Bread Financial Holdings Inc (BFH) 2008 Q4 法說會逐字稿

Good afternoon. Welcome to the Alliance Data fourth quarter and full year 2008 earnings conference call. At this, time all parties have been placed on a listen-only mode mode. Following today's presentation, the floor will be open for your questions. (Operator Instructions). In order to view the Company's presentation on their website, please remember to turn off the popup blocker on your computer.

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

Thank you, operator. By now you should have received a copy of the Company's fourth quarter and full year 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 the SEC. Alliance Data has no obligation to update the information presented on the call.

Also on today's call, our speakers will reference certain non-GAAP financial measures, which we believe will provide useful information for investors. Reconciliation of those measures to GAAP will be posted 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. If you will turn to the agenda slides, you will note that we will hit the fourth quarter highlights, and I will hit a at high level the full year results and talk about our 2009 outlook, then I will turn it over to Ed, for more a detailed review of the business and our financial performance. Let's get started.

Turning to the fourth quarter highlights, I am very pleased, that particularly in this environment, we delivered on our 31st consecutive quarter of meeting or exceeding our guidance. Despite the environment, we continued to execute, and we remain confident that our business model will fair far better than others. Let's take a look at the quarter. We saw a slight decrease in revenue to $508 million, however on a constant currency basis revenue grew over 5%. Operating EBITDA increased by 7% to $182 million. Adjusted EBITDA was just under $159 million. Cash earnings per share grew 31% over last year to $1.19.

Bringing you up-to-date on our repurchase plans and activities for the full year, we purchased more than 17 million shares for approximately $1 billion. This continues to be most advantageous use of the strong cash flow of our business, and Ed will go into more details a little later.

Let's turn to the next slide and talk about the individual businesses starting with our AIR MILES Rewards program in Canada, our Loyalty Services group runs that program. They did an outstanding job delivering the largest EBITDA quarter in history. Revenue came in at $196 million, and adjusted EBITDA grew to $61.5 million, a 59% increase over the same period last year. The long-term success of the program remains very sound, and offer a very unique value proposition that attracts and retains sponsors, and as a result in virtually 100% rate of our sponsors year-over-year.

By expanding opportunities within our current base and adding new sponsors as well, this program derived more spending from our sponsors, and more earning opportunity for our collectors. Coupled with very robust and attainable rewards, we have the successful coalition Loyalty program in North America.

I do want to mention a couple of notable items in the quarter. In December we announced a renewal of Hudson's Bay Company, Canada's largest general mass merchandise retailer, and a long-term sponsor of the program. We also renewed our relationship with another long-term sponsor, Boston Pizza, Canada's largest casual dining brand, and a sponsor since 1993. Outstanding work to the entire team.

Let's turn to the next slide and the a Epsilon, our US based marketing service units. They continue and we continue to see demand for the programs that deliver measurable results, via transaction-based solutions. We are pleased to be providing a comprehensive Permission-based E-mail program, a marketing solution for Marriott International. Our solution is designed to help them increase customer engagement, loyalty, and revenue.

We also renewed our agreement with the National Multiple Sclerosis Society, to continue to provide data management services to drive campaigns for retention and loyalty among their 15 million members. The MS Society has been an Epsilon client since 1985.

The question we are often asked is what has been the impact of the economy on our business climate on our business unit. There are some client who are struggling, however, among our key clients there is steady if not an increased level of spending. ROI based marketing programs and every day we are in discussions with potential new clients, to help them realize the benefits of transaction-based marketing.

This year we completed 15 new signings, up from our typical dozen or so. These companies have placed a priority on retaining customers and increasing loyalty among their customers, and they are not the only ones. You may have read recently in AdAge, a survey of marketing executives, that particularly in this economy, companies are prioritizing their marketing spend and effects in four areas, Customer retention, customer satisfaction, marketing ROI, and brand loyalty. And that is right in our sweet spot, so nice job Epsilon team.

Let's hit Private Label next. Turning to the next slide, we wrapped up 2008 with a record year for new program signings. We did announce ten programs, as well as several renewals as well. As was said before our success lies in our ability to demonstrate that our Private Label is positioned as a marketing solution, can help our clients increase sales and increase loyalty with their customers.

A few weeks ago we announced Home Shopping Network. We now provide both Private Label and Co-Brand card services. We will also be providing analytic services geared towards helping them identify, target and acquire high-value customers. We will also be including customer segmentation, product affinity, and response modeling.

We also launched a Private Label program for Butler Animal Health Supply. Butler was over $1 billion in sales is the the largest distributor, veterinarian, animal health products to vets across the United States.

Lastly we find a renewal with one of our longstanding clients, The Buckle. The Buckle, as you may be aware is one of the few standouts among retailers this year, with positive growth. We had a terrific year for new program signings. It positions us well for 2009 and 2010.

Our Private Label team expects to continue to capitalize on our position of strength, compared to our competitors, as financial institutions see their business model and strategy being challenged. Nice work to the Private Label team, let's go on and wrap up 2008 on the next slide.

For the full year, despite the challenging environment we are in, we delivered mid-teens earnings growth for the year. Cash EPS was $4.42, 14% up from last year. We finished the year at about $2 billion in revenue, EBITDA of $655 million, and operating EBITDA of $711 million. As a recap to 2008, a strong year, forging new relationships. We added more than our normal goal for new clients, and we extended many of our key relationships. I am very proud of our performance. I am just as optimistic as we go into 2009.

So let's turn onto the 2009 outlook looking forward, as I said we remain confident in our business model, and the ability to execute on our strategy. The hallmark of our model, as Ed has sometimes call our key themes, ares as follows. Solid recurring revenues, Strong free cash flow, Strong balance sheet and excess liquidity, and as a result, we expect to deliver $5.15 to $5.20 on a per share basis, or up between 17 and 18% for 2008.

Loyalty Services will have a strong organic growth, however, more in-line with our typical growth rate of mid-teens, and we expect relationships with our sponsors to expand and grow, while adding new sponsors and expanding categories. Epsilon will have solid growth as well. Specifically, the demand for database, analytics and interactive services will continue.

Private Label, our growth will be driven by the portfolio growth from our 2008 wins, coupled with the benefits of lower funding costs. In 2008 we took steps to ensure double-digit cash flow growth, as well as an advantageous repurchase program. This has proved to be both a timely and effective use of our capital, and we expect to continue.

In closing, our earnings growth should be stronger in these challenging times, and we plan on using our strong position to come out even stronger. I believe our stakeholders are second to none. We have great client partners, that we help grow and maintain loyal customers, and we have an exceptional team that has created a culture, delivering on our promises to our clients, to our shareholders, and to each other.

