Bread Financial Holdings Inc (BFH) 2007 Q3 法說會逐字稿

Good afternoon. Welcome to the Alliance Data third quarter 2007 earnings conference call. At this time, all parties have been placed on a listen only mode. In order to view the Company's presentation on the website, please remember to turn off the pop-up blocker on your computer. Thank you. It is now my pleasure to introduce your host, Ms. Julie Prozeller of Financial Dynamics.

Thank you, Operator. By now you should have received a copy of the Company's third quarter 2007 earnings release. If you haven't, please call us day at 212-850-5608. 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?

Thanks, Julie. Good afternoon, everyone. Thanks for joining us again. Today, I'll spend a few minutes reviewing the status of the acquisition by Blackstone, and the highlights for the quarter and the full year, and then Ed will review our financials in more detail and discuss guidance. So let's get started.

Let's turn to the next slide, the acquisition status. Things continue to move along as planned. First, we received shareholder approval during August. Second, on the regulatory front, discussions with both the OCC and FDIC have been quite positive and there have been no red flags in the process. As such, we feel we're in good shape for a fourth quarter close. I do want to take a minute to clarify a potential misunderstanding around the bank regulatory process, though.

Our merger agreement with Blackstone contemplated that we would have the necessary bank regulatory approvals by today or we would begin restructuring our bank subsidiaries to facilitate the merger closing. Based on the progress with the FDIC and OCC to date, we and Blackstone have agreed to continue working toward obtaining the bank regulatory approval and have deferred going down the restructuring path. If at some point we determine that it is no longer likely that we would receive bank regulatory approval, the Company has the ability to notify Blackstone that the deferral has ended and the parties will pursue the bank restructuring. To be clear, reaching the October 17, date without obtaining bank regulatory approval is not a breach of the merger agreement and does not give any party an out. To keep it very simple, we are happy with the progress and path we are on to get the necessary approvals.

All right. Moving on to the third item, as you'll see our results for the quarter were exceptionally strong. Guidance was raised and our outlook for 2008 is very positive and finally, financing has been fully committed and capped and we recently completed our rating agency visit. Yesterday we announced the launch of a pre-payment offer for our existing 500 million of senior notes. We're set to begin the marketing of the deal upon receipt of our ratings from the rating agencies and approval from regulatory agencies. We remain on track to close in Q4, and as mentioned earlier, will not be taking any Q&A, will not be taking calls after today's presentation, and all the way until the deal closes. We are in a very fluid process and we do not want to run the risk of providing anyone an advantage, or as importantly a disadvantage. So, now let's move on to the quarter.

Next slide, obviously we're very pleased to announce a record quarter. Our largest quarter ever for revenue, EBITDA, and cash earnings per share. This also marked our 26th consecutive quarter of delivering or exceeding on our plan. During the period, revenue reached $576 million, an increase of 14% and adjusted EBITDA increased by 30% to $173 million. For the first time, our cash earnings exceeded $1, up to $1.01, which was up 25%. Also, our operating cash flow or operating EBITDA was a record $182 million.

Now let's take a look at a few of the highlights, turning first with our marketing service business, in Canada. As you know, they manage our Air Miles Reward program and they did an outstanding job this quarter delivering another double digit organic growth quarter in both revenue and EBITDA. Also this quarter we announced an expansion with one of our founding and top 10 sponsors Rona, Canada's largest hardware , home renovation, and gardening retailer. Now collectors can earn reward miles at their Reno-Depot big box stores in Quebec which represents 20% of RONA's big box property.

We also signed a multi-year agreement to extend our relationship with Katz Group of Canada for their Rexall/Pharma Plus pharmacies. They have over 200 locations where collectors can earn miles for merchandise purchases. Nice work, guys.

On to the next slide, our U.S. marketing services business, Epsilon, turned in a tremendous performance this quarter. Top line grew in excess of 50% and EBITDA in excess of 70%. While our growth in the U.S. is still very strong, we're also very excited by our international prospects. Last month, we announced an agreement with Tesco Stores Limited, UK's largest retailer. We'll provide an e-mail communication and campaign management platform as well as professional services to their online business, Tesco.com. Additionally we'll help them in developing highly targeted campaigns to acquire and retain customers and increase sales through up selling and cross selling opportunities.

