Good day, ladies and gentlemen, and thank for standing by. Welcome to the Rent-A-Center First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session [Operator instructions]. As a reminder, this conference call is being recorded [Operator instructions]. At this time, I'd like to turn the conference over to Mr. Brendan Metrano.

Good morning, and thank you all for joining the Rent-A-Center team to discuss our results for the first quarter of 2022. We issued our earnings release after the market closed yesterday. The release and all related materials, including a link to the live webcasts are available on our Web site at investor.rentacenter.com. On the call today from Rent-A-Center, we have Mitch Fadel, our CEO; and Maureen Short, CFO. As a reminder, some of the statements provided on this call are forward-looking statements, which are subject to factors that could cause actual results to differ materially from our expectations. These factors are described in our earnings release, as well as in the company's SEC filings. Rent-A-Center undertakes no obligation to publicly update or revise any forward-looking statements, except as required by law. This call will also include references to non-GAAP financial measures. Please refer to our first quarter earnings release, which can be found on our Web site, for a description of the non-GAAP financial measures and reconciliations to the most comparable GAAP financial measures. With that, I'll turn the call over to Mitch.

Thank you, Brendan. Good morning, everyone. And thank you for joining the call today to review our results for the first quarter of 2022. I'll begin today's call with some high level comments on the company's key objectives and progress, followed by a review of financial and operational highlights and then an update on our plans for the year. After that Maureen will provide a more detailed review of our financial results and then we'll finish of course with Q&A. Following the challenges we had at Acima in the second half of 2021, our primary objective for this year is getting the company back in a position to successfully execute the growth strategy we developed last year with the acquisition. Over the past number of months, we identified issues that drove Acima’s underperformance, developed a plan of action and began implementing solutions. In addition and as previously announced, we've recently completed a leadership transition at Acima. So we're encouraged with our start to the year with early indications that our adjustments are having the desired effect, and first quarter financial results coming in above the midpoint of our guidance ranges. While there are growing external headwinds this year, including the wind down of government stimulus programs, we believe the operational and financial progress we've made thus far have the company on a path to achieve 2022 financial targets and we've reaffirmed our full year guidance. Consolidated revenues were 1.16 billion down 5.8% year-over-year on a pro forma basis with Acima down 8.1% and the Rent-A-Center business segment down 1.2%. We believe the decline in revenue was attributable to the performance of Acima leases just underwritten in the latter part of 2021 using assumptions that lag worsening customer payment behavior, negative effects on customer incomes from government stimulus programs winding down…

Thank you, Mitch. The first quarter was a step in the right direction for the company, following a challenging second half of 2021. We achieved quarterly guidance targets, made good progress on key operational objectives and reaffirmed full year 2022 financial targets. Looking forward, we are cautiously optimistic about the rest of the year. Although, there are external headwinds from macroeconomic uncertainty and pressure on customers’ income from the wind down of government stimulus programs, we believe that we have a solid plan to get the business back on the path of strong profitable growth and achieve our financial targets. First quarter revenues of $1.16 billion increased 11.9% year-over-year on a reported basis and decreased 5.8% on a pro forma basis, with both merchandise sales revenues and rental and fees revenues down year-over-year. Merchandise sales revenues decreased as a result of fewer customers electing early payouts this year compared to the prior year period when government stimulus programs boosted discretionary income. Rental and fee revenues were down because of the poor performance of Acima’s lease vintages that enter the portfolio during the second half of 2021 prior to recent underwriting adjustments, which caused an increase in delinquencies that significantly outpaced top line growth. This required us to increase our provision for delinquencies, which is treated as a reduction in revenue and caused rental and fees revenues to decrease year-over-year. Adjusted EBITDA of $99.5 million decreased 28.3% on a reported basis and 42.9% on a pro forma basis. Adjusted EBITDA margin was 8.6% in the first quarter compared to 14.2% for the prior year period on a pro forma basis. The margin contraction was a result of higher loss rates for both the Acima and Rent-A-Center segments, higher delinquencies at Acima and higher operating costs mostly from labor. Below the line,…

[Operator Instructions] Our first question or comment comes from the line of Kyle Joseph from Jefferies.

