Upbound Group - Earnings Call - Q4 2020
February 25, 2021
Transcript
Speaker 0
Good morning, and thank you for holding. Welcome to Rent A Center's Fourth Quarter Earnings Conference Call. As a reminder, this conference is being recorded Thursday, 02/25/2021. Your speakers today are Mitch Fidel, Chief Executive Officer of Rent A Center Maureen Short, Chief Financial Officer Jason Hogue, Executive Vice President, Preferred Lease Anthony Blazquez, Executive Vice President, Rent A Center Business and Daniel O'Rourke, Senior Vice President of Finance and Real Estate. I would now like to turn the conference over to Mr.
O'Rourke. Please go ahead, sir.
Speaker 1
Thank you. Good morning, everyone, and thank you for joining us. Our earnings release was distributed after market closed yesterday, and it outlines our operational and financial results for the 2020. All related materials, including a link to the live webcast, are available on our website at investor.rentacenter.com. As a reminder, some of the statements provided on the call are forward looking statements, which are subject to many factors that could cause actual results to differ materially and adversely from our expectations.
These factors are described in our earnings release issued yesterday as well as in the company's SEC filings. Rent A Center undertakes no obligation to publicly update or revise any forward looking statements except as required by law. This call will also include references to non GAAP financial measures. Please refer to our fourth quarter earnings release, which can be found on our website for a description of the non GAAP financial measures and a reconciliation to the most comparable GAAP financial measures. I'd now like to turn the call over to Mitch.
Speaker 2
Thank you, Daniel, and good morning, everyone. Thank you for joining us. We'll be providing a voice over to the presentation shown on the webcast that can be found on our website at investor.rennacenter.com. 2020 was a pivotal year here at Rent A Center. In late December last year, we entered into an agreement to acquire Asima, a leading virtual platform.
The closing of the acquisition earlier this month immediately transformed partner business to a higher growth, higher profit, best in class virtual channel. At the same time, Renasant reinforced its position as a leading omnichannel business in lease to own. We had a sharp acceleration in same store sales growth during 2020, and our profit was well above our original expectations. We've made momentous progress during the year to optimize operations. We added significant talent and technology to drive our long term strategy, and we ended 2020 a better company than we were at the beginning of the year.
So looking at some of the additional highlights on Slide three. Total revenues increased 5.4% for the year with adjusted EBITDA up 30% and diluted EPS up 58%. Preferred lease invoice volume rose over 20% on the year despite closures and product shortages that affected many of our retail partners. And of course, Asimo will further improve our invoice volume growth going forward. Rent A Center ended 2020 with its twelfth consecutive quarter of positive same store sales.
E commerce revenues increased 53% in the quarter, and we believe we can maintain positive comps over the long term, supported by that e commerce growth and our digital expansion and the continued strong performance of our lease portfolio and the momentum in the business. 2020 also demonstrated the resiliency of our model. The pandemic impacted almost everything we do in stores around servicing and collections and across our supply chain, and our team acted quickly to adjust operations, add additional digital capabilities, and we've proved once again that our model can thrive in periods of economic uncertainty. And we think we're just getting started. Like I said earlier, we emerged from 2020 even stronger than before.
Slide four provides an overview of our financial goals, and we think we can achieve $6,000,000,000 in consolidated revenues with a mid teens consolidated adjusted EBITDA margin by 2023. On a pro form a basis, that equates to total consolidated revenue growth of 50% and consolidated adjusted EBITDA growth of 60%. We expect the CEMA to be approximately 30% accretive to non GAAP EPS in 2021 with significant additional accretion in 2022. The acquisition dramatically increases our overall scale, profitability and free cash flow generation. And at the same time, we're confident our omnichannel strategy can maintain strong growth for the Rent A Center segment.
Digital is enhancing engagement with our customers, and we have a strategic advantage compared to other virtual LTO firms due to our last mile capabilities. We've a strong balance sheet with about 2.4x leverage following the acquisition, and we intend to pay that down quickly, and we'll maintain a conservative financial policy that prioritizes investment in the business as we drive shareholder return. A big part of our excitement for the future is the Asciem acquisition, which we recap on Slide five. As I mentioned, we completed the acquisition in February just earlier this month after announcing it in late December and we're fast at work on the integration. Is a profitable and rapidly growing virtual lease to own business, which has nearly doubled revenue and EBITDA each year for the past five years.
So we're really bullish about the continued path for growth. A couple of important highlights. Asciem accelerates our growth with premier platforms across both traditional and virtual lease to own. Their scale enhances our ability to compete for high value national retail accounts. Their underwriting is best in class with decision engine that supports a wide range of verticals.
They bring extensive data and digital expertise and a superior back end infrastructure. Importantly, we believe the purchase price and the mix of cash and equity consideration positions us to generate the kind of returns we expect. And probably more important than anything, we've retained the leadership team at Asima. So what does all that roll up to? Slide six puts our consolidated revenue, adjusted EBITDA and adjusted EBITDA margin targets in the graphic form.
We start with where the Asima business would have put 2020 on a pro form a basis at $4,100,000,000 in consolidated revenue and $561,000,000 in consolidated adjusted EBITDA. This acquisition is not a onetime bump. Our 2023 goal captures significant revenue and EBITDA growth as we integrate Asima and grow the Rent A Center business. Asima tilts revenues to the higher growth retail partner business, which will obviously benefit earnings. We believe Assima can grow annual revenue by 25% with high teen margins, and there are numerous synergies to drive our consolidated EBITDA margin to a mid teens rate.
