Rent-A-Center Inc.

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Good day and thank you for standing by. Welcome to the Upbound Group, formerly Rent-A-Center's, fourth quarter 2022 earnings conference call. At this time, all participants are in 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, Brendan Metrano, Vice President, Investor Relations.

Good morning, and thank you all for joining us to discuss the company's performance for the fourth quarter. and full year of 2022, the outlook for 2023, and our new parent company name and enterprise brand, Upbound Group Inc. We issued two press releases this morning before the market opened. The first regarding Upbound, and the second, our fourth quarter earnings release. Both press releases and all related materials, including a link to the live webcast, are available on our website at investor.ranacenter.com. On the call today from Upbound Group, formerly Rena Center. We have Mitch Fidel, our CEO, and Femi Karam, our CFO. As a reminder, some of the statements provided on this call are forward-looking and 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. UpFound Group 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 fourth quarter and full year earnings release, 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 will turn the call over to Mitch. Thank you, Brendan, and good morning to everyone on the call today. We'll start with a discussion of our corporate name change to Upbound Group, Inc., which we announced in a press release this morning. Then I'll review some full year 2022 highlights and plans for 2023 before handing it off to our Chief Financial Officer, Fami Caron, for a more detailed review of financial results and our financial outlook. At the conclusion, of course, we'll take some questions. As I just mentioned, today the company announced the corporate name change to Upbound Group, Inc., This is an important milestone for us, essentially marking the next stage in the company's journey. Since acquiring Acima Holdings in February of 2021, which almost doubled the company's size and expanded its presence in point-of-sale financial solutions, we made a lot of progress on integration and strategy development. Today, the two organizations have really come together to become a new and exciting company positioned to continue to evolve and grow our reach. We now think it's important to define who we are under unifying identity and mission. That identity is Upbound, and its mission is to elevate financial opportunity for all. As Upbound, we will achieve this mission with a nominee channel platform that offers a range of inclusive and flexible financial solutions that can address the changing needs and aspirations of consumers. Upbound is an enterprise brand that will help to define strategies and unify resources and capabilities across the company so that we can more effectively achieve our objectives. Our customer-facing businesses will continue to operate under the same well-established brands that have built a loyal following over many years. Upbound represents our transition to a different enterprise operating structure that will enhance strategic planning and other functions within the organization that can be leveraged better as shared services. Upbound should also provide the company with a greater ability to focus on innovating and applying technology to enhance existing solutions and develop new solutions that will benefit customers and merchants, such as targeted credit and point-of-sale loan products. On slide four, we provide a high-level example of the Upbound operating structure. Upbound's an umbrella holding company, that's responsible for optimizing functions that can be shared across the organization to drive better performance and efficiency for the operating business units. Note that we showed just a few types of shared services as an illustration, but there are certainly other opportunities for us to realize efficiencies. Another noteworthy aspect of Upbound illustrated in this chart is the potential opportunity to apply our data and analytics capabilities to the vast amount of payment history we have. and millions of relationships with our own customers to offer them a broader set of financial solutions. And we hope to have more to share on this front over the course of the year. Looking at slide five, we feel confident that we have the right leadership team to successfully execute Upbound's growth strategy and overall mission. Business unit leaders have deep industry experience with several years of both Rent-A-Center and Adesima. The shared service leaders are all accomplished in their functional roles with a range of relevant industry experiences includes specialty finance, technology, enterprise sales, and account management. We have a good mix of tenure. Roughly half of our leaders have been with us for more than a decade and have deep company and industry knowledge. The other half have joined us in the last couple of years and bring fresh ideas and insights from outside the company. Additionally, we have several updates within the company leadership. I'm really excited to announce that Tyler Montrone has been appointed Executive Vice President of the SEMA, and Tyler will oversee the business segment, reporting directly to me. Tyler's played a significant role in Aseema's development over the years, including senior legal, compliance, and development roles, and most recently, he's been responsible for Aseema's product, engineering, and underwriting functions. I'm also pleased to say Aseema's founder, Aaron Allred, will continue to work with the company in an advisory role. I'm also pleased to announce that Sudeep Gwatham has joined the company as Chief Technology and Digital Officer. Sudeep has an impressive track record of leading digital transformations with companies like Pratt & Whitney and Hewlett Packard. And we believe Sudeep's technology expertise and leadership will be an important factor in our digital evolution. Also, as we've previously announced, our CFO, Fami Karam, and our head of business development, Mike Bagel, joined the company within the past six months. And we'll have more to say on Upbound and our plans for the future in the coming months, including an investor day on May 24th in New York City. In the interim, to learn more about our vision and mission as UpBound, visit our updated corporate and investor relations websites. So moving on to our fourth quarter results, we're encouraged by the progress we saw in our business, executing well on top line and customer payment objectives and delivering financial results that were better than our fourth quarter outlook, including revenue of $990 million, adjusted EBITDA of $110 million, and adjusted EPS of $0.86. Looking at full-year 2022 performance, it's important to consider how disproportionately macro conditions impacted less affluent households. Many of them effectively went through their own recession, faced with declining cash balances and rampant inflation. This, combined with the effect of demand pulled forward in the previous two years, was a significant headwind for our business. Portfolio values for both Rent-A-Center and Asema were under pressure throughout the year, translating to an 11% performance year-over-year decrease in consolidated revenues to $4.25 billion, with Rent-a-Center down 4% and ASEMA down about 16% on a pro forma basis. Customer payment behavior was also under pressure, which resulted in higher loss rates and lower lease renewal rates compared to the prior year. Skip zone loss rates for ASEMA increased to 100 basis points year-over-year to 10.6%, and for Rent-a-Center, increased 180 basis points to 4.9%, both above our long-term expectations. Although we took steps to control costs and improve efficiency, the combined effect of lower revenues and higher losses drove over 