Q1 2020 Earnings Call

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Good morning. My name is Alyssa and I will be your conference coordinator at this time. I would like to welcome everyone to the errands in first quarter 2020 earnings conference call all lines have been placed on mute to prevent any background noise after the speakers prepared remarks. There will be a question-and-answer session. I will now turn the call over to mister Michael Dickerson Choice president of corporate Communications and investor relations for Aaron's Inc. You may begin your conference. Thank you and good morning everyone. Welcome to the errands a first month or two thousand twenty earnings conference call joining me. This morning are John Robinson Aaron's Inc, president and chief executive officer Ryan Woodley Chief Executive Officer of progressive leasing office Douglas Lindsay president of the errands business and Steve Michaels Aaron's in Chief Financial Officer and president of strategic operations.

Many of you have already seen a copy of our earnings release issued this morning. For those of you who have not it is available on the investor relations section of our website at Aarons. During this call, certain statements. We make will be forward-looking. I want to call your attention to our Safe Harbor provision for forward-looking statements that can be found at the end of our earnings release the Safe Harbor provision identify key risks that may cause actual results to differ materially from the content of our forward-looking statements. Also, please see our form 10-K for the year ended December Thirty One 2019 Ford Edge of the risks related to our business that may cause actual results to differ materially from our forward-looking statements listeners are cautioned not to place undue emphasis on forward-looking statements and we unpack no obligation to update any such statements.

On today's call we will be referring to certain non-gaap Financial measures including Eva. And adjusted ebitda. Non-gaap net earnings non-gaap EPS which have been adjusted for service items which may affect the comparability of our performance with other companies.

He's not get measures are detailed in the reconciliation samples included with our earnings release the company believes that these non-gaap Financial measures provide meaningful insight into the company's operational performance cash flows and provide these measures to investors to help facilitate comparisons of operating results with prior periods, and to assist them and understanding the company's ongoing operational performance off with that and I'll turn the call over to John Roberts.

Thanks, Mike and thank you all for joining us today. The world is currently confronting the covid-19 pandemic which is creating serious public health issues and inflicting economic damage beyond what most of us have ever experienced.

having been

In business for over 65 years operating in times of uncertainty is not new to Aaron's the company is navigated the aftermath of many natural disasters and numerous economic Cycles through these difficult times Aaron's has persevered innovated and thrived with a safety of our Associates and customers as the top priority. Our team is Lainey focused on successfully managing the business through this crisis and positioning it to succeed after the pandemic passes.

Aaron's purpose is to provide access to life enhancing products for our customers with compassion and respect never has this purpose been more important than during this crisis and never have our Associates who executes this purpose been more heroic.

Whether it is a refrigerator or a laptop errands is enabling customers to get the products. They must have in a critical time of need.

I'm humbled by the dedication and compassion our teams have demonstrated to each other our customers and the communities we serve.

We've made considerable efforts to give back to our communities during this crisis of particular note is the so happy to help PPE project that are Woodhaven Furniture to be launched in mid-march.

Massachusetts New York and the Navajo Nation

in addition through our partnership with the Boys & Girls Club of America. We became aware of the need for laptop computers in their member communities in response to this need we have donated 200,000 tops to clubs in Atlanta and Salt Lake City to enable students to complete their studies from home.

Woodhaven team led by Tommy Harper quickly transitioned from furniture manufacturing to the product.

These are truly trying times, but I'm proud that our Associates have continued errands long tradition of giving back to our communities particularly in this time of need.

Turning to our performance year-to-date through April. We think of these first four months of the year in three distinct periods, the. Year-to-date through March 15th was marked by the news origination cash flows portfolio performance and earnings ahead of our expectations.

at the onset of the covid-19. In mid-march, the company experienced the closure of retail partner stores and made the decision to voluntarily close Aaron's business corporate-owned showroom that it's part of our efforts to protect the safety and well-being of our Associates and customers

During this period from mid-march until mid-april. Both business has experienced significant reductions in lease origination at the same time. We made major changes to our business office and cost structures preparing for a crisis of unknown depth and duration.

This was a period of Maximum uncertainty particularly for our customers as a result. We modified many of our Portfolio Servicing efforts and proactively reach out to customers to offer covid-19 payment relief programs including payment deferrals of up to 90 days.

The result was a reduction in customer payments during the. Nevertheless when combined with the Titan management of expenses and the reduction in working capital liquidity position continued to strengthen during this.

Beginning in mid-april customers began to receive cares act relief and enhanced unemployment benefits in addition later in the month some Progressive Retail Partners and our veterans business corporate-owned showrooms began to reopen as a result in the second half of April, we experienced markedly improved performance with a rebound in customer payments and not Nations.

Overall, year-to-date the business is generated strong operating cash flow is driven by solid customer payment activity operating expense management a significant reduction in income tax and favorable working capital reductions. The net result of these Dynamics is that our balance sheet has delivered since December 31st, and we ended April with total loss of approximately $620. So while it's been a tumultuous period for us since the onset of the pandemic our business has been impressively resilient as far off.

well

Please that our business performs. So well in the first quarter there remains a tremendous level of uncertainty as we navigate this pandemic given the weakness and new origination is over the last eight weeks off a lease portfolios are smaller than expected as of the end of April while we've seen improving Trends in the last few weeks. We expect that revenues will be below our original expectations until we expect a sustained recovery and origination activity. Therefore we will continue to take a conservative approach to managing expenses working capital and capital allocation.

Before turning the call over to Ryan I want to again thank our incredible Associates across all of our businesses for their dedication and determination over the past eight weeks. I couldn't be prouder of how you have reacted to this crisis.

Well, this pandemic is created at new set of challenges for us. I remain optimistic about our future and excited about the opportunities in front of us now. I'll turn the call over to Ryan to discuss with dresses first quarter performance and recent trends.

