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Edited Transcript of AIM.TO earnings conference call or presentation 25-Feb-20 1:30pm GMT

Q4 2019 Aimia Inc Earnings Call

MONTREAL Mar 4, 2020 (Thomson StreetEvents) -- Edited Transcript of Aimia Inc earnings conference call or presentation Tuesday, February 25, 2020 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeremy Rabe

Aimia Inc. - CEO, President & Director

* Steven Leonard

Aimia Inc. - CFO

* Tom Tran

Aimia Inc. - Director of IR

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Conference Call Participants

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* Lauric Bakomito

TD Securities Equity Research - Associate

* Riley Gray

RBC Capital Markets, Research Division - Associate

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Aimia Inc. Fourth Quarter 2019 Results Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to Mr. Tom Tran, Head of Investor Relations. Please go ahead.

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Tom Tran, Aimia Inc. - Director of IR [2]

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Thank you, Sharon, and welcome, everyone, to this morning's call.

Today's presentation can be found on our website. Before we get underway, I'd like to remind everyone to review our forward-looking statements and the cautions and risk factors pertaining to these statements, which can be found on Slide 2 of the Q4 highlights presentation.

The presentation refers to several non-GAAP metrics to help you better understand the results of the business. For all of our non-GAAP metrics, a definition and a reconciliation to their most comparable GAAP metric can be found on Pages 3 and 4. As usual, you will find a full GAAP income statement on Page 5.

With me on the call today are speakers Jeremy Rabe, our CEO; and Steve Leonard, our CFO. Jeremy will begin with our strategic highlights before handing over to Steve to take you through the results of the quarter. We will have time for questions at the end.

With that, let me hand over to Jeremy.

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Jeremy Rabe, Aimia Inc. - CEO, President & Director [3]

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Thanks, Tom. Good morning, everyone, on today's call and webcast.

2019 was a transformative year for Aimia with tremendous progress made towards building a stronger company through the hard work, focus and execution of our team. We put in place an ambitious plan to radically simplify our operating model, optimize our cost base and demonstrate a sharper focus on our core capabilities in order to strengthen our foundation.

To recap the highlights for the year. Firstly, we delivered what we set out to achieve at the beginning of the year: to significantly improve the operating performance of the business. Operating expenses, excluding impairments taken in 2018, declined by more than 20% or $56 million over last year to $207 million. As the company implemented its cost transformation plan, an adjusted EBITDA loss rapidly narrowed to $32 million, representing a 50% improvement. Excluding severances and onetime items, the improvement in adjusted EBITDA was 90%.

Secondly, we realized the value of key assets and investments at strong valuations, including the sale of Aeroplan for net cash proceeds of over $0.5 billion, plus the transfer of $1.9 billion in redemption liabilities off our balance sheet. We sold our entire stake in Cardlytics for more than $130 million as well as exited our minority interest in Fractal Analytics at 3x our initial investment for around $10 million. With these sale proceeds, we have demonstrated fiscal prudence in paying down debt and preserving a solid financial position, while opportunistically returning capital back to shareholders throughout the year.

In 2019, the company returned a record high amount of capital to shareholders through stock buybacks and dividends, totaling around $390 million. We developed a disciplined capital allocation process, and while the company did evaluate lots of M&A opportunities, the best use of capital was to buy back our own shares. We know our assets well, and we continue to believe that the Aimia share price does not reflect the value of these assets. This value was independently validated by a third party with access to the company's information prior to the SIBs at the end of 2019.

Furthermore, we simplified and streamlined the business and substantially completed the decoupling of our operations from Aeroplan to drive a leaner operating model in order to maximize the performance of our Loyalty Solutions operating business. Also working closely with the PLM management team and our joint venture partner, Aeromexico, we agreed to return excess cash back to PLM shareholders, leading to the exceptional distribution received in the first quarter of 2019, and full year distributions totaling $35 million, which is double the amount received in 2018.

Lastly, the comprehensive settlement reached with our shareholders was also a significant development for the company in 2019, leaving behind a major distraction and onetime costs.

As you will have seen in our separate release issued this morning, we announced the reconstitution of our new Board to help lead the company forward. We expect the shareholder representation on our Board will help tighten the alignment with our investors and further facilitate the exchange of ideas and best practices to grow the company and create value for all stakeholders. For the management team, it will be business as usual to continue on the path of demonstrating the continued operational progress.

Overall, 2019 was a great year for Aimia, with these accomplishments highlighting the success in achieving our key objectives set at the start of the year.

