Bread Financial Holdings, Inc.

Good morning and welcome to Alliance Data's third quarter 2020 earnings conference call. At this time, all participants have been placed on a listen-only mode. Following today's presentation, the floor will be open for your questions. If you'd like to ask a question, please press star one on your telephone keypad. 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, operator. By now, you should have received a copy of the company's third 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 uncertainties described in the company's earnings release and other filings with the SEC. Alliance data has no obligation to update the information presented on the call. Also on today's call, our speakers will reference certain non-GAAP financial measures. which we believe will provide useful information for investors. Reconciliation of those measures to GAAP will be posted on the Investor Relations website at AllianceData.com. With that, I would like to turn the call over to Ralph Andretta. Ralph?

Thank you, Vicki, and thank you to everyone for joining the call this morning. We have had an exciting week with the FISERV announcement as well as the announcement this morning of our agreement to acquire BRETT. The new capabilities, digital advancements, technology upgrades, and efficiencies from these transactions better position the company for sustainable, profitable, long-term growth. I would like to start today's call by thanking our associates and leaders for all that they have accomplished this quarter. Our associates continue to step up to the challenges and changes brought forth by the pandemic, and through their dedicated service, move the company forward on its strategic goals. Starting on page three, here is an overview of the key highlights of the third quarter. The company posted strong financial results, which I will touch on briefly, then Tim will provide more color. As is evident with our recent announcements, we are making substantial progress on our strategic priorities and making significant investments in our business. We will address these themes in more detail throughout the presentation and then provide insight on our focus going forward. After our prepared remarks, we will open up the call for your questions. Slide four provides the highlights for the third quarter. We reported net income of $133 million, an increase of $95 million from the second quarter 2020, and earnings per diluted share of $2.79. We continue to build capital and liquidity through income improvement and strong cash flow. Importantly, credit sales improved 28% sequentially and both air miles, rewards miles issued, and redeemed improved from the second quarter of 2020, which I will discuss in more detail on the following slides. Overall, the quarter we saw a pickup in our business as stores, states, and countries reopened. Moving to slide five, you can see more detail on the improving credit sales trends for our card services business. While the sales are down year over year, we are seeing encouraging signs of growth across our channels and industry verticals. Like most, we are seeing the benefit of stores reopening and customer spend beginning to increase. While the positive September U.S. retail figures are very encouraging, we remain focused due to the many uncertainties our economic our economy faces, among them, the potential resurgence of the virus. We remain cautiously optimistic on the future and are prepared for a potentially uneven but gradual economic recovery for the U.S. and world economies. As you can see on the bottom left chart, our sales channels continue to rebound from the lows during the shutdown period earlier this year. The chart on the bottom right provides the channel details for the 28% sequential growth in the third quarter versus the second quarter of 2020. We saw substantial improvement in multi-channel spend as stores reopened, leading to a sequential 92% increase in store, in-person brand sales at the brand's brick and mortar locations. We are seeing more purposeful shopping, In-store traffic is still down versus a year ago, but when a consumer does come into a store, they are spending more. Our non-brand sales on our co-brand cards increased 27% sequentially. We are seeing an increase in spend in everyday categories for our co-brand cards and are pleased with the early results from our community general purpose card, which we launched late in the third quarter. With stores reopening in the third quarter, consumers reverted back to multi-channel spending, resulting in a pullback in online sales, but an overall increase in total spend. Finally, I would like to highlight the success we are seeing in the transition from our traditional brick-and-mortar apparel focus to a more diversified payments provider across industry categories. Our diversified verticals defined as partners excluding specialty apparel, department stores, and jewelry represented 65% of our sales in the third quarter of 2020 versus 55% in 2019. Slide 6 highlights select partner renewals, new vertical growth, as well as our new proprietary credit card, the Comenity Card. As discussed on our last call, we are focused on signing and renewing key partner relationships. We are partnering with companies that have a shared interest in driving sustained, profitable growth for mutual success. Here we highlighted two renewals in the quarter and some of our enhanced capabilities these partners are utilizing. The middle column highlights our beauty partners, which is one of the many diversified verticals where we are seeing strong, profitable growth trends. With the recent addition and program launch of Sally Beauty, the largest distributor of professional beauty products in the U.S., Alliance Data now partners with the top four brands in the industry, which makes up 53% of the total market share. Also in the quarter, we launched Salon Centric, which is part of L'Oreal. The success we have seen in beauty as a category leader is a good blueprint for our ongoing expansion into additional fast-growing industries. The launch of our new Comedity General Purpose Cash Back Card has exceeded our early expectations. We are currently offering the card to select customers and seeing strong activation rates and early engagement, especially among millennials. The development team for this card has extensive experience working with similar offerings and is confident in the value this card brings from both retention and growth. In a situation where a partner leaves or is having financial troubles, we can strategically offer the community card to retain card member relationships and drive increased sales. Let's turn to page 7 to review the performance for Loyalty 1, which includes the Air Miles Rewards Program in Canada and a Netherlands-based brand loyalty. The segment's third quarter revenue benefited from improving business conditions in most parts of the world when compared to the previous quarter. As I mentioned earlier and as displayed in the graph on the bottom of the slide, reward miles issued rebounded