And with that, thank you to everyone, thanks for a good quarter and successful 2008, and now I am going to turn it over to Ed.

Great, thanks Mike. If you could turn to the slide, 4th Quarter Consolidated Results. I understand we are having not the greatest connection in the world. So I will try to speak up a little bit. I can assure you it is not because it is snowing here in Dallas, but I will go on from there.

First, we did move the conference call obviously up a day, and believe it or not I did get a number of E-mail as to why. The answer is there is nothing nefarious behind it, other than I got a ton of e-mails saying we were vying for your time with Visa. So we decided to move it up, because we were ready to go, and that is all there is there.

So as Mike mentioned, fourth quarter marked our 31st quarter since the IPO, and 31st quarter of delivering or overdelivering on our expectations. We beat our guidance by a couple pennies or so, and for the year our cash EPS was up quite a bit from our initial guidance.

That is about eight years in a row for us, but more importantly let's talk about the key take-aways. There are three of them, we think from the quarter. I think in this environment, first and foremost, all of the financial metrics continue to grow. Operating EBITDA a proxy for operating cash flow. Reported EBITDA and cash earnings per share all grew, and even revenues when adjusted for the Canadian dollar exchange rate also grew. So even in a deep, deep macro recession, we continued to show pretty decent organic growth.

Second, how did we do it? It has to do with the mix shift. The percentage of cash contributed by each business continued to shift. For the first time in our history, Loyalty and Epsilon contributed two thirds of the quarter's cash flow. When you add in Private Label services, that is the customer care, the network, all of the marketing, the non-credit businesses contributed three-quarters, or over 75% of the quarter's cash flow.

And third, cash flow continues to rule. Moderate growth in operating cash flow, as defined by operating EBITDA combined with low CapEx, a lower funding environment, and a strong buyback program, all contributed to a 30% jump in our earnings per share. It isn't the perfect recipe for us long term, but it has and will continue to service us well during this macro meltdown.

All right, finally let's wrap up the consolidated picture with a brief recap of the year. Very simple. Record revenues, record cash flow, record EBITDA, and record earnings per share. When all is said and done, about how bad the global situation is, how bad the retail environment is, how bad the credit environment is, how bad consumer spending is, ADS continued to push ahead through 2008, and wound up with record results, including mid-teens growth in earnings.

This track record of producing through good times and bad is a critical piece of our model. At any given time a few different things in our model are going to underperform, but the key to our model is that a few things can bend or even break, but overall the mother ship, as we call it, continues to produce record results. As we enter 2009, I would certainly expect skepticism to continue to be the rule for most of the investment world, and to all of you out there I am sure this is shocking indeed.

For us, however, it has been 31 straight quarters, or eight years of seeing the good, the bad and the ugly. We fully expect 2009 to bring us another year of mid-teens growth in earnings per share, and we have got lots of extra powder to back that up as well. So over the past eight years, we have heard over and over again, that the model will not withstand a recession, let alone a severe recession. This one is a pretty bad one, and the model has held up extremely well. '09 we actually have a better handle on, I think than even 2008, because a lot of the drivers are beginning to head back in the right direction, so I think '09 will be another year when we can prove that the model, once again, can deliver very nice earnings growth.

So let's turn to the segments. Loyalty AIR MILES in Canada, not much to say. They continue to rip it. EBITDA of over $60 million was a record, and was up 60% from the prior year. Revenue on a constant currency basis was ahead by more than 20%. A quick note here, EBITDA was not materially impacted from the lower Canadian dollar, because we had some investments up in Canada held at Loyalty, that gained in value and virtually offset the FX hit.

Driving the continued growth, were first, the non-discretionary spend nature of the business which focuses on generating revenues, when people buy gas, groceries, go to pharmacy go to the liquor store, home improvement, et cetera. Second, the network effect is alive and well, as we continue to see a gradual increase in the number of sponsors visited by our members. You multiply that by 70% active membership across the entire nation, and you are talking about some serious coin.

Third, we continue to see our sponsors spend a larger and larger share of their marketing dollars on the program, and finally, new sponsor categories continue to be filled, wrapping these items together with strong pricing power and zero sponsor attrition, one can see how this machine continues to hum.

The 2009 outlook remains upbeat. We don't expect a repeat of 2008 hypergrowth of 20% on top line, and over 50% on EBITDA, but nonetheless even assuming some softening in the non-discretionary spend, would still suggest mid to high teens growth in revenue and EBITDA respectively. Foreign exchange translation will be a drag on these results, to the tune of about $88 million on top line, and $24 million on EBITDA, reflecting the the expected weakness, and the Canadian dollar to average about $0.83 per US$1, versus $0.94 in 2008. In other words, one Canadian dollar will equal $0.83 US, versus [$0.94].

While it doesn't have anything to do with the health of the business, and we will provide constant currency metric as well, it is important to point out given that it will be in our numbers. Epsilon marketing services, or US marketing and loyalty business, had a decent quarter and a good year overall. For the year, revenues and EBITDA were each up 7%, while Q4 came in flat. The difference between a flat quarter and 10% growth at Epsilon, is about $3 million in EBITDA. For Epsilon, that delta of 3 million can be attributed primarily to client bankruptcies. These included one big one as wells a number of small specialty retailers within our Abacus catalog coalition business.

Of particular importance, however, is continued double digit growth of database services, analytic and interactive, that is our permission-based e-mail, which altogether account for the majority of Epsilon. Also, this is a key point, we did not significant cutbacks in client budgets, impacting either Abacus or our agency, that is our direct mail businesses. In essence, by holding our own in the face of significant client budgetary cutbacks, we increased our wallet share significantly.

For 2009, expect solid double-digit growth to continue from database, analytics, and interactive products. Abacus and agency are expected to hold their own, with continuing gains in wallet share, mitigated by an expected handful of additional retailer bankruptcies. Bottom line when the dust settles, Epsilon should perform in a similar fashion to 2008, and that is around 7% growth, is a good bet.

Private Label services provides the network processing, the customer care, and the marketing services functions, for our roughly 100 Private Label clients. Comparing Q4 of '08 to Q4 of '07 we get a little caught up in the inter-company charges, so the bottom line is that there is a growth of a few percent on top and bottom, which would be a normalized number. Rather than the much higher revenue and EBITDA growth rates of 10% and 60% respectively. This inter-company apples to oranges has now hit it's anniversary, so next year it will be very, very simple.

