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Edited Transcript of AAN earnings conference call or presentation 15-Feb-18 1:30pm GMT

Q4 2017 Aaron's Inc Earnings Call

ATLANTA Feb 15, 2018 (Thomson StreetEvents) -- Edited Transcript of Aaron's Inc earnings conference call or presentation Thursday, February 15, 2018 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Douglas A. Lindsay

Aaron's, Inc. - President of Sales & Lease Ownership

* John W. Robinson

Aaron's, Inc. - President, CEO & Director

* Kelly Wall

Aaron's, Inc. - VP of Finance, IR & Treasury

* Ryan K. Woodley

Aaron's, Inc. - CEO of Progressive Leasing

* Steven A. Michaels

Aaron's, Inc. - CFO & President of Strategic Operations

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Conference Call Participants

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* Anthony Chinonye Chukumba

Loop Capital Markets LLC, Research Division - SVP

* Bradley Bingham Thomas

KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst

* Brian Christopher Hollenden

Sidoti & Company, LLC - Research Analyst

* John Allen Baugh

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Kyle M. Joseph

Jefferies LLC, Research Division - Equity Analyst

* Laura Allyson Champine

Roe Equity Research, LLC - Senior Analyst for Consumer and Retail

* William Bates Chappell

SunTrust Robinson Humphrey, Inc., Research Division - MD

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Presentation

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Operator [1]

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Good morning. Welcome to the Aaron's, Inc. Fourth Quarter and Year Ended 2017 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

Participating this morning are John Robinson, Aaron's, Inc. President and CEO; Ryan Woodley, CEO of Progressive Leasing; Douglas Lindsay, President of Aaron's Sales and Lease Ownership; and Steve Michaels, Aaron's, Inc. CFO and President of Strategic Operations.

Now I would like to introduce Kelly Wall, Vice President of Finance, Investor Relations and Treasury. You may proceed.

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Kelly Wall, Aaron's, Inc. - VP of Finance, IR & Treasury [2]

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Thank you, and good morning, everyone. Welcome to our conference call to discuss Aaron's fourth quarter results, which were released today. All related material, including 8-K with the earnings release for the Q4 and fiscal 2017 results, 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 remind investors about the safe harbor statement. Except for historical information, these matters discussed today are forward-looking statements. As such, they involve several risks and uncertainties, which could cause the actual results to differ materially from those predicted in Aaron's forward-looking statements. Please see our 10-K for the year ended December 31, 2016, and subsequent SEC filings for description of certain risks that may cause actual results to differ.

Forward-looking statements that may be discussed today include Aaron's and Progressive's projected results for future periods; Aaron's strategy; our expectations regarding the business transformation initiatives for the Aaron's Business and other matters including those listed in the forward-looking statement 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 statements.

During the call, we will also be referring to certain non-GAAP financial measures, including 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.

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

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John W. Robinson, Aaron's, Inc. - President, CEO & Director [3]

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Thanks, Kelly, and thank you for joining us today. We had an outstanding fourth quarter with exceptional growth from Progressive and a significant improvement in our profit margin at the Aaron's Business. The strong finish completed a year of significant achievement for Aaron's. In 2017, associates across all of our businesses delivered record revenues, EBITDA, diluted EPS and non-GAAP diluted EPS for the full year. I would like to congratulate our teams, led by Ryan Woodley at Progressive and Douglas Lindsay at the Aaron's Business, for these outstanding results.

In addition to these excellent financial results, we made important strategic investments in 2017 that we believe will support the long-term growth of our business. Progressive strengthened its position as a market leader by continuing to drive innovation. We're very fortunate to have talented associates and retail partners who, together, continue to find ways to provide access to high-quality merchandise to more customers than ever before. Given Progressive's growth rate and the significant unserved market opportunity, we continue to invest aggressively in the business to maintain our market-leading competitive position.

In the Aaron's Business, we continue to invest in talent and technology, and we're beginning to reap the benefits of these investments. In 2017, we saw meaningful improvement in average ticket and lease margin, which contributed to EBITDA margin expansion despite declining revenues. In addition, many of our leading indicators are positive, which gives us increasingly optimistic expectations about the business going forward. As a reminder, due to the portfolio nature of the business, revenue growth lagged many of these metrics. I'm tremendously proud of the teams for their dedication and high level of execution in 2017. Looking forward to 2018, we believe we can accelerate revenue and earnings growth as we build on our momentum.

At Progressive, we're improving speed and ease of use for both customers and our retail partner associates, and we're making investments to continue to drive efficiency in our operating model. Among other areas, we're making additional investments in technology, sales support and compliance. At the same time, our decisioning continues to benefit from increasing scale and further enhancements that are allowing us to capture additional profit dollars and drive more revenue for our retail partners.

At the Aaron's Business, we're moving forward with operating initiatives that we believe will improve our competitive position. We're pleased with the traction we're seeing from the investments we accelerated to the second half of 2017, and we're encouraged by the initial results of a number of pilot programs that have the potential to be scaled across the organization. We believe the market opportunity for the Aaron's Business omni-channel strategy is significant, and we're building a strong platform to support long-term growth.

