Q4 2019 Earnings Call

[music].

Good morning, My name is scary and I will be your conference coordinator at this time I would like to welcome everyone to the Aaron's, Inc. Fourth quarter 2019 earnings Conference call.

All lines have been placed on mute.

Any background noise. After the speaker's remarks, there will be a question and answer session. Please.

Please note this event is being recorded.

I'll now turn the call over to Mr., Michael Dickerson, Vice President of corporate Communications and Investor Relations for Air and Thank you may begin your conference.

Thank you and good morning, everyone welcome to the Arts Inc. fourth quarter 2019 earnings Conference call.

Joining me this morning, our John Robinson, guaranteeing President and Chief Executive Officer, Ryan Woodley, Chief Executive Officer of Progressive leasing Douglas Lindsay President of the parents business and Steve Michaels Aaron's, Inc, Chief Financial Officer, President strategic operations.

Many of you have already seen a copy of our earnings release issued this morning for those of you have not it is available on the Investor Relations section of our web site and Aarons Dot com.

During this call certain statements, we make will be forward looking I want to call your attention to our safe Harbor provisions for forward looking statements that can be found at the end of our earnings release.

The safe Harbor provision identifies risks that may cause actual results to differ materially from the cost us about forward looking statements.

Also please see our form 10-K for the year ended December 31, 2019, which we filed later this morning.

A description of the risks related to our business that may cause actual results to differ materially from our forward looking statements.

Listeners are cautioned not to place undue emphasis on forward looking statements and we undertake no obligation to update any such statements.

Today's call will be referring to certain non-GAAP financial measures, including EBITDA and adjusted EBITDA non-GAAP net earnings and non-GAAP, EPS, which have been adjusted for certain items, which may affect the comparability of our performance with other companies.

These non-GAAP measures are detailed in the reconciliation tables included with our earnings release.

The company believes that these non-GAAP financial measures provide meaningful insight into the company's operational performance and cash flows and provides these measures to investors to help facilitate comparisons of operating results with prior periods and to assist them in understanding the companys ongoing operational performance.

Lastly, effective as of the first quarter of 2019, the company adopted the assay eight four to a new standard related to accounting for leases in our press release, we have added additional information to the revenue table to provide you a year over year comparison on an equivalent basis.

Throughout our call today, we will make comments related to the comparability of certain items with the prior year and have assumed in his comments that the adoption of this do standard was made at the beginning of each period for compared.

With that ill now turn the call over to John Robinson.

Thanks, Mike and thank you all for joining us today.

I'm pleased to 2019 ended on such a positive note progressive invoice growth in the fourth quarter as expected accelerated nicely.

The Aarons business collections performance also improved which contributed to positive same store revenues in the quarter and strong adjusted EBITDA.

On a consolidated basis, we achieved revenue growth of 8.4% over the same quarter in 2018.

This increase is primarily a result of continued strong invoice growth at progressive partially offset by the closure of underperforming Aaron's stores in the first half of 2019.

Adjusted EBITDA and diluted non-GAAP EPS for 125.2 million in a dollar and 15 cents per share respectively. Both up low double digits from the fourth quarter of 2018.

The progressive team delivered another record quarter for both revenue and earnings.

Invoice volume grew 34.4% over the prior year fourth quarter due to the recent rollout of additional locations from retailers added in 2019 and increased productivity from existing retailers.

The Aarons business same store revenues and adjusted EBITDA increased from the prior year as a result of the improvement in collections performance throughout the quarter expense management and gains on real estate sales.

As we enter 2020 I'm encouraged by progressive prospects for continued strong results and the progress of the transformational initiatives in the Aarons business.

Given our optimism we continue to invest in people and technology to lift to deliver future growth.

We remain conservatively capitalized with a net debt to adjusted EBITDA ratio of less than one turn.

And ended the fourth quarter with available liquidity of approximately $440 million.

Our strong balance sheet and disciplined approach to capital allocation provide us flexibility to continue to invest in our businesses pursue M&A opportunities and return capital to shareholders.

