Aimia Inc.

Good morning, ladies and gentlemen, and welcome to the AMIA Inc. Second Quarter 2021 Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is re-recorded on Friday, August 13, 2021. I would now like to turn the conference over to Mr. Tom Tran, Head of Investor Relations. Please go ahead.

Thank you, Anas, and welcome, everyone, to this morning's call. Today's presentation is available on CDAR in the company's website. Before we get underway, I would like to remind everyone to review our forward-looking statements and the cautions and risk factors pertaining to the statement. With me on the call today are speakers Phil Middleman, AMIA CEO, Michael Lehman, our president, and Steve Leonard, our CFO. Phil will begin with our strategic highlights, followed by Michael, who will cover the performance of our investments, before handing the call over to Steve to take you through the results of the quarter. We will have time for your questions at the end. And with that, let me hand it over to Phil.

Thanks Tom and good morning everyone on the phone and webcast today. We'll begin with our strategic highlights of the second quarter. We are very pleased with our second quarter and first half results and continue to focus on enhancing the value of our existing holdings while deploying excess capital towards new investment opportunities. BLM continued to perform well as it demonstrated ongoing recovery in its operating performance. AMIA received a distribution of $5.3 million in the second quarter. bringing the total distribution from PLM to $15.1 million in the first half of this year. Our amended shareholder agreement with Aeromexico continues to be honored by the airline, and we expect the agreements to be formally assumed in due course through Aeromexico's bankruptcy process. Cognitive continues to focus on the commercialization of its past offering and has been successful in securing contract renewals and extensions for major clients, while developing a strong pipeline of new clients, to onboard their collaborative commerce platform. At ClearMedia, we are pleased to participate in the planned privatization of the business, led by a blue-chip consortium comprised of ClearMedia's current CEO, JCDecaux, Jack Ma's Ant Group, and the China Wealth Growth Fund, and we're excited about ClearMedia's prospects. Members of the consortium, such as JCDecaux, the world's largest out-of-home advertising company, are leaders in digitization technology, and we expect Clear Media's management team to execute on its growth-oriented plan to digitize its 59,000 commercial panels, with the goal of attracting new, higher-margin advertising revenue streams and clientele. With less than 1% of its panels currently digitized, we believe there remains significant runway for digital penetration over the coming years. Since we made our investment, China's economy has continued to recover, and we continue to see these positive economic trends benefiting outdoor advertising sales in China. At Big Life, we completed the sale of our 20% ownership in the loyalty program to AirAsia in exchange for approximately 85.9 million shares of AirAsia and recorded a book value gain of 6.9 million on the transaction. Including our 35.6 million additional shifts acquired through a private placement, AMIA now owns a total of 121.5 million shares of AirAsia, representing an approximate 3.1% equity stake. AirAsia and its subsidiaries, including BigPay, which recently announced a U.S. $100 million financing, have been making good progress in raising new capital from various sources, and we believe that AirAsia will emerge from the pandemic as a stronger airline, uniquely positioned to capitalize on the sizable pent-up demand for low-cost air travel across Southeast Asia. Moving to our latest investment, AMIA invested $44 million as the lead investor of the most recent funding round for Tradex, an innovative solutions provider to the global pre-owned car industry, through its B2B cross-border automotive trading platform at a pre-money valuation of US $250 million. Following an additional US $10 million from other strategic investors in a subsequent closing, our equity stake in Tradex is now 12.3%. Tradex has been growing at a remarkable rate as it expands its market reach to other countries. Gross vehicle sales for the first half of this year have already exceeded 2020's full-year sales, And with recent sales volume activity demonstrating strong momentum, sales are expected to trend even higher in the second half of 2021. The company is generating positive EBITDA as it expands its reach globally and has a robust pipeline of acquisition targets. We realize a tax sheltered gain of $6.9 million from the sale of our investment at J.C. DeCoe. At the end of the second quarter of 2021, our liquid public securities portfolio totaled $57.6 million. including unrealized gains up to the end of the quarter of $8.5 million. We also enhanced our management team with the addition of Eric Blondeau as the company's new chief legal officer. Eric has extensive experience in legal matters with particular specialization in M&A and securities law, among other skill sets complementary to AMIA's strategy. Lastly, we established a new NCIB facility to repurchase up to 7.3 million shares to facilitate opportunistic common share buybacks. Over the past two and a half years, we have repurchased more than 40% of our outstanding shares. And with that, let me turn the floor over to Mike to provide you with some further updates on our holdings. Mike.

