Alliance Data Systems Corporation ADS CEO Ed Heffernan on Q2 2018 Results
canada goose clearance Good morning and welcome to the Alliance Data Second Quarter 2018 Earnings Conference Call. At this time, all parties have been placed in a listen only mode. Following today’s presentation, the floor will be open for your questions. [Operator Instructions] In order to view the Company’s presentation on their website, please remember to turn off your pop up blocker on your computer. canada goose clearance
It is now my pleasure to introduce your host, Ms. Vikki Nakhla of AdvisIRy Partners. Thank you. The floor is yours.
cheap Canada Goose Thank you, operator. By now, you should canada goose clearance have received a copy of the Company’s second quarter 2018 earnings release. If you haven’t, please call AdvisIRy Partners at 212 750 5800. On the call today, we have Ed Heffernan, President and Chief Executive Officer of Alliance Data; and Charles Horn, Chief Financial Officer of Alliance Data. cheap Canada Goose
Before we begin, I would like to remind you that some of the comments made on today’s call and some of the responses to your questions may contain forward looking statements. These statements are subject to the risks and the uncertainties described in the Company’s earnings release and other filings with the SEC. Alliance Data has no obligation to update the information presented on the call.
canada goose uk outlet Also, on today’s call, our speakers will reference certain non GAAP financial measures, which we believe will provide useful information for investors. canada goose uk outlet
canada goose factory sale With that, I’d like to turn the call over to Ed Heffernan. Canada Goose Parka Ed? canada goose factory sale
Great. Thanks, Vikki. And good morning, everyone. Joining me today as always, is Charles Horn, our CFO, and he will provide an update on the second quarter results. And then, I’ll add some color and update our 2018 outlook. We plan to keep the prepared remarks to about 20 minutes, so we can dedicate more time to Q Charles?
Canada Goose Parka Let’s turn to slide four and talk about the consolidated results. Pro forma buy canada goose jacket revenue increased 8% to $1.97 billion for the second quarter 2018, led by double digit growth at LoyaltyOne and Card Services. EPS increased 59% canada goose black friday sale to $3.93 for the second quarter of 2018, aided by onetime foreign tax benefit, which reduced the GAAP effective tax rate to approximately 14% for the canada goose coats second quarter. Core EPS increased 31% to $5.01, using a core effective tax rate of approximately 24%, which excludes the one time foreign tax benefit. Lastly, we spent approximately $100 million on share repurchases during the second quarter while dropping our corporate leverage ratio to 2.5x compared to our covenant of 3.5x, and the end of Q1 2018 of 2.7x. Canada Goose Parka
Let’s go to the next slide and talk about the hot topic of the last few days, delinquencies. Even though delinquency trends improved during the quarter, as shown on the chart, the delinquency rate of 5.5% at quarter end was above our expectations. The miss was primarily due to the influence of TDRs, modified accounts and during the first quarter 2018 primarily from FEMA designated disaster areas.
What is the TDR? It is essentially our hardship program which is designed to help card holders with extenuating circumstances get back on their feet after an event, such as a hurricane. The program reduces minimum payment rates, lowers interest rates and suspends late fees. The maximum timeframe an account can stay in the program is 12 months and the accounts are not allowed to bounce into in out of the program. As you saw in the first quarter 10 Q, we added a number of accounts into the program following the natural disasters like last year.
canada goose coats on sale It is important to note the TDR accounts are not removed from delinquency canada goose clearance sale calculations which can create noise in the delinquency trends. Why? Because there are three outcomes. The first, the account makes the payment and stays in the existing aging bucket; second, the account makes three consecutive payments and returns to current status; and third, the account misses two consecutive payments or three payments over 12 months is removed from the program and ages to charge off. canada goose coats on sale
As accounts are added to the TDR program, a higher reserve rate is applied to these balances, assuming there’s a higher probability of later default. Reserve rate for TDRs is currently at 28%. We feel good that our allowance for bad debt reserve is adequate. For June, we were wrong about the timing of the recidivism. It was a little faster than expected. TDR accounts in the mid to late stages of delinquency who have not met the payment requirements have begun to roll to charge offs and will do so in the next several months. Past program experience suggests the majority of the drag should resolve by the end of the third quarter.
