PROG Holdings, Inc.

Good day and welcome to the Prague Holdings fourth quarter 2023 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation there will be a question and answer session. To ask a question 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 1 1 again. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, John Baugh, Vice President, Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to the Prague Holdings Fourth Quarter 2023 Earnings Call. Joining me this morning are Steve Michaels, Prague Holdings President and Chief Executive Officer, and Brian Garner, our Chief Financial Officer. Many of you have already seen a copy of our earnings release issued this morning, which is available on our investor relations website, investor.progholdings.com. During this call, certain statements we make will be forward looking, including comments regarding our 2024 full year outlook and our outlook for the first quarter of 2024, the health of our portfolio, our capital allocation priorities, including our ability to continue paying a quarterly cash dividend and repurchase shares in future periods, our expectations regarding GMB and the levels of charge-offs and 90-day purchase options in 2024, our expectations regarding the future performance of our other operations, and our expectations regarding consumer demand for leasable items in 2024. Listeners are cautioned not to place undue emphasis on forward-looking statements we make today, and we undertake no obligation to update any such statements. On today's call, we will be referring to certain non-GAAP financial measures, including adjusted EBITDA, and non-GAAP EPS, which have been adjusted for certain items, which may affect the comparability of our performance with other companies. These non-GAAP measures are detailed in the reconciliation tables included with our earnings release. The company believes that these non-GAAP financial measures provide meaningful insight into the company's operational performance and cash flows and provides these measures to investors to help facilitate comparisons of operating results with prior periods and to assist them in understanding the company's ongoing operational performance. With that, I would like to turn the call over to Steve Michaels, Frog Holdings President and Chief Executive Officer. Steve?

Steve Michaels Thank you, John, and good morning, everyone. I appreciate you joining us as we report fourth quarter and full year 2023 results that matched or exceeded the outlook we provided in late October. Today we will cover how Q4 unfolded, how 2023 concluded, our outlook for 2024, some of the strategic initiatives we are implementing to drive our business forward, and our decision to initiate a dividend as a complement to our capital return activities. Last year was another challenging year for both our customers and retail partners. The combination of weaker-than-expected retail traffic and a shift in consumer spending from leaseable categories to consumables and experiences impacted our business. We navigated these headwinds through strong operational execution and gaining balance of share in our top retail partners, while balancing GMV pressures with portfolio management and continued spend discipline. Despite a decline in revenues for the full year of 2023, our gross margin expanded, primarily due to strong customer payment behavior. As a reminder, our portfolio benefited from our decisioning changes made in mid-2022, along with our team's careful monitoring and management of the portfolio throughout 2023, which drove strong customer payments and lower than expected charge-offs throughout the year. The portfolio also benefited from fewer customers choosing to exercise their 90-day purchase option in the first half of 2023. I want to thank our teams for executing at a high level through a volatile macroeconomic and consumer backdrop. Gross margin expansion of 210 basis points, improved write-offs of 6.7% compared to 7.7% in 2022, and a disciplined approach to spending drove year-over-year adjusted EBITDA growth of 41.3 million, or 16.1%, resulting in a 12.4% margin for 2023. Our non-GAAP diluted EPS of $3.67 grew 41.2% year-over-year, as we also benefited from a lower share count due to our share repurchase program. Turning to Q4 and our GMV performance, we delivered a 1.2% increase in progressive leasing GMV, materially above our expectations set in late October when we anticipated a mid-single-digit decline similar to Q3. The GMV pressures of Q3 2023 continued into October, with the month ending down 6.3% year-over-year. The holiday season, however, performed better than expected. resulting in a positive GMV comp for the quarter. We believe this outperformance was driven by a mix of factors, including increased and more effective marketing spend, implementation of various initiatives with our retail partners, slightly higher approval and conversion rates, increased consumer demand for point-of-sale payment solutions, and some signs of trade-down effects due to credit tightening above us in the stack. Notably, we observed strong sales in