Upbound Group, Inc.

Collaborating with them on our marketing initiatives, we're able to more efficiently deliver, more effectively deliver the right message to consumers at the right time, like data-driven marketing campaigns or themed promotions, which provides a better experience for our customers and drives better outcomes for the retailer's top line. Our current merchants see the value in these efforts, which is why active location count was up nearly 10% against a year ago period. As a result, we saw a notable 35% lift in applications compared to last year. When you add together the more merchants and more affected within those merchants, 35% application growth over last year. But it's also important to remember that in the intervening year, we deepened our relationships with two of our enterprise partners in Wayfair and Ashley.com, and we'll start to count their enhanced volumes later this year. I'm also pleased to share that Acima's direct-to-consumer offering continues to grow, with GMV from that funnel up over 50% as we add brand name retailers to the site and continuously improve the shopping experience for our consumers. While most consumers first encounter Acima when shopping at a retail partner, either in-store or online, our Acima marketplace also enables customers to start their journey directly with us. And with shopping destinations like Ashley, IKEA, Amazon and Best Buy, our customers can quickly and easily find what they need and complete their lease on our site 24 hours a day, seven days a week, 365 days a year. Collectively, these are the efforts that resulted in Q2 revenues to be up 19% year over year. Similar to Q1, average ticket size was down a little bit, so the top line lift was driven by the expanded penetration and the productivity that I've been talking about. Overall, The SEMA exited the second quarter with a funded lease count that was approximately 24% higher versus last year, as well as sequentially higher when comparing it against the first quarter of 2024. And from an underwriting standpoint, we continue to take a proactive and vigilant approach to risk management. Our SEMA segment loss rate was 9.6%, in line with our expectations and flat sequentially the last quarter. Despite the volume of applications increasing 35% year-over-year and the strong growth numbers we've been talking about, ASEMA's approval rate declined 160 basis points from last year. And in terms of delinquencies, ASEMA's 60-plus past due rate in the second quarter was down 80 basis points from a year ago and down 90 basis points sequentially to the first quarter this year. These results were in line with our expectations for the second quarter and with the Acceptance now integration into ASEMA's decision engine nearly behind us, we remain very confident in our risk management outlook for the year. As noted earlier, I'm pleased to share that our adjusted EBITDA margin at ASEMA improved by 310 basis points to 14.7% in the second quarter as compared to the first quarter, as we've begun to experience some of the flow-through we talked about with that higher GMV. The EBITDA margins from a year ago second quarter were atypically high and driven by the macro backdrop at that time. So we're expecting the next couple of quarters of EBITDA margins at ASEMA to follow the current performance curve and land in this area, which is right in line with our expectations of low to mid-teens for the segment. Our team at ASEMA is committed to running a lean business that realizes the scale inherent in its virtual platform model, and I'm confident we can continue to deliver sustainable, profitable growth. Now, in Rent-A-Center, we finished the second quarter with a same-store lease portfolio that was up 140 basis points year-over-year, and that portfolio growth helped drive positive same-store sales growth of 2.6% as we carried forward the momentum from last quarter's positive same-store sales growth. Rent-A-Center's web channel volume continues to perform, and it represented approximately 26% of revenue in the second quarter, which was consistent with the year-ago period. These elements help deliver revenue growth of 1.9% year-over-year, which flowed through to gross profit with a similar lift. Operating expenses increased approximately 4% compared to last year due to a combination of elevated labor benefits costs, delivery costs, and store technology investments. We expect the labor benefits expenses to normalize in the back half of the year, especially with the store consolidation efforts this past quarter, and our fleet management team is actively working on operating strategies to to optimize efficiency. Our continued emphasis on underwriting and account management at Reynolds Center resulted in a lease charge-off rate of 4.2% for the quarter, down 30 basis points from the second quarter of last year. Our past due rate, which is an early indicator of potential future lease charge-offs, was stable at 2.7% for the quarter, down 40 basis points sequentially. Although the pace of inflation has recently abated, which will reduce the economic pressure on Rent-A-Center's customer base over time, our account management