Q4 2021 Rent-A-Center Inc Earnings Call
Thank you for standing by and welcome to the Q4 2021 rent a center earnings conference call.
This time all participants are in listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded.
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I'd now like to hand, the conference over to your host Brendon Medtronic Vice President of Investor Relations. Please go ahead.
Good morning, and thank you all for joining the <unk> team to discuss our results for the fourth quarter of 2021, we issued our earnings release after the market closed yesterday, we released at <unk>.
Cereals, including the link to the live webcast are available on our website investor Dot rent a center dot com.
On the call today from rent a center.
<unk>, our CEO , Jason <unk> executive Vice President of Cima.
Anthony <unk> executive Vice President of the rent a center business segment and Maureen short CFO .
As a reminder, some of the statements provided on this call are forward looking statements, which are subject to many factors that could cause actual results to differ materially and adversely from our expectations. These factors are described in our earnings release as well as in the company's SEC filings.
Center undertakes no obligation to publicly update or revise any forward looking statements except as required by law. This call will also include references to non-GAAP financial measures. Please refer to our fourth quarter earnings release, which can be found on our website for a description of the non-GAAP financial measures and reconciliations.
To the most comparable GAAP financial measures.
With that I'll turn the call over to Mitch.
Thank you Brendan and good morning, everyone and thank you for joining the call today to review, our fourth quarter results and our plans for 2022.
2021 was an important and transformational year for the company we.
We completed the largest acquisition in our history, which has greatly enhanced our commercial and technology capabilities growth opportunities and potential for value creation. We also generated strong financial results with revenues up about $4 6 billion up 17% on a pro forma basis on solid organic growth from both the rent a center.
Business segment and the steam of business that we acquired last February .
non-GAAP EPS was $5 57 up from $3 53 in 2020, and we also paid out a healthy dividend of approximately $1 24 per share.
From an operational standpoint, we made great progress on numerous initiatives that should position the company better for the future within the rent a center segment, we made great strides in our ecommerce business, which increased to 23% of revenue in 2021 from 13% just two years ago.
We executed initiatives to lower delinquency and loss rates, including centralized decisioning increased autopay penetration and digital payment capabilities.
We also added new products and sourcing capabilities to drive incremental transaction growth.
Simo, we continued to grow the merchant base, including new relationships with strategic partners like P. C. Richard Sun and Whirlpool, We consolidated collection operations and completed the conversion of most of our preferred lease locations, which contributed to achieving the 2021 synergy target of at least $25 million.
We also launched our proprietary digital ecosystem test that leverages, the theme of scale and technology, including a direct to consumer model, which we believe could be a significant competitive advantage and growth vehicle long into the future.
The more challenging aspects of the year, primarily stemmed from operating in a dynamic macro environment that resulted from the lingering effects of the pandemic.
This caused dramatic swings in customer behavior, especially around delinquencies and early payouts and renewal rates.
For the first half of the year the macro environment was a tailwind with government relief programs pushing expenditures on consumer durables and favorable payment behavior to levels that were above historical averages and.
In the latter portion of the year, the macro environment shifted to a headwind government pandemic relief programs that had supported high rates of consumer spending ended and in addition to supply chain disruptions and a significant uptick in inflation diminished consumers' ability to excess and afford products.
We had anticipated some effect from the end of the pandemic relief and implemented new tactics for Decisioning and collections.
However, we underestimated the speed and the magnitude of the changes in delinquencies and loss rates, especially for sema.
The combined effect of those factors, having a large impact in the fourth quarter, which generated adjusted EBITDA and EPS below the expectations implied in our most recent annual guidance for 2021, Maureen outspend and our fourth quarter results and our 2022 outlook in a few minutes.
Over the past few years, we've built a foundation for the Companys growth strategy to evolve into a leasing and payment solutions platform.
We returned the legacy <unk> operations through a resilient profitable strong cash flow generation business.
In 2021, we took a major step forward in expanding our digital growth engine by acquiring <unk> and then launching the digital ecosystem test.
So today, we have a compelling formula for value creation strong current profitability and cash flow plus the potential for robust topline growth and incremental earnings power.
From a strategic standpoint, we now have the right pieces with the leading Omnichannel business and <unk> one of the top virtual LDL franchises in this space and our proprietary direct to consumer business that we believe could provide a competitive advantage.
While we are well positioned to move forward with our growth strategy and agenda that we've previously outlined in our long term plans. It is unclear if the external environment will allow us to generate the desired results and returns on our investments this year.
When you factor in the effect of ongoing macro headwinds and the material pull forward of consumer durable spending that occurred over the past 20 months, we think our core customers' ability to access and affordable bids may be limited in 2022, especially in the first half of the year.
So rather than push forward with significant investments in growth initiatives and an unfavorable environment, we're taking a more measured approach to execute in areas, where we can influence outcomes and still enhance our position for long term growth.
For example, at the Sema, where delinquencies and losses have exceeded historical averages. The near term plan is to focus on underwriting for yield and loss improvements, including shifting technology resources to that effort, which should also benefit our future underwriting on.
When the environment becomes more conducive for growth, we'll be prepared to pivot and ramp up investments in our growth initiatives, taking advantage of our strong cash flow generation.
Now regarding our 2020 to financial performance, we expect to generate revenue for the year of.
$4 billion 450 million to $4 6 billion adjusted EBITDA of $515 million to $565 million, which excludes stock based compensation of approximately $25 million.
Fully diluted adjusted earnings per share of $4 50 to $5.
And $390 million to $440 million of free cash flow.