Thanks, Phil, and good morning to everyone. We'll begin our discussion with PLM, where I'll be speaking to the operating performance in USD, which is PLM's functional currency. PLM's operating metrics continue to trend positively as the member base grew 5.9% over last year to 7.2 million enrolled members in the second quarter. Gross billings were 44.4 million in the second quarter, up significantly over last year and up 25% over last quarter as the travel industry continues to demonstrate signs of recovery. During the quarter, gross billings rebounded to roughly 65% of the billings generated during the second quarter of 2019, which was PLM's peak billings period. Revenues were 48.6 million in the second quarter, up significantly over last year and up 69% over last quarter due to improving redemption volumes. Adjusted EBITDA was $12.4 million in the quarter, representing a margin of 27.9% due to higher unit cost as a result of the redemption mix towards greater error rewards. Further, free cash flow was a positive $24.7 million, an increase of $63.7 million compared to the same period in the prior year. The improvement was mainly driven by the pre-purchase of award tickets of $50 million that occurred in the second quarter of 2020, of which $12.7 million were used during the second quarter of this year. Overall, PLM and the travel industry continue to demonstrate signs of recovery despite the continued challenging travel environment. Moving on to Cognitive. For the quarter, revenues were $13.1 million, down $1.3 million over last quarter, mainly due to a reduction in revenue from the Air Miles Middle East business due to lower redemption activity and lower yield. Adjusted EBITDA from continuing operations was a loss of $12 million due to lower revenues, partially offset by reduced costs and operating expenses. Cognitive continues to make great strides on the commercialization of its business, as it transitions towards a higher margin subscription-based platform as a service offering, which incorporates Cognitive's collaborative commerce technology. The company continues to execute on its cost synergy plan in order to align with its new business following the sale of the ISS business to IRI, which represented approximately $20 million in annual sales in 2020. While Cognitive's profitability has been delayed due to the recently closed sale of ISS, and its continued focus on investing in the development of its collaborative commerce platform to deliver against its growth plans, we are not expecting a meaningful increase in revenues during the second half of this year compared to the first half. Based on Cognitive's business plan, revenue growth is forecasted to significantly improve in 2022 and reach adjusted EBITDA profitability by 2023. Moving on to our investment management business. Revenue for the quarter from investment management fees was approximately $900,000, partially benefiting from a revenue item of approximately $300,000 tied to a one-time performance fee. Excluding this item, earnings would roughly break even. Assets under management at MIM were $226.9 million in the second quarter, a decline of 5.9% quarter-on-quarter on a U.S. dollar basis, mainly due to net client asset outflows offset partially by positive performance of its investment portfolios. As part of the company's continued process of investing excess capital to generate superior returns, AMIA invested $25 million in Precog Capital Partners, a private fund managed by Middle and Mid Investment Management using its deep value-oriented strategy. And finally, moving on to ClearMedia. The planned privatization of ClearMedia continues as expected. In July, the consortium who owns 88.2% of Clear Media Limited made a voluntary conditional offer with Clear Media to acquire all remaining outstanding issued shares. Following our review of the composite document, we've elected to accept shares and will maintain our 10.85% shareholding in the privatized Clear Media. The transaction is expected to close in the third quarter. Clear Media continues to project materially higher revenues in 2021 compared to the prior year, as indicated in its recent filing, and plans to announce their latest results on August 27. And with that, let me turn it over to Steve to take you through the financial results. Steve?

