Bread Financial Holdings Inc (BFH) 2004 Q1 法說會逐字稿

Good afternoon. My name is Alexandria and I will be your conference facilitator. At this time I would like to welcome everyone to the alliance Alliance Data systems first quarter 2004 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number 1 on your telephone key pad. If you would like to withdraw your question you may do so by pressing star 2.

I would now like to turn the conference over to Julie Prozeller of Financial Dynamics. Ms. Prozeller you may begin

Thank you operator. Good evening everyone. By now you should have received a copy of the company's first quarter 2004 earnings release. If you haven't, please call Financial Dynamics at 212-850-5608. On the call today we have Mike Parks; chairman and CEO and Ed Heffernan; CFO of Alliance Data Systems.

Before we begin I would like to remind that some of the comments made on today'd call may contain forward-looking statements. These statements are subject to the risks and uncertainties described in the company's earnings release and other filings with the FCC. Alliance Data Systems has no obligation to update the information presented on the call. Also in today's call our speakers will reference certain nonGAAP financial measures, which we believe provide useful information for investors. Reconciliations of those measures to GAAP will be posted on the investor relations portion of our website at www.alliancedatasystems.com.

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

Thank you very much. Thanks for joining us. If you'll turn the slide to the agenda page, as we normally do, I'll hit the highlights of the quarter and talk a little bit about the outlook for the year. Ed will then give a more detailed financial review and then we'll take your question.

Turning on to the next slide to first quarter highlights as you might expect, I'm very pleased to announce that we've wrapped up an incredible first quarter the best quarter in our history. We've exceeded all of our targets and, frankly, over-performed, as you've seen in the press release. Strong performances from all three of our growth engines, Utility Services, our Private Label Services unit and our AIRMILES Reward Program.

As you see on the slide our revenue for the first quarter was $312 million, up 30% over last year. EBITDA at million, up 73%. And cash earnings per share was 43 cents, over 100% improvement over last year.

Our key metrics out performed our expectations in the quarter. Double digit growth in both statements and transactions. Credit sales were up 17%. In miles issued an redeemed were ahead of planned.

Let's turn to the next slide and we'll review the highlights of each of the engines and we're going to start with Utility Services. As you recall, our fourth quarter was a strong quarter and coming off that we remain on target as it relates to some of the key initiatives that we had in place going into the year, specifically focusing on the integration activities with our recent acquisitions, Orcon and CBSI.

Orcon, as you recall, provides customer care and billing services to the mid-tier utility market and CBSI provides metering services that include automated meter reading billing and collecting for clients, managing commercial properties with multiple tenants. We also remain on track converting Orlando utilities, the customer information and billing system is underway and if you'll recall they are one of the largest in the country in terms of municipal utilities.

We continue to be recognized by the industry as well and our clients for outstanding service delivery and I want to touch a minute on that. Certainly, our distinctions here further enhance our confidence and trust with our clients and as well as our people.

For Georgia Natural Gas, specifically, we've demonstrated and have been recently recognized for excellence in customer service. Over the last quarter the Public Utility Commissions score card on customer service show G&G receiving the lowest number of complaints of all utilities. G&G also ranked number one in overall customer satisfaction in a survey conducted by J.D. Power. And in February we began providing electronic bill presentment and payment for Puget Sound, the largest electric utility in Washington state. Now they offer over 1.5 million customers the convenience of online bill paying. All in all utility had a very strong quarter.

Turn to the next slide we'll talk about the private label business. Our private label group had an outstanding quarter as a result of strong business development activity, coupled with high teams growth and credit sales.

In February we announced a five year agreement to provide private label programming for design within reach. They're a national multichannel retailer focusing on modern design products for home and office. They selected us for multichannel expertise, particularly, in retail and our unique approach in using private label as our loyalty tool.

This quarter we announced and completed a major expansion with our partner, Stage Tours, as well to provide private label services to our 180,000 accounts under the Peebles' brand. They will generate, roughly, $40 million in AR. Peeble's, as a reminder again, is a family apparel chain with over 140 stores in the mid Atlantic, southwestern and mid western regions of the U.S.. We also extended our relationship with The Buckle for another five years. The Buckle operates over 300 casual apparel stores for young men and women.

And lastly, a key driver of our success and, frankly, over-performance came in the form of strong credit sales. Credit sales increased by 17% over last year, as I mentioned earlier. Growth coming from both our core as well as the new portfolios that we brought on board over the last 24 months. Credit sales were further aided by gains in total retail sales. You've probably seen, released just last week, strong increases in all segments, particularly in our targeted segments, clothing and home furnishing driving results beyond really our expectations.

Now, let's take a look at the loyalty group and our AIRMILES Reward Program on the next slide. We're most excited about the recent announcement about the launch of our first tri-branded card, providing another opportunity for growth in ur AIRMILES Program. Program branded with the Bank of Montreal's MasterCard and WestJet, the regional Canadian airline, the card will provide enhanced opportunities for collectors to earn reward miles while also bringing unique MasterCard and WestJet benefits to their card holders.

Turning now to talk about renewal activity, are certainly as a strong quarter, early in the quarter we announced the signing of a long-term agreement with Bank of Montreal's MasterCard program. The Bank of Montreal is one of our founding sponsor's program. This renewal coupled with the renewal the renewed contract signed in 2002 with their retail banner underscores the strong, strong consumer appeal of this program in Canada.

We're also very pleased we've extended our relationship with another key sponsor, Shell Canada. Shell has been a participant in the program for over ten years.

