Q1 2022 Rent-A-Center Inc Earnings Call
Good day, ladies and gentlemen, and thank you for standing by welcome to the rent a center first quarter 2022 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press Star then one on your telephone keypad.
As a reminder, this conference call is being recorded.
You require any further assistance. Please press Star then zero at this time I would like to turn the conference over to Mr. Brendan a Toronto.
Good morning, and thank you all for joining the rent a center team to discuss our results for the first quarter of 2022, we issued our earnings release after the market closed yesterday there are at least at all related materials include.
A link to the live webcast are available on our website at Investor Dark rent a center dot com.
On the call today from rent a center, we are midst Fidel our CEO and more in short our CFO .
As a reminder, some of the statements provided on this call are forward looking statements, which are subject to factors that could cause actual results to differ materially from our expectations. These factors are described in our earnings release as well as in the company's SEC filings.
Rent a center undertakes no obligation to publicly update or revise any forward looking statements except as required by law. This call will also include references to non-GAAP financial measures. Please refer to our first quarter earnings release, which can be found on our 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 good morning, everyone and thank you for joining the call today to review our results for the first quarter of 2022.
I'll begin today's call with some high level comments on the Companys key objectives in progress followed by a review of financial and operational highlights and then an update on our plans for the year after that Marina provide a more detailed review of our financial results and then we'll finish of course with Q&A.
Following the challenges we added a team in the second half of 2021, our primary objective for this year is getting the company back in a position to successfully execute the growth strategy, we developed last year with the acquisition.
Over the past number of months, we identified the issues that drove the seamless underperformance developed a plan of action and began implementing solutions.
In addition, as previously announced we recently completed a leadership transition at the Sema.
So we are encouraged with our start to the year with early indications that our adjustments are having the desired effect and first quarter financial results coming in above the midpoint of our guidance ranges.
While there are growing external headwinds this year, including the wind down of government stimulus programs, we believe the operational and financial progress. We have made thus far have the company on a path to achieve 2022 financial targets and we've reaffirmed our full year guidance.
Consolidated revenues were $1 6 billion down five 8% year over year on a pro forma basis with the sema down eight 1% in the rent a center business segment down one 2%.
We believe the decline in revenue was attributable to the performance of <unk> just underwritten in the later part of 2021 using assumptions that lagged worsening customer payment behavior negative effects on customer incomes from government stimulus programs winding down in 2021, and the Amacrinal breakout in January .
Consolidated adjusted EBITDA was $99 5 million with a margin of eight 6% negatively impacted by elevated loss rates and delinquencies that we believe largely resulted from the sema underwriting practices in the second half of 2021 as well as post stimulus changes in customer payment behavior.
Our labor costs and rent a center stores and higher corporate costs related to investments also contributed to margin contraction.
non-GAAP diluted earnings per share of <unk> 74 for the first quarter was above the midpoint of our guidance range of 65 to 80.
We also generated almost a $189 million of free cash flow in the quarter compared to about $1 24 in the prior year period, providing us with the flexibility to invest in our business and reduce debt.
And our business lower growth periods, resulting in higher free cash flow, which underscores the strong cash flow attributes of our business and provides us with that significant flexibility.
Focusing in on segment performance the seamless first quarter top line trends were generally in line with the assumptions behind our first quarter guidance.
<unk> $398 million declined 21% year over year on a pro forma basis, reflecting the effect of tighter underwriting that.
At January <unk>.
Outbreak and cycling over strong <unk> growth in the prior year period benefited from government stimulus.
In fact, our first quarter two years' GMB growth has a positive 10%.
The shift in underwriting as part of a broader set of changes at the sema to address the issues that occurred in the latter portion of 2021. As previously noted we did not anticipate the extent or pace of the declines in customer payment activity.
Although we made adjustments to our underwriting the initial changes in 2021 were in hindsight not sufficient to address developments in the external environment.
Because we are a portfolio of business. These earlier vintages lease vintages take time to cycle through our results and we expect to see the impacts of those vintages through the end of the second quarter.
The changes in underwriting that were implemented during this past first quarter drove significant improvement in first payment missed or what we call SPM rates, which is the best early indicator of future loss rates and yield.
Overall FTM rates declined over 30% in March from their peak in December .
We believe we are clearly on the right track when it comes to adjusting to the current macro environment.
Yeah.
The rent a center business segment started the year off with another good quarter revenues of $519 million declined one 2% year over year and were above the assumptions behind our first quarter guidance with same store sales down one 1%.
Importantly, we are cycling over 15, 4% revenue growth in the prior year, which translates to an impressive two year stack revenue growth of 14%.
