Bluestem Group Inc. Third Quarter 2016 Earnings Results Call. December 13, 2016

Transcription

1 Bluestem Group Inc. Third Quarter 2016 Earnings Results Call December 13, 2016

2 C O R P O R A T E P A R T I C I P A N T S Gene Davis, Chairman Steve Nave, Chief Executive Officer Mark Wagener, Chief Financial Officer Andy Spicher, Vice President of Corporate Development and Investor Relations C O N F E R E N C E C A L L P A R T I C I P A N T S Andrew Gadlin, Odeon Capital Group Brian Joseph, Empyrean Capital Partners Eitan Melamed, Glendon Capital Management Alex Klipper, Bank of America Sean Lobo, Vulcan Capital P R E S E N T A T I O N Greetings, and welcome to the Bluestem Group Inc. Third Quarter 2016 Earnings Results call. At this time, all participants are in a listen-only mode. As a reminder, this conference 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. Please go ahead. Andy Spicher: Good morning, everyone, and thank you for joining us on our third 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 statement. 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 the 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 in GAAP, by use of non-gaap performance measures including contribution margin, adjusted G&A expenses, adjusted EBITDA and lender adjusted 1

3 EBITDA. Please refer to the press release document available on our website at for further information. With that, I ll now turn the call over to Gene Davis, our Company s Executive Chairman. Thanks, Andy, and thanks to everyone for joining us on the call this morning to discuss our Company s third quarter results. As usual, leading today s call are Steve Nave, our President and CEO, and Mark Wagener, our CFO. Steve and Mark will walk you through a detailed recap of our financial results, including some of the headwinds we faced in the third quarter. As always, we ll set aside plenty of time at the end of the call to take your questions. Before I turn the call over to Steve, I want to update you on a couple of items we announced yesterday in our earnings release. First, our Board of Directors has made the determination to amend its current no dividend policy, and we intend to pursue the issuance of a special cash dividend before the end of the Company s fiscal year, which as you ll recall is the end of January, conditional on a number of factors outlined in the release. Second, the Board of Directors has formed an independent nominating and corporate governance committee to assist the Board in identifying and selecting individuals to be considered as candidates for election to the Board. The committee is currently conducting a search for qualified potential nominees, focusing on candidates with e-commerce, marketing and/or retail merchandising experience. The Board s search is proceeding with a high sense of urgency while taking the time necessary to identify candidates situated to provide value to the Board, Management, the Company and its stockholders. We believe that both of these actions will be in the best interest of our shareholders and we look forward to sharing more information on these topics down the road. With that, I ll turn the call over to Steve. Thanks, Gene. Good morning, everyone. Let me start by stating the obvious: we are disappointed by our third quarter results. Many of the headwinds we discussed on past quarters calls continued into the third quarter, creating the disappointing top line and bottom line results we re discussing today. We re working diligently to mitigate the external factors influencing our results but understand that some of these factors may continue to influence our results in the short term. The update to our full year outlook provided in this quarter s earnings release, that I will speak to towards the end of this call, reflects this sentiment. As you can see on Slide 3 of the presentation, our overall net sales declined just over 6% in the quarter. As we ve mentioned before, the Gettington repositioning to a close-out retail business model continues to create top line pressure. In fact, you ll note on Page 4 that this strategic repositioning accounted for just over 60% of the year-over-year decline in the Northstar portfolio sales. We ve also discussed before the incremental underwriting changes that are impacting the Northstar portfolio s top line. These changes are primarily in the area of our credit line increase program for Fingerhut, which were deployed to reduce future portfolio volatility by slowing down the pace and amounts of line increases granted to our customers. The Orchard portfolio s top line sales were negatively impacted by soft sales in our fall and cold weather assortment due to the unseasonably warm weather impacting many retailers of this category. We saw this same phenomenon in the Northstar portfolio s Fingerhut business, but the cold weather apparel categories are a much smaller mix of that brand s business so the overall impact to the Northstar portfolio was less severe. Additionally, as previously discussed, we are in the process of executing the contact stream optimization testing which is creating a drag for most of the brands in the Orchard Portfolio. As a reminder, this test needs to span multiple quarters as it s important to get a read through the various seasonal demand cycles and to get a read on the level of demand that is captured in subsequent mailings 2

