Oct 22, 2009
Executives
Julie Prozeller - Financial Dynamics Mike Parks - Chief Executive Officer Ed Heffernan - Executive Vice President & Chief Financial Officer Ivan Szeftel - President, Retail Credit Services
Analysts
James Kissane - Banc of America/ Merrill Lynch Darrin Peller - Barclays Capital David Scharf - JMP Securities Daniel Perlin - RBC Capital Markets Bob Napoli - Piper Jaffray Wayne Johnson - Raymond James Sanjay Sakhrani - KBW Dan Leben - Robert W. Baird Robert Dodd - Morgan, Keegan Christopher Brendler - Stifel Nicolaus & Co.
Mike Grondahl - Northland Securities Reggie Smith - JPMorgan Andrew Jeffery - Sun Trust
Operator
Good afternoon and welcome to the Alliance Data Third Quarter 2009 Earnings Conference Call. (Operator Instructions) It is now my pleasure to introduce your host, Ms.
Julie Prozeller of Financial Dynamics. Ma’am, the floor is yours.
Julie Prozeller
Thank you, operator. By now you should have received the copy of the company’s third quarter 2009 earnings release.
If you haven’t, please call Financial Dynamics at 212-850-5721. On the call today, we have Ed Heffernan, President and Chief Financial Officer of Alliance Data, and Ivan Szeftel, President, Retail Credit Services which encompasses Private Label Services and Private Label Credit.
Before we begin, I would like to remind you that some of the comments made on today’s call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties described in the company’s earnings release, and other filings with the SEC.
Alliance Data has no obligation to update the information presented on the call. Also on today’s call, our speakers will reference certain non-GAAP financial measures, which we believe will provide useful information for investors.
Reconciliation of those measures to GAAP will be posted on the Investor Relations website at www.alliancedata.com. With that, I would like to turn the call over to Ed Heffernan.
Ed?
Ed Heffernan
Thanks, Julie. Why don’t we turn to the slide, third quarter consolidated results and get right at it.
Obviously, today we will spend a bunch of time thinking over the numbers and that’s fine, but before we begin I think we do want to mention that the theme here today is fairly simply and that is across the board things are firming and momentum is clearly building whether it’s looking at our key metrics such as miles issued, miles redeemed up in Canada, the number of new contracts that have been signed and will be boarded at Epsilon over the next 12 to 18 months or credit sales people using our credit cards hitting double digit for the first time and believe it or not three years combined with almost six months of stability in our losses. So then finally, our 2010 guidance will be as usual what we think is compelling, but without any major assumptions about any type of big turn in the macro situation, so one could view it also as being more of our base case.
That being said, lets talk about third quarter, produce results which were satisfactory given that headwinds that we have faced, but again as we mentioned the real needs is around the developing trends that have emerged in all three of our businesses and we’ll cover that in plenty of detail in a bit. Specifically to the numbers, the revenues on a constant currency basis were relatively flat year-over-year a bit under 500.
We expect to finally pop our head above water in Q4 and for the first time in a year coming with growth on the top line. The operating EBITDA or operating cash flow, and reported EBITDA were a bid later than initially planned, a good portion of that can be attributed to incremental expenses incurred on our international coalition efforts along with our decision to lock down long term fix rate funding.
Nonetheless, and with the revenues look for our first quarter a positive year-over-year growth starting in Q4. Cash earnings per share were $1.40 versus $1.22 last year, an increase to 15% and $0.06 ahead of our guidance of $1.34.
On a constant currency basis, earnings were up $1.44 an 18% increase. The third quarter results did include a $12 million current tax benefits and as a brief explanation historically, the company has maintained tax reserves to cover the potential impact related to the recognition of certain taxable income.
Based on recent tax rulings and other items, there is no longer uncertainty around this taxable income recognition and as such, our reserve on the related tax position is no longer required. So the third quarter, we were compelled to release that and it reflects an $8 million one time catch up and the remaining $4 million, which is the good news represents an ongoing annual tax benefit, and that’s cash.
This annual benefit will result in a reduced effective tax rate going forward. For the third quarter of 2009, the company’s business performance combined with this tax benefit produced strong over performance which enables the company to reinvest in certain opportunities.
This includes, completing $1 billion of TALF deal where we locked down long term fixed rate money to enhance our long term visibility while effectively trading off short term call a 2% funding for the [bennies] of a long term 4% funding rate and we will always trade some short term benefit to lock down long term visibility. Next, we are very excited to announce our new loyalty coalition program in Brazil which involved some expense as well as expenses associated with searching for the next Brazil as well and finally, with funding locked and Brazil signed, we also moderated our share repurchase program and used a lower than expected $100 million during the quarter buying a couple of million shares.
This moderation plus the addition of shares on a fully diluted basis as more equity became into money with the stocks rising price, left our share count higher than anticipated. Bottom-line of all this, business was fine, we also received a nice tax penny which allowed us to lock down additional long term visibility, fund our international coalition efforts and moderate our buyback plans in order to avoid crowding out investors coming into the stock during the solid run.
When it does so, everything knitted out to over performance of $0.06 against guidance. As I mentioned we expect Q4 to be our first quarter in a year of top-line and adjusted EBITDA growth joining strong cash EPS growth and providing a strong jump up for 2010.
Much of the remainder of the presentation will be focused on the trends that are solidifying across all three businesses, and which vote extremely well for alliance in 2010 and beyond. Let’s just highlight a few of them.
One, our Canadian Airlines business turned the corner on its key metric miles issue and posted growth in that metric for the first time in a year. Two, our Epsilon business is winning business at double its normal rate suggesting a 10% growth rate for 2010.
Three, our private label has seen all metrics with positive trends as credit sales growth move from negative growth in 2008 to up to plus 13% growth in Q3 our best showing in three years. The portfolio itself is growing double digit.
We have plenty of liquidity and losses have been stable for the past six months despite rising unemployment. And finally, despite some moderation on our share repurchase program in Q3, we have repurchased approximately 30 million shares or 37% of our stock and spent $1.5 billion doing it.
We still have 300 million remaining and will continue to pick our spots. In all, we think the headwinds impacted the last two years coming quickly to an end and we look forward to a return to solid organic growth sooner rather than later, and the buyback of course will serve to enhance that growth.
One other matter, we just received official approval from the regulators to go ahead with the acquisition of Charming Shoppes group of private label programs and we expect to close that very shortly. Let’s move on.
Next slide Loyalty One. The biggest news of the quarter is of course the return to positive growth of miles issued after almost a full year of weak performance very simply miles issued drives our cash flow.
We issue a mile we get paid in cash we tuck most of it aside, about 72% into a trust account for future rewards and we pocket the rest. Our recent double miles deal with the Bank of Montreal was a major contributor to the big turn and issuance during the quarter, despite having it up and running for just August and September.
As we look to Q4 and beyond, the ramp up should continue. Q4 will have a full three months of Bank of Montreal double miles plus will mark the anniversary of our first quarter of weak issuance back in ‘08.
So, Bank of Montreal deal plus easier comps, plus some firming in consumer spent will all contribute to acceleration in issuance, and for those of you who think about our long term model, the way it typically runs is as follows. We look to do high single digit growth in issuance, pop on a couple of points of annual growth in revenue per mile and that will get you to double digit topline growth, and that filters down to low to mid teens organic EBITDA growth.
Good news on the issuance front and the trend going forward. All right, let’s turn to Epsilon.
Obviously Epsilon tends to have fairly uneven quarters, but the general trend is I think heading in our direction as we are looking at Q4 right now, but Epsilon continue to hold its own during the quarter. Marketing and advertising spent of the Fortune 1000 is down by at least a third or more and Epsilon continues to buck the trend by holding relatively flat.
Its Q2 results showed a slight up tick in top line and down tick in EBITDA versus last year. On a sequential basis we did see increases in all metrics.
Topline EBITA and margin, which is all consistent with what is typical seasonality associated with the business. Q3 results were similar to prior quarters, simple a tail of two segments.
First, our largest segment which is driven by the massive loyalty programs of the Fortune 500. These programs encompass our marketing, database and digital that is our permission based email business and account for two thirds of Epsilon’s financials.