Concurrent with our tri-branded agreement we also extended both our sponsor and reward supplier agreements with WestJet and we're very excited about their commitment, long-term commitment to this program. In addition to WestJet we signed a long-term contract renewal with Air Canada to continue as a reward supplier for our AIRMILES Program while the majority of our reward miles are redeemed for nonair travel these renewals provide our collectors with continued strong supply of travel rewards.

And lastly, in the first quarter we expanded our sponsor base to include Purolator Courier and Samsung Electronics. Purolator is the most popular courier among Canadian small businesses and our agreement with Samsung is as a sponsor of our AIRMILES incentive program. These partnerships reinforce the value of our AIRMILES Reward Program in our business to business product offering.

Turning now, I'd like to touch on a few other aspects of the business by way of update. Last year we announced a pilot project with 7-11, as you recall, to provide a store value proprietary card and loyalty marketing services as well as an expansion into their VCom product, as well. We're pleased that the pilot has now been recently expanded to their 1000th VCom location. While still a pilot stage running very strongly, we're very hopeful of the continued success of this program.

The combined store value and our marketing functionality allows the consumers to store money on the VCom card, either through cashing checks or loading cash on to the card through kiosks. We believe it will provide a unique fit for the convenience customer base and will further provide proof of our valued proposition of varying transaction processing and marketing skills.

Also in our traditional merchant processing business we signed a network services agreement with Circle K to provide card authorization and capture. Circle K is one of the largest convenience store chains in the country, operating nearly 1700 stores.

And finally, on the slide, as you see, I'm very proud of the positive and rewarding culture we've developed here at Alliance Data. For a second year in a row we've been named one of Dallas Fort Worth's "Best Places To Work" by the Dallas Business Journal.

All in all it's been a strong quarter. We're executing on our business strategy and well on our way to meeting the targets for the year. While still early, we must remain focused. There's still a lot to do. But having said that we're off to a great start and I'm excited about the momentum we've created.

Turning to the next slide, let's take a look at the full year outlook and talk a little bit about guidance. As you have seen each of our growth engines turned in a very strong first quarter. Additionally, we have renewed all major clients, providing us with great flexibility, excuse me, visibility and predictability for the rest of the year.

The quarter came well ahead of our expectation in part due to our performance and in part due to some FX and timing items. While bullish, we want to temper that with the fact that it's still early in the year and our desire to build and invest for 2005, 2006 growth. Ed will give you a few more details in the financial update to come in a second.

Having said that, we're very comfortable with raising our guidance for the year from $1.30 to $1.33 per share, representing an increase from last year of over 25%, as you can see on the slide, almost 30%, and well ahead of our long-term growth module.

Before I turn it over to Ed for more detailed review I want to say thank you to all Alliance Data Associates around North America. I appreciate your focus and commitment and thanks for a great fast start. Ed?

Thanks, Mike. Why don't we turn to the consolidator results. As Mike mentioned, we sure had a good one. The first quarter marked our 12th quarter or our three year an anniversary of the public company and more importantly it further extended the track record of delivering or over delivering on what we promised.

Turning to revenues, which shot up 30% in the quarter, all three growth engines, that would be the Loyalty Miles, Utility Services and Private Label Services and hence all three reporting segments contributed solid double digit growth. A huge book of business put on over the last two years plus solid performances from our more tenured client base drove the results. Very strong organic top line growth was and should continue to be a key theme throughout the quarter and the year.

EBITDA came in around $80 million, which was up 70% from last year. Similar to revenues, performance was strong across all engines and segments at strong organic revenue growth combined with ongoing operating expense leverage to drive overall results.

Operating EBITDA, which is a proxy for operating cash flow, rose to the 61% growth rate of the company generated just under $80 million in operating cash.

We should note here that operating EBITDA tends to run about $20 million ahead of reporting EBITDA each year, or about $5 million a quarter. Since it's only meant as a proxy for operating cash flow it can jump around a bit on a quarterly basis depending upon when cash is physically received in Canada and moved into or out of the trust account. But the bottom line is last quarter, which was Q4, it was $8 million ahead of EBITDA. This quarter it's flat due to timing, but we're very comfortable that we should still run about $20 million above reported EBITDA on a 12 month basis.

Finally, cash EPS soared over %100 to 43 cents per share. Mike and I found it interesting that less than four years ago our earnings for the entire year totaled only 40 cents.

Okay. Before we hit the segments we thought we'd share a little bit of additional color regarding the makeup of our consolidated results. Again, at a very high level no weak spots across any of the growth engines. We were looking for about 27 to 28 cents for the quarter or about a 30% growth rate, instead we came in with an extra 15 cents of over-performance, driving total growth north of 100%.

I think I'd split the over-performance into two pieces, each worth about the same. Let's refer to the first piece of, again, 78 cents of, what I would call, FX and timing items as Q1 benefited a couple of pennies from the stronger Canadian dollar and around a nickel from certain expenses, which have been delayed a bit since the original guidance was provided. These would include marketing expenses such as new sponsor launches in Canada as well as the new U.S. pilots of our new prepaid and Dynamic Value Program products.

The FX benefits anniversaries in Q2 in turn slightly negative after that, while the nickel of markets and new product expenses will kick in during Q2 and remain during the remainder of the year. We mention this so we need to keep this in mind as we look ahead.

The second piece also about 7 or 8 cents is pure over-performance, pure and simple. Hopefully there's more to come. It's still much too early to make a call on that. Our new guidance reflects much of the unexpected good news, but also tempers it to reflect how early it is in the year as well as the need for us to invest in and build the business for 2005 and beyond.