We also expect strong contribution from the Rent A Center business to support those long term goals. Slide seven gives us a picture of our breadth following the Asimha acquisition. We're starting 2021 with industry leading platforms in both traditional and virtual. Rent Center has about 2,400 locations with about 22 of its business in e commerce. Assema and Preferred Lease combined have approximately 19,000 active retail doors with 15% of that business in e commerce.
And both businesses have the potential to increase e commerce growth. Our scale will allow us to serve customers of multiple touch points as Lease Zone captures new product verticals and a younger generation of customers. And when you you think about the number of young people who are averse to long term debt obligations, you can see why leasing has such a high potential growth curve. When you consider point of sale adoption with the likes of Affirm and Afterpay, which require higher credit scores but are also potential gateways for us, that total addressable market becomes very exciting and very real. The combined company will meet customers wherever they want to transact, whether it's in the CEMA retail partner location or the retail partner website, in a Rent A Center store, rentacenter.com, using our mobile app anywhere and ultimately via a virtual LTO marketplace.
So before I turn the call over to Jason, I'd like to thank our coworkers, franchisees, our retail partners and our suppliers for their dedication to serving customers during a challenging time. Our customers needed us this year more than ever, and we provided them access to household goods with flexible payment options without the burden of long term debt obligations. And we rose to innumerable challenges this year. And I'll tell you, I'm constantly inspired by the service and the dedication our folks put towards putting our customers first. So proud of everybody.
It's been a great year, we've only just begun. So with that, I'll turn it over to Jason.
Speaker 3
Thanks, Mitch. I'll start with a brief review of the quarter before turning it, to the Asima integration. We ended up 2020 with solid momentum in the business. During the fourth quarter, invoice volume increased approximately 25% year over year, driven by the addition of virtual retail partner locations and organic growth in virtual and staff locations. Total revenues rose 4.8% and were impacted by product constraints at our retail partners as well as higher early payout activity related to continued stimulus.
We believe payout activity may remain elevated if there is additional government stimulus, but we're very pleased with the growth and makeup of the invoice volume we're generating. Adjusted EBITDA was 18,300,000.0 for the quarter. Skipstolen losses were 11.6% versus 14.2% a year ago. The lease portfolio features a more attractive risk profile across our customer base that should allow us to drive revenue and yield as we grow the business. Now turning to the main points on Slide eight.
We're thrilled to be adding CEMA after a fast and effective close in February. This combination will enable us to rapidly combine our proprietary digital and mobile technology with CEMA's best in class decision engine, operating system, and integrated servicing platform. Having performed the brand study as part of the due diligence process leading up to the acquisition, Preferred Dynamics will become Asima at the top of the house. Preferred Lease, Preferred Digital, and Preferred Marketplace will become Asima Lease, Asima Digital, and Asima Marketplace, respectively. This will enable us to gain an immediate benefit of the Asima brand at thousands believe there are 40,000,000 to $70,000,000 in potential synergies, and we expect $25,000,000 of that to be realized in 2021.
Once integrated, we believe Ascima can grow revenues 25% on an annual basis with a mid teens adjusted EBITDA margin. As we rebrand the Asima name, we're migrating preferred lease onto the Asima decision engine, enabling us to take advantage of the integrated collections and services process. Our goal is to have all virtual locations converted to the Asima platform by midyear and all staff locations converted by the end of this year. We believe this unit's complementary technology, channels, retail partners, and product verticals can drive long term margin expansion, and we also believe we can leverage benefits to Rent A Center stores in the area of product returns. Turning to slide nine.
We've already begun our integration efforts to plug in Preferred Dynamics' front end customer facing technology into the Asima operating system. Our goal is to provide ubiquitous access for customers while building a long term relationship. The critical component is our ability to provide low friction solutions to help connect our customers with our merchant partners and facilitate seamless lease transactions. As I mentioned in our last earnings call, we launched an innovation partner program with a number of national merchants for a new native mobile platform, which has been running for several months now. I'm pleased to report some encouraging metrics coming off these pilot programs.
We've succeeded in taking the origination process in both our virtual and staff locations down from an average of almost twenty minutes to under one minute. The most interesting finding coming from these pilots is the proprietary low friction mobile origination process requiring only three fields from customers has resulted in a pickup of incremental customers who would otherwise find it discouraging to seek approval from a traditional lease to own process. During testing, we saw some partners see as high as an 18% increase in in store approvals through implementation of the mobile app. The ability for customers and retail partners to present, review, and execute a lease agreement all within the mobile app grew increasingly more important as a contactless option throughout the holiday shopping season with further momentum driven by ongoing concerns over COVID. Innovations like this continue to help our retail partners to physically derisk transactions and demonstrate appropriate safety protocols for customers.
Development of both our proprietary browser and marketplace technologies is proceeding on schedule with the prototype and pilot of our browser technology to launch during the first quarter. We'll have more to report out on that later in q one. With some paradigm shifting strategic technology partnerships to announce as well. Turning to Slide 10. We think there's a multiplier effect as we expand existing verticals, explore new verticals, and target national retail and ecommerce partners.
Picking up on what Mitch said, we believe the total addressable market is in the $50,000,000,000 range as LTO becomes more widely adopted. Siemens tech platform and decision engine are really best in class, and I can say that from the perspective of having been in the fintech and payments industry for nearly thirty years. The integrated approach should enable us to accelerate our growth through a frictionless experience that gives us repeat access to potentially tens of millions of customers and allows us to pursue our strategies within an overall market that we estimate is in the tens of billions of dollars, all while having a proprietary technology advantage to achieve our revenue and profit growth expectations. Ultimately, we see our digital strategy as a platform where our customers can move fluidly between in store, mobile, and online transactions through a seamless interface to a curated network that expands choices for lease to own customers and creates new opportunities for our partners. Now I'll turn it over to Anthony to discuss the Rent A Center business.
