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spk11: Good morning and welcome to Alliance Data's third quarter 2021 earnings conference call. My name is Daisy and I'll be coordinating your call today. At this time, all parties have been placed on listen-only mode. Following today's presentation, the floor will be open for your questions. To register a question, please press star followed by one on your telephone keypads. It is now my pleasure to introduce Mr Brian Verrup from the Head of Investor Relations at Alliance Data. Sir, the floor is yours.
spk15: Thank you. Copy 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 Perry Biberman, 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?
spk02: Ralph Andretta Hey, Brian, thank you, and good morning, and thank you all for joining. I will start on slide three with the key takeaways for the quarter. Our performance demonstrated considerable operating progress as we continue to move forward with the transformation of the company. We are seeing the success of investments and strategic decisions we have made, and we continue working to position our company for strong, profitable, long-term growth. Our business development pipeline is robust, which is evidenced by the new signings and renewals during the quarter. I will highlight a few of these names on the coming slides. We continue to win new opportunities and will share our progress at the appropriate times. Earlier this week, we announced a new partnership with Sezzle. They will integrate with Bred's FinTech payments platform for installment lending on big ticket purchases. This is another example of the multiple ways we can drive new growth for Bred's versatile platform. Our investment in the Bred platform and our digital capabilities are ongoing and set the stage for sales scaled growth in 2022 and beyond. Our full suite of consumer lending products coupled with our expanded total addressable market has created new opportunities. These opportunities provide increased flexibility to optimize and balance our portfolio from a growth, margin, and responsible lending perspective. We are no longer as reliant on a few large partners or a single product to drive our success. The long-term growth we outlined at our May investor event remains in our sights. Our leadership team is focused on driving net partner growth while delivering industry-leading returns. Our credit performance remains strong as a result of our disciplined risk management and the government economic stimulus program. We anticipate that payment rate will continue to slow and credit metrics will moderate in 2022 as stimulus programs expire. Consumers have returned to omnichannel shopping, and we expect credit sales improvement to continue into the holiday season. The spinoff of our Loyalty One segment as Loyalty Ventures, Inc., is expected to be completed on November 5th, advancing our strategic transformation and furthering our ability to deliver long-term sustainable growth. The SPIN positions both Alliance Data and Loyalty Ventures to focus on the unique growth opportunities and is expected to strengthen Alliance Data's enterprise-level capital metrics and other key metrics. Alliance Data will retain 19% ownership interest and expects to receive a $750 million cash distribution from Loyalty Ventures, which we will use for deleveraging. We expect an approximately 300 basis point improvement in our TCE to TA ratio as a result of this spinoff in November. Slide four provides highlights of our key financial metrics for the third quarter. Total revenue for the quarter was $1.1 billion, and net income was $224 million. Revenue increased 5% year-over-year, while total expenses, excluding provision for loan loss, declined 3%. The allowance for loan loss remained nearly flat for the quarter, resulting in reported diluted earnings per share of $4.47. Credit sales were up 20% year-over-year to $7.4 billion. Our net loss rate, 3.9% for the quarter, which marks our lowest third quarter rate in the last 20 years. Slide five highlights select brand partner additions and renewals. We added Turino as a new retail card partner and signed renewals with GameStop and Petland. We continue to thoughtfully manage our new business and renewal opportunities to drive profitable growth and optimize our portfolio. Bread continues to successfully add new online merchants through its direct acquisition channel. A select few of the partners added to the platform are displayed on the right side of the slide. I would highlight the recent signing of our current retail card partner, Eldorado, onto Bread's payment platform. We continue to have positive dialogue with many existing and new retail card partners to enable Bread's digital offerings, and we are working to align with those partners' integration timelines. which vary by merchant. Bred's platform provides quick and flexible integration options with an exceptional customer experience that sets it apart from the competition. I will cover our exciting announcement with Cecil on the next slide. Slide six provides more details on the progress of each of our Bred business models. We continue to invest in Bred's modern platform as we have more than doubled the number of our digital engineers and continue to enhance our product and integration capabilities across the models. One area that we're very excited about is to roll out in-store capabilities in early 2022. This will expand our consumers' ability to use buy now, pay later products at physical locations and provide merchants the omni-channel acquisition FinTech platform to provide their consumers with more options to check out with the addition of Bread's flexible installment payment solutions. Alliance data will underwrite, service, and retain the receivable for the installment loans on our balance sheet. We continue to progress forward with our full launch across all of Fiserv's merchant acquiring platforms, including the Clover POS system in 2022. What distinguishes our relationship with Fiserv is that we are able to leverage Fiserv's vast sales force to promote and distribute our lending products across Fiserv's expansive merchant network, and the offering is integrated into their merchant dashboard. Also, we expect to initiate our in-store technology capabilities with Fiserv by the end of the year. Finally, we are seeing strong momentum in our technology platform offering with RBC in Canada. RBC's pay plan, pay over time solution powered by Bread is now live in EB Games, Best Buy, and The Source, and is the exclusive way to pay for Microsoft, Xbox, all access program in Canada. Additionally, there were several small to mid-sized merchants that launched in RBC's pay plan on Bread's platform during the quarter. The pipeline remains robust, and we expect to have additional launches with RBC in the fourth quarter prior to the holiday season. Let's turn to slide seven. I expect this to be the last time we will review the performance for the Loyalty One segment, which includes the Air Miles Rewards Program in Canada and the Netherlands-based Brand Loyalty Program. The spinoff of that business to Loyalty Ventures, Inc. is currently on track for completion on November 5th. The business is well positioned for success with a strong management team transitioning to lead loyalty ventures. I wish all our departing colleagues the best and appreciate all the hard work and dedication to Alliance data over the years. As displayed in the graph on the right, air miles, reward miles issued and redeemed improved in the quarter as flight bookings increased and merchandise redemption remained strong. We remain optimistic on the long-term outlook as travel rebounds and are excited about the relaunch and rebrand of Amiles in October, with enhanced benefits, a new logo, and digital properties. Brand loyalty had a strong initial campaign launches in September, with momentum continuing into the fourth quarter. Of course, we continue to closely monitor conditions throughout the world, including supply chain interruptions that have the potential to impact macroeconomic environment and our business. With that, I'll turn it over to Perry. Thanks, Ralph.
