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Alliance Data Systems Corp (NYSE:ADS)
Q3 2019 Earnings Call
Oct 24, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Alliance Data Third Quarter 2019 Earnings Conference call. At this time all parties have been placed on a listen-only mode. [Operator Instructions] It is now my pleasure to introduce your host, Ms Vicky Nakhla of Advisory Partners. Ma'am, the floor is yours.

Viktoriia Nakhla -- Investor Relations Director

Thank you, operator. By now you should have received a copy of the Company's third quarter 2019 earnings release. If you haven't, please call Advisory Partners at 212-750-5800. On the call today, we have Robert Minicucci Chairman of Alliance Data; Charles Horn, Executive Vice President and Vice Chairman of Alliance Data; Melisa Miller, President and Chief Executive Officer of Alliance Data and Tim King, Executive Vice President and 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 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 Melisa Miller. Melisa?

Melisa Miller -- President & CEO

Thank you, operator and good morning everyone. I'd like to welcome the folks that are with me here today and I'd like to begin with an important update on our overall business transformation, including the progress Card Services is making in our journey to reposition the portfolio as well as our consolidated financial results.

Tim will then cover the segment results and I'll close with 2019 and 2020 guidance. Let's turn now to Slide 4.

We can all agree that change was necessary and if there is any message that you take away from our time today, it should be that we are indeed making tangible progress. First, I'd like to acknowledge that this road to transition has been lengthy and at times bumpy for our stakeholders. The Epsilon divestiture tender offer and corporate restructuring are complete. Our Card Services business has expanded into healthy verticals and credit metrics have normalized. Within Card Services, you'll see progress in three important areas. We've successfully shifted our focus to healthy brands and verticals. We continue to serve the modern consumer with digital tools, adding new offerings and our streamlined operating model will allow us to do more with less and to get paid for the value we bring to the table. As I mentioned on our last call, we have been making the tough yet critical decisions in the short term to deliver on the long-term health and viability of the business.

With transformation can come disruption, so we have kept this very simple and think about our efforts in three pillars; a streamlined operating model, ensuring we offer differentiated value ultimately leading to consistent and sustainable growth.

Now while Card Services has been executing against its strategy to transition the makeup of the card portfolio, we've considered our broader operating model as well. This transformation is a company wide effort. We've examined all lines of business globally to streamline our various operating models and each has emerged with a leaner and simpler structure. Earlier in the year, we announced corporate reductions resulting from the Epsilon divestiture that run rate is now an estimated $100 million. Additionally, a companywide expense reduction initiative is well under way. These reductions will contribute more than $100 million in incremental cost savings for 2020.

Our approach to human capital which includes increasing both our global delivery model and digital workforce is in progress. We are fully leveraging automation and artificial intelligence to create efficiencies and expand our self-service offerings for brands and consumers. And this is exactly what you would expect from a company with Data as our middle name.

We are not like any other player in our space, we are deliberately different and that differentiation is why we win in the marketplace. An improved operating model and expense structure will allow us to invest more deeply in technology and in the digital space to ensure we will continue to win with the modern consumer and brands. As a result, we expect to have incremental solutions in the market in the near term strengthening our current payment products and our in-house marketing and loyalty expertise. All of this when added together, results in the larger more valuable programs were known to deliver. So what have we done to position ourselves for 2020 and beyond? Over the past several quarters, we've spoken about Card Services shift to growing vibrant verticals and brands and in a moment I'll walk you through the progress that we've made. Note, that we will continue to expand where and how we grow by building on our success, testing new markets and taking full advantage of the dozens of new emerging brands entering our space. Our new business pipeline contemplates these healthy new brands and there is a strong demand in the market for the solutions that we offer.

Let's turn now to Slide 5. We'll spend some time on the progress card is making in positioning our portfolio. As Tim and I spend time on the road visiting with investors, a question we often hear is how will you continue to grow given the uncertainty within retail. It's a question we've asked ourselves, we believe it's a fair question for us and it's precisely why we altered our strategy beginning in 2015. At that time, we made a deliberate decision to expand our reach in the winning new brands and verticals to include among others, beauty, home goods and retail. On our call today we will be more specific about the outcomes and the overall impact on the complexion of our portfolio.

I call your attention to the far left bar on the top chart. In 2016, less than half of our card receivables came from these newer verticals. And if you follow the dark blue bar all the way to the right you will see that in each progressive year our concentration of AR in these healthier verticals continues to build. Today, these vibrant verticals and brands make up greater than 60% of our card receivables.This did not happen by accident. We got here by signing a new grouping or vintage each progressive year.

Now looking at the far left bar of the bottom chart, you'll see that in 2016 less than 10% of our card receivables were coming from our newer vintages. Today that's grown to over 35%. Essentially, all of our growth is coming from these newer vintages. We made the shift intentionally and in Just in four short years we've deliberately altered our portfolio. We no longer rely on our important but slower growing core programs. Instead, we secured our future growth with newer programs in growing brands and verticals.

