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Edited Transcript of BGRP earnings conference call or presentation 27-Apr-17 1:00pm GMT

Thomson Reuters StreetEvents

Full Year 2017 Bluestem Group Inc Earnings Call

HORSHAM May 3, 2017 (Thomson StreetEvents) -- Edited Transcript of Bluestem Group Inc earnings conference call or presentation Thursday, April 27, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andy Spicher

* Eugene Irwin Davis

Bluestem Group Inc. - Executive Chairman

* Mark P. Wagener

Bluestem Group Inc. - CFO

* Steven H. Nave

Bluestem Group Inc. - CEO, President and Director

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Conference Call Participants

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* Andrew Elie Gadlin

Odeon Capital Group LLC, Research Division - Research Analyst

* Charles Philipp

* Dale Stohr

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Presentation

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Operator [1]

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Greetings, and welcome to the Bluestem Group Inc. Fourth Quarter 2016 Earnings Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

It is now my pleasure to introduce your host, Mr. Andy Spicher, Vice President of Corporate Development and Investor Relations at Bluestem.

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Andy Spicher, [2]

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Good morning, everyone, and thank you for joining us on our fourth quarter earnings call. Before we get started, I'd like to point out that we posted today's presentation to our website. It's on our Investor Relations page at bluestem.com. So if you haven't already, you can find it there while I run through the forward-looking statements.

Before we begin, I need to remind you that during the course of today's presentation, various remarks we make about expectations for our company and other statements that make use of forward-looking words such as may, expect, believe or similar expressions constitute forward-looking statements. Actual results may vary materially from those contained in forward-looking statements based on a number of factors.

Also in today's presentation, we supplement historical financial data derived from Bluestem's financial statements, which are prepared in accordance with GAAP, by use of non-GAAP performance measures, including contribution margin, adjusted G&A expenses, adjusted EBITDA and lender-adjusted EBITDA. Please refer to the press release document available on our website at www.bluestem.com for further information.

With that, I will now turn the call over to Gene Davis, the company's Executive Chairman. Gene?

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Eugene Irwin Davis, Bluestem Group Inc. - Executive Chairman [3]

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Thanks, Andy, and thanks to everyone for joining us this morning to discuss our company's fourth quarter financial results. As usual, leading today's discussion is Steve Nave, our President and CEO; and Mark Wagener, our CFO.

Obviously, we encountered significant headwinds in the back half of 2016, which led to disappointing financial results. Steve and his team began defining an aggressive turnaround plan in the fourth quarter to first stabilize our financial results, followed by reversing unfavorable trends going forward. We expect the full turnaround plan to take 12 to 18 months from the beginning of this fiscal year. We'll hear more about this plan from Steve today, but I’d like you to know that the board and I feel that Steve and his team are taking the appropriate actions to ensure the company returns to sustainable long-term profitability increases.

Before I hand it over to Steve, you may have seen our press release this week about additions to our Board of Directors. Last year, we shared with you, and some of you shared with us, a need to augment our Board with more retail experience.

We are thrilled to have Lisa Gavales and Alex Smith join us. They both have significant retail industry experience. Steve and I are excited about having them as thought partners as we navigate our turnaround and establish the foundation for future growth. The full bios were included in Tuesday’s press release, which can also be found in the Investor Relations section of our corporate website. With that, I'll hand things over to Steve. Steve?

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Steven H. Nave, Bluestem Group Inc. - CEO, President and Director [4]

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Thanks, Gene. Before I jump into results, I want to echo a couple of things that Gene said. First, thanks for joining us to hear about what's going on with the company. And second, the excitement around having Alex and Lisa join our Board of Directors. If you haven't yet seen their profiles from the press release, I'd encourage you to take a look at them on our website, because I'm sure you will immediately conclude the same thing that we did, which is they can have an immediate impact on the strategy of our business and how we execute, given their extensive background and experience in retail. So we're really excited about the prospects of immediate impact from their contributions.

So with that, I'm going to touch on, or I'll start -- excuse me, with Slide 3. I'm -- anytime we mention page numbers, we're referring, of course, to the presentation materials that are posted on the website. You can see in the headlines, at a high level, our sales for the quarter were a little over $750 million. This represented a year-over-year decrease of about 1.6% on an adjusted basis. So to be clear, and Mark Wagener will get into the details a little bit more of how the adjustment works, but the high level is, we've adjusted the percentage changes year-over-year to reflect the fact that this last fiscal year was the fiscal calendar that included 53 weeks for us, instead of our traditional 52. And that extra week came kind of at the back end of the fourth quarter, which had 14 weeks instead of 13. So when we evaluate performance year-over-year, and when we report today about year-over-year changes in sales, we adjust for removing that last week of sales to make it an apples-to-apples comparison.

