Bread Financial Holdings Inc (BFH) 2003 Q4 法說會逐字稿

Good afternoon. My name is Ramona, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Alliance Data Systems fourth-quarter 2003 conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Julia Pruthoure (ph).

Thank you, operator. Good evening everyone. By now you should have received a copy of the Company's fourth-quarter and year-end 2003 earnings release. If you have not, please call the Financial Dynamics 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 described in the Company's earnings release and other filings with the SEC. Alliance Data Systems has no obligation to update the information presented on the call.

Also in today's call our speakers will reference certain non-GAAP financial measures which we believe provide useful information for investors. Reconciliations of those measured to GAAP will be posted on the Investor Relations webpage of our Website at AllianceDataSystems.com.

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

Thank you. Good afternoon everyone and thank you for joining us this afternoon. Our agenda as usual is to spend a few moments reviewing our highlights of the quarter. We will also then take a look at full year results and our 2003 accomplishment, and then we will finish and talk about 2004 and our outlook for the future. Ed will then review financials in some detail, and at the end, we will take your questions.

Before I begin, I want to note that we recently received positive news from our auditors regarding the way we translate our Canadian business into our consolidated U.S. dollar-based financials. Ed will give you more detail, but the short version means that our reported results will now better depict the true health of our Canadian business. Up to this point, we have added reported results, plus constant currency results, plus a bunch of explanations but basically all relating to foreign exchange translation.

At the end, what does it mean? Basically it means that foreign exchange timing issues that we began to see in the second quarter is eliminated, and we no longer need to show both recorded and constant currency results. They are now essentially the same.

So our reported number for our Q2 2003 is revised upward by 3 cents; for Q3, it is an additional 3 cents, and the results for the fourth quarter are going forward, and going forward will also no longer reflect this timing issue. We factored this into our '04 guidance after first factoring in some strong performance in trends in our three growth engines. In the end, this should reduce the complexity of our discussion and provide additional comfort in our ability to achieve our targets in the future.

With that said, let's turn to the fourth quarter and the next slide. We are obviously very pleased to announce that we have posted another quarter, a record quarter for our company. Our revenues increased by 27 percent to 298 million, EBITDA increased by 45 percent to 59 million, and cash earning is up 67 percent or 30 cents per share. The updated treatment on foreign exchange added roughly 4 to 5 cents, so under the old methodology, we would have reported just over 25 cents for the quarter.

All three growth engines -- Private Label services, Utility Services and loyalty Air Miles program -- continue to drive this strong performance. All three reported double-digit growth on both topline and EBITDA.

Let's take a minute to look at each, and if you will turn to the next slide, we will start with Private Label business. Client growth and new business efforts over the last year contributed to our record performance in the Private Label group. Our new business wins in the first three quarters were all converted prior to the holiday season, and (inaudible) to take advantage of the crucial retail period.

Regarding new clients wins for the fourth quarter, at the end of October, I announced our long-term agreement to provide Private Label services to Fortuna (ph), New York retailer of jewelry and home furnishings. Then we also announced the launch of a Private Label card program for Shop-at-Home, a major nationally televised home shopping service. Shop-at-Home currently reaches approximately 70 million cable households.

Another highlight was the recognition we received this quarter for our customer service operation where we lead our peer and industry groups in critical customer service benchmarking metrics. Alliance Data received best-in-class certification for our call centers -- the highest ranking possible -- and placed us among the top 10 percent of all call centers evaluated by the Purdue University affiliate, Benchmark Portal (ph).

Our key drivers continue to have very favorable results -- double-digit growth in credit sales and portfolio balances, matched with refinancing benefits completed in the third quarter and an improvement in our credit losses as the result of an impressive quarter.

Turning to the next slide, our Utility Services group, our early wind in 2003 contributed to a strong performance throughout the year and in the fourth quarter as well. Our major conversions are complete, and our integration team is now focused on our recent announcement. During the quarter, we expanded our footprint into the mid-tier utility market with the acquisition of Orcom.

For more than 25 years, Orcom has provided customer care and billing through the electric, gas, water and wastewater utility industry in North America, generating over a million statements each month. The Orcom acquisition also enhances the breadth and depth of our utility leadership team. With the additional talent, along with our current management team, we believe we have a leadership team unparalleled in the new and emerging utility sector.

Turning now to our loyalty Air Miles business. The program continues to provide outstanding performance, and it had another outstanding quarter. Our collector base continues to grow, particularly in the Québec region, where our household penetration has grown 26 percent over last year. Our active collectors representing nearly 15 million Canadians can now earn Air Miles at more than 100 leading brand-name sponsors and even more importantly representing over 12,000 retail and service locations across Canada.

Additionally we are continuing to enhance our rewards portfolio, offering our collectors more than 500 different rewards from movie passes, family attractions, TVs, DVDs, electronic merchandise, sports, recreation, travel and more. We've also been able to significantly leverage the Web by driving collectors to our Air Miles Website to redeem miles. Now 70 percent of all merchandise rewards are redeemed through this channel, deriving additional cost out of our business.

Expanding our sponsor base and reward portfolio to meet and exceed expectations of our collectors is fundamental to our growth and appeal. As a result, we continue to see strong performance in our key metrics, miles issued and miles redeemed, both with double-digit increases.

Let's turn to full year results. Alliance Data reached a significant milestone -- a goal we set four years ago -- by exceeding $1 billion in revenue. We finished the year at 1,050,000,000 in revenue, EBITDA hit 214 million, and cash earnings per share was $1.03, a 75 percent increase.

