Bread Financial Holdings Inc (BFH) 2007 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is Vanessa and I will be your conference operator today. At this time, I would like to welcome everyone to the Alliance Data fourth quarter and full year 2007 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be -- if you need assistance during today's call please press star 0 and an operator will come back on the line to assist you. In order to view the company's presentation on the website, please remember to turn off the pop-up blocker on your computer. Thank you. It is now my pleasure to turn the floor over to your host, Ms. Julie Prozeller. Ma'am, you may begin your conference.

Thank you, operator. By now you should have received a copy of the company's fourth quarter and full year 2007 earnings release. If you haven't please call Financial Dynamics 212-850-5600 for a copy. On the call today, we have Mike Parks, Chairman and Chief Executive Officer, and Ed Heffernan, Chief Financial Officer of Alliance Data..

Please note due to the pending proposed transaction with an affiliate of the Blackstone Group, there will be no live question-and-answer session during the call. I would like to remind you that some of the comments made on today's 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 SEC. Alliance Data 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. Reconciliation of those measures to GAAP will be posted at investor relations website at www.alliancedata.com.

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

Thanks, Julie, and welcome everyone.Thanks for joining us this afternoon.

If you will turn to the agenda, we'll start off by getting an update of the acquisition activities, then we'll turn to the fourth quarter highlights. We'll review full year and our expectations for 2008. So let's go ahead and jump right in.

Let's turn the slide to the acquisition update. This morning as you all know, we filed a lawsuit against the affiliates of the Blackstone Group seeking specific performance by the Blackstone entities, their obligations under the merger agreement. We believe that we have to date performed our obligations under the agreement and we are willing and able to perform our remaining obligation and close this transaction. It is our belief that Blackstone, however, has failed to act good faith or use reasonable best efforts to obtain the approvals we need from the OCC.

I want to step back for a second and remind everyone a condition for closing the merger, the OCC must approve the change of control application for World Financial Network National Bank, our credit card bank subsidiary. After markets closed this past Friday we received a notice from Blackstone stating its belief that the OCC is demanding that extraordinary measures be taken by the parties in connection with the change of control and that as a result the related closing condition was unlikely to be satisfied.

Blackstone later told us that they are unwilling to satisfy the requirements specified in the OCC's most recent request. We believe the OCC's requests are reasonable and that Blackstone is able to satisfy these requests but has simply decided not to close the merger on our negotiated terms, if at all. I direct to you read the complaint filed today as it will describe better than I can, given our time tonight. However, I have a few specific points relating to the rhetoric swirling in the press.

One, we believe the OCC again is reasonable, and furthermore they have repeatedly demonstrated their willingness to consider alternatives.

Two, the rumors of unlimited or unreasonable capital demands are simply not true. The maximum potential call is 400 million, and only in event that neither the bank nor Alliance Data is otherwise able to support the bank. And given the profitability of the bank and our history of performance, it is highly unlikely this would actually come into play. And finally, Blackstone has offered to work towards an alternative solution rings hollow when they are only willing to offer a level of financial support that it knows will only be rejected by the regulators and yet to offer -- and has yet to offer any reasonable alternative. Entering into litigation is always a difficult decision but the board of directors and management believe that this course of action is necessary to best protect the interests of Alliance Data and our stockholders. I know you would like me to have more detail but we do not believe it's appropriate or in our shareholders' interest to fight for our rights in the press, particularly when much of the commentary to date has been based on inaccurate and misleading information.

And lastly, let me be very clear. No one is questioning the strength of our financial or operating performance. As will see in today's presentation we have overperformed all year and 2008 looks strong and no one is asserting that our liquidity has suffered, even in today's macro environment. In fact, as today's presentation will show, our liquidity has never been stronger. All right, enough of the acquisition talk. Let's get on with the company.

If you will turn to the next slide for -- and before we jump into the specific highlights for the quarter and the year, I want to remind many of you and perhaps introduce to some of you our newer shareholders, our business model and why we continue to be confident in our future. The business model drives results, double-digit organic growth, strong free cash flow generation, strong visibility and predictability, and adding tuck-in acquisitions to our organic growth, our 12/15/18 model has performed for 10 years now. 12 meaning top line, 15 EBITDA, and 18 our cash EPS. And since our IPO in June of 2001, for 27 consecutive quarters we've met or beat expectations. It is a very recession-resilient model. It's based on several key factors in our loyalty business in Canada; it's based on everyday nondiscretionary spend.

