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Alliance Data Systems Corp (BFH 3.01%)
Q3 2018 Earnings Conference Call
Oct. 18, 2018, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, and welcome to Alliance Data Third Quarter 2018 Earnings Conference Call. At this time, all parties have been placed on a listen-only mode. Following today's presentation, the floor will be open for your questions.
(Operator Instructions) In order to view the company's presentation on their website, please remember to turn off the pop-up blocker on your computer.
It is now my pleasure to introduce your host, Ms. Vicki Necla (ph) of Advisory Partners. Madam, the floor is yours.
Vicki Necla --
Thank you, operator. By now, you should have received a copy of the company's third quarter 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 the uncertainties described in the company's earnings release and other filings with the SEC.
Alliance Data has no obligation to update the information presented on the call. Also on today's call, our speakers will reference certain non-GAAP financial measures, which we believe will provide useful information for investors. Reconciliation of those measures to GAAP will be posted on the Investor Relations website at alliancedata.com.
With that, I would like to turn the call over to Ed Heffernan. Ed?
Edward Heffernan -- President & Chief Executive Officer
Thanks Vicki. With me today, as always, is Charles Horn, our CFO. He'll update you on the third quarter results and then I will update everyone on our 2018 outlook, talk a little bit about some of the things we have going on and initial thoughts about 2019. We'll try to get through this and have plenty of time for Q&A. So, Charles?
Charles Horn -- Chief Financial Officer
Thanks, Ed. Pro forma revenue increased 5% to $2 billion for the third quarter of 2018, led by strong performances at LoyaltyOne and Card Services. EPS increased 28% to $5.39 for the third quarter of 2018, while core EPS increased 17% to $6.26, both aided by lower tax rate. That flips in the fourth quarter as we expect a 24% core effective tax rate compared to 14% in the fourth quarter of 2017.
Turning to capital deployment, we spent approximately $103 million on share repurchases during the third quarter, while dropping our corporate leverage ratio to 2.4x compared to our covenant of 3.5x. Year-to-date we've repurchased slightly over 1 million shares or about 2% of outstanding shares. Cash flow will continue -- to be used to continue to support share repurchases and our quarterly dividend, but will also be used to reduce our corporate leverage ratio to 2.2x or lower by year-end.
Let's turn to a recent hot topic which is CECL, the new accounting standard impacting loan loss reserving. The new accounting standard uses the life of the loan methodology to determine expected credit losses. The life of the loan approach is widely viewed as replacing the loss emergence period, creating the potential for estimates to cover a longer loss horizon. We are in the early stages for implementation of this standard, but the preliminary thought is that the life of the credit card loan would be less than 12 months of coverage we currently reserve.
Key in the determination of the allowance is the ability to provide reasonable and supportable forecasts over the life of the loan. Again, because we expect the life of credit card loan to be reasonably short, we believe our current forecasting process would cover that period as opposed to those with mortgage or auto loans which have significantly longer life. In summary, we do not expect the new accounting standard to have any impact to our month's coverage.
Let's go to the next page and talk about the segments. Starting with LoyaltyOne, pro forma revenue increased 8% to $329 million. Breaking down the quarter, AIR MILES pro forma revenue decreased 6% from the third quarter of 2017, primarily due to a lower burn rate, that's the number of miles redeemed and a weaker Canadian dollar.
AIR MILES issued increased 3% compared to the third quarter of 2017, benefiting from increased promotional activity by the Bank of Montreal. BrandLoyalty's revenue increased 29% for the third quarter of 2017 and we expect continued strong growth in the fourth quarter.
Turning to Epsilon, revenue decreased 4% to $538 million. Similar to the first half of 2018, combined revenue for our agency and site-based offerings were down double digits. However, through strong expense management and the favorable shift in revenue mix, we maintain the same level of adjusted EBITDA as the third quarter of 2017.
Lastly, Card Services revenue increased 10% to $1.16 billion consistent with growth in average card receivables, while adjusted EBITDA net increased 4% to $414.3 million. Net loss rates improved sequentially by 50 basis points and the recovery rate improved from high single-digits in the first quarter to slightly over 18% in the third quarter.
The third quarter reserve rate decreased slightly to 6.5% due to expectations of further improvements and the net principal loss rate in the fourth quarter. The delinquency rate remains slightly elevated, primarily due to a slowing growth rate in card receivables, essentially what we call growth math.
With that, I will turn it over to Ed.
Edward Heffernan -- President & Chief Executive Officer
Okay, let's move to Slide 6, LoyaltyOne, and we'll start with the Q3. As Charles walked you through, we had a good quarter in terms of growth in both pro forma revenue and adjusted EBITDA for the second consecutive quarter. The key metric here in our AIR MILES program is the MILES issued. As you can see from the chart, ever since we got the unfavorable ruling out of Parliament back in '16, it's been a tough road back and we've been making good progress and turned the corner as we moved into the second quarter and it's since continued into Q3 and we expect that in Q4. So that's a good indicator of not only the health of the program but the way the accounting is done with the deferral of the revenue. It means that we're getting decent visibility on a go-forward basis.
