Bread Financial Holdings Inc (BFH) 2008 Q1 法說會逐字稿

Good afternoon. Welcome to the Alliance Data first quarter 2008 earnings conference call. At this time, all participants have been placed on a listen-only mode. Following today's presentation, we will open the call up for your questions. (Operator Instructions). It is now, with great pleasure, to introduce your host, Ms. Julie Prozeller of Financial Dynamics. Ma'am, you may begin your conference.

Thank you, operator. By now, you should have received the copy of the Company's first quarter 2008 earnings release. If you haven't, please call Financial Dynamics at 212-850-5721. On the call today, we have Mike Parks, Chairman and Chief Executive Officer and Ed Heffernan, Chief Financial Officer of Alliance Data.

Before we begin, I would like to remind you that some of the comments made on today's call and some 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 has no obligation to update the information presented on the call. Also, on today's call, our speakers will refer in certain non-GAAP financial measures which we believe will provide useful information for investors. Reconciliation of those measures to GAAP will be posted on the Investor Relations Web site at www.alliancedata.com. With that, I would like to turn the call over to Mike Parks. Mike?

Thanks, Julie. Welcome everybody. Thanks for joining us this afternoon. If you will turn to the agenda page, as usual I will spend the few minutes talking about the highlights of the business. I will then make a few brief comments about the outlook and I will ask Ed to take a deeper dive in the financials and then we will take your questions.

Before we begin reviewing the results though, I have a few comments related to Blackstone and the merger. As you have no doubt heard, Blackstone informed us after the market closed Friday that it was not going forward with the purchase of Alliance Data. As you have also heard I am sure, we terminated the merger agreement based on their breach of contract and filed a lawsuit to collect $170 million business interruption fee that Blackstone now owes us.

In our view, Blackstone could easily have closed the transaction but chose not to do so and frankly, it's not any more complicated than that. We are committed to enforcing all of Alliance Data's rights in light of Blackstone's breaches including the pursuit of this lawsuit as well as any other potential remedies that are in the best interests of our stockholders.

Given that we are now in litigation with Blackstone, we will not be discussing the terminated agreement any further or taking any questions relating to it. While we are obviously disappointed that Blackstone chose not to live up to its commitment and satisfy the terms of its agreement, we remain focused on delivering exceptional value to all of our stakeholders and as you will hear today our strong performance speaks for itself. Enough said about that distraction, so let's move on. Let's talk about the business.

Turning to the next slide, I am pleased with the first quarter results. We expected this to be our [toughest] quarter. As you can see on the slide our revenue reached to almost $500 million, about an increase of 7%. Our operating EBITDA increased nicely by 16% to $175 million and adjusted EBITDA came in at a little over $164 million, up about 3%. Cash earnings per share was a buck and while flat to last year's first quarter result, this was on the high end of our guidance range.

We expect to gain momentum throughout the year as we start to see traction from the new client win, some key renewals and the impact of having already completed our goal of $2.7 billion in financing at very favorable rates. As we said last March for companies with the strong, proven performances, the current environment is not an issue and in fact the Company's liquidity is on an all time high despite the volatility in the capital markets.

Now, let us take a look at the units. Let's turn to the AIR MILES Reward Program. Our loyalty services group in Canada posted a great quarter. In fact, it is the best in history, a 30% increase, as you will see in the top line over last year. This quarter, we also announced 2 key renewals of long term sponsors—Century 21 Canada, one of the most recognized brands I am sure you all recognized an they focus in real state. They have been a national sponsor since 1992.

We also renewed InterContinental which includes the InterContinental Hotels, Holiday Inn, Crowne Plaza and Candlewood Suites and they have been a sponsor since 1994. They have also been a reward supplier for our collectors' offer in hotels in any location worldwide, great partner. Just this week, we announced a multi-year renewal of one of our top five sponsors in AIR MILES Program arena, [RONA]. They are Canada's largest retailer of hardware, home renovation, and gardening products, and have a network of 680 stores all across Canada.

As the most successful and recognizable coalition program in North America, our AIR MILES Program has a unique and competitive advantage. First, one we talk about a lot is our advantage as a result of the network effect, meaning the program continues to expand as we add new sponsors, new collectors and new rewards. This then creates strong resiliency to competitive pressures not just for our program but also for our sponsors.

And lastly, as the program continues to deliver double digit organic growth, we also realized significant and increasing operating leverage as we spread more and more volumes over our relatively fixed cost platform. Needless to say, it's a machine. Nice work, team.

Let's turn on to Epsilon. Our Epsilon marketing services group delivered solid mid-teens growth this quarter. We continue to see the benefit of the shift of traditional marketing spin, a nearly $700 billion market, toward the transaction-based and loyalty- in-marketing programs that generate measurable ROI for our client. This is right in our sweet spot.

Its ongoing shift can best be demonstrated by our recent announcement of the multi-year expansion with Citicorp. In 2006, we rewarded a contract to build and run a loyalty platform to support their ThankYou Network as well as host and maintain a website and customer interface for reward redemption. We then build a proprietary email marketing platform to support their consumer credit card business and now, in our latest expansion, the design and operation of a customized database marketing and analytic platform for the ThankYou Network to provide campaign management, analysis, and reporting.

So, as you can see, companies are quite willing to invest in transaction-based solutions when they realize real value from these programs. To wrap up, we fully expect solid double-digit growth this year. While we are often precluded from announcing expansions and new client wins because of the competitive nature of our client's businesses, we have successfully secured larger commitments from existing clients, our new client wins are ramping up, and we have a very solid pipeline approaching 1000 companies.

