Bread Financial Holdings Inc (BFH) 2010 Q4 法說會逐字稿

Good afternoon, and welcome to the Alliance Data fourth-quarter and full-year 2010 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).In order to view the Company's presentation on their website, please remember to turn off the pop-up blocker on your computer.

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

Thank you, operator. By now, you should have received a copy of the Company's fourth-quarter and full-year 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 Alliance Data; and Ivan Szeftel, President of Retail Credit Services.

Before we begin, I would like to remind you that some of the comments made on today's call, and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties described in the Company's earnings release and other filings with the SEC. Alliance Data has no obligation to update the information presented on the call.

Also on today's call, our speakers will reference certain non-GAAP financial measures, which we believe will provide useful information for investors. Reconciliation of those measures to GAAP will be posted on the Investor Relations website at www.AllianceData.com.

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

Thanks, Julie, and for those listening, yes, we are still functioning here in Dallas, despite the fact we got a light dusting of snow, and the city has seemed to have shut down a bit. But we'll be open for the Super Bowl, not to worry. Let's get at it. Joining us today is Charles Horn, our CFO, and Ivan Szeftel, who is the President of our Private Label division.And most of you know Charles and have certainly met me, and have heard Ivan on some of the previous earning calls.

I'll give just a little more color, then turn it over to Charles. But both Ivan and I actually joined ADS at virtually the same time back in 1998, so it's been 13 years for us. And at the time, we were a private, tiny, debt-challenged, and looking to pull the trigger on buying a business in Canada called AIR MILES, and ever since then it's been a great ride for both of us. And given what's gone on in the last three years from a macro perspective, we certainly expect the next few years to be even better than the prior 10. So, having now completed this journey down memory lane, I'll turn it over to Charles.

Thanks, Ed. In the following slides, we compare against adjusted 2009, as it provides you a better sense of trends. We've attached a reconciliation to adjusted 2009 in the back as part of the appendix.

In total, we had a very strong quarter to finish a record year. Record revenue, record core EPS, and a record adjusted EBITDA in 2010.And this is true regardless of how you look at it, whether you look at it from the new accounting presentation in 2010, or the old 2009 presentation. For the fourth quarter of 2010, revenue increased 9% to $756 million, and for the year revenue reached a record level of $2.8 billion, a 12% increase to last year. Notably, income from continuing operations per share increased a robust 44% to $0.88 per share for the fourth quarter of 2010, and 38% to $3.51 for the full-year 2010. Core EPS increased 29% to $1.56 for the fourth quarter of 2010, and 26% to $5.86 for the year, exceeding our guidance of $5.70. Adjusted EBITDA increased 2% for the quarter to $193 million, and 15% to $823 million for the full-year 2010. In summary for 2010, we more than achieved our targets of double-digit revenue growth, double-digit adjusted EBITDA growth, and double-digit core EPS growth.

Let's turn to the next slide and look at LoyaltyOne.Revenue was up 7%, and adjusted EBITDA was down 15% for the quarter. In addition, adjusted EBITDA margin dropped 200 basis points for the Canadian AIR MILES reward program, and 500 basis points for the segment in total, primarily due to earnings drags we discussed during the last couple of earnings calls, and which I'll talk to you about again in a moment. For the year, revenue was up 12%, and adjusted EBITDA was down 3%.

As I mentioned, we continue to work through three earnings drags, and they are -- one, soft issuance combined with a lag effect of our deferred revenue recognition model; two, less amortization of deferred revenue associated with the conversion of the split-fee program to a non-split-fee program; and three, continued investment in our non-Canadian businesses. And again, our investment in non-Canadian businesses generally operate and generate operating losses. As previously discussed, we expect the first two earnings 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 reduced EPS in 2010 by about $0.15.

AIR MILES issued during the fourth quarter of 2010 were down 1%, due to the grow-over of strong promotional activity in 2009 by grocers in some of our geographies. This was partially offset by an uptick in credit card performance. On a positive note, AIR MILES issued increased over 6% in December compared to last year, and that's the first monthly increase in six months. This positive issuance trend continued into 2011, as January issuances increased a similar positive amount.

On the international front, we are now primed to perform national rollout of the dotz loyalty coalition program in Brazil. Our first national partner is expected to be Banco do Brasil, the number-one bank in this country of close to 200 million people. While the contract is still pending, both parties are currently proceeding under the assumption that the deal will be signed, and are working to link Banco's current credit card reward program to the dotz loyalty platform. This connection lays the foundation for an auto-conversion of some of Banco's accounts into the dotz loyalty platform in the near future. Accordingly, our regional and national rollout plans remain on track.

Looking ahead, the Canadian economy is expected to grow moderately in 2011, at around 2.5% to 3%. We believe that issuance from our existing sponsors will match that growth, and we will see incremental growth coming from the addition in full-year rollouts of several exciting new sponsors. Accordingly, we expect to see mid-single-digit growth in both issuances for Q1 and full-year 2011. Lastly, for the second year in a row, LoyaltyOne has been named one of Canada's best employers, in a study conducted by Aon Hewitt. The award, in part, is based upon high employee engagement, and organizational success.

Let's flip to the next slide, and look at Epsilon. Epsilon capped off a stellar year, with an exceptionally strong Q4, setting a new high for quarterly financial performance both top and bottom line, with $180 million in revenue and $50 million in adjusted EBITDA, representing growth of 27% and 23%, respectively. All of Epsilon's major offerings showed robust growth in Q4, contributing to the final tally for 2010 of 19% revenue growth, and 19% adjusted EBITDA growth; that is record performance. $613 million in revenue and $152 million in adjusted EBITDA.

Specifically, database digital offerings were up 25% for the quarter. Epsilon continued to on-board a strong backlog of large marketing and loyalty platforms in key verticals -- pharmaceutical, financial, retail, and consumer package goods. The digital volumes also continued to grow as expected, consistent with the ongoing industry migration toward low-cost, measurable, and personalized marketing channels like email. This core offering, representing 60% of overall Epsilon, continues to show resilience and sustainable double-digit organic growth. The remaining 40% of Epsilon's business includes the data business, which also contributed strongly, as we saw a healthy return to growth, and a gradual return to stability over the year, leading to solid double-digit growth throughout the year for Epsilon's Abacus offering, which is the market-leading data cooperative for retailers, cataloguer's and other verticals.

Finally, the Equifax DMS acquisition, which is now fully integrated, contributed solidly to performance over the back half of the year. As noted on the slide, the impact of the acquisition, as well as payroll expenses in the quarter associated with the surge of new client on-boarding and implementation, led to a temporary 100 basis point negative margin impact.

Summing up, a great year overall for Epsilon, with solid double-digit organic growth, a token acquisition that bolsters Epsilon's data offering, and creates promising cross-sell, upsell potential, and 10 major announcements, including Barclaycard in Q4. We're very pleased to have been ranked as the clear leader and number-one provider in the category, in an independent research report recently published by Forrester Research. Forrester's report, which details the eight top strategic providers in the industry, awarded Epsilon the high score for its current offering, and the top-ranking in database management.

