Good day. Thank you for standing by. Welcome to the Q3 2024 Upbound Group 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 first speaker today, Jeff Chesnut, Head of IR. Please go ahead.

Good morning, and thank you all for joining us to discuss the company's performance for the third quarter of 2024. We issued our earnings release this morning before the market opened, and the release and all related materials including a link to the live webcast are available on our website at investor.upbound.com. On the call today from Upbound Group, we have Mitch 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 and adversely from our expectations. These factors are described in our earnings release as well as in the company's SEC filings. Upbound Group undertakes no obligation to publicly update or revise any forward-looking statements, except as required by law. This call will also include references to non-GAAP financial measures. Please refer to today's earnings release, which can be found on our website for a description of the non-GAAP financial measures and the reconciliations to the most comparable GAAP financial measures. Finally, Upbound Group is not responsible for and does not edit or guarantee the accuracy of our earnings teleconference transcripts provided by third parties. Please refer to our website for the only authorized webcasts. With that, I'll turn the call over to Mitch.

Thank you, Jeff, and good morning to everyone. I'll begin with a review of the key highlights from the third quarter, Fahmi will share a more detailed review of our financial results and our financial outlook and afterwards we will take some questions. To being, I'm very pleased to share that our third quarter revenue was nearly $1.1 billion adjusted EBITDA was approximately $117 million and non-GAAP earnings per share was $0.95, which was right at the midpoint of the guidance we provided on our last call and a couple of cents above the average of our street consensus estimates. Acima led the way with revenue up 19% year-over-year with Rent-A-Center delivering 110 basis point improvement in revenue against the prior year despite, the impact of about 50 store closures we mentioned last quarter, in addition to a recent sale of 55 stores in the New York metro area to an existing franchisee, and I'll discuss the successful execution of that franchisee sale in more detail shortly. Acima delivered another strong quarter GMV growth with a 13% increase year-over-year, which was in line with our stated guidance of low double-digits growth as we start to comp against the accelerated performance from the latter part of 2023. Last quarter, we also shared our outlook for the third quarter lease charge-off rates and also consistent with those projections, the seamless lease charge-off rate improved sequentially and year-over-year to 9.2%. On the Rent-A-Center side, as expected, we did experience a seasonal sequential increase to 4.9%, which was slightly above our earlier expectations as the environment for our consumers remains challenging. Now despite the tick up in losses at Rent-A-Center, and they remain at an acceptable level of optimized risk-adjusted returns, especially when you think about the environment we're in, while also delivering EBITDA…

Thank you, Mitch, and good morning, everyone. I'll start today with a review of the third quarter results, then discuss our outlook for the rest of the year, after which we will take questions. Let's begin on Page 6 of the presentation. We are very pleased to report another strong quarter with revenue growth over 9%, EBITDA growth of 10% and EPS growth of 20% compared to last year. Consolidated revenue for the third quarter was up 9.2% year-over-year with Acima up 19.1% and Rent-A-Center up 1.1%. Rentals and fees revenues were up 8.8%, while merchandise sales revenues increased 18.2%, reflecting a larger portfolio balance at Acima coming into the quarter, more customers exercising a 90-day purchase option and promotional initiatives at Rent-A-Center. Consolidated gross margin was 47.8% and decreased 300 basis points year-over-year with a 280 basis point decrease in the Acima segment and a 90 basis point decrease in the Rent-A-Center segment. Consolidated non-GAAP operating expenses excluding lease charge-offs and depreciation and amortization were down low single-digits due in part to non-labor operational efficiencies at Rent-A-Center combined with overhead labor savings. The consolidated lease charge-off rate was 7.4%, a 40 basis point increase from the prior year period and broadly in line with our expectations. On a sequential basis, the consolidated lease charge-off rate increased 20 basis points due to a 70 basis point sequential increase at Rent-A-Center. Consolidated adjusted EBITDA of $116.9 million increased 10.3% year-over-year, due to higher Acima and Rent-A-Center segment adjusted EBITDA in addition to lower corporate costs. Adjusted EBITDA margin of 10.9% was up approximately 10 basis points compared to the prior year period, driven by approximately 130 basis points of expansion at Rent-A-Center in addition to a decrease of approximately 70 basis points in corporate costs as a percent of sales, which…

[Operator Instructions] Our first question today comes from Vincent Caintic with BTIG.

Hi, good morning. Thanks for taking my questions. So first question on the Acima, the trade down activity. So it was nice to see the merchandise sales being up and it seems like that's all incremental. And so if you could talk about that the economics of the trade down business model in more detail, if you could talk about where you expect the gross margins will fall out. And I guess with the lower losses that you're expecting, does that mean that the economics of that trade now business is kind of similar to the rest of the lease business once you account for the lower losses?

