Q2 2022 Loyalty Ventures Inc Earnings Call

August 11, 2022

Good afternoon, and welcome to loyalty ventures second quarter 2022 earnings conference call.

At this time all parties have been placed on a listen only mode. Following today's instruction the flow be open for your questions. It is now my pleasure to introduce Jack Taff Senior director of Investor Relations Jack the floor is yours.

Thank you operator.

Copies of the slides, we'll be reviewing in the earnings release can be found on the Investor Relations section of our website.

Hosting todays call, we have Charles Horn, President and Chief Executive Officer of loyalty ventures.

Jeff Chesnut Executive Vice President and Chief Financial Officer of loyalty ventures and.

Jon Stewart President of the air miles reward program.

Before we begin I would like to remind you that some of the comments made on today's call and some of them.

The responses to your questions may contain forward looking statements. These.

These statements are subject to the risks and uncertainties described in the company's earnings release and other filings with the SEC.

Loyalty ventures has no obligation to update the information presented on the call.

Also on today's call our speakers will reference certain non-GAAP financial measures, which we believe will provide useful information for investors.

Reconciliation of those measures to GAAP will be posted on the Investor Relations website and loyalty ventures Dot com.

That I would like to turn the call over to Charles Horn Charl.

Charles.

Jack and thank you all for joining us today to review our second quarter results, let's turn to page three.

Our consolidated results in the second quarter reflected the steady performance of air miles along with a challenging period for brand loyalty were higher costs and more cautious consumers merch margin loss and the impairment of the segment's goodwill.

Further amid U S equity markets worst first half and more than 15 years Air miles received notice that a longtime partner was exiting the coalition.

The combined effects resulted in a significant reduction will be ventures market valuation.

These headwinds have created some challenges, but we have strengthened our leadership across the organization and we are confident in the marketing position positioning and future opportunities for both air miles and brand loyalty.

We will share with you today, our action plans to confront these new developments with strategies to drive growth for both our partners and ourselves.

It's been begin with the recap of the second quarter.

At Air miles performance was in line with expectations due to the inherent visibility in our operating model.

Issuance was up approximately 8% from the second quarter of 2021 with particular strength in the credit card and fuel verticals.

<unk> results were impacted by the continuing effects of the invasion of Ukraine, which are compounded existing supply chain pressures and created wide ranging inflation and recessionary conditions in the segments key European markets.

While brand loyalties topline improved about 33% from the second quarter of 2021.

Adjusted EBITDA was essentially flat with the previous year due to increased logistics cost.

We expect these conditions to persist throughout the year and we will share more color on Brian <unk> action plan later.

Finally, we recognize that our corporate capital structure was not optimally suited for the investments we are making at air miles and the market conditions, we are facing a brand loyalty.

In partnership with key lenders, we proactively amended our debt agreements to provide more certainty and flexibility as we execute our strategic plans over the coming quarters as before we remain committed to the capital allocation priorities that we outlined earlier this year, which are designed to deliver stronger marketing rois and top line growth for our sponsors and clients and in turn.

<unk> growth in both air miles and brand loyalty over time.

Slide four highlights the key financial metrics for the second quarter total revenue for the quarter was $172 million and adjusted EBITDA was $27 million revenue.

Revenue increased 14% year over year, while adjusted EBITDA declined 15%.

For the quarter, we reported a net loss per share of $17 95.

Which included a goodwill impairment of $423 million and restructuring and strategic transaction cost of $5 million, which totaled $70 32 per share.

Year to date total revenue was flat compared to the prior year and adjusted EBITDA of $52 million down $19 million.

Through June 30, we reported a net loss of $441 million net loss per share of $17 92.

Which is inclusive of the $17 37.

Reflecting the effects of the goodwill impairment and $6 million of restructuring and transaction costs now.

Now, let's discuss the recent developments for both brand loyalty and air miles.

Slide five illustrates the broad geographic area that brand multi serves as well as selection of the campaign is currently underway.

Geographically EMEA continues to represent the largest market for brand loyalty followed by the Asia Pacific region. Our team is working to expand our footprint in the Americas as we believe this area represents an important growth opportunity for this segment over time.

In terms of active campaigns in the second quarter, our selection as highlighted here.

While acknowledging this segment's underperformance this quarter, we believe brand loyalty is combination of global grocery relationships and exclusive supplier partnerships provide a differentiated foundation for future sustainable growth.

Turning to slide six let's review the key challenges for brand loyalty in the second quarter that resulted in a disappointing performance and lower expectations for the balance of the year brand loyalties original outlook for 2022 was based on a post COVID-19 recovery. After two years of pandemic and logistics related disruption to this segments operating environment in response to Russia's invasion of.

Ukraine brand loyalty past its operation in Russia, as we indicated mid March which we expect to result in a roughly $16 million impact to the top line is the conflict persistent it created a more pronounced negative impact on the region's macro environments. European consumers are now confronted with further increases in food and energy prices, along with ongoing supply chain issues and.

Other widespread inflationary and recessionary concerns.

This has resulted in three primary challenges for the brand loyalty business, which contributed to the goodwill impairment of $423 million versus the higher cost environment means that <unk> margins will reflect pressure from merchandising and shipping costs that exceeded expectations.

Cause its contracts with groceries or signed nine to 12 months advance brand loyalty does not have terms for many of the pass through of unexpected increases in these costs.

Team has taken two key steps to manage this new dynamic the business has moved to more regional sourcing where possible to mitigate disruptions in the ocean freight market.

Earlier this year brand loyalty locked in an ocean container rates and capacity for reward merchandize not really available through regional sourcing.

Combination of more local sourcing and ocean freight price hedging, we will deliver better cost certainty for our clients going forward.

In addition brand loyalty saw key prospects in the market close to Ukraine withdraw from the near term pipeline.

