Good day and thank you for standing by. Welcome to PROG Holding's Second Quarter Earnings Conference Call. At this time, all participants are on listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, John Baugh, VP of Invest Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to the PROG Holding's second quarter 2024 earnings call. Joining me this morning are Steve Michaels, PROG Holding's 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 revised 2024 full-year outlook and our outlook for the third quarter of 2024, the health of our portfolio, and our expectations for write-offs for our progressive leasing segment for the remainder of 2024, our expectations regarding GMV for the third quarter and full-year 2024, and our capital allocation priorities, including our ability to continue returning capital to shareholders. Listeners are cautioned not to place undue emphasis on forward-looking statements we make today, all of which are subject to risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements. 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?

Thanks, John. Good morning, everyone, and thank you for joining us. Today we are reporting our second quarter results, as well as providing some thoughts on Q3 and our increased 2024 full-year financial outlook. Our team delivered a great second quarter, surpassing our expectations for GMV growth and exceeding the high end of our revenue and earnings outlook. Our success is rooted in strong execution, which balances growth with profitability. We've made significant strides in our 2024 priorities, focused on enhancing customer and retailer experiences, deepening integrations with existing partners, marketing directly to consumers, expanding affiliate relationships through our PROG marketplace, and collaborating with retail partners through omni-channel marketing and promotions. Our customers are positively responding to these initiatives, evidenced by an improvement in our conversion rates and a year-over-year increase in leases originated with new and reactivated customers. Our internal efforts were complemented by lenders higher up in the credit stack having tightened approval rates in recent quarters. This has resulted in some higher credit quality applicants entering our funnel. While this shift in credit dynamics doesn't directly convert to GMV one-for-one, these applicants did contribute to our Q2 GMV. We believe we will continue to benefit from this credit tightening, as well as the internal growth initiatives I mentioned throughout the remainder of 2024. As a reminder, when we issued our outlook in late April, we had just reported a flat year-over-year Q1 GMV quarter, which had rebounded from a slow start to the year. We anticipated retail traffic headwinds in most of our leasable categories to persist in Q2. However, we remain confident in our strategic initiatives under Grow, Enhance, and Expand, and despite ongoing macroeconomic challenges, we are optimistic about achieving low single-digit Q2 GMV growth for our progressive leasing segment. I am proud of our…

Thanks, Steve, and good morning, everyone. Our strong performance this quarter demonstrates our ability to deliver on our strategic priorities and financial framework, which emphasizes growth alongside a healthy portfolio and prudent spending. For the second quarter in a row, we exceeded GMV expectations and surpassed the high end of our outlook for revenue and earnings. Non-GAAP diluted EPS of $0.92 per share beat the high end of our outlook by $0.17. I want to echo Steve's enthusiasm regarding our first half results and how it positions us as we move forward in the second half of 2024. Our teams have been driven and diligent throughout an uncertain macro environment over the last several years, and I'm proud of their performance. We are focused on sustaining our momentum and strategically navigating the periods ahead. Starting with progressive leasing segment, GMV exceeded our expectations with a 7.9% year-over-year increase, surpassing our initial projection of low single-digit growth. This outperformance reflects a significant stride our teams have made with our strategic initiatives which are driving GMV performance and we believe will impact results positively throughout the remainder of the year. Additionally, we benefited from the impact of tightening of credit supply above us. Our GLA balance at the end of Q2 of 2024 was down 0.7% compared to the same period last year, a material improvement from the previous six quarters of mid-single to low double-digit declines. We expect the GLA balance to turn positive during Q3 and improve throughout the remainder of the year contributing to the revenue growth implied in our revised outlook. Q2 revenues for the progressive leasing segment declined 0.8% from $574.8 million in Q2 of 2023 to $570.5 million, primarily driven by the gross lease asset balance being down 4.7% as we entered the quarter, partially offset…

Thank you. [Operator Instructions] Now, first question coming from the line of Brad Thomas with KeyBanc Capital Markets. Your line is open.

Hi, good morning and congrats on the execution here in the quarter. Steve, I want to just jump in first in talking about some of the growth drivers in the business. I was hoping you could just give us a little bit more color, maybe even quantify to some extent, how you're thinking about the drivers of GMV going forward here in the balance of the year and how much comes from the established retail base that you have, these important partners that are still seeing some tough times, how much improvement from them versus some of the growth initiatives you have? Thanks.

