Bread Financial Holdings, Inc. (BFH) Q2 2019 Earnings Report, Transcript and Summary

Good morning, and welcome to Alliance Data's Second Quarter 2019 Earnings Conference Call. [Operator Instructions]. In order to view the company's presentation on the website, please remember to turn off the pop-up blocker on your computer. It is now my pleasure to introduce your host, Ms. Vicky Nakhla of AdvisIRy Partners. Ma'am, the floor is yours.

Thank you, Operator. By now, you should have received the copy of the company's second quarter 2019 earnings release. If you haven't, please call AdvisIRy Partners at 212-750-5800. On the call today, we have Robert Minicucci, Board Chairman of Alliance Data; Melisa Miller, President and Chief Executive Officer of Alliance Data; Tim King, Executive Vice President and Chief Financial Officer of Alliance Data; and Charles Horn, Executive Vice President and Chief -- and Vice Chairman 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 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 alliancedata.com. With that, I would like to turn the call over to Robert Minicucci. Robert?

Good morning to all. I won't repeat the management introductions as it's just been affected, so let me say a few words regarding the company's strategic direction and the related organizational changes announced last month. As discussed on previous earning calls, over the last 18 months, the Board and management together conducted a comprehensive strategic review of the company, its component businesses and its go-forward strategy. Through that process, a number of steps were identified, including the sale of the Epsilon business and other initiatives designed in each case to simplify the Alliance Data narrative and, more importantly, focus capital and effort on the Card Services business. That business comprises both the company's highest earnings and highest growth assets. Previously, Ed Heffernan had led the company through a strategic review process and implementation of these initiatives, some of which have been completed, other of which are in flight and progressing as expected. Ed's leadership on these transformative projects was invaluable, and his departure was part of the succession plan implemented in connection with the company's new strategic direction. The Board extends its sincere thanks to Ed for his outstanding services. So, we begin a new chapter in the company's leadership. It's aligned with our Card Services focus. Our new President and CEO, Melisa Miller, joins us from the Card Services business, which she successfully led as President for the last eight years. Our new CFO, Tim King, also comes for -- too as well from Card Services where he served as CFO for the past seven years. Given their respective background and Alliance Data's strategic direction, the Board believes Melisa and Tim are ideally suited to lead the company, and we have every confidence in their ability to take Alliance Data to new levels of success. Finally, our former CFO, Charles Horn, has taken on a new role as Vice Chairman. In this capacity, he will oversee, on an interim basis, a number of transitions at the company resulting from the Epsilon transaction, including ongoing cost reductions and other Board initiatives. I'll now ask Melisa to provide some introductory remarks.

Well, good morning, everyone, and thank you, Rob, for the kind introductions and for delivering them in person. I wanted to begin today by saying how honored and incredibly excited I am to be assuming this new role, including the expected challenges and the opportunities that lie ahead. As Rob mentioned, we have a sound plan in place to transform this great company, and we've been successfully executing against that plan in the past several months. To be sure, we are making intentional, purposeful changes for the long-term viability and health of the organization. We are laser-focused on returning Alliance Data to its more formidable growth and profit profile and achieving our key objective with this transformation, and that key objective is to unlock greater shareholder value and deliver value to all of our key stakeholders. During this deliberate journey, we have and will continue to tackle the tough decisions head on. We will make the necessary and critical changes in the short term to restore credibility and confidence for the long term. We are well positioned to drive our performance and long-term, profitable, sustainable success. My commitment in getting our consistent growth game back on track is steadfast. And while our expected success does not come without some anticipated near-term choppiness, we set a new course for Alliance Data's growth and viability for the long haul. I am confident in what our future holds and prepared to both lead and support our business heading into this exciting new chapter. Charles, I'll now turn the floor over to you.

