Welcome to The Aaron's Company 1st Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's prepared remarks, there'll be a question and answer session. Instructions will be provided at that time. Thank you. I'd like to hand the conference over to Keith Hancock, Senior Director of Corporate Affairs for The Aaron's Company. Mr. Hancock, please proceed. Thank you. Good morning, everyone. Welcome to our First Quarter 2023 Earnings Conference Call. Joining me today are Aaron's Chief Executive Officer, Douglas Lindsay, President Steve Olsen, and Chief Financial Officer Kelly Wall. After our prepared remarks, we will open the call for questions. Yesterday, after the market closed, we posted our earnings release on the investor relations section of our website at investor.aarons.com. We also posted a slide presentation that provides additional information about our first quarter results and full year 2023 outlook. During today's call, certain statements we make may be forward-looking, including those related to our outlook for this year. For more information, including important cautionary notes about these forward-looking statements, please refer to the safe harbor provision that can be found at the end of the earnings release. The safe harbor provision identifies risks that may cause actual results to differ materially from the content of our forward-looking statements. Please see our Form 10-K for the year ended December 31, 2022, and other filings with the SEC for a description of the risk related to our business that may cause actual results to differ materially from our forward-looking statements. On today's call and in the release, we refer to certain non-GAAP financial measures, including EBITDA and Adjusted EBITDA, non-GAAP net earnings, non-GAAP EPS, and adjusted free cash flow, 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 in our earnings release and the supplemental investor presentation posted on our website. I will now turn the call over to our CEO, Douglas Lindsay. Thanks, Keith. Good morning, everyone. Thank you for joining us today and for your interest in the Aaron's Company. I'm pleased to report that we delivered consolidated company earnings for the first quarter that were ahead of internal expectations, despite lower revenues in both business segments. In the Aaron's business, I'm pleased to report that we ended the quarter with a higher lease portfolio size than expected. As we've noted before, our lease portfolio size is a leading indicator for future revenues, and our strong performance in the quarter was a result of fewer customers exercising early purchase options and lower write-offs. The portfolio benefited from enhancements to our lease decisioning model, and we expect these benefits to carry forward in the year as leases initiated under our tightened model reflect a greater percentage of the total portfolio. I'm also very pleased with the progress we've made in our market optimization and cost reduction initiatives, which contributed meaningfully to our bottom line in the first quarter. Our e-commerce business continues to grow, and we continue to open more GenNext locations. Our GenNext stores now make up more than a quarter of Aaron's lease and retail revenues. In the BrandsMart business, demand continues to be challenging. Macroeconomic factors continue to weigh on our customer, who remains cautious in their purchasing decisions, especially for big ticket and discretionary product categories that we carry. We remain focused on enhancing profitability in this segment through direct procurement savings, strategic pricing actions and cost controls, while also continuing to invest in enhancing and growing the business. We remain confident in BrandsMart's compelling value proposition and its long-term growth opportunities. In particular, I'm excited to announce that we plan to open our first new BrandsMart store in Augusta, Georgia in the fourth quarter of this year. Turning to the consolidated company results. I'm pleased to report that we reduced net debt by nearly $37 million in the quarter and ended the quarter with $352 million of available liquidity. This was primarily a result of strong cash flow from operations, demonstrating the advantage of our recurring revenue model in the Aaron's business. Given our performance in Q1 and the larger and healthier lease portfolio than expected to end the quarter, we have updated our outlook for the year, which reflects higher expected earnings for the Aaron's business and lower expected earnings at BrandsMart. Our updated outlook includes both higher earnings per share and higher free cash flow for the year. I do wanna note that our outlook does not assume any further credit tightening above us. However, if that were to occur, we believe that the Aaron's business would benefit over time from increased customer demand. As we look ahead, we remain focused on optimizing profitability in both businesses. We continue to make progress on the execution of our multi-year strategic plan. This includes our growth