AAN (2022 - Q1)

This transcript is designed to be used alongside the freely available audio recording on this page. Timestamps within the transcript are designed to help you navigate the audio should the corresponding text be unclear. The machine-assisted output provided is partly edited and is designed as a guide.: Operator: 0

00:06 Good morning. My name is Elliot, and I'll be your conference coordinator. Welcome to Aaron's Company Inc. First Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. 00:20 I'd now like to turn the call over to Keith Hancock, Senior Director of Corporate Affairs at Aaron's. You may begin your conference.

00:28 Thank you and good morning, everyone. Welcome to The Aaron's Company first quarter 2022 earnings conference call. Joining me this morning are Douglas Lindsay, our Chief Executive Officer; Steve Olsen, our President; and Kelly Wall, our Chief Financial Officer. 00:45 After our prepared remarks, we will open the call for questions. Many of you have already seen a copy of our earnings release issued last evening. For those of you that have not, it is available on the Investor Relations section of our website at investor.aarons.com. During this call certain statements we make will be forward-looking, including forward-looking statements related to our financial performance outlook for 2022. 01:14 I want to call your attention to our safe harbor provision for forward-looking statements that can be found at the end of our earnings release. The safe harbor provision identifies risks that may cause actual results to differ materially from the content of our forward-looking statements. Also, please see our Form 10-K for the year ended December 31, 2021, and other subsequent periodic filings with the SEC for a description of the risk related to our business that may cause actual results to differ materially from our forward-looking statements. 01:47 On today's call, we will be referring to certain non-GAAP financial measures including EBITDA and adjusted EBITDA, non-GAAP net earnings, non-GAAP EPS and free cash flow, which have been adjusted for certain items which may affect the comparability of our performance with other companies. These non-GAAP measures are detailed in the reconciliation tables included in our earnings release and the supplemental investor presentation posted to our website. 02:14 With that, I will now turn the call over to our CEO, Douglas Lindsay.

