Bread Financial Holdings Inc (BFH) 2010 Q3 法說會逐字稿

Welcome to the Alliance Data third quarter 2010 earnings conference call. At this time, all parties have been placed in a listen-only mode. Following today's presentation, the floor will be open for your questions. (Operator Instructions). It is now my pleasure to introduce your host, Ms. Julie Prozeller of Financial Dynamics. Ma'am, the floor is yours.

Thank you, operator. By now you should have received a copy of the Company's third quarter 2010 earnings release. If you haven't, please call FD at 212-850-5721. On the call today, we have Ed Heffernan, President and Chief Executive Officer; Charles Horn, Chief Financial Officer of Alliant Data; and Bryan Kennedy, President of Epsilon.

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 the uncertainties described in the Company's earnings release and other filings with the SEC. Alliance Data has no obligation to update the information presented on the call. Also on today's call, our speakers will reference certain non-GAAP financial measures which we believe will provide useful information for investors. A reconciliation of those measures to GAAP will be posted on the investor relations website at www.AllianceData.com. With that, I would like to turn the call over to Ed Heffernan. Ed?

Thanks, Julie. I think we'll get right after it. Charles and Bryan will talk about the quarter and the segments, and also Charles will give the rest of 2010 guidance and then I'll talk a little bit about 2011 as we establish our base case guidance consistent with what we do during every third quarter of every year. So we are going to keep up with that tradition, and with that I will turn it over to Charles.

Thanks, Ed. We had another strong quarter. Core EPS increased 12% to $1.55 for the third quarter of 2010, exceeding the Company's guidance of $1.52. Excluding the tax benefit recorded in the third quarter of 2009, core EPS increased 31% year-over-year. Our GAAP EPS increased an even stronger 16% to $0.96 per share for the third quarter of 2010. Again, excluding the tax benefit recorded in the third quarter of 2009, GAAP EPS increased 55% year-over-year. Revenue increased 14% to $702 million for the third quarter of 2010, the second consecutive quarter of double digit revenue growth. It appears that the Company's macro environment continues to improve, albeit at a controled pace.

Adjusted EBITDA increased 25% to $219 million for the third quarter of 2010. Our adjusted EBITDA margin increased to 31%, up from 28% in the third quarter of 2009, primarily driven by strong performance in the Company's private label segment.

Let's move to the next page and look at loyalty one. Revenue was up 4% and adjusted EBITDA was down 13% year-over-year. Adjusted EBITDA margin dropped 500 basis points year-over-year, primarily due to the runoff of the deferred profit which we discussed below, and increased non-Canadian investment. The adjusted EBITDA margin for the core Canadian operations were still very healthy at 28% for the third quarter.

For the year, revenue and adjusted EBITDA are up 14% and 8% respectively. As Ron Pearson discussed in our second quarter earnings call, we'd anticipated a weaker third quarter due to three earnings drags. One, weak issuance of unfavorable mix from the latter part of 2008 and all of 2009 combined with the lag affect of our deferred revenue recognition model. Two, less amortization of deferred profits associated with the conversion of a split fee to a non-split fee program. And three, continued investment in our non-Canadian businesses.

We expect the first two drags will anniversary by mid-2011. The third will continue as we invest in our non-Canadian business to drive accelerated growth for the long-term. This investment will reduce EPS in 2010 by about $0.15. Air miles issued during the quarter were down 4% year-over-year.

The softness was driven by three main factors. One, sluggish credit card growth as a result of less buoyant consumer spending, brought on by the slowing of the economic recovery in Canada. While the average spent on credit cards has slowed in Canada in general, air miles credit cards continue to enjoy more than their fair share of the market spend. Two, anniversary of the enhancement of the Bank of Montreal credit card program in Q3, 2009. Three, timing and less promotional activity than last year by grocers in similar geographies.

Overall, we expect similar trends for the fourth quarter. With that, I will turn it over to Bryan Kennedy to discuss Epsilon.

Okay great. Thanks, Charles. I'm looking at page five. And it's good to be here on the call today and speak with you and I'm delighted to share the highlights with Epsilon which has had a great year and exceptional quarter with $171 million in revenue and $44 million in adjusted EBITDA, which makes a new high water mark in our Company's history. This represents 29% top line growth and 25% adjusted EBITDA growth, with excellent margins at 26%.

So with three quarters of the year now on the books, Epsilon has delivered 16% top line and 17% bottom line growth which exceeds expectations even before the impact of our acquisition of Equifax's marketing services division, which basically listed an already a strong Q3 from high teens purely organic growth to a growth rate in the high 20s. Essentially what you are seeing in Epsilon's numbers right now is solid overall momentum with double-digit growth across the board in all of our offerings.

So just breaking those down as you see on this page, database and digital, which represents approximately two-thirds of the business on a full year basis, consisting of multi-channel integrated marketing platforms that leverage our database capabilities and our digital services, continues to be fueled by the on-boarding of both 2009 wins and equally strong 2010 wins, and a number of key verticals for us, including consumer packaged goods, financial services and pharma, just to name a few.

And the other portion of our business data and other consisting of the Abacus data cooperative that supports over 1800 clients in retail, catalog, not-for-profit and publishing verticals, along with our non-transactional demographic compiled data has shown a lot of resiliency throughout this entire year, with Abacus producing solid growth for nine straight months. We attribute this to market demand as well as the benefit of a number of market share strategies and a continued push into new verticals. It has been a core part of our strategy in our data business. Our non-transactional data assets, i.e. non-Abacus, have also been nicely bolstered by the integration of the Equifax acquisition, bringing a nice lift in revenue as well as some added benefits of cost synergies.

