The Aaron's Company, Inc.
Q4 2014 Earnings Call Transcript

Published: 6 Feb 2015

[Operator:]

Good morning, and welcome to the Aaron’s Fourth Quarter 2014 Earnings Call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. At this time, I’d like to turn it over to Garet Hayes, of Aaron’s. Thank you and enjoy your conference. You may proceed.

[Garet Hayes:]

Good morning, everyone. Welcome to our conference call to discuss Aaron’s fourth quarter and 2014 – company’s earnings release issued today. Participating this morning are John Robinson, Aaron’s CEO, Gil Danielson, Aaron’s CFO; Steve Michaels, Aaron’s President, and Ryan Woodley CEO of Progressive Leasing. All related material including Form 8-K are available on the company’s investor relations website investor.aaron.com and this website will be archived replay there as well. Before the results are discussed, I would like to read the Company’s Safe Harbor statement. Except for historical information, the matters discussed today are forward-looking statements. As such, they involve a number of risks and uncertainties, which could cause actual results to differ materially from those projected in Aaron’s forward-looking statements. These factors include matters such as changes in general economic condition, competition, pricing, customer demand, legal and regulatory proceedings, customer privacy and informational security, risks related to the Company’s recent progressive acquisition, risks related to its new strategy and other issues, including those discussed in the Company’s SEC filings. Forward-looking statements that may be discussed today include Aaron’s projected results for future periods, Aaron’s new strategy, the future effects of the Progressive acquisition and other matters including those listed in the forward-looking statements disclaimer and our earnings press release published today. Listeners are cautioned not to place undue emphasis on forward-looking statements. I will now turn the call over to Aaron’s CEO, John Robinson. John

[John Robinson:]

Thank you, Gareth. Good morning, everyone, and thanks for joining us today. I appreciate the opportunity to talk to you on my first earnings call as CEO of Aaron’s. Founded by Charlie Loudermilk, a dynamic and visionary entrepreneur Aaron’s is a company with a proud 60-year history of innovation in growth. Over the years, Mr. Loudermilk assembled its group of talented associates and franchisees who together created a highly compelling business model for customers, associates and shareholders. I’ve spent much of my career admiring the success of Aaron’s from the outside, so it’s a tremendous honor for me to now be the CEO of this great company. As many of I joined the company in April of 2014 when Aaron’s acquired Progressive leasing, the leading virtual lease to own business in the U.S. The combination of Aaron’s and Progressive brought together the right blend of assets to grow this company into a true omni-channel lease purchase provider. While we have a lot of work to do integrating the two businesses and continuing to adapt to a rapidly changing market place. [Indiscernible] I am pleased to announce that our overall results for the fourth quarter of 2014 exceeded our expectations. For the fourth quarter of 2014, Aaron’s revenue increased 37% to $759.7 million compared to $553.9 million for the fourth quarter of 2013. Net earnings were $22.1 million versus $22.7 million a year ago and diluted earnings per share were $0.30 per share in both years. Non-GAAP EPS which excludes special charges, costs and expenses were $0.39 compared to $0.30 for the same period a year ago. In both our Aaron’s stores as well as our Progressive we saw write offs trend slightly higher in Q4 as compared to the same quarter of 2013. It is a trend we are monitoring closely and have taken into account and the guidance we are providing today for 2015. In addition we have a number of levers we can pull to mitigate write offs if needed and in some cases have already done so. Steve and Ryan will address specific trends for the core business and Progressive later on this call. In my first weeks as CEO I’ve been reviewing our operations, meeting with associates and franchisees as well as members of the financial community. Through these interactions, I’ve learned a lot about our business and I am convinced that we have the right blend of assets to execute an omni-channel lease purchase strategy. Today, I’d like to share some of my initial thoughts on our overall business and strategic direction. But I’d also like to make it clear that as CEO I’m going to continue to keep my mind open. As Aaron’s and Progressive become more closely integrated and as our omni-channel strategy takes off, we are going to have many great opportunities. On today’s call Steve Michaels our President will talk in detail about the initiatives we have underway at Aaron’s and Gil Danielson, our Chief Financial Officer will report on the financial performance of our business for the fourth quarter and full year 2014. Also joining us on today’s call is Ryan Woodley, the new CEO of Progressive leasing. We are excited about Ryan’s promotion to CEO of Progressive and are confident that he and the team and you all will take the business to another level of success. Prior to his promotion, Ryan served as Chief Operating Officer and Chief Financial Officer of Progressive. So he is well prepared for the CEO position. The growth of Progressive Leasing continues to be very strong, driven by invoice volume growth from both existing retailed doors as well as from new doors where the Progressive platform has been rolled out. We are going to continue to invest to make sure we have the infrastructure in place to support new, and existing retail partners and ensure that customers have a smooth experience. For example, during the fourth quarter we opened a new call center in Phoenix to supplemental the existing facility in Salt Lake City. We are also continuing to invest in our product, to streamline the process at the point of sale and to make our product available to more customers. Aaron’s traditional core business has not performed at a satisfactory level over the past few years. I have a high sense of urgency about improving our top line, continuing our cost cutting initiatives and managing the business for more cash efficiency. I am keenly focused on these opportunities and will consider all our options to improve our core business. Progress has been made on the strategic initiatives outlined last April to strengthen the core business. On the cost side, we closed 44 underperforming stores in the third quarter and restructured our home office and field support to more closely align with current business conditions. We continued to expect to realize approximately 50 million in cost savings relative to our Q2, 2014 expense run rate by the end of 2015. We are also taking action to improve the top line with new pricing and marketing initiatives, product lines and through our new e-commerce platform. Steve will share more details about our e-commerce rollout in a moment. This is clearly an area we are excited about. As we look at Aaron’s today we believe we have the right blend of assets to grow the company into a truly omni-channel lease purchase provider. Aaron’s people, technology, brand, customers, retail relationships, store footprint, distribution network and manufacturing capabilities uniquely position us to execute this strategy. I am looking forward to updating you on future quarterly calls as we execute on this. As CEO my continuing priority will be to strengthen our company for customers, associates, franchisees, retail partners and shareholders. As we reduce cost and drive revenues in our profitable core business we expect to generate cash. We will use this cash to reduce leverage, support the growth of Progressive and take opportunistic actions to create shareholder value. Whether that’s a tuck in acquisition that advances our omni-channel strategy or returning capital to shareholders. With that, I will turn it over to Steve Michaels, Interim’s President who will talk about the core business in more detail. Steve.

