MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the years ended December 31, 2013 and 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Aimia Inc. (together with its direct and indirect subsidiaries, where the context requires, “Aimia” or the “Corporation”), formerly known as Groupe Aeroplan Inc., was incorporated on May 5, 2008 under the laws of Canada as a wholly- owned subsidiary of Aeroplan Income Fund (the “Fund”). It is the successor to Aeroplan Income Fund following the completion of the reorganization of the Fund from an income trust structure to a corporate structure by way of a court- approved plan of arrangement on June 25, 2008.
The following management's discussion and analysis of financial condition and results of operations (the “MD&A”) presents a discussion of the financial condition and results of operations for Aimia.
The MD&A is prepared as at February 26, 2014 and should be read in conjunction with the accompanying audited consolidated financial statements of Aimia for the year ended December 31, 2013 and the notes thereto.
The earnings and cash flows of Aimia are affected by certain risks. For a description of those risks, please refer to the Risks and Uncertainties section.
CAUTION REGARDING FORWARD-LOOKING INFORMATION
Forward-looking statements are included in this MD&A. These forward-looking statements are identified by the use of terms and phrases such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “predict”, “project”, “will”, “would” and “should”,and similar terms and phrases, including references to assumptions. Such statements may involve but are not limited to comments with respect to strategies, expectations, planned operations or future actions.
Forward-looking statements, by their nature, are based on assumptions and are subject to important risks and uncertainties. Any forecasts, predictions or forward-looking statements cannot be relied upon due to, among other things, changing external events and general uncertainties of the business and its corporate structure. Results indicated in forward-looking statements may differ materially from actual results for a number of reasons, including without limitation, dependency on top Accumulation Partners and clients, changes to the Aeroplan Program, failure to safeguard databases and consumer privacy, conflicts of interest, greater than expected redemptions for rewards, regulatory matters, retail market/economic conditions, industry competition, Air Canada liquidity issues, Air Canada or travel industry disruptions, airline industry changes and increased airline costs, supply and capacity costs, unfunded future redemption costs, changes to coalition loyalty programs, seasonal nature of the business, other factors and prior performance, foreign operations, legal proceedings, reliance on key personnel, labour relations, pension liability, technological disruptions and inability to use third-party software, failure to protect intellectual property rights, interest rate and currency fluctuations, leverage and restrictive covenants in current and future indebtedness, uncertainty of dividend payments, managing growth, credit ratings, as well as the other factors identified throughout this MD&A and throughout Aimia's public disclosure records on file with the Canadian securities regulatory authorities. The forward- looking statements contained herein represent Aimia's expectations as of February 26, 2014, and are subject to change after such date. However, Aimia disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required under applicable securities regulations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
THIS MD&A CONTAINS THE FOLLOWING SECTIONS:
CAPABILITY TO DELIVER RESULTS 12
OPERATING AND FINANCIAL RESULTS 14
SELECTED INFORMATION AND RECONCILIATION OF EBITDA, ADJUSTED EBITDA, ADJUSTED NET EARNINGS AND FREE CASH FLOW 15
OPERATING RESULTS AND PERFORMANCE INDICATORS IN % TERMS 24
YEAR ENDED DECEMBER 31, 2013 COMPARED TO YEAR ENDED DECEMBER 31, 2012 26
QUARTER ENDED DECEMBER 31, 2013 COMPARED TO QUARTER ENDED DECEMBER 31, 2012 36
SUMMARY OF QUARTERLY RESULTS 46
LIQUIDITY AND CAPITAL RESOURCES 48
EQUITY-ACCOUNTED INVESTMENTS 55
PROVISIONS, CONTINGENT LIABILITIES AND GUARANTEES 57
NEW FINANCIAL CARD AGREEMENTS 60
TRANSACTIONS WITH AIR CANADA 61
SUMMARY OF CONTRACTUAL OBLIGATIONS AND COMMITMENTS 63
EARNINGS (LOSS) PER COMMON SHARE 72
CHANGES IN ACCOUNTING POLICIES 72
CRITICAL ACCOUNTING ESTIMATES 76
MEASURING OUR PERFORMANCE AGAINST 2013 GUIDANCE 96
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
GLOSSARY
"Accumulation Partners" - means Commercial Partners that purchase coalition loyalty services, including Loyalty Units;
"Aeroplan" - means Aimia Canada Inc. (formerly known as Aeroplan Canada Inc.); "Aeroplan Miles" - means the miles issued by Aeroplan under the Aeroplan Program; "Aeroplan Program" - means the coalition loyalty program owned and operated by Aeroplan;
"Aimia" or the "Corporation" - means Aimia Inc., formerly known as Groupe Aeroplan Inc., and where the context requires, includes its subsidiaries and affiliates;
"Average Cost of Rewards per Loyalty Unit" - means for any reporting period, the cost of rewards for such period divided by the number of Loyalty Units redeemed for rewards during the period;
"Breakage" - means the estimated Loyalty Units sold which are not expected to be redeemed. By its nature, Breakage is subject to estimates and judgment. Management's consolidated weighted average breakage estimate at December 31, 2013 is 12% (December 31, 2012: 17%), and is calculated based on the total Loyalty Units outstanding under the Corporation's loyalty programs;
"Broken Loyalty Units" - means Loyalty Units issued, but not expired and not expected to be redeemed;
"Broken Miles" - means the Aeroplan Miles issued, but not expired and not expected to be redeemed;
"Card Migration Provision" - means the provision in relation to the net migration of Aeroplan-branded credit card account between CIBC and TD as described under the NEW FINANCIAL CARD AGREEMENTS section;
"Cardlytics" - means Cardlytics, Inc.;
"CIBC Payment" - means the payment of $150.0 million made to CIBC by Aimia on December 27, 2013 in relation to the sale of approximately half of the Aeroplan card portfolio to TD in accordance with the asset purchase agreement as described under the NEW FINANCIAL CARD AGREEMENTS section;
"Change in Future Redemption Costs" - means the change in the estimated Future Redemption Cost liability for any quarter (for interim periods) or fiscal year (for annual reporting purposes). For purposes of this calculation, the opening balance of the Future Redemption Cost liability is revalued by retroactively applying to all prior periods the latest available Average Cost of Rewards per Loyalty Unit, experienced during the most recent quarter (for interim periods) or fiscal year (for annual reporting purposes). It is calculated by multiplying the change in estimated unbroken Loyalty Units outstanding between periods by the Average Cost of Rewards per Loyalty Unit for the period;
"Commercial Partners" - means Accumulation Partners and Redemption Partners;
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
"EIM" - means Excellence in Motivation, Inc.;
"Expired Miles" - means the Aeroplan Miles that have been removed from members' accounts and are no longer redeemable;
"Future Redemption Costs" - means the total estimated liability of the future costs of rewards for Loyalty Units which have been sold and remain outstanding, net of Breakage and valued at the Average Cost of Rewards per Loyalty Unit, experienced during the most recent quarter (for interim periods) or fiscal year (for annual reporting purposes);
"GAAP" - means generally accepted accounting principles in Canada. As of January 1, 2011, this represents International Financial Reporting Standards;
"Gross Billings" - means gross proceeds from the sale of Loyalty Units, from proprietary loyalty services, analytics and insights services and from other services rendered or to be rendered;
"Gross Billings from the sale of Loyalty Units" - means gross proceeds from the sale of Loyalty Units;
"IFRS" - means International Financial Reporting Standards;
"ISS" - means Intelligent Shopper Solutions services, formerly known as LMG Insight and Communication (I&C);
"i2c" - means Insight 2 Communication LLP;
"Loyalty Units" - means the miles, points or other loyalty program units issued by Aimia's subsidiaries under the respective programs owned and operated by each of the entities;
"Nectar", “Nectar UK” or the "Nectar Program" - means the coalition loyalty program operated by our EMEA segment in the United Kingdom;
"Nectar Italia" or the "Nectar Italia Program" - means the coalition loyalty program operated by our EMEA segment in Italy;
"Nectar Points" - means the points accumulated by members under the Nectar Program;
"Nectar Italia Points" - means the points accumulated by members under the Nectar Italia Program;
"PLM" - means PLM Premier, S.A.P.I. de C.V., together with its predecessor Premier Loyalty & Marketing, S.A.P.I. de C.V., owner and operator of Club Premier, a Mexican coalition loyalty program;
"Prismah" - means Prismah Fidelidade S.A., a company formed to offer loyalty services in Brazil;
"Productive Capacity" - encompasses Aimia's and its subsidiaries' leading market positions and brands; strong base of members; relationship with Commercial Partners and clients; and technology and employees;
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
"Redemption Partners" - means Commercial Partners that offer air travel, shopping discounts or other rewards to members upon redemption of Loyalty Units;
"Smart Button" - means Smart Button Associates, Inc.;
"Think Big" - means Think Big Digital Sdn Bhd;
"Total Miles" - means all redeemable Aeroplan Miles (including Broken Miles but not Expired Miles), under the Aeroplan Program.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
OVERVIEW
Aimia, a global leader in loyalty management, through its subsidiaries, operates in three regional business segments: Canada, the United States and Asia-Pacific (“US & APAC”) and Europe, Middle-East and Africa (“EMEA”).
In Canada, Aimia owns and operates the Aeroplan Program, Canada's premier coalition loyalty program. In EMEA, Aimia owns and operates Nectar, the United Kingdom's largest coalition loyalty program, Nectar Italia, Italy's largest coalition loyalty program and Air Miles Middle East, the leading coalition loyalty program in the UAE, Qatar and Bahrain, through a 60% ownership interest. Aimia's EMEA segment also provides data driven analytics and insights services in the UK and internationally to retailers and their suppliers, through ISS and its 50% participation in i2c, a joint venture with Sainsbury's. Aimia also develops analytical tools to provide services to clients globally to collect, analyze and derive actionable insight from their customer data which is used to improve marketing return-on- investment. In each of the regions, Aimia provides proprietary loyalty services, including loyalty program strategy, design, launch and operation. In addition, Aimia has strengthened its product offering through the acquisition of Smart Button, which offers clients a turnkey, feature rich, software as a service loyalty solution.
Aimia also holds a 48.9% interest in, and jointly controls with Grupo Aeromexico, PLM, owner and operator of Club Premier, a Mexican coalition loyalty program and a 50% interest in, and jointly controls with Multiplus S.A., Prismah, a company formed to offer loyalty services in Brazil. Additionally, Aimia holds an investment in China Rewards, a Chinese based retail coalition loyalty program start-up, and a minority interest in Cardlytics, a US-based private company operating in card-linked marketing for electronic banking. These investments are reported under Corporate in the segmented information.
Aimia also holds an investment in Think Big, the owner and operator of BIG, AirAsia and Tune Group’s loyalty program. Please refer to the SUBSEQUENT EVENTS section for more information.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
REGIONAL STRUCTURE AND LOYALTY SERVICES
The following chart illustrates Aimia's regional reporting structure and full suite of loyalty services :
Notes:
• The chart above does not reflect the actual corporate structure of Aimia, it reflects Aimia's operational structure.
• As at December 31, 2013 Aimia owned 60% of Air Miles Middle East, 50% of Prismah, 50% of i2c, 48.9% of Club Premier, an investment in China Rewards and a minority interest in Cardlytics. All other businesses listed above are owned 100% by Aimia.
• Analytics and Insights incorporates ISS and i2c. Although ISS offers services in each of the regions, for reporting purposes, its results are reported in the EMEA segment only.
• Through its strategic alliance, Aimia works with Cardlytics to offer card-linked marketing services for electronic banking in each of our regions other than the US. As at December 31, 2013, the investment in Cardlytics was reported in Corporate and accounted for as an available-for-sale investment.
• On February 6, 2014, Aimia acquired a minority stake in Think Big, the owner and operator of BIG, AirAsia and Tune Group’s loyalty program.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
STRATEGY
Aimia's vision is to be recognized as the global leader in loyalty management. Our strategy is to deploy our expertise in building proprietary loyalty solutions, designing, launching and managing coalition loyalty programs, creating value through analytics and insights and driving innovation in the emerging digital, mobile and social communications spaces. We build and run loyalty programs for ourselves and for some of the world's best brands. Our experience in running loyalty programs has taught us innovative ways to unlock data and reveal hidden insights for our clients and partners. Customer data is at the heart of everything we do. We believe in making business personal by inspiring brands to build unparalleled relationships with their customers and making engagement more relevant and rewarding.
Our ability to execute this strategy is grounded in our depth of people, our technology and our operational expertise. As owner-operators in the loyalty industry we have developed advanced technology platforms and operational experience which we leverage to grow profitability for our company, our partners and our customers.
Our strategy and full suite model is delivered on a global basis through the three principal loyalty service streams outlined below:
Coalition Loyalty
Aimia's coalition loyalty experts build value for existing coalition partners, launch greenfield coalitions, partner with legacy programs to spin them off into multi-partner coalitions and deploy the full suite of loyalty services for coalition partners. Through a member and partner-centric approach, these coalitions add value to the eco-system of partners and members by sustaining, enhancing and deepening the members' relationships with partners.
Proprietary Loyalty
Aimia's proprietary loyalty service experts design, launch and operate new client programs, re-launch, refresh and operate existing client programs and bring our technology platforms, digital, mobile and analytical expertise to bear on behalf of clients, to sustain, enhance and deepen relationships with their customers. We also create incentive programs and loyalty solutions to encourage loyalty, increase sales and deliver results for employee and channel networks.
Analytics and Insights
Aimia is at the forefront of insight and analysis. Understanding the customer and their needs enables decisions that transform businesses. We provide cutting-edge data analytics for coalition and proprietary clients, derive insight from program, SKU-level, third-party and other data sources and use data to deliver unparalleled marketing ROI, transform the customer experience and build loyalty. Our analytics and insights services include member analysis and reward, partner and liability optimization.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Aimia's strategy is executed through the following initiatives:
• enhancing the value proposition to our partners and customers;
• increasing member engagement in the loyalty programs we own and operate by providing new accumulation opportunities and offering a wider range of redemption opportunities;
• assisting our clients in managing and evolving their proprietary loyalty programs to maximize the impact on their businesses;
• offering loyalty management services and applications that span across coalition and third-party proprietary models, from strategy to execution to optimization;
• assisting our clients to gain unparalleled insight into shopping trends from analysis of product and customer information to help them make strategic decisions; and
• delivering optimum data driven solutions to our clients in their interactions with customers, loyalty and reward programs and other data sources.
We are also well positioned to leverage our full suite of loyalty management services to expand profitability by:
• seeking to acquire interests in existing frequent flyer programs and customer loyalty programs in existing and new geographic markets; and
• pursuing investments in strategic and synergistic acquisitions.
PERFORMANCE INDICATORS GROSS BILLINGS
Aimia derives its cash inflows primarily from the sale of Loyalty Units to Accumulation Partners with respect to its
coalition loyalty programs, from proprietary loyalty services rendered or to be rendered to customers and from analytics and insights services. These inflows are referred to as “Gross Billings”.
OPERATING INCOME
Revenue
Coalition Loyalty
A key characteristic of Aimia's multi-partner or shared currency loyalty programs business is that the gross proceeds received for the sale of Loyalty Units to partners, known as "Gross Billings from the sale of Loyalty Units”, are deferred and recognized as revenue upon the redemption of Loyalty Units by the members. Based upon past experience, management anticipates that a number of Loyalty Units sold will never be redeemed by members. This is known as “Breakage”. For those Loyalty Units that Aimia does not expect will be redeemed by
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
members, Aimia recognizes revenue based on the number of Loyalty Units redeemed in a period in relation to the total number expected to be redeemed.