Okay. Turning to the segments. First up is Transaction Services, which 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.

To understand the segment, you should look at two things. First, look at the number of statements generated, which captures the activities of both Private Label and Utility and combine the engines. These engines achieved statement or new account growth north of 20%.

Second, look at the pricing power in the two engines, once again, revenue per statement remained firm, which is consistent with what we've been seeing and what we've been saying since going public three years ago. Statement growth plus firm pricing captures close to 85% of the segment.

The remaining pieces is our traditional merchant acquiring business, which remains relatively flat but stable and is now only 15% of the segment or well below %10 of the rest of the company. Our other driver that we release will transaction processed relates to that business.

Okay. Back to Private Label and Utility. What's behind the growth? In Utilities we continue to benefit from the larger than expected book of business put on last year including clients such as AEP [Centreca], TXU in Orlando, as well as the [INAUDIBLE] aquisitions of CBSI and the submetering space and Orcon in the [INAUDIBLE] space. Overall, we're looking for top line growth north of 30% in this engine this year and the pipeline this year looks solid as well.

Turning to Private Label, same deal. Last year's book of business was huge and included Eddie Bauer, Spiegel, Newport News, Stage Stores, American Home, Shop at Home and Fortunoff. This business continues to ramp up and is already being joined by Design Within Reach and Peebles', two new deals announced this year.

Looking ahead, we expect another very solid year of double digit organic growth in this segment for both revenue and EBITDA. And we should note that EBITDA may be a bit choppy depending on the timing of ramp up of pilots for Prepaid and Dynamic Value products, as well as some integration activities in Utilities. But again, nothing too exciting there.

Next up, Credit Services, which continue to out-perform. Before we hit the details the performance at high level can be explained by three things. First, the enormous book of new business put on during the last two years. Second, the post holiday consumer spending spree at higher end specialty retailers ie. our Sweet Spot and three continued good news on operating expenses.

So let's walk through the four key drivers of the P&L on this segment, which are credit sales portfolio growth funding costs and credit losses. First credit sales came in well ahead of plan at over 1.2 billion representing a 17% growth rate. Credit sales drive our fee income in the form of merchant fees.

While we expected strong growth due to the enormous amount of new business signed over the last two years we were also pleasantly surprised by the ongoing strength of consumer spending throughout Q1, especially at the high end specialty retailers. In my cases retailer sales were at their strongest in three years. Explanations range from higher consumer optimism, tax rebates, low interest rates early spring weather and fresh fashions. In any event, strong spending plus new clients drove higher than expected results. The same holds true for portfolio growth, which was up in the mid teens, benefited from the same drivers.

So let's now talk a little bit about operating expenses. We continue to see positive news. First would be credit losses and credit quality. This year we targeted around a 7.5% rate for credit losses and a 6% for delinquencies. In Q1 against that 7.5% target, losses came in closer to 7% and delinquencies were well below 6%. While the prime quality nature of our client base limits the swings in this rate, the firming U.S. employment picture certainly won't hurt, at least at the margin.

Now, I also want to mention that coming up in Q2 you should look for seasonal up tick in losses as bankruptcies spike due to some card holders running out of gas post holiday and the reverse should occur for delinquencies as tax rebates help less strained card holders cure their delinquency status. Overall, for the year we are in very good shape.

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 future. As a result, even a rising rate environment this year should not dent the good news.

Wrapping up credit, the monster quarter, however still too early to determine if our 10 million active card holders can hang in there as strongly as they did in Q1, given the fading benefits from tax rebates and low interest rates. Rather, higher interest rates and gas prices are more likely to weigh on their minds. So, while we expect a very strong remainder of the year, we're assuming only moderate over-performance going forward.

Finally, marketing services, which essentially is our Loyalty AIRMILES Program in Canada, came in above expectations at the top line and enjoyed a 30% growth and EBITDA soared over 80%. Certainly the results were very strong, but they were in fact aided by an FX benefit of 7 to $8 million on the top line and 2 cents EPS on the bottom line.

In addition, EBITDA has yet to reflect expenses from 2004's major marketing initiatives. Overall, however, we expect strong results the remainder of the year as the business continues to speed along.

The group in Canada stood out even more than usual during the quarter as it not only nailed down all three of its major renewals, that would be the Bank of Montreal, Shell and Air Canada, but also launched, as Mike talked about, a new growth vehicle through The Bank of Montreal WestJet credit card. These new growth channels should continue to propel the business at our targeted mid-teens growth rate.

All right. A bit long but that's it for the segments. Lets's move right into the balance sheet. Next slide. Real quick here, three items of note. First capital structure and strength. To remind folks, our key metric at our company is core debt, which excludes CDs divided by LTM operating cash flow or operating EBITDA, since this is the key ratio used in all our debt covenants. Our target is to maintain a healthy investment grade profile, which we believe requires a two times or less, that is two times to core debt cash flow. And against that target we came in at less than 1 times based on core debt on $228 million and LTM EBITDA of a 1/4 billion.

Next, all in net debt, which includes CDs and cash, basically throwing everything together, improved by $110 million, versus year-end. Driving that improvement was the strong operating cash generated from the business in Q1. Also, a good chunk of cash was freed up following the typical post holiday seasonal decline in cash requirements relating to funding AR and balance sheet.

