Bread Financial Holdings Inc (BFH) 2014 Q2 法說會逐字稿

Good morning, and welcome to the Alliance Data second quarter 2014 earnings conference call. At this time, all parties have been placed on a listen-only mode. Following today's presentation, the floor will be open for your questions.

(Operator instruction)

In order to view the company's presentation on their website, please remember to turn off the pop-up blocker on your computer. It is now my pleasure to introduce your host Ms. Julie Prozeller of FTI consulting. Ma'am, the floor is yours.

Thank you, operator. By now, you should've received a copy of the Company's second 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; and Charles Horn, Chief Financial Officer of Alliance Data; and Bryan Kennedy, Executive Vice President and President of Epsilon and Alliance Data Company.

Before we begin, let me 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 on www.alliancedata.com.

With that, I'd like to turn the call over to Ed Heffernan. Ed.

Great. Thanks, Julie. And good morning, everyone.

Joining me today is our always colorful CFO, Charles Horn and Bryan Kennedy, our President of Epsilon. Charles is going to go first and talk about our operating results. Bryan will talk about Epsilon and, in particular, the results of our new product, Harmony. And then I'll wrap up with a discussion of our raised guidance and outlook for 2014 and how we see our jumpoff for 2015. So, Charles, take it away.

Thank you, Ed.

During the first quarter earnings call, we discussed an expectation of growth acceleration as 2014 progressed. During the second quarter, we delivered on that expectation with over 20% growth in both revenue and core EPS. That is the trend we were talking about, and that is the trend we expect to see continue during the remainder of 2014.

For the second quarter, 2014 revenue increased 23% to $1.27 billion, driven by double-digit, organic growth and strong contribution for Brand Loyalty, which added 13% to revenue growth. Adjusted EBITDA net increased 8% to $332 million with solid expense leveraging in both Epsilon and Private Label. However, the growth rate was dampened by reserve billed at private-label due to significant release in credit card receivables. The related provision expense increased $39 million, or 67%, from the second quarter of 2013, despite a 20 basis point improvement in principle loss rates.

EPS and court EPS increased 28% and 20%, respectively, aided by an 8% decrease in diluted shares outstanding, which dropped with the maturity of the convertible notes in May. There were still 2.7 million phantom shares in the diluted share count for the second quarter, due to the average calculation. Starting in the third quarter, that impact will be gone, and the diluted share count should be about 60 million shares.

Let's flip over to the next page and talk about LoyaltyOne. LoyaltyOne's revenue increased 62% to $356 million for the second quarter 2014, driven primarily by Brand Loyalty which added $136 million to the top line.

The AIR MILES business continues to be hampered by weak Canadian currency which reduced it's revenue by $14 million compared to the second quarter of 2013. On a constant currency basis, the AIR MILES had a robust second quarter with a revenue up 6% compared to the previous year.

Adjusted EBITDA increased 32% to $87 million for the second quarter. Brand Loyalty contributed $26 million gross, or $16 million net of non-controlling interest to the quarter. It's adjusted EBITDA margin was 19% of 600 basis points from the first quarter, reflecting Brand Loyalty's largely, fixed operating cost structure and it's ability to leverage revenue growth. Adjusted EBITDA for AIR MILES decreased 6% compared to the second quarter of 2013, but was flat on a constant currency basis. We expect improvement in adjusted EBITDA margins for AIR MILES as the year progresses.

AIR MILES issued were flat compared to the second quarter of 2013 as the growth rate was primarily dampened by two items. Number one, the Sobeys' purchase of Safeway negatively impacted issuance, as numerous Safeway stores were closed in order to comply with government regulations. As legacy Sobeys stores roll into the AIR MILES program, we expect to see this pressure abate. And two, new regulations in one Canadian province limiting the awarding of incentives for prescription drug purchases.

For the year, we still expect issuance growth in the 3% to 4% range, driven by increased promotional activity by our sponsors and new initiatives in the instant reward program, such as the new e-voucher program which is delivered via e-mail and can be used to gift redemptions.

AIR MILES redeemed increased 11% compared to second quarter 2013, primarily due to increasing popularity of the instant reward program. We expect year-over-year increases in AIR MILES redeemed for the remainder of 2014.

Back to Brand Loyalty, it exceeded expectations in the second quarter with over 20% organic revenue growth, driven by growth in core markets as well success in developing ones. With the majority of programs already inked for 2014, we have a clear sightline into the second half and expect this momentum to continue. In addition, Brand Loyalty provides a platform to generate opportunities for growth in other areas of LoyaltyOne. What Ed and I refer to as "revenue synergies."

Precima, a consulting and analytics firm specializing in shopper insights, is now leveraging brand loyalties grocery relationships to grow its top line. While currently a small part of LoyaltyOne, Precima is rapidly growing by signing multiyear contracts with major Canadian and overseas grocers.

Turning to DOS for quick update, the Brazilian-based business added another half million collectors during the second quarter, bringing the total number of enrolled collectors to 12.5 million, pacing ahead of our year-end target of 13 million. In addition, the program expanded into a tenth market during the second quarter with plans to expand to 13 markets by year-end.

With that I will turn it over to Mr. Kennedy to discuss Epsilon.

Thanks, Charles.

