Bread Financial Holdings Inc (BFH) 2003 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the Alliance Data Systems’ First Quarter 2003 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star one on your telephone keypad. If you would like to withdraw your question, press star, then the number two.

I would now like to turn the conference over to Stephanie Prince of FD Morgen-Walke. Please go ahead.

Thank you, Operator, and good afternoon, everyone. By now, you should’ve received a copy of the Company’s First Quarter Earnings Release. If you haven’t, please call FD Morgen-Walke at 212-850-5608.

On the call today, we have Mike Parks, Chairman and CEO, and Ed Heffernan, Chief Financial Officer, of Alliance Data Systems.

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 as described in the Company’s earnings release and other filings with the SEC. Alliance Data Systems assumes no obligation to update the information presented on this call.

Also on today’s call, our speakers will reference certain non-GAAP financial measures, which we believe provide useful information for investors. Beginning with today’s call, we will post reconciliations to those measures to GAAP on the Investor Relations page of our website at alliancedatasystems.com.

Lastly, our registration statement relating to common shares to be sold in a public offering has been filed with the Securities and Exchange Commission but has not yet become effective. The common shares may not be sold, nor may offers be accepted prior to the time that the registration becomes effective. Nothing on this conference call shall constitute an offer to sell or the solicitation of any offer to buy securities of the company.

Now, with that, I’d like to turn the call over to Mike Parks. Mike?

Thanks, Stephanie, and welcome this afternoon, everyone.

Before we begin, I feel it’s important to take just a minute and acknowledge what is happening in Iraq and around the world, as it impacts many of our lives. Over the last several weeks, the war has taken center stage, dominating television and radio and newspaper coverage, and many of our associates are directly affected by these events, both their friends and family members, many serving in the armed forces. There are also Alliance associates who serve as reservists and have been called to active duty, and we want to express our gratitude for their service to our country and wish them a safe and quick return.

Moving on now to our agenda, as usual, we’ll review the highlights of the quarter, Ed will take us through the financial performance pages, and then we’ll talk about your questions.

So turning to the next slide as we begin to review the first quarter highlights, there’s – extremely pleased, as you can see, to announce we’ve just wrapped up a great quarter. We exceeded all of our targets due to a strong performance really from all three of our growth engines – Utility Services, Private Label Processing Services and our AIR MILES Reward Program.

Revenue for the first quarter was $240m, a 14-percent increase over last year. EBITDA came in at $46m, or 35-percent growth. And cash earnings per share was $0.21, a 62-percent performance over the same period last year. Certainly, each of our three growth engines were significant contributors. I want to thank all of our associates for a great fast start to the year and a very impressive performance.

Let’s turn now as we hit each of the segments. And starting with Transaction Services, as we’ve mentioned on past calls, we expect to add 10 to 12 new clients each year, with two or three of those key wins from our Utility Services group. It’s been a tremendous quarter for the Utility guys. We are pleased to report those wins all came early in the year, and I might add with some of North America’s leading utility companies.

First, we signed the multi-year agreement with TXU, one of the largest utilities in the U.S. and the largest energy provider here in Texas, to provide billing and support services to their small and mid-sized business customers.

This quarter, we also reached an agreement with another significant player, American Electric Power, and we will be providing billing and customer care for AEP’s deregulated residential customers here in Texas, approximately 200,000 accounts in all.

And our third win, Centrica, is one of the largest deregulated retail energy providers in the U.S. and Canada. We will provide billing, customer care, statement generation and remittance processing for their 800,000 residential and small business accounts here in Texas. Centrica is the parent of Direct Energy, which you may recall from last quarter we signed as a new AIR MILES sponsor. I’m very pleased with our success in broadening and deepening this relationship.

These wins put this business on track to deliver our revenue target for 2003 and further solidify our leadership position in this market.

Now, turning to Marketing Services. As many of you know, this segment is predominantly our AIR MILES Reward Program. This quarter, we renewed a cornerstone sponsor, Safeway, who has been a sponsor since the AIR MILES inception in 1992. The AIR MILES Reward Program has become an integral part of Safeway’s marketing programs. Chuck Mulvenna, President of Canada Safeway said, “It is such a popular program with our customers that has created a [indiscernible] of differentiation between Safeway and our competitors.” This statement underscores one of the real benefits the AIR MILES Award Program delivers to our sponsors.

We also continued to see reward redemptions take a shift toward more non-travel rewards. Fifty-three percent of the redemptions are for merchandise and services, including gift certificates for grocery, amusement parks, movies, etcetera. This is the result of our specific strategy to expand our reward portfolio to include a greater variety of merchandise and services from which to redeem, making the program even more attractive to collectors.

And, lastly, we continue to add new collectors, specifically in the Quebec region, which represents a large portion of Canada’s population and a significant target opportunity for us. We saw our active collector base grow by 9 percent over the previous year.

Now, let’s turn to Credit Services. In January, we were pleased to announce the signing of a top-10 client to a 10-year renewal, Brylane. Brylane is the nation’s leading catalog and e-commerce retailer for women’s apparel and home furnishings. Some of their catalog brands include Chadwick’s of Boston, Lane Bryant Catalog, and Brylane Home. This is another example of our ability to form deep, long-term relationships with our clients.

