Bread Financial Holdings, Inc.

Good morning, and welcome to Bread Financial's first quarter 2022 earnings conference call. My name is Victoria, and I'll be calling to 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 your questions. To register a question, press Start, followed by 1. It is now my pleasure to introduce Mr. Brian Verup, Head of Investor Relations at Bread Financial. Sir, the floor is yours.

Thank you. Copy of the slides we will be reviewing and the 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 Bread Financial and Perry Beaverman, Executive Vice President and Chief Financial Officer of Bread Financial. 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 FTC. Bread Financial 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 breadfinancial.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. Starting on slide three, we are excited to display our new logos and company name, Bread Financial. Our rebrand reflects the company's transformation to a tech-forward financial services company providing simple, personalized payment, lending, and saving solutions. After a multi-year corporate transformation, Bread Financial has emerged as a more modern, nimble, and streamlined company backed by technology and platform solutions that empower today's consumer. We will continue to build on our 30-year legacy of creating value for our brand partners, and as we transform, we will continue to invest in data and analytics, innovative technology, and digital capabilities. The Bread Financial brand will be prominently used with our core offerings including our private label and co-brand products with our brand partners. The Bread Cashback brand is used for our newly released direct-to-consumer Bread Cashback American Express credit card, which I will discuss in more detail in a moment. Bread Pay represents the payment and lending offerings on a versatile FinTech platform, which includes our Buy Now, Pay Later solutions and our strategic relationships with Fiserv, RBC, and Settle. The Bread Savings brand reflects the rebranding of our community direct consumer savings, providing high yield savings accounts and consumer certificates of deposit. Our new brands and offerings underscore our focus on delivering full spectrum innovative payment lending and saving solutions that customers need at every stage of their financial journeys. Slide four highlights our ongoing business transformation progress. We continue to develop our suite of lending products to provide consumers with a diverse set of payment options. Our product set, including private label, co-brand, and proprietary cards, installment lending, and split pay, unlocks graduation and optimization strategies that increase the lifetime value of a customer. Our variety of product offerings allow us to meet the needs of a diverse consumer base in a way that increases conversion while also allowing our brand partners to manage the product mix and optimize profitability. We continue to strategically invest in our digital platform, product innovation, marketing efforts, and technology modernization with our 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 and leverage new capabilities to drive both revenue opportunities and operating efficiencies. Our capital ratios continue to improve as a result of growing retained earnings, providing flexibility to continue to support our possible growth and improve our ratios over time. 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 that is focused on supporting our ability to make disciplined financial decisions to drive long term value for our stakeholders. At the bottom of the slide, we listed our key foundational elements, proactive risk management, prudent balance sheet management, and disciplined expense management. These three elements guide our strategic decision making as they are critical to creating sustainable long-term value for our stakeholders. Moving to slide five, I will highlight a few key updates from the quarter. We continue to make progress towards our long-term financial goals driven by our focus on responsible, profitable growth. In the first quarter, consumer activity remained strong, with credit sales up 14% from the first quarter of 2021, with particular strength from our beauty vertical and co-brand and proprietary travel and entertainment sales. Co-brand and proprietary sales now make up over 50% of our sales. Our loan growth balance continues to accelerate on a year-over-year basis, with end of period loans up 8%. We remain optimistic on continued growth with a robust business development pipeline, increasing engagement with existing brand partners, and the expansion of our brand financial direct to consumer offerings. Looking at the business environment, we are closely monitoring macro and geographical conditions, including longer term effects of persistent inflation, rising interest rates, and recessionary risks. However, our consumers' financial health