I will now turn it over to Ivan to discuss Private Label, services and credit.

Thank you, Charles. I'd refer you to slide 6. The Private Label Group capped a year marked by significant recovery, with a very good fourth quarter. Fourth-quarter revenues increased by 4% to $354 million, bringing total revenues for 2010 to $1.386 billion, a 10% increase over 2009. Fourth-quarter adjusted EBITDA, net of funding costs, increased by 27% to $80 million, bringing adjusted EBITDA, net of funding costs for the year to $346 million,a 34% increase over 2009's adjusted performance.

These results were achieved despite the fact that a very significant effort was required to ensure full compliance with the requirements of the new CARD Act. In addition, the fee provisions of the CARD Act necessitated the execution of multiple revisions to our cardholder terms. As a result of both the cost and the revenue impact of these activities, our earnings for the year were reduced by approximately $28 million. The good news is that we have fully complied with all current requirements of the Act, and we believe we have fully mitigated any potential revenue implications.

Moving to the key drivers of our business, we see solid performance in all key metrics. Credit sales grew by 3% for the quarter, and 10% for the year. Solid gains recorded by many of our large apparel clients were dampened by continued weakness in our catalog, furniture and jewelry verticals, as well as the impact of discontinued programs. The relative fourth-quarter comparative sales and receivables levels reflect the anniversary of the acquisition of the Charming Shoppes portfolios in October of [2009].

Average receivables grew by 4% during the quarter, and by 15% for the year. This growth came despite stronger payment levels, where we saw increases of 170 basis points for the quarter, and 100 basis points for the year. The increased payment rates can be attributed to a combination of consumer payment patterns returning to pre-recessionary levels, and to a lesser extent, the increase in minimum payments we now require. We would expect a smaller increase in payment rates in 2011, as payment levels approach historic norms.

While higher payments do put pressure on receivables growth, they are beneficial to the delinquency levels. Gross yield was 26.4% for the quarter, and 25.5% for the year, representing 100 basis point increase over the fourth quarter of last year, and essentially the same annual yield as 2009. We would expect to see growth yields stabilize in the mid-27% range in 2011, as we anniversary the impact of the CARD Act changes. Principal charge-offs were 8.9% for both the fourth quarter and the year, representing a 60 basis point improvement over the prior periods. The fourth-quarter improvement was somewhat dampened by a delinquency bubble that originated early in the year, and moved through to [write-off] during the quarter.

As of December 31, our delinquent accounts were 5.4% of outstanding receivables, a 70 basis point improvement over last year's 6.1% rates. Delinquency rates continue to trend downward, and are back to following typical seasonal trends; this obviously bodes well for further improvements in our credit losses. Our loan loss reserve ended 2010 at 9.8%, down 80 basis points from the beginning of 2010. This decline is consistent with the improvement in actual charge-off experience. Looking forward, we are comfortable that our reserve rate is appropriate, especially in view of the fact that we expect to see a continued 60 to 70 basis point reduction in charge-offs in 2011.

Turning to our new business growth, after a slow start to 2010 due to the uncertainties of the CARD Act, we signed five new clients in 2010, two of which will be announced shortly. Our focus in 2011 will be to sign an additional two to three new clients for a total of four to five new clients, and then grow each of them over time to an average of at least a $50 million portfolio, resulting in a 4% to 5% increase in receivables. The pipeline looks solid, and as such, we feel confident we can accomplish this goal.

We have been receiving a number of questions recently related to the potential impact of the Federal Reserve's proposed changes to Regulation D, requiring that individual, instead of household income, be used in determining a credit card applicant's ability to repay. We and many of our clients believe strongly that this proposal not only has the potential to discriminate against stay-at-home spouses and the spouses of deployed members of the military, but that it also sub-optimizes the credit adjudication process. Household income is for the most part fungible, and as a result, an issuer could make a more accurate assessment of an applicant's ability to repay by taking into consideration the entire household's financial situation.

We currently use a multi-step adjudication process, with primary evaluation utilizes proprietary scoring models to score the applicant's credit bureau attributes. For those applicants who pass the primary credit evaluation, we apply an additional filter. This essentially ensures that the household's current income to debt obligation ratio is adequate to take on a new obligation. If not, we request additional information from the applicant before the credit decision is final. The key determinant of the credit decision has been, and will continue to remain, the applicant's credit history.

In the event the Federal Reserve's proposed changes are enacted, we believe that there are steps that we can take to mitigate any material impact to our approval base. These efforts would require a review of the criteria we currently use, as well as the possible expansion of the data we collect from the applicants. Bottom line, the proposed rules are a bad idea, but if enacted we've identified the revisions we would make to ensure that the impact to our business would be immaterial. That is not to say that certain customer segments won't be impacted, by either being required to provide more information at the point of sale, or in some cases, not getting the credit they deserve.

Today, we are a significantly stronger and more capable entity than we were just a few short years ago. Despite the economic downturn and the distraction of the CARD Act, we have made significant investments in both our core infrastructure, and in new emerging capabilities. You can expect these investments to reinforce our competitive advantage, and to ensure our continued growth.

As we enter 2011, we are very pleased with the trends we are seeing. The delinquency rates and principal loss rates are trending downward. Gross yields have recovered from one-time hits; funding costs are stable. Coupled with a renewed effort to sign new clients, I have every confidence that Private Label will have a very strong 2011.

Charles, back to you.

Thanks, Ivan. On the next page, I'll walk you through liquidity and capital. We'll begin by looking at corporate. And our corporate availability remains very strong at December 31, 2010. And it breaks down as about $50 million of cash available outside of our banks, which we have left, and borrowing capacity of about $450 million. So we have total liquidity of $500 million to continue to grow our Company and support our repurchase program.

The cash held at our bank subsidiaries is currently being used to support regulatory capital, as previously off-balance-sheet assets are transitioning into the calculations. This transition concludes March 31, 2011, and thereafter we expect to resume dividends from our banks to the parent Company. During the year, we used $149 million of cash to repurchase 2.5 million shares. Since 2008, we've used approximately $1.7 billion to purchase approximately 32.4 million shares, or almost 40% of the Company's fully diluted shares outstanding when the repurchase program began in 2008.

The share repurchase program continues to be an attractive use of liquidity, and we will consider our share price; any time it's considered under value, we will be very active. Along those lines, we expanded and extended our share repurchase program during the third quarter of 2010. The repurchase program now authorizes the repurchase of up to $400 million of the Company's common stock through the end of 2011, of which $328 million is available at December 31, 2010. Our debt levels continue to be modest. The key loan covenant ratio, core debt to operating cash flow, was 2.3 to 1 at December 31, 2010, substantially below the covenant ratio of 3.75 to 1.