I think from a GAAP accounting perspective, you'll see an increase in sales, but it was driven by that extra week. So on adjusted basis, sales were down 1.6%, obviously, that's not the trajectory that we want in the business. However, we were pleased with the fact that we were able to significantly eat into what -- the softness that we saw in the third quarter and reduced the difference compared to last year by about 400 basis points. The third quarter net sales were actually down year-over-year by 6.3%. So we're pleased that we were able to start to bend that curve.

On a consolidated Bluestem Brand subsidiary level, we had adjusted EBITDA in the quarter of a little over $60 million. That, of course, is down from the roughly over $75 million in earnings from the prior year's fourth quarter. We'll talk about the drivers of that in a moment. As of the end of the quarter, the consolidated Bluestem Group Inc. entity had cash and cash equivalents of a little over $212 million and net cap mark related portfolio assets of $23 million, the vast majority of which we'll monetize by the end of this fiscal year and turn to cash. We did record, as you probably saw in our press release and our earnings materials, we did record a $350 million noncash impairment charge against intangible assets and goodwill primarily related to the Fingerhut brand and the trends in that business. But the company was in compliance throughout. And at the end of the fiscal quarter, as Gene mentioned and as we talked about in our third quarter earnings call in December, we initiated a turnaround plan, given the trends that we started seeing in the back half of the year and that we clearly experienced in our results in the third quarter. We implemented -- we started developing a turnaround plan and started taking actions almost immediately. We have an estimated $75 million reduction in operating and overhead expenses as a result of that turnaround plan on an annualized basis. And then, obviously, subsequent to the fiscal period end, the company issued a special dividend of $0.60 a share that totaled about $80 million. To be very clear, that dividend was declared at the end of the fiscal quarter. It wasn't distributed until the end of the first quarter of this fiscal year. So when you back up a few bullet points and you see that we had $213 million in cash on the balance sheet at the end of the quarter, that's before the dividend was paid. So I just wanted to clarify that.

If you move on to Slide 4 of the presentation materials, you'll see some of the drivers of the business performance that we experienced in the fourth quarter. Again, adjusted net sales, down 1.6%. Breaking that down at the segment, or at the brand, business level, Fingerhut's fourth quarter sales, again, on an adjusted basis, actually increased $7 million or 1.7%. So from a GAAP accounting perspective, the increase was even better than that, but again, not really apples-to-apples. This was driven by higher demand in the business overall. We saw, obviously, a bending of the curve that we started seeing in the back half of the year that took place -- really started in about mid-November. And that bending of the curve was offset a little bit by the underwriting tightening that we'd talked about throughout last year as part of our longer-term strategy to reduce potential volatility in the portfolio and improve the economics of the credit portfolio long term on a stand-alone basis. So that clearly had an impact on our sales, and we knew that, that was going to happen. So that wasn't unexpected.

The Orchard Portfolio year-over-year adjusted net sales decreased about $1.5 million or about 0.5 percentage point. We did increase our promotional activity in the fourth quarter for the Orchard Portfolio of brands to help bend that curve. So you'll see the downside of the -- or the offset, if you will, of the changing trend in the fourth quarter for the Orchard Portfolio in our margin rates for that line of businesses in the next call out, number two.

The Gettington repositioning had an impact of reducing our overall sales for the company by about $21 million. That, again, is the repositioning of the brand from its old brand positioning to being an off-price retailer of closeouts and overstocks. That repositioning is going to take a quite a while, and as we lose customers related to the old business, the old brand positioning, the sales are going to decline because we had quite a significant customer base for that business under the old positioning. So that again, was expected.

Net selling margin -- moving on to point two, improved by a little bit over $7 million or 60 basis points compared to the fourth quarter in 2015. A mixed bag on the Northstar side. We saw significant improvement overall. That was driven by -- on the negative side we had about 200 basis points of gross margin erosion or initial margin erosion, offset by efficiency in the marketing-to-sales ratio. To be clear, some of that related to the reduction in prospect marketing from decisions that we made when we started seeing the trends in the third quarter, and we felt like we needed to do that to stabilize the earnings of the company. So by the time we started bending the curve and feeling better about where sales were going to come in, it was too late to actually put those books back in home. So that's going to have a little bit of a drag on our first quarter results as we acquired fewer customers than we had originally anticipated in the fourth quarter. But it did produce a benefit in the quarter of 2016.

On the Orchard side, net selling margin was unfavorable by about 360 basis points. As I mentioned a moment ago, one of our short-term tactics to bend the curve for the Orchard business in the fourth quarter, we got more promotional as did a lot of retailers, and that definitely had an impact on our margin rates. But it certainly helped us ensure that we were clean on inventory at the end of the quarter, and that, overall, the balance ended up being more favorable than what we would have experienced otherwise.