Proprietary Loyalty
Aimia derives proprietary loyalty service fees related to direct marketing, sales promotion and the design, development and administration of loyalty programs on behalf of its clients. These proprietary loyalty service fees are included in Gross Billings and recognized as revenue when the amount, stage of completion and costs for the service can be measured reliably and it is probable that the economic benefits associated with the service will be realized.
Other
Other revenue consists of:
• analytics and insights service fees from services and tools licensed to clients to collect, analyze and derive actionable insight from their customer data which is used to improve marketing return-on- investment;
• charges to coalition loyalty members for various services;
• loyalty industry related business know-how, trademarks and expertise, royalties earned with respect to the Air Miles and Nectar trademarks; and
• the management of Air Canada's tier membership program for its most frequent flyers.
These fees are also included in Gross Billings and are recognized as revenue when the services are rendered or on an accrual basis, in accordance with the substance of the agreements in the case of royalties.
Cost of Rewards, Direct Costs and Operating Expenses
Cost of rewards consists of the cost to purchase airline seats or other products or services from Redemption Partners in order to deliver rewards chosen by members upon redemption of their Loyalty Units. At that time, the costs of the chosen rewards are incurred and recognized. The total cost of rewards varies with the number of Loyalty Units redeemed and the cost of the individual rewards purchased in connection with such redeemed Loyalty Units.
The Average Cost of Rewards per Loyalty Unit redeemed is an important measurement metric since a small fluctuation may have a significant impact on overall costs due to the high volume of Loyalty Units redeemed.
Direct costs consist of those costs directly attributable to the delivery of proprietary loyalty and analytics and insights services and include labour, technology, reward fulfillment and commissions.
Operating expenses incurred include contact centre operations, consisting primarily of salaries and wages, as well as advertising and promotion, information technology and systems and other general administrative expenses.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
ADJUSTED EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION (“ADJUSTED EBITDA”)
EBITDA adjusted for certain factors particular to the business, such as changes in deferred revenue and Future Redemption Costs (“Adjusted EBITDA”), is used by management to evaluate performance and to measure compliance with debt covenants. Management believes Adjusted EBITDA assists investors in comparing Aimia's performance on a consistent basis without regard to depreciation and amortization and impairment charges, which are non-cash in nature and can vary significantly depending on accounting methods, and non-operating factors such as historical cost. Adjusted EBITDA also includes distributions and dividends received or receivable from equity- accounted investments.
Change in deferred revenue is calculated as the difference between Gross Billings and revenue recognized, including recognition of Breakage.
Future Redemption Costs represent management's estimated future cost of rewards in respect of Loyalty Units sold which remain outstanding and unbroken at the end of any given period. Future Redemption Costs are revalued at the end of any given period by taking into account the most recently determined average unit cost per Loyalty Unit redeemed for that period (cost of rewards / Loyalty Units redeemed) and applying it to the total unbroken Loyalty Units outstanding at the end of that period. As a result, Future Redemption Costs and the Change in Future Redemption Costs must be calculated at the end of any given period and for that period. The simple addition of sequential inter-period changes to arrive at a cumulative change for a particular period may result in inaccurate results depending on the fluctuation in the Average Cost of Rewards per Loyalty Unit redeemed for the period in question.
EBITDA and Free Cash Flow are non-GAAP measurements recommended by the Canadian Institute of Chartered Accountants (“CICA”) in accordance with the recommendations provided in their October 2008 publication, Improved Communications with Non-GAAP Financial Measures - General Principles and Guidance for Reporting EBITDA and Free Cash Flow.
Adjusted EBITDA is not a measurement based on GAAP, is not considered an alternative to operating income or net income in measuring performance, and is not comparable to similar measures used by other issuers. For a reconciliation to GAAP, please refer to the SELECTED INFORMATION AND RECONCILIATION OF EBITDA, ADJUSTED EBITDA, ADJUSTED NET EARNINGS AND FREE CASH FLOW included in the Operating and Financial Results section. Adjusted EBITDA should not be used as an exclusive measure of cash flow because it does not account for the impact of working capital growth, capital expenditures, debt repayments and other sources and uses of cash, which are disclosed in the statements of cash flows.
ADJUSTED NET EARNINGS
Adjusted Net Earnings provides a measurement of profitability calculated on a basis consistent with Adjusted EBITDA. Net earnings attributable to equity holders of the Corporation are adjusted to exclude Amortization of
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Accumulation Partners' contracts, customer relationships and technology, share of net earnings (loss) of equity- accounted investments and impairment charges. Adjusted Net Earnings includes the change in deferred revenue and Change in Future Redemption Costs, net of the income tax effect and non controlling interest effect (where applicable) on these items at an entity level basis. Adjusted Net Earnings also includes distributions and dividends received or receivable from equity-accounted investments.
Adjusted Net Earnings is not a measurement based on GAAP, is not considered an alternative to net earnings in measuring profitability, and is not comparable to similar measures used by other issuers. For a reconciliation to GAAP, please refer to the SELECTED INFORMATION AND RECONCILICATION OF EBITDA, ADJUSTED EBITDA,
ADJUSTED NET EARNINGS AND FREE CASH FLOW included in the Operating and Financial Results section.
STANDARDIZED FREE CASH FLOW (“FREE CASH FLOW”)
Free Cash Flow is a non-GAAP measure recommended by the CICA in order to provide a consistent and comparable measurement of free cash flow across entities of cash generated from operations and is used as an indicator of financial strength and performance.
Free Cash Flow is defined as cash flows from operating activities, as reported in accordance with GAAP, less adjustments for:
a) total capital expenditures as reported in accordance with GAAP; and
b) dividends paid, when stipulated, unless deducted in arriving at cash flows from operating activities.
For a reconciliation to cash flows from operations please refer to the SELECTED INFORMATION AND RECONCILICATION OF EBITDA, ADJUSTED EBITDA, ADJUSTED NET EARNINGS AND FREE CASH FLOW
included in the Operating and Financial Results section.
CAPABILITY TO DELIVER RESULTS
Aimia operates in a relatively new industry with a limited number of peers. As a result, there are few industry comparables and Productive Capacity benchmarks.
Capital Resources
Aimia generates sufficient cash flow internally to fund cash distributions, capital expenditures and to service its debt obligations. Management believes that Aimia's internally generated cash flows, combined with its ability to access external capital, provide sufficient resources to finance its cash requirements for the foreseeable future and to maintain available liquidity, as discussed in the Liquidity and Capital Resources section.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Non-capital Resources
Aimia's critical non-capital resources are its brands, its strong and large member bases and related data, its relationships with Commercial Partners and clients, its technology platforms and its employees.
Leading Market Position and Brands
Aimia's leading market position and strong brands, including Aeroplan and Nectar, make it attractive to existing and potential Commercial Partners and clients. Management believes that its brands are associated with an attractive base of consumers in terms of household income, spending habits and loyalty program engagement.
Strong Member Bases
Aimia's coalition loyalty programs benefit from growing member bases. Attractive demographics of the membership bases of Aimia's coalition loyalty programs have demonstrated a strong willingness to collect Loyalty Units over other loyalty program units.
Relationship with Commercial Partners
Aimia has relationships with numerous Commercial Partners, including leading financial services, travel services, retailers and consumer products and services companies. The terms of these contractual arrangements typically range from 2 to 5 years and are longer with Air Canada and certain financial services partners with respect to the Aeroplan Program. Management believes that Commercial Partners benefit from members' sustained purchasing behaviour, which translates into a recurring flow of Gross Billings.
Long-Term Strategic Relationship with Air Canada
Aimia benefits from the unique strategic relationship Aeroplan has with Air Canada and its affiliation with the strong Air Canada brand. Aeroplan benefits from a long-term commercial agreement for the purchase of seat capacity from Air Canada and its affiliates, at attractive rates based on its status as Air Canada's largest customer. This is of great importance as travel continues to be one of the most sought after rewards under the Aeroplan Program. In addition, not only does Aeroplan have access to Air Canada's passengers for the purpose of acquiring new Aeroplan members, it also has access to Air Canada's most affluent customers through the management of its frequent flyer tier membership program. As an exclusive benefit, Aeroplan also has the ability to offer qualified members access to Air Canada's global network of Maple Leaf airport lounges.
In addition, Air Canada is one of Aeroplan's leading Commercial Partners, purchasing a high volume of Aeroplan Miles yearly for the purpose of awarding Aeroplan Miles to its customers. Aeroplan is Air Canada's exclusive loyalty marketing provider based in Canada.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Large Base of Loyalty Marketing Clients Worldwide
Aimia's international footprint spans the globe with some of the world’s best known brands, with presence in North America, South America, Europe, the Middle East and Asia, and in sectors as diverse as airlines, automotive, CPG/ FMCG, financial services, high tech, pharma/healthcare, retail, telecom and travel hospitality.
Technology
Aimia relies on a number of sophisticated systems in order to operate loyalty management platforms and contact centres, and to manage and analyze member databases and process redemption rewards. Through the use of its distinctive technology platforms, Aimia is able to offer value-added services to Commercial Partners, clients and members. In addition, Aimia uses technology to provide analytical services to its partners, their suppliers and others.
Employees
Our people are what make Aimia a great company. We base our culture on a few simple but powerful values which shape every aspect of the way we do business. These can be summed up by passion. Aimia benefits from a strong and experienced employee base in coalition loyalty, proprietary loyalty services, analytics and insights, which is focused on driving growth and enhancing value to our Commercial Partners, clients and members. Aimia has 32 offices in 20 countries around the world, with its largest employee bases in Canada (where we own and operate the Aeroplan program), the UK (where we own and operate the Nectar program) and the US. Around three-quarters of our 4,300 employees are located in these countries.
OPERATING AND FINANCIAL RESULTS
Certain of the following financial information of Aimia has been derived from, and should be read in conjunction with, the audited consolidated financial statements for the years ended December 31, 2013 and 2012, and the related notes.
Historically, the Aeroplan Program has been marked by seasonality relating to high redemption activity in the first half of the year and high accumulation activity in the second half of the year. The Nectar Program is characterized by high redemption activity in the last quarter of the year as a result of the holiday season. While the proprietary loyalty services business is also affected by similar seasonality in the last quarter of the year, also related to the holiday season, the impact at the consolidated level is not significant due to the lower relative importance of the reward fulfillment component of the business compared to that of the Aeroplan Program and the Nectar Program.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
SELECTED INFORMATION AND RECONCILIATION OF EBITDA, ADJUSTED EBITDA, ADJUSTED NET EARNINGS AND FREE CASH FLOW
Years ended December 31, % | |||||||
(in thousands of Canadian dollars , except share and per share information) | 2013 | 2012 (q) | 2011 | 2013 over 2012 | 2012 over 2011 | ||
Gross Billings | 2,366,449 | 2,243,023 | 2,233,226 | 5.5 | 0.4 | ||
Gross Billings from the sale of Loyalty Units | 1,711,376 | 1,628,429 | 1,560,801 | 5.1 | 4.3 | ||
Total revenue before change in Breakage estimate | 2,376,360 | 2,248,918 | 2,229,205 | 5.7 | 0.9 | ||
Change in Breakage estimate (f)(p) | (702,812) | — | (113,300) | ** | ** | ||
Total revenue (as reported) | 1,673,548 | 2,248,918 | 2,115,905 | (25.6) | 6.3 | ||
Cost of rewards and direct costs | (1,301,795) | (g) | (1,300,925) | (1,332,874) | 0.1 | (2.4) | |
Gross margin before depreciation and amortization (a) | 371,753 | (g) | 947,993 | 783,031 | (60.8) | 21.1 | |
Depreciation and amortization | (43,474) | (38,425) | (36,033) | 13.1 | 6.6 | ||
Amortization of Accumulation Partners' contracts, customer relationships and technology | (84,414) | (87,234) | (93,474) | (3.2) | (6.7) | ||
Gross margin | 243,865 (g) | 822,334 | 653,524 | (70.3) | 25.8 | ||
Operating expenses | (908,911) (g)(h)(i) | (566,386) | (612,548) | (i) | 60.5 | (7.5) | |
Amortization of Accumulation Partners' contracts, customer relationships and technology | 84,414 | 87,234 | 93,474 | (3.2) | (6.7) | ||
Operating income (loss) before amortization of Accumulation Partners' contracts, customer relationships and technology | (580,632) | (g)(h)(i) | 343,182 | 134,450 | (i) | ** | ** |
Depreciation and amortization | 43,474 | 38,425 | 36,033 | 13.1 | 6.6 | ||
Impairment of goodwill | 19,144 | — | 53,901 | ** | ** | ||
EBITDA (a)(c) | (518,014) (g)(h) | 381,607 | 224,384 | ** | 70.1 | ||
Adjustments: Change in deferred revenue Gross Billings Revenue Change in Future Redemption Costs (b) (Change in Net Loyalty Units outstanding x Average Cost of Rewards per Loyalty Unit for the period) Distributions from equity-accounted investments | 2,366,449 | 2,243,023 | 2,233,226 | ||||
(1,673,548) | (2,248,918) | (2,115,905) | |||||
(40,070) | (j) | 11,640 | 472 | ||||
15,700 | 15,712 | — | |||||
Subtotal of Adjustments | 668,531 | 21,457 | 117,793 | ||||
Adjusted EBITDA (c) | 150,517 (g)(h)(j) | 403,064 | 342,177 | (62.7) | 17.8 | ||
Net earnings (loss) attributable to equity holders of the Corporation | (498,281) | (g)(i)(k) (l)(m) | 165,507 | (59,678) | (i)(p) | ||
Weighted average number of shares | 172,514,527 | 173,015,589 | 179,146,339 | ||||
Earnings (loss) per common share (d) | (2.95) | (g)(i)(k) (l)(m) | 0.89 | (0.40) | (i)(p) | ||
Net earnings (loss) attributable to equity holders of the Corporation | (498,281) | (g)(i)(k) (l)(m) | 165,507 | (59,678) | (i)(p) | ||
Amortization of Accumulation Partners' contracts, customer relationships and technology | 84,414 | 87,234 | 93,474 | ||||
Share of net (earnings) loss of equity-accounted investments | 6,556 | (2,917) | 4,444 | ||||
Impairment of goodwill | 19,144 | — | 53,901 | ||||
Adjusted EBITDA Adjustments (from above) | 668,531 | 21,457 | 117,793 | ||||
Tax on adjustments (e) | (173,245) | (196) | 6,273 | ||||
Non-controlling interests share on adjustments above | (3,974) | (2,252) | (18,042) | ||||
Adjusted Net Earnings (c) | 103,145 | (g)(l)(m) (n) | 268,833 | 198,165 | (61.6) | 35.7 | |
Adjusted Net Earnings per common share (c)(d) | 0.53 | (g)(l)(m) (n) | 1.49 | 1.04 | |||
Cash flow from operations | 150,000 | (o) | 357,443 | 242,541 | |||
Capital expenditures | (54,383) | (57,955) | (44,919) | ||||
Dividends | (126,873) | (119,992) | (113,481) | ||||
Free Cash Flow (c) | (31,256) | (o) | 179,496 | 84,141 | ** | ** | |
Total assets | 5,338,596 | 5,246,581 | 4,931,733 | ||||
Total long-term liabilities | 2,107,669 | 1,760,871 | 1,313,201 | ||||
Total dividends per preferred share | 1.625 | 1.625 | 1.625 | ||||
Total dividends per common share | 0.670 | 0.630 | 0.575 | ||||
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
(a) Excludes depreciation and amortization as well as amortization of Accumulation Partners' contracts, customer relationships and technology.
