Q2 2019 Earnings Call
Our earnings release was distributed after market close yesterday, which outlines our operational and financial results.
For the second quarter of 2019.
All related materials, including a link to the live webcast.
Are available on our website at Investor about rent a center dot com.
As a reminder, some of the statements provided on this call are forward looking statements.
Which are subject to many factors that could cause actual results to differ materially from our expectations.
Rent a center undertakes no obligation to publicly update or revise any forward looking statements. These factors are described in our earnings release issued yesterday.
As well as in the company's FCC filing.
I'd now like to turn the call over to Mitch.
Thank you Dan Daniel and good morning, everyone. Thank you for joining us.
We will be providing a voice over to the presentation showing on the webcast. If you are unable to view. The webcast presentation can also be found in Investor day around center Dot com.
Now moving onto the first page even in our company highlights and strategic update.
The strategic plan, we laid out last year focused on cost optimization.
Enhancing the value proposition and Refranchising.
The successful execution of our strategy has been instrumental in driving same store sales and EBITDA.
Over the last 18 months, we've taken over 140 million of annualized cost out of the business and with the refinancing now completed that number goes up to approximately 160 million moving forward.
Due to the expected interest expense savings of between 15 and 20 million annually.
This new capital structure is also enable our board approved the initiation of a quarterly cash dividend.
25 cents per share starting in the third quarter.
Marino filling additional details regarding capital allocation, but certainly a big step forward.
The value proposition and since we've made are having a positive impact as reflected in our continued same store sales growth.
One of the key initiatives, we focused on this year, it's driving online traffic.
Which is up almost 30% for the quarter.
We also focus on improving the conversion rate of those orders, which we've also done and that's improved by about 400 basis points.
I had a few more web and E. Commerce, that's an amended its really become a really key growth growth driver for us.
On July 15th we announced our intention to acquire merchants preferred.
A nationwide virtual wrench on provider, which fast tracks, our existing virtual rent to own strategy. The virtual business is now becoming a top priority and we intend to leverage the experience of the merchant preferred team to take full advantage of the growth potential more on that in a moment as well.
Finally, franchising spend our third pillar, which we have selectively executed during the second quarter, we refranchise 20 locations.
Given the strength of our corporate owned locations Refranchising will be utilized as a means of improving operating results and underperforming markets and stabilizing our brick and mortar footprint.
As a result of the strategic plan, we continue to see significant progress in both our top and bottom line results.
Highlighting the second quarter, our consolidated same store sales increased 5.8%.
A considerable achievement for any retailer as shown on the same store sales grew up our two year stack consolidated same store sales were 9.5%, which is a testament to how our topline to stabilize over the last 18 months.
The bottom line results are shown on the trailing 12 month EBITDA basis, and centrally last year, our trailing 12 month EBITDA has improved sequentially each quarter.
As a result of our performance to date and the recent refinancing.
We are raising our annual guidance.
The revised guidance as shown in the lighter colored bar on the far right speaks to what we expect will be a strong second half of the year as our cost savings are fully reflected in the bottom line.
Now moving on to more specifically to the core segment.
Driven by the execution of the value proposition changes the coal produced a better than expected same store sales increase of 5.6% in the second quarter.
Well the overall revenues are down year over year due to the Refranchising and are so rationalization efforts the comp increases reflect the parts of our business.
The same store sales increase was primarily driven by higher customer traffic year over year, especially the mine increases I mentioned a moment ago.
Our portfolio on a same store basis finished the quarter approximately 4% higher than the comparable quarter last year I think as most of you know this metrics a good leading indicator for future same store sales expectations in the core business.
Well as I mentioned earlier, we continue to focus on converting our online traffic, which was up almost 30% last.
Over last year.
In the quarter with a conversion rate.
That traffic or the coverage rate also being up you think about a 30% increase in the traffic.
But we're converting more of that traffic. So we're gonna 38% increase in orders being closed off the web.
And now represents about 25% of all of our rent to own agreements written in about 15% of our revenue.
So the significant increase in online or E. Com agreements gives us confidence in the sustainability and the continued growth of our platform.
Couple of other comments on the core business.
Our skips phone losses remain very consistent year over year, and they actually came down 50 basis points. During the first quarter of this year as the team is executing very well.
Do you think we get asked a lot about a tariff impact on our product purchases and I'm pleased to report based on who and where we get our products from to date, we have seen virtually no impact from tariffs nor do we foresee any future impact coming from tariffs.
As a result of this positive momentum adjusted EBITDA improved $12 million in the core and 280 basis points versus last year.
Now moving on to acceptance now.
Our changes to the value proposition drove a same store sales increase of 6% for the quarter, an invoice volume was 113 million for the quarter, 75% higher than last year.