Thanks, Michael, and good morning to everyone. Let's begin by covering the consolidated results before we move to the segment performance and cash movements in the quarter. In the second quarter, total income was $9.7 million. which included a $6.9 million gain on the Big Life transaction. Reported expenses were $5.9 million, driven by an increase of $2.9 million related to share-based compensation and other performance awards, which included a reversal of the share-based liability in the second quarter of 2020. Within the holding segment, total income was $8.8 million, down from $9.1 million in the same quarter last year. Total expenses were 5 million in the second quarter of 2021, up from 1.5 million in the same quarter last year. Within total expenses, corporate operating expenses, which includes compensation, professional and advisory fees, as well as technology and other office expenses, were 5 million in the quarter, up 2.8 million from the same period last year. due to an increase in share-based compensation and other performance awards, as previously mentioned. Excluding share-based compensation and other performance awards, corporate cash operating costs were $3.8 million in the quarter, an improvement over the same period last year of $4.5 million. We remain on track to achieve our targeted annual holdco cash operating expenses of around $14 million for 2021. moving on to cover the major cash movements for the quarter. We ended the second quarter with total cash of $117.9 million, excluding cash held at precog of $2.9 million, which is now consolidated in AMI's results, down $16.9 million from the $134.8 million we reported last quarter. The main movements in cash this quarter compared to last quarter were $5.3 million distribution receipts from PLM, proceeds of $17.4 million from the sale of our investment in JCDecaux, which resulted in a tax shelter gain of $6.9 million. $27.5 million invested in precog and other investment funds. We paid preferred dividends of $3.2 million and related Part 6 tax of $1.3 million. We invested another $4.4 million in a publicly listed security. and we had the corporate cash operating costs of $3.8 million. Subsequent to the end of the quarter, we also made a $44 million investment in Tradex, taking our pro forma cash to $73.9 million. Including our liquid portfolio of publicly listed equities, which had a market value of $57.6 million at the end of the second quarter, AMIA's pro forma cash plus liquid investments totaled $131.5 million. With that, let me turn it over now to Phil to wrap up with a few concluding remarks. Thanks, Steve.

AMIA has been successfully transformed into a lean, opportunistic holding company with an exciting portfolio of investments. 2021 is shaping up to be an exciting year, highlighted by the positive developments in our various holdings. We remain focused on delivering long-term value for AMIA stakeholders. Before we turn to questions, I would like to say a few words about PLM. As we have said from the beginning of the Aeromexico bankruptcy process, AMIA continues to actively monitor the Chapter 11 proceedings and engage with all relevant parties to ensure that AMIA's economic interests are well served. PLM is a highly successful frequent flyer loyalty program that we believe is integral to the continued success of Aeromexico. As the bankruptcy process continues to evolve, we will not be commenting further on those proceedings during this call. However, We look forward to providing an update at the appropriate time.

Operator, that concludes today's prepared remarks. Please go ahead and prompt the questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have any questions, please press star followed by one on your touch-tone phone. You will hear a three-tone prompt acknowledging your request and your questions will be pulled in the order they are received. Should you wish to decline from the pulling process, please press star followed by two if you're using a speakerphone. Please lift your hands up before pressing any keys. One moment for your first question. Your first question comes from Brian Morrison with TD Securities. Please go ahead.

Good morning, guys. Good morning, Mike. Good morning, Phil. Good morning. Good morning. I was going to ask a detailed question on PLM, but maybe I'll back off a bit. I do want to ask one, though, in terms of last quarter we talked about the motion to be held in the bankruptcy court in May. I guess just to soften it up a bit, maybe I'll just ask. Can you update us maybe on the next procedural hearings we should be looking for in terms of timing, what they might entail?

Yeah, Brian, I understand. You know, we mentioned the shareholder agreement and the participation agreement will continue to be honored by the airline. You know, we expect the agreements to formally be assumed through the process. All we can really say is we've received, you know, over $15 million in dividends year to date, and we're very happy with the ongoing recovery of PLM. But as we said earlier, unfortunately, we aren't going to be commenting any further at this time.

Okay. I'll switch gears to Cognitive then. There's some new disclosure, obviously. I have a couple questions on that. Maybe just update us on what's changed you to push out your forecast to achieve positive data data 2023, and then you've disclosed this new round of financing this year. Maybe any color on the amount you're looking for, presumably will be private, and how this might compare to your prior valuation of $525 million. Sure.

