Good day, and welcome to the PROG Holdings Fourth Quarter 2023 Earnings Conference 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 hand the conference over to your speaker today, John Baugh, Vice President, Investor Relations. Please go ahead.

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

Thank you, John, and good morning, everyone. I appreciate you joining us as we report fourth quarter and full year 2023 results that matched or exceeded the outlook we provided in late October. Today, we will cover how Q4 unfolded, how 2023 concluded, our outlook for 2024, some of the strategic initiatives we are implementing to drive our business forward, and our decision to initiate a dividend as a complement to our capital return activities. Last year was another challenging year for both our customers and retail partners. The combination of weaker-than-expected retail traffic and a shift in consumer spending from leasable categories to consumables and experiences impacted our business. We navigated these headwinds through strong operational execution and gaining balance of share in our top retail partners, while balancing GMV pressures with portfolio management and continued spend discipline. Despite a decline in revenues for the full year 2023, our gross margin expanded, primarily due to strong customer payment behavior. As a reminder, our portfolio benefited from our decisioning changes made in mid-2022, along with our team's careful monitoring and management of the portfolio throughout 2023, which drove strong customer payments and lower-than-expected charge-offs throughout the year. The portfolio also benefited from fewer customers choosing to exercise their 90-day purchase option in the first half of 2023. I want to thank our teams for executing at a high level through a volatile macroeconomic and consumer backdrop. Gross margin expansion of 210 basis points improved write-offs of 6.7% compared to 7.7% in 2022, and a disciplined approach to spending drove year-over-year adjusted EBITDA growth of $41.3 million or 16.1%, resulting in a 12.4% margin for 2023. Our non-GAAP diluted EPS of $3.67 grew 41.2% year-over-year, as we also benefited from a lower share count due to our share repurchase program. Turning…

Thanks, Steve. I'll start with a summary of the Q4 financial highlights. Our fourth quarter results matched or exceeded our outlook, showing strong demand for our virtual lease-to-own product as sales and marketing initiatives improved GMV results, and we continue to demonstrate our ability to manage financial drivers within our control. Beginning with the Progressive Leasing segment, as Steve mentioned, GMV for Progressive Leasing improved 1.2% compared to Q4 of last year, materially above our expectations communicated on our Q3 call of a mid-single-digit decline. In addition to the benefit of strong consumer demand during the holiday season, our TIM increased the rate of marketing spend and pursue direct-to-consumer opportunities, which contributed to overall results. As a portfolio of business, this GMV tailwind late in the year will contribute more meaningfully to 2024 revenue as compared to Q4 2023 revenue. Revenues for our Progressive Leasing segment declined 6% from $592.9 million to $557.5 million. We entered the fourth quarter with a gross lease asset balance down 9.6% as compared to the same time last year and exited 2023 down 5.2% as the improvement in Q4 GMV benefited our portfolio size. Revenue for the fourth quarter exceeded the top end of our outlook, largely due to the better-than-expected customer payment behavior, along with a slight benefit from the favorable GMV. Year-over-year, we saw higher portfolio yield driven by favorable charge-off trends, while revenue from 90-day purchases remain at normalized levels in the quarter, as gross margin improved 20 basis points year-over-year to 32.9%. Our management of the lease portfolio led to strong customer payment behavior and resulted in a provision for lease merchandise write-offs of 7%, the midpoint of our annual targeted range of 6% to 8%. Progressive Leasing's SG&A expense as a percentage of revenue increased year-over-year to 15% in…

Thank you. [Operator Instructions] Our first question comes from Kyle Joseph with Jefferies. Your line is open.

Hey, good morning, Steve and Brian. Congrats on navigating a challenging year, and thanks for taking my questions. I'd love to start just getting your perspective on kind of the health of the underlying consumer in your guidance kind of run through. You talked about a normalization of EBO activity, but also a little bit higher provision. Is that a function -- what's driving that? Is that really just a function of the kind of the Goldilocks scenario reversing? Obviously, weighing inflation, but a relatively healthy employment environment, but just kind of want to get the sense of what's going on with your consumer.

