Norm Miller - CEO Lee Wright - CFO

Brad Thomas - KeyBanc Capital Markets Brian Nagel - Oppenheimer Rick Nelson - Stephens John Baugh - Stifel David Magee - SunTrust

Good morning and thank you for holding. Welcome to the Conn's, Inc. Conference Call to discuss earnings for the fiscal quarter ended July 31, 2017. My name is Andrea and I'll be your operator today. [Operator Instructions] As a reminder this conference call is being recorded. The company's earnings release dated September 7, 2017 distributed before market opened this morning can be accessed via the Company's Investor Relations website at ir.conns.com. I must remind you that some of the statements made in this 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 call over to Mr. Miller. Please go ahead sir.

Good morning and welcome to Conn's second quarter fiscal year 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. As a note, we are no longer providing a separate presentation to accompany our conference call remarks. Please refer to the Investor Presentation going forward. I'd like to start today's call by discussing the impact of Hurricane Harvey. As many of you are seeing in the media, Hurricane Harvey was a major weather event that disrupted many communities within Southeast Texas and Southwestern Louisiana. Having experienced the impact of Hurricane Harvey firsthand, I can tell you that this was a significant storm that unleashes record amounts of rain and caused historic flooding. Many of our customers, employees and communities were severely affected. Harvey developed rapidly and lingered over the region for multiple days. Prior to the storm making landfall, Conn's responded quickly and proactively closed its Corpus Christi location. As the storm continued, it impacted portions of Southeastern Texas and Southwestern Louisiana causing Conn's to close locations for several days in the Houston, Golden Triangle and Southwestern Louisiana markets. Although we closed our Beaumont corporate office for two days, our corporate offices in the Woodlands and San Antonio remained open and operations also benefited from our third-party service and support relationships. This infrastructure allowed Conn's to support store, credit and collection and customer service operations outside the path of the storm during the entire weather event. I am proud of our team's response to the disruption Harvey caused and many of our stores were open and able to support our communities quickly after Harvey first made landfall. In total, Conn's has lost approximately 100 selling days as a result of the storm. This compares to 144 loss selling days during Hurricane Ike and Gustav in 2008, and 134 selling days loss during Hurricane Rita in 2005. As of this past Sunday, all of our stores are back open. It is been only 8 days since Harvey ended and a situation in Southeast Texas and Southwest Louisiana is still very fluid. Because of the near-term uncertainty Harvey has created, we are not providing specific financial guidance for the third quarter. We will resume quarterly guidance when we announce third quarter results in December. To limit the amount of near-term uncertainty this may cause here are some things to consider; prior to the impact of Harvey, for the third quarter we were expecting same-store sales to improve from the second quarter as we fully lapped a meaningful underwriting changes we made last fiscal year, we anticipated consistent margins compared to prior seasonal trends while our credit spread was projected to continue to grow. In addition, we believe the account performance would have improved for the third quarter as the 60-day plus delinquency balance was expected to be lower year-over-year for the first time in almost 5 years. As a result of Hurricane Harvey, third quarter retail sales will be impacted by the loss of approximately 100 selling days associated with the store closures along with the unprecedented disruption the aftereffects of the storm are causing within our local communities. While temporary the storm's overall impact is hard to project making it difficult to accurately provide third quarter guidance on retail gross margins and SG&A as a percent of sales. Our near term credit results will also be impacted but again it's difficult to predict the full extent on the third quarter. Conn's net exposure should be limited by requiring in-house credit customers to have property insurance. This can be provided by either an existing policy such as a homeowners or renters insurance or policy Conn's sales on behalf of third-party insurance carriers. However higher claim volumes reduce credit insurance revenue as we recently experienced primarily in the third quarter of fiscal year 2017 due to the severe flooding in Louisiana. In addition, we anticipate near term pressure on 60 day plus delinquency as customers lives have been upended by the storm's devastation. We expect these near-term headwinds caused by Hurricane Harvey to be temporary. According to early reports, it is estimated that at least 100,000 homes were flooded or damaged while tens of thousands of residents living in the destructive path were forced to evacuate. As cleanup efforts get underway, we expect many of our core customers will have meaningful job opportunities created by rebuilding efforts which should help improve storm-related credit performance. In addition, we believe Conn's is well-positioned to support our local communities as they begin to replace the products in their homes that were damaged by the storm and as the company experienced in prior storms, retail sales rebounded in subsequent quarters as rebuilding efforts got underway. Harvey disrupted many facets of our daily lives but our team responded admirably and I'm proud of Conn's execution during this very difficult period. Almost 15% of our Associates in Houston and Beaumont were seriously impacted by the storm and we're standing by to provide support to those in need. We recently announced the $200,000 pledge to a donation matching program to help affected employees, as well as our local communities. I'm proud to announce that as of today's call, Conn's customers, associates, neighbors, vendors and family members have raised over 241,000 that when combined with Conn's matching program brings our total current contribution to over $440,000. I am confident in the rebuilding efforts of our affected communities and Conn's has actively engaged with our customers and employees to help repair the damage caused by Hurricane Harvey. Before I review the highlights from the very strong second quarter, I want to take the opportunity to discuss the successful transformation underway at Conn's. It has been almost 2 years to the day since I joined the company as CEO. As I've discussed in previous calls, I was attracted to Conn's because of its distinctive business model based on delivering a unique value proposition that provides access to quality goods for the home to a growing population of underserved customers. The unique synergy of Conn's retail and credit businesses gives the company a compelling competitive advantage in the marketplace. I also saw company with significant opportunity to become a national retailer and create meaningful shareholder value if the right platform which created and managed correctly. It is in the details of execution were most value creation takes place. In over the past two years, we have assembled a team of proven, motivated and experienced business leaders to help improve the company's near-term performance while creating a foundation to support Conn's significant growth opportunity. Of Conn's core leadership team, 22 of the top 25 positions have been replaced during my tenure with