(b) The per unit cost derived from this calculation is retroactively applied to all prior periods with the effect of revaluing the Future Redemption Cost liability on the basis of the latest available average unit cost.
(c) A non-GAAP measurement.
(d) After deducting dividends declared on preferred shares.
(e) The effective tax rates, calculated as income tax expense / earnings before taxes for the period on an entity level basis, are applied to the related entity level adjustments noted above.
(f) The impact of the change in the Breakage estimate in the Aeroplan Program, which occurred in the second quarter of 2013, resulted in a reduction of $663.6 million to revenue from Loyalty Units, of which $617.0 million is attributable to the years prior to 2013 and $46.6 million to the six month period ended June 30, 2013. For the third and fourth quarter of 2013, the change in Breakage estimate resulted in a reduction of $39.2 million to revenue from Loyalty Units.
(g) Includes a favourable impact of $26.1 million (£16.4 million) resulting from the final judgment of the VAT litigation which occurred in the second quarter of 2013. Of this amount, $74.9 million (£47.0 million) was recorded as a reduction of cost of rewards and $48.8 million (£30.6 million) as an increase to operating expenses.
Prior to the issuance of the final ruling, Aimia had recorded an amount of $2.1 million (£1.4 million) in cost of rewards, representing input tax credits accrued during the period from January 1, 2013 to March 31, 2013.
(h) Includes the impact of the CIBC Payment of $150.0 million and the Card Migration Provision of $50.0 million.
(i) Includes goodwill impairment charges of $19.1 million and $53.9 million recorded during the years ended December 31, 2013 and 2011, respectively, related to the US Proprietary Loyalty CGU.
(j) The Change in Future Redemption costs for the year ended December 31, 2013 includes the unfavourable impact resulting from the change in the Breakage estimate in the Aeroplan Program, which occurred during the second quarter of 2013, and amounted to $49.9 million.
(k) Includes the unfavourable impact of the change in Breakage estimate in the Aeroplan Program, which occurred in the second quarter of 2013, of $512.6 million for the year ended December 31, 2013, net of an income tax recovery of $190.2 million.
(l) Includes the unfavourable impact attributable to the CIBC Payment and the Card Migration Provision totaling $146.9 million, net of an income tax recovery of $53.1 million.
(m) Includes the favourable impact of the reversal of previously accrued interest of $17.3 million (£10.8 million) resulting from the final judgment of the VAT litigation which occurred in the second quarter of 2013.
Prior to the issuance of the final ruling, Aimia had recorded an amount of $1.1 million (£0.7 million) as interest expense during the period from January 1, 2013 to March 31, 2013.
(n) Includes the unfavourable impact to the Change in Future Redemption costs resulting from the change in Breakage estimate in the Aeroplan Program, which occurred in the second quarter of 2013, of $36.8 million for the year ended December 31, 2013, net of an income tax recovery of $13.1 million.
(o) Includes the CIBC Payment of $150.0 million made on December 27, 2013 upon the closing of the asset purchase agreement and the related harmonized sales tax of $22.5 million.
(p) Includes the impact of the adjustments to the Breakage estimates related to the Nectar and Air Miles Middle East programs, which resulted in a reduction of $113.3 million to revenue from Loyalty Units attributable to the years prior to 2011. Of the total adjustment,
$82.0 million is attributable to the Nectar Program and $31.3 million is attributable to the Air Miles Middle East program.
(q) 2012 financial information was restated to reflect the retroactive application of the amendments to IAS 19. Refer to the CHANGES IN ACCOUNTING POLICIES section for additional information.
** Information not meaningful.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Three Months Ended % December 31, | ||||
(in thousands of Canadian dollars, except share and per share information) | 2013 | 2012 (n) | Q4 | |
Gross Billings | 658,067 | 615,055 | 7.0 | |
Gross Billings from the sale of Loyalty Units | 464,673 | 429,534 | 8.2 | |
Total revenue before change in Breakage estimate | 706,820 | 678,179 | 4.2 | |
Change in Breakage estimate (f) | (19,193) | — | ** | |
Total revenue (as reported) | 687,627 | 678,179 | 1.4 | |
Cost of rewards and direct costs | (427,407) | (412,651) | 3.6 | |
Gross margin before depreciation and amortization (a) | 260,220 | 265,528 | (2.0) | |
Depreciation and amortization | (11,774) | (12,013) | (2.0) | |
Amortization of Accumulation Partners' contracts, customer relationships and technology | (23,890) | (24,831) | (3.8) | |
Gross margin | 224,556 | 228,684 | (1.8) | |
Operating expenses | (400,318) (g)(h) | (153,435) | ** | |
Amortization of Accumulation Partners' contracts, customer relationships and technology | 23,890 | 24,831 | (3.8) | |
Operating income (loss) before amortization of Accumulation Partners' contracts, customer relationships and technology | (151,872) | (g)(h) | 100,080 | ** |
Depreciation and amortization | 11,774 | 12,013 | (2.0) | |
Impairment of goodwill | 19,144 | — | ** | |
EBITDA (a)(c) | (120,954) (g) | 112,093 | ** | |
Adjustments: Change in deferred revenue Gross Billings Total revenue Change in Future Redemption Costs (b) (Change in Net Loyalty Units outstanding x Average Cost of Rewards per Loyalty Unit for the period) Distributions from equity-accounted investments | 658,067 | 615,055 | ||
(687,627) | (678,179) | |||
34,111 | (i) | 53,504 | ||
5,313 | 15,712 | |||
Subtotal of Adjustments | 9,864 | 6,092 | ||
Adjusted EBITDA (c) | (111,090) | (g)(i) | 118,185 | ** |
Net earnings (loss) attributable to equity holders of the Corporation | (125,592) (h)(j) (k) | 56,897 | ||
Weighted average number of shares | 172,852,768 | 172,123,799 | ||
Earnings (loss) per common share (d) | (0.74) (h)(j) (k) | 0.31 | ||
Net earnings (loss) attributable to equity holders of the Corporation | (125,592) (h)(j) (k) | 56,897 | ||
Amortization of Accumulation Partners' contracts, customer relationships and technology | 23,890 | 24,831 | ||
Share of net (earnings) loss of equity-accounted investments | (1,516) | 374 | ||
Impairment of goodwill | 19,144 | — | ||
Adjusted EBITDA Adjustments (from above) | 9,864 | 6,092 | ||
Tax on adjustments (e) | (8,171) | (1,377) | ||
Non-controlling interests share on adjustments above | (1,041) | (889) | ||
Adjusted Net Earnings(c) | (83,422) | (k)(l) | 85,928 | ** |
Adjusted Net Earnings per common share (c)(d) | (0.50) | (k)(l) | 0.48 | |
Cash flow from operations | (30,243) (m) | 100,570 | ||
Capital expenditures | (21,858) | (23,506) | ||
Dividends | (32,207) | (30,374) | ||
Free Cash Flow (c) | (84,308) (m) | 46,690 | ** | |
Total assets | 5,338,596 | 5,246,581 | ||
Total long-term liabilities | 2,107,669 | 1,760,871 | ||
Total dividends per preferred share | 0.406 | 0.406 | ||
Total dividends per common share | 0.170 | 0.160 | ||
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
(a) Excludes depreciation and amortization as well as amortization of Accumulation Partners' contracts, customer relationships and technology.
(b) The per unit cost derived from this calculation is retroactively applied to all prior periods with the effect of revaluing the Future Redemption Cost liability on the basis of the latest available average unit cost.
(c) A non-GAAP measurement.
(d) After deducting dividends declared on preferred shares.
(e) The effective tax rates, calculated as income tax expense / earnings before taxes for the period on an entity level basis, are applied to the related entity level adjustments noted above.
(f) The impact of the change in the Breakage estimate in the Aeroplan Program, which occurred in the second quarter of 2013, resulted in a reduction of $19.2 million to revenue from Loyalty Units for the three months ended December 31, 2013.
(g) Includes the impact of the CIBC Payment of $150.0 million and the Card Migration Provision of $50.0 million.
(h) Includes a goodwill impairment charge of $19.1 million recorded during the three month ended December 31, 2013 related to the US Proprietary Loyalty CGU.
(i) The Change in Future Redemption costs for the three months ended December 31, 2013 includes the unfavourable impact resulting from the change in the Breakage estimate in the Aeroplan Program, which occurred during the second quarter of 2013, and amounted to $12.9 million.
(j) Includes the unfavourable impact of the change in Breakage estimate in the Aeroplan Program, which occurred in the second quarter of 2013, of $14.2 million, net of an income tax recovery of $5.0 million.
(k) Includes the unfavourable impact attributable to the CIBC Payment and the Card Migration Provision totaling $146.9 million, net of an income tax recovery of $53.1 million.
(l) Includes the unfavourable impact to the Change in Future Redemption costs resulting from the change in Breakage estimate in the Aeroplan Program, which occurred in the second quarter of 2013, of $9.5 million for the three months ended December 31, 2013, net of an income tax recovery of $3.4 million.
(m) Includes the CIBC Payment of $150.0 million made on December 27, 2013 upon the closing of the asset purchase agreement and the related harmonized sales tax of $22.5 million.
(n) 2012 financial information was restated to reflect the retroactive application of the amendments to IAS 19. Refer to the CHANGES IN ACCOUNTING POLICIES section for additional information.
** Information not meaningful.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
SEGMENTED INFORMATION
At December 31, 2013, the Corporation had three reportable and operating segments: Canada, EMEA and US & APAC.
The segments are the Corporation’s strategic business units. For each of the strategic business units, the Corporation’s Group Chief Executive and Group Chief Operating Officer review internal management reports on a monthly basis. The segments have been identified on the basis of geographical regions and are aligned with the organizational structure and strategic direction of the organization. The US & APAC regions have been combined on the basis that they meet the aggregation criteria prescribed under IFRS 8 - Operating Segments.
The Canada segment derives its revenues primarily from the Aeroplan Program and from proprietary loyalty services. The US & APAC segment derives its revenues primarily from proprietary loyalty services. The EMEA segment derives its revenues primarily from loyalty programs, including the Nectar and Nectar Italia programs, operating in the United Kingdom and Italy, respectively, and from its interest in the Air Miles Middle East program. In addition, the EMEA segment also generates revenues from proprietary loyalty services and analytics and insights services, including ISS.
Accounting policies relating to each segment are identical to those used for the purposes of the consolidated financial statements. Management of global shared services, other financial expenses, share-based compensation, and income tax expense is centralized and, consequently, these expenses are not allocated to the operating segments.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
The tables below summarize the relevant financial information by operating segment:
Years Ended December 31, | ||||||||||||
(in thousands of Canadian dollars) | 2013 | 2012(l) | 2013 | 2012 | 2013 | 2012 | 2013 | 2012 | 2013 | 2012 | 2013 | 2012(l) |
Operating Segments Canada EMEA US & APAC Corporate(b) Eliminations Consolidated
Gross Billings | 1,300,101 | 1,292,551 | 704,120 | (c) | 639,851 | (c) | 362,685 | (c) | 315,205 | (c) | — | — | (457) | (4,584) | 2,366,449 | (c) | 2,243,023 | (c) | |
Gross Billings from the sale of Loyalty Units | 1,085,820 | 1,079,793 | 625,556 | 548,636 | — | — | — | — | — | — | 1,711,376 | 1,628,429 | |||||||
Revenue from Loyalty Units before change in Breakage estimate | 1,096,266 | 1,109,523 | 625,307 | 528,359 | — | — | — | — | — | — | 1,721,573 | 1,637,882 | |||||||
Change in Breakage estimate (f) | (702,812) | — | — | — | — | — | — | — | — | — | (702,812) | — | |||||||
Revenue from Loyalty Units (reported) | 393,454 | 1,109,523 | 625,307 | 528,359 | — | — | — | — | — | — | 1,018,761 | 1,637,882 | |||||||
Revenue from proprietary loyalty services | 166,512 | 158,169 | 18,531 | 15,191 | 362,288 | 312,337 | — | — | — | — | 547,331 | 485,697 | |||||||
Other revenue | 47,378 | 49,731 | 60,078 | 75,608 | — | — | — | — | — | — | 107,456 | 125,339 | |||||||
Intercompany revenue | — | 17 | 220 | 304 | 237 | 4,263 | — | — | (457) | (4,584) | — | — | |||||||
Total revenue | 607,344 | 1,317,440 | 704,136 | 619,462 | 362,525 | 316,600 | — | — | (457) | (4,584) | 1,673,548 | 2,248,918 | |||||||
Cost of rewards and direct costs | 689,200 | 693,044 | 410,900 | (i) | 438,639 | 201,695 | 169,563 | — | — | — | (321) | 1,301,795 | (i) | 1,300,925 | |||||
Gross margin before depreciation and amortization | (81,856) | 624,396 | 293,236 | (i) | 180,823 | 160,830 | 147,037 | — | — | (457) | (4,263) | 371,753 | (i) | 947,993 | |||||
Depreciation and amortization (a) | 98,762 | 95,170 | 16,663 | 17,005 | 12,463 | 13,484 | — | — | — | — | 127,888 | 125,659 | |||||||
Gross margin | (180,618) | 529,226 | 276,573 | (i) | 163,818 | 148,367 | 133,553 | — | — | (457) | (4,263) | 243,865 | (i) | 822,334 | |||||
Operating expenses before the undernoted | 438,807 | (g) | 224,579 | 195,268 | (i) | 141,995 | 164,781 | 138,277 | 71,925 | 53,260 | (457) | (4,263) | 870,324 | (g)(i) | 553,848 | ||||
Share-based compensation | — | — | — | — | — | — | 19,443 | 12,538 | — | — | 19,443 | 12,538 | |||||||
Impairment of goodwill | — | — | — | — | 19,144 | — | — | — | — | — | 19,144 | — | |||||||
Total operating expenses | 438,807 | (g) | 224,579 | 195,268 | (i) | 141,995 | 183,925 | 138,277 | 91,368 | 65,798 | (457) | (4,263) | 908,911 | (g)(i) | 566,386 | ||||
Operating income (loss) | (619,425) (g) | 304,647 | 81,305 | (i) | 21,823 | (35,558) | (4,724) | (91,368) | (65,798) | — | — | (665,046) (g)(i) | 255,948 | ||||||
Adjusted EBITDA (k) | 137,664 | (g)(h) | 396,598 | 94,000 | (i)(j) | 49,187 | (3,791) | 7,365 | (77,356) (j) | (50,086) (j) | — | — | 150,517 | (g)(h)(i)(j) | 403,064 | (j) | |||
Additions to non-current assets (d) | 33,054 | 32,269 | 17,693 | 18,675 | 3,636 | 7,011 | — | 2,273 | N/A | N/A | 54,383 | 60,228 | |||||||
Non-current assets (d) | 3,131,097 | 3,190,837 | 516,682 | (e) | 468,782 | (e) | 78,077 | (e) | 77,805 | (e) | 2,244 | 2,156 | N/A | N/A | 3,728,100 | (e) | 3,739,580 | (e) | |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
(a) Includes depreciation and amortization as well as amortization of Accumulation Partners' contracts, customer relationships and technology.
(b) Includes expenses that are not directly attributable to any specific operating segment. Corporate also includes the financial position and operating results of our operations in India.
(c) Includes third party Gross Billings of $573.2 million in the UK and $227.2 million in the US for the year ended December 31, 2013, compared to third party Gross Billings of $525.2 million in the UK and $191.5 million in the US for the year ended December 31, 2012. Third party Gross Billings are attributed to a country on the basis of the country where the contractual and management responsibility for the customer resides.
(d) Non-current assets include amounts relating to goodwill, intangible assets and property and equipment.