Also just last week, we announced an agreement with EachNet, a joint venture with U.S. based eBay and Shanghai based TOM Online. EachNet is an online auctioneer in China founded in 1999 and has a database of 30 million customers throughout mainland China. We'll provide both e-mail marketing technology, professional services, to help them manage their complex communications and create timely and relevant marketing campaigns. We're equally proud of our ability to deliver what we promised and as a result, we've received high marks from our clients. In a recent survey conducted by Gartner, 100% of Epsilon clients would recommend Epsilon to their colleagues. Great quarter, team.

Now let's turn over to the next slide in our Private Label Group, once again an outstanding quarter. They delivered strong double digit growth, despite a difficult economic environment as you know. Unlike many other providers whose business models are those of a finance company, our focus on helping our clients increase sales, and create long term loyal consumer relationships.

The most recent testament to our strategy is the renewal and expansion of our Williams-Sonoma agreement. We announced last month a launch of the new Private Label card program for their West Elm brand and extended our contract to provide services for the Pottery Barn brand. West Elm offers high quality furniture and home accessories through their catalog, website, and retail store locations. We signed a solid book of new business. So far this year we've announced six transactions against our typical four to five deals we expect each year. We may even sneak another one in before the year is out. So our pipeline is strong, and we see it carrying us well into 2008. Once again, a very nice quarter, thanks to the card group.

Let's turn to the next slide if you will for the full year outlook. Looking at the fourth quarter, based on our overperformance in the first nine months of this year, we're upgrading guidance to at least $3.70. We expect strong double digit growth to continue from Air Miles, Epsilon, and our Private Label business, which positions us very nicely for the year. These businesses represent 85% of all of our revenue and nearly all of our EBITDA. We have strong momentum for the remainder of this year and through 2008. We've had some significant client wins and fully expect this to continue. Our renewals and expansions with key clients are solid, further providing us with highly visible and predictable year. I want to congratulate our management team and associates on an outstanding quarter and thanks for remaining committed and focused amidst the many distractions we've had over the last few months as we work toward our close. Great work, everybody. Ed, will you take a dive into the

Thanks, Mike. Before we get into the results, let's just do a quick walk through of the one-time or non-cash items this quarter. As you might expect, these were related to getting things ready for the buyout, EBITDA and cash EPS excluded the usual non-cash stock comp charge of about $11 million. Additionally, it excludes about $6 million in accelerated stock comp charges related to certain departing executives, $6 million in merger costs, and a one-time non-cash charge of $40 million related to the writedown of assets in our utility business.

The writedown decision was made due to the continuing cost overruns in our utility business and the flat revenue forecast for 2008. As such, this review resulted in an impairment and we took the one-time non-cash charge in Q3. All right, let's talk a little bit about the quarter.

I'd say probably six key take-aways from the quarter, the first one being this was our 26th consecutive quarter, that is from the IPO all the way to today, where the Company has met or exceeded expectations. Second, this was also our best quarter in our history with record revenues, EBITDA, and cash EPS. From a purely cash flow perspective, also our best, as operating EBITDA, a good proxy for operating cash flow, came in at $182 million, up over 30% from last year. Third, double digit top line growth came from our big three engines. That is Loyalty Air Miles in Canada, Epsilon, or U.S. Marketing, and Private Label. Of special interest is that each of these engines grew at a double digit pace on both top line and EBITDA. Great growth with great balance.

Fourth, the big three accounted for all of the growth and produced 85% of all revenues and virtually all our cash flow. This bodes extremely well for future growth. The remaining 15% of the business was flat. Fifth, EBITDA margin hit a record 30%, up 400 basis points from last year as Loyalty, Epsilon and Private Label achieved huge gains from leveraging operations. And finally, cash flow growth has continued to accelerate as EBITDA's year-over-year growth has moved from 19% in Q1 to 30% in Q3 with similar acceleration in operating EBITDA. So overall, thought it was a great quarter and as importantly, there has been absolutely no sign of any "bleed up" from subprime troubles in the economy. Onward and upward, so let's hit the segments.

The next slide. As we say, let's go from worst to first. The transaction services segment houses Private Label, utility services, and our traditional merchant acquiring bank card business. Top line was stagnant, despite a respectable 6% growth in statements generated which drives both Private Label and utility services. Statement growth was offset by the expected ongoing attrition in our non-core merchant acquiring bank card business as well as some softness in utility. EBITDA bounced back from Q2 but still remained below prior year. Similar to Q2, the segment was burdened by about $5 million in extra costs from ramping up our collections staff and client services teams for Private Label. The results of this spending shows up in the huge performance in the credit segment as credit losses, yield, and portfolio growth, all came in strongly. So overall, the money was well spent.