02:19 Thanks, Keith. Good morning, everyone and thank you for joining us today. I'm pleased to report a strong start to 2022 and continued positive momentum at The Aaron's Company. In the first quarter, we delivered financial results consistent with our expectations for the quarter and we remain on track with the 2022 outlook we provided for The Aaron's core business in our February 23 earnings release. 02:46 I'm proud of all of our team members in the field, our store support center and at our Woodhaven manufacturing facilities who work hard every day to continue to innovate within our business. Through their efforts, we were able to deliver results consistent with our expectations and to continue to invest in our strategic initiatives despite the challenging economic environment. 03:11 In addition, I'm thrilled to report that we completed the previously announced acquisition of BrandsMart U.S.A. on April 1, 2022. We believe BrandsMart enhances our ability to execute on our mission of providing consumers with easy access to high quality products through affordable lease and retail purchase options. I will share additional insights related to the BrandsMart acquisition after we discuss The Aaron's core business. 03:41 Regarding The Aaron's core business, we delivered results consistent with our expectations for the quarter. On a two-year basis, same-store revenues were up 9.6%. In addition, we ended the quarter with a larger lease portfolio than the same period in 2021, which we achieved despite volatility and consumer demand in the quarter. Also in the quarter, we experienced expected normalization in customer payment activity, which resulted in lower lease renewal rates and higher write-offs. 04:16 As we look ahead to the remainder of 2022, we are also navigating the challenging economic environment facing the market including ongoing inflationary pressures, the uncertainty arising from geopolitical conflict and a complex supply chain. Despite the volatile economic environment, I remain confident in our outlook for the year and our ability to optimize performance using the many levers inherent in our direct to consumer model. We believe our customer value proposition is compelling and gives us a competitive advantage. 04:55 Over the last several years we have significantly transformed the Aaron's core business with the goal of continuing to provide an exceptional customer and team member experience, while also driving greater productivity in our operating model. To achieve this transformation, we made significant investments in promoting The Aaron's value proposition, digitizing all aspects of the customer lifecycle and optimizing our store footprint. 05:24 As a result, our brand awareness in the first quarter reached the highest level since 2018. Our enhanced e-commerce platform continues to grow, attracting a new and younger customer. Our digital payment platforms offer increasing flexibility and convenience to our customers. Our centralized decisioning platform enables an increasingly predictable lease portfolio and our more than 135 GenNext stores continue to outperform our legacy stores. 06:00 I'd like to expand further on a few of these growth initiatives. First, our fast growing e-commerce channel remains a key revenue driver and an area of strategic focus with e-commerce revenues representing 15.4% of lease revenues in the first quarter. This is the largest contribution of e-commerce revenues to total lease revenues since launching aarons.com. We are attracting more customers to our website, improving conversion rates and enhancing the customer experience. 06:34 We more than doubled our online product assortment in the last year and importantly, we have meaningfully accelerated the speed with which we are able to introduce new products to our e-commerce channel. We expect to leverage these capabilities to drive growth in our business by expanding our marketplace, offering a broader product catalog to our Aaron's lease-to-own customers. 06:58 Complementing our investment in digital channels, our GenNext store concept continues to deliver a superior customer experience and drive meaningful financial performance. In the first quarter of 2022, lease originations in our GenNext stores opened less than one year continue to grow at a rate of more than 20 percentage points higher than our average legacy stores. 07:25 Following the opening of 19 new GenNext locations in the first quarter, our 135 company-operated GenNext stores accounted for more than 13% of lease and retail revenues. We remain committed to the GenNext strategy and currently plan to add more than 80 additional GenNext stores this year for a total of approximately 100 GenNext locations in 2022. We continue to innovate here at Aaron's and the business transformations we have implemented are yielding great results. We are excited to apply the assets and capabilities we have built to our newest platform for accelerated growth, BrandsMart U.S.A. 08:11 As discussed in our last earnings call, we believe the acquisition of BrandsMart will provide meaningful value creation opportunities. We continue to expect this transaction to deliver a variety of strategic and financial benefits. It broadens our customer reach and significantly expands our total addressable market. It leverages Aaron's strengths to create an in-house lease-to-own solution. It significantly increases the product assortment available to Aaron's customers, and the transaction also yields significant purchasing power and cost synergies. 08:49 We are operating Aaron's and BrandsMart as separate lines of business, each operating under their current brand. The BrandsMart business reports into our President, Steve Olsen. Steve and his team are already hard at work integrating BrandsMart into The Aaron's family and executing on our strategic initiatives. Our initial efforts are focused on capturing the synergies for the transaction, as well as making investments in the BrandsMart business to position it for future growth and to enable it to operate effectively as part of a public company. 09:26 We have already begun the work on the implementation of an in-house lease-to-own solution for BrandsMart customers, which we expect to launch in the second quarter of this year. We are also preparing to add some of the BrandsMart product catalog to aarons.com by the end of the year and are beginning to assess procurement synergies between the two businesses. 09:48 Finally, we have begun assessing optimal locations for new BrandsMart stores with the intent of opening one to two stores per year beginning in 2023. This is an exciting time for our company as we have new opportunities to drive long-term value for shareholders, create opportunities for our team members and enhance our compelling value proposition. We continue to expect the combined company to deliver more than $3 billion in total annual revenues and more than $300 million in adjusted EBITDA by 2026. We look forward to reporting BrandsMart's second quarter performance in our next quarterly earnings release. 10:36 Before I turn the call over to Kelly, let me reiterate how pleased I am with the progress we're making on our strategic initiatives for both our Aaron's core business and BrandsMart. I remain confident we have the right team, the right strategy and the right platforms to deliver long-term growth for all of our stakeholders. 10:57 With that, I'll now turn the call over to Kelly Wall to discuss the details of our first quarter results and 2022 outlook.

