U.S. Markets closed

Edited Transcript of AFGR earnings conference call or presentation 27-Jul-17 2:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 Affinion Group Holdings Inc Earnings Call

NORWALK Aug 13, 2017 (Thomson StreetEvents) -- Edited Transcript of Affinion Group Holdings Inc earnings conference call or presentation Thursday, July 27, 2017 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Gregory S. Miller

Affinion Group Holdings, Inc. - CFO & Executive VP

* Todd H. Siegel

Affinion Group Holdings, Inc. - CEO & Director

* Torrey Martin

================================================================================

Conference Call Participants

================================================================================

* Brian Thomas Denes

Cowen and Company, LLC, Research Division - Associate

* Juliano Torii

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to the Affinion Group's Second Quarter 2017 Earnings Conference Call. (Operator Instructions) And as a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Torrey Martin, Senior Vice President of Communications. Sir, you may begin.

--------------------------------------------------------------------------------

Torrey Martin, [2]

--------------------------------------------------------------------------------

Thank you, Sandra. Good morning, everyone. Welcome to our quarterly conference call. With me today are Todd Siegel, our Chief Executive Officer; and Greg Miller, our Chief Financial Officer. This call is also being simultaneously webcast on our website and will be available through July 31, at www.affiniongroup.com/investors. As a reminder, this call cannot be taped or otherwise duplicated without the company's prior consent.

Before we begin, I would like to remind everyone that this call may contain certain statements that are forward-looking, as that term is defined by the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, discussions regarding industry outlook, opinion, expectations regarding the performance of the company's business, liquidity, capital resources, its guidance for 2017 and other nonhistorical statements in the discussion and analysis.

These forward-looking statements are subject to certain risks and uncertainties and assumptions, including risks related to the general, economic and business conditions that are based on management's belief as well as assumptions made by and information currently available to management. When you listen to this call, the words believe, anticipate, estimate, expect, intend and similar expressions are intended to identify forward-looking statements. All forward-looking statements made today reflect the company's current expectations only. And although management believes the expectations reflected in these forward-looking statements are reasonable, the company undertakes no obligation to revise or update any statement to reflect events or circumstances that occur after this call.

Important risks, uncertainties, assumptions and other factors that could cause actual results to differ materially from those in these forward-looking statements are identified and discussed in the reports filed by Affinion and Affinion Holdings with the SEC. Including Affinion Holding's most recent annual report on Form 10-K.

During the call, management will provide certain information that will constitute non-GAAP financial measures under the SEC rules such as adjusted EBITDA. Certain information required to be disclosed about these non-GAAP measures, including reconciliations with the most comparable GAAP measures, is available in the earnings press release that we issued this morning.

With that, let's begin by turning the call over to Todd.

--------------------------------------------------------------------------------

Todd H. Siegel, Affinion Group Holdings, Inc. - CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, Torrey. Good morning, everyone, and thank you for joining us for our second quarter 2017 conference call. With me today is Greg Miller, our CFO.

Today I will discuss key themes and developments from the second quarter and the first half of the year, and I will review our progress toward our 2017 goals. I will then turn the call over to Greg, who will walk you through the financial results in more detail. At the end of the prepared remarks, Greg and I will answer your questions.

I'd like to start to take a moment by -- to discuss our progress on our strategic plans. We entered 2017 with positive momentum in our core businesses, particularly with strong growth expectations for the Loyalty segment. We also entered the year with a 2018 debt maturity wall.

Through the first 6 months of the year, we have delivered on our operational plans and we have simplified and extended our capital structure through a transaction that provides sufficient runway to capitalize on significant opportunities across our core businesses. A positive momentum in trends that we've seen in the marketplace continue to support our long-term goals and strategic plans.

