Q3 2021 PROG Holdings Inc Earnings Call
[music].
Good day and welcome to the Prague Holdings, Inc, Q3, 2021 conference call.
All participants will be in listen only mode.
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After today's presentation there'll be an opportunity to ask questions. Please note. This event is being recorded.
I would now like to turn the conference over to John <unk>, Vice President of Investor Relations. Please go ahead.
Thank you and good morning, everyone.
Welcome to the Prague Holdings third quarter 2021 earnings call. Joining me. This morning are Steve Michaels Prague Holdings, President and Chief Executive Officer, and Bryan Garner, our Chief Financial Officer.
Many of you have already seen a copy of our earnings release issued this morning, which is available on our Investor Relations website, Investor Dot Prague Holdings Dot com.
During this call certain statements, we make will be forward looking including comments regarding our expectations related to the execution amount and timing of and benefits expected from the modified Dutch auction tender offer to purchase up to 425 billion.
<unk> of our shares of common stock, our new $1 billion repurchase program.
Any further or future share repurchases under that program.
Levels of G. M D. The delinquencies write offs and other performance metrics, we expect in future periods.
And our updated 2021 financial performance outlook.
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 press release that we issued earlier this morning.
That safe Harbor provision identifies risks that may cause actual results to differ materially from the content of our forward looking statements.
There are additional risks that can be found in our latest 10-K filing and in our subsequent SEC filings.
Listeners are cautioned not to place undue emphasis on forward looking statements, we make today and we undertake no obligation to update any such statements.
On today's call, we will be referring to certain non-GAAP financial measures, including EBITDA and adjusted EBITDA non-GAAP net earnings and non-GAAP, EPS, which have been adjusted for certain items, which may affect the comparability of our performance with other companies.
These non-GAAP measures are detailed in the reconciliation tables included with our earnings release the.
The company believes that these non-GAAP financial measures provide meaningful insight into the company's operational performance and cash flows and provides these measures to investors to help facilitate comparisons of operating results with prior periods and to assist them in understanding the company's ongoing operational performance.
With that I will turn the call over to Steve Michaels Steve.
Thank you John and good morning, everyone.
I appreciate you all joining us this morning.
Couldnt be more proud of our team as we look to close out a strong year.
We've made great progress in our first year as a standalone public company positioning Prague holdings for significant long term value creation as a profitable high growth asset light Fintech company.
In Q3, we continued to navigate the pandemic impact on our customers and partners and saw our portfolio trend towards normalized performance, although somewhat earlier than anticipated.
The quarter benefited from accelerating growth in our lease portfolio strong margin performance exceptional E. Commerce growth continued technological innovation with the release of updated e-commerce plug ins and merchant platforms.
And the addition of buy now pay later capabilities through our acquisition of <unk> technologies.
This morning, we announced that the Prague Holdings Board has authorized a new $1 billion share repurchase program, replacing the $300 million authorization, we announced in February.
Tomorrow, we intend to commence a modified Dutch auction tender offer to purchase up to $425 million and value of our common stock under this new authorization, which we expect to be funded through a combination of new debt and current cash.
We believe the tender offer which represents approximately 15% of our market cap and a significant new share repurchase authorization are clear demonstrations of our ongoing commitment to value creation through returning excess capital to shareholders.
This transaction will also have the benefit of lowering our cost of capital.
The tender offer will be priced than anticipated range between $44 and $50 per share and we expect the offered to commence on November 4th 2021, and expire at the end of the day on December three 2021.
We believe the tender offer represents an opportunity to acquire our shares at an attractive price, while preserving our ability to invest in both organic growth and M&A, which remain our top priorities.
We also believe the increase in leverage resulting from the additional debt we expect to incur to fund the tender offer will be supported by the strong EBITDA and cash flow profile of our business.
Since last November spin transaction capital allocation has been a top priority for management and the board.
And for many of our shareholders to based on my conversations with them.
Our progressive leasing and vie financial segments are both well established businesses with strong proven models and Prague Holdings. The holding company that remains following last year's spin started with and has maintained a very strong unlevered balance sheet.
As you will remember on our first earnings call as Prague Holdings in February we laid out our capital allocation priorities and announced that $300 million share repurchase program funded with excess cash flow.
Over the past nine months, we have repurchased $128 million in shares under that program, including 51 million in the third quarter.
Our decision to significantly expand and accelerate our share repurchases is driven by the alignment of three key factors.
Our confidence in our long term growth.
Second the opportunity for value creation by more aggressively investing in our own shares.
And third an attractive interest rate environment that affords low cost debt.
As I have previously shared we are comfortable with a net leverage range of approximately one to one and a half times adjusted EBITDA.
Given our robust free cash flow in excess of organic growth needs. This leverage range maintains the flexibility to pursue it.
Tractive M&A opportunities and.
And allows for continued ongoing share purchases beyond this tender offer.
Of course, the future price of our stock the size of any M&A opportunities general economic conditions and other factors will influence our decisions on future share purchases.
I want to reiterate a key point here.
We have diligently forecast our future capital needs and believe strongly that the modest amount of leverage we expect to add to execute the tender offer will not impact our ability to invest in the business or our ability to capitalize on the large unserved virtual lease to own addressable market.