11:07 Thank you, Douglas. Before I share our financial results for the quarter, I want to remind you that the financial and operating results for the first quarter of 2022 and prior periods do not include BrandsMart. As Douglas noted, the acquisition closed on April 1, 2022 and results for BrandsMart will be included in the company's consolidated financial statements beginning in the second quarter of 2022. 11:35 With that said, I am pleased to share the financial results for The Aaron's core business for the first quarter of 2022. Total revenues in the quarter were $456.1 million compared with $481.1 million for the first quarter of 2021, a decrease of 5.2%. This decrease in total revenues was primarily due to lower lease revenues attributed to the expected normalization of the lease renewal rate and lower exercise of early purchase options by our customers. These were partially offset by the increased size of our lease portfolio year-over-year. 12:20 More specifically, the company ended the first quarter with a lease portfolio size for all company-operated stores of $131.7 million, an increase of 2.3% compared to a lease portfolio size of $128.8 million on March 31, 2021. Lease revenues in the first quarter also benefited from an increase in average monthly rent per agreement, which is partially offsetting lower customer delivery volume. To help offset the continuing high inflation we are experiencing in the cost of lease merchandise. We continue to adjust product lease rates and modify the product assortment mix offered to our customers. 13:10 The same factors that have impacted lease revenues also contributed to a 4.3% decline in same-store revenues for the first quarter of 2022 compared to the 14.8% increase in the prior year quarter. On a two-year basis, same-store revenues were up 9.6%. In the first quarter of this year, our customer lease renewal rate was 89.4% for all company-operated stores compared to 92.5% in the government stimulus-aided first quarter of 2021. We have discussed the benefits to our customers from government stimulus programs on prior earnings calls. And as we continue to comp over stimulus-aided periods, we expect that this normalization will continue to result in lower customer lease renewal rates and lower customer demand when compared to the same prior year periods. 14:12 As Douglas highlighted, we continue to experience strong performance in our e-commerce originations channel. E-com revenues grew 3.9% in the first quarter of 2022, after increasing 41.9% in the same quarter of the prior year. E-commerce also has continued to represent an increasing percentage of our total lease revenues, increasing to 15.4% in the first quarter of 2022 from 14.3% in 2021. 14:51 At the end of the quarter, we had 135 company-operated GenNext locations. These stores contributed 13.2% of lease and retail revenues in the first quarter, up from 5.2% in the first quarter last year. We plan to open a total of approximately 100 GenNext locations in 2022. Due to the continued challenges in the global supply chain, we have delayed 20 of the previously communicated planned GenNext locations into 2023. With this change, we currently expect to have 215 GenNext locations by year-end, which will represent approximately 20% of our company-operated stores. 15:40 In addition, our GenNext stores are generating favorable revenues and earnings growth when compared to our legacy stores and are continuing to meet our internal expectations. With lease originations and GenNext stores opened less than one year, continuing to grow at a rate of more than 20 percentage points higher than our average legacy stores in the first quarter of 2022. 16:07 Turning to our operating expenses for the first quarter. Personnel costs declined $3.8 million in the first quarter as compared to the prior year, primarily due to lower performance-based incentive compensation, partially offset by higher wages for in-store team members. Similar to the fourth quarter of 2022, staffing levels in the first quarter at our stores remain below our operational target due to the ongoing challenges in the U.S. labor market for retail-based hourly employees. 16:42 Excluding restructuring expenses, spin-related costs and acquisition-related costs, total other operating expenses declined $4 million in the quarter as compared to the prior year period. This decrease is primarily due to lower advertising costs, partially offset by higher occupancy costs, shipping and handling and other miscellaneous expenses. The increase in occupancy cost is attributed to higher store maintenance and utility costs and the rent and leasehold improvement depreciation related to our new GenNext format stores. 17:22 The provision for lease merchandise write-offs as a percentage of leased revenues and fees for the first quarter was 5.4% compared to 3.1% in the prior year period. As expected, this increase in write-offs was primarily due to lower customer payment activity this year as compared to the government stimulus-aided first half of 2021, where lease renewal rates were 300 basis points to 400 basis points higher than what we experienced pre-pandemic and the continued product cost increases in our lease merchandise. We also believe that the current macroeconomic conditions and especially the high inflation our customers are facing have impacted payment activity. 18:11 Adjusted EBITDA in the first quarter of 2022 was $54.7 million compared with $73.9 million for the same period in 2021. As a percentage of total revenues, adjusted EBITDA was 12% compared to 15.4% last year. The decline in adjusted EBITDA and adjusted EBITDA margin was primarily due to the expected lower lease renewal rates and expected higher provision for lease merchandise write-offs compared to the government stimulus-aided levels in the first quarter of 2021. 18:50 On a non-GAAP basis, diluted earnings per share were $0.87 compared with non-GAAP diluted earnings per share of $1.24 for the same quarter in 2021. Free cash flow was $10.7 million, an increase of $16.6 million year-over-year, primarily due to lower purchases of lease merchandise, sale and leaseback transactions for three company-owned stores and lower capital expenditures in the current year quarter. 19:26 For the year-to-date period ended April 22, the company has repurchased 516,000 shares of the company's common stock for approximately $11 million. On March 3, 2022, the company's Board of Directors increased the share repurchase authorization to $250 million from the original $150 million plan and extended the maturity to December 31, 2024. The remaining authority under the new share repurchase plan is $135.8 million. 20:03 Additionally, on April 5, 2022, the company paid a quarterly cash dividend of $0.1125 per share. This is an increase of 12.5% from the previous quarterly cash dividend of $0.10 per share. As I stated previously, we closed the acquisition of BrandsMart on April 1, 2022. In connection with the transaction, we replaced the existing $250 million unsecured revolving credit facility with a new credit facility that includes an unsecured $375 million revolving credit facility and a five-year $175 million unsecured term loan. 20:49 As of April 1, the consolidated company had $121.2 million of borrowings outstanding under its revolving credit facility. Including cash on hand, our total available liquidity was approximately $260 million at closing, which included $237 million available under our unsecured revolving credit facility. 21:15 Turning to our outlook. We have updated our full year 2022 outlook to reflect the acquisition of BrandsMart. This updated annual outlook includes nine months of financial results for the acquisition. We expect total consolidated revenues of between $2.32 billion and $2.39 billion and consolidated adjusted EBITDA of between $200 million and $215 million. We also expect consolidated non-GAAP diluted earnings per share of between $2.65 to $2.90 per share, consolidated capital expenditures of $100 million to $125 million and consolidated free cash flow of $45 million to $55 million. Additionally, we are assuming an effective tax rate of 26% and the diluted weighted average share count of 32 million shares. We have not assumed any additional share repurchases in 2022 for purposes of this outlook. 22:27 Excluding the BrandsMart acquisition, the Aaron's core business annual outlook for total revenues, adjusted EBITDA and annual same-store revenues remains consistent with the outlook provided on our fourth quarter 2021 earnings call. For BrandsMart, we expect revenues of between $545 million and $565 million and adjusted EBITDA of between $20 million and $25 million for the nine-month 2022 period post acquisition. 23:02 As Douglas discussed earlier on this call, the addition of BrandsMart is expected to provide many strategic and financial benefits, and we believe the transaction has significant synergy opportunities. More specifically, we believe that the in-house LTO synergy will provide approximately $15 million to $20 million of annual run rate EBITDA by the end of 2024. And the increase in product assortment provided to the Aaron's customers and procurement opportunities will provide synergies of approximately $5 million and $10 million, respectively. 23:39 We are also investing in people, process improvement and technology to position BrandsMart for growth and to operate this business as a segment of a public company. We expect this incremental expense to be approximately $10 million annually. Net of these incremental investments, we are forecasting annual net run rate synergies of $20 million to $25 million by the end of 2024, which we expect to double by the end of 2026. When combined with our existing e-commerce and GenNext growth platforms at Aaron's, we continue to believe that the consolidated business will deliver total revenues of over $3 billion and adjusted EBITDA greater than $300 million by 2026. 24:29 With that, I will now turn the call over to the operator who will assist with your questions.