efforts will continue to be an important element of customer connectivity in the near to medium term to help us maintain our delinquency and charge-offs rates at our target ranges. Overall, we're very pleased with our operating and financial results in the second quarter. Both segments successfully anticipated and met our customers' and merchants' expectations, enabling us to achieve that 21% GMV growth into SEMA, while meeting that mid-teens EBITDA margin target, along with the same-store sales growth at Rent-A-Center. These results, along with the momentum we've already seen in the early July results, give us confidence that we're tracking well towards achieving our updated and increased full-year targets. So on slide five, let's review the status of the strategic priorities we outlined for the year. At Asima, we believe we continue to grow our market share with a nearly 10% increase in merchant partners year over year, with additions such as Purple Mattress and iFit, whose family of brands includes NordicTrack and ProForm. We also onboarded two of the top 50 furniture retailers in the U.S., Levin Furniture and Slumberland Furniture. While we haven't yet seen the hard lines category fully recover from the pandemic era pull forward, we believe our lineup of merchandise of merchants in that vertical is poised to accelerate when it does. In fact, we now partner with six of the top 15 furniture retailers in the U.S. And it's important to note that in addition to maintaining a strong presence among the largest furniture retailers, our teams have the talent and technology to deliver superior service and outcomes to sizable partners in a number of retail categories. And even as we add national and regional accounts, Aseema's merchant network remains well diversified. In the second quarter, our largest retailer represented approximately 6% of total GMV, and the top five were collectively about 20%. We strongly believe that the diversification of our merchant base and product categories will help provide a stable foundation of predictable and sustainable growth for the future. So we continue to add national and regional players but we also had the the smaller players to keep that diversity and growth one of our recent operational priorities has been the migration of the acceptance now staff business from the legacy underwriting platform over to a sema's decision engine i'm pleased to report that that journey is nearly done with only a few stores in puerto rico remaining as we wrap up our conversion i'd like to speak to the benefits of the initiative For our retailers, we can embed ASEMA team members onsite at certain high-volume locations to supplement the merchant's in-house team. Our representatives can serve as the leasing coordinator to help customers complete an LTO transaction, and in between transactions, they can reinforce the training we provide to the retailer staff about ASEMA's leasing process. At hundreds of locations across the country, our team can drive nearly double the conversion rate of an unstaffed store while allowing the retailer to redeploy resources more efficiently. In terms of underwriting in the consumer experience, a shift is a really important milestone for ASEMA. The legacy platform was not designed for virtual e-count transactions. Given ASEMA's fully virtual model, the decision engine was designed from the beginning to handle digital orders and should deliver stronger lease outcomes with lower losses. From a customer experience standpoint, the Asimo platform allows our customers the flexibility to fully check out online without speaking to one of our representatives or physically going into the retail store like they had to do at Acceptance Now. This should improve conversion and increase GMV at these locations because now they can best handle the whole spectrum of customer interactions. We're excited about the opportunity to improve yields, increase GMV for those merchant partners, and supplement our staff business with a sophisticated underwriting platform. At Rent-A-Center, we've highlighted our continuing investments in technology, and in particular in our digital channels, to help us seamlessly serve our customers, whether it's in-store or online. And those investments are paying off with nearly 17 million visits to Rent-A-Center.com in the second quarter, which increased double digits against the year-ago quarter. Our web visits being up double digits reflects our team's efforts to drive online traffic and create a consistent, friction-free customer experience across each of our channels. More specifically, we've added new identity validation steps to expedite the online checkout process for customers while improving our ability to screen out fraudulent traffic. As we see more of our customer interaction shift to digital channels, we have an opportunity to optimize our footprint, our store footprint, which is already closely managed based on key store-level metrics we look at and what's going on in the local area. And based on those variables, we consolidated 55 stores, or approximately 3% of our company-owned stores during the first half of the year, most of which