Importantly, some of these newer programs were start-up programs. So our ramp to fully mature tender share has tremendous reach. Now, before we leave this slide. We also wanted to cover the math and how we build a bridge from where we are today to our projected year-end card receivables. Important to note, we now project our end of period receivables to be roughly $19.5 billion down from our prior quarter forecast, largely due to the softness in the core programs I just mentioned. Generally with normal seasonal trends, we expect to see a 10% to 12% increase from Q3 end of period receivables to Q4 end of period receivables.

Our 2019 Q3 ending position of $17.9 billion puts us well in the range of $19.5 billion by the end of the year. We thought it was important to spend some time on the deliberate shift that card has been making these past few years. As I mentioned, these moves were intentional. We have exited some verticals that were not winning or no longer core. And admittedly, these actions have caused noise. However, we have also entered new verticals that are healthy and growing and evidence of that is illustrated here. Ultimately we are building a stronger, more diversified portfolio with room for growth and stability.

Now, let's turn our attention to the consolidated results for Q3 and move to Slide 6, let's begin with the revenue line. Revenue increased 1%to $1.44 billion and EPS decreased to $2.41 per share. Tim will speak to the components of revenue on the next slide. So let me address the decline in EPS numbers. EPS from continuing operations declined significantly due to the restructuring charges of $55 million pre-tax, primarily related to our non-card businesses and a $72 million pre-tax charge related to early debt retirement.The combined after-tax effect of these two items was $1.86 per share.

In addition, in our card business, we had a $100 million increase in provision expense related to the AR build which Tim will address on slide 8. The after-tax effect of this one large item was approximately $1.50. When combined the impact of these two items, was $3.36 per share. The provision expense also negatively affected core EPS, adjusted EBITDA and adjusted EBITDA net of funding.

Moving to net income, we were further affected by the expenses related to discontinued operations in connection with the Epsilon sale. The Q3 after-tax effect of this item dropped our EPS from a positive $2.41 to a loss of $2.13. Finally, 2019 had a higher effective tax rate of 26% versus the 16% we saw in 2018 causing an additional $0.33 of year-over-year pressure.

The Q3 was a noisy quarter and I understand how it can be difficult to reconcile due to the number of one-time events. So, Tim, let me turn it over to you to provide more detail on our results.

Tim King -- Executive VP & CFO

Thank you, Melissa and good morning to everyone. As Melisa just mentioned, there are factors negatively impacting us in 2019 while not under plan these the underlying metrics of the businesses are improving. So starting with LoyaltyOne, we see reported revenue decreasing 6% to $246 million for the third quarter.

Adjusting for the unfavorable foreign exchange rate and the shift to a net revenue presentation for certain reward products, revenue increased 1%. Looking at Card Services revenue was up 3% and in line with the increase in normalized AR. It is important to note that the both of our businesses saw positive revenue growth on an organic basis.

Moving to adjusted EBITDA LoyaltyOne's number were negatively affected by product mix resulting in an 8% decrease in adjusted EBITDA. I'll now move to slide 8 where I go into more details on card services. As I mentioned on the previous slide, revenue was up 3% in line with the increase in normalized AR. This is important turnaround versus the prior quarter when we saw revenue down 4%. In Q2, we had both lower yields and lower normalized average receivables. This quarter our average receivables are up and yields are stabilizing resulting in positive revenue growth.

Operating expenses were flat year-over-year and as Melissa mentioned, we have taken dramatic steps to increasing our operating efficiency . In this quarter, our revenue growth outpaced our operating expenses by 300 basis points. We had a $100 million provision increased compared to last year, which is largely because of the Card Services year-over-year negative performance. This was driven almost entirely by the difference in the AR growth trajectory.

Let me walk you through the math. In 2018 our Q3 reservable AR decreased by approximately $430 million. In the third quarter of 2019, our reservable AR increase by approximately $630 million. In 2018, our P&L benefited from the decline conversely in 2019, we needed to build the provision for the incremental AR, as we are now back to growing our book, we need to post up allowance for loan losses. Without this expense our quarterly performance would have been slightly better than 2018 and in line with our average receivables build.

Now turning to slide 9, I'll focus on some of the cards key metrics. Starting with credit sales, Card Services was up 6% on a reported basis. Compare that to Q1, where we are down 7% and in Q2 where we were flat. Also showing improvements from the prior quarters are the AR metrics. Specifically end of period AR was down 5% in Q1, down 2% in Q2 and that is now up 3% in Q3.

As most as Melisa mentioned earlier, we are still expecting robust growth for the year, but are lowering our year-end receivables expectations to $19.5 billion. While year-over-year gross yields are negative, they too are showing improvements. In Q2, we were negative to 2018 by 90 basis points. In Q3, we are 20 basis points lower than the prior year. This pressure is coming from the ramping up of new programs. By Q4, we expect this pressure to have largely abated and that we will be positive year-over-year. As we have guided before, we do expect gross yields to be down slightly on a full-year basis.

Turning to operating expenses, after adjusting for the mark-to-market and the held for sale receivables, we saw strong improvement of 100 basis points. We expect this number will continue to improve as a result of the efforts Melisa has mentioned. Both metrics of credit quality are showing stability or improvement our charge-off rates improved 30 basis points and a delinquency numbers were up slightly. And for the remaining year, we do expect our charge-offs to be flat versus the 2018 levels.