Consistent with Q1 and Q2 this segment continue to turn out double digit organic growth and expectations remain equally high for Q4. The other third of the division consist primarily of our data businesses, the largest paid piece being our Abacus coalition program, which encompasses 1800 catalogers.
Simply put, Abacus did well considering the 100% retail exposure it had, but not quite good enough to show growth from last year and finally, there were some other data assets outside of Abacus, which had been in the red, continue to be in the red and are in the process of being streamlined. I think I’d sum up Epsilon as follows.
Couple of items. On a year-to-date basis Epsilon in total is virtually flat versus prior year on both the revenue and EBITDA perspective.
Q4 is trending positive and as such we believe Epsilon remains untracked to pose single digit growth in both revenues and earnings for the full year. Second, while not contributing much to this year Epsilon signings are running at double the pace of prior years as stretched marketing budgets are seeking those programs which can micro target consumers and demonstrate superior ROI results.
Signings have increased across the board, including those sectors such as big pharma, not-for-profit, CPG financial services, telecom, B2B and digital. Consequently, we are looking for a strong finish to the year and then jump to 10% growth in 2010 as Epsilon’s largest segment continues on at a strong pace while the remaining data services segment, anniversary sweet comps begins to recover.
Now, I’d like to turn it over to Ivan Szeftel, our long serving President who handles all private labels including all the processing, customer care, the marketing database, loyalty and all the credit functions. Ivan and I have worked together, I think for ever and certainly since the beginning of ADS around eleven years ago, and I think the best way to think about it is you could say that he and his team have really done through it all.
First, if you look at the results through the first half of this decade that those groups had a heck of a run as many new clients were signed, sales are strong; funding was wonderful in a macro environment that contained losses and of course we have Phase II. In 2007 he and his team had to endure their first major client loss as Lane Bryant was brought in-house by Charming Shoppes.
Finally, over the past few years the private label team has been hit with the liquidity crisis, pull retail environment and credit losses up over 400 basis points or $200 million since 2007. I think the good news is quickly approaching and we’re going to call that Act III.
With the big ramp up in sales and portfolio growth plus the return of Lane Bryant via the Charming deal, plus the availability of liquidity and now stable credit losses we are eagerly awaiting the big run coming soon and increasing in intensity over the next several years, and so with no pressure in that set up, Ivan, your ball.
Ivan Szeftel
Our private label business was indeed Alliance Data’s primary growth engine during our early years. The Group’s financial performance peaked in 2007.
The severe’08-09 economic recession has reduced our earnings by about a $115 million since then. Despite this earnings erosion our clear focus, operating discipline and the signing of new clients has enabled us to remain profitable.
The same cannot be said for many of our competitors. Our ability to remain profitable during the worst macro economic environment since the 1930s has created a unique opportunity for us.
Specifically, while virtually every other entity providing private label credit card services has cut back to limit their credit exposure or to preserve liquidity we have chosen to grow. We are taking a different approach, and have decided to use this unique situation to build a foundation that will power our growth for many years to come.
We have accumulated a significant amount of excess liquidity through our certificate of deposit programs and our bank and Telbec Securitization Facility. We will, we have and we’ll continue to maintain capital at our two banks at levels well above those required to be considered well capitalized.
The combination of our excess liquidity and robust capital levels will enable us to grow through the acquisition of existing private label programs and the launching of new programs. While all the while maintaining our current high credit standards.
While, our current financial results are yet to reflect a turnaround I believe that we are beginning to see some trends that are indicative of a return to earnings growth in the near term. Our growth in credit sales was negative last year.
Plus 3% in Q1, plus 6% in Q2 and plus 13% in Q3. Of note, Q3 was the first quarter of double digit sales growth in over three years.
Q4 will further accelerate this trend since we expect to have the Charming Shoppes programs on board for part of the quarter. Year-to-date our sales increases have been entirely attributed to the new clients that we have added in the preceding 12 months.
During the month of September however this changed, with our sales increases coming from both new and core legacy clients we fully expect the trend we’ve seen in September to continue. With our strong retail clients hosting increased credit sales.
These increases will be a function not only of a total sales level as the anniversary re-comparative numbers but also as a result of our increasing market share. As we look to 2010, we are comfortable that the low double digit portfolio growth we have seen will continue if not accelerate further.
The primary drivers will be the addition of the Charming Shoppes programs, new client singing and the growth generated from our core legacy clients. For sales and portfolio growth to translate into a corresponded growth in earnings, it mush accompanied by stable credit profile.
We believe that if we have not already arrived at a point of loss and delinquency stability we are very close to it. Specifically, delinquency, subject to normal seasonal fluctuations have been stable for quite a while and credit losses have been stable since May, all this despite rising unemployment.
The negative impact of year-over-year loss increase will now lessen each quarter before being completely eliminated. This trend is already evidenced.
If you consider that while our Q3 earnings were down $20 million from the same quarter a year ago the second quarter was down $30 million to last year. We fully expect our 2009 Q4 earnings to be at or above the last year’s levels.
Let’s turn to the next slide. With credit sales headed in the right direction we need to focus on the outlook for credit loses.
Historically our losses have checked about a 100 to a 120 basis points above the unemployment rates. These were the equivalent loss levels that we were experiencing at the beginning of the Great Recession.
However, the longer the recession lasted it became evident that our predominantly small tickets, private label credit cards were less susceptible to the significant run up of balances that the third party and big ticket card programs were experiencing. In addition, as we have signed new retailers and hence new accounts we were slowly replacing some poorer performing accounts with new accounts attached to consumers who are more creditworthy.
Net result is that our loss rate has moved from a 100 to a 120 basis points above the employment rate to 20 basis points below it. Moreover, our losses have been stable for the past five months and we expect this relative stability to continue.
Let us turn to the final slide and talk about the future. Throughout our company’s history we have been asked why we remain bullish about our private label business.
Early on, the view was that it was a shrinking market that private label was not permissive. This despite our impressive growth now why in the midst of a financial crisis do we plan to grow and invest in private label.
Very simply this is a tremendous business with room for solid growth. The reality is that the need for retailers to promote a strong private label credit card program has never been greater.
The financial crisis, new business regulations have significantly reduced the liquidity available to the average American consumer. By some estimates, revolving credit card lines have been cut by over 30% in the last 12 months.
The significant reduction in revolving debt levels we have seen is not only a function of the consumer’s desire to de-leverage but is also indicative of a lack of credit availability and the perceived need to preserve some of the diminished liquidity for emergency new use. What better solution can a retailer have to help facilitate a credit line dedicated for use solely in their store.
Couple this with a robust loyalty and marketing capability that our programs provide and you have an unbeatable combination. Now, let us turn to our addressable marketplace opportunity.
Our criteria for a successful partnership are threefold. First, we target mid to large retailers with annual sales of between 200 and a few billion dollars.
We look for retailers who are passionate about their brand and see our programs as an extension of their brand. Those potential clients we do see private label as a loyalty and sales program, not just a financing vehicle.
And further, we focus on retailers whose customers have our desired demographics and credit profiles. Using these criteria we have analyzed various retail statements.
Clearly apparently there are sweet spots. Particularly woman’s apparel holds the leadership position in all distribution channels.
Bricks and Mortar, Catalog and Online. In addition, we have a significant presence in the home furnishings and jewelry segments.
What is common across these verticals is our ability to develop and build loyal relationships between our clients and their customers, and thereby drive incremental sales. By running all possible suspects through this filter we have identified roughly 300 retailers in our addressable market.
Of this half of the program about two thirds of those have programs with us. Even with our significant market share there is plenty of room for growth, more than enough to enable us to return to our historic 8% to 10% annual growth levels.
We expect to sign 5 to 16 programs each year coming from retailers who currently do not have a program or perhaps by adding co-brand programs that complement the existing private label program. In addition, we will also selectively add new programs in adjacent verticals.
Spring Stone Financial and Pacific Dental are just two recent examples and finally, our plan includes one to two existing portfolio acquisitions out of a prospect universe of approximately 40. Today, we are in the best position in our history to take advantage of such portfolio acquisitions and we will do just that.