the company. These positions have been filled with leaders that have the combined finance and retail experience required to successfully understand and execute Conn's unique business model. As the tenure of the leadership team has increased, we have been able to initiate positive changes throughout our business structure that have directly contributed to our recent successes. Specifically on the credit side of our business we created programs to increase yield and improve account performance, which produced the highest credit spread in the past seven quarters while Conn's borrowing cost have continued to decline. Today Conn's has a much stronger foundation compared to when I first joined the company and this is the basis for our success going forward. Whether it's responding to events outside of our control like Hurricane Harvey or plan strategies we are pursuing to grow our business. Creating a strong, profitable and differentiated business provides Conn's with flexibility to navigate a highly competitive marketplace, and I'm extremely proud of the platform we have created. I am confident we are headed in the right direction and we are well-positioned to create long-term and sustainable shareholder value. Let's review some of the financial and operational highlights during the second quarter. Our retail execution remains strong despite the decision to proactively slow sales growth by refining our underwriting standards and limiting new store openings. Favorable mix within product categories and lower warehouse delivery, and transportation costs continue to benefit retail gross margins which exceeded our expectations and increased our retail gross margin by 270 basis points to a record 39.8% during the second quarter of fiscal year 2018 compared to the second quarter of fiscal year 2017 and 140 basis points from the first quarter of this fiscal year. As expected second quarter sales were impacted by the underwriting refinements made last fiscal year, general consumer softness, and the transition to Progressive which slowed lease-to-own sales. In addition, certain markets around the Mexican border and in the southern part of Texas remain soft which we believe is caused by statements coming out of the nation's capital regarding immigration policy. Lease-to-own sales to our new Progressive offering represented 3.8% of total retail sales in the second quarter and grew sequentially during each month of the quarter. This trend continued into August and lease-to-own sales represented 5.3% compared to 4.6% in July. We are still working to fully integrate Progressive solutions into Conn's point-of-sale and IT systems to create a seamless experience and we continue to believe once the systems are successfully integrated and the sales force is fully trained, lease-to-own sales can represent at least 10% of our retail sales. Moving onto our credit segment, we are successfully executing strategies to strengthen credit performance and profitability as demonstrated by the 390 basis point credit spread recorded this quarter which is the best credit spread Conn's has achieved in the past seven quarters. 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 of last year. During this fiscal year, Conn's expects to roll-out new direct loan offerings in Oklahoma and Tennessee and once completed we expect approximately 90% of originations from Conn's in-house financing will be at the higher rates. Once these programs are fully implemented and seasoned into the portfolio, we continue to expect net interest income and fee yield to increase to 23% to 25%. We remain confident that our current credit strategies appropriately manage our credit risk and we are seeing recent originations performed better than prior periods. The full benefits of stricter underwriting take time to appear and our overall credit segment results continue to be influenced by slower growth, changes in credit strategy and the performance of accounts originated under prior underwriting standards. Early performance trends remain encouraging for originations made in the second half of fiscal year 2017 after the more significant underwriting changes were implemented. First pay defaults and delinquency rates on originations from July of last year through June of this year are lower than the corresponding period in the prior-year. Originations made after the underwriting changes took effect in late second quarter of fiscal year 2017 accounted for approximately 68% of the portfolio as of July 31, 2017 and portfolio performance is expected to benefit from continued originations under these tighter standards. The year-over-year growth rate of the 60 day plus dollar balance in the second quarter continued to decline and represent the lowest growth rate in five years. Our progress in the 60 day plus dollar balance is demonstrated even further with the most recent month of August where the balance actually declined versus the prior year period which was the first time we have experienced a year-over-year reduction in the 60 day plus dollar balance in almost 5 years. As recent originations become a larger percentage of the portfolio, the static loss rates from prior year periods are less relevant to our financial performance. Current loss expectations for historic vintages remain generally in line with the rates we have previously communicated. And as you can see on an as reported basis, Conn's total provision expense for the second quarter declined by nearly 11 million compared to the prior-year representing the improving credit quality in the portfolio. With each passing quarter, the confidence that our credit model can produce long-term static loss rates around 12% is growing and as our net interest income and fee yield increases to an expected 23% to 25% range, we continue to believe we are well-positioned to achieve a credit spread of at least a 1000 basis points before servicing and financing costs. This spread provides Conn's with the flexibility to successfully navigate events like Hurricane Harvey, as well as the ever-changing economic, regulatory and credit trends while maximizing financial performance. Second quarter results demonstrated that the transformation underway in our credit business is gaining real momentum and the business platform we have developed positions us well for the future. We have made meaningful investment in Conn's credit business by building a strong, talented and experienced credit team while upgrading the systems and analytics to better manage performance. Creating a strong credit infrastructure was a key area focus over the past two years. As our credit spread widens and we gain more confidence with our credit platform and approach, Conn's senior leadership team can start to shift even more of its focus to driving retail growth. This includes better ways to segment and analyze underwriting to drive incremental sales opportunities, grow lease-to-own sales to at least 10%, and enhance our customer experience. In addition, we are developing a new store growth plan and expect to begin adding new locations next fiscal year. As plans solidify, we will update investors accordingly. However, our initial growth plan will focus on opening locations within our existing markets to leverage fixed distribution, warehousing transportation, as well as advertising costs. As you can see we are excited about Conn's long term potential as our turnaround initiatives take hold. Throughout the remainder of this year, we will focus on supporting our employees and local communities in the rebuilding efforts while enhancing our financial and operating performance and we continue to anticipate full-year profitability. With this, let me turn the call over to Lee.

