Alliance Data Systems Corporation

Good morning and welcome to Alliance Data's fourth quarter full year 2021 earnings conference call. My name is Charlie and I will 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 questions. To register a question, please press start followed by one. It is now my pleasure to introduce Mr Brian Berra, Head of Investor Relations at Alliance Data. Sir, the floor is yours.

Thank you. Copies of the slides we will be reviewing and the earnings release can be found on the investor relations section of our website. Today on the call, we have Ralph Andretta, President and Chief Executive Officer of Alliance Data, and Perry Beekerman, 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 Vendretta. Ralph?

Thank you, Brian, and thank you to everyone for joining the call this morning. Before I begin with the slides, I would like to address the news last week regarding our contract with BJ's Wholesale Club. As you may be aware, a lawsuit was filed noting the non-renewal of the contract. While we cannot speak further about this matter on the call today, we firmly believe we are in compliance with the terms of our contractual agreement. What I can comment on is our steadfast commitment and track record of delivering the highest level of service and support to our valued brand partners, including operating responsibly and with the utmost integrity. Our leadership team has decades of industry experience and understands the importance of building trusted relationships with our partners and working together to drive long-term success for all of the parties involved. We will be highlighting our achievements on this call this morning as we look back over at 2021, a record year for new brand partner signings, successful renewals, and continued significant progress on our transformation. Regarding the BJA's non-renewal impact on our receivables growth and financial outlook, our forecast contemplates business activities including new brand partner wins not yet at announcement stage, thoughtful assumptions around our ongoing new business development pipeline and renewal probabilities, and expected but not yet announced non-renewal and portfolio optimization decisions like BJ's. We will maintain financial discipline in both signing new partners and renewing existing ones. As I said before, we will not chase unprofitable deals simply for the sake of growth. we remain committed to delivering responsible economics. With these factors and assumptions, we have clear visibility across our portfolio activity through 2023, underscoring our confidence in our outlook for continued growth. More importantly, we remain committed to our long-term financial target of $20 billion in average receivables for the full year of 2023. As the year progresses, I look forward to sharing updates regarding ongoing success, new brand partner wins, supporting the achievement of our goal. Now, moving to the slide deck, I will start on slide three. Slide three highlights just a few of the major accomplishments we achieved in 2021 as part of our business transformation. We made great strides in simplifying our business model, including completing the spinoff of Loyalty Ventures in the fourth quarter. The spinoff allowed us to strengthen our balance sheet by improving our capital ratios and reducing our leverage ratio, as well as enabling a sharper focus on our investments and future growth plans. The spinoff marks the culmination of a three-year strategy implemented by our board to simplify and streamline the company. the outcome of which is a stronger more focused business profile with increased flexibility and sustainable growth potential we continue to develop our full suite of lending products to provide consumers with a diverse set of payment options for example we had great success introducing our new proprietary card as it grew to 1 million cardholders and nearly 650 million dollars and outstanding balances at the end of 2021. We project continued success with this product, which provides a diversified growth driver and helps balance our portfolio risks. Our diverse product set, including private label and co-brands, installment lending, and split pay, unlocks graduation and optimization strategies that increase the lifetime value of a customer for us and our brand partners. Product choice allows us to meet the needs of a wide variety of consumers in a way that increases conversion while allowing brands to manage the product mix and optimization profitability. We recently celebrated the one-year anniversary of the bread acquisition, which added buy now, pay later offerings, including digital installment lending and split pay products. These additions to our product set were instrumental at a time of increasing omnichannel focus by our partners and consumers, increasing digital payment preferences. Our versatile payments platform provides new opportunities to deepen our relationships, expand our total addressable market, and have provided a new strategic relationship with RBC, Fiserv, Wayfair, and several. These partners leverage our nimble and flexible FinTech platform to expand and improve their customer experience while also offering greater payment choices to consumers. We will continue to strategically invest in our digital platform, product innovation, marketing efforts, and technology modernization, with a planned incremental investment of over $125 million in 2022. Also, in 2022, we are scheduled to complete the conversion of our core processing system to Fiserv. which will allow us to be more nimble, manage risk effectively, and leverage new capabilities to drive both revenue opportunities and operating efficiencies. Last but not least, as highlighted in our environmental, social, and governance report, we have continued to refine and prioritize our ESG strategy with board-level oversight. We have an outstanding board of directors which is aligned with and confident in the strategic direction of the company and is supportive of our ability to make disciplined financial decisions to drive long-term value for our stakeholders. Moving to slide