I want to thank and congratulate our management team and associates across North America for their outstanding effort this year. All our businesses realized solid organic growth, and our focus will continue to be on markets with strong organic growth potential.

We also had a better year forging new relationships with new clients, including Eddie Bauer, Stage Stores, Spiegel, TXU, American Electric Power, Centrica and John Kutu (ph) just to name a few. We work hard to ensure we deliver on our promises to our client, and our client results drive their confidence in us. Our success is demonstrated by the number of renewals and expanded relationships we secured with our clients like Brilane (ph), Limited Too, Conoco-Philips and Safeway Canada.

Now let's turn and talk about the new year. Certainly we are very excited about 2004. Our strong business fundamentals are work, and we have a solid pipeline across all of our businesses. We expect to secure three to four new Private Label clients, two to three new utility clients, and two additional or three sponsors in Canada. The loyalty program itself remains strong and dynamic because not do only we drive our performance through additional sponsors but from a very active collector base through expanding relationships with our existing sponsors and focusing on attractive rewards.

In the industries we serve, we have established ourselves as a company that delivers results. In operations, we will focus on smooth and timely integration and conversion resulting from our new business efforts. We want to be continually recognized for our excellence by our peer and industry groups but most importantly our clients.

To lead us to our next milestone will require a strong leader. We have laid a good foundation, but it is left up to the team to build on that by investing in our management team. We are in our third year of our leadership academy series. These academies are designed to prepare our associates for the future -- first by grooming our leaders for new challenges and secondly encouraging innovation and creativity. We have identified areas for future growth whether by expanding in our product line, our markets or geographic footprint, our associates will drive innovation for our success.

From a financial perspective on the next slide, we expect another strong year. All segments will deliver double-digit topline and EBITDA growth. All of our growth engines are firing on all cylinders, and we expect a nice balance growth across the Company. At this time, we are updating and raising our guidance. We expect to deliver cash earnings per share of approximately $1.18 to $1.19 per share. This is as a result of the expectation across the board strength in all of our businesses, plus the FX treatment which equals about a dime, all captured in 2003's final numbers.

Turning to the next slide, we have had a strong start in the new year as well. In the last few weeks, we have announced the renewal of two sponsors for our Air Miles program -- Bank of Montreal, a founding sponsor of the program, and Shell Canada. Both of these sponsors are top 10 clients. Additionally we signed a long term contract renewal with Air Canada to continue as a reward supplier for our Air Miles reward program. While the majority of our Air Miles are now redeemed for non air travel, this renewal provides a continued supply of Air Canada seats for our collectors.

We are also very proud of the major expansion with our partner, Stage Stores, and appreciate their ongoing confidence in us. We will provide Private Label Credit Services to an additional 180,000 of their peoples branded accounts, generating roughly $40 million in Accounts Receivable.

Peebles' is a family apparel chain with 142 stores in mid-Atlantic, Southwestern and Midwestern regions of the U.S.. As you see, we've had some of early wins, but it is still very early; it is only January. We will remain focused on the year ahead, committed to delivering on our promises for our stockholders, our clients and our associates.

Now Ed will get into some more detail on our '03 and '04 numbers. Ed?

Thanks,Mike. As Mike mentioned earlier, Q4 was a tremendous quarter for all three growth engines, and additionally we had a very nice win on the accounting front that should result in a more transparent representation really of the true performance of our Canadian business versus the prior methodology.

Let's step back a little to review our Canadian Air Miles programs follows deferral accounting, whereby revenues are (inaudible) balance sheet, and then over a period of years brought into the P&L and recognized. This occurs despite the fact that we receive our cash upfront. A key point here is this deferral methodology remains intact and has not changed. Rather it was during the process of converting these Canadian revenues and expenses into U.S. dollars for reporting purposes only that we began to report results which seemed a bit skewed versus actual operating performance.

The process of converting into U.S. dollars involved converting revenues at their weighted average historical exchange rate, and that is the rate, for example, when they were booked perhaps three years ago, while expenses were booked at the current period spot rate. For years and years, the reported results in U.S. dollars closely tracked the actual Canadian results, but the U.S. Canadian foreign exchange rate remains very stable.

So what changed? What happened? Over the past year, the U.S. dollar tanked about 20 percent against the Canadian dollar. Normally a U.S. company would expect to see a benefit as it now has more valuable earnings to report. That, too, should have been the case with us. However, because we were bringing in revenues at lower historical rates and matching them against higher spot rate expenses, our reported earnings actually got artificially squeezed starting in Q2.

Now this would eventually reversed itself in later years, but the early results were earnings which were artificially low due to this timing issue. In both Q2 and Q3, results were depressed by about 3 cents per share. This would have grown to about 5 cents in Q4. Reversal of this would not have started until the latter part of 2004.

Now since this was just a timing issue, we try to give folks a more accurate view of our performance by also showing at the time results on a constant currency basis, which merely shows revenues and expenses at the same rates and, thus, shows true business performance. So as it came toward the end of the year, we're spending more and more time explaining this timing issue and the variant gap between reported results and constant currency results as Mike had talked about. So we took another hard look at the accounting literature along with our auditors, and it was determined that, in fact, we should translate Canadian revenue at the current period spot rates and to be consistent with the expense translation rate. In the end, it's the right thing to do and better represents true performance.

