Loyalty Ventures Inc.

Good afternoon, and welcome to Loyalty Ventures' fourth quarter 2021 earnings conference call. At this time, all parties have been placed on a listen-only mode. Following today's presentation, the floor will be open for your questions. To ask a question, you will need to press the start and the one key on your touch-tone telephone. It is now my pleasure to introduce Ms. Lynn Morgan of Advisory Partners. Ms. Morgan, the floor is yours.

Thank you, operator.

Copies of the slides we will be reviewing today and the earnings release can be found on the investor relations section of our website. Hosting today's call are Charles Horne, President and Chief Executive Officer of Loyalty Ventures, and Jeff Chesnutt, Executive Vice President and Chief Financial Officer. Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties described in the company's earnings release and other filings with the SEC. Loyalty Ventures has no obligation to update the information presented on the call. Also on today's call, our speakers will reference certain non-GAAP financial measures, which we believe will provide useful information for investors. Reconciliation of those measures to GAAP will be posted on the Investor Relations website at loyaltyventures.com. With that, I would like to turn the call over to Charles Horne. Charles?

Thank you, Lynn, and thank you all for joining us today to review what we accomplished in 2021, and most importantly, to discuss our business outlook and roadmap for 2022. 2021 was a pivotal year for Loyalty Ventures as we separated from a longtime parent on November 5th and became an independent publicly traded company. We have brought two established data-driven loyalty solution providers to the market, both of which share key investment strengths. Namely, they are leaders in the respective businesses, have long-standing customer relationships, and combined generate very strong cash flow. These are the attributes that we intend to build upon in the coming years. As you can see on page three, with our spinoff complete, we are now organized exclusively around the clients and consumers of our air models and brand loyalty businesses. Air models and brand loyalty drive sustainable, top-line growth for their clients through their substantial data assets and the analytics to transform that data into actionable and personalized marketing insights delivered to scale. During a year charged with COVID developments and supply chain disruptions, those capabilities helped us create value for our clients while developing new approaches to serve our partners in 2022. At AirMiles, both revenue and adjusted EBITDA were up slightly compared to 2020. Brand loyalty's revenue and adjusted dividend were both down in 2021 as the business dealt with ongoing COVID-related logistics challenges. In 2021, brand loyalty implemented several initiatives to unlock more sourcing alternatives and drive improved performance in 2022. As we look forward, our capital allocation priorities have been established around the goal of transforming our company. We will invest meaningful in these businesses with both the capital to drive innovation and growth, and the commitment to be creative and flexible in our approach to enhancing ROI for our customers. Turning to slide four, it highlights the key financial metrics for the fourth quarter. Total revenue for the quarter was $239 million, and adjusted EBITDA was $47 million. Revenue increased 3% year-over-year, while adjusted EBITDA grew 15% year-over-year. For the quarter, we reported a net loss of $2.27, which included a goodwill impairment charge of $50 million transaction related costs of 18 million, and then the related impact on the provision for income taxes. For the full year, revenue totaled 735 million and adjusted EBITDA was 166 million. In 2021, we reported 2 million of net income and earnings per share of 7 cents, both of which were inclusive of the effects of the goodwill impairment, the transaction costs, and the impact on the provision for income taxes. When excluding the goodwill impairments and the transaction costs, net income and diluted EPS for the fourth quarter would have been 8 million and 34 cents, and for the full year, 66 million and $2.68. Slide five provides a quick update on several key initiatives that launched in the fourth quarter at AirMiles. In conjunction with this spinoff, AirMiles refreshed its visual identity, which helped to highlight and reinforce the enhancements we introduced to the program. The refresh was a strong success with high level of impressions, digital activations, and positive sentiment among collectors. Our sponsors also appreciated the extra energy and enthusiasm it added to the coalition. In addition, AirMiles launched an all-new flight booking program in the fourth quarter. Collectors now have more airline partners from which to choose and more ways to pay using both cash and miles, along with more value per mile. As a result, AirMiles saw a sizable lift in flight redemptions before the Omicron variant emerged late in the year. AirMiles also rolled out the card-linked offers in Q4. Collectors now can link any Canadian-issued MasterCard to their AirMiles account and earn bonus miles at leading retailers. This limited promotion is a great way for collectors to earn more miles at more locations. We have seen strong collector uptake and