This momentum was reflected in the lease portfolio also which ended the quarter five 6% above last year.
E Commerce continued to contribute to growth with revenues up about 4% and now accounting for about 23% of segment revenues in the quarter.
Adjusted EBITDA margin was 27% for the quarter, even with cost pressure from losses in wages fuel prices and inflation in the cost of certain products, we lease and so.
And the strategy front, we continued to advance our omni channel capabilities by improving the customer experience with enhancements to our digital checkout process and launching functionality that allows customers to make payments via text messages are SMS.
We also.
We ended our extended aisle partnership initiative and added thousands of Skus to our ecommerce platform available at other retailers in local markets.
Looking forward to the rest of the year the objectives, we outlined in February remain in place for Sema, We will continue to focus on initiatives that can benefit both near term results and long term capabilities like putting more resources and emphasis behind underwriting to optimize yield and loss improvements. This year, but also the benefit of our future underwriting.
We will also continue to develop high potential growth opportunities like the digital ecosystem and other new offerings in a manner consistent with our internal profitability goals.
For the rent a center business. The team has put together a compelling commercial plan that we believe can sustain and grow the portfolio beyond 2021 levels.
Value proposition, we provide our customers continues to support solid transaction volumes and renewal rates, despite the more challenging macro environment.
In addition, we think our commitment to the local retail centric RTL model, coupled with an improving e-commerce offering is enhancing our competitive position.
Additionally, we've proven in the past to be very resilient to recessionary pressures.
Regarding our financial outlook, when we issued full year 2022 guidance back in February it did not incorporate improvement in the macro environment over the year because there was so much uncertainty.
And even with continued uncertainty given the solid start to the year progress with the changes of the Sema and consistent performance of the rent a center business segment. We are reiterating our guidance of full year consolidated revenues of $4 45 to $4 6 billion.
Adjusted EBITDA of 515 to 565 million.
Diluted earnings per share of $4 50 to $5 and free cash flow of $390 million to $440 million.
In addition, given the extent of noise and variability in trends related to the effects of government stimulus programs. In 2021, we have provided guidance for the second quarter that was highlighted in our earnings press release.
Also I'm very pleased to announce that the company has taken a step forward and its ESG efforts with the production of our inaugural sustainability report for 2021, which will be available on our Investor Relations website.
In closing first quarter results were in line with our guidance and we believe changes at the Sema have placed the business back on a path of longer term profitable growth.
We believe we have a solid game plan for the year that we think will allow us to effectively navigate a more uncertain business environment. While also positioning us for longer term success I want to thank the entire team for their continued effort and dedication as they continue to see tremendous opportunity in our future and with that I'll turn the call over to Maureen.
Thank you Mitch the first quarter was a step in the right direction for the company following a challenging second half of 2021.
We achieved quarterly guidance targets made good progress on key operational objectives, and reaffirmed full year 2022 financial targets.
Looking forward, we are cautiously optimistic about the rest of the year.
Although there are external headwinds from macroeconomic uncertainty and pressure on customer of income from the wind down of government stimulus program.
We believe that we have a solid plan to get the business back on the path of strong profitable growth.
And achieve our financial targets.
First quarter revenues of $1, one 6 billion increased 11, 9% year over year on a reported basis.
And decreased five 8% on a pro forma basis.
With the merchandize sales revenues and rental and fee revenue is down year over year.
Merchandise sales revenues decreased as a result of fewer customers electing early payouts this year compared to the prior year period and government stimulus programs versus discretionary income.
Based on fee revenues were down because of the poor performance of our seamless lease vintages that entered the portfolio during the second half of 2021.
Prior to recent underwriting adjustments, which caused an increase in delinquencies that significantly outpaced top line growth.
This required us to increase our provision for delinquencies, which.
Which is treated as a reduction in revenue and caused rental fees revenues to decrease year over year.
Adjusted EBITDA of $99 5 million decreased 28, 3% on a reported basis.
And 42, 9% on a pro forma basis.
Adjusted EBIT margin was eight 6% in the first quarter compared to 14, 2% for the prior year period on a pro forma basis.
The margin contraction was the result of higher loss rates for both the Athena and Renault Center segment higher delinquencies at a FEMA and higher operating costs, mostly from labor.
Below the line net interest expense was $18 9 million compared to $11 9 million in the prior year.
Collecting a higher debt balance in the current year.
The effective tax rate on a non-GAAP basis was 25, 2% compared to 19, 7% in the prior year period.
Ignoring the effects of a net operating loss diluted average share count was $60 1 million in the quarter compared to $66 three in the prior year period.