Thanks Norm. Consolidated revenues of $366.6 million for the second quarter of fiscal year 2018 decreased 7.9% from the same period last year. Net income improved significantly and was $0.14 per diluted share for the second quarter of fiscal year 2018 compared to a loss of $0.39 per share for the prior-year quarter. On a non-GAAP basis, adjusted for charges and credits and the loss on extinguishment of debt, net income for the quarter was $0.26 per diluted share compared to a loss of $0.04 per share for the same period last year. Second quarter of fiscal year 2018 retail revenues were $286.5 million which declined $45.9 million or 13.8% from the same quarter a year ago, while same store sales declined 15.1%. At July 31, 2017 core stores represented approximately 54% of our store base. Single stores in new markets represented about 20% of the same-store base. The remaining 26% of our same-store base represented new stores in new markets with existing locations resulting in the cannibalization of sales in these locations. For the second quarter of fiscal year 2018, same-store sales of our core stores were down 15.3%, single stores in new markets were down 12.8% while stores in cannibalized markets were down 16.4%. Despite lower revenues, retail gross margin as a percentage of retail revenues for the second quarter of fiscal year 2018 expanded by 270 basis points from the same quarter in the prior year to a quarterly record of 39.8%. 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 increased efficiencies and further optimization. The mix of sales from a higher margin furniture and mattress category represented 36.7% of our second quarter of fiscal year 2018 retail product sales, and 51.3% of our product gross profit. The percentage of sales from furniture and mattresses increased 590 basis points since the second quarter of fiscal year 2015, when furniture and mattresses represented 30.8% of product sales. The shift towards higher margin furniture and mattress sales is increasing and 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 help to reduce retail SG&A by 7.3% in the second quarter versus the same quarter in the prior year. We offset our increased store occupancy cost from a higher store base through cost efficiency savings in other areas. Retail SG&A as a percentage of sales deleveraged 200 basis points from the same quarter last year to 27.5% due to lower sales. Turning now to our credit segment. On an as reported basis, finance charges and other revenues were $80.1 million for the second quarter of fiscal year 2018 up 21.9% from the same period last year despite a 4.2% decline in the average portfolio balance. The increase versus last year was due to a yield of 18.7%, an increase of 470 basis points from last year offset by 5.1% decline in insurance commissions. SG&A expense in the credit segment for the quarter have decreased 5.8% versus the same quarter last year and as percentage of the average customer portfolio balance annualized was 8.9% compared to 9.1% for the same period last fiscal year. Provisions for bad debts in the credit segment was $49.3 million for the second quarter of fiscal year 2018, a decrease of $10.8 million in the same period last year. The 18% decline in the credit segment provision was primarily the result of a reduction in the allowance driven largely by decline in six month average first payment default rates from the prior-year versus an increase in the allowance in the same period last fiscal year. As of July 31, 2017 we had $35 million in cash and approximately $130.5 million of immediately available borrowing capacity under the revolving credit facility. Additionally we had $416.8 million that could become available upon increases in eligible inventory and customer receivable balances under the borrowing base. Our ABS notes are performing in line with our expectations and I'm pleased with the new warehouse facility we put in place on August 15. This new facility further diversifies Conn's funding sources and provides additional ability to fund the business. This warehouse facility was used to redeem the outstanding balances of our 2016 Class B and C notes. By redeeming it's high cost notes through our lower cost of funds warehouse facility, we expect to save approximately $2 million of interest expense over the life of these receivables. ABS notes currently outstanding include our 2016 B, Class A and B notes and our 2017 A, Class A, B, and C notes. We anticipate completing one additional ABS transaction during fiscal year 2018. Interest expense for the second quarter decreased $4.1 million or 17% from the same period last year to $20 million. For the second quarter annualized interest expense as a percentage of average portfolio balance was 5.4% compared to 6.3% for the same period last year. Average net debt as a percentage of average portfolio balance was approximately 72% compared to approximately 77% for the same period a year ago. Conn's opened one new store in the second quarter and currently has a total of 116 stores throughout 14 states. We do not plan on opening any additional stores in fiscal year 2018 and the three new stores we opened in this fiscal year are in geographies supported by our existing distribution network. With this overview, I'll turn the call back over to Norm to conclude our prepared remarks.

