Upbound Group, Inc.

Hello, and welcome to the Upbound Group, Inc. Fourth Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. I would now like to turn the conference over to Jeff Tesnut. You may begin.

Good morning, and thank you all for joining us to discuss the company's performance for the fourth quarter and full year of 2024. We issued our earnings release this morning before the market opened, 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 Femi Kutum, 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 and adversely 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. Please refer to today's 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. Finally, a found group is not responsible for and does not edit or guarantee the accuracy of our earnings teleconference transcripts provided by third parties. Please refer to our website for the only authorized webcasts. And with that, I'll turn the call over to Mitch.

Thank you, Jeff, and good morning, everyone. Before I begin, I'd like to take a moment to address the announcement we made this morning about my decision to retire as CEO and step down from the board as well as the appointment of Fami Karam as UpBound's next CEO effective June 1st of this year. This transition follows a deliberate and thoughtful succession planning process in which Fami emerged as the board's unanimous choice for the role. Fami joined the company as an EVP and Chief Financial Officer two and a half years ago as an experienced leader with an outstanding track record of strategic and financial execution, as well as deep experience with subprime consumers. Since then, he's become an instrumental force behind our success, including driving the Bridget acquisition, assisting in integrating Acima, and achieving its strong growth. Over my 40 years at the company, this industry has changed immensely. But we've remained at the forefront every step of the way. from brick and mortar consolidation in the 90s and 2000s, establishing the first national third-party LTO business in 2005, to becoming a leader in the virtual channel today. We remained a leader thanks to our innovative spirit and our relentless commitment to our mission to elevate financial opportunity for all. Thanks to the stellar execution of our team, we've closed the two transformative acquisitions of Aseema and Bridget and firmly established ourselves as a technology-driven growth company. with a differentiated and expanding platform of financial solutions for underserved consumers. With Upbound in a position of incredible strength, now is the right time to make this change, and Fami is the right person to lead the company in this next chapter. I look forward to continuing to work closely with them over the coming months to ensure a smooth transition. With that, let's begin with a review of key highlights from 2024, as well as a discussion of our priorities for 2025, then Fami share a more detailed review of our financial results and our outlook. After that, we'll take some questions. Let's begin with a brief look at our recent achievements, which collectively represented another significant step forward for the company in our mission to elevate financial opportunity for all and to achieve our strategic growth objectives. At the seam of the momentum we generated in the second half of 2023 continued across 2024 as we welcomed nearly a million new customers to our network, by onboarding thousands of new merchants, reflecting the success of ASEMA's industry-leading sales force, merchant productivity gains, our growing direct-to-consumer marketplace, and the trade-down impact stemming from a tighter credit environment. ASEMA was able to capture share throughout the year, highlighted by numerous regional wins, and I'm pleased to announce already in the first quarter, two more top 50 furniture merchants have elected to move to ASEMA as their preferred partners. Speaking of merchant growth, we've achieved all-time highs for active locations, which increased approximately 10% year-over-year. Our large and diverse merchant roster also limits concentration risk. In fact, ASEMA's top 10 retailers represent approximately 30% of the GMV. All of these factors and our commitment to top-tier service for our consumers and our merchants helped ASEMA deliver top-line growth of over 17% for the year. with revenue ending at approximately $2.3 billion. And even while serving a record number of consumers, the ASEMA team completed the conversion of the ANOW stores into ASEMA's platform, established a field customer service network in collaboration with Rent-A-Center, and launched a leaseability engine for the ASEMA marketplace, which guides shoppers to lease eligible durable goods on unintegrated e-commerce sites with a broad array of merchandise. We believe these efforts will support and extend ASEMA's growth into 2025 and beyond, while also prudently maintaining our stable consumer risk file. The Renaissance team focused on elevating the customer experience in 2024 while concurrently managing its operating expenses to deliver stable EBITDA and cash flow in a challenging environment. The successful rollout of our new point of sale system called Rackpad resulted in a smoother and more efficient customer journey, whether in-store or online, by making our coworkers more efficient in reducing manual components of their day-to-day responsibilities. Behind the scenes, the team also maintained its disciplined approach to expense management, reducing labor expense as a percentage of revenue while improving attrition rates. Our businesses delivered these results during a period in which economic and regulatory uncertainty were the norms. Overall, it really emphasized the durability and resilience of the business model to drive profitable outcomes across economic environments. When macroeconomic conditions are more cautious, we can tighten at one end while welcoming higher income consumers into the top of the funnel. This helps us manage lease chargeouts while protecting our stable base of volume. And when conditions are more constructive for all consumers, we can accommodate more of them across all income levels, which helps us drive additional top line growth with margin expansion and losses within our long-term targets. So we're excited about the opportunities ahead of us. And 2025 brings the addition of Bridget, a business with its own impressive growth profile, plus the ability to