Our skip stone losses in acceptance now improved by 40 basis points versus the first quarter of this year and the year over year increase driven it does have a year over year increase driven by abnormally low losses in the second quarter of 2018 related to the impact of recoveries, but sequentially into the third quarter in a row that theyre down so feel good about where were going there in there and they are in line with expectations. The sequential improvements in scripts on losses versus the first quarter.
Despite the lack of tax refund money in our customer base in the second quarter as compared to the first.
As a further indication of our team's ability to execute in both of our key business segments.
Now looking forward, we expect to integrate the merchants preferred business model into the acceptance now segment over the back half of 2019 and slide five expands on the merchant to preferred opportunity the transaction and what this means to acceptance now add to our retail partners.
As we announced in July the pending acquisition of merchants referred was unanimously approved by Renaissance Board of directors for a total value of approximately 45 and a half million dollars and it is expected to close this month.
As noted on our earnings call. After the first quarter, we were in the early stages stages of standing up our own virtual rent to own expansion.
In parallel we are also looking at acquisition opportunities in this space to speed up our timeline.
And after looking at numerous companies, we believe merchants referred as the right match for us to fill the holes we had in our set up initiative.
Acquiring the merchants preferred technology and their infrastructure and their 2500 locations is expected to enable us to accelerate our expansion plan by at least 18 months.
Merchants referred was founded in two.
2012.
It's a nationwide provider as I think you know virtual rental and services for Nonprime customers they've generated approximately $80 million in revenue on a trailing 12 month basis as of June thirtyth of this year.
The retail partners include independent furniture, bedding appliance tires and other retail partners.
There are led by President and Chief Executive Officer, Joe Corona and over the past seven years of built what we believe is leading edge technology and scalable infrastructure for virtual rent to own that will complement our existing acceptance now staffed business model.
Looking ahead over the next two slides, we see our merchants referred enhances our capabilities and where we think we can take the business over the next three years.
Strategically this acquisition is very appealing to the advancement across several key capabilities.
It also gets us pass the infrastructure building phase, which can be costly when starting up a new business.
They've already established the infrastructure, we were just starting to stand up.
And they have made the necessary startup investments.
And now we buy them at a time, when they're not profitable and as I said, they should accelerate our virtual rent on growth by at least 18 months.
They bring a management team experienced in virtual rent to own in a nationwide sales team of over 40 people.
With access to lower cost of capital. We believe this team can capture significant share in the over $20 billion virtual rent to own market.
Next up the risk decision engine.
Most of Thats not utilizes an automated decision engine in our staff locations.
Merchants prefer it's been able to do this in the virtual space, which does present different challenges and this is a significant step forward from where we are today as acceptance now on the Standalone basis is in the early innings of fine tuning a virtual decision engine.
Merchants prefer it also brings to the table a scalable technology enabled call center that provides what we believe is industry, leading service to both customers and retailers.
Utilizing artificial intelligence as a means to efficiently track compliance and improve upon best practices.
Merchants refer it also has a retailer facing portal that provides capabilities such as real time reporting ability to build marketing listen live chat with a call center just to name a few.
The retailer partner portal portal is also integrated with the core technology platform and its very intuitive utilize the tutorial built right into the platform for retail partners to referencing quickly get up to speed much farther along than where we were.
Similar similarly, our ability to integrate with e-commerce platforms and convert online traffic will continue to be a focus.
Merchants referred currently generates approximately 20% of its business via online applications fulfilled in store, whereas in acceptance now it's about half of that.
This acquisition accelerates the advancement with integration of online only retail providers.
Consumer facing technology is an area that will evolve.
Generally as platform as a means for us to interact with our customers from origination through servicing and the merchants preferred technology Foundation accelerates our ability to build consumer facing functionality.
Both acceptance our conversions preferred have a waterfall tech now have waterfall technology integration capabilities that retailers rely upon to ensure a seamless customer experience.
As a matter of fact acceptance now generates approximately 80% of its revenue and partners, where we are fully integrated and waterfall technology.
We're committed to providing a convenient and seamless application process with any platform our retailer partners retail partner shoes.
And we'll have the capability to do so on both acceptance and merchants preferred.
Looking forward, we believe the combined offering will be the most comprehensive in the industry as we will offer Steph.
Model, a virtual model or hybrid model for use during peak selling season store retail partners.
Our retail partners will be able to assess inflect, which model, but there needs to maximize revenue and save the sale.
With us added flexibility will now be in a much better position to land more large national retailers.
So what our growth expectations over the next three years.
By 2022, we expect to grow revenues over $1.2 billion in annual growth rate of approximately 15%.
And an increase of approximately 400 million versus the current pro forma combined businesses.
We believe our our goals will be achievable out of the gate with improved capital position and ability to aggressively sell to our respective pipelines.
As we move forward, we'll introduce that hybrid model expand in the new product verticals and as I mentioned earlier put ourselves in position to land more national partnerships.
And although we'll see a slight dip in acceptance now acceptance now overall margin percentage. When we initially combined these two businesses will be at a higher margin Swans virtual is a meaningful part of our business.
