Synchrony Financial

Welcome to the Synchrony Financial First Quarter 2021 Earnings Conference Call. My name is Vanessa, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Jennifer Church, Vice President of Investor Relations. You may begin.

Thank you and good morning, everyone. Welcome to our quarterly earnings conference call. In addition to today's press release, we have provided a presentation that covers the topics we plan to address during our call. The press release, detailed financial schedules, and presentation are available on our website, synchronyfinancial.com. This information can be accessed by going to the investor relations section of the website. Before we get started, I wanted to remind you that our comments today will include forward-looking statements. These statements are subject to risk and uncertainty and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website. During the call, we will refer to non-GAAP financial measures in discussing the company's performance. You can find a reconciliation of these measures to GAAP financial measures in our materials for today's call. Finally, Synchrony Financial is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcasts are located on our website. On the call this morning are Brian Doubles and Brian Wenzel. I will now turn the call over to Brian Doubles.

Thanks, Jennifer, and good morning, everyone. It is truly an honor and a privilege to talk to you today for the first time as the CEO of Synchrony. Building on our strong foundation, I believe Synchrony is exceptionally well positioned for this next chapter of our growth journey. There is strong momentum in the business driven by the ongoing implementation of our strategy and the unwavering hard work and commitment of our people. While this past year has been challenging and unprecedented in many ways, we are starting to see positive signs of recovery and we are seeing the benefits of the strategic initiatives that we accelerated in the new programs that we launched last year. I am very optimistic and excited about the opportunities ahead, and I'm honored to lead Synchrony into the future. And with that, I'd like to get into some of the highlights of our first quarter results. Earnings were $1 billion, or $1.73 per diluted share, an increase of $1.28 over last year. The resilience of our business has been evident as we navigated the pandemic. From the underlying fundamentals of our business, including diverse programs and networks and solid underwriting, to our ability to quickly adapt to meet the moment with easily integrated, seamless digital solutions, we have demonstrated that our business is structured to execute even in the most challenging operating environments. And as we begin to emerge from this challenging period, we have seen many of our growth drivers outperform pre-pandemic levels experienced during the first quarter of last year. Importantly, purchase volume increased a strong 8% over last year, with a substantial increase in purchase volume per account of 18%. While we're seeing strong trends on purchase volume, loan receivables are down 7% to $76.9 billion, given elevated payment rates with the infusion of additional stimulus this quarter. Though average balances per account have rebounded, increasing 1% over the first quarter of last year, as have new accounts, which were up 3%. Net interest margin was down 117 basis points to 13.98% as further stimulus continued to elevate payment rates, which lowered our receivable mix and yield. The efficiency ratio was 36.1% for the quarter. We are on track with our strategic plans to reduce our expense base, removing $210 million of expenses by the end of the year. Credit continued to perform exceedingly well with net charge of 3.62% this quarter compared to 5.36% last year. As a result of our liquidity and funding strategy in response to the COVID-19 impact on our balance sheet, deposits were down 1.9 billion or 3% versus last year. Given our excess liquidity, we have been slowing our overall deposit growth. Total deposits comprised 81% of our funding, as our direct deposit platform remains an important funding source. Our ability to service and provide digital tools to customers makes our bank attractive to depositors, and we will continue to build out additional capabilities. During the quarter, we returned $328 million in capital through share repurchases of $200 million and $128 million in common stock dividends. We continue to have a solid pipeline of new opportunities across our platforms, but we are being very disciplined around risk and returns and that it's critical to ensure that our partnerships are structured with strong alignment that benefits both parties. Having said that, as we previously announced, we will not renew our partnership with the gap as we were not able to reach terms that made sense for our company. We expect that exiting this partnership and redeploying the capital will be EPS neutral relative to current program economics and accretive to proposed renewal terms. We have been on a journey to grow with partners who leverage our digital capabilities to help them drive sales and meet the rapidly changing needs of their customers. Our ability to win programs with transformational digital innovation has been demonstrated with a number of recent wins. These capabilities are also integral to the success of all of our programs as consumers are rapidly adopting technologies that enable contactless commerce and expect engagement along their digital purchase journeys. We are leveraging our vast digital assets as well as our strong data analytics capabilities to make the entire consumer experience more personalized and meaningful. We have continued to expand our digital penetration across the customer journey from apply to buy to servicing. Approximately 60% of our applications were done digitally during the first quarter and we grew 14% in mobile channel applications. In retail card, 50% of our sales occurred online and approximately 65% of payments were made digitally. The investments we are making in digital and data analytics continue to pay off. During the quarter, we renewed 10 programs, including American Eagle, Ashley Home Store, Citgo, and Phillips 66. We also added 10 new programs, including Prime Healthcare, Mercy Health, and Emory Healthcare, which