All of this gives us a sizable market opportunity where we once again return to our strong historic growth levels. So, for those of you that still ask why are we committed to this business, and in fact are aggressively investing when others in our space have chosen to restrict their growth or even consider exit strategies.
I would again ask you to consider the following. We know that private label is a highly effective tool to help retailers grow their sales especially in the current environment.
We know that our results driven marketing and loyalty strategies coupled with high end customer care would help retailers gain and sustain a great amount of share and finally, we are confident in our ability to manage private label credit card playgrounds in a manner to ensure attractive returns even in this most challenging times. Thank you.
Ed, let me turn it back to you.
Ed Heffernan
Thanks Ivan. Why don’t we move to the balance sheet, just a couple of quick notes here.
Our deferred revenue account grew by $100 million, it’s over a $1.1 billion as miles issued, began to crank up and the Canadian dollar continued to strengthen. Also our trust account now stands just under $600 million, and again, that’s the account we use for when people would cash in for rewards, which is an increase of about $70 million from Q2.
The account includes about $500 million in Canadian securities and about a $100 million in investment grade, US securities backed by our card assets, which are now fair valued at just about par. The trust account is utilized to pay for as I mentioned the reward redemptions on our Air Miles program.
It’s been funded assuming 72% or 28% breakage of all miles issued will be redeemed. After 17 years against that 72% our cumulative redemptions rate stands only at 54% and it’s moving up ever so slowly between one or two points a year.
So, again, lots and lots of room there. Turning to debt; no real major changes during the quarter in our net core debt which is core debt, less cash, to LTM operating EBITDA remain at less than 2.5, well under our self imposed three times guideline.
As mentioned earlier we spent about a $100 million during the quarter on share repurchases due to the rise in the stock prices, purchases were largely offset by dilution from the higher impact within the money options and dilution related to the convert. So, we stand at about 55 million fully diluted shares and we have repurchased approximately 30 million shares over the will go after two years.
We have 300 million remaining to go on the existing repurchase program, and as I earlier will be floating around and looking to pick our spots. Let’s move on.
Guidance. We should finish our Q4 in pretty good shape.
So we’re going to move very quickly to 2010, nothing real news. In Q4 we would expect losses to sort of be tracking where they have in the past five or six months, somewhere in the mid nine or so.
Again, no major improvement, no major degradation. So sort of the three month average is about right for Q4.
But let’s go ahead and move right ahead. It’s October so it’s time of year again.
We traditionally give our next year’s guidance during our October call, and this year is no different. 2010 guidance is pretty straight forward with expectations of mid to high single digit growth for both revenues and EBITDA, which will translate into high teens growth in cash EPS due to modest CapEx needs and a lower share count.
The guidance assumes no significant improvement in the macro-economy, no improvement in credit quality and it suggests a weak consumer spent and as a result credit losses again in the mid to upper end on that 9% range. By segment, LoyaltyOne Air Miles in Canada will start off week from a P&L perspective due to the impact of weak issuance of Miles over the pervious year and the fact that the resulting impact doesn’t flow into the P&L until a year or so later due to the accounting, specifically deferred accounting, but as issuance continues to strengthen, the so-called bucket so to speak will be filled again and EBITDA will start to flow in at a greater pace.
On the cash flow side, however, nothing changes. Expect very strong results from the beginning as issuance begins to crank up or continues to crank up, and essentially weak accounting P&L results for a bid.
We’ll be overshadowed by strong free cash flow as miles issued ramp up. The net result is that operating EBITDA or operating cash flow which usually runs about, I don’t know, anywhere from $30 to $40 million of reported EBITDA is going to most likely run closer to $50 to $60 million than reported EBITDA during 2010.
Also, expenses from our recently announced Brazilian coalition plus other international efforts will be born in this segment. For competitive reasons we will not be supplying these amounts other than to say that they are moderate.
We expect Epsilon to be around 10% growth as the large numbers of signings in 2009 are ramped up and finally, the combined private label services in credit segments should be back on track which means growth mode. Private label will face a modest credit loss grow over in Q1, but it should show steady improvement after that.
Bottom line a solid growth here for the company is expected. The resulting impact of a weak 2009 miles issued on 2010 earnings in Canada expenses for international coalition expansion and a modest loss over in Q1 will most likely keep top line in EBITDA from the double digit level, but it should not hinder a strong cash flow generation and high teens cash EPS growth, will also be looking to use 2010 to continue to walk down our funding book.
Also of note here is something that I think we’re quite proud of, and that is Lane Bryant has returned to us via the Charming deal, we can once again say that in the 11 years that Ivan and I have been here, we have never lost a major client in Canada at Epsilon or in private label as we look into 2010 there are no major clients that are at risk of leaving that we are aware of, and as a result there is no huge hole to fill as we start out the year. Again, going to assume there is no benefits from significantly stronger consumer spent for credit improvement, and guidance assumes no incremental benefit from additional buybacks above today’s level and, we’ll update guidance as we’ve done in the past as the year progresses to the extent there is incremental good news to flow through, it will be done on a quarterly basis and we’ll update again as we step through the year.
Let’s finish up with our 2010 free cash flow on the next slide and then we can hit Q&A. Very simply we’re looking at doing about $650 million in EBITDA.
As we talked about the difference in Canada between what we book and the actual free cash, we have runs of about 50 million next year. So we’re looking at about $700 million in operating cash flow take out CapEx interest, taxes and you are looking at about $360 million of pure free cash, which is about $6.5 are around a 10% yield where the stock is today and, I think that’s about it for now, we will try to keep it under the three hours that we did last time.
So we’re going to open it up to Q-&-A. Operator.
Operator
(Operator Instructions) Your first question comes from the line of James Kissane - Banc of America/ Merrill Lynch.
James Kissane - Banc of America/ Merrill Lynch
Hey does your 2010 guidance include Charming? I just want to confirm that and maybe review what Charming can add in terms of revenue and earnings?
Ed Heffernan
2010 does include Charming, and I think we are sort of steering away from ..
Ivan Szeftel
I mean I don’t think we’re going to break it out separately Jim, but you can assume that it does include, given the latest approval it does include Charming in our 2010 guidance.
James Kissane - Banc of America/ Merrill Lynch
Okay and maybe the accounting for the Brazilian loyalty investment, I assume that’s g to be the equity method, but will you be generating any top line revenue there?
Ed Heffernan
Not enough to be significant, and yes it will be the equity method.
James Kissane - Banc of America/ Merrill Lynch
Do you have any call option to buy in a bigger stake, maybe get control?
Ed Heffernan
I think you can assume that, yes, there is write up first refusal, there is goals and the usual stuff that would be in one of those things.
James Kissane - Banc of America/ Merrill Lynch
Okay. Was this the international loyalty program that you were referring to on the last call?
Ed Heffernan
It’s certainly one of them. We continue to search the globe for the next one, and so, we will have a team out there during 2010 looking for other programs such as this where we can take a sizeable position in an existing program and then bring in our expertise and bricks and mortar and everything else and get this probably ramped up.
So, this would probably be the model going forward.
James Kissane - Banc of America/ Merrill Lynch
Okay. So, note taking majority stakes.
Just investment, kind of seeding investments here.
Ed Heffernan
This one was a good shot, chance for us but as we moved from phase one, which is in one region of Brazil, to hopefully a full countrywide roll out, some of the other players may have interest, some of the sponsors in taking in equity stake as well. We want to keep ours certainly where it is if not go higher, but Brazil probably is a little different because the country is so big, six or seven times the size of Canada.
With smaller countries we would obviously prefer to take the whole shoot and match.
James Kissane - Banc of America/ Merrill Lynch
Okay. Just one last question since Ivan is here.
Ivan, there’s been some concern about late fees being regulated. What are some of your thoughts on the late fees regulation generally?
Ivan Szeftel
Yes. As you are well aware we are still yet to receive guidance on specifically what the Federal Reserve has in mind for late fees.
So, until such time as we get that guidance from the Federal Reserve it’s hard for us to know what it means, but certainly our late fees are at the low end compared to the others that are out there and we are just going to play it by as it comes.