BrandLoyalty, which stumbled last year, came back strongly by Q2 of this year; experienced double-digit growth in both revenue and adjusted EBITDA for the second consecutive quarter, so we feel that that program is back on track. So the outlook for the remainder of the year, solid pro forma revenue and adjusted EBITDA to finish the year, and we expect continued positive growth in AIR MILES issued.
Turning to Epsilon, Q3 revenue was down 4% compared to down 5% in the first half. It's still soft and it's still below expectations. We do have a number of businesses; so we have a mix of businesses that are growing, mix of businesses that are stable; and some product offerings that are declining. The biggest areas of challenge right now are the agency and site-based display the old Valueclick platforms and we had a number of client bankruptcies during the year.
The outlook, we expect to be soft, down 3% to 5% for the year. We do, however, note that a lot of that is in the lower margin areas and strong expense control keeps adjusted EBITDA approximately flat with last year. That means our EBITDA margin; we expect to expand by about a 100 basis points this year.
Okay, Card Services, Q3; probably the biggest item in Q3 was the fact that the new signings continue to be exceptionally strong. At the same time, we are aggressively implementing our strategy to diversify away from what really has been the backbone of cards for 20 years, which is the mall-based specialty apparel sector. And you'll notice that the Bon-Ton portfolio, which was one of our largest clients and went into liquidation. We have moved that out of our portfolio and into held-for-sale for the eventual migration up to a third-party as it winds down.
Getting back to the new signings, what you'll find is that, as part of our ongoing process to find the verticals where the growth opportunities are greatest, you'll find that we continue, as we started in 2015, to find verticals where the demand for our product is quite strong. And so the signings of IKEA in home decor, Wyndham in hospitality, Academy Sports, Floor & Decor.
Then we have some essentially pure e-com plays. Again, very much outside of what our traditional new signings would have been years ago, but again, this continues the process of really reacting to where the consumer is going today. And fortunately, we're finding that the retailers in those spaces are quite interested in the product itself.
Probably the biggest thing for this year is the fact that, you know over the years, we've talked about signing $0.5 billion dollar vintage, then a $1 billion, then it was $2 billion for a number of years. This year is going to be the first year where we are looking at close to a $4 billion vintage signing. What does that mean? It essentially means signing clients who will, over a period of 2.5 years to 3 years, spool up and add as much as $4 billion of receivables to the portfolio.
So it is a massive year in terms of these signings. We have announced roughly $2 billion and we have signed, but not yet announced, an additional $2 billion, So you'll see them either announced at the very end or toward probably December or either first quarter of next year.
But in total a very, very large signing year which makes this pivot that we're talking about happen that much faster. Also of note is that 100% of this has been what we call away from our traditional mall-based specialty apparel. So again, the portfolio is flipping very, very quickly.
If you were to look at our active client base, credit sales were double digit; receivable grew 17%; but highlighting the fact that the one area that is a drag on cards is the fact that there were a number of discontinued programs whether it's liquidation or bankruptcies, and those tend to reduce or those will reduce reported sales and receivables. And so, you sort of have a tale of two worlds. You have the up and coming newer verticals or verticals that traditionally weren't the mall-based specialty apparel that are doing quite well and they are becoming an increasingly larger part of our portfolio.
Okay, credit quality continues to improve. As Charles mentioned, from a guidance perspective, we sort of started the year and said high-6s for the first quarter then mid-6s and high-5s and mid-5s and we've been dead on as Q1 came in at 6.7% and 6.4% and Q3 came in at 5.9%. We're right on track from mid-5s for Q4. What's behind this -- what gives us comfort that we can get there, it really is nothing more than we're seeing stability on the growth side. But the other driver that we've been waiting for has been on the recovery side.
When you're recovering almost 20% of your losses, that's an important piece and then as a lot of you know, we went through a number of quarters where we moved that whole process from third parties to in-house and that caused sufficient noise and turmoil in the numbers, where the recovery rate had to dip down really in the single-digits. Third quarter was the first quarter in quite some time where it actually was slightly above prior year and fourth quarter looks to be very strong.
So, it was an investment that we made, a decision that we made, caused some pain earlier, but it is working out right now. So, if you were to sum up where we are in Card Services, you sort of have one negative and three positives. The one negative is, again, more of a macro issue of our traditional verticals, mall-based specialty apparel, certainly are stressed and they've caused some dampening and a drag on growth. Against that, we've got actually four positives; very solid financial performance; second, it's the strongest year of wins ever and a very robust pipeline; third, the wins are in stronger verticals; and fourth, credit quality continues to improve as recovery process is complete.
Turning to the receivables growth for Q3, we had reported growth of 10%. Again, that sort of masks what really is going on, which is the active client growth of 17%. And again, as we pivot toward the healthier verticals, what we see here and I think the big message is that the clients that we've signed since 2015, so the newer vintages are already 25% of the portfolio, up from 14% of the portfolio last year, and in fact, they're growing 90% year-over-year. And that's the area we're going to be really focused on.
