Bread Financial Holdings, Inc.

Good morning and welcome to Alliance Data's fourth quarter full year 2021 earnings conference call. My name is Charlie and I will be coordinating your call today. At this time, all parties have been placed on listen-only mode. Following today's presentation, the floor will be open for questions. To register a question, please press start followed by one. It is now my pleasure to introduce Mr. Brian Vera, 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. Today on the call, we have Ralph Andretta, President and Chief Executive Officer of Alliance Data, and Perry Biegerman, 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. Before we begin with the slides, I would like to address the news last week regarding our contract with BJ's Wholesale Club. As you may be aware, a lawsuit was filed noting the non-renewal of the contract. While we cannot speak further about this matter on the call today, we firmly believe we are in compliance with the terms of our contractual agreement. What I can comment on is our steadfast commitment and track record of delivering the highest level of service and support to our valued brand partners, including operating responsibly and with the utmost integrity. Our leadership team has decades of industry experience and understands the importance of building trusted relationships with our partners and working together to drive long-term success for all of the parties involved. We will be highlighting our achievements on this call this morning as we look back over at 2021, a record year for new brand partner signings, successful renewals, and continued significant progress on our transformation. Regarding the BJ's non-renewal impact on our receivables growth and financial outlook, our forecast contemplates business activities including new brand partner wins not yet at announcement stage, thoughtful assumptions around our ongoing new business development pipeline and renewal probabilities, and expected but not yet announced non-renewal and portfolio optimization decisions like BJ's. We will maintain financial discipline in both signing new partners and renewing existing ones. As I said before, we will not chase unprofitable deals simply for the sake of growth. We remain committed to delivering responsible economics. With these factors and assumptions, we have clear visibility across our portfolio activity through 2023, underscoring our confidence in our outlook for continued growth. More importantly, we remain committed to our long-term financial target of $20 billion in average receivables for the full year of 2023. As the year progresses, I look forward to sharing updates regarding ongoing success, new brand partner wins, supporting the achievement of our goal. Now, moving to the slide deck, I will start on slide three. Slide three highlights just a few of the major accomplishments we achieved in 2021 as part of our business transformation. We made great strides in simplifying our business model, including completing the spinoff of Loyalty Ventures in the fourth quarter. The spinoff allowed us to strengthen our balance sheet by improving our capital ratios and reducing our leverage ratio, as well as enabling a sharper focus on our investments and future growth plans. The spin-off marks the culmination of a three-year strategy implemented by our board to simplify and streamline the company, the outcome of which is a stronger, more focused business profile with increased flexibility and sustainable growth potential. We continue to develop our full suite of lending products to provide consumers with a diverse set of payment options. For example, We had great success introducing our new proprietary card as it grew to 1 million cardholders and nearly $650 million in outstanding balances at the end of 2021. We project continued success with this product, which provides a diversified growth driver and helps balance our portfolio risks. Our diverse product set, including private label and co-brands, installment lending, and split pay, unlocks graduation and optimization strategies that increase the lifetime value of a customer for us and our brand partners. Product choice allows us to meet the needs of a wide variety of consumers in a way that increases conversion while allowing brands to manage the product mix and optimization profitability. We recently celebrated the one-year anniversary of the bread acquisition, which added buy now, pay later offerings, including digital installment lending and split pay products. These additions to our product set were instrumental at a time of increasing omnichannel focus by our partners and consumers, increasing digital payment preferences. Our versatile payments platform provides new opportunities to deepen our relationships, expand our total addressable market, and have provided a new strategic relationship with RBC, Fiserv, Wayfair, and Seville. These partners leverage our nimble and flexible fintech platform to expand and improve their customer experience while also offering greater payment choices to consumers. We will continue to strategically invest in our digital platform, product innovation, marketing efforts, and technology modernizations. with a planned incremental investment of over $125 million in 2022. Also, in 2022, we are scheduled to complete the conversion of our core processing system to Fiserv, which will allow us to be more nimble, manage risk effectively, and leverage new