We're working closely with our partners at PLM and BIG to ensure continued strong performance of our joint investments. As we continue to deepen our partnership to grow the PLM program and explore ways to enhance value, we're encouraged to see positive development in the industry that, we believe, provide a good public comp on the potential value of our unique investment.

In October of last year, Virgin Australia announced it would buy back its remaining 35% interest in its frequent flyer program, Velocity, from its minority shareholder in the business for consideration of approximately AUD 700 million, implying an enterprise value of AUD 2.1 billion. The transaction was completed at a very healthy valuation multiple of 16x adjusted EBITDA on a pre-synergies basis.

As we previously stated, we strongly believe our stake in PLM, a growing business, which has generated adjusted EBITDA of USD 85 million in 2019 and has a similar co-brand financial card-based business model to that of the Velocity loyalty program is a high-quality investment, given our meaningful representation on PLM's Board, long-term commercial contract with the airline and strong banking relationships. The outlook for PLM remains strong and positive, and we look forward to deepening our cooperation with our partners at PLM and Aeromexico. As we have consistently stated, our focus remains on growing the Club Premier program for the benefit of all stakeholders.

In Asia, we're also actively engaging with our partners at BIGLIFE, which is the entity that operates AirAsia's loyalty program, BIG Loyalty, currently one of the largest loyalty programs in Asia with 25 million enrolled members and over 200 partners. Our focus here will be to assist with the strategic program development and sharing of knowledge to best leverage the loyalty program's comprehensive lifestyle platform to drive continued member engagement. The success we have seen in our investment in PLM where the program has grown and reached a scale to generate sufficient profitability to support steady income distributions to its shareholders provides a proven framework for us to leverage our success gained in Mexico and deploy it across Asia.

Our ability to drive operational improvement continued in the fourth quarter, as we executed on streamlining the company's operating systems, realigning our technology support and consolidating our real estate footprint. Head count in Q4 was reduced to 450 from 520 in Q3 as we transform the way we deliver our contact center services in Canada through a more cost-effective outsourced model. For the full year, head count has declined by 40% from 750 at the beginning of the year.

On technology, we're progressing well and executing on our renegotiated IT infrastructure contract and have now substantially completed our decoupling from Aeroplan, with a few remaining IT projects to be finalized by the first half of 2020. We expect the reduction in this IT spend will lead to annualized savings of more than 40% year-over-year once fully implemented by the end of Q2 2020.

Furthermore, insourcing of our enterprise loyalty platform application development work was completed in the fourth quarter and will also add to the reduced cost base over the long run, as we retain greater control over the management of these assets.

On real estate, we relocated our -- to a lower-cost office space in London in December, and our Montréal office will be moving in the first half of this year into a shared office space. These real estate consolidation efforts will also drive a lower cost in real estate footprint going forward.

Overall, excellent progress has been made on reducing the key elements of the company's cost structure and improving the long-term health of the business.

Finally, let me come back to our commercial operations where our Loyalty Solutions business is a well-recognized global full-service provider of leading loyalty technology platforms and services for the world's leading brands. We're extremely pleased with the remarkable speed and improvement in transforming our Loyalty Solutions business and are seeing good traction with both existing client growth and new customer wins. In the fourth quarter, our Loyalty Solutions business signed new strategic consulting contracts with a leading South American food retailer and a U.S.-based travel entertainment company. Also in our Air Miles Middle East coalition program, member engagement remains healthy, supported by the recent enhancement of the loyalty program's online travel shop designed to provide members with more options to redeem, including flights, hotels, car rental and experiences. Members can also now book their travel using cash instead of going to other travel sites and can earn Air Miles as part of the process.

In further evolving our business model to perform more efficiently and cost-effectively, we've also established strategic partnerships that will help extend our reach with new customers and expand our capabilities, while allowing us to continue delivering the great service we currently provide for our clients. An example of this is our recently announced partnership with Microsoft where our loyalty technology SaaS platform will be available online through Microsoft's Azure Marketplace for brands worldwide seeking a dynamic customer loyalty management platform. We're excited about our new strategic partnership with Microsoft and furthering both our innovation and co-sales of our ALP SaaS platform through Azure, while offering our clients access to innovative cloud-based tools with a leading technology provider.

Lastly, during the fourth quarter of 2019, we saw several industry transactions announced that highlight the strong demand for personalized marketing services by well-established and leading technology firms. Mastercard's acquisition of SessionM, Oracle's purchase of CrowdTwist and Nielsen buying of Precima, we believe these recent transactions reinforce our view on the unique value of our Loyalty Solutions assets and helping brands form stronger relationships with their customers.

