Rent-A-Center Inc.

Good day, and thank you for standing by. Welcome to Rent-A-Center's second quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, please press star 1-1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Brendan Matrano, Vice President of Investor Relations. Please go ahead.

Good morning, and thank you all for joining us to discuss Rent-A-Center's results for the second quarter of 2022. We issued our earnings release at the market close yesterday. The release and all related materials, including a link to the live webcast, are available on our website at investor.rentacenter.com. On the call today from Rent-A-Center, we have Mitch Fiddle, 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. Brandeis 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 second quarter earnings relates, which can be found on our website, for a description of the non-GAAP financial measures and the reconciliations to the most comparable GAAP financial measures. With that, I'll turn the call over to Mitch.

Thank you, Brendan, and good morning, everyone, and thank you for joining the call today to review our second quarter results. On today's call, I'll begin with an overview of second quarter performance, followed by our plans for the remainder of the year and some perspective on the external environment. And then Maureen will provide a more detailed review of our financial results. And of course, we'll finish up with Q&A. Well, second quarter trends are down compared to stimulus enhanced 2021 results. We are encouraged by the performance of the business in the second quarter, given the very different and more challenging macro environment we're experiencing this year. Second quarter financial results were strong relative to the quarterly guidance we provided in early May with revenues at the high end of the range and adjusted EBITDA and EPS above the high end of the respective ranges. We also delivered on business objectives over the first half of the year, optimizing ASEMA's underwriting, maintaining year-over-year portfolio growth for the Rent-A-Center business segment, and managing costs to help offset profitability headwinds from the challenging environment. Well, we executed well in the areas of the business that we could control. External factors like inflation and economic growth and discretionary income worsened during the first half of the year. As the second quarter progressed, we began to see indications that macro weakness was causing lease volumes and payment behavior to trend below our assumptions for the second half of the year. These trends have continued, and it became clear that if the current weak environment continued for the rest of the year, we would not achieve the full year 2022 financial targets introduced back in February. As a result, we've lowered our full year 2022 financial targets and now expect full year non-GAAP earnings per share of $4 to $4.50, with 10 cents of that change related to the increase in variable interest rates on our outstanding debt above and beyond what was built in our original targets. The full set of updated 2022 targets is included in our press release. Maureen will talk through them in more detail. As you can see, We still expect the progress we've made on our 2022 initiatives will result in a sequential step up in profits for the second half of the year. Moreover, we believe our business is well positioned to generate value for shareholders during these evolving economic environments, as well as long-term growth in the business. Moving on to financial highlights, consolidated revenues of $1.1 billion decreased 10.3% year-over-year, with ASEMA down 16.5% and the Rent-A-Center business segment down 3.1%. The primary factors that drove that decrease in revenue were cycling over strong growth for both businesses in the prior year period that had benefited from the effects of pandemic stimulus programs, lower lease volume in the current year for ASEMA due to tighter underwriting, and the effects of lower discretionary income for consumers in the current year. Consolidated adjusted EBITDA of $129 million was above the high end of our guidance range with a margin of 12% up sequential and a bit stronger than expected due to the favorable delinquency trends for SEMA vintages originated in late 2021 and early 2022. Non-GAAP diluted earnings per share for the quarter were $1.15 above the high end of the guidance range. We continued to generate solid cash flow with $256 million of free cash flow year-to-date, highlighting the resiliency of our business. Moving on to segment performance, it was a productive quarter for ASEMA. Financial results were better than the assumptions behind our second quarter guidance. Our top ASEMA business priority for the second quarter and first half of the year was to optimize underwriting for the current environment in order to generate returns that were consistent with our double-digit to low teen segment margin targets. After substantial progress in the first quarter, evidenced by a reduction of around 30% in first payment missed rates from the peak levels of December and January, we essentially maintained FPM rates near pre-pandemic levels during the second quarter. As a reminder, we believe FPM rates are the best early indicator for delinquencies and loss rates. Speaking of loss rates, we also had favorable trends for loss rates, with 11.6% in the second quarter down from 12.6% in the first quarter. The improved underwriting should be even more visible in the second half of the year, with loss rates expected to drop into the 8% to 9.5% range, and adjusted EBITDA margins expect to increase to the 11% to 13% range. GMV was down 24% in the quarter, which was at the lower end of our assumption range. However, two-year stack growth was 19%, positive 19%, when you factor in the 43% GMV growth in the second quarter of last year. So a good two-year count number for sure. Drilling down into GMB drivers, active merchant locations were up approximately 15% year over year, while applications, approval rates, and conversion rates were lower compared