These grocery retailers, who are taking a wait and see approach in terms of the macro landscape before returning to business as usual.

In response, <unk> Leverages data illustrates the potential clients that its campaigns can drive top line growth for all of its retail partners and the grocers, who rely upon brand royalties campaigns can avoid across the board price cuts or discounting that could take years to recruit and while brand loyalty knows that as campaigns can deliver topline growth for clients even in an uncertain time the team is proactively.

Operational efficiencies to reduce costs and given the near term slowdown finally, the business saw some campaigns underperformed in the second quarter as a result reward offering which was planned a year in advance did not match. The current interest in economic considerations of the consumer.

Brand loyalty is target consumers.

Seeking to stretch their grocery budget. This sentiment resulted in less shopper interest and some active campaigns featuring aspirational or luxury rewards and response <unk> reward merchandize strategy has shifted to focus on the essentials that consumers need in their everyday life categories like housewares and entertainment are especially relevant when shoppers are stretching there.

<unk> and focus on <unk>, rather than going out brand loyalty also continues to develop digital loyalty promotions and we believe these innovations will give the business more flexibility up to the start date of a program to tailor campaigns to best reflect the current market conditions by.

By year end, we expect to have activated several of these campaigns, which will provide the proof points to enable more retailers to make the shift from traditional programs to fully digital campaigns.

As we've noted before this rewards bypassed the physical supply chain and our ESG friendly.

Beyond these discrete action plans spring loyalty is also reducing the risk profile of its business development efforts. The brand loyalty team is now focusing on known geographies relying on proven reward offerings and actively pursuing new clients in adjacent verticals. While these changes could result in slower near term top line growth, we expect will improve the businesses margin profile and <unk>.

<unk> more durable returns given economic conditions.

While we are disappointed with this segment's performance in the impairments. We are encouraged by the path forward, which includes operational efficiencies inventory alternatives and structural campaign adjustments and I look forward to sharing our progress later this year.

At this point I'd like to introduce Sean Stewart Air miles, President, who will discuss the recent developments for the programs Sean.

Thanks Charles.

Before I begin with slide seven I'd like to say I am extremely excited to be leading air miles through this transformative period, a lot has changed since I was last at air miles a dozen years ago I'm coming up on 100 days in my new role and I have been continuously impressed by our team's passion and commitment to create value for our sponsors and our collectors.

We're leading our efforts to innovate and elevate the coalition so that we maintain our standing as the best known and best loved loyalty brand in Canada.

We believe these efforts will lead to a vibrant and growing coalition and I'd like to provide more detail here.

Today's air miles program already has a set of powerful attributes that benefit both our collectors and our clients are collectors can earn and redeem across more than 300 brands in Canada. These brands represent approximately 80% of consumer spend categories, meaning we have extensive data on customer behavior at an individual level across multiple retail verticals.

This data enables us to engage in digitally market to a large number of Canadians providing both insights at scale to our sponsors they could not achieve on their own.

Going forward, we will focus on growing our partner base to capture more retail spend and to provide more choice of brands to our members' collective value is driven by digital engagement shopping multiple brands and being part of our credit card programs.

We'll focus on digital marketing programs designed to drive these behaviors. These priorities will help us attract new sponsors and collectors to the coalition going forward.

In addition, we are pursuing new revenue streams that involves supporting clients that do not participate in the current traditional coalition.

For example, we have run marketing programs for several large U S state tourism organizations.

These programs are created using air miles traveled data in currency in concert with our digital reach to target prospective travelers to the specific destinations.

In one program the tourism board was able to reach our collectors with relevant destination content and convert searches into purchases, resulting in an almost 40% lift in flight bookings attributed to this campaign.

This campaign helped position the state as a leading vacation destination for collectors and convert browsing collectors into travelers.

These are the types of nontraditional partnerships, we are building leveraging our data digital reach and currency to benefit our clients growth objectives.

Slide eight provides an overview of the different elements of todays air miles ecosystem.

Even as we innovate around new partnership models. It is important to remember that the air miles program has a history of developing creative ways for sponsors to participate in the coalition.

At a commitment level that fits their business Eric.

Air miles shops dossier gives collectors the opportunity to earn air miles when they shop online at one hundreds of top brands, including Apple.

HSM Nike and Amazon.

E Commerce experience for our collectors as quick and efficient.

Seamless handoff to the air miles shop side to the brand site.

In the past quarter, we've added new top retail names, including Farfetch, Jim sharp in the home depot.

Our next tier of sponsor participation is through our card linked offer platform, which we launched late last year.

As we noted on our year end earnings call collectors now can link any Canadian issued Mastercard to the air miles account and earn bonus miles at leading retailers going forward, we will look to expand both our card partnerships as well as our network of participating retailers, which each of these initiatives, making it easier for collectors to earn more miles at more locations, where they want to.

Sure.

Our deepest relationships with our core retail partners, including BMO American Express shell and Metro, which can issue base and bonus miles to collectors on every transaction both in store and online.

This has been the foundation of the Air miles program since 1992 and continues to anchor the program today, but.

But our other tiers provide a pathway for retailers to see firsthand the power of the coalition in a way that best fits their needs.

As an illustration of the scale of the coalition's physical footprint in Canada for brick and mortar issuers, we estimate that more than 80% of Canadians live within 10 kilometers or about six miles of three or more sponsors after considering the recent <unk> notification.

We know that shopping multiple brands continues to be a key driver of collector engagement and a focus of our marketing communications.

Overall, each element of the air miles ecosystem amplifies the opportunity to earn miles and the number of retailers that can join the program.

As we continue to strategically develop and deploy new models to connect collectors with the brands. They love. We believe the program will continue to grow and prosper.

Moving to slide nine let's discuss the recent developments from the second quarter.

<unk> air miles as maintain exclusive relationships in the grocery vertical.

