Good morning, ladies and gentlemen, and welcome to the Aimia Inc's 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 being recorded on Friday, August 13th, 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 SEDAR in the company's website. Before we begin on our way, 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 Mittleman, Aimia CEO, Michael Lehmann, 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. 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 for 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. PLM continued to perform well as it demonstrated ongoing recovery in its operating performance. Aimia received a distribution of CAD 5.3 million in the second quarter, bringing the total distributions from PLM to CAD 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.
Kognitiv continues to focus on the commercialization of its PaaS offering and has been successful in securing contract renewals and extensions from major clients while developing a strong pipeline of new clients to onboard their collaborative commerce platform. At Clear Media, we are pleased to participate in the planned privatization of the business, led by a Blue Chip consortium comprised of Clear Media's current CEO, JCDecaux, Jack Ma's Ant Group, and the China Wealth Growth Fund, and we're excited about Clear Media'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 a 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 BIGLIFE, 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 CAD 6.9 million on the transaction. Including our 35.6 million additional shares acquired through a private placement, Aimia 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 $100 million financing, have been making good progress in raising new capital from various sources. 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, Aimia invested CAD 44 million as the lead investor of the most recent funding round for TRADE X, 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 $250 million. Following an additional $10 million from other strategic investors in a subsequent closing, our equity stake in TRADE X is now 12.3%. TRADE X 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 realized a tax-sheltered gain of CAD 6.9 million from the sale of our investment at JCDecaux. At the end of the second quarter of 2021, our liquid public securities portfolio totaled CAD 57.6 million, including unrealized gains up to the end of the quarter of CAD 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 Aimia'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. 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 air 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 Kognitiv. 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. Kognitiv 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 Kognitiv'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 Kognitiv'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 Kognitiv'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 CAD 900,000, partially benefiting from a revenue item of approximately CAD 300,000 tied to a one-time performance fee. Excluding this item, earnings were roughly breakeven. Assets under management at MIM were $226.9 million in the second quarter, a decline of 5.9% quarter-on-quarter on a US 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, Aimia invested CAD 25 million in Precog Capital Partners, a private fund managed by Mittleman Investment Management using its deep value-oriented strategy. Finally, moving on to Clear Media.
The planned privatization of Clear Media 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 27th. 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 CAD 9.7 million, which included a CAD 6.9 million gain on the BIGLIFE transaction. Reported expenses were CAD 5.9 million, driven by an increase of CAD 2.9 million related to share-based compensation and other performance awards, which included a reversal of a share-based liability in the second quarter of 2020. Within the holding segment, total income was CAD 8.8 million, down from CAD 9.1 million in the same quarter last year. Total expenses were CAD 5 million in the second quarter of 2021, up from CAD 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 CAD 5 million in the quarter, up CAD 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 CAD 3.8 million in the quarter, an improvement over the same period last year of CAD 4.5 million.
We remain on track to achieve our targeted annual holdco cash operating expenses of around CAD 14 million for 2021. Moving on to cover the major cash movements for the quarter. We ended the second quarter with total cash of CAD 117.9 million, excluding cash held at Precog of CAD 2.9 million, which is now consolidated in Aimia's results, down CAD 16.9 million from the CAD 134.8 million we reported last quarter.
The main movements in cash this quarter compared to last quarter were CAD 5.3 million distribution received from PLM, proceeds of CAD 17.4 million from the sale of our investment in JCDecaux, which resulted in a tax shelter gain of CAD 6.9 million, CAD 27.5 million invested in Precog and other investment funds. We paid preferred dividends of CAD 3.2 million and related Part VI tax of CAD 1.3 million.
We invested another CAD 4.4 million in a publicly listed security, and we had the corporate cash operating costs of CAD 3.8 million. Subsequent to the end of the quarter, we also made a CAD 44 million investment in TRADE X, taking our pro forma cash to CAD 73.9 million. Including our liquid portfolio of publicly listed equities, which had a market value of CAD 57.6 million at the end of the second quarter, Aimia's pro forma cash plus liquid investments totaled CAD 131.5 million. With that, let me turn it over now to Phil to wrap up with a few concluding remarks.
Thanks, Steve. Aimia 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 Aimia 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, Aimia continues to actively monitor the Chapter 11 proceedings and engage with all relevant parties to ensure that Aimia'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 now begin the question- and- answer session. Should you have any questions, please press star followed by one on your touch-tone phone. [audio distortion] acknowledging your request and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press star followed by two. If you are using a speakerphone, please lift up your handset 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 a 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 and what they might entail?
Yeah, Brian, I understand. We mentioned the shareholder agreement and the participation agreement will continue to be honored by the airline. We expect the agreements to formally be assumed through the process. All we can really say is we received over CAD 15 million in dividends year to date, and we're very happy with the ongoing recovery of PLM. As we said earlier, unfortunately, we aren't going to be commenting any further at this time.
Okay. I'll switch gears to Kognitiv. 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 EBITDA 2023. You've disclosed this new round of financing this year. Maybe any color on the amount you're looking for, presuming it'll be private, and how this might compare to your private prior valuation of CAD 525 million.
Sure. Well, first of all, we sold ISS. Kognitiv sold ISS, which moved the profitability goalposts. That company did about CAD 20 million in annual revenues and was profitable. Ex ISS, Kognitiv continues to be focused on investing in its collaborative commerce platform. We're seeing renewals of existing contracts, we're seeing new client signings, and we're seeing the pipeline strengthen. We're very happy with what we're seeing develop at Kognitiv. In terms of the funding question, Kognitiv 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 CAD 25 million Precog investment. Just help me understand why this is being done under the Mittleman umbrella, and how does that long-term value-oriented strategy differ from that of Aimia's?
