Good day, and thank you for standing by. Welcome to the Upbound Group, Inc's Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' 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 turn the call over to Brendan Metrano, Head of Investor Relations.

Good morning, and thank you all for joining us to discuss the Company's results for the second quarter of 2023. We issued our earnings release before the market opened today. 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 Fadel, our CEO, and Fahmi Karam, 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 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, and our discussion of comparable performance will generally refer to non-GAAP results. 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 the reconciliations to the most comparable GAAP financial measures. With that, I will turn the call over to Mitch.

Thank you, Brendan, and good morning, everyone, on the call today. Second quarter results exceeded our internal expectations again this quarter with revenue of $979 million at the high-end of our expectations, while adjusted EBITDA of $130.6 million and non-GAAP earnings per share of $1.11 were above expectations. Similar to the first quarter, earnings upside was primarily attributable to effective underwriting execution and strong gross margin for the Acima segment, driven primarily by fewer customers electing the earliest lease payout option. Now, Fahmi will provide additional context on this in a few minutes with his discussion of our financial results and our outlook. Closing out the first half of the year, we are pleased with the company's performance and confident in our ability to execute our strategy, which we believe positions us well to have the company back on the growth path in 2024. Concerning the better-than-expected second quarter earnings and early third quarter gross margin trends for Acima, we've raised our full-year 2023 guidance for the second time this year. We now expect full-year 2023 non-GAAP EPS to be between $3.25 and $3.55, up from our previous guidance of $2.70 to $3.20. While we are cautiously optimistic about the company's prospects for the second half of the year, we also know it's critical to manage risk given the level of uncertainty that remains in the market and ongoing financial headwinds affecting less affluent households. Before we review the highlights of our second quarter results, I'd like to touch on the progress of some of our key priorities for the year. We are really pleased with our underwriting and risk management performance for the first half of the year. We maintained our discipline, enhancing our underwriting and risk management with new tools and techniques. This will offer continued sequential progress,…

Thank you, Mitch, and good morning, everyone. I'll start today with a review of the second quarter results and then discuss our updated fiscal year 2023 guidance, after which we will take questions. Beginning on Page 6 of the presentation. Consolidated revenue for the second quarter was down 8.6% year-over-year, with Acima down 12.4% and Rent-A-Center down 4.9%. Rentals and fees revenues were down 5.8%, reflecting lower portfolio values for both businesses during the second quarter of this year. Merchandise sales revenue decreased 22.4% due to fewer customers electing earlier payout options, and a 9% year-over-year decline in combined GMV for the first and second quarters. The dollar decrease in revenue was fairly evenly split between rental and fee revenue and merchandise sales revenue. Consolidated gross margin was 51.7% and increased 200 basis points year-over-year, led by improvement in the Acima segment, which is our lower gross margin business as well as a greater mix of Rent-A-Center segment revenue, which is our higher gross margin business. Partially offsetting these benefits was a year-over-year decrease in Rent-A-Center gross margin. Second quarter results are a good example of our ability to manage costs, while still supporting growth initiatives. Consolidated operating expenses, excluding skip/stolen losses and depreciation and amortization were down low-single digits, with a high single-digit decrease in store labor, largely offsetting an increase in general and administrative costs. Our disciplined approach to underwriting continues to generate improving results, with consolidated skip/stolen loss rate down 110 basis points year-over-year and 20 basis points sequentially, driven by continued improvement in the Rent-A-Center segment. Putting the pieces together, consolidated adjusted EBITDA of $130.6 million increased 1.3% year-over-year, with 47% growth for Acima, offsetting a 20% decline for Rent-A-Center and 4.8% higher corporate costs, excluding special items and share-based compensation. Adjusted EBITDA margin of 13.3%…

Yes. Our first question comes from the line of Bobby Griffin of Raymond James. Bobby, your line is now open.

Good morning. Can you hear me all right?

We can. Good morning, Bobby.

All right. Good. Yes. Sorry about that. I didn't hear my name get announced. But yes, congrats on the good quarter and seeing some of the upside. So I guess, first, I just wanted to ask on the trade-down behavior. I mean, can you unpack a little bit of what you're seeing from that? And then b, I guess the second part of that question, is it a little too early to actually see the full benefit than where we would actually see more of the trade-down taking place during the holiday? Because typically, in this business, we build portfolios kind of on the holiday fourth quarter. And at that point, maybe we'll get a little bit more of kind of this credit tightening potential impact the results and coming into your favor in terms of new customers.