Here in the U.S. with Epsilon, it's based on long-term relationships requiring constant transactional updates. And our private label business is not about financing, it's all about loyalty based programs with very low balances that have a natural hedge between losses and funding. We are confident in our model and we continue to perform, and 2008 will be no exception. So let's turn on for the quarter. Next slide.

I'm pleased to announce we've posted our largest quarter ever for revenue. During this period, revenue reached $603 million, an increase of 15%. Adjusted EBITDA increased by 31% to $158 million. And cash earnings was $0.93, which was up 33%. Operating cash flow or operating EBITDA was at $175 million, and as I said earlier, this is our 27th consecutive quarter, by delivering our exceeding on our promises.

Now let's take a look at a few highlights, starting with our marketing service business in Canada, which manages our AIR MILES or More reward program. They delivered another great quarter, 20% plus organic growth in revenue and EBITDA. The long-term success of our program remains very sound as the fundamentals of the program, based on our sponsors, collectors, and rewards continue to be quite strong.

We're excited to announce a new sponsor this past quarter, Vision Electronics. This marks our entry into a new sponsor category, consumer electronics, and they are western Canada's -- one of western Canada's leading electronics retailers. We also saw a strong increase in air miles issued, one of our key metrics that measures the health of continues. Miles issued serves as evidence that our program encourages collectors to shop at sponsor locations and shop more frequently.

Sponsors see firsthand our program's value in developing sustained consumer buying habits and for us, that translates into virtually a 100% renewal rate for sponsors. Turning to the U.S. marketing group, Epsilon, next slide, Epsilon turned in tremendous performance this quarter. We continue to realize the benefit of companies shifting more of their traditional marketing dollars to programs like ours that use transactional data and deliver measurable ROI.

This quarter both top line and EBITDA grew in excess of 50%. We also announced two new clients. First, a multiyear agreement with Charter Communications to provide integrated marketing services and strategic consulting.

Charter, as you probably know is a Fortune 500 company providing more than 5.6 million customers with cable television, high-speed Internet access and telephone services. Epsilon will be using their loyalty and e-mail communications platforms to launch Charter's customer attention and loyalty programs for the future.

Last month we also announced an agreement with Helzberg Diamonds to manage their marketing database, provide data and analytical support for cross-selling and customer acquisition programs. Their subsidiary of Berkshire Hathaway and they operate 269 fine jewelry stores throughout the U.S. And lastly, we're very proud to be recognized as industry leaders by Forrester Research in their recent assessments of both database and e-mail marketing service. We were the only company to receive the distinction in both reports. All right, let's turn on to private label.

Once again, another great quarter. Our success lies in our ability to demonstrate to clients is when a private label tool positioned as a marketing solution and not a financing option, it can help them increase sales and increase loyalty. The team delivered solid organic growth despite some macro challenges including the grow over of abnormally low credit losses in 2006 due it to the bankruptcy bill, as well as the loss of Lane Bryant portfolio going in-house. Even so, the operating metrics of the business are very solid. Portfolio growth, funding and losses have positive trends. And this bodes well as we enter 2008 and beyond.

We launched a program with Dell Computer this quarter, exclusively targeting Dell's spanish-speaking customers. All of our support services are available in spanish, so spanish-speaking customers can better understand the program's benefits as well as the financing terms and conditions. Also in October we announced the renewal of a long-term client, Alon USA, to provide intergrated and marketing services for their 1100 [fena] locations. We expect to deliver another four or so new deals in 2008 which is typical for us, and we're off to a great start with an announcement already with Sharper Image.

We will be providing integrated private label card program, and just as importantly, we're very excited that at the same time, our Epsilon group won Sharper Images permission-based e-mail marketing services work. Both services will be geared toward driving multi-channel sales and increasing customer loyalty. This is yet another great example of opportunity of the many cross-selling opportunities we see in 2008.

Let's turn to the full year results on the next slide. We finished the year, as you know, just under $2.3 billion in revenue, EBITDA of $643 million, operating EBITDA 685. Cash earnings per share of $3.75, up 19%, just as we promised, when we last increased guidance in October.

