Bread Financial Holdings Inc (BFH) 2014 Q1 法說會逐字稿

Good morning and welcome to the Alliance Data first quarter 2014 earnings conference call.

(Operator Instructions)

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

Thank you, operator. By now, you should have received a copy of the Company's first quarter 2014 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, Executive Vice President and President of LoyaltyOne.

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

Also on today's call, our speakers will reference certain non-GAAP financial measures, which we believe will provide useful information for investors. A reconciliation of those measures to non-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 exuberant CFO, and Bryan Pearson visiting us from Canada, and leader of LoyaltyOne. Charles will discuss the operating results for the first quarter, and then Bryan will walk you through LoyaltyOne, and in particular its new business BrandLoyalty. I'll wrap it up with a discussion about our guidance, and I'll look for 2014.

Charles?

Thanks, Ed.

The year started off pretty much as we expected, with strong revenue growth up 17% from last year, and dampened core EPS growth of 9% from last year due to incremental personnel costs needed to support growth expected in the back half of 2014. Even so, we dropped through some additional earnings to beating core EPS guidance of $2.70 for the quarter. Organic revenue growth was strong at 8%, driven by high single-digit organic growth at Epsilon, and low double-digit growth at Private Label.

For LoyaltyOne, organic revenue growth was essentially flat on a constant currency basis, as their amounts redeemed dropped 4% compared to the first quarter of 2013. BrandLoyalty, which closed on January 2, 2014, added approximately $112 million in revenue to the first quarter.

Adjusted EBITDA net, meaning reduced for funding costs and the portion attributable to the minority shareholders of BrandLoyalty, increased 3% compared to the first quarter of 2013, burdened by higher payroll expense. We estimate that approximately $20 million was development to payroll, signifying it did not drive current period revenue but is needed to support future revenue. BrandLoyalty added about $14 million of EBITDA, $9 million net of non-controlling interest to the first quarter, which we believe will be the seasonally lowest quarter.

Diluted share count was 66.1 million, consistent with our guidance. With the maturity of the next and final tranche of convertible debt in May, we expect our diluted share count to drop to approximately 63.1 million for the second quarter of 2014.

Let's turn to the next slide, and Bryan Pearson will talk about LoyaltyOne.

Thanks, Charles.

LoyaltyOne's revenue increased 37% to $329 million, due to the acquisition of BrandLoyalty, which, as Charles said, added $112 million. During the first quarter, we fought through a couple of headwinds in our core AIR MILES business, as revenue declined 10% from the first quarter of 2013.

The first and primary driver was the Canadian dollar being down by about 8% from a year ago. This lower translation rate dropped AIR MILES revenue by about $19 million. And then the second factor was that AIR MILES redeemed declined 4% from a year ago, creating a revenue drag of about $6 million. We'll likely face these kinds of headwinds throughout 2014.

Adjusted EBITDA increased 4% to $65 million for the first quarter, again, due to BrandLoyalty, which added $14 million gross or $9 million net to LoyaltyOne. Adjusted EBITDA for the AIR MILES business was down 10% from the first quarter, but was essentially flat on a constant currency basis.

Adjusted EBITDA margin for AIR MILES remained consistent between quarters at 26%. Adjusted EBITDA margin for BrandLoyalty was 13%, but we believe that it will definitely expand as the year progresses.

AIR MILES reward miles issued actually decreased 4% compared to the first quarter of 2013, due to weakness in consumer spending. Some of which relates to the timing of the Easter holiday, which landed in Q1 in 2013, and doesn't actually land until Q2 in 2014. And some of this relates also to regulatory changes, which are eliminating reward mile issuance from prescription purchases in some regions. We still expect full-year issuance growth to be in the low single-digit rate for 2014, mostly due to increased promotional spend and the addition of new sponsors in the back half of the year.

For the first quarter, AIR MILES redeemed decreased 4%, due to reduced demand, primarily for our travel related rewards. AIR MILES Cash, on the other hand, our instant reward program, continues to gain momentum with the rollout of 300 plus IGA stores in Quebec during the quarter. And we expect the expansion of the AIR MILES Cash offering to increase overall miles redeemed by approximately 3% compared to 2013.

Now before turning to a discussion on BrandLoyalty, let me just give you a brief update on dotz. Our priority for dotz in 2014 is really pretty simple. It is all about growth.

We had an excellent start to the year, as dotz added 1.2 million collectors during the first quarter, bringing its total collector count to 12 million. In addition, we plan to continue our market expansion strategy in 2014, with a target of four new markets by the end of the year, which would bring the total market count to 13.

Why don't we turn to the next slide now. During the quarter, LoyaltyOne acquired a 60% stake in BrandLoyalty, which is a leader in transactional and emotional loyalty programs. BrandLoyalty is based in the Netherlands, and employs over 400 associates in 14 offices around the globe.

The primary product offering they have are short-term loyalty campaigns that are run for grocery retailers in Europe, Asia, and Latin America. In the programs, shoppers earn points using either digital or paper stamps for achieving spend thresholds during each shopping trip. The points are then redeemed in-store for high-quality merchandise that BrandLoyalty sources and distributes to the retailer.