One other highlight I’m very proud to share is WFNNB, our credit card bank, was named Creditor of the Year for 2002 by the Association of Independent Consumer Credit Counseling Agencies. We were awarded this honor for providing prompt and responsive services to our cardholders and for our flexibility in addressing consumers’ debt-management needs. This award is particularly meaningful as it speaks to our key strengths – our strong retail heritage and our customer care philosophy.

Our goal with every cardholder is to create positive memorable customer experiences even during our collection efforts. By doing so, we ensure [inaudible] favorable impressions of our clients. It’s about loyalty, not lending. The outstanding customer service levels we’ve been recognized for and our proven one-to-one marketing skills have resulted in another strong year-over-year growth in our credit sales.

Despite generally weak retail sales, we saw a 16-percent growth over last year from both our existing and our new clients. These results continue to prove that a private label program, if run properly, is one of the most effective strategies that a retailer can implement.

Now, before I turn it over to Ed, I’d like to point out another couple of highlights on the next slide. In February, we announced a multi-year agreement with 7-Eleven to provide stored value and loyalty marketing services through our dynamic value product. First, we’re providing stored value services for the new 7-Eleven convenience card introduced in February. Also, we will be adding stored value and loyalty functionality to 7-Eleven’s Vcom card, used in their electronic commerce kiosks. Using combined stored value and marketing functionality, we will allow consumers to store money on their Vcom card after either cashing checks or loading cash onto the card through the kiosks.

We also announced that at the beginning of the month that we renewed our contract with ConocoPhillips, and as part of that agreement, expanded the services to include an additional 5,000 locations that were being processed in-house. The combined entity now has around 17,000 merchant locations. We demonstrated to ConocoPhillips that we’re more than just a transaction processor with our ability to integrate transactions and marketing. They, too, recognize that transforming a commodity transaction into a loyalty transaction is at the heart of our differentiation.

It’s been an incredible first quarter. We’re executing on our business strategy, and we’re well on our way to meeting our targets for the year. It’s been an exceptional quarter. It’s a little early in the year, and we must remain focused on our tasks. There’s still a great deal to do, but having said that, it’s very good to be off to a fast start.

Ed, it’s yours.

Thanks, Mike.

If everyone could turn to the slide titled, “First Quarter Consolidated Results,” our first quarter marked our eighth quarter as a public company, and like the seven previous quarters, we continued to extend our track record of delivering on what we promised. At this point, many of you have become accustomed to hearing us say, “Another good quarter,” or, “On track for another record year.” Today, you’re going to hear the same thing again as we review our Q1 results. This time, however, as Mike mentioned, we also – we’ll also add that during this quarter, every business unit clicked together, which resulted in an overall performance well in excess of even our high expectations. And let’s start walking through some of the key metrics.

First up would be revenues. Again, as Mike mentioned, they’re roughly $240m. We’re up 14 percent versus prior year as all three growth engines delivered. Our Loyalty Group in Canada posted solid growth even against an unusually strong Q1 from the prior year, while Private Label and Utility Services continued along with very strong double-digit growth.

Operating EBITDA, a proxy for operating cash flow, came in at $48m, or up 20 percent from last year. This measure reflects the effects of certain cash received and profits earned in Canada but not yet fully reflected in our P&L, and this is why our operating EBITDA tends to track a few million bucks a quarter above our reported EBITDA. Speaking of which, our reported EBITDA of $46m, surged ahead 35 percent from last year as our margin expanded dramatically as well. And in just a few seconds, we’ll go through each segment in a bit.

And, finally, cash EPS was up over 60 percent to $0.21 versus $0.13 a share last year as we continued to see more and more of the free cash from the business drop straight to the bottom line.

To sum up, despite continued difficult macroeconomic conditions, Alliance once again performed extremely well and produced results well in excess of even our strong expectations. The impressive over-performance was driven by two factors: first, our Utility Services business basically brought on a whole year’s worth of business in just the first quarter; and, second, the Private Label business continued to soar as wallet-share gains and new client ramp-ups combined with operating expense reductions from both lower credit and funding costs.

Turning to the next slide, let’s get into the segments a little bit.

First up is Transaction Services, which, as a reminder, houses two of our three growth engines. That would be Private Label Services and Utility Services, as well as being the home of our traditional merchant-acquiring business. Both of the growth engines mentioned earlier grew at a strong double-digit growth rate, as evidenced by the combined impact of strong growth in both the total number of statements generated, as well as in revenue per statement itself. And as we’ve stated in the past, these are the two key drivers for each engine. Now, specifically, Private Label experienced its strong growth due to the combined impact of solid growth in the core account base, as well as the continued ramp-up of large new client signings from last year, such as Ann Taylor, Pottery Barn, Restoration Hardware and Crate & Barrel.