So, overall, our outlook for the year remains strong at Epsilon. As we finish out the year and continue to absorb the backlog of wins from clients such as AAA, Visa, Unilever, some of the other announcements that we have published, we expect to see continued momentum from a combination of new clients coming on board as well as growth from existing clients and as such, we're confident in a strong finish to the year and a very good outlook for 2011. So that's Epsilon, and I'll turn it over to Charles for Private Label.

Thanks, Bryan. Let's turn to the next page and we'll look at Private Label. Again, Private Label had another very strong quarter with total revenue up 16% and adjusted EBITDA of 40%. If you look at the charts you can see the increase in gross yield for the quarter dropped to the bottom line as can be seen by 700 basis points increase in our adjusted EBITDA margin.

Let's turn to the next page and walk through the key drivers for Private Label. The key things I would look at is first, card holder spending was very solid for the quarter. Credit sales increased 7% from third quarter of 2009. Growth came largely from new credit card portfolios, as growth in our long-term core counts was dampened by the runoff of canceled programs, and these programs were cancelled either due to poor performance or client bankruptcy.

Second, portfolio growth remains strong at 16% growth rate for the quarter, despite an overall consumer pull back on revolving debt products. This portfolio growth will slow in the fourth quarter as we anniversary new credit card portfolios. Third, gross yields increased 200 basis points to almost 27% for the quarter. This level approximates a normal run rate going forward.

Fourth, funding rates were stable with 2009 even though we prefunded several asset-backed debt maturities during the quarter. Funding rates are largely fixed until the third quarter of 2011. Finally, the last piece of the Card Act, surrounding late fees became effective during the quarter. We responded by modifying card holder terms to adjust to the new Card Act requirements and to maintain historical averages for late fees. New terms are in the process of burning in with expected full effectiveness by mid November 2010. We estimate that the negative impact on late fees for the third quarter was approximately $3 million. And we further estimate that the negative impact to the fourth quarter before the terms fully burn in, which we expect by late in the year, will be about $8 million.

Let's turn to the next page and look at charge offs and delinquencies. Actual principal charge offs in the quarter came in at 8.3% rate, which was both better than Q2 2010's principal charge off rate of 9% and significantly better than Q3 2009's principal loss rate of 9.4%. We expect a seasonal increase of charge offs in the fourth quarter into the high 8% range, but thereafter continuing a downward trend in charge-off rates with the improving quality of our credit card receivables. As you can see from the chart on the bottom of the page, we have maintained a steady reserve rate for 2010, down only 10 basis points for the year.

The decline in reserve balances from the beginning of 2010 is due to lower ending credit card receivable balances. This is a key point I want to make. A volume driven, not a rate driven, decline in loan lost reserves does not create incremental earnings. Rather, it creates a drag on earnings as the reserve benefit is more than offset by loss finance charges of income. Said another way, we would always prefer to generate a 27% gross yield and maintain a 10% reserve on higher credit card receivables. Delinquency rates, which were a good predictor of future losses, improved to 6.1% of principal receivables as of September 30th, 2010, down from 6.2% at September 30, 2009.

As you can see from the chart, delinquency rates continued to trend downward, and are following typical seasonal trends. Having said that, the September 2010 delinquency rate is 10 to 20 basis points higher than predicted by normal seasonality. It appears that the changes we made to cardholder terms during 2010, first, raising APRs in March and second, increasing minimum payments from $10 to $20 in June has created two small bubbles that are working their way through the delinquency rate. This is not uncommon in the industry.

As discussed in our second quarter earnings release, we anticipated this could happen. Accordingly, we sized our adjustment to late fees to cover the bubbles and prevent any negative impact to EPS. Looking forward to Q4 2010, we expect the delinquency rates to fall as the bubbles charge off and we experience a typical seasonal improvement. Ed will walk you through expectations for 2011 later in the call.

Let's flip to the next page and look at the balance sheet. A couple of points I've made before, but I'll just remind you, under the new accounting rules, we now consolidate all previously off balance sheet receivables and asset-backed securities debt. That's why you see the big increase from December to September. Also, under the adoption of the new rules, we reduced our shareholders equity by over $400 million. Thus the reason for the drop in stockholders equity. I would also point out the redemption trust assets are flat with December 31, 2009. The new accounting rules now eliminate Loyalty One's investment of $74 million in funding certificates issued by WFNNB, our largest bank.

Year-to-date, we have acquired 1.4 million shares of outstanding common stock for approximately $77 million. The share repurchase program continues to be an attractive use of liquidity, as we consider our share price undervalued. Along those lines, we expanded and extended our stock repurchase program during the quarter. The repurchase program now authorizes the repurchase of up to $400 million of the Company's common stock through the end of 2011. To date, no repurchases have been made under this new program.

Lets flip to the next page and look at liquidity and capital. At the corporate level, liquidity remains strong as of September 30, 2010 at approximately $500 million. It breaks down as, one, cash outside of our banking subs of approximately $117 million, two, available borrowing capacity of approximately $380 million. Cash of approximately $274 million at our bank subsidiaries is being used to support regulatory capital ratios this year, as we transition in previously off balance sheet assets into the calculations.