Of note, however, is the segment's metric, statements generated. Specifically, we were seeing declines of 8 to 9% throughout much of the year in the statements that we generated. In Q4, however, the rate of decline was cut in half to under 4%, as we anniversaried Lane Bryant, and new clients were cranking up. Obviously, this is nothing to pound the table too hard about, but it is a trend going in the right direction, and we expect to see decent, positive growth in 2009. Specifically, look for around 7 to 8% growth, which will be highly correlated with statement growth. All right the fun stuff.

Let's finish up with Private Label credit. Compared to Q4's EBITDA of last year, the segment was hit by two things. Increased credit losses accounted for two-thirds of the deterioration versus prior year, and the remaining third consisted primarily of the higher-interest segment charge noted above.

Normally, we would expect these drags to be offset by earnings from portfolio growth and lower funding costs, the latter being very typical in a recession. Those offset did not occur as we did not anniversary Lane Bryant until mid-November, and for lack of a better term, the mess in the funding environment actually drove our funding costs up, as evidenced by LIBOR being at 4.5% in October, versus 43 basis points today. So what does that all mean? Well we have some good news, which will drive 2009.

Our two positive drivers are back in the saddle. First, as noted, the portfolio had no growth in 2008. However, we signed a record ten new clients, and anniversaried Lane Bryant in mid-November.

The results are quite promising, after no growth at all a year until December, the portfolio exited 2008 at a solid 6% growth rate, with the addition of the Home Shopping Network file, and the beginning ramp of the ten new clients we exited January at 8.5% growth rate, and I might add with positive sales growth versus prior year, and seemed well on our way to our low double digit growth goal of 2009. Again, the reverse of everything you are reading about in the papers.

And then second, funding costs. On our October call, we guided to a funding headwind in 2009 of around $25 million, due to the financial crisis. That headwind is now completely gone. LIBOR has come in 400 bips in the last three months. So not only is that headwind now eliminated, but we would expect to actually see a benefit developing as 2009 progresses. So simply stated, what are we looking for? We are looking for portfolio growth and funding benefits, to be of such size as to mitigate the expected increase in losses, which should be about 150 basis points.

All right, let's wrap up the full year summary for 2008. If you were to combine Private Label services and Private Label credit, it came in about $80 million behind 2007 in EBITDA. The $80 million hit, however, was more than offset by over $100 million in EBITDA growth from the rest of the business, resulting in consolidated EBITDA growth of 4%, and earnings per share growth of 14%.

2009 looks more favorable. While we won't get quite as much zing out of Loyalty as we did in 2008, both Loyalty and Epsilon will still do well. Also in Private Label, the portfolio is already nearing 10% growth, and funding rates are dropping like a stone. These positive drivers, both lacking in 2008, should mitigate another year of losses, increasing 150 bips or so, and 2009 will not be saddled with the big drain in 2008. Pretty straight forward.

Let's hit the balance sheet. First up Canada, deferred revenues actually decreased by $145 million from last quarter, but not the to worry, it is solely due to the translation loss from the lower Canadian dollar, which tanked from $0.94 in Q3 to $0.82 in Q4, which is a huge move for the looney. Second, we continued to buy back our stock, specifically we bought back 2.9 million shares for a total of just over $130 million. For the year as Mike mentioned, we spent exactly, I think almost to the penny, $1 billion, and purchased just over 17 million shares, or 20% of fully diluted shares. And yes, that is a whole bunch.

And no, we are not done yet. We have another 800 million authorized and quite frankly this this market, I can't imagine a better use of some of our excess liquidity. Speaking of liquidity, even after dropping $1 billion on the buyback, we ended the year with a leverage ratio of just 2.1 times. Still well under our self imposed cap of 3 times, which we feel would still preserve an investment grade profile.

All right, finally, we have between 1.8 billion and $1.9 billion of available liquidity, consisting of such items as cash, revolver capacity, conduit capacity, CDs, and expected free cash flow. And no, we are not concerned about renewals of these sources. All right, that is it for '08. Let's see what 2009 has in store for us.

Next slide, please. 2009 guidance for those of you who recall the October call, we essentially took that slide and said, what has changed? The easy part of it is 2009 guidance is very simple. There has been no change. So what you heard last October is what you are going to hear today. The highlights, let's take a look at the business before we have any headwinds attributed to them.

As outlined earlier, Loyalty is expected to continue strongly, that is high teens through 2009. Epsilon, normally at 10% plus organic growth engine, will get dinged a bit by retailer bankruptcies, but we still expect a decent 7%-ish type growth, and finally in Private Label with the profile already at an 8.5% growth rate and ramping up, as well as the significant reduction in funding costs, Private Label should come out of the blocks with conviction.

Looking now at the headwinds, things have changed a bit since our October call. We have bumped up losses another 50 basis points, adjusting the total of 150 basis points increase versus 2008. What does that translate into? It translates into a drag of about $66 million. But going the opposite way by 50 bips would be funding costs, which rather than a headwind should now be flat, if not beneficial.

And finally the expected FX hit of around $0.11, that is the Canadian dollar depreciating from $0.94 to $0.83, remains similar to October's number as well. Bottom line, losses are more in-sync with what people are seeing and expecting, while funding is returning to it's historical position as a natural hedge during recession. All-in-all, there is no change to our overall guidance from October's call.

Okay, I can we are going to take a couple minutes here and hit, let me guess the #1 question we will get asked, 300 or 400 times over the next three months, let's go to the slide that says 'Sidebar' #1 Investor Concern: Credit Losses. Let's try to put a fence around how high credit losses can go, how comfortable we feel with it, essentially provide some level of comfort that you can put down on a piece of paper.

We went back and looked at 2008, and we noticed that the average unemployment rate was just around 6%, and if you looked at our total credit losses, that includes both the Public Master Trust, and every other portfolio that we have outside of the Trust, we came in around a 7.3. That is 150 bips ahead of unemployment, and that is a $60 million incremental hit to the P&L, which we talked about. Just as an FYI, the Master Trust that comes out monthly that everyone looks at, except us, averaged about 6.7%, which was consistent with our mid-6% guidance from over a year ago. So we came pretty close.

So what does it all mean, going back a couple of years, total losses tend to run about 100 to 120 basis points above the average unemployment rate for the year, and that is a pretty typical correlation for us, and that is sort of a back of the envelope-type of spread that you can count on going forward. So let's take a scenario here that says all right in 2009 unemployment goes from 7-ish to a little over 8%, averaging somewhere in the high 7's for the year. Slap on 150 basis points, and you are going to get an average loss rate in the high 8's. That is the $66 million incremental hit to the P&L.