Thanks Lee. Conn's made significant progress turning around its financial performance during the second quarter of fiscal year 2018, achieving the highest level of profitability in the past seven quarters. We have a strong foundation that will allow us to successfully navigate near-term challenges associated with Hurricane Harvey while positioning the company to resume store growth next year. I'd like to thank all of Conn's employees, customers, vendors and shareholders for their hard work, loyalty, support and patience over the past two years, as well as to the harrowing aftermath of Hurricane Harvey. Hurricane Harvey was arguably one of the worst storms to ever impact the state of Texas, as well as the country as a whole. Conn's has been part of the Texas community for over 125 years. Our thoughts continue to be with the many families who have lost so much. We have felt the distress of our employees, families, friends and neighbors and all of us have been profoundly affected by this historic disaster. The response of Conn's employees located in the affective area is commendable and all of us at Conn’s are thankful they are safe and appreciate their passion to return quickly to work and help our customers and communities rebuild. The attraction to Conn’s business model that initially brought me here two years ago has turned into excitement about our ability to grow and create significant value in the future. While we still have much to accomplish, I am encouraged with the solid foundation we have created and the direction we are headed. As we enter the second half of our fiscal year, we are focused on further enhancing our financial and operating performance, and we continue to anticipate full-year profitability. With that, operator, please open the call up to questions.

