Good morning, and welcome to Alliance Data's Third Quarter 2020 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce your host Ms. Vicky Nakhla of Advisory Partners. Ma'am, the floor is yours.

Thank you, operator. By now, you should have received a copy of the company's third quarter 2020 earnings release. If you haven't, please call Advisory Partners at (212) 750-5800. On the call today, we have Ralph Andretta, President and Chief Executive Officer of Alliance Data; and Tim King, 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, Vicki, and thank you to everyone joining the call this morning. We have had an exciting week with the fiserv announcement as well as the announcement this morning of our agreement to acquire Bread. The new capabilities, digital advancements, technology upgrades and efficiencies from these transactions better position the company for sustainable, profitable long-term growth. I would like to start today's call by thanking our associates and leader for what they have accomplished this quarter, our associates continue to step up to the challenges and changes brought forth by the pandemic and through their dedicated service, move the company forward on these strategic goals. Starting on Page 3, here is an overview of the key highlights of the third quarter. The company posted strong financial results, which I will touch on briefly, then Tim will provide more color. As is evident with our recent announcements, we are making substantial progress on our strategic priorities and making significant investments in our business. We will address these themes in more detail throughout the presentation and then provide insight on our focus going forward. After our prepared remarks, we will open up the call for your questions. Slide 4 provides the highlights for the third quarter. We reported net income of $133 million, an increase of $95 million from the second quarter 2020, and earnings per diluted share of $2.79. We built capital -- we continue to build capital and liquidity through income improvement and strong cash flow. Importantly, credit sales improved 28% sequentially and both AIR MILES, reward miles issued and redeemed improved from the second quarter of 2020, which I will discuss in more detail on the following slides. Overall, the corridor we saw a pickup in our business as stores, states and countries reopen. Moving to Slide 5.…

Thank you, Rob, and good morning to everyone. I will start on Slide 12 to review our results for the third quarter. During the third quarter, revenue was down 27% versus last year as the company and both the segments were impacted by the COVID-19 pandemic. The decrease in revenue was primarily tied to reduction in normalized card receivables, lower card yields for the from the Fed rate cuts as well as low redemption levels of LoyaltyOne. The year-over-year improvement in earnings before taxes was impacted by $72 million loss on extinguishment of debt and a $55 million of restructuring charges in the third quarter of 2019. Adjusted EBITDA net decreased for the quarter due to the decline in revenue, partially offset by the cost reduction driven by lower volumes and our cost savings actions. Slide 13 provides an overview of some of the key business metrics for the company. Starting at the bottom left, we show our normalized AR, which would include held for sale versus our total credit sales. For the quarter, we saw sales come in $6.2 billion, which was down 21% year-over-year. However, when compared to the prior sequential quarter, we did see a rebound from the COVID low of $4.8 billion, up 28% sequentially. There's still pressure on our AR, but we have begun to see a rebound in our sales and would expect the typical fourth quarter seasonality to increase AR balances at year-end. Moving to the lower right, we also saw a rebound in our yields. Recall in the second quarter, we were down 350 basis points year-over-year to a COVID low of 20.4%. Since the second quarter, we have rebounded 210 basis points, though we are still off the prior year's number by 220 basis points. As I discussed during the second…

Thanks, Tim. Slide 18 provides an outline of our strategic initiatives. We are opportunistically investing in strategic areas highlighted on this slide as well as ramping up marketing spend in our growth verticals in the fourth quarter. As part of our way forward, we are leveraging our technology as a strategic advantage with continued innovation and a focus on reducing our cost to serve. As evidenced by our recent announcements with fiserv and Bread, we are continuing to diversify and develop our product offerings to provide our partners with a full suite of payment solutions. Digital advancement remains at the forefront of our development framework. Finally, our data science and analytics capabilities and insights remain a key strategic advantage and will continue to drive efficiencies and effectiveness for our business operations as well as for economic environment. Jared, we're now ready to open up the line for questions.

[Operator Instructions] First question comes from Ryan Nash with Goldman Sachs.

