Q4 2021 Alliance Data Systems Corp Earnings Call
Yeah.
Good morning, and welcome to Alliance Data's fourth quarter full year 2021 earnings Conference call. My name is Charlie and I will be coordinating your call today.
All parties have been placed on listen only mode. Following today's presentation. The floor will be open for questions to Register a question. Please press star followed by one it is now my pleasure to introduce Mr. Buying Barrett head of Investor Relations at lines data.
Floor is yours.
Thank you copies of the slides, we'll be reviewing in the earnings release.
The Investor Relations section of our website.
Today on the call, we have Ralph <unk>, President and Chief Executive Officer of Alliance data and Perry Beeferman 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.
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 measure, 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 in dry dock now.
Thank you, Brian and thank you to everyone for joining the call. This morning.
Before I begin with the slides I would like to address the news last week regarding our contract with Bj's wholesale club as.
As you may be aware a lawsuit was filed noting the non renewal of the contract.
While we cannot speak further about this matter on the call today, we firmly believe we are in compliance with the terms, while contractual agreement, but I can comment on is our steadfast commitment and track record of delivering the highest level of service and support to our value brand partners, including operating responsibly and with.
Utmost integrity.
Our leadership team has decades of industry experience and understands the importance of building trusted relationships with our partners at working together to drive long term success for all of the parties involved.
We will be highlighting our achievements on this call. This morning, as we look back over our 2021, a record year for new brand partners signings successful renewals and continued significant progress on our transformation.
Regarding the Bj's nonrenewable impact on our receivables growth and financial outlook, our forecast contemplates business activities, including new brand partner wins, not yet add announcement stage thoughtful assumptions around our ongoing new business development pipeline and renewal probabilities and <unk>.
Expected, but not yet announced nonrenewals and portfolio optimization decisions like Bj's.
We will maintain financial discipline in both signing new partners and renewing existing ones as I said before we will not chase unprofitable deals simply for the sake of growth.
We remain committed to delivering responsible economics.
With these factors and assumptions, we have clear visibility across our portfolio activity through 'twenty two 'twenty three underscoring our confidence in our outlook for continued growth more importantly, we remain committed to our long term financial target of $20 billion in average receivables.
For the full year of 2023.
As the year progresses, I look forward to sharing updates regarding ongoing success, new brand partner wins supporting the achievement of our goal.
Now moving to the slide deck I will start on slide three.
Slide three highlights.
Just a few of the major accomplishments, we achieved in 2021 as part of our business transformation.
We made great strides in simplifying our business model, including completing the spinoff of our royalty ventures in the fourth quarter.
The spinoff allowed us to strengthen our balance sheet by improving our capital ratios and reducing our leverage ratio as well as enabling a sharper focus on our investments and future growth plans.
The spinoff marks the culmination of a three year strategy implemented by our board to simplify and streamline the company the.
The outcome of which is a stronger more focused business profile with increased flexibility and sustainable growth potential.
We continue to develop our full suite of lending products to provide consumers with a diverse set of payment options. For example, we had great success, introducing our new proprietary card has it grew two 1 million cardholders at nearly $650 million and outstanding balances at the end of 2000.
'twenty one.
We project continued success with this product, which provides a diversified growth driver and helps balance our portfolio of risks.
Our diverse product set including private label and co brands installment lending and split PE unlocks graduation, and optimization strategies that increase the lifetime value of a customer for us and our brand partners.
Product choice allows us to meet the needs of a wide variety of consumers in a way that increases conversion, while allowing brands to manage the product mix and optimization profitability.
We recently celebrated the one year anniversary of the bread acquisition.
Which added buy now pay later offerings, including digital installment lending and split paid products. These additions to our product set were instrumental at a time of increasing omnichannel focus by our partners and consumers increasing digital payment preferences.
Our versatile payments platform provides new opportunities to deepen our relationships expand our total addressable market and have provided a new strategic relationship with RBC <unk> wafer and settle.
These partners leverage our nimble and flexible fintech platform to expand and improve their customer experience, while also offering greater payment choices to consumers.
We will.
<unk> to strategically invest in our digital platform product innovation marketing efforts and technology monetization with a planned incremental investments of over $125 million. In 2022 also a 2022, we are scheduled to complete the conversion of our core processing system to five.
Sure.
It will allow us to be more nimble manage risk effectively and leverage new capabilities to drive both revenue opportunities and operating efficiencies.
Last but not least as highlighted in our environmental social and governance report, we have continued to refine and prioritize our ESG strategy with board level oversight.
We have an outstanding board of directors, which is aligned with and confident in your strategic direction of the company and is supportive of our ability to make disciplined financial decisions to drive long term value for our stakeholders.
Moving to slide four.
I will highlight a few key updates for the quarter and full year.
Im happy to announce that we exceeded our 2021 financial guidance driven by stronger than expected revenue growth thoughtful expense management and positive credit performance, we are well positioned to build on this momentum in 2022.
Consumer activity remains strong with credit sales up 15% in the fourth quarter from the prior year period, our beauty and jewelry verticals remain the front runners with holiday sales up more than 30% in each category.
We saw particular improvement among millennials and Gen Z with spending and transaction activity during the holiday season exceeding pre pandemic levels.
While diverse purchasing options across all channels is important to our brand partners. We did see a notable year over year increase in in store transactions in the fourth quarter.
As previously discussed our business development pipeline remains robust and you were seeing the results in our announced new signings and renewals during the quarter moving to slide five I will highlight a few of these names.
We signed several large partners Pebble watch new brand partners in the fourth quarter, including the National Football League with its tens of millions of fans and they are 32 affiliated clip shops located at their stadium.