Thanks, John. I'd like to begin by acknowledging the remarkable execution of the progressive team during these challenging times over a period of just a few days in mid-march. We transitioned our entire Workforce to work from home without any system or operational downtime the team's resilience and efficiency and overcoming unprecedented logistical challenges including managing through one of the worst earthquake in the last hundred years while transitioning to work from home enabled us to maintain high levels of uninterrupted performance for our customers and Retail Partners.

I'd also like to knowledge a retail partner for their continued collaboration as we have worked together to develop innovative solutions, including e-commerce and curbside alternatives to assist our customers during this difficult economic climate.

Today, I'd like to provide detail on our performance for the quarter overall as well as to share insight into covid-19 trends that we've observed in the last half of March as well as end of the month of April.

Through March 15th and prior to the full impact of covid-19 progressive posted better-than-expected Financial results as reflected in the fact that our Revenue gross margin customer page and all performed ahead of our original expectations for 2020.

We executed well at a recent National launches and overall invoice volume was trending in line with the plan.

Is being offset by lower conversion rates as consumers are unable to transact or retail partly locations have been closed.

Active doors grew 10.2% for the first quarter driven by prior rollouts of new retail partner locations and invoice / Active Door grew 2.9%

as expected gross margins decline in the. To 29.6% compared to 31.2% in the first quarter of 2019 driven primarily by the trends we discussed in our last call back specifically higher 90-day buyouts due to strong growth resulting from recent National Retail partner launches.

Sg&a expenses were 10.4% of revenues in the quarter compared to 11.8% in the prior year. And Improvement of 140 basis points.

In mid-march is covid-19 began to impact the operations of our business and those of our Retail Partners. We took decisive action to reduce our cost structure in anticipation of declining invoice volume.

As we've mentioned previously Progressive benefits from a relatively High variable cost structure which gives us the flexibility to quickly adapt to changes and overall invoice volume cost-cutting measures wage were primarily directed of these volume driven call centers while preserving our ability to continue to execute across all functions of the business as well as to invest in important growth initiatives.

Usually we're curtailed discretionary spending and are continually evaluating the need to maintain these cost controls kids ahead.

Journey 2 portfolio performance measures write-offs were 8.5% of revenues in the first quarter of 2020 up from the 7.0% reported in the year-ago. Wage the impact of covid-19 and incremental reserves write-offs were 6.6% in the first quarter an improvement of 40 basis points from a prior year.

At the onset of the pandemic given the uncertainty our customers were facing. We took proactive measures to provide payment relief including deferrals for up to 90 days to customers affected by covid-19. No portfolio performance has remained strong for the year. That's far. We believe that we have likely not yet seen the full impact of the economic challenges. Our customers are facing off, but it's clear that customer payment activity has been assisted in part by the provisions of the cares act and enhanced unemployment benefits is not possible to completely disaggregate the stimulus-driven effect on payment action from underlying consumer health. It is also not possible to predict whether and to what extent the federal government will issue further stimulus and how that stimulus might impact Club.

That reason in addition to booking our typical reserves that reflect current levels of delinquency. We increased our accounts receivable and leased asset reserves by 16.1 million and a first quarter to reflect our best estimates potential future losses driven by covid-19.

In late March, we also tightened our decisioning parameters in an effort to maintain strong performance and insulate the go-forward portfolio against a tougher economic Outlook.

Ebitda was 70.2 million in the first quarter and increase of 7.6% compared to the first quarter of 2019 these results include the 16.1 million of CO2 are right off and bad debt reserves before the impact of these incremental reserves ebitda margin increased approximately fifty basis points in the quarter due to the year-over-year partially offset by the impact of higher 90 days from the.

You're managing the business today in a way. We believe will maintain strong portfolio performance and that appropriately sizes our sg&a to a lower level of expected revenues. We believe this will put us in the best position to resume profitable growth at least originations recovered.

in closing

My appreciation for the outstanding work accomplished by teams across Progressive and effectively and efficiently managing through this crisis inspired by a commitment to our mission. They somehow pack seems like a Year's worth of work into a short weeks. So the benefit of our customers and partners I couldn't be prouder.

I'll now turn the call over to Douglas to discuss the errands business first quarter results and recent trends.

Thanks Ryan. I too am extremely proud of the exceptional dedication and contributions of our errands store and store support center team members during this crisis. I want to thank Ryan Malone head of stores.

Robert O'Connell or head of human resources are divisional vice presidents and all of our multi-unit is in store team members for their support of our customers and communities during this challenging time on March 20th. We closed all of our corporate-owned showrooms and converted to a curbside and e-commerce only model. We made the decision to close showroom off the safety of our team members and customers as our top priority while doing our best to provide essential products for our customers during this crisis.

Feedback from our customers has been tremendous and I'm proud of our teams resourcefulness positive attitude and desire to take care of our customers whose lives in many cases have been turned upside down.

There was one point I'd like to emphasize given that we are classified as an essential business in most jurisdictions. We could have continued to operate with open showrooms. However at the office of this pandemic, we made a decision to close showrooms to protect our team members and customers while we determine what new safety protocols we needed to implement to operate in a safe manner.

In addition to closing showrooms. We made other significant changes to our store operating practices at the onset of this pandemic including reducing weekly operating hours by more than 50% or 100% of our sales staff processing new orders and payments at the curb side of our stores the spending all in home activities office deliveries and returns to the door only in implementing covid-19 payment relief programs for our customers affected by the pandemic.

Needless to say making these changes in such a short period of time is extremely disruptive to operations and I want to reiterate how proud I am of our team members who quickly adapted to these changes took tabling us to continue to serve our customers safely during the crisis.

moving on to the financial results

the first quarter ended March 31st, 2020 revenues were 432.8 million a decline of 9.8% from the first quarter of 2019 off merrily do to lower store count a smaller lease portfolio to begin the quarter and a weaker customer payments in the second half of March due to the onset of the pandemic.