[Steve Michaels:]

Thank you, John. In the fourth quarter and throughout 2014 we continued to face a challenging operating environment. Our customer demographic has had to work hard to benefit from the economic recovery in this country. And in light of these challenges, we have remained focused on cost while at the same time taking action to drive top line growth through new marketing initiatives, pricing strategies, expanding our product offering and rolling out our e-commerce platform. Our inventory reduction initiative is progressing well and we have begun to reduce the ideal inventory in our stores and fulfillment centers since launching the initiative in July of 2014. We still have work to do to achieve our goal of reducing total ideal inventory by approximately 15% from the July levels but we are well on our way. We continue to analyze our store footprint with a view to finding the optimal way to reach and service our customers. Our omni-channel initiatives will extend the reach of our traditional store base and aid us in executing a second phase of store consolidation. We are currently identifying the potential closures and expect them to take place in the first half of 2015. While focusing on cost efficiency we have also rolled out marketing strategies to win new customers. We are buying deeper in some local TV markets, testing entirely new markets and ramping up our digital advertising campaigns. We are also continuing to adjust our product mix to stay current with what our customers want. Customer payment and collection performance has certainly been a focus for us and for all companies serving a similar customer base. The fourth quarter write offs in our core Aaron’s business were 34 basis points higher than the same period last year. I am pleased that from a write off dollar and percentage of revenue standpoint both metrics improved sequentially as the quarter progresses and we have continued to see their improvement in the first month of 2015. As John mentioned, we are analyzing our pricing strategies and we are mindful of the continued headwinds faced by our consumers and we do feel there are areas of opportunity for us to improve margins through pricing actions. As you may know most of our franchisees have operated with higher prices in their stores for a very long time. We have studied the price point sensitivity and impact on customer deliveries pre and post price increase and feel we have the opportunity to improve margins. In 2015 we are anticipating these actions will result in an improvement in gross margin of approximately 40 basis points. We currently have flexibility to make these moves while maintaining our positioning of being the low cost solution. On the new product category front, we are excited about the potential for smartphones in our stores. Progressive has extensive experience in the category and has been great business with its retail partners over the last several years. We have leveraged those learning’s and have very recently rolled out a limited pilot in select stores. Our customers ask for these devices and we are proud to offer the latest phones in technology from our partners at Samsung and LG. We will provide our customer the selection of prepaid, voice, text and data plans from prominent national carriers. As I mentioned we are very early in this pilot program but as it stands now we are planning to run the test for several months and then execute a phase rollout to be fully deployed before the holiday season later this year. We are mindful of the potential impact on our tablet business and have been conservative in our program modeling. We believe the smartphone category could contribute approximately 2% to our revenue in Q4 of 2015 and the percentage revenue impact in 2016 could approach mid to high single digits. We are also aware of the historical performance of this category and have taken pricing measures to ensure that the program is accretive from a contribution margin standpoint. We will continue to monitor the category and take necessary steps if it’s not performing as planned. As John also mentioned we have been aggressively developing our online strategy and are excited about the results so far. Our website aarons.com is opened for business. During the fourth quarter, we continue to develop our capabilities and successfully leverage the proprietary decisioning to develop our Progressive to enhance our customer experience and provide a fully transactional e-commerce site. We are live in about a third of the markets where we have stores and are increasing our reach each week. We plan to have e-commerce in all markets we serve before this summer. By the end of 2015, we expect our online business to be generating revenue equivalent to adding a new Aaron store each week. We have learnt that approximately 50% of our online transactions are happening when our brick and mortar stores are closed, late nights, very early mornings and on Sundays. This is consistent with our strategy to meet the consumer on their terms and remove obstacles that would otherwise keep them from doing business with Aaron’s. Further proof that online is not just cannibalizing our own in store traffic, our data also show that a majority of online transactions involve the consumer who has never shopped at Aaron’s before. This is clearly an exciting opportunity for us. We are learning about how our online customer shops and will be changing up our product offering accordingly. What truly sets us apart is that we are the only lease purchase company that can offer frictionless delivery, installation and service. What supports our e-commerce strategy is our physical footprint we have in our stores and our distribution centers. Overtime we expect there will be opportunities to improve efficiency but the infrastructure to support growth across channels is in place and is working. Overall, while faced difficult conditions across the industry I am pleased with the progress we have made and excited about the opportunities in front of us. Our priorities remain the same, to operate an efficient, cash generative business while positioning the business for growth. I will now turn it over to Ryan, CEO of Progressive. Ryan?

