Good morning, and thank you for holding. Welcome to Rent-A-Center's Second Quarter Earnings Conference Call. As a reminder, this conference is being recorded, Thursday, August 6, 2020. Your speakers today are Mr. Mitch Fadel, Chief Executive Officer of Rent-A-Center; Maureen Short, Chief Financial Officer; and Daniel O'Rourke, Senior Vice President of Finance and Real Estate. I would now like to turn the conference over to Mr. O'Rourke. Please go ahead, sir.

Thank you. Good morning, everyone, and thank you for joining us. Our earnings release was distributed after market close yesterday. And it outlines our operational and financial results for the second quarter of 2020. All related materials, including a link to the live webcast are available on our website at investor.rentacenter.com. As a reminder, some of the statements provided on this call are forward-looking statements, which are subject to many factors that could cause actual results to differ materially from our expectations. These factors are described in our earnings release issued yesterday as well as in the company's SEC filings. Rent-A-Center undertakes no obligation to publicly update or revise any forward-looking statements. This call will also include references to non-GAAP financial measures. Please refer to our second quarter earnings release, which can be found on our website for a reconciliation of any non-GAAP financial measures discussed on this call to the most comparable GAAP financial measures. I'd now like to turn the call over to Mitch.

Thank you, Daniel, and good morning, everyone. Thank you for joining us. We will be providing a voiceover to the presentation shown on the webcast that can be found on our website at investor.rentacenter.com. So starting on Slide 3, we're very pleased with our performance in the second quarter, which was significantly above expectations. We marshaled our resources and made extensive changes to navigate the challenges of the pandemic. Our agility, speed, strong execution and investments to support customers really paid off and I believe we are now even better positioned for the future. The safety of our coworkers and customers has remained our top priority. And I could not be more proud of our team for providing our customers safe access to essential products during this difficult period. All of this enabled the company to exceed expectations, growing the top line by over 4% and increasing earnings per share by approximately 33% versus the second quarter of 2019. The Rent-A-Center business increased same-store sales by almost 8% versus last year. And this is our tenth consecutive quarter of positive same-store sales. Consolidated adjusted EBITDA increased 12.6%, and we achieved the highest adjusted EBITDA margin in years. Revenue performance was positive versus last year in each month of the quarter and accelerated throughout the quarter. That's a testament to the critical role we serve for customers, our recurring revenue model and the resiliency of the business model. We feel great about our core assets and omnichannel strength and believe we're well positioned to continue to drive comps as we capture share. Preferred Lease achieved 8% revenue growth and 25% invoice volume growth in Q2 despite extensive store closures in the quarter related to the pandemic. Approximately two thirds of our Preferred Lease locations were temporarily closed due to shelter-in-place orders…

Thanks, Mitch. As you can see on Slide 7, total revenue grew 4.2% in the second quarter versus last year. Adjusted EBITDA increased 12.6%, both significantly exceeded our guidance for each to be down less than 10%. Adjusted EBITDA margin increased 80 basis points versus last year. Non-GAAP diluted EPS rose 32.8% as compared to our guidance of flat versus last year. The solid performance, tight management of expenses and favorable working capital reductions resulted in strong operating cash flow of $207 million, and we ended the quarter with zero net debt. Digging a little deeper into the segment performance on Slide 8 and starting with the Rent-A-center business, same-store sales increased 7.8% with positive comps in each month of the quarter as compared to last year. two-year same-store sales were 13.4% for Q2. Customer payment activity was strong in the quarter, and demand was better than last year mainly driven by higher customer retention. Gross margin in the Rent-A-center business was lower by 80 basis points in the second quarter versus prior year primarily due to higher early payoffs as customers took advantage of government stimulus programs to obtain ownership of lease products. It's important to note that payouts increased without significantly impacting the lease portfolio since demand remains strong, and the portfolio ended the quarter up 4% over last year. Skip/stolen losses for the Rent-A-center business were 3.7%, up 50 basis points versus last year with no incremental reserve adjustment related to COVID-19, given the strong customer payment activity and exceptional execution in the field. For the full year, we still expect skip/stolen losses for the Rent-A-center business to be approximately 4% of revenue, up slightly versus last year due to growth in e-commerce. As Mitch mentioned, we came into the quarter with an aggressive plan to mitigate…

[Operator Instructions] Your first question comes from Vincent Caintic from Stephens.