So let's go to the results slide. What does it all mean? Well, simply stated, we don't have a timing issue anymore. Movements in the U.S. dollar no longer cause an artificial earning squeeze or the reverse.

Second, this eliminates the need for us to show another performance metric. We have been showing constant currency along with reported results. Now they are effectively the same. Also, U.S. results more clearly reflect Canadian performance, and then finally -- a key piece here -- provides much better visibility. The results reflect performance not just accounting. And that along with the very strong trends we are seeing in the business have given us confidence, even though it is only January, of coming out and raising guidance already. So overall we think it's a very nice win on top of a good year.

All right. Enough of that. Let's get into the fourth quarter and the consolidated results if you can find that slide. It was another very big quarter. Fourth quarter marked our 11th quarter since going public and further extended our track record of delivering or overdelivering on what we promised. While we walked up our guidance throughout the year, we were once again presently surprised by the strength of Q4 results. Revenue shot up 27 percent to just under 300 million in the quarter as all three growth engines -- that would be the loyalty Air Miles group, Utility Services, and Private Label services -- and hence all three reporting segment contributed solid double-digit growth. For the full year, as Mike mentioned, revenues passed the $1 billion, up over 20 percent in reaching one of our key company goals set a few years back.

Turning to operating EBITDA, our proxy for operating cash flow, it surged ahead 60 percent to over 68 million and finished the year just north of 235 million, which is running about 20 million higher than reported EBITDA. EBITDA itself came in solidly ahead at 59 million, up 45 percent, similar to revenues. This was the result of all engines and segments posting double-digit growth. Finally, cash EPS at 30 cents was up 67 percent.

Now a quick note. The cash EPS does exclude a non-cash executive comp charge of about 2 million after-tax related to the expected vesting of restricted stock scheduled for Board review in February. Normally we would incur this in Q1 of '04, but due to the huge over-performance of the Company in '03, which is, in fact, the primary trigger, it was deemed more appropriate to show the charge in '03 and not wait until '04.

So overall very strong quarter. All engines were firing on all cylinders, winding up the year at over a billion in topline while growing earnings over 60 percent was well above our expectations, especially on the heels of 20 percent earnings growth in '02 and 20 percent plus in '01.

All right. Let's hit the segments. First up, Transaction Services, which houses two of our three growth engines -- Private Label and Utility -- as well as being the home of our traditional merchant acquiring business. The story in that segment all centers around the key driver statements generated, as well as our ability to maintain pricing power.

As we have communicated in the past, our model focuses on markets where we can grow volume but in the process preserve pricing power as well. Both Utility Services and Private Label Services key off of statements generated. In the quarter, statements generated through 20 percent, and as importantly, we saw no fall-off in price per statement. Statements generated drives over 80 percent of the segment's reported resolves, and looking at the segment's total revenue and EBITDA, we saw a better than anticipated surge in revenue, up 18 percent, as a string of new Utility and Private Label clients continued to ramp up and combine with solid performance of the core client base.

EBITDA, up double-digit as well. Tracked to the normal seasonal trend expected. Specifically we usually see revenue shoot up pretty dramatically in Q4 and EBITDA grow but margin declined as holiday sales help spike revenue but significant holiday ramp up expenses such as backup capacity costs, call center ramp-ups, extra personnel and start-up expenses tend to hold back EBITDA a bit during the season. This was exacerbated by the enormous book of new business which was brought on, which was double the rate of normal new signings in both Private Label and Utility.

This year's Q4 also included some expense for moving a large utility client's call center business from a third-party to in-house at ADS in Texas. That has now been completed, and overall it bodes very well for 2004 and beyond.

So for the year, both revenue and EBITDA went up solidly with double-digit gains, and let's turn to expectations for 2004. We expect more of the same with double-digit growth in both revenues and EBITDA to continue.

The next segment would be Credit Services, which continued to outperform, and to understand it, let's walk through the four key drivers of the P&L, which are credit sales, portfolio growth, funding cost, and credit losses.

The first, credit sales, which drives our merchant fees, hit midteens growth for the quarter. Two factors contributed. First, our core client base experienced solid results during the holiday season as consumer spending held up nicely in general and even seemed a bit skewed towards the higher end retailers which tend to be our sweet spot. Second, the huge book of new business put on this year was all up and running in time for the critical holiday season and as such contributed to sales growth.

Next up, portfolio growth. Also grew in the midteens benefiting from the same factors which were driving credit sales. And now let us turn to operating expenses, and we saw a continuation of positive news.

Let's first hit credit quality and credit losses. Our guidance this past year had been to target average loss rate of about 7.5 percent and average delinquency rates in the mid-6s. Q4's loss rate came in right on the money, mid-7s, while delinquency rates, which helped predict future trends, came in better than anticipated.

Finally, funding costs continue to benefit from the very slow gradual refinancing of large blocks of maturing fixed-rate funds, which are being rolled over and locked down for the next five years.

I want to take just a second here and talk about the potential impact of a rising interest rate environment since I have been getting quite a few questions on it recently and I think the timing probably is ideal right now given the Fed's statements to the market this afternoon. It is important to remember that unlike most bankcards, our cards and hence our assets are primarily fixed-rate and are funded primarily with long-term fixed-rate money, which matures in big blocks over a number of years, i.e. we ladder the maturities.

Even if rates were to rise moderately in 2004, we do not anticipate any negative impact to us since this rise in rates should be mitigated by a maturing debt which was put on years ago at higher rates. Also, we have no obvious impact on debt already locked down. So we don't see any negative hit from rising rates this year.