initiatives for both Aaron's and BrandsMart, as well as our cost reduction initiatives that we announced last quarter. I wanna thank our teams at Aaron's, BrandsMart, and Woodhaven for their hard work this quarter and for their continued focus on providing exceptional value and service to our customers. I will now turn the call over to Steve. Thanks, Douglas, and good morning, everyone. As Douglas just mentioned, the Aaron's business delivered first quarter results ahead of our internal expectations. In the Aaron's business, merchandise deliveries across all origination channels were down mid-single digits year-over-year. Deliveries were impacted by lower customer traffic and strategic actions we made to tighten lease decisioning. Our lease renewal rate for the quarter was 88.5% for all company-operated Aaron's stores. This was down 90 basis points year-over-year. We are pleased that the lease renewal rate in Q1 was 270 basis points higher than the prior quarter. As typical in Q1 of each year, we experienced lease renewal rate improvement related to the tax refund season. This year, we experienced further benefits from ongoing optimization of lease decisioning. I want to bring your attention to a new metric related to lease renewal activity that we are sharing for the first time in our investor presentation. Our 32+ day non-renewal rate measures the number of lease-to-own customers who are one month or more non-renewed. At the end of the first quarter, this rate was 1.6%. This was an improvement of 110 basis points from the prior quarter, and more importantly, flat to the prior year period. As we look at the overall health of the portfolio, we see the 32+ day non-renewal rate as an important leading indicator for future write-offs. Moving to our lease portfolio size. We exceeded our internal expectations by ending the quarter with a lease portfolio size of $121.9 million. This was a decrease of 7.5% compared to the prior year quarter. However, we are pleased with this larger than expected lease portfolio as the tax refund season comes to an end. Let's talk about our important growth initiatives for the Aaron's business. As of the end of the quarter, GenNext stores now account for approximately 27% of our lease revenues in retail sales. That compares to approximately 15% in the prior year quarter. Lease originations in GenNext stores opened less than one year, continue to grow at a rate of more than 20 percentage points higher than our legacy store average. In addition to opening GenNext stores, we also continue to execute our new Hub and Showroom program. Far this year, we have converted 34 additional showrooms, bringing the total number of converted locations to 63 since we launched the program. Turning our attention to e-commerce. Our e-commerce platform is a key vehicle for new customer acquisition and a revenue driver for the Aaron's business. In the quarter, revenues generated from leases initiated on the aarons.com platform increased 12.3% year-over-year. E-commerce now represents 17.9% of total lease revenues. This compares to 15.2% in the prior year quarter. In addition, our digital marketing strategies and tactics are gaining momentum. I am pleased to report that the volume of lease applications completed on aarons.com increased year-over-year. Despite the higher volume of lease applications, recurring revenue written into the portfolio from e-commerce decreased 5.5% compared to the prior year quarter. This decrease was a result of tighter lease decisioning, lower conversion, and lower average ticket. As we continue to innovate the Aaron's business, we are focused on enabling our customers to move seamlessly among our in-store and online platforms. Turning to BrandsMart. We continue to operate in a challenging macroeconomic environment as customers remain cautious with their discretionary purchases. We are experiencing weaker customer traffic and a lower average transaction value. Product sales were down in both our in-store and e-commerce channels by approximately 18% as compared to the prior year quarter. In the face of this challenging demand environment, we continue to focus on optimizing our profitability. Direct procurement savings and strategic pricing actions helped improve our product gross margin by approximately 60 basis points as compared to the prior year quarter. We continue to focus on expense reductions and optimizing our labor model. As we look to the future, we remain focused on achieving transaction synergies, enhancing our e-commerce platform, and opening our first new BrandsMart store. Similar to the Aaron's business, e-commerce remains an important channel to acquire new BrandsMart customers. We continue to invest in digital marketing, and we are improving the online shopping experience. Also, as Douglas mentioned, we plan to open our first new BrandsMart store in Augusta, Georgia in Q4. I'm excited about this opportunity to bring our competitive prices, broad product selection, and exceptional customer service to Augusta. We are confident