Before I turn to the results in the quarter, I'd like to briefly discuss some changes to our Board of Directors. As part of the most recent refinancing and recapitalization transactions and pursuant to the new nominating agreement, we've had some changes to our Board of Directors. Spencer Wells; Skip Victor; and David Resnick have resigned, and Christophe Browne; Austin Camporin; Michael Iaccarino; and Gilbert Palter have been appointed to the board. We appreciate the commitment and efforts of David, Skip and Spencer. At the same time we're excited by the addition of 4 new members with significant financial and operational experience to our board.

Christophe Browne is a Managing Director with ICG Strategic Secondaries Advisors. Austin Camporin is an Associate Portfolio Manager with Elliott. Management. Michael Iaccarino is Chairman and CEO of Infogroup and formerly was the CEO of Epsilon, and Gilbert Palter is a Managing Partner and Chief Investment Officer with EdgeStone Capital Partners. Together, with Rick Frier and Mark Vondrasek, we believe their broad knowledge and experiences will be a tremendous asset to the company.

In the past, we have outlined our keys to long-term success with the company and I'd like to revisit them now.

We expect to achieve the following: first, new client wins in Global Loyalty; second, continued success in global customer engagement; third, combining platforms and infrastructure to achieve efficiency and meaningful cost savings; and fourth, to continue our focus on growing existing partnerships by providing best-in-class solutions and services.

We believe we have made significant progress on each of these goals in the past 18 months. However, we also believe that there are more opportunities to capitalize on these initiatives and continue to grow our core businesses.

Now turning to the business results. Our 3 core businesses continued to perform well in the second quarter, building on the strong start to the year in Q1. Adjusted EBITDA for the core businesses reported an increase of approximately 9% year-over-year as compared to the second quarter of 2016 led by strong growth from the Global Loyalty segment.

Global customer engagement earnings were down year-over-year, largely due to slower than expected product launches with new clients for our Engagement Solutions business.

Insurance earnings in the second quarter were relatively flat. And as expected, the legacy membership and Package business experienced declines as compared to Q2 of 2016, which offset the gains we reported in our core businesses.

Overall, our second quarter 2017 financial performance was in line with our expectations and the key trends and recent developments continue to support our long-term goals and targets.

Now I will briefly touch on the key trends in each of our business segments.

First, Global Loyalty. Our Loyalty business continued to experience significant growth, driven by rapid expansion of existing client programs and our new significant U.S.-based financial institution clients. Revenue in the second quarter increased approximately 39% compared to the second quarter of 2016, and adjusted EBITDA increased 61% year-over-year in Q2.

We continue to see positive trends and significant momentum in the Loyalty business, evidenced by our key performance metrics. Our gross transactional sale volume for the second quarter increased approximately 72% as compared to Q2 of 2016, growing from $493 million to $850 million. First half 2017 gross transactional sales volume was up approximately 66% year-over-year, growing from $975 million to $1.6 billion, led by travel volumes across all categories including air, hotel and car.

Although this trend in transactional volume is a leading indicator for the direction of the Loyalty business, I'd like to remind you there is seasonality for the business and it does not account for all of our Loyalty capabilities. We also create and manage any and all aspects of our clients points based Loyalty programs, including design, platform, analytics, online and offline servicing and points management. And we saw a growth in the second quarter in this core platform part of the Loyalty business as well.

While the Loyalty solutions we provide and related transaction volume remains a key driver of growth for our Loyalty business, we are still dealing with the impact from the cybertheft that we had earlier this year. During the second quarter, we recorded a charge of $18.1 million related to the Q1 2017 cybertheft in our Loyalty gift card business, which we spoke about last quarter. The second quarter charge was largely due to a commercial dispute with a gift card provider and we're seeking to recover that portion of the charge from that provider.

In addition, as we stated last quarter, we are seeking recovery from our losses from this cybertheft from our appropriate insurance carriers. We have taken several security measures, including hiring third-party experts and putting new protocols in place to strengthen our security. We feel that we now have the necessary security measures to ensure that this does not happen again. We believe the lion share of this issue is now contained and we remain committed to providing best-in-class service to our clients and their customers.

