Blackhawk Network Holdings (HAWK) Q4 2016 Results - Earnings Call Transcript

| About: Blackhawk Network (HAWK)

Blackhawk Network Holdings, Inc. (NASDAQ:HAWK)

Q4 2016 Earnings Call

February 15, 2017 5:00 pm ET

Executives

Patrick Cronin - Blackhawk Network Holdings, Inc.

Talbott Roche - Blackhawk Network Holdings, Inc.

Jerry N. Ulrich - Blackhawk Network Holdings, Inc.

William Y. Tauscher - Blackhawk Network Holdings, Inc.

Analysts

Bryan C. Keane - Deutsche Bank Securities, Inc.

Timothy Wayne Willi - Wells Fargo Securities LLC

David J. Chu - Bank of America Merrill Lynch

Ramsey El-Assal - Jefferies LLC

Paul Condra - Credit Suisse Securities (NYSE:USA) LLC

Ashwin Shirvaikar - Citigroup Global Markets, Inc.

Eric Wasserstrom - Guggenheim Securities LLC

Operator

Good day, ladies and gentlemen. Welcome to Blackhawk Network's Fourth Quarter 2016 Earnings Conference Call. For those on the audio-only dial-in, 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.

Patrick Cronin - Blackhawk Network Holdings, Inc.

Thank you, operator, and good afternoon, everyone. Earlier today we published our fourth quarter 2016 earnings results along with a supplemental slide presentation, which contains additional detail on Blackhawk's quarterly results, business highlights, and financial guidance for fiscal 2017. A copy of the presentation and earnings release can be accessed from our Investor Relations website at ir.blackhawknetwork.com.

Also, as a reminder, we announced last month that we will be hosting an Analyst Day tomorrow morning, February 16, at 8 AM Pacific Time. Today's earnings call and tomorrow's Analyst Day complement each other. Our earnings call will focus on fourth quarter results and key assumptions around our 2017 financial guidance, followed by a Q&A session. And tomorrow's Analyst Day is focused on Blackhawk's long-term strategic growth initiatives and will address the company's market opportunities, business segment strategies, technology platforms and products, growth targets and capital investment plans.

You will also have a chance to hear from several new members of Blackhawk's senior leadership team responsible for daily execution of Blackhawk's strategy. A video webcast of tomorrow's Analyst Day event can be accessed by visiting the company's Investor Relations website.

So, joining me today to discuss Blackhawk's fourth quarter results are, Talbott Roche, our Chief Executive Officer and President; Jerry Ulrich, our Chief Financial and Administrative Officer; and Bill Tauscher, our Executive Chairman.

Before we begin, we should spend a minute on forward-looking statements. I'd like to remind everyone that management will make statements during this call that are forward-looking within the meaning of federal securities laws. Forward-looking statements contain information about future operating or financial performance. 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.

Further, such forward-looking statements speak only as of the date of this presentation. 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 the Safe Harbor statement on slide 2 and the Risk Factors section in our filings with the SEC.

Also today's call will focus on non-GAAP financial metrics. For a reconciliation of GAAP to non-GAAP measures, please see the appendix in today's earnings slide presentation.

I'll now turn the call over to Talbott Roche.

Talbott Roche - Blackhawk Network Holdings, Inc.

Thank you, Patrick, and good afternoon, everyone. As mentioned in our earnings release, the estimated EMV impact on U.S. retail fourth quarter results was somewhat higher than the forecast provided on our October 12 call. I will provide additional details on EMV on the next slide. But, first, I want to cover other important milestones for each of our three business segments plus digital.

Despite the EMV focus for some of our key distribution partners, we continued our ongoing effort to increase per store productivity in U.S. retail and added over 50 new brands into our network. One very promising example of this new content is our 5% Visa cash back variable card, which we launched late in Q3 2016 and was immediately popular with consumers and exceeded our initial sales forecast in the fourth quarter.

We grew incentives EBITDA organically over 15%, driven by over-performance at Achievers year-over-year. Our two acquisitions, GiftCards.com and extrameasures further accelerated growth, and we hit both our revenue and adjusted EBITDA targets for the full year. In addition, we delivered solid expansion of adjusted EBITDA margins in this segment for the second consecutive year.

International had a strong year, exceeding our original plans, due to solid performance in Germany and the Americas region. Results for the quarter included a small gain on the sale of our program-managed general purpose reloadable business to a third-party. This is consistent with our earlier decision in the U.S. to divest our proprietary GPR products and focus on maximizing distribution of leading third-party GPR products instead.

We also significantly expanded our business in the UK with the Grass Roots acquisition in the fourth quarter. This acquisition accelerates our move into incentives and international and provides a strong base of referenceable customers.

The acquired business performed in line with expectations, and the integration is on track and will continue throughout 2017. Two emerging markets, Brazil and South Korea, reported high double-digit growth during the fourth quarter of 2016 compared to the same period last year.

Finally, across all our digital, online and mobile distribution channels in the retail and incentives segments, transaction dollar volume increased 93%. Products delivered through digital channels represented 8% of TDV in U.S. retail and 16% of incentives volume or roughly 10% across these two segments. This is double 2015's proportion. We continue to add new content across our growing digital channels, including our own proprietary Visa eGift product. This Visa eGift is now available across all our e-commerce websites as well as through our digital product catalog covering both the retail and incentives business. We definitely saw a heavier shift to eGift during the holiday season this year.

Now, let's move on to 2016's biggest topic, EMV on slide 4. Unfortunately, one of our larger distribution partners scheduled to achieve compliance in October experienced delays. Due to limitations for certain of their self-checkout point-of-sale hardware, they did not achieve compliance in a few hundred of their top-selling stores. It's now expected that these stores will become EMV compliant in Q2 2017.

Furthermore, in the November timeframe, we saw softer sales than previously forecast in a few accounts, which we attribute to a carryover of EMV-related restrictions. So while we did see improving sales throughout the fourth quarter at the recently compliant chains, the recovery began later in the quarter and therefore transaction dollar volume for the full quarter was below our Q4 forecast.

For the fourth quarter of 2016, the estimated EMV impact was $19 million on adjusted operating revenues and $18 million on adjusted EBITDA. Net of cost savings offsets, the EBITDA impact was $6 million. For full year 2016, the estimated impact related to EMV was $52 million on adjusted operating revenues and $46 million on adjusted EBITDA. Again, net of cost savings offsets, the impact on adjusted EBITDA was $31 million for the full year.

A large portion of the expense offset was the reduction of management incentive programs. While full Q4 open loop gift TDV was 75% of 2015 levels, we are encouraged by the fact that in the final four weeks of fiscal 2016, U.S. retail open loop gift transaction dollar volume recovered to 88% of December 2015 levels.

