Aimia's (GAPFF) CEO Rupert Duchesne on Q1 2016 Results - Earnings Call Transcript

| About: Aimia, Inc. (GAPFF)

Aimia, Inc. (OTCPK:GAPFF) Q1 2016 Earnings Conference Call May 13, 2016 8:30 AM ET

Executives

Karen Keyes - Head, Investor Relations

Rupert Duchesne - Chief Executive Officer

David Johnston - Chief Operating Officer

Tor Lønnum - Chief Financial Officer

Steve Leonard - Vice President and Corporate Controller

Analysts

Kenric Tyghe - Raymond James

Adam Shine - National Bank

Drew McReynolds - RBC Capital Markets

Stephanie Price - CIBC

Anthony Zicha - Scotiabank

Brian Morrison - TD Securities

Robert Peters - Credit Suisse

Operator

Good morning. My name is Jessa and I will be your conference operator today. At this time, I would like to welcome everyone to the Aimia Inc. First Quarter Results 2016 Conference Call. [Operator Instructions] Thank you. Ms. Karen Keyes, Head of Investor Relations, you may begin your conference.

Karen Keyes

Thank you very much, Jessa. Good morning to all of you attending on the phone and the webcast this morning. With me on the call today are Rupert Duchesne, Aimia’s Group Chief Executive; David Johnston, Group Chief Operating Officer; Tor Lønnum, Chief Financial Officer and Steve Leonard, Vice President and Corporate Controller.

Before we get underway, I would like to remind everyone to review our forward-looking statements and the cautions and risk factors pertaining to these statements, which can be found on Page 3 of the results highlights presentation on the website. I would also like to point out the presentation refers to a number of non-GAAP metrics to help you better understand the results of the business. These can be found on Page 4. And finally, I would like to draw your attention to the new disclosure on the company’s divisional structure, which took effect from January 1. Prior year comparatives can be found on Page 33 of today’s presentation and more detail can be found in the presentation we issued on April 19, which can be found on our website.

And with that, I will hand over to Rupert.

Rupert Duchesne

Thank you, Karen. Good morning, everyone and of course, a particular welcome to Tor, who joined us as CFO last week and who we all get to know in the coming months.

2015 was the year, which we simplified and focused the company to divest in our core businesses for growth. We are pleased with how that effort including our reorganization has set us up for 2016 and supported a solid first quarter across our divisions. We met our expectations across all of our businesses and we are encouraged by many achievements in which I will highlight just a few. The performance of the financial card portfolio at Aeroplan, the new clients in Global Loyalty Solutions and our new ISS with Aeon Retail, which is a core retail subsidiary of Aeon is Japan’s largest retailer group, which we announced today.

Our new structure intends to simplify and improve the efficiency of the business, drive collaboration and focus and improve our financial results. We will spend the next 20 minutes associating you through an update on progress in these areas, leaving a good amount of time for questions afterwards. The low transitions in the business from a year ago were the main factors in dropping gross billings of 3.7%. The next, Alitalia winding down explains $10 million of the decrease. Next, UK represented another $15 million, resulting from the strategic change by Sainsbury’s shift from base to bonus miles points and the regularity change facing British Gas that pushed them to reshape their offerings as well.

The impact of our previously noted contract loss in America’s coalitions explains most of the remaining decrease. We expect this drop will be counterbalanced by growth at the second half of the year. Our favorable Aeroplan redemption mix benefited our adjusted EBITDA margin in the quarter, which was stable at 8.8%, excluding severance costs. Now typically, free cash flow is negative in the first quarter as we fund higher redemptions from the fourth quarter as this seasonal effect held in this first quarter. Excluding severance payments, the current third quarter cash flow was an outflow of $12 million. This was $3 million better than last year when you exclude the one-time impact of the $20.4 million tax refund we received in the year earlier period.

Receiving the Club Premier distribution, the first quarter versus the second also benefited both adjusted EBITDA and free cash flow. Results in the latest quarter reflect the flow-through savings of $37 million and reduced operating expenses, which we achieved by the end of last year. We are tracking well on our cost reduction program in identifying a further $20 million in savings beginning in 2017 as well as on our focus to dispose of the non-core assets.

So, let me hand over to David now who will provide you with an update on the operations.

