Blackhawk Network Holdings' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.20.14 | About: Blackhawk Network (HAWK)

Start Time: 08:00

End Time: 08:59

Blackhawk Network Holdings, Inc. (NASDAQ:HAWK)

Q4 2013 Results Earnings Conference Call

February 20, 2014, 08:00 AM ET

Executives

Patrick Cronin - VP, Finance and IR

William Y. Tauscher - Chairman and CEO

Jerry Ulrich - CFO and CAO

Analysts

Sara Gubins - Bank of America Merrill Lynch

Bryan Keane - Deutsche Bank

Ramsey El-Assal - Jefferies

Gil Luria - Wedbush Securities

Mike Grondahl - Piper Jaffray

Tim Willi - Wells Fargo

David Chiaverini - BMO Capital Markets

Operator

Welcome to Blackhawk Network's Fourth Quarter and Full Year 2013 Earnings Conference Call. For those of you on the audio on redialing, your lines have been placed on listen-only until the question-and-answer session. This call is being recorded. If you have any objections please disconnect at this time.

I would now like to turn the call over to Mr. Patrick Cronin, Blackhawk's Vice President of Finance and Investor Relations. Please go ahead, sir.

Patrick Cronin

All right, well, thank you, Michelle. Good morning, everyone. Before we get started, I wanted to remind you that we scheduled two events this morning; our earnings call from 8.00 to 8.45 AM Eastern Standard Time and we'll end that with approximately a 10 to 15 minute Q&A session. We'll follow-up our earnings call with our Investor Conference which will run from 10 AM to noon Eastern Standard Time. You can access the webcast of both these events by visiting Blackhawk's Investor Relations website at ir.blackhawknetwork.com.

Also, a copy of the earnings release that accompanies our call this morning can also be found on the Investor Relations website.

So with me today to discuss Blackhawk's fourth quarter and full year 2013 earnings results is Bill Tauscher, our Chairman and Chief Executive Officer; and Jerry Ulrich, our Chief Financial & Administrative Officer.

Before I turn the call over to Bill, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws. Forward-looking statements contain information about future operating or financial performance, and forward-looking statements are based on our current expectations and assumptions and involve risks and uncertainties that could cause actual results or events to be materially different from those anticipated. However, we undertake no obligation to update or revise any such statements as a result of new information, future events or otherwise. For a list and description of those risks and uncertainties, please see our filings with the SEC.

With that, I'd like to turn the call over to Bill Tauscher.

William Y. Tauscher

Thank you, Patrick. Good morning, everyone. Here's the agenda for our call today. First, I'll comment on Safeway's announcement of their intention to complete the spin-off of Blackhawk. I'll then summarize Q4 and full year 2013 financial results and finally I'll share business accomplishments for 2013 in both the U.S. and international. Jerry will then take us through a deeper dive to the numbers and we'll share our 2014 financial outlook.

As many of you are aware, yesterday Safeway announced their intention to distribute the remainder of their ownership in Blackhawk to its shareholders. After much study and analysis, Safeway and its advisors concluded this path was the one that would result in a maximum value for Safeway and Blackhawk taken together. As we've stated previously, we at Blackhawk with Safeway's assistance have been preparing for this eventuality for several years. For the past two years we've been operating independently from Safeway in all respects except for the preparation of consolidated tax returns and treasury management.

Relating to this we also announced that we are negotiating with a group of banks to establish an independent credit facility to support our business going forward. While this will increase our interest cost slightly related to borrowings to support our recent acquisitions, we have operated profitably and we have generated positive cash flows for many years. So we see this as business as usual for Blackhawk.

From an investment standpoint, as you will hear further today, we are optimistic that we will continue to grow the business and with the additional flows that will be available, certain investors that have previously been excluded from investing may have a new opportunity going forward. We won't be able to answer all your questions regarding the spin-off today, but we will work with Safeway to keep everyone apprised of the status going forward.

Turning now to the Blackhawk business, in our first year as a public company we're very pleased to report that we met our full year 2013 financial targets by delivering adjusted operating revenue growth of 21%, adjusted EBITDA growth of 15% and adjusted net income growth of 14%.

On a pro forma basis, adjusting for the change in commissions paid in Safeway at the beginning of 2013, adjusted operating revenues, adjusted EBITDA and adjusted net income growth rates were 23%, 25% and 27%, respectively. Results are in fact slightly higher than the mid to long-term growth targets on the low 20% range that we presented during our road show in April 2013.

We also completed two acquisitions in November. Retailo provided us with access to the important German prepaid market and InteliSpend opens up a significant new opportunity for us in the corporate incentives and rewards market. We'll discuss these deals later in this call and during our Investor Conference this morning.

So now let's review our fourth quarter results. Loan value grew 17% compared to the fourth quarter of 2012 with 13% excluding loan value contributed by InteliSpend and Retailo for the seven weeks and four weeks respectively after the acquisitions closed. Fourth quarter growth rates are typically lower than the other quarters during the year borrowing major new distribution partner rollouts, as the holiday season is more heavily weighted to closed-loop or private branded gift cards.

