Good morning, and welcome to the Alliance Data Fourth Quarter and Full-Year 2017 Earnings Conference Call. At this time, all parties have been placed in 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 the website, please remember to turn off your pop-up blocker on your computer. 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 fourth quarter and full-year 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. Thanks Eddie, and good morning, everyone. As always joining me is Charles Horn, who is preparing himself for about the 20 questions on tax. And we will also update you on the fourth quarter full-year results. I'll give a wrap up of 2017, and then we're going to get right into 2018 and the trends we are seeing by business, and we are going to get after it. So with that being said, I’ll just kick it over to Charles right away.

Thanks Ed. Revenue for the fourth quarter came in strong at 15% growth to $2.1 billion. For the year, revenue increased 8% to $7.72 billion, slightly soft to guidance due to Hurricanes Harvey and Irma negatively impacting revenue at Card Services by approximately $80 million. Core EPS increased 34% to $6.26 for the fourth quarter and 14% to $19.35 for the full-year. Excluding the net tax benefit, core EPS increased 12% to $5.24 for the fourth quarter and 8% to $18.33 for the full-year, better than our guidance of $18.10. The recently enacted tax reform lowered the provision for income tax for the fourth quarter of 2017 and full-year by reducing our net deferred tax liabilities, essentially reducing cash taxes that we would have had to pay in the future. Tax reform also benefits us moving forward as we expect our effective tax rate to drop to 26% to 27% in 2018 and that compares to 33% in 2017 prior to the adjustment we just talked about. We also anticipate the cash benefit to approximate $100 million to cash flow in 2018. Our net corporate debt ended the year at approximately $5.9 billion, while the corporate leverage ratio ended the year at 2.7 times consistent with the last several years. Let's move on to the next slide and talk about LoyaltyOne. It was a mixed year for LoyaltyOne. AIR MILES made expectations and we restored the profitability of the level we anticipated, while BrandLoyalty results were unexpectedly poor. We entered the year knowing that we needed to retool the AIR MILES business model following the breakage assumption reset at the end of 2016. We were successful in introducing small changes that allowed AIR MILES EBITDA margins to return to the mid-20's range. On the other hand, AIR MILES issued came…

Great, thanks Charles. If everyone could turn to the slide titled 2017 full-year, this is sort of more of the commentary part of the call. I don't have a lot to add from the numbers perspective, but I would call out two items on the slide. First up would be under Epsilon. When as Charles mentioned, the goal for the year was mid single-digits top and bottom on an apples-to-apples basis, we believe we accomplished that. Again the delta between the reported number for EBITDA and the 5% growth rate is the restoration of the incentive comp or bonus program. So if you - said differently if you went back the prior year, there was zero payout, which we don't believe is sustainable in this market and therefore we wanted to make sure we were highly competitive as we move into 2018. But we didn't want to cloud the actual performance and frankly exiting the year to plus seven topline is a very good signal as we move into next year. So we think we're getting a handle on that sort of mid single-digit growth rate. And overall, feels good. Card Services as Charles said even with 90 basis point increase in loss rates, still managed to deliver EBITDA, net of all these provision costs and funding costs and everything else of double-digit, so nice job there. And then finally, on the earnings per share, we had guided to roughly $18.10. We came in at $19.35. The differences are the following. Over performance would have brought us in it $18.33, so ahead by $0.23 and then a little over a buck coming from the tax benefit, which consisted both of the benefit itself less about $12 million that we allocated to non-executive bonuses coming out of the Tax Reform Act.…

So essentially this revenue standard has been out there for quite a while, but it was really in December when AICPA came out with a whitepaper, that basically said that if the locality program does not take inventory risk, meaning we don't – own it we don't carry the inventory into the point of redemption we should record it net, meaning the gross revenue minus the cost of the product redemption to get to a net revenue. LoyaltyOne travel is definitely fit that that threshold. So would have forced us to do is to look at the travel related redemptions going into 2018, recognize will now have a net recordation for it. To Ed’s points, no impact at all in terms your earnings, any of your earnings metrics obviously bumps up your EBITDA margin appreciably, but it's purely shifting to a net presentation. This was something that came very late in the year. We not anticipated to early, not a big impact overall to ADS in terms of revenue, and like I said, no impact to profitability.

