PROG Holdings, Inc. Q2 FY2022 Earnings Call

Good morning and welcome to the PROG Holdings, Inc., Second Quarter 2022 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Mr. John Baugh, Vice President of Investor Relations for PROG Holdings. Please go ahead.

Thank you and good morning, everyone. Welcome to the PROG Holdings Second 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 impact of our lease decisioning adjustments on write-off levels, Progressive Leasing's write-off levels for full year 2022 and the benefits we expect from the adjustments we have made to our SG&A spend. 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, 2021, which we encourage you to read. Listeners are cautioned not to place undue emphasis on forward-looking statements we make today, and we undertake no obligation to update any such statements. On today's call, we will be referring to certain non-GAAP financial measures including adjusted EBITDA and non-GAAP earnings per share, which has been adjusted for certain items which may affect the comparability of our performance with other companies. These non-GAAP measures are detailed in the reconciliation tables included with our earnings release. The company believes that these non-GAAP financial measures provide meaningful insight into the company's operational performance and cash flows and provides these measures to investors to help facilitate comparisons of operating results with prior periods and to assist them in understanding the company's ongoing operational performance. With that, I would like to turn the call over to Steve Michaels, PROG Holdings' President and Chief Executive Officer. Steve?

Thank you, John, and good morning, everyone. I appreciate you being with us today as we discuss our second quarter results and update you on our business as we navigate this dynamic macro backdrop while continuing to support key growth initiatives. I'm proud of the team's ability to quickly adapt to conditions that have been especially challenging for our customers and POS partners. We expect these actions will provide future benefits as we aim to increase our share of the largely unserved addressable market. As you may have seen in our press release this morning, we launched a new exclusive partnership with Samsung.com. We are excited to have emerged from this competitive process as the exclusive provider of Samsung.com's lease-to-own payment options and are pleased to have onboard yet another national e-commerce partner. While the full benefits of this relationship will not be realized in 2022, we believe we will see meaningful benefits in 2023 and beyond as the partnership continues to ramp. In our Q4 earnings call in February and most recent mid-June update, we said we expected headwinds to our 2022 results as we left stimulus and other government support. Still, we believe our ability to manage the company's portfolio performance and expense structure while growing our customer account and generating significant free cash flow will help us remain in a strong position even with the slowdown. We further tightened lease decisioning during Q2 to address the increase in delinquencies and write-offs we are seeing due to the inflationary pressures our customer is feeling. As we move forward through this difficult environment, we will continue to make the necessary adjustments that we believe will move us back towards our targeted annual write-off levels of 6% to 8%. Also in June, we announced adjustments to our SG&A spend levels in response to the headwinds we're experiencing and to align with our revenue outlook. While cost-cutting measures are never easy, these actions demonstrate our ability to quickly adapt our cost structure to changing economic conditions while maintaining investments in revenue-generating initiatives that we anticipate will support our future growth prospects. For our Progressive Leasing segment, second quarter GMV and revenues were in line with our revised expectations. Q2 GMV was down 2.4% year-over-year, while e-commerce GMV increased almost 18%, representing 15.6% of Progressive Leasing's total GMV for the quarter. We have now added 32 e-commerce partners to our platform in 2022 with more consumer brands in the pipeline for the remainder of this year. Widespread weakness in retail traffic along with our tighter decisioning drove the decline in GMV. However, that weakness was largely offset by share growth within many of our POS partners. Retailers and consumers need us more than ever as inflation remains at unusually high levels. As I've mentioned before, for retailers, we drive fast integration with prospective partners and incremental sales with existing partners. And for consumers, we offer purchasing power through flexible payment options. While we've not yet seen an impact from credit providers tightening above us, there is increasing evidence that those pressures are beginning to build. Consumer cash reserves, which were inflated by government stimulus programs and reduced spending during COVID, are depleting rapidly as income struggles to keep pace with inflation, leading to increased credit utilization. We cannot predict the timing of when we may see a tailwind from tightened credit above us. But we expect ultimately that the current economic trends are more conducive to POS partners and consumers benefiting from our offerings. In short, we'll continue to control what we can control, partner with new retailers, complete e-commerce integrations, improve the customer experience, and manage our decisioning in a way that we believe will return us to our targeted financial performance. Our Q2 adjusted EBITDA of $52.2 million was slightly better than our revised outlook as a result of lower-than-expected SG&A expense. The provision for lease merchandise write-offs for the second quarter was 9.8%. As the quarter progressed, we made additional decisioning changes that have resulted in improvement in our early stage metrics. And we believe that the adjustments we have made here today are working to drive our write-offs lower from Q2 levels. The average 6 to 7 months duration of our lease portfolio means that our portfolio quickly shifts to the new lease pools originated with tighter decisioning. As I mentioned earlier, the team executed well in the evolving environment. Portfolio performance remains a key focus, and we will continue to manage it through the remainder of the year in a manner that we believe will drive sustainable and profitable GMV with healthy unit economics. Our capital priorities remain unchanged. During the second quarter, we repurchased 3.9 million shares, reducing our outstanding share count by 26% since the beginning of 2021. We ended the quarter with a leverage ratio of 1.67x, which is still, in our opinion, within a comfortable range. We ended June with a cash position of $127.3 million, even after $98.4 million in share repurchases during the quarter. The capital we generate for the full year will continue to allow us to reinvest in the business and maintain a strong balance sheet even with the dynamic economic backdrop. I'll close with emphasizing the strength of our business model. Even in a challenging environment with negative GMV growth, we have demonstrated our ability to control unit economics, quickly reduce costs to align with revenue, and generate significant cash flow. Finally, I want to reiterate my appreciation for the resilience and teamwork of all PROG employees as we continue to execute on our strategy. I'll now turn the call over to Brian for a more detailed look at the quarter's financials. Brian?