Obviously a lot going on both macro and that Acima, so just kind of trying to dig through the weeds here. In terms of GMV growth, can you kind of give us a high level breakdown of how much of that is kind of macro or how much of that is more specifically the underwriting changes? And kind of give us a reminder of the timing of the underwriting changes, so we can kind of think about how trends improve there over the remainder of the year and into '23?

On the GMV growth, when you think year-over-year, the biggest -- certainly the tightening and underwriting was an issue and is an issue, when it comes to GMV. And we’ve tightened starting last fall obviously it wasn't tight enough in the vintages and then really additional tightening started in the first quarter, early in the first quarter and throughout the first quarter. So when we think about it, one of the bigger issues besides the tightening of underwriting is what we're comping over. As we mentioned in the prepared comments, our two year comp in the first quarter is 10% on GMV, our two your stack number for the second quarter is forecasted to be over 20%. So it's still very, very high numbers when you think about it on a two year basis. As the comps ease in the latter half of the year. I think Maureen said in her prepared comments, we'd expect to be flat by the fourth quarter. And then long-term, we would still anticipate double-digit growth when you think about 2023 and beyond maybe higher than that depending on we get larger account plans and so forth. But being the double-digit range going forward after we get over these tougher comps, the tighter underwriting, as well as -- when I say tougher comps, obviously, the stimulus last year is driving a lot. There's still a lot of growth out there. We added almost 1,300 net active merchants in the first quarter. So still a lot of growth out there and just some tough comps. And like I said the two year numbers seems to be, as Maureen said, where we'd like to see them in market.

And then just on the Rent-A-Center side, obviously, losses are up there. But a lot of that can be ascribed to macro factors. Can you give us a sense for where you see long-term losses at the Rent-A-Center segment shaking out kind of once we lap all the stimulus and everything?

I think we've always said the normalized range is three to four that came in at 3.9 in the quarter. So a little higher than we want to serve at the high end of the range, but they're in that range. And we'd expect them to be in the middle of that range for the year in that 3% to 4% range. So really it's just a normalization, maybe 30 or 40 basis points higher than the midpoint of that range with all the growth they've had the last couple of years, but really in line, really a good quarter on the Rent-A-Center side when you think about where the portfolio ended. A flat comp roughly coming off of what was the last two years 15% last year, I'm talking about for the year. And 10% in 2020, you're talking about 25% growth over two years and then to be flat. This year you're going to be forecasted roughly flat, maybe down a little bit for the year, is pretty impressive when you consider what -- holding on all that base that we added the last two years.

And then last one from me just modeling, Maureen. I think you gave us some share count guidance or share count for guidance, is that consistent and can you remind us what number that is for '22?

The share count in the first quarter was $60.1 million.

Okay. And then for '22, the adjusted EPS number, do you have a number of what that's based on for the share count?

It's pretty similar, it's 60.5 for the full year.

Our next question or comment comes from the line of Bobby Griffin from Raymond James.

Mitch or Maureen, I want to first check, I mean, obviously, tightening trends here in Acima to kind of get the portfolio back in line. Just curious what feedback has been from your customers? I know customers focus on approval rates, purchasing dollars of approval that you can do. So these tightening trends is definitely a different environment versus what they're used to Acima. So just any anecdotal feedback from customers as you kind of go through this process to get the portfolio back in line?

When you think -- I know, when you say customers, you're talking about our retail partners. It's all about where you start from. I mean, our tightening underwriting and our approval rates are in line historically where Acima was. And when you look at 2018, '19 even 2020, it really was a matter of what happened in 2021. And so when we look -- like I mentioned in my prepared comments, the FPM rates, first payment missed rates being down 30% in March from the peak in December, those are just historically in line with where they always are and the same thing with approval rate. So it's not like we're hearing from retail partners that, my gosh, you're tighter than your competition or things like that. I think in this environment, everybody's probably tightened a little bit. But we're not -- it's not like we're tighter than we were and going back and looking three years before 2021.

