Bread Financial Holdings, Inc. (BFH) Q4 2015 Earnings Report, Transcript and Summary

Good morning, and welcome to the Alliance Data Fourth Quarter 2015 Earnings Conference Call. At this time, all parties have been placed on listen-only mode. Following today's presentation, the floor will be open for your questions. [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; 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 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'd 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 early results and then I'll give a wrap up for 2015 and then talk little bit about what '16 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 US dollar reduced the reported revenue by about $67 million or a 4% hit to the growth rate and quarter PS by $0.12 or a 3% hit to the growth rate. Organic revenue growth remained strong in the fourth quarter, a 14% on a constant currency basis. That compares to 15% constant currency growth for the full year, reflecting balance 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 for about $280 per share. We have now required about 80% of the number of the shares issued to acquire Conversant at the end of 2014. Looking to 2016, we 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'll 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 '15 than in 2014. For the year, AIR MILES issued increased 4%, up from 1% growth in 2014. The improvement in annual growth is due to the onboarding of a national grocer, continue promotional activity, and growth in the instant reward program. For 2016, we expect issuance growth in the 3% to 5% range with promotions time similar to 2015. AIR MILES reward miles redeemed decreased 2% compared to the fourth quarter, largely as result of the decrease in AIR MILES reward miles issued. The instant reward option, AM Cash, continues 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 and 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 share 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 headwind issuance growth and further drive a shift in sponsor mix negatively impacting our profitability. Let's turn the page and talk about Epsilon, 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 is 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 to 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 in India versus US will allow a solid flow-through of revenue growth to the bottom line again in 2016. Of note, Epsilon was named by recent Forester report as a market leader within loyalty space, highlighting the businesses ability to further integrate its loyalty capabilities for the multi channel marketing solution in order to provide more useful customer insights. Turning to Conversant, as shown on page – 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 returned to growth story, led by the cross-sell efforts and onboarding of the backlog. The quarterly progression of the turn wrapped 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 price 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 efforts 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, we are now expanding into key verticals such as automotive, CPG and media. As a result, the backlog has nearly doubled since mid way 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 of 2016, seeding the next wave of cross-sell activity. Finally, Coversant's offerings continues 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 [ph] immediate targeting in 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 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 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 strong finish to the year. For the fourth quarter of 2015 revenue increased 20%, while adjusted EBITDA net increased to healthy 16%. A nice flow-through of revenue growth, given the substantial provision build for quarter and full year as a result of strong card receivables growth and the needs to get ahead of the uptick and loss rates. Notably we achieved substantial expense leveraging for the fourth quarter and full year, mitigating the decline in our gross shield from a higher percentage if 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 mentioned before, our credit sales growth rate at three times STAT of our overall brand sales and that’s usually what we try to track to. Core credit sales from brand 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 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 credit applications came through web enabled mobile channels and about 40% of our credit sales were online for the fourth quarter of 2015. Retailer’s online sales trended up this holiday, but our strong results substantially outpaced that performance. In addition, we continued to rollouts of our MyLoyalty app with several brands during the quarter. This is our proprietary, retailer-branded mobile app built to serve the needs of 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 '15 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 top line 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 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 '16, '17 and '18. 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 its 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 offline. So its 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 was in the past few years is saying about this consumer and how we can read into that and reach that consumer on a personalize 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're 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 it’s important to actually reach the folks through the right channel, whether it is from personalize message to direct mail or permission based email, mobile social targeted display, you wrap it all together and a big services wrapper and that’s really where we are on the model. So often times I am asked where are we in five years and five years you're basically looking at one massive platform. But today what we're looking at are a series of platforms and what we want to do with sort of probe and tweak and pick and choose the platforms that are growing and those that maybe less relevant. So with that being said, let me dive into the first couple of platforms. One would be our correlation 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, the number of miles, whatever you want to call. The number of units that get issued, they are issued based upon the consumer spend. And that’s our key metric, that’s how we get paid. And last year, I am sorry in 2014, that metric had fallen to a troubling sort of flattish to 1% up, and that is not something that we think is inappropriate 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 their key metric 4% and our goal is to grow at somewhere 4%, 5% a year. If we can do that eventually you'll have