Operator
Your next question comes from Darrin Peller - Barclays Capital.
Darrin Peller - Barclays Capital
When we think about the potential impact from the buybacks you have had thus far, I think somewhere around $0.40 or $0.50 on top of your budgeting guidance, you are pretty close to the $6 number right there. So I guess maybe help us understand what is embedded within your guidance in terms of maybe expenses and investment in loyalty.
If you can give us a little more color on what might be inhibiting the number from being considerably higher than $6 that would be helpful?
Ed Heffernan
I’d say the first thing that inhibits it is probably around eight conservative nature this early in the game. I mean it’s only October.
So what we’re looking at is we think is fairly compelling which high teens growth and we’ll doing high teens growth this year as well. So it’s not like we are digging back out of a hole.
So I think that’s part one. Part two is it does not assume any type of [bennie] from the macro environment improving to any extent.
It doesn’t include any type of bennie form credit quality getting better. So, as a result you will have a decent growth out of Ivan Szef in the various private label groups.
You will have decent growth for sure out of Epsilon, and in Canada, I would say that is going to be a little bit weak in the first half because of the way the accounting work and you mix that all together drop it down and you will get to about six bucks a share. Most of the buyback was done during 2008.
Operator
Your next question comes from David Scharf - JMP Securities.
David Scharf - JMP Securities
Hi, good afternoon. Couple of things.
First focusing Epsilon, Ed I know you gave a little bit of a color on the different types of businesses, and the mix between the Abacus and the other higher margin business. Can you give us a sense for I guess the mix in the potential margin profile of all the stuff that’s been signed up this year, how we ought to think about how that flows in next year?
Because it seems like Epsilon is a segment where there is always fits and starts between signing up new business, but then there is start up cost, should we be looking at material margin pick up next year in that segment?
Ed Heffernan
I would say as a general rule that if whatever you’re looking at in terms of top line, you would expect EBITDA to be roughly 2-3 points faster than that, and so whatever margin expansion that drives and done the math should be something that would be consistent with what we are looking at next year.
David Scharf - JMP Securities
In terms of securing these new mandates, obviously there is the trend towards higher ROI digital email marketing, but are you seeing a tougher pricing environment right now, the normal, as you compete for those deals, is there a possibility of potentially a little firmer pricing in the Epsilon side going out a year or is it still pretty rough?
Ed Heffernan
Actually on the big loyalty programs that we have, we are not really seeing that the pricing pressure that may be a afflicting some of the one-off sort of direct marketers and stuff like that. What we are essentially seeing is pretty strong pricing across the board for those two thirds of the company that handles the big loyalty programs.
So I think that’s in good shape, and I think that’s in good shape going into next year. The question will be the final third of the business, which is the data business, and if you can imagine how data works, like in Abacus, right?
I mean you are taking down those every day and taking all those purchase records every day. So, you’re incurring all your operating expenses throughout the year and the way you get revenues is the catalog just come in and say, okay, let me pull a million names and I will pay you per thousand or something like that.
What’s happening is, we seem to be, the Catalogers may have cutback 50% or so on their spent and we may be the only one still supplying some of these folks, but they are just not dropping as many books as they did in prior year. So, it looks like that’s s taking a little bit longer to come back than we had anticipated, and I think that would lead to the difference between -- we were hoping Epsilon to do 7% this year, it will be slightly less than that, probably to the tune of $5 to $6 million of EBITDA and then, as we go into next year, quite honestly I think the big database group is just going to be a bigger and bigger piece of Epsilon.
David Scharf - JMP Securities
Okay, got you. Just a couple more on the airmail side.
Is there any issuance growth this past quarter or as well as maybe the first half of 2010 guidance when we exclude the impact of the new BOM deal?
Ed Heffernan
Well, we certainly are going to let you know what would be most pumping out the door, that’s for sure, I don't think that would go over too well with them. I will tell you that in terms of sectors that seem to be doing pretty well right now.
Gross are seems to be the sector that is doing quite well and seems to be accelerating. There are a lot of deals out there where they are doing a lot of promotions, they’re doing work with the various CPGs out there as well, and the CPGs will pick up some of the tab.
So, I would say what we really want to see, and I think what we’ll see in Q4, is you will see additional acceleration in the miles issued somewhere around, let’s call it 6% or so, we would like to get that a little higher going into next year and that will come primarily from I think two sources one being the return of the credit card sponsors, and specifically Bank of Montreal the mile offer, and second the work diverters are doing along with the CPGs.
David Scharf - JMP Securities
Shifting to private label, I just want to clarify, did I hear Ivan to say the growth in credit sales that this quarter it was the first time in a while it included credit sales growth from cards that basically are more seasoned that they were not issued in the last 12 months.
Ivan Szeftel
No, I think the way to look at it is most of the credit sales growth came from new clients that we had signed, and in some cases we had acquired those portfolios, so those were coming from season cards but cards that were new to us. In the month of September particularly, we saw sales from our core legacy client’s growth, which was the first time we had seen that.
David Scharf - JMP Securities
I see and was that concentrated in just a handful of retailers or, you have got about 95 programs out there, just trying to get a sense for how broad based this trend may develop.
Ivan Szeftel
Well, we clearly have some retailers that are doing better than others, but that’s been true all along. So what you really saw was with few exceptions across the board improvement in the sales levels.
I would say to you that what was really encouraging is that some of our parallel retailers, the soft goods, consistently seem to be stronger than some of the bigger ticket programs, but again with some exceptions.
Ed Heffernan
Yes and I would say David, to answer your question, I think the way we’ve always phrased it, it would be I think exactly the way you were looking at it, if there are a 100 programs that we have of which 20 or so have come on fairly recently, those 20 were the ones dragging the whole sector into positive sales growth, right, through the first half of this year and I think what I have been saying is for the third quarter for the first time it’s the other 80 programs as a whole for the first time in a long time have actually shown real growth.
David Scharf - JMP Securities
That’s helpful and last question, I promise I’ll get off. Just need a little explanation on the tax benefit.
How exactly does that factors into the cash EPS calculation? Is it $12 million, a little confused between the $12 million and the $4 million or whether $4 million is an absolute number that’s recurring?
Ed Heffernan
Yes, what we did is typical of us. We took the [bennie] that we were required to flow through one certain hurdles were achieved.
We flowed the 12 through, because that is a cash savings, but then what we did is we went out and obviously traded off some of that bennie for really three things, right? We swapped out of 2%, 1.8% CDs into four plus percent money for the $1 billon deal that shoot up a little bit the expenses that we have getting dots, the Brazilian deal up and running as well as other international programs we are looking at.
That shoots up some of it as well, and then there were a couple of other things floating around. But those are the two things that would have hit sort of in dings, EBITDA a little bit.
And then, again because we are running pretty strongly ahead of where we had guided to and the stock was having a good run. We did in fact cut back on the buyback program and saved a little powder for going forward.
Mix it all together and I think what we came up with is about an extra $0.06 that we flowed to the bottom line. If you were then to split it out for what’s one time and what’s ongoing, roughly $8 million of it was one time that we flowed through the other $4 million will be an annual benefit that you should factor in on a go forward basis.
Operator
Your next question comes from Dan Perlin - RBC Capital Markets.
Daniel Perlin - RBC Capital Markets
So, if you look at the fourth quarter there is a pretty significant margin improvement that you guys are modeling in order to get to the 515, and I’m wondering Ed if you could kind of stack rank by segment, which ones you are expecting to see the most margin improvement going forward on a sequential basis not on an annual basis.
Ed Heffernan
I think that will certainly go to Ivan with the big margin improvement. Epsilon also will have a decent margin improvement for Q4.
It’s really Epsilon and then for sure Ivan is probably two thirds of it in Q4 and I’ll let you talk about the growth.
Daniel Perlin - RBC Capital Markets
Well, no, no, is it a function of Charming Shoppe’s coming on in the fourth quarter. My understanding was you get it in the fourth quarter but then it gets changed off the process or teases in the first quarter.
Ivan Szeftel
Yes. Certainly the growth in the file, as we said which is a function not only of Charming, although that will be contributed in the fourth quarter.