As a recap for 2007, we had a great year forging new relationships, adding 14 new customers, including 7-Eleven, Gardner White, Tesco, Orchard Supply as a few. We extended and expanded our relationship with key clients such as Williams-Sonoma, Red Cats, A&P Canada and Good Year Canada, and we continue to build on our strong leadership position in the U.S. and Canada while having increased our internation presence as well. I'm very proud of our team and their performance and I want to congratulate you all. We're all equally excited about 2008 which Ed will review after he tops off 2007 with a few more details.

Ed, over to you.

Thanks, Mike.

We're going to spend a little extra time on the call tonight to share with you detailed information on both the quarter, the year, our outlook for '08, given the fact that we really can't be taking phone calls given the litigation for a little while yet. Again, we will be trying to get some type of update Q-and-A session at some point in the near future. But we're hoping with the press release and with the discussion tonight, that folks out there, whether they're new to the story or whether they've been out of the story over the last year, this should be a quick catch-up, and hopefully for a lot of you out there who have known us for the past eight years, seven years, you will sit there and basically say more of the same. And that's what you're going to hear.

We are very jazzed up about '08, and before I get there, let's talk a little bit about '07. Again, we're going to talk about the quarter, the year, and especially our '08 outlook, because there's just so much noise out in the market about what's going on that we thought we'd take an extra few minutes to talk about it. In terms of where we should be on the slide show, it should be fourth quarter consolidated results.

Let's spend just a few minutes on the quarter. I would say there are five key takeaways. The first, quite simply, top line of $600 million is the best in our history. So it's, again, kudos to the folks here.

Number two, our EBITDA margin expanded over 300 basis points and hence, drove 30% growth in EBITDA.

Third, over 85% of our consolidated revenues and virtually all of our cash flow and growth were generated by our big three engines: the loyalty AIR MILES program in Canada, our U.S. marketing business, also called Epsilon here in the states, and our private label business.

Number four, regarding the three engines, both loyalty and Epsilon posted enormous top line and bottom line growth, each generating 20% plus top line, and 30% plus bottom line. Private label, despite the loss of Lane Bryant and the final normalization of credit losses to a higher base run rate still managed to do mid single-digit growth. Which is pretty good.

And finally, as cash flow, that's what we call operating EBITDA, grew 25% versus last year, margins expanded over 300 basis points, and the three growth engines continued to motor cash earnings per share topped 33% growth and showed a steady growth trajectory that moved from 12% growth in the first quarter, 11% growth year-over-year in the second quarter, 25% in Q3, and 33% in Q4. Needless to say it bodes extremely well for a nice jump-off for 2008. All right, let's move on to the next slide and talk a little bit about the segments.

First, transaction services, which houses our processing, customer care, and the loyalty units within private label as well as utility services and our traditional merchant bank card business. The key driver here, is statements generated, which was flat during the quarter, reflecting single-digit growth in utilities offset by a decline in private label due to the loss of the Lane Bryant portfolio, which started in November. That, along with the sale of our Mail Services print business drove a decline in revenues.

EBITDA was adversely affected by nothing more than our intra-company charge between our private label and transaction services business units. In other words, between our credit segment and our transaction segment. Specifically, we set the inter-company charge once a year. This year expenses have run ahead of expectations, so margins and transaction services have been squeezed. Or says differently, one could suggest transaction services has actually subsidized the credit segment. The uptick in costs covers four areas; one, we beefed up our call center group to enhance service and support. Two, we beefed up our collection group. Three, we had costs associated with moving facilities in Ohio. And four, we added incremental expense to drive new marketing initiatives.

Overall, we believe the money was extremely well spent, as indicated by the strong stable yields, stable losses, and high customer satisfaction. How do you know if the paid off? We'll talk about it in the credit segment.

But needless to say, we think it was money well spent. This inter-company rate will be reset in Q1 based on standard market arm's length transaction type margins.

Next, credit succeeded in growing through both the loss of Lane Bryant and the normalization of losses. Top-line growth of just over 10% was overshadowed by 30% plus growth in EBITDA.

They drove margins up 600 basis points. As yields crept up, funding rates remained flat, and losses normalized out. That is, they rose moderately by about 50 basis points versus the prior year's abnormally low rate which resulted from to '05 bankruptcy reform act windfall which benefited '06.

Delinquencies. They're our best indicator of future losses. Remained in the mid-5's, suggesting little upward pressure on future loss rates.

