Good morning, and welcome to the Alliance Data Fourth Quarter 2014 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 pop-up blocker on your computer. It is now my pleasure to introduce your host, Mr. Daniel Haykin 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 2014 earnings release. If you have not, please call FTI Consulting at 212-850-5709. 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’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 this 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 these 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, Daniel. Joining me today is Charles Horn, our always exuberant CFO and Charles will kick it off and talk about our operating results for the fourth quarter and full year of ’14. I’ll do a quick summary of ‘14 and hit the high points and low points, and then talk about the guidance for ‘15. So, Charles, take it away.

Thanks, Ed. To use an Ed-ism [ph], it was a boomer of the fourth quarter as revenue increased 30% while core EPS and adjusted EBITDA net increased at even stronger rates of 44% and 32% respectively. Better than expected performance by BrandLoyalty, our European loyalty operation and improved credit quality of private label led to the profitability acceleration. The acquisition of Conversant which closed December 10 added about $0.09 to core EPS for 2014. Before anyone gets too excited, $0.09 accretion in 22 days, you need to keep in mind that 4.6 million shares were issued as part of the acquisition consideration had not fully burned into the fourth quarter share count. Being an average calculation, only 1.1 million of these shares impacted the fourth quarter diluted shares. So overall, we think we are still on track for about $0.50 of accretion in 2015. Core EPS excluding Conversant’s step period contribution was $3.36 for the fourth quarter beating guidance by $0.08. This beat was accomplished despite a $0.05 drag from unfavorable FX rates, which were down 8% from the prior year quarter and 4% from the third quarter of 2014. EPS decreased 52% to $0.86 for the fourth quarter 2014. It was negatively impacted by a couple of one-off charges aggregating $2.05. Dual costs which are investment banking legal and accounting fees pertaining to Conversant acquisition aggregated $7.3 million, while the strong performance by BrandLoyalty triggered a $106 million earn out charge. Overall, a nice charge to take because it reflects how well the acquisition has performed with adjusted EBITDA up over 50% compared to pro forma 2013. As you may remember, this was a one year only earn out arrangement. Excluding both from EPS calculation, EPS increased 63% for the fourth quarter of 2014. Let’s go on to the…

Great. Thanks, Charles. If everyone could turn to the page 2014 wrap-up, this is where I chat a little bit about what went well, what we are working on, and then we will get into the outlook for ’15. So, from a financial perspective it was a heck of a good year, you’ve got top line up over 20%, you’ve got organic growth at 4X GDP, which is ahead of our 3X goal and you got earnings per share up in the mid-20s. So, financially heck of a year, obviously our focus is on the individual businesses and how they did and what they could do better. Going forward we start with LoyaltyOne, which consists of primarily our AIR MILES program out of Canada and then our BrandLoyalty business, which is primarily our European platform. And overall, organic top line growth when you combine everything is about 9% and that’s in both constant currency and what we did is we dropped in pro forma BrandLoyalty for 2013. So apples-to-apples, the combined entity grew about 9% organically. BrandLoyalty itself was the big driver and far, far exceeded all of our expectations. And as Charles mentioned, because it over performed so much, it actually triggered an earn-out charge to us haven’t quite figured out how over performance figures a charge, but the fact of the matter we’ll do that all day long. Then, we also want to talk a little bit about Brazil which is not in any of the financial numbers because we own slightly less than 40% of the entity itself, but it continues to school up very nicely as collectors are up over 30% to 14 million. It’s quiet in terms of not flowing through the financials but the program itself continues to move nicely into a significant asset…

[Operator Instructions] Your first question comes from the line of Sanjay Sakhrani with KBW.

Hello.

Do you hear me guys.

Yeah we do now.

Okay cool, sorry. Thank you. I guess first question is on Epsilon, how should we think about margin improvements in 2015 and beyond as you’re thinking about outsourcing initiatives as far as headcount is concerned?

Well you’re going to have a couple of things going on there, Sanjay. The first will be Conversant layering in. Conversant carries a pretty good margin as you know so that’s going to be beneficial to us, so we will go up just purely from the addition of Conversant for the full year. Go beyond that we will look to get some leveraging in the base Epsilon model coming through as well in 2015. So, when I look at it, I think it’s reasonable to think that EBITDA margins for the combined entity can probably be in the 24% range in 2015.

Yeah, which if you were just to do a standalone Epsilon you’d be about 150 basis points I think versus where we are this year.