Current Revenue written into the portfolio decline 1.9% in the quarter.

Excluding consumer electronics recurring Revenue written into the portfolio increased 2.7% in the first quarter with growth occurring in our largest categories of furniture and appliances.

Notably TVs the largest component of our Electronics category represented 10.8% of Revenue written in the quarter down from 14.3% in the same quarter last year.

This decline is a continuation of a trend we have seen in the last several years.

Adjusted even though with thirty-five million.

Decrease of 16.4 million or 31.9% compared to the year ago quarter resulting from lower revenues in incremental covid-19 related allowances partially offset by strong expense management.

Included in adjusted ebitda for the quarter was approximately 5.7 million of excess bad debt in inventory reserves resulting from an assessment the future economic environment may be actively impacted by the covid-19 pandemic.

Right off or 6.2% of revenues in the first quarter driven by an increasing mix of e-commerce and additional covid-19 related allowances.

living the incremental allowances write-offs were 5.5% of revenues down from 7.3% recorded in the fourth quarter of 2019 and as expected higher than the 4.8% reported in the same period last year

during the quarter the errands business took a charge of 16.4 million to write down the value of stores permanently closed or expected to be closed this year.

This represents a total of 100 and three locations. Well about two-thirds of these closures or underperforming stores the remainder or consolidations or relocation a profitable stores.

All of these closures are expected to be accretive to earnings.

These closures are part of our strategy to operate fewer higher-volume stores along with a robust digital platform, which we expect will improve the customer experience wage earnings and reduce the capital intensity of the business.

I want to provide a little bit more detail on the errands business results year-to-date through April.

From January 1st through March 15 revenues customer payments and adjusted ebitda were all performing ahead of our original 2020 expectations.

However, in mid-march as we closed our showrooms and shelter in place orders became effective. We saw a recurring Revenue written decline to nearly 35% below the prior-year off the customer payment Trends worsening as well.

this trend

Lasted until mid-april.

Effective April 23rd, we began a phase reopening of our showrooms across the country informed by guidance from government authorities and after monitoring trends of covid-19. Kaisa counties in which we operate as part of our re-opening. We implemented enhance operating protocols to ensure the continued safety of our team members and customers including you Santa Claus and procedures required use of personal protective equipment modified store layouts and limiting the number of customers in our show rooms.

Additionally, we've invited further team members of our reopen showrooms back to work.

As of today 85% of company-owned showrooms are open and operating at regular hours.

And the last few weeks lease origination Xin customer payments have improved as a result of government stimulus programs and the phase reopening of our showrooms while overall lease originations are improving. I'll be at still blower original expectations doors with recently reopened showrooms are beginning to perform near original plan levels.

Over the same period customer payments across all stores are performed better than our original expectations.

In addition to changes in our operating model. I want to highlight what a positive impact of technology Investments over the past few years have made on our business during this crisis.

In late March, we celebrated the planned 2020 roll out of our centralized decisioning platform. We believe this platform allows us to improve the customer and team member experience better control risk A reduced labor in our stores.

Because we had the technology infrastructure already in place and two years of decisioning performance data under our belt we able to quickly and confidently convert our Us corporate stores in New Jersey.

Additionally our industry-leading e-commerce platform aarons.com continues to be a bright spot for the business eCommerce recurring Revenue written was up 23.4% in the first quarter compared to the first quarter of 2019 and up over 50% in April despite tightening decisioning in the last week of March.

Don't performance. And April is the result of higher traffic and conversion rates for strove a surge in e-commerce Revenue written in the back half of April.

I'm proud of our operations technology and data analytics team for continuing to advance our digital capabilities and putting us in a position to serve so many customers through these platforms.

I'm extremely thankful to all the errands business team members their extraordinary efforts to serve our customers our company and our communities during this challenging time. We have an exceptional team employees. We've executed at a high level and shown great agility during this crisis looking forward. We have a compelling value proposition and Industry best technology platform and aarons.com and a risk decisioning engine that we expect to drive productivity predictability and risk-mitigation. I'm very optimistic about our prospects for a future and our long-term ability to generate sustained growth strong cash flows and continued innovation.

I'll now turn it over to Steve to discuss our first.

for financial results

Thanks Douglas. Let me begin with a few items before moving on to our first quarter financials. First is our Goodwill charged during the quarter. We conclude that the significant decline in the company stock price and market capitalization during March 2020 triggered the need for an interim Goodwill impairment test for the errands business segment.

The company engaged the assistance of a third-party valuation firm to perform the interim Goodwill impairment test this included an assessment of the errands business reporting units fair value relative to its offering value fair value is derived using a combination of income and Market approaches as of March Thirty One the company determined the errands business. Goodwill was fully impaired and reported a Goodwill impairment charge of 446.9 million.

Next in the preliminary proxy filed in early April and again in the final proxy filed this week among other things the company requested shareholders vote to give our board and management team the discretion to implement a change to a holding company structure. The requirement for a shareholder vote is necessary in Georgia where we are Incorporated, but would not otherwise be required where we incorporated in Delaware life as many companies are

We believe it's holding company structure could facilitate future corporate actions and provide greater operational and financing flexibility for Progressive Leasing and the errands business.

I consolidate bases revenues for the first quarter of 2020 were 1.1 billion an increase of 8.8% over the same period a year ago.

Adjusted even top of the company was 98.5 million for the first quarter of this year compared to 115.2 million for the same period last year a decrease of 16.8 million months or 14.6%

adjusted even thought was 8.9% of Revenue in the first quarter of 2020 compared to 11.4% in the same period a year ago.