Michael.
The nation's largest retail of arts and crafts materials with over 1000 stores across 49 states.
<unk> photo, which went live last week and is one of the world's largest independent retailers a photo video audio computer and creative technology equipment with nearly 50 years in the business and finally TBC Corporation, one of North America's largest marketers of tire repair and automotive services.
<unk> delivered through a multichannel strategy for over 65 years TPC as more than 3000 franchising company operated tire and automotive service centers on the brand side national tire and battery.
At Midas.
We look forward to working with these new partners to drive incremental sales growth and customer loyalty through our comprehensive product suite and exceptional customer service. These new partners are prime examples of our ongoing vertical vertical diversification efforts and we continue to actively add new brand partners, which we will announce in the coming months.
This morning, we announced the early renewal of a long term agreement with Ulta beauty top millennial brand in one of our largest and fastest growing brand partners selling over 25000 products at more than 1300 stores and on Ulta Dot com.
<unk> rewards credit card is designed to enhance the benefits of olson's loyalty program and increase engagement and spend amongst the 36 million loyalty members and.
Importantly, this renewal reinforce our industry leading position in the beauty vertical.
We have a demonstrated track record of growth that was important to ulta for our continued relationship.
Our breadth of lending products provides customer choice increases top of the funnel conversion, while allowing <unk> to optimize the product mix for lifetime customer value.
We have also renewed our relationship with Toyota a preferred.
<unk> Z Gen Z brand and Lexus, which further extends the growth of our diversified portfolios.
With these renewables nearly 90% of our year end receivable balances excluding bj's are now under contract through 2023.
This clarity should provide additional confidence in our long term receivables outlook and overall growth potential.
Additionally, we continued to successfully add new online merchants through our direct acquisition platform channels doubling new merchant additions in the fourth quarter compared to the third quarter. This success provide additional merchant diversification and it's another source of ongoing growth.
A select few of the partners added to the platform are displayed on the right side of the slide.
Also our strategic partnerships continue to progress with new merchant additions to the RBC platform as well as to a fiserv platform pilot in the fourth quarter.
We will be better positioned to provide additional detail on the platform activities from fiserv as we move from pilot stage to a full rollout and for <unk> wafer following our expected launch in the first half of 2022.
We continue to monitor the changing buy now pay later landscape, particularly in split pay or pay in four environment.
As with any business.
Consumer economic competitive and regulatory landscape is continuously changing however, the vast majority of our platform businesses and pipeline opportunities are aligned with our digital installment lending products, where the returns and growth opportunities remain strong.
We will remain responsible and disciplined with adding new partners to ensure we are already receiving acceptable lifetime customer returns.
We remain the only provider who is primarily focused on deeply integrating with merchants and partners, allowing the customer to stay on the merchant site throughout the shopping journey, rather than being directed to a third party site or app.
This is an important distinction as.
As many third party sites promote multiple merchant offers.
And their number one priority is having their app downloaded so they've become the entry point of the shopping journey.
This ultimately intermediates the merchant.
Our number one priority is sales conversion for our brand partners.
Yes.
We've launched bank compliance project products that follow regulatory guidance have strong underwriting discipline lower cost funding and industry experience that gives us confidence in making the appropriate responsible decisions to drive long term shareholder growth.
Finally, I am confident that with a full spectrum of lending products, we can't compete win and drive growth with any size part of our merchant from large brands like Victoria's secret Cigna, and Ulta to smaller merchants, our ability to drive strong results for our menu brand partner.
It has been and will continue to be the key to our success.
I'll now turn it over to our CFO Perry be women to review the financials and our outlook for 2022.
Thanks Ralph.
As a result of the loyalty venture spin off our income statement and balance sheet have been recast as the loyalty one segment and spin related items reflected as discontinued operations as you can see on slide six this impacted net income for the quarter by $44 million, which was primarily comprised of related transaction costs.
The release of a net investment hedge and allocated interest expense the remainder of the slides will focus on the continuing operations portion of the business.
Slide seven provides our fourth quarter highlights.
Credit sales were up 15% year over year to $8 8 billion as consumer spending continued to recover.
Average receivables were up 2% driven by strong credit sales and the recovery of economy, providing for year over year momentum as we enter 2022.
Revenue for the quarter was $855 million and income from continuing operations was $61 million.
Revenue increased 11% year over year, while not while total non interest expenses declined 12%.
Diluted EPS from continuing operations of $1 21 was impacted by a higher provision for credit losses, primarily due to provision build of $187 million.
For continued portfolio growth and the seasonal increase in year end receivables.
Credit metrics remained strong with net loss and delinquency rates of four 4% and three 9% respectively for the quarter.
Moving to slide eight.
Slide eight highlights the key financial metrics for the full year.
Credit sales were up 20% year over year to $29 6 billion.
Revenue for the year was $3 3 billion and income from continuing operations was $797 million.
Revenue was nearly flat year over year, while total non interest expenses declined 3%.
Diluted EPS from continuing operations of $15 95 improved driven by a lower provision for credit losses, due to lower credit losses, and a lower reserve rate at year end.
Our net loss rate was four 6% for the year remaining well below our historical average.
Turning to slide nine.
As part of our ongoing efforts to provide additional transparency and comparability in our reporting we have transitioned our financial reporting to more closely align with the presentation of traditional bank holding companies.
Looking at the fourth quarter financials total interest income was up 7% from the previous year attributed to higher average receivable balances and improved loan yields total interest expense improved 24% due to continued improvement in our cost of funds, which you can see on the following slide.