And that was actually the second part of the question. Do you think now, it kind of seems like everybody across the space, at least on the virtual side, has tightened a little bit with the portfolios got a little bit out of whack as we came back into normalization. Have you seen any favorable trends kind of in the competitive environment where maybe it's a little less competitive and everybody can kind of grow into this virtual business a little bit more friendly, or is it still probably every bit as competitive for new customers in dollars out there as it always has been?

I think it does feel and just listening to comments of other companies, public companies, certainly, there is an overall tightening. So I think it's pretty similar though, as far as the competitive environment. What we haven't seen yet we, but as you know, we historically see is the tightening above us helps us when we get into these times with higher interest rates, and as the economy tightens up. And even though we haven't seen it yet, we're optimistic, at least cautiously optimistic, we'll see some of that as the year goes on and the funnel widens. And there's really no reason to think that those anti-cyclical attributes relating to tighter credit above us won't -- wouldn't apply going forward. Like I said, we haven't seen them yet. But I think that's coming when you think about interest rates and spreads and so forth. So like I said, we're optimistic we'll see that again. And although, it's not like we forecasted any -- not like that’s forecasted in our plan either, but we are expecting to see that.

And then maybe, if that was to happen and play out. So right now, consumer spending still remains pretty resilient. There's obviously some shifts going on between durables and services. But if that tightening impact plays out as the potential with interest rates and inflation running through the economy. When you start to see the pool -- the customers get pushed out in your rent to own pool. How long does it take to really float through the P&L or you see that benefit, is it a six month lag, nine month lag from when we start to see the changes in the economy?

No, I think you'll start to see them -- they build over that six to nine months, but you start to see him right away. I mean, every month you write a lease you fund a lease, you expect to make a little money on that lease. So I think it builds, maybe to a crescendo on six to nine months, but it starts pretty much as soon as you start seeing that pushing down, you start adding -- beating your GMV numbers and so forth. And I think when you think about the spending, it is very resilient and it's everything you hear on the news and so forth. Although, the reason we would expect to see tightening above us, when you get down below prime and get in near prime and certainly subprime that customer is not in the same shape as the -- what we might hear every morning on CNBC or something. That customer we deal with is not -- with the inflation and gas prices and that kind of stuff, they're not in the same shape. So when you get down in the near prime and below prime and especially the subprime, you're going to have to be careful if you're writing loans. So that's why we normally see the tightening and we would expect to see it sometime this year as well.

Our next question or comment comes from the line of Jason Haas from Bank of America.

So the first one is on the guidance, it does imply a pretty big acceleration in the back half of the year, and I appreciate all the color that you gave. But I'm curious just what gives you confidence that you will see that acceleration through the year and maybe by segment? I mean, there's a lot of that acceleration going to come from Acima or is there going to be some acceleration across the Rent-A-Center business and franchise in Mexico as well?

So what gives us the confidence is a lot of what needs to happen to make the improvement from the first half to the second half is simply getting the leases, the underperforming leases from the latter half of 2021 for them to cycle through the system. And so that will improve provisions for delinquencies, as well as loss rates in the Acima segment. The average lease lasts about six months. So we know that by the second quarter we'll have worked those through most of the system. We also expect the second half will have more profitable leases due to the underwriting improvements that we've made. So new leases that we write in the -- even the beginning of this year and all throughout the second quarter will be more profitable leases. So we'll have higher revenue, lower delinquency rates and lower provision adjustments. And then we should be through the adjustment period our customers went through when stimulus ran out. And so that should also help lease performance. We've also got the Acima leadership team very focused on improving merchant acquisition and productivity. So we'll see better GMV growth rates in the second half versus the first half. And then, as Mitch mentioned, we may see some of the near prime customers falling into our funnel. But the main improvements are in the Acima segment, reducing Acima loss rates by about 400 basis points between the first and second quarters and reducing the provision for delinquencies by about 200 basis points in the Acima segment. There is some improvement in the Rent-A-Center segment not nearly as much as Acima, but we are expecting the Rent-A-Center portfolio to increase in the fourth quarter like it normally does. There's better seasonality in the fourth quarter for both segments. And then we're expecting collections to improve in the second half in the Rent-A-Center segment. There's also some cost efficiencies we're expecting but generally, big buckets are Acima improvement and lease performance.

