Upbound Group, Inc.

Good day and thank you for standing by. Welcome to the Quarter 3, 2023 Upbound Group Incorporated 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 that session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would like to now hand the conference over to your first speaker today, Brendan Montrano.

Good morning, and thank you all for joining us to discuss the company's results for the third quarter of 2023. We issued our earnings release before the market opened today. And the release and all related materials, including a link to the live webcast, are available on our website at investor.upbound.com. On the call today from Upbound Group, we have Mitch Fidel, our CEO, and Fahmy Khadam, 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. Upbound 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. And our discussion of comparable performance will generally refer to non-GAAP results. Please refer to our third 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 will turn the call over to Mitch.

Thank you, Brendan, and welcome everyone to the call this morning. We are pleased to report another strong quarter for the company, which generated financial results at the high end of our financial outlook. Non-GAAP diluted earnings per share was 79 cents compared to guidance of 70 to 80 cents on revenues of $979 million and adjusted EBITDA of $106 million. We are encouraged to see our businesses are on track to meet key operating objectives for the year despite the continuing challenging external conditions. We again delivered sequential improvement in top-line trends, lower overall loss rates year over year, and strong margins due to stable customer payment behavior in the third quarter. Considering the third quarter's strong financial results, the positive trends we're seeing in the business, and the resilient underlying fundamentals of the leased-owned model, our outlook for 2023 has continued to improve. Accordingly, we increased the midpoint of our 2023 financial targets, which Fami will discuss in more detail in a few minutes. Before reviewing our third quarter results, ongoing headwinds across consumer credit, I think it's worthwhile to offer some perspective on the state of the non-prime consumer, who we believe we know well based on Rent-A-Center's 50 years of operating history in this market. The fact that we've been successful for over 50 years speaks to the durability of the lease zone model and its relative stability within disruptive economic environments. We attribute this countercyclical aspect to a few factors. First, Our lease solutions have a strong value proposition for consumers with credit and liquidity constraints who otherwise may not be able to access important durable goods like furniture and appliances and tires and big-ticket electronics. So it's not surprising that they will often reprioritize budgets to stay on lease with us as long as possible, especially given the important role these products play in their lives and the flexibility of a lease, which allows them to return the products free of any obligation. Second, historically some non-traditional LTO consumers will trade down from credit solutions when lending conditions tighten and they no longer qualify for traditional consumer financing. This trade down can help sustain our lease portfolio, drive incremental lease portfolio value, and help manage credit risk with higher credit quality consumers entering the top of the funnel. We've seen signs of trade down in our applicants and portfolios over the past three quarters, And we believe this dynamic could be a positive tailwind to our results if a slowdown in the economy continues. Regarding the current state of our consumers, many households are experiencing financial pressures due to higher prices for non-discretionary items, growing debt balances and high interest rates, limited wage growth, and decreasing bank account balances. While these dynamics are causing certain customers to remain on rent for longer, it's important to recognize that many of our customers many of the customers we serve are accustomed to living on tight budgets and are adaptable to changes in financial position. In addition, the labor market for wage workers remains relatively tight, providing ample opportunity to find employment. And our underserved consumer has been under this inflationary pressure since mid-2022. And although the environment has not improved, it has stabilized as consumers have adjusted their cash priorities and We've adjusted our operations to balance meeting their needs and generating appropriate risk-adjusted returns. Our underwriting and account management have continued to evolve over the past year, improving the quality of our lease portfolios. So while we've seen some recent softening in the financial profiles of customers and applicants, we do not expect it to translate to a significant increase in delinquency and loss rates in the foreseeable future. In fact, given the better-than-expected yields in the ASEMA business, we've been able to tactically underwrite leases in certain channels at the best credit bins to pick up GMV volume with just a modest uptick in delinquencies and loss rates. The more challenging aspect actually of consumer behavior for us today is the ongoing impact of demand pulled forward in key durable good categories, especially for seamless furniture-oriented merchant partners. On a positive note, we have partially offset the soft demand by expanding our presence in less penetrated categories such as auto and jewelry. Today we have a more diverse product portfolio that should be even better positioned for growth when the effects of the demand pull forward dissipate. So looking at 2024, we will be almost three years out from peak stimulus and we expect furniture demand should begin to normalize. Putting the pieces together, we believe the non-prime consumer has been and will continue to be resilient and is in relatively good shape for this environment, which further increases our confidence that the company can return to growth in 2024. Now moving to third quarter results, the Rent-A-Center segment performed in line with our expectations. Revenues in same store sales decreased approximately 4% year over year, improving from a 4.9% decrease in the second quarter with both rental and fee revenue and merchandise sales revenue down year over year. However, Despite ongoing top-line pressures, numerous forward-looking KPIs demonstrated promising sequential improvement relative to the first half of 2023. The portfolio value finished the quarter 2.7% lower year-over-year, the best performance year to date, and almost 18.5% above the third quarter of 2019 on a per-store basis. Deliveries for the quarter were down a modest 2% year-over-year despite continued pressure on consumer durable goods spending we see more broadly, which reflects the team's strong execution and the resilient underlying demand for