Maybe I'll start off with the deal. Clearly, makes strategic sense, just given the emergence of Buy now, Pay later as a borrowing option for customers. But I guess, can you maybe just talk about how you think about the strategic benefits of this versus other uses of capital? And I guess just given where the stock is trading today, it seems that you -- to imply you could have reduced shares by a material amount. So I'm curious just how you weigh the long-term strategic benefits versus the near-term financial implications? And then second, can you still pursue other capital actions over the next few quarters even in the face of this?

Yes, Ryan, so I'll start and then I'll ask Tim to chime in. This is Ralph. So I think a couple of things. I think if COVID-19 has told us anything, it has taught us the value of e-commerce. And you've seen that in the first and second quarter, and we'll continue to see e-commerence almost pretty much exploded. So for us, the [Audio Gap] has improved over the course of the year as a good thing. The bond offering helped us spread out our debt, as Tim talked about. So I think we're in a reasonable position if there are uses of capital to take advantage of that. But I see this as strategic and long term benefits for [indiscernible]. Tim, anything?

Yes. I would just reiterate what important strategically. While, of course, maintaining the balance of flexibility we have at the parent level. Our capital allocation strategy remains. If we're finding things that we find are is important to our business. Of course, we're going to invest them. But from there, of course, maintaining our dividend and not doing any share repurchases.

Got it. And if I can maybe switch gears to ask about growth. So you guys saw a really nice sequential improvement yet as was highlighted on the call balances, sales are still down about 20% year-over-year. So can you maybe just talk about how, from a year-over-year perspective, they trended over the quarter? And second, you talked about Tim the expectation to see normal seasonal trends in 4Q to today's levels over the next couple of quarters?

No, clearly, we put that out last quarter that the store reopenings and state openings that were very dependent. We were very encouraged by the number of folks going back into the brick-and-mortar that Ralph went through that slide. There may be a little bit of pressure on our receivables from where we are now. As we roll into 2021 as COVID allows -- starts to abate a little bit and we could have a little bit of pressure, but we start to think that we're getting back to normalized AR at this point.

Next question comes from Mihir Bhatia with Bank of America.

I wanted to ask on the acquisition too. Maybe just a couple of quick questions just to start on BNPL and Bread in particular. Can you talk about just why the accretion is going to take 3 years? I mean, you're paying a pretty a good amount of the purchase price, it seems in my cash, right? I mean I understand the quart of it is in stock. But what Bread profitable? And then just relatedly, can you just talk about the economic returns of the product, how does the revenue profitability model differ from your core card product? Should we assume longer-term as that product grows ROEs decline from your historic level? Or do you think you can get the same ROEs?

Sure. So I'll start with just talking about the accretion. Clearly, we have not gotten into looking at the integration and what type of long-term profitability we'll have. We think there'll be a nominal pressure in the next year or 2, mid-2021 and '22, and then obviously, growing from there with most of that dilution coming from just the increase in the share count.

So this is Rob. I think we shouldn't think of this as a replacement of our product set, but an enhancement to our product set that will attract new customers, particularly younger customers who tend to use debit as a means to pay for them. So while we will add to our revenue base, I don't see this replacing our existing products. In fact, we will migrate some of these customers to our existing products as we move forward. So I think it is an enhancement, not a replacement. a good amount of the purchase price, it seems in my cash, right? I mean I understand the quart of it is in stock. But what bread profitable? And then just relatedly, can you just talk about the economic returns of the product, how does the revenue profitability model differ from your core car product? Should we assume longer-term as that product grows ROEs decline from your historic level? Or do you think you can get the same ROES? Sure. So I'll start with just talking about the accretion. Clearly, we have not gotten into looking at the integration and what type of long-term profitability we'll have. We think there'll be a nominal pressure in the next year or 2, mid-2021 and '22. And then obviously, growing from there with most of that dilution coming from just the increase in the share count. So this is Rob. I think we shouldn't think of this as a replacement of our product set, but an enhancement to our product set that will attract new customers, particularly younger customers who tend to use debit as a means to pay for them. So while we will add to our revenue base, I don't see this replacing our existing products. In fact, we will migrate some…

Okay. Great. And then just one other question. On your -- I think, Slide 5, if I could just talk about credit sales. I was surprised, I mean, the trend is clearly favorable, but I was surprised by the online brand sales being negative. That seems a little different than what we've seen from some of the other payment companies regarding online things. Is that just a function of your retail partners? Or can you maybe just provide a little bit of color there.