The federal tax reform passed in December has clear positive implications for our capital position. Steve will outline these in more detail.

But overall, our goal is to continue to invest in our businesses while remaining conservatively capitalized. In 2017, we reduced our debt by $135 million and continued our history of returning capital to our shareholders by increasing our dividend for the 15th consecutive year and repurchasing nearly 2 million shares of stock. Going forward, our first priority continues to be increasing the long-term value of this business. We added significant talent to the organization in 2017, and we'll continue to invest in people and technology.

As we've stated on prior calls, we believe strongly that a conservative capital structure will allow us to remain opportunistic regarding acquisitions and other investments that can support innovation and growth. Finally, we intend to return excess cash to shareholders through dividends and, when market conditions are appropriate, share repurchases. The new $500 million repurchase authorization announced today is evidence of that.

Now I'll turn it over to Ryan to discuss Progressive.

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Ryan K. Woodley, Aaron's, Inc. - CEO of Progressive Leasing [4]

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Thank you, John. Progressive capped off the year with an excellent fourth quarter, delivering our strongest revenue growth in 2017 and a 20% increase in EBITDA over the same quarter last year. We're excited about the trends we're seeing in the business and pleased with how our team is executing.

Total revenues increased 32% versus the year-ago quarter. Invoice per active door rose 24%. That's a sharp acceleration from the third quarter as new doors are being successfully onboarded. The number of active doors increased 10% to approximately 20,000 doors that completed a lease with Progressive in the period.

The dynamics supporting these gains are encouraging. We experienced balanced growth across regional as well as national accounts. Our average ticket increased, driven by a combination of product mix and steps we're taking to increase lease approval amounts where prudent. The approval rate declined slightly in the quarter.

SG&A expenses as a percent of revenues improved modestly as we realized operating leverage despite making significant investments in the business. Write-offs were 5.4% of revenues in the fourth quarter compared with 5.9% a year ago. Bad debt expense was 12.1% of revenues versus 11.3% in the prior year.

EBITDA rose to $50 million in the quarter versus $42 million a year ago. As we look to 2018, our goal is to maximize revenue and EBITDA growth within the parameters we've historically outlined for profitability. Our plan for this year assumes continued significant investment in people and systems to support our pursuit of what we believe is a large, unserved market. To date, the strategy has proven effective, as evidenced by the strong growth we saw in 2017 and the growth we expect in 2018. In addition to enabling us to continue this strong rate of growth, we believe these investments will allow us to generate margin expansion in future years as we drive further operating efficiency.

Additionally, we believe our increased scale, access to capital and ongoing investments in data science have enabled us to continue to enhance our application decisioning across the portfolio. This continued improvement of our decisioning processes is driving more profit dollars for our retail partners and for Progressive while allowing us to remain within the annual EBITDA margin range that we've previously provided of 11% to 13%.

We finished 2017 with bad debt expense of 10.9% and expect 2018 to be higher as a result of a shift in invoice mix and the further optimized decisioning but still within our expected annual range of 10% to 12% of revenue. Likewise, we expect write-offs will increase but remain within the annual range of 5% to 7%.

Advanced algorithms, additional predictive metrics and more data, aided by a relatively short average lease life at 7 months, are continuing to provide good visibility into the performance of our lease pools. In addition to the opportunities arising from further optimization, we're seeing strong application growth across the business as well as a continued robust pipeline. These factors, among many others, contribute to our optimistic expectations for 2018 and beyond.

Dent-A-Med also delivered solid results in the quarter and achieved several key operational objectives that we believe better position the business for future growth and profitability.

I'll now turn it over to Douglas for comments on the Aaron's Business.

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Douglas A. Lindsay, Aaron's, Inc. - President of Sales & Lease Ownership [5]

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Thanks, Ryan. The Aaron's Business had a strong fourth quarter with an increase in lease revenues, adjusted EBITDA dollars and adjusted EBITDA margin. We have solid momentum in our transformation initiatives, and the expectations for the business are increasingly optimistic.

Our lease portfolio is performing well, and the positive trends that emerged in 2017 continued in the fourth quarter. Improvements in average ticket size, customer retention rates and collections all contributed to strong results. At quarter-end, our lease margin was at its highest level in 3 years.

Lease revenues were up slightly as the acquisition of franchisees in 2017 offset the impact of our recent store closures. We closed or consolidated an additional 11 stores during the quarter.

Same-store sales declined 5.4%, a slight improvement over the third quarter performance. We had a great Black Friday and a solid holiday season overall. The average ticket size delivered increase as we benefited from a more favorable product mix and pricing initiatives. Our per store customer delivery trends have now improved for 4 consecutive quarters, which we believe is an important leading indicator for the portfolio.

