Q1 2020 Earnings Call
Good morning, and welcome to Alliance data first quarter 2020, <unk> earnings Conference call.
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It is now my pleasure to introduce your host Ms. ticking UCLA Advisory partners Ma'am the floor is yours.
Thank you Carol I know you should have received a copy of the company's first quarter 2020 earnings release.
If you haven't piece called Advisory Board.
You want to 750 slide eight zero here.
On the call today, we have watson's right.
In Truth Executive Officer of Alliance data and thinking executive Vice President and Chief Financial Officer of a lifestyle.
Before we begin I would like to remind you. The some of the common me on today's call a simultaneous responses to your question may contain forward looking statements.
These statements are subject to the with although certain key that's quite a bit companies going it's really an otherwise would have to see.
A life data has no obligation to update information because I get all the coal.
Also on today's call always speakers will bustling certain non-GAAP financial matters, which we believe will provide useful information for investors.
Reconciliation of those matters the gap will be posted on the Investor Relations website at alliance data that's called.
With that.
I would like to tends to go over to wall Andreas fault.
Thank you good morning.
Thanks for joining this morning's call to discuss our first quarter results.
We already an unprecedented times for our organization has responded immediately and effectively to the pandemic challenge.
We have moved swiftly during the month from March to activate business continuity plan.
Implement work from home protocols.
Proud of our associates and global leadership team at Alliance data were completely rose to the challenge, we'll fully operational are performing well throughout this crisis.
Today, I will discuss our immediate response to covert 19.
Well first quarter results.
I'll figure one the steps we have taken to improve our operating model with an eye toward our towards investing in our future.
On slide four you can see some real reaction, we have taken to support our associates.
Cardmembers in consumer.
Brand partners and clients and of course our communities.
First and foremost we have taken a number of step.
<unk> for health and safety of or workforce.
Currently 95% of our associates worldwide are working from home.
We have instituted Paisley where appropriate as long as other health and welfare accommodations to support our associates during this difficult time.
For the small number associates, who must still come to the worksite.
Paying bonuses practicing social distancing.
Staggering shifts.
For our card members and consumers, we are proactively and introducing number of forbearance options, including the option of skipping the next payments without alexy, rather than enrolling in a formal hartshorne program.
We're also waving week fees where appropriate.
For our brand partners and clients, we have maintained or regular dialogue to understand Voltaire current and future needs and to support them, it's easy to adjust their business operation.
Our card services, we are working with all brand partners to optimize their budgets and marketing support and shifting resources to areas that have become more relevant like ecommerce.
On air miles, we have added merchandise reward options to increase engagement as collectors interest shifts.
From an operational items pictures travel to more practical domestic merchandise and stay at home central.
Brand loyalty, we are extending the length of certain short term loyalty program, allowing consumers a better opportunity to collect and reading points prior to program exploration.
The goal is to increase in store traffic for grocer corn.
[laughter].
Additionally, we immediately responded to community emerged if you really need in virtually all of our key locations.
Polluting contributing to food bags and mental health services organization for you.
We allowed collectors and our air miles program to donate miles to travel organization for relief efforts.
We also accelerated corporate charitable donations planned for later in the year to support immediate immediate emergency relief efforts I continue to match our associates charitable donations dollar for dollar.
These actions exemplify alliance stays commitment to responsible business practices and demonstrate our sustainability strategy and action every right as we respond to the needs of our key stakeholders. During this time.
I am proud of these efforts and our culture of partnership perseverance and resolve navigating this difficult period.
Now, let me talk about the first quarter.
It's best to break down this breaks down between the first two months and then March when covert 19 began to have the impact on our retail partners and customers are.
Our business is tracking well in January and February with revenue up mid single digits profitability, increasing by double digits as we benefited from higher yields.
Lower operating expenses and cost reduction reductions made last year.
At retail partners close and travel flow during March we began to experience consumer spending declines which continues today.
And card services, our credit sales declined more than 50% I've brick and mortar retail essentially stopped partially offset by shift E commerce.
World You want before a similar story. This is holding strong through mid March falling off sharply as travel related redemptions declined 90%.
The combination of strength in January and February and softness in March led to a 4% consolidated revenue growth for this quarter.
Trends at the end of March for card services was similar to what we are experiencing today.
Retail brick and mortar sales were down more than 80% <unk> ecommerce was down in low single digits.
That's the first quarter profitability, we benefited from approximately approximately $50 million of the $150 million of cost savings we expected for this year [laughter].
Operating expenses were down $90 million into first quarter adjusting for onetime benefits.
Tim will discuss our savings in greater detail from the actions we took in 2019.
Considering our adoption of Cecil effective January one and the impact of Cobiz, 19th we increased our loan loss reserve by $404 million, resulting in first quarter earnings before taxes of $25 million.
Based on what we know today with April nearly over and our current economic assessment. We believe this is the appropriate level of reserves for the economic slowdown and related loan losses.
It puts us at a reserve percentage of 12%.
Of course, we continue to monitor the economic outlook, which remain fluid and we'll just further if necessary.
