Bread Financial Holdings Inc (BFH) 2014 Q4 法說會逐字稿

Good morning, and welcome to the Alliance Data fourth quarter 2014 conference call.

(Operator Instructions)

In order to view the Company's presentation on their website, please remember to turn off the pop-up blocker on your computer. It is now my pleasure to introduce your host, Mr. Daniel Haykin of FTI Consulting. Sir, the floor is yours.

Thank you, operator. By now you should have received a copy of the Company's fourth quarter and full-year 2014 earnings release. If you have not, please call FTI Consulting at 212-850-5709. On the call today, we have Ed Heffernan, President and Chief Executive Officer, and Charles Horn, Chief Financial Officer of Alliance Data.

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 of the SEC. Alliance Data has no obligation to update the information presented on this 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 these measures to GAAP will be posted on the Investor Relations website at www.AllianceData.com. With that, I'd like to turn the call over to Ed Heffernan. Ed?

Great. Thanks, Daniel. Joining me today is Charles Horn, our always exuberant CFO, and Charles will kick it off and talk about our operating results for the fourth quarter and full-year of 2014. I'll do a quick summary of 2014, and hit the high points and low points, and then talk about guidance for 2015. Charles, take it away.

Thanks, Ed. To use an Ed-ism, it was a boom of a fourth quarter as revenue increased 30%, while core EPS and adjusted EBITDA net, increased at even stronger rates of 44% and 32%, respectively. Better than expected performance by BrandLoyalty, our European loyalty operation, and increased credit quality of Private Label led to the profitability acceleration. The acquisition of Conversant which closed December 10 added about $0.09 to core EPS in 2014.

Before anyone gets too excited, $0.09 accretion in 22 days, you need to keep in mind that the 4.6 million shares we issued as part of the acquisition consideration had not fully burned in into the fourth quarter share count. Being an average calculation, only 1.1 million of the shares impacted the fourth quarter diluted shares. Overall we think we're still on track for about $0.50 of accretion in 2015.

Core EPS excluding Conversant's (inaudible) period contribution was $3.36 for the fourth quarter, beating guidance by $0.08. This beat was accomplished despite a $0.05 drag from unfavorable FX rates which were down 8% from the prior-year quarter and 4% from the third quarter of 2014.

EPS decreased 52% to $0.86 for the fourth quarter of 2014. It was negatively impacted by a couple of one-off charges aggregating $2.05. Deal costs, which are investment banking, legal, and accounting fees pertaining to Conversant acquisition aggregated $7.3 million, while the strong performance by BrandLoyalty triggered a $106 million earn-out charge. Overall, a nice charge to take because it reflects how well the acquisition has performed, with adjusted EBITDA up over 50% compared to pro forma 2013. As you may remember, this was a one-year only earn-out arrangement. Excluding both from the EPS calculation, EPS increased 63% for the fourth quarter of 2014.

Let's go on to the next slide and talk about LoyaltyOne. LoyaltyOne had a better than expected fourth quarter with the revenue up 62% in adjusted EBITDA. net of non-controlling interest up 41% compared to last year. Notably adjusted EBITDA margins expanded during the fourth quarter to 29%. One of the things I like about BrandLoyalty is its largely fixed operating expense structure. Sequentially, meaning compared to the third quarter 2014, its revenue increased $76 million, while its adjusted EBITDA increased $25 million or a 33% flow-through rate, very solid.

As it had been all year, FX was a headwind to the fourth quarter, reducing our revenue, adjusted EBITDA growth rates by about 8% compared to last year. The US dollar continues to appreciate, so we will face this headwind again in 2015. However in 2015, we'll encounter translation risk with both the Canadian dollar and the euro which really didn't come into play in 2014, since we did not own BrandLoyalty in 2014.

AIR MILES issued increased to a solid 11% during the four quarter, helping us salvage a positive growth year, albeit only at 1% increase compared to our expectations of 3% to 4% for 2014. The growth rate in the fourth quarter was driven by increased promotional activity by a few of our larger sponsors. Entering 2015, we should get some help from the grocer vertical as Sobeys is a national sponsor after joining our program in Ontario and Western Canada. The addition of these stores take the place of the Safeway stores closed earlier in 2014. We talked about that being a lost opportunity, and now we can make that up in 2015.

2014 was the year of tremendous collaboration between international loyalty platforms. Precima, our Canadian analytics solution worked extensively with BrandLoyalty throughout the year to develop deeper customer insights which we believe contributed to BrandLoyalty's terrific year. Conversely, BrandLoyalty entered Canada later in 2014 in order to offer a complementary product offering to our existing AIR MILES clients as well as other potential clients in the market. We believe this tag-team approach will enhance growth opportunities in 2015.

Let's flip over and talk a little bit about Epsilon. For Epsilon, revenue increased 18% for the $440 million for the fourth quarter of 2014, aided by the 22 days that we owned Conversant, overall, a solid growth quarter with organic revenue growth of about 5%. Adjusted EBITDA net increased 9% to $102 million for the fourth quarter, reduced for approximately $3 million of integration costs incurred during the [sub] period, and that would primarily be severance.