that our brand and our customer value proposition will resonate in this new market. Now, I'll turn the call over to Kelly to provide further details on our financial performance. Thanks, Steve. Unless stated otherwise, my comparisons to prior periods will be on a year-over-year basis. Consolidated revenues for the first quarter of 2023 were $554.4 million, compared with $456.1 million. This is up primarily due to the acquisition of BrandsMart and offset by lower revenues at the Aaron's business. Consolidated Adjusted EBITDA was $45.9 million compared with $57.9 million. This is mostly down due to a decline in adjusted EBITDA at the Aaron's business, offset by the contribution of BrandsMart. As a percentage of total revenues, Adjusted EBITDA was 8.3% compared to 12.7%. On a non-GAAP basis, diluted earnings per share were $0.66 compared to $0.87. Net earnings in the quarter included a net income tax benefit of $6.6 million or $0.21 per share. Effective as of the start of this fiscal year, we have elected to treat Aaron's, LLC, a subsidiary of the company, as a corporation for income tax purposes. This election is expected to change our state apportionment percentage, resulting in a favorable remeasurement of certain state-deferred tax assets. Despite the lower earnings in the quarter, adjusted free cash flow was $42.5 million, an increase of $29.9 million or over 200%. This increase was driven by higher cash provided by operations as we lowered our inventory purchases at the Aaron's business and BrandsMart to align with current customer demand trends. During the quarter, we continued to return capital to shareholders, declaring $3.9 million in dividends. We did not repurchase any shares during the quarter. We ended the first quarter with $44.3 million of cash and $222.1 million of debt. This is a $36.9 million reduction in our net debt balance from the end of Q4 2022 and improves our net debt to Adjusted EBITDA leverage ratio to 1.1 times. I'll dive into the financial details for Q1 at the business segments. First, the Aaron's business. Total revenues decreased 9.6% from the prior year to $412.1 million, primarily from lower lease revenues in the segment. These revenues were lower due to a smaller lease portfolio size, lower lease renewal rate, and fewer exercises of early purchase options by our LTO customers in the quarter. In addition, retail sales, non-retail sales, and franchise royalties and fees were lower year-over-year. Gross profit in the quarter was $260.7 million, down 8.5%. This is attributed to a smaller lease portfolio size, lower lease renewal rates, and lower new lease originations. However, since fewer customers exercised their early purchase options this Q1, gross profit margin increased 80 basis points to 63.3%. Operating expenses decreased $7.9 million. This was due mostly to lower personnel costs and a lower provision for leased merchandise write-offs and were partially offset by higher other operating expenses. We continue to be pleased with the improvement in our write-offs. The provision for leased merchandise write-offs as a percentage of leased revenues and fees was 5.4% compared to the same 5.4% in the prior year period. Although flat year-over-year, this was a 170 basis point improvement from the fourth quarter of last year. We believe this improvement is the result of three things. First, seasonally stronger customer payment activity. Second, enhancements we've made to fraud controls and our lease decisioning algorithms. Third, strong execution by our store operations and store support center teams. Adjusted EBITDA at the Aaron's business was $54.6 million compared with $69.9 million. This decline was primarily due to a smaller lease portfolio size and a decline in our lease renewal rates. These were partially offset by lower personnel expenses and the lower provision for write-offs I just reviewed. As a percentage of revenue, Adjusted EBITDA was 13.2% compared to 15.3%. Turning to BrandsMart's financial results in the quarter. Retail sales were $144.2 million. Gross profit was $35.1 million or 24.4% of retail sales. Adjusted EBITDA was $2.8 million. Adjusted EBITDA margin was 1.9%. Yesterday, we issued our first quarter earnings release, which includes the complete detail of our updated full year 2023 outlook. This revised outlook assumes no significant deterioration in the current retail environment, state of the U.S. economy, or global supply chain as compared to their current condition. It also does not reflect any meaningful impact of credit tightening for the prime and near-prime credit consumer. This revised outlook reflects our expectation that total revenues for the consolidated company will be between $2.15 billion and $2.25 billion. We have lowered revenues to reflect lower early purchase options and lower retail sales at the Aaron's business in Q1 and the remainder of the year. This update to consolidated revenues also includes expected lower product sales at BrandsMart. We have increased our earnings outlook for the Aaron's business