The Master Trust as we talked about, that is that public thing that comes out every month, would normally run in the low 8's, also consistent with 150 basis points increase versus prior year. So that is sort of the rule of thumb that we have here, which is you can't do it by month, or perhaps even not by quarter, but on a full year basis there is a very loose correlation of 100 to 120 basis points, between the unemployment rate and our total managed loss rate.

So let's go to the next slide, my favorite, that we titled, Credit losses - Avoiding the Freak Out. This is highly sophisticated financial term that we thought we would use, but we couldn't come up with anything better. Again it lays out for you the average unemployment rate that we put in for budget purposes. If you looked at '07, '08, and '09.

We talked about '09 going from the low 7's to above 8%, and we then constructed a budget and guidance based on a typical 100 to 120 basis point spread, and that would give us total credit losses, again as we said in the high 8's. Normally again the Master Trust, the thing that comes out monthly, runs about 50 basis points below that.

However, this year something fairly unique will be taking place, and specifically what we are doing is in order to optimize our funding and our liquidity, we will not be pushing hundreds of millions of receivables into the Master Trust, after they have seasoned on the balance sheet, like we normally do. Instead we are going to keep them on balance sheet, and we are going to use very low cost, FDIC-insured CDs, to continue to fund them, and also to fund the brand new programs starting up. So essentially what is going to happen is the Master Trust rate will start to creep up, and converge with the total loss rate for the Company.

So if you look at the bullet points we put down below. For 2009 your Master Trust rate will equal your total rate, think of it in the high 8's. We are optimizing financing. What we are talking about here is the denominator effect, usually we fund the new growth outside of the Trust, but once it gets nice and mature we jam it into the Trust, and that tends to moderate the loss percentage.

We are not doing that this year, however, whether the Master Trust is 50 below or at our total losses it doesn't matter. It has the same impact on our consolidated results. So it is more of a heads up when you see the report. Q1, we are actually looking in the high 8's for both managed and the Master Trust, with the expected upward creep throughout year-end to be mitigated, meaning fully offset by the new growth.

I guess a couple of points I will make before we move on, hopefully anticipating some questions. One is for those of you who get a lot of entertainment out of going into financial services companies with us on the securitization side, there won't be any significant I/O write-down that we can see for 2009. Essentially growth is solid, the yield is extremely solid. Funding costs are coming way down, and should offset the increase in credit losses. So going to have essentially an I/O that probably is about zero for the year. So there is no surprise lurking out there.

The second, and we can debate this all day long is, hey Ed, how about if unemployment doesn't go just to the low 8's. Let's say it goes all the way to 9%. Isn't that a big problem? And if you did the math, unemployment going from a 7.2 to a 9%, gives you an average rate for the year of an 8.1. Add your 110 basis points, that puts our total losses at a 9.2, versus an 8.8 that we had in our budget. That is 40 basis points. That is $16 million of EBITDA.

The bottom line is it is only 2% of our EBITDA for the year. So what we are trying to get though here is, we are going to be in the general ballpark on the losses and on the unemployment, but if unemployment goes up 50 or 75 bips more, you are talking 2 to 3 to 4% of EBITDA. Again it is just not enough to move the needle for us. I know the losses get an awful lot of play, because of people who are pure card issuers, they have for the most part blown up so far. We haven't and that is why.

Now if you look at the question of well, if unemployment is creeping up throughout the year, and you are starting the year in Q1 in the high 8s, and you add in a growing unemployment rate, shouldn't that overall rate be creeping up as well through the year? And actually we thick it is going to be relatively stable, and it has nothing to do with the fact that we are not seeing more losses.

It has to do with the fact that the denominator is growing rapidly. Again, very different from bank card issuers and AMX that are out there, whose portfolios are shrinking. Because we have signed a record amount of clients last year, our denominator is actually growing. When you grow it, it grows with receivables, with virtually no losses. That then tends to keep down the loss rate throughout the year, and that stuff is cranking up as we speak.

So it actually does make sense for a company that is growing like ours, to have a moderating impact on the losses, as opposed to virtually everyone else in the bank card world, who may be shrinking. Other than that, I think what we are trying to do is put it in perspective of losses are an important item, but we are close enough we think in the ballpark that 50 bips, one way or the other, really isn't going to make a difference, at 2 or 3% of EBITDA, and we can cover that off.

What does that all mean? Let's finish up with the next slide. 2009 guidance, again no change from the Q3 call. After you factor in the headwinds of FX, and after you factor in the headwinds of higher credit losses, revenues of about $2.2 billion, operating cash flow of about 720, and reported EBITDA of about 680, that leads us to about a cash EPS number of $5.15 to $5.20, same as before, up 17 to 18% versus the prior year.

Specifically, Q1 we are going to set the bar at $1.10 for now. I think the key thing that needs to be noted about Q1 is that is our most challenging quarter when it comes to the foreign exchange growover, because that includes a $10 million EBITDA hit for FX, or roughly a $0.10 drag on cash EPS. After Q1, that drag starts to climb to $0.09, $0.06 and then zero by the end the year, when we anniversary it. So this is our toughie we it comes to the FX growover. So on a reported basis 10% growth, on a constant currency basis we are still looking at 20% growth, and if you looked at the full year cash EPS number on a constant currency basis, we are looking to about do north of 20% for this year.

So, that is pretty much where we are. 2008, obviously was a year of recession and a year of the credit crisis, yet our earnings grew in the mid-teens. 2009, we are assuming, as is everyone else that the recession will continue, and will become the worst since the actual Depression, and yet we are forecasting 17 to 18% growth. They are over 20% on a constant currency basis, and that leaves us to a thought about 2010 and 2011.

If you can imagine when things finally begin to settle out, the storm passes, what are we looking at? We are looking at the Loyalty business in Canada, no real change. It is going to do great in good times and in bad times. It will just continue to zip along. Epsilon, which will have a decent year last year and a decent year this year, will actually move back up into double-digit growth, as soon as this thing turns.

But most importantly, Private Label, which drained us for about $80 million of EBITDA last year, will be no drain to us this year, will be a solid contributor, and therefore you have got all three engines cranking away. You throw that in the fact that the foreign exchange has anniversaried, that we continue to generate huge free cash flow at double-digit growth rates, and we are going to have a third or more fewer shares out there, and you will see an enormous acceleration in the growth of the Company coming out of this recession, but that is even after showing 14% and 17% growth during the recession of 2008/2009.

So that is our view point here. We expect to have a good '09 as we had a decent '08, but more importantly, we expect to come out of this thing even stronger, and it will be somewhat of a sling-shot effect if we do emerge, but again we are not saying it is because we are not growing in the recession. We are growing very, very nicely. It will just be hypergrowth once we get out of the recession.

