Aaron's (AAN) John W. Robinson on Q4 2015 Results - Earnings Call Transcript

| About: Aaron's Inc. (AAN)

Aaron's, Inc. (NYSE:AAN)

Q4 2015 Earnings Call

February 18, 2016 8:30 am ET

Executives

Garet Hayes - Director-Public Relations

John W. Robinson - Chief Executive Officer

Douglas A. Lindsay - President-of Aaron Sales & Lease Ownership

Steven A. Michaels - Chief Financial Officer and President of Strategic Operations

Ryan Woodley - Chief Executive Officer, Prog Leasing LLC

Gilbert L. Danielson - Executive Vice President

Analysts

J.R. Bizzell - Stephens, Inc.

Jason Campbell - KeyBanc Capital Markets, Inc.

Beryl Bugatch - Raymond James & Associates, Inc.

David G. Magee - SunTrust Robinson Humphrey, Inc.

John Baugh - Stifel, Nicolaus & Co., Inc.

Bradley B. Thomas - KeyBanc Capital Markets, Inc.

Operator

Good morning, welcome to the Aaron's Inc. Fourth Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

Participating this morning are John Robinson, Aaron's CEO; Douglas Lindsay, President of Aaron's Sales & Lease Ownership; Steve Michaels, Aaron's CFO & President of Strategic Operation; Ryan Woodley, CEO of Progressive Leasing; Gil Danielson, Executive Vice President.

At this time, I would like to introduce Garet Hayes, Director of Public Relations. You may proceed.

Garet Hayes - Director-Public Relations

Thank you and good morning everyone. Welcome to our conference call to discuss Aaron's fourth quarter results issued today. All related materials including Form 8-K are available on the company's Investor Relations website, investor.aarons.com, and this webcast will be archived for replay there as well.

Before the results are discussed, I would like to read the company's Safe Harbor statement. Except for historical information, 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 predicted in Aaron's forward-looking statements. Please see our SEC filings for certain risk inherent in our business that may cause actual results to differ.

Forward-looking statements that may be discussed today include Aaron's Progressive and Dent-A-Med's projected results for future periods, Aaron's strategy and other matters including those listed in the forward-looking statements disclaimer in our earnings press release published today. Listeners are cautioned not to place undue emphasis on forward-looking statements and we undertake no obligation to update any such statement.

During this call, we will also be referring to certain non-GAAP financial measures, including adjusted EBITDA, non-GAAP EPS, and non-GAAP net earnings, which have been adjusted for certain items, which may affect comparability of our performance with other companies. These non-GAAP measures are detailed in the reconciliation tables included with our earnings release.

I will now turn the call over to Aaron's CEO, John Robinson. John?

John W. Robinson - Chief Executive Officer

Thank you, Garet. Good morning, everyone. Thanks for joining us today. We appreciate your interest in Aaron's.

As we stated in our release, we're encouraged by the trends we saw in the fourth quarter and we're pleased with the way we closed the year. We had some challenges in 2015, but overall, it was an excellent year. We achieved the targets we laid out at the start of 2015 and had a record year in revenues, adjusted EBITDA, non-GAAP earnings per share and total customers. In the fourth quarter, we saw prospects of better revenue performance in our core business, adding new customers at the strongest pace since 2012. It was also encouraging that delivery growth was broad-based rather than being heavily reliant on any one product segment.

We're happy with the 8% increase in Progressive's active doors in the quarter. We spent a lot of time and energy laying the groundwork for partnerships with regional and national retailers, and we're executing on a broad and deep pipeline. We're also pleased to put the data and software issues that elevated our bad debt expense in the third quarter behind us with lease performance at Progressive that is back in line with our expectations.

I am particularly proud of the Progressive team for eclipsing $1 billion in revenues in 2015. The business has grown from approximately $100 million in revenues in 2011 to over $1 billion in revenues in 2015, which is a testament to the virtual lease-to-own market opportunity, the Progressive value proposition and to the Progressive team.

Aaron's key strategies for 2016 include: profitably growing our stores and retail relationships, executing on our pipeline of retailers and improving our omni-channel experience for customers. We'll continue to make investments in e-commerce and our customer service hubs for returned Progressive merchandise. We will also maintain our focus on improving the customer experience in our Aaron's stores and those of our retail partners.

Overall, our goal is to grow top-line and invest in future growth, while maintaining discipline around profitability. We're conservatively capitalized and at yearend, we had a net debt-to-capitalization of approximately 30%. We expect both our store based-business and Progressive to continue to generate cash in 2016.

We're very mindful of capital allocation in driving long-term shareholder value. Accordingly, we're focused on organic growth, first, acquiring new businesses or technologies that can help us grow, second, and finally, returning excess cash to our shareholders. Given our strong pipeline of retailers, we're keeping our powder dry for now, so we will be well-positioned to capitalize on those opportunities.

