Good morning, and welcome to the Alliance Data Second Quarter 2017 Earnings Conference Call. At this time, all parties have been placed on a listen-only-mode. Following today's presentation, the floor will be open for your questions. [Operator Instructions] In order to view the company's presentation on their website, please remember to turn off the pop-up blocker on your computer. It is now my pleasure to introduce your host, Ms. Annelise Han of FTI Consulting. Annelise, the floor is yours.

Thank you, operator. By now you should have received a copy of the company's second quarter 2017 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; and Charles Horn, Chief Financial Officer of Alliance Data. Before we begin, I would 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 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. Thank you, Annelise. Today, we're going to stick with the same format that we did last quarter, which is probably fairly brief commentary by Charles and myself. And then, we'll open it up for questions. So obviously joining me today is Charles Horn, our CFO, and he is going to walk you through the second quarter results. And then, we'll turn our attention to the full-year outlook. How we're doing against our goals for the year. And then also, we believe at this point, we feel pretty good about putting a stake in the ground for 2018. So with that being said, Charles?

Thanks, Ed. The second quarter came in slightly better than expected with both the revenue and core EPS up 4% from the second quarter of 2016. We saw continued strength at Epsilon and Card Services and positive momentum at AIR MILES in both miles issued and adjusted EBITDA margin, which returned to the mid-20s range during the quarter. However, brand loyalty continues to fight through some timing issues. Revenue down about 30% for the second quarter, and we now expect that trend will continue through the third quarter. Setting the unexpected softness of BrandLoyalty aside, we are delivering on our three major objectives for 2017. First, restoring Epsilon to both positive revenue and adjusted EBITDA growth. Second, delivering on credit normalization. And third, retooling the AIR MILES model. During the quarter, we concluded our 500 million share repurchase program. In addition, we augmented our liquidity during the second quarter by replacing and upsizing our corporate credit facility. Its maturity is now 2022 and its capacity is $4.6 billion, up $500 million from the previous facility. Let's go on to the next slide and talk about LoyaltyOne. It was a soft quarter for LoyaltyOne, if we breakdown the segment by major business. AIR MILES revenue decreased 12% to $179 million for the second quarter of 2017, driven by 13% decline in AIR MILES reward miles redeemed. The decline in miles redeemed was expected given the elevated redemption rates in the second quarter of 2016. The burn rate, which is miles redeemed divided by miles issued dropped to 76% this year versus 86% last year, and that's the range that we really try to operate this program to 76%. AIR MILES issued was down less than 1% year-over-year and that's improvements from the 4% decline in Q1 due to several sponsors driven…

Thanks, Charles. Thinking here, we'll also have the wedge that was provided to you and that's just sort of illustrative of how we're doing against what we first actually introduced, I believe it was October of last year. So, if you will turn to slide nine, which is the second quarter of 2017. Again, just sort of quickly reviewing all the points Charles made, consolidated plus four, bottom-line plus four, we are looking for about that range on top-line and that's a little bit better than what we had anticipated on core EPS, where we had gotten to more like flat. Again, in terms of the businesses, Card Services growth continues to be quite strong. Epsilon, which is the second consecutive quarter of what we like to call repeatable growth, so we don't have all the big dips that we've had in the past sort of the false starts and then disappointment, so it looks like things are going along pretty nicely there. And then in LoyaltyOne Canada, some good news there; the actual EBITDA margins up there came in in the mid-20s, which is really where we want to be for the full year or so. The model has been retooled, and now we are just getting ready to crank it back up, probably the one disappointing area was on the BrandLoyalty side, less so on Q2, we knew Q2 would be soft, but a bit more in terms of when we expect to bring on a number of these programs, we will talk about that a little bit later. Again, the three goals for this year that we've laid out over the last six months would be one, Epsilon Conversant, let's make sure we have repeatable growth quarter-after-quarter both top-line and bottom-line. And we feel comfortable at this…

Thank you. [Operator Instructions] Your first question comes from the line of Bob Napoli with William Blair.

Thank you, and good morning. I guess looking at the business and now the BrandLoyalty business and it has always been pretty volatile by quarter. And I guess that's continuing a little more. But do you feel that the business has become more complicated overtime than you'd like it to be I mean are all of the pieces, do they fit. I mean you're multiple obviously is a way below where it's been historically, your valuation your PE multiple. And maybe some of that is the additional complication of the business. I just would love your thoughts around that.