Okay, finishing up free cash flow. Again this is our typical slide. We throw in the Loyalty adjustment of free cash in Canada, gets you to over $700 million of operating cash flow, take out CapEx, interest, taxes, and you will get to free cash flow with a little under $400 million, or $5.75 a share, which is about a 14% yield on pure free cash flow, which isn't such a bad thing, and then finally the growth and shift in operating EBITDA. You will see again that between Loyalty, Epsilon, and Private Label services, those three businesses have become 70% or more of the Company.

That being said, It appreciate your time, and I turn it to Mike.

Thanks, Ed. Thanks everybody for bearing with us. We thought this quarter deserved a little more detail, and I think it is laid out fairly straightforward. Thanks, everyone, for the year, we will take some questions.

(Operator Instructions). Your first question comes from James Kissane of Banc of America.

Hi Mike and Ed, great job. Ed, can you maybe elaborate on the fact behind the huge increase in the Loyalty EBITDA?

I am sorry you said Loyalty?

Yes, the big, big increase in the EBITDA there?

Yes, it is just sort of a continuation of what we have been seeing all along. It used to be as you recall years ago, driven by miles issued, and then hopefully we get some leverage. What we are seeing now is miles issued and then as you are bringing on the tier two, tier three sponsors, your revenue per mile will obviously be higher, because the volumes will be a lot lower than our national sponsor, and you are just getting huge, huge lift out of the infrastructure that we have up there. So from that perspective, you have got a combination of miles issued, price per mile issued, and the cost for running the operation are all going in the right direction.

Was there any non-recurring items on the quarter?

No. I mean if you look at the first four quarters of the year, right, they are all running around 60%.

All right, but the miles issued did slow in the quarter. What is your outlook in '09 for miles issued?

We would probably say high-single digits, and then miles redeemed would probably be low-double digit. So not all that different. One of the questions we did get was, boy was it going to be a run on the bank. All of these miles were going to get redeemed, and what actually happened was almost the reverse. People started to hoard the miles as currency, and I guess wait for when they really needed to use it. So we are not seeing any big run-up on the miles redeemed.

And then the pipeline, maybe your appetite for Private Label portfolios, and then maybe your capacity to take on some sizeable portfolios here?

Yes, there is no question that we are taking an aggressive approach to this recession, or whatever we are calling it these days, through both of buyback of our shares, and the fact that there are retailers out there who still have a program in-house, and are having some fairly severe liquidity problems, or have felt that it is a non-core asset of theirs. We will be a buyer or a bidder, and as we were with Home Shopping Network, which is a very nice file for us, about the right size between 100 and $200 million.

Additionally even though we don't usually run into the big players that tend to play with the Home Depots of the world, and the Monster files. They still have a few of those hundred or so million dollar files floating around, and I think across the board we can say they are taking a step backwards during this recession, and they are not out there in the marketplace, or at least we are not seeing them, so we like our chances, and we would like to do somewhere in the order of two to three portfolios a year for the next two to three years. In addition to signing our typical five or six new client startups.

Okay. Great. Last question. What portion of your debt is variable rate, and maybe specifically off of LIBOR?

Well you have got a couple of chunks. You have got the portfolio itself, which is a little under $4 billion, and then you have got another 1.5 billion or so up at the corporate level. So if you smashed all of those together, you have got converts and revolvers and CDs and everything else. I would say we probably have at least $2 billion that is sure floating. Then you got CDs which are 18 to 24 months, and then you have got a lot of the fixed stuff that is out there. So I would say maybe $2.5 billion, maybe half of the file.

Great, thanks, Ed.

Your next question comes from Reggie Smith with JPMorgan.

Hey, guys. Nice quarter.

Thank you.

I guess can I get the exact managed loss rate for the quarter in the credit services segment?

You bet. We did 7.3 for the year, and we did 8.5 for the quarter.

All right, I guess I was a little surprised at the way you are kind of getting to your guidance next year. I didn't expect the big increase in the portfolio I had a pretty aggressive, well not aggressive but substantial share repurchases next year, kind of in my model. Just curious what is your appetite for repurchases next year, and what is contemplated in your guidance today?

When you are saying next year you mean this year?

This year, exactly.

We would say we can only put in there what we have already done, and everything else will be an add-on to that. So a little over 1 billion would be the right answer. But certainly at these levels, we are going to be a little bit more interested.

Okay. And then I guess you have an AVS note maturing this year. I think you have some on balance sheet notes. How are you thinking kind of refinancing that? Do you have enough untapped capacity in your conduit to handle the AVS note? If not, if you had to go to CDs would that change? Would there be any I/O recognition risk or anything there, associated with way you decide to fund those as they come due?

Those are all obviously good questions. We have only one deal maturing this year. I believe it is March or April. I believe it is about $500 million if I am not mistaken. Usually, when those mature we put them in what is called a conduit or a warehouse conduit, that is offered by one of the large banks, and then it sit there, until such time as we decide to push it out into the public market.

I can say, although I can't name the bank, that we have a commitment from one of the large banks, to provide that facility for when those notes mature. However, we will also be looking in addition to that a backup plan, which is we are very, very interested in the TALF program, which is the $0.25 trillion program, set to kickoff offered by the government, that will essentially provide an alternative to the term ABS market, which is all but nonexistent today. That is supposed to be kicking off by mid-February, and it is right in our sweet spot and we would be looking to term out, and take advantage of that program for sure, and also use existing commitments we have from the banks on conduits, and using additional CD capacity.

So we are going to be looking at really those three sources of funding, the conduits, which we think are in good shape. We have gotten good verbal commitments from the banks on renewals. CDs are nice and cheap these days, and we can push them out to 24 months, and then this TALF program with the government, should also be a fairly low cost alternative to locking in some term money. So any one of the three, and we are going to just see where the liquidity is, where the rates are, and we will be probably trying to keep a presence in each one.

Okay, and if I could sneak one more question in. With regards to your credit portfolio, what percentage of that portfolio would you say is kind of at-risk for like retail bankruptcies? Without naming any accounts specifically, like how much of the portfolio do you kind think about and are you concerned about, as these retailers kind of go under?

That is a fair question. I mean we took a hard look, as I am sure everyone is, at the top 15 or 20, which of course make up the vast bulk of the portfolio, and again I don't think it is any surprise that some of the names like Victoria's Secret, and Stage stores, and Brylane, which is owned by PPR, which owns Gucci, out of France. They are all in decent shape.

As we went down the list, really the two that jumped out at us that had any size whatsoever were Goody's Clothing, and also Fortunoff, and those two files combined are probably about, I would say about 3% of the overall portfolio. So I would say about 3% would be what we are looking at.