in the quarter from the low in the second quarter. Recall that we recognize most of our revenue when a collector redeems their miles, but a good indicator of our future revenue is the miles issued. Given the lingering effect of COVID-19 on travel, AirMiles continues to pivot its rewards portfolio to emphasize more non-travel options, such as merchandise, to drive higher customer redemption rates. Our merchandise redemptions increase double digits as we focus on stay-at-home, type products we are also adding added streaming services for games and movies to our rewards portfolio brand loyalty revenue improved 37 percent from the second quarter 2020 as areas around the world began to reopen during the quarter we are closely watching the pandemic inflection trends especially in europe as cases are beginning to rise slide 8 provides a look at our digital engagement statistics for card services consumers are rapidly adopting technologies that simplify how they purchase, manage their accounts, and engage with payments. Our suite of digital capabilities reflects the changing landscape by creating a seamless process for customers to adapt, apply for, and use payment options. Several of our brands are now leveraging our patented frictionless capabilities across all channels to drive easy applications. including qr code text and applied functionality as well as a dynamic real-time offer messaging that brings payment offers to the forefront of the customer shopping journey 45 of our card services credit sales in 2020 were made online up by one-third year-over-year seventy percent of applications are now digital and 78% of our bills are paid digitally, underscoring the importance of investing here and the success of our efforts to date. Turning to slide nine, I will speak to a number of ways we continue to enhance our technology capabilities. As discussed during the second quarter call, we are focused on expanding our product suite with additional product offerings like buy now, pay later, and installment loans. The acquisition of Bread was an efficient way to expand our offerings and gain access to a broader audience and younger demographic. The deal jumpstarts our ability to offer these products to our brand partners while bringing additional opportunities to leverage and offer our core products to those customers. Bread's leading FinTech platform advances our digital capabilities and offerings. Given Bread's advanced technology position in this space, we determined that the right strategy in this case was to buy rather than to build or partner. Our recently announced strategic agreement with Fiserv offers a number of benefits. We leverage Fiserv's highly flexible and scalable credit processing platform to benefit our brand partners and card members while driving operational efficiencies. Through our relationship with Fiserv, we will improve our brand partner conversions and speed to market, including quickly and seamlessly adding new products and capabilities that benefit our partners and our card members. The platform enables efficient integration and use of mobile wallet and virtual cards, while supporting our data and analytics capabilities. Importantly, the agreement provides efficiencies that reduce our cost to serve. we plan to reinvest those cost savings in digital capabilities and other grow up initiatives. During the third quarter, we announced the launch of our enhanced digital suite. This suite of digital applications and capabilities helps our brand partners capitalize on the accelerated growth of e-commerce. The suite promotes credit payment options earlier in the shopping experience and prescreens customers in real time, allowing for immediate credit approval without leaving the brand's partner site. We also support these offerings with enhanced digital marketing and payment tools. Combined, we expect these offerings to bring through more qualified applicants, a higher average purchase value, and a higher sales conversion, making our suite of services more valuable to our brand partners. Slide 10 provides details on announced acquisition of Bread. We are excited to welcome Bread's talented employees to Alliance Data. The addition of Bread's highly skilled development team will boost our innovation potential with new perspectives and collaborative thought. We will create a new innovation hub in New York City to drive digital advancement throughout the organization. Bread is an ideal partner to strengthen the expansion of our verticals and addressable market of small and medium sized merchants while providing our existing partners with additional white label product solutions. With the acquisition, Alliance Data uniquely positioned to provide a branded full spectrum payment suite for our partners. The partnership expands the growth potential for Alliance Data and spurs our digital innovation and development. Moving to slide 11, we made strong progress on our recover, rebuild, and regrow action plan in the third quarter. The recover components are nearly complete, and our efforts to rebuild and regrow are advancing more quickly than we had originally planned. Due to the hard work and resiliency of our associates, we have successfully adapted to a different way of working and in many ways improved and simplified our processes. We are changing the landscape of where and how work gets done. Our new flexible, adaptive workforce and evolving physical workplace strategies effectively balance cost efficiencies with high levels of service and support. Tim will highlight a few of the many actions we have taken to reduce our fixed cost base and improve our underlying financial position over the past five quarters. One example of this is our announced transition to Fiserv, which will provide for lower cost, scalable growth, increasing our ability to reallocate capital to areas of strategic differentiation. On rebuilding actions, we are expanding digital offerings and upgrading platform speed, flexibility, and technology. These actions, along with our ongoing strategic initiatives, which I will highlight later in this deck, position Alliance data for sustained, profitable, long-term growth. This growth will be supported by our regrow actions, which include focused investments, especially in digital enhancements and operational and product efficiencies. Putting this all together, we have the opportunity to unlock long-term value for our shareholders. I will now turn the call over to Tim to cover the financial. Thank you, Rob, and good morning to everyone. I will start on slide 12 to review our results for the third quarter. During the third quarter, revenue was down 27% versus last year as the company and both the segments were impacted by the COVID-19 pandemic. The decrease in revenue was primarily tied to the reduction in normalized card receivables, lower card yields from the Fed rate cuts, as well as low redemption levels of Loyalty One. The year-over-year improvement in earnings before taxes was impacted by $72 million loss and extinguishment of debt and a $55 million of restructuring charges