Q2 2023 PROG Holdings Inc Earnings Call

July 26, 2023

Thank you for standing by and welcome to the problem Holdings second quarter 2023 earnings Conference call. At this time all participants are in listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone.

Move yourself from the queue simply press Star one again as a reminder, today's program is being recorded and now I'd like to introduce your host for today's program Mr. John <unk>, Vice President Investor Relations. Please go ahead Sir.

And good morning, everyone.

Welcome to the Prague Holdings second quarter 2023 earnings call.

Joining me this morning are Steve Michaels, Prague, Holdings', President and Chief Executive Officer.

Bryan Garner our Chief Financial Officer.

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

During this call.

Certain statements, we make will be forward looking including comments regarding <unk> performance in lease merchandise write offs in future periods.

Shareholder return over time.

Our updated 2023 full year outlook.

And our outlook for the third quarter of 2023.

I wanted to call your attention to our safe Harbor provision for forward looking statements.

So it 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.

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

Thank you John and good morning, everyone. I appreciate you being with US today as we discuss our second quarter results.

Share our thoughts on a few important Q3 metrics and provide an update on our full year 2023 financial outlook.

We had another excellent quarter with Q2, <unk> slightly beating our expectations.

Net revenues above the high end of our expectations and adjusted EBITDA well above the range. We provided at the end of April .

I am proud of our team's performance as they execute at a high level and what remains a challenging retail environment.

The trend of fewer customers choosing to utilize 90 day buyout options and a strong portfolio performance that we discussed in Q1 continued into the second quarter.

As you may have seen in this morning's earnings release, we are incorporating our year to date outperformance and reflecting these favorable trends and our increased outlook for 2023.

The strong customer payment behavior, we experienced in Q2 as evidenced by our year over year 260 basis point gross margin expansion.

Prove write offs of seven 1% in.

And adjusted EBITDA growth of $22 8 million or 43, 7%, resulting in a 12, 7% margin.

Our write offs for the first half of 2023 or six 5% keeping us on track to deliver another year within our targeted annual range of 6% to 8%.

The decline in <unk> was largely due to our implementation of tighter decisioning in Q2 last year, which we believe accounted for approximately two thirds of our G&P decline.

As we look to July trends in our Q3 expectations, we anticipate the difficult year over year GMB comparisons to ease as we fully lap the introduction of last year's tighter decision.

We have yet to see any indicators, leading us to assume that retail sales will materially rebound through the balance of 2023.

So we have not assumed any benefit in the revised outlook. We provided this morning, we believe that the current macro environment will result in tightening of lending practices from credit providers above us in the stack.

Additionally, past experience demonstrates that consumers benefit from our flexible payment options during periods of sustained liquidity pressures.

Our teams are working well with their counterparts at our retail partners to find GMB growth opportunities, including promotions point of sale materials and tech integrations that improve application flows and conversion rates.

We're on track to grow our balance of share with several large retail partners in the second half of this year through new E Commerce integrations.

Our three pillared strategy to grow enhance and expand remains focused on sustainable growth rather than short term gains.

Grow emphasizes dedication to our business development efforts.

In a sluggish retail climate, our goal is to broad new and existing retail partnerships positioning ourselves for significant growth once conditions improve.

We remain focused on regaining growth through sustainable strategies, including E Commerce marketing and technology innovations along with new retailer pipeline conversion.

Our efforts to increase our e-commerce business are showing solid progress.

We added nearly four times the number of new partners in the first half of 2023, and we did in the same period last year.

The channel consistently contributes more than 15% of our total GMB.

These new partners, along with upcoming E Commerce integrations with several existing retailers should contribute to our long term <unk> growth.

We are also planning second half promotions and cross marketing with many of our key retailers in support of <unk>.

One specific example of this is last week's Prague Perks week, where we provide daily offers from select retail partners through our large database of current and previous customers.

We have run this promotion several times over the last two years with much success and retail partners have enjoyed the incremental business program drives.

This is just one example of the benefit of being part of the <unk>.

<unk> preferred partner network.