capabilities to drive both revenue opportunities and operating efficiencies. Last but not least, as highlighted in our environmental, social, and governance report, We have continued to refine and prioritize our ESG strategy with board-level oversight. We have an outstanding board of directors, which is aligned with and confident in the strategic direction of the company and is supportive of our ability to make disciplined financial decisions to drive long-term value for our stakeholders. Moving to slide four, I will highlight a few key updates for the quarter and full year. I am happy to announce that we exceeded our 2021 financial guidance, driven by stronger than expected revenue growth, thoughtful expense management, and positive credit performance. We are well positioned to build on this momentum in 2022. Consumer activity remains strong with credit sales up 15% in the fourth quarter from the prior year period. Our beauty and jewelry verticals remain the front runners with holiday sales up more than 30% in each category. We saw particular improvement among millennials and Gen Z with spending and transaction activity during the holiday season exceeding pre-pandemic levels. While diverse purchasing options across all channels is important to our brand partners, we did see a notable year-over-year increase in in-store transactions in the fourth quarter. As previously discussed, our business development pipeline remains robust And you are seeing the results in our announced new signings and renewals during the quarter. Moving to slide five, I will highlight a few of these names. We signed several large partners, several large new brand partners in the fourth quarter, including the National Football League, with its tens of millions of fans and their 32 affiliated club shops located at their stadium. Michael. the nation's largest retailer of arts and crafts materials with over 1,000 stores across 49 states. B&H Photo, which went live last week and is one of the world's largest independent retailers of photo, video, audio, computer, and creative technology equipment with nearly 50 years in the business. And finally, TBC Corporation, one of North America's largest marketers of tire repair and automotive services, delivered through a multi-channel strategy for over 65 years. TPC has more than 3,000 franchising company-operated tire and automotive service centers under brands like National Tire and Battery, Big O, and Midas. We look forward to working with these new partners to drive incremental sales growth and customer loyalty to our comprehensive product suite and exceptional customer service. These new partners are prime examples of our ongoing vertical diversification efforts, and we continue to actively add new brand partners, which we will announce in the coming months. This morning, we announced the early renewal of a long-term agreement with Ulta Beauty, a top millennial brand and one of our largest and fastest-growing brand partners, selling over 25,000 products at more than 1,300 stores and on Ulta.com. The Ultimate Rewards credit card is designed to enhance the benefits of Ulta's loyalty program and increase engagement and spend among the 36 million loyalty members. Importantly, this renewal will reinforce our industry-leading position in the beauty vertical. We have a demonstrated track record of growth that was important to Ulta for our continued relationship. Our breadth of lending products provides customer choice, increases top of the funnel conversion, while allowing Ulta to optimize the product mix for lifetime customer value. We have also renewed our relationship with Toyota, a preferred Gen Z brand, and Lexus, which further extends the growth of our diversified portfolios. With these renewals, nearly 90% of our year-end receivable balances, excluding BJs, are now under contract through 2023. This clarity should provide additional confidence on our long-term receivables outlook and overall growth potential. Additionally, we continue to successfully add new online merchants through our direct acquisition platform channels, doubling new merchant additions in the fourth quarter compared to the third quarter. This success provides additional merchant diversification, and it's another source of our ongoing growth. A select few of the partners added to the platform are displayed on the right side of the slide. Also, our strategic partnerships continue to progress with new merchant additions to the RBC platform as well as to the Fiserv platform pilot in the fourth quarter. We will be better positioned to provide additional details on the platform activities for Fiserv as we move from pilot stage to a full rollout and for Sezzle and Wayfair following our expected launch in the first half of 2022. We continue to monitor the changing buy now, pay later landscape, particularly in split pay or pay in four environment. As with any business, the consumer, economic, competitive, and regulatory landscape is continuously changing. However, the vast majority of our platform, businesses, and pipeline opportunities are aligned with our digital installment lending product, where the returns and growth opportunities remain strong. We will remain responsible and disciplined when adding new partners to ensure we are receiving acceptable lifetime customer returns. We remain the only provider who is primarily focused on deeply integrating with merchants and partners, allowing the customer to stay