Noninterest income, which primarily includes merchant discount fees and interchange revenue net of the impact from our share agreements and customer awards declined slightly in the quarter driven by higher credit sales activity.
Total noninterest expenses declined 12% year over year in the fourth quarter largely due to <unk>.
One time $48 million real estate optimization activities in the fourth quarter of 2020, partially offset by a 15% increase in employee compensation and benefits costs in 2021.
The increase in employee costs were driven primarily by continued digital and technology modernization related hiring as well as higher volume related staffing levels.
We have provided additional details on our new expense driver slide in the appendix of the slide deck.
Overall income from continuing on continuing operations was down 18% for the quarter driven by provision build of $187 million this quarter versus a relief of $82 million in the fourth quarter of 2020, while pre tax pre provision earnings were P. PNR improved fit.
52% year over year as you can see on the graph to the right of the page.
We are pleased with the PPR growth over the last three quarters and expect this momentum of year over year P. PNR growth to continue into 2022, as we profitably grow our portfolio and improve our efficiency.
Turning to slide 10.
As part of our updated financial presentation and quarterly disclosures, we are providing increased transparency into the components of our net interest margin or NIM.
The left side of the slide highlights, our earning asset yields and balances.
Fourth quarter loan yield came in stronger than we had expected in October as consumer payment behavior begins to gradually move back towards pre pandemic levels.
<unk> the impact of fed rate increases, we expect loan yield to remain fairly steady this year as the benefit from payment normalization is offset by continued growth of our co brand and proprietary products.
On the liability side, we continue to benefit from the maturity of our longer dated funding as new balances are added at current lower rates as you can see from the stack bars on the bottom right our direct to consumer deposits have grown from 6% of our average interest bearing liabilities in the first quarter of 2020.
15% this last quarter.
As this growth continues we anticipate our cost of funds continuing to improve in the first quarter. However, once interest rates begin to rise the benefits from lower cost of funds will reduce overall rate increases will be nominally accretive to the net interest margin is variable priced assets slightly offset increases in <unk>.
Funding costs.
Moving to slide 11.
I'll start on the upper left.
Our delinquency rate increased 10 basis points versus the previous quarter due to normal seasonal trends.
On a year over year basis, the delinquency rate was down 50 basis points on.
On the upper right you can see that we had a loss rate of four 4% for the quarter still well below historical averages.
Turning to the bottom left of the page our allowance increased sequentially due to seasonal balances. The overall reserve rate remains steady at 10, 5%, we anticipate that the reserve rate will stay in this range until greater economic certainty emerges.
Lastly, on the bottom right hand side of the page our revolving credit risk distribution was consistent with the third quarter, our risk mix and associated delinquency and losses are the result of our ongoing thoughtful management of our book as well as the strong payment rates indicative of the general health of the consumer we.
Expect these rates will begin to trend back towards historical averages in 2022 as COVID-19 related federal stimulus programs wind down.
Slide 12 provides our financial outlook for full year 2022.
We remain optimistic for a steady normalization of both economic activity and consumer behavior, and we remained villages vigilant in monitoring COVID-19 conditions and the impact on consumers and our brand partners our outlook.
Assumes a moderation in consumer payments throughout 2022 with payment rate volatility leading to the ranges provided.
For fed rate increases are included in our 2020 outlook with our models indicated that these rate hikes would result in a nominal benefit to total net interest income in 2022.
Our full year average receivables are expected to grow high single to low double digits as continued sales momentum net brand partner additions and direct to consumer products will drive strong growth. We expect year end 2022 year over year receivables growth to be slightly stronger.
Then our average receivables growth.
As Rob said, our previously provided outlook contemplated the bj's non renewal.
Timing of the Bj's relationship wind down will likely cause some quarterly volatility within our forecast, but that does not have an impact on our long term outlook of $20 billion in average receivables for the full year of 2023.
Sure.
We expect revenue growth to be aligned with average receivables growth in 2022.
Net interest income growth is expected to be slightly favorable to average receivables growth as our NIM benefits from lower funding costs earlier in the year.
This change in year over year non interest income is anticipated to offset the slight favorability in net interest income.
Note that conservatively.
Our guidance does not include any potential impact from the monetization of our 19% equity stake in royalty ventures or any potential gains from portfolio sales.
We're targeting modest full year positive operating leverage in 2022.
As Ralph already mentioned.
We plan for incremental strategic investment of over $125 million.
In technology modernization digital advancement marketing product and product innovation to fuel growth opportunities and future operating efficiencies.
A large portion of the investment is expected and employee expense as we continue the higher digital engineers and data scientists to drive our continued business transformation. We also plan for higher marketing expenses in 2022, as a result of portfolio growth new partnerships and new products.
Information processing costs will increase as a result of our ongoing technology modernization, including the conversion of our core process into <unk>. This year.
Our strategic investments will be thoughtfully balanced with our revenue growth outlook, we're making investments now to stay ahead from a technology perspective in today's dynamic environment.
Regarding our net loss rate both loss and delinquency rates were at historical lows in 2021, we.
We expect credit metrics to begin to gradually normalize throughout 2022.
We anticipate that our full year 2020 loss rate will remain in the low to mid 5% range.
Phil well below historical averages as we discussed at our Investor event last year, our disciplined portfolio and partner management focus on risk reward tradeoff enabled us to drive profitability and growth even at slightly higher loss rates.
I would also reiterate our confidence in our long term outlook on average through the cycle net loss rate below our historical average of 6%.
Overall, we are excited for the opportunities in front of us for 2022, we're making thoughtful investments and decisions to ensure we are driving long term value creation for our shareholders.
