Bread Financial Holdings Inc (BFH) 2015 Q4 法說會逐字稿

Good morning and welcome to the Alliance Data fourth-quarter 2015 earnings conference call.

(Operator Instructions)

It is now my pleasure to introduce your host, Mr. Steve Calk 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 2015 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 of Alliance Data; 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 uncertainties described in the Company's earnings release and other filings with the SEC. Alliance Data has no obligation to update the information presented on the call.

Also on today's call our speakers will reference certain non-GAAP financial measures which we believe will provide useful information for investors. Reconciliation of those measures to GAAP will be posted on the investor relations website at www.alliancedata.com.

With that, I would like to turn the call over to Ed Heffernan. Ed?

Great. Thanks, Steve.

Joining me today is Charles Horn, our always informative CFO. Charles will update you on the quarterly results and then I will give a wrap-up for 2015 and then talk a little bit about what 2016 looks like. And with that, Charles, it's all yours.

Thanks, Ed.

It was a strong finish to 2015 as revenue increased 18% or EPS increased 20%, and adjusted EBITDA net increased 18% compared to the fourth quarter of 2014. Impressive growth, considering the FX headwinds we have faced all year long. For the fourth quarter, the strong US dollar reduced our reported revenue by about $67 million or a 4% hit to the growth rate, and core EPS by $0.12 or a 3% hit to the growth rate. Organic revenue growth remained strong in the fourth quarter, up 14% on a constant currency basis. That compares to 15% constant currency growth for the full year, reflecting balanced growth throughout 2015.

From a capital allocation standpoint, we spent $952 million during 2015, acquiring 3.4 million shares under our repurchase program at an average cost of about $280 per share. We have now reacquired about 80% of the number of shares issued to acquire Conversant at the end of 2014. Looking to 2016, expect our capital allocation to shift to M&A first, probably in the $400 million to $500 million range, and then to share repurchases up to the $500 million Board authorization. Essentially, we will look to deploy our free cash flow while maintaining or lowering our leverage ratio of about 2.7 times.

Let's flip over to page 3 and talk about LoyaltyOne. On a constant currency basis, revenue increased 6% to $421 million, while adjusted EBITDA decreased 13% to $99 million compared to the fourth quarter of 2014. A shift in sponsor mix, which lowered the average price per mile issued, coupled with increased support of our sponsor promotional programs, pressured AIR MILES' financial results for the quarter. The strengthening US dollar was a year-long headwind and will likely again be in 2016.

AIR MILES reward miles issued decreased 8% compared to the fourth quarter of 2014. This was expected, as several sponsor promotions happened earlier in 2015 than in 2014. For the year, AIR MILES issued increased 4%, up from 1% growth in 2014. The improvements in annual growth is due to the onboarding of a national grocer, continued promotional activity, and growth in the instant reward program. For 2016, we expect issuance growth in the 3% to 5% range, with promotions times similar to 2015.

AIR MILES reward miles redeemed decreased 2% compared to the fourth quarter, largely as a result of the decrease in AIR MILES reward miles issued. The instant reward option, AM Cash, continues to grow, accounting for 21% of miles issued and 29% of miles redeemed for the fourth quarter of 2015. This option is growing in popularity as the instant gratification resonates with our collector base, especially in a tough economy.

Turning to BrandLoyalty, revenue increased 18% and adjusted EBITDA increased 2% on a constant currency basis for the fourth quarter in 2015. Growth in adjusted EBITDA for the fourth quarter was dampened by expenses associated with our North American expansion efforts and incremental bonus expense tied to the overall strong annual performance.

Overall, it was a tremendous year for BrandLoyalty, as constant currency revenue increased 31% and adjusted EBITDA 15% from 2014. Importantly, we made substantial strides in our North American expansion effort, ending 2015 with a signed backlog in excess of $45 million in Canada and a pilot set to launch in the US during the first quarter of 2016.

Looking ahead to 2016, AIR MILES faces a weakening Canadian economy, particularly in Western Canada, which could create a headwind to issuance growth and further drive a shift in sponsor mix negatively impacting our profitability.

Let's turn the page and talk about Epsilon and Conversant. Epsilon's revenue increased 38% to $608 million and adjusted EBITDA increased 54% to $157 million for the fourth quarter of 2015, both helped by the acquisition of Conversant in December 2014. Organic growth was strong as revenue increased 7% and adjusted EBITDA increased 5% for the fourth quarter of 2015.

Notably, as shown on the slide, organic top line growth accelerated as the year progressed. Also, adjusted EBITDA margins increased by 270 basis points, driven by strong performance at Conversant, where margins increased to approximately 37% for the fourth quarter of 2015.

For Epsilon, our main priority for 2015 was to control increases in human capital costs, allowing revenue growth to flow through to adjusted EBITDA. We were successful as organic revenue and adjusted EBITDA both increased 5% compared to full-year 2014. Strength in the auto vertical, coupled with double-digit growth within Epsilon's digital experience offerings, contributed to the positive revenue momentum.

