Aimia Inc. (AIM) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Aimia Inc. First Quarter 2023 Results Conference Call. [Operator Instructions] This call is being recorded on Friday, May 12, 2023. I would now like to turn the conference over to Albert Matousek, Head Investor Relations and Communications. Please go ahead.

Thank you, Brian, and welcome, everyone, to this morning's call. Today's presentation is available on SEDAR and on our 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 statements. My name is Albert Matousek, Head of IR and Communications. With me on the call today are speakers, Phil Mittleman, Aimia's 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 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, Albert, and good morning to everyone on the phone and webcast today. We are pleased to announce the successful closing of the Bozzetto and Tufropes transactions as well as the Bozzetto debt financing, 2 cash-generating businesses with significant value creation potential for our stakeholders. Furthermore, we are very excited about the strength being exhibited by all of our current portfolio holdings. On May 9, Aimia closed the Bozzetto transaction and the associated debt financing at the subsidiary level. Aimia invested $206.3 million for an equity stake of 94% in Bozzetto, investing alongside the management team who purchased 6% of the company at the same valuation as Aimia. We look forward to working with this remarkable management team as they continue to grow this business organically and through strategic acquisitions. And it is in advanced discussions with a potential target in the Americas. On March 17, we closed the Tufropes transaction and acquired 100% of the company for $239.2 million. Following this acquisition, the leadership team has actively engaged with customers, suppliers and employees, and the response has been overwhelmingly positive. The team is exploring new opportunities for potential strategic partnerships and is actively pursuing an accretive acquisition target in the U.S. Tufropes expects adjusted EBITDA margins to grow above 20% within the next 2 years based on reasonable assumptions such as operational improvement initiatives as well as the optimization of product mix. Turning to our financial results. We ended the first quarter of 2023 in a strong financial position with over $318 million of investable cash and liquid securities, a diversified portfolio of holdings that we believe are poised to deliver strong results in 2023. In addition, the company has tax losses of approximately $660 million that will help shield a sizable portion of our taxable income and capital gains for years to come. As a reminder, at the end of 2022, Aimia utilized $130 million of capital losses to repatriate a portion of the PLM gains. Turning to our holdings. Clear Media is seeing a sharp recovery in demand beginning in its second quarter of 2023 as China emerged from its COVID lockdown, and we expect Clear Media to accelerate digitization of its panel portfolio. TRADE X's enhanced, asset-light model is achieving some of the highest gross margins to date. TRADE X projects a return to EBITDA profitability by the third quarter of this year. Eric Gosselin, currently the COO, will be named CEO on June 1 as Founder, Ryan Davidson, focused on business development. Kognitiv's new CEO, Tim Sullivan, is overseeing the launch of its new AI-powered product, Kognitiv Pulse, which has been met with industry-wide praise and excitement. Kognitiv continues to undertake a series of initiatives to reduce costs and increase efficiency, which is expected to drive the company towards EBITDA positivity by the end of the year in 2023. In addition, Kognitiv is securing additional sources of financing through divestitures of noncore assets. Capital A is experiencing a strong rebound in its airline business, generating its first profitable quarter since the pandemic began amidst soaring demand. And with that, let me turn the floor over to Mike to provide you some further color on our investment portfolio. Mike?