24:38 Thank you. [Operator Instructions] Our first question today comes from Bobby Griffin from Raymond James. Your line is open.

24:59 Good morning, everybody. Thank you for taking my questions.

25:02 Hey, Bobby.

25:02 I guess, first, -- Kelly and everybody, Doug. I appreciate the detail on the renewal rates. Just curious, did that move around a lot during the quarter or are we kind of now at the level around 89%-ish you feel is the new baseline for the business given all the work you've done with centralized decisioning and some of that stuff?

25:22 Yeah, Bobby. As you recall from previous calls, renewal rates have strengthened over the last year and half with stimulus in the economy. Our historic renewal rates are call in the 87% to 88% range. At the end of 2020, with stimulus coming in, they increased by about 200 basis points to 300 basis points. And then the first half of 2021, they were up 300 basis points to 400 basis points. So that's what we're comping over now, so this normalization is really as expected. And as we look forward, the renewal rates were normalizing as expected going into the year. So what's reflected in our guidance is really consistent with what we have seen this normalization as the government aided-stimulus is coming out is really nothing different than what we'd articulated on our last call.

26:15 So just to say it in another words just to make sure I understand like the 1Q played out -- 2022 played out the way the 89%-ish has played out kind of as you expected, and that's what -- that type of rate is what's assumed in the go forward as well, 89 or so rough numbers?

26:31 Yeah. Well, it's important to realize that we have a seasonal business. So it was expected in Q1, as you know, tax seasons in Q1, but it was as we expected. And then, we believe we will still be comping negative to last year in Q2 because of the stimulus-aided Q2 last year, but still normalizing down. We believe as we get into Q3 and Q4, those will be closer to historic levels, seasonally adjusted for those two quarters.

27:01 Perfect. That's very helpful. And I guess two questions -- two follow-up questions and some of the detail on BrandsMart. One, I was a little surprised you guys mentioned the synergies for the in-house lease solution, but called out the run rate probably by the end of 2024. Can you just maybe unpack that timing, I would have thought maybe that would have came, a little bit sooner given that's one of the biggest synergy buckets and a large compelling opportunities, is there just some investments that have to be made there to kind of get that up and running or anything else to help us understand some of the behind-the-scene work that has to take place to get the in-house leasing solution in BrandsMart.