During the quarter, we used $117 million of cash to acquire the direct marketing services division of Equifax, Inc. and $51 million to repurchase our shares. In addition, we closed on a new $236 million term loan which enhances our liquidity position. Our debt levels continue to be modest. The key loan covenant ratio, which is core debt to operating cash flow, was 2.5 to 1 as of September 30, 2010, substantially below the covenant ratio of 3.75 to 1.

At the bank subsidiary level, we have approximately $3 billion of availible liquidity as of September 30, 2010. During the quarter, we concluded all schedule financings for 2010 and all were done at equivalent or better spreads than before. Our regulatory ratios at our banks remain strong and well above regulatory well capitalized minimums. As expected, the Tier 1 and total risk based capital ratios declined from Q2, 2010 due to the continued phase-in of previously off balance sheet credit card receivables. Barring an acquisition of a new credit card portfolio, we do not anticipate any need to downstream further capital to our banks. In summary, our balance sheet liquidity and capital remain very strong.

Let's look at now 2010 guidance. For the fourth quarter, the Company expects double digit growth in both revenues and adjusted EBITDA. We expect core EPS to be at least $1.40 for Q4, 2010, a 16% increase to adjusted fourth quarter of 2009. Overall, we continue to track core EPS of at least $5.70 for 2010 which would be a 23% increase to adjusted fourth quarter of 2009. I would point out that both of the metrics I referred to, the $1.40 for the quarter, $5.70 are the minimums and we believe that that's a minimum to achieve and that's why we refer to it as "at least."

Loyalty one, we expect about a 5% growth in revenue. Adjusted EBITDA will be down about 20% from last year due to grow over from the amortized profit. Full year adjusted EBITDA has been upgraded to consistent with 2009, compared to prior guidance of a mid-single digit decline. Air mile issuances will likely be down year-over-year due to the same factors discussed for Q3.

For Epsilon, we're looking for a great quarter, with at least a 20% growth in both revenues and adjusted EBITDA, year-over-year. Private Label, we're looking for at least a 5% growth in revenue and adjusted EBITDA from adjusted fourth quarter of 2009, which excludes $28 million of infrequently occurring gains. Average credit card receivables are expected to be flat year-over-year as new programs anniversary and remaining core growth is tempered by the run off of cancelled programs, again, either due to poor performance or client bankruptcy.

Looking at Q4 2010, on a sequential quarter basis, meaning I'm comparing to Q3, 2010, we expect the provision for loan loss to increase due to the seasonal build up and ending credit card receivables. A typical $400 million seasonal increase in ending credit card receivables will increase the provision for loan losses by an estimated $35 million. This is the reason Q4, 2010 core EPS guidance of at least $1.40 is lower than the Q3, 2010 actual core EPS of $1.55. With that, I will turn it over to Ed to discuss 2011.

Great. Thanks, Charles. Why don't we turn to slide, I think it's 12, and talk a little bit about our initial base case guidance for 2011, and again, for those who are relatively new to how we do things here, each year we tend on our third quarter call to give our first base case guidance outlook, and then, obviously since it is rather early, as things progress, we'll refine it, hopefully in a good way, on a go forward basis, as we enter and go through 2011. As Charles mentioned, even at the low end of the range for 2010 on a normalized basis, earnings will be up 23%, which I think, given nice clean quarters that we have had all year, is certainly something to be applauded.

As we look into 2011, we also expect to have another great year. And to remember here is that our initial base for 2011 is based off of what we are seeing off of current trends and also it excludes any benefits from things like acquisitions or any benefit from accretion from buy backs. So, truly this is our base case and as I mentioned it will be refined as things flow through.

Let's start with the business units, Loyalty One, along with continuing top line growth, thankfully, we are also expecting a return to bottom line growth in 2011, following relatively flat earnings over the last three years. So it would be nice to get some of the weak growth or no growth behind us and start growing again. However, we are not expecting it it to be a boomer. For Loyalty One, we expect mid single digit growth in both top line and bottom line.

Factors driving the growth are two fold. First, the two headwinds restraining issuance growth in 2010, which was the big down draft in grocer promotions and generally weak credit card sales. The anniversary at the beginning of the year and, second, the grow over related to the amortized profit ends mid year. Miles issued and redeemed are expected to get back on track and grow in the mid to high single digit respectively. By 2012, we will expect Loyalty One to be fully ramped up and that means its return to its long-term growth which we believe is high single digit top-line and low double-digit bottom line, all of which organic. It going to be a two stepper here, where we go from flat to mid single digit growth next year to double EBITDA growth in the following year.

Epsilon, pretty straight forward, it's a very simple story, which is record signs over the last two years will show the strongest growth rates at Alliance. The expectations are for strong double-digit top line and bottom line growth for 2011 and hopefully we will be on that as well.

Now, Private Label, we expect 5% increase in the portfolio growth by year-end of 2011. That will be driven by core growth in new signings, yet dampened somewhat from the turn off of several programs. Simply stated, there were several programs that went bankrupt or performed extremely poorly during the last couple of years and we are burning those off. They don't affect the profit. They just affect the metric of growth in the portfolio.

The burn off will recede as 2011 progresses and new programs, plus core growth become more and more pronounced. Something important here is in terms of new signings and new programs, it has been relatively quiet this year. A lot of it had to do with the Card Act that thankfully is behind us, but that essentially put everything on hold until July, August when we finally got the appropriate deals understood and which could go out and price some deals.

