Norm Miller - CEO Lee Wright - CFO

Brad Thomas - Keybanc

Good morning and thank you for holding. Welcome to the Conn's, Inc. Conference Call to discuss earnings for the fiscal quarter ended April 30, 2017. My name is Kelly and I'll be your operator today. [Operator Instructions] As a reminder this conference call is being recorded. The company's earnings release dated June 6, 2017 distributed before market opened this morning and slides that will be referenced during today's conference call can be accessed via the Company's Investor Relations website at ir.conns.com. I must remind you that some of these statements made in the call are forward-looking statements within the meaning of federal securities laws. These forward-looking statements represent the Company's present expectations or beliefs concerning future events. The Company cautions that such statements are necessarily based on certain assumptions, which are subject to risks and uncertainties, which could cause actual results to differ materially from those indicated today Your speakers today are Norm Miller, the Company's CEO and Lee Wright, the Company's CFO. I would now like to turn the conference over to Mr. Miller. Please go ahead sir.

Good morning and welcome to Conn's first quarter fiscal 2018 earnings conference call. I will begin the call with an overview and then Lee Wright will complete our prepared remarks with additional comments on the financial results. Our first quarter results shows the progress we're making, improving our financial performance, as the strategies we implemented last fiscal year to turn around our credit business continue to take hold. During the quarter, Conn's credit segment experienced higher finance charges, strengthening portfolio trends, controlled expenses, and lower borrowing costs. These positive trends demonstrate the significant long-term potential of our realigned credit strategy. In addition, retail segment profitability continues to improve, despite the proactive decision to reduce total sales reflecting the strength of our retail model. I'm encouraged by the progress we're making to improve Conn's financial performance and continue to expect annual profitability in fiscal 2018. As we have discussed on previous calls, we have assembled proven credit and retail business leaders who have experience managing large complex organizations, and are motivated by the significant growth potential Conn's unique business model represents. It is critically important to have an infrastructure of experienced and talented leaders across all segments of our business to manage a growing national retail chain and a unique credit portfolio. Our retail execution remains strong despite the decision to proactively slow sales growth by refining our underwriting standards and eliminating new store openings. Favorable product margins across all categories drove record first quarter retail gross margins of 38.4% while a 7.5% decline in retail SG&A expenses helped retail operating margins increase 90 basis points to 11.5% during the first quarter. First quarter sales were impacted by the underwriting refinements made last fiscal year, the delay in the payment of tax refunds, one less business day in 2017 versus the leap year in 2016, and general consumer softness while our transition to Progressive slowed lease-to-own sales from fourth quarter levels. We continue to believe higher lending rates have not had a material negative impact on our sales trends. As we mentioned in our fourth quarter call, we began transitioning our third-party lease-to-own offering from Acceptance Now or ANow a division of Rent-A-Center to Progressive a subsidiary of Aaron's. I’m happy to announce that as of May 24, Progressive's lease-to-own platform was available throughout all Conn's locations. Implementation was ahead of schedule reflecting the strong partnership between our two companies and the desire to have Progressive's lease-to-own platform available to all customers before the Memorial Day holiday weekend. Lease-to-own sales was 7.6% in the first quarter but were much stronger at the beginning of the quarter. Lease-to-own sales for February and March were 12% and 8.7% respectively but fell to 1.9% in April as our relationship with ANow wound down. As our sales associates become more comfortable with Progressive's offering and it becomes fully integrated within our IT and sales systems, we believe that we are uniquely positioned to capture more lease-to-own sales and currently believe this financing category could represent approximately 10% of Conn's retail sales. Progressive's similar growth oriented culture, advanced decisioning capabilities and robust balance sheet provides Conn's with a strong and committed partner and we look forward to working with Progressive. Moving on to our credit segment, we continue to focus on executing strategies to strengthen credit performance and profitability. Programs to increase interest income and fee yield are producing their intended results and are having a powerful impact on improving the profitability of our credit segment. Approximately 84% of current originations now have a weighted average interest rate of 28.6% up from almost 22% in September. During the year, Conn's expects to roll out new direct loan offerings, and additional lower interest rate states and once completed we expect approximately 90% of originations from Conn's in-house financing will be at higher