Bread Financial Holdings, Inc. (BFH) Q4 2014 Earnings Report, Transcript and Summary

Good morning, and welcome to the Alliance Data Fourth Quarter 2014 Earnings Conference Call. At this time, all parties have been placed on a listen-only mode. Following today’s presentation, the floor will be opened for your questions. [Operator Instructions] In order to view the company’s presentation on their website, please remember to turn off 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’d like to remind you that some of the comments made on today’s call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and the uncertainties described in the company’s earnings release and other filings with the SEC. Alliance Data has no obligation to update the information presented on 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 ’14. I’ll do a quick summary of ‘14 and hit the high points and low points, and then talk about the guidance for ‘15. So, Charles, take it away.

Thanks, Ed. To use an Ed-ism [ph], it was a boomer of the 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 improved 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 for 2014. Before anyone gets too excited, $0.09 accretion in 22 days, you need to keep in mind that 4.6 million shares were issued as part of the acquisition consideration had not fully burned into the fourth quarter share count. Being an average calculation, only 1.1 million of these shares impacted the fourth quarter diluted shares. So overall, we think we are still on track for about $0.50 of accretion in 2015. Core EPS excluding Conversant’s step 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 2014. It was negatively impacted by a couple of one-off charges aggregating $2.05. Dual 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 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 revenue up 62% and adjusted EBITDA net of non-controlling interest of 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, mainly compared to third quarter ’14, its revenue increased $76 million, while its adjusted EPITDA increased $25 million, or a 33% flow-through rate, very solid. As it has been all year, FX was a headwind to the fourth quarter reducing our revenue and adjusted EBITDA growth rates by 8%, compared to last year. The U.S. dollar continues to appreciate, so we will face this headwind again in 2015. However, in 2015 we will encounter translation risk with both the Canadian dollar and the euro, which really didn’t come as the planned ’14 since we did not own BrandLoyalty in 2013. AIR MILES issued increased a solid 11% during the fourth quarter helping establish a positive growth year albeit only a 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 few of our larger sponsors. Entering 2015, we should get some help from the grocery vertical as Sobeys is now a national sponsor after joining our programs 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 a year of tremendous collaboration between our international loyalty platforms, Precima, our Canadian analytic 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 in late 2014 in order to offer a complementary product offering to our existing AIR MILE 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% to $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 cost incurred during this sub-period and that would primarily be severance. As Ed’s quote in the earnings release stated it was a mixture 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 cost. For 2014, average headcount increased about 4% while total personal cost increased about 8%. For 2015, we will look to moderate the growth rate and human capital cost through some modest offshore initiatives. Notably, Agility Harmony continues to gain traction in the marketplace, its volumes increased 39% compared to the fourth quarter of 2013. Harmony’s unique features allow its ingest both structure 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 the discussion of Epsilon without talking about the biggest acquisition ever for us, Conversant. It is a company we have watched 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 a compelling opportunity and the combination of Conversant’s unique assets with ours, we put ourselves in the position to observe billions of digital interactions on a daily basis across Vista, mobile browser, mobile in app, social and video channels. With our unique and deep trusted position of managing clients first party transactional data paired with Conversant’s leading cross device common ID, we are 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 it as competitive advantage in the marketplace. Now let’s turn over to the next slide and talk about Private Label. As we expected, Private Label finished the year strong with revenue up 24% and adjusted EBITDA net of a stronger 43% both compared to the fourth quarter of 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 have talked about all year. With the growth in receivables we delivered nice operating efficiencies with operating expenses of 21%, compared to revenue of 24%. Probably a better way to evaluate our operating efficiency given this substantial growth in card receivables is offering 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 to 120 basis points, compared to the fourth quarter of 2013. This improvement has 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% of 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 upon average 8% to $500 in 2014, still a very modest number. Third and last we continue to expand beyond traditional bricks and motor sales and to the digital channels. Our digital credit sales expressed as a percentage of total credit sales increased 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% plus growth rates in receivables combined with stable loss and funding rates. As it pertains to our cost structure, we experienced some growing pains early in 2014 before we ultimately grew into it. We do not expect to repeat this in 2015, but rather will 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 during the fourth quarter and they were onboard in November. Keeping in mind from the accounting standpoint they are