Bread Financial Holdings Inc (BFH) 2013 Q1 法說會逐字稿

Good morning and welcome to the Alliance Data first quarter 2013 earnings conference call. All lines have been placed on mute to prevent any background noise. 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, Ms. Julie Prozeller of FTI Consulting. Ma'am, the floor is yours.

Thank you, operator. By now you should have receive a copy of the Company's first quarter 2013 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 and Chief Executive Officer 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 the call over to Ed Heffernan. Ed?

Great. Thanks, Julie. Joining me today is Charles Horn, our always insightful CFO, and hailing from Toronto, Canada is Bryan Pearson, President of LoyaltyOne. Charles will first talk about our consolidated results, as well as Epsilon and Private Label, and then Bryan will walk you through LoyaltyOne and then I'll wrap up by discussing our new guidance and outlook for 2013. Charles?

Thanks, Ed. 2013 is off to a great start. With revenue increasing 18% to just north of $1 billion and adjusted EBITDA also increasing a robust 18% to $357 million. As mentioned in our press release, this was a milestone quarter for ADS as we exceeded $1 billion in quarterly revenue for the first time. Private Label and Epsilon contributed high double-digit increases in both revenue and adjusted EBITDA for the quarter. Of note, Epsilon's organic revenue growth bounced back during Q1 increasing by about 7%. LoyaltyOne on the other hand experienced a 7% decline in revenue, which we expected, but still delivered a 7% increase in adjusted EBITDA.

Core EPS beat guidance by $0.05, increasing to $2.55 for the first quarter of 2013 up 7% compared to last year, while net income per diluted share increased to $1.92, up 3% compared to last year. Both calculations were dampened by 9% increase in diluted share count. Our diluted share count increased by 5.5 million to 67.3 million for Q1 2013 due to incremental dilution from convertible notes. Phantom shares, which are shares we never have to economically settle, increased by 2.5 million, while convertible note warrants, which we do have to economically settle, increased by 3.6 million. We were able to partially mitigate the share dilution by spending over $50 million on share repurchases during the quarter and over $120 million year-to-date. At the current ADS share price, approximately 5.1 million of the Phantom shares will drop from our diluted share count on August 1, as the first tranche of convertible notes mature.

Let's now look at the segment results in a bit more detail. With that I will turn it over to Bryan Pearson to discuss LoyaltyOne.

Thanks, Charles. LoyaltyOne's revenue declined 7% or $17 million for the quarter, as redemption revenue fell $28 million or 15% versus last year. As you may recall, Q1 of last year had an unusually high redemption rate due to the announcement of our five-year expiration policy at the end of 2011. This run on the bank, which inflated revenues as miles were redeemed, makes a true year-over-year revenue comparison difficult. This effect will be seen throughout 2013 and coupled with the slightly unfavorable Canadian dollar exchange rate will pressure top-line growth throughout the year. Even with such headwinds, however, we still expect full-year revenue growth in the 2% to 4% range.

In contrast to revenue performance, our adjusted EBITDA increased by 7% or about $4 million for the quarter. We're very pleased with this growth in light of a tough year-over-year comparison and we are also quite pleased with LoyaltyOne's margin performance, which was up almost 300 basis points compared to the first quarter of 2012. Full-year adjusted EBITDA is tracking up about 8% and that's consistent with our previous guidance, as we believe we can cover off any bottom-line impact from the unfavorable Canadian dollar exchange rates.

The first quarter burn rate followed typical seasonality trends, but came in a bit hot at about 93% due to the decrease in miles issued. Again, last year's run on the bank, in addition to typical seasonality, drove up the burn rate for the first half of 2012 with a predictable tapering down into the 60%s by the back half of the year. And we expect to see exactly the same behavior this year as well, with a full-year burn rate projected to be somewhere between 70% and 75%, which by the way also approximates our reserve rate. A reminder for everyone that burn rate is defined as the current quarter or year redemptions divided by the current quarter or year's issuances.

Issuance growth was below expectation for two reasons. First, the softness in general consumer spending negatively impacted the credit card vertical and second, we had reduced promotional spending in the gas vertical compared to Q1 of last year. As we've said many times in the past, we look at full-year issuance as the key metric in the business, since the timing of large promotional activities can significantly skew results in any given quarter. Our full-year issuance goal remains mid-single digits, with the first half being negative and the second half swinging solidly positive. Our emphasized focus will be on ensuring that it does flip strongly positive in the back half of the year.

During the quarter we also announced several large national deals with companies such as Staples and General Motors, as well as having renewed long-term deals with BMO, our top sponsor, and AMEX, a top five sponsor. These early new wins have laid the groundwork for our record year of new sponsors added, with a coming focus on the telecom, specialty retail and petroleum verticals. Coupled with renewals of the two of our major anchor sponsors, we have a very solid foundation for the rest of the year, as well as for the future. Importantly, we believe that the continued ramp-up of new national sponsors, increased promotional activities that are aimed towards additional spend on cards, and easier year-over-year comparisons will all contribute to issuance growth during the second half of the year.

