PROG Holdings, Inc. (NYSE:PRG) Q4 2022 Earnings Call Transcript

PROG Holdings, Inc. (NYSE:PRG) Q4 2022 Earnings Call Transcript February 22, 2023

Operator: Good day, and thank you for standing by. Welcome to the PROG Holdings Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, John Baugh, Vice President, Investor Relations. Please go ahead.

John Baugh: Thank you, and good morning everyone. Welcome to the PROG Holdings fourth quarter 2022 earnings call. Joining me this morning are Steve Michaels, PROG Holdings’ President and Chief Executive Officer; and Brian 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.progholdings.com. During this call, certain statements we make will be forward-looking, including comments regarding our expectations related to the benefits we expect from the three pillars of our strategy, our lease portfolio performance in 2023, including with respect to delinquencies and write-offs, our GMV for 2023, and our outlook for the 2023 full-year and first quarter.

I want to call your attention to our Safe Harbor provision for forward-looking statements that can be found at the end of the earnings press release that we issued earlier this morning. That Safe Harbor provision identifies risks that may cause actual results to differ materially from the expectations discussed in our forward-looking statements. There are additional risks that can be found in our annual report on Form 10-K for the year ended December 31, 2022, which we expect to file later today. 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 provide these measures to investors to help facilitate comparisons of operating results with prior periods and to assist them in understanding the company’s ongoing operational performance. With that, I would like to turn the call over to Steve Michaels, PROG Holdings’ President and Chief Executive Officer. Steve?

Steve Michaels: Thank you, John, and good morning, everyone. I appreciate you joining us this morning as we report our Q4 and full-year 2022 results, as well as take this opportunity to provide thoughts on our additional 2023 financial outlook. Last year was a challenging year for both our customers and merchant partners and the combination of weaker than expected retail traffic and rising inflation pressures impacted our business. In response, we quickly adapted balancing near-term expectations against long-term growth strategy, managing our portfolio, and rightsizing our cost structure, while still advancing key investments and initiatives. Towards the end of the first half of the year, we enacted changes to our decisioning that continue to bolster our portfolio performance today.

We substantially reduced our write-offs in the second half of the year with Q4’s 6.5% marking our low point for 2022. And I’m extremely proud of our efforts that resulted in annual write-offs of 7.7%, which is within our targeted annual range of 6% to 8%. We have a long history of managing our portfolio in various macro environments and have not exceeded our targeted annual write-off range since we established that range in 2016. Entering 2023, we feel good about the health of our portfolio based on the decisioning changes made last year and the delinquency performance we have seen since that time. Since the beginning of last year, our leadership team has continued to improve with a number of key additions in technology, finance, and other critical areas.

I believe that the experience and stability our executives and department heads offer will provide the leadership necessary to successfully navigate this dynamic macro environment. Again, in 2022, we executed multi-year renewals with a number of our top partners. These renewed and extended exclusivity agreements are recognition by our retail partners of the value they see in continuing to partner with progressive leasing. Despite declines across the retail landscape, our balance of share within leasable categories grew with nearly every one of our top accounts. Thanks to technological improvements, deeper integrations, a mix shift towards e-commerce, and success with co-branded marketing campaigns. We believe our history of delivering value for our existing and new partners will continue to benefit our future growth.

In Q4, e-commerce as a percentage of progressive leasing GMV reached an all-time high of 20.4%. During the year, we saw a continued shift towards a more online or omnichannel shopping experience following the transition forced by the pandemic. As the largest e-commerce leased to home provider by GMV, the value in aligning our offerings with our customers’ behavior is clear. We remain focused on providing a range of customizable e-commerce integration options for our retail partners. These accomplishments allowed us to operate more efficiently, while continuing to support growth initiatives for both the short and long-term. And we exited the year in a strong financial position, despite the macroeconomic headwinds. Our strategy remains centered around three-key pillars: grow, enhance, and expand.

We believe these pillars will deliver growth and value for our shareholders. First, we plan to grow GMV through strategic collaboration and marketing efforts with our . In addition, we remain focused on converting our pipeline of retailers into new POS partners and our ability to maintain and strengthen new and existing relationships, including addressing the changing needs of our POS partners is critical to the long-term growth of our business. We will also continue to expand our direct-to-consumer marketing efforts to attract new customers and drive more GMV through in-store and online retailers. Second, we are investing in technology platforms that enhance customer engagement and simplify the lease application, origination, and servicing experiences.

We are committed to providing our customers with transparency, flexibility, and greater choice on how and where they choose to shop. And we are enhancing and innovating our e-commerce capabilities to benefit existing and new POS partners and customers. Third, we expect to expand our financial technology product ecosystem through research and development efforts and strategic acquisitions that we believe will result in a more loyal and engaged customer base. We will leverage our extensive database of lease agreements to offer current and previous customers products that meet their needs. While Brian will get into more detail on our 2023 outlook, I’d like to summarize how we are thinking about the macro backdrop related to our positioning going into 2023.