Hey, Vincent. Good morning. So generally speaking, the 90-day purchase activity is usually associated with trade down comes to us at a lower margin. But what trade down really allows us to do, especially in this backdrop of the macro being so uncertain, and it allows us to keep GMV up and it also allows us to be a little bit more selective kind of on the bottom end of our core consumer. As we mentioned, applications were up 25%, approval rate was down about 60 basis points. But if you exclude some of the staff business that moved, most of that moved from the ANow to the Acima platform, our approval rates were actually down closer to 300 basis points. So it really allows us to be more selective in who we allow onto the balance sheet, who we give leases to. But it does come, as I mentioned, at a lower margin and you saw that reflected in our gross margin this quarter and we expect that to continue into the fourth quarter. As we said in our prepared remarks, it does give us the ability to get to new customers into the Acima platform. Those customers that come to us through trade down typically do exercise a 90-day buyout option, but they also have repeat business. And that second and third lease that they do with us typically has better margins than the first lease. It's good business for us. We're excited about having that opportunity, as it's continued to trend up through the year. As you mentioned, you start seeing some of the loss improvement, as it rolls through delinquency and into the P&L. You haven't really seen that just yet, just because it takes a while to go through the P&L, but you are seeing some of the headwinds associated with the gross profit margin.

Okay, great. That's super helpful. Thank you. And then last question, just switching over to the Rent-A-Center business, understanding that the charge-offs were up, part of that was due to seasonality, part of that's due to the consumer. But it was interesting to also see that margins were actually up 130 basis points year-over-year. So I'm wondering how you're thinking about sort of managing that business if perhaps maybe the higher loss content is there, but there's higher profitability in that business. You can talk about how you manage that? Thank you.

Yes. Good morning, Vincent. This is Mitch. Excuse me. No, thanks for the question. It's a good question, because EBITDA margins are pretty strong at Rent-A-Center. So you're always balancing the losses with the total bottom-line, balancing how much you let through to get to the enough volume to cover all the costs of running a bricks-and-mortar business unlike a Acima and so forth. But we're happy with the margins. We are tightening. We -- the losses didn't surprise us. We expected that uptick. When you look at the year, we still expect to be in the range, we've been talking about all year in that 4.5% range for the year. But at the same time, we do have to tighten a little bit and we're doing that. We're being prudent. When you look at the delinquency rates, which is more the forward-looking way of looking at losses going forward, I don't know, if you have it in front of you, but Page 8 on the presentation? But they went up just like they did last year in the third quarter. The lines are almost identical. The numbers went up basically the exact same as last year in third quarter. And as we've seen in October, it's a leveling off in the Q4 exactly what we saw last year. So that's our peak, the 4.9% expected and so forth. We are tightening, but you're right, we need a certain amount of volume to keep those EBITDA margins in that 16% range. So it's a balance, always is. We're really comfortable with it, really happy with the overall margin. We usually peak in the summer, when it comes to the losses or the delinquency rates, especially like I just mentioned and those have leveled off just like they did last year.…

Our next question comes from Bobby Griffin with Raymond James.

Good morning. Thanks for taking my questions. Congrats on another good GMV quarter. I guess first, Fahmi, I want to just touch on the Acima segment and the EBITDA flow through. Is it just a matter of timing? You see the gross margin pressure, but then you get the relief later on with the skips and stones or if this customer dynamic stays, maybe it's a faster growing or stronger dollar growth business with a little bit less margin upside. Just help us think about the moving parts there and more importantly the timing. And I guess I'm just asking in context, could we see margins in EBITDA growth accelerate in ‘25, if it really is just a timing dynamic that we're seeing that's pressuring the flow through?

Hey, Bobby, good morning. Thanks for the question. So yes, I would agree with your comment and your question regarding some of this is timing, specifically when you think about the trade down activity and seeing higher 90-day buyout activity. You'll start seeing the merchandise sales go up, which we saw this quarter. We expect that to continue into the fourth quarter and that puts pressure on your gross profit margin. Eventually, those that GMV that did come from a better credit quality consumer will be a bigger portion of the portfolio and you'll see the loss improvement probably a couple of quarters from now. So as we think about 2025, not that we're going to get into specifics around guidance for 2025, but our expectation is that you'll start to see some normalization of gross profit margin from where we are today. And then, you'll start to hopefully see a little bit better loss number or loss rate into 2025. And that kind of puts Acima right -- from an EBITDA margin standpoint, right where we want it to be, right in that low to mid-teens number. As a reminder, we just guided Q4 to be relatively flat from a charge-off basis, but also have a slight uptick in the EBITDA margin at the Acima business. But that's the trade-off. It allows us to grow GMV. You'll definitely have a little bit of headwinds in the near-term from a gross profit, but you should see some benefit in losses in a couple of quarters.