Yes, that's the big one, Jason. I would just add on to that, that there's really nothing yet that to Maureen said, except just to do a little math when you think about the 400 basis point improvement in losses as these leases from last year run through Acima. I mean, just think about what 400 basis points per quarter or on an annual basis, because people want to take our current number and look at run rates and so forth. So if you think annual basis, you're talking 400 basis points high, even in the second quarter, and that's a based on our guidance, just call it $1 run rate. 400 basis points is -- on an annual basis, if you use that as a run rate, you can see -- what's Acima, $2 billion business roughly from a revenue standpoint. So it adds quite a bit. And I think -- and you think about last summer too, the third quarter last year, we were about $1.52 in diluted EPS, and I'm using the third quarter, not the first year -- the first year or second quarter last year was even higher, but obviously stimulus driven. And there was still obviously some stimulus in the third quarter last year. But it's not like we haven't done those numbers before. And when you just put a normalized loss rate in there, even not a low normalized loss rate when you say 400 basis points under 12.5. I mean, 8.5 is not like that's the lowest. We always said the range on a virtual business is 6% to 8%. So just take that 400 basis points and you start to get back to those numbers. And the same way those losses in the delinquency reserves that Mareen's talking about to get $1.50 down below $1 really quickly, it snaps back when you don't have to put those reserves up or have those higher losses just as quickly.

As a follow-up question, I think Maureen just mentioned it. But I was curious about the leadership change at Acima. Could you just talk to what the rationale was for having that leadership change, and any plans to run that business differently? Appreciate what you've said about being more -- a little more tighter with the position there, but curious if there's going to be any other changes on to expect from that business?

I think, we felt like it was just time to make some changes in it. It was really not just about any one person, it was a team change, as well. Obviously, with the founder being more involved now here and I'll read -- but we also brought back a key engineer, the tech leader that was part of growing the company from the beginning, elevated a few people that have been there for many, many years. We're really trying to build a long-term sustainable team against that, just about any one person, it's really more team building. And I would expect besides the tighter underwriting that's already providing good results for us, as we mentioned, I think we'll see improvement from a sales standpoint, and as the new team -- the newer team works on the sales function and so forth. So I don't think there's massive changes, like the business is going to change, we're still testing the digital ecosystem. We have -- look at that to make sure we're getting the right profit margins as we mentioned. So we're testing very thoroughly to make sure we get the right profit out of it, but we're still excited about what it can become and so forth. So that's not changing. Not so much to change, Jason, I think we can get better in all aspects of the business.

Our next question or comment comes from the line of Anthony Chukumba from Loop Capital Markets.

I guess my first question, it's kind of a follow-up to the prior question. With the change in leadership at Acima. Is it -- and obviously with Acima, the changes you're making in terms of tightening credit and getting that lease portfolio back in shape. Is it safe to assume that the lease pay card stuff that you guys were talking about like the virtual card, is it safe to assume that's kind of more on the back-burner now?

I wouldn't say back-burner, we've slowed the testing a little bit just to make sure we're at the right profit margins. We don't want to run too fast. This year is about fixing the underwriting, getting a sustainable long-term team in place but continuing to test it. So I wouldn't say back-burner Anthony as much as just a good thorough test. And we're still excited about what it can become at that. There's still a lot of opportunities there for us to evaluate with the new leadership team there and figure out what the best way to use it is. So no, I wouldn't call it back-burner. Just we're still excited about it and maybe a little more prudent testing from a profitability standpoint.

