Good morning, and welcome to the Alliance Data Fourth Quarter and Full Year 2013 Earnings Conference Call. At this time, all parties have been placed on a listen-only mode. Following today's presentation, the floor will be opened 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. Julie Prozeller of FTI Consulting. Ma'am, the floor is yours.

Thank you, operator. By now, you should have received the copy of the Company's fourth quarter and full year 2013 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, 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 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, Julie, and joining me today is our [indiscernible] and CFO, Charles Horn, and Charles will discuss our operating results for the fourth quarter of 2013 and I'll wrap it up with the final scorecard for 2013 and moving into 2014. And with that, I'll turn it over to Charles?

Thanks Ed. It was a strong finish to a record year. Revenue increased 17% to $1.14 billion for the fourth quarter, bolstered by 14% organic growth. Importantly, revenue growth was balanced with double-digit growth in all three segments. Our profitability growth was even better. Adjusted EBITDA, net of funding cost, increased 18% to $290 million while core EPS increased a stellar 30% to $2.39 for the fourth quarter of 2013. A higher than expected diluted share count for the fourth quarter, $66 million versus a guidance of $64.7 million, was offset by a 300 basis points improvement in the effective tax rate. Our guidance for the fourth quarter did not consider either but it was essentially a wash, a $0.05 benefit from the effective tax rate offset by a $0.04 drag by the higher share count. Fortunately, the diluted share count will drop in 2014 as the second tranche of convertible debt matures, while the lower effective tax rate is expected to be sustainable in the 36% to 37% range going forward. For the year, revenue increased 19% to $4.3 billion, supported by very strong 9% organic growth. Adjusted EBITDA, net of funding costs, increased 16% to $1.25 billion while core EPS increased 20% – core earnings increased 20% to $669 million. Core EPS increased 15% to $10.01, exceeding Company guidance of $9.90. This was achieved despite a $0.43 drag from the higher year-over-year diluted share count. The Company's effective tax rate dropped 70 basis points to 37.5% for 2013. The improvements for the fourth quarter and the year relates to our ongoing strategy of using international profits to invest in new international growth opportunities. Let's go to next slide and talk about LoyaltyOne. LoyaltyOne's revenue increased 13% to $245 million while adjusted EBITDA increased to robust 19% to $68…

Great. Thanks Charles. I'm moving on to the 2013 wrap-up page and I'm glad Charles addressed some of the confusion around that call report stuff. We've been to that dance before and it's important that you look at all the pieces and obviously you seem them to get combined today in the financials. So sorry for the confusion, obviously things are in very good shape but you can always call the Company if you start hearing about a piece here or a piece there and Charles can put the puzzle together. So that being said, on '13 wrap up, again what I focus on and what the Company focuses on primarily is organic growth. As we're seeing obviously the market results coming in across various companies, once again it looks like the top line from an organic growth perspective seems to be the one item that is struggling. And so here once again it looks like we had a bang up here as it comes to organic growth as compared to the follow-up in GDP growth rates over the past two years and likely going forward it becomes increasingly hard to grow above the nominal GDP growth rate. From our perspective however, we would suggest that we can comfortably grow in the high single-digits which would put us at least 3x on nominal GDP, 4x on real GDP and we did so in '13 as well as in '12 and in '14 it looks like it's going to be a similar repeat. For us to be very clear, organic means that we take out or the pro forma any acquisitions, be it of a company or of a portfolio and we look at true organic growth rate. So that was very strong for '13. Our model essentially is combining strong…

(Operator Instructions) Your first question comes from the line of Sanjay Sakhrani from KBW.

So a couple of questions. First just on Private Label, I appreciate the color around the yield, Charles, just as we move out to this year, you expect yields to remain relatively flattish relative to last year, is question one, and then secondly, what kind of receivables growth are you guys assuming in 2014?

Couple of things there from a growth yield standpoint, combined has probably been about 40 basis points in '14 compared to '13. If you break that down, the core programs will be stable to maybe even slightly up. The onboarding of the 20 plus programs that Ed talked about will be what drives the little bit of decline in overall yields. In terms of growth, we're looking at least 15% growth in average receivables year-over-year. I think with the potential that we're seeing in the top line, that could be a very conservative number.

And then, as we look out into the future, when can we expect some operating leverage in Private Label, I'm understanding that you guys [aren't] (ph) investing this year, is it next year or is it later than that?

It's by Q3 of '14.

So essentially what you're seeing, Sanjay, is we're getting ready for the new volume, we're getting a new call center in Q1. When you put in [indiscernible] call center, you staff up immediately, so growth is going to b coming Q3, Q4 and going into next year. So by Q3 you should see some leverage.

