Bread Financial Holdings Inc (BFH) 2009 Q3 法說會逐字稿

Good afternoon and welcome to the Alliance Data third quarter 2009 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. By now you should have received a copy of the Company's third quarter 2009 earnings release. If you haven't please call Financial Dynamics at 212-850-5721. On the call today we have Ed Heffernan, President and Chief Executive Officer of Alliance Data and Ivan Szeftel President Retail Credit Services which encompasses private label services and private label credit. 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 earning 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 we which believe will provide useful information for Investors. Reconciliation of those measures to GAAP will be posted on the Investor Relations web site at www.AllianceData.com.

With that I'd like to turn the call over to Ed Heffernan.

Thanks, Julie. Why don't we turn to the slide third quarter consolidated results and get right at it. Obviously, today we'll spend a bunch of time picking over the numbers and that's fine. But before we begin, I think we do want to mention that the theme here today is fairly simple. And that is across the board, things are firming, and momentum is clearly building. Whether its looking at our key metrics such as miles issued, miles redeemed up in Canada. The number of new contracts that have been signed and will be boarded at Epsilon over the next 12 to 18 months, or credit sales, people using our credit cards, hitting double-digits for the first time in believer it or not, three years, combined with almost six months of stability in our losses.

Finally, our 2010 guidance will be as usual. What we think is compelling. But without any major assumptions about any type of big turn in the macro situation. So one could view it also as being more of our base case. That being said, let's talk about the third quarter. Produce results which were satisfactory given the head winds that we have faced. But, again, has we mentioned the real news is around the developing trends that have emerged in all three of our business and has we'll cover that in plenty of detail in a bit. Specifically to the numbers, the revenues on a constant currency basis are relatively flat year-over-year a bit under 500. We expect to finally pop our head above water in Q4 and for the first time in a year come in with growth on the top line. Operating EBITDA or operating cash flow and reported EBITDA were a bit lighter than initially planned. A good portion of that can be attributed to incremental expenses incurred on our international coalition effort along with our decision to lockdown long-term fixed rate funding. Nonetheless simular to revenues look for our first quarter of positive year-over-year growth starting in Q4.

Cash earnings per share were $1.40 versus $1.22 last year an increase of 15%. And $0.06 ahead of our guidance of $1.34. On a constant currency basis earnings were up to a $1.44 an 18% increase. The third quarter results did include a $12 million current tax benefit, and there's a brief explanation. Historically, the Company has maintained tax reserves to cover the potential impact related to the recognition of certain taxable income. Based on recent tax rulings and other items, there's no longer uncertainty around this taxable income recognition, and as such a reserve on the related tax position is no longer required. So the third quarter we were compelled to release that and it reflects an $8 million one-time catchup. And the remaining $4 million which is the good news represents an ongoing annual tax benefit. And that's cash. This annual benefit will result in a reduced effective tax rate going forward.

For the third quarter of 2009, the Company's business performance combined with this tax benefit produced strong over performance which enabled the Company to reinvest in certain opportunities. This includes completing a $1 billion TALF deal, where we lockdown long-term fixed rate money to enhance our long-term visibility while effectively trading off short-term, call it 2% funding for the (inaudible) long-term 4% funding rate. And we will also trade some short-term benefit to lockdown long-term visibility.

Next, we're very excited to announce our new loyalty coalition program in Brazil. Which involved some expense as well as expenses associated with searching for the next Brazil as well. Finally, with funding locked and Brazil signed we also moderated our share repurchase program and used a lower than expected 100 million during the quarter buying a couple million shares. This moderation plus the addition of shares on a fully diluted basis as more equity became in the money with the stocks rising price left our share count higher than anticipated. Bottom line of all this, business is fine. We also received a tax benefit which allowed us to lockdown additional long-term visibility, fund our international coalition efforts and moderate our buy back plans in order to avoid crowding out investors coming into the stock during a solid run. When the dust settled, everything netted out to an over performance of $0.06 against guidance. As mentioned, we expect Q4 to be the first quarter in a year of topline and adjusted EBITDA growth joining strong cash EPS growth and providing a strong jump off for 2010.

Much of the remainder of the presentation will be focused on the trends that are solidifying across all three businesses and bode extremely well for alliance in 2010 and beyond. Let's highlight a few of them. One, our Canada area miles business. Turned the corner on its key metrics, miles issued, and posted growth in that metric for the first time in a year. Two, our Epsilon business is winning new business at double its normal rate suggesting a 10% growth rate for 2010. Our private label, has seen all metrics with positive trends as credit sales growth moved from negative growth in 2008 to plus 13% growth in Q3, our best showing in three years. The portfolio itself is growing double-digit. We have plenty of liquidity and losses have been stable for the past six months despite rising unemployment.

And finally, despite some moderation in our share repurchase program in Q3, we've repurchased approximately 30 million shares for 37% of our stock and spent a $1.5 billion doing it. We still have $300 million remaining and will continue to pick our spots. In all, we think the head winds impacted the last two years is coming quickly to an end and we look forward to a return to solid organic growth sooner rather than later. And the buyback, of course, will serve to enhance that growth.

One other matter, we just received official approval from the regulators to go ahead with the acquisition of the Charming Shops Group of Private Label programs, and we expect to close that very shortly.

Let's move on, next slide, LoyaltyOne. The biggest news of the quarter is of course, the return to positive growth of miles issued after almost a full year of weak performance. Very simply, miles issued drives our cash flow, period. We issue a mile, we get paid in cash. We tuck most of it aside, about 72%. Into a trust account for future rewards. And we pocket the rest. Our recent double miles deal with the Bank of Montreal was a major contributor to the big turn in issuance in the quarter, despite having it up and running for just August and September. As we look to Q4 and beyond the ramp up should continue. Q4 will have a full three months of Bank of Montreal double miles, plus we will mark the anniversary of our first quarter of weak issuance back in '08. So Bank of Montreal deal, plus easier comps, plus some firming in consumer spend will all contribute to an acceleration in issuance. And for those of you who think about our long-term model, the way it typically runs is as follows. We look to do high single-digit growth in issuance, pop on a couple of points of annual growth in revenue per mile, and that will get you to a double-digit top line growth and that filters down to low to mid-teens organic EBITDA growth. Anyhow, good news on the issuance front and the trend going forward.

All right. Let's turn to Epsilon. Obviously, Epsilon tends to have fairly uneven quarters but the general trend is heading in our direction as we are looking at Q4 right now. But Epsilon continued to hold its own in the quarter. Marketing and advertising spend of the Fortune 1000 is down by at least a third or more. And Epsilon continues to buck the trend by holding relatively flat. Its Q3 results showed a slight uptick in topline and down tick in EBITDA versus last year. On a sequential basis we did see increases on all metrics. Topline EBITDA and margin. Which is all consistent with what is typical seasonality associated with the business.