engagement from this initiative and will continue to develop and test new ways to enhance collector sentiment and program value. Slide 6 highlights select sponsor additions and renewals. During the quarter, we renewed several brands, including Kent Building Supplies, Nova Scotia Liquor Corporation, and Samsung. In addition, Canadian consumers can now earn air models, supporting Canadian small businesses through the Air Models Incentive Shopify Act, which we launched in December. It simply and securely integrates with merchants' existing e-commerce platforms, and the merchants can customize Airmile's offerings to promote specific products, services, or to increase basket size, reduce cart abandonment, and more. The app also offers merchants a simple-to-use interface, along with transaction-level reporting analytics. We are excited about the early returns and look forward to growing in this important channel. As mentioned earlier, we launched our Cart-Linked Offers program in November. and collectors can now earn miles at leading retailers including DSW, H&M, Indigo, Sephora, and Subway. We are seeing positive momentum in this program. We remain focused on growing our sponsor base and providing collectors a multitude of options to earn air miles reward miles across a variety of retail verticals. Turning to page seven, it highlights the air miles reward miles issuance and redemption trends over the past nine quarters. Miles issued increased sequentially in the fourth quarter, boosted by the holiday season, and redemptions improved sequentially as well, though the emergency Omicron variant resulted in fewer flight bookings than would normally be expected. At the same time, merchandise redemptions remained strong and were higher in both the fourth quarter and the full year compared to 2020. As travel restrictions recede, we anticipate higher demand for flight bookings and travel redemptions. Our redemption settlement assets account had a balance of $735 million at year end, funded by cash we set aside for future redemptions. We are confident the redemption settlement assets will cover periods of elevated redemptions without any impact on our liquidity or operating cash flow. Turning to page eight, let's review the key developments for brand loyalty in the fourth quarter. As part of the spinoff, brand loyalty updated its visual identity and introduced a bold new logo that clearly establishes that loyalty is the foundation for what they deliver to their clients. Brand loyalty also renewed its relationship with Disney in key regions, enabling us to offer loyalty promotions, including the Walt Disney Company franchises to our retail clients. We believe the Disney relationship will continue to be a key differentiator for brand loyalty going forward, and we are pleased to recommit to this relationship. The emergence of the Omicron variant in the fourth quarter extended the COVID-related supply chain challenges that brand loyalty has encountered throughout 2021. During the year, the team has worked to develop alternative sourcing options so that its reward merchandise can be reliably produced, shipped, and delivered to its clients. With an emphasis on regional sourcing, new shipping modalities, and pre-booked container capacity, we are confident that we are well-positioned to navigate potential supply chain constraints in 2022. Slide 9 illustrates the broad geographic areas the brand multi-serves. In 2021, these areas were impacted by COVID differently, not only in terms of lockdowns and other restrictions on economic activity, but also in terms of vaccine availability, efficacy, and uptake. As a result, some of these countries and regions would rebound at different times and with different cadences, and each region will represent a different opportunity for brand loyalty. With our strong foundation in the EMEA region, We will work to expand that market through more grocery and retail relationships while also supporting growth in the Americas and APAC. We believe that the current momentum combined with COVID recovery will lead to an expanded footprint and profitable growth in these areas. On slide 10, we provide additional detail on the investment roadmap that is designed to drive accelerated growth. Over the past few years, our businesses have been unable to use the free cash flow to invest in the capabilities at a pace that they wanted. Now that we are an independent company, our new team is committed to putting the earnings from these businesses back into initiatives that will fuel our future growth. Specifically, we plan to invest an incremental $20 to $25 million of CapEx toward enhancing our collector-facing digital platforms while also upgrading our data and analytics capabilities so we can serve our clients better. These investments are underway in 2022 and will enhance our collector experience and sponsor analytics in 2023. To further demonstrate our commitment to enhancing the coalition today, we're investing $20 to $25 million toward improving the collector value proposition in Canada. We believe this will create a virtuous cycle. More engaged and excited consumers will collect more, which will help retain existing partners and attract new ones. This change capitalizes on the momentum of our recent spinoff, fulfills our promise to take a new approach and serves as a bridge until the 2022 CapEx investments are live and in