Turning to our banks, we have approximately $2.9 billion available liquidity at December 31, 2010. Our regulatory ratios at the banks remain strong, and well above regulatory well-capitalized minimums, which are 6% for tier one, 5% for leverage, and 10% for total risk base. In summary, our balance sheet, liquidity and capital remain strong.

I will now turn it over to Ed to walk you through the 2011 guidance.

Thanks, Charles. The slide I'll be starting with is titled 2011 Guidance, and I think I'll make a series of comments as we go through our 2011 discussion; a lot of stuff up on the slide at the moment. But let's just finish up with 2010.

And I think if you step back, there's probably five themes, at least from my perspective, that we think of when we look back at 2010. And the first two that strike me is the fact that there's quite a bit of balance, as well as growth, during 2010. And specifically, all three businesses hit double-digit top-line growth. And that two of the three businesses hit double-digit EBITDA or operating cash flow growth. Again, a very good sign. The third thing would be record results. As Charles mentioned, no matter how you look at it, old accounting, new accounting, doesn't matter. Across all of the metrics we saw record results, and double-digit growth across all of our financial metrics.

Fourth -- quality. In 2009, no question about it, there were some items in there that were nonrecurring in nature. And as a result, we wanted to make sure during 2010 we had the highest quality possible, and/or call out anything that was considered nonrecurring or one-time. We did not have any of those in 2010. And so if you look back at 2009 versus 2010, and take out the nonrecurring items in 2009, you'll see 12% top line, 15% EBITDA, 26% on core earnings, and 38% on GAAP, not too shabby.

And the final item, probably the biggest one, is from a macro perspective. As Ivan has been right in the heat of it for the last three years, we finished 2010 in a very, very good position. We go back to 2008, and we're reminded of the financial or the liquidity crisis, and that, of course, had a deep impact on us, especially in our Private Label Group, as rates shot through the roof, and there was a lot of concern over credit. In 2009, the liquidity crisis changed, and instead we were looking at massive consumer delinquencies and write-offs. And sure enough, in May of 2009, we peaked at 10% losses. So we had to deal with that.

Then moving into 2010, we had one more crisis to go, and that was the regulatory crisis, or the CARD Act. And again, that hit the Private Label business, and Ivan and his team did a fabulous job working around the new regulations to make sure that we're in good shape both today and going forward. We did need to eat about $30 million as a temporary bubble. That run rate has now been restored. And as Ivan mentioned, any of the regulations that may be out there on the horizon, we feel comfortable will be immaterial to us on a go-forward basis.

So as we exit 2010, it was not only a strong year, but it was a year in which we put behind us the three great macro winds that we faced from 2008, 2009, and 2010, and therefore we enter 2011 not just excited about our business, but excited about the fact that for the first time since 2007, we don't have any of these headwinds facing us. And that's huge for us.

So that leads us into 2011. Very simply put, we haven't changed guidance since October. We're keeping guidance the same. We're calling for a minimum of at least $3 billion of top line, adjusted EBITDA of at least $900 million, core EPS of $6.75, and GAAP of around $4.66.

Again, growth rate, high single digits, on the revenue, low double-digit on EBITDA, mid-teens on core, 30%-plus on GAAP. Again, solid numbers, and despite the fact that we did over-perform quite a bit against expectations in Q4, we have not adjusted our guidance at this point. It's much too early in the year for that, but what we can say is we certainly feel even more comfortable with the numbers than we did in October. Also, it should be noted that this guidance does not assume any significant acquisitions. So to the extent we do a deal of size, that will be additive to these numbers.

If you look down the flow of the model, you'll see the leverage we get in the business from both an operating perspective, as well as from a massive share buyback we did over the last few years. And specifically, if you look at $3 billion of revenue and the high single digit organic growth, operating leverage will drive margin expansion and roughly double-digit EBITDA growth. We expect our EBITDA margin to finally hit 30% in 2011, and then as you continue to go down the waterfall, we're the type of company where we have very moderate capital expenditures. We're not out there building wafer plants or anything like that. So our CapEx is very light.

We're tossing off $400 million of free cash flow. And we now have 40% fewer shares than we did a few years ago. You throw that all together, and you can see how we can quite easily move to a mid-teens core EPS growth, and 30%-plus GAAP EPS growth. That's how the model works. And we continue to expect it to work that way for many years to come. Specific to the first quarter, we'll put a place holder in at $1.65 for core EPS, and that's roughly 20% growth. We certainly feel comfortable with that number.

Okay, let's move on to the individual businesses. LoyaltyOne, we're looking at mid-single-digit organic top-line growth. We are looking at mid-single-digit growth on EBITDA for the AIR MILES business, and low-single-digit growth overall in the segment once you layer in the losses of the international expansions. Now, probably the biggest item hanging out there is how we make money, which is issuing miles. When Shell or AmEx or Safeway comes out and issues a mile, we make money; the majority of it is put aside to cover rewards. The rest is profit for us. That's issuance. And over the past three years, our issuance has been flat.

During 2010, we certainly expected issuance to start creeping up again, post-recession; it didn't. That I believe led to a number of folks suggesting that the AIR MILES program has peaked, and that it will be a slow- or no-growth business for years to come. That's not the case. As we've said many times in 2010, the overall miles being issued did grow in the mid-single digits, which is our goal, but that was mitigated by a very large grocer sponsor that cut way back on promotional spend. As we move into 2011, that has been removed from the equation. And as I look at 2011, as Charles already mentioned, which is new news, in December our issuance for the first time since June popped to plus 6%.

In January, we actually just got the numbers in this morning, popped a similar amount, as well. So do two months make a trend? I don't know, but it's certainly a heck of a lot more encouraging than it's been since June. We do think that it looks like the big grocer that had pulled back last year, that has anniversaried.Also, we are seeing increased discretionary spend on the credit cards that we have up there. That would be the Bank of Montreal and the AmEx cards. So from our perspective, if we can do mid-single-digit issuance growth, we're back in the game. You throw in some CPI inflators, and all of a sudden you're up to your high-single-digit top line, and your low-double-digit EBITDA. That's the first step. So we're not going to call it a done deal until we have a couple quarters in the bag on the issuance side, but right now things certainly look to be going quite well.

Now, let's turn to some of our new, nontraditional growth areas, and specifically Brazil. Charles talked a little bit about that, as well. Let me tell you where we stand. The pilot that we'd been running for a year, in the region called Belo Horizonte, has gone extremely well. The number of folks who enrolled was higher than expectations. The activation rate was higher than expectations as a result of sponsors; they are very excited about continuing and expanding this into a full-blown program.

Additionally, we expect to start our national rollout on time, by the end of this quarter. Our first partner in the national rollout is expected to be Banco do Brasil, the largest financial institution in Brazil. As Charles also mentioned, we're still waiting for some ink on the paper. There are no business issues to work through; we seem to be stuck in a little bit of a process snag, but we are moving ahead, both parties are moving ahead operationally. And as Charles mentioned, we are linking both their reward platform with our reward platform, and we expect to flip the switch and start an auto conversion, hopefully by the latter part of the first quarter. So we're very excited about that, and getting that going.

