Q1 2023 PROG Holdings Inc. Earnings Call

Good day, ladies and gentlemen, and thank you for standing by walking through the product Holdings first quarter 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 one one on your telephone keypad.

At this time I would like to turn the conference over to Mr. John Baugh, Vice President of Investor Relations. Mr. <unk> you may begin.

Thank you and good morning, everyone and welcome to the product Holdings first quarter 2023 earnings call.

Joining me. This morning are Steve Michaels Brock Holdings, President and Chief Executive Officer, and Bryan Garner, our Chief Financial Officer.

Many of you have already seen a copy of our earnings release issued this morning, which is available on our Investor Relations website.

<unk> Dot product holdings Dot com.

During this call certain statements, we make will be forward looking including comments regarding our expectations related to the range of 2023 write off resulting from our lead Decisioning posture.

Our G M D.

Gross lease assets balance.

Levels of 90 day buyouts in future periods.

The strength of our balance sheet, and our capital allocation priorities and our revised outlook for the 2023 full year as well as our outlook for the second quarter of 2023.

I wanted to call your attention to our safe Harbor provision for forward looking statements that can be found at the end of the earnings press release that we issued earlier this morning.

That safe Harbor provision identifies risks that may cause actual results to differ materially from the expectations discussed in our forward looking statements.

There are additional risks that can be found in our annual report on Form 10-K for the year ended December 31, 2022, which we encourage you to read.

Listeners are cautioned not to place undue emphasis on forward looking statements we make today.

We undertake no obligation to update any such statements.

On today's call, we will be referring to certain non-GAAP financial measures, including adjusted EBITDA and non-GAAP EPS, which have been adjusted for certain items, which may affect the comparability of our performance with other companies.

These non-GAAP measures are detailed in the reconciliation tables included with our earnings release.

The company believes that these non-GAAP financial measures provide meaningful insight into the company's operational performance and cash flows and provides these measures to investors to help facilitate comparisons of operating results with prior periods and to assist them in understanding the company's ongoing operational performance.

With that I would like to turn the call over to Steve Michaels, <unk> Holdings', President and Chief Executive Officer.

Steve.

Thank you John and good morning, everyone.

I appreciate you joining us as we report our first quarter results.

Share our thoughts on a few important Q2 metrics and provide an update on our 2023 full year financial outlook.

We had an excellent first quarter meeting our expectations for <unk> net revenues.

We also materially exceeded our earnings expectations due to lower 90 day buyouts.

Better than expected customer behavior payment behavior and continued portfolio management.

The last 36 months have presented unprecedented challenges, but I am proud of our team's efforts in overcoming these obstacles to deliver such strong results.

Our actions to improve portfolio performance and right size cost in Q2 of last year continue to benefit us as evidenced by our year over year gross margin expansion.

Improved write offs of 6%.

SG&A leverage.

Despite consolidated revenues declining 8%.

Still grew our adjusted EBITDA by $25 million or 39%.

At 13, 7% margin.

And our non-GAAP EPS by 94, 7% as compared to the first quarter of 2022.

This great start to the year has let us to significantly raise our full year earnings outlook.

While we were pleased with our strong first quarter results. There were factors contributing to our outperformance that may not carryforward, which Brian will discuss in more detail.

So our first quarter demonstrates our ability to manage our business with healthy returns despite persistent macroeconomic backdrop of inflationary pressures economic instability and strained customer liquidity.

We remain cautiously optimistic about our portfolio health and gross margin, while we are prepared to optimize our decisioning to shifts in the economic environment. We believe that our current decisioning positions us to deliver another year within our targeted annual 6% to 8% write off range, which is a key goal for us.

Turning to our JV with double digit declines over the past three quarters are largely a byproduct hydro decisioning, we implemented in Q2 of last year.

We believe that those decisioning changes have accounted for approximately two thirds of the pressure we have experienced in <unk> over the past three quarters.

In terms of <unk> outlook, we expect our second quarter <unk> to decline at a similar rate in Q1 on a year over year basis due to our current decisioning posture, though we expect these difficult comparisons to ease in the back half of the year as we fully lap the introduction of last years seeing changes.

Soft retail demand continues for big ticket consumer durables, and many of our leesville product categories with data showing that this slowing demand is primarily due to the our consumer base redirecting more of their income to essentials in response to liquidity pressures.

We have seen no indicators, leading us to assume that retail sales were materially rebound through the balance of 2023.

We have very recently began to see evidence that credit providers above us are starting to tighten their underwriting.

The recent challenges in the banking sector that developed late in Q1 further speak to the likelihood that credit providers will increasingly look to restrict the level of funding that fueled consumer borrowing for most of the past decade.

Delinquencies that we track for prime lenders are moving higher, albeit at many cases still below pre pandemic levels.

While we believe the credit supply is becoming more of a strict and there may be some delay as to when it will impact consumers.

Because it is still too early to predict the timing of this potential tailwind for our business, we have not assumed any benefit to our <unk> for the balance of 2023.

We continue to closely track the overall quality of our applicant pools and only very recently have we started to see improvements in the top quintile.

Yeah.

Moving on to profitability, we expect to maintain our strong portfolio performance and our ability to deliver healthy margins in our core leasing business. Despite the outlook for our revenues to decline near term.

The tighter Decisioning posture, we took in Q2 of last year helped the portfolio recovered with leases originated in the second half of the year performing on par with pre pandemic levels.

Because of our short duration portfolio leases originated in the first half of 2022 now represent an immaterial portion of our remaining active leases.

In February we elaborated on our three key strategic pillars grow enhance and expand.

We believe our strong profitability and balance sheet will allow us to continue to make selective growth investments that position us to capitalize on market share gains in the near term, while capturing more of our addressable market in the long term.

For example, those investments will allow us to continue to build and enhance our technologies for an evolving consumer that we know better than anyone after more than 20 years as a <unk> leader.

Today, roughly two thirds of our customers are millennial oriented for Gen Z.

Groups that have shown a more omnichannel approach vacillating between online and in store when researching and making key purchases.

We also know these demographics interact with their personal finances differently than previous generations.

Adopting emerging products and technologies as part of their personal financial solutions.

As a result, todays consumers have come to expect more flexibility and control over their payment options, especially for larger ticket items.

We continue to address this demand by enhancing and developing products that offer a more frictionless omnichannel customer journey.

While simultaneously, providing consumers with the educational tools price discovery and disclosure transparency they need to help them make the best and most informed choices.

We also continue to invest in further integration with existing retail partners, while converting new lease to own pipeline opportunities. As we believe these actions will benefit all stakeholders long term, even with the challenging revenue backdrop in 2023.

E Commerce integrations with new and existing partners remain a key focus.

And the pace of our efforts in this area has accelerated as we continued to enhance and innovate technologies that offer retailers flexible customizable and secure ways to add LTE as their online checkouts.

While E Commerce <unk> in Q1 was down year over year decline was less than what we saw for comparable in store results and e-commerce as a percentage of total progressive leasing GMB continued to grow coming in 100 basis points higher than the same period last year.

Additional key technology initiatives that were completed within the quarter include enhancements to decrease the time it takes customers to complete an LBO transaction.

Optimizations to the customer and retailer experience.

And updates the payment and lease systems.

While Brian will provide more detail on the upward revision to our earnings outlook for the year I'd like to summarize a few key themes.

Our Q1 performance was stronger than we expected from a margin perspective, driven by materially low 90 day, buyouts and better than expected customer payment behavior.

Revenue in March from 90 day buyouts was at a historic low, which we believe was driven by the average tax refund decrease of approximately 10% year over year.

While this was a tailwind for Q1 gross margin it will be important to monitor whether the low bio performance continues and how the portfolio performs with a lower percentage of customers executing buyout options.

Should we see normal delinquency trends in the lease pools for the remainder of 2023, the lower 90 day buyouts, we experienced should be a positive impact to our financial results.

However, should the decline in 90 day buyouts proved to be a leading indicator of stress on our customers and portfolio performance, we may experience higher delinquencies, which could prompt us to tighten our decision.

Onto the topic of capital allocation, we purchased $36 5 million in shares during the first quarter, representing 3% of our outstanding stock.

We also generated $157 $4 million in cash flow from operations further illustrating our ability to show financial strength and an unstable economic environment.