In our other growth engine, Utility Services managed to put on a full year’s worth of business before the first quarter was over. The new business consisted of a nice mix of both start-up work, such as TXU, as well as established accounts, such as the cases with AEP and Centrica. The combination of Private Label processing and Utility Services accounted for roughly 80 percent of the segment. The remaining portion consisted of our traditional merchant-acquiring business, which will continue to somewhat dampen total segment top line until, let’s call it, summertime, when the effects of last year’s pruning of non-core accounts hits its anniversary. The effect of this pruning, however, could not hold back the overall 15-percent EBITDA growth in Q1, which also boosted segment margin by 80 basis points. And looking ahead, we continue to expect to see double-digit EBITDA growth, the top line to follow, as I mentioned, by summertime.

Okay, next up, Credit Services, which, needless to say, continued to absolutely crush its budget as top line surged over 30 percent and EBITDA soared over 80 percent. To understand the results, we’ll walk through the four key drivers of the P&L, which are credit sales, portfolio growth, funding costs, and credit losses.

The first, credit sales, quite frankly, surprised us a bit in a good way. Despite a very weak retail environment, exacerbated perhaps by war concerns and high energy prices, our sales growth was outstanding. Driving our mid-teen’s growth was the combination of wallet-share gains, whereby more and more of the dollars spent at the retailer are being spent on our card, as well as new growth from the continued ramping up of clients signed last year. Again, those were the folks, such as Pottery and Crate & Barrel, etcetera.

Next up, portfolio growth came in at a solid 11 percent. We continued to see above-average payment rates, which suggest consumers still have a good amount of liquidity out there.

Now, turning to operating expenses, we saw a continuation in improvements in both our funding costs and credit losses that began last year.

Funding costs continued to benefit from the gradual refinancing of large blocks of maturing fixed-rate funds. The key here is that our fixed-rate cards are funded with fixed-rate money, which matures gradually over a three-year period. We will continue to use today’s favorable interest rate environment to lock up long-term money for as much as five years out.

And, finally, let’s talk a little bit about credit quality and credit losses. This is definitely one area of our business where we tend to get a little bit frustrated with the tendency of some folks to toss us in with the rest of the “industry.” Specifically, as we’ve noted many times before, our profile is very, very different. We do not target sub-prime. Our average Fair Isaac, or FICO, score is 700, and our average cardholder balance is a mere $250, or only about 10 percent the size of the typical bank card, for example. What does it all mean? These portfolio characteristics resulted in delinquency and loss-rate improvements throughout all of last year. We expect a solid performance this year as well, even assuming that the jobless recovery stumbles on. We targeted 2003 losses and delinquencies at 7.5 percent and 6.5 percent, respectively, and we certainly weren’t disappointed as both metrics came in well within our comfort zone during Q1.

So what’s ahead for credit? Two things. First, while obviously a very strong quarter, we expect some moderation in year-over-year growth rates as improvements in operating expenses begin to anniversary. But, second, this “moderation” merely means strong double-digit growth but certainly not quite the 30- and 80-percent scene in Q1 for revenue and EBITDA, respectively.

Finally, Marketing Services, which is essentially our loyalty AIR MILES program in Canada, posted a solid quarter with a 15-percent gain in EBITDA and just under a double-digit gain in revenue. A key note here, the gross revenues, unlike EBITDA, are significantly influenced by redemption activity or people calling in for a reward, like a hockey ticket, plane ticket, theater tickets, etcetera, etcetera.

In last year’s Q1, redemption activity was huge and grew 60 percent, while this year’s activity returned to a more sustainable level. Thus, this return to normal somewhat muted the top-line growth rate this quarter, and we certainly expect a return to double digit. As noted, EBITDA was not impacted, and we expect solid growth to continue throughout the year, although Q2’s EBITDA will be somewhat muted since it’s versus an abnormally high EBITDA performance in Q2 of last year.

Finally, we continue to target roughly 10 percent in new miles issued and 20-percent growth in miles redeemed. Loyalty air miles continues to dominate the landscape in Canada, and we expect the tremendous track record to continue.

Okay, that’s it on the segments. Let’s recap real fast. All growth engines performed extremely well, and the quarter’s most impressive items were, one, Utility’s ability to bring across all three deals, and, two, Private Labels continued solid sales growth, as well as improvement in operating costs despite the tough macro environment.

On to the balance sheet, your next slide. Just a couple of points to discuss. First, taking a look at deferred revenue, all of which relates to our Canadian AIR MILES business, it jumped $19m during the quarter, reflecting additional revenue and earnings that have been earned, cash flow received, but not yet showing up on the P&L.

Next, let’s talk a little bit about our capital structure. First up, we are very pleased to announce that we recently completed a new $400m credit facility, which provides tremendous flexibility in our financial structure, as well as a significant amount of new capacity as a safety net. A key part of this facility is our ability now to carve out and offset funding, which utilizes CDs as a funding source in support of portions of our portfolio, which must remain on our balance sheet. This means that, for example, the typical seasonality during the holiday season, where we’re required to hold more on our books, no longer impacts our liquidity. Essentially, we net any on-balance sheet receivables against the CDs, and they net to zero for debt covenant purposes, and, as such, result, of course, in no working capital needs. As such, our key covenant to watch going forward will be the core debt-to-operating cash flow, or what we call operating EBITDA. We believe an investment-grade profile requires this ratio not to exceed two times, and we are committed to maintaining this investment-grade profile. Today, that ratio stands strongly at only 1.1 times, obviously well within our comfort zone, and so from the debt side, we’re in great shape.