Okay, so again from our perspective and from how we're going to be presenting on earnings and stuff, pro-forma, the norms and from our perspective, it's a 12% topline core EPS. Even with the big bump up in 2017, from the $18.10 to the $19:35. We're still looking at 16% to 19% growth in 2018. If you want to go back to the original guidance, we said we wanted to do $18.10, this past year bumping up to $21.50 for next year. The new guidance is we came in at $19.35 and we're going to bump up 2018 to $22.50 to $23 of share, representing 16% to 19% growth. All right, big question, tax bill, tax bill, tax bill. The tax bill will provide us with $100 million, roughly $100 million a year in additional free cash flow. And that's roughly $1.78 per share. We're going to take that $100 million and obviously flow through, roughly two-thirds of it and we're going to take between 30% and 33% in cloud that back into the company. We're going to put it back into the Company in three different buckets. The first bucket would be to accelerate some existing projects that we have on the board. The second would be to establish an innovation fund to get – to make sure one on the leading edge of the various digital payment products that are out there, and then the third would be to bolster some employee benefits whether it's getting the 401(k) participation rate up or holding down any increases on the benefits. The premiums on various healthcare packages for the employees we want to help out there. So it's – we're trying to live the spirit of the agreements as well as what we believe is the appropriate thing to do…

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

All right. Thanks guys. Let me just start off on the Card business, from an outlook perspective, and you're talking about mid-teens receivables growth, the like again. And I know the year ended off with a slightly slower growth rate and it was closer to 10% in the December month. I just want to understand where the confidence is coming from in terms of the portfolio growth and the underlying trends in retailers you're seeing right now? And then just a quick follow-up on the LoyaltyOne business after please?

Yes, sure. What we do is, obviously, we've got roughly 160 clients, actually a lot of the core clients that we had wound up doing a bit better in [indiscernible] holiday than I think a lot of people had anticipated. So we are seeing a little bit traction. There also what we do is, we look at, Darrin, the vintages that we've signed not just in 2017, but 2016 and 2015 and see how they're ramping up and when they're going to layer into the 2018 growth pipeline. And so you sort of wrap it all together and what we're seeing is even factoring in at roughly $1 billion that could go away due to a client going bankrupt or renewals that we don't want to pursue. We've looked back, Oh! Gosh, if you went back prior five years, our average growth rate has been 22%. If you layer in the vintages, what you're seeing with the ramp up of the IKEAs and stuff like that the 15% looks certainly doable.

So it's really organic, I mean in terms of the strength you're seeing is actually organic additional clients?

Yes, we have not factored in any acquisitions of portfolios in 2018.

Okay. I was going to ask about – I appreciate that. On the LoyaltyOne side, just to be clear, I mean I understand BrandLoyalty has a ton of different new business coming on World Cup, Olympics, Disney et cetera. Just give us more color on the overall confidence on that business, not just, I mean on the LoyaltyOne, on the AIR MILES side specifically in terms of the overall guidance high single-digit revenue. What do you need for the AIR MILES business to do for that business overall LoyaltyOne to deliver the guidance, you are giving high single-digit revenue growth. I mean can you give us a little more confidence on what you're seeing there to give you the conviction in that?

Sure. I think the Canadian business we’ve set the bar I think at a reasonable level. So the goal for 2017 was stabilized, get the margins back to the mid-20s. For 2018, frankly Darrin we’re talking 2% to 3% type growth which should certainly be doable. The BrandLoyalty frankly is going to be the engine driving this bus and based on what we're seeing in terms of the number of programs signed versus the folks who decided to take a pass last year and sort of wait for the Olympics and World Cup and everything else. It looks pretty robust.

All right. Thanks. Charles, just last question and I'll turn it back to the queue. But on the tax side, it's great to see your guidance unchanged backing out the tax benefit implicit in your 2018 guidance. Just curious in terms of the assumptions for the tax benefit, I mean I think we had estimated a little bit higher than the $1.50 or so you're guiding? And I know there's a $0.50 reinvestment. But even with that, is there any other items we should just be aware of in terms of conservatism in your tax profile adjustments or tax estimates for the year?