Sure.
Operator.
We are now ready to open up the lines for questions.
Ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your telephone keypad now if you change your mind.
Followed by <unk>.
We're preparing to ask a question. Please ensure your phone is on mute.
Our SaaS question comes from Sanjay Zachary of VW. Your line is open. Please go ahead.
Great. Thanks. Good morning, Good morning, how are you guys.
I had a couple of questions just on the marketplace.
Obviously, it's a very competitive and you guys have had wins and losses and while we don't know.
What this other when might be but.
Maybe you could just talk about maybe you guys could just talk about.
What this means right because some of the losses you have our good customers and they were merchants that we're growing well, we obviously don't know what youre getting but maybe you can just talk about what the dynamics are and how competitive it is and how you expect to win going forward.
Of course Sanjay so.
The nature of our businesses you have wins and losses, that's the business we're at.
And what makes me confident successful as we have far more wins and renewals and losses. So if you think about 2021. It was a banner year for us double digit renewals.
Digit wins.
When you lose something you put it behind you you plan for it when you put it behind you and we did that.
But if you look about the wins, we just talked about today.
Nichols, NFL DNA itch and Alt.
Altra as a renewal thousands of locations national brands.
Millions literally tens of millions of customers in wireless.
That's our sweet spot, we are going to grow that with our.
For our existing and new partners, that's what we focus on.
The flexibility of our business enables us to.
To compete with the big guys and some of the things we talk about our takeaways from the big guys and also smaller mid size and to grow those partners as well so.
You never like to lose a partner, but they move forward with new partners and renewals and we have a broad product set that really appeals to.
Two new partners and as we renew we just demonstrate to our partners like also that we're going to grow the pie.
And lean in hard on digital and Omnichannel.
Hanmi channel Omnichannel servicing.
Okay.
And then just a follow up Ralph you mentioned the regulatory pressures on buy now pay later and some of the merchants actually viewing them as disintermediation.
Im just curious how you think this shakes out I know you guys have a little bit of a hedged model, but to the merchants get it.
How are they responding to that.
Yes, I think the merchants are starting to get it last year. It was below desperation in the marketplace. They wanted.
Volume and I think buy now pay later gives them more volume, but it's that second next transaction that the merchants are insane and I think thats, causing some pause as I mentioned the buy now pay later space is very competitive now with some of the regulatory scrutiny.
It's all about I want to be I want to be the entry point, where very different partnerships. We want to drive that next transaction with our partners and we've been in this business for a long time.
We built our regulatory product we know what the regulations are we know how to underwrite.
And I think for us that gives us a really good hedge in a really good advantage going forward because we are ready to go with a compliance cost and others are going to have to pay a little bit of catch up and they are under a little bit of scrutiny.
I appreciate that thank you.
Before I before we get off this question. If you think about our product split pay an installment loan installment lending. So installment lending is place levels real profitability for us locally and split <unk> business, but installment lending his willingness real profitability and growth.
Got it.
Thank you.
Thank you.
Our next question comes from Bob Napoli of William Blair. Your line is open. Thanks go ahead.
Hi, Thank you good morning.
So just on the.
Long term ROE target you didn't have an ROE target or what should be the return on equity for this company and I mean are you going to give ETS Andy gave EPS guidance I know you gave all the pieces.
Wondering if youre going to take that a step further.
Yes, I don't think were going to be planning to give an EPS target.
Any point in the near term, but we have previously communicated mid to high <unk> and our long term plan and that's what we're building the business forward. I mean, you heard Ralph talk about you will focus on profitability and that holds true for our partner renewables new product that we launched the partnerships.
That's what we're focused on now with that said I think you all know from you look at your model. The faster you grow and you put on a little bit with that seasonal growth tax, but that moderate growth in the long term that kind of dissipate. So I think youre going to see a little bit lower ROE when you're in high growth mode, and then it will temper, but the long term targets of what we're.
<unk> towards is absolutely.
Mid to high point.
Thank you and I guess also renewal congratulations on that any tenants follows on Sanjay.
And on the industry what are the economics, how different are the economics on all of that I guess mid to high <unk> row speaks to what your view is of the economics of the industry, but has there been.
You go back years ago.
Tony has never really changed hands.
I mean that changed.
But how would the economics on the ultimate renewable and how do you feel about that.
The economics for the overall industry.
Moderating.
And we feel.
Ultra economics were fair for both sides and when you enter a partnership in renewable partnership Thats exactly what you want.
Demonstrated to alter that well we've demonstrated that we are growing that portfolio and we'll continue to grow that portfolio and our enhanced product suite again confirmation for that so we are thrilled at as a high growth vertical for us.
And we will grow the overall pie so there'll be benefits for both Alta and us and so we feel very comfortable.
About that new relationship.
In renewables.
Thanks, I just sneak in one last one following up on buy now pay later, Ralph do you feel like the model is settled for the core ABF reported the industry. The profit model I mean, there is some.
It is out there that I think it's still moving around on the discount rate versus the.
The interest income and other fee income.
How confident are you in the profit model around buy now pay later.
So if I kind of.
Bifurcate buy now pay later to me, there's two parts right. We've got an installment loan and I think yes on installment loan has settled in its profitability and growth. There. So I think from that perspective. It is settled I think with buy now pay later, which is.
For payments and so forth a lot of work can be done I think that market is still still unsettled.
And particularly from a compliance perspective right. So.
So there's a little bit of regulatory pressure.
For us we use.
Regulatory pressure, we've had it for four years, and we respond to it well, but I think that.
Split pay and I think particularly specific on this.
The.