Our high customer retention illustrated by consistent repeat rates of over 50% is a testament to our customers affinity for our leasing products and contributes to a higher than average lifetime value to customer acquisition cost ratio.

Lastly, our pursuit of new retail opportunities remains a key component of our strategy for long term growth, especially in the current challenging retail environment that may motivate more retailers to seek avenues for revenue enhancement.

We have added a number of regional accounts in the quarter and remain an ongoing discussions with many recognizable regional and national brands about the value progressive leasing can bring to their business and customers.

We're confident in our proven ability to increase share balance with existing retailers, while converting retailers without a virtual lease to own payment option and will continue to build the relationships and technologies that will enable us to capture more of our industries $30 billion to $40 billion addressable market.

Under enhance our technology initiatives aimed at improving the retailer experience and offering customers more frictionless omnichannel journey are progressing nicely.

And we believe those initiatives will bolster our <unk> performance in future periods.

Our tech roadmap is focused on three core areas.

Improving our customer centric flexible lease platform.

Providing self service tools to enable a superior retailer experience, while helping the customer make the best and most informed choices.

And offering greater personalization for a streamline shopping and Decisioning experience.

We are also developing products that we believe will boost our direct to consumer business and give retail partners easier path to identify and convert potential <unk> customers.

We aim to enhance operating efficiency, while addressing technical debt and issue common in today's rapidly evolving technology landscape.

Lastly, our Prague Labs, R&D group is innovating ways to enhance customer service personalization and decisioning through generative AI.

As for expand in Q2, we announced a new product called build.

Our credit management tool designed to aid consumers in enhancing their credit scores.

Our leasing customers frequently expressed the desire to improve their credit profile.

<unk>, which is a blend of an installment loan in a secured savings account both issued by web bank can help to address this need while aiding in credit history and savings accumulation.

Build is a natural addition to our product suite, joining progressive leasing vive and four as inclusive and transparent financial products for consumers.

In addition to empowering our customers through their financial journey, we anticipate build will boost progressive leasing and vive volumes catering to potential customers currently not qualifying for leases or loans.

These pillars are underpinned by our robust financial health marked by strong profitability substantial free cash flow and a healthy net leverage position all of which we expect to continue going forward.

This financial strength enables us to invest in areas promoting future growth.

Turning to capital allocation, we have acquired over two 5 million shares of our outstanding common stock in the first six months of the year at an average price of $28 26 per share.

These purchases account for approximately 5% of our outstanding shares.

Since the company's spin transaction, two and a half years ago, we have reduced our share count by roughly one third.

Year to date, we have generated $205 million of cash flow from operations.

Closing the quarter with a cash balance of $253 million.

As a reminder, we typically generate the majority if not all of our operating cash flow in the first half of the calendar year, our seasonal pattern, we expect again in 2023.

Our capital allocation priorities remain unchanged and we expect to fund growth look for strategic M&A opportunities and return excess cash to shareholders primarily through share purchases.

While Brian will provide more detail on the upward revision to our outlook for the year I'd like to provide some high level thoughts.

Our first half earnings outperformed expectations due to tailwind that may not carry forward into the remainder of the year with the same magnitude.

Our updated outlook reflects ongoing challenges to consumer demand, resulting from the macro environment.

We expect that revenues in the second half of 2023 will show a mid to high single digit percentage decline as compared to the same period last year, primarily due to <unk> performance in the first half of the year, resulting in a smaller lease portfolio balance.

However, there is an easing in the difficult year over year <unk> comparison, as we lapped last year's Decisioning changes.

My summary is consistent with last quarters, our strong first half far exceeded earnings expectations and as a result of the hard work of our teams and strong customer payment behavior.

We have a proven track record of navigating through dynamic and challenging environments and.

And we will adjust as macro conditions evolve.

We believe our strong financial health and ongoing investments will drive compelling shareholder return over time.

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

Brian .

Thanks, Steve Let me start by summarizing our Q2 highlights.

For the second quarter row, we exceeded earnings expectations as we effectively managed our P&L in a highly uncertain environment.