Now turning quickly to Dotz in Brazil, I'd say we are pleased with Brazil's continued growth over the last quarter. Dotz is on track to exceed $100 million in revenue this year and this is clearly not in our financials, as we strengthen our presence in both existing markets and look towards expansion into five additional markets, including one large market in the country. With over 50 sponsors currently committed to the loyalty program, the number of Dotz enrolled collectors has increased to 7 million versus only 2 million at this point last year or an approximate 225% increase over last year. With a full-year goal in the ballpark of 10 million enrollees, we're looking forward to great results out of our program in Dotz. With that, I'll turn it back to Charles to review Epsilon's results for the quarter. Charles?

Thanks, Bryan. Epsilon revenue increased an impressive 39% or $90 million for the quarter. Excluding the impact of HMI, organic top-line growth increased approximately 7% compared to Q1 2012.

Now let's look at revenue by major product offerings. If we look at technology revenue it was essentially flat with Q1 2012, but we expect steady improvement as the year progresses. Based on the current backlog and the planned launch of our new e-mail platform in Q3, we are anticipating an increase to mid-single digit growth in technology revenue for the full year. Data revenue dropped 2% due to continued softness in our consumer demographic data offerings, which offset growth in both Abacus and our online survey offerings. Our outlook is for no growth in data revenue for 2013.

Agency impressed with revenue increasing 110% for the quarter aided by a substantial kiss, to use a netism, from the acquisition of HMI back in the fourth quarter of 2012. Excluding HMI, agency revenue still grow a robust 21% driven by strength in the telecom vertical. We expect that agency will continue to be the leading driver of revenue growth at Epsilon for the remainder of 2013. Adjusted EBITDA also increased a remarkable 37% for the first quarter. Again, excluding HMI, organic adjusted EBITDA increased over 15% as a result of cost saving measures implement in mid-2012. Adjusted EBITDA margins were flat between years, but excluding HMI and just looking at the core Epsilon, adjusted EBITDA margins increased a stellar 140 basis points from Q1 last year.

During the quarter the Epsilon team focused on merging the recent HMI acquisition into the recurrent integrated agency offering. Thus far there's been a tremendous amount of traction, as HMI's suite of offerings have been introduced into Epsilon's client base resulting in several cross sale successes. These early wins are strong indicators of the strength of the combined offering and the validation of HMI's tremendous talent in multiple disciplines that will greatly expand Epsilon's digital capabilities in key channels such as mobile, social, targeted display and web development. Epsilon remains very positive about HMI's fit and the opportunity to further drive growth across the combined businesses.

Overall, Epsilon's backlog remained strong, up about 15% over the same period last year. The realignment into industry verticals completed in mid-2012 has not only provided operating leverage, but has helped secure big new wins for Epsilon's database business. In addition, the prediction two years ago that future revenue growth would increasingly be driven by agency rather than technology offerings appears to have been correct, with double-digit organic revenue growth in our agency business. Visibility for the remainder of 2013 is very good and it appears that any residual effects from last year's air pocket have fully dissipated. Accordingly, we remain confident in our ability to achieve high single-digit organic top and bottom line growth for the year.

Let's flip to the next slide and talk about Private Label. Private Label had an extremely strong start to 2013 with revenue jumping by 22% and adjusted EBITDA, net of funding costs, increasing over 16% versus last year. This is particularly impressive given the record year we had in 2012. Average credit card receivables increased 31%, driven by new programs over the last 12 months and increases in core cardholder spending. Overall it appears that customers are ignoring some of the economic uncertainty that has been advertised and are increasing their average spend per card.

In 2012 we signed a record 12 new clients. During the first quarter of 2013 we continued on that pace signing Barneys New York and Caesars Entertainment among others. Our partnership with Caesars is a multi-year agreement that enables cardholders to accelerate their loyalty point earnings through a co-branded credit card program. It is an extension of our travel and entertainment vertical. New signings over the last 12 months helped drive credit card sales up 32% versus Q1 of last year. Even without the wins or basically the adds over the last 12 months, core sales increased over 11% compared -- quarter over quarter. This continued success proves Private Label's multi-channel approach to program growth is a winning strategy.

As expected, gross yields dropped to 27.4%, down 90 basis points compared to Q1 last year. The decrease is almost exclusively related to the onboarding of new programs over the previous 12 months. We expect that gross yields will remain in this range for the remainder of 2013 due to this moderating influence. Loss rates continue to be at historical low levels. The Q1 net principal loss was improved by almost 1% to 4.5%, indicative of an overall improvement in portfolio credit quality. Even so, we flipped to a substantial reserve build during Q1, as the provision expense increased by $17 million year-over-year driven by 31% increase in credit card receivables. The strengthening of the reserve did moderately impact our adjusted EBITDA margins for Q1. Overall, a terrific first quarter for Private Label and all of the trends remain favorable. As such, our outlook for 2013 has improved, as reflected in our new guidance, with expected top-line growth in the 12% to 15% range and bottom line growth in the 10% to 13% range. Additionally, the pipeline of prospects remain robust with a potential for another record year at double-digit new signings.