For Epsilon, revenue increased 8% to $357 million for the second quarter of 2014, which is really driven by growth in our technology offerings. Technology revenue increased a very robust 14% year-over-year, which was really primarily due to the conversion of a number of earlier pipeline wins that rolled into revenue and began to contribute.

Importantly, Harmony also made a nice contribution with e-mail volumes up double digit for the second quarter of 2014, which compares to a double-digit decrease last year for the same quarter. The success of the launch of Harmony has really effectively curbed attrition as Harmony's cloud-based micro-segment and multichannel market capabilities are beginning to get great traction in the market. Reception has been extremely strong, and we're pleased that, with such a short time in the market, Harmony can make such a nice impact on the results with our e-mail volumes for the quarter.

Looking forward, we expect continued growth of Harmony in the back half of the year as we've got about a dozen clients on board today and a dozen that are actively in the process in a very nice pipeline ahead of us. So tremendous progress on the Harmony front.

Turning to agency, revenue slowed just a bit during the second quarter of 2014, up 6% versus last year, compared to first quarter increase of 9% versus last year. We expect the on-boarding of new clients, including the announced relationship with Forward Direct, will add to agencies' growth rates as the year progresses.

Lastly, our data offering fell back just a bit during the second quarter. After a nice strong first quarter were data revenue increased 5% compared to the prior year, it dropped about 2% in the second quarter of 2014. Which was due primarily to circulation cuts that negatively impacted our Abacus catalog offering, as well as a bit of lowering of demand, which was primarily due to one client in our off-line data offering. However, what is encouraging for me is that as the distribution of our data goes up and that data gets used in more digital channels, the value and importance of our data offering continues to increase as part of Epsilon's overall offering.

Turning to profit, adjusted EBITDA net increased 6% to $68 million compared to the second quarter of 2013. While margins and remained essentially consistent with the prior year. Double-digit growth in our high-margin technology business helped to mitigate a $2.5 million expense drag associated with the on-boarding of new clients, such as Forward Direct. As the current backlog of wins rolls out, margin pressures should begin to abate as new client revenue starts to flow to the bottom line.

So lastly, what we're seeing in the marketplace is that trends continue to move steadily towards data-enabled, targeted marketing and a more clear understanding of who the customer is. As a result of that, our clients focus is involving towards engagement. That is, how to market to a consumer buy, one, leveraging the most effective touch points or channels.

And two, in using insight-driven creative messaging to truly enhance the brand experience. I believe Epsilon is superbly positioned to meet these needs by offering a full service, end-to-end, targeted marketing solution. And that service positioning element really differentiates us in the marketplace.

All right. Let me turn it back over to Charles for Private Label.

Thank you, Bryan.

Private Label's revenue increased 16% to $557 million for the second quarter 2014, representing the tenth consecutive quarter of double-digit revenue growth. Revenue growth was driven by 17% increase in average card receivables, the majority of which was organic. Adjusted EBITDA net increased 5% to $210 million for the second quarter of 2014.

As expected, we saw operating expense leveraging during the second quarter. While revenue increased 16%, operating expenses increased a lesser 15% compared to the second quarter of 2013. This leveraging reverses the trend whereby expenses were growing at a faster rate than revenue due to the need to add infrastructure and advance a substantial receivable growth expected in the back half of 2014.

We've beefed up staffing levels, largely already in place. We expect to continued expense leveraging as 2014 progresses. Conversely, the provision for loan loss expense increased $39 million or 67% compared to the second quarter of 2013. This increase is driven by receivables growth, not deteriorating credit quality. As you can see on the next page, credit quality actually improved during the second quarter of 2014. The bottom line is as long as card receivables are in high-growth mode, the provision for loan loss expense will lead revenue growth. This has a dampening effect to adjusted EBITDA net.

Turning to funding costs, we continue to see improvements as we replace maturing trenches of debt with new less expensive funding. Our funding rate for the second quarter of 2014 was 1.5%, 30 basis points better than last year.

Let's go to the next page and look at some of the key stats for Private Label. Total gross yields for the quarter compressed 30 basis points compared to the prior year, as new programs continue to affect yields. We would expect some continued compression throughout 2014 as we on-board a record number of new programs. As it relates to the new programs, it takes about three years -- what we refer to as a vintage period -- to really reach our desired yield levels.

Growth continues to be strong across-the-board. Credit sales up 22%, average card receivables up 17% and ending core receivables up 18%, all compared to the second quarter of 2013. Importantly this growth is balanced.

Credit sales record programs, many we've had for at least three years, increased 11% during the second quarter, or roughly more than double the sales growth rate of our brand partners. This is tenant sure pick up of over 100 basis points. The other 50% of our growth is being driven by the newer programs which are being actively supported by the new grant partners and resonating with their clients.

Lastly, credit stats continue to look good with no indications of future upward pressures. Normalized principle loss rates decreased 30 basis points to 4.5% for the second quarter of 2014, helped by strong receivable growth rates and a higher mix of co-brand receivables.

The related allowance for loan loss reserve remains strong at June 30, 2014 with approximately 15 months of forward coverage. Delinquency rates increased moderately to 4%, up10 basis points compared to the previous year. Based upon current trends, we expect stable principal loss rates for the remainder of 2014.