Adjusted even includes twenty eight point eight million of incremental bad debt inventory and Cecil reserves resulting from an assessment that the current economic environment and expectations for various projected economic metrics such as unemployment rates and GDP will be negatively impacted by the covid-19 pandemic.

Our customer payment activity has been strong through April 30th. However, what is unknown?

Is the depth and duration of the current economic slowdown caused by the covid-19 demek and the degree to which government stimulus will continue to support our customers when the current cares act and enhanced unemployment benefits. Laughs

Again, while the portfolios are performed well and are in good shape today. We believe these reserves represent our best estimate of the potential deterioration. We may experience a future periods.

What did he BS on a non-gaap basis for the quarter decreased 21% to $0.85 versus a dollar eight in the prior-year quarter primarily do the approximately thirty two cents per share of June nineteen related Inc. Reserves recorded in the first quarter.

Operating expenses increased approximately 25.8 million due to the 14.1 million expense from the termination of a sales and marketing agreement and 14.4 million of cobra with mental increases in lease merchandising allowances.

For the impact of these items operating expenses were down 2.8 million. This decrease is primarily due to reductions in personnel and occupancy costs in the errands business partially offset by increased Personnel costs and the progressive business to support its strong Revenue growth over the last year.

Cash generated from operating activities was 227.8 Million for the first quarter of 2020 and including the funds from a 300 million revolver draw. We ended the quarter with 551 million in cash compared to 57.8 million at the end of 2019.

Cash flow generation was strong during the quarter and has continued through April the source of cash flows has been the strength of ongoing customer payments as well as lower than planned lease originations and resulting working capital reductions.

In April, the company paid $60 million in scheduled debt amortization $175 million to satisfy its settlement with the FTC and three hundred million to pay down its revolving facility in full.

As of April 30th the company had a cash balance of $136 million in Gross debt of $287 billion.

As a reminder during January 2020. We took advantage of market conditions and amended our existing credit facilities extending the maturities to January twenty twenty-five and increasing the capacity of a revolver by 100 million two hundred million.

I'm proud of our finance team for taking these proactive measures and we ended April with over six hundred and twenty million available liquidity an increase of approximately $175 million since December 2019, even after satisfying $235 million of obligations during the month of April.

During the quarter we did not repurchase any shares of the company's common stock. However, we have maintained our quarterly cash dividend.

As a reminder on March 23rd, the company withdrew its full-year 2020 Financial Outlook previously issued on February 20th due to the uncertainties resulting from covid-19.

With that I will now turn the call over to the operator who will assist with the question-and-answer.

We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the key to withdraw your question, please press * then two at this time. We will pause momentarily to assemble the roster.

The first question today comes from John please. Go ahead.

Thank you.

Good morning, and I appreciate all the color a few quick easier one. Could you just tell us what the Fourteen Point 1 million marketing contract determination?

Yeah. Hey, John is Douglas. She probably remember last year. We went through a process of looking at our demand side of the business, which was really on how do we drive the increases in marketing and the third and fourth quarter last year as part of that. We I think he explained last year. We drove a lot of volume, but we have some place and challenges fourth-quarter. We got back that back under control in the first quarter and we're doing really well. I mean covid-19 head us and March thirty first became clear to us birthing rooms closing and our salespeople carload that we weren't going to get a future benefit from that engagement. So we took the right off in the core.

And then I'm curious on on either side of the business whether or not you click the link wished it all the tightened underwriting decisions. You made in the onset of the pandemic. Hey, this is hey John is John Smith. Good question. No, we in across all our businesses. We tightened in the latter part of March and maintain that we continue to maintain that approach now despite the fact we we did see improving customer payment performance.

Particularly in the back half of April but we've maintained that more conservative approach.

Okay, and John, are you seeing a higher quality of applicants in either side of the business for many changes in the Titan credit above you yet, or or no, that's not the case, you know in light of the underwriting decisioning again. Yeah, I mean we and Ryan you can feel free to jump in after me. But what I would say is we definitely heard, you know, we've heard out there that there is tightening going on in higher psycho bands.

For sure, but we haven't necessarily seen it across the board. Perhaps we've seen it in pocket on the Progressive business in the errands business. Obviously, we don't have the exact same visibility. We've seen we've seen good demand return in the stores that we have reopened in the back half of the April, but what I would tell you is we've we've heard that but given how short it feels like this has been two years but it's been really eight weeks that we've been dealing with this pandemic and so wouldn't feel comfortable saying there's any sort of trend that's developed their thus far but, you know clearly to the extent tightening happens above us and there's less availability of options for customers, that could be a Tailwind for us in the future, but we're not ready to say that there's any sort of trend near yet. Just given how early we are in this process.

And then confirm my jam said Ryan. Could you tell us your your retail partner base? I don't know what obviously I'm not a hundred percent open and they went to some percentage closed and then you know, they're in the process of reopening any help with where we are where we went down to where we are today and then kind of gave us a an update again on your verticals there roughly in terms of percentage.

Yep happen to do it John sick as you might imagine. We sell the most impact where stores in showrooms were closed particularly in our jewelry electronics and Mattress verticals and some some of the work we did there was some other partners that I that I alluded to in the prepared remarks like working on E, and curved Side Service Alternatives help to offset the impact that we up to what otherwise things but but that was where we saw the most negative impact is where the showrooms were closed off. Obviously. We did have some who remained open throughout the pandemic either because they were well in in almost all cases. They provide essential Services back on office to provide essential services and and we just stay open on stock continuing activity out of our own and less than impact. So in in birth

I'd say a few Trends. We're seeing take place across the portfolio is you think about where we're at in the evolutions of pandemic obviously is at home and do about where we go from here. But we are seeing as you know, stay-at-home orders begin to be lifted and retailers responding to that by beginning. They're reopening process. We're seeing that um, you know, the beginnings of that and and jewelry and electronics and we're also seeing the early signs of an impact the impact that's having a customer activity customers getting out. It's it's really difficult to disaggregate that from the general increase in demand we've seen as a result of the stimulus package. That's that's obviously encouraging and demand that had otherwise existed and those are happening somewhat simultaneously so so so in some way

We're seeing a return to the man to possibly increasing Trend as we move through that March 15th of April 15th. And then from April 15th to present has been sort of a a gradual Improvement sequentially as influenced by those factors.