Our inter-Company transfer prices are established at the beginning of each year and these additional collections and client services costs were not included in the transfer price assumption. Simply put, for now, transaction services [efit] while credit services gets the [bene]. Utility services was the source of the remaining shortfall as client ramp ups continued to lag budget. The outlook, we expect relatively flat year-over-year growth in Q4 EBITDA despite the inter-Company drag.

Next up, credit services. Another great quarter as revenue grew 12% and EBITDA a robust 33%. Let's go ahead and walk through the key drivers. Leading off, portfolio growth was a solid 8% as new programs ramped up and existing programs continue to drive market share. Solid growth in the portfolio, plus a rock solid earnings from yield and fees drove growth into the double digits. Credit sales, however, were poor at a mere 1% growth.

While credit sales growth was generally poor across-the-board, our big catalog clients seemed to bear the brunt of it, specifically the recent large increase in postal rates certainly caused a drop-off in books mailed and hence sales. Other calls have mentioned tough comps from prior year, the weather, et cetera, et cetera, we really can't comment on that. All we can say is fortunately, it didn't dent our earnings whatsoever.

Funding rates remain flat to last year. Our funding book matches fixed rate assets, our cards, with fixed rate liabilities, via long term fixed rate asset backed bonds. This long term approach has enabled us to keep our funding rate flat this year versus last year versus the year before and we believe this will hold true in 2008 as well. All good news. Also, from a liquidity perspective, we have recently renewed all maturing conduit vehicles and have already prefunded our maturing $600 million in asset backed notes. We'll now have the luxury of hitting the markets with new notes at our own discretion.

And finally credit losses came in just a bit under 6% for the quarter while delinquencies came in a bit over 5%. Both excellent numbers. Losses have now normalized versus abnormally low levels previously due to the Bankruptcy Reform Bill and based on delinquency levels, especially in the early stage buckets, the 30, 60, 90 days, we remain very comfortable with our credit loss profile being quite stable, call it around the 6% level. We have seen no evidence to suggest any negative "bleed up" from the macro subprime issues that are out there in the market. So as such, our outlook for 2008 in credit services remains quite positive.

All right, and finally, the big dog, marketing services, which includes both our Canadian Loyalty business and Epsilon, also called our U.S. Marketing footprint. First in Canada, grew double digit organically both top and bottom line, strong pricing power, deeper financial commitments from existing sponsors, the ramp up of new sponsors and the "network effect" from our households frequenting more and more sponsors all drove growth. Despite having 70% of all the households in the entire country active in our program, the trends continue to suggest solid double digit organic growth for the foreseeable future. Firm revenue per mile in combination with a favorable cost per mile rate and leverage of our existing infrastructure were likely all key drivers in our 500 basis point increase in Marketing Services gross margin year-over-year.

Next, U.S., our Epsilon Group which grew both top and bottom lines well in excess of 50% year-over-year, while U.S. growth remains very strong, the international arena continues to hold additional promise. As Mike talked about, the signing of Tesco, a $92 billion retailer and one of the largest in Europe, gives us a great solid cornerstone client for that region. Equally important is our recent signing of EachNet, or eBay's joint venture in China, U.S., Europe, and Asia Pacific, all offer great growth vehicles for the future as more and more marketing dollars are being redirected away from traditional media channels and into our transactional based one-to-one marketing offerings.

In sum, the Company continues its migration towards a purely value-added transactional based marketing firm. Whether it's a coalition program like the one in Canada, or here in the States with with Citi's thank you program or a one-off program like the Hilton Honest Reward program, or a program that offers a credit component such as Fortune Office, or Pottery Barn's Private Label programs, all based on the same principle, and that is that past transactions are the best predictor of future behavior. The ability to link past history to a specific consumer allows for an unbeatable model to microtarget consumers and produce huge ROIs versus traditional marketing channels. We think it's a winner today and for many years to come.

Okay, a couple of items on the balance sheet. First, in Canada, deferred revenue increased a whopping $66 million from last quarter and $126 million from this time last year, more than double our normal rate. What's it mean? Well, I'd suggest that these revenues and profits have been earned but not yet flowed through the P&L for accounting purposes. This will drive exceptional growth in our Canadian business going forward. And second, our net debt, which has always excluded CD's, improved by $150 million in the quarter and our key covenant metric, which is core debt, to LTM operating EBITDA, improved from 1.8 times last quarter to 1.5 times currently. Very, very strong.