Looking ahead, with the business now significantly stabilized, we're placing a sharper focus on our core capabilities to enable operating growth. We will achieve this by building on Aimia's strong loyalty technology platforms and leveraging our extensive brand recognition and deep industry knowledge from decades of experience as an operator. The strategic priorities for our Loyalty Solutions division in 2020 will be to continue improving its operating performance and delivering growth in core markets to drive a higher base of recurring revenue from the sale of our loyalty technology solutions, evolving our proprietary SmartJourney methodology, which uses unique algorithms, AI and machine learning techniques to predict consumer behavior and uncover the highest-impact revenue opportunities and risks for our clients; next, leveraging areas of competitive advantage and superior differentiation to optimize our resources and efforts, while leveraging strategic partnerships that can extend our capabilities and accelerate our business development success; and lastly, demonstrating a cost management discipline with the scale of operation to ensure growth can be sustained. We believe these strategic priorities will position the Loyalty Solutions to operate more effectively and compete with greater impact in 2020.

I'll now hand it over to Steve, who will cover our financial highlights before I wrap up with some closing remarks. Steve?

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Steven Leonard, Aimia Inc. - CFO [4]

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Thanks, Jeremy. We once again delivered on continued operational progress with losses from the existing operating assets rapidly narrowing. The highlight in the fourth quarter was a significant improvement in reducing the adjusted EBITDA loss to $13 million, an improvement of 45% over the same quarter of last year, despite incurring onetime costs of $6 million for IT decoupling, $3 million in severance and $2 million in litigation and activism-related expenses.

Free cash flow was negative $12 million in the fourth quarter, an improvement of $1 million over last year. Excluding severance and onetime costs, the improvement in free cash flow was closer to $9 million. Overall, we had a good quarter and a strong finish to the year as our business continued to improve.

Turning our attention now to our 2 operating segments. In our Loyalty Solutions division, we continued our momentum in making headway on the operating performance by dramatically reducing expenses and improving profitability. Loyalty Solutions operating expense was down $40 million in the fourth quarter, an improvement of $15 million over last year, excluding the impairment taken in 2018, despite incurring around $2 million in severance, $1 million -- and $1 million in IT decoupling.

Reduced head count-related costs and lower technology expenses were the key levers of operating expense improvements in the fourth quarter. We expect these same drivers will contribute further to improvements in operating expenses in 2020.

Loyalty Solutions adjusted EBITDA continued to improve in the fourth quarter, with a loss of $3 million, an improvement of 80% over last year's loss of $14 million. Excluding restructuring and onetime items, Loyalty Solutions adjusted EBITDA was breakeven, reaffirming our cost transformation plan is working and driving improved results in the near and long term.

Moving to Corporate and Other. Operating expenses were higher by about $1 million over last year due to $4 million in IT decoupling, litigation and activism expenses discussed already and $1 million in severance, offset by lower professional and advisory fees and reduced head count. In 2020, corporate operating expenses are expected to reduce further benefiting from the full year of running with a leaner team, integration of back-office information systems and lower advisory fees. The corporate function will focus on its investing and oversight role.

Moving to PLM. PLM's financial performance in the quarter continues to be positive, and operating metrics were solid. Member growth was up 10% over last year to 6.7 million enrolled members, and gross billings were up 12% year-over-year to USD 71 million from the growth across all its major accumulation partners.

PLM adjusted EBITDA performance was steady at USD 22 million due to a strong top line performance with offset by rewards mix from targeted promotions as well as technology investments to support the program's digital transformation.

Aimia received $5 million in distributions in the fourth quarter, up 4% over last year, bringing the year-to-date total to $35 million, representing a substantial increase over 2018.

Softening macroeconomic conditions and Aeromexico's reduced capacity with the grounding of the 737 MAX are expected to be near-term headwinds. The long-term prospects remain strong, underpinned by the favorable secular trends of a growing middle class, increasing credit card penetration and rising air travel in Mexico.

Turning now to free cash flow. Reported free cash flow for the quarter improved by $1 million over last year at a loss of $12 million. The improvement in the fourth quarter was mostly due to strong improvement in adjusted EBITDA. We collected $3 million in cash interest and paid a nominal amount in cash tax. Working capital outflow was $4 million in the quarter as a result of working capital timing.