As a result of the lower income numbers, we did see our ROEs pause 30% on a quarter, this is temporary and this number is being affected by the mark-to-market expenses and we do expect it to take some hits in Q4 for restructuring charges but again a temporary on the ROE.

In summary, there are some issues, we need to work through but the underlying businesses are strong. LoyaltyOne organic revenues up slightly, product mix is causing some noise but is generally stable business. Card Service now has increasing sales in AR, normalizing yields, improving expenses and stable credit metrics. And we've successfully executed a large cost reduction efforts at the corporate level.

I will now give it back to Melissa who will speak to guidance for 2019 and 2020.

Melisa Miller -- President & CEO

Thank you. And as Tim mentioned, there are a number of one-time factors affecting this year statement. If you turn now to slide 10, at first we did not contemplate the Fed lowering the prime rate twice, in fact like many in the industry our early forecast predicted a rising interest rate environment.

Second, we are now expecting a larger mark down on our held for sale receivables than previously anticipated. However, we are committed to moving forward with the sale of these portfolios to clean up our balance sheet. Third , we've seen some credit sales deterioration and our core programs which is leading to a slight reset in our average accounts receivable.

We still fully expect to exit 2019 with yields higher than the previous Q4 yet down slightly for the full year. We are tackling these disruptions now and they are all fully reflected in our guidance for 2019. The combination of these factors is driving both the revenue and a core EPS reset, while we guided to revenues of $5.8 billion, we now believe we will be flat to 2018 at $5.6 billion. On core EPS, we are now targeting a range of $16.75 to $17.00 even per share. On a pro forma basis, we are targeting $20.50 to $20.75 EPS.

So despite the moving pieces, I hope you heard that we have made tangible progress in improving our business model and repositioning the card services portfolio. We are shifting our focus to faster growth verticals and we'll be implementing new offerings and doing more with less at a lower cost. Our efforts will ultimately restore the health and vitality of the company and we are confident that the growth will follow.

And finally, moving on to slide 11, we will enter 2020 with a more focused, streamlined business,. We've put the building blocks in place to ensure this is our future reality. We see significant runway ahead. Based on our current visibility, we expect lower operating expenses from our streamlined operating model, low single-digit revenue growth and mid to high 20% growth in core EPS, Core EPS will be up high single digit versus 2019 pro forma core EPS. Breaking it down by segment and LoyaltyOne, we expect to see consistent, stable performance as we will be operating with the reduced cost structure and they are making the necessary adjustments to improve performance.

We expect Card Services revenue to be up mid to high single digits as our newer vintages continue to drive gains with single-digit growth in average card receivables and flat total gross yields. Credit quality is expected to remain stable. Our road to transition has been bumpy at times and this road has been cleared and we now in new [Indiscernible]. This has positioned us to declare a new beginning and we expect 2020 will be a strong growth year in terms of revenue and profit.

We look forward to hosting an Investor Day in early 2020 and are working through some growth initiatives that we look forward to discussing in more detail. So timing will be firmed up as we get closer.

Operator, that concludes our prepared remarks. I'd ask that we now open up the lines for Q&A. Thank you.

Questions and Answers:

Operator

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

Sanjay Sakhrani -- KBW -- Analyst

Good morning and thank you for all the context as we look into next year but I wanted to just clarify maybe your confidence on some of the guidance data points that you provided both in terms of revenues and expenses for each of these segments, I guess one point I was thinking about is, when I look at your rate assumption for no rate reductions number more further rate reduction. It seems like the market is assuming there might be 2 to 3 more. So should we think of that as putting risk to the EPS target range for 2020 if that's the situation? And then how should we also think about capital ratios and how you manage capital going forward into 2020? I've also got one follow-up after. Thank you.

Tim King -- Executive VP & CFO

So let me start with the rate question. We do not expect any yield compression without contemplating any further actions by the Fed. So that would put risk on us if the Fed does lower rates. So that's the answer one, two as you start thinking about the guidance, going back to the yields we expect yields to say flat. So our yields and therefore our revenues should be very consistent with our AR growth. I mean, we don't expect any degradation in our yields. So very much in line with our AR, that's going to flow through to our our EPS and the EPS is of course going to also benefit from the cost savings.

So if I just use -- and I'm going to use pro forma and I can switch back if it's easier but if I use the pro forma that we put out of $20.50 to $20.75 we would expect our flow through on that pro forma because we've contemplated the expense reductions in our pro forma to be up 6% to 8%.

Sanjay Sakhrani -- KBW -- Analyst

Okay. And I guess what are the asset and liability betas if you have further rate cuts, like how does that flow into revenues and expenses for Card?

Tim King -- Executive VP & CFO

I'm not following your question, are you asking how rate sensitive we are on the asset side versus the liability side?

Sanjay Sakhrani -- KBW -- Analyst

Yes as rates go down, how should we think about the impact?