Our capital allocation priorities remain unchanged and we expect to continue to fund growth.

Look for strategic M&A opportunities and return excess cash to shareholders primarily through share repurchases.

To close I want to emphasize that our strong Q1 was a direct result of the hard work and strategic efforts that our teams have put in over the past several quarters, our mission to create a better today and unlock the possibilities of tomorrow through financial empowerment remains at the core of how we operate and we will continue to grow enhance it.

Expand to help improve the lives of our customers.

I'll now turn the call over to our CFO Bryan Garner for more details on our first quarter results and 2023 financial outlook.

Ryan.

Thank you, Steve and good morning, everyone.

I'd like to start by thanking our teams retail partners and customers for helping us deliver a strong quarter to start the year.

Our first quarter results highlight the resilience of our business model and teams and overcoming the macroeconomic headwinds.

<unk> inflationary pressures and liquidity strains experienced by our consumer.

Q1, 2023, consolidated revenues declined 8% $655 million.

Consolidated adjusted EBITDA increased approximately 39% to $89 7 million in Q1 of 2023 from $64 6 million in Q1 of 2022 outperforming our expectations.

Our better than expected consolidated results were primarily driven by margin improvement and lower write offs at progressive leasing segment.

non-GAAP diluted EPS for Q1 of 2023 increased to $1 11.

Growing 94, 7% from 57 in Q1 of 2022.

Liquidity pressure on our customer partially driven by tax refund checks were approximately 10% lower on average compared to last year resulted in a record low 90 day buyout activity in Q1, which is a headwind to current period revenue, but a benefit to gross margins.

Additionally, we experienced lower than expected charge offs in the quarter due to a tightening efforts in Q2 of last year, which resulted in better payment performance.

Driving higher margins and increased profitability.

For Progressive we issue segment GMP decreased 17% to $418 7 million in Q1 of 2023 as compared to $504 5 million in Q1 of 2022, largely driven by our current Decisioning posture continued weak retail traffic.

The double digit percentage decline in tax refunds.

Revenue in the period declined 8% year over year drew.

Driven by lower gross leased asset balance heading into Q1 software <unk> in the quarter and a material decline in revenue from 90 day buyouts, partially offset by improved customer payment behavior.

However, this segment's Q1 gross margins improved 340 basis points year over year to 31, 7%.

Primarily due to the 90 day buyout activity in Q1, the reached record lows.

And last year's decision actions that improve portfolio yield.

While our 90 day buyout results with significantly lower gross margin than average lease it remains more beneficial to gross margin the most charge offs.

We still expect 90 day buyout activity to be lower year over year for the remainder of 2023, although the variance is expected to narrow over the course of the year.

Progressive lesions SG&A expense as a percentage of revenue declined to 11, 9% in Q1 of 2023 or 12, 4% in Q1 of 2022, while SG&A expense decreased $10 million year over year, primarily due to the cost actions in Q2 of last year.

So Russell, we shouldn't Brian off of $38 4 million or 6% of revenues in Q1 down from seven 3% in the previous year's period.

I continue to be encouraged by trends, we've seen thus far in 2023, and we remain on track to end the year within our targeted annual right offerings.

Looking at our balance sheet, we ended the quarter with $249 8 million in cash and gross debt of $600 million, resulting in a net leverage ratio of 124 times, our trailing 12 months adjusted EBITDA.

In the first quarter, we purchased 146 million shares of our common stock at a weighted average price of $25 and have $308 million remaining under our previously authorized $1 billion share repurchase program.

I would now like to touch on a few key aspects of our Q2 and our revised full year 2023 outlook.

<unk> provided in this morning's earnings release.

Despite our strong first quarter results for adjusted EBITDA, We continue to experience headwinds unexpected GMB due to economic and liquidity pressures felt by our consumers.

As Steve mentioned, we expect a year over year percentage decline of our second quarter <unk> to be roughly in line with our Q1 rate.

This decline should lessen in the second half of 2023, as we compare against lower <unk> year over year due to the timing of decisions we implemented last year.

Our gross leased asset balance, which is a key driver of future period revenue entered 2020, 353% lower year over year. We ended the first quarter eight 3% lower year over year.

This press leased asset balance will likely decline further.

During the second quarter of 2023 due to the <unk> decline, serving as a headwind to revenues in future periods.

Our base case for the remainder of the year considers current consumer trends, but does not assume further economic downturn a materially negative impact on the employment of our consumers for a material benefit from tightening by providers above us and crest Act.

Despite revenue headwinds, we anticipate that our lease portfolio performance and low 90 day buyout rates will continue to drive progressive leasing margin improvement year over year.

As a result, we are raising our full year earnings outlook slightly decreasing our expected revenues.

Our revised consolidated outlook for 2023, we expect revenue in the range of two 3% to $3 75 billion.

Adjusted EBITDA to be in the range of $235 255 million and.

non-GAAP EPS in the range of $2 55 to $2 77.

This outlook assumes a difficult operating environment with continued soft demand for leasable consumer durable goods no material changes in the Companys decisioning posture and effective tax rate for non-GAAP EPS of approximately 28% and no impact from additional share repurchases.

Finally, I would like to address how we're thinking about the strength of the first quarter and our increased earnings outlook as they pertain to the remainder of the year.

While we are encouraged by the strong financial results. We achieved in Q1, we are cautious about the continuing headwinds on GMB and expect margin pressures as we move throughout the year.

Soft consumer demand trends, we observe exiting Q1 and into April have caused us to adjust downward our expectations for <unk> and revenue.

Our revised outlook assumes adjusted EBITDA margins for the remainder of the year that are lower than Q1 due to the dissipation of some of the 90 day buyout dynamic that benefited margin in Q1, an increase in run rate for SG&A costs due to wage inflation and specific initiatives targeting key technology platforms and full year write offs within our <unk>.

<unk> annual 60% range.

In short we optimistic about the 2023 prospects following our strong start of the year and remain committed to the disciplined decisioning and other strategic efforts that have helped us achieve those results as we look to capitalize on the positive momentum gained from our Q1 performance.

I will now turn the call back over to the operator for the Q&A portion of the call operator.

Ladies and gentlemen, if you have a question or comment at this time. Please press star one one on your telephone keypad.

If your question has been answered or you wish to remove yourself from the queue simply press star one again.

Again, ladies and gentlemen, if you have a question or comment at this time. Please press star one one on your telephone keypad.

Please standby, while we compile the Q&A roster.

Our first question or comment comes from the line of Kyle Joseph from Jefferies. Mr. Joseph Your line is open.

Hey, good morning, guys. Thanks for thanks for taking my question and job navigating a difficult environment.

Obviously on the credit side of things a lot of moving parts you guys have heard your underwriting changes implemented last year.

And a lower tax refunds this year, but just trying to get a sense for the health of the underlying consumer obviously their employee.

Facing elevated expenses.

Kind of adapted to this inflationary environment hasnt been that good.

On a year now, but just kind of like FX or some of the dynamics that played out in the quarter in getting some of the moving parts.

Yes. Thanks, Kyle Good morning, this is Steve.

Certainly a lot there.

So we did as you mentioned, Mike that our Decisioning changes throughout Q2 of last year and the portfolio has.

Responded nicely and is expected to those changes underlying that is the consumers and the customers that we were approving.

Having funded GMB, we're performing per our expectations, which as you know we track kind of against the pre pandemic pool performance.

Because we have history that those pools delivered on our portfolio performance within our targeted targeted ranges. So throughout the back half of 'twenty two we saw.

That performance in the portfolio turnover due to our short duration leases.

It was reflected in the metrics that we provide externally Q1 with an interesting.

Interesting story right we saw.

From a portfolio performance standpoint similar.

As expected, although slightly better than expected from a customer payment behavior.

Standpoint.

The wildcard was the tax refund what we believe was driven by the tax refund season, we expected it to be.

Lower and as many of you all report various freight fairly frequently it did come in lower.

<unk>.

We built that into our original outlook as it related to some some pressure on <unk> just kind of on the origination side, what we saw.

And it's not a perfect read through but it's our.

Just our experience and our history dictates us leaves us to believe that this driver is that.

Those lower refunds.

Primary driver of a materially lower 90 day buyout activity by our consumer.

And as Brian and I, both said in our prepared remarks that.

That resulted in higher.

Gross margin.