Let's now move on to liquidity. Liquidity for ADS consolidated remains strong at about $4.6 billion as of March 31, 2013. Our corporate leverage ratio at 2.3 X continues to be well below our maximum leverage ratio of 3.5 X. Breaking our liquidity down further, at the corporate level liquidity remains strong at $1.7 billion, of which about $800 million is cash. At the bank level there's approximately $2.9 billion of available liquidity as of March 31, 2013. During the first quarter one of our master trusts issued $375 million of fixed rate term asset-backed securities. The fixed rate coupon of 1.61% is the lowest coupon ever achieved for any duration in Alliance Data's 17 years of capital markets issuance. We will continue to take advantage of this low interest rate environment by extending maturities and adding liquidity as we execute our strategy of building long-term visibility into our earnings.

On the dividends front, our two banks paid $82.5 million in dividends to ADS's parent during the first quarter, while maintaining strong regulatory ratios. As of March 31, 2013 Community Bank's regulatory ratios were substantially above minimum well-capitalized levels. A few weeks ago we announced our intention to settle the $805 million convertible senior notes due 2013 via cash payment. The cash outlay from ADS will be $805 million. In addition, as part of a hedging arrangement entered into in 2008, we owe 2.9 million shares based upon today's ADS share price to counterparties related to this debt. These shares are included in our diluted share count and considered in our 2013 guidance and thus will have no dilutive impact when issued. I think at this point we're all sufficiently whipped discussing this convertible debt.

Last point I will make is we did hit the gas in the buyback program during the quarter and immediately following the quarter, spending at this time over $120 million out of our $400 million authorization. With that I will turn the call back over to Ed for an update on 2013 and guidance before opening the call for questions.

Great. Thanks, Charles. The slide I'm looking at is new guidance. And with the title raising all key metrics, I think that's sort of is the overall message here. Again, let's have a general discussion about the year and where we see things going and what items we want to keep our eye on. And also have a little discussion about visibility into 2014 as well. Overall, as we've been suggesting over the past few months, we think '13 obviously is shaping up to be another very, very solid year. I don't see a lot of items that will knock us out of the box right now. And so it's one of execution at this point. The backlogs are very, very strong. And so what we're looking to do now is obviously execute for '13 and continue to gain visibility into '14 and '15.

That being said, back to the issue at hand, we are raising guidance, revenue we're bumping up to $4.25 billion, which is a 17% increase over last year and is up $50 million from our prior guidance. And while that's certainly a nice number, I think more importantly is our focus on organic growth. The organic growth of the Company right now is running somewhere between 7% and 8%, similar to last year, which in the old days I guess would not be overly impressive. However, in this new environment where GDP is running at 60% of the rate of the old days, doing 3 times GDP I think is certainly a very, very attractive model. So, our focus is on maintaining that high single-digit or 3 X GDP organic top line. That will then flow into adjusted EBITDA, which we are increasing by $10 million to $1.375 billion and then down to core earnings of $640 million, which is up also from prior guidance. Core EPS we're bumping up another $0.10 to $9.75 and that's up 12% from prior year and $0.25 from the initial guidance that I gave a while ago. So, overall, the improvements continue. The over performance continues. And we're gradually walking up the year.

I would like to spend just a second on the earnings per share and what I think is pretty interesting. Q1 our core earnings were up 17%, but you noticed our EPS was only up 7%. Obviously that was due to the number of shares that Charles talked about being up quite a bit and specifically up to 67 million shares versus 62 million in Q1 of last year. What's interesting is starting in Q3, also as Charles mentioned, one of the converts comes due and you'll start to see what I call the slingshot effect begin to kick in. In Q3 you'll see double-digit core earnings growth continuing, while the share count will now be even with the prior year and therefore no longer a drag, which will give you double-digit earnings growth. In Q4 it reverses and you've got the slingshot where you're going to have double-digit core earnings plus a 5% decline in shares, so it will be running about 63 million shares versus 66 million. And so, for example, if core earnings are up 15% your earnings will go up 20%. That carries us right into 2014 where you'll have another step down in the spring with shares declining another 8% or another 5 million shares. So, it's going to be a little bit of fun watching the slingshot starting in the end of Q3 and into Q4 and 2014. So I just wanted to make sure everyone was aware of that. I know there was some confusion over the converts. And obviously with the accounting being as clear as mud, hopefully this helps clarify things a bit.

Okay, let's talk about the business itself. Next slide. I want to stick to just the messages. As Bryan pointed out, we had, in LoyaltyOne we had some tough comps on the top line, but we did have very nice high single digit organic growth on the EBITDA. So, obviously some good news there. Obviously the thing that we're really focused on right now is ensuring the future growth of the business, which means ensuring that the key metric called miles issued or issuance flips in the second half of the year. We do feel comfortable that the way things are shaping up right now, it does look like we're going to go from a slightly negative issuance growth rate in the first half to strongly positive in the second half. And as a result, I think we are going to wind up the year right where we wanted to be, which is up about 5% on issuance growth. So, until it actually happens, we're going to keep it in our sights.

One of the things that jumps out in terms of LoyaltyOne this year is, going back I don't know 15 years or so, this is by far the strongest year in memory in terms of new sponsors. So for a program that's over 20 years old, the fact that you're signing up national sponsors with great names like GM and Staples suggests that the future of the program is very bright. Also, I think that we're going to be looking at probably announcing one to two new sponsors in addition of these two big ones already before the year is out. So, it is a very, very strong year for new sponsors, which suggests growth going forward should be solid.