Let's go to the next page and give you an update on liquidity. Liquidity at the Corporate level remains very good at $700 million at June 30, 2014. Year-to-date, we've spent about $500 million on the Brand Loyalty acquisition and the share buyback program. We will likely look to both our liquidity and new debt during the third quarter of the year.

I'm happy to say the convertible notes are now gone. The notes were settled in cash, $345 million from EDS and about $1.5 billion from our counter parties in May of this year. With the call option settled, the phantom shares drop from our diluted share count. The ones we owe to the counter parties are currently being settled with an August 11 end date.

As you probably noticed in the June AK, we paid a small fee to our counter parties to shorten the settlement period end date from November to August. The shortened period reduced the dilution risk if our share price runs up later in the year.

Liquidity at our banks remained strong at $2.7 billion. We continue to take advantage of a receptive debt market to not only lower our current funding rates, but also lock in longer-term, fixed-rate money. Approximately 75% of our bank borrowings are fixed-rate, with an average maturity of about 25 months.

Lastly, the buyback program kicked in during the second quarter as we saw an opportunity to buy during a temporary pullback in our share price. Year-to-date, we've spent $202 million of our $400 million forward-authorized program.

I will now turn it over to Ed.

Great. Thanks, Charles. Thanks, Bryan.

I think if we could move to the page on 2014 updated guidance, I will give you a little color on where we're seeing things. Obviously, Q2, I think, across the board came in a bit better than we had anticipated, which is good news. I think the quality itself of the earnings is very strong, specifically you are dealing with a reserve billed which is an expense in Q2 of this year, whereas last year we actually had a reserve release.

Not only were the results from a growth perspective very strong, but it was against a tough comp from that perspective. Also against a tough Canadian dollar comp as well. So, overall, I think very, very high-quality earnings result and better across the board from what we had anticipated. So that gives us comfort as we move through the rest of the year.

I know there were some rumblings or concerns when we posted Q1 and gave guidance for the rest of the year, three months ago, that it looked like there was some spec there -- there was some risk in the back half. Hopefully folks now see that things are falling out quite nicely and, in fact, things have moved up a bit, and we're seeing better results earlier than we had anticipated. So we feel very good about the year.

I think it is comfortable that we have moved the guidance from its original $12.20 to $12.25, to now $12.35 a share, which will give us topline growth of 23% and core EPS growth of 23% as well. That also reflects a hit of roughly $0.17 from the Canadian dollar.

So overall 20/20 is what we're looking for. Within that, you will see the little note on the side of plus 9% organic, that's our base. I think we'll probably do plus 10, plus 11 on the organic side or comfortably running 3X GDP growth rate is our goal.

Let's go ahead and turn to laying out the quarters, which we usually don't do except for the fact that I think it is important that everyone gets comfortable with how things will flow. You will see that the growth rates by quarter on the face of it look like, oh my gosh, it looks like there is a big Q4 hail Mary pass in there, when in fact, that's not the case. Growth rates now have accelerated from 9% in Q1 to 20% in Q2. We look for about that same type of growth rate in Q3.

And then in Q4 sort of the difference between going from the low 20%s up to the 40%, you're talking probably about $30 million in terms of what we're looking for. And two thirds of that is pure seasonality out of Brand Loyalty. Q4 is Brand Loyalty strongest quarter and it is significantly stronger than Q3. So two thirds of that bump between Q3 and Q4 is just seasonality within Brand Loyalty. And then, additionally, at Epsilon, we expect the other third as the Ford deal truly spools up and we get the type of growth that we want.

So I guess the message here is, I think hopefully Q3 looks pretty reasonable compared to Q2, 20% to 22%. And then as you move into Q4, that bump up there is almost exclusively seasonality from Brand Loyalty, which hasn't been introduced until this year. So I guess the net result is there's no spec in the back half. The guidance we're giving is stuff -- clients that have been signed, contracts that have been signed and, therefore, as we look at the rest of the year, this is solid, and we're beginning to look at the jumpoff for 2015. So we feel very good about that.

Let's move along and get a little bit of color on the rest of the 2014 outlook, starting with LoyaltyOne. We talked about the seasonality at Brand Loyalty with Q4 being by far the heaviest quarter. But, overall, I would say that AIR MILES, we think when you factor out the Canadian dollar, is going to do plus three, plus three top and bottom which is, sort of a bit below where we would like it to be long-term. We think it's more of a plus five, top plus six EBITDA-type growth business where we should get back to that in 2015. But plus three, plus three is about what we're looking at now.

The Canadian dollar drag is lessening as the year goes on. So we've got probably two thirds of it behind us, with another one third to go on the second half.

Brand Loyalty -- very, very pleased with how that is playing out. They are running, for sure, 20% plus organic top and bottom for the year, and the growth is coming both from their core countries as well as emerging markets, as well. So this thing's got some legs to it.

And then finally, even though it's not in the numbs, because we only owned 37%, but Brazil -- we're on track to grow revenue about 40%. And again, this is a land grab in terms of, we're trying to grow as fast as we can in terms of memberships. We started with less than 2 million in 2011, we now expect 2014 to be north of 13 million members. So this continues to spool up. I guess you can view it as a very valuable asset that is not in our financials.