As you mentioned, Fahmi, even in the fourth quarter, we'll see -- we expect to see a slight increase at least in EBITDA margin. So it would already be starting in '24 versus just waiting till '25, which was your question, Bob. But the other thing I'd add to what Fahmi said is the repeat business side of these customers, as he mentioned, that, a lot of the repeat business, once people are aware of Acima, we talk about lifetime value. But once they're aware of Acima and they've got the Acima app on their phone and they're making their payments through the app and so forth, a lot of the repeat business ends up going to our own marketplace, where the margins are higher on our marketplace than they are when we're direct with the retailer. Even if that business goes through to that same retailer or a lot of times, it's a different retailer because people don't need more furniture. They might go on our marketplace and get something from Amazon or Target or Best Buy or something like that. Those are at a little higher margin. The underwriting costs are a little lower. Actually repeat business, some of the same customers, they actually pay out early at a lower rate on their second account than they do on their first account, things like that. Through the marketplace, you don't pay some of the same kind of costs that we have to pay the retailer for the product and so forth. So repeat business is more profitable than the first time through too. So that's the other reason EBITDA margins go up when you get more customers in the lifetime value of it.

Thank you. I appreciate that. That's helpful. And then I guess lastly for me, I mean, you guys clearly are looking at different areas of the business, franchise some more stores. So just kind of in the context of that from a capital and investment standpoint and how you view things, maybe talk a little bit about what you think the opportunity is in Mexico. Business has kind of been around the same size profitable, but not really -- hasn't really been a focus point. So just anything there and kind of what you see the long term opportunity to be?

Yes. Good question. As I mentioned in my prepared comments, Bob, we see the store count being pretty well done as far as reducing the corporate store count. We're really excited about the franchise sale we did. Also excited about those stores we closed earlier this year and from the standpoint of how much of their revenue we've been able to keep in the -- as we put those accounts into nearby stores. So that's all been positive for Rent-A-Center. I think when you think about Mexico, we're pretty excited. They're having a good year down there. We talk about the EBITDA being relatively flat this year. It's up a little bit for the year. It was relatively the fact of the quarter. They're up for the year. The currency has gone against us a little bit down there with the peso valuation being against the dollar, not being as good as it was last year. But overall, the business is strong and we're looking at expanding Acima down there as well next year. So, it's a great opportunity down there. From a Rent-A-Center standpoint it's I don't know, it's $7million or $8 million of U.S. EBITDA at least in the year or something like that, which isn't huge and it's not yes, I mean, a good year is adding $1 million. Obviously. If you had $1 million on top of 7 that's really a good year, but it doesn't move our needle. But Acima very well could move the needle when we take that to a country as large as Mexico and so forth. So we're pretty excited about Mexico more from that standpoint of expanding a virtual platform down there than Rent-A-Center stores that are doing well, if they add $1 million a year to EBITDA or something that's like I said, not going to make much of a difference, even though we appreciate everything they do for us down there. But Acima could be really exciting down the road there.

And what we've done, Bobby, this year in Mexico on the Rent-A-Center side is really the reason why we're up on a year to date basis is because we've gotten our losses under control. We've started to build a centralized decision engine down there. The team great job in rolling that out. It is now fully functional down there and really paves the way for us to be more aggressive next year with the Acima platform.

That was the precursor is them doing getting the decisioning right for the Rent-A-Center business to allow Acima to then use it and tweak it and so forth. So, like I said, we're pretty excited about that.

Our next question comes from Hoang Nguyen with TD Cowen.

Thanks for taking my questions, guys. So [Indiscernible] you said that there's going to be a lag on the benefits of the trade down on credit, I guess, on delinquency and losses down the road. But I mean, you're still seeing a tick up in loss and delinquency this quarter. So maybe can you talk about what segment of your customers is contributing to this? And maybe what action that you're taking to manage this group of now higher risk customers? And I have a follow-up.

