Bread Financial Holdings Inc (BFH) 2004 Q4 法說會逐字稿

Good afternoon, and welcome to the Alliance Data Systems Fourth Quarter and Yearend 2004 Conference Call. At this time, all parties have been placed on a listen only mode. Following today’s presentation, the floor will be open for your questions.

It is now my pleasure to introduce your host, Ms. [Julie Posella] [ph] of Financial Dynamics. Ma’am, the floor is yours.

Thank you, Operator.

By now, you should have received a copy of the Company's Fourth Quarter and Yearend 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 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, on today's call, our speakers will reference certain non-GAAP financial measures which we believe will provide useful information for investors. Reconciliations of those measures to GAAP will be posted on the Investor Relations web site at www.alliancedatasystems.com.

With that, I'd like to turn the call over to Mike Parks. Mike.

Thank you very much. And good afternoon. Thanks for joining us, everyone.

Our agenda, as usual, is to spend a few moments reviewing our highlights for the fourth quarter. We'll focus on our three growth engines, and we'll then turn to the full year results. I'll have brief recap, and then we'll turn quickly to our 2005 outlook. Ed will then go over our financials in greater detail, and we’ll take your questions at the end.

So, let’s move on, and we’ll start with the fourth quarter. We’re obviously very pleased to announce we posted another strong quarter, with our revenues increasing by 16 percent to a record 347m. EBITDA increased by 15 percent to 68m. And cash earnings were up 27 percent, or 38 cents per share. All three growth engines: utility services, private label services, and our loyalty marketing group continued to drive our strong performance.

If you turn to the next slide we'll start with the utility group. During the fourth quarter we completed two major signings to give us great traction into 2005 and beyond. We signed a 10-year agreement with Energy Solutions to provide a full suite of billing and customer care services for their deregulated accounts, which today is over 100,000 accounts and growing. Entergy is the competitive retail affiliate of Entergy Corporation, one of the largest utility companies in the U.S.

We are also very pleased to have extended and expanded our relationship with one of our top 10 clients, Direct Energy. In addition to the 5-year extension to provide comprehensive billing and care solutions, this relationship has expanded to include Direct Energy's residential and commercial accounts in additional parts of Texas. Our new agreement underscores the partnership we have forged with them as we will now serve over 1m customers in Texas.

And one last note, we are very pleased to announce the addition of Dr. Lynn Draper to the Alliance Board. Retired Chairman and CEO of American Electric Power, Lynn brings extensive industry experience and vision to our utility practice, as well as adding a seasoned executive to our Board.

Now, turning to private label. The fourth quarter was another solid quarter, and we are very pleased to announce that we renewed our relationships with two of our largest and most tendered clients. First, we renewed and extended our agreement with New York & Company, one of our top 10 clients, formally known as Lerner New York. They are a leading specialty retailer of moderately priced fashion oriented women's apparel. They provide a full suite of private label services, as well as database analysis, segmentation and marketing services, through our database marketing group.

We also extended our service agreement for another seven years with J. Crew, a key client of ours for the last 10 years. The private label credit card program is a strategic tool for J. Crew, enabling them to build loyalty across their multiple channels.

In November we announced a long-term agreement with Trek Bicycle Corp. for a private label card program that is expected to boost their dealer sales and encourage repeat business. Trek is the world's largest manufacturer of bicycles, sold exclusively through authorized dealers which carry a full line of bicycles and accessories. The dealer network has an annual sales target of approximately $2b.

Other key metrics produced on target results for the quarter. Credit sales were a bit soft, impacted by one of our largest client’s difficult holiday sales. Despite that, portfolio growth and funding costs came in just as planned, credit losses were a bit better than expected. All in all, a very nice quarter by the group.

Now, let's turn to review the loyalty marketing services group which is now comprised of our Air Miles Program, and FMI, and Epsilon Teams in the U.S. The Air Miles Program had another outstanding quarter. They delivered above expectations as the fundamentals of the Air Miles Program, sponsors, collectors, and rewards remain quite strong.

First, our sponsors. We have a solid sponsor base, and in the last year we announced two key sponsors whose programs expanded nationally. First, WestJet’s [demo tri-branded card] [ph], and second, RONA, Canada's largest home improvement chain. Our sponsors are committed to the program, they see it as a proven vehicle to develop and sustain loyal relationships with their customers. This commitment is proven again by not having any attrition from our sponsor base this year.

Regarding collectors, the participation of Canadians in the program continues to grow. Nationally, collectors grew 3 percent, and Quebec they were up 11 percent over last year. We believe our Air Miles Program has the most robust reward portfolio of any coalition program, our collectors can redeem now for over 500 different rewards. The combination of our strong sponsor group, this robust reward portfolio, and our marketing expertise continue to drive strong results.

On to our U.S. businesses, we announced last quarter the acquisition of Epsilon Data Management, a leading provider of integrated loyalty and direct marketing solutions. This acquisition has significantly expanded our marketing and analytical capabilities in the U.S., further strengthening our business model of integrating transaction and marketing services. Our integration activities with the Epsilon Group are on schedule, and we're pleased that the results for the quarter were strong. And we expect this trend to continue throughout the year.

Now, on to the next slide, we'll turn to our full year results. We finished the year at 1.26b in revenue and EBITDA hit 279m. Cash earnings per share was $1.54, a 50 percent increase over last year. Our focus has and will continue to be on those markets that have solid organic growth potential. We had a banner year in forging new relationships with great names such as Entergy, Trek, [Design Within Reach] [ph], WestJet, and RONA.

We also worked hard to ensure we delivered on our promises to our clients, and our clients' results drive their confidence in us. This is demonstrated by the number of renewals and expanded relationships we've secured with great names like [Bank of Montreal] [ph], Shell, New York & Company, J. Crew, Direct Energy, just to name a few.