consumer electronics and smartphones during the holiday season. In Q4, e-commerce as a percentage of progressive leasing GMV was at a seasonal high, representing approximately 20% of total leasing GMV. And we continued to add new e-com retail partners during the quarter through our customizable integrations and plug-ins. We also deepened our integrations with several existing partners, including launching an e-comm cart solution with a longtime top five retail partner. In 2023, we added nearly twice as many new e-comm partners as we added in 2022, which allows us to further our strategy of being able to engage with our customers wherever and whenever is most convenient for them. Entering 2024, We feel good about the health of our portfolio and our cost structure. We continue to make progress against our multi-year strategy to grow, enhance, and expand. To support our grow pillar, which emphasizes our dedication to business development efforts across new and existing retail partnerships, I'd like to highlight a few focus areas across sales and marketing. Within the retail challenge environment of 2023, we grew balance of share with our top partners and continued our track record of renewing key retailers with multi-year exclusive contracts. Our sales team creates value for prospective and existing partners through initiatives that drive incremental traffic and improve top of funnel applications and customer conversion. The team is in a business development mindset across all categories, existing and new, all the time. Our pursuit of new retail opportunities across regional and national brands is an important component of our growth strategy to capture more of our industry's $30 to $40 billion addressable market. Additionally, under the Grow pillar, we continue to enhance our direct consumer marketing strategies through a focus on the customer lifecycle. We invest in top-of-the-funnel marketing channels and brand awareness as a catalyst to scale growth. We also work closely with retail partners to support strategic marketing campaigns to increase new customer acquisition and attract repeat business. Our high repeat customer base, which we nurture with engaging content that builds and maintains relationships, helps us keep a healthy customer lifetime value to cost of acquisition ratio. Our direct to consumer efforts, which we refer to as Prague Marketplace, allow new and repeat customers to shop when and where they want through our mobile app, which has been downloaded more than 4 million times since its launch. We grew the Prague Marketplace materially in 2023, and through continued enhancements this year, we plan to roughly double the GMV for Prague Marketplace in 2024. We view this marketplace as a complement to our retail partner channel, since we already partner with some of the best retailers in the country. but we also have affiliate relationships with other leading retailers through our marketplace, which gives our customers more choice. Under our enhanced pillar, we are leveraging technology to make the journey quicker and more seamless for our retail partners and customers. Our recent technology investments provide more self-service tools to enable a superior retailer experience while helping the customer make the best and most informed choices and offer greater personalization for a streamlined shopping and decisioning experience. Also, a portion of our 2024 technology roadmap is dedicated to continuing our investment in our customer-centric flexible lease platform to support new features for our customers and retail partners. Additionally, under our enhanced pillar, we launched the Prague Labs R&D Group last year to achieve productivity gains within the company and to improve our retailer and customer experience through generative AI. These efforts represent a strategic investment in improving our responsiveness to consumer and merchant needs while reducing costs. In the relatively short period since the launch of Prague Labs, the group has piloted several value-creating solutions within customer support, fraud prevention, marketing, and code cleanup. Under the expand pillar, our multi-product ecosystem continues to empower more of our customers through their financial journey. In 2023, we successfully launched our Build product, which combines the benefits of an installment loan and a secured savings account to help customers build both positive credit history and personal savings. We expect 2024 to be a pivotal year as we leverage necessary infrastructure to further integrate Vive, our secondary credit offering, for our buy now, pay later solution and build our credit building product into our progressive leasing ecosystem. We will also lean into marketing and through our cross-selling motion, believe we will drive incremental leasing GMV. In 2024, through customer acquisition and these cross-marketing efforts, we anticipate that our other operations, which include for and build, will represent the size of a top 10 retailer In terms of the GMV, it will drive for our leasing business. Lastly, we've made good progress on the profitability