and lowered our earnings outlook for BrandsMart. With these two changes, our outlook for consolidated Adjusted EBITDA is unchanged, remaining at a range of $140 million-$160 million for the year. We have raised our outlook for non-GAAP EPS and Adjusted free cash flow. This increase to EPS to between $1.00 and $1.40 includes the benefit of the deferred tax revaluation I described earlier and lower expected depreciation and interest expense for the remainder of 2023. We are now expecting a lower year-end debt balance. We entered into an interest rate swap last month. This swap reduces our interest expense rate on a portion of our outstanding debt as compared to our previous outlook. To wrap it up, I want to highlight the increase to our adjusted free cash flow outlook. This increase to a range of $75 million-$85 million for the full year reflects our strong cash flow in Q1, higher after-tax earnings, continued inventory and working capital management, and lower CapEx for the year. With that, I will now turn the call over to the operator for Q&A. Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure that your phone is unmuted locally. That's star one for any questions now. Our first question today is from the line of Kyle Joseph of Jefferies. Kyle, please go ahead. Hey, good morning, guys. Thanks for taking my questions. On the, on credit performance, obviously you guys outperformed your initial expectations despite the lower tax refunds. You know, how are you thinking about underwriting from here? How's your consumer? Are they kind of adjusting to inflation at this point? Just give me a sense for how you're thinking about that. Hey, Kyle Joseph, it's Douglas Lindsay. You know, as I've said before, we've taken a fairly defensive stance there. I think it continues to be a wait and see. We're really encouraged. We gave a new metric this quarter, 32+ day delinquencies. As you see, that's decreased from kind of the mid 2% range to 1.6% over the last 12 months, which is really encouraging. I think as we look at the consumer, we're still in the sort of a state of transition, I would say. It appears that the consumer's acclimating to the inflationary environment that we're in. I do believe that the decisioning changes that we made in the last year and that have been really ongoing, it's been optimization are benefiting us. We continue to remain cautious there. When in any environment like this where you see improved, loss rates and improved delinquencies or write-offs, you tend to look at your decisions going forward and make that assessment as you go. We'll continue to do that. I would say generally the state of the customer is continues to be under stress. Demand continues to be pressure, but we're really happy with what we've done internally. Got it. Very helpful. Just got a few questions, you know, in terms of the changes to EPS versus EBITDA guidance. You know, is EPS going up? Is that just a function of delevering? The swap you mentioned, which should help control kind of interest expense versus initial expectations. On the balance sheet, obviously you did a good job delevering in the quarter. You know, how are you thinking about leverage at this point? Yeah. Kyle, it's Kelly. I think you're spot on there, right. you know, we had the $0.21 tax related item that we called out in some detail. Obviously that's influencing the full year outlook as well as lower interest expense for the remainder of the year. We also have lower depreciation expense coming through the remainder of the year, having taken our CapEx assumptions down as well. Yes, from a debt perspective, with the stronger free cash flow that we had in Q1, the continued expectation of strong free cash flow through the remainder of the year, our view is that, absent some of the use of that cash, yes, our debt balances will continue to be lower, also contributing to that EPS raise. Okay. Got it. Just one follow-up there. How should we think about the tax rate going forward? Yeah. No, going forward for the remainder of this year, I would use 25% for each of Q2, Q3 and Q4, and that'll give you an effective tax rate for the full year of between kind of call it 10% and 11%. Got it. That's it for me. Thanks all for answering my questions. You're welcome. Thank you. Our next question today is from the line of Anthony Chukumba of Loop Capital. Anthony, please go ahead. Your line is open. Thanks for taking my questions. I guess my first question is just on how you're thinking about capital allocation, particularly given the fact that, you know, you beat your internal expectations for the first quarter and you raised your free cash flow guidance and obviously your stock, you know, is depressed, you know, on a valuation basis. How do you think about that? Yeah, Anthony. I'd say our capital allocation strategy really remains unchanged from what we've described, you know, last quarter. Just a quick reminder, right? First, we're focused on investing into the business where we're achieving the appropriate targeted returns, right? Second, we're