Okay, everyone's favorite. Let's talk a little bit about guidance. Next slide. Again, things are going up. We're looking at another strong finish to another strong year. We're raising guidance again. Revenues we're looking at around $2.3 billion, up about 15%, adjusted EBITDA of about $640 million, up about 24%, not on this slide is our cash flow metric which would be operating EBITDA, that's probably going to be running around 675 million to $680 million, and then finally, cash EPS of $3.70 a share as we closed in on about 20% growth. Let's not forget that this year, we actually had to play through about $0.25 of grow over related to the abnormally low losses last year, so our normalized growth rate is getting close to 30%.

In terms of how we walked up the guidance over the past year or so, we've walked it up as we've looked at how the businesses are doing in this macro environment, lots of concerns out there, what we're seeing is not affecting our business whatsoever. I think back in October on our Q3 call, we had $3.50 a share, and then we moved from there to $3.55 to $3.60 to $3.65, and now to at least $3.70 a share, so clearly we're feeling pretty comfortable with the remainder of the year and going into 2008.

Let's move on to free cash flow, which includes both operating EBITDA of at least 670 to 680 somewhere in there, less CapEx and interest and taxes of about 350 million. Essentially, it's about 3.17 minimum, probably it will be a little bit above that or a little bit under $4 per share of pure free cash flow. Going back again, our original guidance was more to the tune of 3.70 and we're going to come in probably a bit north of 3.90 per share, so again, everything seems to be heading in the right direction for the remainder of the year and for 2008.

Finishing up with the last two slides, the leverage we're getting continues to be exceptional. We have been growing our EBITDA margin from the midteens back in 2000 and we're getting closer and closer to 30% this year. So overall, we're seeing tremendous leverage in the business. We expect that to continue on a go forward basis.

And then finally, probably one of our favorite charts is how things have been going. Obviously, the growth rate has been exceptional over the last several years, but as importantly to that, it's been very consistent, and I think those are the two key themes of our model of double digit organic growth plus some over performance, some moderate acquisitions, and keeping things very visible and consistent has been the hallmarks since day one of our model. Obviously we've been very pleased with it, and before I turn it over to Mike, a couple of thoughts, now that we're most likely winding up our public run.

First, this has been now 26 quarters in a row since our IPO of overperformance and it's something we're very proud of and hopefully it provided some ongoing comfort to our large shareholders that they could count on us in good or bad times when the environment itself is difficult we tend to be able to play through. And second, we look back now almost seven years when we went public, had $12 a share, and will be taken out at just under $82, nearly a 600% return versus 20% for the market over that same period and again, a proud record and a special thanks to our shareholders and our sell-side analysts who believed our model even though it wasn't simple but it was in fact unique and it certainly did deliver.

And finally, we started as an LBO 10 years ago, got us down to investment grade while growing enormously. We view the deal with Blackstone as a good opportunity to continue and improve upon our unique model. So thanks for all of the support from both the shareholder base and also from the key sell-side analysts, you all know who you are. So Mike and I say thanks on behalf of the rest of Alliance. It's been fun, but we think Alliance Data, act two, perhaps called, The Return will be even more exciting. So bye for now and I'll kick it over to Mike.

Thanks, Ed and my thanks as well to everyone. I appreciate the support as Ed said, as well for the long term shareholders. I appreciate your guidance as well having never led a public company before, I've certainly learned a lot over the six plus, almost seven years. I've enjoyed our many discussions regarding shareholder return methodology and your guidance there, and at the end of the day I trust that everyone has been highly satisfied or will be highly satisfied with their returns on Alliance Data, and as the opportunity presents itself again, I look forward to working with many of you again.

Also, as Ed said, it helps to have a strong business model, it also helps to have it married in the right market and in the right growth characteristics and we think we're in the sweet spot of that, but even more importantly, the right people that will execute passionately and deliver what they promise and we certainly have that, and it's my sincere thanks for all of our folks, our entire management team, and our associates. So thanks to everyone and with that said, hope everybody has a great week. Bye for now.

Thank you, everyone. This concludes today's conference call. You may disconnect your lines at this time, and please have a wonderful day.