27:38 Yeah. Hey, Bobby. It's Kelly. Happy to unpack that a little bit for you. So, as we are kind of integrating this business and focusing on standing up the in-house lease-to-own product there, remember, it's a portfolio-based business. So day one, we'll have a few agreements and then that will grow over time, right and in the first quarter, we'll recognize less than a full year run rate of revenue and EBITDA contribution associated to that. So as the portfolio size increases through that business, we'd expect that the contribution on an annual basis would grow over time. And you're right, we do have some upfront investments that we need to make. We're obviously leveraging our decisioning technology, our expertise around reverse logistics as well as infrastructure and know-how that we have across the organization that we believe will help us stand this up fairly quickly. But again, the portfolio nature of the product is what's kind of leading to that ramp over time.

28:48 Makes sense. And then, I guess lastly, I mean there's a lot of fear out there on big-ticket home durable spending altogether kind of right now as we go over some really tough comparisons in housing turnover and some metrics have slowed. Great to see the portfolio size up, but can you maybe give us some more color on now that you have BrandsMart as well, kind of how their business has trended over the last couple of months? Have you seen any type of behavior from customers that would show you trade down happening? Just anything there to help us maybe get a better sense of where the consumer and your customer is today?

29:21 Sure. Hey, Bobby. This is Steve. I'd be glad to answer that. So I'm going to first start a little bit -- would give you a background on the category mix of the BrandsMart business. So their business is obviously weighted more to appliances and that ranging at about 50% of their mix, followed by consumer electronics around 25%, computers around 8% and furniture and other categories in the low-single digits. 29:50 As Douglas mentioned and Kelly mentioned in their prepared remarks, absolutely BrandsMart is comping over stimulated periods over the last couple of years, but they continue to see nice growth actually in average selling price across their categories. So the benefit of BrandsMart with their broad assortment, with their compelling value proposition is supported by their knowledgeable sales force that allows them to talk to the customer inside the store and get them to understand the benefits of trade up features and functions in each product. So they're doing that on a daily basis, and I believe that is supporting what I see through Q1 as continued growth in our average selling price.

30:35 Yeah, Bobby. The other thing I'd say on the demand side, so we're -- BrandsMart is as expected normalizing, but we're seeing strength in categories, as Steve mentioned, and particularly in margin and we'll report on that in Q2 as we move forward in the business. In terms of the Aaron's customer, the demand environment has normalized as expected. I did note in my comments that there was some volatility during the quarter. As you know, we had a very strong end to Q4 of last year. Inventory was in great position and our sales were very strong in the holiday season. As we went into January, as you know, there's a resurgence of COVID and that sort of impacted us through mid-Feb where we started as tax season came upon us sort of after the Valentine's Day period. We saw real strength in demand, and that persisted all the way through the end of March. So the consumer, I would say there's a lot of volatility out there. 31:32 One thing, I'm really happy about is our e-commerce business has remained strong all the way through that. So we've got very strong comps in e-com, revenue is up 3.6% over last year, up 41%. So it's a real strength of ours. And so we continue to monitor that as we look forward. Steve mentioned sort of price and was the customer paying the price that we're offering, I'm happy to also say that we've been able to drive average ticket with our consumer. Average ticket at the Aaron's business is up 6% year-over-year, and we've been able to offset price increases that we've seen with higher ticket and preserving margin in the Aaron's business, which is really good. Now that's not to say that our customer isn't under pressure. We, obviously, serve a credit-challenged customer who has cost increases in all aspects of their business but we believe that the decisioning algorithms we have set us up for success as we move forward and the renewal rates are, as I've communicated earlier. So I'm really pleased with the way the business is performing.

32:36 Thank you. I appreciate all the detail. Very helpful. Congrats on the strong quarter versus tough compares and getting BrandsMart closed. Look forward to seeing what you guys do with the business.

32:46 Great. Thank you.

32:49 We now move on to Jason Haas from Bank of America. Your line is open.

32:55 Hi. Good morning and thanks for taking my question. The first one is on write-offs. I'm curious, I think on the last call, we had talked about write-offs getting better throughout the year. I know that the typical seasonal cadence as they do tend to pick up through the year as that customer runs to their liquidity. So I'm curious if that's the expectation for write-offs to come down through the year? And then, I'm just trying to reconcile that with the lease renewal rates, which you're supposed to get, I guess, lower through the year. So I'm just trying to understand those two dynamics that seem to be kind of moving in different directions.