Through its subsidiary, IceMobile, shoppers can also download custom mobile apps that add the digital capability for earning and redeeming points, as well as increasing customer engagement by a targeted mobile messaging. BrandLoyalty's programs are short-term in nature, but they offer a full-service no risk approach for the retailer to grow their sales.

Starting with the program design and the actual selection of the products, they use their unique data and analytical approach to support the procurement, distribution, and in-store merchandising of products that create the kind of aspirational short-term program that changes consumer behavior. These turnkey programs are proven to drive increased visits to the store, and to increase basket size, which results in measurable sales results and a positive return on investment for their clients.

LoyaltyOne is excited about this acquisition, as it offers the following strategic benefits: first, BrandLoyalty is really one of two leading players in the these type of short-term grocery promotions, and they have an excellent track record of double-digit organic growth, which clearly is an excellent fit with Alliance Data's growth model; second, grocery retail is a [cre] vertical for both LoyaltyOne and BrandLoyalty, and we believe that we can leverage existing relationships to grow the BrandLoyalty platform in North America; and third, LoyaltyOne's advanced analytics capability and advisory services presents a new product offering for BrandLoyalty customers, which will lead to future revenue synergies between our organizations.

We are pleased with the results that we've had to date, and we're working diligently as a team towards new opportunities. Now let me turn it back to Charles to discuss Epsilon.

Thanks, Bryan.

If we turn to the next page, Epsilion's revenue increased a healthy 9%, all organic, to $348 million for the first quarter of 2014. Technology led the way, with 11% growth, supported by a 15% increase in database revenues, fueled by expansion both in new and existing client base.

Email, which is part of technology, continues to be soft, but we believe the next release of Harmony scheduled for the second quarter of 2014 will remedy that. Harmony, which is our new digital messaging platform, was recently ranked number one by Red Pill Email for its features and functions, and received a perfect score of five in the categories of vendor security, queries and segmentation ease-of-use. The preview of this next release, which adds segmenting and multi-channel capabilities, has resulted in several new customer wins.

Moving on, Agency also delivered a solid performance, increasing 9% compared to the first quarter of 2013, driven by continued strength in the auto vertical. We are currently in the process of onboarding two new Agency clients, which should contribute revenue as 2014 progresses. Our outlook for 2014 remains high single digit organic revenue growth, supported by a backlog, which is up double digits compared to the same time last year.

Adjusted EBITDA net increased 1% to $55 million compared to the first quarter of 2013, as higher healthcare costs attributable to a higher associate participation rate, severance expense associated with the integration of HMI, and upfront expenses incurred to ramp-up two potentially large new clients dampened the revenue flow through to adjusted EBITDA.

In summary, it was a good start to the year for Epsilon. We remain positive about the product cross-selling opportunities generated from Agency, as well as the continued rollout of the Harmony platform. We could have done a little bit better with expense control in the first quarter, more labor inefficiencies than we would like to have seen, but some of the expense cannot be avoided given our strong backlog and the need to staff in advance. Overall, a strong start to the year with expected continued momentum.

Let's turn to the next slide and talk about Private Label. This quarter represents the ninth consecutive quarter of double-digit revenue growth for Private Label, as revenue increased 13% to $562 million, driven by a 15% increase in the average card receivables.

Organic revenue growth was a robust 12%. Adjusted EBITDA net increased 7% to $244 million, as the revenue flow through was dampened by a 26% increase in operating expenses compared to the first quarter of 2013. As we talked about on the last earnings call, this increase was expected, as we added about 1,000 new associates, mainly in our call centers, in order to increase support capacity and prepare for future growth. We expect the leveraging of operating expenses as the year progresses and we ramp up new clients.

Moving on to the P&L. The provision for loan losses increased 6% from the first quarter of 2013, primarily due to growth in credit card receivables, while funding costs remained stable between years, despite the growth in receivables as we continued to replace maturing debt with cheaper new debt.

Now let's turn to the next page and talk about some of the key metrics for Private Label. The total gross yields decreased 60 basis points as compared to the first quarter of 2013, due to the impact of new programs. Moving into the second quarter, we expect to see a slight uptick in gross yields as this influence moderates. Importantly, we continued to pick up tender share during the quarter, as our credit sales at core plan, meaning pre 2012 [integers] increased 7%, while overall client sales were about flat compared to the first quarter of 2013.

Normalized principal loss rates increased 20 basis points to 4.9%, while delinquency rates increased 10 basis points, both compared to the first quarter of 2013. Based upon the trends we are seeing, we expect stable to slightly improving principal loss rates for the remainder of 2014. From a loan loss reserve standpoint, we ended the first quarter with a 6% reserve rate, which represents approximately 16 months of forward coverage.

The last thing I will discuss is the new metric added this quarter, return on average assets. As you can see from the chart, we generated a very strong return, 6.4% this quarter compared to 6.5% last year. It is just another metric that reflects the difference in Private Label's business model compared to just a card issuer.

Let's move on and talk about liquidity. Liquidity at the corporate level remained strong at $1.1 billion at March 31, 2014, after deploying over $300 million on their BrandLoyalty acquisition and the share buyback program in the first quarter. Debt levels remained modest with excellent debt service coverage ratios.