At Epsilon, as Bryan talked about, we're looking at high-single digit revs, mid- to high-single digit on EBITDA growth. Where we're getting, sort of, the best traction this year, as Bryan talked about, is in the technology side, which are the big loyalty platforms that we're building. There is a huge amount of interest coming from -- not just sort of the core verticals and big, big multinational clients that we're used to servicing, but we're getting into newer verticals where we didn't see that much interest in prior years.

We're beginning to see everyone getting more and more excited about, Hey, I need something that will give me some insight into who my customer is. And that requires some type of loyalty application. So we're seeing a lot of movement in the retail vertical, as well as the food segment, both QSR and casual dining.

And then we're also seeing the mid-tier or midmarket firms that traditionally couldn't pony up the type of dollars that are needed to have one of these solutions. They are making the decision that this is too important not to have. And so we're seeing a lot of movement on mid-market side of dollars switching over and making the big investment in this type of program. So this bodes extremely well going forward.

I would say our biggest challenge at Epsilon right now is making sure that we have the growth in the hot skill personnel that we need to bring this all to fruition. But very pleased there.

And then the second thing is, our new digital platform, Harmony that Bryan talked about is off. We can finally call the ball on this one and say green light on Harmony. We boarded a dozen clients of which one is a very, very large client, maybe as much as 10% of all of our permission-based e-mail volume, up and running, no issues. So we think this will be an industry-leading solution, and very happy about that.

So I think Epsilon it cycles, right? You're going to have in some years, it's data leading the charge; other years it's agency; other years its database; loyalty; e-mail leading the way. This year looks like technology is going to be the -- get the gold star.

Finally if you turn to the card business. We continue to see very, very strong growth, and again, you have a backdrop of a card industry that's barely growing, maybe 1% or 2% per year. We expect our credit sales to be north of 20% for the year.

We expect our average file to actually be higher than the, 15% we were thinking about. We expected actually a run more of 20% for the year. And that will be accelerating as the year unfolds. So we did about a 15 % file growth in Q1, 17% in Q2, 20% in Q3, and we'll exit the year at a 25% growth rate. Which will be extremely positive as we go into 2015.

Again, we always get the question of, how come? How does this work? Why is this working so well in an overall environment where consumers spend is modest at best -- consumer revolving debt is growing a couple of points and that's it.

The answer, I think Charles talked about earlier, is a lot of it has to do with what is happening in our core client base. When you're seeing the pressure that's on our retail base, and you see that their same-store sales are growing 2%-3%, maybe 3% plus, and yet we're looking at double-digit sales growth at those same retailers, something is working. And that has captured the attention of a lot of other folks, and that is, I think, a big reason why they are signing up for the Alliance Solution. Because, again, whether it's at Epsilon, whether it's at LoyaltyOne or whether it's in our card group, across the board, the interest in understanding who the customer is, which requires a data-driven, analytical approach, has never been stronger. So the trend is our friend. We expect to keep riding if for many years, and so far so good.

Again, I am looking frankly more at 2015 at this point. And that means that I need to focus on how is the vintage, how is the signups doing this year? Has it dropped off if not? The answer is no. We're probably somewhere around $1.3 billion-$1.4 billion that we signed up in terms of the vintage for this year. We expect to have another -- we expect to have a $2 billion vintage for all of this year. Which means three years from now, there's another $2 billion of growth added to the file. So pipeline remained strong. You should see a bunch of good announcements coming out the door.

In summary, not much more to add. Revenue and core EPS up 23% respectively. The organic growth rate is running about three times GDP. All the segments are growing. I would say our fastest-growing segment would be Brand Loyalty, for sure, followed by the card group, followed by Epsilon, followed by AIR MILES.

So I think that we've got a nice portfolio of growth engines. And I guess I probably should say that Brazil is probably edging out even Brand Loyalty, but that is not in the numbers.

So hopefully everyone feels comfortable now with how we laid out the back half of the year. I think doing 20% growth on earnings in this quarter does a lot to assuage people's concerns about the back half. So the seasonality of Brand Loyalty, getting past the Ford ramp up, should give us very good visibility as we go into the back half of the year.

So I'm going to leave it there, other than to say that if you look at the way things are playing out for 2014, in the fact that there is no spec in our numbs for the back half of the year. What I am probably most please with is, we had a couple of big question marks this year.

Probably our largest was the very significant investment we made an our all-digital platform, Harmony, which Bryan can talk about. And needless to say, we were positive about it. But until you flip the switch and get things up and running, and actually jammed through huge volumes, you just don't know. So we feel very good about the net results there.

Probably another area that we wanted to make sure played through was the fact that, Hey, this huge run in our card business with these massive vintages that we're signing, is this a one and done, or is this thing for real? I think at this point, we jumped from signing a $400 million vintage, three years ago, to a billion, two years ago, to $2 billion last year and another $2 billion this year. So this is for real. We expect this to continue for some time.

The Brand Loyalty was probably the third area where I wanted to make sure that we didn't have issues there, as a lot of folks have with acquisitions. And, frankly, it is performing much better than even we had anticipated. So I think probably those are the three areas where, as I say, kept us up at night a little bit. I think we can check the box on all three for now, and now it is a function of what their jumpoff for 2015.