canada goose uk black friday In summary, there are two important takeaways. The first, the high reserve rate for TDRs covers off any future P risk; and second, any pressure to net loss rates from recidivism in our TDR program will be mitigated by improving recovery rates. Accordingly, we remain confident that we’re tracking to approximately a 6% net loss rate for 2018. canada goose uk black gooseoutletvip.com friday
canada goose clearance sale Let’s go to the next slide and talk about our segment results. Starting with LoyaltyOne, pro forma revenue increased 12% to $315 Canada Goose Jackets million. Breaking down the quarter, AIR MILES pro forma revenue increased 1% from the second quarter of 2017. Importantly, AIR MILES issued increased 2% compared to the second quarter of 2017, benefiting from increased promotional activity by the Bank of Montreal. BrandLoyalty’s revenue increased 34% from the second quarter of 2017 as customer bookings were up double digits from the prior year. As we have talked about before, some bookings are event driven and the FIFA World Cup helped the second quarter. canada goose clearance sale
Turing to Epsilon. Revenue decreased 5% to $514 million. Similar to the first quarter, agency revenue dropped more than 20% due to client losses in the Canada Goose Outlet CPG sector from consolidation and budget cuts. Importantly, strong expense management and the favorable shift in revenue mix allowed us to increase EBITDA margins and maintain the same level of adjusted EBITDA as the second quarter canada goose outlet 2017.
Canada Goose sale Lastly, Card Services revenue increased 14% to $1.15 billion, consistent with the growth rate in average card receivables. And adjusted EBITDA in that increased 10% to $336 million. Net loss rates improved sequentially by 30 basis points as the recovery rates improved from high single digits in the first quarter to mid teens in the second quarter. The second quarter reserve rate remained at 6.8% and should drop over the remainder of 2018 as the net loss rates improve to the high 5% range in the third quarter and to the mid 5% range in the fourth quarter. Canada Goose sale
With that, I’ll turn it over to Ed.
uk canada goose If everyone canada goose deals could turn to slide 7, I guess, I would comment that the second quarter is probably the best quarter we’ve posted in terms of operational effectiveness in quite some time. Unfortunately, it was a bit overshadowed by the noise that Charles just talked about on the delinquency front that hopefully we can help over communicate today and in the future. uk canada goose
Canada Goose Jackets So, first on LoyaltyOne, it’s been a long road back ever since we had the issues in the program couple of years buy canada goose jacket cheap ago up in Canada where Parliament decided to change the laws around how we run the program. And so, we’ve been building, building, building really over the past year and a half. And finally, in Q2, we saw a return to double digit pro forma revenue and EBITDA. And LoyaltyOne includes both the Canadian AIR MILES business as well as our European based BrandLoyalty businesses. And so, the first return to double double in quite some time and it was really probably the big news, was the key expansion by our largest client or sponsor in the AIR MILES program in Canada, which is Bank of Montreal, which essentially really decided to put their shoulder into it and added a real kicker in terms of additional incentives for people to use the card and use the program. So, that was a big vote of confidence from BMO and we appreciate it. Canada Goose Jackets
canadian goose jacket And then, finally, the key metric AIR MILES issued since we get paid based on the number of miles that are issued, which has been struggling ever since the model came into question, couple of years ago. And it’s been a long battle back. And we finally did in fact break above water in Q2 with a couple points of positive issuance for the first time in a year and a half, and that’s a very good sign. More importantly, as I look at it the outlook for Q3 and Q4, the momentum is beginning to pick up. And that suggests that we are past sort of the rebuilding stage and have returned now to growth, which is good news. canadian goose jacket
Okay. For the second half guide, we don’t see things slowing down. We see a continuation of strong results from both AIR MILES and from BrandLoyalty that we saw in the second quarter. And actually, we expect the key metric AIR MILES issued to actually accelerate in the back half. So, overall, I would suggest that LoyaltyOne is back on its feet and doing quite well.
