Jan 30, 2008
Executives
Mike Parks - Chairman and CEO Ed Heffernan CFO
Operator
Good afternoon, ladies and gentlemen. My name is Vanessa and I will be your conference operator today.
At this time, I would like to welcome everyone to the Alliance Data fourth quarter and full year 2007 Earnings Call. (Operator Instructions).
It is now my pleasure to turn the floor over to your host, Ms. Julie Prozeller.
Ma'am, you may begin your conference.
Julie Prozeller
Thank you, operator. By now you should have received a copy of the company's fourth quarter and full year 2007 earnings release.
If you haven't, please call Financial Dynamics at 212-850-5608 for copy. On the call today we have Mike Parks, Chairman and Chief Executive Officer and Ed Heffernan, Chief Financial Officer of Alliance Data.
Please note that due to the pending proposed transaction with an affiliate of the Blackstone Group, there will be no live question-and answer-session during the call. I would like to remind you that some of the comments made on today's call 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 are speakers who 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 Mike Parks. Mike?
Mike Parks
Thanks, Julie. And welcome everyone.
Thanks for joining us this good afternoon. If you will turn to the agenda, we will start off by getting an update of the acquisition activities, and then we will turn to the fourth quarter highlights to review full year and expectations for 2008.
So let's go ahead and jump right in. Let's turn to the slide of the acquisition update.
This morning, as you all know, we filed a lawsuit against the affiliate to the Blackstone Group seeking specific performance by the Blackstone entities, other obligations under the merger agreement. We believe that today, we’ve performed our obligations under the agreement and we are willing and able to perform our remaining obligations and close this transaction.
It is our belief that Blackstone, however, has failed to act in good faith or use reasonable best efforts to obtain new approvals we need from the OCC. I want to just step back for a second and remind everyone of a condition for closing the merger; the OCC must approve the change of control application for World Financial Network National Bank, our credit card bank subsidiary.
After market closed this past Friday, we've received a notice from Blackstone, stating its belief that the OCC is demanding that extraordinary measures will be taken by the parties in connection with the change of control and that, as a result, the related closing condition was unlikely to be satisfied. Blackstone later told us that they are unwilling to satisfy the requirements specified in the OCC's most recent request.
We believe the OCC's requests are reasonable and that Blackstone is able to satisfy these requests, but has simply decided not to close the merger on our negotiated terms, if at all. I direct you to read the complaint filed today, as it will describe better than I can, given our time tonight.
However, I have refused points relating to the rhetoric swirling in the press. One, we believe the OCC, again, is reasonable and furthermore, they have repeatedly demonstrated their willingness to consider alternatives.
Two, the rumors of unlimited or unreasonable capital demands are simply not true. The maximum potential call is $400 million and only in the event that neither the bank, nor Alliance Data is otherwise able to support the bank.
And given the profitability of the bank and our history of performance, it is highly unlikely this would actually come in the play. And finally, Blackstone's offer to work towards an alternative solution rings hollow when they are only willing to offer a level of financial support that it knows will only be rejected by the regulators and has yet to offer any reasonable alternatives.
Entering into litigation is always a difficult decision, but the board of directors and management believe that this course of action is necessary to best protect the interest of Alliance Data and our stockholders. I know you'd like me to have more detail, but we do not believe it's appropriate or in our shareholders interest to fight for our right in the press, particularly when much of the commentary today has been based on inaccurate and misleading information.
And lastly, let me be very clear, no one is questioning the strength of our financial or operating performance. As you will see in today's presentation, we have over performed all year and 2008 looks strong and no one is asserting that our liquidity has suffered even in today's macro environment.
In fact today's presentation will show our liquidity has never been stronger. All right, enough of the acquisition talk; let’s get on with the company.
If you'll turn to the next slide forward, and before we jump into these specific highlights for the quarter and the year, I want to remind many of you and perhaps introduce to some of you, our newer shareholders, our business model and why we continue to be confident in our future. The business model drives results, double-digit organic growth, strong free cash flow generation, strong visibility and predictability, and adding tuck-in acquisitions to our organic growth, our 12%/15%/18% model has performed for ten years now, 12% meaning top line, 15% EBITDA and 18% our cash EPS.
And since our IPO in June of 2001, for 27 consecutive quarters we've met our bid expectations. It is a very recession resilient model.
