Good day and thank you for standing by. Welcome to the Fourth Quarter 2023 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 Investor Relations. Please go ahead.

Good morning and thank you all for joining us to discuss the Company's performance for the fourth quarter and full year of 2023 as well as our outlook for 2024. We issued our earnings release before the market opened today and the release and all related materials, including a link to the live webcast are available on our website at investor.upbound.com. On the call today from Upbound Group, we have Mitch Fadel, our CEO; and Fahmi Karam, our CFO. As a reminder, some of the statements provided on this call are forward-looking and are subject to factors that could cause actual results to differ materially 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 our fourth quarter and full year earnings release, which can be found on our website for a description of the non-GAAP financial measures and 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 will turn the call over to Mitch.

Thank you, Jeff, and good morning to everyone on the call today. I'll begin with a review of key highlights from 2023, as well as a discussion of our priorities for 2024, and then I'll hand it off to Fahmi for a more detailed review of our financial results and our financial outlook. After that, we'll take some questions. As we reflect on our achievements throughout 2023, we believe our business took meaningful steps forward across both major segments and the new shared services holding company. At Acima, we saw growth in both customer base and our retailer network. We also continue to develop our direct-to-consumer options with the virtual Acima marketplace where our customers can shop at merchants, including unintegrated merchants to select eligible products and enter lease with Acima. Acima return to year over year revenue growth in the fourth quarter driven by a 19% increase in GMV. The investments we have made in our technology and product offerings are beginning to pay off with GMV momentum throughout the fourth quarter. Importantly, we're driving GMV growth while remain disciplined on underwriting with Acima loss of stable throughout the year. Our disciplined and targeted approach to underwriting combined with normalizing customer behavior drove material year over year profitability improvement with full year 2023 gross margins increasing 340 basis points and adjusted EBITDA margins increasing 490 basis points versus 2022. At Rent-A-Center, we remained focused on offering a broader product lineup as well as an enhanced digital experience. We expanded our merchandise lineup with new products in our existing categories while adding new product verticals such as jewelry and tires in the fourth quarter. Whether in the showroom or our extended aisle web channel, our product mix continues to grow and evolve to meet our customer's needs. These efforts are…

Thank you, Mitch, and good morning everyone. I'll start today with a review of the fourth quarter and 2023 results and to discuss our fiscal year 2024 guidance, after which we will take questions. Beginning on Page 7 of the presentation. Consolidated revenue for the fourth quarter was up 2.8% year-over-year with Acima up 6.6% and Rent-A-Center down 1.7%. Rentals and fees revenues were up 4.3% reflecting higher portfolio values for both businesses during the fourth quarter. Merchandise sales revenues decreased 5.6% due to fewer customers electing earlier purchase options. Consolidated gross margin was 50.3% and increased 30 basis points year-over-year with improvements in both the Acima segment and the Rent-A-Center segment. Consolidated non-GAAP operating expenses excluding skip/stolen losses and depreciation and amortization were up mid-single digits. Led by a low teens increase in general and administrative costs as a result of certain corporate investments in technology and people and higher incentive based compensation tied to company performance in addition to mid single digit increases in both store labor and other store expenses. The consolidated skip/stolen loss rate was 7.5% unchanged from the prior year period and in line with our expectations. On a sequential basis, the consolidated loss rate increased 50 basis points due to a modest uptick in the Acima segment, driven primarily by the legacy Acceptance Now business. Putting the pieces together consolidated adjusted EBITDA $107.6 million decreased 2.2% year over year as higher Acima segment EBITDA was offset by lower Rent-A-Center segment EBITDA and higher corporate cost. Adjusted EBITDA margin of 10.6% was down approximately 50 basis points compared to the prior year period with approximately 20 basis points of margin contraction for Acima, approximately 10 basis points of contraction for Rent-A-Center and a 40 basis points increase in corporate costs as a percent of sales.…

[Operator Instructions] Our first question will come from the line of Kyle Joseph from Jefferies. Your line is open.

Just on the pre-cash flows in ‘23, it looks like came in a little bit below your guidance. Is that really just a function of the better growth at Acima or the better GMV growth out of Acima?

That's what causing a lower free cash flow for the year. As we stated, the GMV came in above our expectations, and so you'll have an impact on the short term on free cash flow, but we'll benefit in the long run from a higher portfolio.