spk18: Slide eight provides our results for the third quarter of 2021 compared to the third quarter of 2020. Revenue was up 5% driven by higher receivables and improved card yields from last year. Total expenses, excluding provision for loan loss, were down 3% to the third quarter of 2020 as a result of lower interest expense, which currently resides in total expenses for the company. Pre-tax, pre-provision earnings, or PPNR, were up $69 million, 18% year-over-year aligned with our focus on driving core underlying earnings growth. Finally, net income was up 68% driven by the PPNR growth combined with lower provision expense than last year. I will provide more details on our third quarter results in the coming slides. Slide 9 provides our segment level results for the third quarter. Loyalty One revenue was down 8% year-over-year, while card services revenue increased 7%. Loyalty One EBT was up 143% due to lower cost of redemptions and amortization expense. The improvement in card services EBT is primarily a result of higher underlying PPNR combined with the lower loan loss provision expense resulting from continued strong card member payment behavior and strong credit metrics. Looking forward, our financial statement at the end of the year will present the Loyalty One segment as a discontinued operation. At the same time, we expect to align the financials to be in a format more consistent with those of our peers. For example, we plan to move interest expense to be part of net interest income going forward. We will provide more details and a historic view once available later this year. Moving to slide 10, I will review some of the key business metrics for the company. Starting on the left side of 10, we show our average receivables and our total credit sales trends. For the quarter, we saw credit sales come in at $7.4 billion or up 20% year-over-year and flat sequentially. Average receivables were up slightly sequentially. Both figures were partially impacted by the sale of the non-renewal portfolio in the third quarter. Moving to the right, revenue yields improved slightly from the second quarter in line with seasonal trends and our guidance. We expect the influx of transactional balances to lower the revenue yield in the fourth quarter to be more in line with the second quarter yield of 22.5%, consistent with seasonal trends. Card services cost of funds continue to trend lower, down approximately 30 basis points from the second quarter as we continue to shift the mix of our funding toward low-cost consumer deposits. Turning to slide 11, I will start in the upper left. Our delinquency rate increased 50 basis points versus the previous quarter to 3.8% due to normal seasonal trends. On a year-over-year basis, the delinquency rate was down 90 basis points. On the upper right, you can see that we finished at a loss rate of 3.9 percent, the lowest third quarter rate we have had in the last 20 years. These low rates are the result of our disciplined risk management as well as the economic stimulus, which is driving higher consumer saving rates across the industry and a greater ability to pay. Turning to the bottom left of the page, our allowance stayed nearly flat at $1.6 billion, leading to a reserve rate of 10.5%. Outside of seasonal movements, expect a rather steady reserve rate until more economic certainty emerges. Lastly, on the bottom right-hand side of the page, our revolving credit distribution shifted slightly as we had projected last quarter it would. The reduction in 660 plus from 64% to 62% sequentially is driven by the anticipated customer risk score migration to a more expected level. Overall, we expect to maintain a healthy portfolio from a risk-mixed perspective and better than pre-pandemic levels, one that allows us to get rewarded for the risk we take and drive sustainable, profitable growth at lower than average historical loss rates. Slide 12 provides our financial outlook for full year 2021. Our full year average receivables guidance remains down mid-single digits year over year, with credit sales up double digits in 2021. While payment rates are moderating month to month, the elevated level continues to pressure receivables growth related to credit sales growth. Our outlook for the full year total revenue remains unchanged, including our expectation that card gross yields will remain steady for the full year. Total expenses are expected to be flat to modestly down due to improved funding costs and efficiencies in operations, partially offset by higher investments in marketing, technology infrastructure, digital, and bread. We expect seasonally higher expenses in the fourth quarter. Looking farther ahead, we plan to continue to increase our investments into 2022 to drive growth and innovation. We have the ability to flex our investment dollars up or down as needed to align with market conditions and our outlook to achieve positive operating leverage. As both our loss and delinquency remains low, we are adjusting our full-year loss rate guidance to be in the high 4% range. We anticipate that credit metrics and payment rates will moderate as stimulus programs wind down. We expect to resume high single to low double-digit receivables growth in 2022, and we'll provide full-year 2022 guidance on our fourth quarter earnings call in January. Now I'll pass it back to Ralph to discuss progress on our business transformation on slide 13.