remains incredibly resilient, buoyed by historically low unemployment, robust job offerings, and rising wages. We proactively scrutinize the performance of our cardholders across the credit risk spectrum, with special emphasis on performance by income and within our products. As expected, coming off 20-year lows, we are seeing some normalization materialize in risk and delinquency. That said, our cardholder's performance in the first quarter and into April continues to show both strong payment rates and strong spending. Given the nature of the macro risk, we especially focus on near prime and lower income cardholders. Here as well, we are seeing good payment rates, lower non-payment rates than pre-COVID, and healthier spending across discretionary needs, and needs-based spending categories. In short, we remain optimistic that the consumer demand will remain strong in 2022. And year to date, our results are slightly better than our expectations. While we are optimistic about the outlook in 2022, we will manage our risk strategies with real-time analytics, making adjustments as necessary in this dynamic environment. We are fortunate to have built a leadership team of industry veterans who have successfully managed through cycles and changing market conditions. As you would expect, we have a recessionary readiness playbook and will remain proactive in our approach. As part of our transformation, we have changed the underlying credit risk profile of our portfolio. We are a more balanced company with over one-third of our loans now on co-brand or proprietary cards, which more often than not come with a better consumer credit profile. As a result of our disciplined risk management approach and a more balanced product mix, our credit risk mix distribution has improved from where it was before the pandemic. Moving to slide six, I will highlight some of our business development activities and our new 2% cashback credit card. Earlier this month, we successfully launched the Bread Cashback American Express card. The Bread Cash Back Card offers industry-leading benefits and complements our existing suite of financial products as we continue to ensure our customers have access to robust solutions to serve their payment and savings needs at all stages of their financial lives. Cardholders receive unlimited 2% cash back, no annual or foreign transaction fees, and access to dining, travel, and entertainment offers. as well as a comprehensive purchase identity and travel protections. In particular, this proprietary card provides additional opportunity to drive acquisition and growth with an appealing value proposition, especially within the millennial and Gen Z consumer base, while providing further product mix diversification for our overall portfolio. Our plans include increased marketing investment, for the remainder of this year and into 2023 to drive profitable growth and adoption. Early feedback on this card has been positive, with consumers noting the simplicity of the instant mobile acquisition process and wallet provisioning. With our modernized response pre-fill application experience, customers go from application to tokenized card with their digital wallet in approximately 30 seconds. Also during the quarter, we announced the early renewal of our long-term agreement with Victoria's Secret, our largest and longest tenured brand partner with nearly 1,400 stores. As part of this renewal, we launched a new co-brand credit card. The new Victoria's Secret MasterCard complements the existing Victoria's Secret private label credit card, offering compelling rewards for purchases both at Victoria's Secret and anywhere card members shop. This car uses tap-to-pay technology, is compatible with all digital wallet, and offers increased anti-fraud security. We also renewed our relationship with Lending Club, which further extends the growth of our diversified verticals. With these new renewals, over 90% of our loan balances, excluding BJ's, are now secured through 2023, and nearly 75% through 2025. Building on our recent new business development success, we launched a pilot for a new Harley-Davidson private label credit card to provide promotional finance plans for general merchandise, parts and accessories, services, and more through participating Harley-Davidson dealers. Additionally, we continue to add new online brand partners on our Bread Pay platform, and we introduced our in-store checkout pilot with Fiserv on their Clover app. We are pleased to be awarded the FinTech Breakthrough Award for Best Consumer Payments Platform for our versatile Bread Paid platform. We continue to execute on our strategy and we are seeing the results of the team's dedicated work and focus. For example, last week we launched our NFL card with its tens of millions of fans just in time for today's draft. And Wayfair is now live on our Bread Paid platform. I will now turn it over to our CFO, Perry Biberman, to review the financials.

