Bread Financial Holdings, Inc.

Good morning and welcome to the Alliance Data fourth quarter and full year 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 opened for your questions. To ask a question over the phone, simply press star, then the number one on your telephone keypad. To withdraw your question, press the pound key. In order to view the company's presentation on their website, please remember to turn off your pop-up blockers on your computer. It is now my pleasure to introduce your host for today, Ms. Vicky Nakla of Advisory Partners. Madam, the floor is yours.

Thank you, Operator. By now, you should have received a copy of the company's fourth quarter and full year 2018 earnings release. If you haven't, please call Advisory 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. 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 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 Ed Heffernan. Ed?

Ed Heffernan Great. Thanks, Iggy. And good morning, everyone. Joining me today, as always, is Charles Horne, our CFO. He's going to update you first on the full year results. I'll wrap up 18, and then we'll shift over to 19 with our guidance and our thoughts. We'll keep this relatively brief so that we'll have plenty of time for Q&A. So, Charles?

Thanks, Ed. Performant revenue increased 5% to $8.1 billion. Adjusted EBITDA net increased 7% to $2.1 billion, and core EPS increased 17% to $22.72 for full year 2018. Revenue came in short of our initial guidance. Conversely, our core EPS achieved the midpoint for the year. EPS increased 24% to $17.49 for four-year 2018, aided by a lower effective tax rate, approximately 27% in 2017 compared to approximately 21% in 2018. We were active during 2018 transitioning card services toward more attractive clients and verticals. We sold 1.2 billion of Hail for Sale receivables during 2018, and ended 2018 with $1.95 billion in health for sale receivables with the goal of selling the majority of the balance early in 2019. From an accounting perspective, health for sale receivables are removed from card receivables and the related allowance for loan loss. They also no longer impact delinquency or principal loss rates. In addition, provision for loan loss expense is no longer recognized after the reclassification to health for but rather the market value of these receivables is continuously adjusted through a charge recorded in operating expenses. The marked market charges on health for sale receivables were over $100 million in 2018. Optically, the different classification makes provision expense look low and operating expenses look high. During 2018, we spent $443 million on share repurchases and $125 million on dividends. In addition, we reduced our corporate debt by $342 million during the year lowering our corporate leverage ratio from 2.7x to 2.3x, well below our covenant of 3.5x. Turning to the segments on the next page, starting with loyalty one, pro forma revenue increased 4% to $1.4 billion. Air miles pro forma revenue decreased 3% versus the prior year, primarily due to lower redemptions. Air miles issued were flat for the year, as we saw a pullback in promotional activity by our sponsors in the fourth quarter. Brand Loyalty's revenue increased double digits for the year, but product mix and higher-than-expected expenses kept adjusted EBITDA essentially flat. Epsilon's revenue decreased 4% to $2.2 billion, while adjusted EBITDA was $475 million, consistent with last year. The decline in revenue is primarily due to double-digit declines in our agency and site-based product offerings. Despite the top-line decrease, we were able to maintain adjusted EBITDA due to expense control and a positive shift in product mix. Lastly, card services revenue increased 10% to $4.6 billion, while adjusted EBITDA net increased 11% to $1.5 billion. Average receivables increased 8%, while active card receivables increased a robust 23% for 2018. Net loss rates were 6.1%, essentially the same as the prior year, aided by an improving recovery rate. The reserve rate at year-end was 6.1% of reservable receivables, down slightly as a rate from 2017 due to improving loss trends. The delinquency rate remains elevated due to a slowing growth rate in CARTS receivables, one in the industry we call primarily growth math. I will now turn it back to Ed.

