Loyalty Ventures Inc.
Q4 2021 Earnings Call Transcript

Published: 3 Feb 2022

[Operator:]

Good afternoon and welcome to Loyalty Ventures Fourth Quarter 2021 Earnings Conference Call. At this time, all parties have been placed on a listen-only mode. Following today’s presentation, the floor will be open for your question. It is now my pleasure to introduce Ms. Lynn Morgen of Advisiry Partners. Ms. Morgen, the floor is yours.

[Lynn Morgen:]

Thank you, Operator. Copies of the slides we will be reviewing today and the earnings release can be found on the Investor Relations section of our website. Hosting today’s call are Charles Horn, President and Chief Executive Officer of Loyalty Ventures, and Jeff Chestnut, Executive Vice President and Chief Financial Officer. 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 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 at royaltyventures.com. With that, I would like to turn the call over to Charles Horne. Charles?

[Charles Horn:]

Thank you, Lynn. And thank you all for joining us today to review what we accomplished in 2021 and most importantly to discuss our business outlook and roadmap for 2022. 2021 was a pivotal year for Loyalty Ventures as we separated from a longtime parent on November 5 and became an independent publicly traded company. We brought two established data driven Loyalty Solution providers to the market, both of which share key investment strengths, namely their leaders and respective businesses have longstanding customer relationships and combined generate very strong cash flow. These are the attributes that we intend to build upon in the coming years. As you can see on page three, with our spinoff complete, we are now organized exclusively around the clients and consumers of our AIR MILES and BrandLoyalty businesses. AIR MILES and BrandLoyalty drive sustainable top line growth with their clients through their substantial data assets and the analytics to transform that data into actionable and personalized marketing insights delivered to scale. During the year challenged with COVID developments and supply chain disruptions, those capabilities help this create value for our clients while developing new approaches to serve our partners in 2022. At AIR MILES, both revenue and adjusted EBITDA were up slightly compared to 2020. BrandLoyalty’s revenue and adjusted EBITDA were both down in 2021 as the business dealt with ongoing COVID related logistics challenges. In 2021, BrandLoyalty implemented several initiatives to unlock more sourcing alternatives and drive improved performance in 2022. As we look forward, our capital allocation priorities have been established around the goal of transforming our company. We will invest in the needful on these businesses with both the capital to drive innovation and growth and the commitment to be creative and flexible in our approach to enhancing ROI for our customers. Turning to slide 4, it highlights the key financial metrics for the fourth quarter. Total revenue for the quarter was $239 million and adjusted EBITDA was $47 million. Revenue increased 3% year-over-year, while adjusted EBITDA grew 15% year-over-year. For the quarter, we reported a net loss of $2.27, which included a goodwill impairment charge of $50 million, transaction related costs of $18 million and then the related impact on the provision for income taxes. For the full year revenue totaled $735 million and adjusted EBITDA was $166 million. In 2021, we reported $2 million of net income and earnings per share of $0.07 both of which were inclusive of the effects of the goodwill impairment, the transaction cost and the impact on the provision for income taxes. When excluding the goodwill impairment and the transaction costs, net income and diluted EPS for the fourth quarter would have been $8 million and $0.34 and for the full year $66 million and $2.68. Slide 5 provides a quick update on several key initiatives that launched in the fourth quarter at AIR MILES. In conjunction with the spinoff, AIR MILES refreshed its visual identity, which helped to highlight and reinforce the enhancements we introduced to the program. The refresh was strong success with high level of impressions, digital activations and positive sentiment among collectors. Our sponsors also appreciated the extra energy and enthusiasm it added to the coalition. In addition, AIR MILES launched new flight booking program in the fourth quarter. Collectors now have more airline partners from which to choose and more ways to pay using both cash at miles along with more value per mile. As a result, AIR MILES saw a sizable lift in flight redemptions before the Omicron variant emerged late in the year. AIR MILES also rolled out the card linked offers in Q4. Collectors now can make any Canadian issued MasterCard to their AIR MILES account and earn bonus miles at leading retailers. This limited promotion is a great way for collectors to earn more miles at more locations. We’ve seen strong collector uptake and engagement from this initiative and will continue to develop and test new ways to enhance collector sentiment and program value. Slide 6 highlights select sponsor additions and renewals. During the quarter, we renewed several