It's based on several key factors. In our Loyalty business in Canada, it's based on everyday non-discretionary spend.
Here in the US, with Epsilon, it's based on long-term relationships requiring constant transactional updates. And our Private Label business is not about financing, it's all about Loyalty based programs, with very low balances that have a natural hedge between losses and funding.
We're confident in our model, we continue to perform and 2008 will be no exception. So let's turn on for the quarter, next slide.
I am obviously very pleased to announce we posted our largest quarter ever for revenue. During this period, revenue reached $603 million, an increase of 15%.
Adjusted EBITDA increased by 31% to $158 million. And cash earning was cash $0.93 which was up 33%.
Operating cash flow or operating EBITDA was at $175 million. And as I said earlier, this is our 27th consecutive quarter delivering or exceeding on our promises.
Now let's take a look at few highlights, starting with our marketing service business in Canada which manages our AIR MILES Reward program. They delivered another great 20%, plus organic growth in revenue and EBITDA.
The long-term success of our program remains very sound, as the fundamentals of the program based on our sponsors, collectors and rewards continue to be quite strong. We are excited to announce a new sponsor this past quarter, Visions Electronics.
This marks our entry into a new sponsor category, consumer electronics and they are one of the Western Canada's leading electronics retailers. We also saw a strong increase in AIR MILES issued; one of our key metrics that measures the health of the business.
MILES issued shows as evidenced that our program encourages collectors to shop at sponsor locations and shop more frequently, sponsor first hand our programs value and develop sustained consumer buying habit. For us that translates into virtually a 100% renewal rate for sponsors.
Turning to the US marketing group, Epsilon, next slide. Epsilon turned into tremendous performance this quarter.
We continue to realize the benefit of the company shifting more of their traditional marketing dollars to programs, like ours, that use transactional data and deliver measurable ROI. This quarter, both top line and EBITDA grew in excess of 50%.
We also announced two new clients. First, a multi-year agreement with Charter Communications, to provide integrated marketing services and strategic consulting.
Charter, as you probably know, is a Fortune 500 Company providing more than 5.6 million customers with cable television, high-speed internet access and telephone services. Epsilon will be using our Loyalty and Email communications platform to launch Charter's customer attention and loyalty programs for the future.
Last month, we also announced the agreement with Helzberg Diamonds to manage their marketing database, to provide data and analytical support for cross-selling and customer acquisition program to their subsidiary Berkshire Hathaway and they operate 269 fine jewelry stores throughout the U.S. And lastly, we are very proud to be recognized as industry leader by Forrester Research in their recent assessment of both database and e-mail marketing service.
We were the only company to receive the distinction in both the reports. All right, let's turn on to Private Label.
Once again, another great quarter. Our success lies in our ability to demonstrate to clients that when a private label tool position as the marketing solution and not as financing option, it can help them increase sale and increase loyalty.
The team delivered solid organic growth, despite some macro challenges including the grow over of abnormally low credit losses in 2006 due to the bankruptcy bill, as well as the loss of Lane Bryant portfolio going in-house. Even so, the operating metrics of the business are very solid.
Portfolio growth, funding and losses have positive trends and this bodes well, as we entered 2008 and beyond. We launched a program with Dell Computer this quarter exclusively targeting Dell's Spanish speaking customers.
All of our support services are available on Spanish, so Spanish speaking customers can better understand the program's benefit, as well as the financing terms and conditions. Also in October, we announced the renewal of a long-term client Alon USA to provide integrated and marketing services for their 1100 FINA locations.
We expect to deliver another four or so new deals in 2008, which is typical for us and we're off to a great start with an announcement already with Sharper Image. We will be providing integrated private label card program and just as importantly, we're excited that at the same time our Epsilon Group won Sharper Images permission, based on e-mail marketing services work.
Both services will be geared toward multi-channel sales and increasing customer loyalty. This is yet another great example of the many cross-selling opportunities we see in 2008.
Let's turn to the full year result on the next slide. We finished the year as you know just under $2.3 billion in revenue, EBITDA of $643 million, operating EBITDA $685 million, cash earnings per share $3.25, up 19% just as we promised when we last increased guidance in October.
