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#Thanks Ed
Revenue for the third quarter increased 1% to $1.9 billion, soft against our mid-single digit expectations, primarily due to hurricanes Harvey and Irma negatively impacting the growth shields at Card Services, which knocked off about three points of growth
Core EPS increased 13% to $5.35 for the third quarter 2017, better than our expectations, primarily driven by lower loss rates of Card Services and a lower tax rate, a result of initiatives implemented during 2017. Excluding the improvement and the effective tax rate, core EPS increased approximately 9% for the third quarter
Adjusted EBITDA net increased 7%, benefiting from the better-than-expected loss rate at Card Services
During the quarter, we reduced our corporate debt by approximately $180 million to $6.2 billion
That brings our corporate leverage ratio down to about 2.8x as of September 30, 2017 versus our covenant of 3.5x, leaving us with over $2 billion in available liquidity
Let's slip to the next slide and talk about LoyaltyOne
As expected, the third quarter was tough for LoyaltyOne, with revenue decreasing 20% to $305 million and adjusted EBITDA decreasing 26% to $61 million
Fortunately, the future looks brighter for this segment
Breaking it down by major business
AIR MILES revenue decreased 28% to $185 million for the third quarter of 2017, driven by a 43% decline in AIR MILES reward miles redeemed
This drop in revenue was consistent with our expectations as we pulled in the burn rate, which are miles redeemed divided by miles issued from 129% last year to 80% this year
80% is our target, really, moving forward
Importantly, the negative draw over from the elevated redemption rate is gone entering the fourth quarter of 2017. AIR MILES issued was down 7% year-over-year
Normal spend is on track, but we have seen less promotional activity in the grocery vertical
We expect issuance growth to improve in the fourth quarter and in 2018. Importantly, we recently re-signed BMO, our largest AIR MILES sponsor, to a multi-year contract
BrandLoyalty's revenue decreased 5% to $121 million for the third quarter of 2017, consistent with our expectations
BrandLoyalty's fourth quarter is looking good, with revenue and adjusted EBITDA expected to increase double digits year-over-year
Let's go to Slide 5 and talk about Epsilon
Epsilon came in short of expectations for the third quarter, with revenue increasing 3% to $559 million and adjusted EBITDA decreasing 7% to $125 million
Year-to-date, revenues has increased 5%, slightly better than annual guidance while adjusted EBITDA is essentially flat, soft compared with our annual guidance of 4% growth
Revenue came in short of expectations as the growth rate in our digital offering slowed during the quarter
We believe the onboarding of new clients will fill this hole quickly
The pull back in digital growth also negatively impacted EBITDA margins for the third quarter
Importantly, Epsilon's technology platform offering continued to show progress toward a promising turnaround, with revenue increasing 1% for the third quarter
This is a significant improvement compared to the double-digit decline in the fourth quarter 2016. The client base is showing stability, and we've seen an increased win rate on the basis of the introduction of cloud-based more packaged products into the market
Let’s now move on to Card Services
Card Services produced another solid quarter growth, with revenue up 9% to $1.1 billion and adjusted EBITDA net up an even better 20%
Average card receivables increased 14%, just under $16 billion, consistent with our expectation of mid-teens growth while credit sales increased 5% to $7.4 billion
Operating expenses increased 16% to $382 million or 9.2% expressed as a percentage of average of receivables
The percentage is essentially being flat with last year
The net loss rate was 5.5% for the third quarter 2017. A substantial improvement compared to the 6.2% loss rate in the second quarter of 2017 and better than our expectations
Importantly, gross loss rates were flat with the third quarter of 2016, even excluding the slight benefit from the hurricanes, which I'll talk about later
Recovery rates are still down year-over-year, pressuring the net loss rate, but we consider this pressure to be transitory as we shift collections back to internal
Our delinquency forecast continues to suggest flat to lower loss rates in 2018. This trend allowed us to slightly drop our reserve rate during the quarter while maintaining 12 months of forward coverage
Now the question everyone has been asking what was the impact of the hurricanes
We estimate the hurricanes reduced our credit sales by approximately two points, reduced our revenue by about $40 million for the quarter or about 100 basis points negative impact to gross yield and benefited our loss rates by about 15 basis points
So what that means to our gross loss rates were down 18 bps year-over-year, take away the 15 basis points for the improved from the hurricanes, and that's roughly the flat year-over-year change in our gross loss rates
It is important to remember that this is a temporary impact
Under FEMA-designated individual assistant disaster areas, affected cardholders are not required to make payments nor will any interest or late fees be assessed for two month period
Hurricane Irma will impact us early in the fourth quarter and then operations will return to normal
With that, I will turn it over to Ed