As Ed's quote in the earnings release stated, it was a mixed year for Epsilon. For the year, strong organic revenue growth is 7%, produced organic EBITDA growth of only 1%. While some distraction existed with the acquisition of Conversant, the primary driver for the lack of EBITDA flow-through was a rise in human capital costs. For 2014, average headcount increased about 4% while total personal cost increased about 8%. For 2015, we'll look for moderate to growth rate in human capital costs through some modest off-shoring initiatives.

Notably Agility Harmony continues to gain traction in the marketplace as volumes increased 39% compared to the fourth quarter 2014. Harmony's unique features allow it to ingest both structured and unstructured data across channels, then drive intelligent, highly personalized, tailored messaging to consumers in the digital channels that generate superior, measurable results for our clients.

I can't finish a discussion with Epsilon without talking about the biggest acquisition ever for us, Conversant. It is a Company we've watch for many years. While Conversant may have had its critics, its three-year CAGR, for both revenue and EBITDA, is in the double-digit range when discontinued operations are excluded. That meets our hurdles. However, more importantly we see compelling opportunity in the combination of Conversant's unique assets with ours.

We have put ourselves in the position to observe billions of digital interactions on a daily basis across desktop, mobile browser, mobile in-app, social, and video channels, with our unique and deep trusted position of clients' first-party transactional data, paired with Conversant's leading cross-device common ID, we're extremely well-positioned to identify our clients' consumers online, reach them at scale and digital channels, and personalize messages in a way that drives sustainable ROI for their marketing budgets. We view this as a competitive market in the market place.

Let's turn over to the next slide and talk about Private Label. As we expected, Private Label finished the year strong with the revenue up 24%, and adjusted EBITDA net up a stronger 43% both compared to the fourth quarter 2013. Breaking down the results for the fourth quarter, we saw nice acceleration in the growth rate of average card receivables which increased 30%. This compares to growth rates of 15% in Q1, 17% in Q2, and 22% in Q3.

This was the accelerating growth profile we've talked about all year. With the growth in receivables, we delivered nice operating efficiencies with operating expenses up 21% compared to revenue up 24%. Probably a better way to evaluate our operating efficiency, given the substantial growth in card receivables is operating expenses divided by average card receivables which improved 70 basis points compared to the fourth quarter 2013. Another area I want to highlight is the improvement in credit quality as loss rates decreased 120 basis points compared to the fourth quarter of 2013. Those improvements benefited our provision expense which increased 10% for the fourth quarter but was still up 23% for the full-year.

Now let's do a deeper dive into our receivables growth for 2014 as a number of different factors contributed to it. First, we were able to increase our active card holder base by about 10% to $35 million at year-end. Card programs added during 2014 contributed about 3.5% to that growth rate, meaning pre-2014 programs added 6.5%. That is a good sign and reflective of an improving economy.

Second, card holders are carrying slightly higher balances, up on average 8% to $500 in 2014, still a very moderate number. Third and last, we continue to expand beyond traditional bricks-and-mortar sales into digital channels. Our digital credit sales expressed as a percentage of total credit sales increase over 25% in 2014, an increase of approximately [200] basis points compared to 2013.

Looking into 2015, we expect many of these positive trends to continue, 20% growth rates in receivables, combined with stable loss and funding rates. As a pertains to our cost structure, we experienced some growing pains early in 2014 before we ultimately grew into it. We do not expect a repeat of this in 2015 but rather we'll look to drive further operating efficiencies.

Before I turn it over to Ed, I will point out a couple of things on the slides that will help you with your modeling. First would be you see we acquired about $550 million of portfolios in the fourth quarter. They were on-boarded in November. Keep in mind from an accounting standpoint they were fair-valued, meaning we record them net of any anticipated charge-off, so we don't carry reserve against any of those receivables.

The second thing is when you look at reserve coverage, 5.4% reserve at the end of 2014, that is only on [reservable] AR which would exclude these acquired files, and it would account for the same methodology we used in 2013, which is the trailing LTM charge-off rate of 4.4% at a point spread to 5.4% ending reserve, so basically we followed the same methodology we did in 2013. With that, I'll turn it over to Ed.

Great. Thanks, Charles. If everyone could turn to the page 2014 wrap up, this is where I chat a little bit about what went well, what we're working on, and then we'll get into the outlook for 2015. From a financial perspective it was a heck of a good year. You've got top line up over 20%. You've got organic growth at 4X GDP which is ahead of our 3X goal, and you've got earnings per share up in the 20s. Financially, heck of the year.

Obviously, I focus on the individual businesses and how they did and what they could do better going forward. We start with LoyaltyOne which consists of primarily our AIR MILES program out of Canada, and then our BrandLoyalty business which is primarily our European platform. Overall organic top line growth, when you combine everything, is about 9% and that's in both constant currency and what we did is we dropped in pro forma BrandLoyalty for 2013. Apples to apples, the combined entity grew about 9% organically.