spk02: Hey, thanks, Perry. Before we move on to Q&A, I wanted to highlight some of the accomplishments we've achieved recently as part of our ongoing business transformation. We continue to make great strides in simplifying our business model, including the spin-off of our international loyalty business, which I've already discussed. We are focused on where we see the best opportunity to build value for our stakeholders. We continue to develop our full suite of products to provide consumers with choices they desire. You know, a little less than a year ago, we acquired Bread, adding Buy Now, Pay Later, and digital installment lending to our offerings. which was instrumental during a time of increasing omnichannel focus by our partners. We launched our proprietary card, which continues to perform well, with over one million cardholders and growing. We're excited about the many strategic relationships we have built in conjunction with Bred's versatile modern platform, including RBC, Fiserv, and Sezzle. These relationships leverage Bred's nimble and flexible platform in different ways to expand and improve their customer experience and increase their ability to provide payment choices to consumers. We are enhancing our technology infrastructure with our core processing conversion to Fiserv in 2022. We will invest over $100 million in digital advancement in 2021, and we will continue to invest in digital. We have added industry-leading talent that is driving our organization forward. We have focused on creating a collaborative and inclusive culture, We have changed the way we work. Our associates have increased flexibility, which is driving better productivity, as well as cost efficiencies, including the optimization of our real estate footprint. Last but not least, we have continued to mature and prioritize our environmental, social, and governance strategy. Our multi-year board refreshment program has produced an outstanding board of directors, reflecting diversity of expertise and experience, as well as gender, race, and ethnicity. With the Board's support and oversight, we've released our annual ESG report, including the results of a third-party conducted materiality assessment earlier this year. We established and empowered a new dedicated DE&I office, engaged shareholders on ESG matters, and increased ESG and sustainability awareness across our business. We also look forward to rolling out a new comprehensive ESG strategy over the coming months. Although we've been busy, our efforts do not stop here. We remain dedicated to further strengthening our competitive positioning, which includes the expected improvement of our leverage and our capital metrics post-spend, and investing in our strategic initiatives to continue to drive sustainable, profitable growth. Operated with that, we are ready to open up the line for questions.
spk11: Thank you very much, Perry. If anyone would like to register a question, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure you are unmuted locally.
spk02: Yes, before the questions start, I just want to let the participants know that I've asked Val Greer, our Chief Commercial Officer, to join us, as well as Tammy McConaughey, Head of Customer Service, and our Chief Risk Officer. So they're joining Perry and I for the Q&A.
spk11: Our first question comes from Sanjay Sakrani from KBW. Sanjay, your line is open. Please go ahead.
spk06: Thanks. Good morning. Obviously a lot going on there, I guess. I have one question for Ralph and Val, and then maybe one for Perry and Tammy, so I'll get everyone involved. I mean, maybe you guys can talk about, and I appreciate slide five, but maybe you could just talk about this pipeline that you have that's upcoming of wins and maybe other renewals that you might have. And then I know, Ralph, you kind of touched on a little bit, but Fiserv also announced a partnership with one of your peers. Maybe you could just differentiate and flush that out a little bit, what they're doing for you versus what they're doing for your peer. And then second question, I'll just ask them up front for Perry and Tammy is, you know, we're hearing a lot from some of the subprime consumer finance companies that that they're starting to see a little bit of the turn in delinquencies inside their pools. Obviously, your credit and metrics look stellar, but I'm just curious if you're seeing any subtle shifts, and I know that's to be expected given we're moving away from stimulus, so maybe you could just flush that discussion out. Thanks.
spk02: Wow, Sanjay, I think you should take Alex Trebek's place. A lot of questions. So I think first, let me talk about the pipeline. One of the things I think we've done since our arrival here is we put in a robust business development team. That team now is proactive instead of reactive. So they look at renewals, when they may occur, what's in the marketplace, where we could grow the pie for not only us but our partners. And, you know, we have a calendar of renewals that we go after. Our sales force now is enhanced and robust and very proactive in the marketplace, whether it's with our existing partners, new partners, or digital partners with Bread. So it is, you know, the constant conversation about, you know, opportunities in the marketplace and how we can take advantage of them. On Fiserv, I think the distinguishing factor is what I had mentioned, Sanjay, is that we are part of their offering to their merchants. We are part of their sales force. That sales force is selling us when they're selling merchants. We are part of their dashboard. We are really integrated into their sales prospects. So I feel good about that. You know, I... You know, I wasn't surprised by the signing. You know, it makes good sense. But for us, you know, we're beyond our current partner base. We're with their vast merchant base. Val, anything to add to that?
spk00: No, I think that's right, Ralph. I think the integration into Pfizer's acquiring platform, which is not limited to just Clover and that integration into the merchant dashboards, really does differentiate along with the fact that Pfizer Salesforce is, you know, fully out there selling our product.
spk02: Yeah. I guess the last thing I'll say, Sanjay, about the pipeline, you know, we have, you know, we'll announce wins, you know, as appropriate with, you know, in conjunction with new and existing partners. So we're, you know, I'm excited to do that and, you know, stay tuned.
spk01: All right. Good morning, Sanjay. This is Tammy. So your question in regards to credit and whether or not we've seen any subtle shifts, I would say not quite yet. We did announce our delinquency up from second quarter to third quarter, but that's within our seasonal trends. As Perry mentioned, we have seen payment rates, as we expected, start to stabilize. So we do expect normalization over time. However, consumers were propped up quite a bit and were responsible with the actual stimulus that they received. And so we haven't seen anything quite yet, but we do expect some normalization, and the timing will be what we continue to monitor. Great. Thank you. Thank you.
spk11: Our next question comes from Bob Napoli from William Blair. Bob, your line is open. Please go ahead.
spk13: Thank you, and good morning, everybody. So, Jim, maybe just on bread, you know, it seems like the buy now, pay later, you know, the business model, the profit model still seem to be, you know, in flux, and certainly investors trying to figure it out and So can you maybe give a little color, Ralph, for your thoughts? The revenue mix between merchant discount, interest income, and then the profit model long term, do you feel like it's settled? Or is there a lot of movement yet in the industry to come up with a sustainable profit model?