Tim King -- Executive VP & CFO

We are about 70% to 80% variable rate on our book. It takes about six months for our liabilities to catch up to the rate reductions being to reset our liabilities. So in essence, we have exposure for about 3 or 4 months as it did the liability start catching up and are obviously our asset reset more quickly.

Sanjay Sakhrani -- KBW -- Analyst

Okay and maybe some more color on sort of how we should think about capital management and ratios. And then my follow-up question is also I saw an 8-K that Kelly Barlow from ValueAct is stepping down from the Board and it doesn't seem like there is any disagreements with the company but maybe you guys can talk about the relevance of that and how that might affect the path forward and also Melissa, I thought I heard you say you guys are done with the corporate restructuring, does that mean that any further sales of divestitures are off the table? Thank you.

Tim King -- Executive VP & CFO

I'll take the capital ratio and we will turn it over to Rob since he is here to talk about Kelly and then we will switch back to Melissa as far as any further strategic conversations. So capital ratios Sanjay, I really think about that in three very distinct buckets. I obviously think about the balance sheet, making sure the balance sheet is very healthy. We have enough cash on that balance sheet. We also think about any type of strategic investments. So anything we might do in Card or the other LOB as far as looking at doing some type of investment to obviously sure those businesses up or continue to grow those businesses.

And then finally, of course, we look at stock repurchases . So we look at those three different buckets. And we just balance of three of them out.

Melisa Miller -- President & CEO

And Sanjay if I might add to that, we also consider the capital strategy with the overall business strategy, so we don't separate them they actually go hand in hand. And so as we look forward and ensure that we are making the right investments back into the business that will influence how and where we allocate capital. We see them going together and then I'll pick up on the corporate restructure question, Rob. after you.

Robert Minicucci -- Non-Executive Chairman

With respect to Kelly Barlow of ValueAct Sanjay, this week Kelly informed us that earlier in the year he took on new responsibilities. He remained core portfolio manager of a new fund of ValueAct which focuses on social and environmental problems. He continues as a partner in the Master Fund. You said it in your comments Kelly has been a significant contributor to the Board, there are no issues in terms of strategy differentials, financial or operating differential perspective, he was very effective in raising and changing our strategy in our pivot in the management changes and so I think now with our path to find he's going to devote more time to his role at ValueAct, so clearly we are grateful for his service and wish him the best.

Melisa Miller -- President & CEO

And Sanjay if I might come back around on the corporate restructure question, I appreciate you giving me a chance to follow up, what we were attempting to articulate was that the corporate restructure actions in connection with the Epsilon sale were complete. If there would be anything in the future, of course, we would reevaluate what would be required. We mentioned previously that we had a number of initiatives that were under strategic review and that really a still what we would say where we are today. Does that answer your question?

Sanjay Sakhrani -- KBW -- Analyst

Yes. Thank you very much.

Melisa Miller -- President & CEO

Thank you.

Operator

Your next question comes from Darrin Peller with Wolfe Research.

Darrin Peller -- Wolfe Research -- Analyst

Thank you. May be to start off with what you might be contemplating in 2020 guide with regard to either portfolio acquisitions or the type of growth from different types of retailers, how much flexibility do you actually have a portfolio acquisitions also it would be helpful? And then should we be expecting any more portfolios to move it to held for sale, just overall, how the health of the portfolio?

Melisa Miller -- President & CEO

Good morning, Darren. In terms of portfolio acquisitions, currently our 2020 guide does not contemplate any large-scale acquisitions. So that could be an upside opportunity. Moving forward, our long-range plan certainly we would be evaluating that which is available in the market. We do expect however to be signing a very healthy new vintage next year and some of those programs that we signed this year will be coming up next year and that is also fully contemplated in our 2020 guidance.

And then with respect to held for sale portfolios, we did have a strategic non-renewal but sitting here today, there isn't one that we know about, we will always be selective in what that looks like and that's largely why we are really committed to moving forward and clearing up the balance sheet with those that are there today.

Darrin Peller -- Wolfe Research -- Analyst

Just a quick follow-up on that, when we think about the profile of those new vintages, with respect to the credit quality of those loans as well as the yield and the trade-off between the type of yield we want to get for that credit, I mean is it basically the same and I imagine we should be expecting the ROE to get back to north of 30%?

Melisa Miller -- President & CEO

It is a great question and the answer is from a credit quality perspective, we are actually seeing a bit of an improvement in some of the newer vintages over the rest of the book. But we would expect that over time we would say it would be stable and the exact same with the yields. They just take time as you will know to spool up and it really depends, if we have a start-up program, you're looking at about 3.5 year-ish, but by the time we get to steady state versus of course a full scale conversion where we have productivity right away.

Darrin Peller -- Wolfe Research -- Analyst

Just last question and I'm sorry if I missed this earlier but I was just trying to find the breakdown on the revision to EPS guide this year specifically from the held for sale. I mean, I'm sorry I could find it or you may have said it earlier but if you could just reiterate that one.

Tim King -- Executive VP & CFO

Sure. Obviously our reset mostly outlined three specific items that cause our reset one is going to be the held for sale mark, two is going to be a slightly lower average receivables and then the thirds one, well am I drawing a blank?