Let's now move on to Private Label. The next slide in the first quarter, our Private Label Group signed an agreement with a leading specialty retailer, Hot Topic, to provide Private Label credit services for their newest multi-channel brand, Torrid, which is a specialty retailer of women's clothing and accessories. The program is designed to compliment and enhance towards existing reward program which has over 1 million customers in the world.

For the last three years, we have had great success in securing new Private Label clients and we are seeing the impact of these win as new programs, such as Gander Mountain, Hanover, and Orchard Supply are starting to ramp up. Wallet share for new programs will grow throughout the year and they should start to overcome the loss of Lane Bryant in the later half of this year. As you know, we are faced with a difficult grow-over given the size of the portfolio reduction, but we fully expect to see a return to our normal, high mid-single digit growth later this year.Our prospect pipeline remains strong as retailers are particularly focused right now on ways to secure and grow customer relationships.

Let's turn on to full-year guidance on the next slide. Looking at the full year, I'm very confident about the Company's overall performance. The toughest quarter is behind us, and our businesses are positioned to meet their targets. We expect strong momentum to continue from our loyalty service and Epsilon businesses and we see momentum building in Private Label as in both the new client ramp-ups and our success in securing lower funding costs, despite concerns surrounding credit.

I would like to thank our entire team for a job well done. We got more work to do but I am very confident and I look forward to working with you throughout this year. Ed, would take us through a little bit more to tell on the financials?

All right. Thanks Mike. I am on this slide that says first quarter consolidated results and everyone can pull up one out. Let us start up by saying I guess it is official at this point, we are back and that we pick up right away where we left off and now we are at 20th quarter in a row of delivering or over delivering on our promises. We are now emerging from that long painful root canal called deal purgatory, and fortunately we have managed to maintain focus on the business during all the turmoil. As much as I would love to share some of the most classic moments over the past few months, perhaps we'll have to save that for another day.

So, let us dive right in and see how things are going. There are six key takeaways from the quarter but first let's set the stage. Q1 had four major headwinds to overcome, as Mike mentioned, the loss of Lane Bryant which had its biggest quarter last year during Q1. Two, a moderate uptake in credit losses which had yet to be mitigated by lower funding costs. Three, a mix shift in the business whereby our fastest growth engines, Loyalty and Epsilon, seasonally don't hit their monster quarters until the latter half of the year, and four, very difficult calms and Private Label as Q1 of last year, as everyone knows, was the last truly strong quarter of the entire retail sector.

Now, that being said, as the saying goes, "Don't give me excuses. Just deliver the results." No problem here. Let's start going away now at the takeaways. We have six items that we think we wanted to emphasize for the quarter. The first was that despite severe headwinds, we managed to grow revenue, maintain earnings and generate mid-teens organic growth and operating cash flow, that is operating EBITDA. Two, both of our fastest growth engines, Loyalty and Epsilon, generated a minimum of mid-teen's growth.

Three, and this is fairly critical, the entire negative compare in Private Label occurred in January. Both February and March generated flat to positive compares to last year, suggesting that we are on our way. Four, excluding Lane Bryant, Private Label sales growth was positive and the portfolio grew at a healthy 6%. Five, on the debt side, the capital markets treated us extremely well as we completed our entire $2.7 billion liquidity goal for the year. As importantly, we will now enjoy savings on funding costs which, at a minimum, should nicely offset the moderate uptick in credit losses. And six, finally as we begin to move deeper into the year, this headwinds will begin to dissipate. Lane Bryant, which we have anniversary in November, has a less severe impact each subsequent quarter of this year as newer clients' ramp up.

Also, Private Label compares get easier. Funding saves start ramping up and will mitigate the step up in credit losses which have now hit a plateau, and the Loyalty and Epsilon engines fully kick in to gear. So, overall, pretty good quarter for us sets the stage for a nice return to earnings growth throughout the remainder of the year. Perhaps more importantly, the earnings growth rate will accelerate and hit highest rate at the end of the year, suggesting a very nice jump off for 2009.

Alright, that is kind of a big picture. Let's turn now our attention and walk to the segments which as you all know have been redone to better reflect how we actually operate the business.

Segment results, first stop, Loyalty services, what more can you say? Posted its strongest quarter in its history with operating EBITDA which is a proxy for cash flow of over $50 million. Six drivers accounted for this performance. Mike had a bunch of them but we will do it again. Number one, solid issuance and redemption growth of just under 10%. Two, pricing power, which we describe as, at a minimum, stable combined with increased operating leverage. Three, continued success in securing larger and larger commitments from existing sponsors. Four, new sponsors coming online, and five, the 'network effects' as our members frequent more and more of our participating retailers as the program continues to assume a higher and higher profile. And six, of course, the stronger Canadian dollar certainly didn't hurt. Overall, huge quarter but we do not expect similar results every quarter, we are more than comfortable with our initial guidance of mid-teens growth and EBITDA for the year and know it is entirely organic.

All right, let us chat about Epsilon. Epsilon marketing comes next. It posted a growth in both top line and EBITDA. The bulk of Epsilon's growth comes from a larger commitment from a installed base of customers. The deal with Citi's ThankYou program was a perfect example of this. Additionally, the Epsilon model is increasingly benefiting from the shift in Fortune 1000 marketing spend away from traditional channels and into the transactional-based, highly-targeted, ROI-based programs which is Epsilon's specialty.

As a quick review for some of the newer folks on the phone, Epsilon offers the most comprehensive end-to-end ROI-based solution for the Fortune 1000 covering all 5 key critical offerings from one, creative, that means designing the loyalty program; two, providing the data, whether it is proprietary or purchased; three, designing, building and maintaining the big iron databases; four, high end analytics to develop the analysis and algorithm needed for micro-targeting; and five, of course, you need a delivery mechanism and in our case we rely on commission-based email using previously acquired businesses, Double Click and Bigfoot, to deliver micro-targeted high ROI-based programs.

