Q4 2020 Alliance Data Systems Corp Earnings Call
Listen only mode. Following today's presentation. The floor will be open for your questions to ask a question during that time. Please press star followed by the number one on your Touchtone phone and order to view of the company presentation on the website. Please remember to turn off the pop up blocker on your computer. It is now my pleasure to introduce.
And Mr. Bryan <unk> head of Investor Relations at Alliance data, Sir the floor is yours. Thank.
Thank you Casey.
And because of the slides, we will be reviewing and the earnings release can be found on the Investor Relations section of our website on the call today, we have Ralph and dry dock, President and Chief Executive Officer of Alliance data and Tim King Executive Vice President and Chief Financial Officer of Alliance data before.
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 and 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.
Conciliation of those measures to GAAP will be posted on the Investor Relations website at alliance data Dot com.
With that I would like to turn the call over to Ralph and Dread up well.
Thank you, Brian and thank you all for joining the call. This morning.
I'll start I'll start on slide three with the key takeaways from 2020 per alliance data first we believe that the company's results reflect the significant resilience and what was a very difficult business environment. Thanks to our ability to respond quickly and effectively to the changes brought on by the COVID-19 crisis at the same time, and we were able to reduce our fixed cost.
Base by approximately $240 million in 2020 compared to where we stood in 2019, we optimize our work force and physical real estate footprint and gained operating efficiencies through process improvements, including automation as part of our transformation program.
Even more important and the progress we demonstrated in 2020 are the investments we made and the <unk>.
Dziedzic actions, we took to position of alliance data for sustainable long term and future growth, we invested and top tier talent and to transform our card services business added digital innovation and expertise and strengthen our partner management and project and product development capabilities.
Turning to page four I will cover key investments, we made in 2020, but before I get there I do want to mention our international royalty one businesses as they continue to adopt and invest and better positioning themselves for the new marketplace through new offerings first turning to air miles. The team has pivoted its rewards portfolio to.
As more non travel options such as stay at home type merchandise to drive higher customer redemption rates. During the pandemic brand loyalty has developed a number of new concepts of programs based on pandemic related themes like bringing the world to your home and health and hygiene and is providing sustainability focused offers using 100% recycled plastic.
The rewards like luggage and kids promotions.
Moving to the slide you can see the major products and technology enhancements. We have we've made in 2020 to improve our client experience and drive future growth our acquisition of bread opens up new opportunities to leverage our digital offerings to capture incremental point of sale opportunities and to build strategic technology.
And partnerships bread offerings and integration capabilities and enhance the growth prospects of our card services verticals and increase the addressable market of small and medium sized merchants at the same time, great offers of our existing partners a broader digital product suite and additional white label product solutions.
Which transition of card services core processing to fiserv, we will improve our brand partner conversions and speed to market, including the ability to quickly and seamlessly and new products and capabilities that benefit of our partners and card members. The platform enables efficient integration and use of mobile wallets and virtual accounts, while supporting our.
Data and analytic capabilities and improving operational efficiencies. We will also benefit from capital expenditure savings, which will be redeployed to fund growth initiatives.
And 2020, we also announced the launch of our enhanced digital suite the.
The digital application hopes of our brand partners capitalize on accelerated growth of E commerce by attracting and bringing through a more qualified applicants a higher average purchase value and of higher credit sales conversion rate.
The suite creates a seamless process for customers to adapt apply for and use our payment options. We are seeing improved year over year growth from our digital channels and would expect this trend to continue as our partners and card members benefit from our digital solutions.
Finally, we were pleased with the response to the launch of our new proprietary credit card and the commodity card and 2020, we continue to see strong activation rates engagement and cross category shopping, especially among millennials.
The commodity card allows alliance data to retain card member relationships and drive increased credit sales.
These investments together with a streamlined cost structure underpinned, our confidence and the alliance data as future prospects.
Slide five provides the financial highlights for the fourth quarter.
We reported diluted EPS of <unk> 25.
Including discontinued operations net income from continuing operations was $93 million or $1 93 per diluted share of total revenue for the quarter was over $1 1 billion.
Credit sales improved 24% sequentially and both air miles reward the miles issued and redeemed improve from the third quarter of 2020.
Overall during the quarter, we saw a pickup and our business due to holiday seasonal shopping and improved consumer spending.
Moving on to slide six you can see the continued gradual recovery and credit sales for a credit card services business active program sales, which provide a clearer view of underlying sales and sales trends improved from a 14% decline year over year and the third quarter two of 7% decrease and the fourth quarter.
2020 also of 24% sequential total sales improvement from the third quarter of 2020 was better than the same period last year showing continued progress while adjusting for seasonal holiday increases we continue to see more purposeful spending.
While in store traffic was down versus a year ago, when consumers shop and store they are spending more.