brands, including cart building supplies, Nova Scotia Liquor Corporation and Samsung. In addition, Canadian consumers can now earn AIR MILES supporting Canadian small businesses through the AIR MILES incentives Shopify app, which we launched in December. It simply and securely integrates with merchants’ existing e-commerce platforms, and the merchants can customize AIR MILES offerings to promote specific products, services or to increase basket size, reduce cart abandonment and more. The app also offers merchants a simple to use interface, along with transaction level reporting analytics. We are excited about the early returns and look forward to growing in this important channel. As mentioned earlier, we launched our card linked offers program in November and collectors can now earn miles at leading retailers including DSW, H&M, Indigo, Sephora and Subway. We’re seeing positive momentum in this program. We remain focused on growing our sponsor base and providing collectors a multitude of options to earn AIR MILES reward miles across a variety of retail verticals. Turning to page 7, it highlights the AIR MILES reward miles issuance and redemption trends over the past nine quarters. Miles issued increased sequentially in the fourth quarter boosted by the holiday season and redemptions improved sequentially as well though the emergency Omicron variant resulted in fewer flight bookings that would normally be expected. At the same time, merchandise redemptions remain strong or higher in both the fourth quarter and the full year compared to 2020. As travel restrictions recede, we anticipate higher demand for flight bookings and travel redemptions. Our redemption settlement assets account at a balance of $735 million at year end funded by cash we set aside for future redemptions. We’re confident redemption settlement assets will cover periods of elevated redemptions without any impact on our liquidity or operating cash flow. Turning to page 8. Let’s review the key developments for BrandLoyalty in the fourth quarter. As far as the spinoff, BrandLoyalty updated its visual identity and introduced a logo that clearly establishes that loyalty is the foundation for what they deliver to their clients. BrandLoyalty also renewed its relationship with Disney in key regions, enabling us to offer loyalty promotions, including the Walt Disney Company franchises to our retail clients. We believe that Disney relationship will continue to be a key differentiator for BrandLoyalty going forward and we are pleased to recommit to this relationship. The emergence of the Omicron variant in the fourth quarter extended the code related supply chain challenges that BrandLoyalty has encountered throughout 2021. During the year, the team has worked to develop alternative sourcing options so that reward merchandise can be reliably produced, shipped and delivered to its clients. With an emphasis on regional sourcing, new shipping modalities and pre-booked container capacity, we’re confident that we’re well-positioned to navigate potential supply chain constraints in 2022. Slide 9 illustrates the broad geographic areas the BrandLoyalty serves. In 2021, these areas were impacted by COVID differently, not only in terms of lockdowns and other restrictions on economic activity, but also in terms of vaccine availability, efficacy and uptake. As a result, some of these countries and regions will rebound at different times and with different cadences, and each region will represent a different opportunity for BrandLoyalty. With our strong foundation in the EMEA region, we will work to expand that market through more grocery and retail relationships, while also supporting growth in the Americas and APAC. We believe that the current momentum combined with code recovery will lead to an expanded footprint and profitable growth in these areas. On slide 10, we provide additional detail on the investment roadmap that is designed to drive accelerated growth. Over the past few years, our businesses have been unable to use the free cash flow to invest in their capabilities at a pace that they wanted. Now that we are an independent company, our new team is committed to putting the earnings from these businesses back into initiatives that will fuel our future growth. Specifically, we plan to invest in incremental 20 to 25 main of CapEx toward enhancing our collector facing digital platforms while also upgrading our data and analytics capabilities so we can serve our clients better. These investments are underway in 2022 and will enhance reflector experiences sponsor analytics in 2023. To further demonstrate our commitment to enhancing the coalition today, we’re investing $20 million to $25 million toward improving the collector value proposition in Canada. We believe this will create a virtuous cycle, more engaged and excited consumers will collect more, which will help retain existing partners and attract new ones. This change capitalizes on the momentum of our recent spinoff, fulfills our promise to take a new approach and serves as a bridge until the 2022 CapEx investments are live and in market next year. We expect to start the transition back to traditional EBITDA margins in 2023. Collectively, we believe these