Finally, deferred revenue of $465 million relating to our Canadian business was flat to year-end due solely to a lower translation rate for the Canadian dollar. Versus last year at this time however, it's up $80 million more than double our usual rate. That's it on the balance sheet.

Let's turn to the next slide. We'll alk a little bit about guidance here. We set guidance back in January of $1.18, $1.19 per share. What we decided to do would be to flow through the true over-performance in Q1, which would exclude the FX and timing items, but the true over-performances of the businesses we talked about was 7 or 8 cents. Then we basically add another nickel or so for expected additional upside this year. So all in, we raised to $1.30 to $1.33 per share, which represents a growth rate of 26 to 29%, versus last year.

We believe the revised guidance reflects both a stronger than expected growth that we're seeing but also provides us with sufficient room to invest in a number of initiatives to better prepare for the Company's growth in 2005 and 2006.

Finally, let's talk a little bit about Q2. Credit seasonality kicks in as card holders pay down balances. Therefore we get lower finance fees and at the same time credit losses, as I mentioned earlier, tends to spike up a little bit. That is, it's the end of the line for some stretched Q4 holiday shoppers. This seasonal drag will be in addition to no expected pickup in FX as well as the rollout of the Canadian U.S. marketing and new product initiatives.

What's it all mean? Nonetheless, over-performance we expect to continue and as such we're moving Q2 from around 29 cents to 31 to 32 cents, representing a growth rate of at least 30%, versus prior year.

All right. Almost done. Next slide would be free cash flow. Looking at free cash flow we've moved that higher from $1.50 per share to at least $1.60 per share. Our free cash flow reflects the benefits of certain profits generated in cash received and our Loyalty AIRMILES business, which are deferred for accounting purposes. It also includes capex costs, interest payments and taxes. And as such pure free cash of $1.60 runs about 30 cents higher than are expected reported cash EPS target of $1.30.

Okay. Let's wrap up with our top questions that we've been hearing from folks during the quarter.

Obviously, the number one question, probably the last 48 hours, would be the impact of rising interest rates. I think we tried to hit this pretty hard in our last two calls but we'll do it again. You know, for those folks who try to compare us, the private label business a little bit with bank cards, it's apples and oranges. In our business our cards are fixed rate. We fund it with fixed rate money, we basically ladder that funding over a number of years so only a piece of it comes due each year.

So what's that all mean? We've already locked down a large chunk of the portfolio on the funding side. Those funds that are coming that are coming due this year are actually coming due at rates that are a little bit north of where rates are right now even with the recent spike up. So we should be in pretty good shape. You know, borrowing some huge run in rates, I think we're well positioned in a rising rate environment.

The next question we get is on the foreign exchange rates. The Canadian U.S. dollar rate spiked up dramatically in the first quarter of last year and then has pretty much leveled off since last May, you know, right around that 75 cent level, but in Q1, that was before the big spike up. It added a couple of pennies but for the remainder of if year we expect it to be probably slightly negative one or two cents does seem to be drifting back a little bit. But overall, nothing too major and we should be in good shape there as well.

Also been getting some questions on the Spiegel Family, Spiegel, Eddie Bauer and Newport News, a lot of talk about they're up for sale. I think one of them already announced they were sold. From our perspective it's very much business as usual. We do have ten year separate contracts all those contracts are assignable to the new entities.

And then finally, equity ownership, getting a lot of questions over the last, probably, year in terms of what's next. As most of you know we did do two secondaries last year and Welsh Carson has, in some form or another, primarily through distributions, has pushed out about 12 million shares as well. But overall, in the last 12 months we have pushed 30 million shares, which were added to the public float the major activity is done here. Limited is out completely. We expect Welsh Carson to do what they have done very much in the past with other companies, which is a very slow gradual series of distributions over a number of years, nothing too dramatic in being done opportunistically.

So, I have been getting some questions is there a secondary coming? There is not and I think people should feel pretty comfortable that it's pretty much business as usual and Welsh will distribute in doses over a number of years. So nothing too exciting there as well. We did attach the last slide here to show you the dramatic shift from insider owned to the public float environment where public and management are now the vast majority of the company at over 60%.

Finally, if you were to turn to performance 2000 to 2004, I did update it to reflect some new guidance revenue. You know, we still expect to be north of a billion 150. EBITDA we've moved up to about a quarter billion. I think initially we had about 235. And then cash EPS we talked about $1.30, $1.32 moved up significantly from $1.18, $1.19.

That's pretty much it. I think I'll probably kick it back over to Mike, but in general, it was a good one. We expect to have a good year, off to a good start, long way to go, and that's it.

Thanks, Ed. You said it right. We have a great start to the year and we're confident about the rest of the year and we'll now turn it open to questions. Operator

Certainly, sir. I would like to remind everyone, in order to ask your question, please press star and then the number 1 on your telephone key pad at this time. We'll pause for just a moment to compile the Q and A roster.

Your first question is from Jim Kissane of Bear Stearns.

Thanks. Hey, Mike and Ed, great job again. It seems like a lot of the business signings recently have been more focused on the renewals. Can you comment on the pipeline of the new business, I guess to feed the machine for 05?

You bet, Jim. The pipeline as we've talked about in the past is typically 10 to12 new signings a year. Across the three engines 9 to 12, if you recall the 2002, 2001 that's our typical business model. Last year we got out ahead of it pretty good and we're more successful than typically we are. So we're back on track to have a good pipeline across all three. You noticed two signings already in the retail arena. One new one with our loyalty tri-brand card and in effect we've got three of the 10 or 12 knocked out already and we're in good shape

And given the really strong cash flow now, the super clean balance sheet and maybe some concern about the credit business becoming much, much bigger just given the external environment, you know, can you talk about the M and A strategy here and maybe to reduce the exposure to credit?

