Good morning and welcome to Alliance Data's First Quarter 2018 Earnings Conference Call. At this time, all parties have been placed on 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 the pop-up blocker on your computer. It is now my pleasure to introduce your host, Ms. Emily Liu of FTI Consulting. Ma'am, the floor is yours.

Thank you, operator. By now, you should have received a copy of the Company's first quarter 2018 earnings release. If you haven't, please call FTI Consulting at 212-850-5682. 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. 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. Also, on today's call, our speakers will reference certain non-GAAP financial measures, which we believe will provide useful information for investors. Reconciliation of those measures to GAAP will be posted on the Investor Relations website at www.alliancedata.com. With that, I'd like to turn the call over to Ed Heffernan. Ed?

Great. Thanks Emily. Joining me today, as always, is Charles Horn, our CFO. He'll give you an update of the first quarter results. And then I'll come back on and update everyone with our 2018 full-year outlook. We'll keep our prepared remarks fairly short, so that we can have plenty of time for Q&A. Before I turn it over to Charles, I do want to discuss probably one of the questions we've been getting quite a lot of, obviously, with the whole issue surrounding data in Facebook and everything else. I think that folks tend to mistakenly lump us in as a data broker, and that's not what we do as a business. And so probably, the best way to explain it, I guess, would be to give an example of what we do as a company. So for example, let's say, Epsilon works with a major hotel company. And the hotel company might provide data about its own customers to Epsilon for use in developing and implementing some type of marketing and loyalty campaigns. It's key to note that these customers have already opted in through the hotel company itself. So this type of data is known as first-party or self-reported data because the hotel company's customers would have provided the information when they filled out their profiles for the loyalty program and, most importantly, given their consent for marketing purposes. Now what we'll do is we might combine that data with compiled data, such as demographic information from public records or transactional data, such as purchase data, to help the hotel company's ads or messages reach consumers who are most likely to be interested in that offer. The bottom line is these are overwhelmingly programs that are run using data that has already been opted in on behalf of the clients' consumers. And so from a data broker perspective, again, that's not what we do. There is a very, very small piece of Epsilon, which is less than 1% of ADS, where there are some third-party sales to outside players, but, again, it's de minimis and really doesn't relate to our business, whatsoever. So I think we've got lumped in with a bunch of other folks when, in fact, what we do is we overwhelmingly use folks' opt-in information for our programs. So with that, being said, why don't I turn it over to Charles.

Thanks Ed. Pro forma revenue increased 4% to [indiscernible] for the first quarter of 2018 led by strength at Card Services. EPS increased 14% to $2.95, while core EPS increased 13% to $4.44 for the first quarter. As expected, higher loss rates associated with our decision to in-source collection and charged-off accounts to press first quarter core EPS by approximately $0.60 or 15 points of drag on growth. While the shift in strategy was punitive to the first quarter, we believe that will benefit net loss rates and earnings moving forward. Let's go to the next slide and talk about the various segments. Starting with LoyaltyOne, pro forma revenue decreased to 8% to $305 million. If we break down the quarter, AIR MILES pro forma revenue increased 30% from the first quarter of 2017. Issuance was basically flat for the first quarter of 2017, where consumer sentiment continues to improve and promotional activity has started to pick up. BrandLoyalty's revenue decreased 22% from the first quarter of 2017, essentially hangover from a soft fourth quarter of 2017. Customer bookings have accelerated and now aggregate 90% of the number needed to hit the 2018 revenue target. Turning to Epsilon. Revenue decreased 4% to $509 million. We expected a modest start to the year, as we had a tough grow-over. It was a very strong first quarter of 2017. In addition, agency revenue dropped over 25%, primarily due to CPG pressure, creating a 5 point drag on total revenue growth. On a positive note, the shift from lower profitability agency business increased adjusted EBITDA margins by 2 points for the quarter. Lastly, Card Services revenue increased 13% to $1.16 billion, consistent with the growth rate in average card receivables, while adjusted EBITDA net decreased 4% to $319 million due to a $50…

