Bread Financial Holdings Inc (BFH) 2008 Q3 法說會逐字稿

Good afternoon and welcome to the Alliance Data third quarter 2008 earnings conference call. At this time all parties have been placed on a listen-only mode. Following today's presentation, the floor will be open for your questions. (Operator Instructions).

It is now my pleasure to introduce your host, Ms. Julie Prozeller of Financial Dynamics. Ma'am, the floor is yours.

Thank you, Operator. By now, you should have perceived a copy of the Company's third 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 of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties described in the Company's earnings release and other filings with the SEC.

Alliance Data 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. A reconciliation of those measures to GAAP will be posted on the Investor Relations Website at www.AllianceData.com.

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

Thanks, Julie. Good afternoon, everyone. Thanks for joining us today. We will take a look at the agenda. You'll see the Company highlights for the quarter and we will talk about the year and a little bit about guidance for '09.

Ed will dive into some of the financial details as we normally do. And then we will take your questions.

So let's turn to the third quarter highlights slide. I'm obviously pleased to announce, particularly in this environment, that we delivered our 30th consecutive quarter of meeting or, in this case, exceeding guidance. While no one likes where the economy is today, there are certain business models that I think will fare far better than others over the next 15 months. And I'm very confident about ours.

The highly emotional markets and the dislocation of credit, i.e., LIBOR will have short-term impacts, but will also provide great opportunities for well-positioned companies. And we plan to take full advantage.

So with that, let's talk about the specifics. Revenue increased 4% to just over $511 million. Operating EBITDA, as you can see, also increased 4% to $185 million with adjusted EBITDA reaching $170 million. Cash earnings per share was $1.22, a 15% increase over the same period last year and $0.07 over our previous guidance.

Before I move on, I want to talk a little bit about some special items during the quarter before we hit the unit details. First, in the third quarter we sold our Utility Services unit, netting about $[50] million in cash. We also took some steps to significantly expand our liquidity -- first, through the new $805 million convertible note offering at the corporate level. And also, earlier this month, we announced $1.4 billion in new credit facilities for our private label business.

Lastly, we announced the stock repurchase program which you're all aware of, I'm sure, spending approximately $420 million this quarter. Year to date, we've repurchased about 18% of our shares and a little over 100 -- $800 million in total spending so far. Ed will get into some more details a little bit later on those items.

So let's turn to the business highlights starting with the Loyalty services. Our business in Canada, Loyalty One. They had obviously a tremendous quarter with revenue increasing by 25% over the previous year and adjusted EBITDA growing by 38%.

On the new signing front, we are excited to have Hilton as the new AIR MILES sponsor. Collectors can now earn miles by staying at any of Hilton's 3,000 locations worldwide. Additionally, collectors will be able to redeem reward miles or gift certificates that can be used to pay for any charges incurred during their hotel stay.

From a metrics perspective, our miles issued and miles redeemed grew very nicely at 12% and 20%, respectively. This is a strong measure of consumers' continued excitement in our high level of activity with the great AIR MILES program.

For those new to our story, our ability to sustain growth is fueled by what we call the network effect. The network effect is what happens when collectors shop at a sponsor and are rewarded for their patronage. They come back and spend more. Then they shop at other sponsors with the same effect and look for more.

The culmination or the network effect produces powerful organic growth. Our belief is the AIR MILES Reward Program will stand up well in the current macro environment. We focus on rewarding collectors on their high frequency and everyday spend. This provides protection in a down economy. And although consumers may spend less, it's the discretionary spending, not the nondiscretionary spending, that we target that's cut first.

As consumers feel a greater pinch, they look for more value. And they find that in a loyalty program where they can earn real rewards.

Congratulations Loyalty One team. Tremendous quarter.

Now if you will turn the slide onto the Epsilon Marketing Group. Epsilon had adjusted EBITDA for the quarter, which surged by over 50% from last quarter, much as we had expected. Growth was driven in part by the seasonality of the business, as well as the ramp up of new clients and expanded commitments from our existing relationships.

The big question we get from investors is, what will the impact of the economy be on this business? We recently conducted a survey of 175 marketing executives that further validated the shift from traditional advertising to more direct marketing channels. In fact, 60% of the respondents said they had cut traditional budgets in favor for measurable marketing programs like ours.

The economy and reduced marketing budgets are pushing all marketers to use more effective targeted marketing strategies. As a result we have seen are seeing more of our clients and prospects focusing dollars on programs that deliver measurable ROIs. The numbers are real and impactful.

One example, Epsilon built and runs the Loyalty platform to support Citibank's Thank You network. Early in the month the Executive Vice President over Citi's Rewards program said the program had reduced attrition by 50% since the program was launched in 2004.

It's these kinds of results which are driving a strong pipeline on which, this quarter, we announced two new clients. First, Missouri-based Commerce Bank will provide turnkey direct marketing services. They will support their new customer acquisition program.

Secondly, we also signed Beech-Nut Nutrition, a leading infant and toddler foods company, will provide an integrated solution for managing their customer communication stream, including development and execution of direct marketing programs, managing their e-newsletter program, as well as building a sophisticated customer segmentation model to support the program.

Wrapping up with Epsilon, we continue to ramp up new client commitment and have a very solid pipeline of companies in industries like health care, insurance, retail, computer services and financial services. Its position at Epsilon (technical difficulty) for the year. Nice work, guys.

Now turning to Private Label. Our Private Label group had record level of new business signings this quarter, bringing the total year-to-date to 9. And, yes, that is greater than my prediction of 8, Ed. We announced an agreement with Orchard Brand, a leading multichannel marketer of apparel and home products, providing a fully integrated Private Label program for eight of their catalog and Web retailers. The programs will help them improve sales and customer loyalty for each brand as well as provide opportunity to cross shop all brands.

We also signed a new commercial Private Label client, Southern Pipe and Supply. They are one of the nation's largest independent wholesalers of plumbing, heating and AC. They operate more than 90 locations across the Southeast.

Another new win was Bealls Department Stores. We will be providing integrated credit and marketing services for their 85 department stores as well as their online channel. Bealls Outlet, one of the subsidiaries of the parent company, is one of our current clients. This opens up great cross-sell opportunities, as both branded [cards] can now be used interchangeably across the chains.

We also expanded our relationship with Gander Mountain to now add a Private Label program and database marketing. The new program will complement Gander Mountain's current cobrand card, providing select customer segments with an alternative pay (technical difficulty).

We are also building and maintaining a multi-tender, consumer marketing database as well as providing analytics, customer segmentation and modeling services to assist them in their marketing efforts. And lastly we will launch a new cobrand program for Ann Taylor that will include exclusive points-based awards for their cardholders.

It is certainly an understatement to say that the retail environment is extremely difficult, but by providing vital customer insights and innovative solutions to our Private Label programs, we help our clients increase loyalty, and drive sales. In an otherwise tepid or declining sales environment, creative sales can provide retailers with a sustainable and predictable sales [screen].

Case in point, [Stores Magazine] recently featured an article on Maurice's, a Dress Barn brand and current Alliance client. In the article the retailers state despite a decline in store traffic they saw and increase in sales which they attribute to their loyalty card programs. Nice job, Retail Group.

Now let's turn and talk about the remainder of 2008. Looking at the full year we are comfortable in once again raising our guidance from $4.35 to $4.40 a share representing a 13% growth for the year. Loyalty Services will continue to run well ahead of the plan. Epsilon is on track to finish very strong. And looking at our Private Label business we will see the toughest comps finally even in the last quarter of the year.

And, additionally, actions we've taken to be sure double-digit cash flow growth as well as an advantageous repurchase program has proven to be both timely and a very effective use of our capital. We will discuss 2009 at the end of the presentation.