GAAP loss per share was <unk> <unk> in the first quarter compared to a diluted earnings per share of <unk> 64 in the prior year period.
One time costs related to the <unk> transaction and integration.
After adjusting for special items that we believe do not reflect the underlying performance of our business non-GAAP diluted EPS was <unk> 74 for the first quarter of 2022.
Compared to $1.32 in the prior year period.
We generated $188 9 million of free cash flow in the quarter compared to $124 4 million in the prior year period.
Mainly due to a beneficial swing in working capital in the current year.
We returned $21 1 million to shareholders $3 34 per share quarterly dividend.
At quarter end, the company had approximately $360 million remaining on its current share repurchase authorization.
In addition, we had a cash balance of $95 $7 million gross debt of $1 4 billion after paying down $170 million of the revolver.
Net leverage of two three times and available liquidity of $439 million.
Turning to segment performance Athima DMV was down 21, 2% year over year on a pro forma basis, although it was up 10% on a two year stack basis.
The decrease was an expected result of the underwriting adjustments, we initiated to reduce losses and improve yield the.
Kathy effect of lowering approval rates conversion rates and funded leases.
<unk> was also negatively impacted by less activity for merchant partners compared to the prior year, which appears to stem from the wind down of government stimulus that boosted customer discretionary income in 2021.
The omicron variant likely further pressured merchant activity in January .
These CMV headwinds were partially offset by year over year growth and a Siemens active merchant count.
<unk> revenues declined eight 1% year over year on a pro forma basis.
The biggest factor behind the decline with poor performance of lease vintages from the second half of 2021 that I described earlier in the comments for consolidated results.
Similarly, merchandize sales revenues also declined due to elevated payouts last year.
On a positive note, our digital growth initiatives, including E Commerce, and the ecosystem continued to contribute incremental revenues in the quarter.
Skip stolen losses in the Athima segment increased approximately 400 basis points year over year to 12, 6%.
And by a return to more normalized loss rates following the wind down of government stimulus programs.
And higher charge off rates on poor performing lease vintages from the latter part of 2021.
As Mitch noted the changes we have made in underwriting in recent months are showing strong indications that loss rates should improve in the back half of the year once the vintages from last year cycle through the portfolio.
As you may recall, the average length of the lease out of Siemens approximately six months.
Adjusted EBITDA margin declined 690 basis points on a pro forma basis to four 8%.
The key factors that drove margin contraction were higher loss rates and a 220 basis point decline in gross margin related to a higher provision on delinquencies primarily due to lease vintages written in the second half of 2021.
Okay.
Data Center segment revenue decreased one 2% in the first quarter with same store sales down one 1%.
Rental and fee revenue increased year over year benefiting from the lease portfolio, finishing the quarter five 6% higher than last year.
However, rental revenue trends were more than offset by a decline in merchandise sales revenues.
As noted earlier merchandise sales were negatively impacted by fewer people electing early payout options in the current year.
Skip stolen losses increased to 120 basis points year over year to a more normal level of three 9%.
Adjusted EBITDA margin was 27% and declined 330 basis points year over year due to higher loss rates and wage increases for certain in store positions.
Turning to the outlook for the year My comments will focus on providing supplemental information for the full year financial targets.
Mitch discussed and have been disclosed in our earnings release.
I will also provide comments on quarterly trends.
Starting with full year comments for a steamer we expect recent tightening in underwriting the effect of cycling over 2021 stimulus programs and macro headwinds will result in a high single digit to low double digit decrease in <unk> on a pro forma basis.
Pro forma revenue for Athena is expected to be down mid to high single digits.
And adjusted EBITDA margin is expected to be in the low double digits.
This assumes elevated delinquencies and loss rates on poor performing leases from 2021 will continue through the first half of 2022.
And then improve during the second half of the year when leases originated under new.
And more conservative assumptions comprised more of the lease portfolio.
For the rent a center business segment, we expect revenues in same store sales will be down in the low single digit range.
Adjusted EBITDA margin is expected to be in the low twenties and modestly lower year over year, driven by normalized loss rates and higher labor costs.
The Mexico and franchising businesses are expected to generate similar results to 2021.
While corporate costs are expected to increase mid single digits.
The second quarter is also expected to be challenging from a year over year perspective facing many of the same headwinds experienced in the first quarter.
We expect revenues of 1.0 405 to 1.075 billion adjusted EBITDA of 114 to 127 million.
Excluding stock based compensation of approximately $5 million.
And non-GAAP diluted EPS of <unk> 95 to $1 10.