Our new facility in India became operational during the fourth quarter. We ended 2015 with about 300 associates in India and hope to increase the headcount to about 1,000 by 2016 year end. We believe the higher percentage of headcount growth in India versus US will allow solid flow-through of revenue growth to the bottom line again in 2016.

Of note, Epsilon was named by a recent Forrester report as a market leader within the loyalty space, highlighting the business's ability to further integrate its loyalty capabilities with a multi-channel marketing solution in order to provide more useful customer insights.

Turning to Conversant, as shown on slide 5, this was a year of two halves. The first half was about much-needed change within the existing business model and the second half was a return-to-growth story led by the cross-sell efforts and onboarding of the backlog. The quarterly progression of the turn wrapped up the year with strong growth in the fourth quarter as revenue grew 6% and adjusted EBITDA grew an impressive 14% compared to pro forma Q4 2014. A methodical pruning of lower-margin product offerings early in the year and refocusing on the more profitable data-driven cross-device offerings resulted in margins growing close to 300 basis points versus pro forma Q4 2014.

Success with the cross-selling effort continues to ramp up, as Conversant's rich offering is introduced to the Epsilon client base, beginning with the retail industry as our primary focus in 2015, but now expanding into key verticals such as automotive, CPG, and media. As a result, the backlog has nearly doubled since midway through 2015, increasing to over $90 million in annual contract value with new logos such as Toys R Us, Cornerstone Brands, Staples, and a leading telecom provider. Now that the holiday season is over, a time when many clients' budgets tend to be frozen, a half-dozen new tests are already queued up and underway for the first quarter 2016, seeding the next wave of cross-sell activity.

Finally, Conversant's offerings continue to gain market recognition with a recent Gartner Magic Quadrant report highlighting a [small] from a niche player to a challenger in its digital marketing hub report, specifically emphasizing Conversant's high match ratio, media targeting and reach, and unique ability to personalize one-to-one interactions with every consumer across device, media, and channel.

Let's go to the next page and talk about the nice growth we saw in Conversant. If you look in during the second quarter, Ed and I came out and gave guidance that we would see a turn in the back half of the year. Fortunately, we saw it in Q3 and we actually exceeded Q3 and Q4 expectations, so the turn that we talked about earlier in the year has definitely manifested and we expect to see that continue into 2016.

For Card Services, it was the 16th consecutive quarter of double-digit revenue growth and a strong finish to the year. For the fourth quarter 2015, revenue increased 20% while adjusted EBITDA net increased a healthy 16%, a nice flow-through of revenue growth given the substantial provision build for both the quarter and full year as a result of strong card receivables growth and the need to get ahead of the uptick in loss rates. Notably, we achieved substantial expense leveraging for the fourth quarter and full year, mitigating the decline in our [gross] shields from a higher percentage of co-brand receivables. These outstanding results can be attributed to our proven ability to drive credit sales, which increased 22% for the fourth quarter, even without the onboarding of Zales, which slipped to January of 2016. If you remember, we onboarded about $600 million of acquired portfolios during the fourth quarter of 2014, creating a difficult comparable, which is why the growth rate dropped a little bit compared to earlier in the year.

As we have mentioned before, our credit sales growth rate is three times that of our overall brand sales, and that's usually what we try to track to. Core credit sales from brands with us before 2012 were up 11%, driving tender share growth north of 200 basis points for the quarter, a strong endorsement of our collaborative tailored approach to loyalty. Our card members continue to shop more often, up nearly 6% to last year, and spend more per trip, up about 5% to last year, confirming that our brands' best customers were in the stores, online, and engaged digitally.

From a digital perspective, about 10% of our cap credit applications came through web-enabled mobile channels and about 40% of our credit sales were online for the fourth quarter of 2015. Retailers' online sales trended up this holiday, but our strong results substantially outpaced that performance.

In addition, we continued the rollouts of our MyLoyalty app with several brands during the quarter. This is our proprietary retailer-branded mobile app, built to serve the needs our card members value most. Our continued and very purposeful investment in mobile and digital engagement provide great momentum to position us for further strong growth as customer engagement continues to evolve.

Average card receivables increased an impressive 25% for the fourth quarter. From a credit quality perspective, principal loss rates were 4.7% for the fourth quarter and 4.5% for the year, both consistent with our original guidance. The 30 basis points increase for 2015 is due to normal seasoning of new programs, as well as slightly lower recovery rates. Delinquency rate trends have been consistent and stable throughout 2015, trending up slightly from 2014.

Looking to 2016, momentum remains strong. We signed another $2 billion vintage in 2015 and believe we can do the same in 2016. Our unique and demonstrated strategy of bringing a collaborative, targeted approach to loyalty provides Card Services with a very vigorous pipeline of potential new brands to sustain these growth rates.

With that, I will turn it over to Ed.

All right. Thank you, Charles.

If everyone can turn to the slide 2015 wrap-up, this is where it gives me a chance to talk about the year, what went well, what could have gone better, and how the overall model continues to evolve as we continue down the path into 2016, 2017, and 2018. And, again, the best way to start this off and to look at it is that Alliance's model continues to move towards, if you think of it, a series of platforms, whether it's for a coalition, a private-label card, a one-off loyalty program -- but a series of platforms, depending upon what the customer wants, that are used really as a capturing device -- the ability to capture the clients' customer and what he or she is purchasing down to the SKU level, both online and off-line.