Really excited about the opportunities with merchants preferred and I'll now turn the call over to Maureen for additional highlights on our financial results.
Thanks, Mitch good morning, everyone I'll cover some financial highlights for the second quarter provide an overview of the refinancing we recently completed.
And close with our increased guidance for 2019 before opening up the call for questions.
During the second quarter consolidated total revenues were approximately 656 million.
Flat versus the same period last year.
Primarily driven by a consolidated same store sales increase of 5.8%.
Offset by Refranchising and rationalization of our store base.
Adjusted EBITDA was $67.4 million in the quarter and EBITDA margin was 10.3%.
100 basis points over the same period last year.
Net diluted profit per share excluding special items was 60 cents.
Intercourse USA segment total revenues in the second quarter decreased 1% versus the same period last year, primarily due to re franchising and rationalization of our store base, partially offset by same store sales increase of 5.6%.
Store labor and other store expenses decreased by 23.8 million, primarily driven by lower store count and cost savings initiatives.
Adjusted EBITDA in the quarter was approximately 73 million and EBITDA margin was 16.2%.
At 280 basis points versus the prior year.
Now turning to the acceptance now business.
Total revenues in the second quarter decreased 1.5%, primarily due to the write off of certain acceptance our partners.
Partially offset by same store sales increase of 6%.
Store labor and other store expenses increased by 3.8 million, primarily due to higher year over year gets stolen losses due to recovery credits in the second quarter of 2018.
Adjusted EBITDA in the acceptance now segment was $23.1 million.
An EBITDA margin was 13.1%.
Lower than last year, but up 180 basis points from 11.3% in the first quarter 2019.
Remember as you look at last year. The acceptance now business benefited from the run off of accounts from calls and Hh Gregg and this gets stolen recovery as I just mentioned as well.
Mexico grew revenue by 10.1% in the second quarter and generated $1.6 million in adjusted EBITDA.
In the franchise segment revenue was $14.9 million and adjusted EBITDA was $1.8 million.
Corporate operating expenses in the second quarter decreased by approximately $1.4 million compared to the prior year, primarily due to the realization of cost savings initiatives.
Partially offset in the quarter by executive severance and higher incentive compensation.
Moving on to the balance sheet and cash flow highlights.
For the second quarter of 2019 cash generated from operating activities was 110 million.
51 million higher than the prior year, driven by the merger termination settlement and stronger operating performance.
Partially offset by one time working capital benefits in the prior year.
We ended the quarter with $353 million in cash on the balance sheet and a net debt to adjusted EBITDA ratio of 2.8 times.
The liquidity and net debt to EBITDA metric shown in the graph highlight our strong liquidity position and the improvement of our net debt to EBITDA ratio over the past 18 months.
Moving to page 11, as Mitch mentioned, we recently completed the refinancing of our credit facility and the redemption of our outstanding senior notes.
With the refinancing the company entered into a new credit agreement.
For five year 300 million asset based revolving credit facility.
And the seven year 200 million term loan b.
The initial draw on the revolver was $80 million in the book 200 million was borrowed under the term loan b.
The proceeds from the refinancing plus $260 million of cash on hand was used to prepay info the $543 million senior note.
Following the completion of the refinancing outstanding debt was 280 million.
Given the significantly lower debt balance net interest expense is expected to decrease by approximately $15 million to $20 million.
On an annualized run rate basis.
Cash on the balance sheet at the time of closing was 102 million and total availability on our revolver was 128 million taking into account our letters of credit.
Now I'll talk a little bit about our capital allocation framework.
Our first priority will be investing to grow the business with a focus on the 20 plus billion dollar virtual rent to own opportunity.
We're also committed to maintaining a conservative balance sheet going forward.
Our net debt to EBITDA ratio is currently at 2.8 times and we have a long range target to not exceed 1.5 times.
Through the refinancing and our improved financial performance.
We are also now able to return value to our shareholders.
Drew at 25 cents per share quarterly dividend starting in the third quarter 2019.
Also as a reminder, the board of directors previously authorized a share repurchase program.
And as of June Thirtyth 2019, we had 255 million remaining under the program.
With the new flexibility of the refinancing the company now has the option to repurchase shares.
Moving to slide 12, it lays out our revised guidance for 2018.
Please note. These ranges do not include the merchants appropriate acquisition, but do include the refinancing transaction.
Total consolidated revenue increased by $10 million and is now expected to be in the range of $2.595 billion to $2.640 billion.
The revenue increase was due to the strength of our core portfolio in acceptance now revenue remained flat to prior guidance.
Same store sales is now expected to be mid single digits.
Up from low to mid single digits.
Adjusted EBITDA was increased to be between 240 and $265 million.
non-GAAP diluted earnings per share are expected to be between $2.05.
And $2.40.