Yes, thanks Brad. Good morning. Yes, GMV, we're pleased with the GMV performance and it was strong and pretty consistent throughout the quarter. I'll talk about the second quarter and then we can talk about what we're -- what's baked into the outlook for the balance of the year. But the team's partnered well with our partners to your question about existing retailers and we were able to get a few initiatives that we had been working on for some time over the goal line during the quarter. So that's going to help us with our productivity within existing retail partnerships. The marketing team also had a hand in it both in the form of partner marketing with our retailers as well as direct-to-consumer marketing. And as we called out in the prepared remarks, we're encouraged by the momentum in our regional business. It's been a renewed focus for us and I'm pleased with the progress that we've made thus far and we're really just getting restarted, I would say, in that area. We also called out that the credit supply dynamic was at play and probably a little bit more observable this quarter than in previous quarters. We did see evidence of tightened supply above us in the stack and those apps are not -- it's not just about top of the funnel dynamics and apps. It's just one part of the picture. We have to continually work to improve the experience and remove friction from the onboarding process in order to convert those apps into funded leases and we had a few improvements, not only in the DTC or direct-to-consumer area, but also in particular retail installations there. So we're pleased with the execution because as you noted, in many of our – in our top retailers, they're still facing down traffic and down comps and so to be able to have this growth is, you know, we're pleased with that. We expect the momentum to continue and to somewhat even accelerate as evidenced by the fact that we guided to high singles in the third quarter for GMV growth. We did add some retailers mostly in the SMB space and in the regional space, but we've got a good pipeline and look forward to continuing the growth.

That's very helpful, Steve. And if I can ask a follow up just about, sort of the retail landscape. I think there's news of cons filing for bankruptcy today and plans to close at least some stores. You used to partner with them. I don't believe you were in them at all. There's other retailers you partner with that obviously close stores and maybe at risk of bankruptcy themselves in the future. I guess the question I have is, if you could talk a little bit about your relationship more directly with a customer than just a retailer? And how you maybe try and take advantage of situations where there might be like someone like cons that goes away and how you continue to navigate this landscape where the retail roadmap is changing almost every day?

cons:

Very helpful. Thanks so much.

Thanks, Brad.

Thank you. And our next question is coming from the line of Hoang Nguyen with TD Cowen. Your line is open.

Hi guys, and congrats on the very strong quarter. I just wanted to talk about credit tightening a little bit. It looks like from your outlook, it seems that you guys are incrementally more positive on the trade down from lenders above. So I just wanted you to confirm whether that is true. And maybe when we think about the environment right now, inflation is coming down, maybe things have gotten a little bit better versus maybe three months ago. So, I mean how sustainable do you think this trade down would be and have a follow up?

Sure. Well I would agree with your characterization that we're incrementally positive, but it's not just about trade down. It's about our execution and the initiatives that are recently deployed as well as things that we've got on the roadmap. Trade down is a factor in it. We talked about it. You'll remember we kind of were braced for it for a number of years and it really didn't happen. We started to see some evidence of it in holiday of 2023 and it was in two, I'll call it facets. Like more customers that were coming into the retail environment where we thought or we observed were in need of a payment plan. And that doesn't necessarily mean us. It could mean that they were appropriately partnered with a prime provider and that's fine. But more customers needing a payment plan and then couple that with less of them being approved by the providers in the stack above us does tend to have a funnel dynamic for us, which is positive for us. We read all the public reports from the prime providers and you'll see that maybe some of their DQs are stabilizing, but they stabilize because of some tightening efforts on their part. So I'm not calling for an intensity or a increasing benefit. I think the tightened conditions are here, at least for the rest of this year. I don't think they're going to continue to tighten, but the tightened conditions have had an impact at the top of our funnel and we feel pretty good about that continuing. But more impactfully are the things that we're doing on the execution front. We'll see what the view is for 2025, but right now we're not calling for increased tightening, but we believe that the tightening that's in the market will stick around for a little bit.

Got it. And maybe about your PROG Marketplace, I mean, very strong growth there. I mean, can you talk about historically how -- have you guys been successful in converting a PROG Marketplace relationship into like a direct integration relationship? Thanks Steve.