4 after a period of reduced catalog activity. We are seeing some promising results and will be in a position to report on these results in greater detail at our next quarterly call after incorporating holiday results. Our adjusted EBITDA for the quarter was a loss of $900,000 compared to income of $27 million in last year s third quarter. At a high level, the drivers are the decline in gross profit driven by sales and margin rates and the increasing discount on receivables sold to SCUSA driven in part by the denominator impact of the shortfall in sales. Mark will walk you through this in greater detail in a moment. We ended the quarter in good shape from a covenant compliance perspective. Quarter-ended leverage of roughly 4.2 times and liquidity of just over $109 million were both consistent with the guidance we provided back in August. Cash and equivalents at the Bluestem Group holding company level at quarterend was $162.3 million, and the net book value of Capmark portfolio assets, the majority of which are expected to be monetized in this fourth quarter, totaled just under $54 million. Moving on to Page 4, I just spoke about the headwinds in sales, so I ll point you to the second set of factors on this page. During the quarter, we focused on pulling two levers to drive demand in this challenging retail environment: pricing adjustments at Fingerhut and increased promotional discounts in the Orchard portfolio. As you would expect, these demand-driving activities affected third quarter gross margin, which decreased 370 basis points year-over-year for total Bluestem. We are continuing to evaluate and assess the impact that merchandise pricing has on net demand and gross margin throughout the holiday cycle and are making adjustments in near-real time. Our ongoing assessment includes comparing pricing adjustments to promotional discounts and evaluating our advertising investments in channels with lower directly measurable results, such as digital and other mass media. On Slide 5, we note that the credit portfolio charge-off rates continue to be up year-over-year, driven primarily by continued pressure on payment priority created by our customer base having increased available credit and increased obligations. The regulatory environment in the quarter was similar to last quarter but continues to impact our collection strategy effectiveness. We have continued to maintain tighter new account underwriting, including reducing mailings to the riskiest prospect segments, and maintained the raised FICO floor for unsolicited Fingerhut Advantage accounts that we discussed last quarter. As discussed earlier, we continue to explore opportunities to reduce portfolio volatility through our credit line increase strategies. While the decrease in net sales makes it difficult to achieve G&A rate leverage, we did lower unadjusted G&A expenses by $4.3 million in the quarter compared to last year, and we are on track to deliver the $11.9 million run rate savings in G&A we discussed last quarter. We re also continuing to look for opportunities to reduce our capital expenditures. We also continue to evaluate overhead costs to identify further savings beyond the $11.9 million I just spoke of. With that, I m going to turn the call over to our CFO to go into these results in more detail. Mark? Thanks, Steve. Good morning, everyone. I ll have you turn to Slide 6. As in prior quarters, our focus today will be on Bluestem Brands, but first a couple of highlights on the Group. During the quarter, we repurchased Bluestem Brands term debt with a par value of $21.5 million at an average discount of 16.5%. Included in our third quarter results is a $2.5 million gain related to this repurchase. We ended the quarter, as Steve mentioned, with $162.3 million in cash and cash equivalents and $53.7 million of net commercial real estate assets. Moving to Page 7, Bluestem Brands sales for the quarter were $445.1 million. As Steve noted earlier, the increase in subprime credit supply, macro factors such as warm weather, and our repositioning of the Gettington brand with associated advertising pullback continued to impact net sales. Furthermore, 3

