Good day and thank for standing by. Welcome to the Rent-A-Center’s Second Quarter 2022 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. [Operator instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Brendan Metrano, Vice President of Investor Relations. Please go ahead.

Good morning, and thank you all for joining us to discuss Rent-A-Center’s results for the second quarter of 2022. We issued our earnings release after the market closed yesterday. The release and all related materials, including a link to the live webcasts are available on our website at investor.rentacenter.com. On the call today from Rent-A-Center, we have Mitch Fadel, our CEO; and Maureen Short, our CFO. As a reminder, some of the statements provided on this call are forward-looking statements, which are subject to factors that could cause actual results to differ materially from our expectations. These factors are described in our earnings release, as well as in the company's SEC filings. Rent-A-Center 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 our second quarter earnings release, which can be found on our website, for a description of the non-GAAP financial measures and reconciliations to the most comparable GAAP financial measures. With that, I'll turn the call over to Mitch.

Thank you, Brendan and good morning, everyone, and thank you for joining the call today to review our first quarter results. On today's call, I’ll begin with an overview of second quarter performance followed by our plans for the remainder of the year and some perspective on the external environment and then Maureen will provide a more detailed review of our financial results and of course we'll finish up with Q&A. While second quarter trends are down compared to stimulus enhanced 2021 results, we are encouraged by the performance of the business in the second quarter given the very different and more challenging macro environment we're experiencing this year. Second quarter financial results were strong relative to the quarterly guidance we provided in early May with revenues at the high-end of the range and adjusted EBITDA and EPS above the high-end of the respective ranges. We also delivered on business objectives over the first half of the year, optimizing Acima’s underwriting, maintaining year-over-year portfolio growth for the Rent-A-Center Business segment, and managing costs to help out offset the profitability headwinds from the challenging environment. While we executed well in the areas of the business that we could control, external factors like inflation and economic growth and discretionary income worsened during the first half of the year. As the second quarter progressed, we began to see indications that macro weakness causing lease volumes and payment behavior to trend below our assumptions for the second half of the year. These trends have continued and it became clear that if the current weak environment continued for the rest of the year, we would not achieve the full-year 2022 financial targets introduced back in February. As a result, we've lowered our full-year 2022 financial targets and now expect full-year non-GAAP earnings per share of…

Thank you, Mitch. Second quarter revenues of 1.07 billion decreased 10.3% year-over-year due to cycling over strong results from the prior year period that included a significant benefit from stimulus programs, lower lease volume in the current year for Acima due to tighter underwriting, and the effects of lower discretionary income for consumers in the current year. Compared to 2019 pro forma revenues, which is a more normal baseline, second quarter 2022 revenues were up approximately mid-teens. The year-over-year decrease was evenly split between merchandise sales and rental and fees revenue. Merchandise sales revenues were down 27% with fewer customers electing early payout options, compared to the prior year when many customers had built up savings and had additional income from stimulus programs. With the wind down of stimulus in the second half of 2021 and the current high rates of inflation, savings and discretionary income are now likely below pre-pandemic levels for many of our customers. Rental revenues decreased 6.4% year-over-year, but were also up approximately mid-teens compared to pro forma 2019 rental revenue. Most of the year-over-year decrease in rental revenues was driven by the Acima business with the Rent-A-Center Business segment down less than 1%. Consolidated adjusted EBITDA of 128.9 million was down 31.1% year-over-year in the second quarter, but was above the quarterly guidance range. The primary contributors to the decrease were lower revenues, higher provision for delinquencies for Acima, higher loss rates, and higher operating costs, notably labor and fuel. These were partially offset by cost control measures and lower performance based compensation. Sequentially, second quarter adjusted EBITDA was up 29.5%, compared to the first quarter driven by a 515 basis point improvement in Acima margins that benefited from a reduction in the provision for delinquencies, lower loss rates, and better than expected performance on…

Thank you. [Operator Instructions] And we’ll take our first question from Jason Haas from Bank of America. Your line is now open.