And then as we see the trajectory move from 2015 onwards you expect to get decent operating leverage?

I do. I think the combination of the model, obviously with digital out of Conversant’s get lots of leveragability to it. The ability to offshore some of our more roads programming I think is going to be very beneficial with the price differential. So, I do think with Epsilon here to service model we will benefit from the moderate offshoring, with Conversant by driving volume through that operation you’ll get lots of leveraging from it. So, I do thing incremental leveraging down the road next two or three years is very realistic.

Okay and then just final question on the card business. When we think about the pipeline as far as inorganic growth is concerned, can you just talk about it and maybe just relate it to kind of how we could see some operating leverage in that business as well, thank you.

Yeah, I will do the sales side. And again on the Epsilon Conversant just to finish up, Conversant’s probably running, help me out Charles, low 30s in margin and we hope to get up to around 20-ish, so you put the two together and you’ll get your sort of mid-20s that Charles was talking about. So, we are looking to get about 0.5 or so out of Epsilon, you combine it with 33% of Conversant and you should have a very nice lift on the margin side going forward. On the card services business, if you look at sales growth, which I think is going to drive obviously file growth as well, we typically are, you know the past two three years we’ve been running about 20% file growth. I think this year we’re probably going to running somewhere between 25% and 30%, so it’s a bit more of a hyper growth environment for us. From a sales perspective, the way to build up the sales side would be take the core which is two-thirds of the business and you have the retailers growing 4 points in sales. We will do more like 10 points at those retailers. So that’s 10% sales growth. Then you have the existing clients that are ramping up from nothing, which is our preferred way of growing that will probably add another 8 points of growth and then you have the acquired files that will probably bring you another 7 points or 8 points of growth and that’s where you’ll be in the high 20s in terms of sales.

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

I’ll start off by following up on Private Label for a minute, given how strong of a driver that’s been, you know I think Ed you just reconstructed a bit of the growth profile for this year, how you can get to the 20% plus coming up, it’s great to see, I guess just bigger picture longer term, I mean where are we in that in terms of your penetration, you’ve updated us before talking about I think $30 billion of receivables that you can potential raise as a market opportunity. Is that really still, I mean how competitive has that dynamic become is that something that you continue to see in opportunity for a real portfolio acquisitions, you know maybe not the same degree as we saw in ’14, but are there low hanging fruit out there, can you give us a little more color on the trends at ’15.

Sure. What we are seeing out there is more of the same. Again I think there is this sort of secular movement out there focused on the retailers moving away from the traditional brand spend to promote their products to the highly targeted data driven marketing, which requires having that first party skew level information, so that’s a mouthful, but it’s basically saying that trends are friend. We continue to see very robust pipeline. I would say probably though, where most opportunity is and it doesn’t sound like it’s really the sexiest stuff to talk about because it’s not about portfolio acquisitions or big new signings, but the core itself, growing tender share itself is a huge driver of our growth; and so if we can grow our tender share such that the retailer does their 4% growth and we’re doing 10%, 11% growth and it’s two-thirds of our business, that’s a huge piece. We are nowhere near the saturation point on tender share. We’re probably in the high 20s today. We have clients, we are roughly half of all spend is on our card and so if we can continue to grow tender share, you know 150 basis points a year there is your first 10% of growth in both the file and sales. Do I think that 30 billion is reasonable? Absolutely. Where is it going to come from for us? It’s going to come from tender share from the corp, it’s going to come from programs that we are starting from scratch, and I would say between those two that will be, Darrin probably 80% of our growth. I don’t think there’s a lot of files out there that are all that attractive to us. You are looking at probably one or two files per year, is about what we are thinking about at this point, but I would say 80% of the growth is going to come from, if you want to call it the organic, the tender share gains and the starting from scratch. In 2015, you’ve got Zales, which we’ve announced, which is coming on board and there may be one other file, but we are just not going into the game with the banks to bid things through the roof that’s not how we’re going to keep our margins up.

And then on credit quality, I mean, there’s been some other banks talking about, you know early signs of building reserves on provisions and you guys, you know you had a good quarter from reserving, I know next quarter it will be bigger given the receivables you bought, but bigger picture, I mean do you see any sign or expectation that this a year where we will start to need a bigger reserve bill for any reason.

Well, we certainly will be building reserves because of our growth, but from a credit quality perspective, we expect it to be flat. There is nothing that we’re seeing from either aged write-offs, recoveries or personal bankruptcies that are suggesting there is any type of upward pressure on the loss rate. So sort of that mid-4% level sounds about right for us and we reserve about a point above that.