And then finally, we expect to be signing some new sponsors. And we seem to be getting some great traction in three areas -- retail, power and QSR, which would be your fast food outlets. Overall, I would expect loyalty to move from relatively flat performance to mid-single-digit growth performance, and rollout Brazil nationally. And then by 2012, they should be back firing on all cylinders, both in Canada and in Brazil. And again, very encouraging with the new issuance levels.

Let's talk a little bit about Epsilon. We don't really say that much because a lot of people don't have any questions, and Epsilon tends to really just knock the cover off the ball quite a bit. In 2011, it looks like it's going to continue to zip along, with mid-teens growth; inherent in that is double-digit organic growth. And on the EBITDA side, we would expect high-teens or perhaps even as much as 20% growth on the EBITDA side. We expect Epsilon will continue to deliver the strongest growth in the Company over the next few years. The space in which it plays is probably one of the best spaces out there at the moment, in terms of taking advantage of the massive shift in spend, marketing spend, away from general purpose marketing and into these transactional-based micro-targeted loyalty and marketing programs.

Epsilon is the only player out there that has all five pieces of the puzzle. And again, when the Global 1,000 comes looking, they want someone who can sit there as we're creating a loyalty program, and start talking about the creative side, which some people call the agency side. Then, okay, we have the program, what data do we need? The Global 1,000 supplies data, we have a huge data business as well that supplements it. That then flows into massive databases, which are then used to develop various analytics and algorithms, which are then distributed out to the public, normally through digital means. And we did something like just under $40 billion permission-based emails over the last year.

Also, look for Epsilon to continue to bulk up, much like it did with the Equifax data deal last year. We will be looking at tuck-in acquisitions. So you have LoyaltyOne, their non-traditional growth would be international expansion. Epsilon, non-traditional growth would be a tuck-in acquisition, but again, those are secondary to making sure the main engines are firing. And I thought it would be interesting to share with you just at a very, very high level, what types of companies are coming to Epsilon, and wanting these massive new targeted marketing and loyalty programs. And it literally took me about three minutes, and I pulled off 10 verticals, which are very large contributors to Epsilon's growth. And they're all over the place.

So if you look at financial services, names like B of A, Citi, Cap One, Visa, AmEx, JPMorgan. Pharmaceutical, we have nine of the 10 largest pharma players in the world, AstraZeneca, Pfizer, names like that. Hotels -- Hilton Honors, Marriott, La Quinta. Packaged goods, Kraft, P&G, RJR. Not for profit -- National Geographic, AAA, AARP. Insurance -- Liberty Mutual. Health, Kaiser Permanente. Petroleum -- Exxon. Retail -- Walgreens, Office Depot, [Tech], Dell, AOL. That just gives you a sense of the breadth of what Epsilon can offer to the Global 1,000. It's hitting every single vertical.

Okay, not to leave Ivan feeling that we haven't covered his area, let's talk a little bit about Private Label services and credit. To remind folks, a lot of people, again, lump it all together and say it's a credit card.It's very important to understand when you're looking at why we can realize such robust returns on capital, it's because we provide much more than just the provision of credit, like a bank. We also do all the processing, the authorization, provide the network, it's a closed-hoop network. And as a result, you could lump it as services that a bank provides, services that a processor provides. We also do all the customer care, we do it on shore. Ivan has 3,000 folks working pretty hard at it.

And when we put it all together, of course, the goal is to get at the information and the data, and so we also run all of the data work required on a number of these Private Label loyalty programs, as well; so the data base and marketing. All of that is lumped together in this one segment. We expect in 2011 high-single-digit growth in top-line, moderate sales in portfolio growth, and very solid gross yields. In fact, I believe our gross yields are expected to actually tick up a little bit in 2011.

On the EBITDA side, that translates into double-digit growth. Very nice leverage, and continued improvement in credit losses. To give you a sense in 2009, our losses, which peaked around 10% in May, came in for the year normalized about 9.5%. This year we came in at 8.9%. And in 2011, we're looking at an 8.3%. And to give you a sense, our historical run rate is all the way down at 6%. And we fully expect that that will continue to be the case. And it will be an improvement. It's almost like an annuity, the gift that keeps on giving over the next few years until we get there, which means even after 2011, there's another $1.30 in earnings from 2011 to when we get down to historical run rate. So, it's a very nice piece of growth to count on.

We expect to have four to five new clients signed, as Ivan mentioned, two have been signed. We have not announced them. We will be announcing them this month. And they're both very nice, moderate-sized deals that are perfect for us.

So again, what's strong? Yields are very strong, funding is in very good shape, losses, delinquencies continuing to improve. What are we going to be working on? We're going to work on starting to catch up from the fact that we're behind due to the CARD Act, in terms of signing up new business. And also from probably the two points of growth drag that the recession hit us with, as some of our clients went bankrupt.

And how are we going to get there? Well, you certainly are seeing consumer spending return. We talked about new clients. And that should be more than enough to offset some of the burn-off we talked about, and the lag in the client signings from last year.

One final note, people have obviously talked about payment rates, the consumer seems to be retrenching and going back to basics, and revolving credit's tanking and all that other stuff. Is that bad?The answer is that's not really what we're seeing. What we're seeing instead is that payment rates, which were running around 17.5%, have reverted back to the historic norm. It was more the exception during the recession that payment rates started to come down, as you might expect.

So payment rates are doing nothing more than reverting back to where they were historically. And that gives us some comfort that the overall delinquencies and losses should also begin to converge on historic rates, as well. So to give you a sense -- anything with a 17% or 18% payment rate is considered a very, very nice prime portfolio, and that's just another example of it. Okay, so that's it for Private Label.

We go to free cash flow. Very quickly on free cash flow -- in Canada, obviously, we collect cash. We put a bunch in the trust account, the rest is profit. That profit does not get recognized in the P&L immediately. It's brought in over a period of time, so we have more free cash flow than profit. That causes about a $50 million difference between what we book as profit, and what actually shows up in free cash flow. So we'll do about $950 million of adjusted operating EBITDA. If you were to then net out Private Label funding costs, and what you'd be left with after core interests, CapEx, cash taxes, rate capital, you'd have about $400 million, which is over $7 a share.

How would you break that out? I would say roughly 53% of that is Loyalty and Epsilon, and the remainder is from the Private Label Group and their four divisions. We do have very modest leverage. What are we going to do with all the free cash flow? What are we going to do with our low leverage? Clearly, as Charles mentioned, we do have a good chunk left on our share repurchase program. We both feel the stock is attractive at these levels. And as a result, that would be a good use of liquidity, tuck-in acquisitions, principally for Epsilon. If there's a nice portfolio for Ivan's group in Private Label, we'd sure like to get our hands on that. And then the relatively modest, but they still exist, capital costs associated with going international.