First of all, we sold ISS. Cognitive sold ISS. which moved the profitability goalposts. You know, that company did about $20 million in annual revenues and was profitable. XISS, Cognitive continues to be focused on investing in its collaborative commerce platform. You know, we're seeing renewals of existing contracts. We're seeing new client signings, and we're seeing the pipeline strengthen. So we're very happy with what we're seeing develop at Cognitive. In terms of the funding question, Cognitive is engaged with its bankers to provide the funding it needs, and I can't comment any further than that or provide any other details at this time.

All right. Maybe just one question on this $25 million precog investment. Just to help you understand why this is being done under the Middleman umbrella and how does that long-term value-oriented strategy differ from that of Amos?

Sure. Sure. You know, Precog is a, you know, understand we own Middleman Investment Management, so Precog is a fund managed by them. So effectively, you know, we own Precog. It's a way for us to deploy excess capital into a fund we manage. Precog takes advantage of opportunities in the value space. By investing in that fund, it also enhances the marketability of the fund, so we can attract additional capital to yield, you know, additional income for AMIA. In terms of the strategy, it's a concentrated fund. It invests in companies with similar characteristics to what we see at AMIA. But probably most importantly, the smaller early footholds in some of these holdings can lead to larger investment opportunities, which is exactly what happened with Clear Media and Village Roadshow for AMIA. So it's a really good use of excess capital into a fund we manage.

Okay. And then, Mike, you mentioned the August 27th results went clear. Previous conversations, you've made a disclosure on the EBITDA potential. I think you said it could maybe double the five-year average. Any change to that outlook with the digital transformation, or still that's the goalposts we're looking at?

Yeah, you know, thanks for that question. So we continue to be extremely excited about ClearMedia and the prospects to not only grow its market share, as both China economy rebounds and they kind of refocus on digitization. So, we acquired these shares at about five times normalized EBITDA and feel that the EBITDA and the cash flow margin can continue to expand. The digitization platform is certainly a way to do that where we can see multiples earned from a similar panel. through digitization as well as increased profitability. One of our partners in this portfolio holding, J.C. DeCoe, are showing that and have shown that for 20 years through their public holding. So we continue to be extremely excited about the prospects. I don't think anything has materially changed with regard to the digitization sequentially. And, you know, this is going to be a a focus, a multi-year focus. And it's not going to be in every city that they have panels in. There are some cities and some locations of bus shelters that just don't need the increased spend. And they won't, you know, customers won't pay for it. So not all the 59,000 panels are going to get digitized, we can imagine. So We continue to be really excited. No change, no material change. We should see, I don't think this quarter they're going to speak to a material change in the plan. And, you know, it's probably going to take six to 12 months even just to get it going and planning to get going. You know, and who knows, there could be a backlog and some issue just getting new panels, right, with COVID it seems like. every part or electronic product is backlogged a little bit. But, again, this is a multi-year plan. We think over three to five years generally with all of our investments, and that's what we're focused on here.

Very good. Last question for me, for Phil here. Fairly decent investment in Tradex. Maybe walk us through the opportunity there. I'm just wondering if it's being positively or negatively impacted by the current chip shortage. and maybe the end game to monetization of this opportunity?

Sure. We're very, very excited about this investment. The international auto trading market is highly fragmented. It's got a lot of issues. Buyers and sellers, it's tough for them to recognize where the inventory is. It's hard to figure out the per unit valuation metrics. There's logistical costs. The processes are often unknown to the parties involved. You'd be surprised that only 1% of dealers invest know how to trade cars internationally. There's currency risk. There's need to hedge the currencies. There's inspection issues. And Tradex solves all these issues through its technology platform. It gives buyers and sellers the ability to transact fluidly and efficiently, and their blue-chip roster of clients love the services that they provide. So we think it's a great business. It's unique. We see a lot of runway for organic growth, and there's a lot of potential growth through acquisitions and by applying that same tech platform to other verticals. So we're very excited about it. In terms of the valuation, the company's growing extraordinarily fast. It's expanding globally, and it's already achieved EBITDA profitability, so we're very happy on that front as well. In terms of your question on the exit strategy, I mean, like any investment, this is early, obviously, but there can be an IPO, there can be a sale. This could become a big dividend generator for us. It's a very attractive SPAC target. I mean, it runs the gamut of of possibilities in terms of what the exit strategy would be. In terms of the chip shortage question, you know, the prices of these cars doesn't, you know, really matter to Tradex. It's really about unit volume. So even if the market softens, we're gaining material market share, and we're hearing, you know, we're seeing, again, a very, very high-end client base choose them over competitors, and that process is accelerating.