I want to thank the teams for their perseverance in managing portfolio health and SG&A expenditures and a retail challenge environment and for the pursuit of sustainable long term growth opportunities.

During the quarter, our customer payment behavior remains strong as elevated portfolio yields contributed to increased gross margins in the period.

Similar to Q1, we saw fewer customers choosing to utilize 90 day purchase options yet our write offs remained within our targeted annual range.

As always we are actively managing portfolio performance as consumer behavior and lease outcomes changed.

Q2, consolidated revenue declined eight 7% year over year due to a lower portfolio balance entering the period.

However, revenue exceeded expectations driven by strong portfolio performance.

Consolidated adjusted EBITDA increased by 43, 7% to $75 million for $52 2 million in Q2 last year.

Our better than expected consolidated adjusted EBITDA results were primarily driven by a progressive leasing segments, lower SG&A lower write offs and stronger gross margins.

And a favorable SG&A was driven by our focus on operational efficiencies.

non-GAAP diluted EPS increased to <unk> 92 per share growing 76, 9% from 52 per share in Q2 of 2022.

We continue to demonstrate the resiliency of our business model and our capacity to adapt our revenue headwinds, while preserving margins and cash flow.

And I am extremely proud of our team's efforts to deliver these results.

For a progressive weakness segment <unk> decreased 14, 7% year over year, which was slightly better than our internal expectations.

We have improved the year over year <unk> comparison from a 17% decline in Q1, two a 14, 7% decline in Q2.

And believe we are trending to a mid single digit decline for Q3.

As Steve mentioned, we believe roughly two thirds of the negative <unk> comp in the first half is driven by the proactive steps, we took to tightened our decisioning and Q2 of 2022.

Which has improved our write offs and profitability.

Q2 revenue declined eight 9% and was impacted by a lower gross leased asset balance throughout the quarter ending the period down 10, 7% year over year as well as a decline in 90 day buyouts during the period, partially offset by improved portfolio yield.

However, similar to last quarter year over year gross margin in Q2 improved 260 basis points to 33%.

Primarily driven by strong customer payment behavior, and lower levels of 90 day buyouts as fewer customers elected to utilize the early buyout option.

These lower buyouts in the first half of the year translated into higher margin outcomes in Q2 as write offs remained at acceptable levels.

Our revised outlook anticipates 90 day buyout activity and write offs to follow a pre pandemic seasonal trends for the remainder of 2023, resulting in a slight decrease in gross margins versus the first half of 2023.

The rest of the week as SG&A expense in Q2 was $78 3 million a decrease of $3 6 million or four 4% compared to $81 9 million in the same quarter last year.

SG&A as a percentage of revenue increased slightly to 13, 6% compared to 13% in Q2 of 2022.

We expect that the remainder of the year SG&A as a percentage of revenues will be higher compared to the first half of 2023.

We will continue to operate efficiently through a challenging consumer demand environment, while balancing investment in key technology platforms marketing and business development.

Progressive leashes write offs were $41 million or seven 1% down from nine 8% in the previous year's period.

The sequential quarterly increase in write offs in the first half of 2023 was driven by seasonal trends, resulting in year to date write offs of six 5%.

We remain on track to end the year within our targeted annual write off range, 6% to 8%.

Moving to our balance sheet, we ended the quarter with $253 million of cash and gross debt of $600 million, resulting in a net leverage ratio of 114 times, our trailing 12 months adjusted EBITDA of $304 1 million.

In the second quarter, we purchased $1 1 million shares of our common stock at a weighted average price of $32 65 per share and have $265 $4 million remaining under our previously authorized $1 billion share repurchase program.

To summarize our outperformance to expectations in the first half of 2023, we actively manage the portfolio return.

While driving efficiencies in our cost structure and a shift we observed fewer customers choosing utilized 90 day buyout options resulted in higher gross margin.

I'd now like to touch on a few key aspects of our Q3 and our revised full year outlook.

For provided in this morning's earnings press release.

As a reminder, the guidance we provided on our Q1 earnings call in late April assumed headwinds on GMB with easing in the year over year comparisons starting in July .

