PROG Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 25, 2023

There are 9 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Prague Holdings Q3 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. You will then hear an automated message advising your hand is raised.

Operator

Please be advised that today's conference is being recorded. And I would now like to hand the conference over to your speaker today, Mr. John Barr, Vice President of Investor Relations. Sir, please go ahead.

Speaker 1

Thank you, and good morning, everyone. Welcome to the Prague Holdings 3rd Quarter 2023 Earnings Call. Joining me this morning are Steve Michaels, Prague 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.

Speaker 1

During this call, certain statements we make will be forward looking, including comments regarding our GMV performance And lease merchandise write offs in future periods, consumer demand and the retail environment going forward, The level of 90 day buyouts in future periods, gross and EBITDA margins, our capital allocation priorities, Our updated 2023 full year outlook and our outlook for the Q4 of 2023. I want to call your attention to our Safe Harbor provision for forward looking statements that could 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 ks for the year ended December 31, 2022, as well as our quarterly report on Form 10 Q for the quarter ended September 30, 2023, 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.

Speaker 1

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, Prague Holdings' President and Chief Executive Officer. Steve?

Speaker 2

Thank you, John. Good morning, everyone, and thank you for joining us. Today, we are reporting better than expected Q3 financial results. We will also share our thoughts on a few important Q4 metrics and provide an update on our full year 2023 financial outlook along with a brief glimpse into 2024. Despite a difficult operating environment, we've exceeded our financial outlook again this quarter, Recording revenues for Q3 that were higher than expectations and adjusted EBITDA that was well above the range we provided in July.

Speaker 2

As you might recall, in the first half of the year, our earnings were lifted by the trend of fewer customers choosing 90 day buyout options along with robust portfolio performance. Strong customer payment behavior trends continued in Q3, slightly offset by 90 day buyouts trending higher and back to pre pandemic levels. Higher than expected gross margin and lower write offs Combined with our disciplined approach to spending supported our material Q3 earnings beat. I am once again extremely proud of the team's ability to execute at a high level. The strong customer payment behavior is evidenced by our year over year 200 basis point gross margin expansion, improved write offs of 6.6% as compared to 7.2% in Q3 last year and adjusted EBITDA growth of $6,800,000 or 10.4 percent, resulting in a 12.3% margin.

Speaker 2

Non GAAP diluted EPS grew 32.4% year over year as we also benefited from a lower share count. As you may have seen in this morning's earnings release, We are incorporating our year to date outperformance and these favorable trends in our updated outlook for 2023. Progressive Leasing's GMV decline of 6.5% was within our mid single digit decline expectations despite challenging retail conditions. Our view is that the macro backdrop presents a blend of optimism and caution. We are seeing the rate of inflation ease, Healthy labor markets and GDP forecasts stronger than initially projected.

Speaker 2

However, average Q3 retail traffic was down double digits year over year across large ticket consumer durables and we anticipate this is likely to persist. We're also monitoring the potential impact of student loan payment resumption and recessionary concerns going into 2024. We believe our business model has a degree of insulation from a typical recession, during which an increase in unemployment and credit tightening above us Could result in higher applicant volume and higher quality applicants at the top of our funnel for both Progressive Leasing and VIVE. I'd like to highlight the resilience of our customers through uncertain macro conditions, evidenced by lower than anticipated and lower than historical trends of delinquent accounts moving to charge offs. Our strategic move to Titan decisioning in mid-twenty 22 and our active management of our portfolio since then have significantly benefited performance.

Speaker 2

Separately, strain on discretionary incomes has dampened demand for many of the leasable products offered by our retail partners. We have skillfully navigated these demand headwinds through strong operational execution, balancing GMV pressures with portfolio management, cost control and strategic investments to enable future growth. For the holiday season, we have planned initiatives aimed at maximizing retailer traffic conversion as we are expecting traffic to be down year over year. We anticipate our Q4 GMV year over year to be roughly similar to Q3, although the all important holiday season and its material impact on our quarterly GMV results are still in front of us. On the portfolio performance side, we expect Q4 to align more closely to pre pandemic levels Would normalize 90 day customer buyout activity.