I'm sure many of you read various accounts and announcements about the factors that led to slower holiday sales at retail in general, but gift cards still performed well. In addition, like many retailers, our online sales hit new records this year but still represent a small portion of overall gift card sales. This is in large part due to the true convenience afforded by our gift card mall destinations and highly traffic grocery and other leading retail chains.

Our international load value represented 18% of the total load value in the quarter and excluding our acquisitions, continued to grow at just over double the U.S. growth rate. Fourth quarter GAAP revenues totaled 521 million, an increase of 15% over the fourth quarter last year. Commission and fees which are driven primarily by our closed-loop gift card sales increased 13% for the quarter.

We recorded a 27% increase in program management, interchange, marketing and other fee revenues primarily the result of strong growth in the sales of open-loop gift cards and also due to higher marketing revenues from the U.S. card partners. Finally, revenues from product sales grew 17% with virtually the entire increase coming from Cardpool.

Turning to adjusted operating revenues which are total revenues net of the share of commissions and fees paid to our distribution partners, they grew 16% for the quarter to 243 million. On a pro forma basis, again, adjusting for the change in Safeway share, commission and fees, this line grew 18%.

On a GAAP basis, net income for the fourth quarter increased 36% year-over-year from 36 million to 49 million. The GAAP figures do include a 13.5 million non-cash fair value reduction of the liability for the contingent portion of the Cardpool acquisition purchase price, partially offset by an increase in non-cash and tangible asset amortization related to our two acquisitions. Jerry will provide more detail on these non-cash items later in the call.

GAAP diluted earnings per share increased 32% to $0.92 for the fourth quarter of 2013 compared to $0.70 for the fourth quarter of 2012. Excluding the impact of non-cash items and adjusting for the Safeway commission change, pro forma adjusted diluted earnings per share increased 21% to $0.81.

Okay. Now moving on to the full year 2013 results. Load value for the full year grew 17% or 15% excluding the results of InteliSpend and Retailo. As a reminder, we did exit the prepaid telecom wholesale business just after the end of the third quarter in 2012. Excluding the effect of the telecom wholesale business adds 2 percentage points to the respective growth rates I just mentioned.

GAAP revenues totaled 1.1 billion for the year, an increase of 19% over 2012. Commission and fees increased 15% while program, interchange, marketing and other fees grew 37% and product sales grew 33%. The drivers for the increases are similar to Q4, strong open-loop gift card growth, increased marketing funds from content providers and Cardpool revenue growth.

After deducting the commissions paid to distribution partners from total revenue, adjusted operating revenue grew 21% for the year to 541 million. Again, the increase was 23% after adjusting pro forma for the Safeway commission change. I know this is a bit redundant, I apologize for that, but we believe pro forma results are an important metric for measuring the underlying growth in our business.

On a GAAP basis, net income for the full year increased 12% from 48.2 million to 54.1 million. Excluding certain non-cash items as detailed in the earnings release, the increase was 14% and again, excluding the Safeway commission impact, adjusted net income increased 27%.

Finally, on a GAAP basis, diluted earnings per share increased 10% to $1.02 for full year 2013. On a pro forma and adjusted basis, the increase was 24% to $1.09 compared to a pro forma adjusted $0.88 for fiscal 2012.

Now that I've covered the key financial results, I'd like to highlight our achievements against our key business initiatives for 2013. Let me begin with the U.S. We entered the corporate incentives and rewards space when we completed an acquisition of InteliSpend in November 2013. InteliSpend on its own had 12% load value growth at calendar 2013 over 2012. We believe that by adding closed-loop gift followed by digital eGift to InteliSpend's current open-loop product offering, we will add to the InteliSpend's top line growth.

In addition, over time we will achieve infrastructure synergies with the similarities of our products. We looked to the number of opportunities to enter the corporate incentive market over the past several years and we believe InteliSpend and Blackhawk together can bring innovation and accelerate the changes toward prepaid products in the marketplace. We'll be talking about our plans in more depth in our Investor presentation later this morning.

In our core retail business, we added to our U.S. distribution launching 1,950 Home Depot locations in November with a full product suite. Through the first seven weeks of 2014, Home Depot has already become a top 20 distribution partner based on load value. We also launched Casey's, Macerich Malls, RaceTrac and Shell as U.S. new distribution partners in 2013.

We continue to focus on several initiatives to increase productivity of our existing distribution partners. We added 2 million pegs to our gift card and telecom displays across our top domestic distribution partners; Kroger, Safeway, Food Lion and Sears, Kmart, each added significant new displays in 2013.

In addition, 1,700 grocery store locations enhanced their gift card programs this year migrating from what we referred to as basic category in execution to best practices. Safeway's expansion of its fuel loyalty program utilizing third-party fuel locations had a positive impact on load value throughout the year. We also increased the overall number of marketing events across most product groups and increased both the marketing revenue funding from our content partners as well as our overall net marketing spend.

We completed a retail optimization test at Safeway that adjusted placement of content on a fixture to maximize productivity. The test results indicated the potential for an approximate 5% sales lift as we apply it to the rest of the channel going forward. Another indicator of our strength is our ability to retain existing accounts when they come up for renewal. Across our top 50 U.S. distribution partners, we had 100% success rate again of contract renewals.