Also I want to highlight the success, we saw and our beauty health and wellness verticals.
Both had an excellent holiday season with strong online adoption and sales performance.
Online sales made up 42% of total sales and the fourth quarter up from the low <unk> for the fourth quarter of last year.
Please note that we include additional details of our sales by channel and the appendix of the check.
Slide seven highlights select partner additions and renewals and our new strategic technology partnership with RBC and the fourth quarter. We added over 60, new online merchants and now have over 500 online merchants breads innovative fintech approach and platform capabilities combined with card services funding Mark.
Getting data and analytics and underwriting expertise provides new opportunities for growth and synergies our pipeline of digital partners is growing at an impressive rate as a result of bringing our two companies together and addition active cross sell part of the discussions continue with high levels of interest from our existing card services brand partners to.
The existing programs with bread solutions, we expect the integration of existing partners to start and the latter part of the first quarter.
I would also highlight the addition of famous footwear, which will be fully integrated with the enhanced digital suite to take advantage of our digital capabilities through a single API integration.
The strategic agreement that we have announced this morning with Royal Bank of Canada, Leverages breads, leading platform technology and digital offerings and new ways. RBC is now utilizing breads white label platform to expand its payment solutions for its Canadian merchants.
This accelerated split breads platform growth and enables us to continue to bring next generation payments and checkout solutions to more consumers globally.
Let's turn to slide eight to review the performance of the loyalty, one which includes air miles reward program, and Canada, and Netherlands based brand loyalty.
The segment's fourth quarter revenue benefited in part from higher seasonal spend when compared to the previous quarter.
As I mentioned earlier and as displayed in the graph on the bottom of the slide air miles reward miles issued and redeemed continued to improve and the quarter driven in part by the success of the expanded merchandise portfolio cut.
Customer engagement continues to improve with the new offerings.
Once travel resumes the new offerings combined with travel options should provide a substantial growth opportunity.
Brand loyalty revenue improved 36% sequentially, yet remains down versus the prior year. We continue to closely monitor the pandemic infection rates, especially in Europe and certain countries as they implement strict stricter influence.
The measures.
Moving to slide nine.
Our areas of focus remain consistent.
With the recover actions behind US we remain focused on the rebuild and we grow elements of our plan and.
And we will execute on these efforts in 2021 to position of alliance data for sustainable profitable and long term growth.
I will now turn the call over to Tim to cover the financials.
And good morning to everyone I'll start out of slide 10 to review our results for full year of the fourth quarter of 2020.
Starting with the full year of 2020 income from continuing operations was $295 million down 48%.
2019.
<unk> revenue was primarily due to COVID-19 pandemic.
This reduction was partially offset by reduced operating expenses as a result of decreased variable costs tied to lower receivables as well as the $240 million of fixed cost savings that Ralph mentioned before.
And starting in the fourth quarter of 2019, we took action to right size of our expense base, we optimize our work force and physical real estate and continue to recognize the benefit from our investment and automation.
Others of reduced costs and 2020 included legal consulting and so on expenses.
For the fourth quarter of 2020 revenue was down 24% versus the prior year.
Fourth quarter income from continuing operations of $93 million.
<unk> benefited from lower provision for loan loss expense.
And compared to the prior year, driven by better than expected credit performance.
Income from continuing operations per diluted share was $1 93.
And net income per diluted share was 25 for the fourth quarter.
Net income was impacted by the $81 million after tax charge and discontinued operation as discussed in the press release.
I will provide more detail of the quarter for the coming slides.
Slide 11 highlights of our segment level results for the fourth quarter and full year of 2020.
Focusing on the fourth quarter, both loyalty lend and card services revenues were down the decrease and card services was primarily tied the reduction of the normalized card with cable and lower card yields from the fed rate cuts.
Royalty revenue was down primarily due to fewer short term loyalty programs and market. Due also to the COVID-19, as well as the sale of <unk> in January of 2020, which accounted for $23 million of incremental revenue and last year's fourth quarter.
The improvement and card services ADT is primarily the result of lower loan loss provision expense, resulting from continuing strong card member of payment behavior and improving year over year delinquency rates and.
At the corporate level EBIT was down for the fourth quarter of 2020, including costs associated with the <unk> acquisition.
Moving to slide 12, I'll review some of the key business metrics for the company.
Starting with the bottom left you'll show the normalized.
Which include held for sale versus our total credit sales for.
For the quarter with soft sales come in at $7 7 billion, which.
Which is down 18% year over year compared to down 21% year over year the <unk>.
Last quarter.
As Ralph highlighted we continue to see a gradual rebound and our sales along the typical fourth quarter and along with it.
Typical fourth quarter seasonal increases.
While normalized average receivables improved sequentially.
With levels continued to be pressured by lower year over year sales and strong payment behavior.
