Q2 2020 Alliance Data Systems Corp Earnings Call
[music].
Good morning, and welcome to align status second quarter 2020 earnings Conference call.
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It is now my pleasure to introduce your host.
Ricky Nacala of advisory partners Ma'am the floor is yours.
Thank you for the Oh, no [laughter] a copy of the company's second quarter 2020 earnings release.
Robin Please call advisory partners at Q1 to seven 5058 years here.
On the call today would have gone from dried up.
And then and Chief Executive Officer of Alliance data and Tim Kaine Executive Vice President and Chief Financial Officer Alliance data.
Before we begin I would like to remind you.
I want to comment made on today's call I phone mobile phone Thats. Your question may contain forward looking statement.
These statements are subject to the risks and uncertainties described in the Companys earnings for me and other filings with the ethnicity.
Alliance data has no obligation to update information presented on the call.
Also on today's call Oh speakers, who have reference certain non-GAAP financial measures, which we believe will provide useful information for investors.
Deletion of those measures to GAAP will be posted on the Investor Relations website at alliance data that's come with that I would like to turn to go over to while I'm trying to vote.
Thank you and good morning, Thank you for joining us to review our second quarter results.
Since our last earnings report in April which came merely weeks. After cobot nine was declared a global pandemic. Our associates have continued to navigate exceptionally challenging conditions and rise to the occasion of course every facet of our business.
Continue to be inspired by the dedication of our leadership team and resilience of our associates all of whom has successfully adjusted to new and different working environment, while maintaining a required client service levels supporting each other and doing what we can in our communities to show our support to people and organizations.
Indeed during this time.
Likewise, we have done our car to support our card members are collectors and our retail partners.
Our card members, we introduced a number of forbearance programs.
[laughter] used by card members are proximate to approximately 10% of our accounts receivable to relieve financial pressure during the during this difficult time.
For our air miles collectors has traveled slowed we pivoted our reward options to at home delivery and service options and launched a digital redemption program.
For our retail partners, we worked to support E commerce and direct to consumer engagement.
Brandloyalty has used this time to support its retailers by leveraging digital channels for loyalty programs and increased engagement.
In summary for the second quarter, we are managing well in the covert 19 environment remaining profitable and we believe who will have adequate liquidity to manage through this period of significant stress.
Sales and credit were better than we anticipated people are spending and meeting their credit obligations. They are engaged with us and our brand partners and we are investing in our future with people process and technology.
[noise] turning to slide four let's discuss the key takeaways from our second quarter results.
On a consolidated basis, our results reflected the challenging environment revenue was down 27% year over year and adjusted EBITDA net was down 50%.
Loyaltyone results were mixed air miles benefited from a shifting focus to items that are more relevant for time at home. This combined with expense reduction led to 5% improvement over last year's constant currency adjusted EBITDA.
Brandloyalty results were less favorable with revenue and adjusted EBITDA, both down as clients in group in the grocery business deferred world to spending to later in the year [noise].
For card services, our second quarter sales activity progressive Lee improve throughout the period at stores reopened.
Sales ended 14% down as we exited June compared to last year.
However, sales were down 36% to Q2 of last year, although sales were down considerably our products and offerings remain attractive.
Within this challenging environment, our focus has been on managing what doesn't within our control.
Our service levels, and our costs and the second quarter, our cost reduction programs, resulting in approximately $50 million of additional savings.
Consistent with what we announced previously we are on track to deliver $240 million of savings for 2020, meaning we expect to reduce expenses by another $100 million and the second half of this year, primarily attributable to additional procurement and operating efficiencies.
We are positioning the business to be far leaner and more profitable once topline growth returns.
Our credit metrics and payment activity were better than expected I.
I will highlight some of those metrics after Tim discusses our financial results.
The majority of our card members continue to shop across all channels.
Our card members, including those currently in forbearance programs continue to make payments, indicating continued engagement and responsiveness in managing their payment obligations.
The positive performance together with lower sales volume led to lower accounts receivable and resulted in a modest reserve release this quarter.
However, given the uncertainty around the macroeconomic environment for the remainder of the year, we are maintaining a robust allowance for loan loss exceeding 13% of our period ended receivables, which is an increase of over 110 basis points from the previous quarter, our loan loss reserve reflects a more concern.
Rid of economic outlook than the first quarter with a further reduction in GDP and a further increase in unemployment.
Finally, we will continue to invest in our business technology and talent or at the top of our list.
Ill now turn the call over to Tim to cover the financials.
Thank you often and good morning to.