[Ryan Woodley:]

I am excited to take on this new role as CEO of Progressive and have the opportunity to continue working with John and the rest of the Aaron’s team. We are fortunate that every member of the Progressive leadership team has remained with the company since our acquisition by Aaron’s in April of last year. Premier is perhaps the greatest indicator of the size, the opportunity we see ahead. During the fourth quarter, Progressive again exceeded expectations generating revenues of $220.8 million. Q4 invoice volume was $193 million up 70% from the fourth quarter of 2013. As discussed on previous calls, invoice volume is the dollar value of merchandise that we purchased from retailers and subsequently leased to consumers. As John mentioned their business is growing both with our existing retail partners and with the introduction of Progressive to new retailers. Among the growth metrics we track is the number of retail doors [ph] you do at least one Progressive transaction during a period. We refer to these as active doors. In the fourth quarter, Progressive funded deals in 12,307 unique active doors, this figure is up 25% from a 9,818 doors we funded in the fourth quarter of 2013. Both the growth and magnitude of our unique door counts speaks to the broad appeal of Progressive’s virtual model across small, medium and large retailers. Another growth metric we track is the average invoice volume per active door during a period. In fourth quarter the average invoice volume per active door was $15,715, up 30% over the same period last year. This strong growth in the invoice volume per active door is a result of ongoing productive retail doors as well as successfully increase in the productivity of existing doors through training and our ongoing work to develop a frictionless application process. The pipeline of new growth opportunities is robust. As such we’re continuing to invest in the infrastructure we need to support that growth and to maintain the excellent level of our service that our retail partners expect. It’s all about making sure the process is quick and easy for both the retailer and the customer at the point of sale. We experience a slight increase in write-offs during the fourth quarter consistent with the trends reported by other companies is so credit constraint consumers. The increase is approximately 80 basis points was in line with expectations and in spite of this increase we generated year-over-year EBITDA margin expansion in the fourth quarter of 40 basis points. What differentiates our model is our centrally automated decision in algorithms that allow underwriting changes to be made in real time, consistent with past practice we’ve made slight adjustments to the algorithm in response to current market conditions and have seen the positive impact of those adjustments flow through the performance of our least gross. I’d like to now turn to Gill, who will give more detail overview of the combined businesses financial results. Gill?

[Gil Danielson:]

Thanks, Ron. I’d like to review the financial results for the fourth quarter and the year. Revenues for the 11 months of 2014 were $759.7 million and 2.725 billion up 37% and 22% respectively over the same period a year ago. These increases are due to the inclusion in 2014 of $220.8 million and $549.5 million respectively of Progressive’s revenue from the April 2014 acquisition date. Our franchisees collectively had revenues of $241.2 million for the fourth quarter and $995.3 million for the year respectively. Please note that revenues of the franchisees are not revenues of Aaron's, Inc. Same-store revenues in the fourth quarter for company operated stores in our core business decline 2.8% compared to the same period last year and the customer count on a same store basis for our company operated stores was down 4.6%. Customer count at the end of 2014 however was up slightly from the end of the third quarter of 2014. Same-store revenues for franchised stores decline 2.9% and their customer count on a same-store basis was down 5.2% for the quarter, again the revenues and customers of franchisees are not revenues and customers of Aaron’s Inc. Revenues in our HomeSmart division were up 2% in the fourth quarter to $15.5 million and up 3% for the year to $64.4 million. Net earnings for the fourth quarter for the company were $22.1 million versus $22.7 million a year ago. Net earnings for 12 months were $78.2 million compared to $120.7 million for the same period last year. As outlined in our earnings release this morning, pretax earnings in both 2014 and 2013 were impacted by its special charges, costs and expenses. On a non-GAAP which excludes amortization expense related to the acquisition of Progressive and other special charges and expenses from all periods. Net earnings for the fourth quarter of this year would have been $28.7 million compared to $22.7 million for the same period last year, and earnings per share assuming dilution would have been $0.39 compared to $0.30 a year ago, which is an increase of 30% fourth quarter versus fourth quarter last year. Non-GAAP net earnings for the 12 months of 2014, our non-GAAP basis would have been $123.2 million compared to $142.4 million in 2013 and earnings per share would have been $1.69 versus $1.86 last year. Both the fourth quarter and the year GAAP and non-GAAP EPS numbers for the company succeed its expectations. Effective tax rate for the fourth quarter of this year was 35.5% compared to 33.5% for the same quarter last and the effective tax rate also increase for the 12 months of 2014 to 35.7% compared to 34.8% in 2013. Adjusted EBITDA for the company, which again is adjusted to exclude the special charges, cost and expenses for the fourth quarter was $52.8 million and for the year it was $253.9 million. Progressive’s EBITDA which is included in those numbers was $17.9 million for the quarter and $50.4 million for the year, again since the acquisition date at acquisition of April of 2014. We are providing annual guidance for 2015, diluted earnings per share is again provided both on a GAAP basis and non-GAAP basis, the non-GAAP basis excludes the transaction related amortization and any special charges cost and expenses. For 2015 we expect to achieve the following in the core business. Total revenues of approximately $2.05 billion to $2.15 billion in those revenues that’s includes lease revenues of $1.55 billion to $1.65 billion. In the core business same-store revenues of approximately 4% to a negative 1% quarterly with an improving trend throughout the year, depreciation expense as a percentage of lease revenues of 35% to 37%, gross margins between 55% to 57%, and operating profits of 6% to 8%. Again for the core business we’re expecting adjusted EBITDA of approximately $200 to $220 million. We anticipating opening a small number of new company stores next year, around 10 or so, and little bit higher number of franchise stores and consolidating approximately 15 under performing store locations during 2015. For Progressive, lease revenues for the year of 2015 are expected to be between approximately $1 billion and $1.5 billion, again depreciation expense as a percentage of lease revenues of 61% to 63%, amortization expense of approximately $26 million. Gross margins of 37% to 39%, and operating profit margin, again excluding the amortization expense of 8% to 10%. Progressive is expecting our guidance on Progressive adjusted EBITDA is $95 million to $105 million. We expect that Progressive will grow at these rates in 2015 and will be sale funded through internally generated cash flow. On a consolidated basis which includes core business and Progressive. We are expecting total revenues of approximately $3.05 billion to $3.25 billion expecting adjusted EBITDA of $2.95 million to $3.25 million, anticipate that the core business with Progressive internally funding their operations and the core business generating cash flow, their free cash flow will be an excess of $100 million in 2015. Capital expenditures of $55 million to $75 million for the consolidated company and the effective tax rate between 36% and 38%, we’re expecting our GAAP diluted earnings per share in a range of $1.68 to $1.88 and the non-GAAP adjusted dilutive as about the amortization of Progressive $1.90 to $2.10. EPS guidance does not assume any significant repurchases of the company’s common stock or the potential impact of any cost associated with store closings. As we noted in our earnings release, given our focus on executing on our long-term strategy to integrate and grow Progressive, strengthen the core business, and continue Aaron's transformation into an omni-channel lease provider. Going forward we will only be providing annual guidance. While we will no longer provide quarterly guidance, we will update our annual guidance on a quarterly basis when it is appropriate. Those are the highlights. I would now like to turn it back over to John for some closing comments.