Thanks, Melisa. Let's flip to Page 4, and we'll discuss consolidated results for the second quarter. Revenue decreased 3% to $1.35 billion, adjusted EBITDA net decreased 15% to $310 million and core EPS decreased 12% to $3.83 for the second quarter of 2019. These results exclude the Epsilon segment, which was in discontinued operations. Our second quarter results were mostly in line with expectations, although core EPS was negatively impacted by the timing of credit card portfolio acquisitions. We acquired several client portfolios aggregating over $900 million in June, which we expected to acquire later in the year. While this pull forward supports our receivables growth projections for the year, the impact of the provision-built post acquisition reduced second quarter EPS. The provision bill leads revenue recognition for a couple of months following the acquisition of a portfolio. EPS decreased 33% to $2.71 for the second quarter of 2019. A higher effective tax rate, 27%, compared to 15% in the prior year quarter negatively impacted EPS by approximately $0.43 for the second quarter. As previously discussed, we completed the sale of Epsilon to Publicis Groupe on July 1. We anticipate using the net proceeds of approximately $3.5 billion from the transaction to retire corporate debt and to repurchase our shares. The debt retirement of $2.4 billion is largely done, dropping our pro forma debt leverage ratio to 1.6x, and we plan to launch within the next few days a modified Dutch tender -- Dutch auction tender offer to acquire between $700 million to $750 million of our common stock. The remainder of our share repurchase authorization has been set aside as dry powder to enable opportunistic future open markets for other purchases, the timing of which is tied to other initiatives underway. Let's flip over to the next page, and we'll talk a little bit about LoyaltyOne. LoyaltyOne revenue increased 1% to $251 million for the second quarter. Adjusted for unfavorable foreign exchange rates and the shift to a net revenue presentation on certain product redemptions at AIR MILES, revenue increased 10% for the second quarter. Adjusted EBITDA decreased 23% on a constant currency basis primarily due to higher cost redemptions at AIR MILES, largely a function of product mix redeemed. Breaking down the results further. AIR MILES revenue, adjusted for the items discussed above, decreased 6% due to low redemptions. Issuance and redemptions both decreased 2% for the second quarter with issuances down due to the timing of promotional activity. BrandLoyalty's revenue increased 24% on a constant currency basis due to strong program performance in Europe, Asia and Brazil. We continue to focus on driving cost efficiencies in order to improve EBITDA margins back into the historical mid-teens range. With that, I will turn over to Tim King to talk about Card Services.

Thank you, Charles. It's an honor and pleasure to be here today. I look forward to working with all of you. Getting started. Let's turn to Page 6 while I'll review our key statistics. Overall, you should take from the slide that we're beginning to show improvements in our AR and credit sales while maintaining healthy credit quality and return on equity metrics. Starting with credit sales. We are flat to Q2 2018. Recall that in Q1, this number was down 7% year-over-year. You may recall that Charles outlined during the Q1 call that it takes some time for our newer programs to spool up. This is fully in line with our expectation that we'd take a quarter or two for the new healthy vintages to replace the divested programs. We expect healthy year-over-year increases for the remainder of 2019. Also showing improvement from the prior quarter are the AR metrics. For instance, end-of-period AR was down 5% in Q1 versus a decrease of only 2% for this quarter. All AR metrics were in line with credit sales. However, with credit sales, we expect continued improvement in positive variances for the next two quarters. Previously, we guided to a year-end AR number greater than $20 billion, and we are still very comfortable with this target. As Charles mentioned, a few strategic acquisitions were put forward into Q2, which pressured deals. But ultimately, these acquisitions will be beneficial to the remainder of the year. Operating expenses, excluding the impact of the mark-to-market for the held-for-sale receivables, were 9.4% or 25 basis points worse versus prior year. As in previous quarters, this number is being affected by the mark-to-market accounting. Let's turn to our credit quality metrics. As expected, we continue to see improvement in the loss and delinquency rates, both of which are showing a 30 basis point improvement. Finally, on this page, we continue to show a very stable 31% return on equity. This number is consistent with Q2 2018 and Q1 of 2019. The key takeaways are improved credit sales and AR numbers, stable credit quality and return on equity results. Let's turn to Page 7 and review key financial numbers. Revenue is down $50 million or 4% for the quarter. This is driven by slightly lower normalized average receivables, coupled with lower gross yields. As previously discussed, the variance on the operating expense ratios -- the ratios we're seeing here are the dollar variances. And as mentioned earlier, this is being driven entirely by the mark-to-market accounting for these held-for-sale receivables. The provision expense benefited from a slight decrease in receivables, lower charge-off rates and better delinquencies with some offset due to the provision build required for the day two accounting of the newly acquired portfolios. Lastly, our cost of funds are up from 2% to 2.3%, resulting in $30 million increase and primarily due to the higher spread in the ADS market. And we'll now turn it over to Charles who will run you through the updated full year guidance.

Thanks, Tim. What you'll see basically is our revenue guidance for the year remains at the $5.8 billion or 4% increase that we talked about in the first quarter. We have updated the reported core EPS guidance to reflect the anticipated Dutch tender as well as the completed cost reductions at the corporate location. In addition, we remain on track to deliver accretion compared to the original guidance of $22 for 2019 as pro forma core EPS is still expected to exceed the lower end of the range provided during the last earnings call. With that, I will flip it back over to Melisa.