Yes, so there's two things I'd point you, Dan
First is the gross yield decline year-over-year makes the percent growth look a bit higher, the 16% you referred to
If you had basically the same gross yields year-over-year, you'd see it flat-flat
As a percentage of AR, it moved a nominal amount
We said, going back to the last quarter, we expected our operating expenses to be better this year, 40 to 50 basis points
I think that's still on track
We would tell you we're still in the process of adding collectors
And we'll staff them up over the remaining of Q4. I would still expect the OpEx leveraging in Q4 to be better year-over-year
That said, we're still very much on trend to that guidance we gave last quarter of about 40 to 50 basis points improvement on an annual basis
That'd be correct as well
But let's say we hadn't had the influence of the hurricanes affecting our gross yields, the revenue growth would have been up 15% to 16%
So you have to basically influence the fact that you take a whack on your gross yields is not influencing your OpEx
It just means for affected person within that FEMA designated zone, that account is frozen from migration to the delinquency trends to loss if they're in that affected area
So if they were in to 150 days past due and they were affected, it would just mean that's going to freeze and that would not have rolled into the charge off after 180 days
I'd say, Dan, we think the core is still very strong
Occasionally, you get some timing differentials when new programs are coming onboard
I think that's the biggest thing we're looking at
We'd expect it to bounce back in Q4. We just had a little bit of a timing with fewer new programs launched in Q3 than what we've been doing before
But like I said, I think that will bounce back in Q4.
We would tell you the backlog is still strong
Occasionally, it just shifts as to which quarters till when the program is going to onboard
And I would say, we said a little bit lower in Q3.
Thanks
That is the consolidated number
And again, it's rounded to three
It was about $40 million impact to card and a $40 million to total
It's about 2.6% so around…
Well, what we said on the last call, <UNK>, is that the credit sales through online are basically outside of bricks-and-mortar over a third of our credit sales
That number can jump up to north of 40% in the fourth quarter as you get the holiday spend
That's really the metric we've been focusing on
It's the traditional bricks-and-mortar or about 85% in store, 15% online
And we have over a third of our credit sales online
So that's really the ability for us to capture the data, identify you, track you online and give you a relevant target it off and it gives us the ability to do that
We'd put it this way, <UNK>, is the improvement is not definitive on us onboarding Signet
I mean, we're looking basically – yes
If we're looking to Q4, we would tell you putting Signet on the side line, we feel good gross losses will be down year-over-year in Q4. And that's going to be driven by the natural improvement you're seeing on delinquencies in that wedge
We estimate that it's up to 15% of our accounts were within the Florida affected area and the Houston and Texas affected area
That doesn't mean that all of them would have gone into this program, but it's up to 15% of our accounts were affected
Yeah
I’d hate to say anything is permanent, but I'd tell you what we would target is about 20 basis points improvement per year, and that's expressed as a percentage of average AR
Obviously, growth imbalances influences it
There are certain programs that influence it
But I think that's a very reasonable target
It's about 20 basis points per year
Tim, we'd tell you not really anything that we've seen different between the interactions online versus bricks-and-mortar
We know with online, we need to drive different service products
That's just the ability to minimize shopping cart abandonment, the ability to capture
You make it very simple if you make a transaction
But in terms of loss performance, delinquency performance, so forth, there's really no differences
So think about it this way
It didn't influence our loss rates, really, at all for the quarter
The shift you saw that is put in held-for-sale is a vertical that's really just not a core vertical for us
It's pretty small
We're going to look to divest it
It is at the carrying value, which would be par amount than the anticipated losses, so there is no assumed gain or anything associated with it
It's something we'd probably look to try to get off our books toward the end of this year, early next year
But really, it goes back to something that Ed said before, is with the growth we're generating and now assume that coming onboard, we can look at different verticals and this is one we tested for several years, really, not a great vertical for us
It's really time for us to basically do a little bit of cathartic process to the file and get rid of the things that we don't want to focus on
And so that shift to held-for-sale, that's exactly that small vertical that we're just decided not to pursue
It is performance of the overall portfolio, plus we did have some sales in the market, which we already had contracts in place
So just like we saw in June, we saw a little bit of improvement in recovery rate
We saw the same thing in September
So it's a combination of natural trends, a little bit of sale of previously charged-off paper that really drove the improvement