So that's it. Why don't we turn it over to Q&A, and we will open it up.

Thank you. At this time the floor is now open for your questions.

(Operator Instructions)

One moment please for your first question. Your first question comes from the line of Sanjay Sakhrani from Keefe, Bruyette & Woods.

Good morning. Thank you for all of the color on the numbers.

I guess stepping back and thinking about next year, and I know you guys save that for the next call. It seems to me like the EPS growth rate we're seeing this year is very achievable if not beatable as we look out. Is that a fair statement?

And secondly, thinking about free cash, you guys have repurchased, I think, $200 million worth of stock, and there is still a fair amount of free cash that's been generated, or will be generated throughout the year. How should we think about that access over the remainder of the year? Thanks.

Well, you know, we want people to show up for the Q3 call, Sanjay, so I probably won't go too far out on a limb for the earnings growth rate. But, you know, I think, clearly, people can see the trends. We would expect 2015 to be a strong year, and just bear with us until we get to Q3 when we give official guidance in terms of free cash flow, Charles.

You can see we've been fairly active this year, Sanjay. Again, with the buyback program about $200 million -- with the Brand Loyalty 60% acquisition about $300 million. I think you'll see us to continue to support the buyback program as necessary over the course of the year. Obviously, we're more active when we have a pullback in our share price.

You'll also see us continue to look for acquisition opportunities, whether it be abroad in Europe, something to flesh out the Epsilon model a little bit further, or even in the US I think some opportunities are coming to our attention that could make sense. So, you know, us, we like to deploy our free cash flow. We'll find a way to do so during the course of the year.

So just expect us to continue to look at our main competencies, which is buyback, M&A. We will have a little bit of cash that supports the growth of Private Label from regulatory standpoint. And those would be the three uses.

Okay. I guess the question on Harmony -- on Epsilon. In terms of Harmony, can you just talk about how much of a contribution you are expecting from the remainder of the year from the rollout? And how beneficial it could be next year?

Sure, Sanjay. I think as we grow through the back half of the year it is obviously going to ramp. So if you think about Q2, you know, Harmony contributed in the low single digits in terms of volume that we would push out the door. By the time we get to the end of the year, that should be into the double digit range.

And as we roll into 2015, you'd see, I think, better than 50% of our volume next year would come from Harmony. I think the natural follow-on question to that would be, well, how much of that is clients that you are converting from old platform to new platform? And how much of that is new clients?

The interesting thing that we're seeing right now is the majority of the Harmony activity is coming from new clients. And that is a bit because our existing clients have been waiting, just as Ed said, until they saw us in production and in marketing. Excited about what Harmony brings to the table, but they have been slower to come versus new clients. So we should see some nice acceleration as we move out of this year and into next year as they jump on board.

Okay, great. Thank you very much.

Your next question comes from the line of Darrin Peller from Barclays Capital.

Just to be clear, the ramp up through the year and into the fourth quarter, you did a good job I think laying out. But really Brand Loyalty is the vast majority of that. But it also seems like Ford is rolling up in a big way. Harmony, as you mentioned multiple times, is rolling up in a big way.

So what kind of organic growth should we be looking at from an Epsilon standpoint? When you think about -- right now it's growing -- you're saying high single digits. But when we factor in Ford and Harmony -- I mean for next year, in the exit run rate we're going to see in fourth-quarter, is that the right way to look at this business is to the new growth rate?

Secondly to that -- just a little more on Harmony just for one minute. I think the overall opportunity for new clients, can you, Brian, give us a little more color on what this actually means for the business after the extensions you've built out. What can this actually do for growth?

So, Darrin, I will take the first one. You do have a valid premise that Q4 you could see low, double-digit organic revenue growth as some of the ramp come through that you talked about. Going into 2015, we will keep it pretty conservative -- high, single-digit organic revenue growth is kind of the target we have for Epsilon.

If you think about data-enabled marketing in the US growing 6%-7%, which is the bulk of Epsilon. Digital growing 20% per year, which is a piece of Epsilon. That gets you more to that high, single-digit number -- run rate number, and that's what we will look for in 2015.

I think, just to chime in on that, Darrin, we've had a bit of an ankle wave that we've been dragging around for the last couple of years in terms of our existing e-mail business. Which has been healthy, but not contributing to the growth. So I think of the Epsilon offerings as a portfolio, and they are going to cycle, which is the point that Ed made earlier.

We have had one major engine, which is the e-mail engine, which hasn't really been contributing. Now you've got something back in the portfolio that has nice growth ahead of it, which kind of insulates us against risk as some of the other offerings will bounce around in terms of their growth rate. What that can do long term, obviously we're going to push hard and heavy.

But I think -- more broadly, if you think about Harmony, it's less about what can that one offering do for us from a revenue perspective? And for us, it's more about how it becomes a part of these large enterprise relationships that we are pushing for, which cover multiple channels, multiple offerings, which draw on everything from data, to database, to our strategy and analytics, and creative, and then distribution. In this case, distribution is e-mail. So we see it as a good cross sell -- upsell engine that should help to reinforce some those big enterprise relationships.