Turning now to the equity side, you’ve all seen the recent filing we’ve made where Limited Brands is selling half their stake, and we’re taking a bit to pay off our final traunch of 10-percent sub-debt. Welsh, Carson, Anderson & Stowe, our largest shareholder, as well as management, are not sellers. Due to filing restrictions, we can’t comment on the deal. All we will say is that both Mike and I have heard the concerns from many, many, many folks on the buy side regarding the lack of trading liquidity in our stock, and we believe this transaction will finally put this behind us once and for all.

Turning now to free cash flow, we expect to do about $1.04 per share, which includes the expenses associated with capex and interest and taxes. Also, it includes the benefits of certain profits earned and cash received in our Loyalty AIR MILES business, which are hung up on our balance sheet and flow into the P&L over the next three-plus years, and that’s the $20m you’ll see. Overall, this $80m of free cash flow can be used to bring on new assets or to do a couple of small tuck-in M&A deals or to just pay down debt.

Moving along now to the 2003 outlook – real simple – same outlook we gave last October and reaffirmed in January, which calls for strong top-line and EBITDA growth leading to an 18-percent growth and cash EPS of $0.73.

Let’s now look at Q2, and a couple of notes here. First, Q2 tends to be a bit lighter than Q1 due to seasonality in our credit segments. Specifically in Q1, you have the benefits from post-holiday cardholder balances and their related finance charges. In Q2, however, people tend to pay down balances primarily from income tax refunds. Nonetheless, we’re still looking for $0.18 to $0.19 cash EPS, or another very nice increase of around 30 percent per share.

And, finally, to reiterate what Mike had said earlier, there is no question that Q1 was an unusually strong quarter and Q2 is taking shape very nicely. We, however, are not changing our full-year guidance at this time. Rather, the Q1 success allows us to gain even more confidence in our full-year guidance as we very, very methodically chew through the year’s key objectives. Certainly off to a tremendous start, but we still have a ways to go.

Turn now to the slide entitled, “Full Year.” To finish up, our game plan is pretty straightforward, and we focus on three objectives: one, minimize the yearly grow-over hurdle by developing strong and deep relationships which carry a high likelihood of renewal; two, very selectively add new clients which fit our long-term relationship model in total, 10 to 12 per year perhaps; and then, three, focus on markets where value-added services are truly valued, and as such, pricing power is maintained for our three growth engines – full-service Private Label processing, Utility Services, and our Loyalty AIR MILES program all fit the bill. We believe our business model and our approach has been and will continue to be successful for both its consistency in good times and in bad, as well as its ability to deliver solid growth, and our final slide shows this.

At this point, I’m going to kick it back over to Mike.

Thanks, Ed.

Just wrapping up, there’s no question our really unique business model, which integrates marketing and transaction processing, continues to deliver results for our clients and for Alliance and our shareholders, combined with our new credit facility and our new capital structure and a very motivated and talented management team. We’re excited for the year, and I think we’re positioned well.

Operator, we’ll take all questions now.

[Caller instructions.]

Your first question comes from Jim Kissane with Bear, Stearns.

Thanks, and great job, guys. Not to put you on the spot, but you beat our first-quarter estimate by a fairly wide margin. You’re raising the second quarter a little bit, but you’re keeping the full-year guidance intact. Is there any reason to think that the momentum may slow in the second half?

Well, I guess I’ll chime in first, Jim, and then I’ll kick it over to Mike. But the fact of the matter is, listen, this is early in the game. We’ve tried very hard over the last two years to stay away from getting into the quarterly sort of guidance revision up or down, and we have been fortunate in the last couple of years that both years in the third quarter we were comfortable to raise it for the year. But at this point, listen, there’s still a lot of unknowns out there. We do see, you know, some items out there that we need to clean up as the year progresses. For example, in our credit segment, bankruptcy reform legislation, as you’ve heard us drone on about for the last two years, is now winding its way through Congress. While that -- passage of that is certainly a good thing for the company longer-term, short term, it could cause a spike in credit losses. We’ve got it covered, but at the same time, we want to be a little bit cautious here. So at this point, until we’re comfortable, we’ve basically taken care of all the risks to the business plan for the year. We’re not going to go out and start raising guidance.

And as usual, Ed takes all the answer, so he doesn’t leave me anything other than to say that certainly the economic environment is still up in the air. We continue to believe that the sales performance will be there, both from the cardholder sales that are critical to our continued success, and we’ve also got some other deals that we need to get closed this year. So I think we’re off to a great start, Jim.

Your next question comes from Dirk Godsey with J.P. Morgan.

Good afternoon, guys. Thank you, and congratulations on another outstanding effort here.

Thank you.