So if you look at 2017, our effective tax rate was 33%. We're guiding to 26% to 27% effective tax rate in 2018. To Darrin’s point, it does assume that will get a little pressure from the States. You’ve read what's going on in New York, New Jersey, California. They could – the States could look to grab some of that federal savings. So there is a little bit of conservatism built in there, but the state rates could go up in 2018 versus 2017, which is why we set the bar at 26% to 27% effective tax rate in 2018.

All right, so it’s maybe another 100 basis points or so above what it otherwise would have been or…?

I can't quantify Darrin.

Okay, well, that helps. Thanks guys.

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

Thanks. Good morning. Maybe this goes back to spirit of some of Darrin questions. But Ed, maybe you could just talk about where you see the largest risks to your outlook? I know there's a lot of positive things happening underneath it all, but maybe you can just talk about what you're worried about to the extent that you are worried about anything. And then as far as tax reform, can that help Card Services in Epsilon as consumers benefit from that and businesses look to reinvest? I'm just trying to think through the impact?

Yes, I think they are fair questions. Look, we don’t – the areas that we need to continue to show consistency that would be Epsilon and Conversant; we've had a good run in 2017 frankly. I think we need to demonstrate, we can do that again in 2018 before people get really comfortable. From what I'm seeing it looks pretty good. Obviously, the BrandLoyalty thing was probably the thing that took us all by surprise. And I can – I see the number of programs we've signed, based on prior year, we know how that will flow into earnings growth. I don't think we're going to say much more until we actually just print the numbers because we missed so badly during 2017. If there's one place of risk at the overall level, it's certainly not with the consumer. What we're hearing out of the 1000s of folks who are in our collection areas is that the consumer is quite strong, quite healthy. So I would say Sanjay, the only thing that would pop up to me of our 160 or so Card clients, we're assuming a handful and we watch them pretty closely are going to have a very difficult time, couple may even head towards bankruptcy to the extent on the retail side that estimate is off and there's another handful that we haven't thought about. I don't think it will hurt 2018 per se, but what we will do is, we will make for a tough grower for 2019. So from a macro perspective, it’s more retailer specific, a handful we've sort of identified, it's no more than a handful.

And on the tax reform Sanjay, we would say, you've seen many companies come out announcing, they're going to put more money in the hands of their associates, which could lead to cardholders spending more money in 2018, which could be beneficial to our Card operations.

How about Epsilon, are businesses looking to reinvest some of the upside?

Yes, I think from some of the reinvestments, I would call out probably two areas. The first in terms of reinvestment would be – we have always given the size of the Card business today. It was a lot easier when the file was a couple billion as opposed to heading towards $20 billion. We will be rolling out and launching a new source of funding, which will be on the consumer deposit side, out of our ILC facility in Utah and obviously that requires consumer platform. It requires marketing. We’ll have to come up with some fancy slogan or catchy slogan I guess that will get people excited about what's in their purse. And then the other area would be the CRM business at the Conversant side of it. Given the growth rates there, we will probably – not probably, we will absolutely be ramping up the size of the sales force effort and perhaps focusing even more on – not just the large clients, but also mid markets. So those would be the two big areas I would see initially for investment.

Your next question comes from the line of Vincent Caintic with Stephens.

Hi, thanks. Good morning, guys. So first I have to ask a question on credit, but on the in-house question efforts that you've had so far, so I know its early days, but given the 60 basis point headwind you had in 2017. What are you seeing so far in your experience that maybe can give us some encouragement? And then also how you think about the level of credit reserves that you keep? We've had some good provision performance recently, but just kind of wondering how you think about credit reserves. Thanks.