spk02: You know, I think the thing to remember with our Buy Now, Pay Later product, Bob, is that it is one of several offerings that we have. So we're not completely reliant on the Buy Now, Pay Later economic model. It's a choice we give consumers. So as we approach merchants and we approach existing partners, we approach it from a partnership perspective with a basket of pricing. So we're not reliant so we can be flexible with pricing, we can respond to the market because we have the ability to do that because of the relationship we have. And again, different from other Buy Now, Pay Later organizations, we're there to help the merchant create a transaction. Where if you think about Buy Now, Pay Later, they're a bit of a Trojan horse in terms of they get the transaction, they want you to download their app. So their loyalty is to themselves. Our loyalty is to the merchant that we're working with. So pricing for us at this point is, you know, we feel good about it. We feel that we can compete in the marketplace as we move forward.
spk13: Are you, I guess, in the pipeline, are there a lot of cross-sells with the current private label customers that we should expect to see? And then signing 30 new direct partners in 30 days, does that mean we're going to see 120 new, you know, clients? What prompted that statement in the next 90 days?
spk02: So, Bob, I push my sales team the same way. I said, one a day, I get $365 a year minimum. But to me, I think right now, we've signed three or four of our existing partners, and we're moving forward with them. We're in you know, in constant negotiations with our other partners in terms of how do we get into their tech stack and prioritization, how we move forward with them as well. So that work continues. You know, we've invested in a sales force to be proactive out there. So, you know, I expect that 30 partners in 30 days, I expect that they will continue to, you know, push the pedal to the metal and sign more partners on a frequent basis. So I'm pleased with their results so far, and I'm really looking forward to – as you said, the next 120 days and see how many partners we rack up on the bread platform.
spk13: Thanks. And then just last question, the 19% ownership in air miles, how long would you expect to hold that? I mean, I would expect that's not a long-term position.
spk02: No, no. You know, our expectation is to hold that probably less than a year. You know, as an organization, we want, you know, loyalty ventures to get on their feet before we would consider selling that you know, selling at 19% stake. But, you know, our expectation is less than a year, so we mitigate any tax leakage.
spk13: Great. Thank you. Appreciate it.
spk11: Our next question comes from John Pansari from Evercore. John, your line is open. Please go ahead.
spk17: Morning. Back to the credit topic, I know you kept the reserve essentially stable or you added slightly, very slightly, to the reserve ratio after you had seen pretty steady releases to the reserves in the prior several quarters. Can you just talk about how you're thinking about it from here? I know you indicated in your prepared comments that you need to see more economic certainty. So I guess the way I'm thinking about it is what changed given this outlook today versus previously that's given you the, you know, that you expect that the reserve will be more stable here? Thanks.
spk18: I'll take that, Mr. Perry. You know, so I think about it as really not a lot has changed. And I think that's the way I'm thinking about it is that, you know, we're maintaining a cautious posture. And if you think of where we are, we're only 12% above day one CECL. And if you look at, I'll say, the rest of the industry, on average, about 20% above day one. So we've actually, we're closer to our day one CECL than others. And, you know, we didn't, you know, I'll say increase our reserve to the same extent. So we've got ourselves to a place that we feel comfortable with. You know, and as you look at your reserve rate, there's a number of factors that go into it. The economic conditions, obviously, what the outlook is for inflation, unemployment, wage growth, you know, the government stimulus winding down. And as Tammy spoke earlier, we haven't really yet seen the effects of that in the portfolio. So that's what we want to watch for. And as well, you know, I'll say the third variable, all companies go through is the modeling of CECL. And, you know, we're working to next generation modeling. So there's a number of factors. But in terms of the economic outlook, I'd say we've maintained our view of the future for right now and waiting to see, you know, how things unfold before we continue to move our reserve rate.
spk17: Okay. All right. Thanks. And then on the expense front, I know you indicated that you expect some increase in the fourth quarter, mainly on seasonality, and then You expect to increase your investments into 2022. How should we think about expense levels then for the fourth quarter and, more importantly, for 2022 as you continue with the business investments versus this year? Thanks.
spk18: Mr. Yeah, I think the way to think about expenses is, remember, right now, interest expense is included in there. So, we're continuing to see, you know, about, say, 10 basis points a quarter of improvement on that side. And we're going to see seasonal increases in the fourth quarter, along with a little bit of increase in investments. For next year, we'll give guidance for 2022 in January. But again, we're going to deliver positive operating leverage for next year. So I wouldn't be worried that our expenses are going to outpace our revenue growth.
spk02: Yeah, I think the thing to keep in mind is, you know, when we invest in the business, we have, you know, we have flexibility. We can lean in on investments that we think are paying off in the near term. We could, you know, potentially ease off on investments that are not. So, you know, we have that flexibility to, you know, in the expense space to invest heavily or ease up based on the environment and the macroeconomic conditions.
spk17: Got it. Okay. Thanks for taking my questions.
spk11: Thank you. Our next question comes from Bill Karkash from Wolf Research. Bill, your line is open. Please go ahead.
spk08: Thank you. Good morning, everyone. I wanted to follow up on the business transformation. As you continue to look more like your peers, can you discuss how you're thinking about your bank subsidiaries? How long before you start thinking about capital at the enterprise level? Have you communicated any intention to your regulators of any potential changes in that bank subsidiary versus parent structure? And And is it reasonable to expect that you'd suspend the buyback until you've rebuilt capital at the enterprise level sufficient to get your CET1 up to peer levels in that sort of 10% to 11% range?
