Rent-A-Center Inc.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Renner Center First Quarter 2022 Earnings Conference Call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star then 1 on your telephone keypad. As a reminder, this conference call is being recorded. If you require any further assistance, please press star then 0. At this time, I would like to turn the conference over to Mr. Brendan Matrano.

Brendan Matrano Good morning, and thank you all for joining the Rent-A-Center team to discuss our results for the first quarter of 2022. We issued our earnings release after the market closed yesterday. The release and all related materials, including a link to the live webcast, are available on our website at investor.renacenter.com. On the call today from Rena Center, we have Mitch Fidel, our CEO, and Maureen Short, our CFO. As a reminder, some of the statements provided on this call are forward-looking statements, which are subject to factors that could cause actual results to differ materially from our expectations. These factors are described in our earnings release, as well as in the company's SEC filings. Rent-A-Center undertakes no obligation to publicly update or revise any forward-looking statements except as required by law. This call will also include references to non-GAAP financial measures. Please refer to our first-quarter earnings release, which can be found on our website, for a description of the non-GAAP financial measures and reconciliations to the most comparable GAAP financial measures. With that, I'll turn the call over to Mitch.

Mitch Bergeron Thank you, Brendan. Good morning, everyone, and thank you for joining the call today to review our results for the first quarter of 2022. I'll begin today's call with some high-level comments on the company's key objectives and progress, followed by a review of financial and operational highlights, and then an update on our plans for the year. After that, Maureen will provide a more detailed review of our financial results, and then we'll finish, of course, with Q&A. Following the challenges we had at ASEMA in the second half of 2021, our primary objective for this year is getting the company back in a position to successfully execute the growth strategy we developed last year with the acquisition. Over the past number of months, we identified issues that drove ASEMA's underperformance, developed a plan of action, and began implementing solutions. In addition, as previously announced, we've recently completed a leadership transition at ASEMA. So we are encouraged with our start to the year with early indications that our adjustments are having the desired effect and first quarter financial results coming in above the midpoint of our guidance ranges. While there are growing external headwinds this year, including the wind-down of government stimulus programs, we believe the operational and financial progress we've made thus far have the company on a path to achieve 2022 financial targets, and we've reaffirmed our full-year guidance. Consolidated revenues were $1.16 billion, down 5.8% year-over-year on a pro forma basis, with ASEMA down 8.1%, and the Rent-A-Center business segment down 1.2%. We believe the decline in revenue was attributable to the performance of ASEMA lease vintages underwritten in the latter part of 2021 using assumptions that lagged worsening customer payment behavior, negative effects on customer incomes from government stimulus programs winding down in 2021, and the Omicron breakout in January. Consolidated adjusted EBITDA was $99.5 million with a margin of 8.6%, negatively impacted by elevated loss rates and delinquencies that we believe largely resulted from ASEMA underwriting practices in the second half of 2021, as well as post-stimulus changes in customer payment behavior. Higher labor costs in rent-a-center stores and higher corporate costs related to investments also contributed to margin contractions. Non-GAAP diluted earnings per share of 74 cents for the first quarter was above the midpoint of our guidance range of 65 to 80 cents. We also generated almost $189 million of free cash flow in the quarter compared to about 124 in the prior year period, providing us with the flexibility to invest in our business and reduce debt. In our business, lower growth periods result in higher free cash flow, which underscores the strong cash flow attributes of our business, and provides us with that significant flexibility. Focusing in on segment performance, the SEMA's first quarter top-line trends were generally in line with the assumptions behind our first quarter guidance. GMV of $398 million declined 21% year-over-year on a pro forma basis, reflecting the effect of tighter underwriting, the January Omicron outbreak, and cycling over strong GMV growth in the prior year period that benefited from government stimulus. In fact, our first quarter two-year GMB growth is a positive 10%. The shift in underwriting is part of a broader set of changes at ASEMA to address the issues that occurred in the latter portion of 2021. As previously noted, we did not anticipate the extent or pace of the declines in customer and payment activity. Although we've made adjustments to our underwriting, the initial changes in 2021 were, in hindsight, not sufficient to address developments in the external environment. Because we're a portfolio business, these earlier vintages, lease vintages, take time to cycle through our results, and we expect to see the impacts of those vintages through the end of the second quarter. The changes in underwriting that were implemented during this past first quarter drove significant improvement in first payment missed, or what we call FPM rates, which is the best early indicator of future loss rates and yield. Overall, FPM rates declined over 30% in March from their peak in December. We believe we're clearly on the right track when it comes to adjusting to the current macro environment. The Rent-A-Center business segment started the year off with another good quarter. Revenues of $519 million declined 1.2 percent year-over-year and were above the assumptions behind our first quarter guidance, with same-store sales down 1.1 percent. Importantly, We are cycling over 15.4% revenue growth in the prior year, which translates to an impressive two-year stack revenue growth of 14%. This momentum was reflected in the lease portfolio also, which ended the quarter 5.6% above last year. E-commerce continued to contribute to growth, with revenues up about 4%, and now accounting for about 23% of segment revenues in the quarter. Adjusted EBITDA margin was 20.7% for the quarter, even with cost pressure from losses in wages, fuel prices, and inflation in the cost of certain products we lease and sell. On the strategy front, we continue to advance our omni-channel capabilities by improving the customer experience with enhancements to our digital checkout process and launching functionality that allows customers to make payments via text messages or SMS. We also expanded our extended aisle partnership initiative and added thousands of SKUs to our e-commerce platform available at other retailers and local markets. Looking forward to the rest of the year, the objectives we outlined in February remain in place. For ASEMA, we will continue to focus on initiatives that can benefit both near-term results and long-term capabilities like putting more resources and emphasis behind underwriting to optimize yield and loss improvements this year, but also to benefit our future underwriting. We will also continue to develop high-potential growth opportunities like the digital ecosystem and other new offerings in a manner consistent with our internal profitability goals. For the Rent-A-Center business, the team has put together a compelling commercial plan that we believe can sustain and grow the portfolio beyond 2021 levels. The value proposition we provide our customers continues to support solid transaction volumes and renewal rates, despite the more challenging macro environment. In addition, we think our commitment to the local retail-centric RTO model, coupled with an improving e-commerce offering, is enhancing our competitive position. Additionally, we've proven in the past to be very resilient to recessionary pressures. Regarding our financial outlook, when we issued full-year 2022 guidance back in February, it did not incorporate improvement in the macro environment over the year because there was so much uncertainty. And even with continued uncertainty, given the solid start to the year, progress with the changes to the SEMA, and consistent performance of the running center business segment, we are reiterating our guidance of full-year consolidated revenues of $4.45 to $4.6 billion, adjusted EBITDA of $515 to $565 million, diluted earnings per share of $450 to $5, and free cash flow of $390 to $440 million. In addition, given the extent of noise and variability in trends related to the effects of government stimulus programs in 2021, we have provided guidance for the second quarter that was highlighted in our earnings press release. Also, I'm very pleased to announce that the company has taken a step forward in its ESG efforts with the production of our inaugural sustainability report for 2021, which will be available on our investor relations website. In closing, first quarter results were in line with our guidance, and we believe changes to the SEMA have placed the business back on a path of longer-term profitable growth. We believe we have a solid game plan for the year that we think will allow us to effectively navigate a more uncertain business environment while also positioning us for longer-term success. I want to thank the entire team for their continued effort and dedication as I continue to see tremendous opportunity in our future. And with that, I'll turn the call over to Maureen.