Good morning, and welcome to the Alliance Data Fourth Quarter 2015 Earnings Conference Call. At this time, all parties have been placed on listen-only mode. Following today's presentation, the floor will be open for your questions. [Operator Instructions] It is now my pleasure to introduce your host, Mr. Steve Calk of FTI Consulting. Sir, the floor is yours.

Thank you, operator. By now you should have received a copy of the company's fourth quarter and full year 2015 earnings release. If you haven’t, please call FTI Consulting at 212-850-5721. On the call today, we have Ed Heffernan, President and Chief Executive Officer of Alliance Data; Charles Horn, Chief Financial Officer of Alliance Data. Before we begin, I'd like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties described in the company's earnings release and other filings with the SEC. Alliance Data has no obligation to update the information presented on the call. Also, on today's call, our speakers will reference certain non-GAAP financial measures, which we believe will provide useful information for investors. Reconciliation of those measures to GAAP will be posted on the Investor Relations website at www.alliancedata.com. With that, I'd like to turn the call over to Ed Heffernan. Ed?

Great. Thanks, Steve. Joining me today is Charles Horn, our always informative CFO. Charles will update you on early results and then I'll give a wrap up for 2015 and then talk little bit about what '16 looks like. And with that, Charles, it’s all yours.

Thanks, Ed. It was a strong finish to 2015, as revenue increased 18% or EPS increased 20% and adjusted EBITDA net increased 18% compared to the fourth quarter of 2014. Impressive growth considering the FX headwinds we have faced all year long. For the fourth quarter, the US dollar reduced the reported revenue by about $67 million or a 4% hit to the growth rate and quarter PS by $0.12 or a 3% hit to the growth rate. Organic revenue growth remained strong in the fourth quarter, a 14% on a constant currency basis. That compares to 15% constant currency growth for the full year, reflecting balance growth throughout 2015. From a capital allocation standpoint, we spent $952 million during 2015 acquiring 3.4 million shares under our repurchase program at an average cost for about $280 per share. We have now required about 80% of the number of the shares issued to acquire Conversant at the end of 2014. Looking to 2016, we expect our capital allocation to shift to M&A first probably in the $400 million to $500 million range and then to share repurchases up to the $500 million board authorization. Essentially we'll look to deploy our free cash flow, while maintaining or lowering our leverage ratio of about 2.7 times. Let's flip over to page 3 and talk about LoyaltyOne. On a constant currency basis revenue increased 6% to $421 million, while adjusted EBITDA decreased 13% to $99 million compared to the fourth quarter of 2014. A shift in sponsor mix, which lowered the average price per mile issued, coupled with increased support of our sponsor promotional programs pressured AIR MILES financial results for the quarter. The strengthening US dollar was a year-long headwind and will likely again be in 2016. AIR MILES reward miles issued decreased…

All right. Thank you, Charles. If everyone can turn to the slide 2015 wrap up, this is where it gives me chance to talk about the year, what went well, what could have gone better and how the overall model continues to evolve, as we continue down the path into '16, '17 and '18. And again, the best way to start this off and to look at it is that Alliance's model continues to move towards if you think of it a series of platforms, whether its for a coalition, a private label card, a one-off loyalty program. But a series of platforms depending upon what the customer wants. That are used really as a capturing device. The ability to capture the clients, customer and what he or she is purchasing down to the SKU level both online and offline. So its really a platform to capture this very important unique information, which is then all funneled down to the same type of analytics to gain insight into what purchase behavior was in the past few years is saying about this consumer and how we can read into that and reach that consumer on a personalize basis. We believe the model will continue to move from a mass marketing approach to a segmented approach, where it really is today to where we're heading, which I think is the one-to-one personalized approach, which is beginning to manifest itself today, and will over the next 18 to 24 months. So taking that information, gaining the insight, figuring out what makes them tick, and then reaching them with a relevant message or communication from our client, again, personalized to their taste and habits and reaching them through the right channel. Because it’s as important to have the right message, but it’s important to…

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

Looks like Epsilon is back on track and Conversant is obviously growing very well now. When we look at the last quarter, your fourth-quarter, your constant currency, it looks like we're calculating your constant currency organic growth rate to be still like almost 13% or low double-digits. I guess, first of all, do we have that right? And then that's pro forma for Conversant. And, again, I think you mentioned first quarter's guide of 8% was really a step down because of the timing year-over-year versus of where the BrandLoyalty results come in, right? First quarter or second? Just make sure that's the only difference. And if that difference did not exist, what would your first quarter growth rate look like? I'm just curious. We're getting a bunch of questions on Q1 already.

