put on. It was a referendum vote as part of the general election that took place in November, we were not successful. So the voters did not vote the way that we had hoped they would that would allow us to continue to operate as we had previously. We were mindful that that was a possibly and so in advance of that, had been looking at some other ways that we might be able to offer the product and in fact we applied for and received license and permits under what is known as the Ohio Mortgage Lending Act, the MLA. It’s a little different than what we had operated before and really probably the key difference is there’s minimums that we’ll lend and maximums and before where you could have been as little as $50, generally speaking the minimum is $150. Then we have maximums under that MLA, where we are limited to no more than $300. There are some other loans that we can do that are higher that are permissible, but what we’re doing in terms of the typical pay day under that MLA, has the mins and maxs and then the fee structure is different. It does have a much lower interst rate, but what it allows for is the collection of a application or a processing fee, as well as a credit check fee and albeit at lower rates than what we were able to do before, it gets us kind of close and we felt it was worth testing, so that is what we’re doing in Ohio. It’s probably a little too early, because it’s only been 90 days at this point, but thus far again we know the demand and the need is there from the consumer side. So we’re seeing the traffic and we’re doing the loans and we believe we can do it profitable, but again one that we’re still evaluating much likely are the other results and so forth in the other states. It’s a lower margin, so the test is can you make it up and buy, right. Then certainly some of the competitors given that all, I mean there was a reduction. Some of them left the state, others down sized quite a bit. So again we know we can leverage the real estate and some of the others. So Mike can afford us an opportunity to take up some business and to Mitch’s point, I’ll run a good volume if you will. So that’s what we are working on.

[Mitch Fadel:]

The way we leverage real estate and labor to some extent and utilities and all the other times, we can do business at a lower margin than others and then that’s probably the state that volume may come for us. So that’s worth it.

[Operator:]

Your next question comes from Gina Matsuyama - Post Advisory Group.

[Gina Matsuyama - Post Advisory Group:]

Housekeeping question; the 30 to 40 new stores for next year, that’s gross right?

[Mark Speese:]

30 or 40 new stores in the rent-to-own that we expect to open this year would be the gross number.

[Gina Matsuyama - Post Advisory Group:]

And what is the timing of that and how many stores do you plan on closing?

[Mark Speese:]

That would be ratably over the year.

[Gina Matsuyama - Post Advisory Group:]

Okay and then do you know how many stores you plan on closing?

[Mark Speese:]

No, we don’t because we analyze those over the course of the year. I think it will be somewhere less than that. I think we’ll have positive square footage growth, but it’ll be pretty minimal. It will be close to 30 to 40, slightly below that and then the overall; the net gain will be minimal.

[Operator:]

I will now like to turn the conference over to Mr. Mark Speese for closing remarks.

[Mark Speese:]

Ladies and gentlemen, thank you very much again for joining us and your support. Again, we are pleased with the fourth quarter. I’m pleased with how we’re positioned and how we’re starting 2009. Certainly none of us know exactly what 2009 will bring, but I believe that we are well positioned; both operationally and financially to handle whatever may come our way. Again, we appreciate your support and look forward to updating you on our progress next quarter. Thanks and have a great day.

[Operator:]

This does conclude today’s conference call. You may now disconnect.