fair valued, meaning we record them net of any anticipated charge-offs so we did not carry reserve against those receivables. The second thing is when you look at the 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 the same methodology we used in 2013, which is the trailing LTM charge off rate of 4.4% at a point spread to a 5.4% in the reserve, so basically we follow the same methodology we did in 2013. With that I will 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 are working on, and then we will get into the outlook for ’15. So, 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 got earnings per share up in the mid-20s. So, financially heck of a year, obviously our focus is 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. And 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. So apples-to-apples, the combined entity grew about 9% organically. BrandLoyalty itself was the big driver and far, far exceeded all of our expectations. And as Charles mentioned, because it over performed so much, it actually triggered an earn-out charge to us haven’t quite figured out how over performance figures a charge, but the fact of the matter 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, but it continues to school 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 suggest that as we move into ’15, hopefully we can get back to that plus 4%, plus 5% for the year. I do think in ’15 we are going to see that. As Charles alluded to, we now have a national grocer relationship which we hadn’t had before. The issues with the pharmacies issuing miles, that’s off the table for now. We are continuing to issue through all the pharmacies and there seems to be a fair amount of promotional activity bubbling up on the financial services side. So we need to make that a top priority for 2015 and it is, believe me. Obviously, from the FX perspective in ’14 wasn’t much of a hit but always still $0.15 in earnings per share from the weakening of the Canadian dollar. So then we move to Epsilon. As Charles also mentioned, pleased with the organic top line growth of around 7%. We like to think of high single digits 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. And I think the ability to link the Harmony capabilities and platform with the Conversant capabilities is something that we are 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 had scale. So 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. So we’ll see how that plays out over the next year or so. And 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 ’15. 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 ’15. 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 cost under control as you might expect. With 5,000 people, these are expensive folks and as a result we will continue to grow the U.S. footprint. But at the same time, we will also look to offshore modestly certain components within Epsilon and hopefully recapture the dollars that we need to get the successful flow through from revenue down to EBITDA. So that’s the top priority for Epsilon in ’15. And 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 are very pleased also with the fact that we invested in the future by signing an additional vintage in 2014 that would school up to an additional $2 billion in file growth within three years. What we are seeing out there very, very stable in terms of both loss rates as well as funding cost and we are comfortable in saying that if rates move up this year, we certainly aren’t going to get dinked 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 APRs actually reset upward. So again rising rate environment would be slightly positive for us and from what we are seeing there, no issues from a credit quality perspective. Okay, let’s turn to the next page which is sort of I guess the summary of the summary. Just going through very quickly, we are a growth company and that’s what people know us for and we added $1 billion of top line growth to the company this year and certainly want to do bit more than that during 2015 but ’14, we added $1 billion. We talked about the fact that organic growth was actually north of our usual target of 3X GDP. We are 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 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%. So very pleased with the organic growth rate. In addition to being a growth company, we are also a company that brings that growth to the bottom line in terms of cash flow and you saw that in our earnings increasing 26%. We do that with modest net debt levels, our leverage ratios are still hovering around 2 times and we have very nice visibility into ’15. Then before we get into ’15, 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 a year ago, October or I’m sorry when we released Q4 in January, beginning of February with roughly $12.20 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. And what you are left with is, we came in about $0.30 above the original guidance. So I think that’s fairly consistent with us giving guidance that is a relatively if not conservative and certainly solid, and then hopefully meet and beat as we move ahead and as the year unfolds. So what that means for 2015? Last October, we gave the following guidance for ’15. We said revs were going to be up about $6.6 billion, about 25% increase; roughly about 13% core growth and the remainder from the Conversant deal. Adjusted EBITDA and EBITDA net of funding costs were going to be about $2 billion and $1.8 billion respectively and core EPS we put it in a range of $14.80 to $15.00, roughly 20%. Clearly, I think people have heard this quite a bit by this point, but there is a headwind with FX issues that is going to be a challenge for us in 2015. If you look at where we have exposure to FX, the Canadian dollar being the biggest one, the loony was at par to the U.S. dollar 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, very big moves and moves that really I’ve never seen happened so quickly especially over the last six months. So we want to talk a little bit about what it means to us and is it true economic issue 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 ’14 