Bread Financial Holdings Inc (BFH) 2011 Q4 法說會逐字稿

Good afternoon and welcome to the Alliance Data fourth-quarter and full-year 2011 earnings conference call. At this time all parties have been placed on a listen-only mode. Following today's presentation the floor will be open for your questions. (Operator Instructions)

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

Thank you, operator. By now you should have received a copy of the Company's fourth-quarter and year-end 2011 earnings release. If you haven't, please call FTI Consulting at 212-850-5721.

On the call today we had Ed Heffernan, President and Chief Executive Officer, and Charles Horn, Chief Financial Officer of Alliance Data.

Before we begin I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and 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. Reconciliations 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, and welcome. We are aware it is earnings season and everyone is pressed for time, so we will be respectful of your time this morning. And also, hopefully, we will give everyone a very good start to the day as we talk about our record 2011 earnings, which came in nicely ahead of our expectations and also drove our decision to come out of the gate raising 2012 numbers. It does look like it's going to be a superb year in 2012 thus far.

With that being said, let's get right at it. I will turn it over to Charles Horn, our CFO. He has finished his cup of coffee and is ready to go.

Thanks, Ed. It was a great quarter and another record year. We will start by looking at the fourth quarter.

Our revenue increased 12% to $848 million. Our EPS increased 33% to $1.12 per share. A very meaningful core EPS number increased 9% to $1.70, beating the Company's guidance of $1.46. If we exclude the year-over-year build in phantom shares which you see on the slide, our core EPS increased 17% year over year and adjusted EBITDA, net of funding costs, increased 21% to $194 million.

You routinely hear us talk about phantom shares and many of you ask why do we point them out. The simple answer is because we never have to economically settle them. They come into our share count due to accounting reasons but nothing else.

So if you look at the slides you can see our phantom shares added 4 million and 2.8 million shares, respectively, to our diluted share count for the fourth quarter and full year 2011. As a result it created a drag on core EPS of $0.12 for the fourth quarter and $0.39 for the full year 2011.

Summarizing for the year, we achieved double-digit growth in our numbers. Revenue up 14%, EPS up 57%, adjusted EBITDA net of all funding costs up 35%, and core EPS up to 30%. A remarkable year.

Let's flip to the next page and talk about LoyaltyOne. LoyaltyOne came in consistent with our expectations for the quarter as we had anticipated an unfavorable exchange rate environment and lower collector redemptions as a result of active program management.

For the quarter revenue was down $10 million, or 4%, due to a $2 million negative impact from exchange rates and a $9 million decrease in redemption revenue. The decrease in redemption revenue was due to a conscious effort by management to pull back the burn rate compared to the fourth quarter of 2010.

Adjusted EBITDA for the quarter was consistent with the fourth quarter of 2010. Unfavorable exchange rates lowered adjusted EBITDA by approximately $500,000 while incremental costs associated with the expansion of the dotz coalition program in Brazil was a $2 million drag for the quarter. Excluding these items, adjusted EBITDA was up 6% for the fourth quarter of 2011.

The key metric for AIR MILES, AIR MILES issued, increased 10% for the quarter, the highest percentage increase of 2011 and the highest since the third quarter of 2008. This large increase shows that both collectors and sponsors remained highly engaged in the AIR MILES program. It also drives immediate cash flow and positions us for strong revenue growth in 2012 and beyond.

As discussed before, we continue the rollout of the dotz loyalty platform in Brazil. Enrollment in the program continues to exceed our expectations as we ended 2011 with over 1.6 million collectors. We estimate that this number will grow to over 3.5 million collectors by the end of 2012.

During the fourth quarter we announced a program enhancement for AIR MILES, the addition of an instant rewards option. Collectors in the AIR MILES program beginning in the first quarter of 2012 will have the ability to allocate some or all of their AIR MILES collected into this option. It will provide collectors with an instant liquidity at the point of sale with participating sponsors.

Both the sponsors and collectors have been asking for this enhancement and we delivered. We anticipate that AIR MILES earned under this option will have a shorter life, perhaps as short as 12 months, with only a nominal number going unredeemed. Profitability to LoyaltyOne for this option will be from the pricing of the redemptions or gross margin rather than the more traditional breakage.

Let's turn to the next page.

At the same time we announced that all existing and future AIR MILES reward miles will have a date stamp of five years. This is a common industry practice. The implementation has no immediate accounting impact to LoyaltyOne. Rather it just expires miles already considered dead for accounting purposes. All this does is crystallize the breakage rate over the next several years.

As we have talked about in the past, management routinely pulls levers to keep the AIR MILES program tracking to a 72% ultimate redemption rate. As you can see on the chart, aside from 2010, which was somewhat of an anomaly, our burn rate has been below or at the ultimate redemption rate. As of December 31, 2011, 59.9% of all miles issued since inception of the program have been redeemed. As expected, the upward trend in the cumulative redemption rate is flattening.