As we turn to Epsilon, as Charles talked about, the famous or infamous air pocket that we talked about last year I think we can finally put to bed. It was the concern last year. It is absolutely gone, as organic growth swung from minus 3% in Q3 plus 3% in Q4 plus 7% in Q1. The way I do the math that sounds pretty good. And so, [if you owed] 10 percentage point swing in a couple quarters I think we can put the air pocket to bed. That being said, we need database to really start cranking out the growth. It's been signing a number of very large new clients and it's beginning to crank back up. Again, it was the cause for going negative in organic growth last year in Q3. It's now running flat. We expect mid-single-digit growth as the year progresses. Overall Epsilon is running 7% organic growth and as we talked about the pivot that we made with our strong focus on the digital agency as the tip of the spear leading the rest of the product line into our client base looks like it's been a decent bet so far.

Private Label. Again, I guess we could sum it up by saying it's all good. Funding is obviously very attractive and we are doing our best to term this thing out as long as we can and lock that down. Credit quality continues to remain pristine at right around 5%. The big question is, will it drift back to our more normalized 6% level? When will that happen? Quite frankly, from what we can tell on our forward-looking indicators, there is nothing that suggests that that's going to happen in the near-term. It looks like things are very, very stable where they are right now. And so, so far so good.

What was interesting about Private Label this quarter is that when you heard about some softness in consumer spend from a macro perspective, what we actually saw was very, very strong organic growth in the use of the card. In fact we saw credit sales actually going up organically in the high single-digit rate. And I guess it really attests to the fact that the whole loyalty concept behind the card does in fact work. Because the only way it does work is we're getting more market share. I think the takeaway from Private Label is that similar to last year, the book of new business is huge. Last year we signed at least twice the number of signings that we had in the past. Those signings equated to a vintage, as we call them, of almost $1 billion of receivables. And again, that's on a file that's only $6 billion in size. This year, with Barneys, Caesars, and a number of others that have been signed that we have not yet announced, we are very comfortable saying that this will be another year where we're going to close in on a vintage of about $1 billion of AR once these things spool up.

So, again, very, very strong year in terms of signings. I think we'll sign probably a total of 10 new clients this year. And that again would be a record for us. The backlog going into '14 also looks strong. I keep getting asked the question, what happened? Why so strong? And I think, again, we're all familiar with the secular shift in the change in spend from general-purpose spend on marketing and advertising into very specific ROI based targeted marketing. And you just don't get that type of information out of the blue. And with Private Label and linking into the customer systems, pulling out SKU level information, adding demographic and psychographic information, it works. And that's where the money is going. So, we're getting a lot of folks interested in harnessing that data collection platform, which is called Private Label.

All right. Let's finish up with the 2013 outlook. From a financial perspective, we talked about the businesses, let's talk about some of the numbers. We raised guidance on rev, EBITDA, core earnings, core EPS double-digit growth across the board. We talked about share repurchases. We had a $400 million authorization. We said we would be in and out of the market as appropriate. It was relatively modest in the first quarter from a calendar basis as things were running pretty solidly in the market. As soon as things began to drift a little bit, we came in much heavier and I think at this point we spent about $120 million year-to-date. That will continue to be our plan going forward, so we will be extremely supportive of the stock and be opportunistic when we feel it is a good opportunity. So, so far so good there.

One of the key things is free cash flow. We're running approximately $720 million of free cash and everyone seems to define free cash flow differently. I keep it real simple, which is how much is left in the bank account at the end of the year? Which means, how much after you pay for CapEx and interest and taxes and working capital and bank capital and everything else? At the end of the day the bank account will have $720 million more, which is up 15%. And it's approximately an 8% yield on our shares. So I think very, very attractive from that perspective. Also, balanced growth I expect to continue throughout the year, all three engines once again are contributing. And then EPS momentum I think will be a very interesting story as we move into the back half of the year where we are facing pretty strong headwinds on share count in the first half and yet still growing 6%, 7% in terms of earnings growth. That's going to start cranking up big time in the back half and then crank up again in the spring of next year.

So, that is pretty much where we are right now. Why don't I just sum it up with maybe a half a dozen quick comments? And that is, as we mentioned, it's really nice to see all three businesses will grow this year. And we think it will range from low single digits at LoyaltyOne up to 30% plus at Epsilon. EBITDA high single digit at LoyaltyOne, up to 30% at Epsilon. Additionally, the question always is out there of what keeps us up at night, what are our big worries for the year. And I think at this point there are less worries, but more of -- there's probably three critical things that we're going to keep our eye on to make sure we execute. The first would be, of course, at LoyaltyOne making sure that the issuance growth is in fact on track to flip strongly positive in the second half, to ensure that we have strong visibility going into '14 and '15.