Melisa Miller -- President & CEO

Primary.

Tim King -- Executive VP & CFO

Primary. Thank you. And each of those about a third each.

Darrin Peller -- Wolfe Research -- Analyst

Okay, All right. Guys, thanks very much.

Operator

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

Bob Napoli -- William Blair -- Analyst

Thank you. Melisa, what is the right revenue and earnings growth rate for this business over the long term? Can you give some color on what you think the right model is?

Melisa Miller -- President & CEO

That's a great question, Bob. And I'm glad that you asked it because as we bring forward our long-range plan for us, it's not growth at all costs for us, it's not deliberately throttle growth back because you have a short-term gain, it really is what is the best for the long-term viability of the business and we would say long-term, high single digits both in terms of revenue growth and throughput and of course our sales in AR would be slightly different depending upon if we have a year with many conversions or many start-ups.

Tim King -- Executive VP & CFO

Bob, there are some other factors. When we start growing in the high single digits that certainly if we have some opportunistic things presented to us and certainly if we go over slightly that number, that's fine. We don't end up hurting our organization, we have infrastructure we need to put in place, we have capital requirements. Certainly, we need to make sure that we have a compliance organization to keep up with that. So we start thinking long term with high-single digits. It will bounce around a little depending on the opportunities we see.

Bob Napoli -- William Blair -- Analyst

If you look at that high single-digit revenue growth in with your strong ROE, do you get some operating leverage on expenses? And then capital return drives like low-double digit earnings growth and EPS growth? is that the model or is that ..

Tim King -- Executive VP & CFO

It Is our model. As you go down the P&L, obviously what I'll start looking at the AR growth, high single digits I expect my revenue to be in line with that, we are not seeing any degradation in our yields at all. When you go down to our operating expenses, we are pushing efficiencies there. So we'll get a little pickup there, charge-offs have been very stable. So our provision expense and our charge-offs have been very stable.

The little bit of pressure in the last few years and cost of funds which certainly is abating now so by the time you get down through that yes, you should have some flow-through that's better than your growth on your AR.

Bob Napoli -- William Blair -- Analyst

Okay. My follow-up question is just--and I appreciate the presentation on the shift in the customer mix but it's still in a way, I mean a very choppy retail market out there and I mean I would guess that as you look at your portfolio that I mean, I'm sure you guys which customers could be at risk and not at risk and how do you get confident I guess in that long-term model that even as you're still converting or adding high more stable retailers that you're not going to have some significant fallout. Some of your larger customers still are that are in that active, or not exactly performing with all cylinders going. I guess if you would.

Melisa Miller -- President & CEO

Yes, I think that's a fair observation. And then just a few thoughts we bring forward first, some of the divestitures, particularly those that we executed against that last year actually helped to de-risk our portfolio, we closely monitor the viability and the financial health and of course there is a list or watch-list that we carefully consider but when we really think about the rest of the organization, we look at it in the form of EBT risk. So what we have done is, as we've built our long-range plan and our guidance for 2020, we have assumed that there will be some percentage of brands that will not make it and that is fully contemplated in our 2020 guide and our long-range plan.

Bob Napoli -- William Blair -- Analyst

I'm sorry, I need to sneak one more in. The buyback that you did, why do the buyback when you did and the way you did with, knowing that there is some clean up to go and I think you raised your guidance a little bit last quarter, why do the buyback at the point that you did and not wait until you have a little more understanding or control over the business if you would.

Tim King -- Executive VP & CFO

So obviously we looked at a variety of options, working with the Board as far as what was the right return to shareholders. We felt that Dutch tender auction was the best way to get some return back to the shareholders considering a variety of different options and it seems like the best to us at the time and I'll tell you, our view is we successfully executed that Dutch tender. The stock was trading about $155 a share when we executed that we were able to buy close to 5 actually a little more than 5 million shares that below the market price for 148 and I think a lot of people judging that versus where the stock is now but if you look at the circumstances when we execute that Dutch tender we felt it was a nice return to our shareholders.

Bob Napoli -- William Blair -- Analyst

Thank you very much. I appreciate it.

Operator

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

David Scharf -- JMP Securities -- Analyst

Good morning. Thanks for taking my questions. Melissa, I'll echo some other comments in expressing appreciation for kind of the the deeper dive into the portfolio shift. I did want to follow up on that a little bit and one of the hallmarks of the traditional retailer base and not notwithstanding all the secular challenges that you've had to pivot away from is that over the years there is a remarkably high retention rate among all those traditional mall-based retailers. And as we think about the 60% of AR now that's coming from these newer verticals, I'm wondering if, as a start you can perhaps give us a sense for the timing of those renewals. I mean, since a lot of these are newer companies are not necessarily start-ups but things like all and so forth that have experience such rapid growth recently. Can you give us a sense for the contract lengths of a lot of these and perhaps what percentage of that AR might be up for renewal in 2020 and 2021?

Melisa Miller -- President & CEO

Great question, thank you and good morning. So again, our guidance for 2020 would fully contemplate any programs that we would bring forth or consider up for renewal. So that would be important and on average, it does depend on the vertical and it does depend on the product type whether it's a co-brand program or private label but they are anywhere from 7 years to 10 years. there are a few programs that are five years and that's largely driven by us because we want to ensure that it's a vertical into which we would like to play. Does that answer your question?

