Bread Financial Holdings, Inc.
Q4 2007 Earnings Call Transcript

Published: 31 Jan 2008

[Operator:]

Good afternoon, ladies and gentlemen. My name is Vanessa and I will be your conference operator today. At this time, I would like to welcome everyone to the Alliance Data fourth quarter and full year 2007 Earnings Call. (Operator Instructions). It is now my pleasure to turn the floor over to your host, Ms. Julie Prozeller. Ma'am, you may begin your conference.

[Julie Prozeller:]

Thank you, operator. By now you should have received a copy of the company's fourth quarter and full year 2007 earnings release. If you haven't, please call Financial Dynamics at 212-850-5608 for copy. On the call today we have Mike Parks, Chairman and Chief Executive Officer and Ed Heffernan, Chief Financial Officer of Alliance Data. Please note that due to the pending proposed transaction with an affiliate of the Blackstone Group, there will be no live question-and answer-session during the call. I would like to remind you that some of the comments made on today's call may contain forward-looking statements. These statements are subject to the risks and uncertainties described in the company's earnings release and other filings with the SEC. Alliance Data has no obligation to update the information presented on the call. Also on today's call are speakers who will reference certain non-GAAP financial measures, which we believe will provide useful information for investors. Reconciliation of those measures to GAAP will be posted on the Investor Relations website at www.alliancedata.com. With that, I'd like to turn the call over to Mike Parks. Mike?

[Mike Parks:]