We have announced two deals so far this year. The year is not over yet, but I can say we have another 5 that are in the pipe that have a very high probability of getting some ink sooner rather than later. We feel pretty good about the new signings. We feel pretty good about the growth rate, mid single digits for 2011.

So you take portfolio growth. You combine it with yields that are expected to remain robust. Again, to reemphasize the Card Act, we had to do a lot of restructuring and changes. If he end of the day our run rate is fully restored once the final terms and conditions kick in near the very end of Q4. So yields we expect to be quite strong. You put that together with portfolio growth and you will drive top line growth in the high single digits, and then significant cash flow, adjusted EBITDA and margin growth are are expected as credit quality continue to improve with both cash flow and adjusted EBITDA notching mid-teens gains.

Again, this is all organic. Despite the assumptions that macro unemployment will remain in the 9% range next year, credit losses are expected to continue to improve throughout the remainder of the year. Going back, last year if you normalized for the bankruptcy deferral, our losses were about 9.5% principal. This year we will come in right around 9%. Next year we expect to come in around a 8.3% in 2011 and we have very, very strong level of comfort that the trend we are seeing will continue forward.

I will go a little bit off track here and talk about the delinquencies and the losses. Obviously, there has been a little bit of confusion out there. Recently there was some noise -- we got a couple calls today actually, some noise out there about delinquency trends and loss trends or something. Obviously, we couldn't answer them but I will now.

You recall that this business -- Private Label business, during the great recession rather than being hit harder than bank cards actually performed quite a bit better than bank cards. That is something that was a test that was coming and the test that showed the resiliency of the portfolio and the high quality of the portfolio. As we look going forward, we are assuming that the macro environment will be slow, muddling along, and we won't be seeing anything exciting for a while. Hopefully we will be positively surprised there. If that is the case, we would expect our losses, which again were about 9.5% in 2009, about 9% this year, 8.3% last year, 7.5% in 2012 and back down to normal run rate of around 6% in 2013.

It is a gradual wind down. We feel very comfortable about that rate of improvement. Again, we don't -- the losses for us don't jack around like they do for the bank cards, the huge reserves that are put up, huge reserves that are released for us. It is sort of a nice steady improvement over a four-year period. If you follow the math there, the improvement each year, 70, to 75 basis points is about $0.35 per share, which by itself accounts for about 5 points in growth in earnings.

That combined with the fact that as Charles mentioned, our delinquencies are following seasonal patterns, they will be down by December. And we feel delinquencies themselves will be around the 5.3% level in 2011. That would correspond very nicely to about an 8.3% level in principal losses. Again, the difference is -- how come the 8.3% isn't coming down faster.

It doesn't have to with delinquencies, or at least right off. It has to do with the other two components of losses, one being recoveries and bankruptcies. Those have tended to be very high during this recession, and the good news we are seeing right now is that bankruptcies as a percent of the file have for the first time actually been flat to slightly better than prior year, and the same goes true for on the recovery side, we are seeing our recovery rates better than they were a year ago. So you combine that with delinquencies that are coming down significantly next year, and you will get a nice hit on your loss rate.

You roll that all together and on a consolidated basis, the Company expects revenues to cross the $3 billion level for the first time with core EPS increasing by more than $1. In this case, we have a base case of roughly $6.75 for core and we started this guidance with the assumption that core EPS would be up 20%-ish, which is what we had indicated before. We are consistent with that.

We took out a $0.10 which we have now decided to allocate to additional or incremental international investments in spooling up potentially another large national coalition in another country. We are extremely excited about what is happening in Brazil and getting ready to roll that thing nationally, as we are waiting for some ink on the paper. We also think this is a good play to make now as opposed to later.

As one small data point you can look at Multi Plus down in Brazil. Which is only about a year or so old as a coalition, it is more of a frequent flyer program. It's got a market cap of $2 billion. So those numbers get our attention. For the sake of $0.10 we think it is worth rolling Brazil as well as rolling in potentially another country as well. So that would back off your actual growth rate to more in the 18% range. Again, that doesn't include any accretion from potential acquisition or buy backs and 18% translates into 34% in GAAP EPS.

I think it will be a very, very strong 2011. We are excited about international possibilities. We are excited about Loyalty finally turning the corner and back into growth mode. We are excited that Epsilon will be the star of the show for next year and also that Private Label we are through three years of pain from the liquidity crisis, the consumer credit crisis and the regulatory crisis. We think things are moving along very nicely.

Let me turn you to the next page, which is cash flow. Since it is somewhat challenging to understand our balance sheet or cash flow statement, I decided to ask Charles to make it as simple, so that even I could understand it, which is how much will we have in our pocket at the end of the year? And quite simply, if we did EBITDA of around $900 million, there is about $50 million or so in Canada, which is called the Loyalty One adjustment which is cash that comes in. Then a portion of it is put into the trust account, what is left is profit.

That profit is deferred and not recognized. It is one of the few businesses where free cash flow outstrips actual reported earnings. Our high level cash flow is $950 million. With all the new accounting Charles talked about for this year, our funding costs for the Private Label business, if you want to get apples to apples, you can reduce that by $200 million on the EBITDA side to get it across the three different businesses apples to apples.

You have the other things in there we assume, another $50 million will be held at the bank for rate capital and basically come up with $400 million of free cash in year as bank dividends also start coming or streaming up from the banks to help us reach that $400 million goal. That's over $7 bucks, which is over double digit free cash flow yield, which is fairly enticing to us. If you are curious about how the three units would stack up, Loyalty and Epsilon combined would be about 53% of the pure free cash flow of the Company. The remaining 47% would be Private Label, if you take out the funding costs, and again, that covers everything from the processing to the customer care to the credit function to the database and loyalty programs that it runs.