rates. We are increasing the lower end of our previous long-term guidance for interest income and fee yield as new higher rate originations become a larger component of the portfolio. Once these programs are fully implemented and seasoned into the portfolio, interest income and fee yield is now expected to ultimately increase to 23% to 25%. We remain confident, credit strategies underway appropriately managed credit risk and we're seeing recent originations perform better than prior periods. However the benefits of stricter underwriting take time to appear and our overall credit segment results continue to be impacted by slower growth, changes in credit strategy, and the performance of accounts originated under prior underwriting standards. The delay in tax refunds also impacted first quarter credit performance. Early performance trends remain encouraging for originations made in the second half of fiscal 2017 after the more significant underwriting changes were implemented. First pay defaults and delinquency rates on originations from July of last year through February of this year are lower than the corresponding month in the prior year. We expect similar performance from originations after February, however at this point they have not been outstanding long enough to provide this information. It's important to note, that prior year originations also benefited from the high FICO no interest accounts now being funded and serviced by Synchrony. Originations made after the underwriting changes took effect in late second quarter of fiscal 2017 accounts for approximately 56% of the portfolio as of April 30, 2017 and portfolio performance is expected to benefit from continued originations under these tighter standards. As we have slowed sales and adjusted underwriting, we have experienced a significant increase in the number of repeat customers as shown on Slide 4. This is important because existing customers historically have had meaningfully lower loss rates than new customers. Customer originations with more than five months of credit transaction at Conn's were approximately 54% of the total originations during the recently completed quarter. This trend continues to increase as a result of the tightened underwriting standards, slower store opening pace, and increases in repeat purchases from customers and new market entered over the past four years. The underwriting changes and reduced store opening pace has caused the portfolio to contract $56.6 million or 3.7% since April 30, 2016. And since the end of last fiscal year, the portfolio has contracted $75.5 million or 4.9%. While slower growth and changes to our credit strategies are benefiting the underlying performance of the portfolio they continue to have a negative effect on the portfolio metrics including delinquency, provision rate and charge-off rate. However total provision dollars expense dropped by over $2 million compared to prior year. In addition to macro factors including weakness in the Houston market, slower portfolio growth combined with the decision to shift long term no interest programs to Synchrony impacted the reported 9.8%, 60 day delinquency rate for the quarter. Also while our higher risk vintages are maturing, they will impact delinquency rates until they exit the portfolio. Our static pool loss expectations are shown on Slide 5 and remain consistent with what we have outlined in previous calls. We continue to expect a static pool loss rate of approximately 14% for fiscal 2014 which only had 0.3% of the origination amount remaining. For fiscal 2015 we expect losses to be in the mid 14% range which has 2.9% of the vintage remaining. The expected loss rate for fiscal 2016 is in the upper 13% range with only 18.9% of this vintage remaining. For fiscal 2017's vintage, we currently expect losses to be better than fiscal 2016 in the mid 13% range as underwriting changes benefit originations made in the second half of fiscal 2017. We continue to believe our credit model can produce long-term static loss rates around 12%. As we increase interest income and fee yield to an expected 23% to 25% range, we continue to believe that we are well-positioned to achieve a credit spread of at least thousand basis points before servicing and financing costs. Creating this spread provides Conn's with the flexibility to successfully navigate ever-changing economic, regulatory and credit trends while maximizing financial performance. The groundwork to achieve this goal was implemented in fiscal 2017 and we should be fully realized on a run rate basis by the end of this fiscal year. I'm very encouraged by the better terms and lower all-in cost of our latest ABS transaction as improving credit performance and investor confidence are helping us reduce our ABS cost. We continue to believe the ABS market provides Conn's with an affordable and efficient way to finance our receivable portfolio even in a rising rate environment. The first quarter reflect the progress we're making turning around our credit results, while maintaining strong retail performance. With each passing months, better performing and higher APR originations are supplanting legacy receivables and we're moving closer to our goal of creating a credit business with the spread over 1000 basis points. I'm encouraged by the direction we are headed and expect to return to annual profitability during this current fiscal year. With this, let me turn the call over to Lee.