Speaker 4
Thanks, Jay. The Rent A Center business had a strong end to 2020. Total revenues in the fourth quarter were up 5.8% with an impressive 13.7% increase in same store sales. Revenue growth in the quarter was driven by continued strength in our portfolio, and we achieved the growth despite refranchising approximately 100 stores in California. Fourth quarter adjusted EBITDA margin was up 580 basis points versus last year.
The team executed extremely well overall with an improvement in gross margin, favorable losses, and lower skipstolens. As we outlined on slide 11, driven by e commerce growth, we expect to maintain strong progress in 2021 and believe the Rent A Center business can sustain low to mid single digit comps over the long term, and we plan to be on the higher end of that range in 2021. Additionally, expect to generate a 20% adjusted EBITDA margin over time. Our strategy to support long term growth includes increasing omnichannel sales while leveraging existing store infrastructure and accelerating ecommerce growth. We believe there's a great opportunity to leverage Asimas' decision engine for our business, and we'll continue to expand digital payment and emerging categories.
Mitch characterized 2020 as pivotal, and that is particularly true for our Rent A Center business. While the pandemic accelerated the shift in shopping patterns, we advanced operational and strategic work to support long term growth for omnichannel. We launched a new website with service integration that better ties web orders with the stores. We gave customers greater control over their own payment enrollments, and we worked hard to improve communication across the consumer experience. Slide 12 shows the initial results of our efforts.
We've seen a digital acceleration in the Rent A Center business segment with ecommerce doubling over the last two years. Digital payments account for almost half our volume, and they result in much stickier customer engagement. Our goal is to grow e com to over 30% of Rent A Center revenues over the next several years, and we are well on our way with over 50% growth in the fourth quarter. The work we accomplished in 2020 supports a move to a full online transaction with end to end shopping experience and self-service account management. That will obviously include a strong decision engine and fraud detection.
As ecommerce grows, we do not need to add infrastructure costs as our store locations handle the final mile delivery and the payment flow from the customer. We don't need to separate facilities to handle inventory or delivery, and it layers over our store business in a very seamless way for omnichannel growth. We're also working to improve the in store experience with technology that enables better service, deeper ties with mobile and web management, and a smoother point of sale transaction. I'll now turn it over to Maureen to discuss the fourth quarter financials and our 2021 outlook.
Speaker 5
Thanks, Anthony. I'll be covering the financial highlights for the fourth quarter twenty twenty one guidance, our new debt structure following the ASEAMA acquisition and corporate allocation priorities. Looking at highlights for the quarter on Slide 13. On a consolidated basis, total revenues were $716,500,000 a 7.3% increase versus the prior year. Adjusted EBITDA rose 52.2% to $97,000,000 and rose 400 basis points as a percent of revenues to 13.5%.
Revenue growth and an increase in profitability combined to drive a 77.2% increase in non GAAP diluted EPS, which was $1.03 for the quarter. Preferred lease revenue increased 4.8% and invoice volume increased approximately 25%, driven by growth in new virtual retail partner additions and organic growth in existing locations. The difference in revenue growth and invoice volume growth was influenced by higher early payouts as well as challenges with availability of inventory at many retail partners. Overall, increases in invoice volume support a strong lease portfolio. Preferred lease skipstolen losses were 11.6%.
The skipstolen rate was positively influenced by 130 basis points as a result of reversing our remaining incremental merchandise loss reserve created earlier in the year to address potential COVID-nineteen losses. Adjusted EBITDA for preferred lease was $18,300,000 a slight increase versus the prior year, and came in at 9.1% of revenue. Without the inventory shortages at our retail partners, we estimate the adjusted EBITDA margin would have been approximately 10.5%. Higher revenue and lower operating expenses were partially offset by lower gross profit margin from a higher mix of virtual. Turning to Rent A Center.
Revenue was up 5.8, driven by a 13.7% increase in same store sales. The performance was achieved despite the refranchising of approximately 100 stores in California. The lease portfolio ended the fourth quarter up 10% versus last year and is a good leading indicator for near term same store sales performance. Skipstolen losses were 2.6% of revenue in the Rent A Center business. The 150 basis point improvement over the prior year was partially driven by increased digital payment adoption.
Adjusted EBITDA was $102,900,000 representing an increase of $30,800,000 versus the prior year. Adjusted EBITDA margin was 22.2% for the quarter, up five eighty basis points versus the prior year, driven by increased operating leverage from higher revenues and lower operating expenses, partially due to a lower store count. Our balance sheet improved over last year with $236,500,000 generated in cash from operations in 2020 and a cash balance at the end of the quarter of $159,400,000 We believe our strong balance sheet made us well positioned for the Asima acquisition. Turning to our 2021 guidance on Slide 14. Consolidated revenues are expected to be between $4,305,000,000 and $4,455,000,000 for 2021.
We expect consolidated adjusted EBITDA of $570,000,000 to $620,000,000 and non GAAP diluted earnings per share of $5 to $5.55 We also expect to generate free cash flow of 145 to $195,000,000 for the year. Turning to our segment projections. We expect our new ASEAMA segment, which includes preferred lease for twelve months and Asthma for ten point five months of the year post acquisition, to generate revenues of 2,290,000,000.00 to $2,390,000,000 Adjusted EBITDA of $320,000,000 to $350,000,000 is expected with adjusted EBITDA margins of 14% to 14.7% of segment revenues. We expect the Rent A Center business segment to achieve revenues of $1,830,000,000 to $1,880,000,000 and adjusted EBITDA of $375,000,000 to $395,000,000 or 20.5% to 21% of segment revenues. There are a few additional things I'd like to point out regarding our guidance.