Adjusted EBITDA margin improved 230 basis points versus a year-ago quarter to 9.3%. The gain was driven primarily by initiatives focused on improving lease profitability. The quality of our lease portfolio is improving as we're churning out lower value leases and replacing them with leases that we expect to drive a higher return.

In addition, we continue to streamline the business in the quarter as we reduced operating costs and benefited from our 2-year close/merge strategy. Merchandise write-offs were 4.2% in the quarter compared with 4.6% a year ago due to better operational execution and continued adoption of our recurring payment platform. Overall, our optimism is building as the investments we made in the second half of 2017 start to pay off and a number of our leading indicators are favorable as we enter 2018.

While we continue to focus on driving more efficiency in the business, we're encouraged by a number of initiatives to generate revenue growth. For example, we're in the process of replatforming our e-commerce site, a key component of our omni-channel strategy. The new site should improve our customer experience, increase product selection and make it easier and faster to lease products at Aaron's. We continue to see healthy site traffic at aarons.com, and we're doing a better job on conversion and decisioning, among other things, which is driving profit growth in the channel. We're also rolling out rapid onboarding in our stores, which we expect to enable us to further streamline the lease decisioning process, decrease transaction times and further optimize our labor model.

Our investments in merchandising are starting to pay off. Our team, led by Chief Merchandising Officer Steve Olsen, launched a number of initiatives that we expect to deliver value in 2018 and beyond. We're testing new inventory optimization strategies designed to stock a more relevant product assortment in the diverse markets that we serve. I cannot be more pleased with the team and excited about the opportunities to drive more value in the future.

There are a number of other transformation initiatives that are in their early stages, which we believe has significant potential to drive top line growth, improve customer experience and reduce our cost to serve. As we continue to invest in these initiatives, we look forward to updating you on our progress.

I'll now turn it over to Steve for an update on the financials.

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Steven A. Michaels, Aaron's, Inc. - CFO & President of Strategic Operations [6]

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Thanks, Douglas. Revenues for the fourth quarter and 12 months of 2017 were $885 million and $3.384 billion, up 11.3% and 5.5%, respectively, over the same period a year ago. The increase for the year was driven by Progressive revenues, which were up 26.6%.

Net earnings for the fourth quarter were $177.6 million versus $21.6 million a year ago. Net earnings for the 12 months were $292.5 million versus $139.3 million in the prior year. Net earnings for the fourth quarter on a non-GAAP basis were $47 million compared to $36.3 million for the same period in 2016. Net earnings for the 12 months on a non-GAAP basis were $184.7 million compared with $167.7 million for the same period in 2016.

Earnings per share assuming dilution were $2.46 in the fourth quarter of 2017 and $0.30 in the fourth quarter of 2016. Earnings per share assuming dilution for the 12 months ended December 31, 2017, were $4.06 compared to $1.91. Earnings and EPS in the fourth quarter and 12 months of 2017 were favorably impacted by the Tax Cuts and Jobs Act that was signed into law in December of last year. Diluted EPS on a non-GAAP basis for the fourth quarter was $0.65 in 2017 and $0.50 in 2016, and diluted EPS on a non-GAAP basis for the 12 months was $2.56 in 2017 and $2.30 in 2016. Non-GAAP diluted EPS in 2017 is adjusted to exclude the favorable impact of the Tax Act.

Adjusted EBITDA for the company was $89.9 million for the fourth quarter this year compared to $73.8 million for the same period last year. Adjusted EBITDA for the 12 months was $362.7 million versus $342.5 million a year ago.

At December 31, 2017, the company had $51 million of cash on hand compared to $309 million of cash at the end of 2016. Cash generated from operating activities was $158.1 million through the 12 months of 2017. During the year, we reduced our total debt by $135 million, and at the end of December, we had a net debt-to-capitalization ratio of 15.2%, total debt to EBITDA of 1x and no outstanding balance on our $400 million revolving credit facility.

As John stated earlier, our company has benefited from the recently passed tax reform act. In addition to the reduction in the federal statutory rate, our lease merchandise purchases are eligible for immediate expensing under the new law. The accelerated depreciation for tax purposes was applicable to assets acquired after September 27, 2017. The tax expense generated by merchandise purchases after September 27, 2017, resulted in an overpayment of our 2017 federal tax liability. We have filed for and expect to receive a 2017 tax refund of approximately $75 million in the first half of 2018. The provisional $137 million or $1.90 per share tax benefit recorded in Q4 2017 was driven by the revaluation at the new lower rate of our approximately $970 million deferred tax liability, offset slightly by the loss of other tax credits.

During the year, we repurchased 1,961,442 shares of common stock for $62.6 million. 753,000 shares were repurchased in the fourth quarter of 2017 for $28.2 million. As we announced this morning, the board has replaced our existing share repurchase program with the new authorization to repurchase up to $500 million of common stock. Consolidated customer account increased 9.5% to 1,768,000 at December 31, 2017, up from 1,614,000 a year ago.