Speaker 2

Next, I'd like to provide some initial thoughts on 2024. As I mentioned earlier in our thoughts on the macro environment, demand for leasable categories is down year over year And it is our view that trend will likely continue into 2024. We intend to partially offset these headwinds through achieving deeper integrations with Existing retail partners, capitalizing on anticipated tighter conditions in the credit stack above us and expanding our retailer base. As we conclude 2023, a high single digit negative year over year comparison in our gross leased assets Our ability to navigate through dynamic and challenging environments, managing these headwinds through prudent cost management and strategic investments, while generating robust profits and cash flow. Sustainable growth remains a key focus within our 3 pillared As a reminder, the Grow pillar emphasizes our dedication to business development efforts across new and existing retail partnerships.

Speaker 2

In 2023, within a retail challenged environment, We grew our balance of share within our top retail partners and continued our track record of renewing key retailers with multi year exclusive contracts. Also, our pursuit of new retail opportunities across regional and national brands It's an important component of our strategy to capture more of our industry's $30,000,000,000 to $40,000,000,000 addressable market. We are focused on growth efforts across several other dimensions, including brand awareness and new customer acquisition through marketing, Products boosting our direct to consumer business and strategic partnerships. E commerce penetration remains a strength With nearly 3 times the number of new partners added via our customizable integration process through Q3 this year compared to last. And the channel consistently contributes around 15% of total GMV.

Speaker 2

Under the enhanced pillar of our strategy, our initiatives are focused on improving customer experience and optimizing the sales funnel from awareness to purchase. We made progress on our 2023, 2024 tech roadmap, which as a reminder is centered on 3 core areas: Improving our customer centric flexible lease platform, providing self-service tools to enable a superior retailer experience, while helping the customer make the best and most informed choices and offering greater personalization for a streamlined shopping and decisioning experience. As for the expand pillar, we are evolving and integrating the other products in our ecosystem to help empower our Customers through their financial journey. During this challenging macro environment, we want to bring awareness to a larger breadth of potential customers that could benefit from the virtual lease to own payment option supplemented by the other products in our ecosystem, such as our Second Look Product 5, Buy now, pay later option 4 and credit builder loan build. The core of how we operate And Gro remains in the execution of our mission to create a better today and unlock the possibilities of tomorrow through financial empowerment.

Speaker 2

Lastly, we look forward to further productivity gains and improvement to our customer experience through the application of generative AI led by our Prog Labs Group. Turning to capital allocation, We acquired an additional 1,000,000 shares of our common stock in Q3 at an average price of $34.85 per share, bringing our year to date purchases to 7.5% of our outstanding shares. Year to date, we have generated $292,000,000 of cash flow from operations, closing the quarter with a cash balance of $295,000,000 Our capital allocation priorities remain unchanged and we expect to fund growth, look for strategic M and A opportunities and return excess cash to shareholders. Our strong results year to date are driven by the hard work and strategic initiatives put forth by our teams. And I would like to extend my thanks to our employees and partners for their efforts.

Speaker 2

With that, I'll turn the call over to our CFO, Brian Garner.

Speaker 3

Brian? Thanks, Steve. Let me start with a quick summary of our Q3 financial highlights. For the Q3 in a row, We exceeded earnings expectations despite a lackluster demand environment. Our active management of our lease portfolio continues to deliver strong returns and customer payment performance came in meaningfully better than we projected in the Q3 outlook we provided in July.

Speaker 3

Our management of portfolio performance and SG and A were the key drivers of our strong results for the period. With Progressive Leasing's adjusted EBITDA margins Coming to slightly above the high end of our targeted annual range of 11% to 13%. During the quarter, we saw resiliency within our delinquent accounts as a smaller percentage are moving to charge off compared to historical trends. Revenue from customers choosing to exercise their 90 day purchase option in the quarter trended back towards normalized levels, which we anticipated in our July outlook. Q3 consolidated revenues declined 6.9% year over year As our gross leased asset balance was down 10.7% at the start of the quarter and finished Q3 down 9.6% as the retail environment Durable consumer goods remains challenging.