Let's flip to the next page and talk about Epsilon. Epsilon had another excellent quarter with the revenue up 42% and adjusted EBITDA up 29% compared to the fourth quarter of 2010. Excluding the acquisition of Aspen, revenue and adjusted EBITDA increased 4% and 13%, respectively, for the quarter.

Data digital revenue increased 11% compared to the fourth quarter of 2010, continuing a long trend of double-digit organic growth. A robust backlog and pipeline should continue this double-digit growth into 2012 and beyond. Data revenue was up 1% compared to the fourth quarter of 2010. Softness continued in the consumer demographic portion as consumers pull back on prospecting volumes.

On a positive note, Abacus, which is our cooperative catalog division, showed improvement with revenue up 3% in the fourth quarter. This compares to the flat year-over-year growth in the third quarter of 2011. We expect some softness in data to continue into 2012 with the revenue growth expected to be in the low single digits.

Our agency/analytics had a strong quarter benefited by the Aspen acquisition in the second quarter of 2011. Aspen continues to exceed our expectations and provide depth to our pipeline for 2012.

Adjusted EBITDA margins for 2011 were down 170 basis points compared to 2010 due to the Aspen acquisition. As you can see on the chart, excluding Aspen, adjusted EBITDA margins increased 40 basis points compared to 2010, reflecting the operating leverage in the Epsilon business model. As we have talked about for several quarters, Aspen carries a lower adjusted EBITDA margin than the rest of Epsilon, even with the expected cost synergies that will likely continue into the future.

The addition of Aspen, however, greatly augments our Epsilon offering. One, it completed our end-to-end marketing solution; two, it opened up new previously untapped verticals; and three, it provided tremendous cross-sell/upsell opportunities. The prospect for revenue synergies is expected to drive EBITDA margin expansion for Epsilon in the future.

Let's flip to the next page.

You routinely hear us talk about the end-to-end marketing solution, so what we have done is we have provided you an example here. For example, when Citi decided to launch the premier loyalty program Citi ThankYou in 2004 they turned to Epsilon to design, build, and host the core platform.

Over the last seven years Epsilon has extended from that platform to, among any many things, deploy and manage a multichannel marketing communication platform, to manage Citi's outbound permission-based e-mail marketing campaigns, and recently to assist Citi's innovative move into social media with the launch of the Citi ThankYou Facebook application.

Epsilon's role was to build the Facebook app pulling together creative, technology development, analytic and data management services, and to integrate the app back into the core loyalty program. This is how it works.

ThankYou members are invited via Epsilon's e-mail platform to download the Facebook app. Members invite other Facebook friends to pool Citi ThankYou points across their personal social network. This point pooling approach enables consumers to use the group's aggregated points to earn rewards at an accelerated pace. Because the app is resident on a member's Facebook page, Epsilon has helped Citi to extend its brand presence into the member's personal social network.

Clients like Citi are enhancing their customer brand experiences by taking advantage of Epsilon's end-to-end solutions and extending the use of data, technology, and customer insight into new channels and customer applications. We continue to see strong growth prospects for the business with these innovations and with the added service capabilities that Aspen brings to the table.

Let's flip to the next page and talk about Private Label. Private Label finished 2011 strong with revenue up 7% and adjusted EBITDA, net of all funding costs, up 33% compared to the fourth quarter of 2010. An excellent quarter to conclude a record year.

Perhaps equally as important was the positive momentum generated during the quarter which is seen in four primary areas. The first is receivables growth. The long wait is over as growth materialized during the quarter. Average credit card receivables increased 3% compared to the fourth quarter of 2010 while ending credit card receivables increased 6% from December 31, 2010, setting the stage for strong growth in 2012.

The second is cardholder spending. Credit sales accelerated each quarter as 2011 progressed, up 5% in Q1, 9% in Q2, 10% in Q3, and 13% in Q4. Cardholders continue to be actively engaged and appear to be feeling better about their personal situations.

The third is portfolio quality. Entering 2011 management expected improvement in credit quality. This improvement happened somewhat quicker than what we had anticipated and looks to be continuing into 2012. For the fourth quarter of 2011 the principal charge-off rate was 6.3%, down 260 basis points from last year. This compares to a 200 basis point improvement for full year 2011.

The fourth item I will talk about here is the funding cost. Funding costs improved steadily during 2011 concluding with the placement of term ADS in the fourth quarter at the lowest all-in pricing in the history of ADS. Our cash funding rate for all card-related borrowings, which excludes noncash items, was 3.3% in 2011, 30 basis points better than 2010. A similar improvement is expected for 2012.

The last item I will talk about is new program growth. Our target entering 2011 was five new Private Label programs; broken down, three startup programs and two existing programs with files attached. We exceeded that target signing seven new programs during 2011, four of which had files attached.

These signings had only nominal benefits to 2011 as the two largest files, Pier 1 and Bon-Ton, are expected to be 2012 closings. The addition of these two files or portfolios is expected to boost year-over-year receivables growth to the mid-teens for 2012.