So it is really a platform to capture this very important unique information, which is then all funneled down to the same type of analytics to gain insight into what purchase behavior within the past few years is saying about this consumer and how we can read into that and reach that consumer on a personalized basis. We believe the model will continue to move from a mass-marketing approach to a segmented approach -- where it really is today -- to where we are heading, which, I think, is the one-to-one personalized approach, which is beginning to manifest itself today and will over the next 18 to 24 months.

So taking that information, gaining the insight, figuring out what makes them tick, and then reaching them with a relevant message or communication from our client -- again, personalized to their taste and habits -- and reaching them through the right channel. Because it's as important to have the right message but as important to actually reach the folks through the right channel, whether it is from a personalized message through direct mail or permission-based e-mail, mobile social targeted display. You wrap it all together and a big-services wrapper and that's really where we are on the model.

Oftentimes I am asked, where are we in five years? In five years you're basically looking at one massive platform. But today what we are looking at are a series of platforms. And what we want to do is probe and tweak and pick and choose the platforms that are growing and those that may be less relevant.

So with that being said, let me dive into the first couple of platforms. One would be our coalition program, which is where we have one platform where a number of clients come together, pool their marketing dollars, and it's called the AIR MILES Reward Program in Canada. The reason I gave that introduction is because the critical metric there is the number of points or the number of miles -- whatever you want to call it: the number of units that get issued. They're issued based upon the consumer spend. And that is our key metric; that's how we get paid.

And last year -- I'm sorry, in 2014 that metric had fallen to a troubling flattish to 1% up. And that is not something that we think is an appropriate run rate for that business. So we put our shoulder into 2015 right as the Canadian economy hit a massive headwind. And so the net result was, the team managed to play through the macro environment and actually grow that key metric 4%. And our goal is to grow it somewhere 4%, 5% a year. If we can do that, eventually you will have the revenue and earnings to follow.

It is a deferred model, so that just because you earn it this year, it takes a couple of years for it to actually flow through. I've never quite understood the accounting, but that's why we have Charles. So the 4%-ish type was, I think, something that was outstanding, given the macro environment. And that was our goal. Our goal was to get that this thing back in a growth mode and demonstrate that there is a long runway left in this program.

On the negative side, we have -- it did not yet translate into the type of growth that we really want longer-term from a revenue and EBITDA perspective. Again, there is sort of a lag there that takes place. We would expect in 2016 to see slightly better numbers, both on top and bottom, as we look for positive growth to return on the EBITDA side as well.

The key driver of that, as Charles talked about, was the mix, due to the macro factors that were out there. A lot of the growth that we had came through a ton of work and promotional programs that our big grocers in Canada were pushing and a little less through the somewhat more beneficial spend on our big cards that are up there through Bank of Montreal and American Express. Nonetheless, our key metric is back where we want it and we need to make sure, even in a very difficult Canadian economy -- it's in a recession, there's no other way to say it -- we want to see that thing grow again this year. And that will ensure the long-term growth.

Turning to a little bit of a different story is our other platform, which is the BrandLoyalty platform, which focuses on much shorter-term, largely promotional-type programs at grocers that essentially will hit the consumer hard over a 20-week period to really entice them to spend a little bit more, visit a little bit more often. And what we do is, again, we are taking all that information and the data from what they're buying and shopping for in the grocers and moving towards a personalized approach of getting them excited about coming into that grocer one extra time or to spend a little bit more there to achieve that targeted reward.

Needless to say, similar to 2014, BrandLoyalty had a very strong year with revenues up over 30% and EBITDA, despite spending a whole bunch of money getting North America cranked up, was up mid-teens. So we think that the BrandLoyalty approach has a long runway and we expect another very solid year in 2016 as well.

The North American approach is interesting in the sense of, this is primarily grown out of a European platform and now it's moving to the Americas for the first time. And specifically, what was exciting -- for me, anyhow -- was the fact that we could use the relationships that we have developed in Canada over the past 20 years with the AIR MILES program to introduce them to a different type of targeted marketing approach through the BrandLoyalty program. And sure enough, it went extremely well and we are lined up. We will probably do as much as $40 million or so in revs just from Canada next year. So as you think about the pilot that's also kicking off in the US, in 2016, and the size of the US -- if Canada is any indication, this could be a fun business to be in going forward.

Then finally, we have our coalition program, again, down in Brazil called dotz. It continues to grow. The membership is up 20% to just under 18 million. We successfully launched in Rio, which was our big goal for the year. And it's growing; it's moving along nicely; and that is in spite of a really challenging environment down there. We are going to sit back and hopefully watch this thing continue to move up at a double-digit pace. And as things stabilize down there over the next couple of years, hopefully we will really start to see the flow through. But so far, so good there. I think overall the businesses, the platforms within LoyaltyOne had a very strong year.