Then we were anticipating in that and that we have seen in previous.

Tax refunds seasons.

The question that.

As you know remains to play out as.

Why that.

<unk> buyouts.

React so materially lower was it.

Due to some new set of stress on the consumer that caused them to not have the liquidity to do the 90 day buyout.

And while we're in this kind of interesting.

Situation right now, where we had lower 90 day buyouts, which is a tailwind to margin.

Yet our delinquency picture is still.

In good shape.

Will that persist and we need a few more cycles of data they come through to convince us that that that will persist because we believe that nave to think that someone who did a 90 day or what.

There have been a 90 day it wasn't able to is just going to magically March on to be a filter for full margin lease there's going to be some other stress and dispositions throughout that customer's life cycle.

I didn't do the 90 day, so that remains to play out so it's still a bit of a mixed bag. We had strong performance in Q1.

If that persists, we're going to have some tailwind to the margin throughout the balance of the year, we're anticipating that debt.

Customer payment performance outperformance to dissipate.

Right.

That's really helpful clarification, and then just one follow up for me.

I know you guys talked a lot a lot of retail partners and just wanted to get a sense for.

I guess first kind of thing.

Their take in terms of potential for demand to recovery and I think we have any precedence that we have to go back and look at that 70 and see how long it set for kind of concern consumer durables to recover.

And then.

More challenging environment and have you seen a greater desire to add the product from the tariffs.

Yes, I've been in the business alongside with US seven days, but.

Yes, we definitely thought to our retailers very frequently as you can imagine and it's one of the benefits of us having the large enterprise retail partners they have.

Data shops, obviously, we're not going to.

Out them on what that what they say and what they tell us, but it's a challenging environment out there and as Brian said in his prepared remarks, what we saw.

Some weakness really exiting March and into April .

I would not make a direct correlation between <unk> and the banking crisis to our consumer because I'm not sure. They are impacted by that but something from a animal spirits slash consumer confidence happen and we saw some weakness coming out of out of Q1 and into the first few weeks of April so as.

As we alluded to we've got the lapping of our Decisioning changes here towards the end of Q2, so that'll be a removal of a headwind.

But it continues to be a challenged demand environment for our retailers and then ultimately for us.

Yes.

Got it thanks very much for answering my questions.

Thank you our next question or comment comes from the line of Brad Thomas from Keybanc.

Thomas Your line is open.

Thanks, Good morning.

Nice execution here.

I come from that.

Wanted to ask first about the gross margin outlook.

Even though they were lower right Glenn.

Year over year.

And year over year that produced early buyouts I know that <unk> is usually the big quarter for that.

So as I look out.

Balance of the year. It does look like there's a pretty good outlook here for gross margin, maybe you could just talk a little bit more about how youre thinking about that thanks.

Brian I can take that.

Yes, I think that's driven by primarily by our assumptions around.

How these customers behave those that did not.

I take the 90 day here in Q1, and ultimately the dispositions that they work towards.

We expect to be a more favorable mix based upon what we're seeing thus far the word delinquency profile is sitting or more optimistic around those customers, who elected not to do a 90 day to go into a.

An outcome that is favorable to gross margins. So we've incorporated that into our R.

While our guide and Thats, what Youre seeing in terms of the.

I think the trends that are reflected in the favorable gross margin trends going forward.

We'll see what happens obviously this is the model is very sensitive to consumer behavior and what they what they would like to view based upon everything we're seeing right now delinquencies are.

Holding I would say.

Within our balanced.

That's really helpful. Brian .

And then Steve I'd, just be curious a little more color as youre talking to your.

Retail company customers.

Many of which are dealing with declines in sales right now coming off a tough pandemic comparison, I guess, what do they need most from progressive here right now and how do you think about maybe the opportunity to get more share of wallet with time.

Yes, Thanks, Brad.

I mean it continue.

In 2022 and continues into this year are partnering well with the resellers that are currently in our in our preferred partner network.

And then reaching as we've discussed before for more tools in the tool belt and so what they need from US obviously is for us.

<unk> drive more traffic to them and also save more sales and convert more convert more traffic.

Ultimately increase there.

Their sales and return on AD spend and the way we can do that is by making these payment types and progressive more.

Visible within their environment, whether it's on the site or in the store.

<unk> for the consumer to do business.

With progressive.

Also increased training efforts for the retail sales associates in the in the.

The retailers' in store environment.

So all of the whether it be point of purchase materials for awareness, whether it be direct.

Sure.

Co branded marketing with progressive and the retailer.

Whether it would be.

Our partner week or per week, as we call it where we have daily deals.

Sponsored by various.

Partners.

Those those things are things that we can do that may not take.

A lot of tech lift and then on the other end of the spectrum.

<unk> scale, I should say or other things like <unk>.

Water falls in.

Transactional E comm cards.

Better placement on product display pages online and those things.

We're also seeing a lot of appetite from our retailers to.

So to partner with us in and pull those levers to help.

Help save.

I'll say more sales for them. So we're encouraged by the partnership that we've had and we believe that these this set of this environment will allow us to come out of this environment with a with.

Much deeper integrations with our existing partners and kind of be a springboard for growth.

That underlying demand returns.

That's great. Thanks, Thanks, so much.

Thank you.

Our next question or comment comes from the line of Anthony.

<unk> from loop capital Mr. <unk> Your line is open.

And great job on the pronunciation of my last name.

So I guess my first question is so you talked about the fact that when you start tightening in the back half of last year and given the.

The short duration of your of your leases most of those sort of pre tightening leases are pretty much gone at this point so would that imply then that your.

Lease merchandise write off rate for the remainder of this year I know youre, saying it could be in that 6% to 8% range, but that would imply to me that it should be.

Everything else being equal it's toward the low end of that range right.

I guess I might think about that the right way.

I guess, what I would point you towards.

Thanks, Brian .

Is it what.

What we've been targeting towards in our Decisioning efforts is really trying to get back to.

Pre pandemic level of performance in terms of our last point of normal.

And as you saw during those periods, we were kind of in the midpoint of about 6% to 8% range. So.

Really that's our that's our target.

I don't want to over promise on the low end. It here we saw here, we saw base, 6% year Q1.

Which is great.

But seasonally what you would expect as sequential step up in Q2 and Q3, just as you get further away from tax season, and you experience.

Perhaps just more more strain on the consumer further way you get from taxes Q4 tends to be the lowest write off rates seasonally.

So I would just I would just cost me about taken taking Q1.

And.

Stating that as a run rate and make sure we incorporate the seasonality there again, we're really trying to get back to.

Within the range of reasonableness that we saw pre pandemic.

Got it fair enough and then just a quick follow up.

Obviously, you've increased your earnings guidance and <unk> will remain pressured for the reasons that you mentioned, so that would imply that and I know you didn't give free cash flow guidance, but that would imply that you'll have incredibly strong free cash flow this year.

Your leverage is at one two times, so I guess, how should we think about capital allocation for the remainder of this year I mean is that a reasonable assumption that youll.

I know youre not buildings for guidance, but is that a reasonable assumption that you could at least potentially step up the share repurchases given those free cash flow dynamics.

Yes Anthony.

I mean E mail.

The variables.

Talking about our capital allocation, we're able to fund the growth was internally generated cash we our history has shown that we.

We favor or repurchases of our stock.

As a way to return capital to shareholders.

We will have.

Good free cash flow generation. This year. The reminder, there is a little bit of seasonality on that as well, where we will generate we will likely generate more than 100% of our annual free cash flow in the first six months of the year, just because of the seasonality of <unk>, even in a declining <unk> environment. The dollars of G&A will be higher.

In Q4.

And we also look at that through the lens of our net leverage ratio.

We're in a comfort comfortable one to four times as of 331, when we look at that over over the course of a 12 month period.

It's probably going to pick up a little bit just.

Because of the use of cash in the back half.

<unk> funding as well as some seasonality on the.

On the EBITDA, but having said all of that.

Should the equity remain in these in these price ranges that we deem attractive that has been our preferred vehicle I would expect it to continue to be.

Got it thank you.

Good luck with the rest of the year.

Thank you.

Thank you.

Our next question or comment comes from the line of Bobby Griffin from Raymond James Mr. Griffin. Your line is open yes. Good morning, everybody. Thanks for taking my questions I guess, Steve I wanted to first circle back on on <unk> I think in your prepared remarks, you mentioned that two thirds of the decline was driven by your internal leasing decision I want to make.