Alright right wrapping up with 2004's outlook for credit, same story as the Transaction Services segment. We expect another good year with double-digit topline, double-digit EBITDA.

The final segment, Marketing Services, which is essentially our loyalty Air Miles program in Canada. In a nutshell, business remains very strong as the program continues to grow further with further penetration, new sponsors such as the pharmacy giant John Kutu (ph), and an across the board renewals from our key anchor sponsors -- Safeway, Bank of Montreal, Shell, etc..

The program's popularity has never been higher, driving both miles issued and miles redeemed to all-time highs in the quarter. This in turn generated record revenue and cash flow.

Looking at the drivers, you will note that growth in miles issued and miles redeemed can fluctuate a bit each quarter, but on an annual basis, growth remains consistent. Specifically full year issuance grew 10 percent; redemptions grew 20 percent. This typically leads to revenue growth somewhere in the middle. For '03, this was helped a bit by the appreciation in the Canadian dollar vis-a-vis the U.S. dollar similar to other U.S.-based multinationals.

Again I want to take a second and hit a question we have been getting for quite some time, and for those who have heard it before, we ask you to bear with us a little bit. You will note that miles redeemed grew strongly in Q4, and as mentioned, they were up 20 percent in 2003. Some people are still a little bit confused as to why we keep pushing so hard to increase miles redeemed.

Some may think it just increases comps for us so why do it? And the answer is two-fold. First, our goal is to push for higher and higher redemption levels since this ensures the program remains successful and of value to our sponsors as well as our members.

Second, this does not at all hurt profits because we are already reserve upfront for a high level of redemptions and are well covered to handle the continued pace of activity. Therefore, our goal is the same as that of our sponsors -- drive redemptions and, thus, increase loyalty.

Finishing up, turning briefly to 2004 outlook for the segment. Solid again, double-digit topline in EBITDA expected. To wrap up all three segments real simple, all three engines firing on all cylinders, expect double-digit topline and EBITDA out of '03 in 2004.

All right. So let's move along to the balance sheet. Three items of note. First, capital structure and strength. Our key metric is core debt, which excludes CDs, divided by operating cash flow or operating EBITDA since this is the key ratio used in all of our bank covenants. Our target is to maintain a healthy investment-grade profile which we believe requires the ratio of two times or less. Against that target, we actually came in below one time this quarter as core debt stood at 190 supported by opting cash flow of 235 million.

Next item, CD borrowings were up over a 100 million from last quarter. It is all related to two items. First, every holiday season we are required to hold a bit more of our portfolio on the balance sheet, like an extra 2 percent. This is temporary and is reversed by the end of Q1. Second, a portion of the increase in CDs also reflects the addition of the Fortuna file in Q4, which again is also temporarily as it will be securitized very shortly in cash relief. Other than that, nothing new on the debt or cash side.

And then third, our deferred revenue and earnings account related to our Canadian business continued to swell past $460 million, which is up $110 million for the year or triple our usual run-rate. This was driven by the very strong business results combined with the strong appreciation of the Canadian dollar making our Canadian assets much more valuable.

To wrap up, balance sheet and capital structure are getting stronger every year as the business model continues to generate double-digit growth while throwing off significant free cash flow.

That wraps up 2003. Let's talk a little bit about 2004 if you will turn to that slide. Obviously we think we are going to have another good one. As Mike mentioned, all three engines have strong momentum going into 2004, and we expect double-digit organic growth from all three.

So specifically let's talk a little bit about guidance. We took a look at where consensus was a little while ago and believe it is at $1.05. But we have then added the impact of the foreign exchange timing elimination that we have talked about earlier, which is all in 2003. That is a little overdone, call it 11 cents. Note there is no additional step up in 2004 as what we would have lost in the first half of the year we would have gotten back as it unwound in the second half. And then finally, the way things are looking already, we are feeling that overperformance is looking likely, and as such, we tacked on another 2 to 3 cents.

So that is what we would call our baseline, and we will tweak it as necessarily as the year unfolds and in short should be another good one. Q1 is off to a very fast start, and we are expecting cash EPS of 27 to 28 cents a share versus 21 cents a year ago. My guess is this year you will see the first half of the year contributing a bit more to the overall annual earnings than occurred in 2003. Needless to say, we are pretty excited the way Q1 is already shaping up.

All right. Next slide. Almost done here. One of the things about our business model that we think is pretty important is our free cash flow. We think that if you were to walk down how we generate free cash flow, you would start with EBITDA, and what we are seeing already in 2004 is that our free cash flow generation is growing rapidly due to three things. First, the three core engines are all growing strongly. Second, our capital structure has strengthened dramatically from the days a few years back when we were five to six times core debt to cash flow all the way down to less than one times today. A lot more free cash flow going out. And finally, the guidance we have given assumes we hit the numbers without any need for acquisitions to make it.

So it will beg the question, what are we going to do with 125 million in free cash? Options would include continue to payoff some remaining debt, or look at a couple of small tuck-in acquisitions to set the stage for a strong '05 and '06, and we will have a little more clarity on that as the year progresses.

Turning to the actual free cash flow slide itself, we again are looking for very strong growth, free cash flow including the expenses associated with CapEx and interest and taxes. It also includes the benefit of certain profits earned and cash received in our Canadian business which are hung up on the balance sheet and flow into the P&L over the next three plus years. But to sum up, we are looking for about $1.50 of pure free cash coming out of the Company.