Alright, just last question, thank you. Just a couple of things I may have missed, but how much revenue did Conversant and BrandLoyalty like actually contribute in the fourth and perhaps if you can give us some expectation of what you think it will contribute to your 2015 growth?

If you look at Conversant, it would have added about $46 million in revenue, that’s how you get to a 5% organic growth for Epsilon in Q4.

Alright, thank.

For BrandLoyalty, it would have been – and I’m kind of drawn a blank here Darrin, BrandLoyalty had a very nice Q4. They flow through about a $187 million of revenue.

Okay, alright. That’s great. Thanks guys.

Yeah.

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

Thank you and good morning. Just on the – following up on the private label business, looking at the revenue guidance, is the yield down? It looks like the revenue isn’t growing as fast as receivables. And I’m pretty sure that’s all U.S., are some of these newer programs or the co-brands coming in at somewhat lower yields?

I think it’s all U.S. so we’re good there.

Yes.

And yeah, what you’re going to basically see is if you’re growing the file, make it up 20%, you’re going to have revenue lag that and probably grow around 17%, and then your flow through to EBITDA will be a couple of points below that. So the 20%, 17%, 15%, something like that sounds about right. The yield itself, you have a couple of things going on. One is the growth rate and with the growth rate even accelerating from 20% to 25% or 30%, that’s going to dampen your yield, because these programs need to spool up a little bit and also on the co-brand side as those spool up, those do carry a lower yield, but higher balances. So expect what – 60, Charles? 60 bps, something like that is about the right number.

Okay, pretty modest. And then on gas, I mean you don’t have any gas or very little, right? I mean if I imagine, in your customer, I mean I don’t know if you’re seeing anything in January, but your customer and your products should be benefiting eventually from lower gas prices, I don’t know if you are seeing that now, but I mean – at one of your co-brands, do you have – I mean, gases got to be less than 1% of your spend right on this?

Yeah, we have virtually no exposure to gas. As you said, it’s the lower gas goes for us, you would think two things could happen, one is that the consumer decides they want to pay down debt, you will have a little less growth in the file, but you’ll have lower losses, because people are less delinquent. At the same time, you would also free up discretionary spend and a lot of our card client’s focus on the discretionary spend. So I think we’re good there. In Canada, from a gas price perspective, we do have obviously a very large relationship up there, a couple of relationships there and those are primarily driven off of volume as opposed to price.

Okay. And then just the last question, the M&A pipeline and thoughts around M&A and I understand the way you guys are – I mean you’re always looking at and I’m sure you have people modeling 20-plus companies, you are keeping a close eye on. What types of things are you looking to add another – is there any more impetus to add another leg or are there opportunities to expand through M&A, any of your business in 2015?

Yeah, I mean, you sort of summed it up, I mean the Get out of Jail Free-Card is, sure we’re looking at everything all the time and who knows what could happen, but what we’re seeing right now is – I don’t see anything that is jumping out at us right now, a year from now that maybe different. But right now, our focus is really on digesting not only the BrandLoyalty piece within our LoyaltyOne business, but also the Conversant piece within Epsilon, additionally getting our AIR MILES to be a significant contributor once again is important in getting the flow through to Epsilon margin is critical in spooling up Brazil. So a very long winded way of saying, I think, it’s unlikely you are going to see anything of significance from us this year on the M&A side. We’re pretty comfortable with what we’re seeing.

And Conversant is performing as you expected, it’s early on, the third quarter look a little bit light just in their top line, but are you getting so far what you expected on the top line and bottom line for Conversant?

We fully expect Conversant to deliver what we’ve said to the market, which is about $230 million on EBITDA and about $670 million on top and that’s our expectation and we’re going to hold to it.

Great. Thank you.

Your next question comes from the line of Andrew Jeffrey with SunTrust.

Hi, guys. Good morning. Thanks for taking the question.

Sure.

You’ve talked about digital sales being up about 25% in 2014 in you private label business. Can you elaborate specifically what actions you’re talking about and how that might as we roll forward into 2015 and beyond accelerate tender share, which is obviously such an important driver of your private label business?