If you could unpack that a little does that mean youre seeing outflow and kind of quote unquote demand to use the products stronger than what the <unk> trends that we're seeing on a reported basis or how exactly are you kind of getting at that that figure.

Yes, we do.

<unk> all of our all of our channel metrics top funnel mid funnel bottom funnel.

<unk>, whether it be online in store, we even try and parse out whether it's in terms of months, while they're in the store.

We analyze all of those those outflows. So we can look at our apps by channel.

And.

Then kind of just follow it down the funnel and say, okay, well youre approval rate is X, whereas same period last year. It was why.

<unk> has done this or that and.

And average ticket is has changed this or that so that's how we get to kind of the.

The rough two thirds analysis of the GMB pressure was from effectively in simplistic terms, just lower approval rates.

There's a lot of moving parts as was implied in your question, but that is the driving factor and so as we.

Turning the page into the back half of this year, we will be on a.

On a neutral footing, all things being equal as it relates to the Decisioning and so then there'll be more of a.

On the App and underlying retail demand story.

But as I as I've talked about before we stand ready to potentially.

Loosen approval rates, if the data warrant or if we see additional stress in the data.

Also have a series of adjustments at the ready if we had the tightened Additionally, but all other things being equal that headwind will will go away in the back half.

Okay, Yeah, and I guess that was going to be my second part of the question I guess with that that would imply that there is a greater demand and I guess, we can approve at during the current economic environment for the product, but I guess, what would you want to see economically to may be start to loosen a tiny bit to go after that delta that gap between your app flow and what the <unk> performance AD.

Is it loss ratios continue to hang out here at the bottom of the range at 6% or is it some type of payment trends or some type of category performance I guess, what would you like to see where we can kind of maybe get a view of when there could be maybe.

Potentially loosen.

The dnb.

Yes.

And ultimately the loss rates are.

Over time are a good indicator, but in the shorter term there's components of that Theres reserve buildup of reserve release versus underlying lease performance and obviously the reserves are built based on our expectations of how the leases are going to perform but we're tracking delinquencies against pre pandemic buckets are.

Should say lease pools.

We're tracking all of the indicators that you would think we're tracking.

Stage bounces on first base with first payment defaults and all kinds of things if.

We're just looking in isolation on March 15th at our lease pools, you would say, okay. It's time to loosen.

But.

There is there is.

Theres more nuance to it than that because as we as I talked about in Carl's question.

We don't want to namely create another pig going through the Python, if there's liquidity stress out there for.

For the consumer.

Because of.

Something happened why they werent.

Executing those 90 day buyouts and Goldie losses, Goldilocks situations don't last forever. So we're defensively postured, we think thats appropriate, but as I've said.

It sounds like you want us to be doing we're looking for opportunities to loosen and if the data.

Warrant that and prove to us so that's the appropriate decision.

Then I stand ready to do it.

And so we're just going to have to get a few more cycles of data in the door before the team feels comfortable doing that.

Okay, Yes.

The answers is yes, it makes perfect sense and I guess lastly.

Brian on cash Opex.

With the <unk> implied a cash opex is probably going to step up sequentially from the <unk> levels. Despite kind of I guess, the revenue coming down a little bit and that some of the margin pressure.

Sequentially.

Sure.

From a.

From a cash flow from operations perspective, yes.

Yes.

I look at cash Opex I, just look at Opex ex write offs. So the cash.

Yeah, Yeah, sorry, I got it I.

I think thats, I think theres going to be a.

A step up in SG&A as a percentage of revenue as we move throughout the year.

There's a couple of reasons for that there is.

Inflation that obviously, we're we're dealing with and there is also an element as you could you fill those topline pressures theres a deleveraging aspect.

No that happens with respect to that ratio and we are while we are highly variable and our cost structure. We do have some fixed costs and that will start to that will start to reflect in that metric. So yes to answer your question I think there's going to be.

I would say.

Moderate increase from Q1 run rate levels.

Okay I appreciate all the details and congrats on the on the upside this quarter and best of luck going forward.

Thanks Robby.

Thank you again, ladies and gentlemen, if you have a question or comment at this time. Please press star one one on your telephone keypad.

Our next question or comment comes from the line of Jason Haas from Bank of America. Mr. <unk>. Your line is open.

Hey, great. Good morning, and thanks for taking my questions I'm curious to know.

What extent do you think the current results are benefiting.

From any sort of credit tightening or trade down.

Youre, not really seeing a benefit yet and thats potentially to come even though I know it's not included in the guidance.

Yes, Jason.

Okay.

Certainly I don't believe that the Q1 results.

We're benefited by by credit tightening.

In the prepared remarks, we said and this is really kind of.

Really recently developing news, but we have started to see the beginnings of.

What we think is tightening.

Above us in the stack, we look at it very.

Very precisely whether it would be by vertical or by region or by retailer or by actually primary lender.

As you know the secondary lenders near Prime lenders have been tightening for some time now we have not seen it happening.

And the prime lenders only in the very last couple of weeks that we've seen evidence that it might it might be happening.

But theres certainly a delay in.

And what that means for four <unk> trends or even app trends for us so.

<unk>.

It's encouraging because as I've.

As I have admitted on previous calls I was expecting it to happen.

<unk> ago, and we saw no evidence of it the fact that we're starting to see some evidence is kind of a stay tuned comment.

As you said and we said in our prepared remarks, we have not built anything into the back half or really the full year <unk> expectations.

From a tailwind from that and so to the extent it continues to.

Play out that way it could it could be could be a tailwind for us.

Got it and then over the next few months here, we should start to lap some of the highest gas prices from last year. I was curious is that a factor that impacts <unk>.

Rates I don't know, if thats, something youre able to see a correlation there in your data so maybe I could potentially be a benefit but I'm just not sure how impactful or something like that is for your business.

Well I mean I would.

Definitely say, it's not a negative it would be the benefit it's been difficult to parse out.

With all of the moving parts that have happened during the pandemic like what what is the driver of this or that certainly we.

Note that our customer was more impacted by the inflationary pressures across food energy and shelter than the than the prime customer.

And to the extent there is an easing there that's a good thing for us, especially since <unk>.

Employment is still strong and there has been some some wage gains that could be.

That will that will be a good thing for us it's difficult to tell.

Tell how much is driven by by gas versus <unk>.

Versus price of eggs or something like that but we'll.

We will take it and hopefully it continues to show in the portfolio performance.

Yes.

Strong gross margin.

Got it thank you.

Thank you.

Thank you.

Our next question or comment comes from the line of Vincent <unk> from Stephens. Mr. <unk>. Your line is open.

Thanks for taking my question most of my questions have been asked.

One question on just trying to.

Dissect parse out consumer demand.

Understand that the GMB guidance, ladies kind of weaker through the year, but I'm trying to separate out.

How much of that comes from your tight underwriting posture versus <unk>.

Consumer demand may be.

Picking up maybe there is.

The more need for the product.

So I don't know if theres, a metric like application volume or something like that so we can kind of see.

How much demand might be moving over time. Thank you.

Yes, Vincent I would just I guess.

Point, you back to our comments about the kind of mid teens.

Decline in <unk> that we've seen over the last three ish quarters.

We believe is about two thirds of that is driven by.

By our own decisioning necessary decisioning adjustments.

So that would lead you to believe that there is another third of that.

Kind of mid single digits driven by lower.

Demand for the for the product.

That could be offset by.

Moving further away from the large purchases in the demand pull forward during the during the pandemic as it could be.

Offset by break fixed cycles as.

As things need to be replaced or laptops become obsolete.

So we would look forward to those trends, but we do see some.

Some continued.

Soft consumer demand outside of our.

Decisioning adjustments.

Okay perfect. That's helpful. That's all I had thank you.

Thank you I'm showing no additional questions in the queue at this time I would like to turn the conference back over to management for any closing remarks.

Thank you I'd like to thank you again for joining us this morning and for your interest in Prague Holdings.

Our teams did a great job getting us off to a strong start for the year, we feel good about the positioning of our portfolio and we're making the right investments in people and technology to further our three pillar strategy of grow enhance and expand.

And we look forward to updating you on our progress next quarter and we hope you have a great day.