The second thing we're watching very closely is we are rolling out a brand-new digital platform called Harmony at Epsilon. That rolls in Q3 and should drive a good chunk of growth in 2014 revenues. We believe this platform will put us right at where we need to be in terms of feature functionality within the industry on the e-mail side. And so we're anxiously awaiting that rollout. That's critical for '14 and '15 as well. And then finally, while Brazil is going like gangbusters, we still need to execute on a very aggressive plan of five regions that we want to roll out, including one big one. And while things are looking pretty good, we want to make sure we execute on those. So, those are the three areas that really are the focus of the rest of the year for us in terms of making sure things get done.

Overall, strong 7% to 8% organic revenue growth. You add in the acquisition of HMI and we're looking at teens growth of revenue and EBITDA and core earnings. And we talked about the EPS growth moving from 6% to 7% into double digit into very strong double-digit as we exit 2014. Again, as I focus on '14 and '15, very strong signings and pipelines at all the three businesses and therefore, beginning to firm up '14 at this point. For the rest of '13, I know that's the purpose or most of the purpose of this call, we have raised guidance. That's [for twice] and along with strong new business signings, no flags in credit quality and plus declining share count and certainly some buyback activity, we do feel comfortable that '13 will continue on a very solid path and that '14 is shaping up to be a nice year as well. So that being said, why don't we go over to questions? Thanks.

(Operator Instructions)

Sanjay Sakhrani, KBW.

Good quarter. Seems to me like Epsilon and Loyalty are really going to be strong second half stories. And I was wondering if you guys could dimension that for us a bit. I think Bryan helped on Loyalty, but maybe for Epsilon is it signings plus seasonality? And, for Bryan, what's the risk that the second-half issuance doesn't materialize? Thanks.

Let me take Epsilon first, Sanjay. I think Epsilon had a very, very strong first quarter. I think you're not going to see a huge increase in that type of organic growth. High single digits is what we're looking for, for Epsilon. And, overall, we are looking at plus 30 top plus 30 bottom with the acquisition. And so what you see in first quarter you're going to see really play out through the rest of the year.

The only difference will be you'll probably see a little bit stronger -- or you will see stronger organic growth now coming out of the big database builds, given the signings that we have. So, I think Epsilon will continue what you saw in first quarter, the mix will be a little bit different. Bryan?

So, I think the reason why that we feel strongly about the back half is what we're seeing just brewing. So, I talked about a couple of things, the new sponsor signings that are coming along and the opportunity for consumers to get engaged with those accounts. We're just ramping up; Staples just launched a little over a month ago. So, it takes a few months to see the activity begin to ramp in those customers and the customers start to get used to how to use the currency. So, as we roll through the back half of the year we'll see those partners ramping up. We've also got our existing partners who have shifted the timing of some of their promotional activity. But what we see in the pipeline, in the plans, with our major retail partners would give us comfort that we've got a strong Q3, Q4 on the hustings.

And then, the last piece would be there's some good things happening on the Financial Services partners side in that we just launched a new card with AMEX. It's a premium-based card called a Reserve Card. And we're just on the acquisition run right now for those. So, both acquisition and then the ongoing spend on those cards should help that sector as well. Remember that we, as we said before, always look at the full year and not quarter to quarter and the shifting of these promotions has a material effect sometimes on the issuance growth on also because the grow over from a high quarter versus more normalized quarter the following year could look like it's negative. So, we're very comfortable that we've got a layering of activity which should lend itself nicely to growth.

The last thing I'd just say is, I think if there's a risk in there, Sanjay, it would be really substantive downturn in consumer spending on credit card. And the reality is that we've seen softness in the beginning of the first quarter, but we don't anticipate that, as we roll through the back half of the year, that, that will continue to be an issue. And our credit card partners are equivalently very focused on ensuring that there's growth in their business, and so we're very aligned in creating the right kind of activity in our Financial Services partners.

That's wonderful. There's one more, obviously very strong showing on the share repurchase to date. And I was wondering how you guys feel about executing on the authorization you have and offsetting some of that warrant dilution. And also maybe if you could remind us, Charles, those share counts that you disclosed at the end of the slide deck on slide 10, what those would be if you are able to offset most of that dilution on the warrants side? Thank you.

Well, for the first tranche of debt, Sanjay, you have about -- at current prices, about 2.9 million shares that we would owe to our counterparties. So, that is in those numbers. If you look at our authorization and what we've done so far, we bought about 800,000 shares so far. So, I think Ed and I are focused on taking a very big bite out of it. To your point, it's already in our share count, so if we do sell it's going to be incremental to -- or provide upside to our overall 2013 results.

Okay. Great. Thank you.

Darrin Peller, Barclays.

Charles, just a quick first question on the portfolio yield. The profitability across the board has obviously been pretty stable, and I think this quarter in particular we saw the early signs of the portfolio yield coming out of some portfolios you have added. So, the yield itself was down year over year. But, I think you mentioned earlier it should be stable through the year; however, typically you guys have done a very good job of creating more profitability out of the portfolios, including the yield. Can you just touch on that? What are the opportunities to really improve upon what you have now, given the new portfolio you've brought on probably did start off with a lower yield?