Yes, sure, Hoang. Good question. Remember though, on the trade down we're talking about is primarily Acima and the Acima losses are down sequentially and year over year. Rent-A-Center doesn't see the same level of trade down not being in waterfalls within retail partners and so forth. And where Rent-A-Center went up in delinquency very similar to last year, They're not there's no positive impact to trade down there or if there is a positive impact from some of the other subprime retailers closing, they're still not as apt to do the early purchase option. So it's trade down at Rent-A-Center much different. So the than it is at the Acima. So the trade down we're talking about is really at the Acima and their losses are trending down in a pretty significant way when most of our -- most lenders, if you will, are going up. And from a loss standpoint, assume Acima trending down sequentially and year-over-year. So, we certainly feel good about to answer the last part of your question, our capabilities from an underwriting standpoint to be able to control that. We certainly look at that I mean, there's people who look at it daily. Fahmi and I look at it more weekly with Tyler Montrone, the person that runs the Acima for us and certainly make any tweaks we need to and so forth. But we're real comfortable with the trends there because their losses are actually on the way down.

Got it. Thank you. And maybe this is this one is for Fahmi. So I saw that you guys incurred an estimated settlement expenses $7.5 million for all three outstanding legal matters with CFPB, New York AG and Multistate AG. Can you give a little bit more color around that estimate? I mean, is this your estimate currently for all three issues?

Hi, Hoang. Thanks for the question. Yes, look, I can't comment too much on the open litigation and open settlement talks. But from an accounting standpoint, once something becomes probable and reasonable, estimable, we then to put an accrual on the books. It doesn't mean that's where we're going to necessarily shake out, but that was our best estimate given the number that we -- or the fact that we have in front of us at this time. And as far as some of those investigations and litigations go, I would just point you to the 10-Q that we're going to file. We'll have updated disclosures across the board, but that's how we came up with the accrual this quarter.

Our next question comes from Brad Thomas with KeyBanc Capital Markets.

Hi. Good morning and let me add my congratulations as well on a nice quarter here. Mitch, I was hoping to follow-up just on the outlook for Acima and its GMV growth. A year ago, you laid out a multi-year plan through 2026 to be growing revenue in the segment by 10% to 12%. Clearly, the GMV in recent quarters has been even stronger than that. Can you just talk a little bit about your confidence that you can be in that range as you look out to 2025?

Sure, Brad. Love to talk about Acima's growth, because it's been really strong to your point. We think there's many years of low double-digits growth in Acima coming forward. We still see an awful lot of white space out there. We're -- as we just pointed out, we're going to -- we've raised our fourth quarter comp guidance to low double-digits and that's coming off at 19% last year in the fourth quarter. So when you come up to [Technical Difficulty] for the double-digit, pretty it gives us a lot of confidence that low double-digit is the number going forward for many years. We've had an awful lot of wins on the retail side, an awful lot positive things going on there. We talked about trade down, but some of the wins at the retail side, it's interesting and I get a little frustrated, because there's been a lot of talk about one retailer we lost, one regional furniture retailer we lost and a competitor of ours likes talking about that a whole lot even did a press release on it. Yes, we've taken over the last couple of years numerous accounts from our competition. In fact, from that same competitor that wants to talk a lot. Quite honestly, Brad, some of the analysts write about it a lot about one regional win they had, when over the last two years, we've taken Wayfair and Ashley and Sleep Outfitters, Slumberland, CITY Furniture, Levin Furniture. That's at least 6 that we've taken from that competitor in the last two years and those are all top 100 furniture retailers. We've had an awful lot more wins and losses. We've led the industry in growth for a couple of years now, as you know, from the GMV side, and we're very confident that's going to continue. Our sales team is knocking it out of the park. Our integration for retailers is the simplest in the industry. Our marketplace adds volume for our retailers like nobody else's. We've got more options than anybody else, whether they want to have a staff model or a quasi-staff model, a little bit of support from our sales team is the largest out there and I dare say the best just based on the results. So when we look at the growth, we're pretty excited about all the wins we've had and just what our GMV has been. And like I said, I get a little frustrated reading about one loss we had where obviously it wasn't that big a loss or we wouldn't be we wouldn't have upped our GMV for the fourth quarter. But some of these other wins are more than making up for it and there's a lot more coming from there. So we're pretty excited about the future of growth for Acima.

That's helpful, Mitch. Absolutely a lot to be excited about from you all. And no question, the results have been really good. I want to ask a follow-up just on marketplace and wondering if you could share any more color on how big that's been. And as we look to next year, how much you think that could be contributing to the GMV growth?