This year over 35 billion permission-based emails will be sent. Similar to Loyalty, we expect Epsilon to post mid-teens organic EBITDA growth this year. Results tend to chop a bit in the first part of the year with the bulk of the contribution coming in the back half. On a final note Epsilon also boasts by far the most robust pipeline at Alliance.

To review, Private Label Services covers all the processing that we do, all the high end customer care and call center work that we do, as well as all the costs associated with providing the marketing and loyalty functions for approximately 90 Private Label programs. The secret sauce in Private Label has always been our ability to step in and serve as our client's key touch point to its customer via our customer care solutions. Additional stickiness comes from the tailored marketing and loyalty programs which are created on behalf of our clients and the closed-loop network inherent in Private Label provides a unique framework for us to capture both the customers' information and link it back to the SKU-level data regarding their purchases, thus driving effective targeted marketing programs.

Q1's performance was a bit off due to the loss of Lane Bryant which knocked 7 points off of statement growth. Excluding it, statements, our key proxy for performance would have been about flat. As the year unfolds, look to see the grow-over diminish as the 2005, 2006, 2007 signings ramp up, and just to give you a sense that is about 20 of our 90 clients, so it's a huge chunk of our business. Additionally, there will be a positive pop in November when Lane Bryant anniversaries. Overall, then look for a year of mid single digit growth in organic EBITDA in this segment.

Okay, finally same drill with Private Label Credit. As you can clearly see, from the results about one quarter of Private Label's earnings are for the abovementioned services, the processing, high-end customer care, and marketing loyalty, while about three-quarters of it falls directly into the credit bucket. Again, results reflected the loss of Lane Bryant. If you were to exclude Lane Bryant, we saw a very nice 6% growth in the portfolio, along with very stable yields. Sales, which grew slightly when excluding Lane Bryant, are slowly creeping up, based on results at the end of the quarter an early April read.

Combined with the continued ramp up of the 2005, 2006 and 2007 new clients, we would expect mid single digit growth in organic EBITDA and its segment for the year. Again, results should pop up a few more points in November at the anniversary of Lane Bryant. Alright, so let us say we have a decent feel for the revenue drivers that is the portfolio growth and new client ramp ups, stable yields, all impacted or if you want to take out the Lane Bryant impact, so let us assume we have a pretty good idea what top line is doing, let us turn to the fun stuff which will be credit quality and of course cost of funds. Our normal run-rate in decent economic times would be around a 6% loss rate, assuming we are in a recession, we would be looking for something in the mid 6's, about a 50, 60 basis point increase. This factors in prior recession results, plus the benefits from a portfolio mix which has skewed upward in quality over the years and the benefits of the tens of millions we have invested in our back office operations to bring it up to world class status.

Alright, what is our comfort level with this? Well, we actually tend to front run a recession, so our delinquencies moved up as early as late August. If you went back to the data, you would seen something going from the high 4s to the mid 5s. But importantly it plateaued that level and have remained remarkably stable over the last nine months and we will give you a sneak preview and say, the last nine months if you include what April looks like.

Since delinquencies gives us a 180 day window into future write-offs, we have very strong visibility well into Q4 this year. What this all means, losses in the mid 6's, they seem about right. This will ding us for about $20 million of lost EBIDTA versus budget and of course now the good news, the successful completion of our $2.7 billion in refinancing will yield a minimum of $30 million or more in benefits versus budget on the funding side. So we like to keep it simple here, let's just call it a wash for now, and it really is that simple.

Alright, to summarize, Loyalty and Epsilon are ripping it. Private Label Services and Credit are well-positioned to grow despite the loss of Lane Bryant and the macro environment. Thus the difference between the Company having a very, very good year, that is double digit organic growth and generating $400 million of pure free cash flow, and an absolutely great year is not the macro-environment for us, but rather just the waiting game until Lane Bryant hits its anniversary. So we will have to live with just a very, very good year for now.

Alright, let us hit the balance sheet. A couple of notes on the balance sheet, I apologize for this in advance but I am going to go into a bit of detail here for the 5% of votes who drill down this low, and hopefully it will save some questions later but specifically let us head up north to Canada and take a look at deferred revenues and our trust account assets called redemption settlement asset.

From a year end to the end of the first quarter, the Canadian dollar declined. Thus, we have a translation loss for balance sheet purposes. Specifically the effects hit the deferred revenues for about a negative $34 million and our trust account for a negative $12 million leading to a net non-cash FX hit of around minus $22 million. If you look at the actual changes in those accounts from December until the end of March, they will only show a decline of $12 million. So if the net balance sheet hit with around minus $12 million and the FX component was minus $22 million, then the true cash flow contributed during the quarter must be a positive $10 million to make up the difference. Hence, operating EBITDA measures cash flow which ran, in fact, about $10 million ahead of reported EBITDA.

Sometimes folks get confused between balance sheet mark to market, which was negative this quarter, since it compared to December to March versus PNO impact, which was positive this quarter since that measures year over year. There will be a test on this later. The bottom line, Canada produced about $10 million in extra cash flow within the quarter that did not hit the PNO, and is on track to produce a minimum of at least $30 million of this excess cash for the year, which quite frankly is conservative.

And for those of you who are still awake, let's return to the fun stuff. Debt. Net core debt, which similar to our debt convenants, excludes CDs, end of the quarter a bit north of $700 million, while LTM operating EBITDA or operating cash flow was also approximately about $700 million. Thus, our LTM leverage ratio is approximately one times. We used a bit under $100 million of free cash to pay down some CDs during the quarter and to free up even more capacity.