Looking out losses in the corporate 19 environment, we are likely to see increased pressure on loan losses in the back half of 2020 consistent with the reserve actions taken this quarter.
We're also seeing increased delinquencies and request for forbearance, which we would expect to continue given increasing unemployment.
We do expect some mitigation from the government relief programs, including additional unemployment benefits and other stimulus programs.
We also expect to see a benefit when the state's began to relax stay at home restrictions.
And begin a stage reopening.
Given the uncertain climate and the limited visibility into the duration of this health crisis and its impact on the economy and consumer spending and consistent with other companies. We are spending guidance for 2020.
Our priorities are to protect our liquidity.
To worked proactively with our customers and partners and to be ready for a phase reopening of the Uh huh.
We continue to proactively manage the business with an eye toward enhanced liquidity and competitive positioning.
We're not taking or eye off the ballpark strategic repositioning I continue to look for operational efficiencies cost management improvement through the eyes of a fresh CEO.
We are taking prudent steps today to strengthen our financial position and mitigate risk we may face. During this next several months to.
To that end, we announced a reduction of our quarterly dividend to 21 cents from 63 cents, which will reduce our annual dividend by approximately $80 million.
Further unlike many other publicly traded companies we have suspended our share buyback program.
We also have a number of other levers, we can pull as needed to add to our liquidity and reduce our expense base.
Jim will speak more fully regarding all liquidity, but I want to remind you of what I said last month.
We have over a billion dollars up liquidity at the parent level with no near term maturities on or approximately $3 billion of debt.
We continue to rigor rigorously stress test the business prudently using more aggressive cases that we model even a month ago.
Based on our underlying assumptions of large reductions in GDP.
Increased unemployment less disposable income and lower retail spend the outcome is the same.
We are cash flow and EBIT positive undo some fairly dog <unk> economic scenarios.
To navigate through the current period, we are focused on prudent credit and risk management near term expense reduction and investing.
In our business strategically.
Credit and risk management, we have put our recession readiness plan into action I continue to move through which stages.
Pair to 2009, we believe our portfolio is better positioned today as it is more diversified and we have enhanced our scoring model, which drives fives risks to be a dozens of different metrics.
We also skewed towards a higher percentage upon card members today.
We have proactively implemented all forbearance programs, which are being actively embraced.
By our card members since the middle of March 23% of accounts at 4% of balances have engaged in this program. It's still early days, but we expect this program to continue to grow.
As part of our recession readiness plan, we were managing towards higher credit scores and have tightened our customer credit.
Consequently, our credit exposures are down by 25% from the start of the year.
We also closed an active accounts to further limit credit exposure.
We have taken a disciplined approach to expense management in operations.
Actions have already had been taken as evidenced by the $150 million of savings. We expect for 2020, and we've identified and began to execute on over $100 million of additional cost savings.
These savings will come from adjustments in marketing spend renegotiation of contracts and operating expenses, all while maintaining our service levels.
Finally, as we focus on our future we continue to explore strategic investment for our business.
Areas of interest include digital information management, new customer facing products and services that continuing to enhance our we shipped recession readiness capabilities.
To sum up we are pleased with the early progress made on repositioning alliance data and generating cost savings, which was evident in strong performance. We had in the first two months of this year.
Our business continuity plan is functioning well, we have taken actions to further manage our risks strengthen our liquidity to improve our resilience and identify additional opportunities to reduce our cost structure.
Importantly, we continue to thoughtfully evaluate strategic investments that would enhance our business in a post pandemic environment.
Now, we'll turn the call over to Tim for a more detailed review of our financials Tim.
Great. Thank you Raul good morning, everyone.
Let's turn to slide five well start with an overview of our consolidated results.
Revenue grew 4% in the first quarter driven by higher yields in our card services business and consistent with our expectations.
We also saw increases in our loyalty one segment.
Adjusted for currency fluctuations in the sale of cross about.
We benefited from large expense savings across all areas, our business, including corporate card and Loyaltyone.
It all the expense initiatives, we undertook last year generated approximately $90 million direct operating savings.
I'll discuss we made significant improvements in our payroll facilities and marketing costs.
Income from continuing operations down 83% year over year.
The driver this decline was our provision expense up $404 million as we stepped up our reserves considerably for potential future losses.
Looking at the business pre provision demonstrates.
The underlying business.
Benefited nicely for the revenue.
Decreased expenses pre provision earnings before taxes was up $216 million were 46%.
Net income.
Net income per diluted share were down 80, and 70% respectively, consistent with our increase in provision expense.
Let's turn to slide six well discuss loyaltyone.
Revenue for this why business was down 3% to $190 million in adjusted EBITDA.
That increased 5% to $58 million.
Adjusting for Precima, which was sold in January of 2020, and the effects of the currency fluctuation.
Revenue increased 7% and adjusted EBITDA increased 6%.
Great and the results down further.
Miles revenue, excluding precima increased 1% on a constant currency basis, primarily due to an increase in brand revenue associated with strong issuance growth.
Air miles issued increased 5% in the first quarter with strong increases in January February part of the sworn in March two cobot 90.