took place in the second quarter. And we expect to maintain those relationships with the majority of customers by serving them at a nearby store, or by engaging them online. And going forward, we'll keep working to strike the right balance to serve our customers efficiently across all our connection points while optimizing renter center scale and productivity. At the up-on level, we continue to test and learn in the consumer credit space through our partnership with Concurra. We've made sequential progress each month since we launched the pilots in February for the Acima Classic Credit General Purpose MasterCard, and the ASEMA private label credit cards, each of which expands our offerings as well as financial access for our customers. In particular, we've been pleased to see that the private label offering has resonated with our existing and prospective retail partners. Some of our current merchant partners are looking to streamline their vendor relationships, and our combined second look and LTO offering delivers increased opportunities to serve more consumers with our leading solutions. We've also found that potential clients, especially those without an incumbent second-look credit provider, appreciate the one-stop-shop approach, especially when considering integration effort for their POS systems. As a reminder, we structured our existing partnership with a concurrer, so we're not taking any credit risk, and our economics are driven by upfront fees and revenue sharing. Also at the up-on level, we continue to make significant investments in digital technology to support our businesses. Our strategic initiatives on the connected enterprise are on target to supercharge our omni-channel strategy within Rent-A-Center and across the organization. The recent launch of Rackpad, our next-generation cloud-native POS system, sets the direction towards an integrated customer experience across all channels. Its microservices architecture promotes swift development of features, and product integration, prioritizing customer experience and boosting co-worker efficiency with user-friendly workflows. Our online traffic continues to show double-digit growth, and to support this increased demand, we're introducing a new e-commerce platform based on a modular architecture that will allow our brand to adopt, deploy, and scale an omnichannel sales approach focused on increased conversion and retention rates. As we reduce our data center footprint, both of these initiatives mark a significant milestone of improving scalability of our operations, reducing technical debt, and bolstering our cyber resiliency, which are key components to support our growth. Overall, there's still plenty of uncertainty in the market, whether it's where the economy is headed, consumer sentiment, industry dynamics, or even the upcoming election. But we view that as an opportunity. because our business is built to succeed across these cycles. We're already passionate about serving our current customers, and we expect new customers will discover our product offerings as trade down continues. And when they do, we'll be ready as a trusted brand to help them get the products they need to live their lives, their daily lives to the fullest. Now, before I hand it off to Fama, I'd like to briefly address the lawsuit of SEMA Leasing filed against the CFPB last week. We brought this action in Texas federal court seeking to halt what we contend is the CFPB's unauthorized attempt to expand its authority, which is limited by federal law, and usurp the longstanding comprehensive state regulatory framework governing our industry, governing the leased-own industry. As you know, we previously disclosed that the CFPB has been conducting an investigation of a SEMA that began prior to UpBounce's acquisition of the company in 2021. After this protracted investigation, the CFPB threatened an imminent enforcement action against ACIMA. I want to make clear that ACIMA filed this lawsuit reluctantly. Despite our longstanding cooperation, we ultimately concluded the CFPB was not prepared to settle with ACIMA on acceptable terms. Then, as expected, the CFPB subsequently initiated an enforcement action against ACIMA on July 26, of various federal consumer financial protection statutes. We believe the CFPB is engaging in forum shopping by filing a lawsuit in Utah after our lawsuit was already pending in Texas addressing the same subject matter. We strongly contest their claims and will vigorously defend ourselves against them. So as you would expect, though, because of the pending litigation, we're not able to comment any further on this matter. As I wrap up my section, I'd like to thank my exceptional teammates across all the corners of our business for their energy, their enthusiasm, and their dedication. I know they're just as excited as I am about carrying the momentum from the first half of the year across the second half and beyond. Whether working on segment-specific projects or collaborating on enterprise-wide priorities, our coworkers are the driving force that will help us deliver a strong finish to the year. And with that, I'll turn the call over to Fammie.