Finally, marketing services. We'll be spending more time on this during our 2008 outlook, so suffice it tto the say, had a heck of quarter. Top line was up 30, EBITDA 47, margins up close to 300 bifs.

The loyalty AIR MILES program in Canada continued to just rip it, with top line organic growth north of 20% and EBITDA north 30%, and again, this is all organic. Moreover, Epsilon showed even stronger growth as all aspects of its business continued to gain momentum. Again, more on this in a bit.

Let's plow ahead and hit the balance sheet. Highlights from the balance sheet. First, in Canada, deferred revenue increased $24 million from September and a whopping $177 million from last year. That's triple our usual annual rate. What's it mean? Well, it suggests that these revenues and profits that have been earned but have not yet flowed through the P&L will drive exceptional growth in our Canadian business going forward.

Second, core debt, which is our keybank covenant to LTM operating EBITDA continued to improve and now stands at just a bit over one times. Despite if cost of buying Abacus in our stock buyback plan earlier in the year. It at our current run rate, we're heading below one times fairly soon and in fact, if you looked at net core debt, that is core debt net of cash [inaudible]equivalents, we're coming in at less than one times. And this contrasts with our old LBO days 10 years ago that Mike and I remember so fondly, when we were levered up 6 1/2 or more as we started out the company.

Clearly, being at one times or less leverage is not an optimum structure for us, considering our growth rate, our cash flow generation and our visibility, but obviously since the aquisition announcement, we've been frozen out. So, we just wanted to make the point here that we are very well aware of the unlevered position of our current structure. Okay.

Let's go next to free cash flow. Again, for 2007, it was a heck of a year. If you start with our EBITDA for the year of 643, we then have the loyalty cash flow adjustment. Again, for the folks who are relatively new to to this story, or were just clearing out some of the cobwebs from a year ago, essentially in Canada we're receiving cash funding the trust account and what's left over is cash as profit.

We have to recognize that over a period of time even though we have that profit as cash flow today. That gives us timing difference and hence, why our cash flow actually out strips our reported EBITDA. That usually runs about $30 million, this year it's a little bit north of $40 million. Added up, you'll have operating cash flow of $685 million this year. Then backing out CapEx, interest, and taxes, our free cash flow came in at $4.15.

I want to talk about '08 in a little bit, but if I were to look at our estimated free cash flow for '08, it's going up quite a bit. Will you hear us talk about EBITDA north of 700. You throw on a 30 million or so adjustment for Canada, and you're now talking near the mid- 700s in terms of operating cash flow with CapEx dropping off this year, interest in taxes again, this is pro forma.

Obviously, if we get this deal done with Blackstone, this all goes away, but, if you were to take in a run rate on CapEx, interest, and taxes, you're looking at free cash flow of close to $400 million or approaching almost $5 a share, which is about a 20% growth rate in free cash flow. So we're not kidding when we talk about this year is the year of cash flow. It is going to be a very, very good year from that perspective.

So again, before we move on, let's hit a couple of what we like to call our neat looking slides here. Operating leverage obviously continued into 2007. It seemed like just yesterday that we were looking at a 14% EBITDA margin, and yet today we have now doubled that officially and came in at 28% EBITDA margin in '07. We would expect a continuation of that leverage next year. We usually target about 50 basis points. I think we've been averaging double that or more for about 10 years, but we'll just still target 50 bips for now, and we'll see how things play out.

Next up, the 2000 to 2007, a little bit about our ability to perform or overperform, but also very importantly, to do it very predictably and do it every single year, year after year after year. We talk about our 12% top line, 15% EBITDA, 18% cash EPS type model. Obviously we've greatly exceeded that over the years, both from overperformance from our businesses in terms of organic growth and/or some of the aquisitions that we've done, and we usually try to provide guidance that givers you a sound basis upon which to build as the year unfold. This year will be no different.

Okay, the fun stuff. Let's talk about 2008 outlook. Let me first start out by saying that this outlook excludes today's fed cut, which we were quite pleased to see, since we do access the credit markets quite a bit. So keep that in mind. We didn't have time to rewrite it and figured we'd wing it a little bit on the phone here.