300 basis points of adjusted EBITDA margin contraction and led to a full year 2022 adjusted earnings per share of $3.70 compared to $5.57 for 2021. Now, despite those headwinds, free cash flow of $407 million was still quite strong, benefiting from running off higher portfolio balances from the beginning of the year. Now, on a positive note, the pressure on our businesses revealed insights and prompted actions that positioned us well moving forward. We gained a better understanding of sustainable fundamentals when fiscal and monetary excess of the past few years started getting pulled out of the economy. It reinforced the importance of data analytics. risk management, automation, and appropriately balancing underwriting discipline with growth. The company has also become a nimbler organization after adapting to the dynamic conditions from last year. Lastly, it reconfirmed the importance of embracing and investing in technology and adopting a technology-centric operating philosophy to improve the customer experience and to differentiate ourselves with our merchant partners. Digging into our key operating segments on page seven, Rent and center revenues and lease demand held up relatively well, considering the external backdrop, which speaks to its stability and value proposition to customers. Revenues were down 4.3% for the full year in line with our original expectations, but that was down compared to peak stimulus levels from 2021. On a more normal historical basis, 2022 revenues remained healthy, with two-year stack growth of 5.7% and first-door revenues still 20% above 2019 levels. Similarly, same-store sales were down 4.5% year-over-year, but two-year stack growth was 10.8%. We continue to make progress, good progress, with the RAC digital platform. E-commerce revenues increased mid-single digits for the year, representing approximately 25% of total lease zone store revenues, compared to approximately 24% for 2021, and just 13% in 2019. Overall, the pressure on revenues was primarily attributable to a year-over-year decrease in the portfolio, with the portfolio finishing 2022 down about 5%. But on a more normalized basis, the portfolio was up approximately 15% from the end of 2019, after adjusting for franchise stores, which translates to around a 5% CAGR. Looking at these portfolio components, deliveries were down low single digits compared to peak levels in 2021. We launched and advanced several initiatives that helped attract and retain customers, including reducing friction in online checkout, launching a retention engine to better match payments with budgets, and expanding access to new products and brands through our extended aisle service. Returns and charge-offs are where the macro environment most negatively impacted the portfolio, with renewal rates down year-over-year and loss rates up 180 basis points to 4.9% for 2022. Now, the 2022 loss rate increased to 5.8% for the second half of the year, above our expectations. We reacted swiftly in the third quarter with enhancements to account management and adjustments to underwriting to mitigate any further increases. And past due rates, which are an early indicator of loss rates, stabilized in the third quarter and started to decrease in the fourth quarter. Based on changes we've implemented, we expect to see rates improve gradually throughout 2023. Now, moving on to a theme You may recall that the business experienced high delinquencies and loss rates in late 2021 after the pandemic stimulus programs wound down. In early 2022, we made changes in leadership and reprioritized strategic initiatives to focus on more conservative underwriting, marketplace execution, and profitability. During the first half of the year, we made numerous underwriting adjustments that reduced loss rates by 370 basis points from the first to the fourth quarter. contributing to a 10.2 percentage point increase in adjusted EBITDA margin. Importantly, this process has enhanced our underwriting and risk management capabilities, which should benefit the business moving forward. GMV decreased 23% for the full year 2022 on a pro forma basis due to a combination of lower customer traffic and merchant partner retail locations and our own tighter underwriting. We believe we're holding share of volume in stores across our merchant portfolio based on merchant feedback and retail industry data. Average active merchant locations for the full year increased 13.8% compared to 2021, and we made progress with strategic account, fitting several strong regional merchants, including city furniture and sleep outfitters. Our newly formed enterprise account team has elevated our capabilities, and I'm increasingly confident that we should have additional positive developments in 2023. Moving on to our outlook, 2023 looks like another year of macro uncertainty with the consensus view of economists projecting that a recession will begin sometime this year. Historically, the rent-centered businesses outperformed during recessions, while ASEMA has yet to really be tested in a down cycle. We believe a big part of that outperformance is non-traditional LTO customers dropping into the LTO market when unfavorable circumstances arise like job loss or consumer credit tightens. We did not see significant indications of trade down in 2022 as employment was strong and credit was ample. Based on recent trends, there is a better chance we'll see at least some trade down in 2023, but we've not included it in our base case forecast given how different this economic cycle has been compared to previous cycles. Given the macro backdrop, high-level operating priorities for 2023 are similar to 2022. Maintain underwriting discipline and look for good risk-adjusted opportunities to add revenues and continue to control costs to support margins and cash flow. With underwriting now well aligned with external conditions, strategic initiatives should get more focus in 2023, including upbound related initiatives that we believe will return us to growth in 2024 and beyond. We're also in the early stages of exploring opportunities to leverage our expertise in the underserved consumer market and specifically our existing customer database to offer additional financial solutions that can broaden customer options and eventually expand our market reach. And as I mentioned earlier, it'd be more to come on this as we progressed into the year. Top priorities for the Rent-A-Center business are to grow and retain the customer base. We'll do this by expanding our products and brands through our extended aisle offering. improving customer experience and engagement along numerous fronts. We plan to invest in technology to enhance the digital and omni-channel journey for consumers. And on top of those priorities, getting loss rates back towards 4% is also a high priority. Top priorities for ASEMA include growing the merchant base, both the SMB channel and enterprise, continuing to optimize underwriting and enhancing our technology capabilities. This includes recovery and account management improvements, leveraging the expertise of our Rent-A-Center business. And we'll also continue to assess ramping up our direct-to-consumer solutions and other solutions as market conditions are supported. As we start this next stage of the company's journey as Upbound, I believe we're very well positioned to play an important role in the evolving market for more inclusive and flexible consumer financial solutions. In doing so, I believe we can we can achieve compelling growth and deliver significant value for our customers, merchant partners, employees, and shareholders. And I want to thank the entire team for their continued effort and dedication. I've been really impressed with the progress we've made over the last year, and I see tremendous opportunity in our future. And with that, I'll turn the call over to Fami.