Okay.

It is also good to point out that just because they go bankrupt, doesn't mean that we lose the receivable instantly, as if it were a loan to the retailer. These are consumers that continue to pay out over the time. So that won't be an immediate, it will be be lack of future growth from those agreements.

Next question. Thank you.

Your next question comes from Wayne Johnson with Raymond James.

Hi, yes, good afternoon. As I follow-up to the client stability and quality question, could you talk a little bit about the expected pipeline this year? I think you touched on it already, and could you add any color. Has the sale cycle lengthened because of the current macro environment?

We still much like we did all through 2008 have a good pipeline. Not only with our existing customers looking for expansion, but there is no question that budgets are tightening, but we are kind of in the sweet spot ads we talked about in the beginning, of trying to be in an ROI-based model, that we can prove results. So perhaps a little slower, but by the way, probably no slower than '08, compared to '05 and '06, Wayne, but nothing I am worried about, in terms of the signing timeframes of new clients.

Would you say the same applies to Epsilon as it does on the credit?

Yes.

Yes, I would say to Mike's point if you were to start up north, you are going to see some movements probably in the hotel category, the liquor category, maybe the petroleum category, and the consumer electronics category. There is some pretty cool stuff going on there, maybe even the internet category. If you were to look at the Private Label space, although we don't expect to do ten new signings this year, I bet we are looking at 6 or 7, and Mike and I will make a bet later on as to how much, and at Epsilon we also see a pretty good pipeline as well. So people are interested in this kind of ROI stuff.

Terrific. That is helpful. And could you give us any color on Citibank? What would be the outcome if unfortunately business continued to deteriorate for that institution, and could you give us any sense on how important it is, in terms of contribution to revenues and profits at Epsilon?

Well first of all, I would say a couple of things. We don't like to talk about specific clients. They are a good sized customer, no question.

Number two, though, you need to recall this is based on their consumer franchise, that is driving a lot of their deposits and their long-term relationships. So a lot of the troubles that Citibank is having, really doesn't hit the client division that we spend time with, Wayne, but they are certainly a Top 10 client, but you will recall Epsilon is a pretty diversified division, in terms of numbers of clients driving revenue.

And thank you for that, Mike, and just one quick follow-up. Can you give us any sense, has there been any cross selling recently between Private Label and Epsilon, and can you kind of give us a sense, do you see that taking place this year, and if so, what should we expect from that?

I can as close as we could come, I know that they worked together on our recent signing, with the Butler I know we're doing a lot of analytics there, where actually Epsilon is going to do the analytic work, and we actually are going to put that into the retail group, I am not sure yet. They are in close collaboration for the year.

That is great. I will follow-up after the call, thank you.

Thanks, Wayne.

Your next question comes from David Scharf with JMP Securities.

Good afternoon. Ed, a few follow-up questions on Loyalty. Now that AIR MILES is clearly the biggest contributor to profits. First, just on the miles, I mean I know you had a very, very difficult comp this quarter. I think miles issued was up 16% last year's fourth quarter, but we have never seen a growth rate as low as 2%, and I guess that doesn't really get impacted by foreign exchange at all. Anything in particular, is it the lower gas prices, because of Shell, or is it a little more broad based?

I have got to tell you and you have seen enough quarters here, probably all 31 practically, but this stuff chops around a lot. The promotional budgets, some of our clients were clearly focused more on Q2 and Q3, then they were in Q4. So that is why you see some of the choppy stuff. You are right about the tough comp.

As we have said all along, you really can't read anything into one quarter. If I were to guess, I would say maybe there is a little bit of lightness, because of maybe some of the spending that is being done on the credit cards up there, that are not at our sponsors, so consider it discretionary spend, but using our cards maybe that has softened just a little bit, but certainly on the major non-discretionary categories things seem to be pretty strong, so I would say it is a combo of all three of those things.

Okay. Just curious, Shell is obviously a big sponsor, fuel prices have come down. It has probably put a drag on it, but BMO is your biggest sponsor. I know you have got several different programs with them for AIR MILES, but how much of the BMO miles issuance is tied just to how much people spend on their credit card, on their BMO credit card. That would seem to be a a little more discretionary than some of your typical gas/grocery/pharmacy programs?

We don't break it out by line, but we can say it is a combination of both a number of card programs, as well as, don't forget, their entire retail bank. So to the extent you are keeping a couple thousand bucks in there you are going to get AIR MILES, there are all sorts of other retail options as well. So it is not just on the card side. In other words, you can ask the question another 20 times, and we are still not going to give you a client breakout.

That is fair enough. Last question on Loyalty, I know it was in the press release, and you made mention of it in your prepared remarks. I still didn't quite understand this gain, or currency-related gain that led to the high margin? What exactly what that, or just how big was it?

It is a fair question. It is kind of a new one for us and it really wouldn't have happened, had their not been a total tanking of the Canadian dollar vis-a-vis the US dollar, but effectively what you had on one side was the Canadian dollar went from, if I remember, about $0.96 on average in Q3, to $0.82 in Q4, but more importantly, it was at $1.02 last year, so in Q4 it went from $1.02 last year to $0.82 this year, which hit us for about $13 million negative on EBITDA, and we clawed back about 10 of that, because we had certain investments if you recall, BMO gave us a whole bunch of money for the trust accounts early on.

That would be one of the items, and we were allowed to start investing in investment grade US securities, and because there was such a big dropoff between Q3 and Q4 on the mark-to-market on that, both to the P&L was around $10 million, so one was a non-cash hit of about 30, one was a non-cash gain of about 10 or 11. It is not material, it doesn't really materially move it. So that is why we said FX wasn't really a factor.

I mean how should we think about this going forward? You have got a few hundred million from BMO when you restructured that program. I mean just in terms of thinking about the margins, and what is recurring and non-recurring? This is the first we have obviously had this magnitude of investment gains.

Yes, it is not going to be recurring unless there is a significant move, right, because you book these things up around a buck, and it goes down to $0.83. That is going to trigger a gain. But now that has already been taken, so to the extent things hang around $0.82 or $0.83 next year, you are going to see zero.

Okay, so we think about the quarter and arguably there was maybe about $0.10 of Q4's earnings was sort of one-time investment gains, and going forward when I thick about the Loyalty margins more normalized, mid-25, 26%-ish, like we saw for the first nine months is probably more sustainable?

Yes, and I think against the $0.10 of gain you probably have $0.12 of FX hit. And they sort of wash each other out, but don't forget going forward, the FX growover gets less and less, so by Q4 of next year there is going to be a zero impact from FX.