[Operator Instructions] Our first question comes from the line of Brad Thomas with KeyBanc Capital Markets. Your line is now open.

Congratulations on the continued improvement in the business, and thanks for all the details. I was hoping if you could talk a little bit more about that cadence and same store sales in the quarter and what you're seeing in the markets outside of those that are affected by Harvey and how you're thinking about the opportunity to ultimately drive improvements in same store sales down the road. Thank you.

What I would say is when you look at the second quarter's performance from a same-store sales standpoint, the decline we saw as we had shared at the last call, was really driven by the under-writing changes that we didn’t lap completely until the end of the second quarter. The changeover and lease-to-own partner to progressive, as well as some general softness that we've seen predominantly in our core markets, those around in Texas as well as in Arizona, New Mexico that have a heavy immigration population. We have seen softness there, and you saw that in - heard that in Lee's comments when he broke out the sales from the core markets, seeing that impact. Going forward, as we had shared last quarter, excluding the impact of Harvey, we expect it to see a significant improvement from same-store sales and sequential improvement on ongoing quarters. We haven't shared when we thought that would go positive, but certainly improvements from where it was - in the markets to outside of Harvey, that is certainly what our expectation is those that are impacted by that. But unfortunately, about a third of our portfolio is impacted by Harvey.

And then - I think you've a very interesting slide in your deck on the trend in your first payment defaults and how those have been improving since some of the tightening that you did last year. Recognizing that there are a lot a lot of moving pieces here, particularly the hurricane, I mean, if we try to back out the impact of Harvey, I guess before it hit, how were you thinking about the outlook for the losses side of the credit business, and what data points were you seeing that might give you any more optimism, or what data points were you seeing that might make you more concerned as you thought about the potential to bring down losses in that credit book as we move forward over the next year or so.

Very, very pleased with what we're seeing from a trend standpoint, again, excluding Harvey. And recognize, even with Harvey, that's a short-term issue that we’ll have to deal with that will create, some form of a bubble that we'll deal with but it is not a systemic issue from a structure and a credit performance standpoint on an ongoing sustained basis. And what I would point to is as you pointed to Slide 28, the first payment default saw a trend slide, as well as Slide 29 that shows the 60 day balance in dollars year-over-year as I had mentioned in my prepared remarks. If you think about the credit business and what happens from a trends standpoint, think of it from a sequential standpoint. Indicator wise, there is a train. The first car in the train is first payment defaults. First payment defaults lead to 60 day delinquency balances from a bucket standpoint which lead to charge-offs and ultimately lead to provision. So when you have that front of that train, the first payment defaults being dramatically under prior year as you saw that in every month over the past 12 months, and then you see that 60 day balance as I have mentioned in my comments better year-over-year in dollars for the first time in almost 5 years that’s reflecting that improvement in FPDs. That will ultimately translate an improvement in charge-offs that will result in even greater improvements from a provisions standpoint.

And our next question comes from the line of Brian Nagel with Oppenheimer. Your line is now open.