in the third quarter of 2019. Adjusted EBITDA, net decrease for the quarter due to the decline of revenue, partially offset by the cost reductions driven by lower volumes and our cost savings actions. Slide 13 provides an overview of some of the key business metrics for the company. Starting at the bottom left, we show our normalized AR, which would include health for sale, versus our total credit sales. For the quarter, we saw sales come in at $6.2 billion, which was down 21% year-over-year. However, when compared to the prior sequential quarter, we did see a rebound from the COVID low of $4.8 billion, up 28% sequentially. There is still pressure on AR, but we have begun to see a rebound in our sales and would expect the typical fourth-course seasonality to increase AR balances at year-end. Moving to the lower right, we also saw a rebound in our yields. Recall in the second quarter, we were down 350 basis points year-over-year to a COVID low of 20.4%. Since the second quarter, we have rebounded 210 basis points, though we are still off the prior year's number by 220 basis points. As I discussed during the second quarter call, our yields have been under pressure due to both the customer relief programs, and the Fed actions. With fewer accounts in our program, we have now begun to see a recovery in our yields. We would expect our yields to remain near this range. Finally, turning to expenses, we continue to make progress on our year-over-year expense management initiatives. We continue to benefit from the ongoing reductions of our real estate costs, employee costs, and other operating expenses. For instance, our investment in automation, specifically robotic process automation, or bots, are taking costs out of our servicing model through automating processes, which used to be done manually. These bots are now providing approximately $15 million of run rate savings, and we anticipate we continue to find further opportunities with this technology. Our expense areas, we've been successful in reducing both legal, consulting, and fraud expenses. Overall, we realized approximately $50 million of fixed expense savings in the third quarter when compared to the third quarter of 2019. Let's turn to page 14, where I'll spend a little time talking about our card number payment behaviors. As we saw last quarter, card number payment trends remained favorable and continued to improve. As shown on the table, 84% of our accounts made a payment in the third quarter, up from 82% in the second quarter. This is above the levels we saw pre-COVID. Additionally, we have seen a reversion to normal for the percent of our card members who pay us in full at 23%. Balances in our COVID-related customer relief programs now represent 3% of total card receivables and continue to climb from the last one. Importantly, 73% of the accounts that enrolled in these programs are now making payments, up from 55% the previous quarter. While we are pleased with these trends, we are not surprised. Our disciplined and seasoned underwriting process is a core strategic advantage of Alliance data and is a pillar of our company. Turning to slide 15, I'm going to start in the upper left, taking a little bit of time to talk a little bit about our losses. For the quarter, we finished at a loss rate of 5.8%, up 28 basis points versus the prior year. However, sequentially, we were down 180 basis points, mostly due to the strong payment behavior and the actions we have taken with our customer relief programs. This compares favorably to our average net loss rate for the past 15 years and is well below the peak we saw in 2009. Like others in the industry, we do expect pressure on this number as we move into 2021, especially the latter half of next year. However, we do not expect to be near our historic high peak charge-offs as we have much stronger risk management tools and advanced underlying models, along with improved underlying card member base. Turning to our allowance, on the right-hand side of the page, our allowance remains at approximately $2.1 billion for a reserve rate of 13.3%, unchanged from the prior quarter. We did release a small amount of our balances due to decrease in receivables. It is important to note that the reserve level contemplates the assumption in Moody's most adverse economic outlook, the S4, which reflects only a 4% probability that the economy will perform worse which we feel is appropriate given the uncertainty in the economy now and into 2021. Moving to slide 16, as part of our most recent bond offering, we were able to secure additional flexibility with respect to our term debt. At a high level, we have been able to relax our covenant threshold through 2021 and in the first half of 2022. Additionally, as outlined here, we have been able to extend the maturity of our overall debt. A year ago, we had almost $2.9 billion of debt maturing in one and three-quarters a year. We now have been able to ladder this out, including pushing out the closest maturity from coming due in 1.75 years to 2.25 years and decreasing the size of this maturity by about one-half. While certainly not done addressing our balance sheet, our Treasury team has made significant inroads, giving us additional flexibility and time. Slide 17 covers both our corporate and bank liquidity and capital. Since last quarter, our parent company liquidity improved, with overall liquidity increasing $100 million to a total of $1.2 million. We took the opportunity to pay down our revolver, and as discussed on the prior page, extend the maturity of our corporate debt. At the bank level, cash is down sequentially as we were able to pay off some of our liabilities while maintaining a liquidity ratio of 15.7%. Capital has improved with a total risk-based capital ratio of 20.1%, up 40 basis points sequentially. We also were able to renew three conduits in the quarter, all three conduits in the quarter. I'll now turn it back over to Rob. Thanks, Tim. Slide 18 provides an outline of our strategic initiatives. We are opportunistically investing in strategic areas highlighted on this slide, as well as ramping up marketing spend in our growth verticals in the fourth quarter. As part of our way forward, we are leveraging our technology as a strategic advantage with continued innovation and a focus on reducing our cost to serve. As evidenced by our recent announcements with Five Serve and Bread, we are continuing to diversify and develop our product offerings to provide our partners with a full suite of payment solutions. Digital advancement remains at the forefront of our development framework. Finally, our data science and analytics capabilities and insights remain a key strategic advantage and will continue to drive efficiencies and effectiveness for our business operations as well as for our partners. What I hope you will take away from today's call is that we are making significant progress in a challenging economic environment, and we will emerge a leaner, more focused, and more profitable competitor. Sharon, we are now ready to open up the line for questions.