Great. So why don't we go back now and talk about 2018 full-year guidance and what's changed or not changed. Essentially, nothing's changed. So what we laid out beginning of the year continues to be the case. And as we mentioned, Q1 at 13% growth and 4% pro forma topline growth, which should be at their softest of the year. From an overall consolidated basis, we continue to look for overall reported revs of about 8%. And then on a pro forma basis, we do apples-to-apples for the accounting adjustment. We're looking at closer to 12% topline growth and core EPS growth of anywhere between 16% and 19%. Those numbers look solid to us today. And if you were to look at it by how we're going to sequence it first quarter, your pro forma revenue is about 4%. We expect that to trip to about 10% in Q2. And we expect core EPS to continue to move up into mid-teens or a bit higher. And then from there, we expect, obviously, as losses and, therefore, reserve rates continue to start drifting downward, we would, obviously, expect an acceleration thereafter. So overall, I think the year looks solid from what we initially had thought and so far, so good. In terms of Slide 9, the individual units themselves, LoyaltyOne, no change there, we expect high single-digit pro forma revenue and low double-digit adjusted EBITDA growth. We expect BrandLoyalty, which has had a very difficult year last year, will return to strong double-digit growth in the current quarter right now. And AIR MILES issued actually came in a bit better in the first quarter, was essentially flat, and it's trending in the right direction as we go through second quarter and into the back half of the year. So we want…

[Operator Instructions] Your first question comes from the line of Sanjay Sakhrani with KBW.

Thanks. Good morning. So I guess, to me, the story is really about your comfort on revenues for the non-card businesses and, obviously, the provisions for the card business. Perhaps, on the first point, the guidance that's up for a back-half loaded boost in the revenues in the non-card businesses. What is the risk that those aren't achievable? Maybe some of the execution or risks associated with not achieving those targets. And then on the provision, it seems like we should see a meaningful decline in the delinquencies given the hurricane charge-offs in the second quarter that come off, right? And so that should give us confidence on those. And then on the recoveries, could you just maybe just help us think about whether or not that would be a benefit in the second half since you've been building up inventory associated with that? Thanks.

Sure. I'll take a stab. And then Charles can add some color to it. In terms of the non-card businesses, I think that what we're seeing in the AIR MILES business in Canada was that the issuance level, which we expected to be a few points negative in the first quarter, actually came in relatively flat. It looks like we're going to break our head above water as we move into the summer based on some promotional activity that we didn't see last year that we now know is in the pipeline. And so that gives us some comfort that the Canadian business is finally moving back into growth mode. In terms of BrandLoyalty, which is our European-based business, which had a very disappointing year last year, it's all about the book and how much of the book has been built. And we're looking at about 90% of the book. It is solid at this point, which suggests your downside risk is relatively modest if the final 10% doesn't come through. And then on Epsilon, I mean, it's the same type of story in terms of it does chop a little bit quarter-to-quarter, but their toughest comp was the first quarter. And it should get progressively easier from there. And based on what we're seeing in terms of new clients signed and attrition rates, I think the type of growth that we're targeting is certainly doable.

And Sanjay, on the delinquencies, you're right. As the hurricane impact flows out in the second quarter, you should see delinquencies come in. What that means is from a reserve rate, we were at 6.8% reserve rate in Q1. That should drop over the course of 2018. I could see it being very similar at the end of the year to what it was at the end of 2017. On recoveries, you're correct that toward Q3, it could be a net benefit to our loss rates based upon some of the trends we're seeing right now.

Is there any quantification you can give on that, like now it's a headwind, it will become a positive impact effect?

I guess, the way we'd break it down, if you look at the recovery rates, it was a single-digit number in the first quarter, think of it 8%, 9%. Let's say, when you move into the second quarter, mid-teens. Then you're getting close to anniversary-ing what it was the prior year, where we run around 16%. So that means by Q3, Q4, we should be in a position to be beneficial. Meaning, it's going to be north of what it was the prior year. Could be 17%, 18%. As Ed talked about in the last quarter earnings call, could be at a run rate end of the year north of 20%.

Okay. Great. Thank you.

Your next question comes from the line of Ramsey El-Assal of Jefferies.

Thanks for taking my question. I wanted to ask about the Epsilon performance this quarter and the slowdown in the agency business you called out. If you could provide some incremental color there and focusing on whether you think it's a lasting headwind or something that was somewhat fleeting in the quarter. And they maybe if you could just more broadly talk about the degree to which that agency business, it seems like an element that introduces some volatility into the model lately. How strategic it is for you to be there?