Thanks, Steve, and good morning. The second quarter financial results were aligned with our June 16 update and reflect continued challenging operating conditions as our customers manage the impact of the current inflationary environment. Our approach to navigating these headwinds is centered on addressing the financial drivers within our control. This includes making changes to our decisioning parameters to drive improved portfolio performance and managing our SG&A costs at appropriate levels for the current revenue outlook. With respect to the changes made in decisioning, over the course of the last few quarters, the company has made a number of iterative changes to Progressive Leasing's decisioning algorithms in response to the deterioration in customer lease payment patterns. We made the most significant of these changes in Q2 of 2022 based upon early indicators of increased delinquencies of the course originated. As we've stated previously, the 6 to 7 month average duration of our lease portfolio allows the company to influence the delinquency profile relatively quickly through adjustments to our decisioning. While the write-off performance in Q2 is elevated relative to historical levels, I'm encouraged by the early data we've gathered on the performance of our recent lease pools which have benefited from our tightening efforts. We believe we remain on track to close the year near the high end of our 6% to 8% targeted annual write-off range. The annual outlook provided in our June update anticipates improvement from the write-off levels we saw in Q2. As mentioned in our June release, the company took material steps to reduce its cost structure to align with our revised expectations for the remainder of the year. While SG&A was elevated in Q2 of 2022, we expect these cost reduction measures will meaningfully reduce SG&A as a percentage of revenue from current levels. These measures, including approximately 10% reduction in our workforce, remove roughly $50 million of annualized cost compared to the plan that was the basis for our full year outlook provided in February of this year. Turning to the financial results for the quarter starting with Progressive Leasing segment. Progressive Leasing's revenue was $631.3 million for the quarter versus $646 million in the year-ago period, a 2.3% decline. Our larger gross leased asset balance in the period, which ended the quarter up 12% year-over-year, was a tailwind to revenue. However, our accounts receivable provision, which is a direct reduction to revenue, was $97 million in Q2 of 2022 compared to $39.8 million in the same period of 2021, more than offsetting the benefit of the larger portfolio. Progressive Leasing's gross margin was 30.4% versus 31.9% in the year-ago period. The decline in gross margin was primarily the result of the higher accounts receivable provision. SG&A for the Progressive Leasing segment, excluding restructuring charges, was $81.9 million, or 13% of revenues for Q2. Progressive Leasing provision for lease merchandise write-offs in Q2 was 9.8%, or $61.8 million compared to 4.8% and $31.3 million in the same quarter last year. As discussed, we believe this period's write-off results will represent the high points of the year as the lease pools originated under the most recent tightening efforts become a larger percentage of our portfolio. Pivoting to consolidated results, Q2 revenues for PROG Holdings were $649.4 million versus $660 million in the year-ago period, a decline of 1.6%. Adjusted EBITDA was $52.2 million or 8% of revenues in Q2 versus $104.9 million or 15.9% for the prior year period. Reduction in revenue and EBITDA was primarily attributable to decreased portfolio performance in the period relative to the stimulus-aided prior year period. We generated $57.4 million of cash from operations in Q2 and $155.7 million year-to-date. Our Q2 GAAP diluted EPS was $0.37, and our non-GAAP EPS was $0.52. We have $600 million of gross debt and $127.3 million of cash at the end of Q2, or a net leverage ratio of 1.67x or trailing 12-month adjusted EBITDA. We also entered the third quarter with $350 million of availability under our undrawn revolving credit facility. During Q2, we repurchased 3.9 million shares of stock for a total of $98.4 million at an average price of $25.23 per share. At the quarter's end, we have $384.4 million remaining under our $1 billion repurchase program. In summary, our Q2 results were largely driven by the pressures on portfolio performance that negatively impacted near-term results. During the quarter, we adjusted our decisioning and aggressively addressed our SG&A spend levels in response to results caused by the pressures that have impacted our customers. We continue to monitor operational and financial metrics as we manage the business in a disciplined manner. I will now turn the call over to the operator for the Q&A portion of the call.