Appreciate it, Doug. Thank you, guys. Brian, if I could just add on a quick moment. So with regard to the chip shortage, because there's a lot of speculation in the market that used cars because of the chip shortage. There's a huge price increase, which we've seen. There's also increasing demand, right, which are all factually accurate. But you have to remember that we are really a small – continue to be a small player, even just in North America. So even if the used car pricing reverts to the mean, we're gaining significant share, and we're also just only entering additional trade lanes globally. So we should be able to not only dramatically expand throughout North America and participate in that arbitrage between kind of the loonie and the USD, but also as currencies fluctuate globally, There is an arbitrage between, you know, North America, Canada, and U.S. and Europe and Asia and other continents as well. So we should be able to grow exponentially, even as used car prices moderate as we expect, candidly.

Thank you.

Thanks, Brian.

Thank you. Your next question comes from Drew McReynolds with RBC. Please go ahead.

Yeah, thanks. Thanks very much. Good morning, everyone. Brian addressed four of my four questions, but I'll follow up with a few things. So just first on that cognitive, great, great to see a little bit of a target out there on the 2023 adjusted EBITDA. I think I understand all the puts and takes there. Maybe Phil, just a Or Mike, comment on, I guess, the scalability of this platform. It would appear, you know, one of those kind of inflection points and profitability that scales kind of quickly. But maybe just comment on how that, I guess, inflection point adjusted even kind of plays out in and around 2023. Second on Tradex, I mean, a similar question, frankly. You know, these kinds of platforms would appear to have a similar characteristic on scalability. So just curious on the trade X, good to see a positive effect there, but presumably goes upwards and onwards from here. And then lastly, on the buyback, seems you're not finding difficult, challenging to redeploy capital out there, but just updated thoughts on the buyback would be great.

Thank you. Sure. I'll start and Mike, you can, Mike can chime in as needed. Sure. I think, you know, with Cognitive, These are both cognitive trade-offs. They both share that, as you say, they kind of share that quality where it can scale very quickly without a lot of cat-backs. So, you know, particularly with cognitive, what you have is a platform operating in the cloud where people are transacting. And whether you're transacting $100 million or $100 billion, it's not like you suddenly have to go hire 50,000 people. So they're scaled at a very high margin. and very scalable. And so what you're seeing with Cognitive, and it's masked by the losses, and I know people look at the losses and they go, oh, God. But if you look at a tech company at this stage of where they are, there's eight years of heavy investment and acquisitions along the way to get to the point where they're creating a new – it's a new business. I mean, this is collaborative commerce. It's a new business. And I don't know if anyone's been following – But it has been doing what I guess we would call heating up, and people are talking about it. There's a comp or two out there now trading at very high valuations. So collaborative commerce is something that you have to go – it's not like you go out and you say, hey, I want to sell you this piece of software and install it on your computer. You have to convince people to trust you with their product offerings and transact with them and to take somebody – you know, take somebody's hotel room and pair it with somebody's car and pair it with somebody's, you know, any other offering that enhances the availability of that offering. And so it's a big trust issue. So when you get to where they've gotten, you know, and where we see them getting now, it's incredibly exciting. So I think that it feeds on itself, and you'll see, you know, once you see major clients signing up, and we believe that is coming, I think that you're going to see a knock-on effect of people trusting in being more confident. And so it should be one of those things where you see not only it scaling, but it's just feeding on itself as it grows and people get excited and more confident. And, frankly, people don't know what they do. People are learning. I mean, they're going to people, you know, blue-chip companies, Fortune 500 companies, saying, here's what we can offer you. And the typical response is, how can you do that? That sounds amazing, but how does that work? And convincing a Fortune 500 company how it works is not an instant process. It takes a year of endless meetings and back and forth and demonstrations, and then they have to trust that you can actually convert their points to the proper currency and transact. So there's so many things that go on. So we are seeing a very different picture than just the losses represent, and we're very excited, and it is very scalable. With With regard to Tradex, we're seeing it's the same type of thing, except Tradex just is exploding at the same time. It's one of those unique things where it's already EBITDA profitable, which is very rare at the company at this stage of growth. But that really answers your question about scalability and profitability, because if you're seeing it at this stage, it's only going to get better as growth continues. So the management team at Tradex is fantastic. is very dynamic, very smart guys. We see a lot of growth potential there organically, and as I said, through acquisitions and through expansion into other verticals. And they have this technology they call the brain, which is a patent-pending technology that they have developed, which creates enough data. There's a whole separate business model here where they're going to be aggregating data that is going to be very valuable to the market as well because they're actually going to be transacting in these vehicles. They are going to be inspecting them. They have partnerships with all the key logistics players. So this is a very exciting investment, very scalable, low CapEx, and both of those companies share similar qualities in that respect. Before I go on to the buyback, Mike, do you want to? Yeah, sure.