on the merchant's site throughout the shopping journey, rather than being directed to a third party site or app. This is an important distinction. As many third party sites promote multiple merchant offers, and their number one priority is having their app downloaded so they can become the entry point of the shopping journey. This ultimately disintermediates the merchant. Our number one priority is sales conversion for our brand partners. We've launched bank-compliant products that follow regulatory guidance, have strong underwriting discipline, lower-cost funding, and industry experience that gives us confidence in making the appropriate responsible decisions to drive long-term shareholder growth. Finally, I am confident that with a full spectrum of lending products, we can compete, win, and drive growth with any size partner or merchant, from large brands like Victoria's Secret, Signet, and Ulta to smaller merchants. Our ability to drive strong results for our many brand partners has been and will continue to be the key to our success. I'll now turn it over to our CFO, Perry Bieberman, to review the financials and our outlook for 2022. Perry? Thanks, Ralph. As a result of the Loyalty Venture spinoff, our income statement and balance sheet have been recast with the Loyalty One segment and spin-related items reflected as discontinued operations. As you can see on slide six, this impacted net income for the quarter by $44 million, which was primarily comprised of related transaction costs, the release of a net investment hedge, and allocated interest expense. The remainder of the slides will focus on the continuing operations portion of the business. Slide 7 provides our fourth quarter highlights. Credit sales were up 15% year-over-year to $8.8 billion as consumer spending continued to recover. Average receivables were up 2%, driven by strong credit sales and the recovering economy, providing for year-over-year momentum as we enter 2022. Revenue for the quarter was $855 million, and income from continuing operations was $61 million. Revenue increased 11% year over year, while total non-interest expenses declined 12%. The looted EPS from continuing operations of $1.21 was impacted by a higher provision for credit losses primarily due to provision build of $187 million for continued portfolio growth and the seasonal increase in year-end receivables. Credit metrics remain strong with net loss and delinquency rates of 4.4% and 3.9% respectively for the quarter. Moving to slide eight. Slide eight highlights the key financial metrics for the full year. Credit sales were up 20% year-over-year to $29.6 billion. Revenue for the year was $3.3 billion and income from continuing operations was $797 million. Revenue was nearly flat year-over-year while total non-interest expenses declined 3%. Diluted EPS from continuing operations of $15.95 improved driven by a lower provision for credit losses due to lower credit losses and a lower reserve rate at year end. Our net loss rate was 4.6 percent for the year, remaining well below our historical average. Turning to slide nine. As part of our ongoing efforts to provide additional transparency and comparability in our reporting, we have transitioned our financial reporting to more closely align with the presentation of traditional bank holding companies. Looking at the fourth quarter financials, total interest income was up 7% from the previous year, attributed to higher average receivable balances and improved loan yields. Total interest expense improved 24% due to continued improvement in our cost of funds, which you can see on the following slide. Non-interest income, which primarily includes merchant discount fees and interchange revenue, net of the impact from our share agreements and customer awards, declined slightly in the quarter, driven by higher credit sales activity. Total non-interest expenses declined 12% year-over-year in the fourth quarter, largely due to one-time $48 million real estate optimization activities in the fourth quarter of 2020. partially offset by a 15% increase in employee compensation and benefits costs in 2021. The increase in employee costs were driven primarily by continued digital and technology modernization related hiring, as well as higher volume related staffing levels. We have provided additional details on a new expense driver slide in the appendix of the slide deck. Overall income from continuing operations was down 18% for the quarter driven by a provision bill of $187 million this quarter versus a relief of $82 million in the fourth quarter of 2020, while pre-tax, pre-provision earnings, or PPNR, improved 52% year-over-year, as you can see on the graph to the right of the page. We are pleased with the PPNR growth over the last three quarters and expect this momentum of year-over-year PPNR growth to continue into 2022 as we profitably grow our portfolio and improve our efficiency. Turning to slide 10. As part of our updated financial presentation and quarterly disclosures, we are providing increased transparency into the components of our net interest margin, or NIM. The left side of the slide highlights our earning asset yields and balances. Fourth quarter loan yields came in stronger than we had expected in October as consumer payment behavior begins to gradually move back towards pre-pandemic levels. excluding the impact of Fed rate increases, we expect loan yield to remain fairly steady this year as the benefit