Let's turn to slide five discuss our consolidated results for the quarter.
During the second quarter revenue was down 27% versus last year's $979 million as the company and each of the segments were impacted by the pandemic.
I'd card services, many of our retail partners, where essentially closed at the beginning in the quarter and began to reopen as the quarter progressed as you may recall during the last two weeks of March credit sales were down 50%.
This improved approximately down 14% at the end of June.
For our Loyaltyone segment Air miles traveled redemption decreased dramatically and the brand loyalty grocers did not need programs offering to drive traffic.
Income from continuing operations was $30 million down 73%.
And our earnings per share from continuing operations were down 70% at 81 cents per share.
Pre provision earnings before taxes of 297 million were down, 34%, which was impacted by 27% revenue decline and an asset impairment charge taken in the quarter I will discuss the asset impairment charge in more detail in a few slides.
Net income declined at 72% year over year, and net income per diluted share was down 69%, reflecting a lower share count.
All income measures were down we offset some of the covert 19 impact the substantial cost savings, including volume related savings and operational efficiencies.
Specifically in the second quarter of 2020, we took out approximately $50 million of non volume direct operating rates.
This follows $90 million of realized savings in the first quarter for approximately approximate total of $140 million of benefit cost initiatives here today.
As we mentioned in past earnings calls, we expect that we will continue to see cost efficiencies.
For the remainder of the year, we expect approximately $10 million of additional cost savings for approximately $50 million for each of the next few quarters.
Let's turn to slide six then will discuss the results of Loyaltyone, which includes the air miles reward program in Canada, and the Netherlands based brand loyalty.
Revenue for the quarter was $150 million or down 40% versus the prior year.
Excluding personnel, which was divested the first quarter of your revenue decreased by 35%.
On a constant currency basis revenue was down 38%, but adjusted EBITDA was down only 11%.
Reflecting expense reductions and continuing emphasis on prudent cost management.
Turning to air miles revenue was down 28% on a constant currency basis.
I really resulted possible.
Your miles issued declined 26% as a result, a softer consumer discretionary spend especially in our credit card programs.
Redemptions were down 42%, primarily as a result of reduced travel related reduction offset somewhat by stronger merchandise redemption activity.
However, due to strong expense management and margin improvements air miles as Ralph mentioned, the EBITDA net improved 5% on a constant currency basis.
Ran royalty revenue declined 44% on a constant currency basis, due primarily due to fewer short term grocery loyalty programs in market and delay of major sporting events, such as the Euro Championship and the Olympics.
So now let's move on to slide seven and we'll discuss card services.
Our services revenue was down 24% and adjusted EBITDA was down 56% versus the prior quarter.
Operating expenses declined 14% benefiting from cost reduction efforts and volume related savings.
Including in the expense for the quarter was a 34 million dollar noncash impairment charge related to the underperformance of certain client programs and the consolidation of an office location.
As for provision.
$350 million, a charge offs were offset by the release of $55 million from our allowance. This release was largely a function of the 1.9 billion end of period accounts receivable decreased from March Twentytwenty.
On a sequential quarter basis, our end appeared receivables were down approximately 11% versus our allowance down 2.6% to the release was really all volume driven.
Even after the release our reserves of 12 2.1 billion increase as a percentage of our end of period accounts receivables to 13.3% from 12.1.
This high reserve rate is driven by a worse economic outlook, including a deterioration outlook for both our GDP at a unemployment rates.
Moving to funding costs, they were $102 million down 3% year over year.
Or normalized every receivables were offset by higher cost of funds as our short term dated liabilities paydown, increasing the average duration of our fund.
On slide eight of the review some of the card service metrics.
Starting with credit sales were down 36% as Ralph mentioned as a sharp decline, but this marks the progressive recovery from the low point in April as you May recall again, the end of April our sales were down 50% Ralphs Gotta slides I'll talk about that in more detail later.
[noise] normalized card receivables, which include held for sale receivables were down 12% year over year at 16.2 billion and then to period receivables were down 10% at 15.8 billion.
While the forbearance programs have resulted in pot positive consumer behavior that programs have had an offsetting effect on yields overall yields decreased 350 basis points, mostly due to lower late fields. There's also been some pressure on our finance charges due to the federal reserve discount rate cuts.
A positive note because our cost management success operating expenses and as a percent of receivables, excluding mark to market and.
An asset impairments.
There was one 9.1% down 30 basis points year over year, even after a significant decline in receivables.
Principal loss rate was 7.6% up 150 basis point and delinquency rate was 4.3% down 90 basis points year over year.