Yes, so it's a great question. So if you think about agency, the entire business, so basically around the world has been soft the last couple of years. You've seen a lot of companies consolidate the number of agencies that they use. What we see with agency is still a battle. Part of what we do, it does help us cross-sell some of the other products that we sell, such as our Conversant CRM. To your point, though, it's volatile. It can be choppy quarter-to-quarter. It can be down one quarter, up the next quarter, and that's what Ed was referring to earlier, which is Epsilon can be a little bit choppy. So what I would look for is somewhat stabilization of the agency model in the back half of the year or the remainder of the year for Epsilon. I would look for strength still in auto, the Conversant CRM, some steady improvements coming through in technology. But agency is always going to be one that's going to bounce up and down on a quarterly basis. But we still feel it's an integral part of the product offerings we provide.

Okay. I wanted to ask also about potential strategic alternatives for the business. It just still feels like you're not getting a multiple for your kind of normalized earnings profile. Is there a particular inflection point you could identify where you'd say there are higher returns to be had by moving down a different path? And just purely hypothetically, is there an alternative viable possible path that could unlock returns for shareholders?

Yes, it's a fair question. We've been, obviously, getting a lot of it over the last year or so given the multiple compression. We talked at the board level every quarter about different options that are out there. At the moment, I think the biggest drag that we're hearing about is the fact that people really need to see the credit stabilize and normalize. And frankly, we were off by probably five or six months from what we had initially thought a couple of years ago, and that was primarily moving recoveries in-house and then the final residual impact of the hurricane. I think once those get out of the way and people are very comfortable that the core book is running nicely stable to where it was a year ago, you'll know that all those earnings, all the revenue growth will now flow directly into earnings growth, and you're off to the races. I think there is still a wait-and-see out there, and we want to see that one play out. And - but at the same time, if that doesn't excite people, then, obviously, we'll continue to have those discussions at the board level.

All right, great, thanks a lot.

Your next question comes from Dan Perlin with RBC Capital Markets.

Hey, guys. I want to check in on the idea of deleveraging your balance sheet versus buybacks. I mean clearly, as you said, these docs compressed quite a bit and historically, when that happened, you guys have been pretty aggressive on buybacks. But the kind of stated goal this year, it sounds like the pay down debt, which would seem to be more to set up to kind of separate the business. But I just want to know where you guys are still in terms of deleveraging the balance sheet versus buyback.

Yes, again you look at the free cash flow of the company or operating cash flow, Charles doesn't like when I round, but I'll round anyhow. It's roughly $1.5 billion or so. And then we'll use the first 1/3 of that to fund growth in the card business and leaves you with around $1 billion, maybe a little bit less than that for either debt pay down or buybacks. And we had initially set up the year to say, all right. Let's just run hard from an operations perspective, print four clean quarters with sequential increases in growth rates and really put in a strong momentum for the year." Obviously, we didn't expect things to remain depressed at these levels, and so we can't give specifics. But you can expect from us that there will be a bias away a bit from purely debt pay down. And there will be some activity likely on the buyback side. I think that's all I can really say, but we're certainly painfully aware of it, Dan.

Understood. One quick question on gross yields, I know the hurricanes seem to impact Decembers as well. Can you just help us out a little bit in terms of the cadence? I mean, it was down 70 bps. I think, this quarter, the revenue numbers you guys have projected to get the mid-teens suggest that has to be up maybe even meaningfully in the back half of the year. So any kind of directional trend there would be super helpful? Thanks.

Sure. So if we look at it on an annual basis, we were at a 24.8% gross yield in 2017. It would have been about a 25% gross yield if you took out the hurricane impact, which affected the back half of the year. We think with some of the changes this year, in terms of interest rates going up, we've talked about how we have a variable APR that's beneficial. We do have a little drag initially from the Signet portfolio acquisition, which burns off over the course of the year. So you put it together, we would say that we're probably tracking more to a 25.2%, maybe a 25.3% gross yield in 2018. Q2 and Q3 should be up year-over-year. Q4, you always get a little bit of a drop in your gross yield just due to the growth of the denominator effect. But I would say yes, I would say Q1, obviously, is the biggest year-over-year delta with improvements Q2, Q3, Q4 tracking to around 25.2%, 25.3% for the year.

And then just one quick one that you mentioned that the - can you just remind us to the extent that we do get, again as rising rate environment? I think, in the past, you said 80% of your cards are - that portfolio has roughly variable rate, but you got like 60% or 70% on your funding cost that's fixed. Can you just remind us of that spread and how positive that could be in a rising rate environment? Thanks.