As we have said consistently we consider a strong balance sheet and access to liquidity to be sources of strength and optionality that we rely on when looking to convert large pipeline opportunities.
We expect to continue to maintain those sources of strength going forward and to further leverage the competitive advantage they provide us.
Now I'd like to turn to our third quarter results, which reflect the growth in our portfolio and our strong profitability against the backdrop of continued and modestly accelerating normalization of portfolio performance.
G N V for a progressive leasing segment increased 10% in the third quarter and is up 15% year to date, both in line with expectations.
As I stated on last quarters call, we expect Q4 <unk> growth to exceed Q3's growth rate.
Factors that should drive the GMB acceleration in Q4 include a more robust promotional schedule planned by many of our partners.
An easier comparison to last year when store traffic was unfavorably impacted by Covid.
And a seasonal shift in e-commerce, where we haven't even stronger presence than we did in the prior year.
We are well positioned to deliver on our previously provided outlook of <unk> growth in the mid to high teens for 2021.
As always a significant change in the macro environment, including the global supply chain could impact results.
E Commerce GMB grew 192% year over year in Q3, and represented 14, 5% of our total <unk> in the quarter.
We remain on track to deliver our mid teens contribution from E. Commerce G. N V for the full year of 2021 up from 7% in 2020.
And expect this channel to be a key driver of future <unk> growth.
We continue to invest in innovative technology that is designed to make our products easier to use and increase transaction speed and conversion rates.
We launched progressive leasing plug ins for some of the largest e-commerce platforms, including Salesforce Commerce cloud magenta, too and <unk> Commerce, and we expect customized integrations with key retailers and these more user friendly plug ins to help drive future growth in E Commerce G N V.
We've increased our investment in the small and medium sized business market and we remain focused on growing with new and existing SMB retailers.
During Q3, we rolled out Prague central a retailer management platform that greatly enhances our F&B partners' ability to access and manage individual lease details lowering our cost to serve over time, while simultaneously, creating a better experience for retailers and customers.
We expect to begin realizing the benefits of these products and initiatives in the quarters to come.
As we have noted in recent quarters significant federal stimulus payments and enhanced unemployment benefits in 2020, and 2021 were unprecedented and had a significant short term impact on our business.
We experienced record low levels of delinquencies and write offs during much of the pandemic.
Conversely, the stimulus has been a headwind to G N V and lease portfolio growth as more customers elected to pay cash for purchases or opt into our 90 day early purchase option.
As we commented last quarter, we are beginning to see our customers trend back towards more typical behaviors across the board.
In fact, as the impact of federal stimulus and other temporary economic support subsides.
Last quarter and during October we saw key portfolio metrics, returning closer to pre pandemic levels.
<unk> for our 90 day early purchase option have trended down through Q3.
Write offs for the period increased sequentially and year over year, but remain below pre COVID-19 levels as.
As we have noted in recent quarters, we expect the write offs to continue to normalize to our pre pandemic annual range of 6% to 8%.
As seen in this mornings earnings release, we lowered our fiscal 2021 outlook for revenue and lowered the top end of the adjusted EBITDA range.
This updated outlook is primarily driven by higher reserve provisions related to the sooner than expected normalization of portfolio performance as Brian will discuss in a moment.
Having said that our early pool performance indicators and metrics are in line with our pre pandemic levels.
We have proven over the past several years that we can manage the performance of our portfolio within our stated annual range of 6% to 8% write offs and we intend to continue to do so in the future.
Our consolidated revenues in the quarter were $650 million compared to $611 million last year, an increase of six 4%.
Our portfolio has now grown in a progressive leasing segment for two consecutive quarters after hitting a low in March of 2021.
Our adjusted EBITDA margins remained elevated when compared to historical norms.
While SG&A expenses did rise from the prior year the strong portfolio performance drove our 14, 4% adjusted EBITDA margins above our annual target of 11% to 13%.
We expect Q4, adjusted EBITDA margins to decline from Q3.
And the prior year Q4 as portfolio trends continue to normalize.
Finally, I want to thank all of our employees for their commitment to our customers and partners as we strive to innovate and tailor solutions that will enable consumers to shop, however, wherever and whenever they want.
I will now turn the call over to our CFO, Bryan Garner who will discuss our financial results in greater detail.
Brian.
Thanks, Steve.
The third quarter results reflect a trend towards normalization of key portfolio metrics, including decreasing 90 day early buyout levels and higher write offs as compared to the record low write offs in the year ago quarter, which nevertheless, still continued to perform better than historical 6% to 8% annual range.
The net result of these along with other less material portfolio dynamics drove strong EBITDA margin in the quarter exceeding our typical 11% to 13% annual range also as we expected growth in our gross leased asset portfolio continued to accelerate which stands to benefit future period revenues.
<unk>.
We expect this ramp in gross leased assets to continue into the fourth quarter as we execute on our <unk> initiatives.
As I move to the financial results from Progressive leasing segment, it's important to recall the backdrop of the Q3 2020 comparison, when we had a 19, 8% EBITDA margin the highest and progressive Leasing's history.