(e) Includes non-current assets of $463.5 million in the UK and $69.1 million in the US as of December 31, 2013, compared to non-current assets of $418.2 million in the UK and $71.1 million in the US as of December 31, 2012.
(f) The impact of the change in the Breakage estimate in the Aeroplan Program, which occurred in the second quarter of 2013, resulted in a reduction of $663.6 million to revenue from Loyalty Units, of which $617.0 million is attributable to the years prior to 2013 and $46.6 million to the six month period ended June 30, 2013. For the third and fourth quarter of 2013, the change in Breakage estimate resulted in a reduction of $39.2 million to revenue from Loyalty Units.
(g) Includes the impact of the CIBC Payment of $150.0 million and the Card Migration Provision of $50.0 million.
(h) The Change in Future Redemption costs for year ended December 31, 2013 includes the unfavourable impact resulting from the change in the Breakage estimate in the Aeroplan Program, which occurred in the second quarter of 2013, and amounted to
$49.9 million.
(i) Includes a favourable impact of $26.1 million (£16.4 million) resulting from the final judgment of the VAT litigation which occurred in the second quarter of 2013. Of this amount, $74.9 million (£47.0 million) was recorded as a reduction of cost of rewards and $48.8 million (£30.6 million) as an increase to operating expenses.
Prior to the issuance of the final ruling, Aimia had recorded an amount of $2.1 million (£1.4 million) in cost of rewards, representing input tax credits accrued during the period from January 1, 2013 to March 31, 2013.
(j) Adjusted EBITDA includes distributions received or receivable from equity-accounted investments amounting to $15.7 million for the year ended December 31, 2013, of which $14.0 million relates to PLM and is included in Corporate and $1.7 million relates to i2c and is included in the EMEA region. Adjusted EBITDA for the year ended December 31, 2012 includes a distribution received from PLM amounting to $15.7 million reflected in Corporate.
(k) A non-GAAP measurement.
(l) 2012 financial information was restated to reflect the retroactive application of the amendments to IAS 19. Refer to the
CHANGES IN ACCOUNTING POLICIES section for additional information.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Three Months Ended December 31, | ||||||||||||
(in thousands of Canadian dollars) | 2013 | 2012(k) | 2013 | 2012 | 2013 | 2012 | 2013 | 2012 | 2013 | 2012 | 2013 | 2012(k) |
Gross Billings
Gross Billings from the sale of Loyalty Units Revenue from Loyalty Units before change
in Breakage estimate
Change in Breakage estimate (f)
Revenue from Loyalty Units (reported) Revenue from proprietary loyalty services Other revenue
Intercompany revenue Total revenue
Cost of rewards and direct costs
Gross margin before depreciation and amortization
Depreciation and amortization (a)
Gross margin
Operating expenses before the undernoted Share-based compensation
Impairment of goodwill Total operating expenses Operating income (loss)
Adjusted EBITDA (j)
Additions to non-current assets (d) | 13,967 | 12,351 | 6,017 | 8,964 | 1,874 | 2,191 | |||
Non-current assets (d) | 3,131,097 | 3,190,837 | 516,682 | (e) | 468,782 | (e) | 78,077 | (e) | 77,805 (e) |
— | — | N/A | N/A | 21,858 | 23,506 | |
2,244 | 2,156 | N/A | N/A | 3,728,100 (e) | 3,739,580 | (e) |
Operating Segments Canada EMEA US & APAC Corporate(b) Eliminations Consolidated
347,049 | 336,232 | 200,046 | (c) | 177,586 | (c) | 111,020 | (c) | 102,265 | (c) | — | — | (48) | (1,028) | 658,067 | (c) | 615,055 | (c) | |
289,388 | 278,780 | 175,285 | 150,754 | — | — | — | — | — | — | 464,673 | 429,534 | |||||||
244,609 | 267,678 | 271,069 | 223,728 | — | — | — | — | — | — | 515,678 | 491,406 | |||||||
(19,193) | — | — | — | — | — | — | — | — | — | (19,193) | — | |||||||
225,416 | 267,678 | 271,069 | 223,728 | — | — | — | — | — | — | 496,485 | 491,406 | |||||||
45,905 | 45,314 | 5,969 | 4,276 | 109,010 | 101,858 | — | — | — | — | 160,884 | 151,448 | |||||||
11,496 | 12,546 | 18,762 | 22,779 | — | — | — | — | — | — | 30,258 | 35,325 | |||||||
— | 5 | 48 | 48 | — | 975 | — | — | (48) | (1,028) | — | — | |||||||
282,817 | 325,543 | 295,848 | 250,831 | 109,010 | 102,833 | — | — | (48) | (1,028) | 687,627 | 678,179 | |||||||
155,836 | 172,597 | 210,259 | 182,578 | 61,312 | 57,529 | — | — | — | (53) | 427,407 | 412,651 | |||||||
126,981 | 152,946 | 85,589 | 68,253 | 47,698 | 45,304 | — | — | (48) | (975) | 260,220 | 265,528 | |||||||
26,812 | 25,257 | 4,745 | 4,881 | 4,107 | 6,706 | — | — | — | — | 35,664 | 36,844 | |||||||
100,169 | 127,689 | 80,844 | 63,372 | 43,591 | 38,598 | — | — | (48) | (975) | 224,556 | 228,684 | |||||||
272,883 | (g) | 58,796 | 38,699 | 36,910 | 41,219 | 38,018 | 22,573 | 18,172 | (48) | (975) | 375,326 | (g) | 150,921 | |||||
— | — | — | — | — | — | 5,848 | 2,514 | — | — | 5,848 | 2,514 | |||||||
— | — | — | — | 19,144 | — | — | — | — | — | 19,144 | — | |||||||
272,883 | (g) | 58,796 | 38,699 | 36,910 | 60,363 | 38,018 | 28,421 | 20,686 | (48) | (975) | 400,318 | (g) | 153,435 | |||||
(172,714) (g) (114,962) (g)(h) | 68,893 100,428 | 42,145 20,179 (i) | 26,462 16,013 | (16,772) 8,489 | 580 6,718 | (28,421) (24,796) (i) | (20,686) (4,974) (i) | — — | — — | (175,762) (g) (111,090) (g)(h)(i) | 75,249 118,185 (i) | |||||||
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
(a) Includes depreciation and amortization as well as amortization of Accumulation Partners' contracts, customer relationships and technology.
(b) Includes expenses that are not directly attributable to any specific operating segment. Corporate also includes the financial position and operating results of our operations in India.
(c) Includes third party Gross Billings of $170.3 million in the UK and $68.5 million in the US for the three months ended December 31, 2013, compared to third party Gross Billings of $148.4 million in the UK and $67.0 million in the US for the three months ended December 31, 2012. Third party Gross Billings are attributed to a country on the basis of the country where the contractual and management responsibility for the customer resides.
(d) Non-current assets include amounts relating to goodwill, intangible assets and property and equipment.
(e) Includes non-current assets of $463.5 million in the UK and $69.1 million in the US as of December 31, 2013, compared to non- current assets of $418.2 million in the UK and $71.1 million in the US as of December 31, 2012.
(f) The impact of the change in the Breakage estimate in the Aeroplan Program, which occurred in the second quarter of 2013, resulted in a reduction of $19.2 million to revenue from Loyalty Units for the three months ended December 31, 2013.
(g) Includes the impact of the CIBC Payment of $150.0 million and the Card Migration Provision of $50.0 million.
(h) The Change in Future Redemption costs for the three months ended December 31, 2013 includes the unfavourable impact of
$12.9 million resulting from the change in the Breakage estimate in the Aeroplan Program which occurred in the second quarter of 2013.
(i) Adjusted EBITDA includes distributions received or receivable from equity-accounted investments amounting to $5.3 million for the three months ended December 31, 2013, of which $3.6 million relates to PLM and is included in Corporate and $1.7 million relates to i2c and is included in the EMEA region. Adjusted EBITDA for the three months ended December 31, 2012 includes a distribution received from PLM amounting to $15.7 million reflected in Corporate.
(j) A non-GAAP measurement.
(k) 2012 financial information was restated to reflect the retroactive application of the amendments to IAS 19. Refer to the
CHANGES IN ACCOUNTING POLICIES section for additional information.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
OPERATING RESULTS AND PERFORMANCE INDICATORS IN % TERMS
Years Ended December 31, | ||
(as a % of total revenue) | 2013 | 2012(l) |
Total Revenue before change in Breakage estimate | 100.0 (c) | 100.0 |
Cost of rewards and direct costs | (54.8) (d) | (57.8) |
Gross margin before depreciation and amortization (a) | 45.2 (c)(d) | 42.2 |
Operating expenses | (38.2) (d)(e)(f) | (25.2) |
Depreciation and amortization | (1.8) | (1.7) |
Operating income before amortization of Accumulation Partners' contracts, customer relationships and technology | (c)(d)(e) 5.1 (f) | 15.3 |
Years Ended December 31, | |||
(as a % of Gross Billings) | 2013 | 2012(l) | |
Gross Billings | 100.0 | 100.0 | |
Total Revenue before change in Breakage estimate Cost of rewards and direct costs Operating expenses Operating income before amortization of Accumulation Partners' contracts, customer relationships and technology | 100.4 (c) | 100.3 | |
(55.0) (d) | (58.0) | ||
(38.4) (d)(e)(f) | (25.3) | ||
5.2 (c)(d)(e) (f) | 15.3 | ||
Adjusted EBITDA (b) | 6.4 | (d)(g)(h) (i) | 18.0 (i) |
Adjusted Net Earnings (b) | 4.4 | (d)(g)(h) (i)(j) | 12.0 (i) |
Free Cash Flow (b) | (1.3) | (k) | 8.0 |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
(a) Excludes depreciation and amortization as well as amortization of Accumulation Partners' contracts, customer relationships and technology.
(b) A non-GAAP measurement.
(c) Excludes the impact of the change in the Breakage estimate in the Aeroplan Program, which occurred in the second quarter of 2013, and resulted in a reduction to revenue from Loyalty Units of $702.8 million for the year ended December 31, 2013.
(d) Includes a favourable impact of $26.1 million (£16.4 million) resulting from the final judgment of the VAT litigation which occurred in the second quarter of 2013. Of this amount, $74.9 million (£47.0 million) was recorded as a reduction of cost of rewards and $48.8 million (£30.6 million) as an increase to operating expenses.
Prior to the issuance of the final ruling, Aimia had recorded an amount of $2.1 million (£1.4 million) in cost of rewards, representing input tax credits accrued during the period from January 1, 2013 to March 31, 2013.
(e) Includes the impact of the CIBC Payment of $150.0 million and the Card Migration Provision of $50.0 million.
(f) Includes a goodwill impairment charge of $19.1 million recorded during the year ended December 31, 2013 related to the US Proprietary Loyalty CGU.
(g) Adjusted EBITDA and Adjusted Net Earnings include the unfavourable impact to the Change in Future Redemption costs resulting from the change in the Breakage estimate in the Aeroplan Program, which occurred during the second quarter of 2013, and amounted to
$49.9 million for the year ended December 31, 2013. Additionally, Adjusted Net Earnings include income tax recovery of $13.1 million for the year ended December 31, 2013, associated with the impact to the Change in Future Redemption costs previously described.
(h) Adjusted EBITDA and Adjusted Net Earnings include the unfavourable impact of the CIBC Payment of $150.0 million and the Card Migration Provision of $50.0 million. Additionally, Adjusted Net Earnings include income tax recovery of $53.1 million for the year ended December 31, 2013, associated with the impact previously described.
(i) Adjusted EBITDA includes distributions received or receivable from equity-accounted investments amounting to $15.7 million for each of the years ended December 31, 2013 and 2012.
(j) Includes the favourable impact of the reversal in the second quarter of 2013 of previously accrued interest of $17.3 million (£10.8 million) resulting from the final judgment of the VAT litigation.
Prior to the issuance of the final ruling, Aimia had recorded an amount of $1.1 million (£0.7 million) as interest expense during the period from January 1, 2013 to March 31, 2013.
(k) Includes the CIBC Payment of $150.0 million made on December 27, 2013 upon the closing of the asset purchase agreement and the related harmonized sales tax of $22.5 million.
(l) 2012 financial information was restated to reflect the retroactive application of the amendments to IAS 19. Refer to the CHANGES IN ACCOUNTING POLICIES section for additional information.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2013 COMPARED TO YEAR ENDED DECEMBER 31, 2012
CONSOLIDATED OPERATING RESULTS
A discussion of Aimia's consolidated operating results follows. For a detailed discussion of the segmented operating results, refer to the section entitled Segmented Operating Results.
Gross Billings generated for the year ended December 31, 2013 amounted to $2,366.4 million compared to
$2,243.0 million for the year ended December 31, 2012, representing an increase of $123.4 million or 5.5%, including a $22.4 million impact of currency fluctuation recognized on the translation of foreign operations. The remaining variance is mostly explained by the performance of the Nectar, Air Miles Middle East and Aeroplan programs, and additional Gross Billings in the US & APAC region from the inclusion of a full year activity in 2013 for EIM.
Aimia's ability to generate Gross Billings is a function of the underlying behaviour of the Accumulation Partners' respective customer base and their spending patterns, and proprietary and analytics and insights clients, which are in turn affected by the general economic conditions present in the countries in which the loyalty programs are operated and the services are rendered.
Total Revenue generated for the year ended December 31, 2013 amounted to $1,673.5 million compared to
$2,248.9 million for the year ended December 31, 2012, representing a decrease of $575.4 million. Excluding the impact of $702.8 million resulting from the change in the Breakage estimate in the Aeroplan Program, revised from 18% to 11% in the second quarter of 2013, total revenue for the year ended December 31, 2013 amounted to
$2,376.4 million, representing an increase of $127.5 million or 5.7%, including a $31.1 million impact of currency fluctuation recognized on the translation of foreign operations. The remaining variance is mostly driven by higher revenue from Loyalty Units resulting from higher redemptions in the Nectar and Air Miles Middle East programs as well as by higher revenue from proprietary loyalty services primarily attributable to the US & APAC segment, offset in part by a reduction in other revenue explained by the fact that a large portion of the ISS UK revenue is reported within the i2c joint venture as of the first quarter of 2013.
Given the large volume of Loyalty Units issued and redeemed, slight fluctuations in the selling price of a Loyalty Unit will have a significant impact on results.
On a consolidated basis, the impact of a 1% change to the average selling price of a Loyalty Unit would have resulted in a fluctuation in revenue and earnings before income taxes of $16.4 million for the year ended December 31, 2013.
Cost of Rewards and Direct Costs amounted to $1,301.8 million for the year ended December 31, 2013 compared to $1,300.9 million for the year ended December 31, 2012, representing an increase of $0.9 million or 0.1%.
Excluding the impact resulting from the final judgment of the VAT litigation, cost of rewards and direct costs amounted to $1,374.6 million for the year ended December 31, 2013, an increase of $73.7 million or 5.7%, including a $19.7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
million impact of currency fluctuation recognized on the translation of foreign operations. The remaining variance is mainly explained by increased redemption activity in the Nectar and Air Miles Middle East programs as well as by higher direct costs driven by an increase in proprietary loyalty services in the US & APAC and Canada regions, offset in part by lower cost of rewards in the Aeroplan Program.
Given the large volume of Loyalty Units issued and redeemed, slight fluctuations in the Average Cost of Rewards per Loyalty Unit will have a significant impact on results.
On a consolidated basis, the impact of a 1% change to the Average Cost of Rewards per Loyalty Unit would have resulted in a fluctuation in cost of sales and earnings before income taxes of $10.6 million for the year ended December 31, 2013.