Q3 results were similar to prior quarters, simply a tale of two segments. First, our largest segment which is driven by the massive loyalty programs of the Fortune 500, these programs encompass marketing, database, and digital that is our permission based e-mail businesses and account for two-thirds of Epsilon financials. Consistent with Q1 and Q2, this segment continued to turn out double digit organic and expectations remain equally high for Q4. The other third of the division consists primarily of our data business the largest piece being our Abacus coalition program, which encompasses 1800 catalogers. Simple put, Abacus did well considering the 100% retail exposure it has but not quite good enough to show growth from last year.

And finally, there were other data assets outside of Abacus, which have been in the red continue to be in the red and are in the process of being streamlined. I think I'd sum up Epsilon as follows. A couple of items on a year to date basis Epsilon in total is virtually flat versus prior year on both the revenue and EBITDA perspective. Q4 is trending positive and as such we believe Epsilon remains on track to post single-digit growth in both revenue and earnings for the full year. Second, while not contributing much to this year, Epsilon signings are running at double the pace of prior years as stretched marketing budgets are seeking those programs which can micro target consumers and demonstrate superior ROI results. Signings have increased across the board, including those sectors such as big Pharma, Not-For-Profit, CPG, Financial Services, Telecom, and B-to-B and Digital. Consequently, we are looking for a strong finish to the year and a jump to 10% growth in 2010 as Epsilon largest segment continues on at a strong pace while the remaining data services segment anniversaries its weak comps and begins to recover.

All right. Now, I'd like to turn it over to Ivan Szeftel our long serving President, who handles all Private Label including all the processing, the customer care, the marketing data base, loyalty and all the credit functions. Ivan and I have worked together I think forever and certainly since the beginning of ADS of around 11 years ago. And I think the best way to think about it is you could say he and his team have really been through it all. First, if you looked at the results through the first half of this decade that those groups had a heck of a run as many new clients are signed, sales are strong, funding was plentiful, and a macro-environment that contained losses.

And of course, we have phase two. In 2007 he and his team had to endure the first major client loss as Lane Bryant was brought in house by Charming Shops. Finally, over the past two years, the Private Label team has been hit with the liquidity crisis, the poor retail environment and credit losses up over 400 basis points or $200 million since 2007. I think the good news is quickly approaching. And we're going to call that act three. With the big ramp up in sales and portfolio growth plus the return of Lane Bryant via if Charming deal plus the availability of liquidity, liquidity and now stable credit losses, we are eagerly awaiting the big run coming soon and increasing in intensity over the next several years.

And so with no pressure in that setup, Ivan, your ball.

Thank you, Ed. Much appreciated. Private Label was indeed Alliance Data primary growth engine during the early years. The group's financial performance peaked in 2007. The severe '08, '09 economic recession has reduced our earnings by about $150 million since then. Despite this earnings erosion, our clear focus, operating discipline, and the signing of new clients has enabled us to remain profitable. The same cannot be said for many of our competitors. Our ability to remain profitable during the worst macroeconomic environment since the 1930's has created a unique opportunity. Specially, while virtually every other entity providing private label credit card services has cut back to limit their credit exposure or to preserve liquidity, we have chosen to grow. We are taking a different approach and have decided to use this unique situation to build a foundation that will power our growth for many years to come. We have accumulated a significant amount of excess liquidity through our certificate of deposit programs and our bank and TALF-back securitization facilities. We have, will and continue to maintain capital at our two banks at levels well above those required to be considered well capitalized..

The combination of our excess liquidity and robust capital levels will enable us to grow through the acquisition of existing Private Label programs and the launching of new programs while all the while maintaining our current high credit standards. While our current financial results have yet to reflect a turnaround, I believe that we are beginning to see some trends that are indicative of a return to earnings growth in the near-term. Our growth in credit sales was negative last year, plus 3% in Q1 plus 6% in Q2, and plus 13% in Q3. Of note, Q3 was the first quarter of double-digit sales growth in over three years. Q4 will further accelerate this trend since we expect to have the Charming Shops program on board for part of the quarter. Year to date our sales increases have been entirely attributed to the new clients that we have added in the preceding 12 months. During the month of September however, this changed with our sales increases coming from both new and core legacy clients. We fully expect the trend we have seen in September to continue with our strong retail clients posting increased credit sales. These increases will be a function not only of their total sales levels as their anniversary weak comparative numbers but also as a result of our increasing market share.

As we look to 2010, we are comfortable that the low double-digit portfolio growth we have seen will continue if not accelerate further. The primary drivers will be the addition of the Charming Shops programs, new client signings, and the growth generated from our core legacy clients. For sales and portfolio growth to translate into a corresponding growth in earnings, it must be accompanied by a stable credit profile. If we have not already arrived at a point of loss of delinquent stability, we are very close to it. Specifically, delinquencies subject to normal seasonal fluctuations have been stable for quite a while and credit losses have been stable since May. All this despite rising unemployment. Does the negative impact of year-over-year loss increases will now lessen each quarter before being completely eliminated. This trend is all ready evident, if you consider that while our Q3 earnings were down $20 million from the same quarter a year ago, the second quarter was down $30 million to last year. We fully expect our 2009 Q4 earnings to be at or above last year's levels.

Let's turn to the next slide. With credit sales headed in the right direction, we need to focus on the outlook for credit losses. Historically, our losses have tracked about 100 to 120 basis points above the unemployment rate. These with the equivalent loss levels that we were experiencing at the beginning of the great recession. However, the longer the recession lasted it became evident that our predominately small tickets Private Label credit cards were less acceptable to the significant run up of rival balances that the third party and big ticket card programs were experiencing. In addition, as we have signed new retailers, and hence new accounts we were slowly replacing some poorer performing accounts with new accounts attached to consumers who are more credit worthy. That result is that our loss rate has moved from 100 to 120 basis points above the employment rate to 20 basis point below. More over our losses have been stable for the past five months and we expect this relative stability to continue.

Let's turn to the final slide and talk about the future. Throughout our company's history, we have been asked why we remain bullish about our private label business. Early on, the view was that it was a shrinking market that Private Label was a (inaudible). This despite our impressive growth. Now why in the midst of a financial crisis do we plan to grow and invest in Private Label? Very simply, this is a tremendous business with room for solid growth. The reality is that the need for retailers to promote a strong Private Label credit card program has never been greater. The financial crisis, new business regulations have significantly reduced the liquidity available to the average American consumer. But some estimates, revolving credit card lines have been cut by over 30% in the last 12 months. The significant reduction in revolving debt levels we have seen is not only a function of the consumers desire to deleverage but is also indicative of a lack of credit availability and the perceived need to preserve some of that diminished liquidity for emergency use. What better solution can a retailer have than to help facilitate a credit line dedicated for use solely in their store. Couple this with a robust loyalty and marketing capabilities that our programs provide and you have an unbeatable combination.

