Bread Financial Holdings Inc (BFH) 2013 Q2 法說會逐字稿

Good morning and welcome to the Alliance Data second-quarter 2013 earnings conference call. At this time all parties have been placed on listen-only mode. Following today's presentation the floor will be open for your questions. (Operator Instructions). It is now my pleasure to introduce your host, Ms. Amy Pesante, of FTI Consulting. Ma'am, the floor is yours.

Thank you, Kayla. By now you should have received a copy of the Company's second-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 Kennedy, Executive Vice President and President of Epsilon, an Alliance Data Company.

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, Amy. And, everyone, welcome to our 49th edition of quarterly earnings as a public company. And as mentioned, joining me today is the always engaging Charles Horn, our CFO, and also our always insightful Bryan Kennedy, our President of Epsilon. Charles is going to first discuss our consolidated results, LoyaltyOne, Private Label; Bryan will walk you through Epsilon and then I will wrap up by discussing our updated guidance, outlook for the balance of 2013 as well as our thoughts as we take a look at 2014. Charles?

Thanks, Ed. Alliance Data continued to beat expectations with revenue again topping the $1 billion mark aided by 7% organic growth and adjusted EBITDA increasing double digits to $338 million. Both Private Label and Epsilon contributed high double-digit increases in both revenue and adjusted EBITDA for the quarter while LoyaltyOne faced revenue headwinds due to unfavorable FX rates and reduced redemption activity, but still managed to increase adjusted EBITDA by 9% versus last year.

Core EPS beat guidance by $0.16, increasing to $2.41 for the second quarter of 2013, up 13% compared to last year while net income per diluted share increased $1.71, up 5% compared to last year. Core EPS for the second quarter of 2013 included a $0.03 benefit from the release of previously reserved tax liability.

Diluted share count increased 4.4 million to 68.2 million for Q2 2013 due to incremental dilution from convertible notes. Approximately half of the share increase was related to our phantom shares which are shares we never have to economically settle. And convertible note warrants which we do have to economically settle accounted for the remaining half of the increase. Starting in the third quarter of 2013 and continuing through the second quarter of 2014 we should benefit from a declining share count as our convertible notes mature and the related phantom shares vanish.

Let's move to the individual business segments starting with Epsilon. With that I will turn it over to Bryan Kennedy.

All right, great, thanks, Charles. Epsilon surpassed expectations again this quarter with 41% top-line growth, 30% bottom-line growth. Organically we achieved 9% top-line and 11% bottom-line growth compared to the second quarter of 2012. So I have to say it is nice to see high single-digit organic revenue growth again.

Breaking down the individual businesses, first on technology, revenue was up 1% compared to last year, but is showing signs of accelerating revenue growth especially in database which is trending towards double-digit growth in the back half of the year. The quote, slow to grow, trend we saw last year is behind us as key wins in 2013 so far along with a very strong backlog support accelerated growth through the rest of the year.

Additionally there's a lot of optimism around a positive response with the launch of our new email platform which we believe will help alleviate some softness in the digital product offering and that rollout is still scheduled for Q3 of this year with a P&L impact primarily occurring in 2014.

On the data front revenue was essentially flat with prior-year. Notable, our online survey offering continues to exceed expectations as it emerges post restructure in very good form, but it is being mitigated by overall continued softness in the consumer demographic data offerings.

And then finally, on the agency front, agency continued to outperform this quarter increasing revenue 115% to $179 million. And if you exclude HMI, organic revenue growth is about 25%. So agency's record of converting pipeline items into key wins as really nicely positioned Epsilon to meet full-year growth expectations as well as negate any potential softness in the back half of 2013. HMI has also been expanding their vertical footprint and adding depth to the current product offering with a variety of innovative new offerings as part of Epsilon.

Overall the pipeline remains very strong across the business, especially in agency and database. And we continue to expand relationships with clients like AT&T who recently signed a multiyear renewal with us while onboarding new clients like Dunkin' Donuts where we were engaged recently to drive technology for their new loyalty program called the DD Perks Program.

Stepping back, the strategy of selling a full suite of integrated surface offerings across our client base continues to pay dividends for Epsilon. The first half of the year fueled by a double-digit increase in customer wins and verbal commitments has given us the momentum needed to stay on track for high single-digit organic growth by the end of the year.

As we actively ramp up for this year's top-line growth cost-containment efforts are also being directed towards actively managing our bottom-line growth. This proactive approach, coupled with last year's restructuring efforts, is really setting the stage nicely for steady continued momentum into 2014. So that is Epsilon; with that I will turn back to Charles for LoyaltyOne.

Thanks, Bryan. Let's flip to the LoyaltyOne slide real quick and what you will see is, similar to the first quarter, LoyaltyOne's revenue declined 4% for the quarter due to headwinds from a 9% decrease in miles redeemed and a 1% drag from the softening Canadian dollar. Despite this currency weakness we expect full-year revenue growth to be in the low single-digit range as we anniversary the high issuance comps that we saw in the last half of last year.