The Siemens GMB growth is expected to be similar to the first quarter as we plan to maintain relatively tight underwriting assumptions and our coffee and over 43% pro forma growth in the second quarter of 2021.
To put that in perspective, we expect second quarter <unk> will be up around 20% on a two year stacked basis, which we think is at least in line with the market.
DMV growth should improve progressively in the second half of the year with the fourth quarter getting back to roughly flat year over year.
We expect the revenue growth for the rent a center business segment to be down low single digits year over year, and it seems to be down double digits.
EBITDA margin for both of the key business segments should improve sequentially from the first quarter.
For the back half of the year, we expect consolidated revenues will be modestly skewed to the fourth quarter with trends improving from the third quarter to fourth quarter for both the Athena and rent a center business segments.
We expect earnings will be more skewed to the fourth quarter than revenues, reflecting progressively better delinquencies and loss rates.
Lastly, reaffirming our 2022 guidance today reflects modest upside to first quarter guidance being essentially offset by the softer macro environment that has evolved over the past couple of months.
Accordingly, the projections underlying our guidance assumes the current macroeconomic conditions will continue for the rest of the year.
There is no change in capital allocation priorities since our last earnings call. We plan to use most of our free cash flow to pay down our revolver and make progress towards our longer term leverage target of one five times or lower net debt to EBITDA.
In terms of returning capital to shareholders, our quarterly dividend of 34 offers a very compelling yield to investors.
And we evaluate opportunistic share repurchases.
You for your time this morning, I'll now turn the call over for your questions.
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Our first question or comment comes from the line of Kyle Joseph from Jefferies. Your line is open.
Hey, good morning, guys. Thanks.
Thanks for taking my questions and thanks for the all the color provided in the presentation and release.
Obviously, a lot going on.
Both macro and and that as the months and just kind of trying to do that.
Each year.
In terms of GMB growth can you kind of give us a high level breakdown of how much of that is kind of macro and how much of that is more specifically the underwriting changes and kind of give us.
A reminder of the timing of the underwriting changes. So we can kind of think about how.
Trends and improve their experience over the remainder of the year and into 'twenty three.
Sure Kyle good morning.
Yeah, Amit on the GMB growth when you think year over year the biggest.
Certainly the tightening of underwriting was an issue and it's an issue.
When it comes to the GMB.
And we've tightened starting last fall, obviously wasn't tight enough.
And the vintages and then really additional tightening started in the first quarter early in the first quarter and throughout the first quarter. So.
When.
We think about it one of the bigger issues. Besides the tightening of underwriting is what we're comping over as we mentioned in the prepared comments, our two year comp in the first quarters, 10% and <unk>, our two year stack number for the second quarter is forecasted to be over 20% so still very.
Very high numbers when you think about when you think about a two year basis.
As the comps ease in the latter half of the year I think Marty you said in the prepared comments, we would expect to be flat by the fourth quarter and then long term.
Still anticipate double digit growth when you think about 2023 and beyond maybe higher than that depending on if we get larger account wins, and so forth, but but be in the double digit range.
Going forward after we get over these tougher comps the tighter underwriting.
As well as.
<unk>.
When I say tougher comps obviously the stimulus last year is driving a lot of it is still a lot of growth out there.
Almost 3500.
Net active merchants in the first quarter, so still a lot of growth out there to some tough comps and like I said, the two year numbers.
Seem to be.
As Maureen said.
Where we'd like to see them and then in market.
Got it.
Then just on the on the rent a center side, obviously losses are up there, but a lot of that can be ascribed to macro factors can you give us a sense for where you see long term losses at the rent a center.
Segment shaking out.
Once we lap all of the all the stimulus and everything.
Yes, I think we've always said that normalized range is three to four of it came in at $3 nine in the quarter. So a little a little higher than we want because they are at the high end of the range, but they are in that range and we'd expect them to be in the middle of that range for the year.
In the 3% to 4% range. So it's really just a normalization maybe.
30, or 40 basis points higher than the midpoint of that range with all the growth that you've had the last couple of years, but really in line really good quarter on the on the rent a center side when you think about where the portfolio ended.
Our flat comp roughly coming off of what was the last two years, 15% last year I'm talking about for the year and 10% in 2020, you're talking about 25% growth over two years, and then to be flat this year and to be forecasted roughly flat maybe down a little bit for the year.
Pretty impressive when you consider what.
Holding on all that all of that base that we added in the last two years.
Yes, yes totally agree.
And last one from me just modeling.
Thank you.
Davidson.
Share count guidance.
Our share count for guidance.
Can you just and can you remind us what number that is for 'twenty two.
Sure the share count.
The first quarter was $60 1 million.
