Alliance Data Systems Corporation

Good morning and welcome to Alliance Data's full year and fourth quarter 2020 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 during that time, please press star followed by the number one on your touchstone phone. In order to view the company's presentation on the website, please remember to turn off the pop-up blocker on your computer. It is now my pleasure to introduce Mr. Brian Virb, Head of Investor Relations at Alliance Data. Sir, the floor is yours.

Thank you, Casey. Copies of the slides we will be reviewing and the earnings release can be found on the Investor Relations section of our website. On the call today, we have Ralph Andretta, President and Chief Executive Officer of Alliance Data, and Tim King, Executive Vice President and Chief Financial Officer of Alliance Data. Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties described in the company's earnings release and other filings with the SEC. Alliance data has no obligation to update the information presented on the call. Also on today's call, our speakers will reference certain non-GAAP financial measures, which we believe will provide useful information for investors. Reconciliation of those measures to GAAP will be posted on the Investor Relations website at AllianceData.com. With that, I would like to turn the call over to Ralph Andretta. Ralph? Thank you, Brian, and thank you all for joining the call this morning. I will start on slide three with the key takeaways from 2020 for AllianceData. First, we believe that the company's results reflected significant resilience in what was a very difficult business environment thanks to our ability to respond quickly and effectively to the changes brought on by the COVID-19 crisis. At the same time, we were able to reduce our fixed cost base by approximately $240 million in 2020 compared to where we stood in 2019. We optimized our workforce and our physical real estate footprint and gained operating efficiencies through process improvements including automation as part of our transformation program. Even more important than the progress we demonstrated in 2020 are the investments we made and the strategic actions we took to position Alliance data for sustainable long-term future growth. We invested in top-tier talent to transform our car services business, added digital innovation expertise, and strengthened our partner management and product development capabilities. Turn to page four, I will cover key investments we made in 2020. But before I get there, I do want to mention our international Loyalty One businesses as they continue to adopt and invest in better positioning themselves for the new marketplace through new offerings. First, turning to air miles, the team has pivoted its rewards portfolio to emphasize more non-travel options, such as stay-at-home type merchandise, to drive higher customer redemption rates during the pandemic. Brian loyalty has developed a number of new concepts for programs based on pandemic related themes like bring the world to your home and health and hygiene and is providing sustainability focused offers using 100% recycled plastic for rewards like luggage and kids promotions. Moving to the slide, you can see the major products and technology enhancements we have we've made in 2020 to improve our client experience and drive future growth. Our acquisition of Bread opens up new opportunities to leverage our digital offerings to capture incremental point-of-sale opportunities and to build strategic technology platform partnerships. Bread offerings and integration capabilities enhance the growth prospects of our card services verticals and increase the addressable market of small and medium-sized merchants. At the same time, Bread offers our existing partners a broader digital product suite and additional white-label product solutions. With the transition of cloud services core processing to Fiserv, we will improve our brand partner conversions and speed to market, including the ability to quickly and seamlessly add new processing capabilities that benefit our partners and card members. The platform enables efficient integration and use of mobile wallets and virtual accounts, while supporting our data and analytic capabilities and improving operational efficiencies. We will also benefit from capital expenditure savings, which will be redeployed to fund growth initiatives. In 2020, we also announced the launch of our enhanced digital suite. This digital application helps our brand partners capitalize on accelerated growth of e-commerce by attracting and bringing through more qualified applicants a higher average purchase value and a higher credit sales conversion rate. The suite creates a seamless process for customers to adapt, apply for, and use our payment options. We are seeing improved year-over-year growth from our digital channels and would expect this trend to continue as our partners and card members benefit from our digital solutions. Finally, we were pleased with the response to the launch of our new proprietary credit card, the Comenity Card in 2020. we continue to see strong activation rates, engagement, and cross-category shopping, especially among millennials. The community card allows Alliance Data to retain card member relationships and drive increased credit sales. These investments, together with our streamlined cost structure, underpin our confidence in Alliance Data's future prospects. Slide five provides the financial highlights for the fourth quarter. We reported diluted EPS of 25 cents, including discontinued operations. Net income from continuing operations was $93 million, or $1.93 per diluted share. Total revenue for the quarter was over $1.1 billion. Credit sales improved 24% sequentially, and both air miles, reward miles issued and redeemed improved from the third quarter of 2020. Overall, during the quarter, we saw a pickup in our business due to holiday seasonal shopping and improved consumer spending. Moving on to slide six, you can see the continued gradual recovery in credit sales for our credit card services business. Active program sales, which provide a clearer view of underlying sales trends, improved from a 14% decline year-over-year in the third quarter to a 7% decrease in the fourth quarter of 2020. Also, 24% sequential total sales improvement from the third quarter of 2020 was