Obviously, GMB was really strong in the fourth quarter. Is that kind of the new run rate? Was there any sort of one-time things related to holiday sales, just trying to connect GMB in the fourth quarter versus your revenue outlook at the segment?

This is Mitch. I wouldn't call 19% the new, the new run rate. Although, I will tell you it's held up really well going into this year. Our guidance for -- and I'll come back to that in a second, guidance for ‘24 is mid to high single digits on GMV four Acima. So we certainly expect to continue. In fact, it'll be higher than that at the beginning of the year. It'll get a little lower as we comp over the plus 19% in the fourth quarter, and in fact, January within the 15% range and February's looking to repeat that so far. Obviously, February's not done yet, but we're talking about 15% in January and looking about the same so far, at least in February, so really strong momentum. We're saying mid to high single digit GMB growth for the year because it will get a little tougher as we get later in the year. But when you are comping over 19% in the fourth quarter, but really strong -- obviously at the 19% really strong so far this year, and we're really happy with the demand and the overall performance of Acima keeping delinquencies flat with all that growth. And good underwriting everything we just talked about in the prepared comments. But a lot of momentum, a lot of new merchants lot. In fact, I think it was on one of the slides or it is on one of the slides, we added 6% merchant growth. Our productivity per merchant went way up in the quarter, about 25% increase in productivity per merchant. Our direct to consumer almost doubled the business from last year in the fourth quarter. Our e-comm did double in the quarter smaller numbers, but those numbers doubled. So, every aspect of their business is going really well.

And then last one for me, and I can hop back in the queue, but just talk about what merchandise you're seeing really strong growth in at Acima and then some or others where you're not seeing the growth. Is it really kind of consumer electronics? Is it tire? And then, how furniture and mattress been trending as well. And that's the last one for me. Thanks guys.

Sure. Kyle. In the fourth quarter, we had great growth in every segment, every category that we're in, even furniture that's obviously had a lot of headwinds. But we grew in all of them. All the ones you mentioned, everything we're in, it was pretty consistent across the board, of course, again, it's not just a matter of our current merchants, just more productivity within the current merchants. We're adding a lot of merchants, like I said, 6% growth, and more coming in the first quarter. Adding merchants and getting more productivity in each category is driving those numbers.

Maybe just to add to that, Kyle, we saw it across the board as Mitch said, of course in the fourth quarter you'll have a run up in jewelry and consumer electronics being one of the more riskier segments for us, we're able to make sure that we're monitoring that from an underwriting standpoint. But even in furniture, we talked about apps being up overall by 20% in the furniture category, it was up over 30% in the fourth quarter, and that's a reflection of adding merchants and going exclusive on actually.com, which is one of our biggest accounts. And doing that it gives us more apps to look at. We actually had lower approval rates in the quarter, so we were able to be a little bit more selective and still grow GMV year-over-year.

Yes, I think that's a great add-on that's growth with lower approval rates than 19% growth.

Our next question comes from line of Bobby Griffin from Raymond James. Your line is open.

Mitch, I want to maybe just unpack the GMV growth in a little bit more if possible, and spend a few moments there. Look, the 19%, a pretty notable flip from trends, and I would say, our checks at least from investor side, is that retail was just okay, probably during 4Q and maybe even in the categories you guys do was a little less than, okay. So, can maybe unpack what you saw there and what do you think is driving the success to flip this pretty meaningfully here in the fourth quarter?

Sure, Bobby, good question. I think, at the end of the day, we're taking share, just to cut to the chase. And when I say we're taking share, there's different ways of taking share. When an account taken away from someone else, you can get in a better position with that account, because you're servicing them better or the flow is better, the other e-comm flow whatever. You can get in first position wherewith retailers that have more than one LTO option in the store. We had some where we got exclusivity in the store, we had some where we took the account from a competitor. So, it's a combination, all those things. I think when you sum it all up, we're taking share. And one of the big successes of Acima, as you know, Bobby, Acima has a fantastic. One of the things we loved three years ago, last week when we acquired Acima with their sales team out in the field and with a strong sales team as the way the Company built with that diverse sales team and really go after the regional and SMB accounts. And of course, we've got the enterprise team too. So, we've got a multi-pronged diverse approach where this fantastic sales team. Between the people out in the field and some inside sales support, you're over a hundred people, probably about 125 people in total. And they just keep adding accounts and servicing those accounts well. And we just keep adding -- not only adding merchants, but getting in better position with merchants being first one they run, and as long as we approve that customer, then they don't run them through anybody else. Things like that. Taking accounts, taking market share. And then we got some good regional wins, we got…