Sure, it's fair question. I think a business like BrandLoyalty which has sort of these shorter-term hits in terms of loyalty programs, I don't think it's gotten more complicated, it's always been as you've correctly pointed out very choppy by quarter. For the past three years that choppiness sort of has always even doubt on an annual basis to give us that double-digit growth. This is really the first year in four years that they've been part of Alliance, where we're seeing that chop actually pushes it into the first quarter of the following year. So from our perspective, we can see the visibility, we see the pipeline, we see the programs that are getting booked. And we know that with the World Cup coming and with the Disney programs signed, it's going to be a very big '18, it's unfortunate that it had to hit our '17. But I don't really think it's gotten more complicated, but from a volatility perspective, it's great double-digit business growing annually ever year. It's got a huge market, but it doesn't have the type of visibility the other businesses have.

Okay. And just my follow-up question would just be on credit, it looks like the delinquencies as you said are right in line with what you had laid out a year-ago. The conversion, so are you expecting higher credit losses now in the back half for the year as you get that stop selling as much and then bring it in-house, so should we expect charge-offs to stay in the 6% range, or that will be above that for the rest of the year as you make that conversion?

I don't think we really can really pin it down, what we're trying to do is basically say, like the wedge is dead on, so we know we're going to be hitting towards flat loss rates or better in '18. The gross loss rates were up right where we put in that 50 basis points for the year. The recovery is going to vary by how quickly we can get the in-house stuff moved up. So, the comfort that we can give people is the fact that regardless of what we do in-house versus third-party the overall earnings of that business will be up 10% plus. So, we want to give that comfort and then you know, look we're not going to be stupid about it and you know pull the rug completely out of doing third-party sales but it really benefits the company, if we can be a bit more patient, deliver our 10% plus on the earnings side for that business and get it in-house. So, stay tuned.

Thank you. Appreciate it.

Your next question comes from the line of Sanjay Sakhrani with KBW.

Thanks. Good morning. I guess Ed just a question on Epsilon, obviously you guys have pretty decent momentum it seems, as we look out to the intermediate term over the next several quarters. But as we look ahead to next year, are there any other areas that we should be concerned about because it seems like there is been a lot of volatility within the various segments of that business, is there anyone that you are particularly concerned about at this point?

Well, the big one obviously Sanjay was the tech platform business which was the about a quarter of the combined Epsilon Conversant and that was a source of a fair amount angst last year because that used to be the workhorse for the entire segment, as you know I used to pound out 8% to 10% growth and then we've got 5 flat cuts, flat wooded with sort of pricing was too high, delivery time was too long, it was too complex, it had too many belts and whistles, so that's been retooled. At the current rate that we're seeing that business turn, which is a little bit faster than we had anticipated in the backlog of orders that we are seeing for use more shrink-wrapped type offerings from tech. I've got to tell you, I think between the tech platform, getting its head above water as we exit this year, it should do low single-digit growth in 2018 versus sort of down 14% last Q4 and about flattish in the third quarter probably. So that's no longer the big worry, and so if that can stabilize which it has and actually grow a little auto again which is more on existing autos those big programs look solid and the big CRM business, those two are there are really the big drivers of sort of that double-digit growth in those two businesses. And then the other businesses are sort of more a mid-single digit, the data and agency and stuff like that, so it's a very long way to answer to say. We don't see any trains coming at us right now and so, can we finally move Epsilon Conversant from sort of that mid-single-digit and start creeping it up into the plus 7, plus 8 models that we really wanted when we took on a Conversant and that sort of where we're shooting for.

Okay. And my follow-up's on the Card Services segment. You guys talk about the stronger revenue growth, when I looked at the revenue came in relevant to our expectations, those were a little bit weaker and it seems like it seems like it was driven by this uncollectible season finance charge build, maybe Charles you can just talk about your charge-off outlook which is a little bit more non-committal and sort of your expectations for the yield given this phenomenon. And then just on the expenses in that Card Services business, I guess the run rate year-to-date improvement in that businesses have been quite strong and obviously you're expecting a little bit of moderation, but is there anything specific that drove that improvement in the first half? Thanks.