Now let us turn to our addressable marketplace opportunity. Our criteria for a successful partnership are three fold. First we target mid-to large retailers with annual sales between 200 and a few billion dollars. We look for retailers who are passionate about their brand and see our programs as an extension of their brand. Those potential clients who do see Private Label as a loyalty and sales builder not just a financial vehicle. And further, we focus on retailers who customer fit our demographic, and credit profiles. Using these criteria, we have analyzed the various retail segments. Clearly, apparel is our sweet spot, particularly women's where we hold the leadership position in all distribution channels, bricks and mortar, catalog, and online.

In addition, we have a significant presence in the home furnishings and jewelry segments. What is common across these verticals is our ability to develop and build new relationships between our clients and their customers and thereby drive incremental sales. By running all possible suspects through this filter we have identified roughly 300 retailers in our addressable market. Of these, half of a program, about two-thirds of those have programs with us. Even with our significant market share, there is plenty of room for growth, more than enough to enable us to return to our historic 8 to 10% annual growth levels. We expect to sign five to six new programs each year, coming from retailers who who currently don't have a program or perhaps by adding co-brand programs that complement the existing Private Label program.

In addition, we will also had new programs in adjacent verticals, Spring Stone Financial and Pacific Dental are just two recent examples. And finally our plan includes one to two existing portfolio acquisitions out of a prospect universe of approximately 40. Today we are in the best position in our history to take advantage of such portfolio acquisitions and we will do just that. All of this gives us a sizable market opportunity. We can return to strong historic growth levels. So for those of you that ask why are we committed to this business and in fact are aggressively investing in it when others in our space have chosen to restrict their growth or consider exit strategies, I would again ask you to consider the following. We know that Private Label is a highly effective tool to help retailers grow their sales, especially in the current environment. We know that our results driven market and loyalty strategies, coupled with high-end customer care will help retailers gain and sustain greater wallet share. And finally we are confident in our ability to manage Private Label credit card programs in a manner to to ensure attractive returns even in this most challenging of times.

Thank you, and Ed, let me turn it back to you.

All righty, why don't we move to balance sheet. Just a couple of quick notes here. Our deferred revenue account grew by $100 million to over a $1.1 billion as miles issued began to crank-up and the Canadian dollar continued to strengthen. Also our trust account now stands at just under $600 million. That's the account we use for when people cash in for rewards. Which is an increase of about $70 million from Q2. The account includes about $500 million in Canada securities. And $100 million in investment grade US securities backed by our card assets which are now fair valued at just about par. The trust account is utilized to pay for as I mentioned the reward redemptions from our air miles program. It's been funded assuming 72% or 28% breakage of all miles issued will be redeemed. After 17 years against that 72%, our cumulative redemption rate stands only at 54%. And moving up ever so slowly between one and two points a year. Again, lots and lots of room there.

Turning to debt, no real major changes during the quarter and net which core debt less cash. Two, LTM operating EBITDA remains at less than 2.5, well under our self imposed three times guideline . As mentioned earlier, we spent about 100 million during the quarter on share repurchases. Due to the rise in the stock price, those purchases were largely offset by dilution from the higher impact of in the money option and dissolution related to the convert. So we stand at about 55 million fully diluted shares, and we have repurchased approximately 30 million shares over the last two years. We have $300 million remaining to go on the existing repurchase program. And as I mentioned earlier, we'll be floating around and looking to pick our spots.

All right. Let's move on. Guidance. We should finish out Q4 in pretty good shape. So we're going to move quickly to 2010. Nothing real newsy in Q4. We would expect losses to be tracking where they have the past five or six months, somewhere in the mid-nines or so. No major degradation. Sort of a trailing three month average is about right for Q4. But let's go ahead and move right ahead.

It's October. So it's that time of year again. We traditionally give our next year's guidance during the October call. And this year is no different. Our 2010 guidance is pretty straight forward with expectations of mid-to high single-digit growth for both revenues and EBITDA which will translate into high teens growth and cash EPS due to modest CapEx needs and a lower share count. The guidance assumes no significant improvement in the macro economy. No improvement in credit quality. And it's a weak consumer spend and as a result credit losses again in the mid-to upper end on the 9% range. By segment, loyalty one air miles in Canada, start off weak from a P&L perspective. Due to the impact of weak issuance of miles over the previous year and the fact that the resulting impact doesn't flow into the P&L until a year or so later due to the accounting, specifically, deferred accounting. But as issuance continue toss strengthen, the so called bucket will be filled again and EBITDA will start to flow in at a greater pace. On the cash flow side, however, nothing changes. Expect very strong results from the beginning as issuance begins to crank up or continues to crank up. And essentially, weak accounting P&L results will be overshadowed by strong pre-cash flow as miles issued ramp up.

Operating EBITDA or operating cash flow which usually runs about 30 to $40 million above reported EBITDA is going to most likely run closer to 50 to $60 million higher than reported EBITDA during 2010. Also expenses from our recently announced Brazilian coalition plus other international efforts will be born in this segment. For competitive reasons, we will not be supplying these amounts other than to say that they are moderate. Next we expect Epsilon to be around 10% growth as the large number of signings in 2009 are ramped up. And finally, the combined Private Label services and credit segments should be back on track, which means growth mode. Private Label will face a modest credit loss grow over in Q1, but should sow steady improvement after that.

Bottom line, a solid growth year for the Company as expected. The resulting impact of a weak 2009 miles issued on 2010 earnings in Canada, expenses for international coalition expansion, and a modest loss rollover in Q1 will most likely keep top line and EBITDA from the double-digit level, but it should not hinder the strong cash flow generation and high teens cash EPS growth. We'll also be looking to use 2010 to continue to lockdown our funding book. Also of note here is something that I think we're quite proud of and that is now that Lane Bryant has returned to us via the Charming deal, we can once again say that in the 11 year that Ivan and I have been here, we have never lost a major client in Canada at Epsilon or in Private Label. As we look into 2010, there are no major clients that are at risk of leaving that we're aware of, and as a result, there is no huge hole to fill as we start out the year. And again, guidance assumes no benefits from significantly stronger consumer spend for credit improvement. And guidance assumes no incremental benefit from additional buybacks above today's level. And we'll update guidance as we've done in the past as the year progresses to the extent there's incremental good news to flow through, it will be done on a quarterly basis. And we'll update again, as we step through the year.

Let's finish up with the 2010 free cash flow. On the next slide and then we can hit Q&A. Very simple, we're looking at doing about $650 million in EBITDA. As we talked about the difference in Canada between what we book and the actual free cash we have runs about $50 million next year so we're looking at about $700 million in operating cash flow take out CapEx, interest, taxes, and you're looking at about $360 million of pure free cash which is about $6.50 or around a 10% yield where the stock is today. That's about it for now. We will try to keep it under the three hours that we did last time so we are going to open it up to Q&A and call it a

(Operator Instructions). Your first question comes from the line of James Kissane of BAS-ML.