market next year. We expect to start the transition back to traditional EBITDA margins in 2023. Collectively, we believe these investments will strengthen our standing as the leading coalition loyalty platform in Canada and position Aramont for a strong and vibrant future. While the investment focus in 2022 will be concentrated on air miles, we will remain vigilant for opportunistic acquisitions that will help brand loyalty and add clients, suppliers, and capabilities to spur sustainable growth. As we move to slide 11, let's start off with how we plan to elevate consumer engagement across our businesses. At air miles, we recognize the pandemic has impacted historical redemption patterns by limiting demand for travel rewards and temporarily lengthening the overall time to redeem. To drive collector engagement, we have added new merchandise, reward options, adjusted certain mileage redemption thresholds, and enhanced our tier benefits. We've also started rolling out our real-time checkout platform, which provides sponsors with a streamlined method for instantly awarding their customers with AirMiles reward models either in-store or online. Real-time issuance means our collectors can see their updated balances immediately after checkout and having access to the reward amount sooner makes redemption opportunities more accessible. We believe these changes will help our sponsors engage their consumers and improve the overall collector experience. At Brand Loyalty, we renewed our exclusive partnership with Walt Disney Company and Key Regions, making Brand Loyalty the only company in the industry to have a partner with Disney to offer campaigns featuring Disney-branded products. Disney's suite of products resonates with both clients and shoppers, engaging them in ways few other brands can. The brand loyalty team also recognized that the consumers value and prioritize sustainability in their everyday lives, so we have developed and deployed a set of virtual rewards in the form of carbon credits. Consumers can collect and ultimately redeem these credits to have trees planted, which will help offset their personal carbon footprints. These virtual rewards also offer retailers a redemption option that bypasses the physical supply chain and increases the certainty of a program's on-time launch. On slide 12, let's explore how we are focused on digital innovations. At AirMiles, we introduced improvements in our travel booking experience, which offer consumers more choice and flexibility when reserving flights. With the ability to choose flights anywhere in the world, book different cabin classes, and pay with miles or cash, the first phase of this new digital-first self-service platform was rolled out last quarter. We will continue to enhance it throughout 2022, and we believe collectors will appreciate these enhancements even more as travel redemption patterns start to normalize. Additionally, we partnered with Adobe to drive greater personalization and one-on-one messaging across our marketing and communication channels. We believe enabling tailored conversations at scale between our sponsors and our collectors will drive growth for our sponsors and more relevant offers for our collectors. We will be developing and deploying these capabilities to more sponsors, throughout 2022. Brand loyalty in turn has seen strong client uptake with this gamified digital loyalty solution. The new solution where shoppers can win prizes by playing games drives traffic to retailers' digital channels and increases engagement with shoppers through omni-channel campaign activation, increasing monthly active users. Brand loyalty has also launched a business consumer app where consumers can offset their carbon footprint through certified projects. This solution empowers consumers and partners to take collective action to tackle climate change. Unique sustainable platform, known as Club Leaf, also offers a suite of business-to-business carbon offsetting services. Finally, Brand Loyalty has delivered a new campaign solution in the fast-growing e-grocery, e-commerce landscape. This solution is targeted at building online ordering habits by rewarding shoppers for their behaviors. Moving to slide 13. we have highlighted areas of investment in our data and analytics capabilities. Aramont has always used first-party data and insights from consumer behavior to deliver personalized offers. The investments we are making today will allow us to do this with a greater scale and automation. And as these campaigns are in market, Aramont's reporting and analytics suites give our partners access to data, insights, and dashboards in order to analyze and evaluate performance in real time. Finally, our machine learning solutions help measure campaign effectiveness and recommend personalized offers. Brand loyalty has elevated its impact measurement methodology to predict and measure shopper uplift down to the segment of one, paving the way for further personalized communication and campaign design. The new personalized services are deepening the data flow and sharing from our retail partners, which ultimately enables brand loyalty to deliver more impactful and relevant campaigns. As you have heard, we've hit the ground running with programs to strengthen our value proposition and build our capability to support future growth. With that, I will turn it over to our CFO, Jeff Chesnok.