Turning to slide 5, you will see that we have estimated a carryover of some of the impact to 2017. Although, we believe the bulk of the EMV impact was a 2016 event, due to the late compliance and recovery in Q4 of some of our larger accounts, we estimate the carryover impact of EMV to be $14 million on AOR and $12 million on adjusted EBITDA for the full year.

The preponderance of this impact is planned for the first half of 2017 as the remaining stores return to best practices and win back customers that have shifted gift card purchases outside our channel. In addition to rebuilding customer awareness and purchase frequency in our newly EMV compliant distribution partners, we see additional opportunity to expand sales with a broader distribution of variable open loop products across our U.S. retail network, including Visa 5% cash back.

On slide 6, I'm going to start with a review of our Q4 financial metrics relative to the guidance provided on the October 12 call. The EMV impact on revenues, coupled with the revenue shortfall in Cardpool, resulted in total company adjusted operating revenues missing our guidance range. EMV was also the primary driver behind the lower adjusted EBITDA as the Cardpool EBITDA miss was only $1 million.

Also impacting EBITDA for the quarter were write-downs of card inventories as well as some retired technology assets and severance costs associated with expense reduction measures taken in December. The miss versus guidance was a little lower on adjusted net income and adjusted EPS. Our actual tax rate was favorable to forecast as the result of tax credits having a larger proportional impact on lower than forecast pre-tax income.

Also shown on slide 5 (sic) [6] is a reduction in income taxes payable of $15 million, about $3 million below guidance due to the lower pre-tax income, which limited our utilization of NOLs for the quarter.

Total company Q4 adjusted operating revenue growth was of course negatively impacted by EMV and the previously mentioned revenue miss on Cardpool. The Cardpool decline was due to lower volumes associated with reduced number of retail kiosks deployed and operational this year as compared to 2015. We were able to finalize negotiations in late December with our kiosk partner that we had mentioned on the October call. But we did implement cost savings efforts across several areas of the company to partially offset the impact of EMV. Adjusted EBITDA was flat compared to Q4 2015, and adjusted net income and adjusted EPS declined 3% in Q4 2016 compared to Q4 2015.

Turning to our Q4 segment financial metrics on slide 8, while U.S. retail was obviously under pressure from EMV, we made tremendous progress towards further diversifying our earnings base delivering significant top line and adjusted EBITDA growth in the international and incentives segments. As already discussed, EMV and Cardpool shortfalls negatively impacted U.S. retail.

Additionally, we continued to see higher spend-down rates on open loop cards, which in turn results in lower program management fees.

International adjusted EBITDA grew by nearly 30% organically and was further boosted by the acquisition of Grass Roots and the sale of our Canadian PayPower business in the fourth quarter. Incentives growth benefited from the acquisitions of GiftCards.com, extrameasures and strong growth in our Achievers business.

Given the decline in U.S. retail adjusted operating revenues and adjusted EBITDA, we provided a walk on slide 9 from Q4 2015 to Q4 2016 for these two metrics for the U.S. retail segment and for the total company.

Focusing on the adjusted EBITDA column, you can see the estimated EMV impact is the largest factor, followed by the lower open loop Visa gift program management fees I just mentioned and the net effect of some closed gift softness, Cardpool and various other factors. We believe the closed gift results were also an indirect impact of EMV.

Moving to slide 10 and full year 2016 results versus prior year, strong growth in our international and incentives segments was offset by the EMV impact in U.S. retail, limiting total company adjusted operating revenue growth to 7% with a 2% decline in adjusted EBITDA. The decline in adjusted net income and adjusted EPS was greater due to higher interest expense and depreciation, partially offset by a lower tax rate. Diluted share count increased 1.7%.

Moving to slide 11, while we already covered the annual segment highlights on slide 3, we have included annual segment financial results for your reference. While EMV headwinds was the headline for 2016, I do want to point out the progress we made towards further diversifying our earnings base and delivering significant top line growth and margin expansion in the international and incentives segments. We implemented both permanent and temporary expense controls to limit corporate and unallocated expense growth to 9% during fiscal 2016.

Slide 12 shows our adjusted free cash flow reconciled to adjusted EBITDA. We kept our CapEx relatively flat with 2015 levels. In comparison to full year 2015, cash taxes are favorable year-over-year due to timing of payments and refunds, as was the change in working capital. There was a smaller increase in cash flow from settlement timing, as our growth in TDV was lower in the 2016 period.

We ended the year with a debt to adjusted EBITDA leverage ratio of 3.2x, against our bank facility covenant of a maximum 4.0x. Last quarter, we announced our board authorized the use of up to $100 million to repurchase our own shares from time to time. In the weeks following our October 12 earnings call, the Blackhawk stock price rose nearly 20%. To-date since the October announcement, we have not repurchased shares.

Finally, we continue to evaluate a pipeline of synergistic acquisition opportunities, particularly in the incentives and content areas. We believe acquisitions can fuel our growth, even as growth rates slow in our traditional U.S. retail business. We see acquisitions along with a buildout of our digital capabilities and platforms as the best allocation of our free cash flow and available borrowings. During tomorrow's Analyst Day, we will present return on invested capital of our incentives acquisitions as well as total company return on invested capital.

Looking at our key revenue ratios for the fourth quarter, prepaid and processing revenues as a percentage of transaction dollar volume increased 70 basis points year-over-year. This was due to a lower proportion of open loop gift sales in U.S. retail, again the result of EMV, and a higher proportion of incentives on the overall business.

Partner distribution expense declined 230 basis points in the fourth quarter of 2016 compared to the prior year due to the acquisitions of Grass Roots, which generates prepaid and processing revenues, but does not incur partner distribution expense. Grass Roots also drove the increase in adjusted operating revenues as a percentage of TDV.

Moving to slide 15, the full quarter impact of lost revenue due to EMV was the primary driver in the year-over-year increase in each processing and services and sales and marketing expense ratios during the fourth quarter. We realized expense leverage in G&A as a result of the fourth quarter expense reduction efforts.

On slide 16, the fourth quarter 2016 year-over-year decline in product sales and profit was driven by Cardpool and lower telecom handset sales. Growth in Achievers drove the slightly higher product margin in Q4 2016, compared to Q4 2015.

Moving to our 2017 outlook on slide 17, in U.S. retail, besides EMV recovery, we plan to expand distribution of our Visa 5% cash back in an additional 7,000 to 10,000 stores in 2017, up from 8,000 stores at the end of 2016. Also, we are very excited to be able to announce that we have signed an agreement to add Target as a distribution partner. We will roll out across their 1,800 stores and become the third-party gift card provider for target.com in the second half of 2017.

Finally, since we've taken over operation of the Cardpool kiosks, we expect Cardpool to rebound in 2017. Across all of U.S. retail, we are forecasting adjusted operating revenue growth in the range of 8% to 19% with a midpoint of 13%.