Before we move on, I want to talk about someone who has made tremendous contributions to Aaron's. As you know, after 26 years, Gil Danielson is stepping down as CFO and announced his plan to retire at the end of this year. Gil has been a critical part of Aaron's success and a steadying force for the company during good and more challenging times. Gil is a true professional, an outstanding CFO, and a great person. I want to take this opportunity to thank Gil for all he's done for Aaron's over the years. While it's the end of an era here at Aaron's, we're fortunate that he'll remain with us as a senior advisor through the end of the year to ensure a smooth changeover.

In connection with Gil's retirement, we have made some key changes and additions to the senior leadership team. Steve Michaels has been named CFO and President of Strategic Operations. Steve has been with Aaron's for over 20 years and is highly regarded by associates and franchisees. He has a strong financial background and experience across all aspects of our operations. So, we're very fortunate to have someone of Steve's caliber to step in as our new CFO.

We've added Douglas Lindsay as President of Aaron's Sales & Lease Ownership. Douglas joins us from ACE Cash Express where he most recently served as Executive Vice President and Chief Operating Officer. At ACE, Douglas had broad-reaching responsibilities including store operations, support center, business development, real estate, and marketing. He understands our customer and has experienced running a large multi-unit national retailer. I'm confident Douglas will bring valuable perspective and strong leadership to our core leasing operation.

We've also promoted Tristan Montanero, a 22-year veteran of Aaron's to Chief Operating Officer for Aaron's Sales & Lease Ownership. Tristan embodies the Aaron's culture starting with the company straight out of college, working his way up through the store organization to various leadership positions and now to COO. Finally, Robbie Kamerschen, our Executive Vice President and General Counsel will take on the additional role of Chief Administrative Officer. These changes strengthened the already-strong leadership teams across our organization.

I'm now going to turn it over to Douglas to introduce himself. You will hear more from Douglas on future calls. After Douglas, we'll have Steve, Ryan and Gil go over the segments and guidance. Douglas?

Douglas A. Lindsay - President-of Aaron Sales & Lease Ownership

Thanks so much, John. I've known John for many years and being originally from Atlanta, I've admired Aaron's most of my life. So, I could not be more honored to join the team. As John said, I came from ACE Cash Express where we served a similar customer to Aaron's and where I led an organization with a comparable number of retail locations. My plan as President is to build on Aaron's terrific culture and the relationship-driven approach we bring to our business. I'm very passionate about customer service, developing our people and operational excellence.

During 2016, I plan to focus on operating consistency, driving same-store revenues and driving profitable growth. After just three weeks with the organization, I already feel I'm at home and I'm very excited about helping to continue Aaron's legacy of innovation, leadership and service to our customers and our communities. With that, I'm going to turn the call over to Steve.

Steven A. Michaels - Chief Financial Officer and President of Strategic Operations

Thanks, Douglas. First, I'd like to add my thanks to Gil who has been a terrific mentor to me over the years. I'm honored to succeed Gil as CFO and I know I have big shoes to fill.

So, turning to the core business, we had a solid year with growth in adjusted EBITDA despite a difficult revenue environment. Our price, inventory and cost initiatives drove a healthy increase in EBITDA margin for the year and we're encouraged about going into 2016 with customer growth momentum.

Breaking down the fourth quarter, our core revenues were up slightly to $525.5 million. The revenue gain was due to a 17% increase in non-retail sales to franchisees. Core same-store revenues were down 3.4% and down 1.9%, when excluding Texas. As we have discussed in prior calls, Texas stores which represent approximately 18% of our store-based revenues have been down considerably in 2015. We began experiencing better delivery activity in the latter part of the year although customer churn has remained elevated. Despite the improvement in customer activity in the fourth quarter, we continue to face headwinds in this very important market.

E-commerce was strong, representing about 5.5% of total deliveries for the fourth quarter and 6.5% of our December deliveries. We continue to see new customers use the channel, and we're also seeing some former customers return to us via e-commerce. We're very pleased with the increase in our customer balance to end the year. As John mentioned, on a sequential basis, the core business added new customers at the strongest pace since 2012. The growth was balanced across our product offering and not driven by any one category.

Turning to our profit metrics, adjusted EBITDA for the core business was $42.9 million for the fourth quarter or 7.9% of revenues, compared with 8.3% in the year-ago quarter. This decline was due to a larger percentage of non-retail sales to franchisees, which have a lower gross margin. Our lease margin, the margin on merchandise that we lease to customers, was up approximately 90 basis points and continued to benefit from price increases earlier in the year and lower depreciation from our inventory initiatives.

Operating expense improved by 40 basis points year-over-year as cost initiatives continued to benefit our bottom line. Merchandise write-offs were 4.7% versus 4.2% in the year-ago quarter. Merchandise write-offs have been higher than we'd like, and we're working hard to address these.