Now against that, you've got these discontinued programs which primarily would be the bankruptcy of Gander Mountain and a partial quarter of Bon-Ton. And so, overall, the pivot and what we're trying to do seems to be picking up speed. Same view on the credit sales. Again, some of folks were concerned about, oh my gosh, we're not seeing much credit sales growth. A lot of that is nothing more than, you know when you go into bankruptcy and liquidation, you don't have credit sales. So the active clients again were up double-digit. And again, newer vintages are representing about a quarter of our credit sales and are growing quite rapidly.
All right, let's go to outlook. The slide 11, active client receivables growth, we expect to continue in the mid-teens. Non-strategic clients; now, what does that all mean? Non-strategic clients nothing more than saying those clients that are in liquidation that have gone bankrupt or in decline due to M&A. In other words, if you're on the other side of M&A, you're acquired, you don't tend to have the type of growth that you've had in the past. They will be aggressively removed from the portfolio. And what this essentially means is reported growth will slow and then recover as we move throughout 2019, while at the same time, active client growth remains very strong throughout.
This frees up capital and makes room for record new vintage and frankly, we can't really help the clients at this point who were in liquidation and bankruptcy. Our model, which drives loyalty and incremental sales, really isn't any -- isn't effective if the client is bankrupt or liquidating or sold off. So strategically, I don't think we're doing a disservice to ourselves or to the client.
And also, rather than having a slow bleed over the next two years, we're moving these files aggressively out of our active programs. We've got over a half done so far and we'll get the final piece done in Q4. So this is not something that's going to linger around. This is a very, very big piece of our strategic focus. New signings we talked about are on track for a $4 billion vintage. And then, we talked about the '15 to '18 signings are already a quarter of the portfolio, we want them to be at 50% in two years.
So there's a lot of numbers floating around. What does it really mean? If you look at the signings over the past several years and you look at our portfolio today, the portfolio today only reflects about $4.5 billion of the spool up of these vintages. When these vintages are fully spooled up over the next couple of years, they will be a total of $11 billion. So, we're not even halfway there in terms of what the existing signed clients will spool up to be which gives us a lot of confidence in what we're doing today.
Credit quality, I think we've beaten that one forever, but we are at our long-term annual growth rate of right around that 6%. I know it's been a bumpy ride getting there, but the loss rate in Q1 was high 6s; and in Q4, we're coming right-in in the mid-5s. And if you think about it, all the noise and delinquencies and everything else aside, really the difference has entirely to do with the recovery rates.
The recovery rates were a 50 basis point headwind in Q1; they're going to be a 65 basis point tailwind in the end of the year. And so the entire difference between Q1 and Q4 was all due to the ramp up in recovery rates. And since we're fully ramped up, that means that we have a very strong view toward where we believe things will be as we go into next year.
All right, turning to slide 12, we added sort of what is our long term trend, where do we like to be. Loss rates for '17 and '18 are right around that 6%, level. And as much chatter as there is out there, you'll see that pre-great recession, we're right around that 6%, and right now, we're back to where we were pre-great recession. So this is where we like to run the portfolio and that we think provides us with a very strong return, and at the same time, provides our clients with a good tender share flowing through the cards.
If we turn to the next slide, which is the average card receivables and the track record over the past seven years, you will see that the portfolio has grown, on average, 20% a year versus the past seven years. And to put that in perspective, if you were to look at the most common proxy used out there, that'd be the revolving debt numbers.
Revolving debt has moved from about $840 billion to a bit north of $1 trillion. That's about a 3% growth rate over the last seven years. So clearly, we're growing quite a bit faster than the industry. But, at the same time, our return on equity continues to be well above industry levels at 30% plus. So, it's a faster growing model and a more profitable model, and that's what we expect out of cards going forward as well.
All right, let's take a breather. We move to Slide 17 and talk about strategic objectives. There are four primary objectives that we have either executed or in the process of executing or will execute. And this is sort of a flow into next year as well. The biggest one was to move the recovery process in-house. Again, it was done during a time of rising overall loss rates, as credit normalized. So it -- really, you couldn't have had a worse time to have to do it, but I'm glad we did and got it behind us, and it allowed us to move from a headwind in Q1 to a tailwind in the second half and well into 2019.
If you look at -- so we're going to give that a green check. If you look at the next thing, we talked about aggressively pruning the portfolio of non-strategic clients. Again, those are clients that are going to be in liquidation, bankruptcy or on the other side of M&A. And to be sure, we are fully supporting the remaining core clients and support will be including all of everything that we've done in the past, everything on the account acquisition side.
We're building new tools that are pretty exciting in terms of things like in-store acquisition, away from the point of sale, so like iPads; easy, you're just going to swipe your license. We're going to be focusing on payment and security, but we're primarily known for engagement and rewards and having real-time capabilities and always on one-button approach. It's really what we're all about.
Again, we're driving insight loyalty and customer experience, which in the end lift and drive sales and loyalty for our clients, and that's not going to change. In addition to aggressively moving out those clients that have been considered non-strategic, we are pivoting the portfolio toward strong high-growth verticals. And as I mentioned before, less than half of what we have already signed is reflected in the portfolio today. The pipeline looks as healthy today as it did two, three years ago and we expect to maintain a model and improve visibility.