Turning now to Epsilon -- again, I remind folks of what was the goal of Epsilon for the year. The biggest one at the core business itself was to find a way to have a sustainable model that flowed top line growth down to earnings or EBITDA cash flow. And that was a challenge for us over the past several years as we continued to see nice growth on the top line, but because of the hot skills and everything else required in our labor force and the heavy services aspect of the business, it got to be a challenge to actually flow that through to the bottom line.

So for the first time, I think we feel comfortable that we have a sustainable model, long-term, that will allow the core Epsilon offerings. And again, these platforms are primarily these massive database and loyalty platforms that you see out there: the Citibank ThankYous, and the Hilton HHonors, and the Walgreens and stuff, that will allow us to show organic growth rate at about 2 times or so GDP, or roughly 5%-ish, 6%-ish, but actually have that flow down to earnings as well.

And part of that solution was opening up our new office in India, and our new associates over there will be joined with an ever-growing group within North America as well. And we should have, I think, a nice balance on the growth side.

So that was our number one goal. The next one was this trail-off that people have noticed over the past couple of years, in terms of revenue growth at Epsilon tended to start out strong and then sort of trailed off at the end of the year. We think also that this year was -- we had a very good momentum build as the year progressed. Q2 was up 4%. That then moved to 5% in Q3 and we exited the year at 7%, all of which, I think, is -- it bodes well for 2016.

We talked a little bit about our new associates that are joining us over in India. And then on the Conversant side: on the negative for sure, I think on a full-year basis we were too optimistic that we could manage to transform the existing business and get the book of business with the cross-sells signed and get it all up and running. We certainly got over our skis on that one.

However, after a really tough first half of the year, we started to see the results of this effort, and I could not really be more pleased with how the year has turned out in terms of Q4 and how we are stepping off into 2016.

As I have said before, I have likened it to changing a tire on a moving car. It's hard to do, and the teams did a wonderful job at finally getting it done. We took the pain early to make it right in the second half and for 2016. And as Charles showed you, the revenue went from minus 6% in Q1 to minus 9% in Q2. It bounced all the way back to flat in Q3 and we stepped off the year at plus 6%.

On the EBITDA side, again, it was a minus 6% in Q1. That bounced back a little bit faster: we got to flat in Q2 and plus 9% in Q3 and exiting the year at a plus 14%. In terms of a turn or the hockey stick that we have all seen out there, this one actually played out, which was kind of nice.

And as importantly, as Charles also mentioned, the book of business and what does that mean? What it means is that when we sign a deal with Conversant where we are going to be going to, let's say, a retailer, and they're going to start supplying us with all their SKU-level information and we are going to be using that SKU to continue to develop models to go out and reach their consumers or others across the various digital channels -- you know, it's important that, if we look at it and we basically say, okay, where did we come, where are we going, what is the next step?

And the critical thing here was, I think, it was a very good marriage of the two. Epsilon was a little bit light on having the scale it needed in the digital side. I think Conversant on its own would have had some challenges trying to compete with some of the larger players out there. You put it together, and it seemed to actually have worked very well.

And as a result, the book of business that we are looking at here, the vintage, when you sign these clients, is not unlike what happens in our card business, where it takes two or three years to fully realize the full run rate of these relationships. And as a result we signed up a book of up to $90 million of potential top line that would be additive to Conversant as these clients roll out over the next couple of years. We managed to see a lot of that start to come through in Q4. And what was very gratifying was the majority of this came through a collaboration between Conversant and big Epsilon enterprise clients where we were able to get the Conversant folks in to the Epsilon clients; and, between the two of them, created this sale.

I think we are very early in the game in terms of what we are looking to do. We believe across Epsilon, AIR MILES, BrandLoyalty, and Card Services there are about 500 enterprise clients where we have a very good in with the CMOs and that's where we are going to be spending a lot of our time. And of those 500, we have probably hit 25 or 30 at this point. So a long way to go. Anyhow, I feel good about Conversant.

Then finally Card Services, which continued to just have just a tremendous year. I keep saying that. It seems like I keep saying it every year, but it continues to happen, not only because of the offerings we are putting out there, but also because of, again, the macro shift or the secular shift that's going on in how folks are spending. Again, think of this as another platform that also offers a liquidity tool. And what we did here is, we continue to have a huge amount of demand from retailers, both traditional bricks-and-mortars as well as pure online, who are very interested, once again, in understanding who their consumer is and reaching out to them on a personalized basis.

And to do that, we are the folks they trust to hold the SKU-level information, both online, off-line purchase-level SKU. And, again, are you going to come to us to spend your digital dollars on search? Probably not. Or social? Probably not. But based on SKU level, you bet you -- that's who we are. And that's the uniqueness of the model we have here. And so credit sales, and that is actually consumers using our card. And spending on the cards was up over 30%, driving the portfolio of receivables up 30%, translating into revenue up 24%, and finally through to cash flow in the mid-teens. Obviously, a tremendous year.

One of the things that continues to be very important in this business is tender share. We can have all sorts of great signings with new clients and everything else, but if you can grow the core, the folks who have been with you for many years, where you thought that we have plateaued in terms of how much of each dollar spent at the retailer will go through our card. We used to think it was somewhere in the high 20%s, maybe 30%. Now we think that ceiling has been raised quite a bit.