Thank you, Charles. I'd ask everyone now to turn to Slide 9. And I wanted to take just a moment to both reinforce and highlight where we see Card Services ending 2019. As Tim mentioned, we are confident in our guidance on the growth and quality of our receivables and expect to end 2019 with greater than $20 billion in card receivables. As predicted, with credit quality stable, we turn our full attention to maximizing the value of both our legacy core and our newer programs. Our deliberate expansion into a wide range of healthy verticals, including the new partners we've welcomed this year, provide the momentum to achieve our targets and position us well for future success. We note that our newer vintages, so those programs launched in 2015 and beyond, now represent over $5.5 billion in average receivables with incremental runway for growth based on our historical trends. The recent launch of our consumer deposit platforms -- platform with deposits approaching $1 billion will provide incremental flexibility for future growth. So, in wrapping up the financial aspects of our review, the core tenets of the Card Services business are improving, completely consistent with our plans: receivables growth returning; credit quality stable; and new businesses ramping nicely. In closing, we thought it was equally important to spend a few minutes on the value metrics of the Card Services model, in particular, essentially offering insight into why we continue to win and stay differentiated in our space. Put differently, many of you asked these questions of us who are you really and how are you differentiated. So, we want to spend just a few minutes on that question, and I'd ask you now to turn to Slide 10. An answer to the question of who are we, we are really the brand behind the brands that customers love. We have over 30 years of experience in building the most valuable and successful programs in our space. It is no accident that customers who have one of our branded cards in their wallet spend 2 to 3x more than customers without a card. Now you may have heard that proof point before. We highlight it again because once a card member has one of our branded cards, we are able to keep them or retain them as an engaged customer at a far higher rate than others in our space. More importantly, when we welcome a brand and convert a program, we always see the value of the program grow by 20% to 30%. So, your next question might be how do we make all of that happen. Turning now to Slide 11, it's really how we lead the market in the convergence of three core competencies: data-driven insights; marketing; and payments. This is where we invest our time, energy and our effort. Our team of experts sort through the clutter in a sea of choices facing consumers today, and we are uniquely able to deliver the very precise, very personalized experience and recommendations that customers demand today. We have deliberately expanded our universe into verticals where our tools, technology and techniques will also add value. Specialty apparel will continue to be important to our portfolio. More importantly, we've successfully extended into winning categories to meet the emerging demand of consumers and brands. Specifically, we've successfully expanded into beauty, so think Ulta and Sephora. We've expanded into the home goods category. Think Pottery Barn and eTail, think Wayfair. These are just a few examples of how we are actively leading in the transformation of the retail space. We are seeking healthy verticals and brands with a multichannel approach to serving consumers. And the one thing all of these verticals have in common is that the consumer is in the driver's seat. The consumer is at the heart of everything we do, and they are also at the heart of everything that our brands do. And while the consumers' needs and behaviors are changing, our deep understanding of them will not. Our purpose is clear. We help our brands know more about their customers, so they can sell more. Our approach of blending data, marketing and payments together ensures that we build more successful programs than anyone in our space. We acquire more, retain more and maximize the spending and engagement in a manner that differentiates us. We wanted to give you a bit of a preview today. We'd ask you to stay tuned for more. Sometime in the late fall, you can expect that we'll be hosting an Investor Day. We look forward to walking this community through a deeper dive with greater specificity on what the next best generation of Alliance Data Systems will bring to the industry. With that, operator, we are finished with our prepared remarks, and I'd ask that we open up the line for questions.

[Operator Instructions]. Sanjay Sakhrani with KBW. Your line is open.

All right. And congratulations to you all on the call, Melisa, Tim, Charles on your elevated roles. I guess my first question is a higher-level one where, Melisa, maybe you can walk us through some of the objectives you have to get the company back on track and how it might differ to the ones previously articulated to us. And obviously, Rob, please feel free to chime in on the repositioning and sort of the progress there. Underneath it all, I also had a question for Charles or Tim on the strategic repositioning because another $500-some-odd million of loans were moved to held for sale. Are we done with those? Or will there be more?

So, Sanjay, I'll go ahead and take that first question. By the way, thank you for the words of encouragement. For us, what we would say is that we are really creating a maniacal focus on how we create value for all of our stakeholders. Our shareholders, of course, brands we serve, the consumers that we support, getting very, very clear on our key differentiators, what are the consumer trends in the marketplace and then making sure that we have a sound strategy of knowing where to invest and what it takes to win consistently. Getting our growth game back on track, as I mentioned, is a priority, but it's also important to mention that it's not growth at all costs. We hold ourselves to very, very high standards, and you can expect that these ROEs of 30% or greater are standards that we will continue to hold ourselves to. So, we are engaged with conversations across all of our levels of management, be clear on our priorities, be maniacally focused on returning value for all of our stakeholders and creating focus for our organization.