BrandLoyalty itself was the big driver and far exceeded all of our expectations. As Charles mentioned, because it overperformed so much it actually triggered and earn-out charge to us. I haven't quite figured out how overperformance triggers a charge, but the fact of the matter is we'll do that all day long.

Then we also want to talk a little bit about Brazil which is not in any of the financial numbers because we own slightly less than 40% of the entity itself. It continues to spool up very nicely as collectors are up over 30% to $14 million. It's quiet in terms of not flowing through the financials, but the program itself continues to move nicely into a significant asset for us. Those are all the positives.

On the negative side, it would be tough to get excited about the key metric that we use that drives the financials in Canada, which is the number of miles or points or whatever you want to call them, the number of units that get issued, which is how we get paid. Frankly, it was a disappointing year. We are not at all happy with coming in at a plus 1% for the year. We like to run somewhere around plus 4%, plus 5%. I guess if you want to put a silver lining on it, Q4 came in quite strong, up double digits which suggests that as we move into 2015, hopefully we can get back to that plus 4%, plus 5% for the year.

I do think in 2015 we are going to see that, as Charles alluded to. We now have a national grocer relationship which we haven't had before. The issues with the pharmacies issuing miles. That's off the table for now. We are continuing to issued to all the pharmacies, and there seems to be a fair amount of promotional activity bubbling up on the financial services side. We need to make that our top priority for 2015, and it is, believe me. Obviously, from the FX perspective in 2014, wasn't much of a hit but it was still $0.15 in earnings per share from the weakening of the Canadian dollar.

Then we moved to Epsilon. As Charles also mentioned, we're pleased with the organic top line growth of around 7%. We'd like to think of high-single digit as a nice number there. Also very pleased with the success of our new digital platform, the Harmony platform. It's been very successful. Volumes are quite high and continuing to grow. I think the ability to link the Harmony capabilities and platform with the Conversant capabilities is something that we're looking forward to as we move forward.

Obviously again, the Conversant acquisition is an important one for us because it immediately gives us a very significant amount of scale in areas where, quite frankly, we weren't at scale. While we were very heavy in things like permission-based email, we were not heavy at all or heavy enough in areas of targeted display, mobile, social, video, and that's what Conversant can bring to the table. We'll see how that plays out over the next year or so.

Then I would say on the negative side again, we like to call out both the pluses and minuses. We were not at all satisfied with the EBITDA growth associated with the revenue growth at Epsilon over the past year. The inability to flow that top line growth down through to EBITDA is our top priority that we want to focus on in 2015.

To put it in perspective, I think we were probably $15 million or $20 million short in terms of what we were hoping to print on EBITDA growth, and that's something that for Epsilon will be the top priority for 2015. I think revenues look good there. I think Conversant is off to a decent start, but we need to make sure we get the human capital costs under control. As you might expect, with 5,000 people, these are expensive folks. As a result we will continue to grow the US footprint, but at the same time we will also look to off-shore modestly, certain components within Epsilon, and hopefully recapture the dollars that we need to get the successful flow-through from revenue down to EBITDA. That's the top priority for Epsilon in 2015.

Then as it relates to our card services business, not a lot to say there other than good things. Clearly, sales portfolio growth, revenue, EBITDA, everything was up dramatically, and we're very pleased also with the fact that we invested in the future by signing an additional vintage in 2014 that would spool up to an additional $2 billion in file growth within three years. What we're seeing out there, very stable in terms of both loss rates as well as funding costs.

We're comfortable in saying that if [rates] move up this year, we certainly aren't going to get dinged on the funding cost side. In fact, we would probably get a little bit of a kiss in terms of the revenue side as our APR is actually reset upwards. Again, rising rate environment would be slightly positive for us, and from what we're seeing there are no issues from a credit quality perspective.

Let's turn to the next page which is the summary of the summary, just going through very quickly. We're a growth Company, and that's what people bill us for. We added $1 billion of top line growth to the Company this year, and certainly want to do a bit more than that during 2015, but 2014, we added $1 billion. We talked about the fact that organic growth was north of our usual target of 3X GDP. We were running closer to 11% this year, which is quite a bit stronger than we had anticipated.

If you broke it down, again, pro forma for BrandLoyalty, you've got 9% there. Epsilon did 7%. Private Label did 15%, even when you exclude the files that were purchased, and that's how you get to the 11%, very pleased with the organic growth rate. In addition to being a growth Company, we're also a Company that brings that growth to the bottom line in terms of cash flow. You saw that in earnings increasing 26%. We do that with modest net debt levels. Our leverage ratios are still hovering around 2X, and we have nice visibility into 2015.

Then before we get into 2015, this is how we step back and look at our guidance, and where we successful in providing investors and analysts with good guidance throughout the year? We started way back when we released Q4 in January, beginning of February, with roughly at [December 20], looking for about 22% growth. We took a $0.15 FX hit, so you add that back. We got a benefit of about $0.09 from Conversant, so take that out. What you're left with is we came in at about $0.30 above the original guidance. I think that's really consistent with us giving guidance that is relatively if not conservative then certainly solid, and then hopefully meet and beat as we move ahead and as the year unfolds.