Does your 2010 guidance include Charming? I just want to confirm that and review what Charming can add in terms of revenue and earnings.

2010 does include Charming. And I think we're sort of steering away from -- -- inaudible --

I don't think we're going to break it out separately. But you can assume that it does include given the latest approval it does include Charming in our 2010 guidance. Accounting for the Brazilian -- any top line revenue there?

Not enough to be significant. And yes, it will be the equity method.

And do you have any call option to buy in a bigger stake? To get control?

I think you can assume that yes, there's right of first refusal. There's put calls and the usual stuff.

And would this be international loyalty program you were referring to.

It's certainly one of them. We continue to search the globe for the next one. And so we will have a team out there during 2010 looking for other programs such as this where we can take a sizable position in an existing program and they happen bring in our expertise and bricks and mortar and everything else and get this puppy ramped up. So this would probably be the model going forward.

Okay. So not taking the majority stakes, just investments and seating investments here.

This one was a good shot -- chance for us. As we move from, phase one which is in one region of Brazil to a full country wide rollout, some of the other players may have interest, some of the sponsors in taking an equity stake as well. We want to keep ours where it is if not go higher. Brazil is a little different because the country is so big. Six or seven times the size of Canada. With smaller countries, we would obviously prefer to take the whole shooting match.

And just one last question since Ivan is here. Late fees being regulated. What are some of your thoughts on the late fees and regulation generally?

We have still yet to receive guidance on specifically what the Federal Reserve has in mind for late fees. Until such time as we get that guidance from the federal reserve, it's hard for us to know what it means. Certainly, our late fees are at the low end compared to the others out there. And we're just going to play it by ear as it comes.

Thank you.

Your next question comes from Darrin Peller Barclays Capital.

When we think about the potential impact, $0.40 or $0.50 on top of your $5.15 guidance. Are you pretty close to the $6 number. Help us understand what is embedded within the guidance in terms of expenses and investments and loyalty. If you can give us a little bit more color on what might be inhibiting the number.

The first thing that inhibits it is probably our innate conservative nature in the game. It's only October. What we're looking at is what we think is fairly compelling, high teens growth. And we'll be doing high teens this year as well. It's not like we're digging back out of a hole. I think that's part one. Part two is it does not assume any type of [Benny]from the macro environment improving to any extent. It doesn't include any time of [Benny] from credit quality getting better. So result, you'll have decent growth out of Ivan's shop and the various Private Label groups. Out of Epsilon and in Canada, I would says that going to be a little bit weak in the first half because of the way the accounting works. And you mix that all together, drop it down, and you'll get to about six bucks a share. Most to have buyback was done during 2008.

Okay. Thanks, guys.

You next question comes from David Scharf JMP Securities.

Focusing on Epsilon, you gave a little bit of color. The mix between Abacus. Can you give us a sense for the potential margin profile of all this stuff that's been signed up this year. How we ought to think about how that flows in next year. Epsilon is a segment where there's a lot of fits and starts between signing up new business and then there's startup costs. Should we be looking at --

I would say as a general rule, if whatever you're looking at in terms of top line, you would expect EBITDA to be roughly two to 3 points faster than that. And so whatever margin expansion that drives, haven't done the math, should be something that would be consistent with what we're looking at next year.

In terms of securing these new mandates, obviously, there's the trend towards higher ROI in digital e-mail marketing. Are you seeing a tougher pricing environment than normal as you compete for those deals? Is there a possibility of potentially a little firmer pricing? Is it still pretty rough?

Actually, on the big loyalty programs that we have, we're not really seeing the pricing pressure that may be inflicting the direct marketers and stuff like that. What we are essentially seeing is pretty strong pricing across the board for that two-thirds of the company that handles the big loyalty programs. I think that's in good shape and I think that's in good shape going into next year. The question will be the final third of the business which is the data business. And if you can imagine how data works, like an Abacus, you're taking purchase records every day. And you're incurring all your operating expenses throughout the year. And the catalogers come in and say let me pay a million names and I'll pay you per thousand or something like that. And we seem to be -- the catalogers may have cut back 50% or so. And we may be the only ones still supplying some of these folks, but they're just not dropping as many books as they did in prior years. That's taking a little bit longer to come back than we had anticipated. And I think that'll lead to the difference between -- we were hoping Epsilon would be 7% this year. It will be slightly less than that. Probably to the tune of five to $6 million of EBITDA. And then as we go to next year, quite honestly, I think the big database group is going to be a bigger and bigger piece of Epsilon.

Just a couple more. On the air miles side, is there any issuance growth this past quarter? As well as maybe the first half of 2010 guidance when we exclude the impact of the new [BMO] deal?

We certainly aren't going to let you know what [BMO] pumping up, that's for sure. I don't think that would go over too well with them. I will tell you that in terms of sectors that seem to be doing pretty well right now. The factor that is doing quite well and seems to be accelerating. There's a lot of deals out there where they're doing a lot of promotions. They're doing work with the various CPGs out there as well. The CPGs will pick up some of the tab. What we really want to see and I think what we'll see in Q4 is you'll see additional acceleration in the miles issued somewhere around 6% or so. We'd like to get that a little higher going into next year. And that will come primarily from I think two sources, one being the return of the credit card sponsors. And specifically, Bank of Montreal and second, the work the grocery stores are doing along with the CPGs.

Got you. Shifting to Private Label, I just want to clarify, did I hear Ivan say that growth in credit sales, that this quarter it was the first time in a while it included credit sales growth from cards that have basically are more seasoned that were not just issued in the last 12 months.

I think the way to look at it is for most of the year, credit sales growth came from new clients that we had signed. And in some cases we had acquired the portfolios, and those were coming from seasoned card but cards that were new to us. In the month of September, we saw sales from our core legacy clients grow.

I see. And was that concentrated in just a handful of retailers? Or you've got about 95 programs out there. Just trying to get a sense for how.

We clearly have some retailers that are doing better than others. But that's been true all along. So what you really saw was with a few exceptions across the board improvement in the sales levels. I would say to you that what was really encouraging is that some of our apparel retailers, the soft goods, consistently seem to be stronger than some of the bigger ticket programs. Again with some exceptions.

And I think to answer your question, I think the way we've always phrased it, if you looked at let's say our hundred programs that we have out which 20 or so have come on recently, those 20 were the ones dragging the whole sector into positive sales growth through the first half of this year. And I think what Ivan is saying for the third quarter for the first time, the other 80 programs as a whole for the first time in a long time have actually shown real growth.