Now, let's move on to slide number nine and we'll talk a little bit about our liquidity.
In April we suspended our share repurchase programs and reduce our dividend consistent with the actions taken by others in the industry.
As we created and this is obviously, we prudently managing our cash flow and our balance sheet.
This was open a very stable cash position at the parent to $1.2 billion, which is consistent with the cash we had on the balance sheet and liquid we have the balance sheet at the end of Q1.
Our long term debt maturity profile has not changed with $2 billion a term debt not coming due until December 2022.
Moving to the banks, we haven't seen a sequential increase in the collective cash position of $300 million for a total $1.2 billion in cash.
Further the capital ratios have improved with a total risk based capital on the combined back now sitting at 19.7%.
Funding.
And also continued strong with availability to both and securitization of deposit markets a retail deposits continue to grow as a funding source and now represents over 11% of or bank lending.
I'll now turn it back when we were off.
Thanks, Tim the next few slides provide insight on sales activity the credit environment and how we are managing partner bankruptcies.
Who also touch upon the way forward and how we are preparing to emerge from the current environment.
Excuse me on Slide 10, you can see at the end of June 92% of a retail partner stores were opened.
With the stores opening net credit sales improved from a negative 47% during the shelter in place period to a negative 14% in the second half of June.
Obviously store base salary showed the most dramatic improvement from a low of 78% during shelter in place.
Two down 32% at the end of June direct sales returned in May and continue to perform lastly, general purpose sales are improving as states reopened.
We track sales by region very closely as you can see on slide 11 sales group aggressively as our retail partners. We opened stores there was a dramatic improvement over April results.
Since quarter end, some hot spots have returned to closing stores, but the initial impact has been generally balance by momentum in other states that said we're closely monitoring. These these trends and believe that on multi channel credit solutions, and particularly digital offerings are even more important to our retail partner.
During this unusual period.
On slide 12, you can see payment behaviors from our card members, both non enrolled and enrolled and forbearance as I mentioned earlier approximately 10% of our accounts receivable was in forbearance at the peak.
Payment trends in the environment have remained stable.
We are pleased with these trends, which in part looks like to benefit from government stimulus and enhanced unemployment, but also underscore our responsible credit management efforts.
Moving from top to bottom the chart shows zero pairs, those who maintained a balance and those who paid in full.
Card members not roles and forbearance, representing about 90% of our accounts receivable demonstrated strong engagement and payment behavior and the early stage with a pandemic over 85% of those not ruled made a payment which has significantly up over last year.
While these types of payments have shifted it is important to note that these card members are making payments.
Those are enrolled and forbearance also showed strong engagement.
The majority of off forbearance efforts have been shorter term solutions such as payment holiday.
More than half of those continue to make payments, even though they were not obligated to do so.
These payment behavior trends supported a better than expected delinquency rate in the second quarter.
Since behavior was supported by stimulus enhanced unemployment reduced discretionary spend and forbearance.
Hi level of uncertainty remains for the second half of the year and into 2021. This is reflected in our loan loss reserve.
The current environment has either at cost or accelerated a number of retail bankruptcies some of which are our partners.
On slide 13, we provide some information in context, I, how bankruptcies affect our business first approximately 6% of our current accounts receivable within retailers that have bankruptcy filings.
As we've mentioned in the past calls when retailers declare bankruptcy there was little immediate impact on our economics.
We do not lend to the retailer so the bankruptcy does not affect our accounts receivable our customer is to card member.
We maintain our relationship with the card members and the card members continue to make payments on their balances.
Without additional purchases after a retailer remaining card members, we maintained balances and pay over time.
Which proves profitable to us.
As we no longer incur.
Sales or marketing expenses associated with customer acquisition or sales activities.
Most bankruptcies filed by our partners are chapter 11 proceedings with little change for us.
In the worst case for those who filed or shift to chapter seven liquidation, we need to replace the sales generated by the retailer to continue to grow our accounts receivable.
We maintain an active pipeline of prospects and continue to focus our business development efforts on retailers in growing attractive verticals.
The way forward begins with good governance and talent.
As you can see on slide 14, our board of directors continues to implement it's multi year refreshment plan.
We have all long tenured directors completed their board service. This year and we have added two highly qualified directors, who bring new skills views and experience to our board.
The board also elected a new board chair in Roger Ballou.
As previously mentioned, we added key talent to alliance data.
Now Grier joined US from city, where she was head of co brands and successfully revitalized your portfolio car technology infrastructure and drove strong growth.