investments will strengthen our standing as the leading coalition loyalty platform in Canada to position AIR MILES for a strong and vibrant future. While the investment focus in 2022 will be concentrated on AIR MILES, we will remain vigilant for opportunistic acquisitions that will help BrandLoyalty and add clients, suppliers and capabilities to spur sustainable growth. As we move to slide 11, let’s start off with how we plan to elevate consumer engagement across our businesses. At AIR MILES, we recognized the pandemic has impacted historical redemption patterns by limiting demand for travel rewards and temporarily lengthening the overall time to redeem. To drive collector engagement, we’ve added new merchandise reward options by just a certain mileage redemption thresholds in enhanced or tiered benefits. We’ve also started rolling out our real time checkout platform which provides sponsors with a streamline method for instantly awarding their customers with AIR MILES reward marks either in store or online. Real time issuance means our collectors can see the updated balances immediately after checkout and have an access to the reward miles sooner makes redemption opportunities more assessable. We believe these changes will help our sponsors engage their consumers and improve the overall collector experience. At BrandLoyalty, we renewed our exclusive partnership with the Walt Disney Company in key regions, making BrandLoyalty the only company in the industry that will partner with Disney to offer campaigns featuring Disney branded products. Disney suite of products resonates with both clients and shoppers engaging them in ways few other brands can’t. The BrandLoyalty team also recognize that the consumers value prioritize sustainability in their everyday lives, so we have developed and deployed a set of virtual rewards in the form of carbon credits. Consumers can collect and ultimately redeem these credits to have trees planted, which will help offset the personal carbon footprints. These virtual rewards also offer retailers redemption option that bypasses the physical supply chain and increases the certainty of a programs on-time launch. On slide 12, let’s explore how we are focused on digital innovations. At AIR MILES, we introduced improvements in our travel booking experience, which offer consumers more choice and flexibility when reserving flights. With the ability to choose flights anywhere in the world, with different cabin classes and pay with miles or cash, the first phase of this new digital first self service platform was rolled out last quarter. We will continue to enhance it throughout 2022 and we believe collectors will appreciate these enhancements even more as travel redemption patterns start to normalize. Additionally, we partnered with Adobe to drive greater personalization and one-on-one messaging across our marketing and communication channels. We believe enabling tailored conversations at scale between our sponsors and our collectors will drive growth for sponsors and more relevant offers for our collectors. We will be developing and deploying these capabilities to more sponsors throughout 2022. BrandLoyalty in turn has seen strong client uptake with this gamified digital loyalty solution. The new solution where shoppers can win prizes by playing games, drives traffic to retailers digital channels and increases engagement with shoppers through omni-channel campaign activation increasing monthly active users. BrandLoyalty has also launched the business consumer app where consumers can offset their carbon footprint through certified projects. This solution empowers consumers and partners to take collective action to tackle climate change. Unique sustainable platform known as club leaf also offers a suite of business to business carbon offsetting services. Finally, BrandLoyalty has delivered a new campaign solution in the fast growing e-grocery, e-commerce landscape. The solution is targeted to building online ordering habits or rewarding shoppers for their behaviors. Moving to slide 13, we have highlighted areas of investment in our data analytics capabilities, AIR MILES has always used first party data and insights from consumer behavior to deliver personalized offers. The investments we’re making today will allow us to do this with a greater scale and automation. And as these campaigns are in market, AIR MILES reporting and analytics suites give our partners access to data, insights and dashboards in order to analyze and evaluate performance in real time. Finally, our machine learning solutions help measure campaign effectiveness and recommend personalized offers. BrandLoyalty has elevated its impact to measure methodology to predict and measure shopper uplift down to the segment of one, paving the way for further personalized communication and campaigns design. The new personalized services are deepening the data flow and sharing from our retail partners, which ultimately enables BrandLoyalty to deliver more impactful and relevant campaigns. As you have heard, we’ve hit the ground running with programs to strengthen our value proposition and build our capability to support future growth. With that, I will turn it over to our CFO, Jeff Chestnut.