Yes. I'll take that. And then if Fahmi has anything to add, he can add it, Bobby. Again, good morning. This is Mitch. Yes, we're seeing trade-down based on vantage scores or third-party scores, I should call them as they come into our risk engines, both at Rent-A-Center and at Acima. Sequentially, they're rising. It's most pronounced more in the first quarter than the second quarter, but they're still up there, certainly higher than six months ago and higher year-over-year. So we're seeing the higher third-party scores coming in. So that's how we know we're getting a little bit of trade-down. It's not a ton yet. We don't have it in our guidance for later in the year, but your theory that it should accelerate as the year goes on is certainly a plausible one, and we certainly hope to see that. Overall, like the GMV on the Acima side improved pretty dramatically sequentially, 700 basis points and it was just the fourth quarter last year, we're down in the 20s. And now we're talking in the 5s as far as down and flat, forecasted to be flat in the third quarter and slightly positive by the fourth quarter. So we're seeing good trends there. Trade-down is a part of it. And certainly, if that accelerates, it will be even better.

Okay. And then I guess the second part for me is just maybe thinking about some of the moving parts have been hitting the P&L this year. I mean, we have a shrinking portfolio. We have GMV negative. But at the same time, we've had the loss ratios come down in this weird – I guess, weird is not the best term, but maybe unique customer behavior where they're holding on to products longer and not exercising the early buyouts. So when we flow all that in and we kind of think about what that does to the model in 2024, is there any kind of moving parts or anything you would tell us to keep in mind? Because like where I get a little worried is like do we – are we getting a benefit here this year that could reverse next year and then we still have to build back the portfolio, I guess, is the other side of the question?

I think the – it's a really good question. I think the important thing to remember when we talk about the lower percent of our customers exercising the earliest payout like within 90 days, is that it's really not – this isn't the unique time. The unique time was over the last couple of years where it accelerated that number way up with the stimulus money. As we mentioned in the prepared comments, the number of people, the percentage of people exercising those early payout options is similar to pre-pandemic levels now. And in fact, it's similar to 2019 levels. On the Acima side, it's actually still higher than 2018. So I'd say the unique part was during the stimulus when those percentages were way up. I don't think going forward, as Fahmi said, our forecast assumes the yields at Acima will continue to benefit from the low early payouts. We didn't forecast it to the exact same degree as the first half of the year. Being a little conservative there, but we don't expect them to go back either because, again, we're more pre-pandemic levels now, not below that or anything where you would expect them to spike back up in 2024.

Yes. Bobby, just to add to that a little bit. I think the second quarter, obviously, was a really strong quarter for us really across the board. But thinking kind of long-term as far as kind of adjusted EBITDA margins, we don't necessarily think 16% to 17% range for Acima as the right EBITDA margin. I don't know if that's sustainable, especially as we kind of prioritize growth in GMV. We still think that low-double digits to low teens with room to improve on the loss rate that we produced this quarter is kind of the right range for the Acima business. And then on the Rent-A-Center side, long-term, we still think it's a high-teens margin business. Losses continued to improve this quarter. But I would say, long-term, we still think there's room to improve losses on both segments.

Thank you. I appreciate the details. Best of luck during the third quarter.

Thanks, Bobby.

Thank you. Please standby for our next question.

Kyle, I think you're next on our queue.

Okay. Thanks. Sorry. I didn't hear my name announced. Apologies. Thanks guys. Thanks for taking the questions. Just wanted to get a sense for – and it might be helpful to do by segment Acima versus RAC. But just the health of the underlying consumer, obviously, you guys talked about the – what's going on with early buy-outs and then we weigh inflation and low unemployment. And obviously, your underwriting changes have had the desired impacts. But give us a sense for where you think the consumer is as they kind of adapted to the inflationary environment? And then maybe on a year-over-year basis, is the consumer a lot more comfortable here? But yes – and if you can do it by segment, that would be helpful.

Yes. I would say, starting with the Rent-A-Center segment, what we've seen through numerous economic downturns, it's a pretty resilient consumer and they adjust pretty quickly to make ends meet. Last year was a bit of a struggle because the inflation rate was so historically high. But yes, we've seen the adjustment by that consumer. You can see it in our delinquency and our loss rates. There's still more room to come down. Of course, our underwriting has been a big part of that. But you're not seeing us having to cut off a tremendous amount of demand when you start talking about mid single-digit negative numbers on the Rent-A-Center and the Acima side when you think about the growth metrics. In the Rent-A-Center side, sequentially, that's two quarters in a row where it's improved sequentially on the revenue or the same-store sales. So let's say that customers adjusted. On the Acima side, the same thing. Acima will see and sees the trade-down benefit faster and more so than Rent-A-Center because it's direct, right? When you're in a retail store, you can get that directly the trade-down benefit versus having to – on the Rent-A-Center side hope if somebody gets turned down somewhere for consumer credit, then they have to go to Rent-A-Center, go to rentacenter.com obviously, where it's more direct in retail waterfall. So the consumers definitely adjusted some benefits to trade-down and the yields are good. The losses and delinquency are coming in line, and we're getting better from a growth metric standpoint on both Rent-A-Center and Acima sequentially for numerous quarters in a row.