serves as a good model and that is once you went through the puts and takes, we outperformed our initial guidance by about $0.30 and delivered 25% earnings growth. And based on the current trend, I do think the blueprint for ’15 will follow a similar path and the only difference being that our true economic results will be more muted by FX translation issues. Recall that in ’14 FX hit us for $0.15 while in ’15 we are looking at an FX hit of about $0.40. As the dollar has soared or said in other way the Canadian dollar and the Euro have tanked and they have tanked roughly at 11% just since our last guidance. So to keep everyone on the same page here, here is 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 over perform from that perspective and I think we have about another $100 million in over performance along the way which would put us at $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 translation 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 $15.00. To keep it simple, let’s take the midpoint call it $14.90. Same thing is in 2014, let’s say it’s another good year and let’s say we are looking at some pretty nice over performance which I believe we are. We’ll probably add another $0.30 to that resulting in what we normally would print would be about $15.20 per share representing 21% growth. However against that, the FX chews up about $0.40 and will probably print about $14.80, still up 18% but masking true business over performance. So that’s where we are today. And then let’s specifically talk about Q1. We expect revs on a constant currency basis to increase 30% to $1.6 billion. After taking an FX translation hit of about $65 million, we would expect to report about $154 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. So I think we are off to a really good start. It’s one of those things where we’re going to spend more time talking about FX from an accounting perspective and probably anyone wants to, but the fact of the matter is the businesses themselves they do look like we are heading in the right direction in terms of those issues we needed to address and continuing the momentum that we saw in 2014. So I do expect over performance as the year close 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 it shows hopefully what you are seeing there is balance. And what we’ve done over the past several years is, we focused on making sure that we have a balanced offering that would appeal to all the verticals that are out there. So again whether it’s a coalition program like AIR MILES, whether it’s a short term loyalty program like a BrandLoyalty, whether it’s a long-term loyalty platform like Epsilon, whether it’s a loyalty program that has a credit component like card services, it’s all the same stuff. But it does appeal to very different verticals and so what we want to be able to say to the marketplace is, regardless of the vertical you’re in, we’ve got the platform solutions 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 in scale in the digital space which we now have with Conversant. So 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. So I think overall the model of – we’re in a marketplace where you’ve GDP relatively muted. I think that if we are doing three or four X GDP, that’s comfortable for us going forward. Alright, let’s go to really the last slide and then we’ll open it up for questions. And 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 loyalty one, which is our AIR MILES and BrandLoyalty businesses. Again if you take out FX and look at just constant currency and your pro forma BrandLoyalty for 2013, what you are seeing is actually pretty good, 10% organic top line growth from ’13 to ’15. Same thing for Epsilon where you got a sort of 7%, 8% and that includes doing a pro forma for Conversant and so we expect that to contribute nicely to ’15. And then obviously the over performer of the last couple of years has been in the card services group, and you’ve got very strong growth rate there as well. So again what we are shooting for here is balance, consistency and the ability to bring that sort of 3X or 4X GDP growth down to the bottom line. You should note however because we do get 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 ’14 to ’15, we actually expect another year of 30% growth in the member base from 14 million to 18 million. So it’s different 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. But in the Brazilian currency, we are looking at somewhere around mid R300 million which is going to up about 30% also from 2014. So this thing is moving along pretty nicely and it’s beginning to hit critical mass. In summary, then we’ll open it up to questions, the sort of the five takeaways from the company and how the model is doing. One is, 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 are 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 are 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 and that is probably the next point which is consistency. We are going to have same cycle at different times. We are going to have FX one year, we are going to have credit quality another year et cetera, et cetera, et cetera but 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 are going to do around $1.8 billion or so of net EBITDA, if you take out CapEx and cash interest and cash taxes, we will 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 will 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. So, we will keep plenty of dry powder and overall we feel pretty good about things. I mean, it’s the consumer spend that we’re seeing is pretty good and so I think that the bulk of the business that especially is in the current services side, the individual consumer seems to be doing quite well and we expect that to carry through 2015 and 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 a fair amount of importance to us that’s the nice juicy stuff so to speak and so if retailers are growing sales 3%, 4% year-over-year we will look to grow sales at those retailers more like 9% to 12% and that’s what we are seeing. So, overall off to a good start and with that being said, I’ll open it up for questions.