As noted on the slide, we have $345 million of convertible notes coming due in the second quarter, which we plan to cash settle. This has created a little confusion in the markets, given that the current settlement value of the convertible notes would be about $1.9 billion. The way it works is we pay $345 million, the face value of the convertible notes, our hedge counterparties pay $1.55 billion, and the note holders receive a total of $1.9 billion in cash.

Several months after the debt maturity, we have to settle the other side of the hedge arrangement with our counterparties, meaning the warrants. At ADS's current price, we would issue approximately 5.1 million shares to settle our obligation under the warrants. Importantly, these shares are already included in our diluted share count, and are separate and apart from the phantom shares you have heard us talk about so much in the past.

In a nutshell, we paid $345 million in cash, and issued 5.1 million shares to settle the convertible notes. Our guidance reflects all of this.

Lastly, Ed and I have always talked about our capital allocation priorities for 2014. And as we've indicated in the past, they will flip around based upon which gives us the best accretion. M&A will continue to be our first priority, but as you can see, the buyback program is still important to us. Year-to-date, we have spent $115 million of our $400 million Board-authorized program.

With that, I will turn it over to Ed.

Thanks, guys. Now, we're going to step back a little bit and look at the bigger picture and the overall view of how the year is trending and other things that we're seeing out there and how they might impact the Company.

I would say overall, obviously Q1's got a lot of puts and takes, and a lot of moving pieces. But in general, I think we could probably sum it up by saying that we were very, very pleased with the organic growth rate of our top line. I know that's a big item out there in the marketplace these days. And what we're finding is that once again we're feeling very comfortable that this year we're going to run organically at 9%, maybe 10%, and that will be at least 3X GDP, which is our goal.

So I think from a revenue perspective, you're talking 9%, 10% organic, you're talking 20% plus when you layer in BrandLoyalty. The top line looks very strong this year, and we're bumping up guidance accordingly on our top line.

And from an expense perspective, obviously getting dinged with the Canadian dollar is going to cost us $50 million or $60 million on top, and probably about $0.15 to $0.17 on EPS. But again, I think we can play through that without a problem. So it very strong organic top, overall top at 20% plus.

And what we're looking at is, we're seeing stronger revenue growth coming out of BrandLoyalty. We initially were looking at about $0.5 billion of top line, it looks like it will already be more like $550 million. Epsilon is running a little bit stronger than we had thought, as is Private Label. You take those three, offset a little bit of it with the Canadian dollar, and that's where we get an upward bias in our guidance for top line. So very pleased there.

On the balancing act that we're trying to accomplish this year, which is bringing on a huge book of new business at both Epsilon and at Private Label. We had alluded to, last quarter, the fact that we're going to have to ramp-up a significant amount of folks, and Charles mentioned, we added another 1,000 people just in the Private Label group to handle the book of business that we signed last year and we're signing now.

That will, obviously, it bodes extremely well for the back half of this year and going into 2015 as well. Unfortunately, we need to absorb it now without the top line against it. So, that's a little bit of the drag that you're seeing in the first part of the year. We do feel very comfortable, however, that it's the right bet to make, and that the back half and in 2015 we're going to be glad we did so.

Based on where the revenue is going, we think that we're right on track with where we want to be, actually I think we're actually trending a little bit better as we said on top line. And as a result, we're going to go ahead and bump up guidance from $12.20 to $12.25, which would give us earnings growth of 22% for this year. I do think that's probably a conservative raise at this point. And as the year plays out, I certainly would hope that we can continue to drift that number upwards as the year progresses.

Turning to the page on the specific businesses, 2014 outlook. Bryan walked through what's going on in his businesses. I just wanted to hit the high points again.

With the AIR MILES program, we expect, on a constant currency basis, revenue to be up in the low single digits, and adjusted EBITDA to be up somewhere in the mid-single digits. I think, overall, those are good numbers for the year.

I will call your attention to, as we've seen over the past 18 years, the key metric there AIR MILES issued, we've cautioned people from trying to look at it on a quarterly basis. If you looked at it last year, our issuance by quarter was minus 3%, minus 5%, then plus 11%, plus 12%, and we ended the year at plus 4%.

That's pretty much what you're going to be seeing this year. You're going to see this thing jump all over the place, because a lot of it is driven by promotional spend.

We don't have visibility on a quarterly basis, as much as we do on an annual basis. So whether it's growing double digits or down single digits, I would caution anyone into reading too much into either movement, and focus more on the full-year basis.

Bryan also alluded to the fact that while we have our full-year goal of around plus 4%, plus 5% as we usually do, there is probably a point or so of risk due to some legislation up in a couple of the provinces regarding our ability to issue for -- when someone buys prescription drugs. So that could dampen growth in that metric a little bit. So more to come on that. But overall, LoyaltyOne should have a solid year once again.

BrandLoyalty, right out of the gate they are trending quite a bit stronger than we had anticipated, which is always a great thing to see as the first quarter out of a new business. And their revenues are running stronger, and we're bumping them up 10%. We would expect their organic revenue growth to grow over 20% this year.