5 consistent with previous quarters, we continued to test contact stream optimization and expect some downward pressure on revenue for the remainder of the year as we work through these tests. Lower gross profit during the quarter is primarily the result of Fingerhut price testing and shipping expenses and increased promotional activity in the Orchard portfolio. Despite lower net sales, we managed to maintain sales and marketing expenses with only a 20 basis point increase as a percent of net sales year-over-year as we managed costs and focused on measurable media. Credit expense continues to rise, driven by the increase in credit supply contributing to higher losses in the portfolio. All of these factors are applying downward pressure on contribution margin, adjusted EBITDA, and free cash flow. Turning to Slide 8, Northstar portfolio net sales declined 6.7% or $15.6 million, with the repositioning of Gettington accounting for $9.7 million of the sales decline. We continued to experience reduced application volume, fewer revolving new credit accounts, and lower re-buy rates in part to the increase in credit supply. Fingerhut sales were also impacted by changes in our credit line increase program to reduce portfolio volatility. Contribution margin was down 620 basis points, driven by increased credit expense and a decrease in gross margin. Gross margin was down 310 basis points primarily due to pricing adjustments made at Fingerhut to drive sales demand. Net credit expense as a percentage of sales increased 420 basis points due to lower profit sharing, which we will discuss in further detail on the next slide. Turning to Page 9, SCUSA portfolio performance has been negatively impacted by the increased availability of credit and increased regulatory restrictions on our servicing protocols. We believe this environment is driving the increase in our 30-plus day delinquency rate by impacting payment priority and increasing the attrition rate in our more mature vintages, which historically have the lowest delinquency and loss rates in the portfolio. Risk-adjusted margin decreased 370 basis points for the quarter to a negative 0.4% versus a positive 3.3% last year. As a reminder, we calculate RAM as net revenue less net credit losses, servicing fees, and cost of debt to SCUSA. Our net finance charge and fee rate decreased by 210 basis points due to the higher charge-offs of finance charges and fees, along with lower billed late fee yield. Net principal losses increased 140 basis points over the last year to 20.2%. Turning to the next slide, Orchard portfolio performance. Orchard portfolio revenue for the third quarter was down 11% to $218.7 million. The decline was the result of contact stream optimization testing, lower response rates to our advertising and promotional strategies in outdoor apparel caused by the unseasonably warm weather, and soft response to some of our new assortment additions. Promotional activities along with higher shipping and handling costs decreased gross margin by 380 basis points. While we reduced advertising by $6 million in the quarter as compared to last year, the advertising rate increased 200 basis points due to the soft demand. Moving on to PayCheck Direct s performance on Slide 11, net sales grew 36.5% year-over-year, reflecting the increase in eligible client employees which drove merchandise orders up 28,000 or 55.6% over Q Contribution margin also improved 950 basis points primarily as a result of an increased mix of sales coming from existing customers, which have lower advertising expenses, and improved gross margin as a result of our pricing optimization and improved merchandising mix. Turning to Slide 12, G&A expenses: in this area we continue to focus on reducing our fixed costs and driving leverage. G&A expenses improved 20 basis points year-over-year from lower incentive compensation due to performance and lower professional fees and contract labor. As I noted last quarter, it is difficult in this declining sales environment to drive leverage on this line, but we continue to stay focused on our fixed costs and our options to lower expenses. We reduced growth-related capital expenses by 18% to $5.1 million versus last year s third quarter. The 5% increase in maintenance capital expenditures resulted from repairs we completed in the third quarter in our Pennsylvania distribution center. 4