2004 was another strong year for Alliance, and I would like to thank and recognize our Management Team and all Associates for their hard work and commitment. It is a direct result of their passion and this commitment that we were recognized as a Forbes Platinum 400 Company. Inclusion in this list recognizes the top 400 big companies in America based on performance, management strength, and other criteria. Congratulations, again, and thank you for an outstanding effort.

Having said that, 2004 is over, and we are just excited about our prospects for 2005.

Turning to the next slide, as usual, nothing is a slam-dunk, but our strong business model and fundamentals are at work. Let's take a quick look at our growth segment. First, utility services, we expect solid top line growth for 2005, and we also are planning for consolidating infrastructure activity as a result of our significant new business development activity over the last few years.

For private label, we expect to see a return to our historical growth rate at around 10 percent, and a solid pipeline bodes well for the future growth, as well. The Air Miles Program remains strong and dynamic. 2004 activities has positioned this business for another strong year. And combined with our U.S. loyalty marketing businesses, FMI and Epsilon, we expect strong performance across-the-board.

Looking to the future, our pipeline is solid across all three growth engines. During 2005 we expect to secure four to five new private label clients, two to three new utility clients, and another four to six in our marketing services group.

And my final note, we want to continue to be recognized by our clients and shareholders for delivering what we promise. To that end, I want to reiterate our guidance that we set in October of growing our top line to [$1.45m] [ph] to [$470m] [ph], and delivering between $1.81 and $1.83 cash earnings per share.

We're excited about '05, and I'll turn it over to Ed now to give you more details on our financials.

Thanks, Mike.

If you could turn to the fourth quarter consolidated results slide, we can start there. Q4 marked our 15th quarter as a public company, and further extended our track record of delivering or over-delivering on what we've promised.

Overall, things came in a bit better than expected across all four key financial metrics. The individual components which drove the results are indicative of many of the things we expect to see throughout 2005. Specifically, our marketing services group surprised us a bit as both our Canadian Air Miles business, as well as our new U.S. platform, called Epsilon, outperformed expectations. This outperformance was partially offset in transaction services, which suffered the loss of a client due to their filing for bankruptcy. Finally, our credit segment posted another solid quarter, and continues its transition towards its historical growth rate. Summing up, the net overall result was some nice overperformance.

I do want to mention one other item, excluded from our cash EPS results was a 10m non-cash after-tax charge related to the vesting of restricted stock as part of our executive comp plan. The vast bulk of this charge related to the original plan that was set-up five years ago. Under the plan final vesting would occur after five years only if ADS' performance was equal to or better than the top 25 percent of the S&P 500 companies. And for those of you who have been around since the beginning, from 2001 to 2004, we exceeded that margin dramatically, and I believe we beat the S&P by around, even with the pullback in January, about 260, 270 percentage points.

Okay, let's turn to the segments. First up, transaction services, about 80 percent of this segment relates to our utility services and our private label business. On a full year basis the segment had a good year with both revenues and EBITDA coming in at double digit growth rates. For the fourth quarter, performance was a bit light due to two items.

First, our only client in the telecom space was named Pegasus Communications. We provided call center services on their behalf. Their contract was up with us, and before renewal opportunity presented itself they had to file for bankruptcy, which hit us in Q4. We did around 12m to 15m top line, and thus, ended our foray into the telecom space.

Second, in private label, for the most part our 65 clients had a decent holiday season. However, we did have one major client which had a very difficult time and its sales comps were negative, in the high teens. This did drag on our performance a bit.

Both of these items plus some small pruning of non-core accounts in our merchant business will cause a bit of a headwind for the first half of '05 in the segment, but will not be significant enough to dent our consolidated ADS' view for the year.

Specifically, the segment will begin to pick-up speed later on in '05 as three events unfold. First, recent utility wins such as Entergy and Direct Energy will come online, and private label startups such as Little Switzerland, Design Within Reach, AMTV Commercial, and Trek Bikes continue to ramp-up. Second, we'll anniversary the grow over of tough comps at our one retail client which struggled in late '04. And third, we finish up our utility streamlining/consolidation effort planned for '05.

Next up, credit services, which had another good quarter and finishes up a great year. As usual, let’s walk through the four key drivers of the P&L which are credit sales, portfolio growth, funding costs, and credit losses.

Credit sales of just under 5 percent were a little bit light. Excluding the difficulties at the one large client noted earlier, sales were in fact tracking in the high single digits, which was our target.

Portfolio growth seemed to be unaffected and clipped along very nicely at 8 percent which is in our comfort range. Credit losses continued to provide good news with our Q4 rate under 7 percent and well ahead of our long-term target being somewhere in the mid 7's. Delinquency rates, the good predictor of future loss rates, also were favorable, suggesting that good news awaits us in 2005. Overall, the quality of the portfolio remains strong, as evidenced by a median score of 700 for all active accounts, and 720 for new accounts.

Finally, funding costs look to be in good shape as we head into a potentially rising rate environment. Our funding costs are locked down and even contain features where funding rates will actually decline over the next few years. They should nicely offset higher costs needed to fund incremental new growth. To sum up, our biggest macro risk going into 2004 as well as 2005 and 2006 has been neutralized.

All right, wrapping up credit. Essentially, it is cycling back to its more historical growth rate, and we'd like to see it around a solid 10, 11 percent growth rate in '05. Based on the book of signings ramping up, as well as some very nice pipeline opportunities, '05 should be another solid year.