And then one just somewhat related follow-up. So one of your retail partners Conn’s recently announced they're going to bring lease to own in-house. And I know that's an account you guys were sort of sharing with American First Finance. But just -- so how should we think about the -- and I know that it's not going to something's going to happen overnight. But just like long-term, how should we think about the potential headwind losing the Conn’s account?

You're right, Anthony. It's not going to happen overnight if it does happens. But I think the key to Acima is how diversified the almost 40,000 retail partners are. We are very diversified. No one, two or three partners makes that much of an impact. Obviously, we’ll have some of those bigger national accounts. But I guess the other -- the flip side of that coin is we don't have any accounts that are so large that any one or two accounts would be a headwind that would be all that noticeable in the numbers, and that thing we want to lose any accounts, we'd love to do business with Conn’s forever. And hopefully, we will find a way to do business with them forever. But the point is, it's very diversified portfolio and we really don't have that risk of any one or two or three partners really having that big of an impact.

Our next question or comment comes from the line of John Rowan from Janney.

One thing with a similar theme of questions. As far as six months ago or nine months ago, you were talking about national partners with Acima. I'm wondering what the status there is with the management change? And whether or not the change in underwriting affects the sales process of trying to onboard a new large retail partner?

No, I don't think so. Again, we're still very competitive. Maybe we don't have the highest approval rates like we did, probably mistakenly had for six months last year. I wouldn't go out there and say we have the highest approval rates, like we could have been saying last year. You never really know what all the competition's approval rates are anyhow. But it's not that we're not competitive, we can be as competitive as anybody. Again, our approval rates are not sub where they were before last year, they're not. It's not like we're lower than 2019 or '20, so before we bought Acima. So I don't think that has any impact on that. Again, our approval rates are still very competitive. And just large retailers in general, as you know, John, it's a very long cycle. The new management team is focused on, just as focused on national accounts as we have been prior. We haven't had a lot of any big signings yet. We're talking to a lot of people, it's a very long cycle. The good news is we expect retailers to get more focused on it now that their comps are going to be tougher than maybe the last couple of years. It’s hard to get larger retailers focused on it when they couldn't fulfill all the business they had. Tech resources were under pressure for integrations and things like that. So we expect retailers to be more focused now, talking to tons of them. And it's a long cycle and we're going to continue to work, but there's no less emphasis on that than ever.

Our next question or comment comes from the line of Brad Thomas from KeyBanc Capital Markets.

Want to just follow-up on the dialog and trends with retailers. I would think with us entering a backdrop where consumers may need leased to own financing options more readily here that your retail partners maybe more interested in working with you. Can you just comment a little bit more about what you're seeing from a door count perspective and how that pipeline of potential activations looks?

I think you're spot on with those comments. We think all retail, small and large ones, are more interested in now than they were a year ago or obviously two years ago when that pandemic first started. I think I mentioned we added about 1300 active locations in the first quarter, so it's not like there's not a lot of sales going on out there. And that's part of how, even with the tighter underwriting, as Maureen Short said, and in a in a GMV number in the second quarter similar to the first quarter that our two year GMV number still be over 20%. So we're still adding a lot of locations, like I said, almost around 1,300 in the first quarter. So there is more interest, not that we weren't adding them last year but there does seem to be at least a little bit more interest spread from retailers and we're optimistic we're going to be able to continue to add to the regionals and we're going to work real hard on those national accounts as well.

And, Mitch, can you just remind us, is the decisioning in you're getting in your Acima segment, is that all on one process now versus the legacy business you had and Acima? And can you just talk about what you've done to try to further enhance the accuracy and the ability to predict well with your decisioning?