Speaker 3

Nonetheless, our revenue performance exceeded the top end of our outlook as the customer payment strength exceeded our expectations. Consolidated adjusted EBITDA increased by 10.4% The $71,700,000 from $65,000,000 in the year ago period, as we delivered margin expansion through portfolio management. Non GAAP diluted EPS increased to $0.90 per share, growing 32.4% from $0.68 per share in Q3 of 2022. For our Progressive Leasing segment, GMV declined 6.5% from the prior year period, An improvement from the 14.7% year over year decline we posted last quarter as we fully lap the tightened decisioning in late Q2, 2022. While we saw GMV softness across most categories as broader retail trends showed double digit declines in appliances, Furniture and electronics during the period.

Speaker 3

We are confident that our performance represents an increase on average in our balance of share of our top 5 retailers results in our leasable categories. Revenue within the segment declined 7%, which was primarily influenced by the lower gross leased asset balance throughout the Q3, partially offset by strong customer payment behavior. Progressive Solutions gross margin was better than expected, coming in at 32.3% versus 30.3% last year, primarily driven by strong portfolio performance. Our write offs were 6.6%, which was down from 7.2% last year. Based upon current trends, we expect our write offs for the year to end well within our target 6% to 8% annual range.

Speaker 3

Progressive Leasing's SG and A expenses were 13.7% of revenue versus 12.4% in the prior year. We continue to invest in areas that facilitate our ability to scale and drive future growth. However, we reduced our spend compared to the level we had incorporated in our Q3 outlook as we aligned our spend levels with the current demand environment. Adjusted EBITDA from the Progressive Leasing segment was $74,800,000 compared to $68,400,000 in the same period of last year And margins of 13.3 percent improved 200 basis points at the high end of our targeted annual range of 11% to 13%. Pivoting to consolidated results.

Speaker 3

Q3 revenues for PROG Holdings were 5 compared to $625,800,000 in the year ago period, a 6.9% decrease. Adjusted EBITDA was $71,700,000 or 12.3 percent of revenues compared to $65,000,000 or 10.4% last year. Year to date, we have generated $292,500,000 of cash from operations, which is net of the working capital needed to fund GMV. We still anticipate a use of cash in Q4 as is typical with a seasonal holiday boost to GMV. Our Q3 GAAP diluted EPS was 0 point 7 6 EPS came in at $0.90 We had $600,000,000 of gross debt and $294,800,000 of cash at the end of the 3rd quarter, With a net leverage ratio of 0.98x trailing 12 months adjusted EBITDA.

Speaker 3

We remain undrawn on our $350,000,000 revolver at quarter end. During the quarter, we repurchased 1,000,000 shares of common stock at an average price of $34.85 per share. At the end of Q3, we had $229,000,000 of remaining authorization under our previously approved $1,000,000,000 share repurchase program. Finally, with respect to our Q4 outlook, we are encouraged by our strong portfolio results and taking a disciplined approach to Spending in light of our current challenging demand environment. While we expect strong gross margins and EBITDA margins to continue into Q4, A smaller portfolio size and challenging GMV environment will put pressure on revenues as we exit the year.

Speaker 3

We anticipate ending the year with a gross leased asset balance down high single digits. While we are not yet providing detailed commentary on 2024, the year end decline in lease portfolio size will be the starting point for 2024 revenues, putting pressure predominantly on the first half of twenty twenty four. We will actively manage the factors within our control to optimize our internal operations where possible and maximize portfolio returns while pursuing opportunities for growth. For Q4, we expect consolidated revenue in the range of $549,000,000 to $569,000,000 consolidated adjusted EBITDA in the range of $58,000,000 to 63,000,000 And non GAAP diluted EPS in the range of $0.61 to $0.71 In closing, I want to thank the team for its hard work this past quarter, which yielded very strong results in the face of a difficult environment. I will now turn the call back over to the operator for questions.