the revenue and earnings to follow. It is a deferred model, so that - just because you earn it this year it takes 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 4ish type percent was I think something that was outstanding, given the macro environment and that was our goal. Our goal was to get 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 didn’t yet translate into the type of growth that we really want it longer term. From a revenue and EBITDA perspective, again there is sort of 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 sort of the macro factors that were out there. A lot of the growth that we had came through a ton of work promotional programs that are big grocers in Canada. We're pushing, and a little less through the somewhat more, I guess 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 wanted and we need to make sure even in a very, very difficult Canadian economy, while its in a recession, I mean, there is 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 different story, is our other platform which is the BrandLoyalty platform which focuses on much shorter term, largely promotional type programs, 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're taking all that information and the data from what they are buying and shopping for in the grocers and moving towards a personalize approach of getting them excited about coming into the – 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 and getting North American 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 '16 as well. The North American approach is kind of interesting in the sense of you know, this is primarily European platform and now its moving to the Americas for the first time, and specifically what was kind of exciting for me anyhow was the fact that we could use the relationships that we developed in Canada over the past 20 years with AIR MILES program to introduce them to a different type of targeted marketing approach to the BrandLoyalty program and showing up it went extremely well and we are lined up, I mean, we'll 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 '16 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 and you know, it continues to grow. I mean the membership is up 20% to just under $18 million. We've 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 really challenging environment there. So we're kind of going to sit back and just hopefully watch this thing continue to move up at a double-digit pace, and as things stabilize down there the next couple years hopefully we'll really start to see the flow through. But so far so good there. I think overall the businesses, the platform within LoyaltyOn 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 sort of the core business itself was to find a way to have a sustainable model that slowed top line growth, down to earnings or EBITDA, cash flow. And that was a challenge for us over the past several years, as we continue to see nice growth on the top line, but because of the hot skills and everything else required in our labor force and heavy services aspect of the business it got to be challenge to actually flow that through the bottom line. So for the first time I think we feel comfortable that we have a sustainable model, long-term that will allow sort of the core Epsilon offerings. And again these platforms are primarily these massive data base and loyalty platforms that you see out there you know, the Citibank thanks yous, and the Hilton Honors, and the Walgreens and stuff, that will allow us to show organic growth rate at about 2x or so GDP or roughly 5ish, 6ish percent. 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 sort of goal. The next one was this sort of 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 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. So 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-sell sign in, get it all up in running. We certainly got over our skis on that one. However, after of really tough first half of the year, we started to see the results of this effort and I couldn’t really be more pleased with how the year has turned out in terms of Q4 and how we're stepping off into 2016. As I 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 '16. And as Charles showed you the revenue went from minus 6 in Q1 to minus 9 in Q2, it bounced all the way to back to flat in Q3 and we stepped up 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. So in terms of the turn or hockey stick that we've all seen out there, just want to 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're going to beat the – going to a, let's say retailer and they are going to start supplying us with all their SKU level information and we're 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. It’s important that if we look at it and we basically say, okay, where have we come, where are we going, what's 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 as 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 seem to actually have worked very well. And as a result, the book of business that we're 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 rollout 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 allowed able to get the Conversant folks into the Epsilon clients and between the two of them created the sale. I think we're very early in the game in terms of what we're 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're going to be spending a lot of our time and of those 500 we probably hit like 25 or 30 at this point. So long way to go, anyhow, feel good about Conversant. And finally, Card Services, which continue to just have just a tremendous year. I kind of keep saying that and seems like this - keep it saying every year. But it continues to happen not only because of the offerings we're putting out there, but also because of again the macro shift or the secular shift it’s going on and 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 personalize basis. And to do that we are the folks they trust to hold the SKU level information, both online offline, 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 sort of the uniqueness of the model that we have here. So our credit sales and that is actually using, consumer IS 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 to the cash flow of about 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've kind of plateaued in terms of how much of each dollar spent at the retailer will go through our card and. We used to think it was somewhere in the high 20s, 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 a 150 basis points at these core retailers you know, 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 of the past several years. They take three years to ramp and that’s where you get your next 10% of growth. And