Thanks, good morning. Great quarter. Starting off with Preferred Lease. So just two questions here. So first on the write-offs, and thank you for the breakup between the COVID-related impact and the non-COVID-related impact. Even with non-COVID just being up 15.4%, the year-over-year jump, just wondering if you could maybe talk about – of that. And then maybe give an outlook for like July and August, what you've experienced so far. And then for the 25% invoice volume growth, very strong there. Also wondering if you could separate out by maybe same-store sales invoice volume growth versus the benefit from the acquisition of Merchants Preferred.

Sure, Vincent. Well I'll take the last one first. The 25% invoice volume was both organic and because of the Merchants Preferred, the organic was about 5%. So it did pretty good with the – on the organic side with the stores being closed a good part of the quarter, maybe not quite half the quarter, but close to half of the quarter, over two thirds of the stores are closed in the organic growth, mostly out of that staff model, right, because that's the organic part, was still up about 5%. So very strong and obviously then accelerated after that. On the losses, the – besides the COVID or let me address the COVID first. And we really – I'll address this a couple of different ways. We really see it as a onetime anomaly. We do see the losses normalizing in the back half of the year. The current collection metrics are very positive. One of the things that happened to us, you noticed in our prepared comments or in the press release, our losses in the Rent-A-Center business were not impacted by COVID. And actually in our virtual business, they weren't impacted either. The staff business with all those locations being closed, on the staff side, close to 80% of our stores at one point were closed, and we were doing collections only out of those locations in the past. In the context our call center only did collections for the virtual after we bought Merchants Preferred last summer. While – so the local collections was gone overnight basically, and that drove the high losses in the quarter. We switched to using the contact center, the call center, in Atlanta to do the collections for us, but that took a little bit of time to convert over.…

And I would just add that the better comparison would be the sequential change because with the acquisition of Merchants Preferred, it changed the mix, the virtual versus staff. And so in the first quarter, we were at around 12% losses. And as we mentioned, at the beginning of the year, we expected it to be around 12%. So I would compare it more sequentially than year-over-year. We also didn't take any reserve adjustment in the first quarter. I know a lot of companies ended up taking reserve changes within that first quarter. And we expect the skip/stolen preferred lease numbers to be 12% to 13% in Q3 and Q4.

Okay. Perfect. And that's very helpful color. I appreciate that. So very nice forward look on that. The second question, Mitch, you made a comment about M&A. And I'm kind of curious on what you might be thinking of there in terms of is it technological maybe add-ons? Is it stores or maybe other players who might be weaker coming to market just – or a combination? Just sort of wondering what your thoughts are there.

Yes. I wouldn't comment any more specifically as you would guess than would have already said. But I think there could be some opportunities going forward certainly with our balance sheet. And my guess would be – or the only added color I'd say is really we're talking probably more on the preferred lease side to accelerate our strategy there than we are on the brick-and-mortar side.

Thanks very much. That’s very helpful.

Thanks Vincent.

Thanks Vincent.

Your next question comes from Bobby Griffin from Raymond James.

Good morning everybody. Thank you for taking my questions. I hope you all are staying safe and healthy. First, I want to ask about Maureen just real quickly on the guidance. Is the guidance assumed around four stimulus? And if we do end up getting to round four, can you maybe just help us understand how that might impact some of the back half numbers for us in our model?

Sure. So we did not assume additional stimulus. From what we saw in the second quarter, it did drive higher payouts. It drove better demand mainly through customer retention, higher customer payments. And with the guidance that we provided, we assumed a more normalized level of those metrics. So if we were to see additional stimulus, which seems pretty likely based on the discussions taking place so far. But if we do see that, we should be towards the higher end of the guidance ranges that we provided.

Okay. Very helpful. And Mitch, in your remarks, you mentioned the potential of landing a national account there for Preferred Lease. Just curious if that does come to play. Is the scale of the organization kind of builds up and ready for that? Or would there be a round of investments on the SG&A or the cost side that we would need to have as you ramp that account up?