spk02: Yeah, a couple of things. So we're, you know, we're considering, you know, based post-spin, we're considering, you know, the banking structure and what should that be. We've not made any decisions yet on that as of yet, but we're, you know, evaluating structures, and obviously we will keep our regulators informed a prize as appropriate as we move forward. In terms of buybacks, you know, our view is, you know, we'll work with the board and we want to ensure that we're well capitalized and we have our balance sheet as strong enough to sustain buybacks. And, you know, as we move forward, that will be a decision that we make with the board.
spk08: Understood. Separately, can you discuss how you're thinking about that interplay between the pace of normalization, not just in the net charge-off rate, but also in payment rates at a high level? Do you think that net charge-offs and payment rates would eventually both normalize back to that 2019 range at a similar pace, or do those metrics not necessarily have to move in lockstep with one another?
spk18: Yeah, I think the way to think about it, and Tam will correct me if I'm wrong, of course, but the payment rate and delinquency are intertwined, right? As payment rates start to normalize back down, delinquency will start to, you would expect, to increase some. For us, as we continue to transform our book of business through new products and risk mix, I wouldn't expect that our payment rates will get as low as what they were in 2019 pre-pandemic because, you know, our portfolio is going to look different in the future. You know, is it 12 months from now? Is it 18 months? That's, you know, who knows where the end state is, but that's, you know, that's what I would say on that. And then even from that point forward, the book's going to continue to look different depending upon how we lever up proprietary card or co-brand relative to private label and the new products that we're adding in for installment loan and breadth. Got it. That's really helpful.
spk08: Thank you for taking my questions.
spk11: Our next question comes from Mihir Bhatia from Bank of America. Mihir, your line is open. Please go ahead.
spk04: Thank you. Good morning, and thank you for taking the questions. Maybe I just wanted to start, if you could go back to the Sezzle partnership, or maybe you could just give us some more details that you'd be willing to share. Are you going to need to sign up merchants individually, or will that, you know, if anyone who's offering Sezzle will get functionality to just turn it on automatically? Is paying for in that relationship seeded to Sezzle? Who owns the customer relationship? You know, is it you? Is it Sezzle? How is the partnership going to work in terms of, you know, just where the loans sit and who gets which loan? Just any additional details you can share, like, you know, revenue sharing or anything that's going on there?
spk02: Yeah, let me, you know, obviously things are confidential. Let me start. So we will be integrated in the Sezzle offering for 40,000 of their merchants. So, you know, the presentment will be a Sezzle presentment, but we'll be integrating that presentment as a choice for installment loan on 40,000 of their merchants. We will underwrite, we will service, and the receivable will be on our balance sheet for installment loan. You know, in terms of buy now, pay later, we'll be, you know, in competition with Sezzle for buy now, pay later. So we feel, you know, we feel good about the opportunity to work with Sezzle across their 40,000 merchants. And, again, we will service and have that loan on our balance sheet. Val, any other details that we could provide that I've left out?
spk00: Yeah, I think you hit it, Ralph. And one of the other things I would highlight on there is, you know, we do have the ability, because we do own the receivables and it's on our books and we service it, we also have the ability to cross-sell into other products. So it's a good relationship for us. It aligns very much with our distribution model, very similar to Pfizer and gives us an opportunity to distribute that installment lending product to a one-to-one-to-many basis.
spk04: Understood. And then if I can ask a question just on this quarter, you had a nice benefit of name really on both the gross yield side and cost of fund side. Maybe talk a little bit about what drove that this quarter. How sustainable is that? going forward, and just any expectations you could share, whether for Q4 or even for 2022 would be great, just on both the gross yield and cost of fund side. Thank you.
spk18: Thank you. That's a good question. So on gross yield, as I talked about in the prepared remarks, it's seasonal. So I would expect the fourth quarter to come back down to that 22.5 range similar to what it was in second quarter. And so really, I can offer a lot more comments on that going forward, except to say that our goal is to maintain strong returns and steady gross yield. As it relates to cost of funds, we're seeing continued improvement as we become less reliant on asset-backed securities or other cost of funds that are a little bit higher. And growing our retail deposit base. So, as we grow our portfolio, you know, we'll fund it more with direct consumer retail deposits that have lower cost of funds. So, I would expect that will continue to come down over time.
spk04: Male Speaker 1 Sorry, can I just ask one follow-up? As you add more of these RBC-type relationships and FISA, wouldn't, I guess only RBC right now, but wouldn't that push gross yields higher? And I'll jump back in queue after that. Thank you.
spk18: No, that's a fair point, is that when you think about an RBC relationship where it's just a direct revenue stream, that could be slightly accretive to gross yield. At the same time, as you put other products into the mix, some may have lower gross yield. So it really depends on the product mix and streams that will end up in the resulting gross revenue outlook.
spk11: Thank you. Our next question comes from Jeff Adelson from Morgan Stanley. Jeff, your line is open. Please go ahead.
spk05: Good morning. Good morning. Now that we're a couple of months away from the end of 2022, I just wanted to get a sense of what you're seeing or what you're thinking on this trajectory and timing of your high single-digit, low double-digit receivable growth expectation for next year. Wondering about the cadence of that. Should we be expecting this more of an end goal for the year or more of an average goal for the year?