But our three objectives have stayed the same over the past 10 years as Mike said, which is, look, we're about organic growth. And we want to do double-digit organic growth. We want to generate a tremendous amount of free cash flow, but we want to do it in a very visible and predictable fashion. The organic growth targets, again, we are excluding any type of tuck-in acquisitions. We're looking at operating EBITDA which runs about $30 million or so of reported -- above reported EBITDA. We're looking for those to be at least -- probably a little bit bit better than $730 million and $700 million respectively. Cash EPS, we're going to start off at $4.30. Which would be up 15% from 2007.

To the extent we do acquisitions or we have overperformance, the EBITDA and cash EPS growth rates would bump up, most likely to our 15% and 18% traditional, "organic" plus acquisition guidance. Again, for now let's just stick with a nice double-digit organic growth rate and use that as our base upon which to build.

All right, the businesses. Mike alluded to the earlier. Epsilon is expected to generate mid-teens growth in EBITDA or cash flow, as the enormous book of business signed in 2007 ramps up.

Despite a slowing macro environment, Epsilon's program tend to be recession resistant in that they require the client to continue add ongoing customer purchase data in order for Epsilon to maximize and optimize its ROI-based target marketing campaigns. Failure to do so jepordizes the effectiveness of the campaigns.

Trying to put it in English, pretty simply stated, Epsilon relies on prior purchase behavior as a best predictor of future behavior, so that the more purchases that an individual makes that are added to the database, the more precise the algorithms become, the more precise the micro targeting becomes, the higher the ROI for the client. So you enter a recessionary type environment. That's not going to stop. You don't just flip the switch off on those thoings because you're going to hurt your ROI on the programs.

So Epsilon does very well when times are slow. There are some of our clients who actually spend more and you could say it's almost counter cyclical in some aspects. In any event, look for mid teens. Again, this is entirely organic growth for '08.

Let's move up north to the loyalty AIR MILES program. It's also expected to generate mid-teens growth in cash flow, and that would include both operating EBITDA and reported EBITDA. The program is also recession resistant as it derives the bulk of its earnings based upon consumer everyday nondiscretionary spend. That's usually mom and dad going to the gas station,the grocery store, and the pharmacy. Again, I know we've been saying it for ten years, but even though it's called AIR MILES, we don't make a dime from the airlines. It is not an airline program that we're used to here in the states, rather it is a massive consumer based program based on everyday spends as we said of gas, groceries, pharmacy, et cetera, et cetera.

We're finding that there are larger and larger commitments from existing clients, what we call our sponsors. New sponsors signed and the "network" effect of customers frequently more and more sponsors are the three main drivers of growth. Combining these drivers along with strong pricing and operational leverage as the program remains an active part of 70% of Canadian households all suggests another very strong year. A lot of people focus on, gee, 70% of the nation active in the program, how can you grow it?

Again, it's not coming from additional cardholds per se, that may be two or three points at most. It's coming from big, huge new commitments from our long-term existing sponsors, new categories we're entering, such as auto and consumer electronics, internet, places like that. And then we're finding that our cardholders each year are frequenting more and more sponsors, and therefore the network effect is what's driving a chunk of growth as well. So very excited about the prospects for '08 there. And now we're going to spend some time on private label.

That seems to have, my guess will be the most noise level out in the marketplace with folks trying to compare us to a bank card issuer or someone like that, which hopefully is not going to be the case after we get through this, since the behavior of our consumers and the fact that our yields have remained rock solid if not slightly creeping upwards for years and years, and we're looking at January and that's looking good as well. So, private label is expected to generate mid- to high single digit growth rates and cash flow. Again, all organic.

Traditionally,the business generates double-digit cash flow growth, but the loss of the Lane Bryant file where they took it in-house will knock overall growth down to the mid- to high single digits. The [inaudible] anniversary in November after which growth should return to normal levels. So a little bit to play through here. Growth in private label is expected to come primarily from those clients signed during the last three years, what we call the '07, the '06 and the '05 vintages. What does that all mean? These programs are new and as such will grow as their shares of their store sales move from zero to an expected 25% to 33% of all sales. A poor macro environment should not impact this ramp-up cycle which occurs over a three year period. It is assumed that our remaining clients will generate minimal growth in this type of environment.

So again, sort of breaking it down and making it as simple as possible, we're not out there buying a bunch of portfolios and stuff like that. Our programs are with usually well-known retailers who have never had one, and we're starting them up from scratch. They grow from virtually nothing to as much as a third of all sale that the retailer put on our cards. That's a three-year process. So even if the retail environment is weak, even if you see weak comps or negative comps, that really doesn't have the type of impact on us that it would have on, for example, a pure credit card company, because we have all of our vintages ramping up, and regardless of the macro environment, that will drive sales. Same thing this year.