On a consolidated basis, the company currently expects to achieve the following for fiscal year 2018: revenues of approximately $3.68 billion to $3.89 billion; adjusted EBITDA of $380 million to $413 million; GAAP diluted earnings per share in the range of $2.90 to $3.20; non-GAAP diluted earnings per share in the range of $3.20 to $3.50; and capital expenditures in the range of $70 million to $90 million. The above EPS guidance does not assume any repurchases under our newly authorized $500 million share repurchase program. As for the balance sheet, we have scheduled debt amortization of $95 million in 2018, all of which will be paid in the first half of the year.

While we have a practice of providing annual guidance and not giving multiyear projections, since the Tax Act provided multiyear visibility, we wanted to give you a sense of our estimates for the cash tax impact over the next 3 years. As we have said, we will benefit from the lower statutory federal rate, but the primary driver of cash tax timing for us is the immediate expensing of our lease merchandise. At this point, we estimate a total 3-year cash tax benefit versus the previous tax law in the range of $500 million to $600 million, driven by the temporary timing differences of immediate expensing. Our estimated tax rate for 2018 in expected to be in the range of 24% to 24.5%. Had the Tax Act not been passed, we were previously expecting a 2018 tax rate in the range of 36% to 36.5%.

With that, I'll turn it back over to John before we move on to Q&A.

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John W. Robinson, Aaron's, Inc. - President, CEO & Director [7]

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Thank you, Steve. We're pleased with Progressive's continued momentum and the progress we're making to further transform the Aaron's Business. I'm very proud of the record financial performance the team delivered in 2017. We have great talent in the organization, a strong balance sheet and a well-defined strategy that we believe will increase the long-term value of the company.

I want to close the call by thanking all of our associates, franchisees and retail partners for your efforts to deliver the best value proposition to our customers. We appreciate your commitment and all you do to make Aaron's such a success.

With that, I'll turn it to the operator for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question will come from John Baugh of Stifel.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [2]

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Let's start with core, and it looks like the margin trends there are quite positive. I'm wondering how the acquisition of your largest franchisee influenced that or if you could separate the margin improvement outside of that. And then, Doug, as I heard you talk about leading indicators and I think the leverage was one of them you delved into, but I'm curious as to what other metrics you might be looking at that are favorable. And then is there any way, Douglas, to give us a sense of traffic? I know ticket's up, and it sounds like comps are trending. I'm just curious as to whether traffic numbers are indicating less that, if you will, as well.

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Douglas A. Lindsay, Aaron's, Inc. - President of Sales & Lease Ownership [3]

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Sure. Thanks for the question. So as far as the acquisition of SEI, it's meeting our profit expectations for the quarter. We're not separately disclosing that, but that integration has gone really well. And Dave Edwards and team are fully integrated, and as a matter of fact, Dave is taking on some additional responsibilities within the organization, which we're excited about. So that is fully on track, and that was also built into our Q4 and full year guidance. So everything is good there. In terms of the metrics, our leading indicators, as I mentioned, are positive. And when we talk about leading indicators, we're talking about what we're really putting into the portfolio. Those are both the combination of improvement in the trends and our deliveries and in our average ticket size. Steve Olsen, as I mentioned, his team are doing a great job, and our merchandising mix strategy and our trade-up strategy, which is driving average ticket size and also carrying over to higher-margin profitability in the business. In terms of traffic, I would say the traffic sort of trends exactly with our deliveries, and so we're seeing improvement in traffic trends as well.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [4]

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Great. Jumping over to Progressive. Ryan, I heard a comment about the ranges of bad debt and write-offs trending higher but within those ranges, and you mentioned the mix and I guess a slightly more aggressive decisioning. I'm wondering if you could comment, is that all of the driver of that? I guess a different way to ask the question is, what, on a like-for-like basis, are your invoices doing in terms of performance on both the charge-offs and provision?

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Ryan K. Woodley, Aaron's, Inc. - CEO of Progressive Leasing [5]

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Thanks, John. As it relates to decisioning, we're deploying a range of strategies. Obviously, prefer not to discuss specific strategies for competitive reasons, but we're constantly testing and evaluating new strategies. That's the job of the risk team, and they're doing excellent work. We're getting better and better at forecasting curve performance earlier in the life of lease pools and constantly monitoring a range of performance indicators to give us a sense for how those pools are performing. It's one of the areas we talk about when we talk about investing in people and systems. We have a larger team there, and they're leveraging more data and insight, and that's contributing to our ability to make better decisions. As you mentioned, we reference this range for bad debt at 10% to 12%. And over the last couple of years, we've hovered more around the lower end of that range, and we feel we're leaving a little bit of money on the table by doing so. Our ongoing strategy with decisioning is to capture more of that opportunity, and that's really what the goal is as it relates to our decisioning strategies.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [6]

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So we should expect maybe like-for-like invoices to have slightly higher charge-offs and/or bad debt, but the metrics tell you that that's a better return on capital. Is that a fair assessment?