Our adjusted EBITDA guidance is positively impacted by the Asima acquisition, growth in the business and synergies, and negatively impacted year over year by COVID related benefits in 2020. As we shift to more of our business coming from the retail partner channel, our gross margins will decline due to paying retail costs for product versus wholesale costs in the Rent A Center business, but our operating expenses will decrease as a percentage of revenue given the asset light business and scalability of the virtual model. Integration costs of approximately 5,000,000 to $10,000,000 are expected, and along with the intangibles amortization impact from the acquisition, will result in differences in GAAP and non GAAP earnings for 2021. As is our practice, our 2021 projection does not incorporate any share repurchase activity and assumes approximately 69,000,000 diluted shares outstanding, which has increased due to the recent acquisition. Given the impact of the pandemic and stimulus on our 2020 results and the Asema acquisition, there are also some things to point out regarding the expected cadence of earnings in 2021.
Looking at the first quarter, we expect revenue to increase 30% to 35% year over year, with approximately 65% increase in non GAAP diluted earnings per share, assuming a tax refund season similar to prior years. Looking at the balance of the year, we expect revenue to increase in the 60% to 65% range for each quarter, with non GAAP diluted EPS fairly evenly distributed by quarter and reflecting normal seasonal patterns. We expect Rent A Center same store sales to decelerate in the second half given the tough comps in the 2020, but remain fairly flat versus last year given portfolio growth. Turning to Slide 15, we provide a free cash flow walk, which calculates our expected free cash flow guidance range starting with the midpoint of our adjusted EBITDA guidance. This includes cash taxes of 30,000,000 to $40,000,000 which reflects the benefits of the tax step up associated with the acquisition and approximate tax rate of 24%.
Interest expenses are expected to be approximately $70,000,000 to $75,000,000 based on our new debt structure post acquisition and a weighted average interest rate of approximately 5.5%. Capital expenditures are expected to be 65,000,000 to $70,000,000 which includes higher investments in technology and store refurbishment costs. Over the long term, we would expect to reduce CapEx to 50,000,000 to $60,000,000 per year. Working capital investments will also be required for funding new leases, bringing our free cash flow estimate to between $145,000,000 and 195,000,000 Looking at our debt structure on Slide 16 post acquisition, we now have a $550,000,000 asset based loan with $165,000,000 drawn at the time of the acquisition, an $875,000,000 Term Loan B and $450,000,000 in unsecured senior notes. Our debt to EBITDA leverage was 2.4x at the time of the acquisition, and we have ample flexibility and liquidity to invest in growth.
Lastly, on Slide 17, our capital allocation priorities are to fuel organic growth of the largely untapped virtual lease to own business. Both through strong adjusted EBITDA growth and debt paydown, our goal is to reduce net leverage to below two times in eighteen months with a long term leverage target of 1.5 times while maintaining robust liquidity. We also plan to continue to provide attractive total shareholder returns, and our capital allocation strategy continues to include returning capital to our shareholders in the form of dividends. As always, detailed income statements by segment are posted to our website, and the 10 ks will be filed tomorrow, Friday, February 26. Thank you for your time today.
I'll now turn the call over for your questions.
Speaker 0
Our first question is from Vincent Criscianatic with Stephens. Your line is open.
Speaker 6
Hey, thanks. Good morning. Thanks for taking my question. So I appreciate the strong guidance for 2023, that $6,000,000,000 of revenues is pretty significant. I was wondering if you could maybe separate it out between the Rent A Center business and the CEMA and sort of discuss what needs to happen to get there.
Like for CEMA, do you need to have significantly more stores opening from the current, I think, 19,000 or sorry, 17,000 you have now? And maybe you can go into to how you get to that growth in more detail.
Speaker 5
Sure. Hi, Vincent. This is Maureen. I'll talk through some of the key assumptions that go into our 2023 projections that we provided. We're assuming 20% to 25% annual revenue growth within the Ascima segment.
We're assuming low to mid single digit same store sales in the Rent A Center business driven by ecommerce. We believe we can get the ecommerce penetration rate up to about 30% of revenue in in Rent A Center. We believe we'll get to mid teens consolidated EBITDA margins. We've we're assuming 40 to 70,000,000 of synergies. And loss rates fairly consistent with historical averages.
And the way that we get to the 20 to 25% growth within the ASIMA business, and I can let Jay go into more detail on that, but it's a combination of organic growth as well as adding additional retail partners. And if we look at the makeup of overall the distribution between Rent A Center versus Asima, it's we'll get to more than about two thirds of the business as Asima versus Rent A Center over that three year period.
Speaker 3
Yep. This is Jason. Thanks. Good morning. I would just add three quick points.
Point number one is that, we have now a very strong combined national, sales organization, where they've had tremendous success, and we've been able to tie take the best of both of those teams. And we have a a aggressive plan to continue to grow new doors in the space, and they've continued to gain traction there. The second thing is that Maureen was talking about with regard to being positioned for large national partners kind of both on the physical retail side as well as on the ecommerce side. And kind of one of the key factors that is coming to play with the Asima acquisition is that they have an optimized front end for integration with ecommerce partners as well as in large retailers. And their decision engine enables us to move very quickly because they're able to teach the decision engine much faster, and they're bringing a wealth of their own data.
