Bread Financial Holdings, Inc.

Good morning and welcome to the Alliance Data Third Quarter 2019 Earnings Conference Call. At this time, all parties have been placed on a listen-only mode. Following today's presentation, the phone will be open for questions. To ask a question during that time, you will need to press star 1 on your telephone. 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 our pleasure to introduce your host, Ms. Vicky Nakla of Advisory Partners. Ma'am, the floor is yours.

Thank you, operator. By now, you should have received a copy of the company's third quarter 2019 earnings release. If you haven't, please call Advisory Partners at 212-750-5800. On the call today we have Robert Minicucci, Chairman of Alliance Data, Charles Horn, Executive Vice President and Vice Chairman of Alliance Data, Melissa Miller, 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 Melissa Miller. Melissa?

Thank you, Operator, and good morning, everyone. I'd like to welcome the folks that are with me here today, and I'd like to begin with an important update on our overall business transformation, including the progress Card Services is making in our journey to reposition the portfolio, as well as our consolidated financial results. Tim will then cover the segment results and I'll close with 2019 and 2020 guidance. Let's turn now to slide four. We can all agree that change was necessary and if there is any message that you take away from our time today, it should be that we are indeed making tangible progress. First, I'd like to acknowledge that this road to transition has been lengthy and at times bumpy for our stakeholders. The Epsilon divestiture, tender offer, and corporate restructuring are complete. Our card services business has expanded into healthy verticals and credit metrics have normalized. Within card services, you'll see progress in three important areas. We've successfully shifted our focus to healthy brands and verticals. We continue to serve the modern consumer with digital tools, adding new offerings. And our streamlined operating model will allow us to do more with less and to get paid for the value we bring to the table. As I mentioned on our last call, we have been making the tough yet critical decisions in the short term to deliver on the long-term health and viability of the business. With transformation can come disruption, so we've kept this very simple and think about our efforts in three pillars. a streamlined operating model, ensuring we offer differentiated value, ultimately leading to consistent, sustainable growth. Now, while Card Services has been executing against its strategy to transition the makeup of the card portfolio, we've considered our broader operating model as well. This transformation is a company-wide effort. We've examined all lines of business globally to streamline our various operating models, and each has emerged with a leaner, simpler structure. Earlier in the year, we announced corporate reductions resulting from the Epsilon divestiture. That run rate is now an estimated $100 million. Additionally, a company-wide expense reduction initiative is well underway. These reductions will contribute more than $100 million in incremental cost savings for 2020. Our approach to human capital, which includes increasing both our global delivery model and digital workforce, is in progress. We are fully leveraging automation and artificial intelligence to create efficiencies and expand our self-service offerings for brands and consumers. And this is exactly what you would expect from a company with data as our middle name. We are not like any other player in our space. We are deliberately different. And that differentiation is why we win in the marketplace. An improved operating model and expense structure will allow us to invest more deeply in technology and in the digital space to ensure we will continue to win with the modern consumer and brands. As a result, We expect to have incremental solutions in the market in the near term, strengthening our current payment products, and our in-house marketing and loyalty expertise. All of this, when added together, results in the larger, more valuable programs we're known to deliver. So what have we done to position ourselves for 2020 and beyond? Over the past several quarters, we've spoken about card services' shift to growing, vibrant verticals and brands. And in a moment, I'll walk you through the progress that we've made. Note that we will continue to expand where and how we grow by building on our success, testing new markets, and taking full advantage of the dozens of new emerging brands entering our space. Our new business pipeline contemplates these healthy new brands, and there's a strong demand in the market for the solutions that we offer. Let's turn now to slide five. We'll spend some time on the progress CART is making in positioning our portfolio. As Tim and I spend time on the road visiting with investors, a question we often hear is, how will you continue to grow given the uncertainty within retail? It's a question we've asked ourselves. We believe it's a fair question for us, and it's precisely why we altered our strategy beginning in 2015. At that time, we made a deliberate decision to expand our reach into winning new brands and verticals to include, among others, beauty, home goods, and e-tail. On our call today, we'll be more specific about the outcomes and the overall impact on the complexion of our portfolio. I call your attention to the far left bar on the top chart. In 2016, less than half of our card receivables came from these newer verticals. And if you follow the dark blue bar all the way to the right, you will see that in each progressive year, our concentration of AR in these healthier verticals continues to build. Today, these vibrant verticals and brands make up greater than 60% of our card receivables. This did not happen by accident. We got here by signing a new grouping or vintage each progressive year. Now, looking at the far left bar of the bottom chart, you'll see that in 2016, less than 10% of our card receivables were coming from our newer vintages. Today, that's grown to over 35%. Essentially, all of our growth is coming from these newer vintages. We made the shift intentionally, and in just four short years, we've deliberately altered our portfolio. We no longer rely on our important but slower growing core programs. Instead, we've secured our future growth with newer programs in growing brands and verticals. Importantly, some of these newer programs were startup programs, so our ramp to fully mature tender share has tremendous reach. Now, before we leave this slide, we also wanted to cover the math on how we build a bridge from where we are today to our projected year-end card receivables. Important to note, we now project our end-of-period receivables to be roughly $19.5 billion down from our prior quarter forecast, largely due to the softness in the core programs I just mentioned. Generally, with normal seasonal trends, we expect to see a 10 to 12% increase from Q3 end-of-period receivables to Q4 end of period receivables. Our 2019 Q3 ending position of $17.9 billion puts us well in the range of $19.5 billion by the end of the year. We thought it was important to spend some time on the deliberate shift that CARD has been making these past few years. As I mentioned, these moves were intentional. We have exited some verticals that were not winning or no longer core. Admittedly, these actions have caused noise. However, we have also entered new verticals that are healthy and growing, and evidence of that is illustrated here. Ultimately, we are building a stronger, more diversified portfolio with room for growth and stability. Now, let's turn our attention to the consolidated results for Q3 and move to slide six. Let's begin with the revenue line. Revenue increased 1% to $1.44 billion, and EPS decreased to $2.41 per share. Tim will speak to the components of revenue on the next slide, so let me address the decline in EPS numbers. EPS from continuing operations declined significantly due to the restructuring charges of $55 million pre-tax primarily related to our non-card businesses and a $72 million pre-tax charge related to early debt retirement. The combined after-tax effect of these two items was $1.86 per share. In addition, in our card business, we had a $100 million increase in provision expense related to the AR build, which Tim will address on slide eight. The after-tax effect of this one large item was approximately $1.50. When combined, the impact of these two items was $3.36 per share. The provision expense also negatively affected core EPS, adjusted EBITDA, and adjusted EBITDA net of funding. Moving to net income, we were further affected by the expenses related to discontinued operations in connection with the Epsilon sale. The Q3 after-tax effect of this item dropped our EPS from a positive $2.41 to a loss of $2.13. Finally, 2019 had a higher effective tax rate of 26% versus the 16% we saw in 2018, causing an additional 33 cents of year-over-year pressure. Q3 was a noisy quarter, and I understand how it can be difficult to reconcile due to the number of one-time events. So, Tim, let me turn it over to you to provide more detail on our results.