Thank you, Mitch, and good morning, everyone. I'll start today with a review of the fourth quarter and full year financial performance and employee guidance. after which we will take questions. I'll start my commentary on page nine of the presentation and would like to note that we added a new key metrics table in the press release this quarter to help investors more efficiently assess the company's performance. We've also disclosed a couple new metrics at the segment level that we've highlighted in the past, but we'll disclose more prominently going forward. For Rent-A-Center, that's our portfolio value, and for ASEMA, it's GMV. Moving on to the results. Consolidated revenue for the fourth quarter was down 15.4%, led by a 22.2% decrease for ASEMA and a 7.7% decrease for the Rent-A-Center business. Looking at revenue categories, rental and fees revenues were 13.3% lower and accounted for most of the decrease in consolidated revenues, reflecting lower portfolio values for both businesses during the current year. Merchandise sales revenues decreased 26.8% as a result of fewer customers electing early payout options. Consolidated gross margin was 50% in the fourth quarter, up 190 basis points year over year due to a higher mix of rental and fees revenues compared to merchandise sales in the current year period. We continued to execute well on expense management in the fourth quarter, with consolidated costs excluding skipped stolen losses down 8% year-over-year, led by a 10.4% decrease in labor costs. As Mitch noted, our efforts in account management and underwriting are paying off, evidenced by a fourth quarter loss rate of 8.9% for ASEMA, which was down 290 basis points year-over-year, and is the lowest since 8.7% in the third quarter of 2021. The Rent-A-Center loss rate was 5.8%, in line with our expectations, but above our long-term target levels. We have seen continued improvement in past due rates, which suggests loss rates should continue to trend lower as portfolio turns with newly created leases. Fourth quarter consolidated adjusted EBITDA of $110 million was down 15.2% year-over-year, with a 30.1% decrease at Rent-A-Center, offsetting 22.4% growth for Acema. Adjusted EBITDA margin of 11.1% was flat compared to the prior year period, with 470 basis points of margin contraction for Rent-A-Center, offsetting 540 basis points of expansion for ASEMA. I will provide more detail on the segment results on the next few slides. Looking below the line, fourth quarter net interest expense was $26.4 million compared to $18.6 million in the prior year due to an approximately 400 basis points year-over-year increase in variable benchmark rates that affected $950 million, or 70% of our total debt. The higher interest expense alone was a 10 cent EPS headwind compared to the prior year period. The effective tax rate on a non-GAAP basis was 25.8% compared to 23.4% in the prior year. The non-GAAP diluted average share count was 56.5 million in the quarter compared to 65 million in the prior year period. GAAP earnings per share was 5 cents in the fourth quarter compared to 15 cents in the prior year period. After adjusting for special items that we believe did not reflect the underlying performance of our business, non-GAAP diluted EPS with 86 cents in the fourth quarter of 2022 compared to $1.08 in the prior year period. During the fourth quarter, we generated $44.4 million of free cash flow compared to $49.5 million in the prior year period. We paid a quarterly dividend of $0.34 per share, and during October, which we previously disclosed in the third quarter call, We repurchased 2.3 million shares at approximately $19.50 per share. No additional share repurchases were executed in November and December. Drilling down to segment results on page 10. The Rent-A-Center business lease portfolio value was down 4.7% year-over-year, which drove a 6.8% decrease in the fourth quarter rental and fees revenue and contributed to a 20.5% decrease in merchandise sales revenue. Merchandise sales were impacted by fewer customers electing early payout options compared to the prior year period. Total segment revenue decreased 7.7% year-over-year, with same-store sales down 8.1%. Considering the strong prior year growth, it's worth noting that both total revenues and same-store sales were up low single digits on a two-year stacked basis. The trend of lower same-store sales and revenue in the mid-single digits has continued in the first part of 2023, as tax season has not begun in full effect, and consumers remain cautious. Skip-stolen losses increased 180 basis points year-over-year to 5.8%, which was in line with our quarterly expectations. We believe the higher loss rate was primarily due to greater pressure on customers' budgets, as inflation accelerated and remained elevated throughout the year. We made changes to tighten underwriting standards in certain segments and account management starting in the third quarter. Past due rates have moved lower, and a downward trend suggests that loss rates should improve over the next few quarters as newer monthly vintages become a larger percentage of the overall portfolio. We've continued to see this positive trend in the first few weeks of 2023 and are encouraged by our ability to manage losses while maintaining the portfolio. Adjusted EBITDA margin for the fourth quarter decreased 470 basis points year-over-year to 14.6%, primarily due to lower revenues and higher loss rates compared to the prior year period. Those headwinds were partially offset by lower labor, advertising, and other operating expenses, resulting in 140 basis points year-over-year reduction in the ratio of operating expenses, excluding losses as a percent of revenue. Moving to ASEMA. During the fourth quarter, GMV decreased 23.4% year over year, primarily due to macroeconomic pressure on consumers and the pull-forward effect of stimulus that caused a drop in application volumes for merchant partners. This trend has also continued in the first few weeks of 2023. Offsetting lower traffic, merchant locations in the fourth quarter were up mid-single digits compared to the prior year period. With GMV running down over 20% in the past few quarters, our open lease count was down in the high teens compared to the prior year period. This drove a 22.2% year-over-year decrease in revenues, with rental revenues down 20.2% and merchandise sales revenues down 28.6%. Skipped stolen losses decreased 290 basis points year-over-year to 8.9%, which was slightly better than our outlook. Underwriting changes made in the first half of the year and our continuous monitoring of higher risk segments has continued to benefit losses since the high seen earlier in 2022. Also worth noting that our virtual business, excluding