Speaker 3

Operator?

Operator

Thank you. Our first question will come from Kyle Joseph of Jefferies. Your line is open.

Speaker 4

Hey, good morning guys. Congrats on navigating a difficult environment. In terms of GMV in the quarter, can you give us a sense for the cadence that really snapped back towards kind of that Down mid single digits in July or did it gradually kind of build back towards that level?

Speaker 2

Yes. Thanks, Kyle. Good morning. As we talked about from lapping the decisioning that we tightened In June of 2022, it was a little bit more of a progression Because the way we look at decisioning a few different ways and approval rates, I should be more specific, a few different ways and kind of a trailing 4 week Average is probably the best way to look at it because of some of the lags in conversion and funding from an approved application. So it took a little while in July, but we did see those approval rates kind of Get on par and flip back over kind of in early August.

Speaker 2

But so we got into that mid single digit range For most of the quarter, although I will say that based on all the retail reports and the traffic reports And we haven't seen a lot of the retailers reporting their results yet, the publicly available ones anyways. But The quarter seemed to soften a little bit as the quarter went on. So our mid Single digit negative GMV was consistent with what we were expecting, but we didn't see any material improvement like From month to month to month within our retail partners.

Speaker 4

Got it. And then just one follow-up for me. Just want to touch on the health of the underlying consumer. Frankly, it sounds like the Consumer is getting a little bit better off in terms of seeing a normalization of 90 day buyouts, ongoing strength In payment activity and frankly, I think typically losses go up between the second and the third quarter unless the last 4 years have really screwed up seasonality. But just kind of, yes, your thoughts on the underlying consumer and if that's something you bake into the potential

Speaker 2

Yes, it's been an interesting year in that regard. I mean after a pretty stressful 2020 2, which is well documented, the consumer has been really resilient this year. Our portfolio performance has been strong. And we obviously improved the quality of the portfolio through our decisioning posture, but the customer has performed well. And you mentioned United Day buyouts, they were historically low.

Speaker 2

They're starting to trend back up a little bit, which could be Portend the fact that they've got a little bit more cash or liquidity. Interesting dynamic that I think we mentioned in the prepared remarks We are seeing customers go delinquent, but the behavior within those delinquent buckets has changed A little bit to where they're not just based on historical patterns rolling through the buckets to charge off. They may Camp out in the delinquent bucket for a little while and that's fine for us because as long as we're communicating with them, we're happy to Work out a plan or work out something for them to have a positive outcome. So that's been a positive result. Brian and I have sat here on these calls and talked about we're not counting on Goldilocks lasting forever.

Speaker 2

And It's certainly persisted longer than we thought, but the low charge offs are positive. But the really Goldilocks was described as the low 90 day buyout activity and low charge offs and the 90 day buyout activity So I would just say, I'm not sure if they're getting stronger, but they're certainly been resilient all year. There's a lot of Headwinds out there and muddled macro data. We're certainly watching the student loan stuff. I think it's too early to tell What the impact of that will be and how it will impact performance.

Speaker 2

So as always, we have our hands firmly on the wheel as it relates to The portfolio and our decisioning posture, but right now, certainly Pleased with the performance of the portfolio and the resilience of the consumer.

Speaker 4

Got it. Very helpful. Thanks for answering my questions.

Speaker 2

You got it. Thank you.

Operator

Thank you. And our next question will come from Brad Thomas of KeyBanc Capital Markets, your line is open.

Speaker 5

Good morning, Steve, Brian and John, my first question was just if you can talk a little bit about door counts and what we're seeing in terms of the cadence of doors And how things are going as you work with some of your current retail partners on some of the e commerce rollouts for them?

Speaker 2

I'll start and then Brian can give the door count numbers. I mean, we continue to make a lot of progress on e comm. We talked about our plug ins and our integration less rollouts, if you will, and we're having a lot of luck there. We're actually seeing some nice momentum and even prioritization, I would say, from some of our larger retailer Partners that we've had for a while that we don't have transactional ecom with yet. And so some of our product innovations have Move the needle very more quickly on that and then really partnering well with the larger enterprise customers to or partners To get lit up in e com has been nice.