Congrats on nice quarter. I'm glad to hear that everyone’s managing Harvey so well.

It’s been very unique experience. I can say that personally having lived through it.

The first question I have, Norm, just understand better. The loan loss provision definitely ticked lower here in Q2.And that was a nice contributor to the much better earnings performance you had in the quarter. Just to understand, with the lower loan loss provision primarily a function of improved credit trends or were there some type of one-time issues in that?

There were no one-time issues. It's driven by - and you'll see when we file the 10-Q later, we’ll give a little bit more narrative, but it's driven by the improvement in FTDs, the first payment defaults that I had talked, mentioned previously as well as the continued improving trends on the 60 day balance.

And then also with respect to Harvey, and I understand right now the situation like you said is very dynamic and you're not giving guidance for Q3. But looking back at, if there were similar prior experiences, on the credit side, how long should or how long could Harvey remain a disruptive factor?

Frankly, we very much wanted to try to see if we could give guidance this quarter. The fact that it was only eight days ago, we spent a great deal of energy and effort looking at past name storms. Unfortunately, a couple of things. You have to go back almost a decade to the last name storms to affect materially the business, Gustav and Ike in 2008 and then Rita in 2005. Unfortunately, the business was very different then both from a mix standpoint, cash and carry, the products that we had at that point, the credit portfolio, plus the regulatory environment and the collection environment very different back then than it is today. So it was very hard for us. And then obviously, with Harvey, we’re dealing with the storm that - it is almost nonparallel. So to try to determine what that impact will be and how long that will last is somewhat difficult. What I will say is, whether it’s 30 days, 90 days, whatever bubble is created from that from a credit standpoint that we will have to deal with and work with, it is a short-term issue. It is not something that will be systemic that will affect the credit business. The things we’re doing, the impact yield and underwriting, as well as our collection, inherent collection performance and execution, we’ll continue to weather through that as we work through the bubble that’s created with Harvey.

And then if I could slip one more, I guess relatively quick one in there. But you continue to talk up the potential for the new higher yield programs as you roll that out through the company. Has there been any indications or pushback on the part of your customers as you push these higher rates through?

We spend a great deal of energy and effort with our customers, and the people that shop, we really not. Again, our customers shop from a payment standpoint. That's what they focus on. We’re very focused on the payment as well, not just because the customer is focused on it, but from a credit standpoint, and their ability to be able to repay and ability to be able to do that effectively, if that payment is not in line with what their credit means are available and what they're capable of repaying, it create issues for us on the credit side of the house. But we continue to feel very strongly that we have not had an impact, we have not seen a material impact from the sales standpoint.

And our next question comes from the line of Rick Nelson with Stephens. Your line is now open.

I'd like to ask about the static loss that for the fiscal '16 and fiscal '17 originations. It looks like things are widening there and the expected static loss rate I see has changed a bit from fiscal '16 originations. If you can speak to that?

Again, I would point you back to as Norm already talked about Page 28. If you think about on that, I think you were addressing fiscal year ’17 first. As you said, it’s look like it’s widening a bit from fiscal year ’16 but our expectations are for the net static loss to be underneath the fiscal year ’16 and it really gets back too. If you look at Page 28 in the beginning of that train, the first payment defaults and you see how it’s improved in the second half of the year. So obviously, the second half of the year, we expect to be materially better than the first half of the year. So, what you really still only seeing primarily in the next static loss triangles, loss triangles that we’ve released in the first half and as you see the second half start roll through, you’ll see that improve, which is what gives us confidence from that perspective.

So next quarter we should start to see some improvement with that ratio?

Yes, you’ll see it start to roll through.