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Ryan K. Woodley, Aaron's, Inc. - CEO of Progressive Leasing [7]

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Yes. If you think about it, yes, that's a fair assessment. If you think about our ability to optimize the return of portfolio, we're thinking about is the leverage we can move to drive those returns. And if we're solving for more dollars of absolute profit, we've identified ways to achieve that through further optimization of our decisioning models. And while that may drive higher revenue per lease, it may also drive slightly higher bad debt expense or write-offs but yield our target returns, which still keep us in the range of the guidance we provided for -- of the ranges that we provided for bad debt and write-offs, but also help us to achieve that 11% to 13% EBITDA margin that we spoke about.

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John W. Robinson, Aaron's, Inc. - President, CEO & Director [8]

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And John, this is John Robinson. One thing I'd add to that is, ultimately, we're trying to get to what Ryan said, a target EBITDA margin range of kind of 11% to 13% and doing that while really aggressively pursuing this large unserved market opportunity. So we still think it's a really large market with a lot of unserved retailers out there. And when you have that, coupled with the fact the business is growing, it grew 30-plus percent in Q4, if that growth rate and with the opportunities we have in the pipeline, we're building well ahead from an OpEx perspective of the current size the business is today. So it's definitely not -- we're not in a short-term profit maximization strategy right now. We believe the right long-term decision is to go after this big market and to build ahead to be ready for it and to continue to innovate our product to be better for our retailers, to reduce our cost to serve in the future. And so when you're doing that, you're not necessarily trying to maximize your short-term EBITDA margin. We think it's the right long-term decision, but we feel like there's -- if we wanted to, if we wanted to lean the business out from an OpEx perspective, to do that this year, we could. It's just we don't think the right long-term decision to make right now, given where we are in the market.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [9]

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Okay. And if I didn't know better, I would think you guys were in charge of rewriting the tax code. But thanks for the color on the cumulative benefit. I'm curious if you have a sense of what, if any, cash taxes you'll pay in the next 3 years. Would it all be state? And roughly, how much you might guess you'd actually pay in cash taxes over the next 3 years?

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Steven A. Michaels, Aaron's, Inc. - CFO & President of Strategic Operations [10]

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Yes, John. This is Steve. We will obviously be paying state taxes, which don't change all that much. There's some puts and takes with federal credits and state credits. But we won't -- we don't expect to be paying any federal cash taxes in '18, certainly in '19 as well. And then there's the provisioning in the tax code that talks about NOLs and only being able to apply it to 80% of taxable income. So you get it further out on the spectrum, and we should start paying some federal cash taxes. But the state cash taxes are somewhere in the range of $15 million to $25 million per year.

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Operator [11]

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The next question will be from Bill Chappell of SunTrust.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [12]

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Just first on the Aaron's stores and trying to understand if there's a way to break out how positive in terms of the quarter was just the good overall holiday season versus how much on -- from an execution standpoint or if there's even a way to look at that.

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Douglas A. Lindsay, Aaron's, Inc. - President of Sales & Lease Ownership [13]

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Yes. Bill, it's Douglas. So we had a strong holiday season. I think that was highlighted by really sort of the merchandising strategies that I've discussed. We had -- we offered to opt-in our promotions, products that were more aspirational. And so the straight-up strategy, where we put a product out there that is of a higher-end product and we attract it with a low first payment, was really driving a lot of volume and also driving higher ticket price and margin. And we think that was a real benefit. In terms of overall, we also got the benefit in the quarter of our close/merge strategy, which we're annualizing, and that also helped contribute to margin where we had more effectively revenue dollars per store in the portfolio.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [14]

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Okay. And just trying to tie that in, in the guidance, it's kind of an expectation of declines on that business or your business until you get to the fourth quarter where it will flatten out, and I would assume you'll have the toughest comps in the fourth quarter. So help me understand what's -- are things accelerating throughout the year and you don't really see this fourth quarter that was better than expected as really a tough comp?

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Douglas A. Lindsay, Aaron's, Inc. - President of Sales & Lease Ownership [15]

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Yes. I mean, a lot of it is the nature of the portfolio of business. We have a portfolio that we manage every day, and we add deals into the portfolio and churn deals out of the portfolio. When we talk about our leading indicators improving, we're seeing a lessening of the decline in our deliveries that are going into the portfolio, which is an improving trend. We're seeing higher ticket or higher-value deals going into the portfolio, and we're churning out fewer agreements out of the portfolio. Another way to say that is we're retaining more customers in the portfolio. So what's happened over the last year and will continue is we're churning out lower-value deals and replacing it with higher-value deals, which we think begin to comp over themselves in the third and fourth quarter of next year.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [16]

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Got it. And the last one for me, just any difference from the competitive landscape, especially Rent-A-Center as they go through their various iterations, either on the stores or on the Progressive side? Are you seeing any change in how they're competing? Or is it fairly normal over the past -- or fairly the same over the past 3, 4 months?