focused on maintaining a conservative leverage profile, more specifically between EBITDA leverage ratio of between 1 and 1.5 times, which clearly we did. You know, we continue to improve our leverage ratio in Q1. We're at the low end of that range coming out of the quarter. Third, the third leg of our capital allocation strategy is returning capital to shareholders. We've done that in the past through a combination of dividends and share repurchases. While we didn't repurchase any shares in Q1, we do have $133.5 million remaining under the share repurchase authorization that our board had approved the year before last. Finally, you know, we will selectively look at opportunistic M&A. To answer your question a bit more specifically, right, you know, we don't give specific guidance on exactly how we're gonna use the cash, but we use that framework to make decisions as we go quarter- to- quarter. Hopefully that's helpful. That is helpful. Thank you. Just one quick follow-up. Can you just give us an update in terms of integrating the Aaron's lease-to-own solution into BrandsMart stores? I know it's in the stores, but my understanding is that you wanted to make some sort of refinements to it. I was just wonder if we can get an update there. Sure. Hi, Anthony, this is Steve. You know, to date, we're pleased with the performance, and we would say we're ahead of our internal expectations on the key LTO metrics, things like portfolio size, renewal rate, and just the overall demand coming into BrandsMart Leasing. Just to remind you, we rolled it out in May of last year. We're just about a year into that rollout, and we're making continuous improvements, both from a process standpoint and the systems. We feel we're well-positioned if and when the credit tightening above us occurs. Yeah. I'd just add, I mean, the team has done a fantastic job to launch that, and we believe there's additional operational enhancements to gain more market share there and streamline the process. You know, we're sort of in early innings on that, but we're optimistic about the future of that synergy. That's very helpful. Thank you. Next question today is from the line of Bobby Griffin of Raymond James. Bobby, your line is now open. Please proceed. Good morning, everybody. Thanks for taking my questions. I guess first, Kelly, just on the guidance, just trying to unpack the changes a little bit more. Was the higher now Aaron's core guidance, just for the upside during the quarter, or do the expectations for that segment of the business change over the remaining nine months that you guys have to report? The increase on the earnings side there does reflect Q1, but it also reflects the larger lease portfolio size we have going into the beginning of Q2, and that carrying through the remainder of the year relative to our initial expectations. The other thing, two areas where we've updated our view, one on write-offs. I know I hit it. Douglas and Steve also hit on this as well, right? Great continued momentum in the benefit of our lease decisioning changes over the last year. If you see it clearly in the 32+ day non-renewal rate that we're now disclosing and tracking that over the last year, as compared to the prior year. The continued benefit of write-offs is part of what we're continuing to factor in, as well as the cost control initiatives that we've really leaned into this year. We're seeing good results there. All three of those put together is helping contribute to that increase on the Aaron's business side. Is the counter is with the portfolio size coming in better, you know, write-offs coming in better, the cost control, you know, only moving $5 million, is there any offset there, or is it just some conservatism in it? Obviously, the consumer is still very tough to predict. We don't quite know what's gonna happen with trade down. Just trying to kinda unpack because it does seem like the core leasing business has some good developments taking place now versus trends over the last, you know, 12 to 18 months. Yeah. Hey, Bobby, it's Douglas. I mean, I would say the offset to that is demand pressure. You know, we continued to see demand pressure in the 1st quarter, that has persisted through April. We have tweaked our demand assumptions down in the 1st half of the year incrementally from our original outlook, leaving the 2nd half of the year alone, as we think while the 2nd half of the year will be down year-over-year, there will be slight improvement there, relatively speaking. You know, we continue to look at industry data. We look at what we're seeing in our data so far this year and are assessing how much to pull forward to demand and how long that will persist relative to the product life cycle. We've taken all that into account. Kelly outlined the three positives. I would say that's the pressure on the business right now, and it's the pressure on BrandsMart and on Aaron's. Yeah. Bobby- Thank you. ... to your point, right, we are not assuming any trade down in credit. Were that to happen, you know, kind