[Jeff Chestnut:]

Thanks, Charles. Slide 14 presents our results for the fourth quarter and the full year of 2021 compared to the corresponding periods of 2020. Revenue in the quarter was up 3% primarily due to a strong finish to the year at BrandLoyalty, net income and diluted EPS were both down quarter-over-quarter as a result of the goodwill impairment costs related to the spinoff and the income tax provision. Excluding the impairment and the strategic transaction costs, net income and diluted EPs in the fourth quarter would have been $8 million and $0.34 per share. For the full year, revenue declined 4% as a result of the difficult environment that BrandLoyalty faced in 2021. Both net income and diluted EPS were each down for the full year as they were impacted by those items mentioned above. Excluding the impairment and the strategic transaction costs, net income and diluted EPS for 2021 would have been $66 million and $2.68 per share. Over the last two years, the continuing impact of the pandemic combined with the global supply chain challenges have disrupted normal operations at BrandLoyalty. As a result, we determined it was more likely than not that the fair value of BrandLoyalty was below its carrying value and we performed an interim impairment test. Based on the preliminary results, we recognized a non-cash goodwill impairment charge of $50 million in the fourth quarter. BrandLoyalty’s goodwill balance at the end of the year is expected to be $455 million after giving effect to the impairment and the FX impact. As we will discuss on our outlook for this year, we believe BrandLoyalty will deliver a strong performance in 2022 and we’re proud of how the team has navigated the circumstances over the past two years. For full year 2021, the tax rates of the two segments ranged from approximately 25% to approximately 28% and the consolidated tax rate was impacted by several factors. These included Canadian withholding taxes associated with the payments to the former parent and the currently non-deductible U.S. expenses such as the goodwill impairment, interest expense and corporate overhead. I’ll provide more details on our results on the next slide. Slide 15 presents our segment level results for the fourth quarter and the full year. In the fourth quarter, both AIR MILES and BrandLoyalty exceeded their revenues in the year ago period. AIR MILES’ adjusted EBITDA was 13% higher than the fourth quarter of 2020 due to OpEx savings across payroll and marketing. BrandLoyalty’s adjusted EBITDA in the fourth quarter was 18% higher than the year ago period due to the margin from the revenue growth as well as lower costs associated with key programs. For the full year, AIR MILES revenue and adjusted EBITDA increased 3% as the segment benefited from favorable exchange rates. BrandLoyalty’s full year revenue was down 8% and adjusted EBITDA was down 24% due to the ongoing impact of COVID in the markets in which BrandLoyalty operates. In particular, BrandLoyalty experienced persistent difficulties in sourcing timely deliveries of the merchandise that uses to reward consumers and as a result, some retailer loyalty campaigns ran less effectively or were deferred until the product could be reliably sourced. Slide 16 provides our financial outlook for the year. Our full year guidance for 2022 reflects enterprise wide top line growth of about 7% and an adjusted EBITDA margin of approximately 20% at the midpoint of our revenue guidance range after taking into account the increased spending we have budgeted in 2022 to drive accelerated growth in 2023 and beyond. Supporting our guidance for 2022 is our expectation for strong performance from BrandLoyalty. The BrandLoyalty team has significantly more contracted and high potential business today compared to a year ago. As a result, we expect double digit top line growth at BrandLoyalty with an improvement in the margin profile from mid single digits to low double digits. We expect strong growth at BrandLoyalty to more than offset lower net revenues at AIR MILES which reflects the impact of the collector value enhancement initiatives that Charles mentioned earlier. Overall, we expect AIR MILES to contribute about 70% of companywide adjusted EBITDA before corporate expenses. In fiscal 2022, we expect the tax rates for the two segments to range from about 25% to about 28%. After considering the currently non-deductible U.S. expenses, we forecast the consolidated tax rate will be about 50% and we expect cash taxes for 2022 to range from $30 million to $37 million. We are focused on reducing the consolidated tax rate and initiatives are underway to leverage or redistribute the currently non-deductible U.S. expenses. As we undertake the investments discussed today, we are mindful of our liquidity and our cash flow. Slide 17 highlights that our liquidity is strong at over $300 million at year end and our free cash flow $161 million. We have ample liquidity to support the strategic objectives we’ve outlined with capacity to react quickly on inorganic opportunities as appropriate. And we’re confident that the strategic priorities we outlined today will enable us to strengthen the leadership positions of both AIR MILES and BrandLoyalty by building upon our relationships with existing clients, attracting new sponsors and clients and driving enhanced collector and consumer engagement with our loyalty programs. Ultimately, these initiatives will transform AIR MILES and BrandLoyalty and will help us continue to drive sustained profitable growth for our clients and for loyalty ventures. Operator, we are now ready to open the lines for questions.

[Operator:]

Thank you. We have a question coming from the line of Marc Riddick with Sidoti. Your line is open.

[Marc Riddick:]

So, I wanted to start with, is there a general sense that we should be thinking about as far as the timeframe of the investment throughout 2022 if there’s any particular lumpiness or how should we think about how that would flow throughout the year?

[Charles Horn:]

The changes will be made to the AIR MILES program to increase the value proposition think of it is pretty much equally weighted by quarter just based upon the volumes. If you look at the CapEx right now, we’re really in the analysis stage of what changes we want to make, and we want to implement them. So I’d say and maybe Jeff will agree with me, it’s going to be more weighted Q2 through Q4 versus Q1 as we do a complete assessment of what we have and what we want to do.

[Marc Riddick:]

And then, I wanted to shift gears and could you talk a little bit more about the Disney renewal to the extent what you can share with us as far as timeframe or sort of maybe a little bit more detail around that renewal and the regions?