Alright, turning back to the leverage, in the absence of any changes to our capital structure, our free cash flow will continue to reduce our net core debt, while our cash flow will continue to grow as the year unfolds. As such, our leverage ratio will quickly drop well below one times. This however is not what we believe is the optimal capital structure for us. Specifically, we would like to maintain an investment grade profile which would suggest no more than three times leverage. The difference between where our leverage is heading now and the three times level is around $1.5 billion to $2 billion of dry powder. Let's call it $1.8 billion A of dried powder for now and be assured we will be looking at our capital structure intensively now that we have been freed from purgatory. That's it on the balance sheet.

Seems like a good time to chat about liquidity. Next slide, please. All right. Liquidity going into Q4 of last year and as noted in the 10K, we were looking for new or to renew approximately $2.7 billion in facilities related specifically to our Private Label Program. We are done. Names such as Barclays, Royal Bank of Scotland, Royal Bank of Canada, Bank of Montreal, JP Morgan, Wachovia, all contributed to the effort and we thank them.

Next question. How much capacity do we have?

Well, let us first look at the off balance sheet facilities where we have about $1 billion of available and unused capacity at the moment. Let us go ahead and toss in about $400 million in extra CD capacity and over $0.5 billion in our normal corporate credit facilities, add it all up and as we sit here today, we have about $2 billion in immediately available and unused capacity. Finally, as we noted before, if we were to lever up a bit, we could be looking at another couple of billion. In summary, call it $2 billion immediately available and up to $2 billion if we lever up a bit.

We feel comfortable saying that despite the gloom and doom on the capital markets, liquidity has never been more plentiful for us. One more thing, our new renewed facilities offer us the opportunity to save at least $30 million in funding costs this year versus budget. Hopefully, let's put the final nail in the coffin regarding investor concerns about liquidity.

Next up guidance. All right, we are going to reiterate what we've already laid out there to the public, which is our operating EBITDA of at least $730 million, adjusted EBITDA of at least $700 million, and cash EPS certainly very comfortable at $4.30 per share. You will see the check mark, Q1 was a tough one with the Lane Bryant drag and the very difficult comps. Q2 we expect about 10% growth in earnings and what essentially happens in Q2 is we'll still experience the Lane Bryant drag, also from a seasonal perspective, Private Label earnings from that always tends to trail off in the second quarter. Essentially folks tend to revolve the balances on the cards in the first quarter post-holiday and in the second quarter, they tend to pay them down. But now we start seeing the positive bennies of the Private Label ramp ups. Again those with the '05, '06, '07 vintages, which is 20 out of 90 clients, and we begin to see the funding benefits as well.

Q3, Lane Bryant drag, but again now we are really beginning to kick into gear with positive funding benefits, positive Private Label ramp ups, and positive Loyalty and Epsilon, who really kick into gear at this point, especially Epsilon. In Q4, that is when the fun begins. We anniversary Lane Bryant, funding benefits, Private Label ramp ups and Loyalty and Epsilon, all positives no negatives and that is our jump up for 2009.

As in the past we will take a look at the end of Q2 to see how things are running. We think we are pretty close and perhaps just a bit conservative at the moment. If things open up in the set in the back half, we will adjust guidance accordingly, so let us not get ahead of ourselves just yet.

Ok free cash flow. Going back to adjusted EBITDA north of $700 million, we talked about the adjustment in Canada where we are receiving cash, putting some into a trust account, keeping the profit. That profit does not get recognized immediately even though we have the cash, that is US$30 million to US$40 million a year. So our operating cash flow is going to be near or north of $730 million this year. Personally we look at the all the cash items, CapEx, interest, taxes and we come down to a pure free cash flow number of about $400 million this year. Per share that is $5 which is about a 10% yield. In the past, we typically had a 5% yield and that does not include any type of asset sales or other initiatives.

In terms of the asset sales, we talked about the network business and the utility business. We are in process on both of those and the utility business is in the process of starting a little bit later than the network business and we are just about to begin to winnow down interested parties. The network is much farther along and we have narrowed down our options to less than a handful at this point, so stay tuned.

Next page, very simply just a review of our four key financial metrics and goals and that is very simply double digit organic growth, very strong free cash flow conversion, you will see along with organic growth huge margin expansion over the years. CapEx we have done virtually all of the build up, in fact I think all of the build up, so we are going from 5% of top line to 3%. This is our 28th consecutive quarter since the IPO of meeting or beating a very high recession resiliency and, as we talked about, excellent liquidity.

If you turn to the last slide which is the 2003 to 2008 track record, I want to make a couple of comments before I kick it back to Mike. I know a lot of folks are doing a ton of work on the Company. We will work with you as best as we can and we do ask for your patience given the amount of folks who are calling in. Specifically we look forward to welcoming back many of our long term growth investors as well as a number of our new folks from the value side. Anyhow let me briefly hit on the top three questions that people are asking as they go through their diligence and combine these with what seems to be the disconnect in the market versus the reality of Alliance.

Number of course is liquidity. Capital market are seizing up etc., etc., etc. We are done with everything. We are going to have bunch of savings from doing these renewals and new facilities. We have tons of excess capacity, so I would really like to take this one off the list going forward. It is certainly was an excellent question which needed to be answered and I think we beat this one to death at this point.