That's where we stand. I think the $400 million of free cash plus the $500 million in corporate liquidity, gives us just under $1 billion. That's at a high level of $1 billion. We would then point to use that at things such as share repurchases, tuck in acquisitions, potentially some portfolio acquisitions where only the premium, if there is any, would be taken out of this liquidity and of course, any international work we are doing.

In summary, we expect a very strong and robust 2011. High single digit growth and revenue. Strong double digit growth in both core and GAAP EPS. Return to substantial free cash flow and well 2010 was quite strong due to Epsilon and Private Label, 2011 will continue that trend, but will be adding incremental assistance from Loyalty One. By 2012, all three business units should be at full steam ahead. Overall, it looks like several solid years ahead.

Just finishing up here, if we turn to the next page, this is about as simple as I can make it, which is, what are the pluses and what are the minuses of what's going on as we look into 2011. Another way to look at it is what keeps us happy and what keeps us up at night? Clearly with Loyalty One we have a number of new sponsors in the pipe, renewal rates have been running at 100% and Brazil certainly seems to be a very, very intriguing program. On the negative side, even though we know with the anniversaries in January, we should have a nice jump on issuance growth. It hasn't happened yet. When it starts happening, we will take it off the minus, and put it over on the plus side.

With Epsilon, we don't really have anything that is keeping us up at night. Database and digital are moving along quite nicely. On the data side, which also gives us a hint to the overall macro environment, we are seeing very strong demand on the data side, and those are things like millions and millions and millions of names for catalogs and everything else. From a retail environment, this holiday season will be okay.

On the Private Label side, as we talked about, yields should be very strong. Credit losses, again, we expect improvement, quite a bit down to the low 8s. And funding costs, which is one of the fairly unique things in this environment is if a macro environment, we're looking at relatively slow growth overall, it is kind of interesting that you will get your kiss back on the funding costs. I have never seen them this low before. That will be a help.

The pipeline we talked about. We have some nice deals that we want to get some ink on, sooner rather than later. We will be finishing off the burn off of some of our clients that have not performed well. And then on the negative side, outside of that burn off is the fact that the Card Act did delay the signings. The ramp ups of these new clients will come in a little later than we thought.

Overall at ADS, liquidity, debt levels and free cash flow were all in good shape. And I think that's pretty much it. As I look at it, compared to a couple of years ago or last year and I weighed the two sides, there are a lot more pluses in 2011 than there are minuses, and I haven't seen this type of waiting since 2007, to be quite frank with you. So I think it is going to be a Goodyear.

Final page, then we'll take some questions. This is for those of you who are curious as to the strategic nature of our business model and for those of you who also have been with us for a number of years, you know this, but the fact of the matter is we have a business model that has three separate platforms, all of which try to deliver, transactional based, marketing and loyalty but by their very nature, they cycle up at different times. That's exactly what happened. If you went back to 2007, really the last good year from a macro perspective, we did about $3.88 in core earnings, very balanced across all the businesses.

You moved forward into 2008 and 2009, you had the great recession, which of course came with it the fabulous liquidity excitement, massive lay offs, huge credit losses, weakened consumer confidence, and what actually happened is, even normalizing 2009, we continue to grow earnings as Loyalty One actually grew and Epsilon held its own. We then made a contrarian paly with the buy back. All of that more than off set the decline which we saw which was fairly significant in Private Label.

We then moved to 2010, and we are going to call 2010, 2011, and 2012 the great muddle through. The assumption here is that there will be no double dip. We will see no evidence of that, but very light GDP growth, unemployment staying very high, and with this muddle through, the first part of 2010 was a challenge by the Card Act and the regulatory environment, that is behind us now. And so, we end 2010 with double digit top line across all three businesses. Two out of three businesses showing growth in EBITDA, the third one being flat.

We move into 2011, and you're going to now see EBITDA growth throughout all three businesses albeit mid-single digits at Loyalty. Then 2012, we're finally going to cycle all the way back to where we were in 2007, which is balanced growth across all the businesses except for the fact that our earnings per share will be $8 as compared to $3.88.

From the good times in 2007 to the good times of 2012, and through the recession, we continued to grow. The businesses cycle differently, and over that entire period, we grew earnings 16% a year for five-years and that's essentially how our business works. As you look at the rest of this year and you look at 2011 we can spend time debating whether loyalty's issuance growth will come back in January or February, and whether it will be four points or five points, and we can debate whether the seasonality in delinquencies are 10 basis points or 20 basis points harder than we expected.

All of that is fine, but this page hopefully demonstrates that the overall picture is one of growth no matter what the environment and accelerating growth when the environment gets a little bit better. As much as everyone wants all three platforms to cycle up at the same time, frankly, I am glad they're not. I like having two, two and a half out of three-ringing along and let the other regroup for a little bit. That way you have a nice consistent growth rate, 18%, 20% earnings growth.

So that's it. We will now open it up for questions. We want to keep it for one question per call. And so, I know everyone wants to get back to the ball game and we can rip through this pretty quickly. We will go from there. Operator?

(Operator Instructions). Your first question comes from the Jim Kissane with Banc of America, Merrill Lynch.