spk18: Yeah, at this point, I think we've said receivable growth in that range. The range is a range for a reason. There's a lot of factors that go into that, including, obviously, customer behavior and payment rates will influence which end of the range we're at. You know, I think you've heard from the team, our pipeline is strong, our business activities are robust, and we're feeling very good about consumer health, you know, driving top-line spend, credit sales, and then what it turns into will be largely dependent on payment rate.
spk05: Got it. And just on the competition out there, I'm wondering, In your conversations, how the competitive tenor feels right now, it feels like everything has kind of increased, intensified in recent months. And as part of that, just wondering, you know, there's a pretty large portfolio out there with Amazon's relationship. Are you guys involved in the conversation? Just wondering how you're thinking about that portfolio potential.
spk02: You know, we're always involved in the conversation, and it comes down to a couple of things. One, Is it profitable for ADS to, you know, to partner or to go after that portfolio? And second, you know, how hard will it be to integrate and how hard will it be to service? And, you know, we take all those things to account as we move forward. You know, some of the larger portfolios, quite frankly, are, you know, margin crushing because there's a lot of competition out there for all those large portfolios. The beauty about ADS is we can play in the small to mid-sized businesses. So if you think about a billion-dollar portfolio, that's a great portfolio to have. Your margins may be a little thin, and you have to do some customization. We love those portfolios, and we are in competition with those. But that magic middle, that $100 million portfolio, you put 10 of those together, that's a billion dollars. The economics are usually very good on those portfolios. and they're easy to integrate, and there's standardization there. So while we like to go elephant hunting, we like to have mid-tier portfolios because they're very, very profitable for us, and we service those very well.
spk05: Understood. That's all I had. Thank you, guys.
spk11: Our next question is from Meng Zhao from Deutsche Bank. Meng, your line is open. Please go ahead.
spk07: Great. Good morning, guys. Thanks for taking my question. Ralph, I think in the quarter you mentioned that installment loans might be a little impacted by supply chain management issues. I just wanted to get your thoughts on, one, do you still believe that you could sort of double, you know, installment loan receivables by year end 21? And then, two, if the supply chain management issues are still persisting or have they begun to moderate? Any call there would be helpful. Thank you.
spk02: Yeah, a couple things. So, you know, if, you know, know there's been a lot of talk about supply chains and you know if you think about where we are we are right now we haven't seen a big impact from supply chains thus far you know what our merchants have done is they've extended the Christmas season so they've extended in October and we're starting to see some some some good sales there so I'm speaking about credit cards in particular and you know some of the verticals that we're in which were luxury beauty apparel they seem to be holding up fairly well but that said You know, we're working with our merchants in terms of what their constraints might be going forward. So, you know, we may be impacted by the supply chains as we move forward. In terms of installment loan and doubling our receivables, I'm very pleased with where we are with BREG. As I said, we're adding partners every day. We've got strategic relationships with Sezzle and Fiserv. We are really poised to scale in 2022. You know, we've hit a couple, we've hit a little headwinds, you know, as the back end of the year payment rates would be probably the headwind, I would say, that, you know, that slowed us down a little bit. But by and large, we're really bullish on the growth for 2022.
spk07: gotcha okay and then i guess my second question is it's probably for for tammy and perry i think you know you guys you guys got into net loss rates in the high four percent range and i think perry mentioned profitable growth at lower than average historical loss rates i'm curious if you expect losses to trend back to that historical six to seven percent level or if you can actually see structurally lower losses given your portfolio mix change there
spk18: Yeah, I think, thanks for the question. I think from what I said earlier, I would expect structurally lower loss rates than what that 6% to 7% range. Again, I think, you know, we, and Tammy can speak to it, our underwriting is strong. We know what we're doing in this space. But with the product mix that we're going after, a little bit more mix of proprietary card co-brands, And some of the partners we're bringing on, I would expect us to be able to have a lower than pre-pandemic loss rate going forward.
spk01: Yeah, that's right, Perry. And I think we even discussed that in the May investor call where we talked about our future portfolio mix will drive us to a lower than normal historical loss rate. And again, our continued focus will be on profitable growth going forward. And as Perry shared, certainly our credit underwriting and account management strategies are critically important to that in the future, and we continue to focus on that.
spk07: Great. Thank you.
spk11: Our next question comes from John Armstrong from RBC Capital Markets. John, your line is open. Please go ahead.
spk12: Thanks. Good morning, everyone. Good morning. Just kind of a simple question here, maybe for you, Perry, but you beat earnings estimates by, I guess, $1, almost $1. And when you look at your numbers going forward, is it as simple as taking out the $45 million in earnings from LoyaltyOne and saying that that can be a run rate for your company, or is there anything else you would call out and say, no, that doesn't count, or is that just the right way to look at it, as simple as that?
spk18: Yeah, I mean, you have the segment results, and I think you are pretty close to looking at it in a reasonable way, right? I mean, I'm not going to suggest how you should model, you know, run your models going forward. There are a lot of inputs into it, obviously, but that's, you know, if you look at loyalty one, that is the value that you would extract. Okay. A lot of seasonality and things of that nature.
spk12: Yep, yep, okay. So, I mean, it's just, and again, it's a simple question, but you're saying, you know, on a core basis, it could be, you know, high 380s on a quarterly basis, and we have to make our own decisions on credit costs, but it's as simple as that from your point of view?
spk18: Good point. The credit costs, as you grow, how much reserve ability you have, how much investment, seasonality, all the things that go into it, but For this quarter, that is correct.
spk12: Yep. Okay. All right.
spk18: Thank you.
spk11: Our next question comes from Dominic Gabriel from Oppenheimer. Dominic, your line is open. Please go ahead.