Okay and then for.
'twenty two the adjusted EBIT EPS number do you have a number of what that is based on the share count.
It's pretty similar.
65 for the full year.
Okay got it.
Thanks, very much for answering all my questions.
Thanks, Scott Thanks, Scott.
Thank you our next question or comment comes from the line of.
Bobby Griffin from Raymond James Your line is open.
Good morning, Thanks for taking my questions good.
Good morning, Bob.
Okay.
This morning, I want to first Jack I mean, obviously tightened trends here in the Cmos.
Just kind of get the portfolio back in line just curious what feedback has been from your customers you know I know.
Customers focused on approval rates purchasing dollars of approval that you can do so these tightened trends definitely are different.
Environment versus what they are used to a seamless so just any anecdotal feedback from customers as you kind of go through this process to get the portfolio back in line.
Yes, good question.
Bobby excuse me.
I know when you see customers Youre talking about our retail partners.
It's all about where you start from I mean are are tightening rate are tightening underwriting and our approval rates are in line historically, where it was.
When you look at 2018 19, even 2020, it really was was a matter of what.
It happened in 2021.
And so when we look.
Glenn.
I mentioned in my prepared comments, the SPM rates first lien misreads being down 30% in March from the peak in December those are just historically in line with where they always are in the same thing with approval rates. So it's not like we're hearing from retail partners that Oh. My Gosh, you are tighter than your competition or things like that I think in this environment.
Everybody has probably tightened a little bit, but we're still we're not it's not like we're tighter than we were.
Going back and looking three years before 2021.
Okay, Yes.
It was actually the second part of the question.
Do you think now the kind of it seems like everybody across the space at least on the virtual side has tightened a little bit because the portfolio has got a little bit.
Out of whack as we came back and normalization have you seen any favorable trends kind of in the competitive environment, where maybe it's a little less competitive and everybody can kind of grow into this virtual business a little bit more friendly or is it still probably every bit as competitive for new customers in dollars out there as it always has been.
I think it's there is it does feel and just listen to comments of other other companies public companies certainly there is an overall tightening so.
I think I think it's pretty similar though as far as the competitive environment.
What we're what we haven't seen yet.
But as you know, we historically see as the tightening above us helps us when we get into these times with higher interest rates.
The economy tightens up and even though we haven't seen it yet.
We're optimistic at least cautiously optimistic we will see some of that as the year goes on in the funnel widens and Theres really no reason to think that those.
So the anti cyclical attributes related to tighter credit above us won't.
Wouldn't apply going forward like I.
So we haven't seen them, yet, but I think that's that.
Thats coming when you think about interest rates and spreads and so forth. So.
Like I said, we're optimistic we'll see that again.
Although it is not like we forecasted any not like Thats forecasted an airplane either but we are we are expecting to see that.
Okay, and then maybe if that was to happen and play out so right now consumer spending still remained pretty resilient and there's obviously some shifts going on between durables and services, but if that tightening impact plays out the potential with interest rates and inflation running through the economy.
When you start to see the pool.
The customers get pushed out in your rent to own pool, how long does it take to really flow through the P&L, where you see that benefit as a six month lag nine month lag from when we start to see the changes in the economy.
No I think youll start to see them they build over that six to nine months, but you start to see them right away. I mean every every month you write a lease you fund a lease you start to make a little money on that lease so I think it builds.
To a crescendo in six to nine months, but it starts so it's pretty much as soon as you start seeing net debt pushing down you start, adding beating your GMP numbers and so forth and I think.
When you think about the spending it is very resilient.
And it's everything you hear on the news and so forth although.
The reason, we would expect to see tightening above us when you get down below prime and get into near Prime and certainly subprime that customer it's not in the same shape as.
What we might hear every morning on CNBC or something right.
Customer we deal with is not with the inflation and gas prices and that kind of stuff. They are not in the same shape. So when you get down in the near Prime.
Low prime and scratched the sub subprime.
You're going to have to be careful if you write in loans. So.
That's why we would that's why we normally see the tightening and we would expect to see it sometime this year as well.
Okay I appreciate all the details of your best of luck.
<unk> ended the year.
Thanks, Bobby.
Thank you our next question or comment comes from the line of Jay.
Jason Haas from Bank of America. Your line is open.
Hey, good morning, and thanks for taking my questions.
I just wanted to good morning.
So the first one is on the guidance it does imply a pretty big acceleration in the back half of the year and I. Appreciate all the color that you gave but I'm curious just what gives you confidence that you will see.
That acceleration through the year and maybe by segment I mean, theres a lot of that acceleration going to come from our CMO or is there going to be some acceleration across.