Thanks, Charles. Slide 14 presents our results for the fourth quarter and the full year of 2021 compared to the corresponding periods of 2020. Revenue in the quarter was up 3%, primarily due to a strong finish to the year at brand loyalty. Net income and diluted EPS were both down quarter over quarter as a result of the goodwill impairment, costs related to the spinoff, and the income tax provision. Excluding the impairment and the strategic transaction costs, net income and diluted EPS in the fourth quarter would have been $8,034 per share. For the full year, revenue declined 4% as a result of the difficult environment that Brand Loyalty faced in 2021. Both net income and diluted EPS were each down for the full year as they were impacted by those items mentioned above. Excluding the impairment and the strategic transaction costs, net income and diluted EPS for 2021 would have been 66 million and 268 per share. Over the last two years, the continuing impact of the pandemic combined with the global supply chain challenges have disrupted normal operations at Brand Loyalty. As a result, we determined it was more likely than not that the fair value of Brand Loyalty was below its carrying value, and we performed an interim impairment test. Based on the preliminary results, we recognized a non-cash goodwill impairment charge of 50 million in the fourth quarter. Brand Loyalty's goodwill balance at the end of the year is expected to be $455 million after giving effect to the impairment and the FX impact. As we will discuss on our outlook for this year, we believe Brand Loyalty will deliver a strong performance in 2022, and we're proud of how the team has navigated the circumstances of the past two years. For full year 2021, the tax rates of the two segments ranged from approximately 25% to approximately 28%, and the consolidated tax rate was impacted by several factors. These include Canadian withholding taxes associated with the payments to the former parent and the currently non-deductible U.S. expenses, such as the goodwill impairment, interest expense, and corporate overhead. I'll provide more details on our results on the next slide. Slide 15 presents our segment-level results for the fourth quarter and the full year. In the fourth quarter, both Air Miles and Brand Loyalty exceeded their revenues in the year-ago period. Airmile's adjusted EBITDA was 13% higher than the fourth quarter of 2020 due to OPEX savings across payroll and marketing. Brand Loyalty's adjusted EBITDA in the fourth quarter was 18% higher than the year-ago period due to the margin from the revenue growth as well as lower costs associated with key programs. For the full year, Airmile's revenue and adjusted EBITDA increased 3% as the segment benefited from favorable exchange rates. Brand Loyalty's full year revenue was down 8%, and adjusted EBITDA was down 24% due to the ongoing impact of COVID in the markets in which brand loyalty operates. In particular, brand loyalty experienced persistent difficulties in sourcing timely deliveries of the merchandise it uses to reward consumers, and as a result, some retailer loyalty campaigns ran less effectively or were deferred until the product could be reliably sourced. Slide 16 provides our financial outlook for the year. Our full-year guidance for 2022 reflects enterprise-wide top-line growth of about 7% and an adjusted EBITDA margin of approximately 20% at the midpoint of our revenue guidance range after taking into account the increased spending we have budgeted in 2022 to drive accelerated growth in 23 and beyond. Supporting our guidance for 2022 is our expectation for strong performance from Brand Loyalty. The Brand Loyalty team has significantly more contracted and high-potential business today compared to a year ago. As a result, we expect double digit top line growth at brand loyalty with an improvement in the margin profile from mid single digits to low double digits. We expect strong growth at brand loyalty to more than offset lower net revenues at air miles, which reflects the impact of the collector value enhancement initiatives that Charles mentioned earlier. Overall, we expect air miles to contribute about 70% of company-wide adjusted EBITDA before corporate expenses. In fiscal 22, We expect the tax rates for the two segments to range from about 25% to about 28%. After considering the currently non-deductible U.S. expenses, we forecast the consolidated tax rate will be about 50%, and we expect cash taxes for 2022 to range from $30 to $37 million. We are focused on reducing the consolidated tax rate, and initiatives are underway to leverage or redistribute the currently non-deductible U.S. expenses. As we undertake the investments discussed today, we are mindful of our liquidity and our cash flow. Slide 17 highlights that our liquidity is strong at over $300 million at year end, and our free cash flow is $161 million. We have ample liquidity to support the strategic objectives we've outlined with capacity to react quickly on inorganic opportunities as appropriately. And we are confident that the strategic priorities we outlined today will enable us to strengthen the leadership positions of both Air Miles and Brand Loyalty by building upon our relationships with existing clients, attracting new sponsors and clients, and driving enhanced collector and consumer engagement with our loyalty programs. Ultimately, these initiatives will transform Air Miles and Brand Loyalty and will help us continue to drive sustained profitable growth for our clients and for loyalty ventures. Operator, we are now ready to open the lines for questions.