Okay, last slide I promise. The top questions list. What Mike and I try to do is over the last quarter think about what questions folks would ask the most, and then address them head on on one of these calls. Probably top of the list has been, what is the impact of rising interest rates? And again, with the Fed's statement today, which I believe most folks took to mean that interest rates may, in fact, be moving up a little bit sooner than previously thought, even though rates remained unchanged today. That is okay. We have already locked down very large portions of our funding book into five year fixed-rate money. Even if rates move up moderately, they should be mitigated by some deals that are coming in this year that were put on years ago at even higher rates. Overall we should be in good shape.

In the unlikely event that rates spike up a couple of hundred basis points -- and again when we talk about rates, we are talking about the five-year. That is what we priced off of. That is our key driver. If rates for some reason just went through the roof, usually it is an indication of the economy is certainly eaten up, which would suggest an offset to that would be some lower credit losses, and we would begin to get a little bit more interest income on the 200 million of cash we have in our trust account in Canada. So I would say to sum up, I think we are okay on the interest rate environment.

The impact of the falling U.S. dollar, we talked an awful lot today about the FX timing issues no longer should not have any impact to us. So we should be very typical of U.S.-based multinationals. We would expect from my guess what most experts are saying a pretty unexciting Canadian/U.S. dollar FX market in 2004. Of interest is the fact that while the Canadian dollar did move up 20 percent in 2003, 85 percent of that movement occurred in the first five months. So if you were to look at last June and then compare it to today, there has really been no movement whatsoever. It has been very stable, and that is pretty much the outlook for the rest of the year.

Pipeline. Mike talked about that, but all engines are up and running, and that being said, I will kick it over to Mike.

Sorry for running a little longer than we normally do. To kickoff the beginning of the year, we wanted to spend a little extra time, so we will turn it open to Q&A now. Operator, if you would introduce the callers, please?

Jim Kissane, Bear Stearns.

Maybe this is more for Ed, can you discuss the profitability of the utility business? Where the margins are today. Where you think they can go over the next couple of years given the leverage in the model?

Sure. I would say if you would step back a couple of years when it was nothing, we hit 60,000,000 two years ago, which was probably breakeven, Jim? We hit a little bit right around 80 million in 2002. and we were probably in the mid single digit range in terms of margins. This past year, 2003, we were probably north of 130 million of revenue, 135 or so, and I think we tripped across the double digit margins.

As we look into 2004, I certainly would expect revenue to continue ramping up to 180 million plus, and we would get some lift on the EBITDA side, but until we really consolidate all the platforms, and I will kick it over to Mike, my guess is it won't be another huge jump of 500 basis points. You are probably talking about 100 basis points to 200 basis points per year.

But longer-term, is it a 15 percent margin business once you have all the consolidation done?

At least. The key on the consolidation is, if you think about it, our focus and strategy has been to become the dominant leader in this market. It really, as you will recall, has four submarkets so to speak -- deregulated, regulated, submetering and recently it has been moving to the municipal.

Our predominant multisystem operation today is in the deregulated area, and as I mentioned on our last quarter, it will be close to anywhere from a two to four year figuring out process as the markets continue to mature and get consistency across the United States. We really don't want to invest large amounts to money until we have a good crystal ball as to what the system features and requirements are going to be. So we will not be rushing through consolidation, for example, in the next six to 12 months, but we will keep a very close by on that and progresses slowly as the market allows us (inaudible).

I think to Mike's point, again what you are going to see in utility is a very rapid ramp up in top line as we move from not only the top 200 utilities in North America but expanding into the submetering space, expanding into the mid-tier municipal space, that is why it has been growing from 60 to 80 to 140 to 180. We think it's a pretty exciting market to get in there and dig our heels in.

Just a quick question on the Air Miles business. You saw another big jump in redemptions. Can you give us a sense on where the miles are, or what the miles are being used for? I know the airlines are a lot less relevant, but can you break it out by service or product?

Yes. Sure. In terms of what folks redeem their miles for, again going back ten or eleven years when the only real choice was a seat on a plane, it has shifted very dramatically to I would say more than 60/40 in terms of non-air versus air in terms of redemption. So I would say probably in the fourth quarter that has further shifted to 60 percent to 65 percent probably, and a lot of that has to do with a lot of the new rewards that we are bringing online.

As we talked about, both merchandise certificates, we announced a major rollout of being able to redeem for CDs and DVDs online. It is really the multitude and the variety of product, Jim, that drives interest.

We should assume that issuance picks up in '04. I would assume the popularity is increasing?

Well, the Air Miles issue base is also getting a lot bigger, too. So I think we are comfortable with that 10/20 model, 10 percent issuance, 20 percent redemption. That is our model, which would usually stick revenue right in the middle in the mid-teens.

Dres Upkisk (ph), CSFB.

(multiple speakers). Just a question on the credit side. Can you give us a sense for the GAAP in interest rates right now between the tranche that comes up in '04 and that will be rolling off, or what you would refinance it at and that will be rolling off?

Sure. If you were to look at how we price our bond deals, again it depends on spread over treasures and swap rates and all that other stuff. But keep it simple. If the five-year treasury is about 3.25 and we price about 125 over that, call it 450 or so, is about where we would price a deal given where rates moved up today, which is about 25 bps (ph). That still leaves us 50 to 75 under the deal that is coming due, so we get some room there.

Okay. You said that you are ramping up a lot of the new Private Label signings. I know Spiegel was a big one of those. Can you just give us a sense for where that stands?