Finally, marketing services group, which consists of our Loyalty Air Miles Program in Canada, and Epsilon, our new U.S. platform. The group shot the lights out this quarter and accounted for all of the overperformance. While we don't break-out Air Miles versus Epsilon suffice it to say that both delivered ahead of expectations. Our Air Miles Program benefited from three things. First, zero attrition with clients. Second, firm or what we call 'firm plus' pricing. And third, the ramp-up of two huge national programs, the WestJet Bank of Montreal Program and the program with RONA, which is Canada's largest home improvement chain.

Our U.S. business, Epsilon, which joined us mid quarter, has not missed a beat. Results were slightly better than expected. And combined, we now expect the stronger than anticipated performance in both units to carryover into 2005. This 'excess' performance should more than offset some expected drag early on in our transaction segment, adding in a solid credit segment performance in '05, and we should have a good year.

Next up, full year segment results, pretty straightforward. While the segments do chop, quarter in, quarter out, on a full year basis, pretty good picture. Double digit growth rate across all three segments on both top line and EBITDA.

OK, let's talk a little bit about balance sheet. First up, Canada. Our deferred revenue continued to spike up, and is approaching 550m due to the very strong program growth, as well as the strong Canadian dollar. Since this represents revenues already earned and paid for, but not yet flowed through the P&L, it bodes extremely well for '05, '06, and '07.

Next up, capital strengths. Core debt did jump up around a quarter billion dollars. Over 100m of that relates solely to seasonal funding requirements in our private label business. This does reverse as we exit Q1. The remaining debt relates to our Epsilon purchase, and this, too, will be whittled away during the year with our strong operating cash flow. Even with seasonality and a large acquisition, our core debt to operating EBITDA ratio is barely above one times, and well below our target of two times or less.

Next slide, I wanted to address a question we get quite often, specifically related to Welsh Carson, where are they, where do they stand, what's going on? As you can tell from the chart here, Limited Brands which was our second largest shareholder sometime ago is completely out. Welsh Carson has done a series of distributions over the past couple of years, and they currently stand at roughly 12m shares, or about 14, 15 percent of the Company. So, between Limited and Welsh the public flow has gone from down not so much to over 80 percent. Expectations going forward, we would expect Welsh to on occasion continue their distribution program, and we do not expect any type of secondary activity or any type of straightforward block sale. And that’s pretty straightforward and what, sort of a consistent message we've had for quite some time.

All right, let's talk a little bit about '05 and what we expect. Five themes. First off, expect the growth engines to continue to cycle. For those of you who have been with us since the beginning, going back to '01 and '02, this should sound very straightforward. It's a key part of the model success. If you were to go back to '01 and '02, quite frankly, our private label business had a more difficult time, although it did chug along. And picking up the pace and actually overperforming, utility had very strong years during that time period. As we moved into 2003 what cycles up was our Canadian business with a very strong years, and also, in 2003 and well through 2004 private label took the lead and cycled up as the key engine that overperformed while the others just 'performed.'

As we move into 2005, we're going to see a new cycle. There's no question in our minds that the marketing services group based on what they did in Q4 is going to have a very strong 2005. So, that's the cycling theory, and what we've been seeing over the past four or five years, and what we expect to see in 2005.

Specifically, broken down by growth engines. If you were to look at private label, returns to its sort of solid historical growth rate, you know, 10, 11 percent organic growth. In utility, we do expect the top line to continue its growth drive. But as Mike mentioned, EBITDA and EBITDA margins will be impacted by various consolidation efforts. We're not talking 10s of millions of dollars here. We're probably talking somewhere on the order of 6m to 8m in order to start streamlining operations there. Marketing services, as we mentioned, both Canada and in the U.S. we are expecting overperformance.

If you wrap it all together, where are we overall? Overall, we think the consolidation efforts in utility are comfortably offset by what we expect as overperformance in marketing, and we expect a very solid year in 2005. And what you'll also see from a reporting perspective is you're going to see a bit more balance restored. We know in the past couple of years the credit segment has really been driving the overperformance. You're going to start seeing that shifting back to the marketing services side. So, again, the model will begin to come across as a bit more balanced than it has been in the past couple of years.

Hopefully, that gives folks a good sense of where we're heading. As we move into 2005, let's turn to guidance, itself. As Mike mentioned, we did provide preliminary guidance, all the way back in October. And we've taken the next three months to sort of see if the assumptions are holding, how we're tracking, and we're very comfortable now that the assumptions are going to hold through 2005. Everything seems to be tracking very nicely. The outlook is favorable, and you know, as a result, we're very comfortable reiterating guidance of $1.45b to $1.47b on top line, EBITDA 330 to 335, and cash EPS of $1.81 to $1.83.

We do want to mention one thing that we are going to tweak up a little bit, and that's our free cash. A couple of things going on which would suggest our free cash flow should be tweaked up a little bit, maybe from $2.00 to $2.05 at this point, and perhaps even a little bit higher as we go along here.

Before we get into that, the next slide, let’s talk a little bit about the quarterly guidance. We threw out some numbers back in October of, you know, an approximate rollout throughout the year. We expect the rollout in 2005 to be what we would call a ‘more normal year,’ as opposed to ’04 which was very, very top heavy in the first half of the year as a result of shifting some marketing and new product rollout expenses.

That being said, you know, how would you go about sort of figuring out how the quarter is going to roll out? One suggestion would be, you know, let’s remove the timing issues from the first quarter of last year, give you a base number to start with of about 38 cents, and then grow that around 20 percent. And that’s pretty much what we did. And as you can see, the approximate rollout hasn’t changed from what we thought back in October. I think that’s still some pretty good guidance. Obviously, plus or minus a little bit as the year progresses, hopefully pluses, but overall this should give you a decent picture of where we see things going. And I think it looks pretty reasonable at this point.

Okay, almost done. Free cash flow. We usually talk about what’s left over in free cash, what’s left over in our pocket after operations, and we, here, do include interest and taxes. But we expect to do at a minimum of $175m this year. Obviously, this includes the adjustment up in Canada, and normally we expect this Canadian adjustment which is essentially the difference between true free cash flow received and what’s actually reported because of deferral accounting.