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John W. Robinson, Aaron's, Inc. - President, CEO & Director [17]

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Bill, it's John. I would say that the competitive environment continues to be robust from both sides of the business, and we haven't honestly seen any difference from Rent-A-Center. They're a good competitor and remain that in the market, both on the virtual side against Progressive and in the stores on the Aaron's. And in terms of the Progressive side of business, there's a lot of competitors, and that really hasn't changed. It's been competitive for years now, and it continues that way. And the stores, obviously, have been that way as well. So no real change there.

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Operator [18]

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The next question will come from Brad Thomas of KeyBanc Capital Markets.

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Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [19]

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Wanted to follow up on the Progressive side first. Ryan, if I heard you right, I think you said that the approval rates declined slightly. Any more color you could provide around that, if I heard you correctly? Any nuance that we should think about as you think about maybe different product categories or types of partners or the tenure of your relationship and maybe how that's affecting how that approval rate's tracking?

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Ryan K. Woodley, Aaron's, Inc. - CEO of Progressive Leasing [20]

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Yes, good question. I think your intuition is probably spot on there. Approval rate is one of those things that's influenced by several factors. If you think about the mix of doors in the portfolio, that'll obviously drive approval rate, changes in approval rate as well as the mix of application channels. So as you might expect, for example, as it relates to doors, you might expect a lower approval rate in a prepaid mobile retailer as compared to a betting retailer, as an example, or by channel, you might expect a lower approval rate online than you would in the store. And so as online apps continue to increase, that'll be a factor as well. If you control for all those factors on a same-store basis, if you will, I'd say it's roughly flat year-over-year. But those are the factors that influence trends and approval rate from period to period outside of specific decisioning strategies.

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Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [21]

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Great. Ryan, and as we think about your expectations for the quarters ahead here, how do you think your approval rates [may influence]?

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Ryan K. Woodley, Aaron's, Inc. - CEO of Progressive Leasing [22]

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The approval rates, one of those that's -- it's -- I don't have a number for you, but what I expect that to be in '18 is going to be influenced by the shift in mix, and it's going to be influenced by decisioning strategies. It's one of the elements we keep in mind when we're thinking about sort of titrating our decisioning strategies, along with approval amount and other things.

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John W. Robinson, Aaron's, Inc. - President, CEO & Director [23]

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And the thing I'd add to that, Brad, is these are -- Ryan mentioned on an earlier question, we have a big team working on this, and they're constantly testing strategies. And these are -- it's an evolution, and they're very incremental changes that get made. But their job is to continue to change and continue to evolve. So there are always incremental changes, but I guess I would emphasize that there's small changes as we go. We try to make very small changes that we understand and then we watch, and we make sure that we test it out or validate it with results. And then the other piece to remember is that because the duration of pool is so short, it's about 7 months, and the Progressive leases are 12 months in total and the average life is about 7, we have a very fast feedback loop. So we can have a lot of visibility into the performance. And then when something's changing, we can change it quickly inside of a year, even to affect performance. So we can adapt and move pretty quickly and agilely, and that's important to remember about this. So we're constantly kind of tweaking that on an ongoing basis, but small changes.

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Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [24]

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That's great. And just as we think about the door and account side of things for Progressive, obviously, 2 big account wins in Conn's and Signet. It'll continue to ramp up in 2018. As we think about your revenue guidance for Progressive for 2018, what's assumed in terms of the ramp at doors that you're already in versus new doors that you're expecting to open then?

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Ryan K. Woodley, Aaron's, Inc. - CEO of Progressive Leasing [25]

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Yes, good question. So I think you hit the nail on the head there as we think about the impact of the folks that we onboarded in 2017. We obviously expect to continue to see those doors and churn of the portfolio and perform -- produce well for us. And we also, as you might imagine, added quite a few doors that aren't -- that are in the regional level as well to contribute to the overall door growth. Those are going to mature for us into 2018, and we obviously expect to convert on the pipeline in 2018, as we did in 2017. And those factors are what are contributing to the invoice and revenue forecast for '18. But very excited about continuing to see those new opportunities ramp well and excited to see the progress of opportunities that sit in the pipeline today.

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Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [26]

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Perfect, perfect. And Steve, if I could ask one more follow-up on the free cash flow. I was hoping to just try to bridge maybe what your total free cash flow might look like here for 2018. If I've got this right, it sounds like you've got $75 million from taxes paid in '17 that you'll get back. It sounds like somewhere in the $100 million, maybe even $200 million that you've saved from the new code and then your underlying cash flow from your business. What do you think the ultimate free cash flow might be here for 2018 on the year?

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Steven A. Michaels, Aaron's, Inc. - CFO & President of Strategic Operations [27]

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Yes, Brad. I mean, we don't expect to pay cash taxes, as you alluded to, and then we'll get the refund. And so we -- in CapEx, there's a slight increase as we do a little bit more maintenance CapEx in the stores, but not material as you see from the guidance. So I would say, it'll be in the ballpark of $200 million on the free cash flow side.

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Operator [28]

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The next question will be from Kyle Joseph of Jefferies.