But let me say this to both our shareholders and our associates listening -- I believe we are one of the few business models well-positioned to weather the storm. We have demonstrated over the last 30 quarters we can deliver double-digit earnings growth in good times and bad. We also have strong client partners that we help grow and maintain loyal customers with dependable and measurable results. We have a strong team that has created a culture of delivering on promises for all stakeholders.

Don't get me wrong. We know we are in a storm, but already we believe the credit markets and, hence, liquidity are already beginning the healing process. So the process has started and you will soon be left to focus on a business cycle, the procession. The irrational behavior of the few has hurt us all and the emotionally driven overreactions making it worse than it needs to be.

But it will pass. And in the meantime, opportunities to enhance our business are all around us and we are well-positioned. We have solid recurring revenues. Strong free cash flow, strong balance sheet and excess liquidity.

So to take advantage of our position, we will stay focused on our priorities. We cannot afford to get stuck in the rut of whining about irrational markets. It is time to step on the gas, keep the engines humming and we will come out of this recession. And we shouldn't have missed a beat.

Earnings growth should be strong during the tough times, but perhaps more importantly, we plan on using our strong position to come out even stronger than before by taking advantage of either abnormally low priced, good asset and/or mispricing in the market of our equity.

With that said I want to thank the entire team for another great quarter and job well done. Ed, will you dive into the details, please?

Sure. Thanks, Mike. If you'll turn to the slide title third quarter consolidated results. Let's get right at it.

As Mike mentioned, this is our 30th quarter since our IPO and the 30th quarter in a row of delivering or overdelivering on our promises. Needless to say, but of course I will say it anyway, these are certainly interesting times from both a credit and liquidity perspective, as well as from an overall macro economic perspective.

Our goals here today are to first, review Q3; second, provide our view of Q4; and then finally, we will absolutely provide an outlook for 2009. While we face some difficulties this year from the loss of the Lane Bryant business, and the higher credit losses associated with a recessionary environment, these challenges have been more than offset with a tremendous performances at Loyalty Canada and Epsilon, as well as some opportunistic moves in the liquidity and capital markets front.

If we were to [bubble] it down I would say there's probably three key takeaways from the quarter. The first, what we've been saying all year, the earnings acceleration continues. Q1 earnings were flat to prior year. Q2 posted a 14% increase. Q3 came in at 15% growth and Q4 will run north of that.

Second, mixed shift. The percentage of cash flow contributed by each business continues to shift rapidly. Specifically for the first time in our history, Loyalty and Epsilon combined contributed more to operating cash flow than a combination of Private Label services and Private Label credit.

And perhaps of greater interest is the credit segment itself which is now only about one-third of operating EBITDA versus close to half just three years ago. Also note that all of our growth is coming from Loyalty and Epsilon. This will continue to shift away from Private Label and towards the more recessionary resistant in faster growing Loyalty and Epsilon businesses.

And finally, No. 3, capital markets. We have had great success in our three areas of focus this year. First our $1.8 billion buyback program is highly accretive and continues to move ahead on schedule with 18% of our shares repurchased for $870 million through the end of Q3.

Second, we recently completed $2.2 billion in new liquidity facilities including as Mike mentioned the $800 million convert and $1.4 billion new facilities for our Private Label business. The buyback plus new liquidity facilities have enabled us to hit our third goal of driving shareholder value while maintaining low leverage and ample excess liquidity reserves.

All right. I think that's the big picture. Let's turn to the next slide and dive into the weeds a bit.

Segment results, first up, Loyalty Services -- which posted a record third quarter with organic growth rates of 25% and 38% for revenues and adjusted EBITDA respectively. FX rates were virtually flat year-over-year.

The overperformance of Loyalty continues to be driven by four drivers. First, the program focuses on consumer, nondiscretionary spend, buying gas, groceries, [former] pharmacy, etc. So that's extremely recession resistant.

Second, the pricing we received remained rock solid. Due to our huge presence in Canada, our expense side continues to realize efficiencies. And, third, we continue to receive expanded commitments from our longtime clients as our transaction-based coalition model continues to garner larger and larger share of our clients' marketing and loyalty spend.

And, fourth, we continued to see the network of that as families continue to frequent more and more participants in the program. I think of a family that frequents our sponsor in the gas, and grocery, pharmacy and financial services sectors. Now assume that that same family will add our home improvement client to the mix as we continue to expand our footprint across the nation. That is exactly what has been happening since 1992.

Okay. What is ahead? More of the same.

First, however, let's mention that our expected overperformance in Q4 will, in fact, be tempered by foreign exchange rates. Specifically the Canadian dollar peak at last year's Q4 at an average of $1.02 and had since fallen all the way back to -- well, when we wrote this -- $0.85, this $0.17 weakening will hit revenues for $35 million in Q4 and $8 million in EBITDA when translated into US dollars.

For the full year, however, the foreign exchange impacted the nonevent as the average rate for all of 2008 was roughly flat to 2007 at about $0.95. And, yes, to save you a question we are aware that Canadian dollar has drifted lower over the past couple of days, but again, it could shoot right back up again. So we are just going to stick it at $0.85 for now and we will call it a day.

So on a constant currency basis Loyalty should drive into 2009 at an extremely strong pace. We do not know of any major clients at risk, pricing is strong, sponsors are being added and the network affect continues unabated. 2009 looks strong.

Okay. Next up, going into the US, Epsilon Services, which gained a top three position in our quarterly investor/analysts list of concerns. And lest you wonder what the first two were, surprise surprise -- it was liquidity and credit.

Anyhow, there was concern externally versus, quite frankly, a lot less internally, about whether or not Epsilon's model would continue to hold up during such a severe downturn. We were quite pleased to see that the big Q3 surge, as we call it, came through as expected.

Potentially, Epsilon averaged adjusted EBITDA in the low to mid $20 million range for Q1 and Q2 and then jumped to $40 million Q3 driving sequential margins up almost 800 basis points. This surge occurs every year, and is driven by our clients' desire to start seeing results of all of the previous months of data record collections and analysis.

Effectively, many of our clients spend the first half of the year [recording] all their purchase (technical difficulties) information onto our platforms, while we refine it and develop the algorithms needed to ensure the highest ROI possible in the marketing programs. From July onwards, enormous amounts of target marketing and communication campaigns get underway.

While we believe that many clients have slashed their Marketing/Advertising budgets by 20% or more, Epsilon's high ROI-based programs appear to remain relatively unscathed. This provides us with an -- even more confidence that transactional-based micro-targeted Marketing and Loyalty campaigns are the programs of choice for the Fortune 1000. In addition, like Loyalty Services in Canada, appear to be quite recession resistant.

All right. What's ahead? We continue to see solid growth in Q4 and look to come in with double-digit adjusted EBITDA growth for the year. Turning to 2009, we are confident in Epsilon's ability to continue to deliver double-digit organic EBITDA growth despite the macro environment.

Epsilon's new client citings this year have been strong and larger commitments from existing clients continue on pace. The pipeline remains robust and, as such, we feel confident that Epsilon will continue to move spending away from traditional channels and into its unique transaction-based micro-targeting model despite the macro environment.

All right. We have now finished Loyalty and Epsilon which now officially account for the majority of our cash flow, our revenues and this year essentially all of our growth.

Turning to Private Label Services, which provides processing, high-end customer care and the marketing programs associated with the Company's 95 Private Label card clients. Cost of these services are marked up and charged to the Credit segment as part of its cost for providing its service. Services revenues generally track statements generated. For Q3 revenues were essentially flat as statements, excluding Lane Bryant, declined slightly.