Okay, great. And then just on the Loyalty division, when you guys discuss taking on the breakage rate, I guess what's really driving that, is it engagement, is it the economy, because I've heard like American Express talk about in a weaker economy people like to redeem more of their points. Is that what's happening there or is it just maturation or what?

Clearly maturation is part of it I think. From my standpoint it's just another data point. Historically, we've always had an actuarial analysis that helps us determine what the rate should be. Now we have the benefit of with the expiry policy in place we can track the maturation of our miles driven five years old. So really what you have is just the ability now and have another data point that can influence where you want it to go. Beyond that in some cases it could be a case like American Express who decided to let it move a little bit just as part of running the program. So again with all the moving pieces of loyalty program, you've got the ability to make money on the marketing upfront, on the servicing of the program, on the product redemption as well as breakage. You can make your money in different ways and maybe in case where you want to run the program slightly differently where that can influence that break rate going forward as well. So my end of the line statement would be, one, you've got another data point here, and then two, based on the way you want to run the program can influence that to some degree.

Yes, I would say that if you looked at where we put the stake in the ground years ago where we wanted this thing to be, we're pretty close and right now as we are getting closer to 2016 when some of these actually start expiring we want to be even more precise and so we have the outside folks run all these models and if we tweak breakage of point here or a point there, as Charles mentioned, there are other levers that we pull and we can maintain the margin going forward. So I think we're in good shape.

One final question again on operating leverage but this time in Epsilon, obviously you guys are getting some operating leverage in Epsilon but I assume there's still investments being made, so Harmony probably is one area, I mean as we look out to next year, should we expect that you might get more traction in terms of operating leverage because I'm sure there's room for more operating leverage there, right?

Absolutely. We've given guidance of 40 basis points in '14, could be more in '15.

Okay, thank you.

Our next question comes from the line of Darrin Peller from Barclays.

Nice quarter. Just want to start off following quickly on the Private Label side, I mean here with the number of signings that you're expecting this year, first of all if you could maybe deconstruct it a little bit, I think you said about 19 or 20 for the year versus mid-teens last year, I mean how many of those should we be expecting to be portfolio acquisitions versus organic, real business wins? And then just a bigger picture question, if you can help size this opportunity, I mean you've talked in the past about the number of private label retailers out there that potentially meet your profile, but we're going through 14, 15 to 20 now, and it's a great run rate, just want to know how long it could last?

So are we and I think that right now times are good. I think that the interest and especially once the numbers get out there about the holiday season and how effective the program has been, that will crank it up even more. And I think that from an overall perspective we're probably not going to move up of our sort of original number. If you were to look at a couple of new verticals like T&E that we've been into with you know the Virgin deal and Caesar's, that opens the market up a little bit but if you were to really slice it and dice it down to what's attractive to us, we think it's probably about a $30 billion receivable market that looks doable and you know if we can keep cranking along at a couple of billion a year in vintages, I think obviously that's a real long runway if we're looking at wherever we wound up this year, 10-ish or something like that. So we got about a third done and about two thirds to go of what we think is the real market. In terms of how long it's going to last, I don't know. I thought that frankly '12 was the high watermark and then '13 doubled '12 and as we're looking at '14 it looks like another 2 billion vintages is there. And so it's already beginning to lineup for the following year. So we're kind of running out of slots quite frankly. So that's what Charles said is, our biggest issue now is executional risk which is why we spooled up 1,000 people for the beginning of this year for programs that aren't even going to be coming on till later on. So we're real careful about that. From the 20 that we're talking about, I would say probably three quarters, now probably 80% of those will be starting programs from scratch and there may be a few portfolios in there but by far the vast majority of them will be organic growth.

That's great. And the one that are not, does that includes Coldwater Creek I guess and perhaps PayPal or PayPal is sort of new?

PayPal was a start-up. They had no program but we started it up from scratch when they came over to us, and Coldwater would be, that's an acquired file, yes.

Got it. All right, that's helpful. Just a quick follow-up, with the AIR MILES issued number 12%, we felt that that was a pretty impressive number and just curious to know what we should expect. I know you gave some guidance but in terms of long-term run rate with the Canadian consumer being able to more stretched, I mean just give us some idea as to how that's actually being achieved and really what we should expect over the course of the year in terms of trajectory on AIR MILES issued?

As we continue to learn every year, trying to look at it on a quarter by quarter basis can be very painful to derive a trend from that. So on an annual basis, what do we do, 4% miles issued, I think that's a good target going forward.

All right. And then just quickly on Loyalty task, obviously with [profitable result] (ph) now in renewals, that was one of the big questions you had around whether or not you perceived taking majority, so what are your updated thoughts on that? I mean is that something we're closer to doing now?