four, I will highlight a few key updates for the quarter and full year. I am happy to announce that we exceeded our 2021 financial guidance. driven by stronger than expected revenue growth, thoughtful expense management, and positive credit performance. We are well positioned to build on this momentum in 2022. Consumer activity remains strong, with credit sales up 15% in the fourth quarter from the prior year period. Our beauty and jewelry verticals remain the frontrunners, with holiday sales up more than 30% in each category. We saw particular improvement among millennials and Gen Z with spending and transaction activity during the holiday season exceeding pre-pandemic levels. While diverse purchasing options across all channels is important to our brand partners, we did see a notable year-over-year increase in in-store transactions in the fourth quarter. As previously discussed, our business development pipeline remains robust And you are seeing the results in our announced new signings and renewals during the quarter. Moving to slide five, I will highlight a few of these names. We signed several large partners, several large new brand partners in the fourth quarter, including the National Football League, with its tens of millions of fans and their 32 affiliated club shops located at their stadium. Michael. the nation's largest retailer of arts and crafts materials with over 1,000 stores across 49 states. B&H Photo, which went live last week and is one of the world's largest independent retailers of photo, video, audio, computer, and creative technology equipment with nearly 50 years in the business. And finally, TPC Corporation, one of North America's largest marketers of tire repair and automotive services, delivered through a multi-channel strategy for over 65 years. TPC has more than 3,000 franchising company-operated tire and automotive service centers under brands like National Tire and Battery, Big O, and Midas. We look forward to working with these new partners to drive incremental sales growth and customer loyalty to our comprehensive product suite and exceptional customer service. These new partners are prime examples of our ongoing vertical diversification efforts, and we continue to actively add new brand partners, which we will announce in the coming months. This morning, we announced the early renewal of a long-term agreement with Ulta Beauty, a top millennial brand and one of our largest and fastest-growing brand partners, selling over 25,000 products at more than 1,300 stores and on Ulta.com. The Ultimate Rewards credit card is designed to enhance the benefits of Ulta's loyalty program and increase engagement and spend among the 36 million loyalty members. Importantly, this renewal will reinforce our industry-leading position in the beauty vertical. We have a demonstrated track record of growth that was important to Ulta for our continued relationship. Our breadth of lending products provides customer choice, increases top of the funnel conversion, while allowing Ulta to optimize the product mix for lifetime customer value. We have also renewed our relationship with Toyota, a preferred Gen Z brand, and Lexus, which further extends the growth of our diversified portfolios. With these renewals, nearly 90% of our year-end receivable balances, excluding BJs, are now under contract through 2023. This clarity should provide additional confidence on our long-term receivables outlook and overall growth potential. Additionally, we continue to successfully add new online merchants through our direct acquisition platform channels, doubling new merchant additions in the fourth quarter compared to the third quarter. This success provides additional merchant diversification, and it's another source of our ongoing growth. A select few of the partners added to the platform are displayed on the right side of the slide. Also, our strategic partnerships continue to progress with new merchant additions to the RBC platform as well as to the Fiserv platform pilot in the fourth quarter. We will be better positioned to provide additional details on the platform activities for Fiserv as we move from pilot stage to a full rollout, and for Sezzle and Wayfair following our expected launch in the first half of 2022. We continue to monitor the changing buy now, pay later landscape, particularly in split pay or pay in four environment. As with any business, the consumer, economic, competitive, and regulatory landscape is continuously changing. However, the vast majority of our platform, businesses, and pipeline opportunities are aligned with our digital installment lending product, where the returns and growth opportunities remain strong. We will remain responsible and disciplined with adding new partners to ensure we are receiving acceptable lifetime customer returns. We remain the only provider who is primarily focused on deeply integrating with merchants and partners, allowing the customer to stay on the merchant's site throughout the shopping journey rather than being directed to a third party site or app. This is an important distinction. As many third party sites promote multiple merchant offers and their number one priority is having their app downloaded so they become the entry point of the shopping journey. This ultimately disintermediates the merchant. Our number one priority is sales conversion for our brand partners. We've launched bank-compliant products that follow regulatory guidance, have strong underwriting discipline, lower-cost funding, and industry experience that gives us confidence in making the appropriate responsible decisions to drive long-term shareholder growth. Finally, I am confident that with a full spectrum of lending products, We can compete, win, and drive growth with any size partner or merchant, from large brands like Victoria's Secret, Signet, and Ulta to smaller merchants. Our ability to drive strong results for our many brand partners has been and will continue to be the key to our success. I'll now turn it over to our CFO, Perry Bieberman, to review the financials and our outlook for 2022. Perry? Thanks, Ralph.