Aside from this issue, we are encouraged with the recent results and continue to be well positioned to take advantage of strong growth prospects and market trends. To that end, our recent new client launches have yielded solid initial results, including our financial institution win that was launched at the end of the first quarter. We believe the addition of a top 10 financial institution to our roster of clients speaks to our leading loyalty offering, capabilities and technology platform.

Overall, we're excited about the long-term growth potential for the Loyalty business. And given our expected growth from existing clients, new client launches and our pipeline, this business continues to be well positioned for a strong second half of the year.

Turning to Global Customer Engagement. Revenue and earnings in the Global Customer Engagement business continued to be impacted in the second quarter by a couple of factors. First, foreign exchange was once again a drag on the top line results; and second, slower than expected product launches, with new clients on our engagement solutions business had a negative impact on Q2 results.

While we were pleased with the performance of our revenue enhancement business thus far in 2017, the timing of engagement solution partnerships have been slower than expected.

As a reminder, the revenue enhancement business is a more typical subscription-based business model whereas our engagement solutions business is our technology solutions and platform-based business model. For clients whose primary focus is providing products and services that are natural extensions of their brands, allowing further monetization of their customer base, we utilize our revenue enhancement approach. For other clients, whose primary focus is on customer acquisition, retention, engagement and loyalty, they look to our engagement solution platform to address their needs. By licensing our engagement solution platform, we deliver appropriate benefits, rewards, analytics and content offerings in a customized solution to our clients and their customers.

As we have discussed in the past, we have a solid pipeline on Engagement Solutions business, but this process has a longer sales cycle than our traditional subscription-based programs. The sales cycle is similar to our Loyalty business, however, engagement solution programs can take longer to ramp up and it can be a lengthy process before we start to see material financial benefits. Rather than taking over an existing Loyalty program that immediately impacts financial results upon launch, an engagement solution program can take anywhere between 6 to 9 months to launch and then another 6 to 12 months before we see an impact to our results.

Although the timing of product launches has been a drag on results in the past few quarters, we continue to see strong market opportunities. During the second quarter, we have added new partners and renewed key relationships with leading financial institutions, e-commerce, telecom, media, and technology companies.

In particular, we are seeing strong traction in the telecom, media and technology sector. In Brazil, we agreed to review with a leading insurance company to embed our cyber protection benefits into their mobile phone insurance product, which is projected to cover 3 million customers each year.

In Germany, we recently launched our identity protection solution with a major telecom company with solid initial results.

We also continue to enhance our benefit engine hub with a strong pipeline of near-term launches. For example, we are on track to launch programs through our global relationship with a large team in technology company, with leading financial institutions in Germany, in the U.K. and in Italy. And we have recently strengthened a long-standing relationship with a major financial institution in the U.K. with a 3-year renewal of our benefits engine program.

For the remainder of the year, we remain focused on finding and launching new clients and ramping up our engagement solutions programs. We continue to see growth opportunities in the Global Customer Engagement segment and we need to capitalize on these opportunities.

We continue to expect success in our Global Customer Engagement business for the rest of the year and into the future. We recognize, however, that the timing and success of new engagement solution partnerships and programs will be an important factor in the growth profile. And we don't expect much, if any, year-over-year growth in our global customer engagement business for 2017 due to the longer than anticipated timing of new program launches.

Next, let me turn to Insurance. Financial results in our Insurance business in the second quarter were strong, with a slight increase in revenue and adjusted EBITDA compared to the second quarter of 2016. Consistent with the last several quarters, claims activity was in line with our historical averages in the quarter.

On that note, since the increase in the level of claims activity in 2014 associated with the Insurance carrier conversion, we have seen 2.5 years of solid, steady and predictable performance from our Insurance business. We remain pleased and encouraged with recent financial results in this segment and our overall business continues to benefit from having a steady, core performer with strong cash characteristics.