And our first question will come from Kyle Joseph of Jefferies.

So obviously a difficult operating environment. Stepping back, I mean, you guys are one of the biggest, if not the biggest in this space. Can you talk about how the operating environment is impacting the competitive environment and what's happening to some of the smaller players?

Yes, it's a challenging environment. Regarding competition, it's basically the same as before. There’s a significant amount of competition in various regions, with numerous players vying for business. There is some turnover and fluctuation in the regions, but that's consistent with what we've experienced over the past few years. I haven't heard of any smaller companies going out of business or disappearing, but the competitiveness of offers tends to vary. The major trend in the competitive landscape has been larger players becoming public companies, particularly with Acima and AFF. This has resulted in more shifts in that space. On the enterprise side, we haven't noticed any significant changes either, but we remain vigilant. So, we have not observed the current challenging conditions leading to a reduction in competition.

Got it. And then shifting to credit, I've been getting this question a lot. Folks are interested in auto finance, you're talking about frequency and severity of losses, but can you give us a sense for the write-offs in the quarter? How much of that was frequency versus severity versus increase in reserve levels?

Yes, I’ll address the write-offs. The 9.8% for the quarter is higher than our historical averages, and we are actively working to reduce that figure. In a tough economic environment, we noticed a decline that started late last year and has continued into the early part of this quarter. We implemented several changes, particularly in Q2. Although it is still early, we are monitoring the delinquency trends of the new cohorts we've originated, and the trends are looking positive as they are moving closer to historical levels. Regarding frequency, severity, and reserves, we are currently experiencing levels above the historical annual range of 6% to 8%, with a write-off rate of 9.8%. This increase in reserves has occurred over the last few months, primarily due to the portfolio originated before our recent tightening measures. This is where the significant changes are evident, and you will see this reflected in our queue concerning the reserve adjustments. However, it is still early, and we have the opportunity to improve as we finish the year. The steps we've taken are expected to ease the situation as the new pools, resulting from our tighter standards, will make up a larger share of the overall portfolio and help alleviate the current write-off levels.

Got it. Very helpful. One last one from me. Congratulations on the new retail partner, very excited. It feels like it's been a while since we've seen one announced in this space. Just regarding your pipeline, can you give us a sense for the conversations you're having with new partners and are they more receptive given how much the environment has really changed in the last 6 months?