The final piece I'd throw in there is, look, we've had a heck of a good run on the agency side with the auto vertical. Huge wins, you know, lots of big new auto platforms being built. And with new-car sales, you know, ripping along in the US the last few years, all helpful, I would say, Darrin, quite frankly, the number that Charles gave you is sort of a hedge against sort of the auto sector of the business, kind of, slowing down a bit.

So we would expect -- pure digital side to pick up the slack there. If auto doesn't slow, then, sure, you've got a little kiss to those numbers.

That's helpful. It just seems like between the strength you've seen in agency, and now, taking the e-mail business from what was, maybe not a head wind, but a slower growth to normalize growth rate in line with the rest is not better. It seems like that business should be set to accelerate beyond the, even, high-, single-digits. But that's a fair point.

One follow-up and then I'll turn it back to the queue. On the Private Label side, you guys mentioned ending the year 25% growth -- I guess, end-of-year receivables growth. We imagine there's a fair number of deals coming down the pipe, in terms of portfolio acquisitions that have to flow into that.

Can you give us a sense of the profile of these deals in terms of -- are they co-branding? Are they not as profitable as the other one's credit profile? And really, just the sustainability of that kind of growth rate for the receivable side of the business -- been fantastic at 18% organically in the last couple of months layering on these deals. Is this the kind of new growth rate for this business we should see for a while?

Again, that is the big question. We thought when we signed a billion-dollar vintage that, boy, that was pretty exciting. And, you know, maybe it was one and done. Then we doubled it to $2 billion. This year it will be $2 billion.

I think as you look into Q4 -- yes, inherent in those numbers are probably three, very modest-sized files. You know, $100 million to $200 million-type dollar files, that are pretty standard for us. So there's no big file that is in that year-end number that we have. So think of it as, you know, it includes probably three modest-sized files that are out there and should be good growth engines on a go-forward basis.

You know, it's going to be a combo both Private Label and Co-Brand, depending on what the clients want. But I would say, going forward, that if we could sustain a mid-teens file growth rate for, you know, years to come, that would be very exciting for us. Because then you're talking, you know, double-digit type financial returns. So I think that would be our goal.

And right now, based on the vintages, obviously it's going better than that. But I would assume that most of the clients that you are signing are going to be clients who have abandoned the program because it didn't work in the past, or clients who are brand-new to the scene. And less about some major, you know, let's hope for big portfolio acquisitions. We're not really counting on that.

Got it. All right. Makes sense guys.

Good job. Thanks.

Your next question comes from the line of Dan Perlin with RBC Capital Markets.

I just have a couple. One, Charles, can you just tell us what you're forecasting for the full year the you have to absorb for the Ford switching costs, I needed $2.5 million this quarter. My sense was it was somewhere around $7million, $8 million for the year, and that, obviously, will be a duplicative expense -- it won't be there the next. Can you give us what that number would be like?

Yes. That's a good range. Around $8 million.

Okay. And then the margin profile of Brand Loyalty in the current quarter was a lot better than I would have anticipated given, kind of, the investment and the growth rate. Is that, kind of, the right run rate or -- with this hockey stick in the fourth quarter bit, is there a significant investment pool that needs to go in there before the margin comes in their little bit? Or is this kind of where we should be thinking about going forward?

Think of it this way, Dan, is this a high, fixed-cost business So it leverages revenue growth very well?

So if you look in Q1, revenue was little bit lower, ramped up in Q2, good expansion. I expect it to pull back on revenue a little bit in Q3 and then ramp up in Q4. So for the year around 18-ish in terms of EBITDA margins; probably a little bit of a pull back in the margin, Q3; good expansion in Q4.

So in Q4, it's likely you can see EBITDA margins in the 20% range. But for the year, expect it around 18% with that fixed-cost structure.

If you look at, overall, LoyaltyOne, which consists of, sort of, the international businesses; the Canadian AIR MILES program; Brand Loyalty, which is primarily Europe, as well as some of Asia; and the Brazilian coalition program. You've got Brazil, which is running 40 plus percent top line, but very little earnings at this point because it is in pure growth mode. You've got Brand Loyalty, which is running 20 plus organic top and bottom, but that still means a margin, as Charles said, in that, sort of, high teens. And then you've got the traditional AIR MILES program, which is growing 3% - 4%, but has high to mid-high 20s-type EBITDA margin. So you squish it altogether, to use a financial term, and what you've got there is a very nice double-digit, organic, top-line growth and double-digit, organic bottom-line, so that's sort of what we're after.

Got it. And then, I think, Charles, you mentioned the tender share growth was 100 basis points. Is that a function of this buildout -- this multi-tender database or is this something different?

This is just basically the basic blocking and tackling we have been doing. The multi-tender database really is still under development -- something we're looking get closely done by the end of the year. That's an opportunity maybe in 2015 going forward, but really will not be a contributor to 2014.

Okay. And then, lastly: As I was looking back through some of my notes and thinking about vintages going into 2015 to get some line of sight.

Am I right to assume that you have about $500 million file from a 2013 vintage that you're going to roll in -- it looks like in the 2015 -- maybe back half of 2015? It's not even in 2014 numbers.

That's correct.

Okay. Thank you, guys, so much.

Your next question comes from the line of [Tulu Yunus] with Zamora.

