Alliance Data Systems' CEO Discusses Q1 2012 Results - Earnings Call Transcript

Alliance Data Systems Corporation (ADS)

Q1 2012 Results Earnings Call

April 19, 2012 8:30 AM ET

Executives

Julie Prozeller – FTI Consulting, IR

Ed Heffernan – President and CEO

Charles Horn – Chief Financial Officer, Alliance Data

Bryan Pearson – President, LoyaltyOne

Analysts

Jim Kissane – Credit Suisse

Sanjay Sakhrani – KBW

David Scharf – JMP

Dan Perlin – RBC Capital Markets

Bob Napoli – William Blair

Presentation

Operator

Good morning. And welcome to the Alliance Data First Quarter 2012 Earnings Conference Call. At this time all parties have been placed on a listen-only-mode. Following today’s presentation, the floor will be opened for your questions. (Operator Instructions)

In order to view the company’s presentation on your website, please remember to turn-off the pop-up blocker on your computer. It is now my pleasure to introduce your host Ms. Julie Prozeller of FTI Consulting. Ma’am, the floor is yours.

Julie Prozeller

Thank you, Operator. By now you should have received a copy of the company’s first quarter 2012 earnings release. If you haven’t, please call FTI Consulting at 212-850-5721.

On the call today we have Ed Heffernan, President and Chief Executive Officer; Charles Horn, Chief Financial Officer of Alliance Data; and Bryan Pearson, President of LoyaltyOne.

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 the uncertainties described in the company’s earnings release and other filings with the SEC. Alliance Data has no obligation to update the information presented on the call.

Also on today’s call our speakers will reference certain non-GAAP financial 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 Ed Heffernan. Ed?

Ed Heffernan

Great. Thanks, Julie. Okay. We are going to right into it and joining me today is Charles Horn, our erstwhile and ever popular CFO, and down term Toronto, we have Bryan Pearson, the President of LoyaltyOne, which of course includes both the AIR MILES Program in Canada, as well our efforts in Brazil, and we welcome Bryan, he used the last of the Canadian pennies to make the journey down here.

Charles will discuss consolidated Epsilon and private label results and Bryan will walk you through LoyaltyOne results, and I will chime in at the end with a couple of comments. So that being said, Charles, take it away.

Charles Horn

Thanks Ed. It was a terrific start to 2012. Highlights for the first quarter of 2012 are, revenue increased 20% to $892 million, EPS increased 19% to $1.86 per share, core EPS increased 17% to $2.38 beating the company’s guidance of $2.13, excluding the year-over-year builds and phantom shares, core EPS increased 27% to $2.58, lastly, adjusted EBITDA net of running cost increased 25% to $275 million.

As noted above, the 4.9 million share increase in phantom shares dampened core EPS by about $0.20 for the quarter. We expect this overhang which is directly correlated with our average share price to continue throughout 2012. Ed will talk about this further as part of his update later in this call. The key takeaway the company does not have any economic obligation to issue or cash settle this year.

Let’s move to LoyaltyOne, Bryan take it away.

Bryan Pearson

Thanks Charles. LoyaltyOne had a strong first quarter in both revenue and both key growth metrics increasing by double-digit over the last -- over the first quarter of 2011. Revenue was up 20%, compared to the first quarter of 2011 before foreign exchange translation. Both our marketing and redemption related revenue were up double digits compared to the same quarter of last year.

Adjusted EBITDA in the first quarter was flat to 2011. However, we actually made two EBITDA investments in 2012, which position us well for future growth.

The first is, we introduced the new instant redemption program at our high frequency retail sponsors, which we called AIR MILES Cash and this required a sizeable one-time launch investment of $4.5 million in the quarter primarily to spot marketing activity and infrastructure.

The second investment is, in our expenses, is attributable to our international and non-AIR MILES Reward program related expenses.

Expenses in 2012 increased by $2.1 million over the first quarter of last year, supporting the roll out of Dotz in additional markets in Brazil and investments in other geographies, excluding these items, our adjusted EBITDA was up 13% for the first quarter of 2012 and adjusted EBITDA margin was 26% in line with historical margins.

Miles issued grew 11% for the quarter making five consecutive quarters of growth and two consecutive quarters of double-digit growth. The first quarter was particularly strong as both our credit card sponsors had a great start with strong acquisition programs and increased spend on the cards. In addition, we’ve benefited from aggressive marketing campaigns from our fuel sponsor, Shell, as they looked to gain market share in their sector.

Looking forward, we expect to see mid single-digit issuance year-over-year growth for the remainder of 2012. Miles redeemed were up by 26% for the quarter, which is higher than our normal growth, but in line with our expectations for the quarter.

In late 2011, we announced the implementation of five-year expiry on all existing and future AIR MILES, and we anticipated that the introduction of an expiry policy would cause a temporary one-time pull forward of miles which redeemed in the first quarter, and we expect that that redemption activity will abate and return to more normal 2% to 3% year-over-year growth rates for the remainder of this year.

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