Adjusted EBITDA expanded over 20% due to the ramp-up in expenses during 2007, which were absorbed by the segment and not built out of an intercompany charge.

The charges reset only once a year and as such about $5 million in expenses were eaten last year during the quarter. They were passed through this year.

If you normalize last year, adjusted EBITDA would have been about flat to this year. This line [aversary] after Q4 so as you look to 2009 it gets a lot easier. The segment should be apples to apples and as such revenue and adjusted EBITDA growth will be the results solely of growing a Private Label business.

And specifically we expect mid to high single digit growth and statements generated, which would be consistent with our expected double-digit growth rate in the credit portfolio, due to the record 2008 new client wins. Essentially statements tend to lag two to three points behind the growth rate of the credit portfolio.

Speaking of which, Private Label Credit, revenues declined 12% overall. They would have declined at a more moderate rate of 4% when Lane Bryant was excluded. Also funding saves this year were split between above and below adjusted EBITDA, while 100% of credit losses hit adjusted EBITDA.

On another note, gross yields came back after lagging a bit during the first half and are remaining at levels consistent with last year. Adjusted EBITDA has averaged a $22 million drag per quarter versus last year, excluding Lane Bryant and normalized in foreign funding fees below adjusted EBITDA, and a smaller pass-through charge from Private Label. Last year, adjusted EBITDA would have declined about 11%.

Okay, what's the outlook? We anniversary Lane Bryant in Q4 which should cut the $20 million drag in half. The business metrics, such as the overall portfolio, will show positive growth for the first time this year. Due to the slow but steady creep up in loss rates, expect Q4's loss rate to be in the 7's, thus bringing the year-end around mid 6's, as expected. And the bizarre credit markets which are forcing rates higher, we believe that cutting the drag in half will be about the best we can do at the moment.

Let me just stop there and make a couple of comments.

So essentially what we are saying in Q4 is Lane Bryant will anniversary in November. The segment's then dragging about $20 million a quarter behind where it was last year. That will get cut in half and then we would expect Q4's loss rates to be somewhere in the 7's, and if you were to look at it we are below 6.5. The first half of the year we will be above 6.5. The second half of the year Q4, specifically, will be somewhere in the 7's. And so we don't want to make -- we want to make sure no one freaks out when they see losses pop up to that level that is consistent with what we've been saying all year, but the year will average 6.5 as expected.

As we move into 2009, we should see very strong growth from the record '08 signings, ramping up, despite the expected poor macro environment period

For our guidance, we have assumed some continued turmoil in the funding markets which will cost us, as well as the continuation of the steady creep-up in credit losses. And net of all of this is that the strong portfolio growth achieved will most likely be mitigated by higher funding costs and losses.

Wrapping up with a consolidated level, look for a decent Q4 as well as a solid 2009. Expect Loyalty and Epsilon to continue to lead the charge with double-digit growth, while Private Label Services and Private Label Credit should show a nice ramp up in its growth metrics which will be, unfortunately, offset by higher expected funding and credit losses. Nonetheless, the drag which existed throughout this year should be finally gone. And that is a big drag to get rid of.

Okay. Let's turn to the balance sheet. Picking up steam here, a couple of items first up. Let's go north to Canada. You'll note that deferred revenue in the trust cash decreased by $37 million and $29 million respectively. This is nothing more than the translation of these accounts at a lower exchange rate post-op. Specifically the Canadian dollar was around $0.98 at the end of Q2 and into Q3 down around $0.04 at $0.94.

So, on a constant currency basis deferred revs actually would have been up a bit. And the trust cash would have been about flat.

Next, our core debt, increased about $470 million and cash went up $170 million versus Q2. Thus, the net increase in debt was about $300 million.

Where did the money go? Take the increase in our net debt and the free cash flow in the quarter; and you'll come near the $400 million plus that we spent on the stock buyback during the quarter.

All right. Liquidity, first point. Despite the significant buyback, our leverage ratio -- which our covenants define as net core debt divided by LTM operating EBITDA -- were about $1.2 billion divided by $700 million is 1.7 times, which is entirely consistent with our goal of maintaining a conservative investment grade profile, which we believe sits at three times or less in terms of leverage.

The second point -- again, despite the money that was spent on the buyback, we still have approximately $2.4 billion of excess liquidity. This consists of cash, room on our revolver, CD capacities, conduit facilities and a few other items -- again, all adding up to just under $2.5 billion. So high free cash flow generation, low leverage, and a large amount of untapped liquidity gives us great comfort in our ability to continue to execute our plans.

Let's get to the fun stuff. 2008 guidance, revenues $[2.050] billion reflect strong growth in Loyalty and Epsilon. A slide in Private Label. Again recall that Lane Bryant was probably around $60 million of revs and credit losses left some (inaudible) from a funding pickup plus roughly $60 million in back half headwinds -- primarily a tough Q4 FX compare for Canada, which will hit us for $35 million.

Additionally the bizarre seizing up of the credit markets combined with our desire to lock in excess liquidity will hit us for around $8 million. Again, that is the extra high rates that we pay to lock down some of that funding. Combined with higher credit losses, they will serve to reduce our back half I/O gain to about 0 compared to $18 million last year.

This I/O delta will only hit once. But it still will flow through our numbers.

Operating EBITDA or operating cash flow should do $700 million this year. While reported, adjusted EBITDA should come in around $660 million. Again the numbers reflect the impact of foreign exchange of about $8 million. The higher rates which we are calling liquidity insurance of about $8 million and the fact that the I/O reduction from a plus $18 million last year to about 0 this year.

I think the key thing here that should being noted and for those of us -- those of you who have known us for years, this is fairly typical behavior. That these liquidity I/O adjustments were taken due to the Company's desire to nail down significant excess liquidity during tremendous turmoil, while also saving enough powder to provide confidence in our guidance.

These were proactive decisions that we would do all day long as it strengthens near-term and long-term sustainability. So, no surprises. It was done on purpose. And thus (inaudible) with an increase in cash EPS to $4.40.

Okay, 2009 guidance. I understand very few folks out there are going out on the limb and doing it, but we feel pretty comfortable certainly painting a picture of what is going to drive 2009. If you look at sort of what we call our base and then adjustments to base, you'll see where we got to the numbers.

First as we talked about, Loyalty is ripping right along. We don't expect much impact from a recessionary environment. Again, since it's really based on nondiscretionary spend and the network effect and it continues to grow like a weed. So we are looking at high teens, topline 20% EBITDA.

Epsilon, again, we probably knocked down a couple of points off of topline and a couple of points off of EBITDA growth, because it's recession-resistant, but not completely immune to what is going on. But, nonetheless, if it can do double-digit EBITDA growth, which we think it can in 2009, we should be in very good shape.

And then Private Label, which is really the story that is very different from this year, is that we would expect core growth rates of around 12 and 12 for revenues and EBITDA before we talk about funding in credit losses and that is really coming from the portfolio. Once Lane Bryant anniversaries in November, the underlying portfolio is growing at 5% or 6% on its own right now.

You layer on the nine wins we have announced and the one more to go to make it an even 10 for the year, Mike, and what you'll see is tremendous ramp up through 2009, regardless of how lousy the comps are in the marketplace. Again, you are talking about 10 programs starting from nothing and ramping up their way to about 30% of all the sales in the store going on the card.

So you are going to have some good solid portfolio growth in 2009. And corporate overhead will keep flat. That gets you to about $2.3 billion on the top and about $770 million on the EBITDA side.

Now we need to talk about what adjustments to make. On the FX side, this year, our FX rate averaged roughly $0.95. We assume for next year it would average about $0.85. I can't answer the question of it's been hitting a little bit lower than that or would it go above that? I can just tell you we are putting a stake in the ground saying $0.85 seems about right.