Adjusted EBITDA increased 9% compared to the prior year despite unfavorable Canadian exchange rates which reduced adjusted EBITDA by approximately $1 million. A combination of operating leverage and a $3 million reduction in losses associated with our international expansion efforts drove a 400 basis point improvement in EBITDA margin for the quarter.

As expected miles issued for the second quarter remain light due to softness with our credit card sponsors and the timing of promotional spending. We expect the ramp up from new sponsors added during the first half of 2013, coupled with promotional spending by several of our top sponsors, will stimulate issuance growth in the back half of 2013. For the year we are striving for a 3% to 5% increase in miles issued compared to 2012.

The residual effects from the run on the bank, which occurred last year as consumers responded to the announcement of expiration policy, were felt during the quarter as miles redeemed dropped 9% versus the prior year. This impact had dissipated by the third quarter of 2012, so we should see a slight increase in miles redeemed during the back half of 2013 which should drive revenue growth.

2013 continues to be a record year for new signings as we added Irving Oil and Eastlink as sponsors during the quarter. Both are key wins since Irving Oil deepens our reach within the high-value, high frequency spend category, and Eastlink grows our presence in the telecoms sector.

Turning to our Dotz joint venture in Brazil, our focus continues to be on market expansion. Dotz now has 8 million members, up over 170% from last year; it is on track for 10 million collectors by year end. In addition, we are looking to add four new markets during the back half of 2013 bringing the total count to nine.

Let's flip to the next page and talk about Private Label. Private Label continues to excel with revenue up 19% and adjusted EBITDA net of funding costs up 13% driven by a 27% increase in average card receivables. The growth was balanced as approximately 16% of the AR growth was organic and about 11% acquired.

Gross yields dropped 110 basis points during the quarter primarily due to the onboarding of new programs over the last 12 months. Some of this compression was mitigated by a 30 basis point improvement in principle charge-off rates and a 30 basis point improvement in portfolio funding costs. The end result is approximately a 50 basis point decline in net spreads versus last year.

Loss rates continue to be at historically low levels and it feels like we have likely bottomed. As such we should see a more normal seasonal trend on a go-forward basis, basically meaning the rate should be up in Q1, down in Q2, down in Q3 which should be the low point and then up again in Q4.

During the quarter we continued to lock in long-term competitive financing rates by issuing $500 million of new three-year term asset-backed securities below 1% coupon. Cost of funding expressed as a percentage of average card receivables was approximately 1.8% for the quarter. We will talk more about our funding strategy on the next slide.

Before we do so we need to talk about the continued success in the onboarding of new programs within our Private Label operation. 2012 was a record year for Alliance Data in terms of new signings, but we are on a pace in 2013 to potentially exceed it. Just halfway through the year our new signings should add about $1 billion in steady-state card receivables as the programs ramp up over the next three years.

Let's flip to the next page. As you can see in the debt maturity schedule, we tend to be fairly conservative in our funding approach giving us some rates for longer-term certainty. Currently 83% of our funding is fixed with a duration slightly over 36 months. What that means is in a rising rate environment this approach should be beneficial to us. Or, as Ed would say, we should receive a kiss to earnings in a rising rate environment.

Why? Simply if you look at the slide we are asset positive in Private Label. The APRs on our cards are variable rate tied to prime rate plus and adder. In normal rising rate environments prime rates should increase in conjunction with key rates such as Fed funds. An increase in prime rates would raise the variable APR in the very next billing cycle.

Conversely, on the funding side you can see from the chart that we have staggered out maturities until 2020, meaning that we will stair-step increase in funding costs. Until the increase is fully burned in we should see a slight increase in our net interest margin.

I've been asked many times over the last month what if only long-term rates go up and your APRs don't reset? The answer is pretty simple; as the debt matures we go shorter on the yield curve, minimizing any impact to our net interest margin. Essentially we move closer to a matched book.

Let's turn to the next page and look at our liquidity. Liquidity for Alliance Data remains very strong at about $5 billion as of June 30, 2013. Breaking down our liquidity further, at the corporate level liquidity remains strong at $1.7 billion, of which approximately $750 million is cash on hand as of June 30, 2013. Our corporate leverage ratio of 2.2 x remains well below our maximum leverage covenant of about 3.5 x.

Subsequent to quarter end we entered into a new credit facility which increased corporate liquidity to approximately $2.1 billion. Approximately $770 million will be used to repay the convertible notes coming due August 1, 2013 leaving over $1.3 billion to execute our capital allocation plans. At the bank level there is approximately $3.3 billion of available liquidity as of June 30, 2013.

During the quarter one of our master trusts issued $500 million of fixed rate term asset-backed securities. The fixed-rate coupon of 0.91% is the lowest coupon ever achieved for any duration in Alliance Data's 17 years of capital market issuance. Also during the quarter ADS renewed its $350 million [Trust IV] conduit.