Our ability to reach out and personalize messaging to the various consumer groups out there has allowed us to continue to grow our share of spend at these retailers. And when you can grow 150 basis points at these core retailers, you are essentially, along with their growth, going to get your first 10% of growth in the portfolio -- which used to be, for us, what everything together could get us.

And then you throw in the new vintages that have been signed that are the new clients over the past several years -- they take three years to ramp up, and that's where you get your next 10% of growth. And that's why a 20%-type growth rate here -- which, if you'd asked me a few years ago, I would have said I don't think that's a good long-term growth rate; probably more like 8% or 9% -- but I have been proven wrong, fortunately, for a number of years here. We signed another $2 billion vintage of new clients from Toyota Lexus to Cornerstone to Wayfair to Farmers Insurance, Red Roof, and Univision. Again, good names, and we have those folks up and running.

And then, finally, from the credit-quality perspective, all we are seeing is the typical seasoning you would see as you bring on a large amount of new business. It was also of note that the original guidance that Charles gave of mid-4% for the year, which was made well before we even started the year, we came in right on the button on that one. So you will continue to see these vintages normalize. And we are not seeing any evidence whatsoever of any type of distress on the part of the consumer.

To wrap up 2015: revenue, EBITDA, EPS -- all up 20% in, we know, a tough macro environment. Organic -- which is the thing that I really focus in on -- we try to do three times GDP as our long-term model. If we could do 8%, 9% a year, that would be great. This past year we did 11% or actually on a constant currency basis 15%, which was really gratifying to see.

The dollar, which I think everyone under the sun is probably getting sick of hearing about -- but just to put it in perspective, we grew the 20% or 11% organic despite being hit with about $0.25 billion of FX top line headwind [in] about $0.50. So it knocked about four points off our growth.

All that being said, let's now move into 2016. We say good-bye to 2015 and here we go. 2016 outlook: High single-digit growth in revenue and adjusted EBITDA on a constant currency basis that incorporates both BrandLoyalty and it incorporates our Canadian business. And if you were to break it down on a constant currency basis, you would look for BrandLoyalty, obviously, to be the one that shows the higher growth rate. We would expect another year of a double-double top in EBITDA-type growth rate for BL. And obviously something less than that for the Canadian business, but we do want to see the Canadian business turn the corner and continue to start its growth mode.

The big initiatives will be with BrandLoyalty. The North American expansion -- we think we are very well-placed in Canada. We want to see how the pilots go in the US and we want to really make some headway in the US and start that process going. That's a huge area for growth for us. Again, despite really a challenging macro environment in Canada, we do want to continue to see that mid single-digit issuance growth, because that is what drives the success long-term in the program.

And in Brazil, as we talked about, we want to see double-digit growth in both membership and constant currency revenue. It continues. It's not part of our numbers that you see in our financials. We own 37%, but we continue to see it moving along.

At Epsilon, if you were to mix, again, Conversant and Epsilon together, you would see mid to high single-digit growth in revenue and adjusted EBITDA. EBITDA -- I would say, Epsilon should look a lot like this past year, with mid-single digit top and bottom. Conversant will be different, where we expect to start seeing the high single-digits growth rate that we had been expecting long term. So everything looks pretty good there. We want to drive a minimum of another $70 million in cross-sale revenue at Conversant. And, again, as we penetrate into Epsilon's core client base, as well as into our card group and elsewhere.

All right. Turning to Card Services -- well, we expect another big year. Up to 25% growth in the portfolio. We don't expect a slowdown. We see things looking quite bright for the business for another year. Another year of double-digit revenue and EBITDA growth rate, net of funding.

We look again to sign another $2 billion vintage. And, again, what that means is we sign a bunch of new clients and, over the course of three years, their combined portfolios would aggregate up to about $2 billion in new portfolio growth. So they are big numbers, but if I went back and I looked at the good old days of $300 million or $400 million used to be a big year; and then 2012 we signed our first $1 billion vintage. And then it was $2 billion in 2013; $2 billion in 2014; $2 billion in 2015; and we expect $2 billion in 2016. So I certainly like the outlook for this business.

Getting questions about credit quality, the health of the consumer. Obviously, with some of the noise out there in the marketplace, what can we say? We stay very close to all of this. We have roughly 40 million active households that are in our programs and we are seeing, again, no distress on the part of the consumer. It looks like that is in pretty good shape.

If you look at the actual loss rates that we are going to print, what you are looking at is, you saw it go from roughly 4% to 4.5%. It will be about 5% in 2016; and then in 2017 we expect it to start to level off at about 5.5%, which we believe is the new normal. And so, again, I think we are going to be right on target in terms of this at a 5%-er for 2015.

The question being asked is, why? Why is this drifting upwards? It is primarily -- it's kind of interesting. It is primarily due to the fact that, when you had the Great Recession in 2008/2009, you had massive amounts of charge-offs and it took until 2014 to really clean up the backlog in terms of recoveries. And in our business, which is different from general-purpose cards, recoveries are a huge part of what constitutes our loss rate. And in the post-recession time period, as people are getting back on their feet, we were actually recovering almost $0.35 on the dollar. And that, from a net loss perspective, is what kept the losses abnormally low.