As we look to 2016, we'll continue to develop and grow our omni-channel platform. E-commerce performed well in 2015, and we expect it to grow to a mid-single digit percentage of our lease revenues in 2016. We're shifting our marketing focus from brand and reallocating dollars from sports marketing to focus more on our product and value proposition. We're also running a disciplined strategy on smartphones, and we'll look to add a carrier midyear. We expect to achieve modest gross margin improvement as the price increases we implemented at the beginning of the year work through our lease portfolio. We will make investments in omni-channel and other strategic initiatives this year, but expect to maintain our EBITDA margin.

I'll now turn it over to Ryan for an update on Progressive.

Ryan Woodley - Chief Executive Officer, Prog Leasing LLC

Thanks, Steve. 2015 was another record year for Progressive. Total revenues were up 55% and our adjusted EBITDA margin was 10.4% for the full year, roughly 100-basis-point increase over 2014. Progressive generated $276 million in revenue for the fourth quarter, a 32% increase over the prior year period.

Invoice volume for the quarter increased 12.4% to $217 million from $193 million in the year-ago period. The number of active doors increased 7.6%, up from the 1.5% gain last quarter and 2.8% in the second quarter. We're continuing to execute on converting our pipeline of new retailers which is what's driving a strong growth in active doors. Invoice volume per active door was up 4.5%, down sequentially from the third quarter, reflecting a larger number of new doors entering our active door count. As we add new doors to the mix, the average invoice volume per door slows temporarily, while those new locations increase in productivity.

Adjusted EBITDA for the fourth quarter was $25.5 million or 9.2% of revenue compared with 8.5% to the fourth quarter of 2014. Our gross margin was favorable to last year, and our operating expenses improved as a percentage of revenues. Write-offs were 7.1%, a significant decline from 8.8% a year ago. Our customer service hub operations continued to positively impact that metric. Bad debt expense was 12.4% of sales versus 12.1% a year ago, back within our normal band. As expected, the issues we highlighted in the third quarter were limited in scope and did not have a material impact on the fourth quarter. We're very happy with the performance of our lease portfolio as we end 2015. We're running a healthy and a consistent business.

In October, we completed the acquisition of Dent-A-Med. Dent-A-Med's results in the fourth quarter were immaterial to our performance and are expected to be immaterial to the company's 2016 revenues. As we stated when we announced the acquisition, we believe Dent-A-Med will give us an important strategic advantage, allowing us to offer our retail partners a full solution for their non-prime customers. In 2016, as John mentioned, we expect to continue to harvest our existing pipeline of retail relationship while also focusing on adding new retail partners. We will continue to invest in developing our customer service hub and in improving our product offering to retailers.

I'll now turn it over to Gil who will give a more detailed overview of the combined financial results.

Gilbert L. Danielson - Executive Vice President

Thanks, Ryan. As John mentioned, it was a very good year for Aaron's with record revenues, adjusted EBITDA, non-GAAP EPS, and number of customers. Consolidated revenues for the fourth quarter and 12 months of 2015 were $821.2 million and $3.18 billion for the year, up 10% and 18%, respectively over the same period a year ago.

Revenues of the Aaron's Sales & Lease Ownership division increased in the fourth quarter to $525.5 million compared to $522.6 million in the fourth quarter of last year. Revenues for the year were down 2% to $2.061 billion compared to $2.107 billion a year ago. Same-store revenues in the fourth quarter for company-operated stores in the core business decreased 3.4% compared to the same period last year, and customer counts were down 1.2%. As previously discussed, same-store revenues, excluding the Texas stores, declined 1.9% in the quarter compared to last year's quarter.

Our franchisees selectedly had revenues of $238.7 million for the fourth quarter and $972.5 million for the year, down 1% and 2% respectively from the same periods a year ago. Same-store revenues and customers for franchise stores increased 2% for the quarter. Revenues and customers of franchisees, however, are not revenues and customers of Aaron's, Inc.

Revenues in the HomeSmart division were up 2% to $15.8 million in the fourth quarter and down 2% to $63.2 million for the year compared to the same periods last year. Progressive revenues increased 32% in the fourth quarter and 55% for the year to $276.1 million and $1.05 billion respectively.

Net earnings for the fourth quarter were $21.7 million versus $22.1 million a year ago. Net earnings for the 12 months were $135.7 million compared to $78.2 million for the same period last year. Diluted earnings per share were $0.30 for the quarter and $1.86 for the year. As outlined in our earnings release this morning, earnings in both 2015 and 2014 were impacted by special charges, adjustments, costs and expenses.

On a non-GAAP basis, excluding 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 were $29.8 million compared to $28.7 million for the same period in 2014 and earnings per share, assuming dilution, were $0.41 compared to $0.39 a year ago. Non-GAAP net earnings for the 12 months of 2015 were $157 million compared to $123.2 million in 2014. And earnings per share for the year were $2.15 versus $1.69 last year, an increase of 27%. Adjusted EBITDA for the company, adjusted to the special charges and other items, was $67.4 million for the fourth quarter, up 7% from $62.8 million for the same period last year. Adjusted EBITDA for the 12 months of 2015 was $323.8 million, up 23% from the $263.9 million in 2014. The company generated $166.8 million in cash from operations during the year.