Normally, it’s been running about 20m a year, but the up tick this year to 25, and quite frankly, as we look into ’06 and ’07 is due to the stronger than expected performance in Canada. Traditionally, as we talked about the differences about 20m, we expect it to be closer to 25m this year due to the stronger than expected growth in miles issued, coupled with improving margins on the issuances themselves. And that’s why we’ll go ahead and tweak that up a little bit.

A couple of slides left. We talked a lot about Q4, we talked a little bit about ’05, and sort of Mike and I like to sort of step back here a little bit and take a look at where we’ve come from. And one of the things with our model, with the cycling that goes on in the engines, is that year-in and year-out we continue to see good growth as well as very nice expansion on a consolidated basis in our EBITDA margin.

The beauty of the model, we think, is that all of the engines do tend to chug along. And each year one of them tends to outperform which allows us the flexibility to get the other ones ready for primetime in following periods. And that’s the exact same story, we want to make sure that as ’06 and ’07 approach that our utility business is ready to really step out there.

Finally, the last slide, 2000 to ’05, revenue, EBITDA, cash EPS – it’s been a good run. We expect ’05 to be another good one. And I think probably, you know, no more than four messages to keep it simple. And that is Q4 came in stronger than expected, that’s the first message. The second message is things have firmed up nicely, so we can confidently reiterate ’05 guidance. The third is the ability of the Company to throw off stronger and stronger amounts of free cash flow, continues to grow. And finally, we are going to take the necessary steps in ’05 to ensure that ’06 and ’07 will be in good shape, as well.

That’s it. I’ll kick it back over to Mike.

Thanks Ed.

And just to reiterate, what Ed said, we are confident about ’05. We will continue to invest in the long-term, and the health of our Company, as we did even throughout ’04 in some of our funding activities. And we have a strong outlook for the future.

So, that being said, let’s take questions from the floor. Operator.

[Caller instructions.]

Our first question is coming from James Kissane of Bear Stearns.

Thanks. Hey, Mike and Ed, great job. The Epsilon run rate seems somewhat higher than we were originally expecting. Were there new programs ramping as you were bringing that business on?

Yes, they’ve got a nice pipeline of business, Jim. I think you’ll see some nice announcements coming here shortly. Any time you go into an acquisition, we were pretty conservative, we look at, you know, our historical acquisitions have been tuck-ins, limit risks. This one is a little bit bigger. Sometimes expectations are set higher than what you think when you’re looking at some acquisition books. And frankly, they’re performing ahead of what we thought. We may be [here] [ph] a little bit just for security sake, but no, they’re bringing on new business, and they’re hitting their targets, and we’re very pleased. Now that we’ve been inside with them now for a couple of months, a strong management team, high integrity and they deliver what they promise. So, we’re excited about the year.

As we talked about, Jim, when we did the deal, neither Mike nor I are huge fans of loading in big synergy benefits. And as a result, we basically priced the deal, valued the deal, and provided guidance based on really no up side from being part of the Alliance family. So, hopefully, that’s a potential up side as we roll forward.

And is it possible to break-out what portion of your revenue comes from the weak private label customer? And then generally discuss client concentration in the private label business?

I can give you some general guidelines, and that is I think our overall sales were up around 5 percent or so in the quarter. If we were to back out that client our private label sales would have been up in the high single digits, you know, 8 percent plus, Jim.

Yes.

So, I’m not all that good at math, but I’ll try. I think it means that the client did probably about half a billion in credit sales for the year. So, it’s a good sized client, and it’s going to struggle probably for the first quarter or two this year, which my guess will dampen credit sales growth, you know, a couple of points. But with the other stuff ramping up and this thing going to anniversary, and the stuff coming through the pipeline we feel very comfortable that the private label grew and the credit segment, you know, should be doing its double digits this year.

Right. And one last one, as you focus on the utility platform consolidation, does that prohibit you from bringing on new business this year? I know, Mike, you said you’d like to bring on two to three new customers, but can you actually bring them on in terms of revenue this year?

You bet. You know, it isn’t an all encompassing take the entire organization out of the work force, Jim. We are going to spend some money to actually improve our ability to board new clients. Part of that investment is to improve the what we call the common interfaces around some of our credit collection and other interface systems to make boarding a client easier, as well as adding to some of our consolidation for anticipated future expansion and deregulated States. So, it’s anticipated to help support boarding new clients, actually.

Great. Thank you.

You bet.

Thank you. Our next question is coming from Greg Smith of Merrill Lynch.

Hey, good afternoon, guys.

Hey.

The Pegasus, did you say that, Ed, that it was 12m to 15m on an annual basis?

Yes.

Okay. And then, what’s the profitability on that block of business?

Oh, I don’t think it was huge, probably a couple of million.

Okay. So, was that just a surprise that just came in the quarter for you?

A little bit, in the terms of we were hoping that to the extent we knew they were having trouble, and we were hoping that to the extent they did wind-up in bankruptcy that, you know, we would be their provider throughout that. What did happen is they were, in fact, gobbled up and taken out, and the company that did that kept it in-house. So, with the contract had already expired our hopes were dashed on that front.

Okay. And then the large customer that had some tough comps, are you confident that they’re going to turn things around? I mean I’m not asking you to forecast their business, but are you pretty comfortable that that’s going to remain an important client? Or is there a chance that that could just kind of continue to whittle down?