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

So that was about organic revenue growth for Q4 Darrin?

Yes. Pro forma for Conversant basically?

So you'd be up about 14% on constant currency, about 11% without adjustment for FX.

Okay. That's helpful. I guess what I was just trying to figure out, though, had it not been for the BrandLoyalty timing shift, we would've probably been similar, right? I mean, back to the low double digits, again, I guess, for first quarter?

Sure.

Okay. Let's just hone in for a moment for me and then I'll just as a follow-up on the AIR MILES business. I understand there's macro challenges there. And just in terms of the mix and what we should expect. The AIR MILES issuance was somewhat worse than we expected for the quarter. When we think of that and what's happening on instant rewards also, how do we really have confidence it's going to be that low to mid single digit issuance growth again through the year I think you suggested it should get back to? And especially if you comment a little more of what the impact should be of the instant rewards or rather the rewards expiration in the middle of the year. I guess that's already reflected in your guidance. What kind of impact does that have?

Yes. I'll take the first part and Charles and take the second. The issuance, obviously, we had three huge of quarters of issuance and Q4 was I think down. But that’s you know, you've tracked us for years. You know that it's an annualized-type budget spend from the sponsors. From what we're looking at right now, the commitments from the sponsors and again its primarily coming from the non-financial services side of the house. You're seeing the non-discretionary spent type budgets looking pretty good. And so, that’s why I think we can continue to 3% to 4% type growth rate in the issuance side.

And Darrin, on the expiree, it’s a little bit of an unknown at this point. We've not seen any type of change in consumer or collective behavior at this point. And lastly, we wouldn’t see anything until the Q3 or Q4. So in terms of guidance, we really have not considered it. If something does happen, you could see a little bit higher revenue growth. You'd see us make some modifications to the program, but it's just too soon for us to know. So in terms of guidance, we've not really considered it. We'll evaluate it as years goes on and frankly I wouldn’t expect to see any trend until as early as Q3, as late as Q4.

All right. Just last question for me, guys. It seems like every year you start off and you take your time with guidance, which makes a lot of sense. In terms of conservatism here, the BrandLoyalty business, obviously, is going very well in terms of pipeline in North America especially. Is that an area you've completely included in your guidance? Just give us a little color on that. And just portfolios on the private-label side. Zales hasn't come on yet. Any other opportunities this year? And other than that, I'll leave it at that. Thanks.

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

It makes sense, guys. Thank you.

Thank you.

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

Thanks. I wanted to ask a couple of questions on Card Services. It looks like you had tender share gains of 200 bps in Q4 and I think that was probably above the full-year average. Seemed like a really large contributor to the 11% core growth. Could you give us just a little bit more color on the sustainability of high single to low double-digit core growth, despite a lot of these mixed retail and same-store sales headlines that we're seeing in the marketplace?

Yes, I mean, it’s a great point. Its – we looked at our book of retailers 145 or so brands that we have out there. We think Q4 holiday rolled all up. They probably did about plus three year-over-year and we were more like plus 8 to 10 at those core – at those retailers. So the tender [share stuff, adds anywhere from 5 to 7 points of growth over and above what the retailers grow at. So if the retailers grow at nominal GDP, plus the tender share, we feel pretty good that 10%, first 10% of growth in the business is going to come from the core. It really seems like this tender share thing is for real. We've seen it now the past several years. And again, the more and more personalized we make the outreach to the consumer, the more effective it is, the more sales that are created, the better the retention of the consume is. So I think we've got tender share at some of our folks that are over 50% and if we're somewhere around 30ish today, we got a long way to go.

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

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

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

Thanks, guys.

Yes.

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

Hi, thanks. And good morning, guys. Two questions. One was back on card and then something about capital. Regarding the card business and your comments around sort of mobile and digital and the board omni-channel, I guess as you think about the RFP process, I think some people feel like it's become a competitive environment just based upon pricing that banks are willing to offer retailers for the receivables. But could you talk about, just in the last 12 months, if you've noticed any kind of shift in the priorities of retailers in terms of pricing versus sort of digital versus tender shares? Is there anything that has been shuffled there, in your opinion, around the competitive and the RFP environment?

Sure. I think that - and you'll see that in the fact that we're 20% private label, 20% co-brand. The shuffling or the competitive pressure that you're seeing is really on the co-brand side. That’s where – let's face it, you're running into the buzz of the big banks who are looking to grow balances, and the best way to grow to balances is certainly not through private label, right, there are tiny balances, but through the big co-brand balances. And so what we're seeing out there is the pricing on co-brand deals, the big – these are master cards balances, which are five times, six times what our private label balances are. It’s getting incredibly competitive, and as a result we've backed off in that area because we don’t really need it. What you'll find is most of our co-brand stuff is an added product to an existing private label client. So to answer your question, the co-brand space is not an area where we think that the pricing make sense. In terms of the private label stuff, that’s where you get a lot a more focus on the card being viewed as surely the loyalty tool, which gets into the data and the digital and that’s where you get the Conversant discussions beginning to come in and the Epsilon discussions. That’s sort of our sweet spot and the more assets we bring on the digital side, like a Conversant, the better off we are with those businesses. And frankly, the sale on the private label side is more a sale of developing a loyalty program with all the digital channels attached to it. And that’s where we don’t really run in the type of pricing issues that you run elsewhere, and that’s where we're going to stay.

Great. And my follow-up is on the buyback. I apologize if I missed it, but did you make any commentary around your thoughts on the buyback 316 [ph] relative to your guidance, whether it's included or not included, and any color on using that program through the calendar year?

Yes. We'll continue to be active with it Tim. We will slip it to our second priority versus our primary in 2015. So we'll slip behind M&A. So it will be somewhat consistent with what we've done in the past M&A first buyback. Second it does incorporates some, as you can see we gave a range on share counts, obviously with the market conditions being where they are, we've already been active during the course of the year. It does not assume the entire share program being used. It just assumes basically what we've already done for the most part.

Okay. Sounds great. Thanks very much.

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

Hey, guys. Good morning. Ed, I might have missed this in the prepared remarks and the commentary, but could you give us some insight into Epsilon's database pipeline, in particular? It sounds like there are some smaller players there that are reevaluating some businesses and maybe an opportunity. But I know we spent a lot of times on Conversant. I would love to reel it back to the core Epsilon business for moment.

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

Okay. Great. Thank you.

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

Thank you. Obviously you guys are operating in a choppy backdrop. And I know you did a great job turning around Conversant and the margin trajectory in Epsilon. I guess to ask the question previously a little different, as we look towards 2016, where are the biggest risks and opportunities to the downside and upside respectively?

And you are talking about overall business?

Yes, overall business across all the segment?

I think its going to be fairly consistent with what you saw in '15, where card services always had the ability maybe to grow a little bit quicker, you're getting good traction with Conversant. We were assuming basically high single digit growth for '16, could do a little bit better based on the developing pipeline. BrandLoyalty if we get some traction in the US that could be beneficial to us. On the down side, we talked about it. Canada looks rough as the mix shifts reduces the revenue per mile, redeemed, ergo, it reduces our profitability. Epsilon, I think we gave pretty good guidance, mid single digits, revenue and EBITDA growth seems solid. Could be a little opportunity there, as we get traction in our marketing technology, but I think that sort of middle of the road. Upsides are always if we deploy the buyback program, take our share count down. Upside would be we deploy our cash flow and we buy small tuck in acquisition that’s immediately accretive. That’s kind of the way I would look at it. From a guidance standpoint what Ed and I always try to do, is do is do something middle of the road, recognizing there could be upside, there could be downside, but we usually try to leave enough there to make sure if there is few unknowns, we have the ability to cover it off in our guidance.

And I guess the second question is just on the backlog in Conversant? How long does it take to convert that backlog?

Think of one-third, one-third, one-third. It's not head-on like the vintages and private label, maybe it’s a little bit faster. But you're going to see – you're actually - if you sign it in 2015 you'll actually get about third of it, up and running in 2015. So current year you'll get a third, the next year you'll get up two third and then couple of years out you'll get the final one.

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

We really don’t have anything burning at the moment. Sanjay I would say we're probably just using some of the capital and if we find something broadening the footprint in Europe, I think it’s an interesting time over there. We've seen with BrandLoyalty that that’s been a very helpful area for us. So something in that side of it to help bulk up core Epsilon. And then we'll just see how the year plays out and if there is – I think there we'll go more heavily on the buyback.

And just to be clear, if you do M&A, you'd look for something that's accretive in year-one?

Yes.

All right, cool. Thank you very much.

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