Number two surprise, surprise! Credit losses. Again critical that we put this one in perspective because we are not a credit card company. First, the 50 basis point increase that we talked about for this year is already fully offset by lower funding, so that's done. Second, since I know people love to model things out. Let us say you want a stress test the mid-6's on our losses and bang it up to 7% so we are off another 50 basis points. Well, that is another $20 million hit to us. If we are already going to be doing operating EBITDA greater than $730 million, you are talking about less than 3% of our cash flow. It is just not enough to get excited about. I think when put in that perspective something that can hit less than 3% of cash flow does not seem quite so concerning. Also note, that would probably mean that there was a deeper turn down in the economy and we'd most likely get most of all that mitigated by additional lower funding. And then number three, sort of the general turmoil, what's going on. Obviously we have a shareholder base that is turning over now, now that we're remaining public, it's going to take a bit of time or people complete the work on us and finally from a management perspective, it has been a very long 12 months to 15 months, but as you can see we overperformed last year, we intend to have great performance this year. Management is fully committed once again and we are back and with that I will turn it over to Mike.

Thank you. I think we are ready to take Q&A now operator, open up the line.

Thank you. (Operator Instructions) Thank you. Your first question is coming from [James Cayne] of Bear Stearns. Please go ahead.

Hey Mike and Ed, great job.

Thanks James.

Loyalty blew away our estimate but you are indicating that you are expecting to slow through the year. What are some other factors that would cause the slow down?

Yes. There is a couple of things, I do not -- 60% growth on EBITDA while I'd love to say is that is going to be a gimme for the year, I am hesitant to do so because I am going to get a bunch of calls from Canada if I ever tried something to do something like that. So I think they just had an enormous first quarter but some of it was timing and some of it was the FX from the marketing spend and some of other expenses. We really didn't spend anything so a lot of that dropped right to the bottom line, also the FX grow over was quite large in the first quarter that will diminish as the year progresses as well so while you are not going to see that type of performance, certainly setting the bar at mid-teens organic growth for the year is probably a little conservative

Okay. I just want to make sure mid-teens was pretty conservative, given the 60% on the first quarter.

Next question.

Can you give us the sense of that the ramp ups of the new Private Label programs, the ones you have added over the past three years relative to your past experience?

I think if you were to look at the 20 or so from the '05 through '07 vintages, they're our typical type of clients. There are our typical client and our typical portfolio is that there are $130 million in credit sales and $60 million or $70 million in portfolio size. It takes three years for typical client to go from 0% wallet share to about a third of all sales being put on the card. So I guess the bottom line is very different from like the bank card community is even if those 20 clients are suffering through some really lousy columns and the base is showing negative comps, just the math of getting up to that wallet share itself will pull the overall file and the overall business into positive territory. So we are not betting on even positive comps to make this happen at the stores, all we're betting on is just the math of 20 of these folks ramping up. So if you add negative 5% columns that all 90 clients and you tossed in Lane Bryant, which will ding you for another few points, these 20 will be enough to add that both of those.

Great! And this one last question. You indicate the pipeline of Epsilon, it was the throughout the Company, is it mostly related to new customers or just the existing customers expanding the relationships?

Yes. I would say about 60% of the growth at Epsilon is from existing clients, so again the Citi ThankYou would be a perfect example where we move from spending two years building and maintaining the transactional base platform and the point program, to now we're popping on the actual marketing platform so we can develop all those cool algorithm and analyses to do the micro-targeting. So 60% of the Epsilon growth is from existing clients, the remaining 40% would be from a new clients. And again very similar to Private Label, except on a shorter leash. A lot of these are the signings that were done last year. I would say, it kills us not to be able to announce it, but the signings that we have released to the public are probably 1 out of every 4 that Epsilon signs. So there is a lot of stuff going on that is ramping up and that is what is happening in Epsilon.

And so when you talk of the pipelines, is that backlog or is that future potential?

This share will be driven by what was signed last year. The signing this year will be driving '09 and I can tell you right now the signings that have already happened in the first quarter and the pipeline for the remainder of the year is the largest we have ever seen so '09 and 2010 look to be shaping up nicely. We are always looking about a year ahead.

Thank you very much, great job.

Thank you.

Thank you. Your next question is coming from Reggie Smith from J.P. Morgan. Please go ahead.

Did you guys give the charge-offs for the quarter in terms of rate?

I think we said we were plateauing right around the mid 6's. I have not have averaged—I would say probably somewhere around—if you were to take the match trust data they were probably around 6.5%.

Okay.

I think that is a good number and last year we were about 5.7% or so.

Alright.

We had to chew through about 70 or 80 basis points, Reggie, is about the number I've used.

Okay. And then I guess on the macro front, does the environment change at all retailers' willingness to talk to you guys about Private Label programs. Does it change the pipeline or the sales cycle there at all?

It actually -- we talked about this last quarter. Retailers are more interested in talking to us now than ever. They are looking to drive sales so we have a very positive-looking pipeline in the retail area as well, Reggie.

Yes I think we try to target 4 to 6 signings per year. Right now you will see, I think we are in contract with about 4 so as we speak. We've already announced [inaudible] so that is 5 and clearly we are heading towards the high end of that number for the year.

Okay.

One other thing I pointed out -- we were talking about credit sales even though you do see a lot of quote negative things to our sales comps, there is a whole lot when you look at the total sales that are not as bleak as some people are making them out to be. So I think we are going to have a good year on the retail signing side.

Okay. And then I guess in Epsilon -- remind me, I believe they still have a quarter of Abacus in there that had not annualized that. Is that about right?

One month.

One month?

Yes.

Yes. Abacus is, if you look at Abacus they are second half team, Reggie, it's all Q3, Q4.

A question we get from folks is what is your appetite or share repurchase and how quickly could that happen. The stocks is trading at least 12 times your guidance right now. Which of you on that?