Moving to the lower right yields remained fairly stable sequentially as the impacts of the customer relief programs earlier of the year as of.
Largely subsided.
And the benefit to the lower fee waivers was offset the higher seasonal balances and the fourth quarter.
Card services cost of funds dropped approximately 30 basis points for the third quarter with lower securitization and deposit costs.
Finally, turning to expenses the fourth quarter and.
Included the previously announced $50 million adjusted.
The optimization costs and approximately $40 million of increase in marketing and approximately $30 million increase of the cost redemption and a lot.
And the one business either high seasonal revenue.
Turning to slide 13, I'll start and the upper left for the quarter. We finished the loss rate of 6% down 30 basis points versus the prior year.
As you may have seen and our monthly data our December net loss rate was impacted by the COVID-19 related customer relief programs the off.
And earlier in the year.
And the Spike in the December was timing related and we expect the net loss rates of return to more normalized and not better levels of January.
Slide 27 of independent provides additional information on the topic.
On the bottom left of the slide you can see the improvement of delinquency rate to four 4% down 140 basis points versus the prior year.
And we're very pleased with the continuing year over year improvement and delinquencies.
These improvements are a result of our actions taken in 2020, including enhanced collection efforts prudent credit line management and the <unk>.
Substantially pandemic related consumer lead programs as well as the benefit.
The stimulus programs.
Finally, turning to the right hand side of the page allows us slightly decreased to $2 billion.
So the reserve rate of 12%.
Note that of temporary seasonal increase and balances pull down the reserve rate per cent for the year and.
Given the.
Continued uncertain economy, and particularly the second half of 2021, our reserve levels remained elevated to effect the potential risk.
The reserves contemplate the assumption and Moody's <unk> economic outlook, which reflects only a 4% probability that economy will perform worse.
Slide 14 covers our corporate and bank liquidity cash and capital.
We continue to maintenance of fit.
We continue to maintain sufficient liquidity with over $1 billion.
And the parent company and nearly $350 million and cash.
At the bank level cash was $2 7 billion.
The bank remains well capitalized with the total risk based capital ratio of 19, 7%.
I'll now turn it back over to Ralph.
Thanks, Tim.
Slide 15 provides us.
The initial financial outlook for the year for 2021, we expect period and receivables to be relatively in line with year end 2020, while full year average receivables are expected to be down mid single digits, reflecting the year over year pressure and the first half of 2021.
We anticipate the sequential decline in average receivables and the first and second quarter, and then flat year over year balances and the second half of 2021, we expect to resume high single digit to low double digit card receivables growth as we exit 2021.
Moving to the income statement total revenue is anticipated to be down low single digits from 2020 as the impact from low average receivables and the first half of the year is partially offset by improving revenue from royalty, one and Greg Fintech acquisition.
Expenses ex provision are expected to remain flat for 2020, as we bounce prudent expense discipline and the continued investment and our strategic priorities for 2021 expense figure includes over $100 million.
Of digital innovation and technology enhancement investments, we are capitalizing on the significant growth prospects of our fintech business expansion as well as enhancing our data and analytic capabilities are.
Our Pfizer of processing system transition investment remains on track and we will provide operational efficiencies to lower our cost to serve.
Separate from our digital and Tech investments, we are ramping up marketing spend in 2021 by over $50 million from the depressed levels. In 2020, the investments are key to position the company for growth and the delivery of positive operating leverage in 2022.
On credit and the encouraging trend and delinquencies strong payment behavior and positive impact on the prudent risk management actions. We took in 2020 provides us with confidence that our stable credit performance will continue and the first half of 2021, we expect the first quarter net loss rate to be at or below 6%, while it's hard.
And to predict beyond the first half of 2021, given the uncertainty and volatility in the marketplace of card member of payment behavior remains stable and the economy improves as projected we would expect the net loss rate for full year 2021 to be similar to 2020.
2021 will be of critical year for alliance data to solidify our core businesses improve efficiency and continue to invest and our strategic initiatives and drive sustained profitable growth over the long term.
We will host the virtual investor presentation and May focused on our strategy.
At that time, we will provide the details on our three year strategic plan and our long term financial targets across key metrics, including return on equity balance sheet growth efficiency and capital.
More detail and the time and will be forthcoming.
I'll close on slide 16, outlining our strategic areas, where we are investing opportunistically with.
With the acquisition of bread and the move to Fiserv, we are demonstrating how we are leveraging technology to build the more efficient company evolving our products and capabilities with digital advancement at the forefront of.
Our leadership team will go into more depth on how these initiatives and our key foundation elements will drive our company forward and our strategy update of Mei.
I'm coming up to my one year Mark of.
Joining alliance data I could not be prouder of the team all of them.