No, I think they’re going to play through it from everything we at least hear and read. It’s going to take a couple of quarters. We’re not banking on, you know, any big turnaround. What we are banking on is nothing more than, you know, the other 65 that seem to be doing pretty well, as well as, you know, we had a bunch of new program startups last year that are going to start hitting their stride late Spring, Summer, and Fall, as well as you’re going to see a couple of nice announcements coming out the early part of this year. And that should be more than sufficient to get us back to a nice run rate as the year unfolds.

Okay. And then, last question, is it possible to get the ’04 revenues for utility and the expectations for ’05?

Sure. I think now Pegasus was loaded into ’04, that wasn’t our utility space as we refer to it , it was our massive only foray into the telecom space, and that’ll pretty much do it. But we did probably, you know, in the mid 170’s top line, and then, you know, if you were to back Pegasus out that would get us down to somewhere in the mid 160’s, and then we’d sure like to see, 2, as the first number for 2005. So, I’d say a couple hundred million.

Okay. Great. Thanks, guys.

You bet.

Thank you. Our next question is coming from Wayne Johnson of Sun Trust Robinson.

Yes, good afternoon.

Hi, Wayne.

Hi. Can you talk a little bit about the integration expense, if any, for Epsilon in the fourth quarter, and what you expect in the first half of ’05?

There really isn’t a lot of expense, Wayne. We, as we talked about around the acquisition time, they’re a good standalone entity, have their own business plan, they’re a very similar growth rate model, 12, 15, 18, as ours. The areas that we anticipate to integrate would be in the payroll systems and a few of the minor administrative kinds of things. So, there really aren’t significant expenses associated with it.

Okay. And then a follow-up on the prior topic of utility, what is the ultimate goal here at the end of this year in terms of number of platforms and functionality?

The numbers of platforms will be reduced by one. The key component will become, will be driven by Direct Energy, as I mentioned earlier. We extended that relationship and expanded it by adding a significant amount of new customers that will be converting on. That process will be taking them to a new platform, and dropping the one that they had been on, and then merging those new accounts on to it, as well. That’s a part of that expense that we talked about. The other part of the expense is some development activity around anticipated future deregulation areas around the country that we are adding some functionality to our existing system, and then the conversion interface that I had mentioned awhile ago.

Terrific. Thanks very much.

You bet.

Thank you. Our next question is coming from Colin Gillis of Adams Harkness.

Congratulations, Mike and Ed.

Thank you.

Thank you.

So, I want to turn a little bit to the private label side. Could you give us some, you know, sense on the J. Crew, the New York & Co.? Were those renewals, were they competitive at all?

You mean were there negotiations going on?

Like, you know, did you see other players stepping in, you know, into the process?

I’m not aware of any but, you know, I wasn’t on the other side. I’m sure our clients would know better than that, but there’s no, there were no significant knowledge on our part about the potential other bids. Is that what you’re talking about?

Yeah, that’s right, that’s right. You know, for the most part, I mean do you still view that, you know, in-house solution is the primary competition you’re bumping up against?

From a growth perspective we see about 50 percent of our opportunity in what we call startup that haven’t been in programs before.

Sure.

And maybe even two-thirds, frankly, based on what we see in the pipeline now.

Yeah.

The other third comes from folks that have it in-house or some of the outsource competitors of ours.

Could you give us a little sense about, you know, what some of the advantages or the difficulties you might run into sort of launching a non-private label card? I guess I’m talking about the American TV deal? Is there any color on the status of that particular relationship, you know, going forward?

Yeah, it’s going well. Just for the folks who aren’t fully up to snuff on it, you know, we – it’s a product extension and expansion for us. And as a result, you know, we think we usually can drive, you know, close to 30 percent of all sales dollars flowing on to our consumer private label cards. We think the commercial cards could actually be incremental by another, as much as 10 percent. And that’s the goal. It’s not to cannibalize anything, it’s – there are small businesses and other folks where it’s a natural fit. And we’ve been at it for a few years, and we finally launched it, and there’s more news to come on that as this year unfolds.

And it is a card based product, though. The commercial card, it’s not an on card based product.

Yeah. Great. Okay. Thank you.

Thank you.

Thank you. Our next question is coming from Tien Tsin Huang of JP Morgan.

Hi. It’s Tien Tsin.

Hello, Tien Tsin.

How are you guys doing?

Good.

What was the impact of the lost customer, I guess, on the statements mailed in that trip?

There were no statements mailed with the lost customer.

Right, because that actually takes down a little bit more than what I expected, so I guess what’s driving the trend there?

Yeah, what happened is, from the – you have to go to private label, and think of the one large customer who had a tough holiday season, the activity on their accounts were down, the ability to generate new accounts were down. And as a result I think that that was a big factor in sort of dragging down the overall statement growth for the quarter.

And what you’ll see, I think, as the year plays out as private label, as the signings in ’04, which you know, again, we’re almost, we’re primarily startups, start ramping up, and as clients go to tough it out the first couple of quarters, and the announcement you’re going to see in a couple of weeks, we’ll combine with the ramp-up of Entergy and Direct Energy in late Spring and Summer, and you’re going to see that metric start moving back up nicely.

Got it. So, we should assume you should trend back to the high single digit kind of rate as it progresses through the balance of the year?

Oh, for sure.

Okay. And then just generally speaking can you give us an update on the competitive landscape, and it looks like Accenture made a platform purchase yesterday?

As I understand it Tien Tsin, it’s an old platform that was designed six or seven years ago. We actually took a look at it, and passed on it. The real story there as I interpreted it was the – our competitor in the sub-metering business, which we’ve been making some nice inroads in, decided to outsource their back office, or basically data center and application work to Accenture.

Right.

And so, it’s basically like, you know, whether it be Accenture, or IBM, or EDS, anybody outsourcing a data center, part of the purchase was a software package, however. But very few clients on it, and from our perspective it wasn’t competitive.