Got you.

If you think of Q4 this year had kind a zero impact from FX, or very small, Q4 of '09 should have a zero impact from FX as well.

Okay, and just lastly just so I make sure I get this right. The 10 million to $11 million gain, was this realized, or just mark-to-market?

Mark-to-market. It is non cash as is the foreign exchange loss of 13.

Got you. Okay. Thanks a lot, guys.

Yes.

Your next question comes from Bob Napoli from Piper Jaffray.

Thank you. Good afternoon. Question, just I am a little unclear on the funding, and the way the loans are going to move, the credit card loans on and off balance sheet. You only have $500 million of your funding that needs to be renewed in 2009, that is maturing of the $4 billion is only $500 million. I thought it was more than that?

The question was of our asset-backed notes, how much is coming due, and we have $500 million coming due this year, and that is it. Additionally, we have a whole bunch sitting in conduits, which are not notes per se, but these conduits are commitments from the big banks, and we need to renew them on a yearly basis, and that might be what you are thinking about. But in terms of the bonds coming due, it is only 500.

On the conduit side, how much does the conduits have to rollover this year?

They all do.

That is $2 billion?

Yes, right around there. They need to be 364-day facilities for capital purposes within their own banks. It makes it a little less painful, so what we essentially do, we have been doing this for ten years, we have no issue with the rollovers.

And right now you are expecting that your bank group, they are going to roll over through the back group into the conduits, at higher rates than they are now, is that where the assumption is, or is that $2 billion, is a chunk that $2 billion going to come on balance sheet?

The answer is yes, yes, and yes. We don't know what rates that the banks are going to charge, but with LIBOR where it is, even with a significant widening of the spread, we should still have pretty favorable rates, however, the bulk of this doesn't come due until the end of the year, October/November time period. The alternative to the conduit programs, are one, FDIC-insured CDs, which right now are probably around 2.8 to 3%, which also is quite a bit lower than our rates from last year.

So that is one of the reasons we are looking very hard at expanding that program, and secondly, the TALF program, which begins in February, theoretically as that gets under way, it is going to be driving the spreads from the banks in quite a bit. So hopefully when the big stuff comes due at the end of the year, we will be in a nice position to chose between the three, if the spreads don't come in from the banks the way we want to, we will use TALF or CDs only.

How much capacity, how much can you raise the CDs? Are you limited by any agreement with the regulators?

Obviously we can't talk about the agreements with the regulators, but we think we have quite a bit of room to expand our offerings with the CD program. Recall we have both the Ohio bank, and we have the ILC out of Utah.

Okay, and then in Loyalty, the miles issued, I understand that can be lumpy. Are you looking for that to grow at double-digit rates in 2009?

High-single.

High single digit, and how does the first quarter look in that regard?

We are barely into January, so I don't think we are going to even try to guess at that right now.

We haven't even closed January yet.

Okay. The Home Shopping Network program looks like, I mean you have generally gotten 30% of the business, and it generally has been the rule of thumb in your clients in that business. Home Shopping Network is a pretty large revenue base. I mean is that going to be a very large program for you guys, and are you comfortable with that?

Again, we are not going to get into specifics with a client, but I think it would be safe to say that the wallet's share that we would expect with Home Shopping, would in fact be less than what we would expect from certain other clients. Primarily because the credit quality across the HSN base is quite diverse, and the spreads are quite large between the different scorers, and since we do not target subprime, the prime sector within HSN that is of great interest to us, would yield a wallet's share that was less than our traditional one.

Great, thank you.

Thanks Bob.

Your next question comes from Larry Berlin, First Analysis.

Good evening, guys, is it really snowing down there?

It is 60-something.

If you would let us out of here, we could go cook on the grill.

Cool. Come on up to Chicago, where it is about 15 degrees. (laughter). Just one question left from my list here. Epsilon, just curious what is up with the management of Epsilon. Are they all happy, sticking around, or is there a little bit of rotation going on over there?

We have got a very committed team, Larry. They have all, as you know, grown up with this business, anywhere from 10 to 12 to 15 years across the board, and so don't expect any change in the leadership there.

Okay. Great, thanks guys, see you soon, I hope.

You bet, Larry, take care. Bye.

Our next question comes from Roger Smith with FPK.

Hey, thanks very much. I just have one question on APB 14-1 with debt in 2009, and how will that presentation look, and is that in our numbers right now or not, or that is sort of what I am getting at?

Are you talking about our convert?

Yes.

I had one guess, so I got it right. What we would be doing from a presentation perspective, obviously is because we are focused on cash earnings and cash EPS. We would make it apples-to-apples to this year, so obviously the cash coupon component would be something that would be included in cash EPS, and any other type of accrual that needs to go in there that is a non-cash item is irrelevant to our cash earnings that would be backed out, as well as any type of tax benefit associated with it.

Which would look like sort of the stock compensation line item now?

You bet.

Okay. And then just really just on the stock buyback. Is there any thoughts actually buying back some of the converts, rather than doing share repurchases, or do you think that doesn't necessarily make sense?

Good question. We haven't really put a lot of brain matter into it at this point, since we just issued the thing.

Right.

It would certainly be part of our overall review of where the capital is going. For example, we didn't do any M&A in 2008. I would be surprised other than buying some portfolios out there that really doesn't use capital, that we would be doing much other than using the money for stock repurchases, or converts, or whatever you want to call it, because the accretion on a stock buyback versus an M&A these days it is not even close. So we look at everything, and at this point we just really haven't spent a lot of time on it.

Okay, and then I just have two questions really on the credit side still. With the TALF program going into place, would you expect sort of that this would be the opportunity to take all of that stuff that is in the warehouse, the $2 billion, and sort of roll that over into new kind of notes, is that really how it is intended to work?

You bet. I mean it is geared towards, and again the rules are running fast and furious in Washington, but in theory, it is anything that is maturing in 2009. So one would interpret that to be not only on the $500 million note that is coming due, but anything else that matures in 2009 as well. So, the answer is, would that be a possibility for us? Absolutely. Would we do all of it? Probably not.

We would very much, and I would very much like to keep those relationships we have had for ten years, with the likes of Royal Bank of Canada, and Royal Bank of Scotland, and Barclays, and JPMorgan, and a number of other players out there, alive and well. So what we will do is we will make some distribution of the assets between federally-insured CDs, hopefully a chunk in the TALF program, and a chunk in the conduits, and it will be a combination of terming out a certain amount, a combination of keeping our banks happy with keeping activity in the conduits, and also using the low-cost CDs.

Okay, great. Hey, thanks very much.