Hey, good morning and thanks for taking my questions.

Good morning.

Good morning. The first is on – I know you're not providing any guidance yet for 2023, but conceptually, if the economic environment remains the same, should we expect to see growth in revenue and EBITDA just from a continued reduction in loss rates?

Year-over-year from an EBITDA perspective, yes, we should expect to see benefits next year because of the higher quality portfolio. In the front half of this year, as we've talked about there is a drag from lower performing leases that were written into the portfolio before we tightened up in late 2021 and early 2022. So, definitely there should be a profit step-up next year given the loss rates.

Great, thank you. And then as a follow-up, I wanted to focus on the Rent-A-Center Business EBITDA margin. So that's been up – I think it's almost double now over the past few years. I know it's – that acceleration started before the pandemic, but just as we're in a tougher economic environment, I know you reiterated the long-term target for 20-ish margins there. I think there's some concern that just in this environment we could see revert back to historical levels. So, can you just explain what gives you confidence that you'll be able to maintain those margin levels?

Sure, Jason. This is Mitch. The biggest reason is the difference in the portfolio size, the way it's grown really over the last four years, including the pandemic. And in fact, as we mentioned, the portfolio actually ended the second quarter sequentially up and by about 1%, about 2% year-over-year. So, the portfolio holding up is what drives those margins based on pretty much a fixed cost business. We have some labor fluctuation. Wages are up a little bit. Actually, [ours] [ph] are down a little bit because of technology in auto pay and things like that. So, that offsets some of the labor rate pressure, but it’s really the size of the portfolio continues to perform well. It doesn't have to keep growing to maintain those margins and we don't see it dropping with, especially in this environment as people trade down we think the Rent-A-Center business in the second quarter really so far this year is outperforming retail already, seeing a little bit effects of trade down there like I mentioned in my prepared comments. We believe we are at least and there is some slight indication of that in the numbers that the clarity scores, if you will, that come into our decision engine. So, we're seeing at least the start of some trade down on the Rent-A-Center side and – but regardless of what it's – the short answer to your question is, it's a portfolio that has grown very well over the last three or four years, almost five years now. And that drives the higher margins just with the revenue because the costs don't go up much. Remember, we're starting with a lot of gross profit in the 70% range. So, when you get top line, consistent top line and against the portfolio, so it doesn't fluctuate a whole lot. When you get that portfolio up, you're going to get some good EBITDA margins when the gross profit is 70%.

And Jason, just to add to your question, I think you asked about this general trends for 2023 and I addressed the losses expectations for next year. There is some pressure on 2023 revenue given the lower GMV that we're seeing this year in the Acima business and lower collections as we stated in our lowering of expectations for this year. So, there's still a lot of factors that play for 2023 and we won't give consolidated guidance for profits or revenue until really the beginning of next year, but from a loss rate perspective, should see more normalization as we've worked through lower performing leases through the portfolio.

Got it. That's helpful color. Thank you.

Thanks, Jason.

Thank you. And we'll take our next question from Bobby Griffin from Raymond James. Your line is open.

Good morning, everybody. Thank you for taking my questions. Mitch and Maureen, I wanted to first just [kind of ] [ph] high level, but it really appears that the store business is holding up a lot more resilient in this kind of economic environment than the virtual business. And I understand the comparisons are different and some things, but the overall customers is fairly similar between the two. So, just curious why you think that's the case, why the core Rent-A-Center stores are holding up better? Is it just the legacy aspect of it that they've been around customers know them or just anything there to help us kind of understand what we can think about if things do improve what might happen with the virtual side of the business?