And we're combining that data with our own historic performance data, which is gonna enable us to ramp partners faster. And then the third quick point is that we have a a very specific strategy with regard to mobile browser and market and that enables us to take our combined customer universe, and point it at new means and expand the ability for our customers, to to lease to own. So the combination of those three things, you you know, position us. That third and final factor also is proprietary. So it gives us an advantage, and we're gonna obviously, you know, rigorously defend our intellectual property.
Speaker 6
Okay. I appreciate that. Thank you. And and, Jay, a a follow-up. So I appreciate the disclosure on the ecom percentage.
And if I take the, you know, overall 15% minus the Rent A Center business, the the 25%, I I guess, SEMA is currently in maybe the high single digit percentage now coming from ecom. I'm just sort of wondering when you think about this on a maybe not a fully mature, but as you grow the business, where can you get in terms of the percentage coming from ecom? Actually, you have Wayfair from your slide deck, that's, you know, all ecom. But, you know, where do you think that can grow over time? Thank you.
Speaker 2
No. Vincent, this is Mitch. Good morning. The no. The 15% is just the seam and the 25% is just Rent A Center on the ecom side or roughly 25% on Rent A Center.
So Oh. I guess blended, they're about even right now from a revenue standpoint. Right? It well, maybe the the the SEMA segment's a little bigger. So I don't know if it would blend in 19 or 20 or something like that.
But as far as what the e com can get to Jay, I'll let you I'll let you take that.
Speaker 3
Yeah. No. I said, we're gonna see an acceleration there because we end up getting, like, a force multiplier effect. So now that, you know, if you look at an account like a Wayfair, you start to expand that into other verticals. We have a number of that we're in, the process of, partnership discussions with.
So I think, you know, similarly, you'll see that become, over weighted sort of in the back half of '22, and then throughout '23 where that becomes actually actually a very significant portion of our of our revenue.
Speaker 6
Okay. Great. Thank you. And, sorry, last one. To the extent you can comment, it looks like, some of your peers have received an inquiry from California and was wondering if Rent A Center received the same and anything you can say about that.
Thank you. Last one for me.
Speaker 2
Thanks, Vincent. No. We we have not received that at Rent A Center or or at Esteema. We did not get the anything from California that you're referring to. We, you know, we I would only add to that that we follow the laws in every state.
California has a lease on law, the Carnet Act, and we follow it. And but I guess the short answer is no. We didn't we didn't get that that letter. And I'd also remind everyone that we franchised on the Rent A Center side, franchised California last fall. So we don't have any corporate stores in in California on the Rent A Center side, so that's a little more color.
Speaker 6
Okay. Great. Very helpful. Thanks very much, guys.
Speaker 3
Thanks, Vincent.
Speaker 0
Your next question is from Anthony Chukumba with Loop Capital. Your line is open.
Speaker 7
And thanks for all the great information on this call. And I'd just like to, you know, send my congratulations to the team. I mean, you guys have done over the last couple of years has been nothing short of remarkable. And, you know, as you know, there were times I was pretty down in your business. But, you know, you guys have just really done a yeoman's work.
I just wanted to congratulate you on that. On to my question. So, you a lot of great information, you know, on on and and and what your plans are going forward. I just had a question. You know, was I was I was having some some problems following all the numbers that you guys were kind of throwing out.
I mean a lot of the information and I will go back to it. But what would I guess on a pro form a basis for 2021 assuming you owned Asima for the full year, what would Asima, I guess, revenues and EBITDA be on a pro form a basis?
Speaker 5
Well, on a pro form a basis, we're assuming twenty five twenty to 25% revenue growth over 2020. And then, our March EBITDA on a pro form a basis would be about $25,000,000 higher than that.
Speaker 7
Got it. Okay. No, that's really helpful. Actually, you know, that's the only question I have. I'll turn it over to someone else.
Thank you.
Speaker 2
Yeah. And and thank you, Anthony, for your kind words at the beginning of that. We we appreciate we appreciate those words. No problem. Keep up the good work.
Thank you. We will. We will.
Speaker 0
Your next question is from Bobby Griffin with Raymond James. Your line is open.
Speaker 8
Good morning, everybody. I appreciate you taking my questions, and congrats on managing a challenging year and an exciting start to 2021. Guess, first, Mitch, I wanted to maybe circle up and do a high level question here first. But the 2023 outlook is impressive for both sides of the business. Maybe can you just talk a little bit about your view on how the virtual channel can coexist with the traditional store channel.
And to put it into context, you know, some of the pushback we occasionally get on the space is that virtual will take share from the store. And I understand the customer profiles are a little different, stuff like that, but any additional color about how you see them both growing together over the next three years would be helpful. And then maybe as a second part of that, what type of credit environment do you need, over the next three years to hit those targets? And that and I'll
Speaker 2
go from there. Thank you. Sure, Bobby. Good questions. You know, the as far as coexisting, of course, the virtual business has grown.
There's an awful lot of white space still out there, but it's growing pretty good. And we've heard that for years, right, how it's gonna cannibalize the center side. And you were not seeing that, and
Speaker 3
I wouldn't expect to see
Speaker 2
it going forward either because I think it's it's virtual lease to own, whether it's in a retail partner store or ecom that Jay was talking about, it just brings lease to own more mainstream. And all the buy now, pay later groups out there like Shopify and and and Affirm and so forth, it just takes it just brings spreading out your go getting into small payments more mainstream. And I think as it take as people learn more about leasing, you know, it helps the whole industry. And when people hear about leasing in a retail store, you know, it's not like every single person that hears about in a retail store signs up that day. In fact, it's probably somewhere 50% or less that actually do a transaction, you know, that we have that have an opportunity to do a transaction every day.