Good morning, guys, thank you. One question on clarifying the guidance.

I think for the quarter, you guys beat your published guidance by $0.20 actually, and you're raising the full year by $0.10. Just trying to reconcile that. It doesn't seem like there is anything in the report that suggests you are actually lowering your back half view. Was it just that,, you know, -- is there some conservatism baked in is, sort of, your style, or is there something else we should be thinking about?

That's always a piece of it Tulu, but also you don't always exactly know how things will sequence between quarters. Going back to what Ed said before, we had a little bit more come into Q2 than we'd originally expected which shifts that of Q3, Q4.

So I think it's a combination of both. We always like to try to keep a little conservatism in there because we like to do the beat and race. But sometimes you can't exactly sequence your quarters exactly right.

Got it. Okay, thanks. And then just on the credit trajectory -- actually, just a question there.

So I think last quarter your outlook really was that the loss ratio should be, sort of, flattish to down from those levels. It looks like the DQ rate has done really quite well, you know, beating seasonality and so forth. Can you give us an update on your outlook for the charge-off rate?

We are still expecting improvement in the loss rates. Last year was a 4.7% charge-off rate. This year, we are trending more toward a 4.5% loss rate. I think that very much stays on track.

Okay great.

For modeling purposes, you know, we've been saying this for the last year or so. I mean, the good news or the benes of declining charge-off rate and declining funding costs. We don't factor that in as we look into 2015 and 2016.

We assume this thing has scraped bottom, which is probably a good assumption, in that, the growth that we are expecting is going to be coming purely out of just driving very large increases in the file from all the signings that we have in the tender share pickups from the core.

Right, got it. And then just, lastly on Brazil, obviously tracking very nicely. I guess, what is -- your ownership kind of remains where it was.

Just what is it that you kind of need to see before you can, sort of, you know, perhaps, take that and invest a little bit more into that business? What type of collector account are you really looking for?

That's a fair question. I think it's a classic dilemma, right, of, you know, who would you like to own a majority of something that you hope will work well? Or a large minority piece where the owners are also the operators, and have a huge incentive obviously for themselves and the associates to grow this thing profitably and quickly.

And, frankly, I would prefer to own 37% of something where the ownership is as highly motivated as possible to make this the most valuable asset that they can. And if that means, at some point down the road, they would like a liquidity event, we would be more than happy to offer that. But we are not aggressively pursuing that.

We would prefer to build up the asset to be as valuable as it possibly can. If that means we pay little bit more down the road, I think that is a good play.

Got it. Thank you, Ed.

Your next question comes from the line of Ashish Sabadra with Deutsche Banc.

Thank you, Ed and Charles. A solid quarter. Just had a couple of quick questions. The receivables growth of 20% in the third quarter, does that include Cold Water Creek receivables? Are you planning to [migrate] what those were?

Yes.

Thank you. Can you just help us size how big that is remaining?

I'd say it's still in the $250 million plus range. What we will look to do, obviously, is try to convert the cardholder holders into the other programs and retain utility of those cardholders.

Okay. Now, that's great. And so there's definitely an opportunity for you to convert those over to other programs, and that should help build your receivables folder. Is that the right way to think about it?

That is correct.

Yes. I mean, 20% would be sort of our base. Hopefully there will be a little better news coming up in that.

That definitely. And then the second question on the reserve build -- so in this quarter, the provisions were higher than the charge-offs, and I believe that is associated with receivables growing so fast. So how should we think about the build for the rest of the year? I was wondering if you could comment on the provisions for the rest of the year?

Let me look at my cheat sheet. I think you're basically going to be in a situation where you're in a solid reserve build, Q3 and Q4, just based upon the growth rates we are experiencing. So even though the loss rates aren't expected to move -- we said they would be stable for the remainder of 2014. With the sheer amount of growth we're expecting to see you will be in a reserve billed situation.

It's kind of like -- sometimes people ask, could we float through more? Is there a chance for margin expansion. The answer is, it's a real simple thing. If we slow our growth, you will see a flood of earnings coming through, because your reserve billed always front runs the earnings coming from the file.

So it is one of those things where, you know, the reserve builds that we're going through certainly dampen current period earnings. But at the same time, you know, we would expect that, you know, the goal here is, sort of, long-term earnings generation, and so we expect that the builds are a good sign going forward. But you're not going to see it in margin until we start slowing.

That's great. And just quickly on the M&A pipeline -- usually tend to do one or two tuck-in acquisition every year. I was just wondering when you look at the M&A pipeline, both when you look at the acquisition front, as well as some tuck-in acquisitions, how do you look at the pipeline. If you could just comment on your plans.

On the M&A side -- obviously, in the card business, you know, we don't do a lot of it, you know, we will do, as we talked about, some pretty modest-sized files -- if there's, out there a hundred million, 200 million -- we have one in 2015 that's coming on board that's about 500 million. So we're not assuming that there's going to be a lot of M&A there, which sort of leaves, you know, the other two large segments from an M&A perspective.

And clearly, I certainly wanted to make sure our European adventure, via Brand Loyalty, was successful before we dipped our toe any deeper into the water. And needless to say, we are more than happy with how that's going. So that gives us more confidence that maybe we beef up Europe a little bit more.