better than the same period last year, showing continued progress while adjusting for seasonal holiday increases. We continue to see more purposeful spending. While in-store traffic was down versus a year ago, when consumers shop in-store, they are spending more. Also, I want to highlight the success we saw in our beauty, health, and wellness verticals. as both had an excellent holiday season with strong online adoption and sales performance. Online sales made up 42% of total sales in the fourth quarter, up from the low 30s for the fourth quarter of last year. Please note that we include additional details in our sales by channel in the appendix of this check. Slide 7 highlights select partner additions and renewals and our new strategic technology partnership with RBC. In the fourth quarter, we added over 60 new online merchants and now have over 500 online merchants. Bread's innovative fintech approach and platform capabilities combined with card services funding, marketing, data and analytics, and underwriting expertise provides new opportunities for growth and synergies. Our pipeline of digital partners is growing at an impressive rate as a result of bringing our two companies together. In addition, active cross-sell partner discussions continue with high levels of interest from our existing card services brand partners to augment existing programs with bread solutions. We expect the integration of existing partners to start in the latter part of the first quarter. I would also highlight the addition of famous footwear, which will be fully integrated with the enhanced digital suite to take advantage of our digital capabilities through a single API integration. The strategic agreement that we have announced this morning with World Bank of Canada leverages Bred's leading platform technology and digital offerings in new ways. RBC is now utilizing Bred's white-label platform to expand its payment solutions for its Canadian merchants. This accelerates Bred's platform growth and enables us to continue to bring next-generation payments and checkout solutions to more consumers globally. Let's turn to Slide 8 to review the performance for Loyalty 1, which includes Air Miles Rewards Program in Canada and Netherlands-based Brand Loyalty. The segment's fourth quarter revenue benefited in part from higher seasonal spend when compared to the previous quarter. As I mentioned earlier, and as displayed in the graph on the bottom of the slide, Air Miles, Reward Miles issued and redeemed continued to improve in the quarter, driven in part by the success of the expanded merchandise portfolio. Customer engagement continues to improve with the new offerings. Once travel resumes, the new offerings combined with travel options should provide a substantial growth opportunity. Brand loyalty revenue improved 36% sequentially, yet remains down versus the prior year. We continue to closely monitor the pandemic infection rates, especially in Europe and certain countries, as they implement stricter informed measures. Moving to slide nine. Our areas of focus remain consistent. With the recovery actions behind us, we remain focused on the rebuild and regrow elements of our plan. We will execute on these efforts in 2021 to position Alliance data for sustainable, profitable, and long-term growth. I will now turn the call over to Tim to cover the financials. Thank you, Ralph, and good morning to everyone. I'll start on slide 10 to review our results for the full year and fourth quarter of 2020. Starting with the full year of 2020, income from extended operations was $295 million, down 48% from 2019. The reduction of revenue was primarily due to COVID-19 pandemic. This reduction was partially offset by reduced operating expenses as a result of decreased variable costs tied to lower receivables, as well as a $240 million of fixed cost savings that Ralph mentioned before. Starting in the fourth quarter of 2019, we took action to right-size our expense base. We optimized our workforce and physical real estate and continue to recognize the benefit from our investment in automation. Other areas of reduced cost in 2020 included legal, consulting, and fraud expenses. For the fourth quarter of 2020, revenue was down 24% versus the prior year. Fourth quarter income from continuing operations of $93 million benefited from lower provision for loan loss expense compared to the prior year, driven by better than expected credit performance. Income from continuing operation per diluted share was $1.93, and net income per diluted share was 25 cents for the fourth quarter. Net income was impacted by the $81 million after tax charge and discontinued operation as discussed in the press release. I will provide more detail on the quarter in the coming slides. Slide 11 highlighted our segment level results for the fourth quarter and full year 2020. Focusing on the fourth quarter, both Loyalty One and card services revenues were down. The decrease in card services was primarily tied to a reduction in normalized card receivable and lower card yields from the Fed rate cuts. Loyalty One revenue was down primarily due to fewer short-term loyalty programs in market due also to COVID-19, as well as the sale of Presto in January 2020, which accounted for $23 million of incremental revenue in last year's fourth quarter. The improvement in card services EBT is primarily a result of lower loan loss provision expense resulting from continuing strong card member payment behavior and improving year-over-year delinquency rates. At the corporate level, EBT was down for the fourth quarter of 2020, including costs associated with the bread acquisition. Moving to slide 12, I will review some of the key business metrics for the company. Starting at the bottom left, you'll show the normalized average AR, which include held for sale, versus our total credit sales. For the quarter, we saw sales come in at $7.7 billion, which is down 18% year-over-year, compared to down 21% year-over-year the last quarter. As Ralph highlighted, we continue to see a gradual rebound in our sales along the typical fourth quarter, along with typical fourth quarter seasonal increases. While normalized average receivables improved sequentially, AR balances levels continued to be pressured by lower year-over-year sales and strong payment behavior. Moving to the lower right, yields remained fairly stable