Rent-A-Center's leasing solutions. We continue to make progress on strategic initiatives in the third quarter, including logistics enhancements to improve the omni-channel experience, our 50th anniversary campaign that drove a 40% lift in web traffic and a 15% lift in web orders for the quarter, We've relaunched our presence in tires and we opened four new stores. Higher Rent-A-Center web traffic led to an increase in e-commerce revenue, which accounted for approximately 25% of the third quarter revenues compared to 23% in the prior year period. Extended aisle continued to generate strong growth with deliveries up 129% year over year as we continue to add to our product lineup, which by the way, we now offer about 12,000 SKUs on rentacenter.com. which is over 50% more year over year as far as the SKUs online. The emphasis we've placed on risk management over the past year continued to pay off as well in the third quarter with loss rates and delinquency rates in line with our expectations. Skipstone loss rate for the third quarter of 4.3% was down 20 basis points sequentially and down 150 basis points year over year with a 30-day past due rate of 3.1%. decreased 40 basis points year-over-year, and is stabilized during a seasonably tough quarter. Moving on to ASEMA, top-line trends continued to improve there as well in the third quarter, as we expected. GMV decreased 1.4% year-over-year, improving 440 basis points relative to the second quarter. We saw modest growth in key metrics like active merchant locations, applications, funded leases, and open leases. The external backdrop remained challenging with traffic and volumes for many merchants and more established categories like furniture and home electronics and appliances still negatively impacted by that demand pull forward and the ongoing pressure on consumer budgets. The team has done a great job expanding the platform in less established product categories, like I mentioned before, things like auto and jewelry and channels like e-commerce and the ASEMA marketplace have really helped us offset sluggish demand. In addition, we picked up some good regional account wins and enhanced commercial positions with a few key merchants that also contributed incremental lease volumes in the third quarter. And based on conversations with current and prospective merchant partners, we believe that SEMA is gaining both mind share and market share in the industry. Our e-com capabilities, our ability to staff high-volume stores, and our flexible lease terms are key differentiators for us. Positive trends in September have carried over into October, increasing our confidence that GMV should grow in the low single digits year-over-year in the fourth quarter, as we've been predicting all year, which positions us well to end the year with a strong portfolio and grow revenue and profits in 2024. In fact, September was the first month of positive year-over-year GMV growth since December of 2021, and October was positive as well. Margins were strong again in the third quarter, with adjusted EBITDA margins at a SEMA of 15.3%, up 270 basis points year-over-year, benefiting from stable loss rates and a lower mix of customers electing the earliest lease payout option, which increases our yields. After three-quarters of consistent declines in earliest payouts, we feel confident that the mix has stabilized back to pre-pandemic levels that are several hundred basis points below 2021 and 2022. Although we have seen a very modest uptick in delinquencies and loss rates in the third quarter, we do not believe it's directly attributable to customers shifting from early payouts to staying on lease. Rather, it is related to seasonality, a slight shift in mix to e-comm, and isolated at certain pockets of risk in our legacy Acceptance Now business, which we have addressed by taking further underwriting actions in the quarter. The effect of slightly higher loss rates has been more than offset by the higher yields and margins we are earning from more customers staying on lease longer. We continue to advance initiatives that should enhance the company's competitive position and growth opportunities. The product development team launched several improvements that continues to reduce friction for merchant partners and makes Aseema's offerings relatively easier to integrate and transact with versus our competitors. This dynamic is especially true for e-commerce retailers. Additionally, our partnership with Concur Credit, which was formerly known as Genesis Financial Solutions, is progressing nicely, and we've gained important insights through early testing. Looking forward to the final months of the year, we think that our business should be approaching a normalized base from which we can start to progress on our three-year financial targets we outlined at our investor day earlier this year, which we believe can sum up to a high teens to low 20% annual total shareholder returns. Now moving to slide five and an overview of our key priorities for the year. For the Rent-A-Center segment, we are focused on enhancing our omnichannel platform and performance by expanding our extended aisle offerings and continuing to improve and grow the e-commerce customer experience. In addition, we have logistics initiatives to improve our last mile capabilities, which are a differentiating factor for us. Additionally, we have plans to enhance underwriting at Rent-A-Center by leveraging aspects of a seamless decision engine that should help us approve more of the right Rent-A-Center customers. For ASEMA, our top priority is to increase lease applications and manage risk to start 2024 with a strong portfolio. Key initiatives supporting those objectives include the ASEMA marketplace, a robust business development pipeline, and further enhancing data analytics and underwriting. Next, we remain focused on enhancing ASEMA's market position as the most effective LTO solution for merchants by making ASEMA even easier to integrate with, continuing to reduce friction points for e-commerce, and partnering with financial solution providers to create more holistic offerings. Top priorities at the upbound holding company level are implementing our partnership with Concur Credit. realizing synergies between the operating segments, and investing in our technology organization to support our growth agenda as we head into 2024. Looking back over the last 10 months, I'm really impressed with the company's progress despite the external headwinds. We've made numerous changes and upgrades in processes, people, and technology to create what I believe is the best-in-class platform for non-prime financial solutions serving consumers and merchants. It's exciting to see the pieces coming together and the potential additional value we can create for our customers, our partners, and our shareholders. And I want to thank the entire team for their tremendous efforts and dedication. And with that, I'll turn the call over to Fami.