My associates and their dedication and resilience over the past year, I am confident and our direction and our ability to capture the substantial opportunities we see in front of us.
With that operator.
Please open the line for questions.
Thank you as a reminder, if you would like to ask a question at this time. Please press star followed by the number one and your Touchtone phone.
Withdraw your question press, the pound or hash tag.
Your first question here is from the line of Sanjay <unk> from Keybanc.
Please go ahead. Your line is now open.
Good morning.
Hey, Thanks, good morning.
It's been a year congratulations Rob.
Thank you Sanjay.
So.
And my first question and the outlook on expenses, specifically, the digital innovation and technology related costs can we can you guys talk about maybe some of the specifics around where you are making these upgrades and how you think those will pay off over time like what the IRR on those investments.
And <unk>.
Yes.
With the acquisition of Brad It makes sense for us to make investments in digital and platforms and also with our existing partners with our enhanced digital suite, that's where the investments lie and end to end journeys for our card members and customers and partners to drive incremental digital interaction. So we could be and every every channel are customers of ours.
And so we're excited about that Brett as threads of acquisition has been really very.
Very good for us very surprising great pipeline, and we will continue to invest and we expect <unk> revenue to double and the receivable of development during the course of the year.
Okay.
And I guess maybe.
Specifically to that.
I was noticing that you guys have made a decent amount of progress already cross selling <unk> into your customer base with the most recent one being RBC.
Could you just talk about like how we should think about the profitability of deals like this and how you guys specifically will make money in the.
Transaction, there and then maybe what the opportunities are to do more deals like this and the near future.
And so we're really excited about the about the RBC deal. If you think about that deal RBC has thousands of merchants out there and what we get from that deal is the technology and service fee. So we get a fee with really no risk of that of of.
Receivables on our books that said.
As you think about the white label solutions at grid has and we could drive incremental receivables within our existing partners and new partners moving forward. So again, we're excited about that as well.
And we're getting we're getting those receivables.
Two or three very exciting deals and the pipeline.
That are.
A mix of both of them.
Technology, and technology and servicing fees as well as gathering receivables so more to come and the very near future, but we're excited about the prospects of upright has.
And that has with the alliance data.
And just to be clear on this RBC example, you guys and won't be portfolio.
Of the loans at the RBC right, that's correct there'll be obviously loan of what will.
But we do get is a technology and servicing fee, so very little risk for the for revenue.
And sorry, the last one just in terms of those fees those technology and services, how do they compare to other peers and that.
Business or the lower comparable.
Yes, the comparable there could there consistent with the peers and that business.
Got it thank you so much.
Thank you Sanjay.
Your next question comes from the line of Bob Napoli from William Blair. Please go ahead. Your line is now open. Thank you.
Thanks.
And welcome Tim.
The follow up on some gains question on Brexit I'm, sorry did you say, what the revenue and loans were four Brad and.
At the end of the year on your balance sheet.
And revenue growth rate.
And we're going to report <unk> as part of the card services segment, but what I will tell you going forward, we expect <unk> revenue to double in 2021 as well as the receivables to double.
Okay and the debt.
Tech business.
I mean selling.
Brad to RBC and that a significant strategy to grow the the.
The non credit sensitive and partnerships, providing branch technology, the banks and and.
And the others and is that and is that.
A significant strategy and DM of pipeline.
And the technology side.
It is a it's another revenue stream for <unk> and <unk>.
Really excited.
Excited about it and there is significant pipeline. The two things one continue to grow that technology and servicing fees, but also to gather receivables without the partners, including partners we have today.
Okay. Thank you and then just.
And the current customer base and what you have coming up on renewables has the.
The as it become more competitive and retaining and adding new customers I mean, I appreciate your confidence and growing double digit high single to low double against going into 2022, but are there significant renewals is the pricing pressure and is there more competition for those renewals and how.
Confident and are you historically <unk> has had a pretty high retention rate.
Yes.
And the competition has always been there. So I don't view of the competition is any different than it has been in the past.
And I think it's I think we're better suited now because we have a greater suite of products. If you think about adding those bread white label products to private label co brand Big ticket and it just gives us.
The ability to demonstrate to our partners. We are a one stop shop of finance for underwriting and financial financial services. So we feel good about that and we feel going forward, we even have a better a better opportunity to compete.
Okay, and then just a quick numbers question for Tim and Whats the share count fully diluted share count the expected 2000.
'twenty, one and tax rate.
But you're asking of share count and the tax rate Bob is that correct, yes, and yes, it's 48 48 million shares.
And our tax rate will probably be pretty consistent with our 2020 numbers, which will be around 25%.
Thank you very much appreciate it.
Your next question here comes from the line of Ryan Nash with Goldman Sachs. Please go ahead. Your line is now open.
Hey, good morning, Ralph Good morning, Tim Good morning, Ryan.