Sure. Great question. Yes, we went through this whole recovery in-house versus selling to third parties, post great recession where we raised same type of issue and we had to bring things back in-house. All right, it's pretty simple math at a certain level. It's more profitable to push it outside. What we have found so far because we're about six months into this process is that much like we had anticipated. If I were to put a number on it, the recovery rates internally are probably somewhere around 20% to 22% of your gross loss rates. So against our marketplace that was paying us 25%, it certainly made sense to go outside. However, that 25% dropped all the way down to 16% during 2017. So as we gradually move that up to the 20%, 22% in-house that's what we're seeing, and that's why I think we feel very good about where the net loss rate trend is going to be this year, from a gross loss perspective, it’s going to be flat.

In terms of credit reserves, we tend to carry 11 months to 13 months in terms of forward loss coverage based up on the trends we see in losses. Beginning back in 2015, we carried up to 13 months coverage all the way through the third quarter of this year. We trimmed it back to 12 basis points favorable trends. Fourth quarter, we kept it to 12 months forward coverage, which is likely where we’ll stay until we see it stabilized and potentially drop lower. The key thing to keep in mind and looking at the reserve quality of the reserve coverage is that Signet fall came on late in the year, close to $1 billion. The losses embedded with the forward recorded net, so there is no reserve attributable to it. So you always have to focus on the reserve divided by the reservable AR, which would not include the bulk of Signet in that number.

Okay. Got it. That makes sense. Thank you. And in separately on the – I mean the loyalty programs and kind of a loyalty updates, you talked about 15% AR growth in the card side and the signings activity that you're getting. I am just kind of wondering how – also that might translate into some growth on the Epsilon side. It seems like there seems to be more engagement in the overall loyalty offering that you have and if you can just get more perspective on that? Thanks.

Sure. Yes. I mean, 100% of our card clients are on the loyalty platform developed by Epsilon. The various digital distribution channels such as e-mail, our card clients would use the Epsilon. We are right now beginning a bigger push to get the unique sort of identification platform that is Conversant CRM into the hands of our card clients. So we would expect that to be a big area for us to push. I would say across the board, our card clients are asking not only for the type of insight into their existing customers. But they also want to be able to say let me take a look at my best customers. How do I go out and find people similar to that that may not be customers today. And that's the beauty of what Conversant can do with its unique ID. We can take all those characteristics and then go find these folks, and on behalf of the clients get something really exciting that could motivate them to show up either online or in store at our clients. And that's sort of a new area that we're really beginning to expand. So it's not just taking care of the existing best customers that's obviously job number one, but it's now moving into help me take a profile of my best customer and then go out into space there and find someone similar and then get them all excited about the brand. And that is an area that's getting our clients very excited because it's going to drive sales and that's sort of the bottom line. So that's the big push.

Got it. Thanks very much.

Your next question comes from the line of Jason Deleeuw with Piper Jaffray.

Yes. Thanks and good morning. So I just want to be clear on the credit recoveries. It sounds like we have some noise with the hurricanes maybe in the first quarter, but taking it in-house and the changes you made, I mean, shouldn’t the recovery rate shouldn’t there be a tailwind to your net charge-off rate or are you expecting that still kind of flat versus the 2017 level?

Absolutely going to be – when it's fully up and running, it should be – you should think 22% versus 16% that we did in 2017. So from that perspective if you had flat delinquencies which we have and you're going to see flat gross loss rates and you get this tailwind on the recoveries. As the year progresses, it certainly suggests that we're going to be in decent shape.

Good. Thanks for that. And then just on Epsilon, the technology platform revenue it grew 7% in the quarter, so it was a nice improvement on the growth rate there. Can we sustain that level and can you just help us understand kind of the drivers of that and then kind of the margin profile of that revenue versus the rest of Epsilon?