Hi, Ed, Charles, and Bryan. Just to harp on the business that has been challenged, it seems like it has taken longer for air miles to recover. How would characterize your visibility or confidence that miles issued will in fact start to recover in the back half of 2011?

I think miles issued should come back actually in the first part 2011. The EBITDA will come back more in the back part, but in terms of the issuance, what we basically did is we took a very conservative rate of our run rate and said if the grocer down draft and the weak card spend continued into next year at the levels we have been spending this year, what type of growth would we be looking at and we are coming in at about 5%.

Both of those headwinds anniversary in January. We should be coming out of the gate with decent growth. To the extent we see any type of pick up in discretionary spend or to the extent the grocers in question decide to put their shoulder back into promotional spending, there would be an upside to that. But I think we are all with you in the sense that we were hoping that the promotional side on the grocers would come back on the back half but it didn't. We are assuming it is not around in 2011, and we should do about 5 points.

So just to be clear, it is more new sponsor-driven as opposed to visibility and promotional activity?

Yed, it is clearly not on the promotional side. We've haircutted that quite a bit. It is new sponsors but we are also getting a number of growth in our core sponsors, especially in the largest province, which is Ontario. We saw growth in some of those sponsors whether they be pharmacy or home improvement or the others. It is a combo of both.

Thanks.

Your next question comes from the line of Sanjay Sakhrani with Keefe, Bruyette & Woods.

Thank you. I just wanted to make sure I understood what changed in the 2011 guidance, relative to what you guys provided last quarter. Was it simply the $0.10 of investment spend or were there other assumptions you made in the last forecast versus the current one? If you could talk about the impact of charge off dollars, the changes you made related to the Card Act would have in the fourth quarter and the first quarter, that would be great.

All right. On the first one, you are dead on. When we gave the preliminary 20% increase in Q2, we indicated that we would update it finally and formally in Q3, or we did, once the budgets rolled up and we saw the overwhelming industrial logic to go ahead and continue rolling out the international expansion of the Loyalty programs, the new programs, we decided to take an incremental investment this year. In 2010 we took a $0.15 EPS hit from the international expansion. We decided with the roll out in Brazil and a new country we would increase is it to $0.25 in 2011. That's the $0.10 differential you are looking at.

Just to jump in here, as much as people want to say well, you knocked 2 points off of whatever. This is without buy back and without acquisitions. You look down at Brazil. It is ripping down there. It is red hot. And the other program down there, like I said, has a market cap of a couple billion, and we ought to be at least that size, if not bigger. So it is a no brainer for us right now to go after a coalition across the world.

And the second one on the charge-offs, Sanjay, what were you referring to there?

You guys made some changes related to the Card Act, to the account and I was wondering, those delinquency bubbles, how much in dollars of charge-offs do you expect them to translate to in the fourth and first quarter?

We figure about $10 million, about 20 basis points we see in the delinquency bucket, if you take that fast-forward, it's going to hit in October, it will hit in December in total be about $10 million.

Okay, and I'm sorry. Just one follow-up to Ed's comment, is there a reason you wouldn't include share buy backs or acquisitions for next year's assumptions? Is it just very hard to do the acquisitions, or do you not expect to do any share purchases?

It's a fair question. We tend to be more on the conservative side and it is traditionally, Sanjay, if you went back the nine or ten years, we have never included them. We view them as a nice upside. We can't sit here and telegraph what the buy back intentions are going to be, that sort of takes away the interest that we would have in doing it, sometimes. Also, the acquisitions I certainly would expect to do at least one nice tuck in for sure. They are not in hand. I think the probability of both of those items happening are high, but until they actually take place, we have never put them in guidance.

Okay. Thank you.

Your next question is Bob Napoli with Piper Jaffray.

Good afternoon. I'd like to ask a question on the capital levels on the bank and as the transition of all the off balance sheet assets is completed in the first quarter, is that correct, and what level of risk weighted capital do you expect to have to achieve before you expect to dividend out of the bank?

The way I look at it, Bob, at the end of Q3 you had 50% of the off-balance sheet phase into the capital ratios, so at 13, 11 and 20, that's 50%. But think about what is going to happen by the time you fast forward to Q1 of next year. You have the seasonal build up in AR in Q4, that drops in Q1, so the net incremental assets we'll have to phase in, in Q1 will only be about $300 million, which then, if you had two quarters of earnings at the banks, it will maintain or increase these ratios a little bit.

So would you expect to start dividending then, and are you going to use the securitization markets from here or are you going to see a lot more deposits.

The answer is yes to both. In terms of dividends, as soon as the first quarter is over, we finalize the phase, and we will be seeking -- we've actually already put it in process for dividends, at least in terms of our operating plans, so we will seek that. The second piece of it was --?

Securitization markets versus the deposit markets?

It is still a viable market now that the FDIC came through in our favor, grandfathering master trust. It is still a very good market for us. We will depend upon a combination of things, conduits, ABS term debt as well as CDs, but the ABS market is still good. All the renewals we have done this year have been at very good rates. The market still seems very receptive, and most of the regulatory issues around that are falling into our favor.

Bob. It is Ed. Since I was here during the fabulous liquidity crisis, we have definitely made a firm commitment to diversify away from 100% long-term fixed rate asset-backed debt. At the same time, we are looking at a combo of funding sources being term CDs, conduits with banks, and also the long-term asset-backed market, and right now, I think we have $2.6 billion to $3 billion of excess capacity down at the bank for liquidity, and frankly I don't think we could ever have enough. So I think we want to tap all the three of those and keep those markets vibrant for us for no other reason than just to diversify.