In our earnings release, we provided the following guidance for 2016. In our guidance, diluted earnings per share is presented both on a GAAP basis and on a non-GAAP basis excluding Progressive related to intangible amortization and any future one-time or unusual items. Adjusted EBITDA also excludes any future one-time or unusual items. EPS guidance does not assume any significant repurchases of the company's common stock or the potential impact of any cost associated with store closures.

The company currently expects to achieve the following. In the core business, total revenues of approximately $2.05 billion to $2.15 billion including lease revenues of $1.55 billion to $1.65 billion; same-store revenues during the year in the range of a negative 3% to a positive 2% quarterly with an improving trend throughout the year; adjusted EBITDA of approximately $210 million to $230 million. The company will continue to evaluate its store base for strategic growth and consolidation opportunities. For Progressive, we anticipate in 2016 total revenues of approximately $1.2 billion to $1.3 billion, EBITDA of $125 million to $135 million.

For the consolidated results – and consolidated results include results of Dent-A-Med's operations. We anticipate Dent-A-Med to operate near breakeven on a pre-tax pre-provision income basis for 2016. However, we expect this segment to have a negative impact on GAAP earnings of up to $0.10 per share for the year, primarily due to the effects of acquisition accounting on the acquired receivables and a buildup of the loan-loss provision on receivables originated post-acquisition.

On a consolidated basis, we are expecting the following in 2016. Revenues of approximately $3.25 billion to $3.45 billion excluding revenues of franchisees; adjusted EBITDA of $330 million to $360 million; GAAP diluted earnings per share in the range of $2.03 to $2.23; non-GAAP diluted earnings per share in the range of $2.20 to $2.40; capital expenditure of $70 million to $90 million and operations of both the core business and Progressive are expected to be funded by internally-generated cash flow. In January, we announced Progressive has begun to test with a national retailer. We have not assumed any expansion of that test in our 2016 forecast.

In closing, I would like to thank our investors and analysts, past and present, for their interest in Aaron's and support of the company and myself through the years. I have immensely enjoyed my relationship with the investment community and will certainly miss it. I am leaving the company's financial affairs in good hands with Steve as my replacement as CFO. I would especially like to acknowledge John Baugh who was the first sell-side analyst to pick up coverage on Aaron's in the early 1990s. John and I have spent a lot of time together through the years and he continues to provide astute and inciseful coverage of Aaron's today.

I was very fortunate that Charlie Loudermilk decided to hire me 26 years ago as the CFO of Aaron Rents. The growth and success of the company since that time has been remarkable and rewarding in so many ways. I feel the future is very bright for Aaron's. Under John and the current management team's leadership, our growth potential and prospects of the business have never been stronger. I'm a very lucky man to have been associated with such a fine company for all these years.

With that said, I will turn the call back over to John.

John W. Robinson - Chief Executive Officer

Thank you, Gil, and thank you again for all you've done for Aaron's over the past 26 years.

In summary, I'm proud of the results we achieved in 2015 and am enthusiastic about 2016. We will invest in innovation and growth in both business segments, while maintaining our disciplined focus on profitability. We will use our capital wisely to grow our business and create shareholder value. I'd like to thank all of our associates and franchisees in the Aaron's family. We appreciate your hard work and dedication to providing the best customer experience every day. I have great confidence in what we can accomplish together. Thank you for all of your efforts to make Aaron's such a success.

Question-and-Answer Session

Operator

(24:02 – 24:22)

J.R. Bizzell - Stephens, Inc.

Yeah. Good morning. And first off, Gil, congrats on a long and great career and congratulations on the impending retirement.

Gilbert L. Danielson - Executive Vice President

Thanks, J.R.

J.R. Bizzell - Stephens, Inc.

First off, I kind of wanted to go back to the data interruption we saw last quarter in 3Q, and you all referenced that you felt like it was a one-quarter event. And given kind of the data and the commentary today, it feels like that was the case. Can you kind of give us an update on kind of what you saw in 4Q and how you feel that data and that your rent-to-own in that Progressive platform are kind of trending as we've started the year?

Ryan Woodley - Chief Executive Officer, Prog Leasing LLC

Sure thing, J.R. Ryan here. As you mentioned, when we discussed the issue on last quarter's call, the root cause had been remediated and a new process has been implemented, and that's driving the results that we saw in Q4. So, strong performance in write-offs, and bad debt performing in line with expectations and in line with historical year levels.

I think at that time, we had also mentioned that the lease pool performance had returned in line with expectations and in line with historical levels following those events, which is what we continued to see throughout the back half of last year and continue to see as we begin 2016. So, very happy with the status and performance of the lease pools as we head into the new year.