Speaker 2

Now as we sit here today, we're depending on the specific retailer, we're Right up against a code freeze for holiday season. So not a lot is going to happen between now and the holidays In that regard, but it will those deeper integrations will certainly serve us well in the future and we look forward to Having the ability to be transactional wherever the customer wants to meet us, and that in our view Requires a really nice omni channel experience, which is we're making a lot of progress on. So I'll turn it over to Brian on the door stuff.

Speaker 3

Yes, Brad. The doors were right around 19,500. So that's approximately 2% decline from a year over year perspective. I think the only color that I'd give, as we've stated before, is, obviously, we have a meaningful Level of GMV coming through e commerce stores and that tends to skew that number a bit. So trending down slightly, I think that's consistent With Steve's remarks around the foot traffic in retail more broadly being pretty challenged during the period.

Speaker 5

That's helpful. And then obviously, we know this is a tough environment for the end market for many of your retail partners. Can you talk a little bit about if you end up with a retailer that closes the door or goes out of business, what leverage you're able to pull to try to Keep that customer within the progressive system.

Speaker 2

Yes, I mean, it's something certainly that has evolved Over time and our marketing chops, if you will, have really gotten a lot better. So we've got a high instance of repeat business. And so and we communicate with our customers fairly frequently through nurture campaigns and other marketing campaigns. So, we know what they leased last time and We hope to provide some insights as to what they might like the next time. And so to the extent that a door ceases to exist, we have Certainly, the ability to drive that customer back to a different door within the same environment or I guess at the extreme if a retailer ceases to exist that we could try and fulfill that need in a retailer that has similar products.

Speaker 2

So, it certainly is we have the ability to manage and direct to that customer, not perfectly, it's not a one for 1 of course, but we feel good about our ability to keep them in the Prog ecosystem.

Speaker 5

Great. Thank you so much.

Operator

The next question will come from Jason Haas of Bank of America. Your line is open.

Speaker 6

Hey, good morning and thanks for taking my questions. It's good to see that the Progressive EBITDA margin looks like it's going to be above 13% for the year and I know the Long term target has been 11% to 13%. So I'm curious if that's, you could be above that 13%, above that high end of the range Going forward or you alluded to there could be revenue pressure on revenue next year, just given where the gross leased The balance is going to end this year. So just curious how you're thinking about I know it's early, but how you think about that margin target for next year and beyond?

Speaker 3

Yes. Jason, I think more broadly, we're holding to this 11% to 13% range. I think think that's a good range for the Progressive Leasing segment. The tailwinds that we've seen this year, to Steve's point about the Goldilocks scenario, Have certainly played their way out in EBITDA margins. The 13.3% that we saw this quarter and the trend that we're on for the year It's certainly over earning what we typically would expect.

Speaker 3

Now, I think the state of the consumer Is anyone's guess about the in terms of the long term, but I think we're cautiously optimistic about what we're seeing in terms of payment behavior And the resiliency that we're seeing with even our delinquent accounts, like Steve said, we're seeing a higher yield in the portfolio that's delinquent than we typically had So, going into 2024, without getting too specific, I'd expect Maybe to pull back more comfortably within that 11% to 13% range versus being over the high end of it. So I do expect some correction there. But then again, I've been surprised at how long This Goldilocks scenario has persisted to date. So I guess the commentary I'd give as we enter 2024.

Speaker 6

Got it. That's helpful. And then as a follow-up, have you seen any impact from the cybersecurity incident that you had? Or is it So in the case that there hasn't been any impact on the business from that?

Speaker 2

Yes. Jason, obviously, We can't give too much more color there. And when we file the Q, you'll see not a whole lot of different Disclosures, but I mean the internal teams responded quickly. We engaged leading third party experts and This launched an investigation and notified law enforcement and there were no major operational impacts to Progressive Leasing and And the other subsidiaries weren't impacted. So I mean the investigation remains ongoing.