Due to continued economic pressures held by our consumer, we believe there could be a delay in purchase intentions or a trade down to lower ticket items. Consumer’s cash reserves are declining while credit utilization is increasing, a data show that customer liquidity stress is at the highest level in three years. Despite the challenging macro environment, our tighter decisioning posture has helped the portfolio recover with leases originated in the second half of the year performing on par with pre-pandemic results, with volume performance metrics look strong entering 2023, with lower delinquency rates and charge-offs, which should improve gross margin year-over-year. While we are still early in the year, we are on-track to achieve our annual write-off target of 6% to 8% of revenue yet again based on the results we have seen year to date.

From a GMV standpoint, in addition to the consumer stress, potential declines in average ticket and potential deferred purchases that I just mentioned, because of our tightening of lease decisioning in late Q2 of 2022, we expect GMV results to be pressured in the first half of 2023 as we comp against higher approval rates from last year. As we have discussed in the past, we believe we are a more valuable partner to retailers during tough retail environments and we look forward to helping our partners convert more traffic. As you’ll see in this morning’s release, we also shared a view of how we expect Q1 to shape up in addition to providing our normal annual outlook. As we move throughout 2023, we plan to continue providing key current quarter metrics for greater visibility into how we believe the year will unfold.

As Brian will talk about momentarily, we ended 2022 with our gross lease assets balance, the driver of future period revenue, down 5.3% year-over-year. This decline in addition to our first half expectations around GMV will weigh on our quarterly revenue comparisons. And we expect that these top line headwinds, when coupled with factors such as wage inflation and continued investment in growth initiatives, will result in negative operating leverage. Finally, during the year we purchased 8.7 million shares, which represents 15.5% of our outstanding stock and we generated 242 million in cash flow from operations illustrating our financial strength and commitment to returning value to shareholders. Our net leverage ratio at the end of Q4 was 1.8x, which is still in our opinion within a comfortable range.

We believe that the capital we generated in 2023 will continue to allow us to maintain a strong balance sheet, reinvest in the business, and return excess capital to shareholders. In closing, I want to take a moment to thank our team for navigating through a challenging year by being adaptable and continue to execute on our strategy. We controlled the control of of the business as we head into 2023 with a healthy portfolio, and an eye towards future growth. I’ll now turn the call over to our CFO, Brian Garner, who will discuss our 2022 financial results and 2023 outlook in greater detail. Brian?

Brian Garner: Thanks, Steve. Our fourth quarter results demonstrate our ability to remain nimble in a challenging macroeconomic environment by addressing financial drivers within our control. Our portfolio management and cost actions resulted in year-over-year adjusted EBITDA growth in the fourth quarter, despite a 5.3% decline in revenues, which when combined with a materially lower share count resulted in a 25.4% increase in non-GAAP diluted EPS for the quarter, compared to Q4 of 2021. Our better than expected consolidated results were primarily driven by margin improvement in our Progressive Leasing segment, which had a Q4 adjusted EBITDA margin of 13.6%, compared to 10.5% in the same quarter last year. As indicated on prior calls, throughout 2022, we navigated quickly changing trends in customer payment performance as cash reserves from stimulus decided delinquency started to climb in the first half of the year, and lease merchandise write-offs of 9.8% in Q2.

Our continued investment in our data science team coupled with our short duration portfolio allowed us to quickly reverse the write-off trajectory we saw in the first half. Driving lower write-offs, higher margins, and increased profitability as we exited the year. Moving to consolidated results. Consolidated revenues declined 5.3% in Q4 2022 as the company faced headwinds on GMV stemming from a more conservative decision posture year-over-year combined with a softness in consumer trends for the categories we serve. As Steve mentioned, these factors drove a declining gross leased asset balance and our accounts receivable provision remained elevated in comparison to pre-pandemic levels. Consolidated SG&A as a percentage of revenue was relatively unchanged from 14.8% in Q4 of 2021 to 14.9% in Q4 2022.

The overall SG&A expense decreased by 4.4 million year-over-year in Q4 as a result of the cost reduction actions taken in Q2. Consolidated adjusted EBITDA increased 3.2% to 74.4 million in Q4 2022 from 72.1 million in Q4 of 2021, driven primarily by improvement in gross margin and progressive leasing from a lower accounts receivable provision and declining 90-day buyouts, as well as lower SG&A expense year-over-year. For our progressive leasing segment, gross merchandise volume decreased 14.8% to 540.9 million in Q4 of 2022 as compared Q4 of 2021, primarily result of the impact of tighter decisioning executed in Q2 and weaker retail traffic. Revenue in the period declined 5.9%. However, the segment’s Q4 gross margin improved year-over-year, returning to historical levels for the period.