Thanks, Pharrell. As a result of the loyalty venture spinoff in late 2021, our income statement and balance sheet have been recast with the loyalty one segment and spin related items reflected in discontinued operations. As you can see on slide seven, this impacted net income for the first quarter of 2021 by 18 million, affecting year over year comparisons. The remainder of the slides will focus on the continuing operation portion of the business. Slide eight provides our first quarter highlights for continuing operations. Bread financial credit sales were 14% year over year to 6.9 billion as consumer spending remained strong with double digit growth. Average loans were 5% driven by continued strong credit sales growth and the economy recovering from pandemic related disruptions. Tad Piper- Revenue for the quarter was $921 million and net income from continuing operations was $211 million revenue increase 15% versus the first quarter of 2021 while total non interest expenses increased 6% diluted EPS from continuing operations with $4 and 21 cents. Credit metrics remain strong with delinquency and net loss rates of 4.1 and 4.8% respectively for the quarter. Moving to slide nine. Look at the first quarter financials in more detail. Total interest income was up 13% from 1Q21 attributed to higher average loan balances and improved loan yields. Total interest expense improved 26% due to continued lower 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 35 million in the quarter, driven by higher credit sales activity. Total non-interest expenses increased 6% from the first quarter of 2021, largely due to increased employee compensation and benefits costs as we continue to invest in digital talent and technology modernization, as well as higher volume-related staffing levels. Partially offsetting these increases, marketing expense was down 27% year-over-year, reflecting the timing of marketing spend. Additional details on expense drivers can be found in the appendix of this slide deck. Overall, income from continued operations was down 21% for the quarter, driven by a provision expense of $193 million this quarter versus $33 million in the first quarter of 2021, While pre-tax, pre-provision earnings, or PPNR, improved 24% 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 four quarters and expect this momentum of year-over-year PPNR growth to continue through 2022 as we profitably grow our portfolio and improve our efficiency. Turning to slide 10. The left side of the slide highlights our earning asset yields and balances. First quarter loan yield improved as consumer payment behavior gradually moves back towards pre-pandemic levels. NIM improves sequentially as a result of the higher asset yields and improved funding costs. We would expect NIM to be slightly lower in the second quarter following normal seasonal trends. On the liabilities side, we continued to benefit from the maturity of our longer dated funding as new balances were added at 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 19% this quarter. With our assumption of continued Fed rate hikes in the second quarter, we anticipate that our cost of total interest bearing liabilities will begin to increase from the first quarter. As noted last quarter, we expect the improvement in our variable priced loan yields will more than offset the increase in funding costs as the Fed raises rates. Moving to slide 11, I will start in the upper left. Our delinquency rate increased approximately 20 basis points sequentially and was up approximately 30 basis points versus the first quarter of 2021, which is consistent with the gradual normalization of payment rates. On the upper right, you can see that we had a loss rate of 4.8% for the quarter, still well below historical averages and slightly better than our expected rate. Turning to the bottom left of the page, our allowance balance remained relatively flat quarter over quarter. The overall reserve rate increased to 10.8% as seasonality impacted our quarter and loan balances versus the end of 2021 balance. Consistent with past comments, we anticipate that the reserve rate will stay in this range until there's more clarity on economic uncertainties. Lastly, on the bottom right-hand side of the page, our revolving credit risk distribution remains in line with our expectations as the temporary impact of government stimulus abated in the quarter. Our improved risk mix versus pre-pandemic levels and associated delinquency and losses are the result of our ongoing thoughtful management of our book and more balanced product mix. Slide 12 provides our financial outlook for full year 2022. Our outlook assumes a continued gradual moderation in consumer payments throughout 2022. We expect Fed rate increases during the year to result in a nominal benefit to total net interest income. Our full year average loans are now expected to grow low double digits relative to 2021, up from our previous guidance of high single to low double digits. We expect year-end 2022 year-over-year loan growth to be stronger than our average loan growth, given the success of our new business activities. This outlook includes new signings, both announced and unannounced, which are expected to add greater than $2 billion of incremental year-end loan balances. We expect revenue growth to be consistent with average loan growth in 2022 with potential upside from improved net interest margin. Note that conservatively, our 2022 guidance does not include any potential revenue from the divestiture of our interest in LVI. We expect the sale of the BJ's portfolio to occur in the middle of the first quarter of 2023. We are targeting modest full year positive operating leverage in 2022. While the first quarter was strong at 9%, we expect increasing investment expenses throughout the remainder of the year, which will bring our full year operating leverage down to a more modest level. As we've previously discussed, our outlook includes incremental strategic investments over $125 million in technology modernization, digital advancement, marketing, and 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 direct-to-consumer bread financial 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. As Ralph mentioned earlier, this conversion will result in both expense and revenue synergies in 2023 and beyond. We expect total expenses will increase sequentially each quarter throughout 2022 as our business grows and we continue to invest and add talent. We are making investments now to stay ahead from a technology perspective in today's dynamic environment. Regarding our net loss rate outlook, both loss and delinquency rates were at historical lows in 2021. We expect credit metrics to begin to gradually normalize throughout 2022. We continue to anticipate that the full year 2022 loss rate will be 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 focused on risk-reward trade-offs enables us to drive profitability and growth for us and our partners even at slightly higher loss rates. I would also reiterate our confidence in our long term outlook of a through the cycle average net loss rate below our historical average of 6%. We expect our full year effective tax rate to be in the range of 25 to 26% with quarter over quarter noise due to timing of various discrete items. Overall, we are pleased with our first quarter results and are excited for the opportunities in front of us for the remainder of 2022. We're making thoughtful investments and decisions to ensure we're driving the long-term value creation for our shareholders. Operator, we're now ready to open up the lines for questions.

Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask a question, please ensure that your phone is unmuted locally. And our first question comes from Sanjay Sankari from KBW. Please go ahead. Your line is open.

Thanks. Good morning. Ralph, you mentioned, you know, you and your team have been around for quite some time and through a number of cycles, and you have a playbook. It's, in fact... the consensus is sort of right that there's going to be economic weakness. I'm just curious if you can sort of let us in on some of the data points that you and your team are looking at in terms of gauging, you know, consumer and the health and then sort of what the playbook would actually be if, in fact, we're headed in that direction because you guys are, you know, seeing pretty good growth right now.

Yeah. Hey, Sanjay. First, good morning and thanks for the question. We look at all the normal data points you would look at, so payment rate we look at, ability to pay, we look at are people paying in full, are they paying partial, are they paying min due? All those data points indicate is there still some growth in the economy or health in the economy? We also look at are people's Vantage or FICO scores changing? Are they going up and down the scale? You know, are we seeing missed payments other places? So those are the things we typically look at. You know, our playbook is, as you said, you know, we've got a lot of veterans here. And, you know, we look at, you know, should we decrease credit lines on the margin? Should we change some of our underwriting criteria with our partners? Those are the typical things we look at and typical things we would, you know, do if there was a downturn in the economy.

And, Sanjay, I'd add to what Ralph just said. The one thing to remember is that we've kept our buy box actually a little tighter than where we were pre-pandemic. So, you know, what we did pre-pandemic, you know, we've tightened up a little bit, but, you know, we'll move swiftly if we see any deterioration in any of the cohorts that Ralph mentioned. Okay.

Very helpful. I would tell you, Sanjay, everything, you know, everything's looking good right now. And as I said, we're, you know, I think where we expected to be probably a bit better.

Yep. Okay. That's good to hear. I guess I'll question more on the regulatory side. Obviously, there's a lot more chatter on late fees and other stuff, right? And I'm just curious how you're engaging with the regulators, sort of how you guys feel about some of the conjecture out there. Thanks.

Yeah. You know, Sanjay, I've been in this industry 30 years, and one of the things that remains constant is there's change. So that's pretty much what you can count on. Again, I lean on the veterans I have here and the leadership we have that have managed through regulatory change, particularly CART Act. We adapted to those changes in CART Act. We have a good relationship with our regulators. We intend to lean in on any changes of regulation as we did with CART Act, as the industry has done. And we continue to diversify our portfolio. So, you know, whatever come what may, we'll, you know, we've got the team to address it and move on from it.

All right. Great. Thank you.

Thanks, Ajay.

Perfect. Thank you for your question. Our second question comes from Jeff Anderson from Morgan Stanley. Please go ahead.

Morning, Jeff. Hey, good morning. Good morning, Ralph. Good morning, Perry. Good morning. Just wanted to follow up on the reserve rate. I mean, you guys have now been talking for a few quarters about keeping this more elevated. You're now, I think, 150 bips above your day one. Your book is more prime than it's ever been. Credit seems to be exceeding your expectations. So, you know, what's it going to take before you maybe change your stance, especially in a world where the geopolitical situation keeps dragging on, but maybe your credit profile is not deteriorating in the way that the macro might suggest.

Yeah. So Jeff, thanks for the question. And it's a fair question. So what I tell you is our reserve balance was essentially flat this quarter. You know, the rate then ticked up a little bit, but the reserve was down a few million dollars and that was largely due to the seasonal holiday balances and it came down. You know, there's still a lot of uncertainty out there to your point around geopolitical inflation. As I think about it, our core model, probably the rate would have come down, but then through qualitative overlays and the judgment, like you mentioned, that degree of uncertainty, what's happened with inflation and what that means, just to keep a conservative posture for this quarter, I would expect as more certainty becomes known that that rate would then be able to come down. As we said, steady, I'd say towards the back half of last year is probably what it would look like towards the back half of this year. But again, we'll accept it every quarter.