Ran royalties revenue increased 11% on a constant currency basis due to a strong performance in our grocery clients.
From a strong start to Twentytwenty, let's step in March as clients reduced promotional efforts due to an already strong store traffic.
And redirected focus on sourcing.
Moving to slide seven our view the underlying card metrics.
Credit sales were down 3% on that first quarter as Ralph mentioned heading into March were trending towards high single digit growth.
Good luck in March we saw clear downward pressure on our sales.
As we sit today activity remains down almost 50% year to year.
Normalized card receivables, which include held for sale receivables.
Were down 1% on the quarter to $18.6 billion.
We saw pressure from the sales tail off late in the quarter part of this we're trending towards loaded.
It did growth.
At the end of appeared it appeared receivables.
17.7 billion.
Were up 5% year over year and that's expected.
This was due to the ramping up overnight vintage.
Gross yield was 25.5% up 140 basis points due to the slower growth in the wrapping up of the receivables.
Operating expense as a percent of receivable, excluding mark to market adjustments was 8.2% down to 130 basis points year over year benefiting from the cost reductions we have discussed.
Our principal loss rate was 7% up 60 basis points and consistent with our expectations at the started the year.
Our delinquency rates was 6% was up 80 basis points.
We do expect both our principal loss rates and our delinquency rate to increase as we are seeing deterioration or did the effects of cobot 19, and the lower denominator due to lighter sales.
We expect related to charge off to be evident in the second half of the year.
Finally, our our we have 18% was down from 32% a year ago.
This is also is solely a function this significant increase in allowance.
During the first quarter.
Turning to slide eight overview card services financial results.
Card services revenue increased 5%.
Earnings before taxes, and adjusted EBITDA or down, 8% and 84% respectively.
Entirely due to the increase in provision for loan losses.
Our first quarter provision was $656 million up 160% or four and $4 million from last year.
This led to an adjusted EBITDA that $47 million in earnings before taxes, a $32 million.
Operating expenses.
$385 million were down 24% year to year.
Embedded in the savings.
The cost reduction from marketing payroll facilities and consulting expenses.
Adjusting for the Mark to market gain on sale, our operating expenses would have been the $401 million, which would be $44 million were 10% better than last year.
Moving to provision expense there a couple of calls.
First as we expected charred drug charge offs were up year over year. However, the big increase on a provision expense.
The allowance build.
For the quarter.
For the quarter, we added 336 million dollar store allowed us to do you know and another $644 million through the seasonal adoption for total increase that allowance of $980 million.
Our quarter at allowance is now 184% of where it ended at the end of 2019.
In total we now have $2.15 billion and allowances, which is over 12% for end of period receivables of $17.7 billion.
The last item worth no Oh, well this pages are funding costs.
There was a slight increase year over year, 4%. This is driven by a modest increase in our cost of funds.
Cost of funds increased to 2.4% this quarter from 2.3% one year ago.
Let's turn to slide on and I'll give you an overview of our liquidity.
Starting with the company at the end of the March we had $1.1 billion available liquidity.
Which was a combination of $581 a cash on hand in $500 million available on our revolver.
In addition to the healthy liquidity position out of a blended to caution they've taken additional stake steps to strengthen our balance sheet.
Consist with others, we have suspended our share repurchase programs and we have reduced our dividends.
As Ralph mentioned, we're looking a number of other avenues to further reduce our costs.
Could improve our incoming cash position.
Turning to the banks there too we are well position.
Cash out of the bank is $3.9 billion.
They have $2.5 billion an equity.
Very strong capital ratios, even after paying 75 million dollar dividends to the parent.
We've not encountered any issues raising deposits, where we have been active in both the retail and brokered markets.
We have also been successful the securitization market.
Recently renewed a $2 billion capacity.
To summarize.
We feel core businesses will hurt by the pandemic are still functioning well making money.
We have provided for a substantial increase in charge off to our provision for loan losses.
Our banks are well capitalized and have large cash positions.
At the parent level, we have plenty of cash and liquidity. We've taken further steps to manage expenses and do not have any refinancing risk for almost three years I'll now turn it back over to ROE.
Thank you Tim.
In closing.
I started my tenure with alliance data halfway through the first quarter and approximately one month prior to the onset of Cobot 19.
I have immensely proud of the immediate and successful mobilization of our teams and the response efforts which continue.
It is on it is also not lost on me that next to protecting their health and safety of our associates. During this time.
Earning the trust of our valued investors and analysts is among my top priorities as such I have been and we'll continue to be committed to being accessible and communicating transparently indirectly with this important stakeholder group.
Line State it was moving forward on a path to reposition business consistent with our strategic review and to emerge more.
And to emerge from this crisis in a more efficient competitor.
At the same time Youre thoughtfully investing in the future.
We are working hard to do all this while continuing to support our key stakeholders in any way, we can and show we are a partner of choice.
As I said on a March analyst call, because a prudent and proven actions to responsibly manage all aspects of our operations Alliance data has come through many tragic and the comment I'll make event economic events better positioned I am confident this will be no different.