Sure, Bobby. I'll start and then if Maureen has anything to add, she can. I think the biggest difference in the two is Rent-A-Center is a standalone business whereas the retail partner business, Acima, relies on the retail traffic. And we get a certain percentage of that retail traffic, right. So, if all of us do all of our competitors as well, we get a percent of that retail traffic. So, in retail traffic, it's down, you know you look at numbers that are down 15% same-store sales, kind of numbers and some of the larger retailers out there 15%, 20%. But they're traffic is down even more, right, because they've got some ticket, especially in household durable goods when you look at some of those companies. So, when traffic is down that much and you get a percentage of that traffic like in Acima, let’s say for instance, pick a retailer and say we get – we end up with 5% of their business or 3% of their business or something, let’s say traffic is down 30% or 40%. Even if you have some trade down and you go up to from 3% to 4% of the business, you're still going down overall. Rent-A-Center, conversely, where is that 4% of the traffic that's down is, I'd say the large box furniture store, 30% of the [traffic] [ph], where are they? Certainly there was some pull forward, but where are they when they need something today if they're not going in the retail store? And if you get just a few percentage of that traffic going into Rent-A-Center, because there's so much more traffic in a retail store, so, you think about a large box retail store as one of the big furniture stores, if they – if you can get a couple of percent of what's not walking in there, that's going to drive an awful lot of business to Rent-A-Center, right, because Rent-A-Center is so much smaller than all of that retail added together. So, I think the short answer is, you got – you're not relying on retail traffic to drive your business and when reach out traffic is way down, some of it's obviously – we believe is going over to Rent-A-Center and it only takes a little bit for Rent-A-Center to grow because Rent-A-Center is so much smaller of that whole retail price. So, you get a little bit of that going towards Rent-A-Center and you're going to have some difference in performance. Now, having said all that, in a team of business on a two-year stack basis, up 19%. So, we don't see the today's headwinds as fundamental issues. The business is still there as retail traffic picks back up.

All right. That's helpful. And then I don't know if you – I know visibility in each of the retail merchant partners is tough, but when you look in or kind of get the commentary, are you seeing retailers emphasize the virtual product more? Are you seeing – is there a way to see if you're mixing up or hypothetically you're 2% of the business and now you're 3% of the business? Do you get that type of visibility where you could see the product gaining more traction in this tougher, kind of economic environment?

It depends on the retailer, some do, and not all of them, but some do. So, we certainly see that from a pipeline standpoint, and I mentioned bringing in a top executive from Synchrony to run our Enterprise business. As we continue to add, our team were really excited about him starting later this month, but when you think about – when we look at our pipeline, there's certainly more interest for the reasons you just spoke about in [lease on] [ph] than it was during the pandemic just because people couldn't fill all the orders they had in the first place during the pandemic, so why worry about another payment stream. So, there's more interest there in that. As far as the ones we already have, yes, it depends on the retail, some emphasize it more, but not all of them.

Okay. And then lastly for me Maureen, I think you mentioned that you guys are forecasting a sequential improvement in the GMV performance in 4Q versus 3Q in, kind of the first half trends, just curious the underlying fundamental drivers of that improvement in the fourth quarter?

Sure. We tend to see increases in seasonality in the fourth quarter relative to the rest of the year. So, we're basically using our portfolio at the end of the second quarter and forecasting some improvement in seasonality.

That and the – the third quarter, Bobby, really, I mean, the comps start – we start comping over much different numbers, the 43%, we just had the comp over and then the third quarter, I don't remember it off the top of my head, but the comps go down with 19% in the third quarter and then the fourth quarter was like 5% or something. So, you start comping over easier numbers as some of the simple math on it, as well as what Maureen was mentioning.

Okay. I appreciate the details. Best of luck here in 2H.

Great. Thanks, Bobby.

Thank you.

Thank you. And we'll take our next question from Kyle Joseph from Jefferies. Your line is now open.

Hey, good morning. Thanks for having me on and taking my questions. Staying on Acima for a second, just regarding the GMV contraction, obviously, there's a lot going on, but can you give us, maybe even a ballpark of how much you think of that contraction is underwriting changes versus more macro? Just trying to get a sense for the lift you guys may get into first quarter 2023 really as we lap those underwriting changes?