And when we're talking about our 9% to 10% organic growth, that excludes the organic growth at BrandLoyalty, because it was an acquisition. So overall, organic growth for the Company would be even higher than that.

Brazil, as Bryan mentioned also, it's all about scale. And if you look back at 2011, we were under 2 million collectors, 2012, 6 million. Last year, we ended just under 11 million, and already we're up to 12 million this year, and so I expect to have a very, very strong year this year in Brazil. We are looking to expand into four new regions as well, and we'll keep you posted on that.

I always get the question of how do I -- how can I value the Brazilian piece of the business. And a good rule of thumb is that we would need about 2.5 dotz collectors to be equivalent to about 1 AIR MILES collector. So essentially in Canada, we've got about 10 million folks, and that generates the $0.25 billion or so of EBITDA. So, someone can do the math and come up to about 25 million is what we'll need down in Brazil. Hopefully, we're about halfway there at this point, and it's cooking right along.

At Epsilon, again, very strong story from an organic growth perspective, and it was nicely balanced too, which is what we like. The database part or the technology part was quite strong, up double digit during the quarter, and should continue that. That's based on the large number of builds that are going on now.

We brought on a lot of folks for the record number of databases that were signed last year. A lot of this is, again, a continuing trend with folks wanting their own loyalty program, their own loyalty platform, their ability to collect that data on the consumer that can then be used for data-driven marketing. So we're seeing very strong demand for that.

It looks like if we typically sign about 15 of these type platform builds a year, last year we did 23 plus, this year we're currently running at that rate as well. So, again, I'd say we're scrambling pretty hard right now to make sure we've got the folks on board to make that happen.

Charles mentioned the new Harmony platform, which is getting very good reviews out there. And I think it's so far so good. We will know probably by the end of second quarter we'll be hopefully comfortable saying that this thing is off to the races. Right now, we're just in the process of converting some clients over as we speak, and we want to make sure everything is smooth there as well. So, that's the scoop at Epsilon.

In Private Label, once again, it gets the gold star that I think they will be able to share with BrandLoyalty for the quarter. Again, new client growth continues to surprise. Historically, we tend to sign about five new clients per year, which is a bit under $400 million of new portfolio growth or a vintage.

And again, when we talk about vintage and we talk about signing clients, most of our clients start from scratch. And so it takes three years for them to fully mature, and that's why when we talk about a $400 million vintage that means three years after signing. And that essentially gives us tremendous visibility into the next couple of years.

Well as we talked about over the past couple of years in 2012, there just seemed to be a massive shift of interest from a number of retailers as well as new verticals in retail for our particular product offering. Which again, allows a closed loop network to pull out, not just who the person is, but also the information down to the category or SKU level, which is really the gold standard in data these days.

In 2013, the shift continued to accelerate, and we signed our first $2 billion vintage and in 2014 we're absolutely tracking to another $2 billion vintage. We have announced Virgin, Venus, DSW and IDD, and just those four should be about the first $0.5 billion when they fully spool up.

We have a number of signings that we'll be releasing over the next six months, and it looks like it's going to be another huge year. And the importance of that is that it allows us to look into 2015, 2016, and 2017 as these vintages spool up and be very comfortable with the type of growth rates that we want.

Probably the -- I would say the most important item to note here is a continuation in tender share growth. So for example, if on a typical client, 30% of their sales flow through our card, that's probably a pretty decent level for us. And then you look at, well once the client matures, once the program matures, at the client, we tend to grow or should grow at the growth rate of the client.

Well what we found during the holiday season in Q4 and what we're continuing to see in Q1, is that this Private Label product is really beginning to take off in terms of probably the best type of loyalty tool that the retailer has. And so we saw that in terms of comparing the growth rate in card sales against the growth rate in our client sales overall.

And as many people know from the weather or whatever is being said out there, the first three months of this year you probably saw relatively flat sales growth in the retail space. Against that, our core sales growth is more like 7%. So something is working out there, and I think that's part of what's attracting more and more clients.

Overall, the results, the credit card portfolio, I think you saw we did about 15% in Q1. That is going to accelerate, and we'll be running around 20% as the year rolls out. Principal loss rates and funding rates are pretty stable, and we're not seeing any blips here or there in terms of anything on the credit quality side. It looks good.

Obviously, we have brought on a ton of new folks, which is great. 1,000 plus people onshore, which will of course hit the expenses pretty hard until we have those programs ramped up and the revenue flowing through. But I think it's certainly the right thing to do.

So the overall outlook, mid to high teens growth in revenue, double-digit growth in adjusted EBITDA for 2014. So another good year overall.

Finishing up on the last item, and then we'll open up, there is no question that the ongoing shift of spend in marketing dollars from general brand spending into data-driven marketing and loyalty programs continues. I don't think it's news to anyone. Fortunately, we're on that side of the bet, and in all three of our businesses, we're continuing to see a very high level of interest in every vertical out there trying to get a better bead on who their customer is, and how he or she behaves, and how we can entice them to be a more loyal customer and to frequent the retailer more often.

For us, we essentially have four objectives for the year, and they're pretty straightforward. We are primarily an organic growth shop. Our goal is to grow our top line at 3X GDP, so we would say roughly 9% for the year.