David Scharf -- JMP Securities -- Analyst

That's helpful. It sounds like, there isn't any imminent bubble of renewals necessarily in the next 12 or 24 months.

Tim King -- Executive VP & CFO

There are spread over the term. So if we start thinking a seven year, eight years on average for our renewals, if we look at this is fairly often look at it to make sure we don't have a big bubble in 2023 or 2024 their spread fairly consistently over the terms which is nice because we don't have any big renewal risk in any given year, we look at the big renewals of small renewals co-brands the PLC season, we look at all of them. I'd say we don't have any risk other than it's just peanut butter for lack of better term over over-the-like 7 years 8 years.

Melisa Miller -- President & CEO

And David, I appreciate the comment about remarkable renewal rate. I actually wrote that down I am going to have to put that on our office wall, and we appreciate the acknowledgment we retain 100% of the brand partnerships that we want to retain. So if we are in a situation where we are parting ways, it really is because there is a fundamental disconnect in how we view the value and the viability of the program.

David Scharf -- JMP Securities -- Analyst

That's helpful. That's actually a good segway to my follow-up, as it relates to the held-for-sale by my calculation based on kind of the efficiency ratio, the opex, the 8.7% I calculate the mark down on that held-for-sale is about 60 million. Can you give us and that obviously has implications, not just on valuation but potentially timing, I seem to have jotted down in my notes with the expectation, a quarter ago was that most of that held for sale would be disposed off by the end of this calendar year. Is there any update on your latest thoughts on timing?

Tim King -- Executive VP & CFO

Yes, obviously we are actively negotiating of the portfolios right now. Clearly, we're not going to do something that would be silly economically for the sake of December 31st but we would very much like to clean up the balance sheet by the end of this year.

David Scharf -- JMP Securities -- Analyst

Got it. Thank you very much.

Operator

And your next question comes from Andrew Jeffrey with SunTrust. And we are limiting the questions now to one question with the one follow up.

Andrew Jeffrey -- SunTrust -- Analyst

Thanks for taking the question. Good morning, Tim. Can you help us at all with how your core EPS outlook might translate into GAAP? It strikes me a lot of investors are waiting to understand what your GAAP earnings are to make ADS comparable with peers and I know there are a lot of moving pieces. But can you help us with that at all?

Tim King -- Executive VP & CFO

I am doing this quickly in my head, but there should be no difference in my improvement in my GAAP versus my core EPS. There is not a big difference as I walk down the GAAP from my core So you can get the same type of improvement.

Andrew Jeffrey -- SunTrust -- Analyst

Okay. That's certainly helpful. And then as a follow-up, I want to dig in a little bit on the reserve build and I recognize again the season may change the dynamic here a little bit but should we expect as the portfolio grows that we're going to see sort of a stair-step pattern? I'm just trying to understand why there would be what sounds like what's the catch-up in 3Q and how to reconcile that with growth going forward?

Tim King -- Executive VP & CFO

I realize that was a difficult math exercise to go on an earnings [Cross-talk] but when I'm comparing Q3 of '18 to Q3 of '19, the difference in the end of period receivables build which is what I have to put the provision up for is a $1 billion, I decreased $400 million last year or increased $600 million this year and our normal reserve rate that's just a standard reserve rate it's going to cost you $60 million to $65 million so hence the $100 million. Last year we got a benefit of a lower rates we decline in our rates we pick got even better last year because, again, I'm comparing year-over-year this year I have very stable credit. So I didn't have any issues there but last year I got a lower rate and lower receivables this year of course I had higher receivables stable rates. The difference was $100 million between 2018-2019, there is no credit issue there. It is 100% based on the receivables.

Andrew Jeffrey -- SunTrust -- Analyst

Okay, thanks.

Operator

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

Dan Perlin -- RBC Capital Markets -- Analyst

Thanks. Can you just kind of help remind us how you plan to get L1 back to growing again versus kind of the cost rationalization story? And then what would be like the trigger for underperformance that would require you to get rid of it? I know the question was asked about dispositions of assets but I'm just trying to get a picture of how this all plays out as you think about long-term calculus for the business.

Robert Minicucci -- Non-Executive Chairman

I think it really comes back to a couple of things Dan. First, if we look at AIR MILES, you know it normally comes down to MILES issued so AIR MILES issued drives cash flow it drives future revenue recognition. We've had some major client renewals, we have a major renewal issue with Bank of Montreal . I think that will then position us to get back, it's really driving growth and getting more promotional MILES issued with it, we're also looking for ways where we can improve the value proposition to our collectors to get them more active, get the more engaged and actually increase our burn rate to some degree and that will drive the top line. On top of that we have made several reductions to the cost structure. In Canada which is going to help us on a profitability standpoint. So we are looking for improvements across the board with AIR MILES in 2020.