Sure. I let Charles do the margin. In terms of the product itself, what we basically had there was the traditional Epsilon product release, big iron type database is in loyalty platforms that were highly customized for each and every client and they were just massive, right. They dealt with tens of millions of customers or clients, all the bells and whistles in the world, and they were frankly pretty cool. The problem was, they cost an awful lot of money and it took anywhere between nine months to 15 months for these things to be delivered and cranked up for the customer. That just wasn't feasible anymore. We were frankly a bit slow to make the pivot to transition to a lower cost, quicker delivered product and that's what took us a full-year maybe 15 months to do. We opened a large office in India which helped with the price point brought us very competitive with some of the SaaS-based solutions out there. In addition to that, we frankly could no longer sit there and spend six months getting all the bells and whistles on these platforms and we said here's what we can deliver in a two months timeframe. And so we sort of modularized the offering, and lo and behold with the new price point and the time to market being brought from 10 months to two months. We found a very receptive audience because a lot of these folks frankly don't want to run the things in-house. There's a big market for companies that want to run and they get SaaS-based solutions and they hire IT staff and they go do their things. It is also a very big market as long as we can hit the price point and we can deliver in a timely fashion where they're saying, look, I don't want to be the ones responsible for figuring out how the watch is made. I just want to know the time. And so that's why I think this is something that right now certainly seems sustainable based on the book of business we signed.

Yes, Jason from an EBITDA margin standpoint, think of technology platform being in the 18% to 20% range.

Okay, thank you.

Your next question is from the line of David Togut with Evercore ISI

Thank you. Good morning. Could you drill down a little bit more into the mid-teens portfolio growth assumption for 2018 for Card Services? More specifically, could you talk about your assumption for same-store credit sales and what the breakdown of that would be between expectation for same-store sales of your existing retailers versus expected wallet share gain?

You bet. I think David we are taking a fairly conservative view based upon what we've seen over the last year or so. So for the core clients, the folks who've been with us for three or more years, what we have seen is they've gone from probably negative 2% or 3% to the last quarter. They were probably, which is broke the surface of the water probably 0% to 1%. So we're assuming same-store sales are probably not going to be better than 1% for those core retailers. With tender share, we should be able to get to somewhere between about 4% to 5% in terms of sales that will sales growth on our cards from those core and so as you know you go back half a dozen years or so that 5% used to be closer to 8% or 9%. But it looks like factoring in same-store sales of about a point, we will get tender share of course and so we're thinking 4% or 5%, and then the rest will come from the big books of businesses that we've signed in 2017, 2016 and 2015.

Got it. And then just a follow-up on capital allocation, Charles, you highlighted $1 billion of unencumbered free cash flow, how are you thinking about capital allocation priorities with your stock at its current price? Let’s say balance against potential acquisition and/or divestiture opportunities?

I would say David we're going to be flexible in how we use that. I'd say right now, M&A is probably pretty low on the radar screen. We could use some for buyback. We could use some to pay down debt over the course of the year. Really the focus that I have is to make sure that all three of our segments are fine and back on track and based upon those trends will determine how we deploy that capital. So I'd say conservatively expect it can go, it's just paydown debt, delever a little bit, even though we're in a very good shape now, it makes sense. We could do a modicum of buyback obviously the dividend that there is well. But I would say is expect M&A to be a relatively low priority at this point, really the focus is to get all three of our segments back fine.

Got it. Thank you very much.

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

Hey guys. Good morning.

Hi, Andrew.

Really nice to see Epsilon back in the mid-to-high single-digit range, I'm wondering if you could provide just a little more color and Auto has been really strong, CRM is doing well. So I guess a couple of questions. First on auto, could you characterize how you think about the cyclicality of those – of that end market versus sort of structural demand? And then within the CRM offering, are there any verticals in particular that you'd call out as being important drivers? And again I'm just trying to get a sense for the sustainability of the growth in those two really important drivers of Epsilon?

Yes, good questions. On the Auto side, what's interesting is the bulk of the work that we do both for the OEM and for the various dealerships, thousands and thousands of dealerships. Really is more after the sale is made, so it's much more in terms of service. So that doesn't have the type of variability you'll have with everything is driven off of sales, new car sales. So where the folks who will sit there and hopefully use predictive analysis and more and more the telematics, the data that comes out of the dashboard that basically will say, let's through a text on an email or a big card in your mailbox, it say, hey Andrew, it looks to me like you're about a week and a half away from when it's time to get your oil changed come on over to the dealership and we'll give you a great deal. That's the type of stuff that we will be doing. As more and more data comes from the telematics side of it, we'll be able to bug you all day long about your mission level and all these other things that we will be making sure you don't break down out there in California. So that's sort of it on the auto side from the CRM side. So the auto side shouldn't be all that cyclical. From the CRM side, look the huge verticals thus far have been retail. Auto is certainly looking bigger. What else Charles?