Okay. That’s good to know. Then lastly, if I can ask one more. Mike, can you maybe give us an update I guess on the state of the private label card market, given some of the recent portfolio sales, and some of the co-branding trends with I guess Wal-Mart tying up with Discover, et cetera?

Yeah, I think the, you know, our historical pipeline have been the medium sized retailers. We haven’t typically gone after the billion, 2b balances, we’re the transaction oriented, smaller balance target. So, that hasn’t really affected the market opportunity there.

Secondly, the Discover announcement as our, some of our guys are working in the development of some co-brand ideas, really just gives us another potential network from which to choose, whether it be MasterCard, Visa, or Discover.

At the end of the day, our focus is looking at the entire customer base of our retailer and segmenting our products based on the customer demand and what drive sales. What’s really hampered co-brand in the last five years is a lot of banks coming in, trying to offer fairly high bounties to pick off prime customers to try and drive $3,000 and $4,000 balances, and did nothing to drive retail sales. And that’s why you’ve seen several people come in and get out of the business. So, we’re thinking on, and I think you’ll see here in the next 12, 18 months some announcements around some products that we have in that arena.

Very good. Thanks a lot.

Good. Thanks.

Thank you. Our next question is coming from Don McArthur of Stifel, Nicolaus.

Congratulations on the quarter, guys.

Thanks, Don.

Can you quantify what type of cost savings you might see from the utility consolidation and the streamlining in, you know, late ’04 into ’06, and ‘05?

Sure. I mean we can try, anyhow. I think to start with what are we looking to spend? And, again, we view this as ongoing operating costs, ongoing operating expense. There’s certainly not a one-off. These are – we’re going to be doing it from time to time. At a very, very high level, what we’re doing is now that we think utility is sort of broaching the $200m mark this thing is getting pretty big, and what we want to do is, you know, we’re looking out 10 years, is we want to get ready for this thing to go from 200m to 500m, and we don’t want to get caught with a whole bunch of inefficient platforms and systems, and infrastructure.

So, the first phase, long story short, is we’re probably going to sink somewhere between 6m, 8m into it to start the consolidation, to start the process, to start streamlining. That’s going to drag down the EBITDA margin the first part of the year, and then it should start popping right back up as the latter part of the year unfolds. You know, obviously, we wouldn’t be doing this thing unless we thought that it could drive, you know, probably the rough number we use is a three-to-one return over the next few years. And that’s, those are roughly the numbers we have in the back of our heads.

Okay. Great. And then can you say, you know, who the private label customer is or what industry they’re in so we can look at more seasonality of their decline?

Retail.

Okay. And then with…

Now, I’m just – basically, it’s – obviously, we don’t want to talk about specific customers, but from a seasonality perspective, to put the whole thing in perspective, I know a lot of people talk about retail sales and credit sales, and everything else. But if you were to look at the size of our company, you know, we did $1.25b this year.

The difference between in any given quarter retail, or credit sales growing 10 percent, or growing, you know, three or four points less than that, is probably from a financial perspective, you’re talking $2m. That’s about the size of it. And it’s just not enough when all the other parts of the Company are cooking along to really get us all that worked up. But, obviously, we want to make sure that we’ve got enough in the pipe and ramping up to get it back up there. But it’s not enough to really get all that concerned about it. And we want to, hopefully, these folks will come roaring back later on.

Okay. And I guess one kind of follow-up to that is, you know, with regard to, you know, you’re targeting the loyal customers who keep buying, for this customer did you see the percent of sales of the total store sales that are on your cards stay stable as their total sales declined?

I honestly don’t know the answer to that, other than to say that normally the, you know, the ups and downs of comps and things like that really don’t have a big impact on us, but when the comps are down by 18 or 20 percent, you know, it is going to be a drag. It is going to be a drag.

All right. Thank you.

Thank you. [Caller instructions.]

Our next question is coming from [Dreese Ubitous] [ph] of CSFB.

Hi. Thanks. First, a question on the credit margins, just your outlook for ’05? Just given that delinquency rates continue to improve, and you may have some decline in interest rates going into next year, should we expect that credit margins might be up YOY next year?

I wouldn’t go that far. I doubt very much they’re going down. I think you hit the nail right on the head, Dreese, is from the point of view of, from the key drivers here, you know, we’re going to have good news, we think from what we see on the credit loss perspective that the key operating expense.

From a funding cost perspective I wouldn’t go so far as to say funding costs are coming down. Certainly, the existing book will probably have their funding costs stepped down throughout the year. However, we need to remember that we’re hoping to grow this thing, you know, quarter billion, 300m, and that’s going to be coming on at a higher cost of funds. So, our best case is or our expected case is that our funding costs will be no worse than flat.

Okay. So, the net is kind of flat?

Flat, I’d say flat. And then, you know, we’ll see how the year progresses. But we don’t see anything that would suggest after, you know, just an enormous up tick in ’03, and then ’03 to ’04, that it’s going to go the other way.

Okay. And then just on the Air Mile side, historically in recent quarters you’ve seen stronger growth in the Air Miles redeemed than issued, and that reversed this quarter. Any reason for that, do you think? Did you change the pricing there at all?

No, it’s interesting with the program up there, it’s been the same, boy, for 12 years. It’s very hard to predict on a quarterly basis. But on a full year basis it’s amazing that year after year, after year, after year you tend to see miles issued, which is by far the much bigger number, it usually chugs along and winds up right around 10 percent. And miles redeemed jumps all over the place and can wind up, it usually winds up on an annual basis, you know, right around 20 percent plus or minus a couple of points. And that’s exactly what happened.

As we look into ’05,you know, I think one of the reasons we’re feeling real bullish about Canada is that on the issuance side we expect, we have very strong visibility there, and the margin side we are seeing some very nice movements there, as well. So, as those big national contracts roll through the Provinces of Canada this program should have a real good one.