That's helpful. And last question and I promise I'll get off. I just need a little explanation on that tax benefit. How exactly that factors in to the cash EPS calculation? Is it the full 12 million? It's a little confused between the 12 million and the 4 million and whether it's recurring.

What we did is typical of us, we took the [Benny] What we did is typical of us, we took the [Benny] we were required to flow through once certain hurdles were achieved. We flowed the 12 through because that's a cash savings. Then what we did is we went out and obviously traded off some of those, some of that [Benny] for really three things. We swapped out of 2%, 1.8% CDs into four plus percent money for billion dollars TALF deal. That chewed up a little bit. The expenses that we have getting the Brazilian deal up and running as well as other international programs, we're looking at that shoot up. Some of it as well. And there were a couple of other things floating around. But those are the two things that would have hit sort of EBITDA a little bit. And then again, because we were running pretty strongly ahead of where we had guided to, and the stock was having a good run, we did in fact cut back on the buyback program and saved a little powder for going forward. Mix it all together. And I think what we came up with is about an extra $0.06 that we flow to the bottom line if you then to split it out for watch one time and what's on going roughly $8 million of it was one time that we flowed through the other $4 million. An annual benefit that you should factor in on a go forward basis.

Thanks a lot.

Your next question comes from Daniel Perlin RBC Capital Markets.

In the fourth quarter, a pretty significant margin improvement that you guys are modeling in order to get to the 515. By segment what which ones you're expecting to see the most margin improvement going forward on a sequential basis, not an annual basis.

I think that will certainly go to Ivan.

Okay.

With the big margin improvement. Epsilon also will have a decent margin improvement for Q4. It's really Epsilon and then for sure Ivan is probably two-thirds of it in Q4. And I'll let you talk about the growth.

Is it a function of Charming Shops coming on in the fourth quarter? My understanding is you get it in the fourth quarter and it gets changed off the processor in the first quarter.

The growth in the file as we said, a function not only of Charming, although that will be a contributor. But also of the files like HSN and some of the others that we added in the first quarter of last year will certainly be part of the growth for the fourth quarter. Again, we're looking for the fourth quarter year-over-year to be flat to up so it's a sequential margin improvement.

So you're looking for Private Label credit year on year to be flat on EBITDA basis.

At least flat.

At least flat. Okay. Got it. And then when did you know about the tax benefit? Would it have been last quarter or before that?

I'd say sometime in the first half of the year. But the timing didn't run out until Q3.

Okay. And hate to harp on guidance but I have a couple questions on reconciling. A 46 million or thereabouts of cash earnings. You talk about a $1.75. Of head winds. Then we go to six bucks a share. You're at 690 and I know you're going to spend a lot of that away. Locking in the funding cost is 12 to $16 million of cash earnings. I'm wondering if the Brazilian opportunity is normal natural. Where the other 30 million is going to go. Is that planned opportunity that is you're thinking about for the rest of the year. Should we will focusing on more coalitions or sizable. Or other opportunities in the other segments.

You got an awful lot of numbers floating around. I would say the head winds that we talked about, the $160 million is versus prior year, $1.75. That was from prior year. So $90 million of it is -- was credit losses. That was a grow over. There's-- we're assuming no benefit in 2010 from lower credit losses. So there's no $90 million pick up.

Got it. Neither is there on -- FX will be in a better position. One is a grow over issue and one is on a sequential basis. You can't just add those two.

Abacus was starting to see improvement. And I was wondering if that's continuing closer to the holiday season? It's better than it was. But it's behind where we want it to be is probably not giving you a precise info. What we're seeing is the catalogers spending. They are dropping books. They are dropping them a little bit better than they had been. But frankly, they have a ways to go to get back to where it would put Abacus in a position of growing in the single digits. They're not dropping as many books as they used to. If this continues on through the holiday season, what you'll have is a decent holiday season from the catalog perspective. I know it seems like the mailbox is packed with them. But it is significantly down from normal times. So it's not a disaster. But we're certainly not in a position to say it's turned. It's firmed and that's about it.

Okay. And then what were the end of period shares outstanding.

55.

End of period was 55?

Yes.

And then I guess lastly, one more question on Epsilon, the pharmaceuticals and financial services and retail, sound lie three big. Pharmaceutical was picking up steam last time we chatted. Are you starting to see more brands being marketed.

Big Pharma is doing very, very well and they continue to roll more brands into the program. The preferred approach these days. Again, I think what we're looking at is that division or divisions within Epsilon including sort of the marketing, the big database, and the digital platforms which is two-thirds. That continues to grow double-digit and has throughout the year. That will probably grow closer to 15% in 2010 as we bring on more of the clients. And then if we can get data adjusted, pop its head above the water, that should get us our 10% growth that we're looking for.

Okay. Super, thank you, guys. Yes.

Your next question comes from Bob Napoli Piper Jaffray & Co.

Thank you. Good afternoon. Ed, I was wondering how are you modeling or thinking about in your guidance the change in the accounting regulations for credit cards going on balance sheet in the first quarter? Taking the off balance sheet on balance sheet. How does that -- what effect does that have?

Right now, it really shouldn't have much of an effect at all. I mean, there may be some geography that gets moved around. Right now as we're modeling it, it looks like it's pretty close to the way we have been doing it. You have provisions and you'll be getting the accruals for fees and interest and things like that. So what we need to do right now is just go back and recut this year, but we have not assume that had there's going to be any pick up or any hurt associated with the new accounting. Ivan, do you have anything on that?

I think that's absolutely right. Certainly, the balance sheet will look very differently with the gross up of the assets and the liabilities. You will see the booking of an allowance for loan loss. In terms of revenue recognition, if any changes, they will be minor sort of month to month, quarter to quarter, but nothing that we'll belief.

Okay. And then the share count for next year. Ed, you're using with no additional repurchases. Is it somewhere around $53 million or so.

We're at 55 now. We can only say what we have now. There's a 1 million or so added in from options or such. I'd say 56 which is really the only thing we can model. That being said, we do have $300 million left on the buyback. And also every December, at our December board meeting, we have always chatted about use of capital, and it will depend on where the stock is at that time to determine whether or not we want to add an additional program on to the one we have today. So that would happen in December. Right now, we can only model out what we actually are looking at today.

And then Ivan, as far as the new credit card regulations are, clearly, we're seeing a lot tighter credit from the general purpose card companies. And I was just wondering if you feel like you're talking to your retailers, if you think you're starting to get a real benefit from the tightening of credit elsewhere. And is that helping on the new client front as well?

It clearly is and I think we've seen the early signs of it. We've seen our market share grow in the third quarter. It clearly part of that metric was an increase in market share. So I think there's a clear recognition that as the sort of liquidity options for the consumers as a whole are reduced, Private Label becomes much, much more important. I think we're at the front end of that. And with every day that goes by. With every press article that talks about major issuers cutting credit lines or eliminating cards, I think our case becomes that much stronger.