If we move on to the next page, we've got a couple of other continued drivers for the business in the fourth quarter that I'll cover at a high level. Net credit expense for the full year, year-over-year last year, was about $51 million unfavorable. The reason that we emphasize the full year is the dynamic with how profit sharing on that portfolio works. If sales start missing expectations, we have to increase the merchant discount that we provide to our financing partner. So it starts to make an apples-to-apples comparison impossible for a given quarter, especially as you start getting to the end of the year. So it makes more sense to look at it on a full year basis because that's a little bit matching of the credit against the sales. On an adjusted -- adjusted G&A was down year-over-year by a little over -- or almost $8.5 million or 120 basis points. To be clear, that was primarily driven by a reduction year-over-year in incentive compensation that was the result, obviously, of the performance of the business.

Turning to the next page, I'll cover at a high level our turnaround strategy. To be clear, there are at least 50 deliberate and explicit work streams as part of this turnaround strategy. So I'm just covering the themes at a high level. The first thing that I think is important to communicate are the foundational elements that we make sure that all components of the turnaround strategy can serve.

The first is a recognition that we continue to have a high degree of confidence in the business model itself, both on the Northstar side and on the Orchard side. And that we have confidence in the value of the brands that we have in our portfolio and our ability to provide value to our target consumers. So that's a way of saying that we're not going to abandon the core of our business. We're just going to make it more efficient and identify the gaps that we have in our execution that can push us forward into year-over-year sustained earnings growth.

The second is that we don't want to lose sight of the -- what's required to return our business to sustainable year-over-year earnings growth while we evaluate alternatives for maintaining covenant compliance. In other words, we don't want to make shortsighted decisions that are going to have really bad impacts on the future just to maintain covenant compliance. We instead want to make sure that we're doing things that might be a little bit tougher to accomplish but are the right thing in service of sustainable growth in the future.

And then finally, staying the course on the 2016 strategy that we began, a long-term strategy, to be clear, to improve the long-term stand-alone economics of the portfolio. It would be very easy for us to reverse in the near term, not just this year, but even into next year, reverse some earnings challenges that we have by reversing some of the tightening that we did in our underwriting standard, or just underwriting standards, and to just go back to where we, what our standards were just 12 months ago. But that is not the right thing that we believe for the long term of our company. I continue to believe, and we continue to believe, that the subprime industry as a whole -- that subprime consumer is going to experience more stress. And so I want to make sure that we have reduced volatility in that scenario. So we're going to stay the course on that and not do the easy thing of just going back to underwriting standards that, to be clear, worked very well for us up until the point that we decided to tighten.

If you move to the next page of the presentation materials on Page 7, I'll give you some examples of the significant actions that have happened to date so far. And to be clear, when I talk about to date, I'm talking about as of today, as of yesterday, not the end of the fourth quarter, although actions were taken in the fourth quarter.

We had a workforce reduction that we completed in March, towards the end of the month. We expect that, that workforce reduction will improve our annualized G&A expenses by about $39 million. We expect that it will have an in-year benefit in 2017 of about $30 million, $9 million a quarter starting in the second quarter. Obviously, just a smaller amount in the first quarter.

We executed a decision, or we are executing a decision, to exit our PayCheck Direct business. To be clear, the driver of that was that PayCheck Direct, while a great business that was growing very nicely, is not our core business. It's different enough that it's not -- it doesn't fit into the core. And it had a significant drain on our capital as it was growing year-over-year at such a high pace, and we fund those receivables ourselves. So in order to continue growing that business, it would have required more capital and it just wasn't the right thing for us to continue doing. I say we are executing it, right now, we have announced it. We have basically -- well, we have informed all of the clients of the business that we're ceasing operations. Many of our contracts had 30-day out clauses. So we provided them the notification, and we've continued to generate sales, albeit, with very limited marketing, if any. So we've continued to remain open for sales, but after April 30, all of those out clauses have expired, and we won't be taking any more sales at that point. And we -- when -- the day that we announced it, we did reduce the overhead expenses, obviously, the enterprise as a whole, in addition to what I mentioned in the first point.

The run-off of the existing receivables for PayCheck Direct are going to generate about $29 million in cash this year, which obviously is helpful for our liquidity. I think Mark will get into maybe a little bit about the fact that once you cease operations and you don't have an ongoing relationship with the consumer that holds the credit account with you, your likelihood of recovering -- or the percentage of recovery that you're going to make on those receivables decreases a little bit. So we did, we did take a write-down in the first quarter related to that, which is why it's now a $29 million estimated recovery.