I think we're ready for it. It'd be primarily in the virtual space anyhow, which is obviously easier to scale up than we're growing the staff. And so we're ready for it. From an infrastructure standpoint, it doesn't mean you don't have a $1 million expense somewhere along the line. But I mean from a material standpoint, we're ready for it. And then I'd add, it wouldn't be foreign to us either. While we don't have some of the biggest overall names in the country, we've had national accounts for quite a while on the furniture side. If you think about Rooms To Go pretty national, Bob's Furniture, Ashley, the Value City chain. So we've got some national accounts. Those are primarily staffs. So those are already geared up more than what would come from a virtual. Although a virtual national account could staff some stores, the higher volume stores, and that's one of our differentiators, right, as we could staff during certain periods of time or just some of their higher volume stores, high volume meaning demographically fit for us. Higher volume, maybe more subprime volume. So we're used to having to staff up for national accounts versus just doing most of it virtual.

Okay. And then lastly from me, just on the organic portion of the Preferred Lease. When you look at kind of your customers, are you seeing better ticket growth? Or is it a combination of tickets are going up and you're also gaining more customers? So you're seeing penetration inside your accounts just move higher with what's going on in the world.

The latter, just more penetration with tightening credit, certainly, strong furniture demand as well from a retail partner standpoint. But with the tightening credit, we're getting a higher quality customer coming in and more of them coming in, which means we can also tighten up on the bottom end of our decisioning. Vincent was just asking about losses. So it allows us to tighten up on the bottom end of the decision engine because more is coming in on the top end anyhow. So it's a really great combination for us.

Okay. That’s really helpful. I appreciate answering my questions. Best of luck for a great quarter.

Thanks Bobby.

Thank you.

Your next question comes from Anthony Chukumba from Loop Capital Markets.

Thanks for taking my questions. Congrats on the strong quarter. So I just wanted to – my first question. I just wanted to clarify something in terms of the increased skip/stolens in Merchants Preferred. So it sounded like what you're saying, I just wanted to make sure I understood this. Because all these retail partner stores were closed and the collections were being done in the retail partner stores, the skip/stolens were higher, but now you're switching to centralized collections to the call center. And so that's going to be a long-term benefit because you're centralizing those. I just want to make sure I understood that correctly.

Yes, and remember, we're talking about when the retail partner is closed – we're talking about staff locations, a retail partner closing where we're in there virtually didn't change anything as far as collections. But when the staff stores closed and we furloughed the people that were working out of those stores, then that was a big change to then take the collections from staff to virtual. And it took us a while. I mean we weren't collecting the next day from a technology standpoint. We didn't have the ability to start collecting the very next day from our contact center because they are different systems, and so forth. So it took us a little while causing the blip – that we did not see any blip, obviously, in the Rent-A-Center side or the virtual Preferred Lease side. So again, the resiliency of a lease versus the sale. But we did see the blip in staff because our collections went away for a while until we got converted over to contact center. So that caused a blip. But now we found that we can run just as good metrics, actually better metrics today, by running out of the contact center, and that has the long-term benefit.

Got it. And I just wanted to confirm. But now when the stores are reopened, we're not going back to having the people in the store to do the collections, right? It's just centralizes the way we're going forward.

Less people went back into the stores that's the labor savings. People still went back in to staff stores to handle the sales. But we didn't...

But they're not doing collections, that's what – I'm asking about collections, specifically.

Correct. Correct.

Okay, okay. I just wanted to clarify that. Thanks so much. Keep up the good work guys.

Thanks Anthony.

Your next question comes from Kyle Joseph from Jefferies.

Hey good morning. Thanks very much for taking my questions and I definitely echo the sentiment of others, congratulations on a good quarter and very impressive you guys were able to reinstate guidance, despite everything that's happened so far in 2020. I want to start on Preferred Lease. You talked about your long-term revenue growth outlook there. I just kind of want to get a sense for how you foresee EBITDA margins trending over time. I appreciate the color you provided on the EBITDA margin in the back half of the year. But just as we – as the business ramps towards $1.3 billion of revs over the next few years, how you see EBITDA margins trending?