But as we look ahead, we expect to offer our collectors new opportunities to shop and earn miles at a variety of different retailers in the grocery space as.

As well as in previously unavailable adjacent verticals and categories, including convenience stores mass merchandise discount in everyday low price. We are actively seeking new partners across our tiers of participation.

Look forward to sharing our progress with you as you move through the second half of 2022.

Air miles plans to use a combination of brand relationships like the ones. We just described to expand our weekly touch points for collectors to drive transaction volume and frequency higher.

And as we work to give our collectors more choice for the grocery spend we're excited to announce our BMO grocery accelerator program as.

As of August 1st Cardholders of the Air miles Bank of Montreal credit cards can earn double miles on their credit card spend at any grocery retailer in Canada.

With consumers working to stretch to grocery dollars. We believe this program will be enthusiastically received by our existing collectors.

This should also drive new members to the program, referring cardholder acquisition for the air miles BMO credit cards.

As we work to add new partners were equally attentive to the upcoming renewals with our existing sponsors are.

As a founding member of the coalition from 1992 Bank of Montreal as a key partner in our current agreement matures in the fourth quarter of next year.

Discussions are already underway with BMO and other current sponsors to secure renewals that create value for our sponsors air miles and our collectors.

On Slide 10, let's review the progress we've made on our strategic investments.

As we've previously outlined we are committing an incremental $20 million to $25 million.

Capital spending to drive consumer engagement accelerate digital innovation and enhance our data and analytics capabilities.

The first half of the year was initially focused on translating our air miles collectors and sponsors needs assessments into a technology roadmap. We subsequently.

We assembled our agile digital development teams and kicked off our first wave of projects with a focus on delivering near term requested upgrades to the mobile app experience and I am pleased to report that these efforts are already yielding returns in fact, we have two projects that will be rolling out in the next 30 days.

The first involves a series of improvements to our mobile enrollment process to make it easier and faster for consumers to join the coalition and become collectors.

And as the air miles App becomes the daily hub for user engagement, we're updating the authentication process. So collectors will have seamless access to new offers and rotating incentives.

The second provides collectors more clarity and visibility into their miles balance, which we expect will lift customer satisfaction, while reducing inbound calls to our customer care centers.

As we progress through the second half of 2022, we plan to leverage a set of near term progress metrics to gauge the impact of our digital innovations at air miles.

Expect these metrics to include the monthly active active app users and total active collectors. While these metrics may change over time as our technology roadmap unfolds. They will serve as a helpful near term guide to assessing the impact of our recent investments.

Additional capital projects are underway and moving at pace that we now expect our incremental investment will stretch into 2023 due to bandwidth constraints.

Of our incremental investment, we expect that approximately $15 million will be deployed in 2022, the balance occurring in the first half of 2023.

Page 11 highlights the air miles reward miles issuance and redemption trends over the past nine quarters.

Air miles reward miles issued in the second quarter were higher than the first quarter of 2022 by 13% and higher than a year ago quarter by 8%.

Redemptions in the second quarter were up 17% from Q1 of 2022 and about 54% from the second quarter of 2021 in line with the broader accessibility of travel rewards compared to the year ago period.

The ratio of miles redeemed miles issued what we call. The burn rate was consistent with the first quarter and we expect it to remain elevated across 2022 as regular travel patterns resume collectors pent up interest in travel carried over from the first quarter and air miles saw a five times lift and travel related redemptions compared to the year ago.

<unk>.

Expect the burn rate to normalize in 2023 as a renewed demand for travel levels off and we add new sponsors and earning opportunities for our collectors.

As we noted last quarter this period of elevated redemptions as the natural offset to last few quarters. When we saw historically lower redemptions due to the pandemic related limitations on travel.

Our redemption settlement assets account had a balance of $672 million at quarter end funded by cash we set aside for redemptions.

We are confident that the redemption settlement assets will cover periods of higher redemptions without an impact on our liquidity position our operating cash flow.

Now I'll turn it over to our CFO , Jeff Chesnut for financial review.

Thanks, Sean.

Slide 12 presents our results for the second quarter of 2022 compared to the corresponding period of 2021.

Revenue in the quarter was up 14%, which was a combination of a 7% decrease at air miles and a 33% increase in brand loyalty.

Net loss and diluted EPS were both down quarter over quarter as a result of the goodwill impairment margin loss from revenue declines and a full quarter of interest expense.

Slide 13 presents our segment level results for the second quarter of 2022.

In the second quarter Air miles revenue declined approximately $5 million with about half driven by a decline in service revenue representing the flow through impact of lower miles issuance in 2020 and 2021.

The balance of the decline was associated with higher cost of redemptions, which are netted out from gross revenues to arrive at our revenue presentation.

Margins on redemptions contracted in connection with the enhancements, we made late last year to the collective value proposition.

Brian loyalties revenue improved by $26 million due to the size and timing of campaigns, which can vary meaningfully year over year.

Air miles adjusted EBITDA declined, 14% or $5 million as compared to the second quarter of 2021 due to the revenue impact combined with personnel costs. These costs were partially offset by reduced occupancy expenses and we will accelerate these cost saves with our new enterprise wide operational efficiency plan, which we expect will.

And both in year in run rate savings.

Brand loyalty is adjusted EBITDA in the second quarter, while still negative improved from the year ago period, due primarily to the increase in revenue.

Although we continue to project the brand loyalty topline performance will strengthen across the year.

Assistance of higher production and logistics costs, plus the impact of recent FX movements suggest the brand loyalties full year adjusted EBITDA will be less than the 2021 result.

However, the changes we are implementing organizationally like the operational efficiency and savings plan and the brand loyalty specific changes that Charles mentioned earlier will help brand loyalty secure its financial foundation and position it for profitable growth as we move forward.

Let's discuss our outlook for the balance of our fiscal year.