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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Good day, ladies and gentlemen, and thank you for standing by welcome to the <unk> Holdings first quarter 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 this session you will need to press star one one on your telephone keypad.

At this time I would like to turn the conference over to Mr. John Baugh, Vice President of Investor Relations. Mr. <unk> you may begin.

Thank you and good morning, everyone welcome to the product Holdings first quarter 2023 earnings call.

Joining me. This morning are Steve Michaels product Holdings, President and Chief Executive Officer, and Bryan Garner, our Chief Financial Officer.

Many of you have already seen a copy of our earnings release issued this morning, which is available on our Investor Relations website.

<unk> Dot product holdings Dot com.

During this call certain statements, we make will be forward looking including comments regarding our expectations related to the range of 2023 write off resulting from our lease decisioning posture.

Our GMB.

Gross lease assets balance.

Levels of 90 day buyouts in future periods.

The strength of our balance sheet, and our capital allocation priorities and our revised outlook for the 2023 full year as well as our outlook for the second quarter of 2023.

I want to call your attention to our safe Harbor provision for forward looking statements that can be found at the end of the earnings press release that we issued earlier this morning.

That safe Harbor provision identifies risks that may cause actual results to differ materially from the expectations discussed in our forward looking statements.

There are additional risks that can be found in our annual report on Form 10-K for the year ended December 31, 2022, which we encourage you to read.

Listeners are cautioned not to place undue emphasis on forward looking statements we make today.

And we undertake no obligation to update any such statements.

On today's call, we will be referring to certain non-GAAP financial measures, including adjusted EBITDA and non-GAAP EPS, which have been adjusted for certain items, which may affect the comparability of our performance with other companies.

These non-GAAP measures are detailed in the reconciliation tables included with our earnings release.

The company believes that these non-GAAP financial measures provide meaningful insight into the company's operational performance and cash flows and provides these measures to investors to help facilitate comparisons of operating results with prior periods and to assist them in understanding the company's ongoing operational performance.

With that I would like to turn the call over to Steve Michaels Holdings, President and Chief Executive Officer, Steve.

Thank you John and good morning, everyone.

I appreciate you joining us as we report our first quarter results.

Share our thoughts on a few important Q2 metrics and provide an update on our 2023 full year financial outlook.

We had an excellent first quarter meeting our expectations for <unk> net revenues.

We also materially exceeded our earnings expectations due to lower 90 day buyouts.

Better than expected customer behavior payment behavior and continued portfolio management.

The last 36 months have presented unprecedented challenges, but I am proud of our team's efforts in overcoming these obstacles to deliver such strong results.

Our actions to improve portfolio performance and right size cost in Q2 of last year continue to benefit us as evidenced by our year over year gross margin expansion.

Improved write offs were 6% and SG&A leverage.

Despite consolidated revenues declining 8%.

<unk> grew our adjusted EBITDA by $25 million or 39% for a 13, 7% margin.

And our non-GAAP EPS by <unk> 94, 7% as compared to the first quarter of 2022.

This great start to the year has led us to significantly raise our full year earnings outlook.

While we were pleased with our strong first quarter results. There were factors contributing to our outperformance that may not carry forward, which Brian will discuss in more detail.

Phil our first quarter demonstrates our ability to manage our business with healthy returns despite persistent macroeconomic backdrop of inflationary pressures economic instability and strained customer liquidity.

We remain cautiously optimistic about our portfolio health and gross margin, while we are prepared to optimize our decisioning to shifts in the economic environment. We believe that our current decisioning positions us to deliver another year within our targeted annual 6% to 8% write off range, which is a key goal for us.

Turning to our <unk> the double digit declines over the past three quarters are largely a byproduct of hydro decisioning, we implemented in Q2 of last year.

We believe that those decision changes have accounted for approximately two thirds of the pressure we have experienced in <unk> over the past three quarters.

In terms of G&A outlook, we expect our second quarter <unk> to decline at a similar rate to Q1 on a year over year basis due to our current decisioning posture, though we expect these difficult comparisons to ease in the back half of the year as we fully lap the introduction of last year's decision changes.

Soft retail demand continues for big ticket consumer durables, and many of our leesville product categories with data showing that this slowing demand is primarily due to the our consumer base redirecting more of their income to essentials in response to liquidity pressures.

We have seen no indicators, leading us to assume that retail sales will materially rebound through the balance of 2023.

We have very recently began to see evidence that credit providers above us are starting to tighten their underwriting.

The recent challenges in the banking sector that developed late in Q1 further speeds and the likelihood that credit providers will increasingly look to restrict the level of funding that fueled consumer borrowing for most of the past decade.

Delinquencies that we track for prime lenders are moving higher, albeit at many cases still below pre pandemic levels.

While we believe the credit supply is becoming more strict and there may be some delay as to when it will impact consumers.

Because it is still too early to predict the timing of this potential tailwind for our business, we have not assumed any benefit to our <unk> for the balance of 2023.

We continue to closely track the overall quality of our applicant pools and only very recently have we started to see improvements in the top quintile.

Moving on to profitability, we expect to maintain our strong portfolio performance and our ability to deliver healthy margins in our core leasing business. Despite the outlook for our revenues to decline in near term.

The tighter decisioning posture, we took in Q2 of last year to help the portfolio recovered with leases originated in the second half of the year performing on par with pre pandemic levels.

Because of our short duration portfolio leases originated in the first half of 2022 now represent an immaterial portion of our remaining active leases.

In February we elaborated on our three key strategic pillars grow enhance and expand.

We believe our strong profitability and balance sheet will allow us to continue to make selective growth investments that position us to capitalize on market share gains in the near term, while capturing more of our addressable market in the long term.

For example, those investments will allow us to continue to build and enhance our technologies for an evolving consumer that we know better than anyone after more than 20 years as a <unk> leader.

Today, roughly two thirds of our customers are millennials or Gen Z group.

Groups that have shown a more omnichannel approach vacillating between online and in store when researching and making key purchases.

We also know these demographics interact with their personal finances definitely than previous generations.

Adopting emerging products and technologies as part of their personal financial solutions.

As a result, todays consumers have come to expect more flexibility and control over their payment options, especially for larger ticket items.

We continue to address this demand by enhancing and developing products that offer a more frictionless omnichannel customer journey, while simultaneously, providing consumers with the educational tools price discovery and disclosure transparency they need to help them make the best and most informed choices.

We also continue to invest in further integration with existing retail partners, while converting new lease to own pipeline opportunities. As we believe these actions will benefit all stakeholders long term, even with the challenging revenue backdrop in 2023.

E Commerce integrations with new and existing partners remain a key focus.

And the pace of our efforts in this area has accelerated as we continue to enhance and innovate technologies that offer retailers flexible customizable and secure ways to add <unk> to their online checkouts.

While E Commerce <unk> in Q1 was down year over year decline was less than what we saw for comparable in store results and e-commerce as a percentage of total progressive leasing GMB continued to grow coming in 100 basis points higher than the same period last year.

Additional key technology initiatives that were completed within the quarter include enhancements to decrease the time it takes customers to complete an LBO transaction.

Optimizations to the customer and retailer experience.

And updates the payment and lease systems.

While Brian will provide more detail on the upward revision to our earnings outlook for the year I'd like to summarize a few key themes.

Our Q1 performance was stronger than we expected from a margin perspective, driven by materially low 90 day, buyouts and better than expected customer payment behavior.

Revenue in March from 90 day buyouts was at a historic low, which we believe was driven by the average tax refund decrease of approximately 10% year over year.

While this was a tailwind for Q1 gross margin it will be important to monitor whether the low by outperformance continues and how the portfolio performs with a lower percentage of customers executing buyout options.

Should we see normal delinquency trends in the lease pools for the remainder of 2023, the lower 90 day buyout, we experienced should be a positive impact to our financial results.

However, should the decline in 90 day buyouts proved to be a leading indicator of stress on our customers and portfolio performance, we may experience higher delinquencies, which could prompt us to tighten our decision.

On the topic of capital allocation, we purchased $36 $5 million in shares during the first quarter, representing 3% of our outstanding stock.

We also generated $157 $4 billion in cash flow from operations further illustrating our ability to show financial strength in an unstable economic environment.

Our capital allocation priorities remain unchanged and we expect to continue to fund growth.