Thank you.

Your next question comes from the line of David Scharf with JMP Securities.

Good afternoon. Just wanted to get a little more color on the anticipated portfolio growth. It almost seems like in fact, some of the caution or headwind is almost transitioned from consumer credit to consumer spending. The 5% growth next year, can you give me a little more sense of how much these bankrupt or discontinued programs, what kind of drag they represent. I thought organically, even pulling out Lane Bryant, we were kind of in the high single-digit organically for most of this year. Trying to get a better sense of what your spending assumptions are for next year.

I think you are dead on. There has been a lot of discussion about how bank cards have had their files shrink dramatically, and how consumer revolving behavior or has come down dramatically. I don't know how much of that is for real as opposed to, it's just because people have been writing off huge amounts of large debt and have cut lines. We are seeing our average balance per card member up around 4% or 5%, which has historically been around the right level. If we flow that along with the ramp up of our new accounts, we are probably around about an 8% growth rate year-over-year.

And then we'll probably need to burn off $150 million or $160 million of balances that are still being collected. So we are not losing money on them. They are being collected out primarily from a bankrupt folks such as jewelers such as Fortunoff, and there's four or five others that are out there, and we need to get the balances down and collect the amount. We don't expect any incremental hit from that. Overall, I think you are right around, 8% would be fabulous. We are assuming very modest growth from the core. A couple of points and then the drag from the burn off and that will get us about 5%.

Thank you.

Just to pound through it again, on the credit quality side, to David's point, there is no question as we look at our file and we are seeing bankruptcies which could be 25% of our write offs. They don't flow through delinquencies. They are absolutely heavy anniversaried and actually improving, recovery rates are moving up above last year. Excluding the little bubbles coming through, our delinquency rate is heading south for sure, so all three of those combined gives us a great deal of confidence in improving credit quality. The issue for us is to get our new clients signed, boarded, up and running, maybe throw in a portfolio acquisition so we can do better than 5%. 5% is where we stand right now.

Your next question comes from the line of Darrin Peller with Barclays.

Thanks. Traditionally, delinquencies do show some seasonal improvement during October and then throughout the fourth quarter overall. Charles, do you expect that occur going forward this quarter? And I think really the question -- because it seems to us that you are being quite conservative with 10.5% allowance levels given that delinquencies may come down and then bankruptcies are improving, you only have about 8.3% NCOs expected for 2011. Can you help us understand your thoughts around delinquencies in Q4, and really what we should expect for allowance levels versus chargeoffs?

It's a good question. I do think that you will see delinquencies improve. You will get a seasonal benefit that we do anticipate historically coming through. We do anticipate that the two bubbles will charge off during Q4, which will give some benefit to the delinquency rates as well. In terms of what the reserve rate is, it is a robust reserve rate. We have carried it throughout the year. We will evaluate it in Q4 based on our improvements, our trailing 12 months loan losses as well as looking forward, anticipated 12 months going forward, look at changes in delinquencies, and to your point very well could come down in Q4 as a percentage of overall AR.

But we're just not assuming that.

Yes.

It could come down, Darrin.

Okay. Thanks, guys.

Your next question comes from the line of Robert Dodd with Morgan Keegan.

Hi guys. Just on the Epsilon side, I noticed with the acquisition and then a large number of new programs coming out this quarter, can you give us some color on first half, second half for next year? You give us some high teens growth for the year? Are we looking north of 20 for the first half and teens for the back half of the revenue for EBITDA, can you give us some color?

Sure, good question. Thanks. I would say that what we see in 2011 should match the same seasonality you have seen in 2010 and 2009, with the exception of the Equifax acquisition, which clearly came on board at the back half of this year. You will see the full year impact of that next year. We expect that to add mid-single digits to our total growth rate for next year. You should see a little bit higher growth rate barring any other acquisitions in the first half compared to what you see in the back half. Generally, we will hit the year coming strong out of the gate and we have a backlog built up. We have a very strong pipeline at the point. We have very good visibility for the revenue, that we expect to see in 2011. We don't see any real slow down in the Epsilon story through 2011 and strongly through 2012.

Great, thanks.

Your next question comes from the line of Reginald Smith with JPMorgan.

Hey guys. I have one quick question, did I hear you guys right, that the allowance provision is going to be $35 million higher sequentially in the fourth quarter, and I guess the next question is am I looking at it right in comparing that to last year's receivables balance? I believe in the release you talked about receivables being flat compared year-over-year, and if that's right, I guess the reserve ratio comes down to about 11%. I'm wondering if that's correct and thinking about that and comparing that to your outlook on charge offs. What am I missing there?

Reggie, it's just an example. So let's go back to September. Let's say our AR was $5.1 billion in September. We fast-forward to December and it is $5.5 billion, because you've got your December Christmas spend and your transactors come in, so in one quarter, from September to December, your total AR has increased $400 million. An example would be -- let's say you had to put up 9% against your reserve, that would say, in that example, your reserve, or your expense in Q4 would be $36 million higher than Q3, depending on what you do with your rate. That's the example. I'm not saying that's exactly what it will be in Q3 to Q4.