Thank you, Mitch, and good morning, everyone. I'll start today with a review of the second quarter results and then discuss our outlook for the rest of the year, after which we will take questions. Beginning on page six of the presentation, consolidated revenue for the second quarter was up 9.9% year over year, with the SEMA up 19% and Rent-A-Center up 1.9%. Rentals and fees revenues were up 9.7%, while merchandise sales revenue increased 17.3%, reflecting a larger portfolio balance at ASEMA coming into the quarter. Consolidated gross margin was 49.4% and decreased 230 basis points year-over-year, with a 190 basis point decrease in the ASEMA segment and a 40 basis point decrease in the Rent-A-Center segment. Consolidated non-GAAP operating expenses, excluding lease charge-offs, and depreciation and amortization were up mid-single digits, led by a low double-digit increase in non-labor operating expenses, including delivery costs at Rent-A-Center, and a high single-digit increase in general and administrative costs, which was a result of targeted corporate investments in technology and people. The consolidated lease charge-off rate was 7.2%, a 30 basis point increase from the prior year period, and in line with our expectations. On a sequential basis, the consolidated lease charge-off rate decreased 20 basis points due to a 50 basis point sequential improvement at Rent-A-Center. Consolidated adjusted EBITDA of $124.5 million decreased 4.6% year-over-year with higher SEMA segment adjusted EBITDA, offset by lower Rent-A-Center segment adjusted EBITDA, and higher corporate costs. Adjusted EBITDA margin of 11.6% was down approximately 170 basis points compared to the prior year period, with approximately 160 basis points of contraction for Rent-A-Center and approximately 210 basis points of margin contraction for ASEMA, offset by a 20 basis point decrease in corporate costs as a percentage of sales. I'll provide more detail on the segment results in a moment. Looking below the line, Second quarter net interest expense was approximately $28 million, which was roughly flat compared to the prior year period. The effective tax rate on a non-GAAP basis was 25.8% compared to 25.5% for the prior year period. The diluted average share count was 55.8 million shares in the quarter. GAAP earnings per share was 61 cents in the second quarter compared to a loss per share of 83 cents in the prior year period. which was driven by the prior year tax impact associated with the vesting of restricted stock awards issued in connection with the ASEMA acquisition. After adjusting for special items that we believe do not reflect the underlying performance of our business, non-GAAP diluted EPS was $1.04 in the second quarter of 2024, compared to $1.11 in the prior year period. During the second quarter, we generated $600,000 of free cash flow, which decreased from 24.7 million in the prior year period, primarily due to the increase of GMV at ASEMA. We distributed a quarterly dividend of 37 cents per share, and we finished the second quarter with a net leverage ratio of approximately 2.8 times. Drilling down to the segment results starting on page 7. For ASEMA, double-digit year-over-year GMV growth continued for the third consecutive quarter. Following nearly 20% year-over-year growth in the prior two quarters, GMV grew 21% the second quarter and approximately 15% on a two-year stacked basis. The GMV list was driven by year-over-year growth in key underlying drivers, with active merchant locations up 9.8% year-over-year, more productivity per merchant, and applications increasing over 35%. Those tailwinds were partially offset by lower approval rates as we remained disciplined in our underwriting approach as inflation continues to impact our core consumer base. The net asset value of inventory under lease was up approximately 23% year over year. Revenue increased 19% year over year, including an 18.2% increase in rentals and fees revenue and a 22% increase in merchandise sales revenue due to a larger portfolio at the beginning of the second quarter compared to last year. Lease charge-offs for the Asema segment were 9.6%, 70 basis points higher year-over-year, and flat sequentially. The year-over-year increase in Asema's lease charge-offs was in line with our expectations, as the ANOW leases originated on the legacy decision engine continue to wind down. The conversion will strengthen our underwriting capabilities and should reduce lease charge-off rates as prior cohorts from the legacy system wind down throughout the year. Operating costs, excluding lease charge-offs, were up on a dollar basis approximately $4.6 million in the second quarter, which was 60 basis points lower as a percentage of revenue. Adjusted EBITDA of $81.3 