David Johnston

I am going to start with the America’s coalitions division and focus first on Aeroplan. Member comprehension continues to be a priority for the Aeroplan team. For example, in the first quarter, we finished stake in the ground on value launching a mass media campaign to support our get any seat flight for last climbs. Last week, we also launched our MythBusters campaign aimed at setting the record straight on topics such as seat availability. Our broader goal set of campaigns large customer has now seen hundreds of thousands of our members tell us what they are saving for allowing us to provide them with ever more relevant communications on how to achieve their personal plans.

At the same time, we are strengthening our unique offering to our financial partners, testing improved card acquisition and churn models based on data and analytics. Adding more sectors in which Aeroplan members can earn miles provides better value to both members and partners of the coalition. One example of that is the Toyota partnership we announced last quarter. Toyota’s target demographic aligns very well with Aeroplan’s member base and we have seen good uptake which contributed to a strong quarter from the retail segment. As announced earlier this week, we have also added some furnishing segment with the BRIC and continue to work to expand our sector reach, enhancing what we offer our members and our partners will continue to underpin growth.

Financially, the good results at Aeroplan where gross billings were flat to the year-over-year period were masked by the rest of the America’s coalitions business, where gross billings were 3% lower as we cycled the clients from previously noted lost contracts and lower rewards fulfillment volumes in the Canadian rewards business. The division’s adjusted EBITDA margin was at 14.4%, excluding severance was slightly below last year. Higher gross margin due to lower cost redemptions was offset by higher operating expenses as we implement our IT outsourcing agreement with HP. Gross billings from financial cards were stable in the first quarter. We have seen growth in credit card purchase volume driven by modest growth in both the active card base and average card spend. The reduction in price model resulted from interchange offset some of this growth. Remember, there will be cycle in the impact of interchange for one more quarter.

Our partners delivered stronger than expected new card acquisition in the quarter, including an increased proportion of higher value cards, which compensated for softer than anticipated aggregate spend performance. Cardholder basket size was smaller in the first quarter though transaction frequency increased. So, we will be watching to see if those movements are part of longer term trends in shopping behavior or a reaction to a fragile economy.

American Express membership rewards conversion grew in the first quarter of 2016 reinforcing the value that Aeroplan brings to American Express cardholders. The AmEx co-brand portfolio remains challenging and we continue to work with American Express to reach an acceptable level of performance. What is clear is that three years into our financial card partnerships, our key metrics are stabilized and we remain significantly better positioned in the market than we were in 2013. Aeroplan growth will be supported by the return to growth in financial cards in 2016 as a result of a higher active card base. The level of that growth will be driven in part by the performance of the Canadian economy. The economy has dampened travel and together with changes to Air Canada’s Altitude program, we saw a decline in gross billings from AeroPartners in the quarter. We are monitoring the changing demand for air travel as we see members shift to domestic travel from both U.S. and European flights given the low Canadian dollar.

I want to focus for a minute now on redemptions. Our member-driven agenda is focused on creating redemption experiences that drive member satisfaction and concurrently improve our profitability. We have made a concerted effort to make both the rewards and the redemption process better for our members and let me give you just two examples. With our new app, members can redeem on their phone and as of late March, members can also book a flight entirely cash free using miles to pay for surcharges, taxes and fees. Members redeemed 3.6% fewer miles in the first quarter, which reflects both a slower economy and a high U.S. dollar. When the economy slows, we typically expect a few reactions on the flight redemption side. Some travel is postponed. Other travelers decide to pay cash for discounted fares conserving the air time miles for times when the fares are higher and leisure travelers will substitute more expensive destinations for cheaper ones, staying more often within Canada. Overall, Aeroplan’s flight redemption success rates, satisfaction levels among tier members and overall net promoter scores are all-time highs, a reflection of the meaningful achievements over the last year.