I think the key there is, Darrin, we have had a little pressure this year. But if you break it down, it's pretty much all from the onboarding of new programs of the last 12 to15 months. If you look at whether it's a startup program or a portfolio we acquire, it can take us up to three years to get into the same gross yield we can achieve on the core portfolio. So, it's really going to come down to, bottom line, our acquisition activity. If we continue to grow with the new signings, 10, 11, you're probably going to see that continue the dampening effect and keep it in that 27.5% range. And so, really, we're going to keep it at the lower rate as we keep onboarding these new programs. So, we get the benefit of the previous ones ramping up, but then we're onboarding new. So I'd say it's going to be pretty static in the mid-27%s, which is why we gave that guidance.

So, it's really having to do with more with the new additions. Because without that, from an organic stand, based on what you have today, it would really -- yields should actually improve through the second half of the year.

That is accurate. But as long as we keep onboarding, to Ed's point, up to 10 new programs this year, we'll keep that dampening effect on gross yields going.

Okay. Just a follow-up question. Ed, this is really more in your wheelhouse. One of the big differentiating factors for Epsilon and Private Label is you're accessing your ability to work with merchants on SKU-level detail data, which we continuously hear about across the industry. Just touching on that for a minute, can you talk a little bit about some potential strategies you're working to really exemplify what you have there and how the [heck does that] differentiate you in terms of winning business? We often get the question of how you keep winning Private Label business. Does that help? Is that one of the factors? And then, going forward, any partnerships that might be possible related to that type of relationship you have with the merchant? And then, before I wrap it up, the big -- the recent news around Chase and Visa, the partnership that they have creating Chase Merchant Services seems to potentially give them more access and more direct connections with merchants. Does that have any impact on your model you think long-term?

Okay. I think there are about 18 questions in there. I'm going to start at the end and work back. On the Visa Chase Merchant Services, again, this is one person's opinion. I think it's a very positive announcement for Chase in the sense of having an on-us type network is something that's very attractive because it provides an ability to lower their operating expenses. Right? You're going to have Chase merchants and you're going to have people coming in with Chase-issued cards.

So, my belief is it seems like a very positive announcement on a cost savings perspective. The big question is, who benefits from those savings? Is it going to be used to help have a more attractive program for -- to onboard more merchants versus the competition? Is it going to go back to Chase to their bottom line, or is it going back to the issuers in terms of more rewards? I don't know. I do think a lot of noise is out there about what type of data you can get just by having an on-us network. The data doesn't get any better just because you have an on-us or a closed-loop network.

You have to be also taking the second step, which is tying into the merchant system itself, going into the guts of the merchant, meaning their T logs and their inventory systems and everything else. Otherwise, you don't get the SKU or category information, and I don't believe that, that is going to be the purpose of this venture. So, I look at it more as an expense benefit, which would be, I think, a nice one, but certainly not from the data side. So, from our perspective, regardless, it doesn't make any difference whatsoever. From Epsilon, Epsilon really comes down to a big bet, which is that because so much of the money in marketing and advertising is now solely at the discretion of the Chief Marketing Officer, that having a C-suite presence is absolutely critical.

And so, the pivoting that we did towards digital agency means that the uniqueness of Epsilon is the ability to have an existing C-suite relationship, or develop one; to walk in and talk the same language; develop the creative side of customer acquisition, customer retention, customer communication, customer loyalty; develop those campaigns; design those campaigns; and then, at the same time, where the digital agencies that are out there typically hand it off to some other vendor or some other provider, we bring the full package to bear. So, we can then say, all right, now we can build it for you. And we have the demographic and psychographic data. We can do the analytics. And then we can do the distribution through everything from digital print all the way through to mobile, social, and targeted display.

So, the whole bit on Epsilon and what makes Epsilon so unique is the bet that being able to be the one throat to choke, so to speak, is going to be increasingly important going forward because the CMOs out there are just getting absolutely buried with all these different opportunities that are out there. Our job is to just make it easy and just say, come to these guys and if there's a problem I pick up the phone and I know who to call. And so, that's what's happening. It's really just starting now. I think it's clearly heading in the right direction. And it's going to be -- I think Epsilon itself, even if it doesn't work perfectly, is a very strong high single-digit organic growth machine, maybe 10% EBITDA. And then, once you bring all the services together, you're going to step that up another notch.

Just really quickly, on the Private Label side, you really are the only company that's offering SKU-level detail analytical capabilities on Private Label as well. Is that right? Because of the closed-loop nature?

Yes. Because, again, it's not necessarily just because it's closed loop. AMEX and Discover also have closed loops. What we do differently, however, is, because we don't have hundreds of thousands or millions of merchants -- we have 110 -- you have to take that second step, which is to insert yourself via your systems into the back office, the T logs, the inventory systems of the merchant itself to actually pull out the category or SKU-level information. It doesn't come just because it's a closed loop.

Okay. Just quick last one for Bryan and I'll go back to the queue. On the Dotz, the discussions you're having with Banco do Brazil, how has that been trending and maybe talk about majority ownership?

Yes. The two sides would be this. First of all is, on the Banco side, we've had tremendous success for them. We've just launched some program enhancements, which I think they are very pleased with. And, as we measure the metrics that they're looking at for a successful program, it feels like we're green light across the board. So, we're progressing there well. And then, on the other discussion, which is around consolidation, those are ongoing discussions and we will find a way to daylight on that, and we're looking forward to being able to make announcements in the future on that.