Well this revised outlook impacts the three year targets, we announced last year I think it does demonstrate our resiliency and ability to generate solid financial results in more challenging business environment.
Along those lines given the extent to which late 2021 results in 2022 projections have been negatively affected by changes in the external environment, we will not reach our $6 billion revenue target by 2023.
If you recall in the third quarter call, we discussed potentially hosting an investor day sometime towards the end of the first quarter. We think it is important to hold an in person event to most effectively communicate our story so given the ongoing challenges for in person events due to Covid variance.
We've decided to push out the Investor day until later this year.
In closing I want to thank the entire team for their continued effort and dedication it's been quite a journey over the past few years I've been impressed with the progress we've made and the tremendous efforts opportunity I see in the future with that I'll turn the call over to Jason updates on these FEMA business.
Thanks Mitch.
Echoing your comments 2021 was a transformative year for us with these sema acquisition, we essentially doubled the size of the company and took a big leap forward in our virtual <unk> business.
Over the course of the year, we made good progress integrating the two businesses and launched our proprietary digital ecosystem test that we believe could effectively double our addressable market to almost $100 billion of open to lease capacity.
Today. The company has established a solid foundation for the future with significant opportunities for growth and expansion as the external environment improves.
The CMS segment grew GMB, 23% and revenues, 22% on a pro forma basis in 2021.
Segment adjusted EBITDA margin was 12, 2% in 2021.
Those results would have been even better without the disruptive external environment that occurred in the latter portion of the year that negatively impacted customer spending on consumer durable goods and payment behavior.
In the fourth quarter.
These external factors negatively impacted GMB growth delinquencies and losses.
We started adjusting underwriting and collections back in the third quarter to mitigate deteriorating delinquency rates and loss rates. However, as the external headwinds worsened through November and December the deterioration in delinquencies and losses accelerated despite the additional tightening.
Bottomline. Despite tightening we can now see it was not fast enough to keep up with the changes in customer payment behavior.
Attempting to get ahead of declining macroeconomic trends in January we tightened further in.
In addition, we've implemented new augmentative fraud measures to further prevent losses as E. Comm continues to grow as a portion of our origination and we will continue to implement additional augmentative fraud prevention technologies.
Early first payments missed trends are encouraging however, it will take a while for the improvement to show up in the P&L as leases that were booked prior to these changes in underwriting make their way through the performance lifecycle.
Fourth quarter, <unk> grew 5% year over year on a pro forma basis, driven primarily by increases in merchant locations.
On a pro forma basis revenues grew 12% skip stolen losses increased approximately 100 basis points year over year to 11, 8% and.
And adjusted EBITDA margin declined 540 basis points to nine 6% largely due to higher delinquencies and higher loss rates.
Initial results from the ecosystem testing have been encouraging.
By the end of this month, we expect the mobile App will have approximately half a million activated downloads with open to lease capacity.
Roughly double the number from our third quarter earnings call. We still believe we are on pace to reach 1 million activated downloads with open lease capacity around mid year 2022.
Optimizing the product and better understanding risk and performance is still the primary objectives. So we will continue to operate and methodically with targeted activation on previous CMO customers.
Importantly, we still haven't leveraged the lease pay Mastercard card. The physical card was just piloted on schedule in December with a 1000 cards issued and a larger scale launches planned for some time in 2022.
The strategic aspect of the ecosystem are also beginning to play out.
Merchants have noticed how much volume are proprietary marketplace is driving and have approached us to learn more about the platform and how they can work with the sema to generate more business.
<unk> been very exciting to see the ecosystem coming together and building momentum and we look forward to having all the pieces up and running this year.
As Mitch highlighted we expect the macro headwinds that impacted the fourth quarter of 2021 to persist through much of 2022.
Based on what we learned from the second half of 2021, we think it is unlikely that heavy investments at GMB growth will generate appropriate returns in this environment.
So while our product development initiatives are on track, we plan to take a more measured approach with the launch and ramp up of the products that we previously envisioned.
When the environment and consumer behavior improve we will be ready to scale.
Closing, reflecting back over the past year the team accomplished a lot and laid the foundation for what we believe can be a dynamic and disruptive business.
Like to congratulate the entire team for the tremendous effort and execution in 2021, and I can't wait to see what we accomplish in 2022.
I'll turn the call over to Anthony now.
Thanks Jay.
2021 was an exceptional year for the rent a center business that demonstrated the strong value proposition, we provide to our core consumers. We grew revenue, 10% with same store sales growth of 15, 4% and the lease portfolio, finishing the year up 10, 5%.
This represents the 16th straight quarter of same store sales growth and is a testament to the long term stability of our business model.
As Mitch noted earlier, our E Commerce business had another strong year and will be the primary growth driver as we continue to enhance our omnichannel capabilities. Additionally, we have identified new areas for store expansion and begun the process to complement our growing ecommerce offerings and grow our portfolio.
<unk> margin was 23% and increased 280 basis points year over year, while we continued to invest in the business.
Perhaps even more compelling than our financial results is the sound work of our operations team, who has managed through continuous COVID-19 obstacles since the first half of 2020.
Execution was certainly a key factor in 2020 one's performance, but we also clearly benefited from a more favorable environment as Mitch and Jay both noted earlier those tailwind you started to moderate in the latter part of the year, especially in the fourth quarter with revenue on the lower side of our expectations and EBITDA below our expectations.
But overall results were still impressive with revenue growth of 9%, including same store sales growth of 10, 4%.
E Commerce revenue grew 17, 9% year over year and more than 70% on a two year stacked basis and accounted for 23% of revenue within the quarter.