Great. Thanks, Charles. If you'll turn to the slide entitled 2018 Full Year, a bit of this is repetitive, but just to hit the the key bullet points for the non-card segments, which would be the Epsilon and Loyalty One parts of the company. Again, with Epsilon, about $2.2 billion in REVs and $475 million on the EBITDA side. It is a business that has a mix of growing, stable, as well as declining products, and primarily on the declining side, the The agency and the sort of traditional site-based display offerings are in decline, but the margin itself continues to improve as we're shifting to the more tech-based solutions. On the loyalty one side, again, that consists of two primary businesses. One, the air miles business based out of Canada, as well as our brand loyalty business based out of the Netherlands, combined, we call that loyalty one. They did $1.4 billion in pro forma revenue and a little over a quarter billion in adjusted EBITDA. Brand loyalty, which again, does a lot of the shorter-term grocery loyalty programs across the world. The revenue was up double digits. And Air Miles revenue was down slightly. On the EBITDA side, essentially flat with the prior year. Really, the nice step up in revenue from brand loyalty was largely offset by higher expenses. Air Miles, the issuance, which is a key metric because that's essentially how we get paid. was effectively flat with prior year, primarily because in the fourth quarter, a number of programs were kicked by our sponsors into the earlier part of 19. So that's more of a timing issue. But that's sort of a wrap-up on the non-card segments. Let's turn now to the full-year discussion of card services, which had a good year. The revenue $4.6 billion in adjusted EBITDA. Again, it's a term we use in cards, but it does reflect the costs of both funding the portfolio or cost of funds, as well as the provision expense for credit losses. If you put those in there, you'll still net to $1.5 billion, and that's a very solid double-digit growth rate in both revenue and EBITDA. We had a record number of new client signings. We were running at two times sort of the already elevated historical run rate that we talked about. And I think probably most importantly about this one is the signings were all in growth verticals where we have a proven track record of winning, such as home decor, children's beauty, Jewelry, e-com, areas that actually are doing quite well on the retail landscape. If you looked at some of the names, such as IKEA, Wyndham, Academy Sports, Floor & Decor, Penn Gaming, Pure Ecom Players, such as Appliances Connection and Adorama, as well as three more that we've signed. We haven't announced yet, but very, very good year for signings. And also is a good step as we continue to transition the portfolio into healthier, higher growth type brands. So, you know, nice progress on that. And those will be spooling up, you know, as this year, as 2019 unfolds and we move into 20 and 21. Tender share remains strong. A lot of people ask me what tender share means. Tender share is nothing more than the dollars that flow that are being spent at that retailer, what percent are flowing through the card product. And if you look at the clients that we've signed in 15, 16, 17, and 18, we're seeing nice tender share gains of roughly 120 basis points year over year. So that's what we want to see. At the same time, the core vintage which again is the portfolio that has brands from 2014 and prior. We continue to hold very solid tender share roughly in the mid-30% range. So roughly a third of all sales will flow through our product. Importantly also, credit quality was stable. It was similar to prior year. And as we look ahead, and you talk to the folks whose job it is to watch over this stuff, you're not hearing any types of red flags in terms of consumer distress. And so we think that this, as we call it, the normalized loss rate or our long-term loss rate of roughly 6% right around seems to be a good number. That's what it was in 17-ish, 18-ish, and as we move into 19-so. That's a good sign. We are, as I mentioned, moving towards the more attractive clients and verticals was largely completed in the fourth quarter. Again, we're signing those types of clients, but at the same time, we are also moving out certain clients that can no longer benefit from our services. and many of them are having difficulties in today's changing retail landscape. So think of it as we're accelerating this pivot into the healthier verticals by moving out over $2 billion of card receivables in these troubled verticals. Overall, we reported average receivable growth of 8%. But what we look at here from a longer-term perspective is how about those active brands that we have, those that we're going to be relying on to keep us going well into the future, and that was up well over 20%, which bodes extremely well as we move into the latter part of 19. If we can turn now to the credit metrics. Charles, why don't you hit this one?

Sure. So, we're over on page eight, and I thought we'd talk through some of the key performance indicators for the year. I think it's important to start with normalized average receivables for the simple fact it includes our health for sale receivables. And that's a relevant metric because, really, we continue to earn revenue and incur expenses on health for sale receivables until sold. So, really, in evaluating gross yield, operating expense leveraging, you have to consider the health for sale receivables, which were about $1.9 to $5 billion at year end. Our gross yields were down slightly, about 30 bps, and that's primarily due to vintage mix. What that means is more of our receivables growth are coming from younger vintages, and it takes a younger vintage about three to four years to really hit a run rate gross yield. Operating expenses, we actually were good on the leveraging there. They were up about 10 basis points year over year, even though the chart shows 70 bps, as we talked about before, about 60 bps is due to the mark-to-market adjustment to carrying value for the health or cell receivables. Lastly, the delinquency rate, which we talked about a little bit before, it continues to be elevated on a year-over-year basis, primarily due to the slowing growth rate in card receivables. That pressure should moderate as card receivables growth reaccelerates, and we're anticipating that will be more in the third quarter, back half of 2019. With that, I'll turn it back over to Ed.