The final thing that I'll mention for actions actually executed, we did exit the Draper’s & Damon’s brand retail stores. Draper’s & Damon’s is part of the Orchard Portfolio. It has a great direct business, but it also had about 30 retail stores. We closed those in the first quarter. We made that announcement internally early in the year, and we managed through the liquidation and closures of the stores that were completed this past weekend. We executed -- we exited all of the store leases for a onetime cost of about $2.6 million, which saved us about $4 million over the actual remaining liability of those leases. So we feel good about that onetime cost. And we were able to profitably liquidate all inventory, which was around $5 million of cost, through these liquidation events, again, that concluded this past weekend.

Moving to the next page, a few actions that we have in process before I turn things over to Mark to go through the details of the financial results. We are partnering with our issuing bank on the multiyear plan that I have referenced a few times today and in past calls to improve the performance of the credit portfolio on a stand-alone basis and reduce volatility. Those actions include further tightening of underwriting standards, which have taken place this year and will continue to take place, additional actions; changing our strategies around credit line increases for existing customers; and making changes to line assignments provided to new customers. We're reducing our television advertising expenses. This is really in service to number one, frankly. So we are pulling back on television, because television, while it brought in a credit quality that we would've approved before television, it pretty dramatically changed the mix of the overall -- of the risk of the overall portfolio. So again, in an effort to improve the economics of the portfolio as a whole, we're pulling back on our TV advertising, and I believe by the third quarter, certainly the fourth, for sure, we'll be completely dark. So we're just running through our remaining commitments and then we're going to, we'll be dark on that, and that will save us quite a bit against that initiative.

We are in the middle of extracting significant efficiencies across all parts of the organization. This number three bullet point is where there are too many work streams to actually start to articulate. But think of it as a holistic end-to-end extraction of efficiencies, and in a very thoughtful manner. So that is in place right now, and the reason I say that it's in process is because it will take us some time to achieve the full potential of that track of work. But we expect the annualized run rate benefit from this work to be about $36 million, and have an in-year benefit in 2017 of about $15 million.

And then finally, we're executing much more efficient inventory management practices to reduce inventory levels by between $25 million and $50 million. The range there, of course, is only driven by off-peak inventory versus peak inventory. So our peak inventory level is expected to reduce by $50 million year-over-year. If you take a look at our balance sheet, at the end of the quarter, end of the fourth quarter, you see a pretty significant reduction as well. We're taking that kind of to the next level. So we're really excited about the things that we're able to implement very quickly on the inventory management side, to just do things like improve the efficiency of how we flow our inventory and how we look at buys. So a pretty exciting change in that regard.

So that's at a high level. There is a lot of stuff going on right now, frankly, And I don't want these -- this page to imply that we're just doing 4 things right now, because it's 50-plus specific things, specifically resourced and passed and managed and tracked on a very tight and frequent short-cycle basis. So a lot of change going on in the organization.

With that, I think I'll hand things over to Mark to cover the actual financial results in a little bit more detail.

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Mark P. Wagener, Bluestem Group Inc. - CFO [5]

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Thanks, Steve. And good morning, everyone, and thank you for joining us this morning. If you turn to Page 9 of the deck, just -- so this is the GAAP P&L for Bluestem Brands Inc. Net sales include the extra week of activity in Q4 2016. So that's why sales are up 1.6% or $13 million as you look at it here. Steve mentioned earlier, EBITDA $60.4 million, down $16 million from the fourth quarter of 2015. As you think about what's driving that downward in EBITDA, it's really being driven by the net credit expenses. You can see those are up basically $54 million over the fourth quarter of last year. Included in that number is $22 million of a noncash loss on servicing rights that we add back for EBITDA purposes. And then the deterioration, obviously, the performance of the credit portfolio is what's driving the higher net credit expense, and that's partially offset by a lower G&A, due to lower comp expense, as well as slightly higher selling margin.

As you think about selling margin for the fourth quarter, sales up about 1.7%. Our selling margin was actually up about 70 basis points at a Bluestem level. We'll talk a little bit later about what happened at the brand, at the individual brand levels, but that was primarily driven by marketing efficiencies. And we got those marketing efficiencies through some of the retail pricing adjustments we did at Fingerhut that drove demand at Fingerhut, as well as slightly lower new account marketing catalog costs. As we tightened our underwriting in the fourth quarter, we also mailed fewer catalogs to newer customers. That improved our marketing efficiency. And then, we were promotional in the fourth quarter at Orchard, both promotional and discounts to drive demand as well as to move inventory. And that, while it impacted our gross margins, it also helped in terms of our marketing efficiency. So selling margin improved primarily due to marketing efficiencies. You can see that the gross margin dropped about 220 basis points on an overall company basis. And that's the retail pricing strategies at Fingerhut and Orchard discounting.