spk14: Hey, great. Thanks so much, and great quarter. You know, I had the opportunity to speak with the Sezzle CEO at Money 2020, and there's obviously just a lot of excitement around this partnership. Maybe you can talk about, you know, what opportunity to cross-sell into that base besides just even installment loans could be. And then maybe you could talk about, you know, you know, the difference between white labeling your product and having your bread product, and then also having at the same time the bread logo at an existing partner. So two buttons, so the partner's branded button and the bread button, is that possible? Maybe we can just walk through a few of those. Thanks so much.
spk02: So let me start, and I'm going to ask Val to jump in. I am... as excited as Charlie is in terms of our partnership together. I have a lot of respect and admiration for Charlie. I think he's built a great product and a great company, and I'm really excited to partner with him. You know, the white label approach, I think that is an excellent approach for buy now, pay later installment loans because we end up in the buy flow, and the customer views it as just a continuation of the purchase process. And so there's no punch out. There's no downloading of an app. It's just an extension of the process and an offering, which I think is critically important. As I said before, we're not asking the customer to download our app. We are servicing the customer right there on the merchant's website. And with data and analytics and everything we do, we want to generate that next transaction for the merchant with our buy now, pay later platform. So that, I think, is distinguished between the white labels. Val was at 2020. I was not. So she'll talk a little bit about cross-sell opportunities, and she had some time with Charlie as well.
spk00: Great. Thanks, Ralph. So, yeah, I think to build on Ralph's point around the white label, you know, clearly a way to ensure that we are kind of front and center at the point of sale. And with Sezzle, you know, Sezzle will be the merchant of record for those relationships. Bread will own and service the receivables. And so the consumer will also see the bread name when they're servicing that loan and portfolio. So a nice way on the branding side. We have an opportunity on cross-sell. If you think about, you know, today you heard Terry talk about cost of funds and increasing our consumer deposits. We have an opportunity to cross-sell on the deposit side. We also have an opportunity to cross-sell on our proprietary credit cards. So You know, as we continue to expand on some of those direct-to-consumer opportunities, we continue to have the opportunity with Sezzle to cross-sell the customer base there.
spk14: Great. And then just maybe one more on the gross yield this quarter, just so I – you know, we don't go running off and – perhaps having a really high third quarter 22 yield. Could you just talk about the benefit given the reduction probably in interest in feed net charge-offs that boosted the yield quarter-over-quarter, the yield benefit quarter-over-quarter there? That might not be repeatable in 22. Thanks.
spk18: Michael Heaney Yeah, I don't know if I'm going to give a lot of detail into the gross yield except to the extent that this is normal seasonality that we see in our yield. You know, when you look back to, you know, I think last year, you know, the delinquency is starting to tick up, so you get a little bit more late fees coming back in. But outside of that, you know, things are looking, you know, strong within yield. And, again, we've signaled that we expect steady yield outside of normal season.
spk14: Great. Thank you.
spk11: Our next question comes from Michael Young from Truist Securities. Michael, your line is open. Please go ahead.
spk09: Good morning. Thanks for the question. Not sure if this is better for Ralph or Perry, but it's been a long time since we've seen more material inflation in the U.S. and just wanted to get your maybe high-level thoughts on impact to sales volume and average receivables versus impact to the expense base and if that would be a net positive for ADS or not.
spk18: Yeah, this is Perry. I'll take that. You know, there's a lot of debate on inflation. We're all reading the different points of views out there, and they range the gamut. You know, I think, you know, so the point of view is around inflation, you know, the consumer's basket of goods increases. It doesn't change the credit lines and the lines that customers have available. So, and, you know, with wage growth, you know, perhaps that will increase lines as they demonstrate their ability to pay, but So as I think about it, it can help and aid our overall sales growth as it factors into the next year, so long as the customer's wage is increased to afford it. And if you look at the base of who our customers are, and Tammy could probably expand more on it, You know, when you think about minimum wages going up and the wage growth that's happening overall and the incentives that are out there for companies to rehire, I think that's a positive for us. And it gives people more, you know, the ability to buy and provide more discretionary. And those things cost a little more. You know, that doesn't hurt our overall sales growth. The question is, you know, does wage growth keep up with that so that it doesn't create strain on the customer?
spk02: Yeah. I think the only thing I'd say about, you know, if you think about inflation, you also think about wage inflation, and there is a war on talent out there. And, you know, that may impact our expense base as we move forward. But, you know, I think it's, you know, environment-wide, but that's where I see us getting impacted from an expense perspective.
spk09: Okay, great. Appreciate it. And as a follow-up, I apologize, it's a little different question, but just on the stores and physical store locations being open, do you guys have a perspective on, you know, kind of what percentage of your partners have their stores fully open and what remaining tailwind there could be as more stores open up, you know, post kind of Delta variant?
spk02: Yeah, you know, I think all our partners have their stores open. I haven't heard of any of our partners not opening their stores. And, you know, as I go to the bricks and mortar, I think there's good traffic. I think we expect good traffic during the holiday season. You know, people are cautious. I mean, there's mask wearing. I think everybody's obeying the rules, which I think is a good thing. As vaccinations become more prominent, I think you'll see more, you know, more influx into the mall. So I've not seen anything that would give me a concern that the malls are not functioning as as we've expected this year. Okay, great.
spk09: Thanks.
spk11: Our next question comes from Reginald Smith from JP Morgan. Reginald, your line is open. Please go ahead.