The model for cards long-term continues to be mid-teens receivable growth, a targeted loss rate of approximately 6% in that range, and most importantly, as you move different levers of OpEx and losses and revenue and all that other stuff is, we want to make sure we grow, but we grow with a return on equity target of greater than 30%. That's the model and that's what we expect to execute on.
Alright, 2018 overall company guidance revenue; obviously with some weakness in Epsilon and with the pruning that we're doing in cards, that is going to put pressure on our top line, and so, we're going to be moving top line to a little under $8 billion and pro forma at about $8.2 billion.
And we expect that that will not influence our cash flow, that will not influence our EBITDA, and as a result, we see no issue with maintaining our overall guidance that we gave a year ago of $22.5 to $23.0 a share or roughly between 16% and 19%. Just to put it in perspective, year-to-date, we're up 20%. So, with three months to go, I think we feel pretty good about being nicely in that range.
All right, two part strategic effort. This is what we've been working on over the last year or so and let's unveil as much as we can at this point. So, it has two pieces. The first piece relates to the card group and the second piece relates to the non-card group. In the card group, we'll be, again, aggressively continuing our effort to reposition the portfolio into the strongest highest growth verticals. This is not something that's new. We started this back in '15. And again, the receivables in our portfolio, only about $4.5 billion of the $11 billion signed, are reflected in the portfolio today. So, we've got quite a bit more that we know is coming onboard.
The pipeline for new business remains exceptionally strong. So while you have sort of a crosscurrent of mall-based specialty apparel feeling stressed, as people are moving to a different way of shopping in different verticals. On the other side, you're seeing new verticals that, frankly, were never really interested in our product. Basically, all saying the same thing, which is tell me about my customer? I've got to know more about my customer and that gets down to the ability to extract that skew level information and use it for insight at marketing.
So, if I were to put a net against it, I would say, the net macro flow into the new verticals is outweighing the stress that we're seeing on the mall-based specialty apparel. So, we will expect to continue to see very large vintages being signed. And as a result, we feel comfortable taking the position of ripping the band aid off, so to speak, and aggressively prune those clients in liquidation, bankruptcy, on the other side of M&A. We've done about 50% so far. We'll take care of the rest in the fourth quarter.
It will eliminate the drag over the next couple of years, give us a nice clean start, frees up some regulatory capital, and I think one of the big things that gave us increasing comfort in doing this now as opposed to later or absorbing this drain over the next two years is, the team has done a superb job of making sure that we are now at the point of saying, we have no renewal risk in 2019, which is a very big plus going into the new year.
Alright, high level objectives; card receivables, we would expect to exit 2019 north of $20 billion. We would expect to exit 2020 north of $24 billion. Those are our guideposts for the next couple of years. How do we get there? Well, it's actually pretty simple. We just simply added the remaining piece of those signed in '15 to '18 that are not in the portfolio today. Recall about $4.5 billion is in the portfolio today. However, the way they're spooling up with 90% growth, they're going to get from $4.5 billion to about $11 billion. You simply add that additional $6 billion and there you have it.
So what we've done is, we've taken that as sort of a very conservative tack and we basically said that that means that any new clients signed in '19 and '20 merely offset unknown future client attrition. We have no idea whether there'll be any or whether there'll be some, but this seems to be a fairly conservative way of taking care of it. So I think these are these are good numbers. That's what our plan is driving toward.
Credit quality; '17 and '18, we know we're going to be right around that 6% loss rate, which is our long-term target. We have a similar target going forward, assuming there's no major macro shock out there. And again, while so many people focus on it, the rates are important, but our focus is on return on equity. Now, our ROE target remains greater than 30%. So in summary, stronger client base, high growth, and high profitability.
All right, let's get into strategic efforts in the non-card space. We have taken a good year or so to get to this point and let me just go through it. We believe that the current stock price does not reflect the intrinsic value of our business period. We are evaluating which assets could thrive under a different steward, while also unlocking the value for stockholders. We will have a crystalized game plan of what and how before year-end and we'll communicate this path at this time.
Overall, it should be noted this will be an aggressive and significant effort. In 2019 -- for 2019 more specific guidance will be provided on the fourth quarter earnings call, obviously due to the upcoming major non-card strategic announcements. You should have a pretty good idea on cards, where we're heading; but non-cards, we're going to wait until we make the announcement.
We believe that executing on both parts of our strategic plan will result in a much more focused and unique model, a model that can sustain strong double-digit growth, a model generating significant and growing cash flow and a configuration that unlocks significant value for investors. So I do want to make sure that I'm crystal clear on this thing.
Regarding our upcoming announcement for non-cards, make no mistake, we will be moving very aggressively on this and that it will be significant in size. This is not going to be minor surgery. Our Board and management are in full agreement as to the needed actions, and frankly, we like what we're seeing from a market demand perspective.
Our Board review and debate phase, which took all of a year, is now over. There is no more debate, so you can expect a detailed announcement comfortably before year end. We just need a few weeks more to dot the Is and cross the Ts. Between this and the Card's aggressive approach, we expect to have a very nice model as we move forward, while at the same time, unlocking significant value for shareholders and creating the new Alliance for the next decade.