[John Robinson:]

Thanks a lot, Gill. I’ll make one just added to what Gill, so just to make sure it’s clear. Our consolidated guidance for adjusted EBITDA is $295 million to $325 million. I just think Gill might have miss spoke on that. I just want to make sure that’s clear.

[Gil Danielson:]

That’s the number. If I miss spoken, I apologize.

[John Robinson:]

I think you said $2.05, but just want make sure that was clear. So as you can we believe we are on the path towards strengthening our core business, making our omni-channel vision a reality and driving rapid growth of Progressive. While 2015 will undoubtedly have its challenges, we are optimistic about the year and expect revenues, adjusted EBITDA and adjusted EPS to all grow over 15% in 2015. So overall I’m excited about our prospects and I’m looking forward to working with our great team to execute this strategy. Before I end, I would like to thank our 13,000 plus associates for all of your hard work and dedication. I’m hugely impressed with your talent, commitment and enthusiasm. We will not open up the cal for questions. Operator?

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Matthew McCall with BB&T.

[Matthew McCall:]

Thanks. Good morning everybody.

[Gil Danielson:]

Good morning.

[Matthew McCall:]

So first I think, maybe I’m wrong, but the active door data that you gave, I had something much higher than that and maybe I had some dated information and some bad information, so I guess the active door data and invoice door data specifically the growth rates, first part of the question is how those compared to recent trends and then what’s in the guidance from progressive new door and invoice volume per door?

[Ryan Woodley:]

Good question. This is Ryan. We shared a metric earlier on active doors which we calculate for a given period. So in this case we’re reporting active doors for the quarter rather than for the trailing 12 months. So for the quarter that’s the count of doors that did a deal in that quarter. And if you look back on our trailing 12 months basis it would be a much higher figure. And reason for that is it goes back to the merits of the virtual model as we can profitably serve retail doors at very low volumes to very high volumes. So the 12,300 in Q4 is just the count for the doors that did a deal in the fourth quarter.

[Matthew McCall:]

Okay. So can we really compare quarter to quarter growth rates and which growth rates, is that a good way to look at it?

[Ryan Woodley:]

We believe this is the best way to look at the productivity of the business and we intent to share this metric on a go forward to allow you to track the progress of the business quarter-over-quarter and build the model.

[Matthew McCall:]

Okay. Okay. And I might have missed this Ryan. But the write-offs at Progressive and the trend there had some technical difficulties, did you give that number?

[Ryan Woodley:]

We did. No problem. So, we said that the trending write-offs which for us refers to the netbook value of charge-offs and it was up approximately 80 basis points in the fourth quarter, which is in line what we expected it to end up and allowed to still generate EBITDA margin expansion of 40 basis points.

[Matthew McCall:]

Okay. 80 basis points to what level?

[Ryan Woodley:]

From the year prior. So Q4 of 2013.

[Matthew McCall:]

Two, what level was factual, the write-off percentage?

[Ryan Woodley:]

Our write-offs were approximately in the 6% range. We’ve – and for other on the call. We’ve historically reported a metric that we refer to as bad debt expense which had to do with the gross charge off of the receivable and the provision, net the recoveries in an effort to be more consistent with how Aaron’s historically reported and discuss the performance – the financial performance of the core business. We’re now going to speak more about write-offs which is the netbook value of the asset. And that was written off and so that’s in the 6% range. I think as we’ve discussed before which is approximately twice the level of the core business given the difference in the models.

[Matthew McCall:]

Okay. Okay. And then last one maybe for you Steve. When you talk about rollout of phones what’s the anticipated write-off paying that you’ll face there in the guidance, and then on your Progressive had some experience with mobile phones? Is there anything that you’ll learn from their experience that will help you as you roll it out?

[Steve Michaels:]

Yes. So certainly, we have learned from Progressive and we talk to them a lot. They’ve done a lot of devices over the last couple of years, and so, we’ve been sharing those learnings. As far as what our assumptions are, we have modeled higher write-off rate and we’ll do everything we can to mitigate those losses. But we’ve in our rollout plan we’ve both modeled a higher write-off rate as well as cannibalization of our tablet business. So we feel like we’ve been pretty – well, we’ve taken all those factors in consideration in the 2015 plan.

[Matthew McCall:]

Okay. Thank you, guys.

[Operator:]

Thank you. Our next question comes from the line Budd Bugatch with Raymond James.