Very good. All right. Nice job, guys. Thanks.

Kevin McVeigh, Macquarie.

Wonder if you can give us a sense -- it sounds like, Charles, if I have it right, the average base is about $150 on the buyback. Is there upside to the $400 million, given the $120 million you've done year to date?

I think there's always upside potential. I've said this before, Ed never thinks we're overvalued. He is always going to think our price is too low. So, if we do see good opportunities, would we be willing to go back to the Board and get increased authorization? Sure. But I think, even if the $400 million if we beat away at it, at the price you threw out, I can pick up over 2 million, 2.4 million shares, big bite out of 2.9 with the converts. And, from my standpoint that convertible equity is already in our share count, so if we nip away with our buyback, it's just -- I'll use another Ed-ism -- it is just gravy and we're just again setting us up for the future.

Great. And then -- and I apologize if I missed this, but what should we use for the Q3 share count? I know there's a lot of moving parts and then they start to run off. I'm clear on Q4, but what should be the Q3 share count, based on where we are right now with buyback and assuming things don't move at all?

I would say in the 63.8 million range. Again, you've got convertible debt in there, the phantom shares for one month, out for two months. So, you'll have -- probably be in that 63.8 million range versus the 67.3 million we currently sit at.

Super. Okay. Thanks so much.

David Scharf, JMP Securities.

Ed, the first is on Epsilon. Is the agency side of the business, which is obviously the lower margin, more labor-intensive, that continues to increase in mix, can you give us a little better sense for how to think about the long-term maybe margin upside in the Epsilon segment? (multiple speakers).

If you look at it year over year, if I strip out HMI, for Q1 we were up 140 basis points. Even if I leave HMI for the full year, we're probably looking about 50 basis points of expansion in 2013. So that would put us back in the mid-22%, 22.8%, 22.9%, in that range, I still believe long term, with the cross-sell upsell and the integration on that side, you can get this business back to a 25% EBITDA margin.

Okay. Getting up to 25%, what are the implications on mix? Is that the current mix of data tech and agency?

I think you're always assuming you're getting your foot in the door with the agency side. And then your cross sell upselling the higher value-added products in your technology and data. So, a lot of it can come from your data from being flat year over year to get some good growth coming through on data. Data is one of your highest EBITDA margin products. So, it's ability to cross sell into these higher-margin products that will help us get that way.

Got it. And just reflecting on the increase in organic growth in this quarter and you mentioned the telecom vertical, agency is a little lumpier than the other two businesses, which have been more transaction oriented. Should we be thinking about Q1 and the backlog going forward as a lot of large-project-oriented business that came in on the agency side? Just trying to get a sense for thinking about the visibility and recurring nature of the business versus a year ago and even pre-Aspen.

Yes. I think -- I'll take that. I think using that 7% to 8% organic top is a good number to use throughout the year. Exactly to your point, we're pretty comfortable that what we're seeing on the, as you call it, the older Epsilon business has turned very nicely and has gone from negative to flat to -- with the backlog, we expect that to be running at about a plus 5% organic as the year unfolds. So, you're going to see more and more coming from what used to be called the big iron builds, but the big database builds as the year progresses because those are the stuff that we signed. Towards the end of last year and in the first quarter of this year that will start flowing in as the year progresses. So, the visibility I think for that type of organic growth of 7% to 8% overall is pretty good for the year.

Got it. And, lastly, on Epsilon, can you talk a little bit more about the new e-mail platform, Harmony? Is this replacing the legacy, the old double-click server? Or is this a new product?

Absolutely. It's the complete redo. Years ago -- you're correct -- we bought the double-click and we had the Bigfoot platforms and we've been sort of trying to combine and add this and upgrade that. And what we eventually decided to do was a complete redo and come out with a sparkling new platform. We looked at everything in the marketplace, obviously, at the competitors. And, quite frankly, I think at where we are right now, the competitive landscape is such that we frankly were not competitive with the offerings that were out there.

So, with the Harmony rollout that should be coming later on this year, we should be at, if not above, all the feature functionality that exists in the marketplace today. That's the goal. And our job is to be perfectly blunt with everyone, which is, we weren't there. And I think this will get us where we need to be, but it's not going to show up until the first part of ' 14.

Got it. And then, lastly, just switching gears to Private Label. With respect to the provisioning rate this quarter, which is obviously a pretty meaningful spread above your existing loss rate and even your LTM loss rate, I understand provisioning in advance of a big build up. Given the fact that you're -- I think you commented you're anticipating bringing onboard, on a vintage basis, the equivalent of another $1 billion of receivables, is the provisioning rate going to resemble what we saw at March 31 for most of this year? Should it be coming down at all, just given what we see on delinquency trends? How should we model that throughout the year, Charles?

I'll put it this way, David. If the trends we see now continue as a reserve rate, it will drift down over the course of the year. But, conversely, with the growth that Ed's talking about, you'll still see a big provision or reserve build. So, even though the rate's drifting down, the expense will be recognized and year over year will be substantially higher than what it was in 2012. So, to your point, I do think the rate will drift down. It could drift down 40 basis points from where it is now, if we see the trends continue. But even with that, with the additional AR we're putting on the books, you're going to see a big reserve build, which will increase our expense on a year-over-year basis.