from payment normalization is offset by continued growth of our co-brand and proprietary products. On the liability side, we continue to benefit from the maturity of our longer-dated funding as new balances are added at current lower rates. As you can see from the stacked bars on the bottom right, our direct-to-consumer deposits have grown from 6% of our average interest-bearing liabilities in the first quarter of 2020 to 18% this last quarter. As this growth continues, we anticipate our cost of funds continuing to improve in the first quarter. However, once interest rates begin to rise, the benefits from lower cost of funds will reduce. Overall, rate increases will be nominally accretive to the net interest margin as variable priced assets slightly offset increases in funding costs. Moving to slide 11. I will start in the upper left. Our delinquency rate increased 10 basis points versus the previous quarter due to normal seasonal trends. On a year-over-year basis, the delinquency rate was down 50 basis points. On the upper right, You can see that we had a loss rate of 4.4% for the quarter, still well below historical averages. Turning to the bottom left of the page, our allowance increased sequentially due to seasonal balances. The overall reserve rate remained steady at 10.5%. We anticipate that the reserve rate will stay in this range until greater economic certainty emerges. Lastly, On the bottom right-hand side of the page, our revolving credit risk distribution was consistent with the third quarter. Our risk mix and associated delinquency and losses are the result of our ongoing thoughtful management of our book, as well as the strong payment rates indicative of the general health of the consumer. We expect these rates will begin to trend back towards historical averages in 2022 as COVID-related federal stimulus programs wind down. Slide 12 provides our financial outlook for full year 2022. We remain optimistic for a steady normalization of both economic activity and consumer behavior, and we remain vigilant in monitoring COVID conditions and the impact on consumers and our brand partners. Our outlook assumes a moderation in consumer payments throughout 2022, with payment rate volatility leading to the ranges provided. Four Fed rate increases are included in our 2022 outlook, with our models indicating that these rate hikes would result in a nominal benefit to total net interest income in 2022. Our full-year average receivables are expected to grow high single to low double digits as continued sales momentum, net brand partner addition, and direct-to-consumer products will drive strong growth. we expect year-end 2022 year-over-year receivables growth to be slightly stronger than our average receivables growth. As Rob said, our previously provided outlook contemplated the BJA's non-renewal. Timing of the BJA's relationship wind down will likely cause some quarterly volatility within our forecast, but that does not have an impact on our long-term outlook of $20 billion in average receivables for the full year of 2023. We expect revenue growth to be aligned with average receivables growth in 2022. Net interest income growth is expected to be slightly favorable to average receivables growth, as our NIM benefits from lower funding costs earlier in the year. This change in year-over-year non-interest income is anticipated to offset the slight favorability in net interest income. Note that, conservatively, our guidance does not include any potential impact from the monetization of our 19 equity stake in loyalty ventures or any potential gains from portfolio sales we are targeting modest full-year positive operating leverage in 2022 as ralph already mentioned we plan for incremental strategic investment over 125 million dollars in technology modernization digital advancement marketing, product innovation to fuel growth opportunities and future operating efficiencies. A large portion of the investment is expected in employee expense as we continue to hire digital engineers and data scientists to drive our continued business transformation. We also plan for higher marketing expenses in 2022 as a result of portfolio growth, new partnerships, and new products. information processing costs will increase as a result of our ongoing technology modernization, including the conversion of our core processing to Fiserv this year. Our strategic investments will be thoughtfully balanced with our revenue growth outlook. We're making investments now to stay ahead from a technology perspective in today's dynamic environment. Regarding our net loss rate, both loss and delinquency rates were historical lows in 2021. we expect credit metrics to begin to gradually normalize throughout 2022. We anticipate that the full-year 2022 loss rate will remain in the low to mid 5% range, still well below historical averages. As we discussed at our investor event last year, our disciplined portfolio and partner management focus on risk-reward trade-off enabled us to drive profitability and growth even at slightly higher loss rates. I would also reiterate our confidence in our long-term outlook on average through the cycle net loss rate below our historical average of 6%. Overall, we are excited for the opportunities in front of us for 2022. We're making thoughtful investments and decisions to ensure we're driving long-term value creation for our shareholders. Operator, We are now ready to open up the lines for questions.