legacy staffed business, loss rates for the quarter were 8% at the high end, but within our 6% to 8% expectation for that part of the business. Adjusted EBITDA of $71.7 million was up 22.4% year over year, driven by lower losses and operating costs, offset by lower revenue. Adjusted EBITDA margin of 15%, increased 540 basis points year-over-year and 240 basis points sequentially. On a full-year basis, consolidated revenue decreased 7.4% on a reported basis and 11.2% on a pro forma basis, reflecting the February 2021 acquisition of ASEMA. The decrease in reported revenue was evenly split between rental and fees revenue and merchandise sales revenue. as both were down approximately $150 million from 2021. Consolidated gross margin was 48.9% of 40 basis points year-over-year due to a higher mix of rental and fees revenue compared to merchandise sales in the current year period. Adjusted EBITDA of $453.5 million decreased 28.2% year-over-year on a reported basis and 32% on a pro forma basis. The Rent-A-Center business accounted for approximately two-thirds of the decrease, and Acima accounted for approximately one-third. The primary factors that drove EBITDA lower were the decrease in revenues and higher loss rates. Operating costs, excluding losses, decreased 1% year-over-year on a pro forma basis, with labor costs down almost 2% and G&A down 4%, reflecting our cost management efforts. Full year net interest expense was 87.1 million compared to 70.7 million in the prior year due to higher variable benchmark rates. The higher interest expense was a 21 cent EPS headwind compared to the prior year period. The effective tax rate on a non-GAAP basis was 25.8% compared to 23.3% in the prior year. The non-GAAP diluted average share count was 59 million for the year compared to 66.8 million for 2021. For the year ended December 31st, 2022, we generated $468.5 million of cash flow from operations and $407.1 million of free cash flow, up from $392.3 million of cash flow from operations and $329.9 million of free cash flow in 2021. We paid an annual dividend of $1.36 per share and repurchased 3.5 million shares at approximately $21 per share. The company has approximately $285 million remaining on its current share repurchase authorization. In addition, at year end, we had a cash balance of $144 million, gross debt of $1.4 billion, net leverage of 2.8 times, and available liquidity of approximately $540 million. Shifting to the 2023 financial outlook. Note that references to growth or decreases generally refer to year-over-year changes unless otherwise stated. For the full year, we expect to generate revenue of 3.8 billion to 4 billion, adjusted EBITDA of 380 million to 415 million, which excludes stock-based compensation of approximately 24 million. We are projecting modest margin contraction as lower revenues will largely be offset by lower losses and operating expenses. Fully diluted adjusted earnings per share is expected to be $2.50 to $3.00. which assumes a fully diluted average share count of $56.7 million with no share repurchases throughout the year. For the year, we expect $180 million to $215 million of free cash flow, net interest expense of $105 million to $110 million, and an effective tax rate of 25.5% to 26.5%. Our forecast assumes a macroeconomic backdrop consistent with existing conditions, persistent inflation, and a slight increase in unemployment. For SEMA, full-year 2023 GMV is expected to be down low to mid-single digits year-over-year, as we expect merchant partner volumes will remain under pressure from the prevailing macroeconomic conditions and the remaining impact of the pull forward. GMV will start off the year with similar year-over-year trends that we experienced in the fourth quarter, but we do expect that to improve throughout 2023 and get back to year-over-year growth by the third and fourth quarter, as some of the headwinds for merchant volume applications improve, and targeted sales initiatives take effect. We expect ASEMA full-year revenues will be down low double digits, with the first half of the year down in the high teens and the second half down mid-single digits. Adjusted EBITDA margin is expected to be in the low double-digit range and remain relatively consistent throughout the year, as loss rates should stay around 9% to 9.5% range. For the Rent-A-Center business segment, we expect 2023 revenues and same-store sales to be down in the low to mid-single-digit range, mainly driven by a lower lease portfolio due to lower demand and higher return rates. Adjusted EBITDA margin is expected to be in the mid-teens range throughout the year, with loss rates improving throughout 2023 with continued elevated losses in the first quarter and ending the year in the 4.5% range. We expect the Mexico and franchising businesses will generate similar results to 2022. Corporate costs are expected to increase mid to high single digits, reflecting several new executive leadership additions in late 2022 and early 2023, as well as lower than normal performance-based compensation in 2022 and higher technology investments across the organization. For the first quarter, total consolidated revenue will be down in the mid-teens year-over-year, with adjusted EBITDA margins in the 9.5% to 10% range. Interest expense, tax rate, and share count should be similar to the fourth quarter of 2022. Regarding capital allocation, the top priorities continue to be dividend payments and debt reduction. Given the pressure on the portfolio size and revenues, paying down debt to maintain a relatively flat leverage ratio is a top priority. Over the long term, we continue to target a 1.5 times debt to EBITDA ratio. Touching quickly on the corporate name change, as Mitch mentioned earlier, the change to Upbound Group became effective yesterday. Starting on Monday, February 27th, our shares will be listed on NASDAQ under a new ticker, UPBD. In summary, 2022 was a challenging year for our customers as well as our financial results. We have demonstrated our ability to identify risks in our portfolio in both segments, adjusting our underwriting and account management practices, And we've seen the impact of those adjustments with lower delinquencies and losses throughout the year. We have a strong balance sheet and generate strong cash flows. We have an opportunity to further support our core businesses with a unified strategic direction, leveraging best practices and realizing operational and cross-brand synergies. The macro environment will remain uncertain in 2023, especially for our consumers. However, we believe we have a resilient business with a disciplined approach that can deliver long-term sustainable growth. Thank you for your time this morning. We will now turn the call over for your questions.