What does that means for 2015? Last October, we gave the following guidance for 2015. We said revs were going to be up to about $6.6 billion, about a 25% increase, roughly about 13% core growth, and the remainder from the Conversant deal. Adjusted EBITDA and EBITDA net of card funding costs were going to be about $2 billion and $1.8 billion, respectively, and core EPS we put in the range of $14.80 to $15, roughly 20%.

Clearly, I think people have heard this quite a bit by this point. There is a headwind with FX issues that is going to be a challenge for us in 2015. If you looked at where we have exposure to FX, the Canadian dollar being the biggest one, the loonie was at par to the US dollar a couple of years ago. Now it's down 20%. The euro was at $1.40. Now it's at $1.14, so that's down 20%.

These are very big moves and moves that really I've never seen happen so quickly, especially over the last six months. We want to talk a little bit about what it means to us, and is it true economics issues for us? Or is it more of an accounting FX translation issue for us? Obviously, the latter is the case.

When it comes to guidance, I think 2014 serves as a good model. That is, once you went to the puts and takes, we outperformed our initial guidance by about $0.30 and delivered 25% earnings growth. Based on the current trend I do think the blueprint for 2015 will follow a similar path. The only difference being that are true economic results will be more muted by FX translation issues. Recall that in 2014, FX hit us for $0.15, while in 2015, we're looking at an FX hit of about $0.40 as the dollar has soared, or said another way, the Canadian and euro dollar tanked. They've tanked roughly 11% just since our last guidance.

To keep everyone on the same page here, here's what I call the back-of-the-napkin math that I'm using. The original guidance had revs up 25% to $6.6 billion. I do think that we are nicely on a path to overperform from that perspective, and I think we have about another $100 million in overperformance along the way which would put us $6.7 billion, up around 27% from a true operating or economic perspective. Then against that, our financials will get hit with about $200 million of FX transition losses, the result being reported revs of around $6.5 billion, up 23% over last year.

Moving on to core EPS, our original guidance was $14.80 to $15. Keep it simple. Let's take the midpoint, call it $14.90. Same thing as in 2014, let's say it's another good year, and let's say we're looking at some pretty nice overperformance which I believe we are, we'll probably add another $0.30 to that resulting in what we normally which print would be about a $15.20 per share representing 21% growth. However, against that the FX chews up about $0.40, and we'll probably print about $14.80, still up 18%, but masking true business overperformance. That's where we are today.

Then let's specifically talk about Q1. We expect revs on a constant currency basis to increase 30% to $1.6 billion. After taking a FX translation hit of about $65 million, we would expect to report about $1.54 billion in revs still up 25%. For earnings we expect $3.52 per share on a constant currency basis which would be up 26%, and reported earnings after FX of $3.40, up 22% year-over-year. I think we're off to a really good start.

It's one of those things where we are going to spend more time talking about FX from an accounting perspective than probably anyone wants to. The fact of the matter is the businesses themselves, they do look like we're heading in the right direction in terms of those issues we needed to address and continuing the momentum that we saw in 2014. I do expect overperformance as the year flows out which is typical for us.

If you then move to the next slide which is a pie chart, basically shows the different pieces of Alliance, and hopefully what you're seeing there is balance. What we've done over the past several years is we've focused on making sure that we have a balanced offering that would appeal to all the verticals that are out there. Again, whether it is a coalition program like AIR MILES, whether it's a short-term loyalty program like at BrandLoyalty, whether it's a long-term loyalty platform like at Epsilon, whether it's a loyalty program that has a credit component like card services, it's all the same stuff. It does appeal to very different verticals.

What we want to be able to say to the marketplace is regardless of the vertical you are in, we've got the platform solution for you. I think the pieces that we were missing over the last two to three years, one was a strong international footprint which we now have with BrandLoyalty, and also having sufficient bulk and scale on the digital space which we now have in Conversant.

We've got the platforms. We've got the products, the ability to pull the first-party SKU data across all the different verticals is all in place, and then the ability to do the analytics and the targeted marketing through all the different channels that are out there is also in place. I think overall the model of we're in a marketplace where you've got GDP relatively muted. I think that if we're doing 3X or 4X GDP, that's comfortable for us going forward.

Let's go to really the last slide, and then we'll open it up for questions. If you look at this slide, it gives you a sense of the balance that we have across the Company. If you look at the first one, that's LoyaltyOne which is our AIR MILES and BrandLoyalty business. Again, if you take out FX and look at just constant currency, and you pro forma BrandLoyalty for 2013, what you're seeing is actually pretty good, 10% organic top line growth from 2013 to 2015.

It's the same thing for Epsilon where you've got 7%, 8%, and that includes doing a pro forma for Conversant. We expect that to contribute nicely to 2015. Obviously, the overperformer of the last couple of years has been in the card services group, and you've got very strong growth rate there as well. Again, what we're shooting for here is balance, consistency, and the ability to bring that 3X or 4X GDP growth down to the bottom line.