amplify the growth of Rent-A-Center and Asema through its current lineup of products and capabilities. I'll remind you our Bridget colleagues officially joined Upbound when the acquisition closed on January 31st. And as we shared in mid-December when we announced the deal, Bridget brings a host of new digital products that will complement what we already offer our consumers. Their liquidity solutions through earned wage access, credit building programs, and financial literacy tools will help us improve our customers' financial health while engaging with them more frequently compared to only when they need a big-ticket durable good. One of the reasons UpBound was attracted to Bridget is our customer demographic overlap is so large, yet the actual customer overlap is so small. We're incredibly excited for that opportunity to introduce our millions of customers to the Bridget ecosystem while benefiting from the reverse energies of leveraging Bridget's capabilities to enhance our underwriting and customer acquisition strategies. Across 2025, we'll look forward to seeing Bridget continue to grow and Rent-A-Center and ASEMA executing their operating plans while testing collaboration opportunities across our brands to accelerate our growth profile. In fact, by the end of this year, we're expecting about two-thirds of adjusted EBITDA before corporate expenses will come from our tech-enabled channels, including ASEMA, Bridget, and Rent-A-Center.com, and we expect that share to increase in the coming years. Overall, we see the business continue to shift to a digital-first platform to further align with consumers, with Aseema and Bridget leading the way with their virtual and mobile solutions, and Rent-A-Center continuing to evolve to offer its customers a frictionless omni-channel experience, whether in-store or online. Now, before moving on to our 2025 priorities, let's go to slide four and recap our consolidated financial results for Q4. Fourth quarter revenue of nearly $1.1 billion was a 6% increase from a year ago period, mainly driven by strength of the SEMA. Upbound delivered $123 million of adjusted EBITDA, which was a lift of over 14% year-over-year, and adjusted EBITDA margins of 11.4%, which was up 80 basis points from last year. Non-GAAP diluted EPS was $1.05, which was nearly 30% higher than the year-ago quarter. Each of these figures are within or above the implied midpoint of guidance we provided on our last call. And in terms of consolidated lease charge-offs, we finished at 7.3% for the quarter, which was 20 basis points better relative to last year's fourth quarter or 2023's fourth quarter, where the LCO rate was 7.5%. So having said that, let's move to the full year results on slide five. For the full year, our revenue grew 8.2% to over $4.3 billion, representing the second highest on record for upbound behind fiscal year 2021, which of course benefited from stimulus and the pandemic-related pull forward in the furniture sector. As FAMI will discuss, though, we expect to beat 2021's record with our top-line performance this year. Adjusted EBITDA for the year was over $473 million, which was up 3.8% from the prior year. In the segment breakdown, FAMI had discussed the drivers for Rent-A-Center last year, and the tactical levers will pull it to SEMA in 2025 to see more flow through from its top-line growth. Consolidated lease charge-offs for the year totaled 7.3%, which was the same rate as I just mentioned for the fourth quarter, up slightly from fiscal year 2023, which was 7.1%. Our non-GAAP diluted EPS was $3.83 compared to $3.55 in 2023, an 8% improvement. And in line with our guidance last quarter and in line with the framework for growth that we introduced in our investor day in 2023. Overall, I'm really pleased with the strong performance that our team delivered in 2024. The Rent-A-Center segment successfully navigated a number of challenges across the year. Between the uncertain environment for Rent-A-Center's core consumer, pressure on demand, and payment behavior as inflation continued to take a toll in an evolving competitive landscape. Despite those hurdles, the entire Rent-A-Center team stayed focused and grew adjusted EBITDA by 5.4%, while simultaneously investing to advance the segment's digital capabilities going forward. At Acima, we introduced more merchants and more consumers to our virtual LTO platform, which enabled the segment to print its fourth consecutive quarter of double digit top line growth. Acima's revenue grew over 17% in 2024, which is really impressive when it comes off a base of nearly $2 billion in 2023. A portion of that growth came from trade down that we saw across the year, which pressured Acima's EBITDA margins by more than 200 basis points the first three quarters of the year when compared to the prior year, but that gap narrowed pretty significantly to 90 basis points in Q4. And we expect our 2025 margin profile to improve over 2024 to be within our low to mid-teens target. And that's a good segue into our priorities for 2025, so let's move to slide six. On slide six, Let's discuss the strategic priorities that will guide our efforts this year. ASEMA's strategic imperatives for 2025 are organized around three key pillars, our merchants, our customers, and our margins. For our merchants, we'll continue to expand the core LTO offering across our key verticals, furniture, wheel and tire, jewelry, and electronics. That effort will be deployed across two vectors, which are adding new merchants to our platform, and driving more leases per merchant through compelling offers and attentive customer service. The focus on merchant growth and satisfaction has been a hallmark of Acima since its founding, and it will be a key part of our growth strategy going forward. And this year, we're amplifying our commitment to our customers. Similar to the importance of increasing productivity with our merchants, it's equally, if not more important, to increase our repeat business with our first-time consumers. We're removing friction points for familiar customers and making upgrades to our SEMA marketplace where our shoppers can find a vast assortment of leaseable durable goods. You know, just last month we added Walmart, Amazon, and Target as new unintegrated retail options for our consumers. Pretty impressive list there. We'll also test and improve virtual lease cards so that our customers have the freedom and flexibility