We are managing through the Koby 19 environment, we are implementing a more efficient and effective operating model.
And thoughtfully investing in the future.
That thank you and be happy to open up the line for some questions.
As a reminder to ask your question you will need to press star one on your telephone.
To withdraw your question please press the pound or hash key.
Our first question. This morning comes from Sanjay Sakhrani from KBW. Please go ahead.
Thanks, Good morning, and I Hope you guys are doing well I wanted to ask about the reserve build assumptions first if I'm doing my math correctly based on sort of the day one assumptions you made for the seasonal build you're assuming about an 8% charge off rate.
Under under the Recessionary view that you have do you guys think that that's appropriate maybe you could just talking to actually about the macro assumptions you made.
And sort of where you expect the loss rate the pan out under this scenario.
And I think if you hear somebody other issuers and banks that have reported they've said the macro forecast is actually deteriorated since quarter end. So maybe you could just speak to what that might mean for you guys as we look into the second quarter. Thanks.
Hey, Sunday, Thanks to the question actually let me start.
The question the work way backward.
She is we actually clearly can see the.
The economy as we've said that Cecil later in the month and I think some of the competitors. So we did have a pretty good walk into mid April thinking about all the economic environments and of course, what we set the Cecil.
It's going to be a of why do you have economic indicators, but like a lot of our competitors. We stress that we discussed it you know stressed GDP, we stress unemployment you know it pushed our unemployment rates and some are stressed today is north of.
10% some of our GDP.
The I guess, a contraction to 30% depending on the quarter.
So we did stress it brought a different ways. We felt we had a pretty good luck late in the quarter late to BT as into the first couple.
I'll weeks of April the set that we did not set a specific charge off numbers, we looked of economic over it lays we looked at whether delinquencies were to set our seasonal level.
Okay, and then are you what you're assuming a recovery inside your macro assumption.
Yes, we are so we think that we should start coming out of this at a rolling basis at the end of Q2, starting to get back to some type of normality towards.
Q3, we did of course stress that to make sure that we're being conservative on the Cecil side of that but we did expect recovery by the latter half a year.
Okay Alright, great.
And then I guess second question for Ralph I know you had a embarked on a listening tour.
And I know unfortunately, we've thrown wrench into sort of what you might have decided at the point.
That you finished and are concluded it but you know you're pulling guidance.
And obviously a lot of structural change might occur over this situation unfolding I'm just thinking at a high level.
How different Ats might look based on your preliminary review and what you might see unfolding given you've you've been around and previous recessions. Thanks.
Yes [noise].
Yes, and I hope, you're well as as well I think a couple of things.
It would take a step back you know I joined I joined Adss.
Because as a company that had really good bones and had really good reputation that had been you know had a couple of bad years and my view was this was an organization that we could certainly move quickly without buhr bureaucracy of larger organization and I still believe and see that so for me obviously my listening tour got my listening in.
Discovery to I got cut a little short, but the way. We responded to covert 19 really gives me a lot of Oh, yeah, a lot of I'm confident that we can become a more efficient and effective organization going forward, we're able to pivot you know reduce our operating costs and and.
And it.
Improve on margins as we go forward.
As importantly, really invest where we think we where where the consumer is going to be so digital and online was it was investments have will continue to make I think the of the the.
Evidenced that they were even more important.
Is clearly here and we'll continue to invest there and customer facing capabilities and and continue to to move to digital and mobile satellite my.
You know my thesis hasn't changed I think this is really.
Put a spotlight on why our investments are important in the near term.
Great. Thank you.
Our next question comes from Darrin Peller from Wolfe Research. Please go ahead.
Hey, Thanks, guys. You know, maybe just to help us understand revisiting the structural opportunity versus risk for someone like yourselves in the sense that I think you guys have spent a lot of time in investment over the years on being able to help your client your merchant suites. As you mentioned, just a minute ago omni channel and.
But curious to hear the kind of demand you're getting right now from the end market for that upgrade.
What you can do to help them out and maybe on the other side of all this maybe any any type of percentages are numbers. They give us a sense of what what part of your portfolio you think would be.
Really able to survive it benefits and those trends around omni channel just those technologies that you can help them versus those that really are relying on just physical brick and mortar but out.
Any type of on demand around the channel capabilities.
Yeah. It's Rob. So we are we are in in constant contact with our partners.
And ensuring that we are assessing what their needs are assessing how they want to move forward. So you know the shift of our of our some of our marketing resources to online was clearly clearly evident continued switch to ensuring that we have the right on like capabilities as ours is a focus going forward.
Yeah, I, no matter, where the customer shops, whether it's in the mall or in their living room or in on their phone in their car, we're going to be there to provide the right capability for them to have bigger baskets and have that ability to get engaged with the brand. So for me. It's about it's about helping our brand partners.
Enhancing the enhancing their customers experience with that ran so I.
View this as certainly an opportunity to enhance our our digital capabilities.
I think in terms of bricks and mortar you know 25% of ourselves or a portfolio is probably bricks and mortar.
You know and but they have also coupled with.