And what 1.5%? Is it around 1.5% on average on sales. Our interchange is a very different numbers it varies from program to program, depending. The 1 1/2% you're referring to is the interchange that a traditional Visa, MasterCard. Yours would be below that?

It varies in term offense pure fees paid to us by the merchants. It varies widely depending on the dynamics of the program. We'll have promotional programs with deferred payments. It's much above it and in other cases it's below it. It's all over the place.

And last question, as far as the portfolio has grown a fair amount. And is there any thoughts of outsourcing? Is there any significant investment in a needs to be made in technology over the next couple of years.

We are currently making a very significant investment and is that your we're compliant with all aspects of the new card. From a strategic point of view the flexibility to provide the kind of services that drive incremental sales for our client. Having our own system is one of our competitive advantages. But it will necessitate ongoing investments in the systems to make sure that we have the required capabilities. And that's been brought to a head this year with all the new regulations that have been thrown at us.

Thank you.

Your next question comes from Wayne Johnson Raymond James.

Housekeeping item. On the tax rate itself, how should we think about that going forward on a percentage of pretax income?

Whatever we're running at now, Wayne, take $4 million off. Actually, I haven't done the math.

So if I'm looking at this correctly, it's roughly 26 -- it's mid- to upper 20s tax rate including the tax benefit going forward.

4 million for the whole year.

Got it, got it.

A million a quarter.

Good. And then can you talk about the pipeline for Private Label, credit, excluding charming shops?

The pipeline is very robust. Clearly in this environment with many other major issuers looking to downsize their businesses, there are a significant number of opportunities. And certainly, our folks is to be selective. We want to add retailers that are -- play to our sweet spot. And certainly as I said earlier. We can develop long-term relationships with the significantly strengthened foundation and specifically retailers that will grow with us over time. So, that's a very long winded way of saying we've got a lot of options out there and a lot of choices and it's up to us to pick the one that is best fit our long-term future.

It seems like Private Label credit has held its own in terms of adding new customers in a difficult economic environment. Have you seen or are beginning to see any change in the competitive landscape when there's RFPs for business?

We're seeing some change in certain sectors. Some of the bigger ticket areas, we are seeing a few of the issuers beginning to come back in. But across the board, it is certainly not the situation that we saw two or three years ago. I think most of the other issuers are trying to work through the current situation. So RFP, the competitive environment is less than two or three years ago.

Thank you.

Next question comes from Sanjay Sakhrani with KBW.

I guess I had a question on credit quality. Based on your commentary. It seems like the charge-offs are declining. But the charge-off guidance calls for flat levels. Is there anything in the delinquency trends that you are seeing that lends you to believe that charge-off will remain flattish to most current levels, or is it just being conservative?

I think that two things, certainly what we've said is that delinquency levels are steady. We certainly as we have seep for the last 12 to 18 months that the relationship between charge-offs and delinquencies have altered. The much greater than historically. We've seen uptick in bankruptcy which does modify that relationship. So that's really the two drivers behind the current situation.

Just because -- Charming Shops carries a lower charge-off rate than you existing portfolio, right?

Marginally lower. It's not that significant.

Okay. All right. And then on the share repurchase plan, is there any specific level you're targeting for the fourth quarter? I'm trying to think through how to allocate the 300 million?

So are we. I would say we're not going to talk about it. Obviously, we started buying after the Black Stone deal blew up in the '60s. All the way down to where it bottomed out and all the way back up again. At these levels, it certainly doesn't spook us. But, we're certainly not going to get out there and start telling you what levels we'll buy and not buy. We're just going to pick our spots.

If we back into the assumption that you're making in terms of guidance for the fourth quarter, is there a certain level of share repurchase assumed in that number?

Nothing of any significance, no.

Okay. And then maybe just a couple of questions for Ivan and a lot of them were touched on by other people before. I just want to drill down on it a little bit more. Is there any specific strategy you're working on with the retail customers in advance of the card act so that they can adjust their models. And 166, 167, has there been further discussions on how the calculation will kind of be impacted? Will there be a phase-in or not is where I'm going?

Let's start with the first one. We certainly have a number of strategies we're working on, some of the them are in tests. To to create contingencies for what may come. There are a number of things in tests and clearly it needs to be done with the retail clients to assure them as to the impact that any of these changes could have on their sales. That's an ongoing session. I don't want to get into specifics. You can rest assured that we have been very active in this area. With respect to the capital requirements or the transition or the phase-in of the calculation, that is still ongoing. The Federal Reserve asked for a comment period and as yet, we do not have any specifics as to where they're going to go. I think most of the major financial institutions are release a phase in, a multi year phase-in. But we don't have any specifics beyond that. We stress tested it. And as we have looked at situations in the most extreme situation where be there was no face-in and certainly we believe that we have adequate capital levels to meet even the most extreme situations.

Okay. Great. Thank you very much.

Your next question comes from Dan Leben Robert W. Baird & Co.

Great, thanks. Just wanted to jump into the Epsilon data business, is not Abacus side of it. When will you find the bottom in this business?

Getting worse, it's a question of firming up but not enough compared to last year. We did have some data assets that we wanted to consolidate into the overall data division that we moved from Canada. Those were bleeding at a pretty significant pace and we've been streamlining that, the bleeding has not completely stopped. There's a couple million here or there in the red. My guess is that the current thinking is Q4 should be relatively flat in that business from what we're seeing on the trend side. And that from the big two-thirds of the business, the database side, that's in pretty good shape. Q4 ought to be pretty good shape for epsilon. I'm hoping Q3 is from a comparative perspective, the bottom.

And then on that two-thirds side of the business, just what you're seeing on the digital side in terms of incremental dollars. What verticals are you seeing the most health from?

I'd say pretty much across the board. Digital is obviously as you know, it's really beginning to take over all the traditional sources of communication, distribution, acquisition, financial services, CPG. Those would probably be the biggest ones. Obviously, we did a very large deal with RJR and that is going to be very, very significant on the digital side given the restrictions that they would have under new FDA guidelines. So that's a big one. And I think those are probably the largest.

Great, thanks, Ed.

You bet.

Your next question comes from Robert Dodd Morgan Keegan & Co.

Hi, guys. Just a couple of EBITDA questions. One that stands out is corporate EBITDA was a loss or $60 million a quarter versus seven. Can you tell us what that increase was. That was a sizable earning pit when we drilled down to the EPS impact. Was a lot of that or was that something else going on in that line?

I'll ask Mike Kubic our CFO to address that.

When you look at -- and I think you're talking sequentially Q2, in Q2 we still had some profitable transaction arrangements in place as we were getting rid of those businesses. And in Q3 we have higher medical expenses and things of that nature. We had facility costs from the guest operations. And I think that's probably most of it right there.