So, Sanjay, it's Tim. I'll take the held-for-sale question. Obviously, in the quarter, we actually had some success, and we were able to move some portfolios out, but we also had one strategic nonrenewal. Frankly, it was a client that was -- the economics were untenable for us, so we have decided to let that portfolio go. So, in essence, you'll see on our balance sheet the held-for-sale stayed about flat, and that was a function of, obviously, divesting some programs. We're successful with those and then, obviously, marketing one portfolio held for sale.

Your next question comes from the line of Darrin Peller with Wolfe Research.

Melisa and Tim, I also want to echo my congrats on the role. Let me just start off. If you could talk about the profile on your $900 million books that you acquired a little sooner than you expected, I guess, first, what types portfolios? Do these involve an e-commerce oriented? What kind of loss profile do they have? And then the ROE on the new active AR that you have now that's growing. And then Melisa, when we think about the bigger picture for the card, what may be a card stand-alone business long term, can you talk to us about do you foresee that being still a double-digit receivables grower? I know you've mentioned 30%-plus ROEs, but maybe just a little bit more profile. Are you still going to have some profile of loans in them all in the traditional retail you've had before? Or is it -- are you really trying to shift it all to a more omnichannel-type e-com offering?

Yes. Darrin. Thank you all. If I may all answer that question in reverse order. In terms of our growth profile, as I mentioned, we are just keenly focused on restoring sustainable, profitable growth, but we will use a balanced scorecard approach. We do hold ourselves accountable for growing AR, but again, not at all costs. So, we'll continue to hold ourselves to a very high standard. And as I've mentioned, you can expect to see us delivering superior ROEs than others in our space. With respect to mall-based versus non-mall-based, for us, we're going to be opportunistic. There are brands that are domiciled in malls that are still winning. And where we have a healthy brand, where there can be a program where we can add value, we will be opportunistic and pursue it. What's most important for us is seeking those brand partners that have a multi-channel approach. Darrin, that's where we can build our biggest and most valuable programs. We know that when we can get one of our cardholders shopping in more than one channel, they are more than 2x as valuable. So, having a multi-channel approach for the brands that we serve is really important. With respect to the brand profile of the acquisition, more to come on that later, Darrin. As we actually relaunch the programs, we'll be a little bit more specific. But take great comfort in knowing that a couple of these brands are actually in some of these winning segments that we've discussed, and these are completely consistent with our overarching strategy.

Okay. And then just a quick follow-up. I mean, in terms of the strategy now for the next 12 to 18 months, I assume that the LoyaltyOne business is on the radar in terms of -- I guess, the question really is how active are you in that process? How should we as investors and analysts think about that business? How quick should we expect this to be a standalone Card Services company?

Yes, Darrin. It's one of those where we've talked about going back to the first quarter and as I've said before, we have a number of initiatives underway. Additionally, nothing to discuss at this point or to announce at this point, but we will keep you updated as we move forward with these initiatives.

It's Rob Minicucci speaking. I think from a Board perspective; we got a little out of -- ahead of our skis in November when we talked about Epsilon. And frankly, management and the Board have resolved that we're going to announce something when we have announced Epsilon, when we signed the contract. And that's going to be the policy of this company going forward. We're not going to talk about [indiscernible]. We're going to announce something when we have something to announce.

Your next question comes from the line of Bob Napoli with William Blair.

And congratulations as well. Melisa, one of the things that -- I think has been some concern maybe around your clients that maybe you could address is that the sale of Epsilon has removed some of the value-add potential that Alliance Data brings to its partners. And that what we sense there maybe was a little bit of consternation amongst your customer base. But can you go just address that and talk about the skill set that you bring to the table today versus what you brought to the table with Epsilon?

You bet. And I'm so glad that you asked that question because we do not expect this transaction to change in any way the value or the nature of our relationships with our brands. We had a long history of working together with Epsilon and have actually enjoyed the relationship a great deal. It's completely memorialized with arm’s length agreement. We're one of Epsilon's largest, most strategic partners. And as such, together, we have an opportunity to influence their innovation and technology roadmap. What's important for this group to know is while we do leverage some of the capabilities and the data assets, it's really the 30 years of experience and the data scientists and the data analysts and the marketers within the Card Services business that have leveraged these capabilities and have made these programs saying, "We don't expect to miss a beat."