All I'm trying to do is give an example that an $400 million increase under the new accounting rules has to be provided for, so at a reasonable 9% principal rate, that would say you're tying up about $35 million of incremental expense on a sequential quarter. I'm not saying we'll actually come in there, we could do better. That's an example of how to think of it in your modeling. The reason it has a little bit of a negative impact on the EPS is think about it, a lot of the build up takes place in December, so we have to put a reserve against it. But to build up in December, we don't get any finance charge benefit until January or February. A little bit of a timing difference there from when you recognize the reserve and expense from when you get the benefit of the run up. You may have a little bit of transactors in December, but you may have some people that revolve, but until they revolve we don't get the gross yield.

Reggie, another way I look at it is you are used to hearing everyone saying releasing reserves. For us, because it is a retail file and there is such a huge spike in December, it is actually the quarter where our actual write offs are going to be less than the provision, because we have to provision for that big $400 million seasonal spike that comes in December and that dings Q4. It is a timing issue, and it floods back in at Q1. That's why Q1 is going to be huge.

I guess in your fourth quarter expectations, in the release, you talk about average card receivables being flat year-over-year, which I guess would suggest sequentially on an average basis 4Q will be below 3Q. What you are saying is that is going to be true, but the ending balance in December will be significantly higher than the average for the quarter. Am I thinking about it right?

That's exactly right.

Okay.

That's why Ed talks about some of the gross yields. You don't get the benefit until January. Because the build up in December, which is in the average, but you don't get the full benefit on your gross yields.

Okay. That makes sense.

In the old days it was basically, we didn't have to provision on a go forward, looking forward basis, and now it is just one of the quirks of the retail file that it spikes in December and we have to cover that off and it flows out in the first quarter because that entire spike essentially disappears and then you have the reverse, where your actual losses versus your provision reversed.

For Equifax, rough math is it about $14 million in revenues in the quarter? How should we think about EBITDA on that business?

The revenue is not completely consistent on a quarter to quarter basis because you have spikes in demand over the course of the year. There is a little bit of seasonality there. But roughly in the ballpark and from an EBITDA perspective, we have had some expense bringing the acquisition on board. We expect to see some benefit flowing through next year in terms of cost synergies that will give us some lift.

The way I would look at it in terms of incremental 2011 to 2010, about 40 to 45 incremental revenues, and about 10 to 15 incremental EBITDA flowing through.

Thank you. And that's annualized, correct?

Yes.

Your final question comes from the line of Tim Willi with Wells Fargo.

Thanks, and good afternoon. Wondering if you can talk a little bit about Brazil and the catalyst for what seems to be much more bullish in terms of the market opportunity and the ramp. Is that sponsor acceptance, is it consumer usage that seems to fuel some of this elevated optimism? Just sort of get a feel for that, and in addition, just your thoughts around the GAAP profitability time line with that country if that has changed at all versus prior commentary?

I think we are definitely incrementally more bullish. We were, as Brian Pearson had said on the call, we had hoped to have ink on paper before the call, that's not the case, but I think we feel confident enough that we will have ink shortly, such that we can announce a national roll off. That is obviously, incrementally, new news and better news.

Also, the tests we have been doing a pilot that we ran for over a year actually came in a little bit better than we had anticipated. That is incrementally good news. It is as simple as looking at the one comp down there, Multi Plus with the $2 billion market cap means not only that it could work, but that it can grow very, very quickly right out of the gate. That is probably the third piece of incremental good news. The fourth piece, and I can't get too much into it right now, Tim, but it is the national sponsors who would be on board to roll this out. We would look to effectively use their existing client base in some type of conversion program in the millions of potential customers right out of the gate, as opposed to sort of the two or three-year long ramp up process of going out and sourcing from scratch. We have done it on a couple of sponsors in Canada who had their own loyalty programs. We did an auto conversion into our program up there. It looks like that will be the case with a couple of very, very large potential sponsors in Brazil. That means that this thing will go from zero to 60 very, very quickly, much faster than we had originally anticipated. That's sort of the good news. In terms of --

Second piece was the accounting for it. The way we would look at this on a time line is by 2011, we would expect it to be cash flow positive. By 2013, EPS accretive. The reason for 2013 on the earnings, the way the accounting rules work, you have to assume at least two years of experience you have to have in order to assume any breakage. So for year one of the program, year two of the program, we will assume no breakage, so you're not setting up any deferred revenue to amortize through. Year 3, you can start to originate it so that plus your servicing fee could get us to EPS accretive by 2013. By then, you start getting the deferred revenue rolling through, and you get quite a bit of benefit from the program. It is somewhat of a ramp. The key thing is the cash flow positive 2011, EPS accretive 2013.

To finish up on that big reason cash it's flow positive is unlike in Canada, we will not be required to fund a 100% of the potential future obligation. That is not going to be a requirement. We can use that as working capital, which means there is no drain on the corporate liquidity, which would be helpful. If you go back to the last slide, I walked through about how we see the different businesses spooling up over the next couple of years. We talked about in 2011 Private Label and Epsilon should rip it pretty good but Loyalty will only be about halfway back with mid single digit growth by 2012. Get Loyalty fully back and all three businesses moving along at a pretty good clip in 2013, you have the added benefit of the significant accretion from Brazil. Hopefully that is the game plan anyhow. Hopefully it all cycles up that way and you will have a nice continuous growth rate, which will get us where we want to be.

Great thank you very much.

We appreciate everyone's time. We tried to keep the call as short as we could. This is our shortest call yet. Thank you, and we will talk to you later, goodbye.

This concludes today's conference call. You may now disconnect.