Thank you, ladies and gentlemen. To ask a question at this time, you will need to press the star, then the one key on your touch-tone telephone. To withdraw your question, press the pound key. Again, to ask a question, please press star one. I'm sure we have a question coming from the lineup. Mark Riddick with Sedona. Your line is open.

Hi, good evening. Hi, Mark. So I wanted to start with the... Is there a general sense that we should be thinking about as far as the timeframe of the investment or throughout 2022, if there's any particular lumpiness, or how should we think about how that would flow throughout the year? Sure.

So the change we made to the year-on-year miles program to increase the value proposition, think of it as pretty much equally weighted by quarter just based upon the volumes. If you look at the CapEx right now, we're really in the analysis stage of what changes we want to make and when we want to implement them. So I'd say, and maybe Jeff will agree with me, it's going to be more weighted Q2 through Q4 versus Q1 as we do a complete assessment of what we have and what we want to do.

Okay, great. And then I wanted to shift gears and could you talk a little bit more about the Disney renewal to the extent of what you can share with us as far as time frame or sort of maybe a little bit more detail around that renewal in new regions?

Yeah, sure. So if you think about it, most of our contracts sit in the three- to four-year renewal space, and that's just the way it's historically been. We tend to start negotiations a year in advance, and so we'll be starting right now with one of our larger clients, and then we'll start later in the year with a second one. And so we'll continue with what we have in the past. We'll negotiate and we'll try to get a good deal for us and try to get a good deal for our clients. And we'll just see how it goes. It's just one of those things we always have to deal with with these short-term contracts.

Okay. And then can we talk a little bit about the card-linked offers? So some of the brands that you have mentioned in the presentation are There's certainly a mix of industry verticals. We could talk a little bit more about that and maybe where you think that might go and to some degree what that might do over time as to the mix of what's available to customers.

Hey, Mark. This is Jeff. We're excited about the card-linked offer program. It's a great way to help our potential long-term sponsors try the program from an efficient standpoint without standing up too much infrastructure. It's also a way for our collectors to quickly expand where and how they earn. So I would expect this is a time-limited program, but I would expect to see more names joining here over the coming weeks, and we'll continue to evaluate it. I think this one's got legs.

Okay, and then shifting gears actually over to the commentary around the gaming option for folks because, quite frankly, we don't spend enough time on our phones already as it is. I just wanted to talk a little bit about sort of how that program came about and sort of maybe even the content that's involved in these games? Is that something sort of where these games come from? And as far as engagement and maybe how that works to sort of translate into revenue for yourselves and growth for your customers? Thank you.

Yeah.

Hey, Mark. So from a, you know, from a gamification standpoint, this is something that we work together in particular with our clients at Brand Loyalty to determine that the type of traction or consumer behavior that they're looking to drive. And some of that behavior is foot traffic or basket size. Some of that behavior is oriented around app mobile adoption or online adoption, spending more time in the app. And so if that's the objective for the program, that's an opportunity for us to layer in those gamification elements I really try to sharpen the consumer's behavior around coming back to that app or that site in particular for retailers, especially in the grocery channel. Just like you're competing for foot traffic in your grocery store, you're competing for web traffic to get consumers to adopt your online delivery service or meals in a box, things of that nature. That's where you're going to see those changes. really roll out and have traction. We'll do it in concert, of course, with the retailers' strategic objectives.

Okay, and then one of the slides, and then I'll jump back in queue. I'm asking a bunch of questions. I'm sorry about that. But there was one slide on the brand loyalty going into the campaign statistics, and I was wondering if you could talk a little bit about that, the 185-plus campaigns, 140 retailers, and what have you. And I was wondering, sort of where you think that can go in a normal environment, normal year, and how maybe what we've seen historically as far as those campaigns over time. Thank you.

Yeah, sure. The brand loyalties – has been, as Charles mentioned earlier in his remarks, really impacted by the pandemic and the supply chain. The lack of travel, in particular, has limited brand loyalty's ability to get out and sell new campaigns to potential new clients. So as you think about the list of countries they're in today and where we're reporting those campaigns are running, we'd expect that to grow as they move into not only more campaigns in their existing geographies, but expanding into those new geographies and new verticals within existing and new geographies as well through some of those partnership and digital innovations that Charles mentioned. So once the travel restrictions lift, not only certainly in Europe where brand loyalty is headquartered, but in those regions around the world so they can get there, and introduce these programs, I think you'll see those numbers continue to expand.

Our next question, coming from the lineup, Bruce Crystal from Crystal Family Office, Yolanda Selfin.

Yes, good afternoon. A few questions, please. The first is the investment of the $20 million to $25 million that you'll be running through the Miles program. P&L I was curious was this at all related to the loss of the two sponsors earlier in the year and second question along those lines a couple more after that is your confidence that the 20 to 25 million investment maybe you could spend a little bit more time about what that exactly will be and will that in fact drive new sponsors and specifically could there be any sponsors that are related beyond Canada.