Last year's results were driven by record customer payment performance due to government stimulus programs, which presented unprecedented comparison for Q3 2021 results.
Revenues for the Progressive leasing segment were $635 million, an increase of $33 9 million or five 6% compared to the third quarter of 2020.
The revenue growth rate for the period reflects a trend towards normalization of customer payment performance and declining year over year 90 day buyout rates.
We expect to see an acceleration of revenue growth into Q4, as we benefit from a gross leased asset portfolio balances grew 11, 5% year over year in the period.
This growth represents the second consecutive quarter of acceleration in the first double digit gain in our lease portfolio since Q1 of 2020.
Portfolio size and portfolio yield will remain key variables for continued top line improvement.
But Russell <unk> gross margin was 31, 4% for the third quarter versus 32, 6% in the same period last year.
20 basis point decrease year over year, as we trended closer to a typical pre pandemic third quarter gross margins.
As I mentioned on our Q2 earnings call of this year SG&A was expected to trend higher in the Q3 2021 period as we increased year over year investments in marketing technology sales efforts and occurred Standalone public company costs relative to the more conservative spend at the height of the Panda.
<unk> in 2020.
SG&A for the Progressive leasing segment was $80 2 million and 12, 6% of revenues in the quarter compared to 69 million and 11, 5% last year.
The SG&A spend in the third quarter is in line with pre pandemic levels for the same period as we reinvest the result of operational efficiencies towards revenue generating activities.
Progressive Leasing's provision for write offs has historically ranged between six and 8% as a percentage of revenues on an annual basis.
In comparison, they were five 4% in Q3 of 2021 versus two 1% in the prior year.
As discussed on our last earnings call, we expected our back half 2021 write off levels to increase from the all time low we saw in Q3 of 2020, when we benefited from strong payment performance driven by the stimulus environment. In addition to the more conservative decision and posture, we adopted due to the pandemic.
For reference pre pandemic write offs were seven 8% at seven 7% in Q3, <unk> and Q3 dollars 19, respectively further reflecting the strong payment performance drove the five 4% for the third quarter of 2021.
We believe Q4 write offs will be in line with our seasonally adjusted typical pre COVID-19 right.
Write offs were five 8% in Q4 of 2018 and six 6% in Q4 of 2019.
Adjusted EBITDA for progressive leasing in the third quarter was $88 4 million or 13, 9% margin.
So down from last year's record levels. The margin performance is favorable relative to our 11% to 13% annual historical range and was primarily driven by continued strong portfolio performance and associated lower write offs.
Pivoting to consolidated results.
Consolidated adjusted EBITDA, including our Vive financial and for technologies businesses was $93 6 million for the third quarter of 2021 compared to $110 6 million for the same period last year.
We generated $294 9 million in cash from operations for the first nine months of 2021 ending the quarter with a cash position of $128 8 million and debt of $50 million.
We have 300 million available under our revolving credit facility.
GAAP diluted EPS was <unk> 86 cents compared to the dollar turn in a year near ago period, and non-GAAP EPS was <unk> 94, compared to $1 17 for the same period in 2020.
As noted in this morning's earnings release as we enter the fourth quarter, we updated our full year 2021 consolidated outlook for adjusted EBITDA to a range of $390 million to $395 million and lowered our revenue range to $2 68 billion to $2 7 billion.
This outlook incorporates the recent trends, we are seeing relating to the normalization of portfolio performance metrics.
Specifically, we are seeing the reserves relating to leased assets, which impact write offs and reserves relating to accounts receivable, which impact revenue begin to rebuild after the significant release in the second half 2020 and into the beginning of 2021, driven by the stimulus environment and historically strong payment.
<unk>.
The pull forward of these reserve increases into 2021 will impact the current year results more than anticipated. When we provided our July outlook and are the primary driver for the changes in outlook.
Steve mentioned the early indicators of portfolio performance remains strong and we believe will translate into write offs and EBITA margins more in line with pre pandemic ranges over the next few quarters.
Finally during the quarter the company acquired one 1 million shares with a weighted average price of $45.43.
Totaling $51 million.
Year to date purchases were $2 6 million shares at an average of $48 88 per share totaling $128 2 million.
Beyond the tender offer which Steve highlighted and as detailed in this morning's press release, we will continue to look for opportunities to acquire shares at a favorable price levels.
The new 1 billion repurchase authorization.
Now I'll turn things over to the operator for the Q&A portion of the call operator.
Thank you we will now begin the question and answer session.
Last question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble a roster.
My first question comes from Anthony <unk> with.
Capital markets. Please go ahead.
Good morning, and thank you so much for taking my question.
So you know you talked about the normalization, which makes a lot of sense given the fact that everybody.
Mac and they're stingy checks anymore, but I guess my question is.
Historically, you've always guide to kind of a 6% to 8%.
Write off rate.
Is that still the right way to think about the write off rate.
Long term or are there any other are there any sort of changes.
Sort of post pandemic versus pre pandemic, where maybe that's not necessarily the right range like how do you how do you sort of think about that.
Yes. Thank you Anthony this is Steve.