Yes. So you're right. I won't get into numbers, but the way you would look at it is our asset book, the AR, will reset within $1 billion to $2 billion cycles. Whereas to your point, Dan, the debt is 70% fixed, let's say to 2-year duration. What it means is in the first year of increase is very beneficial to ADS. The second year, more flattish. Third year, it can move a little bit negative on us in terms of the impact if we don't have any further rate increases.

Got it. Thank you.

Your next question comes from the line of Andrew Jeffrey with SunTrust.

Hi, guys, good morning. Thanks for taking the question. Ed, appreciate you proactively addressing the credit sales. I just wonder there are some puts and takes, obviously, this quarter. How are you thinking about, I don't know if you think a lot about it, sort of the competitive positioning and relevance of the Card Services offering, recognizing that there will be M&A and customers do go bankrupt and so forth? I mean, are you comfortable with the sustainability of, say, mid- to high single-digit credit sales growth and as an underpinning for the kind of portfolio growth that you're anticipating?

Yes, I mean it's a fair question. Again, the model has shifted to one where you're relying upon, really, the big vintages or the big signings that you've done over the prior 3 years for the bulk of your growth and much less so from the more traditional core book. And that's going to change that's been going on as you look at the client base and saw the retail landscape changing so dramatically. So the folks that we've been signing over the last 3 years, the ones you're going to see us announce this year, the vast majority of them are in growth mode, which means that you're going to have a very nice type of sales growth. What you're really dealing with is sort of the bottom of funnel, as I call it, of those retailers who are either distressed or just have really to sales given the environment. And the goal is to make sure that the folks who are bringing on can overwhelm that to the point where we can grow the portfolio, AR, mid-teens each year, which can require sales growth, as you said, certainly, 8% to 10%. And that's where we are - And I think from what we're seeing, you have two trends that are ones going against us, which is the pressure on your more traditional mall-based retailers. And then you have the trends - the secular trend going the other way, which is a lot of new verticals and retailers are coming to the realization that they need to get into one-to-one personal marketing. And so their budgets are migrating from the TV commercials and the newspaper ads and billboards and radio and stuff like that and into what we do for a living. So thus far, we've been a net beneficiary of it. And based on the pipeline, I think that's where we're going to be for a while.

Okay. Thank you. As a quick follow-up, with regard to the internal collections efforts. Are there some benchmarks or mileposts that you're looking for internally? I mean, I guess, the real question driving at is, is there a risk that you don't get a meaningful lift in that efficacy in recovery rates having brought all that functionality in-house?

Yes. We're watching it pretty closely. And what we're seeing is as our jump-off to Q2, we expect to move, as Charles said, from sort of a mid-single, as a percent of gross charge-offs to mid-teens and what we were seeing right now as we right on track for that. And then you know the final thing we want to see is we want to actually see it - that rate creep up above where it was last year, as we move into Q3, Q4. And then that means you've got that nice tailwind in the back half and moving into the following year. I mean, that thing is, as you know, we did this once before. We did it right after the Great Recession. So fortunately, we've been there, done it. And what we're seeing so far, because it's been, as everyone is painfully aware of, we started this last summer. And so it takes a while to really build up the experience and the expertise and find the few hundred folks that we need. And what we're seeing right now is the curve compares almost identically to what it looked like post-Great Recession. So, so far, so good. But for sure, we're watching it like a hawk.

Thank you.

Your next question comes from Bob Napoli of William Blair.

Thank you, and good morning. Follow-up on a prior question. I think if you look - I think part of your valuation is - a big chunk of it, besides credit, is the health of the customer base and the view of the health of retail, in general. If you look at your closest Private Label peer, their multiple isn't that different. But if you look at your portfolio, we obviously have some very good retailers, Children's Place, Williams-Sonoma, RH, DSW, IKEA coming on. But then, you also have a lot of troubled retailers, whether it's a Bon-Ton or Ascena pieces of or New York. I mean, if you look at your portfolio and you look at it historically, do you have, like, it's - what is the mix of troubled retailers today versus non-troubled, I guess, if you would? And if you segment the growth rates for troubled versus non-troubled, then theoretically, some of this should cycle out over time. And having it one way or another, right, you're going to have a much higher quality portfolio a few years from now and the others will be gone. But is there any way to put - quantify that and try to get - if investors had comfort in the health of the customer base and then you put credit on top of that, that's going to be worth a couple multiples, at least?