Got it. That's helpful. And just switching gears to the, you know, your rate profile. Sounds like you're talking about some modest benefit, even as the Fed's hiking right here. But just wanted to better understand your funding needs and how you're thinking about deposit data. Seems like you just increased your, online rate to one percent recently um and i think you had your deposit balances shrink this quarter you're still running it around you know 60 of your funding coming from deposits only like 18 coming from direct to consumer maybe just help us understand how you're thinking about your your deposit needs this time around your funding needs whether you need to be a leader um already at one percent yeah i think as i as i mentioned in the comments and you know i'll reiterate

is that for us, our funding is going to be continuing more direct to consumer deposits, and that will be market rate driven. So as rates go up, we'll be right there moving up with them. So just to your point, that will have a higher beta. As we think about what the overall impact of Fed rate increases means to the company, we have a higher proportion of variable priced assets that go up with those increases that more than offset the increases in our funding costs. So we've modeled a whole bunch of scenarios from six to 10 and beyond of Fed rate increases. And I'll tell you, even up to 10 or more, we are slightly accretive.

Got it. Thanks for taking my questions.

Thank you for your question, Bob. Our next question comes from Bob Napoli from William Blair. Please go ahead. Your line is open.

Thank you. Good morning. The American Express partnership seems like a significant move towards a higher-end customer base, maybe. Just any thoughts on that relationship and, you know, ADS or bread moving towards a higher you know, somewhat, you know, in a mix or a balanced portfolio, maybe a heavier weighting on some higher-end consumers. I mean, it seems like a very competitive area as well.

Yeah. Hey, Bob, it's Ralph. It is a competitive area, an area I've been competing in for a number of years. That's why I have a lot of faith in this 2% cash card, no questions asked, 2% across the board. You know, it's simple. It's easy to understand. and it rewards people for their spend. I see this as an opportunity to expand our consumer base to Gen Z and millennials and to be more inclusive on the American Express network. So to me, it's not about just getting the high end. It's really casting a wider net, particularly in the Gen Z and millennial populations.

Thank you. Then on your buy now, pay later business, if you would, what is the confidence level that you have today in the profit model on that business. The industry is still in flux and I think still being determined on how this model really works between merchant discount and credit risk and things like that. Just your thoughts on the confidence in the profit model generating attractive returns and your competitive position.

Hey, Bob, let me start and then I'll make sure Perry has his say here. You know, for me, you've got to look at that platform, the buy now, pay later, in two distinct forms. One is that pay in four, which I think there's considerable pricing pressure and competition. And the other part is installment loan. And I think the installment loan part is where there's whether it's good profitability and how we balance those two and how we go to market is important. So, you know, on buy now, pay later, the pay in four, there's some irrational behavior in terms of signing bonuses just to get volume. We're not going to do that because there's no economic value to that. But an installment loan, like we just, you know, with the announcement of Wayfair and others that we have, we think there's real economic and long-term value there.

Great.

And your competitive position in that space versus... You know, we've got a, you know, we've got, you know, we're an award winner to start. And, you know, I think our product is coming along. And, you know, we've got partnerships with Sezzle, particularly on the installment loan side, which gives us a lot of scalability with their merchant base. So I feel our competitive position is really strong when it comes to that particular, you know, to that platform. Don't forget that you have to... You have to underwrite well. You have to collect well. There's a credit cycle. So we've been doing that for a number of years. We have industry veterans here. So I feel not only do we have a really good platform that's humming, we have the strength of this team to execute on that platform. That's really important as well. Thank you.

Thank you for your question. Our next question comes from Mihir Bhatia from Bank of America. Please go ahead.

Hi, this is Nathaniel from Mihir's Line. So the company laid out targets before for bread pay to get to $10 billion of GMV by 2023. Could you talk about your confidence with that target currently and what it will take to get there and any of the performance of bread pay year to date?

Thanks, Nathaniel. You know, as I've said last quarter, you know, we're not targeting the $10 billion of GMV. A lot has changed from the time that happened. And what Ralph just talked about, irrational pricing in the marketplace, particularly around split pay, is we've said we're committed to our shareholders to drive responsible, profitable growth. And we weren't going to just chase that number for the heck of it. Again, as we've We know we can have responsible growth in the installment loan product in that side of buy now, pay later. So that aspect of the volume, we're not chasing volume just for volume's sake.

Got it. Thank you. And I know Sandra already asked a question on late fees, but since your portfolio and product mix has evolved throughout the year, could you guys remind us the percent of revenue that the company gets from late fees?

Yes, our late fees are embedded in our net interest income, and we do not disclose that amount.

Okay. Thanks for your questions.

Thank you for your question. Our next question comes from Bill Karach from Wolf Research. Please go ahead. Your line is open.