If you flip to Page 10, so Northstar portfolio, I think Steve talked a little bit earlier about what we saw for the fourth quarter here. So thinking of this on an adjusted basis, sales were down 3%. Obviously, the Gettington repositioning and with their year-over-year sales down $20.8 million is a big driver in the reduction in sales. We also saw, obviously, the -- what's going on in the credit environment and with our portfolio and the underwriting decisions that we made to tighten underwriting in the fourth quarter also took sales down. And some of that was offset by the adjustments we made in some of our retail pricing strategies back in the summer of 2016, which actually helped with some of the demand momentum in the fourth quarter. And then also, I think one other thing I'd want to point out here is just as you look at revolving new credit accounts, $266,000 in the fourth quarter of '15, $223,000 in the fourth quarter of 2016. So down a little over 43,000 accounts year-over-year. That reflects -- is a big part of our underwriting changes that we made throughout 2016. And also see that FreshStart new accounts are up 10,000 from the fourth quarter of 2015.

In addition to what I would call underwriting changes, which tightened our approval of new revolving credit customers, we also are using our down payment products to help manage credit as well, and that's reflected in those 2 account lines. Contribution margin down 880 basis -- 890 basis points, excuse me, from the fourth quarter of 2015, and again, that's largely driven by credit.

If we turn to Page 11, and just highlighting the SCUSA credit portfolio performance. So again, just to level set here, this is our revolving credit portfolio and the receivables that have been purchased by SCUSA and is sitting on their balance sheet. Risk-adjusted margin, before the merchant discount fee that we -- that SCUSA earns as they -- when we sell receivables to them on a daily basis have a discount. Risk-adjusted margin was a negative 1.4% for the quarter, down 500 basis points from last year. And that's again, largely driven by the credit losses in the portfolio. And see principal loss rates up 230 basis points. Net revenue on the credit portfolio is also down 200 basis points, and that's largely driven by fee reversals, finance charge reversals. And we also had slightly lower late fees build during the fourth quarter of 2016. The portfolio grew about $60 million during the quarter. We would expect that, that will, with the underwriting changes, that, that will continue to flatten out and start to shrink as we get into 2017.

You can see the delinquency rate for the year ended at 16.1%, up 14.7% from last year, and that reflects some of the deterioration that we talked about in the second and third quarter of last year in the roll rates in the portfolio. So a number of the underwriting initiatives that we have taken is with a goal to turn that around. I'll also tell you that as you slow down the growth in the portfolio, and you start shrinking the portfolio, that also provides a denominator impact in terms of delinquency rates and loss rates in the portfolio.

Turn to Page 12, orchard Portfolio performance for the quarter. On an adjusted basis, net sales were down 60 basis points, 0.6% over the prior year. As I mentioned, we were promotional, both in terms of markdowns and discounts during the fourth quarter to drive demand. And that reflects a large part in just the flattish sales year-over-year. So we were able to claw back some of the demand as we were promotional. But it was a tough quarter from what I'll call an apparel retail perspective. We did, however, with the demand that we did drive, I feel that we ended the year in a good inventory position. And I'll talk about that on the next page, both at Fingerhut, but at Orchard as well. And that makes us feel good as we walk into 2017.

Let's turn to Page 13, selected balance sheet covenant compliance information. A couple of things I want to point out here. One, in the fourth quarter, Bluestem Brands did purchase from the Bluestem Group Inc. the term debt that the group had bought last summer. If you recall, last summer, Bluestem Group bought $21.2 million par value of BBI's term debt. BBI purchased that from the group in the fourth quarter, paid $17 million for it, and that helped us satisfy our 2016 excess cash flow sweep requirements that we had under the term debt agreement. Bluestem immediately retired the term debt upon purchase from Bluestem Group.

Second, I'd like to point out that inventory levels are down $33 million year-over-year. So it helps us feel good about at least starting the year for inventory in 2017. As Steve mentioned earlier, we continue to have with our -- with some of our restructuring turnaround initiatives in 2017, our expectations are is that we will be able to drive further efficiencies in our inventory area and drive that down even further on a year-over-year basis.

And finally, we ended the year with a lender leverage ratio of 3.51x. We are confident, with our outlook for 2017, with compliance with all of our covenants. We feel that with the turnaround strategies that are being taken, the workforce reduction, the PayCheck Direct receivable runoff and the other initiatives that are being put in place that we will continue to, as we get to -- deeper into 2017, continue to build upon our covenant cushion. And we feel that we are in a good spot today. Also, just as we take a look at the start of 2017, both from a retail perspective and a portfolio perspective, we've started the year slightly better than our expectations going into it. So we feel good about how 2017 has started.