Got it. Helpful. Thanks. And then just one follow-up to just kind of think about, kind of hear how you're thinking about the Genesis. I know it's obviously early – in the early innings there. But is that going to be reported as part of the Acima segment? Is that going to be its own segment? And just kind of how you're thinking about it, the integration there and how it impacts the P&L really more into next year and beyond?

Yes. So the majority of it, Kyle, will be in the Acima segment. If you think about the two products that we have with the Genesis partnership, the general-purpose credit card, that one will be split between the Rent-A-Center business and Acima depending on where the customer was sourced originally. But then on the other product, the SMB retail product that's going to be all flowing through the Acima segment with fee revenue.

Very helpful. Thanks for taking the questions.

I think next is Anthony Chukumba.

Thank you. Our next question comes from the line of Anthony Chukumba from Loop Capital Markets. Please go ahead.

Good morning. Thanks for taking my question. I just wanted to focus on Acima. Just wanted to get an update on the retail partner pipeline, whether you're talking sort of small and regional chains and also large national retailers? Thanks.

Yes. Good morning, Anthony. Some nice regional wins. We don't talk specific names. Obviously, we will when there's bigger names. But specific names on the regional side, the SMB side, continuing to grow, continuing to grow our marketplace as we mentioned as well. But we've had some good wins, some good growth. Our team out there still signing up hundreds really of retail partners every month. And again, we've had some bigger regional wins. So pretty happy with the growth trajectory there. On the largest accounts, it's just such a long cycle on those, but we continue to have great conversations. The team we mentioned adding to the strategic accounts team because they've got so much more in the pipeline and working with a lot of big names. And we've had some regional wins, not any nationwide big-box names yet, but working on a lot of them and the cycle is long, but certainly, the conversations are – that are happening are the best – in the best place we've been in since we started working on large accounts. So pretty optimistic we'll have some – we'll continue to have good regional wins and optimistic we'll have some big national wins down the road.

Got it. And then, I think Fahmi testing this a little bit in his remarks. But I guess when you think about potential share repurchases, I mean, are you thinking, well, we need to get down to a certain leverage ratio before we start buying back stock? Or would you maybe think about being opportunistic with that?

Yes. I think from a capital allocation standpoint, the priorities necessarily haven't changed from what we've given you commentary in the past, especially in this environment with some of the uncertainty that we've talked about kind of left in the market. Our first priority is still going to be to pay down debt and opportunistically look at share repurchases as they come up. And I think we've been – we've demonstrated that ability in the past to be really good stewards of capital when we have excess capital to return that to shareholders. But the mindset we're in now is, again, reinvest in the business first, sustain what we think is a healthy dividend, pay down debt and then be opportunistic on anything else. And we demonstrated that in the second quarter. We paid down our ABL facility by $90 million, ended it there with fully unutilized at the end of the quarter. So we feel good about what we've done from a liquidity and balance sheet standpoint.

That’s helpful. Thank you.

Thanks, Anthony.

Thank you. And I show our next question comes from the line of Brad Thomas from KeyBanc Capital Markets. Please go ahead.

Thanks for taking my question. First, I want to ask about the outlook for GMV on Acima. I think we're all really excited about getting back to growth there. And so I was wondering if you could help put in a little more context, just some of the puts and takes on it for 3Q and the back half? Can you help us think about what the headwind has been from the kind of tighter underwriting, when you start to lap that, what the potential tailwind can be from incremental doors? And perhaps what kind of a headwind you may still be facing as the end market still has some challenges? And maybe just to start with that. Thanks.

I'd say when you think about the tighter underwriting, it started early in 2022. And I think that's why we're seeing the trajectory being what it is from minus 20s kind of numbers to minus roughly 13 in the first quarter and then 5.8 or whatever it was in the second quarter. And then by the third quarter, we pretty much where we wanted to be tightening wise, which is why we'll be flat year-over-year in the third quarter and then flat to slightly positive in the fourth quarter. So we kind of fully start comping the underwriting tightening in the third quarter. So then once you get there, Brad, you've got a combination of the pull forward, especially in furniture, reducing demand in our furniture partners. So how do you even get even if there's less demand on the retail side? Well, we've grown our retail pipeline. We've grown merchants. So you got growth offsetting the retail softness, especially in furniture. We've done a nice job. The team at Acima's done a really nice job of diversifying where furniture is only in the – isn't 90% of our business anymore. It's more like 60% of our business. Wheel and tire is really strong, and that didn't have the pull forward. Jewelry is a big part of the business, but wheel and tire is a part of the business where we didn't have to pull forward. So it's a combination of growth making up for the pullback in furniture because of the stimulus programs, gets us flat once we're comping over the full impact of the underwriting changes.