Yes, Kyle, we expect EBITDA margins of approximately 10%, as we mentioned, in the back half of the year. And then as we scale up the virtual business, we expect to increase those margins to 12% to 15% over time. As we increase the revenue, there's been the investment in the technology and the infrastructure. So as we scale up the business, we expect pretty significant margin expansion within that business to continue.

Got it, very helpful. And then one other on Preferred Lease, can you guys talk about the pipeline and pipeline conversion given we're approaching – well, not really, but it's been less than a year since you've integrated the business, but give us a sense for the pipeline there. And then any changes in demand from retailers for the virtual rent-to-own products given the COVID disruption?

Sure, Kyle. And good morning. Yes, pipeline is strong. As you would imagine – with credit tightening, those who don't have a lease-to-own option in their store or even those who do are looking for gains in that category as things tighten above them. Depending on the category, there's demand there. But it's tougher to get people approved. So I'd say our pipeline is better today than before the pandemic for those reasons, both at local, regional and national levels. So it's really exciting. And like I said that – looking for lease-to-own opportunities that they don't already have one or even if they have one, because our – we have a differentiator in the fact that we're the only one out there that does business with the unbanked customer. We can add volume to retailers that even if they already have a lease-to-own option because we have the highest approval rate in the industry when you consider the fact we do. You don't have to have a bank account with us to get approved. So very strong pipeline.

Got it, I appreciate that. And then one last one from me, probably applies a bit to both the Rent-A-Center business and Preferred Lease. But just in the – in terms of the early buyout activity, can you give us a sense of the cadence of that in the quarter? Was it heaviest in April? And did it kind of wind down towards the end of the quarter? Or did it remain elevated throughout the quarter?

Yes, I mean it was probably – I don't know if you look at it on a month-by-month basis, it was heavier in April because the stimulus started in the middle of the month, right. The first – that big first deposit was April 15. The irony of the stimulus being on tax day is probably why I remember the date. But the April 15 – or at least what used to be tax day, I should say – but April 15. But yes, they were stronger at the beginning of the stimulus than at the end. The good news for us, if you think about – if you want to think about impact of the stimulus, you think about the Rent-A-Center business with the portfolio coming into the quarter somewhere in the 3% range ahead of the year before, and then round about 8% same-store sales. But the end of the quarter, that segment ends the quarter 4% ahead in the portfolio. So if you think about the stimulus impact when – normally in the first quarter with – when we have – except more EPOs from tax returns, the portfolio goes down. And in this case, the portfolio gain year-over-year actually went up. So the demand certainly offset it from a portfolio standpoint, more than offset it from a portfolio standpoint plus the extra revenue from the EPO. So it's a great combination. And then on the Preferred Lease side, as Maureen mentioned, that portfolio ended up 15% year-over-year as well. So the payouts brought in extra revenue, but didn't hurt the recurring revenue going forward. But because – obviously, that particular payout here, but the demand offset it in our portfolio was bigger at the year-over-year anyhow at the end.

Understood. I appreciate that. Thanks very much for answering my questions.

Thanks Kyle.

Thanks Kyle.

[Operator Instructions] Your next question comes from Brad Thomas from KeyBanc Capital Markets.

Hi, good morning Mitch. Good morning Maureen. A couple of questions for you if I could. First, I wanted to just ask about – thinking about the guidance. As you weigh some of the more important factors behind the second half of the year here, what do you think is most important as we consider perhaps the low end of the range versus the high end of the range?