Rent a center business and franchise in Mexico as well.
Sure I can take that.
What gives us the confidence is a lot of what needs to happen to make the improvement from the first half to the second half is simply getting the leases the underperforming leases from the latter half of 2021 for them to cycle through the system.
And so that will improve provisions for delinquencies as well as loss rates in the cement segment.
The average lease last about six months. So we know that by the second quarter well have worked those through most of the system.
We also expect the second half will have more profitable leases due to the underwriting improvements that we've made so new leases that we write and the even the beginning of this year and all throughout the second quarter will be more profitable leases that will have higher revenue.
Lower delinquency rates and lower provision adjustment.
And then we should be through the adjustment period, our customers went through when stimulus ran out.
And so that should also help lease performance.
You've also got the Athena leadership team very focused on improving merchant acquisition and productivity. So we will see better DMV growth rates in the second half versus the front half.
And then as Mitch mentioned, we may see some of the near prime customers falling into our funnel, but the main improvement.
Or in the seamless segment.
Reducing athima loss rates by about 400 basis points between the first and second quarters.
And reducing the provision for delinquencies by about 200 basis points in the seamless segment.
There is some improvement in the rent a center segment not nearly as much as a FEMA.
But we are expecting the rents on our portfolio to increase in the fourth quarter like it normally does theres better seasonality in the fourth quarter for both segments.
And then we're expecting collections to improve in the second half in the rent a center segment. There's also some cost efficiencies were expecting but generally big buckets are athima improvement in lease performance.
Yes that is the big one Jason I would just add on to that.
Theres really nothing to add.
Maureen said, except just to do a little math when you think about.
The 400 basis point improvement in losses as these leases from last year run through as Sema. I mean, just think about what 400 basis points as per quarter or on an annual basis.
People want to take our current number and look at run rates and so forth. So if you think annual basis, you're talking 400 basis points high.
Even in the even in the in the second quarter.
And Thats our.
Based on our guidance just call it a dollar run rate.
400 basis points.
On an annual basis, if you use as a run rate you can see on.
What's the seam of $2 billion business roughly from a revenue standpoint, so it adds quite a bit in.
Thank you.
Do you think about last summer to the third quarter last year.
We're one of $1 52 in diluted EPS.
I'm using the third quarter, not the first or second quarter of last year was even higher.
But obviously stimulus driven and there is still obviously some stimulus in the third quarter last year, but it's not like we haven't done those numbers before and when you just put a normalized loss rate in there even though.
Not a low normalized loss rate when you say 400 basis points under 12, and a half I mean, even perhaps not not like that's the lowest we always said the range on the virtual business is 60%. So just take that 400 basis points and you start to get back to those numbers the same way those losses in the delinquency reserves of Morningstar.
Talking about took a $1 50 down below a one dollar really quickly.
Snaps back when you don't have to put those reserves up for those higher losses, just as quickly.
Thanks.
Didn't really helpful color.
As a follow up question I think Martin just mentioned it but I was curious about the leadership change at.
But could you just talk through what the rationale was for having that leadership change and any plans to run that business differently I appreciate what you've said about.
Being more a little more tighter with the decision there, but curious if there's been any other changes or do you expect from that business.
Yes, I think.
Yes.
We felt like it was just time to.
To make some changes and it was really not just about any one person that was a team change as.
As well.
<unk>.
With the founder founder being more involved now Erinn I'll read, but we also brought back.
A key engineered tech leader that was part of growing the company from the beginning elevated a few few people that have been there for for many many years. So we're really trying to build the long term sustainable team against that.
Just about any one person is really more team building and I would expect besides the tighter underwriting this already.
Already providing good results for us as we mentioned I think we will see improvement from a sales standpoint.
Is that the new team the newer team works on the.
Sales function and so forth.
Yes, I don't think there is massive changes like the business is going to change we're still testing the digital ecosystem.
We have.
Yeah.
Look at that to make sure we're getting the right profit margins as we mentioned so we're we're testing very thoroughly to make sure we get the right profit out of it but we're still excited about what it can become and so forth. So that's not changing.
Not so much a change Jason as I think we can get better in all aspects of the business.
Thank you that's great to hear.
Thanks, Jason.
Thank you our next question or comment comes from the line of.
Anthony <unk> from loop capital markets. Your line is open.
Good morning, Thanks for taking my questions.
I guess my first question.
It's kind of a follow up to the prior question with the change.
Leadership.
And obviously, but.
The changes were making in terms of tightening credit.
Given that lease portfolio back in shape.
Is it safe to assume that.