We expect overall revenue growth rate of 22%, as we're seeing a bit stronger results on top line from BrandLoyalty, Epsilon and Private Label. And then we've got a little bit of offset with the Canadian dollar. That will flow through the core EPS growth of 22%.

And in the middle there, of course our expenses and there is a lot of frontloading right now going on both in Private Label and at Epsilon. And it's just the nature of those businesses that you've got to pay for it now, and it starts flowing in a little bit later. But I think that means that it bodes extremely well for the future, and we're building the foundation for the future while onboarding a record amount of new businesses.

So if I were to finally sum it up, I would say the year is tracking a little bit better out of the gate than we had anticipated. It's a little bit choppy in the first half, but it's because we're building for the second half and into 2015, 2016, and 2017, which is for me where a lot of my attention is being spent these days.

And then finally, I'll sum up obviously in the market there's been a fair amount of volatility to start out the year. And there's not much we can do about that, but we can say that with volatility comes opportunity. And from our perspective, things are looking a bit more intriguing now if this volatility continues.

So that being said, I think we'll cut it off here, and we'll move to Q&A. Operator?

Ladies and gentlemen, the floor is now open for your questions.

(Operator Instructions)

Sanjay Sakhrani with KBW.

Just starting with Epsilon, the two new Agency deals that you guys spoke about, could you maybe just talk about when you on board the revenues are they're going to be significant incremental costs that you incur, or are most of those costs being incurred now and then the revenues come after? And maybe if you could give us a little bit more qualitative color on the nature of these two relationships, because they seem pretty sizable.

And then maybe just one on Private Label, could you just also talk about the M&A pipeline? You have a player that's going public, and obviously Wells came into the market a little bit. So maybe you could just talk about how that M&A pipeline is materializing. Thank you.

Sure, let me start with the second and finish with the first. The M&A pipeline, per se in Private Label, if you looked at the clients that we've signed, probably 90% plus of the clients that we're signing, they're are starting a program from scratch. So we're not really in the takeaway game from an M&A perspective.

They will be one or two files probably per year that we will on board, and I would expect that to be the case this year as well. But for the most part, Sanjay, this stuff is coming from clients who either have had a program in the past and it's dead now and they're going to start cranking it up again, or folks that have never had one.

So I think in terms of running into the other folks, for the most, unless it's a really large file, I think we're comfortable in our sandbox. Our biggest challenge is trying to convince the prospect that the Private Label platform is the better loyalty option than other options. Of course, one of the other options is Epsilon, so it's a delicate balance there.

Speaking of Epsilon itself on the agency deals, we're beginning to see some traction in terms of selling through the stacks, so to speak. Which would be not only the creative and Agency side of it, but also allowing Epsilon to be the provider of things such as the demographic and psycho graphic data, the database build, as well as the analytics and distribution side of the business as well.

So, I'm not going to get into the specific clients themselves. But we are seeing some traction on that side. On the expense side, whenever you're in a strong -- when you're assigning a strong book of business, you're always going to have expenses that are running in front of the revenue, and that should even out as the year progresses.

Okay. And just one more on the Epsilon question, just is the opportunity to move some of those new relationships into the other lines as well? So will they materialize as revenue in database and technology as well?

Yes, that's the game plan, or they could be a big tech client today, and we would try to sell in the Agency side.

Okay. All right, Great. Perfect. And then I just had one last one for Brian. Maybe you could just give us a little bit more of a refined window into Brazil. I guess, Ed, you mentioned the $25 million collector target to get to roughly the size of Canada. How do you guys get there from where you are right now? Because it seems like a lot of the you got thus far came from Banco do Brasil.

Yes, I think they did come from Banco do Brasil, but they also came very much from the retail partners that we have in each of the regions that we've launched, Sanjay. So I would suggest the following. Is that, we've been doing a market by market rollout. We've been trying to get and look for a national sized grocery player, which would help us penetrate the two largest markets which are basically Rio and Sao Paulo.

So remember that we're now at 12 million customers in that marketplace, and we're not in the two largest cities in Brazil. There's still a number of markets there are left. So you can think about it three ways.

One is, we continue growing into new markets, as we've been doing, and that would take us on the pace and the cadence the we're on today. The second piece would be by adding additional partners to the mix. So whether that's a big grocer or a new fuel player or a bigger electronics player, whatever it may be, those will make the program more attractive and add even more customers from the existing markets we're in, but also lend us the opportunity to do the third thing which is really grow that national presence which would bring Rio and Sao Paulo into the mix.

That's the path to daylight. I think we're quite comfortable that we can continue at the pace of growth that we've been on in the last little while, and the focus for us right now is to build a very viable program in all the markets that we're in. Which, today, the collector activation, which would be the measure of how many points they're earning, are they redeeming, how many partners are they using. Those metrics are tracking quite nicely with what the early days were in Canada, and so we feel quite confident that we're on the right track in terms of the value proposition we have for the marketplace.

Thank you very much.

Darrin Peller with Barclays.