Yes, I think, hard to break down the exact number, Kyle, but certainly the retail traffic is a big part of it. It's not – I would say that's the – if you split – if you were going to try to split them down the middle, the retail traffic versus the underwriting, I’d lean a little more towards the retail traffic even than the [underwriting out] [ph]. You could just about [split them] [ph] down the middle, but again, I think it's probably more the retail traffic than the underwriting. It's not like our underwriting is tighter by 20 points or anything like that. So, it's certainly as we lap the underwriting stuff and the comps get easier. It'll get us into that flattish range, but certainly as a retail traffic, the retail traffic needs to pick up for us to get back to what we talked about our long-term goals of double-digit growth at Acima.

Okay, got it. And then it sounds like you're still able to add a lot of partners at Acima, can you give us a sense of, kind of the channels and the verticals of the retail partners that you've been adding and then also talk about conversation with retailers and whether there's improved demand for having the lease to own products for retailers that do not have it yet, given the challenging environment?

Yes, you're right. On the smaller business level, small business level, regional level, that continues to be very strong as we mentioned 15% year-over-year growth continue to sign a lot of good accounts. There are some larger good year accounts and City Furniture recently, down in Florida, we talked about P.C. Richard’s a couple of quarters ago. So, we continue to sign some good accounts and then a ton of accounts you have never heard of, much smaller ones. And that's going well. And as we see the pipeline increasing on the enterprise side as we see more interest in people trying to figure out now that the supply chain pressures have eased so much and people actually have more supply in a lot of cases that they're looking for other avenues. And so, the pipeline is strong. There is more interest, we're investing in the team adding to the team we already have by bringing in the executive I mentioned earlier. So, we're strong at the local regional level with our sales programs and getting stronger on the enterprise side. And by adding some to the team, once we have enterprise clicking, as well as we have the local sales going, it's going to be even bigger growth.

Got it. Thanks. Thanks a lot for answering my questions.

Thanks, Kyle.

Thank you. And we'll take our next question from Brad Thomas from KeyBanc Capital Markets. Your line is open.

Hi, good morning. Thanks for taking my questions. Wanted to focus first on one of the bright spots here and the 15% growth in active door count and hoping you could add a little bit more color on categories that you're seeing growth in and perhaps also some perspective of the size of these incremental doors and if they're the kind of partners and doors that could be meaningful or if they're smaller cell phone kiosks and [malls] [ph] kind of things?

Yes, it's a mix. It's primarily – the two biggest categories of our growth are in furniture and at [wheel and tire] [ph]. I mentioned Goodyear, a lot of Goodyear stores are on our program now. There continues to be local furniture stores signing up. As far as meaningful, I think it's not like one big national account that you would factor into the business, but everybody gives us a little more business every month. So, we're happy to be up year-over-year at a pretty good number of 15%, but back to the category issue. Again, primarily furniture will [indiscernible] a little bit of jewelry addition, would be the third largest category we're adding.

That's great. Thank you, Mitch. And then just a housekeeping item on the Acima losses, I think you said in the second half of the year, you're looking that to come in the 8% to 9% range. Obviously, at least for 4Q that would set you up for lower [Technical Difficulty] but curious how you're thinking about it in the third quarter and if we're, kind of getting through this [picking the pipeline] [ph] dynamic in the third quarter and if we're, kind of getting through this, [picking the pipeline] [ph] dynamic on the losses from your perspective?

Yes. We did say Brad 8% to 9.5% for the second half of the year. We are, kind of working the lower performing leases through the portfolio. We'll see a step down in losses in the third quarter and then fourth quarter similar rates may tick-up a little bit in the fourth quarter relative to the third, just given the tougher credit environment, macro environment, but yes, 8% to 9.5% for the back half of the year for the Acima segment. And a lot of that really is as we talked about working as lower performing leases through the system with the tighter underwriting, the leases that we've underwritten since the tightening are much more in-line with historical averages. Now that cost us some GMV, but the quality of the portfolio is much better than it was late last year.