When we originally provided guidance on our first earnings call in February It was predicated on a post COVID-19 recovery and a healthy economic climate in our key markets Russia.

Russia's invasion of Ukraine persistent supply chain issues.

<unk> inflation rising rates and client developments have amplified the challenge to accurately forecast the second half of 2022.

Considering these uncertainties, we project that our full year adjusted EBITDA for 2022 will be approximately $110 million. This also represents air miles EBITDA estimate as brand loyalty contribution and the corporate costs will generally offset each other.

This performance with add backs permitted by our debt agreement would be in compliance with our revised loan covenants.

We expect our next guidance update will be later this year.

The economic climate has worsened since the start of the year and we're responding proactively and prudently to prepare loyalty ventures to weather these conditions.

To maximize both our results and our liquidity we are implementing an operational efficiency plan across the enterprise, while reducing our expense base as a component of the plan, we're focused on more than finding cost savings.

We are reassessing each of the steps we take in our daily business processes with the goal of eliminating or reconsidering the lower return elements.

This will enable us to focus our teams and our efforts on only those initiatives that deliver the strongest return on investment or a business critical for example, this period, we closed our offices in Calgary, Montreal and continued downsizing our footprint in Toronto.

In addition, we're evaluating workforce adjustments to reduce our cost of service and collectively we expect these initiatives to deliver approximately $15 million in run rate savings annually.

We also modified our debt to EBITDA Covenant, which is now 575 times through September 32023, before stepping down to five five times in the fourth quarter of 2023, and ultimately declining to 475 times.

Loyalty ventures. Prior Covenant was five times through September 30 of this year stepping down to four five times at year end.

As Charles noted earlier this adjustment will provide more certainty and capacity as we continue transforming our business as we've outlined today.

As we enter the second half of the year, we will continue to focus on our liquidity and our balance sheet flexibility.

Slide 16 highlights that our liquidity at quarter end was $224 million exclusive of the redemption and settlement assets.

The $15 million of annual run rate savings from our operational efficiency plan will provide self funding options for future projects.

Our average interest rate for the quarter was 5% and for every 100 basis point interest rate increase our interest expense will increase approximately $6 million annually.

We ended the second quarter with no borrowings on our revolver and we reduced our gross debt by $13 million consistent with our focus on deleveraging while investing in our future.

This resulted in our covenant leverage ratio of four times net.

Net debt basis, we finished the quarter at about $552 million.

Overall, we have sufficient liquidity to support the strategic objectives, we prioritized and outlined here.

We remain both realistic about the near term impact of the macro environment and optimistic about the medium and longer term prospects for both air miles and brand loyalty.

In recognition of the current economic conditions, we implemented and ongoing operational efficiency plan and adjusted our debt covenants to reflect both the state of our business in the state of the broader economy.

Brand loyalty will navigate the near term turbulence in its key markets, while developing next generation loyalty solutions that resonate with consumers and reduce its exposure to supply chain volatility.

At Air miles, Sean and his team are working to secure the core of the program with extensions for key clients. While also piloting new ways to participate in the program for both collectors and sponsors.

We're confident that these new initiatives along with the it investments with previously described will position air miles to retain and grow its existing base of collectors, while adding new members who are equally passionate about the value inherent in our coalition.

Altogether. These strategic priorities are designed to address our current challenges, while providing a strong and durable foundation for sustainable future growth.

Operator, we're now ready to open the lines for questions.

At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.

And your first question comes from the line of Toni Kaplan with Morgan Stanley . Your line is open. Thank you.

My chain disruption seems to be a continuing issue in the quarter, you mentioned that the sheer loss throughout the year.

We still see this impacting.

2023 results or should we be done by then.

Tony I think that we should be able to alleviate some of these issues before 2023, we actually have quite a bit of inventory run at the moment because we got ahead of some of the programs. We've been unfortunately, some of the programs as we talked about earlier didn't perform to our expectations.

At this point, we're actually going to be focused more on trying to be nimble hitting the right programs and markets, reducing our overall inventory levels sourcing more locally reducing some of that pressure of trying to get things done the southeast Asian ports. So I don't want a situation, where it's continuing into 2023, how about you Jeff.

Okay.

Yes, Charles I think Thats a good summary in terms of the actions that we've taken and our expectations for next year.

Okay.

Great and then.

Just when you think about on the sponsor side for air miles.

Just how is the pipeline looking I know you talked about youre looking at getting into some adjacent verticals are.

Are you planning on replacing the grocers sponsor and getting into a new vertical or is it.

Sort of either or and what the tradeoffs are there. Thanks.

Hi, Tony Sean here, Yes, I think about.

Well I'll talk about new business development and your question about the grocery separately.

On the business development pipeline, it's been stronger than it has been in some time and as you've referenced there are some verticals that are now open to us, including convenience discount mass mass merchants, which are obvious I would call frequency replacements for grocery we still think grocery is a key key cat.

<unk>, but as we look at collector engagement, we're starting to think about it too in terms of frequency of engagement with the program and when you add up the 300 brands. We have in the program we start to see.

How relevant we are across retail categories.

The one thing interesting my first 100 days I've noticed and spent a lot of time with with with prospects and the business development pipeline is the real strong response to.

Two are kind of new go to market model. So what we outlined in our remarks is this flexibility and removing barriers to entries.

For brands and whether that's card linked offers where whether that's air mile shops, making it easier for brands to onboard with us in a way that fits their business needs best.

So we look to have more news coming through the back half of this year to share on the business development pipeline.

We're looking strong.

Thank you.

Your next question comes from Noah <unk>.

Oh Peterson.

Your line is open.

Hey, Good afternoon, guys. Appreciate you taking the question.

I wanted to touch a little bit on the Soviets transition.

Within air miles and opportunity.

Phil that within.

The grocery vertical.