As a recap for 2007, we had a great year and forging new relationships, adding 14 new customers, including [Seven-11, Garden White, Tesco and Orchid Supplier] as a few. We extended and expanded our relationship with key clients such as Williams-Sonoma, [Redcat], A&P Canada and Goodyear Canada, and we continued to build on our strong leadership position in the US and Canada while having increased our international presence as well.
I am very proud of our team and their performance, and I want to congratulate you all. We're all equally excited about 2008, which Ed will begin to review here after he tops of 2007 with a few more details.
Ed, over to you.
Ed Heffernan
All right, thanks Mike. We're going to spend a little extra time on the call tonight to share with you detailed information on the quarter, the year and our outlook for ’08, given the fact that we really can't be taking phone calls, given litigation, for a little while yet.
Again, we will be trying to get some type of update Q&A session at some point in the near future. But we are hoping with press release and with the discussion tonight that folks out there, whether they are new to the story, or whether they have been out of the story over the past year, this should be a quick catch up catch up and hopefully for lot of you out there who have known as for the past eight years, seven years, you will sit there and basically say more of the same.
And that's what you are going to hear. We are very jazzed up about our weight.
And before I get there, let's talk a little bit about '07. And again, we are talking about the quarter, the year and especially our '08 outlook because there is just so much noise out in the market about what's going on that we thought we would take an extra few minutes to talk about it.
In terms of where should be on the slideshow fourth quarter consolidated results, let's spend just a few minutes on the quarter. I would say there are five key takeaways.
The first, quite simply, is top line of $600 million is the best in our history. So again, kudos to the folks here.
Number two, our EBITDA margin expanded over 300 basis points and hence drove 30% growth in EBITDA. Third, over 85% of our consolidated revenues, inversely all of our cash flow and growth, were generated by our big three engines.
The Loyalty AIR MILES program in Canada, our U.S. marketing business also called Epsilon here in the States and our Private Label business.
Number four, regarding the three engines, the Loyalty and Epsilon posted enormous top line and bottom line growth, each generating 20% plus top line and 30% plus bottom line. Private Label, despite the loss of Lane Bryant and the final normalization of credit losses to a higher base run rate still managed to do mid single-digit growth, it's pretty good.
And finally, as cash flow, that's what we called operating EBITDA grew 25% versus last year, margins expanded over 300 basis points and the three growth engines continue to motor cash earnings per share top 33% growth and showed a steady growth trajectory that moved from 12% growth in the first quarter, 11% growth year-over-year in the second quarter, 25% in Q3 and 33% in Q4. Needless to say bodes extremely well for nice jump off for 2008.
All right, let's move on to the next slide and talk little bit about the segments. First, transaction services which houses our processing, customer care and the loyalty units within private label, as well as utility services in our traditional merchant bank card business.
The key driver here the statements generated which was flat during the quarter reflecting single-digit growth in utilities, offset by a decline in private label due to the loss of the Lane Bryant portfolio which started in November. That along with the sale of our Email Services print business drove a decline in revenues.
EBITDA was adversely affected by nothing more than our inter-company charge between our private label and transaction services business units, in other words between our credit segment and our transaction segment. Specifically, we set the inter-company charge once a year.
This year expenses have run ahead of expectations, so margins and transaction services have been squeezed, or set differently, one could suggest transaction services has actually subsidized the credit segment. The uptick in cost covers four areas.
One, we beefed up our call center group to enhance service and support. Two, we beefed up our collection group.
Three, we had costs associated with moving facilities in Ohio. And four, we added incremental expense to drive new marketing initiatives.
Overall we believe the money was extremely well spent as indicated by the strong stable yields, stable losses and high customer satisfaction. How do you know if they paid us?
We will talk it about in the internet credit segment. But needless to say we think it was money well spent.
This inter-company rate will be reset in Q1 based on standard market arms-length transaction type margins. Next, credit succeeded in growing through both the loss of Lane Bryant and the normalization of losses.
Top line growth was just under 10%, was overshadowed by 30% plus growth in EBITDA. This drove margins up 600 basis points as yield crept up.
Funding rates remained flat and losses normalized out, that is they rose moderately by about 50 basis points versus the prior year abnormally low rate which resulted from the '05 Bankruptcy Reform Act windfall which benefited '06. Delinquencies, they are best indicators of future losses and remained in the mid-5s suggesting little upward pressure on future loss rates.