And I guess secondly for me tough, I don't want to call it one quarter a huge flip and trend, but just hypothetically speaking, if this does kind of build from here. Can you talk a little bit about the scale of the organization and kind of will you need to scale up for this type of growth from an OpEx standpoint? Or is the organization at a good scale really on both sides of the business, the core Rent-A-Center stores as well as the Acima, that if we start to see kind of more sticky, meaningful GMV growth, you guys can handle it and, and what would it kind of flow through at?

I think we're at a good scale. We mentioned -- Fahmi mentioned when we talking about the 2024 outlook, we were able to keep -- by building scale and by adding things, a lot of technology investments and so forth. We're able to keep our percentage, our corporate overhead percentage, the same as last year, which I think going forward when you start talking about ‘25 and beyond, we talk about leveraging the revenue growth obviously this year keeping that percentage flat and then seeing leverage down the road as the revenue grows. But I think this year we've got the investments already in there keeping the percentages the same because with revenue growth, you should actually see it go down a little bit. But because of some of those investments we've had to make, they're in there. And so, I don't think you would have to go over that. And I think actually if you want to look longer term, like ‘25 and ‘26, you'd be talking leverage against that number.

Bobby, the high growth that we're talking about, especially at Acima obviously being a virtual business, you can really scale that business up without adding a lot of expenses.

Our next question will comes from line of Bradley Thomas from KeyBanc Capital Markets. Your line is open.

Wanted to kick off with maybe one more follow up on the GMV dynamic that seems so -- it seems to have such a great momentum here right now. Wondering if you cut the data and you'll look at how many are new customers to Acima versus repeat perhaps who's new to rent to own, or if you have any data, if they've been a rack customer previously? Just curious about that dynamic.

Yes, there's not as much overlap between the Acima customer and the Rent-A-Center customer, as you might guess. It's certainly -- of course as we look at the demographics, there is a bit of a spread between them. The customer going in shopping for retail and getting denied or maybe not having traditional financing options, there is a pretty big difference between them and we don't see a whole lot of overlap. We see as you probably know, Brad, the repeat business is extremely strong in Rent-A-Center. Of course, you can get every product under one roof at Rent-A-Center, and it's a little more the demographic a little different than the Acima customer. So depending on the year, we see as much as 70% repeat business in Rent-A-Center and Acima it's about half that from a repeat business standpoint. Something we're always trying to grow because they -- again, it is more diversified if they got tires somewhere or they got furniture somewhere that it may be a few years before they come back and use Acima. We only count repeat business if it's within a period of time. I think its12 months when we count it as repeat business. So, we do get a lot of repeat business. I guess the short answer is, we get a lot of it more Rent-A-Center than we do at as Acima just virtual the way the business models work. But I think where the expansion of the consumer base -- well, let put it this way, if 35% roughly of Acima customers are repeat business, obviously 65% are new. A lot of new customers coming through the pipeline more so at Acima than Rent-A-Center because we're getting them through all those retail partnerships. You're talking about over 35,000 retail partner stores that you could do a lease into Acima, not to mention the direct to consumer stuff. And I say 35,000, and then a website like Wayfair is one customer, right. So, there's an awful lot of places that LTO is becoming much more popular and much more mainstream through these retail partnerships, and a lot of new people are being exposed to it. I think, especially if the economy gets any worse going forward, even more people will get exposed to it. More people will need it. Family mentioned, the credit card fee, late fee kind of thing could affect some approval rates above us. And we may get more trade down going forward. We didn't build that in, but it certainly could be a tailwind for us. So a lot of people need LTO and a lot of people getting exposed to it every day.

Absolutely. That's helpful, Mitch. Just to ask the question about underwriting. As you think about the segments, could you just talk a little bit more about how you feel about the underwriting and potential needs to tighten on the horizon versus opportunities to maybe loosen?