[Budd Bugatch:]

Good morning. Thank you for taking my question. I just maybe Ryan or John, maybe I’m trying to make sure I get the guidance for Progressive. I want to understand the variable cost draw through of an extra dollar of revenue now that you have some experience under this growth scenario. And then I want to make sure that how we’ll get from 8% to 10% excluding amortization operating profit to the adjusted EBITDA number. What’s in there? It should be interest expense, I thought depreciation other than the lease merchandise, is that right?

[John Robinson:]

When I did the guidance for Progressive for revenues, it’s correct in the earnings release. So I think I misspoken, I read is really guidance on revenue on revenue side is [indiscernible] on that.

[Budd Bugatch:]

Yes.

[John Robinson:]

On the release, there’s a reconciliation of EBITDA as you know in our release, it shows how this is calculated on the adjusted basis, but Ryan you want to explain that.

[Ryan Woodley:]

Yes. One the 2013 results of the Progressive business aren’t the result of Aaron’s that maybe helpful to know that we grew revenues in the fourth quarter 88% and we grew EBITDA 97%. So we’re pleased with the pace of margin expansion in the Progressive business and expect that trend to continue in the future. As you might expect we’re investing a lot into the infrastructure that support the growth of the business and that’s people systems and its certainly factored into our 2015 forecast, even with the investment in infrastructure we intent to see continued margin expansion in the business and I think the trends that you’d extract from the guidance we’ve provide would suggest that we should continue to see margin expansion going into 2015.

[John Robinson:]

Budd, this is John, I mean, the reality is our growth rate remains robust. Our pipeline in Progressive remains robust. So we just don’t feel like it’s the appropriate time to tighten the margins as tight as we get it. We’re trying to continue to build this business to capture this huge opportunity and that’s the mindset we’ve been for a couple of years and we continue to be in. In fact they were getting some margin expansion, while we make that investment we feel like is a positive.

[Steve Michaels:]

Are you still there Budd.

[Operator:]

Thank you. Our next question comes from the line of Brad Thomas with KeyBanc.

[Brad Thomas:]

Yes. Hi. Thanks and good morning everyone.

[Steve Michaels:]

Hi, Brad.

[Brad Thomas:]

Just to follow-up on Progressive perhaps from the revenue side, I believe as we stand here today you should have a pretty good idea of what stores you’ll be add it to this coming year and what kind of maturation you could have within existing stores. What does that pipeline look like for new accounts as we look out to 2016 and what kind of revenue growth do you think is reasonable to look for in 2016 or maybe over three-year horizon for progressive?

[John Robinson:]

We feel good about the pipeline as its today. We’ve been fortunate that there has been a general positive reception, not just to the virtual model but the acquisition of the business by Aaron’s. I think retailers interpret from that continued stability in the business and robust access to capital going forward to fund the growth of our combined business. We think about the opportunity to grow the business in terms of both logos that are in the system today and their existing doors and new doors they rollout, as well as new logos, new retail partners that we will add to the platform. And we’ve been fortunate to experience strong growth in all three of those buckets. We’ve been fortunate we have partner with some high caliber retailers and the growth of their platforms supports the growth of our business and we expect that trend to continue into 2015. We haven’t prepared guidance of 2016, but we’re very confident about the guidance we’ve given for 2015.

[Brad Thomas:]

That’s great and if I could follow-up, I guess, Ryan, with respect to starting to leverage Aaron’s on the collection side, where do we stand in that process for Progressive customers and what is baked into the guidance for this year in terms of better collections?

[Ryan Woodley:]

We’re progressing very well on that front. So as of the end of the year we had 12 customer service subs up and running across the country and large MSAs where we have large base of accounts. And those hubs are now able to pick up merchandise and that merchandise is providing a net benefit to the program from where we were prior to the Aaron’s acquisition. We intent to have approximately 18 hubs up and running by the end of the first quarter and are excited about the results that are come from that.

[Brad Thomas:]

Great. And so what kind of a – how many of your customers can – that number of hubs and I believe in the past [indiscernible] they could perhaps your losses by 200 basis points to 300 basis points, what are you baking in for this year?

[Ryan Woodley:]

We feel that 18 hubs will cover the majority MSAs and we’ll develop a different strategy for areas that aren’t covered by those 18 hub locations. As we discussed on last quarter’s call or as John discussed on last quarter’s call, we perceive run rate potential to improve write-offs in that range, though we don’t necessarily intent to take that all in a reduction and write-offs. There’s an opportunity for us to be responsive to market conditions and see if there’s an opportunity to expand approval rates, while maintaining levels of bad debt and beauty to model is that we have the flexibility to do that. And so we’ll continue to evaluate what makes most sense for the business as we forward.

[Brad Thomas:]

Great. That’s very helpful Ryan. And maybe just one last housekeeping item, in fact exquisite, deal for differed taxes, where do we stand at the end of this and what’s was baked in or what should we expect for free cash flow implications from differed taxes in this upcoming year?

[Steve Michaels:]

Well, the bonus depreciate was standard and added by Congress at the end of December. So we did actually get a big refund 1st of January, $100 million refund on taxes that we paid in 2014. So our cash taxes that we will pay in 2015 will be much less than they were in 2014. So, as far as a deferral its standpoint, it will be – I had to get back to, Brad, where that will be at the end of year, the tax swinging around a little, so I’ll defer and come back with a little bit cleaner question and answer on that.

[Brad Thomas:]

Great. So obviously, that $100 million is on the balance sheet as of the year end?

[Gil Danielson:]

No. It came in right after the year end, so on our balance sheet no.

[Brad Thomas:]

Great. Thanks so much. And looking forward to following thing this year.

[Operator:]

Thank you. Our next question comes from the line of John Baugh with Stifel.