Yes, thanks, Kyle. We are excited about partnering with Samsung and pleased to have emerged as the exclusive provider for one of the top global brands. We believe that, despite the challenging conditions, our business model is well suited for both consumers and retail partners. In terms of GMV, while our negative 2.4% is slightly lower than desired, it demonstrates that we are outperforming the overall performance of our retailers when it comes to headline costs. This reflects positively on our business model as we can gain market share during tough times. This makes our solution more appealing for retailers who don't have a fully developed finance stack, and we stand by that. As you've seen over the years, there are typically long sales cycles, and we are doing everything possible to shorten that period. We are nearing code freeze season for most retailers as we prepare for the holiday season, and the discussions we are having from a pipeline perspective are encouraging. We expect to see conversion over the next couple of years.

The next question comes from Anthony Chukumba of Loop Capital.

So allow me to ask a question that's a bit psychoanalytical. So you put out a press release about signing up Samsung. If I recall correctly, typically, you don't put out press releases when you sign up new retail partners. I don't recall a Best Buy one or a Lowe's one. So I guess I'm just trying to figure out like why a press release about this particular one? Is it just a difference in sort of philosophy? Is it that you're super excited about this? Should we expect press releases on other partners? Like how should we sort of think about that? I'm probably over-analyzing, but that's what we do on the sales side.

I appreciate that, Anthony. It's a good question. This company has not traditionally shared information like that. Part of that comes from when Progressive was under Aaron's umbrella. Now that we are an independent public company, our philosophy may have shifted. In the case of Lowe's and Best Buy, we typically announce exciting partnerships to people like you first, and that often requires us to respond to it publicly. We decided to take control of our own news cycle and share it ourselves. We are thrilled about our partnership with Samsung, as having a top 5 global brand endorse our program and capabilities is significant. That's why we chose to collaborate with them and issue the release.

Got it. That makes sense. So I have one follow-up question regarding credit tightening. How should we view credit tightening in terms of acceptance rates? Specifically, when you implemented the tightening, did the acceptance rate drop from 70% to 60% or from 60% to 55%? What should we expect in terms of magnitude?

Yes, certainly. Approval rates are essentially the same as acceptance rates. We implemented a series of tightenings, and after the initial pandemic shock, we sought ways to enhance approval rates due to favorable payment conditions and market liquidity. If we compare Q2 approval rates to Q2 of 2021, we are down about 400 basis points. However, when we look at Q2 of 2022 versus Q2 of 2019, which represents a more stable pre-pandemic period, the drop is about 100 basis points. As Brian mentioned, we did tighten during the quarter, resulting in higher approval rates in April compared to June. To provide a more relevant data point, as of last week, we are approximately 600 to 700 basis points lower than last year and about 200 basis points lower than July 2019.

I'm confused about the year-over-year change and the change since 2019. What were those figures?

Okay, sorry. The average approval rate in Q2 of '22, right, so the quarter we're reporting on now was about 400 basis points lower than last year in '21. It was about 100 basis points lower than the second quarter of 2019 before the pandemic. Those numbers are a little bit wider if you look at mid-July versus the average of the quarter. So that's what I was trying to communicate.

The next question comes from Jason Haas of Bank of America.

I'm just inquiring about the write-off expectations for the remainder of the year. I believe I heard the high end is around 6% to 8%. Is that the annual figure? Is that what’s anticipated for the second half? Additionally, what kind of GMV growth are you forecasting for the second half to achieve that?

Yes. So I think our competitor was near the high end of the 6% to 8%, and that's on an annual basis. So as we get to the end of the year and look back over the trailing 12, Jason, we expect to be near that 8%. And we haven't given…

Yes, while we haven't specifically provided guidance on GMV, I can share that based on our current observations and the insights that led to our preannouncement in mid-June, we expect GMV in the second half of the year to be lower than in the first half. This expectation is factored into our revenue outlook. I understand it might be challenging to gauge this due to various factors, but we are forecasting weaker GMV overall for the year, with the second half being less robust than the first half.