Yeah, you got it, Kyle. And you hit on some of it, right? So, without going too far in the past, obviously, '22 was a super stressful time for our consumer with inflation. And then, 2023 was certainly stable and maybe you could even say improving. And you mentioned Goldilocks, right? So, we've talked a lot about the lower 90-day buyouts that happened during tax season. And probably as, if not more importantly, those 90-day buyouts that did not happen, those customers continuing to pay and not like rolling through to a charge-off. So, they might have had some stress that cause them not to be able to do the 90-day or to choose not to do the 90-day, but they were able to continue making their payments, and that resulted in the Goldilocks. Now, as you flip to the back half of 2023, the 90-day activity normalized. And certainly, that's where we were exiting 2023. And it's difficult for us to assume that Goldilocks or historically low levels of 90 days are going to repeat. We don't really have a ton of visibility into that right now because tax season really hasn't really kicked in yet, but that's what's baked into our view. The consumer is in good shape. Employment, as you said, is strong. There's certainly been some cost inflation that has an outsized impact on our consumer, but jobs are good. So, we're not waiting for the shoe to drop. We're just not assuming that the Goldilocks that happened -- for the most of '23, but certainly more pronounced in the first half of '23, it will repeat. We'll have more visibility into that over the next six or eight weeks as tax season plays out. But we're in good shape from a consumer health standpoint. We're just not expecting a complete repeat of 2023.

Got it. Yeah, that makes sense. And then just one follow-up for me. I think you mentioned that you saw a little bit of a tailwind for -- in fourth quarter GMV as a result of the trade-down effect. But I just want to pick your brain on your perspective. Obviously, it seems like the macro environment changes. A few weeks ago we were talking about a soft landing, and now we're talking about potentially higher rates. And then, obviously, some big news in the prime consumer finance space this week. But give us a sense, like are you seeing kind of incremental trade down into the fourth quarter and expectations just from your conversations with retailers?

Yeah. Thanks, Kyle. Yeah. I mean, we believe that the fourth quarter benefited and the holiday season benefited from certainly a number of factors, one of which was more evidence of a trade-down impact, which, as we've talked about for many quarters, we've been anticipating, and it has been delayed. But we did -- talking to our retail partners, we did hear that finance generally was a bright spot during the holidays. And that wasn't just LTO. That was from the primary all the way to LTO and -- which demonstrates the consumers' need for a payment option on big ticket items. And we've also heard directly from retailers that their primaries have told them that they have tightened and are planning to tighten again in the future. The way we think about it, though, is it's really more about the traffic, right, the traffic that is generated. Off that traffic, more consumers, we believe, will need a purchase option -- over time, purchase option, and less of them will be approved by their primary providers. So that's one of the drivers of our belief that we can continue to gain balance of share within our retail partners and offset the otherwise challenging demand environment. The magnitude of the trade-down impact, the tailwind, if you will, is difficult to predict because even if you see top-of-funnel dynamics, it's not a direct or linear relationship to funded GMV, but it's certainly a removal of the headwind. And we hope it will be a tailwind into 2024 and beyond.

Got it. Very helpful. Thanks for taking my question.

Thanks, Kyle.

One moment for our next question. Our next question comes from Jason Haas with Bank of America. Your line is open.

Hey, good morning, and thanks for taking my questions. I'm curious if you could provide a little bit more color on what you saw in regards to write-offs in 4Q. I think historically, you've seen write-offs will tick down from 3Q to 4Q. But this quarter, we saw a step up. And then following on that, I'm just curious about how you're thinking about the cadence of write-offs through 2024.

Yeah, Kyle, there are some seasonal dynamics there, but right in the middle of our historical range of 7%, and there was no inclination that the portfolio was degradating in any way beyond our -- beyond where we're comfortable. All indications are we're in a very healthy place as we enter into 2024. As we look at 2024, as we've sized up the current macro and what Steve alluded to kind of the reversion from a Goldilocks scenario to a more normalized scenario, we do expect maybe just slight uptick on an annualized basis from what we posted here in 2023, which was below the midpoint of that 6% to 8%. So, portfolio remains at the forefront of what we're focused on from a P&L management standpoint and optimizing gross margins, but I think we feel very confident in our ability to deliver within that range for 2024.

And just to clarify, was there any decisioning changes? Did you lose some credit at all in the quarter or no?

Jason, this is Steve. We're always tweaking and adjusting and testing on the decisioning, but no wholesale changes were done in the quarter. Approval rates in the quarter were slightly higher than the previous year, more so in the online channel than in the in-store channel, but on a weighted average, slightly higher. And obviously, as you know, those different channels have different conversion dynamics. There's more purchase intent if you're in the store versus online. So, an increase or a change to approved rates in store would have a bigger impact on GMV. But nothing that we believe really flows through into a noticeable change in our portfolio performance or certainly write-offs.

Got it. That's helpful. And then as a follow-up, I was curious if you could provide some more color on the weakness that you've seen in January, I'm curious how that compared on e-commerce versus in-store? I know there's some bad winter weather in January in certain regions. And then also by category, if there are any categories that were noticeably stronger or weaker in January?