And Rob Minicucci again. I want to support that statement by giving you a fact or two. Previously, each of the three businesses, the executives running the business units had a compensation scheme based on their performance. And both EBITDA and revenue growth were accounted for 80% of their economics. So, we had, at Card Services, arm’s length agreement with Epsilon in the past. We have extended that contract. And now instead of 80%, it's 100%. There's no corporate overhead sharing, if you will. But there really is no change in the economic incentives to the executives running their respective businesses. So again, we have a contract in place. We expect them to be a valuable partner with us. And it's just documented now as I suggested.

And a follow-up question. You put out a pro forma EPS, at least $22.67 for 2019. And you talk, Melisa, about critical changes in the short term, near-term choppiness. Like how much visibility do you have on that number? And then maybe, as importantly or more importantly, there's a very wide range of estimates out there for 2020. And if you could just maybe -- if you could address that at all because if you have good visibility on the $22.67, maybe add a little bit of color to how people think about or if you could add some color how people think about 2020.

Sure, Bob. I'd say this. If you look at it from a performance standpoint, we have very good visibility into Card Services numbers this year as well as LoyaltyOne. You do have a variable associated with the $350 million of consideration from Epsilon that we fell back. So, based upon the deployment of that $350 million in terms of open-market purchases, that can influence the run rate a little bit just in terms of timing, but otherwise, and so we have very good visibility into achieving that number.

Okay. And then as we think about 2020, any color on the very broad range of -- do you expect to grow that number in 2020? Or is the near-term choppiness add some cloudiness to that capability?

I'd wouldn't say there's any cloudiness, Bob. But I will that it is somewhat dependent upon some of the other initiatives we have underway. So, it'd probably be a little bit premature for us to start jumping and talking into 2020 at this point.

Andrew Jeffrey with SunTrust. Your line is open.

Melisa, just honing in on one of the bullet points on Slide 7 in the deck that talks about OpEx in Card Services. I wonder if you could elaborate a little bit on some of the investments, you're making for new partner launches, sort of how those might compare with historical growth investments in Card Services and how you think about those both from a timing perspective and in the context of your long-term ROE targets.

You bet. What I would tell you is the types of investments with -- to support new program launches are consistent with what we've seen in the past. What makes -- what will change the dynamics of the investment is whether or not we have a large number of stores that we have to bring up and train; the amount of collateral that is in keeping with training all of those stores; and actually, the number of channels that a partner integrates with us. So, one of our greatest strengths is that we interact with our partners in all of our channels. It's also one of the things that add some expense upfront, both on the technology side and on then the people side as we get brand partners pulled up. So, this profile isn't terribly different, but we did have a number of new partners that we brought up this past quarter, so we had a lot of activity with respect to new brands.

Okay. And would you expect to see the leverage on those expenses in the back half of '19? Or does that wind up being more of a 2020 kind of event?

Andrew, it's Tim. We would expect that in the back half of 2019.

Okay. And then one quick last one for me, Tim. Can you quantify the amount of provision lift or the higher provisions this quarter resulting from that portfolio acquisition, so the timing value?

Yes. It was about $10 million.

Jason Deleeuw with Piper Jaffray. Your line is open.

And congrats, everyone, with the elevated positions. Melisa, I was hoping you could talk about the addressable market opportunity that you see out there that's still remaining for Card Services. And then just given all your experience in the space, just talk about the evolution of the competitive environment. Have there been any significant changes on that front over the years?

You bet. I'm glad you asked that question, Jason, because part of the reason that we're so bullish on our future is that the addressable market is actually growing for our space as we see emerging retailers coming into the market. So we would tell you that when you look across the $1 trillion that's actually available to us, and we do a little bit of the Goldilocks, some are too large, some are not, going to fully leverage our sweet spot, we would tell you that there's about $250 billion worth of opportunities that we could pursue where we would put our head on the pillow at night and say, "Our tools and our approach could add value to this program." So, it's a very, very large market. And if we were to just say, "All right. Let's get our 35% share of this market," you can see that you've got a very, very significant growth path. I'd also add, Jason, while not in the scheme of new business, in the scheme of growth tests, when you think about that 2015 vintage and beyond, because so many of those programs were startup, that also provides us with a great deal of runway for growth. So, we are really optimistic that we are in a marketplace that has a lot of white space for us. That's for sure. In terms of the competitive landscape, we would tell you that it's crowded. There are certainly some emerging payment solution companies. This group might refer to them as fintechs that are becoming more prominent in the marketplace, and we're watching them very closely. Consumers do have expanding demands. Everything we do is to serve consumers. So, we are clear on what consumer demands may mean for us and are watching very closely how we might serve those emerging demands. Does that help, Jason?