[Operator Instructions] Your first question comes from the line of Sanjay Sakhrani with KBW.

Hello.

Do you hear me guys.

Yeah we do now.

Okay cool, sorry. Thank you. I guess first question is 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?

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

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

And then as we see the trajectory move from 2015 onwards you expect to get decent operating leverage?

I do. I think the combination of the model, obviously with digital out of Conversant’s get lots of leveragability to it. The ability to offshore some of our more roads programming I think is going to be very beneficial with the price differential. So, I do think with Epsilon here to service model we will benefit from the moderate offshoring, with Conversant by driving volume through that operation you’ll get lots of leveraging from it. So, I do thing incremental leveraging down the road next two or three years is very realistic.

Okay and then just final question on the card business. When we think about the pipeline as far as inorganic growth is concerned, can you just talk about it and maybe just relate it to kind of how we could see some operating leverage in that business as well, thank you.

Yeah, I will do the sales side. And again on the Epsilon Conversant just to finish up, Conversant’s probably running, help me out Charles, low 30s in margin and we hope to get up to around 20-ish, so you put the two together and you’ll get your sort of mid-20s that Charles was talking about. So, we are looking to get about 0.5 or so out of Epsilon, you combine it with 33% of 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, we typically are, you know the past two three years we’ve been running about 20% file growth. I think this year we’re probably going to running somewhere between 25% and 30%, so it’s a bit more of a hyper growth 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 retailers growing 4 points in sales. We will 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 and then you have the acquired files that will probably bring you another 7 points or 8 points of growth and that’s where you’ll be in the high 20s in terms of sales.

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

I’ll start off by following up on Private Label for a minute, given how strong of a driver that’s been, you know I think Ed you just reconstructed 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, I mean where are we in that in terms of your penetration, you’ve updated us before talking about I think $30 billion of receivables that you can potential raise as a market opportunity. Is that really still, I mean how competitive has that dynamic become is that something that you continue to see in opportunity for a real portfolio acquisitions, you know maybe not the same degree as we saw in ’14, but are there low hanging fruit out there, can you give us a little more color on the trends at ’15.

Sure. What we are seeing out there is more of the same. Again I think there is this sort of 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 skew level information, so that’s a mouthful, but it’s basically saying that trends are friend. We continue to see very robust pipeline. I would say probably though, where most opportunity is and 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; and so 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 20s today. We have clients, we are roughly half of all spend is on our card and so if we can continue to grow tender share, you know 150 basis points a year there is your first 10% of growth in both the file and 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 corp, it’s going to come from programs that we are starting from scratch, and I would say between those two that will 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 are looking at probably one or two files per year, is about what we are thinking about at this point, but 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 are 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 margins up.

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

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

Alright, just last question, thank you. Just a couple of things I may have missed, but how much revenue did Conversant and BrandLoyalty like actually contribute in the fourth and 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 have added about $46 million in revenue, that’s how you get to a 5% organic growth for Epsilon in Q4.

Alright, thank.

For BrandLoyalty, it would have been – and I’m kind of drawn a blank here Darrin, BrandLoyalty had a very nice Q4. They flow through about a $187 million of revenue.

Okay, alright. That’s great. Thanks guys.

Yeah.

Your next question comes from the line of Bob Napoli with William Blair.

Thank you and good morning. Just on the – following 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. And I’m pretty sure that’s all U.S., are some of these newer programs or the co-brands coming in at somewhat lower yields?

I think it’s all U.S. so we’re good there.

Yes.

And yeah, 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%, and then your flow through to EBITDA will be a couple of points below that. So 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 and also on the co-brand side as those spool up, those do carry a lower yield, but higher balances. So expect what – 60, Charles? 60 bps, something like that is about the right number.

Okay, pretty modest. And then on gas, I mean you don’t have any gas or very little, right? I mean if I imagine, in your customer, I mean I don’t know if you’re seeing anything in January, but your customer and your products should be benefiting eventually from lower gas prices, I don’t know if you are seeing that now, but I mean – at one of your co-brands, do you have – I mean, gases got to be less than 1% of your spend right on this?

Yeah, we have virtually no exposure to gas. As you said, it’s the lower gas goes for us, you would think two things could happen, one is that the consumer decides they want to pay down debt, you will have a little less growth in the file, but you’ll have lower losses, because people are less delinquent. At the same time, you would also free up discretionary spend and a lot of our card client’s focus on the discretionary spend. So 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 and those are primarily driven off of volume as opposed to price.