If you recall, the Spiegel group really comprised of three portfolios, including Spiegel, Eddie Bauer and Newport News, and all three -- some better than others -- but for the most part, all are beating expectations. So we have had strong performance there, and we've had strong performance from the rest of our new signings as well. It has really been a strong year.

Yes and I would say when Mike says we have everything up and running, what does that mean? It means there really are four different channels that we would use to start generating interest. The first would be like, for example, in Eddie Bauer stores quick credit where we can sign up new folks. We have online tasks to prescreen when people call in to place an order. We will take a look at them and see if we would like to offer them a card.

We are also working with some Web online prescreen, so as people browse, the banner will pop up. And then, of course, the catalogers prescreen with the catalog and quick credit with the catalog. So there is a bunch of channels that we pound away at, and as Mike mentioned, with the Eddie Bauer, Spiegel and Newport, everything is up and running for the holidays, so it performed nicely.

Then last question, just on the Air Miles, the 6 percent growth in issued in the fourth quarter, and you mentioned that bounces around a little bit, but can you give a little more color there on what weighed on that?

Yes. A lot of it depends on, for example, if a huge supermarket chain that dominates a province up in Canada wants to run a huge promotion, (inaudible) miles, that could occur in the first quarter or fourth quarter or whenever they want to do it. So we have a pretty good idea on a full year basis that our miles issued should come in around the 10 percent level.

But on a quarterly basis, like I said, there is a fair amount of leeway. It is really dictated by the sponsors themselves. So we try to focus in more on the full year. Actually if you look at our Q4 issuance, I think it was over 700 million miles. That is the best we have ever done, so it was still a record.

Do you look at that in terms of dollars that run through the system so that it normalizes for the promotions?

We don't follow you on that one.

Just to normalize for any 2 for 4 or any of those promotions, the dollars that are run through the system?

No. I think what we try to do is manage to a full-year commitment by each sponsor.

Okay. Thanks.

Dirk Godsey, J.P. Morgan.

Good afternoon. Nice job. Just a couple of cleanup items here. I am sure some work I could get to this, but to make it easy, do you have the adjustments for marketing services for revenue and EBITDA under the old methodology before you adjusted the foreign currency translation?

Yes. In terms of how much it drove -- the 11 cents you are talking about?

I am assuming the revenue in Marketing Services was pumped up by bit as a result of changing your methodology on foreign currency and also with the flow through to EBITDA I would assume for the fourth quarter.

The total numbers for the year is about 11 cents. In terms of the earnings that moved up, it's about 14 million -- 14 million -- that translates into 14 EBITDA and the same amount on revenue.

You can almost ratio that by quarter.

It's almost (multiple speakers) 3 cents, 3 cents, 5 cents, which would be about 3.5 million in Q2, 4 million of EBITDA in Q3 and about 6 8 in Q4, and I can send you the knits and knats if you want.

Just another knit on stock compensation. If I understand the logic here for excluding that 2 or 3 cents in the fourth quarter from the 30 cent number, the earnings number you are talking about is because that was an acceleration from something that normally would have happened in '04. Is that right?

I think it would normally happen in Q1, but more specifically, we try to have cash EPS be a nice starting point for true cash flow. It is a non-cash charge.

But you are right. It is consistent with past years. It just happened to normally do it in the first quarter, but as a result of the overperformance, it was appropriate to put it in the fourth and probably will continue that.

Okay. There will be a similar expense in the fourth quarter of 2004, and is that included in the 118 to 119?

It is not included.

We don't include anything on the cash EPS. It's all excluded from that prospective as consistent with past reporting.

To the extent you start getting into the new option accounting and strict stock accounting, I think every company is going to have to look hard at what does to the financial statements. We just don't know at this point.

Okay. Looking at the $1.18 number, I am trying to correlate that number back to the slide eight which talks about your goal of signing three or four new Private Label accounts and two or three new Utility accounts. Does one feed into the other? Do you need to see three to four new Private Label accounts and two or three new Utility clients to get to your new guidance for 2004? Are have you already seen a lot of the new sales that you are required to hit the current numbers?

That is a good question. I think based on how Q1 is shaping up, we are off to a pretty strong start. What we call it here is blue sky, and that is revenue or earnings we need to go get with some new clients. There is not a whole heck of a lot of it left to go get for us to make the numbers. However, as we talked about before, if you don't see those announcements, that sends a pretty scary message for '05 and '06.

So as you know with me, it's always the long answer. It is '04 is in pretty good shape, but we have got to make sure we get those things done, or else '05 and '06 would, in fact, fall short.

Just the last question here. For those of us who have to start thinking about '05, is there any reason to believe at this point that the Alliance secret sauce here of 12 to 15 to 18, is there any reason that is not the right formula for looking beyond 2004?

We really don't get into trying to predict that far out. We continue to focus ahead, and we think we are positioned well for the year. We will give you further guidance as the year comes on.

But in general, it is business as usual.

The 10 to 12, 9 to 12 new accounts, what we are sharing with you today is basically no different than that we have been sharing with you in the past couple of years.

Fair enough. Thanks a lot.

Greg Smith, Merrill Lynch.

Just back to the currency, I realize this accounting makes it much more transparent, but what was still the kind of overall benefit for the full-year, whether on cash EPS or EBITDA from the strength of the Canadian dollar just so we can get an idea of what if this trend reverses dramatically how would it impact you?