This is important role at alliance data valve will lead our efforts to attract and retain brand partners and drive profitable growth.
We will continue to invest in data and analytics and customer facing digital capabilities, while we migrate to more to a more flexible business model, reducing our cost to serve.
We continue to renew and sign partners in high growth verticals, including health and beauty <unk> home improvement and home furnishings.
We recently signed a multiyear private label renewal with the tile shop especial to retailer of stone and manmade tiles.
We also launched a private label commercial card program for small business owners wood flooring decor and signed a new private label credit card program for Salon centric one of the largest U.S. wholesale distributors of professional salon and beauty supplies.
Finally, we remain highly focused on our balance sheet and we'll continue to work to improve on liquidity and cash flow.
In conclusion for the remainder of the year, we will focus on two key areas first on our current near term performance across the enterprise as we continue to work and deliver for Cardmembers customers and partners.
I'd like to thank our associates across all lines of business for their efforts and hard work. During this very challenging an unprecedented time, we continue to evaluate evaluate our return to office plans as we monitor the progression of the virus in the U.S. and maintain proper safety work protocols in international markets.
We're infection rates have tempered.
The health and safety of our associates always comes first.
We will also continue to monitor that a credit environment closely in the second half of the year manage our risk strategies and maintaining prudent reserve levels.
We will continue to employ a disciplined approach to managing our balance sheet and risk profile.
Second while we're managing the present environment, we're also working to shape, our future and position ourselves to emerge as a strong competitor.
Our go forward focus will include Rightsizing, our expense base to reduce our cost to serve.
Partnering with clients in growing attractive verticals and building to scale growing with our partners through payment capabilities that integrate with any purchasing channel providing products and services that are relevant to the consumer to meet their purchasing borrowing and saving needs and managing our balance sheet to him.
Prove shareholder returns and reduce risk.
As we continue to develop our longer term our long term strategy, we will take advantage of opportunities late this year to share plans to conference calls future, earning calls our participation in investor conferences.
With that operator, I'd like to open the call to questions.
Ladies and gentlemen, if you like to ask a question. Please press star one on your telephone keypad.
Your first question comes from the line of Sanjay Sakhrani from KBW.
Thanks, Good morning, and I'm glad you guys are doing well.
Yes, if we strip out provisions for a minute and understanding the returns on the business are quite high and probably not reflected in the stock I'm just trying to think about pre provision profitability going forward are you guys, suggesting that going forward a combination of some of the expense saves you know Wilson.
Mitigate.
The revenue yield the weakness because the revenue yield is down 500 basis points itself from its peak, maybe you could just walk us through sort of profitability at the business going forward sure Tayside, Dave. Thanks for the questions. Obviously, Tim So let's start with the expense portion clearly what we outlined is yet on a year.
The year basis about 250 $240 million of total operating expense savings.
And that is not volume related those are operating expense David. So obviously you know if you look at our PML, you'll see a much larger number $1 to say that appeared to take out was about $240 million is what were we either have realized are going to realize then you work your way backup to the revenue line item and the <unk>. The effect you know all.
Our yields are twofold, one is I'll start with a smaller is going to be the effect of the discount rate translated into our yields those are down 40, 50 basis points is a little bit of noise around the charge off the purification, but the vast majority of that drop income from the late fees, so but of that 350 basis points about.
Two thirds of that is a function of our late.
So the real wildcard is going to be for US you know the positivity associated with the that credit metrics is obviously, then turning background and having some negative effect on the yield and that's the wildcard for us. So if we continue to have very good credit metrics I'd expect that we continue to have pressure on late fees, our credit metrics begin to deteriorate I'd expect that like credit.
My yields and specially my life to start to come back into line.
Okay.
And then when we think about the provision and the reserves.
When you when you when I look at that reserve rate and I think about what that implies in terms of a macro could you just talk about what you're assuming inside for your macro assumption and then if I'm doing the math correctly are you, suggesting sort of the.
Associated charge off rate for that reserve rates like 9% annualized is that the right way to think about it. Thanks.
We didnt I'll start with the last question work my way back to the assumptions, we didnt, we don't necessarily have a charge off rate the were assigned into that because the way you end up setting allowances. The massive so different I'm looking at obviously all my receivables on the balance sheet today and look at the total dollars that are going to charge off over the life for those loans.
So I didn't really translate that back and we don't really translated back into a charge off rate.
But having said that they were talking about how we did set the provision which is clearly we look at all the the math associated with the you know the different buckets and if you look back on page 14 of our 10-Q from last quarter, we basically break out the different segments.