But also the files like HSN and some of the others that we added in the third quarter of last year will certainly be part of the growth for the fourth quarter. But again, we are looking for the fourth quarter year-over-year to be flat to up.
So it’s a sequential margin improvement.
Daniel Perlin - RBC Capital Markets
So you’re looking for private label credit year-on-year to be flat on an EIBITDA basis.
Ivan Szeftel
At least flat, yes.
Daniel Perlin - RBC Capital Markets
And when did you note about the tax benefit? Would it have been the last quarter or even before that?
Ed Heffernan
Yes, it’s sometime in the first half of the year, but the timing didn’t run out until Q3.
Daniel Perlin - RBC Capital Markets
And then, I hate to harp on guidance, but I do have a couple of questions about reconciling. It looks to me like there is about kind of $46 million or thereabout of kind of cash earnings.
You talk about $1.75 kind of headwinds here this year they abate, and then we go to six bucks a share if you roll those forward here at 690, and I know you are going to spend a lot of that away, but it would seem to me like locking in your funding cost was about $12 to $16 million of cash earnings. So, I’m wondering if the Brazilian opportunity is nominal where are the other $30 million, you are thinking about, is going to go?
Is that just kind of planned opportunities that you are kind of thinking about for the rest of the year, and if so, should we be focusing on more coalitions that are sizable or should we be thinking about other opportunities and maybe some of your other segments?
Ed Heffernan
You have got an awful lot of numbers floating around. I would say the headwinds that we talked about, a $160 million is versus a prior year of about 75.
That was brought over from prior year. So $90 million of it was credit losses; that was grow over.
We’re assuming no benefit in 2010 from lower credit losses, so there’s no $90 million pickup. Here FX would be in a better position, but one is a grow-over issue and one is on a sequential basis you cant just add those to it.
Daniel Perlin - RBC Capital Markets
One of the things you had said recently was that Abacus was starting to see some improvement kind of on a sequential basis, maybe weekly even last time I spoke, and I was wonder is that continuing as we get closer to the holiday season?
Ed Heffernan
It’s better than it was, but it’s behind where we want it to be, which is probably not given you a heck of a lot of precise info. What we’re seeing is the catalogers are spending, they are dropping books, they are dropping them a little bit better than they had been, but frankly they have a ways to go to get back to where it would Abacus in a position of growing in the single digit.
They are not dropping as many books as they used to. So if this continues on through the holiday season what you will have is a decent holiday season from the Catalog perspective.
I know it seems like your mail box is packed with them, but it is significantly down form normal times. So, it’s not a disaster, but we are certainly not in a position to say it’s turned.
It’s firmed and that’s about it.
Daniel Perlin - RBC Capital Markets
And then, what were the end of period shares outstanding?
Ed Heffernan
55.
Daniel Perlin - RBC Capital Markets
End of period was 55.
Ed Heffernan
Yes.
Daniel Perlin - RBC Capital Markets
Then I guess just lastly, one more question quickly on Epsilon. The pharmaceuticals and financial services in retail, I mean those sound like a three big vertical there.
And it sounded like pharmaceutical as a vertical was picking up since teen last time we also chatted. And I’m just wondering is that falling off or are you starting to see more brands being marketed within the pharma channel?
Ed Heffernan
Yes. Big pharma is doing very, very well and they continue to roll more brands into the program, the direct consumer channel obviously being their preferred approach these days.
Again, I think what we’re looking at is that division or divisions within Epsilon including sort of the marketing the big database in the digital platforms, which is two thirds that continue to grow double digit and have throughout the year. My guess is that will probably grow closer to 15% in 2010 as we bring on more of the clients, and then if we can get data just to pop its head above the water that you get it to our 10% growth that we are looking for.
Operator
Your next question comes from Bob Napoli - Piper Jaffray
Bob Napoli - Piper Jaffray
Thank you. Good afternoon.
I was wondering how are you modeling or thinking about in your guidance the change in the accounting regulations for credit cards going on balance sheet in the first quarter? Taking the off balance sheet on balance sheet, what effects does that have?
Ed Heffernan
Right now it really shouldn’t have much of an effect at all. I mean there may be some geography that gets moved around, but right now as we are modeling it looks like it’s pretty close to the way we have been doing it, you’ve got provisions but you’re also getting your cools for fees and interesting things like that.
So, what we need to do right now is just go back and re-cut this year, but we have not assumed that there is going to be any pickup or any curt associated with the new accounting. Ivan, do you have anything on that?
Ivan Szeftel
No, I think that’s absolutely right here. That means certainly the balance sheet will look very differently with gross up of the assets and the liabilities.
You will see the booking of an allowance, the loan loss, but in terms of revenue recognition if there are any changes that will be minus sort of month-to-month quarter-to-quarter, but nothing that we at this point will believe is important.
Bob Napoli - Piper Jaffray
Okay. And then share count for next year, you are using I guess with no additional repurchases, is it somewhere around $53 million or so?
Ed Heffernan
Or 55 now, so we can only say what we have right now there is usually another million or so added in from options and the stuff. So, I would say 56, which is nearly the only thing we can model.
That being said, we do have 300 million left on the buyback and also every December at our December board meeting we have all these chatted about. Use of capital, and it will depend on where the stock is at that time to determine whether or not we want to add an additional program on to the one we have today so that that would happen in December, but right now we can only model out what we actually are looking at today.
Bob Napoli - Piper Jaffray
Then Ivan, as far as the new credit card regulations, clearly we’re seeing a lot tighter credit from the general purpose card companies, and I was just wondering if you feel like you are talking to your retailers and looking at your metrics if you think you’re starting to already get a real benefit from the tightening of credit elsewhere and is that helping you on the new client front as well.
Ivan Szeftel
It clearly is, and I think we are seeing the early signs of it. We’ve seen our market share grow in the third quarter when we saw that year-over-year sales increase from our core clients, it’s clearly part of that metric was an increase in market share.
So I think there is a clear recognition that as the sort of liquidity options for the consumers as a whole reduced private label becomes much, much more important. So, I think we are at the front end of that, and certainly with everyday that goes by, with every Chris article that talks about other major issuers cutting Visa MasterCard credit lines or in fact even eliminating cards I think our case becomes that much stronger.
Bob Napoli - Piper Jaffray
And what do you interchange on the dollars, 1.5%, is it around 1.5% you earn on average on sales?
Ed Heffernan
No, interchange is a very different number. It varies from program to program depending upon whether the deferred programs etcetera.
But the 1.5% you are referring to is the interchange that a traditional Visa MasterCard folks would do and that would be the low end of it, ours is a very different situation.
Bob Napoli - Piper Jaffray
So, yours would be below that or?
Ed Heffernan
It varies. In terms of pure fees paid to us by the merchants it varies very lightly depending upon the dynamics of the program.
We will have promotional programs with deferred payments where it’s much above it. And another case is depending on the program that’s below it, but it’s all over the place.
Bob Napoli - Piper Jaffray
Thanks, and just last question, Ivan since we have you on is as far as the systems, I mean the portfolio has grown fair amount in pieces, I mean is there any thoughts of outsourcing the systems, I think everything is done internally at this point or is there any significant investments that needs to be made in the technology over the next couple of years?
Ivan Szeftel
Well, let me say this to you. We are currently making a very significant investment to ensure that we are compliant with all aspects of the new card regulation.
It is a very significant effort. Having said that, there is no question in our my mind that from a strategic point of view having our own system provides us the marketing capabilities, the flexibility to provide the kind of services that drive incremental sales for our client.
So, having our own system is one of our core strategic competitive advantage, but it will necessitate ongoing investments in the systems to make sure that we have the required capabilities and that certainly have been brought ahead this year with all of the new regulations that have been thrown at us.
Operator
Your next question comes from Wayne Johnson - Raymond James.
Wayne Johnson - Raymond James
This is a housekeeping item; on the tax rate itself how should we think about that going forward on a percentage of pre-tax income?
Ed Heffernan
Whatever we are running at now, Wayne, take four million off. Actually, I haven’t done the math.
Wayne Johnson - Raymond James
Right. So if I’m looking at this correctly, it’s kind of mid to upper 20% tax rate, does that sound right including the tax benefit going forward?