Turning now to the International Coalitions division, Nectar is on a path to fundamentally transform the member experience and increase member engagement through digital first strategy and the early signs are encouraging. Draft as we downloaded about 1.7 million times and members were using the app or engage for longer and higher opt in rates to offers, earn more points and redeem more profitability. All of these provide better value to members and to our partners. And while it will take another, I would say six months to nine months to determine the new norms. There are also early signs that changes to the program are increasing our member reach with one in seven of those downloading the new app being new to the program. You were seeing that since last quarter, we acquired full ownership of Air Miles Middle East through the purchase of HSBC Bank Middle East stake in the business. We get greater flexibility in how we manage the program and introduce innovation, alongside a renewed partner commitment and a financial profile, which frankly differs a little to what we had previously expected. The base payments are broadly aligned with the dividends previously expected to make to HSBC. In April, Air Miles Middle East was the first coalition program to transitional to the new annually loyalty platform on our broader suite of products. This provided the base from which we can grow and evolve the program digitally. Air Miles Middle East follow the lead of Aeroplan and Nectar, with a new app launched at the end of April.

We are delighted to announce our latest client of ISS on the retail for which we will provide a full range of data and analytic services. Gross billings from this new client contributed to the international coalition result in the quarter and partly offset the expected gross billings declines at British Gas Sainsbury’s Nectar Italia. Gross billings in this division were down 8%. As you think about the rest of the year, recall that Nectar Italia accumulations significantly declined after the first quarter of 2015 and Sainsbury’s, transformation began in April 2015, although we did benefit this year from the fact that April fell in Q4 – Easter, sorry, Easter, fell in Q1 April. At Nectar, points redeemed would have 15% in the quarter as lower accumulations through last year reduced members points balances. We are also seeing some shift to more considered redemptions with our ability to target offers on the app. Even with the lower gross billings and a higher market spend, adjusted EBITDA margin was in line with last year at more than 10%. Our Global Loyalty Solutions business represented around 10% of the gross billings in the quarter. As we have told you previously, our business plan is to deliver platform based loyalty solutions to clients in order to build our current revenue stream over the next few years and with scale and operational discipline to drive profitable growth and improving returns on invested capital.

Gross billings result positive in the quarter relative to the trajectory we expected with the full year, as we cycle out of lower margin rewards fulfillment services. Although small overall, friends looking for more sophisticated marketing capabilities will drive growth in this area. We are seeing increased traction in our third client implementation going live in the fourth scheduled later this year on ALP and related platforms. Each new client vertical helps to demonstrate the value we can bring to new prospects in the pipeline and to build sales momentum. New costs incurred in quarter to support these implementations were in line with our expectations and adjusted EBITDA was negative $2.8 million in the quarter. We made significant operational progress over the course of the last 2 years, with a $37 million reduction in operating costs last year. In the quarter, we brought expected costs to transition in relation to the transition to our HP outsourcing agreement. The deal will provide real efficiency and cost avoidance benefits over the long-term as well as improved agility and security to meet our clients’ needs.

The transition costs $10 million, are more heavily weighted to the first half of the year and we incurred $4 million in the quarter. We also had $2 billion – $2.1 million of severance costs in the quarter. Overall, operating costs were stable on a constant currency basis. We are progressing on our plan to take a further $20 million of costs out of the business from the beginning of 2017 through areas such as procurement and real estate. As an example, as a result of our lower headcount, we are consolidating our Toronto offices in mid-June, saving about $2 million a year. One of the benefits of moving to a new divisional structure was to give us the ability to more clearly align costs and performance of the business and we remain mindful of the need to maintain that alignment and to protect our margin in the event that we see pressures on the top line should we experience on foreseen events.

We closed the year with our capital spending plans to ensure we are directing our resources to the areas at the highest payoff. Investing in our core products is to focus on capital spending this year, which we continue to expect will be between $75 million and $85 million for the full year. More than 40% of the $19.5 million in the first quarter was spent in the Americas coalitions, as we continue to invest in Aeroplan one-to-one personalization capabilities, program enhancement and secure program engagement and security. Beyond Aeroplan, we will continue ongoing investment in platforms to drive recurring revenue with most significant this year being a refresh of our ISS product. Rupert?

Rupert Duchesne

Our balance sheet remains solid with $140 million of surplus cash at the end of the quarter. We drew down on cash on hand to fund year end redemptions and share buybacks in January and February. We have renewed our normal course issuer bid for another year, through as we said, our plan is to accumulate sufficient cash to give us the flexibility of repaying the $200 million bond maturing in January 2017, if we so choose. Our capital allocation strategy continues to be a balance between reinvesting our free cash flow and building Aimia and return to shareholders. Given our expectations for the performance of the business in 2016 and beyond, we are again increasing our quarterly dividend this year by 5% to $0.20 per quarter. This is the sixth consecutive year of annual dividend increase. And on our free cash flow guidance represents a payout ratio of over 60%.