Yes, we've been talking about normalization for several quarters and we've actually been rooting for it quite frankly, because we believe that.
In a normalized environment, while it will include increased write offs.
And the buildup of the reserves that we've discussed this morning. It also will include.
Probably.
More pre pandemic customer behavior from a from a <unk> standpoint and from a.
Demand for the for flexible payment options.
Specific to the write offs, yes, we think that on an annual range in 6% to 8% is.
Is the right range that we're targeting.
We put those guideposts out in early 2016 and <unk>.
Till the pandemic hit there was no trailing 12 month period, where we didn't deliver within those 6% to 8% range, which we.
We believe demonstrates our ability to manage the portfolio.
Tightly.
We believe that.
When the pandemic is a we're living with it and it's a distant memory.
That 6% to 8% will be will be the range and that's an appropriate way to run the business. We're constantly evaluating the data that we have in and learning from the pool performance.
We believe six 8% as a comfortable.
Our range for us to help.
To help us on our growth initiatives as well as deliver within the earnings ranges that we've also laid out.
Got it no. That's helpful. And then just two quick Super quick follow ups, just any updates on four technologies and then.
Somebody's got to ask the question the retail partner pipeline. Thank you.
I appreciate that yeah for where we're excited about for the team down in South Florida are doing an awesome job getting integrated into into Prague Holdings.
We've you you'll notice there's an other category with a little bit of a EBITDA drag and that's just kind of the the spend to get to get the team you know as we talked about last quarter. Four is a is a great tech platform and are in a great app and a great team, but with certainly a start up so we've got.
Some investments to do there we're having good conversations we've had multiple we've had conversations with retail partners about multiple product solutions. We've had those are the those would include existing retail partners, we've had conversations with <unk>.
Prospective retail partners about multiple product solutions. We've also done some very limited cross marketing, where we're getting good Intel and good results too.
To see how we can.
Used for to grow Prague, and just increase the progressive ecosystem. So we're excited about that but it's very early innings as we talked about it it was very incremental not transformational and we'll continue to run it that way.
And then on the on the on the partner pipeline and I know this is a.
A frustrating answer but.
You know theres a lot of opportunity out there and we continue to believe that every.
Retailer will have V L T O as a solution and they're fully developed finance stack.
It's not there yet that's why we are so excited about the <unk>.
Served addressable market that's out there.
Obviously this time of year, it's difficult to to have a have an announcement around <unk> around our partner, but we look forward to.
Continuing the conversations that we're having and progressing them along in our business development.
Process and.
We will update you as.
Cause wins happen.
Got it thanks, so much queue up the good work.
Thanks Anthony.
Our next question comes from Kyle Joseph with Jefferies. Please go ahead.
Hey, good morning, Thanks for taking my questions.
Just wanted to talk about at <unk>, obviously, a deceleration versus the second quarter can you walk us through that.
Is it more difficult comps within supply chain issues.
And then you talked about credit normalization been talk about kind of how GMB.
Normalization and plays out.
Would you anticipate getting back towards your kind of pre pandemic levels as well.
Yeah, Thanks, Scott Yeah.
So I would say GMB well, we did say specifically that <unk> was in line with our expectations for the quarter.
And.
We said on the last call without giving quarterly guidance that we expected well we are confident in our mid to high teens and <unk> for the full year.
We're still in that range and we knew that Q4 would have a higher growth rate than Q3, So I know that.
There may have been some expectations of a different number in Q3, but for us that that was in line with our expectations.
Certainly supply chain, we are exposed to supply chain to the extent that our retail partners are exposed to it.
And we are not immune from inventory outages in long wait times and as we've talked about on previous calls if you.
Executing a lease agreement for a group a group of furniture that may be coming in in 10 or 12 weeks the likelihood of the customer cancelling that before delivery is much much higher than if it's ready and available now. So we are impacted by that and we will continue to be but we still believe that even with those pressures and head.
<unk> we will.
Maintain or hit our mid to high teens <unk> for 2021.
On the portfolio of normalization.
We you know we've been expecting it.
It happened a little faster or is happening a little faster than we anticipated.
But again, it's not a it's not a bad thing for the model.
It comes with these reserve buildups that Brian talked about and will and can talk about more.
We believe that the it will come with a removal of a headwind on G. N V originations the unknown for US is does it happen simultaneously or is there a.
A quarter or two lag or a few months lag so.
We're watching that and we were putting together and we've got our plans and we will update you all on our 22 views.
In February but overall.
Overall as we've said.
Normal is.
More stable and predictable operating environment for us versus this pandemic over the last 18 months.
Got it.
Yeah and then.
A follow up to that E talking about normalization, but also talk about sort of the.
Consumer good insulation prices in any in the demand for leases in this sort of environment with higher costs are you seeing would you expect to see greater demand for essentially credit.
I mean I think the short answer is is yes inflation.
Inflation cuts both ways right. So.
What you just said is definitely.
Factor in that that to the extent that big ticket consumer durables get a little bit more expensive.
The need for flexible payment options should increase.
On the flip side, we are.
But when you talk about the paying for products.