Is this something that you guys at least planning on attacking more trying to get a traditional coalition replacement in there or is there something more between a combination of.

Whether it's some card linked offer programs in the grocery accelerator program with BMO that you plan on attacking it that way I just wanted to get a sense or in the strategy moving forward and how we should anticipate that.

I think the key for US is is getting brands and giving opportunities for collectors to earn.

When we talk about traditional model in card linked offers that's really the how.

And it's not a fixed how for instance, if we if we get our brand to join with a quicker speed to market on card linked offers that's not to suggest they can't become more deeply engaged in the program over time.

And that benefits them I mean, the cartilage golfers is largely on the issuance side, but when you want to talk about air miles redemption, there can be great value to that happening instantly and lane and so.

This is these are the conversations we'll have it with brands, but we expect that the models.

Regardless of how they are onboard it can evolve.

Got it that's helpful. And then I guess, just a follow up particularly on.

Our global strategy.

Historically, you guys had a pretty minimal footprint.

Yes.

Can you just some contractual things, but I guess given that.

One of your management team sits in the US You guys are are listed on a U S exchange do you guys see opportunities to be able to expand in the U S moving forward.

How are you guys kind of attacking those and how should we think of that looking forward.

It's definitely a situation, where we think both businesses can move into the U S. I'll be candid, it's gone a little bit slower with the brand loyalty operations and what we thought going into the U S different markets different products different where they evaluate the impacts of the program.

Something we definitely want to do.

Like to say that we are looking for M&A, it's probably a little bit premature for us to do so I do think the ability to do consulting in the U S lineup individual royalty programs and run them for clients would be very important right now our focus though is growing air miles, replacing the <unk> exit and the focus is adjusting the business model for being able to be more nimble.

Recur to market and deliver results in a better ROI, but it's definitely an opportunity is just going to take a little time to really grow in the U S.

Understood. Thanks has I'll hop back in the queue.

Your next question comes from the line of Marc Riddick with Sidoti Your line is open.

Hey, good afternoon.

Hello, So wanted to tie there so wanted to touch on one of the things that has come up on the commentary around brand loyalty as I wanted to touch a little bit on those campaigns and that <unk>.

Mix of the luxury aspirational versus kind of the.

The current consumer realities I was wanted to touch a little bit more about that maybe if youre seeing different things in different locales and then also maybe if you could give maybe a little bit of a historical.

Background as to what you've seen in the past as to the types of offerings that would resume maybe more so with.

With the projected economic realities.

Yes, so it's one of those and we've seen this with air miles before we've seen with the <unk> brand loyalty people adjust what they're going to spend based upon the economy recession inflation whatever the case may be so with US we do programs 912 months in advance when we negotiate we start bringing the inventory, but if you come into an environment like we're in now we've tried to run a campaign program in <unk>.

Germany, you Didnt book It didn't work so success rates were very poor we need to be more nimble. So we can adjust the offering one of the things. We've talked about is going digital we can adjust it too. Thanks for the house entertainment things that people are staying and more they are trying to spend less so go into spending in the store to try to get camping equipment, just not overly germane to them. So one of the things we need to do is spot.

A way to be more nimble change the way we can source. It go more local be able to adjust the program and that's where digital really comes into it the ability to adjust the program on the fly to make sure. We have the right program in market at the right time, and that's where we've seen our success rates hurt us. This year is where the products no longer resonated with the consumer because the market condition to changed.

Got it that's very helpful. Thank you and then maybe you could touch a little bit on <unk>.

As you.

I appreciate it.

Being in the seat for about 100 days.

So to take over at Air miles.

You can understand that.

Having started to hit the ground running immediately but I was sort of curious as to maybe if you could touch a little bit on.

How we should think about the maybe the historical.

Sales cycle, and the process and how that might maybe be a little different in a recessionary environment or anything that might have.

Might change what that historical sales cycle might look like.

Mark Sean here.

I kind of referenced a little bit earlier, I mean part of and I'm 100 days in but I spent three years at air miles previously so I like to think I have a running start here.

And what I've seen historically is wildcard barriers to entry in terms of Onboarding with air miles and those can take the form of.

Heart surgery on a point of sale system with a retailer in the integration efforts of those it just it takes some time.

What I'm seeing here and what you see in the early days of card linked offers and shops is a way to bypass some of that integration effort. The investment on both sides to get to market quicker to prove outcomes for our clients and sponsors on collector engagement.

And so the sales cycle as such should be shorter right, because where we're not having to do those big technology implementations.

I said earlier there is there may be times, when when we're up for that.

What I see is is getting more brands and quicker speed to market.

To prove out the engagement to give our collectors more choice right.

And then we can we can determine the best way to move forward.

But over the last 10 years, the theres been a lot of evolution in terms of digital loyalty and how these programs work and so we're just going to have to follow the trend and as you see we're making investments in the mobile and digital experience two to drive engagement because that's absolutely key.

Yes.

A perfect way to lead into my next question I. Just wanted to me is are there any areas that you've sort of touched on thus far that you're encouraged by as far as boosting.

Consumer engagement or.

Are there any areas that you think might take a little longer to show the benefits of <unk>.

Of greater consumer activity.

Yes.

We placed our bets in the REIT space in terms of the investments, we're making in the digital experience and the mobile App absolutely has to be the daily hub for for collector engagement.

The thing I'm always impressed by coming back to air miles is just the depth and breadth of brands that are in the program.

I think we have to do a better job of telling our collectors about all of the brands that are in the program I referenced the stat in my remarks around 80% of Canadians actually have three or more.

Earnings sponsors within six miles of their home and that's without the grocery in the program.

So.

Where I see immediate opportunity beyond the sort of capital investment, we're making is our speed to market from a from a marketing perspective, one of the first things I can.