Speaker 2

But as you can see from the Tables that we provided in the release, the incident did not have a material impact on the 3rd quarter results. And So, but we'll continue to update you as we learn new information.

Speaker 6

Got it. That's helpful. Thank you.

Operator

And our next question will come from Anthony Chukumba of Loop Capital Markets. Your line is open.

Speaker 7

Good morning and thank you so much for taking my question. You had a really nice sequential improvement in GMV between the second and third quarter. I guess my first question is, what are your sort of like high level GMV expectations for the 4th quarter, Particularly, yes, just what are your expectations for the Q4?

Speaker 2

Yes, Anthony. We mentioned that we expect Q4 to be roughly in the similar range to Q3, so down That mid single digits. I would tell you that as we sat here in July, I think Our expectation was that we would be seeing an improvement in Q4 over Q3. And that may still happen because the all important holiday season is ahead of us. But And it's the GMV impacts from holiday are certainly material on Q4.

Speaker 2

But just What we've seen and what we've heard in the press and in the headlines is the traffic seems to have Softened our expectations for traffic seems to have softened since even the summer. So, we're in that kind of Negative mid single digit range, which is not inconsistent with what we said earlier, even when we were down mid teens, We were saying that about 2 thirds of that was due to the year over year decisioning posture. And now that we've lapped that, It kind of leaves the remainder, which is that mid single digits down. I would be remiss if I didn't say that we are outperforming the headline comp and that is a testament to Our business's ability to partner well and to gain balance of share in these challenging times. So in the leasable categories that we serve, The comps are down worse than mid single digits, but that is the that's what we're achieving and we certainly Have operator optimism and we hope to outperform that, but our base case is down a similar amount to Q3.

Speaker 7

Got it. And apologies for having missed that in your prepared remarks. I haven't had my morning coffee. I guess a somewhat related question. As you think about 2024, and I know you gave some high level thoughts on that, but I guess this is just a sort of obligatory question.

Speaker 7

What's going on right now in terms of your new partner pipeline? Because you mentioned that was something that could potentially help you in 2024 given the fact that your These assets are going to be down heading into 2024.

Speaker 2

Yes. I mean, You're right. And it's a constant focus of ours. And it's funny, the obligatory pipeline question, that's what we call it around here too. But

Speaker 8

it

Speaker 2

is a constant focus. We're having some nice wins In some smaller accounts that wouldn't be named, our e comm products are certainly helping in that regard as well. And we always assume that we're going to have a nice enterprise account win. What time that happens in a given year certainly impacts the trajectory of GMV. And So that remains to be seen and we're not obviously naming any particular names.

Speaker 2

But we will We always go into our operating plan for the next year assuming some pipeline in GMV To keep the pressure on us and 2024 will not be different in that regard.

Speaker 7

Got it. Thanks and good luck with the remainder of the year.

Speaker 2

Thanks, Anthony.

Operator

Thank you. Our next question will come from Bobby Griffin of Raymond James. Your line is open.

Speaker 8

Good morning, buddy. Thanks for taking my questions.

Speaker 2

Thanks, Doug.

Speaker 8

I guess the first question is, You guys have done a great job this year on operating expense control, but at the same time, you've called out some investments and working on the integration of e commerce and stuff. So As we think about where we are from a spending perspective, is there a catch up period that has to come with SG and A next year end of 2024 or do you feel good that even with some of the more kind of cost conscious approach you've taken this year, The pace of investments has remained pretty stable, so there isn't like a catch up period into next year.

Speaker 2

Yes. I'll start and I'll let Brian chime in. But I mean, obviously, as we think about the theme of 23 and controlling the controllables, SG and A is the portfolio and SG and A are the two things that we have, and We'll continue to do that, right? So we're committed to that 11% to 13% margin. We talked about 2024, especially the first half having Some revenue pressures due to the portfolio size that we're anticipating at the end of this year, and we will Move levers and pull levers to make sure that we deliver that.