6 Turning to Slide 13, our inventory turnover decreased to 2.9 compared to 3.6 in the same quarter last year, primarily the result of higher inventory levels at Orchard to drive better fill rates as well as the impact of softer sales; however, I would like to point out that we decreased inventory dollars year-over-year by $28 million. We ended the quarter with a liquidity position of $109.6 million, exceeding the $40 million liquidity requirement in our covenant, and with a leverage ratio of 4.1 versus our covenant requirement of As we mentioned on the call in mid-august, the required leverage ratio decreases to 4.5 at the end of the fourth quarter of I ll now turn the call back over to Steve to discuss our revised and updated guidance for Steve? Thanks, Mark. If you will turn to Slide 14, I ll walk you through our updated guidance for the year. The third quarter was clearly a challenging quarter and did not produce the results we expected when we provided guidance this summer. As discussed throughout the call, we ve seen top line demand pressures which we have not been able to fully mitigate. At the same time, our credit portfolio performance continues to be stressed. Although we are taking actions to improve performance, the tightening of underwriting will take time to impact our portfolio performance. As a result of these headwinds, we re revising our guidance for the year. Net sales remains in the range previously provided but at the lower end of the range, with a new range of $2.06 billion to $2.085 billion. The largest change is to Adjusted EBITDA, which we are lowering to a range of $85 million to $95 million. Lender Adjusted EBITDA is revised to a range of $110 million to $120 million. We have no change to our expected capital expenditures and we continue to project that we will remain compliant with our leverage and liquidity covenants, albeit with tighter compliance than we previously expected. Before we hand the call over to take your questions, I want to assure our investors that both the management team and the Company s Board of Directors is and has been highly focused on improving the Company s profitability and financial standing while we navigate the headwinds facing our business. We appreciate your patience and support that you ve provided us today. With that, I d like to turn the call over to the Operator to provide instructions for the Q&A session. Thank you. If you would like to ask a question, please signal by pressing star, one on your telephone keypad. If you re using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. To allow everyone an opportunity to ask a question, we ask that you please limit yourself to two questions. Again, that is star, one. We ll go first to Andrew Gadlin, Odeon Capital Group. Andrew Gadlin: Good morning. What was the discount on receivables sold to SCUSA this quarter? Hello? Hi, yes, sorry. If you can give me a second, I ll answer that question. Let me go looking for that. I don t have that off the top of my head. Operator, why don t we take another question and we ll circle back on that one? 5

7 Okay, we ll go next to Brian Joseph, Empyrean Capital Partners. Brian Joseph: Hi. You essentially reiterated guidance midway through the quarter on the recent conference call by saying, we re well positioned to deliver what we committed to about a month ago. Does that mean the back half of the quarter was much weaker than expected? Yes, that s correct. We didn t really speak to it yet, but we saw the impact of the election cycle on retail, which is a very common phenomenon you see every four years. We saw, and expected that to happen, but we saw a much more severe dip in sales as a result of the election and a rebound that took a little bit longer than you would typically see, so definitely we were not expecting the severity of that hit. Brian Joseph: Okay. Have you seen any bounce back post-election? Yes, so we did see some recovery post-election. Like I mentioned a second ago, it was a little bit more delayed than you would typically see. Without providing an editorial on the election, I think we can all understand why the country was a little more polarized after this election, so the recovery took a little bit longer than you would typically see, like I just said. I would say to date through, well through yesterday, we ve seen recovery. We ve definitely seen some rebound in performance since then. Brian Joseph: Okay, and obviously the $64,000 question is here what are the factors impacting your dividend distribution? I m sorry, can you say that again? Yes, let me see if I can answer that. The dividend distribution, there are how should I put it? There are legal technicalities and there s computational technicalities and tax technicalities that we re working on right now to properly size it. Some of it has to do with the availability of cash. As you know from the presentation, there s something north of $50 million of assets that we expect and hope to turn into cash by the end of December, former Capmark assets. We need to see those processes go through and we need to understand what the remaining liabilities are at the holding company. When you do a dividend, there s a process you have to go through, and we re working on that right now. But it s nothing that you wouldn t see in a normal dividend calculation except for the fact that what we re talking about is basically a one-time, fairly large dividend, and we want to make sure that we ve calculated it properly and it s not subject to challenge at a later date. Brian Joseph: 6