The outlook for 2012 for Private Label is solid. Receivables growth, coupled with declining loss rates and cheaper funding rates, should lead to higher profits.

Let's flip to the next page and we will give you a quick update on liquidity. At the corporate level, we ended 2011 with a robust $600 million of liquidity at the corporate level. Entering 2012 we plan to be opportunistic and raise additional liquidity as market conditions permit. Essentially, we will look to increase our dry powder by terming out borrowings under our existing revolving credit facility.

Our net corporate debt was $1.97 billion at year-end, a very moderate amount given that it equates to approximately 2x adjusted EBITDA and only slightly more than 3x our expected 2012 projected free cash flow. At the bank level we have approximately $2.2 billion of available liquidity at December 31, 2011.

We issued $350 million of public fixed-rate, term asset-backed securities during the fourth quarter of 2011 with an average life of approximately 3.6 years and a weighted average to fixed-rate coupon of just under 2%. We will look to increase the amount of term ABS placements in 2012 in order to lock in long-term low-cost funding.

Regulatory ratios at our banks remain strong. WFNB capital ratios were 15% for Tier 1, 14% for leverage, and 16% for total risk-based at December 31, 2011. This compares to well-capitalized minimums of 6% for Tier 1, 5% for leverage, and 10% for total risk-based. Due to these robust capital ratios our banks dividended $55 million to ADS during the fourth quarter.

The last thing I will talk about here is the share repurchase program and it continues to be one of our anchor strategies. During 2011 we acquired 2.9 million shares for aggregate consideration of $241 million. During the fourth quarter we announced a new $400 million repurchase program for 2012.

I will now turn it over to Ed to walk you through our updated outlook for 2012. Ed?

Great. Thanks, Charles. I am on the slide, 2012 Trends and Expectations, and I think it would be helpful if we step back just for a second and talk about the assumptions inherent in these expectations.

First, sort of a general couple of statements on the overall macro environment. I don't think it's anything stretching, but it's essentially saying that we expect continued tepid growth in the macro economy, call it 2% real GDP. We do expect modest job creation; however, not enough to really make a dent in the elevated unemployment level. And we expect the continuation of low interest rates.

So those are sort of the assumptions underpinning our expectations for the year. They seem fairly reasonable from what we are seeing out there.

Then more specifically, let's talk about our sandbox. In our sandbox we are really focused on the $400 billion of annual spend in the marketing space that has continued its long-term shift towards direct data-intensive targeted marketing and away from sort of the general marketing that characterized the industry a couple of decades ago.

The important thing is here is the market is, in fact, growing in these direct, data intensive channels. In fact, the aspects in which we compete, the organic growth rate in these markets themselves is about 7% growth. So it's a very, very attractive market.

As we all know, it's a lot easier to grow when the overall market is growing. So we focused our energy on this space, this subsection of the $400 billion that is in fact growing very nicely, and it's important because it does cover all three of ADS's businesses.

So whether it's a one-off type program, like a Hilton Honors over at Epsilon or a large coalition program as in Canada or a one-off loyalty program in private -- with a credit component in Private Label, all three of the businesses are driven by ultimately getting at the data from the consumer and then using that information to help micro-target to those existing consumers or to acquire new consumers. So bottom line is we believe the market itself is growing quite a bit faster than the overall GDP.

Specifically, if we look at the divisions, you have Epsilon which came out of nowhere a few years ago and is on pace to top $1 billion in revenues this year which will certainly be a great milestone. We expect strong double-digit revenue and EBITDA growth to continue. We do expect that most of our efforts will be on further integrating the different parts of Epsilon.

To put it in perspective, we started the process of creating the overall epsilon model back in 2004 so it has been a seven-year process. And the idea was to essentially replicate what we have in the other two businesses, which is a one-stop, end-to-end solution catering to large corporations. Over the past year we completed that with the addition of Aspen providing a big footprint in the digital agency space.

And so now we have really the only global full-service end-to-end business that can provide everything from the creative or agency. We have an enormous amount of data, both demographic and psychographic. That can, of course, churn through the database, produce very fancy analytics, and help our clients target on a micro basis many, many segments of their consumer base or for customer acquisition.

So you put that all together and it's like, well, that is a neat little mouse trap you have got there, but it's also important that you have the right distribution channels as well. Not every distribution channel works effectively with one person over another.

And so as exciting as everyone in the digital world is about all the different channels there, let's not lose focus of the fact that for the Global 1000 it's also important to have a very strong presence in the traditional world.

So what we have done is we have also put together the complete distribution channel, everything from your more traditional point-of-sale and direct mail approach to your sort of beginning digital offering, which is permission-based e-mail. We did 40 billion permission-based e-mails over the past year, another record. But also increasingly getting into mobile display and, as Charles talked about, new initiatives in the social space.

So the idea of having the information as well as having all the distribution channels is extremely attractive to the Chief Marketing Officers of the Global 1000. As I call it, we like to serve as the one throat to choke and that is our job.