We are not going to give any guidance on that, Reggie. We have just gotten out from underneath agreements, we have been spending a lot of time on that, but we are now turning to looking at it so that is about all we can say right now.

To my explaining, there is an awful lot of dry powder there and obviously we know we are having the investor base is in the process of doing a lot of work, a lot of diligence. We are absolutely flooded here with both value and [gapping] growth folks and we are going as fast as we can. Clearly, we are not very excited about where the stock is right now. That does not take a rocket scientist to figure out and hopefully as folks finish up their diligence, get comfort with -- the things that have been bugging folks -- the credit and liquidity and comfort with our year that will help-- We have always been a company that has given -- we step side to let the folks who are likely to be big long-term shareholders do their work, make a decision and at the same time as Mike clearly indicated, we are doing our own work here and that is all we can say.

All right, that is helpful. Now one last question, IO gains, any IO gains for the quarter?

Yes, I think it was right around 9ish.

9 million?

Yes.

Okay.

Right now it is right around -- yes. That sounds about right.

Okay, thanks a lot.

And again any IO gain is recaptured in cash flow within the current year because the receivable has such a short life. It is just a proxy for cash flow. Operator, next question please.

Thank you, your next question is coming from Bob Napoli of Piper Jaffray. Please go ahead.

Thank you, good afternoon.

Hi.

Question I guess on the Loyalty, just trying to understand a little better, the revenue growth of 30% versus the year Miles Rewards' growth of 10%. How much of that is currency? What is the -- what am I missing on the driver and the disparity between the two.

Yes, a couple of things going on. One is it is not just the miles issue or miles redeemed that drives the financial of the program -- those are drivers that, quite frankly, those are the only 2 that we could really find that would give at least an indication directionally of where the business is going. You really want to see those right around the double digit point, but at the same time we talked about the pricing power that we do have up in Canada and while we do not want to get into the price per mile and which way it is trending, clearly when we say it is very strong pricing, hopefully you can draw the line from A to B.

Then on the EBITDA's side, since we are now so big in Canada, our purchasing power is enormous and our cost per's are certainly -- we are getting some very nice leverage there. So it is the combination of pricing power plus the drivers and then also as I mentioned when Jim asked the question the foreign exchange benefit this quarter was substantial. If you were to look at the Canadian dollar this year versus last year, it is up almost $0.15, so it is huge, and so we picked up about $24 million in revenue strictly due to FX. And that will probably explain a lot of it. If you were to knock it down by 24 million -- it would be a much lower number. Now what is going to happen is that Canadian dollars is going to start its anniversary as we go through the year so you are not going to see that big FX gain later on this year.

Okay, that makes sense. Thank you. On margins, we talked about margins obviously you had massive margin expansion over the last several years, 14% to 32% -- from this level, how much more can you grow margins over the next, say, 5 years. What kind of a goal do you have?

Again, we keep resetting the bar so we went from 14 and then we said let us try to get to hit 20 then let's 25 and then 30. I would say from a big picture perspective, we finished all the build out that we needed in the businesses. We are disposing those businesses that were rather draining on the Company from cash flow perspective and the margin perspective. So what we are left with 3 businesses that are very leverageable and have all been built out. Our CapEx is dropping to only 3% from 5%, so obviously that is going to start -- you will start seeing that show up on the bottom line. I would say even though we were doing 200 basis points plus of expansion over the last 7 years, we comfortably say 50 basis points and hopefully we can achieve something a bit north of that. I think it is unrealistic to expect 200 a year but I think 50 is certainly something that conservatively said is certainly doable.

Thanks and last question just on the retailer side, do you have exposure to many troubled retailers? Obviously it's a much tougher environment for retailers and how long ahead of time do you know when you are going to lose somebody like a Lane Bryant?

Yes, I have been here 10 years, Mike can be 11 or something like that, seems like yesterday. But over 10 years we are trying to think of loyalty, Epsilon and Private Label altogether, I can only think of one other large client that ever left us and that was due to a bankruptcy at Service Merchandise back in 2001. Other than that, across all 3 of our businesses I cannot, otherwise, think of any one major who has left. So this is one of those things that happens very, very rarely and we just happened to get a hit with it this year. As we look at renewals and everything else for 2008 and for 2009, we are not seeing anything that would suggest there are any issues whatsoever with any of the renewals. Lane Bryant quite frankly was purchased by Charming. They decided to go against the trend and bring it in-house, not much we could do about that and so I would say I would not worry about losing another large client. We think we are pretty sticky here. In terms of exposure to troubled retailers, there are a couple in the portfolio that are pretty small on the jewelry side that are in bankruptcy, but again we do protect ourselves and we do not lose money when the retailer goes out of business. All we do is we just wind down the file.

And then we start up with a new owner, stand on what the situation is. So do not see that impacting our year.

Thank you very much, very helpful.

Thanks Bob.

Thank you, your next question is coming from Mark Bacurin of Robert W. Baird. Please go ahead.

Good afternoon.

Alright.

Hey.

A couple of questions -- first I just want to make sure I am clear on adding a comment on the press release you talked about the charge offs coming in $20 million higher than budget. When was that budget set? I mean when you set the guidance for '08, you talked about the expectation of a 50 basis point increase in charge offs, which sounds like what is happening, so I just want to make sure on understanding what you are referring to on the $20 million relative to budget.