Adjusted EBITDA margin was 19, 3% and declined 290 basis points year over year due to higher labor cost loss rates and other store expenses.
Per store labor cost had been almost flat for the past two years, and we believe labor investments where needed to keep up with wage growth and staffing needs to manage a much larger portfolio within a more normalized collections environment.
Skip stolen losses increased 140 basis points year over year to 4% due to the same factors affecting customer payment activity that mentioned Jay discussed and longer term, we expect it will average around the upper 3% range.
Moving on to 2022, our top business priorities are focused around enhancing omnichannel capabilities. Our goal is to deliver a more seamless experience for our customers. However, they choose to shop with US we have several significant initiatives underway that are aimed directly at driving sales and customer retention.
We are working to create a better shopping experience for customers and enhance our ecommerce growth through improvements to the online checkout process expanded product offerings and increased personalization within our sales and marketing strategies we.
We are also working towards making payments easier implementing better communication strategies, and improving personalized retention strategies to enhance our customers' churns.
We expect these efforts along with other initiatives will grow our portfolio beyond existing levels, while also maintaining our key advantage of remaining embedded within our communities.
We'd like to thank the rent a center team for the great work they've put in to deliver an exceptional 2021, and we look forward to another solid year in 2022 with that I'll turn the call over to Maureen.
Thank you Anthony.
Fourth quarter revenues of $1 2 billion increased 63, 5% year over year on a reported basis and 10, 5% on a pro forma basis.
Adjusted EBITDA of 124 million increased 28, 2% on a reported basis and decreased 22, 5% on a pro forma basis.
Pro forma adjusted EBITDA margin was 10, 6% in the fourth quarter compared to 15, 1% for the prior year period.
The year over year decline in adjusted EBITDA and margin was primarily attributable to the large swing in delinquency and loss rates between the two periods.
Predominantly in the cement business.
As noted earlier, we believe this change in customer payment behavior as a result of the more challenging economic setting our customers experience during the second half of 2021, which worsened throughout the fourth quarter.
Other factors that contributed to margin contraction include higher labor and other store expenses in the rent a center business.
Below the line net interest expense was $18 6 million compared to $3 1 million in the prior year, reflecting the debt financing from the Athena acquisition.
The effective tax rate on a non-GAAP basis was 23, 4% compared to 28, 4% in the prior year period.
The diluted share count was $65 million.
GAAP EPS was <unk> 15 cents in the fourth quarter compared to a dollar in the prior year period and included onetime costs related to the <unk> transaction and integration.
After adjusting for special items that.
We do not believe reflects the underlying performance of our business.
non-GAAP EPS was $1.08 in the fourth quarter of 2021.
Compared to $1 <unk> in the prior year period.
We generated $49 5 million of free cash flow in the fourth quarter and returned $388 million to shareholders through a 31 quarterly dividend and $370 million of share repurchases.
At quarter end, the company had approximately $360 million remaining on its current share repurchase authorization.
In addition, we had a cash balance of $108 3 million gross debt of $1 6 billion.
Leverage at two three times.
And available liquidity of approximately $280 million.
Turning to our outlook for 2022.
Let's discuss the key consolidated metrics. So I'll focus my comments on some additional details and provide a view on the first quarter.
Note that for 2022 and moving forward, we will exclude stock based compensation from the calculation of adjusted EBITDA, which we think better reflects the underlying performance of the business and is consistent with the approach of peers.
For the Renault Center business segment, we expect 2022 revenues and same store sales will be down in the low to mid single digit range.
Adjusted EBITDA margin should be in the low twenties.
The key drivers being higher loss rates and higher labor costs, resulting from mid 2021 wage increases.
For <unk>, we expect to continue to add new merchant locations and grow E Commerce.
However, macro headwinds and tighter underwriting are expected to negatively impact volume.
Translating to a mid single digit decline in G. M D.
After factoring in higher expected delinquency rates until the underwriting initiatives take full effect later in the year, we expect a mid to high single digit decline in revenues.
Adjusted EBITDA margin is expected to be in the low double digits.
Afflicting modest margin contraction on volume deleverage higher delinquencies and higher loss rate.
We expect the Mexico and franchising businesses will generate similar results to 2021.
Corporate costs are expected to increase mid single digits with the FEMA integration synergies.
Offset by the investments, we've been making in talent and technology to support our growth initiatives.
Shifting back to consolidated results, we expect net interest expense of approximately $75 million and an effective tax rate at 25% to 26%.
2022, non-GAAP EPS guidance assumes a fully diluted average share count of $69 million and does not assume any share repurchases.
Free cash flow for 2022 is expected to be between 390 and $440 million, which is up year over year due to lower working capital investments offsetting higher cash taxes.
Regarding capital allocation.
Top priority continues to be appropriately funding our business.
And investing in value enhancing growth.
For 2022, we expect Capex will run a little over 1% of revenues with our emphasis on executing initiatives to help drive profitable growth.
After satisfying investment needs, we will use our cash flow to pay down debt and return capital to shareholders.
A combination of dividends and opportunistic share repurchases.
Given the level of uncertainty our approach for share repurchases. This year will be based on balancing capital allocation priorities.
Risk and long term value creation.
We remain committed to a sound financial structure that supports our growth strategy and total shareholder return objectives, we all.
Also continue to have a longer term net debt to EBITDA target of below one five times.
The biggest variable for the year is the external environment and how the path back to a normalized post pandemic setting impacts our core consumers.
The macro headwinds that negatively impacted the fourth quarter has so far continued through the first quarter.
And we expect will persist through the second quarter.
The environment may improve over the second half of the year, but given the current uncertainty we are not assuming the business gets back to its normal run rate in 2022.