All right. Let's finish up here. The business model, again, this is the long-term view, over six years from 2007 to 2012. What's really gone on here, and what's really gone on is back in 2007, which was sort of the last solid year from a macro perspective, we had balanced growth across all of our businesses. And in fact, as we moved into 2008, the AIR MILES business in Canada continued to have huge growth, 20%-plus. Epsilon had high-single-digit growth, and Private Label went negative. Overall, the earnings were up in the mid-teens.

In 2009, LoyaltyOne or AIR MILES was slightly down, Epsilon was still hanging in there with mid-single-digit growth, and Private Label was considerably negative at the depths of the recession. As we moved into 2010, again, Loyalty, Epsilon and Private Label all did double-digit top line, and Epsilon and Private Label did double-digit on EBITDA. That resulted in 26% core EPS growth, and 38% GAAP on a normalized basis. As we move into 2011, LoyaltyOne or AIR MILES, it's turning. We expect low-single-digit on EBITDA, mid-single-digit on revenue. Epsilon and Private Label should both have fabulous years. And that will eventually lead to mid- to high-teens earnings growth, 30%-plus in GAAP growth.

All this basically means is, if you look over a six-year period, by the time we hit 2012, Loyalty will be firing again on all cylinders, just like all three businesses were in 2007. So despite the recession, the liquidity crisis, the credit crisis, the regulatory crisis, what you'll find is a model that cycles up at different times, metrics will be stronger some years, weaker the next.But in the end, you put the three businesses together, and what you'll find is over the last six-year period, including the worst recession since the Great Depression, that we've returned mid-teens earnings growth consistently over that time period. And that's one of the reasons we like our model; not the easiest to understand, but it sure does work.

Okay. We're going to now move into Q&A. The bottom line, again, is that unlike 2008, 2009, and 2010, we're not facing any macro issues, whether it be liquidity, the consumer or regulatory. That gives us tremendous confidence that we're not going to be knocked out by some unforeseen headwind. We don't see anything out there; we see the numbers look very, very strong. We did reiterate guidance from October. We didn't update it, but we're going to let a couple quarters roll by and see how things go.

But we certainly are very, very comfortable with those numbers, and I guess our comfort is at such a level that for the first time since 2007, I can certainly say that we are already beginning to spend time working on 2012, and the type of renewals that are coming up, and the types of new clients we want to get. So, we're going to knock it out, the quarters -- each quarter out this year, nice and clean. And then we'll move on to 2012. Hopefully that gives you a good sense of what's going on.

That being said, why don't we take 40 minutes of Q&A, and then we'll go from there.

(Operator Instructions).Our first question comes from Jim Kissane of Banc of America-Merrill Lynch.

In the release and during the call, you keep alluding to a strong pipeline of acquisitions, especially for the Epsilon business. But it also sounds like across the business. So Ed, can you kind of talk about the M&A environment, valuations out there, the ability to do accretive deals. And since Ivan's on the line, make he can give us his perspective on the Private Label pipeline. More in terms of buying portfolios, thanks.

You bet. And clearly each business has a different sort of non-traditional leg of their strategic plan. LoyaltyOne is clearly going to be the development from scratch of an international coalition in Brazil, Ivan can talk about potential files that are out there. So really from an M&A perspective, we're talking about Epsilon. And what we're looking at in Epsilon is the very interesting environment out there while we're always looking at everything, Jim, the fact of the matter is, if you're talking about a deal of any size, to be quite frank, we're not competitive. What we are finding right now is that private equity can get leverage that I haven't seen since 2007. Frankly, I kind of remember that one ending badly. But that's just me.

But the fact of the matter is anything of size, private equity's going to be out there levering up 7 to 1 again, which -- we're not going to bid on those. What we're looking again is an Equifax type carve-out where you're talking a couple hundred million dollars. Most likely, it would add bulk to one of the five pieces of Epsilon, whether it's the agency side, the data side, the database, analytics, or the digital side. I'm not going to go into more detail than that. There are probably right now a half a dozen or so targets that we are very interested in, that would hit on those characteristics. And my guess is they're much more -- they're a much better fit with strategics and probably will fall out of the purview of private equity, I hope at least, and so we would expect any deal that we do to be consistent with a push the first year on core earnings worst case, and then accretive thereafter. So we're going to chase some, but we're not going to pay out for them.

Okay. Jim, there are a number of portfolios that are being shopped at this point. A number that we were interested in. But as you saw us through 2005, 2006, 2007, and 2008, we will be disciplined. You may see some what we consider out of market deals with very aggressive pricing. Our focus will be on those retailers who see a real value in using the card program to drive incremental sales. And really those are the folks that we will go after. What we find a lot of activity in, quite frankly, are some retailers that currently don't have programs, that are looking for the program to drive incremental sales. And you'll see as much if not more activity in those kind of start-ups from our perspective, as the acquisitions are portfolios.

Our focus is, who are those retailers that will work aggressively with us to drive incremental sales, those are the clients that we have the best work for. And as you've seen us before, we are not shy from walking away from deals, not dissimilar to what Ed mentioned. There were a whole bunch of deals done in 2006, 2007, and 2008 that turned out very badly, with many issuers looking to renegotiate those deals. That was not true of us.

Okay. That's great. Thanks for the call. Just one last question, Ed, can you take a stab at miles issuance growth longer-term? Thanks for the 5%, 6% growth for 2011, but do you think AIR MILES in Canada, just Canada can get back to, say, a high single digit rate of growth in miles longer term? Or should we just say mid-single?

I would use probably -- if we used to run around eight, I would say six is probably about right. Then add a couple of points for CPI inflators, and that's where you'll get your long-term top line of about 8%-ish and probably 10% or 11% for EBITDA.

And international accretive to that?

You bet.

Thank you.

You bet.

Thank you, our next question comes from Bob Napoli of Piper Jaffray.

Thank you. Good afternoon. Question on the interest expense. I'm sorry, I missed the beginning of the call. I'm not sure if you gave -- the securitization interest expense was down quite a bit quarter-over-quarter. Related to some -- I guess get a better explanation for that and the outlook for 2011 on the interest expense.

Yes, Bob, if you look at the securitization funding cost for Q4, it was little bit down on a sequential basis, a little bit year-over-year. It's really due to three things. If you look at our banks, we've been carrying a great deal of excess cash, over $200 million of excess cash that was supporting regulatory capital. In Q4, we finally decided to put it to use. Rather than borrowing, we used the cash. The second thing is, as the years progressed, we have been negotiating better rates. So as we've renewed, and some of the term debts rolled off, we've been putting in some better rates. The third thing that I'd point to, that's in the release is we did have lower expense related to the interest rate derivatives. And if you look at our financials, we have about $1.2 billion of interest rate derivatives, we recognize expense on. And they can fluctuate a little bit quarter-to-quarter.