Yes, when we -- it is kind of a moving target but you can think of credit losses and cost of funds as doing a flip-flop if you want to do it that way. When we set the initial budget way back in the fall, we were thinking sort of a moderate economic type of environment and we were thinking losses around the 6ish, and we were going to get dinged on the funding side, and then as we were moving into the new year, it completely reversed itself and it looked like the losses were going to be up 50 basis points and our funding was going to be improving by about $30 million. And so what we did is we just reset those expectations on the budget so at the end of the day, it is kind of a wash and our guidance really did not change.

So when you are saying budget that was something from last fall, not the guidance you gave back in February.

Right and what we basically did is when we talk to the guy in Private Label we know losses are going up 20 and funding is coming down 30, we are going to adjust their budget accordingly because it only makes sense.

Okay, perfect. And so I am thinking...

I am sorry, Mark. If you go back and look at our history, we normally at the [Industrial] we will give guidance historically its public company, it is just something we have always done so because of that visibility year around. So this is business as usual.

Great. Switching over to Epsilon side, can you give us -- you talked about a very robust pipeline, can you talk about any success story you have had with regard to taking that suite of services and trying to sell it more aggressively into those 90 or so Private Label customer relationships you have?

I think if you look at the focuses, it is within the Epsilon client, Citibank example is a good one -- you look at Charter Communication is a good one. In terms of our retail Private Label, the specialty retailers versus the big financial services, insurance, travel, hospitality, which has historically been Epsilon's bread and butter. That is where we really growing the business. We have had several e-mail clients in our Private Label world but those are not driving the big, big performances that you are seeing out of Epsilon. It is within their existing historical markets, expanding within those relationships and then adding some new ones like Charter.

I would say to Mike's point as he said sort of the ability to expand and offer all 5 of those services, Mark, from the creative, to the data, the database, the analytics, and the delivery mechanisms. That is where we are getting the juice and obviously we cannot give you names unless they let us, but we will try our best to get the names out there. So I would say to Mike's point, obviously the permission base e-mail -- that would be a nice add to Private Label. We've had success there also -- there is a fair amount of folks between Private Label and Abacus, the coalition database within Epsilon, that also are shared clients.

You have to remember the -- often people forget and think about our Private Label billing system like other quote processors. It was built around a database marketing platform that also could do billing. So we got the analytics and the marketing capabilities and lot of the things that Epsilon does for the other industry significantly built already with our Private Label business.

And then you made a reference to the fact of looking at optimal capital structure. I know you said you do not want to talk about share buy back, but I guess the other thing that you might look at using leverage for would be M&A. Can you give us any sense of what your upside might be for plugging in more [tuck-in type] acquisitions either on the Epsilon side or elsewhere.

We are, first and foremost, a growth Company. Our cash is going to go to bringing on new organic customers. We will look at tuck-ins -- right now they are just really are not that many. We have pretty much built out the suite of services at Epsilon and because of just the pure amount of cash we are producing we will just have an enough excess to do a lot more with. But we will always focus on growth first, Mark.

Again, this year because everything has been built out and we're going to generating additional cash flow from potential disposition and the discontinued ops and we really do not have anything major in the pipe right now in the acquisition side. Obviously that would tend to sway one towards other uses of the cash.

Great, thanks. And Michael, I am looking forward to see you in a few weeks at our conference.

I am looking forward to it.

Thanks.

See you in a few weeks.

Okay your next question is coming from Wayne Johnson of Raymond James. Please go ahead.

Hi. Good afternoon.

Hi Wayne.

Hi Wayne.

Hi. I was wondering if you guys can give us a sense of how the group of Epsilon Company has performed in the last recession and if there is any kind of compare and contrast or telltale signs of what we should expect.

I do not want to go so far to say it's counter-cyclical, but certainly it is extremely resilient in a recession. Obviously what you have is the business, as you know, Wayne, that you cannot really turn the lights off. It is transactional-based and if you were to stop feeding the beast and stop sending that purchase-related information to us on a daily basis then that compromises our ability to do the most effective micro-targeting and hence the highest ROI type campaigning that we can do. So that is a very long way of saying, other type of marketing budgets will certainly go by the wayside in difficult times, but what we found in the last few session was that there was no impact to us whatsoever, because again the whole basis of the Epsilon beast is built around capturing individual transactional behavior and using that to predict future behavior.

Then secondly, we will say that for some of our clients that, obviously not big pharma and a couple of those, but some of the other areas that those sectors that actually do get hit hard by a recession, if you think of the hotel industry, for example where occupancy rates, would actually go through the roof, we actually could generate quite a bit more revenue because we are doing a lot more work-- If you think of it, it's logical that the marginal cost have a room for example goes down dramatically if it is not being occupied.

Okay, that is a little helpful, so I appreciate that. Clearly, Citibank is pleased with results of the Epsilon program and ThankYou Network. Is there any kind of metrics of efficacy that you could share with us -- I was told how successful it is -- we thought it would be this way and then fact it is --- you know it was X and then in fact it is Y -- any kind of before and after snapshot and if Citibank is too sensitive, is there any other customer you can point to, and kind of walk us through what it was and kind of what it is today.

Again, particularly in this marketing segment we have a hard enough time giving people to even allow us to do a press release on major releases because of their view of the competitive nature -- so getting actually specific results of customers will not happen, Wayne, but I think we can get some very strong testimonials direct from customers, those that would be willing to talk. We cannot share specific results.

Understood. I thought I could give it a try anyway.

Nice try, it really was. Thanks Wayne.

Alright, thanks.

Your next question is coming from Larry Berlin, at First Analysis. Please go ahead.

Actually you guys answered my question, so let us go to the next guy.

Thanks Larry.

Thank you, have a great evening.

Thank you. Your final question is coming from David Scharf of J&P Securities. Please go ahead.