That being said, with the buildout of Epsilon now complete M&A is not a major emphasis for 2012. We will, of course, be opportunistic if something comes along, but right now we believe we have got the machine built. And so the focus is very simple; it's to continue to drive double-digit growth.

Second, and this is also critical, is we want to make sure that when we are dealing with the Global 1000 that they view Epsilon not as just a provider of digital agency or analytics or distribution or data, but they view Epsilon as the place to go to handle their entire needs when it comes to this targeted marketing.

And so much time and effort will be spent on integrating all the different parts of Epsilon and the sales teams to make sure that we are selling no longer a $3 million or $5 million contract, but a $40 million or $50 million contract. And that is the ultimate goal. Very similar to the other two parts of the business where it's all or nothing with our client. So stay tuned, we have got some pretty neat things in the pipeline.

Let's not forget the other two areas as we move to the next page. Charles talked at length about LoyaltyOne. Obviously, the bulk of that is our AIR MILES business in Canada.

We were very, very pleased that the key metric, which is -- if you want to call it miles issued, points issued, whatever it is, it's when a consumer spends some money and generates some miles or points. That had been stalled, for lack of a better word, for about three years and that came roaring back last year as the team did a wonderful job of driving incremental sales growth, as well as getting additional commitments from existing sponsors, and having a very successful year bringing on new sponsors especially in the retail vertical.

So that key metric was up very nicely and we expect that to continue in 2012. We are looking for 5%, 6% type issuance growth for 2012 and revenue tends to follow that over a long period of time. So we expect revenue and adjusted EBITDA to be -- again, it's 100% organic, tracking up in the mid-single digits, the trends look favorable.

What we are seeing is the growth behind it really is coming from three areas. One is new sponsors. We are getting additional successes in the retail vertical, which you will see. Again, we also are seeing a bounce back in some of the nondiscretionary spend as well as discretionary spend on the credit cards that are up there with Bank of Montreal and American Express.

And then also the new offerings. We talked about the launch of the AIR MILES cash option, which gives a number of our collectors what they have been asking for for quite some time. So I think you put all that together, we should have a pretty good year in Canada.

Also, needless to say, we are pretty excited about how the Brazilian venture is progressing. We did take a go-slow approach to sort of test the waters a couple years ago. Last year in 2011 we rolled it out to a couple of the regions and what we found was the acceptance rate was quite a bit better than we had anticipated.

It seems like timing is half of it and the timing seems to be right for Brazil. As a result, we have made the decision, and it's reflected in our guidance, that we will use a bit more of some of what we expect is over performance in 2012 in order to fund the rollout of additional regions in Brazil. So rather than an additional two regions we are looking to double that and roll an additional four regions in 2012.

We had 1.6 million folks enrolled by the end of 2011. We would be disappointed if we came in less than 4 million by the end of 2012. And to put it in perspective, Canada, which has been around for 20 years, the AIR MILES program, has a total of 15 million. So you can get a sense of how quickly this thing is ramping up.

Obviously, we will need more than 15 million eventually to replicate the size of Canada because of the demographics are a bit different. But needless to say, that is going to be our critical metric that we will share with you over the next several years as this thing spools up.

Finally, private label. No other way to say it, this year is going to be characterized to the good in the sense of it is a return to the very basics, old-school growth. And that means we are not looking for driving big numbers from funding, from credit quality improvements, from op improvements, from yield enhancements or any of that stuff. Yes, many of those will contribute to better earnings, but behind it all, really after quite some time of relatively stagnant file growth, we are now seeing finally very, very strong acceleration in both credit sales, people using the card, and portfolio growth.

January is no different. I think we are seeing somewhere around mid-teens credit sales growth in January. So folks are spending, and that will drive high single-digit growth in the portfolio that we are seeing in January. That will continue as we bring online, as Charles said, some of the new signings from last year, which was a year of record signings. That will bring on additional growth as the year progresses.

As you roll in the Pier 1s, the Marathon Oils, J.Jill, Petland, [Cycle], Christopher & Banks, all signings from last year, you are going to get that growth rate into the double digits on the portfolio which is a number we haven't seen in quite some time. So it does look like everything is heading in the right direction.

What is also pleasing is that the 2012 pipeline looks equally robust. Obviously, there has been some chatter out there about the Bon-Ton deal. Again, we can't say too much until everything is signed, sealed and delivered, but we certainly think this could be a major, major win for the Company. So I think with the signings pooling up from last year, the comfort that consumers seem to have in finally loosening up and spending some money, as well as what we are seeing with additional opportunities this year, I would expect the growth rates of both credit sales and the portfolio to be quite impressive.

Not to take away from the fact that there are other things also driving increased earnings within Private Label and that would be, of course, we are continuing to see credit quality improve. A lot of folks had thought that 2012 was the end of all the improvements and that may be the case at the big bank cards. I don't know.