Finally marketing services, we will be spending more time on this during our 2008 outlook, suffice to say, had a heck of a quarter. Top line was up 30, EBITDA 47, margins up close to 300 BPS.
The Royalty AIR MILES program in Canada continue to just repeat with top line organic growth north of 20% and EBITDA north of 30% and again this is all organic. Moreover, Epsilon showed even stronger growth as all aspects of its business continue to gain momentum.
Again more on this in a bit. Let's plow ahead and hit the balance sheet: Highlights from the balance sheet.
First in Canada, deferred revenue increased $24 million from September and a whopping $177 million from last year, that's triple our usual annual rate. What's it mean, well suggest that these revenues and profits that have been earned but have not yet closed to the P&L will drive exceptional growth in our Canadian business going forward.
Second, poor debt which is key our bank covenant to LTM operating EBITDA continue to improve and now stand at just a bit over one times, despite the cost this year of buying Abacus and our stock buyback plan earlier in the year. At our current run rate, we are heading below one times fairly soon.
In fact, if you looked at net core debt, that is core debt, net of cash and cash equivalents, we are coming in already at less than one times. In this contrast with our old [LBU] days 10 years ago that Mike and I remember so fondly when we were levered up [6.5 or more] as we started out the company.
Clearly, being at one times or less leverage is not an optimum structure for us considering our growth rate, our cash flow generation, and our visibility, but obviously since the acquisition announcement we've been frozen out. So we just wanted to make the point here that we are very well aware of the unlevered position of our current structure.
Okay. Let's go next to free cash flow.
Again, for 2007 it was a heck of a year. If you start with our EBITDA for the year of $643 million, we then have the loyalty cash flow adjustments again for the folks who are relatively new to the story or we are just clearing out some of the Cobe labs from the year ago.
Essentially in Canada, we are receiving cash funding the trust account and what's left over is cash as profit. We have to recognize that over a period of time even though we have that profit as cash flow today.
That gives us the timing difference and hence where our cash flow actually outstrips our reported EBITDA. That usually runs about $30 million this year, it's a little bit north of $40 million, added up you'll have operating cash flow of $685 million this year.
Then backing out CapEx interest and taxes our free cash flow came in at $4.15. I want to talk about '08 in a little bit, but if I were to look at our estimated free cash flow for 08, it's going up quite a bit.
You'll here us talk about EBITDA north of $700 million, you throw on a $30 million or so adjustments for Canada and you're now talking near the mid-700s in terms of operating cash flow with CapEx dropping off this year. Interest and taxes again this is pro forma, you know obviously if we get this deal done with Blackstone this all goes away.
But if you would have taken our run rate on CapEx interest and taxes, you're looking at free cash flow close to $400 million or approaching almost $5 a share which is a about 20% growth rate in free cash flow. So we're not kidding when we talk about this year as the year of cash flow.
It is going to be a very, very good year from that perspective. So again before we move on let's hit a couple of what we would like to call our neat looking slides here.
Operating leverage obviously continued into 2007. It seems like just yesterday that we were looking at a 14% EBITDA margin and yet today.
We have now doubled that officially and came in at 28% EBITDA margin in '07. We would expect the continuation of that leverage next year.
We usually target about 50 basis points. I think we've been averaging double that or more for about 10 years, but we just still just target 50 BPS for now and we will see how things play out.
Next step, the 2000 to 2007 a little bit about our ability to perform or over perform but also very importantly to do it very predictably and do it every singly year, year after year, year after year. We talk about our 12% top line, 15% EBITDA, 18% cash EPS type model.
Obliviously we have greatly exceeded that over the years, those from over performance from our businesses in terms of organic growth and to some of the acquisitions that we've done and we usually try to provide guidance. They gave you a sound basis upon which to build as the year unfolds.
This year would be no difference. Okay, the fun stuff.
Let's talk about 2008 outlook. Let me first start out by saying that this outlook excludes today's rate cut which we were quite pleased to see, since we do access the credit markets quite a bit.
So keep that in mind, we didn't have time to rewrite it and figured, we would wing it a little bit on the phone here. But our three objectives have stayed the same over the past 10 year as Mike said which is look we are about organic growth and we want to do double digit organic.