The gross leased asset balance, which was a key driver of future period revenue was expected to decline further at the end of Q2.

Although we anticipated margin pressures as we move throughout the year, we assumed our lease portfolio performance and our low 90 day buyout rates would drive progressive leasing's margin to improve year over year.

We projected 90 day buyout activity to be lower year over year for the remainder of 2023, although the variance was expected to narrow compared to Q1 over the course of the year.

Our performance in the second quarter gives us reason to believe that <unk> is trending slightly better compared to what we expected in April .

In addition to our favorable year to date performance, we feel a higher degree of confidence in our portfolio performance going forward.

Lastly.

Although SG&A as a percentage of revenue will increase as we move through the remainder of 2003, we will evaluate the timing and return of our investments to align with revenue trends and future growth opportunities.

As a result, we are raising our full year revenue and earnings outlook.

We anticipate the Q3 <unk> year over year comparison to ease to a mid single digit decline as we lap last year's tightening.

Our revised consolidated outlook for 2023 includes revenues in the range of $2 36 to $2 39 billion adjusted EBITDA to be in the range of $270 million to $280 million.

And non-GAAP EPS in the range of $3 10 to $3 25.

This outlook assumes a continued soft demand for leasable consumer durable goods no material change to the Companys decision posture and effective tax rate for non-GAAP EPS of approximately 27%.

No impact from additional share repurchases.

Consistent with last quarter, our base case outlook for the remainder of the year considers current consumer trends, but does not assume further economic downturn, a material negative impact on employment of our customers or a material benefit from tightening by providers above us in the credit stack.

I will now turn the call back to the operator for questions operator.

Certainly one moment for our first question.

And our first question comes from the line of Kyle Joseph from Jefferies. Your question. Please.

Hey, good morning, guys. Thanks for having me on.

I'm, taking my questions.

Just curious.

Your thoughts on kind of the health of your underlying consumer obviously, some moving parts.

In terms of the last early buyout activity, but online.

Stable credit performance, obviously, the employment environment is very strong still.

But just kind of get a sense for the overall health of your underlying consumer.

Essentially if there is any sort of green shoots of improving demand or consumer confidence there.

Yes, Thanks, Kyle good morning.

I guess I'll start when we spoke last last quarter, we talked a lot about fewer consumers choosing utilize the 90 day buyout option.

And its impacts on the overall margin the gross margin of the business.

But what we are trying to.

Assess at that point was how will those pools continue to mature.

And would those customers that otherwise during a regular tax season.

Would have utilized their 90 day biopsy buyout option how are they how.

How would they perform.

So so far today through Q2.

The verdict is that they are performing fairly well there.

They're making their payments theres still active leases.

And so that's a good sign for the health of our consumer you mentioned in kind of one of your data points. There strong employment and that is always a big big factor in our business and we're not seeing any signs of weakness on the employment side of the business.

Our economy I should say.

As it relates to cost pressures and inflation rolling over I think thats probably.

We're also fairly good news you can see it in our portfolio performance.

And what we've talked about in the prepared remarks around strong portfolio and strong customer payment behavior.

The only.

What I would say wildcard that's out there is a very fluid and developing situation related to the student loan repayment.

That is facing us in the fall and there is a lot of.

Puts and takes on that to who will be impacted and what may happen between now and then so.

I would say generally it's pretty good pretty good shape for the consumer with a little bit of a wildcard in the in the future that may or may not materialize.

Got it very helpful. And then just one follow up for me I think.

Last quarter's call you guys addressed.

Credit availability broadly.

And I think you mentioned some initial signs of tightening.

From the bond deal or trade down.

Other words.

Any update there.

Yes.

We said last quarter was that we had only very recently begun to see some change in our applicant and the top of the funnel if you will.

The best way, we have the monitor that is basically the the FICO scores or and even our own internal risk scores of our applicants in the top quintile of our of our App funnel.

And what we saw in late April .

That had just recently begun we did continue to see throughout the quarter. So we have seen a drift up in our FICO scores.

Throughout our App funnel, but certainly at the top quintile.

They're as has been widely reported there has been some FICO inflation so.