As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, press star 1 1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Bobby Griffin with Raymond James.

Good morning, everybody. Thank you for taking my questions. I guess first I want to follow up. I want to follow up first on the Aseema comments around 1Q. I think I heard you correctly. It's GMV down similar to the 4Q trend, so call it, I guess, low 20s. The comparison starts to get easier, though, in 1Q. So just curious why we shouldn't see some type of maybe sequential recovery, admittedly still down, but less down, given that we're starting to lap minus 20 GMV growth throughout 2022. Yeah.

Hey, Bobby, good morning. Thanks for the question. This is Fannie. Yeah, the comment was really it was going to be similar trends to the fourth quarter. We don't expect it to be in the low or mid-20s. So it will be down year over year, but you're right. We started making some changes and underwriting the first part of the first quarter. of 2022, didn't take full effect at the beginning of the quarter, but it will be down. I'll call it mid-teens in the first quarter, year over year, despite some of the changes that we made last year.

Good morning, Bobby. Mitch here. You have some of those, the comps start to change, so it'll be down less, but still be down, I think was the point of the comment. And then as Femi mentioned also in his prepared comments, as we go through the year, Third and fourth quarter is when we would see it being back into positive territory. So it's kind of like it gets better a little bit each quarter along the way, the negative mid-teens that you said in the first quarter. And then by third and fourth quarter, we're in the positive territory.

Okay, that's helpful. And I guess secondly, Mitch, on the sourcing of products, have you started to see some break in the cost? Because I kind of have a view that you know, inflation basically priced out this consumer, your target consumer base, even if they needed some of these durable products, just given that you had to pass through, you know, the massive level of inflation we've seen across all kind of durable products. Are you starting to see breaks in sourcing where you can lower kind of the rental prices to customers? And is that starting to move demand in certain categories where that's actually happened?

Yeah, I think absolutely it has. You know, we're back to, Of course, they went up a lot. We're back to deflationary times when it comes to electronics. You know, electronics have been deflationary for so many years. You know, so they come out with something new, it starts deflating from day one. Of course, that changed for a couple years during the pandemic, but we're back to things dropping down now in electronics. Really, all categories have had a drop, some more severe than others. We've even seen some furniture pricing reductions. Quite honestly, not so much in appliances yet, but electronics and furniture for sure. So, yeah, I think we're seeing some of that deflation that will help our business in 2023.

Okay. And then I guess lastly for me, just on the leverage side of things, understand kind of what the game plan is for 2023. But on a multi-year basis, should we think about share repurchases turned off until we get closer to the target, or would you still look at it even if you're above target, if there's excess cash or just any kind of decision like that?

Yeah, I wouldn't say they're turned off. They're going to be opportunistic in nature. We're very focused on, as I mentioned, maintaining our leverage ratio to kind of flat to slightly up this year, given the the pressure on EBITDA. We paid over $200 million of debt in 2022, and I don't think we'll be able to get to that level in 2023, just given the drop in free cash flow year over year. But our focus is to maintain that leverage ratio around where we ended the year, so paying down that debt is still a top priority.

Thank you. I appreciate all the details. Best of luck this year.

Thanks, Bobby.

Our next question comes from the line of Jason Haas with Bank of America.

Hey, good morning, and thanks for taking my questions. I just wanted to follow up on the ASEMA GMV. What gives you the confidence that you will see an acceleration and get back to positive by the second half of the year? Because I don't think the comparison, at least on a one-year basis, I don't think they ease that much through the year. I'm not sure if you're looking...

like a multi-year basis if that's the case or um if there's anything else that we should just be aware of to um get some confidence that we will see that acceleration yeah i think i think because of the because of the comps we're going over and and even though you're right 2022 was was pretty flat but when you look at multiple years uh you know of course 2022 had different times of the year we're tightening the underwriting so that kind of flattened things out but In other years, you'll see the, you know, the fourth quarter certainly trend up, you know, from a seasonality standpoint. So when we put multiple years in there, Jason, we see, you know, we trend it conservatively, still trend our GMB, but we can do it based on multiple years. The way the comps come out, you end up with some positive, and they're not going to be huge positive numbers in the third and fourth quarter, but you'll be low to mid single digits is what we believe.

Got it. That's great. That makes sense. And then as a follow-up, I was curious, Mitch, if you could talk about, it sounds like you're not really seeing much benefit from credit tightening yet. I'm curious when you expect that might happen. And when we do see that, do you think it'll benefit the ASEMA segment more or the RENA segment more?

Yeah, good question. We are, you know, we've seen a little of it. And I think we said in the comments that we, you know, in recent trends, you know it just hasn't been significant yet certainly not like past cycles you know downturns where it was almost immediate but because the unemployment rate and and remaining so strong we haven't seen much we've seen a little bit depends on the depends on the retail partner when we look at some of our larger ones you know depends on how the retail partner you know is willing or not willing to pay fees to the lenders above us uh because they'll have to pay more merchant fees as interest rates goes up and things like that. But we are seeing a little. Certainly nothing large yet. Our Vantage scores coming in, especially the top 10% of our scores are showing a bit of an increase. We haven't loosened underwriting at all, and our approval rates are up a point or two, which means a little different customers coming in. So we're seeing a little. We don't have any of it in our forecast for this year, so that's all upside for us in 2023. And the second part of your question, yeah, I think ASEMA will see it more noticeably, presuming it does get to a significant level in 2023. Just because, I mean, Renison is pretty consistent anyhow. They just don't have the volatility in their in their portfolio that, that a SEMA does. And, and, you know, it's not a direct, it's not directly aligned with lenders above us. You know, it's not like a waterfall business when people go to go into rent a center. So yeah, I think a SEMA would see it would see more of it than rent a center.