So let's start off with your first question on really two of the programs that went away. The biggest one was Lowe's where they just decided not to be in the program anymore. I think indirectly it's a case where they were looking at the cost. Now the collectors in the market were sitting there and we'd gotten some feedback and we'd gone out to all of our big sponsors and talked to them. So we went out and did a little bit of a market check against some of our competitors in the market, and we felt that over the last couple of years we kind of priced ourselves in terms of the value prop above where we should be. So we looked at it. We said to bring us back into really in check, even though we're the leader in the market, to make it, again, more agreeable to the collector. Let's adjust it. Let's try to get more value going through the consumer. They spend more. They pull through more to the sponsors to your point. Sponsors get happy when people spend. So if we get the collector happy with the redemption options and we have a plethora, now they're getting more value, they spend more, and it's a virtuous cycle we talked about. So we felt after going into the market, talking to our big clients, doing a market check on some of the other programs in the market, PC Optimum, the RBC program and so forth, we felt it was appropriate to make the change, and we do think we'll get that back over time. We do think that's going to drive collector engagement and drive more spend, and we're going to come out ahead on it.

Okay, but at this point, is there any ability to see that this investment will lead to several new clients? I'll say we're being very active out in the market right now.

To your point, we do need to bring in some new clients and some key verticals, and we're trying to do it aggressively. I do think this helps, but this is not the only thing we need to do. We also need to add capabilities. We need to move to open source data where clients can get into this rich database we have and do some of their own marketing programs. So there's a number of things we're looking to do to facilitate the products, make it where it's even more than just the value prop to the consumer. We're adding value to the sponsor by helping them market the program and marketing what they need. So that's really what the focus is going to be, a combination of making it better for the collector but also adding capabilities for the sponsor and make it in such a way that no one else can replicate what we do. That's what we're attempting to do.

Okay. The second question is, in light of the lower EBITDA, Was there any change in the breakage rate assumptions? And if so, what would a 1% change in the breakage rate cause to the EBITDA?

So I'll let Jeff answer that one. There was no change to the breakage rate. But if you think about what's happened over the last two years, the burn rate has been below the ultimate redemption rate. And what I mean by that, the amount of points burned during the current year over the months issued. has been below the 80% ultimate redemption rate. So what it gives us is some room down the road that if we see a spike, and we think it will when people start booking flat again, we can go above the ultimate redemption rate for a period of time, the 80% on the DREAM program, and not be in an issue. So that shouldn't be a problem. Jeff, to your point, did we quantify in our 10K the effect of one point change? I think it should be there, and you should know what that is.

We haven't put the 10K out, I think you're referencing the Form 10, Charles?

Yeah.

Yeah, I think it's about 80 million. Canadian? I believe so, yeah.

Okay. The next question I had was just curious here, the the improvement here on the retail side of the business is actually quite dramatic. And I was wondering just from a fact that you're effectively a new company and the fact that the parent company really is effectively controlled by regulators, et cetera, and has all of those type of things. Is there something here that, As you see as an independent company now, the strategy going forward will be a little bit shackle-free, if you will, from regulators, et cetera, that will allow you to actually be a little bit more aggressive in the marketplace.

Charles, you may be on mute. Oh, you're right. You're right. If you think about it with With ADS, the focus was on the payment side. It was on the card services side, which, to your point, is highly regulated. So basically, the little T Ventures operations were looked at as how much cash can we harvest out and reinvest in the business. So it did do very well for ADS in terms of dividending money back, but in my opinion, at the detriment of future growth. So as Jeff talked about, if we go through, we retain our cash flow, which is strong, we invest in the business for a couple of years, that's how we're going to get to the growth profile we're looking for. That's going to be the key thing for us, the ability to go into new markets. I'd like to bring Air Miles into the U.S. I'd like to go with many coalitions and some of the developing loyalty markets like Mexico. There's a number of things we can do now that we just didn't have the opportunity to do before, not that there was anything wrong with the way it was done. It was just a different priority. So we're shifting from harvesting cash now to how can we really grow the top line and make this a growthy company?

Do you think in 2022 we will actually see a U.S. partner? in Air Miles?

Well, maybe not necessarily with Air Miles. We already have some U.S. partners with Brand Loyalty. We're going to look to bring some of the Air Miles capabilities, especially around data analytics, into the U.S. One of the things we're also looking to do is to acquire certain assets in the U.S. We had a presence in the U.S. before with a company that was part of Air Miles that was divested away a couple of years ago by ADS. We'd like to reestablish some of that, go into the grocery vertical, support Brand Loyalty in the U.S., and maybe add some additional capabilities. Back when Jeff and I were involved with Epsilon, we knew what Epsilon did really well. We knew what Epsilon didn't really do in the U.S. markets, and we think there's a gap there that we can really take advantage of. So look for us to be pretty aggressive trying to come into the U.S. in 2022.