[Charles Horn:]

Yes, sure. So if you think about it, most of our contracts sit in a three to four year renewal space and that’s just the way it’s historically been, we tend to start negotiations a year in advance. And so, we’ll be starting right now with one of our larger clients and it will start later in the year with a second one. And so, we’ll continue with that we have in the past where we will negotiate and we’ll try to get a good deal for us and try to get a good deal for our clients. And we’ll see how it goes. It’s just one of those things we always have to deal with the short term contracts.

[Marc Riddick:]

And then, can we talk a little bit about the card linked offers? So some of the brands that you have mentioned in the presentation, there’s certainly a mix of industry verticals. I was wondering if you could talk a little bit more about that and maybe where you think that might go, to some degree what that might do over time as to the mix of what’s available to customers?

[Jeff Chestnut:]

Mark, this is Jeff. And we’re excited about the card linked offer program. It’s a great way to help our potential long term sponsors, try the program from an efficient standpoint, without standing up too much infrastructure. It’s also a way for our collectors to quickly expand where and how they earn. So I would expect this is a time limited program. But I would expect to see more names joining here over the coming weeks. And we’ll continue to evaluate it and I think this one has got legs.

[Marc Riddick:]

And then, shifting gears actually over to the commentary around the gaming option for folks because, quite frankly, we don’t spend enough time on our phones already as it is. I was wondering if you could talk a little bit about sort of how that program came about and sort of maybe even the content that’s involved in these games, is that something sort of where these games come from and as far as engagement and maybe how that works to sort of translate into revenue for yourselves and growth for your customers? Thank you.

[Jeff Chestnut:]

Yes, Mark. So from a gamification standpoint, this is something that we work together, in particular, with our clients at BrandLoyalty to determine the type of traction or consumer behavior that they’re looking to drive. And some of that behavior is foot traffic or basket size, some of that behavior is oriented around app, mobile adoption or online adoption, spending more time in the app. And so, if that’s the objective for the program, that’s an opportunity for us to layer in those gamification elements and really try to sharpen the consumers behavior around coming back to that app or that site in particular, for retailer, especially in the grocery channel. Just like you’re competing for foot traffic and your grocery store, you’re competing for web traffic to get consumers to adopt your online delivery service or meals in a box, things of that nature. That’s where you’re going to see those really rollout and have traction. We’ll do it in concert, of course, with the retailers’ strategic objectives.

[Marc Riddick:]

And then, one of the slides then I’ll jump back in queue. I’m asking a bunch of questions. I’m sorry about that. But there was one slide on the BrandLoyalty going into the campaign statistics. And I was wondering if you could talk a little bit about that. The 185 plus campaigns, 140 retailers, and what have you, and I was wondering, sort of where you think that can go in a normal environment, normal year, and how maybe what we’ve seen historically as far as those campaigns over time? Thank you.

[Jeff Chestnut:]

Yes, sure. The BrandLoyalty has been, as Charles mentioned earlier in his remarks really impacted by the pandemic and the supply chain. The lack of travel, in particular has limited BrandLoyalty’s ability to get out and sell new campaigns to potential new clients. So as you think about the list of countries, they’re in today and we’re reporting, those campaigns are running we’d expect that to grow as they move into not only more campaigns in their existing geographies, but expanding into those new geographies and new verticals within existing and new geographies as well through some of those partnerships and digital innovations that Charles mentioned. So once the travel restrictions lift, not only certainly in Europe, where BrandLoyalty is headquartered, but in those regions around the world so they can get there and introduce these programs, I think you’ll see those numbers continue to expand.

[Operator:]

Our next question coming from line of Bruce Krystal from Krystal Family Office. Your line is open.

[Unidentified Analyst:]

Yes. Good afternoon. A few questions, please. The first is the investment of the $20 million to 25 million that you’ll be running through the Miles P&L. I was curious, was this at all related to the loss of the two sponsors earlier in the year? And second question along those lines a couple more after that is, your confidence that the $20 million to $25 million investment maybe you could spend a little bit more time about what that exactly will be and will that in fact drive new sponsors and specifically, could there be any sponsors that are related beyond Canada?

[Charles Horn:]

So let’s start off with your first question on really two of the programs that went away, the biggest one was they just decided not to be in the program anymore. I think indirectly, it’s a case where they were looking at the cost. Now the collectors in the market, we’re sitting there and we’ve gotten some feedback. And we’ve gone out to all of our big sponsors and talk to them. So we went on a little bit of a market check against some of our competitors in the market. And we felt that over the last couple of years, we kind of priced ourselves in terms of the value prop above where we should be. So we looked at it, we said to bring us back into really in check, even though we’re the leader in the market to make it again, more agreeable to the collector let’s adjust it, let’s try to get more value going to consumer, they spend more, they pull through more to the sponsors. To your point, sponsors get happy when people spend so if we get the collector happy with the redemption options, and we have a plethora, and now they gain more value, they spend more and it’s a virtuous cycle we talked about. So we felt after going into the market, talking to our big clients, doing a market check on some of the other programs in the market, PC optimum, the RVC program and so forth, we felt it was appropriate to make the change and we do think we’ll get that back overtime. We do think that’s going to drive collector engagement and drive more spend and we’re going to come out ahead on it.