We've passed that point at this stage and it's beginning to normalize from 35% to more in the 20%s -- probably low 20%s is where we will net out. And if you move from last year to this year, you will have seen the recoveries are coming down about 5 points and, as a result, that turns into about 50 basis points less recovered on the losses.

It's not really the actual loss rate from a gross perspective going up 50 basis points. It means the net loss rate -- that is, lower recoveries that have normalized that is really driving the net loss rate up about 50 basis points.

We don't see anything alarming there. It's a normalization process that happens in the private label business in a high growth mode. The remainder tail of any type of drift upward will be the continued seasoning of the big vintages.

The net story here is that we believe our long-term normalized loss rate before the Great Recession was about 6.5%. Today we are very comfortable that we are going to level out around 5.5% probably sometime in 2017 going into 2018. The reason why it's a little bit lower is the fact that over the past half-dozen years or so we have attracted a bit higher, from a credit perspective, quality-type consumer. When you bring on the Barneys and the Talbots and the BonTons of the world, and then you have some co-brand mixed in, which carries a lower loss rate -- so we think the 5.5% is about right. We're slowly marching towards that level and we feel comfortable with our 2016 guidance.

I do want to address how it will play out sequentially. I think that's important, because you have seasonality in our business which, again, is different from traditional cards that are out there. Q1 will tend to be our highest quarter. If you looked at last year, at 2015, you jumped off from Q4 of 2014 to Q1 of 2015 and your losses jumped up about 70 basis points on a seasonal basis. We expect that exact same type behavior to take place in 2016. So you are going from your mid-4%s at the end of 2016 to somewhere in your low 5%s as a starting point.

And then from a seasonality perspective, that starts to actually drift down as the year progresses and then flattens out in the back half. That's how the seasonality works and so no one is surprised. As we talked about, we expect full normalization at around 5.5% as we move into 2017.

From a guidance perspective -- to wrap up, we are maintaining our guidance for the full year. We are not going to change that despite, I think, people's outlook that has gotten a little bit more negative on the macro. We think we are in pretty good shape here. So a constant currency basis -- look at about $7.2 billion on top and the $17 on the core EPS. That's 100% organic growth rate. We are using FX rates of 0.78 and 1.11 for the year.

As it relates to Q1, we are looking at about 8% constant currency growth rate and about 5% from an actual print perspective. So that includes the FX headwind of about $0.10. I think it will probably be a little bit less than that right now. We used FX rates of about $1.69 for the euro and Canadian respectively. Right now the euro is more like $1.09 and the Canadian dollar is $0.71. So I think that gap has closed somewhat. But look for those types of numbers in Q1.

Before we get asked the question, the big difference between this year and last year is the fact that last year Q1 is when BrandLoyalty, their programs all hit in the first quarter and their earnings were up over 100% in Q1. And then we're down 50% in Q2, and that caused quite a bit of questioning in terms of how do you actually flow this thing out? It's tough on a quarterly basis, but what we are looking at here is rather than up 100% in Q1 and down 50% in Q2, you are going to see more like flat performance in BrandLoyalty in Q1. The big programs seem to be hitting in Q2. They've been signed up. We expect over 100% growth in Q2 this year. By Q2 you should see that mid-teens growth return to earnings.

So that is pretty much it. You've got to watch the bouncing ball in terms of the quarterly stuff, but on an annualized basis it looks pretty good. From a quality perspective, it looks pretty good. And I know the sentiment out there is fairly negative on the macro side, but what we are seeing in the businesses we are in would suggest another double-digit organic growth year for us.

So that's it. I'm going to actually let Charles now talk and we will wrap it up and take questions.

Questions? Operator?

(Operator Instructions)

Darrin Peller, Barclays.

It looks like Epsilon is back on track and Conversant is obviously growing very well now. When we look at the last quarter, your fourth-quarter, your constant currency, it looks like we're calculating your constant currency organic growth rate to be still like almost 13% or low double digits. First of all, do we have that right?

And then that's pro forma for Conversant. And, again, I think you mentioned first quarter's guide of 8% was really a step down because of the timing year over year versus of where the BrandLoyalty results come in, right? First quarter versus second? Just make sure that's the only difference. And if that difference did not exist, what would your first quarter growth rate look like? I'm just curious. We're getting a bunch of questions on Q1 already.

I will take the BrandLoyalty thing. Last year, like I said, it grew over 100% and Q2 was down 50%. This year's going to be flat and then up 100% in Q2.

If you were to put the two together, what you -- you would've had double-digit growth right out of the gate in Q1, probably low teens. In Q1 what you are going to see is a little bit lighter in Q1, a little bit heavier in Q2. That's strictly the grocer programs and how they roll on. It's pretty straightforward there. Charles, you can take the first question.

That was about organic revenue growth for Q4, Darrin?

Yes, pro forma for Conversant, basically.

You would be up about 14% on constant currency; about 11% without adjustment for FX.

Okay. That's helpful. I guess what I was just trying to figure out, though, had it not been for the BrandLoyalty timing shift, we would've probably been similar, right? I mean, back to the low double digits, again, I guess, for first quarter?