Thank you. Good morning. I wanted to follow up, Perry, if you could please frame the pace of payment rate normalization that you saw this quarter relative to the pace of the credit normalization. It seems crystal clear that you expect credit to certainly normalize but be better than historical levels. And so we're seeing that normalization and all that is in the context of you know, being sort of in line with your expectations, but you know, maybe what about the payment rate side?

Yeah. So good question. So payment rates, you know, still remain elevated compared to pre pandemic level. So again, I think about it, the health of the consumer is really good right now. And I know there's a lot of noise out in the marketplace around inflation, but when you look at the level of unemployment, as low as it is over 11 million, open jobs, high savings, wage growth. And if consumers want jobs, they're there to be had. And that's what the important part of when I think about past economic cycles, those were largely unemployment driven. This here, we've got a very strong economy. So payments are remaining strong. But what I would say is, you know, what was important to us, and you can see it start coming through in our loans and the revolve rate and finance charges, is payment rates are starting to come down a little bit from where they were. So this is the first quarter since the pandemic that our payment rates for the quarter are below last year. And so that's the sign that the normalization is occurring in tandem with delinquency increasing. So those two things work together is what drives really good profitability. Again, up to a point. So that's why we're carefully monitoring, as Ralph talked about earlier. And we've got playbooks in case things weaken. But right now, we're not seeing that. The consumer is really strong, and normalization is happening, and actually it's happening, I'll tell you, a little better than what we had anticipated. So we're very encouraged right now. But monitoring carefully, as you expect.

Yeah. Yeah, and I'm going to say a little bit better than you were expecting on both the credit and payment rate side. Yes. Yes. Okay, got it. And then separately, given the growth that you're seeing and the partnerships that you're announcing, is it reasonable to conclude you're still on track to reach your 2023 receivables target of $20 billion?

Definitely on track. Again, that's assuming the economy holds up and nothing crazy happens. Right now, we've got a robust pipeline. You've now seen the launch of our proprietary product, and I think as you look for us to lean in, on some of those opportunities that we are well on track to hit that number, you know, all else being with a, you know, I'll say a friendly economic environment that we don't have any dramatic pullbacks, which we don't anticipate at this point.

Understood. Thank you for taking my question.

Thank you, Bill, for your question. Our next question comes from David Shaw from J.P. Morgan Securities. Please go ahead. Your line is open.

Great. Good morning. Thanks for taking my questions. Ralph, I wanted to switch a little to just sort of the competitive and renewal environment because, you know, it looks like on the heels of, you know, the last 12, 18 months, you know, some headlines related to some takeaways, you know, like Wayfair or Williams-Sonoma, you know, you've managed to renew, you know, some of your biggest contracts, BS, fastest growing, Alta. You know, as you reflect on sort of that 25% of balances that are up, I guess, through 2025, you know, compared to, I guess, 12 months ago, are you feeling like renewal terms have changed much? Are you going to become more competitive? Do you feel better about, you know, the outlook? Maybe just some context around, you know, what you're seeing in terms of potential renewals and takeaways. Sure.

Yeah, so let me just take a step back. You know, 2021 was the best year we ever had in terms of signings and renewals. I think if memory serves, we went 20-1, you know, if you combine renewals and signings and obviously the loss of BJs. But so I think we've certainly demonstrated to the marketplace that we can play up and down the scale. We can play with the big guys and bring on those small and mid-term players mid-sized companies and grow with them. What I think has changed for us is that we now work with our partners and demonstrate to them that we have better capabilities than we have ever had, that we're using data and analytics to grow the pie, not give them a bigger piece of our pie, not take a hit on our economics, but grow the pie for both our partner and ourselves. And we've done a lot in terms of building better relationships with seasoned veterans and people that know how to work that we're partners with. So for the first time in the long term, we're working with not just a marketing organization, but the technology organization to deliver technology solutions. We're working with the CFO team to demonstrate to them that were driving incremental benefit by going deeper into their book. So it's been a lot. It's not just been we're going to just throw more economics. It's been the right economics, the right team, the right capabilities, and approaching them at the right time. I think all of those have really helped us renew some of our bigger partners and attracting partners like the NFL to the franchise.

got it got it no it seems like obviously an impressive track record last year and maybe just as a follow-up you know particularly on the heels of you know last quarter renewing Alta you know it's been a while since we've I think gotten an updated you know mix of the portfolio by verticals and you know just broadly speaking you know it you know how should we think about it now with respect to you know the concentration and areas like health and beauty, which tend to be a little more recession and even pandemic proof versus more, you know, highly sensitive verticals like T&E. I mean, you know, based on both kind of the renewal profile, the pipeline, as well as the general, you know, purpose component, you know, is this looking like... Go ahead.