So, let's first start off with the gross yields that Sanjay is referring to. If you recall, we keep an allowance for principal receivables, meaning receivables, we don't think we'll collect. We also keep reserve for build finance charges that we deem uncollectible. There is a direct correlation between the two except that the build finance charge reserve goes against revenue so it's a gross yields impact. With that direct correlation, the loss rates being up in the high watermark in Q2, then that reserve for your build finance charges will go up and that gross yields is negatively affected. And then when your loss rates come down that pressure based on your gross yields go up. So, what we see, it's a short-term issue, it's a direct correlation with the loss rates as the reserve basically the loss rates come down our principal, you'd see that reserve come down and expect gross yields to come back up in Q3 and Q4. On the OpEx, we do think we can get 40 to 50 basis points of improvement as a percentage of average AR. Some of the improvements this year just timing meaning we're shifting some marketing out of Q1, Q2, Q3 and Q4, that's why we have been really startling Q1, Q2, we'll give some of that back. So, 50 to 60 basis points is a realistic target for 2017.

And I think Sanjay also to make sure, we certainly expect losses to be down back half versus the front half, it's just one clear as to how much based on what we do with recoveries, but earnings themselves should be out that sort of double-digit in that business.

Thank you.

Your next question comes from the line of Darrin Peller with Barclays.

All right, thanks guys. Credit sales, I think came in about 6% growth versus the high single-digit trends I think you guys were expecting and yet the organic growth of your receivable side continues to be even stronger than that. Can you talk through the dynamics there in terms of what you are seeing in terms of the overall purchase volume trends and what are your expectations are for that embedded in your guidance throughout this year and next? And then if we should expect that gap organically between the purchase volume growth and the receivables growth ready to process, are you including also Signet in the portfolio or in the revenue growth outlook, I know it's not as a full-year impact, but some benefit to '18. And then lastly on the credit side, the cost, I'm just curious what bringing recoveries, the collection in-house due to the cost structure of the business? Thanks guys.

Sure, I'll take that and then I'll kick it over to Charles. The relationship between sales and portfolio growth, you will have periods where a sales growth is higher than portfolio growth and you'll have periods when portfolio growth is higher than sales growth. So, it's not - they are not an absolute lock step, this is what you probably see as the year progresses, is you'll begin to see that narrow a bit. We do expect to see our credit sales walk back up to the low double-digit as we move into the back half based on what we're seeing out of the new. It's primarily from the new clients rolling up, and so, you are going to see that gap narrow as the year progresses.

Yeah, what I'd add to it, Darrin you talked about Signet, since it's coming in so late in the year coupled with purchase accounting is really not going to drive a lot of lift to revenue or profitability. So, it's really more of 18 events for us. The other question on the core, the core growth and credit sales is consistent with what we thought for the year and based on that low single-digit range, there has really been no change or modification there. On the cost of bringing things back in-house, we have factored that in, in terms of the guidance we're giving you to 50 to 60 basis points OpEx leveraging. So, there is really nothing incremental if add thoughts to bring in 100% back inside, we're good or if we keep it somewhere between we're good. So, don't expect that to be any additional pressure in terms of their profitability for the year since we've already factored that in.

And to give everyone sort of a sense of why the recovery thing is so important to us in terms realizing what the true values are on the recovery side? There is sort of - there is breakeven point out, do you format out or do you crank up other resources in-house, and do it? If we can book somewhere in that 20s let's say recoveries are between 20% and 25% on losses then we're relatively in different when you do the math between in-house versus pushing into a third-party, but the outside market this year has brought this rate down to more like in the mid-teens. So, it's fairly dramatically and it behooves us, because we knew in-house, because we're also running in-house programs, that we're collecting in the 20's. So, this has found money once we bring it in-house, so that's sort of the tradeoff.

And just to be clear, I mean just a closer loop on that, you are including some economic benefit from Signet in '18's guidance but not additional portfolio acquisitions?

That's correct.

Okay, thanks guys. And just a quick follow on the AIR MILES side, just remind us again, are we reiterate the visibility you have. I mean I understand your sponsors are sticking with you and saying they want to do more, but I guess from a consumer standpoint, you talk about the brand not being damaged from last year. Just more evident so you can give us that, we should expect AIR MILES' issuance to rebound. Is it just, have you really surveyed the population meaning the client base?

