Bread Financial Holdings, Inc.

Good morning and welcome to Alliance Data's second quarter 2021 earnings conference call. At this time, our parties have been placed on a listen-only mode. Following today's presentation, the floor will be open for your questions. If you would like to ask a question at that time, please press star then the number one on your telephone keypad. It is now my pleasure to introduce Mr. Brian Vareb, 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. On the call today, we have Ralph Andretta, President and Chief Executive Officer of Alliance Data, and Perry Bieberman, 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, Brian, and thank you to everyone for joining the call this morning. I'm excited to have our new CFO, Perry Bieberman, joining me today. He's been on the job for less than three weeks, but he's jumped right in, and we're happy to have him on the team. I'll start at slide three with the takeaways from the second quarter. We continue to make considerable progress on our strategic initiatives. During the quarter, we hosted an investor event, where we discussed our three-year strategic plan, highlighted our enhanced product offerings, reviewed our lending philosophy, and released our long-term financial targets across key metrics. We also announced the expected spinoff of our Loyalty One segment, which is key to our strategic transformation to strengthen our balance sheet metrics and deliver long-term focus, sustainable growth. We've successfully implemented several modernization and efficiency initiatives, that I will discuss later. At the end of the quarter, we launched our Bread-Fi-Serve relationship and continue to sign new partners and build our prospect pipeline along with renewing several of our valued brand partners. We are pleased to see credit sales rebound to pre-pandemic levels as we exit the second quarter. Consumer confidence and mobility continue to improve as retailers focus on engaging their customers through an omni-channel shopping experience with our Gen Z and millennial sales of double digits compared to pre-COVID levels. Digital sales were up $400 million versus the first quarter as total overall sales continued to grow. Finally, our credit performance remained strong as a result of our disciplined risk management and the ongoing impact of the economic stimulus payments and programs. We anticipate the credit metrics, including our delinquency rate, will normalize once government stimulus programs expire in the latter part of the year. Slide four highlights the key financial metrics for the second quarter. Total revenue for the quarter was $1 billion, and net income was $273 billion. Revenue increased 3% year over year, while total expenses, excluding provision for loan loss, declined 4%. The quarter included a net reserve release of $208 million, resulting in reported diluted earnings per share of $5.47 for the second quarter. Credit sales were up 22% compared to the first quarter and up 54% year over year. Our net loss rate was 5.1% for the quarter, well below our historic average of 6%. Slide five provides a quick update on select initiatives from our ongoing strategic roadmap. Our strategic lending distribution relationship with Fiserv provides a significant opportunity to scale the bread platform beyond the direct distribution model. The program went live June 30th and select merchants will launch in the second half of the year with a broader rollout plan for 2022. To continue to provide a more frictionless experience for our brand partners and their customers, we have accelerated the adoption of our enhanced digital suite and our unified software development kit. These applications provide for a seamless experience for brands to integrate and offer our full suite of offerings, including the bread digital payment platform products. Technology advancements continue to be at the forefront of our strategic initiatives. During the second quarter, we completed the transition of our statement processing to FISERV, and the transition of our core processing to FISERV remains on track for mid-2022. The transition of these processing functions reflects Alliance Data's continued focus on tech monetization, delivering enhanced payment and servicing capabilities, and realizing additional efficiencies. The migration to Pfizer's industry-leading processing platform will enable faster speed to market for new products, credit program launches, and product portfolio conversions. The migration will also free up capital, reduce fixed costs, and lower our cost to serve. Our proprietary card, which launched in 2020, exceeded one million cardholders in the second quarter, which we view as a very important milestone. We look forward to driving acquisition growth of our proprietary card through expanded targeted marketing programs in 2022. Finally, we remain focused on responsible balance sheet management. We recently completed a debt refinancing, which extended the maturity of nearly all of our term loan by 18 months to July of 2024, and we received the necessary permissions required for the anticipated spin code debt refinancing activities. The Loyalty One spinoff is on track for the fourth quarter of this year. These activities will help improve our capital metrics and provide additional flexibility for the company. Side six highlights select brand partner additions and renewals. We added several new partners during the second quarter, including new card partners, RU21 and GasBuddy. Bread's success in acquiring new online direct acquisition partners also continues. A select few of the new partners added to the platform are displayed on the right side of the slide, including a new opportunity with Wayfair to provide Bread's digital payment platform offerings to their customer base. Also in the second quarter, we signed multi-year card renewals with several partners, including Ann Taylor and Signet. We remain focused on growing profitably with collaborative brand partners and our enhanced product set. Turning to slide seven, I'll provide more details on the progress in each of our bread business models. We just recently celebrated the six-month mark of our acquisition of bread, and we are excited about the progress we have made and for the opportunities ahead of us. Bread's direct acquisition pipeline remains strong. We continue to have positive dialogue with many card brand partners to enable Bread's digital offerings, and we are looking to align with their IT roadmaps and release timelines, which may take longer for larger merchants. Once scheduled, Bread's platform makes for a quick, seamless integration. I would highlight the recent signing of our current card partner, Blue Nile, one of the largest online jewelers with over 1.7 million customers now on Bread's payment platform. Moving to the distribution channel. As I mentioned on June 30th, we activated an e-commerce pilot with Fiserv and anticipated a select few early launches of Fiserv merchants onto the Bread platform during the second half of the year. We are excited about this opportunity and anticipate a full rollout in 2022. Finally, our platform capabilities with RBC continue to improve as we have a quality pipeline of new partner additions expected to launch in the fourth quarter prior to the holiday season. Moving to slide nine. In June, we released our 2020 Environmental, Social, and Governance Performance Report. I am proud of the progress we've made over the past three years, and we remain focused on the priorities that drive long-term success for our business and our stakeholders alike. Among the many accomplishments, I would highlight the results of our multi-year Board Refreshment Program and our human capital management, including our strong commitment to diversity, equity, and inclusion. Alliance Data's ESG strategy will continue to be central to the company's ongoing transformation, which prioritizes delivering long-term, sustainable stakeholder value, modernizing technology, advancing an inclusive culture, and managing our commitment to ethical decision-making. These priorities embedded in the company's cultural business practices and corporate governance ensure that we mitigate risk and remain competitive in the dynamic marketplace. Before I turn it over to Perry, I'd like to go back to slide eight and review the performance of Loyalty One, which includes Air Miles Reward Program in Canada and a Netherlands-based brand, Loyalty. As displayed in the graph on the right, air miles reward miles issued and redeemed improved in a quarter as flight bookings increased in anticipation of reduced travel restrictions in the back half of the year. At the same time, merchandise redemption remains strong. Average daily flight bookings are currently 10 times higher than we experienced in the first quarter, yet remain at 60% to 70% of the pre-pandemic level. So there is an expectation for further improvement as the recovery in Canada continues. Brand Loyalty's new program activity is improving with a strong pipeline of clients in the second half of 2021. Of course, we continue to closely monitor the COVID conditions throughout the world, including the rise of the Delta variant and the potential impact on the macroeconomic environment and our businesses. My apologies for being out of order. Now I'd like to turn it over to Perry Bieberman, our new CFO. Perry started with us on July 6th, and I am really happy to turn over the CFO duties to him. As you likely saw, Perry has over 33 years of experience in the card industry and card and banking industry and is a very welcome addition to our team.