Yeah. I mean, January has been -- I know you follow very closely, pretty well documented how fairly soft. And I told the team we weren't allowed to say the word weather on the call, but you broke the seal for us. So, certainly, some weather events out there across the country that had more impact on in-store than online. But coming out of the holiday season, we did see a low in January, as we said in the prepared remarks, down kind of low-single digits. There wasn't a marked difference between the two different channels. As far as categories go, similar to the holiday season, we continue to see -- consumer electronics was actually performing better. And some of the promotionally-driven furniture stores had some decent days or decent weekends. But overall, it was softer than we were planning for.

Was there any pickup during the Presidents' Day weekend or too early to say?

Yeah, too early to say. We partnered well with our retailers for their -- the sales that they were -- the campaigns they were putting on. The data will still come in with some delay in funded leases and deliveries and things of that nature. And as you have written, tax season and whether it's delayed or not, it has an impact on purchase activity during Presidents' Day. So it's difficult to really put a pin in February until we start to see how tax season comes through and really not through till the end of March, what's going to happen.

Got it. Really helpful. Thank you.

Thanks, Jason.

One moment for our next question. Our next question comes from Bradley Thomas with KeyBanc Capital Markets. Your line is open.

Hi, good morning. I apologize if I missed this in the prepared remarks, but I don't think it was in the press release. Steve, I was hoping you could talk a little bit about customer count and how that's been trending? I believe you're starting to lap a point where there was a bit of a step down in the number of customers about a year ago. So, just curious about how that's trending and how you all are thinking about that going forward?

Yeah, Brad, I don't have those numbers right in front of me. We can get those to you after -- in the after call. I think we'll file the K here shortly as well. But obviously, we have a lot of repeat business. We are always looking to add new customers to the ecosystem. And that's some of the discussion that we had about our multiproduct ecosystem and the other products that we have, helping to introduce new customers to all of our products, including leasing from the existing retailers that we have. The more mature those relationships become, we will have a higher repeat business. So obviously, we're working very hard to try and add new retailers and then we'll get a new influx of customers in that regard. But as far as the year-over-year customer numbers, I don't have those right in front of me.

Can you guys still hear me?

Yeah, we got you.

Yeah, I was going to say I've got a -- you'll see in the K. It's down just slightly, but consistent with the decline in GLA, so right around 5%. So there's not a disconnect from customer count and GLA, so it's pretty consistent.

I appreciate it. Really, I was going to kind of tie it to my follow-up question just around dynamics like average lease balance and some of the dynamics with deflation that we're seeing out from your retail partners. Broadly, a lot of the hard goods, furniture, et cetera, have been seeing deflation, particularly as lower container rates have flowed through. So I was curious how you're seeing that affect your business if it's been reducing average lease balance or if the customers are taking up usable capacity that they have with you to which they're approved for it? And then kind of how you're thinking about the dynamic going forward?

Yeah. We actually -- I don't remember if we talked about that on last February's call, but it was -- we expected that to happen a little bit anyways, reduction in average basket size or ticket size in 2023. And we didn't really see it. It was fairly flat in '23. But we are seeing. And whether it be deflation or promotional activity to clear inventory out, there could be some pressure on average ticket, and that is -- there's a small amount of that baked into our forecast for 2024.

Got you. Understood. Well, if I could squeeze in one last one. Obviously, the new share repurchase program, quite sizable. Just curious if you could give us any context around leverage ratios or potential capacity to get after that program over the course of this year.

Yeah. I mean we, I will call it, topped up the repurchase authorization, the Board did up to $500 million. As you know, we've been pretty aggressive acquirers of our stock over the last several years, and we'll continue to look at that for our preferred method of returning capital to shareholders. However, we did initiate a dividend as well. The Board approved that. And so that -- we look at that as a nice complement to those activities. As it relates to leverage ratios, it's similar to what we have said. We're kind of comfortable in that 1.5 turns to 2 turns of net leverage range. And that will -- we look at that on an annual basis, not necessarily on a quarter-to-quarter basis because that's going to fluctuate. But the current leverage ratio is comfortable for us, and we will generate cash in pretty much all scenarios that we can accomplish from a growth standpoint. And certainly, our forecast for 2024, has us generating additional cash flow. And as we define excess cash flow, we'll look to return that to -- continue to return that to shareholders with our primary vehicle being repurchases, but now we have a dividend as well.

Great. Thank you so much, Steve.

Thanks, Brad.

One moment for our next question. Our next question comes from Anthony Chukumba with Loop Capital Markets. Your line is open.

Good morning. Thanks for taking my question. I guess my first question is in terms of what you're seeing in the retail partner pipeline, both from an SMB perspective, but also from an enterprise perspective.

Yeah, Anthony, I mean, obviously, pipeline is a big focus of ours, it continues to be the. On the SMB side, depending on which vertical or category you're in, there's various levels of maturation. And as we've talked about a number of times, that's a more, I'll call it, competitive area with more players out there. But we do a great job in the regional SMB space, and we'll continue to look to grow that business through growing existing partnerships as well as converting pipeline. The national side or the enterprise side is always a frustratingly long sales cycle and not really any new updates and certainly not any names for you here this morning, but clearly remains a top priority of ours. And we believe this continued challenging environment is a supportive backdrop for those conversations to lead to conversions.