I was going to ask Jim’s question. I think I’ll let that one go. But other than to say that in order to maintain a $0.73, that would mean taking $0.04, $0.05 out of the third and fourth quarters, and I’m not – I’m pretty convinced here that that’s not the message that you’re wanting to send in terms of the trend that you’re looking for in a business, but this is really more of an effort to just kind of have a slightly higher handicap going into the club championship here, is that right?

Look, we’ve had two years of not – of really trying to stay away from making changes every quarter. It’s really been our policy to try and hold firm until we get kind of into the third quarter and our announcement and have a much firmer position, and that’s where we want to stay.

Okay.

And I think, to Mike’s point, I mean you look at what happened in Q1, and it really all came together. Our Utility folks, you know, they nailed all three of basically the whole year’s quota and brought it on sooner than we had anticipated, which is great news. You know, that combined with the fact that despite an absolutely horrible retail environment, our credit sales were up 15 percent and [indiscernible] were down and funding costs were better. So it all came together, and obviously, we hope it continues. But as Mike said, we’ve still got some work to do here, and until we get comfortable, we’ve [indiscernible] blasted through everything, we’re going to be a little bit cautious.

I hear you. On the AIR MILES program, again, congratulations. It looks like you’re making good progress in each of the three primary growth drivers there as consumer sponsors and offerings. [That] said, there’s been quite a bit of noise recently related to Air Canada, some restructuring activities there, the [SAURUS][ph] situation, etcetera. I wonder if you could talk a little bit about the risks you see coming out of those situations and what you can do and are doing to manage these risks?

Let’s level that first to kind of recognize the size of risk. I think you’re aware that our miles redeemed for air now over the last 10 years have significantly reduced to about a little over 40 percent of our miles redeemed. Air Canada is 50 to 60 percent of that, so, really, only 25 percent of our redemptions come from there.

Secondly, we’ve got a long list of suppliers that are very anxious to increase their revenue opportunities, folks like West Jet and KLM and Northwest, etcetera. And certainly Air Canada knows that we’re a large revenue source. So, so far, it’s business as usual. Two or three years ago, Canadian Air went through this. We renegotiated our account with them; went fine and it was pretty much business as usual. And that’s really where we see this ultimately coming. We’re not high on their list right now. They’re going after a lot of guys that have a lot of debt with them. We drive revenue for them. So I think in the long run we’ll be fine.

Just one last question and then I’ll get off. As we heard last quarter, Air Canada, you know, spun off a competitor. Any thoughts on potential competition on this front or any other new entrants that you’re seeing in the market?

Ed, you can take it in a second. First of all, the spin-off hasn’t taken place yet. It’s still in negotiation, and given their whole bankruptcy filing, we’ll see what happens there. But they’ve been around for quite some time focused on the frequent flyer, high travel. You’ll recall we’re focused on the other, you know, 80 percent of the population. So right now, we don’t see any signs that there’s any significant new competitive challenge in the marketplace. Ed, do you have a comment?

Yes, the last I heard is that that transaction was put on hold and has not closed at this point. Obviously, as Mike said, with the bankruptcy filing, that kind of makes a lot of sense. So basically, there’s no movement on that end. The other thing to remember is that we are a very large client. We spend a lot of money on Air Canada, for example, but we also have a bunch of other airlines and other rewards, whereas the potential competing program really is tied at the hip with Air Canada. So I think they’ve got some issues they need to work through first.

All right. Well, thank you. Keep it up. Good job.

Thank you.

Your next question comes from Art Bender with CSFB.

Good afternoon. I had a question for you on the strategy in your utility business. Do you see your existing infrastructure as sufficient to support planned growth? Or do you see yourselves continuing to buy additional data centers as you grow your customer base?

The data center component, we have sufficient capacity and are continuing to leverage that data center, Art. The facilities that we have continued to add on are predominantly in the people-intensive area, development activities, exception processing and handling and those kinds of things. And to the extent that they bring on some added services that expand our offering, we will continue to do that. But we’re positioned very well to leverage the data center and billing complex, the mail center, remittance processing, and the majority of obviously the revenue drivers of that segment.

Okay. And then do you have the delinquency and charge-off numbers for the first quarter?

Yes, again to – Mike used the term earlier – to level-set, we would like to track to about 7.5-percent loss rate and about 6.5-percent delinquency rate. Our first quarter was pretty surprising on the good side in the sense that our loss rate came in really closer to 7 percent and our delinquency rate came in closer to 6 percent, which is certainly very good news. I would like to just caution some folks, I tend to get some phone calls each month when the 8-Ks get filed and everything else. You need to be real careful drawing conclusions about what a quarter or what a trend is just based on some monthly 8-K data points. But Q2, as we look ahead, you do have a fair amount of seasonality as well in Q2. Losses tend to tick up a little bit as that tends to be the higher bankruptcy quarter. And then on delinquencies, we expect further good news as well.

Great. Thanks.

Your next question comes from Andrew Jeffrey with Needham.

Good afternoon, gentlemen.

Hey, Andrew.

Just looking at – for AIR MILES issued in the key indicators, the number of miles issued this quarter was lower than it’s been in the last few quarters. Could you comment on that, whether or not that’s, you know, economic or a macroeconomic consideration at this point?