Yes. Brad. The underwriting, we've talked about it a few times, it's a continuous process of us to evaluate where we are, where the market is, and where we are compared to our competitors. And it really was a good sign for us to be able to really reduce the approval rates in the fourth quarter and still have that growth. From an underwriting standpoint, we try to optimize our decisioning for EBITDA dollars and the yield that we've seen specifically at Acima over the last 12 months has given us the opportunity to be very opportunistic on where we want to lean in. And also we're very confident we can identify pockets of risk going forward, but that the higher yields allow us the ability to absorb potentially higher losses down the road if the macro worsens and still generate those mid-teens. So, we feel good about our capabilities to manage it and produce the returns that we're looking for.

And the other exciting thing about the underwriting is not just as Acima, we mentioned that we're taking our legacy business, we only have two more large retailers to convert, and that'll be done by the end of the first quarter. So that we're excited about the early results of accounts we've already switched over there. Again, getting in line compared to the underwriting that Acceptance Now was using. And we're excited about that because after we get through, as Fahmi mentioned, after we get the first half of the year, the losses come down from where they are now based on the consolidated losses come down after those accounts were run through, and then we'd have all of A Now on it, looking at some of those best practices, some of the great tools that the Acima uses, and using them on the Rent-A-Center side as we get into 2024 is exciting. So, there's some potential tailwinds on underwriting. We talk a lot about A Now, but even on Rent-A-Center, using some of that same team to influence and put some of the same tools on Rent-A-Center that can -- not only most people only think of underwriting. Well, if it's better underwriting, you reduce your losses. But one of the things you learn when you really dig in is better underwriting also finds you green shoots of things you can approve that maybe you weren't approving before. So it can also drive volume be, because if it is so much more sophisticated than targeted, you don't have to cut out whole swabs of a particular group or and if a customer looks like this, you cut out the whole group, a particular score or whatever. And when it's better sophisticated and targeted, you certainly can -- maybe you…

That's very, very helpful. If I could squeeze in one more here, just on how to think about gross margin and modeling it for the year. Fahmi, it strikes me that probably mix towards the Acima away from rack would be one of the more powerful drivers just in terms of how the margin rate on a consolidated basis plays out. But anything else we should think about, as we think about baking the cake on the gross margin for the year?

Yes, I think that's right between the mix of Rent-A-Center and Acima for looking into 2024 for Rent-A-Center, expect to have gross margins to be relatively flat year-over-year. For Acima, the guide has us coming down a little bit year over year especially in the first half of the year. We have some tough comps in Q1 and Q2 compared to 2023. And we talked about the early payout options and fewer customers electing that. We expect that to continue this year, but maybe not to the same degree more normalized. If you look at Q1 of last year, the gross margin expanded almost 500 basis points or over 500 basis points. And so, we don't expect it to do that again in the first quarter of 2024. But it'll be close to that. We expect it to be slightly down from that. So it's more of a cadence of first half being a little bit lower than 2023 and then catching up in the second half of the year.

Our next question will come from the line of Anthony Chukumba from Loop Capital Markets. Your line is open.

I wanted to focus just a little bit on the Rent-A-Center business. You had a nice sequential improvement in terms of comps. You mentioned in your prepared remarks some new product categories, jewelry and tires. I guess my question is, how much do you think that jewelry and tires contributed to that sequential improvement in your fourth quarter Rent-A-Center comp? And also related to that, do you think that credit tightening above you contributed to either the Rent-A-Center comp improvement or the really strong GMV growth in Acima? Thanks.

Sure, Anthony, good morning. Rent-A-Center -- those new products that we put in the fourth quarter, pretty really small contribution. I would give them a little bit of credit, but not much quite honestly, but a little bit. And obviously we expect them to grow in 2024. But it was pretty late in the year. So, the thing about the thing probably that helped Rent-A-Center more than that is overall the extended aisle that we added to all year adding products in not necessarily new categories, but new -- a lot more product offerings on the website where instead of going through the -- let me give you an example. The 20 living rooms maybe that we had on a fast ship to our stores that our stores could get on a weekly basis from say, an Ashley Furniture from the manufacturing side of Ashley Furniture. Now the customer can shop the all of Ashley's products on the website and the special order anything on there through our Rent-A-Center store. So I think the extended aisle on there, there's so many more products, like 6,000 more products or something. I mean, it is a huge number more products on there and that's really where the growth of Rent-A-Center is coming from. As I mentioned, in my prepared comments over 30% more web visits, 16% more orders coming through there. And that's what tighter underwriting as well. So, when I say orders coming through, those are orders that -- those are approved orders coming through, and we got 16% more. I think the extended aisle is more the story in Rent-A-Center. I think certainly the demand is there, the consumer's still under pressure. And the good part about that business, the reason it turned 50 years old last year is when…

And then just real quickly, you mentioned going exclusive with Ashley Furniture. Can you just remind us, I guess how many LTO providers did they have previously? And when did you go exclusive and do you think that was a meaningful contributor to Acima GMV growth?