Each of those bricks and mortar organization certainly have online capabilities and that's what where we're helping our brand partners focus on now which was online capabilities.
Okay. All right now that's helpful. So I mean look segmenting the portfolio for US we're all trying to figure out I think most investors and kind of looking through the second quarter right now and probably even 2020 to some degree you mentioned your liquidity is in a sound positioned to take advantage and kind of weathered. The storm. So we're trying to figure out structurally what eight what size someone like.
Yes can be on the other size side of all this and then structurally if you're going to be able to win embark in market share by helping these motions are maybe others out and it sounds like it has in demand as demand been coming in and already in these conversations already having to help along this process.
Yeah, I mean, good times, a bad we're always in conversations on merchants to make that to and partners to healing and enhanced their sales enhance their market share you know now it's a matter of talking to them to plan.
They are there they are emerging from this how they're going to emerge from this when making sure were coordinate with the timing, making sure were there where they need us most and right now the where they need US most is the capabilities online, but we are working with them on a pretty regular basis to talk about Asia reopening.
During the course of this year.
Yeah, Alright, just last question and it sounds you touched on this but with regard to credit quality.
Look I mean, you mentioned in the prior cycles I remember also just seeing peak charge offs at around 10% I'd be curious you know.
What's the dynamic in this environment that wouldn't give you confidence and what kind of rate should we be thinking about I mean is it potentially something that could be 12% to 14% or any any thought process on that.
Thanks, guys.
So.
If I if I.
Just think going for whom we've stressed our business.
Till the last recession.
And I think that say you know it's a it's a good barometer for us and to every stress test through every dire scenario, we our cash flow positive EBIT positive as we as we exit 2020.
That said there are certain things that are available to our consumers now that weren't available during the great recession, the economic stimulus to the consumer wasn't available during the great recession to that level now at early days, but we've seen some good.
Pick up when the stimulus checks came out in terms of our customers and cardmembers re reaching out proactively to to to make payments. So you gave us a bit of confidence and early days, but certainly people are are certainly meeting their obligations.
Okay. Thanks, guys.
Our next question comes from Andrew Jeffrey from Suntrust. Please go ahead.
Okay.
Okay.
Yeah.
Hey, Andrew you break it up a little on us.
Okay.
It could go to that go to the next though to the next question, what's even seen getting into backend.
Next today is Bob Napoli with William Blair. Please go ahead.
Thank you and ER and good morning, and Oh, So hope everybody well the that's if I recall going back to last recession with charge offs, peaking at.
10% I think the market no the stock market.
Grossly underestimated the profitability at higher charge off levels and I think you know that the company was able to stay profitable even you know materially higher charge offs that now what is the maximum charge off rate that this company can withstand for say a period of a year.
[music].
Without having a.
Significant losses and liquidity challenges.
Yeah look so clearly we test a test the our bank set a variety of different stressed assets going to depend on how long we tested it back to the last recession, we remain profitable cash flow positive.
It's going to be a combination of both that charge off rate.
Well as what happens with our receivables for liquidity and cash positions.
We tested it for a variety of different scenarios.
Including the peak charge off we saw in recession decreases the receivables receivable staying flat isn't all those cases, we state cash flow in income positive.
Okay.
What are you seeing so far in April from a payments perspective, what should we expect how did the payment rate I mean are you have you seen.
I mean, you up to date throughout the month I mean have you seen any significant what type of change have you seen in payment rates delinquencies as we've gone through April.
Hi, This is Rob show in terms of payment rates, if I look a payment rates year over year, our payment rates have not gone down. So I did payment rates are essentially stable, we're seeing people proactively reach out to us to to make payments now people are proactively also looking at forbearance programs, but that said the full various program.
People are taking advantage of our shorter in duration 30, or 60 days as opposed to a.
A 12 month forbearance program. So we're seeing people actively want to.
Got a little relief, but also engage in terms of of paying their obligations.
Thank you that's helpful and you know the 50% decline in.
The in spend volume that you've seen in April as that I mean, what percentage of your spend is.
Currently E Commerce and online and have you seen did that trend is a continuing to decelerate or has it bottomed out.
Well you know.
Talked about am I in my opening comments, we've seen a 50% decline in bricks and mortar, but we in the beginning we did see an uptick in.
And ecommerce our E commerce, we spend is about 30% to 40% you know that's where we see that's where we pretty much land on point ecommerce fan now that will fluctuate, but we've seen that increase a bit during the crisis.
And gift again through the month of April.
No so the 50% with bricks and mortar so it's a combination.
E Commerce, so overall blended you're down you're down 40 ish and again is can you give any color on the trend over the month.
Yeah. So what we've been seeing is though yeah.
Similar to the end of March we've seen our collective sales down 50% bricks and mortar are down.
Homeless to nothing and 10 28, 90% mean 10, 20% and we're making the west of that up on our ecommerce group and our E. Commerce is actually down slightly but doing pretty well.
Okay.
And I guess last question, just a Ann and I was just a follow up I guess on the customer base and is there any Ah I mean, what is your confidence level that.
I mean, obviously this is that [laughter] precedented environment that your customer base.