We want to generate a tremendous amount of free cash flow, but we want to do it in a very visible and predictable fashion. Your organic growth target again we are excluding any type of tuck-in acquisitions.
We are looking at operating EBITDA, which runs about $30 million or so above reported EBITDA. We are looking for those to be at least, probably, a little bit better than $730 million and $700 million respectively.
Cash EPS, we are going to start off that $4.30 which would be up 15% from 2007. To the extent we do acquisitions or we have over performance, EBITDA and cash EPS growth rates were bumped up, most likely to our 15% and 18% traditional "organic plus guidance".
Again, for now let's just stick with a nice double-digit organic growth rate and use that as our base upon which to build. All right, the businesses.
Mike alluded to it earlier, Epsilon is expected to generate mid-teens growth in EBITDA or cash flow as the enormous book of business signed in 2007 ramps up. Despite of slowing macro-environment Epsilon's program tend to be recession resistant in that they required the client to continually add ongoing customer purchase data in order for Epsilon to maximize and optimize its ROI-based target marketing campaigns.
Failure to do so jeopardizes the effectiveness of the campaign. Trying to put it in English, pretty simply stated, Epsilon relies on prior purchase behavior as a best predictor of future behavior, so that the more purchases that an individual makes that are added to the database, the more precise the algorithms become, the more precise the micro targeting becomes, the higher the ROI for the client.
So you enter recessionary type environment, that's not going to stop. You don't just flick to switch off on those things because you're going to hurt your ROI on the programs.
So Epsilon actually does very well when times are slow. There are some of our clients who actually spend more and you could say it's almost counter-cyclical in some aspects.
In any event look for mid-teens, again this is entirely organic growth throwaway. Let's move up north to the Loyalty AIR MILES program.
It's also expected to generate mid-teens growth in cash flow and that would include both operating EBITDA and reported EBITDA. The program is also recessionary system as it derives the bulk of its earnings based upon consumer everyday non-discretionary spend, that's usually Mom and Dad going to the gas station, the grocery store and the pharmacy.
Again I know we've been saying it for ten years, but even though it is called AIR MILES, we don't make a dime from the airlines, it's not an airline program that we used to hear in the States, rather it is a massive consumer-based program based on everyday spend as we've said of gas, groceries, pharmacy etcetera, etcetera. We're finding that there are larger and larger commitments from existing clients what we call our sponsors.
This sponsor signed an "Network effect of customers frequenting more and more sponsors are the three main drivers of growth." Combining these drivers along with strong pricing and operational leverage as the program remains an active part of 70% of Canadian household all suggest another very strong year, a lot of people focus on through the year.
You have 70% of the nation active in the program, how you can grow it. Again it's not coming from additional cardholders per say that may be two or three points at most; it's coming from big huge new commitments from our long-term existing sponsors.
New categories were entering such as auto and consumer electronics, internet, places like that, and then we are finding that our cardholders each year are frequenting more and more sponsors and therefore the network effect is what's driving a chunk of growth as well. So we are every excited about the prospects for ’08 there and now we are going to spend some time on private label.
Since that seems to have my guess will be the most noise level out in the market place with folks trying to compare us to a bankcard issuer or someone like that, which hopefully is not going to be the case after we get through this, since the behavior of our consumers and the fact that our yields have remained rock solid if not slightly creeping upwards for years and years and we are looking at January and that's looking good as well. So, private label is expected to generate mid-to-high single-digit growth rate in cash flow again all organic.
Traditionally the business generates double-digit cash flow growth at the loss of the Lane Bryant file where they took in-house, where not overall growth down to the mid-to-high single digits. Lastly, anniversary in November, after which growth should return to normal levels.
So we have got little play through here. Growth in private label is expected to come primarily from those clients signed during the last three years, what we called the '07, the '06 and the ’05 vintages.
And what does that all mean? These programs are new and as such will grow as their shares of their store sales moved from zero to an expected 25% to 33% of all sales.
A poor macro-environment should not impact this ramp up cycle which occurs over the three year period. It is assume that our remaining clients will generate minimal growth in this type of environment.
So again, sort of breaking it down and making it as simple as possible, we are not out there buying a bunch of portfolios and stuff like that. Our programs are with usually well-known retailers who never had one and we're starting them up from scratch.
They grow from virtually nothing to as much as the third of all sales of the retailer are put on our card. That's a three-year process.