We continue to take advantage of this low interest rate environment by extending maturities and adding liquidity as execute our strategy of building long-term visibility into our earnings. During the quarter our two banks paid $82.5 million in dividends to the ADS parent while maintaining strong regulatory ratios. As of June 30, 2013 Comenity Banks' regulatory ratios were substantially above minimum well-capitalized levels and are basically the highest in the card industry.

Lastly, we continued to use our share repurchase program to take advantage of market opportunities during the quarter, spending over $150 million. For the first half of 2013 we've spent $208 million of our $400 million authorization. With that I will turn it over to Ed for an update on 2013 guidance and a business outlook before opening the call up for questions. Ed.

All right, thanks, Charles. Why don't we moved to the page titled New Guidance? And I guess at a very high level we are raising -- bumping up all the ROI key metrics from where they were before revenue -- we are pumping up a little bit. And we are looking at about 17% revenue growth versus prior year.

The thing that I focus on is organic growth and in this environment of really sluggish GDP growth and hard to get organic top-line, our goal is to run organic growth about three times real GDP. Right now organic growth is actually running above that, we're running at about 8%.,., we think on a full-year basis against probably a 2% or less real GDP number. So it's a very strong showing on the organic growth on the top-line. So, so far so good there.

On core earnings, also we are looking to do about 17% increase, which is up from prior guidance and core EPS is going to be up a little bit less than that, about 13% to $9.85, we bumped it up a dime from the prior guidance. And we are inching our way towards the $10 mark as the year unfolds, but for now we will keep it at $9.85, up in the low teens. Economic EPS obviously is coming in around $11.28, that is when you exclude the Phantom.

So overall the way things are flowing out it is pretty nice. I think that we had good core earnings in the low double-digits through the first half of the year. We ran into the headwinds of actually higher share count in the first half of the year. That dissipates in Q3 and then in Q4 you are going to have this nice earnings increase but you are also going to have finally a share count that is down versus Q4 of last year. And that when you combine the two essentially is what we call our slingshot as we exit 2013 and move into 2014 where that slingshot should continue throughout the year.

Turning next to business outlook -- I'm going to talk a little bit about the rest of 2013 and then, I think probably as importantly or more importantly, how we are looking -- how are we shaping up for 2014.

Obviously we will start with LoyaltyOne and AIR MILES. I would say if there was one weak spot that the business is seeing so far this year it's the key metric of miles issued, which is certainly soft during the first half of this year. We do, however, as we have been saying, expect a very strong bounce in the second half and we can get into what is driving that during Q&A if you want.

But it is primarily driven by the spool up of the big new sponsors that have been signed this year; it is but a very strong year for new sponsor signings, they are cranking up. And then we have definitely gotten some commitments in terms of big promo spending in the back half, especially from our financial institution partners as they are looking to grow spending on their cards. So I think that this metric should turn very nicely in the second half, but that is something that we are clearly keeping our eye on.

As we talked about, I'd say the high point for LoyaltyOne or AIR MILES so far this year has been -- it is been a very strong year for big new sponsor signings -- GM, Staples, Irving Oil and Eastlink on the telecom side. We usually do about to big signings a year. This year we are looking at four, there may be one or two more out there as well as the year unfolds. So that is very, very good news going forward in terms of our issuance metric.

Turning to Brazil, it continues to grow and grow quickly. Members are up to 8 million which is up 170% from 3 million a year ago. We are hoping and expect to get to 10 million folks by the end of the year. Again, the question being asked is how do we compare that to our Canadian business? And a good rule of thumb that Charles and I use would be we would need about probably 25 million enrolled to roughly equate to the Canadian program where we have 10 million households enrolled. So that's what we are shooting for and if we could end this here at 10 million that would be superb.

Full-year organic revenue growth will be a couple of points when you include Brazil. And the grow over that Charles talked about from the run on the bank in 2012 is really driving flattish revenues. We'll get a couple of points, as we said, from Brazil. That is not in our numbers obviously, but we are going to put it off to the side here and let you know how things are going. What is a big plus is the organic growth in EBITDA is very nicely running in the high single-digits, which is what we like to see as it did last year as well.

So turning to 2014, what is key -- what do we need to see? We need to get that issuance turned strongly in the back half. And again, our financial institutions partners have committed to some big promos, we've got the big sponsor ramps. The watch that is going on right now is the Canadian consumer; specifically the Canadian consumer is running at very high debt levels in terms of debt to income.

And the concern is that there's a housing bubble up there. What we are seeing is, in fact, that the debt levels, while high, have not turned into a rout in the housing market and in fact the housing price increases have been moderating over the past quarter or two. So we think the Canadian consumer is stretched but probably not overly so.

Brazil, as we've talked about, we are in the midst of a multiyear land grab so to speak, which is essentially pushing as hard as we can to get as many collectors signed up and on board as quickly as possible. And that is going to be the focus for the next couple of years.