You should note, however, because we get a lot of questions a lot on Brazil, and how that coalition is going, that's not in any of these numbers. As I mentioned earlier, growth has been solid. If you were to look at expectations from 2014 to 2015, we actually expect another year of 30% growth in the member base from 14 million to 18 million, so it's zipping right along there.

From a revenue perspective, I will give it in the Brazilian currency, and so that will not make me go back and figure out what the FX translation is. In the Brazilian currency, we are looking at somewhere in around mid BRL300 million which is going to be up about 30% also from 2014. This thing is moving along pretty nicely. It's beginning to hit critical mass.

In summary, and then we'll open it up to questions, the five takeaways from the Company and how the model is doing, one is, yes, we continue to be who we are, which is a growth Company. We expect to be well north of adding another $1 billion to our top line. We're looking at 27% constant currency basis, probably 23% reported basis, and nice solid EPS growth of 21% constant currency, and 18% after FX.

Organic, we're looking at double-digit organic growth, probably around 10%-ish, 11%, again, which is significantly ahead of the market and the S&P. Balance, I think I addressed that. All the businesses are growing. Clearly they cycle differently, but when you put them all together it does give a nice flow to the earnings.

That is probably the next point which is consistency. We're going to have things cycle at different times. We're going to have FX one year. We're going to have credit quality and other year, et cetera. Again, the portfolio of businesses that we seem to have cycle at different times, and as a result the earnings growth seems to be relatively consistent.

Then finally free cash flow, if we're going to do around $1.8 billion or so of net EBITDA, if you take our CapEx and cash interest and cash taxes, we'll probably be around $1.3 billion of free cash flow, and of that $1.3 billion, we will use some for obviously incremental capital needed to grow the card services file. Additionally, buybacks, and then we'll look to increase our stake in BrandLoyalty, each year over the next three years while also maintaining modest leverage across the business of about net-debt to EBITDA of about 2X.

We'll keep plenty of dry powder, and overall we feel pretty good about things. The consumer spend that we see is pretty good. I think that the bulk of the business that especially is in the card services side, the individual consumer seems to be doing quite well, and we expect that to carry through 2015. I'd say probably most important to us in terms of growth is the existing clients that we have.

Our ability to use data and data driven targeted marketing to grow our tender share at our existing clients is of paramount importance to us. That's a nice juicy stuff, so to speak. If retailers are growing sales 3% to 4% year-over-year, we will look to grow sales at those retailers more like 9% to 12% and that's what we're seeing. Overall, we're off to a good start. With that being said, I'll open it up for questions.

(Operator Instructions)

Sanjay Sakhrani, KBW.

Hello?

Can you hear me?

We do now.

Okay, thank you. The first question's on Epsilon, how should we think about margin improvements in 2015 and beyond as you're thinking about outsourcing initiatives as far as headcount is concerned?

You're going to have a couple of things going on there, Sanjay. The first will be Conversant layering in. Conversant carries a pretty big margin, as you know, so that's going to be beneficial to us. We'll go up just purely from the addition of Conversant for the full year. Going beyond that, we will look to get some leveraging in the base Epsilon model coming through as well in 2015. When I look at it, I think it's reasonable to think that EBITDA margins for the combined entity could probably be in the 24% range in 2015.

Which if you were just to do a standalone Epsilon, you would be about 150 basis points I think versus where we are this year.

Then as we see the trajectory move from 2015 onwards, do you expect to get decent operating leverage?

I do. I think the combination of the model. Obviously we've (inaudible) of Conversant to get lots of leveragability to it. The ability to off-shore some of our more [roads] programming I think is going to be more beneficial with the price differential.

I do think with Epsilon, we get the service one we will benefit from the moderate off-shoring. With Conversant, by driving volume through that operation, you'll get a lot of leveraging from it. I do think incremental leveraging down the road, next two or three years, is very realistic.

Then just final question on the card business, when we think about the pipeline, as far as inorganic growth is concerned, could you just talk about it, and maybe just relate it to how we could see some operating leverage in that business as well? Thank you.

Yes, I'll do the sales side. Again on the Epsilon, Conversant, just to finish up, Conversant's probably running, help me out, Charles, low 30% in margin, and in Epi, we hope to get up to around 20%-ish. You put the two together and you'll get your mid-20% that Charles was talking about. We're looking to get about 1.5 points or so out of Epsilon, you combine it with 33% Conversant, and you should have a very nice lift on the margin side going forward.

On the card services business, if you look at sales growth which I think is going to drive obviously file growth as well, the past two, three years, we've been running about 20% file growth. I think this year, we're probably going to be running somewhere between 25% or 30%. It's a bit more of a hypergrowth environment for us from a sales perspective. The way to build up the sales side would be take the core which is two-thirds of the business, and you have the retailer's growing 4 points in sales. We'll do more like 10 points at those retailers, so that's 10% sales growth.

Then you have the existing clients that are ramping up from nothing, which is our preferred way of growing. That will probably add another 8 points of growth. Then you have the acquired files that will probably bring you another 7 or 8 points of growth, and that's where you will be in the high 20% in terms of sales.

Darrin Peller, Barclays.