[John Baugh:]

I wanted to get that cash flow number again, and is the $100 million of guidance for 2015 which I think was your annual consolidated free cash flow number. Does that incorporate this to tax cash payment, number one? And number two, excluding tax, could we talk about how Progressive growing is fast as its growing and Aaron’s flat lining. What the puts and takes on free cash flow by segment are excluding cash taxes? Thank you.

[John Robinson:]

Okay. Well, as far as taxes are concern. Again, we paid last year in cash taxes about a $187 million, I guess. I believe this year we’ll pay about $80 million in cash taxes. So there’s a $100 million swing in the cash taxes looking forward from 2014 to 2015. But on top of that, I believe we will still generate substantial free cash flow. So the $100 million, it could be more than a $100 million, but just going with that number and we’ll see how it comes out John. We don’t have the details of that by segment, of course we did talk about Progressive being basically cash flow neutral for the year. So whatever free cash flow we generate it’s going to come from the core business.

[John Baugh:]

So just to be clear on that, it could be much as $200 million counting the cash from the taxes?

[John Robinson:]

It could be.

[John Baugh:]

Okay. That’s helpful. And then secondly, I was wondering if we could talk about the progressive charge-off comment and then the trend and delinquencies, could you walk through how many days or months it is to charge-off. You mentioning underwriting a little bit and you’re seeing an improvement already. I’m just kind of curious as to the timing of – when you started to tighten and then how that relates to timing of when things are charged off?

[Ryan Woodley:]

One thing I want to clarify is the model is designed to be dynamic, so that the beauty of the model is our ability to make changes at any time to the underwriting algorithm which we do on ongoing basis. So any changes that were made won’t necessarily the only changes that were made to the algorithm, that’s one of the attributes to the algorithm that we leverage continually to make sure that what we refer to as the pools, the curves, stay in line where we’d like them to be. So the business trend as I mentioned in write-offs up 80 basis points year-over-year. In terms of how we think about the current snapshot of delinquencies, we obviously track that delinquency of receivables in their various buckets, the one that 60-day buckets are performing at parity with the same period in the prior year. It’s a Q4 of 2013 versus of Q4 2014 on 60 day buckets are virtually the same. And I think that speak what we’ll continue to flow through and level of in Q1.

[John Baugh:]

Okay. And that’s helpful. And then my last question is on the cost cut numbers deal of $50 million and you’d mentioned when you started and when you sort of get it all. Is there a way to think about the calendar 2015 versus calendar 2014 change in your net cost reductions?

[Gil Danielson:]

Yes. Just to be clear, our cost cutting – our $50 million goal was setup – set on our run rate in the second quarter of 2014 where our operating were in the second quarter of 204. And we have during the first – during the third and fourth quarter, we’ve realized about $8 million or so of those savings this year in 2014. We look at 2015 roughly another $42 million will come through in 2015 which will bring us at the end of 2015 to probably or slightly over $50 million goal that we have to reduce cost, annual cost savings. And the 15 number is roughly accelerate a little bit every quarter, pretty close – pretty equal on each quarter of 2015. Quarter one is a little bit lower, but then the other three quarters are pretty constant and it comes up about $42 million for the quarter. So at the end of 2015 we will have taken $50 million of cost out of our system from our run rate at the second quarter of 2014.

[John Baugh:]

Okay. So those are the run rate comments. It’s great. And then lastly on Aaron’s, what was the charge-off number for the core Aaron’s?

[Gil Danielson:]

Write-offs for Aaron’s was 4.16%.

[John Baugh:]

Great. Thank you very much. Good luck.

[Operator:]

Thank you. Our next question comes from the line of John Rowan with Sidoti.

[John Rowan:]

I understand your adjusted earnings guidance now $1.90 to $2.10. Is that comparable for the guidance that you put out when you first did the Progressive deal that should cash EPS of 2015 is $2.55 to $2.80 or is there something that I’m not connection between those still?

[Gil Danielson:]

That was the original cash guidance year ago or so when we did Progressive. It’s certainly lot has happened since then in our core business and we have not really updated or talked about that guidance since then, so it’s a little bit – still stale in that regard. So certainly the course that we had since then especially in the core business has trended that guidance probably needed to be updated on an annual basis, which we did in our press release to that.

[John Rowan:]

Fair enough. I just want make that those run the same accounting or pro forma standard, those numbers are comparable?

[Gil Danielson:]

Cash EPS is based – the non-GAAP EPS is basically EPS hovered adding back to the amortization on the transaction.

[John Rowan:]

Okay. And then just going back to the smartphone business little bit obviously your peer roll it out and they had higher and they didn’t have a lot of – initially lot of technologies surrounding, tracking the phones and obviously there are lot of steps and so on, so I just curious from your standpoint what type of technology do you have to make sure that the loss don’t run away from you on that business. Is that IMEI bases or give me an idea of how you control that retail item?

[Gil Danielson:]

Yes. We’re going to be partnering with out carriers and with our providers to take the advantage of all the technology that’s available. I think IMEI certainly be a tool and I’m not sure about being able to lock them down. But we’re mindful of the risk associated with the category and we’ll be using every tool at our disposal.

[John Robinson:]

Yes. Certainly from the Progressive side we have experience with the lost rates relative to other verticals and we have learned over time at Progressive how to price correctly for that additional risks that will certainly be taken into account with our pricing on these products.

[John Rowan:]

Okay. Thank you very much.

[Operator:]

Thank you. Our next question comes from the line of James Ellman with Ascend Capital

[James Ellman:]

Yes thanks for taking my question. I have a couple. First could you just comment on your thoughts about your guidance with RadioShack closing a large number of stores and many of their stores geographically [Indiscernible] are these relatively close to Aaron and its existing stores? And also could you comment on any impact you have in your guidance on lower gasoline prices and its impact on your consumer? Thank you.