If you could help us understand what may have surprised you with regard to your top line growth during the quarter versus your initial I think $1.25 billion guidance, maybe beyond currency? And then maybe you could just rank the key drivers enabling you to raise revenue guidance for the year, despite this quarter. And is it maybe just conservatism in the Private Label business that was going into the year, or is it that you had better than expected results in BrandLoyalty? And what other key variables should we focus on? Thanks.

Darrin, in terms of the revenue, I'd say really came from two areas. One, FX of was a little bit worse than we anticipated, so you had a little bit more pressure coming through on LoyaltyOne. The second was, we just acquired BrandLoyalty, and initially probably were a little optimistic on terms of the revenue. But really, it's a sequencing issue, which is they're still going to hit there, as Ed talked about, we're actually going to have a very good year for BrandLoyalty revenue.

Where probably initially, we thought the revenue would be a little bit stronger in the first quarter than what it ended up shaking out. So I think it's just more of a timing issue for us, nothing more. The currency was a little more pronounced, BrandLoyalty timing issue on the revenue was still very strong for the year.

And then if you go through and look at why we feel better about the revenue stream, obviously Ed has already talked about BrandLoyalty going from $500 million to $550 million. Ed also talked about Private Label. We started the year with 15% growth on average receivables, now we're talking about 20%. So that's the upside you're seeing.

The third of it is, we did start off a little bit stronger with Epsilon, good high single-digit organic growth. Looking for some new clients to come through on Harmony, which could give a little upside to the back half of the year. And then, going back to Sanjay's point, as we do have these two to big clients ramping, if we get to a point of revenue growth where we can recognize it Q3, Q4 that gives upside to the year as well.

All right, that's helpful. So if we were to rank it, it sounds like it is basically the BrandLoyalty upside. Although it sounds like the first quarter was a little bit weaker, but you're still expecting that ramp up enough and see the evidence that it will ramp up enough to actually do better than you initially planned latter part of the year. Okay.

And then, Private Label, obviously you're looking at 20% versus 15%, and then those big deal still ramping in. All right, that's helpful.

Just on the credit quality side, one question. It seems like provisions were about $20 million or $25 million below your charge-off level in the quarter, which to the way we see you guys more in line or a little higher. Although, you also seem like, at least by our calculation, you're still over 100 basis points higher in terms of your allowance level than your charge-offs, which is still a really conservative cushion. Are we thinking about this correctly in the sense of how you want to keep that level going forward, or can give us a little guidance in terms of how we should think about your allowance levels for the rest of the year?

I think you're right Darren. In terms of the spread between the reserve rates and trailing charge-off rate, 100 to 110 bips is reasonable. Like we talked about, we're still looking at about 16 months forward coverage in terms of the reserve we currently carry. So that's obviously very robust when most card companies would carry more like 9 to 12 months worth of coverage. So I think we'll continue to be very conservative, or what I'll say, appropriate in that regard. Good forward coverage, good spread, think of it being in the 100, 110 points range.

Okay, very helpful. All right, thanks, guys.

Brett Huff with Stephens Inc.

Hello, can you guys hear me okay? Sorry about that. One quick -- just to put a little finer point on the guidance, Charles, I wanted to make sure I understood this. What was your expectation for the Canadian headwind in the prior guided range versus the I think it's $55 million now? And I'm just trying to balance that with it seems like the benefit of an extra $50 million or so we're going to get from BrandLoyalty.

So, when we came out with our guidance last quarter, were assuming the Canadian dollar would be about CAD0.94. Now we think the Canadian dollar will be more like CAD0.91 for the year. Now, the headwinds we face will be throughout the full year, but it's worse in the first quarter and lightest in the fourth quarter.

So what we saw was a little bit more of a negative impact in Q1 than we had anticipated. We have taken it down a little bit for the year, which is obviously included in our $12.25 core EPS guidance. But again, as the year goes on, it abates in terms of the amount of the headwinds.

That's helpful. And can you talk about -- a little bit more on the Epsilon front-end loading? I think you called out in the press release $2 million, but it sounds like it might be a bigger project than that. And somebody already asked that question, but I just want to know a little bit more on is it $2 million, or is there more ancillary stuff in there that's harder to quantify? We thought the profitability would be better at Epsilon, and I'm trying to understand what's going on there.

I guess I'd considered it more direct costs we're incurring to roll out the platform with these clients. Again, if it's a large client and it's technology platform in this case software we're rolling out, it takes number of months to get rolled out. During that timeframe, we're incurring the expense, the direct expense, to do the rollouts but we're deferring the revenue stream until it really gets up and ramped.

So what you're seeing now is deferrment on the expense, expense we have to incur to get the technology platform rolled out. But then when we get to the point of recognizing the revenue stream in Q3, Q4, then you can see the leveraging coming through and a little bit obviously the EBITDA margin contribution.

Yes, I think one of the things that we're beginning to see now given the size of Epsilon with north of 5,000 people, is that when you're signing 23 new deals a year on platforms and stuff, you've got to bring in a lot of folks. And these are what we call, folks who have the hot skills where were competing with the other folks out there, the Googles and Facebooks and stuff like that for the same talent.

And so getting those folks, getting them in the door, and getting in the size of the labor force that we need, it's becoming something that is now more of a challenge than it was when we were a lot smaller, I'll tell you that. And so, we will probably air on the side of getting a little bit more in the door sooner rather than later to make sure we have the pool available.