33:26 Yeah. Hey, Jason. It's Kelly. So on the write-off side, you're right. We had called out on our prior call that write-offs would be higher in the first quarter than what we had seen last year and higher than what we had seen kind of historically on a kind of seasonally adjusted basis, right. So just to remind you, we came in at 5.4% for the quarter that's up from 3.1% last year. And we think that this increase has been driven by a few things. One, the anticipated normalization in the customer activity that we've seen, customer payment activity that we've seen. We've also -- and as Douglas said on this briefly, there was a delay in the tax season. That impacted that plus the normalization impacted lease revenues for the quarter as well as charge-offs. So charge-offs were up. 34:23 The other thing that was impacting charge-offs in the quarter were the higher net book value of the lease merchandise. Again, that's been up year-over-year due to the inflationary pressure that we're seeing as we're buying product kind of going forward. Now as we look at that and we think about the rest of the year, we do continue to feel like we're going to land in that annual range that we've talked about before of 4% to 5%, albeit at the high end, again, consistent with what we were thinking when we put out our original plan for the year last quarter. The seasonality is a bit different this year. We've talked about that some as well with typically, Q1 would be your lowest period. It's going to be at the high end of our four quarters this year and we would typically see some improvement and increased in Q3 and then Q4 tends to be kind of right around Q3 as well. 35:18 So we're starting to get back to a more normal cadence, at least that's what we're planning for. But again, we're paying very close attention to this because some of the things that we're facing right now, we haven't seen in over a decade. But again, I want to reiterate, we feel good about that kind of coming in on an annual basis at the high end of that 4% to 5% range.

35:37 Yeah, Jason. It's Douglas. As that relates to our lease renewal rates, and I may have admitted this in my comments to Bobby, and we're seeing normalization, particularly in the second half of the year, kind of comping the pre-pandemic normalization, albeit at a higher rate than pre-pandemic levels. I think we've previously communicated 100 basis points higher than pre-pandemic levels. So we see that normalizing, the settling in above pre-pandemic levels, which kind of correlates with our write-offs guidance, and that's because of our decisioning algorithms we put in place. We now have over 90%-plus of our network being decisioned through centralized decisioning and we have a lot of levers and a lot of predictability in the portfolio.

36:22 Thanks. That's helpful color. And then for a follow-up, a bit related to a question Bobby asked. Just on the BrandsMart revenue and EBITDA guidance for 2022. I'm trying to reconcile that with the numbers that you gave for 2021, which were I know it's -- I'm comparing four quarters to three quarters, but it does seem like if I try to adjust for seasonality, I don't know the exact seasonality of BrandsMart, it does seem like it's a step down. I think on the EBITDA side, you talked about, I think, the $10 million of public company costs and it sounds like maybe on the revenue side, you're lapping over some stimulus comparison. I'm just curious if you could provide any more color on just how 2022 revenue and margins for BrandsMart compared to 2021?

37:04 Yes. Hey, Jason. It's Kelly. So you're spot on in that we provided a range of $20 million to $25 million on EBITDA. That is the last nine months of the year. So if we kind of start there and level set over the last nine months of 2021, BrandsMart in those nine months, they delivered about $39 million of EBITDA. And so from there, the $10 million of investments that I did talk about, that's an annual number. It's also net of kind of adding back some onetime investments that we're making along the way. So as we think about what that net number is going to look like for this year, it'd be about $7 million of investments. And again, that's in people at both the store and the store support center as well as investments in process and technology. Again, as we look to set the company up to deliver consistent growth going forward as well as, quite frankly, to operate it as a segment of a public company. 38:06 We're also looking to bring our staffing levels back up to what -- to where they were at pre-pandemic, likely not all the way back up, but we do think it's important to invest back into the stores there in terms of labor in the stores. We're also seeing increases in just other store-related OpEx, kind of more inflationary kind of driven things outside of just the cost of product that we're selling. And then the remainder of that would be normalization from last year into this year as we see the demand trends slightly lower.

38:39 Yeah. I just mentioned, those demand trends are lower over an inflated 2021 year. I mean when you look at our two and three-year performance in that business, it's been very strong, and we believe the markets that we're serving in Florida and Georgia are very strong markets. And so just generally, I'd say the integration is going very well, and we're super optimistic about the business looking forward.

39:06 It’s great to hear. Thank you.

39:10 We now move to Kyle Joseph from Jefferies. Please go ahead.

39:14 Hey. Good morning, guys. Thanks for having me on and answering my question. Just one follow-up on BrandsMart for modeling as we incorporate it into our model just for kind of the expense breakdown, give us a sense for gross profit margins at that business?

39:32 Hey, this is Steve. I'll be glad to answer that. So I'll relate back to the category mix. So obviously, when you look at the weight of appliances in their business relative to other retailers in the market, you're going to see gross margins in the, like, call it, 21% to 22% range and that is obviously, up the benefit of having appliances at that 50% range and consumer electronics slightly lower than other players.

40:10 Okay. Understood.