Great, thank you. And if I could squeeze one more question. I was curious if you look by category, if there's anything performing noticeably better or worse than others by furniture and mattresses versus consumer electronics and other categories, I guess both in Rent-A-Center and the SEMA business.

Yeah, I think the items – I think, Jason, it comes down to the items – the big pull forward in 20 and 21 – was really in the furniture space. Other things, not as much. Certainly, laptop computers were a pull forward as people started working from home, but other things, there wasn't really a pull forward in appliances. People didn't just replace their appliances because they were home more. That's more of a replace when they break, at least for our customer. the real pull forward was in furniture. You look at some other categories where a seam is bigger, like wheel and tire, where there wasn't a pull forward. And, you know, we're not seeing weakness in that compared to furniture. So it's really furniture stands by itself when it comes, in our business, when it comes to a pull forward comment, furniture really stands alone.

And our mix at Acima has also shifted. Going back to the The earlier comment about what gives us confidence that we can grow throughout the years is our ability to kind of shift the product categories that we do. So we talked about SEMA being down from a GMV standpoint, you know, 23%. But if you look at jewelry and electronics and auto, as Mitch mentioned, those are only down 5% year over year. So the mix shift also helps.

Yeah. Got it. That makes sense. Thank you.

Thanks, Jason.

Our next question comes from the line of Vincent Cantik with Stevens.

Good morning. Thanks for taking my questions. So nice brand name change and look forward to the investor day. So just maybe want to touch on that if there's any, you know, in addition to the brand name change, any strategic changes or shifts that you might be seeing as part of that. Thank you.

Sure. Good morning, Vincent. Yeah, I think it's a few things. We mentioned the new products that this kind of paves the way from a strategic standpoint. And when we say new products, we're talking about loan products. You know some of our competition already has a loan product out there to go along with the lease-owned product to move up a little bit. So we're looking at those kind of products as we move up in the in a credit and loan products at the point of sale. That's certainly part of the strategy. We're in the early stages of looking at that, but again, that's certainly part of the strategy. The way, you know, sharing best practices and, you know, a shared service model where, not like we're adding a whole bunch of people in the shared service model, just moving some deck chairs around and where we can share, you know, create shared services for both the big segments, add a third segment here down the road in the lending products that I mentioned. But it's really those products, the shared services, the sharing of data that can really make an impact from a underwriting and a marketing standpoint. Collections as well. We're in a center helping collect and pick up a lot more on the ASEMA front. So it's a matter of, there's been quite a bit of integration in the last year anyhow, and the companies are really starting to work well together. And we just thought it was the right time for us to go the holding company route where it's, like I said, shared services, best practices, and those kinds of things, and really feed off each other and be able to set the strategy at the upbound level, which would be taking advantage of those best practices, synergies, certainly some synergies to be gotten as we do this along the way. Nothing in our model, in our financial forecast, but we think there's some synergies down the road as we look at this. And we're really excited about getting into some new products.

Yeah, maybe Vincent, I'll add to that a little bit. We are, as part of the strategy, we're still in the early stages of evaluating and assessing it, especially around our approach and timing. And we'll be able to update you more on Investor Day. We know it's an opportunity for us. We have millions of customers that we've dealt with, that we have payment history with, so the ability to kind of monetize our customer database and help them kind of move upward in their financial journey. If you think about who our core customers are, they typically either have bad credit or no credit and are not able to get some of those typical lending products But for us, we actually have history with them. We have payment history, and we have the data behind it to be able to potentially offer them those types of products. And then the second piece, as Mitch said, the point of sale. We think our merchant partners, especially on the small, medium-sized businesses, will really get a lot of traction with that. It drives incremental sales, and honestly, it makes us stickier with them on the LTO side as well. So definitely feel like it's an opportunity for us. We'll have more for you as we progress through the year.

Okay, great. That's very helpful. Thank you for that. And just a second, following up on the GMV discussion, I'm just wondering if there's other changes that need to happen for the GMV improvement, or is it just comps? So, for example, thinking about your approval rates or on the seamless side, if more merchant engagement needs to happen, just sort of what are you assuming as, you know, GMV improves throughout the year? Thank you.

Yeah, good question. Good question. You know, we're not assuming any large enterprise accounts, although that's certainly always an opportunity as we've built that team out. You know, not as a direct answer to your question, I'll get back to that, but Mike Bagel, you know, joined us about six months ago. He's building out that team. We're starting to see much better conversations at that highest level from an enterprise standpoint, so we're excited about where we're going with that. In the way Acima has always grown the core business, I mean, we do have more active merchants now than we had a year ago. So we're growing from that standpoint. We think we can target from a strategic standpoint. I mentioned Tyler Montrone, now in charge at Acima, believes we can target better to get more GMV out of the merchants that are the ones that are given us GMB now, like more of a targeted approach than a managed approach, not that we won't be adding a lot of merchants, but just the ones we already have, how do we target more out of certain ones and so forth and those kind of things. So it's more of a targeted strategy on the SMB. Of course, the enterprise strategy I mentioned, but I think it's that targeted strategy from a sales standpoint, and we've got momentum from that standpoint also. It's not like we've lost merchants. Our merchant base, even though we're sitting at minus 20 for GMB in 2022, our merchant base grew. Of course, you know, with all that pull forward in furniture, it's under a lot of pressure to actually grow GMB, but the merchant base is still growing. So that's probably the biggest part of the answer, Vincent, is the merchant base is still growing.

Okay, that makes sense. And just is there kind of any change to the approval rates or any assumptions there? Thank you.