We continue to think it's a compliment to two or at least the one product not a not a competitor not only from average order size, but also from.
The profile of the consumer.
When you go out to the other end of the spectrum.
The law the longer term installment loans, they're not not really active in the in the subprime space So from a.
From an education of the retailer standpoint, it's a positive thing because the retailers sees the power of the fully developed finance stack and offering all the payment options to the customers too too.
Widen their their top of their funnel.
We've talked a little bit about somewhat of a headwind and that it could take some mind share in some.
Prioritization, if they prioritize paying for a product in front of an <unk> initiative, but.
I think the.
The farther we get into that the the less that will be because.
Pretty much everybody is talking to a BNP provider.
Provider.
I appreciate it thanks for answering all my questions.
Thanks Pal.
Our next question comes from Jason Huh.
America. Please go ahead.
Hey, good morning, and thanks for taking my questions.
I'm curious about the performance at your key large national retail partners. It sounds like that was a source of strength during the quarter I'm curious if you could talk about what was driving that.
Yeah, Thanks, Jason and good morning.
I guess without getting specific we just continue to have great partnership with <unk>.
With our large partners and we still are excited about being in the early innings. So we've as we talked about on previous quarters. We've had good luck and an increasing appetite for collaborative marketing.
And.
And just partnering well and continuing to innovate the product.
And make it easier and more frictionless and so we've still got work to do and we will continue to partner with those retailers to do that but.
I think as as we would have expected and as we've seen in the past, it's just had a bigger scale.
The more you get in the more kind of comfort that you have in years, two and three et cetera.
You build that credibility with that retail partner and they.
And they are happy too.
Take your suggestions and maybe more so than they were in there in the first couple of quarters. So we're excited about.
Govt production, we look forward to a great holiday season.
We've got a good roadmap of product innovations that would be very specific to.
A retailer to help with not only the application funnel, but also the conversion funnel and.
And those retailers will be.
Like I said, it's kind of still in the early innings, which is which is exciting for us.
That's great to hear and then you mentioned the supply chain shortages, which had been very topical lately. So I'm curious to what extent that impacted GMB.
Within the quarter and then curious about your visibility as we look out into four Q.
And just if you have an expectation as to whether they're shortages could be more impactful or Latin impactful uhm, just just giving you got into the acceleration, but I think a lot of people expect it goes could worse and so curious you have to what extent that's a central risks.
Yeah, I mean definitely there is there is impact there is no question, it's difficult for US we talked to our retailers every day, obviously and.
And so we know and and we have a good feel for where they are from an inventory position we.
We've talked in the past about inventory shortages.
May not even show up and the cops have that retailer, but it could show up in the balance of or the composition of their sales and that it tax more towards.
Cash purchases or personal credit cards vs in store payment options and so.
It could be mask, the little bit that they've got they still have good sales and they're selling what they've got but it's being sold.
On deposit before it even lands and we don't even get the at bat.
Having said that like the Q3 numbers.
That we printed from a <unk> standpoint, we're in line with our expectations that we.
That we laid out at the end of July.
And we still believe that we have the ability to accelerate Jean Vigo into Q4 and hit our mid to high teens GMB number even facing the pressures of.
Of the supply chain, I mean, I wouldn't speak to specific retailers.
Plans are confidence on being in stock during the holidays, but.
That's certainly it will have an impact on us there's no question.
Got it that makes sense.
Our next question comes from Bobby Griffin with Raymond James. Please go ahead.
Good morning on for body Griffin, Thank you for taking our questions.
First I wanted to dive further into the strong e-commerce scheme be crap in the quarter.
What was the larger driver on the e-commerce can be ground existing customers are some of the new programs you have been working on a recently launched including the plug and play.
Yeah. Thank you for the question E Commerce continues to be an exciting.
Grow channel for Us and I really feel like we're just scratching the surface the specific.
The answer to your specific question is.
While we're excited about these ecommerce plug ins Salesforce conference cloud the wound commerce magenta too.
It is.
That's the smaller portion and those things will help us to grow GMB econ GMB in the future quarters in years to come but the majority of our.
Of R E com penetration and growth is still coming from our larger retail partners.
But we are but we are really excited about the opportunity to partner with the thousands and thousands of retailers that are using these these leading E com platforms that we have the capabilities to have.
Plug and play.
Office Optionality with.
Okay. That's helpful and then what impact you believe the child tax credit on your Bill.
Did you see lower 90 day option to cross the retail accounts for only at large account.
Yeah. The child tax credit has been a difficult one to see which is not the same case and other types of forms of stimulus that we've observed whether it would be kind of just tax season generally before the pandemic or the various.
Around the stimulus during the pandemic so.
We haven't really seen an impact from child tax credit we haven't seen.
We've actually seen a decline in a 90 day buyout options too which was in your question.
It's pretty much across the board.
It is not retailers specific.
And we would have expected that as we talked about portfolio normalization I can't I can't sit here and say the the child tax credit a monthly check has heard it certainly I don't think it could have hurt but.
There's a lot of noise and a lot of ingredients in the mixing bowl and when you when we look at our at the portfolio performance.
And it's trending back towards more normalization.