And Tim maybe.
Question on credit.
You talked about the reserve still contemplating as for can you maybe just talk a little bit further about what is assumed in terms of in terms of unemployment and.
The economy continues to improve how should we think about both the pace of reserving and.
And reserve releases over the coming quarters sure. So let me start with the second part and again, we will get the S. Four assumptions.
And clearly we're concerned as most of the others and the industry about the fourth quarter.
We feel fairly comfortable about our guidance of the charge off number over the course of 2021 should be pretty consistent with 2020.
Like others, we feel of it.
And maybe a little bit of a spike at the end of the year of reserve rate cards and plate side. So specifically right. If you start asking about and what do I think that there is any opportunity to release. It clearly if the economy improves and we don't see that spike and the fourth quarter, the it's going to be and opportunity to release the <unk>.
<unk>.
And I think.
Check me, but I think we had 11, 1% unemployment rate for us for is that correct.
So I think that's what's caused by the thus far so pretty conservative with the overlays, but at this point like others in the industry. We're very concerned about what happens and the day, we were concerned about the fourth quarter and we're watching pretty carefully.
Got it and.
<unk>.
You talked on one of the last questions about the potential for high single digit low double digit card receivables growth as you exit 2021. He may be just talk about what you expect to be the drivers as well as youre of degrees of confidence and delivering on this and does this factor in and further merchant bankruptcies and is this sort of the way we should think about.
The franchise is capable of in terms of growth on an ongoing basis or is this really just specific to the near term.
Yes.
The the exit rate is a combination of a number of things.
The vaccination taken hold people being more and more confidence and go out shopping that pent up demand that people have to go out and shop. So we feel good about that.
The integration of bread and through our existing partners going deeper into our existing partners. The.
The.
The incremental marketing dollars of $50 million to drive acquisitions and sales all of that.
That is going to contribute to the double digit growth as we move forward and.
And my view that is.
High single digits double digit growth of what you can expect from us on an ongoing basis given the investments that we have made in 2021 and the execution of any of those investments and our new digital platforms.
Got it and then sort of say thanks for all of the color on the outlook and really good see all the information that you gave us and thank you.
Your next question comes from the line of her body and from Bank of America. Please go ahead of your line is now open.
Hi, Thank you for taking my questions and good morning, and let me also start off by thanking you for the color on the argument and the additional disclosure at the back.
And wanted to just clarify the answer on the 2021 credit outlook.
I think and you announced obviously you mentioned did that did you say the do you expect 'twenty and 'twenty, one if things keep improving and you expect 2021 lots of outlook to be similar to what you saw experienced in 2020 I just wanted to make sure about that because I think and the former guidance yellow and they talked about 24th quarter of 'twenty and 'twenty.
Yeah, So Ralph when we're on the guidance data set.
Unless something happens with the economy, we feel the 'twenty 'twenty one charge off on the year will be consistent with the 2020 and just.
Glad everybody of the 2020 charge off number was 660%.
Feel like it should be and pretty close to that given what we're seeing and the economy at this point.
Got it. Thank you and then just I guess I wanted to go back to the <unk>.
Ed.
And then particularly on the the RBC integration announced this morning I was wondering and you mentioned you were talking about the fees and the things of that data.
Is that just the straight licensing fee and the dependent on line.
The based on number of non vaccines as the book of loans that can be any more details of the financial impact of that data flow.
And you could provide.
It's a number of things, it's technology services and marketing fees. So it's an ongoing ongoing ongoing fee revenue.
Okay.
Okay, and then I guess one on one last question from me and then I'll.
And just if we can go back to your slide seven where you have all your new partnership is that just bread box of the ships card clients. We're just trying to understand what it means the AD. So many new partners and the quarter what does it mean from a financial standpoint, one of the deal or is.
Of that ball I can show and Youre, making progress towards the strategic but I just want to make sure I understand what kind of stay on that obviously, the a lot of those digital partners.
Our new added additives from Brad and it just expands our portfolio and where people can spend famous footwear as a traditional client from from <unk>. It will be and our enhanced digital suite I think the thing to notice there is that they're going to integrate simply with one API and as we move forward the integration of <unk> of.
Of partners to the to our enhanced digital suite.
Continues to be become seamless that drives more partners online and again it gives us the ability to meet consumer needs and all of the channels, whether it's bricks and mortar.
Or digital.
Okay. Thank you.
And your next question here comes from the line of Jeff Adelson from Morgan Stanley. Please go ahead. Your line is now open.
Hey, good morning, Ralph and Tim Glenn and good morning.
Yes, Hi, I was wondering if you could elaborate a little bit more on the credit sales trend that you guys are expecting.
And 2021 I appreciate the full year guide of.