Sure.

Yes.

Let's just hone in for a moment for me and then I'll -- just as a follow-up on the AIR MILES business. I understand there's macro challenges there. And just in terms of the mix and what we should expect. The AIR MILES issuance was somewhat worse than we expected for the quarter.

When we think of that and what's happening on instant rewards also, how do we really have confidence it's going to be that low- to mid-single-digit issuance growth again through the year I think you suggested it should get back to?

And then especially if you comment a little more on what the impact should be of the instant rewards -- or rather the rewards expiration in the middle of the year. I guess that's already reflected in your guidance. What kind of impact does that have?

I will take the first quarter and Charles can take the second. The issuance -- obviously we had three huge quarters of issuance and Q4 was, I think, down. You've tracked us for years. You know that it's an annualized-type budget spend from the sponsors. From what we're looking at right now, the commitments from the sponsors.

And, again, it is primarily coming from the non-financial services side of the house. You are seeing the non-discretionary spend type budgets looking pretty good. And so that's why I think we can continue to 3% to 4% type growth rate in the issuance side.

And, Darrin, on the expiry, it's a little bit of an unknown at this point. We've not seen any type of change in consumer or collective behavior at this point, and lastly we would not see anything until the Q3 or Q4. In terms of guidance, we really have not considered it.

If something does happen, you could see a little bit higher revenue growth. You'd see us make some modifications to the program, but it's just too soon for us to know. So in terms of guidance, we have not really considered it and we'll evaluate as the year goes on. And, frankly, I would not expect to see any trend until as early as Q3, as late as Q4.

All right. And last question for me, guys. It seems like every year you start off and you take your time with guidance, which makes a lot of sense.

In terms of conservatism here, the BrandLoyalty business, obviously, is going very well in terms of pipeline in North America especially. Is that an area you've completely included in your guidance? Just give us a little color on that.

And then, just portfolios on the private-label side. Zales hasn't come on yet. Any other opportunities this year? And other than that, I'll leave it at that. Thanks.

It's always a delicate balance, of course. I think you nailed it in terms of, look, we don't know how quickly North America is going to roll out for BrandLoyalty, but if the US is 10X Canada and we get $40 million booked in Canada; you draw the line from A to B and this could be pretty exciting here.

I am reticent, Darrin, to start putting what quarter it will be, primarily after the beating on Conversant from having that lag a couple quarters, but that is certainly an area that's going to be pretty exciting.

On the card side, yes. Look, we are at the point now where the book is just full and we are continuing to see more interest as people are shifting their dollars more and more to the platform. So there is a bunch of other opportunities there. The question is do we have the capacity? Do we have the desire to grow even faster, which we could do, or do we think that where we are right now is a good place? So we will make that call as the year unfolds.

It makes sense, guys. Thank you.

Thank you.

Josh Beck with Pacific Crest.

I wanted to ask a couple of questions on Card Services. It looks like you had tender share gains of 200 bps in Q4 and I think that was probably above the full-year average. Seemed like a really large contributor to the 11% core growth. Could you give us just a little bit more color on the sustainability of high single to low double-digit core growth, despite a lot of these mixed retail and same-store sales headlines that we're seeing in the marketplace?

Yes. It's a great point. We looked at our book of retailers, our 145 or so brands that we have out there. We think Q4 holiday, if you roll it all up, they probably did about plus 3% year over year, and we were more like plus 8% to plus 10% at those retailers.

The tender share stuff adds anywhere from 5 to 7 points of growth over and above what the retailers grow at. If the retailers grow at nominal GDP, plus the tender share, we feel pretty good that 10%, first 10% of growth in the business is going to come from the core. It really seems like this tender share thing is for real.

We have seen it now the past several years. And, again, the more and more personalized we make the outreach to the consumer, the more effective it is, the more sales that are created, the better the retention of the consumer is. So I think we've got tender share at some of our folks that are over 50%, and if we're somewhere around 30%-ish today, we've got a long way to go.

I wanted to ask a follow-up on credit quality. It sounds like the majority of the 50 bps increase in loss rates for next year is really due to a normalization of the recovery rates. Is there any way to quantify or maybe break out the impact of seasoning? Is that material or is it mainly about this recovery dynamic that we should be focused on?

I would say three-quarters of it is the recovery normalization and then the tiny piece left is just the normalization.

I would agree with that. If you look over the last three years, Josh, we have seen our gross losses move -- and this is over a three-year window -- 20 bps and that 20 bps is all due to seasoning.

Thanks, guys.

Yes.

Tim Willi, Wells Fargo.

Two questions. One was back on card and then something about capital. Regarding the card business and your comments around mobile and digital and the word omnichannel, I guess as you think about the RFP process, I think some people feel like it's become a competitive environment just based upon pricing that banks are willing to offer retailers for the receivables.

But could you talk about, just in the last 12 months, if you've noticed any kind of shift in the priorities of retailers in terms of pricing versus digital versus tender shares? Is there anything that has been shuffled there, in your opinion, around the competitive and the RFP environment?