Finally, as we disclosed in our earnings release. This morning Progressive is also reached an agreement in principle with FTC staff.

Which we expect will result in progressive paying 175 million to the FTC and agreeing to a consent order with respect to compliance related activities, such as monitoring disclosure and reporting.

We have agreed to this proposed settlement to avoid the distraction and uncertainty caused by protracted litigation.

Taking great care of customers is the centerpiece of progressive business philosophy, and the reason the company has had so much success.

For many years Progressive has led significant innovation in a lease to own marketplace on behalf of the customer.

There are several other capable competitors also driving innovation, but as the leader in the industry progressive is subject to more scrutiny.

Ultimately our objective has always been for every customer to be fully informed about their transaction and have an exceptional customer experience.

The team is constantly looking at new and innovative ways to meet this objective and are always willing to incorporate feedback on how to better serve customers.

Responding to the Fccs inquiry has required a significant amount of company resources and management attention.

Over an 18 month period, the team provided millions of records and answered numerous questions regarding progressed as offerings and business practices.

While this inquiry has been difficult we believe progressive is stronger and in a better competitive position having been through this process.

Now I'll turn the call ever to Ryan to discuss progressive outstanding fourth quarter performance and plans for 2020.

Thanks, John.

Very pleased with the team's execution in the quarter and for all of 2019.

We continue to deliver on key objectives, including the launch of large national retailers and investments in people and infrastructure, which will help contribute to growth in future periods.

Net revenues rose, 22.3% in the quarter as compared to the fourth quarter of 2018 to a record 559.5 million.

The revenue performance was driven by consistently strong invoice growth throughout the year capped by 34.4% increase in the fourth quarter.

The growth in the fourth quarter was the result of a 9% increase in active doors, driven by Rollouts of new retail partner locations and a 23.3% increase in invoice per active door.

Adjusted EBITDA increased 17.6% does compared to the same period last year driven by the strong growth in revenue offset by slightly higher than expected onboarding costs for national retailers and a year over year increase and write offs.

As anticipated accelerating invoice growth in the fourth quarter drove an increase in our initial impairment reserve on newly originated leases.

As a result write offs were 6.6% of revenues in the fourth quarter of 2019 up from the 5.8% reported in the year ago period.

We ended the full year 2019 at 7.2% of revenues compared to 7.0% in 2018.

Demonstrating consistent performance within our targeted annual range of 6% to 8% of revenues.

As we look to our growth plan for 2020 and beyond we expect to benefit from the continued ramp of newly onboarded retailers as well as from incremental growth opportunities across our existing partnerships.

Historically, we've exhibited a trend that productivity improvement over time with many of our long standing partners supported by a strong and increasing rate of repeat business from existing customers, we expect that trend to continue.

2019 was an exceptionally successful year in terms of pipeline conversion.

That said the available addressable market remains large and we plan to continue our investment and people in technology to attract and convert new opportunities.

Consistent with past practice, our outlook for 2020 includes anticipated growth from our existing retail partners as well as the expected conversion of a portion of our retail partner pipeline, where we have near term visibility.

EBITDA margin in 2020 is expected to be below 2019, but well within our long term annual target range of 11% to 13% of revenues.

Lower EBITDA margin is primarily due to pressure on gross margin from that rapid acceleration in invoice growth and the resulting younger portfolio, which we expect will increase 90 day buyout activity in the first half of 2020.

In addition, our plan for this year includes approximately 15 million of incremental investments to support enhanced compliance initiatives related to our tentative agreement with the FTC.

We believe these investments will further enhance the customer experience and strengthen progressed since competitive position.

Again, I'm tremendously proud of the team's performance in the quarter and the highly productive relationships, we forged with our retail partners. We believe our investments in people and technology position us well to continue to grow existing partnerships as well as attract convert and profitably scale, new retail partner opportunities.

I'll now turn the call over to Douglas to discuss the errands business fourth quarter results in the plan for 2020.

Thanks, Ryan I'm happy to report that in the fourth quarter. The Aarons business successfully return collections to normalized levels and generated growth in both adjusted EBITDA and same store revenues.