So with that, I'll think turn it over to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

(technical difficulty)

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Andy Spicher, [2]

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Please also, when you ask a question, identify yourself and your institution.

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Charles Philipp, [3]

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Charles Philipp from U.S. Bank. You mentioned you're tightening up on some of your underwriting standards. Does that follow any loosening? Or what caused you to want to tighten (inaudible)?

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Steven H. Nave, Bluestem Group Inc. - CEO, President and Director [4]

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So the core reason behind it was, we have traditionally looked at our business, when we look at the credit portfolio, and we've looked at what our contribution margin is. And if that's the way you approach it, you might trade off some credit performance if it's offset by something else, right, like what it costs to acquire the customer. The challenge with that strategy is you have to -- you really do have to balance it with what does the credit portfolio performance look like on a stand-alone basis? And not taking into consideration some of those other things. And so when we looked at the credit portfolio, we decided for the future, looking at other financing arrangements, et cetera, you dramatically expand the universe of interested parties if the economics just appear differently, if they look better, regardless of profit sharing arrangements like the arrangement that we have with our financing partner, SCUSA. So it was really an effort to say, like, over the next 4 or 5 years, what do we want on a stand-alone basis the economics of the portfolio to look like. To be clear, we did see rising delinquencies. And I do believe, I had been talking about this for a year, I do believe that stress for this consumer is coming, and it actually it has started coming, right? We did, the industry started seeing it kind of in the back half of last year for the most part. My belief, and our belief as a board, is that, that is going to continue, and we want to position our portfolio to be -- to have the least amount of volatility in that kind of environment as possible. So it's more about that. So, the interesting thing, I might just add one more point related to the question. The interesting thing, and Mark kind of alluded to it, about the portfolio is, all else being equal, when you have fewer new customers coming in, things like delinquency rates are going to look higher. All else being equal, right, it's this denominator effect. And so when the business isn't performing well, like we didn't perform well in the third quarter from a top line perspective, and although we've been -- we did change the trajectory in the fourth, it still wasn't great -- it wasn't good performance. If the business doesn't perform well, it makes delinquencies in the short term go up on a rate basis. Compounding that is the deliberate decisions we're making to actually pull back, right, because the business just in general wasn't performing well, as well as deliberate decisions that we knew were going to impact our sales and new customers in the credit portfolio. So it's just the denominator effect is pretty significant at this point. And to give you an example of something that we did in the back half of last year that definitely had an impact, a denominator impact in the fourth quarter. In the third quarter, in September, we traditionally -- our credit line increase strategies lead us to an event in September, where we do a pretty significant credit line increase strategy that touches just a significant part of the portfolio. We materially changed that strategy in September as part of our efforts to reduce volatility in the long term. That had a -- it had to have a meaningful impact on fourth quarter sales, because customers coming into the fourth quarter for holiday, now have a lower line assignment than their predecessor -- their like predecessors from prior vintages in prior years. So it had a -- it would have had a significant impact in the fourth quarter. It's incredibly difficult to quantify exactly what that impact was, because you really don't know what drives customer behavior and whatnot. But having significantly reduced available open-to-buy compared to similar vintages from prior years would have had a big impact.

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Operator [5]

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(Operator Instructions) And we'll go to Andrew Gadlin of Odeon Capital Group.

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Andrew Elie Gadlin, Odeon Capital Group LLC, Research Division - Research Analyst [6]

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Could you talk a little bit more about your comment that 2017 started off well? And should we expect that this year, you will be delivering guidance at some point?

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Steven H. Nave, Bluestem Group Inc. - CEO, President and Director [7]

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I'm sorry, you kind of trailed off at the very end of the question. I want to make sure that -- it was kind of difficult to hear you. I want to make sure that I got it. Would you mind repeating it a little?

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Andrew Elie Gadlin, Odeon Capital Group LLC, Research Division - Research Analyst [8]

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If you could just talk about how the year started and whether or not the company will be delivering guidance for 2017.

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Steven H. Nave, Bluestem Group Inc. - CEO, President and Director [9]

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Yes. Thank you. So yes, we've mentioned that we -- the first quarter of this year so far, the quarter's not done, but so far is we're seeing some of the benefits of the actions that we're taking. Regarding guidance, we will provide guidance. It's our intention to provide guidance. We will provide guidance at some point in the future this year. The reason that we're not prepared to give it today is there are so many things that are changing in our business. And timing of some of the changes and quantum of some of the changes are still, they're still moving around a little bit. And so it would be difficult for us to have confidence in the in-year impact and the timing of those impacts. So we want to get a little bit further along in the execution of some of these activities and the planning for some of these activities that have yet to be done before we're ready to give guidance, because, frankly, we want to give something that we feel confident and is tight enough to be meaningful to the interested parties, right. Because the guidance I'd give today, because of that uncertainty of timing, et cetera, would be pretty wide and I don't think would be very helpful. That said, we -- I can give you guidance that we have high confidence in our covenant outlook for this year, and that we will maintain covenant compliance through the year with both our term loan leverage covenant and liquidity covenant as well as the covenants for the SCUSA financing agreement. So we feel we certainly don't have concerns at this point about our ability to achieve that.