[John Robinson:]

Yes so this John. In terms of what’s going over the RadioShack I don’t really have a good view on how the great insight into all the issues there with their business. I don’t know if that’s a relevant comparison to what we are doing, it’s certainly a very different business model from a profitability standpoint and potentially customer base. So I don’t know if that’s what you see there is necessarily an indicator of where our business is going in anyway. We have challenges in our business, we have a huge opportunities in our business, so we are certainly going to continue to look at underperforming stores and as we did last summer we will – we are planning in the first half this year to consolidate stores that are not performing, but we have a lot of great stores and we have a lot of stores that are growing. So we feel really really good about our prospects. We do you know company coming out of a 10 to 15 year growth cycle as Aaron’s has had over the past. It’s very understandable that there will be some stores that may not be in the right spot or we over saturated the market or we might have gone into a market that didn’t support the model and so we’ve tried to get more scientific about that and we will continue to consolidate stores that don’t make sense, but we feel really good about our core store business and we’re having some great results there and we think we have the right initiatives to continue to improve them from both a topline and a cost perspective. So that will be my answer on the first. The second on the gas prices…

[James Ellman:]

I’m sorry here, just on RadioShack – I know I think you misunderstood the direction of my question which is, they have clearly had problems based on their brands and foot traffic for whatever reason, but as a top ten retailer of smartphones in a large retailer of this similar electronics that you sell in your stores. Do you expect to pick up much of their foot traffic and either stores close?

[John Robinson:]

Yes that’s a good question. I haven’t thought about that. I don’t know if that’s going to move the needle for us or not, but that would be I mean additive [ph] if that happens but really haven’t given that much thought. Certainly in terms of smartphones, it’s not going to be a huge number for us in 2015 and my knowledge of their business is it was heavily weighted to smartphones so I don’t think that’s something that which should be built into the model as maybe upside. I think our smartphone guidance we’ve given is pretty conservative but 2016 will be a big year for that business for us.\ In terms of gas prices, we get that question a lot, it’s a great question. My personal belief is that gas prices have come down so aggressively and fast that it’s a good thing obviously for our customer from a collection standpoint it can only help. From a demand standpoint and the psychology of our customer my personal belief is that it happens so quickly that’s it’s going to take some time for that to season in our customers mind, it certainly has a mind. I can’t tell if it’s permanent or longer term or is it something that’s going to pop right back up. And I think once customers get more comfortable that’s it longer term phenomenon, I think we should expect to return to see some improvement in their psychology and hopefully we’ll translate into more deliveries but we haven’t seen anything in our numbers yet to reflect the change in prices that does happen.

[James Ellman:]

Okay, one other last quick question is when you look at the franchise as it stands now, what is your target for where you can get EBITDA and how long until you think you could get it there in terms of total…?

[John Robinson:]

That’s a great question. It certainly has a focus of ours, where I’m not comfortable given that I am not even a full quarter into my job, I don’t feel comfortable giving longer term guidance yet. We certainly are focused on EBITDA as a key metric and there is some great opportunities for us in 2015 and then really the pickup in 2016 things like the pricing initiatives, marketing initiatives, e-com. All these things should allow us to grow EBITDA with our cost rationalization. So I feel like there is opportunity but we don’t want to get 2016 guidance – we make it longer term guidance at some point, but I just don’t want to give that at this point given my newness in the job.

[James Ellman:]

Okay, very good. Thanks so much for the time.

[Operator:]

Thank you. We now have a follow up question from the line of Budd Bugatch.

[Budd Bugatch:]

Yes a couple of quick questions.

[John Robinson:]

Budd, we apologize for dropping off.

[Budd Bugatch:]

Can you hear me?

[Gil Danielson:]

I can hear you.

[Budd Bugatch:]

Okay, what is the cost of what was in the fourth quarter for Progressive, what was the depreciation of lease merchandised cost for the cost of goods sold?

[Gil Danielson:]

In the fourth quarter, its approximately $125 million

[Budd Bugatch:]

Okay. And just for interest expense if you were to track to the adjusted EBITDA from the 8% to 10%. What do we need to add back, what’s the interest expense expectation the company maybe and also Progressive?

[John Robinson:]

Moving forward on Progressive for next year, I would view on a quarterly basis about outstanding in your basis about $22 million.

[Budd Bugatch:]

Okay. So that’s about $5.5 million a quarter, I was having difficulty reconciling then to the from the operating margin target set Progressive to the adjusted EBITA target of $95 million to $105 million I think.

[Gil Danielson:]

I’d tell you what, why don’t you call me back…

[Budd Bugatch:]

Okay, we can do it all fine. All right. Thank you, good luck on the year. Thank you very much.

[Operator:]

Thank you. Our next question comes from the line of Rob Straus with Gilford Securities.

[Robert Straus:]

Hi guys, thank you for taking my questions. Gil, I just wanted to ask a big picture question. Long ago Aaron’s has always grown its core retail business a number of locations and has consistently said that as that growth flowed or halted, that that business would generate significant free cash flow. It sounds like this coming year that business is generating about a $100 million of free cash flow excluding the tax refunds. If we were to look out over the next couple of years and with the things that you are doing on the expense side of the equation of course and assuming that Aaron’s store locations were flat at dust and it sounds like they might decline somewhat, where do you think the target free cash flow number is for the core Aaron’s business?

[Gil Danielson:]

Well again, we talked about from a long term guidance we haven’t put any numbers out they are all speaking broad generality [ph] so that is certainly is a cash flow business. If you are not growing, not opening stores, assuming, we think we can get some revenue growth back into the business it will generate a cash flow and that’s certainly our strategy over the next two or three years. As far as the that numbers would show I can’t what just – what kind of defer until later to have a more definitive number I would think as John said or in the future we’ll come out with some longer term guidance that would clarify that situation.