It's certainly something that [indiscernible] at some point, we'd love to take another look at it. That's all we can say on it.

All right, guys. If I could just squeeze one last quick one on Epsilon and I'll turn it back to the queue, Epsilon obviously performed 14% organic growth from 16% the quarter before, you guys are calling for I think high single digit growth rates now, if anything agency continues to grow really well and you know almost [indiscernible] a call option to improve, so what would drive the deceleration I guess you can say albeit still good rate?

I think we were little – we are going in '14 being cognizant of the fact that the digital agency piece went through the roof especially in the auto sector, and so the question is, is that repeatable in '14 or not, and so until we see that we can achieve that type of growth again, we've moderated our expectations on the agency side.

Okay, that's helpful. Thanks guys, good quarter.

Your next question comes from the line of Bob Napoli with William Blair.

Question on the security, as your thoughts around security and the hackers are getting, continue to get more sophisticated every year and there have been suggestions that the Private Label, the retailer Private Label portfolios they might have more risk than the general purpose credit card market. I was just wondering what you're doing on the security side, what investments you're making there, if you've seen, if you've had any issues or have seen any issues, I mean obviously I think most of those would be announced for your retailers?

Yes, I mean actually the Private Label card itself is probably much less attractive to a hacker than a general purpose credit card, right, because you are talking about a card with a $800 credit line that can only be used to buy a specific line of clothing or something like that. So it doesn't lend itself to the type of hacking activity that you'll find in the general purpose card environment with credit lines of around 5,000 and can be used anywhere. So I don't think that concerns us. However, obviously you know we do have co-brand products, but I would say overall our focus on the security is not only on as I call it bubble wrapping the whole company but we have an awful lot of data, right, over in our Epsilon side that is equally valuable to outside folks. And so I would say our security efforts are two-fold, it's both focused on specifically the card business and securing those cards as well as the overall data within the entire ADS organization. We spend some incredible amount of money every year and it is a bit of an arm-stretch, right, it's the more you build up, the more defences you put up, the more sophisticated the offense is. What we have figured out and we do talk with obviously a number of other large companies out there and share information about who's doing what and where, is that it continues to be less about firewalls and getting inside and more about this whole spear-fishing stuff, seems to be the area where folks are getting in. So a lot of that has to do with educating the employee base and we spend a lot of time on that as well.

Thank you. A follow-up on the eBay relationship, I need more color you could give on how – I mean are you now issuing or taking some credit risk under the Bill Me Later program and how are you working with them on their Wallet and then update on that because it seems like it could be a very big program long-term, and I'm still little confused on how that's working and what other services you're providing?

I think, Bob, the Bill Me Later program is going exactly as we expected. I think it's going to be a good program, [indiscernible] for us. We do take some credit risk, we keep a small undivided interest in the portfolio, again it's fairly small, that we will take credit risk on the profitability that's primarily driven by the upfront merchant fee. In terms of traditional marketing support, we don't have that same level yet but that could be an opportunity for us down the road to expand our relationship with eBay.

Thanks and just last question, the Harmony, how is that rollout going and you've mentioned some customer losses, has that rollout stand the losses and the e-mail space and are you getting traction with clients with it yet?

It's a little too early to tell. We think the future functionality of the platform has been very attractive to our prospects that we've shown it to. Quite frankly right now it's a question of getting it rolled out and people converted on it before we can actually say, yes, this is market competitive. I would say we're two quarters away from making that call.

Okay. Thank you very much.

Your next question comes from the line of Dan Perlin from RBC Capital Markets.

Just a couple of quick ones. So I heard you guys talk about margins on redemptions being higher, I was trying to understand what was driving that and why that would be sustainable?

Again, we have unilateral control of the programs to specify what products we offer, how we price it and then what products we give. So it's actually quite easy to control, it could be a case where you just give a little bit cheaper products so you know what are your cost to your mile or it could be a case where you just make more miles to be used with an equivalent cost of the products to get more margin. So it's a very flexible way of dynamically running the program that we have unilateral control over.

Okay, so it's just your mix that you guys have been playing with it in terms of the conversion ratios for that. Okay, the other thing is, I wanted to explore this recent legislation impacting the ability to have rewards programs for prescription drugs at the pharmacy, I know pharmacy is a very big vertical for you guys, can you maybe put a finer point on what that is and then if there's the guideline that we need to be aware of to monitor that?