If you'd like to ask a question at this time, please press star for the number one on your telephone keypad. If you'd like to withdraw your question, press the pound key. First question comes from Ryan Nash with Goldman Sachs.

Good morning, Ryan. Ryan? Maybe I'll start off with the deal. You know, clearly it makes strategic sense just given the emergence of buy now, pay later as a borrowing option for customers. But I guess, can you maybe just talk about how you think about the strategic benefits of this versus other uses of capital? And I guess, given where the stock is trading today, it seems to imply you could have reduced shares by a material amount. So, I'm curious just how you weigh the long-term strategic benefits versus the near-term financial implications. And then second, can you still pursue other capital actions over the next few quarters, even in the face of this?

Yeah, right. So I'll start, and then I'll ask Tim to chime in. This is Ralph. So I think a couple of things. I think if COVID-19 has taught us anything, it has taught us the value of e-commerce. And you've seen that in the first and second quarter, and we'll continue to see e-commerce pretty much explode. So for us, this investment was paramount. The technology that Bright brings to the table and the talent they bring to the table is very much in our strategic plans as we move forward. And we'll continue And so I think long-term, this is the right decision for us. You know, our cash flow and liquidity have improved over the course of the year, so that was a good thing. The bond offering helped us spread out our debt, as Tim had talked about. So I think we're in a reasonable position, if there are other uses of capital, to take advantage of that. But I see this as a strategic and long-term benefit for ADS. Tim, anything? Yeah, I would just reiterate what Ralph said. Clearly, the recent performance has allowed us to invest in this technology, which we've talked about a number of calls we feel is very, very important strategically, while, of course, maintaining the balance and flexibility we have at the parent level. Our capital allocation strategy remains. If we're finding things that we find are this important to our business, of course, we're going to invest them. But from there, of course, maintaining our dividend and not doing any share repurchases.

Got it. And if I can maybe switch gears to ask about growth. So, you guys saw a really nice sequential improvement, yet as was highlighted on the call, balances, sales are still down about 20% year-over-year. So, can you maybe just talk about how, from a year-over-year perspective, they trended over the quarter? And second, you talked about, Tim, the expectation to see normal seasonal trends in 4Q. Do you think we've actually seen the bottom for receivables? And assuming no major change in the macro, could we actually begin to grow off of today's levels over the next couple of quarters? Thanks.

Obviously, the biggest known for all of us is going to be COVID and the store reopenings. Clearly, we put that out last quarter that the store reopenings and state reopenings were very dependent. We were very encouraged by the number of folks going back into the brick and mortar that Ralph went through that slide. There may be a little bit of pressure on our receivables from where we are now as we roll into 2021, you know, as COVID allows, you know, starts to abate a little bit and could have a little bit of pressure. But, you know, we start thinking we're getting back to, you know, normalized AR at this point.

Got it. Thanks for taking my questions.

Next question comes from Mihir Bhatia with Bank of America.