So even if the retail environment is weak, even if you see weak comps or negative comps, that really doesn't have the type of impact on us that it would have on, for example a pure credit card company, because we have all of our vantages ramping up and regardless of the macro-environment that will drive sales, same this year. Now, the fun begins.
On the expense side, the company does not envision any significant impact from higher loss rates, again very different from what folks are reading about on the bankcard side. Specifically, our delinquency data which provides a very good predictor of losses over the next 180 days have remained extremely stable over the past few months.
Losses, it normalized levels during Q4 that is the full benefit from the Bankruptcy Reform Act has now played itself out and as such losses have normalized out right around at 6% level. For 2008 the company has factored into its guidance a 50 basis point increase in its loss rate which equates to approximately $20 million [EBITDA ahead].
Now, however, that the company will benefit on the funding side, and let me also say that while we factored in the 50 basis points increase, the way our delinquencies are flowing now we're still not seeing it. But just for budgeting purposes, MILES will be a little bit safe.
As a side note, I also don't know where in the world people who get the idea that are funding rates are going up, that's completely wrong. Although funding spread themselves have widened the enormous drop in the benchmark rates of LIBOR and 3 to 5 year treasuries have much more than offset widening spreads.
The company expects to have at least a $15 million savings in this area versus our initial budget. So Mike talked about a hedge between the two.
So factoring in both losses and funding, we would expect may be a net impact of a hit of call it $5 million which has been factored into our guidance, but the overall impact represents less than 1% of the expected '08 cash flow. So again the fact that you could see some creep up or some weakness in retail, it's just not enough based on how our company is put together to knock us out of the bucks, it's probably 1%.
And as an FYI we've already identified expense initiatives at the corporate level which would offset this $5 million hit. Now finally this is where we were weighing it a bit.
With the fed cut today of another 50 basis points, you can forget most of what I just said. We are not going to have a hit, in fact we will actually have a slight benefit because their savings on the funding side will in fact be greater than any uptick in the losses.
So it's not in our guidance, but it's nice to know at this time. In summary, factoring in the relative sides of each division was corporate overhead, overall growth in operating and reported EBITDA should be consistent with our goal of double-digit organic growth, thus as we expect play nicely through any macro headwinds.
Again demonstrating that our business model is unique in the poor macro conditions will push things around a bit, but in the end will not have enough of an impact to throw us of our growth targets. So, there were no macro or financial or operational issues which should keep us from achieving another record year consistent with our long-term targets in consistent with our 27 quarters in a row since becoming public.
Thanks for hanging in there, we are getting there. Cash flow timing and again a little more precise guidance on cash EPS which again to the extent the deal closes that will go away as one of our metrics and we probably just be reporting EBITDA and operating EBITDA.
Let's talk about cash flow timing. If you look from '06, '07 in a way you, will see pretty straight forward trend which is we tend to have more and more of our cash flow generated towards the latter part of the year.
And why is that? It's mainly because our fastest growth engines Epsilon and Loyalty which are growth at double or so the rate of Private Label tend to be exceptionally strong in the back half of the year.
So we would expect that trend to continue. And as we move down to cash EPS and we start with the base case of 15% organic growth or $4.30 a share, the way it basically going to play out is Q1 is essentially going to be roughly flat to past year, essentially will be growing through the Lane Bryant drag.
We haven't yet factored in the additional benefit of the funding, so that could give us a little bit of a kiss of there. But let's say for the sake of this discussion, we are relatively flat in Q1, then things begin to pick up steam, we'll be in the low to mid-teens in Q2.
Again, we will be playing to the Lane Bryant drag. But now what will be happening as those vintages we talked about are really going to start ramping up in private label and there is probably about between '05, '06, '07 third year or so different clients, but we have a lot of folks that have just started and they are ramping up as we speak.
By mid-three, we hit our stride. We'll be doing mid to high teen.
Again, we have got the Lane Bryant drag. But now we are really getting the benefit on the funding side.
We are really getting the benefit from the Private Label ramp ups and now Loyalty and Epsilon start to spread their stuff and again this is their time of the year. And then finally Q4 is going to be big one.
Lane Bryant has now finally hit the anniversary, so that turns into a plus. We will have funding benefits.
Private Label ramp ups continue and Loyalty and Epsilon are at their strongest. So that's how it's going to play out this year.