High single digits, just kind of wondering how that progresses throughout the year once you lap the COVID-19 impact and.
Perhaps what Youre also expecting on the payment terms from here with the stimulus coming in and you're still expecting a pretty.
Significant rate of <unk>.
<unk> and <unk>.
That's part of what's happening with your guidance and then on the average receivables and just trying to understand how much upside the average receivables could could have from Brett this year and how much of that kind of contemplating is that doubling fully in there.
Yes, so I think the.
Questions I'll get back to what we think for average receivables and the different pieces Geoff So we'll start with just what we're expecting.
As Ralph said by the end of the year, we feel like we should be flat to 2020.
The big issue is obviously going to be Q1, and Q2, which we took the obviously the COVID-19 out of the big impact on us of the end of the year. The sales trends are going to follow that same year over year trend, which is the build out of Q1 and Q2 and by Q3 Q4, we'll have a nice increase in our sales which is also part of the reasons, we're guiding to 2022 with much stronger growth.
On top of that in 2021.
Covid behavior is that people are paying us and they continue to pass the above what we saw back in 2019 timeframe. We have contemplated that so if you put all of that and.
The perspective, Q1 is going to be down.
Two is going to be down, but then you start making that all up and as you get into Q3, and Q4 and by the end of the year, we feel pretty confident that we should be flat year over year.
Included in that is some opportunity with bread, but as Rob obviously.
And I certainly would second that we think there is a whole lot of opportunity and bread above and beyond we've contemplated more than doubling the AOR. The we have for bread and there, but given some of the things we're seeing that we think there maybe some upside there and which we.
We have not contemplated.
Okay, great and maybe just kind of switching a little bit of capital.
No that buybacks are off at this point, but.
As you start to see some of this excess capital come through and some of the excess reserves come off.
Can you remind us all how youre thinking about your.
Tangible equity targets and.
And what your goal is there and when you might eventually the.
<unk> and start looking at perhaps turning on that again.
So let me start and I'll turn it over to Tim and in terms of targets and my view is.
As the use of capital to me is kind of continuing to invest in the business and thats critically important we've kind of.
Certainly returned some shareholder value and dividends and we've got to pay down our debt. So as I look at as I look at uses of capital and also my top for uses of capital.
At least in the near term and.
And as we move forward to talk about targets.
And so.
And yet the sake of being with data and I'm going to reiterate we're well set of our first party with the capital has got to be putting money back of the business and we will continue to do that so and the reason I say that is we have targets for the TCE to ta ratios that are going to be consistent with our peers, but as we get opportunities like bread, both purchasing bread as well as.
<unk> and Brad.
We're going to do that so we're not we're not.
I've got a ticket data, we're going to continue to grow the business with the first priority, making further the capital goes back and the opportunities and we see the.
And pretty strong, but long term of key.
Eight years out we would expect our TCE to Ta ratio is consistent with our peers.
Great. Thank you guys.
Your next question here comes from the line of David Scharf from JMP Securities.
Securities. Please go ahead. Your line is now open.
Hi, good morning, Thanks for taking my call and.
I guess congratulations on the impending anniversary Ralph.
Free cash.
And at five years.
Yes.
That debt.
Remarkably quickly on your front.
I'm wondering maybe you could just a follow up and.
And the bread.
The pipeline, how we ought to think about it I know you referenced.
Active discussions and cross selling with the kind of existing.
Private label partners.
Can you.
Well number one I believe you said there were some integrations to start and the end of this quarter.
The new kind of signings that were referenced and that slide of 50 digital partners or are there some existing.
Private label partners that are going to be coming on board right.
Existing private label partners.
The different from the 50 60, net new digital partners and their existing private label partners and we expect that integration later in the first quarter.
Got it and in the course of those negotiations and just curious since the buy now pay later product is still emerging.
Are your partners.
Open to exclusivity with bread or are they generally adding several providers on the online shopping card how do you see that playing out over time and.
It depends on the part of it but what they what they particularly like about our great solution of its white labeled so it's.
It's not a not a move to another provider it looks like it's right and the bi flow of REIT and the checkout flow and it gives and the gives our partners and our customers the opportunity to to finance transactions and different ways, whether they want to use the private label card there.
And or buy now pay later and installment loan and just as a.
Seamless.
The transaction, where it is within within the bi flow and not having the punch out two of third party.
Okay. So is it is it are we ever going to see of bread logo or it sounds like it will always be branded as the <unk>.
Yes, yes.
Yes.
And some of these and some of the offerings, you'll see the bread logo I think I think the brand logo has some some equity to it and youll see that red logo and as you've seen it in the past.
Got it got it and just one follow up.
And I guess for Tim.
Once again sort of touching upon some of the underlying assumptions.
On <unk> this year.
And you referenced obviously debt.
I think the guidance is still contemplating elevated payment rates.