And then one last question, I think, Ed, you'd talked a little bit about Private Label going forward, and it sounds like you're spending time there. And I think the last call, you had said the 2015 Private Label spots to start implementing were starting to look a little scarce. First of all, I want to make sure that I'm remembering that right. And if so, can you give us your sense of that same view today?

Yes, in terms of 2014, obviously, we're all booked up and it's straining the resources a little bit at this point. And so we probably -- we are drifting into slots for 2015 already, to your point. I would say we could probably launch up to at most 20 clients in a given year, given that we used to do five.

I'd say folks have done a spectacular job giving us that capacity, but I would say 20 is about it. And it goes back to the overall theme that we've been talking about which is organic top line is very strong. Revenue is very strong. We're going to flow through enough of it to give us the 20% plus earnings growth.

Our real issue this year is not going to be bringing in top line and organic growth. Our biggest issue this year is on execution and making sure that with these record books of businesses, especially at Epsilon and in Private Label, that the machine doesn't break down frankly. And that's where we're putting all of our efforts.

In terms of the year itself, I think the financials are in very good shape for the year. There may be a couple of minor tweaks as the year unfolds, hopefully to the upside. But we are 100% focused right now on just handling the two books of business that we've signed, and getting those on without things fraying at the seams.

Great. Thanks for your time.

David Togut with Evercore.

Thank you, and good morning. Could you comment on the unit pricing outlook for Private Label, Epsilon, and LoyaltyOne for this year and next year?

I'm not sure exactly what you mean David. I'll probably answer a little bit differently. If you were looking at EBITDA margins, we're looking probably for stable to maybe slightly up at LoyaltyOne AIR MILES. Obviously, well see some improvements coming through on BrandLoyalty as the year progresses. For Epsilon EBITDA margins, probably flat to maybe up slightly.

For Private Label, just because we'll have a little bit of a reserve build associated with the growth, you'll probably see a little bit of EBITDA margin compression in the Private Label space. Is that where you're going David?

That's helpful. And to follow that up, in the Private Label space, I'm curious if you're seeing any change in unit pricing as you compete for some of these new awards, or have most of these awards that you highlighted in the quarter really been sole sourced?

I wouldn't say we're seeing really any pricing pressure in that regard. If you look through the year, we're saying that gross yields may be down as much as 40 basis points. If I take out the ramp of the new programs, the required programs, basically flat to maybe slightly up.

So that would tell me really what you're seeing is the influence of the growth, not the influence of pricing pressure coming through on re-signing some deals or some of the programs that we have. Really it's just the ramp you're seeing.

That's helpful. And just a quick final question on the Co-Branding side. Could you update us on your strategy in Co-Branding?

Sure. I think that one of the things we're trying to do in our Private Label business is to diversify a little bit away from our traditional verticals, which would be soft goods, jewelry, home furnishings. And so Co-Brand, the choice of whether to use Private Label or Co-Brand is really up to the client.

And what we've found is there are certain verticals where Co-Brand works best, and specifically that would be T&E, hospitality. Those are the areas where there's a huge amount of interest in just having Co-Brand. So if you see an announcement in those areas, so for example with Caesar's or with Virgin America, something like that, those are going to be the Co-Brand space. The majority of our business will always continue to be Private Label, but there is a slot that's opening up for Co-Brand.

And then on that point, to what extent can you extract SKU level data from a Co-Brand card?

Sure. It's the same gig. It's actually what you do is because we are the merchant acquirer and the issuer for Co-Brand, if the transaction takes place at that retailer, clearly, we can extract the same type of information as long as the merchant once again agrees to give us that information.

For purchases outside of the retailer, we can't get that level of information. We could probably only get where you went and how much you spent at the location. So for stuff that takes place at the retailer, we can get the same level of information, that's the deal with the merchant. And outside of that, we're stuck with just total dollars being spent.

What percentage of purchases on Co-Brand typically occur at the retailer on the card versus outside of that?

I don't know David, I don't have that stat.

It's all over the place.

Okay, thank you very much.

David Scharf with JMP Securities.

Morning, thank you. Two areas. First, on Epsilon, wanted to follow-up on earlier questioning about cross-selling. Has there been a history thus far of moving any Agency clients to become data and technology clients, or is there a track record over the last couple of years since you've entered the Agency business?

It hasn't been nearly as strong as it should be. A lot of that has to do with we really just finished, I think when you're talking about last year, the organizational changes at Epsilon. Where as before, we sold by product. So you would have someone responsible for the agency P&L, someone else responsible for technology, someone else for distribution, et cetera, et cetera.

We rearranged everything so that now the P&L is by vertical. So if you are in the auto vertical, your P&L responsibilities are now cut across all the products. And as result, your comp is cut across all the products. And we have found that when you tie your comp to that type of goal, that that tends to move the needle.

So I would say that you had a smattering of deals last year. This year, we're beginning to see much more sellthrough, and it goes both ways. It goes Agency clients, which are now going into the technology side, and technology going upstream into Agency. I would say this year and next year should be significant years for the sellthrough.