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

Yeah, I mean, you sort of summed it up, I mean the Get out of Jail Free-Card is, sure we’re looking at everything all the time and who knows what could happen, but 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 maybe different. But 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 is critical in spooling up Brazil. So a very long winded way of saying, I think, it’s unlikely you are going to see anything of significance from us this year on the M&A side. We’re pretty comfortable with what we’re seeing.

And Conversant is performing as you expected, it’s early on, the third quarter look a little bit light just in their top line, but 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 and that’s our expectation and we’re going to hold to it.

Great. Thank you.

Your next question comes from the line of Andrew Jeffrey with SunTrust.

Hi, guys. Good morning. Thanks for taking the question.

Sure.

You’ve talked about digital sales being up about 25% in 2014 in you 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?

Yeah. With our retailers, it’s really – Andrew, a lot is driven by the retailers, right? They’re not sitting back. They’re basically saying look we got to get in the game here and so the percentage of their sales that are not bricks and mortar is now at about what, Charles, 25%, which is growing pretty dramatically. So the retailers are investing a lot in the online channels. And as a result, that’s one of the areas where we’ve invested a lot of money in whether it’s something as straight forward as applying for a card when you’re in the store, we can do that as you shop, whether it is pre-screening as you’re shopping online, we can help you out there, but our view is you need to have an omni-channel approach and that’s what we’re looking to support. And so, 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 the retail has been online and here 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 sort of the tool box that we’re bringing to the clients.

Okay. And so, 25% meaningfully oversamples for your private label customers, the total U.S. economy where e-commerce, for example, might be 10%, is that the right way to think about it?

Yeah, for sure.

Okay.

Yeah, if you look at the way I guess we look at it, you will get total retail sales, right, only about 10%, it gets so much pressed, 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 and the remaining 3% are just internet only, which is primarily Amazon. So 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 and so it’s a big piece.

Okay. And 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, but can you just breakdown the specific categories and how they’re growing and whether you’d expect to see that growth rate bump up a little bit this year?

Yeah, I think high single digits Andrew is still a comfortable number for us. From an Epsilon perspective, in terms of the areas that I’ve really blown it out over the past year or so, I mean auto is huge, right. I mean 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. So banks are beginning to crack open the wallets again for these very large scale loyalty type programs and that’s where we’re going to see some growth in ’15 as well. So I would say auto, I would say I think retail also is an area where we are seeing a lot of interest again. It’s in these multi-tender databases where essentially whether you are using our private label card that captures a third maybe of your sales. Retailers are saying I need a bigger picture and so what Epsilon can do is it can look at multi-tender types. And if there is a loyalty program layered on top of that, we can get a view on to 80%, 85% of the clients spend at that retailer. So that’s a great interest and so how many else, Charles, we’ve got auto, we got financials, we got retail, those are probably the three biggies.

Okay, great. I’ll get back in the queue. Thanks, guys.

Yeah.

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

My question, question on Conversant. I was wondering if you could provide some color around the pipeline for Conversant and any initial conversations you’ve had around cross selling Conversant into your existing customer base.

Well, we haven’t owned it for all that long, but we are sort of moving in – I think of it on three fronts. First is to continue sort of 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 offer as opposed to having a video sales force and a display sales force and a mobile sales force. The idea is to put it all together and that’s sort of the transformation they were undergoing. So the first front is, continue on letting the Conversant folks hold their product set together and sell that. The second front and we are already often running here is, setting up a joint sales team identifying your top dozen big client prospects on the card services side, we are often running there and then also probably your top 15 or 20 prospects from the large Epsilon client side. And so between those three, we ought to get some pretty good traction and 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 year ’15 guidance, so essentially you are raising your guidance by 2% on constant currency basis if I understood it correctly on the revenue side. And on the EPS side also on a constant currency basis, you would be raising it by $0.20 but it is essentially the FX headwinds. Just wanted to – did you provide the EBITDA guidance for fiscal year ’15 and just wondering if you could provide that?

What we gave before was EBITDA net amount controlling interests and funding cost about $1.08. You are still going to be in that ballpark still rounding. So we just basically didn’t really address it. Again, the gives and takes to get for the core EPS can come from a number of areas. So we just basically left at what we gave in the last quarter.

1.7

Yeah.