In our closed-loop gift card category, we signed over 50 new national, regional and local content providers including names such as Chipolte and Crate & Barrel. As mentioned previously, the open-loop gift category which includes our program managed, these are gift cards of distributed MasterCard and Amex gift cards performed well in the U.S. for 2013. Load value growth grew in access of 25% and it was driven by increased marketing of our Visa cards and expanded offerings of Giant Eagle, Publix and Wawa.

In the telecom category, three of our largest distribution partners; Kroger, Safeway and OfficeMax installed larger telecom displays in 2013 which helped us achieve double-digit load value growth in our retail telecom business for the full year 2013. We also continued to fine-tune our handset logistics and selection to enhance the category overall at our grocery and our convenience distribution partners.

In financial services which includes our proprietary PayPower general purpose reloadable card and the reloaded network and also major brands that we distributed including Green Dot, NetSpend, PayPal and Univision, we finished the year with load value growth in excess of 70%. Earlier in the year we talked about our partnership with TaxACT that allows consumers to directly deposit their tax refunds into a PayPower card. This solution contributed well over half of the load value growth in 2013, albeit at lower revenue margins.

Another significant milestone for our financial services group in 2013 was the partnership formed with T-Mobile under which Blackhawk is the technology and service provider for the new T-Mobile money visa prepaid card. This new solution that links prepaid financial services to prepaid telecom customers rolled out early this month in over 3,000 T-Mobile locations nationwide.

Our online and digital channel load value exceeded 100 million in 2013 with triple digit growth. We signed 16 new digital distribution agreements in 2013 included among those were PayPal and Google. We've also signed nearly 100 additional content providers for digital eGift and now have over 200 content providers who are partnering with Blackhawk to offer a digital gift card solution.

Finally, in the U.S. we launched our Cardpool gift card exchange solution with ACE Cash Express and ended 2013 with over 1,000 selling locations for purchasing unwanted or unused gift cards which are then sold on our Cardpool dot-com website. We expect them to launch an additional 600 locations in 2014.

We also rolled out in partnership with Coinstar over 215 new card exchange kiosks allowing consumers to exchange unused gift cards for cash using a state-of-the-art unattended service kiosk. For 2014, Coinstar plans to rollout up to an additional 1,200 locations with new kiosk.

Now I'm going to turn to international to highlight some developments there. The most significant of course was the acquisition of Retailo. It's the leading third-party gift card distributor in Germany with over 40,000 distribution locations and partners such as Rewe, Tengelmann and Aral. And of course great distribution is reinforced by great content and vice versa and Retailo currently has approximately 100 content partners including German, European brands like Douglas, IKEA, C&A, Tchibo and Mediamarkt Saturn.

Across the rest of Europe, Albert Heijn, the leading grocer in the Netherlands moved to best practices. Tesco rolled out a new expanded display in their UK stores and we launched the Google Play card in several countries.

In Canada we also launched Home Depot in Q4 in a 180 locations and through the first seven weeks of 2014, Home Depot Canada has become a top 15 Canadian distribution partner. We launched general purpose reloadable cards at several top distribution partners, added local discount content and our selling electronic gift cards in the Wallet provided by Rogers Telecom.

Turning to the Asia Pac region, we launched in South Korea but we're still negotiating our approach for commencing sales in China with our China partner. In Japan we now have two of the four largest convenient chains giving us distribution in 20,000 locations that sell gift cards with in-store fixtures and kiosk and another 20,000 kiosk-only locations. Across the regions, international load value sales represented 17% of worldwide load value sales and 16% of operating adjusted revenues in 2013.

We made a lot of progress in 2013 and we believe our financial results demonstrate that. The growth in our existing businesses coupled with the addition of InteliSpend, Retailo and our new T-Mobile relationship give us real confidence about meeting our financial goals as we enter 2014.

I'll now turn it over to Jerry to cover in-depth some more of the financial results.

Jerry Ulrich

Okay. Thanks, Bill. I am going to provide a little bit more color on the 2013 financials and share the 2014 high level outlook. During our Investor conference later this morning, we will review the results in more detail and highlight a lot of the key growth drivers and assumptions included in that 2014 outlook.

All right, so first on the fourth quarter results. With respect to the load value increase of 688 million or 17%, we did see some reduction in fuel loyalty programs at a number of our distribution partners during this holiday as compared to a more aggressive stance on these programs during the 2012 fourth quarter. This softened our growth in the closed-loop gift business somewhat, but as Bill mentioned earlier, growth in the open-loop gift cards was strong during the quarter which helped balance the overall growth rate for the gift card category.

Turning to revenues, I want to discuss a few drivers beside the load value that impact the revenue lines. So, as Bill indicated, commissions and fees revenue increased by 50 million or 13% year-over-year. As a percentage of load value, commissions and fees were 9.1% in Q4, down about 32 basis points from Q4 of 2012. About two-thirds of that decrease was due to the addition of InteliSpend which has most of its revenue in the second line of revenue program, interchange, marketing and other fees, which we refer to as PIMO. Similarly, the mix change from closed-loop to open-loop gift shifts revenue from commissions and fees to the PIMO line.

So looking at that second line of revenue, it increased 27% in the fourth quarter over last year or 17% excluding marketing revenues from content partners. So as a reminder, this marketing revenue is generally a pass-through that shows up in sales and marketing expense for promotions that we coordinate through our distribution channels. The 17% increase excluding marketing corresponds to the growth in load value of the Blackhawk program managed visa products.