Yes, we did actually check some of the forward curves and other things. And it seems like they are around $0.83, $0.84. Purchasing power parity would put it right around $0.88. So we think $0.85 is a good place to be. For every $0.01 that the [MUNY] declines, it dings us for roughly $8 million on a full year basis of revs and about $2 million on EBITDA. So on a full year basis if we are going from $0.95 this year to $0.85 next year, it is going to hit us for $80 million [topline] and $20 million on EBITDA. That's pretty straightforward.

On the funding or liquidity, "insurance side", essentially all that means is that we went out and we now [see] the $1.4 billion that we did that when LIBOR was through the roof and the banks were not lending back, nonetheless, our five or six banks came through. But it certainly cost us all the more than anticipated and that would be driving up next year's cost of funds about 60 basis points, which is about $25 million.

And for those of you who don't live and breathe securitization accounting, you'll find that that hits both your revenue. It is netted in revenue and therefore flows directly to EBITDA.

Same drill with credit losses. And I know there's all sorts of questions out there. But I do ask you to recall that, a year ago, people asked what our credit loss number would be and we said, for 2008, we believe credit losses would be roughly 6.5% and delinquencies would be roughly 5.5%.

And lo and behold, we are going to come in this year almost spot on, 6.5% for the full year for losses and 5.5% spot on for delinquencies. So I think we nailed it pretty well. I think the fact that, unlike bank card issuers, these are Loyalty Programs. There's good growth in the portfolio. We never turn the spigot on full blast when times are good nor do we ever turn it completely off.

So we don't have a lot of jerky growth in the portfolio. And as a result we think it would be prudent to drift up our assumption for next year to roughly another 100 basis points. That will put us around 7.5% loss rate and about 6.5% on the delinquencies side. I think those are comfortable numbers for us.

As I mentioned, Q4, we do have a little bit of a bubble coming through, but we will be somewhere in the mid 7's, could be low 7's in Q4, but that's about where we expect it. That will still bring us in around 6.5% for the year and then we would expect to see things sort of go back to low 7's, and then creep up throughout the year and average about 7.5% for the year.

And this assumes that there is going to be a fairly significant recession. So 100 basis points for us is $44 million in EBITDA. And so if you took FX, if you took the funding and liquidity insurance, if you took the credit losses, we are going to ding the base cage by 150 top and 90 on the EBITDA side. And we'll come in at about $2.15 billion of topline and about $680 million EBITDA.

And why don't we turn now to the summary of guidance which, again, we just walked through. I just have a couple more numbers, of $2.15 billion on the revenue. Operating EBITDA, which is operating cash flow, runs about $40 million these days ahead of our reported or adjusted EBITDA. So we would look to do about $720 million there.

We talked about adjusted EBITDA. And then the nice thing is, even though we are going to have those headwinds as we race through next year -- because of the rather minimal CapEx that we have these days after we've built out everything and the tremendous amount of free cash flow which will be a tad under $500 million of pure free cash -- on top of that, we secured some good funding facilities. And the accretion from the buyback all lends itself to a huge amount of leverage in terms of growth rates on earnings per share.

And as a result, we do not think we will miss a beat on the earnings per share and, specifically, we think we can do somewhere between $515 million and $520 million or 17 to 18% growth. And those are numbers that we are comfortable laying out now. And I think that something that in this environment -- I don't know if a lot of people will buy into it right away or will need another quarter to get comfortable but we are kind of used to that.

So we are going to put it out there and put our heads down. And as Mike said we will execute on it.

A couple of other just very quick comments would be -- Mike mentioned liquidity, which I think was very important. And that is that you are beginning to see the healing process. We are seeing it. We are talking to our banks.

You can see it looking at LIBOR which is a fairly important rate obviously around the world. That has come in over 100 basis points since October 10. That is quite a move. Forwards and futures would suggest it is going to come in another 150 to 200 before the end of the year.

So an alternate view of how to look at guidance and, again, everyone has their own viewpoint. But if you were to take our revenues that we gave you and said, "Look, the FX is going to anniversary in a year and the cost of funds is because of a dislocation in the market." If you back those two out you know, you would be back to about a 10% organic growth rate.

Same thing on EBITDA, FX and funding because of the dislocation in funding that is beginning to wear itself off. And that would give you about 10%. And if that were the case we would have been growing 25 or 30% next year. So again it's food for thought and nothing more. All right.

About to get the hook here, so I am picking up steam. Let's go to really my last slide before I kick it over to Mike and that is something that in this slide is pretty interesting. A lot of people have asked over the years as the Private Label business just absolutely boomed for quite a few years. But you'll also see that the other businesses are doing even better and this growth and shift in our cash flow is fairly pronounced.

If you went back to 2005 you'd see about 44% of the Company's cash flow came from what we call the Credit segment. And that has steadily moved down to -- it's only 30% today. 30% as we go into 2009. So that is a fairly significant shift.

It follows primarily because the other businesses are just in growth markets, which are much higher growing. We still think Private Label is a very good business, but it's more of a he mid single digit growth engine as opposed to something that is triple that rate.

If you were to move it out another five years, you probably would be down to about 20%. That would be Credit. So anyhow that's all I have. Mike, back to you.

Thanks, Ed, and the last slide is our typical bar chart that we like to show. It really highlights what I think are the key messages that I hope you walk away with.

One, we've got a solid business that is very recession-resistant and we are in growing market. Two, you continue to see the mix shift now greater than 50% and growing at three times the credit side. Three, the short-term impact from the abnormal credit markets which, by the way, usually offset in terms of lower interest our extra losses.

It's actually gone the opposite so we've got kind of a double-dip. We think we are correct and get it back going in the right direction throughout the year. We've got a strong pipeline, five strong balance sheet for growth and a share buyback.

And I guess the key point I also want to make is, most of you that have been with us now for some eight, nine years know the depth of our management team, know the depth of our business model. Yes, next year is going to be challenging for everybody but we've got a good model, a good team. This will pass and we will be here, steady and strong, and I think you'll see some great growth from the long-term perspective.

I think you should start to look at the models and numbers. As you look out and beyond '09, it gets pretty strong.

So with that said we would like to take questions from the field operator if you'll open up the line.

(Operator Instructions). James Kissane with Banc of America Securities.

Hello, Jim Kissane. Close enough.

Can you -- first, good job. Can you discuss the Private Label pipeline? It sounds like you're going to do 10 this year but are you going to target four to five next year? Or do you think you can kind of match the nine or 10 in relation to that just competitive landscape? In particular GE Capital and Citibank and Private Label business?

You bet. The competitive landscape continues to be, frankly, in our favor as you see. The traditional finance company-driven kind of businesses go through the open up the spigot, then shut them off.

We continue to see many calls from potential clients at our competitor location sharing with us. You know their termination dates and that kind of thing. So, we have a strong pipeline.

You know, our historical fortified -- I think -- will do better than that. I'm not going to try and predict the number, but certainly our focus will be on, as I said earlier, good assets. There have been some people in the banking industry that perhaps lost control of their underwriting skills.

And so we will do some deep diligence to make sure we don't pick up some bad portfolios. That's key to it, but I think you'll see us have a better than average year next year for sure.

Great. And just given the volatility of the Canadian dollar, have you considered hedging because right now you don't hedge your exposure up North. Are you considering that?

No, it's more entertaining doing it this way, Jim. So --.

Yes, we love it.

Yes so, no, we haven't. I mean, look, we have been with them -- they've been out with us for the last 10 years and we've seen [Ed Scott] go down and you know the best I think we should do is, work on an economic hedge as opposed to a financial hedge. And that is what we have.