That's in the face of some of our customers still receiving these these monthly checks and so it's very difficult to to see the.
The direct impact from from that.
That monthly income.
I understand thank you and best of luck on the balance of the year.
Thank you.
Our next question comes from Brad Thomas Keybanc Capital markets. Please go ahead.
Hi, good morning, Thanks for taking my question.
I was hoping you could just remind us a little bit about how you all think about seasonality for right off.
For the fourth quarter, obviously last year with an unusual year how.
Do you normally see it trending for progressive for the fourth quarter and and.
How are you thinking about it for this year.
Yeah.
Brian.
The.
Typically Q4 represents the lowest right off.
Percentage in in the in the calendar year, I think there's dynamics happening Steve mentioned with portfolio normalization in the reserve buildup that will while while I still expect us to be at or below that that 6% to 8% range.
It's perhaps not as low as we would typically see.
And and so will be will be will be fairly close to in line with where we've been out in Q4.
I'll say 18 and 19 for example.
But but I don't but the reserve buildup as muting a bit of the performance of lower than than typical right off that we are experiencing as we trend back towards that makes sense and Brad Brian.
Gave those numbers and I don't want to misspeak. So what what are they for Q4 hundred 80 to 19 Q4 of 18 was five eight and Q4 was $6 six.
Okay. Great. So you just to be clear you are expecting it to go up sequentially.
From the $5 for as long as you're every year.
Yeah, that's kind of a needle him threading up up from the 5.4.
And there's some where close to where we've been historically, even though we are doing with this reserve buildup.
Factoring into that.
Very helpful and just as we think about your decisioning trends in underwriting trends.
As you think about approval rates and things like that do you feel like you're able to keep those in line or are you in a position where you have been or may need to be doing some tightening.
With your decision and how should we think about that.
Yeah, Hey, Brad this is Steve Desir.
Decisioning well first of all we're constantly evaluating and tweaking and adjusting decisioning. The team is just really dialed in as.
As we've talked about over the last several quarters, we are in a.
Current posture of having slightly higher approval rates than we had pre pandemic.
After obviously tightening during the pandemic that we've talked about quite a bit.
But.
Is higher approval rates come with some other changes which are.
Aw changing retailer composition with the addition of some of the retailers that we've had over the last several years along with Ah continually increasing.
Repeat customer.
Composition and so.
I wouldn't say that higher approval rates are necessarily a more aggressive decisioning posture. There, it's almost an output of what we see coming in the top of the funnel.
And so we we look at early indicators, we look at all of these metrics at the seven days 14 days 30 days, an overall pool performance center and are constantly has our finger on the on the scale, but those indicators are.
Telling us that the full performances.
As in line with our expectations, while while training back towards Prepandemic, which we don't think is a bad thing it's in line with our expectations and so while I would never rule out.
Doing some tightening it's not something that we.
Feel like we have to do right now to manage the business within that 6% to 8% annual range that where we were comfortably within before before the pandemic.
It's really helpful and if I could ask one more Steve just about in the conversations that you are having with retailers really more your existing partners.
It seems to me that during the pandemic retailers had many things that they were focused on and I don't think pushing progressive was high on their list has been my own observation as you have conversations with them within a more normal world are you seeing them take more tools from the tool kit.
Progressive or should we be seeing more creative promotions more advertising.
More training.
What other tidbits can you share with us about retailers reengaging more with progressive here.
Yeah, no that's a very.
It's an interesting dynamic and you are right when when Ah retailers printing, 20% comps there, they're not all that interested in talking to you even an existing retailer to your point.
But yes, we have seen.
As this year has progressed and that's a function of a couple of things not only.
The desire to continue to drive incremental business and comps, but also the comfort with our team and with our program and so.
So yes, we are seeing retailers across the board not just newly onboarded retailers, but once we may have had.
For a number of years and maybe they had some management change and.
But we're seeing retailers reach for as I like to call. It in you validated our toolkit.
And that does include.
Promotional campaigns.
That are.
Digital in nature with E mail, but also the old fashioned direct mail.
Cobranded and we've actually had without naming names we've had a few.
At least two major retailers for.
For the first time in a relationship in 2021 agreed to kind of do a co branded where it's their logo and the progressive leasing logo on the same collateral material and that's an exciting kind of inflection point for us because we know that that means that we've got a lot of opportunity.
For future.
Promotional campaigns once they've kind of made that internal decision. So we're excited about that we think that's partially.
Will help us with our acceleration of GMB in queue for but it will continue to pay dividends in the future periods as well.
Okay, great. Thanks, so much Steve thanks.
Thanks, Brian.
Our next question comes from Vincent came.
With Stevens. Please go ahead.
Hey, Thanks. Good morning, Thanks for taking my questions first just kind of.
Guidance questions I know will be getting.
Two guidance in February, but just kind of based on the fourth quarter.
So it seems like everything's kind of normalized so let's say like the write offs are back to 6% when I calculate the EBIT margin. It seemed like fourthquarter is gonna be 12% by the guide.
And gmg's growing 5% year over year, if I got my math correctly and I'm just kind of wondering if the fourth quarter has anything unusual with any of these metrics or if it's kind of a good jumping off point that we're looking to to update our estimates for it go for it.