Given the ongoing headwinds in the first quarter, we have decided to provide some additional detail.
For the first quarter, we expect the following revenues of $1 125 to 1.155 billion.
Adjusted EBITDA of 85 to 100 million, excluding stock based compensation of approximately $5 million.
non-GAAP diluted EPS of 65 to 87.
We will post detailed income statements by segment to our website.
Thank you for your time this morning, I'll now turn the call over for your question.
Thank you and as a reminder to ask a question simply press star one on your telephone to withdraw the question question, Pat or Harriss key.
Again, if you have a question press Star then one on your telephone keypad.
Your first.
Your first question comes from Anthony <unk> with loop capital markets. Your question. Please.
Hi, good morning, Thanks for taking my question.
I guess I'm just.
Well the first question.
Obviously this is a pretty significant myths to what your expectations were and I guess my first question is.
Wow why didn't you pre announced.
I can't imagine that you wouldn't have had pretty good visibility in terms of.
Level of underperformance.
Quite some time ago I mean, the quarter ended almost two months ago.
Yeah, Anthony good morning.
Yeah, I'm not going to speak to the to the.
Two two.
Legal question.
Why then we pre announced we.
We didn't have great visibility two months ago. Obviously is January is P&L, it's got printed and so forth visibility get clearer and clearer over the last six weeks.
But obviously, we chose not to not to pre announce as it got clear of course, we were coming out with 2022 guidance for the first time also so wanted to make sure. We had we had a feel for the for our guidance before we started talking about it so you know.
And then by the time, we knew where our 2022 guidance as you know, we're a week away or something like that so.
That's that's why.
Got it fair enough and then Mike.
Second question.
And I'm focusing more on the fourth quarter performance.
So let me say it seems like a tale.
I mean, one of the final business seems like you had a pretty good quarter right I mean, the comp up 10%.
Operating EBITDA margins down, but not significantly I mean, particularly given the tough year over year comparison.
It just seemed like I don't know it seems like the real kind of throw up I'm, just I'm just trying to understand like what.
You know why why is it puts a divergence right I mean, you sort of macro headwinds, but you pointed to.
Affecting the female customer.
It seems like it's about similar customer I don't I don't understand why that wouldn't have affected the Renaissance.
Well, so I'm just I'm just trying to reconcile the difference in the performance between the two.
Pretty significant delta, particularly from a.
Profitability perspective.
Yes, good question Anthony.
Yeah, Ryan incentive so low end of our and I think Anthony mentioned at the low end of our expectations. So we saw we saw some stress there, but the biggest difference between two businesses.
And Jason was talking about the underwriting at Sema, we didnt, we didnt tightened fast enough.
And deep enough back in the third quarter and into the fourth quarter rent a center rent a center's collections. There is a lot different on the street with too.
2000 stores worth of local collections versus a seam of doing primarily call center collections rent a center you know one of our synergies is for rents or to help them with collections, but that's something that I.
I think we mentioned on our last call was in test and it's really just kicking off so.
The difference really.
Is when you underwrite it without tightening the underwriting or let's just let's just say it underwrite poorly for a period of time not taking into account the changing macro environment fast enough on the <unk> side, it's going to it's going to rear its ugly head a lot more so from a payment standpoint, because we don't have.
2000 stores worth of four to 5000 collectors knocking on doors like.
Rent a center does.
Okay No that's.
That's really helpful. Thanks for taking my question.
Anthos.
Our next question comes from caller Joseph with Jefferies. Your line is open.
Hey, good morning, Thanks for taking my questions.
A follow up on on Athena and the.
Recent underwriting changes, but can you give us a sense for what the portfolio duration.
<unk> is at this point and kind of how.
How long we would expect that to take the for the pig through the Python at this point.
Go ahead, Mark sure. So good morning, Kyle This is Maureen the average duration of the Athena leases.
Currently six to eight months, depending on how much the famous cash activity takes place within.
The portfolio.
So.
As we alluded on the call we expect the front half of the year to be under more pressure given some of the lower performing leases need the time to work through the lifecycle. So we do expect the underwriting changes that we're making to have improvements in the back half with.
Quincy the loss rate.
The front half is going to be under pressure because of that underwriting not being where it should have been given the drastic changes that we saw in the macro environment and.
And more so more so tile in the first quarter than the second but really it is a first half issue, but more so on the first half and you can see in our guidance how the how the first quarter, where the first quarter is and that's why we wanted to point it out and give specific guidance for the first quarter.
Because obviously when you extrapolate the rest of the year it improves as the year goes on primarily because of underwriting that not because we're predicting when the macro environment is going to get better. We don't think that's necessarily our expertise.
Lets say all of the second half is going to be better.
A lot of people are saying that.
Okay.
Then that's certainly upside if it's better in the second half, but for us to predict that.
To improve as the year goes on but it's primarily because of the underwriting that because we're predicting the future as far as the macro environment.
Yeah, Yeah understood and then.
A follow up for me on kind of the macro environment as long as that.
Followed your company in the space.
Been a relatively defensive space and kind of when the economy has been.
Yes.
More challenge in your customer has been more challenged they've typically had to rely on you more I recognize this is <unk>.
Determinant, but unprecedented times to come out on the heels of.
Hum.
Record stimulus payments and have the consumer facing.
Highest inflation, we've seen in decades.
Ultimately over time.
Do you expect kind of the demand for credit to improve from this from your consumer as a result of the macro changes.
And then can you give us a sense of any sort of sense for the availability of credit youre seeing and whether youre seeing those by the Titan at this point as well.
Sure Kyle Yeah, I think you hit on it certainly.