With BrandLoyalty, it's been a rough three years frankly, in terms of performance. This year it will be up year-over-year in terms of EBITDA. There's still some improvement to do, we've made several changes there in terms of the cost structure and we're looking to further roll out some digital initiatives to further drive basically client engagement. We think that's going to be good going into 2020. I could still see a situation with BrandLoyalty where the revenue is down year-over-year as we reposition it in the market but we do believe that EBITDA will be up just based upon the revised cost structure we put in place.

Dan Perlin -- RBC Capital Markets -- Analyst

Okay. Did you said the BEMA renewal is still yet to happen is that, that was my follow-up, just want to clarify that.

Robert Minicucci -- Non-Executive Chairman

Yes.

Dan Perlin -- RBC Capital Markets -- Analyst

But that happened '19?

Tim King -- Executive VP & CFO

Yes. Q4.

Dan Perlin -- RBC Capital Markets -- Analyst

Okay, great. And then the second question, Melissa. As you talk to kind of the portfolio. Right. So it's pretty bifurcated you got this great new opportunity of clients. You've got some these legacy clients struggling. I'm trying to understand the conversation that you have with them the kind of drive growth. So you've got legacy clients we are trying to sustain. I guess in a lot of ways but also help them through their process and I'm wondering what that conversation is actually like today versus this real growth opportunity which is this rate of change story that you're selling. Thanks.

Melisa Miller -- President & CEO

That's a great question. Of course every brand partner is different, you would almost have to look at each one of those dozens of programs individually because there are brands within our core file that are growing, high single and in some cases low double year after year. They are however masked a bit by the partners that are not growing. So for us, it's all about making sure that we have the right campaigns in place that are getting the consumers to spend more often, make an extra trip and spend more when they make a trip.

In fact if you look at our year-over-year metrics number of buyers spend per trip retention rate, that's a little brand dependent but by and large it's either flat to up. So our partners do count on us to be there for them during these these times of weak sales. The card program for many of our partners is the bright spot, when someone who has one of our cards in good times and bad for brand they spend 1.5 to 3 times as much as a non-cardholder. So these card programs are very, very valuable to the partners we serve.

Dan Perlin -- RBC Capital Markets -- Analyst

Thank you .

Operator

And your next question comes from the line of Eric Wasserstrom with UBS.

Eric Wasserstrom -- UBS -- Analyst

Thank you for taking my question. Melisa my question relates to just the go forward economic model of ADS relative to the historical. And I think one of the things of the investment community is I think struggling with a little bit is understanding how ADS contemplates value creation. Historically, the emphasis was on earnings growth and adjusted earnings growth which resulted in high double leverage and an emphasis on share repurchase which of course accelerated EPS but was largely destructive to book value. And now that you are predominantly a lending company and book value was a relevant valuation metric, you look very expensive on-book even as your PE optically is very low.

So can you just maybe help us understand on a go-forward basis, how we should think about and measure value creation at ADS.

Tim King -- Executive VP & CFO

Sure. Eric, if it's OK, I'll take that and Melisa will jump in. So the value creation, I'm just going to go right to the top, with the revenue clearly. If you are thinking value creation as far as shareholder return increasing the EPS. So I'll go book value in a second but going to straight through growing our book by 9% 10% 11% high-single digits and having that flow straight through and then getting to my revenue having like my earnings obviously increasing my leverage, my operating expenses, you get your earnings per share.

You then go back to say well, boy, I'm concerned about my book to my book value and that is very much as you said a financial institution metric we still do have two other divisions we still very much and that's obviously one quote unquote EPS, I'm not quoting the GAAP EPS that is who we are currently. If we are able to go to an institution that didn't have those, of course, we would look at our tangible book value. But then I'll come back and say, tangible book value is going to be a function of the trying to value all my assets at that what they're carried. And I'd say we start looking at our receivables. Our receivables have dramatically higher yields, dramatically higher returns that when you start looking at book value versus our peers given how our ROEs and our growth are, I don't think that's a fair comparison. I think obviously we should trade at a higher multiple just given our performance. So I'm happy to walk through kind of more metrics with you if you'd like, but that's because you're in that land of boy tangible book value as opposed to what the value of the underlying assets are.

Eric Wasserstrom -- UBS -- Analyst

Thank you for that. And just to follow up on one point, just with respect to your leverage position, can you help us understand whether the priority is to continue to reduce your debt or in fact to accelerate leverage through incremental share repurchases.

Tim King -- Executive VP & CFO

That's a conversation when we start thinking about the cash flows debt repurchase that we're balancing, I'm going to take a little bit of the newbie card here and say 120 days I am obviously working with the board making sure we think about debt repurchases that share repurchases. So we're working through that.

Eric Wasserstrom -- UBS -- Analyst

Great, thanks very much.

Operator

And your next question comes from the line of Vincent Kentek with Stephens.

Vincent Kentek -- Stephens -- Analyst

Good morning. Just first a quick clarification, discussed earlier in lot of numbers but the 2020 outlook EPS mid to high teens. That's based on the 2019 core of 60 million, 75 million, 70 million shares is that right?

Tim King -- Executive VP & CFO

Yes. So if you're going to use core EPS and go to core EPS in 2020, the quote we had was mid 20s, so you can call it 25, 24, 26 range to high '20s call to 28 range, we're guiding in that zone.