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Kyle M. Joseph, Jefferies LLC, Research Division - Equity Analyst [29]

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You guys talked about the tax reform impacts on your business. Can you give any commentary on any potential impacts on your customers?

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John W. Robinson, Aaron's, Inc. - President, CEO & Director [30]

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Yes, Kyle. It's John. We think as -- overall, it should probably help. We think it'll increase their take-home pay a bit, which should be positive. And to the extent jobs are created out there for this, it also should help. So generally, I would say a net benefit, but we haven't really factored that into any of our forecasts necessarily. And in terms of what we're seeing in our business, we haven't seen a change to date. Obviously, it's early in terms of the tax bill. But just in general, we haven't seen any change, certainly not getting worse, but no change that's noticeable to us.

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Kyle M. Joseph, Jefferies LLC, Research Division - Equity Analyst [31]

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Got it. And also related to taxes, can you give any commentary on the tax refund season, if there's been any impact there as a result of tax reform? I know they were delayed last year, and I've heard they were going to be delayed this year. But any thoughts there?

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Steven A. Michaels, Aaron's, Inc. - CFO & President of Strategic Operations [32]

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Yes, Kyle. This is Steve. We -- they have not started yet, not that we've observed anyways. In the last year, the refund started hitting, and we saw it both in our call centers at Progressive and in our stores at Aaron's around February 21st, and we're thinking it'll be plus or minus 2 or 3 days of that this year as well. So it has not started yet that we've observed.

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John W. Robinson, Aaron's, Inc. - President, CEO & Director [33]

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But our expectations, it'll continue to -- and we think the expectations call -- we think it'll have the same impact as it normally does for our business whenever it starts, so.

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Kyle M. Joseph, Jefferies LLC, Research Division - Equity Analyst [34]

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Understood. And then macro. I know you commented on the competitive environment, more specifically to rent to own. But just more broadly, can you comment on the availability of credit to your customers that you've seen recently?

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John W. Robinson, Aaron's, Inc. - President, CEO & Director [35]

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I don't know that we've observed a change there recently. I mean, you certainly can look ahead, and if rates rise, perhaps, there, credit tightens to some extent, and that could potentially be a tailwind for us. It could help from a demand perspective, but we haven't noticed that recently.

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Operator [36]

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The next question will come from Laura Champine of Roe Equity Research.

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Laura Allyson Champine, Roe Equity Research, LLC - Senior Analyst for Consumer and Retail [37]

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Could you comment on your thoughts on the M&A environment and how those might shift, given the increased cash available to you with tax reform?

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Steven A. Michaels, Aaron's, Inc. - CFO & President of Strategic Operations [38]

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Sure. Laura, it's John. In terms of kind of -- I'll kind of take it broader. In terms of our excess cash, tax reform and kind of our capital allocation strategy, our first priority is really to continue to invest in our businesses. On the Progressive side, we've got a lot of growth opportunities we discussed. On the Aaron's side, we've gotten a lot better at our testing and analytics. So I think we're doing a much more efficient job of figuring out where to invest before scaling concepts. And so the first part of that was to continue to build those businesses because we feel great about both of them. In terms of M&A, we're going to continue to be opportunistic, and we're out there looking. We have a team that's out there looking for opportunities that can help us from a technology perspective or product that we may not have that may enable us to serve more customers and so -- or to serve our customers better. And so that's kind of what they're out there doing, but we're going to be opportunistic and disciplined about that. And we might buy some more franchisees back in the future. I would expect we would. We don't have anything planned at this time. But to the extent there are opportunities that are attractive, that may be something that we do in the future. We want to maintain a conservative capital structure, so that's been important to us, and will continue to be important. It gives us a flexibility and allows us to be opportunistic, and we're kind of targeting like a 1x to 1.5x debt to EBITDA as kind of an area kind of right where we are now that we feel good about. And then beyond that, we're going to continue returning cash to shareholders. So we've had a history of that. We've raised dividend 15 straight years, I believe, and we've bought back stock. And so the $500 million announcement is really to let investors know that over the next several years, we expect to continue to buy back shares and all the while maintaining this conservative balance sheet and continuing to invest in our businesses.

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Laura Allyson Champine, Roe Equity Research, LLC - Senior Analyst for Consumer and Retail [39]

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John, along those lines, as you -- on investing in your business, your CapEx guidance does seem to indicate some significant growth, and I doubt that's to open core stores. Where do you think those incremental investments are made? If you can just give us more color on the specific projects.

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Steven A. Michaels, Aaron's, Inc. - CFO & President of Strategic Operations [40]

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Yes. Laura, this is Steve. I mean, we're obviously -- the CapEx is up slightly from -- not a huge increase, but it's up from last year. But we've got -- we do have a fleet of stores out there, and they need to be remodeled or repainted and splash and dash, if you will. So there's some increase in maintenance CapEx across the fleet of stores, and we think that's a good use of capital. And obviously, we're continuing to invest in systems and technology and hardware to -- on both sides of the business. So that's really where the increases are coming from.