8 Okay, fair enough. I would hope that you guys would outline that rather than just announce a number, so we can see the logic. When the time comes, we will provide some information as to how we got to the number we got to. Rest assured, we re going to make this happen. Brian Joseph: Have you delineated how big the liabilities are at the holdco? We have worked on that internally. Some of the liabilities that we ve looked at are contingent and some are actual, and we re trying to work through those things right now to make sure that whatever reserve we have to keep is the right size, not too much and not too little. That s what we re working through right now. Some of these things have to do with guarantees on certain lending relationships and so forth, and when you have to impute how much we have to hold in reserve, some of it is science and some of it is art, and we have to get to the right place because it s always subject to contest after the fact. Brian Joseph: Okay, thank you. All right. This is Mark. Just to follow up on the earlier question, our discount for the quarter was 3.2%. We ll go next to Eitan Melamed with Glendon Capital Management. Eitan Melamed: Hi, guys. Wondering if there s anything creative you could do at the operating company I ll give you an example, trying to monetize PayCheck Direct, which is obviously going really well. Have you guys thought about any steps like that? It s a good question. I would say we re constantly evaluating opportunities to either improve our performance or monetize certain assets that we have. I probably won t go any further than to say that, but as we mentioned before, we re spending quite a bit of time and energy trying to identify additional levers to improve our performance and financial standing. Eitan Melamed: Thanks. 7

9 We ll take a follow-up from Andrew Gadlin. Andrew Gadlin: Guys, so I m trying to understand this guidance on the levered ratio being below 4.5 times. I assume what you re using there is the lender Adjusted EBITDA. That is correct, yes. Andrew Gadlin: So, where is the term loan debt today? What level is that at? It is around about $500 million. Andrew Gadlin: About $500 million? Then do you still anticipate there being around $20 million paid down under the excess cash flow sweep, or would that be lower as well? I assume it would. Obviously we ll wait until we get to the end of the year to see where working capital comes in and other inventory before we ll make a determination as to what an excess cash flow sweep would be. Typically the excess cash flow sweep would be made after year-end, so it just reflects in terms of the outstanding term debt at the end of the year plus any ABL outstanding less cash on hand. Andrew Gadlin: Okay, and then when you focused on the holdco cash earlier on in the presentation, there s $162 million of cash and then real estate of almost $54 million, and that real estate, you said you expect to be liquidated by the end of Q4? The majority of those assets should be monetized in the fourth quarter. Yes, Steve, let me just clarify that, for whatever it s worth, because sometimes we can be confusing. Our fiscal fourth quarter ends at the end of January, all right? I believe the reference to the disposition of the assets relates actually to the end of the calendar quarter, which would be December. Now, again, sometimes closings roll over and so forth and they might roll into January, which is one of the reasons why we re waiting to see the actual realization on those sales before we put them into our computation of what we can put into the dividend. But right now, they're scheduled to close by the end of the December, which would be the calendar fourth quarter as opposed to our fiscal fourth quarter, which is the end of January. Andrew Gadlin: 8