No, I don’t think there’s a whole heck of a lot to read into it. We try to keep folks away from focusing on, you know, the quarterly driver numbers in that segment specifically because it can chop all over the place, for example, depending upon if one of our big sponsors, like a grocer, may have a big promotional program in the first quarter as opposed to the fourth quarter and issue, you know, twice as many miles when you come in and buy X soda versus not having it. So you need to be a little bit careful there. We do like to track, however, Andrew, on a full-year basis to do about 10-percent miles issued, and I think in the first quarter, the number is close to 9.5 percent. So we’re tracking pretty closely to where we want to be on a full year. So –

Nothing we should read in against an easy comparison or on the gross – the absolute number then?

No.

Okay. And then one more question, if I may. Could you give us some color on statement growth as it breaks out between the Utility business and the Private Label business? I mean obviously you signed some new business in the – a lot of new business in the first quarter in Utilities. I assume that’s going to take a little while to ramp. But in terms of the good growth overall, could you break it down a little bit by end market?

Yes, we try to, you know, stay a little bit away from getting too far in the weeds, but in general, sort of as a general rule, if I were to look at the first quarter, I think we did about 39 or 40 million statements in the quarter. I would say the Utility Services business is tracking a little bit north of 25 or about a quarter of that, to close to 30 percent as the year progresses. So it’s a big chunk, and it certainly grew very strongly. Also, Private Label came in very strongly as well. Total statements generated were up close to 15 percent. But what’s also interesting there is we also saw growth in revenue per statement. So in our business, as you’re getting used to hearing from us, we tend to look at both to drive our top line, both revenue per statement and the total number of statements. Some years, our revenue per statement will grow faster than total number of statements and vice versa. And this year, first quarter tends to be total number of statements leading the charge, followed by revenue per statement. But both showed growth as we continue to push into the Utility arena.

Okay. And I do apologize, one last quick question. And if I missed it, I also apologize. Did you say what capex was in the quarter?

I didn’t but use 5 percent of top-line is probably going to be very, very close, $12m.

Great. Thanks a lot.

Your next question comes from Don McArthur of Stifel, Nicolaus.

Good afternoon. Great quarter, guys.

Hey, Don.

Could you give a breakout on your funding costs? How much was the swap payment and how much, I guess traditional interest [inaudible]?

I sure can. We had on our funding costs roughly $4.5m of sort of plain vanilla interest expense. We had another about $2.7m of cash interest expense associated with the swap, which, again, is we pay fixed-receive flow. So I’d say our total cash interest expense is six, about $7.2m.

Okay.

And then against that, Don, we had a non-cash mark-to-market gain on the swap of $1.5m, and obviously in our cash earning, since it’s not a cash flow item, we don’t take credit for that gain on the swap, so we back that out.

Great. And how much effect in your Transaction Services sector did the pruning of the, I guess, the merchant-acquiring accounts impact that?

Yes, I’m going to take a [swag][ph] here, but I’d say the number we toss around here is about $10m a quarter, top line.

And that should end mid-, you know, second, third quarter?

Yes.

And when did the, I guess, the Utility Services hit during the quarter? When do they start generating revenue?

Yes, during the -- I believe it was the third month of the quarter. Now, TXU’s a start-up, so that’s going to sort of chug along as the year progresses. But both Centrica and AEP, which, I think, account for roughly combined about a million accounts on a run-rate basis, that started flowing very nicely in March, and it’s off and running.

Great. Thank you.

Yup.

Your next question comes from David Tossman of Wachovia Securities.

Thanks. Ed, to what extent can you quantify a little bit more for us the impact of the refunding on the Private Label card business and the contribution that that added to just sort of the revenue growth there?

Boy, that’s a good question.

I’m trying to look back at what the charge-off and delinquency trends are. It doesn’t seem like those improved nearly enough to account for the real improvement in there. I’m trying to understand how much of it is stuff that we can really grab in our hand and how much of it is still likely to fluctuate around the business.

Okay. No, I’ll [swag][ph] it. How’s that? In terms of the huge growth in credit, I think you have to – I would break it into two pieces. I’d first focus on how much came from just pouring ahead on the top-line growth from sort of the ongoing credit sales and portfolio growth, and let’s say that’s half of it. You know, we had credit sales growth of 15 percent. We had portfolio growth of 11 percent. So, you know, take it at 13 or 14 percent of the growth came from those two items. That leaves another, you know, 15 percent of the remaining 15 points came from operating expenses, and I would split that probably, David, evenly between – you’re dead on – credit loss improvement, which improved about, you know, 40, 50 basis points, and then the other, call it, 40, 50 basis points came from funding cost saves. You combine those two, and you’ll probably get another 13, 14, 15 points. Does that help?

That helps.

Thanks.

Your next question comes from David Scharf with JMP Securities.

Hi, good afternoon. Ed, a few follow-up questions. You know, on the credit side, how much of that credit sales growth was coming from accounts that have been [inaudible]? How much is internal versus Pottery Barn and other [inaudible] accounts?