Now, the fun begins. On the expense side, the company does not envision any significant impact from higher loss rates. Again, very different from what folks are reading about on the bank card side.

Specifically, our delinquency data which provides a very good predictor of losses over the next 180 days have remained extremely stable over the past few months. Losses hit normalized levels during Q4. That is, the full benefit from the bankruptcy reform act has now played itself out and as such, losses have normalized out right around that 6% level.

For 2008, the company has factored into its guidance a 50 basis point increase in its loss rate which equates to approximately a $20 million EBITDA hit. Note, however, that the company will benefit on the funding side. And let me also say that while we factored in the 50 basis point increase, the way our delinquencies are flowing now, we're still not seeing it. But just for budgeting purposes, might as well be a little bit safe.

As a side note, I also don't know where in the world people are getting the idea that our funding rates are going up. That's completely wrong. Although funding spreads themselves have widened, the enormous drop in the benchmark rates of LIBOR and three to five year treasuries have much more than offset widening spreads. The company expects to have at least a $15 million savings in this area versus our initial budget.

So Mike talked about a hedge between the two. So, factoring in both losses and funding, we would expect maybe a net impact of a hit of, call it $5 million, which has been factored into our guidance, but the overall impact represents less than 1% of the expected '08 cash flow. So again, the fact that you could see some creep-up or some weakness in retail, it's just not enough, based on how our company is put together to knock us out of the box. Probably 1%. And as an FYI, we've already identified expense initiatives at the corporate level which should offset this $5 million hit.

Now finally, this is where we're winging it a bit, with the fed cut today of another 50 basis points, you can forget most of what I just said. We're not going to have a hit. In fact, we'll actually after slight benefit because our savings on the funding side will, in fact, be greater than any uptick in the losses. So it's not in our guidance, but it's nice to know at this time.

In summary, factoring in the relative size of each division as well as corporate overhead, overall growth in operating and reported EBITDA should be consistent with our goal of double-digit organic growth, thus as we expect will play nicely through any macro headwinds. Again, demonstrating that our business model is unique and the poor macro conditions will push things around a bit but in the end will not have enough of an impact to throw us off our growth targets.

So, there are no macro or financial or operational issues which should keep us from achieving another record year consistent with our long-term target and consistent with our 27 quarters in a row since becoming public. Thanks for hanging in there. We're getting there. Cash flow timing and again, a little more precise guidance on cash EPS which again to the extent the deal closes that will go away, as one of our met metrics and we'd probably just be reporting EBITDA and operating EBITDA. But let's talk about cash flow timing.

If you look from '06, '07, and '08, you'll see a pretty straightforward trend, which is we tend to have more and more of our cash flow generated towards the latter part of the year, and why is that? It's mainly because our fastest growth engines, Epsilon and loyalty, which are growing at double or so the rate of private label, tend to be exceptionally strong in the back half of the year. So we would expect that trend to continue. And as we move down to cash EPS, and we start with base case of 15% organic growth, or $4.30 a share, the way it's basically going to play out is Q1 is essentially going to be roughly flat to the past year. Essentially we'll be growing through the Lane Bryant drag.

We haven't yet factored in the additional benefit of the funding, so that could give us a little bit of a kiss there, but let's say for the sake of this discussion we're relatively flat in Q 1, then things begin to pick up steam. We'll be in the low to mid-teens in Q2.

Again, we'll be playing through the Lane Bryant drag, but now what will be happening is those vintages we talked about are really going to start ramping up in private label. And there's probably about between '05, '06, '07, 30 or so different clients, but we have a lot of folks that have just started, and they're ramping up as we speak. By mid-3, we hit our stride. We'll be doing mid- to high teens. Again, we've got the lane Bryant drag, but now we're really getting the benefit on the funding side.

We're really getting the benefit from the private label ramp-ups, and now loyalty and Epsilon start to strut their stuff, and again, this is their time of the year. And then finally, Q4 is going to be a big one. Lane Bryant has now finally hit the anniversary, so that turns into a plus. We'll have funding benefits. Private label ramp-ups continue, the and loyalty and Epsilon are at their strongest. So that's how it it's going to play out this year. We're pretty comfortable giving this type of precise guidance to you.