So if you think about the third quarter as opposed to the second quarter, we had our traditional partners opening up their bricks-and-mortar locations. And we have pent-up the demand for people to get out of the house and actually get a change of senior. So we saw people shopping in the stores. And if you look about that, although our -- maybe online went down a bit, sequentially, people are shopping so. Our sales were up 92%. But if you combine those 2, sales were up in the quarter, as I said, 28% sequentially. So while we saw a little bit of a dip in online sales, we saw an amazing increase in in-store sales.

Next question comes from Sanjay Sakhrani with KBW.

Maybe I'll start with credit quality. Obviously, some nice charts there that show credits obviously performing quite well, but you've had the relief programs you've had stimulus, that's going to be a little bit of an air pocket. I don't know what you guys are doing with their relief programs. Are those sunsetted? Or are you still offering them? But I guess, just to think about the reserve rate and the migration going forward and the direction of credit quality, henceforth, I mean, how are you guys thinking about?

Yes. And, it's Tim. Yes. So clearly, the quarter benefited for those relief programs that we were seeing back heavy use of those back in Q2. But where we are right now, we would expect, like most of the others in the industry to have pressure on our credit in 2021, specifically in the latter half of 2020. One is the relief programs have kind of gone a little bit back to normalized levels. In my prepared remarks, I talked about being about being about 3% for release programs on our chip and other relief programs, and that's pretty much the back to normal pre-COVID levels.

And do you expect the reserve rate to sort of stabilize here? Or can it go higher here? Because I know you guys didn't really move that a whole lot.

Yes. So clearly, we're anticipating the increase in charge-offs and a fairly direct [indiscernible] S4 level with our reserve rates. If the COVID starts to abate, and we continue to see the strong payment behavior we've seen from the last 6 months, there's opportunity on our reserve rates.

Okay. And then just my follow-up question unrelated to that, maybe for Ralph, is, I guess, you guys talked about strategically needing to beef up on technology. Does Bread solve for everything you needed? Or do you need more investment in technology from here on out?

Well, technology like anything else is evolving. So what Bread does is it really puts us in a really terrific competitive position. But as I said, our reinvestment is going to be in digital enhancements going forward as well as products. So while it's all -- it puts us -- gives us additional capabilities. We're not done that.

And would you expect to solve for that through acquisition or through internal investment?

Well, the acquisition of Bread gives us tremendous talent in digital, and I'm looking forward to working with that team and helping -- having them help us solve our go-forward endeavors.

Next question comes from Chris Kennedy with William Blair.

Bob Napoli here. Just following up on Bread, Ralph. I think Alliance Data has been some of -- I'm sure several of your customers use other buy now, pay later programs like Affirm or Klarna or Afterpay, and I would imagine that you've seen how the 2 products work in tandem. So I'm just wondering what your thoughts are on how this enhances your cross-sell capability? Would you be able to replace some of those other buy now, pay later's? And what is how does the technology at Bread compare to in Affirm or Klarna or an Afterpay?

Yes. So I think a couple of things. One is, certainly, we're going to offer this to our partners. And why I think it gives us a strategic advantage, it's a white-label offering. So that means that the customer doesn't feel like they're going yet to another company for some kind of credit. They feel they're invested in the brand they're buying from, and this is to them an extension of that brand. I think that's tremendously important. So I'm excited about that. And I think that gives us an advantage to potentially replace some of those third parties, link organizations that are out there. I think the other important thing is that we will have -- we will control the producing journey end-to-end. It's not a punch out to somebody else. It's from beginning to end, we're able to service that customer in a consistent way, whether they use a private-label credit card or co-brand credit card or installment loan or buy now and pay later.

Yes, Bob, clearly, the implication there is that we have the cross-sell opportunity. We can upsell people into the private label, the co-brand cards that have the branded across the board on all our different products.