Your next question comes from Bobby Griffin Raymond James, please go ahead. Good morning everyone. Hope everybody staying healthy and safe. And I appreciate the details on the prepared remarks off. The first question. I had is around really The Core Business and maybe can you provide a little color on the ability to scale back up some of the cost system and returns and how are you approaching that long as the stores are coming back open now, but the volume is not quite back the trends that you you might have been used to in the past.

Hey buddy, this is Douglas.

Basically question. So first of all, you know, we've we're trying to control all the expenses we can control we've suspended a lot of the discretionary spend. That's at the corporate level. You know, we suspect Merit increases were working their landlords on rent. We're taking a hard look at all of our discretionary spend is you know on a temporary basis. We took out a lot of cost we furloughed roughly 2,000 employees and our stores and about 400 of our team members in our corporate office are in our fulfillment centers. And so as business returns, I mentioned in my prepared remarks about 85% of our stores are back open. We are bringing back on our sales force. And so far the stores we brought back online. We're seeing demand to rebound our Revenue written into the portfolio is which is our leading measure of sales effectively appears to be rebounding in those so we definitely want sales teams on our floors to capture that demand collection volumes are up dead.

So we need the labor in the stores to manage all that we are however monitoring store by store. So where we have lesser demand, we're scaling back on hours for our drivers and other areas where we can but we want to be ready for the business and we're being prudent about how we look at the tall structure. Okay, I appreciate that and then maybe the fault of Dawn's question for the progressive side of the business can use remind us on you know, what region of the country you're Retail Partners are more heavily weighted in, you know, either the south east or west coast or anything that might help us think about the impact of stay-at-home orders of modestly getting lifting the next couple of months. Yeah, given the given the increasing way to portfolio toward national accounts. It really is a Coast-to-Coast border the Border presence across the partners with with what's been a traditionally stronger waiting toward the the South and the and the southeast in terms of, you know, just penetration of rent-to-own January, but you know, we're experiencing

Just sort of same Patchwork of returned activity that that others are you know, as you look at varying interpretations of like Federal guidance and and return to General levels of returning to activity. So it's it's you know, it's it's going to be it's going to be sort of a patchwork of as we come through but then that activators, you know, increasing and increasing or turn to kind of growth

Okay, I appreciate the details. Best of luck in the second quarter. Next question comes from Brad Thomas Bank Capital markets, please. Go ahead.

Hey, good morning, everybody. Thanks for taking my question. Just jumping right into it Ryan. I wanted to talk a little bit about the transit invoice volume and and making sure we're not connecting it properly to how we think about the income statement, you know, you gave a lot of numbers in your prepared remarks about the invoice early. I'm having been up over 20% and then down over 90% And then improving so I guess are these these basically like week increments you're giving us and so are we sitting here with the two cute a date running down of a weighted average basis, but that week by week we're seeing growth. And so if the trend of the last week or two continues, we could see invoice volume up four two. Am I understanding that right? Maybe let me step back a little bit and sort of give a bigger picture and then we can zoom in for some of that detail cuz I think it'll help set the contact so we had really strong.

Revenue growth in

Q one you know that that actually was the strongest growth we've had and six quarters. And the reason we had that strong growth in q1 was obviously because we had seen a strong growth an invoice leading up to it a 34% and into four so q1 benefited and large part not only because of the month Jan one two, March 15th for four months but also because it was coming on the Kayla such strong prior invoice growth without really needed to one performance obviously wage and then the drop off an invoice only had so much time to impact human results. So cute to you know will experience the brunt of the impact of the invoice reduction versus plants. And and that will that will begin to more significantly impact Revenue, but you won't feel it more fully until Q3 when you have a dog

Impact of a lower invoice and Q2 booting into revenue and Q3. So that's sort of the bigger picture of the trends that are influencing what you see an invoice and how that translates in the revenue. And what we are trying to do is give you a little bit more precise insight into what invoice was doing for the periods that John Reid up but she doesn't really the periods of movement and material movement and he said through March 15th invoice is doing well growing 21% year-over-year. And in that interim period of impact or stimulus are 3:15 to 4:15 roughly is down 26% year-over-year, you know, there's a lot of uncertainty and store closures show enclosures and then when stimulus mid-april through the we're kind of talking about Trends capped at the end of April.

Mid-april through the end of April, you know, you saw that recover significantly and down $26 down and I guess the inside that I just provided in a repair question, but it's it's continue to improve from there now, uh into the positive range and and that's that leaves us with quite a bit of optimism. I think the caveat wage provided is it's just impossible to know, you know, the extent to which that continues to be supported by stimulus and how much its stimulus tails off will continue to see increasing wage to the man just because of her cuz we're seeing increasing the transfer the levels of activity will stay at home owners get lifted, and I hopefully that helps

Got to that that helpful. So if we were to extrapolate out, you know the trends you've been saying the last couple of weeks, you know would be reasonable to think of that invoice volume could settle out to being somewhere in the neighborhood of flat for two in a world where again, you've added new doors year-over-year and the partners were working with are starting to reopen or is that just too much of a hole to dig yourself out of after a tough period of time at the end of March in the beginning of April.