so that’s why a 20% type growth rate here, which if you ask 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've 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're 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 '15 revenues, EBITDA, EPS all up 20%. We know a tough macro environment organic, which is the thing that I really focusing on. We try to do 3x GDP as our long-term model if we could do like 8% 9% a year that be great. This past year we did 11. We're actually on 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 in perspective, we grew the 20% or 11% organic despite being hit with about a quarter billion dollars of FX top line headwind and about $0.50, so it knocked about 4 points off of growth. All that being said, let's now move into '16. We say good bye to '15 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 would 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 and EBITDA type growth rate for PL 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 BrandLoyalty. The North American expansion we think we are very well placed in Canada. We want to see how that 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 for growth for us, again, despite really 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 to 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, its 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 sort of 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 was sort of 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 being expecting long-term. So everything looks pretty good there. We want to drive a minimum of another $70 million in cross-sell 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 to slow down. 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 with that means is we sign a bunch of new clients. And over the course of three years their portfolios, 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 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 '13, $2 billion in '14, $2 billion in '15 and we expect $2 billion in '16. So I certainly like the outlook for this business. All right, getting questions about credit quality to help, the health of the consumer. Obviously, with some of the noise out there in the market place, what we can 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. So it looks like that’s in pretty good shape. If you look at the actual loss rates, that were going print, what you're looking at is you saw it go from roughly 4% to 4.5%, it will be about 5% in '16 and then in '17 we expect to start to level off at about 5.5%, which we believe is the new normal. And so, again, I think we're going to be right on target in terms of this sort of 5% for '15. Question being asked is why, why is this drifting upwards. Its primarily - it’s kind of interesting, it’s primarily due to the fact that when you had the great recession in '08, '09, you had massive amounts of charge-offs and it took until to 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 were 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 at normal. Though we sort of half of that point at this stage and its beginning to normalize from 35% to more in the 20s, probably low 20s, it’s where we'll net out. And if you moved from last year to this year, you will see the recoveries are coming down about 5 points, and as a result that turns into about 50 basis points less recovered on the losses. So its 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 new loss rate up about 50 basis points. So we don’t see anything alarming there. Its normalization process that happens in the private label business in a high growth mode. The remainder tail of any type of drift up will be the continued seasoning of the big vintages. The net story here is that, we believe our long-term normalize loss rate, before the great recession was about 6.5%, today we're very comfortable that we're going to level out around 5.5% probably some time in '17 going into '18. The reason why its little bit lower, is the fact that, over the past half dozens years or so we've attracted a bit higher from a credit perspective quality type consumer, you know, when you bring on the Barney's and the Talbots and the BonTons of the world, and then you have some co-brand mix in, which carries a lower loss rate. So we think the 5.5 it’s about right. We're slowly marching towards that level and we feel comfortable with our '16 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 2015, you jumped off from Q4 of '14 to Q1 of '15 and your loss has jumped up about 70 basis points on a seasonal basis. We expect that exact same type behavior to take place in 2016. So you're going from sort of your high fours at the end of or mid fours at the end of '16, to sort of somewhere in your low fives as a starting point. And then from a seasonality perspective that starts to actually get drift down as the year progresses and then flattens out in the back half. So that’s how the seasonality works and so no one surprised. And as we talked about, we expect full normalization at around 5.5% as we move into '17. From a guidance perspective to wrap up, we are maintaining our guidance for the full year. We're not going to change that, despite I think peoples outlook that has gone a little bit more negative on the macro. We think we're in pretty good shape here. So constant currency basis, look at about 72 on top and 17 bucks on the core EPS, that’s a 100% organic growth rate, we're using FX rates to 78 and 111 for the year. As it relates to Q1, we're looking at about 8% constant currency growth rate and about 5% from an actual print perspective. So that includes the FX headwind of about a dime. I think it will be probably little bit less then there right now. We used FX rates of about a buck in $0.60 [ph] million, for the euro in Canadian respectively, right now euro is more like 109 and the Canadian dollar is 71. So I think that gaps 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 they are earnings were up over a 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. Its tough on a quarterly basis, but we're looking at here is rather than up a 100% in Q1 and down 50% in Q2, you're going to see more like flat performance in both BrandLoyalty in Q1. The big program seem to be hitting in Q2. They've been signed up, we expect over a 100% growth in Q2 this year. So like Q2 you should see that mid teens growth return to earnings. So that’s the pretty much it. You've got some – to watch bouncing balls in terms of the quarterly stuff, but on annualize 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 we're seeing the businesses we're in would suggest another double-digit organic growth here for us. So that’s it. I am going to actually let Charles now talk and. We'll wrap and take questions. Questions, operator?