And the Bread technology. And I guess -- and also like maybe the credit quality, is somebody that qualifies that doesn't qualify for an Alliance Data card then offered the -- is that the thought process that -- I mean, I would think the retailer would want the loyalty associated with the private label card first lowered credit quality?

You'll see these things side-by-side, right? So ultimately, it's the consumer's choice on whether they want the private label credit card, which comes with all of the rewards or they want to have an installment loan, have something where they can have an installment loans, they have a set payment in a given month. So I think that will be the choice of the consumer going forward.

Okay. Then lastly, can you give some metrics like what the revenue is for Bread, what the -- how -- what the EBITDA is and what the growth rates are? And would you be holding their loans on your balance sheet?

Yes. Well -- so we'll eventually migrate them on to the balance sheet, that's part of the integration process. There's a couple of different steps we'll have to take there. And we're not disclosing it wasn't public the revenue and EBITDA. I just -- I'll go back to that it should be nominal pressure on us in 2021. And as we move into '22, '23, clearly, we expect some fairly significant revenue because we'll be able to integrate them across our board with all 160 of our different partners.

Our next questions comes from David Scharf with JMP Securities.

Can you shed a little more light on what the anticipated savings are from converting over to Fiserv, I assume it's the first data card card processing platform. But -- and whether that transition to outsourcing was more expense driven? Or were there kind of speed to market issues that were more impactful?

Savings that we have, we'll certainly invest in the transition of fiserv, if you think about more products that will certainly help our -- help our partners. And for us, it will lower our cost to serve as we move forward. And just give us more flexibility in the marketplace to scale up and down as the marketplace moves.

Got it. Understood. And then as a follow-up, because it's been a familiar. So you refrain on the call, just focusing on the buy now pay later offering again, maybe at a higher level, I understand it's viewed as kind of complementary. It adds a potentially younger demographic and there's an upsell opportunity. Edition of private label as a product. It seems like as the -- as commerce becomes more and more digital, it seems like the barriers to entry for new competitors to offer loyalty tools like Buy Now pay later increase as well. And I'm wondering, is there any feedback you're getting from your specific retail partners about either a whether the loyalty and value-add associated with a private label card has been impacted at all by some of these other types of shopping card conversion offerings? And b, specifically, have they provided any data on how many of your end consumers that have Comenity issue cards have started to use an alternative by now pay later option in the shopping card checkout?

So let me take the first one. I believe the private label card, there will always be a place for part of label and program cards because there's an affinity to the brand. And so when you think about other entrants, they don't -- they're not connected to the brand. So it's pretty -- it's an linked transaction. So there's no brand affinity, there's no brand rewards. And that, we think, is still a barrier to entry going forward. And in terms of your second question in terms of how many of the clients are using a buy now pay later or installment loan, I'm not aware of any specific data that our partners have supplied. Now our partners do have them on their sites, which was one of the reasons we certainly wanted to invest in a leading-edge fintech that has so much great talent and such a digital platform. That's why we did invest in this. We want to be the supplier to our partners of all their payment methods and give them a full suite of ways for our customers to engage with them and purchase bigger baskets as a partner.

Next question comes from William Ryan with Compass Point.

One kind of granular and one a little bit bigger picture. But on the granular side, looking at the Trust data, it looks like there's a little bit, I kind of called it a credit bubble kind of working its way through. On the backside of it, delinquencies are very low again. But it looks like you might be kind of running into a little bit of charge-off headwind maybe in November and December. As I recall, you're kind of restrictive on some of the accounts that you gave for variance to. And I was wondering if you can kind of comment on what that might be or what it might reflect? And then second, as it relates to, Bread, looking at the buy now pay later, one of the comments partners have had is about economics of the business being detrimental, but more importantly, [indiscernible] brought up several times in the call is the loyalty side of the equation. Do -- will the retailers I assume they probably would? Would they have the ability and I don't not necessarily like this word, but to steer towards their product offering that you're going to have because it seems like they want to create loyalty side out of this by now, pay later over time.

Yes. So let me take the second one first, and then I'll ask Tim to comment on your first question. I do think that the -- that our partners will as they do today, steer their customers to our products because it's beneficial to them to do that. So I would say this is caused another product or another basket, another product in a basket that then to use as a loyalty device. And that's why we are -- I'm particularly excited that it's a white-label solution, and we didn't partner with a third-party where it would be just a name out there and it'd be a service rather than a customer engagement.