With that, I'll stop and take questions.
Questions and Answers:
Operator
(Operator Instructions) And your first question comes from Sanjay Sakhrani of KBW.
Sanjay Sakhrani -- KBW -- Analyst
Thanks. Good morning. Maybe first on this strategic repositioning or realignment. Ed, just to be clear, by the end of the year, we'll get details on how you move forward versus a specific sale? I guess what I'm asking is, are you shopping the businesses now? And also secondly, as far as the card businesses are concerned, is the sale of those -- of that business being contemplated as well?
Edward Heffernan -- President & Chief Executive Officer
On the card side, we're looking -- the big focus on the card side will be on, if you want to call it, moving out the sale of -- moving to held for sale, just those accounts that are liquidation, bankrupt or are on the receiving side of M&A. So you should think of that more as pruning and cleaning up the files that are just going to be a drag for the next couple of years.
And look, regarding the non-card side of it, again, the decisions have been made. We are in the process of getting all the information where it needs to be. And so the announcement that you're going to see shortly will just be clear in terms of which assets we're talking about and we would expect that we would move very quickly on that.
Sanjay Sakhrani -- KBW -- Analyst
Okay. And then, as far as the pruning is concerned in the Card Services business, maybe Charles, you could just -- could you just talk about what kind of core -- or what's going to be removed further in the fourth quarter as far as size? I think my math gets me to a little under $1 billion that would be moved aside? And I guess then, how comfortable are you guys that going forward the core portfolio, what's left, is not going to experience any additional bumps or hits again?
Charles Horn -- Chief Financial Officer
Sure. So you could see in the third quarter, we added to the held-for-sale. We're about $1.7 billion at this point. The biggest piece was Bon-Ton, which was one of our biggest -- I think it was our second biggest program when it went into Chapter 7 bankruptcy.
In the fourth quarter, I think there'll be another one or two that we'll look to add, based upon the various criteria that Ed gave you before. I don't know if it's going to be as much as $1 billion, but it could be, and I think it will position us quite well. As Ed talked about, the renewal risk for 2019 is done. I think we'll be in very good shape after the one or two additional programs in the fourth quarter that we evaluate and we look to divest.
Edward Heffernan -- President & Chief Executive Officer
Yes. And I think that, as we said, the view toward where we want to exit next year, that's all based on what we've already signed. So there's no spec in there, there's no renewal risk in there. And what we're basically saying is if there's another client that comes along that goes into bankruptcy or liquidation, we're just counting on offsetting that with anything new that we sign over the next two years. So I think it's a fairly conservative plan.
Sanjay Sakhrani -- KBW -- Analyst
And just one final one, sorry, just on the charge off rate for next year, I know ROE is important and there's a lot of noise in the rate, if you're divesting or moving aside portfolios. But you're expecting 6% for next year despite the denominator pressure?
Edward Heffernan -- President & Chief Executive Officer
We expect to be around the 6% level, approximately 6% level this year and approximately 6% last year; so yes, 6% plus or minus. We do believe that that's where we're heading. And a lot of that, Sanjay, is nothing -- if you think nothing more than if there is some pressure coming from the growth math, which you're going to see is -- that's going to be nicely offset through much of the year with nothing more than the anniversary of the higher recovery rates.
Sanjay Sakhrani -- KBW -- Analyst
All right. Great, thank you.
Operator
Your next question comes from Darrin Peller of Wolfe Research.
Darrin Peller -- Wolfe Research -- Analyst
All right guys, thank you. So I mean, it sounds like you're going to be freeing up a pretty decent amount of capital for moving those non-core loans more aggressively. And I just want to understand, I mean, would that be applied to just other receivables growth in some of the better areas you're talking about or would it be -- should we consider some for debt pay down? And then, just when think of the $4 billion, which is obviously a much bigger number than we expected of loans signed this year or the vintages, just what's the underlying growth in credit to that and I guess are there portfolio acquisitions included in that that we haven't seen announce yet?
Edward Heffernan -- President & Chief Executive Officer
You've not seen any portfolio acquisitions announced in that $4 billion, and in fact, there aren't any. There are, obviously, a handful of files that are out there that we'll take a closer look on -- look at. Clearly, freeing up additional capital from troubled clients and pouring it into potentially a portfolio acquisition would make all the sense in the world. The guidance that we've given you on the norms (ph), however, do not contemplate any portfolio acquisitions.
Darrin Peller -- Wolfe Research -- Analyst
Okay. All right, thanks. And then, when you think of the Epsilon businesses, I know you mentioned a decline in the agency side, which we've been seeing. How was the growth of the other non-agency sides of the business overall?
Charles Horn -- Chief Financial Officer
I'll put it this way. The biggest growth drivers for the Epsilon business has been the auto vertical as well as the Conversant CRM. They're still growing. They haven't grown at quite the same pace as last year and part of it goes to what Ed talked about, which is the various (ph) clients going into bankruptcy. We had some big clients within Conversant CRM that filed bankruptcy, this put a little bit of a drag.