Okay. I mean that sounds great. And just one final follow-up question to Epsilon question to that earlier, what was the component of the data technology and agency revenues within Epsilon? And as you think about ’15, how do we think about – like what’s going to be the driver? Is it going to be the technology which is going to drive, which can also be margin accretive going forward?

I do think it’s going to be the technology that drives it. The reason we did give the historically categories is, with Conversant, it kinds of blows it up as we move things around to really integrate it. So you will be looking for your digital applications to drive a lot of your growth in 2015, database is going to be very solid and they are in that 7%, 8% top line range and then the data is going to be sitting there more in that mid single-digit, lower to mid single-digit. Now the thing we are trying to do, Ashish, is refine the data, make it towards the strong offline data that we sell as well as now refined online anonymize data could be an opportunity for us, but I think digital will lead the way in 2015.

Thant’s okay. Thanks.

Yeah. Take one more.

Your final question will come from the line of Dan Perlin with RBC.

Guys, I just wanted to revisit the comment around Epsilon becoming more labor intensive. It sounded – I know you talked about a little, but it sounded like you kind of came up in surprise, you guys have been maybe more than you’d have expected. So, one, is that a correct kind of characterization? Has the business changed a little bit in terms of its mix just completely forgetting Conversant for the moment? And then, secondly, you talk about shifting your labor pool. I’m assuming you are going after hires in digital analytics. I’m just wondering how you plan to present yourself, I mean a lot of the IT service companies, you are doing the exact same thing, it’s a little different, but still going after that same talent pool? Thanks.

Yeah. I think you characterized it correctly, Dan. I mean it did take us a bit by surprise in terms of how fast the labor cost did move up vis-à-vis the revenue and we missed it. It’s that simple. I think we were probably off $15 million, $18 million from where we thought and that was solely due really to – you know, the type of individual we are bringing on is more expensive than we had anticipated. So going forward, we are not going to make that mistake again. I think what we are going to do is we will continue to grow the U.S. footprint and along with Conversant for sure. We are going – Conversant though is not nearly as labor intensive as Epsilon. Epsilon has over 5,000 people, Conversant has 1,500. So it’s a completely different model. It’s a much more leveragable tech model. So I don’t think the labor issue will be a big one over at Conversant. But at Epsilon, we will – if we are growing in the high single digits, we would like to keep the workforce growth in the U.S. probably into the low single-digit and then the incremental piece, we will look to do some modest offshoring, you put the two together and that should get us back on track.

Okay. And can I ask another question? In Epsilon, I thought you were carrying some duplicative costs from some of your large conversions. Have those gone away or is that part of the benefit that we might expect in 2015? And then, the other part of the question separate of Epsilon is, I just wanted 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 the BrandLoyalty asset? Thanks.

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

I’ve taken the liberty since I’m the last.

Yeah, clearly. I will start with the FX stuff first. From what we are seeing in Canada, which seems to be your question, I mean what we are seeing up there is that you’ve got consumer discretionary spending. Canada has been weak for the past couple of year. We expect to continue to be weak. Most of the dollars seem to be going into housing as housing prices continue upward. So we are assuming a relatively modest amount of consumer spend in Canada and that’s why we have to make sure that we’ve got the additional sponsors spooled up and there is a lot of promotional activity that you saw hitting Q4, my guess is you will see a lot of that throughout 2015 as people are promoting the heck out of things to get that relatively limited consumer dollar. In terms of – what was part A again? The Epsilon?

Duplicative carrying costs with some of these large clients that you converted over?

Yeah. In terms of – the biggest piece would be on the email platforms, right. We’ve got quite a bit of legacy costs. If you look at the Harmony platform, we probably got a third of our volume is flowing through Harmony, which is a huge chunk, but we’ve got two-third that need to migrate over, over the next probably 18 months to 24 months and those are – that will get rid of many, many millions of sort of cost that we are incurring today.

Great. And then just remind us the amount of portfolio funding cost that’s locked down?

Let’s see, we are about 70% of it is fixed rate, you have close to $1 billion of revolving that will be coming due and they don’t have a lot of term debt coming due in 2015. I can get you to that afterwards when we talk to them.

Okay. Thank you very much.

You bet.

Alright. Thank you, everyone. I know everyone has got a bunch of stuff to get back to and we will end it there and we will look forward to seeing a lot of you on that road.