10 Bridge me here also, just in terms of the trend as we look ahead a year. So, obviously EBITDA declined significantly year-over-year, certainly on a pro forma basis, so what kind of trends are we taking into 2017? The headwinds from other subprime credit issuance aren t going away, so as you think ahead I know you re not issuing guidance, but help us, from where we sit, think about what we should put into our models for Yes, so it s a good question, so I ll open by saying we re not in a position right now to provide an outlook for 17. It s something that we ve been working on for a little while now, we ve still got work to do on it, and we want to read holiday results and new-to-file metrics and things like that to understand how everything rolls into 17. So, at this time, we intend to provide that on our fourth quarter call, much like we did this last year in August at kind of the same level, so that will come in the future, in the near future. When you think about some of the headwinds that we re facing, for what it s worth, I believe you will see some moderation in the supply of subprime credit. If you re reading the Journal and other news media, you re starting to hear about the delinquency impact of what s been going on in the industry, so I do think that we ll see some pullback in this area. I ll just reiterate, we didn t say it today but I ve said it multiple times before, our policy has been: do not react to this, do not loosen underwriting. As a matter of fact, we ve talked before about how we re actually tightening things a little bit, given what else is going on. So, we re not going to react to it, but I do believe you ll see some moderation in the impact here in 17, and that s going to be factored into our outlook for the year that we provide on the fourth quarter call. The other thing I ll point out is, I know contact stream optimization can feel kind of nebulous to those that aren t that close to it like we are, but those tests by the end of this quarter, the fourth quarter, will have been in place for the year, for the most part. One of the most important parts of those tests is not just what s the immediate impact from customers of reduced mail streams, but what s the subsequent re-buy impact down the road and when and with what frequency do you need to contact the customers and change your contact to the customers down the road quarters later. So, we ll be substantially through those tests in the fourth quarter. Mostly at this point it s about reading subsequent purchases and re-buy, so that we ll be in a better position to then take our learnings and apply those to 17. And by that I mean we re running tests right now where within a certain brand, we might run, say, three different streams at the same time, where we take a population and reduce their contacts by 20%, we take another and reduce it by 30%, and another and reduce it by 40%. Some of those tests are winners and some of those tests are losers, and it actually varies by brand and how each brand has contacted customers previously. So, at the end of the fourth quarter, we ll be able to know by brand within the Orchard portfolio which mail plans are the most optimal, and we ll be able to then apply those across the brand in 17. So, the headwind and the noise, if you will, that s created by our CSO testing will largely subside in 17, and we ll be able to then optimize both in terms of driving the right top line performance as well as the marketing expense efficiency that we re going for. So, that s a longwinded way of telling you that we re not in a position today to give you the guidance, but there are factors that you should be considering and that we re certainly considering that would run contrary to the trends that we ve seen this year, and again our intention is to provide that outlook on our fourth quarter call. I hope that was helpful. We ll take our next question from Alex Klipper, Bank of America. Hey, guys. How do you think about capital allocation in terms of potentially repurchasing term loans, particularly as we look at next year given potential continuance of poor results plus LTM look back to 9

11 maintain covenant compliance? Do you guys feel comfortable that the operations can do that, or do you expect to need some cash as you begin negotiations with your lenders? Alex, good to hear from you. So we re managing this very tightly, as you can imagine. I would say, as Gene mentioned, our first priority with respect to the deployment of holdco cash is this effort that we ve got going on right now to declare and pay a special one-time dividend. I ll tell you, in the analysis and consideration of going in that direction, we did discuss other alternative uses of the cash. We determined at this time, especially in light of the fact, and I guess we didn t say this yet, but in light of the fact that the headwinds that we re working through overcoming on the business and the current performance of the business, I think an M&A transaction is highly unlikely at this point. We want to focus on making sure that the core business gets back to the performance that it should be at. Because of that, you look at all that cash that s sitting there. We ve talked about before how that s kind of being reserved for strategic purposes like M&A. So the first thing that we decided that we re going to do if we re not going to deploy the money towards a strategic acquisition, is give it back to the shareholders through a special dividend, which is something that many of you have been asking for and we ve declined in the past because of potential M&A activity. So, that s a longwinded way of saying that we ve looked at a number of considerations for how to deploy that cash. I think the special dividend is a first step in that process, and we ll continue to monitor the uses of the cash or the requirements of the cash that need to be left behind as we navigate through Got it, and how long do you get to add back those cost savings in your lender Adjusted EBITDA? Twelve months. So, when did that start, if you could just remind me? Third quarter, we started putting in some expected savings. We ve had some new contracts that we ve been working on that came to fruition, so we started to put those in our lender add-backs, and you see it if you go back to the Q2. So I guess second quarter. If you go back to the Q2 earnings release, we actually had some in there, and you can see that. Yes, and maybe I m stating the obvious, but as those add backs roll off the calculation, it s because they're actually being realized in the results prior to the add back. So, as we roll those off, we ll be enjoying those benefits in the actual results. Right, got it. Then given your guidance, how much free cash flow should we expect this year? Is it to the tune of around $20 million? 10