Gross Margin before Depreciation and Amortization, excluding the impact of the change in Breakage estimate in the Aeroplan Program and the impact resulting from the final judgment of the VAT litigation, remained stable compared to the prior year, and represented 42.2% of total revenue for the year ended December 31, 2013.
Operating Expenses amounted to $908.9 million for the year ended December 31, 2013 and included the following:
• the CIBC Payment of $150.0 million and the Card Migration Provision of $50.0 million in the Aeroplan Program;
• the impact of the final judgment of the VAT litigation in the current period of $48.8 million, including an amount of $43.2 million (£27.1 million) relating to the contingent consideration payable to the former shareholders of Aimia EMEA Limited; and
• the goodwill impairment charge of $19.1 million related to the Proprietary Loyalty cash-generating unit in the US region (the "US Proprietary Loyalty CGU").
Excluding the above mentioned items, operating expenses amounted to $641.0 million for the year ended
December 31, 2013 compared to $566.4 million for the year ended December 31, 2012, representing an increase of
$74.6 million or 13.2%, including a $6.7 million impact of currency fluctuation recognized on the translation of foreign operations. This remaining variance is mainly explained by additional operating expenses of $22.5 million resulting from the inclusion of a full year activity in 2013 for EIM in the US & APAC region, higher marketing and promotional fees of $23.5 million mostly associated with program enhancements in the Aeroplan Program, professional fees of
$10.3 million associated with the negotiation of the new financial card agreements in Canada and higher corporate expenses.
Depreciation and Amortization amounted to $43.5 million and $38.4 million for the years ended December 31, 2013 and 2012, respectively. The increase is mostly driven by new technology initiatives in the Canada and EMEA regions.
Amortization of Accumulation Partners' Contracts, Customer Relationships and Technology amounted to
$84.4 million for the year ended December 31, 2013 compared to $87.2 million for the year ended December 31, 2012.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Operating Income (Loss), excluding the amortization of Accumulation Partners' contracts, customer relationships and technology, referred to above, amounted to $(580.6) million for the year ended December 31, 2013 compared to
$343.2 million for the year ended December 31, 2012, representing a decrease of $923.8 million which is explained by the unfavourable impact of $702.8 million related to the change in the Breakage estimate in the Aeroplan Program, the unfavourable impact of the CIBC Payment of $150.0 million and the Card Migration Provision of $50.0 million in the Aeroplan Program, the goodwill impairment charge of $19.1 million related to the US Proprietary Loyalty CGU and the favourable impact of $24.0 million related to the final judgment of the VAT litigation, with the remainder being a direct result of the factors described above.
Net Financing Costs for the year ended December 31, 2013 consist primarily of interest revenue of $13.1 million earned on cash and cash equivalents, short-term investments on deposit and long-term investments in bonds, the reversal of previously accrued interest payable relating to the final judgment of the VAT litigation of $16.2 million, net of interest expense accrued of $1.1 million during the current period, and a fair value gain of $4.2 million relating to the Air Canada warrants; offset by interest expense on long-term debt of $51.2 million.
Net Earnings (Loss) for the years ended December 31, 2013 and 2012 include the effect of $95.2 million and
$(54.4) million of current income tax recovery (expense), respectively, as well as $101.8 million and $(1.2) million of deferred income tax recovery (expense), respectively. Net earnings (loss) for the years ended December 31, 2013 and 2012 also include the share of net earnings (loss) of equity-accounted investments of $(6.6) million and $2.9 million, respectively.
Excluding the impact of income tax recoveries attributable to the change in Breakage estimate in the Aeroplan Program of $190.2 million, and the impact relating to the CIBC Payment and the Card Migration Provision totaling
$53.1 million, current income tax recovery (expense) and deferred income tax recovery (expense) for the year ended December 31, 2013 amounted to $(55.6) million and $9.3 million, respectively.
Current income taxes are primarily attributable to our Canadian operations. Consistent with the prior year, deferred income taxes related to our international tax structures and foreign operations have not been recognized.
Consequently, the deferred income tax recovery recorded during the current period, which is primarily related to the Canadian operations, was not increased by deferred income taxes in our foreign operations, resulting in a distorted effective tax rate which is not meaningful or comparative.
Adjusted EBITDA, amounted to $150.5 million or 6.4% (as a % of Gross Billings) for the year ended December 31, 2013. Adjusted EBITDA was $403.1 million or 18.0% (as a % of Gross Billings) for the year ended December 31, 2012.
Adjusted Net Earnings amounted to $103.1 million or 4.4% (as a % of Gross Billings) for the year ended December 31, 2013. Adjusted Net Earnings for the year ended December 31, 2012 amounted to $268.8 million or 12.0% (as a % of Gross Billings). The effective tax rate has been impacted as described under Net Earnings.
A change in Breakage revenue does not affect Adjusted EBITDA and Adjusted Net Earnings. However, a change to the Breakage estimate affects the Change in Future Redemption Costs. An adjustment to the Future Redemption
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Costs is applied as if the change to the Breakage rate had been in effect from the inception of the program, and therefore the Change in Future Redemption Costs only reflects the impact of the Breakage adjustment related to the current period. The impact of the change to the Breakage estimate on the Change in Future Redemption Costs for the year ended December 31, 2013 was $49.9 million. Adjusted EBITDA for the year ended December 31, 2013 also includes the unfavourable impact of the CIBC Payment and the Card Migration Provision totaling $200.0 million.
Adjusted Net Earnings for the year ended December 31, 2013 also includes tax recoveries of $13.1 million attributable to the impact of the change to the Breakage estimate on the Change in Future Redemption Costs and
$53.1 million attributable to the impact of the CIBC Payment and the Card Migration Provision. Additionally, Adjusted EBITDA and Adjusted Net Earnings for the year ended December 31, 2013 include the favourable impact resulting from the final judgment of the VAT litigation of $24.0 million. Adjusted Net Earnings for the year ended December 31, 2013 also includes the favourable net impact of the reversal of previously accrued interest of $16.2 million in relation to the VAT litigation. Excluding the items listed above, Adjusted EBITDA and Adjusted Net Earnings for the year ended December 31, 2013 amounted to $376.4 million or 15.9% (as a % of Gross Billings) and $246.6 million or 10.4% (as a % of Gross Billings), respectively.
Adjusted EBITDA and Adjusted Net Earnings exclude impairment charges as described under the PERFORMANCE INDICATORS section.
Free Cash Flow for the year ended December 31, 2013 amounted to $(31.3) million compared to $179.5 million for the year ended December 31, 2012. Excluding the impact of the CIBC Payment of $150.0 million and related harmonized sales tax of $22.5 million during the fourth quarter of 2013, Free Cash Flow for the year ended December 31, 2013 amounted to $141.2 million. The final judgment of the VAT litigation had no impact on cash from operating activities, with the exception of the provision payable to certain employees amounting to $7.2 million (£4.5 million) which was paid during the third quarter of 2013, accordingly the explanations provided below exclude any non-cash related impact. The unfavourable variance of $38.3 million is mainly the result of:
• a decrease in cash from operating activities of $34.9 million, explained primarily by changes in the net operating assets. Additionally, the decrease is driven by higher cost of rewards and direct costs of $73.7 million, higher operating expenses of $74.9 million and higher net interest paid of $3.1 million, offset in part by an increase in Gross Billings of $123.4 million and lower income taxes paid of $32.9 million;
• lower capital expenditures of approximately $3.6 million; and
• increased dividends paid on common shares of $6.9 million, explained primarily by the increase in the quarterly dividend rate paid per share.
Adjusted EBITDA, Adjusted Net Earnings, and Free Cash Flow are non-GAAP measures. Please refer to the
PERFORMANCE INDICATORS section for additional information on these measures.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
SEGMENTED OPERATING RESULTS
This section provides a discussion of each of the segment's operating results.
CANADA
Gross Billings generated for the year ended December 31, 2013 amounted to $1,300.1 million compared to
$1,292.6 million for the year ended December 31, 2012, representing an increase of $7.5 million or 0.6%. The different Gross Billings categories were affected in the following manner:
Gross Billings from the Sale of Loyalty Units generated for the year ended December 31, 2013 amounted to
$1,085.8 million compared to $1,079.8 million for the year ended December 31, 2012, representing an increase of
$6.0 million or 0.6%. The variance is mostly explained by an increase in the financial sector driven by higher card acquisitions and partner program conversions, offset by the lower average consumer spend per active credit card. Additionally, the variance reflects an increase in the retail and non-air travel sectors due to promotional activity and higher partner performance all of which was partly offset by a decrease in accumulation at Air Canada relating to changes in the accumulation grid.
Aeroplan Miles issued during the year ended December 31, 2013 decreased by 0.6% in comparison to the year ended December 31, 2012.
Other Gross Billings, consisting of proprietary loyalty service fees and other revenues, amounted to $214.3 million for the year ended December 31, 2013 compared to $212.8 million for the year ended December 31, 2012, representing an increase of $1.5 million or 0.7%, mainly explained by higher Gross Billings from proprietary loyalty services due to a net increase in new business, offset in part by the compensation amount of $5.5 million received from Air Canada in the comparable period in relation to the transfer of all pension assets and obligations related to pension benefits accrued by contact centre employees prior to 2009 transferred to Aeroplan in 2009. Please refer to the Total Revenue section for details explaining the remaining variance.
Redemption Activity - Under the Aeroplan Program, Total Miles redeemed for the year ended December 31, 2013 amounted to 73.0 billion compared to 74.2 billion for the year ended December 31, 2012, a decrease of 1.2 billion or 1.6%, driven mostly by a decrease in air redemptions, in anticipation of enhanced travel reward offerings under the Distinction program commencing on January 1, 2014.
Total Revenue amounted to $607.3 million for the year ended December 31, 2013 compared to $1,317.4 million for the year ended December 31, 2012, a decrease of $710.1 million. Excluding the impact of $702.8 million resulting from the change in the Breakage estimate in the Aeroplan Program, revised from 18% to 11% in the second quarter of 2013, total revenue for the year ended December 31, 2013 amounted to $1,310.2 million, representing a decrease of $7.2 million or 0.6%. The decrease is mostly explained by:
• a decrease of $13.3 million in revenue from Loyalty Units resulting primarily from a decrease in redemption volumes; offset in part by
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
• an increase of $8.3 million in revenue from proprietary loyalty services primarily resulting from a net increase in new business.
Cost of Rewards and Direct Costs amounted to $689.2 million for the year ended December 31, 2013 compared to
$693.0 million for the year ended December 31, 2012, representing a decrease of $3.8 million or 0.6%. This change is mainly attributable to the following factors:
• a lower redemption cost per Aeroplan Mile redeemed of $13.3 million due to redemption mix; and
• a lower volume of air and non-air redemptions for the period, representing $9.6 million; offset in part by
• an increase in proprietary loyalty services direct costs of approximately $19.1 million due mostly to higher cost volumes.
Gross Margin before Depreciation and Amortization, excluding the impact of the change in Breakage estimate in the Aeroplan Program, remained stable compared to the prior year, and represented 47.4% of total revenue for the year ended December 31, 2013.
Operating Expenses amounted to $438.8 million for the year ended December 31, 2013 compared to $224.6 million for the year ended December 31, 2012, representing an increase of $214.2 million. Excluding the impact of the CIBC Payment of $150.0 million and the Card Migration Provision of $50.0 million, operating expenses amounted to $238.8 million for the year ended December 31, 2013, representing an increase of $14.2 million or 6.3% compared to the prior year. The increase is explained by higher marketing and promotional expenses of $23.5 million mostly related to program enhancements and professional fees of $1.7 million related to the negotiation of the new financial card agreements in the Aeroplan Program, offset in part by ongoing synergies and lower information technology costs.
Depreciation and Amortization, including amortization of Accumulation Partners' contracts, customer relationships and technology, amounted to $98.8 million and $95.2 million for the years ended December 31, 2013 and 2012, respectively.
Operating Income (Loss) amounted to $(619.4) million for the year ended December 31, 2013 compared to $304.6 million for the year ended December 31, 2012, representing a decrease of $924.0 million. Excluding the impact of the change in the Breakage estimate in the Aeroplan Program of $702.8 million and the impact of the CIBC Payment of
$150.0 million and the Card Migration Provision of $50.0 million, operating income amounted to $283.4 million for the year ended December 31, 2013, a decrease of $21.2 million or 7.0% in comparison to the prior year, a direct result of the factors described above.
Adjusted EBITDA amounted to $137.7 million or 10.6% (as a % of Gross Billings) for the year ended December 31, 2013. Adjusted EBITDA was $396.6 million or 30.7% (as a % of Gross Billings) for the year ended December 31, 2012.
The impact of the change to the Breakage estimate on the Change in Future Redemption Costs for the year ended December 31, 2013 was $49.9 million. Additionally, Adjusted EBITDA also includes the impact of the CIBC Payment of $150.0 million and the Card Migration Provision of $50.0 million. Excluding these items, Adjusted EBITDA for the year ended December 31, 2013 amounted to $387.6 million or 29.8% (as a % of Gross Billings).
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Adjusted EBITDA is a non-GAAP measure. Please refer to the PERFORMANCE INDICATORS section for additional information on this measure.
EMEA
Gross Billings generated for the year ended December 31, 2013 amounted to $704.1 million compared to $639.9 million for the year ended December 31, 2012, representing an increase of $64.2 million or 10.0%, including a $17.0 million impact of currency fluctuation recognized on the translation of foreign operations.
The different Gross Billings categories were affected in the following manner:
Gross Billings from the Sale of Loyalty Units generated for the year ended December 31, 2013 amounted to
$625.6 million compared to $548.6 million for the year ended December 31, 2012, representing an increase of $77.0 million or 14.0%, including a $14.9 million impact of currency fluctuation recognized on the translation of foreign operations. The operational variance of $62.1 million is mostly explained by a $51.3 million increase in Gross Billings from the sale of Loyalty Units in the Nectar Program, driven by the grocery sector and new Accumulation Partner billings, and from the benefit of the new contract terms initiated with the program's main Accumulation Partner in the second quarter of 2012. Additionally, Gross Billings from the sale of Loyalty Units in the Air Miles Middle East program increased by $20.8 million also due to new contract terms, including funding provided by the program's main Accumulation Partner to support enhanced member engagement. Gross Billings from the sale of Loyalty Units in the Nectar Italia Program decreased by $10.0 million compared to the prior year mostly due to a decrease in promotional bonus point activity during the current year and difficult economic conditions.
Nectar UK Points issued during the year ended December 31, 2013 increased by 13.5% compared to the prior year driven by higher issuance in the grocery sector, as well as growth from new Accumulation Partners added in the fourth quarter of 2012.
Air Miles Middle East Loyalty Units issued during the year ended December 31, 2013 increased by 19.4% in comparison to the prior year, mostly due to program growth due to new contract terms with the program's main Accumulation Partner and increased member engagement.
Nectar Italia Points issued during the year ended December 31, 2013 decreased by 14.7% in comparison to the prior year, mostly due to a decrease in promotional bonus point activity during the current year and difficult economic conditions.
Other Gross Billings, consisting of proprietary loyalty service fees and other revenues, amounted to $78.6 million for the year ended December 31, 2013 compared to $91.2 million for the year ended December 31, 2012, representing a decrease of $12.6 million or 13.9%, net of a $2.1 million impact of currency fluctuation recognized on the translation of foreign operations. The operational decrease of $14.7 million is primarily explained by the fact that a large portion of the ISS UK Gross Billings is reported within the i2c joint venture as of the first quarter of 2013. The decrease was partly offset by growth in Gross Billings from ISS international activities, proprietary loyalty and analytics and insights services.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Redemption Activity - Redemption activity in the Nectar Program increased by 12.4% compared to the prior year, mainly driven by an increase in the number of Nectar Points in circulation.