Overall if I were to sum up LoyaltyOne, clearly the one area we are watching is miles issued. We want to make sure that that turns smartly in the second half. Against that we have probably the big pluses of the big new sponsors; organic cash flow growth that is in the high single-digits; we have margin expansion that is up 200 basis points and Brazil seems to be going nicely. So I think that is about it for LoyaltyOne.

When we turn to Epsilon, I think Bryan did a nice job covering it, which is good since he runs the division. The division will obviously cycle differently depending on the various areas within it and I think the thing that is most comforting at this point is we have seen a 12 point swing in the organic growth number from minus 3% towards the latter part of last year to plus 9% so far this year. So that's very, very encouraging.

He talked about the book of business being exceptionally strong; we've never seen it this strong so that is good news. I think that, again, looking for what could go wrong as we move into 2014 or what we're watching, I think overall we can say that the pivot that we made to digital agency starting a couple of years ago with Aspen and then HMI is certainly beginning to pay off big time for us.

Having digital agency leading our overall offering is driving our organic growth and now what we are beginning to see is it is pulling through some very large commitments on the technology side and database side. So we are going to see some big [nums] on the database bill side as we go into the back half of this year and going into next year. So that is very good to see.

What are we watching? Probably two things. One is, as Bryan mentioned, the rollout of our new digital email platform and that is called [Harmony], and so far the initial reviews have been very positive. But we want to make sure we have an extremely strong rollout as we go into 2014 and make sure that we are considered best-of-breed in the marketplace.

And then second, obviously with the huge overall growth at Epsilon, obviously making sure that we on-board and don't stumble when we bring on these big new clients is of paramount importance at this point.

Okay, let's turn a little bit now to Private Label. Obviously Private Label is -- it's certainly continuing on with record signings. And we talk in vintages here which means that when we talk about the 2013 vintage, that means if we were to take those clients that we signed in 2013 and then most of them are starting from scratch, some of them are existing programs, but we look out three years and say, okay, will this vintage ramp up to about $1 billion of incremental new business for ADS?

And we did $1 billion in the 2012 vintage for the first time since I've been here. And this year so far, as Charles mentioned, we have signed the $1 billion for the 2013. I will say that there are a number of deals that have been signed that you will see released over the next I guess quarter. And I think that it is safe to say that this year rather than the $1 billion vintage we are probably looking at closer to $2 billion, that is how strong it is out in the marketplace.

It is absolutely unreal the amount of interest that we are having in this data-driven targeted marketing product that we call Private Label. So very, very strong and hopefully this is a trend that will continue for quite some time.

What is behind it, again, continues to be this huge desire on the part of the retailer to link category or SKU transactional data with an individual consumer. And what is driving a lot of that is the fact that it is very, very hard obviously to get the consumer in the door and spend. And what we try to do is we try to make sure that we can offer up an appropriate message or an appropriate offer for each individual consumer.

It is something that has grown in sophistication as we layer in demographic and psychographic information on top of transactional information. And it is, as we said, very compelling when you link it to the ability to communicate through what we call our omni-channel approach, which is everything from direct marketing -- I'm sorry, direct mail to permission-based email, mobile, social, targeted display, whatever it may be.

Okay, funding -- as Charles talked about, it is mainly locked down, credit quality is very stable, call it 5%. We are not seeing anything out there and we have a good view through delinquency flows through the end of this year and the beginning of next year. There is nothing out there that suggests that there is -- that it is going up or that it is going down.

So I think what we are looking at here is you've got funding locked down, you've got credit quality relative -- essentially stable. And so growth is going to be coming from top line. Overall full-year organic growth we are looking at about 10%, which is about two thirds of our total. And if you looked at Q2 we talked about roughly 12% organic growth versus a card market that is essentially flat.

We get the question over and over again of why is the organic growth so strong. Why is it growing so quickly? What is very interesting that we are seeing is it's less about new accounts flowing in the door when it comes to the organic side because that plays in later, it is more about our growing tender share within our existing client base and new client base.

Essentially over the last quarter we have picked up tender share of almost 100 basis points, meaning that traditionally if 26% of all the dollars that are being spent at the retailer flow onto our card now it is 27%. It may not sound like a lot, but it is big numbers when it comes to organic growth, you throw in the new ramp ups and that is where you're going to get 12% organic growth.

And what we are trying to do with the retailer is we found that it's extremely profitable for the retailer to spend a little less time about just driving new accounts in the door and more about activating the interactive or low active accounts. And that is all through these loyalty programs, what is called trigger marketing.

And so, very simply put it could be someone who hasn't been shopping all that much at this store, we notice that and we communicate with her and let her know that, hey, you are only $30 away from the next reward tier and we send out that little communication or we send out a coupon or something like that. And what you do is you trigger a reaction and it is extremely, extremely profitable for the retailer.

