Alliance Data Systems' CEO Discusses Q2 2012 Results - Earnings Call Transcript

Alliance Data Systems Corporation (ADS)

Q2 2012 Earnings Call

July 19, 2012 08:30 am ET

Executives

Julie Prozeller - FTI Consulting, IR

Ed Heffernan - President & CEO

Charles Horn - EVP & CFO

Bryan Kennedy - EVP & President, Epsilon

Analysts

Jim Cassin - Credit Suisse

Sanjay Sakhrani - KBW

Darrin Peller - Barclays

David Scharf - JMP Securities

Presentation

Operator

Good morning and welcome to the Alliance Data second 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 open for your questions. (Operator Instructions)

It is now my pleasure to introduce your host Ms. Julie Prozeller of FTI Consulting. Ma’am you may begin your conference.

Julie Prozeller

Thank you, operator. By now you should have received a copy of the company's second 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 Kennedy, President of Epsilon.

Before we begin I would like to remind you that some of the comments made on today's call and some of the references 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 this 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. A reconciliation of those measures to GAAP will be posted on the Investor Relations website at www.alliancedata.com.

With that I would like to turn the call over to Ed Heffernan. Ed?

Ed Heffernan

Great, thanks Julie. Alright, we’re going to get right at it today and joining me as always is the ever popular Charles Horn our CFO and also Bryan Kennedy the Head of Epsilon. Charles is going to discuss our consolidated LoyaltyOne and Private Label results. Bryan will walk you through Epsilon’s results and I will wrap it up by walking you through our updated guidance for 2012. Charles?

Charles Horn

Thanks Ed. To use an idioism it was a boomer of the quarter. For the second quarter of 2012 revenue increased 17% to $866 million, EPS increased 37% to $1.63 per share; core EPS increased 22% to $2.13 meeting the company’s guidance of $1.85 and lastly adjusted EBITDA net of funding costs increased 33% to $264 million.

As noted above, the 30.8 million share increase in Phantom shares dampened core EPS for the second quarter. Excluding Phantom shares from the calculation of core EPS for both periods presented pro-forma core EPS was $2.46 for Q2 2012 compared to $1.91 for Q2 2011, a 29% increase year-over-year.

We expect the overhang from Phantom shares which is directly correlated with the average ADS share price to continue throughout 2012 and as such have increased our share count guidance for 2012. Ed will talk about this further as part of his update later on the call.

Let’s turn the page and look at LoyaltyOne. LoyaltyOne had a solid second quarter with both revenue and adjusted EBITDA growing by double digits over the second quarter of 2011. Revenue was up 13% compared to the second quarter of 2011 and up 18% when excluding the unfavorable impact of foreign exchange translation. The growth in revenue was driven by robust increases in both redemption and marketing related revenue.

Adjusted EBITDA in the second quarter was up 14% over the same quarter last year. Again excluding the unfavorable impact of foreign exchange translation and incremental international operating losses adjusted EBITDA was up 25% in the second quarter. Adjusted EBITDA margins in the core Canadian operation were very strong and slightly over 29%.

Miles issued grew by 8% for the quarter marking six consecutive quarters of growth. In the second quarter, we saw the continuation of the strong start from our credit card sponsors and our fuel sponsor, Shell. In addition, we experienced gains in our grocery category as our sponsors increased their presence of vendor promotions in store. Looking forward, our current momentum and our recent new sponsor signings in specialty retail categories have positioned us well to achieve mid-single digit plus issuance growth for 2012.

Miles redeemed were 25% for the quarter, which is higher than the traditional growth rates been in line with our expectations. In late 2011, we announced the implementation of a five-year expiry on all existing and future AIR MILES. We experienced what we believe to be a one-time pull forward of miles redeemed in the first quarter, which moderated substantially in the second quarter.

You can see the moderation in the burn rate. The burn rate, which we define as current quarter redemptions over current quarter issuances dropped to 78% for Q2 compared to over 100% for Q1. We have a target of about 74% burn rate for full 2012. So overall, we expect the redemption activity to further moderate as the year progresses.

And one of the main reasons we expect the redemption activity for the second half to moderate is we plan to phase out certain gift certificates in favor of AIR MILES Cash. AIR MILES Cash are new entry reward program launched late in the first quarter of 2012 with four sponsors providing national coverage. To-date, we are please with the collector acceptance is over 600,000 collectors have signed up for the program.

In the second quarter, we launched our fifth redemption sponsor, RONA who is in the home improvement category. The issuance in the Cash Program continues to meet our expectations. However, to-date it’s not a material part of total issuances. We plan to add additional sponsors and categories to the program during 2012 and to increase the number of locations where AIR MILES Cash redemptions are accepted. During the second quarter, we spent approximately $3 million in marketing cost supporting this roll-out.

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