It's one of the interesting things about having that type of business in the sense of, all right, with the market itself overall and the card industry is stagnant. So, there's really no growth out there in general-purpose cards and, as a result, the pristine credit quality that really everyone's seeing, any type of growth is coming through reserve releases, which eventually will end. In our case, it's the reverse. Because we have so much growth, we're not having a bunch of reserve releases dumping through earnings. It's a good problem to have, and eventually when things slow, obviously that will reverse itself and would be a nice mitigator to slowing growth. But, at this point, it's all about cranking up the growth. And we'll get the reserve release somewhere down the line.

Got it. Thanks very much.

Bob Napoli, William Blair.

Question on Brazil, I guess. You gave a number of about $100 million of revenue this year. And with the number of collectors growing from 2 million to 7 million, I would imagine that growth rate's very strong. As we think about 2014, are we -- is that business -- is it growing in line with the rate of growth of collectors?

Bob, it will actually grow quicker. Again, think back to the deferred revenue model we had with L1 where we issue a point now that may not redeem for 42 months, so we don't recognize most of the revenue until 42 months down the road. If you think about the Dotz program its really came into existence in '09, so you have issuances '09, '10, '11, '12 and now they are starting to come through on the revenue stream. So, if you think about a LoyaltyOne in Canada, about 65% of the revenue stream is from miles redeemed. So, now the collectors are accumulating in Brazil. Now they can start redeem. So, what you're going to get is a little bit of a hockey stick effect. So, if you go back in time in 2011, it was about $15 million of revenues; about $60 million of revenues in '12, jumping up to $100 million in revenues in '13. You're going to see another big jump coming through in '14 as that hockey stick plays out and now the consumers in the markets have accumulated sufficient points to get to that point of redemption.

And then, what are the -- what do you think the margin, EBITDA margin environment is like, the business model there? And I know you're doing a lot of investing, but over the next couple years, is that a higher-margin business, lower margin than Canada?

Yes. I mean at the end of the day, it's very similar. I'd say that the margin structures it flows through may be a little bit tighter at the top end of the gross margin level. But because costs are lower in Brazil to run the business, you end up with an EBITDA margin which approximates what we see in Canada.

And again a nice rule of thumb, since I find that the shorter the better, is that, in terms of replicating the size of the Canadian business in terms of the financials, which is $0.25 billion or so of EBITDA and we have roughly 10 million active households in the program today. But to do that in Brazil, we're going to need about 2.5 times that, so about 25 million to replicate that because the per-capita spend obviously is quite a bit lower. So, getting up to 10 million this year obviously puts us in great shape to crank it up to the 25 that we need. But that's the magic number is, let's get to 10 million. We feel at that point, we've tipped over to the point of this thing will just really start cranking even faster than it is now. And then, at 25 million, once you have some stability there, you're going to get a model very similar to Canada.

Thank you. Just to follow-up on the Private Label business, your portfolio is $7 billion today. And you've grown a lot, but $7 billion is nothing in the scheme of the credit card industry. And I know that you have a specific type of retailer you're targeting. I'm starting a new investment fund to invest in every public company that becomes an ADS client, because the stocks all seem to double and triple as they take on ADS. But, what do you think the market opportunity is over the next five years, obviously, through both a combination of organic and inorganic growth? What is the market available to ADS?

Yes. It's a great question. You're exactly right, the rest of the world can do their thing. Our sandbox where we play we've always come back to this roughly 300 potential -- existing or potential clients in our sandbox. And they're all roughly -- they are going to be a similar type of profile of what we have today. And as a result, we have 110 clients today, that's $7 billion of AR. If we think there's roughly 300 out there, you do the math. I think it comes out to about three times that, so call it $20 billion or so. We think we're about one-third penetrated. And, as a result, if this shift continues towards the data-driven marketing, this could be a very strong growth engine for years to come, but we think we are about a third of the way there.

Thanks. And just last question on the pipeline of new clients, are you seeing more of that coming from those that are customers of your bank competitors, or are they people who are doing it internally? I guess my question is, are you seeing a wave of bank competitors that are -- or clients that are bank competitors that are now looking at ADS and seeing what you've done for the likes of Bon-ton and Pier One, et cetera, and not happy with the banks?

It's a combo. Barneys was in-house. And Caesars did have a program at one point with a competitor. But I would say that it's really the vast bulk of the signings are going to be coming from starting a program from scratch. It's usually triggered by, it could be a change of management where the CMO comes over and has some familiarity with the benefits of Private Label. Or it could be that this whole big data thing in bringing it online is really beginning to seep into the consciousness of the CMOs across the industry. But, I would say probably 80% of the signings will be folks where we're starting a program from scratch. And then the other 20 is, to your point, we will welcome certain clients who have decided to join us.

Thank you.

All right. We're going to call it a day. I know everyone has a bunch of stuff they have got to do. I'm sorry we didn't get to everyone. But, again, so far so good. Enjoy your day and thank you.

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