Good morning, Mihir.

Good morning. Thank you for taking my question. I wanted to ask on the acquisition too, maybe just a couple of quick questions just to start on BNPL and bread in particular. Can you talk about just why is the accretion going to take three years? I mean, you're paying a pretty good amount of the purchase price, it seems, in my cash, right? I mean, I understand a fourth of it is in stock, but was the bread profitable? And then just related, can you just talk about the economic returns of the product? How does the revenue profitability model differ from your core car product? Should we assume longer term as that product grows, ROEs decline from your historic level? Or do you think you can get the same ROEs?

Thank you.

sure so we all start with just talking about you know the accretion clearly we have not got um into looking at the integration and what type of long-term profitability we'll have you know we think there'll be a nominal pressure in the next year or two in 2021 and 22 and then uh obviously going from there with most that uh dilution coming from just the increase in the share account so um this is rob i think We shouldn't think of this as a replacement of our product set, but an enhancement to our product set. It will attract new customers, particularly younger customers who tend to use debit as a means to pay for things. So while we will add to our revenue base, I don't see this replacing our existing products. In fact, we will migrate some of these customers to our existing products as we move forward. So I think it is an enhancement. not a replacement. OK. Thanks for that. And then just one other question. On your, I think, slide five, if I could just talk about credit sales. I was surprised. I mean, the trend is fairly favorable, but I was surprised by the online brand sales being negative. That seems a little different than what we've seen from some of the other payment companies regarding online sales. Is that just a function of your retail partners, or can you maybe just provide a little bit of color there? Yeah, so if you think about it, you know, think about the third quarter as opposed to the second quarter. We had our traditional partners opening up their their bricks and mortar locations. And, you know, we have pent up demand for people to get out of the house and actually, you know, get a change of scenery. So we saw people shopping in the stores. And if you look about that, although, you know, our maybe online went down a bit sequentially, people shopping in stores, our sales went up 92%. But if you combine those two, sales were up in the quarter, as I said, 28% sequentially. So while we saw a little bit of a dip in online sales, we saw an amazing increase in in-store sales.

Thank you. Next question comes from Sanjay Sakrani with KBW.

Good morning, Sanjay. Thanks. Good morning. Um, maybe I'll start with credit quality. Obviously a nice charts there that show, um, you know, credits obviously performing quite well, but you've had the, the, the relief programs, you've had stimulus. That's going to be a little bit of an air pocket. I don't know what you guys are doing with your relief programs or have those sunsetted or are you still offering them? But, but I guess just to think about the reserve rate and the migration going forward and the direction of credit quality, um,

henceforth.

I mean, how are you guys thinking about it?

Yes. Hi, Sandy. It's Tim. Yeah, so clearly, you know, the quarter benefited for those relief programs that we were seeing back, you know, having use of those back in Q2. But where we are right now, we would expect, like most of the others in the industry, to have pressure on our credit in the 2021, specifically in the latter half of 2020. One is, you know, the relief programs have kind of gone a little bit back to normalized levels. You know, in my prepared remarks, I talked about it being about 3% for relief programs on hardship and other relief programs, and that's pretty much back to normal pre-COVID levels. And do you expect the reserve rate to sort of stabilize here, or can it go higher here? Because I know you guys didn't really move that a whole lot. Yeah, clearly, you know, we're anticipating the increase in charge-offs. and a fairly draconian, you know, an S4 level with our reserve rates. You know, if the COVID starts to abate and we continue to see the strong payment behavior we've seen for the last six months, there's opportunity on our reserve rates. Okay. And then my follow-up question, unrelated to that, maybe for Ralph, is, I guess you guys talked about strategically needing to beef up on technology. Does bread solve for everything you needed, or do you need more investment in technology from here on out? Well, you know, technology, like anything else, is evolving. So what bread does is it really puts us – in a really terrific competitive position. But as I said, our reinvestment is going to be in digital enhancements going forward as well as products. So while it gives us additional capabilities, we're not done yet. And would you expect to solve for that through acquisition or through internal investment? Well, you know, the acquisition of Bread gives us tremendous talent in digital, and I'm looking forward to working with that team and having them help us solve our go-forward endeavors. Got it. Thank you.

Next question comes from Chris Kennedy with William Blair.

Morning, Bob. Good morning. Bob Napoli here. uh thank you for the questions uh just uh following up on on bread uh ralph uh i think uh you know alliance data has been you know some of i'm sure several of your customers use other buy now pay later programs like affirm or clarna or afterpay and i imagine that you've seen how the two products uh work in tandem uh so just wondering what your thoughts are on how this enhances your cross-sell capability? Would you be able to replace some of those other buy-now-pay-laters? And how does the technology at Bred compare to an Affirm or a Quarna or an Afterpay?