What percentage of your customer base, you think is at risk. So I mean is this company.
30% smaller coming out of.
In a potentially like in the worst case scenario at 30% smaller company.
You know coming out of this before you and you have to grow on top of that or you know just any feel for what percentage of your customer base is at risk.
Or is it more than 30%.
Yes. So are you are you referring to our retail partners or yes, consumer the card the retail part have retail partners yes.
Oh. Good question, we're obviously watching that very closely it's tough for us to tell at this point because we don't know what type of government support any of our retail partners will get what type of you know poor barents on their rent payments.
Certainly we expected to be smaller we've been some stress, but just it's too early for us to tell because we just don't know how.
It's going to affect our retailers the post the type of help are going to get from the government and some of the forbearance programs that Brent et cetera.
And you can under a smaller business you can maintain you can hit targeted returns obviously you have work to do on the organization.
Sure. Yeah, you know, there's one thing you, though clearly we often I have a very very sharp focus on is going to be the expenses and making sure we have the expenses.
Luckily.
It just doesn't snapple bid over night. So when you start seeing the sales start dropping a receivable started dropping you've got word to ever happened, we can adjust our cost basis into that.
So were relatively low fixed overhead is going to be the variable associated with you know the attrition we might not be able to call center natural attrition combat ship the receivables drop.
But a small base, yes, we could be possible, we would be profitable.
Thank you appreciate it.
Good.
Our next question comes from Andrew Jeffrey from Suntrust. Please go ahead.
Is this better guys will try again [noise].
Yeah, Andrew much better.
Okay excellent.
Appreciate your patience with me.
Yes, I wonder Ralph you could elaborate a little bit on underwriting standards. I know you mentioned a curtailing some some credit lines and and this is a in a dynamic environment you heard at least one credit Bureau. This we talk about the challenges of trying to ascertain employment and.
Income.
You know given furloughs and compensation cuts and things like that I know historically alliance hasn't used FICO scores necessarily to underwrite are there specific changes in assumptions, you're making your underwriting criteria that try to account for sort of the dynamic environment today, where people maybe out of work for little while and come back in that.
Variable incomes and things like that I can I think about risk management that kind of world.
Yeah, So I'll just talking about our underwriting strategy and how it's evolved so today our card members look much different than they did in the past and we believe no a portfolio is more resilient than it was during the recession. The changes had been driven by both you know a product diversification.
We started several years ago underwriting changes, we started making about a year ago, which indicates a potential economic slowdown. So you know we constantly look it's not that we have a knee jerk reaction to what happened we constantly look at it to enhance our models.
Our scoring models by upgrading to it you know a newer version of try Bureau score and can you were to find add on score is focused on fraud prevention synthetic identities and quite a fall cuts.
Credit file customers in other elements.
In 2009, our underwriting changes were focused on finalizing scoring enhancements you know raising minimum do scores for new applicants and reducing contingent liability by closing an active accounts are scaling back you know that said, we you know where for certainly very diligent on you know weve tigner underwriting criteria.
But also where where we're responsible lender, we're not gonna go out there and and offer credit lines or or or product to those that do not have the capacity didn't pay.
Okay. Good to hear your proactive and that there is a good foresight and then.
With regard to forbearance and I know, it's early days and encouraging perhaps that you're not seeing some of your borrowers really want to stretch out to 12 months. For example, I'm just thinking back to the experience with with Harvey and the you know the does sort a bubble that created in delinquencies that lasted I think a lot longer than that maybe you expected at the.
Time, recognizing one of the company.
Is there risk that we're still talking about cobot, 19, elevated delinquencies and or losses, a year from now 18 months from now I guess.
What how do you probability weight the outcome of this just drags on for a protracted period.
Yes.
You know I again, nobody could predict what's going to happen over a protracted period, particularly with a something we've never really face before but my view is there a more resources today than it had been with past.
Past pass crises, whether it was.
Hurricanes or or or or other economic crisis easy the assistance to the general public our ability to react quickly offering programs that are more flexible than they've been before I think we'll certainly curtailed that bubble of long term.
I appreciate it thank you.
Our next question comes from Ryan carry from Bank of America. Please go ahead.
Good morning Hope, you're all well. Thank you for taking my questions I just wanted to building Andrew's question, a little bit I think on the update call you mentioned majority of customer and applying for for parents on to that point or after for shorter term programs and that these customers more likely to end up current on their alone and so how does that change since late March and if it has a how do you think about.
The inferences <unk> as a result, and the impact on the business.
You know what hasn't changed so we're seeing we're seeing customers proactively want a short or a shorter forbearance program and in fact wanting to just skip a month payment rather than go into a forbearance program. So that's what we're seeing its early days. These programs are just getting up and running as I said right now.
We're in a low low single digits full we expect them to you know to probably settle in the you know in though in the low double digits as we move forward.
And so I really haven't changed yet little bit too early to tell what we're seeing though in the month of March of our you know our payment rates are are are holding to what we have predicted and we're seeing based on the first wave of stimulus checks customers have a willingness to to make payments.