Additionally, we continue to see strong marketing results and growing adoption of our new, innovative product, hospital accident plans and Recuperative Care. The strength of these programs validate that customers are finding the benefits relevant and our clients are eager to provide these industry-leading programs.

For the remainder of the year, we are focused on continued solid performance from our Insurance business through our full suite of accident and life insurance products.

Lastly, legacy membership and package. During the second quarter, and as expected, legacy membership and package reported a decline in revenue in adjusted EBITDA, year-over-year, primarily due to the continued attrition of legacy members largely from our financial institution partners. Similar to the first quarter, the attrition rate in Q2 was more in line with historical average.

In summary, the first half of 2017 has met our expectations as we continue to capitalize on attractive opportunities in our core businesses which were offset by the decline in our legacy membership and package segment. We remain focused on executing on our long-term strategic plan as we believe the company is well positioned to provide best-in-class content offerings, service capabilities and technology platform, which continue to be attractive offering for our clients and their customers.

We entered this year expecting to benefit from positive momentum in our Loyalty business, driven by strong growth from existing clients and the launch of several new clients. We also expected our Global Customer Engagement and Insurance businesses to continue to perform well and we generally remain on track with those expectations.

Therefore, we remain confident that for the remainder of the year, our core businesses will be led by strong growth in our Global Loyalty segment.

And with that, I would like to turn the call over to Greg, who will go over the quarterly results in greater detail. Greg?

--------------------------------------------------------------------------------

Gregory S. Miller, Affinion Group Holdings, Inc. - CFO & Executive VP [4]

--------------------------------------------------------------------------------

Thank you, Todd. Good morning, everyone. Overall, I'm pleased with our financial results for the second quarter and the first half of 2017. We had solid results in our core businesses led by strong growth in our Global Loyalty segment. And financial results in our noncore businesses were in line with our expectations.

As Todd mentioned earlier, we have delivered on our expectations for the first 2 quarters of this year and we continue to see positive momentum across our core businesses.

Indeed we are well-positioned to provide our clients with meaningful content, services and technology, while continuing to execute against our long-term strategic plan. Additionally during the first half of the year, we simplified and extended our capital structure through a transaction that provides sufficient runway to capitalize on significant growth opportunities across our core businesses. As part of the transaction, the remaining subnotes were redeemed in July, and we now have our term loan and revolver and our senior unsecured notes.

Following the transaction, as a reminder, we will now only file Affinion Group Holdings results with the SEC because the holdings entity guarantees the new debt as permitted under our debt agreement.

Now I'll provide some comments on our balance sheet and new debt metrics, and then we'll discuss our operating results for the quarter, followed by some comments about (inaudible).

Starting with the balance sheet and debt metrics. At June 30, our debt, net of unrestricted cash, was approximately $1.8 billion. We had cash on the balance sheet of $59.3 million and borrowings of $58 million on the revolver.

I'd like to note that we had a large partner of income payments on the last day of the quarter and because our revolver requires 24 hours of notice, we could not pay down the revolver before the close of the quarter, which left us with our cash and revolver down.

In terms of our debt metrics, the new term loan has 2 financial covenants: one, the total secured leverage ratio may not exceed 7.5x on the last day of any fiscal quarter through 2017 and the ratio steps down as we get closer to maturity; and second, the consolidated fixed charge coverage ratio may not be less than 1x on the last day of any fiscal quarter through June 2018, and the ratio increases for a period of time before returning to 1x as we approach maturity. At the end of the second quarter, these ratios were within both of our covenant requirements.

I will now review the financial results for the quarter. As always, the earnings release includes the reconciliations for any non-GAAP measures, such as adjusted EBITDA that will be discussed on the call.

I will begin with an overview of the total business for both adjusted and segment EBITDA, as well as break out for you the material adjustments between segments and adjusted EBITDA, as defined under our new debt agreement. And then I'll provide a brief walk-through of key items for each of our business segments.