Of course, Ashley also has a lot of licensees, so when we say exclusive of them, we're talking about corporate stores, which I think there's over a 100 corporate stores. We were splitting them. There was two LTOs in there before now there's just us. And the website was split between two LTOs and now it's just us. So we've been with them a long time, but we're splitting the account and now it's a 100% ours, I don't know the number. I mean, I imagine it was probably worth a couple of points of the 19% though two or three. I'm looking at --, 2% or 3% probably out of the 19. It's not insignificant. But it's not the whole thing either. There's a lot of growth out there.

We come from the line of Alex Fuhrman from Craig-Hallum. Your line is open.

Mitch, you mentioned that you've been having some success adding merchants to Acima that aren't fully integrated with the platform. Can you talk a little bit about how that works and what categories that you've been able to do that in? And just over time, I mean, how much growth could that potentially unlock for you?

Well, you're asking me to get technical now, Alex, but I'll do the best I can. Yes, the only -- when I mentioned the unaffiliated merchants, I'm talking about the Acima marketplace where you can go on there and you'll see a partner. We were just talking about Ashley. You'll see a partner like Ashley where we're certainly integrated with them and so forth. Then you'll see another partner on there like Best Buy where we're not fully integrated with them, we don't -- we're not on their website, but yet our customers can shop Best Buy and put it on Acima lease if they go at it through Acima, through the Acima marketplace. We can take unaffiliated partners like that and put them on there. So when you say, what's the growth potential of that? I mean, it's almost any retailer out there. The largest retailers in the world you can put on there and then our customers can shop there. So, we've got some already that are unaffiliated. I mentioned, Best Buy, and there's a few others on there that are unaffiliated, but more will be added really every quarter. And of course we're partial to the ones we're affiliated with to put on there as well. Not every single one of our partners wants to be on there. They'd just rather us be their partner in their stores, but most do, and so we put them on there, and you can find any of our partners on there, even local partners through something we call find a store. If you are shopping in one particular area, you can find one of our partners there. But as far as nationwide ones to answer your question, really the sky's the limit as far as how much we can add there. And like I said, it doubled in the fourth quarter the GMV from it.

Now, the way we think about it is just giving customers more choices and more options. And we really want to be fulsome in our product category lineups. We want to make sure they have access to all the major categories, whether it's furniture, electronics, appliances, and all of the above. So, when we look out to round out the unintegrated with the integrated it's making sure that we have all the product categories kind of filled out.

Our next question will come from line of Hale Holden from Barclays. Please go ahead.

On the growth potential to change credit card late fees, does that change your outlook for the private label credit cards that you're looking at this spring or the economics around that potential launch?

Good morning. No, it doesn't. I think, all of the credit card providers are finding ways to maybe offset some of those rule changes and our partnership is no exception to that. We're even more bullish about the opportunity just based on the feedback we're getting from some of our retailers and specifically the more the larger retailers around the benefit of having two products under one umbrella and one integration. So, if anything, we're more bullish about the opportunity.

Thank you. And I'm not showing any further questions in the queue. I'd like to turn the call back at over to Mitch Fadel for any closing remarks.

Thank you, Victor. And thank you everyone for your continued interest in our business. As we discussed today, we're awfully proud of what we achieved last year. We look forward to updating you across the year on our progress in 2024. We certainly believe our team's focus on the customer and on our retail partners and new partners and existing partners and so forth will continue to create opportunities for growth that at Upbound, whether you're talking to Seymour, the Rent-A-Center side and create value for our investors. So we appreciate you, we appreciate all of our hardworking teammates out there in the field. And with that, I'll just wish everyone a great day, and operator, you can now disconnect. Thank you everyone.

Thank you for participating in today's conference. This does include the program. You may now disconnect. Everyone have a great day.