In incentives, following a sales team reorganization to better address enterprise and e-commerce sales opportunities, our focus will be on continuing to deepen relationships with existing accounts and signing significant new prospects currently in our pipeline. We're also building out our global rewards platform with over 1,000 brands across 135 countries today.

Finally, we are continuing to evaluate additional acquisition opportunities in the incentives segment. For 2017, our forecast is for growth from 12% to 25% with a midpoint estimate of 18%.

In international, Grass Roots will enhance our incentives presence in the UK and Australia incentives markets. Also, we plan to divest the Grass Roots meetings and events business, a lower margin service-oriented business, which does not fit Blackhawk's business model. We have not included this business in our guidance. Finally, launching our digital solutions and incentives solutions, especially the Achievers employee engagement platform, into all international regions will be a key focus in 2017. All this combined results in international growth in the range of 51% to 68% with a midpoint estimate of 60%. We have not factored into these estimates any material FX impact.

Across digital channels, we continue to add both new distribution and content and have several important bank loyalty programs planned to launch in 2017. In addition, we are expanding our NimbleCommerce capabilities and launching Hawk Direct to be able to address the large online first-party gift card distribution market. We have multiple partners like Kroger and Airbnb in launch and have a robust pipeline of accounts looking to use the platform to drive online sales of their cards to corporate buyers and consumers.

Further, the launching of Hawk Mall gives us the capability of providing all of our physical distribution partners with matching e-commerce capabilities. We've launched the solution with over half a dozen accounts and we'll continue to convert a growing pipeline in 2017. We expect to see another year of strong growth for digital within all of our segments.

With that, I'll now turn it over to Jerry to cover guidance and other key financial metrics for 2017.

Jerry N. Ulrich - Blackhawk Network Holdings, Inc.

Okay. Thanks, Talbott. Turning to slide 18, I'll start with the GAAP financial guidance. Total operating revenues are forecast to grow 13% to 22% for the full year. This, of course, reflects the rebound from EMV and also the growth in incentives and international, including the contribution from the Grass Roots acquisition. On a GAAP basis, income and EPS include the amortization of intangible assets recorded at purchase price allocations as well as related acquisition costs and interest expense.

On slide 19 is the 2017 non-GAAP full year financial guidance. The roll up of the growth forecast that Talbott provided results in a 16% to 28% increase over 2016 adjusted operating revenues or a midpoint growth target of about 22%. We are forecasting operating leverage at the adjusted EBITDA line with margins growing between 50 basis points and 70 basis points.

We're forecasting adjusted free cash flow in the range of $115 million to $135 million and the estimated benefit from the reduction in income taxes payable, which is no longer included in the adjusted net income line, is $58 million, about the same as last year.

Slide 20 provides you with additional insight on the growth drivers supporting our 2017 guidance. Focusing again on the adjusted EBITDA column, you can see the organic growth driven by volume increases is about $39 million. This is partly offset by the program management fee rate reductions on open loop products that Talbott mentioned of $11 million.

So, net, the organic growth is effectively $28 million on EBITDA, or about 15%. The rebound that we're estimating from EMV contributes an additional 10% increase in EBITDA for a total of 25%. Then acquisitions are expected to add a further 9% growth. Those are the acquisitions, the large ones, that were done in 2016. But offsetting this are non-repeating acquisition-related items from 2016.

We do recognize revenue at the time we migrate open loop product portfolios of acquired companies on to our issuing bank contracts. So, I want to note that we've had this type of revenue each of the past three years, but it does appear as a headwind in this walk, since we don't assume any material acquisitions or new acquisitions in our 2017 guidance at this time.

All right. On slide 21, the expense trends, we expect processing and services as a percent of adjusted operating revenues to decline compared to 2016 with the bounce-back in U.S. retail revenues, even as incentives grows as a proportion of the total. We are forecasting a slight uptick in sales and marketing to support the launch of new distribution partners and other new programs, such as the 5% cash back products. Finally, we are forecasting expense leverage in G&A. Overall again, we're estimating our adjusted EBITDA margin will improve to approximately 22% in 2017 up from 21.3% in 2016.

Slide 22 gives you a point estimate for modeling purposes for some of the other expense line items, primarily non-cash items, in order to get you to the adjusted net income line. Note that 2016 included benefits of certain cash credits against a lower adjusted pre-tax income amount, which resulted in a lower than normal effective tax rate. So, it's coming back to a more normal range in 2017. Also, lower growth in share count reflects the full year impact of the stock buyback that we completed in mid-2016.

On slide 23, we've got the details of the tax benefits that we're forecasting for 2017. As a reminder, the Section 336 step-up basis benefit resulting from the spin-off from Safeway in 2014 does continue through 2029, while the NOL and other tax benefits from acquisitions expire over varying time periods of up to 20 years. In addition to the 2017 forecast that we've provided, the current forecast for 2018 and 2019 tax benefits is $61 million and $46 million, respectively.

The net present value of our tax benefits using a 7% weighted average cost of capital is $380 million or $6.50 per share assuming 57.5 million shares outstanding. That of course assumes adequate pre-tax income to utilize all those tax benefits. Our guidance factors in, at this time, no potential changes in U.S. corporate tax rates.

All right. Over on slide 24, again, we're projecting free cash flow of between $115 million and $135 million after $50 million in CapEx, flat to last year and 4.5% of our estimated adjusted operating revenues. Earlier on slide 13, we indicated that 2016 ended with about $655 million debt outstanding. We do expect to manage the debt to leverage ratio during 2017 between 3.5 times and 4.25 times EBITDA, depending on acquisition activities. Share repurchase activity will depend on available capital and competing uses. And during the Analyst Day presentation tomorrow, we will review how we evaluate capital allocation alternatives and will provide projected return on invested capital for the company and our incentives business.

Finally, on the last two slides, 25 and 26, we provide guidance for the first fiscal quarter that ends March 25. Now, in Q1 of last year, we still had three EMV sales levels and as Talbott indicated, we are going to have some carryover EMV impact into this year. We also had a revenue benefit in Q1 of 2016 related to the bank migration activity I described earlier and, of course, with the first quarter typically being a seasonally lower profitability quarter, these items have a disproportionate effect on the year-over-year comparisons.

For your reference and as Patrick mentioned earlier, the appendix includes reconciliations of GAAP to non-GAAP financial measures, including the new GAAP to non-GAAP guidance reconciliations.

I'm going to turn it back to Talbott now for some final comments.

Talbott Roche - Blackhawk Network Holdings, Inc.

Thanks, Jerry. Just another reminder about our Analyst Day tomorrow. You'll have an opportunity to hear from a number of our key leaders, those of our core retail, incentives and digital businesses. We will review the growing addressable markets as we continue to expand our product offerings and how our technology platform is supporting unique value proposition for our partners.