No, just more of the same as far as the customer. We're not assuming that things get better where we'll be able to approve a higher percentage or so forth. I mentioned approval rates have ticked up slightly the last couple of months, but that's without changing the underwriting, that's really where we're starting to see probably just at least a little bit of trade down. But no, we're not assuming that we'll be able to loosen. That would be a tailwind. Obviously, a headwind if we had to tighten more, but We're not assuming the customer behavior changes in 2023. Okay.

We've done a lot, Vincent, over the year to really dig into our decision engine, understand our data better as we kind of had really high losses in the first part of the year. We've had to look at it at a very granular level, whether it's by product category or by channel or even at the merchant level, to really try to optimize our approval rates and our conversion rates. And so we're going to continuously look to tweak those and try to

as much gmv and penetrate those good merchants as as we can um so that you know it's hard to look at just approval rates because the strategy changes uh across twenty five thousand thirty thousand uh merchants yeah when you look at when you look at those past due and and lost charts that are in the presentation i don't know if you've looked at the presentation vincent if it's in front of you or not but on the on the eczema side as bad as those had gotten in in late 2021 in early 2022. It's really impressive how fast the team, Aaron Allred, obviously we had him come back and work on it. Aaron and Tyler, basically, how fast, and a gentleman by the name of Stuart out in Salt Lake. Those three guys, the way they brought down those losses and past due numbers as quickly as they did, and now we've got loss numbers as low as the third, lowest since mid-2021. So certainly proved we can we can do it and learned a lot as families. Same thing on the Rent-A-Center side with that underwriting team. As soon as you look at those past student numbers in our presentation, it jumped in July and now we're back down already, already back down below July. And of course we got tax season coming. So we proved, we learned a lot. We learned a lot. We're better today than before that happened to us in both segments. So that's the brightness of the future.

Very helpful.

Thanks very much. Thanks, Vincent.

Our next question comes from the line of Brad Thomas with KeyBank Capital Markets.

Hi, good morning. I just wanted to follow up on, I think, the last topic of the losses, the skips stolen. Can you talk a little bit more about that? you know, expectations here for the full year and the ranges that you're targeting for the two larger segments?

Sure. So, obviously, you know, we just talked about a seamless coming down almost 300 basis points year over year. So, it's kind of back into our range. You know, on the virtual side of the business at 8% for the for the quarter that's at the high end, but within our range for that business. And so guiding on a combined SEMA segment in that nine to nine and a half range, very similar to where we ended the fourth quarter is where we expect it to be. And then on the Rent-A-Center side, obviously the 5.8% in the fourth quarter was higher than what we'd like to see. It's much higher than our target levels, but consistent with our forecast. And throughout the year, we expect that to trend down. So first quarter will still be a little bit elevated. It will be better sequentially, but it will still be elevated compared to historical trends. And then end of year, kind of in that 4.5% range. And if things go well and the macro gets a little bit better, maybe we can drive it a little bit further than 4.5%. But the guidance we gave gets it to 4.5% on the rent-a-center side.

Really helpful. Thanks, Tammy. And then, you know, maybe, Mitch, I just want to ask a question about the Rent-A-Center store business. You know, the segment's coming off of, I think, three really good years for revenues and still running at profitability that most retailers would kill to have. But, you know, as you face perhaps a tougher revenue outlook going forward, Can you talk a little bit about the store portfolio and what you think the right number of stores is and how you might want to invest in and evolve that portfolio going forward?

Yeah, good question, Brad. I think we're very comfortable where the store count is today. We think there's some opportunity down the road. We've mentioned on past calls we're testing some smaller footprints. We think we can cover the country and cover a lot of our business, as we mentioned, coming from e-com. We're in the 25% range, but the stores are still a fulfillment center for that. So we're comfortable with the count we have now. Probably could do it in less square footage on average, so we're testing some of that, using technology in the stores to search categories versus having to have as much showroom space and so forth. So we're We're going to be able to, over the next five years, bring down the cost of real estate, I believe. But the store count itself will stay about the same. We're still running 15% higher than 2019 portfolio levels on a per store basis or even on an overall basis when you back out some of the stores we sold to. We basically sold California in 2020 to a large franchisee. But 15% growth, we think we're... We can finish this year at or above where we are now, so it doesn't go lower from here. It'll go lower in the course of the year, but we really see 2023 as a trough year for Rent-A-Center and for SEMA for that matter, although SEMA's EBITDA won't be much off 2022s, but a trough year overall, and especially at Rent-A-Center. Store count won't change a whole lot. We don't believe it's going forward. We have some opportunities from an overall square footage standpoint, but I think we're getting as low as we believe it's going to get. Again, when you think about year-end numbers, it'll get lower this coming next few weeks and months with income tax refunds. We lose some portfolio and then build it back, especially as we go into the fourth quarter, but we expect to finish this year from a portfolio standpoint at least flat with where we started the year and and therefore maintain that 15% growth over 2019 levels, pre-pandemic levels.

Great, great. We've talked about kind of tax refund season. It's come up in a couple of questions. I think the early data would suggest that the average refunds are down kind of double digits from a year ago. Any particular view on how tax season will play out and implications perhaps for your business?

Yeah, I think you know, Brad, I've done this a long time. I don't get too wrapped up in some of those numbers that come out because they're not necessarily related to our consumer. So I don't know that the consumer at the $35,000 to $40,000 income range is having 10% to 12% lower refunds or not. I know that those are the overall numbers. We'll know soon enough. We'll know in the next next couple of weeks when it comes to, you know, what we're seeing in the business. So, you know, the good news there, Brad, is if there's less money, there'll be less payouts. The portfolio actually maintains, might maintain better than we anticipate. On the other hand, when there's a good income tax season, I mean, we've put a lot of new business on the books too. So it's, they tend to, well, The portfolio still goes down. They don't balance out. We don't do enough new business for the portfolio not to go down at all. It does go down during tax season, but the money's good on the payouts, especially on the Rent-A-Center side. We still make good margins on those. So, you know, if there's a few less payouts, you know, that'll be good for the portfolio. So we're not really worried about it, whether it's if they're a little lower or not. I don't know that they will be lower, but I don't see how that's going to be much of a negative force. It could end up a positive force if they're a little lower, especially on the ASEMA side where less payouts are really a good thing at ASEMA because we don't make a heck of a lot on those early payouts. Unlike Renison where we got the difference between wholesale and resale built in there where we're okay when there's those early payouts. You know, whether there's a few less payouts or not, I don't think it's going to matter a whole lot at the end of the day.