<unk> and <unk>.
Split pay is where I think there are some on settlement, but installment loan I think has been around for a very long time, we have a very digital flexible.
Our platform and we see we see growth there and I would add to what Rob said.
The installment loan product as a bigger ticket and we know how to underwrite that whereas your split pay tends to be lower and so when you think about where we're going to lean into growth we're going to.
We will responsibly and will be advantageous at the right time so.
Let's say it looks like it's not provide economics won't we're not going to lean in as much. There. So we'll throttle up and down and but we're ready to pounce when the market settles out.
Thank you.
Our next question comes from Bill Kirk cash of Wolfe Research. Your line is open. Please go ahead.
One of them.
Hi, good morning.
Gary.
Thanks for the additional disclosures in the deck.
I guess, what would you view as your steady state reserve rate given your risk appetite and expectation of sub 6% through the cycle. It shows you said, Gary I believe it should hold up.
5% until there's greater clarity. So does that suggest that you would expect it to eventually move lower.
Move beyond the pandemic it seems like you have lower losses.
In your book than you did on day, one, but not appear to be running with higher reserves, maybe if you could just frame for us.
No.
Thanks, Bill Great question.
I think when we spoke last quarter.
We had said.
From our position and trying to be cautious given the degree of uncertainty and if you think about last quarter Covid cases gone up buybacks since that point omicron took off and it was pretty prudent.
We held our posture.
So now as we're moving through this we're starting to again, we're in a position where we're trying to wait and see and be prudent with that now remember, we're only 12 months to 13% above day one.
Seasonal reserve rate.
Others are still above 20% somewhere obviously less but I think everybody has taken a different position and there is a number of different possible outcomes, our customers benefited more greatly from the government stimulus.
And so we're going to be you're going to see us probably have an earlier normalization and so what happens in the next three to six months will help drive that but I would expect as we are.
You said and as I said, we're going to have a through the cycle loss rate.
<unk>, 6% average.
That will give us.
A good line of sight that at some point, we still start to reduce that reserve rate all else equal.
Thank you that's very helpful.
Can you discuss how you're thinking about the relative importance of starting up the buyback again on one hand and on the other building capital back up to peer levels, where CET, one gets up to that call it 10% to 11% range at the enterprise level and then.
Extending the maybe the question that Bob asked earlier about ROE could you maybe just close the loop on us and tell us what that translates into in terms of rotc's. Thanks.
Yes, let me comment on.
The buyback.
<unk> talked about in the past.
Capital number one has grown this business, we're going to deploy capital for growth.
And then make sure we're getting the right returns and then over time, we obviously need to get our capital ratios up to peer levels, where it should be and then at that point, we will be able to put in front of the board options for a buyback program.
I think the only thing, we're giving guidance around right now as total Roe.
Got it.
And it was rather limited offer that I think that's consistent with what we said.
Yes.
Mid twenties.
It was consistent.
He said that.
We'll get there in 2023.
And when we get there responsibly and buybacks important to us and use of capitals continue to grow the business pay down our remaining debt.
And then obviously returned to shareholders, whether it's dividends buybacks and we will put that in front of the board.
When appropriate our balance sheet is strengthening it just got a shot of adrenaline with this spin off will continue to do that and when we believe our ratios are appropriate.
I prefer to the board.
That's very helpful. Thank you for taking my questions.
The next question comes from Manhattan Bahia.
Bank of America. Your line is open. Please go ahead.
Good morning, and thank you for taking good morning, and thank you for taking my question first let me just also add my thanks for the incremental disclosures in the presentation.
Really hope you'll continue to provide those consistently going forward.
Maybe.
I understand you've gone talk about a specific renewal or make any announcements right now, but given the bj's is around 9% 10% of your receivables if the press reports that.
You can imagine there's a little bit of consternation with your investments. So maybe talk broadly about a couple of states.
Just shouldnt be expectation be that bj's get back filled with like one of your big portfolio announcements or is it going to be a series of smaller announcements.
And then just in terms of your pipeline with regard to 2022 opportunity are there certain verticals or products that you are focusing on 2022 and then just lastly on the same topic is just about.
Future Nonrenewals contemplated in the guidance are there more non renewals, we should be aware of that could happen in 2000 22023. Thank you.
Hi, Alex.
That's a long question I will see if I can take all those parts.
This will probably be my final comment about bj's.
I'd like to lose a partner.
But they are in our rearview mirror quite frankly, we will do what's appropriate and have a <unk>.
<unk> separation from the company, but at the end of the day. Our focus is on growth on the new partners, we talked about the NFL Michael being Htpc also renewals will talk and then what we have yet to announce now we're not going to announce something prematurely.
But I will tell you that our our guidance Hasnt changed our guidance contemplated a loss of a partner in addition to our partners and our growth comes from more organic and inorganic and we are confident.
Our 2022 guidance and that $20 billion.
Average receivables in 2023, so im up as I said.
We're focused on the future and the future of the partners, we mentioned today and in renewables and the partners will mentioned and announced during 2022.
Yes, and then to add on to what Ralph said you asked the question around additional product.
We've talked about this before diversifying our product set.
Growing installment lending proprietary card products, so that combined again those strategies all in we were sticking to the strategy, we've laid out and executed against them and that's what will drive us to the targets around receivables growth.
And then I guess just to confirm.
Maybe you don't want to answer but are there any other nonrenewals contemplated but.
Thank you I'll take that.
Question I had so many parts I forgot one.
I apologize.
And all I would say is 90% of our Anr through 2023 is secure.
Could do the math from that.
For instance from that 90% got it.