[Unidentified Analyst:]

But at this point is there any ability to see that this investment will lead to several new clients?

[Charles Horn:]

I’d say we’ve been very active out in the market right now. Sure point, we do need to bring in some new clients and some key verticals. And we’re trying to do it aggressively. I do think this helps. But this is not the only thing we need to do. We also need to add capabilities. We need to move to open source data, where clients can get into this rich database we have and do some of their own marketing programs. So there are number of things we’re looking to do to facilitate the products make it where it’s even more than just the value prop to the consumer. We’re adding value to the sponsor by helping them market the program and marketing what they need. So that’s really what the focus is going to be. The combination of making it better for the collector, but also adding capabilities for the sponsor and make it in such a way that no one else can replicate what we do. That’s what we’re attempting to do.

[Unidentified Analyst:]

The second question is in light of the lower EBITDA, was there any change in the breakage rate assumptions? And if so, what would a 1% change in a breakage rate cost to the EBITDA?

[Charles Horn:]

So I’ll let Jeff answer that one. There was no change to the breakage rate. But if you think about what’s happened over the last two years, the burn rate has been below the ultimate redemption rate. And what I mean by that the amount of points burned during the current year over the Miles issued has been below the 80% ultimate redemption rate. So it gives us some room down the road that if we see a spike and we think it will, when people start booking flight again, we can go above the ultimate redemption rate for a period of time the 80% on the dream program, and not being a profit in an issue. So that shouldn’t be a problem. Jeff, to your point that we quantify in our 10-K the effect of one point change, I think it should be there. And you should know what that is.

[Jeff Chestnut:]

We haven’t put the 10-K out. I think you’re referencing the Form 10, Charles?

[Charles Horn:]

Yes.

[Jeff Chestnut:]

Yes. I think it’s about $80 million.

[Charles Horn:]

Canadian?

[Jeff Chestnut:]

I believe so, yes.

[Unidentified Analyst:]

The next question I had was, just curious here, the improvement here on the retail side of the business is actually quite dramatic. And I was wondering just from a fact that you are effectively a new company. And the fact that the parent company really is effectively controlled by regulators, etc., and as all of those type of things. Is there something here that as you see as an independent company now that the strategy going forward will be a little bit shackled free, if you will from regulators, etc, that will allow you to actually be a little bit more aggressive in the marketplace?

[Jeff Chestnut:]

Charles, you may be on mute.

[Charles Horn:]

You’re right. So, if you think about it with ATS, the focus was on the payment side, it was on the card services side, which your points highly regulated. So basically, the Loyalty Ventures operations were looked at is how much cash can we harvest out and reinvest in the business. So it did do very well for ADS in terms of dividends and money back, but in my opinion at the detriment of future growth. So as Jeff talked about, if we go through, we retain our cash flow, which is strong, we invest in the business for a couple of years. That’s how we’re going to get to the growth profile we’re looking for. That’s going to be the key thing for us, the ability to go into new markets. I’d like to bring AIR MILES into the U.S., I’d like to go mini coalitions and some of the developing loyalty markets like Mexico, there’s a number of things we can do now that we just didn’t have the opportunity to do for not that there was anything wrong with the way it was done. It was just a different party. So we’re shifting from harvesting cash now to how can we really grow the top line and make this a growth company.

[Unidentified Analyst:]

Do you think in 2022, we will actually see a U.S. partner in AIR MILES?

[Charles Horn:]

Well, maybe not a certain with AIR MILES. We already have some U.S. partners with Brand Loyalty, we’re going to look to bring some of the AIR MILES capabilities, especially on data analytics into the U.S. One of the things we’re also looking to do is to acquire certain assets in the U.S. We had a presence in the U.S. before with a company that was part of AIR MILES that was divested away a couple of years ago by ADS. We’d like to reestablish some of that go into the grocery, vertical support BrandLoyalty in the U.S. and maybe add some additional capabilities. Back when Jeff and I were involved with Epsilon, we knew what Epsilon did really well. We knew what Epsilon didn’t really do in the U.S. markets and we think there’s a gap that we can really take advantage of. So look for us to be pretty aggressive trying to come into the U.S. in 2022.