Yeah, so I think a couple of things. One is, certainly, we're going to offer this to our partners. And why I think it gives us a strategic advantage, it's a white label offering. So that means that the customer doesn't feel like they're going yet to another company for some kind of credit. They feel, you know, they're invested in the brand they're buying from, and this is to them an extension of that brand. I think that's tremendously important. So I'm excited about that. And I think that gives us an advantage to, you know, potentially replace some of those third parties, arm's length, organizations that are out there. I think the other important thing is that we will control the purchasing journey end-to-end. It's not a punch out to somebody else. It's from beginning to end, we're able to service that customer in a consistent way, whether they use a private label credit card, a co-brand credit card, or installment loan, or buy now and pay later. Yeah, Bob, and clearly the implication there is that we have the cross-sell opportunity. We can upsell people into the private label, the co-brand cards, you know, and have them be branded across the board on all our different products.

Yeah, and the brand technology, and I guess, and also, like, maybe the credit quality. If somebody that qualifies, you know, doesn't qualify for an Alliance Data card, then offered the thought process that I would think the retailer would want the loyalty associated with the private label card first.

Yeah, well, I think a couple of things.

Lower credit quality?

You see these things side by side, right? So, ultimately, it's the consumer's choice on whether they want the private label credit card, which comes with all of the rewards, or they want to have an installment loan, you know, have something where they can have an installment loan if they have a set payment in a given month. So, I think that, you know, that will be the choice of the consumer going forward.

Okay, then lastly, can you give some metrics, like what the revenue is for bread, what the EBITDA is and what the growth rates are? And will you be holding their loans on your balance sheet?

Yeah, we'll eventually migrate them onto the balance sheet. That's part of the integration process. there's a couple different steps we'll have to take there. And we're not disclosing, it wasn't public, the revenue and the EBITDA. I'll go back to it should be nominal pressure on us in 2021. And as we move into 2022 and 2023, clearly we expect some fairly significant revenue because we'll be able to integrate them across our board with all 160 of our different partners.

Thank you. Appreciate it.

Next question comes from David Sharf with J&P Securities.

Good morning, David.

Maybe the first one, just shifting gears to the expense side, can you shed a little more light on what the anticipated savings are from converting over to Fiserv? I assume it's the first data, you know, card processing platform.

But, you know, and whether that transition to outsourcing was more expense-driven, or were there kind of, you know, speed-to-market issues that were more impactful? So I would say it's all of the above. So, you know, we wouldn't disclose expense savings, but I can assure you those expense savings that we have will certainly reinvest in, you know, digital and product capabilities. But the ability for the transition of Fiserv, if you think about it, it's speed-to-market issues. more products that will certainly help our partners. And for us, it will lower our cost to serve as we move forward. And just give us more flexibility in the marketplace to scale up and down as the marketplace moves. Got it. Understood. And then as a follow-up, because it's been a familiar refrain on the call, just focusing on the buy now, pay later offering again. Maybe at a higher level. I understand its view is kind of complementary. It adds potentially a younger demographic. There's an up-sale opportunity.

But as we think about just private label, the value proposition of private label as a product, it seems like as commerce becomes more and more digital, it seems like the barriers to entry for new competitors to offer loyalty

tools like Buy Now, Pay Later increases well. And I'm wondering, is there any feedback you're getting from your specific retail partners about either, A, whether the loyalty and value-add associated with a private label card has been impacted at all by some of these other types of shopping cart conversion offerings? And B, specifically, have they provided any data on how many of your end consumers that have community-issued cards have started to use an alternative buy-now-pay-later option in the shopping cart checkouts? So let me tell you the first one. I believe the private label card, there will always be a place for private label and co-brand cards because there's an affinity to the brand. And so when you think about other entrants, they're not connected to the brand. So it's an arm's-length transaction. So there's no brand affinity. There's no brand rewards. And that, we think, is still a barrier to entry going forward. And in terms of your second question, in terms of how many of the clients are using a buy now, pay later or installment loan, I'm not aware of any specific data that our partners have supplied. Now, our partners do have them on their site, which was one of the reasons we certainly wanted to invest in a leading edge fintech that has so much great talent and such a digital platform. That's why we did invest in this. We want to be the supplier to our partners of all their payment methods and give them a full suite of ways for our customers to engage with them and purchase bigger baskets as a partner. Got it. Very helpful. Thank you, Ralph.

Next question comes from William Ryan with CompassPoint.