Ed Heffernan
No, no, $4 million for the full year.
Wayne Johnson - Raymond James
$4 million for the entire year, got it.
Ed Heffernan
$1 Million a quarter.
Wayne Johnson - Raymond James
Then, can you talk a little bit about the pipeline for private label, credit excluding Charming Shoppes?
Ivan Szeftel
The pipeline is very robust. Clearly, in this environment with many other major issuers looking to down size their businesses, there are a significant number of opportunities and certainly our focus is to be selective.
If you want to add retailers that play to our sweet spots and certainly as I said earlier ones that we can develop very long term relationships with that significantly strengthen our foundation and specifically retailers that would grow with us over time. So that’s a very long winded way of saying we’ve got a lot of options out there and a lot of choices for us to pick the ones that best fit our long term future.
Wayne Johnson - Raymond James
It seems like private label credit has held its own in terms of adding new customers in a difficult economic environment. Have you seen or beginning to see any change in the competitive landscape when there is RFPs for business?
Ed Heffernan
We’re seeing some change in certain sectors, some of the bigger ticket areas. We’re seeing a few of the issues beginning to come back in.
But across the board it is certainly not the situation that we saw two or three years ago. I think most of the other issuers are trying to work through the current situation.
So, the RFP, the competitive environment is so significantly less competitive than it was two or three years ago.
Operator
Your next question comes from Sanjay Sakhrani - KBW.
Sanjay Sakhrani - KBW
I guess I had a question on credit quality. I mean based on your commentary that delinquencies were flat.
It seems like the roll rates to charge-offs are declining, but your charge-off guidance calls for kind of flat levels. I was just wondering if there are anything specific in the delinquency trends that you are seeing that leads you to believe that charge-offs are going to remain flattish to most current levels or is it just being conservative?
Ed Heffernan
Well, I think there are two things. Certainly, what we’ve said is that delinquency levels are stable, there is always a seasonal fluctuation to the delinquency trends.
We certainly as we have seen for the 12 to 18 months that the relationship between charge-offs and delinquencies have altered, because the roll rates in the later stage delinquency buckets are much greater than they have historically been. We’ve also seen some uptick in bankruptcy which does modify that relationship.
So that’s really the two drivers behind the current situation.
Sanjay Sakhrani - KBW
I mean Charming Shoppes carries a lower charge-off rate than your existing portfolio, right?
Ed Heffernan
Marginally lower. It’s not that significant.
Sanjay Sakhrani - KBW
And then just on the share repurchase plan. I mean is there any specific level that you are targeting for the fourth quarter, I’m just trying think through kind of how to allocate the $300 million?
Ivan Szeftel
We’re not going to talk about it. I mean obviously we started buying after the Black Stone deal blew up in the ‘60s all the way down into where we bottomed out and all the way back up again.
So, at these levels, it certainly doesn’t spook us. But we’re certainly not going to get out there and start telling you what levels we buy or not buy.
We’re just going to pick our spots.
Sanjay Sakhrani - KBW
I guess, where I am going with that is just if we back into kind of the assumption that you are making in terms of your guidance for the fourth quarter. I mean is there a certain level of share repurchase assumed in that number?
Ed Heffernan
Nothing of any significance, no.
Sanjay Sakhrani - KBW
Then maybe just a couple of question for Ivan, and a lot them kind of were touched on by some other people before, but I just want to drill down a little bit more. Just on the Card Act.
I mean is there any specific strategy that you are working on with your retail customers in advance of the Card Act so that they can adjust their models. Then just on the accounting change FAS 166, 167, I mean has there been any further discussions on how the assets or the calculation to risk weighted assets will kind of be impacted, will there be a phasing or not is kind of where I’m going with that?
Thanks.
Ivan Szeftel
Okay, let’s talk with the first one. We certainly have a number of strategies that we’re working on with our clients, some of which are in test, to mitigate both the actual impact of the act that we know about today, and to create contingencies for what may come down the pipe.
So, there are a number of things in test and clearly that needs to be done with our retail clients to show them as to the impact that any of these changes could have on their sales. So, that’s an ongoing situation.
I don’t want to get into specifics as to what they are, but you can be rest assured that we have been very active in this area. With respect to the capital requirements a little bit, the transition or the phase-in of the calculation that is still ongoing.
The Federal Reserve asked for comments, period, and as yet we do not have any specifics as to where they are going to go. I mean I think most of the major financial institutions are recommending a phase-in, a multi year phase-in but we don’t have any specifics beyond that.
I would say that we stress tested it and we have looked at situations, the most extreme situation, whereby there was no phase-in and certainly we believe that we have adequate capital levels to even the most extreme situations.
Operator
Your next question comes from Dan Leben - Robert W. Baird.
Dan Leben - Robert W. Baird
Just wanted to jump into the Epsilon data business, but not Abacus side of it; could you talk a little bit about what the trends were there sequentially and when will you potentially find the bottom in this business?
Ed Heffernan
Yes. I think with the data business itself, right now it looks to be, like I said, it didn’t come in as firm or as strong as we had liked it to come in.
I don’t think it’s a question of is it getting worse, I think it’s a question of it’s firming up but not firming up enough compared to last year. We did have some data assets that we wanted to consolidate into the overall data division that we move from Canada.
Those were bleeding at a pretty significant pace and we’ve been streamlining that the bleeding has not completely stopped, there is still a couple of million here or there in the red. So my guess is, the current thinking is Q4 should be relatively flat in that business from what we are seeing on the trend side, and that from the big two-thirds of the business the database side that’s in pretty good shape.
So, Q4 ought to be pretty good shape for Epsilon. So I’m hoping Q3’s from comparative perspective the bottom.
Dan Leben - Robert W. Baird
Okay. And then on that two-third side of the business, just what you are seeing on the digital side in terms of kind of incremental dollars that are not in the kind of base program.
What verticals are you seeing the most held from?
Ed Heffernan
I’d say pretty much across the board. I mean digital is obviously as you know it’s really beginning to take over all the traditional sources, communication, distribution, acquisition, retention.
So I would say whether it’s Big Pharma, Financial Services, CPG those would probably be the biggest ones. Obviously, we did a very large deal with our dealer with RJR, and that is going to be very, very significant on the digital side within the restriction that they would have under new FDA guideline.
So, that’s a big one, and I think those would probably be the largest.
Operator
The next question comes from Robert Dodd - Morgan, Keegan.
Robert Dodd - Morgan, Keegan
Just a couple of EBITDA questions I think. One that stands out is corporate EBITDA was a loss or it will cost you $6 million a quarter versus seven in that quarter.
I mean could you tell us what that increase was, a sizable of earning pit when we drill down to the EPS impact. I mean was a lot of advisory fees etcetera for dots or was it something else going on in that line.
Ed Heffernan
I’ll ask Mike Kubic, our CFO to address that.
Mike Kubic
Yes. I think part of it is, when you looked it, I think you’re talking sequentially Q2 to Q3.
Robert Dodd - Morgan, Keegan
Yes.
Mike Kubic
When you are looking at it, in Q2 we still had some profitable transaction services arrangements that were in place as we are getting rid of those businesses, and also in Q3 we do have some higher medical expenses and things of that nature. We had some facility cost that were from the divested operations, and I think that’s probably most of it right there.
Robert Dodd - Morgan, Keegan
Is this $16 million is that kind of the ongoing run rate for that line or was that one time in that quarter?
Ed Heffernan
I think that’s probably heavy, and I think you’re probably talking more around, what do you think, twelve-ish?
Mike Kubic
It would be 12 to 13.5 something like that in a quarter is a good average.
Ed Heffernan
Yes, it will bounce around, but twelve-ish sounds about right, about 48 in a year.
Robert Dodd - Morgan, Keegan
Just referring on the dots issue; I mean I know you don’t want to give the investment etc. But, I mean were there advisory fees, legal fees, etc.
in the quarter and that wouldn’t violate any competitive concerns I think if you told us how much you paid your lawyers in this quarter.
Ed Heffernan
I’d prefer not to. I think….