Got it. That's helpful. And then I wanted to ask about how the Vive segment is performing. It looks like it's been pretty strong. I'm curious if you're tightening credit there or maybe if you're seeing a different dynamic for that customer because I know it's a little more higher income than the Progressive Leasing business?

Vive has demonstrated strength over the past few years, although it is currently facing some challenges regarding GMV production. Its revenue recognition model differs from that of the leasing model, meaning GMV trends do not impact revenue as swiftly. Despite this, Vive has remained resilient throughout this cycle and has a longer average portfolio duration. We have adjusted our management approach during the pandemic; while we tightened some parameters, we did not ease them during the favorable liquidity conditions. As a result, our approval metrics are more conservative than they were before the pandemic. We are actively monitoring for signs of primary or competitive secondary tightening in various retail environments, as we believe this will occur, although we have yet to see substantial evidence of it, and it may be too early to make definitive conclusions. Overall, Vive is managing its portfolio effectively while seeking opportunities to tighten further and respond to shifts in credit supply, all while aiming for growth and maintaining strong partnerships with our POS partners.

The next question comes from Bobby Griffin of Raymond James.

This is Alessandra Jimenez on for Bobby Griffin. First, I kind of just wanted to dive a little bit more into the more recent demand and payment activity trends. So have you seen kind of a somewhat stabilization versus the mid-June business update? Or are trends still kind of continuing to deteriorate and remain volatile?

It remains a dynamic market. I can't say there have been significant changes in the past month since June. We are analyzing our origination pool and conducting a static pool analysis, looking at the portfolio composition from before and after the Q2 decision changes. We are observing effects on payer behavior and pool performance due to those decision changes. However, we have not noticed any substantial shifts in overall payment performance since the mid-June update.

Okay. That is helpful. And then can we maybe talk a little bit more about the steps you've taken to align the cost structure? What part of the workforce was that 10% decline in? And then are you continuing to cut costs? Or do you feel good about where you are today based on the current portfolio performance?

Yes, I will address the cost measures. First and foremost, these steps were challenging, particularly because they involved our employees. We undertook these actions knowing they would be tough, but we understood the top-line projections we were working with. We quickly aligned as we noticed the decline in the portfolio and the shift in consumer trends due to the current environment. These changes were significant. You noted about a 10% decrease in our headcount, which was mainly aimed at enhancing efficiencies across the organization, focusing on appropriately adjusting the variable costs in relation to the revenue outlook we were facing. A significant part of these cost measures came from maximizing our business operations and driving efficiencies, which we observed in both our sales and operational functions. We wanted to underscore the importance of maintaining our investment for future growth, as we don't intend to reduce those investments significantly. We believe we have made substantial progress, particularly in technology and other areas, and we view these as integral to our cost structure. We anticipate these improvements will be more visible in our financial results as we close out the year and move towards a pre-pandemic level relative to our revenue. This positions us well for 2023 from a run rate standpoint. It’s worth noting that this is an outcome achieved even after accommodating the inflationary pressures we experienced in wages and other areas throughout the year.

The next question comes from Brad Thomas of KeyBanc Capital Markets.

I apologize if I missed this, but did you talk about what the customer growth was in the quarter? I know that had been trending pretty favorably in the last few quarters. How is the customer count trending for you?

It is trending higher. It's in our Q. I don't have that number right in front of me, but we do have that disclosed in our Q.

Okay. No problem. Maybe another question for you, Steve, as you and the team are talking to retailers where we know that sales are challenged and getting a bit softer of late, what are you hearing from them in terms of trying to use more tools from the Progressive toolkit and the likelihood that they may take on more and lean more into Progressive in the quarters ahead here?