Good morning, Bill. Good morning. Thanks for taking my questions. One kind of granular and one a little bit bigger picture. But on the granular side, when you look at the trust data, it looks like there's a little bit, I kind of called it a credit bubble, kind of working its way through. On the back side of it, delinquencies are very low again, but it looks like you might be kind of running into a little bit of a charge off headwind maybe in November and December. As I recall, you're kind of restrictive on some of the accounts that you gave forbearance to. I was wondering if you can kind of comment on what that might be or what it might reflect. And then second, as it relates to bread, Looking at the buy now, pay later, one of the comments partners have had is about economics of the business being detrimental, but more importantly, it's been brought up several times on the call, is the loyalty side of the equation. Will the retailers, and I assume they probably would, would they have the ability, and I don't necessarily like this word, but to steer towards their product offering that you're going to have? because it seems like they want to create a loyalty side out of this buy now, pay later of a time.

Yeah, so let me take the second one first, and then I'll ask Tim to comment on your first question. I do think that our partners will, as they do today, steer their customers to our products because it's beneficial to them to do that. So I would say this is just yet another product or another, you know, basket, another product in a basket for them to use as a loyalty device. And that's why we, you know, I'm particularly excited that it's a white label solution and we didn't partner with a third party where it would be a, you know, just a name out there and it would be a service rather than a, you know, a customer engagement. Bill, when you get to the trust data, that's just a timing issue with some of the customer relief programs. We're getting a little bit of pressure there just at the trust level.

As I mentioned, the customer relief programs are having a benefit overall.

Okay. Thank you.

Next question comes from Jeff Adelson with Morgan Stanley.

Good morning, Jeff. Questions. I know a lot has already been said on bread so far, but maybe another question there. You said that you're making that available to your retailer soon, but just wondering how fast you feel like you can get that platform up to speed with your retailers. Is this something that's going to take a couple quarters, or you think it'll take a few years to really get entrenched with your client base? And then I know you've already covered a lot on what kind of color your retailers are giving you, but maybe could dig in a little bit more on what percentage maybe of your retailer's you think are actually going to use this? Is this something where some can turn it on and turn it off, or are you just going to kind of make it available to everyone and just let the customer base kind of dictate usage? Yeah, just a couple of things. The announcement is an hour and a half old. I'm sorry, an hour and 45 minutes old. So as you would expect, we are just starting to work with our brand partners on integration and who might want it first and how we might do that. The beauty of this platform is that integration happens pretty quickly. It's like a 40-day to 50-day integration at a brand partner. That is incredible. is key for us in terms of the number of brand partners we have and the demand we would be expecting for this as we go forward. And so from my perspective, we will begin working with our brand partners as soon as we hang up from this call. Got it. OK. And then maybe just shifting to general purpose, you're clearly moving into a new payment capability with Bread. I feel like general purpose could be another growth channel for you. I was just wondering,

If you could give us some insight into where you hope to take that program over the medium to long term, is that really more just a backstop against retailer bankruptcies, or do you view that as a real opportunity to really drive growth outside that? And then separately, I know you've also covered a lot about your strength and beauty and some of these other non-specialty retailers outside there.

Is there an opportunity for you to do a little bit more outside of consumer on the small business side? Yeah, so let me – so let's define general purpose. I define general purpose as two things, one being our co-brand cards and the second one being, you know, the community card that we just launched. So if you think about our co-brand cards and our partnership with Fiserv, we now have – co-brand capabilities that we can compete head-to-head with anybody out there. Again, that's a, you know, certainly a beauty of moving to the FISA program very quickly. Not only do we have capabilities, we also have experience. So speaking for myself and Val Greer and others who've been brought into the organization, we've all managed large co-brand portfolios. I think it is a terrific part of our business. Each portfolio in our entire portfolio plays different roles. So although the margins may be a little thinner on the co-brand side, they certainly bring better credit quality. And that better credit quality enables us to take a little bit more risk on the private label side. So we're looking for that balanced portfolio as we move forward. As far as the community card, early days, again, really excited about the engagement and the early spend we're seeing and the fact that it's attracting millennials. But at this point, we're thinking of that as right now as a save tool. That doesn't mean we won't pivot sometime in the future. But when you either, you know, when you part ways with a partner and you retain the receivables, and you could, you know, give those card members the ability to still spend with you and engage with you, that's a great thing. And then as a – and doing the same thing when a partner does – you know, bankruptcy is just two types, but when a partner does liquidate, saving those card members to ensure that they are still going to pay down their debt as well as, you know, engage with you and build another receivable is a terrific use of that product. Thank you. And, Jeff, as far as the question around the businesses, we do have the capability to do small business loans. Most of those are going to be attached to small, you know, single, you know, sole proprietors, et cetera. We already have that ability. And I've been a big focus of them to make sure that if it's a consumer that's running a business that we continue to be able to underwrite those folks. Thanks for taking my questions.

Once again, to ask a question, please press star 1 on your telephone keypad. Next question comes from Michael Young with Truist Securities.