We continue to on-board new programs quite aggressively in CRM that are going to be very good. But CRM works little bit like a credit card vintage, a new client in year one is going to be much smaller than the clients you've had four or five years. So really with the Conversant side of it, we've been playing through the bankruptcies with auto. It's really coming down to when do our big clients run the programs? If they're doing well, they run fewer programs and so it's a little bit of a timing issue to get there.
But overall, the two growth drivers are still in place, technology is very stable. We came into the year looking for stable growth within the technology business and that's what we're seeing. The two big drags have been -- again continue to be agency and obviously the old ValueClick, which is the side base not the CRM where we directly target to. Those have been drags, but they're getting to a point where they're much smaller and I think at some point that the drag will abate.
Darrin Peller -- Wolfe Research -- Analyst
Okay, alright guys. Thanks very much.
Operator
Your next question comes from Andrew Jeffrey of SunTrust.
Andrew Jeffrey -- SunTrust -- Analyst
Hi, good morning guys. Thanks for taking the question. I Understand and appreciate Ed, that the strategic repositioning is a work-in-progress. I just wonder, from a high-level conceptual standpoint, is Alliance Data sort of for the next decade going to be best thought of as a pure play technology-enabled private-label services business? I mean, from a high-level, can we start to think about the company looking like that?
Edward Heffernan -- President & Chief Executive Officer
I would probably broaden it a little bit more to say, more of a payment solutions, Andrew, only because I'm not sure the card moniker is something that is going to be relevant three, four years from now. It will be considered sort of yesterday's news, but effectively -- essentially, everyone will have, if you want to call it virtual cards on their phone and in different payment options and multi-channel marketing and all that other stuff.
So, at the end of the day, I think it's fair to say that Alliance Data 2.0 will be a combo of both the financial services that we provide today as well as the technology behind those programs, which allows us to understand the customer better than anyone else out there through the use of data and use that information to drive incremental activity at that client, whether it's on the card or separate from the card. And so, yes, I mean I would say at a very high level, it's sort of a combo platter of financial and technology that are going to be wrapped together and entwined.
Andrew Jeffrey -- SunTrust -- Analyst
Okay. And with regard to these new clients you're signing, can you talk a little bit about the demographics. And it sounds like perhaps you think the ultimate cardholder or virtual cardholder, as it may be, is perhaps a better customer than the traditional mall based retail customer and does that imply the potential for faster or higher than GDP sustained same-store sales growth? I'm just thinking about the (multiple speakers).
Edward Heffernan -- President & Chief Executive Officer
Yes, it's a great question. The cardholder itself isn't changing, right. It's really the retailer itself, so in the quote unquote old days of all of five or six years ago, you had same store sales growth at the core retailers growing 3%, 4% a year. We pick up tender share and that gives us the first seven points -- six points, seven points of growth in the portfolio. Today, you're not seeing any growth. In fact you may be seeing negative growth at the retailer.
So as a result, you don't have that sort of existing growth driver that you used to have. So it's not really the cardholder, it's more of the client. So as we shift into areas where the clients themselves are growing quite dramatically, then we're going to pick up more and more cardholders as the client grows. So it really is more of the health of the client and how the client is doing because that will allow us to -- we will typically get you know 30%, 35%, 40% sometimes of all sales flowing through our cards. And if you can get that with a client that's growing, obviously that -- rising tide lifts all ships, right.
Andrew Jeffrey -- SunTrust -- Analyst
Right, thank you.
Operator
Your next question comes from Bob Napoli of William Blair.
Bob Napoli -- William Blair -- Analyst
Thank you and good morning. I guess -- I mean it sounds like you're strongly leaning toward selling both the Epsilon and Loyalty businesses. And if that were to be the case or if you sold either one of those two, I would assume you're going to channel that capital back into a substantial share buyback or what is the thought on the segments and the capital from the distribution?
Edward Heffernan -- President & Chief Executive Officer
Yes. As I mentioned, obviously, we're not at the point right now where we're going to specifically identify which are the assets other than saying it's going to be significant and it's going to be within cards. Obviously, we see what's going on outside in the marketplace. We think there's a huge opportunity to unlock some value here.
We'll have the announcement come out in the next several weeks. We expect to move quickly, and yes, we would expect to have a considerable amount of capital or cash flow available to us, assuming everything goes well and we take care of these things, they're going to be some big numbers and they would come in and we would have a -- there's a few things you can do with it just like the free cash flow coming off the business. You can reduce debt. You can do buybacks. You can do special dividends. You could do acquisitions. You should assume that we will fall into one, if not more, of those buckets.
Bob Napoli -- William Blair -- Analyst
Thank you. And then Charles, on CECL, what are your plans? What is Alliance Data's accounting strategy going to be on CECL? How is that going to affect the reported numbers?
Charles Horn -- Chief Financial Officer
Like we talked about, Bob, earlier, we really don't think it's going to have much of an impact on us. We currently reserve at about a 12-months forward coverage. If you look at the life of our balances, it seems to run six, seven months. So we don't see anything that would put upward pressure in terms of how we currently reserve. So 12-months feels pretty reasonable. I could actually present a scenario where it could go a little bit lower, but I think right now we'd sit here and say we feel very comfortable, we will not have to increase our month's coverage going forward.