Yeah, that's a fair question. And to say the brand hasn't been damaged I probably misspoke. I think they're definitely was damaged, I mean it was terrible for us. And clearly, the political environment was such that it was open season on the AIR MILES business from the government's perspective. From the consumer side, the best metric that we look at is our people engaged. What's the activity rate, and if we've got two thirds of the entire country of Canada active in our programs, we say our eye is at number staying stable or is it down. And as you started out the year quite frankly it was down. And we were I guess the activity rate we were probably down what Charles, 4%, 5%. Then it was down 2%. The last - we don't even have to do surveys, you just look at all the active account holders we're back to flat. So that would just that's our best predictor of saying, hey, it looks like people are overrate and are moving on. But I can tell you I'd rather not go through out it again.

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

Hey, thanks. Good morning. Just a quick clarification, so despite the push out in BrandLoyalty, you were still able to increase the revenue guidance given the momentum in the rest of the business. But this guidance that was mostly because of the fixed cost in the BrandLoyalty is that right? That isn't really any other pressure in other parts of the business, which is putting any kind of the pressure on the earnings.

Yeah, we'd say Ashish that we're not really seeing any pressure against Epsilon. If you look at it we've raised the revenue growth, we said we're going to have some cost associated with the onboarding of two new clients, which is why we did really push any incremental EPS from that and that's not unusual. If you remember back to your skill, we on-boarded the client, you incurred all the cost to get them onboard before you get the revenue stream coming through. With Card, what we're basically saying is you've got some upside on your OpEx that maybe the left side on your gross yield, but conversely, you've got a little risk in the recoveries which would mitigate it, so we don't want to pass through any increase there. So then if you look over BrandLoyalty, when we started the year, we really thought BrandLoyalty would do about EUR115 million in EBITDA extracting close more like to 85 so about EUR30 million delta in Europe which equates to $0.40. And so that's why what we're saying it's really an issue where we've got good performance with got Epsilon not ready to pass anything through yet. But as I talked about we have a very good visibility would be, it's not coming through in Q3 where we expected, that's a short fall we're talked about $0.40 or more to slipping in into 2018.

Yeah, let me sort of the crystal clear on this one, it's something where we spent a lot of time internally talking about. If we wanted to stay within our Card business the third-party sales even at the lower rates, let's say you could have come up with that $0.40 to offset the push out of BrandLoyalty. But we feel from a business perspective, that just the wrong way of thinking. And so, I know people are not going to be thrilled that this $0.40 that they're pushing into next year. We were very thoughtful in what we did. And there was potential of over performance significant over performance in cards, if we kept doing what we were doing. But we do think that using some of that over performance in pushing out to in-house recoveries is the best thing from the business. It's going to benefit '18 and beyond and its real cash flow, but it can't be used to cover off the $0.40 in BrandLoyalty this year. That's as plain as I can put it.

Thanks for the color. That's very, very helpful. And maybe just a follow-up question, so as we think about the impact with the recoveries, how should we think about the provisions in the back half and also allowance for loan losses reserve rate for the back half of the year. Should we see more provisions in the current quarter and then maybe taking moderating off in the fourth? Thanks.

What I would say Ashish, we are still looking for Q2 being the high watermark in that net loss rates, so dropping in Q3, Q4. If you look for the second quarter of about 6.65% reserve rate. What I would expect it could drift up a little bit in Q3, but it'll end Q4 right around that 6.65% reserve rate. So, I think we're pretty well got the rate for what we expected in the year. And now you just got a couple of quarters for to flow through.

Thanks for the color.

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

Hi, good morning. I have two questions, one regard to [indiscernible] other one regarding capital structure. So, on the new tech platform, Ed is it fair to say that the coding is complete on this. If you have it given the percentage of completion, how far is it completed? And if not, when do you it will be?

Yeah, it's done. We're selling and we're delivering. So, there is no more from that perspective now, it's just a question of completing the delivers and booking the revenue. So that's why I think you're going to see us get our head above water before the end of the year. So, the work is done.

Okay, I appreciate that, so just a quick follow up on that. So how many customers have you boarded on it today? Or that's in process at least; I'm just trying to get some more clarification on that?

Yeah. I mean we probably have fairly robust pipeline. I would say you probably have 12 to 15 that are either then delivered on or in the process of getting spilled up, but that's a solid number for us.

Okay, that's helpful. And then just on the capital structure side. Do you still think it make sense to keep all three provisions all the business units together? Or do you foresee at some point in the future a reason to split the company up.