At the same time that our clients are asking for a larger footprint in Europe, as well as in Asia, because these are global clients. So we need to be aware of that.

At the same time, you know, it's always the question, do we build or buy in terms of beefing up digital assets, you know, if prices are crazy, we're certainly not going to get involved in that. We prefer to build it. If there are opportunities where there are reasonable valuations -- and that means accretive to us -- then we will buy. So that's about as close as I can get.

Okay, that is great. That's a great segue into my last question.

Just under synergies between Brand Loyalty and Epsilon business. Can you talk about your plans to expand Epsilon in Europe and Asia and maybe bring Brand Loyalty in the US? If you could just provide some color on that front.

There's no question. I will take the first piece, Brian can take the second. There's no question that Brand Loyalty which exclusively is with the big supermarket-type of markets, whatever you want to call them, over in, primarily Europe, as well as some in Asia. We are already getting traction in Canada first, which would make sense given our presence up there. As well as beginning to look at opportunities in the US

As part of this deal, we certainly wanted to use our relationships in North America to help the footprint of Brand Loyalty. I think what you will find is that in Canada, will be the first jump off, and that will be sooner than rather than later. And then the US would be next.

I think from and Epsilon perspective, just to give you some color. Epsilon, today, already has a nice healthy footprint across Europe and APAC. But as a percent of revenue, that is a fairly small piece of our business. We have been growing that.

Originally many of those relationships we're centered around our e-mail offering. And as our multinational clients grow, we are growing with them by adding personnel and adding services in all of those locations. Which enables us to, you know, broaden what we do internationally beyond e-mail to database and data and etc. So that is something that is going to be a critical need for Epsilon going forward, is to continue to strengthen those international offices, so we can grow with our global clients.

That's great. Solid quarter, guys. Thank you.

Thank you. One more.

Your final question comes from the line of Andrew Jeffrey from SunTrust.

Thanks for squeezing me in, guys. I appreciate it.

Ed, I think your comments on Epsilon are particularly telling, vis-a-vie the strategic positioning of the business. Harmony from a long-term, sort of, cross-sell synergy perspective is clearly critical.

Could you elaborate a little bit on a competitive basis when you look at the broadening of a revenue base. From whom do you think Epsilon is taking share? And who do you see in the market as your primary competition?

I will take a stab at it but I won't do it justice, so I will let Brian finish up. But from, you know, there is a large chunk of the growth in Epsilon that is coming from, not dissimilar to what we talk about in the card business as well -- It is coming from a shift of dollars away from your much more traditional channels of marketing. You know, your brand advertising, everything else.

When we're looking at -- especially in the midmarket space, which, you know, we have never really had much traction, because, you know, this stuff is expensive. But what we're finding is people are going to pony up the bucks to get a solution that will provide them with, you know, using all types of data to get good insights into their customer base. They're taking money out of those traditional channels.

So I would say, Andrew, to answer your question, it's less about against whom we compete, it's more about a shift that's taking place out of traditional spend and into data-driven, sort of, targeted marketing and loyalty. That's the biggest one. I will let Brian hit the --.

I think Ed is right. We see it a little bit more in the category of market expansion than stealing market share. I mean indirectly, for sure.

If you got -- for example, Ed talked earlier about the food vertical, quick serve and casual dining and retail. You are seeing in those clients a shift in spend, which is basically away from general advertising and into these data-driven forms of marketing. In that regard, I guess your indirectly stealing share from traditional advertising agencies who would've been supporting those channels.

But really, we think of it more as new spend in these data-driven categories. In particular, loyalty which Ed emphasized earlier, which is a lot of runway to it and is a big driver of the growth in our technology business.

Beyond that, you see competitors in the categories that we cover. Which would range from data companies to database and marketing services companies, to agencies -- in Epsilon's emphasis and our market position is about integrating all of those services together in one end-to-end platform. We think that is a winning formula, because our clients are looking for somebody who can insulate them from all of the complexity in the marketplace.

And we believe we are one, if not the only one, of the companies that has the broadest reach across all of those channels and categories. So it's a good position for us to take, and that is helping to drive growth.

That is helpful. And then one follow-up if I may.

The Precima business is a relatively new business. I haven't heard you talk a lot about that. Can you talk about the opportunities for growth, sort of, on that, you know, I guess more of a bespoke or one off or closed-loop kind of offering. Is that something we're going to be hearing more of in terms of loyalties long-term growth?

Yes, I think it's a natural growth of the AIR MILES business itself in the sense of what Precima does is it gets a lot deeper into the behaviors and spending patterns of the existing clients. So you're really getting down into, for example, at a grocer, you know, the individual SKUs and trying to figure out, you know, how we should do product placement. To who we should be offering the big promotions to, how we should be tearing those promotions.

Again, think of it as adding another level of detail for those clients. And those clients can either be part of the coalition or outside of the coalition itself.

So some clients don't want that level of detail. Those who do, Precima is the solution. So I would say, given the trend in the amount of information people want, I would say Precima is a legitimate new growth vehicle for the LoyaltyOne segment.

Great. Thank you very much.

Thank you everyone.

Thank you, ladies and gentlemen. This concludes today's Alliance Data second quarter 2014 earnings conference call. You may now disconnect.