Yes. That's very helpful. And then as a follow-up just -- is there any help you can give us on thinking about receivables growth? In June, the active client’s receivables grew 12%, have been growing 10%. And then on the last call, there was talk about a 15% receivables revenue -- or run rate growth rate. So, I'm just -- is there any help you can give us on thinking about kind of the targeted or just kind of a range on receivables growth?

Sure. So, in the latter half of the year, you're going to get mid-teens active growth. I think you're quoting the active growth, Jason. And we should finish the year in the low to mid-teens for our active growth for the receivables. If you go just to reported, you're going to be more on the single digits in the -- in Q2, but then to the double digits in Q4. And you'll finish the year low single digits.

Will Nance with Goldman Sachs. Your line is open.

And congratulations to Melisa and Tim. So, I maybe wanted to start off on credit. So, delinquencies and losses have both been improving recently. And when we look out over the next year or two, how should we think about the interplay between, on one hand, the portfolio growing really fast than some of the newer portfolios and that can tend to put upward pressure on losses versus some of the tailwind you have from lower recoveries and some of the shift towards some of the higher-quality portfolios? I guess how are you thinking about losses over the next 18, 24 months?

Yes. That's a great question, Will, and we would tell you that we've lived through the cycle of delinquency and losses. And when we look out into the future, we would tell you we would expect both would be stable.

And Will, on your question on recoveries, I would say there's no pressure or change in our strategy at all. The recovery process is very, very stable. We wouldn't expect any change to what we're experiencing now.

Got it. That's helpful. And then maybe if I could hit on yields. They've been under a little bit more pressure for the first half of the year. I guess can you talk about some of the moving pieces and how we should think about that as some of the newer programs start to spool up? And I guess on that note, like, when we think about the company moving more towards kind of a card-centric focus, is there any thought being put towards maybe moving towards more of a GAAP presentation of results over time?

So, I'll answer the yield question and then come back to the GAAP question in a second. The -- we would expect that we spool up some of those programs you saw announced last quarter and over the course of the last few weeks as well as the spool up of the portfolios we purchased. By the end of the year, we should be down a little bit, but really consistent year-over-year versus 2018. So, we obviously will have some rebound in Q3 and Q4. And obviously, on the GAAP presentation...

It's really going to come down, Will, to the other initiatives underway. At this point, we think it's -- the core EPS is still a very good metric. As time goes by, that could change. But there's really nothing at this time to indicate that, that's going to happen.

David Scharf with JMP Securities. Your line is open.

And welcome, Melisa and Tim. I guess the question I had and it also dovetails to maybe a broader question on some of your plans for future disclosure with the management transition in place, I'm wondering, Melisa, we have disclosure, obviously, in the securitization documents of your top 10 retail programs that are in those asset pools and their concentration. And the vertical breakdown on Slide 11 is very helpful. But obviously, the securitized assets are only about 40% of the total now. I'm wondering, specifically, if there's any color you could provide on, perhaps, how those verticals that you outlined on Slide 11 stack up in terms of the mix of the portfolio; and b, whether or not going forward we may get increased disclosure on program-specific balances for the managed receivables, not just the securitized.

Yes. It's something we've thought about. And clearly, as we've transitioned the portfolio, we'll continue to think about what's the right disclosure. So, I would say stay tuned. I'll make a joke at my expense. Five weeks into the job, so we got to think about those disclosures and what the organization looks like in the future and about what's the right segmentation. So, stay tuned.

Dan Perlin with RBC Capital Markets. Your line is open.

Melisa, now that you've taken over, and I'm sure you guys have done another deep dive in terms of looking over the core portfolio, are there any retailers that are on your watch list that could surprise in the card business that we should be at least mindful of as we think through this transition right now?

Yes. Dan, that's a good question. There are some brands within our core portfolio that have struggled certainly with their top line growth. We are in constant contact with the senior level individuals within these brands, meet often to understand what their plans are. The great news is there are none that are of size, that if some sort of event were to occur, that we would expect there would be any impact to us.

Okay. And then the other question I had was around corporate expenses declining kind of post the divestiture of Epsilon. So, it looks like in the quarter, it was down about $12 million. I don't know if that's entirely related to that. But can you just help us a little bit with the cadence in order to get us to that pro forma $1 to $1.15 that I think you guys had provided in the first quarter?