Yes, that's a great question. And the marketplace is an exciting area for us and it's really growing very quickly. Its origins and it started from really, because we already partner with some of the best retailers in the country, and it started with just another way for our customers to shop with our retail partners. And it is another evidence of us driving traffic back into the retail environment and helping to demonstrate the value that we provide to the retailers that we partner with. It has morphed into some affiliate relationships, which are retailers that we don't have partnerships with. And we're not going to specifically call out any retailers, but I can tell you that we have had conversations with and had conversation starters due to the volume coming through on the marketplace. In fact, there's been one retailer that we got a call from that we had been having conversations with already, but we got a call from them saying that they had enough volume coming through their customer service line that they wanted to get like a one-page tear sheet for their call center agents to talk about our program and then it kick-started on the biz dev side too. We're encouraged about just the volume of the DTC motion generally, but also as a complement to our biz dev partnership efforts.

Thank you. And our next question is coming from the line of Bobby Griffin with Raymond James. Your line is open.

Good morning, buddy. Thanks for taking my questions and congrats on the performance this quarter.

Thanks, Bobby.

Steve, I guess I want to circle back to the GMV upside and maybe ask it a slightly different way and maybe unpack it a little bit more. But when you guys saw the upside this quarter, was it a function that the initiatives that you've been working on and we've talked about got over the finish line sooner? Or is the actual impact from these initiatives greater than maybe what you guys were forecasting and they're having a greater impact at a quicker rate than what maybe the team was thinking the impact from these investments would be contributing?

Yes, that's a great question. Maybe a little bit of both. Initiatives never get over the goal line as quickly as I want them to, so I would never say that it happens sooner, but obviously we have to partner with the retailer and make sure it gets prioritized if it requires tech resources. So we had a few things that we had. What I've learned over the time is it's difficult, it's dangerous if you will to bake in GMV or business results from an initiative that you think or is scheduled to get done in a particular month or in a particular quarter. And so you may see some conservatism from us by thinking it's on the roadmap for Q2, but we haven't baked in the upside in Q2 because we have been burnt by that before. So maybe, yes, through that, some things got done faster than we had planned, which basically means they got done on time as opposed to being delayed. And as far as the impact of those items, yes, I mean I think on the margin it's probably slightly better than we were expecting and that's coupled with. It's hard to unpack that because it could be coupled with just general app funnel dynamics and that isn't necessarily trade down. It could just be customers that need a payment plan more and they're in our market already and maybe last time they bought during the stimulus period they paid cash and this time they're looking for a payment plan. So it's kind of a multiplier effect that we got some initiatives across the goal line and those initiatives were met with more apps so it was more productive.

Okay, perfect. Appreciate that. And then I guess two other quick ones, maybe one for Brian. Just on the lease merchandise write-offs being the high watermark, what is the driver behind that? Is that just a function of kind of how we roll through the rest of the year from a revenue standpoint or is it some leases rolling off the books? And then how much pressure -- can you give any color just how much pressure the gross margin might see versus last year in 3Q or I think you called out some dynamics in the 90-day buyouts?

Yes, thanks Bobby. With respect to the write-offs, as you go back the last few years, Q2 generally has bled down into Q3, so Q3 has been lower than Q2 just from a seasonal perspective. But I think part of what's playing into what we're seeing and it goes to your second question is, when we talk about trade down and the benefit we're seeing from the credit providers above us, unsurprisingly what we've observed with some of these incremental leases, and while many of them are in their early stages, the propensity or the tendency for them to steer towards electing a 90-day purchase seems to be higher than your typical lease. And so, that's going to have, and at the same time you may see some write-off impact from those, but it's early and we're watching those. So from a gross margin perspective, that higher 90-day is baked into a reduction sequentially from Q2 to Q3 in our anticipated gross margins and we'll watch that. The yield overall is still very strong collectively from these pools and we don't have any level of concern about getting to where we need to be from a profitability standpoint on these leases. They just appear to skew towards 90-day a little bit more. So that's going to help your – that's going to likely trend more favorable from a write-off perspective but come with higher 90-days. So that's what we're seeing there.

Thank you. I appreciate the details and our best of luck here in the third quarter.

Thanks, Bobby.

Thank you. And our next question coming from the line of Anthony Chukumba with Loop Capital Markets. Your line is open.

Good morning. Thanks for taking my question and congrats on the strong quarter as well. I was just wanted to see if we could get a little bit more color about those cross-marketing efforts, those successful cross-marketing efforts. You mentioned email. If you can just kind of dimensionalize that for us like how exactly, I mean, how are you kind of sharing information with the retailer? Who's sending the email out? I just want to get a little bit more color on that. Thanks.