Thanks, Julie. And welcome everyone. Thanks for joining us this good afternoon. If you will turn to the agenda, we will start off by getting an update of the acquisition activities, and then we will turn to the fourth quarter highlights to review full year and expectations for 2008. So let's go ahead and jump right in. Let's turn to the slide of the acquisition update. This morning, as you all know, we filed a lawsuit against the affiliate to the Blackstone Group seeking specific performance by the Blackstone entities, other obligations under the merger agreement. We believe that today, we’ve performed our obligations under the agreement and we are willing and able to perform our remaining obligations and close this transaction. It is our belief that Blackstone, however, has failed to act in good faith or use reasonable best efforts to obtain new approvals we need from the OCC. I want to just step back for a second and remind everyone of a condition for closing the merger; the OCC must approve the change of control application for World Financial Network National Bank, our credit card bank subsidiary. After market closed this past Friday, we've received a notice from Blackstone, stating its belief that the OCC is demanding that extraordinary measures will be taken by the parties in connection with the change of control and that, as a result, the related closing condition was unlikely to be satisfied. Blackstone later told us that they are unwilling to satisfy the requirements specified in the OCC's most recent request. We believe the OCC's requests are reasonable and that Blackstone is able to satisfy these requests, but has simply decided not to close the merger on our negotiated terms, if at all. I direct you to read the complaint filed today, as it will describe better than I can, given our time tonight. However, I have refused points relating to the rhetoric swirling in the press. One, we believe the OCC, again, is reasonable and furthermore, they have repeatedly demonstrated their willingness to consider alternatives. Two, the rumors of unlimited or unreasonable capital demands are simply not true. The maximum potential call is $400 million and only in the event that neither the bank, nor Alliance Data is otherwise able to support the bank. And given the profitability of the bank and our history of performance, it is highly unlikely this would actually come in the play. And finally, Blackstone's offer to work towards an alternative solution rings hollow when they are only willing to offer a level of financial support that it knows will only be rejected by the regulators and has yet to offer any reasonable alternatives. Entering into litigation is always a difficult decision, but the board of directors and management believe that this course of action is necessary to best protect the interest of Alliance Data and our stockholders. I know you'd like me to have more detail, but we do not believe it's appropriate or in our shareholders interest to fight for our right in the press, particularly when much of the commentary today has been based on inaccurate and misleading information. And lastly, let me be very clear, no one is questioning the strength of our financial or operating performance. As you will see in today's presentation, we have over performed all year and 2008 looks strong and no one is asserting that our liquidity has suffered even in today's macro environment. In fact today's presentation will show our liquidity has never been stronger. All right, enough of the acquisition talk; let’s get on with the company. If you'll turn to the next slide forward, and before we jump into these specific highlights for the quarter and the year, I want to remind many of you and perhaps introduce to some of you, our newer shareholders, our business model and why we continue to be confident in our future. The business model drives results, double-digit organic growth, strong free cash flow generation, strong visibility and predictability, and adding tuck-in acquisitions to our organic growth, our 12%/15%/18% model has performed for ten years now, 12% meaning top line, 15% EBITDA and 18% our cash EPS. And since our IPO in June of 2001, for 27 consecutive quarters we've met our bid expectations. It is a very recession resilient model. It's based on several key factors. In our Loyalty business in Canada, it's based on everyday non-discretionary spend. Here in the US, with Epsilon, it's based on long-term relationships requiring constant transactional updates. And our Private Label business is not about financing, it's all about Loyalty based programs, with very low balances that have a natural hedge between losses and funding. We're confident in our model, we continue to perform and 2008 will be no exception. So let's turn on for the quarter, next slide. I am obviously very pleased to announce we posted our largest quarter ever for revenue. During this period, revenue reached $603 million, an increase of 15%. Adjusted EBITDA increased by 31% to $158 million. And cash earning was cash $0.93 which was up 33%. Operating cash flow or operating EBITDA was at $175 million. And as I said earlier, this is our 27th consecutive quarter delivering or exceeding on our promises. Now let's take a look at few highlights, starting with our marketing service business in Canada which manages our AIR MILES Reward program. They delivered another great 20%, plus organic growth in revenue and EBITDA. The long-term success of our program remains very sound, as the fundamentals of the program based on our sponsors, collectors and rewards continue to be quite strong. We are excited to announce a new sponsor this past quarter, Visions Electronics. This marks our entry into a new sponsor category, consumer electronics and they are one of the Western Canada's leading electronics retailers. We also saw a strong increase in AIR MILES issued; one of our key metrics that measures the health of the business. MILES issued shows as evidenced that our program encourages collectors to shop at sponsor locations and shop more frequently, sponsor first hand our programs value and develop sustained consumer buying habit. For us that translates into virtually a 100% renewal rate for sponsors. Turning to the US marketing group, Epsilon, next slide. Epsilon turned into tremendous performance this quarter. We continue to realize the benefit of the company shifting more of their traditional marketing dollars to programs, like ours, that use transactional data and deliver measurable ROI. This quarter, both top line and EBITDA grew in excess of 50%. We also announced two new clients. First, a multi-year agreement with Charter Communications, to provide integrated marketing services and strategic consulting. Charter, as you probably know, is a Fortune 500 Company providing more than 5.6 million customers with cable television, high-speed internet access and telephone services. Epsilon will be using our Loyalty and Email communications platform to launch Charter's customer attention and loyalty programs for the future. Last month, we also announced the agreement with Helzberg Diamonds to manage their marketing database, to provide data and analytical support for cross-selling and customer acquisition program to their subsidiary Berkshire Hathaway and they operate 269 fine jewelry stores throughout the U.S. And lastly, we are very proud to be recognized as industry leader by Forrester Research in their recent assessment of both database and e-mail marketing service. We were the only company to receive the distinction in both the reports. All right, let's turn on to Private Label. Once again, another great quarter. Our success lies in our ability to demonstrate to clients that when a private label tool position as the marketing solution and not as financing option, it can help them increase sale and increase loyalty. The team delivered solid organic growth, despite some macro challenges including the grow over of abnormally low credit losses in 2006 due to the bankruptcy bill, as well as the loss of Lane Bryant portfolio going in-house. Even so, the operating metrics of the business are very solid. Portfolio growth, funding and losses have positive trends and this bodes well, as we entered 2008 and beyond. We launched a program with Dell Computer this quarter exclusively targeting Dell's Spanish speaking customers. All of our support services are available on Spanish, so Spanish speaking customers can better understand the program's benefit, as well as the financing terms and conditions. Also in October, we announced the renewal of a long-term client Alon USA to provide integrated and marketing services for their 1100 FINA locations. We expect to deliver another four or so new deals in 2008, which is typical for us and we're off to a great start with an announcement already with Sharper Image. We will be providing integrated private label card program and just as importantly, we're excited that at the same time our Epsilon Group won Sharper Images permission, based on e-mail marketing services work. Both services will be geared toward multi-channel sales and increasing customer loyalty. This is yet another great example of the many cross-selling opportunities we see in 2008. Let's turn to the full year result on the next slide. We finished the year as you know just under $2.3 billion in revenue, EBITDA of $643 million, operating EBITDA $685 million, cash earnings per share $3.25, up 19% just as we promised when we last increased guidance in October. As a recap for 2007, we had a great year and forging new relationships, adding 14 new customers, including [Seven-11, Garden White, Tesco and Orchid Supplier] as a few. We extended and expanded our relationship with key clients such as Williams-Sonoma, [Redcat], A&P Canada and Goodyear Canada, and we continued to build on our strong leadership position in the US and Canada while having increased our international presence as well. I am very proud of our team and their performance, and I want to congratulate you all. We're all equally excited about 2008, which Ed will begin to review here after he tops of 2007 with a few more details. Ed, over to you.