Yes. Dan, it's a situation where we think that from an EBITDA standpoint or a drain, we can take it to probably in the $94 million to $96 million of expense this year. As you saw going forward, we think that, from an EBITDA standpoint, we can take it to as low as $60 million or maybe even better. So, what you're seeing is the partial year benefit coming through in 2019. We'll look for the full run rate benefits entering into 2020.

Okay. And then just one last quick one. The wind down in this retail marketing division at BrandLoyalty, how big was that business? Was that contemplated? Any just color there would be great.

It was pretty small. I think the charge we took in the first quarter for it was around €8 million. It was basically a satellite office that wasn't really carrying its weight. It did have some inventory that had some lease improvements that we wrote off, but it wasn't overly large charge to us, Dan.

George Mihalos with Cowen. Your line is open.

And congrats, everyone, as well. Melisa, just wanted to follow up on something that you had said about fintech competition in the space, if you could kind of elaborate on that. And is it -- you're talking more about some of these nontraditional financing methods that maybe some of these retailers are employing sort of like a mini-layaway program. Or is it proliferation of digital wallets and Apple Pay or PayPal, things like that, where maybe there's an embedded funding source and that could be impacting usage?

Good morning, George. It's really the former and not the latter, and we're seeing it obviously in the web environment or the digital environment and certainly not in-store. It's really an acknowledgment that there are emerging payment types in the marketplace. We are watching them very, very closely. What's interesting about some of these fintech organizations is, as you know, none of them really have their own bank charter. So, we believe that we have a unique opportunity, both because we have expertise on the financial side and we have strong relationships with our brand partners on the technology side. And for me, it was really an acknowledgment that consumer needs are changing. In order for us to stay relevant and differentiated, we have to make sure that we have options to serve those needs. Does that help, George?

That's very helpful. That's perfect. And maybe just a quick follow-up. As you enter or expand in some of these newer verticals, just curious, the demographics of your customer, is that materially changing? Is there anything to kind of call out that are maybe a little bit different that have some of these historical users of your Private Label instruments?

Great question. From a credit quality standpoint, George, we would tell you that our standards certainly don't change. Demographically, though, our newer vintages are skewing a bit younger. And what we like about that is that helps to balance the overall demographics of our file. So, our legacy core has a tendency to be a bit more mature on the spectrum. And some of the newer brands that we've onboarded attract a slightly younger customer. So, on balance, it's a really great mix for us.

Jamie Friedman with Susquehanna. Your line is open.

It's a talented new team. Exciting time for the company. My first one is about in terms of the prior guidance, I know it's better for Charles or for Tim, but when you gave the receivables guidance last quarter, have that already contemplated the new portfolio acquisitions?

It had. It's just, obviously, we've contemplated that being later in the year. So, we pulled that up into Q2. And hence, the effect on the provision and the overall income for Q2. But we -- the number that we had given before for a year-end guidance had contemplated the portfolio acquisitions.

Got it. Okay. And then just a follow-up there. In terms of the $900 million in new AR, how should we be thinking about the profitability contribution of that, say, near and longer term? Anything you'd call out about that part of the book?

No. I would -- it's going to be fairly consistent with our -- the book, as you see it, the overall book. So, nothing that I'd call out in particular. It does take, obviously, a little bit time to spool up to get to normalcy, meaning that the first quarter, we're going to have a provision available. Once we get to run rate by the end of the year, it should be at the overall portfolio levels.

Ashish Sabadra with Deutsche Bank. Your line is open.

Let me also echo my congratulations to the team. My question was on the allowance for loan losses. Those have been coming down. The results have been released. But as we think about receivables growing going forward, how should we think about the headwinds from result there going forward? And then also just a question on CECL. Any initial thoughts on CECL effective in 2020?

Sure. So, thanks, Ashish, for the question. First on the allowance, I wouldn't expect any additional pressure from the charge-off or the delinquency. Charge-off and delinquency, we expect to be very flat to slightly better on the year. And therefore, no pressure on allowance as contemplated under the guidance in 2019. As we adopt the CECL into 2020, we've been very successful in hardgoods and jewelry. Those assets generally have longer lives, so we would expect to have some build as we go into 2020 as we adopt CECL. We're going to have to look at the end-of-period balance sheet to see how much we have of the longer-lived assets versus short-lived assets. But we do expect some build.

Okay. That's helpful. And maybe a question on capital allocation going forward. Thanks for providing the details around the Dutch process, but my question was about the free cash flow. The business generates a lot of cash. How should we think about the use of cash going forward? And is there a change in strategy there?