Financial.

Yes, financials of the banks for sure. There's a couple other verticals we’re beginning to look at that whole promise. So we want to take the offering and move it from just sort of a retail type offering to auto financial services. CPG looks promising. Those are the verticals we'd be focused on.

Okay. Thanks. And just one quick one if I may. In technology side – to the extent you're winning more there and your win rates look better. Are these competitive takeaways or are they buy versus build decisions that you're swaying?

I would say it's less competitive takeaways. I think it's that the market continues. It's a growing market, right, as you know, it really comes down to the CMO needs to decide whether she wants to have the thing built in-house and have a big tax back, meaning let's get a SaaS-based solution and surround it with 100 tech people or now that we can have a similar price point to that offering and do it ourselves. Is it okay to give up controls of the guts of this thing and just have the results forward through into her shop. So he or she can just have a bunch of analysts to look at the results. So the sandbox itself is getting bigger and bigger, so I would say the vast majority of it are more and more folks who are getting into the whole concept of hey, we can use this data and loyalty platforms to understand the customers and market to them. It's a huge.

Terrific. Thank you.

All right. We will take one more.

Your last question comes from the line of David Scharf with JMP Securities.

Hi. Good morning. Thanks for squeezing me in here. Hey, first question on the card side, just a point of clarification. Ed, when I look at the components of your portfolio growth guidance this year, is the $1 billion subtraction for retailers that ultimately may become non-core, non-growing, is that just a guess in a cushion or are there specific programs you've identified?

Yes. I think it's a case. Think of it David, we divested $800 million in December. So you know for the full-year in terms of average this going to be part of it. So basically it means that there's another $200 million potential over the course of the year that we could look at evaluate, do a held-for-sale or it could be a retailer that goes away. So simply the bulk of it was the divestiture we made at the end of December.

Okay. Got it. In the mid-teens, Charles that's a 12/31 versus 12/31 guidance average apples-to-apples?

Average 2018 over average 2017.

Got it. And then lastly, shifting to Epsilon, you noted that tightening the labor market, curious – you obviously took a lot of initiatives in recent years on the offshoring side to address that? Did you feel like based on the mix of skill sets that are needed the composition of Epsilon as it exists today? Is off-shoring as an option pretty much run its course or are there additional opportunities there?

Yes. Again, we view it a little differently from offshore. I think it’s actually an office that we've built over there these are Alliance Data employees just like the folks here. So it's very much keeping it within the family type approach. I would expect we're going to have 2,000 folks over there and no I don't think it's on its course in terms of the cost model itself. The proportion that of our associate base that’s over there versus here is probably getting to be at the point where we find it’s comfortable and I don't think there will be a huge shift either way going forward. But in terms of the benefits on working across both India and here in the States, we're just beginning to see that. So I would expect while there's a nice chunk that we picked up thus far there's probably another chunk to go.

Okay. That’s helpful. And just last question quickly on the AIR MILES business. You've noted obviously for several quarters the challenges in issuance growth associated with the Grocery segment. Is there something structural that's changed among a number of the large sponsors in terms of how much they're willing to spend on promotional activities or did you feel like 2017 may have just been a breather on their part as they assessed maybe the fallout from the expiry events. Trying to get a sense for visibility there?

I think David it's hangover from what took place in the fourth quarter of 2016 around the expiry. I think that's really what it was. Obvious we had a number of things going on this year. We need to get Bank of Montreal renewed, which we did around the third quarter that should help. And I do think in the grocery vertical, we just need to get them back satisfied, get the consumers back in their stores and that by itself will lead to getting promotional activity back, but I would attributed to purely hangover from the Q4 2016 event.

Got it, got it. Thanks very much. End of Q&A

Okay. Thanks everyone. We’ll see at Q1.

Thank you. This concludes today's conference. You may now disconnect.