And really you have to think about fiscal ‘17 Rick in kind of two half. The first half and the second half that slide shows that, that what's going to ultimately happen from a 60 day delinquency standpoint and then charge-offs and provision and you will really start to see the benefit on the back half of ‘17 that from the charge-off standpoint, and ultimately provision standpoint as we get into fiscal year'18. And going back to '16 on your question on it, it has kicked off slightly, 10 to 20 basis point. But remember I mean ’17, when you start going back ’16 there's not much of that portfolio left. It’s not going to have a material impact on what happened P&L wise and you know fiscal year ’17 65% plus of the portfolio now. So that's really what will have the primary driver on what happens P&L wise. And remember all of this is under the caveat of Hurricane Harvey will have an impact over fiscal year '17 still to be determined on what that is. But we’ll attempt to try to split that out and delineate that as we give future guidance and explanation of performance and results.

Was that then incorporated into the new updated fiscal ’16 originations static loss guidance?

You mean for Hurricane Harvey.

Yes.

No, none of the static loss rates are incorporated any impact from Harvey. I would say, the further years you go back ’16 and whatever, the little bit left in ’15, we think that will be less impact as customers are fairly far along from a payment standpoint. Whatever impact we do have, we expect them the majority of that Hurricane Harvey impacts to be in the fiscal year ’17 vintage.

Also this thousand basis points spread that you are targeting, you make in a ton of progress on that front. Any updates as to the timeline, where you expect to achieve that and it is a Hurricane's such back in terms that spread?

Rick from a yield perspective, our net yield perspective, it won't set us back. Obviously, we'll have to see the impact on our losses due to Harvey, when we go. But again, as Norm pointed out, this is a short-term issue not a systemic issue. So, longer-term we feel obviously, very comfortable with that. And in terms of timing, again as we talked about in the script, we will have, our yield initiatives we believe rolled in by the end of this year. So at the end of this year, on a run rate basis, you will start to get that thousand points spread and all of that seasoning the portfolio with the vast majority of that should be seasoned in at the end of next fiscal year.

And our next question comes from the line of John Baugh with Stifel. Your line is now open.

Congrats on getting through a tough period. Thoughts are with everybody concerning Harvey, the recovery. My question for clarity, is there any change in the methodology for the various building blocks to create the provision or was it just improvement in the first payment defaults that drove but no change in calculation.

Not to get into great details. But obviously we have to come up with our gross loss estimates through segmentation model and we’re constantly evolving that model as we see different changes in our portfolio. And so as we talked about in the earnings release and I talked about my prepared remarks. As we began to see our first pay defaults become so much better that obviously as we looked at that and how that will ultimately impact the overall losses. So, that was factored in, did more heavily in our model. But the overall methodology, how the provision is calculated certainly haven’t changed. But it gets back to how your ultimate loss allowance is calculated.

Again, our purpose on the loss, one of the things we’re very conscious of is, the accuracy of the loss provision model and forecasting the losses over the future 12 months and looking at look backs on the past 12 months. So we're very focused and attuned to making sure that the segmented model that we use, we constantly are looking at that to make sure, we’re as best as possible being able to accurately predict what we think those losses will be, and that's reflected on when we do the look back. How accurate we were projecting in the past.

And is that something again, not to get that nickel. But is that something your auditors would help you with or something that you create internally and then run by the auditors or its just completely your decision based on what you think the best leading indicators if you will are to an estimated loss?

John, it’s very much a comprehensive effort. We go through the management team to put together our best estimate of future losses. Obviously, that discussed with our auditors et cetera. So, it is truly comprehensive effort review process.

You mentioned the immigration issue, I mean somebody in various pieces impacting the comp. But I was wondering if you - as you look at the quarter year-over-year July quarter whether you could range how much was still an impact from underwriting tightening year-over-year. How much was due to immigration and you know I guess when do we start the comp the immigration issue as well as we look forward?

John, we really haven’t broken it out in that level of detail of it other than saying the underwriting changes in total were about a thousand basis points when we put in place last year. Now, what we said in the last earnings call was the majority of those were still left to be left into the second quarter, this past quarter but a number of several hundred basis points we had lapped here, the previous quarter and then from an immigration standpoint it's really the first quarter of this year is coming right after the election is when we started to feel that in a material way.

And then you mentioned the 100 days of selling loss. But correct me if I am wrong, some of those were Labor Day, maybe a little bit more heavily weighted or am I thinking about that wrong?