On a consolidated basis, overall adjusted EBITDA for the second quarter of 2017 was $53.6 million, which was $3.4 million lower than Q2 of 2016 or down 6%. The overall decrease was largely due to a decline in our noncore segment as legacy membership and package adjusted EBITDA for the second quarter, was $10.9 million or $6.6 million lower than Q2 2016. This was partially offset by an increase in our Global Loyalty segments.

In our core business segments, adjusted EBITDA increased by $4.6 million or approximately 9% to $54.5 million compared to $49.9 million in the second quarter of 2016. The increase was largely due to the year-over-year growth in Global Loyalty business, partially offset by decline in our global customer engagement business.

As a reminder, adjusted EBITDA excludes certain nonrecurring items as defined in Affinion's credit agreement. The adjustable items in the second quarter totaled $26.6 million, which included an $18.1 million charge recorded for the vendor dispute relating to the external gift card inventory cybertheft that occurred in the first quarter of 2017. $4.9 million is cost related to the restructuring of certain operations, including related severance cost; $2.1 million in cost related certain litigation matters; and $0.6 million in stock compensation expense as well as other minor items.

In the press release on Table 5, you'll see a breakout of the adjustments by segment and by category.

In the second quarter of 2017, segment EBITDA was $27 million as compared to $48.7 million in the second quarter of 2016.

I'll now turn to our segment results. Beginning with Global Loyalty. Net revenues increased by $15.5 million or approximately 39% as compared with the second quarter of 2016. The increase was largely due to the growth with existing clients and launches with new clients.

Segment EBITDA for the second quarter decreased by $9.3 million year-over-year as the impact of higher net revenue was more than offset by higher servicing cost and a charge recorded relating to a commercial dispute with one of our gift card providers relating to the external gift card inventory cybertheft that occurred in the first quarter of 2017. Excluding this charge, Global Loyalty segment EBITDA would have increased nearly $9 million or up approximately 69% as compared to the second quarter of 2016.

As Todd highlighted earlier, the second quarter charge was primarily due to a commercial dispute with one of our gift card providers, which is related to the cybertheft in the first quarter. We are seeking to recover the portion of the Q2 charge from the gift card provider. Clearly it is an unfortunate event and we've taken several security measures, including hiring third-party experts to strengthen our security and put new protocols into place to prevent it from occurring in the future. We feel that we have the necessary security measures in place to ensure that this does not happen again. The insurance claims related to the theft is currently being pursued with our carriers and we expect the recovery in future periods, which will be recorded when received.

Although the gift card charge impacted second quarter results, we don't think it should mask the strong results and positive momentum that we continue to see in the loyalty marketplace. During the first half of the year, we reported significant growth in transactional sales volume, including strong growth from our existing clients and we've successfully launched with a top 10 financial institution.

We believe the trend and transactional volume is a strong leading indicator for the business. However, it's important to note that there is seasonality for this business and it does not account for all of our loyalty capabilities.

For the rest of the year, we remain focused on building our existing business, continuing to successfully implement new clients and capitalizing on our growth opportunities. Given the favorable market trends, our full suite of Loyalty capabilities and our commitment to maintaining a leading technology platform, we continue to believe this business has a long-term growth engine for the company.

In the global customer engagement segment, revenues decreased by $9.7 million as compared to the second quarter of 2016. On a currency consistent basis, revenue was down $5.2 million, year-over-year. The decrease was primarily from lower revenues in our engagement solutions business, principally due to the timing of product launches with new clients as well as lower revenue in our revenue enhancement business.

Segment EBITDA decreased by $8.1 million compared to the second quarter of 2016, as lower revenues and higher operating G&A facility and exit costs were partially offset by lower marketing and commission expense. The lower marketing and commission expense was primarily due to lower volumes and deal structure change and the favorable impact of foreign exchange. The higher operating and facility exit costs were primarily the result of costs related to restructuring efforts from our cost savings initiatives. And the higher G&A costs were largely from a provision for the collectability of a customer receivable.