Yeah, you know, I think we've done a couple of things, you know, we've done a couple of things over the last couple of years. One is that, David, as we've certainly diversified our portfolio. So if you think about where we were two years ago, we didn't have a proprietary card. We have two now. We have the Comenity card, which has over a million customers, good spend, and driving a good loan growth. And again, we've just introduced the American Swift 2% cash card. But during that period of time, we've also increased our verticals. So, you know, right now, you know, we've really shifted. In terms of beauty, we are the industry leader. If you look at our partners like Ulta and Sephora, we're the industry leaders in that specialty apparel. I'm sorry, in beauty. We've shifted from that, you know, kind of mall-based specialty apparel. I think it's less than a quarter of our... number now. So we feel really good about that jewelry and it's another one of the verticals that we feel that we are pretty dominant in and have a good market share. So not only have we diversified our portfolio in terms of product, we've diversified it in terms of verticals as well. And we'll continue to do that. And as we add more digital type partners, those verticals tend to diversify as well. you know, we feel good about, you know, the distribution we have today.

Got it. Great. Thank you very much.

Thank you so much for your question. Our next question comes from Michael Young from Truist Financial. Please go ahead.

Hey, thanks for taking the question. I wanted to kind of follow up just on the expense outlook. I understand the commitment to positive operating leverage, but If you were to see kind of that recession scenario play out, what areas kind of would you go to to trim expenses if revenue were a bit weaker? And then as a follow-up, just wanted to get some comments on hiring. A lot of people are seeing higher hiring costs, particularly in the data and analytics space. So any outlook there would be helpful. Thanks.

Yeah, let me take that second part of your question first, and then I'm going to turn it over to Perry to talk about the levers we have. I think the hiring and data analytics and engineers and technology, I consider those investments that are well worth it because they deliver data and information and enhancements to our platform, which enables us to do what we just talked about, diversify the platform, go after millennials and Gen Z. So to me, even though there's a demand for them, those data and analytic resources, engineering resources that are highly sought after, I consider those investments and will continue to make those because we see a payback for those investments. In terms of how we manage our expenses, I'll let Perry to kind of jump in here.

Yes, that's a good question, right? So your question is, again, we said we're trying to drive for positive operating leverage. And, you know, you can see from the first quarter, we paced our investments, making sure that the revenue came through, as you saw that came through very strong. So it allows us then to, you know, further commit to the plan that we have in place. But those investments are going to ramp up throughout the year. So therefore, if we don't see the revenue, or we need to invest more in another part of the business. We have levers to pull back and repace those investments. So we always have contingency plans on that, whether it's repacing the marketing investment, repacing technology project. So those are levers we can pull on. But the one thing, as Ralph said, and we're committed to, is we will not do anything to jeopardize the stability of our company or the long-term strategic direction in any given year. So we'll get clear guidance if we would not be able to achieve positive operating leverage in a given year as a result of our prudent investment. But right now, we are committed to that positive operating leverage.

Thank you, Michael.

Our next question comes from Meng Zhao from Deutsche Bank. Please go ahead.

Great. Good morning, guys. Thanks for taking my questions. I wanted to ask on your near prime customer basis, given your comments on sort of focusing on your prime and low income shareholders. But are you seeing any divergence on both sort of credit and spending with your customers that have differing vantage scores? And if there's sort of any normalization trends that are sort of sticking out?

You know, we have not. So their payment rate continues to be strong. uh and their spending continues to be strong and the you know the the non-payers or zero payers uh is well below the pandemic pre-pandemic levels so we've not seen them uh you know we've we've not seen them deteriorate uh you know as at all that's it okay um and then i guess secondly just

I wanted to ask on the new cashback card that you have with Amex, but also the proprietary general purpose community card that you guys have. I mean, do you sort of expect any cannibalization between these two products or is the, I guess the bread card with Amex sort of the aspirational card targeted to your higher income, higher FICO score customers?