Look for strategic M&A opportunities and return excess cash to shareholders primarily through share repurchases.

To close I want to emphasize that our strong Q1 was a direct result of the hard work and strategic efforts that our teams have put in over the past several quarters, our mission to create a better today and unlock the possibilities of tomorrow through financial empowerment.

The core of how we operate and we will continue to grow enhance and expand to help improve the lives of our customers.

I'll now turn the call over to our CFO Bryan Garner for more details on our first quarter results and 2023 financial outlook.

Brian .

Thank you, Steve and good morning, everyone.

I'd like to start by thanking our teams retail partners and customers for helping us deliver a strong quarter to start the year.

Our first quarter results highlight the resilience of our business model and teams and overcoming the macroeconomic headwinds.

Including inflationary pressures and liquidity strains experienced by our consumer.

Q1, 2023, consolidated revenues declined 8% $655 million.

Consolidated adjusted EBITDA increased approximately 39% to $89 7 million in Q1 of 2023 from $64 6 million in Q1 of 2022 outperforming our expectations.

Our better than expected consolidated results were primarily driven by margin improvement and lower write offs at progressive leasing segment.

non-GAAP diluted EPS for Q1 of 2023 increased to $1 11.

Growing 94, 7% from 57 in Q1 of 2022.

Liquidity pressure on our customer partially driven by tax refund checks were approximately 10% lower on average compared to last year, resulting in a record low 90 day buyout activity in Q1, which is a headwind to current period revenue, but a benefit to gross margins.

Additionally, we experienced lower than expected charge offs in the quarter due to a tightening efforts in Q2 of last year, which resulted in better payment performance.

Driving higher margins and increased profitability.

For Progressive leasing segment, GMP decreased 17% to $418 7 million in Q1 of 2023 as compared to $504 5 million in Q1 of 2022, largely driven by our current Decisioning posture continued weak retail traffic.

And the double digit percentage decline in tax refunds.

Revenue in the period declined 8% year over year.

Driven by lower gross leased asset balance heading into Q1 software <unk> in the quarter and a material decline in revenue from 90 day buyouts, partially offset by improved customer payment behavior.

However, this segment's Q1 gross margins improved 340 basis points year over year to 31, 7%.

Primarily due to the 90 day buyout activity in Q1, the reach record lows.

And last year's decision actions that improve portfolio yield.

While our 90 day buyout results was significantly lower gross margin than an average lease it remains more beneficial to gross margin the most charge offs.

We still expect 90 day buyout activity to be lower year over year for the remainder of 2023, although the variance is expected to narrow over the course of the year.

Progressive lesions SG&A expense as a percentage of revenue declined to 11, 9% in Q1 of 2023 for 12, 4% in Q1 of 2022, while SG&A expense decreased $10 million year over year, primarily due to the cost actions in Q2 of last year.

For Russell, we shouldn't Brian off of $38 4 million or 6% of revenues in Q1 down from seven 3% in the previous year's period.

I continue to be encouraged by trends, we've seen thus far in 2023, and we remain on track to end the year within our targeted annual right offerings.

Looking at our balance sheet, we ended the quarter with $249 8 million in cash and gross debt of $600 million, resulting in a net leverage ratio of 124 times, our trailing 12 months adjusted EBITDA.

In the first quarter, we purchased 146 million shares of our common stock at a weighted average price of $25 and have $308 million remaining under our previously authorized $1 billion share repurchase program.

I would now like to touch on a few key aspects of our Q2 and revised full year 2023 outlook.

Which will provided in this morning's earnings release.

Despite our strong first quarter results for adjusted EBITDA, We continue to experience headwinds unexpected GMB due to economic and liquidity pressures felt by our consumers.

As Steve mentioned, we expect the year over year percentage decline of our second quarter <unk> to be roughly in line with our Q1 rate.

This decline should lessen in the second half of 2023, as we compare against lower <unk> year over year due to the tightening decisions we implemented last year.

Our gross leased asset balance, which is a key driver of future period revenue entered 2020, 353% lower year over year. We ended the first quarter eight 3% lower year over year.

This growth leased asset balance will likely decline further.

During the second quarter of 2023 due to the CMV decline, serving as a headwind to revenues in future periods.

Our base case for the remainder of the year considers current consumer trends, but does not assume further economic downturn are.

A materially negative impact on the employment of our consumers for a material benefit from tightening by providers above us and crest stack.

Despite revenue headwinds, we anticipate that our lease portfolio performance and low 90 day buyout rates will continue to derive progressive leasing margin improvement year over year.

As a result, we are raising our full year earnings outlook slightly decreasing our expected revenues.

Our revised consolidated outlook for 2023, we expect revenue in the range of two 3% to $3 75 billion.

Adjusted EBITDA to be in the range of 235 to 255 million.

And non-GAAP EPS in the range of $2 50 to $2 77.

This outlook assumes a difficult operating environment with continued soft demand for leasable consumer durable goods no material changes in the Companys Decisioning posture.

Effective tax rate for non-GAAP EPS of approximately 28% and no impact from additional share repurchases.

Finally, I would like to address how we're thinking about the strength of the first quarter and our increased earnings outlook as they pertain to the remainder of the year.

While we are encouraged by the strong financial results. We achieved in Q1, we are cautious about the continuing headwinds on GMB and expect margin pressures as we move throughout the year.

Soft consumer demand trends, we observe exiting Q1 and into April have caused us to adjust downward our expectations for <unk> and revenue.

Our revised outlook assumes adjusted EBITDA margins for the remainder of the year that are lower than Q1 due to the dissipation of some of the 90 day buyout dynamic benefited margins in Q1, an increase in run rate for SG&A costs due to wage inflation and specific initiatives targeting key technology platforms.

And full year write offs within our targeted annual 60% range.

In short we optimistic about 2023 prospects following our strong start of the year and we remain committed to the disciplined decisioning and other strategic efforts that would help us achieve those results as we look to capitalize on the positive momentum gained from our Q1 performance.

I will now turn the call back over to the operator for the Q&A portion of the call operator.

Ladies and gentlemen, if you have a question or comment at this time. Please press star one one on your telephone keypad.

If your question has been answered or you wish to remove yourself from the queue simply press star one again.

Again, ladies and gentlemen, if you have a question or comment at this time. Please press star one one on your telephone keypad.

Please standby, while we compile the Q&A roster.

Our first question or comment comes from the line of Kyle Joseph from Jefferies. Mr. Joseph Your line is open.

Yes.

Hey, good morning, guys. Thanks for thanks for taking my question.

Navigating a difficult environment.

Obviously on the credit side of things a lot of moving parts you guys have heard your underwriting changes implemented last year.

Lower tax refunds this year, but just trying to get a sense for the health of the underlying consumer obviously their employee.

The painting elevated expenses.

Kind of adapting to this inflationary environment hasnt been that occur.

On a year now, but just kind of a long answer some of the dynamics that played out in the quarter in getting some of the moving parts.

Yes. Thanks, Kyle Good morning, this is Steve.

Certainly a lot there.

We did as you mentioned make that our decisioning changes throughout Q2 of last year and the portfolio has.

Responded nicely and is expected to those changes underlying that is the consumers and the customers that we were approving.

Funded GMB.

Performing per our expectations, which as you know we track against the pre pandemic pool performance.

Because we have history that those pools delivered our portfolio performance within our targeted targeted ranges. So throughout the back half of 'twenty two we saw.

That performance in the portfolio turnover due to our short duration leases.

It was reflected in the metrics that we provide externally Q1 was an interesting.

Interesting story right we saw.

From a portfolio performance standpoint similar.

As expected, although slightly better than expected from a customer payment behavior.

Standpoint.

The wildcard was the tax refund what we believe was driven by the tax refund season, we expected it to be.

Lower and as many of you all report various freight fairly frequently it did come in lower.

We built that into our original outlook as it related to some some pressure on <unk> just kind of on the origination side, what we saw.

And it's not a perfect read through but it's our.

Just our experience and our history dictates us leaves us to believe that this driver is that.

Those lower refunds were the primary driver of a materially lower 90 day buyout activity by our consumer.

And as Brian and I, both said in our prepared remarks that.

That resulted in higher.

Gross margin.

Then we were anticipating in that and that we have seen in previous.

Tax refunds seasons.

The question that is remains to play out as.