While the revenue enhancement business has performed fairly well thus far in 2017, the timing of product launches with new clients in the engagement solutions business has been a drag on revenue. However, as Todd mentioned earlier, we remain focused on signing and launching new clients and ramping up our engagement solutions program, creating solid pipeline in our engagement solutions business. But this process has been more of a sales cycle than our traditional subscription-based program. The sales cycle is similar to our Loyalty business, however, engagement solutions programs can take long to ramp up and it can be a lengthy process before we start to see material financial benefits.

While we continue to view the platform engagement solutions in overall Global Customer Engagement business as a long-term growth segment for the company, we recognize that near-term results will depend upon the timing and success of new engagement solution partnerships and programs.

Next I'll turn to Insurance solutions. Net revenues increased by $0.9 million or approximately 2% as compared to the second quarter of 2016. The slight increase was primarily due to an increase in average revenue for supplemental insured and a lower cost of insurance principally due to lower claims experience, which is partially offset by lower average supplemental insured. As we have highlighted in the past, these trends continue to be consistent with our strategic decision to focus on higher average buys.

Insurance segment EBITDA increased by $0.6 million compared to the second quarter of 2016, primarily due to the higher net revenues partially offset by slightly higher operating expenses.

We continue to be pleased and encouraged with steady performance of our Insurance business. Over the past 2.5 years, we have seen this segment produce solid results, following the impact of our carrier conversions in 2014. Our newer insurance products have shown positive initial results and our clients are eager to sign up industry-leading programs and solutions to their customers.

Lastly, legacy membership and package. During the second quarter, our legacy segment performed in line with our expectations, with the expected declines. Legacy net revenues decreased by $13.8 million, or approximately 27% as compared to the second quarter of 2016, largely due to the expected attrition of legacy members as well as lower package revenues. On a sequential basis, revenues in Q2 were only slightly off from Q1 as we had anticipated. This marks the fifth consecutive quarter of relatively minor revenue decline in legacy membership and package following the accelerated decline from the fourth quarter of 2015 and the first quarter of 2016.

Legacy segment EBITDA for the second quarter decreased by $6.3 million compared to Q2 of 2016 primarily due to lower net revenues which were partially offset by lower operating costs, or marketing and commission expense and lower G&A expense.

Similar to the first quarter of 2017, attrition rates in the legacy membership and Package business were more in line with historic levels in Q2 of 2017. We believe this trend should continue for the remainder of 2017.

In terms of our liquidity position, as I previously mentioned, we had approximately $59 million of cash at the end of second quarter. It is important to note that this cash position incorporates some of the cash items related to the gift card matter and the Loyalty business, and any recoupments from insurance or resolution will mitigate the impact to our cash positions. We continue to believe we have sufficient liquidity to pursue our growth initiatives and capitalize on significant opportunities based on available cash on hand and our revolver availability. As a result we believe our liquidity profile remains solid.

So in review, we're pleased with the growth in our core business in the second quarter, particularly in our Global Loyalty segment, and our overall financial results for Q2 were largely in line with our expectations.

During the first 6 months of the year, we have delivered on our operational plan and made significant progress on our long-term strategic plan. We have also simplified and extended our capital structure through a transaction that provides sufficient runway to capitalize on significant growth opportunities. And we continue to see positive momentum across our core businesses. For the remainder of the year we expect our core businesses to be led by continued strong growth in our Global Loyalty segment.

With that, Todd and I will take your questions. Operator, please provide the instructions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Brian Denes with Cowen and Company.

--------------------------------------------------------------------------------

Brian Thomas Denes, Cowen and Company, LLC, Research Division - Associate [2]

--------------------------------------------------------------------------------

Just a few questions. The revenue pick up within Global Loyalty, how much of that would say stems from the top 10 financial institution win versus growth within existing customers? Is that like 99% to 1%?