Yeah, yeah, just a few things. First on Cogniv, you know, the development of the peer-to-peer platform that they're working on is really focused, and the way I think about it is in two different ways. First of all, they continue to build out the tech platform, so it's becoming better and better for the branding customers, for each side of the peers, right? And secondly, The peer-to-peer platform, this is going to enable businesses to reach a new reality. The ability to personalize, to engage, and to optimize services for their customers is nirvana for each large brand, if you think about it, right? I mean, you know, a large hotel brand and a large credit card brand or something like that, where rather than going through the middleman and everybody earning 40% margins, all of a sudden you can go peer-to-peer and you can share these terrific customers without degrading each brand, any of the brands. So it's a terrific opportunity. And candidly, this is a disruptive technology that's going to take time to get fully adopted, as Phil mentioned. But the concept of the peer-to-peer collaborative network throughout the market is being extremely well received in the market. So And with any software or, you know, PaaS program, the margins are software margins. So once this thing's built, we'll be able to load people and brands on it, and the margins are extremely high. And just a comment on Tradex, you know, the brain technology, this platform that builds that essentially – enables buyers and sellers to recognize where the inventory is and the ability to transact based on real unit values and a history of unit values, that's so material. Because if you go out there and you talk to an end market customer and they'll say, listen, I need 100 cars now because I've got clients that want to purchase them. And I don't know where to get them right now. And I actually don't even know what the transactional price is because it's opaque. It's kind of in the shadows. So what we're going to have is we're going to have this data collection, this feed that shows what historical pricing is for certain cars, for certain ages, for certain types of cars, for certain quality of cars. And that's, you know, data is king, right? So we feel that that the platform and the data are going to be kind of transitional, right? That we're going to be able to sell other things in addition to cars in a different vertical, as Phil described it. And to your point, the margins are extraordinarily high because once we load the information on the platform – then the customers are doing a lot of the work for us. They're going in, they're searching, they're buying. We've got to execute in the middle. We get paid on the buy side, the sell side, as well as the logistics aspect. But it's very, very profitable.

So back to you, Phil. So in regards to the buyback, you know, we love buying back our stock. You've seen us buy back over 40% of our shares over the last two and a half years. I would just say that we're opportunistic, but there's a lot of variables that go into our decisions, our cash needs at the time, our projected cash needs, things we're considering, whether or not we're in a blackout, et cetera, et cetera. So we will always continue to make opportunistic purchases when we can and want to.

That's great. Great commentary both, Phil and Mike. Thanks for that. And it sounds as if both Cognitive Trade X are – or market efficiency solutions. Last time I checked, gravity will be on their side. Yes, yes. Thank you, Drew. Appreciate it.

Thank you.

Thank you. There are no further questions at this time. Mr. Tran, you may proceed.

Thank you, everyone, for joining today's call and webcast. If you have any questions, please reach out to Investor Relations. Have a great day.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.