No, that’s accurate, all days are not created equal for certain and there were some heavier days, weekend and Labor Day that were in there. In addition to that, I would tell you that, we only quantified loss selling days where stores were closed. However I will say and I'm sure that for those folks that have retail operations in Florida facing Irma today, they're feeling that, we felt before we started closing stores in San Antonio and Austin, the original predictions was that Hurricane Harvey was going to impact the San Antonio and Austin markets with 20 to 30 plus inches of rain. So, even when the stores were open for the 3 to 4, 5 days before as the storm started to build in speed and intensity, we felt impacts outside of even the affected areas, as well as clearly in the Houston and Beaumont the affected Golden Triangle areas.

And my last question for Lee. In the past you've helped us calculate with the slowing, actually I think in this case declining loan balance, what the impact in this case negatively there are 60 day calculation on basis points, do you do you have that number?

You know what, on our second call we can chat about that because it did have a slight impact, but I’ll give you that.

And our final question comes from the line of David Magee with SunTrust. Your line is now open.

Nice numbers and also best of luck here with the recovery of next weeks and months. A couple of questions, obviously you guys are doing some pretty good things in terms of the credit trends Based on what you see out there in the overall environment and this is maybe away from that Hurricane but just overall and I think we touched on this last quarter. Are you satisfied with where you need to be in terms of the underwriting hurdle?

I am, we are - feel pretty, very, positive with what’s happening. You know as we shared in the earlier call that we took I think Brian brought up on - when you look at static loss rates for fiscal year '17 On the investor deck that we've shared, we shared on mid ’13, but really have to look at fiscal year ’17, is it kind of a tail of two stories. And it’s - yes, the first half of fiscal year and the back half of fiscal year '17 and there is a material difference and what’s underwritten in the back half of ’17. To get to that, what we anticipate again, excluding from Harvey that mid 13% static loss rate. Although, we haven’t talked about fiscal year ’18 and what we’re projecting there, we continue to underwrite and we’re halfway through fiscal year ’18 with those tighter standards and feel very good about getting into that 12% to 13% range, with where we are underwriting at.

So you don’t anticipate then changing that - the current hurdle either up or down based on the trends? Norm Miller.: We don’t. Clearly Harvey will create a bubble that we’ll have to deal with but from a basic systemic standard point I would no. It’s certainly in that 12% to 13% range with where we were at versus - and in conjunction with that, that net yield of 23 to 25 as Lee had mentioned, we anticipate on a run rate basis to be in that range at the end of this fiscal year. Now having said that, what I would also caveat with is, we continue to do underwriting changes what I would classify as a micro basis, on a regular, on a regular interval. Our credit underwriting team that we significantly beefed up as I mentioned in my notes or in my prepared comments, that’s what they do every day as we’re underwriting continue to see performance in fiscal year '18 now only taking out small segments where the performance may not be performing initial delinquency wise. Where we expected to be, but also where there's opportunities for us to say yes to customers. They did in the past. We weren't able to do that. That’s the value of a sophisticated credit underwriting team with a model that's proven and it's working.

And just lastly, the progress with the Progressive seems like it's ahead of plan and that you’re pretty happy with it. Can you talk little bit about that and maybe whether 10% could be sort of lowball goal at some point in time?

10% still as Norm talked about in his script certainly our goal and where we think it should be able to be. So, when we have been pleased with the progress that we've made and continue to as our salespeople become more comfortable completing that rent to own process from end to end and owning that process and as we get more integrated from a point of sale in IT systems, we really look forward to that continuing to accelerate certainly believe 10% is doable.

Thank you. And this does conclude today's Q&A session. I would now like to turn the call back over to Mr. Norm Miller for any closing remarks.

Thank you very much. First, I want to thank everyone for joining us. We also appreciate everyone's thoughts and prayers, not only on this call but in your notes and emails as we weather through Harvey and rebuild our communities here in Southeastern Texas and Louisiana. And we look forward to speaking with everyone after next quarter in early December. Thank you.

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