Yeah.
All started then Brian can chime in I guess I just had a.
Not the answer a question with a question, but I think he said that <unk> was implied to grow at 5% in queue for if you had your mouth right is that what you said.
Yeah, I think I might have to redo that but please correct me.
Yeah, I mean, we are a year to date.
15% DNV growth and we're guiding to a mid to high teens, So I think.
You just have to maintain those that type of a growth rate in order to maintain the mid to high teens.
It wouldn't be 5% were obviously, we're not got into the number but I just wanted to make sure that it wouldn't be five forget it.
So Brian on the on the guide Yeah. That's in a couple of things with respect to queue for and I think as we position ourselves into 2022, the mattress, but we're watching here I think first.
The growth of the portfolio is very encouraging as we've seen that acceleration.
From a from a decline in Q1 accelerating into Q2, and then and then hearing the Q3 and as I as I mentioned my my prepared remarks, we expected to accelerate again, so that's our launching point, so that portfolio, which you'll see on the balance sheet is gross lease assets as in a good good position as we as we look to exit the year the other.
Other piece that I would that would draw you too as you think about the undercurrents within the financials and the trends are happening Steve's gaffey right the reserves.
It really saw a significant decline in the back half of last year into the into the front half of this year.
As customer pain performance was extremely strong and just did not necessitate the reserves that we had on the books and so began to bring them down and inevitably we knew.
At a future point as the portfolio normalize we wouldn't have to rebuild those reserves and whether that occurred this year or next year that was an eventuality that just just was going to happen and so the pull forward of that dynamic into this year.
Wallets wallets.
Certainly caused us to take a look at our outlook.
In a.
In a different light for this year.
I think you without getting into 2020 results again that was something that was forecast to happen anyway and so.
Those are those are the main undercurrents that I see as we as we exit the year and I think it bodes well for a for a 2022 picture in Virginia V growth is Steve is talking about accelerating into the queue for so I think there's a lot to be optimistic about with respect to the financial movement in the write offs.
Staying in shaq, and 6% to 8% all the early indicators that we are watching.
In terms of early stages delinquency et cetera, while they're while they're moving up there that they're not they're not outside of what we would typically expect it's just happening happening a bit a bit sooner hopefully the answers your questions.
Okay. That's yeah that is really helpful. Thank you and it's not like I guess when you think about your underwriting of your your credit box, it's not like.
You're changing that at all through this entire process that's my.
Right that that's been fairly consistent actually through the throughout the pandemic it as we're doing.
In the fourth quarter.
Well visit from a decisioning standpoint.
We tightened at the very the onset of the pandemic as we've talked about though.
We rolled back some of that tightening starting in the fall of 2020 into the spring of 2021, and we've been pretty consistent for call. It the last six months or so around our other around our decisioning box and so yeah nothing's really.
The dials or not as I said that we are constantly evaluating the dials and we have our finger on the dial, but they're not really being tweaked that much.
In the last couple of quarters.
Okay perfect. Thank you and next question. So it was very nice to see.
The large share buyback and the capital returned to put in your your free cash to work and I was wondering if he can remind US you know what is the free cash flow generation of the company and and.
When you look at different avenues that you can use that for you know what your priorities are.
This particular 1 billion share buyback I know you talked about any prepared remarks, but if maybe you can do about in more detail like how much.
Do you expect to raise the fun to share buybacks and so what do you expect your capital structure to look forward to it looks like it looks like.
Yeah. Thanks.
Since the since the spin last year, which is almost a year ago. The board we have been.
Really focused on capital allocation and I've acknowledged in the past that are net cash position was not the not the most efficient capital structure and we were looking for.
Owing ways and opportunities to.
To deploy capital very prudently and judiciously and R. As a reminder, our capital priorities are to invest in organic growth reinvest in ourselves to reinvest in our business and we just we're fortunate.
The business has a a great cash flow profile and Ken self funded.
The high growth rates far in excess of where we're growing now and.
So kind of when you check the box and say, okay, well organic growth is.
Is there is plenty of capital for that then you look opportunistic and strategic M&A and we've talked about that and how that's we're looking for platforms in tech and capabilities and.
Extensions of our current product.
And then the third thing would be to return to excess capital to shareholders and so that's been the framework and we announced a $300 million authorization to repurchase shares. The board authorized in February we've been executing against that to the tune of $128 million a year to date.
Based on our average daily trading volume.
It's more difficult to do open market purchases and get an aggressive amount of shares back in so that's.
One of the reasons that we are.
That we look to to do the tender that we're planning to.
Launched tomorrow.
As it.
As we sit here on 930 that we still have net cash so we would look to.
Raise some debt to execute on this tender.
We haven't said, what what form or how we're going to do that we look we look forward to updating all fair.
Fairly soon on that but as you can imagine we're in great position, because the balance sheets strong business model strong and the.
The credit markets are pretty.
Are pretty attractive right now we've got a great supportive bancgroup, but the.
So the pro rata market is open but also the the.
The public debt capital markets are available and attractive and we look to take advantage of those that environment and those rates.