to last year. When you add that all together, we think the takeaway here is that over the two-year period, favorable long-term underlying fundamentals seen in the continued merchant growth I just mentioned more than offset near-term volume headwinds from a combination of challenging prior year comps, pressure on discretionary income, and tighter underwriting. The Rent-A-Center business segment continued to show impressive stability in the second quarter, largely sustaining the levels of business that we generated in 2021 during the peak period of government stimulus benefits. Revenues were $490 million in the quarter with same-store sales down 3.3% in the current year and up 13.3% on a two-year stack basis. Rental revenues were down less than 1% year-over-year, benefiting from a strong lease portfolio that finished the quarter up nearly 1% sequentially, and up 2% compared to last year. To put this performance in perspective, according to Census Bureau data, the three largest product categories we offer, furniture, appliances, and consumer electronics, experienced retail sales year-over-year decreases of 1%, 3%, and 4% respectively for the three-month ending in May. So our numbers certainly outdid those. And although it's not clear in our data yet, We think part of the outperformance is customers trading down into leased-owned, which we have historically benefited from during challenging economic periods. e-commerce continues to benefit top-line performance with web orders up 38% year-over-year and accounting for about 23% of revenue in the quarter. Commercial execution was strong again this quarter at Rent-A-Center. The team hosted a number of successful events that drove lease volumes, opened six new stores, including new concept stores featuring a smaller footprint in design intended to enhance the customer experience. We also advanced our extended aisle service, adding access to additional products and contributing to the e-commerce growth. Customer payment behavior started showing signs of pressure from the high rates of inflation and pressure on discretionary income, and payment collection rates worsened during the second quarter, negatively impacting rental revenues. Skip zone losses ticked up to 4.2% as a percentage of revenue, which is above our long-term target of 3.5% to 4%. So we're implementing measures designed to improve that activity, including changes in the underwriting at Rent-A-Center as well as some changes in account management processes. So looking forward to the second half of the year, our objectives will build off the plan we've been executing against this year for SEMA. This evolves to more of an emphasis on optimizing GMB within acceptable levels of risk and executing on the changes we have made within our sales function to continue to drive active and new merchant growth. We're also continuing to build out the enterprise sales function. And I'm happy to announce we recently brought on a new Senior Vice President of Enterprise Business Development and Partnerships, Mike Bagel, who starts later this month. And Mike spent over eight years in a similar executive role with Synchrony. And we believe he'll make an impact by accelerating the partnership initiatives that are within our pipeline. For the rent-centered business, some of the key areas of focus are further developing our extended aisle services, improving our retention engine to optimize returns, and enhancing our digital customer experience through more personalized offers, just to name a few. We also remain committed to our cost management efforts in all segments of the business. Overall, looking at the back half of the year and into 2023, we believe the company is poised for commercial and financial performance that across economic cycles. Lease zones are relatively large and under-penetrated market offering flexible and valuable solutions for more than 40 million U.S. households who have limited access to credit and also may be experiencing financial pressure from inflation and slowing economic growth. As the only LTO solution provider with both traditional and third-party host retailer LTO channels, we believe we're well positioned for growth opportunities as consumers turn to LTO. Historically, LTOs demonstrated counter-cyclical attributes, maintaining better top-line and loss rate trends during economic downturns due to the essential nature of the products we lease, the momentum of a portfolio business, and the stabilizing effect of non-traditional LTO consumers trading down to LTO. This was illustrated during the global financial crisis from approximately the first quarter of 2008 through the second quarter of 2009, when our quarterly same-store sales growth outperformed Year-over-year growth in consumer durable expenditures by an average of 900 basis points. The inflection for this trade down appears to be on credit conditions deteriorate or tighten. External and internal data we monitor indicates that trends seem to be moving in that direction, and we'll continue to monitor that data. And as I mentioned earlier, anecdotally, we saw signs in the strength of the Rent-A-Center business portfolio in the second quarter. Importantly, we think we're well prepared to take advantage of market opportunities. With the ASEMA underwriting challenges that we experienced late last year, we had already started optimizing underwriting for a challenging macro environment early in the first quarter of 2022. Today, our virtual lease zone underwriting is performing in line with expectations as we balance our objectives of generating both appropriate levels of GMB and attractive segment profits. In closing, second quarter results mostly outperformed our guidance, and we met key objectives for the first half of the year. We believe we have the right plan in place to navigate a challenging environment and remain optimistic about the longer-term growth opportunities we see in our business. And I want to thank the entire team for their continued dedication and their strong efforts throughout the quarter. With that, I'll turn the call over to Maureen.