Thank you, Brad. We are having productive discussions, which has contributed to our ability to gain market share with several retail partners. We’ve been able to become increasingly significant to our current retailers and enhance sales. We have previously mentioned initiatives like joint consumer marketing with Progressive, co-branded marketing with retailers, and cross-marketing among multiple retailers in our preferred partner network. These initiatives are progressing well, and our marketing teams are collaborating effectively with their retail counterparts. As I noted in the last quarter, we've discussed possibly accelerating some initiatives that were planned for 2023. However, it can be challenging as many people have ideas they want to implement before the holidays, but real-world dynamics and competing priorities often arise. We continually work to demonstrate, with data, the greater potential of our initiatives compared to others they might be considering. We are seeing some success in this area. There are numerous opportunities for us to enhance productivity and further integrate into our retail partners’ operations, making us a more significant part of their business. These are the conditions that lead to fruitful conversations, and we look forward to continuing to showcase the value of our partnerships.

Hey, Brad, I wanted to follow up on something that was mentioned to me. The total number of active customers is just under 1.1 billion as of June 30, compared to about 990,000 for the same period in 2021, which represents a 9.2% increase across the organization. For Progressive Leasing, the total is 965,000, up from 905,000 during the same period last year, reflecting a 6.6% increase.

That's really helpful. I believe it certainly gives us some optimism about the continued growth prospects for the business. Regarding revenues, I understand that you are dealing with some tightening, and early trends seem to be normalizing a bit. How are you approaching revenues in the third quarter? It seems implied that they might be slightly better than what you experienced in the second quarter. Any additional insight into your expectations for overall revenues in the second half would be appreciated.

Yes, I believe your instincts are correct. You can calculate our current position and our guidance, which suggests some improvement as we move into the latter half of the year. The challenge we've faced this year has been that while our portfolio is growing, which should boost revenue, we've seen some customer counts and gross leased assets improving. However, this momentum has been countered by the accounts receivable provision and accumulating reserves due to pressure on the portfolio. To achieve revenue growth, we need to see gross merchandise volume trending upward. Additionally, if the accounts receivable provision resulting from our decision-making changes diminishes to a more acceptable level, that will foster revenue growth. We've made significant progress in positioning the portfolio, which I consider a substantial advancement.

The next question comes from Vincent Caintic of Stephens.

Congratulations on winning Samsung. I'm eager to hear more about those merchant successes. I wanted to follow up on your discussions with potential merchant partners, and I have a two-part question. First, how is their focus and prioritization regarding potential additions? I remember during the pandemic there wasn't as much emphasis, so I'm curious about their current thinking. Secondly, I know that some merchants, like Samsung, have other financing options, such as Buy Now Pay Later. While you are still looking for signs that primary lenders are tightening, are you hearing from potential merchant partners that they might be frustrated with their current lenders due to tightening conditions and are considering increasing sales conversion by incorporating Progressive and exploring new partnerships?

Thank you, Vincent. Those two questions are related. The short answer is yes. More elaborately, during the pandemic, it was difficult to attract an audience because of the favorable conditions at that time. Now, we are facing tough comparisons and opinions vary on whether a recession will occur and, if so, when. Retailers are seeking ways to offer a broader range of options, and lease-to-own solutions seem like an obvious choice for those that don't have them. Our responsibility is to effectively communicate this to retailers, and we are engaging in productive discussions about piloting these options, proving their effectiveness, and prioritizing them for development resources. Regarding other credit supplies, we haven't observed primary lenders tightening, but we have seen significant tightening among non-performing lenders. They have had to scale back significantly. In this context, I'm referring specifically to payment providers. We have noted that they aren't direct competitors for a lease-to-own model aimed at larger purchases. However, this situation affects the overall mindset of retailers, particularly in their merchandising and finance departments. While the allure of payment options during the pandemic may have diverted attention from us, these options may not be meeting expectations now. This could lead to more fruitful discussions with us, potentially resulting in significant returns on investment for retailers. The partnership with Samsung is a positive example in this regard, and we are eager to collaborate with them in a gradual manner, similar to our past strategies. Such initiatives can provide valuable data to support our business development team in approaching future retailers. We remain optimistic, but we also understand the sales cycle and the time required to convert large enterprise clients.