(inaudible) start off by following up on Private Label for a minute, given how of a strong driver that's been. I think, Ed, you just deconstructed a bit of the growth profile for this year, how you can get to the 20% plus coming up. It's great to see. I guess just bigger picture, longer-term, where are we in that, in terms of your penetration? You've updated us before, talking about $30 billion in receivables that you can potential raise as a market opportunity.

How competitive has that dynamic become? Is that something that you continue to see an opportunity for real portfolio acquisitions, maybe not in the same degree, as we saw in 2014, but are there low-hanging fruit out there? Can you give us a little more color on the trends in 2015?

Sure. What we're seeing out there is more of the same. Again, there is this secular movement out there, focused on the retailers moving away from the traditional brand spend to promote their products to the highly targeted data-driven marketing which requires having that first-party SKU level information. That's a mouthful, but it's basically saying the trend's our friends. We continue to see very robust pipeline.

I would say probably though, where the most opportunity is, it doesn't sound like it's really the sexiest stuff to talk about because it's not about portfolio acquisitions or big, new signings, but the core itself, growing tender share itself is a huge driver of our growth. If we can grow our tender share such that the retailer does their 4% growth, and we're doing 10%, 11% growth, and it's two-thirds of our business, that's a huge piece. We are nowhere near the saturation point on tender share. We're probably in the high 20% today.

We have clients where roughly half of all spend is on our card. If we can continue to grow tender share 150 basis points a year, there's your first 10% of growth in both the file and the sales. Do I think that $30 billion is reasonable? Absolutely. Where is it going to come from for us? It's going to come from tender share from the core. It's going to come from the programs that we're starting from scratch. I would say between those two that would be, Darrin, probably 80% of our growth.

I don't think there's a lot of files out there that are all that attractive to us. You're looking at probably one or two files per year, is about what we're thinking about at this point. I would say 80% of the growth is going to come from, if you want to call it the organic, the tender share gains and the starting from scratch. In 2015, you've got Zales which we've announced which is coming on board, and there may be one other file, but we're just not going into the game with the banks to bid things through the roof. That's not how we're going to keep our market up.

Then on credit quality, there's been some other banks talking about early signs of building reserves on provisions. You guys had a good quarter from reserving. I know next quarter it will be bigger, given the receivables you've bought. Bigger picture, do see any sign or expectation that this is a year where we'll start to need a bigger reserve bill for any reason?

We certainly will be building reserves because of our growth. From a credit quality perspective, we expect it to be flat. There's nothing that we're seeing from either aged write-offs, recoveries, or personal bankruptcies that are suggesting there's any type of upward pressure on the loss rates, that mid-4% level sounds about right for us, and we reserve about a point, about that.

Just last question, thank you, a couple of things I may have missed, but how much revenue did Conversant and BrandLoyalty actually contribute of fourth quarter? Perhaps if you can give us some expectation of what you think it will contribute to your 2015 growth?

If you look at Conversant, it would've added about $46 million in revenue. That's how you get to a 5% organic growth for Epsilon in Q4. In BrandLoyalty, it would have been -- BrandLoyalty had a nice Q4. They flowed through about $187 million of revenue, US dollar.

Okay, that's great. Thanks, guys.

Bob Napoli, William Blair.

Thank you. Just a follow-up on the Private Label business, looking at the revenue guidance, is the yield down? It looks like the revenue isn't growing as fast as receivables. I'm pretty sure that's all US. Are some of these newer programs or the co-brands coming in at somewhat lower yields?

I think it's all US, so we're good there. Yes, what you're going to basically see is if you're growing the file, make it up 20%, you're going to have revenue lag that, and probably grow around 17%. Then your flow-through to EBITDA will be a couple of points below that. The 20%, 17%, 15%, something like that sounds about right.

The yield itself, you have a couple of things going on. One is the growth rate, and with the growth rate even accelerating from 20% to 25% or 30%, that's going to dampen your yield because these programs need to spool up a little bit. Also on the co-brand side, as those spool up, those do carry a lower yield but higher balances. Expect, 60, Charles? Sixty bips? Something like that is about the right number.

Pretty modest. Then on gas, you don't have any gas or very little, if I imagine. In your customer, I don't know if you're seeing anything in January, but your customer and your product should be benefiting eventually from lower gas prices. I don't know if you're seeing that now. Do any of your co-brands? Gas has got to be less than 1% of your spend, right?

Yes, we have virtually no exposure to gas. As you said, the lower gas goes for us, you would think two things could happen. One is if the consumer decides they want to pay down debt, you'll have a little less growth on the file, but you'll have lower losses because people are less delinquent.

At the same time, it would also free up discretionary spend, and a lot of our card clients focus on the discretionary spend. I think we're good there. In Canada, from a gas price perspective, we do have obviously a very large relationship up there, a couple of relationships there. Those are primarily driven off of volume as opposed to price.

Okay, then just last question, the M&A pipeline and thoughts around M&A, and I understand the way you're always looking at, and I'm sure you're modeling, you have people modeling 20+ companies you're keeping a close eye on. What types of things are you looking to add? Is there any more impetus to add another leg, or are there opportunities to expand through M&A any of your businesses in 2015?