Yeah. With our retailers, it’s really – Andrew, a lot is driven by the retailers, right? They’re not sitting back. They’re basically saying look we got to get in the game here and so the percentage of their sales that are not bricks and mortar is now at about what, Charles, 25%, which is growing pretty dramatically. So the retailers are investing a lot in the online channels. And as a result, that’s one of the areas where we’ve invested a lot of money in whether it’s something as straight forward as applying for a card when you’re in the store, we can do that as you shop, whether it is pre-screening as you’re shopping online, we can help you out there, but our view is you need to have an omni-channel approach and that’s what we’re looking to support. And so, the Conversant deal provides us with the ability to go to a specific retailer and say we know you’re pushing hard to get into this space. Obviously, a lot of the growth or most of the growth in the retail has been online and here the tools that you need and now we can offer scale across the spectrum from permission-based email, mobile, social, video, targeted display, whatever and that’s sort of the tool box that we’re bringing to the clients.

Okay. And so, 25% meaningfully oversamples for your private label customers, the total U.S. economy where e-commerce, for example, might be 10%, is that the right way to think about it?

Yeah, for sure.

Okay.

Yeah, if you look at the way I guess we look at it, you will get total retail sales, right, only about 10%, it gets so much pressed, but only about 10% is actually non-store related, non bricks and mortar of that 10%, 70% of that are from retailers who have actual storefronts and the remaining 3% are just internet only, which is primarily Amazon. So the store format may change, but between online presence and their store format, you’re still looking at 96%, 97% of all retail sales are captured by these types of retailers and so it’s a big piece.

Okay. And looking at Epsilon, the organic revenue growth slowed a little bit in the fourth quarter, I know you’ve had a recovery in some discretionary categories like auto, but can you just breakdown the specific categories and how they’re growing and whether you’d expect to see that growth rate bump up a little bit this year?

Yeah, I think high single digits Andrew is still a comfortable number for us. From an Epsilon perspective, in terms of the areas that I’ve really blown it out over the past year or so, I mean auto is huge, right. I mean auto has been a very, very big one for us plus on boarding. Folks like Ford, those tend to be big spenders. We are seeing a resurgence from the financial services side. So banks are beginning to crack open the wallets again for these very large scale loyalty type programs and that’s where we’re going to see some growth in ’15 as well. So I would say auto, I would say I think retail also is an area where we are seeing a lot of interest again. It’s in these multi-tender databases where essentially whether you are using our private label card that captures a third maybe of your sales. Retailers are saying I need a bigger picture and so what Epsilon can do is it can look at multi-tender types. And if there is a loyalty program layered on top of that, we can get a view on to 80%, 85% of the clients spend at that retailer. So that’s a great interest and so how many else, Charles, we’ve got auto, we got financials, we got retail, those are probably the three biggies.

Okay, great. I’ll get back in the queue. Thanks, guys.

Yeah.

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

My question, question on Conversant. I was wondering if you could provide some color around the pipeline for Conversant and any initial conversations you’ve had around cross selling Conversant into your existing customer base.

Well, we haven’t owned it for all that long, but we are sort of moving in – I think of it on three fronts. First is to continue sort of that consolidation and transformation within Conversant itself so that the sales force is out there really discussing the full suite of digital products that they offer as opposed to having a video sales force and a display sales force and a mobile sales force. The idea is to put it all together and that’s sort of the transformation they were undergoing. So the first front is, continue on letting the Conversant folks hold their product set together and sell that. The second front and we are already often running here is, setting up a joint sales team identifying your top dozen big client prospects on the card services side, we are often running there and then also probably your top 15 or 20 prospects from the large Epsilon client side. And so between those three, we ought to get some pretty good traction and we’ll keep you updated as the year unfolds. It’s a little bit early at this point to start saying whether the big cross sells are working or not, but there sure seems to be a lot of interest.

That’s great. Thanks for that color. Quickly on fiscal year ’15 guidance, so essentially you are raising your guidance by 2% on constant currency basis if I understood it correctly on the revenue side. And on the EPS side also on a constant currency basis, you would be raising it by $0.20 but it is essentially the FX headwinds. Just wanted to – did you provide the EBITDA guidance for fiscal year ’15 and just wondering if you could provide that?

What we gave before was EBITDA net amount controlling interests and funding cost about $1.08. You are still going to be in that ballpark still rounding. So we just basically didn’t really address it. Again, the gives and takes to get for the core EPS can come from a number of areas. So we just basically left at what we gave in the last quarter.

1.7

Yeah.