Got it, that's helpful. And then secondly, turning to Private Label, that was helpful commentary on the yield outlook. Maybe there's more type of question to answer, it's more qualitative or macro driven.

But setting aside the near-term headwinds on gross yields just because you're boarding on more new clients, you have to build bigger reserves. Can you give us a sense for whether gross yields are still running below ignoring the new client aspect, whether gross yield are running historical peaks just based on the percentage of your yield that's coming from late fees.

I'm just trying to understand whether or not as we think about ultimately where that portfolio can trend, whether it's still, let's say, more of a prime portfolio, or a higher credit score portfolio than you actually like? Just trying to understand what key profitability can be, and whether late fees are still representing about a third of gross yield, or if payment rates are still too high.

I think if you take out the influence of the new program, it's right around to where it is. It is about we'd want it to be. To put it another way, we're not really trying to push it up or push it down.

You'll have some influence that's coming through there, David. Obviously, we have an APR tied to prime rates. So if you see short-term rates go up, then you're going to see the APRs go up, so you're going to see a little bit of float there naturally. The increase in APR offsetting the increase in funding costs.

The flip side of it is that, obviously, we are doing a little bit more Co-Brand than what we did in the past. Co-Brand is going to carry a little bit lower gross yield than what a typical PLCC would. So I'd say, [investing] for those will be somewhat static.

But those will have an influence on a go-forward basis that it's hard for me to really answer your question exactly. We do have a prime portfolio, we'll endeavor to keep it that way. Going back even 2007, we've kept our underwriting standards very consistent. Approval rates now are still pretty low for us, we could [exceed] them to come up over time as people repair their credit. But aside from the two [fedras] I talked about, I don't any impetus to make it to go up or down.

Very helpful, thank you.

Andrew Jeffrey with SunTrust.

Good morning, thank you for taking the question. Ed, I appreciate the color on the pipeline, and it sounds like demand is strong across your businesses. I've been following Alliance for a while, and I certainly have less than perfect memory. But I can't remember a time when you called out 1,000 new employees in a call center, for example.

Can you just frame up for us how you balance visibility? And I think you mentioned a couple of potential large customers at Epsilon suggesting that they're not signed. Can you just frame up the balance between the front end loaded investment, and perhaps the risk on either timing of new deals coming on this year? Or the risk that you don't win the contracts that you think you're going to win, and how you frame that up in the context of your real confident second half outlook?

Yes. You hit the nail on the head. It's a balancing act. What we're finding is that really especially at Epsilon and Private Label, you're just seeing more demand, more demand, and more demand, which is, as we say, a great problem to have.

I think hiring 1,000 people at Private Label, we need those folks up and running. We need the call centers built. We need the space provided well in front of these clients spooling up.

I think the messaging here is that none of this is hiring on spec. We're hiring folks based on deals that have been signed. So in the case of Private Label, as we said, we've got 20 new folks, 20 new clients spooling up this year. The backlog looks very strong, and at Epsilon we've got 23 big platform builds going on this year and getting those people in the door. That's the big challenge, and we're going to try to match delivering 20% earnings growth this year, at the same time not letting business fall through the cracks so we can have strong growth outlook for 2015 and 2016.

It's a long-winded way of saying it's a balancing act. It's a good problem to have, but it doesn't take much either way to get your expenses to shoot out of control for a quarter or two. And we want to make sure that doesn't happen.

Okay. And you guys have a good track record of forecasting your business. One last one, if I might, just with regard to the loyalty business generally. When you step back and look at the traditional AIR MILES business versus some of the other things you're doing, whether it's BrandLoyalty or the cash rewards business in Canada or certainly the growth in Brazil, would you frame that up at all as a changing of the guard or a maturation of your loyalty business generally? Or is that too dramatic a comment?

Let's put it this way. The program is 22 years old. When you've got a business that's been running for that long, and you've got 70% of Canadians participating in the program, you could look at it and say is it in a maturing phase as a business overall. And I think that you could put that color on it. The reality is, that we still see a lot of opportunity in that business for growth.

Is a going to be a strong double-digit growth in the future? No. Does it have the potential to be mid- to high single-digit as you go forward? Yes. And do we have some things that we put in place that will help us get there? And the answer to that is yes.

We probably had the best year of signing new partners that we've had in years last year. If you look at that 10 million households, there's a portion of them that they're very engaged in the program, and there's a portion of them that are using some sponsors but they're not holistically engaged in the program and using it as their primary reward vehicle.

And so, we see opportunity to continue to add sponsors in categories, to continue to basically add -- to continue to add more cross sponsor activation, as we would say. In other words, a measure of engagement. And as a result of that, we think that there's opportunities with things like the cash program to change the nature of what our growth pattern has been over the last few years.

I think as much as anything, Canada has had an anemic spending environment for probably the better part of 18 months now. And I think the consumer is cautious in terms of how they're spending, and so a little bit of economic recovery and a little bit of these other strategies will get us back to a healthier outlook going forward.

That's great, thank you.

Okay, I think that wraps it up, and we'll talk to you next quarter. Thank you.

Thank you ladies and gentlemen. This concludes the Alliance Data first quarter 2014 earnings conference call. You may now disconnect.