Is this $16 million is that kind of the ongoing run rate for that line? Or one time in that quarter?

I think that's probably heavy. I think you're probably talking more around 12ish.

12 to 13.5 is a good average.

It will bounce around but 12ish sounds about right. 48 for the year.

Got it. On that Dots issue, -- inaudible -- were there advisory fees in this quarter? And can you, that wouldn't violate any competitive concerns if you told us how much you paid your lawyers.

I'd prefer not to.

Somebody might come up and offer less money.

Too late. We already signed. There were expenses associated with getting ink on the paper, no question about it. Again, a lot of this we did no have advisers. This was done by the team in Canada. And as a result, what you have is you have a core group now of expenses. Let's call it a few million a year that will be tasked solely with getting other coalitions together and getting them up and running, and that's an investment that we will make and we're happy to do so. Additionally, any quarter that you're signing in, we also launched phase one of this thing. You're going to have expenses. Bigger than a bread box? No. Were they in seven figures? Yes. And that's about as far as I can go. The lawyers were not in seven figures, but the phase one rollout, you're talking about rolling into an area of 5 million folks. We had a lot of folks down there. And took some expenses on a go forward basis. One of the questions came up in terms of an accounting. We use the equity method. We're going to have a number of employees in systems and things like that that are not part of the entity itself, but are working for entity, those would be expenses born by us as well.

Got it. On Epsilon if we move back to that at the risk of beating a dead horse.

Beat away.

I thought you might say that. Obviously, when you look at the EBITDA and go back to the year ago seasonality and I realize it's a different economy this year, but about incremental revenue and 14 million EBITDA last year. This year, about $9 million in revenue. But EBITDA only up five. Was it -- this Abacus data was it so soft in that. And the margins so high that that's the entire explanation or were there other investments. You mentioned other Non-Abacus data. Is there anything else in terms of maybe a potential acquisition that didn't happen or something like that in that segment?

No, it's strictly the two areas within data. A very difficult third quarter both Abacus and then what we didn't have last year that we have this year. The assets we talked about. The assets that we consolidated from Canada. We are trying to stop the bleeding on those. But we're not quite there yet. That may account for about half of it. And then the other half was Abacus had a decent Q3 last year. And we're just not all the way back yet. I wouldn't say Abacus had a terrible quarter. It was more of given that marketing stem and especially on the retail side and the catalog side. Off 50, 60% from a year ago. Down a little bit but nothing near that. It was all housed in that one big division.

Got it. And one final one for Ivan. When we're talking about the potential late fee regulation, are there adjustments (inaudible) late fees were to get regulated down, there's collective bounce back in discount late or any other fees to retailers or all on your head?

Well, I think it's yes to all of those opportunities that you've mentioned ranging from the two places to make it up. One in terms of adjustments to other card holders terms and the second in terms of the relationship we have with the retailers. So we both of those are viable options. Brought to bear in the event that late fees were in fact adjusted significantly.

Thank you.

Your next question comes from Christopher Brendler Stifel Nicolaus.

Thanks, good afternoon. A couple of quick questions. The Epsilon business, the deceleration in revenue there you talked about that being a little lumpy. Does that include the data base marketing business.

Again, I don't know where anyone got the concept that that was a meaningful number. It's not a meaningful number at all. It's probably a few million on the top line and unfortunately, not that far off on the bottom line. So the bottom line is really the thing that through the quarter. And what we're trying to do essentially is shrink that -- those data assets as fast as we can because right now we can't seem to get the thing to break even yet. So it's going to be a smaller and smaller piece, what little there is today will be smaller in Q4.

The reason I thought the way it was presented in last quarter's Q, it was 12.9 million, does that including is else in there as well?

I'm sorry?

The last quarter, the when it was called out as a variance, it said 12.9 million. But maybe there was something else in there.

There was a considerable deceleration seems to be a nice way of putting it. By the time epsilon got a hold of it, it de-accelerated quite a bit.

It's not helping as much as it did last quarter. A little bit of deceleration.

I wouldn't say it helped last quarter, that's for sure.

On the guidance, I think second quarter guidance for 2009 was 645. And now 650 for 2010. But it's still mid-to high single digit growth. I didn't realize -- lower based on that guidance. I thought this quarter was on track.

Some of the investments we've made and where we see the year coming -- out coming out closer to where First Call is which is around 620. And so that's where we're going from 620 to sort of our 650.

And the investment you're talking about the Brazil?

Also the fact that -- depends on how you want to look at it with Canada. You put in a year of weak issuance. What happens is that it brings your growth rate and reported EBITDA to a stop pretty quickly even though your cash flow will be up significantly year-over-year. So some of this is just accounting.

Okay. On the credit side, I think you haven't actually quantified what your portfolio delinquency rate is. It was up about 40 basis points from second quarter to third quarter in the trust. Is it more flattish on a managed basis given the growth?

We had your typical seasonality. Again, as you know, Q2 you typically have your lowest delinquencies and highest losses, right? And then Q3 your tend to normalize out. So Q3 our delinquency was a 6, 6, Q4, 6,6, Q1, 6,5. So again, it's been pretty steady all year.

And on the tax benefit did you talk about what the -- what drove, sounded like you were accruing for something but now you don't..

FIN 48, basically, you need to accrue up for penalties and interest fees to the extent you're setting aside certain reserves. Obviously, to the extent that position has been upheld in our favor which it was, you are then allowed to release that and flow it through the P&L.

And the ongoing benefit is you don't have to accrue for it any more.

That's correct. It just hits your tax rate. And last question, your guidance considering the 156, 157. It's not going to have a meaningful impact. Do you anticipate having some of the increased volatility that that introduces such as provision expense and maybe the accrual of interest and fees. Are you going to back those out or just let them fly? We'll probably just let everything flow through unless there's something significant. The numbers should be pretty close.

Okay, great. Thanks a lot.

And I think as someone asked earlier about our Q4 guidance in getting to the right number, I think Ivan was -- and rightly so -- after dodging bullets the last three years, we fully expect Loyalty to have a good quarter. We fully expect Epsilon to have a strong quarter. But the majority of the benefit and growth that we will see in Q4 is going to be Private Label. So I will move Ivan's comment up a bit from flat to potentially up to it sure as heck better be up.

Thanks for extra pressure, Ed.

Otherwise, you can't tie the numbers. Hopefully, that helps out a little bit.

Your next question comes from Mike Grondile Northland Securities.

Ed, could you talk about how you are thinking about margins in the Loyalty business in Canada in 2010?