Ashish, the way we look at it is we'll continue to balance the leverage at the holdco, the parent-level debt. We've taken it down to a very manageable level at 1.6x leverage right at the moment. So, what we will try to do is balance the reward or basically the contributions back to the shareholders as well as balancing that parent-level debt. We think we're in very good shape. Going forward, I think it's going to be pretty much driven by the other initiatives we have underway. And that could influence how much we return to shareholders. It could be more or it could influence, as we go a little bit the other direction, it could be a little less. What I would anticipate there going forward is you'll still see a share repurchase program in place for Alliance Data. It will be probably an authorization of usually $500 million a year, of which some portion is going to be used to return capital to shareholders.

Your final question comes from the line of Vince Caintic with Stephens.

Just of a question on the $900 million and perhaps the opportunity set for more portfolio acquisitions. What is the market looking like in terms of being able to acquire more? And then conversely, how does the organic market look like? So, if you could maybe talk about the $20 billion in guidance and how it looks like versus the -- further acquisitions versus the organic growth.

Vince, is your question would we expect any more portfolio acquisitions this year? I want to be sure I'm answering the question that you're asking.

Yes, for this year. And then also just what you'd see as maybe the pipeline of portfolio acquisitions, if there's being market out there for more acquisitions.

Yes. Moving forward, 2020 and beyond, and we would tell you then into this year, we would be opportunistic if one or something became available. We don't have further acquisitions contemplated in this guidance that we've shared with you today. But again, we would be opportunistic if we could add value and it meets our financial hurdles, and we have a committed brand. With respect to the pipeline, in general, we have built out our pipeline for the next 3 to 4 years. So, we're pretty clear on which programs are likely to become available and are building a strategy on how or if we would pursue them.

Got you. And when you look at those pipelines, I know you said that you have -- so you're growing but not necessarily at all costs. Sort of if you could give us a sense of when you look at a portfolio, what sort of hurdle rate and sort of what kind of characteristics you look at as you're looking for that growth.

Yes. I'll start and then let Melisa jump in. And on the -- I'll start off as the finance guy saying the first thing, we look for is commitment from the management team of our partners. When we have a strong commitment, those programs grow. And that basically then ends up being a program that we know we can grow the sales, we can grow the program, we can grow the number of accounts with -- coming out of those programs. So that's first and foremost. The size of the portfolio, the vertical therein as well as the credit profile dictates what type of return, we're going to demand of those. And so, we generally will talk about a blended, but we won't talk about a specific in the open market. We'll try to manage through the blended given the different verticals we're in and the different sized portfolios.

And we are, as I've mentioned earlier, I think several times today, really holding ourselves accountable to that ROE of 30% or greater. And the folks within card are conditioned for that type of threshold as well.

We have one final question in the queue, Surinder Thind with Jefferies.

Just following up on a question about the strategic direction of the firm. More specifically, when we look towards the end of the year, is the -- excluding any strategic decisions around BrandLoyalty, should we expect the firm to be at full run rate, meaning all of the changes surrounding the cost cuts of Epsilon, obviously, the repurchase of the shares from the Dutch auction. And then it seems like there's a little bit of variability around some of the spending around some of the initiatives. But how should we think about where the firm is going to be positioning at a year-end basis relative to kind of the pro forma guidance of run rates $22 do you think?

And the answer is yes. We would be looking forward to the full pro forma run rate as of January 1. As we did talk about earlier, the $350 million that we've set aside as dry powder for the repurchase, there is some variability as to when we will deploy that, which could impact it to some degree, Surinder. But overall, I'd say, all the profitability initiatives, the corporate reductions, everything that we have planned will be at a full run rate by pretty much January 1.

Understood. And then just a point of clarification. How should we think about the growth of the active portfolio in the back half of the year, if you can just revisit that, and then maybe on a longer-term basis looking into 2020?

Sure. So, the active, the back half of the year, while on just a recorded average AR, you should be expecting mid-teens, low teens growth rate from active AR in the back half of the year. As we get towards the latter half of this year, we would expect to report it in active to be the same. And so, we won't obviously quote active on a go-forward because it -- we won't have the -- that look at that metric anymore.

There are no further questions at this time. I would now like to turn the call back over to the presenters for final remarks.

Well, I will end the call the same way that I began the call today with great enthusiasm in this new role. I appreciate everyone's interest in our firm, everyone's congratulations, and we will talk with you next quarter. Thank you.

Thank you.

This concludes the Alliance Data second quarter 2019 earnings conference call. We thank you for your participation. You may now disconnect.