Thanks Norm. Consolidated revenues of $355.8 million for the first quarter of fiscal 2018 decreased 8.6% from the same period last year. Conn's reduced its loss to $0.08 per share for the fiscal 2018 first quarter compared to a loss of $0.32 per share for the prior year quarter. On a non-GAAP basis adjusted for charges and credits and the loss on extinguishment of debt, loss per share for the quarter was $0.05 compared to a loss of $0.31 per share for the same period last year. First quarter retail revenues were $279.4 million which declined $39.7 million or 12.4% from the same quarter a year ago, while same store sales declined 15.2%. Looking at same-store sales across our three store categories, core stores, single stores in new markets, and new stores in new markets, core stores represent approximately 57% of our store base, single stores in new markets represents about 24% at the same-store base, remainining19% of our same-store base represents new stores in new markets with existing locations resulting in the cannibalization of sales in these locations. For the fiscal 2018 first quarter, same-store sales of our core stores were down 13.2%. Single stores in new markets were down 18.7%, while stores in cannibalized markets were down 21.2%. Despite lower revenues, retail gross margin as a percentage of retail revenues expanded by 260 basis points for the same quarter and the prior year to a first quarter record of 38.4%. The improvement in gross margin is primarily due to improved product margins across all product categories, favorable product mix and lower warehouse delivery and transportation expenses through increase efficiencies and further optimization. Higher margin furniture and mattress sales represented 37.6% from our fiscal 2018 first quarter retail product sales and 53.2% of our product gross profit. Furniture and mattress sales have increased 580 basis points since the first quarter of fiscal 2015 when furniture and mattresses represented 31.8% of product sales. We continue to believe the longer-term goal of 45% of retail product sales from the furniture and mattress categories is achievable. Disciplined cost management helped reduce retail SG&A by 7.5% in the first quarter versus the same quarter in the prior year. We offset our increased store occupancy cost from a higher store base through cost savings in other areas. Retail and SG&A as a percentage of sales deleveraged 140 basis points from the same quarter last year to 26.5% due to lower sales. Turning now to our credit segment. Finance charges and other revenues were $76.5 million for the first quarter of fiscal 2018 up 9.1% from the same period last year despite a 3.1% decline in the average portfolio balance. The increase versus last year was due to a yield of 18.2%, an increase of 240 basis points from last year in stable credit insurance commissions. SG&A expense in the credit segment for the quarter decreased 2% versus the same quarter last year and as a percentage of the average customer portfolio balance annualized was 8.6% compared to 8.5% for the same period last fiscal year. Provision for bad debt and the credit segment was $55.7 million for the fiscal 2018 first quarter, a decrease of $2.1 million from the same period last year. The 3.7% decline in credit segment provision was primarily the result of a reduction in the allowance driven by lower balance of customer receivables in the first quarter of fiscal 2018. As of April 30, 2017 we had $112.8 million in cash and approximately $128.8 million of immediately available borrowing capacity under the revolving credit facility. Additionally, we had $615 million that could become available upon increases in eligible inventory and customer receivable balances under the borrowing base. Interest expense for the first quarter decreased $1.9 million or 7.3% from the same period last year to $24 million. For the first quarter annualized interest expense as a percentage of average portfolio balance was 6.4% with an average net debt as a percentage of average portfolio balance of approximately 73% compared to approximately 78% for the same period a year ago. During the first quarter we opened two new stores in North Carolina. We also opened a third store in the current quarter in Richmond, Virginia and now have a total of 116 stores throughout 14 states. We do not plan on opening any additional stores in fiscal 2018 and all of these new stores are located in geographies supported by existing distribution network. As our turnaround strategies continue to take hold and the credit segments financial performance improves, we will reexamine our unit growth plans and update investors accordingly. There is a significant opportunity for Conn's to expand its store base and become a national retailer by creating a sustainable platform first is critical to our success. To this end I'm pleased with the continued progress we're making. We continue to expect to invest between $20 million and $25 million in gross capital expenditures compared to $46.6 million in fiscal year 2017. Our ABS notes are performing in line with our expectation and I am extremely pleased with the terms we received in our latest transaction. During the first quarter, Conn's closed on a $469.8 million securitization transaction. The all-in cost of funds of the Class A and Class B notes was approximately 5.4% represented a 150 basis point improvement over the 6.9% all-in cost of funds for the Class A and B notes issued in Conn's October 2016 securitization transaction. We also concurrently issued the Class C notes in the April 2017 transaction providing us with a total advance rate of 84% which is the highest advanced rate we had achieved since we reentered the securitization market in 2012. This is the fourth consecutive ABS transaction that experienced better terms and lower all-in cost demonstrating investors growing confidence in our credit strategy. In addition to our April 2017 transaction, we expect to complete one additional ABS transaction during this fiscal year. During the current quarter, we redeemed all the notes outstanding under our 2015-A securitization transaction further reducing our overall cost of capital. Regarding the 2016-A transaction, although we've paid off the Class A notes, the Class B and C notes are still outstanding and have significantly higher interest rates compared to Company's other sources of capital. As a Class B and C notes are paid down overtime, the Company's all-in cost of funds will continue to decline. With this overview, I’ll turn the call back over to Norm to conclude our prepared remarks.