And Brad, when we had the underwriting issues late last year. And we said it would take two quarters for the – to use your term picking the pipeline, we said it would take two quarters. And sure enough, we're seeing that. Now, you'll see that – I think one of your points is, [indiscernible] 11.6 to 8% to 9.5%, is that really doable? Remember, we've been saying that it would be two quarters to get rid of those leases to play out. So, it's consistent with what we've been seeing. And in fact, they performed a little bit better than we had forecasted and that was the majority of the beat actually in the second quarter.

That's great. Really helpful. And if I could squeeze one last one in, I was hoping you could talk a little bit about just leadership at Acima and how the, kind of overall integration of Acima is going. Obviously, Aaron has taken over more recently. Aaron obviously served Acima when it was independent. Just hoping you could talk a little bit more about how that team and leadership and strategies have evolved here as Aaron has taken back over?

Yes, good question. And one of the things we focused on is building that team, right, rather than just be relying on the founder who's got a window that, as far as how long he's going to be with us. So, we got to build as a team, right? And building around like a Chief Operating Officer, Reed Farnsworth; our Chief Development Officer, [indiscernible] just bringing in [Mike Bagull] [ph] who I just mentioned, as well as brought back a top technology person Ryan [indiscernible]. So, a lot of – building the team is really the focus and not just to be focused on one person. We're certainly happy to have Aaron back and more involved. The underwriting improvements we're talking about are all due to him coming back and he's got a great person [in Stuart] [ph] and a great team with Stuart and everybody else on that team. So, it's more about – as we think about who are the key 10 people are out there and so forth. So, we're in much better shape and all that from an integration standpoint to answer your question than we were three or six months ago.

Great. Thank you so much.

Thanks, Brad.

Thank you. And we'll take our next question from John Rowan from Janney. Your line is open.

Good morning.

Good morning.

Good morning.

Mitch, you talked a lot about last recession and how it actually helped the Rent-A-Center Business. You didn't have Acima then, I'm wondering as a leading indicator here with Acima, do you think, kind of that trade down in credit that happens for the consumer? You see that faster as our participant in broader waterfalls at other retailers, meaning you'll see the [FICO bands] [ph] change of people applying for credit through Acima in this cycle, relative to the last one?

I do believe that will happen on the Acima side as well. I think it's a little slower. To see on the Acima side, as we talked about earlier, with the way the Rent-A-Center Business has held up better, because the retail traffic is so far down. So, it's hard to see. If you could get a 5 point swing in trade down and it'd be hard to see today based on the way retail traffic is and some of the – especially in the furniture side of things, but as the pull forward [indiscernible], let's say going into 2023 as you have that pull forward, kind of being less of an issue in the furniture business than – and you have trade down, I think that's where things will start to get – you'll start to see it on the Acima side just like we're already seeing it on our Rent-A-Center side. So, yes, I do believe it's going to happen. We think there's already some of it happening on the reinsurance side, but like I said, we're going to – overall, I mean, the traffic in some of these retail stores has to bounce back for the Acima business to get back to positive GMV growth.

Okay. And then just maybe two housekeeping questions for Maureen. What was the interest expense guidance that you provided? Can you repeat that?

Well, we said the interest expense was going to be about a $0.10 impact, so higher by about $0.10 in the back half of the year relative to the front half? Yes, it's about 8 million to 10 million higher. So, the interest expense we expect to be around 22 million in the third quarter and 25 million in the fourth quarter.

Okay. And can you just remind me how much of your corporate overhead is allocated to Acima?

There are some expenses allocated to the different business segments. If we can attribute them directly to the business. However, there is a good deal of corporate costs that are in the corporate segment. So, things like, for example, the call center is in the Acima segment. The sales team, but then some of the IT expenses are in the corporate segment. So, any kind of overhead from a headquarters perspective is mainly in the corporate segment.

Okay. All right. Thank you.

Thanks, Justin.

Thank you.

Thank you. [Operator Instructions] And our next question will come from Carla Casella from JPMorgan. Your line is open.

Hi, good morning. This is Mike on for Carla. One of the ones we wanted to ask was that skips/stolens for the Rent-A-Center core side was a little bit above your typical range, I think it was 4.2% and you guys got something a little bit lower than that. Can you say how that trended month-to-month within the quarter? And do you see that as, kind of the peak?

