Bread Financial Holdings, Inc.

Good morning and welcome to Alliance Data's first 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 the Q&A session, 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 my pleasure to introduce your host, Ms. Vicky Nakla of Advisory Partners. Ma'am, the floor is yours.

Thank you, Carol. By now, you should have received a copy of the company's first quarter 2020 earnings release. If you haven't, please call Advisory Partners at 212-750-5800. 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 uncertainty 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. Good morning. Thank you for joining this morning's call to discuss our first quarter results. We are in unprecedented times, but our organization has responded immediately and effectively to the pandemic challenge. We've moved swiftly during the month of March to activate business continuity plans and implement work-from-home protocols. I am proud of our associates and the global leadership team at Alliance Data, who have completely rose to the challenge. We are fully operational and performing well throughout this crisis. Today, I will discuss our immediate response to COVID-19, review our first quarter results, and update you on the steps we have taken to improve our operating model with an eye towards investing in our future. On slide four, you can see a summary of the actions we have taken to support our associates, card members and consumers, brand partners and clients, and of course, our communities. First and foremost, we have taken a number of steps to protect the health and safety of our workforce. Currently, 95% of our associates worldwide are working from home. We have instituted paid leave where appropriate, as well as other health and welfare accommodations to support our associates during this difficult time. For the small number of associates who must still come to the worksite, We are paying bonuses, practicing social distancing, and staggering shifts. For our card members and consumers, we are proactively introducing a number of forbearance options, including the option of skipping the next payment without a late fee rather than enrolling in a formal hardship program. We are also waiving late fees where appropriate. For our brand partners and clients, we have maintained a regular dialogue to understand both their current and future needs and to support them as they too adjust their business operations. At Card Services, we are working with our brand partners to optimize their budgets and marketing support and shifting resources to areas that have become more relevant, like e-commerce. At Airmiles, we have added merchandise reward options to increase engagement as collectors' interest shifts from aspirational items, such as travel, to more practical domestic merchandise and stay-at-home essentials. At Brand Loyalty, we are extending the length of certain short-term loyalty programs, allowing consumers a better opportunity to collect and redeem points prior to program expiration. The goal is to increase in-store traffic for our grocer clients. Additionally, we immediately responded to community emergency relief needs in virtually all of our key locations, including contributing to food banks and mental health services organizations for youth. We allowed collectors in our air miles program to donate miles to charitable organizations for relief efforts. We also accelerated corporate charitable donations planned for later in the year to support immediate emergency relief efforts and continue to match our associates' charitable donations dollar for dollar. These actions exemplify Alliance State's commitment to responsible business practices and demonstrate our sustainability strategy in action as we respond to the needs of our key stakeholders during this time. I am proud of these efforts and our culture of partnership, perseverance, and resolve in navigating this difficult period. Now, let me talk about the first quarter. It is best to break down this break this down between the first two months and then March, when COVID-19 began to have the impact on our retail partners and customers. Our business was tracking well in January and February, with revenue up mid-single digits and profitability increasing by double digits as we benefited from higher yields, lower operating expenses, and cost reductions made last year. As retail partners closed and traveled slow during March, we began to experience consumer spending declines, which continues today. In card services, our credit sales declined more than 50% as brick and mortar retail essentially stopped, partially offset by shift to e-commerce. At Loyalty One, we saw a similar story with business holding strong through mid-March, but falling off sharply as travel-related redemptions declined 90%. The combination of strength in January and February and softness in March led to a 4% consolidated revenue growth for this quarter. Trends at the end of March for card services were similar to what we are experiencing today. Retail brick and mortar sales were down more than 80%, while e-commerce was down in low single digits. As for the first quarter profitability, we benefited from approximately $50 million of the $150 million of cost savings we expected for this year. Operating expenses were down $90 million in the first quarter, adjusting for one-time benefits. Tim