[Unidentified Analyst:]

And then just to kind of nitpicky questions, one is on the revolver. Depending on who you believe, it could be four to seven rate increases. Have you thought about either doing something very creative like Air Canada did or not Air Canada, but United did in the second quarter here in the middle of the pandemic, where they were able to securitize part of their miles program? Or do something where you’d swap out floating for fixed?

[Jeff Chestnut:]

Yes. Bruce, we certainly have been watching the rate environment. I don’t know that we do anything like from the airlines’ perspective with what they’re considering, but certainly looking at swaps to help manage the interest exposure as we consider the entirety of the debt capital structure as well.

[Unidentified Analyst:]

Just strike me that there’s something I’d just hate to be in a position here, where if we go through multiple increases, we don’t cap that out. But the final thing I was, in the footnotes, there was about a $70 million tax loss carry forward that had a various reserves against it. And I was just wondering, insofar as they’re the goodwill charges and some of these other charges, will there be a position that will be in a tax loss carry forward that will actually be able to be utilized going forward?

[Jeff Chestnut:]

Yes, of course, I think there’s a couple of elements there, in particular, there’s a Canadian position that’s owed back to the former parent. And then, from a tax optimization standpoint, you’re right, we’re going to be looking to really structure the business now that we’re on our own in a way that we can leverage the tax efficiencies in the countries in which we’re in and some of that’s going to depend on those growth initiatives that Charles outlined in the U.S. as well for this year.

[Operator:]

And our next question coming from the line of Seth Goldberg with Trilantic. Your line is open.

[Seth Goldberg:]

Hi guys, congrats, and thanks for taking the question. First question is just around miles and would love to get your thoughts as to kind of the relative importance of factors that could cause issues to flip to growth. And so, is it simply just an abatement of kind of COVID related pressures? Is it improving sponsor attention? Is it winnings from the sponsor logos? How do you think about what needs to happen in order for there to be an inflection to Miles assurance growth?

[Jeff Chestnut:]

Sure. So I’ll break it down in a number of ways. The first is, we are looking actively to bring more sponsors into the programs. That’s always the best way to do it is to give your collectors the ability to cross activate more places to spend. The second thing we need is to see some of our clients get back into promotional models. So the way our contracts generally work, you’ll have clients who have base miles and then they had the opportunity to do promotional miles, which is above and beyond. We haven’t seen a lot of promotional miles during this timeframe. You would expect to during COVID. So I think we will overtime see the promotional miles come back into play. And the third, we’d expect to pick up on discretionary spending. Once you see pick up discretionary spending more credit card spend coming through DEMO that’s another area that we think we could get some stimulus coming through. So it’s going be new clients, it’s going to be promo miles and this can be also a little bit of mix as discretionary spend gets a little more prevalent.

[Seth Goldberg:]

And do you have any color around just the relative mix of base miles versus promo miles and the magnitude of the decline in promo miles that you saw during COVID?

[Jeff Chestnut:]

I don’t have that off the top of my head. I know promo miles are way down from where they were. I just don’t have it right the moment. It’s small I know.

[Seth Goldberg:]

No problem. And how you guys thought about the assumptions around miles issuance that are baked into the guidance for 2022?

[Jeff Chestnut:]

Seth, its Jeff. From a miles issuance standpoint, I think you’d be looking, as we look across the year, we’re looking at between 4% and 5% miles issuance trending back up towards that 5 billion of issuance that we had last year.

[Seth Goldberg:]

And then just switching gears for a second to the $40 million to $50 million of incremental investment that you highlighted. How much of that should we think of as kind of recurring versus 2022 only?

[Charles Horn:]

Yes, so I’ll break it down, the CapEx is going to be for a couple of years, even though we started expect to start seeing the benefit of it in 2023. The changes to the program in terms of the cost per mile or the value we are giving to the consumer will stay the same. But what you’re going to look for is to drive more points issued more spent, and you’re going to look to basically leverage your fixed costs more than mitigate the impacts to your EBITDA margins. So you’ll see that the CapEx will start trending back down in 2023 and then you’ll see us leveraging the top line and producing more EBITDA than what we did before. Just as we get the pull through effect from the collector being more engaged.

[Seth Goldberg:]

And presumably, to the extent that the incremental value to the collectors isn’t something that drives, increase engagement in EBITDA and that’s something that can be ratcheted back?