660 might not.

Perform like a 660 did a couple of years ago, So we're paying attention to that as well.

As we mentioned in the prepared remarks.

<unk> for us to at this point in the year determined.

How large if any of the benefit from that will be for us, but and so it's not baked into our outlook at least in the material benefit is not baked into our outlook, but we do believe and have believed for a long time that is.

A potential.

Tailwind for our business.

Great. Thanks, that's it for me thanks for answering my questions and congrats on a good quarter.

Thanks Scott.

Thank you one moment for our next question.

And our next question comes from the line of Jason Haas from Bank of America. Your question. Please.

Great. Good morning, Thanks for taking my questions. So it seems like the guidance implies a worsening of margins in the second half of the year versus the first half and also for look on a year over year basis.

You talked about it a little bit in the prepared remarks, but can you just walk through.

Gross margins, which soften in the second half and then also what's driving that step up in SG&A spending as well. Thanks.

Yeah. Kyle this is Brian sorry, sorry, Jason This is Brian .

<unk>.

That dynamic is playing out as effectively.

Starting with a lower GLA balance of roughly SaaS AR balance entering the back half and so that's been put pressure on total dollars of revenue.

First and foremost so you've got it you got to fix some fixed costs within the SG&A structure, you've got a lower.

Revenue stream coming in the back half so that's going to put some pressure on margins. The other the other dynamic that is happening as SG&A expected to step up.

And that has that has to do with some technology initiatives.

Some back end office initiatives that we are pursuing and also on the sales and marketing front I think.

As we look forward to the end of the year and into next.

We want to we want to grow the gross lease asset balances.

Or put it on a trajectory towards.

A higher balance.

As we exit the year. So we can get a good footing entering into next year. So.

That's the that's the primary reason for the margin.

Pressures in Q3 and Q4.

It's not it's not unexpected from what we what we communicated in our in our previous outlook, we'd anticipated this SG&A ramp.

Some of these revenue pressures from a from a declining GLA at this point in the year.

That's great. Thank you and then for my follow up.

Are the margins that youre expecting in 2023 is that a good framework to use for 2024 and beyond I think historically, you've talked about for the progressive segment.

The goal is to be in that 11% to 13% range for EBITDA margins.

Thank you should be.

Well within that range. This year based on the guidance and then is the expectation just to be able to grow revenue and from there and maintain that margin rate or is there any.

Do you have any goals to grow margins from here.

Yes.

I am not going to get specific on 2024, but I do think from a long term.

The long term margin expectation, where we're at this year and what we've been trending and I think it's within a comfortable range for us and its not happened.

It's one that's been actively manage through portfolio management.

Watching SG&A and aligning SG&A with with our top line performance and so.

I think that 11% to 13% that you highlighted for progressive leasing remains unchanged I think it's.

Here in the quarter aggressive leasing was about 13, 5% for for Q2 and.

That's obviously a very strong.

Quarterly result, I don't expect it to remain that high on a quarter to quarter basis, but we had a great quarter.

And I think that 11% to 13% is a.

Good guideline for long term.

That's great. Thank you congratulations on the strong results.

Thanks, Dave.

Thank you one moment for our next question.

And our next question comes from the line of Brad Thomas from Keybanc Capital markets. Your question. Please.

Hi, Good morning, I wanted to follow up on on the GMT a bit.

I was wondering if you could talk a little bit more about.

How are you thinking about the cadence of gmg in the second half of the year.

That does seem like in the end markets.

We're hearing out of retailers is kind of is getting less bad.

Some cases even retailer.

Moving to positive territory more recently, so again curious a little bit more how youre thinking about G&A growth in the second half and then if you could also just remind us how much of a headwind the underwriting has been as we think about maybe what the more organic run rate trends have been.

Yes, Brad.

We did give the.

Range I would say of kind of negative mid single digits for Q3.

Did not.

Speak to Q4 as of yet from a <unk> standpoint.

That I guess as you.

Rolling it back a little bit of your thinking about Q2.

We heard the same things from the retail earnings season that April was bad and Lei.