Thank you, Lee. Our business plan for fiscal 2018 focuses on returning to profitability by turning around the financial performance of our credit operation and reducing leverage. As we execute this plan, we believe we're creating a platform that will allow Conn's to become a larger national retailer. While the retail environment is quickly evolving, I continue to believe Conn's has a sustainable model that will allow the Company to compete profitably for many years to come. The foundation of my belief is Conn's differentiated business strategy, offering customers the ability to affordably finance top of the line brand name products for their homes, creates a retail experience unlike any other national or regional option today. The attractive rates of Conn's in-house credit offering combined with strong retail profitability creates a compelling business model that is unique and hard to replicate online or through a traditional retail model. I am encouraged by the progress we're making turning around our financial results and the long-term opportunity to become a national retailer. With that operator please open up the call to questions.

[Operator Instructions] Our first question comes from the line of Brad Thomas with Keybanc. Your line is open.

Hi, good morning Norm and Lee and congratulations on the continued progress here.

Thank you, Brad.

My first question - or couple questions if I could was just getting around same-store sales and I was hoping you could just give a little bit more color on trends through the quarter how they progress particularly given the delay in income tax refunds, you did highlight the impact from the transition to Progressive. And then any color you could give on how you're thinking about things going forward on same-store sales?

Sure, absolutely Brad. Couple of things, first as you heard in our prepared remarks there are a number of moving parts from a same-store sales standpoint that are impacting the results. First and foremost is the underwriting changes that we’ve talked about over the previous two or three calls. We did lap some, but the majority of the underwriting changes we will not lap until later in the second quarter and actually the third quarter will be the first clean quarter without any of the significant underwriting changes that we undertook last year. Second is the delay in the payment from a tax refund standpoint. As we communicated previously and other retailers had communicated the delay was significant this year much greater than we've seen in previous years and that delay creates pressure for the subprime consumer that from a purchasing standpoint you see that they're not capturing or they’re not taking advantage from a sales standpoint that they would have had they gotten that tax payment when they had anticipated. Obviously there was one less business day from a leap year standpoint in the first quarter we won't have that issue in the second quarter. And then the other comment from a prepared standpoint is just some general consumer and economic softness that we're seeing specifically around our core markets. Some of the comments coming from DC regarding immigration we are seeing more reluctance to buy from some of our consumers in our Texas market especially around the borders and in the Southern part of Texas and whether it’s high immigration percentage within the cities that we serve. In the second quarter, as we look forward and you saw our guidance of the 12% to 15% down a part of that is the underwriting changes that we won't lap completely until the end of the quarter. The second is the transition with Progressive and as we laid out in the first quarter there was a material difference from the early part of the quarter to the latter part of the quarter as we wound down our relationship with our previous lease-to-own partner and although that did not have an impact to same-store sales from year-over-year - from last year because the number was relatively low last year. We do expect there to be some choppiness as we get our relationship with Progressive up and running and fully integrated. Although we are selling Progressive in all of our stores, it’s not a fully integrated model yet with our IT system and our point-of-sale that won't occur until sometime. We expect either later in the second quarter or early part of the third quarter with the intention and our belief that we will be fully up to speed from a relationship and a partnership standpoint by the fourth quarter at the end of this fiscal year. And then the third piece is just our concern around continued general consumer or economic softness in the second quarter is what led us to that guidance of 12% to 15% down.

Great, that’s a very helpful answer, thank you Norm. And to follow-up on the Progressive piece of things, you did note that you all still believe that the rent-to-own component of your sales can grow to 10%. Any early color you can give us around how Progressive’s approval rates have been and how meaningful positive or potential drag it may be over the next quarter or two as you two companies start to build on your relationship?

Sure. Obviously we’re reluctant to share any specific details and frankly as I mentioned it’s really been only about 10 days that it’s been up and running but since May 24, but I will say we're very encouraged out of the gates and we continue to be - had strong belief that achieving that 10% especially where we finished - where we started the first quarter and our performance with our previous lease-to-own partner was at at that 12% and the 8.7% as we started the first quarter. We’re confident we can get to that that 10% with the partnership and the relationship, but as I mentioned it's not fully integrated from both an IT and a point-of-sale standpoint that’s going to create some choppiness here through the second quarter and possibly and into the early part of third quarter. And then the second piece is, the process is different, so for our commissioned sales force, there is a learning curve to get up because there is a different method and process to work with that customer than what they have been accustomed to over the last several years with our prior partner.

And if I could add just one last follow-up here on SG&A, normally you all have done a very good job of controlling expenses. Maybe at a high level could you just help to frame up how the cost structure is for the business today and maybe whether it might be some opportunities over the next 12 to 24 months to continue to bring cost down?

Look as you said we’ve been very focused on cost control and cost discipline. I think - there are a few opportunities but overall I think we sort of hit the level that makes sense for us going forward. As Norm mentioned obviously we have a commissioned sales force so part of our G&A is obviously relative to sales expenses for commission, so that is variable from that perspective. But from an overall cost structure, I think you’re going to see just continued discipline very thoughtful going forward, but I don’t think you’ll see substantial step function changes downwards of SG&A.

But I will say Brad from two years ago the mindset and the culture within the organization from a cost control and a discipline standpoint I feel very good about the mindset and the culture that’s been instilled within the organization and very comfortable of our ability to leverage future sales going forward with that discipline that’s instilled in the organization.

Very helpful. Thanks so much and I’ll turn over to others.

Thank you. And I’m showing no further questions at this time. I’d like to turn the call back to Mr. Miller for closing remarks.

Thank you, guys. I just want to take the opportunity to thank the thousands of Conn's employees across our store base in our call centers, in our headquarters for their hard work, their commitment day-in and day-out. Thank you for your interest in our Company and we look forward to talking with you next quarter.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.