Robert Dodd - Morgan, Keegan
Hey, somebody might come up and offer you for less money.
Ed Heffernan
Well, that’s too late, we already signed it. Yes, there were certainly expenses associated with getting ink on the paper there’s no question about it.
Again, a lot of this we did not have advisors. This was done by our team in Canada and as a result what you have is they have a core group now of expenses which has totaled a few million a year that will be tasked solely with getting other coalitions together and getting them up and running, and that’s an investment that we will make and are happy to do so.
Additionally, for sharing, any quarter that you’re singing in we also launched phase one of this thing. You are going to have expenses, were these expenses bigger than a bread box.
No. Were they in seven figures, yes, and that’s about I think about as far as I can go.
The lawyers weren’t in seven figures but the phase one rollout you’re talking about rolling out into an area of five million folks. We had a lot of folks down there and took some expenses on a go forward basis.
One of the questions came up earlier in terms of accounting. From an accounting perspective for sure we used the equity message, but because we are going to have a number of employees and systems and things like that, that are not part of the entity itself but are working for the entity those would be expenses borne by us as well.
Robert Dodd - Morgan, Keegan
Okay, got it. On Epsilon if we move back to that the risk of beating dead horse again.
I thought you want to say that.
Ed Heffernan
Beat away.
Robert Dodd - Morgan, Keegan
Yes, I thought you might say that. Obviously when you look at the EBITDA and going back to a year ago, seasonality Q1 to Q3, and I realize it’s a different economy this year, but about $15 million incremental revenue to the Q3, and $14 million incremental EBITDA last year.
This year about $9 million in revenue, but EBITDA is only up 5. I mean the Abacus data, I mean was the early volume so soft and the margins that high that that’s the entire explanation or were there other investments or other deterioration, obviously you mentioned some other non-Abacus data.
But I mean is there anything else going on in there in terms of potential acquisition that didn’t happen or something like that in that segment?
Ed Heffernan
No. It’s strictly the two areas within data.
It itself had a very difficult third quarter both Abacus, and then what we didn’t have last year that we had this were some of those assets we talked about these one off data assets that we consolidated from Canada. We are trying to stop the bleeding on those, but we’re not quite there yet.
So that may account for about half of it, and then the other half was Abacus had a decent Q3 last year, and were just not all the way back yet. I wouldn’t say Abacus had a terrible quarter.
It was more of given that marketing spin and especially on the retail side and especially on the Catalog side can be 50% to 60% from a year ago Abacus was down a little bit but nothing near that. So it was all housed in that one big division.
Robert Dodd - Morgan, Keegan
And one final one if I can for Ivan; when we’re talking about these potential late fee regulation, I mean are there any auto adjustments in your contracts if late fees would get regulated down there are some collective bounce back in discount late or any other fees to retailers or would it just be all on your head.
Ivan Szeftel
Well, I think it’s yes to all of those opportunities that you’ve mentioned ranging from there really would be two places to make it up, one in terms of adjustments to other card holders terms and the second would be in terms of the relationship we have with the retailers. So, we certainly, both of those are viable options which would be bare in the event than late fees were in fact adjusted significantly.
Operator
Your next question comes from Christopher Brendler - Stifel Nicolaus & Co.
Christopher Brendler - Stifel Nicolaus & Co.
A couple of quick questions; the Epsilon business is the deceleration in revenue there. I think we talked about that being a little lumpy.
Does Epsilon include the benefit of the mood the business, the database marketing business that was moved from loyalty or would that benefit decelerate year-over-year and quarter-over-quarter?
Ed Heffernan
Yes, and again, I don’t know whether anyone got the concept that that was a meaningful number. It’s not a meaningful number at all, it’s probably a few million on the top line and unfortunately not that far off from the bottom line.
So the bottom line is really the thing that’s through the quarter, and so what we are trying to do essentially is shrink that those data assets as fast as we can, because right now we can’t seem to get the thing to breakeven yet. So it’s going to be smaller and smaller piece what little there is today will be even smaller in Q4.
Christopher Brendler - Stifel Nicolaus & Co.
Oh okay, I thought, the reason why I thought it was more material because of the way that it was presented in the last quarter, I think it was $12.9 million, does that include something else in there as well? The second-quarter when it was called out as a variance it said $12.9 million.
So maybe there was something else in there as well. The decline in database marketing fees is $12.9 million.
Ed Heffernan
Yes. There was a considerable deceleration and it seems to be a nice way of putting it by the time Epsilon got hold of it, it decelerated “quite a bit”.
Christopher Brendler - Stifel Nicolaus & Co.
So it is impacting this quarter, like it’s not helping as much it did last quarter so it a little bit explains the deceleration in Epsilon, got it.
Ed Heffernan
I certainly wouldn’t say it helped last quarter that’s for sure.
Christopher Brendler - Stifel Nicolaus & Co.
Okay. On the guidance there, I think second-quarter guidance for 2009 was 645, adjusted EBITDA and now your base state is 650 for 2010 but there is still mid to high single-digit growth.
I didn’t realize that you would be able to lower faith in that guidance, I thought this quarter was pretty much on track. Is there something else that I am missing.
Ed Heffernan
Yes I think some of the investments we have made and where we see the year coming out is probably going to be coming out closer to where first call is which is around a 620, and so that’s where we are going from 620 to sort of 650.
Christopher Brendler - Stifel Nicolaus & Co.
And that the investment is coming from Brazil.
Ed Heffernan
That’s Brazil. It’s also the fact that Canada, it depends on how you want to look at it with Canada, the way the accounting works is you put in a year a very weak issuance, what happens is it brings your growth rate in reported EBITDA to a stop pretty quickly even though your cash flow will be up significantly year over year.
So, some of it’s just accounting.
Christopher Brendler - Stifel Nicolaus & Co.
Okay. On the credit side, I think you haven’t actually quantified what your portfolio delinquency rate was, am I correct there?
It was up about 40 basis points from the second quarter to quarter in the trough, but is it is more flattish on that basis given the growth?
Ed Heffernan
We had your typical seasonality, again as you know Q2 we typically have your lowest delinquencies and your highest losses, right, and in Q3 you tend to normalize out. So Q3 our delinquency I think was 6.6, Q4 we are looking at a 6.6, Q1 we are at a 6.5.
So, again, its been pretty steady all year.
Christopher Brendler - Stifel Nicolaus & Co.
Okay, and on the tax benefit did you actually talk about what drove, it sounded like you were accruing for something but you no longer needed to accrue for it.
Ed Heffernan
Yes. FIN 48, basically you need to accrue up for penalties and the interest fees to the extend you are setting aside certain reserves.
Obviously, to the extent that position has been upheld in our favor, which it was. You are then allowed to release that and clove it through the P&L.
Christopher Brendler - Stifel Nicolaus & Co.
Okay, and how is the ongoing benefit obviously because you don’t have to click anymore.
Mike Kubic
That’s correct.
Ed Heffernan
That’s correct, it just picks your tax rate.
Christopher Brendler - Stifel Nicolaus & Co.
And the last question; I think your guidance, I think some of that has been considering the FAS 166-157, I guess the answer is it does consider but it’s not going to have a meaningful impact. Do you anticipate having some of the increased volatility that introduces such as provision expense, and maybe the accrual of interest in fees, are you going to back those out of your adjusted EBITDA numbers or just let them fly?
Ed Heffernan
We’ll probably just let everything flow through and unless there is something significant the number should be pretty close, and I think someone had asked earlier about our Q4 guidance in getting to the right number. I think Ivan was being rightly so.
After dodging bullets for the last three years we fully expect Loyalty to have a good quarter, we fully expect Epsilon to have a strong quarter, but the majority of the benefits in growth that we will see in Q4 is going to be private label. So I will move Ivan’s comment just up a bit from flat to potentially up, that better be up, so...
So, yes, otherwise you can’t tie the numbers. So I think hopefully that helps out a little bit
Operator
Your next question comes from Mike Grondahl - Northland Securities.
Mike Grondahl - Northland Securities
Ed could you talk a little bit about how you are thinking about margins in the Loyalty business up in Canada in 2010?