12 We have not and we re not going to provide guidance on free cash flow at this point, because obviously we want to see where inventory levels come in. We have an idea of where they re going to come in at, but I think we re going to limit right now our guidance to what we ve provided in the earnings release and we ll let people know as we close out fourth quarter what the expected ECF would be in April. Okay. Then, I noticed that you monetized some of the real estate assets last quarter for more than book value. Should we be thinking the same as you close out the real estate portfolio here? We think there is some opportunity to monetize some of the assets above book value, and I think we ll see a little bit of that in the fourth quarter here. Obviously we want to make sure we have the transaction across the finish line and we have the cash in the door, and at that point we ll make a final assessment as to whether we have gains or not. The monetization has been worked on for a number of years, and so obviously we want to make sure we re at the finish line before we opine as to where we think it will land. Got it. Then Guys, just to be clear on something, the assets that we have for sale now, that we re closing, correct me, Mark, if I m wrong; they re not actually the last of the assets. There are still some left out there. It s not a huge number, but there s still an additional sum that we expect to realize on the sale of the final old Capmark assets sometime over the course of the next year, hopefully. That s correct. It s over the next basically 15 months, so Steve mentioned earlier the majority will be in the fourth quarter here, but we will have some still coming in in 2017 and maybe a little bit in early 18. If you guys will allow me one last question, just more existential or philosophical, given what we re hearing about regulatory rhetoric and potential loosening of the regulatory reins here, how do you think about that being either a positive or a negative? Certainly, on the collections side, I guess you d say maybe it s a positive, but if there s more subprime credit out there, couldn t that actually be a headwind? Yes, I mean, I think it s a very reasonable question and it s one that we ve spent a lot of time talking about internally for the last several months. I think honestly it s premature to speculate on how the regulatory environment may change in the near future, but it s something that we re staying very close to, to make sure that we understand the impact as developments occur. But it s premature and highly uncertain about what s going to happen. Got it, okay. Thanks, guys. 11

13 You re welcome. We ll take our next question from Sean Lobo, Vulcan Capital. Sean Lobo: Good morning. I just wanted to calibrate some administrative questions. The Capmark assets will be sold between now and December 31, is that right? They have been sold. We re talking about closings. Sean Lobo: Okay, so the $53 million that was reported last night, that s now out the door and you re going to receive cash for that sometime between now and the end of the year, is that right, Gene? That s the expectation. Steve, please, and Mark, correct me if I m wrong, but my understanding is the assets have been identified with that $54 million number as assets that are actually under contract and expected to be sold. Mark, have I got that wrong? Correct me, please. Just to be clear, Sean, the $54 I think it s $53.7 million that we talked about, the majority of that will be monetized in the fourth quarter, and our current expectation is that it will happen by the end of December, not the end of our fiscal quarter. The majority of it, not the entire $54 million. What Mark spoke to a few minutes ago is that remainder will monetize mostly in 17. I think there s a very small, kind of long tail that reaches into early 18. But if you re trying to model out that we re going to bring in roughly $54 million by the end of the quarter, that would not be accurate. It s a smaller number than that, but it is more than half of the balance. Sean Lobo: Sure. Would $40 million plus or minus $5 be a fair range? Yes, I think so. Sean Lobo: Okay, thank you very much. Then, just in terms of the wording on the distributions, it will be done sometime between now and the end of your fiscal year, so typically that s January 31 or February 1, so sometime between today and that day, you guys will do the distribution calculation and send that out, so pretty much the next 45 days? Is that right? Sean, just to be clear on the way it s done, I m going to probably do this out of sequence, so counsel can correct me. The Board will have to first declare a record date, it will declare an amount, all right? There 12