Okay. I mean that sounds great. And just one final follow-up question to Epsilon question to that earlier, what was the component of the data technology and agency revenues within Epsilon? And as you think about ’15, how do we think about – like what’s going to be the driver? Is it going to be the technology which is going to drive, which can also be margin accretive going forward?

I do think it’s going to be the technology that drives it. The reason we did give the historically categories is, with Conversant, it kinds of blows it up as we move things around to really integrate it. So you will be looking for your digital applications to drive a lot of your growth in 2015, database is going to be very solid and they are in that 7%, 8% top line range and then the data is going to be sitting there more in that mid single-digit, lower to mid single-digit. Now the thing we are trying to do, Ashish, is refine the data, make it towards the strong offline data that we sell as well as now refined online anonymize data could be an opportunity for us, but I think digital will lead the way in 2015.

Thant’s okay. Thanks.

Yeah. Take one more.

Your final question will come from the line of Dan Perlin with RBC.

Guys, I just wanted to revisit the comment around Epsilon becoming more labor intensive. It sounded – I know you talked about a little, but it sounded like you kind of came up in surprise, you guys have been maybe more than you’d have expected. So, one, is that a correct kind of characterization? Has the business changed a little bit in terms of its mix just completely forgetting Conversant for the moment? And then, secondly, you talk about shifting your labor pool. I’m assuming you are going after hires in digital analytics. I’m just wondering how you plan to present yourself, I mean a lot of the IT service companies, you are doing the exact same thing, it’s a little different, but still going after that same talent pool? Thanks.

Yeah. I think you characterized it correctly, Dan. I mean it did take us a bit by surprise in terms of how fast the labor cost did move up vis-à-vis the revenue and we missed it. It’s that simple. I think we were probably off $15 million, $18 million from where we thought and that was solely due really to – you know, the type of individual we are bringing on is more expensive than we had anticipated. So going forward, we are not going to make that mistake again. I think what we are going to do is we will continue to grow the U.S. footprint and along with Conversant for sure. We are going – Conversant though is not nearly as labor intensive as Epsilon. Epsilon has over 5,000 people, Conversant has 1,500. So it’s a completely different model. It’s a much more leveragable tech model. So I don’t think the labor issue will be a big one over at Conversant. But at Epsilon, we will – if we are growing in the high single digits, we would like to keep the workforce growth in the U.S. probably into the low single-digit and then the incremental piece, we will look to do some modest offshoring, you put the two together and that should get us back on track.

Okay. And can I ask another question? In Epsilon, I thought you were carrying some duplicative costs from some of your large conversions. Have those gone away or is that part of the benefit that we might expect in 2015? And then, the other part of the question separate of Epsilon is, I just wanted to get your thoughts on FX impacts from a consumer behavior perspective, forget translation for the moment and just think about purchasing power behavior in Canada and then the BrandLoyalty asset? Thanks.

Sure. I will try to remember part A through F here.

I’ve taken the liberty since I’m the last.

Yeah, clearly. I will start with the FX stuff first. From what we are seeing in Canada, which seems to be your question, I mean what we are seeing up there is that you’ve got consumer discretionary spending. Canada has been weak for the past couple of year. We expect to continue to be weak. Most of the dollars seem to be going into housing as housing prices continue upward. So we are assuming a relatively modest amount of consumer spend in Canada and that’s why we have to make sure that we’ve got the additional sponsors spooled up and there is a lot of promotional activity that you saw hitting Q4, my guess is you will see a lot of that throughout 2015 as people are promoting the heck out of things to get that relatively limited consumer dollar. In terms of – what was part A again? The Epsilon?

Duplicative carrying costs with some of these large clients that you converted over?

Yeah. In terms of – the biggest piece would be on the email platforms, right. We’ve got quite a bit of legacy costs. If you look at the Harmony platform, we probably got a third of our volume is flowing through Harmony, which is a huge chunk, but we’ve got two-third that need to migrate over, over the next probably 18 months to 24 months and those are – that will get rid of many, many millions of sort of cost that we are incurring today.

Great. And then just remind us the amount of portfolio funding cost that’s locked down?

Let’s see, we are about 70% of it is fixed rate, you have close to $1 billion of revolving that will be coming due and they don’t have a lot of term debt coming due in 2015. I can get you to that afterwards when we talk to them.

Okay. Thank you very much.

You bet.

Alright. Thank you, everyone. I know everyone has got a bunch of stuff to get back to and we will end it there and we will look forward to seeing a lot of you on that road.