[Ed Heffernan:]

All right, thanks Mike. We're going to spend a little extra time on the call tonight to share with you detailed information on the quarter, the year and our outlook for ’08, given the fact that we really can't be taking phone calls, given litigation, for a little while yet. Again, we will be trying to get some type of update Q&A session at some point in the near future. But we are hoping with press release and with the discussion tonight that folks out there, whether they are new to the story, or whether they have been out of the story over the past year, this should be a quick catch up catch up and hopefully for lot of you out there who have known as for the past eight years, seven years, you will sit there and basically say more of the same. And that's what you are going to hear. We are very jazzed up about our weight. And before I get there, let's talk a little bit about '07. And again, we are talking about the quarter, the year and especially our '08 outlook because there is just so much noise out in the market about what's going on that we thought we would take an extra few minutes to talk about it. In terms of where should be on the slideshow fourth quarter consolidated results, let's spend just a few minutes on the quarter. I would say there are five key takeaways. The first, quite simply, is top line of $600 million is the best in our history. So again, kudos to the folks here. Number two, our EBITDA margin expanded over 300 basis points and hence drove 30% growth in EBITDA. Third, over 85% of our consolidated revenues, inversely all of our cash flow and growth, were generated by our big three engines. The Loyalty AIR MILES program in Canada, our U.S. marketing business also called Epsilon here in the States and our Private Label business. Number four, regarding the three engines, the Loyalty and Epsilon posted enormous top line and bottom line growth, each generating 20% plus top line and 30% plus bottom line. Private Label, despite the loss of Lane Bryant and the final normalization of credit losses to a higher base run rate still managed to do mid single-digit growth, it's pretty good. And finally, as cash flow, that's what we called operating EBITDA grew 25% versus last year, margins expanded over 300 basis points and the three growth engines continue to motor cash earnings per share top 33% growth and showed a steady growth trajectory that moved from 12% growth in the first quarter, 11% growth year-over-year in the second quarter, 25% in Q3 and 33% in Q4. Needless to say bodes extremely well for nice jump off for 2008. All right, let's move on to the next slide and talk little bit about the segments. First, transaction services which houses our processing, customer care and the loyalty units within private label, as well as utility services in our traditional merchant bank card business. The key driver here the statements generated which was flat during the quarter reflecting single-digit growth in utilities, offset by a decline in private label due to the loss of the Lane Bryant portfolio which started in November. That along with the sale of our Email Services print business drove a decline in revenues. EBITDA was adversely affected by nothing more than our inter-company charge between our private label and transaction services business units, in other words between our credit segment and our transaction segment. Specifically, we set the inter-company charge once a year. This year expenses have run ahead of expectations, so margins and transaction services have been squeezed, or set differently, one could suggest transaction services has actually subsidized the credit segment. The uptick in cost covers four areas. One, we beefed up our call center group to enhance service and support. Two, we beefed up our collection group. Three, we had costs associated with moving facilities in Ohio. And four, we added incremental expense to drive new marketing initiatives. Overall we believe the money was extremely well spent as indicated by the strong stable yields, stable losses and high customer satisfaction. How do you know if they paid us? We will talk it about in the internet credit segment. But needless to say we think it was money well spent. This inter-company rate will be reset in Q1 based on standard market arms-length transaction type margins. Next, credit succeeded in growing through both the loss of Lane Bryant and the normalization of losses. Top line growth was just under 10%, was overshadowed by 30% plus growth in EBITDA. This drove margins up 600 basis points as yield crept up. Funding rates remained flat and losses normalized out, that is they rose moderately by about 50 basis points versus the prior year abnormally low rate which resulted from the '05 Bankruptcy Reform Act windfall which benefited '06. Delinquencies, they are best indicators of future losses and remained in the mid-5s suggesting little upward pressure on future loss rates. Finally marketing services, we will be spending more time on this during our 2008 outlook, suffice to say, had a heck of a quarter. Top line was up 30, EBITDA 47, margins up close to 300 BPS. The Royalty AIR MILES program in Canada continue to just repeat with top line organic growth north of 20% and EBITDA north of 30% and again this is all organic. Moreover, Epsilon showed even stronger growth as all aspects of its business continue to gain momentum. Again more on this in a bit. Let's plow ahead and hit the balance sheet

[Mike Parks:]

Thanks Ed. Lastly, I would like to thanks for hanging in there with these folks. I am not going to reiterate all of the stuff. There is certainly is a plenty of information for you to begin to digest and really join in our excitement for the future. Frankly, regardless of our ownership structure for 10 years now, our culture has been driven by our model. It says deliver on your promises and we plan to do just that. We'll be looking forward to talking with you in the next 30 to 45 days and thanks for joining us tonight. Bye now.