I have two areas I want to cover. I have one on Epsilon. I guess it follows up on the prior questions, kind of has to do with transparency. I appreciate you got a record pipeline here but it is still a little opaque. Can you -- are there any metrics much like air miles -- you know you searched for a few metrics and all you could kind of come up with is miles redeemed and issued, but nevertheless those are helpful barometers. Is there anything in the Epsilon business that could be released quarterly such as number of companies contributing to the Abacus network, number of statements, number of permission dates and e-mails? Is there any type of returning statistics that can, in the future, give us a little bit of a more tangible indication on how the business is trending?

Revenues in EBITDA?

It is hard. The individual transaction stuff is really a small piece of the overall revenue. A lot of the revenue is from running these big processing engines that are build out every month, that are not transaction driven, so as much as anything else it is revenue, EBITDA, and customer signings and I know that is really the next track we are trying to give you some guidance on numbers of customers, but we are still working on it and we will continue to look for ways to give you some better guidance.

We are trying pretty hard to find a driver that'll work -- unfortunately, as Mike said, we cannot at this point -- we have looked back over the years and it is just, it is the real tough one.

It is not consistent enough--

We'd hate to give you the wrong driver--

I appreciate that. We are obviously kind of faced with the situation where, by your admission, the strongest segment is one in which there are the fewest metrics out there, but we will wait on that.

If you could be a little bit patient, one of the things we could try to do is essentially give a sense of -- look, if last year we have X hundred millions of revenue, we dragged whatever the number is and make it up 98% of it into this year and then we would expect signings from last year, which on average $X million per client, and we signed 15 clients, that should get you 10% growth, and then new enhancements or whatever they may be on average of $2 million per client, now we are 10 of those and help you build up to the 15% side EBITDA growth -- does that help you out?

I think one thing to be helpful is to get a sense for how much of the revenue you would consider to be somewhat recurrent. I would imagine when a Hilton Honors statement goes out every month, it is largely recurring, versus project-oriented work.

Yes, it got to be 90 plus, so we will put this on our to-do of trying to get you something. Right now unless we made some -- I cannot come up with anything.

One last topic which touched upon and I'm going to try it again. I think you kind of opened the door by putting a slide out there talking about how much Dry Powder you have, I mean $2 billion of borrowing capacity you and that would still keep you with an investment grade level. Other than buying that stock, I am not sure what you would you use $2 billion from because... seems like if you levered it up 2 billion more and bought that stock at $80 per share you would be raising your ETS and you'd still be investment grade. It seems like it is the same condition than your balance sheet to prompted Blackstone a year ago to take a look that you still exist today. Am I missing something here?

Again, we were just turning our attention to it. We have a lot of work to do, again, we will focus on growth first. There is certainly a lot of concern about liquidity in the market that we keep hearing about all the time so just having a strong balance sheet is important, but we will let you know when we can let you know.

Okay. Well, it seems like this is an awful lot of room there so you are in a good position.

Thank you.

Bye.

Bye, bye now.

And the next question is coming from Andrew Jeffrey, of Sun Trust. Please go ahead.

Hi guys, sorry I apologize I am out of this --- there is some ambient noise.

There is a lot of background -- like overhead speakers.

Yes. That I should go away now. Sorry about that.

Sure.

Could you talk a little bit about again, on Epsilon, how much of that backend-loaded nature of the business is a function of Abacus versus the core Epsilon business, and [inaudible] the top and the bottom line because it seem like that was accentuated a little bit, last year too, that first quarter of the so [inaudible] Is that mostly Abacus or is that traditional Epsilon businesses?

It is a combo of both certainly Abacus. Abacus by itself I mean it is just --- It's all a second half player, but there are large parts of Epsilon that also crank up very, very heavily in the latter part of August for the back to school and just don't slow down until the end of the year. So if you were to look at the amount of EBIDTA that we would expect from Epsilon this year, we would probably say that I guess 60% or more of the EBIDTA from Epsilon is going to come in the second half, and Q1 and Q2 within Epsilon are going to be very similar and then it just pops up not dissimilar to what it did last year. So I think you are going to see that type of seasonality.

Okay, and then the pipeline sounds great, and any change in (inaudible) at all or has it been pretty constant, I mean, customers obviously can indicate interest given the nature of the economy though it is like in pushing out the decision timeline within Epsilon?

No. We have seen no measurable change faster or slower, Andrew. We are very happy with pipeline right now.

Thanks a lot.

Give that ball game. Alright. Do we have one more question, operator or is that it?

It is coming from Mr. Dodd of Morgan Keegan, please go ahead.

What is your strategy on swaps going forward? I mean you started to -- you're starting to swap out a lot of your floating exposure to fix it for longer terms or is there anything on the crowds on that direction here?

Absolutely, and again as Mike and I have said, we appreciate everyone's patience, that we were really constrained under the merger agreement from pretty much doing anything but by brushing our teeth. So it is now that we have some freedom here we will have a lot more opportunity to work with our capital structure and our debt structure, and as part of that, you correctly pointed out, we were a little heavy right now on the variable part of our funding book and we would in fact be looking to turn out and fix a significant portion of that floating book into a fixed rate book at some point this year. So yes.

Okay. Thanks.

Thanks, Robert.

I would now like to turn the floor back over to Mr. Mike Parks, CEO. Please go ahead, sir.

Thank you very much. Again everybody I appreciate you joining the call today. Welcome back. We are happy to be back. We are going to have a good year, so and to all of the associates listening as well, I want to thank all of them and let's go deliver what we promised. Thanks everybody. Bye now.

Thank you. This concludes today's Alliance Data first quarter 2008 earnings conference call. You may now disconnect your lines at this time and have a wonderful afternoon.