And as you can tell, as things roll out it's going to be a fabulous jump off as we talk about 2009, which, of course, we're already working on as we speak. Just as an FYI, Epsilon derives 60% of its cash flow in the back half and loyalty generates between 55% and 60% in that period as well. That's why we have the 45/55 split this year.

Okay, we're moving on to liquidity. We have heard an awful lot of noise in the marketplace about liquidity and access to markets and all sorts of other stuff and conspiracy theories, and you name it, we've heard it. We appreciate all those e-mails. Keep them coming.

But with all that chatter in the marketplace about a credit crunch and potential liquidity crisis, we are absolutely sure and agree that there are reasonable concerns for certain segments of the market and -- but the company's position here has never ever been stronger. Today our liquidity is provided from a number of sources. Let's first talk about what's locked in.

Our ability to issue CD's from the banks, our conduit commitments, our revolving credit facility, our warehouse facility, which is the facility that's funding a matured $600 million bond deal, until we decide to access the public markets, in cash, all come in to roughly $3.4 billion of capacity. Of that $3.4 billion, $1.5 billion is not being used and probably will remain unused. And as such we have a tremendous amount of dry powder if needed.

Also note, in case someone is saying, oh, I see another bond deal maturing in May, we do not expect to be using our available capacity to fund it, but rather we'll be putting in play a second warehouse facility. Again, we're already deep in discussions with a number of large banks on that. So if that weren't enough, we could also access both the public and private ADS markets. People are saying the markets are closed. They are not. You can note that Cabelas and Citi have both recently done deals. While the spreads have indeed widened, the base rates, LIBOR and treasuries, have dropped even more. And thus, we could fund at rates all in that are below our budgeted rates. We are now waiting for clarity of the Blackstone ADS acquisition before we access the public markets.

And finally, and only 1.3 times leverage, or less than one times net of cash and tossing off well over $700 million of operating cash flow in '08 and growing organically double-digit annually, we believe our liquidity position is in great shape today and will be in the future. And, again, the, "liquidity scare" in the market is, we're sure, legitimate for some. But for us, and based on ongoing pitches that we're seeing at our banks, we have zero concerns over liquidity or over our ability to access favorable funding rates and provide a pickup to our 2008 budget.

So, wrapping up 2008, as Mike mentioned earlier, there's so much noise in the market that it the's hard to tell if any of it is true or not. With us, we hear the usual rumors about a recession dragging on us or conspiracy theories that Blackstone is using the OCC as an excuse to bail out because they see something bad coming down the road, et cetera, et cetera, et cetera. In the end, we don't know, and frankly, we don't care because it's a waste of time. We're focusing on the business, we're focusing on getting the deal closed. Hopefully today you've been given enough detail so that you can make an informed decision without all the noise.

As we've stated, we expect a very strong '08, double-digit organic growth, perhaps enhanced by a tuck-in acquisition or not. Two of our three businesses are recession resistant, the third indicating very stable delinquency trends and hence loss rates, any upward pressure in losses will be moderated -- will be moderate, and thus with today's fed cut more than offset by funding saves. Liquidity capacity is at an all-time high with many banks still banging on our door. So those are the facts. Very simple and straightforward.

We've been doing this for 27 consecutive quarters, and I think you will find our guidance to have been pretty good over the years. This is what we do for a living. Our model is unique. It's easy to make it confusing.

We are not a credit card company, we are not a marketing company, we are not a transaction processing company, we are not a loyalty company and we are not an Internet company. We are, however, all of these combined. That makes us a unique model which has worked in good times and bad. 2008 will be no different. Q1 is already off and running well.

So, enjoy digesting tonight's news, and we'll be back to you in the near future with additional comfort on our outlook and any new news on the merger and with that, I thank you for your patience, and I turn it it over to Mike.

Thanks, Ed. Lastly, thanks for hanging in there with us, folks. I'm not going to reiterate all of the stuff. This certainly is plenty of information for you to begin to digest and really join in our excitement for the future. Frankly, regardless of our ownership structure, for 10 years now, our culture has been driven by our motto that says deliver on your promises, and we plan to do just that. We'll be looking forward to talking with you in the next 30 to 45 days, and thanks for joining us tonight. Bye now.