Bob Napoli -- William Blair -- Analyst
All right. And last question, just on -- to be clear on the end of 2019, $20 billion of receivables. Does that compare to the balance sheet receivables of $17.4 billion, the reported balance sheet receivables excluding the held for sale and that's an end of period number?
Charles Horn -- Chief Financial Officer
It would be an end of period number, so whatever number we exit the year at, that would be excluding anything sold or held for sale, so the -- what we would call our active file.
Bob Napoli -- William Blair -- Analyst
And that's what we would see on the balance sheet, is that the same comparable number because there's a number of different receivables that you report monthly versus the balance sheet that includes some other things?
Charles Horn -- Chief Financial Officer
It would be your end of period 2019 balance sheet number compared to your end of period 2018 balance sheet number.
Bob Napoli -- William Blair -- Analyst
Great, thank you.
Operator
Your next question comes from David Togut of Evercore ISI.
David Togut -- Evercore ISI -- Analyst
Thanks, good morning. As you move toward the strategic alignment and become more of a payment solutions company, do you anticipate being able to use your data and analytics capability to move well beyond private label and cobrand, let's say to more traditional Visa and MasterCard issuers to help them with, let's say, marketing to their customer base? Or is there broader applicability of your analytics in other words?
Edward Heffernan -- President & Chief Executive Officer
Yes, it's a great question too. I think, for sure, obviously the big engine that's going to continue to drive the bus will be private label. But to the extent there are cobrand programs out there, we can clearly use the similar type of technology to certainly help any type of on-us transactions. If it's a cobrand issued by a certain retailer, obviously any transaction that retailer would be part of sort of the family that we've talked about in terms of skew level information. A little less so once they do their shopping outside of the cobrand, but there's a lot of interesting things we can do with that data as well in terms of understanding the lifestyle and tendencies of those customers.
So, we would not limit ourselves to just the private label space. We wouldn't limit ourselves just to general purpose cards, although from -- right now, from a financial perspective, we're steering clear of most of the cobrands because of the competitive pressures in the marketplace. But, we would like to be viewed as a larger payment options provider than just private label.
David Togut -- Evercore ISI -- Analyst
Understood. Then, as a quick follow up on the credit side, you expect Hurricane Michael to be a significant credit event, the way the hurricanes last fall were to your book of business?
Edward Heffernan -- President & Chief Executive Officer
Yes, at this point, it's a little bit too early to tell. But we don't expect it to be nearly the size of last time. That's why we're sticking with our last guidance. Again, we've done, frankly, a pretty poor job of communicating delinquency flows in and out of the bucket. So, there may be some noise in there, but from a loss perspective, we feel good about the guidance that we've provided.
David Togut -- Evercore ISI -- Analyst
Understood. Thank you very much.
Operator
Your next question comes from Jason Deleeuw of Piper Jaffray.
Jason Deleeuw -- Piper Jaffray -- Analyst
Good morning. Thanks for taking the question. Just last quarter, there was talk about the in-house capabilities that had been built up in Card Services and the data and the marketing side, is Card Services now at a point where it can kind of stand on its loan -- on its own with those capabilities or with the strategic changes that will be coming. I mean is there going to have to be, I guess, depends on what happens, but I guess I'm just trying to figure out, does Card Services have enough capability on its own or will it need outside help still?
Edward Heffernan -- President & Chief Executive Officer
Yes. No it's a good question. We've looked at obviously a lot of this stuff. Fortunately, several years ago, because the retail vertical was so large for us, you've heard me talk about building up this mini Epsilon within cards with sort of 500 of data scientists and analytics and marketing specialists. So, from a perspective of what's already in place within cards, that's already there.
From a technology perspective, regardless of where we wind up on this realignment, we will continue to have the various cousins involved in the card business. So for example, providing the technology that drives the loyalty platforms of all of our businesses, whether those assets are within the mother-ship or sort of outside as a cousin, it's a pretty straightforward deal. But we will absolutely need to rely on the cousins, for example, the loyalty platform.
For example, on the Conversant side, we think that's going to be a critical new account acquisition tool for us to go out there in the marketplace and source new growth for our customers. So, there'll be a number of technology items that will continue to go back and forth between the different divisions, whether some of those assets are within the company or some are out, it's pretty straightforward in terms of what the services are.
Jason Deleeuw -- Piper Jaffray -- Analyst
Thanks for that. And then, there's been a lot of pivoting and strategic change already across the three businesses and some of the businesses are much further along and been more successful on that than some of the others or at least areas of the others. I guess why is now the right time to do the strategic change and maybe unlock value by separating some of the pieces of the business. Why is now the right time? Why not wait a little bit longer till some of these other businesses benefit from the changes you've already put in place?
Edward Heffernan -- President & Chief Executive Officer
Yes, I mean it's a fair question. It's one of those -- how long do you wait? And I think. We've had these discussions with the Board for well over a year now. So this started up north of a year ago, probably a year and a half ago. And if I go back 20 years, there's always a time when one of our engines people are saying, oh this thing should be spun out or sold or done something with.