Okay. So, I'm on the slide nine, card services, the average receivables growth. This is what we use here to sort of gauge are we heading in the right direction as we pivot the card business itself. And if you look at the active clients, those are the brands that we're counting on to drive the longer-term growth of the business. It's masked quite a bit by the fact that we did, as we've talked about, discontinue our relationship with a number of brands. And if we turn back to the active clients, you'll see it was a very healthy year for growth, up over 20%. That's nice. What probably is more important is what does that mean for the future? And you'll see to the far right that roughly a third of the growth coming from these newer vintages in the healthier, probably more exciting verticals that we've been talking about. And that's up 200% from the prior year. So what's it all mean? What's it all mean is that the 2015 to 18 groups of clients that we sign represented roughly four billion of the portfolio in 18. And when those things are fully ramped up, because many of them are in the early stages, that's going to be roughly $11 to $12 billion. So there's a lot of runway there with these signings. We mentioned various verticals that we're excited about in names such as IKEA and Wyndham and Academy Sports and Penn Gaming. But also in there are some of the earlier signings, such as the Wayfairs and the Ulta Beauty and the Signet Jewelry, Williams-Sonoma, Diamonds International, Build.com, Viking Cruises. As you can see, a lot of different verticals from what we've been known for for the first probably 15, 18 years of the company, which was primarily mall-based specialty apparel. So we've made a lot of progress. and we're going to see the benefits of that play out as 19 moves into the latter part of the year. All right, so let's move to slide 10. I think this captures it succinctly, which is, you know, If you were to look at what is the benchmark in the industry in terms of growth rates, if you want to put in general purpose cars, you want to put in co-brand, you want to put in private label, most of it is captured in revolving debt. Revolving debt has been growing around 3% or 4% if you go back 7 or 10 years. And against that, we've been growing 18%. And that even includes the divestiture of those non-core brands that we talked about at length earlier in the call. So even with the $2 billion removed, we've averaged roughly 18% growth versus an industry that does three to four. And we expect that to be one of the attributes of this company going forward as well. We believe that we play in a sandbox that will allow us to grow at a significant multiple above the industry as a whole. A lot of this has to do with where we play in terms of our clients tend to be much smaller than the very large co-brand card programs that are out there. And if you were to look at our portfolio of 18 billion, that's spread over 160 different brands. So again, these tend to be smaller portfolios, very focused on brand and on high-end quality service, and that's our specialty. Additionally, to the industry-leading growth rates, our industry-leading return on equity. So our ROEs are, you know, 30% or more, which is anywhere between two to three times what the industry is at. A lot of people keep sort of scratching their heads saying, how can you be growing so fast and have ROEs that are two or three times the industry? And the answer is, again, we play in a sandbox situation. that we believe we have unique advantages. And the uniqueness of our advantage is the fact that everything we do is in-house from the actual network itself. We don't outsource that. The customer care is done in-house. The collections are done in-house. The marketing, the database, the databases that we build, they're all done in-house. And with that, that allows us to approach the industry in a holistic manner and allows us to have the uniqueness that comes with a closed loop type network that can extract not only who the customer is of the client, but also what she purchased down to the SKU level. And we use that type of information to then go back on a one-to-one personalized basis through the various digital channels as well as some of the more traditional channels to drive that incremental purchase. And it's those incremental purchases that that sort of set us above and apart from sort of the more traditional banks and card players in the industry. And so we're not for everyone, but we believe that the total addressable market, or the TAM, that we're going after is about $50 billion. And so we've got a long way to go to get there, and that gives us a lot of runway as we look forward. And when we talk about the TAM for our business, we're not talking about these big co-brand programs. We don't really play in that area. We believe that the private label offering is really the type of offering that is sought after by the client base that we're after. We'll occasionally do a co-brand as an accommodation for some of those clients. who already have a PLCC or private label card. But otherwise, we're trying to remain very disciplined in the products we offer and the deal terms that we'll accept. And that's why we believe that even moving into these newer verticals and healthier and faster-growing verticals, we're keeping the same types of discipline such that those ROEs can remain at that 30% plus level. Okay. Let's move into a little discussion about losses, which I think is always, you know, garners all sorts of different questions of why do you run the portfolio at a 6 percent loss rate, not a 3 percent, not an 8 percent, not a 1 percent? And the answer is we've tried to find sort of what we believe over the last 20 years to be the right level to run the portfolio to garner both significant tender share and therefore value for the retailer while at