J.R. Bizzell - Stephens, Inc.

Great. And then switching gears, kind of update on the smartphones, and if you could, maybe some commentary on kind of where you are in the progression, how you're feeling about the early indication of the trends and anything that is helpful around the smartphone?

Steven A. Michaels - Chief Financial Officer and President of Strategic Operations

Yeah, J.R. Thanks. This is Steve. So, smartphones have – as you know, we launched the device-only strategy in the middle of the fourth quarter and they've started well, but they've started slow by design. As we said, we're going to be launching with a national carrier in the mid-year and we expect that's when we'll promote more heavily and be more aggressive in the category, but we're committed to the category, our customers have devices and want to upgrade. So, we think it's going to be a good category for us, but we're moving forward with a conservative plan around inventory, device lineup, and risk mitigation solutions to make sure that we're successful.

J.R. Bizzell - Stephens, Inc.

Yeah. And did they benefit the comp in any way in the fourth quarter?

Steven A. Michaels - Chief Financial Officer and President of Strategic Operations

So, good question, they were in the comp but it was not material enough to lift the comp.

J.R. Bizzell - Stephens, Inc.

Excellent. And then last one from me, and Ryan, I probably should have asked you this earlier, but kind of the number of national partner trials, I don't know, you all want to start this trend, but just wondering if you could kind of give us an update on trials that you've got in the pipeline and how those three launch platforms are doing that you announced in 3Q?

Ryan Woodley - Chief Executive Officer, Prog Leasing LLC

Sure thing. I would not like to start that trend, but I'll respond to your question. So, we did mention on the last call that we had three launches in process and two tests with national accounts. One of them we issued a press release on subsequent to the call. One of the two tests has since been converted to a launch. The test that we – that was the subject of the press release that was issued earlier remains in test and our guidance assumes that we continue with approximately 100 doors for the time being. But the four launches that are in process continue in various stages of deployment, and are scaling in line with our expectations.

J.R. Bizzell - Stephens, Inc.

Excellent. Thanks, guys, and congrats on the good quarter.

John W. Robinson - Chief Executive Officer

Thank you.

Ryan Woodley - Chief Executive Officer, Prog Leasing LLC

Thanks, J.R.

Operator

Thank you. We have the next question from Brad Thomas, KeyBanc Capital Markets.

Jason Campbell - KeyBanc Capital Markets, Inc.

Hey, guys, this is actually Jason on for Brad. How are you?

John W. Robinson - Chief Executive Officer

Good. Great. Thank you.

Jason Campbell - KeyBanc Capital Markets, Inc.

Going back to the test with Walmart, I was wondering if you can tell us what – it's 100 stores. Is there any other details in terms of what products there are, what kind of parameters there are around doing a test like this in a Walmart store versus a furniture, a consumer electronics store?

Ryan Woodley - Chief Executive Officer, Prog Leasing LLC

Jason, Ryan here, obviously, very, very pleased and excited to have the opportunity to partner on the pilot, but not sharing any further information at this time. Just in line with historical practice of not providing detail on specific retail relationships.

Jason Campbell - KeyBanc Capital Markets, Inc.

Okay. And then on the four launches that you have in progress, will you give us any details in terms of how much that contributed to the acceleration in the door growth? And then what that means for door growth as we look out to 2016, even excluding Walmart or anything happening with that?

Ryan Woodley - Chief Executive Officer, Prog Leasing LLC

Yeah, the guidance does just assume 100 doors for that test. We're not quantifying the specific contribution of those launches to the active door comp. But suffice it to say that going up from 1.5%, a significant driver, a very significant driver was the introduction of those four launches to the platform, and we expect those to continue to jump left (30:02) as we move throughout 2016.

Jason Campbell - KeyBanc Capital Markets, Inc.

Okay. And then, switching over to the Aaron's side. I know, you mentioned that deliveries have accelerated. Is there any other in terms of keep time or average ticket or any of those statistics that you can give us that kind of point to an improvement in the quarter?

John W. Robinson - Chief Executive Officer

Yeah, Jason. So, we did see an increased delivery activity in Q4 and we're excited about that and hope to bring that momentum into 2016. We launched our kind of more localized brand – I'm sorry, product and promotion marketing in the fourth quarter and that definitely helped. We saw strength across all categories. The revenue per customer has remained fairly consistent over the last number of quarters. And e-comm drove some exciting activity as well.

We're encouraged about the fact e-comm, we have a self-imposed kind of one agreement per customer limit on e-comm right now as we continue to develop that model. That helped us drive our customer growth, but it also allows us to have the ability to have add-on agreements with those customers in the future. So, we look to continue to drive the revenue per customer as our customers per – I'm sorry – as our agreements per customer increase in the future.

Jason Campbell - KeyBanc Capital Markets, Inc.

And in terms of, are customers keeping things longer, anything like that?