Sure. I'll kick in here. We've talked to a lot of folks about this. Our long-term model would be Jim, to have about half the company resident in the transaction services segment, which of course would capture Utility and Private Label processing customer care and marketing. And about a quarter of the company out of Canada and about a quarter of the company in the credit piece. That's sort of where we were a few years ago. It's cycled much more into a little bit heavier on the credit side.

My guess is if we were to look out 2 or 3 years, there's no question it is cycling back the other way, probably starting as soon as next year. From a long-term perspective, we review our Canadian business as sort of a mid-teens growth engine. We would view our utility business as 20% plus and we would view the private label, which would encompass credit as, most likely, low teens, 11, 12% long-term, and they've just been on such a terror the last couple of years they've sort of overshadowed the strong growth in the other one. So if you use those as your long-term growth rates it should start cycling back the other way

And one last one. Can you break out the utility revenue in the quarter or at least the growth rate and where you are in terms of markings there

Yeah I think utility will probably stick to where we ended last year, Jim, which is probably, you know, we tripped across the 10% line. We're, right now, integrating CBSI and Orcon, so it's a little bit - - we want to make sure those are fully cleaned up. But in terms of utility, I think the numbers we wanted to give I think we did a little bit north of $130 last year. Our goal is to do about $180 this year and so I think we're well on track to hit that number. The revenues in Q1 were a little bit north of $40 million. So that would be about a 50% growth rate.

Excellent. Thanks. Great job.

Thanks, Jim. Next question operator

Your next question is from the line of Dris Upitis with CSFB

Hi. You just mentioned the potential for some of the retail spinning tail wind was slow. Can you just comment on what you saw on March and so far in April on that front or if you've actually seen any of that or if you're being cautious there

I think we've continued to see strong performance. I think you've seen publicly reported in March. But it's really too tough to tell. You know that the business continues to perform well. You've probably seen also in the paper particularly strong responses from fashion this year and warm weather early hitting, there's a lot of things that also have some impact on it. But I would say we're being cautiously optimistic for the year.

Yeah. I think to add to Mike's point, we haven't seen the slow down. However, something is fueling the liquidity out there in Q1 where you had purchasing, basically, go through the roof, but at the same time, we actually saw improvements in delinquencies and losses. So, people are not running up their balancing. They're not leveraging up. They're spending and they're paying off and they're doing so in good fashion. So, hopefully that holds. And if it does hold then there's probably additional good news later on in the year, but we want to be comfortable with the guidance that we gave and I think to Mike's point that's why we're probably going to be a little bit careful, you know, it still is only April. So hopefully it holds.

Okay. And then can you elaborate a little bit on the marketing and prepaid expenses? You said the timing of that moved up, what sorts of expenses those were and if all of those do end up coming back in the third and fourth quarters.

Well, the timing expense, and Ed can give you some details on the actual dollars, as you note, is we're going to be rolling out the tri-brand program. It's not been the exact date announced yet so I can't share that with you and we continue to roll out here that the remainder of the year the 1,000 some locations and we've got some other kind of pilot things we're doing. You can comment on the exact dollars

Yeah. We haven't really dotted all the Is and crossed all the Ts. But I would say if you would break the expenses are going to start unwinding the other way in Canada, oh gosh, it's probably about $15 million of marketing and sponsor promotion and mega mile promotion and all sorts of other good stuff we're doing up there. That's going to hit Q2, Q3, Q4. And then on top of that 15 it's probably somewhere on the order of 10 to $12 million that we have earmarked right now to facilitate the rollout and sponsorship in here in the states for the programs Mike talked about.

You add those two together and then we expect probably a negative drag from the Canadian dollar of a couple pennies a quarter and that's sort of how we backed into the math.

Okay. Thanks. And then just finally on the credit side, sounds like you have a lot of things working your direction still there. The mid to high teen margin that you're seeing on the portfolio, can you comment on - - do you think that there's much more upside from that? As we go through the year, I know this is a seasonally strong period as well, or do you think that you're somewhat topped out on that line?

I tell you in Q1 we're topped out. That was an interesting quarter where normally we make a bunch of money from the merchants through merchant fees. In Q4 that tends to fall off dramatically and Q1 is replaced by finance charge from the card holder. This year it didn't fall off. So you know, we had all the merchant fees, which are all in that credit segment as well as all the finance charge all combined to flow o the bottom line. But in terms of the high teens, I think that's doable.

Going forward nothing would suggest at this point that we're going to see a reversal in the good news on either the funding side, due to the way we finance the portfolio, or delinquencies and credit losses. We're going to have the seasonal uptake in Q2 as we talked about in losses and we're going to get dinged a little bit on finance charges, but on a full year basis I think that's a reasonable assumption.

Okay. Great. Thanks.

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

Hi, it's actually [INAUDIBLE] filling in for Dirk. I was wondering if 7-11 made any commitments to marketing that prepaid product

We have joint commitments yes. I can't share the specific details of the dollars et cetera, but it is a joint rollout with them.

Okay. And then in the AIRMILES business what's driving the big gross in redemptions there? Has something fundamentally changed?