Got it and then those are the largest input but that doesn't mean, 10% are not renewed it just means that those are still yet to be worked on and are being worked on for a continued renewal.
Got it.
And then just the last one was.
I guess, just switching topics maybe competing on credit.
Are you seeing we've heard from both.
One other issue about.
Little bit of different bits of normalization between different FICO buckets, I mean to be clear nothing to be worried about but.
We are starting to see some differences are you seeing the same thing anything worth calling out that and then I'll just stop there. Thank you.
And I think I've mentioned that earlier, a little bit right is if you think about that we have a concentration in the private label space are consumers, who are say more near prime.
We are seeing a little bit faster normalization than those customers that are high high risk scores that are really strong that have more trans accurate behaviors.
To give context, if you think about that Theres still.
Two to two five trillion dollars of savings pent up out there that's sitting in the.
It wasn't directed to the low income folks or is the near prime.
It's sitting out in those savings account people, who need to spend the money you have spent the money and the stimulus is unwinding, so that's where you're starting to see that and with up we've got a balanced portfolio and we've got some mix of both so we can see what's happening to the full spectrum of those customers, but the thats whats driving our delinquency up say a lot.
But sooner, but I think but I will tell you. This were actually better than we thought we were going to be at this point right now.
Recent quarter, so things are normalizing, but I think we're very positive on the outlook.
Thank you.
The next question is from Jeff Adelson of Morgan Stanley . Your line is open. Please go ahead.
Good morning, Jeff Hi, Hi, good morning, guys.
Just as we think about the.
Loan growth target for this year.
I know you guys had spoken in the past about your long term loan growth receivables growth being roughly two thirds coming from organic growth one door and one third from inorganic growth.
Are you thinking about a similar mix of growth this year and then.
I know, we're basically done with the B J question, but is there anything you can do to help us with the timing of that portfolio.
That there is some speculation thats more of an August state anything you can help us think through the timing and growth map there would be helpful.
Yes, I think as you think about the how we're growing this absolutely a mixture of organic and inorganic and that will vary in any given year any given quarter based on the business development activity that we have so I really can't comment specifically on that in a year like this you've got.
Net going out we get as a net positive coming in we're going to be net up overall. The Wyndham also thing that so how we get there is probably actually quite a bit more on the organic side. When you think about the netting of the wins and losses.
Of the partners.
In terms of the the timing of the non renewal that's something that is in active discussion and something we can't comment on but there's definitely will add a little volatility into whatever quarter that happens there.
But we do have a central view in our guidance that we've provided.
Understood and then just maybe switching to expenses I know you've given the guide for modest full year operating leverage in 'twenty two.
How are you guys thinking about targeting potentially inefficiency ratio over the medium long term is as you kind of continue along this path I think youre at a 50% right now and your peers are more than 40% or so range.
Yes.
If we deliver positive operating leverage.
That's the goal we're up and I've talked about is we want to give the team flexibility to invest in our future.
And if revenues come in a lot stronger this year, we may lean in harder to be opportunistic on those investments, but the investments that we're making will provide continued long term revenue growth and at the same time, we have a big portion of investments are driving efficiencies in our cost to serve so our expectation is over the long haul we.
Specced in improvement in our efficiency ratio.
Okay. Thanks, Thanks for the questions guys.
Thank you.
The next question comes from John Hecht of Jefferies. Your line is open. Please go ahead.
Morning, guys and thanks for taking my questions.
Yield.
<unk> nicely in the second half of 2021, and I'm wondering how much of that was.
Whether it was mix or.
Or C. There was enhancements from some fees may be from from some contribution from Brad.
And then outside of rate hikes, what might influence that yield in 2022.
Sure.
So one of the biggest thing that's happening is some of the behavior the payment behavior, starting to normalize and when you think about payment rates normalizing the rollover behavior. Some of additional delinquency drive some fees so that starts to normalize it and that will happen.
Say the near term throughout points too, but at the same time your product mix shifts occur and so when you put on higher credit quality co brand and proprietary card often comes with lower yields but also lower losses. So when you think about the interplay between.
Revenue yield and credit losses, they have to be looked at in tandem.
Okay.
That's helpful. Thanks, and then second I mean.
Your commentary on bread is interesting the installment component, it's profitable, but the split pay.
As foreseen that is potentially not profitable what about the split pains not profitable is it skip payments is it customer acquisition.
Cost to manage the process I'm just interested because.
That's an interesting take on that product relative to other things we have heard.
Yeah, maybe let me clarify that it can't be profitable if it's done correctly.
Alright, and I think that to me is that.
Our focus is to have correctly.
And make sure that we are.
Compliance, we're not chasing trains actors that gives the ability to cross sell that.
Our ability to extend the relationship with them.
The customer.
All of that and that's how.
That's how you doing.
Its stickiness and longevity and Thats why I think we have the right product for the merchants because it's about driving that next transaction not just.
Loading in App and intermediate the merchant.
On the merchant side.
And I think it's going to the profitability is going to evolve and mature its going to be mature market. It's a hot new market, that's starting to sell.
You know our market starting to settle when it gets the attention of the regulators.
Quite frankly, we.
Anticipating that that's why we spent.
The right amount of time, making sure that we had a compliant bank product that can stand the test of review.
And that I think gives us a good advantage and that's how you do it.
Okay I appreciate that guys. Thanks very much.
The next question is from Mango of Deutsche Bank. Your line is open. Please go ahead.
Hi, good morning. Thanks.
Thanks for taking my questions.