Vincent Kentek -- Stephens -- Analyst

Okay. And at the core, the year-over-year course, t's not the pro forma number, pro forma of 2050 versus the [cross-talk]

Tim King -- Executive VP & CFO

When I answered the question for Sanjay when I switched to pro forma, that's what I said the 6, 8. So if you want to use a pro forma the to 25, to 2075, it would be 6 to 8.

Vincent Kentek -- Stephens -- Analyst

Very helpful. Thank you. And then my broader question is, so I appreciate the things that are changing and all the detail and I think at the Investor Day I think people look forward to that. Because it seems like a lot of things are evolving and sort of just wondering kind of similar to may be similar, but a different take some of the other questions. So you've got active receivables growth still in the mid-teens range, you've got your maybe the total portfolios is shrinking, how should we expect that to go into 2020? And then when you think about I guess your stocks now indicating 114 pre-market. When you think about buybacks there versus renewing some of these accounts. It might be struggling just how you probably do you think about that part of the business. Thank you.

Tim King -- Executive VP & CFO

Let me talk about the receivables growth. Clearly, we're looking at the average receivables growth, you'll see that we are down 1% on a reported basis but at the end of period being up 3% the trajectory we're showing hence the position we're taking in the earnings call was, if you go back and look at Q1 down dramatically Q2 getting back to flat Q3 to end of period and then if you just use the guide of 19, 5 versus the end of period last year, we're going to be up 9%. And so, part of what we're trying to convey and we hope folks takeaway is all that we're selling portfolios, all these different things we've done back in 2018, we're working our way through that and we're back to a growth profile with our AR that should then translate into because we think our yields are fairly flat, then you translate into a growth in your revenue that's commensurate with your growth in your AR. If the business model from our perspective is pretty simple, grow your AR keep your yields, keep your charge-off and obviously get some leverage in the opex and you obviously grow your EPS and that's what we're trying to convey here.

Vincent Kentek -- Stephens -- Analyst

Okay, great, thanks so much and I look forward to the Investor Day. Thanks.

Operator

Your final question comes from the line of Jamie Friedman with Susquehanna.

Jamie Friedman -- `Susquehanna -- Analyst

Thanks for all the detail. I just wanted to ask you, Melissa with regard to that slide 5 your voice was noticeably more excited and enthusiastic. I had two questions related to that one. I'll just ask them upfront, the distinction you're making in sequencing of the vertical versus the vintage, it looks like the verticals go before the Vintage. I just want to make sure I understand why you point out. And second, if you could just share some more use cases, you talked about beauty home goods retail in e-tail rather in your prepared remarks, but somewhere would be helpful. So the vertical versus the vintage and and the use cases. Thank you.

Melisa Miller -- President & CEO

Sure. So the part of the reason that we tried to separate the two is we, if you go to vintage first, we have found that there is huge demand in the marketplace for what it is that we bring to the table. But of the vertical itself is not growing or not changing with the modern consumer then three years from now, we're going to be back to the same place.

So we deliberately tested into what are the winning categories where we believe there's market and consumers are going to want to stay. Another example could be children's. So those of us that are on the phone that are parents, the one thing that we always do is we want to be sure that our children have before we do, so that would be another example of a vertical, not all are winning, but that is a vertical that is going to endure.

So then when we go down to the vintages. By the time that you conclude the vertical is viable you develop a list of healthy candidates go through the selling and on-boarding journey, you're looking at about an 18-month time-frame before you get that first dollar, if you will of revenue. So that's why you will always see that vintage shift lack the vertical shaft or lag the vertical shift. Does that answer the question?

Jamie Friedman -- `Susquehanna -- Analyst

Yeah, that's really helpful. Thank you.

Tim King -- Executive VP & CFO

Okay, thank you.

Operator

And at this time there are no further audio questions. We will go back to the speaker for closing remarks.

Melisa Miller -- President & CEO

Well, I certainly want to thank everyone's time for today. I understand there were a number of moving pieces and messages that we ask you to consider. We want to acknowledge again that this road has been long for many on the phone here today and our goal is to make sure that you are confident that we are making the progress that we know that we are making and that we will finish this year, strong and will be a great jumping-off point for 2020.

So thank you everyone and we'll talk next quarter.

Operator

[Operator Closing Remarks]

Duration: 59 minutes

Call participants:

Viktoriia Nakhla -- Investor Relations Director

Melisa Miller -- President & CEO

Tim King -- Executive VP & CFO

Robert Minicucci -- Non-Executive Chairman

Sanjay Sakhrani -- KBW -- Analyst

Darrin Peller -- Wolfe Research -- Analyst

Bob Napoli -- William Blair -- Analyst

David Scharf -- JMP Securities -- Analyst

Andrew Jeffrey -- SunTrust -- Analyst

Dan Perlin -- RBC Capital Markets -- Analyst

Eric Wasserstrom -- UBS -- Analyst

Vincent Kentek -- Stephens -- Analyst

Jamie Friedman -- `Susquehanna -- Analyst

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