We achieved these results by rebalancing our sales in collection efforts as well as by reducing operating expenses.

Same store revenues increased 0.4% in the quarter.

Primarily due to the sequential improvement in collections performance.

For the full year 2019 same store revenues were flat and improvement of 143 basis points from 2018.

Recurring revenue written into the portfolio declined 3.3% mcwhorter.

As lease originations were negatively impacted by the rebalancing of our sales and collection efforts.

By ongoing weakness in consumer electronics, which was 20% of lease revenues in 2019.

Excluding consumer electronics recurring revenue written into the portfolio increased 4% in the quarter.

With growth occurring in our highest margin categories.

Recurring revenue written as a leading indicator of same store revenues, which would have been low single digit positive and both 2019 and 2018.

Excluding the impact of consumer electronics.

E Commerce continues to be a bright spot for the business representing 14.3% of overall recurring revenue written in the fourth quarter of 2019.

Up from 10.2% and fourth quarter 2018.

E Commerce recurring revenue written was up 35.3% compared to the fourth quarter 2018.

Commerce remains one of our key growth initiatives in an area of continued investment.

Adjusted EBITDA increased $1.7 million or 3.6% compared to the year ago quarter.

Adjusted EBITDA increased as a result of a sequential improvement in collections performance gains on real estate sales and expense management.

Which were partially offset by higher write offs.

Write offs were 7.3% of revenues in the fourth quarter down slightly from the 7.4% and third quarter.

And as expected elevated compared to the 5.1% recorded in the same period last year.

The increase in write offs was primarily driven by the negative impact on collections performance created by our new sales initiatives in the third quarter.

The closure of 155 stores in 2019.

And an increasing mix of ecommerce revenues.

We expect this sequential improvement to write offs to continue going forward as we return to normalized relations performance.

As a result of the reduction and recurring revenue written into the portfolio and the elevated write offs in the fourth quarter, we entered 2020 with a lower portfolio balance than 2019.

As we look to our 2020 outlook, we expect the business to be challenged by the lower portfolio size continued pressure from consumer electronics.

Partially offset by continued cost savings throughout the business and lower write offs.

As you know over the last few years, we've been testing various formats to develop our next generation store concept.

In 2019, we opened nine new stores across several states.

Thus far these next generation stores are achieving significant lift in lease originations and are attracting and you are in younger customer.

Given that success, we expect open approximately 25 next generation stores this year.

We'll continue to monitor the result of these stores and continue to take a measured approach to future investment decisions.

I'll now turn the call over to Steve to discuss our fourth quarter financial results in 2020 outlook.

Thanks Douglas.

On a consolidated basis revenues for the fourth quarter of 2019 were 1 billion an increase of 8.4% over the same period a year ago when calculated on a basis consistent with the 2019 adoption of assay a 42.

Adjusted EBITDA for the company was $125.2 million for the fourth quarter of this year compared to 112.7 million for the same period last year, an increase of 12.5 million or 11.1%.

Adjusted EBITDA was 12.5% of revenue in the fourth quarter of 2019 up 30 basis points from the 12.2% in the fourth quarter of 2018 on a constant accounting basis.

Adjusted EBITDA includes approximately 5.6 million of gains for real estate sales related to certain aarons business locations.

Diluted EPS on a non-GAAP basis for the quarter increased 12.7%.

To $1.15 versus a one dollar too in the prior year quarter.

Operating expenses decreased approximately 48.5 million on.

On a constant accounting basis operating expenses would have increased 18.6 million in the fourth quarter of 2019 compared to the year ago period.

The increases in write offs in both businesses and increased investments in personnel at progressive account for more than the year over year increase in operating expenses, partially offset by reductions in occupancy costs and advertising expenses in the aarons business.

During the fourth quarter, the company recorded a $175 million charge and 4 million for fourth quarter legal expenses related to an agreement in principle to settle the progressive FCC matter.

Cash generated from operating activities was 317.2 million for the full year 2019, and we ended the year with 57.8 million in cash compared to 15.3 million at the end of 2018.