For sure. I think that -- and you will see that in the fact that we are roughly 80% private label, 20% co-brand. The shuffling or the competitive pressure that you are seeing is really on the co-brand side. That is where -- let's face it, you are running into the buzz saw of the big banks who are looking to grow balances and the best way to grow balances is certainly not through private label, right? They're tiny balances, but through the big co-brand balances.

And so what we are seeing out there is the pricing on co-brand deals, the big Visa, MasterCard balances, which are five times, six times what our private label balances are, it's getting incredibly competitive and as a result we've backed off in that area because we don't really need it. What you will find is most of our co-brand stuff is an added product to an existing private-label client.

So to answer your question, the co-brand space is not an area where we think that the pricing makes sense. In terms of the private-label stuff, that is where you get a lot more focus on the card being viewed as purely the loyalty tool, which gets into the data and the digital and that's where you get the Conversant discussions beginning to come in and the Epsilon discussions. That's sort of our sweet spot and the more assets we bring on the digital side, like a Conversant, the better off we are with those businesses.

And, frankly, the sale on the private-label side is more a sale of developing a loyalty program with all the digital channels attached to it. And that's where we don't really run in the type of pricing issues that you run in elsewhere, and that's where we're going to stay.

Great. And my follow-up is on the buyback. I apologize if I missed it, but did you make any commentary around your thoughts on the buyback through 2016 relative to your guidance, whether it's included or not included, and any color on using that program through the calendar year?

We will continue to be active with it, Tim. We will slip it to our second priority versus our primary in 2015. So it will slip behind M&A. So it will be somewhat consistent with what we've done in the past, M&A first; buyback second. It does incorporate some.

As you can see, we gave a range on share count. Obviously with the market conditions being where they are, we've already been active during the course of the year. It does not assume the entire share program being used. It assumes basically what we have already done for the most part.

Okay. Sounds great. Thanks very much.

Dan Salmon, BMO Capital.

Ed, I might have missed this in the prepared remarks and the commentary, but could you give us some insight into Epsilon's database pipeline, in particular? It sounds like there are some smaller players there that are reevaluating some businesses and maybe an opportunity. But I know we spent a lot of times on Conversant. I would love to reel it back to the core Epsilon business for moment.

Yes. I think that what we are seeing is the demand is coming much more heavily for loyalty platform builds and a little less from the more traditional customer database builds. Said differently, the desire of the client to offer something up to the consumer in return for having insights into that consumer and their behavior, it seems to be the play of the day here.

And the way to get the consumer to share that information and share those insights is to obviously offer something up from a loyalty perspective. The big news in probably the database build side of things will be on the big loyalty builds. And that's where we are seeing a fairly strong level of demand.

Great. Thank you.

Your final question comes from Sanjay Sakhrani with KBW.

Obviously you guys are operating in a choppy backdrop. And I know you did a great job turning around Conversant and the margin trajectory in Epsilon. I guess to ask the question previously a little different, as we look towards 2016, where are the biggest risks and opportunities to the downside and upside respectively?

And you are talking about the overall business?

Yes. Overall business across all the segments.

I think it's going to be fairly consistent with what you saw in 2015 where card services always had the ability to grow a little bit quicker. You are getting good traction with Conversant. We are assuming basically high single-digit growth for 2016. Could do a little bit better based on the developing pipeline.

BrandLoyalty, if you get some traction in the US, that could be beneficial to us. On the downside, we've talked about it. Canada looks rough. As the mix shifts, it reduces the revenue per mile redeemed, ergo, it reduces our profitability.

Epsilon, I think we have pretty good guidance. Mid-single-digit revenue and EBITDA growth seemed solid. Could be a little opportunity there as we get traction in our marketing tech, but I think that's sort of middle-of-the-road. Upsides are always if we deploy the buyback program, take our share count down. Upside would be we deploy our free cash flow and we buy a small tuck-in acquisition that's immediately accretive.

That's kind of the way I would look at it. From a guidance standpoint, what Ed and I always try to do is do something middle-of-the-road. Recognizing there could be upside, there could be downside, but we usually try to leave enough there to make sure if there's a few unknowns, we have the ability to cover it all in our guidance.

I guess the second question is just on the backlog in Conversant? How long does it take to convert that backlog?

Think of one-third, one-third, one-third It's not head-on like the vintages and private label. Maybe it's a little bit faster. But you are going to see -- actually if you sign it in 2015, you will actually get about one-third of it up and running in 2015. So current year, you will get one-third, the next year you will get up to two-thirds and a couple years out, you will get the final one.

Final question, M&A, you guys talked about tuck-ins. Where, exactly, are we thinking about opportunity? Thanks.

I really don't have anything burning at the moment, Sanjay. I would say we are probably just using some of the capital, and if we find something broadening the footprint in Europe, I think it's an interesting time over there. We've seen with BrandLoyalty that's been a very helpful area for us, so something in that side of it to help bulk up core Epsilon. And then we will see how the year plays out. And if there's nothing there, we will go more heavily on the buyback.

And just to be clear, if you do M&A, you'd look for something that's accretive in year-one?

Yes.

Cool. Thank you very much.

Thank you, everyone. Good-bye.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.