Yes. You summed it up. The get out of jail free card is, sure, we're looking at everything all the time. Who knows what could happen? What we're seeing right now is, I don't see anything that is jumping out at us right now. A year from now, that may be different.

Right now, our focus is really on digesting not only the BrandLoyalty piece within our LoyaltyOne business, but also the Conversant piece within Epsilon. Additionally, getting our AIR MILES to be a significant contributor, once again is important in getting the flow-through to Epsilon margin. It's critical in spooling up Brazil. It's a very long-winded way of saying I think it's unlikely you're going to see anything of significance from us this year on the M&A side. We are pretty comfortable with what we're seeing.

Conversant is performing as you expected? It's early on. Their third quarter looked a little like -- Their top line, are you getting so far what you expected on the top line and bottom line for Conversant?

We fully expect Conversant to deliver what we've said to the market which is about $230 million on EBITDA and about $670 million on top. That's our expectation, and we're going to hold to it.

Thank you.

Andrew Jeffrey, SunTrust.

Hi, guys. Good morning. Thanks for taking the question. You talked about digital sales being up about 25% in 2014, your Private Label business. Can you elaborate specifically what actions you're talking about, and how that might, as we roll forward into 2015 and beyond, accelerate tender share which is obviously such an important driver of your Private Label business?

Yes, with our retailers, a lot is driven by the retailers. They're not sitting back. They're basically saying we've got to get in the game here. The percentage of their sales that are not bricks-and-mortar is now at about what, Charles, 25%, which has grown pretty dramatically. The retailers are investing a lot in the online channels.

As a result, that's one of the areas where we've invested a lot of money in. Whether it's something as straightforward as applying for a card, when you're in the store, we can do that as you shop. Whether it is prescreening as you're shopping online, we can help you out there. Our view is you need to have an omnichannel approach, and that's what we're looking to support.

The Conversant deal provides us with the ability to go to a specific retailer and say, we know you're pushing hard to get into this space. Obviously a lot of the growth or most of the growth in retail has been online. Here are the tools that you need, and now we can offer scale across the spectrum from permission-based email, mobile, social, video, targeted display, whatever, and that's the toolbox that we're bringing to the clients.

Okay, so 25% meaningfully over samples for your Private Label customers, the total US economy where ecommerce, for example, might be 10%, is that the right way to think about it?

Yes, for sure. If you look at the way, I guess we look at it, if you look at total retail sales, only about 10%, it gets so much press but only about 10% is actually non-store related, non-bricks-and-mortar. Of that 10%, 70% of that are from retailers who have actual storefronts. The remaining 3% are just internet only which is primarily Amazon. The store format may change, but between online presence and their store format, you're still looking at 96%, 97% of all retail sales are captured by these types of retailers, so it's a big piece.

Okay. Looking at Epsilon, the organic revenue growth slowed a little bit in the fourth quarter. I know you've had a recovery in some discretionary categories like auto. Can you just breakdown the specific categories, and how they're growing, and whether you'd expect to see that growth rate to bump up a little bit this year?

Yes, I think high single digits, Andrew, is still a comfortable number for us from an Epsilon perspective. In terms of the areas that have really blown it out over the past year or so, auto is huge. Auto has been a very, very big one for us plus on-boarding folks like Ford. Those tend to be big spenders.

We are seeing a resurgence from the financial services side. Banks are beginning to crack open the wallets again for these very large scale loyalty type programs. That's where we're going to see some growth in 2015 as well. I would say auto. I would say, I think, retail also is an area where we're seeing a lot of interest. Again, it's in these multi-tender databases where essentially whether you're using a Private Label card, that captures a third, maybe, of your sales. Retailers are saying I need a bigger picture. What Epsilon can do is it can look at multi-tender types. If there's a loyalty program layered on top of that, we can get a view into 80%, 85% of the clients' spend at that retailer. That's of great interest.

Help me out, Charles. We've got auto. We've got financials. We've got retail. Those are probably the three biggies.

Okay. Great. I will get back in the queue. Thanks, guys.

Ashish Sabadra, Deutsche Bank.

Question on Conversant, I was wondering if you could provide some color around the pipeline for Conversant. Any initial conversations you've had around cross-selling Conversant into your existing customer base?

We haven't owned it for all that long, but we are moving in, think of it on, three fronts. First is to continue that consolidation and transformation within Conversant itself, so that the sales force is out there really discussing the full suite of digital products that they can offer as opposed to having a video sales force, a display sales force, and a mobile sales force. The idea is to put it all together. That was the transformation they were undergoing.

The first front is continue on letting the Conversant folks pull their product set together and sell that. The second front, and we're already off and running here, is setting up a joint sales team, identifying your top dozen big client prospects on the card services side. We're off and running there. Also, probably your top 18 or 20 prospects from the large Epsilon client side, and so between those three, we ought to get some pretty good traction. We'll keep you updated as the year unfolds. It's a little bit early at this point to start saying whether the big cross-sells are working or not, but there sure seems to be a lot of interest.