Yes. So -- and Bill, when you get to the Trust data, that's just a timing issue with some of the customer relief programs. We're getting a little bit of pressure there that just at the trust level. As I've mentioned, the customer lease programs have a benefit overall.

Next question comes from Jeff Adelson with Morgan Stanley.

I know a lot has already been set on Bread so far, but maybe another question there. You said that you're making that available to your retailers soon. But just wondering how fast you feel like you can get that platform up to speed with your retailers? Is this something is going to take a couple of quarters? Or you think it will take like a few years to really get entrenched with your client base? And then I know you've already covered a lot on like what kind of color your retailers are giving you, but maybe you could dig in a little bit more. What percentage maybe of your retailers do you think are actually going to use this? Is this something where some can turn it on and turn it off? Or are you just going to kind of make it available to everyone and just let the customer base kind of a half fold?

I'm sorry, now are 45 minutes old. So as and who might want it first, how we might go we might do that. The beauty of this platform is that integration happens pretty quickly. It's less -- it's like a 40-day to 50-day integration at a brand partner, that is key for us in terms of the number of brand partners we have and the demand we would be expecting for this as we go forward. And so from my perspective, we will begin working with our brand partners as soon as we hang up from this call.

Got it. Okay. And then maybe just shifting to general purpose. You're clearly moving into a new Cayman capability with Bread. I feel like general purpose could be another growth channel for you. I was just wondering, could you give us some insight into where you hope to take that program over the medium to long term? Is that really more just a backstop against retailer bankruptcies? Or do you view that as a real opportunity to really drive growth outside that? And then separately, I know you've also covered a lot about your strength in beauty and some of these other non-specialty retailers outside there. Is there an opportunity for you to do a little bit more outside of consumer on the small business side?

Yes. So let me -- so when we -- let's define general purpose, I define general purpose as 2 things: one being our co-brand cards and the second one being the Comenity card that we just launched. So if you think about our co-brand cards, and our partnership with Fiserv, we now have co-brand capabilities that we can compete head-to-head with anybody out there. Again, that's a -- certainly, a beauty of moving to the 5SA program very quickly, not only do we have capabilities. We also have experience. So I'm speaking for myself and [indiscernible] and others report into the organization, we've all managed large co-brand portfolios. I think it is a terrific part of our business. Each portfolio in our entire portfolio plays different roles. So although the margins may be a little thinner on the co-brand side, they certainly bring better credit quality. And that bed of credit quality enables us to take a little bit more risk on the private label side. So we're looking for that balanced portfolio as we move forward. As far as the Comenity card, early days, again, really excited about the engagement and the early spend we're seeing and the fact that it's attracting millennials. But at this point, we're thinking of that as right now as a save tool. That doesn't mean we won't pivot, sometime in the future. But when you either -- when you part ways with a partner and you retain the receivables and you could give those card members the ability to still spend with you and engage with you, that's a great thing. And then as a -- and doing the same thing when a partner does -- bankruptcy is just 2 times or when a partner does liquidate, saving those card members to ensure that they are still going to pay down their debt as well as engage with you and build another receivable is a terrific use of that product.

And Jeff, as far as the question around the businesses. We do have the capability to do small business loans. Most of those are going to be attached to small single sole proprietor's, et cetera. We already have that ability. Not been a big focus other than to make sure that if it's a consumer that fit running a business that we continue to be able to underwrite those folks.

[Operator Instructions] Our question comes from Michael Young with Truist.

I know we've talked a lot about bread so far, but I was curious, maybe just on the retailers actually on the kind of more the core business. There's kind of -- was a lot of noise made of bankruptcies and issues there. But just wanted to get an outlook on what's going on kind of with the bankruptcies versus the new additions of new retailers and kind of how those are trending?