[Charles Horn:]

Correct. Even though when we first announced the changes, we definitely saw an uptick in terms of redemptions for flight before the variant kicked back in process. So we definitely saw very positive reaction. I’d like to maintain that positive reaction. And I do think it helps with renewals. I do think it helps with collector engagement. It’s really now that driving growth and leveraging our costs in the business.

[Seth Goldberg:]

And one last question, how should we think about the sustaining CapEx needs of the business? Obviously, next year is going to be a big or this year, it’s going to be a big year for capital spending, and maybe there was some deferred investment and investment for growth. But just on a longer term basis, how do you think about what the CapEx profile of the business look like?

[Charles Horn:]

Yes, Seth, I think, as you think about the CapEx outlook would get that extra investment this year, I think you’ll see a blend between the baseline that we had before and what this new level is incrementally speaking as we go forward. Some of that investment beyond CapEx may be redirected into tuck-in acquisitions, as we’re on the lookout for adding capabilities if we see that there’s something that we can pick up in the market faster than we could build it ourselves.

[Operator:]

And we have a follow up question from Marc Riddick with Sidoti. Your line is open.

[MarcRiddick:]

Hi, good evening. Again, I just wanted to follow up on a couple of things there. One of which being, if you can sort of comment on given the investments that are going to be taking place this year, how we should be thinking about that reduction goals either just this year or sort of maybe in general on a longer term basis as far as annualized debt reduction and how we should be thinking about that? And then I have a quick follow up after that.

[Jeff Chestnut:]

Yes sure, Marc. From a debt reduction standpoint, it’s one of our top two capital allocation priorities for the year, the investments that Charles outlined, as well as deleveraging and strengthening the balance sheet. I’d expect this year you’d see a reduction of approximately $50 million U.S. towards the debt capital structure as we move across the year.

[Marc Riddick:]

And then, given the investments that you’re making, I’m sort of thinking about this change or the timing or focus of acquisition targets, are there may be some type of acquisitions that you might push off until later until you’ve made these investments or how should we think about maybe the timing of acquisition targets and your ability to sort of get some of those done as you’re also laying on the investments spend?

[Charles Horn:]

I’ll break it down in pieces. I would say for AIR MILES, it’s a build versus buy concept. We know we want certain capabilities, products in place. And it may be a case where we can acquire it more timely and at a better cost than what we could necessarily develop it internally. So I’d say it will not reduce our effort and trying to engage acquisitions for AIR MILES. With BrandLoyalty, we could push it off for a while. I think BrandLoyalty is in very good shape in terms of the capabilities they bring, the product offerings they have. So for them, down the road, I like to do a little bit of a roll up, I’d like to take out some of the smaller under capitalist players within the space, there is not anything pressing, there is not anything we need to do right now. So the priorities really in 2022, going back to what’s been asked before debt pay down, let’s get to a very good leverage ratio that Jeff and I are comfortable with. And then adding capabilities for AIR MILES, which may very well mean we acquire a company in Canada or the U.S. that supports it.

[Marc Riddick:]

And the last one for me, I promise. I am wondering if you could talk a little bit about the efforts that were made around the supply chain challenges, maybe what kind of worked well and what you kind of see being more having longer tail, and maybe just give me a couple of examples of that and sort of how that was received by customers, and then how that might end up impacting how you do things in the long term? Thanks.

[Charles Horn:]

Sure. So one of the things we’re doing it, and we talked about it in the script, is we are looking to add digital capabilities, e-capabilities, where basically you can redeem online, it could be gaming, it could be you redeem it, offset your carbon footprint, that will give us the ability to go into smaller, fast retail type businesses. So add more digital capabilities. What we did do though is, we started to buy a little bit more volume, or to get the containers even though they were expensive, the issue would be that the ports would shutdown. So when the ports shutdown, there’s not a lot you can do about it. So a lot of it’s going to be trying to source locally, which will really help us a lot, but from a lead time standpoint, as well as from a back stock standpoint, and then adding e-capabilities and then I do think the ports are going to open up, but we don’t have the same level of lockdown that we’re consistently dealing with in 2021.

[Operator:]

And I’m showing no further questions at this time. I will now like to turn the call back over to Mr. Charles Horn for any closing remarks.

[Charles Horn:]

Sure, thank you, really appreciate everyone for joining into our first earnings call. It’s a great event. We’d like to thank all the associates of Loyalty Ventures, we finally got to the point we’re looking for. And so, I really appreciate everyone being involved today, and let’s look forward to driving some good outcomes in the future. Thanks, everyone.

[Operator:]

Ladies and gentlemen that does conclude our conference for today. Thank you for your participation. You may now disconnect.