Yes. No, it's a good question. And it's a question we get a lot. And I don't think there's a perfect answer to it. But in terms of those who are distressed versus those that aren't, I think the first item to discuss is the fact that, look, the bigger issue with some of the distressed retailers has nothing to do with the fact that they may be sitting in a mall and everyone seems to be going online and everything else. The vast majority of the distressed retailers got that way because they built - overbuilt stores and increased their footprint by third or something like that and used debt to do it or they were part of an LBO. And as a result, what's bringing down the distressed retailers today is really their capital structure is just very much under pressure because of leverage and there's too many stores out there. I mean, I think most people believe that the store counts need to come down by 30% before we've hit equilibrium. So as you said, those are going to cycle out. And I think the way we set up the business for this year is that we assume that there's probably, I don't know about $1 billion or so in portfolios that will, in fact, as you said, cycle out of the business, which means we need to grow the rest of the portfolio about $3.5 billion. And it looks like the bulk of that is going to be coming from the big accounts we've signed over the last three years. So from our perspective, I think we've factored in a fairly good size cycling out, as you would call it, above to $1 billion of portfolios going away. And the huge vintages that we've been signing over the past three, four years, which the secular trend that's in our favor, would suggest that's about $3.5 billion of growth, and you're netting out at about a 15% growth rate in the file. So we absolutely will factor in the number of distressed folks. My guess is there's probably five or six that are on the bubble there - about five or six last year that were on the bubble, and that's a how we come up with our $1 billion drag that we see.

Yes. I think the key takeaway Bob, is this is nothing new. We've been cycling out of clients that didn't fit our profile or were underperforming through the years, 2015, 2016, 2017 and we still have been able to maintain this good growth rate. So it's nothing new. It's nothing unique. It's just something that's cathartic. We could grow the file quicker, but we like to where it's growing right now. And we always take the opportunity that if it's a client that we don't feel comfortable with, then we cycle them out using that [indiscernible].

Thank you. And just one follow-up on Epsilon, the - I mean, the agency understood, but the biggest pieces of this business, I think agency is less than 10% of revenue there. Auto and CRM are probably 40% of revenue, maybe a little more than that, and the tech platform, another 25%. How are those three businesses trending? I mean, the CRM had a high-growth trend. I think you were looking for double-digit growth of auto.

Yes, I think from a guidance perspective, CRM and auto, to your point, which is probably half of Epsilon, is probably running - they're going to run double digits this year. And the tech platform, which is about - to your point, about a quarter, which was sort of that melting iceberg a year or so ago, we'd like to see a couple points of growth coming out of that. And then you've got the remainder as well as agency and their agency is definitely declining right now. So if you put all that together and mix it in, you probably get like a 5%, 3% type growth rate for the year. The goal would be frankly, we think we've got that third piece, the tech platform piece, nicely stabilize. The price point is good. Time-to-market is good. We would like that to turn into the third growth engine for the business. So if we could have auto, CRM and tech platform all in decent growth mode, that's when you'll start moving Epsilon from sort of a mid-single into the high single organic growth, which is really the goal, quite frankly.

Okay. Thank you.

Yes.

Your next question comes from the line of David Togut with Evercore ISI.

Thank you. So you called out 85 basis points of tender share gain year-over-year in the quarter. That's below your trend line, which has been more in the 100 basis point to 150 basis point gain, historically. What are the reasons for that? And are there any new technologies or offers that you can put out to your retailers' customers to drive faster tender share growth?

So there are a couple of things there, David. One that Ed talked about, which is the grow-over impact to the programs we walked away from, such as Bon-Ton that filed bankruptcy pulled quite hard back during the quarter. That will abate over the course of the year. You're correct in the fact that we will support client programs. You'll probably see us do programs. You'll probably see us do a little bit more discretionary marketing out of our Card Services division to stimulate sales in the back half of the year. But really, it's more of a case where, as we know, Bon-Ton was a fairly good-sized client, when they filed bankruptcy that really pulled in the credit sales, when they started looking to move toward liquidation that pulled in as well. So really, it's more of a grow-over impact from the loss of clients that we voluntarily walked away from or they filed bankruptcy that we're growing through in the first quarter, and that should increase over the remainder of the year.

Yes, I think, also, and it's a good question, of we are in the process of helping as many of our clients as possible enhance their online capabilities because so much of our sales are coming online, right? During the holiday, it's almost 40% of our sales are online from the marketing. And a number of folks have, to put it nicely, fairly clunky online systems right now. And what we're working to do, from a payments perspective, is to integrate the payments and loyalty directly into the website and make it a frictionless-type experience, so that we don't have the types of abandonment - card abandonment that you see all over the place. And that's a big initiative on our part. And I think if we can get some traction there and get the focus of our clients to put some IT dollars in it as well that, that would be something that can incremental move the needle for sure.