And there was less bad in June was less bad. So if you if you carry those things into the into the third quarter.

I would expect we would participate in that.

Less bad scenario as well on top of that we've got.

Lapping of the decision tightening from last year.

And.

We have said.

Number of tons that we believe that about two thirds of our negative <unk> pressures were from the year over year.

Decisioning changes our approval rates if you will.

As it relates to approval rates, we generally look at a trailing four week average because approvals are good for about 90 days it doesn't.

It's rare that somebody comes in on the 89 day and fund believes but but it does take a bit for those approved leases to flow through to funded GMB and so we look at a trailing four week average and as we sit here today, we're still not.

We're still several weeks away from getting back to parity with last year as those decisions decision changes happened late in Q2 of last year, So still a little bit of a headwind, but certainly less of a headwind.

As the quarter.

Regresses.

So thats the decisioning in the retail environment on top of that I would say I'm encouraged by the.

The receptivity and the partnerships of of our retailers looking for ways to deepen our integrations and.

Deploy tools that we have like we've talked about for several quarters.

The sense of urgency to get some of that stuff done before holiday of this year.

Obviously, we're fast approaching code freezes for most retailers and so time is of the essence, but to the extent we can get some of those done.

We look forward to the to the benefit that can have in the balance of 2023, but also as we roll into 'twenty four.

That's great and then Steve you all talked about what you are seeing kind of above your all in flight stack, but I was curious if you could comment a little bit more about what youre seeing from a competitive standpoint.

Are you seeing those in the lease to own group.

Yes.

More are you seeing anyone loosening.

Do you feel like competitors are playing defense here are they getting more aggressive with trying to win basis away from you but.

I'm, just curious what youre seeing out there right now.

Yes, I mean competition is strong as it usually is.

As we always talk about the bifurcated business. The book of business that we have with the enterprise accounts and their exclusivity along with the regionals, where there may be multiple players there.

I would not say that ive seen the evidence that our competitors are tightened from.

From approval rate standpoint in fact on the margin it might be a little bit the other way.

And so the competition remains strong in.

Hum.

We're out there fighting day to day.

Great. Thank you.

Thank you as a reminder, ladies and gentlemen, if you have a question at this time. Please press star one on your telephone.

Our next question comes from the line of Anthony Chicken from loop capital markets. Your question. Please.

Good morning, Thanks for taking my question and congrats on a nice quarter.

So can you just provide some more color on.

On the build product I guess that was getting a little confused on that what exactly is that and when and when would you be rolling that out. Thanks.

Yes, Thanks Anthony.

Yes build is.

Okay.

Credit builder loan so its a combination of.

Our credit builder loan and savings accumulation vehicle.

And we are proud to be partnering with with web bank.

To offer that and what we what we saw there is are we survey a lot.

Our customers quite frequently.

Many of them have said that they are looking for ways.

To improve their credit score or profile. However, you want to characterize that.

And build as a <unk>.

Credit builder alone is not a new product, it's a tried and true way to do that.

Or can do that if it's done properly and so.

We're excited to add it to the Prague.

Ecosystem suite of products and it helps to further our mission of.

Proving the lives of our customers through financial empowerment.

<unk>.

There's lots of opportunities for us to acquire new customers into the ecosystem using billed.

We.

As you can imagine with our approval rates, we declined a number of customers every year and we believe there is to the extent that we could offer them a build product and have them grow back into at least approval and then effectively maybe overtime will hopefully over time grow into a byproduct of a more a more near prime product.

So we've got a lot of plans for or.

It will build as launch just to be clear, it's not in all states yet.

But we expect to be in all states by the end of this year.

We have active customers, we have active loans out there we're going to be launching a secured card would allow their customers to be able to access the accumulated savings.

And we will be doing cross.

Marketing and promotional activity between the products to help.

Our customers access build but also have.

Bill.

Help to grow the leasing business.

Got it and just a follow up so how is that being market is that being marketed under a progressive or under web bank.

It is being marketed and inter build build is the product name.

Get build dot com.

And it is being marketed.

Through to the Progressive database, but also.