The flip from the household.
Income level, where they are what do you call it the spending level.
The consumer had one from you know with our customer and probably an all time high to an all time low right. So it's a bigger swing than normal but youre right.
We always see win.
Past times, when I've seen plenty of recessionary times, Matt that we're calling this recession at least not yet, but the b it all of it.
There's always an adjustment period there. The first thing that happens is we see a lot of stress in our customer this more so more than ever before but stress in our customer and then you know.
Don't know how to predict that two months three months six months later, you start to see the credit tightening above you and people getting pushed into the lease to own transaction. So so far that's that's normal. The first thing you see is the stress on our customer and I would expect that to.
To help us somewhere down the road the tightening of collections above us, we've not or I'm, sorry, the tightening of credit above us credit availability, we have not seen it yet.
And but I would expect that as we kind of gets tougher and tougher and tougher with us inflation. So we would expect that to be a tailwind at some point.
Got it helpful. Thanks, very much for answering my questions. Thanks, Scott.
Your next question comes from Brad Thomas with Keybanc capital markets. Your question. Please.
Mr. Brad Thomas Your line is open.
Maybe on mute, Brad I don't know.
Please check that Gregg.
Sir May I move to the next.
Yes, yes.
The next question comes from John Rowan with Janney. Please go ahead.
Good morning.
<unk>.
Mitch in the past you've characterized inflation is good for your business I'm curious what's changed there.
Number were.
Changes from a tailwind to a headwind I'm just trying to understand you know.
Frankly, whether or not inflation is good or bad for your for the rental business.
I think I think it has been in the past and I think it has been in the past I think it will be in this case I think we're in an adjustment period I really think it's a matter of timing I don't know when because what inflation will do is help push more business out of what you might call subprime financing as things get more expensive.
And credit tightens above us it'll push customers in the lease to own. It I believe that will happen again, it's just not happening yet and the first thing that happens is it.
I was just talking to Kyle about the first thing that happens is the.
We see the stress that are in our core customer and you lose some of that amount of one end of the one side of the funnel, but the other side of the funnel.
Because of the inflation and tightening credit above us should should be a tailwind somewhere down the road.
Okay, and then turning to as Sema.
Lee losses, they are all running high.
You talked a lot about fraud prevention, I'm trying to parse out whether or not losses in our Cmos.
You know.
Or really just credit normalization or if theres fraud, there given that you are seeing losses delinquencies above pre COVID-19 levels.
Yeah, I'll start and then I'll, let Jay Jay.
Talk about it but I think I think there's.
Two different things going on there. It is the credit normalization effect that credit's been I wouldn't even call. It normalization, it's dropped a little tougher than than pre pandemic levels and then on the fraud side as we do more and more E. Commerce, you need more and more fraud tools and that's really what we're speaking about on fraud tools as the as the more economy.
<unk>, which we are growing the account business you got to have more fraud tools. So Jay I don't know if there's been anything to add to that no. I mean, that's actually spot on and I think what happens is work.
And tightened as I mentioned in my comments to sort of get ahead of the macroeconomic trends that are taking place.
We made those moves in January and in addition to that.
Bringing in new technologies, when Mitch was talking about shifting our our technology and engineering focus further to underwriting. He was mostly speaking directly about the ability to integrate things that we use in our payment speeds that are.
Very effective at minimizing any type of upfront fraud losses.
Both from malicious actors or what they call friendly fraud, right. So that we can source out.
Behavior before we let the people into the.
Into the ecosystem.
Okay and just last question for me kind of housekeeping Maureen I think you said that for 2022, the assumption for the share count was 16 $69 million is that correct and what the assumption. There that there is no share repurchases does that also mean that the diluted share count going into <unk> is actually sick.
<unk> nine so it's a relatively big delta versus the average share count for December .
Yes, that's correct.
Okay. Thank you.
<unk> 66 in the first quarter, but 69 for the full year, yes, the share repurchases the share repurchases John right you end up averaging.
When you're in the fourth quarter and for the year of 2021, but then when you start the new year. You. Just started you started the loan number.
Correct I just wanted to make sure that it's basically a flat.
Flattish roughly 69% for the year.
Without share repurchases throughout the year, just I just want to make sure that we were starting an endpoint was correct I'm. Good. Thank you.
Thanks, Jeff Thank you.
Your next question comes from Jason Haas with Bank of America. Your question. Please.
Hi, good morning, and thanks for taking my questions. So I wanted to dig into the gym the outlook for the cement segment I'm curious I think you said, if I caught it right youre expecting mid single digit declines through.
Through 2022, so I'm curious how much of that is self inflicted.
Judy your own tightening or are you starting to see maybe that customers I guess pulled forward some demand during the pandemic and it's starting to ease up there.
Yes, I mean, I would I would say the vast majority of it is because of our underwriting change in posture and the key levers are you have got the application approval rates and so to be clear the applications are still coming in.
Sure.
At good volumes and in addition to that the new merchant doors are opening.
At good volumes and we are meeting targets. So it's more about us being more selective with regard to who you approve the other components of it is that when you look at the conversion rates. It is also a control mechanism that we have an underwriting because it stems from controlling the open to lease.
<unk> line capacity that we assigned to consumers and that is something that could potentially also drive. It. So these are two primary levers that we have the good news is theres not any sort of a precipitous drop off in application volume or new merchants, which means when.
When it when things improve.
We'd whenever that is.
It's up to us its up to us to two you know we can drive more <unk> when things improve right be when things improve right and I think the way I would the way I would describe this is that.