And we're seeing elevated savings rates as well.
Are you, making any assumptions about additional round of stimulus that's being debated and the new Congress right now and how we ought to think about how that might.
Potentially impact.
The cadence.
Yes, I would say that yes, and no. The the payment rates. We're seeing are indicative of the stimulus checks that are going out and the stimulus of the folks have been getting over the course of 2020. So we didn't we didn't put a step function in our payment rates for our new out of stimulus, we just kept them high.
Consequently, the U S government would continue to support the consumer.
Got it got it thank you.
Your next question comes from the line of Scott Mcfarlane from Wolfe Research. Please go ahead. Your line is now open.
Good morning, guys and Scott on for Darren Thanks for taking my questions.
Just to add one question here. So in terms of credit sales looking at online sales being over 40% of total during the fourth quarter and you guys have any sort of expectation.
And for sort of a normalized run rate of E comm and data those sales as we head into 'twenty and 'twenty one.
Yes.
Yes.
It will continue to grow.
It may moderate when when malls open and people are able to shop in store, but I think I see that continuing to grow over the course of the year of particularly as we add new digital partners and.
And partners like RBC and other partners. So that we have and the pipeline you'll see digital sales continue to ramp up.
Got it great. Thanks again.
My questions guys.
Thank you.
Your next question comes from the line of John Hecht with Jefferies. Please go ahead. Your line is now open.
Yes.
Thanks, very much guys and welcome and congratulations on coming up on one year.
Thank you you guys I appreciate all the color and guidance as well.
And we've talked a lot about the credit receivables outlook.
Royalty one it sounds like you expect.
And the recovery and revenues over the course of the year.
Any color there is that just generally with the expectation.
The increase.
<unk> traveled throughout the year any other kind of incremental factors, we should think about what the royalty one yeah I think the royalty one and I think both organizations have done a really nice job in 2020, and 2020 of doing a few things one certainly trimming their sales in terms of expenses and secondly.
Having to reinvent themselves in terms of their product offerings, particularly in Canada and miles has pivoted to a stay at home offerings, which we continue to drive spend and redemptions I think that combined with travel coming back of the gives the the.
The customer options on how to redeem miles and I think that will be only the only positive for that business and.
And our.
Our Netherlands based business brand loyalty I think they've done the same they've kind of reinvented themselves a lot of their promotions got pushed off the 2021, we'll see those promotions and 2021.
I think they've added again added some stay at home options and bringing.
Bring bring bring briefings home and I think that will again, the combination will will drive incremental revenue and 2021.
Okay, and then thinking about.
The broad and boom.
On the business.
And it's growing nicely and you.
And youre starting of different forms of partnerships and I can probably of different economic relationships. How do we think about the importance of brand over time on the move.
And the receivables portfolio and the mix of PL.
All of <unk> versus co brand versus the okay.
Sure. So let me start with the.
With the the yield.
And when you get a relationship like the RBC relationship which is ongoing.
The income revenue income for that over time and as they continue to grow that business, we continue to make money with no <unk>.
And that's obviously going to help our yields.
So that I think is going to continue the incremental.
And adds to our yields.
No no denominator, obviously of that yield so that's certainly going to help.
Once you move into our split.
Plc Big ticket co brand.
Thank you.
And given guidance, we think the co brand is going to get a little bit larger over time, which that's not changed we think that the bread is not going to influence that and we think we're going to be able to penetrate co brand type relationships plc type relationships and big ticket relationships at this point I would say that were pretty consistent with our product split.
Okay I appreciate the color.
Thanks, Sean.
Okay.
Your next question comes from the line of Bill Ryan from Compass Point. Please go ahead. Your line is now open.
Thanks, and good morning of couple of questions first just a numbers question.
Your total expense guide was flat versus 2020, and you kind of look at the footnote it says.
And that includes interest expense and kind of any interest expense goes down does that mean and we should be modeling just higher operating expenses and general second question.
Looking looking back of the firm.
It is kind of surprising to see a little bit over 50% of their business being installment lending and about a 25% interest rate.
And I was kind of curious and the positioning of the brand.
And kind of a hybrid between pure be NPL and see what percent type offers and installment lending and do you see an opportunity. If there is installment lending to the kind of offer of somewhat more attractive rate relative to what is being offered by the competitors. Thanks.
Yes so.
Let me talk about expenses first.
<unk> operating expenses are projected to be flat and I just wanted to remind everyone and in that number there is a $100 million of investment dollars and operating expenses. So the congrats.
Investment dollars and necessary to drive our digital enhancements and and.
And such and umbrella I think it will be of hybrid I think youll see the white label solution of buy now pay later and Youll also see let's be competitive in the marketplace with rates.
And on installment loans.
And so.
Clearly when we start looking at the <unk>.