14 is formalities that we have to go through with FINRA in terms of setting the record date, and so all that stuff will be announced in terms of what s the date for calculation and what it will be. Honestly, while I think we will give you some context for how we reached the decision, some of these things that we re going to have to deal with in calculating what the maximum amount is have to do with some estimations we may have to have with regard to third party liabilities. Some of those are contingent liabilities, and to a certain extent I m not sure we want to be completely public with how we came up with those numbers because those third parties will be looking at those numbers, and that may affect their behavior with us, all right? So, I can t tell you that you re going to get a spreadsheet with every single thing that we look at internally. There s some things from a competitive point of view and from our relationship with a third party point of view which we can give you the result, but we can t necessarily give you the way that we ve calculated it. I don t want you to think that we re being misleading, but I don t want to give somebody out there an idea that we acknowledge that we owe them something when in fact it s a contingent liability. Sean Lobo: No, I appreciate that. It makes total sense. I m just making sure I understand the process for the next phase in this. Then, just one question on Orchard brands. You explained some of what happened: the mid cycle election, unseasonably warm weather. In a world where let s say there was no election in Q3 this past year, how would the business have performed in Orchard? Well, I mean, it s hard to know, Sean, but I would say, if you recall in the first two quarters of the year, Orchard, and somebody s going to give me the exact number, I m sure, after I say this, but Orchard was roughly down 4% to 5% year-over-year. We view this election cycle issue, as well as the cold weather, the unseasonably warm weather, I guess, as contributing about half of the decline. Sean Lobo: Okay, I understand. The one last piece on credit, if I may. When you look at the performance and you think about what has happened, the sort of continued deterioration as you called it, what s driving that, given some of the efforts? I know it takes time to work out, but what strings can you sort of pull, what should we think about how long that plays out from a time perspective, and what happens from here? Well, I think we ve taken, as Steve mentioned earlier, some of the underwriting changes we have made, including slowing down credit line increases, which we strongly believe that will have a positive impact on the performance of the portfolio as we get into Clearly, with just on the collections side, we ve put a lot of technology and processes in place to improve our performance there. We still have the supply of credit out there as a headwind, and that will continue to be a challenge in 2017, although we see, as Steve mentioned, there s some signs that that could be abating as we get deeper into 17. So, right now, we are continuing to do what we ve done in previous quarters, which is manage the underwriting to a level that we believe is appropriate to improve the performance in the portfolio long term, and not loosening to drive current sales because we know that that would bite us as we get into So, we re playing the long game here, and it s going to take a while for it to turn around. Sean Lobo: All right. Gene, Steve and Mark, thanks for your time this morning. 13

15 Thank you. Good to hear from you, Sean. That concludes today s Q&A session. I d now like to turn it back to Gene Davis for closing remarks. Okay. Thank you all for joining us today. I d like to reiterate what Steve said. Our management team and our Board of Directors is highly engaged in improving the Company s financial performance. Let me reiterate: our discussion of a dividend at this point is a very real discussion. Steve gave you our thoughts and our feelings, which was we ve held this money principally in the past with the idea that we were going to deploy it to build the business by acquisition or by strategic transaction. We are in turnaround mode now. We re fixing this business. It s not realistic to assume that we would complicate the Company s business by making acquisitions in the foreseeable future, and it s for that reason that we re talking about giving the money back to the investors. So, as I say before, we recognize what we re telling you, and we recognize what we have to do to fix this business, and we recognize the impact on our ability to hold onto what s essentially your money to do with. We re going to do our very best to give you a material dividend and make it clear as to how we got there. I caution all of you in calculating the cash on the Company s books. You re not entirely aware and cannot be aware of all our contingent liabilities, and please be patient with us as we calculate them to maximize what is a fair and safe dividend, but it will happen. Also with regard to supplementing the skill sets on the Board, we re not going through the motions here. We are going to be looking for some people that can add skill, to add strength to the Board as we consider what we have to do to put this business back on track. It is a bad time for us and this is a bad report, and we feel as bad as we could reporting it to you because we know we have to fix this. We are going to fix this business. There s a future for all of our businesses here, and we re going to learn from what occurred and we re going to turn this thing around and bring you value over the course of time. We ask for your patience and we re sorry for the disappointment. We appreciate your support of the Company. We look forward to speaking to you again. We wish you happy holidays, and we ll be coming back to you in fairly short order with detail on the dividend and steps we ve taken to augment the skill sets on the Board. Thank you very much, everybody. Bye-bye. That concludes today s conference. We thank you for your participation. You may now disconnect. 14