And as we think about 2011, $27 million of interest expense. So, I think it brought your interest expense yield down, your costs down about 100 basis points. Somewhere between the cost of the third and fourth quarter, or --

I think what you'll see is for the year going into 2011, funding costs, a total funding cost including CDs, cash, the equity we deploy, a little below 4%. So you do get a little bit of a lower rate in Q4. But for the year, it's pretty reasonable. Slightly below four, I think that's what you'll see for next year.

Okay. And then the Epsilon business, what was the amount of revenue from the Equifax business in the fourth quarter?

The back half of the year, we had about $35 million of revenue, for the back half of the year, about $9 million to $10 million of incremental EBITDA.

And just trying to get a run rate on growth. Did you have the fourth quarter?

I don't have that, Bob. I'll have to get with you on Q4 alone.

Okay. And then the -- you are seeing more competition, I guess in the card portfolios? I mean, we've seen GE,who was going to get out of that business. I think they've become relatively more aggressive in that business. Capital One, I think, going after much larger portfolios. But I think there's some play in the $400 million portfolio from a retailer. Looked like it would have been a fit for you. Are you seeing a lot more competition from those two, or is there any -- in particular, or anybody else?

Well, what we are seeing is our competitors emerge from their slumber in terms of trying to retain the business they have, clearly around some of the very big portfolios. There appears to be heightened interest. But I would just remind everyone, that over the last two years, we continued to acquire existing portfolios. That was not true of our competition. But I would say, we are seeing a renewed interest in certain areas, from some of the established issuers.

Great. And what type of price premium do you feel is the right -- what kind of premium in receivables are you seeing?

In evaluating any deal, it's not just the stand-alone premium. There are various components to any. The most significant of which is what is the go-forward pricing to the retailer in terms of marketing support, et cetera. So it's really the combination of what is the acquisition price for the file, what is the ongoing marketing support. And you've got to look at the totality of both in looking at the viability of any. So it's a combination of those two. Again, it will vary dramatically depending upon the actual performance of the file being looked at.

Yes. Let me jump in here and make sort a general comment about, a lot of people try to comp us to bank cards. And that is something that's very hard to do on any type of -- what do you pay as a premium on the file. You really have to look at the cash flows. That's the same thing with the portfolios, because of the fact that we're wrapping together network processing, customer care, marketing database, and credit, the returns that we're going to get on our capital are two or three times the size of the returns of a bank card player. So therefore, if you were to pay 20% for a bank card player premium with us, you would think it would be something like a 3X multiple of that or something. You've really got to get into the cash flows.

Thank you.

Thank you, our next question comes from Sanjay Sakhrani of KBW.

I have a question for each of you guys.Ivan, I was wondering if you had any thoughts on how much of that growth that occurred in the fourth quarter could actually stick, and produce net growth in the first quarter. And if you could just remind us the credit impacts of the delinquency bubbles created from the CARD Act in the first half.

And then Charles, could you just go over that funding cost benefit? Why would the funding cost actually go up? Is there a one-time benefit in the fourth quarter, and then finally, just on Epsilon, just thinking through the top line guidance you guys have, it seems like you had a pretty strong second half, and that momentum would continue into the first half. Is it the second half that drops off a little bit, because the comps get tougher? I want to understand why we're expecting a drop-off in the top line growth in 2011. Thank you.

Sanjay, the growth you saw in the fourth quarter, we expect to continue into the first quarter, and we're expecting a very strong first quarter. So there's nothing in that, that is not go-forward momentum. In terms of the bubble in the first quarter, in the fourth quarter, I would say, you can look at somewhere around $5 million to $10 million of being the impact of that. As you know, we do have in the private label business, a seasonality to our losses, where losses in the fourth quarter historically have gone up fourth quarter over third quarter. So I would put it down to that. But again, to actually tease out precisely the impact of that bubble gets a little more difficult, which is why I'm giving you the range. Charles, anything else?

Yes. Back to securitization funding cost. I guess the easiest way to look at it is, I'll walk you through the three things. The one thing that from a GAAP perspective can create a little noise in the numbers is the expense you recognize on the swaps. The way I look at it is, for the year, our securitization funding costs were a little over $155 million, in terms of the derivatives, we had $7 million less expense for the year than what we did the prior year. So that's the way I would look at. It that's what the impact of the derivatives was, about $7 million. I'd say going into next year, if you look at all-in funding costs, which would be securitization, CDs, amortization of loan issuance costs, you're going to be somewhere in the high 3% to 4% range, even though it can vary throughout the course of the year on a per-quarter basis.

Okay. I think I'm next, Sanjay. I think you asked about Epsilon. From Epi's perspective, I think that we're looking for them to run high-teens to 20% EBITDA. They've been running in the low 20s, as you said, the last quarter or so. I would expect the EBITDA growth rate at Epsilon to start off equally strong in the first half of the year, as well.

So you're right, it should continue to zip right along. And if the rest of the year goes as well as it did in the first half, or the back half of this past year you could be up to around a 20% growth rate on EBITDA at Epsilon. In terms of revenue, clearly the highest growth rate of the revenue will come in the first half, and then it will slow down a little bit, as we anniversary the Equifax acquisition.

Maybe if I could ask one more follow-up for Ivan. Just on your response to my first question, I mean, you usually get pay downs, right, from the growth in the fourth quarter. Do you guys anticipate pretty significant pay downs, or what are the trends showing you through January?

Well I think it's part and parcel of what we said before, is that we've seen a higher repay rate in December than December of 2009. That has continued into January of 2011 versus January of 2010. But again, the other elements of the P&L are solid. The losses are continuing to decline, yields are up. There is some pressure on AR levels because of the higher payment rates. But Sanjay, they've been more than offset by the incremental yield and the low delinquencies that we've seen.

Great. Thank you very much.

Our next question comes from Darrin Peller of Barclays Capital.

Thanks guys, good quarter, and just a couple of questions on the long-term outlook on the Loyalty. It looks like Brazil is proceeding well, it's on track for the national rollout that you've talked about. What about the other country? Are those expenses still assumed to be the same level as assumed last quarter? Also, if you just could remind us, when you would expect some material impact from revenue from either of those two countries you're trying to roll that business out in.

You bet, I'll talk to where we are and then Charles can talk about the financials. Brazil, as you correctly pointed out, I think, is moving along nicely. The other country that we're looking at, we have hit the point now where we have identified partners. And we have selected a vehicle for investment, and we are beginning to pull together the initial stages of the coalition.

And as a result, I would expect to have an announcement before summer, in terms of a pilot, similar to what we did in Brazil. So that by the time this second coalition is ready for a national rollout, Brazil has fully turned the corner and is contributing positively to the financials of the Company. So think of them as staggered about a year and a half apart from each other. But the second coalition itself is moving along very nicely, and we've got quite a few players already lined up, and we'll be working on structuring over the next couple of months. And financially, Charles?