During the quarter, we repurchased 513900 shares of the company's common stock at an average price of $58 in five cents per share returning approximately 32.2 million to our shareholders through these repurchases and our quarterly cash dividend.

For the full year 2019, the company returned approximately 78.7 million related to the purchase of approximately 1 billion 156000 common shares at approximately $59, a 90 cents per share and 9.4 million in dividends.

We remain conservatively capitalized and ended the fourth quarter with available liquidity, a $444 million and a net debt to adjusted EBITDA ratio of 0.65.

On January 20, Onest 2020, the company completed an amendment to its credit facilities, which among other changes extended the maturity date to January of 2025 and increases the maximum revolver commitment from 400 million to 500 million.

For 2020, we have included our initial outlook in the earnings release issued this morning.

Cash flows from operating activities before the impact of the charge related to the tentative agreement with the FCC are expected to be approximately $375 million to $425 million in 2020.

We will continue to evaluate the use of our excess cash prioritizing investments in our businesses followed by potential M&A activity and returning capital to shareholders through share buybacks and dividends.

As of December 30, Onest 2019, the company had approximately 262 million of availability on its 500 million share repurchase authorization.

On a consolidated basis, we expect lower gross margin and therefore, lower adjusted EBITDA margin in the first half of 2020 due to the rapid acceleration in invoice growth and the resulting younger portfolio at progressive, which we expect will increase night a buyout activity.

Due to the higher buyer activity at progressive and lower year over year results in the Aarons business first quarter, adjusted EBITDA and non-GAAP EPS is expected to be the lowest quarter of the year.

Consolidated revenues are expected to be split roughly 50 50 between the first half and the second half of 2020, while adjusted EBITDA adjusted EBITDA margin and non-GAAP EPS are expected to trail the prior year in the first half and exceed the prior year in the second half.

These estimates are based on assumed annual effective tax rate of approximately 24%, which will trend similarly to the quarterly effective tax rates in 2019.

We're also assuming approximately 68 million shares outstanding throughout the year.

Our 2020 outlook incorporates the expected impact of progressive agreement in principle with the FCC staff.

Because this matter is still pending final approval, we are unable to comment beyond what is in our fourth quarter earnings release form 10-K and are prepared comments.

With that ill now turn the call over to the operator, who will assist with the question and answer period.

We will now begin my question and answer session.

To ask a question you May Press Star then one on your Touchtone phone.

You are using speakerphone, please pick up your handset before pressing the key to.

Withdraw your question. Please press Star then to this time, we will pause momentarily to assemble our roster.

The first question will come from Bill Chappell Suntrust.

Thanks, Good morning.

One available.

Hey, I've two questions I guess first on progressive.

I appreciate the color you kind of on the 90 day pay offs second one cubic trying to understand how it.

You know you get some relief as you move to the back half worried until you've been doing 2021, just says I assume these two big new customers.

Our still at early stages on in terms of percentage of transactions and as they get bigger throughout the year and they ramp walk you continue to have them.

It will keep portfolio fairly do and so help me understand how as we moved to the back half and into 2021.

That that is alleviate.

Got it right here thanks for the question Bill.

If you look back what's interesting is we saw similar trends play out and 2018. If you look back to the latter part of Q2 thousand 17 later quarters that you are we are generating 30 plus percent growth rate.

On a same thing happen in the first half of 2018, and where yet where you experienced higher netted a buyout rates because you had a younger average portfolio. So we're just expecting that same trend to play out.

In 2020, and and yes, I know you know the dynamic, but just to sort of stated here when you generate those high levels of invoice growth.

Blend in younger leases and younger leases by definition or in the period at their lease where they are eligible for those discounted early buyout options as opposed to.

Older and older portfolio on average, which may be outside of that window. So we're just expecting similar trends to play out in 2020 that we saw in 2017 and.

As you pointed out we we we.

We're very excited about those opportunities we think they represent great long term growth potential obviously, all of which is that won't be realized in year, one, but we're excited about the results we've.

We've delivered thus far in.