Boy, I would say revenue in Canada ought to be fairly decent. Again, if you recall the way the EBITDA is going to be flowing in right after some weak issuance, that comes in over 42 months. And a year of weak issuance or so mean that is while redemptions should be strong and therefore drive revenue at a decent level, you're not going to get a corresponding benefit on the EBITDA side because redemptions don't drive that EBITDA. It's the issuance flowing into the P&L. Long story short is you'll have revenue holding up pretty well. Because of the weakness from the miles issued. You're not going to have as much profit into the P&L. Your margins will go down until we refill the bucket.

Okay.

I know very long and complicated, but essentially, when someone redeems a mile, cranking up pretty nicely, you book revenue and you book cost of goods sold, but when you issue a mile, that takes a while for the profit to flow through. You can have strong revenues without corresponding strong EBITDA. And it'll take a little while for that to flow through. The offset is from a cash flow perspective you make up for it with the fact that the free cash flow which usually runs 30 or $40 million higher is going to be 50 or $60 million higher next year. That's basically your delta. If you were to have that in EBITDA, then your margins expand a little bit.

Okay. Thank you.

You bet. I think we're getting near the end here. What do we have? Two more?

Your next question comes from Reggie Smith JPMorgan Chase & Co.

Hey, guys.

Hey, Reggie.

My question is similar to the other folks. I'm surprised at the guidance for next year. And I guess I need to revisit some of my assumptions about Charming Shops. What type of net interest margin should we think about for that portfolio? I know the charge-offs are in the same ZIP code as the rest of your business. And I assume the funding costs are in the same area as well. Are the gross yields different than rest of the portfolio?

The Charming Shops portfolios look very similar to most of our other soft goods apparel retailers. The differences I would point you to are that we are assuming the Charming Shops trust so to some extent your initial comment about funding costs being the same. There are differences there given that we're inheriting certain term deals, so there's a difference there. On balance, I don't think that you'll see the addition of the Charming Shops portfolios materially modify our terms.

Let me jump in here on this consensus. Can't say I'm absolutely shocked that people are trying to firm up 2010 consensus. What I will say I think we said five or six times tonight is that look, for those of you who know us, this is how we do it here. We put out what we think the pretty decent guidance, pretty firm guidance. High teens share growth. When we put out guidance for 2009. It was criticized. And we are going to be coming in right where we said. So we will always take a more conservative tact that I think some of the folks out there wanted us to take. But saying earnings will be up 17, 18% of high single-digit organic growth is not in our opinion that far off from our long-term model. And to the extent that there are improvements in the macro environment, to the extent there are improvements in credit quality. To the extent we start cranking up the buyback. All those things can have a positive impact. As you've heard Ivan tonight, after two plus years of not having a whole heck of a lot of fun, we don't want to spend all of next year chasing after numbers when we can sit there and lockdown our book, get Brazil going, get a couple of portfolios in the door and a few other things while at the same time hopefully have some room to flow through potentially good news to those shareholders who stick around. And that's always been the way we do things.

That makes sense. And then I guess to kind of clarify a comment you guys made, you talked about locking down longer-term financing through the TALF deal and I guess you compared it to the CD rates that you guys are paying. I guess my question -- with these TALF deals, you're basically refinancing your conduits, right? Or are you financing CDs?

They're same rates, Reggie. The conduits are right now LIBOR -- they're around 2%, two and a quarter. So CDs or conduits are essentially the same thing from a funding perspective. This was not the case a year ago where conduits were or LIBOR was 350 and conduits were 6.5%. Right around where our CDs are. The point between CDs and conduits. And perhaps we should have said conduits. It's a lot easier for people to understand CDs. If we have five or 700 million sitting in conduits, we'll scoop them out and pop them in to a TALF deal.

Okay.

The spread there about 200 basis points, 250.

Okay. Got you. That's actually good to know. I didn't realize that the conduit funding had come down so much.

I got to tell you. The TALF program and the liquidity that's been pumped in to the system, there's been all sorts of criticism heaped on a lot of things. I got to tell you, it's been -- it's been a boon for us. Because it is definitely moved spreads in the conduit market way, way way back down to frankly where they should have been all along.

Got you. Were there any unusual gains during the quarter? I know you talked about the investments held in the air Canada and air miles air Canada and air miles business being. Does that flow to EPS or was a gain there.

That's the balance sheet item. That's essentially.

Okay. And one last question. Just to make sure I'm hearing this right. Something in the mid-nines for charge-offs next year is a good place to start for us. Certainly below 10% is a good place to start for 2010?

Yes.

Thank you.

One more.

Today's final question comes from Andrew Jeffrey SunTrust Robinson Humphrey.

My stamina I guess. I'm a little slow. But maybe you can walk me through this. If you're talking about a consensus EBITDA number for 2009, you're implying a $200 million number for the fourth quarter when you just did 131 in the third? Is that right?

Let's see. (inaudible) I hear an echo in here.

I've been getting this throughout the call actually.

(inaudible), Sorry. Hold on a second. We're trying to fix it. Okay. We got it. We'll make it quick. We're looking at certainly around 190 or above.

Okay. And it's safe to assume that the bulk of that delta or increase sequentially is going to come from Private Label and Epsilon is going to have a pretty good quarter.

Epsilon will have a good quarter. So you'll see sequential increase there. But as you know, their quarterly numbers are not big number to have such a huge change sequentially. But they'll have a good quarter. Canada will have a good quarter. But the bulk is going to come from Private Label.

The implication is that Ivan is being far too modest.

He's been in the bunker for two years, man.

I understand. And then could your just give a little color about how you're thinking about the non-cash add-backs in '10. The reconciling items between GAAP and non-interest, the non-cash interest expense and the income tax effect items. Are they going to look like they did in '09? Or are the numbers going to move around at all? How should I think about modeling that?

The way you're doing it today and try to keep it apples to apples. And if there's any change, we'll certainly let you know.

Okay. So the net of the two being roughly zero as it was or the small number as it was in the third quarter?

The net of what?

non-cash interest expense and the income tax effect.

Yes, I can only give you --

I think your imputed interest is going to be running the same if that's what you're asking. Like wise, the intangibles will be coming down 5 million a year, something like that. That's probably what you're going to see. And stock compensation is going to be 50 million, something like that which is flat. It's going to be flat for this year. I think that will help you out.

That is helpful. Thanks, guys.

All right. Well, I think that's it. And again, for those of your still hanging on the phone, still made it this far, I think we did an hour better than last time. We'll try to keep up the pace. Essentially, as we talked about at the beginning of the call, this is a question of trends and I think we're all heading in the right direction. It's a little bit of three steps forward, one step back. But we're definitely feel that it's firm. We have not obviously gone out on the limb yet to say things have absolutely turned. And we're off to the races. But I think we're comfortable giving out this type of guidance at this time of the year. And as usual, for those folks who want to hang around and to the extent that we over perform, we'd love to have you aboard and we'll flow that through. That being said, we'll sign off. Thank you.

That does conclude today's conference. You may now disconnect.