And as we approach the end of this year what we're essentially seeing is that there seems to be huge demand out there in the marketplace for some of our assets, and frankly, we're seeing that these assets are not really getting value as part of Alliance and that they're overwhelmed by the sheer size of some of the other businesses.
And so, you put that -- those two pieces together, outside demand is quite strong for these sort of scarce assets along with we're certainly not getting credit for it. So it just seems like an appropriate time to do something.
Jason Deleeuw -- Piper Jaffray -- Analyst
Great. Thank you very much
Operator
Your next question comes from Tim Willi of Wells Fargo.
Timothy Willi -- Wells Fargo Securities LLC -- Analyst
Thanks and good morning. I just had a few questions. One was just sort of clarifying something around the credit loss expectations. I apologize if I missed this earlier but -- so for 2019 your guidance is essentially a loss rate of 6% that would essentially be what you're expecting for 2018, correct?
Edward Heffernan -- President & Chief Executive Officer
Our guidance is around 6%, so that I don't get nailed on if it's six point something, something, something, something. So we'll be in the ballpark, in the zip code, whatever you want to call it, of the six-ish range, in '17 '18 '19. That's sort of what we're -- what we target and whether it's 6.25% or 5.9% or something like that, I can't really say. But it will be close enough that it won't change the numbers.
Timothy Willi -- Wells Fargo Securities LLC -- Analyst
Okay great. And then my follow up, I guess, just sort of going to the company after all these events that you're going to discuss, I guess, in the next month or two. When you look at private label, I guess, and payment solutions, I guess I'm thinking about like the talent acquisition side. If there's any way to think about, hey, we want to hire the best payments of the dynamic space, you know a bit challenging to get the people of the caliber that we want to move forward, given where the equity has been and the noise around the company and if we can really streamline this, like you're talking about, is there actually an HR aspect here, a talent aspect that you think also benefits the ongoing company.
Edward Heffernan -- President & Chief Executive Officer
Yes, it certainly doesn't hurt. But I think we have thousands of people throughout the organization that are in, what we call the hot skill areas. And we have not had any major issues recruiting folks from that area. Again, 98% of the company is outside of Silicon Valley, where you hear a lot of those pressures. And so hubs that we've developed over the years, whether it's Chicago or Dallas or Boston, New York, Columbus, places like that we have a pretty strong rap and a pretty strong presence in those areas. So I think that's -- that should put us in good stead from an -- from a talent acquisition perspective.
Timothy Willi -- Wells Fargo Securities LLC -- Analyst
Okay, great. That's all I had. Thanks very much.
Charles Horn -- Chief Financial Officer
All right, one more.
Operator
And our final question comes from Larry Berlin of First Analysis.
Lawrence Berlin -- First Analysis Securities Corp. -- Analyst
Good morning, guys how are you today?
Charles Horn -- Chief Financial Officer
Doing great, yourself?
Lawrence Berlin -- First Analysis Securities Corp. -- Analyst
Good. Hey, I'm good thank you. Thank you very much. Hey, someone have to answer that question right? On the portfolio and so forth, no discussion on the interest rates so far. What percentage of your borrowings are fixed versus floating and then what assumptions are you making or consider that going forwards for the interest rates in the US these days?
Charles Horn -- Chief Financial Officer
Yes, you'd have to break it down between Card Services and at the corporate level. With Card Services we tend to keep around 60% to 70% of the borrowings fixed which would either be term asset backed securities and/or CDs. The variable would be on the conduits and primarily are in the money market managed accounts. That could change, Larry, as we move more to a consumer directed program out of our small bank in Utah. We could be doing more savings accounts and so forth that could influence it. But that's kind of where we tend to stay. At the corporate level, we're probably at about $2 billion of fixed rate debt, the rest is variable, but I can sync -- you just call me and we can sync up your models.
Edward Heffernan -- President & Chief Executive Officer
Yes, I would say overall a gradual rising interest rate environment is not hugely beneficial but slightly beneficial to us at this point.
Lawrence Berlin -- First Analysis Securities Corp. -- Analyst
Thank you guys.
Edward Heffernan -- President & Chief Executive Officer
Okay. All right, thanks everyone. We'll be updating everyone sooner, rather than later, on the strategic realignment and so stay tuned. Thank you.
Operator
This concludes today's conference call. You may now disconnect.
Duration: 61 minutes
Call participants:
Vicki Necla --
Edward Heffernan -- President & Chief Executive Officer
Charles Horn -- Chief Financial Officer
Sanjay Sakhrani -- KBW -- Analyst
Darrin Peller -- Wolfe Research -- Analyst
Andrew Jeffrey -- SunTrust -- Analyst
Bob Napoli -- William Blair -- Analyst
David Togut -- Evercore ISI -- Analyst
Jason Deleeuw -- Piper Jaffray -- Analyst
Timothy Willi -- Wells Fargo Securities LLC -- Analyst
Lawrence Berlin -- First Analysis Securities Corp. -- Analyst
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