furthers our penetration of health systems. We are also expanding the utility of our care credit card, our patient financing app is now available in the Epic App Orchard. This makes CareCredit available to hundreds of healthcare organizations using Epic's MyChart and enabling cardholders to use CareCredit to pay co-pays, deductibles, and medical expenses not covered by insurance. Not only does this technology integration provide a way to increase usage and acceptance of CareCredit, it also helps health services and hospital providers run efficient, financially healthy organizations by helping to improve revenue cycle management and reduce debt risk. We are excited by the prospects to support patients beyond elective care as we expand to offer payment options for non-elective medical expenses and routine care. I'll spend a few minutes today outlining our care credit strategy and providing a framework to think about the opportunities that lie ahead. Over the last several years, we've been transforming CareCredit to become a more comprehensive solution for consumer financing and payments in healthcare, pet care, and wellness by expanding our relationships with providers, retailers, payers, and pharmacies. We have unparalleled scale and depth in this space with 9.3 billion receivables and acceptance at approximately 250,000 enrolled provider health and wellness retail locations. The card is used by more than 8 million cardholders. We are in more than 80% of dental offices nationwide and over 40 healthcare specialties, 13 of which we entered into since 2018. We see big opportunity in health systems and hospitals and have rapidly expanded our reach by launching eight new programs in 2020, bringing our total to 13. With the growth in our pet vertical, we are now in over 85% of vet practices and have grown pets enforced by 174% since our acquisition of the Pets Best Insurance business two years ago. A big part of our success is the engagement we have with our cardholders. Our cardholders give us high marks as we have increased our customer satisfaction score to 92% from 78% back in 2009. Our net promoter score is nearly double the credit card industry average. And as proof of the value our cardholders place on the card, we've been able to increase our repeat sales to nearly 60%. That is a testament to the hard work that we've put into creating a strong value proposition for the card and for increasing utility as we build our network, one office and provider at a time. And our growth numbers reflect these efforts and the position we hold in this space. Our receivables have increased 44% in seven years. We have also increased the breadth of our business with an increase in provider locations of 41% in that time frame. and active accounts currently stand at 5.7 million, another double-digit increase in seven years. We have built an incredible platform for growth, and we are in an enviable position as we chart the course forward, continuing to evolve to capture further opportunity. There is still tremendous opportunity to continue to unlock growth in dental, veterinary, and specialty industries. We are making investments to simplify the customer and provider experience and leveraging technology to support more consumer-driven self-service capabilities. We have ample room for growth with increased penetration among our existing partners and through innovation to make it increasingly easy to engage with our network. Just recently, we acquired Allegro Credit, which has both deepened our penetration in audiology and other industries while also enabling new products and capabilities. With the steady increase in out-of-pocket healthcare costs, and the popularity of high deductible health care plans, consumers are assuming more of the financial responsibility for their health care. This translates to a significant opportunity of more than $405 billion in out-of-pocket health expenditures in the U.S. But flexible and extended financing is only a small component of overall health care payments, so there is significant runway for growth. We're also expanding beyond the traditional care credit industries. and capitalizing on the evolving healthcare landscape that has increased focus on overall wellness. We have moved beyond elective care financing and now support patients by enabling them to pay for non-elective medical bills, planned procedures, and routine medical care as we expand into health systems and more healthcare specialties. This will be enhanced by ongoing integrations with practice management software and the recent news about CareCredit becoming available through Epic's App Orchard. Further, we have expanded our utility creating more ways to access health care services by partnering with pharmacies. Care credit is already accepted at more than 17,000 pharmacies nationwide, and we recently announced that we will become the issuer of the Walgreens co-branded credit card program in the U.S., the first such credit program in the retail health sector, and expect to launch the new program in the second half of 2021. We are also transforming our pet business to be a more comprehensive financial solution provider and to meet the needs of pet parents throughout their pet care journey. Now more than ever, Americans are invested in their pets, with both pet ownership and cost increasing significantly over the past several years. And that trend grew even more during the pandemic. Americans spend more than $100 billion on pet expenditures. There is a large market outside of vet practices with significant opportunity to provide new products, financing alternatives, and services. CareCredit supports a lifetime of care for pets, and with the acquisition of Pets Best Insurance, we currently offer a complimentary solution with veterinary care to support pet owners with simple, flexible financial options. We continue to integrate the Pets Best Insurance offering to capitalize on the payment and customer experience synergies. We're also looking for ways to expand into other pet agencies through products and services and retail. By focusing on the needs of our partners and customers and bringing substantial scale and expertise, we believe we will drive loyalty to the Care Credit Network and, as a result, should see outsized growth in the future. With that, I'll turn the call over to Brian.