Yes. Thanks, Phil, and good morning to everyone. As announced earlier this week, we closed the Bozzetto transaction and the associated debt financing. Aimia invested $206.3 million for an equity stake of 94% of the company. We're very pleased to have Bozzetto's executive management team invest $13.3 million of their proceeds alongside Aimia into this new investment venture, which represents a minority position of 6%. This investment provides for further alignment with Aimia and our shareholders. Concurrent with the closing, we secured debt financing of $139.5 million with a weighted average coupon of 8.1%, and total leverage will be roughly 3x as we previously targeted. Transaction costs and debt financing fees totaled $19.1 million. Excluding the transaction cost of $12.3 million and accounting for cash on hand of $14.2 million, the enterprise value at closing was $333 million, representing approximately 7x fiscal 2022 pro forma adjusted EBITDA. For the fiscal year 2022, Bozzetto reported revenue of $320.6 million and adjusted EBITDA of $45 million. Including the recent Levaco transaction, that closed at the end of 2022, pro forma annual revenue was $335.3 million, and adjusted EBITDA was approximately $47 million. Given the Bozzetto acquisition closed after this quarter ended, the results of Bozzetto have not been recorded in Aimia's financial statements for the quarter. Bozzetto is one of the world's largest ESG-focused providers of specialty chemicals. Through its innovative technologies, it is deeply interconnected with its clients' production process and allows for efficiencies and superior final product quality. Their focus on ESG formulations allows for a lower environmental impact on the entire value chain. We're currently in advanced discussions with a potential target in the Americas, which would significantly increase and diversify Bozzetto's geographical and end market footprint as well as give greater exposure to different trends, drivers and structural long-term growth. We see significant opportunities to grow this business, both organically and through accretive acquisitions. On March 17, we closed the Tufropes transaction for $239.2 million. Since the acquisition, the leadership team has met with 2/3 of its top customers spanning across Europe, North America and Asia, and the feedback has been exceptional. During these discussions, the management team has uncovered many opportunities for further collaboration, both by gaining clients' wallet share as well as evaluating new business opportunities, one of which is already underway. These opportunities are within general maritime and aquaculture and are both through our distribution channel as well as direct to clients. In addition, Tufropes is in discussions for a potential acquisition in the U.S. within the high-performance ropes industry. We'll report back at the proper time. For the first quarter, on a pro forma basis, Tufropes reported adjusted EBITDA of $5 million on revenues of $25 million. As previously disclosed, Tufropes expects adjusted EBITDA margins to grow to above 20% within the next 2 years based on its reasonable assumptions on operational improvement initiatives as well as on the optimization of product mix. In the near term, with operational initiatives underway, we expect EBITDA margins to be in the range of 18% on a full year basis. For the full fiscal year ending March 31, 2023, Tufropes achieved revenue of approximately $114.3 million and adjusted EBITDA of $20.7 million on a pro forma basis. Fiscal 2023 revenues came in slightly below expectations due to a delay in shipments associated with the post-closing transaction as well as the timing of customer orders, which are expected to be reversed over the next 2 quarters. As we previously discussed, we continue to explore debt financing for Tufropes, in line with our general strategy of reasonable leverage on our operating assets. Moving on to Clear Media. Clear Media is seeing a sharp recovery in demand for its outdoor advertising displays beginning in March and has continued into the second quarter as China has ended its mobility restrictions. And we expect Clear Media to rapidly accelerate their digital panel conversions in 2023. Moving on to TRADE X. TRADE X generated gross vehicle sales of $156.7 million in the quarter, down from $248.3 million recorded in the same period last year mainly the result of focusing its business away from being primarily volume-focused and embracing its enhanced higher-margin, asset-light business model. The company will continue to benefit as the number of global car dealers utilizing its online trading platform grows. TRADE X continues to streamline and innovate the process of cross-border used car trading by announcing a strategic partnership with PAVE, allowing dealers globally to perform reliable vehicle inspections, which ensures a trustworthy purchasing process and for sellers from any condition disputes upon delivery. Moving on to Kognitiv. In the first quarter, revenues from continuing operations were $11.5 million. Adjusted EBITDA from continuing operations was a loss of $5.6 million, a significant improvement of $4 million from a loss of $9.6 million in the prior year's quarter. We expect to see a continued reduction in losses as the year progresses and is expected to drive the company towards positive EBITDA by year-end 2023. We would also like to welcome Jon Ott, an executive with deep experience in enterprise sales, who has recently joined as Chief Revenue Officer at Kognitiv. Next up is Capital A. Capital A, formerly AirAsia, continues to experience a strong rebound in all 4 of its businesses. In Q4 2022, Capital A recorded its first positive net profit since COVID began. While revenue has grown substantially, it remains only 70% -- 77% of the level it reached during Q4 2019. However, EBITDA is 108% of Q4 2019 better -- due to better seat pricing and expense management. This was accomplished while only operating 56% of the 2019 fleet. The group operated 14.8 million seats in the first quarter of 2023, which is 71% of first quarter 2019 levels with a load factor of 89%, at par with prepandemic levels. And with that, let me turn it over to Steve to take you through some of the financial results. Steve?