uk canada goose outlet Epsilon, as we’ve guided to, we knew the first half would be soft. Revenue was down in the first half. But again, as Charles mentioned, this is primarily pass through, low margin agency business. Frankly, we’re deemphasizing those types of areas. And as a result, you saw the softness there. The adjusted, however we held for the first half, up 4% and cheap Canada Goose tracking to sort of that mid single digit guidance that we want for the year. We’re using some additional dollars from the tax windfall, as we mentioned last year, for additional development in our various digital channels. uk canada goose outlet
buy canada goose jacket Second half, we do have a decent visibility on mid single digit revenue and adjusted EBITDA growth. Both are probably big growth engines, the auto and the Conversant CRM revenue are tracking to canada goose coats on sale double digit growth. And that’s approximately half of Epsilon and the other businesses relatively stable or flat, and that’s where we get our mid single digits. And so, we’ll be talking more in Q3 as Epsilon begins to contribute along with the other two businesses. buy canada goose jacket
canada goose store All right. Let’s turn to slide nine, Card Services. Obviously, it’s been another very strong first half of the year, 14% revenue growth. EBITDA growth started soft due to the higher loss rates and then moved from a minus 4% in Q1 to plus 10% in Q2. And that’s really being driven by the loss rates continuing to tick down as we move throughout the year. We’ve got almost 20% average receivable growth for active programs, and 12% reported. I’ll get into that a little bit. And then, we also are spending significant dollars in the innovation funds to support various consumer, as we call them bells and whistles, on both the frictionless mobile initiatives, as well as building out our consumer deposit platform. canada goose store
Our second half guide is going to be very familiar in terms of the revenue and receivable growth because it looked very similar to the first half. The adjusted EBITDA again, which includes the cost of funds and the cost of bad canada goose store debt, will continue to ramp up. So, we did minus 4 in Q1, plus 10 in Q2, and we should be in the 20% range in the second half. The net loss rates, which again is the ultimate driver of the credit expense, we guided to a high 6 in Q1; we came in at 6.7. We guided to a mid 6 in Q2; we came in little better at 6.4. And we are currently tracking nicely to high 5s in Q3 and mid 5s in Q4. And as Charles mentioned, that will give us approximately 6% for the year. We believe the noise from the first half is largely gone. And the delinquency rates which caused the hubbub over the last week or so in fact did decline. They were up 60 basis points in April and they declined to up only 40 basis points in June. Importantly, the early stage delinquencies have narrowed to up 25 basis points in June, which bodes well through the future.
I do want to take two minutes to talk a little bit more and circle back to the June delinquency concern that Charles covered. We did guide to a significant improvement in year over year delinquency rates during Q2. The actual results did show improvement from 60 basis points over prior year in April to 40 basis points in June. While that was a significant improvement, we had in fact guided to even better results. We do not factor in those hardship accounts that still remain, neither cured nor written off. This overstated the June delinquency number by roughly 30 of the 40 basis points. And thus, the normal run rate would have been only about 10% higher 10 basis points higher than the prior year.
Why do we make the distinction? Well, probably, the simple reason is, these accounts are placed in hardship back in the first quarter of this year. And importantly, they were fully reserved for in the first quarter of this year at a 28% reserve rate versus our less than 7% rate for the entire portfolio. So, they were completely covered off in Q1. This means that the P hit was already taken in Q1. And whenever some portion of these accounts flow to write off and out of delinquency, it’s already been Canada Goose online covered in expense. So, internally, when we carve out these accounts, when we do our internal analyses, since they’re viewed as noise, since it’s hard to compare a 28% reserve versus the 7% reserve for the portfolio, you get a little bit of apples and oranges. Our internal analysis continues to support loss rates stepping down nicely from the high 6s, as predicted to the mid 6s as predicted to the high 5s and then to the mid 5s in Q4 when recoveries are fully ramped. Frankly, I do apologize for the poor communication and will try to over communicate going forward on these complicated items. The bottom line, however, is that the credit quality within the portfolio looks quite good and losses are trending down nicely to plan.
All right. Page 10, bunch of credit metrics that you can look at, at your leisure. What I’d like to do is get into little bit more detail of what we’re trying to do strategically Canada Goose sale with the business, which is starting on page 11.
Let’s talk about the first half credit sales. And when you look at the active clients, those are clients that are not in liquidation or bankruptcy or have been terminated. And if you look at just those active clients, our credit sales are up a very healthy 12% during the quarter. Even though the printed credit sales growth was only 2%, it was masked by the liquidating files of Bon Ton, Gander Mountain and Virgin America. So, what’s left is obviously doing quite well.