We do have a longer tail than the bank card world and, as a result, we are absolutely seeing continued improvement in credit quality. We expect at least 70 basis points better credit quality than we had in 2011 and we are certainly tracking to that. So that is good news.

Then, finally, on the funding rate side we do continue to see the benefits of record low yield curve. One of the things that we talked about using some over performance dollars to drive an accelerated rollout in Brazil.

One of the other things we are toying with now is is this the time to go out on the yield curve and lock down longer-term fixed rate funding. Obviously paying up a little bit for that, but, again, you are providing much more visibility into your future earnings stream and using a little bit of over performance for that as well.

So people who have known us for years know that we tend to do this and look for that for this year as well.

Finally, on a consolidated level, next page, yes, record 2011. We expect a record 2012. What I like to see, of course, is what we are seeing, which is all businesses are expected to contribute solid growth. So in the past we have had usually two out of the three engines cycle up and that usually is fine. We are actually seeing all three cycling up nicely for 2012.

We expect core earnings, core EPS, EPS, and other metrics to have double-digit growth. We actually expect our free cash flow to be up almost 20%.

To stave off the obvious question of where all the cash is headed, we talked about M&A and right now that is a low priority for us, primarily because all three of our businesses are built out. And so we are focused exclusively on organic growth. While we want to drive the core businesses, we also have -- each business has its own sort of additional growth avenue for LoyaltyOne.

It's the Brazilian ramp up for our Private Label group. It's signing new clients, but at the same time let's see if we can't make some hay out of a lot of the confusion out there in the banking world and pick up a couple of files of some good names. Then also at Epsilon we talked about converting the discussion away from, hey, let's be database and data and really make it a one-stop shop and one throat to choke for the Chief Marketing Officers of the Global 1000.

So all of that is sort of organic growth and so then we turn it to share buyback. Charles mentioned that we have $400 million authorized for 2012. We will be opportunistic in our buying.

If you were to go back, we have spent $2.32 billion at an average price of $52 and have taken down 40% of our outstanding shares. Obviously that was probably a decent move. It's not quite as much of a give-me at these levels, but there is certainly still an appetite at the Company, especially to the point that there is an opportunistic chance to get in there. So that is around and we expect to use some cash for that.

And then, finally, our leverage is still very moderate. We are only a little over 2 times debt. Again, I can recall when we went public 10 years ago we were at 6 times. So to us 2 times is a nothing; however, it looks like, given our priorities this year, we will have fairly extensive free cash flow to pay down some of the debt that is outstanding.

And what are we going to do? What we think we are going to do at this point is we made our contrarian plays over the last few years. As we have talked about, we bought the bulk of our shares at the bottom and I think that was a pretty good move. Again, it's less of a give-me at these levels.

We took advantage of a lot of the negative, I guess the negative vibes over the market in the past few years and we stepped in and spent our money on M&A. Also, that is now fully built out. So we made our two big contrarian moves at that point. We also grew Private Label right during the Great Recession, so we had three big contrarian plays over the past few years.

I think those benefits will continue for many years, but the opportunity to do more has lessened quite a bit. So right now, perhaps, is the time where we step back for a little bit and start rebuilding the war chest for the next big run. As a result, Charles has been charged with utilizing not only our free cash flow, but also to get out there and identify additional funding facilities such that our corporate liquidity can move very nicely from our $600 million to $1.5 billion to $2 billion over the next couple of years.

We will be cautious and we will be willing to wait for the right opportunity to come along. It could come along this year or next year or the year after. We know it will be there, but we certainly don't want to chase it.

So that is pretty much it from that perspective. The bottom line is 2012 looks good, expect record year of double-digit growth, double-digit per share growth. We should also mention is artificially dampened by the phantom shares which we will finish up on the next page.

With all the businesses running strong, we are going to be focusing on really building up a nice war chest for the next run because there will be something that pops up the next two, three years that is going to get us pretty excited again. All that being said, we are going to start off the year by raising guidance.

As we turn to, I believe, the last page which is Raising Guidance, you will see that across the board we have increased our core EPS from $8.30 to $8.45. Our free cash flow, which is really what is left in our pocket at the end of each year after CapEx, regulatory capital, interest payments, taxes, etc., is increasing roughly 20% to $600 million, which is roughly about a 9% free cash flow yield. Taking out the phantom shares it's more of a 10%-plus free cash flow yield. So it's fairly robust and there are no big CapEx projects floating around that should dampen that.

Finally, Charles talked at length about phantom shares and, yes, this troublesome apparition does cause some issues when trying to explain it to the marketplace. The short answer is those shares go away when our converts mature.

And so to put it in perspective, if you were to look at 2011 and we reported $7.63, had those shares, those converts matured and those shares went away we would have reported about $8.29. So about a $0.66 benefit from eliminating the phantom shares. In 2012 it's bigger. If we are guiding to $8.45, without the phantom shares it's more like $9.55 which is about a 15% year-over-year growth on an apples-to-apples basis.