to shop at any online and physical location for the leaseable products they need in that moment. With this new product, our customers are not limited to the roster of retailers that are our active partners, though that line-up is really robust, as you know, with tens of thousands of locations. This technology offers them access to SEMA at their fingertips at most checkout counters just by using the app. And wherever our customers are shopping for durable goods, ASEMA will be ready to meet their needs and give them confidence to take home the products they want with the flexibility of our lease-to-own solutions. ASEMA will complement that GMV growth with a separate yet equally important commitment to customer lifetime value, product profitability, and prudent expense management. The trade-down we've seen in the second half of 2024 helped drive a portion of the double-digit GMV and top-line growth, but those customers are electing the earliest purchase option more often than our traditional customers. This development does have several positive implications, including the ability for SEMA to acquire new and repeat customers for lower costs and to grow the business at a lower loss profile. ASEMA now has a new sizable cohort of customers who understand and appreciate the flexibility and value offered by the lease zone transaction. The ASEMA folks, our team, will work to capitalize on these new relationships by guiding them back to our merchants through our marketplace for subsequent leases and by introducing them to the virtual lease card that I just mentioned. To supplement that work, the ASEMA team will feature to its customers a robust lineup of leaseable products, will remain disciplined in pricing and underwriting with a hyper-focus on maintaining an appropriate expense structure that produces operating leverage as we continue to grow. Our plan for 2025 calls for a step up in those margins, and Femi will cover that in a little more detail here in a bit. Shifting over to Rent-A-Center, unlike ASEMA, Rent-a-Center does not directly benefit from trade-down in a retailer's checkout waterfall, and it's not expanding its overall footprint to new locations. So as we tightened underwriting in the second half of the year in response to performance indicators, that put pressure on the portfolio value. Open lease count and lease portfolio value on a same-store basis are expected to be slightly lower across the first part of the year as the team monitors signs of consumer confidence and performance improvements. In addition to our disciplined underwriting, the recent liquidation sales across certain former competitors have also absorbed a portion of holiday demand for durable goods. We believe that most of those liquidation events are completed and should not impact us moving into 2025. Over our years in the business, our Rent-A-Center team has handled shifting economic cycles and customer performance metrics before and will do what we always do, which is adapt to the needs of our market and our consumers and shift our approach. The pandemic prompted us to strengthen our online channel and our strategy is to continue to focus on web traffic in response to consumer shopping habits. We're focused on continuing to grow the online portion of the RAC business by investing in our e-commerce capabilities to streamline the fixed cost base and make Rent-A-Center more nimble across different cycles. Let me give you an example. Think about the millions of customers that visit us monthly on Rent-A-Center.com. Our focus is to convert more of those visitors into customers, and we're doing that by streamlining and improving the website experience, the checkout process, and the communication with the store. Working with Google, we're eliminating friction points on the customer journey and elevating the shopping experience to greater personalization and on-time offers to the right customers. This includes AI-enabled search functionality to feature the durable goods that are the best fit for that shopper's sourced from over 1,000 products on rentacenter.com. And as our web channel grows, we're evolving our customer identity validation and underwriting tools as well to ensure responsible risk-adjusted outcomes, no matter the customer acquisition channel. The Rent-A-Center team is also deploying an upgraded platform for pricing and promotions, which can deliver unique offers to specific customers for individual products. This next-level targeting will improve personalized more relevant and actionable communications with our consumers, while also helping the business manage its inventory based on real-time metrics like rental status, age, and remaining value of the product. Pretty exciting stuff on the technology side at Rent-A-Center. Now moving to Bridget, we previewed its priorities for 2025 when we announced the deal mid-December, and those goals haven't changed. Bridget's product lineup, which I highlighted earlier, offers our shared targeted consumer a value proposition that really resonates in this economic climate, but also meets a critical market need regardless of economic conditions. The Bridget leadership team will look to extend their growth curve in 2025 by introducing those products to new consumers, including consumers who have interacted with the CMN Rent-A-Center. Bridges' plan for this year also includes testing and learning of new digital products and services in the financial health space. We'll have more fulsome updates on those initiatives as we move across the year. And as a reminder, Bridges' co-founders, Zubin Matthews and Hamil Katari, will continue to lead the team's efforts just as they have since the company's inception. And with such strong leadership across all three of our major segments, I'm very confident we'll be able to achieve the goals I've outlined here and that our combined business will create meaningful value for our customers and for our stakeholders in 2025. Of course, all of these goals are a team effort. I feel so privileged to work with what I know is the best team in our industry. And each day, our colleagues and coworkers across North America take immense pride in helping our customers lead better lives with our innovative and flexible financial solutions. And I'd like to thank them for their passion. and their dedication to the upbound business and to the financially underserved community. And with that, I'll hand it over to Femi.