All those segments were going to perform over time and then we of course, we choose to your question, we get to choose a boy what type of economic environment. Do we think we're going to have be used Moody's as our economic overlay, we use the conservative economic overlay from Moodys. Those you from with it would be the asked before which is a probable.
Steve that we're going to perform.
96% chance, we performed better than we overlaid in that and that includes having a double dip on recession that has unemployment rates are back in the 13%. Many of you have a double digit unemployment rates go back to 13% into Twentytwenty, one that we have at least at 10% decrease.
The GDP, but again the most conservative numbers, we're putting too in that I'm off of movies S. Four.
Okay. Thank you.
Thanks Isaac.
Your next question comes from the line of Andrew Baum from Wolfe Research.
Hey, guys. This is Andrew on behalf of Darren So just thinking about how is the how ats is going to become more aggressive on.
The the marketing front in those types of things when the economy turns I guess what are the types of levers that you're thinking about polling when that that turn actually starts to happen as it is it a credit perspective is that the investments and data analytics that you kind of turned on maybe you can give us a some higher level thoughts around that sure.
This is rob so a number of things I think we.
We will continue to invest and data and analytics and I and will will kind of turn that up as as we come out of the turn here. We have a good platform will continue investing that platform digital is key to us and I think we've learned anything through this pandemic is you know digital is the way forward and we've had to have made some good digital investments and enhancement prevention.
Presentment online time real prescreen provisioning, our co brand card and Apple pay will continue to make those investments to to make it seamless for our customers to transact in any channel they choose to.
Got it thank you so much.
Your next question comes from the line of sight Lee from William Blair.
Thank you and good morning.
Yes.
Tim just a quick.
Question, you said, 6% in bankruptcy Im not sure if that includes a sina that so that's been one of your larger.
Clients and then I've a follow up for Ralph just a big picture question sure. Yet so that was a was about 6% at the end of the quarter. So the end of June so that did not include Sina.
And how much does that what does that bring the number two on the bankruptcy side.
Oh, I think you're probably couple more percent, probably two or three more percentage I'm off it's okay.
Okay. Thanks, then Ralph I mean, you spent a lot of time it as American Express and Citigroup and now you've been today D. S. I think long enough to get your arms around I know, obviously, it's very difficult situation, but.
And as you look at this business, what do you think or how do you compared to.
Where you've been what do you what a what do you view as the strengths and then what is that what do you think should be out like a normalized credit loss for this type of business.
Yeah, well over the long term for the card business.
Yeah, So I've.
I've spent.
Let's see what it is about 25 years had seen American express in six months at a D.S. So I will give you my perspective I I think this strength here I think the reputation of adss with retailers a ball kind not just apparel, but all retailers, where they will help us going forward and structuring the right kind of of deals in the marketplace.
I'm thrilled about that I think the nimbleness of baby Adss has been recently because of the size of organization decision, making is is quicker than than in organizations I've been in before so that's all been very refreshing.
The leadership team is in very focused on what needs to get done there. They know ancillary things, we need to worry about where focused particularly in the card services business on serving the customers and on striking deals that are adss.
So to me those are you know things have going forward that that make good sense for us in terms of the.
Yes.
Okay, I think the way I look at loss rates already getting paid for the risks that were taken so here's my credit margin increase outpacing my loss rate increase and that's the way I.
Hi, I tend to look at I look at loss rate clearly in a private label business as opposed to the.
To a.
General purpose credit card, you're going to get higher loss rates, but you're also going to get higher yields so and that's kind of the way I I look at the organization I feel very comfortable.
Cool with our underwriting processes and procedures here and and working with our card members not only to get through difficult times, but also to get through a business as usual times.
And if I could just sneak in one quick one what percentage of your sales today is digital online versus what it was prior to the pandemic.
So.
Prior to the pandemic it was hovering around 30, 30% now, it's probably hovering a bit above 40%.
Okay.
Thank you very much appreciate it.
Your next question comes from the line of Eric Wasserstrom from you'd be at.
Great. Thanks, very much for for taking my question.
I just want to return if I could to the.
To the to the PPNR discussion.
Could you maybe give us a sense of.
Where you see the Oh, the loan portfolio sort of Troughing in is that now or do you think it will continue to attract over the course of this year and and what will sort of single inflection and then I just have a follow up on me on the Opex.
Sure. So here can you tell PPR are you talking about the average receivable conversation.
Yes, exactly yeah, obviously, the it's going to be very depended on what happens with those sales we saw a fairly significant drop for us from you know sequentially from the end of March till the end of June when we actually dropped 50% you know beginning finishing at 14% we continue.