--------------------------------------------------------------------------------

Todd H. Siegel, Affinion Group Holdings, Inc. - CEO & Director [3]

--------------------------------------------------------------------------------

No, no. I would say that the -- there's a very healthy mix between the growth in our existing client relationships as well as the new relationships. And that's why I think we'll see a 40-plus-percent revenue growth for this next several years. But it's a trend that could continue.

--------------------------------------------------------------------------------

Brian Thomas Denes, Cowen and Company, LLC, Research Division - Associate [4]

--------------------------------------------------------------------------------

Is it fair to assume that it's 50-50?

--------------------------------------------------------------------------------

Todd H. Siegel, Affinion Group Holdings, Inc. - CEO & Director [5]

--------------------------------------------------------------------------------

Again, it's fair to assume that both growth of existing clients as well as the growth with the new partner contributed to the overall growth profile for the business.

--------------------------------------------------------------------------------

Brian Thomas Denes, Cowen and Company, LLC, Research Division - Associate [6]

--------------------------------------------------------------------------------

Okay. Thanks. Moving on to cybertheft. What steps are you guys taking to cover yourself going forward? And how much of that loss do you think you'll realistically recover?

--------------------------------------------------------------------------------

Todd H. Siegel, Affinion Group Holdings, Inc. - CEO & Director [7]

--------------------------------------------------------------------------------

So we've taken several security measures. We worked with third-party experts. We've strengthened the security. We've strengthened our protocol. We've strengthened our systems. The reality of the situation is we live in a world where cybertheft is a real threat and we continue to feel that we have the right security measures in place, notwithstanding what happened to us in Q1. But we're happy to say that it's been fully tested by numerous parties including ourselves, third parties and vendors and clients have looked at it as well. As far as the recovery, we would expect that other than any deductible that might be due to insurance, our current thinking is we should expect to get the lion share of the charges we covered in future periods.

--------------------------------------------------------------------------------

Brian Thomas Denes, Cowen and Company, LLC, Research Division - Associate [8]

--------------------------------------------------------------------------------

Right. So I guess it's safe to look at this as nonrecurring? Or is this something that's kind of realistic amongst you and your competitors and peers, and what have you?

--------------------------------------------------------------------------------

Todd H. Siegel, Affinion Group Holdings, Inc. - CEO & Director [9]

--------------------------------------------------------------------------------

Yes. I think this issue, the one that happened with us in Q1, we were not the only gift card provider that was targeted for this type of theft, so it happened to some of our competitors. We do feel it's a onetime event. We feel that our security measures are in place to prevent this from happening in the future. That being said, I think, cybersecurity and cybertheft, is a risk that is something that every business faces and we need to make sure that we stay ahead of the cyber thieves to the extent as possible.

--------------------------------------------------------------------------------

Brian Thomas Denes, Cowen and Company, LLC, Research Division - Associate [10]

--------------------------------------------------------------------------------

Moving on to your maturity wall, obviously that's been pushed out, which makes it a lot easier to lock down new business, attract and retain partners. Are you seeing much of an impact of that yet? And if not, when do you looking to expect that?

--------------------------------------------------------------------------------

Todd H. Siegel, Affinion Group Holdings, Inc. - CEO & Director [11]

--------------------------------------------------------------------------------

So I think it's in a couple of things. I think number one, it's short of any concern that existing partners, clients, customers, vendors have. So I think we've seen that immediate impact which is great. As far as capturing new business prospects, we do feel that the competitive challenges that we were facing with our comparators, we would say, hey look at their maturity wall, that's just not something that is in their arsenal anymore. So we feel that should benefit us in the short and midterm.

--------------------------------------------------------------------------------

Brian Thomas Denes, Cowen and Company, LLC, Research Division - Associate [12]

--------------------------------------------------------------------------------

Got it. Thanks. And last one, I know you talked in the past about potential monetization of the Insurance segment. How discrete would you say that business is? And would there be much in the way of dissynergies?