That's great. Thanks for that color. Quickly on fiscal 2015 guidance, essentially you're raising your guidance by 2% on a constant currency basis, if I understood correctly on the revenue side. On EPS side also on a constant currency basis you will be raising it by $0.20, but it is essentially the FX headwinds. Did you provide the EBITDA guidance for fiscal year 2015? I was just wondering if you could provide that.

What we gave before was EBITDA net of non-controlling interest and funding costs of about $1.8 billion. You're still going to be in that ballpark, still rounding. We just basically didn't really address it. Again, the gives and takes to get to the core EPS can come from a number of areas, so we just basically left it as what we gave in the last quarter.

Or $1.7 (inaudible), how's that?

Okay, that sounds great. Just one final follow-up question, that Epsilon question which was asked earlier, what was a component of the data technology and agency revenues within Epsilon? As we think about 2015, how do we think about what's going to be the driver? Is it going to be the technology which is going to drive, which can be also margin accretive going forward?

I do think it is going to be the technology that drives it. The reason we didn't give the historical categories is with Conversant, it blows it up as we move things around to really integrate it. You will be looking for your digital applications to drive a lot of your growth in 2015. Database is going to be very solid in there, in that 7%, 8% top line range. Then the data's going to be sitting there more in that mid-single digit, that lower to mid-single digit. Now the thing that we're going to be trying to do, Ashish, is refine the data, make it where it's the strong offline data that we sell as well as now refined, online, and anonymized data. It could be an opportunity for us, but I think digital will lead the way in 2015.

That's great. Thanks.

We'll take one more.

Dan Perlin, RBC.

I just wanted to revisit the comment around Epsilon becoming more labor-intensive. I know you talked about it a little bit, but it sounded like it came up and surprised you guys a little bit, maybe more than we would have expected. One, is that correct characterization? Has the business changed a little bit in terms of its mix, just completely forgetting Conversant for the moment?

Then secondly, when you talk about shifting your labor pool, I'm assuming you're going after hires in digital analytics. I'm wondering if you plan to position yourself because I know all the IT service companies are doing the exact same thing. I know it's a little bit different, but still going after that same talent pool. Thanks.

I think you characterized it correctly, Dan. It did take us a bit by surprise in terms of how fast the labor cost did move up, vis-a-vis the revenue. We missed it. It's that simple. I think we were probably off $15 million, $18 million from where we thought. That was solely due really to the type of individual we're bringing on is more expensive than we had anticipated.

Going forward, we're not going to make that mistake again. I think what we're going to do is we will continue to grow the US footprint, and along with Conversant for sure. Conversant though is not nearly as labor-intensive as Epsilon. Epsilon has over 5,000 people. Conversant has 1,500. It's a completely different model. It's a much more leveragable tech model.

I don't think the labor issue will be a big one over a Conversant. At Epsilon, if we're growing in the high-single digits, we would like to keep the workforce growth in the US probably into the low-single digits, and then the incremental piece, we will look to do so modest off-shoring. You put the two together, and that should get us back on track.

Okay. Can I ask another question? In Epsilon, I thought you were carrying some duplicative costs from some your large conversions. Have those gone away, or is that part of the benefit that we might expect in 2015? The other part of the question, separate of Epsilon is, I just want to get your thoughts on FX impacts from a consumer behavior perspective. Forget translation for the moment, and just think about purchasing power behavior in Canada and then BrandLoyalty asset. Thanks.

Sure, I will try to remember part A through F here.

I'm taking liberties since I'm the last.

Yes, clearly. I'll start with the FX stuff first, from what we're seeing in Canada which it seems to be your question. What we're seeing up there is that you've got consumer discretionary spending. Canada has been weak for the past couple of years. We expect it to continue to be weak. Most of the dollars seem to be going into housing as housing prices continue upward.

We are assuming a relatively modest amount of consumer spend in Canada. That's why we have to make sure that we've got the additional sponsors spooled up, and there's a lot of promotional activity that you saw hit in Q4. My guess is you'll see a lot of that throughout 2015 as people are promoting the heck out of things to get that relatively limited consumer dollar. What was part A again? Epsilon?

Duplicative carrying costs with some of these clients you've converted over?

Yes. The biggest piece would be on the email platforms. We've got quite a bit of legacy cost. If you look at the Harmony platform, we've probably got a third of our volume is flowing through Harmony which is a huge chunk. We've got two-thirds that need to migrate over, over the next probably 18 to 24 months. That will get rid of many, many millions of costs that we're incurring today.

Great. Then to just remind us the amount of portfolio funding costs that's locked down? Then I'll hop off.

Let's see. We're about 70% of it is fixed rate. You have close to $1 billion of revolving that will be coming due, and you don't have a lot of term debt coming due in 2015. I can give that to you afterwards when we talk, Dan.

Okay. Thank you very much.

All right. Thank you, everyone. I know everyone's got a bunch of stuff to get back to, and we'll end it there. We'll look forward to seeing a lot of you on the road.

Thank you. Ladies and gentlemen that does complete the call for today. You may now disconnect.