No I think we and with sort of tried to talk about this in the past few years, I think the two drivers that we talked about AIRMILES issued and AIRMILES redeemed, we shy away from quarterly estimates in terms of growth, because it is very much dependent upon sponsor rollouts and promotions and mega miles and all this other stuff, media spend et cetera. But on a full year basis, I think first quarter came in right around, so to the full year run rate, of 9 or 10% for miles issued and then our miles redeemed we've always said we'd like an 18 to 20% growth rate. So Q1 was a little bit up. My guess is the latter part of the year will be a little bit down. So I think we're very comfortable that it's tracking to our 10 and 20 model of issued and redeemed that we talked about.

Okay. Great. And what's the timing and the sizing of the next ABS refinancing again?

Sure. We're packing our bags as we speak. We'll be hitting the road in a couple of weeks. Our goal is to get this thing priced probably by middle of next month.

I think what we're going to try to do, even though we've been locking down a lot, there's been so much new business that was put on the last couple of years, and the last year especially, that's just been sitting in variable rate funding conduits that we want to lock that thing down. So, we will look to get our first deal done in May. It will be about half a billion dollars. And then there's another one that's maturing in the fall and we'll just roll that one over. And that should pretty much complete everything and lock probably 90% of the portfolio down going into probably a rising rate environment next year.

Very good. Great job.

Thank you.

Thanks.

Your next question is from David Scharf of JMP Securities.

Good afternoon. Hey, Ed can you give us a sense for the utility business, just what the organic gross is there when you kind of X out the acquisitions? Are you converting more of your billing customers to more full service customer care customers or should we for the time being focus on more acquisitions right now.

I'll talk a little bit and then turn over to Mike, but I would say it depends. What we look for is a mixture very similar to private label where we have announced some have an existing program that will take over immediately and some are new programs starting from scratch. To the extent in Utilities it is, for example, a regulated utility with an existing customer base your organic growth is probably at the growth rate of the general population or the meters. So probably my guess is 3 or 4%. You then layer on top of that the deregulated clients that are starting from zero, their growth rate, you know obviously is - - can't compute it. It's just very very high and hopefully between the two we can get up to a double digit sort of organic growth rate. And then we would then layer on as we're building math a couple of these tuck -ins to get us north of that 20% long-term growth rate that we're looking for. Mike?

And expand on that a minute, you saw us convert in the call center business fourth quarter. Obviously, one of the skills that we bring from our retail heritage is strong collection kind of capabilities that as they need some collection expertise we have expanded our service offerings beyond just customer service questions and answers, into actual collection activity for the first time. And we've also begun doing some segmented profiling of their database and customers. So we continue to push customer relationship along the curve to expand the relationship all along the product the product offering.

Maybe just a hypothetical example, can you give me a sense, for let's say 100,000 person or account you know large investor on utility client, you know what the revenue opportunity is there when you're just doing statementing versus statementing plus let's just say the first pass at call center activity rudimentary call service work.

I do want to make a clarification. The base starting point would be what we call the CIS system that does all the record keeping and that creates the files necessary to keep track of the accounts. It might not even include the physical printing of the statements. That certainly is something we do for most of them but it is not necessarily 100%.

And then you have, as I mentioned earlier, the customer service fees and then you have the collection offering and then you have the marketing piece. And frankly, just because competitively we prefer not to unbundle our pricing in public. Or not to share those specific detail

Fair enough. Lastly, you know, Ed, on the forward outlook in credit services you've mentioned what your sort of average annual targets are for credit losses at 7.5%. They've obviously been coming in considerably below that and your March master trust filings just came in today and it is below 70 again.

Are the full year estimate or guidance you're providing today, is that assuming an average credit loss of 7.5% still or should we assume it's below that and is there more room?

Yeah. I don't think it's going to differ a lot from sort of our long-term target of 7.5. I would caution you against those master trust filings in Q1. Again, as you know, it's a very seasonal business from our loss perspective. We may do 7% flat in Q1. I can tell you flat out, it is going to jump up to 7.7 or so in Q2 and then come all the way back down to probably low to mid 7s for the remainder of the year.

So Q1 tends to be a pretty low quarter. I wouldn't use that as representing the full year, but between Q1 and Q2 I think you're going to be at about 7.5. Listen, to the extent that the delinquency numbers continue to come in well above, from a good sense, what we thought, sooner or later some of that will break through to losses.

Right. Well I was going to ask, you know, throughout the quarter it looks like delinquencies, January was 5.6 you just filed March today of 5.1 that's certainly the best forward indicator for 180 day charge offs. Given that do you think Q1 would actually come in below that 7778, because there's an awful lot of leverage there.

What we haven't seen yet is we haven't seen the delinquency flows break into the losses, meaning that we are seeing some very nice activity at the front end of the bell there, the early stage delinquencies, but we're finding a greater percentage of the delinquencies are flowing fully to write-offs.

So hopefully it's cleaning out the pipe is the way we look at it and we'll have a pretty good - - or a much better picture you know, when we release Q2 in July. And then I think in July we'll be able to really step up and see if this stuff is breaking into lower losses. But I think it's just a little bit too early to tell right now

Great. Thanks a lot.

Your next question is from Peter Swanson of Piper Jaffray.

I had a question about the 04 guidance and the incremental investments to drive growth for 2004 and 2005. Can you help me understand, earlier you mentioned 25 to $27 million both in Canada and also the sponsorships here. Was that more related to timing or does that also include the incremental investments for '05, '06?

Yeah. The 25 isn't all incremental to our historical number. The majority of that Ed was referring to was just the timing of our normal marketing expenses within our budget, which made Q1 look a little bit more favorable.