--------------------------------------------------------------------------------

Todd H. Siegel, Affinion Group Holdings, Inc. - CEO & Director [13]

--------------------------------------------------------------------------------

Yes, so that business is currently operated for the most part as a stand-alone entity. So it's easily separable. If we were to make a strategic decision that it was no longer core to what we're doing. And I would say there would be minimal, if any, stranded cost, if were to decide that was the strategic direction we wanted to take.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from the line of Juliano Torii with Descartes.

--------------------------------------------------------------------------------

Juliano Torii, [15]

--------------------------------------------------------------------------------

I was just trying to understand on your 3 months income statement, when your operating cost goes from $82.7 million to $106.1 million, is that the impact of the charge that you took as a result of the cyber attack?

--------------------------------------------------------------------------------

Gregory S. Miller, Affinion Group Holdings, Inc. - CFO & Executive VP [16]

--------------------------------------------------------------------------------

Yes, that was the primary reason for the increase in the cost in the quarter.

--------------------------------------------------------------------------------

Juliano Torii, [17]

--------------------------------------------------------------------------------

Okay. Could you please describe what you're expecting in terms of cost cutting apart from that going forward? In terms of marketing and also operating costs and G&A as well?

--------------------------------------------------------------------------------

Todd H. Siegel, Affinion Group Holdings, Inc. - CEO & Director [18]

--------------------------------------------------------------------------------

Yes. So one of the things that we're doing is we're continuously looking at our infrastructure. And as we are combining platforms and systems, we believe that will lead to certain efficiencies across our global customer engagement business as well as legacy business, as we, both modernize and combine platforms. Additionally as we continue to move some of our infrastructure to the cloud, we would anticipate having additional efficiency.

--------------------------------------------------------------------------------

Juliano Torii, [19]

--------------------------------------------------------------------------------

I just want to understand what is your general expectations on your EBITDA and cash flow statement trends for the entire group including legacy for this year, compared to last year, do you expect any improvement overall? Or do you expect to decline a bit?

--------------------------------------------------------------------------------

Gregory S. Miller, Affinion Group Holdings, Inc. - CFO & Executive VP [20]

--------------------------------------------------------------------------------

So we -- I think what we've said is we expect meaningful growth in our Global Loyalty segment, year-over-year. Given some of the challenges we're having and the timing it's taking to launch some of the engagement solution programs, I'm not sure if we would expect meaningful if any growth in our global customer engagement business and our loyalty business is a solid, solid steady performer. And then the natural attrition in our legacy. So we would anticipate we're feeling good about the growth in the core business that's being led by our Global Loyalty segments.

--------------------------------------------------------------------------------

Juliano Torii, [21]

--------------------------------------------------------------------------------

And do you think that's going to be enough to offset the decline of the legacy business? What is your -- this piece of decline that you would expect over the year and the next, more or less?

--------------------------------------------------------------------------------

Todd H. Siegel, Affinion Group Holdings, Inc. - CEO & Director [22]

--------------------------------------------------------------------------------

We would think the Loyalty business would continue to attract at the recent trends that you've seen.

--------------------------------------------------------------------------------

Gregory S. Miller, Affinion Group Holdings, Inc. - CFO & Executive VP [23]

--------------------------------------------------------------------------------

Legacy business, not the Loyalty business.

--------------------------------------------------------------------------------

Todd H. Siegel, Affinion Group Holdings, Inc. - CEO & Director [24]

--------------------------------------------------------------------------------

Yes, that's correct.

--------------------------------------------------------------------------------

Juliano Torii, [25]

--------------------------------------------------------------------------------

So it should continue to decline in the current speed.

--------------------------------------------------------------------------------

Todd H. Siegel, Affinion Group Holdings, Inc. - CEO & Director [26]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

And I'm showing no further questions at this time.

--------------------------------------------------------------------------------

Todd H. Siegel, Affinion Group Holdings, Inc. - CEO & Director [28]

--------------------------------------------------------------------------------

Great. Thank you, everyone.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.