And and and put some put some leverage on the balance sheet. We're not focus on the 1 billion right now we're focused on executing on the tender the $425 million tender that will launch that we intend to launch tomorrow.
But I've also said in the past that we're comfortable kind of in a net leverage range of one to one five times.
Which is a decent number from where we are today.
The but having said that will all we'll constantly.
Run a strong balance sheet with conservative structure for the reasons I outlined in my prepared remarks, which are the fact that we want to project strength.
Current an existing and future perspective retail partners.
And visit with respect to free cash flow.
Year to date 295 million cash flow from operations and then you can adjust when you look at that for for capital expenditures, which are pretty nominal generally speaking. So that gives you a sense of of the cash generation power. The business, obviously, it's been a bit elevated in the first half because of because of the <unk> environment, but I think going.
Forward.
And that's in that's take note account I think meaningful meaningful investments that we've made in our our organic growth. So.
Going forward I think there's we're on a very strong footing.
For Optionality.
Great very helpful. Thanks, very much.
Oh.
Our next question is a far from Anthony to combo with Blue capital markets. Please go ahead.
Thanks for taking my question and allow me to double dip uhm. So I just wanted to get your thoughts on last week's announcement of the first cache acquisition of American first finance I guess.
Two questions somewhat related I mean.
What what are you what are your thoughts just in terms of what the impact will be from a competitive landscape perspective from that deal and then also what do you think that that D. O says about the current valuation of your stock right. Because you know that deal was done at nine times there are 2022.
EBITDA asthma, and 11 times with you assume the the earn out. So you know how do you think about where your stock is or maybe that's part of why you do the 10 or I would love to just get your thoughts. Thanks.
Yeah. Thanks Anthony.
I would be consistent in that I think it's I think it's positive for the industry that are that are that are private competitors become part of public companies and I think that helps us from an industry standpoint from a profile standpoint from a competitive standpoint from a compliance standpoint, all all of the above.
So I think.
View the transaction as positive in that regard.
Thoughts about how it's somewhat difficult to compete against some.
Private companies that have single shareholders that they might not have the same.
Guardrails or or even margin margin expectations.
So I think it's a positive thing and I think that.
Being under.
A public company and having that infrastructure will be will be positive.
From evaluation standpoint, well first of all the first ashes is not a pure play VLT O player right they've got a decent size of their business is kind of high APR installment loans. So it's got it's got a little bit of a different I'm sorry, not first cash American first finance F F.
A little bit of a different profile from evaluation standpoint, but clearly we believe we are undervalued.
And and we're not commanding the multiple that this business profile should command.
11 times, you know I don't I'm, not I'm not sure exactly what the earn out is but at 11 times EBITDA multiple for.
For a F F.
Hitting where we're sitting you know we believe that we should have a higher multiple than that because of we don't have that larger percentage. That's in a different business segment, but and that's one of the reasons why we feel like these these levels are so attractive for us to to really use other vehicles to execute them.
A share repurchase program and be able to get more aggressive and.
And so I think it's a good thing on net net for the for the industry and hopefully the.
The valuations will continue to pick up.
Got it thank you.
Our next question comes from how it goes two it was capital markets. Please go ahead.
Okay. Thank you.
You just shifting the market, taking place where saint <unk> like by not to either promoters are coming in the channel or becoming a model for customer acquisition and you just mentioned this chest of co brand.
With some of your customers.
Oh wait I'm wondering if this market is heading toward maybe.
Maybe I'm Lucky if you get the the website I'm, a firm or <unk>, where they literally profile all the merchants.
Yeah, you can use their financing way.
And they link then.
The financing option first two back to the retail.
I have to get your thoughts on where that might be in your plane will go over the over the long run. Thank you.
Yeah. Thank you I mean, it wasn't there's a couple a couple of thoughts on that one as the our retail partners are are a great customer acquisition channel for us and but also we and every time, we add a new.
Logo into our preferred partner network it is kind of Ah.
A virtuous cycle for for the for the retailers because we continue to have higher.
Our increased repeat business, we got and.
And engaged cut.
Customer on our digital channels, and we can use that to.
Direct them back into our preferred partner network and so we've talked about a direct to consumer motion in the past, which is similar to what you're talking about but as we can attract consumers.
And deliberate and say, hey, here's where were accepted.
Through vie for an progressive leasing and direct them into our into a retail partner channels. It. It helps us not only grilled GMB for both us and our retailers, but also helps us in our discussions with our retailers, saying that we're not just riding on their marketing rails, but we're also driving incremental business.
Into their into their ecosystem in their environment and so is certainly the this this network effect that you're referring to his front of our minds and something that were that were leading into.
Thank you very much.
[noise], that's congrats that question and answer session I would like to turn the conference back up to see if Michael's for any closing remarks.
Yes. Thank you very much. Thank you all for joining us today.
We appreciate your interest and support in Prague Holdings, we look forward to launching this this tender offer tomorrow and updating all.
During that process and also updating you in February on the next quarter in our view of 2022, so thanks very much.
The conference is napkin graded. Thank you for attending today's presentation you may now disconnect.