Okay. And then just two kind of nitpicky questions. One is on the revolver. Okay. depending on who you believe it could be four to seven rate increases. Um, has that, have you thought about either doing something very creative like air Canada did where, or not air Canada, but United did in the second quarter here in, um, in the middle of the pandemic where they were able to securitize part of their miles program or do something where, you know, you'd swap out, uh, floating for fixed.

Yeah. Hey Bruce. Um, We certainly have been watching the rate environment. I don't know that we do anything from the airline's perspective with what they're considering, but certainly looking at swaps to help manage the interest exposure as we consider the entirety of the debt capital structure as well.

Okay. It just struck me that there's something – I just hate to be in a position here where if we go through multiple increases, we don't cap that out. But the final thing, in the footnotes, there was about a $70 million tax loss carry forward that had various reserves against it. And I was just wondering, insofar as the goodwill charges and some of these other charges, will there be a position that will be in a tax loss carry forward that will actually be able to be utilized going forward?

If the, yeah, of course, with the, I think there's some, there's a couple of elements there. In particular, there's a Canadian position that's owed back to the former parent. And then from a tax optimization standpoint, you're right, we're going to be looking to really structure the business now that we're on our own in a way that we can leverage the, you know, the tax efficiencies in the countries in which we're in. And some of that's going to depend on that that those growth initiatives that Charles outlined in the U.S. as well for this year. Okay.

All right. Thank you very much for your time.

Appreciate it.

Thanks, Bruce.

Ladies and gentlemen, as a reminder to ask a question, please press star one. Our next question coming from the lineup, Ted Goldberg with Tri-Atlantic. Your line is open.

Hey, guys. Congrats and thanks for taking the question. Sure. The first question is just around Miles' issue and And we'd love to get your thoughts as to, you know, kind of the relative importance of factors that could, you know, cause issuance to inflect to growth. And so, you know, is it, you know, simply just an abatement of kind of COVID-related pressures? Is it improving sponsor retention? Is it, you know, winning some new sponsor logos? How do you think about what needs to happen in order for there to be an inflection to Miles' issuance growth?

Sure. Sure. So I'd break you down in a number of ways. The first is we are looking actively to bring more sponsors into the program. So that's always the best way to do it is to give your collectors the ability to cross-activate more places to spend. The second thing we need is to see some of our clients get back into promotional miles. So the way our contracts really work, you'll have clients who have base miles, and then they have the opportunity to do promotional miles, which is above and beyond. We haven't seen a lot of promotional miles during this time frame. You wouldn't expect it during COVID. So I think we will over time see the promotional miles come back into play. And the third, we would expect to pick up in discretionary spending. Once you see a pickup in discretionary spending, more credit card spend coming through with BMO, that's another area that we think we could get some stimulus coming through. So it's going to be new clients, it's going to be promo miles, and it's going to be also a little element of mix as discretionary spend gets a little more prevalent.

Got it. And do you have any color around just the relative mix of base miles versus promo miles and the magnitude of the decline in promo miles that you saw during COVID?

I don't have that off the top of my head. I know promo miles are way down from where they were. I just don't have it right at the moment. It's small, I know. No problem.

And what, you know, how have you guys thought about the assumptions around miles issuance that are baked into the guidance for 22?

Seth, it's Jeff. You know, from a miles issuance standpoint, I think you'd be looking, you know, as we look across the year, we're looking at, you know, between 4% and 5% miles issuance, trending back up towards that $5 billion of issuance that we had last year.

Great. Got it. And then just switching gears for a second to the $40 million to $50 million of incremental investment that you highlighted. how much of that should we think of as kind of recurring versus, you know, 22 only?

Yes, so I'd break it down. The CapEx is going to be up for a couple of years, even though we expect to start seeing the benefit of it in 2023. The changes to the program in terms of the cost per mile or the value we're giving to the consumer will stay the same. But what you're going to look for is to drive more points issued, more spend, and you're going to look to basically leverage your fixed costs more than mitigate the impact to your EBITDA margins. So you'll see that the capex will start trending back down in 2023, and then you'll see us leveraging the top line and producing more EBITDA than what we did before, just as we get the pull-through effect from the collector being more engaged.

Got it. And presumably, you know, to the extent that the – incremental, you know, value to the collectors, you know, isn't something that drives increased engagement and EBITDA, and that's something that can be ratcheted back.