Okay. So parts of it would be incremental. Can you give me maybe an idea of what types of projects it would be working on today to help that '05 and 06 to what the growth rate could be in the out years.

Some of the expenses that - - I'm sorry go ahead

I'm sorry. You know what the expenses more importantly what the projects would be for the future growth.

Sure. They're all around our,what we would call our innovation area. Certainly the example of the Dynamic Value Program and gift card starting with 7-11 and looking at other client relationships, looking at that across our retail spectrum and then moving on to such things as our retail group, looking at some co-branded opportunities in the specific segmented approach with our retailers.

We're also looking - - you'll see some expenses this year associated with looking at some U.S. loyalty opportunities both one-off loyalty programs that we will manage on behalf of retailers as well as looking at some, what we'd call, some small regional coalition ideas. We continue to look at investing and growing in some of our acquisition area, we talked about in the utility space. Those are ones that tend to be the ones that come to mind right now. Ed, any others

No. I think in terms of if you're up there taking in tie in stuff I would say that Canadian marketing and the U.S. pilot launches. We talked about that number 25 to $27 million bucks as we talked about that's not incremental. I mean that is our marketing and pilot rollout fund for the year. We just didn't spend any in Q1 and that's about 20 cents and then FX will probably ding us a couple pennies a quarter. So that's how we come up with the 25 to 26 cents of sort of timing and FX expenses for the remainder of the year, none of which hit in Q1.

Okay. Thanks. That's very helpful. And one question on your wallet share numbers. Did you see those increase with the strong spending or has - - what are the trends with wallet share and the private label card?

Obviously each customer has some pluses and minuses. Strong total sales across the board, I would say on average the wallet share was fairly flat, as we talk about the strong up winds are back in terms of retail sales sometimes they get a lot of new customer business in the door that isn't our private label account that tends to be one time that from a short term perspective would dampen that wallet share, but still continued strong performance.

Thanks good job in the quarter.

Your next question is from Charles Trafton of America's Growth Capital.

Hi. Thanks.

Hi Charles.

On that question of the wallet share, you used to bang around kind of the growth formula for credit of something like 6% from new clients maybe 4 or 5 from share wallet and 2 or 3 from same store to get to a double digit top line growth. Do you have a flavor for what that might have looked like in the this last quarter how that %17 credit sales growth number came up?

Yeah, I think from a credit sales perspective you can go right into the individual retailers who for the most part just put up some teller numbers.

Right.

And quite honestly we went on for the ride.

That was double digit instead of two or three

Let's say that's high single digits or something like that. Again it's gross sales not same store sales that are more relevant for us.

Right.

So if those were in the 6 to 8% range, which I believe they were probably across our client base or even higher then top of that you have the book of business that continues to grow from last year and that gets you into probably the low teens at that point and then some new clients that we've been putting on recently to get us there.

But I say the big lift we got was not only the huge book of business, I mean we were expecting some pretty strong low to mid teens growth, but we got probably an extra 3 or 4 points of growth just from the retail environment.

Right. Client concentration at this point, do you have a top five number? Top three?

I don't.

Top five would be in the 30s. 39 percentage.

And those are all locked up

By the way, that includes the limited as one entity. If you - -

Right.

You know, if you break them out as individual brands, that drops into the lower portion of the 30s.

Yeah. And the big ones obviously Limited being the biggest, they're locked down through '09 [INAUDIBLE], which is the holding company and owner for folks like Chadwick's and stuff.

Bank of Montreal.

Those are 2013 and Bank of Montreal we just renewed, as you know.

Well that concentration number hasn't changed much in the last six months, because those guys are growing pretty well.

Yeah, I would say that's accurate.

Last question. The 25 or $27 million in marketing expense coming up, Ed, do you capitalize any of that or does that all flow through

Flow through.

Great. Thank you.

Thanks, Charles.

Your next question is from Collin Gillis of Adams Harkness and Hill.

Hi Mike and Ed.

Hi.

Congratulations on an excellent quarter. So just a little different take on the interest rate question. Are you able to accelerate any of the maturities on the out outstanding portfolio just to help role over at the current rates? And separately we talked about a lockdown hitting about a 90% rate. Over what time frame are we talking about that lock down happening like the last 18 months or so?

Yeah in terms of accelerating and trying to lock down I tell you we don't get into that. What we try to do is we're managing for sort of a 10 or 20 year cycle here. So when these things come up and come due, that's when we just roll them over and keep it going and what we try to do is have a chunk coming due each year.

In terms of you know, getting in front of the interest rate movement that have gone up, we really don't do that. We have a deal maturing in the fall. We will wait until that matures and then roll that over into long-term money. We have accelerated the processes of this spring deal based on the things that have been happening the last few days. We decided to get out there and get after it a little bit fast faster.

So this year, if all goes well, we should be doing about a billion and a half of total long-term fixed rate deals, which is about double our average. We have decided to accelerate things so that as we go into next year we probably don't have really much of anything to do. Other than that it's pretty much annual

Okay. Great and then like the five year vehicles it's pretty much the preferred vehicle?

What we try to do is we ladder the maturity spectrum so that we could be anywhere from 2 to 7. And what we want to do is make sure the bond investor base has something that they have some type of liquidity event every single year. So certainly it won't be anything coming due next year, but there may be a piece that comes due the following year and then every year after that for the next five years.

Okay. Thank you very much.

Your next question is from Lou Miscioscia with Lehman Brothers

Okay. Great. Hopefully I'm coming through okay.