In fact, it is in the virtual world. It's in the 40 to 50% range. So if you know, that means 60% of people are walking out having, in many cases, heard about leasing for the first time in their life, decided not to do it that day, but now they know about leasing. So I think what we've seen over the years, and this isn't me speculating, I'm talking about what's happened over the years. I mean, we've we've bought a SEMA, you know, and the numbers are out there, 1,200,000,000.0 or whatever they did last year.
You know, you know what other companies have done in the space, yet Rent A Center grew at it's had positive same store sales for 12 quarters. So I'm not speculating going forward. I'm speculating and giving history that I think as it becomes more mainstream, it just helps it helps us on the Rent A Center side too. As far as the the the credit side, as you know, Bobby, we've we've done well in multiple economic environments. As as credit tightens up, we tend to outperform.
We didn't you know, if you look at 02/1819 on the Rent A Center side, we didn't necessarily you know, we didn't need tight credit to perform well there either because the model is so resilient as credit tightens up, it pushes people from one side of the funnel into the funnel. And as it loosens up and pushes other people and the economy gets better, it pulls people into the transaction from the other side. So it's it's a little bit of a swing of customer depending on the credit environment. But, obviously, the numbers in our history, you know, prove the resiliency either way. And I wouldn't say that that that we have to have any one particular credit environment over the next three years to get that $6,000,000,000.
Speaker 8
Okay. That's helpful. I appreciate it. And I guess secondly for me, you may want to just dive into the synergy potential a little bit more. And in particular, the potential synergies of Asima helping out the the core Rent A Center business, are are those more 2022 aspect?
And if so, what's some of the big building blocks or moving parts that you and the team will be working on integrating here in 2021 to get it set up for those synergies to accelerate in 2022?
Speaker 3
Yeah. Thanks for the question. We're already hard at work. First thing is that, as you know, we closed the transaction last Wednesday, and we've already worked to integrate our national sales teams, and we've rationalized our field force. So we're getting after the synergies, and we have a tremendous amount of confidence in the synergy number that we're putting up from a from a, you know, a 21 perspective.
On the on the go forward aspect, and then to answer your rent rent center questions, we got a couple of things. In addition in addition to what, you know, we would think the natural synergies are, decision engine itself has a tremendous potential potential on both sides of the business because we're, don't forget, bringing a significant business with our preferred lease over from an origination perspective, and the SEMA engine has fantastic yields in the space. And also, Anthony on the Rent A Center side has been, you know, working through testing and implementation of the decision engine, and we'll be able to further leverage that. So you get a yield impact the deposit yield impact. And then and then the third, you know, is those and those are the things that are more immediate.
And then the third is that, you know, like I referred to earlier with the ecommerce, you end up with a situation where if you're able to move in more quickly with better yield capacity through better decisioning and you have an integrated service platform, like I said in my opening comments, then the performance of that portfolio also is going to improve because you have better collections activities. And then the final thing I would end up saying is we already have an integrated approach with regards to working, Anthony and I, partnering on things like collections of goods, and we are actually working on an automated, version of that to make that more seamless process as we continue to scale the business. So that's you know, those those are all things that are that have already started and will continue to go, and and we see the impact both this year and then and like I alluded to in my comments, you know, to really be at a full run rate next year.
Speaker 4
Yeah. And I would echo the sentiments about the decision engine. You know, the Rent A Center business, we're excited. The synergy associated with that is you know, our loss rates are up well within our range right now. We feel very, very confident.
But the opportunity for us to go ahead and just improve the customer experience with the Assima decision engine and really continue to reduce the friction and speed up end transactions. I mean, we're focused on it as an opportunity to convert our customers quicker and faster. So that's just gonna improve our performance as well. So these synergies are are very exciting as we move forward.
Speaker 8
Okay. And then that's very helpful. I guess, lastly for me, Jason, I might have missed it. You gave some good detail about, you know, the building blocks for for SEMA's growth. And I guess what I was curious is is do you see the opportunity to partner with some of the, you know, second tier offering credit people as as some of your competitors have?
Is is that in the cards, or is it, you know, more for you guys to focus on growing the doors and then the ultimate opportunity of of further monetizing your existing customer base to just additional categories and things like that.
Speaker 3
Yeah. The the good news there is that they already have a a dual pronged approach. You know, when you look at, obviously, the ecommerce integration into waterfalls that are some of the, you know, logos that we had up on the slide, both in the physical and the ecom side. Sorry. That ends up being something that we can continue to build off of.
So it's not an either or. Those capabilities are actually already generating significant amounts of revenue, and the goal is to continue to increase. And so I think the other two factors that you'll see, look, we're gonna continue to do further integrations from waterfall perspective, partnering, you know, with the the test partners that you mentioned. And then in addition to that, we are on target with our own browser and marketplace technology, which enables us to take a very large multi multi million universe of customers and, provide them with a with a seamless, experience to be able to do LTO, online. So, the good news is the foundation is not only already there, it's in use, and now we're looking to accelerate upon it.
Speaker 8
Great. I appreciate the detail. Best of luck here in 1Q, and congrats again.
Speaker 2
Thanks. Thank you,
Speaker 0
Your next question is from Brad Thomas with KeyBanc Capital Markets. Your line is open.
Speaker 9
Hi, good morning. Let me add my congratulations as well on a great year and a very exciting outlook here with the CEMA. I wanted to follow-up on the last line of questioning a bit to talk about how much you may need to adjust and refine Asima's product offering. When I think of the legacy offering of Rent A Center's digital B2C operations, you know, which have gone under a number of names over over the years. I I think of it as having been very strong on on the on the man side with, obviously, some very important, you know, national partners.