Our outlook is that we now have the ability to proactively control, how we want to grow the business and be opportunistic with regard to looking at the macroeconomic environment, and then and then making decisions versus being in a completely reactive mode.
Got it that's helpful. Thank you.
A follow up question.
I'm curious what your conversations are like with retailers now I'm not sure to what extent some of the supply chain issues and omicron, maybe pushed out some of those conversions or I guess Conversely.
Now that I'm sure the retailers are starting to see a weaker sales.
If that's happening there at all.
Thanks, John more of that as a driver of their customer needs financing more.
That's certainly been a conversation so far this year certainly in January were about.
Crime and.
Not necessarily shutdowns.
They might as well been shut down and a lot of cases with.
So many employees being out and saying no.
It affected so many people on that so many people are staying home for a week at a time, whether you're talking about customers or employees, so and certainly the supply chain issues have cat no better from the fourth quarter in fact, they probably got worst in January because of the because of how fast that variance spreads. So so most of it was just about that.
Of course, that's come in come in are not gone, but certainly.
Rescinded pretty fast as well so now it's about it's about supply chain with our when we talk to our current ones, but but your point Jason about.
<unk>.
You know the.
Need for <unk> and a lot of retailers that don't already have it is certainly something we expect to accelerate.
As we as we build a pipeline and build a team working on larger strategic accounts.
We anticipate Jason mentioned that he mentioned the ecosystem the marketplace people wondering.
Seeing some business there.
From their own websites and asking us about it but also as things get tougher for retailers. We would expect we'd expect the doors open even faster than they have in the past so I think thats.
Going to be a tailwind for us.
The tougher comps that retailers have in general we are as Jason mentioned, I mean, we're adding still adding hundreds of doors a month on a net basis, but.
Controlling that <unk> ourselves with the underwriting, but I think the outlook as far as retailers needing lease bonus is going to be very good yep completely agree and the only thing I would add to that is that when you look at the larger retailers and sort of the strategic account pipeline I want to draw a little bit more clarity with regards to.
My comments, which is the ecosystem because sema marketplace enables our consumers to make purchases at large.
Large national partners without formal integrations, what's happening is.
That actually illustrates the power of what the lease to own option can provide to those prospective partners, but most importantly, it also gives us metrics to center our conversations around so instead of being a notional discussion, we're actually able to provide customer level metrics.
Into those discussions so we're seeing positive traction there and I guess, one I guess I'd sum it up this way Jason.
On the FEMA business.
Okay.
Just to be real clear, it's not like we think it is broken.
Think.
That was still a great acquisition for us last year.
For the reasons, we've spoken about the capabilities. It's given us we still think there is better than double digit growth rates coming.
Yeah.
We've talked about 20% and 25% in the past.
I would say certainly better than double digit.
In the future I don't know if Thats 15, 2025, but it's still there the business is there.
We still love the business, it's not broken long term.
The macro environment has us having to underwrite.
Right.
We don't expect to see GMB growth in 2022, but it does not affect the long term.
Yes, it looks it does effect.
As we commented you know where we would end up in 2023 of course, it pushes things out as far as as far as the revenue, but a $6 billion of revenue is still on our future absolutely is it in our future in 2023, no it's not but it's still on our future and but because it's not broken long term.
Good to hear thank you.
Thanks, Jason.
Your next question comes from Bobby Griffin with Green James.
Good morning, everybody.
Thanks for taking my questions I guess.
The first question I had a follow up on this is more just the.
The virtual lease to own business with TMR industry.
And just I understand there is a large tam and there's we always talk about double digit growth opportunities, but it seems every time, we get aggressive and go after GMB not just you guys anybody in the industry loss ratio is at some point come back to bite US right. So it is the right strategy more like more just grow $5 10 per.
<unk> and not get Super aggressive on writing and then over time grow into that Dnb burst trying to get it so quickly because it just seems like every time somebody in this industry goes that way, we Havent issued 689 10 months down the road.
Yeah, Bob It's a fair point, although I mean, it's seamless grown over over eight years.
You know well over 20% a year in fact, a compounded growth rate of course, there are smaller than when we bought them. It was whatever it was more than 70% or whatever on a compounded basis, but I mean.
It's really never happened before on the seamless side.
This way so I think these are are.
Somebody said earlier I hate the term I hate it to but I'll use it unprecedented times from an inflationary standpoint, so forth I'm.
Having had so much extra money and over the last 20 months versus now so I think I think you know we've been able to do before without this this is really the first time in a seamless history.
This has happened so I think.
We can get higher than the 5% to 10% numbers in the future and not have.
Collections go sideways on us like it did at the end of last year. So.
On the other hand.
Yeah, Youre right Theres nothing wrong for you grow 10% a year for the next 10 years, either so but I do think we can we can accelerate it when the environment gets better a little higher than the numbers you were talking about without the collections blown out.
Yes, yes.
Yes, and then the only other thing I would add is that you know.
The traditional <unk> market was sort of a singular product based market within store and now we have a diversified suite you hear us talking about how E. Com is now playing a greater percent and how that is growing you hear about the test fees that were coming out of with the ecosystem and so what that enables us to do is to start.
Shifting our model to a more proactive kind of controlled approach, where we have options to accelerate in areas that are performing well as we calibrate them in and.
And that's a little bit of a different approach than than before.
Okay, and I guess.
The second question for me is you know versus some of these tough lapse that we knew that we're facing we kind of knew was coming and we all knew we had lapsed stimulus and different things like that so while we didn't have formal 2022 guidance. We did have a pretty big revision here today versus kind of the building blocks, we talked about 90 days.
Our 180 days ago, when we when we spoke last.