Yeah that up a drop in sales were going to continue and how that type of drop of receivables.
Well, obviously showing is that you get who is we're coming out of the pandemic and people are working to shop again, you know down 10 down 15% that we saw at the end of June than we would expect our receivables to start to stabilize so it's really going to depend if you know we start having California, Texas, Florida, New York start to lose a steam from the band.
It gets started coming back up again people stop shop, we of course will lose receivables, but if it does stable and that stabilize it down 10 down 15, we should stabilize on receivables.
And then just on the Opex the the 240 that that's not volume as needed.
The appropriate way to think about that.
Relative to the year end figure from among teens in other words, it's like.
Roughly a quarter of a billion dollar lower run rate as we move into into the 2021 is at the appropriate way to think about right Yep. So if you had exactly the same receivables exact lets say air miles redeemed exactly same program the numbers in brand loyalty if I looked at all lows and that was all flat and then I would be.
Taking 240 $250 million out on a straight.
Okay. Thanks, very much for for the for the response.
Thanks, Eric.
Your next question comes from the line of David Scharf JMP.
JMP Securities.
Hi, good morning.
Thanks for taking my questions as well first just stay a.
<unk> near term.
Sort of financial cadence question for you Tim.
And on the on the yield outlook as we think about the second half.
How how should that cadence work is forbearance eases up and the payment holiday season. We start you know recognizing late fees again can you give us a little sense for whether you know the 20.4%.
Likely represents a bottom and how that might trend near term.
Yeah.
I'll never say bottom, but I, certainly would say pretty pretty darn close to the bottom given what's happened the last three or four months.
And let's break it down a little I'll take the easier portion the yield you know the one third year of that that's a function of the fed discount rates, that's going to stick with us for the rest of the year, but as we get back to the forbearance fat and the payment effect on the two thirds of that 350 basis point drop I think.
As people start coming out of the forbearance programs and you saw the forbearance down dramatically by the end of the quarter, you're going to see people start paying us late fees again, so I could.
See that mitigating down to you know have to a quarter, where it was before maybe that that a two to 30 to 40 to be you know 80 basis points, we'd have not model that out so I'm just a I'm working on that a matching my forbearance to my weight fee.
Fields, and then you got its going to be dependent people go back in the forbearance will give up the late fees will get obviously you deal with the charge off on how the benefit of the charge off but people come back out forbearance programs in a longer there they come out of skip Prepays will start getting those late fees again.
Right right got another <unk>. That's helpful. And then it is a follow up I guess for Ralph.
You know me, maybe bigger picture sort of product mix question, you know given disagree with background, you know with with kind of co brand.
In working with partners and in in with I guess with has seen a you know eight 9% of the portfolio with retailers in BK.
Do you have any thoughts about sort of the mix of pure private label versus co brand.
That you.
You might think is optimal going forward is there any desire to perhaps.
From a little less.
You know tethered to the fortunes of specific programs or just the profitability of the plc see programs such that you actually want to stay away from the price competitiveness of.
<unk> branded products I I think a couple of things I think you know somebody's going to be opportunistic what comes into the marketplace. That's always clearly part of the part of the equation, but the way I look at as you do want to balance for you do wants to buy a balanced portfolio you want to a fair amount of P.L.C.C. in your portfolio, but you also want a balance of co brand now each ports.
Folio does a different job for you. So for example, P.L.C.C. the private label portfolios have higher yield and higher losses were in the co brand portfolio, you will have higher spend you'll have less losses and your yields are a little oh, a little less well that balances out. So you can you can take the right amount of risk in a right.
Each portfolio to drive overall profitability, so I'm not looking for each portfolio to do the same job I'm looking for each portfolio do with specific job and how that all fits together. So you know like I said summed it up opportunistic on what's in the marketplace I think in P.L.C.C., we are yeah, our concentrate.
And whats apparel, well moving our concentration to other or the other types of a private label home and beauty.
Yeah, the home home home design home improvement all of which approved stable throughout this pandemics out where not only diversifying our portfolio between a co brand and private label will get diversifying their private label portfolio as well.
Got it thank you very much.
Your next question comes from the line of Raphael SATA from Oppenheimer.
[noise] roughly even higher.
Rafael.
Thank you guys hear me and now we see it does.
Hey, this is Dominic Gabriel I think they must have mixed my associated my name up.
So I think I was just wondering if you guys can talk a little bit more about.