Finally, we'll walk through our operational leverage opportunities and discuss our expectations around midterm adjusted operating revenue growth targets and we hope you can join us.

With that, I'll turn it back to the operator to open up the line for questions.

Question-and-Answer Session

Operator

We'll be taking our first question from the line of Bryan Keane from Deutsche Bank. Your line is open.

Bryan C. Keane - Deutsche Bank Securities, Inc.

Hey, guys. If I look at the U.S. retail segment in the fourth quarter and I add back EMV and reduced program management fees and even closed gift Cardpool and other, I still am only showing U.S. retail in the fourth quarter on revenues, just looking at revenues first, is flat year-over-year. So, what is maybe explaining this slower growth in the U.S. retail segment?

Jerry N. Ulrich - Blackhawk Network Holdings, Inc.

Well, I think, Bryan, again, it's our measure of where we think the bounce-back comes to in the first quarter. And I mentioned just a minute ago a couple of the items in the first quarter of last year that also have an impact on that relative growth. So, I assume it's...

Bryan C. Keane - Deutsche Bank Securities, Inc.

Yes. I mean, I was asking about the fourth quarter, in particular. Just if I add back EMV [technical difficulty] (28:59) Cardpool and other, kind of that was on – some of the stuff that was on the Q4 walk, it just doesn't look like the U.S. retail segment is growing anymore.

And then even if I look at 2017 guidance, if I add back the $38 million for EMV recovery and I do kind of the same thing, it just doesn't look like there's much growth ex items that you're calling out. I'm just trying to figure out is there something else going on or is that now a saturated market that's just not expected to grow?

Jerry N. Ulrich - Blackhawk Network Holdings, Inc.

Well, I think, what we're saying is it's normalized growing kind of mid-single digits. We are projecting with the bounce-back next year that it's going to be up around 13% growth, and that's at the midpoint and it could be higher than that.

We did have some other things, of course, we talked about. Earlier in the year, we got out of the direct management of the GPR products. So that has a bit of a dampening impact. We've talked about the telecom business is not a growth part of the business at this stage. So, some of those factors would weigh on that fourth quarter view. We'll be clear of those as we move through 2017.

Talbott Roche - Blackhawk Network Holdings, Inc.

Bryan, I wouldn't want to message that there is no growth in U.S. retail. That's not the message we're trying to send. I think you saw that we forecasted the 13% midpoint. Could it be higher? Could it be lower? It could be. I think there is a fair amount of – we feel fairly optimistic about the rebound in 2017.

I think there were some, last year, some drag coefficients on the business besides EMV, and Cardpool was the biggest one from an AOR perspective, obviously not from an EMV perspective, and that's also turning the corner in 2017.

So, no, we wouldn't want to message that there is no organic growth in U.S. retail. We still feel the mid-single-digit to high single-digit growth in – organic growth in retail is there. We talked about pushing out the open loop variable cards into more locations. We're obviously going to be adding new brands as we do every year.

We're going to go back more to best practices and implementing more marketing. There was a little bit of a slowdown on that, given the focus on EMV in 2016. So, it's really getting back to those best practices.

Bryan C. Keane - Deutsche Bank Securities, Inc.

Okay. And then just last question for me. Target, it sounds like it starts to ramp up in the back half of this year. Can you just talk about how much will that start the P&L in the back half and expect that's a run rate or will that take a little bit longer to ramp up?

Talbott Roche - Blackhawk Network Holdings, Inc.

Yes. We have some startup costs associated with launching any new partners. This is a very big new partner. We're very excited about it, obviously, a great addition to the network. We modestly forecast contribution from that chain in the back half just to make sure that we don't over-assume the sales ramp and all the benefits, so we also just like to be conservative when we're putting new accounts into our plan. But we feel fairly confident that it's going to be long-term a major contributor.

Jerry N. Ulrich - Blackhawk Network Holdings, Inc.

Yes. And, Bryan, just one more comment on kind of Q4 retail walk that we've provided. Again, we're going to put that out there by segments because of the year-over-year delta. And you have to understand that there was a lot of the EMV noise in the fourth quarter, trying to sift through that effect particularly on closed loop is not a science.

Open loop is a little more straightforward throughout the year because that's really where we estimated specifically EMV impact. We looked at cards that had been pulled and other measures taken around the open loop product and pretty much measured year-over-year versus 2015 what was going on with that product line.

On closed gift, there is lots of moving parts to that, of course. We definitely believe that to the extent customers were shopping elsewhere, because they couldn't get all of the cards they wanted, they may have been buying closed loop products elsewhere. That's where we think there's a recovery still in progress.

2017 will flush all that out and we'll get back to what we think is in fact a normal growth rate. If we would have pegged more of this on EMV, then the offset would have been organic growth. So, it's just a little muddy in terms of being able to sort that out in the fourth quarter.

Bryan C. Keane - Deutsche Bank Securities, Inc.

Okay. Thanks for taking the questions.

Operator

Thank you. Our next question comes from the line of Tim Willi from Wells Fargo. Your line is open.

Timothy Wayne Willi - Wells Fargo Securities LLC

Thanks and good afternoon. A couple of questions. One, going back to the comment on the management fees, can you just explain exactly what that's about? Is it lower breakage because people are spending more of the balance on the card, or was there actual contractual agreement associated with net spend, I guess I don't quite understand how that came about?

Jerry N. Ulrich - Blackhawk Network Holdings, Inc.

Well, it's two parts. This relates primarily to open loop gift products and we're the program manager for the Visa products in that category and we have issuing banks that we have contracts with. So, our revenues relate to the contractual rates for those program management fees. However, as we've said, those rates are influenced directly by the amount of spend-down on the cards, the inverse of what you said, the breakage. So, as the spend-down rates are higher particularly with some increased self-use type use of the products, in turn, we sit down every quarter or so with those banks and look at what those trends look like. We may adjust the rates, which we have, in fact, on a go-forward basis related to new products sold.

So, what we're trying to do is always estimate where we'll end up based on new product sales. But the fees themselves are the contracted rates with the banks. But they are influenced by the trends we're seeing on redemption.

Talbott Roche - Blackhawk Network Holdings, Inc.

Yes, as there has been broader adoption of open loop cards over the past few years and there's been more self-use by consumers of these products, spend-down rates have increased. So that's what that's alluding to.

Jerry N. Ulrich - Blackhawk Network Holdings, Inc.

We had this also in 2016. So, I mean, the rates were lower in 2016 than they were in 2015 as well.

Timothy Wayne Willi - Wells Fargo Securities LLC

Okay. And then I just had two other quick ones and then I'll get back in the queue. First is, stock compensation expense looks like it's jumping up pretty sharply in 2017 off of 2016. I guess, given the fact that the share price hasn't really appreciated that much, which I know sometimes can impact that number, what is that, is that tied to equity grants with acquisitions like Grass Roots, or something of that nature, or is it a competitive issue with your labor pool?

Jerry N. Ulrich - Blackhawk Network Holdings, Inc.

I think it's the ongoing update of kind of the stock equity program. Each year we go through an analysis with our consultants and looking at IFF (36:27) data. In addition, maybe a couple of senior executives would have a lower grant that would impact that stock comp forecast at this point. So, it is a shorter timeframe also for amortization of some of those expenses.

William Y. Tauscher - Blackhawk Network Holdings, Inc.

Tim, this is Bill. We have a couple senior executives, who, because of their age, you end up with a telescoping in of how the expense works on their options because our retirement dates are set. So, it's an artificial number. We didn't grant more options, we didn't do something in Grass Roots; we don't have a competitive problem in the industry, none of that.

Timothy Wayne Willi - Wells Fargo Securities LLC

Okay. So just sort of accounting and timing...

William Y. Tauscher - Blackhawk Network Holdings, Inc.

It's a little bump – it's a bump that'll pass next year since we don't have anybody for some time coming up with any substantial stock options with that particular set of circumstances.

Timothy Wayne Willi - Wells Fargo Securities LLC

Okay. Great. Thank you. And then my last one just comes back to sort of the guidance and I think you hit a bit on it in the prior question about Target. I mean relative to my model, which again was done prior to you giving any guidance, the revenue outlook actually looks better than I would have thought and maybe I guess others on the Street. But the flow-through to the bottom line, I think it's clear in your adjusted EPS, something is missing in between top line to bottom line, it looks like tax rate and interest expense definitely are some deltas relative to how I was thinking about the year.

But are there other sort of discretionary investments ramping up customers like Target that you would highlight as also that sort of that delta between a pretty robust top line, but arguably what might be a bit of a disappointment on the EPS number that you'd want to point to or call out or is it really just taxes and interest and ramping up Target?

Jerry N. Ulrich - Blackhawk Network Holdings, Inc.

No, there are a couple other things. I mean we have some of the expense reductions in 2016 were temporary in nature as we described. That adds up to about $15 million. In addition, the Grass Roots model, of course, that acquisition was just completed.

We're working through synergies and adjustments as we go forward. Certain leverage points. So, that may put a – have put a little bit of a drag on 2017. We are seeing nice improvements on Achievers margins as they continue to grow a little faster than the rest of the business, but also expand the margins. The program management fees that we talked about put some pressure on the U.S. retail margins, so you see a little bit of compression there year-over-year offset by the...

Talbott Roche - Blackhawk Network Holdings, Inc.

Yes, obviously the EMV impact we talked about just because the recovery in some of the top accounts is taking a little longer and we're lapping a period, Q1, where there wasn't much EMV impact in the base, particularly in the first half of the year – I'm sorry, first half of the quarter. And any kind of EMV impact, you know, flows through disproportionately to the EBITDA line because it is impacting that higher margin open loop volume.

Timothy Wayne Willi - Wells Fargo Securities LLC

Okay. Great. I'll catch up with you guys tomorrow. Thanks so much.

Jerry N. Ulrich - Blackhawk Network Holdings, Inc.

Okay.

Operator

Thank you. Our next question comes from the line of David Chu from Bank of America. Your line is open.

David J. Chu - Bank of America Merrill Lynch

Hi. Thank you. So, last quarter you mentioned kind of uneven execution post EMV. Can you just provide an update?

Talbott Roche - Blackhawk Network Holdings, Inc.

Yes, we monitor all the top accounts and we're continuing to work with them on a weekly basis on removing restrictions and I think that's going very well. As we've gotten into the first quarter, we continue to see a nice climb in open loop sales week-over-week, and this is literally blocking and tackling with the accounts on a weekly basis.

These restrictions, as I said before, I think I said on last October call, we have an account that is still holding some of the cards behind customer service. They are going to be working over the next four weeks to get those returned, even though they are EMV compliant, they kept them behind customer service.

We have an account that's executing a patch to solve for a loophole, I would say, in their EMV software that they've already downloaded. That will get executed over the course of the next week. We have a lot of accounts now who have executed signage reminding consumers that they can return to the use of debit and credit cards in the purchase of higher denom or open loop cards, which previously were restricted.

Additionally, we are back to more of a normal marketing cadence with the accounts in 2017 and so that should have a positive effect as well. But I would say, we're working closely with all of our top accounts. Most of them, we believe will be completely free of any restrictions and back completely to normal by the end of this quarter.

We do have that drag coefficient with one large account whose hardware had to be upgraded in their self-checkout lanes and that pushes into Q2. We also have outside of our top 25, some smaller accounts that are not EMV compliant and won't be till later in the year, but they are relatively small, 2% to 3% in terms of total TDV.

David J. Chu - Bank of America Merrill Lynch

Okay. Great. That's very helpful. And in terms of your interest expense assumptions, like what is your debt assumptions and average interest rate behind that?

Jerry N. Ulrich - Blackhawk Network Holdings, Inc.

We're not assuming a significant increase in the average interest rate. Our forecast is a little over 4%. And average borrowings I think for the year, about $750 million.

David J. Chu - Bank of America Merrill Lynch

$750 million. Okay, great. Thank you very much.

Operator

Thank you. Our next question comes from the line of Ramsey El-Assal from Jefferies. Your line is open.

Ramsey El-Assal - Jefferies LLC

Hi, guys. Thanks for taking my question. Could you also just elaborate again on the non-repeating corporate development cost? That was another piece that I didn't accurately factor into my model, and could you just describe again what that is and why that's there?

Jerry N. Ulrich - Blackhawk Network Holdings, Inc.

Yes. Actually there's two major or two material components. The sale of our PayPower business during 2016, it happened in two pieces. One, the U.S. piece, where we sold to NetSpend and the second in Canada later in the year. The total impact or benefit in the course of the year was about $6 million from that. The other component relates to this migration of open loop card portfolios on to our issuing bank contracts for certain acquisition-related entities. So, GiftCards.com, we bought in the first quarter and then extrameasures, so the net benefit from these various moves over the course of the year is probably in the neighborhood of $8 million to $10 million.

Ramsey El-Assal - Jefferies LLC

Got it. Okay. And I do recall those items now that you repeat yourself. Thank you. I wanted to talk about the organic growth profile of the entire business, maybe also sort of zeroing in on U.S. retail because that seems to be a big driver, obviously. But the organic growth rate, I guess there's two parts to the question. First is, how should we think about organic growth going forward in the context of the results and, secondly, it seems to have come down year-over-year since the IPO maybe a little more quickly than I had anticipated. Is there a stabilization that will occur, or is this the type of a thing where U.S. retail seems to kind of just keep decelerating and it really won't pick up until those other segments, incentives and international, have enough ballast in the model in order to kind of inflect it back in the other direction?

Talbott Roche - Blackhawk Network Holdings, Inc.

Well, I mean, first off, I think we have been diversifying the business, so if you look at 2017 revenues, international and incentives on a combined basis represents about 50% of our adjusted operating revenues going into 2017. So, there is a balancing impact there. I do think U.S. retail, it's hard to look at 2015. If you look at it since 2013, there has been a really nice 8% compound annual growth rate and that's factoring in 2016, which we know was an aberrational year because of EMV.

We have been adding new doors each year, although this addition with Target of 1,800 new stores is a fairly significant step-up in new doors over the course of the last three years. We have been fortunate enough to add accounts like Whole Foods, Market Basket, those types of accounts, which do contribute to growth. But then, of course, our best practices is the piece we rely on for same-store sales increases year-over-year. We didn't get those in effect because of EMV this last year, but every year prior to this we have. And there is a little bit of an effect of long large numbers as it gets bigger, you know, we have seen the growth rate go down, but we're not – we still see U.S. retail as a growth driver for the business, albeit, we have been saying now organically single digits, and the other businesses growing midterm, 15% to 20%, meaning the other segments, incentives and international.

So, there is a blending effect, but we also have each year added acquisitions on top of the organic growth that added somewhere in the neighborhood of 5%. So, we still feel comfortable with the long-term adjusted operating growth goals that we talked about being in the 20% range.

Ramsey El-Assal - Jefferies LLC

Okay. Lastly for me, would you ever consider stepping in with buybacks, you know, in terms of not simply to offset dilution from the stock-based comp, but in a more aggressive sense to kind of back-stop your shares?

Talbott Roche - Blackhawk Network Holdings, Inc.

Well, we don't like to comment. We talked about – we have announced, the board approved $100 million for buybacks. We I think explained that we didn't implement any in the fourth quarter. And we have looked at this as part of the capital allocation strategy.

I think it just comes down to what is going to generate the best rate of return for the business and that's the greatest long-term growth potential. It is part of the consideration set. I think we announced that in fourth quarter of last year. We're also careful not to talk forward-looking statements about buybacks.

Jerry N. Ulrich - Blackhawk Network Holdings, Inc.

And I think, again, tomorrow we'll talk about how we view the return on investment from our acquisitions and, you know, just as a preview, you know, we see that return in 12%-plus range.

So, it's a prioritization as we said earlier on the call that as long as we have this pipeline of acquisitions, we have been successful in diversifying the revenue base and now we want to make sure we continue to add to what is a relatively fragmented market in incentives for example, as well as take advantage of opportunities throughout the international regions, including some emerging regions.

So we still feel that we're getting a better return on the operating side than, you know, what you can count on as a calculated return from stock buybacks, recognizing that, gee, if we time it just right, the return would look better.

Ramsey El-Assal - Jefferies LLC

Okay. Thanks a lot.

Operator

Thank you. Our next question comes from the line of Paul Condra from Credit Suisse. Your line is open.

Paul Condra - Credit Suisse Securities (USA) LLC

Hey. Afternoon, everybody. Thanks. I guess, I just wanted to kind of go back to the margins and earnings growth. And I guess first on margins. How are you thinking about margin expansion internally? I mean how much of it – is that a priority for you at this point? Or is it more, keep margins stable, let's focus on growth? And if you wanted to expand margins, what would be the steps you could take to do that?

Talbott Roche - Blackhawk Network Holdings, Inc.

I would say margin expansion is a priority for the organization. I think you saw us focused on the margin expansion we're achieving in both the international and incentives segments and it continues to be a focus in U.S. retail too. When we look at being a scale operator and expense containment measures that can be taken, but also, we're developing new products with higher margin profiles. We'll be talking about some of that tomorrow at the Investor Day.

That's a key priority for us in the U.S. retail segment. And we're always looking for ways to drive more margin into the business. Look, it isn't just about top line growth. It's a mature business and we want to make sure that we're optimizing all of the potential for bottom line expansion as well.

I think there's a lot of potential expansion in the incentives and international businesses, incentives I'll speak of, because we continue to capture synergies that we've planned in our integration models as we purchase companies and we're still executing on those. And that includes things like in-sourcing our processing when it previously had been outsourced, that can save millions of dollars. It includes in-sourcing customer service and getting more leverage out of the operation that we already have.

And we're doing that across both the incentives and commerce business. So, the retail business and the incentives business, bringing scale and leverage to our operating model. So we're finding ways to consolidate on to single global platforms and leverage that into a lower operating expense. So, it's a big priority for the company.

Jerry N. Ulrich - Blackhawk Network Holdings, Inc.

Well, I think, just to add on to that, we talked about the temporary cost reductions which were primarily incentive compensation last year, but we also took some permanent savings measures. We had some adjustments in head count, those will drive $7 million to $10 million of permanent savings in 2010 (sic) [2017].

We consolidated the technology organization under Sachin Dhawan, our new CTO. You might note that in our adjusted metrics walks, we did have a consolidation of platforms, so we purchased a few e-commerce type businesses and that consolidation resulted in a write-off of the balance or impairment of the value of a couple of those platforms that we're consolidating. So, those are all measures that we're taking. As Talbott said that, focus on utilizing the infrastructure most effectively across the segments, and we're going to continue to scrub those. Now, we recognize that some people believe with a bounce-back here we should be 150 basis points of expansion, but we have some other costs as we talked about, including the launch of a very important customer, new account, as well as some of the headwinds around program management piece.

Kind of going back to the fourth quarter walk, year-over-year, recognize that Cardpool really did have a bad quarter compared to the prior year, so we had this kiosk issue that really drug us down, and so that impact is fairly significant, about $16 million year-over-year on the AOR line and not as much on the EBITDA side, but significant on the AOR, which if you kind of back that out, where is the organic growth, there is significant growth in e-commerce. And you end up at about 6% organic growth rate in that U.S. retail if you really adjust for Cardpool.

So, I don't want to apologize, because there is a lot of moving parts, but the fact is that there is a number of issues that drug down that number, makes the growth rate hard to observe, but we are still growing. I think that's the bottom line message.

Talbott Roche - Blackhawk Network Holdings, Inc.

Yes, I'll just pile on to the Cardpool comment, because we did reach agreement with our kiosk partner by agreeing to purchase those kiosks that we now no longer have that dependency. We can move forward with the marketing and management of those kiosks independent of the third-party, which we think is a better arrangement and focus on return to growth in that Cardpool business, which as you know has a very different margin profile than the core business.

Paul Condra - Credit Suisse Securities (USA) LLC

Okay. And I just wanted to clarify also – thanks for that detail, but on Target, so you're including the revenue you expect to generate from that account, you do have that factored into your guidance at this point?

Jerry N. Ulrich - Blackhawk Network Holdings, Inc.

We do.

Talbott Roche - Blackhawk Network Holdings, Inc.

We do.

Jerry N. Ulrich - Blackhawk Network Holdings, Inc.

In the back half.

Paul Condra - Credit Suisse Securities (USA) LLC

Right. Okay.

Jerry N. Ulrich - Blackhawk Network Holdings, Inc.

We typically build in some ramp period as a bit of a cushion, but it is in the back half of the year.

Paul Condra - Credit Suisse Securities (USA) LLC

Okay, great. And then can you give us, what are you expecting in 2017 for overall depreciation and amortization and then acquired assets amortization?

Jerry N. Ulrich - Blackhawk Network Holdings, Inc.

Let me come back to that. Maybe go on to the next question and then we'll come back to that.

Paul Condra - Credit Suisse Securities (USA) LLC

That was really everything I had. I just wanted to get that last one just more cleared up.

Jerry N. Ulrich - Blackhawk Network Holdings, Inc.

All right. The amortization next year we're projecting at $58 million, depreciation at $56 million.

Paul Condra - Credit Suisse Securities (USA) LLC

And then just the acquired amortization?

Jerry N. Ulrich - Blackhawk Network Holdings, Inc.

That's the biggest component of the amortization, amortization of intangibles.

Paul Condra - Credit Suisse Securities (USA) LLC

Yes. Of that $58 million, most of that is the acquired intangible asset...

Jerry N. Ulrich - Blackhawk Network Holdings, Inc.

Absolutely.

Paul Condra - Credit Suisse Securities (USA) LLC

Okay. Thanks.

Jerry N. Ulrich - Blackhawk Network Holdings, Inc.

There really isn't any other amortization cost.

Operator

Are we ready for our next question?

Jerry N. Ulrich - Blackhawk Network Holdings, Inc.

Yes.

Patrick Cronin - Blackhawk Network Holdings, Inc.

Yes.

Operator

Okay. Our next question comes from the line of Ashwin Shirvaikar from Citi. Your line is open.

Ashwin Shirvaikar - Citigroup Global Markets, Inc.

Thank you. Thanks, guys. My first question is with regards to competitive intensity, in particularly U.S. retail. I mean, for years, you guys have operated essentially, sort of an oligopoly type environment and in the last few months you traded clients. I mean, you could argue you guys came out with the larger client, obviously, Target, but you also lost a grocery client.

And so my question is, as compared to intensity increasing and, if so, why now? And perhaps it is sort of symptomatic of really the slower growth of U.S. retail, which, I don't know, it seems to be more or less a 5% to 10% growth business.

Talbott Roche - Blackhawk Network Holdings, Inc.

Yes, so, Ashwin, I wouldn't read too much into it. I think at the end of the day we have contracts renewing all of the time. And we have a cadence of renewing them throughout the year, and you're right, we don't typically win an account from our competitor, it's much more atypical than it is, it has happened from time-to-time and they have from time to time.

We enjoy a really nice relationship with Target. You may recall that they are a card partner and have been a card partner for many years and I think they've enjoyed the execution they've seen through our network. And so, we – look, I'm not saying it isn't a competitive situation out there.

I just feel that we've been fortunate to be granted this business. I think we've worked well with that team and exhibited really a lot of follow-through in terms of distribution of their product. And so, yes, I mean, so I would leave it at that. I understand physical retail is under pressure and we see that in accounts like – I won't name names, but we all know accounts that are struggling in physical retail today, just with the impact of e-commerce, that's why we're really glad that we work with some of the largest e-commerce players out there. But I don't see that impacting the competitive environment between us and others.

Ashwin Shirvaikar - Citigroup Global Markets, Inc.

Got it. Okay.

Talbott Roche - Blackhawk Network Holdings, Inc.

It's always (58:22).

Ashwin Shirvaikar - Citigroup Global Markets, Inc.

Yes, yes. No, no. Understood on that point. On the expense trends, looking in particular at the processing and service as a percent of AOR, and it seems to not quite be a full-fledged recovery on that point, even though you guys seem to have consolidated systems. So is this more or less a timing issue where you might get back to the 2015 level by the time 2018 rolls around and kind of a transition year? Is that a good way to think about it?

Jerry N. Ulrich - Blackhawk Network Holdings, Inc.

Well, partly that's true, but the other factor we've pointed out is the incentives business, in general, has a little higher processing and services cost component. That includes Grass Roots, that is additive next year. But if you look at that business, there's just more individual consumer fulfillment. So the consumer or the fulfillment costs in total are a little higher than our retail business, which is more bulk fulfillment, large quantities to stores and so forth.

So, there is just a mix question, as Talbott pointed out, the incentives business now will be 30% of the total adjusted operating revenue next year, international pops up to 20% inclusive of Grass Roots. So I think the mix of the businesses has the impact of lessening what you think would be an improvement in that line.

William Y. Tauscher - Blackhawk Network Holdings, Inc.

As we move forward...

Jerry N. Ulrich - Blackhawk Network Holdings, Inc.

But the margins – by the way, the margins are expanding for international and incentives in total. So, the revenue is compensating for that.

William Y. Tauscher - Blackhawk Network Holdings, Inc.

Grass Roots is early on, only owned it literally for a little bit of time. And there clearly are a number of synergies that we will be harvesting over the course of the year that as we go through next year it will have an offsetting impact on the way that model works. You also hear constantly of us doing things that are putting our incentives businesses on single platforms and then are merging (1:00:33) various kinds of cost structures in those businesses. So there are some offsetting trends to the normal nature of that business that will be helpful in the next year or two years.

Ashwin Shirvaikar - Citigroup Global Markets, Inc.

Got it. I was looking – just a couple more questions, if I can squeeze them in. One is the extremely wide range with regards to guidance, and I was hoping you could kind of – and specifically talking about segment level AOR forecasts, 8% to 19%, 12% to 25%, 51% to 68%, I mean, those are fairly wide ranges of growth. Are there specific assumptions that get you to the lower end versus the upper end, anything that sticks out?

Jerry N. Ulrich - Blackhawk Network Holdings, Inc.

No, I think it's just the fact that it's early in the year. We want to get a few more signals before we would lock in on a narrower range which I think typically we'd do. We do agree that it's a little wider range than we started last year with. Of course, we're not expecting something like last year, because EMV was so volatile, but we also have just what level of recovery, as you guys have all been also trying to predict. So we just decided, I think, that we're hopeful about the upside, for sure. But we recognize the variability across the segments.

Talbott Roche - Blackhawk Network Holdings, Inc.

Yes, and we understand that, I think, it is exactly as Jerry said, a little wider in the beginning of the year and our goal is to narrow that as we get more visibility on the year. But we're comfortable with the midpoint. We're not trying to signal discomfort with the midpoint.

Ashwin Shirvaikar - Citigroup Global Markets, Inc.

Got it. Last question. The settlement timing benefit that's being added back to your adjusted free cash flow, could you sort of walk through that again, because when I look at it, it seems to me more or less just the seasonal ebb and flow of what happens every year end for you. And I'm kind of concerned a little bit that you'd add that back and investors really have little visibility into what gets added back. So can you explain that a bit?

Jerry N. Ulrich - Blackhawk Network Holdings, Inc.

Yes, so, Ashwin, we've tried to explain it. It is a little bit different concept. But at our year end, because the cash balances and the settlement balances of receivables and payables are volatile based on how Christmas falls relative to our fiscal year end, we collect our cash on average about six days to seven days before we end up remitting the cash to our partners. And so as we grow the business historically, there's some float that's usable for the ongoing operations. And that typically came out to a couple of percentage points.

But it would be confusing for people to just assume the year-end cash balances represented your cash flow, and that's why we back out the year-over-year change in those settlement receivables and payables, but then we feel like we need to add back what is the more permanent effect of that settlement, payable, receivable difference. So that's kind of the net-net of the thing. Does that help explain it?

Ashwin Shirvaikar - Citigroup Global Markets, Inc.

Yes, conceptually it does. I just kind of, you know, with regards to the exact modeling of it, if you could break it down further maybe tomorrow at the Investor Day it would help.

Jerry N. Ulrich - Blackhawk Network Holdings, Inc.

Yes. Well, basically we're looking at the change in transaction load value that relates to the product where you've got this differential in payment collection versus payment. But we can elaborate on that tomorrow.

Ashwin Shirvaikar - Citigroup Global Markets, Inc.

Okay. Great. Thank you, guys.

Operator

Our next question comes from the line of Carl Norberg from Craig-Hallum. Your line is open. Mr. Norberg, please check your mute button. We're not getting any audio from your line, Mr. Norberg. Last call.

Okay. We will move on to the last person in the queue at this time. This one is from the line of Eric Wasserstrom from Guggenheim Securities. Your line is open.

Eric Wasserstrom - Guggenheim Securities LLC

Great. Thanks for fitting me in. I know there has been a lot of discussion about the U.S. retail segment, but I'm afraid I have one more question. Talbott, for locations that were added in 2016, how did the growth profile of those look relative to the historical profile?

Talbott Roche - Blackhawk Network Holdings, Inc.

That's a great question. So, I'm going to count Whole Foods in that, because Whole Foods, even though we signed them the year prior, they didn't roll out, Eric, until the back half of the year, because they also had EMV conversion issues. So, we saw a great ramp in their sales. They are, what I would call, a basic execution and we have this internal vernacular for how we develop our accounts, they go from basic to best practices to loyalty enhanced, and they are basic. But what we saw is a really healthy climb and we continue to see that and we'll continue to see that through this year on their stores.

They need to expand to best practices by having more pace in the store right now. It's a fairly restricted display. But based on the display, their throughput is indexing higher than we would expect from the number of pegs and I think part of that is the spend inside those locations.

Market Basket, which is a smaller chain up in the Northeast, that we brought on board, they have also seen a nice healthy ramp and these are correlating exactly with how we saw chains when we first launched them years ago. It takes a while for the consumer to find them in the store and then they ramp up to a per store basis, anywhere from $100,000-plus for a basic all the way up to $0.5 million per store on a TDV basis is what I'm talking about, for best practices and then of course it can go to $1 million-plus for a loyalty enhanced store. But we are seeing them develop in line with our normal experience with launches.

Eric Wasserstrom - Guggenheim Securities LLC

Got it. So on a like-for-like basis, I guess, probably most stores start out on the basic level. There's nothing distinct about the post EMV environment for a new retail distribution partner location?

Talbott Roche - Blackhawk Network Holdings, Inc.

No. The behavior is the same by the chain and the consumer. So, I think, what we've seen with the EMV, the ones who actually restricted sales and/or removed cards for a temporary period till they became compliant, they can lose some customers who will go seek those cards out in other channels.

Maybe that's a drug chain, maybe it's a big box store that we don't sell in, but we are seeing increased frequency in purchase of those high denom open loop return to those stores. So I think it's just a matter of time before the purchase frequency is restored in those folks who went through a change.

Eric Wasserstrom - Guggenheim Securities LLC

Got it. Okay. Just...

Talbott Roche - Blackhawk Network Holdings, Inc.

Yes. Non-EMV chains are growing normally and we're seeing normal behavior there, normal ramp times, normal sell-through, normal response to marketing and merchandising.

Eric Wasserstrom - Guggenheim Securities LLC

Got it. And you anticipated my next question, but the – so it sounds like for legacy retail distribution partners, your expectation is still that they'd return to their pre EMV levels and that's tracking, but potentially over a longer time horizon than you would have anticipated.

Talbott Roche - Blackhawk Network Holdings, Inc.

Yes, Eric, that's correct. And one of the reasons we like grocery is because of the inherent frequency of shops. So, many of our accounts are grocery stores. Those are the ones that really got impacted by EMV. The reason I bring that up is because consumers are in those chains with very high frequency. And so we think it's going to take – it is taking a little time for them to realize those cards are back, but once they do, it's much more convenient for them to purchase from that location than many other locations that they don't frequent as much. The other thing that we're starting to use more of is the data the retailers themselves hold about consumer behavior.

So, when you shop with your loyalty card or your discount card in a grocery store, they can identify who has been buying gift cards in the past, and if they miss those sales from those particular households, we can now focus digital marketing to those households to reignite the consumer's engagement with the category and get that purchase frequency back and that's really working at some of the higher, I'll call it, more sophisticated larger retail chains that have very, very good loyalty programs and good loyalty data.

Eric Wasserstrom - Guggenheim Securities LLC

Great. Well, thank you for taking my questions.

Jerry N. Ulrich - Blackhawk Network Holdings, Inc.

You're welcome.

Operator

Thank you. That's all the time that we have for questions for today. So, I'd like to turn the call back over to management for closing comments.

Patrick Cronin - Blackhawk Network Holdings, Inc.

All right. Well, thank you, everyone, for joining us today and we hope most of you will be able to join us for tomorrow's Analyst Day. Enjoy the rest of your evening.

Operator

Ladies and gentlemen, thank you, again, for your participation in today's conference. This now concludes the program and you may now disconnect at this time. Everyone, have a great day.

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