Multiple times after two in <unk> and <unk> so what.
Has changed so aggressively and.
As the first part of the question and then the second part is when we think about your 2022 guidance are you assuming further.
Degradation in the different performances from the customer as a conservative aspect or you're taking kind of in right here at the end of January and February and using that going forward.
Yes, I think.
<unk>.
Probably the.
In our in our forecasting when we talked about 2023, because you're right. We never had 2022 guidance out before but as we as we stair stepped our way to 2023.
We had we knew the business.
What's going to normalize excuse me what we didn't know is that it was going to actually fall below normalized levels from a from.
From a macro environment standpoint, or from a collection standpoint that we actually would see numbers from.
They didn't just go back to normal they were actually worse than normal on especially on the <unk> side from a collection standpoint, our loss standpoint. So the correction was more than we anticipated for sure. We didn't have a soft landing we had.
A real like I said, we went below 2019 levels and.
A lot of reasons for that we didn't tightening underwriting faster we didn't we didn't we didn't call this level of inflation.
Properly with pretty tough to do but we didn't we didn't we didn't think it was going to get this bad from an inflationary standpoint book.
So we didn't land that normal we got below normal now our underwriting is going to get us back to normal but it says it sets that that those kind of numbers do you like when do you get to 6 billion or.
It set us back maybe as much as a year if not a good part of the year.
Okay.
Alright, I appreciate I appreciate the detail best of luck here in 2022.
Thanks, Bob Thank you.
Your next question comes from Brad Thomas with Keybanc. Your line is open.
Hi can you hear me now.
We can hi, Brad.
Alright, I'm, sorry about that earlier I don't I Couldnt get myself off mute apologize no problem.
Thanks for.
Waving me in here so.
Couple of questions if I could.
Just following up on the trends in at Sema.
Where were the skip stolen spend trending as we've moved into one Q how are you thinking about.
That metric trending through the year.
So in the first quarter well really in the first few weeks of the first quarter, we've seen similar trends to what we saw in the fourth quarter and we anticipate that that level will continue through the second quarter and then in Q3 and Q4 further in Q4 well.
Expect to see the changes in the underwriting and some of the lower performing leases to have already cycled through the system.
So that in the back half of the year.
<unk> get more towards a normalized level.
Longer term, we still expect the virtual lease to own business to be in that 6% to 8%.
But this year, given the environment and kind of the shock that our customers went through there is going to be an adjustment period for both our customers and for us with the underwriting.
And so it did dip below normalized levels, but.
Again long term, we still believe in the economics of these FEMA business, including the loss rate on I'd add to that I would add to that Maureen and I think Jim mentioned it in his prepared comments.
The tightening of the underwriting recently I mean, we're seeing some good trends to start with the first payment Miss numbers have been very encouraging.
Here the last few weeks.
But we did as Jim mentioned, we've got.
We got the older leases still have to run through and Thats, what marine speaking about the losses will be higher in the first half of the year long term, we still expect a median of six to eight range, but the the.
The best News, we're seeing is the the first payment Miss numbers.
Very encouraging numbers as we as we've tightened.
So far this year. So we've got some some good trends there yeah. It's a great early indicator of future performance on the leases that were written in the month of June .
January so yes, the rates that I said to where the blend of the entire business.
Yeah.
Great and obviously of course, not tremendously long duration portfolios Thats something you can adjust quickly.
Two quickly.
As we think about the tightening.
What is approval rates change to how much lower are they right now and how should we think about that.
Revenue or GMB growth rate stepped down.
Relative to the impact just from the tightening changes.
Yes, I think.
So it's in our guidance.
We don't want to get too specific on what our approval rates are and so forth from a competitive standpoint, but but.
It certainly is what's driving the <unk> to be.
Mid single digit negative this year of course, there are tougher comps as well right. So you put the tough comps in there plus the tightening in the end up at minus five versus plus 15, but it's a combination of those two things the tougher comps and and the tightening.
And then that's what's built into our that's what's built into our guidance and when you have a.
Mid single digit <unk>.
The negative mid single digits I think Maureen commented.
Mid to high single digit revenue drop because of the way the payments come in especially at the front half of the year. So if you have if you have a little payment pressure on some of the older accounts at the beginning of the year of revenue, yes, it might be slightly worse than that mid single digit GMB get mid to high than on the revenue.
Again tough comps, but also the underwriting tightening so that'll give you some some sense its not just the approval rate either either Brad you know I think Jay mentioned this its a.
Again, there are tougher comps with the approval rate plus how much did you approve the person for in and what are the what are the terms you offered that particular customer based on this environment.
If the if the terms a little tighter which means the payment goes up or the approval rate wasn't as much you get a little less conversion. So just to speak to how much we've dropped the approved approval rates wouldn't really even if we're going to do that it really wouldn't give you the whole story because its approval and then what did we approve them for.
You know and then what are we comping over and so forth, but that's what's built into our guidance.
Yes, that's helpful.
Last one from me just thinking about the free cash flow guidance of $290 million to $440 million.
Just can you help me think about how much of a benefit or headwind you have in that number from dynamics like working capital or the portfolio.
Presumably will shrink the share with revenue declining just what kind of a normalized free cash flow would be just as we think about the underlying profitability and cash flow generation of the business.
Sure there is a pretty sizable benefit from working capital given the slowdown in dnb and and lower inventory purchases that we plan. This year to support the business. So that is a key driver of the higher free cash flow growth year over year.
Seeing negative working capital of course, the last couple of years as we grew significantly and so this will shift to a significant benefit.
Far as other components of working capital, we expect our capex to be around 50 to 60 million.