Yes and that is a different question from eliminating the timing squeeze, right? So if you were to go back to January 1st of 2003 when the Canadian dollar was at 64 cents and then you looked at it on December 31st when the Canadian dollar was 77 cents, and you asked the question how much of your revenue and earnings can be related directly to just the Canadian dollar appreciation, which I believe is your question, it would be about probably I am guessing about 25 million top line and about 5 million on EBITDA.

Okay. Perfect. And then I wanted to find out what is your appetite on the portfolio acquisitions, like what you did with Stage Stores? What is your appetite, what is out there, and what does pricing look like?

When we look at business, we do not look at it as portfolio acquisitions. We are in the business of helping retailers drive sales through our loyalty model called the Private Label Card. So when we talk about pipelines of bringing on new clients, some might have balances, some might be new startups. So we have seen a continuation of our pipeline.

We have got, frankly, two or three surprise wins this year that really drove a lot of overperformance. I don't think we want to set the expectation that that is the kind of performance that we will continue in future years as we focused on our 10 to 12 announcement. Typically half of those have receivables; half don't if that gives you any indication.

Yes. That is what I was looking for. Lastly, anything on merchant processing? Any change in the outlook for that business for you guys?

Yes. I will tell you I think right from a financial prospective, it continues t decline as a percent of the overall company. I think in the fourth quarter, it was less than 10 percent of consolidated ADS. It is not that it is shrinking. It is more that the rest of the growth engines are growing so much faster. So our guess going forward would be it will continue to shrink as a percent of the overall company probably into the high single digits as we exit '04 into '05. But to the extent it is still throwing off some nice free cash flow, which it is, we still think it's a pretty decent business. It is just not a growth engine right now.

Okay. Thanks a lot you guys.

Lou Messiosio (ph), Lehman Brothers.

This is Julian for Lou. Congratulations guys. First of all, I have to hit on this '04 guidance. The EPS going from $1.03 to $1.18 to $1.19, which is essentially the 15 to 16 percent growth. Do you still stick with the prior guidance -- 18 percent EPS growth?

Yes. I will take a shot at it. Mike had the first one. Nothing has changed from our point of view in terms of where we expect the model to be. The fact of the matter is, is that it is January. It is very early on in the year. We wanted to establish a nice comfortable baseline from which we can tweak it as the year progresses. For those of you who have known us the last 11 quarters, you know we tend to start where we are extremely comfortable and then go from there as the year unfolds, and hopefully that should give you a little guidance.

Okay. Great. So also the revenue growth target, 12 percent, and EBITDA growth, 15 percent, those are still valid as well?

And constant.

Great. The last one I have, the Air Miles business, if I remember last year, it kind of launched the program, competing program. Do you have any update on that?

Air Canada has had the Aero Plan (ph) program for quite a number of years. That was not something that was just launched last year. So they have predominately targeted the business in frequent-flier.

If you were a member, our model is focused at the other 80 percent of the population that don't live on airplanes for a job and need to acquire miles from a variety of locations to be able to redeem on a frequent basis. That is really the health of our business, and I don't see any significant impact from anything that Aero Plan does in our market.

Just to Mike's point, if you recall, we just announced a huge contract with Air Canada itself to supply us --

It is on the supply-side, right, for a continued supply of seats.

Great. I was just curious whether the composition is also doing okay. Just indicating the overall market interest rates or whether you have been gaining share out of their expense?

A little different demographics. All we can say it is we are winning our fair share of (inaudible).

Thank you.

(OPERATOR INSTRUCTIONS). David Scharf, JMP Securities.

Maybe a question on each segment. On credit, you had said in the fourth quarter that your volume was trending towards higher-end retailers. Is that something that is continuing, and does that have any implications on the margins?

I think I was mentioning that our sweet spot is more -- we tend to live a little bit more at the higher-end retailer as opposed to discounters and things like that. I know you guys did some channel checks as you looked at the holiday season. I think what we saw was the fact exactly what a lot of folks read, which as the consumer spending was strong, but it was particularly strong at some of the higher-end retailers.

So you go through our client list, and we would probably say that our client list versus the overall retail universe tends to be skewed a little bit more towards the middle to upper middle part of America. And that is all I think I was trying to say. We benefited from those trends.

With delinquency rates, the last few master trust filings, there are pretty low -- 5.2, 5.3 percent -- considerably below where you were targeting. Does that have, since it is a forward indicator, what type of credit loss rate would you think we should zero in on this year?

I think obviously the overall loss rate we experienced in '03 was right on the money. The delinquency rate is your dead on. It dropped like a stone, and I would suggest certainly good things for the future.

What is unclear as we go into '04 is we would probably for now want to stick with the mid-70s loan-losses, and I would probably say you can improve your delinquency target from 6.5 to 5.5 to 6, somewhere in that range is what we're seeing.

Will it eventually pop up in lower credit losses? It will at some point, but one of the reasons why it has not shown up yet, as folks know, there was a much higher bankruptcy rate during 2003, which does not really unpack delinquencies but does hit it your credit loss. In addition, we have a little bit of clean-out work to do with the stage portfolio, and that should start coming off as we enter the spring of '04.

So directionally what we are assuming for a budget quite honestly is about mid-7s, and to the extent it is trending better than that, that would be great news. Usually you have an economic recovery, and then you have the labor force recovery and then taking up the rear in third-place is the eventual improvement in credit losses. So we don't know when that leg will finally kick in.

Any sense for margin guidance in that segment? This quarter your credit sales portfolio growth and revenue were right in line with our estimates, yet you were way way ahead on margin. Is there something in the cost structure that we are missing?