Basically it is all about timing, messaging and merchandising and that is where we are today. So I think overall we are in very good shape when it comes to Private Label for 2013 and for 2014, it is a little early for 2015 but 2014 certainly looks quite strong.

Consolidated, at the consolidated level we are looking at high single-digit organic top-line growth greater than three times real GDP. Again, we talked about roughly 12%-ish for Private Label, 9%-ish for Epsilon, if you adjust for FX, probably relatively flat for LoyaltyOne and overall that should give you about 8% organic growth for the year.

I think as we move ahead into 2014, we talk about what exactly are we worrying about right now at Private Label? Obviously the credit sales look strong, portfolio growth is strong, funding is fixed, losses are flat, I think Private Label is in good shape for next year.

Epsilon, what we are looking for is a bit of a cycling where the big, big database builds start ramping up heavily in Q3 of next year which will drive a lot of the organic growth as we go into 2014, which is kind of nice, it takes the pressure off of the digital agency piece a little bit. But overall Epsilon should be in very good shape for 2014.

In Canada obviously we are looking for a turn on the miles issued. Our focus is making sure that key metric turns for 2014 and it is a little bit of a wait and see at this point until we actually bring in the numbers in Q3 and Q4 of this year.

In Brazil, as we talked about, we are going as hard as we can to ramp up. We have gone from no collectors to less than 2 million to 6 million last year, hopefully 10 million this year. We own 37% of this entity; it is obviously very appealing to us. We are looking at double-digit free cash flow for next year and then sort of the nice kiss that we get is our share count is going to drop off quite dramatically going from 66 million shares to closer to 59 million.

So if you just do simple math, which is if earnings in general grow 10% and your share count is going down by 10%, that suggests that you're going to pretty nice earnings per share growth of 20% plus.

So we feel pretty good about the rest of this year, we feel pretty good about next year. Our goal is to be 7% to 8% organic for next year, double-digit core earnings for next year and, as we said, with the lower share count you are going to have a slingshot on earnings per share. That is it. Why don't we open it up for questions?

(Operator Instructions). Sanjay Sakhrani, KBW.

In the press release that international expansion is something that you are looking at. Could you just talk about what exactly you are looking for within Loyalty and Epsilon, especially within Loyalty because you guys talk about the fact that you might take -- not take up the ownership in Brazil? Thanks.

Sure, on the international side I think that the LoyaltyOne group up there is well-positioned from a management and organizational perspective that they can handle a little bit more. And so we are casting our net for other loyalty like programs outside of Canada and Brazil. And there are a handful of attractive ones as we look out in places such as Europe or the Far East.

So if we could establish a loyalty program elsewhere then we would certainly like to do that. Probably the best way to get in is through M&A. And again, not saying it is going to happen, but that is something we are looking at.

Here in the states we think the pricing on some of these deals are just nuts. So we are going to stay away from that for now. We are not going to get in the middle of this -- these pricing wars that are going on. But there are opportunities out there.

I think Epsilon will probably focus entirely on organic growth for the next year. It has more than it can handle in terms of new wins and verbal agreements. So they are going to stick pretty close to their knitting over the next year.

And as far as Brazil goes, again, we don't want to upset the apple cart down there. So as far as we are concerned it is basically go as hard as they can to drive this land grab that is going on.

So just in terms of Brazil, not taking up the ownership, does that change your view of the growth potential there and the ability for Banco do Brazil to renew?

No, what we need is -- it is a question of what is Banco going to do. Hopefully we will have that completely resolved as the end of the year approaches. I don't think we are all that concerned about whether they are going to renew or not, it is a question of are we looking at an extension, a renewal? We don't really know right now, Sanjay.

But our focus is entirely on getting that core base of customers from $8 million to $10 million to $15 million to $20 million and not distract management with some type of other financial transaction right now. So when the time is right we will be stepping in and seeing if we can get something done there that is attractive to both sides. But right now all eyes are on the land grab.

Okay, great. And one final question for Bryan. I guess the big announcement in the marketing world was the merger of Publicis and Omnicom. I was just wondering if there were any implications far as Epsilon was concerned. Thanks.

Yes, sure, Sanjay. I mean I don't see any immediate or even long-term significant implications for us. I think from my perspective the fact that a merger that size happened just validates the thesis that we've been pursuing for the past several years, which is there is a sea change in the world of advertising and data and technology and analytics is really what is driving the future of this industry.

I think we have been way out ahead of that with our strategy and with Operation Pivot and are well down the path with our own integration of all those kinds of capabilities. So it will be interesting to see where that one goes. But other than maybe some disruption that creates some opportunity for us from a growth perspective I don't see any major impact on us.

All right, great. Thank you.

Bill Carcache, Nomura.