Yeah, I I think it would be perhaps unrealistic to think that you know, you you overcome being down 26% for that. Not not providing specific instruction guides for Q2 obviously because so much still yet unknown, you know, just a comment. There's I think the the biggest impact expect to have you know to current key to but again caveat. Yep. Yeah, you just still a lot of uncertainty out there about how this plays out. We just cautiously optimistic. I I I appreciate that just making sure we're all getting on the same page and how to confirm some some of these numbers maybe just lastly for me if we could uh-huh. If you could give us one more context on the bad debts and the right off and I know there's a lot of unknowns here, but can you remind me is that you know, if you're experiencing elevated bad debt, is that going to result in US needing to take a bigger hair cut off?

As we try and triangulate the invoice volume into a revenue number in our models and you know, and then I guess is there anything that you would think at this point in terms of the likelihood that the your ability to collect, you know gets better or worse with what you're seeing here, Thank you. John doesn't get as much attention. Now that it's factored into our presentation net revenues sort of above the line, but I'm just since you bought it. I think of the impact that it has on the translation from invoice to net revenue. So for q1 bad debt was I believe I am 4% of gross revenues compared to 99.7% last year. But if you back out the effect of that incremental provision on that it was dead.

Point eight percent of gross revenue meaning that as we book The provision in the ordinary course accounting for current levels of delinquency would have been 9.8% off. So just right in line with last year. So we're saying as we package q1 and Report out on it will right in line with where we were last year reflecting current levels of of of delinquency you step back from that and say is it reasonable to assume that payment Trends will continue as they will in light of increasing levels of unemployment and other public macroeconomic Trends. It's it's unlikely you'd expect to have no impact whatsoever on our customers feature ability to pay and so we're trying to we're trying to reflect that an incremental reserves that we trust. So the idea is that when you do that you're sizing it appropriately so that you don't need to further build that reserved in the future, but it's impossible.

I could do that exactly right with that.

Knowing knowing the future obviously, so you make our best guess and obviously if we are a little conservative will relieve that reserved over time and if you're a little aggressive or Builder, but the goal was to get it is as close to Accurate as possible. It's close to an active accurate representations of potential featuring Paramount.

Gotcha, very helpful. Thank you so much Ryan. Yep. Thanks, bro.

The next question comes from Anthony chukumba of loop capital markets, please. Go ahead.

Good morning. Thanks for taking my question two quick questions. First one just in terms of e-commerce. Just any kind of update there. I would expect you probably saw a pick it up, you know with you know with shelter-in-place and what's your showroom close but loving update you can provide their Banks.

Yeah, hey Douglas. So we've seen a big pick up Annie, over the last quarter as you would expect more of our existing customers customers who were previously going into our Chef. Um, we're doing business online and April with our store is closed interestingly as we begin to reopen stores. We saw that econ traffic continue to be up and down towards the last part of April. So even in states where we're opening, we're seeing a lot of strength in April at the last part of April and I was continuing into May and E, So really happy really happy at all the framework in place and the technology in place. I think we get better better at that everyday seeing higher traffic on our side and higher conversion. So really proud of the team and too early to tell if that's not be sustained or happy with the performance so far.

That's helpful. And then just a quick follow-up. Is there anything that you're seeing on the virtual, you know Parts business on the progressives part of the business in terms of the competitive landscape. I I you know, I just think that you know, after we talked many times about the fact that you have, you know dozens and dozens of these little you know, sort of competitors. A lot of them are, you know are are backed by you know, private equity and and I would imagine there may be suffering mightily in this environment. But I was just wondering if there's anything that you guys were hearing out there, you know in the in the channel. Thanks. Yeah, I appreciate the question. We we you know, we we may have heard similar rumors about you know, difficulties being experienced by others in the market. But you know, we've all had a lot to focus on as the last eight years and I would say it continued there continues to be pretty tough competition or market and uh, you know, we wouldn't be doing the right thing to put in to continue to take that seriously, which is one of the big reasons, why wage

we haven't played back on some of our important investments in you know, growth initiatives like Newcomb & Noble, you know as we move forward even in this environment because there's just so much potential out there and look the fact that you know, there's I think we we should expect to continue to see strong competition and that's just a natural result of a really large remaining Market opportunity just not just share shift, but Greenfield that remains out there retailers, uh who have not yet implemented right down and and uh, you know, the significant portion of the third of the US population that could still benefit from some random because I understood so I think that's going to continue to do to support strong competition in the market and and we're you know investing to maintain

got it if I can speak with one more and I you know, I hate to be that guy but just

and just reminded me of something that you said what what do you seeing in terms of the pipeline particularly given the fact that you have a lot of retailers who are obviously struggling mightily I would I would think that that that would be helpful to you in terms of building out the pipeline maybe there are a lot more receptive to adding you know non-recourse rent-to-own solution you know you've been given the current sort of macroeconomic Heaven I bought my last one it's a good question you know we debated this at the onset of the pendennis because there were these sort of competing competing factors one Fairway just the you know the level of uncertainty and what that would do to uh you know folks desire to make plans and make investments sort of set by their strong desire to serve a customer who who is going to benefit from the flexibility of me and knowing that there would be tightened down

Asking about maybe a jail and going forward that that might further increase demand in the pipes of uh, I may have been I'm a thought it would slow down more but it actually hasn't as I say here today. I think the pipeline looks better today than it did in early March. So I'm I'm really happy with where we sit right now. We've we've already had a couple of wins and you know compared to be optimistic about the potential future growth I could come from those.

Got it. Keep up the good work. Thank you. The next question comes from of please. Go ahead.

Thank you morning. Hope you and your families are safe.