I think a lot of it is don't forget in that segment, it is not just cardholder type revenue. It is from the cardholder. A big chunk of it, especially in Q4, is merchant discount. So when sales went through the roof, all of that merchant discount poured into the segment as well, and a lot of that just drops to the bottom-line. So the very very strong holiday season, a lot of that dropped to the bottom-line, which drove the margins a lot higher.

Also, on the margin front in marketing, you mentioned the push to Web redemptions, 70 percent of them. Has that been a gradual push, or is this something that has really picked up lately, and does that have a material impact on your cost to process those redemptions?

Let me clarify the 70 percent. That was in the merchandise category. But from a company prospective, we're going to leverage all our assets to drive excess cost out of our business. So we've got a long-term plan to continue to move and eliminate costs by leveraging the Web. As we move other products, we ultimately move even air redemption more and more online. So you are not going to see any "all of a sudden" dramatic swing, but you will see continually improvement on cost structure.

I am just going to beat a dead horse as well on the guidance front just so I understand. The 18 percent bottom-line growth is still a formula that we ought to be looking at? When I apply that to $1.03, obviously I come north of $1.20, and I just want to understand the difference between conservatism, caution and making sure that the earnings model, as you see it in '04, is still intact.

Yes, listen, you are right. We are kind of beating on this thing. I will chime in here and say we don't see any change to the business model. The guidance we put out there at $1.18 to $1.19 -- again for those of you who have known us for awhile -- we like to be real comfortable as we get going here.

As each quarter unfolds, we see a lot of trends that suggest things could continue to improve as the year progresses. But it is early on, and as a result, we wanted to establish a baseline. And that is I think -- hopefully there is an up.

The last question on the Utility. This may be looking ahead, but the whole outsourced customer management segment, clearly a lot of peer plays in that area have been moving offshore at a pretty rapid pace. Is there anything about the Utility vertical that would suggest it is any different from so many other verticals -- financial services, consumer or otherwise -- that are being serviced offshore? Are your clients -- do you get a sense they are going to come back to you 12 months from now and look for a lower-cost call center alternative?

We talked about this in the last quarter, and we will continue to keep an eye on it. We do have some small operations onshore in preparation for it. But at the end of the day, as the deregulation activity happens over the next three to eight years, we may begin to see that. But it is not going to be short-term.

The Public Utility Commission and the relationships that the providers have with the state public utility commissions are very political positions. Very few of our customers are wanting to decide to go out of their area, particularly offshore. You see that as well in many of our high-end, high-quality retail operation. That customer service selling proposition has to be a quality experience, and frankly I have seen a lot of what I would have perceived as quality companies go to offshore, and I experienced myself I have been sorely disappointed in the quality of the relationship, particularly if you get beyond first or second question and then you get transferred back to the U.S.. It is a mess. But it certainly is cheap.

But our focus is on high-quality. Our customers expect that. We're trying to regain a strong loyal relationship. So there is no reason we could not to offshore as that happens however.

Wayne Johnson, SunTrust Robinson-Humphrey.

I was wondering if you could give us a little color on the wallet share in the fourth quarter for the loyalty cards on a per-store basis. Just an average. You used to talk about it on prior quarters.

On the Private Label?

Yes.

Yes. Sure. I think we talked a lot about it depends what stage and lifecycle of a client we are at. So for the core clients, you tend to max out weighing around the 25 to 30 cents of every dollar on the core clients. And then the folks who we put on in the last two to three years, because it really takes a solid three years to really crank up the wallet share to the 25 or 30 cent level, those continue to gain. And then, of course, the new folks we put on Eddie and Newport and Spiegel and all those guys, that started from ground zero to I think a nice run-rate as we went into the holiday season. It is a long answer that is not really answering your question; other than I I don't think for the core clients -- the folks who have been around for three plus years -- that we probably had much additional increase in wallet share, that more of the growth in 2003 came from very strong spending that we saw during the holidays as opposed to huge wallet share gains.

So we participated somewhat in the uptick in consumer spending. But it was not necessarily through wallet share. I think it was new clients, clients we have had been ramping up three years in the core client base who had strong holiday sales, I was say was the real story in Q4 and less so on the wallet share.

Could you also address the market opportunity question in the specialty retail area that you are focusing on? How many more -- how do you get your arms around what the total market opportunity is there?

We think we talked about this a lot before, if you slice it and dice it and you basically say we only make sense for folks who have a client base that isn't sub-prime because we will not target those folks, we think it is probably 220, 250 total prospects in our universe that would make sense in our sandbox so to speak. Of those 250, those are folks who have 100 million or more of retail sales, and I would say the last count we had was less than half -- even half a program today which is surprising to a lot of people. So I would say at least half the market does not even have a program.

The other half -- call at 100 plus -- we have 63 of those. So there is an awful lot of room in terms of folks who don't quite have the cards, who don't have a program yet, as well as some remaining folks who are in-house who we would love to have a chat with.

Plus low penetration of some of the newer customers?

Correct.

That is terrific. Thanks very much.

Thank you. Any more, operator?

Ladies and gentlemen, we have reached the end of our allotted time for questions and answers. I would now like to turn the call back over to management.

Thank you, and just to wrap up folks, we certainly appreciate your ongoing support over the years. We are excited about 2004. Our business model and the fundamentals are strong, and we are looking forward to a great year. We will talk to you next quarter. Thank you.