Speaker 2

As far as catch up goes, we certainly have some technical debt that we're retiring that we've talked about and Some of those things are back office things like ERPs and HCMs. We've got some more exciting kind of revenue generating and customer facing things That we are not going to put on the back burner just because it's a slow demand environment because As we've talked about a lot during this challenging GMV period, it's our goal to broaden the foundation and broaden the base of retailers and customers such that when demand does rebound, we have a big springboard a bigger springboard from which to grow. So I wouldn't call it a catch up period. We're managing it strongly. We've seen some wage inflation this year, But certainly look for other opportunities for efficiencies.

Speaker 2

And this is the time when we have Actively manage the business in order to deliver the results and SG and A is a massive focus for us.

Speaker 8

Okay. That's helpful. And then I appreciate the comments on 2024, at least the first part. That makes sense From the revenue perspective, given what's going on with the size of the portfolio, as profits have flown through the P and L, is there anything that we Keep in mind that took place this year as we calibrate kind of our models for next year, just large items that either were a good guy this year or Could end up being a headwind next year. I know we talked about less early buyouts, but it still appears early buyouts are above pre COVID levels, right?

Speaker 3

Yes. They're starting to normalize with pre COVID levels. And I think, Bobby, You're hitting on it. I think I draw your attention to just real particularly the first half gross margins that we recorded here in 2023. And I think what represents a bit of a difficult comp as we look at 2024.

Speaker 3

And We have been cautious all throughout this year and it's part of what has resulted in our outperformance versus outlook about how this consumer is going to behave and their resilience and wherewithal in this challenging environment. And that's what's really Boosted the gross margins above our expectations. And so, whether that persists next year, I think is a key input to the model. And certainly, the first half, this Goldilocks scenario we're referring to It was very strong in terms of the EBITDA or sorry, the gross margin performance. So I think I would just be cautious about assuming we're going to be able to replicate that to that degree, as the base case.

Speaker 3

So that's the other area I would draw you to. You're hitting on SG and A. There's always going to be an element of fixed costs within our business even though we're highly variable. So deleveraging Is a potential, when you're starting from a down a lower GLA balance, Grossly SaaS balance entering next year. So that's something to watch.

Speaker 3

But to Steve's point, this is an area that's Actively managed and it's always going to be informed by our top line performance. So as we face these headwinds, we're going to be inefficiencies and discretionary spend to a higher degree of scrutiny to ensure that we're able to land within this 11% to 13 Progressive leases segment long term EBITDA margin target. So we're having a great year from a margin perspective. I'd expect maybe a bit of softening in terms of the bottom line margin and gross margin perhaps as we look at 2024.

Speaker 8

Thank you, Brent. That's helpful. And I guess last one for me is predicting how the student loan impact flows through is highly Uncertain, so I get that. We've had a couple of months of student loans returning. So have you seen anything interesting in your data set to kind of help us think about the behavior and what that could do or is Still too early, in terms of the payments returning.

Speaker 2

Yes, I think it's too early. I mean, we obviously are watching, folks In our portfolio that have student loan trade lines also in our applicant pool as well, The data are muddled a little bit because there are various programs available for relief or deferments. And I would I would guess that our consumer is probably the largest beneficiaries of those. The payments, I believe, restarted in October. So it's Too early to tell how that's going to affect performance, but we are watching it.

Speaker 2

I mean, and to the extent that Other providers above us in the stack are also watching it and making adjustments. It could also Further, the opening of the top of the funnel that we've been anticipating and talking about for several quarters now.

Speaker 8

Okay. Thank you for the details and congrats on the upside this quarter, a strong operation quarter.

Speaker 2

Thanks Bobby. Thank you again for joining us this morning and for your continued interest in Prague Holdings. Our teams did a great job and delivered another strong quarter. We feel good about the positioning of our portfolio. We're making the right investments in people and technology to further our 3 pillared strategy of grow, enhance, expand.

Speaker 2

We look forward to updating you on the full year as well as a more detailed view on Our 2024 thoughts when we have our next call in February. Have a great day.

Operator

This concludes today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day.

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Earnings Conference Call
PROG Q3 2023
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