An increase of 20 cents on the low end of 15 cents on the high end of the guidance range.
The adjusted EBITDA and EPS increases versus the previous guidance are due to the performance in the second quarter.
And the interest savings in the back half of the year due to the refinancing.
Free cash flow is expected to be between 200 and $225 million and I also wanted to note that the net debt has been adjusted to include the dividend payment.
The guidance does not include any new refranchise transactions after the second quarter of 2019.
Due to the seasonality.
Most of the guidance increases are expected to materialize in the fourth quarter.
As always detailed pro forma income statement by segment are posted on our company website.
And the 10-Q for the second quarter will be filed later today.
Thank you for your time now open up the call for your questions.
Thank you at this time, if you would like to ask a question. Please press star followed by the number one on your telephone keypad.
Your first question comes from the line of but gosh from Raymond James. Please go ahead.
Good morning, and thank you for taking.
Two questions just a couple of questions short I guess start with other merchandise preferred since that's the newest.
Initiative, Mitch can you give us kind of a read of what's your first steps will be on merchants referred how you're going to plan to integrate.
And maybe give us a little bit more flavor of what.
Their current is in terms of doors and.
Growth of doors year over year and that kind of all.
Historical.
Yes, I'll give you some bed bugs good morning.
Probably won't get into too much of the historical results, we haven't even closed yet so we can talk quite a bit about it but but.
I won't get into too much depth with it.
Like I said, we haven't even closed yet but.
Generally speaking going forward.
We're going to have.
Integrating the businesses, we're going to have it.
At least initially.
The people here running the staffed model, we'll continue on that model and Joe Corona and his team out of Atlanta with merchants peripheral run the virtual model. So.
We're going to we'll see the numbers integrated we're going to have the experts on each side work together kind of co leads if you will the person that runs except as not worsen and then Joe will lead to the CEO of running the virtual so cold leads still working on the branding doing some customer research on whether we keep both brands long term. Initially we will when we keep both brand names long term or not we're doing consumer research on.
The Guy about 2500 doors, I mentioned, the LTM and revenues about $80 million.
They are.
Yes, they have to have started to turn a profit in the last year or two.
Others.
As I mentioned that we like a lot as they've already built the infrastructure already taken on startup losses that we are about to embark on from an acceptance now standpoint to dive into the virtual world They've got a large pipeline had been capital constrained. So we can unleash that pipeline with their 40, plus salesperson team, we've got a large pipeline for virtual.
Which we went over the numbers how we think we can grow this 700 million of acceptance now becomes.
800 million with merchants preferred initially and we think we can go to 1.2 over the next three years very confident we can do that based on.
The business is out there the offering will have new verticals.
And when I say, the offering unmanned or virtual or a combination of the two which will be we're the only ones out there where they don't have that combination.
And can you do more both their end tires were not in tires for this new vertical there's other new verticals to talk about so we're excited should close this month and get working on integrating the two businesses.
Okay.
Well, let me just turn to quickly to the core.
One of the one of the issues, we talked about last quarter and was the 180 days. It looks like your showed up maybe a little bit gross margin performance this quarter in the quarter or year over year can you talk a little bit about what's affecting gross margins I saw the cost of merchandise sales were up significantly year over year talk a little bit about how that works and maybe if you can give us a flavor on.
No what investors should expect.
Yes, I think.
I don't think it just showed up this quarter. If you when you go year over year.
Yeah those were last year in the second quarter is when we're making the value proposition changes. If you look sequentially. The last four quarters since the highest.
Gross margin in the core business in the last four quarters. So.
It started to show up as soon as we put it in the beginning of 2018 by the third quarter was showing up in our gross margin percentages of all have only gone up from there slightly they've been about 69 and a half every quarter. So it's been pretty consistent I'd expect them to stay at least at that range.
Sequential either their improved they've improved actually.
Since the third quarter of last year.
And quite a bit of improvement over the first quarter. So I think thats already baked in sounds like they are dropping their only dropping year over year, because we made a lot of changes last year at the beginning of the year.
And I'd just point to the EBITDA margins, but the 16.2% EBITDA margin in the quarter is the highest in forever.
And.
Yes, three it's almost 300 basis points higher than it was a year ago. So.
The gross profit down marginally from a year ago, the EBITDA margins of almost 300 basis points, So which I think is the important number.
And like I said, just like the gross margin the last four quarters and it's not like it's dropping it's only dropping if you go all the way back to the second quarter last year before we made the value proposition.
And and then lower than it was before we made the value proposition, but again the EBITDA margin is the highest in forever. So we've got a better value proposition.
And but weve taken cost out so we're making we're making a lot more money than we used to overall and the gross margins are pretty pretty.
It's already begun good drop in a more now they're only drop and when you. When you go back to early last year. So overall were really happy with those margins that with EBITDA margin.
Agreed I see that what's the average contract for a number of contracts now per per quarter or can you kind of give us what that looks like how the customer counts.