will discuss our savings in greater detail from the actions we took in 2019. Considering our adoption of CECL effective January 1 and the impact of COVID-19, we increased our loan loss reserve by $404 million, resulting in first quarter earnings before taxes of $25 million. Based on what we know today with April nearly over and our current economic assessment, we believe this is the appropriate level of reserves for the economic slowdown and related loan losses. It puts us at a reserve percentage of 12%. Of course, we continue to monitor the economic outlook, which remains fluid, and we'll adjust further if necessary. Looking at losses in the COVID-19 environment, We are likely to see increased pressure on loan losses in the back half of 2020, consistent with the reserve actions taken this quarter. We are also seeing increased delinquencies and requests for forbearance, which we would expect to continue given increasing unemployment. We do expect some mitigation from the government relief programs, including additional unemployment benefits and other stimulus programs. We also expect to see a benefit when the states begin to relax stay-at-home restrictions and begin a stage reopening. Given the uncertain climate and the limited visibility into the duration of this health crisis and its impact on the economy and consumer spending, and consistent with other companies, we are suspending our guidance for 2020. Our priorities are to protect our liquidity, to work proactively with our customers and partners, and to be ready for a phased reopening of the economy. We continue to proactively manage the business with an eye toward enhanced liquidity and competitive positioning. We are not taking our eye off the ball on strategic repositioning and continue to look for operational efficiencies, cost management improvement through the eyes of a fresh CEO. We are taking prudent steps today to strengthen our financial position and mitigate risks we may face during this next several months. To that end, we announced a reduction of our quarterly dividend to 21 cents from 63 cents, which will reduce our annual dividend by approximately $80 million. Further, and like many other publicly traded companies, we have suspended our share buyback program. We also have a number of other levers we can pull as needed to add to our liquidity and reduce our expense base. Tim will speak more fully regarding our liquidity, but I want to remind you of what I said last month. We have over $1 billion of liquidity at the parent level with no near-term maturities on our approximately $3 billion of debt. We continue to rigorously stress test the business, prudently using more aggressive cases than we modeled even a month ago. Based on our underlying assumptions of large reductions in GDP, increased unemployment, less disposable income, and lower retail spend, the outcome is the same. We are cash flow and EBIT positive under some fairly dire economic scenarios. To navigate through the current period, we are focused on prudent credit and risk management, near-term expense reduction, and investing in our business strategically. For credit and risk management, we have put our recession readiness plan into action and continue to move through its stages. Compared to 2009, we believe our portfolio is better positioned today as it is more diversified and we have enhanced our scoring model, which stratifies risk via dozens of different metrics. We also skew towards a higher percentage of prime card members today. We have proactively implemented our forbearance programs, which are being actively embraced by our card members. Since the middle of March, nearly 3% of accounts and 4% of balances have engaged in this program. It's still early days, but we expect this program to continue to grow. As part of our recession readiness plan, we are managing towards higher credit scores and have tightened our customer credit. Consequently, our credit exposures are down by 25% from the start of the year. We also closed inactive accounts to further limit credit exposure. We have taken a disciplined approach to expense management and operations. Actions already have been taken as evidenced by the $150 million of savings we expect for 2020, and we have identified and begun to execute on over $100 million of additional cost savings. These savings will come from adjustments in marketing spend, renegotiation of contracts, and operating expenses, all while maintaining our service levels. Finally, as we focus on our future, we continue to explore strategic investments for our business. Areas of interest include digital and information management, new customer-facing products and services, and continuing to enhance our recession readiness capabilities. To sum up, we are pleased with the early progress made on repositioning Alliance data and generating cost savings, which was evident in strong performance we had in the first two months of this year. Our business continuity plan is functioning well. We have taken actions to further manage our risks, strengthen our liquidity to improve our resilience, and identify additional opportunities to reduce our cost structure. Importantly, we continue to thoughtfully evaluate strategic investments that would enhance our business in a post-pandemic environment. Now we'll turn the call over to Tim for a more detailed review of our financials. Tim?