Came in as deployed the agile marketing methodology to get campaigns and promotions for our sponsors in the market because the truth is we become and flexible tool in their toolkit and the digital marketing toolkit has expanded and we need to be competitive and so.

There is kind of I think things in the marketing world automation personalization and scale, they're going to help drive awareness of those brands and relevancy of those brands to each collector and a more personalized way that we can move on fast and we have moved on fast and my first 100 days here.

Thank you very much.

You bet.

There are no further questions at this time I would now like to turn the call back over to the presenters for final remarks.

Well, we appreciate you taking the time today to listen to our story understand who we're taking this business. We do think we're on the right track, while we think the investments we're going to make are going to really pay off over 12 to 18 months period.

This will be an ROI, we're going to look at brand loyalty, how can we transition to model as we talked about drive the ROI in that business.

Shawn is doing a good job getting replacement sponsors within the air miles program. So we think we're on the right track. So again, thank you for joining us today and we'll talk to you later.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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Good afternoon, and welcome to loyalty ventures second quarter 2022 earnings conference call.

At this time.

All of these have been placed on a listen only mode.

Today's instruction.

<unk> be open for your questions. It is now.

My pleasure to introduce Jeff <unk> Senior director of Investor Relations, Jack with Louis Yours.

Thank you operator copies of the slides, we will be reviewing in the earnings release can be found on the Investor Relations section of our website.

Hosting todays call we have Charles Horn.

<unk> and Chief Executive officer of loyalty ventures.

Jeff Chesnut Executive Vice President and Chief Financial Officer of loyalty ventures and.

And Sean Stewart President of the Air miles reward program.

Before we begin I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward looking statements.

These statements are subject to the risks and uncertainties described in the company's earnings release and other filings with the SEC.

Loyalty eventually it has no obligation to update the information presented on the call.

Also on today's call our speakers will reference certain non-GAAP financial measures, which we believe will provide useful information for investors.

Reconciliation of those measures to GAAP will be posted on the Investor Relations website and loyalty ventures Dot com.

With that I would like to turn the call over to Charles Horn sorry.

Charles.

Can you Jack and thank you all for joining us today to review our second quarter results, let's turn to page three.

Further amid U S equity markets worst first half and more than 15 years <unk> received notice that longtime partner was exiting the coalition and the combined effects resulted in a significant reduction in loyalty ventures market valuation.

Headwinds created some challenges, but we have strengthened our leadership across the organization and we are confident in the marketing position positioning and future opportunities for both air miles and brand loyalty, we will share with you today, our action plans to confront these new developments with strategies to drive growth for both our partners and ourselves.

It's been begin with a recap of the second quarter.

At Air miles performance was in line with expectations due to the inherent visibility in our operating model issuance was up approximately 8% from the second quarter of 2021 with particular strength in the credit card and fuel verticals for.

<unk> results were impacted by the continuing effects of the invasion of Ukraine, which are compounded existing supply chain pressures created wide ranging inflation and recessionary conditions in the segments key European markets, while brand loyalty topline improved about 33% from the second quarter of 2021.

This adjusted EBITDA was essentially flat with the previous year due to increased logistics cost.

We expect these conditions to persist throughout the year and we will share more color on Brian <unk> action plan later.

Finally, we recognize that our corporate capital structure was not optimally suited for the investments we are making at air miles and the market conditions, we are facing a brand loyalty.

In partnership with key lenders, we proactively amended our debt agreements to provide more certainty and flexibility as we execute our strategic plans over the coming quarters as before we remain committed to the capital allocation priorities that we outlined earlier this year, which are designed to deliver stronger marketing rois and topline growth for our sponsors and clients and in turn.

<unk> growth in both air miles and brand loyalty over time.

Slide four highlights the key financial metrics for the second quarter total revenue for the quarter was $172 million and adjusted EBITDA was $27 million.

Revenue increased 14% year over year, while adjusted EBITDA declined 15%.

For the quarter, we reported a net loss per share of $17 95, which.

Which included a goodwill impairment of $423 million and restructuring and strategic transaction cost of $5 million, which totaled $70 32 per share.

Year to date total revenues flat compared to the prior year and adjusted EBITDA of $52 million down $19 million.

Through June 30, we reported a net loss of $441 million net loss per share of $17 92.

Which is inclusive of the $17 37.

Reflecting the effects of the goodwill impairment and $6 million of restructuring and transaction costs now.

Now, let's discuss the recent developments for both brand loyalty and air miles.

Slide five illustrates the broad geographic area of the brand multi serves as well as selection of the campaign is currently underway.

In terms of active campaigns in the second quarter, our selection as highlighted here.

Turning to slide six let's review the key challenges for brand loyalty in the second quarter that resulted in a disappointing performance and lower expectations for the balance of the year brand loyalties original outlook for 2022 was based on a post COVID-19 recovery. After two years of pandemic and logistics related disruption to this segment's operating environment in response to Russia's invasion of.

Ukraine brand royalty pause its operation in Russia, as we indicated mid March which we expect to result in a roughly $16 million impact to the top line is the conflict persisted created a more pronounced negative impact on the region's macro environments. European consumers are now confronted with further increases in food and energy prices, along with ongoing supply chain issues and.

Other widespread inflationary and recessionary concerns.

This has resulted in three primary challenges for the <unk> business, which contributed to the goodwill impairment of $423 million versus the higher cost environment means that <unk> margins will reflect pressure for merchandising and shipping costs that exceeded expectations.

These contracts with groceries or signed nine to 12 months advance brand loyalty does not have terms for many of the pass through of unexpected increases in these costs.

Team has taken two key steps to manage this new dynamic the business has moved to more regional sourcing where possible to mitigate disruptions in the ocean freight market.

Earlier this year brand loyalty locked in an ocean container rates and capacity for reward merchandize not really available through original sourcing.

