Bread Financial Holdings, Inc.

Good morning and welcome to the Alliance Data's first quarter 2021 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 at that time, please press star then the number 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 Mr. Brian Varek, Head of Investor Relations at Alliance Data. Sir, the floor is yours.

Thank you. A copy of the slides we'll be reviewing and the earnings release can be found on the Investor Relations site of our website. On the call today, we have Ralph Andretta, President and Chief Executive Officer of Alliance Data. Executive Vice President of Operations and Credit Risk, Tammy McConaughey, will join Ralph for the Q&A portion of the call. 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, Brian, and good morning, and thank you all for joining the call. Before I begin, I'd like to acknowledge Tim King for his contributions to Alliance Data. As we previously announced, Perry Bieberman will be joining the company in July as our new CFO. Perry is an accomplished executive leader with more than 30 years of experience in financial services. We look forward to him joining the team. I will start on slide three with the key takeaways from the quarter. First, we are pleased to see credit sales rebound towards pre-pandemic levels. With the expansion of the vaccine rollout, additional government stimulus, consumer confidence continues to improve, and we are seeing the return of the consumer to in-store shopping. Next, the initial rollout of the Bread platform to our brand partners began in the first quarter with Apartment 2B. We are in active discussions with our partners for additional cross-sell opportunities, and we expect to have more to discuss in the second quarter. Just this morning, we announced the expansion of our business relationship with Fiserv through a new strategic partnership. Fiserv will leverage Bread's payment platform to offer our digital products and capabilities to its merchant partners. The strategic partnership will power point-of-sale lending for five-thirds extensive merchant base and drive platform sales and receivables growth for Alliance Data. We are very excited about the potential of this partnership. Finally, our credit performance continues to improve as a result of our prudent risk management, deliberate underwriting actions, and continued strong card member payment behavior enhanced by stimulus payments in the first quarter. We took deliberate actions to improve our credit performance last year, and the results are evident in our credit metrics. Slide 4 highlights the key financial metrics for the first quarter. We reported diluted EPS of $5.74. Net income was $286 million, and total revenue for the quarter was $1.1 billion. The quarter included a net reserve release of $165 million, or $2.40 per diluted share. Revenues were down 21% year-over-year, impacted by elevated consumer payment behavior, while total expenses excluding provision for loan loss declined 6%. Credit sales were virtually flat year-over-year as we moved closer towards an inflection point for average receivables growth the second half of the year moving on to slide five you can see the continued recovery in credit sales for our card services business which aligns with the improvement in consumer confidence and mobility the mobility tracker is based on time spent away from home estimated using cell phone location data as a result of the increased activity in-store brand sales picked up in the first quarter and are now only 5% lower year-over-year compared to being down 28% year-over-year in the fourth quarter of 2020. In addition to the improvement to in-store sales activity, consumers continue to spend online with digital sales remaining at 40% of the total sales in the quarter. Applications also bounced back in the first quarter to be flat year-over-year with new account growth improving 1%. We are encouraged by the progress we are seeing in the economy and remain optimistic that these positive trends will continue. Slide 6 highlights select partner additions and renewals and our new strategic partnership with FISERV. The FISERV partnership opens an extensive distribution model for bread, As the primary point-of-sale financing partner, Bread will collaborate with Fiserv to provide a best-in-class suite of fully integrated solutions for merchants, both online and in-store, that use Fiserv's merchant acquiring services. Fiserv will utilize Bread's customized payments platform and robust suite of APIs to augment its existing payment processing services, unlock significant growth opportunities for both companies. We anticipate having our first merchant launch with Pfizer early in the third quarter of 2021. We continue to add new bread and card partners, including a new partnership with Petco, growing our total merchant count to approximately 650. The Petco Pay co-brand card and private label card offer a wide array of benefits for Petco's loyalty program members and allows card members to experience quick, easy, and secure checkout in-store with a contactless payment option. Bread's success in acquiring new online merchant partners continues. We have displayed a select few of the dozens of new partners added to the platform, in the first quarter on this slide. As I mentioned, we successfully launched our first existing card partner on Bred's platform with Apartment 2B, which is part of the Rooms Placed relationship. This was a good chance for the team to test and learn in preparation for several more opportunities we expect to materialize in the second quarter. Our partners have shown considerable interest in augmenting existing programs with Bred's white label solutions. Also in 2021, we sign multi-year partnership card renewals, both with Torrid and Big Lots, and look forward to delivering even greater value going forward. The table on slide seven displays our three bread business models, direct acquisition, distribution model, and as a technology and marketing platform, which includes our growing relationship with RBC. Today, I will focus on the distribution model, which the Fiserv relationship represents. In the model, Fiserv