All the revenues are in Canadian dollars and all the expenses are in Canadian dollars. We really focus on the economic hedge and the cash flows as opposed to trying to manage a financial hedge.

Got you. And just curious was Hilton Honors a cross-sell between Epsilon and AIR MILES? Or was it just (multiple speakers)

You bet. You bet and it's a real interesting program because it was additive to the Epsilon business, which you know the Hilton Honors Reward Program -- what Hilton basically said is, let's continue to give Hilton Honors points but if you are an AIR MILES person you can also get AIR MILES points as well. So you can do a nice double-dip which comes -- both of which streams come home to us.

Just the last question on the buyback, you were very aggressive. But we are seeing a lot of companies just giving conditions on the credit market back off doing buybacks. Just maybe discuss your philosophy on the buybacks.

We announced it. We are executing. We will continue to execute.

Can you give us -- right now can you -- my sense is you were buying back post-quarter. What's the current balance?

No, we are not able to do that right now. I guess the key message is we will continue to be opportunistic and we will continue to spend throughout the year. And we will also balance that capital against great asset opportunities that are out there in the marketplace.

So we want to be able to have the flexibility to move the capital around in its most advantageous positions.

Another way of saying that is I think last quarter when our average price was $60 someone asked is that a good price for us and we said all day long. I don't think we've changed what we said and it's pretty accretive above that as well.

But as I said -- as Mike said, we are not going to be doing any type of crazy Dutch tender or something like that. It will be a methodical approach as we've done all year. And it will carry into 2009. And as long as we are seeing the strong free cash flow that we expect and the liquidity market continues to get better and better, which it is, we would certainly expect to execute on the program.

Great. Thank you. Good job.

Andrew Jeffrey with SunTrust.

Good afternoon. You made some comments, pointed comments actually, about the Epsilon business and its exposure to the cycle. It looks like you are running mid single digit revenue growth today, talking about that maybe being little bit better next year.

Can you just give a little more color on how much of those programs within Epsilon are discretionary versus how much is Loyalty -- which I think would be more visible -- and just exactly how you get some comfort that this isn't a business, that if things get worse and the economy doesn't ultimately become exposed to a pull down in marketing budgets broadly, despite the secular shift you talk about?

Yes, well, if things -- you know, if we are in the Great Depression, all bets are off. But assuming we are in a deep recession I think we are going to be in pretty decent shape. I can recall a quarter ago sitting and listening, not just on this call, but at all the investor conferences about, "Hey, I'm hearing all the retailers are cutting. There's no way Epsilon is going to be able to do the huge surge between Q2 and Q3."

And so we decided to keep -- at least, shocking for me -- relatively silent about it, but in fact we did come in with a surge from the 20s million to $40 million despite the fact that we have confirmed retailers have cut back about 20% on their marketing budget. As we look into 2009, you know, again, it's unfortunate we can't announce a lot of the deals.

But a lot of the growth in fact over 60% of the growth in 2009 is coming from already committed existing clients. So if you look at our big big clients that business is already in the books. And it's a question of continuing to ramp up, expand into maybe another division within the pharmaceutical company, or into the bank, or into the hotel or whatever it may be.

Folks are moving in that direction. The remaining road, I would say a good chunk of that is also already covered with new business we signed this year. It is ramping up. So I think we feel 90% plus comfortable that we will see double-digit EBITDA growth out of Epsilon next year. Essentially what we did, we backed off a couple of points and took effectively the blue sky out of the numbers. And that kept us right around double digits.

So, unless someone just decides to start pulling the plug which I don't think we've ever really seen, it would be pretty surprising to us.

I'll make one other comment Andrew. Ad Age this week had a pretty interesting interview with the CMO at [Bsip] about a year there, came 12 years prior to Visa. And he was focusing on this specific topic exactly and in fact I will read the quote here -- it says -- "the focus for them for our next year will be optimizing their dollars. They certainly want to pare back their dollars."

But I will quote you specific, it says "We will optimize all of the different communication vehicles that we have with emphasis on one that you can measure the most, which will mean shifts in the media spending patterns of our historical advertising dollars." So they are all going through this evaluation right now. This is a perfect example and he has come in and relooked at the entire marketing spend at Visa. And they are going directly into the products that we offer and serve, so --.

Yes and (multiple speakers)

We feel it's confident and more confident than most.

And does the improvement in operating margin and the EBITDA margins in that business, is that reflective of just inherent scale? Or are you -- do you have some thoughts on cost structure there too?

It is primarily almost exclusively scale for sure.

And in Loyalty, can you talk a little bit about pricing and whether you've been able to take price in this [varmers]? Is that another factor that we should be thinking about 10 to 2009?

On the pricing side I wouldn't give a lot of thought. I think we're in real good shape with a couple of folks we need renewed. We don't expect anyone to leave us. Pricing I think will be firm to firm plus and that's about as far as I guess we go.

It's going to be steady as you go.

Okay. Thanks.

[Wayne Johnson] with Raymond James.

Good afternoon. The Loyalty Canada performance has been stellar particularly the last few quarters. Could you describe the competitive environment in Canada for your services? And can you also describe the pricing environment up there? What allows you guys to have so much pricing leverage in that the particular region for that service?

Okay. I will take a shot. First we have a pretty unique model. So in the sense of the competitive environment, potential new customers or even our existing ones have to decide whether they want to try and do a one-to-one kind of Loyalty program, move to television advertising, Web based, all of those kinds of things.

Those are typically the review processes that customers go through unlike potentially other businesses, where there are more direct competitors. Their focus is looking at our ability to drive incremental sales and significant profits around that. And as long as we are proving those results, that's what they are worried about.

They are not worried about whether the mile is an extra $0.01 or not if we can drive extra sales at incremental margins of 40 and 50%, much like we talk about in our Private Label business. That really doesn't come much into play. We've got long-term contracts with embedded inflation numbers in it. And so we are pretty confident in the value proposition we have there and really don't see any deterioration from clients that are suggesting that they want to move their marketing dollars to some other vehicle.

Right, could you talk about the penetration in Canada? How much more market opportunity -- how much more runway do you guys feel you have in that particular region?

I think we've talked all this year that we think we've penetrated about 50% of the available segment. Some people get hung up on, gee, we have 70% of the Canadian household and therefore there's no more -- no more growth.

If you look at it this past quarter we actually increased new collectors by 4%, active collectors by over 2, just on the base. That doesn't even speak to the real growth drivers which we talk about in -- opening -- about the network effect. As they come on board, they start at 2, 3, and 4 and continue to grow through other locations.

Then as we add on which is in effect that the next major driver of growth, we continue to expand relationships with our existing sponsors as they roll out either geographically or through other products. And then we, lastly, we bring on new sponsors like Hilton. So we think we've got a strong runway for the future.

That's terrific and just a quick follow-up then. So how would you describe the difference between Alliance Data and Aeroplan?

I would describe ours as an everyday [spin-centric] model, driven at 80% of the consumers that go to their everyday spin categories versus the frequent-flier programs.

And also the easiest thing is where the revenues come from. I don't know the exact numbers, but with Aeroplan, (inaudible) comes from either Air Canada or the CIBC credit card, which is typical of a business frequent-flier program. When, in fact all our money comes from someone buying gas and groceries, the pharmacy, home improvement, financial services, liquor store -- whatever it may be.

So we are pretty much where the family goes during the week and [Aeroplan] is pretty much for the business traveler.

Terrific. Thank you.

Dan Perlin with Wachovia.