40:14 Kyle, one thing I'd say is we're trending -- as the shift mixes and our product categories that margin will mix, we've seen real strength in appliances in that business, and we'll continue to add new products into that business and more as Steve gets a hold of it and his merchandising team and as we work with the very talented BrandsMart merch team and more of our mix, those profiles will change. But we'll give you more detail about that as we move forward in the business.

40:46 Got it. Appreciate that. And then a lot going on in the world and everything. Can you just give us a sense for kind of the cadence of both the comp as well as write-offs through the first quarter and kind of into April and when you really saw tax refunds start to hit and how that impacts and then admitted there was Omicron and there's just a lot going on, but just give us a sense for the cadence of both the comp and write-offs through the quarter and kind of since the quarter?

41:18 Yeah. Sure. I mean, I think I mentioned a little bit in my remarks with Bobby -- ended the year strong last year in January, we saw this early resurgence of Omicron. Obviously, our demand softened during that time as we had not only customers not visiting our stores, but employees out. That came back mid-February as we saw a delayed tax season, albeit the tax season that showed up ultimately strengthening through the month -- with great strength in the month of March at the end of the quarter. That being said, our store business was down year-over-year. We were comping a very strong sales quarter last year. But all during that time, our e-com business was very strong, comping a huge comp last year and so, we're really happy about that. As we ended the quarter and entered April, we continue to see strength in our e-com business, but we continue to see volatility in the store business and choppiness. We continue to monitor it. But fortunately, we have a lot of levers in our business to be able to offset that. We're doing things on the promotional side and certainly able to control what we can control there. So as we look at the outlook going forward, our revenue outlook remains the same. It's on slightly softer demand, but slightly higher ticket, still staying within the annual range that we provided. 42:43 And as I mentioned earlier, a big part of our revenue because our portfolio business is not just the size of the portfolio and the quality of the portfolio and we believe renewal rates are normalizing, albeit higher than pre-pandemic levels. So that gives us confidence in reiterating our guidance for the year.

43:03 Got it. Very helpful. And then just one last one from me, kind of post-BrandsMart. How are you guys thinking about -- do you have any sort of target leverage and then kind of update us on your capital allocation priorities? It sounds like you're planning kind of a mix of new store builds between GenNext and BrandsMart, so just update us on capital allocation priorities.

43:25 Yeah. Hey, Kyle. It's Kelly. So I'd start with our capital allocation priorities. Really, they remain unchanged from what we've talked about in the past. We're going to continue to focus on investing in both of our businesses, right to drive revenue and earnings. We're excited that we now have kind of three platforms for growth going forward. And obviously, our GenNext repositioning and remodeling kind of program that's ongoing on the Aaron side, as well as e-com growth with both businesses. And then last and certainly not least, right, is the BrandsMart acquisition, where we're expecting growth to come not only from the synergies that we've outlined, but also as we move into 2023 and beyond opening new stores. So we're going to continue to focus primarily there and as long as we're seeing returns where we'd expect them to be, we'll make investments across all those three platforms. 44:25 And then second and third, right, looking at M&A as it makes sense as well as returning any excess capital to shareholders. I mean, clearly, we're very focused from an M&A perspective on integrating this acquisition that we just completed in terms of closing it. So we're hard at work there. So again, I think the focus will primarily be on as we have excess capital, returning that back to shareholders as it makes sense. From an overall kind of capital structure perspective, I'd say longer term, we'd want to operate the business consistently at less than 1.5 turns of net debt divided on adjusted EBITDA. Pro forma for this transaction were around one turn of leverage. And we would expect with some free cash flow to potentially lower that going forward. But at the same time, as we have opportunities to invest in these businesses, we'll utilize that capital to do so there appropriately also.

45:29 Great. Thanks very much for answering all my questions.

45:33 Thanks, Kyle.

45:35 We now turn to Anthony Chukumba from Loop Capital Markets. Your line is open.

45:42 Good morning. Thanks for taking my questions. First question, just a quick housekeeping question. What were the store counts for company-operated stores and then franchise stores at the end of the first quarter?

45:55 Yes. Hi, Anthony. It's Kelly. At the end of the first quarter, we had 1,070 company-owned stores or company-operated stores and in 236 franchise operating stores for a total of 1,306 stores across the franchise here.

46:14 Got it. That's helpful.

46:17 135 of those stores are new GenNext format stores.

46:21 Got it. And then just a real quick update, I guess, on supply chain. I know that's a headwind for a number of retailers last year. And it seemed like you guys fared well in most, but would just like to get an update there, if that was a admitted to your first quarter results?