That's - people have asked us along the way. And it's going to be the standard answer Wayne of, if this model isn't getting traction over a period of time in terms of value, then we're clearly compelled to look at other structures. Right now, frankly, if we are correct and this acceleration and slingshot happens in '18, frankly we would be disappointed if people weren't pretty excited about it. And we're getting closer and closer to it. We'll see what people think about it and once we start really cranking up the double-digit growth on a consistent quarterly basis. Hopefully that will get folks excited. There is a school of thought on both sides. I mean as we look at it now, and you look at all the disruptions that's going on in the various industries that are out there, and what you're really seeing right as you're beginning to see tech beginning to or continuing to disrupt verticals that no one had even contemplated a couple of years ago. And if we were to look at for example the Card business and the retail space, everything else. If you believe that disruption is occurring there which we do, we have the type of structure where you have all these technologies which is in the form of all these skew data and all these unique IDs that we use at Conversant to identify folks and their proclivities online. And so, the question is can we have, can we be the tech type provider that is the big disruptor as it comes to the Card industry itself and frankly I think we can. There is so much fragmentation and disruption going on in just the retail space that our ability to bring data and skew level information, the analytics, the digital distribution channels, the Omni channel type distribution approach something that's pretty compelling to these retailers today and the ones that were breaking off from the big department store platforms, frankly they are looking at the tech side of us while they are looking at the card side of us. So, right now it kind of makes sense, but you know we need to execute on the slingshot.

That's really helpful. But you say that these services like Epsilon and Card Services as well it will be a low demand because of what's happening with Amazon coming into the physical retail world with the potential acquisition of Whole Foods and potentially others will follow?

You kind of fade in on me Wayne, could you say that again?

Would you say that Epsilon and Card Services could be in more demand to fight off the impact of Amazon getting into the physical retail market?

Yeah, I mean I don't just say Amazon, I mean all the big tech platform players who are disrupting more traditional verticals. There is no question that when we have discussions with clients or prospects today, let's just taken the Card business, if less and less of the tell me about the Card product and its more and more about how does that help me have a differentiated product, how does that help me reach the consumer across all channels, how can you provide sort of that personalization approach to the consumer that these big tech platforms are promising. And so that's why I see sort of this when people are down about where retailers going, what we are looking at is actually all these hybrids brand new e-commerce players those splitting off from department stores for us, it's actually this type of volatility and disruption is driving a tremendous amount of business for us and that's just in the retail space and as we go into other verticals that's right in Epsilon sweet spot, so yeah. I mean you know from what we are seeing this disruption has probably a good thing for us.

Thank you.

We're going to do one more.

And your final question comes from the line of Larry Berlin with First Analysis.

Hi, good morning guys. Two quick as I hold. First one on BrandLoyalty, how was the U.S. and then Canada deployments going and are you seeing external pipeline building in those two countries, going for next year?

Yeah, in Canada you've got the benefit of having 20-year presence 25-year presence in the country. So, we're in pretty good shape in Canada in terms of the programs that are there and they're up and running there is either four or five brands that we have programs with in the U.S., it's a question of when does the first - fall we have one grosser there we are doing now we have a couple pilots, we have couple of calls that are come in since the Amazon Whole Foods thing popped up. So, I think you know again we've never really been able to find a way to penetrate the grosser vertical in the U.S. every other vertical we got but grosser has always been tough, I think the margins are so tight. But there is a new sense of urgency out there, so I would expect a couple of these things to fall but, look we are not relying on some monster deal in the U.S. pushes through '18. Our bread and butter has been the 40 countries that we're in in Europe, Asia, Latin America, now its Canada, but I do expect to get some traction in the U.S. I know there are one or two names would be nice and if one of the big ones comes into the tent, then it gets fun.

You pulled that on a totally different topic, on stock buyback, what do you guys think is going forward in this year and next year for us I mean the program and soft goods?

I'll tell you Larry, we've completed the 500-main authorization this year. I'm sure we'll do at least another 500-main authorization in '18. I would say at this point we've not really decided to do another buyback authorization or '17. Do we look to pursue a little bit of M&A or do we just look to pay down a little bit, I'd say at this point we're just being flexible around the remaining free cash flow utilization for '17?

Thank you, guys.

Thanks.

Bye.

All right, thank you. Bye-bye.

This concludes today's Alliance Data second quarter 2017 earnings conference call. You may now disconnect.