In other forms.

That's helpful. Thank you.

Thank you one moment for our next question.

And our next question comes from the line of Bobby Griffin from Raymond James Your question. Please.

Good morning, Bobby Thanks for taking my question I guess my first question is Steve or Brian can you guys. Just provide any type of contacts and numbers to kind of maybe help us understand the number of customers that are hanging onto leases longer than maybe historical standards.

I'm just asking in the sense of as we roll into next year. This behavior could be relatively unique and I'm trying to get a gauge on the size of that or any type of estimate just to help us think about it.

Yes.

Bobby we haven't we haven't disclosed the revenue component of the of the 90 day buyout or the number of customers I guess, what I would say is it's the primary driver of the gross margin improvement.

<unk> seen year to date.

That along I mean, there's that component and then you've got the you've got the strong customer paying performance overall that are influencing gross margins and so.

Our expectations around this this.

Lower 90 day take rate.

That it will subside over the course of time and as I mentioned in my prepared remarks.

The variance year over year and versus pre pandemic.

As expected to kind of narrow as we move throughout the year and so as we exit into next year, obviously, we'll take a look at what what the customer Bill.

<unk>.

We have not made made public that that that revenue.

Tranche the bookings coming from 90 day. So so I think that I think that the.

A way to think about it as normalized gross margins.

We experienced pre pandemic.

Are are really probably what we would expect longer term.

And not not necessarily counting on this being a permanent dynamic in the model.

Okay that makes sense and then I guess the follow up on that then the right way to think about like the flow through of the guide is not necessary that you are betting. The 90 day behavior continues. It's just more that you feel more comfortable about those customers that didnt buy out staying on lease longer so youre, implying some of that upside that's been taking place actually continues on <unk> and <unk>.

Correct.

Yes, I think there is I think youre right on that there is two primary components from from the previous outlook to the current outlook that would highlight your the 90 day.

Certainly.

At the top of the list.

Performance, we've seen in Q1 Q2, now like Steve mentioned, one of those customers do and where do they go from a performance standpoint after they elect not to do the 90 day buyout I think what we've got incorporated in the model as such.

Some level of degradation or.

Yeah.

An allowance for some.

Performance.

The decline from where it's been right now.

If payments continue the way they have been in the first half than.

And then thats upside to the base case that we've we've we've laid out but we're not counting on.

The customer kind of.

At this elevated level of portfolio performance and the low level of 90 day. So 90 day will start to normalize a bit as we move throughout the year payment performance will show, maybe maybe a slight tick down from where we've been in the first half.

But overall still still.

Is incorporating the year strong strong EBITDA performance and EBITDA margins, along the lines of what we.

We would have expected so.

I think thats a commentary again.

Okay, and then lastly for me just any we talked last quarter, just about some of the product category performance with N GMB any interesting changes and that I know some of these some of these larger ticket home durable categories likely over around a little bit more during the pandemic. So just anything interesting to call out from a product category standpoint within the <unk>.

And how it played out during the quarter.

No body nothing.

Nothing that we would note.

Obviously, we are with.

We participate in the categories and how they're doing generally but we can also have.

The.

Results that might deviate from that just because of some new integration or a new initiative that we're doing within the door and so.

Obviously, we're focused on all of the categories and some are stronger than some of our weaker but.

Nothing specific to call out.

Okay I appreciate the details best of luck here in the third quarter.

Thanks.

Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Steve Michaels for any further remarks.

Thank you.

I'd like to again, thank you for joining us this morning and for your continued interest in Prague Holdings. Our teams did a great job and delivered another strong quarter, we feel good about the positioning of our portfolio and we're making the right investments in people and technology to further our three pillared grow enhance expand strategy.

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

Thank you, ladies and gentlemen for your participation that debate conference. This does conclude the program you may now disconnect good day.

Okay.

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Thank you for standing by and welcome to the problem Holdings second quarter 2023 earnings Conference call at this time all part.

Disappoints are in 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 on your telephone to remove yourself from the queue simply press Star One one again as a reminder, today's program is being recorded and now I'd like to introduce your host for today's program Mr. John Baugh.