Okay. And then the final question, just on the marketing side, can you give us a sense for what that margin might have been excluding Epsilon? I know that you picked up some extra expenses that you had delayed earlier in the year in 4Q.

It’s always difficult on the marketing side, as you know, Dreese, because you have, you know, it’s a deferred revenue model. So, you know, you’ve got some timing differences. But I would say the margins were probably not so far off from where they were last year. I don’t think we saw the expansion in the marketing services segments this year. I do expect ’05 that you are going to see a significant expansion in EBITDA margin versus 2004. So, while the credit segment, you know, we talked may be sort of flattish, we would expect marketing services to be two or three times sort of that 50 basis points that we target year after year.

Okay. Great. Thanks.

Thank you. Our next question is coming from David Scharf of JMB Securities.

Hi, good afternoon. You know, my questions have been answered. But perhaps a little insight further into private label. Ed, do you find that your wallet share among your 60 odd clients is becoming more or less concentrated? You know, divorcing ourselves from the discussion of credit sales growth? When you just look at wallet share and really what’s driving the portfolio growth, do you feel that you’re becoming more diversified in terms of reliance on clients? Or is it pretty much static?

I think, you know, as each year, obviously as you know, we’re bringing on anywhere between four and six new folks. And the way the ramp-up works you don’t really reach full wallet penetration till probably year three or beyond.

And what we’re finding is it’s remained relatively constant. It seems to be around 30 cents of every dollar at a fully ramped up program tends to be on our private label card. And it always seems to take about three years, and it always seems to plateau out at 30. We do have some clients where it’s as high as 40, or a little bit higher than that, but you know, as we continue to do that, you know, four or five, six new clients a year. And ’05 will be no exception, for sure, that we’re right on track for that.

You know, you become less and less dependent. Take, for example, the [limited] [ph] group family. I can remember back in the IPO that was probably a quarter of the Firm’s total revenues. And I think it’s probably down now to, you know, the mid teens. And will probably continue to decline in terms of importance as the Company grows a lot faster than they are.

Okay. And qualitatively can you speak a little bit about how the Eddie Bauer program ran this past season?

Yeah. Eddie did very well. Again, we don’t want to specifically talk about our clients. But, you know, if you were to look at the whole family there, like the Spiegel Group, Eddie, Newport, and Spiegel, itself, I think what we saw we were very, very pleased on the Eddie side. And we would, and they’re really just starting, they’re beginning to ramp-up very nicely. We expect that to be a good, good, solid portfolio. So…

A top end performer.

Yeah.

In terms of wallet share growth and credit sales growth.

It’s doing real well.

Okay. And lastly, on private label, can you talk a little bit about the tradeoff between credit quality and portfolio growth? You know, for example, you know, you mentioned an average FICO score of 700 for your overall portfolio, but 720 for new accounts.

Yes.

You know, if new accounts, for example, were ratcheted back to 700, you know, since delinquencies are at such low levels now, as are credit losses, it seems like – help me out, I mean do you have room to play a little with the credit quality to tradeoff a little quality for some more portfolio growth near term?

That’s a great question. And I think that’s one of the issues everyone struggles with, right when the economy is cooking right along, and everything looks great. We’ve pretty much made the decision, David, way back when, that we only really want to play in the prime space. For no other reason than it’s very difficult to call a turn in the economy, and decide when to rein everything in, and readjust credit lines. And it can really sneak up on you.

And that’s what we want to avoid. That’s why we’ve maintained sort of that prime focus, even though for sure, to your point, which is a great one, it’s been a heck of a good ride and I don’t think it’s over yet. We’re going to stick to the original game plan, and in that way, as Mike and I like to say, we don’t like a whole lot of excitement when a recession hits. So, we’d like to keep that.

Some of that is driven also by the clientele of our new clients. Our average has been going up a little bit because of some of the new clients over the last couple of years. Not that they’re all still prime quality credit, but some are higher prime than others. So, you’ll see that average over time go up and down. But we won’t have it come down as a result of going into the, you know, the sub-prime kind of a range.

Got you. Thanks, gentlemen.

You bet.

Thank you. Our next question is coming from Dan Perlin of Legg Mason.

Thanks. I haven’t heard anything about the kind of regional coalition program for Epsilon here in the States. Can you talk about where you are with that?

The regional coalition thinking that we’ve talked about in the past was our kind of initial foray as a pilot with a grocer that it was started with our Air Miles Group, not Epsilon, in Texas, and it’s going very nicely. It will be a six to nine-moth pilot. It is at or above performance in terms of customers using the card, and so we’re very pleased with it. But any expansion into other geographies or other coalition partners right now will not take place until we get to the end of the pilot, look at the lists and shift of sales, and approve the business model to the grocer, and we’ll go from there. So far, so good.

So, not looking to expand it outside grocery?

No, this is strictly starting with the grocery model first, and we’ll prove it step by step. You know, no, it did not start as a coalition.

Okay. And you mentioned that the number of platforms, I was a little confused, are you actually reducing your total utility platforms by one, or are you closing one, and then opening another one? It’s kind of a weird question but that’s kind of how my notes read.

Yes.

Okay!

That is correct, we are going up to, because of the size and the relationship with Direct Energy, we’re putting on a newer version, a more modern version.

Okay.

Then the one that they’re currently on, and we will be shutting down the old one so we won’t be continued – I know some people that are concerned, we keep adding, adding portfolios. I’ll reiterate what we talked about last quarter. We are not in a giant hurry in this infant stage of the utility world to get to one platform. Each State, and the DUC, and the rate structures are all different around the country. As the market matures and more goes toward the regulation, and they get to rulemaking that is, I suppose some future date, like a MasterCard and Visa, where all the rules are the same, that will be easy. But that will be a number of years out.