The combination of more local sourcing and ocean freight price hedging will deliver better cost certainty for our clients going forward.

In addition brand loyalty saw key prospects in the market close to Ukraine withdraw from the near term pipeline.

These grocery retailers, who are taking a wait and see approach in terms of the macro landscape before returning to business as usual.

In response, <unk> Leverages data to illustrate the potential clients those campaigns can drive top line growth for all of its retail partners and the grocers, who rely upon brand loyalty campaigns can avoid across the board price cuts or discounting that could take years to recoup. Meanwhile, brand loyalty knows that as campaigns can deliver topline growth for clients even in an uncertain time the team is proactively.

Operational efficiencies to reduce costs given the near term slowdown finally, the business saw some campaigns underperformed in the second quarter as a result reward offering which was planned a year in advance did not match. The current interest in economic considerations of the consumer.

Brand loyalty is target consumers okay.

We are currently seeking to stretch their grocery budget. This sentiment resulted lists shopper interest and some active campaigns featuring aspirational or luxury rewards and response brand loyalty reward merchandize strategy has shifted to focus on the essentials that consumers need in their everyday life categories like housewares and entertainment are especially relevant when shoppers are stretching.

Their budgets and focus on <unk>, rather than going out.

<unk> also continues to develop digital loyalty promotions and we believe these innovations will give the business more flexibility up to the start date of the program to tailor campaigns to best reflect the current market conditions.

As we've noted before digital rewards bypass the physical supply chain and our ESG friendly.

Beyond these discrete action plan spring loyalty is also reducing the risk profile of its business development efforts. The brand loyalty team is now focusing on known geographies relying on proven reward offerings and actively pursuing new clients in adjacent verticals. While these changes could result in slower near term top line growth, we expect will improve the businesses margin profile in <unk>.

<unk> more durable returns given economic conditions.

At this point I'd like to introduce Sean Stewart Air miles, President, who will discuss the recent developments for the programs Sean.

Thanks Charles.

Before I begin with slide seven I'd like to say I'm extremely excited to be leading air miles through this transformative period.

A lot has changed since I was last at air miles a dozen years ago I'm coming up on 100 days in my new role and I have been continuously impressed by our team's passion and commitment to create value for our sponsors and our collectors.

Leading our efforts to innovate and elevate the coalition so that we maintain our standing as the best known and best loved loyalty brand in Canada.

We believe these efforts will lead to a vibrant and growing coalition and I'd like to provide more detail here.

Today's air miles program already has a set of powerful attributes that benefit both our collectors and our clients.

Collectors can earn and redeem across more than 300 brands in Canada. These brands represent approximately 80% of consumer spend categories, meaning we have extensive data on customer behavior at an individual level across multiple retail verticals. This.

This data enables us to engage in digitally market to a large number of Canadians, providing both insights and scale to our sponsors they could not achieve on their own.

Going forward, we will focus on growing our partner base to capture more retail spend and to provide more choice of brands to our members.

Value is driven by digital engagement shopping multiple brands and being part of our credit card programs.

Our focus on digital marketing programs designed to drive these behaviors. These priorities will help us attract new sponsors and collectors to the coalition going forward.

In addition, we are pursuing new revenue streams that involves supporting clients that do not participate in the current traditional coalition.

For example, we have run marketing programs for several large U S. State tourism organizations. These programs are created using air miles traveled data in currency in concert with our digital reach to target prospective travelers to the specific destinations.

And one program the tourism board was able to reach our collectors with relevant destination content and convert searches into purchases, resulting in an almost 40% lift in flight bookings attributed to this campaign.

This campaign helped position the state as a leading vacation destination for our collectors and convert browsing collectors into travelers.

These are the types of non traditional partnerships, we are building leveraging our data digital reach and currency to benefit our clients growth objectives.

Slide eight provides an overview of the different elements of todays air miles ecosystem.

And as we innovate around new partnership models. It is important to remember that the air miles program has a history of developing creative ways for sponsors to participate in the coalition at a commitment level that fits their business.

Air miles shops Dot CA gives collectors the opportunity to earn air miles when they shop online at one hundreds of top brands, including Apple <unk>, Nike and Amazon.

E Commerce experience for our collectors as quick and efficient.

The seamless handoff to the air melt shop site to the brand site.

In the past quarter, we've added new top retail names, including Farfetch, Jim sharp in the home depot.

Our next tier of sponsor participation is through our card linked offer platform, which we launched late last year.

As we noted on our year end earnings call collectors now can link any Canadian issued Mastercard to the air miles account and earn bonus miles at leading retailers going forward, we will look to expand both our car partnerships as well as our network of participating retailers, which each of these initiatives, making it easier for collectors to earn more miles at more locations, where they want to.

Sure.

This has been the foundation of the Air miles program since 1992 and continues to anchor the program today.

Our other tiers provide a pathway for retailers to see firsthand the power of the coalition and the way that best fits their needs.

We know that shopping multiple brands continues to be a key driver of collector engagement and a focus of our marketing communications.

Overall, each element of the air miles ecosystem amplifies the opportunity to earn miles and the number of retailers that can join the program as.

As we continue to strategically develop and deploy new models to connect collectors with the brands. They love. We believe the program will continue to grow and prosper.

Moving to slide nine let's discuss the recent developments from the second quarter.

Historically air miles as maintain exclusive relationships in the grocery vertical.

But as we look ahead, we expect to offer our collectors new opportunities to shop and earn miles at a variety of different retailers in the grocery space as.

We look forward to sharing our progress with you as you move through the second half of 2022.

Airmiles plans to use a combination of brand relationships like the ones. We just described to expand our weekly touch points for collectors to drive transaction volume and frequency higher.

And as we work to give our collectors more choice for the grocery spend we're excited to announce our BMO grocery accelerator program is <unk>.