I guess first question just on the Progressive side trying to understand if that's too early to tell but kind of of your retail customers, you know, if you see any risk out there of them going away some of the smaller ones or struggling ones and if you've kind of factor dead in over the next few months and then conversely, you know again, I understand it's early, but typically this is a time where retailers are looking for incremental dollars and over the next few years. And so have you seen more interest as summer coming in back to you who have been in in Project mode or what have you and and wanting to move for

And and by interest you mean pipeline activity or do you mean exactly that's maybe you know people put push you off from the past but now say hey this does sound like something is especially if we go into recession that we we could want to add to our our business if it's if it's heated up or again, there's been so much turbulence that might be too early for that.

Yeah.

So it you know, it's a decent-sized pipeline. So there you know, I'd say the person takes inside of it, but on the whole, you know, I just reiterate the statement that I feel like it's uh, you know, it's I'm more excited about it now than I was and in early March we we've had some winds um, uh, and you know, I'm excited about life, you know, you know the growth they could they could come from stuff that we have moving moving through the pipeline. So it's it's better than I expected heading into Kovacs which is, you know, a good definition of the end and then I'm sorry. What was your first question just with regard to the health of your existing customers. Are you worried about any of them going under?

Oh gotcha. The partners, you know, we have a base of several thousand Partners. So I expect you know that we'll see the gamut of thought of you know outcomes from the pandemic and I guess would be naive to save it across several thousand Retail Partners that we wouldn't have thought that they go out of business, especially in the long tail, uh-oh those Partnerships. I imagine that will that will occur down there, but

Rice it to that that's a pretty good about the strength of those Partnerships and got it and just any kind of early read for in a show rooms that have been reopened. Have you seen pin up demand that we've seen people to actually show up. I mean, I know it's you know in Georgia. We're we're kind of Leading Edge on these things and people are ready to get out and about and didn't know who what what what you what you've experienced so far. Yeah. I think we I think Brian not both did some work on the call of really breaking it up in time. Thursday after April 15th, um, you know checks began to come out and we began to open showrooms on April 23rd. So what we saw was surging customer payments that lasted down to the end of the month and we're continuing to see that going into two May so that's positive lot of cash coming in the door customers have a lot of cash and they're they're buying and they're and they're making their payment switch off.

Encouraging. Um, so our deliveries have been strong in the stores that we've reopened. We've got a phased reopen going on and we're um, now we initially open Tuesdays then then continue to open up to 85% of our Network and those stores that we've reopened. We are tracking to our original plan that we put out the beginning of 2020, but probably more importantly we're driving a lot of money. I'm sorry, is is way up as I said in my prepared remarks in the month of April and that is a percent of our total deliveries is a significantly higher number that has been in the past. So we're really bullish about that, you know, anything can add to that Douglas. It was exactly right at the only thing I added interestingly even in the stores the showrooms that have reopened month bill is you remember e-com be serviced through our stores and so the e-com has remained strong.

in those so

Even after the show room is open, which is an encouraging sign. We we don't know what the Douglas said earlier. We don't know that speaks to a trend but it's an interesting fact that the e-com business has been strong and remains even when the show ends of reopen great. Thanks for the color and stay safe.

Thank you. Thank you.

The next question comes from Kyle Johnson of Jeffries, please. Go ahead. Hey, good morning guys been answered wage. If you follow up here, I'll start with Brian if I'm a Ryan you can just a sense for the revenue breakdown at Progressive between e-commerce and brick-and-mortar and how you see that track over time. And then on that note, can you give us a any sort of update with with the new Nationwide retailers partnered with and you know where you are on being able to be offered in Commerce solution there?

Sure, happy to Kyle. So we we don't split out or from brick-and-mortar when we talk about results, but I will offer that the insight to a Dodge what Douglas had shared earlier. We're seeing similar Trends. So I'm on our native e-com Partners. We're seeing you know strong strong strong performance. Um, especially in the context of covet as you can imagine, you know, they're benefiting from that shift to online and doing very well and even among our omni-channel providers. We're seeing the same thing. So we're seeing very strong double-digit increases and application volume of those channels, which is a really good thing to see and if it was, you know, it's maybe inappropriate to say but you know if there is a silver lining in a crisis like this, it's been the significant.

Focus on accelerating digital initiatives, you know across our portfolio amongst over a larger accounts. There's there there was a focus prior prior to cover the Chrome serve as a catalyst for further focus and investment on getting those, um, getting those uh, you know news sources of application to Integrations develop so long that'll be you know, a silver line coming out of it cuz the advancements or going to make on that side, you know, that's an area we've been investing in for quite a while now and we expect it to be a significant component of our. Future growth and transfer a scene or positive and the advancements that are being made on that phone or are likewise positive. And then on your second question on National National Partnerships know I mentioned in the prepared remarks that that up until March 15th, you know tracking right in line with expectations.

Going well.

Great relationships with those partners and you know, the only thing that's changed is that you know the deflection and uh, an invoice growth among some of them as a result of clothing stores and or showrooms those that have remained open are doing well. And you know, I I feel like you know, we're we're seeing but I feel like the RC increasingly positive Trends there and I expect that to continue got it and then one follow-up for you Ryan. I think I know the answer but I'd rather hear it from the horse's mouth, you know, even the invoice volume guys had in January and February. I think you said it was just north of 20% Obviously. That's that's down in the fourth quarter is is that more driven by retailer seasonality than actual you know, what drove that might guess it would be retailed season dead.

Yeah, we got it. That's it.

Okay for four big categories, like, you know Electronics even mobile and jewelry. They do well in that. And so it was just it was just going to be that be respectable service.

Okay, that's helpful. Thank you. And then last question for me over to Douglas, you know, seven back was, you know a month plus of store closures and look up your performance during that time has it has it changed your perspective on the on the long-term outlook for the number of stores or potential consolidation activity wage and and and given the success of the e-commerce platform any sort of long-term Outlook changes. You've seen their yeah. I mean the way we're thinking about it is dead. You know, we're taking effectively a digital first strategy. We're trying to do things in the business that we can scale quickly. I think our Co is a good example that how do we like put things at scale in our Network and I drive a better customer experience control decision and control risk and have a better outcome for us. So with the digital first sort of focus comes through this Thursday.