acquires the merchant relationship. Bread provides the platform and capabilities, and the loans reside on Alliance Native Bank's balance sheet. The strategic partnership will drive platform sales, growth, and build receivable balances for Alliance data. In return, we provide the merchant acquirer with an acquisition fee. By leveraging Fiserv's broad merchant distribution network, their assets, existing relationships, and large sales force, we can further expand our payment capabilities and bring next-generation payment and checkout solutions to more merchants. Let's turn to slide 8 to review the performance for Loyalty 1, which includes the Air Miles Rewards Program in Canada and the Netherlands-based Brand Loyalty. As displayed in the graph on the bottom of the slide, Air Miles Reward Miles issued and redeemed declined as a result of the continued lockdowns in Canada. AirMiles is optimistic that travel-related redemptions will increase in the second half of the year, providing a substantial growth opportunity, and is already preparing for eventual comeback with airline partners. Brand Loyalty's new program is picking up with a strong pipeline of clients in the second half of 2021. Consumers are actively engaged in loyalty campaigns with particular success in products focused on the home. Slide nine provides our results for the first quarter of 2021 compared to the first quarter of 2020. Revenue was down 21% while total expenses excluding provision for loan loss was down 6% compared to the first quarter of 2020. This despite increased strategic investments in digital and a full quarter of bread expenses. The primary driver of high net income in the quarter was the benefit of lower provision expense for loan loss. I will provide more details on the results in the coming slides. Slide 10 provides our segment-level results for the first quarter. Both Loyalty I and card services revenues were down year over year, with a decrease in card services primarily tied to lower receivable balances and lower delinquency. Loyalty-run revenue in EBT were down primarily due to the reduction of travel redemptions, the sale of Pressima in January of 2020, and fewer short-term loyalty programs in the market due to the COVID-19 impact. Although, we are seeing the loyalty program activities start to pick up. The improvement in card services EBT is primarily a result of lower loan loss provision expense resulting from continued strong card member payment behavior and and improving year-over-year delinquency rate. Moving to slide 11, I will review some of the key business metrics for the company. Starting at the bottom left, we show our average receivables and our total credit sales trends. For the quarter, we saw credit sales come in at $6 billion. As I highlighted earlier, we continue to see a rebound in our credit sales performance as consumer confidence improves and would expect stronger credit sales in the second quarter. While average receivables remain flat sequentially, balances continue to be pressured by elevated payment behaviors and normal seasonal balance reductions coming out of the holiday season. Moving to the lower right, yields improve sequentially driven by the higher seasonal sales in the fourth quarter as we maintained our pricing discipline and focus. Card services cost of funds dropped approximately 10 basis points for the quarter. Finally, turning to expenses. The first quarter was down, the fourth quarter was, excuse me, the first quarter was down $154 million from the fourth quarter of 2020, in part due to real estate expenses from our optimization actions in the prior quarter lower redemption expenses, and lower amortization and depreciation expense. Turning to slide 12, I will start in the upper left. For the quarter, we finished at a loss rate of 5%, down 100 basis points versus the previous quarter. On the bottom left of the slide, you can see the improvement in our delinquency rate to 3.8%. down 60 basis points versus the previous quarter. We are pleased with the continued improvement in our credit metrics. Last year, we took deliberate actions to ensure well-managed and balanced risk management, and the results are evidence of our success. Finally, turning to the right-hand side of the page. Our allowance decreased $165 million to $1.8 billion, primarily driven by a sequential balance decline, the improved delinquency rate, and improving economic conditions, for a reserve rate of 11.9%. Given the continued uncertainty in the economy, our reserve levels remain elevated to reflect the potential risk. Slide 13 provides a financial outlook for the year. We expect full year average receivables to be down mid single digits year over year, with credit sales up high single to low double digits in 2021. We expect to resume high single digit to low double digit card receivables growth in 2022. Our outlook for total revenue and total expenses remains unchanged for the year. Expenses will thoughtfully ramp up each quarter throughout 2021 as we continue to make investments in digital, data and analytics, marketing, and bread to fuel future growth. We have the ability to flex our investment dollars up or down as needed to align with market conditions and our outlook. At this time, given our cautious recovery, we are in our quarters. As credit performance improves and delinquency rate remains low, we anticipate our four-year loss rate to be better than the historic average of 6% and the second quarter net loss rate to be in the mid to high 5% range. We remain focused on solidifying our business, improving efficiency, and continuing to invest in our strategic initiatives to drive sustained profitable growth over the long term. We hope you can join us on May 18th for our investor event, where we will showcase our strong leadership team, go deeper into our strategy, and provide our long-term financial targets around returns, efficiencies, risk, and growth. Operator, we are now ready to open up the lines for questions.

As a reminder, to ask a question, you would need to press star, then the number one on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Sanjay Sekharani with KBW.