Ed, I wanted to kind of go back to some your comments on tender share. And you threw out 26% as an example. Is that kind of a reasonable level to think about traditionally that now it is up 100 basis points to 27%? I guess I was hoping you can kind of give a little bit of additional perspective around that, how long does it typically take to get there? And I guess maybe what's the high, how high could it go overall? Maybe just some commentary around that and maybe how also it differs by vertical -- furniture, electronics, apparel, home products, etc.?

Sure, you bet. Yes, I mean it's one of these trends that frankly is really beginning to pick up. We have programs where we have tender share in the high 40%s. So 45%, almost 50% or half of all the money spent at the retailer is put on our card. And obviously we have a number of programs that are below that and others that are ramping back up.

But I think a tender share of around roughly 30% is something that is extremely comfortable. We are at about 27% today and we can grow these programs to about 40% as we work on them throughout the year. What we are seeing, which is very different from past years, is what we talked about in terms of the focus on getting the less active or virtually inactive accounts back into the game. And in the past we didn't have all the tools that we have today.

So a lot of this stuff is focusing around retention. And there is two ways to grow -- you can just chunk in a bunch of new accounts to the front end, but you are going to have folks going inactive on the backend and hopefully net-net you're up. What we're seeing is, yes, we are bringing in the accounts on the front end, but we are doing a much better job of keeping our shopper interested on the backend so that she is more willing to come in let's say just one extra time per year or make one additional online purchase.

And a lot of that is focused around the data and the ability to identify all these micro-segments. We will then do all this trigger marketing. As I talked about, you are only $30 away from the next reward. You bought these pants, how about you try this top and we will give you something off. So it is one of those things that if we can drive tender share you are talking probably 8 points of organic growth just coming from driving your tender share up a little bit.

So, that is where we are going. Obviously the big, big drivers of our tender share growth would be in our more traditional areas such as soft goods, but also furniture and jewelry are also very big in terms of very strong tender share.

That is really helpful. Switching gears, you guys had -- I think you said 12% of the increase in your credit sales came from higher core cardholder spending. Can you relate for us how much of the strength in your credit card sales volume growth is really kind of tied to wealth effects? Kind of haven't really heard you guys talk about wealth effects as being much of -- or I guess specifically being a driver, but wondered if you could comment to what extent you see that specifically in your customer base.

Yes, I mean it's a good question. I think it is more of an incremental benefit, Bill. I think we talked about -- of our revenue, two-thirds of the revenue or 12% was coming from this organic growth that we talked about, the other third from the acquired side. And on the organic growth side what we're seeing is that our shopper, she is not going nuts in terms of huge increases in spending. We are seeing our average card balance probably going up 5% or 6% for the year, which is not a huge number when you are talking about a $450 balance.

So what we are seeing from the consumer side is a continuation of the last couple years of elevated payment rates. Meaning that she is shopping but she is paying off a big chunk every month and a very moderate increase in balance size probably going from $450 to probably $480 to $490.

So we are seeing a lot of discipline out there. What we are seeing also is that we are beginning to see the start of those folks who had challenges during the great recession. It has taken now almost four years for them to get back in the game in terms of being really attractive to us from a credit perspective. And so that also is a new trend that is beginning to cycle in.

That is great, thanks. Finally, if I may, one for Charles. Charles, can you -- I was trying to square the commentary you guys had in the release about there being a moderate provision build this quarter. But from looking at the monthly credit data that you guys put out it looks like there is -- there were about $80 million of charge-offs during the quarter and you had a $58 million provision. So that would seem to imply a release, but you guys said there was a build. Can you help me understand what I'm missing there?

It is on a year-over-year basis, Bill. If you look at our reserve Q2 last year it was $432 million, this year at the end of Q2 $448 million. So it was (multiple speakers) comparison for the reserve build.

Got it. Thanks very much, guys, appreciate it.

Darrin Peller, Barclays.

Let me just start off on the private label side. The portfolio yields, it seems like overall this business is obviously performing extremely well. But even with that said it is probably underperforming in some regard given that the portfolio yields continue to be negatively impacted by some of these new portfolios you are onboarding. So I think, Charles, I think you've mentioned in the past that it could improve over time. When do you expect the portfolios to actually generate yields that are more in line with ADS's core portfolio and what are the key factors that would drive that?

I think you'll see a little bit of lift come through in Q3 and Q4 of this year. As we talked about in Q1 of our earlier call, we are looking for probably 27.4% gross yield for the year, which is down slightly year over year; it was 27.7% last year. So I think you'll see a little bit of lift in Q3, Q4 for the year-round senior 27.4%. So slight compression year-over-year, but that is due to the onboarding that Ed talked about it. So what I would be looking for, Darrin, is a little bit less than Q3. For the year coming in basically what we signaled in Q1 at around that 27.4% level.

And that is just basically the -- as you have the opportunity to really provide your services and your expertise around the portfolios that you are acquiring?

That is part of it. Also, just obviously with Bon-Ton onboarding in Q3 of last year, some of the effect will start going off in Q3 of this year. So some of it is just timing as well.