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Andrew Elie Gadlin, Odeon Capital Group LLC, Research Division - Research Analyst [10]

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Can you, along those lines, could you share some expectations you may have for what kind of discount or credit expense the company might have due to the SCUSA relationship?

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Mark P. Wagener, Bluestem Group Inc. - CFO [11]

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This is Mark. We do not. I think we disclosed where we ended the year in terms of the merch discount. That is just by our agreement with SCUSA. We revisit that every quarter, but we are not providing any guidance or view into 2017 at this point. I think in terms of, as Steve mentioned earlier, there's a number of initiatives that we've taken on the credit side as well. And given the -- both the credit environment and I think when you look at the slide that we had in the appendix on Page 15, just in terms of the growth in the fourth quarter footings in the number of the banks with the subprime credit, it was just a lot of -- well, I'd say change in that environment as well. And so we're just not comfortable providing guidance at this point on the portfolio. But I will share Steve's confidence around how we view covenants for 2017.

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Andrew Elie Gadlin, Odeon Capital Group LLC, Research Division - Research Analyst [12]

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Okay. A Couple more questions, if I can. There were -- you announced some closing PCD and closing net retail -- the physical retail presence. I'm sure that ties into some of the cost savings that you identified going forward. How much of revenue is lost? And maybe even how much contribution margin will you expect to be lost from these cost-saving initiatives?

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Steven H. Nave, Bluestem Group Inc. - CEO, President and Director [13]

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I don't want to butcher the numbers from memory, so I'm going to ask Mark to keep me honest, and I'm also going to reserve the right to follow up with you offline if my memory is not directionally accurate. I would think from the PayCheck Direct part of the question, PayCheck Direct did roughly $75 million in sales last year, in net sales. And on a, call it, a business as usual approach to the business for 2017, we would have seen a decrease in the growth rate year-over-year, because growth rate in the early years is so high, and every year, it's coming down a little bit, but it still would have been a material percentage. So we lose that, obviously. On the Draper's retail side, what I'll tell you about the number, and I really don't want to try to recall it from memory without the numbers in front of me. But I'll tell you the fact that I don't even want to recall it from memory should lead you to believe that it's immaterial. The Draper’s brand overall is a great brand, and it's a nice contributor to our top line, but the retail component of it was not material, is not material for the business. Again, Draper's also has a direct business that obviously is doing well.

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Mark P. Wagener, Bluestem Group Inc. - CFO [14]

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Yes, I think I would just add to that, that in 2016, PayCheck Direct for the full year had a negative contribution margin of about 40 basis points, and that's before you add direct G&A against that, and that's before you also take into consideration the capital costs associated with maintaining those receivables on the balance sheet. So obviously, we view that as a positive, then, as we get into 2017, as we close that business down.

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Steven H. Nave, Bluestem Group Inc. - CEO, President and Director [15]

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That's a great call out. It was negative last year, and so that will have a benefit to us this year overall versus the business as usual approach. But it was on track on its bottom line plan, its long-term bottom line plan, as we go from kind of startup mode to scale mode. So in the future, it will be -- a profit loss in the future. But again, the key issue there is in order to get there, it would have required way too much capital to fund those -- the growth in the receivables.

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Operator [16]

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(Operator Instructions) We'll take our next question from Dale Stohr of Ellington Management.

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Dale Stohr, [17]

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Just 2 questions from me. If you said it, I didn't hear it on the call, but in that -- exiting the PayCheck Direct business you said you had to write off some of the (inaudible). How much did you write off?

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Steven H. Nave, Bluestem Group Inc. - CEO, President and Director [18]

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The write-down in the receivables, basically think of it as you go -- you have to basically value the receivables at the net orderly liquidation value, and I think that was, it was low single-digit millions.

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Mark P. Wagener, Bluestem Group Inc. - CFO [19]

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Yes. So it's a charge you'll see the first quarter, but we will be able to add it back for, obviously, covenant purposes. But it's just all, to Steve's point, we didn't -- technically, we didn't charge off the receivables. We just increased our allowance for loan losses for a more tighter what I'll call estimate or point of view as to what we think the impacts will be of just shutting down the business. And we'll have -- probably have a little bit better line of sight of that as we get on the first quarter earnings call here in the next 6 weeks, in early June.