The new commercial card and the opportunity there and why now and you know what that revenue opportunity could look like for earnings say a year from now could that be needle mover is there's a penetration within your.
Your current customer base are you looking for new partners you could expand to on that commercial card. If you could discuss more on the commercial card. It seems really interesting love to hear about it. Thanks so much.
[noise] <unk> Dominic he talked about how replacing Ido the out the current offering with the Oh It was a tall shop and how why we think that's a good good offered currently.
Yeah, Yeah Lucky with.
Looking for opportunities to expand the tile shop is that you know strongly filler it's in the home improvement sector, which we like quite a bit.
As you've probably seen some of the statistics out there you know what hasn't suffered in this pandemic as you know the do it yourself or slashed funeral home improvement area. This will be mostly small commercial programs you know.
Tyler Guy, putting it on who bathroom et cetera, and so we felt it was well positioned with what's happening in the the current economic environment. Yeah, We're anxious to see what it does it is a its new for US you know I put this into test and learn category right now and I understand you know you cant is it something that we can grow responsibly and thoughtfully and.
And manage manisha yields and managed credit of of of commercial card.
Okay, Great and then and then maybe you could just go over what you're seeing among your you know the the the jewelry category in particular, how does that trend line look does not mirror travel versus home improvement how does that trend line look and then when you think about you know look.
George average balance accounts versus.
Smaller average balance accounts, what are the differences among the payment behavior given all the stimulus you've seen from.
From the government in particular, and then just yet the the payment behavior. Among your customer banks are best. Thanks. So much everyone. You back. So so as you would imagine jewelry is down it's probably not down as much as travel, but it is down you know right now the a central's are up and even even apparel was a bit a bit better than jewelry in terms of the payment.
Hey views of balances.
Really no difference across the board. They we've seen the same behavior is whether the balances is high or low so really no difference there.
Great. Thank you.
Your next question comes from the line of William Ryan from Compass point.
Good morning, and thanks for taking my questions a couple of things.
A while back a go I think Gary was mentioned that the initial expectation was maybe that 50% of accounts that wrong deferral.
Oh for Barents may ultimately charge off but you've clearly had a big percentage you know paying while in forbearance.
Is that this still like still the expectation do you think that might be a little bit less.
The while you're in why they've been in forbearance.
And second.
Well, we focused on the yield a lot but on the funding cost side, you know you've clearly articulated a that there is a lag in the b a repricing of funding cost you know just wonder what is the cadence of that that you're anticipating over the course of the next deal call. It two three quarters. Thanks sure. So we are we.
We were seeing based in back and my last recession. He would put in a forbearance program, we thought that would be about a 50% cure rate, meaning that they wouldn't go to charge off well actually we're seeing that more like 75% now but people coming out of those programs and that's obviously all a function of the large for side of the folks now that are coming into the skip a pay.
The shorter term programs.
So.
It's kind of.
<unk> positive news, there and what am I I'm, sorry, I missed your second question can you repeat a funny.
Second question is just on the funding cost side or the only focused on the call mostly on yield, but just thinking about you've always articulated that.
There's a lag in the funding cost repricing and sort of what kind of cadence might we expect over the next two or three quarters. Yeah. It we'd expect by the time, we get into the fourth quarter that we should start getting some benefit there what I hadn't anticipated. What we had anticipated was the quick pay down of the receivables I'm on the liability side in the course without it.
It was the short term liabilities the money market accounts, the short term cities where of course, what paid off and given how much the balance sheet shrunk we needed to keep the long dated.
Cost of funds went up a little bit this quarter that should mitigate over the course of the next two quarters. So we think we'll start getting some benefit by the fourth quarter.
Thank you.
Thanks Wayne.
Well I know my here Uh huh.
Bank of America.
Hi, good morning, and thanks for taking my questions up but just wanted to maybe first just start with I think previously you talked about <unk>.
To breach up 10% I think you had mentioned because that was high watermark at the last crisis is that still your expectation based on everything you've seen so far.
And just if you could talk a little bit about just what do you what you're seeing in terms of what do you expectations out for the trend at least yeah I I think that's what our expectation would be this year and you know it's hard to predict with the stimulus package now rolling off and and and the spiking. The pandemic, but we you know we think we are certainly adequately reserved for.
For for the year and going into 2021.
[laughter] does your reserve fumed, the stimulus package rolls off so it would reduce it would be a positive I guess from the reserve point of view Oh, Yeah. So you can go look at that.
No I was obviously its purpose for called out to the movie or work. There's a very specific right on do you have access to that it does not.
Assumes that our friends in Ah.