Sure. So as you guys -- as you know, when we think about bankruptcy, it's 2 types, right? There's Chapter 9 and Chapter 7. And the Chapter 9 bankruptcies are reorganization -- I'm sorry, Chapter 11 and Chapter 7, my apologize. The Chapter 11 bankruptcies are a reorganization of the partner. And that results in potentially store closings. But that said, we still continue to transact with the partner. We still continue to acquire cards, and we still continue to market to the partner. Albeit maybe when the partner comes out of Chapter 11, they may have less physical locations. That is why we are investing heavily in digital. So when that part of emerges and they are a bigger -- a bigger part of their business is digital, we'll be right in that channel where the customer wants to shop. In terms of liquidation or Chapter 7 bankruptcies, that's why we certainly are -- have the Comenity card as a Save tool. But you remember in Chapter 7, the bankruptcies, we -- the customer is our -- is a card member. We actually -- margins improve in a Chapter 7 bankruptcy during early liquidation. As far as what I see going forward, stressful time for retailers, but we haven't seen any other retailer right now tell us that they're entering into an 11 or 7 situation.

It's -- 1 of the things we noticed was there was as we came into 2020, there was a number of retailers that had weak balance sheet and COVID hit them fairly hard, and they have obviously, done what they've had to do from the organization. The retailers, we have a lot to have a pretty strong balance sheet and been able to withstand this and look like they're starting to come back out. So for a lack of better term, it feels like we fleshed out some of the weaker players on the retail side.

Okay. So net-net from here, you think you can kind of be in a net add position in terms of retailers and volume even ex-kind of the macro?

Yes. So I think if you look at -- let's take the one category we talked to you about today, beauty, we see even year-over-year improvement in beauty. And we're a market leader. We've got over 50% of the market share there. So we'll continue to add at there. So we see that as a really good vertical for us. Other verticals that we're thinking that we're adding to our home goods, home improvement, that's been really powerful for us. So we've seen improvement there as well. So most important is that we are able to work with partners across different categories and offer them this basket of opportunity for their customers to purchase -- have larger tickets and give them the opportunity to do it in a variety of ways, private label, co-brand, buy now, pay later and installment loan. We're just filling our products very nicely.

And our next question comes from Vincent Caintic.

And just a quick follow-up question. So I'm sorry, I might have missed some of this. But -- so I appreciate the commentary on just the current quarter receivables, maybe still shrinking going into 2021. But I just want -- that seems like it's been picking up nicely. And then the yields as well, that picked up nicely quarter-over-quarter. I'm just kind of wondering what you're expecting for trends there? And when you made the comments on receivables, does that include the Bread acquisition? Or is that just thinking of the existing quarter?

Yes. So let me -- I'll start with the yields, and then I'll go to the AR, Vincent. So on the yields, the -- we're obviously down year-over-year about 220 basis points. Look, 150 basis points came from the Fed action. So unless the Fed obviously increases the discount rate and therefore, flows into the prime rate that we all have that pressure. The rest of that pressure is coming from the customer relief program. And the -- actually, the consumer behavior they're paying us. So the benefits we're seeing in the charge-offs and the delinquencies. And obviously, the downside of that is some of the late fee give up. So we may be able to pick up some of that over time. But I think the 150 basis points is pretty permanent unless we have some that action. As far as the AR, specifically, it's going to be dependent on the consumer coming back into the retailers. Obviously, had some really positive news for the folks coming back in, as Ralph highlighted in his slides. We think there may be a little bit of pressure, certainly nothing like 2020, and that's prior to the bread acquisition, we think the might be accretive to that.

Okay. Great. That's really helpful. And then I'm going to try my Bread question. So on -- I'm just wondering how much overlap there is on your existing retailer footprints between Bread and Alliance Data? Because it seems like maybe there shouldn't be just because the product sets are pretty different. And so kind of thinking maybe there is a great cross-sell opportunity between the two different products, but just want your comments on the existing overlap?

Yes, I would -- I would agree with you, there's minimal overlap, and it just presents us with a really strong cross-sell opportunity. I would agree with what you said.

And at this time, I will turn the call over to Mr. Andretta.

Thank you for joining our call today and for your interest in Alliance data. We're excited about the future and our focus on the execution of our strategic priorities to drive our company forward. Everybody, have a terrific day. Thank you.

This concludes today's conference call. You may now disconnect.