Yeah, no, we don't, we don't, you know, expect a great deal of cannibalization between the two products. I mean, if a, uh, you know, if there's somebody in the community card that would like the Amex product and they're, you know, they have the ability to spend will certainly, you know, and the criteria will certainly move them over. But, you know, I think both products complement each other. And, you know, one, you know, depends on, you know, one's running on a, you know, a MasterCard network. The other one's running on the American Express network. And so I really like that diversity of networks that we have. And I'm And I like the fact that we have, you know, two products in the marketplace that people can choose from.

Great. Thanks for the questions.

Thank you, Mike, for your question. Our next question comes from Reggie Smith from J.P. Morgan. Please go ahead.

Hey, good morning, and congrats on the rebranding. For what it's worth, I like the way it looks. I think it's slick. And I guess I'm kind of on the cusp of being a millennial still. So, you know, hopefully it'll, it'll work out for you guys. My question, you kind of, you know, a question you kind of touched on in the last question, but I was curious if you were going to, it doesn't sound like you're going to migrate your, your legacy MasterCard card holders over to the Amex card. Is that, is that correct? It's not going to be like an auto migrate type, type deal.

No, but there's certainly some targeting we would do to move people over. And the way you think about that is they have an opportunity in their wallet. Do they spend on the right commodities? And we'll target people as appropriate. But wholesale migration, we won't do.

Got it. Can you talk a little bit about, I guess, the decision process of how you guys landed on Amex versus, say, Aviz or something like that? What did you... What about that platform or brand or what are the things that went into that decision on your part?

Sure. So a few things, right? So, you know, it's always good to have competition in terms of networks. That's always a positive for the issuer to, you know, to have competition in networks. You know, secondly, you know, we looked at the economics and the economic and partnership we have with American Express enables us to deliver these 2% rich rewards to the customers. on a regular basis, so economics have a bit to do with it. The cache of the network and the cache of the brand also has a lot to do with it, and the benefits and protections that American Express offers, the consumer also has a lot to do with it as well. So diversification of network, economics, and benefits of the network all went into our decision.

But that's kind of what I suspected. Last question from me, you know, just thinking about kind of marketing two different cards. You know, what thought went into that, and how are you thinking about, you know, kind of the marketing spend and running, you know? I would imagine, and maybe I'm wrong here, like there's probably more leverage if you had one brand and one product, but maybe that's not the case. What does your experience in the area tell you, and how are you thinking about that?

yeah you know as i said we we increased marketing spend in 2022 and we expect to increase it in 2023 to drive adoption uh of both products but the community yeah the community one and a half percent cash back and the and the america's best two percent cash back card um you know and we'll target customers where we think it's appropriate to you know to offer which product at which particular time so you know we have You know, we have models that tell us that, and we're very focused on, you know, working with the individual networks to also have them help us drive opportunity.

I appreciate it. Last thing for me, I just wanted to thank you guys. I think the disclosure is much improved, and certainly I appreciate the additional metrics to kind of analyze the company.

You know, Reggie, I appreciate you saying that. That was one of our commitments to the investor community was was to be more transparent in our disclosures. And I appreciate the comment. Thank you.

Thank you so much. And our final question is a follow-up from Jeff Anderson. Please go ahead.

Hey, thanks for taking my follow-up. I really appreciate it. Just been getting some inbounds from people just trying to understand the BJA's exit timing on the guide. I know previously it looks like in the prior slides you were contemplating that exit in your full year 22 guide. Just wanted to understand the prior impact in that 22 guide because it sounds like, Perry, you were talking more that success of new business activities is driving your expectation of growth higher to the double-digit range. And then just with loan growth already ending this quarter above 8%, with BJ's now not in that number, how high you know, how rich of a double digit could this really be this year potentially?

Yeah, so the guidance that we have put out for this year contemplates, you know, BJ's portfolio being sold in mid-first quarter 23, and it'll have, I'd say, kind of an immaterial impact to the 2023 guidance. And for this year, you know, it contributed a slight bit to the the improved range we've given. But honestly, it's also largely because the payment rate normalization is coming through, the strong business development pipeline, everything's executing, and we feel very optimistic that we are going to finish in a good place. And as you noted, the end of period loans are going to finish much stronger than average loan growth for this year because of the dynamic now of BJ's being in that year-end number.

Great. Thank you.

Thank you for your question, Jeff. I'll now pass it back over to Andresa for Clay's remark.

I just want to, again, thank everybody for being on the call today and your interest in Bread Financial. And certainly, everyone have a terrific day. And thanks again.

Thank you, everybody, for joining today's call. Even now, disconnect your lines.