Thanks, Mike. Before I begin covering the consolidated financial results for the quarter, starting in the second quarter, we will be presenting our consolidated income statement as well as our segment reporting with a focus on the operating results of our new holdings in Bozzetto and Tufropes. Our goal is to provide additional clarity and insight into each of our holdings. Let me now cover the consolidated results before we move to the segment performance and cash movements in the quarter. Starting with our consolidated results. In the first quarter, income from investments was $14.1 million compared to a loss of $14.3 million last year. Income from investments in the quarter was mainly due to an increase in fair value of investments in equity instruments of $10.8 million; interest, dividend and other investment income of $7.2 million; and revenue of $2 million mainly associated with the 14-day stub holding period of Tufropes. Our total expenses were $33.2 million for the quarter, which included a number of nonrecurring expenses. These included transaction costs of $11.6 million; noncash costs of $10.8 million related to Paladin's carried interest and option rates; activism-related costs of $1 million; and accelerated amortization of a MIM intangible asset for $1.1 million. Excluding these items, total expenses were $7.3 million, of which $3.4 million were related to the Tufropes business for the 14-day period held since acquisition, where we have no comparables versus the prior year. Accounting for all of these items, total expenses were approximately [ $4 million ], which is in line with the prior year's quarter. For the Holdings segment, corporate operating expenses were $5.4 million in the quarter, up by $1.3 million mainly due to the expenses incurred related to the shareholder activism. Moving on to cover the major cash movements for the quarter. We started the quarter with cash and cash equivalents of $505 million. The main movements in the quarter were $256 million used to fund Tufropes acquisition. As a note, this funding was offset by a working capital adjustment to derive our $239 million net consideration, and it's been funded by the sellers by liquid -- by having liquid mutual fund securities of $17 million, which are being converted to cash in the second quarter. $8.9 million of transaction costs were related to the Tufropes acquisition and $4.7 million of Holdco costs. We also had the $3 million of dividends and the $1.3 million of Part VI tax. Moving on to the pro forma unrestricted cash and liquid securities to reflect the Bozzetto acquisition as of March 31, 2023. We had $318.6 million prior to the Bozzetto acquisition of cash and liquid securities. And we ended up funding $206 million to acquire the 94% stake in Bozzetto. In turn, Bozzetto had $14 million in cash on hand at closing. Taking these 2 cash movements into consideration, we estimate the pro forma cash and liquid investments of $126 million post closing. This liquidity position provides sufficient cash and liquid resources to support the funding of our Holdco as well as opportunities to support our businesses or renew the NCIB. To conclude financing on Tufropes, we would expect up to $100 million in additional liquidity. And with that, let me turn it back over to Phil to wrap up with a few concluding remarks. Phil?

Thanks, Steve. Since the close of the PLM transaction last summer, we have been carefully planning to redeploy the proceeds to create value for our shareholders. We said at that time that we return a portion of our capital directly to shareholders as well as seeking opportunities to acquire established businesses with long track records of growth and free cash flow generation. We reviewed a robust pipeline of potential targets around the world and narrowed our focus to the most compelling candidates. We knew we could act swiftly when presented with the right opportunities, and we did so with the recent acquisitions of Tufropes and Bozzetto. We are very excited to have completed the purchase of these 2 businesses that check all of our boxes. Both companies are global players in growing markets with solid financial track record, sustainable competitive advantages, serving diverse customer bases, geographies and revenue streams with proven management teams. The Bozzetto and Tufropes investments will form the foundation of the "new Aimia" with plans to grow both organically and through carefully planned accretive acquisitions. We will continue to execute our strategy of maximizing the value of our current portfolio holdings while redeploying our capital into new investments with significant upside. 2023 is off to a strong start for our entire portfolio, and we look forward to providing you further updates as soon as we can. We look forward to a very exciting 2023.

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

[Operator Instructions] First question, we have Surinder Thind with Jefferies.

A few questions here related to the portfolio holdings. Let's start with Tufropes. Can you provide any additional color on kind of what impacted the timing of customer orders? It sounded like it was a combination of customers waiting to -- till the deal closed, but was there other things here that we should consider in terms of what is the general outlook for the remainder of the year?