Sure. Understand we own Mittleman Investment Management. Precog is a fund managed by them. Effectively, 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 additional income for Aimia. In terms of the strategy, it's a concentrated fund. It invests in companies with similar characteristics to what we seek at Aimia. 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 Aimia. It's a really good use of excess capital into a fund we manage.
Okay. Mike, you mentioned the August 27th results on 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 goalpost we're looking at?
Thanks for that question. We continue to be extremely excited about Clear Media and the prospects to not only grow its market share as both China economy rebounds and they kind of refocus on digitization. We acquired these shares at about 5x 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, JCDecaux, are showing that and have shown that for 20 years through their public holding. We continue to be extremely excited about the prospects. I don't think anything has materially changed with regard to the digitization sequentially. This is going to be a multi-year focus.
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. Customers won't pay for it. Not all the 59,000 panels are going to get digitized, we can imagine. We continue to be really excited. No material change. I don't think this quarter they're going to speak to a material change in the plan. It's probably going to take 6- 12 months even just to get it going and the planning to get going. 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. 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 from me for Phil here. The fairly decent investment in TRADE X. Maybe walk us through the opportunity there. I'm just wondering, is it being positively or negatively impacted by the current chip shortage and maybe the end game, the 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 parties involved. You'd be surprised that only 1% of dealers know how to trade cars internationally. There's currency risk. There's need to hedge currencies. There's inspection issues. TRADE X solves all these issues through its technology platform. It gives buyers and sellers the ability to transact fluidly and efficiently. Their blue-chip roster of clients love the services that they provide. 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. 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, like any investment, this is early, obviously, but there can be an IPO, there could be a sale. This could become a big dividend generator for us. It's a very attractive SPAC target. It runs the gamut of possibilities in terms of what the exit strategy would be. In terms of the chip shortage question, the prices of these cars doesn't really matter to TRADE X. It's really about unit volume.
Even if the market softens, we're gaining material market share. We're seeing, again, a very, very high-end client base choose them over competitors, and that process is accelerating.
Appreciate it. Thank you, guys.
Brian, if I could just add on a quick moment. 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. You have to remember that we really continue to be a small player, even just in North America. 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. 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's an arbitrage between North America, Canada, and U.S., and Europe and Asia, and other continents as well.
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 very much. Good morning, everyone.
Hi.
Brian addressed four of my four questions, but I'll follow up with a few things. Just first on Kognitiv. Great to see a little bit of a target out there on the 2023 adjusted EBITDA, and I think I understand all the puts and takes there. Maybe Phil or Mike, comment on, I guess, the scalability of this platform, it would appear one of those kind of inflection points in profitability that scales kind of quickly. Maybe just comment on how that, I guess, inflection point in adjusted EBITDA kind of plays out in and around 2023. Second on TRADE X, a similar question, frankly. These kinds of platforms would appear to have a similar characteristic on scalability. Just curious on the TRADE X. Good to see a positive EBITDA, but presumably goes upwards and onwards from here.
Lastly, on the buyback, seems you're not finding difficult challenging to redeploy capital out there, just updated thoughts on the buyback would be great. Thank you.
Sure. I'll start, Michael can chime in as needed. I think with Kognitiv, both Kognitiv and TRADE X both share that, as you say, they kind of share that quality where it can scale very quickly without a lot of CapEx. Particularly with Kognitiv, what you have is a platform operating in the cloud where people are transacting. Whether you're transacting $100 million or $100 billion, it's not like you suddenly have to go hire 50,000 people. This scale, they're very high margin and very scalable. What you're seeing with Kognitiv, and it's masked by the losses, and I know people look at the losses and they go, "Oh, God." If you look at a tech company at this stage of where they are, this is eight years of heavy investment and acquisitions along the way to get to a point where they're creating a new, it's a new business.
I mean, this is collaborative commerce is 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. 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, 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's hotel room and pair it with somebody's car and pair it with somebody's, any other offering that enhances the scalability of that offering. There's a big trust issue.
When you get to where they've gotten, and where we see them getting now, it's incredibly exciting. I think it feeds on itself, and 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 and being more confident. 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. Frankly, people don't know what they do. People are learning. I mean, they're going to people, blue-chip companies, Fortune 500 companies, and saying, "Here's what we can offer you." The typical response is, "How can you do that? That sounds amazing, but how does that work?" Convincing a Fortune 500 company how it works is not an instant process.
It's 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, and they have to. There's so many things that go on. We are seeing a very different picture than just the losses represent, and we're very excited, and it is very scalable. With regard to TRADE X, we're seeing it's the same type of thing, except TRADE X 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. 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. The management team at TRADE X 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. 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. This is a very exciting investment, very scalable, low CapEx. Both of those companies share similar qualities in that respect. Before I go on to the buyback, Mike, do you want to add anything on?
Yeah, sure. Just a few things. First, on Kognitiv. The development of the peer-to-peer platform that they're working on is really focused. 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? Second, 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 a large hotel brand and a large c redit card brand or something like that, where rather than going through the middleman and everybody earning 40% margin, 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. 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. The concept of the peer-to-peer collaborative network throughout the market is being extremely well-received in the market. With any software or PaaS program, the margins are software margins. Once this thing's built, we'll be able to load people and brands on it and the margins are extremely high.
Just to comment on TRADE X, 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. 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. I actually don't even know what the transactional price is because it's opaque. It's kind of in the shadows." 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, data is king, right?
We feel that the platform and the data are going to be kind of transitional. That we're going to be able to sell other things in addition to cars in a different vertical, as Phil described it. 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. It's very, very profitable. Back to you, Phil.
In regards to the buyback, 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. 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. It sounds as if both Kognitiv and TRADE X are market efficiency solutions. Last time I checked, gravity will be on their side.
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.