Good morning, Michael. Good morning. Thanks for the question. I know we've talked a lot about Bread So Far, but I was curious maybe just on the retailers, actually, and more the core business. There was a lot of noise made of bankruptcies and issues there, but just wanted to get an outlook on what's going on with the bankruptcies versus the new additions of new retailers and how those are trending.

Sure. So, you know, as you guys, as you know, when we think about bankruptcies, there's two types, right? There's Chapter 9 and Chapter 7. And the Chapter 9 bankruptcies are reorganization, I'm sorry, Chapter 11 and Chapter 7. My apologies. The Chapter 11 bankruptcies are a reorganization of the partner, and that results in, you know, potentially store closings. But that said, we still continue to transact with the partner. We still continue to acquire acquire cards and we still continue to market to the partner albeit maybe when the partner comes out of chapter 11 they may have less physical locations that is why we are investing heavily in digital so when that partner mergers and they are a bigger and a bigger part of their business is digital we'll be right in that channel where the customer wants a shop In terms of liquidation or Chapter 7 bankruptcies, that's why we, you know, we certainly have the community card as a safe tool. But remember, in Chapter 7, the bankruptcies, the customer is a card member. We actually, you know, margins improve in a Chapter 7 bankruptcy during early liquidation. As far as what I see going forward, you know, stressful time for retailers, but we haven't seen any other retailer right now tell us that, you know, they're entering into a into an 11 or seven situation. It's one of the things we we noticed was there was as we came into 2020, there was a number of retailers that had weak balance sheets and, you know, COVID hit them really hard and they have you know, obviously done what they've had to do from reorganization. The retailers we have left have a pretty strong balance sheet and been able, you know, to withstand this and look like they're starting to come back out. So for lack of a better term, it feels like we fleshed out some of the weaker players on the retail side.

Okay. So net net from here, you think you can kind of be in a net ad position in terms of retailers and volume, even X kind of the macro?

Yeah, so I think if you look at, let's take the one category we talked about today, beauty. We see even year-over-year improvement in beauty, and we're a market leader. We've got over 50% of the market share there, so we'll continue to add there. So we see that as a really good vertical for us. The other verticals that we're adding to are home goods, home improvement. That's been really powerful for us, so we've seen improvement there as well. So most important is that we are able to work with partners across different categories and offer them this basket of opportunities for their customers to purchase, you know, have larger tickets and give them the opportunity to do it in a variety of ways, private label, co-brand, buy now, pay later, and installment loan. We're just filling our product suite very nicely.

Okay, thanks. Next question comes from Vincent Saintig. Please go ahead.

Good morning, Vincent.

Hey, good morning. Thank you. And just a quick follow-up question. I'm sorry I might have missed some of this. So I appreciate the commentary on just the current core receivables maybe still shrinking going into 2021. But that seems like it's been picking up nicely. And then the yields as well, that picked up nicely quarter to quarter. I'm just kind of wondering what you're expecting for trends there, and when you made the comments on receivables, does that include the bread acquisition or is that just thinking the existing core?

I'll start with the yields and then I'll go to the AR, Vincent. On the yields, we're obviously down year-over-year about 220 basis points. Look, 150 basis points came from the Fed action, so unless the Fed obviously increases the discount rate and therefore flows into the prime rate, we all have that pressure. The rest of that pressure is coming from the customer relief program and actually the consumer behavior they're paying us. So the benefits we're seeing in the charge-off and the delinquencies, and obviously the downside of that is some of the late fee give-up. So we may be able to pick up some of that over time, but I think the 150 basis points is pretty permanent unless we have some type of action. As far as the AR specifically, it's going to be dependent on the consumer coming back into the retailers. I obviously have some really positive news for the folks coming back in, as Ralph highlighted on his slides. We think there may be a little bit of pressure, certainly nothing like 2020, and that's prior to the bread acquisition. We think the bread might be accretive to that.

Okay, great. That's really helpful. I'm going to throw in my bread question. So, I'm just wondering how much overlap there is on your existing retailer footprints between bread and Alliance data, because it seems like maybe there shouldn't be just because the product sets are pretty different. And so, kind of thinking maybe there is a great cross-sell opportunity between the two different products, but just want your comments on the existing overlap.

Yeah, I would agree with you. There's minimal overlap, and it just presents us with a really strong cross-sell opportunity. I would agree with what you said.

Okay, great. Let's go ahead. Thanks very much. Thank you.

And at this time, I'll turn the call over to Mr. Andretta.

Thank you for joining our call today and for your interest in Alliance data. We're excited about the future and are focused on the execution of our strategic priorities to drive our company forward. Everybody have a terrific day. Thank you.

This concludes today's conference call. You may now disconnect.