Progressive Leasing’s SG&A expense as a percent of revenue declined year-over-year to 13.2% in Q4 of 2022 from 13.4% in Q4 of 2021. And SG&A expense decreased 6.4 million year-over-year, also primarily a result of our cost actions. The rest of leases write-off was 38.3 million or 6.5% of revenues in Q4, down from 6.8% in the previous year’s period. Additionally, that 6.5% represents a decline from the 7.2% in Q3 of 2022 and from our peak of 9.8% in Q2 of 2022. Looking at our balance sheet. We ended the quarter with net debt of 468.1 million, a function of our 131.9 million in cash and gross debt of 600 million, which is 1.83x our trailing 12 months adjusted EBITDA. In 2022, we repurchased 8.7 million shares of our common stock at a weighted average price of $25.64 and have $337.3 million remaining under our previously authorized $1 billion share repurchase program.

I’d now like to touch on two key aspects of our 2023 outlook, which was provided in this morning’s earnings release. As Steve mentioned, we believe the economic and liquidity pressures felt by our customers will have an impact on our 2023 results, including GMV, which will face a tougher compare in the first half of the year, the timing of our decisioning in Q2 of last year. Additionally, we expect the year-over-year percentage decline of our first quarter GMV to be roughly in-line with our Q4 rate of decline. We entered 2023 with a gross leased asset balance, 5.3% lower year-over-year, which is the basis for future period revenue. We expect this decline to serve as a headwind to revenue, particularly in the first half of the year. Our base case does not assume further economic downturn or material negative impact on the unemployment of our consumers nor does it assume any benefit from timing by providers above us in the credit stack.

Some factors we did take into account include a decline in average ticket size, a lower average tax refund amount versus last year, and reduced government support programs. Turning to our consolidated outlook for 2023, we expect revenues to be in the range of $2.34 billion to $2.44 billion, adjusted EBITDA to be in the range of 215 million to 245 million, and non-GAAP EPS in the range of $2.11 to $2.54. This outlook assumes a difficult operating environment with continued soft demand for consumer durable goods. No material changes in the company’s decisioning posture and effective tax rate for non-GAAP EPS of approximately 28%, and no impact from additional share repurchases. As Steve mentioned, while the revenue picture for 2023 was challenging, we anticipate that our lease portfolio performance from lower 90-day buyout rates 2023 will drive our progressive leasing gross margins higher year-over-year helping to offset much of the pressured earnings from lower revenues.

In closing, I’m also extremely proud of our company’s ability to react to a macroeconomic backdrop in 2022. It was different from anything we have experienced over 20 years in this business. Our team of dedicated employees showed a remarkable ability to quickly respond to external pressures and I remain confident in our team’s ability to continue and adaptable approach. I will now turn the call back over to the operator for the Q&A portion of the call. Operator?

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Q&A Session

Operator: Our first question comes from the line of Brad Thomas from KeyBanc. Your line is open.

Brad Thomas: Hi, good morning. Steve and Brian, and I had a couple of questions if I could. First one, kind of on the environment that you’re in and one on how you’re operating the business today. And so first, Brian, I think it was in your prepared remarks, you mentioned that the outlook does not factor in any benefit from tightening within the subprime part of the credit stack. And I’d just be curious, what you’re seeing out there and hearing out there and if you think you’re starting to get any benefit from tightening in that part of the credit world?

Brian Garner: Yes. I appreciate your question. I’ll let Steve weigh in on that as he’s been close to the following now with the sales team.

Steve Michaels: Yes, Brad, good morning. Yes, I would just say this is €“ it’s kind of a confusing one for me because as we’ve talked about on several calls, this has been an expectation in mind for a while that as you €“ that should have happened already, but as you’re looking at the cash reserve data and the savings rates, certainly, our customer was impacted more quickly than the prime customer. And we’re waiting to see that prime customer show up in our application funnel. You’re starting to hear some of the product providers using the word tightening on their calls and you’re certainly seeing their results, higher delinquencies, and higher provisions. Although I would say, we have not yet seen a material impact from those actions.

It has to €“ well, it’s our expectation that it will lead to reduced credit supply above us on the stack, but we have not seen it to any material effect yet. And so, while we think it will happen, it is not baked into our outlook because I’ve been terrible in predicting the timing of it thus far. So, more specifically, we do operate in business. And so €“ and there are a few instances where we are both the and the tertiary provider within a retail environment and has tightened several times over the last 18 months and has seen a little bit of tightening for the prime provider above them. But more broadly, we have just not seen it yet, although we are watching like a hawk and looking for it.

Brad Thomas: That’s helpful Steve. And then I was wondering if you could just help us think a little bit more about how you think about the expense base of the business? Obviously, there were €“ have been many years where Progressive experienced significant growth. I think there’s still a tremendous amount growth opportunity ahead of you all, but nonetheless, a tougher operating environment here in the near-term, in terms of GMV, how do you feel about the cost structure of the business, the level of spending and maybe could you talk a little bit more about some of the specific savings opportunities that you might have here this year?