Loud and clear

Okay. I guess my question is pretty simple. You know you continue to have great success and competitors that maybe weren't as focused on the different business areas can you give us an update on the main two segments, maybe not the Canadian, but maybe the utilities and private label card and if anything's changing there?

From a competitive landscape perspective I'd say there's not been any new interest in the competitive world nor have we seen any significant strategic direction changes of those existing competitors. You'll see in some proposals and advertising a lot of words around loyalty and marketing but in terms of significant new entrants, I would say no.

Okay. Thank you.

You bet.

One moment for your next question. Your next question is from Don McArthur with Stifel, Nicolaus.

Great quarter guys.

Thanks.

Ed, can you give me the net finance charge for the quarter?

Yeah. I think it was about 100 million.

Okay.

Yeah. Let me do the math real fast. We did about 140 in the segment and that usually runs about two-thirds to 70%.

Okay.

Actually that's a good question. A lot of people think the credit segment is credit and finance income it's not. It's about 1/3 fees like merchant fees and everything else and about 2/3 to 70% is actual finance. Just put them all in that bucket

So it's about 100 million though. So that kind of picked up this quarter.

Yeah.

Okay.

And again the reason it always picks up in Q1 because again in Q4 we make all the money from the merchants in Q1 it swings over to the card holders.

Okay. Makes sense. And then regarding capacity in your transaction services as far as statement processing and transaction processing, is there a level where you start hitting a capacity issue?

No. Anymore we've got sufficient, significant sufficient plant in statement mail production area and data capability. That's not even a concern I would lose sleep over at night

Okay. And then regarding the Canadian dollar I guess exchange rate, do you use a constant model from, you know, where we're at now or how do you view the exchange rate kind of going forward for your internal models

I certainly haven't got it right yet, so I think it's interesting. It has been relatively flat at 75 cents since last May after its huge move up. What we are expecting to see, which is different from when we budgeted, is that at end of the year at about 77 cents very, very strong. Today it's at 73.

So what we have seen is sort of a slow gradual depreciation of the Canadian dollar vis-a-vis U.S. dollar and that works almost in [INAUDIBLE] conjunction with The Bank of Canada cutting its interest rates, which have been kept at a historically large spread above U.S. rates.

Now, that spread continues to narrow and it's expected while Bank of Canada may be done, the next expectation from the U.S. is the fed will be biased upward. So that gap should continue to slows, which would suggest we continue to see, we're assuming, a very slow, gradual depreciation of the Canadian dollar, a couple more pennies from where it is today.

Makes sense. Thank you.

Your next question is from Wayne Johnson with Sun Trust Robinson.

Yes. I was wondering looking at the model going forward for the rest of the year, could you give us a sense of the EBITDA margin that you're looking at, particularly for the second quarter? First first quarter was very strong and I was just wondering if you'd give us a little color on that.

Yeah. I think what we would probably say is that we target to grow consolidated margin about 50 basis points a year. I think last year we tripped across 20% on a full year basis. Obviously, first quarter I think, gosh, we were up around 25 or something, Wayne.

My guess is because of the seasonality in the business that would cycle back down. I would still expect to be a bit north of 20% and on a full year basis, you know, we're going to do versus last year, I would say, at least 50 basis points. Right now it's probably going to be a little above that.

All right. Thank you.

You bet. One more

Your next question is from David Tossman with Wachovia Securities

Thanks so much for getting me in. I'm looking and thinking about the high portfolio yield in the quarter and I'm wondering if you can give us a view as to what you're seeing in the newer portfolios that have come on recently and maybe in the private trusts that we don't see.

And, specifically, I'm wondering if you have some one-time good experience in those as you acquire those things, get them off your system, get through the holidays and then maybe crank up the Sunday collection machine and do a better job managing it.

Yeah. I think the Sunday collection machine probably relates to some of the activity we're doing with some of the required portfolios, where we were tightening up more on the back end. That wouldn't necessarily do anything to gross yield. It certainly would benefit losses, which would benefit net yield. I think is where you're heading.

Since yield is a come bo of gross money coming in less cost of funds less credit losses. So the fact that credit losses came in a little bit better than we had thought, the fact that funding costs are coming in a little bit better, I think combined with the fact that the yield itself continued to hold up extremely well. We didn't see any real falloff that you might have expected later on. So, I think all three of those are going in the right direction.

And then if you were to really look at what happened in the credit segment, don't forget that in that segment is all the merchant discount fee that comes flooding through the door from those very strong retailer sales in Q1.

So between merchant fees from higher retail sales, very nice finance charge fees from the card holders, better losses and better funding costs, all of those combined to drive Q1 numbers.

And but there wouldn't be anything that would be in that one Q that would look abnormally high because you're early on in trying to get recoveries and pull those credit losses down?

I can't think of anything.

You know, the continued - - I guess the big difference from previous years is credit sales continue much stronger in the first quarter than they have, which causes the balances to probably stay higher than they normally would for a period of time before they start to trail off as they talked about so you'd get more gross yield than perhaps previous years. And then as someone pointed out here, this was leap year so we had one more day in the year than we - - no.

And it was a Sunday.

Yes. Exactly. No. It's nothing unusual in that sense.

Thank you.

You bet. Thanks, David. I think that wraps us up, everybody. Thanks for joining us today. One more thanks to the Alliance team. Great quarter and keep up the great work. Take care good bye.

Ladies and gentlemen, thank you for your participation in today's Alliance Data Systems first quarter conference call. This concludes today's call. You may now disconnect.