Do you want me to take that?

Yes.

So, for the Rent-A-Center segment, it did come in at 4.2%, what we've seen the last – what a normal rate looks like is about 3.5% to 4% so just slightly over. We don't typically look at the numbers on a monthly basis. At the end of the quarter, we do basically a reserve adjustment based on portfolio. And that reserve adjustment resulted in us going slightly above the 4%, which is the high-end of the range. So, because of the higher or the tougher collections that we've seen in the Rent-A-Center segment, we did expect to or it did end-up being higher than we expected in the second quarter and we've factored those trends into our guidance.

Okay. Thank you. And then another one was, you guys alluded to it earlier, but it feels like the foot traffic at your Acima partners is a little bit different than, kind of the traffic you're seeing at your core Rent-A-Center stores. I mean, I don't know if you guys quantify the gap or how do you compare it qualitatively or quantitatively, whatever you can provide?

Yes. Just say, when you think about Rent-A-Center having 38% more e-commerce business than a year ago, we don't have too many retail partners that are even up in traffic, let's call it, let alone up 38%. So, I think the traffic – again, the numbers are much, much different, much, much smaller, as far as the number of people nationwide that going in a Rent-A-Center versus all furniture retail, but – so when you get retail traffic, you get some trade down, you get 2% trade down out of a huge retail number going into a small number like Rent-A-Center and it can make a difference. So, I think the traffic is much better there. Again, on a percentage basis with the e-com 38%, things like rental same-store sales, rental and fee same-store sales being down 1%, compared to all the other retail numbers you're looking at. So, the Rent-A-Center business, just like in 2008 and 2009 in a tough economic environment holding up well, you mentioned you asked about the losses, I mean 4.2 versus 4.0 being the high-end of our range is, if we don't like it, we want it to be within our range, but catastrophic doesn't happen in that business – in that such a resilient business. The retail partner business, we need the retail traffic to pick up. We'll continue to add, thankfully, we're continuing to add locations or would be down more if we ended at 15% location growth year-over-year. So, we got to continue to add locations, continue to work on national accounts and get that GMV back to at least flat.

Great. Thank you. And the last one from us was on the $15.5 million settlement, did that come in line with your expectations? And was there – if there's any update on any other pending investigations or any matters like that? Thank you.

Yes. I’m sorry, the first part of the question, did it come [indiscernible]?

In-line with your expectations. Yes.

Yeah. And we said that last November from a dollar amount standpoint, it took this long to actually get the settlement agreed to all the details of the settlement [indiscernible]. So, yes, that was in-line with our expectations. I will say that our [indiscernible] has the rest any other issues like that in it, but there is no issue particularly like the one in California that the cash price law in the [indiscernible] in California is very uniquely written and no other states right is the way it's written in that law. So, we don't – did not see that being in any kind of issue elsewhere, that particular issue of the cash price in California. Again, we don't agree with the way the [AG looked] [ph] at it. We thought it was better to get it behind us. It's not the, kind of settlement that we worry about rolling into other states. Sometimes you'd find a lot harder rather than settle if you thought it could roll in other states, but again, that loss id unique to itself in California. So, we just want to get it behind us. And then as far as any other AG issues, the rest of that's in our Q.

Okay. That's all from us. Thank you very much.

Thanks, Mike.

Thank you.

Thank you. And that does conclude the question-and-answer session for today's conference. I now like to turn the call back over to Mitch Fadel for any closing remarks.

Thank you, operator, and thank you everyone for taking the time this morning on our call. We're happy with the second quarter we're able to report, not all that happy about having the lower guidance for the rest of the year, but we'll continue to work as hard as we can to continue to deliver results and address [Technical Difficulty] very best we can to provide value to our shareholders. Thank you, everyone.

Thank you. This concludes today's conference call. Thank you for your participation, and you may now disconnect. Everyone have a wonderful day.