[Operator Instructions] Your first question comes from the line of Darrin Peller with Barclays.

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. I guess, 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 or 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.

Yes. I mean, I'll take the BrandLoyalty thing, I mean, last year it – like I said it grew over 100% in Q2, it was down 50. This it’s going to be flat and then up a 100% in Q2. If you would have put two together, what you would have – you would have double-digit growth right out of the gate and in Q1, probably low teens. In Q1, what you're going to see is, little bit lighter in Q1, little bit heavier in Q2. That’s strictly grocer programs and they roll on. So it’s pretty straight forward there. And then Charles you can take the first question.

So that was about organic revenue growth for Q4 Darrin?

Yes. Pro forma for Conversant basically?

So you'd 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.

Okay. 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 especially if you comment a little more of 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?

Yes. I'll take the first part and Charles and take the second. The issuance, obviously, we had three huge of quarters of issuance and Q4 was I think down. But that’s you know, 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 its primarily coming from the non-financial services side of the house. You're seeing the non-discretionary spent 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 expiree, 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 wouldn’t see anything until the Q3 or Q4. So 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've not really considered it. We'll evaluate it as years goes on and frankly I wouldn’t expect to see any trend until as early as Q3, as late as Q4.

All right. Just 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 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.

Yes. I mean, it’s always a delicate balance of course. I think you nailed it in terms of - look, we don’t know how quickly North Americas are going to roll out for BrandLoyalty, but if the US is 10x, Canada and we got 40 million booked in Canada, you know, you draw the line for me to be and it’s like this could be pretty exciting here. I am reticent, Darrin, to start putting what quarter will be primarily after the beating on Conversant from having that lag a couple of quarters. But that’s certainly an area that’s going to be pretty exciting. On the card side, yes, I mean, we - look, we're at the point now where the book is just full and we're continuing to see more interest, as people are shifting their dollars more and more to the platform. So you're – there is bunch of other opportunities there. The question is you know, 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'll make that call as the year folds– unfolds.

It makes sense, guys. Thank you.

Thank you.

Our next question comes from the line of Josh Beck with Pacific Crest.

Thanks. 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, I mean, it’s a great point. Its – we looked at our book of retailers 145 or so brands that we have out there. We think Q4 holiday rolled all up. They probably did about plus three year-over-year and we were more like plus 8 to 10 at those core – at those retailers. So the tender [share stuff, adds anywhere from 5 to 7 points of growth over and above what the retailers grow at. So 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've 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 consume is. So I think we've got tender share at some of our folks that are over 50% and if we're somewhere around 30ish today, we got a long way to go.

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

I'd say three quarters of it is the recovery position and then the tiny piece left is just the normalization.

That’s over the last three years Josh, we've seen our gross losses moved and this over three year window 20 bps and that 20 bps is all due to seasoning.

Thanks, guys.

Yes.

Your next question comes from the line of Tim Willi from Wells Fargo.

Hi, thanks. And good morning, guys. Two questions. One was back on card and then something about capital. Regarding the card business and your comments around sort of mobile and digital and the board omni-channel, 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 sort of digital versus tender shares? Is there anything that has been shuffled there, in your opinion, around the competitive and the RFP environment?

Sure. I think that - and you'll see that in the fact that we're 20% private label, 20% co-brand. The shuffling or the competitive pressure that you're seeing is really on the co-brand side. That’s where – let's face it, you're running into the buzz of the big banks who are looking to grow balances, and the best way to grow to balances is certainly not through private label, right, there are tiny balances, but through the big co-brand balances. And so what we're seeing out there is the pricing on co-brand deals, the big – these are master cards 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'll 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 make sense. In terms of the private label stuff, that’s where you get a lot a more focus on the card being viewed as surely 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 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 316 [ph] relative to your guidance, whether it's included or not included, and any color on using that program through the calendar year?

Yes. We'll continue to be active with it Tim. We will slip it to our second priority versus our primary in 2015. So we'll 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 incorporates some, as you can see we gave a range on share counts, 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 just assumes basically what we've already done for the most part.

Okay. Sounds great. Thanks very much.

Your next question comes from the line of Dan Salmon from BMO Capital.

Hey, guys. Good morning. 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 mean, I think that what we're seeing is the demand is coming much more heavily for loyalty platform build and a little less from sort of the more traditional, just customer data base builds. Said differently, the desire of the client to offer something up to the consumer in return for having insights into their consumer and their behavior it seems to be the play of the day here and the way to get the consume to share that information and share those insights is to obviously offer something up from a loyalty perspective. So the big news in probably the data base build side of things will be on the big loyalty build and that’s where we're seeing a fairly strong level of demand.

Okay. Great. Thank you.

And your final question comes from the line of Sanjay Sakhrani with KBW.

Thank you. 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 overall business?

Yes, overall business across all the segment?

I think its going to be fairly consistent with what you saw in '15, where card services always had the ability maybe to grow a little bit quicker, you're getting good traction with Conversant. We were assuming basically high single digit growth for '16, could do a little bit better based on the developing pipeline. BrandLoyalty if we get some traction in the US that could be beneficial to us. On the down side, we talked about it. Canada looks rough as the mix shifts reduces the revenue per mile, redeemed, ergo, it reduces our profitability. Epsilon, I think we gave pretty good guidance, mid single digits, revenue and EBITDA growth seems solid. Could be a little opportunity there, as we get traction in our marketing technology, but I think that 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 cash flow and we buy 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 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 is few unknowns, we have the ability to cover it off in our guidance.

And 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're going to see – you're actually - if you sign it in 2015 you'll actually get about third of it, up and running in 2015. So current year you'll get a third, the next year you'll get up two third and then couple of years out you'll get the final one.

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

We really don’t have anything burning at the moment. Sanjay I would say we're 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 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'll just see how the year plays out and if there is – I think there we'll 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.

All right, cool. Thank you very much.

All right. Thank you, everyone. Bye-bye.