And then when I think of SEMA's legacy business, it tends to skew, I think, a bit more towards smaller independent retailers. You know, I guess, Jason, Mitch, as you as you look at the product offering, how much do you think you have to evolve it to, you know, grow the addressable market and and to improve your ability to compete with, you know, the field?
Speaker 3
Yep. Yeah. Thank you very much for the question. So what you're looking at is a very, very sophisticated vertically integrated system from origination online, mobile, and through what they call portal, which is their retail which is what, their retail, origination system is. And that's tied to the decision engine, the servicing platform collections.
Other than some other than some additions of things that we have, such as our benefits plus program and our loss damage waiver program, things that we're incremental in bringing to the table, the system itself is, you know, very much ready to handle what we do, both in the virtual side and on the staff side. So it really becomes a matter of making sure, you know, that we're rolling out. So what we have is a sequential integration plan where, you know, when I said by the by the, you know, mid half of the year, we're right on target with that, trying to get to pull it into the second quarter to have it kinda up and running at scale as virtual. And we've already begun to test the Asima platform within our staff locations on a limited basis. That's how pliable it is.
We could close on a Wednesday, and this Monday, we were able to stand up, you know, a store. So I I think that it's, for us, sort of nirvana because we have the ability to fold our origination business and our partnerships into this best in class platform.
Speaker 9
That's very helpful. Thank you, Jason. And a follow-up on the synergy commentary. When we think about that range of 40,000,000 to $70,000,000 is there a way to think of what sort of maybe the minimum might be that you can feel confident when you look at the expenses that you know you're going to get those dollars versus what might be a little bit more speculative if it's something along the lines of potential revenues, for example? Just how to think about quantifying that range?
Speaker 2
Yes. This is Mitch, Brad. I would say, this year, we talked about $25,000,000 We're very confident in that or we'd held on to some of it. In the forty to seventy, you were very confident, obviously, on the low end. But we're also confident on the high end, honestly.
If if you're you recall going back to 2018 when we talked about, you know, what we could do as far as when I came back to the company, you know, it just kept growing as we looked more and more. So as as Jay said, we've only had this we've only closed eight days ago. So as time goes by, will we find more synergies? Will will the yield produce some more top line as as you just as you just pointed out, Jay mentioned, the benefits plus and LDW that we use on the preferred lease side of the business, that putting that into a CEMA because they haven't had it. So there's you know, quite honestly, we're very confident in the 40, and and the whole range may be conservative at the end of the day.
Speaker 5
And just to add to that, Brad, most of what we've built in from a synergies perspective are around a higher gross margin and cost savings. So about 15,000,000 of the center the 25,000,000 in synergies for '21 will be margin improvement within the Asima preferred lease business, and about 10,000,000 will be corporate related expense reductions. So those are more tangible, less, you know, estimates as far as revenue. They're more concrete and predictable.
Speaker 9
That's that's very helpful. And and then recognizing that you only closed a week ago, so you you still have a lot of work ahead of you here. I I I know a question that you're gonna get is, have you had a chance to review what the customer overlap is between a CEMA and and the Rent A Center business and and how you're thinking about, you know, serving those customers that do work through both channels?
Speaker 3
Yeah. There there's actually we we, during due diligence and since, have obviously gotten much more granular with regards to that. It's actually a a very complementary set. And I think that gets to the point that Mitch made earlier with regard to there's still such a large addressable market here. And so, you know, we're not bumping into each other and fighting over only the same customers.
So very small overlap perspective, which is great because we're gonna be able to get much more leverage.
Speaker 9
Thanks so much. Good luck.
Speaker 2
Thank you. Thanks, Brett.
Speaker 0
Your next question is from Kyle Joseph with Jefferies. Your line is open.
Speaker 10
Hey, good morning. Let me echo the sentiments on a very strong 2020 and exciting acquisition. I'll focus on the Asimas segment, what will be the Asima segment first, in terms of credit performance? Can you give us a sense for what Asima's historical losses were, as an independent? And then, you know, potentially, where you see that heading given the combination with Rent A Center?
Speaker 5
Sure. So the Ascena business, their loss rates are in the range of 7% to 8% of revenue. There is a slight accounting difference between how how we do the accounting treatment on losses in the preferred lease and rental center businesses, but this is more in line with other virtual competitors. As we integrate with the CEMA, the expectation is that we'll be for 2021, we'll be high I'm sorry. We'll be double digits, low double digits in 2021.
And then as we blend the two businesses over time, it will be high single digits. So it'll be closer to that seven to 8% that we see in Asima. Because as Jay mentioned, we'll be migrating our preferred leads and and virtual businesses onto the Asima platform and expect to see improvements from the decision engine.
Speaker 10
Got it. Very helpful. And then, Maureen, probably another one for you. You know, as we work on building our consolidated models here, you know, what kind what sort of disclosures can we expect for the SEMA segment? Would you guess it's similar to what we're getting in terms of invoice volumes or active doors?
Or just how we should think about modeling that segment going forward?
Speaker 5
Yes, Kyle. It'll be very similar to what we do today for preferred leads. We'll be disclosing the the combined Athena and preferred leads business together. We don't plan on separating the two since, again, we'll be fully integrated businesses. And then we'll be providing invoice volume.
As we grow the ecommerce business and the marketplace, the number of doors becomes less relevant, so we're focused around invoice volume.
Speaker 9
Okay. Understood. And then
Speaker 10
last one for me on the on the '21 guidance. I think you mentioned earlier it incorporates some of a normalized tax refund season. Can you walk us through what sort of stimulus assumptions are incorporated in that guidance?