Understood. As a quick follow-up, what was the same-store sales number for your retailers in Q1 within Card Services?

I don't know, David. I'd have to get with - I don't have that number off the top of my head.

Thank you very much.

Your next question comes from the line of David Scharf with JMP Securities.

Hi, good morning. A lot of might have been answered, but a few follow-ups. Charles, just want to revisit how we ought to be thinking about the reserve rate. I know you've mentioned earlier that as we cycle through the year, we could conceivably end where we were at the end of 2017 at [indiscernible]. Could you tell me what is the reservable balance that is driving the 6.8% reserve rate? And is there anything other than just the Signet receivables that with - that we should be pulling out of your total AR when calculating that?

So the reservable AR at the end of March was 17 - let's round it to $17.2 billion. So that's where you get your reserve of $1.169 billion, which is how you get to your 6.8% reserve rate.

Okay. And is the delta between that reservable balance and the total gross of $17.8 billion the remaining Signet? Okay I got it.

Yes, Signet reserve.

Okay. Back to just sort of the demand side on credit. Is there a credit sales growth number if we actually - I guess Signet wasn't present in Q1 last year. So the 11% credit sales number is sort of the correct apples-to-apples when we pull out some of the programs you left, correct?

I think you would include Signet, so you're probably more like high single digits.

Okay. And I guess that I mean historically, Ed, I mean, when you think about all the factors at play, the profile of the newer programs that are ramping, kind of what's in the pipeline, tender share as well as what you're seeing in terms of commitment level from your retailers in terms of promotion, what ultimately get you to kind of mid-teens AR growth this year coming off a little lighter than expected growth in the first quarter? And what are the biggest factors?

Yes, I think the biggest factors, unlike - if you go back 5 years, where 95% of it was all driven by the core that's been sitting there for many years, the vast bulk of what we're looking at is really the spin-up of the big vintages of 2017, 2016 and 2015 where you're bringing on the types of clients that, combined, will add $2 billion, $2.5 billion of growth to the portfolio. So you really don't need a whole heck of a lot out of the core anymore, which is a very different model than we used to have. So it's really a function of you're almost cycling out of some of the more distressed retailers and cycling into the retailers that are experiencing solid growth rates and are focused on the personalized marketing and the investments and all that stuff. It's happening naturally. It's just we've never seen so much of it coming from the most recent signings. And we don't expect much growth coming from the core. So as long as we're signing our $2.5 billion vintage each year, it's probably safe to say that the growth in the core, less the attrition in the core, probably leaves the core relatively flat. And you're looking at about a net $2.5 billion growth or 15% coming from the newer vintages. And I think - I don't think anyone was expecting - we didn't give quarterly on the AR growth of - I think 13% is, frankly, right in our wheelhouse of where we want to be and that will creep up a little bit as the year progresses. So it's just a - it's a different structure from what we're used to, for sure.

Yes. And part of the question was related to thinking about the back half of the year in relation to that 13%. I'm wondering, so much of the hurricane focus has been on credit, the delinquency roles, the timing issues. I'm wondering, have you actually seen any increased pressures on just spending levels in those FEMA areas? I mean, once again, thinking about that 13%, like you said, it's in your wheelhouse. But to the extent it was a little bit below the full-year guide, are there any increased pressures just on the demand side on consumers, even if they haven't rolled into delinquency buckets? Are they spending at the kind of levels they were a year ago?

Yes. I think what you saw a little bit of reciprocal flip of what you're talking about. What we'll be looking for is a lift in consumer spend as they come out of the hurricanes. So it's going to depress your credit sales for a period of time. And then you're going to see the lift as they start to buy furniture for their new homes and so forth. That part, I can't tell you if we'd really seen yet. But it could be a benefit in the back half of the year.

Okay. Got it. Thank you.

Your next question comes from the line of Jason Deleeuw with Piper Jaffray.

Yes. Thanks. Good morning. Just wondering on any APR changes in Card Services with rates. How do you balance that versus your receivables growth targets and just your retailer client wishes?

So Jason, we're a variable APR. It's tied to primary the majority of our programs. So it's not a case, where we're looking to change any spreads. Basically, the APR will be moving up or down based upon what's going on with prime rate.