<unk> President of Investor Relations. Please go ahead Sir.

Thank you and good morning, everyone.

Welcome to the Prague Holdings second quarter 2023 earnings call.

Joining me this morning are Steve Michaels, Prague, Holdings', President and Chief Executive Officer.

And Bryan Garner, our Chief Financial Officer.

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

During this call.

Certain statements, we make will be forward looking <unk>.

Including comments regarding our G M D performance and lease merchandise write offs in future periods.

Shareholder return over time.

Our updated 2023 full year outlook.

And our outlook for the third quarter of 2023.

I want to call your attention to our safe Harbor provision for forward looking statements.

It 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.

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

Yes.

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

Thank you John and good morning, everyone. I appreciate you being with US today as we discuss our second quarter results.

Share our thoughts on a few important Q3 metrics and provide an update on our full year 2023 financial outlook.

We had another excellent quarter with Q2 G M V slightly beating our expectations.

Net revenues above the high end of our expectations and adjusted EBITDA well above the range. We provided at the end of April .

I am proud of our team's performance as they execute at a high level and what remains a challenging retail environment.

The trend of fewer customers choosing to utilize 90 day buyout options and a strong portfolio of performance that we discussed in Q1 continued into the second quarter.

As you may have seen in this morning's earnings release, we are incorporating our year to date outperformance and reflecting these favorable trends and our increased outlook for 2023.

The strong customer payment behavior, we experienced in Q2 as evidenced by our year over year 260 basis point gross margin expansion.

Prove write offs of seven 1% in.

And adjusted EBITDA growth of $22 8 million or 43, 7%, resulting in a 12, 7% margin.

Our write offs for the first half of 2023 were six 5% keeping us on track to deliver another year within our targeted annual range of 6% to 8%.

The decline in <unk> was largely due to our implementation of tighter decisioning in Q2 last year, which we believe accounted for approximately two thirds of our GMB decline.

As we look to July trends in our Q3 expectations, we anticipate the difficult year over year <unk> comparisons to ease as we fully lap the introduction of last year's tighter decision.

We have yet to see any indicators, leading us to assume that retail sales will materially rebound through the balance of 2023.

So we have not assumed any benefit in our revised outlook. We provided this morning, we believe that the current macro environment will result in tightening of lending practices from credit providers above us in the stack.

Additionally, past experience demonstrates that consumers benefit from our flexible payment options during periods of sustained liquidity pressures.

Our teams are working well with their counterparts at our retail partners defined GMB growth opportunities, including promotions point of sale materials and tech integrations that improve application flows and conversion rates.

We're on track to grow our balance of share with several large retail partners in the second half of this year through new E Commerce integrations.

Our three pillared strategy to grow enhance and expand remains focused on sustainable growth rather than short term gains.

Grow emphasizes dedication to our business development efforts.

In a sluggish retail climate, our goal is to broad new and existing retail partnerships positioning ourselves for significant growth once conditions improve.

We remain.

Focus on regaining growth through sustainable strategies, including E Commerce, marketing and technology innovations, along with new retailer pipeline conversion.

Our efforts to increase our ecommerce business are showing solid progress.

We added nearly four times the number of new partners in the first half of 2023 than we did in the same period last year and the channel consistently contributes more than 15% of our total <unk>.

These new partners, along with upcoming E Commerce integrations with several existing retailers should contribute to our long term GMB growth.

We are also planning second half promotions and cross marketing with many of our key retailers in support of <unk>.

One specific example of this is last week's Prague Perks week, where we provide daily offers from select retail partners through our large database of current and previous customers.

We have run this promotion several times over the last two years with much success and retail partners have enjoyed the incremental business the program drives.

This is just one example of the benefit of being part of the broad preferred partner network.

Our high customer retention.

Illustrated by consistent repeat rates of over 50% is a testament to our customers affinity for our leasing products and contributes to a higher than average lifetime value to customer acquisition cost ratio.

Under enhanced our technology initiatives aimed at improving the retailer experience and offering customers more frictionless omnichannel journey are progressing nicely.