Speaker 5
In our guidance, we're not assuming any additional stimulus, and so we're we're assuming that the business kind of reverts to more historical trends throughout the year with the with the economy and everything kinda going back to normal towards the back half of the year. But no incremental stimulus is assumed in our '21 guidance.
Speaker 10
Great. Thanks very much for answering all my questions.
Speaker 2
Thanks, Thank you.
Speaker 0
Your next question is from Tim Virangel with Northcoast Research. Your line is open.
Speaker 11
Thank you for taking my questions. Most of them actually just got answered, but I do have a clarification over to Jason. Just wondering how you guys define ecommerce sales at a team. Are these sales that were fully processed online on the website, or do you include, like, your originations online and and closing somewhere else?
Speaker 3
No. The it is this is an end to end ecommerce, so origination through the funding and and, and purchase. So there's a it is its own segment, essentially. And then anything that we're doing within a store, is is specific to, you know, the the actual retail purchase takes place there.
Speaker 2
Yeah. And if if you want that that it with the retail partners that it originated at their website and then got closed in the store, that would be much higher than $15. That's right.
Speaker 11
Much higher. Yeah. That's that's right. Thank you. And then, Maureen or Mitch, I was wondering if you guys get out of line, you know, how you guys feel about your store footprint moving forward.
Do you guys feel like you're you're right sized right now, or do you think, there's some opportunity to move into new locations? Just if you could give give some color there as well. Thanks.
Speaker 4
Yeah. This is Anthony. I'll I'll take that. Obviously, as part of our strategy, we know the opportunities that are present for us on the web. But equally, we still see tremendous upside on our brick and mortar locations as well to not only serve that omnichannel experience for the customer, but also to be the final mile for the growing e com business as well.
And, when we just go forward for 2021, our forecast is at least net neutral on store locations, flat where we're at and potentially some upside opportunities as well.
Speaker 11
Excellent. Thank you.
Speaker 2
Thanks, Tim.
Speaker 0
Your next question is from John Rowan with Janney. Your line is open.
Speaker 3
Good morning, everyone.
Speaker 2
Hi, John. Just
Speaker 12
had some modeling questions. Maureen, I know you went through kind of 1Q guidance. I didn't get everything written down. Can you just repeat what you said on revenue and earnings?
Speaker 5
Repeat what I said for
Speaker 12
q one q revenue and earnings.
Speaker 2
I didn't get everything written down.
Speaker 5
Sure. No problem. So for for q one, we assume that revenue is gonna be up 30 to 35%, and that EPS will be up around 65%. And that takes into account kind of that sub period or the month and a half where we did not have the CEMA post before the transaction.
Speaker 12
And that's year over year. Correct?
Speaker 5
Correct.
Speaker 12
Okay. And year over year operating or gap? Because you had a you had a charge in was it one q of this year? I'm trying to hang on a second. Actually, I'm
Speaker 6
not sure about that now that I'm saying it.
Speaker 12
I assume that's on the adjusted figure, correct?
Speaker 5
Exactly. The adjusted figure.
Speaker 12
Okay. And then as far as interest expense goes, I'm kind of having trouble getting to $75,000,000 You have 1.49 at 5.5%. You're generating, I don't know, 170,000,000 at the midpoint of free cash flow and you're paying out the $0.31 dividend, it's $80 some odd million in dividends. How I'm just trying to understand, is that cash flow all front end loaded? I can get to that $75,000,000 if we are very aggressive in reducing cash in that debt number in the beginning part of the year at 5.5% versus taking a more measured approach through the year.
So I'm just trying to balance out where that debt number goes and how fast it goes through the year.
Speaker 5
You're right, John. We do have most of the paydown in debt in the first half of the year, and so that's how you would get to the numbers. It's higher in the first quarter due to the tax refund season. We we see more cash payments, and so the cash flow is higher. A pretty significant amount in q two as well, and then it's fairly small payments in the back half.
Speaker 3
Okay. Very good. Thank you.
Speaker 2
You. Thanks, Matt.
Speaker 0
Our last question is from Carla Casella with JPMorgan. Your line is open.
Speaker 5
Hi. Just another question to follow-up on Asima on your guidance for the full year. Does that include revenue synergies? Or I guess now that you've you've gotten under the hood and owned the business, do you have a sense for the revenue synergies you could see from the combined businesses over the next few years? The guidance itself synergies.
Sure. The guidance itself doesn't include any revenue synergies, not to say that there there isn't potential opportunities. I mean, adding the decision engine speeds up the process in our preferred lease business. And so there's that's an example of an opportunity to potentially have revenue synergies.
Speaker 0
Okay. Great. Thank you.
Speaker 2
Thanks, Carol.
Speaker 0
We have no further questions at this time. I'll turn the call back to Mitch Fidel for closing remarks.
Speaker 2
Thank you, Megan, and thank you, everyone, for your time this morning. Thanks to everyone out there, our 15,000 or so employees out there that have you know, really knocked it out of the park in 2020 as you've heard. And and I'm and I'm confident with this. They can do the same thing. We can do the same thing in 2021.
I wanna welcome the the great team out in Salt Lake City to SEMA. Officially welcome them. Certainly, I've welcomed them, but I'll do it publicly now. You know, to Aaron and and Tyler and Rob and Nate and Jared, the whole team out there, I could keep going. Not that I've met everybody yet, but great team out there.
Really glad to have them on board. They've knocked it out of the park the last seven or eight years, and they'll they'll continue to do that. They're we're so so fortunate to have been able to keep the whole leadership So welcome, guys and ladies, and thank you again, everybody, for your time this morning. Thanks to thanks, everyone, for the hard work in our in our great company.
Thank you. This
Speaker 0
concludes today's conference call. You may now disconnect.