Well, I'm glad you asked about the marketplace, because we did touch on it and I touched on it in the prepared comments. But it really is exciting when you think about our new product, this AI leasability, generative AI leasability engine, which allows us to not only onboard retailers so much faster on the marketplace, it's like it takes 10 days now instead of a month and a half, things like that. So and the reason the onboarding used to be slow is you had to sift through their products and figure out what's leasable, and it's hard to add an Amazon onto the marketplace and make sure people aren't leasing food or something like that being different from Amazon, right? So with this new leasability engine and it's working just tremendously, our team did a great job putting it together with a tremendous partner, as I mentioned. And now we've added people like Walmart and Amazon and Target and eBay, and that really just went live the lease billings went live at the first week of October. So that's not even in the like 30% growth we had in the marketplace in the third quarter, roughly 30%. So really excited about it. As far as how much it adds next year, I think it's certainly without getting into too many details about next year, certainly it adds it helps us get that double-digit -- low double-digit growth. But if it on the other hand, if it works as well as we think it could, we'll be helping those numbers too. Because you just think about we're doing low double-digit growth right now comping over 19%, and we're not even -- that was before we added Amazon and Walmart and Target to our marketplace. So I guess you'd have to say, when we say low double digits, it's the low end of the spectrum when you think about adding the adding those kind of names in when we're already doing the low double digit numbers. So, really excited about the marketplace and the future of it as well.

Our next question comes from John Hecht with Jefferies.

Thanks guys. Good morning and congratulations on all the good momentum. Actually one of my questions was just asked, so I'll just have one question. And that's that given the consumer trade down effect, happening in real time as we enter the holiday season. Are there any differences that you guys expect in terms of the mix or type of transaction and how that flows through?

Good morning, John. I don't know if I would expect any real changes over the holiday season. Obviously, those five weeks are very important to us to generate a lot of GMV. And then, if you think about kind of the flow into the first quarter with tax season, that's typically our highest 90-day purchase option activity anyway. With trade down, we'd probably expect to see some of that activity continue. But as far as kind of where the GMV is coming from by channel, new and returning customers, I'm not expecting a big shift year-over-year.

Our next question comes from John Rowan with Janney Montgomery Scott.

Good morning, guys. Just a quick question for me. The so the settlement with the CFPB that the $7.5 million that covers specifically the issue that, they raised with Acima regarding the difficulty of returning leases and whether or not it was actually non-recourse. I just want to make sure that, that settlement covers or expects to cover that specific issue.

John, we don't disclose kind of the specifics. But I will say it's not just that one issue. So it's not something we're going to disclose on which one of the issues, it's not something we typically do.

It's not settlement, it's an estimate. It's putting money on the books to presumably settle at some point, right? So it's not like it's settled. It's an estimate on -- our best estimate right now on wood on settlement of those three issues put together.

So the three outstanding issues are all included in that estimate?

Correct.

Our next question comes from Anthony Chukumba with Loop Capital Markets.

Good morning. Thanks for taking my question. So, I mean, you've laid out your fourth quarter guidance. I'm sure this is factored into the guidance. But how do you think about, I guess, two things, the fact that we do have this presidential election next Tuesday and then the fact that it's going to be 5 fewer shopping days between Thanksgiving and Christmas? Thanks.

Yes, good question. I mean, we do have that factored in, although, I mean, November leading up to Black Friday is very strong for us as well. So the shopping days certainly make it a little less than last year, when you had certain years, you're going to have the opposite effect, depending where that fourth Thursday falls and all that stuff for Thanksgiving. So but really leading up to Thanksgiving so strong, Anthony, it doesn't have that big of an impact, some impact, but probably a lot less impact, than maybe just traditional or even a theme where they do their business off of traditional retailer, at least most of their business off traditional retail. We're probably being a little conservative because of the way the calendar falls, but the applications are so are up so much, like we said, 25% in the third quarter. We just gave a lot of momentum in -- but we do have that factored in. You're exactly right about that.

That does conclude our Q&A for today. I would now like to turn it back to Mitch Fadel for closing remarks.

Thank you, operator, and thank you to everyone who joined us today for the update on the third quarter and our outlook for the fourth quarter and for the rest of the year. I'm really thankful for the efforts of our coworkers and our merchant partners, who helped us deliver an impressive quarter in a few different ways, especially on GMV and of course, Rent-A-Center same store sales results, we're also very impressive. So, we're grateful to all of our coworkers for all their hard work. We got a bunch of people working really hard for our shareholders and it shows. And we're also grateful for our shareholders and for the interest and support of them and look forward to updating you next quarter on our continued progress towards our goals in 2025. We'll be talking about soon enough. Thanks, everybody.

This does conclude today's program. You may now disconnect.