Got it. Thanks. And then we're just kind of thinking about the pipeline of new card portfolios that you're targeting over the coming years. What types of retailers? Are there any change in the characteristics of portfolios you're going after? Just any thoughts on kind of what's out there in terms of opportunity. And is there anything that's kind of different from what you already have in the portfolio?

Yes, it's a good question. In terms of the interest that we're seeing, a lot of the more traditional mall-based folks, for the most part, were the traditional Private Label customers. So you could say that, that market is much more penetrated than others. But what we are seeing, again, because everyone and their brother is talking about how do I understand my customer down to the individual level, which means the SKU-based program that we run, what you're seeing is kind of - it's very interesting. You're seeing verticals that you never saw before beginning to show a lot of interest. So for example, like cruise lines, like Viking Cruise lines, very interested in understanding who their customer is. That would be a new vertical for us. Retailers that have a very different model than their traditional mall base, so more of a - they have their standalone separate boutiques, like in Ulta Beauty, something like that, that are doing extremely well. Those are our new types of verticals for us away from sort of that mall-based model. The IKEAs of the world, again, very different from what we're used to and then finally, you have the pure dot-com players, the wafer dot-coms, the build dot-coms of the world. Again, they didn't exist a while ago. And so what you're seeing is the interest in the product itself, because of the information they can get on their individual customers, is now - the appeal is broadening well beyond the traditional base that we had before, which is sort of - it's a great secular trend that will keep the growth rate in the mid-teens of the portfolio, which more than offset sort of some of the dampening that you're seeing in the more traditional retailers.

Great, thank you.

One more.

Your last question comes from the line of Jeff Meuler with Baird.

Yes, thank you. Can you just run through the delinquency rate trends over the last couple of months? And I guess, what I'm wondering is, is the increase largely due to higher delinquency rate trends because of the financial impact on consumers in FEMA zones? Or are there other impacts from the hurricanes or other things? And to the extent to which that's the case, can you just comment on what's the year-over-year trend right now in the FEMA zones for the delinquency rate trends versus outside the FEMA zones?

Yes, I mean I can give you the overall picture and then Charles can give you a little bit more color. But in general, your delinquency rates to be up 50 basis points at a high level, higher as this sort of bubble is moving through the pipe. And so you can expect to see that April, May, let's call it. And then it should drop off dramatically as the bubble clears and those accounts flow to write-off. And then you're going to have delinquencies that are, more or less, in line with where they were a year ago. And that's all hurricane-related.

Yes, if you think about it, the lag between delinquencies to loss rate is about one quarter, as we talked about before. So as Ed talked about in the slides, we expect the hurricanes to hit us about 40 basis points net loss rate in Q2, which means you would expect your delinquency rates to be up 40 basis points, 50 basis points year-over-year in Q1. So basically, it's just a leading indicator that the bubble or air pocket is coming through will clear out in Q2 then you will see improving delinquency trends.

Yes, you'll still have sort of April, May at elevated levels. And then by June, again, the delinquencies ought to clear the deck.

Okay. And then can you just comment on the financial implications to your Card Services business from having increased churn in the client base, meaning clients - more clients going out of the base than you had, at least going back, I don't know four, five years and kind of prior to that? So what I'm thinking is, like, new client launch cost and impacts like that if - to the extent to which that's more part of the model and a higher churn model. What are the implications to you? And has it been fully felt at this point?

Yes, it's a good question. The - if it was just a churn out the bottom, and that was the secular trend, then I'd be pretty worried. But what we're seeing is, as we talked about, other secular trends sort of coming in from the different verticals and people that we never even knew existed are coming in wanting to know about their consumers. And so we're getting a lot coming in, as I call it, in the top of the funnel to more than offset what is churning out the bottom of the funnel. And so we are in a position that frankly 10 years ago, we weren't in, which is we can be a bit more selective in terms of when it comes to renewal times, in terms of if there are owners' demands, we may choose to put our capital elsewhere, and that's been the case with a couple of folks. So I would say, overall here, you're seeing pretty robust returns. We wouldn't expect that to change much.

And if you think about it, Jeff, we've been onboarding double-digit new clients for years and years and years. The churn cost or the onboarding cost are not material.

Okay. Thank you.

Okay. Well, that's it. And we'll see everyone or talk to everyone in Q2.

This concludes today's conference call. You may now disconnect.