Got it okay. It sounds like before you're expecting to see pent up demand and potential bounce back wants to covert situation is under control and how it feels like there's a little bit more wait and see is this just due to the duration and severity of the slowdown Ferguson anything else changed over the past month that would lead you to think through recovery might take a little longer.
No I think people are off optimistically looking at the recovery of me first but you know as you can tell publicly the recoveries going to be a stage recovery over over over a period of mine. So it's going to be a ramp up rather than a you know a big Bang and certainly we've you know we've stressed our business model.
For that and under those scenarios our business model is still EBIT and cash positive for the year.
Got it and just to make sure. It just clarifying question on that I know before you were talking about the stress scenarios as retail sales down kind of 25% extended for 12 months is that still the same ZIP code in his most recent stress.
Examples.
Yeah, we've restructured down 25% for the for the year to go so that's actually more like 33, excuse me, 25% on the full year, which is more like 33% on a year ago. So that was one of the stress scenarios we ran.
Great. Thanks for taking my questions.
Yep.
Our next question comes from Dan Perlin from RBC capital markets. Please go ahead.
Thanks.
Can you guys, just remind us a little bit about the customer concentration risk that's embedded in the current portfolio today.
I mean, you really just trying to handicap, what is going to happen to the extent than we have more retail failures.
So maybe you can just balky the puts and takes that we need to be thinking about modeling in that environment.
Yeah. So I'm you know I'll do it in terms of high level in terms of of percentage of receivables.
I think our portfolio has changed as a great recession. If you recall probably during that time, a 95% private label, we've evolved to something less than that so 50% of our portfolio is you know retail goods a private label, 25% about portfolio is big ticket items, where you tend to get.
That across the credit quality and then 25% of our portfolio is co brands, where you tend to get better credit quality and general purpose plastic that's how I dimensionalize the portfolio now so certainly stronger than we were in the great recession and a bit more diversified than we were.
Okay. That's helpful and then to the extent that we have to braced for additional failures or your retail partners over the coming months in quarters can you just talk through the puts and takes that we need to be thinking about in the model. So I know you're talking to the stress tests, but you know what are the.
Actual.
Outcomes are optics that we need to be thinking about and how long duration are you able to come up send off those.
Yeah. So can you all I'll use the most good agregious the worst scenario, we get a private label retail partner, who filed for chapter seven goes out of business. It takes you know call. It six to nine months, where you to get a half of those receivables and then you continue with that type of half life. So.
Call, we one to the consumer not retailers what happens is of course, we stopped getting new sales from that retail if they go out of business and it takes and then we of course make a lot of money as they unwind.
We just start losing the receivables we lose about half of it up six to nine months to lose another half six to nine months and so.
Quickly to try to after two to three years, we don't have that receivable. So our real risk is that we'd make less money.
On a volume basis, we make a higher percentage of those receivables and then of course, that's up to us as an organization and replaces receivables with the new.
A new partnership.
Okay. That's super helpful is one other one if I could sneak it in just for cadence the provision expense I know you had a huge reserve build I'm just trying to think about what.
What do we jumping off into and kind of second quarter as you are framing it from.
Plus or minus range the provision expense in that quarter.
Yeah. So obviously.
I'll take into consideration to everything we know at the time, we set that provision expense. We clearly we're able to do that you know as we saw April unfold in the first couple of weeks of April there's always risk. The economy continues to deteriorate or people don't come back as quickly as we'd expect but it's going to you know we looked at and we.
We we felt very good that weve factored into everything we took a nice solid conservative look at the the balance sheet and what we needed for the reserves at the end of Q1.
Alright, Thank you guys.
Our next question comes from Eric Wasserstrom from <unk>. Please go ahead.
Hi, Thanks very much for taking my question is on the order.
Yes, we can.
Okay, great. Thank you.
So.
Thank you for going through some details of the liquidity and capital position.
I think in Mali.
Then my recent expansion decide to think that is in fact, the probably the more of a woman conserve even relative to credit quality and the credit environment. So could you just maybe talk about how you're thinking about the overall companies leverage position at this point and whether these circumstances has caused any rethinking about that relative to.
Lets say, even a month or two ago.
Sure I'll, obviously the leverage.
Ratio when you when you take that big an equity it to set up Cecil what's going to cause the luxury should go up and you'll see that we also took up could be oh drawn down on our line of credit.
Having said that we are concerned about the leverage ratio, we're not talking internally about it we have enough cash flow to cover that we're comfortable with that it's cool is something Ralph and I will need to adjust.
But dress excuse me a long term, but at this point the leverage ratio from our perspective as you know first and foremost we feel comfortable that we can pay no debt service, we feel very comfortable that we can.
Great and just to follow up on the in terms of the.
The subsidiary banks position. The do you think that do you anticipate any any challenge to continuing to upstream dividends to the to the Holdco based on.
The near term operating outlook at the subsidiary level.
Sure. Obviously, what are the things were going to watch very carefully is the banks and their capital position I've said before and I know Ralph wouldn't I've had the conversation first and foremost we want to make sure. We have very robust balance sheets for both appeared in the bank bank being part of that part of course, the reason we called out the total leverage.