Well, I think executing our basic program is always important from a sales standpoint, collection standpoint, growth standpoint on the Preferred Lease side with more and more demand for the lease-to-own transaction and retail partners. I think Maureen mentioned it that there's no stimulus figured into our guidance. And additional stimulus, of course, it depends what shape it takes, but additional stimulus probably takes us closer to the higher end of the guidance in – so I don't know. I mean honestly, I don't know what would take us to the lower end, quite honestly. As you can imagine, when people give guidance, it's a range because normally, you're in the middle there somewhere. But I think there's upside with another stimulus. And I mean downside would have to be where we didn't execute. And I certainly don't see that. The team is executing so well because even – and we get asked that question all the time, well, if there's another shutdown, look at the losses in – you could say, look at the losses in Preferred Lease in second quarter when that happens again. Certainly, I don't think anybody expects that kind of shut down because we saw the – we saw what happened to the country when we did that before. But in the worst-case scenario, even if they were to happen, we've already made that switch on the staff locations to the contact center. So we wouldn't have that same kind of blip from a loss standpoint that I was describing earlier. So quite honestly, Brad, I don't know anything that would get us to the downside. It's a range for a reason, though, because obviously, we don't know everything. There's still a lot of uncertainty out there. But I think there's upside if there's in those stimulus is the best way to answer the question.

That's helpful color. I appreciate it. And then a topic of great interest in the industry right now is one of your competitors deciding to split its store and direct businesses. I was hoping you could maybe talk to how you think about the synergies that come from owning both businesses versus perhaps the potential longer term to split them off. Thanks.

Yes, thanks Brad. As you know, we're in the early phases of our growth in the virtual retail partner business, right? And we expected to add significant long-term value. So at this point, we're in that earlier phase of growth as compared to the company you're referring to that's splitting that. Now when it becomes a larger part of our business, could that be an option for us down the road? Certainly, it could be. But right now, we're – Preferred Lease is benefiting from the high cash flow of Rent-A-Center. And that makes sure we have ample capital for all of our growth initiatives by keeping them together. But down the road, like I said, when we're past that growth curve, and that's a bigger part of our business in the brick-and-mortar, maybe – well, I mean, we'll see how it works for the other company and see how the valuation changes over time, and that will inform our decision down the road, too. So we certainly wouldn't say that we'll never do that. Well it's certainly not the right time for us, but could it – it's a possibility down the road. We'll see how it works for the other company.

That’s really helpful. Thank you so much Mitch.

Thanks Brad.

Your next question comes from Tim Vierengel from Northcoast Research.

Good morning and thank you for taking my questions. It sounds like everything – a lot of really good news on the demand side of things. We've heard some commentary from both manufacturers and other retailers, appliances and furniture, that there have been some supply chain disruptions, and those are expected to continue over the next six months to a year. I was wondering if you guys could comment on any disruptions you guys might be seeing and how you're handling that or if you're not seeing anything at all.

Thanks, Tim. We've had certainly a little bit. It's gotten better for us. I don't see it as a six-year to one-year issue. I think it's getting better already. And one thing I'd point you to, Tim, is in the press release or the balance sheet or the held-for-rent numbers that I don't know how much that people pay too much attention to the held-for-rent or the on rent balance sheet numbers. But what you you'll see in there is the held-for-rent in other words our inventory levels that are in the stores, the idle inventory levels, are down about 20% year-over-year, which is certainly not catastrophic to the supply – to our rental. It's like $107 million, Maureen, just give me the numbers now because I didn't have them in front of me, $107 million down to $85 million year-over-year. So about 20%, means we have less inventory. But 20% for a retailer doesn't mean you're – it's hurting the business. We got enough of a buffer there. And we want to get that 20% back up. And I see it happening over the next 90 days, not six months to a year from our supply chain people we talk to and our suppliers. So it's down a little bit. We wish we had that 20% back in the stores, but it's not like it's down 50% or 60% where it hurting the business. And it's already starting to climb back up. We're seeing in the last couple of weeks, it climbed back up. So I think it was a pretty minor blip for us, and we don't see this as an issue going forward.

All right, thank you.

Thanks Tim.

And that concludes our call. I will now turn it back over to Mitch Fadel for final comments.

Thank you, Michael, and thank you, everyone, for joining us today. We appreciate your support. And mostly, I want to thank our coworkers out there that have done such a tremendous job serving our customers and doing it safely, thank our franchise partners and our retail partners, we couldn't be putting these strong results together without all of you. And again, a special thanks to all of you. And thanks for those of you on this call who joined us this morning. We appreciate your support, and we look forward to continuing on delivering these strong results for you. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.