of counterbalance that demand pressure that Douglas had mentioned before. Just another thing to kind of keep in mind in terms of potential upside going forward. Yeah. I would say the last thing is, and it's based on Kyle's original question, to the extent we continue to see lower write-offs, we produced our lease approval rates by several hundred basis points year-over-year. To the extent those low write-offs continue, that is also an opportunity for us. If we were to lose some there, that could help throughout the year. Thank you. That's helpful, too. I guess, Kelly, on the subject of trade down, you know, none assumed going forward, have you seen any signs that it might be coming, or did you see a little bit, you know, in 1Q that gives you kind of hopes that maybe we're entering this period that, you know, credit actually is gonna tighten a tiny bit, either from an application standpoint or some your customer bands that are applying or anything like that? Yeah. Bobby, this is Douglas. I would say as of right now, we're not seeing an increase in demand from credit tightening above us, either at Aaron's or BrandsMart. It's really tough to gauge what's going on right now. It seems to me that things are getting tougher with the prime and near-prime consumer. As Kelly said, should credit tighten above us, default rates increase, credit get restricted, we believe that our market will expand. We get e-external data every day. We run that through our lease decisioning committee, and we're looking at what's coming into our funnel. We have not seen evidence of that. We see some slight evidence of demand coming in from our peer group, I would say, with lower approval rates, but not necessarily from above us. We do data that comes through BrandsMart, and we're looking at that as well in BrandsMart Leasing. We continue to focus on the external factors and how they may influence that going forward. Gas prices, housing prices, food prices are major factors for our customer. Of course, the near-prime consumer as their savings rates diminish and credit increases. Those will be important factors. We'll continue to keep you updated on that. Absolutely. Well, I appreciate the details. Best of luck here, going forward. Thank you. Thanks, Bobby. As a reminder, to ask a question today, please dial star one on your telephone keypad now. The next question is from the line of Scot Ciccarelli of Truist. Scot, please go ahead. Your line is open. Hey, good morning, guys. This is Joseph Civello on for Scot. Thanks for taking my question. I just wanted to dive a little deeper into the 170 basis point sequential improvement in write-offs and how we should think about the full year guidance. I think last time you guys said, 5.5%-6.5% for this year. Longer term, kind of getting back to the 5%-6% range. Just wanted to see if those changed at all. Joe, it's Kelly. Thanks for the question. Our outlook or guide, right, for write-offs for the full year is unchanged at the 5.5%-6.5%. I mean, we are trending towards the lower end of that now. Just given some of the volatility, right, we've seen over the last four quarters, we're not ready to, you know, tighten that range. Certainly based on what we're seeing in terms of the results in charge-offs and write-offs and the 32+ day non-renewal rates, from the management of our lease decisioning over the last several months. What we're seeing there, we're increasingly confident in that 5%-6% range as you move into 2024 and beyond. Got it. Great. Then one follow-up on that. If you keep seeing write-offs come in lower than expected, would you decide to then loosen credit standards again, or is that, like, off the table for this year? Yeah, this is Douglas. I would say it's not off the table. We're constantly optimizing our lease decisioning. We have a recurring lease committee meeting that we do that in and we'll continue to assess the current environment and what we're seeing in the future to make those decisions. You know, tightening or loosening happens real time in our business, and so that is not off the table for sure. Got it. Great. Thanks. Thanks, Joe. Thank you. We have no further questions in the queue today, so it's my pleasure to hand back to Douglas Lindsay for some closing remarks. Thank you, operator. As we wrap up, I just want to reiterate how encouraged I am by our execution to start 2020. Our larger, as we said, our larger and healthier lease portfolio size, combined with lower delinquencies set us up really well for the future, despite a softer tax season. I'm really pleased with the efforts by the team to consolidate our efforts to integrate BrandsMart in the business and achieve our transaction synergies. I'm excited to open our first store in Augusta, Georgia this year at BrandsMart. Again, I wanna thank our team members, our franchisees for a great first quarter, and thank you for joining us today. We look forward to speaking with you soon. Thank you for joining us today, everyone. This concludes the call, and you may now disconnect your lines.