Darrin, the way it works, as long as we're a minority interest, it is an equity investment. So you have a one line item consolidation. So what we will do within the LoyaltyOne segment, we pick upon our proportionate share of any gains or losses related to the entity. That's what you see coming through the operating expense line. Right now, we're picking up losses. So until we get to a majority ownership or take control, you will not see any revenue coming through our financials, any operating costs coming through, because basically we will not consolidate until that point in time.

Okay. That part of the -- yes. That is actually part of the plan?

Yes. Down the road, as it continues to progress to our satisfaction, we will look to take the majority ownership and consolidate the results.

Okay. And the other business outside of Brazil, again, is a year and a half out from there, is that right, Ed?

Yes. I mean, we want to do the pilot, and if the pilot takes off like it did in Brazil, there's really no waiting, we just move right into the national role. We're trying to stagger it so, when Canada comes back, full speed really in the back half of this year, and especially in 2012, you've got Brazil fully rolled out. And you're easily absorbing any sort of final losses that are there before it turns positive. And then as move into 2013, you've got Canada going strong, Brazil going strong, and then you're absorbing a portion of the other country. And it's just the layering effect that you keep the whole segment growing pretty nicely over the next few years for sure.

Great. Just one more question in terms of guidance, just to confirm. While you do expect to use cash flow for buybacks, I think repurchases are still not assumed in your 2011 outlook for EPS, right?

What I did, Darrin, is we just gave a stipulated share count. The reason we did that is, we do plan to be active on the repurchase program, but conversely, as our share price goes up, we had more phantom shares come into our diluted share count from converts. So rather than try to estimate where our share price was going to go, and what the impact of the converts would be, versus how much we buy back, we just gave you a set number for reported diluted share.

Okay. Okay, understood. Very well, thanks, guys.

Yes.

Thank you. Our next question comes from David Scharf of JMP Securities.

Good afternoon. A couple questions. Ed, on the pick-up in AIR MILES issuance in December and January, I think you mentioned January was also up 6%, similar to December. Is it pretty broad-based among your sponsors, in particular, have you seen a rebound in Bank of Montreal to more discretionary credit card-related purchases?

Yes, let me -- let me answer that by backing up a second. And that is if you were to look at 2010, that 4.5 billion miles, whatever the issuance was, outside of that very large grocer, all the other sponsors combined were up about plus six. And so the grocer brought it all the way down to basically zero for the year. So what has happened is that now that we've anniversaried that grocer, and we're not seeing any weakness anywhere else, we're seeing a little bit of strength on the consumer spending side on both card programs, which would be American Express and Bank of Montreal, and as a result, we don't have any drags from a large sponsor pulling back, nor do we have the drag any longer from lousy consumer spend.

So you put those two together, and that's where you're kind of running it, your plus six, which I think is really where we want to be. Then add a couple points for CPI. But across the board, most of the other stuff was doing pretty well. It was just a little bit of weakness on the consumer spend side, on the cards last year, and the big pull-back from the grocery chain. Those have, it looks like, dissipated at this point. So all we need is everyone to just keep doing what they're doing, and it should be a good run.

Okay, Ed. That's helpful. Switching to Private Label. You had mentioned, by March 31 you'll be in a position to start dividending cash back up to the parent. Can you give us a sense for how much you're anticipating for the nine-month balance of the year? Obviously that's a primary source issue, repurchasing.

I think what we can say is that our dividend policy is driven by the capital needs of the Bank. I think the issue around the March 31 is, that will be the final phase in of receivables in terms of the rules that have been established for capital calculations. So I would say that clearly, it's our intention to declare dividends in 2011, but we'll have to see how things go in terms of ensuring that the banks are adequately capitalized. So if it's not March, it will be presumably the first half of the year.

The key thing I would add, David, is we have considered what we believe the dividends back from the Bank will be, and the free cash flow numbers we gave you on the charts.

Oh, okay. That was really what I was getting at. Perfect. Then lastly, -- I'm sorry.

Yes, it has been considered in that number.

Okay. Charles, just lastly, another question on the interest cost. As you referenced building up cash at the Bank, when we think about our modeling in addition to the -- it sounds like a high 3% effective rate in 2011, that you've locked in, it looked like the conduit balances I know at September were a little over $400 million. Were those balances probably brought down by year-end? Should we be thinking about a lower number to start the year?

Let me put it this way, David. I think you're going to see a shift a little bit toward more CD funding, more conduit funding, and maybe less in the amount of fixed rates funding we had in place. Ending this quarter, we were about 90% fixed. With us now moving to Delaware, and having a variable rate program, we will likely move to more variable rate funding. So I think what you'll see is, term debt comes due, we'll look to pay it down, use more variable rate funding at the conduit, which is cheaper, do more funding under CDs which is cheaper, and that will help drive the rate. So I think you're going to see a shift away from term. As much term securitization funding, as we do to more variable funding. And that does give you the ability next year to get a little bit better funding rates.

Perfect. Thank you very much.

Thank you. Our next question comes from Robert Dodd of Morgan Keegan.

Hi, guys. On the payment that you talked about in your comments, can you separate the effect of normalization to -- going back to a more moderate credit environment in terms of consumers paying down, versus the effect that the minimum payment change had in the fourth quarter?

I think it's a little premature for us to do it. You'll recall that some of the last changes only occurred in November. I would say that we'd need to see it. But again, our expectation is that the vast majority of the impact is people reverting back to pre-recessionary payment levels. When we implemented the minimum pay changes, we did a fairly exhaustive analysis of, what were those new minimum requirements, versus what people were actually paying before, and quite frankly, the change we made impacted a relatively small percentage of the buy-off. So that's why the vast majority we believe is a function of consumers going back to their previous issuance habits.

Yes. Another way for some of the folks out there who just need to jog their memory a little bit, is when we changed the minimum pay, there is a perception out there that a lot of folks are going to be sitting there who used to pay $15 and then have to pay $25 and oh my gosh, that's going to cause a big problem. The fact of the matter is when we went through, when Ivan went through and looked at the file, 90%-plus of folks were paying well above the minimum anyhow. That would lead us to believe that very little of what we're seeing is a result of that restructuring, and it just kind of makes sense, therefore, that seeing a 17.5%-type payment rate, seeing the losses and delinquencies coming down nicely, is very consistent with pre-recessionary levels.

Thanks. And just on -- second on the credit business or the card business for a moment, are you -- what's your view of any risk to extra regulations on originations, in terms of who could apply for a card or qualification criteria for a card? And are you seeing applications pick up right now, or is the spending changes just a function of same-card spending per quarter?

In terms of applications, certainly one of the element that the CARD Act did address in the early part of the year was special procedures for folks that were under 21. We clearly saw for a period of time during the middle of the year, that particular consumer segment was impacted until both we and our clients were able to install technologies to address the new requirements. So that clearly was an issue for a period of time, for the most part, that is behind us.