Okay. Perfect. That’s very helpful. And I guess speaking about a recession and kind of going back to underwriting. I guess if you could give us a sense, it sounds like you feel comfortable with that underwriting perhaps has stabilized here. From the write-offs, it seems like the reserving is from losses that maybe haven’t happened yet, so maybe reserves for future losses. Sort of wondering what are your assumptions and expectations that have been baked in when you think about the macro and a potential upcoming recession?

Yes. I mean – so I kind of – without being too cute, I feel our customer is in a recession right now. Like we may not be in a recession, but the bottom 40%, you see the Walmart news, I mean, there are so many data points that our customers are in recession now. We’re – there’s strong employment, right, so that’s a good thing. That’s why it’s kind of a unique set of economic circumstances right now. But our customer is facing double-digit inflation in the things that matter in energy and housing and food. And so they’re feeling it already. We’re not anticipating things getting materially worse, but we’re not anticipating them getting better. So we’re firmly, as we always are, firmly watching our pool performance. And other than our customer service hub activity and our call center activity, there’s not a ton that we can do on a pool that was originated in December of ‘21 or January of ‘22. But the pools that – as Brian said, that were originated post a couple of our decisioning changes, we’re watching them and seeing how they’re performing. We feel good about the early indicators on those pools, and we’re doing everything we can to not have the pools originated before those changes deteriorate further. We’re not anticipating massive improvements in the – or any improvements, quite frankly, in those pools performance, but we’re doing everything we can to make sure that they don’t deteriorate further from here.

The next question comes from Hal Goetsch of Loop Capital.

My question is about the approval rate. You mentioned that your approval rates are currently 200 basis points lower than they were in 2019, and in the second quarter, they were 100 basis points lower than 2019. These conditions are much tighter, but your pool of potential customers has expanded significantly; you now have many more merchants on your platform. I recall you saying you added 30 new e-commerce merchants in the first half of the year. What is happening with overall applications before approval? Are you seeing an increase or a decrease in applications due to the economy? Additionally, considering the strong job market, do you think there is a possibility for better recoveries in the future once people adapt to their new cost structures and start reengaging with payments if they’ve fallen behind?

Yes. Regarding the first part of your question, you are correct that the number of applications is increasing due to a wider range of retailers, and we are continually adding new e-commerce players. I would like to quickly touch on approval rates in comparison to pre-pandemic levels in 2019. There have been shifts in channels, with 32 new e-commerce retailers added this year. The source of applications will also influence approval rates. Generally, digital applications tend to have a lower approval rate than those assisted in-store. When comparing approval rates from July 2022 to July 2019, the shift in channels plays a significant role in changes we see, alongside our assessment of consumer health during these periods. Back to your query about application volume, it has increased positively, and our conversion rates are holding steady. However, we are not approving as many applications as we did previously for various reasons, as we are managing our portfolio to meet targeted levels. We anticipate and hope to continue diversifying our retailer base and attracting new consumers, which ties into our goal of expanding our customer base. When conditions improve or if we experience tighter credit supply above us, which is still our baseline assumption, it will widen the application pool, enabling us to approve and convert more applicants and grow our Gross Merchandise Value. We are taking steps during this cautious period to position ourselves for growth later. Regarding employment, incomes are important, and our customers are resilient, often adapting through various economic cycles. They may take on additional jobs or part-time work. I expect they will adjust to the new normal, as long as conditions do not deteriorate. Strong employment is beneficial. Although wage inflation has not kept up with cost inflation for our consumers, leading to a deficit, they will make necessary adjustments over time, hopefully reflecting positively in our portfolio performance and customer payments.

This concludes our question-and-answer session. I would like to turn the conference back over to Steve Michaels for any closing remarks.

Yes. Thank you, and we appreciate you joining us this morning as we update you on Q2. I know I said this in my prepared remarks, but I'd certainly like to thank all the PROG people. It's a tough environment, and they're doing a great job taking care of our customers and partnering with our retailers to continue to prove the value of the partnership every day, and I really appreciate everybody's efforts. It's a tough environment that we're navigating through. Who would have thought that it would be harder to exit the pandemic than to manage into the pandemic? But that's where we find ourselves. And we appreciate your interest, and we look forward to updating you in the coming quarters.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.