of our other operations. We expect to reduce the drag on our 2024 earnings from these operations by approximately one-third compared to 2023. And we believe other will reach profitability as we exit the year. While Brian will get into more detail on our 2024 outlook, I'd like to summarize how we're thinking about the macro backdrop going into the year. Similar to 2023, due to continued economic pressures our customers are facing, we believe the headwinds and demand for our leaseable categories will continue in 2024. However, we are optimistic that as the year progresses, the initiatives outlined in our Grow, Enhance, Expand strategy will further offset these pressures. Despite a strong 2023 holiday season, 2024 started off with GMV pressures across many of our retail partners. With trends softening since the holidays in major leaseable categories, an uptick in promotional activity by retailers in an attempt to drive traffic could result in a decline in average ticket size. Q1 is heavily influenced by the tax refund season, which has yet to really kick in. Tax season impacts our business in several different ways, and can have a margin impact due to refunds affecting the level of 90-day purchase activity, but can also have a GMV impact based on the amount of liquidity our customers have. As we understand it, the first large release of refunds will happen this week, but we will not know the full impact of how the tax season will unfold until late March, when most of the tax refund activity should be complete. Our progressive leasing GMV for the month of January was down low single digits, and given the macro headwinds and uncertainty I have been discussing, we expect the quarter to end within a similar range. Even with these headwinds and unknowns as we enter the year, we are optimistic about our strategic direction, growth initiatives, and the health of our portfolio. In terms of gross margin, we have a difficult comparison between this year and last, predominantly in the first half of the year. 2023 benefited from a Goldilocks scenario of lower charge-offs and fewer customers choosing to exercise their 90-day purchase option in the first half, which, based on behavior as we exited 2023, we are not expecting the historically low 90-day purchases from the first half of 2023 to repeat in 2024. Our strategy remains solid across grow, enhance, and expand, with resources in 2024 focused on numerous initiatives across these three pillars. Turning to capital allocation, Prague Holdings Board of Directors declared a quarterly cash dividend of 12 cents per share for the first quarter of 2024 and increased the availability under the company's share repurchase program to a total of $500 million, reflecting our business model's strong free cash flow generation and our ongoing commitment to returning excess capital to shareholders. We intend to pay a cash dividend on a quarterly basis going forward, subject to a number of factors, including market conditions and approval by a board of directors. This dividend initiation is designed to complement our share repurchase program, and our capital allocation priorities remain unchanged, prioritizing reinvesting in the business, followed by M&A and returning excess capital to shareholders. In summary, our performance in 2023 and our ongoing strategic initiatives lay a solid foundation for 2024 and beyond. We are excited about the opportunities ahead and remain dedicated to delivering value to our customers, retail partners, and shareholders. Before I turn the call over to Brian, I want to announce that Curt Doman, co-founder of Progressive Leasing and chief innovation officer and board member of Prague Holdings, will be retiring as a member of the executive team in this his 25th year of service. While he is retiring from his executive position, Kurt will transition to a senior advisor role and will continue as a member of our board of directors. It would be impossible to overemphasize the impact that Kurt has had on both the virtual lease to own industry and on our company. 25 years ago, Kurt and his partner, Brent Wilson, created the industry we now call virtual lease to own with the founding of Progressive Leasing. For the last two and a half decades, Kurt has been the driving force behind the grit and innovation that has helped Prague remain a market leader while creating a better today and unlocking the possibilities of tomorrow for millions of customers through financial empowerment. I want to congratulate Kurt for all he has built and thank him personally on behalf of the entire Prague family for what he has accomplished in his exemplary career. We are fortunate that Kurt will continue to advise and counsel us. He will remain involved in strategy, but his primary focus will be driving Prague's philanthropic efforts, specifically the Prague Foundation and its recently launched Youth Development Center, which was also Kurt's brainchild. Thanks, Kurt. I'll now turn the call over to our CFO, Brian Garner, who will discuss our 2023 financial results and 2024 outlook in greater detail. Brian? Thanks, Steve.