Correct. Even though when we first announced the changes, we definitely saw an uptick in terms of redemptions for FLI before the variant kicked back in and depressed us. So we definitely saw a very positive reaction. I'd like to maintain that positive reaction. I do think it helps with renewals. I do think it helps with collector engagement. it's really now about driving growth and leveraging our costs in the business.

Got it. Um, and one, one last question. How should we think about the sustaining CapEx needs of the business? Obviously next year is going to be a big, or this year is going to be a big year for, for capital spending. And maybe there was some deferred, uh, you know, investment and investment for growth, but just on a, on a longer term basis, how do you think about what, uh, you know, what the CapEx profile of the business looks like?

Yeah. So that's, uh, I think as you think about the CapEx outlook, we've got that extra investment this year. I think you'll see a blend between the baseline that we had before and what this new level is, incrementally speaking, as we go forward. And some of that investment, you know, beyond CapEx may be redirected into tuck-in acquisitions as we're on the lookout for adding capabilities if we see that there's something that we can pick up in the market faster than we could build it ourselves.

Got it. Well, thank you very much. Thanks, Seth.

And we have a follow-up question from Mark Riddick with Fedoti. Yolanda, it's open.

Hi, good evening again. I just wanted to follow up on a couple of things there, one of which being if you could sort of comment on, given the investments that are going to be taking place this year, how we should be thinking about debt reduction goals either just this year or sort of maybe in general on a longer-term basis as far as annualized debt reduction or how we should be thinking about that. And then I have a quick follow-up after that.

Yeah, sure, Mark. From a debt reduction standpoint, it's one of our top two capital application priorities for the year, the investments that Charles outlined as well as deleveraging and strengthening the balance sheet. I'd expect this year you'd see a reduction of approximately $50 million U.S. towards the debt capital structure as we move across the year.

Okay. And then given the investments that you're making, I'm sort of thinking about now, does this change or the timing or focus of acquisition targets? Are there maybe some type of acquisitions that you might, you know, push off until later until you've made these investments? Or how should we think about maybe the timing of acquisition targets and your ability to sort of, you know, get some of those done as you're also laying on the investment spend?

I'll break it down in pieces. I'd say for air miles, it's a build versus buy concept. We know we want certain capabilities, products in place, and it may be a case where we can acquire it more timely and at a better cost than what we could necessarily develop it internally. So I'd say it will not reduce our effort in trying to engage acquisitions for air miles. With brand loyalty, we could push it off a while. I think brand loyalty is in very good shape in terms of the capabilities they bring, the product offerings they have. So for them, down the road, I'd like to do a little bit of a roll-up. I'd like to take out some of the smaller undercapitalized players within the space. But that's not anything that's pressing. That's not anything we need to do right now. So the priorities really in 2022, going back to what's been asked before, debt pay down, let's get to a very good leverage ratio that Jeff and I are comfortable with, and then adding capabilities for air miles, which may very well mean we acquire a company in Canada or the U.S. that supports it.

Okay, and the last one for me, I promise. I wonder if you could talk a little bit about the efforts that were made around the supply chain challenges, maybe what kind of worked well and what you kind of see being more, you know, having longer tail and maybe just give a couple of examples of that and sort of how that was received by customers and then, you know, how that might end up impacting how you do things long term.

Sure. So one of the things we're doing, and we talked about it in the script, is we are looking to add digital capabilities, e-capabilities, where basically you can redeem online. It could be gaming. It could be you're redeeming to offset your carbon footprint. That will give us the ability to go into smaller, fast retail-type businesses. So add more digital capabilities there. What we did do, though, is we started to buy a little bit more volume. We could get the containers, even though they were expensive. The issue would be that the ports would shut down. So when the ports shut down, there's not a lot you can do about it. So a lot of it's going to be trying to source locally, which will really help us a lot from a lead time standpoint as well as from a backstop standpoint, and then adding e-capabilities. And then I do think the ports are going to open up where we don't have this same level of lockdown that we're consistently dealing with in 2021.

Appreciate it. Thank you.

I'm sure enough for the questions at this time. I would now like to send a call back over to Mr. Charles Horne for any closing remarks.

Sure. Thank you. Really appreciate every one of you joining in for our first earnings call. It's a great event. I would like to thank all the associates at Loyalty Ventures. We finally got to the point we were looking for. And so I really appreciate everyone being involved today, and let's look forward to driving some good outcomes in the future. Thanks, everyone.

Ladies and gentlemen, that's our conference for today. Thank you for your participation. You may now disconnect.