We are pretty comfortable giving this type of precise guidance to you. And as you can tell, as things roll out, it's going to be a fabulous jump of as we talk about 2009 which of course we're already working on as we speak.
Just as an FYI, Epsilon drives 60% of its cash flow in the back half and Loyalty generates between 55% and 60% in that period as well, that's why we have the 45/55 split this year. Okay, we're moving on to liquidity.
We have heard an off a lot of a noise in the marketplace about liquidity and access to markets and all sorts of other stuff and conspiracy theories, a new name that we've heard. We appreciate all those e-mails keep in coming.
But we all that chatter in the marketplace about the credit crunch and potential liquidity crisis, we are absolutely sure and agree that that are reasonable concerns for certain segments of the market, but the company's position here has never ever been stronger. Today our liquidity is provided from a number of sources.
Let's first talk about what's logged in. Our ability to issue CDs from the banks, our conduit commitments, our revolving credit facility, our warehouse facility which is the facility that's funding a matured $600 million bond deal until we decide to access the public markets.
In cash all come in to roughly $3.4 billion of capacity. Of that $3.4 billion, $1.5 billion is not being used and probably will remain unused.
And as such, we have a tremendous amount of dry powder if needed. Also note okay someone's saying, Oh I think, I see another bond here maturing in May.
Would you not expect to be using our available capacity to fund it, but rather we will be putting in play our second warehouse facility and again we already in deep discussions with number of large banks on that. So that one enough we got to access both the public and private ABS markets.
People are saying the markets are closed. They are not.
You can note that Cabelas and City have both, recently done deals, while the spread have indeed widened the base rate LIBOR and treasuries have dropped even more. And thus, we could find that rates all in that are below our budgeted rates.
We are now waiting for clarity of the Blackstone ADS acquisition before we access the public markets. And finally, in only 1.3 times leverage were less than 1 times net of cash and tossing off well over $700 million of operating cash flow away and growing organically double-digit annually, we believe our liquidity position is in a great shape today and will be in the future.
And again "Liquidity-Scare" in the market is we're sure legitimate for some. But for us, based on ongoing pitches that we're seeing at our banks, we have zero concerns over liquidity or over our ability to access favorable funding rates and provide a pick-up to our 2008 budget.
So wrapping up 2008, as Mike mentioned earlier, there is so much noise in the market that it’s hard to tell if any of its true or not. With us, we hear the usual rumors about our recession dragging on us or conspiracy theory that Blackstone is using LTC as an excuse to bail up because they see something bad coming down the road et cetera, et cetera, et cetera.
In the end, we don't know and frankly, we don't care because it's a waste of time. We're focusing on the business.
We're focusing on getting the deal closed. Hopefully, today, you've been given enough details, so that you can make and inform decision without all the noise.
As we stated, we expect a very strong '08, double-digit organic growth, perhaps enhance by a tuck-in acquisition or not. Two of our three businesses are recession resistant, the third indicating very stable delinquency trends, enhance loss rates, any upward pressure in losses will be moderate, and thus with today's Fed cut more than offset by fund intakes.
Liquidity capacity is at an all time high with many banks still banging on our door. So, those are facts, very simple and straight forward.
We have been doing this for 27 consecutive quarters and I think you'll find our guidance to have been pretty good over the years. This is what we do for a living.
Our model is unique. It's easy to make it confusing.
We are not a credit card company. We are not a marketing company.
We are not a transaction processing company. We are not a loyalty company.
And we are not an internet company. We are, however, all of these combines.
That makes us a unique model, which has worked in good times and bad. 2008 will be no different.
Q1 is already off and running well. So, enjoy digesting tonight's news and we'll be back to you in the near future with additional comfort on our outlook and any new news on the merger.
And with that, I thank you for your patience and I turn it over to Mike.
Mike Parks
Thanks Ed. Lastly, I would like to thanks for hanging in there with these folks.
I am not going to reiterate all of the stuff. There is certainly is a plenty of information for you to begin to digest and really join in our excitement for the future.
Frankly, regardless of our ownership structure for 10 years now, our culture has been driven by our model. It says deliver on your promises and we plan to do just that.
We'll be looking forward to talking with you in the next 30 to 45 days and thanks for joining us tonight. Bye now.