In the fourth quarter isn't there as far as any ongoing you know going to help the consumer so exactly to ongoing recession with no further stimulus.
Understood and then just maybe a little bit them, all but big picture question. I was curious you know you clearly signed up some new programs that it sounds like the pipeline is.
Filling up too so I was just one.
Wondering can you talk about the competitive environment, just curious what you're hearing from retailers are you seeing retailers, maybe relying a little bit more than that God pro but the driver sales revenue et cetera are there particular features I think you've talked about 80, 80, s. need maybe needs to be it a few capability.
That's just what those all and how idiots its position.
Yeah, I mean, so I think our I. I think we're partnering well with <unk>.
With them to determine [noise].
Excuse me up when we Mark.
Well what office, we make so we're working with them really day in and day out targeting and determining when we will make those those offers to the card members I mean, I think we give the we give the consumer the ability to to have a bigger basket at the at the retail or that's good for the retailer.
Let me move forward so in terms of.
Done some really nice digital work.
I've talked about are inherent as well as you know provision or.
Cartoon Apple pay those would realpage steps forward, a will continue to make those digital investments.
Great and then just one last question if you still might just on Bino Bailey, though is that a product you can offer you don't do your retail bought those up and then just curious on what your thoughts on that brought out how it compares to the pod product why out like you know if you can offer. It is there you know parts around that or is that like do you have <unk> referred.
And with your Retailo, except <unk> on that Okonjo retail, but let's go to someone else for that product. Thanks, No ongoing <unk> goal is to offer our customers a basket of products, where they could a used to borrow and pay and save by now pay later is one that clearly we're interested in we're working towards offering that too.
Our to our customers in a in a a in a very you know in in a very expedited expedited way our product ties are to the brand loyalty program, but we certainly will you know on our road map is certainly a by now pay layer in generally you know for.
By now pay later <unk> either have a a first right of refusal we have the ability to keep that with our reach on it but I think probably more importantly is the retailers wants us to have that plot of does the basket of offerings. So a lot better if they go across the board with a by now pay later or private label co brand we have that.
That suite and all of them branded with the retailers name. So we if regardless of what preference we had before we have the most important preference which is the partners would like us to offer that I'd be part of that total solution for the retail partner.
Thank you.
Your last question comes from the line of John Hecht with Jefferies.
Morning, guys and thanks very much for taking my questions.
Yeah first what did indeed, I think you talked a little bit about that's in the call, but yes. So maybe some moving parts at Loyaltyone given your end market trends, but also some of the marketing plans you guys have you considered originally with lots of either that said Unfortunately had been yep disrupted. So maybe can you just give us a little bit more information about your outlook for loyalty.
The one and your strategic your strategic intentions for that division.
Yeah, John by virtue of your question the I think you're talking about brand loyalty in the delay in some of those programs.
Correct, Yeah, Yeah. So obviously you know they're fairly they're two different kind of a group. So we will have though that we talked about you end up having which is the grocery channel which is fairly ongoing those will come back is we need to as our grocers need us to drive people back into the stores so in brand well.
To the grocery stores are going to be very dependent upon you know getting out of a pandemic him and getting back to the point, where the grocers meet our offerings to drive backend and then the other side of that business is going to be very event related the Olympics. How many these type of event like that and that cool is going to.
She she knows them out.
I think your second question was around you know long term plans with us different.
Ah different divisions.
Yes.
Yeah. So is Ralph I I, Yeah, all right now those programs Oh that both programs are working well for us that part of our.
Hello of our organization will continue to operate those as we move forward they throw off good good cash flow and and we'll continue to operate though thats appropriate.
Okay.
And then second question as you guys talked about a pretty good pipeline of new potential retail partners. I'm wondering can you characterize that as it is there more of an outreach to digital channel partners or or are they more physical retailers, maybe just some color on that side, Yeah, I think it's across the board.
And the way I look at partnerships its location channel and resilience I think those three things we look at and you know do the partners have bad and our focus is to help the partner and then help the customer transact in any channel that they wish to whether it is traditionally a traditional store.
Whatever its online whether it's a combination of both.
You know that's that's the way we look at <unk> at our partnership pipeline.
Okay. Thanks, very much guys.
Thanks, John.
And there are no further questions at this time are there any closing remarks.
I know it. Thank you all for your time and looking forward.
In the coming months to talk about Oh wait forward, how we will emerge from this pandemic a stronger competitor. Thank you [noise].
Ladies and gentlemen, this does conclude today's conference we thank you for your participation.
So would you. Please disconnect at this time.