Yeah, I don't have that in front of me I know one of the one of the slide shows the customer count per store back on page three the customer count is.
Is right on top of where it was per store back in 2016, the Blue line on page three compared to the Red line. So were right on top of our high point for ever finishing the second quarter.
However in the last four years, we're at our high point.
Customer count wise.
On page three of the presentation now I don't have accounts in front of me, but the customer count which is going to be about the same.
I mean that the accounts are higher than the customer count work on a relative basis and comparable store will be pretty close.
Great and last for me just marine can you talk a little bit about the the in the rates in the term loan B and.
Revolver, how does that how does that look I know, we got $10 million to $15 million or annual interest savings. So when will the the document be filed on on those agreements and.
Can you talk maybe give us a little flavor of insights.
What those are and what does it look like.
Sure, but the.
The within the 10-Q that's filed later today. It will include all the information about the credit agreement.
And the rate on the ABS deal are initially 150 basis points plus LIBOR is dependent on leverage so it can range from 150 to 200 basis points.
And the term loan B is 450 basis points plus LIBOR.
430 basis points above LIBOR, yes.
Okay and is that is that a filer loan is that how that's working.
No. It's it's a traditional term loan b not a filer.
It's not it's not based on the borrowing base.
And repayment for repayment capability, if you want to.
What kind of flexibility do you have yes, we have.
Full flexibility there's six months.
Before we will be able to prepay the debt with no penalty.
Okay, and lastly, or any charges that will show up for the bank refinancing in the third quarter.
Yes within the third quarter, there is refinancing fees of between seven and $8 million.
Terrific. Thank you very much good luck and congratulations really lovely to see.
The complete turnaround thanks.
Thanks, but.
Your next question comes from the line of John Rowan from Janney. Please go ahead.
Good morning, everyone.
Good morning.
Good morning, I, just I appreciate the information on the.
The cost of the.
Of the B in the al but I'm, just wondering what maybe backup making it a little simpler what's the blended rate of debt costs, you have now including any commitment fees that you might have just trying to get a sense of what the overall cost of the facility is to you today.
The blended rate is I believe it's around 6% a little under 6% it would be the $200 million.
At the 450 basis points less labor and then the $80 million on the sale at 150 plus LIBOR.
And then 6% does that include commitment fees as well.
Yes, there are commitment fees on the letters of credit and that ranges from 25 to 32nd half basis points.
And I think.
And then.
The guidance that you gave you guys gave for the net debt at the end of the period does that include an assumption for repurchases I mean, basically asking if your guidance includes the assumption of repurchases.
It does not include purchases.
Share repurchases in our guidance.
Is there a limit or in the covenants to how much you can return whether it be through dividends acquisitions or repurchases.
As long as we meet certain liquidity thresholds the restricted payment basket is unlimited within both facility.
Okay.
Any tax rate guidance going forward.
Any tax rate guidance.
Yes, it's the screen.
23, and a half in 24.5%.
Okay, and then just one one question on.
On the acquisition that you did what is their strategy for dealing with return merchandise.
Well they have a they have a few different ways.
They do that.
I think the key point there my when I say, a few different ways when they recover merchandise coarse sand on a brick and mortar stores to reroute amounts of their views.
Other things online sales things like that to discard the merchandise whether its offer up are those kind of things, which is what most of the virtual providers do attempt to find another way liquidators and things like that.
The key point, there, though John is that in our without us having the brick and mortar stores, we can monetize them at a higher level than what they've been able to do that.
Without.
And it's not like they have a level of returns it's going to hurt the core based on the way there their value proposition works with shorter term agreements 12 to 18 month agreement they don't get a lot, but the few they do get we can monetize we can through the monetization with our core brick and mortar stores.
Yes would you would you be willing to tell us what they return it is relative to the rent a center.
Well relative to rent a center core and.
And acceptance now.
No for two reasons, one we haven't closed yet so I wouldn't I wouldn't give any data on what their current situation and I don't have in front of me.
But we didn't get into that later, it's not real high it's not real high but there are returns of course is the rental business, but the few they have we'll be able to monetize in a much better way.
And you think you'll be able to you know plug them into our your brick and mortar stores and improve the gross margin that they are getting on return merchandise.
Correct to be clear.
Right. Okay. All right. Thank you very much thanks gents.
Your next question comes from the line of Kyle Joseph from Jefferies. Please go ahead.
Hey, good morning, guys. Thanks for taking my questions and congratulations on a on a busy good quarter. Thanks guys.
Just following up a I know you guys talked about onetime costs from the credit facility should we expect any onetime costs related to the acquisition in the third quarter as well from from modeling perspective.
A little bit.
From a banker standpoint investment banking fees or not it's not a whole lot.
Okay.
But that would be a small small amount of investment banking fees.
Got it and then thinking about merchant preferred how quickly do you anticipate being able to.