<unk> pay card stuff that you guys were talking about like the virtual card safe to assume that's kind of more one more on the back burner now.
I wouldn't say back burner.
We've slowed the testing a little bit just to make sure. We're at the right profit margins.
We don't want to run too fast this year's about fixing the underwriting getting a sustainable long term team in place, but continuing to test it so I wouldn't say back burner.
Anthony as much as just a good thorough test and we're still excited about what it can become that theres still a lot of opportunity there for us to evaluate with with the new leadership team there and figure out what's the best way to use it so no I wouldn't call it back burner just.
We're still excited about it and maybe a little more prudent testing from a profitability standpoint.
Got it and then just somewhat related follow up.
So one of your.
Retail partners.
Recently announced theyre going to bring.
We used to own.
In house.
No Thats all right.
You guys were sort of shared with American first finance, but just so how should we think about the.
And I know this is not going up it's going to happen overnight, but just like long term, how should we think about the potential headwind.
Losing the Commscope.
Yes, you are right Anthony effect, it's not going to happen overnight.
If it does happen, but I.
I think the key too.
Siemens is how diversified.
The.
Most 40000 retail partners are we are very diversified no one two or three partners makes that much of an impact.
Obviously, we want some of those bigger at national accounts, but.
But I guess the other.
Flip side of that coin is as we don't have any accounts that are so large that that any one or two accounts would be a headwind that would be all that noticeable in the numbers. So I'm not saying, we wont lose any accounts, we'd love to do business with comps for forever.
Hopefully, we will find a way to do business with them forever.
<unk> is very diversified portfolio, and we really don't have that risk of any one or two or three partners really having that big of an impact.
Got it.
Okay.
Good luck with the remainder of the year.
Thanks Anthony.
Thank you. Our next question or comment comes from the line of John Rowan from Genuity. Your line is open.
Good morning.
Hey, Jim let me start with.
Similar theme questions.
No.
As far as six months ago or nine months ago, you were talking about national partners with the Sema.
Wondering what the status there is with the management change and whether or not.
The change in underwriting affects the sales process of trying to onboard new large retail partner.
No I don't think so again, we're still very competitive maybe maybe maybe we don't have the highest approval rates like we did probably mistakenly head for six months last year.
Wouldn't go out there and say we have the highest approval rates.
Could have been saying last year, you never really know what all the competition approval rates any.
Anyhow, but.
<unk>.
It's not that we're not competitive we can be as competitive as anybody again, our approval rates are not where they were before last year theyre not its not like were lower than 2019 or 20, so before.
Before we bought it seems so.
I don't think that has any impact.
Again, our approval rates are still very competitive.
This large retailers in general.
As you know as you know John it's a very long cycle. The new management team is focused on just as focused on national accounts as we have been prior we haven't had a lot of.
Any any big signings, yet we're talking to a lot of people. It's a very long cycle. The good news is we expect retailers to get more focused on it now that their comps or are going to be tougher than.
Maybe the last couple of years.
It was hard to get larger retailers focused on it when they couldnt fulfill all the business. They had tech resources were under pressure for integrations and things like that so we expect retailers will be more focused now talking to talking to tons of them and it's a long cycle and we're going to continue to work with there is no less emphasis on that than ever.
Okay. Thank you.
Okay. Thanks, Jeff.
Thank you. Our next question or comment comes from the line of Brad Thomas from Keybanc Capital markets. Your line is open.
Hi, Thanks for taking my question.
Wanted to just follow up on.
The Dod.
Dialog and trends with retailers I would think with.
Entering a backdrop where consumers may need.
Palin financing options more readily here that your retail partners might be more interested in working with you can you just comment a little bit more about what youre seeing from a door count perspective, and how that pipeline of potential activation books.
Yes, I think.
Spot envelope comments we.
I think all retailers small and large ones are more interested now than they were a year ago or obviously two years ago. When the pandemic first started I think I mentioned we added.
About 3500 active locations in the first quarter. So its not like Theres not a lot of sales going going on out there and that's part of how even with the tighter underwriting as Maureen said and in the.
GMB number in the second quarter similar to the first quarter that our two year GMP number still be over 20%.
So we're still adding a lot of locations like I said almost around 300 in the first quarter. So.
There is more interest.
Not that we werent, adding him last year, but there does seem to be at least a little bit more interest spread from from retailers and we're optimistic we're going to be able to continue to add to the regionals and we're real hard on those national accounts as well.
And Mitch can you just remind us.
The Decisioning and Youre getting in your <unk> segment is that all on one process now versus the legacy business you had.
And can you just talk about.
What you've done to try to further enhance the accuracy and the.