All the virtual business is on the same system, some of the staff business, there's still a few staff partners to convert to the Acima software and therefore, their decisioning. So it's mostly all on one system but there is still a few retail partners to convert over. And I think the tools have been there, we've added a few tools to the underwriting process as well, there's always new tools, we could probably add tools every week, you got to be careful not to chase every single one of them. But when I say tools, things they can add into the process, fraud detectors and all those kinds of things, and the team out there is adding things they think they need. A lot of it, most of what -- where our missteps were, Brad, were just philosophical and from a leadership standpoint, just pushing too hard for volume. It's not like they didn't have enough tools. But again, they're still adding tools and different products to it. I'm not that the tech guy, although, I could throw out a couple of names. Even though I'm not exactly positive what they do, I could sound smart, if I wanted to throw out a couple of brand names or things they've added to the decisioning. But we got a great team out there in Salt Lake, and they're adding the fraud detectors that they think they need to add. And obviously, the numbers are working really well, even though our approval rates are in line with where they were pre-2021. The FPM rates have come right back in line, as I mentioned, 30% lower than they were when they peaked in December. So obviously we're about 30% on the line as the year came to an end. And then I'm sure as the year goes on, we'll add one or two more tools, because like I said, in the tech world, there's always some new product to add that can maybe get us a little bit smarter, and they're always working on that the team out there. So we're really pleased with what's happened with the underwriting obviously in the numbers so far this year.

If I could squeeze one more in just on the Acima outlook for margins. Obviously, we're in an unusual period here, so lack in stimulus and you've done some tightening. How should we think about what the medium term margin outlook is for Acima? I think maybe more of a 2023 sort of number. And do you still think mid-teens adjusted EBITDA margin is a reasonable target, maybe longer term after you get past some of the growth initiatives that you're still making in the business?

So as you can see in our guidance, we expect substantial improvement in margins from the front half of the year, which is still negatively impacted by the underperforming leases to the back half. We’ll average around 12.5% EBITDA margin if you look at our guidance to get to that double-digit EBITDA margin for the full year. And so you can see we'll end the year, not quite to mid teens. I would say our longer term rate is in the 12% to 13% range for the Acima segment. With how we're viewing things right now, that could change. We're obviously not giving 2023 guidance. But as we stand right now, it's probably closer to 12% to 13%.

Our next question or comment comes from the line of Carla Casella from JPMorgan.

This is Mike on for Carla, and thanks for taking our questions. Just two ones from us and hopefully quick. Do you guys recognize you guys get down a little bit of the revolver balance this quarter, do you guys expect to pay more either in second quarter or by year-end? And then I'll ask my second question after that.

We are more focused this year on reducing our leverage just given the macro uncertainty. So there's a chance that we pay down debt further throughout the rest of the year.

And second one is, can you guys give us any sort of parameters to help forecast, think about the purchase of rental merchandise for the core business? Recognize that Acima kind of goes directly with sales, on to kind of touch on to that. Are your stores, would you say that they're under inventory in certain categories just given that as well? Any context or color that would be helpful there.

No, we don't feel like we're short in any products in the stores, like any retailer with electronics in their stores, we could sure use a few more PS5s on the shelf. So I think Anthony would agree with that. Anthony Blasquez runs the Rent-A-Center segment. And I think he takes a lot more PS5s if he could get them. But other than that, no. In fact, as I mentioned in my prepared comments, we had thousands of SKUs to our Web site recently, extended aisle, if you will, through other retail partners. So no, from an inventory standpoint, our Rent-A-Center has been in really good shape.

Thank you. I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to Mr. Mitch for any closing comments.

Thank you very much. And thank you, everyone, for your time this morning, for your interest in us. We certainly are happy to report numbers in line with our guidance. And to reiterate our annual guidance, it was a tough latter half of last year and a tough start to this year from the standpoint of having the add to the delinquency reserves and losses and so forth. But we know what we did wrong, we know we need to fix and we're on the right track. And a lot of the metrics are coming in line really well and we're pleased with that. And we look forward to reporting back to you next quarter. Thank you everyone.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program, you may now disconnect. Everyone, have a wonderful day.