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Operator [41]

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The next question will come from Anthony Chukumba of Loop Capital.

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Anthony Chinonye Chukumba, Loop Capital Markets LLC, Research Division - SVP [42]

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My first question is a clarification question. So in the -- in your press release, you say that the Progressive active doors were up 10% to approximately 20,000. Is that 10% year-over-year? Is that sequential? Because I was looking at my notes from last quarter, and it looked like your Progressive active doors was 20,000 then as well. So I guess I was a little confused by that, so if you can clear that up for me.

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Ryan K. Woodley, Aaron's, Inc. - CEO of Progressive Leasing [43]

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Yes. That was a -- that's a year-over-year stat, not a sequential stat. And I think some of the confusions admittedly, partly on our part, as we at times refer to an active door count in the quarter and then an active door count annually, which may be causing the confusion there. But the stat we gave in the release was year-over-year for the quarter.

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Anthony Chinonye Chukumba, Loop Capital Markets LLC, Research Division - SVP [44]

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Okay, that's helpful. And then my second question or last question was back to the Aaron's Business. You talked a little bit about SEI now it's fully integrated. It's on track to meet the expectations. Do you think that any of the improvement that we saw in the fourth quarter in the Aaron's Business was due to sharing of best practices from SEI? Because I know that's something you had talked about when you first announced the acquisition.

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Douglas A. Lindsay, Aaron's, Inc. - President of Sales & Lease Ownership [45]

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No, Anthony. This is Douglas. It's really too early to really discern any lift from that. As I said, some of the talent that we brought down at the SEI acquisition is taking broader roles within the organization. But fourth quarter, really late third quarter, early fourth quarter is really a time of integration for us in the SEI transaction. We're on target there and hope to see benefits in 2018.

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John W. Robinson, Aaron's, Inc. - President, CEO & Director [46]

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Yes. Anthony, if you remember, I mean, the acquisition kind of came onboard right about the time we hit all these hurricanes, and so it was a pretty difficult time, kind of September, October, because of that. And so a lot of the attention that was to be focused on the integration obviously went into kind of recovering from these hurricanes. And so I applaud the team for the results they delivered despite the fact that it was a difficult time operationally during the fall, just because those storms are so disruptive across our system in the Southeast. It was tough in Texas. It was a tough time. So we hope to -- in the future as we talk about, as their team gets more integrated in our's and Douglas has done a great job of his team of getting them integrated, I think that's opportunity going forward.

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Operator [47]

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(Operator Instructions) The next question will come from Brian Hollenden of Sidoti.

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Brian Christopher Hollenden, Sidoti & Company, LLC - Research Analyst [48]

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Can you provide some more color on DAMI? Your guidance for the segment in 2018 is still for negative EBITDA. When do you expect an improvement in that segment? And has it met your expectations since the acquisition?

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Ryan K. Woodley, Aaron's, Inc. - CEO of Progressive Leasing [49]

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Yes, Ryan here. It has. We're happy with the progress that DAMI is performing in line with our expectations and fulfilling strategic objectives we had in mind when we acquired the business back in 2015. The team's doing a great job there. We've, obviously built out the team, built out the infrastructure and the ideas that it will -- it's better positioned now than it was a year ago or 2 years ago to support future growth in the business. So we're happy with where it's at.

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John W. Robinson, Aaron's, Inc. - President, CEO & Director [50]

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Let me add to that, that -- listen, 2017 was a big year in terms of infrastructure and a lot of projects that don't get -- they don't show up necessarily positively in the P&L, but position the business for the future. And Ryan Ray and his team did an excellent job this year of accomplishing a number of those milestones to kind of position the platform better for the future. So as Ryan said, it's -- they performed in line with what we thought, and we feel good about it from a strategic standpoint going forward.

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Brian Christopher Hollenden, Sidoti & Company, LLC - Research Analyst [51]

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And sorry if I missed this, but invoice volume per active door increased 24% in the quarter. With 2018 guidance, how much of revenue growth is based on invoice volume compared to new active door growth?

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Ryan K. Woodley, Aaron's, Inc. - CEO of Progressive Leasing [52]

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Yes. I don't -- unfortunately, I don't have that number in front of me. Obviously, we're pretty excited about the new accounts that are driving that strong increase in invoice per active door. There's a little bit of pressure early in the life of onboarding large numbers of doors because they need to mature into productivity, and we're seeing the benefits of that now, which is obviously modeled into the 2018 results, but pretty excited about how it's shaping up.

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Operator [53]

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And ladies and gentlemen, at this time, we will conclude the question-and-answer session. I would like to hand the conference back to John Robinson for his closing remarks.

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John W. Robinson, Aaron's, Inc. - President, CEO & Director [54]

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Thank you. And we appreciate your interest in Aaron's, and we look forward to updating you on our first quarter results on our next earnings call. Thank you.

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Operator [55]

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Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. You may now disconnect your lines.