Total points redeemed in the Nectar Italia Program for the year ended December 31, 2013 decreased by 7.9% in comparison to the prior year.
Redemption activity in the Air Miles Middle East program increased significantly due to promotional activity to enhance member engagement as part of the new contract terms.
Total Revenue amounted to $704.1 million for the year ended December 31, 2013 compared to $619.5 million for the year ended December 31, 2012, representing an increase of $84.6 million or 13.7%, and is explained by the following:
• an increase of $96.9 million in revenue from Loyalty Units, including an impact of $23.7 million of currency fluctuation recognized on the translation of foreign operations. The operational variance of $73.2 million is mostly explained by increased redemptions in the Nectar and Air Miles Middle East programs and an increase in the average cumulative selling price of an Air Miles Middle East Loyalty Unit as a result of the new contract terms, including funding provided by the program's main Accumulation Partner to support enhanced member engagement; and
• an increase of $3.3 million in revenue from proprietary loyalty services; offset in part by
• a decrease of $15.5 million in other revenue, net of a $1.7 million impact of currency fluctuation recognized on the translation of foreign operations. The operational variance of $17.2 million is driven by the fact that a large portion of the ISS UK revenue is reported within the i2C joint venture as of the first quarter of 2013. The decrease was partly offset by growth in revenue from ISS's international activities and analytics and insights services.
Cost of Rewards and Direct Costs amounted to $410.9 million for the year ended December 31, 2013 compared to
$438.6 million for the year ended December 31, 2012, representing a decrease of $27.7 million or 6.3% . Excluding the impact resulting from the final judgment of the VAT litigation, cost of rewards and direct costs amounted to $483.7 million for the year ended December 31, 2013, an increase of $45.1 million or 10.3% in comparison to the prior year, including a $17.7 million impact of currency fluctuation recognized on the translation of foreign operations. The operational variance of $27.4 million is mainly attributable to the following factors:
• an increase driven by redemption activity in the Nectar Program, representing $31.4 million; and
• an increase in redemption activity and a higher redemption cost per Loyalty Unit in the Air Miles Middle East program driven by promotional activity and the new contract terms with the program's main Accumulation Partner, representing $13.0 million; offset in part by
• a decrease in direct costs of $13.4 million resulting mostly from the transfer of the ISS UK business into the i2c joint venture; and
• a reduction in redemption activity in the Nectar Italia Program, representing $3.6 million.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Gross Margin before Depreciation and Amortization increased by 12.4 percentage-points, a direct result of the factors described above, and represented 41.6% of total revenue for the year ended December 31, 2013. Excluding the impact resulting from the final judgment of the VAT litigation in the current year, gross margin before depreciation and amortization increased by 2.1 percentage-points, and represented 31.3% of total revenue for the year ended December 31, 2013.
Operating Expenses amounted to $195.3 million for the year ended December 31, 2013 compared to $142.0 million for year ended December 31, 2012, representing an increase of $53.3 million or 37.5%. Excluding the impact resulting from the final judgment of the VAT litigation in the current year of $48.8 million, operating expenses amounted to $146.5 million for the year ended December 31, 2013, representing an increase of $4.5 million or 3.2%, including a $3.2 million impact of currency fluctuation recognized on the translation of foreign operations. The operational variance of $1.3 million is mainly explained by an underlying growth of the EMEA region, offset by a reduction in costs associated with the transfer of the ISS UK business into the i2C joint venture.
Depreciation and Amortization, including amortization of Accumulation Partners' contracts, customer relationships and technology, amounted to $16.7 million and $17.0 million for the years ended December 31, 2013 and 2012, respectively.
Operating Income (Loss) amounted to $81.3 million for the year ended December 31, 2013 compared to $21.8 million for the year ended December 31, 2012, representing an improvement of $59.5 million, a direct result of the factors described above. Excluding the impact resulting from the final judgment of the VAT litigation, operating income amounted to $57.3 million for the year ended December 31, 2013.
Adjusted EBITDA amounted to $94.0 million or 13.3% (as a % of Gross Billings) for the year ended December 31, 2013, and includes a distribution receivable from i2c of $1.7 million. Excluding the favourable impact resulting from the final judgment of the VAT litigation of $24.0 million (£15.0 million), Adjusted EBITDA amounted to $70.0 million or 9.9% (as a % of Gross Billings) for the year ended December 31, 2013. Adjusted EBITDA was $49.2 million or 7.7% (as a % of Gross Billings) for the year ended December 31, 2012.
Adjusted EBITDA is a non-GAAP measure. Please refer to the PERFORMANCE INDICATORS section for additional information on this measure.
US & APAC
Gross Billings, consisting of proprietary loyalty service fees, amounted to $362.7 million for the year ended December 31, 2013 compared to $315.2 million for the year ended December 31, 2012, representing an increase of
$47.5 million or 15.1%, including a $5.4 million impact of currency fluctuation recognized on the translation of foreign operations. The operational variance of $42.1 million is primarily explained by an increase in Gross Billings from EIM of $32.2 million due to the inclusion of a full year activity in 2013, higher reward fulfillment volume and a net increase in new business. The variance is partially offset by the exit of the Qantas business representing $7.2 million in the first quarter of 2012.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Total Revenue amounted to $362.5 million for the year ended December 31, 2013 compared to $316.6 million for the year ended December 31, 2012, representing an increase of $45.9 million or 14.5%, including a $5.2 million impact of currency fluctuation recognized on the translation of foreign operations. The operational variance of $40.7 million is primarily explained by an increase in revenue from EIM of $35.9 million due to the inclusion of a full year activity in 2013, higher reward fulfillment volume and a net increase in new business. The variance is partially offset by the exit of the Qantas business representing $7.2 million in the first quarter of 2012.
Cost of Rewards and Direct Costs amounted to $201.7 million for the year ended December 31, 2013 compared to
$169.6 million for the year ended December 31, 2012, representing an increase of $32.1 million or 18.9%, including a
$1.9 million impact of currency fluctuation recognized on the translation of foreign operations. The operational variance of $30.2 million is primarily due to an increase in direct costs from EIM due to the inclusion of a full year activity in 2013, higher reward fulfillment volume and a net increase in new business, partially offset by the impact of the Qantas exit.
Gross Margin before Depreciation and Amortization decreased by 2.0 percentage-points, a direct result of the factors described above, and represented 44.4% of total revenue for the year ended December 31, 2013.
Operating Expenses amounted to $183.9 million for the year ended December 31, 2013 compared to $138.3 million for the year ended December 31, 2012, representing an increase of $45.6 million or 33.0%. Excluding the goodwill impairment charge recorded during the fourth quarter of 2013 of $19.1 million related to the US Proprietary Loyalty CGU, operating expenses amounted to $164.8 million for the year ended December 31, 2013, representing an increase of $26.5 million or 19.2%, including a $3.4 million impact of currency fluctuation recognized on the translation of foreign operations. The operational variance of $23.1 million is driven mostly by an increase in operating expenses from EIM of $22.5 million, including incremental deferred compensation and integration expenses, due to the inclusion of a full year activity in 2013, offset in part by $1.8 million of transaction costs incurred during the prior year related to the acquisition of EIM.
Depreciation and Amortization, including amortization of Accumulation Partners' contracts, customer relationships and technology, amounted to $12.5 million and $13.5 million for the year ended December 31, 2013 and 2012, respectively. The decrease is mainly explained by the acceleration of the amortization of certain intangible assets during the fourth quarter of 2012, offset in part by an increase in depreciation and amortization expenses from EIM due to the inclusion of a full year activity in 2013 and by the inclusion of depreciation and amortization expenses from Smart Button.
Operating Income (Loss) amounted to $(35.6) million for the year ended December 31, 2013 compared to $(4.7) million for the year ended December 31, 2012, representing a decline of $30.9 million, mostly explained by the goodwill impairment charge recorded during the fourth quarter of 2013 of $19.1 million related to the US Proprietary Loyalty CGU, with the remainder being a direct result of the factors described above.
Adjusted EBITDA amounted to $(3.8) million or (1.0)% (as a % of Gross Billings) for the year ended December 31, 2013. Adjusted EBITDA was $7.4 million or 2.3% (as a % of Gross Billings) for the year ended December 31, 2012.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Adjusted EBITDA is a non-GAAP measure. Please refer to the PERFORMANCE INDICATORS section for additional information on this measure.
CORPORATE
Operating Expenses amounted to $91.4 million for the year ended December 31, 2013 compared to $65.8 million for the year ended December 31, 2012, representing an increase of $25.6 million or 38.9%. The increase is mainly attributable to higher costs of $7.0 million to support growth in the global businesses, including consulting and business development initiatives, and professional fees of $8.6 million related to the negotiation of the new financial card agreements in the Aeroplan program. In addition, the variance is due to higher share-based compensation expense of $6.9 million explained by an increase in the share price and share-based awards granted.
Adjusted EBITDA amounted to $(77.4) million for the year ended December 31, 2013 compared to $(50.1) million for the year ended December 31, 2012. Adjusted EBITDA for the years ended December 31, 2013 and 2012 included distributions received from PLM of $14.0 million and $15.7 million, respectively.
Adjusted EBITDA is a non-GAAP measure. Please refer to the PERFORMANCE INDICATORS section for additional information on this measure.
QUARTER ENDED DECEMBER 31, 2013 COMPARED TO QUARTER ENDED DECEMBER 31, 2012
CONSOLIDATED OPERATING RESULTS
A discussion of Aimia's consolidated operating results follows. For a detailed discussion of the segmented operating results, refer to the section entitled Segmented Operating Results.
Gross Billings generated for the three months ended December 31, 2013 amounted to $658.1 million compared to
$615.1 million for the three months ended December 31, 2012, representing an increase of $43.0 million or 7.0%, including a $16.7 million impact of currency fluctuation recognized on the translation of foreign operations. The remaining variance is mostly explained by the performance of the Nectar and Aeroplan programs as well as the increase in Gross Billings in the US & APAC region.
Aimia's ability to generate Gross Billings is a function of the underlying behaviour of the Accumulation Partners' respective customer base and their spending patterns, and proprietary and analytics and insights clients, which are in turn affected by the general economic conditions present in the countries in which the loyalty programs are operated and the services are rendered.
Total Revenue generated for the three months ended December 31, 2013 amounted to $687.6 million compared to
$678.2 million for the three months ended December 31, 2012, representing an increase of $9.4 million or 1.4%. Excluding the impact of $19.2 million resulting from the change in the Breakage estimate in the Aeroplan Program, revised from 18% to 11% in the second quarter of 2013, total revenue for the three months ended December 31,
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
2013 amounted to $706.8 million, representing an increase of $28.6 million or 4.2%, and included a $25.5 million impact of currency fluctuation recognized on the translation of foreign operations. The remaining variance is mostly driven by higher revenue from Loyalty Units in the EMEA region driven by increased redemption activity in the Nectar Program, partly offset by lower revenue from Loyalty Units in the Canada region driven by lower redemption activity in the Aeroplan Program.
Given the large volume of Loyalty Units issued and redeemed, slight fluctuations in the selling price of a Loyalty Unit will have a significant impact on results.
On a consolidated basis, the impact of a 1% change to the average selling price of a Loyalty Unit would have resulted in a fluctuation in revenue and earnings before income taxes of $5.0 million for the three months ended
December 31, 2013.
Cost of Rewards and Direct Costs amounted to $427.4 million for the three months ended December 31, 2013 compared to $412.7 million for the three months ended December 31, 2012, representing an increase of $14.7 million or 3.6%. The variance is explained by a $17.1 million unfavourable impact of currency fluctuation recognized on the translation of foreign operations and by higher redemptions in the Nectar Program partially offset by lower cost of rewards in the Canada region.
Given the large volume of Loyalty Units issued and redeemed, slight fluctuations in the Average Cost of Rewards per Loyalty Unit will have a significant impact on results.
On a consolidated basis, the impact of a 1% change to the Average Cost of Rewards per Loyalty Unit would have resulted in a fluctuation in cost of sales and earnings before income taxes of $3.3 million for the three months ended December 31, 2013.
Gross Margin before Depreciation and Amortization, excluding the impact of the change in Breakage estimate in the Aeroplan Program, increased by 0.3 percentage-point, a direct result of the factors described above, and represented 39.5% of total revenue for the three month period ended December 31, 2013.
Operating Expenses amounted to $400.3 million for the three months ended December 31, 2013 and included the following:
• the CIBC Payment of $150.0 million and the Card Migration Provision of $50.0 million in the Aeroplan Program; and
• the goodwill impairment charge of $19.1 million related to the US Proprietary Loyalty CGU.
Excluding the above mentioned items, operating expenses amounted to $181.2 million compared to $153.4 million for the same period in 2012, representing an increase of $27.8 million or 18.1%, including a $4.3 million impact of currency fluctuation recognized on the translation of foreign operations. The remaining variance is mainly explained by higher marketing and promotional fees of $14.7 million mostly associated with program enhancements in the Aeroplan Program, professional fees of $4.7 million associated with the negotiation of the new financial card agreements and other corporate expenses.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Depreciation and Amortization amounted to $11.8 million and $12.0 million for the three months ended December 31, 2013 and 2012, respectively.
Amortization of Accumulation Partners' Contracts, Customer Relationships and Technology amounted to
$23.9 million for the three months ended December 31, 2013 compared to $24.8 million for the same period in 2012.
Operating Income (Loss), excluding the amortization of Accumulation Partners' contracts, customer relationships and technology, referred to above, amounted to $(151.9) million for the three months ended December 31, 2013 compared to $100.1 million for the three months ended December 31, 2012, representing a decrease of $252.0 million. The variance is explained mostly by the unfavourable impact of the CIBC Payment of $150.0 million and the Card Migration Provision of $50.0 million in the Aeroplan Program, the unfavourable impact of $19.2 million related to the change in the Breakage estimate in the Aeroplan Program and the goodwill impairment charge of $19.1 million related to the US Proprietary Loyalty CGU, with the remainder being a direct result of the factors described above.
Net Financing Costs for the three months ended December 31, 2013 consist primarily of interest revenue of
$3.2 million earned on cash and cash equivalents, short-term investments on deposit and long-term investments in bonds, and a fair value gain of $1.8 million relating to the Air Canada warrants; offset by interest expense on long- term debt of $12.9 million.
Net Earnings for the three months ended December 31, 2013 and 2012 include the effect of $2.2 million and $13.1 million of current income tax expenses, respectively, as well as $58.9 million and $5.3 million of deferred income tax recoveries, respectively. Net earnings (loss) for the three months ended December 31, 2013 and 2012 also include the share of net earnings (loss) of equity-accounted investments of $1.5 million and $(0.4) million, respectively.
Excluding the impact of income tax recoveries attributable to the CIBC Payment and the Card Migration Provision totaling $53.1 million, and the impact related to the change in Breakage estimate in the Aeroplan Program of $5.0 million, deferred income tax recovery for the three months ended December 31, 2013 amounted to $0.8 million.
Current income taxes are primarily attributable to our Canadian operations. Consistent with the prior year, deferred income taxes related to our international tax structures and foreign operations have not been recognized.
Consequently, the deferred income tax recovery recorded during the current period, which is primarily related to the Canadian operations, was not increased by deferred income taxes in our foreign operations, resulting in a distorted effective tax rate which is not meaningful or comparative.