Why that.

The NIAID buyouts.

React so materially lower.

It.

Due to some new set of stress on the consumer that caused them to not have the liquidity to do the 90 day buyout.

And while we're in this kind of interesting.

Situation right now, where we had lower 90 day buyouts, which was a tailwind to margin.

Yet our delinquency picture is still.

In good shape.

Will that persist.

We need a few more cycles of data they come through to convince us that.

That will persist because we believe that nave to think that someone who did a 90 day or would have been a 90 day. It wasn't able to is just going to magically march on to be a false or full full margin lease there is theres going to be some other stress and dispositions throughout that customer's life.

Cycle.

Do the 90 day, so that remains to play out so it's still a bit of a mixed bag. We had strong performance in Q1.

If that persists, we're going to have some tailwind to the margin throughout the balance of the year.

We're anticipating that debt.

Payment performance outperformance to dissipate.

That's really helpful clarification, and then just one follow up for me.

I know you guys talked a lot a lot of retail partners and just trying to get a sense for.

I guess first kind of their take in terms of potential for demand recovery and I think we have any precedent and you have to go back and look at that the $7 million and see how long it set for kind of concern consumer durables to recover.

And then.

More challenging environment have you seen a greater desire to add the product from new retail clinics.

Okay.

Yes, I've been in the business a lot of that but not in <unk>, but.

Yes, we definitely thought to our retailers very frequently as you can imagine and it's one of the benefits of us having the large enterprise retail partners. They have sophisticated shops, and obviously, we're not going to.

Out them on what that what they say and what they tell us, but it's a challenging environment out there.

Brian said in his prepared remarks, what we saw.

Some weakness really exiting March and into April .

I would not make a direct correlation between <unk> and the banking crisis to our consumer because I'm not sure. They are impacted by that but something from a animal spirits slash consumer confidence happen and we saw some weakness coming out of out of Q1 and into the first few weeks. So the April so as.

As we alluded to we've got the lapping of our Decisioning changes here towards the end of Q2, so that'll be a removal of a headwind.

But as it continues to be a challenging demand environment for our retailers and then ultimately for us.

Yes.

Got it thanks very much for answering my questions.

Thank you our next question or comment comes from the line of Brad Thomas from Keybanc.

Thomas Your line is open.

Thanks, Good morning.

Nice execution here, let me add my.

Kind of in that very small.

Wanted to ask first about the gross margin outlook.

Even though they were lower right Glenn.

Year over year.

And year over year that pretty steadily Biosimilar <unk> is usually the big quarter for that.

So as I look out.

Balance of the year. It does look like there's a pretty good outlook here for gross margin. Maybe you can just talk a little bit more about how youre thinking about that thanks.

Brian I can take that.

Yes, I think thats, driven primarily by our assumptions around.

How these customers behave those that did not.

Take the 90 day here in Q1, and ultimately to dispositions as they work towards we expect to be a more favorable mix based upon what we're seeing thus far.

Our delinquency profile is sitting or more optimistic around those customers, who elected not to do a 90 day to go into a.

An outcome that is favorable to gross margins. So we've incorporated that into our R.

For our guidance and Thats, what youre seeing in terms of the.

I think the trends that are reflected in the favorable gross margin trends going forward.

We'll see what happens obviously this is the model is very sensitive to consumer behavior and what they what they would like to be with based on everything we're seeing right now delinquencies are.

Holding I would say.

Within our balanced.

That's really helpful. Brian .

And then Steve I'd, just be curious a little more color.

We're talking to your.

Retail company customers.

Many of which are dealing with declines in sales right now coming off a tough pandemic comparisons I guess, what do they need most from progressive here right now and how do you think about maybe the opportunity to get more share of wallet with time.

Yes, Thanks, Brad.

I mean it continue.

In 2022, it continues into this year, our partnering well with the retailers that are currently in our in our preferred partner network.

And then reaching as we've discussed before for more tools in the tool belt and so what they need from US obviously is for us.

Drive more traffic to them and also save more sales and convert more conversant with traffic.

Ultimately increase there.

Their sales and return on AD spend and the way we can do that is by making these payment types and progressive more.

Visible within their environment, whether it's on the site or in the store.

These year for the consumer to do business.

With progressive.

Also increased training efforts for the retail sales associates.

The retailers' in store environment.

So all of the whether it be point of purchase materials for awareness, whether it be direct.

Sure.

Co branded marketing with progressive and the retailer.

Whether it would be.

Our partner weaker PRC weak as we call it where we have daily deals.

Sponsored by various.

Partners.

Those those things are things that we can do that may not take.

A lot of tech lift and then on the other end of the spectrum.

<unk> scale, I should say or other things like <unk>.

Waterfalls.

Transactional E comm carts.

Better placement on product display pages online and those things were.

We're also seeing a lot of appetite from our retailers too.

So to partner with us in and pull those levers to help.

Dave.

You can help save more sales for them. So we're encouraged by the partnership that we've had and we believe that these this set of this environment will allow us to come out of this environment with a with.

Much deeper integrations with our existing partners and kind of be a springboard for growth.

That underlying demand returns.

That's great. Thanks, Thanks, so much.

Thank you.

Our next question or comment comes from the line of Anthony.

<unk> from loop capital Mr. <unk> Your line is open.

And great job on the pronunciation of my last name.

No.

Yes. My first question is so you talked about the fact that when you start tightening in the back half of last year and given the.

Short duration of your of your leases.

Are those sort of pre tightening leases are pretty much gone at this point so would that imply then that your.

Lease merchandise write off rate for the remainder of this year I know youre, saying it could be in that 6% to 8% range, but that would imply to me that it should be.

Everything else being equal.

Towards the low end of that range right.

I guess I am I think about that the right way.

I mean, I guess, what I would point you towards.

Thanks, Brian .

Is what we've been targeting towards in our Decisioning efforts is really trying to get back to pre prepay.

Pre pandemic level of performance in terms of our last point of normal.

And as you saw during those periods, we were kind of in the midpoint of about 6% to 8% range or so.

Really that's what our that's our target.

I don't want to I don't over promise on the low end here. We saw here, we saw base, 6% year Q1.

Which is great.

But seasonally what you would expect.

As.

Sequential step up in Q2 and Q3, just as you get further away from tax season.

<unk> experience.

Perhaps just more more strained on the consumer further way you get some taxes in Q4 tends to be the lowest write off rates seasonally.

So I would just I would just cost me about taken taking Q1.

Stating that as a run rate and making sure. We're incorporate the seasonality there again, we're really trying to get back to within.

Within the range of reasonableness that we saw pre pandemic.

Got it fair enough.

And then just a quick follow up.

Obviously, you increased your earnings guidance and GMB will.

Main pressured for the reasons that you mentioned, so that would imply that and I know you didn't give free cash flow guidance that would imply that you'll have incredibly strong free cash flow this year and youre leverages at one two times. So I guess, how should we think about capital allocation for the remainder of this year I mean is that a reasonable assumption that youll I.

I know youre not buildings for guidance, but is that a reasonable assumption that you could at least potentially step up share repurchases given those free cash flow dynamics.

Yeah Anthony.

I mean E mail.

The variables we.

We talked about our capital allocation, we're able to fund the growth was internally generated cash we our history has shown that.

We favor or repurchases of our stock.

As a way to return capital to shareholders.

We will have.

Good free cash flow generation. This year. The reminder, there is a little bit of seasonality on that as well, where we will generate we will likely generate more than 100% of our annual free cash flow in the first six months of the year, just because of the seasonality of <unk>, even in a declining <unk> environment. The dollars of G&A will be higher.

<unk>.

In Q4.

And we also look at that through the lens of our net leverage ratio.

We're in a comfort comfortable spot at 124 times as of 331, when we look at that over over the course of a 12 month period.

It's probably going to pick up a little bit just.

Because of the use of cash in the back half.

For <unk> funding as well as some seasonality on the.

On the EBITDA, but having said all of that.

Should the equity remain in these in these price ranges that we deem attractive that has been our preferred vehicle I would expect it to continue to be.

Got it thank you good.

Good luck for the rest of the year.

Thank you.

Thank you.

Our next question or comment comes from the line of Bobby Griffin from Raymond James Mr. Griffin. Your line is open.