Ratio at the banks of that 16.7%.
The the banks have been profitable that were profitable throughout the recession, we expect them to continue to be profitable. The then the question becomes a growth versus the income you. This recession plays out.
One way that we might see it which is decreased sales lead to decrease receivables that actually allows us to dividend up more capital.
Even though we don't have as much receivables, we have told capital against Jim we're going to be very prudent make sure banks are very well positioned very heavily capital intensive sort of big withstand chunks like this so there's a variety of different scenarios. We run in most cases, we feel the banks would be able to upstream some cash to the parent.
And just one last one on the topic the.
I know that obviously were you are.
Understandably it sort of in crisis mitigation mode, but over the longer term rough I'd love to understand your philosophy about earnings growth versus tangible book value accretion and how you think there you know if you think that tangible book value accretion is or isn't important role of value creation for freight yet.
I think a couple of things. So let me just say this the safety and soundness of our banks. You know is you know influences every decision, we make and I think even through the crisis here, where weve, taking prudent prudent measures to to enhance our capital position cut cut expenses I think those are.
Clearly important you know important actions, we've taken two and to ensure the safety and soundness of our institutions I think from from my perspective predictable sustain good growth on topline and bottom line.
He is what we're looking for long term.
And I think that will sustain that will sustain a safety and soundness and assets in the bank.
Thanks, very much for taking my question.
Our next question comes from Ashish Sabadra from Deutsche Bank. Please go ahead.
Hi, Thanks for taking my question.
Just a quick question on the much detail is that any benefit from the floor balance program on the delinquencies and charge off is there any to quantify.
Yeah.
It is it's very early I will tell you, but what we what we have seen as I think I mentioned it earlier the payment rates, if I compare them to last year or virtually the same and we're seeing a are you know our roll rate are you know where they were they thought we'd.
They would be probably a little bit better and we saw a you know a.
When the first stimulus check checks came out we did see incremental you know phone calls and incremental payments come in.
During that period of time now that does not make a trend were still for men managing it very closely but we did see something improved activity or increased activity.
That's helpful and maybe just as you think about again, the charge off and charge off trend going through the either like house as you mentioned charge of could potentially go up in the back half as more or can you, let us come out of the forbearance and also as we see a higher unemployment rate, but instead of.
We need to think about all the puts and takes and potentially something back from a from read any potential you did the bankruptcy, but as we think about going into the back office that we need to think about than it did that could help do and all the puts and takes going into the back a couple of thanks.
Yeah I think.
You know as as I I think about the backend after the year, we've traditionally see.
Loss rates come down we're going to I believe see elevated loss rates I think what weve. The actions we've taken into first quarter to reserve I think our are appropriate for what we are what we are.
We are projecting in the in the balance of the year that said to very fluid environment and if things change we will certainly adjust accordingly.
That's helpful.
Our next question comes from Tim well enough from Wells Fargo. Please go ahead.
[laughter]. Thank you and good morning, just just had one question if we could to talk about E commerce a bit.
I understand that probably a fair amount.
Retailers are probably in the discretionary bucket, which is going to obviously impact the overall volume, but we're obviously seeing from some retailers stories of exceptionally strong E.
E Commerce digital et cetera.
There anyway that you could just sort of comments or discuss.
Where you think youre retailers are with their digital commerce plans and when it went out are they punching after weights or do you think that some of these retailers are still reacting and they're still better experiences and better volume to come from that Mr.
It really reposition businesses for more digital E commerce than maybe they otherwise would've expected six months ago or a year ago.
Yeah, I would categorize it probably has a mixed bag I think we have some good.
Right and who's out there that have really good retail really good sites them. You know just site likes a for a for example, but you know there are certainly this has been a opportunity for them to rethink their strategy and ensure that they have a robust E commerce.
You know ecommerce channel.
Which plays right into you know the investments we've been making and the investments we are going to continue to make to to be.
Even more relevant in E commerce for our partners in our and our customers.
And if I could just ask one quick follow up.
Yes, there are some stories on chatter out there about the Victoria's secret transaction and whether or not that will occur is there anything that we should be aware of or think about relative to that deal closing or not closing as it might impact anything with yes.
Yeah.
It's it's it's difficult for me to comment on on you know one on both in the news over the last couple of days Victoria's Secret has been as a partner for very long time, I think we'll continue to be a partner down the road I think we'll work with them.
And we were set to work with them in their current capacity roof set to work with them in a future capacity and we'll continue to be supportive partner.
Okay, yes, thanks very much.
This concludes the question and answer portion of our call I would like to turn it back to Ralph for final comments.
Well thank you all four.
Participating this morning I know this is a very difficult circumstances, and we are in many different locations as opposed to Tim and I being in the same room.
Thank you for your for your time and as I said. This is an important stakeholder constituency group for me.
And I intend to be available and and certainly transparent as we communicate going forward.
I have a good day and thanks again.
Ladies and gentlemen, this concludes today's conference call. Thank you much more for participating you may now disconnect.
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