Adjusted EBITDA amounted to $(111.1) million or (16.9)% (as a % of Gross Billings) for the three months ended December 31, 2013, and includes distributions received or receivable from equity-accounted investments of $5.3 million. Adjusted EBITDA was $118.2 million or 19.2% (as a % of Gross Billings) for the same period in 2012, and includes distributions received from equity-accounted investments of $15.7 million.
Adjusted Net Earnings amounted to $(83.4) million or (12.7)% (as a % of Gross Billings) for the three months ended December 31, 2013, and includes distributions received or receivable from equity-accounted investments of $5.3 million. Adjusted Net Earnings for the three months ended December 31, 2012 amounted to $85.9 million or 14.0%
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
(as a % of Gross Billings), and includes distributions received from equity-accounted investments of $15.7 million. The effective tax rate has been impacted as described under Net Earnings.
The impact of the change to the Breakage estimate on the Change in Future Redemption Costs for the three months ended December 31, 2013 was $12.9 million. Adjusted Net Earnings for the three months ended December 31, 2013 also includes an income tax recovery of $3.4 million attributable to the impact of the change to the Breakage estimate on the Change in Future Redemption Costs.
Adjusted EBITDA for the year ended December 31, 2013 also includes the unfavourable impact of the CIBC Payment and the Card Migration Provision totaling $200.0 million. Adjusted Net Earnings for the three months ended December 31, 2013 also includes an income tax recovery of $53.1 million attributable to the impact of the CIBC Payment and the Card Migration Provision.
Excluding the impact of the items listed above, Adjusted EBITDA and Adjusted Net Earnings for the three months ended December 31, 2013 amounted to $101.8 million or 15.5% (as a % of Gross Billings) and $73.0 million or 11.1% (as a % of Gross Billings), respectively.
Adjusted EBITDA and Adjusted Net Earnings exclude impairment charges as described under the PERFORMANCE INDICATORS section.
Free Cash Flow for the three months ended December 31, 2013, amounted to $(84.3) million compared to $46.7 million for the three months ended December 31, 2012. Excluding the impact of the CIBC Payment of $150.0 million and related harmonized sales tax of $22.5 million during the fourth quarter of 2013, Free Cash Flow for the three months ended December 31, 2013 amounted to $88.2 million. The variance of $41.5 million is mainly the result of:
• an increase in cash from operating activities of $41.7 million, explained primarily by changes in the net operating assets. Additionally, the increase is also driven by an increase in Gross Billings of $43.0 million and lower income taxes paid of $12.5 million, offset in part by higher operating expenses of $24.4 million, higher cost of rewards and direct costs of $14.7 million and by lower distributions received from PLM of
$12.1 million;
• lower capital expenditures of approximately $1.6 million; and
• increased dividends paid on common shares of $1.8 million, explained primarily by the increase in the quarterly dividend rate paid from $0.160 to $0.170 per share.
Adjusted EBITDA, Adjusted Net Earnings, and Free Cash Flow are non-GAAP measures. Please refer to the
PERFORMANCE INDICATORS section for additional information on these measures.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
SEGMENTED OPERATING RESULTS
This section provides a discussion of each of the segment's operating results.
CANADA
Gross Billings generated for the three months ended December 31, 2013 amounted to $347.0 million compared to
$336.2 million for the three months ended December 31, 2012, representing an increase of $10.8 million or 3.2%. The different Gross Billings categories were affected in the following manner:
Gross Billings from the Sale of Loyalty Units generated for the three months ended December 31, 2013 amounted to $289.4 million compared to $278.8 million for the three months ended December 31, 2012, representing an increase of $10.6 million or 3.8%. The variance is mainly explained by an increase in the financial sector driven by higher partner program conversions and higher card acquisitions, and an increase in the non-air travel sector resulting from higher promotional activity.
Aeroplan Miles issued during the three month period ended December 31, 2013 increased by 2.1% in comparison to the three month period ended December 31, 2012.
Other Gross Billings, consisting of proprietary loyalty service fees and other revenues, amounted to $57.7 million for the three months ended December 31, 2013 compared to $57.5 million for the three months ended December 31, 2012, representing an increase of $0.2 million or 0.4%. Please refer to the Total Revenue section for details explaining the variance.
Redemption Activity - Under the Aeroplan Program, Total Miles redeemed for the three months ended December 31, 2013 amounted to 16.3 billion compared to 17.9 billion for the same period in 2012, representing a
decrease of 1.6 billion or 8.9%, resulting mostly from a decrease in air redemptions, in anticipation of enhanced travel reward offerings under the Distinction program commencing on January 1, 2014.
Total Revenue amounted to $282.8 million for the three months ended December 31, 2013 compared to $325.5 million for the three months ended December 31, 2012, a decrease of $42.7 million or 13.1%. Excluding the impact of
$19.2 million resulting from the change in the Breakage estimate in the Aeroplan Program, revised from 18% to 11% in the second quarter of 2013, total revenue for the three months ended December 31, 2013 amounted to $302.0 million, representing a decrease of $23.5 million or 7.2%. This variance is mostly explained by a decrease in revenue from Loyalty Units due to lower redemption volumes.
Cost of Rewards and Direct Costs amounted to $155.8 million for the three months ended December 31, 2013 compared to $172.6 million for the three months ended December 31, 2012, representing a decrease of $16.8 million or 9.7%. This change is mainly attributable to the following factors:
• a lower volume of air and non-air redemptions for the quarter, representing $13.8 million; and
• a lower redemption cost per Aeroplan Mile redeemed of $7.5 million due to redemption mix; offset in part by
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
• an increase in proprietary loyalty services direct costs of approximately $4.5 million due mostly to an increase in higher cost volumes.
Gross Margin before Depreciation and Amortization, excluding the impact of the change in Breakage estimate in the Aeroplan Program, increased by 1.4 percentage-points, a direct result of the factors described above, and represented 48.4% of total revenue for the three month period ended December 31, 2013.
Operating Expenses amounted to $272.9 million for the three months ended December 31, 2013 compared to $58.8 million for the same period in 2012, representing an increase of $214.1 million. Excluding the impact of the CIBC Payment of $150.0 million and the Card Migration Provision of $50.0 million, operating expenses amounted to $72.9 million for the three months ended December 31, 2013, representing an increase of $14.1 million or 24.0% compared to the same period in 2012. The variance is mostly explained by higher marketing and promotional expenses of $14.7 million, relating mostly to the launch of program enhancements, increased compensation costs offset in part by lower information technology costs.
Depreciation and Amortization, including amortization of Accumulation Partners' contracts, customer relationships and technology, amounted to $26.8 million and $25.3 million for the three months ended December 31, 2013 and 2012, respectively.
Operating Income (Loss) amounted to $(172.7) million for the three months ended December 31, 2013 compared to
$68.9 million for the same period in 2012, representing a decrease of $241.6 million. Excluding the impact of the CIBC Payment of $150.0 million and the Card Migration Provision of $50.0 million and the impact of the change in the Breakage estimate in the Aeroplan Program of $19.2 million, operating income amounted to $46.5 million for the three months ended December 31, 2013, a decrease of $22.4 million or 32.5% in comparison to same period in 2012, a direct result of the factors described above.
Adjusted EBITDA amounted to $(115.0) million or (33.1)% (as a % of Gross Billings) for the three months ended December 31, 2013. Adjusted EBITDA was $100.4 million or 29.9% (as a % of Gross Billings) for the same period in 2012.
The impact of the change to the Breakage estimate on the Change in Future Redemption Costs for the three months ended December 31, 2013 was $12.9 million. Additionally, Adjusted EBITDA also includes the impact of the CIBC Payment of $150.0 million and the Card Migration Provision of $50.0 million. Excluding these items, Adjusted EBITDA for the three months ended December 31, 2013 amounted to $97.9 million or 28.2% (as a % of Gross Billings).
Adjusted EBITDA is a non-GAAP measure. Please refer to the PERFORMANCE INDICATORS section for additional information on this measure.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
EMEA
Gross Billings generated for the three months ended December 31, 2013 amounted to $200.0 million compared to
$177.6 million for the three months ended December 31, 2012, representing an increase of $22.4 million or 12.6%, including a $13.3 million impact of currency fluctuation recognized on the translation of foreign operations.
The different Gross Billings categories were affected in the following manner:
Gross Billings from the Sale of Loyalty Units generated for the three months ended December 31, 2013 amounted to $175.3 million compared to $150.8 million for the three months ended December 31, 2012, representing an increase of $24.5 million or 16.3%, including a $11.7 million impact of currency fluctuation recognized on the translation of foreign operations. The operational variance of $12.8 million is mostly explained by a $14.5 million increase in Gross Billings from the sale of Loyalty Units in the Nectar Program, driven by the grocery sector and new Accumulation Partner billings, offset in part by a reduction of $2.2 million in the Nectar Italia Program.
Nectar UK Points issued during the three months ended December 31, 2013 increased by 14.4% compared to the same period in the prior year driven by higher issuance from the grocery sector and by new Accumulation Partners.
Air Miles Middle East Loyalty Units issued during the three months ended December 31, 2013 increased by 4.9% in comparison to the same period in the prior year, mostly due to increased member engagement.
Nectar Italia Points issued during the three months ended December 31, 2013 decreased by 12.5% in comparison to the same period in 2012, mostly due to difficult economic conditions and lower promotional bonus point activity.
Other Gross Billings, consisting of proprietary loyalty service fees and other revenues, amounted to $24.8 million for the three months ended December 31, 2013 compared to $26.8 million for the three months ended December 31, 2012, representing a decrease of $2.0 million or 7.7%, net of a $1.6 million impact of currency fluctuation recognized on the translation of foreign operations. The operational decrease of $3.6 million is primarily explained by the fact that a large portion of the ISS UK Gross Billings is reported within the i2c joint venture as of the first quarter of 2013. The decrease was partly offset by growth in Gross Billings from ISS international activities and proprietary loyalty services.
Redemption Activity - Redemption activity in the Nectar Program increased by 12.5% compared to the same quarter of 2012, mainly driven by an increase in the number of Nectar Points in circulation and promotional activity.
Total points redeemed in the Nectar Italia Program for the three months ended December 31, 2013 decreased by 6.8% in comparison to the same period of 2012.
Redemption activity in the Air Miles Middle East program decreased significantly compared to the same quarter in 2012. The decrease is explained primarily by significant level of redemptions in the first quarter of 2013 ahead of the first expiry anniversary, which caused a subsequent reduction in redemptions in the remaining quarters of 2013.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Total Revenue amounted to $295.8 million for the three months ended December 31, 2013 compared to $250.8 million for the three months ended December 31, 2012, representing an increase of $45.0 million or 17.9% and is explained by the following:
• an increase of $47.3 million in revenue from Loyalty Units, including an impact of $20.6 million of currency fluctuation recognized on the translation of foreign operations. The operational variance of $26.7 million is mostly explained by increased redemptions in the Nectar Program; and
• an increase of $1.7 million in revenue from proprietary loyalty services; offset in part by
• a decrease of $4.0 million in other revenue, net of a $1.2 million impact of currency fluctuation recognized on the translation of foreign operations. The operational variance of $5.2 million is explained by the fact that a large portion of the ISS UK revenue is reported within the i2C joint venture as of the first quarter of 2013. The decrease was partly offset by growth in revenue from ISS international activities.
Cost of Rewards and Direct Costs amounted to $210.3 million for the three months ended December 31, 2013 compared to $182.6 million for the three months ended December 31, 2012, representing an increase of $27.7 million or 15.2%, including a $15.7 million unfavourable impact of currency fluctuation recognized on the translation of foreign operations. The operational variance of $12.0 million is mainly attributable to the following factors:
• an increase driven by redemption activity in the Nectar Program, representing $15.1 million; offset in part by
• a decrease in direct costs of $3.5 million resulting mostly from the transfer of the ISS UK business into the i2c joint venture.
Gross Margin before Depreciation and Amortization increased by 1.7 percentage-points, a direct result of the factors described above, and represented 28.9% of total revenue for the three month period ended December 31, 2013.
Operating Expenses amounted to $38.7 million for the three months ended December 31, 2013 compared to $36.9 million for the same period in 2012, representing an increase of $1.8 million or 4.8%, explained by a $2.6 million unfavourable impact of currency fluctuation recognized on the translation of foreign operations and by increased expenses resulting from the underlying growth of the EMEA region, offset in part by the timing of marketing initiatives and by a reduction in costs associated with the transfer of the ISS UK business into the i2C joint venture.
Depreciation and Amortization, including amortization of Accumulation Partners' contracts, customer relationships and technology, amounted to $4.7 million and $4.9 million for the three months ended December 31, 2013 and 2012, respectively.
Operating Income amounted to $42.1 million for the three months ended December 31, 2013 compared to $26.5 million for the same period in 2012, representing an improvement of $15.6 million, a direct result of the factors described above.
Adjusted EBITDA amounted to $20.2 million or 10.1% (as a % of Gross Billings) for the three months ended December 31, 2013, and includes a distribution receivable from i2c of $1.7 million. Adjusted EBITDA was $16.0 million or 9.0% (as a % of Gross Billings) for the same period in 2012.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Adjusted EBITDA is a non-GAAP measure. Please refer to the PERFORMANCE INDICATORS section for additional information on this measure.
US & APAC
Gross Billings, consisting of proprietary loyalty service fees, amounted to $111.0 million for the three months ended December 31, 2013 compared to $102.3 million for the three months ended December 31, 2012, representing an increase of $8.7 million or 8.6%, including a $3.4 million impact of currency fluctuation recognized on the translation of foreign operations. The operational variance of $5.3 million is primarily explained by a net increase in new business in the APAC region.
Total Revenue amounted to $109.0 million for the three months ended December 31, 2013 compared to $102.8 million for the three months ended December 31, 2012, representing an increase of $6.2 million or 6.0%, including a
$3.3 million impact of currency fluctuation recognized on the translation of foreign operations. The operational variance of $2.9 million is primarily explained by a net increase in new business in the APAC region.
Cost of Rewards and Direct Costs amounted to $61.3 million for the three months ended December 31, 2013 compared to $57.5 million for the three months ended December 31, 2012, representing an increase of $3.8 million or 6.6%, including a $1.5 million impact of currency fluctuation recognized on the translation of foreign operations. The operational variance of $2.3 million is primarily due to a net increase in new business in the APAC region.
Gross Margin before Depreciation and Amortization decreased by 0.3 percentage-points, a direct result of the factors described above, and represented 43.8% of total revenue for the three month period ended December 31, 2013.
Operating Expenses amounted to $60.4 million for the three months ended December 31, 2013 compared to $38.0 million for the same period in 2012, representing an increase of $22.4 million or 58.8%. Excluding the goodwill impairment charge recorded during the fourth quarter of 2013 of $19.1 million related to the US Proprietary Loyalty CGU, operating expenses amounted to $41.2 million for the three months ended December 31, 2013, representing an increase of $3.2 million or 8.4%, which included a $1.7 million impact of currency fluctuation recognized on the translation of foreign operations and operating expenses from Smart Button.
Depreciation and Amortization, including amortization of Accumulation Partners' contracts, customer relationships and technology, amounted to $4.1 million and $6.7 million for the three months ended December 31, 2013 and 2012, respectively. The decrease is mainly explained by the acceleration of the amortization of certain intangible assets during the fourth quarter of 2012, offset in part by the inclusion of depreciation and amortization expenses of Smart Button.