It's primarily in the provinces in the Western Canada and I guess the concern is that when someone picks up a prescription getting rewarded for that prescription for reason I guess some people are having some challenges with is that the right thing to do or not. To me frankly the idea of rewarding someone to keep making sure that they're taking their required medication is probably a good thing. But then again no one asked for my opinion. Bottom line of all of it is that it's a few provinces in Western Canada, it's probably a total of a couple hundred million miles out of over 5 billion. So it's under 5% of our issuance for sure, but it's something that we need to watch because if it rolls through, we need to make sure that we have some mitigant in terms of other issuance avenues to make up for that. So it's not a killer from that perspective, it's a few points for sure but it's under 5%, and it's kind of a wait and see this year and we'll keep you posted on it.

Just to be clear, it's a big vertical for Epsilon but this is not [indiscernible] Epsilon at all. It's a purely isolated Canadian market.

Okay. I wanted to ask, Ed, you mentioned an $800 credit line like average credit line, is that what you guys are at now? If it is, that's a pretty big bump-up from what I remember being in, and then if that's the case, how much of that is driving your [indiscernible]?

Actually our 800 line has been fairly consistent. We've been around 750 to 800. You may be thinking our balances, balances are more right in the 4-ish, 400, 450 range.

I was thinking line, so I was [indiscernible].

It's not there something to scale that fast.

Okay, co-brand lines were a little bit higher, Dan, but Private Label lines we've not really moved very much.

You get open to buy there usually about 300, 400 and you get – the balances take up about 50%, 60% of [line] (ph).

Got it. And then just one quick last one, I want to follow-up on what Sanjay was asking, so the 40 basis points decline in gross yields, that's a mix issue that you guys are seeing right now, it's not an issue with the profitability of 5the new programs long-term and so the message is that it's coming down but that's not necessarily say drumbeat coming down, you have to say I need to break on the programs, is that correct?

Yes, as Charles mentioned, the core portfolio [indiscernible] incentives with us for three years and more, right. They've seasoned and so their yields are flat to last year. So they are solid. But any time that you slap on 2 billion of new business that's ramping up, right, you're going to have a pool-up time and that's what's going on.

Okay, understood. Thank you.

We'll take one last question.

The next question comes from the line of George Mihalos from Credit Suisse.

Congrats on the quarter. Just wanted to circle back on the Epsilon margins just to make sure I understand you're talking about that 40 basis points improvement in '14 versus '13 yet the ad agency business continues to grow at very strong healthy clicks, so am I thinking a bit wrong that the agency business should be diluted from the overall margin for Epsilon or is something else happening to help drive the margins higher next year?

No, you're absolutely right, George. Over the last two years, if you look at '12 and '13, where we bought two agencies, it definitely had that impact. Now what happens over time is as percentage of the mix gets stabilized, it will start to drop a little bit as we cross-sell, up-sell into the higher value-added products. That's part of it. Now obviously as we can integrate multiply HMI, that gives you a little bit of benefit coming through on the leverage as well.

Yes, but let's also be crystal clear here, this event was offered as a service, right. I mean this is not, here's a bunch of software, here's the platform, go have a ball. What we are focused on is a premium level service offering and you know we've been over 5,000 at Epsilon providing that level of service. So you are not going to get the type of leverage that you know you see with some of these other, here just have the product and walk away. We're specifically going after the very deep long-term commitment with a promise of premium level service and you're going to get some leverage, as Charles said, 50 basis point is probably a good number, but that's it.

Okay. And then just last question, you spoke a little bit about the potential for BrandLoyalty revenue synergies, I assume that's bringing that model to the U.S., can you provide any details on that, it sounds like it's not in your numbers for '14 but when might we start seeing that start to come through?

It's a fair question. It actually goes both ways. So if you think of BrandLoyalty specialty are these shorter-term 12 to 20 week type loyalty programs, what we don't offer would be the longer-term large loyalty reward platforms that either Epsilon or the coalition program folks in Canada offer. So that would be something that we would be adding to their portfolio of products and at the same time let's keep on about it, we have not been able to penetrate the U.S. marketplace in the grocer segment, we just can't seem to solve the puzzle. We're doing pretty well in a lot of the other verticals but we can't solve the grocer. And perhaps these folks at BrandLoyalty have the secret sauce where maybe the grocers are focusing more on there's a lot of interest in the shorter-term, move the needle, right out of the gate type program that fits with their DNA better than these huge big loyalty builds that we've been focused on in the U.S. So if that's the secret sauce, we'll be thrilled to death, but it should – you're going to see it out of both sides.

Okay, great. Thanks guys.

Thank you everyone.

Okay, I think that's it. So I want to thank everyone for their – to put up with us and talk to everyone next quarter. Bye-bye.

This concludes today's conference call. You may now disconnect.