One quick question. On the latter part of the press release, you guys talk about your revenues and EBITDA could be impacted by the classification of your cost of funds depending upon the source you utilize?

Yes.

My question is, Ed, I know you've talked about $25 million of incremental funding cost. What is -- and that being 60 basis points. What is the spectrum that we need to be thinking about for your funding costs? I mean are there some that are going to potentially push you 120 basis points higher and others that are 20 basis points higher?

Yes, actually, that is a good question. The press release wasn't talking about that. I think the $25 million is probably a good all-in number, Dan.

Because if you recall, it would have been $25 million to the extent we utilize the full $1.4 billion facility when in fact, right now, we are only utilizing $700 million. So it makes room for either using up that entire facility or renewing a couple more deals early in the year at higher pricing.

I think that's all captured in the $25 million. I think that's a good number.

What we were referring to in the press release is, because some folks focus on EBITDA, some focus just on earnings. As you know, when you securitize something, it means that the cost of financing that collateral is dated in revenue and, hence, close [right] to EBITDA. Therefore depressing EBITDA.

However, if you choose to let's say, keep it on balance sheet, because the CD market is just a fabulous market right now vis a vis the public ABS markets, that funding cost will not show up above EBITDA, but in fact will be below EBITDA. And your EBITDA will be higher. It doesn't change your overall cash flow of the Company. It's a geography question. And that's what we were saying.

Depending on how much we securitize versus hold on balance sheet will tend to drive EBITDA either up or down, but will not changed cash flow. Nor will it change cash earnings.

Got it. Okay. That's very helpful. The other thing I've been noticing is your recovery rates in your portfolio in your most recent trust data still are very strong. And I'm just wondering is there anything you guys are doing today that is unique, different, more aggressive in terms of trying to get people to pay on time? Or are you selling some of these receivables at all?

Yes. It's another good question. You have to remember that we do a lot of this stuff in-house, whereas most of the big general-purpose bank card players tend to outsource that. And when you outsource that essentially you pay a big fee. And therefore your recovery rates are coming in, tend to be quite a bit lower.

From the income statement, you are looking at a little bit more of a geography question because of how the big banks do it. The way we do it is that, let's say, we recover $0.30 of every $1 that's written off. That's the direct recovery.

The cost for doing so is not a fee to an outside agency. It's actually buried in our operating cost. Whereas with the bank card it's all buried in lower recoveries, because they are netting out the fee to the outside recovery agency. Does that make sense?

Yes. Yes. You're right. Okay.

And so we would -- we've always tended to see, because we are doing it in-house, really good recovery rates. They are dipping a little bit, as you might expect going into recession.

If -- I think what you'll hear from other folks is if I were to be a betting person I would say our delinquencies would probably not be going up a full 100 basis points next year. But I would certainly say our losses will probably go up 100 basis points, the difference being that we're probably not going to recover quite as much as we did during good times.

And that essentially means -- I mean this is all fairly logical, and intuitive. But once someone gets 120 days past due in this environment, they are going to roll it to write off.

Right. And if I heard you correctly you said your gross portfolio yields are getting back to more normalized trends. Is that what you were trying to imply?

In other words, the late fees that typically accrue when things get a little sloppy in the economy, your portfolio yields tend to benefit from that. And I would think, kind of based on the commentary you just kind of outlined for '09, that your gross yields should be up pretty good.

Yes, I wouldn't go quite that far, but no. We didn't imply, we actually said that if you recalled the first half of these you're our yields versus prior year are actually down a little bit? And part of that was it seemed like our late fee income had actually dropped off a bit.

Some of it obviously going to write off, because it was uncollectible. And some of it we believe people were being more careful by making sure their bills are paid on time. What we saw in third quarter, basically, was the reversion back to essentially what we've seen in the last 10 years that I've been here, which is yields very consistent with where they were last year, which gives us a fair amount of comfort going into 2009 that those yields are going to hold.

We get this question a lot so maybe you can just clarify it. You don't have any restrictions on your buyback program today in terms of restricted covenants around your convert or any other debt, correct?

No.

Okay. Stock comp was up quite a bit, relative to what I was expecting it to be. Is there -- can you just explain what drove that? It was almost $17.2 million versus $8 million sequentially and $14.5 million last year. Is there anything materially driving that?

I don't think so. It's -- we would expect to be on pace this year. Probably to do somewhere on the order of, let's see, about $47 million of total comp of which virtually all of it is restricted stock and about $4 million of it is option-related. So the big chunk in Q3 and Q4 are the [restrictive comp pieces].

Okay. And then, lastly, the corporate and other revenue was up (technical difficulties) sequentially? To almost $8 million. Is there anything in that number?

You bet. We did -- we've sold a couple of divisions if you recall. And we have in term servicing agreements for the next year or so.

Okay. Excellent. Thanks. Great quarter.

Reggie Smith with JPMorgan.

Nice quarter and guidance. I guess my first question, your share count as you [ended] the quarter, I don't know if you guys provided that. I want to know that. And then I guess wanted to know also, does your guidance for next year include any incremental share repurchases or what are your assumptions around that?

Yes, our share count in Q3 was $70 million. Is that your question?

No. Actually where it ended the quarter. So not the average rate, but where did you exit the quarter (multiple speakers)

$1.66.

$1.66. And I guess your guidance for next year assumes [66] or are you including any incremental repurchases in there?

I put in a little incremental, but probably not the whole thing.

Okay. I'm not sure you gave it, but the third quarter managed charge-off rate?

We did not give it, but I would be more than happy to. It was 7%. So if you were to look at the year, you would see managed which for those of you don't live and breathe this stuff, it's the Master Trust 1, which we usually guide off of plus anything that is not in Master Trust 1.

In Q1 it was just right around 7%. Q2, it was 6, 7% which tends to be seasonally the lowest. Q3, it's 7%. And Q4, it will be mid 7's, or higher. And we will come in right on the year at 6.50 for the Master Trust and 7 overall which is pretty much consistent with the usual 50 basis point spread between the two.

I guess if the charge-off is next year, you are talking about a 100 basis point increase over the average. As we exit '09, are we thinking something with a high 7% range or do you see it pop into 7.5% and kind of staying their?

That's a great question. I mean we are assuming things are going to be pretty bleak next year. So hopefully, we will be wrong and things will be going better.

But I think the best we can do right now is say, look toss 100 [bips] in, it's $44 million. And as we are nearing third quarter of next year whatever if things are still lousy, we are going to still -- we are going to be in the ballpark, quite frankly. And we are going to be, as the saying goes, close enough because the portfolio just isn't big enough. And the losses aren't large enough that it should toss us off our guidance.

But right now, Reggie, the best we can tell you is mid 7's sounds about right. And as you can tell from this year, Q1 and Q3 were almost identical. So I don't know if it's really going to have the big creep up or it may just pop up and stay there, which is also another way of thinking about it.

But right now we have no evidence to suggest that there's going to be another pop above that.

If I could sneak two more quick ones in. You guys called out a $25 million drag on some of your conduit renewals. I was just wondering if you could talk about what the spread on some of the private stuff has done over the last two years, just so people can get an appreciation for the magnitude of what you guys are facing in terms of basis points?

So maybe two years ago it was 60 basis points over LIBOR. Now it's 120 or if you can size it for us that way?

Reggie, if I could get 120 I would do it today. It's a fair question. We it's more a fraction of two things. One is the spread of LIBOR. That is over the Fed funds rate. LIBOR is what we usually been swap into fixed-rate. So to the extent LIBOR is high, that obviously will hurt our long-term fixed-rate.