Fair point. Thanks, Mitch.

Great. Thanks, Brad.

Our next question comes from the line of Anthony Chukumba with Loop Capital.

Good morning. Thank you so much for taking my question. So I know this is probably a bit difficult to parse out, but if you think about the 23% GMV decline in ASEMA last year, how much of that was, you know, you – PROACTIVELY TIGHTENING CREDIT AS OPPOSED TO, YOU KNOW, SORT OF THE PULLBACK IN DEMAND AT YOUR RETAIL PARTNERS? BECAUSE IT SOUNDS LIKE, YOU KNOW, AT LEAST FROM A DOORS PERSPECTIVE, YOU KNOW, YOU ACTUALLY HAD A PRETTY GOOD YEAR. SO HOW DO YOU SORT OF THINK ABOUT THAT?

YEAH, I'LL START, AND FAMILY CAN CHIME IN. WE DID HAVE A PRETTY GOOD YEAR FROM A DOORS COUNT STANDPOINT, BUT EACH LOCATION WAS LESS PRODUCTIVE, ESPECIALLY THE FURNITURE LOCATIONS. You know, even where there wasn't a pullback, like Sammy was talking about, like on the auto space or even the jewelry space, where there wasn't much of a pull forward in 20 or 21, you know, we're still down in the mid to high single digits, you know, just based on, so that, if you say that's underwriting, you know, you're somewhere in the half and half range as far as, traffic at the retail partner versus underwriting. Maybe it's a little more on the traffic side than it is underwriting, but there's somewhere 50-50 as far as the reasons for it.

Yeah, and I would add to that, it's also average ticket size in our product mix also is part of the GMV calculation. So average ticket sizes have trended down throughout the year, especially year over year. Because of the mix. And the mix also has trended down. So, Anthony, it's tough to kind of parse out, as you said. It's a combination of all those three things. But if we had to rank them, I do think it's foot traffic is probably at the top of the list.

Got it. And then just one quick follow-up. From a credit underwriting perspective, I mean, have you – Have you sort of stabilized that? Are you tightening at all? Are you loosening at all? I'm thinking more kind of sequentially.

I would say yes, all of the above, Anthony. We're continuously kind of trying to optimize and drive higher yield, better performance, and then ultimately get to a better EBITDA number. It kind of depends. Your question is, have we bottomed out? It depends on your view of the recession. There's a lot of conflicting signals on where we're going. I feel good that if we see early indications of risk in certain segments, we have the ability now to adjust pretty quickly at a very granular level. So I'm good around losses. The question will become, how much GMV do we lose if we have to tighten? So it's more around demand. portfolio size than it is the overall loss rate, just given the fact that we've been able to decrease it in such a short period of time.

And I mentioned, Anthony, that the, you know, not seeing any significant trade down yet, but we think we're starting to see a little of it. Our approval rates are actually, have actually gone up a hair on the a seam aside without loosening underwriting, which means there's a little bit different customer at least coming into the mix. We look at our Vantage scores, and they are, I mentioned earlier, at least the top 10% we're seeing differences in the scores. So I think if you see some trade down, you know, then that naturally moves the approval rates up a little bit without – because the better customer for us coming into the funnel – a more creditworthy customer, I should say, coming into the funnel. And that can help the approval rate even with us not changing underwriting.

Got it. Thank you. That's helpful.

Thanks, Anthony.

Our next question comes from the line of Alex Furman with Craig Hallam.

Hey, guys, thanks very much for taking my question. You know, it sounds like furniture and to some extent, laptop computers were really the big driver of demand in 2021 and is now creating some tough comparisons. You know, as you look at this being the trough year, what do you think is going to really be the category that helps to drive demand to leave you out of that Do you think furniture is likely to re-accelerate, or do you think it's going to be more weighted towards appliances or other categories as you resume growth?

Personally, I think it'll be across all the categories. I think every quarter we get farther away from the pull forward on furniture, it's helpful. Same with the laptops that I mentioned. We have game systems on the Rent-A-Center side now that are helping with some of the new games that came out last year that there wasn't great availability on, but now there is. So electronics will help us. I think it'll be pretty widespread. I mean, SEMA's doing really well in the auto business, wheel and tire specifically. Jewelry, depending on the timing. It's spotty, obviously. Valentine's Day and Christmas and so forth, but I think it'll be across all of them, just because I think the furniture category has hit bottom in 2022. So I think the growth coming out, especially our exit growth velocity at the end of 2023, will be on all categories.

Okay, that's really helpful. Thanks, Mitch.

Thanks, Al.

That concludes today's question and answer session. I'd like to turn the call back to Mitch Fidel, CEO, for closing remarks.

Thank you, Liz, and thank you all for joining us today. We appreciate your interest in our company, and we look forward to talking with you more in the future about the exciting developments, the opportunities. Of course, we mentioned the Investor Day, May 24th in New York City. We'll be talking to you before that on an earnings call, but put that on your calendar, and we look forward to updating you on the exciting developments and opportunities we see here at Upbound, formerly known as Rent-A-Center. So have a great day, everyone.

This concludes today's conference call. Thank you for participating you may now disconnect.