John W. Robinson - Chief Executive Officer

We haven't seen any material changes in returns or in exercise of early buyout options or anything like that. So, it's been fairly steady.

Jason Campbell - KeyBanc Capital Markets, Inc.

All right. I'll turn it over to somebody else.

Operator

Thank you. And the next question comes from Budd Bugatch.

Beryl Bugatch - Raymond James & Associates, Inc.

I think it was me, but I can hardly hear the operator. It's Budd Bugatch from Raymond James. Is it my question?

Operator

Yes, sir. Yes. Yes, sir.

Beryl Bugatch - Raymond James & Associates, Inc.

Okay. Thank you very much. Good morning. Congratulations on the quarter. Perhaps you mentioned this, but I didn't – if you did, I didn't get it. You mentioned the invoice volumes for Progressive, I think it was $193 million last year as I have it. I know, it was up per active door, but I don't know that I heard the actual numbers. Could you give that, Ryan?

Ryan Woodley - Chief Executive Officer, Prog Leasing LLC

$217 million in Q4.

Beryl Bugatch - Raymond James & Associates, Inc.

Okay.

Ryan Woodley - Chief Executive Officer, Prog Leasing LLC

It was $193 million in Q4 of the prior year. So, up 12.4%.

Beryl Bugatch - Raymond James & Associates, Inc.

Right. Okay. Thank you. And what about gross profit for Progressive, did you mention that as well?

Ryan Woodley - Chief Executive Officer, Prog Leasing LLC

We said it was up versus the year-ago period.

Beryl Bugatch - Raymond James & Associates, Inc.

Will you help us quantify that or can you help give a... (33:02)?

Ryan Woodley - Chief Executive Officer, Prog Leasing LLC

We're not at this time, Budd. Just saying that it was up and OpEx was down. Operating expenses improved as a percentage of revenues.

John W. Robinson - Chief Executive Officer

Did we lose you, Budd?

Operator

Yeah. He just dropped off the line actually. And the next question comes from David Magee with SunTrust.

David G. Magee - SunTrust Robinson Humphrey, Inc.

Yeah. Hi. Good morning. Congrats, Gil, and congrats to the others who got promotions and everything, and it's good to see the stability here. Just a couple of questions. One is, when you mentioned better tone with regard to customer acquisition, I guess, on the core side, I know you're doing several things. What do you think is behind that? What's the primary driver? I don't sense the environment is getting better. So, it must be something more company specific in nature.

John W. Robinson - Chief Executive Officer

Yeah, it's a great question, David. We had a good November and December from customer demand, and it was across all channels. So, e-comm certainly drove it, but it didn't explain the entire uplift. In-store activity was good. We feel like our marketing campaigns were effective and on point. We had good merchandising offerings for the Black Friday and what we call the holiday countdown timeframes. And so I think that those things all kind of – that coordination came together with merchandising, marketing and operations. And we saw an uplift, and we're encouraged by that, but still have a lot of work to do to keep it going.

David G. Magee - SunTrust Robinson Humphrey, Inc.

And I'm sensing that you're judging the e-commerce to be more accretive in nature than cannibalizing in nature. Is that fair?

John W. Robinson - Chief Executive Officer

Yeah. So, we said since we've been kind of monitoring it that we're attracting new customers and extending the trade area of our stores through our omni-channel efforts, and that still is the case. And so approximately 60% of the customers finding us through e-comm have never done business with Aaron's before, and that continues to be an exciting statistic. We also track what we call previous customers, and as compared to in-store agreements, the e-comm agreements of previous customers tend to be customers that have, it's been longer since they have been an active customer with us, so you could certainly call that as almost like a new customer bringing them back into the family. So, we're encouraged by that.

Certainly, there are customers that would have come into a store that are doing business with us on e-comm and that's just the nature of retail today and you have to have – you have to engage with the customer where they want to do business with you. So there's definitely some overlap, but we're very encouraged and excited about the segments that are not overlapping.

David G. Magee - SunTrust Robinson Humphrey, Inc.

Great. Thank you for that. And my last question is on Progressive. Ryan, if I heard this correctly, I guess the EBIT number was up nicely from 8.5% last to 9.2%. The write-off improvement was more dramatic than that year-over-year, and you mentioned higher gross margins and better expenses too. Was there anything that was sort of offsetting that write-off improvement that would reduce the improvement in the overall EBIT for the division?

Ryan Woodley - Chief Executive Officer, Prog Leasing LLC

We made investment...

David G. Magee - SunTrust Robinson Humphrey, Inc.

Does that make sense?

Ryan Woodley - Chief Executive Officer, Prog Leasing LLC

Yeah. I think so. Yeah, you know, we had a – your point is we had 170 basis point pickup in write-off. We're making – we continue to make investments in people and systems to support the pipeline that we think is out there and that we expect to realize in 2016 and beyond. That would be a slight offset, but obviously pleased that we're able to generate margin expansion even in the face of that investment.