Consolidate the two businesses in and go out and in pitch the platform to new potential retail partners, what sort of timeline you have there.
Well the.
Ken but kind of will come in phases Kyle the.
They've got a large pipeline right now for virtual they've been capital constrained. So somewhere we can unleash immediately based on the current offerings as far as the hybrid offering where it's a combination of.
Virtual or man within the same within the same store.
In different stores, we'd be able to do that pretty quickly in the same store from a technology standpoint, we're probably looking.
It early next year so.
Six month kind of time window on the full offering but as far as the current offering and unleashing their sales team based on that being capital constrained start day one.
Got it and then just thinking about EBITDA margins of the of the consult inside and out the consolidated business, but the combination of acceptance now and merchant preferred overtime. I know you said you know from a near term perspective, there may be a little bit of.
Margin compression that's understandable given you highlighted there a little bit profitable, but overtime given the combination of the business. How do you think about the EBITDA margin.
Versus where acceptance now has been trending given it is virtual and.
Fully understand that there's some puts and takes in terms of EBITDA margin, obviously less employee costs, but some offsets there as well.
Yes, Theres some girls certainly gross profit is a little lower in the virtual World. But then then you make up for it and from a labor standpoint, I think initially it will drop the margins, but but as it becomes more meaningful the margins will be higher than where acceptance now is today.
Got it thanks very much translate my questions.
Thanks Scott.
Your next question comes from the line of Bradley Thomas from Keybanc Capital markets. Please go ahead.
Good morning. This is Andrew on for Brad I, just had a question on our merchants preferred it seems like the acquisition will complement acceptance now well a question that we've been getting from investors is whether or not you are keeping an eye out for additional acquisitions like this one going forward.
Well.
We look at numerous companies and decided merchants preferred we believe merchants referred to the best fit for us for what we needed.
Certainly, yes, with our with our capital structure will we'd have the opportunity to do more in.
Yeah, we won't need to buy the infrastructure and so forth. There were there were buying so we'd have to look at it a little differently.
But I would never say never we're always going to look at opportunities.
But right now we're focused on just integrating and growing rapidly with the one we just bought but to answer your question Andrew.
Of course, we look at things, but it would be under a different.
Under under a different.
Look right because again this is a lot about buying buying infrastructure and so forth.
Sure we look at it there is an awful lot of virtual companies out of there and if the economics are right for us we'd look at it.
Right that makes sense.
And my last question is on the core business I was wondering if you could talk more about some of the merchandising trends and initiatives.
That you guys are doing that will drive comp in the second half.
Well, it's really [laughter] really that the.
E com side of the business the the web orders that are growing at 30%.
Our conversion rates growing grew about 400 basis points in the second quarter. So our online agreements that are up 38% when you combine those two.
It's already 15% of our revenue and is growing every quarter. So the the value proposition changes we've made are really.
Attracted to the customer and we're getting a lot more online traffic and.
Very confident that thats very sustainable.
Okay, great. Thanks, that's all from me.
Thanks, Andrew.
Your next question comes from the line of John both from Stifel. Please go ahead.
Thank you good morning, and congrats on particularly the progress or the balance sheet.
I was wondering first could we just get a clarification on your comp calculations marine that.
That hasn't changed at all were still like taken out the benefit right. Another close store when it folds into an existing store for what 12 months and then comes back into the comp.
It pulled out for full 24 months.
If the store receives a certain percentage of count trend a closed location and there were.
Quite a bit of changes this quarter with new stores coming into the comp whether that be from hurricanes that had occurred previously or the closures, particularly on the acceptance outside.
Okay, great. Thanks.
In 10 minutes I know you've mentioned the merchants prefers been capital constrained, but is is there any kind of rough invoice volume growth number over the last 12 24 months to be willing to offer.
I don't have the invoice volume growth or their revenue has grown I know there are you know the 2000.
18.
Revenue was about $75 million in the last 12 months revenues 80.
So that's a nice trend from a percentage standpoint, especially being capital constrained having to pick their spots where they can grow so I don't im invoice volume in front of me, but the revenue is growing and and and their profits have been growing in and even though they're only slightly profitable now with synergies we're going to be in the.
Yeah. We said is it an immaterial effect this year of course, only going to be about four months left in this year and we take it over but on a run rate basis. Once we get the synergies by the end of the year, even their current profit.
We're looking in the $5 million range, so besides buying the infrastructure and speeding up our process from virtual standpoint, it's not like we didn't get any revenue or profit was like I said with synergies, we're going to be in the $5 million range.
We said, we said immaterial to this year because of the timing and obviously, we got to get those synergies over the next couple of months.
Okay, and then marine is there any if you hit this goal for.
Merchant preferred to already now growth how does how does that impact cash flow is it self funding.
Generate cash to use cash.