Sure. The marketing efforts as it relates to the partner marketing with our retailers really come in a lot of forms. But I'm very proud of the team. We get a lot of kudos and a lot of positive comments from our retail partners about our marketing team and how they kind of view them as an extension of their marketing team. And so, it could be to your question, it could be a co-branded email that comes from us to our database. We're always very careful about channel conflict, but we can hit the database with a message from one of our partners. It could be a promotional campaign like a reduced IP promo that the retailer promotes. It could be -- we have another retailer who does a tremendous amount of mailers promoting the program. In their particular instance they have got a name for the leasing program that they promote. But the partner marketing is a big and growing part of our efforts. And we've also -- I think we've talked in previous calls about PROG Perks Week where we have retailers that partner with other retailers and we'll have a mail piece or an email piece that goes out from us that has two different retail brands on it and each of them offering a promotional item for our consumer. So it takes a lot of different forms. And it's not just email. It's also SEO and digital marketing and display and other things. Most of which is done with partner marketing, but some of which is done just from our DTC efforts as well.

Got it. Thank you.

Thank you. And our next question coming from the line of Vincent Caintic with BTIG. Your line is open.

Hey, good morning. Thanks for taking my questions and I wanted to echo the great results. First question, I wanted to actually focus on your discussion about the regional account growth. I know like in the past I think investors think about PROG Holdings as being more of a national account and some of the competitors as being regionally focused. So it was interesting and great to see the account growth on the regional side for PROG Holdings. If you could talk about your efforts in more detail, so sort of what you're building up there? What you see as an opportunity and where we can expect that to go, that'd be helpful? Thank you.

Yes, thanks Vincent. Yes, the regional space or the SMB space has been of particular focus from certainly the competitive set and on our calls recently and it's been a renewed focus of ours. The way I think about the business is really kind of like you described it, bifurcated. There's the enterprise side and there's a certain way that you support and partner with the largest retailers and then there's a different motion for the regional players. And regions within the bifurcation of the business, regions can also be split into pillars with super regionals, regionals and then what I call the long tail or the small SMB shops. But it's a big business and there's a lot of business out there to do and we compete very well in that space. So we have had a renewed focus on it. We made a change in leadership that focuses on attacking that business. In the quarter there was a particular focus on reactivating doors that we had maybe lost some productivity in or potentially had gone completely dormant and we had some success there. And as I mentioned in the prepared remarks, we saw an increase in doors as well as productivity per door specifically in the regional space. We saw it in the national space as well but in the regional space. So that was a key. We did add a few new partnerships and we expect to continue to do that. But as I've said in the past, the regions are very competitive and the churn is fairly common. So far and it's early, but so far we've achieved these gains without really having to increase the resources in the regional team as it relates to a sales force either inside or outside. But if when we identify high ROI opportunities to increase that team going after that GMV, we'll absolutely do that.

Okay, great. That's super helpful. Thank you. And second question, so separate topic from what we've been discussing, but on regulation. So there's been, I think two days ago we saw one of your competitors and the CFPB have their disagreements made public and then separately the CFPB is going after another one of your competitors. I think they're hearing in Utah this Friday. But wanted to kind of get your broad thoughts about regulation and maybe how those topics, to the extent they do affect or how they relate to PROG Holdings? Thank you.

Yes, I mean, I guess limited comments. We're aware of the activities as you can imagine in the multi-year investigations that have led up to those activities. We've read the complaints, but we can't comment. We don't generally comment on litigation that we're in, let alone litigation we're not in. It's hard to predict what could happen in the future, but it's something we closely monitor and take very seriously, which is why we work really hard to be a very transparent and flexible provider of our solutions to our customers. And we take that. We're very proud of that and take that very seriously. As far as, this is a highly regulated business, it's been that way for a long time. The states is where a lot of the action is. These happen to be at the CFPB level. And I guess all I would say as it relates to PROG Holdings, we're not aware of any investigations of us at this time, whether they be at the federal level or the state level, and haven't received any written notices or inquiries indicating such.

Okay, that's helpful. Thanks very much.

Thanks, Vincent.

Thank you. And I'm showing no further questions in the queue at this time. I would now like to send a call back over to Mr. Steve Michaels for any closing remarks.

Thank you. And I'd like to thank you guys again for joining us this morning and for your continued interest in PROG. Our teams are executing well and we are excited about our accelerating return to growth, coupled always with a healthy portfolio performance. We look forward to updating you again in October with our Q3 results, and we hope you have a great day.

Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect.