Good morning, and welcome to the Alliance Data Third Quarter 2016 Earnings Conference Call. At this time, all parties will have been placed on a 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. Eddie Sebor of FTI Consulting. Sir, the floor is yours.

Thank you, operator. By now you should have received a copy of the company’s third quarter 2016 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; and Bryan Kennedy, Chief Executive Officer of Epsilon/Conversant. 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 the 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 will provide useful information for investors. Reconciliation of those measures to GAAP will be posted on the Investor Relations website at www.alliancedata.com. With that, I would like to turn the call over to Ed Heffernan. Ed?

Great. Thanks, Eddie. Joining me today is Charles Horn, our always prolific CFO; and Bryan Kennedy, as mentioned, President of Epsilon/Conversant. Charles will go first and update you on the quarterly results and then Bryan will discuss Epsilon/Conversant specifically, and then I’ll wrap up with a third quarter look, and a full year outlook as well as sort of our initial brief discussion as we look into 2017. So, Charles, take it away.

Thanks, Ed. It was a terrific third-quarter with double-digit growth in all profitability measures. LoyaltyOne and Card Services came in better than expected for the third quarter, while Epsilon/Conversant lagged a bit on the top line growth expectations, but executed the important turn in adjusted EBITDA, which was flat for the third quarter after being down in the first and second quarters. As a result of Q3’s strong performance we are raising annual guidance for the second time this year, increasing revenue from $7.15 billion to $7.2 billion and core EPS from $16.85 to $16.90. We did not pass through the full $0.32 [beat] to third quarter core EPS guidance because a large portion is timing related, whereby some earnings were pulled forward out of Q4 to Q3. In particular, for AIR MILES we expect redemption activity to moderate in Q4 after a run in Q3. Basically collectors were getting ahead of the upcoming expiry date. And for Card Services, our principal loss rates came in 20 basis points better than guidance in Q3. We expect to give that back in Q4 which will prompt some reserve build. Lastly I expect tax rates to tick up a bit in Q4. Turning to the repurchase program, we have acquired approximately 3.3 million shares under our repurchase program year-to-date, and have approximately 300 million of our board authorization left in 2016. You will notice from this slide that we are making a big change in our shareholders return philosophy with our board of directors declaring a quarterly dividend yielding 1% with a record date of November 3. Going forward we expect to use the balance of share repurchases and dividends to return capital to investors. Ed will talk about this some later in the presentation. Let us flip over to page 4…

All right. Thanks Charles. Epsilon’s revenue increased to $543 million for the third quarter, up 2% compared to the third quarter of 2015. Importantly, adjusted EBITDA came in at $135 million, which was flat compared to prior year after two straight quarters of decline. So to give you an update on our business, let me first discuss the EBITDA results. Our most critical focus at Epsilon for the last several quarters has been to alter the long-term trajectory of the cost structure required to support our business. And a big part of that has been the ramp up of the investment in our India operations to fuel the global staffing model. I am pleased that adjusted EBITDA after a Q1 decline of 22%, followed by a Q2 decline of 9% has leveled off flat in Q3, even while still carrying substantial duplicative costs. While it has taken perhaps a quarter or two longer than we originally anticipated, I think on the cost front we can safely say that our strategy is working and we expect to see that trend continue to play out positively in Q4. So let us turn briefly to the revenue picture and a breakdown of the offerings within the Epsilon segment. I will start with agency media and services, roughly 25% of the total business. These offerings produced $138 million of revenue for the quarter, a decline of 5% versus prior year. At the beginning of the year this business line was one of our concern areas and our objective was quite simply to lower the drag that it was placing on overall growth rates. We have made steady progress with each sequential quarter from a decline of 23% in Q1 to a decline of 15% in Q2 and in this quarter as you can see…

Thanks Bryan. Let us flip over to Page 6 and talk about Card Services. Card Services had a better than expected quarter with revenue up 26% and adjusted EBITDA net up 14% compared to the third quarter of 2015. Now what really drove the over-performance and there is really several things that I would point to. First gross yields came in at 26.8%, 60 basis points better than original guidance and within 10 basis points of last year. Essentially the cardholder friendly changes we made in mid-2015 have burned in and the related compression has dissipated. Second, we continue to drive operating expenses leveraging with operating expenses as a percentage of average card receivables dropping 30 basis points compared to the third quarter of 2015. Third, principal loss rates were 20 basis points better than guidance of 4.7% and trends in delinquency rates are moving consistent with our principal loss rate forecast for 2016. Looking forward we believe the [Indiscernible] Q3 loss rate guidance is due to timing from seasonality and that we will give it back in Q4. Conversely we did see credit sale slow during the quarter. While we increased tender share with our brands by approximately 150 basis points during the third quarter, softness at several of our core brands dropped credit sales growth in our core to 3%, down from 7% growth in the first half of 2016. We expect that softness to continue into the fourth quarter. Counterbalancing, we have had a terrific year with new signings; The Children’s Place, Ulta Beauty, and Williams-Sonoma to name a few. Two of these brands have launched and we are seeing early and very encouraging results as we welcome new card members to the programs. We have seen healthy applications in the first few weeks thanks to our new [Frictionless] mobile credit acquisition capability, which reduces the times to apply by 25% and reduces abandonment rates more than five times. Turning back to our solid loss performance we have a good view into the rest of the year, and expect that we will track in line with full year expectations. We also expect as vintages mature, we will see delinquencies normalize around the middle of 2017 with losses normalizing thereafter. Ed will talk about this a bit later. With that I will turn it over to Ed.

Great. All right. If everyone could be on Slide 8, it say third-quarter and full year outlook. It has a bunch of colored dots on it to make it easy to follow, and this is the commentary I will give on the quarter and full year, then we will go into a couple of other items and then 2017. And from a consolidated level, third quarter revenue of $1.9 billion, up 19% and earnings per share of $4.74, up 20%. Obviously this was the largest quarter we have ever had in our history, and needless to say very, very pleased at how strong a quarter it was especially in this environment of low growth for the economy. Obviously compared to guidance we exceeded guidance by a lot, and I did want to break out our thinking in terms of how much to pass through and not pass through. We decided to sort of break it up into three pieces. Clearly some of it was timing. Our loss rate in Q3 was lower than expected but we expect the loss rate in Q4 to be to get that back and as a result, if you want to call $0.15 or $0.30 sort of that timing issue between quarters for loss rates that is just how it goes. So we don't expect to recapture that additional $0.15. The second is yes, we are following through some of the over-performance into higher guidance. We have raised guidance twice this year and that is what hopefully we will continue to do as is our practice. And then finally the third is, a little bit of – we need a little bit more flexibility in Q4, specifically as it relates to our AIR MILES business in Canada. As Charles talked about, we are now approaching…

Your first question comes from the line of Ashish Sabadra with Deutsche Bank.

Good morning, thanks, solid beat. My question was around Epsilon, so Ed you talked about it being choppy and you’re taking all the right measure on the cost structure. My question was can you also talk about the demand environment and the competitive environment is there anything going on there which has caused the softness in the technology, revenues that moderated quite a bit from 15% to 5%?

Sure, I’ll take that question. I think, I mean that’s something that we look at pretty carefully there is no question that there are lot of companies that are playing in this space and have entered the space from the big Google and Facebook of the world that provide solutions to SAS players to the big agency holding companies that are scrambling to put together technology and data solution. Now, we stand back and look at it and we think that it’s still a very vibrant market, we have a particular focus which is to bring our data driven solutions together with technology and creative and deliver those in kind of a client intimate ways. So, we’re looking for the segment of the market where clients really value a services rich sort of deliver that’s not going to be the model that the entire market will chase after, but we think that there is plenty for us. So, I think for Epsilon at this point this is a bit more of a scenario where our win rate has slowed a bit that perhaps is because you’ve been more picky and cautious with all of the focus on costs. And then, if you look at our existing client base, we’ve seen a bit of a pullback in some of our large clients again perhaps that’s a loss of focus that something that we better workout as we move through 2017, we certainly will have a much more intense focus on growth as we roll into the year. So, a couple of factors out there but I don’t think major drivers for this market.

Thanks for that color Bryan, very helpful. Second question Charles was on the delinquencies, on the slide 11 you talk about – the slide talks about delinquencies going up 30 basis point in 2017 that’s lower than the expectations for the charge off increased by 50 basis point, I was wondering if you can provide some more color there and how much confidence do you have in the delinquencies only go up 30 basis point?

It’s one of those I would say we’ve pretty good confidence in what we have here Ashish, you can see as Ed talked about we built this up portfolio to portfolio, we do expect as you look at the gap on page 12 would be most pronouncing the first two quarters then narrowing in the third and fourth quarter. Going back to what Ed talked about if you look in the Trust which is not a great illustration but it’s a little bit of a sample. You could see the 2015 vintage went quickly to loss, the 2016 vintage is going much slower it takes about two years for an account to get what we comment to and less risky. So that 2015 will be flowing through by the middle of 2017 and that’s why you will see that wedge close quite appreciably. So, I would say right now that obviously we’re looking for the 12 months, more than 12 months, we turn the portfolio every six months. So we can get pretty good visibility to it and we can make changes to the portfolio as necessary to track to the numbers we are looking for.

Yes. I mean the way I look at it is just math, if you are going to be up your 50 basis points it's kind of what we are talking about at the beginning of the year and then the gap starts to narrow and then you are running in the back half at almost flat to where you are. By definition you are not going to be up your 50 or 60 basis points because of the math.

Okay. That's very helpful. Thanks for that color. And maybe the last question on the – if I based on the fiscal year 2016 guidance if I back into the fourth quarter number that implies a softness like the revenue moderate to 8% growth for fourth quarter. Is that just conservatism or are there puts and takes there that we need to be aware of?

It primarily goes back to what we talked about with LoyaltyOne and AIR MILES where we had a big ramp in revenue in Q3. We think some of that is pull forward out of Q4. So we already expect that the AIR MILES revenue to drop in Q4 and that's really what you are seeing sequentially.

Okay. That's helpful. Congrats once again on the solid quarter. Thanks.

Thank you.

Your next question comes from the line of Wayne Johnson with Raymond James.

Hi, yes good morning. Ed I was hoping that we could touch base a little bit on the card services and the four growth components namely same-stores sales growth, tender share, new account wins and then portfolio purchases. In the past you parsed that out when we asked about it and I was hoping you could do the same again as we look forward into 2017?

Sure I would be happy to Wayne, I think one of the areas that is of concern is the fact that our client base although the consumer right is doing quite well and is holding up the economy what we are not seeing is we are not seeing that translate into a lot of good growth at our clients. What we are seeing that our clients probably overall is actually they are same-stores sales Wayne have been down 1% to 2%. And that's not new news to anyone, but soft good apparel high end home furnishings, jewelry stuff like that you are just not seeing the consumer spend there. The consumer spending it on autos and things like that which of course benefits our auto business, but so the same-stores sales are probably minus 1, minus 2, and as a result with the tender share gains we can get probably plus 5, plus 6 and sales growth from the core whereas before we used to do plus 10 when the clients were doing plus 3. So you have sort of down shifted a little bit in terms of expectations from the core. We still expect to get somewhere between 5% and 8% point above same-stores sales of the clients but right now we are seeing softness. I know the NRF came out and suggested we are going to have a pretty decent holiday, hopefully that is the case. But again that's sort of down shifted. Sort of mitigating that for us has been the fact that the vintage that we did sign for 2016 frankly was well north of what's going to be a 2 billion add to the file. The big growth chains like in [indiscernible] and forever 21s of the world those are going to do quite well. The other ones are very large clients [Williamson] owners of the world. They are beyond of the world. They are going to be good size files and so I would say that weakness on the core client base itself is going to be mitigated by the ramp up on the organic side from the big 2016 vintage. As we look at big portfolio purchases in 2017 frankly, we don't see much out there that is hugely attractive if we do something it will have to be some very strict hurdles rates we are not going to dilute the business. We want to see our yields hold up very firmly through 2017. So, we may sacrifice a bit of growth on the portfolio to maintain more robust yields and a better use of capital. So look for 2017 to reflect a little less robust growth from the core due to the core itself the retailers being sort of sub-par growth on their sales but we do expect the tender share gain and very strong 2016 contribution.

I appreciate that response. That's very helpful. And just a quick follow up if I may so on the tender share gain can you just talk little bit about where, what the tender share is for matured retail customer or customer you have had three or four or so. What's that wallet share versus a new client when they are brought on board and what's driving that cadence?

Sure, fair question. Essentially when for those of you not all that familiar with wallet share it's essentially right the percentage of the retailer sales that flow through our card. The first answer to where it is when we start the program I can even do that without rounding. It's at zero. And then over the course of three years we will probably get it to around 30% or so of all sales at that retail flow through our card. And then, the real fun stuff kicks in that the longer we have our client, the more skew level information we have on the customers of that client which means the more precise the targeting is when we do all of our targeting to the clients through all the different channels that whether it's point of sale or whether it's through all the various digital channels using Conversant. And we actually have a number of clients who are over 50%. And what we are finding is a huge chunk of the incremental pickup for us Wayne is through the online channels, these retailers are using online very effectively and our online sales are probably close to 40% of total card sales versus the retailers which are maybe 20%. So you can expect to see the slow creep from 30% tend to share up to as much as 50% over a period of ten years.

Great, thank you.

Your next question comes from line of Andrew Jeffrey with Sun Trust.

Hi guys. I appreciate you taking the questions this morning. Just a question with regard to the wedge add which I think is a great way to frame up your expectations. When you talk about normalization just cause that -- would you say that as the credit cycle progressed and you saw the 2015 vintage sort of evolve that underwriting tightened a little bit and that's why you are so sure that as there is vintages season that the loss rates will moderate or is there something else at work? I am just trying to get a little granularity on your confidence level there and what’s driving in?

Yes, Charles can take care, but the bigger thing is that the losses, in the great recession you flushed out more than you normally would in a more typical recession and as a result what was left over who was left standing meant that you had a lot of like super prime coming into the file which is not really our bread and butter. We are much more in the sort of mid to upper prime type range and what's happened over the course of the number of years the recession is in the rare view mirror, you are having more and more folks who have repaired their credit, who are back in the market, who have jobs again, who are working and they tend to flow into the file and as a result what you saw was it's less about losses going up is more about losses are beginning to conform more to sort of the type of consumer that we cater to. So that’s sort of the big, sort of misperception out there of – we’re not shooting for 4% loss rate that’s not how we optimize a file. When you’re talking to folks that we want and the people who visit the stores, our loss rate we believe is optimized at a higher level and those are the folks that have been flowing in specific to your question, yes, when we saw the 2015 vintage and we saw that we were kind of, it’s looks like a lot of the prime folks who are at the high end of the pool, there are few of those and more folks who still matter credit card carrier but it was a little bit lower in the overall pecking order. They tended to dominate a little bit more and we needed to tighten up a little bit.

Not a lot I can add to it, this is purely mix. A higher percentage of applications in the early part of coming out of the recession are high quality individuals, super prime because you basically burned a lot of the market. As they start to repair their credit four or five years thereafter they start applying for credit hitting the bottom end of it and writing quite seriously. So, you have a mix shift that you can adjust if it gets beyond a certain spectrum and that’s what we did. 2015 move to little bit, quicker than what we thought it would so we tightened up little bit in 2016 to keep a track into the numbers we want.

Okay, thanks. And just as a quick followup can you just talk a little bit about how you view Amazon with regard to its impact on your client same store sales recognizing the tender share may get some of the impact?

Yes, whether it’s Amazon or the whole online Amazon affect, what it essentially done is two things. First, it has made shoppers much more educated when it comes to where they can get the best price. So whereas before you had folks who has a little bit hit or miss, now everyone has got their phone, everyone is comparing prices and as a result that’s what putting a lot of pressure on our clients which is really on the pricing side and so that’s why the margins have been so tough at our clients. Obviously, the whole online space makes it a lot more convenient for people to work, I do think the retailers in our space are coming back strongly with their online offerings and will make a nice dent on that side of it. But Andrew, I really from what we’re seeing it’s the pricing side of it, it is your Amazon has educated the consumer to such a degree that the consumer, no one pays full price anymore and as a result your sales are suffering as much from pricing declines as from just unit declines. So that's what the retailers are struggling with is what is the new model. What we are trying to do is obviously this flows very nicely into how we run our business which is you can't just have $200 million marketing budget and go out and splash it around to everyone. You need to be much more precise, much more effective with how you market to folks down to one-one-one level. So this impact has been driving quite a bit of thinking on the part of retailers to change what has been for decades their way of going about marketing and moving towards the unique data driven personalized approach we do.

Okay. Thanks a lot. Appreciate it.

Your next question comes from line of Brett Huff with Stephens.

Good morning guys. Thanks for taking my question. First question on Epsilon, you talked a little bit about sort of some of the things you going through and I think you said you needed to kind of refocus on some of those big clients that they have pulled back their spending and maybe there is loss of focus as you’re reducing cost. Can you talk about how that might compare to any structural changes that you see because you mentioned it wasn't structural, but I just want to make sure I understand that point that you made?

Yes, sure Brett, I mean, I think from the perspective of existing client relationships obviously you got to do an excellent job of serving clients, walking the halls, bringing solutions to them that really meet the needs that they have. And I mean, we strongly believe that that demand for full service kind of strategic support is still rich in the marketplace. There are certainly alternatives with software as a solution kind of offerings that will allow client to maybe do something in-house. Over the long haul our bet is that the kind of skills required to really make that work and to drive results are difficult to create within a client's organization. So, I think from a market perspective having watched us for 20 years I don't see that that's going to change radically. So that's kind of the focus point for our business. In terms of whether there is something structural that goes well beyond that again we will watch that quarter to quarter but we really believe strongly and this is coming from the voice of the clients that we serve and the global 1000 CMO that we are targeting that needed there in the marketplace and those are the skills that they don't have in-house. The focus issue for us and really they’re using famous foundation and places, the change we did see is scenario where the kinds of skills that you need to service those relationships aren't always matched up with the client’s willingness to continue more for those as cost of living goes up etcetera. So that's really the driver behind our shift on the cost structure.

Great, that's helpful, thank you. And just second follow-up question on card. Ed, I think you mentioned more folks in organic growth less buying portfolios I think you have also in the past said that there are couple of programs you are going to non-renew, I want to know the status of those were in your commentary of focusing on organic growth and if there is any knock-on effects from that non-renewal, should we expect more of that overtime from some of those clients or does that moderate?

So, in the first quarter we did put the two portfolios to help our sale knowing that we were not going to renew them at the end of 2016. We would expect those two programs to be gone from ADS by the end of 2016. If you look at the average card receivables we gave you, we excluded already. So we are not considering that in the growth rate. So I don't think it's going to have any meaningful effect going into 2017 especially to Ed's point given that very strong 2016 vintage we signed to replace it.

Okay. That's all I need. Thanks guys.

And our final question will come from the line of Robert Mattson with Dougherty & Company.

Thanks for taking my call and congratulations on the quarter. Ed quick question. The dividend and for long time I guess the preference was to not protect [indiscernible]. I guess a little thought here is this, you curiously book up your cash flow in the three buckets M&A, funding the receivables and then share returns. Will this strictly come out of the share returns or will this be incremental and obviously we see this as maybe pulling little out of M&A, a little out of funding and then also you mentioned about it growing, should we also be thinking this as some of the payout ratio and should grow more or less with those?

So on the first one Robert I would say this adds to fourth option that we can flex based on what we see in the market. It could flex against M&A, it could flex against buyback. So it's really just fourth item we can consider on our capital allocation strategy.

Okay. And I guess going on to Epsilon on a little bit different angle. Let's talk about the current customers. If you look out in the space there is a lot of vendors particularly in the technology side versus Derby, which is one of your partners. They are seeing opportunities to gain share, they’re seeing lot of activities, lot of activities on the digital transformations and the data driven marketing. Opportunity spend against share could you elaborate a little bit more Bryan I guess on kind of activity you can do to bring the growth rate higher and make them more durable to get around away from this choppiness. It would seem to me that the growth rate should be able to get higher give rate of market strength and desires where most thing down this path?

Yes, I mean no question there right now given all of the options in the space it's kind of a complicated decision process for our clients to navigate in terms of thinking through all of those options and then selecting the right choice. I mean, part of what we have done historically is position ourselves is kind of a trusted adviser that has the ability to really help a client navigate those decisions and then actually drive outcomes from their investments. That's a different position than a lot of the other providers including some of our partners who are little more focused on a software sale with less accountability and responsibility to really drive results. So part of what we need to do better I think is kind of double down on that bet in terms of educating our clients. And then focusing carefully on the players that really value this sort of services that we bring to the table and not frankly chasing everything. The other side of it from our perspective is when you look at the assets that Conversant brings to the table from a digital execution perspective, from the ability to really have pristine cross device capabilities and then incredible ability to reach consumers. When you put that together with our big technology platforms including harmony and database and loyalty platforms you start to really see I think some significant differentiation in terms of what we do versus the rest of the marketplace. We have frankly not put our shoulder significantly into that effort. It’s part of what we are working on right now in fact we have several key pilots with clients that being to put those capabilities together on a more integrated way and I think that's going to be a key effort for us as we move through 2017, that will start to drive part of what you are asking about.

Okay and I guess this is final question, going back to the delinquency trajectories, if we were to look at the ability to meet that wedge, missing the wedge would that be, is anything intrinsic to your portfolio or this be largely a broader macro event?

This is the portfolio by portfolio roll up, so again we go through all 155 portfolios every vintage in it and we will see where they are and life of the account and how the curves are looking and then we project out. So it does not assume any huge improvement on the macro side at all.

Okay, great, thanks a lot.

Okay. So I think that's it. Thank you for all your time and we will talk you next time. Bye, bye.

Thank you. That concludes today’s conference call, you may now disconnect.