We entered 2016 with a leaner cost base and a continued discipline on costs. We remain focused on investing in our core businesses, with a view to generating strong returns. Results from the first quarter are in line with what we expected to see and thus support the guidance that we provided in February.

And with that, I am going to hand over to the operator to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Kenric Tyghe from Raymond James. Your line is open.

Kenric Tyghe

Thank you and good morning. Rupert, you maintained your full year guidance despite the billings miss in the quarter, is your confidence largely a function of the solid underlying performance within the Aeroplan business, I noted the average spend tracked higher acquisition take higher AmEx normalizing, is that sort of a key driver here of that confidence or is this something else behind it as well, seasonality wise we should be thinking about?

Rupert Duchesne

Regarding that – you just said the right word, seasonality, the quarter as far as we are concerned was exactly what we expected and pretty much all of the items you identified were expected in lower quantities, I mean the seasonality of the business is pretty clear from historic patterns. There are one-offs, which we have talked about, you just listed. So it’s very much what we expected to see. And I will remind you that we have said that we expect the second half of next year – this year to be the time when things improve and normalize given some of the comps we have from the first half of last year, so that’s what’s underpinning our overall confidence in the guidance that we have given.

Kenric Tyghe

Great. Thank you. And then switching quick if I could to Nectar UK, how much of the performance in the quarter reflected deflation and so the continued deflationary challenge in UK grocery versus the bonus mile dynamic, I am just trying to sort of break it apart and better understand the moving parts within that number?

Rupert Duchesne

Look, deflationary pressures are still a dynamic in the UK and we will be some I think, sometimes Sainsbury’s have said they – publicly that they don’t see the market getting out of the deflationary states at least I think till the middle of 2016. So for sure that will be a dynamic. The other and things are suppressed net gross billings in the quarter which we talked about earlier were the British Gas I think in the last quarter we said British Gas would be about $30 million lower overall this year. And we saw I think a $10 million of that in the first quarter, as well as Q1 is the last quarter where we are lapping the old Sainsbury’s issuance structure, because it was in April they changed to the new structure. We had some benefit from Easter being in the first quarter, but those are the sort of key dynamics that I think about as you look at Q1.

Kenric Tyghe

Thank you.

Operator

The next question comes from Adam Shine from National Bank. Your line is open.

Adam Shine

Thanks a lot. Rupert, what’s the current life of the mile at Aeroplan, it used to be 30 months. I am not sure if you have updated us on that. And obviously, I speak to that in the context of we are heading past the, what is it, 27, 28 month mark in the context of the new program, at least with TD. Obviously, we go beyond that in terms of accumulation efforts. But just as we look out to redemption activity potentially back half of this year, maybe into early 2017 particularly given your explanation of some of the weakness we saw in Gates early in Q1? And then maybe a second question, PLM dividend was a nice surprise in the period. It certainly helped mitigate what otherwise would have been a greater miss to Street expectations, but is this dividend more timing or will be likely to see a greater dividend from PLM this year than expected? Thanks.

Rupert Duchesne

Okay, so we will do that in reverse order. The PLM dividend it is purely a timing issue as I said in my remarks, so that’s very straightforward. Yes, you asked – you raised a very interesting question around redemption pattern and how that relates to breakage, how it relates to the life of a mile and it is 30 months overall. And actually that varies within customer segment. But one of the very interesting things is despite all of the significant changes we made in the program that the life is what hasn’t materially changed and that reflects different characteristics by groups. Obviously, those people who are very heavily engaged in the program have much shorter life in miles and that’s exactly what you would expect, but also there are lower accumulators. You have very much longer and those two elements have remained in balance, notwithstanding the very heavy bonusing activity we saw during the launch of the revised program particularly in the TV.

Adam Shine

Anything we should think about this year in terms of timing of bonusing activity by your financial partners?