Ed Heffernan
I would say revenue in Canada ought to be fairly decent. But, again, if you recall the way the EBITDA is going to be flowing in right after some weak issuance that comes in over 42 months, and so, a year of weak issuance or so means that while redemptions should be strong, and therefore drive revenue at a decent level you are not going to get a corresponding benefit on the EBITDA side, because redemptions don’t drive that EBITDA, it’s the issuance flowing into the P&L.
Long story short is you’ll have revenue holding up pretty well but because of the weakness from the miles issued you are not going to have as much profit flowing into the P&L, so your margins will actually mostly likely go down at Loyalty until we refill the bucket. I know it’s very long and complicated, but essentially when someone redeems a mile and redemptions are cranking up pretty nicely you book revenue and you book cost to goods sold.
But when you issue a mile that takes a while for the profit to flow through. So you can have strong revenues without corresponding strong EBITDA and that it will take a little while for that to flow through.
The offset to that is from a cash flow perspective you more than make up for it or you make for it with the fact that the free cash flow, which usually run $30 or $40 million higher is going to be more or like $50 or $60 million higher next year. That’s basically your delta if you were to have that, and EBITDA they need to let your margins expand a little bit.
Operator
Your next question comes from Reggie Smith – JP Morgan
Reggie Smith - JPMorgan
Hi, guys. I guess my question is kind of similar to the other folks.
I’m kind surprised at the guidance for next year. I guess I need to revisit some of my assumptions about Charming Shoppes.
Like what type of net interest margin should we think about for that portfolio. I know that charge offs are in the same zip code as the rest of your business and I assume the funding cost are there in the same area as well.
You know, the gross here is materially different than the rest of your portfolio?
Ed Heffernan
The Charming Shoppe’s portfolios look very similar to most of other soft goods apparel retailers. The difference is that I would point you to all that we are assuming the Charming Shoppe’s trust.
So to some extend your initial comment about funding cost being the same, there are some differences there given that we are inheriting certain deals. So there is a difference there.
But, on balance I don’t think that you will see the addition of the Charming Shoppe’s portfolios materially modify to make returns.
Ed Heffernan
Let me jump in here on this consensus. Can’t say I’m absolutely shocked that people are trying to firm up 2010 consensus.
What I will say that I think we have said five or six times tonight is that, look, for those of you who know as this is how we do it here. We put out what we think is pretty decent guidance, pretty firm guidance.
We are looking at high teens, share growth, when we put our guidance for 2009 it was randomly criticized and yet we’re going to be coming in right where we said. So we will always take in more conservative tact than I think some of the folks out there wanted us to take.
But saying earnings will be up 17% to 18 % on high single digit organic growth is not in our opinion that far off from our long term model, and to the extend there are improvements in the macro environment to the extend there are improvements in credit quality to the extend we start taking up the buyback. All those things can have a positive impact.
But as you’ve heard Ivan tonight, after two plus years of not having a whole heck of a lot of fun, we don’t want to spend all of next year chasing after numbers when we can sit there and lock down our book, get Brazil going, get a couple of portfolios in the door and a few other things while at the same time hopefully have some room to flow through potentially good news to those shareholders who stick around, and that’s always been the way we do things.
Reggie Smith - JP Morgan
All right, that makes sense. I guess to kind of clarify comments you guys made.
You talked about locking down longer-term financing through the TALF deal, and I guess you compared it to the CD rates that you guys are paying, I guess my question with these TALF deals you are basically refinancing your conduits, right, or are you refinancing CDs because I see CD balance up sequentially?
Ed Heffernan
Yes, they are of the same rates Reggie. The conduits are right now LIBOR, they are around 2% to 2.25%.
So CDs or conduits are essentially the same thing from a funding perspective. This was not the case a year ago where our LIBOR was 350 and conduits of 300 over that or 6.5%, but our conduits now are right around where the CDs are.
So we are almost at the indifference point between CDs and conduits. So, what we’ll do is and perhaps we should adjust that conduit, it’s a lot easier for people to understand CDs.
But what we do is if we have $500 or $700 millions sitting in conduits we will scoop them out and pop them into a four year fixed rate TALF deal. Yes, the spread is about 200 basis points, 250.
Reggie Smith - JPMorgan
That’s actually good to know, I didn’t realize that the conduit funding had come down?
Ed Heffernan
Oh Yes. I got to tell you, the TALF program and the liquidity that’s been pumped into the system, I know there’s been all sorts of criticism heaped on a lot of things.
But I got to tell you it’s been a boon for us, because it has definitely moved spreads in the conduit market way, way, way back down to frankly where they should have been all along.
Reggie Smith - JPMorgan
Got you. Were there any, I guess, unusual gains during the quarter.
I know you talked about some investments held in your Air Canada Air Miles business being pardoned out, does that flow through the cash EPS or was there any gain that we need to know about for the quarter?
Ed Heffernan
No, that’s a balance sheet item.
Reggie Smith - JPMorgan
Okay, and one last question just to make sure I’m hearing this right. I guess something in the mid nines for charge-offs next year is a good place to start for us or it was certainly below 10% is a good place to start for 2010?
Ivan Szeftel
Yes.
Operator
Your final question comes from Andrew Jeffery - Sun Trust.
Andrew Jeffery - Sun Trust
Hey Ed, I’m a little slow but maybe you could just walk me through this. If you are talking about a consensus EBITDA number for 2009, you are implying a $200 million number for the fourth quarter when you just did 141 and the third, is that right?
Ed Heffernan
We are looking at certainly around 190 or above.
Andrew Jeffery - Sun Trust
Okay. It’s safe to assume that the bulk of that delta or increase sequentially is going to come from private label and it sounds like Epsilon is going to have a pretty good quarter in your mind too.
Ed Heffernan
Epsilon will have a good quarter. So you will a sequential increase there, but as you know their quarterly numbers aren’t big enough to have such a huge change sequentially, but they’ll have a good quarter, Canada will have a good quarter, but the bulk is certainly going to come from private label.
Andrew Jeffery - Sun Trust
Okay. So the implication being that Ivan is being far or too modest when he talked about the fourth quarter versus a year.
Ed Heffernan
He has been in the bunker for two years.
Andrew Jeffery - Sun Trust
I understand. And then, could you just give a little color about how you are thinking about some of the non-cash add backs in ‘10 Ed, specifically the reconciling items between GAAP and cash EPS, the non-cash interest expense and the income tax effect items.
I think you look kind of net like they did in ‘09 or are those numbers going to move around at all, how should I be thinking of a modeling?
Ed Heffernan
I would just model it the way you are doing it today, and try to keep it apples to apples and if there is any change we’ll certainly let you know.
Andrew Jeffery - Sun Trust
Okay, so the net of the two being roughly zero, a small number as it was in the third quarter.
Ed Heffernan
The net of what to?
Andrew Jeffery - Sun Trust
Non-cash interest expense and the income tax effect.
Ed Heffernan
Yes, I can only give you the…
Mike Kubic
I think your imputed interest is going to be running about the same next year, right, if that’s what you are asking.
Ed Heffernan
Yes.
Mike Kubic
Likewise the intangibles will have been coming down, intangible amortization has been coming down $5 million a year or something like that. So that’s probably what you are going to see next year.
And stock compensation is going to be $50 million or something like that, which is…
Ed Heffernan
Flat.
Mike Kubic
Yes, it’s going to be flat for this year. So, I think that probably will help you out.
Ed Heffernan
All right. Well, I think that’s it, and again for those of you still hanging on the phone, still made it this far I think we did about an hour better or so than last time.
So we will try to keep up that pace. But, essentially as we talked about at the beginning of the call, this is a question of trends and I think we are all heading in the right direction.
It’s a little bit three steps forward one step back, but we definitely feel that it’s firm. We have not obviously gone out on the lim yet to say thanks that absolutely turned, and we are off to the races.
But I think we are comfortable giving out this type of guidance at this time of the year. And as usual for those folks who want to hang around and to the extent we over performed we’d love to have your board and we’ll flow that through as it occurs.
So, that being said, we’ll sign off. Thank you.
Ivan Szeftel
Thank you.
Operator
This concludes today’s conference you may now disconnect.