Makeup of.
Firm and the installment lending and.
And that rate and.
And we think theres some opportunity to drive that forward.
As far as how we position ourselves how we get our rate.
No.
And so John I think that I think that answer your question Greg.
Yes, like I said I was just kind of interesting when youre looking at the securitization data for the firm just.
The appreciation that Theres, a lot of installment lending and a very high rate and kind of the traditional private label products actually look somewhat more attractive and in some respects.
One of the things, we like and Thats. All you think about how we're going to position the and.
We are positioning bread vis a via our credit card installment lending line.
Later, we're going to have that whole suite and go across all of those different products, including being able to have the installment and migrate people back and forth of a private label.
Fit nicely and our big ticket space of some of our jewelry verticals are certainly very very interested and that red products. So yeah.
Yes of that rate is.
<unk>, which where we think we have a lot of opportunity there, but we're also as opportunity for us across the spectrum of products.
Thank you.
Your next question comes from the line of Michael Young with True Securities. Please go ahead. Your line is now open.
Hey, Thanks for taking the question.
Wanted to ask and I appreciate as well all of the the outlook items and it seems like the focus is on generating positive operating leverage in 2022 with stronger revenue growth. Obviously, there's a lot of macro factors that are kind of going into the revenue outlook. Currently so if we get either upside or downside the kind of the revenue growth.
And should either later this year or into 2022 do you plan to spend that back and to further investment and digital or other areas or should we expect that to drop to the bottom line.
Yes I.
I think the investment the $100 million of investment of $50 million of marketing are all of the right investments as we look out of 2021 income.
The mental opportunity with of course, the way that but I would expect that to be dropped to the bottom line.
Okay. Thanks, and maybe just as a follow up kind of on capital of Big picture either you guys did the bread acquisition, but as we look at kind of the.
Moving into the re grow phase are there other areas of capital deployment of <unk>.
Growth that we should expect whether it be acquisitive or share buyback or anything else that we should be kind of thinking about that you guys are focused on.
Yes, the <unk>.
Capital commitments remain consistent.
And with number one being invest back in the business once we.
And we go pass that phrase.
Phase.
The getting the balance sheet getting the TCE to ta ratio as the spot we feel very consistent with our peers would be the next priority and then of course after that and we would do and the type of share repurchases slash dividend.
And the reason we've been careful about not saying, hey, we're going to poke of target out is because luckily we're better the spot we've gotten some great opportunities to invest back of the business as well and talked about obviously and <unk>.
The $1 billion and <unk>.
Just going back and digital and transformation there, obviously, the $50 million of marketing the cute advantage for us that will of course push or any type of debt repayment and out a little bit, but we think thats. The right thing to do for the business when we get opportunities like we've been seeing with the <unk> acquisition, and then putting money back into the business and 2021.
Okay. Thanks.
Your next question comes from the line of Bank Channel and Deutsche Bank. Please go ahead. Your line is now open.
Good morning, gentlemen, thanks for taking my question.
The first question of are headed.
If the payment rates.
Continue to remain elevated into the second half of 'twenty. One do you expect I guess modest downward pressure of that.
And we have the payment rates are at.
Pretty close to historic highs on those rates so I.
I doubt, we have much more pressure coming on our AUR for the payment rates of it even with the stimulus packages that might be out there the payment rates, we have a pretty elevated so I wouldn't expect any further pressure.
On our <unk> from the payment rates.
Got it great and then I guess secondly.
With breads receivables that are coming up and the new year and current ones. I mean is there any sort of I guess fundamental difference between those and what are you guys. Currently have on balance sheet I guess in terms of credit profile or anything.
Yes.
I'll start and I'll turn it over the Timothy.
The credit the bread credit really of shorter term than our traditional receivables.
And that we would have on balancing and if you think about the installment loans. The buy now pay later, so those tend to be.
Short of turning favorable.
Yes, that's what I would add on the credit perspective right now.
We think theres some opportunity to put our full spectrum lending and and enhance the offerings we have.
And for the installment loans of the buy now pay later.
Great. Thanks, guys.
Your next question comes from the line of Scott Mcdonald from Wolfe Research. Please go ahead. Your line is now open.
Hey, guys just had one quick follow up on credit sales. So looking at in 2021 of high single digits.
And some of that and students some easier comps, but how should we think of that sort of credit sales growth rate and like kind of.
Normalized as we get past 'twenty and 'twenty one yes.
Yes, I would say if you are going to we should be able to do the high single digits. In 2022. So if I start looking at normalized you should be high single digits.
Great. Thanks, guys.
And how much line any further question and thank you and I will turn the call back over to Ralph angina for any closing comments.
Thank you all and I appreciate you joining us this morning and have a good day.
Thank you and ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
And.
Okay.
And then.
And.