the same time not going too far out on the risk spectrum. And so if you were to look at the typical cycle, I always get asked about the cycle. The typical cycle for our business would be we run at a 6% or so loss rate. A lot of folks thought that, oh my gosh, the last couple of years, losses are creeping up. And what does that mean? Is the portfolio getting worse? And the answer is no. What basically happened, if you go back to the Great Recession, was that losses ran quite a bit higher than they typically do. And as a result, you effectively drain the pipe in terms of potential new customers. And as a result, you wound up going from above trend to well below trend. And all that's happened over the past several years is we've returned to our long-term trend line. It's nothing more than that. We think the fact that 17 and 18 were very stable, 19 looks to be stable as well, that we're at trend and we want to keep it right around that level going forward. So it's not going to jump up too much, not going to jump down too much. This is where we want to run the programs to optimize what we talked about earlier. Also, Charles touched briefly on delinquency rates, which were running around 60, 70 basis points above prior year as we exited 2018. There was some noise in that number. What's going to happen is you're going to see that start stepping down pretty pretty quickly. And so we expect that to drift down as we move throughout 2019 and we lose the noise. In terms of the outlook for 2019 for loss rates, again, we expected to come in in that six-ish type range for the year. The trends look good. From a seasonality perspective, just sort of a heads up, The way it works in our private label business is first quarter tends to be sort of the high water mark, and you'll be in the sixes there, and then you'll start drifting down. So look for about mid-six, maybe a little better in Q1, and then we'll drift down, and for the full year, we'll wind up right around back at that 6% level. So that's that. finish up 2018 we now move to 2019 to the extent there are no transactions completed if you were to just look at status quo for the non-card businesses we would expect to see mid single digit growth in revenue and adjusted EBITDA I don't think that status quo is going to be what we're going to see And we'll talk about that in a little bit. So let's go to CART services. We expect to exit 2019 at roughly 20.5 billion. It's up a little bit from last call where we thought it was around 20 billion. So about 20.5 billion compared to exiting this year at 17, this past year at 17.9 billion. Or said differently, we expect that both active as well as reported growth rates will converge at the end of the year as we push through this $2.1 billion discontinued programs, and both metrics will show an exit rate in the mid-teens, which again sets us up for a nice run exiting this year and going into next year. As importantly, the new vintages that I talked about earlier, these are the clients from 15 to 19 that we're excited about. We now expect them by the end of the year to account for over 40% of the receivables. So in terms of pivoting the portfolio, it's going very, very fast. And that's both from the new signings as well as the discontinued programs. It's a little bit of pain that we need to go through in terms of getting through the first part of the year without those programs that have been discontinued. However, the end result is clearly a much healthier and stronger portfolio. 19 also assumes a modest level of growth coming from some relatively small files that are out there that we have our eyes on, and we assume that we'll take a few of those in-house, nothing too significant, however. We talked about the transition to the home decor and the children's, the beauty, the jewelry, again, away from that sort of mall-based specialty apparel sector that's having such a difficult time. Importantly, we are keeping very strong discipline in terms of signing for these new vintages. And although obviously it takes them a while to ramp up, we are building the models and signing the deals keeping similar ROE characteristics. So, we do not expect that to be an issue going forward. We talked about the stability in credit quality and the loss rate staying relatively flat. with delinquency rates year over year beginning to come in as we move throughout the year. So the net result is it should be a very strong year for cards in terms of these critical metrics that we look at, active growth, the convergence of active and reported growth to 15% exiting the year, losses, delinquencies. But it will be dampened, you know, especially in the first half from the disposition of those card receivables. So that's sort of the price that we've decided is necessary to get us pivoted in the right direction as fast as possible and get this behind us. All right. Page 13, the 2019 outlook. For the Epsilon divestiture, obviously people are very curious as to how that's going, and I need to be somewhat brief in my remarks. Obviously, 18, we spent a good deal of the time with the board coming up with our overall strategic review of the various businesses. It was quite clear that Epsilon has many valuable assets, both from a technology side as well as a people side, that seem to have more value or is ascribed more value out in the marketplace than it was within the company itself, I think primarily due to the size of cards. And so the decision was made to go ahead and move towards a divestiture to capture that value and find the right home for Epsilon. The strategic review took a good chunk of the year. We did, in the fall, hire bankers and lawyers and all sorts of folks. And in November, we moved to a formal process. Where are we today? The process continues to move We did have a great deal of interest in the businesses. Initial bids have been