David G. Magee - SunTrust Robinson Humphrey, Inc.

Great. Thanks and good luck.

Ryan Woodley - Chief Executive Officer, Prog Leasing LLC

Thank you.

John W. Robinson - Chief Executive Officer

Thank you.

Operator

Thank you. And the next question comes from John Baugh with Stifel.

John Baugh - Stifel, Nicolaus & Co., Inc.

Thank you, and Gil, thanks for your kind words. They mean a lot. Thanks for your honesty and integrity over the years. It was a pleasure working with you. And I truly hope you enjoy your retirement.

Gilbert L. Danielson - Executive Vice President

Thanks so much. Thanks so much, John.

John Baugh - Stifel, Nicolaus & Co., Inc.

So, a question that – you can take, Gil, or you can take the privilege of deferring to Steve. Cash versus reported taxes in 2016, and what do you think the free cash flow would be before you did anything in terms of acquisitions or buybacks or anything like that.

Gilbert L. Danielson - Executive Vice President

Yes. As far as the tax standpoint is concerned, in 2015 we paid $191 million in cash taxes. But we got most of that or getting it back in refunds. So, our net payments in 2015 were $91.7 million in net tax payments. We're also getting another refund back here. In fact, I guess, we've already gotten it in February for $120 million due to the bonus depreciation that the government decided to stand (38:25) in December. So, with the refund coming back, we anticipate that we'll make additional federal and state payments of about $50 million during fiscal 2016.

So, our payments will be down substantially in 2016 and actually in future years also because of the bonus depreciation. So, that being said, we generated cash from operations of $160 million or so in 2015. It will be higher than that and then with the refund coming back in, we'll substantially generate I would say from a free cash flow standpoint at least $150 million, maybe $200 million in free cash flow in 2016.

John Baugh - Stifel, Nicolaus & Co., Inc.

Great. Thank you. Any color on tax refund season? How that's going, normal, not normal? And also in the core business, if I heard it right, the guide on where e-commerce would be as a percentage of 2016 in the core was fairly similar to where I think you exited the month of December that you called out. And I'm just curious if there's some seasonality to that or is that a conservative guide and maybe along the same fronts, how that improvement in e-commerce maybe impacts your thoughts long-term, John, about store count and anything related to the core business there? Thank you.

John W. Robinson - Chief Executive Officer

Yes. So in terms of tax season, we're just not going to comment on Q1 at all. So I really don't have any comments on that. In terms of e-com...

Steven A. Michaels - Chief Financial Officer and President of Strategic Operations

This is Steve. Let me jump in there. It was actually kind of a little bit of a mixed metric there. The number in December was 5.5% of actual agreement deliveries is what – I'm sorry, that was for the quarter, 6.5% for December. That was actual deliveries. From a revenue standpoint, it was very small in the quarter. So the mid-single digit revenue contribution in 2016 is what we're expecting e-com to ramp to, but it's a different metric there.

John W. Robinson - Chief Executive Officer

And in terms of stores, John, the e-com platform is growing. We're learning a lot about it as it goes. We're definitely trying to understand what it means for our trade areas and how that affects store locations. In terms of stores, we're continuing to kind of keep our eye on stores to trim, but not obviously planning any big expansion in 2016.

Steven A. Michaels - Chief Financial Officer and President of Strategic Operations

But one thing...

John Baugh - Stifel, Nicolaus & Co., Inc.

Great.

Steven A. Michaels - Chief Financial Officer and President of Strategic Operations

Kind of following on that. The stores are the key to our omni-channel kind of success and strategy because we're able to with that delivery activity and the customer relationship managers in the stores, they're out there servicing those customers and we want to do it and engage with them how they want to. So if they don't want to come in the store that's fine, but we still have trucks and people that are there to do service and to help in other ways. So the store footprint will probably get repositioned but the stores are definitely a central theme to our omni-channel strategy.

John Baugh - Stifel, Nicolaus & Co., Inc.

Great. And my last quick question for Ryan, were there any changes in the fourth quarter or here in 2016 in terms of underwriting process or approval rates or are the improved bad debts and write-offs just a function of getting the issues last year behind you?

Ryan Woodley - Chief Executive Officer, Prog Leasing LLC

We continue as we have historically to make minor changes in our decisioning to be responsive to current market conditions. It wasn't what I would characterize as an overcorrection. It was just a return to normal operations following the events of last year. We're very happy with how those systems are performing today, again performing in line with our expectations, we expect 2016 to exhibit bad debt and write-off levels in line with what we would consider historical norms. We continue to work to make the process robust and to adhere to the controls that we implemented in the wake of those events.

John Baugh - Stifel, Nicolaus & Co., Inc.

Great. Thank you. Good luck.

Steven A. Michaels - Chief Financial Officer and President of Strategic Operations

Okay. Thank you.

Operator

Thank you. And we have a follow-up question from Mr. Budd Bugatch with Raymond James.