Okay, that's helpful. Just another question, a follow-up on the Private Label side. Opportunities for additional portfolios beyond maybe Zales, for instance, which I know really doesn't probably come on until even at the earliest 2014. What else is out there?

And I think, Ed, you mentioned in your prepared remarks around the vintage. You are seeing now so much strength that a new vintage of $2 billion is more likely than $1 billion? Is that right? Did I hear that correctly?

You did.

All right, so that is -- I mean that is a pretty significant number, obviously for a one year addition over time, even with six months left to the year. What else is out there? How much is that organic; how much of that is actually acquired?

There is probably at least one more announcement coming out of a fairly significant file or portfolio that we would expect to acquire. The rest of it, quite frankly, is coming from starting from scratch. And what we are seeing is again, Darrin, it's one of those things right now where we are right in the sweet spot of every retailer and it's now expanding into the T&E market like the Caesars.

But all of these retailers out there are so focused on, hey, tell me about the customer, tell me what works, the trigger marketing, how can I get her to purchase just one more time this year and that essentially will make their year. So what we are finding is the offerings that we have just seem to be extremely attractive today.

You sprinkle on top some of the Epsilon dust in terms of, for example, also providing a whole bunch of potential prospecting names for the retailer on a go-forward basis, that is also something that is turning out to be very attractive from an offering perspective. And you factor in the fact that we can reach the consumer through direct mail, permission-based email, mobile, social, targeted display -- all of those abilities that we have in-house today I think are really driving the signings.

I mean it's -- you know, look, we have been doing the same thing for it seems like forever. And the last couple of years there just seems to be a massive shift towards this data-driven targeted marketing. And so, that is why I think you are looking at -- it's going to be a biggie this year.

All right, that is amazing. Just last question for Bryan and then I will turn back to the queue. In Epsilon, obviously it performed well, a little bit better than our expectations in the quarter. A lot of it seemed to be driven, as I think you said, off the agency business. Is it possible for you to give us a little bit of a breakdown or at least some color on the size of each one of those segments, agency versus data versus technology? And then what is driving the 20% plus? It sounds like organic growth if you back out HMI, I think, in the agency side of the business.

Yes, sure, Darrin. I mean for sure agency, digital agency, as Ed said, is the driver right now for our growth. And I think if you were to break it down between existing clients versus new clients across the board, not just in agency. But I would say we are seeing a little bit higher contribution from new clients coming on board as we go into the back half of this year and into next year than we are from existing, which is for me a very good sign for this business. Because typically we rely on existing clients to drive growth and then new adds a little bit on top of that.

So when you see that number flip it typically signals a pretty good longer-term trend ahead because we continue to drive growth off of existing clients as well. And I think if you think about our agency offering, just to distinguish it from much of the broader advertising market, it is very data centered, very technology enabled agency services that we tend to deliver.

And just like Ed was saying with Private Label, we are seeing the same thing among our client base, that there is high demand there. So that's a bit of what's driving that growth, our three largest verticals, which would be automotive, financial services and insurance/telecom, are all growing strong double-digits. That is with good agency offerings and increasingly as we get in the back half you're going to see a ramp up on the technology side.

Yes, and I think also just to say as you recall last year, healthcare got dinged a little bit on our calls in terms of going backwards. So it is only appropriate to say that that has not only stabilized but has turned positive this year as well. So that is good news.

All right, great. Thanks, guys.

(Operator Instructions). Dan Perlin, RBC.

Can you guys maybe talk a little bit about what is going on with EMEA and CIBC and then TD in Canada? It seems like there are some questions around what is going on with that kind of coalition marketing program as a competitor. And is that -- do you think that is opportunistic for you guys or has it been disruptive?

That is a fairly loaded question, Dan. I would say, you know, at the highest level the easiest way to think of it is it is typically not our customer, it tends to be the business traveler. So again recall it is an airline program where ours is after the mass consumer. And so, they are very different programs, they never really overlapped in the past. I don't really expect them to overlap in the future.

I would be remiss if I didn't say that, look, there is a fair amount of disruption in that program that is going to happen as you have the two largest sponsors cycling in and cycling out, meaning the banks. And as a result, could that be an opportunity for other financial institutions to, let's say, take advantage of that displacement in the marketplace.

And that is a long-winded way of saying that our folks in our financial institution category are probably viewing it as an opportunity to perhaps pick up some incremental growth if they do heavy promotions in the back half. And that is one of the reasons why we think miles issued is going to flip pretty nicely in the back half.

Great. Can you also just remind us -- I mean it has been a while since we've talked about rising rates. And I know, Charles, you talked about the fixed funding and how that kind of falls through. I'm really more interested in your commentary around kind of price elasticity for the consumers that revolved in your portfolio. What would you expect them to tolerate?