There will be a working capital outflow on as we grow the merchants preferred business, but clearly we believe that's a profitable growth from an EBITDA standpoint over time and.
I'm definitely believe in the potential growth of that business.
So yeah. It is it will generate free cash flow as an ongoing business as the as we put the inventory investments out to work and.
We'll generate cash flow over time, but initially there will be a working capital investment.
Great and jumping back to core and write offs.
You mentioned online is growing my understanding is that that has a little higher risk to it is is a are you seeing that or is it too early.
To see.
That you mentioned is up 30%, I'm wondering what you're experiencing or and or anticipating on write offs and core.
Yeah were our assets give SOLANS there were 3.2% in the core and second quarter in a year ago when.
Online business was probably less than well as I said the online agreements are up 30%. It was 3.1%. So were right on top of last year, even with all the new customers come from the web. So we're not seeing that kind of a risk from that customer coming in so we're not anticipating is that to happen going forward. We haven't seen it yet we're right. So were right on top of last year sequentially down.
Significantly from the mid threes.
And we're executing very well on that so.
We're not seeing a problem with the web customers driving our losses, though.
Okay and then my last question Mitch is.
Around I mean, obviously the balance sheets great.
And you announced a dividend and.
Let's just curious the debate internally around the opportunity to grow with the virtual business and how important it is to have Oh.
Capital structure balance sheet that can support that in one pitching the business can you give me the puts and takes on how you thought about the capital allocation as it relates to raise the total addressable market being so large.
Sure Yeah.
Simply put our first priority is to grow their business and to grow into that 20 billion dollar business in that Didnt come from places, where we think we can do both.
We're.
0.8 times debt right now as Morry said, we're we're we want to stay conservative from balance sheet standpoint, and keep it at one and a half or less but thats an off there's an awful lot of cash flow on a monthly basis today anyhow. So we the sure answer John is we can do both.
Okay.
Terrific. Thank you and good luck.
Thanks, John .
Your next question comes from the line of Vincent <unk> from Stephens. Please go ahead.
Hey, Thanks, good morning, guys or the questions on the virtual rendon. So appreciate the revenue guidance you gave for this through your outlook of up to 1.2 billion kind of wondering if you could give us a flavor of kind of what confidence in what's might have insight you have in there and I guess the reason answers it seems like for for rental for virtual Vento and you have a typical three year sales cycle with a with a retailer. So are there any pilot programs that you have already running is there any progress you can share.
Well our confidence Vincent comes from the the pipelines that are out there the opportunity that's out there how much white space is still out there.
We've been able to.
Okay.
Grow the manned model merchants preferred actually been able to grow the virtual model, even being capital constrained they've got a great sales team.
We don't have any any pilots not that we're going to speak to today on the as far as large national partners ran and we do have we already have some large national furniture partners and we believe that this will accelerate our opportunity to do that but it's not but.
I guess the short answer here is the 1.2 billion is not based on going and getting one of the largest retailers in the country is is that would actually improve that $1.2 billion. We believe we're going to be able to do that but it's not in our numbers more conservative than that when it comes to just standing regional players. Some some some other verticals.
Like I mentioned earlier, so it's not it's not based on how we got to get that one big retailer that we're going to do $200 million year on EUR $300 million year on.
Okay got it that's helpful and I guess, maybe taking a step back and kind of your view of virtual rents on in your expansion plan. So you've got your existing acceptance now manned offering now you have to virtual offering with.
Third.
And another one we haven't talked about I think before is your partnership with volumes by Mastercard, where I think you've already got a couple of retail partnerships there like with home depot.
So I wonder if you could talk about that but then once so once you get merchandize preferred integrated this year, how do you could you give us a broad overview, how you see rent a center and then.
I mentioned on offering competing beginning in 2020.
Well, we do have relationships with a few of the different waterfall companies like buys and and integrators like Verizon versatile and some of those other ones stores. Some of those other companies. We also integrate right into Pos systems directly with retail partners as I mentioned earlier.
About 80% of our business comes through a waterfall a partner that has a waterfall whether it's their own that we that our IP department went into and built into with their with the retail partners IP Department or it's a third party like visor versatile. So we're we're doing business with all those companies great relationships with all those companies and that will be.
As we grow a lot of times you are talking not just a retail partners, but you're also using those waterfall integrators as a growth vehicle.
We just recently.
Did did a deal where we're in something called TD complete the TD Bank is the primary and where the only tertiary in there that just started being offered last month.
So yes, there is a lot of activity around not just retail partners, but also online partners in these in these waterfall integrators and.
The direct online business is going to be a big play there on the and the virtual world to not just necessarily direct with the retailer.
Okay. Perfect then yeah, I think PD as a couple of private label credit cards with the retailer so thats really exciting.
Just one last quick one so I know we've talked about the value proposition driving some of the gross profit margin declined but.
Has there been any recent changes to the value proposition since second quarter last year or should we now be expecting the comp the virtual proposition value proposition in.