million was up 4.5% year-over-year, primarily due to the 19% increase in revenue that was partially offset by a 22.5% increase in cost of goods sold. Adjusted EBITDA margin of 14.7% increased approximately 310 basis points sequentially and decreased approximately 210 basis points year over year, primarily due to 190 basis point contraction of gross margin compared to the second quarter of 2023. The decrease in gross margins compared to the prior year was a result of a few factors, including a growing portfolio where revenue lags GMV production, an increase in merchandise sales which represented a larger percentage of revenue compared to the prior year period, and the conversion of Acceptance Now locations to the SEMA platform, which increases merchandise depreciation expense and cost of goods sold. EBITDA margins were impacted by higher labor costs, Underwriting costs as application volume significantly surpassed the prior year, and the performance of the Legacy A Now portfolio, increasing our LCO rate. All of these headwinds were in line with our expectations, were included in our guide for the year, and are expected to improve as we get into the second half of this year. For the Rent-A-Center segment, at quarter end, the same store lease portfolio value was up 1.4% year over year. while same-store sales increased 2.6% year-over-year, improving from an 80 basis point increase in the first quarter of 2024. Total segment revenue grew year-over-year for the second consecutive quarter, increasing 1.9% compared to the second quarter of 2023 and improving from a 20 basis point year-over-year increase in the first quarter of this year. The increase in revenue was driven primarily by a 2.1% year-over-year increase in rentals and fees revenue, while second quarter merchandise sales revenue increased 1.6% year-over-year, an improvement from a 3.6% decrease in the first quarter. Lease charge-offs were 4.2% of revenue in the second quarter, 30 basis points lower year-over-year and 50 basis points lower sequentially, a result of ongoing underwriting and account management efforts. 30-day past due rates averaged 2.7% for the second quarter, up 10 basis points from the prior year period and 40 basis points lower sequentially. Adjusted EBITDA margin for the second quarter decreased 160 basis points year-over-year to 16.3%, primarily due to higher operating expenses, including elevated labor benefit costs, delivery costs, and sore technology investments. This is reflected by a 150 basis point year-over-year increase in the ratio of non-GAAP operating expenses, excluding lease charge-offs to segment revenue. For the Mexico segment, adjusted EBITDA was higher year-over-year, and the franchise segment's adjusted EBITDA was lower. Non-GAAP corporate expenses were approximately 7% higher compared to the prior year, primarily due to additional investments in technology and people. Shifting to the financial outlook. Considering our sustained momentum through the first half of the year and the latest projections for the macroeconomic environment, we are pleased to raise the midpoint of our full year 2024 targets for revenue, adjusted EBITDA, and non-GAAP diluted EPS. Our portfolio and GMV growth, coupled with low delinquencies, give us confidence that we can improve margins in the second half of the year and achieve these updated targets. Our forecast continues to assume a generally stable macro environment with durable goods demand remaining under pressure and continued discipline in our underwriting. At ASEMA, we'll start comping against higher growth rates in the third quarter, so we expect GMB growth to drop from the 20% area we've achieved for three consecutive quarters to low double digits in the upcoming quarter. Rent-A-Center's portfolio value is expected to seasonally drop in the third quarter from the second quarter, similar to the prior year. For both ASEMA and Rent-A-Center, we expect third quarter revenue to follow the same sequential pattern as in 2023, with a slight increase sequentially at ASEMA due to a growing portfolio. We expect losses to remain within our previous guidance commentary for the year. with Rena Center experiencing a typical seasonal uptick in the third quarter from the second quarter and to be in the 4.5% range. Asema losses are expected to improve in the third quarter as the legacy ANOW portfolio continues to wind down and finish in the 9% area for the quarter. In terms of adjusted EBITDA margins for the third quarter, the Rena Center segment will follow a similar seasonal trend from Q2 to Q3, as we experienced last year, and be down sequentially to the mid-teens area. The store optimization efforts this past quarter will have a minimal impact to the financials for the year, with pressure