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Steven H. Nave, Bluestem Group Inc. - CEO, President and Director [20]

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And we did engage -- just to give you some confidence around the number that we used. We did engage a third party to do a pretty exhaustive evaluation of the portfolio to help inform kind of where we were thinking.

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Dale Stohr, [21]

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Okay. And this -- what was the -- can you just tell me what the revolver balance and term loan balance was at year-end? I mean, I have the financials, but I'm trying to reconcile back to what's in the presentation, and it wasn't exactly tying, so I just thought I'd ask directly.

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Mark P. Wagener, Bluestem Group Inc. - CFO [22]

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Yes, so the revolver was, I believe, 0 at the end of the year. And the term loan, you can see it on the last page of the earnings release in terms of what the amount of that is. So we can, I can have Chris shoot you an e-mail with the detail afterwards, because we got some capital lease obligations and some other -- and we got discount, et cetera. So we can we get that to you.

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Dale Stohr, [23]

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Okay. That would be great. And the last question, maybe you could just talk for a second -- I mean, you guys have talked for a few quarters now about kind of the effect of third-party credit and how it's impacted your market. Can you just spend another minute or 2 on it? Do you have any specific evidence on how that's negatively impacted you guys? Obviously, I would think there would be offset there. If the subprime guy has access to more credit in general, I would think that would give them access or more ability to repay your loans as well. And I know it's a hard thing to quantify, but if you have any data points on that, that would be helpful.

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Steven H. Nave, Bluestem Group Inc. - CEO, President and Director [24]

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Yes, no. It's a great question. The first thing I would do is I would point you to the first page of the appendix in the presentation materials, so Slide 15, just to reinforce the phenomenon that have been referring to. You can see that subprime credit card receivables for the top 7 banks, and we've got the source and the banks included in the footnote, you can see on a quarterly basis, just continue to rise at peak levels. So -- and I know that's not really your question, but I want to make sure that we ground it in. It's just not theory. It's stuff that we look at and track all the time.

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Eugene Irwin Davis, Bluestem Group Inc. - Executive Chairman [25]

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(inaudible).

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Steven H. Nave, Bluestem Group Inc. - CEO, President and Director [26]

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'14. Yes, so it was in Q4.

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Eugene Irwin Davis, Bluestem Group Inc. - Executive Chairman [27]

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Yes, when you look -- I mean, I don't want interrupt (inaudible), but if you take a look at that chart, the quarter that we closed on the business (inaudible), we were looking at something less than $100 billion in subprime receivables, all right? As opposed to today, at the end of the fourth quarter of '16, it's $125 billion. I guess, we were closer then to 90, 85? I can't tell. I'm bad at reading bar charts. But that's kind of the delta of what's happened over the time period we've owned the business.

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Steven H. Nave, Bluestem Group Inc. - CEO, President and Director [28]

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Yes. And so your comment about having more credit and therefore having more -- a better ability to actually pay, I get that. And that's certainly a dynamic. But I'm more concerned, and I believe the impact is greater, of customers getting overextended by just high-level -- having our credit and any other debts that they have and now taking on more credit. And typically, this consumer, when they do, when they do receive credit, they use it, and they run up a reasonable, a material utilization rate pretty quickly. And I believe that just, that clearly is going to create stress for them. The second component of it is, when we're in the mail making preapproved credit offers, and at the same time, they're now also getting a preapproved credit offer from a general purpose supplier of credit, like Capital One, for example, and they decide that they're going to take one, they're going to take Capital One all day long, right. Because our credit offer is for a closed-end credit account that you can really only use at Fingerhut. So we're having a negative impact on the top line as a result of it as well. So that's how we think about it. It's really difficult for us, or for anybody, to get in and try to quantify the impact, the financial impact, at any given point in time of this, which is why we pretty closely monitor anecdotal data like this with the market. And what the take rate is on our credit offers and how that changes and the correlation between that, the response rates and the chart that we're showing in the appendix. But again, it's hard to quantify the exact impact.

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Mark P. Wagener, Bluestem Group Inc. - CFO [29]

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I just wanted to go back to previous question. So when you look at the last page of the earnings release, we had $21.2 million outstanding at the ABL at the end of the year. The term debt, net of discount, was $467.4 million. I'll have Chris shoot you what the gross amount was at the end of year. I don't have that off the top of my head.

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Operator [30]

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We have no further questions in the queue.

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Steven H. Nave, Bluestem Group Inc. - CEO, President and Director [31]

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(technical difficulty)

In June regarding our first quarter performance and to update you on the progress of our turnaround plan. Operator, you can disconnect the call, and we are adjourned. Thank you, again, everyone.

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Operator [32]

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Again, this does conclude today's conference. We appreciate everyone's participation today.