Moving on to the balance sheet. We ended the quarter with cash and investment in bonds totaling $350 million. The largest cash movement in the fourth quarter related to the cash payment to repurchase $125 million in total for our common and preferred shares through the substantial issuer bid in December. As a result of the recently completed SIBs, the company has reduced its common shares by an additional 14% to 93.8 million shares outstanding and lowered its preferred shares by more than 25% to 9.4 million shares outstanding. To reduce share count of preferreds, we'll lower the run rate cash financing cost of future preferred dividends to around $3 million per quarter as well as lower the associated Part VI Tax payable on preferred dividends.

Restricted cash was $97 million at the end of December, of which $73 million was set aside as restricted cash as part of the Aeroplan transaction. Around $65 million of the restricted cash is expected to be released to Aimia in accordance with the term of -- terms of the share purchase agreement. As you can see from the cash -- our cash balance, the company continues to maintain a robust balance sheet with a healthy level of cash and no debt to operate and grow the business.

And with that, I'll hand it back to Jeremy to wrap up with closing remarks. Jeremy?

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Jeremy Rabe, Aimia Inc. - CEO, President & Director [5]

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Thanks, Steve. To conclude, I'm really pleased with our strong finish to close out the year and delivering a solid set of 2019 financial results that achieved our key objectives set out for the year.

2020 is off to a good start. Our outlook is positive, and we remain on track to deliver profitability and substantially improve free cash flow during 2020.

So with that, we'll turn it over for your questions. Operator, please go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question comes from Riley Gray with RBC.

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Riley Gray, RBC Capital Markets, Research Division - Associate [2]

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It's Riley here on for Drew. Just looking into 2020, do you still expect a positive adjusted EBITDA? And what is your outlook for free cash flow?

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Steven Leonard, Aimia Inc. - CFO [3]

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Yes. As Jeremy closed in his remarks, we're still focused, as we've -- we said, closing off 2019. We've stabilized the business. We feel confident that we'll be adjusted EBITDA positive in 2020. On the cash flow side, we want to point out that we are facing Part VI Tax payable related to the preferred dividends we paid in 2019, including the cumulative amount of preferreds we paid in the first quarter, so that will have a drag on our cash flow in 2020. But cash flow going after the first quarter, where we'll pay most of the Part VI Tax, should track adjusted EBITDA.

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Operator [4]

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(Operator Instructions) We have a question from Brian Morrison with TD Securities.

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Lauric Bakomito, TD Securities Equity Research - Associate [5]

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It's Lauric in for Brian. So you guys recently completed your SIB for the common and preferred shares. I'm just wondering, is there a legal restriction on the number of times you can do an SIB in one year?

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Steven Leonard, Aimia Inc. - CFO [6]

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I'm not aware of any frequency on the SIBs. So if the company so chooses, we can do another SIB.

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Lauric Bakomito, TD Securities Equity Research - Associate [7]

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Okay. And then the second question, with regards to the new directors who have been appointed by the Mittleman Brothers as well as the requisitioning shareholders, are you able to tell us who was appointed by whom?

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Jeremy Rabe, Aimia Inc. - CEO, President & Director [8]

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I don't think we disclosed that. What we are excited, as you'll have seen in our results, there was a lot of costs -- onetime costs associated with that activism litigation last year, and it was a big distraction for the company. I think, going forward, we're really excited to have that behind us. As you'll seen in the new Board, we have representation from a number of shareholders that have a significant ownership of the company, so we really expect that to create a great deal of alignment between what the -- what's in the best interest of our shareholders and how the company is managed. So I think that's a real positive.

And so I think we have -- also within the Board slate, you'll see a good mix of different types of skill sets and different backgrounds and diversity there. So I think it will be a good robust Board.

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Lauric Bakomito, TD Securities Equity Research - Associate [9]

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Okay. Great. And then -- sorry, finally, with regards to your previously said intention of being free cash flow breakeven by 2020, does that target still stand? Or will that be dependent on the new Board?

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Jeremy Rabe, Aimia Inc. - CEO, President & Director [10]

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Yes. We remain on track to deliver the profitability in 2020. Our free cash flow will also be substantially approved -- improved. You've heard Steve talk a little bit about the Part VI Tax that will happen in Q1. But for the -- we remain status quo and maintaining our expectation to deliver that profitability in 2020.

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Operator [11]

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At this time, I will turn the call over to Mr. Jeremy Rabe for closing remarks.

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Jeremy Rabe, Aimia Inc. - CEO, President & Director [12]

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Well, I'd like to thank everyone for joining today. Also to those employees that are on the call, I just want to extend a huge thank you to all of you for your hard work over the course of the year. Great year and off to a great start in 2020. Look forward to speaking with you all again soon. Thanks, everyone.

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Operator [13]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.