So, our focus now is on several platforms, based on the different markets, one being the deregulated piece, one being the municipal, the regulated arena, and the sub-metering area. And we have a couple in several of those. So, our focus now is to try not to expand to any more as we work through the other States and other market opportunities. And spend dollars to streamline the ability to bring on new customers to our existing platform. And as the infrastructures get similar over time we will slowly bring them together. But you’ll not see that, you know, in the next five to seven years, anywhere before that.

Okay. But is the plan that this new platform that you’re developing for this client, is it just specific for that client, or are you going actually be able to have other utilities, we call it deregulated, in that same market on that platform in the future?

That is correct. We will be able to use that same platform in the future.

In the past you’ve kind of talked about maybe a small carve-out of Epsilon helping the utility business, can you just update us on that?

Yeah. We, in the…

This is more for the deregulated marketing?

Right, right. Georgia Natural Gas, for example, is our first customer that has taken one of our database products. It’s actually out of our FMI Group, not our Epsilon Group, to begin to build database to understand their customers. And as those deregulated entities begin to understand the database marketing capabilities we think we’ll have not only in our FMI but expanding into the bigger accounts with some of the products that we have at Epsilon, as well. So, it’s a beginning stage with them, as well.

I’m wondering what, to what extent – I’m fumbling around here a bit – but the card statistics that you’re seeing out of Trek? And out of [AMTV] [ph], given the fact that the average credit limit on either one of those can’t be $500. I mean you can’t buy bikes for $500, but and the same thing for these [plasma] [ph] TVs. So, what I’d like to know are what are the credit statistics that you’re seeing coming on so far, and how different are they from your private label retail accounts?

Yeah. Well, things like, a client like Trek, that’s still a consumer private label company. Obviously, whether it’s a Trek, or you know, take another name, like a [Fortune Off] [ph], or someone like that, you are going to have higher credit limits.

Okay.

As you mentioned, you don’t get a lot these days on a bike for $500. So, from that perspective it’s almost to Mike’s point of, it does tweak the new account scores a little bit higher than our traditional ones, but the fact of the matter is in terms of moving the needle on the overall portfolio it’s going to take awhile to do that.

Right.

You know, so…

But what you’re seeing so far isn’t all that different except for the average balances are just higher?

Yes.

Okay. And do you make any money off of all of these inactive accounts that are associated with your customers?

No.

Nothing?

No.

Okay. Thank you very much. I’m sorry, I’ve got one other question. I have a feeling I’m at the end of the queue, so I’m going to take up your time.

Operator, we have a problem – no, go ahead!

The margin assumption that’s inherently built into your guidance is 50 basis points YOY, so I’m assuming that’s still good for ’05?

Yes.

And what I just heard was that credit services is kind of flat YOY, marketing services is up anywhere from 100 to 150 basis points?

Yes.

And so, we’ll just plug in what we need for transaction services?

It’s all correct.

Okay. Thank you. Now, I’m done.

Thanks a lot.

Okay.

Thank you. Our next question is coming from Moshe Katri of SG Cowen.

Hey, thanks. Just two final questions, I guess. Ed, can you – hi – can you quantify G&A for the quarter? And then, also, costs of operations for the quarter, as well? And then, finally, was there a currency benefit to EPS this quarter? Thanks. I’m just trying to…

Yes, yes, and yes. Okay. In terms of SG&A I think we usually run, you know, somewhere around 15m, 16m, 17m on a quarterly basis. And I think that’s probably consistent with where we were running this past quarter. We did have, obviously, dare I say it – a whole bunch of expenses for SOX, which I’m sure everyone has had. And hopefully, that is a big chunk of that is one time, just getting ready. So, that probably bumps Q4’s G&A a little bit higher than expected. But I’d probably say around 18 for the quarter. And then that included, you know, a couple million for SOX.

Your other question was, what again?

Cost of operations?

Yeah, I mean that would be the difference. It would be operating expenses are around 335, it sounds about right.

Okay. Great.

And add your 18, take it out of revenue, and that’s where you should get your 68m of EBITDA.

You had a part C to the question, sorry?

And the final, the currency benefits of EPS?

Yeah, it’s interesting. It, the top line, we probably picked up 5m, 6m. And on EBITDA we picked up about I think about $800,000, which from a cash EPS perspective, a little over half a penny. It’s, if you look to see where the Canadian dollar was, it had, back in ‘03, that’s when it went on a tear in Q4 of ’03, and sort of caught up. And we had nice, big FX pickups through the first part of this year, the first part of ’04, and it’s beginning to trail off. And now, with U.S. rates and the Canadian rates at par it’s going to be interesting to see what happens through ’05.

In this respect, in your Q1 EPS guidance, are you factoring any benefits from us on the Canadian dollar or any currency benefits there? Or are you just, you know?

No, no.

Okay. Great. Thanks.

Thanks a lot.

Operator, any other questions?

We do have a follow-up question coming from Wayne Johnson of Sun Trust Robinson.

Hi. Just a little bit of clarification on the wallet share topic. I seem to recall it feels like it was a couple of years ago, but you guys used to talk about wallet share and the aggregate, like was it 15 percent of every dollar for all of your customers, that was purchased on your private label card? And I think that …

Hello?

Wayne, are you still there? I think the call cut-off.

I’m sorry. He has dropped out of the queue.

Okay.

I will now turn the call back over to Mr. Mike Parks for closing remarks.

Sorry, Wayne.

Wayne, if you can hear us, we apologize, we’ll talk to you later.

Thanks for joining us, everybody. We’re excited bout ’05, look forward to talking with you soon. Bye, now.

Thank you. This does conclude this afternoon’s teleconference. You may disconnect your lines, and enjoy your day.