Everybody. Thanks for taking my questions I guess, Steve I wanted to first circle back on on <unk> I think in your prepared remarks, you mentioned that two thirds of the decline was driven by your internal leasing decision I wanted to maybe see if you could unpack that a little does that mean youre seeing apps flow and kind of quote unquote demand to use the products stronger than what the <unk>.

<unk> trends that we're seeing on a reported basis or how exactly are you kind of getting at that that figure.

Yes, I mean, we do we analyze all of our all of our channel metrics top funnel mid funnel above the funnel.

<unk>, whether it be online in store, we even try and parse out whether it's in terms of on slowed while they're in the store and we analyze all of those those outflows. So we can look at our apps by channel.

And then kind of just follow it down the funnel and say, okay, well youre approval rate is X, whereas same period last year. It was why <unk>.

Conversion is done.

To that end.

And average ticket is that has changed this or that so that's how we get to kind of the.

The rough two thirds analysis of the <unk> pressure.

It was from effectively in simplistic terms, just lower approval rates.

There's a lot of moving parts as was implied in your question, but that is the driving factor and so as we.

Turning to page into the back half of this year, we will be able to.

On a neutral footing, all things being equal as it relates to the decisioning and so there'll be more of a.

On the App and underlying retail demand story.

But as I as I've talked about before we stand ready to potentially.

Loosen approval rates, if the data warrant or if we see additional stress in the data.

Also have a series of adjustments at the ready if we had the Titan. Additionally, but all other things being equal that headwind will will go away in the back half.

Okay, Yeah, and I guess that was going to be my second part of the question I guess with that that would imply that there is a greater demand and I guess, we can approve at during the current economic environment for the product, but I guess, what would you want to see economically to may be start to losing a tiny bit to go after that delta that gap between your app flow and what the <unk> performance AD.

Is it loss ratios continue to hang out here at the bottom of the range of 6% or is it some type of payment trends or some type of category performance I guess like what would you like to see where we can kind of maybe get a view of when there could be maybe add.

Potentially loosen.

The dnb.

Yes.

And ultimately the loss rates are over time are a good indicator, but in the and in the shorter term. There is components of that Theres reserve buildup on reserve release versus underlying lease performance and obviously the reserves are built based on our expectations of how the leases are going to perform but we're tracking delinquencies against.

Pre pandemic buckets are.

Or should say lease pools.

We're tracking all.

All of the indicators that you would think we're tracking.

Which bounces in first phase the first payment defaults and all kinds of things.

If.

If you were just looking in isolation on March 15th at our lease pools, you would say, okay, it's time to loosen but.

There is.

There is more nuance to it than that because as we as I talked about in Kyle's question.

<unk>.

We don't want to natively create another pig going through the Python, if there's liquidity stress out there for the consumer.

Because of.

Something happened why they werent.

Executing those 90 day buyouts and Goldilocks as Goldilocks situations don't last forever. So we're defensively postured, we think thats appropriate, but as I've said.

Yes.

It sounds like you won't you want us to be doing we're looking for opportunities to loosen and if the data.

Warrant that and prove to us thats the appropriate decision.

Then I stand ready to do it.

And so we're just going to have to get a few more cycles of data in the door before the team feels comfortable doing that.

Okay, Yes, that's the answer I was looking for yes, it makes perfect sense and I guess lastly, just.

Brian on cash Opex.

With the <unk> implied a cash opex is probably going to step up sequentially from the <unk> levels. Despite that I got the revenue coming down a little bit on that some of the margin pressure.

Sequentially.

Just because from a cash flow from operations perspective.

Yes, I guess I.

I look at cash Opex I, just look at Opex ex write offs.

Got it got it.

Yeah, Yeah, alright, guys I.

I think thats, I think theres going to be a.

A step up in SG&A as a percentage of revenue as we move throughout the year.

A couple of reasons for that there is there is wage inflation that obviously, we're we're dealing with and there is also an element as you fill those topline pressures theres a deleverage aspect that.

That happens with respect to that ratio and we are while we are highly variable and our cost structure. We do have some fixed costs and that will start to that will start to reflect in that metric. So yes to answer your question I think there's going to be.

I would say.

Moderate increase from Q1 run rate levels.

Okay I appreciate all the details and congrats on the on the upside this quarter and best of luck going forward.

Thanks Robby.

Thank you again, ladies and gentlemen, if you have a question or comment at this time. Please press star one one on your telephone keypad.

Our next question or comment comes from the line of Jason Haas from Bank of America. Mr. <unk>. Your line is open.

Hey, great good morning, and thanks for taking my questions.

Curious to know what.

What extent do you think the current results are benefiting.

From any sort of credit tightening or trade down.

Are you not really seeing a benefit yet and thats potentially to come even though I know it's not included in the guidance.

Yes, Jason.

Okay.

Certainly I don't believe the Q1 results.

We're benefited by by credit tightening.

In the prepared remarks, we said and this is really kind of.

Really recently developing news, but we have started to see the beginnings of.

What we think is tightening.

Above us in the stack, we look at it very.

Very precisely whether it would be by vertical or by region or by retailer or by actually primary lender.

As you know the secondary lenders near Prime lenders have been tightening for some time now we have not seen it happening in.

And the prime lenders only in the very last couple of weeks that we've seen evidence that it might it might be happening.

But theres certainly a delay in.

And what that means for four <unk> trends or even app trends for us so.

<unk>.

It's encouraging because as I've as I've admitted on previous calls I was expecting it to happen.

Quarters ago.

Saw no evidence of it the fact that we're starting to see some evidence is kind of a stay tuned comment and as you said and we said in our prepared remarks, we have not built anything into the back half or really the full year <unk> expectations from a tailwind from that and so to the extent it continues to.

The play out that way it could be could be a tailwind for us.

Okay.

Got it and then over the next few months here, we should start to lap some of the highest gas prices from last year. I was curious is that a factor that impacts payment rates I don't know if its something you are able to see a correlation there in your data so maybe I could potentially be a benefit but I'm just not sure how impactful or something like that is for your business.

Well I mean.

Definitely say, it's not a negative it would be a benefit.

Difficult to parse out.

With all the moving parts that have happened during the pandemic like what was the driver of this or that certainly we.

Note that our customer was more impacted by the inflationary pressures across food energy and shelter than the than the prime customer.

And to the extent there is an easing there that's a good thing for us, especially since <unk>.

Employment is still strong and there has been some some wage gains that could be.

That will that will be a good thing for us it's difficult to tell.

Tell how much is driven by by gas versus.

Versus price of eggs or something like that but we'll.

We will take it.

It continues to show in the portfolio performance.

Yes.

And strong gross margin.

Got it thank you.

Thank you.

Our next question or comment comes from the line of.

Can you take from Stephens Mr. <unk> Your line is open.

Great. Thanks for taking my question most of my questions have been asked.

One question on just trying to.

Dissect parse out consumer demand.

Understand that the GMB guidance, maybe is kind of a weaker through the year, but I try to separate out.

How much of that comes from your tight underwriting posture versus <unk>.

Consumer demand may be.

Picking up maybe there is.

More need for the product.

So I don't know if theres, a metric like application volume or something like that so we can kind of see.

How much demand might be moving over time. Thank you.

Yes, I would just I guess.

Point, you back to our comments about the kind of mid teens.

A decline in <unk> that we've seen over the last three ish quarters.

We believe is about two thirds of that is driven by.

By our own decisioning necessary decisioning adjustments.

So that would lead you to believe that there is another third of that.

Kind of mid single digits driven by lower.

Demand for the products.

That could be offset by.

Moving further away from the large purchases in the demand pull forward during the during the pandemic it could be.

Offset by break fixed cycles, as as things need to be replaced or laptops become obsolete.

So we would look forward to those trends, but we do see some.

Some continued.

Soft consumer demand outside of our.

Decisioning adjustments.

Okay perfect. That's helpful. That's all I had thank you.

Thank you I'm showing no additional questions in the queue at this time I would like to turn the conference back over to management for any closing remarks.

Thank you I'd like to thank you again for joining us this morning and for your interest in Prague Holdings.

Our teams did a great job getting us off to a strong start for the year, we feel good about the positioning of our portfolio and we're making the right investments in people and technology to further our three pillar strategy of grow enhance and expand.

And we look forward to updating you on our progress next quarter and we hope you have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day.