So bottom line is these phantom shares depress our reported earnings about $1.10 this year. The good news is these dampened earnings do drop off in the latter part of 2013 and then finally in 2014 with 100% of the benefit in 2015.

So it's a little bit of a pain to talk about it and, frankly, I haven't quite figured out the accounting on it, but that is why we have Charles. The good news is that we are growing pretty strongly, even with these phantom shares, and once they drop off you are going to see a very nice pop.

So that being said why don't we turn to Q&A?

(Operator Instructions) Jim Kissane, Credit Suisse.

Thanks, guys, and great job. Charles, can you sketch out the P&L impact from the AIR MILES cash or instant redemptions, and maybe some of the expectations around what portion of the AIR MILES will be instantly redeemed versus collected or saved for a future use? Just trying to get a sense of what the future redemption rates will be and impact on the P&L. Thanks.

Jim, at this point we really don't know how much will transition into this newest reward option. My guess would be over the next five years it could be as much as 40% of points issued goes into it.

The difference is with the instant reward option it's not going to be more profitable. The EBITDA percentage will be about the same, but what it's likely going to do is just accelerate forward revenue and EBITDA for the simple fact that you are going to have a shorter life. We estimate right now that the instant reward option will probably have about a 12-month life versus our existing program which has a 42-month life.

So I think the profitability will be equivalent. It will come through the gross margin versus breakage, but it will just likely come through quicker as the program ramps up due to the shorter life of the points.

Now sponsors will be paying more per mile, is that the case?

No, the cost to the sponsor will be the same. It just comes down to reward option value.

So like with any traditional program -- like in the US, if you take cash versus a product you get less equivalent cash value, so it's the same concept. The cost of the product to redeeming for is a little bit cheaper to maintain a gross margin, which equates to what you normally would make on your EBITDA margin.

Okay. And you obviously did some things in the fourth quarter to push down the redemption rate. Should we expect the redemption rate, maybe absent this instant reward option, to remain lower than where it has been in the past?

We try to keep the existing program with a burn rate of somewhere around 69% to 73%. That is the range we like to see it operate. Last year in the fourth quarter of 2010 it was a little bit rich. So what we do is we actively control the program via the options that you can redeem for, the pricing of the option to try to keep it in the band as we move up toward that ultimate redemption rate of 72%.

Okay. And just last question, I know running out of time. But the incremental investments related to going to more regions with the dotz program in 2012; what is the impact this year on the numbers?

Again, we are going to double the number of regions we are going to go in. I don't think it's a very material number. It's a few million probably for an extra couple of regions, but given where we think the over performance is going to come in in the Company that has already been factored in.

So think of it as we will take a little bit off the table in terms of over performance and pour it into a faster spool up there, the same way on our funding side for Private Label. Jim, as you know, in the past we have tended to trade off a little bit of over performance there to lock in longer-term visibility by locking in long-term fixed-rate funding.

Great job. Thanks.

Darrin Peller, Barclays.

Thanks, guys. So let me just start off, if you don't mind, with Epsilon.

The trends have obviously been pretty strong over the past couple of quarters and you are now seeing mid single-digit type organic growth in the business added on by the recent deal. But can you just maybe give us some color on expectations for 2012, maybe beyond just the actual growth rate? Can you give us a little color on the actual trends? What is the demand by your customers really that is driving this kind of growth and how sustainable is that?

Yes, as we look into 2012 obviously we think the Epsilon model is high single digits on the top line for sure. Will it reach 10%? I don't know, but it's very robust.

What we are seeing is the biggest demand is coming from the very large database builds and those are driven by the Global 1000 essentially saying, hey look, I have got 20 different brands; they are all in a different system. I need someone who can pull it all together and then also I need sort of the demographic/psychographic information to be added to it. Oh, by the way, I need to have someone who has a clue about the campaigns and how they should look and what distribution channels they should use.

So the bottom line, Darrin, is if our bet is right at Epsilon, which right now it looks like it's heading in our favor, that there will be a -- the biggest demand at Epsilon will be coming from the Global 1000 basically sitting there saying I want to expand my relationship with Epsilon because I am sick of dealing with 20 different providers out there. And as a result, with Epsilon you are seeing almost two-thirds of the new growth at Epsilon is actually coming from existing clients making bigger commitments along the food chain there.

Got it. Moving more internationally as well still? In other words, existing clients taking their business from a domestic operations and moving it out, overseas perhaps?

Yes, I mean that is part of it. So, for example, when you see us launch a big Global 1000 you can be assured that if someone is in another country and logging into that client's website and signing up for whatever it may be and providing information that that engine will flow into Epsilon for sure.

All right. If I can shift over for a minute to the credit book, Private Label, the reserve rate now -- your allowance is about 200 basis points higher than your charge-off ratio, which is one of the bigger cushions in terms of safety and reserving that we have seen versus most of the banks. It just seems kind of high.

I guess, just a question; should we expect further momentum down on that number assuming charge-offs stay flat or even improve more?

Darrin, the way I would look at it, we ended the year with a -- for the full year a charge-off rate of 6.9%. We have guided towards 6.3% for 2012. What I would anticipate is that 60, 70 basis points have been manifest, will come through to the bottom line. So the reserve will drop.

Good, so you still have more leverage there as well. Then last question on Private Label and I will turn it back into the queue is on the transaction side, can you just explain the drop in the merchant fees? I think you said there was a 19% drop in some of the merchant fees or the merchant-related revenue, whereas I know volume was up.

Yes, I will jump in on that. A lot of that has to do with the programs that we are striking with -- either on the renewals or on the new accounts, which essentially is we are in partnership with the merchants creating, if you want to call it, a structure whereby there is a pool of money based on sales that will -- both parties has agreed will go directly towards promoting increased usage in the card.

So a big struggle that Private Label has always had and won't go away in the near future is, unlike a bank card, Visa, MasterCard which is jam in your mailbox with a gazillion offers, our cost per acquisition is very, very low. It's through the store most likely, point of sale, but what is behind all that is a critical need for the store associates to be familiar with the card, the offer, the rewards program, the loyalty attached to it. Therefore, given the turnover in retail associates at the store which is huge, there is a huge amount of training that needs to take place.

So we think it's better to spend our dollars helping that part of the training as opposed -- and to give up some of the merchant fee in return. So essentially funding -- it's a rebate that is being used to fund that training.

Okay, that is very helpful, Ed, thanks. All right, thanks, guys. Good quarter.

Carter Malloy, Stephens Inc.

Congratulations, again. Some great wins and growth in the Private Label program so I almost hate to ask, but can you comment on is there more there; what you see in the pipeline and competition for those portfolios?

Sure, I will jump in on that. I think, Carter, if you looked at last year times six, seven, whatever the number is, that was probably our best year in a number of years. And then from a qualitative perspective the names that we sign, the Pier 1s and the Marathons or whatever, these are good, quality names that I think will endure and grow in our file going forward.

As I look into 2012 and 2013 there are a couple of trends that are of interest. One is -- and it all gets back to all this micro-targeted marketing and everything else, the Private Label business, again with the closed loop network, provides SKU level information which is so critical to merchants these days. And you can't get that with general purpose bank cards.

So there is a renewed interest from what we have seen on behalf of a lot of retailers out there to find a way to mine information so they know more about the client and they can market to their existing customers and acquire new customers. And Private Label is the perfect platform for that, so there is additional interest in that.

The other is a really interesting trend that is going on separate from that, and that is there is an awful lot of turmoil at what I would call the large players in the big portfolios that are out there that really fly above our radar screen. But you have got Private Label is now back, quote-unquote, in as a great asset to hold so it has been moved from bad banks to good banks. You have got a very significant acquisition of one of the major players out there in the Private Label business that will sell some confusion.

So there is a lot of turmoil from what we are seeing out there. As a result, there are certain clients who in the past have gone with the larger players, primarily because they don't want to give up the touchpoints, the customer care, and a lot of the marketing that we require to come on board with us. What we are finding is that is now becoming a reasonable request given what they have experienced through the Great Recession from a service quality perspective.

So we are going to try to make some hay. I would be very surprised if you did not see a couple of nice portfolio wins, takeaways in addition to our more traditional new retail startups.

Thanks for the color on that and then another question on the Canadian loyalty side. You have roughly 1,200 basis points of safety net there, but what are your expectations around the impact of expirations driving up redemption rates there? And how is your outlook over the next, say, two to five years?

It's a situation where the expiration really doesn't affect that curve very much. The expiration or the time-stamping merely makes the miles we have already deemed to be dead from an accounting perspective go away. It just provides a certain [piece].

In terms of the way we keep it tracking towards the 72%, it's through exactly what Ed has talked about for years. You pull levers to keep the burn rate within a reasonable range 69% to 73%. Then you know it's going to mature at about a pace of about 1% per year, and then you keep tapping the brakes until it slows at the 72%.

So to your point, there is a lot of headroom between the current redemption rate and the ultimate redemption rate, and you just moderate your redemption levels, your burn rate to keep it achieving that ultimate redemption rate.

Said another -- to put it in highly technical terms, Carter, there hasn't been any freak out.

All right, that is helpful. Thanks, guys.

David Scharf, JMP.

Good morning. Going to stay on the same topic because I want to make sure I understand, really just from more of a consumer perspective, how this transition works. First of all, when you talk about rolling out instant rewards in March is this with just a handful of sponsors or -- you have got some significant client concentration; are one or two very large sponsors behind this drive to move towards instant rewards? And what is the real time frame for when this is all rolled out to your top guys?

It will take pretty much the full year, David. So you will get a couple of big guys that come in in the second quarter, some in the third quarter, some in the fourth, so it's just going to roll out by region. Obviously it affects your supermarkets, people like that, any type of retailer benefits most because you are point-of-sale. You come and swipe your card, you get the instant liquidity option.

So I would say it's going to roll in over the course of the year. Will not have too much of a salient impact to 2012 but it really sets us up in 2013, 2014, and 2015.

Okay. When you think about managing to this same gross margin level, I mean I think most of the loyalty world out there is no longer really operating on a breakage model. They have instant rewards.

When you look at other instant reward programs in the industry, and even when you look at dotz which is not a breakage model, should we ultimately think about -- there is always going to be some level of breakage. People die and, in the case of AIR MILES, people probably leave Canada.

But how long does it take -- when you look at other programs, I mean is this sort of a 95% redemption kind of program ultimately? And does that mean you have to basically raise the number of miles constantly that people have to accumulate if they want to redeem instantly? Because it seems like if the sponsor is not paying more the consumer has to.

We do think you will have a bifurcated collector base. What we are seeing is there was a very strong push from both sponsors and collectors to offer up something less than a week's vacation down in Disneyland or something like that and have something more on the instant side.

So to your point you will have almost a barbell where you are going to have one end which is driven by the more instant rewards, where profit is driven by pricing and gross margin and really no breakage. And then you will still have a fairly significant group, which could be 50%, 60%, who are in fact aspirational and as a result they do want to spend their time saving up for the family vacation or the big reward down the road. So you are going to have two types of collectors and not much in the middle.

Is there any data out there, I mean as you do market research, on what the impact is of ultimately raising the number of miles, points you have to accumulate to take advantage of an instant reward? I mean are the sponsors -- the sponsors obviously want this because their consumers do, but did sponsors have any say in how much you ultimately are raising the effective price really on their consumers? Do they just pretty much assume that, at least in Canada, it's the only game in town so these people are still going to want to accumulate?

(inaudible) [and vet it through] before we do it. The second piece of it is as a consumer you are accustomed to a discount when you are dealing with cash option versus a product option. It's the same in the US where we do that.

You have various credit cards. If you want cash you get 20% less than what you would get if you did product. So it's a mindset that is pervasive throughout any coalition program or any loyalty program for that matter that if you take cash you are going to take a little bit of a discount or a haircut off of it. So that is just pretty common nature and it's pretty well accepted.

Thanks very much.

Sanjay Sakhrani, KBW.

Thank you. Charles, we have talked about this before, but just in terms of the receivables growth you guys are expecting this year, but could you just talk about what kind of impact that has on the P&L as far as pluses and minuses are concerned?

And then, I am not sure if I missed this, but just the interest expense was a lot better than what we expected. Could you just talk about that a little bit? Thanks.

All right. So if we break down the seven signings, we had four of them actually come with files attached. Two closed in 2011, which you will get a full benefit pretty much in 2012. Now the two files that we closed within 2012, Pier 1 and Bon-Ton, you get the A/R coming through; you don't get a lot of earnings boost within 2012. Most of the earnings will come through in 2013, 2014.

The reason basically being when you acquire a portfolio you fair value it, so your purchase accounting will soak up any embedded income that would come from it. So the key take away would be most of the programs we added in 2011 will be ramping in 2012. Pier 1 and Bon-Ton, even if they are closed in second/third quarter, will not provide a lot to 2012 because of the way the accounting works. But most of the benefit will come in 2014 and 2015. I am sorry, 2013 and 2014.

And the growth expectation that you guys alluded to at the begin -- in your prepared remarks, that doesn't include any potential wins that you may have, right?

Correct.

Okay, great. Just that interest expense line?

This is corporate?

Yes. Was there anything specific there?

You know, Sanjay, I can't think of anything. I will look at it and call you back. It didn't hit my radar screen as to what you are looking at.

Okay, fair enough. Final question maybe, just on dotz. I think you guys -- Ed kind of touched on it earlier on, but what is the timeline where it becomes a significant (technical difficulty) to earnings?

Well, it depends how fast -- if we keep accelerating it. There are eight regions that essentially cover the marketplace. With 190 million people in Brazil there is about 70 million to 90 million that we would consider in our sweet spot, sort of middle-class type consumers. And 90%-plus of them are in those eight regions.

So we should have six regions done by the end of 2012. We should have all eight regions done by the end of 2013. So in terms of the earnings power I think what you will see is something fairly significant start flowing in in 2014 for sure. Maybe we can accelerate that a little bit sooner.

But the beauty is, because there is no big trust account down there, that the cash coming in is in fact used as working capital and, therefore, can fund a lot of the expansion. And so the only ding you take is a little bit more on your P&L.

So, look, our goal is -- it's like everything else. The coalition program works best when you have the largest number of folks and the largest number of sponsors. And so our goal is essentially to charge 100% to get this stuff up and running and get the network in place. Then after that, hopefully, it just becomes a nice cash flow machine for us.

Okay, great. Thank you.

Okay, that is it. We will let everyone get back to work. Thank you very much for your time. Bye.

This does conclude today's conference call. You may now disconnect.