That's great. Well, I'm really excited to see the improvement there. And on the RAC side, can you just talk a little bit more about the loss rates that you're seeing there? Obviously seeing some sequential improvements, but I think still a bit elevated from where you were pre-pandemic and of late. And are there additional initiatives you need to take there to be trying to bring down the loss rate?

Yes. We'd still like to get – we said at 4.5%, and that's probably where the – roughly speaking, over the next couple of quarters come out. We think we can get it back into that 4% number, the 50 basis points lower, 50 basis points, 60 basis points lower and get down to 4% even in the high 3s. So we still have that goal. It's really a matter of – partially would raise it is a lot more coming through the web. So that's a riskier customer. So e-com is driving it up. We still think we can – if not this year, next year get back closer to 4 than the high 3s or 4 instead of being in the 4, 5. I think the key to doing that is just continuing to improve our underwriting and without cutting off too much, where the – would it come green shoots or whatever, where do you have an opportunity to add some volume here and there and so forth. So trade-down to help a little bit. But basically, at this point, we're happy with the progress we've made. We just have to continue to work on the underwriting, and I think we can get it back to where it was next year. Just call it, 4 instead of 4.5.

And maybe I'll just add to that real quickly, Brad. We talked about the health of the consumer and they've been very resilient. They've had to adjust, but they're still under a lot of pressure from inflation. Inflation has cooled a little bit over the last couple of months. But if you think about it compared to where we were two years or three years ago, it's still a multiple of what it was. So it is definitely a balanced approach that we have to take between the underwriting and maintaining the portfolio, especially in this kind of macro backdrop where the consumer is still under pressure from inflation.

That’s really helpful. Thanks so much.

Thanks.

Thank you. [Operator Instructions] And I show our next question comes from the line of Alex Fuhrman from Craig-Hallum Capital Group. Please go ahead.

Hey. Thanks guys for taking my question and congratulations on a strong quarter. I was hoping you could talk a little bit more about the Genesis partnership. It seems like with the big increase, the guidance for the year, sort of highlighting the value of the lease-to-own model. Can you talk a little bit about what you hope to achieve with the Genesis partnership and who you might be offering other types of credit to?

Sure. So yes, we are – Alex, as you said, early on, early stages of kind of working on the product and launching it. And as I referenced earlier, it's two-fold, right, a general-purpose credit card, where we leverage our past customers and our existing customers and offering them a chance at a traditional lending product using our customer history. And so that is an opportunity for them to get a small balance credit card. So I think that's one way where we can further enhance our customers' value proposition. And then on the retail side, if you think about where we focus our efforts today on the small and medium-sized business, a lot of those merchants do not have access to the second-look credit card providers. And so having our own waterfall, if you will, between a second-look and the lease-to-own product, we think is a huge advantage for us to go into these merchants and I'll talk about one integration and getting two products. So the feedback that we've gotten on the initial kind of pilot stores that we're hopefully launching in the third quarter has been extremely positive in their ability to see the incremental sales that the two products together can achieve for them. As far as the guide goes for this year, there's not any benefit to it. If anything, I would say there's probably more expense as we get the project and some of the IT integration up and running in the third and fourth quarter.

Okay. That’s really helpful. Thank you very much.

Thanks, Alex.

Thank you. I'm showing no further questions in the queue. At this time, I would like to turn the call back to Mitch Fadel for closing remarks.

Thank you. Thank you, everyone, for joining us this morning. It's always a pleasure to report our earnings to you. We are pretty excited about the progress we've made from our lowest level. So if you want to call it first quarter or last year in the fourth quarter, some trough levels when it comes to revenue or GMV growth or both, any of the growth metrics. So we're certainly on the right trajectory there. The underwriting changes we've made in both segments, obviously, are working very well. We'll continue to tweak them every day, but they're working really well when you look at delinquencies and losses in either segment. So growth is in the right direction and the underwriting side. We understand it's an uncertain market out there though, and our customer still faces a lot of headwinds. So we'll continue to be prudent with the way we manage the business and look forward to reporting back to you next quarter. Thank you, everyone.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.