spk16: Thank you. Good morning, guys. Thanks for taking my question. I wanted to talk a little bit about the Sezzle deal. It was somewhat surprising that you guys announced that. I certainly didn't expect it, and it feels like an endorsement of your bread platform. I guess the question I have is, you know, what are the advantages in your mind that Sezzle gets by using your platform rather than developing it in-house? And then my second question, a follow-up to that, is had you considered something greater than a partnership? And so I'm looking at the valuation of Sezzle. I look at what you paid for bread. I think about, you know, the dividend that you're going to receive from the loyalty spend. Had you considered anything more substantial in talking to Sezzle?
spk02: So I think what Sezzle gets is, you know, a top-quality product and customer experience. And it's the shortest distance between two points, right? It's about execution, not about development. So we're, you know, I think for both companies, that's a great advantage. We get the, you know, we get the access to their 40,000 merchants. They get a top quality product that they can implement faster than when they would have been in terms of development. So there's no capital outlay. It's just we're in market. So I think that's the For both of us, that's a win-win for both organizations. In terms of other relationships, we're strengthening our balance sheet right now, and we're really focused on executing everything that's on our plate rather than looking for something new to put on our plate at this point.
spk18: I'll add one point to what Ralph just said. you know, with the proceeds from the spin, for covenants of our current debt, you know, we're required to pay down the debt. So it wasn't just proceeds and invested somewhere else.
spk16: I understand. And if I can get one more in, my call dropped earlier, so I'm not sure if it was covered. But did you guys provide any color on, I guess, in-store sales versus digital sales, anything of that nature to kind of help us understand what's going on within your mix of your business.
spk02: Thank you.
spk18: So if you look in the presentation, we actually provide in-store versus digital sales, and so you'll find that on the last page. And I really don't have – You know, we're not going to provide an outlook for that, but you can see how things are trending. And it's basically, as consumers resume, as Ralph said earlier, people going back to the malls and resuming in-store, I think you're seeing that become a little bit of an increasing mix for us, given our merchant partners, but still maintaining a strong digital presence. And we are impacted by a little bit of a non-renewal in this quarter that was more digital than in-store. Yes.
spk02: You know, I think the thing to remember is, you know, two years ago, we were, you know, pretty much a brick and mortar focus in digital sales. It was not a big part of our portfolio. We leaned heavily over the last two years in digital, and we're seeing some, you know, the benefits of that and the mix. So, you know, we are every place our customers want to transact, whether it's, you know, at the mall or online, you know, we're able to transact with them more now than we ever have before.
spk16: Perfect. Thank you.
spk11: Our final question comes from David Scharf from JMP Securities. David, your line is open. Please go ahead.
spk03: Great. Good morning, and thanks for squeezing me in here at the end. Hey, one follow-up question, Ralph and Brad. I know there continue to be, obviously, a lot of questions about sort of longer-term, the economic model. of buy now, pay later, how it may evolve. But I think one of the most difficult things maybe to get visibility into is that in contrast to private label, which historically is an exclusive arrangement, this is sort of the first product ADS is involved in, in which there's not client exclusivity. And I'm wondering, can you give us a sense, for example, you know, when we get metrics like 30 new direct signings in the last 30 days, whether those were all exclusive arrangements or whether you were added as a, you know, additional provider to those merchants. And maybe the same thing, you know, with Sezzle, to give us some sort of context about, you know, just what the, you know, current footprint already is with these merchants in terms of other providers.
spk02: Yeah, so, you know, I can't speak for the 30 merchant sign in 30 days, but I'm sure some of them may be exclusive, some of them may not be exclusive. But I think the key for us is, you know, competitive pricing and ease of use. That's going to put us at the top of the league table, whether we are, you know, obviously if we're exclusive or not, that's going to put us at the top of the table. If we have good rates, we're fair with the consumer, and we are able to – you know, they're able to transact with us seamlessly. I think that's the most important. Val, anything to add in terms of Settle, in terms of how we're approaching it?
spk00: Yeah, and I would just add, I think one of the other big differentiators for us is our model. You know, and Ralph mentioned it earlier, you know, we do go to market as driving loyalty in sales and increasing average order value for our brand partners. Many of our competition is really more trying to disintermediate the customer in that shopping experience and positioning themselves as the start of the shopping journey through an app. And so, you know, that type of model resonates well with our partners. And so I think that's a key differentiator. And the other thing I would say on the accessible side, again, predominantly those relationships, there is a single party providing the buy now, pay later model. And so while many of them are not exclusive, most of the SMB mid-market merchants have a singular provider that they do leverage in the point of purchase.
spk03: Got it. No, no, that's very helpful. Hey, one follow-up, completely different topic. On cost of funding, it's been a while since the topic of deposit funding was kind of broached in much detail. Any updates on the plans there and kind of long-term, how that might factor in in terms of the overall mix of your funding profile?
spk18: I think, as I mentioned, we're expecting to come down, I'd say, at least 10 basis points per quarter for a period of time as we grow the portfolio and we increase the mix of retail deposits. Just by that mix alone, we're going to we'll get the benefit of that from a lower funding cost. And as Val mentioned and Ralph mentioned, we'll cross-sell that into existing customers as well as offers direct.
spk02: So Perry, Val, and Tammy, thank you for joining me today. Thank you all for joining us for the call and your interest in Alliance data. Just to be clear, we remain focused on executing our strategy and our transformation plan and building the future. So everyone have a terrific day, and thank you all again.
spk11: Thank you, everyone, for joining today's call. You may now disconnect your lines and have a lovely day.
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