Ability to predict well with their decision.
Yes.
All the virtual all the virtual business is the.
At the same system some of the staff business Theres still a few staff partners to convert to the sema.
Software and therefore their decisioning. So it's mostly all on one system, but there is still a few retail partners to convert over and I think the.
The tools have been there we've added a few we've added a few tools to the underwriting.
Your process as well there is there is always new tools, we could probably add tools every week you got to be careful not to not to chase every single one of them, but when I say tools things that can add into the process fraud detectors and all those kinds of things.
And the team out there is.
As adding adding things they think they need.
A lot of it most of what we're our missteps were.
Brad we're just philosophical.
From a leadership standpoint, just pushing too hard for volume, it's not like they didn't have enough tools, but again, theyre still adding tools and different products to it I'm not that the tech guy, although I could I could I could I could throw out a couple of names, even though I'm not exactly positive what they do I could sound smart if I, if I wanted to throw out a couple of brand names.
Things they've added to the Decisioning, but.
We got a great team out there in Salt Lake and they are adding the fraud detectors that they think they need to add in.
Obviously, the numbers numbers are working really well even our approval rates are are in line with where they were pre 2021.
The <unk> rates have come right back in line.
As I mentioned, the 30% lower than they were when they peaked in December . So obviously, we're about 30% out of the line as the year came to an end so.
And then I'm sure as the year goes on we will add one or two more tools because like I said in the tech World Theres always some new new new product to add that.
And maybe give us a little bit smarter and they're always working on that the team out there. So we're really pleased with what's happened with the underwriting obviously in the numbers so far this year.
It's very helpful. Mitch if I can squeeze one more in just on the Cmos outlook for margins, obviously were an unusual kidney here as we're lapping stimulus and you've done some tightening.
How should we think about what the medium term margin outlook is for Athena I think maybe more of a 2023 sort of number.
And do you still think mid teens adjusted EBITDA margin.
A reasonable target maybe longer term after you get past some of the growth initiatives that you are still making investments.
Yeah right. So as you can see in our guidance, we expect substantial improvement in margins in the from the front half of the year, which is still negatively impacted by the underperforming leases to the back half.
Well, we'll average around.
12, 5% EBITDA margin, if you look at our guidance to get to that double digit EBITDA margin for the full year.
And so you can see we'll end the year.
Not quite to mid teens, I would say our longer term rate is in the 12% to 13% range for the Athene the segment with how we're viewing things right now that could change, we're obviously not giving 2023 guidance.
And as we stand right now, it's probably closer to 12% to 13%.
That's very helpful. Thank you so much.
Thanks, Brad.
Thank you. Our next question or comment comes from the line of Carlos Castillo from JP Morgan Your line is open.
Hey, Good morning. This is Mike on for Carla and thank you for taking our question.
Two one from us and hopefully quick.
Hey, guys recognize you guys have done a little bit of the revolver balance. This quarter do you guys expect to pay more either in the second quarter or by year end.
Then I'll ask my second question as well.
We are more focused this year on reducing our leverage just given the macro uncertainty. So there there is a chance that we pay down debt further throughout the rest of the year.
Great. Thank you and the second one is can you guys give us any sort of parameters to help forecast the thing about the purchase of rental merchandise for the core business.
Recognize that kind of moves directly with sales.
Touch on to that all your stores.
I would just say that they're under inventoried in certain categories, just given that as well.
Any context or color would be helpful. Thank you.
No good question Mike.
We don't feel like we're we're short in any products in the stores like any retailer with electronics in their stores.
We can sure use a few more PS $5 on the shelf. So I think I think Anthony would agree with that Anthony glass because it runs to the residential segment I think if you take a lot more <unk>, if you could get them, but but other than that no. We are in fact.
As I mentioned in my prepared comments, we had thousands of skus to our to our website recently.
Extended aisle, if you will through other retail partners. So no from an inventory standpoint is in really good shape.
Great. Thank you.
Thanks, Mike.
Thank you I'm showing no additional questions in the queue at this time I would like to turn the conference back over to Mr. Mitch <unk>.
Closing comments.
Thank you very much and thank you everyone for your time this morning for your interest in <unk>.
In us we certainly are happy to report numbers in line with our with our guidance and reiterate R.
Our annual guidance.
It was a tough latter half of last year in a tough start to this year from the standpoint of.
The having to add to the delinquency reserves and losses and so forth.
But we know what we did wrong, we know we need to fix or underwrite track and a lot of the metrics are coming in line really well and we're pleased with that and we look forward to reporting back to you next quarter. Thank you everyone.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day.
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