You bet.

Thanks, Roger.

A couple more?

Your next question comes from Robert Dodd with Morgan Keegan.

Hi, guys. Congratulations, just going back to Epsilon, I mean in addition to [inaudible], one of your customers, you signed Marriott, and 15 others, if I remember right through the course of the year. Can you give us an idea of how those are going to ramp up through, are we going to see relatively modest growth in the first half of the year, and then a ramp in the back half, or can you give us an idea on those clients ramping on?

Well again, not going into specific clients, if you think about and bringing up the press releases, those that are directed towards e-mail, permission-based e-mail activity, and the analytics associated with that, come up quicker than the bigger database builds. Those typically take six month-ish, to depending on the size and the complexity, even longer. If you go back through the press releases, that will probably be your best bet of some ramp ups, --

Sorry, Mike.

To be quite specific, we would expect Q4 of this year to be fairly strong for Epsilon, because of the big programs that are ramping up. The later on in the year the stronger they are going to be, and also because the comps quite frankly is the easiest I think in Q4, and then you work backwards from there. I don't think you will have quite the huge surge that you see in Q3, that you would normally see off of, but you will see a strong Q2, a decent Q3, and a very strong Q4 I think.

Got it. Another one, when I try and back into what it looks like you guys are spending promoting the AIR MILES program, versus the AIR MILES sponsors themselves, it looks like you ramped down a little bit in Q4? I mean is that right? And then if it is, what are your plans on your promotion of that program, versus the sponsor promotions for this year?

Again, I don't know how long you have been tracking us, Robert, but that marketing spend in advertising bounces from quarter to quarter, a high degree of it is tied to campaigns and programs with our sponsors. So we will have a normal year in terms of annual dollar amount, but from quarter to quarter, until we get all of our clients kind of budgets for the rest of the year, and look at those promotions, we don't have as good a feel yet on the individual quarters.

Got it, and one final question. Just to clarify, your guidance does not include any additional buybacks, versus other than what you have already completed. Is that right?

I think you can say there is just a modest amount put in there. We really don't feel comfortable putting in much more than what we have already spent,.

Got it. Thank you.

All right, thanks, Robert. We will take two more, and then call it a night.

We are running a little bit late, go ahead Operator.

Your next question from Dan Leben with Robert W. Baird.

Thanks guys, just two quick questions on the Epsilon side of the business. First, can you quantify kind of the annual impact that you have had, in terms of lost businesses from the bankruptcies?

Yes, let's see, probably about $2 million of EBITDA from Q4. So that is about $8 million.

Okay. Great, and then can you just comment on the linearity throughout the quarter, and then to the extent that you have had any visibility into January in the Epsilon business, we have seen from some of your other competitors, have said that they have seen trends deteriorate later in the quarter? Just wanted to know if you saw a similar trend, or if you were picking up enough share to where that didn't materialize for you guys?

I am not really sure what linearity means, but I will take a shot at it. It seemed about the same. The bankruptcy of the big guy actually came a little bit earlier. So that might have skewed the results, but at the end of the day, you had database and analytics, and you had interactive all cranking through the end of the year. We didn't see a falloff there.

With Abacus and with agency are the direct marketing piece, you saw that softness really throughout the quarter, because it was a combination, Dan, of both catalog, and bricks and mortar, and as you know, the catalogs will tend to soften up a little bit earlier in the quarter. It was about the same throughout the quarter, and when the dust settled, it was here are half a dozen bankruptcies, of which there was one big guy, that dinged the quarter for a couple of million.

Great, thanks, guys.

One more.

Final question comes from Andrew Jeffrey with SunTrust.

Hi, guys, how are you?

Hey, Andrew.

Starting with AIR MILES, and the increase in redemptions versus issuance, can you just comment on where we are, life of program, in terms of breakage assumptions, this is probably the biggest gap we have seen in any given period. What are the cumulative numbers looking like these days?

Yes, they haven't really moved too much. Again, this is a program that has been going on for 17 years, or almost 70 quarters, if I did my math right. So that is an awful lot of quarters, and you are going to have ups and downs, and I believe if I were to look at the total cumulative miles redeemed, divided by the total cumulative miles issued, I would be surprised if it is much over 53%, and as you know, with the new Bank of Montreal deal that we have put in place, our weighted average reserve rate actually moved up from 67% to 72%.

So at 72% we are reserving, and our cumulative redemption rate is about 53%. It continues to move up about 1 percentage point a year. So theoretically if nothing else is done in 20 years, we will bump up against the reserve level, and obviously we would take actions well before that time. So the cumulative rate is moving up about 1 point a year from 53.

Okay. And then looking at Epsilon, when you think about the full year growth rate there, sort of a very difficult first quarter comp. Is this all new business that is going to overcome $8 million in annualized lost revenue from bankruptcies, and extensively, some more in '09? Is this all signed business? How much of it is pipeline, and how much of it is already highly visible?

A combination of three, Andrew. You have existing clients, continue to have commitments to specific growth, and that is probably, plus the signed is the key driver. With the existing guys, probably 60% of it I would say.

Okay, and then finally on the I/O, you had mentioned, Ed, no adjustment this year. Are the assumptions as you disclosed in the K, going to change meaningfully from what they were at the end of 2007?

You are going to see the life of the receivable to be a little bit longer, which is a plus. The funding costs will be improving. That will be a plus. The yield will be flat to slightly up, which will be a plus, and then you will have the mitigant being credit losses, which will be call it a double negative, and so it should pretty much even out.

And the yield going up is a function of something contractual, or what is the key assumption there?

I think it is just what we are seeing is, if you remember earlier in the year we were a bit nonplussed by the fact that our late fees were a little bit light, and our yield was actually below a year ago, even though our credit losses were going up, and usually our late fees tend to move up when credit losses move up, and then we speculated that people were getting their house in order, and all of that other good stuff. And then by Q3 and Q4, what we found is once again, the typical behavior in a deep recession, which is we take it on the chin, on losses, but we do end up actually collecting cash from more folks being late, than we do during the boom times. So our yield is a little bit higher because the late fees collected are a little bit higher than before.

Okay, so a little bit better collection performance than we saw in late '08?

Right, but it is really a function we really take it on the chin on the loss side. We certainly don't make it all up all in late fees, believe me.

Thanks, Andrew. I want to congratulate the team across the board for a great performance in '08, and looking forward to '09. Thanks for everyone being on the phone, and bearing with us. Hope the earnings release lays out very directly what we anticipate doing this year. So talk to you soon. Thanks for joining us.

Thank you, and this concludes today's conference call. You may now disconnect.