Beryl Bugatch - Raymond James & Associates, Inc.

Well, I'm not going to ask another question. I just wanted to – I got cut off somehow on the call, so. Also I wanted to just give Gil my thanks and congratulations on a job well done for a long time. Thank you and I'll cede to others. Thank you very much.

Gilbert L. Danielson - Executive Vice President

Thank you very much, Budd.

Beryl Bugatch - Raymond James & Associates, Inc.

Thank you.

Gilbert L. Danielson - Executive Vice President

I will certainly miss you, but don't think I will miss you and I think we'll be in contact in the future.

Beryl Bugatch - Raymond James & Associates, Inc.

Sure.

John W. Robinson - Chief Executive Officer

Gil is going to be here throughout the year, so definitely he'll stay involved with all the critical aspects of the business that he's been so critical to in the past. So we're very fortunate to have him to help us transition. Thank you. Is that all the questions?

Operator

Actually, there is one more from Brad Thomas with KeyBanc.

Bradley B. Thomas - KeyBanc Capital Markets, Inc.

Hi. It's Brad on now. Thanks for taking another question for us. And, Gil, we've obviously talked about this offline, but just wanted to wish you our best regards as well.

Gilbert L. Danielson - Executive Vice President

Thank you very much.

Bradley B. Thomas - KeyBanc Capital Markets, Inc.

Just with respect to the core Aaron's business, we were wondering if you could talk a little bit about maybe some of the cost opportunities and how aggressively you might begin to pursue them if negative same-store sales were to persist. Obviously, the company is focused on trying to drive revenue growth in that segment. But just if you could touch on the cost side of that equation, we would appreciate it.

John W. Robinson - Chief Executive Officer

Yes, we're going to certainly maintain a focus on cost and managing the business for EBITDA. And as the year progresses, we'll be able to make adjustments in this regards. We are going to continue to invest, though, to be clear in key areas. So around e-comm, for example, we're going to continue to invest capital to build that platform because we think it is one of the keys to getting our comps back to positive, and we hope as we said in our guidance that we trend back to a positive comp. Our franchisees have done that and we hope to follow their lead on that.

So there are cost opportunities. There always are. We've done a good job in 2015 of managing cost better than we've ever done. And in 2016 we're going to maintain that discipline, but that doesn't mean we're not going to make some investment because we do think our prospects going forward are good.

And as Steve said, the core side of our business is exciting when you layer the e-comm platform on top of our stores, on top of our distribution, on top of our great people. And so we feel like that's a really viable model. So I want to be clear that we're going to keep our eyes on cost, be very cost conscious, but also looking forward and investing in the future.

Bradley B. Thomas - KeyBanc Capital Markets, Inc.

Great. And then just on Progressive's accounting for the fourth quarter with Dent-A-Med now included, I think it's immaterial impact on earnings, but I don't know if we heard a revenue number. Could you quantify if there was any revenue impact within the Progressive segment in the fourth quarter and what the benefit may be in 2016 from Dent-A-Med?

Ryan Woodley - Chief Executive Officer, Prog Leasing LLC

Sure thing, Brad. Ryan here. So the impact in Q4, it was the net effect of the impact of the acquisition accounting. It kind of mucks with things a little bit. So the revenue impact in Q4 was just a few million, $2 million, and about breakeven on EBITDA for that stub period. Just not material. And again, primarily driven by the acquisition accounting.

Gilbert L. Danielson - Executive Vice President

And the revenue is just a shade under $3 million, as Ryan said, it's $2 million.

Bradley B. Thomas - KeyBanc Capital Markets, Inc.

Great. Great. And I guess if I could just squeeze in one last question kind of on the big picture. On the one hand the low-end consumer would seem to be benefiting from lower gas prices, some rising wages. On the other hand, there's obviously data points out there that the consumer has been a bit choppier. You all have seen a little bit of an elevation in write-offs. You cited the softer trends in Texas in the core business. I guess as you look at the consumer and think about it for this year, how are you all feeling?

John W. Robinson - Chief Executive Officer

We look at that a lot and we see the same macro data that a lot of you folks see. And the reality from our perspective is we see our numbers and it still feels like it's choppy for our customer out there. We don't see any big change in Q4 versus the rest of the year, but it still feels like there are some headwinds for our customer. We've not seen any tailwinds from lower gas prices. You would think over time that would help us, but we can't say that in our data we've seen that. So I would say it's kind of the same from what we've been seeing and we certainly hope it gets better. But it's challenging overall.

Bradley B. Thomas - KeyBanc Capital Markets, Inc.

Got you. Thank you so much, John.

John W. Robinson - Chief Executive Officer

Thank you.

Operator

Thank you. And there are no more questions. I would like to turn the call back over to John Robinson for any closing comments.

John W. Robinson - Chief Executive Officer

That's it for this call. We look forward to talking to you on our next quarterly update. Thank you.

Operator

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

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