46:43 Sure. Hey, Anthony. It’s Steve. I'd be glad to answer that. As Douglas mentioned in his prepared remarks, we feel we're in a really strong inventory position coming out of Q1 across all of our major categories. And that's just the result of all the hard work, both the merchandising and supply chain teams within the Aaron's business as well as the BrandsMart business, just setting themselves up, having the right inventory in the right place. I think just generally got to learn to live in this new supply chain environment, and that's just about building in the correct lead times and safety stock to run the business, and I really believe we've done that through all the hard work the team has done over the last quarter.

47:31 Got it. That's helpful. Keep up the good work.

47:37 Thank you.

47:39 We now turn to Bill Chappell from Truist. Please go ahead.

47:44 Thanks. Good morning. Can you I guess talk a little bit more on the supply side, specifically, kind of BrandsMart, barely appliances are still -- it's tough to find. And I just don't know, if there's a way to quantify how much that hurts or negatively impacted sales for BrandsMart last year, if you see some kind of window opening up in the next six months where appliances in particular, but I mean all things will start to be more full stores, more full sales or if it didn't have that much of an impact compared to other retailers?

48:24 Sure. I'll be glad to talk -- this is Steve again. I'd be glad to talk about some of the general trends that we've seen that BrandsMart has seen in their business. So BrandsMart today coming out of Q1, coming out at the close of the acquisition, obviously, is in a strong inventory position across all the categories and most importantly, in their appliance business. They've got great supplier partners, and they have a very broad assortment to put it in a range, over 180 refrigerators, 70 laundry payers and close to 200 ranges. So what that gives them is the ability to always have an offering from the low end to the high end. I can't speak specifically about any details they may have seen last year, but assuming maybe there were minor holds in the assortment, but having that broad assortment allows them to trade and have the appropriate items at every price point to benefit the customer. Their business continues to perform well in appliances. They had positive results in their Q1 business and we believe looking forward that from an inventory perspective, we'll continue to watch it closely, but hopefully, we'll be -- we'll continue to be in a strong position.

49:55 Well, I guess with that answer, just -- so do you think BrandsMart got a boost last year by having available product that may -- as other retailers start to get inventory or a wider selection of inventory. I mean, clearly, appliances are short in lot of places. So I'm just trying to understand, was that a net benefit, it sounds like, for BrandsMart by just having availability?

50:17 Yeah. Hey, Bill. It's Douglas. I mean, listen, as Steve mentioned there, we've got very talented buyers down there. They -- it's a merchant-driven culture, they're scrappy and I would say much like the Aaron's business, we did a great job of making sure inventory was in stock during some of the more challenging periods in the global supply chain issues. And I think they did the same. We're not going to directly comment on their performance last year. But as Steve said, they've done a really nice job, and we continue to see strength in appliances there. We'll unpack BrandsMart a bit more in the second quarter as we report their performance next quarter.

51:03 All right. Got it. And then just last one for me. Just understanding the BrandsMart seasonality, is that -- is there any way just for optically us thinking of kind of percentage of revenue for the year on third quarter versus fourth quarter or is it pretty heavily fourth quarter similar to kind of Aaron's?

51:24 Yeah. I think typically, most retailers are heavier fourth quarter, Bill. But I think what we're trying to really get our hands around as we integrate this business in the same way that we have acknowledged that the seasonality for 2022 for Aaron's is a bit different than a typical year. We may see similar trends at BrandsMart as well. So right now, we're not prepared to comment specifically on seasonality and quarter-to-quarter trends, but we do expect to unpack that a bit more going forward.

51:59 But Bill, what I'd say on that, just coming to the top a little bit is the seasonality in BrandsMart will be different than the seasonality at Aaron's because Aaron's has a recurring leasing business, recurring revenue that's impacted by liquidity of the customers per season. BrandsMart is more -- is a retail business. It will perform more similarly to traditional retailers. So you can look to that as a guide.

52:27 Got it. Thanks so much.

52:30 Great. Thank you.

52:33 We have no further questions. I'll now hand back to Douglas Lindsay, CEO, for closing remarks.

52:40 Okay. Thank you for joining us today. As we continue to navigate a challenging macroeconomic environment, we're pleased that we've delivered financial performance consistent with our expectations for the quarter. Our team members remain focused on delivering exceptional value and service to our customers, and we're investing in our strategic initiatives, both at The Aaron's core business and the BrandsMart. We believe we're well-positioned to create long-term value for all of our stakeholders and look forward to reporting the consolidated results of both Aaron's and BrandsMart next quarter. Thank you again for being with us today, and we look forward to speaking with you soon.

53:21 Today's call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines.