Bread Financial Holdings Inc (BFH) 2012 Q1 法說會逐字稿

Good morning, and welcome to the Alliance Data first-quarter 2012 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 FTI Consulting. Ma'am, the floor is yours.

Thank you, Operator. By now you should have received a copy of the Company's first-quarter 2012 earnings release. If you haven't, please call FTI Consulting 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 Bryan Pearson, President of LoyaltyOne.

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. 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 to call over to Ed Heffernan. Ed?

Great. Thanks, Julie. Okay, we're going to get right into it. Joining me today is Charles Horn, our erstwhile and ever popular CFO, and down from Toronto we have Bryan Pearson, the President of LoyaltyOne, which of course includes both the AIR MILES program in Canada as well as our efforts in Brazil. And we welcome Bryan, he used the last of the Canadian pennies to make the journey down here.

Charles will discuss the consolidated Epsilon and Private Label results and Bryan will walk you through LoyaltyOne results and I'll chime in at the end with a couple of comments. So, that being said, Charles, take it away.

Thanks, Ed. It was a terrific start to 2012. Highlights for the first quarter of 2012 are -- revenue increased 20% to $892 million; EPS increased 19% to $1.86 per share; core EPS increased 17% to $2.38, beating the Company's guidance of $2.13. Excluding the year-over-year build in Phantom shares, core EPS increased 27% to $2.58. Lastly, adjusted EBITDA net of funding costs increased 25% to $275 million.

As noted above, the 4.9 million share increase in Phantom shares dampened core EPS by about $0.20 for the quarter. We expect this overhang, which is directly correlated with our average share price, to continue throughout 2012. Ed will talk about this further as part of his update later in this call. The key take away, the Company does not have any economic obligation to issue or cash settle these shares. Let's move to LoyaltyOne. Bryan, take it away.

Thanks, Charles. LoyaltyOne had a strong first quarter in both revenue and both key growth metrics increasing by double-digit over the first quarter of 2011. Revenue was up 20% compared to the first quarter of 2011 before foreign exchange translation. Both our marketing and redemption-related revenue were up double-digits compared to the same quarter of last year.

Adjusted EBITDA in the first quarter was flat to 2011. However, we actually made two EBITDA investments in 2012 which position us well for future growth. The first is that we introduced a new instant redemption program at our high frequency retail sponsors which we called AIR MILES Cash. And this required a sizable one-time launch investment of $4.5 million in the quarter primarily to support marketing activity and infrastructure.

The second investment in our expenses is attributable to our international and non-AIR MILES Reward Program related expenses. Expenses in 2012 increased by $2.1 million over the first quarter of last year supporting the rollout of Dotz in additional markets in Brazil and investments in other geographies.

Excluding these items our adjusted EBITDA was up 13% for the first quarter of 2012 and adjusted EBITDA margin was 26%, in line with historical margins. Miles issued grew 11% for the quarter making five consecutive quarters of growth and two consecutive quarters of double-digit growth. The first quarter was particularly strong as both our credit card sponsors had a great start with strong acquisition programs and increased spend on the cards.

In addition, we've benefited from aggressive marketing campaigns from our fuel sponsor, Shell, as they look to gain market share in their sector. Looking forward we expect to see mid-single-digit issuance year-over-year growth for the remainder of 2012. Miles redeemed were up by 26% for the quarter which is higher than our normal growth but in line with our expectations for the quarter.

In late 2011 we announced the implementation of a five year expiry on all existing and future AIR MILES and we anticipated that the introduction of an expiry policy would cause a temporary one-time pull forward of miles which were redeemed in the first quarter. And we expect that that redemption activity will abate and return to more normal 2% to 3% year-over-year growth rates for the remainder of this year.

A quick update on AIR MILES Cash -- our new instant reward program which launched late in the first quarter already has about 350,000 collectors that have signed up for the program, which is currently being offered at only four sponsors -- Shell, Metro, Jean Coutu and Rexall. We plan to add six more sponsors to the program during 2012. Overall the target of the instant reward program is high frequency retail sponsors primarily in the grocery, pharmacy, gas and home-improvement categories.

So let's turn to the next slide now and discuss our longer-term view of initiatives. Beyond the growth of the Canadian AIR MILES Reward Program we continue to see progress with Dotz, an international coalition program in Brazil in which we own 37%. As shown on the slide, Dotz achieved growth in all of the key metrics during the first quarter of 2012.

First, Dotz launched in the Sao Paolo interior region in March of 2012. This region is made up of 23 cities and a total population of 4 million with Campinas being the largest city amongst them with a population of 1.1 million.

Second, the total new enrollment in the first quarter was 600,000 collectors bringing the total number of collectors that we currently have enrolled in the program to approximately 2.2 million. And that represents 45% target market penetration in the markets we're operating in.

Third, issuances in the first quarter were strong with 3.5 billion Dotz issued, which was in line with our expectations.

The Dotz program and the Brazilian market continue to demonstrate increasingly strong results. Our focus is on securing additional high frequency partners in existing markets and adding national partners. For the remainder of 2012 we anticipate launching Dotz in three additional markets in Brazil including one major market with a significant population base.

With the new markets launched we expect total enrollment by the end of this year to approach 4 million collectors and we remain extremely excited about the opportunity in Brazil. Based on its target market, coupled with current consumer spending habits in Brazil, we believe the long-term opportunity for Dotz is at least the same size as our Canadian program.

As we ramp up the business in Brazil we're looking for opportunities to make similar measured investments in other interesting markets. As mentioned in previous calls, we continue to pursue attractive markets for coalition with our main criteria being the size of the market, the competitive environment in terms of the presence of existing coalition programs and a strong network of national retailers in high frequency categories.

Over the long term we expect that international growth, in combination with continued solid performance from the AIR MILES program in Canada, will result in a return to double-digit top-line and bottom-line growth for LoyaltyOne. Now before I pass it back to Charles, I'd just like to express a heartfelt thank you to all of the LoyaltyOne and Dotz teams for another outstanding year in 2011 and a strong first quarter of 2012.

Thanks, Bryan. Let's flip over to the next page and we'll discuss Epsilon's quarter. Overall it was a very solid first quarter for Epsilon with revenue up 46% and adjusted EBITDA up 18% compared to the first quarter of 2011. Organic revenue increased 5% while adjusted EBITDA was flat on a year-over-year basis.

After adjusting for investments related to one-time data center relocation costs, along with incremental 2012 spend in infrastructure and security to build out Epsilon's platform for future growth, adjusted EBITDA growth was in line with revenue growth at 5%.

If we turn and break it down by business line, database digital revenue increased 7% compared to the first quarter of 2011 due to continued growth in existing clients and launches such as both Kellogg and Kraft during the quarter. The backlog continues to expand with new wins such as The Container Store and Northwestern Mutual announced this quarter.

Data revenue was flat compared to first quarter of 2011. Strength in the Abacus Cooperative catalog offering, which was up 6% year over year, was offset by softness in the consumer demographic data offering due to weakness in two sectors including financial services.

The third piece of it, which is agency analytics, had a strong quarter benefited by the Aspen acquisition which was completed in the second quarter of 2011. It was bolstered in particular by solid growth in the automobile sector. Aspen continues to add to the pipeline of integrated opportunities for Epsilon overall.

Adjusted EBITDA margins for the first quarter were down 400 basis points compared to 2011, primarily due to a shift in business mix that is directly related to the Aspen acquisition, which, as we've talked about before, carries a lower adjusted EBITDA margin than the rest of Epsilon.

In addition, 2012 investments, including a one-time data center relocation, cost and incremental spend related to infrastructure and security, negatively impacted Q1 adjusted EBITDA margins. However, as Epsilon builds out the integrated platform, the strong pipeline of bundled solution opportunities continues to grow and should drive leverage as we move into 2013.

Let's flip to the next page and briefly talk about Private Label. Private Label started 2012 strong with revenue up 10% and adjusted EBITDA net of funding costs up 34% compared to the first quarter of 2011. Positive momentum continues to be seen in four primary areas -- the first is receivables growth.

Growth has returned with a continued moderation of cardholder payment rates. Average credit card receivables increased 7% compared to the first quarter of 2011, while ending credit card receivables increased 12% from March 31, 2011 aided by the conversion of the Pier 1 Imports credit portfolio on March 29, 2012.

Second is cardholder spending. Credit sales continue to accelerate, up 20% from the first quarter of 2011. This compares to 10% growth for full year 2011. Cardholders continue to be actively engaged and appear to be feeling better about their personal situations. In addition, the on-boarding of new programs in 2011 contributed approximately 6% of the growth.

Third is portfolio quality. Entering 2012 management expected approximately 60 to 70 basis points of improvement in principal charge-offs compared to the prior year. Trends are now suggesting closer to a 100 to 120 basis point improvement in 2012.

Lastly would be funding cost. And our funding costs continue to improve as older tranches of debt mature and are replaced with new, cheaper, longer tenor paper. Our cash funding rate for all card-related borrowings, which excludes non-cash items, was 2.7% in Q1 2012 or 100 basis points better than last year.

Overall, the outlook for 2012 is excellent, solid fundamentals coupled with a strong pipeline of potential new programs. We recently announced a long-term agreement with Premier Designs, which brings along a small portfolio. Similar to 2011, our goal is five new programs for 2012. We remain confident this is an achievable number.

Let's turn to the next page and talk about liquidity. At the corporate level our liquidity increased to $1.3 billion at March 31, 2012 after raising over $750 million of additional liquidity during the first quarter. In March 2012 the Company issued $500 million of senior notes at a rate of 6-3/8 that mature in 2020 and raised about $251 million of bank debt at LIBOR plus 200 basis points. The all-in blended rate of the new debt is approximately 5.1%.

Net corporate debt was approximately $2 billion at March 31, 2012, a modest amount given our leverage ratio which is defined as corporate debt to adjusted EBITDA. The ratio was 2.3x for the first quarter compared to a maximum loan covenant of 3.5x. We expect the leverage ratio will fall as 2012 progresses and we keep our free cash flow.

At the bank sub level we have approximately $2.8 billion of available liquidity at March 31, 2012. Subsequent to quarter end one of our credit card trusts issued $550 million of public, seven-year fixed-rate term asset backed securities, only the third credit card debt offering issued longer than five years since 2008 by any issuer.

Approximately $413 million of the AAA rated notes were issued to investors with a fixed coupon of slightly over 3.1%. The remaining subordinated bonds were retained by the Company.

Regulatory ratios as our banks remain strong. For the World Financial Network Bank capital ratios were 17% for Tier 1, 16% for leverage ratio and 18% for total risk-based as of March 31, 2012 -- all well above regulatory well-capitalized minimums. Robust capital ratios allowed our bank subs to pay dividends of approximately $58 million to Alliance Data during the quarter.

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

Thanks, Charles. If we can move to the slide entitled 2012 Guidance, we can walk through that fairly quickly. I guess as an overall statement, clearly things are running stronger than anticipated. And that over performance, if you really look at it, coming from two main areas -- the first is that the use of our clients' Private Label cards is running well ahead of everyone's expectations.

Growth in card spending is really zipping along and hit 20% growth in card spend in Q1 versus last year. Obviously incredibly strong. With the stabilization in customer payment rates, what that means is the cardholder spending is in fact finally driving some growth in the average credit card receivables. For that reason finance charge income was quite robust in Q1 as well as benefits from the merchant.

Second, as Charles mentioned, credit quality continues to defy its long-standing correlation to unemployment. Again, you're looking at a file that looks to be pristine after being cleaned out during the Great Recession and as a result you've got the characteristics of a super prime file. And as such the portfolio is notching loss rates really quite a bit better than anticipated.

These are the two main drivers behind the over performance that we're seeing thus far this year. Everyone else seems roughly on track. These two areas plus the results of LoyaltyOne and Epsilon give us the comfort to significantly raise our earnings guidance for the year and specifically we are increasing our after-tax total core earnings guidance by as much as $25 million. And on a GAAP net income basis the corresponding increase would also be $25 million.

So, big increase in total earnings and now how does that filter down on a per share basis? This is where the fun begins. This would equate to over $0.40 of incremental earnings using our original share count of 60.5 million shares. However, as you've heard a lot from us over the past few months, due to our increased stock price our projected 2012 fully diluted share count has increased by right around 3 million shares.

So as such our higher total earnings will now be divided into more shares leaving us with effectively the same $8.45 per share guidance from before. However, all is not lost since about half of the increased shares are what we call the phantom shares which disappear at no cost to us when the converts mature in '13 and '14. That is it's merely an accounting convention.

So if you were to look past the 1.3 million in new phantom shares you would see effectively a true increase in economic earnings per share of $0.17, which will automatically flow through to EPS as the converts mature. And the next slide will walk you through it in a bit more detail.

It's a little bit busy, but you'll see we've increased the after-tax core earnings by $25 million from $511 million to $536 million. The higher share count, due to our projected higher stock price, caused an increase of 3 million in our total share count. EPS stayed the same due to the large share increase. However, about half of the increase for phantom shares, which drop off in '13 and '14, excluding those -- as you can see, we've effectively increased our guidance by $0.17.

In fact, if you back out all 8.3 million phantom shares, which again will drop off, our true economic EPS that will flow through is $9.72 or $1.30 higher than our expected reported number of $8.45. Frankly whether you look to the phantom shares now or wait until they officially drop off when the converts mature, it doesn't change the outcome. In the end the much higher EPS number will flow through.

So to keep things simple for everyone, I like the rule of thumb that for every $1 increase in the share price, let's say above $125, roughly 200,000 shares are added to our share count and of those 200,000 roughly half are real and half are Phantom. So our guidance was set originally at $110 move to $125, so we added $15, at 200,000 shares per buck, that's what added 3 million new shares of which about half are Phantom. So hopefully that's clear as mud for everyone.

Let's now turn to the final page titled with our new financial term, In a Nutshell. Again, reiterating over performance is driving us to increase our core earnings by $25 million versus prior guidance. Second, incremental Phantom shares are in fact masking this significant increase in guidance. If you excluded the new Phantom shares, as we said, the core EPS guidance would have increased $0.17.

These aberrations are masking approximately $1.30 in core EPS compared to 2011 and that will flow through core and GAAP EPS as convertible debt matures in 2013 and 2014.

All right, what does it all mean? Again, the business is running stronger than anticipated. For those of you have known us for years, what we tend to do is we tend to try to use some of that over performance to invest in the future, some to invest in visibility and some to flow through as just pure over performance.

And if you were to look at where we expect to use the over performance that is clearly beginning to pick up steam in 2012, what you'll see is the following buckets. First and foremost, we're taking the opportunity to invest very heavily in Epsilon's infrastructure.

Again our seven-year effort to pull all of Epsilon's pieces together including digital, marketing agency, data, database, analytics and distribution, we completed that last year. We now need to stitch everything together so that we can go out and land the full suite of services at some of the Global 1000, that's the ultimate goal here.

That does take a fair amount of work. We will be done with all this investment by the end of 2012. The mandate to Epsilon is they need to be ready for primetime in '13.

Second, also something we've done in the past is since one of our businesses, specifically Private Label, does require us to be fairly active in the capital markets and borrow a good chunk of funds, we have the choice of obviously having a very short duration in our funding book and borrowing at a percent or something like that. What we did, however, is -- and we'll do it all day long -- is we traded off that short-term benefit to lock in money, fixed-rate money for up to seven years.

And obviously you lose a couple of points of benefit in terms of interest savings. However, we think the trade off is worthwhile, it gives greater visibility down the road, and, frankly, we will be doing more of this as the year unfolds. And in all the years I've been here I can't recall getting 3 points for seven-year fixed-rate money. So we're going to get as much as we can of this stuff and I think it will pay off great down the road.

Also, not only because of the over performance, but primarily because of the success we've seen in Brazil last year and the initial rollout this year, we have in fact doubled down and accelerated the rollout in Brazil which Bryan alluded to earlier, and it's going gangbusters down there. We're pretty jazzed up about the way things are going and we would expect to incur incremental costs obviously associated with the rollout. But frankly, now is the time to hit that thing hard.

Also some of the over performance will in fact be chewed up to cover true dilution from the convertible debt warrants. I would also say that -- Charles talked about going out into the market, raising liquidity right when we didn't really need it, but that's exactly the time we want to do it.

We are left with a lot of cash and as a result we're going to have a negative ARB between borrowing costs and what we earn on our cash. Again, we think that's an excellent trade-off and an excellent use of some over performance as it gives us new flexibility as the year progresses.

And then finally, what's left over is effect an increase in our guidance by $0.17, although it won't flow through until the Phantoms disappear.

So overall things look good. I think we're taking the over performance and slicing it up into a balanced approach between actually having the over performance flow through as well as using it to invest in the future and accelerating some investments in the near term.

We also talked about the nice balance of wins to start the year with Premier Designs, Northwestern Mutual, The Container Store, Toys "R" Us. Subsequent to the end of Q1 obviously we just announced a very significant expansion in Brazil. We talked about the $750 million of new liquidity and a $500 million fixed-rate ABS deal that we did for the Private Label group.

So it's been a busy first quarter. I can say that we are -- our comfort level is quite high right now in terms of how 2012 is coming together. As a result most of us are turning our attention to 2013.

Based on the trends that we're seeing, both in things like cardholder spending, portfolio growth, new wins, funding costs, credit quality, miles issued, miles redeemed, new database wins, new agency wins -- you put it all together and we think the momentum carrying us through 2012 will give us a very, very strong jump off for 2013.

And so, we're spending a lot of our time now on what 2013 is going to shake out as. So, that being said, I think we'll open it up for Q&A.

(Operator Instructions). Jim Kissane, Credit Suisse.

A question for Bryan I guess and Ed. Can you give us a sense of your level of confidence that the miles redeemed will in fact moderate over the course of the year? And, Bryan, is the fact that you rolled out the instant redemption having some impact? Are collectors of traditional miles cashing them in as they move to the new model? Is that having any impact? Thanks.

Yes, Jim. Yes, you basically have hit the nail on the head. There's two dynamics which are happening, one is the announcement of expiry. And despite best efforts on communication you're always going to have people who don't understand there's a five-year window on that, and so they might act a little quicker than they need to.

But I'd say the bigger piece of the pull forward, and we see it in the underlying numbers, was the move to cash, which launched at the very beginning of March and what happened was we saw a pull forward of redemptions. And when we moved to cash at the beginning of March there was also a change in the pricing -- effective pricing for gift card and for certificate-based miles, redemptions as wells.

So consumers -- a little bit of activity was based on people moving to cash and then taking some miles out, but most of it was pull forward in that sector. In fact, Jim, when we look at the rest of the reward categories we saw exactly what we expected to see which was nominal growth, and that leads us to believe that it's effectively a pull forward.

So, Jim, we think it's going to abate quite a bit in the second quarter through the rest of the year. And I think overall we're targeting about a 74% burn rate for the year, which is in line with what our overall expectations would be. So I think you do, as Bryan talked about, you get the one-time pull forward, you'll see it fall back in Q2 through Q4 and then have a very reasonable burn rate of about 74% for the year.

But to be clear, the instant redemption miles are not included in your metrics in the release, right? Those are going to be accounted for separately?

They're still nominal at this point, Jim. And so, going forward, as they do become material, you'll see them broken out separately.

Got you. And just a sense on the outlook for the growth investments in Epsilon and Loyalty. You flagged a few of them making them sound like they're one time. But it also seems like several of the investments are more recurring. So can you give us a sense on how much spending will be done on the investment front in Epsilon and loyalty going forward? Thanks.

Yes, I'll leave the numbers to Charles, but the big probably if you want to call it one-timer would be whenever you accelerate the rollout in numerous regions down in Brazil what you're doing is -- obviously you're adding per region a few million bucks as -- almost as a pull forward if you want of what we would have done the following years. But I think it's the way to go. Charles can put a fence post around it.

But also in Epsilon probably -- we're doing some infrastructure investments to make sure we're best-of-breed. Those are probably ongoing expenses. Our biggest stuff is we are consolidating data centers and I think that is -- that's going to be done by the end of this year as well as a couple of other items. So, Charles, I don't know how much you want to --.

Right. So for Epsilon, for the one-offs primarily the data center move will probably be $5 million to $6 million of expense this year. On the ongoing internal investment, just to beef up the infrastructure, that is about $2 million a year in incremental cost, which you see coming through the numbers.

And loyalty?

For loyalty, it's not going to be appreciably higher. Probably for Dotz will be $3 million -- $2 million to $3 million higher than what it was last year.

And then the instant redemption cost, does that go away now that it's been rolled out or does that continue?

That was a one-time marketing spend. We did have some over-performance coming from obviously the higher redemption, so we plowed it back in, to use an Ed'ism, into the marketing to get that program up and running.

And just last question, Charles, I think you said you expect five wins in Private Label this year. Does that include the Bon-Ton and Pier 1, or is it incremental?

No, it would be incremental.

Great. Okay, thank you very much. Good job.

Sanjay Sakhrani, KBW.

So maybe we'll start there with the five wins. So just M&A, in terms of outstanding RFPs, are there a bunch in terms of what's left over from Cap One and HSBC linking up?

And then maybe we could talk -- staying on Private Label we could talk about charge-offs. I mean, how low can charge-offs really go? If you look at the general-purpose industry, we're materially or appreciably below average. Can the same happen in Private Label or does the growth phenomenon kind of temper that a little bit?

Yes, I'll take a little bit of it anyhow. In terms of what we're seeing in the pipeline, I would say it's probably more active today than I can recall. I think part of it is because, exactly you mentioned, a couple of the players, there is turmoil in the industry; there's people deciding to come back in who were out before.

In addition to that, we have taken a much more aggressive stance towards growth in our private-label business. We think this is the time to strike, so we are being aggressive on that front as well. You slap it all together and I think what you'll find out is our typical year where we'll sign five new clients, which tend to be spooling up that take 2, 3 years for it to really hit a good run rate, those are what we typically do.

We're usually not too active on the M&A front from the file perspective. However, that being said, for a number of reasons what we're seeing is there is a very significant opportunity out there I think for us specifically and you see it in the Pier 1, you see it in the Bon-Ton's.

There are a number of other significant names that are also circulating in the pipeline, Sanjay, for a number of reasons, one being I think our product set is appealing more and more to the CEO's and CMO's who understand the whole micro-targeted loyalty concept. And also, quite frankly, there is an awful lot of turmoil in the other parts of the sector, which lends itself very nicely to our approach of nice, clean, smooth, we'll hold your hand and give you premium service type approach.

So I think those two combined, you will see most likely over performance in the both wins and our typical long-term growth rate in file growth for the next two to three years, would be my guess.

On the credit quality side -- hey, look, I'm with you. We typically track 100 to 120 basis points above the unemployment rate; I'm certainly glad we're not there now. The pristine nature of the file, right, because of the depth and the length of the Great Recession, has created a super prime type profile in the file itself.

We're down in the 5% range; we typically run rate around 6%. We are -- I'd love to sit there and say boy, our crystal ball says we're going to begin to drift back up to 6% sometime over the next 12 months or so, but we're not seeing it. We're seeing in the early stage delinquencies, middle stage, late stage recoveries. Everything is suggesting to us that this could be a fairly lengthy process before things begin to drift up, in our case maybe another 80 or 100 basis points until they normalize at 6%.

So everything we're seeing, and, again, looking at early-stage delinquencies give us probably the best view. But all the -- what we're hearing from the floor, from the collectors is that across the board all the buckets are looking as strong now as they were six months ago. So to answer your question, I think we will be below our long-term average probably for quite some time now.

Just a follow-up for Charles. Just on reserve coverage, I mean that went up this quarter. Could you just maybe talk about that migration over the course of the year? I know you guys got some portfolio wins, so that can that eat into that coverage going forward?

First, we did take it down a little bit. We were at an 8.2% reserve at the end of Q2 versus 8.3% at the end of 2011, so we took it down about 10 basis points. Likely over the course of the year if we continue to see this continued strength in our charge-offs rates falling that you'll see the reserve rate come down, it could be as much as 30 or 40 basis points if we see these trends continue.

From an acquired portfolio standpoint it really does not affect our reserve because it rings in at fair value. So really what you're seeing more is the maturation of the file, the credit cleansing that's taken place with the file. So if we continue to see those trends, Sanjay, I'd expect the reserve percentage to continue to drop for the remainder of '12.

Okay. And maybe since we have Bryan on the line, I had just a couple questions on loyalty and it's specific to Canada. I think Charles has mentioned this notion of co-exclusivity in certain regions. I was just wondering if you could talk about how the partners had reacted to that and kind of what the opportunity is there for growth beyond kind of what you've already signed up? And I think there's a couple of renewals next year and I was just wondering how those discussions are going. Thanks.

Okay, so there's three questions there. First is this amazing fascination with the Canadian ability to accept co-exclusivity, which just seems to be a funny term.

Yes, where we usually enter in a co-exclusivity is where we've got a sector or segment of the market which is fairly fragmented. And if we don't have a dominant player who owns a vast proportion of the marketplace, significant market share, then it actually serves our collector better and, believe it or not, it actually serves the partner better to have more players in the sector.

And sometimes there are stores that overlap or you've got two credit cards that are competing for the same customer. But the amount of upside that exists for both partners is greater than the amount of overlap that exists. And so, we look to optimize around co-exclusivity in categories where it makes sense.

Do our partners like it? Well, yes and no. But now we've got a track record of well over a decade of doing this in different categories and we can demonstrate that there actually is a net gain by virtue of having better category penetration.

I think the second question was around growth and what categories we would pursue, and I'd say that you've seen some great announcements in the last little while around things like Zales and Toys "R" Us and Nova Scotia Liquor this year which shows that we're continuing to penetrate the specialty retail segments quite effectively and we are working quite diligently in there.

There's a lot of the landscape to continue to work on that front. And so, if you're looking for where we would be acting, it would be around specialty retail, quick service restaurants and continuing to grow in the liquor category in provinces where we don't have presence so far. I'm trying to remember your last question. It was --?

It was on just renewals next year.

Oh yes, renewals. And we don't anticipate -- we're in current discussions on a few fronts. I think you saw that we re-signed Metro which has continued our track record of basically re-signing on favorable terms virtually every major sponsor category that we've had and we don't have any reason to believe that that should change in the -- for coming months or years.

Wonderful, thanks.

David Scharf, JMP.

Ed, wanted to shift back to Private Label. You used the word turmoil to describe some of the goings on in terms of some M&A activity and some people making noise of entering the business again. Can you just qualitatively discuss whether or not -- in regards to converting the pipeline, whether the RFP, the bidding process, the sales cycle -- anything on the ground is changing yet with potentially some more renewed interest from some other banks?

Yes, I'll have to be a little careful here. But I think what we are seeing and what really came to fruition with both Pier 1 and with Bon-Ton's had more to do with not the usual suspects, (inaudible) jumping in and jumping out of the market depending upon where it is in the credit cycle. But it had a lot more to do with probably two things.

One is there is a much greater and heightened awareness of if you want to call it the new way of reaching and messaging the end-user, which obviously is what we've bet the Company on since day one. And that is there's a much greater interest in both traditional point of sale, direct mail and even permission-based e-mail, but now moving into mobile, social and targeted display as ways of communicating with the customers -- the client's customer base.

That's obviously our bread and butter. So I think that's attracted renewed interest from folks who in the past probably weren't quite as jazzed about that.

The second thing would be -- how to describe the quote/unquote turmoil is that there are a number of I think CEO's, CMO's who did not have a good experience elsewhere during the Great Recession, in fact they didn't. And as a result what kept them from joining us here was the fact that we of course require that the customer care functions and a lot of the marketing and database work needs to come with the more traditional credit and processing functions that they can just get elsewhere.

And so, they've always debated do I want to actually give all this stuff to ADS or let me just outsource the pieces that I don't deem strategic. So what we're finding is that the conversations that we've had with the CEO's has been very much along the lines of look, I had a really bad experience during the Great Recession and, as a result, you guys are effectively a marketing firm first and I'm willing to give up those pieces to join the party.

So there is a new sense of, A, the different channels that need to be tapped out there, this is what we do for a living; and B, some of them, as I said, had a very bad experience during the Great Recession. And they knew that during the Great Recession we actually grew the business and kept everyone onshore and actually continued to invest in it. So that seems to be resonating with people.

Okay, that's helpful context. Maybe for Charles, just three quick questions on some of the credit metrics. With respect to the 20% credit sales growth, is there a figure for how much of that's from programs that have come on board in the last 12 to 15 months ramping up versus how much of that would be considered either a mature or a same client figure?

If you take the programs added in 2011, they were about 6% of the overall 20% increase in credit sales.

Got you. So 14% is almost a true organic figure.

Correct.

Got you. Also a question on the payment rates, and you had made reference to payment rates moderating a bit and that helping balances and we should continue to see more of that. I'm looking at the trust data which is about I guess two-thirds of your receivables.

The payment rates in the first three months of this year are above 19%, it looked like the average payment rate throughout last year was 18.5%. And I'm wondering if there's even more upside than you're indicating? I mean, it doesn't look like payment rates have moderated all that much from what we saw last year.

Let me put it this way, you're right, they've not flattened (technical difficulty). But if you're looking at a year-over-year change of 30 to 50 basis points back what we were going through which was a 130 to 150 basis point year-over-year change, it definitely is moderating and so we're not getting nearly the amount of pressure we did before.

Obviously and generally you'd want a 14% growth rate to produce more than 7 to AR. But as that continues to thin out and go from maybe a 50 basis point spread to 30 to 10, there's more upside in the ability to grow average AR based upon the credit sales we're generating.

Yes, I think if I can jump in here, one of the nice hedges that you have naturally in the business is that as you move from a super prime type file where it takes strong double-digit sales growth to just generate high-single-digit type file growth.

When you start moving those losses, when those losses begin eventually, whether it's a year or two years from now, migrating back towards that 6% normalization level, that usually translates into -- obviously you're beginning to come away from super prime and more back into our sweet spot which is prime.

That then means that double-digit sales growth means double-digit file growth. So what you give up on losses you pick up in file growth and hence finance charge and we actually make more money that way.

Lastly, I just wanted to revisit the reserve levels. You were provisioning at 8.2%. Charles, we've talked about this a few times. I know in the past you've mentioned a reserve level at about 100 to 130 basis points above the trailing 12-month average loss rate. If we stay at sort of the mid-fives -- 5% for loss rate this year, that LTM average starts trending down below 6%.

And written down, I thought you had said maybe a 30 to 40 basis point improvement in the provisioning, which would still put you at a couple hundred basis points above that LTM. I'm trying to get a little more clarity on what the year-end reserve levels are going to look like.

The first thing, David, is when you look at it on a quarterly basis -- we always factor in the seasonality aspect of it. But if we fast-forward to end of the year, you're likely going to see an LTM charge-off rate and we'll keep a spread, meaning when we look at macroeconomic factors in other externalities that would be 120 to 130 basis points over the trailing 12-month charge-off rate.

So based upon that trend, you're right. We're going to see our overall reserve percentage fall by the end of the year if we continue to see these strong improvements in charge-off rates.

Okay, so just so I'm clear, by the fourth quarter we're looking at LTM average loss rates at around 5.5%; we should be looking at a provision rate at 7% or below at year end?

I think that's reasonable, yes.

Okay, implying a release in Q4. Okay, thank you very much.

Dan Perlin, RBC Capital Markets.

Just a couple quick ones. I saw you launched a couple databases in the quarter for Epsilon, that sounds good. I'm wondering what the trajectory and the schedule looks like for the planned launches with your clients for the remainder of the year. Are there any call outs we need to be thinking about, whether it be second or third quarter, being slightly larger than what we would have seen in the current quarter for instance?

Really there's probably no real call outs. I mean, we had Northwestern Mutual, but, again, the timing can always vary as to when it actually launches and you get the revenue stream. So there's nothing in particular I would point to, because with any type of data base build you've got timing differentials that can obviously influence which quarter it affects.

Right. But I guess what I'm trying to figure out is not of them it seems like have been at least scheduled them through have been fully announced. And I'm just wondering, are there going to be a couple that come through that maybe we weren't thinking about? Northwestern obviously we know about, but my sense was there's a couple other ones that maybe you would sign.

Oh, yes, I mean if you look at Northwestern, you look at Container Store -- there are some clients, and we've always had this issue since we've owned Epsilon. Some clients just do not want any of this stuff announced; it's a little different than the other two businesses. But on average if you want to ask is whether we are tracking to our goal of effectively signing 10 significant new large database clients, that's our goal for the year.

Are we at least 25% of the way through that? I would say we're a bit ahead of that at this point. We've announced two; hopefully we'll get some more folks who will allow us to announce it. But we like to do 10 significant database builds announced and then we would also like to have 10 other announcements that may not have a database component to them, it could be a large agency, digital agency deal, it could be a data deal, it could be a large e-mail deal.

So effectively the bogey for Epi is to sign 20 new clients or in their expansions with existing clients. And right now we are tracking to that 20 bogey for the year.

And, Ed, can we just stay on Epsilon for a second? Are you seeing across your client base within Epsilon -- historically it's retention of clients, it's cross-selling/upsell or you're going after new clients. And I'm just wondering, given the current environment and where we've come from, what kind of shift have you seen if any? And is that going to play a role in the profitability and/or growth rate for Epsilon throughout the year?

Yes, I mean it's a great question. I think what you're seeing is if probably one of our strongest verticals, which would be pharma, right, they have huge spend for direct-to-consumer. I would say that is absolutely coming under pressure that we haven't really seen before.

So one of our large verticals -- we've got nine of the 10 biggest pharmaceutical firms in the world, that is coming a bit under pressure. However, coming back what we're seeing is we're seeing very strong growth in areas such as not-for-profit and now with Aspen onboard we're seeing very nice growth in the auto sector and the telecom sectors.

So I think what we're seeing here is there is a continuation, no doubt, between dollars being diverted away from general spend to this type of highly sophisticated data-driven marketing spend. But what we're also seeing at the same time is you're seeing the verticals that are beginning to spool up are ones that haven't really started spooling up until this year.

So auto, telecom, not-for-profit I would say are doing quite well. You'll have pharma, which is seeing some pressure, and then you'll see financial services, which is always a big player, I would say it's having an okay year. So overall you're going to see good results, but they're going to come from different verticals.

Okay. And then, Bryan, are you seeing a benefit in average ticket for AIR MILES issued -- for the issuance side as a result of higher oil prices on a year-over-year basis? Or is that just kind of de minimis as we look at the current quarter and the next couple quarters?

No, I mean it's a dollar-based offer, so it's not a volumetric-based offer. So as the fuel price goes up basically, depending on the volume or the pricing -- how extreme the pricing is, you could see that there would be an impact on the issuance that would come out on the base side.

Having said that, I think Shell has been very supportive of the AIR MILES Cash initiative both from a promotion of it to get their customers signed up and also from a redemption side. And so, I'd say that the larger component of increase through the first quarter that we saw from Shell actually came from their promotional activity than it came from a fuel price consideration.

Okay. And they're on track to continue that throughout the year?

Yes, I mean there's always ebbs and flows with respect to budget considerations, but that's kind of the nice thing about our business, a little like Epsilon's business. We have a portfolio of sectors, so as Shell spools up we're balancing that against what may be happening promotionally in the grocery category or with the retail category. And so, between seasonality and between sectors that spool up and spool down, we tend to have a nice balanced growth perspective over time. That's what we've seen over many, many years.

Okay, and then one last quick one for Charles. I think the gross yield on the portfolio was up 30 basis points on a sequential basis. Anything to call out there or is it more sloppy payors in the quarter, just mix? If you could just highlight that a little bit I'd appreciate it. Thanks.

Nothing really to point to specifically. Obviously some of it would be driven by your late fees to just get a little bit of more of a frequency coming through with your first cycle delinquents. Otherwise I think your gross yield APRs are consistent, a little bit more coming through for late fee, but nothing really to point out.

Okay. Thank you, guys.

Bob Napoli, William Blair.

Question on credit card. Ed and Charles, are -- you guys loosely I think over time have suggested that you would like to have -- you didn't want credit card to be too big of a piece of your earnings. You're generating obviously phenomenal returns in that business and you have a lot of opportunity, so should we throw that thought out the window or -- I think you had talked about half of your earnings at one point.

Yes, I mean, again, right -- for people who have known us for many years, you're going to have businesses here cycle at different times. We used to say if we could have two out of three cooking that would be great. We are in a period right now where all three businesses are contributing nicely. Private Label, however, is going to be contributing more than its fair share both this year and next year for sure we think for a couple of reasons.

One is, as we talked about, you have lower than our run rate history in terms of credit quality, you have funding rates that are at all-time lows and we are making a play for sure in Private Label to let her rip. And that means let's get out there and not only sign our traditional clients and spool them up over a period of time, but we do see -- look, we have to be opportunistic here.

We are going to leap at what we think is some low hanging fruit here which are a number of clients that are going to be perfect for our business and we're going to get them and we're going to bring them on board and you're going to have higher than anticipated file growth probably over the next two to three years.

That will no doubt swing the contribution from Private Label to a little bit higher than what we target long-term. But I'm never one to turn down a great opportunity in the marketplace. So we're going to make hay where we can. At the same time, if you think about just a little bit longer, what's happening?

Well, we're getting Epsilon -- all the pieces all stitched up nice so we can hit '13 and '14 at a much stronger rate. And that will start beginning to move the needle back the other way. And then obviously Canada is doing well, but don't forget Brazil has been a drag and we're accelerating that, investing in that. And then probably when the cycle in Private Label begins to diminish you're going to see a very large contribution coming in from Brazil.

I mean that's -- the goal is let's take advantage where we can and right now the advantage for us with some low hanging fruit in Private Label, we're going to grab it and then we'll get Epsilon ready to rip it in '13/'14 and have Brazil come flying in at the end of '13 and '14 as well and then your balance will be restored.

So it's a function of we're on track for the long-term balance to remain the same, but you're going to have years where sometimes the percentages are a little bit higher, a little bit lower. In the end, if we can make more money doing it that way, we'll do it that way.

Thank you. And with regards to Brazil, Ed, don't you have the opportunity when you expand into new markets to increase your percentage ownership or how does that work? I mean, you own 37% and do you want to get over 50%? And is that right, when you move into new markets within Brazil you get the opportunity to increase your ownership, or is that --?

I don't think we can really get into the agreements too much. Obviously right now we're just building the thing. So we're looking to start the creation of value and that will start to build as we continue to add new people. As you go from no one to $1.5 million at the end of last year to $4 million the end of this year, doubling each year, you're going to build up a pretty valuable franchise down there.

Clearly we certainly think it's valuable, we certainly think there's more valuable the more we own. But at the same time, let's not forget that there is a very, very strong incentive for the folks who are down there running this thing -- a very strong incentive for them to run as hard as they can and ramp this thing up.

And so, we don't want to do anything to disincent them from doing what they're doing today. And if the timing is right later on and some folks want to exit we'll certainly be there.

Thanks. And this last question on the card business. The charge-offs -- I mean, the delinquencies are still plummeting for you guys and I guess maybe there's some seasonality in the first quarter, some positive seasonality on that front. But it doesn't look like your charge-offs are going to stop at 5% right now.

Is that -- I mean, you were in the fours, if you go back to 2006 and delinquencies were higher. So I mean we haven't -- have we seen the end? When do you think charge-offs bottom and are we going to see -- could we see another 100 basis points of decline before that time?

Bob, I don't think so. I think you'll see us on a seasonal basis bottom at the end of this, year early 2013. Then going back to what Ed talked about, we'll probably bump along for a year or two at these very low rates until we can actually get new originations coming back through.

And then over time we're going to migrate back up slightly over the unemployment rate. So I don't think that there's a lot of additional declines to be coming through, but I do think it's going to moderate probably by the end of the year and bottom.

Yes, I think the really neat thing about Private Label and the way it works and the way hitting this growth cycle right where we're hitting it is that if you look at last year the file didn't really grow because of the high payment rates, but we got a great kiss from both funding losses, funding rates coming down and credit quality improving.

This year we're kind of getting the bene of all three, the files growing, again, pretty nicely and you're getting a better credit quality and better funding costs. As Charles said, once those other two begin to stabilize and sort of flatten out the next couple years, the beauty is if we can execute the way we want to, then you're no longer going to get the kiss from better credit quality or from better funding costs.

But if we've locked in our funding cost and the credit quality remains relatively stable for the next couple years, then if we're executing on our growth strategy you're going to more than make up for that with a file that's growing strongly in the double digits, which we didn't see before. So it all sort of lends itself to it should be a very, very strong run for the next two to three years we think.

Thanks. I'm sorry, one last quick factual one on Phantom shares, because I still think there's some confusion -- a little bit of confusion. When -- the amounts -- it's 2013. Do have the exact dates, Charles, 2013 and '14, the amount of dollars that you're redeeming? And do you have all the capital now on the balance sheet for that?

You don't need to raise any additional capital for the -- I mean, you obviously have the opportunity and the ability to raise a lot of capital. But it's -- is it $800 million, when in '13, $300 million in '14?

Correct, Bob, we already have enough money to fund the maturities as they come due. So you have $805 million that matures in August of '13, $345 million that matures in May of '14. So from a liquidity perspective plus the free cash flow we expect to throw off we're in very good shape even if we choose not to go back into the public markets.

And of the Phantom shares, how much relates to '13 and how much relates to '14? I know it's more '14 because of the strike price, but --?

I don't have that stat with make, Bob. But again, that the majority of it will relate to '14 because they had a strike of 47 versus the 2013 debt having a strike I believe of around 71, 72.

Thank you very much. Nice job.

Thanks.

That concludes the Q&A portion of the call. We'll turn it back over to Mr. Heffernan for closing remarks.

Okay. These are my closing remarks -- great quarter, should be a good year, we'll talk to you later.

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