And then of course you have the additional credit spread that is over and above the spread of LIBOR over Fed funds. Traditionally LIBOR tends to trade very close to Fed funds. Let's say a typical spread is 40 or 50 basis points over. When we did the $1.4 billion deal, LIBOR was essentially 300 basis points over, and then the credit spread on top of that was another 250 basis points. So that's 550 basis points or 500 bips above what we would have paid two years ago.

Now that 500 already come down by 100 as LIBOR has begun to come in. Most of the forward curves would suggest LIBOR should be coming in another couple hundred before summertime. And, hopefully, with the $1 trillion or whatever is sloshing around the banks, our credit spreads will not be 250 over, they will be a more normalized 50 to 100 over.

Very longwinded answer but what was probably a premium of 500 basis points back when we did the liquidity deal has probably come in 100. And we would expect it to come all the way in and normalize, probably be up by around summertime.

And then one last question. If I were to tell you that a year from now the asset debt markets would be unchanged and the private conduit markets would be unchanged, how much stock would you be willing to buy back now? Assuming that you want to keep some liquidity to possibly fund receivables on balance sheet to avoid this type of drag? Does that make sense?

Yes. Obviously we are not going to answer the question, but --.

We will all be in soup lines.

Yes, I'll dance for a little bit. I think what you're going to find and it's not just with us, I think we've got plenty of liquidity up at the corporate level. And we're throwing off a ton of free cash flow. So the ability to execute the buyback, I don't think is going to be something that's a huge issue for us.

But down at the funding levels what I think you will find is, I don't think that the public markets will be closed a year from now, but I think it will be more of an issuer's choice because of the rates. So what I think you'll probably see is, you'll see many folks -- ourselves included -- turning increasingly to lower cost, much more stable funding sources for right now, which would be the CD market which is very deep. It's FDIC-insured.

We can do quite a bit of financing that way. We've never really used a ton of it because the Master Trust is so efficient.

And then, secondly, the conduit market itself, I mean we -- look, banks like, I don't know, JPMorgan and some of the foreign banks at Barclays, Royal Bank of Canada, Royal Bank of Scotland -- you know, folks like that are stepping up big in the conduit market. And now that they can sell, they are funding it with commercial paper, asset-backed commercial paper. They can sell that to the government.

Those two markets are in pretty good shape. So I think you'll see rates and spreads coming in on the conduit market. The CD market is great already. You can do CDs at 4%. So I think you are going to see more folks turn to that, if spreads don't come in on the public market.

Sounds good. Thank you.

David Scharf with JMP Securities.

On the AIR MILES business just curious, the tagline has always been it's gas, groceries, very nondiscretionary. You've signed up so many new sponsors over the years. I know [RONA] for an example was a big contributor to your growth last couple of years. You've got to believe that business is struggling.

Is the mix of sponsors or the mix of miles that you would deem to be nondiscretionary consistent with where it was a couple of years ago?

Yes, I think looking over at (inaudible) rented to for many years and he said the basic thing is the only change that we've really seen is that there's been a big increase in bonusing.

So, like in the old days, the supermarkets, the Safeways of the world would pay us X millions a year. And now what they will do is they will team up with Packaged Goods Industry and PepsiCo and Safeway will give a two-for-one mile sweepstakes or they will do other bonuses and promotions.

So I think the short answer to your question is no, I don't think it's really changed the mix much. It's just that the way it's become more challenging, quite frankly, to tell you quarter by quarter what the issuance is going to be. We have a very good feel for a full year basis, but quarter by quarter it's kind of a crap shoot.

Got you. And on Private Label, I guess the 10 -- soon to be 10 new programs this year and, then, let's throw in last year's new programs as well. How many of those were just -- and I should have this in front of me but remind me -- how many of those were just sort of cobranded offerings to supplement existing store card programs? I'm just kind of curious just to get a sense of magnitude. (multiple speakers).

The cobranded ones you launched so far I mean have those been material contributors to portfolio growth? Or are they just sort of --? (multiple speakers).

Yes, actually, the programs are pretty -- doing well, but they are never going to be the anchor of our offering. The Private Label is, let's say gets us to 30% wallet share. If co-brand can pick us up another 10 are 12, that would be great.

So we would probably not view a co-brand as being materially more than at some point down the road 10% of the file. But at the same time, it may pick up another 10 points of wallet share within the client because they are high-quality folks. They just don't want to have another card in their wallet so we get their outside spend as well.

I think what comes to mind would be Ann Taylor, co-brand and New York and co-brand were probably the two.

And how do the yields on that type of product compare to your (multiple speakers)?

They are a little bit less profitable in terms of ROI. I'm sorry, ROA. Get my own self mixed up here. But ROA, but what you give up on ROA you make up in volume. So you are going to have more credit sales because it's used both inside and outside the store. And you are going to have a higher balance than our $350 balance.

So overall the gross dollars are probably not so different from the Private Label Program. It's just our focus will always still be the Private Label.

Then, the last questions just to, I guess, to clarify that prior one. Once again the $25 million drag on funding costs that's inherent in your guidance. You know you were outlining where historical LIBOR spreads were and where you expected them to come back to.

Does the $25 million reflect what your funding cost looked like when you actually got this facility done? Or is it actually kind of incorporate the assumption that we continue to see a return to normalcy and that that 500 basis point spread sort of narrow to 150 and so forth?

Yes and yes. Very simply, the 25 was assuming that we fully utilized the $1.4 billion facility we set up as opposed to the $700 million that we really needed it for. And that was the time where the LIBOR spreads peak, you know -- 300 bips or something like that. So very simply to the extent we ever used that facility when it was at that peak level it would have been $25 million or 60 basis points.

So that was why we put that in the press release. Obviously spreads have come in. We haven't used more than the 700 so that would suggest something less than that, but as we looked into 2009, we said looked we've got some stuff coming due. Clearly spreads are coming in, but it's still going to be incrementally a little bit higher than existed.

So we use 25 as I think a decent proxy for if not the $1.4 billion facility at the peak LIBOR spread, then a good proxy for what we think the incremental funding cost will be for us in 2009, factoring in a couple of renewals and assuming spreads have not completely come back to normal.

Okay. Thanks a lot.

Dan Leben, Robert W. Baird.

One quick one, because we are running a little long here. On the Epsilon business one thing we've heard from some of the direct marketers out there is some of the retailers and catalog companies push forward some of their typical 4Q spending on marketing programs in order to try to get an early start on Christmas and try and salvage what is probably going to be a pretty horrible season for those guys.

Did you guys see any of that in the Epsilon business during the quarter?

Third quarter is always historically -- if you look at when all the work is done and whether they mail it on the first of October versus the 15th of October or whatever doesn't really make that much difference on our revenue stream.

Great. Thanks.

Moshe Katri with Cowen & Company.

Good execution. Just really one question.

Assuming we -- obviously we are going to go through some pretty tough times during the next few quarters and also assuming, I don't know, maybe we will lose a couple of retail customers like Lane Bryant, credit losses continue to creep higher, I guess that will place you in a defensive mode. How are you set up for the scenario from an expense perspective? Maybe you can kind of decompose, maybe categorize your expenses by personnel, maybe other items. And which part of discretionary (inaudible) and obviously all focus is on your ability to protect the bottom line. Thanks.

I want to hit the first one. The potential loss of another Lane Bryant. That is not going to happen. You look at our history. That generally never happens but, in particular, it won't happen now. Because there aren't any banks out there that would even do it.

So I don't think you need to worry too much about losing a big client to a competitor. Obviously there is a lot of discretionary expense in call center if something were to happen like that. But those are the two key points. Ed, you were going to --?

Yes. I would say we don't know of any large client who is leaving, but let me take your question a different way and say what happens if some clients go bankrupt?