received. We are currently finishing the selection of the final round. The process is moving smoothly. And I have to say, if consummated, the use of proceeds will be focused on a combo of further debt reduction as well as significant share repurchases. And the only comment I can make on that is it was good to see, as we move into the final round, interest from both the strategic side as well as the sponsor side. So stay tuned. We're moving into the final throws on that. All right. We're getting near the end here. In fact, I think I'm actually on my last slide. So if you go to the last slide on 2019 guidance, the initial annual guidance that we're going to throw out there is a little over 8 billion of REVs and 22 as a base case in core EPS. We expect, as we talked about, very strong growth in ending card receivables. What that also will mean, however, is you need to build a provision. for that big growth, and that is one of the reasons that earnings will be slightly dampened this year. Additionally, obviously, you had a couple billion of receivables that were generating income for us in 2018. Those have been moved out, and so as a result, that's the other reason why you're going to see some dampening of the earnings. Both of those are timing issues, which is good. The first being the provision bill means that the newer vintages are ramping up nicely, and that should pay off as we move into the following year. And then the dispositions that we talked about, again, we are doing that thoughtfully, but we wanted to do it and get it over with. We don't see anything else on the horizon. First quarter, revenue will be down mid-single digits. Core EPS will be down high single digits, primarily due to the dampening effect of the divestitures of the $2 billion-plus of receivables. Normalized average card receivables, again, will be down because of this divestiture. what we report from an active perspective should be nice and healthy in terms of growth rate. Importantly, from a guidance perspective, you're going to have quite a bit of movement, I believe, on the guidance as we start moving through the year. If you were to assume that there is an epsilon divestiture coming up in the use of proceeds, the timing of that, how it's used, is it debt, is it equity, et cetera, et cetera, that's going to change things quite dramatically. And so we're trying to sort of give everyone enough to start their models and give enough color with the understanding that you should expect things to be updated and changing Both Charles and I believe fairly dramatically as the year unfolds. From a summary perspective, the divestiture of certain card receivables will create some near-term headwinds. We've talked about that at length, and this was done on purpose to make sure that we can move faster to get this thing going. back to very healthy, strong, mid-teens-type growth in the file. We are the repositioning, as we've talked about, and the brands that we sign suggest that we're on the right path. And, you know, as a result, strong double-digit growth in active clients throughout the year. The gap that we talked about between our reported receivables and the active receivables will obviously, by definition, narrow to zero by the end of the year and should both exit at 15% plus as we finish that anniversary. Credit quality is stable. We talked about the ROEs in the business. Again, the newer clients, the disciplined approach we're taking would suggest that we expect those ROEs to remain stable at elevated levels vis-a-vis the industry. The epsilon divestiture, again, we think we will find a good home, the right home, while also at the same time unlocking a good deal of value for our shareholders. And at the same time, it does help the narrative in terms of beginning to make the whole story a bit easier to explain and a bit more focused on what we're trying to do. So I'm gonna wrap up now just with a thought or two, which is what we're going through right now in terms of repositioning the card portfolio into, to reflect where the health and the growth are in today's retail environment. is something that needed to be done, and we very aggressively are pursuing that approach, and I think the payoff will be superb as we move towards the back part of the year, as well as taking a look at other businesses within the company that may not be valued as highly as part of Alliance as they could be outside of Alliance, as well as potentially complicating our overall story. To some, it may seem like this is an awful lot of stuff going on at once. It is. But for those of you who've been around, this is not so different from what we did roughly 10 years ago, back in the 08-09, in the teeth of the Great Recession. We divested three separate businesses that were viewed as non-core, simplified the story. We then did a massive share repo at recession-level pricing. And so those two moves paid off quite handsomely for our shareholders. I view today as sort of act two, sort of 10 years later. At the end of the day, the critical things as part of the strategic plan are that we're pivoting the portfolio to healthier verticals. We're exiting those brands that we can no longer help and they can no longer benefit from our services. Additionally, we are divesting businesses that have higher value elsewhere and probably have not gotten the type of attention that they needed within Alliance. And then when it's all said and done, frankly, we'll be taking advantage of these, what I view as recessionary-level valuations, to benefit our longer-term shareholders with proceeds from these divestitures. So a little bumpy, but strategically it's a sound plan. We believe very strongly that it will pay off. especially for those who recall that it's not so dissimilar to what we did 10 years ago. With that, I'll put the pen down, and we'll open it up for questions.