And the cash taxes will be.
Call It 60 to 75 million.
And then the rest besides interest would be benefits to working capital as you flow through the EBITDA excluding.
Stock based compensation and the free cash flow in 2021, which was a growth year, though was what.
Roughly speaking that's free.
Free cash flow was 300 thirtyish, okay. So you've got $3 30, and a growth year and $3 90 to $4 40 in a year where working capitals.
A tailwind for us from a free cash flow standpoint, Brett. So that gives you a kind of a rank our long term range to doesn't it.
Okay.
Absolutely.
Very helpful.
The.
Positive attributes to the business.
Absolutely yeah.
Yeah.
Great. Thank you all so much thanks.
Thanks, Brad.
Your next question comes from Vincent <unk> with Stephens.
Okay.
Thanks for taking my question.
Yes.
Most of my questions have been asked and answered but wanted to step back and go back to the 30000 foot view of the business.
The last time when you gave your three year outlook on the business.
2020, we still weren't in the pandemic, yet and we haven't gone through all these issues. So.
And now were seeming to.
Sort of normalize from from that point.
So maybe if you could talk about.
A reiteration of what you think might be different from the three year outlook. You had previously versus when you think about the business now looking over the next two to three years I can understand that.
2020 revenues of $6 billion.
It would be tough to achieve because youre tightening underwriting in 2022.
2020 portfolio size, but when you think about 2024 hopefully were in a normalized environment then but.
At a time when we can see those kinds of revenues and then the EBITDA margins that you laid out.
Back in 2020 would that three year outlook.
Still achievable. So yes, if you could just maybe talk about the near term or the medium term vision of the business. Thank you.
Absolutely Vincent good question, and you're right with the portfolio size coming out of 'twenty to 'twenty two is going to make 6 billion.
Not the right number for 2023, but we do think we can achieve that level of revenue.
Timing is a little difficult to predict because I mean, it's 2024, well I don't know if it's exactly moved one year, but it certainly it's certainly still achievable, whether it's 2020 for 2025 I don't want to predict that right now let us get a couple of quarters into 2022, and then and then maybe we will be able to predict that a little more when we see what happens, but it's certainly still.
<unk>, whether it's whether it's moved one year or.
18 months or whatever it's moved up like I said I don't want to predict that but certainly still achievable. We believe in the long term.
Aspects of the business on the rent a center side, even in a tough environment like this it's pretty stable it doesn't it doesn't swing a lot.
Going to come off.
25% growth over the last two years to be maybe slightly under flat in 2022, which is a heck of a heck of a business low twenty's EBITDA margin.
With some really really tough comps from a revenue standpoint, especially on the on the sales income side because of all the payouts with stimulus last year and still to have just a probably a slight revenue drop is it's pretty darn. Good so thats a real stable business in the Sima the Athima business is still there I mean, we're adding we're adding <unk>.
<unk> partners like we said monthly.
The pipeline for.
For the larger strategic accounts, we think will improve this year as they look for other avenues. It's already we've built that over the last year. Since we bought a cement built that team, but we think that'll get even better as we go into 2022 or through 2022 from a retailer larger retailer perspective.
So our long term outlook hasn't changed a bit it's just it has slid.
As I said I don't know if thats a year, it's 18 months or 24 months, but it slipped but yes.
That number is still there will still be able to $2 6 million and it'll be up mid teen mid teen EBITDA margins.
Okay perfect. Thank you and.
Kind of also referencing the prior three year guidance.
Back then versus where we are today is there anything else that you think needs to normalize from this point I guess.
Talking about the consumers getting back to normal.
What might what might be different. This time is I guess, we do have higher inflation.
And then maybe some of the concerns of some of the other.
The types of competitors.
Lease Don but somebody is buying out of guys are still competing and not.
Focus on profitability is there anything else that you kind of.
I think it might be different or maybe still needs to normalize.
Thank you.
No none of the other than the inflation you mentioned Vincent.
I'd say, that's the big one the buy now pay later.
With where they are in the credit spectrum doesn't impact us probably will will help us I still think that that'll help us as retailers see so many more turned balances there as their credit starts to blow up on them as we've as we've read with a few of them recently as their collections gets tougher and they tighten their underwriting that's only.
That's only going to help us because retailers you know hey, what happened to this you were a proven 70% now you are proven 50% by.
Buy now pay later or whatever their numbers or we're not getting as much business out of the buy now pay later.
Which didn't affect us anyhow based on their credit score, but I think that'll that'll help retailers think about other avenues. So I think that's more of a tailwind than a headwind but.
Yeah, you mentioned it really is the inflation and the impact on the on the customer.
Okay great.
Very helpful. Thanks, very much.
Vincent.
Thank you ladies and gentlemen, this concludes our Q&A session and I will pass it back to Mitch Fadel for his final remarks.
Thank you operator, and thank you everyone for joining us this morning.
Understand some of the some of the numbers were disappointing we're disappointed at our outlook for 2022, but we're extremely excited about our long term potential is still there.
We just got to get back to work work hard and make sure that the things we can control.
We do a good job controlling them likely the underwriting and the collections and some of those things in.
Keep keep adding on new retail partners every month to keep working on larger strategic accounts and our long term. The long term view of this business hasn't changed it's not broken.
Even though the 2022 numbers are disappointing we've got great cash flow so when the when the environment when the environment turns we're ready to write a lot more leases.
Based on the risk profile of the consumer so a lot of good things embedded here and we'll just keep working and deliver the best results, we possibly can thank you everyone.
And with that ladies and gentlemen concludes today's program. Thank you for your participation and you may now disconnect.
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