Yes.

And that's certainly possible. You know the last big one we had, I think, was Service Merchandise back in 2001. So it has been a while. But I think especially this year -- I'm sorry -- especially in 2009, all that would do is, it wouldn't cause us to have to take out some type of expense plan. Because the ramp-up that we are looking at right now would suggest almost a $500 million AR increase in the file itself from the 10 new clients.

So all that would basically do would be knock down that growth rate a little bit. And we wouldn't be hiring as much, but it wouldn't be a cut scenario.

In particular we just -- because they might go bankrupt -- you don't lose the majority of the driver of that revenue stream, which were our fees from cardholders. They will pay out over time and the balances will steadily get slowly get paid out. So there isn't a big drop or one big write off so to speak.

Is there -- Ed, can you kind of elaborate a bit on your expenses? Is there any kind of way to kind of decompose them by personnel? Maybe other items? And what in your view is discretionary and where you can kind of [bring] it get down if you need to?

We would prefer to stay [where we're at]. Right now we are looking for solid growth in Canada. Solid growth at Epsilon and solid growth in terms of the business metrics at Private Label. And in order to handle that you are going to need your customer care call center, back end collections and everything else.

So we don't view 2009, quite frankly, as a year for cutting expenses. Because we are going to be growing and the headwinds are facing our foreign exchange issues and maybe higher credit losses and a little bit of funding headwinds. Those you don't fix by cutting folks when you're growing.

So I would stay away from thinking about are we going to do expense cuts. We are not.

The nice thing about it, look, we've signed specifically Private Label (inaudible). 10 folks this year or will. I guess nine. And we will be ramping up to support those. If for some reason there were some customers, we would just not have to higher as many and would be able to transfer fully trained people right away which, frankly, is less expensive than hiring and training brand new people that have never been with us before. So.

Yes, my guess -- (multiple speakers)

Great hedge there against declining customers by continuing to ramp up new clients.

Yes, I would say, Moshe, since again we are keeping folks on shore that we are going to be one of the few companies that are probably hiring during 2009.

Great. Thank you.

Bob Napoli. Piper Jaffray.

Nice job on the quarter. On the deposit side, I mean, your deposits are relatively small, relative to your asset base and the credit card receivable base.

Why haven't you grown that much more substantially especially over the course of this year? And is that -- can you grow that? I mean, if the wholesale, that type of CD funding generally you can grow relatively quickly. Why isn't that a bigger focus?

Believe me, it has become one very quickly. We typically, Bob, if you went back because Private Label for us, you know, the funding has been so fluid and so liquid and so easy over the past 10 years, you just -- the banks have been knocking down the door to do conduits or to underwrite the public ABS deal.

And you know we had so much excess capacity that it never really crossed our minds to spend too much on the CDs. We'd normally save the CDs quite frankly for nothing more than our year-end blip-up, which is a financial term meaning the seasonal upturn around the holiday season. And that is usually $200 million or $300 million and that is typically what we run this CD program at.

Is there any reason we can't ramp that up to $1 billion, $1.5 billion -- whatever else we need? Absolutely not. It hasn't been an area of focus, but it is a source as you know for well -- FDIC-insured, very stable, very inexpensive, relative to other sources of funds as a source for us. So you can count on seeing that number go up pretty significantly through 2009. You are dead on.

Now do you think you qualify for any of the government funding programs? I mean, American Express, I think believe they can get $9 billion of funding through some of the government guaranteed programs as a bank and is it --?

No, I don't think so. We just started looking. We haven't spent much time on it (multiple speakers).

Right now we are feeling pretty comparable with, you know, let's the CD program going. Let's get everyone lined up for maybe some more access to the conduit market. And if some time in the spring or early summer the public markets open up, I think a lot will be dependent upon not just LIBOR coming down, but having some type of final resolution on this mark-to-market accounting. So that the folks buying the securities can get a little more comfort.

That would be very helpful if we -- the sooner the better on that one. So you know just like I said we are not AMEX. We don't have $24 billion that needs to be refinanced. So I think a nice CD program ought to do it for us and that will be about it. And we will certainly look and if there's some freebie out there or whatever, we will certainly take a look at it. But right now we are not counting on it, no.

You signed 10 new clients in private label this year, or nine, 10 new clients, adding $500 million in receivables next year. Is that pretty much the most you feel comfortable with? Is there a pipeline? I mean can you repeat that next year? Would you? Is that or is that too much growth?

That's on the high side. I again don't want to predict much like I mentioned earlier. But from an operational boarding perspective, that's something that we feel comfortable with.

Yes, I think the challenge doesn't come in, Bob, from signing new clients per se if there are clients where we are starting a program from scratch and ramping up over a three-year period. It is more when you are talking about if you are taking on a $50 million or $100 million or $150 million file that comes along with it, you have a conversion that needs to take place. And we probably don't want to do more than four conversions a year.

Last question. Just on -- I mean you are buying back stock, but in this environment it's possible that there could be some opportunities on the deal side. I know you haven't focused on that, but there may be some extremely attractive opportunities from stress sellers. Is there any interest in that from your perspective or is it just any -- the total focus on share buybacks? Over the next -- through 2009?

We are certainly watching.

And what area would you (multiple speakers) would you be interested?

It would be either for Canada or for Epsilon.

Thank you.

Colin Gillis with Canaccord.

Is it going to be possible for you to (technical difficulties) individual files in from some of the larger portfolios held by your competitors?

Yes.

All right. Okay. Good. Are there any step downs left in 2009?

Yes.

Then, just what exactly is driving your expectations through the lift in charge-offs in November and December?

It's all based on the delinquency flows. And what we've been seeing in the later stage delinquencies would suggest that Q3 was probably a little bit below what we had anticipated. And I thank you for is going to be a little bit higher than anticipated.

I think when you average them out, you know they are about right where we want them to be. I mean as you know they jerk around quarter to quarter and Q1 last year was the same as Q3 this year and Q4 is going to be a little bit higher. Does that mean it will come back down in Q1? It's too early to say right now. But we are going to come in the year right at 6.5 on the Master Trust.

And just on that lift and charge-offs, is that more likely to happen despite -- more likely to happen to on balance sheet portion so that we might not see it in the Master Trust data? I just want to be clear on that.

No, no. Not at all. We really haven't seen the spread riding between total owned or total managed and Master Trust. It's been 40, 50 basis points for quite some time.

Okay. So that spike should -- that spread should be consistent throughout the year?

Yes, I wouldn't even really call it a spike. I would say Q3 was probably a little bit better than we thought. Q4 will be a little bit worse than we thought. I don't think there's any rhyme or reason to it. It's just sometimes you get some batches of accounts that are hard to break in the later stages. And that's sort of what we're looking at.

It is going to go up-and-down next year too. People need to get ready for -- you know you're going to see some quarters that are above mid 7's and some that are below. And I think just like this year I'm pretty comfortable we will come in almost dead on of what we want.

When that's all out the cash is still going to flow into the balance sheet.

You got that one right, Cowboy.

Great quarter. Thank you.

Operator, we have time for one more.

Robert Dodd with Morgan Keegan.

Two very quick ones. On the Canadian -- the guidance you given for Canada with 18 and 20% growth, is that based on -- that's the local currency growth I assume there?

Correct.

Yes, and then the last one. Treatment of the convert, you are going to run an effective volume cost to do through GAAP right and then add back at cash?

Correct.

That's it. Thank you.

All right we will wrap it up. It was an hour 40. It's such a short one that I have another 20 minutes of chatter time. Well, maybe not. Thanks everybody. We will talk you at the end of the year. Bye now.

This concludes today's teleconference. You may now disconnect.