Wanted to sort of get your thoughts on in store versus digital I mean, clearly we've seen the second quarter of last year was that was a benefit to online, but that's sort of fallen back down to roughly historical levels or even below I guess my question is why do you think that percentage of digital sales hasnt really been sticky do you guys feel like necessary to sort of increases in beef.
Current levels and if so how would you accomplish that.
Yes, it's interesting.
I think there is a strong social aspect to purchasing.
I'd like to go into store feels something try it on I'll speak for myself, it's hard for me to buy soft goods online I would like to go and let's see what it is and so I think theres some social aspect to that I think digital will always be important.
I think people have gotten used to the hybrid model now the in store model in the digital model and people will pivot based on yes.
Based on the environment.
But importantly, when they pivot we are there to pivot with them.
So I think it will.
As long as there is obviously, a transacting with us whether it's digital or in store.
Happy and we can accommodate.
Got it great and then I guess per your question.
Wanted to follow up on your comments around deposit costs.
Typically the lower cost of funding in 2022.
Can you give us more color on the call from positive comparable trends from sort of current levels, especially as you mentioned made heights or to begin later this year.
Yes, I think when you think about the pause.
That's what we've talked about in the past is a large part.
Loan growth.
Accounts receivables growth that we're going to see over the coming year or two are going to be funded by more direct to consumer deposits. So when you when you look at the.
The rates of our deposit rates of our funding of different instruments, we're replacing our savings on replacement, but we are growing into a lower <unk>.
Cost of funds product than other instruments now as it depends on how far rates rise.
In terms of what that guidance would look like.
<unk> modeled in for rate hikes. So we will see some early period benefits as we fund.
The growth with deposits, but remember our assets are largely variable rate as well so.
Cost of funds go up on deposits, there offset by increases for our variable portion of the portfolio.
Got you Great and then just one quick one sorry, sorry about that.
Can you sort of seeing any impact from some AUM economy recently, how sales incentives that in January thank you.
Yes so.
Sales were strong in the fourth quarter book paradigm mentioned, a 50% year over year growth.
We did see sales growth.
Early days, we saw some sales growth in January but you can see that omnicom is having a bit of an effect on growth.
And you can make for taking my questions.
Yes, and I would add to that is.
Just as the last time, we're very confident going forward I mean, there's this spike in omicron has gone in the past authorities should start to settle out and candidly were surprises to the extent it didn't slow people down through the holiday season and more recently.
But I think it's as much of an impact that if people can get into being able to get into work and is there a desire to shop. So we feel confident and then it peaks out we've seen it with two different variants that this will just address I think the last thing I'll say is people are now shopping with a purpose.
When they go to their browsing their shopping.
So the SEC.
That gives us confidence that ourselves.
<unk> projections.
The next question comes from John <unk> of Evercore ISI. Your line is open. Please go ahead.
Good morning.
Alright.
I know you and then you can beat your guidance assumes the nonrenewable on Bj's just one clarification. The does that mean that you do assume that the back book is sold as well not just the discontinuation of the relationship for the new purchases.
Well, we cant specifically talk about any anything within that.
Sure.
About the contract with PJ its typical in these transactions the back book as often.
<unk>.
Considered for sale.
Got it okay, alright, thanks for clarifying and then separately.
On the.
Our revenue share agreements can you, possibly help size up where you are.
RSA stand now from a ratio perspective, and then maybe give us a thought on the trajectory how we should think about that.
Are able to begin modeling that out here.
Yes, so right now the.
RSA is included in our non interest income and you should think about that is largely growing in line with credit sales again.
Again, there's a lot of different unique relationships, but if I was looking to give you a proxy I would use that as a proxy.
Okay, Alright, Thanks, and then lastly in terms of the.
The rate assumptions I know you indicated that four rate hikes dialed in could you just maybe help us with the sensitivity to your net interest income from 25 basis point increase in rates.
Yes so.
It will vary over time right. So that's the sensitivity what I would tell you is we.
You've indicated it is a nominal impact so it's slightly accretive but again it goes back to as a point in time, where if it goes up dramatically there may be a different view, but in the near term for whats expected for rate increases in 2022, you can think about that is nominally accretive.
Got it okay. Thanks for taking my question.
Okay.
The next question comes from Bill Ryan It Brian of Seaport Global Your line is open. Please go ahead.
Good morning.
Couple of questions. One in the guidance you talk about noninterest income year over year change expected to offset the favorability in net interest income.
I was wondering if you can elaborate on that a little bit more kind of falls along the last question is that anticipation of a little bit higher RSA rewards on two new proprietary card.
Credit sales if you could just kind of provide some color on that and then second.
Has there been any geography change in the revenue recognition associated with bread in the new presentation format, because I believe youre, putting it all.
And the effective yield under the prior presentation for that thank you.
So.
Mds is in non interest income for Bristow answered the bread one first so.
That's what we have that sitting.
As it relates to your question on the RSA and that will go up with sales.
And our proprietary Colorado is another growth piece. So if we have incentives to grow proprietary card of customer awards.
Things are typical of what you've seen there again, that's netted against interchange income that we received.
And then for the yield component of bread products that is in NII.
And net interest income.
Okay. Thank you.
The next question comes from Dominic Gabriel of open Hi, Matt. Your line is open. Please go ahead.
Hey, great. Thanks, so much for taking my question. So if we just think about the credit sales growth year over year that you would need that youre kind of assuming that would reach you to your roughly $20 billion.
Average balance of 2023.
Should we think how should we think about that.
That growth rate.
And then I have a follow up thanks.
Yes, I think if it is.
Terms of.
The general rule of thumb it will grow in line with average receivables growth now that can depend on product mix and revolving balances.