Okay. You sort of faded out on me a little bit.

I’m sorry.

I think if you were to break down the 15-percent growth, what we do at – you know, all of it is organic growth, but what we do is we, in fact, just like you do, break it into how much is from the business that’s been around more than 12 months and how much is from the business that we signed last year and we’re just continuing to crank up and ramp up? And I would say of the 15 percent, probably 7 or 8 percent of it is from the stuff that’s been around more than 12 months, and seven or eight points came from Pottery, Crate, Ann Taylor and Restoration from last year. It doesn’t make a lot of sense for folks to pick up the paper and say, “Oh, I saw same-store sales were actually negative in Feb and March,” as they were at many of our clients, but the fact of the matter is our wallet share, the amount of dollars being spent on our card, continues to grow. And so, therefore, we saw a very nice mid to high single-digit growth from the folks who’ve been with us for 12 months or more.

Gotcha. And if these clients renew, like a Brylane, you know, are they – well, you obviously know. I mean what type of wallet share is considered sort of a maxing out? You know, trying to get a sense, after, you know, you had a big class of ’01 and ’02 new accounts –

Yup.

-- you know, once those programs have kind of run their course –

Yup.

-- in terms of ramping up, you know, what type of growth in portfolio and credit sales, you know, do you expect to get in ’04 beyond just in wallet-share gains? What kind of metrics do you look at to get a sense for when that maxes out in terms of --?

Yeah –

[Inaudible] up to 20 percent penetration, 15, 40 of sales?

Yeah. The answer is yes to everything. It’s all over the board. [Indiscernible] the clients -- many of the clients are at different stages. I would say our biggest penetration’s probably close to 40 percent, or $0.40 of every dollar is put on our card, which seems like a staggering number, but it’s true. Obviously, as you get start-ups, that starts at zero and gradually works its way up. I would probably take a guess and say our median of our 53 different portfolios is in the high-20s, if not close to 30 percent.

No, you’re exactly right. We get added sales, and just as the inflationary dollar goes, we get more dollars even though it might not be a higher percent, but just the raw dollars grows as well.

On the marketing side on AIR MILES with Safeway’s recent renewal and [inaudible] Montreal a couple quarters ago [inaudible], what were the pricing trends in terms of what they’re paying to you per mile? Are they holding steady? Is [inaudible]?

Holding very strong. Certainly, we don’t have a significant increase, but we hold a very powerful position in the marketplace, and we try and maximize what’s fair for all the parties as we look at consumers and collectors and what can drive the most miles for everybody.

Perfect. Thank you.

Yup.

Your next question comes from Jeff Baker with Piper Jaffray.

Hey, guys. Ed, just to clarify, not to beat a dead horse, on the Utility business, three great contracts signed here. And you get the benefit for the whole year on those, right?

We get the benefit starting in March, so I call it 10 months.

Okay.

On two of them. TXU is a start-up, so it will load account throughout the year.

And when will TXU kind of ramp?

It’s already starting. It will take – it will go all through the next 12 to 18 months.

Okay. All right. And then if you can help me out, Ed, on the $52m debt pay-down that you anticipate from Welsh, Carson --

Yup?

-- that’s all in long-term debt? There’s no current portion there; is that right?

No, it’s one traunch. We had – boy, I guess a year or so ago, we had a total of $100m of 10-percent stuff out there. We paid off half. We’ve got another half to go. So it’s one final piece, and then we should be in real good shape from that point of view. We – you know, sometimes we haven’t gotten the question of why are we looking to use equity proceeds for that because we’ve mentioned that that’s certainly a trade we would do all day long. But we think it’s time to get rid of that stuff and with our new credit facility, we should be in very, very good shape going forward in terms of flexibility. But push to accretive, I’d say.

But that’s 10-percent debt, and you said that on the – if you look at the balance sheet, all have been current portion or it’s in long-term?

Long term.

Oh, it’s on long-term, okay. And the $52m, is that including the accrued interest?

No.

What would that be, you know, say in the payment at the end of the month here, about?

Yeah, it’s $5m a year divided by 12.

Okay. Okay, and then I guess that’s about it. All the questions have been answered. So thank you very much.

Your next question is a follow-up question from Jim Kissane with Bear, Stearns.

Yeah, just a quick follow-up. Because you’ve been really successful in terms of renewing the contracts, both on the Private Label and on the AIR MILES sponsor side, and it seems like you’re doing it longer term, any impact on pricing on the renewals?

No, nothing that would affect our budgets or forecasts or guidance at all, Jim.

So similar to the Limited last year, where the terms were, you know, pretty consistent with where they were?

Yeah.

Okay. And you’re also generating, you know, very strong free cash flow here. Can you comment on uses going forward?