Certainly, and at this time, if you do have a question, please press star 1 on your telephone keypad. To withdraw your question, press the pound key. And your first question comes from the line of Sanjay Sakrani with KBW.

Thanks. Good morning. I guess I've got one multi-question question on CARD and one on Epsilon. On CARD, could you just walk us through this noise on the delinquencies and sort of why you're confident it will improve over the course of the year? And then as far as like the provisioning is concerned into 2019, I know it's probably going to be a headwind from the growth, but any cadence associated with that, Charles, would be helpful. And then as far as the profile of the customer of these new partners that you're growing with, has that changed in any way, like the demographic profile? Because it used to be that this customer that you'd get would have a secondary income or additional income that they wouldn't sort of notate, and they'd have a very good credit quality profile. Is it sort of consistent with the same in low lines? Thanks.

You want to start off from the delinquent?

Sure. I'll take the easier one first, and then I'll give the hard one to Charles. But in terms of the type of customer we're seeing in the newer verticals, no, I don't think the quality is any different. In fact, since we have the right to maintain a certain level of quality within the overall portfolio, Sanjay, we can obviously adjust the knobs as necessary to sort of track that goal of roughly 6%. So I would say the only big thing that has shifted, you know, when the vast majority, when 90% plus of our cart holder base are women, you know, I don't see that changing a lot. But what we are seeing, obviously, as we're moving into the wafer.coms and some of the pure e-com plays, as you might expect, is you're going to begin to skew down more into the millennials and you're beginning to see with the Ulta Beauties and stuff like that, the Gen Zs or the iGens. And so for those types of clients, we're getting them in the door a little bit younger. And so, you know, you would adjust your credit lines accordingly.

And on the delinquency, Sanjay, you know quite well when AR growth decelerates, it pressures delinquency trends. You have less receivables going into your current bucket. And then when you get back to a point where AR growth is accelerating, it gives you some benefits on your delinquency trends. Based upon the profile we see now, I think you'll still see pressure on delinquency rates until you start moving into the growth periods of Q3, Q4. And I'd say the same will be true of your provisioning. Most of that will be more back half weighted Again, as you saw, we expect receivables to be down Q1, Q2, accelerating Q3, Q4, with quite a bit of growth based on the time that we see now in fourth quarter. So, I'd expect it to be your largest quarter in terms of provisioning expense.

And I think on the delinquency side, Charles checked me if I'm wrong here, but we should see the year-over-year spread begin to narrow like very soon.

So, probably next release. I hope so. And then on Epsilon, I know you guys are limited to what you can say, but could you just characterize if you're reasonably pleased with the bids and if you envision a total or partial sale?

Well, I've got counsel sort of hanging over here. But, no, I think we've probably said all we can. I mean, clearly, if you're going into – if you're selecting final bids – final round for bidders, you're not displeased with what you're seeing. So I think I'll probably have to stop there. All right. Thank you.

And your next question comes from the line of Darren Peller with Wolf Research.

Hey, thanks, guys. Let me just start off. I understand the rationale around the restructuring on the card side, obviously. Just can you give us a little more of an idea? When do you expect the helper sale portfolios to actually get sold? And then thinking about the freed up capital there, should we consider that being investing in growth receivables? Should we think about portfolio acquisitions? Is there even anything out there?

So I'll start with the hell for sell. You saw, Darren, we sold $1.2 billion during the course of the year. We ended the year at $1.95 billion. A chunk of that still relates to one bankrupt retailer that's in liquidation we're working on. I think that one could get done in the first quarter. And then I think a lot of it can be addressed first half of 2020. It's just some of it may take a little bit longer. What was the

Just the freed up capital plans. Yeah, I mean clearly if we're expecting both active and reported to hit that 15% growth rate by year end, clearly we're deploying that capital back into the business. A lot of it will be obviously to fund the continued ramp up of the 15 to 18 vintages. However, to your point, Darren, there are a handful of files that are not likely to attract the attention of the big banks, but very nicely in our wheelhouse in terms of size. And I think you can expect to see a combo platter from us in terms of both the organic vintage ramp-ups as well as a handful of these smaller portfolios coming in. Okay.

And just one follow-up. When we think of the pro forma entity for the restructuring for Epsilon, I mean, we have a large card business now, and we'll have obviously the Loyalty One business. So when we think about that, I mean, is the loyalty one business still going to operate as just a standalone business underneath the alliance? The umbrella, does it make sense to keep it? Does it make sense to, I just, I just, you know, I never really saw a ton of synergy between that and the court business. So I'd just be curious your thoughts there. Thanks again, guys.

Yeah, no, it's a fair comment. I think, um, I guess the easiest way to explain it is, um, we had a lot of balls in the air right now. And so we're taking things one step at a time. You've got, you know, sort of what can we say has been completed in terms of the overall strategic plan. We've completed sort of the necessary divestitures of those brands that we talked about in the card business, and we've set the card business up now, in my opinion, to have a very strong run for several years. We also have determined that There's a lot of value in Epsilon that we can unlock, and so that's sort of number two on the list. Obviously, there are further discussions going on about what else could we do in terms of continuing to focus and clean up the narrative on a go-forward basis. Are there other assets that may or may not fit? And, you know, at this point, we're getting around to that. But right now, the cards was first, Epsilon second. And that's sort of what we're focused on right now.

Okay. All right, guys. That makes sense. Thanks, guys.

Your next question comes from the line of Ramsey L. Afal with Barclays.

I'm going to try again on Epsilon. Can you share any details on potential timing? Is this something that we should expect prior to the next earnings call somewhat imminently in terms of some resolution there on Epsilon?