Yes, there were registration and licensing issues that we could only take care of after closing. So there was a lot of red tape involved. We also were redomiciling the company to Canada, which added a little additional complexity. That caused shipment delays, which we expect to be pushed into the next 2 quarters. So those are the primary reasons for those issues.

So at this point, should we assume that things are operating on a fully normalized basis?

Yes. Yes, we're fully normalized now.

Got it. And in this environment, any color on what demand looks like?

We're seeing signs of strengthening demand. We're also, more importantly, seeing signs of opportunities that could have a dramatic impact on our EBITDA. So we're seeing -- we immediately were met with a potential joint venture opportunity with one of the largest distributors, which will be very meaningful. We're pursuing that. We -- as we mentioned, we met with all the top -- most of the top customers. And many of them validated our thesis, which was the -- this company has not really been actively marketing their products around the world. So one of the customers said, "Well, we hadn't heard from you in 2 years, so glad you're here because we want to expand our relationship." So we're very excited about what we're seeing there. So overall, we're seeing the kind of demand that we expected, but we're finding opportunities to grow this materially outside of just organic growth. We're also pursuing, as you mentioned, an acquisition in the U.S., which would provide a whole another platform for us here and would also potentially allow us to utilize some of our U.S. NOLs. So we're pursuing that as well.

So Surinder, it's Mike Lehmann. It's Mike. If I could just jump in a second. So just to expand on a little bit what Phil said. The discussions with both existing and new customers have been going extraordinarily well. The future collaboration that we're -- that we've been discussing has not only been on growing existing client wallet share, increasing business with existing clients, but also it's multifaceted, creating new opportunities and new products for those existing clients and through distributors, creating products for new markets, all right? So the largest of which is maritime and shipping customers, but it's really across the board. We're seeing opportunities that through the due diligence process, we highlighted. And now that we're out there seeing 20, 30, 40 of the top customers, we are recognizing that not only are those opportunities that we highlighted in due diligence there, but there's a lot more as well. And as Phil said, one of the opportunities is already ongoing and in the works, which is really exciting. And our -- the research and development within the company is examining other ways to continue to participate with new clients as well as develop the new markets that we discussed.

That's helpful. And then just related to that in terms of as you've identified these opportunities as you have these discussions with the existing clientele for new opportunities, can you talk about the harvesting of that? Are the -- is the idea that we'll see the impact in 2024? Or should we begin to see the impact on growth before that?

No, we're anticipating you'll be able to see growth before 2024. New product set will take a while to get through R&D and get through testing and certification, et cetera. But expanding current wallet share within customers, either direct to customer or distribution channels, we're looking to increase those relationships immediately. So that could be over the next several quarters.

Surinder, when you -- when we first announced this deal and our stock went down, one of the main things we were hearing was oh, this is a commodity business. You guys bought a commodity business. That is -- couldn't be further from the truth. What you learn about this business, which is pretty incredible, is that one net will hold up to $20 million worth of fish. So you can imagine how important that net is to the person dragging it. So if a fish comes and bites a piece of the net off, $20 million or the fish can fly out your window. So the quality of these nets is critical. And when we were diligent in this, what we heard from anonymous professionals, even the competitors were saying, "Look, Tufropes has some of the best product out there." There are competitors that white label it because their product is just better than theirs. These are leaders in the industry. So when we went and visited every one of their factories, we saw women sitting on the floor with the nets. And my first reaction was, wow, you're so automated. You don't automate that. And they said, "No, you don't understand. This is a skill set that is so valuable." Tying these nets at the end of these nets and the quality of these nets is the reason that they don't break. And it's the reason that our quality is so high. They're some of the highest paid women in India, highly skilled. And so this is not like some simple thing where you're just making nets. So some of the technological advances Mike was referring to is putting sensors on the net that alert the boat when there's a rip in the net or a tear or any type of damage to it. That allows you to maybe save $14 million worth of the $20 million that's going to escape. I mean, these are huge numbers. So it's a very important part of the business, and we're expanding it. And it's very high margin, and we're very excited about the future of that business.

Got it. And then moving on to Clear Media here. We've now kind of had a quarter to 2 quarters where the Chinese economy has started to open up. Any color on how we should think about the revenue trajectory here and a return to normal now that the conditions themselves or the factors influencing them have normalized?