<unk> first cardholders of the air miles bank of Montreal credit cards can earn double miles on their credit card spend at any grocery retailer in Canada.

With consumers working to stretch to grocery dollars. We believe this program will be enthusiastically received by our existing collectors.

It should also drive new members to the program offering cardholder acquisition for the air miles BMO credit cards.

Our existing air miles credit cards are among our most active and engaged collectors and we expect this campaign will help new cardholders quickly discover the benefits of double dipping when earning miles as we work to add new partners. We are equally attentive to the upcoming renewals with our existing sponsors.

<unk> member of the coalition from 1992 bank of Montreal as a key partner in our current agreement matures in the fourth quarter of next year.

Discussions are already underway with BMO and other current sponsors to secure renewals that create value for our sponsors air miles and our collectors.

On Slide 10, let's review the progress we've made on our strategic investments.

As we previously outlined we are committing an incremental $20 million to $25 million.

Of capital spending to drive consumer engagement accelerate digital innovation and enhance our data and analytics capabilities.

The first half of the year was initially focused on translating our air miles collectors and sponsors needs assessments into a technology roadmap.

We subsequently assembled our agile digital development teams and kicked off our first wave of projects with a focus on delivering near term requested upgrades to the mobile app experience I am pleased to report that these efforts are already yielding returns in fact, we have two projects that will be rolling out in the next 30 days.

The first involves a series of improvements to our mobile enrollment process to make it easier and faster for consumers to join the coalition and become collectors.

And as the air miles at becomes the daily hub for user engagement, we're updating the authentication process. So collectors will have seamless access to new offers and rotating incentives.

The second provides collectors more clarity and visibility into their miles balance, which we expect will lift customer satisfaction, while reducing inbound calls to our customer care centers.

As we progress through the second half of 2022, we plan to leverage a set of near term progress metrics to gauge the impact of our digital innovations at air miles.

Additional capital projects are underway and moving at pace that we now expect our incremental investment will stretch into 2023 due to bandwidth constraints.

Of our incremental investment, we expect that approximately $15 million will be deployed in 2022, the balance occurring in the first half of 2023.

Page 11 highlights the air miles reward miles issuance and redemption trends over the past nine quarters.

Air miles reward miles issued in the second quarter were higher than the first quarter of 2022 by 13% and higher than the year ago quarter by 8%.

Redemptions in the second quarter were up 17% from Q1 of 2022 and about 54% from the second quarter of 2021 in line with the broader accessibility of travel rewards compared to the year ago period.

The ratio of miles redeemed miles issued what we call. The burn rate was consistent with the first quarter and we expect it to remain elevated across 2022 as regular travel patterns resume.

Collectors pent up interest in travel carried over from the first quarter and air miles saw five times lift and travel related redemptions compared to the year ago period.

We expect the burn rate to normalize in 2023 as a renewed demand for travel levels off and we add new sponsors and earning opportunities for our collectors.

As we noted last quarter this period of elevated redemptions as the natural offset to the last few quarters. When we saw historically lower redemptions due to the pandemic related limitations on travel.

Our redemption settlement assets account had a balance of $672 million at quarter end funded by cash we set aside for redemptions.

We are confident that the redemption settlement assets will cover periods of higher redemptions without an impact on our liquidity position our operating cash flow.

Now I'll turn it over to our CFO , Jeff Chesnut for financial review.

Thanks, Sean.

Slide 12 presents our results for the second quarter of 2022 compared to the corresponding period of 2021.

Revenue in the quarter was up 14%, which was a combination of a 7% decrease at air miles and a 33% increase of brand loyalty.

Net loss and diluted EPS were both down quarter over quarter as a result of the goodwill impairment margin loss from revenue declines and a full quarter of interest expense.

Slide 13 presents our segment level results for the second quarter of 2022.

The balance of the decline was associated with higher cost of redemptions, which are netted out from gross revenues to arrive at our revenue presentation.

Margins on redemptions contracted in connection with the enhancements, we made late last year to the collective value proposition Brian .

Brand loyalties revenue improved by $26 million due to the size and timing of campaigns, which can vary meaningfully year over year.

Air miles adjusted EBITDA declined, 14% or $5 million compared to the second quarter of 2021 due to the revenue impact combined with personnel costs. These costs were partially offset by reduced occupancy expenses and we will accelerate these cost saves with our new enterprise wide operational efficiency plan, which we expect will result.

And both in year end run rate savings.

Brand loyalty is adjusted EBITDA in the second quarter, while still negative improved from the year ago period, due primarily to the increase in revenue.

Although we continue to project the brand loyalties topline performance will strengthen across the year, the persistence of higher production and logistics costs plus the impact of recent FX movements suggest the brand loyalties full year adjusted EBITDA will be less than the 2021 result.

However, the changes we're implementing organizationally like the operational efficiency and savings plan and the brand loyalty specific changes that Charles mentioned earlier will help brand loyal to secure its financial foundation and position it for profitable growth as we move forward.

Let's discuss our outlook for the balance of our fiscal year.

When we originally provided guidance on our first earnings call in February It was predicated on post Covid recovery and a healthy economic climate in our key markets.

Russia's invasion of Ukraine, persistent supply chain issues surging inflation rising rates and client developments have amplified the challenge to accurately forecast the second half of 2022.

This performance with add backs permitted by our debt agreement would be in compliance with our revised loan covenant.

We expect our next guidance update will be later this year.

The economic climate has worsened since the start of the year and we're responding proactively and prudently to prepare loyalty ventures to weather these conditions.

We are reassessing each of the steps we've taken our daily business processes with the goal of eliminating or reconsidering the lower return elements.

This will enable us to focus our teams and our efforts on only those initiatives that deliver the strongest return on investment for our business critical for example, this period, we closed our offices in Calgary in Montreal and continued downsizing our footprint in Toronto.