sequentially as the impact from the customer relief programs earlier in the year has largely subsided. The benefit from lower fee waivers was offset by higher seasonal balances in the fourth quarter. Card services cost of funds dropped approximately 30 basis points for the third quarter with lower securitization and deposit costs. Finally, turning to expenses, the fourth quarter included previously announced $50 million in real estate optimization costs, an approximately $40 million increase in marketing, and approximately $30 million increase in the cost of redemption in our World 21 business, tied to high seasonal revenue. Turning to slide 13, I will start in the upper left. For the quarter, we finished a loss rate of 6%, down 30 basis points versus the prior year. As you may have seen in our monthly data, our December net loss rate was impacted by the COVID-related customer relief programs we offered earlier in the year. The spike in the December was timing-related, and we expect the net loss rate to return to more normalized, if not better, levels in January. Slide 27, independent, provides additional information on the topic. On the bottom left of the slide, you can see the improvement in our delinquency rate to 4.4%, down 140 basis points versus the prior year. We are very pleased with the continuing year-over-year improvement in delinquencies. These improvements are a result of our actions taken in 2020, including enhanced collection efforts, prudent credit line management, and the expansion of the pandemic-related consumer relief programs, as well as the benefit of the stimulus programs. Finally, turning to the right-hand side of the page, our allowance slightly decreased to $2 billion for a reserve rate of 12%. Note that a temporary seasonal increase in balances pulled down the reserve rate percent for the year end. Given the continued uncertain economy, in particular the second half of 2021, our reserve levels remain elevated to reflect the potential risk. Our reserves contemplate the assumption in Moody's S4 economic outlook, which reflects only a 4% probability that economy will perform worse. Slide 14 covers our corporate and bank liquidity in capital. We continue to maintain sufficient liquidity with over $1 billion at the parent company and nearly $350 million in cash. At the bank level, cash was $2.7 billion. The banks remained well capitalized with a total risk-based capital ratio of 19.7%. I'll now turn it back over to Ralph. Thanks, Tim. Slide 15 provides our initial financial outlook for the year. For 2021, we expect period and receivables to be relatively in line with year-end 2020, while full-year average receivables are expected to be down mid-single digits, reflecting the year-over-year pressure in the first half of 2021. We anticipate the sequential decline in average receivables in the first and second quarter, and then flat year-over-year balances in the second half of 2021. We expect to resume high single-digit to low double-digit card receivables growth as we exit 2021. Moving to the income statement, total revenue is anticipated to be down low single digits from 2020 as the impact from low average receivables in the first half of the year is partially offset by improving revenue from Loyalty One and our bread FinTech acquisition. Expenses ex provision are expected to remain flat for 2020 as we balance prudent expense discipline and the continued investment in our strategic priorities. The 2021 expense figure includes over $100 million of digital innovation and technology enhancement investments. We are capitalizing on the significant growth prospects of our fintech business expansion, as well as enhancing our data and analytic capabilities. Our Fiserv processing system transition investment remains on track and will provide operational efficiencies to lower our costs to serve. Separate from our digital and tech investments, we are ramping up marketing spend in 2021 by over $50 million from the depressed levels in 2020. The investments are key to position the company for growth and the delivery of positive operating leverage in 2022. On credit, the encouraging trend in delinquencies, strong payment behavior, and positive impact on the prudent risk management actions we took in 2020 provide us with confidence that our stable credit performance will continue in the first half of 2021. We expect the first quarter net loss rate to be at or below 6%. While it's hard to predict beyond the first half of 2021, given the uncertainty and volatility in the marketplace, if card member payment behaviors remain stable and the economy improves as projected, we would expect the net loss rate for full year 2021 to be similar to 2020. 2021 will be a critical year for Alliance Data to solidify our core businesses, improve efficiency, and continue to invest in our strategic initiatives and drive sustained profitable growth over the long term. We will host a virtual investor presentation in May focused on our strategy. At that time, we'll provide the details on our three-year strategic plan and our long-term financial targets across key metrics, including return on equity, balance sheet growth, efficiency, and capital. More detail on the time will be forthcoming. I will close on slide 16, outlining our strategic areas where we are investing opportunistically. With the acquisition of Bread and the move to Fiserv, we are demonstrating how we are leveraging technology to build a more efficient company, evolving our products and capabilities with digital advancement at the forefront. Our leadership team will go into more depth on how these initiatives and our key foundation elements will drive our company forward at our strategy update in May. I'm coming up to my one-year mark. of joining Alliance Data. I could not be prouder of the team, all my associates, and their dedication and resilience over the past year. I am confident in our direction and our ability to capture the substantial opportunities we see in front of us. With that, operator, please open the line for questions.

Great, thank you. As a reminder, if you would like to ask a question at this time, please press star followed by the number one on your touchtone phone. To withdraw your question, press the pound or hash sign. Your first question here comes from the line of Sanjay Sukran from KBW. Please go ahead. Your line is now open.