Give Advantage. We have a stores. We believe that we really should have fewer stores in the network but higher-volume stores. And so what you'll see from us going forward is more wage would say to store in the one store type moves. Um, we think we can do this at a lower cost Drive greater earnings and have really good cash flow Dynamics from that.

Got it. Thanks very much for answering my questions. Really appreciate the color.

The next question comes from Vincent Quinta Cat Stevens, please go ahead. Hey, good morning. And thank you for taking my questions on the Progressive. I just wanted to follow up on some earlier on an earlier question. Just come on, the the number of doors that are open. I guess if you can maybe let us know when you'll input volume was down. I think the worst was 26% when it was down at that level. How many doors were closed at that time? And then where we now and are there any sort of discussions you're having with your Retail Partners where it seems like maybe one hundred percent of the doors might be opened by let's say summer or so like any any sort of afford look there.

sure

Yeah, we don't have exact count just because of you know, the line in the tens of thousands of hard to to track that, you know discreetly by. But I just give you example the key movers so, you know in our jewelry vertical obviously there's our showrooms were closed early, you know, many of those and multiplication for the entire mall was closed and uh, well the vast majority of those remain close to this day. We are seeing dead reopening there, you know, when the early stages of that and expect that we can continue graduate to reopen again in response to have a listing of State her Motors. No electronics is another example where showrooms uh, show rooms were closed and there's a lot of curbside service wage.

On the facility curbside service and I expect that when we moved, you know, gradual reopening process with you. No limits on the number of people allowed in the showroom. And you know, I'm actually uh evolving Into You know open showrooms, but those you know, those two examples are examples where you know showrooms remains closed but we are we have already seen the beginnings of the reopening process and we expect it all over occur gradually, that's not going to be a one week to the next as you pointed out. It'll be over a period of several weeks. But outside of that we're seeing that recovering invoice which is which is what's interesting. So, you know, it's it's obviously, uh being driven by by several factors that

Second question for both on the Progressive side on the air and business. I'd just wondering what what sort of levels are baked into the reserves that you're taking I guess not necessarily A forecast of you know, how bad can reserve 10 bad debt yet, but sort of what what's what levels can you absorb in and be fully covered by your existing reserves and maybe relatedly do the reserves bacon any thoughts about depreciation rates and how you're thinking about um return to inventory volumes so pickups of volume.

Yeah. Hey Vince, this is Steve. I mean as as we said in the prepared remarks as Ryan said we obviously looked at at the balance sheet date of March Thirty One. We looked at our month lease impairment reserves in our bad debt allowances and and decided or made the determination that it was unlikely to assume that covid-19 have some impact on on the future and once you make that kind of you know from an accounting standpoint, you make that you know, potential impairment analysis, then you move on to like well, how do you quantify it? And you have to kind of ability wait different outcomes. We've got this government government stimulus that we don't know how the immediate $1,200 checks and the you know, the actual checks are going to age continue to play out. We've got enhanced unemployment benefits that currently last until the end of July, but there's you know, we have no knowledge of whether those will be extended. So we just had

Use all of the information that we have.

Available to us along with the actual results that we've been seeing kind of post the quarter and make make our best determination about potential future outcomes is Ryan said appropriately. We're not going to be right right because we we don't know the future but at the time our best estimates were to take these incremental reserves, um, and they were basically applied against the the valuation of the of the least merchandise that we have on the balance sheet. And then the the amount of the pay our reserves or the yeah, they are that we have money on the on the balance sheet. So it's not reflected as a percentage of how many customers we think you're going to go bad or anything like that. It's just it's an overlay against off the the reserves that we would have had any ways based on the information we had available to us when we were making the decision.

Oh, yeah, and then obviously part of the reserve is is a Cecil Reserve which refers specifically to our Vibe business, you know, which is a second a credit provider that partners with banks and we had to adopt Cecil as of January one. As you know, there we had about a historically ran about a month teens provision expense under the previous provisioning method and after adopting Cecil we expected that we'd be kind of in the low to call it mid 20s, and we were after we bought that the day one retained earnings charge from the adoption of Cecil because of macroeconomic factors related to that that Cecil calculation we end up taking additional reserves in the quarter that put us into the low 30s for Central provision expense. And that is heavily weighted on future expectations of unemployment rate and GDP.

So that was about seven million of the additional incremental reserves that we took.

Okay, that's that's very helpful. Thank you. Maybe have you seen a lot of returned items a request for insurance by customers.

Hey, this is Douglas. You know, we've actually seen lower return levels in the first quarter and going into April. Then we have experienced historically and I think there's multiple reasons for that. I think we're working with the customer more through this crisis and making sure that they can stay on the product and that we fulfill our value proposition for being flexible with them. Second is the the customers really not trading Out product right now customer rent to own typically will buy something and then trade up or trade out into something different. They're just not leaving their homes right now, but lastly there's just more liquidity in the market. So customers are able to stay in their payments longer and get towards ownership. So, you know, we don't expect we expect to see lower returns over the near-term as what it is in the market and the more payments are making their leases. I think the more likelihood that they go to, you know further down.

That concludes our question-and-answer session. I would like to turn the conference back over to John Robinson for any closing remarks. Thank you. I want to thank our Associates Josie's and Retail Partners for your commitment to serving our customers during this time of Crisis. It's definitely been tumultuous. And our sympathy goes out to all of those who've been negatively affected by this pandemic. We thank you all for your participation on our call today, and we look forward to updating you again on our second quarter call me now concluded thank you for attending today's presentation. You may now disconnect.

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