Got it. That's helpful. And then as you think about GMV, so you mentioned that you think GMV is going to be down low-single digits for the first quarter. What do you think has to happen for GMV to possibly inflect this year? I mean you did have a nice GMV, certainly much better than you expected and first positive GMV growth in quite some time in the fourth quarter. So, what do you think has to happen for us to see positive GMV growth, let's say, for the -- in the last three quarters or any of the last three quarters of 2024? Thanks.

Yeah, Anthony, I mean, we have a lot of things going on internally with our existing retail partners. I think we highlighted an e-com card integration with a long-time top 5 partner. Those types of things can help us overcome an otherwise soft demand environment. And we have a number of those things on the roadmap and many of those -- one of the things that the current difficult retail environment has done while we hasn't resulted in a large enterprise pipeline conversion, it has resulted in increased prioritization of projects from existing retailers. And so, our internal objectives, including PROG Marketplace, our direct-to-consumer motion that I mentioned in the prepared remarks as well as our cross-sell marketing motions from our other products, can kind of manufacture GMV in the face of a tough environment. And while we're working day and night on large pipeline conversions, we can place small ball and hit singles and doubles and really inflect that or overcome hopefully, that soft environment. So those are the things we're working on. And we mentioned in the -- that we expect the progress on those things, certainly as the year progresses and look forward to continuing to report out to you guys on that.

That's helpful. Thank you.

One moment for our next question. Our next question comes from Bobby Griffin with Raymond James. Your line is open.

Good morning. This is Alessandra Jimenez on for Bobby Griffin. Thank you for taking our questions. Maybe first, just a follow-up on GMV. My apologies if I missed it in the prepared remarks. But what is the full year 2024 sales guidance apply for the full year GMV outlook?

Yeah. We don't actually guide the GMV for the year. So obviously, everybody has their models. And you can kind of back into revenue, although disposition types and those revenue composition will have a big factor in that. So, what we did last year and what we intend to do this year is give a little bit of view on what our -- what we think GMV will be for the quarter as we're reporting on it -- the next quarter in front of us as we're reporting on the last one, but we have not given a full guide for GMV for 2024.

Okay. Understood. And then maybe just on 2024 profitability guidance. What are the building blocks to kind of get us to the low end versus the high end of that range? Is it just revenue-dependent? Or are there some other puts and takes there?

Yeah. I think what I'd point you to in terms of some of the variability that exists within the model, obviously, there's the revenue dynamics, which you pointed to in a challenging environment. I would also just highlight the gross profit and the gross margin dynamic. I think if we've explored different scenarios, there's -- the potential for variability there. I think we're confident in our ability to manage the portfolio, like we said. But if the Goldilocks scenario that we saw in 2023 persist for any duration here in 2024, that's obviously upside to the model, and we'll continue to protect against the downside. So, I think the gross margin and gross profit is outside of revenue is the other single biggest factor. From an SG&A perspective, I think those cost dynamics remain well within our control, and [indiscernible] we manage and align those with what we're seeing on top-line. Yeah, it's really revenue and the gross margin dynamic.

Okay. That's very helpful. And then lastly for me. We're pleased to see the dividend announcement and then regards to upping the share repurchase. Just given the strong cash flow generation of the business, what is the implied free cash flow off of the guide? Should we expect a similar adjusted EBITDA to cash flow conversion in 2023 and 2024?

Yeah. I mean I think that's fair. There's a cash tax dynamic where you might have a little more in cash taxes. But I think the relationship between EBITDA and free cash flow is relatively consistent. The big variable in that is GMV as you're putting working capital out on the street. So, what I'd pay attention to there is obviously, if we start to exceed our GMV plan or GMV starts to come later in the year, that can be a pretty significant usage of free cash flow. So that's the variability I point you towards. But otherwise, you're thinking about it right. The consistency between EBITDA and free cash flow, absent those dynamics.

Thank you so much. Best of luck in 2024.

Thank you.

That concludes the question-and-answer session. At this time, I would like to turn the call back to Steve Michaels, President and Chief Executive Officer, for closing remarks.

Yeah. I'd like to, again, thank you guys for joining us this morning and for your continued interest in PROG Holdings. Our teams did a great job and delivered a strong 2023. We feel good about the positioning of our portfolio and we're making the right investments in people and technology to further our three-pillared strategy of Grow, Enhance, Expand. We look forward to updating you on our progress on 2024's initiatives during our Q1 call in late April. Hope you have a great day.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.