So in terms of the acquisition side, that is not an issue. As I said earlier, in terms of market share for the vast majority of our clients, we are in fact seeing at least tender share or market share equal to or above what we have seen in previous years. But there is a drag. The drag, the burn-off files, where the programs have been terminated, which were 2%, 2.5%, and we are seeing certain moderately-priced big ticket retailers having a difficult time of things. We've got clients in the midwest and we have a furniture retailer in Detroit, who's not exactly the best place to be, and that is having an impact.

I would also say that the bigger tickets are being impacted, which in turn has some impact on payment rates, because on the bigger tickets where we have promotional programs, the repay rates are very much lower. So if I were to summarize it, the biggest impact is around that. We'll also see another differentiation, retailers catering to a higher income demographic seem to be doing better than those that are catering to customers with more moderate income. So but on balance, that is the bigger issue.

Okay. Got it, thank you.

Thank you. Our next question comes from Bill Carcache of Macquarie.

Good evening. I have a follow-up question on a comment you made earlier about AR levels. Can you help us understand how to think about loan growth for the Private Label portfolio, in relation to loan growth for general purpose credit cards? Some of the card issuers have talked about expecting some modest loan growth, as we move forward through 2011. And I was just curious to hear your thoughts on how loan growth would differ if at all for Private Label. And then, Ed, I wonder if you could share your thinking on whether AmEx's announcement mid December that it was acquiring a loyalty partner signals an increase in the level of competition for loyalty assets among bigger players, and what that could mean for ADS as you work to grow your loyalty business in other geographies.

Can I start, Ed?

Please.

I think it's important that you draw a clear distinction between the Private Label and the general purpose cards. The significant erosion that you've seen amongst general purpose cards is a function of a number of things, not the least of which are a significant tightening of credit card standards, withdrawal of cards, reduction of credit lines. We did almost none of that. For us, it was very much more around trying to continue to drive the sales for our client. And we've seen sales continue to grow.

So I think in terms of the two, with us it becomes -- with Private Label, it becomes more a function of what are our retailers in total doing, are they continuing to grow, are our market shares growing with them. Are we continuing to bring on new clients to grow the receivables? So I would feel comfortable saying that you could expect growth at the very minimum in the mid-single to high-single digit range. That could be accelerated, depending upon whether there are portfolios of size or relationships of size that you acquire. As you saw us do in 2010, with a double-digit growth, a big chunk of which came from the acquisition of single portfolios.

Yes. I think just to finish up and then I'll jump in with your question, or I'll try anyhow, is that if you look at our model for Private Label, it's not about just getting balances and growth in the balances. Historically, we've probably run over the -- the 13 years I've been here, about 9% or 10% and they'll fluctuate up or down. We're probably looking at mid-single digit, as Ivan said, over the next couple of years. But you combine that with an extremely stable and relatively robust gross yield as Charles said, a little bit of a kiss on the funding side, as rates have come in. And then of course, you've got another three years before our losses come all the way down. So you put them all together, and you wind up with mid-single digit portfolio growth, can certainly lead to 10%, 11%, low double-digit EBITDA growth. That's the model, and something that will take all day long.

In terms of your question about AmEx's acquisition of the company in Germany, I guess two comments there. One would be it was certainly a very healthy multiple. So I guess that's suggestive of people beginning to get into the groove of all this Loyalty stuff. We're very familiar with the company. We looked at it more than once. We were not quite as excited about price levels as AmEx apparently was,but that's fine. What it signals to us is, clearly more people are getting on the bandwagon of either a very sophisticated coalition program to drive loyalty, or the Epsilon model of a one-off highly-targeted-type ROI-based program.

You can look at the -- that program in Germany right now, does that enter into any type of competitive threat to us? No, it doesn't. We're not in Germany or a couple of other countries that they are beginning to put their toe in. So it certainly doesn't hit Canada, it doesn't hit Brazil, and it doesn't hit the other country we're looking at. Also, if you look down in Brazil, Multiplus, of course, is another program down there that's quite strong and quite valuable. Aeroplan up in Canada is also fairly competitive in that space. So my gut tells me, overall there will be a lot more activity in the loyalty space because that's what the Global 1,000 are searching for, is some way to get the consumers to stick.

That's very helpful. Thanks.

Okay. Why don't we do one more.

Your last question comes from Carter Malloy.

Hey, guys, thanks for taking my question here. So just looking at the Epsilon business again, and the momentum you guys are stepping into this year, obviously a lot of big client wins last year, what keeps that up this year? Is it macro, or is it really more signing of new people, expansion within existing clients? And with the new clients that are coming in the door, are those guys just building out new programs, going after new Loyalty partner programs overall, or is it really more competitive wins?

Yes, it's Ed, I'll take it. Historically, and I don't think we're giving away any secrets here, but historically, 60% of the growth in Epsilon is organic growth, comes from existing clients. So yes, we did sign and board a huge number of big-name clients during this past year. But recall that as we look at 2011, probably two-thirds of the growth baked into the plan is coming from the existing client base, either the older clients, or the ones that we've already boarded in 2010.

So does that mean we don't expect to be announcing the type of wins that we had in 2010? No. That's not the case. You'll be seeing sooner rather than later, a number of very large and significant Epsilon wins, and as I mentioned, I mean, they're coming from all the different verticals. So I think what you'll find is a continuation of, if I thought Epsilon's long-term growth rate used to be 10%, I would say that's no longer the case. And you're probably talking organic growth rates more in the mid-teens, and again, 60% of that comes from large clients who start with Epsilon, like what they see, and tend to start displacing other providers.

Okay. And then the growth within Abacus there, assume that's existing catalogers and existing clients, or is that actually new people coming onto that platform, as well?

Yes. That's a good question. Abacus has been really interesting. It's turned very quickly, and from the amount of names that it's been providing to the catalogers, the catalogers continued to be very active. And again, the demise of the catalog is greatly overstated because I know at least in my house it's the kids love to look at the catalogs, and then pull my sleeve to go online to buy the stuff.

But what you're seeing is a resurgence of the number of books that are being dropped by existing catalogers, and you're seeing catalogers who had never joined the coalition before, in certain verticals. Some may be like not-for-profit. They're beginning to be added to the coalition, as well. So it's a little bit of both.

Okay. And then lastly, you guys may have said this earlier but I missed it. On tax rate this quarter, what drove it down, and then should we expect it to jump back up to around 38% going forward?

No, the way I'd be looking at this, you're going to be lower than 38 in 2011. Basically what we had, Carter, was the true-up of the effective tax rate based upon our estimates. You start the year, you're estimating what your pretax income will be, what your foreign source income will be, your permanent differences. And then basically, I was probably a little bit conservative throughout the year. We get to the end of the year and permanent differences were a little bit lower, foreign source income was a little bit advantageous and so we shoot up the right. Going forward into next year, I'd say we could have ability to come in the 37% in terms of our overall ETR.

Okay, thanks.

Okay. That's it. Thank you very much. And I'll talk to you next quarter.

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