And then, can you just remind us to the extent that there are an caps on the cards rates, I think they are running at close to 25 today? And I am pretty sure they are all variable up to the -- you talked about the way that they get pushed forward. But I'm just wondering are there any caps that we have got to be mindful of at some point in the future? Thanks.

No caps in place, I will answer that one first. So we do have programs, we have some at a 23%, rate, some up to 25%. I think frankly revolving rates will not be affected adversely if it moves 1%, 2%, 3%, 4% I really don't. If you look at the Private Label industry now, there are programs out there over 30% APRs.

So I don't think you would see any appreciable change in the consumer behavior. I think many people at the income levels we're going after about $65,000 a year or more toward a payment and that is what is the most important part of it.

So frankly, and I think we talked about this before, Dan, I don't think small changes in rates will affect the revolving behavior and the way we are structured we are true variable-rate. So if prime rate moves we do get that flexing through in the next billing cycle. Again, we do not have any caps in our programs the way we are structured.

David Scharf, JMP Securities.

I wanted to follow-up on the last question. Just to clarify, all of -- are all of your programs variable, Charles?

I believe so, yes.

Okay, got it. And shifting to provisioning, I know you had mentioned on a year-over-year basis just based on the growth of the portfolio, obviously your overall provisioning is up. It looked like at about 6.2% provisioning rate on ending balances at June 30, it came down quite a bit. But I haven't run the numbers.

But effectively was there any -- well, put another way, it looks like it is 50 basis points down from March 31. I mean, is this a planned step down in the provisioning rate as you kind of assess the forward charge-off outlook? I'm trying to get a sense for just how low a level and what is spread over loss rates we want to provision at?

So two points there. The first one is our rate in Q1 always drifts up because you get a lot of transactors that basically go into our stores, buy in the fourth quarter and then pay off in Q1. So you always see the rate drift up in Q1 then drop in Q2. So you are right, they went from 6.7% at the end of Q1 to 6.2% at the end of Q2 probably targeting end of year around 6%, 6.1%. And basically what that means is we will be growing into it based upon the growth profile Ed talked about, not necessarily releasing reserves.

But we will somewhat keep a spread differential; we've talked about it could be 120, 130 basis points over the trailing charge-off rate. When we do the provisioning we are always looking forward 12 months, 15 months, we are not looking necessarily backwards on us. So in that situation you get a little flex intra-quarter. So what I always try to get people to do is target end of the year and look at an end of year spread. So let's say roughly for the year we are at 4.8% charge-off rate, then you will see us reserve at around 6% at the end of the year.

Got it, that's helpful. Shifting -- actually one other clarification. The comment about the 2013 vintage ultimately comprising potentially $2 billion of receivables. I mean over what time frame are you thinking about when you put that $2 billion figure out?

Yes, all our vintages, a good assumption is three years. So since the majority of this vintage will be program starting from scratch, it takes about three years before we will hit that $2 billion mark. And you look back to 2012, three years to hit that $1 billion mark. So you will see it coming in chunks. The net result is you are going to be in very strong growth mode for the next two, three years for sure.

Got it. And lastly, Ed, you commented in the context of sort of consumer health and behavior that payment rates are kind of still at elevated levels, there seems to be more discipline, less willingness of households to relever as much. Are there any trends you can discern in that though? I mean are the payment rates pretty much holding steady? Is there anything about recent vintages that maybe tell you they may go up a little in the next couple years or --?

Yes, that's a good question. I think what we are seeing across roughly 30 million active households on an annual basis is that you had payment rates, right, during the Great Recession trend way down as people were stretching to probably 14%, 15% -- well below where we usually run which is probably 18% to 19%.

And then post-recession as you really cleanse the pipe, so to speak, in terms of folks who are somewhat on the margin, you move towards more of a prime or super prime file, and you saw payment rates jump up to like 21%, something like that, which is quite a bit higher than our historical average.

What we have seen is that has stabilized. So the last two years has been very flat in terms of any movement in payment rates. The net result seems to be that right now we are in an environment where the consumer is a bit more comfortable paying off more than she did historically. But at the same time is still out there shopping, which is good.

And I would say overall if, for example, you had 10 new folks apply for the card on any given day at one of our retailers you might have had seven get approved pre-recession, during the recession it may be more like two or three and right now we are probably back up to five or so.

So I still don't think we are all the way back to the level that we could be at because those folks who had difficulty during the Great Recession, it has taken four years for them to finally get back into the flow. So I think going forward there is no reason for us to believe that payment behavior will be any different from what it is right now, which is fairly conservative, but spend is still strong.

Got it, got it. And then lastly in that context, can you give us a sense at these levels of payment rates, 20%, 21%? How many basis points of your gross yield -- your roughly 27% gross yield is now derived from late fees on an annualized basis?

I think we are still fairly consistent on the collected yield about two-thirds, slightly over two-thirds from APR, slightly under one-third from late fee.

Perfect. Thanks very much.

Okay, I think that's it. So thanks, everyone, and we will let you get back to work. Bye.

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