I guess we can keep trying to answer the question the same way, but I guess the best way to think of it is – talk to your banker friends, and when someone says they're going into the final round, you can take from that how long it usually takes from final round to when a potential announcement could come out, and we're likely to be on that track. So that's about as much of a non-answer as I can give you. Okay.

The end state of the entity here, let's just say that you hive off Epsilon and that potentially loyalty one is to follow. I mean, at some point, does it make sense to change your corporate structure from this ILC structure? I mean, would that not unlock quite a bit of trapped capital that could be put to work? I was just curious about your philosophy of kind of the long-term maintenance of that ILC corporate structure.

That would certainly be a possibility. All right. Thanks a lot.

Your next question comes from the line of Dominic Gabriel with Oppenheimer.

Hi, thanks so much for taking my questions. Just as you continue to develop your relationships with the card partners and their needs, many of these partners are seeing more sales on the online channel. Can you talk about how ADS's capabilities in a post-Epsilon world can continue to help your partners drive sales through the online channel? And also, you know, what did Wayfair see in ADS and your capabilities that some new prospective partners in the car business may also gravitate towards?

Thanks. Sure, and it's a good question. I think, you know, obviously we've had the capabilities for quite some time to do, you know, omni-channel type transactions, whether it's bricks and mortar or catalog, whatever it is. To us, they all flow into the central bucket. You're absolutely right. We're seeing, even with traditional bricks and mortar, you're seeing a larger and larger footprint on the online space. You're seeing at times our online sales representing 40% of our overall sales volume. So it is an enormous piece of our business today. What we're trying to do on the online side is continue to develop those tools that will make it, if you want to call it, an effortless transaction on behalf of anyone who shops online. We've all been in that position where the screen pops up and you've got all these fields to fill in and it takes forever. you know, the abandonment rate is huge. People just get frustrated with that. So what we do is, you know, you have your card and you have your number and, you know, your ability to get in there and sort of that one button, one push type transaction, which is so critical to closing the sale and You know, that type of technology we have rolled out or are in the process of rolling out across all of our clients. Additionally, you know, the ability to understand who is shopping online and offer right then and there a personalized type discount or board point or something that would get them to what we call a trigger marketing to make that one extra purchase that they normally wouldn't have done is critical. And so to sort of answer your question of what do we do that others don't, it really comes down to, again, understanding who the customer is, whether online or in the store, and proactively offering up a very, very focused offer that could trigger that one incremental change purchase that they otherwise wouldn't have made. And so our whole business is driven off of driving incremental sales as opposed to saving money from the client on interchange or something like that. And so the data itself and how we use the data won't change whether Epson is part of the overall ADS or outside of ADS. It'll either be a service arrangement or, frankly, we've built you know, a 500-person division within CARS itself over the years of folks, whether data scientists or marketing experts, to help drive that. So that's sort of the special sauce.

Great. Thanks. And then just one more, if I can. You just talked about the average balance size that you have currently versus where this average balance size could go when you've keep moving away from specialty retail? And how much do you think that piece of the loan growth story in 19 and 20 is attributed to that? Thanks.

You know, I don't have that off the top of my head. I can get that for you once we go offline. I just don't have that number. Okay, great. Thanks a lot.

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

Thank you, and good morning. Ed, I'm not sure if you could answer this or not, but I'll try. With Epsilon, would the company, would ADS not sell Epsilon if they didn't get offers that were within an evaluation that added significant value to shareholders with the capital deployment you would make? Are you committed to selling this, or if you got the bids that weren't sufficient, would you pull back?

Oh, I think that there's no question there is a floor, and it's got to be above the floor for sure. And so we wouldn't be moving to final rounds with bidders unless, you know, we felt comfortable we're heading in the right direction.

Okay, thank you. And then just on, I think last quarter you had put out kind of a 2020 receivables number. First of all, are the new assets generating the same returns that you generated historically, or are they a little bit lower? I mean, 30% ROE is wonderful, but as we try to think about earnings growth into 2020, as you build a portfolio, how should we think about the returns relative to the historical levels that ADS has delivered?

Yeah, I mean, I think, look, there's a lot of deals that we walk away from, obviously. And what we're trying to do is keeping the pricing discipline, you know, where it has been in the past. And so far, as long as, frankly, as long as we stay within, I keep calling it our sandbox, we seem to be maintaining that level of ROE balance. that we've had in the past. Now, clearly, when you're taking a very mature portfolio that's been around for 15 years, not really growing, you know, it's thrown off a lot of cash and profit, but longer term, obviously, it's not the healthiest, but those are being divested, and, you know, you're spinning up the newer brands, which take a little bit more of time before they can actually generate those types of returns, right? I mean, it's the nature of these vintages. But steady state, no. We're keeping the same discipline we've seen before. And frankly, the people who are looking for the special sauce that we offer, they're pretty focused on how are you going to drive that incremental sales and prove it to me. And as a result, I think we should be in good shape on the ROEs

Thanks. Last question real quick on the $22 guidance for next year, and I understand there's a lot of moving pieces that are going to change that as we move through the year, but does that include share buybacks?