[John Robinson:]

Certainly from a strategy standpoint we’re doing things to maximize that. So not only EBITDA but when you look at what we’re doing in the inventory side of our business that’s a big focus of ours. So we have work to do to tighten up the business to see how cash efficient we can be but it’s certainly a focus of ours and it’s something that we can execute on substantially in 2015 but also will flow into 2016 some of the initiatives we have, so I would say I have to stick with Gil’s answer until we get a little deeper into it, but we feel very good about the cash flow generating capacity of this business.

[Robert Straus:]

Okay. And then just one other question for you John regarding Progressive. If you think about your existing retail partner chains that you are currently doing business with, what percentage of those total stores are we in at the end of 2014?

[John Robinson:]

We’re in the majority of their doors. So excluding the pipeline of new retailers there is not a lot of new doors to add with our existing retail partners that exist today. Now having said that, some of our retail partners are growing pretty rapidly, so we get the benefit of that from them adding new doors so we have that kind of built in organic growth. And then we’ve invested substantially over the last couple of years in the productivity of doors. We didn’t have a great system 18 months ago for helping our retail partners generate more volume per door. So in addition to our focus on adding more retailers and more doors than our existing retailers over the last couple of years we’ve really invested heavily in an infrastructure that will allow us to optimize our performance per door. And we’re just now starting to feel the benefits of that. So we talked about it early in 2014, it was a significant investment we made but it takes time. It goes to training and support out in the field and so that’s an investment that’s been made that we expect to reap the benefits and we’re actually seeing great benefit from in our existing retail doors. So it goes back to Ryan’s point. Our growth at Progressive is going to come from existing retail partners, their existing doors, new doors from them and then we have a great pipeline that we are really excited about that we – it’s a lot of work to execute on but is robust and the combination with Aaron’s has enabled it to get much stronger because of our – the transparency of our financials, the size and scale of the business, the stability that we offer as a partner to large retailers, I think is very attractive and obviously we talked about that so that retailer that we keep the business is very separate from a data standpoint so that it protects our retailers and but they also get the benefit of Aaron’s size and scope

[Robert Straus:]

Great. Thanks so much and good luck in the coming quarter.

[John Robinson:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of David Magee with SunTrust.

[David Magee:]

Yes. Hi, everybody. Nice quarter.

[Gil Danielson:]

Thank you.

[David Magee:]

Just a couple of questions that I would add here. One is on the store closure front are you relatively confident that 50 is the right number or do you think we’ll see another significant round next year?

[Ryan Woodley:]

I think its constant evaluation and optimization of the store portfolio, I think there are areas that we are not in that we need to get to, but there are also ways as we learn through the multi-channel, omni-channel approach that we can reach customers and maybe have less store footprint. So I think we constantly evaluating it. We mentioned in our investor presentation back in April of 2014 that it would be 18 to 24 month process and so I think we’re looking phase 2 of that and we’re currently identifying those stores but we will continue to look at that and make the appropriate – take the appropriate steps.

[David Magee:]

Would it make sense to close stores near franchise stores to sort of soften the paint to them to grow cannibalization or other competition?

[Gil Danielson:]

Well, we don’t have that many instances of sharing a trade area or market with a franchise in a company store. We’ve been over the years fairly disciplined in that. There are couples here and there that have cropped up and we’re working with our franchisees to make sure it’s a win-win. But we don’t have a lot like some other franchise, so lot of types of situations. But we are in constant communication with and deciding whether it make sense to trade stores with franchisees either us sell to them or then sell to us, where it make sense. And so that’s part of the process certainly.

[David Magee:]

Thank you, Ryan. I guess for you, Ryan, are you seeing any competition in the virtual space that would be grown as fast as Progressive right now or offering any different terms of pricing at this point in time?

[Ryan Woodley:]

Good question. So it’s interesting the exposure that the model has received over the last few years, but increasingly since the publicity surrounding the acquisition of the business by Aaron’s, it’s certainly lend transparency to the scope and scale of the opportunity, and I think as you’d expect that’s attracted competition of the market. And what confident with where we’re positioned vis-à-vis that competition, there may be some entrance who are smaller and therefore able to grow it more than 90% because they are starting with a really small base. But we’re pretty confident that there is no other competitor in the space that has a value proposition that we have when do have conversation with the retailer about how we can save the sale and grow their business. So competitively positioned we think the business is doing well, and we continue to invest the lot and trying to make we keep that edge going forward.

[John Robinson:]

And I would add to that, I think in terms of new competitors, it’s hard for new competitor to come in incredibly offer the scale and reference ability and process all the things that Progressive have developed over long period of time when you are speaking with the large retailer. So, where you may see more competition on that’s smaller regional players, we think the opportunity is pretty significant for us on the large retail front. So it kind of mapping and it kind of evens out for us a better.

[David Magee:]

Thank you. It’s not obvious to me how they could offer better terms. You guys have find wonderful price in retailer and I don’t know?

[Ryan Woodley:]

That’s a great point. I just building on John’s comment. I think there’s an opportunity to lose money if you’re willing to in this market and we’ve decided to remain price disciplines and that means that we’ll able to offer sustainably high approval rates, sustainably high conversion rates and sustainably pricing and so that means that we’re the right partner over the mid and long term for any retailer.

[David Magee:]

Great. Thanks and good luck.

[Gil Danielson:]

Thanks, Dave.

[Operator:]

Thank you. There are currently no additional questions waiting from the phone lines.

[Gil Danielson:]

I just like to thank everyone for joining the call today. We appreciate your interest in the company and look forward to speaking with you guys in the future. Thank you.