on total segment revenues offset by lower expenses, which should slightly improve adjusted EBITDA margins going forward. We expect ASEMA to realize an improvement in adjusted EBITDA margins sequentially. as flow through from higher GMV continues to benefit the P&L and from lower loss rates. If trade down activity continues to expand, GMV could improve from our guidance today. We are assuming a fully diluted average share count of 55.8 million shares for the quarter, with no share repurchases assumed in our guidance. Interest expense and our tax rate are expected to be similar to the second quarter, resulting in a non-GAAP EPS range for the third quarter of $0.90 to $1. For the quarter, we expect to generate 60 to 75 million of free cash flow and increase sequentially due to the pace of growth changing at ASEMA, lower inventory purchases at Rent-A-Center, and timing related to other working capital needs that were recorded in the second quarter. For the year, we are revising revenues to be in the $4.1 billion to $4.3 billion range adjusted EBITDA to be $465 million to $485 million, and we're tightening our full-year guide of non-GAAP EPS to a range of $3.65 per share to $4 per share. Our 2024 outlook reflects our continued focus on execution to drive sustainable and profitable growth. The midpoint of our revised guidance compared to 2023 represents a 4% increase in revenue and a 5% increase in adjusted EBITDA, and an 8% increase in non-GAAP EPS with no share repurchases assumed. Our ability to navigate this challenging environment and generate earnings growth at both segments while meeting our margin and loss targets is a testament to the entire team's effort and dedication to drive shareholder value. In terms of capital allocation, we have a proven business model that generates strong operating cash flows over time, and an experienced management team that allocates those cash flows in support of our strategic priorities. Our first priority continues to be supporting growth with profitable leases and innovative ideas that will improve our customer interactions and merchant outcomes. Concurrently, we will focus on enhancing shareholder value by maintaining our commitment to our dividend program and being opportunistic regarding share purchases. I'm pleased to share that during the second quarter, we optimized our capital structure in support of our long-term capital allocation priorities. Capitalizing on our strong recent performance and favorable market conditions, we refinanced our term loan debt, which resulted in over 60 basis points of annual interest savings, while also extending the maturity of our $550 million ABL revolver through 2029. Combined, these enhancements to our capital structure secure our liquidity position while reducing the cost of capital for the company. We expect the balance of our free cash flow this year will go towards deleveraging as we progress toward the net leverage ratio of under two times and toward our long-term target of one and a half times. We ended the second quarter at 2.8 times, up from 2.7 times at the end of the first quarter due to an increase in working capital needs to support GMV growth. The strength of our balance sheet helps to insulate us from market volatility and enables us to act confidently and decisively when pursuing our strategic priorities. As of quarter end, we carried nearly half a billion dollars of available liquidity, which enables us to invest during periods of broader uncertainty, whether supporting our homegrown initiatives or targeted inorganic opportunities. Wrapping up on slide 11, We're encouraged by the company's sustained momentum across the first half of this year, which included top-line growth at both primary segments, GMV growth at ASEMA and same-store sales growth at Rent-A-Center, and importantly, a notable improvement in adjusted EBITDA margins at ASEMA in line with our low to mid-teens target. Our prudent risk management and account management strategies helped deliver loss rates that were in line with our expectations and allowed us to raise the midpoint of our guidance as we look out across the balance of the year. Going forward, we will continue to execute against our day-to-day priorities to serve our customers and elevate our retail partners' businesses, while pushing forward with new ideas and business strategies that will help us achieve our long-term growth plans. Thank you for your time this morning. Operator, you may now open the line for questions.

Thank you. At this time, we will conduct the question and answer session. As a reminder, To ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. The first question will come from Kane We'll come from, sorry about that, Vincent Caintick. Vincent, your line is open.