Now Bill cited the growth in Cardpool sales as the driver behind the 17% increase in product sales for the quarter. This was actually a little bit short of our expectations mainly due to the slower forecast rollout or slower event forecast rollout of ACE Cash Express locations and the Coinstar kiosks. In addition, the growth trajectory is a little lower than what we used to set the threshold through the contingent earn out portion of the negotiated purchase price to Cardpool. So this resulted in a $13.5 million fourth quarter reduction in the contingent consideration liability.

We still believe we will achieve the original projections for the Cardpool exchange business but over a slightly longer timeframe than originally forecasted. We'll discuss Cardpool further in the Investor meeting.

Distribution partner commission expense increased 35 million or 14.5% year-over-year which was in line with the commission and fee growth after adjusting for the Safeway commission change that Bill referred to. As a percentage of commissions and fees, the distribution partner commissions were 65.4% for the fourth quarter compared to 64.7%, an increase of 66 basis points. That again was primarily driven by the change in the Safeway commission in 2013 partially offset by InteliSpend results which has a smaller proportion of revenues that are sharable with the channel partners and also by other geographic and partner mix changes.

Turning to the processing and services line, the expense increased $5 million or 9% in the fourth quarter versus last year and it was 23.2% of adjusted operating revenues as compared to 24.6% of adjusted operating revenues in the fourth quarter 2012. Now conversely for the fourth quarter, sales and marketing expenses increased 16 million or 28% but again due primarily to the higher marketing expenses associated with the increased marketing revenue that we talked about earlier.

In addition, the non-cash mark-to-market and warrant amortization expenses are recorded in the sales and marketing line, both of these increased at a faster rate than revenue in this IPO year. So excluding the marketing expenses and these two non-cash items, this line grew 13% year-over-year and was 13.8% of adjusted operating revenues compared to 14.2% in the fourth quarter of 2012.

On the G&A expense line, it grew 2.6 million or 17% in the fourth quarter but only increased year-over-year by 7 basis points as a percentage of adjusted operating revenues. This was in spite of increases in accounting and audit fees associated with being a public company as well as some increased headcount in our regulatory and compliance areas.

Turning to the income tax expense line, the effective tax rate on a GAAP basis for Q4 was 0.34% which was low because of the fair value adjustment of continued consideration which is not a taxable item. And this item also resulted in a full year effective tax of 35.7%. The full year ETR on adjusted pre-tax income was 39%, a more normal number excluding these non-cash, non-taxable items.

Okay. Turning to the balance sheet and cash flow, our combined balance of cash and cash equivalents and overnight advances to parent of which there were none at the end of 2013 declined 117 million in 2013. The biggest use of cash of course was for the InteliSpend and Retailo acquisitions. While Safeway provided a portion of the financing for the acquisitions in November, we repaid this debt to Safeway prior to year end based on our yearend cash flows.

As we completed the settlement cycle following the end of the year, we have re-borrowed a portion of the acquisition costs from Safeway. And as Bill mentioned earlier, we disclosed in our earnings release that we're negotiating with a bank group to establish a credit facility of up to $475 million comprised of a four-year term debt facility and a revolving credit facility to replace the treasury and management services from Safeway. Again, we'll have more details at the Investor meeting which begins at 10 o'clock Eastern Time.

Our fiscal year end cash balance by the way is affected by changes in working capital and in particular to the changes in settlements, receivables and payables. The receivable side increased 290 million with most of the increase simply due to the additional shopping day in fiscal week 52 versus fiscal week 52 of the prior year, and this is what we referred to as a holiday shift. The remainder of the increase is due to growth in the business and other payment timing.

You'll also see the corresponding build up in settlement payables related to timing of year end. The change in net settlement receivables and payables for the year represented a $50.3 million use of cash on the GAAP cash flow statement which we adjust out in our supplemental free cash flow analysis provided at the end of our earnings release. So after subtracting this change and the capital expenditures, free cash flow from operations was 48 million for fiscal 2013.

Also on the balance sheet we had an increase in intangible assets of 97 million and goodwill of 90 million, the result of the acquisition and purchase price allocations. These included significant intangibles set up for InteliSpend customer contracts and revenue backlog which will be amortized over periods from 1 to 14 years. The amortization will be an adjustment included in our adjusted EBITDA and adjusted net income metrics going forward. And again, we'll have more detail on this a little bit later this morning.

Capital expenditures for the year were $30 million, up 6 million or 26% from 2012 with half of the increase from technology spend and the other half related to a retrofit of our corporate offices to better utilize the existing space.

All right, so I'm going to turn now to our 2014 outlook. Our mid to long-term financial objectives that we communicated during the IPO were to grow adjusted operating revenues and adjusted net income in the low 20% range with adjusted EBITDA margins also in that low 20% range.

So looking forward for 2014, we expect adjusted operating revenues will be in the range of 670 million to 690 million representing growth between 24% and 28%. Adjusted EBITDA of 137 million to 142 million, a growth of 20% to 24% and adjusted net income in the range of 64 million to 67 million or a growth between 11% to 16% resulting in diluted adjusted earnings per share in the range of $1.19 to $1.24.

Now just a couple of comments. The lower growth in adjusted EBITDA as compared to the adjusted operating revenue growth reflects the impact of reduced near-term revenue contribution from InteliSpend because of deferred revenue accounting on certain revenue elements. Also, the expense from expanded retail displays that we incurred this year carried over to next year, additional program development expenses with our distribution partner and also the initial launch costs in this year of the T-Mobile money card that Bill referred to earlier. So a number of things that carry over to 2014 which have impact on that adjusted EBITDA line which we would expect to normalize as we move out of this year.

Now, we mentioned the borrowings related to the acquisitions as we prepared for separation from Safeway, so that's one factor in the lower adjusted net income growth figures. It also reflects increased depreciation from higher CapEx in 2013, again a slightly higher figure in terms of growth in 2013 than we would expect on a normalized basis. I think the average compared to the – over the last two years, our average CapEx has increased about 5% per year. A little extra boost last year both related to the digital and mobile platform development work that we were doing as well as some CapEx picked up with the acquisitions late in the year.

The other factor that impacts the lower adjusted net income growth is an increased tax rate caused by an increased presence in certain states in the U.S. which is causing an overall higher state tax costs. And a small amount of stock compensation expense that's not deductable as a result of our IPO earlier in 2013.

So with that, I'd like to turn it over to the operator to open up the line for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question comes from the line of Sara Gubins from Bank of America. Please go ahead.

Sara Gubins - Bank of America Merrill Lynch

Hi. Thank you. Good morning. You mentioned a lower use of royalty advanced program, could you talk more about that and whether or not you think it's a more permanent change or if there was something unusual?

Jerry Ulrich

Well, I think Sara your question was what additional comments about the lower use of fuel loyalty. So in 2012 we had several partners that really significantly increased their emphasis around fuel loyalty and that boosted growth rates. As we came into 2013 kind of late in the first quarter, we began to see some tapering and shifting of messaging around the fuel loyalty programs. I think we had mentioned earlier on some calls earlier last year that a couple of these were lower margin programs, so it did affect load value and to some extent revenues, not as much on the bottom line. As we go forward in 2013, I think one of the things we see is that we're lapping a period where the messaging and emphasis on fuel loyalty is a little bit more normalized, so we would expect what you would call an easier comparison, if you will, year-over-year. So in 2013 we are seeing some comparisons against very aggressive programs more normalized throughout 2013 and we think as a result we'll see some rebound in the growth rate particularly around the closed-loop gift card.

William Y. Tauscher

Sara, just to add to that to be clear. This is not a case of our grocery partners we're moving or stopping their fuel programs, it's a case of them changing their messaging in the store and out of the store and spending more of that messaging – a great deal more on price in most cases. And if you're sort of a student of watching how that's happened over the last year, just walking in lots of grocery stores, it's very apparent. So the fuel programs are still in place. It did have an effect on the consumer sort of being reminded of the value of the self use of gift cards and dampened sales a bit, especially in line with the fact that 2012 was so strong in fuel promotion. I think again to just emphasize what Jerry said, our belief and we've already seen it so far in the beginning of this year as we move forward in 2014, the more normal growth rate for our business will sort of take forth because we'll be lapping sort of a same presence of messaging. We haven't provided it in any of the guidance or plan, but that messaging would turn back to fuel. At this point we think it will stay the way it is. But again, I emphasize it's not people sort of dropping and canceling fuel programs. In fact we expect that you'll hear a little later today, we might add one more.

Sara Gubins - Bank of America Merrill Lynch

Okay. And then separately, could you provide some color on the pipeline for new distribution partner stores for 2014?

William Y. Tauscher

Yes, we can. We've actually got a pretty robust year potentially ahead of us. We are today actively engaged with four potential partners and each of those partners would be a top 15 distribution partner for us. So, it's pretty remarkable after all these years that we still have that opportunity and at least in a couple of cases, they're actually greenfield opportunities. So we're pretty excited about that. We'll see what unfolds here in the next three or four months but we think in most cases, the decisions as they often are, will get made in the first half of the year because people who want to either enter the business or for whatever reason want to make some changes would like to get that done before the holidays.

Sara Gubins - Bank of America Merrill Lynch

Thank you.

Operator

Thank you for your question. The next question we have comes from the line of Bryan Keane from Deutsche Bank. Please proceed.

Bryan Keane - Deutsche Bank

Hi. Just a couple of questions on the guidance. How much do the acquisitions impact the top line and the bottom line?

Jerry Ulrich

I think on the top line, Bryan, first of all as we indicated I think at the time of the acquisition, Retailo in Germany we kind of consider that as part of our international growth. Now it does give a nice boost to the international growth, so we'll continue to see in 2014 overall revenue – load value and revenues growing at least double the rates in the U.S. With respect to InteliSpend we expect an increase of 5% to 7% on that revenue line. A little bit more modest on the bottom line again in the first year as we get some leverage out of it and move forward with more robust contributions to the bottom line. So you could anticipate probably a 4% probably closer impact in 2014. The impact in 2013, the short period that we have then was on the adjusted net income was affectively nil.

Bryan Keane - Deutsche Bank

Just thinking about – I mean this year there's some moving parts that's making some adjustments to the operating EBITDA growth level and the net income level. So I'm just thinking about going forward, do those normalize out in 2015 where we should have revenue growth and adjusted EBITDA and net income growth all being around those same levels and not the big decrease we see now between adjusted revenue and net income?

Jerry Ulrich

Yes, I think I probably was not as clear as I could have been on that last part, for example, on the adjusted net income, obviously interest is something new. Traditionally, we've had a very cost effective partner in our parent Safeway but also we haven't needed to borrow very much in the past. We have borrowing forecast going forward for the acquisitions that will probably have about a $5 million in 2014. You wouldn't expect a sizable increase or impact like that in 2015 year-over-year. With regards to depreciation, again we expect CapEx levels to be roughly flat, maybe even slightly down in 2015 but call it flat, so we won't see as much increase in depreciation going forward into 2015. So I think those are two of the significant factors in terms of delta between EBITDA and net income. With respect to the EBITDA impact, I mentioned the launch of T-Mobile. That's certainly an investment in an interesting new partner that should provide a lot of growth for the financial services business. That's our current expectation. We have talked before about that business being very a modest size for us, a little over 1% of our load value, so a small piece of our business and we'd like to get a little more critical mass in that business. So we've been pretty aggressive about looking for partners that can help us do that. So we definitely will feel the brunt of that as we launch this year with the various launch costs and waiting for the volume to ramp.

William Y. Tauscher

There are several items here. I think the short answer to your question about 2015 is yes. If you look at the results in 2013 and adjust for the Safeway item, the revenue and income items were pretty much in line. The 2014 guidance does have a number of items but if you – as Jerry did, if you sit and carefully pick them through each one, they virtually all normalize as we go out of the year and we'll get the benefit of the very strong revenue growth and of course even the EBITDA number is not that far off of the revenue growth with one or two explanations that will again normalize this InteliSpend deferred accounting will again normalize as we go forward. So I think we feel strongly the answer to that question is yes.

Bryan Keane - Deutsche Bank

Okay. And just last question from me, free cash flow was 48 million I know for 2013, I might have missed it but what's the outlook for 2014 for free cash?

Jerry Ulrich

We'll talk I think a little bit later this morning on the Investor Call, Bryan, about that and how to derive it. But you could expect roughly a 15% to 20% increase.

Bryan Keane - Deutsche Bank

All right. Thanks, guys.

Operator

Thank you for your question. The next question we have comes from Ramsey El-Assal from Jefferies. Please go ahead.

Ramsey El-Assal - Jefferies

Hi, guys. So the load volume came in a little lighter than your guide in the third quarter, just wondering if there are any callouts or drivers there. I believe you had a 19% to 20% pro forma sort of number going into the fourth quarter. And if I understood correctly, it was 17% and 13% ex the acquisition. So just wondering if there was any particular callout aside from just general consumer behavior out of your control that led to this sort of weaker performance there?

Jerry Ulrich

Well, I think just one comment and then I'll turn it over to Bill to kind of reiterate our thoughts about the load value growth. But in the fourth quarter overall, 17%, yes, it was a little bit lower without the acquisitions. So very slightly short of what our expectation was, but I think for the year we came in pretty close to what we had projected in Q3. And we did see again very strong open-loop gift card growth and a little bit offset then by closed-loop.

William Y. Tauscher

Yes, I think our expectations were mid teens, so we were 2 points under that. The facts are though that it was a softer retail season. I think there was certainly a lot of press about that and today still even though we have this hugely growing online and mobile business, it's a small piece and doesn't really drive the numbers yet. So the effect on the slower retail clearly had some effect on us. We saw it interestingly in sort of the period between Thanksgiving and Christmas up until the last couple of weeks and then it came on very strong in the last couple of weeks. We're talking about a few points here though, not a crash or anything like that. The retail gift card sales were still very strong compared to retail of course. But there was a bit of a slowing that made that couple of 3 points difference without question.

Ramsey El-Assal - Jefferies

Okay. Thanks. Last one from me, I'll help you get down on time here. Can you give us an update on sort of the movement between the different buckets of your productivity ladder basic to best practice to loyalty enhanced? At the end of the year here, how much runway is sort of left in each step in terms of movement between these levels?

William Y. Tauscher

Still quite a bit actually. And let's just take it by pieces. In the most – if you take a look at sort of our largest customers, our largest channels in the U.S., our most mature and people who are already on best practices, we'll talk about this a little more at the Investor conference but we are still finding ways that are driving enhancements to the program whether that be additional fixtures and pegs, optimization of how those whole displays are handled, some local content and with some meaningful differences. So there's across that group our most productive room left. We probably have something still approaching half as we add new distributors. That number is not changed where we have an opportunity to bring people up to best practices in the U.S. and we have a lot of work ahead of us on the financial programs and the telecom programs as we've set new standards for best practices and learned new lessons, especially in the telecom area and we spoke to that a little bit. Of course, international is all of those same sets of rules but back two or three years compared to the U.S. One of the interesting things about Retailo that has us so excited, it's a very fast growing entity itself and much of its distribution was put in place in the last 12 to 24 months and much of it is in our terms sort of basic. And so we think there's an enormous opportunity there to drive those retail partners through to our best practices and continue their very rapid growth rate they've enjoyed. That's true in many countries around the world.

Ramsey El-Assal - Jefferies

Great. Thanks for your answers.

Operator

Thank you. The next question we have comes from the line of Gil Luria from Wedbush Securities. Please proceed.

Gil Luria - Wedbush Securities

Yes. Thank you for taking my question. I wanted to clarify some of the organic numbers, you gave some numbers but would you mind being a little more specific. In the fourth quarter, based on your previous disclosures, is it appropriate to say that you got about $50 million to $100 million of loan value from the acquisitions, 5 million to 10 million of revenue? And then for 2014 what's the total revenue contribution you expect from both of your acquisitions combined?

Jerry Ulrich

Gil, I don't we necessarily would break out the exact details in the fourth quarter. You can count back into the load value contribution based on the differential and rates there. As we look forward to next year, we'll see contribution at the adjusted operating revenue line somewhere around 10% in total for the two acquisitions.

Gil Luria - Wedbush Securities

Got it. Thank you very much.

Operator

Thank you for your question. The next question we have comes from the line of Mike Grondahl from Piper Jaffray. Please go ahead.

Mike Grondahl - Piper Jaffray

Yes. Can you talk a little bit about what you're seeing on the competitive environment? And then maybe what's resonating with consumers? If you could talk a little bit about categories, maybe where you saw growth that was better than what you thought or worse than what you thought?

William Y. Tauscher

Yes, I think it's fairly straightforward. On the category standpoint and kind of what's resonating is we've clearly been pleased but also a little surprised at the strength of our open-loop gift programs. They have been growing substantially stronger than the closed-loop program and frankly substantially stronger than our plans. It's a good thing for our business because they're positive from a contribution standpoint. But as Jerry has talked about it you see it on this PIMO line as opposed to just the commission line. We see that continuing as we moved into 2014. And so it's a good trend for our business and we don't have open-loop product very prolifically distributed in international. So that's something that we will be moving forward as a key initiative in 2014. We have it in couple of countries but not in most. Secondly, there's no question that there is an appetite as nobody should be surprised by it for acquiring things online and acquiring things digitally. And our triple digit growth is an indicator of that. We see that growth continuing and it's literally triple digits in our online business and we see that growth continuing albeit still very small if you look at the numbers, it's literally 1% of our overall load value. But at the rate it's growing, it's going to begin to contribute over the coming years. I think the third thing that we're seeing is we have been working in investing heavily as we have said all along in this digital services and digital content. And while there's been more noise than there has been reality to-date about everybody buying things with mobile wallets and paying for things in retail with mobile wallets, there's clearly been a lot of work going on and the move to online and mobile purchases as a percent of the overall business is continuing. And as we have developed our own reference application and begun to work inside a number of other people's applications and offerings, we are finding confirmation that the things we can do in the digital environment to help the consumer manage their cards, check their balance, exchange their cards, et cetera, are very, very welcome services that we just couldn't do in the physical world. So, we think we're on the right track there in terms of those investments and we'll hear and see more of that as we go forward. And I think the final thing that we're clearly new to but something that we think has – it's going to be very interesting as we spend time and energy on it is this whole incentive business. At the end of the day it's really a large part but a smaller part of a bigger trend which is payments in general in various categories and areas moving to prepaid. And whether it be the general purpose reloadable cards that people are using now off their T-Mobile phones and with their T-Mobile card or whatever, there is a move by governments and organizations worldwide to take payments to prepaid. And incentives is a piece of that but we think there's a very real opportunity that will continue to drive growth in prepaid payments for our company.

Jerry Ulrich

Bill, the other question Mike had was competition.

William Y. Tauscher

Yes. We really have in our direct business a couple of competitors that we spend lots of time worrying about. Interestingly enough, as we said, we continued to renew all our contracts, so competition certainly hasn't had an effect where it's taken any of our business. That's essentially true around the world as well not just in the U.S. But to us it's not so much a question of worrying about competition. I think we spend more time worrying about the productivity of our own channels. I think we spend more time worry about where this whole digital thing will go and to make sure that we have positioned ourselves to take advantage of what we see as an opportunity, so far a pretty good incremental opportunity and I think you'll hear more about that in our conference. We got a number of things there that are indicating we're laying a pretty good groundwork to go forward. But the facts are I think we spend more time working about those sorts of things than we do sort of the basic general competition that one would think of in our business. I think finally this incentive business is a very fragmented business but we acquired one of the larger players and we intend to grow that business as we talked about and there will be certainly some competition as we do that, given the fragmented nature of the business.

Mike Grondahl - Piper Jaffray

Okay. Thank you.

Operator

The next question we have comes from the line of Tim Willi from Wells Fargo. Please go ahead.

Tim Willi - Wells Fargo

Thank you and good morning. I had two sets of questions. First was, could you just remind us on digital, you mentioned the strong growth there and the pretty sizable I guess content signing activity? From an economic perspective (indiscernible), could you just remind us sort of how those look versus sort of traditional plastic distribution or how we should think about that?

William Y. Tauscher

So far our digital distribution model is following a very similar path to our physical distribution model, so the structures that we have walked through for physical distribution, commissions on cards, sharing those commissions with our distribution partners remains intact. Certainly there are some variations but by and large we'll actually walk through a series of examples today in the investor conference and in those cases it's in fact as I described it. So, today it doesn't look like it's going to cause at least in the near term or even the intermediate term some big dislocation to our model.

Tim Willi - Wells Fargo

And if I could just follow up on that before the other question is, of the content providers you've signed up for digital distribution and support, would you characterize those as some of the bigger top 20, top 50, top 100, who – or is it more smaller content providers that don't have the internal wherewithal to develop their own proprietary distribution?

William Y. Tauscher

No, it's a complete mix of our content providers and it's really not a question so far anyway of people sort of developing their own digital distribution for third parties. There are people today who of course fundamental to gift cards for a long time have been selling gift cards directly to consumers in their stores and physical gift cards online. And those people are moving in some cases, not all the selling digital gift cards online directly to their consumers.

Tim Willi - Wells Fargo

At their website?

William Y. Tauscher

At their website. That's different than what we're trying to do. What we're doing is trying to develop the exact same model where we identify and contract with digital distribution players, ones you have real malls [ph] and real activities and create a gift card mall offering on those digital distribution sites. And we don't see people by and large – we don't see people trying to do that from the card partners. The same economics of having to do that with lots and lots of digital distribution partners is the same as what they faced of doing it with retail distribution partners. So, today anyway we don't see any signs of that model changing where the card partners want an efficient aggregator who provides all the various services on the platform, the clearing, the settlement, all the work that we do, that model walks right into the distribution world. And generally the only reason someone is not today part of the digital program is they're struggling fundamentally with being able to redeem a digital gift card in their retail locations. And as you know I think many, many retailers today aren't able without some friction to easily redeem a digital gift card. The scanners may have but not been upgraded. NFC is still pretty stillborn and the end result of that is that people are struggling to decide where all that's going to go. And that's more of the limiting factor for people's participation and any thought about going direct into third-party distribution.

Tim Willi - Wells Fargo

Great. And then my last one, and I'll hop off, is international. Just any thoughts you could give us around – from the M&A perspective or partnerships that not only, just sort of curious about the pipeline there – but if there is anything to add around investments that will be required if you were to make announcements about partnerships or acquisitions internationally that we should think about. If we see a headline of a partnership or an acquisition internationally, would that be followed by a similar message that we got around T-Mobile that – a great long-term partner acquisition here. But in the interim, we got to spend some money to do some good things with the business. Just want to know how to think about that?

William Y. Tauscher

I think the short answer is there's nothing that I know of that we are currently working on that would hit that category. Generally speaking our partnerships are driven so that we leverage either really in-country position and leverage in-country expense structures. So it actually helps when you see us enter a country with a partnership, it helps our short-term results. Generally going into a new country (indiscernible) for Blackhawk has met a couple of years of losses and by and large all that is behind us. We do have a couple free countries that are new but if you look at the aggregate effect of those countries startup, if you will, it's a couple 3% of our EBITDA max and dropping and all our regions internationally are now profitable. So, announcement for allusions to partnerships that we might create doesn't mean we're rushing in to somehow create a T-Mobile like effect. That's just not the case. And the model of what we're developing internationally with our retail partners or for that matter our digital partners is following a fairly similar model to what we've done in the U.S. So I don't see a big change there. Could we acquire someone else internationally, we certainly continue to try to find a local strong partner. Unfortunately there's not very many of them. If you walk through an exercise of maps of the countries that really can have a strong Blackhawk program, Retailo was a fairly unique opportunity for us.

Jerry Ulrich

Tim, just to follow on, I mean you will hear later on a little outsized growth in load value and international next year associated with some lower margin, but that's on the revenue line. So those are deals where we've leveraged a local distribution presence. So we keep less proportion of the commission overall. And so that has an impact on that ratio to load value to commissions and fees but it doesn't reflect the cost investment because we're utilizing a local partner.

William Y. Tauscher

Yes, and the local partner of course bears not only the investment in things like fixtures, et cetera, merchandizing, but has the local expenses. So it's a combination of reduced revenue and reduced expenses to load value creating a profitable result for us but one that does change the metrics a little bit. We have that in a couple of places.

Tim Willi - Wells Fargo

Great. I appreciate the thoughts. Thanks very much.

Operator

Thank you for your question. We have time for one more question and that comes from the line of David Chiaverini from BMO Capital Markets. Please proceed. Your line is now open.

David Chiaverini - BMO Capital Markets

Thanks a lot. Just one question from me. So you gave some detailed guidance, thanks for that. I was just curious, what load value growth range are you expecting that's associated with that guidance for 2014?

Jerry Ulrich

The load value will be somewhere north of 30% we expect next year.

David Chiaverini - BMO Capital Markets

Okay. That's it from me. Thank you.

Operator

Thank you for your question. I would now like to turn the call over to Jerry Ulrich for closing remarks.

Jerry Ulrich

Okay. Thank you. We want to again thank everybody for participating this morning. Hopefully, it's been informative and we would encourage you to come back for the webcast beginning in about an hour and get some more details on the future. So appreciate it and we'll talk to you at 10 AM Eastern.

Operator

Thank you for your participation in today's conference call. This concludes the presentation. You may now disconnect. Thanks for joining and enjoy the rest of your day.

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