Operating Income (Loss) amounted to $(16.8) million for the three months ended December 31, 2013 compared to
$0.6 million for the same period in 2012, representing a decline of $17.4 million, mostly explained by the goodwill impairment charge recorded during the fourth quarter of 2013 of $19.1 million related to the US Proprietary Loyalty CGU, with the remainder being a direct result of the factors described above.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Adjusted EBITDA amounted to $8.5 million or 7.6% (as a % of Gross Billings) for the three months ended December 31, 2013. Adjusted EBITDA was $6.7 million or 6.6% (as a % of Gross Billings) for the same period in 2012.
Adjusted EBITDA is a non-GAAP measure. Please refer to the PERFORMANCE INDICATORS section for additional information on this measure.
CORPORATE
Operating Expenses amounted to $28.4 million for the three months ended December 31, 2013 compared to $20.7 million for the same period in 2012, representing an increase of $7.7 million or 37.4%. The increase is mostly attributable to professional fees of $4.7 million to support the negotiation of the new financial card agreements in the Aeroplan Program, higher share-based compensation expense of $3.3 million explained by an increase in the share price and share based awards granted, offset in part by lower corporate expenses.
Adjusted EBITDA amounted to $(24.8) million for the three months ended December 31, 2013 compared to $(5.0) million for the three months ended December 31, 2012. Adjusted EBITDA for the three months ended December 31, 2013 and 2012 included distributions received from PLM of $3.6 million and $15.7 million, respectively.
Adjusted EBITDA is a non-GAAP measure. Please refer to the PERFORMANCE INDICATORS section for additional information on this measure.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
SUMMARY OF QUARTERLY RESULTS
This section includes sequential quarterly data for the eight quarters ended December 31, 2013.
2013 | 2012 | (s) | |||||||||
(in thousands of Canadian Dollars, except per share amounts) | Q4 | Q3 | Q2 | Q1 (r) | Q4 (r) | Q3 (r) | Q2 (r) | Q1 (r) | |||
Gross Billings | 658,067 | 576,727 | 570,540 | 561,115 | 615,055 | 537,030 | 554,302 | 536,636 | |||
Gross Billings from the sale of Loyalty Units | 464,673 | 419,143 | 414,211 | 413,349 | 429,534 | 398,885 | 414,026 | 385,984 | |||
Revenue | 687,627 (d) | 499,730 | (e) | (123,312) | (f) | 609,503 | 678,179 | 498,781 | 504,233 | 567,725 | |
Cost of rewards and direct costs | (427,407) | (290,467) | (230,513) | (i) | (353,408) | (412,651) | (285,978) | (279,900) | (322,396) | ||
Gross margin before depreciation and amortization (a) | 260,220 (d) | 209,263 | (e) | (353,825) | (f)(i) | 256,095 | 265,528 | 212,803 | 224,333 | 245,329 | |
Operating expenses | (400,318) (g)(h) | (157,059) | (198,221) | (i) | (153,313) | (153,435) | (131,186) | (140,949) | (140,816) | ||
Depreciation and amortization | (11,774) | (10,867) | (10,513) | (10,320) | (12,013) | (9,407) | (8,543) | (8,462) | |||
Operating income (loss) before amortization of Accumulation | |||||||||||
(151,872) (d)(g) (h) | 41,337 | (e) | (562,559) | (f)(i) | 92,462 | 100,080 | 72,210 | 74,841 | 96,051 | ||
Partners’ contracts, customer relationships and technology | |||||||||||
Amortization of Accumulation Partners’ contracts, customer | |||||||||||
relationships and technology | (23,890) | (20,126) | (20,091) | (20,307) | (24,831) | (20,788) | (20,820) | (20,795) | |||
Operating income (loss) | (175,762) (d)(g) (h) | 21,211 | (e) | (582,650) | (f)(i) | 72,155 | 75,249 | 51,422 | 54,021 | 75,256 | |
Net earnings (loss) attributable to equity holders of the Corporation | (125,592) (h)(j) (m) | 2,070 | (k) | (415,286) | (f)(i) (l)(n) | 40,527 | 56,897 | 28,295 | 34,937 | 45,378 | |
Adjusted EBITDA (b) | (111,090) (g)(o) (p) | 85,652 | (o)(p) | 101,953 | (i)(o) (p) | 82,815 | 118,185 | (p) | 93,719 | 102,116 | 88,977 |
Net earnings (loss) attributable to equity holders of the | |||||||||||
(125,592) (h)(j) (m) | 2,070 | (k) | (415,286) | (f)(i) (l)(n) | 40,527 | 56,897 | 28,295 | 34,937 | 45,378 | ||
Corporation | |||||||||||
Earnings (loss) per common share (c) | (0.74) (h)(j) (m) | 0.00 | (k) | (2.43) | (f)(i) (l)(n) | 0.22 | 0.31 | 0.15 | 0.19 | 0.24 | |
Free Cash Flow (b) | (84,308) (q) | 36,428 | 56,553 | (39,929) | 46,690 | 99,556 | 43,841 | (10,591) | |||
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
(a) Excludes depreciation and amortization as well as amortization of Accumulation Partners' contracts, customer relationships and technology.
(b) A non-GAAP measurement.
(c) After deducting dividends declared on preferred shares.
(d) The impact of the change in the Breakage estimate in the Aeroplan Program, which occurred in the second quarter of 2013, resulted in a reduction of $19.2 million to revenue from Loyalty Units for the three months ended December 31, 2013.
(e) The impact of the change in the Breakage estimate in the Aeroplan Program, which occurred in the second quarter of 2013, resulted in a reduction of $20.0 million to revenue from Loyalty Units for the three months ended September 30, 2013.
(f) Includes the impact of the change in the Breakage estimate in the Aeroplan Program which resulted in a reduction of $663.6 million to revenue from Loyalty Units, of which $617.0 million is attributable to the years prior to 2013, $25.1 million to the three month period ended March 31, 2013 and $21.5 million to the three month period ended June 30, 2013.
(g) Includes the impact of the CIBC Payment of $150.0 million and the Card Migration Provision of $50.0 million.
(h) Includes a goodwill impairment charge of $19.1 million recorded during the three month ended December 31, 2013 related to the US Proprietary Loyalty CGU.
(i) Includes a favourable impact of $26.1 million (£16.4 million) resulting from the final judgment of the VAT litigation which occurred in the second quarter of 2013. Of this amount, $74.9 million (£47.0 million) was recorded as a reduction of cost of rewards and $48.8 million (£30.6 million) as an increase to operating expenses.
(j) Includes the unfavourable impact of the change in Breakage estimate in the Aeroplan Program, which occurred in the second quarter of 2013, of $14.2 million, net of an income tax recovery of $5.0 million.
(k) Includes the unfavourable impact of the change in Breakage estimate in the Aeroplan Program, which occurred in the second quarter of 2013, of $14.6 million, net of an income tax recovery of $5.4 million.
(l) Includes the unfavourable impact of the change in Breakage estimate in the Aeroplan Program, net of an income tax recovery of $179.8 million, of which $167.5 million is attributable to years prior to 2013, $6.6 million to the three month period ended March 31, 2013 and $5.7 million to the three month period ended June 30, 2013.
(m) Includes the unfavourable impact attributable to the CIBC Payment and the Card Migration Provision totaling $146.9 million, net of an income tax recovery of $53.1 million.
(n) Includes the favourable impact of the reversal in the second quarter of 2013 of previously accrued interest of $17.3 million (£10.8 million) resulting from the final judgment of the VAT litigation.
(o) The Change in Future Redemption costs for the three months ended December 31, 2013 includes the unfavourable impact of
$12.9 million resulting from the change in the Breakage estimate in the Aeroplan Program which occurred in the second quarter of 2013.
The Change in Future Redemption costs for the three months ended September 30, 2013 includes the unfavourable impact of
$12.2 million resulting from the change in the Breakage estimate in the Aeroplan Program which occurred in the second quarter of 2013.
The Change in Future Redemption costs for the three months ended June 30, 2013 includes the unfavourable impact resulting from the change in the Breakage estimate in the Aeroplan Program amounting to $24.8 million, of which $12.4 million relates to the three month period ended March 31, 2013 and $12.4 million to the three month period ended June 30, 2013.
Additionally, the Change in Future Redemption costs for the three months ended June 30, 2013 includes the favourable impact of $0.5 million (£0.3 million) resulting from the final judgment of the VAT litigation.
(p) Adjusted EBITDA includes distributions received or receivable from equity-accounted investments amounting to $5.3 million,
$3.5 million, $6.9 million and $15.7 million for the three months ended December 31, 2013, September 30, 2013, June 30, 2013 and December 31, 2012, respectively.
(q) Includes the CIBC Payment of $150.0 million made on December 27, 2013 upon the closing of the asset purchase agreement and the related harmonized sales tax of $22.5 million.
(r) These figures do not include any effect related to the change in Breakage estimate made during the second quarter of 2013 in the Aeroplan Program.
(s) 2012 financial information was restated to reflect the retroactive application of the amendments to IAS 19. Refer to the
CHANGES IN ACCOUNTING POLICIES section for additional information.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
FINANCING STRATEGY
Aimia generates sufficient cash flow internally to fund cash dividends, capital expenditures and to service its debt obligations. Management believes that Aimia's internally generated cash flows, combined with its ability to access undrawn credit facilities and external capital, provide sufficient resources to finance its cash requirements for the foreseeable future and to maintain available liquidity, as discussed in the LIQUIDITY AND CAPITAL RESOURCES section. Dividends are expected to continue to be funded from internally generated cash flows.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2013, Aimia had $449.1 million of cash and cash equivalents, $33.7 million of restricted cash, $60.7 million of short-term investments and $269.7 million of long-term investments in bonds, for a total of $813.2 million. Approximately $18.5 million of the total amount is invested in Bankers' Acceptances and term deposits maturing on various dates through to May 2014 and $310.5 million is mostly invested in corporate, federal and provincial government bonds maturing at various dates between September 2014 and June 2020. The Aeroplan Miles redemption reserve described under Redemption Reserve is included in short-term investments and long-term investments. Aimia's cash and cash equivalents, restricted cash, short-term investments and long-term investments in bonds are not invested in any asset-backed commercial paper.
The following table provides an overview of Aimia's cash flows for the periods indicated:
Years Ended December 31, | ||
(in thousands of Canadian dollars) | 2013 | 2012 |
Cash and cash equivalents, beginning of year | 497,976 | 202,147 |
Cash from operating activities | 150,000 | 357,443 |
Cash used in investing activities | (92,092) | (131,304) |
Cash from (used in) financing activities | (129,207) | 66,659 |
Translation adjustment related to cash | 22,431 | 3,031 |
Cash and cash equivalents, end of year | 449,108 | 497,976 |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
OPERATING ACTIVITIES
Cash from operations is generated primarily from the collection of Gross Billings and is reduced by the cash required to deliver rewards when Loyalty Units are redeemed, and by the cash required to provide proprietary loyalty and analytics and insights services. Cash flow from operations is also reduced by operating expenses and interest and income taxes paid.
Cash flows from operating activities amounted to $150.0 million for the year ended December 31, 2013 compared to
$357.4 million for the year ended December 31, 2012.
The final judgment of the VAT litigation had no impact on cash from operating activities, with the exception of the provision payable to certain employees amounting to $7.2 million (£4.5 million) which was paid during the third quarter of 2013, accordingly the explanations provided below exclude any non-cash related impact.
The unfavourable variance of $207.4 million for the year ended December 31, 2013 compared to the year ended December 31, 2012 is partly explained by the CIBC Payment of $150.0 million and related harmonized sales tax of
$22.5 million made during the fourth quarter of 2013. The remaining variance is explained primarily by changes in the net operating assets. Additionally, the decrease is driven by higher cost of rewards and direct costs of $73.7 million, higher operating expenses of $74.9 million and higher net interest paid of $3.1 million, offset in part by an increase in Gross Billings of $123.4 million and lower income taxes paid of $32.9 million.
Please refer to the Free Cash Flow section for more information.
INVESTING ACTIVITIES
Investing activities for the year ended December 31, 2013 reflect proceeds from short-term investments of $24.7 million. Investing activities for the year ended December 31, 2013 also reflect long-term investments made of $36.0 million, including additional investments totaling $31.9 million in Cardlytics and investments in Air Canada Class B shares of $3.7 million upon the exercise of warrants.
Also, investing activities for the year ended December 31, 2013 include a payment made of $8.9 million, net of cash acquired of $0.7 million, related to the acquisition of Smart Button and an amount of $6.0 million which was put in escrow. Aimia also acquired the remaining 60% interest of a privately-owned company based in Indonesia for cash consideration of $2.1 million. Refer to the Business Acquisitions section for additional information.
During the year ended December 31, 2013, Aimia invested an additional amount of $5.5 million in Prismah as well as investments totaling $4.3 million in China Rewards.
Capital expenditures for the year ended December 31, 2013, amounted to $54.4 million. Anticipated capital expenditures for 2014 are expected to approximate between $60.0 million and $70.0 million.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
FINANCING ACTIVITIES
Cash used in financing activities for the year ended December 31, 2013 related primarily to the payment of common and preferred dividends amounting to $126.9 million. Financing activities for the year ended December 31, 2013 also reflect the receipt of $7.0 million by the Corporation upon the exercise of stock options. During the year ended December 31, 2013, Aimia also acquired the remaining 25% of the issued shares of Nectar Italia for cash consideration of $9.3 million.
LIQUIDITY
Aimia anticipates that total capital requirements for the 2014 fiscal year will be between $197.8 million and $207.8 million, including $137.8 million in respect of anticipated cash dividends to its common and preferred shareholders and between $60.0 million and $70.0 million in respect of capital expenditures. The capital requirements will be funded from operations, available cash on deposit from the Redemption Reserve to the extent required and where applicable (i.e. in periods of unusually high redemption activity) and undrawn credit facilities, if necessary.
REDEMPTION RESERVE
Aeroplan maintains the Aeroplan Miles redemption reserve (the “Reserve”), which, subject to compliance with the provisions of the Corporation's credit facilities, may be used to supplement cash flows generated from operations in order to pay for rewards during periods of unusually high redemption activity associated with Aeroplan Miles under the Aeroplan Program. In the event that the Reserve is accessed, Aeroplan has agreed to replenish it as soon as practicable, with available cash generated from operations. To date, Aimia has not used the funds held in the Reserve. At December 31, 2013, the Reserve amounted to $300.0 million and was included in short-term investments and long-term investments.
The amount held in the Reserve, as well as the types of securities in which it may be invested, are based on policies established by management, which are reviewed periodically. At December 31, 2013, the Reserve was invested in corporate, federal and provincial bonds.
Management is of the opinion that the Reserve is sufficient to cover redemption costs, including redemption costs incurred in periods of unusually high redemption activity, as they become due, in the normal course of business. Management reviews the adequacy of the Reserve periodically and may adjust the level of the Reserve depending upon the outcome of this review.
At December 31, 2013, the Reserve, as well as other assets held to comply with a contractual covenant with a major Accumulation Partner, represented 23.9% of the consolidated Future Redemption Cost liability or $437.0 million.
The deferred revenue presented in the balance sheet represents accumulated unredeemed Loyalty Units valued at their weighted average selling price and unrecognized Breakage. The estimated consolidated Future Redemption Cost liability of those Loyalty Units, calculated at the current Average Cost of Rewards per Loyalty Unit redeemed, is approximately $1,828.1 million.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
CREDIT FACILITIES AND LONG-TERM DEBT
The following is a summary of Aimia’s authorized and outstanding revolving facility and Senior Secured Notes:
(in thousands of Canadian dollars) | Authorized at December 31, 2013 | Drawn at December 31, 2013 | Drawn at December 31, 2012 |
Revolving facility (a) | 300,000 | — |