So we put on a lot more trans actors will clearly.
The receivables.
The spend would have to grow faster to achieve that but if you put on more plc that has high revolve those balances will grow in line. So overall I think it's a good proxy to think about it growing in line with average receivables guidance.
Great that makes a lot of sense.
And I guess, if we just think about Mastercard just reported U S credit sales were up 33% year over year in the U S. If we think about that number in general purpose in general versus private label growth in credit card and some of the dynamics that are playing out between consumer desires as you look.
The shift in spend maybe you could just talk about where that spend how you think that might affect your business going forward, whereas the shift in spend.
Maybe experienced versus store sales anything that could help us understand just general positioning and whatnot. Thanks, So much really appreciate it.
I saw that data.
Some of that I would think it's pent up travel demand some of that spend.
And I think travel demand to big ticket and I think some of that demand with that so I was very comfortable with 20% year over year growth in our portfolio that portfolio with both private label and.
And our.
General purpose cards, so a 20% average is really healthy.
Our travel.
This is a dominant factor I think if you look at two of our growing verticals jewelry and beauty those grew 30% year over year in the fourth quarter.
So.
There is there is growth there, but I think that some of that.
That 30, plus number with some pent up travel demand.
Thanks, so much I appreciate it.
The next question comes from Reggie Smith of Jpmorgan. Your line is open. Please go ahead.
Hey, good morning, guys. Thanks for taking the question.
No.
To beat a dead horse.
Matt.
The numbers.
My.
Jim.
And then.
Mike.
I wanted to know.
Both.
Details of the nation.
Carl I had a pretty rich reward feature.
Sure.
As Bob and I would assume correct me, if I'm wrong, the APR probably below.
I guess in line out of the year.
The company.
Correct.
Yes.
Two.
From a wrong to assume that.
Probably the economic impact will be less than.
With reported headline.
We think the portfolio am I thinking about that right or am I being a little.
Most of that demand.
Yes, I think so.
Traditionally have a co brands.
The margins are thinner.
And then it's been around renewal. So I think your assumptions are directionally correct that.
It is.
As they reported a portfolio of size, but the profitability wasn't equal to the course were put to the size of the portfolio.
The way I think about it.
So, let's say transacted in that portfolio.
And the.
The impact to our bottom line.
Again, we plan for it.
The significance wasn't.
As great as the loss would indicate.
Yes, and I would add to Ralph said in your comment I mean these these are highly competitive deals and there's a point where.
The team walks away from the deal because it.
Addition by subtraction so.
If we say if we are not going to be.
Specific to this partner, but there are sometimes.
The right decision for the company is to not pursue at any cost.
None of it.
Two quick ones then.
I know you guys talked about the payment rate.
We are beginning to normalize.
Paul.
And I think your portfolio.
Thats kind of the core bank notes and beyond yes.
Alright, thank you.
Bobby.
Yes.
Moving on we'll call it out in the outbound that.
Great.
Already in the last question bundle them together.
With the new branding now.
Any impact there.
Great capability.
No.
It was at the top of mind.
No.
The partners are those going to be.
Yes.
Currently.
Yes.
Right.
Thank you.
So let me answer the last question first and I'll turn it over to Perry for the payment rate question. So.
When we talk to new partners who've renewals, we lead with a basket of products and capabilities, we give the partner choice. So as we sign these partners as primarily a card to deal with because we're good at that and we demonstrate how we can grow the pie, but with each of these partners certainly the bread capabilities, particularly around installment loan.
Is under negotiation and we will work with them to implement that one of the things that is.
We do.
Giving you you installed a digital suite so.
All of our products become.
Ease of integration.
And that's the important part so we also the partner choice, we offer the customer choice and the ease of integration of that choice.
It makes it easier for us to.
Putting more products to the consumer into the park.
And I'll answer your question on <unk>.
The payment rate.
Spoke about that earlier you may have missed it.
We believe payment rates are going to normalize we're starting to see some of that from where they peaked out in midway. This past year. So that is starting to occur wish we had a crystal ball, where we could see what that was going to be and exactly when but that's why we gave the guidance in our they are.
Range.
Payment rates remained really high it could be on the lower side, if they come in better or be on the high side. So.
I think we're all across the industry.
Trying to figure that out and we'll all watch it.
Got it.
Thank you.
Uh huh.
The final question comes from Vince can kick of Stephens. Your line is open. Please go ahead.
Hey, Thanks for taking my question just one quick one.
On the receivables guidance, so the 10% year over year that excludes Bj's I guess, if I were to use the UC push number of bj's portfolio size.
Is that the.
Your the rest of your portfolio is growing at 20% year over year for 2022.
So I guess first.
Maybe if you could talk about.
If you are able to get the BJ side to talk about whether that math is directionally correct and if so the sustainability of that growth rate going into 2023, I think it might seem that maybe that at least 20 billion might be conservative, but thats sustainable. Thank you.
Yes.
Just reiterate we've given guidance and high single to low double digit growth in our receivables were not going to comment on the size of the non renewal or the timing of when that might happen, but what we can tell you is we have good line of sight into our pipeline, we understand our product strategy and growth.
<unk> I am very confident in achieving the range that we've put out there and what that means to the following year.
We can work on the pipeline for that year planting.
Plans in place to achieve the $20 billion.
Okay understood. Thank you.
I wanted to thank you all for joining today and your continued interest interest in alliance data.
Must say 2021 with a transformational year for Lionsgate and we look forward to building our success in 2022 and beyond Thank you all and everybody have a terrific day.
This concludes today's call. Thank you for joining you may now disconnect your lines.
Right.
Okay.