In the third quarter. Thanks.
Yeah Okay.
I'm not sure I totally understood understood that Vincent but no there hasn't been any any major value proposition changes since the since last year in the second quarter and.
It's a good point, it's kind of like when I was talking about when somebody asked a question about the quarter the second quarter last year.
From a margin standpoint, if you start with the third quarter you see a much more consistent gross profit margin of course, EBITDA EBITDA goes up and then on the aim outside you see a more consistent as you get into the latter part of <unk> of last year and there is not more that's going to drop and except for virtual virtual as you know Vincent drops.
Gross profit level, but grows EBITDA level and thats, what we expect to see in one other point on what were talking about earlier when you following up in Sydney at TD Bank as some of these.
Some exclusive private offerings were works inclusive in there and would there with their online program as it's called TV complete and we are the exclusive rent on provider in there.
That's great really helpful. Thanks, So much guys. Thanks Vincent.
Is there any additional questions at this time. Please press star one on your telephone Keypad. Your next question comes from the line of Anthony Chukumba from loop capital markets. Please go ahead.
Hi, Good morning, and let me add my congratulations, particularly in terms of although what you guys got them this quarter the refinancing and the.
Preferred deal less so.
The turnaround so hopefully rob.
Oh for long vacation sometime soon.
Marine.
So I had a question claims related to the last question you know you talked about.
In the in the in the core business from both incorporates an acceptance now gross margin has been coming down that's because it's a better value proposition.
In the core business you know at least this quarter it was all more than offset that.
Through since the expense leverage right. So you had it came up at the higher operating margin that wasn't the case in acceptance now and I was just sort of looking through my model. This is the first time in.
You know in five quarters acceptance now operating margins back of onetime items actually declined year over year. So I guess im just trying to sort of reconcile that while why that's sort of working in the core business is not working now in acceptance now for something I'm kind of missing there.
Well couple of comments that I made.
First of all I want to reiterate in the core business margins are not coming down there the lower the gross profit margin lower than a year ago, but if you look at the last four quarters, it's been very stable and it's actually higher than the third quarter of last year, so they're not continuing to drop their only lower than the second quarter of last year as the value propositions were being implemented.
And overall, the EBITDA margins up 300 basis points.
And against the third quarter last year is up 500 basis points, so they're not they're not coming down there only coming down if you if you compare to five quarters ago.
On the acceptance now side be as Marine mentioned and if you look at US give stolens now this is the third quarter in a row, where theyre down we've gone from the middle Elevens, which was out of our range of eight to 10, and then there were 10% in last quarter. Another 9.6, they've dropped significantly in the last three quarters, we performed well there, but a year ago. When you go back five quarters for the second quarter of 2018.
We have some recoveries morry mentioned it we.
In 2017.
HM.
Love cans and Hh Gregg declare bankruptcy. So those two large partners with up to 36 month agreements.
Those the revenue from those accounts.
Was was running off in 2018, especially the early part so we had the run off of those accounts, which is driving revenue with with very little cost because we closed those kiosks and put the put the revenue stream into other key so we had the.
The accretion of those closed stores, helping us early last year, the recoveries, where we booked a certain recovery amount at the end of 2017 and the losses associated with closing those stores, we had some or some large recovery as we look at what the real losses were in the second quarter of some recovery. So we had a low an abnormally low skip stolen number so even though our skip Solon number this past quarter is in line with our expectations, It's 200 basis points higher than a year ago. So when you take those 200 basis points you the margins right on top of or pretty close to right on top of where you'd expect it to be or where it was last year excuse me in that 15, 16% range, we're not disappointed with a 13.1.
EBITDA margin this quarter. It's just last year was abnormally high because that runoff and then the recoveries.
Okay. No. That's that's it's very helpful clarification.
And then just one one thing.
Just wanted to admits reference correctly when you were talking about the increase in your EBITDA guidance and you said part of that was the debt refinancing and I was I did I hear that correctly, because I mean, that's interest expense right. So that that wouldn't the fact that that wouldn't affect your EBITDA right no I hear incorrectly.
The EPS was impacted by the refinancing.
Oh, yes.
Yes, yes, okay got it got it okay. Okay. Thanks, thanks for clearing that up okay. Thanks. Thanks, so much guys.
Thank you Anthony.
There are no further questions at this time I turn the call back over to Mr. Fidel for closing remarks.
Well. Thank you everyone. Thanks for your time.
We are pleased to report these really solid numbers and getting the refinancing done and now we'll go back to work on getting the merchants preferred acquisition closed and maintaining these kind of.
This kind of revenue growth number same store sales numbers and go out there and put another another good quarter on the on the board. So were working hard for shareholders working hard to grow the business and we're really excited about getting our refinancing done in the merchants preferred acquisition. So with that thank you for your time.
Thank you. This concludes today's conference call you may now disconnect.