It does not.

Okay. Thank you, Charles.

Your next question comes from the line of Dan Salmon with BMO Capital Markets.

Hi, everyone. This is William on for Dan. Just following up on Epsilon with a more fundamental-oriented question. You called out agency and site-based displays obviously being weak, but I was wondering if you go into more detail about areas of strength and, you know, which offerings are showing the most promise right now. Thank you.

The way I'd break it down is technology platform, which you remember is really the older part of Epsilon was very stable this year after being down the prior year. The two big drivers last year really were the auto vertical and the CRM, conversion CRM. We did not see the same level of growth this year with those two growth drivers as we did the prior year. But we still see building backlogs with them. We still see a big runway for them to develop. But even with our two bigger growth drivers, they didn't really produce as much in 2018 as what we thought they could. Perfect.

Thank you. Yeah. I mean, the big growth drivers going forward would be the CRM engine, the more traditional tech platforms, which are building the big loyalty and CRM databases, and then the auto as well. Perfect.

Thanks a lot. Your next question is from the line of Andrew Jeffrey with SunTrust.

Hey, good morning. Appreciate you sneaking me in. With regard to the ongoing discussions around Epsilon, Ed, I wonder if you could just comment on how sort of broadly or from a high level you're thinking about the pieces of that business that historically have been important to driving the value in card and whether or not or how you contemplate the sustainability of your ROE and the value prop, which we, I think, understand so well in the context of selling the entirety of Epsilon perhaps, you know, just how intertwined are those businesses?

Yeah, it's a great question, Andrew, and obviously something we gave a great deal of thought to of, you know, by quote unquote unlocking the value with Epsilon, are you in fact going to hurt the offering of cards? And so what we've done is a number of things. First out of the gate, as I mentioned, over the last several years, we've built up what I would call mini Epsilon within Cards itself. So you've got a 500-person dedicated division of marketing and data scientists who you could say normally would be over at Epsilon, but since Cards was so big, we built it in Cards. So that won't suffer. It's more on the technology side. So all of our brands... cards use the Epsilon platform for the various reward and loyalty programs that will continue to be the case so there'll be a service level agreement service agreement between the two entities additionally these brands would use the various digital channels whether it's conversant or whether it's the digital email platforms again Those would be direct service agreements with Epsilon. And then finally, a lot of the demographic psychographic data that is housed within Epsilon, again, would be a service agreement between the two entities. So to put it as succinctly as I can, which is always difficult, Andrew, it would be, you know, the people-based stuff we think is all taken care of and housed within CARTs, the technology and the data that we need from Epsilon, we are carving out very specific contracts and agreements between the two entities. So the goal is not to have anything that disrupts what we offer to the client set.

Okay. That's helpful. And then, Ed, I just wonder, I think becoming a pure play or closer to a pure play in value-added card services makes a ton of sense for Alliance shareholders. But is there a question about where we are in the cycle as you get more of a – as you become more of a pure play in a credit business?

Yeah, I mean, I think that's a lot of the stuff that has sort of hit – valuations of the financial sector and consumer finance companies. All we can do is, frankly, what worked best for us should a recession approach in the next couple of years, what worked best for us in the Great Recession, because you were around, was the fact that we actually grew. We basically did not pull in during the Great Recession. In fact, we expanded and actually grew the portfolio and took advantage of the environment to, frankly, get some really nice clients with very good ROEs over the longer term. And my guess is we are positioning the company right now, if you think about it, as we deleverage and take advantage of what we believe are very attractive valuations out there for us. I don't see us doing anything differently. So we're going to play through in terms of right now, times are good. And so we're going to continue to sign and to grow to the extent there's some type of recession in the road. When you're making the returns that we're making, you know, losses from our you know, you're probably talking a point, maybe a point and a half at most, which still leaves a ton of profit flowing from the card business. So we would follow the exact same game plan as before and deploy as much, if not more, capital towards growth if there's a downturn.

Okay. Appreciate it. Thank you.

All right. Okay, thank you, everyone. Appreciate it, and we'll look forward to our next call. Bye.

Thank you again for joining today's call. This does conclude today's conference. You may now disconnect.