Sure. I mean it’s – for those of you who have – Mike and I are chuckling here a little bit – for those of you who have known us for a few years, again, we were up at six times debt to cash flow not long ago. So being down at one times core debt to cash flow is sort of a first for us. But of the 80 million, I would say we would probably in this environment, although we don’t have anything big out there, we would be looking to probably try to do a couple more of these AEP-type transactions where we could basically help facilitate a transaction by putting a little cash up front to take some assets in return for consideration on the back-end, i.e., our margin. So it’s more of a use of capital. I’d see probably doing a little bit of work on the utility space. But other than that, I don’t – you know, we’re cooking along pretty well here, so we don’t want to overload things. So I would say maybe one or two of those, but other than that, you know, in this environment, there’s some good stuff out there. It’s just we’re kind of busy with what we have right now. I don’t really see anything big right now, Jim. So probably pay down debt.

Excellent. Thank you.

Your next question is a follow-up question from David Tossman with Wachovia Securities.

Thanks. I have just a quick follow-up on the new Utility businesses and the start-up of those things in March. They come on in a reasonably profitable way, do they not? Is there any sort of short-term drag in those things as you ramp them up?

Not the ones that have an existing business. The start-ups, for sure, don’t really move the needle for a while, so TXU won’t be moving the needle for a while. But both Centrica and AEP had an existing book of business, and those are up and running, and that’s one of the reasons why – you know, that was part of the reason why Q1 was so strong.

It will be like Private Label with TXU or other start-up customer, we do have start-up costs, system costs, service, you know, organizations there waiting for the revenue to begin to build. So there is [fall] but still some amount of drag.

Thanks.

Any more questions? Got another five minutes, I guess?

Your next question is a follow-up question from Don McArthur with Stifel, Nicolaus.

Hi, guys. One quick question. What was the finance charge portion in the quarter?

In our Credit -- again, for folks who weren’t too familiar with our Credit Services segment, we did about a – a little over $100m, I guess, revenue, $100-110m. That is, I would say, about 70 percent, or two-thirds of that is finance charge income. And that may be news to some people who thought the whole segment was based on the portfolio and the finance charge. The other third, or 30 percent, are fees and basically merchant discount from the billion dollars of credit sales that we ring up. So it’s about two-thirds/one-third, Don, in terms of finance charge versus fee income.

Thanks. And do you provide what kind of your average cost of funds is on your portfolio now if you’re refinancing?

We don’t. I think what we could say is we have another batch coming due this summer, and based on where rates are today, we should be in good shape. But, again, we’re not going to go run out and bake that into any numbers because rates could move up. So, you know, that’s one of the things we have in our hip pocket if rates stay where they are.

Great. And then I guess for your – try not to beat a dead horse – but for your -- I guess, previously when we were talking about the $0.73 for the year, was that kind of baking in an economic rebound in the second half of ’03, or --? Go ahead.

Yeah, I’ll save you the trouble.

Thanks.

We assumed the economic environment would be sluggish at best, maybe perhaps very similar to 2002, perhaps a continuation of the jobless recovery, you know, 6-percent unemployment, maybe 2.5-percent GDP, something like that. So nothing too extraordinary. We expected to do about 18-percent growth in per-share. We are, I guess, experiencing exactly what we thought in the macro environment, and lo and behold, in the first quarter, we were pleasantly surprised that our credit sales were just so strong and that our Utility guys just brought it all home well ahead of schedule. So, again, first quarter is – it’s off to a great start. I don’t know what else to say, but, you know, it’s not feet-up time yet.

All right. Congratulations on a good quarter. Thanks.

Thank you much. A couple more? I don’t know if it’s two, three minutes? Operator, do we have any more or are we done?

Yes, sir. Your final question comes from Andrew Jeffrey, Needham.

Hi, just looking at [inaudible] the mix between G&A and operating expenses were, can you give us a little sense of how that should look for the rest of this year and then [inaudible] look into the crystal ball into ’04, should we continue to think about leverage on fixed costs with a greater investment in infrastructure prospectively?

Yeah, I’ll take a [swag][ph] and kick it to Mike. You know, we, quite honestly, the way things move around between S – you know, G&A and direct expenses, depending on where you put a department here or there, I’ve got to tell you, what we try to do is we focus very hard on revenue and EBITDA in that those are our two key metrics. We have very consistently in the past -- have a stated goal of raising our EBITDA margin a minimum of 50 basis points per year, which would put us somewhere in the mid-17-percent range. We believe we are obviously well on track on that given where first quarter came in.

So the very long answer, as I’m droning on here, is that, yes, we expect to continue to see leverage in the business but to remind folks, this is a business that isn’t a core processing company. We’re not going to be a company that has, you know, 25, 28-percent EBITDA margins because of all the human value-add component. It is a business that could very nicely move 50, 60 basis points a year as we approach our, you know, our 20-percent margin. So I think, hopefully, that answers it. Mike?

No, you hit on the key component. It’s the value-add and human support activities that traditional purely billing kind of processes don’t have. So – but we’ll continue to grow nicely. We’ll also continue to try and push any expenses that may have historically been housed in the corporate environment down to the business units. We want them controlling and driving that return. So you’ll continue to see that focus, but we’re off to a good start, and we’re excited about the year.

Thank you.

Okay. All right, everyone. Thanks for joining us again. We appreciate your support, and we’ll talk to you next quarter.

Thanks. Bye.

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