Rupert Duchesne

No, I mean as you – we have had very successful card acquisition behavior in the first quarter. And I think from a financial cards perspective, you will see pretty steady activity just in the course of the year, but as you know, not a great deal of activity happens over the summer in financial cards and there is usually a significantly heavy concentration in the fall. But I said I don’t want to give you any indications right now where that will be, because that will be welcome signal to some of our competitors as to when our partner intends to promote card usage.

Operator

Your next question comes from Drew McReynolds from RBC Capital Markets. Your line is open.

Drew McReynolds

Thanks very much. Just maybe Dave or Rupert just expanding on Nectar in the UK, I think we are all just kind of struggling with all the moving parts. When you get through the kind of revamp of the accumulation formula, when British Gas falls out or falls off on a year-over-year basis, what are we looking at in terms of kind of steady state gross billings and margins, can you help us out with that one?

David Johnston

Well, Dan, what we said at the last quarter from a growth point of view is that we will see growth in the second half. We expect to see growth in the second half of this year. We will still be lapping the British Gas numbers through the full year. The impact of that will be little bit less in third quarter, a little bit higher in the fourth. And – but overall, we are sort of in phase now where we are learning with Sainsbury’s on exactly how bonusing works when it’s best to use, when it’s driving the best return. And I think it will be the use of bonusing in the second half of the year that will drive growth in the program. From a margin point of view, I mean, we have not, Steve, you want to...

Steve Leonard

Yes. The margins themselves will still hold relatively similar to what we have seen historically, so that’s what we see.

Drew McReynolds

Okay, thanks for that. And just Rupert, you commented on just the balance sheet, the free cash flow priorities, you got the buyback and dividend in place. I think when you look out into 2018-19, just with some of your kind of refinancing requirements and the elephant in the room obviously with Air Canada renewals and overhang, just wondering if you approach kind of the later years here before 2020 in a more conservative way with respect to capital management. And then also to what extent do you somewhat lean on potential crystallization opportunities around PLM and Cardlytics, which in a good scenario could obviously generate a source of funds? Thanks.

Rupert Duchesne

Yes, look I think you pointed in the right direction. We feel that we have a significant asset base that is currently undervalued and/or not even really well understood. So, the out-years remains very confident about quite aside from our free cash flow generation. If I go back to the comment about dividend increase, we increased our dividend this year essentially looking at the underlying free cash flow performance of the business and the trend from ‘15 to ‘16 where we are seeing underlying growth and over the three years of our business plan of ‘16, ‘17, ‘18, we expect to see that growth continue and that’s what’s underpinned our dividend increase, because we feel that we should be thinking here for the long-term as to what is an appropriate dividend to payout given the free cash flow growth in the company as opposed to necessarily the yield, etcetera. So I think what we are signaling here pretty clearly is that we will continue to run a conservative balance sheet as we have frankly since the inception of the company. We will continue to treat the dividend as a reflection of the underlying free cash flow growth and we remain very confident that we have plenty of flexibility both from the operating free cash flow and from our asset portfolio with respect to future debenture maturity.

Drew McReynolds

And if I could just have one follow-up there, Rupert, just on the crystallization or potential of crystallization your investment in Aeromexico, I understand it’s a liquidity event. You have the potential to take control of that asset if you exercise that option. At this point, are you leaning towards using that investment as a source of funds just to kind derisk liquidity in the balance sheet as you get into negotiations with Air Canada?

Rupert Duchesne

Look I think we have the luxury of not actually having to address that right now and we have just – last year, we extended the CPSA with the airline to 2030 giving us a lot of runway. Secondly, we are just in market with the new credit card relationships, which are very important to the long-term value of the assets. And so we are quite some time away from the point where a public market event would crystallize that value. We have always said that we would like to consolidate those numbers in with Aimia overall, because they are very attractive and yes, we have got a very good dividend, but I think if you saw the underlying economics and that was reported and you would find it very appealing. So I think – I have given you the long answer, but short answer is we are just not at the point yet where we either want to or need to make that decision about the use of our asset that we have in the PLM investment.

Operator

Your next question comes from Stephanie Price from CIBC. Your line is open.

Stephanie Price

Good morning.

Rupert Duchesne

Good morning.

Stephanie Price

You mentioned the $20 million tax credit that you saw in Q1 ‘15, are you expecting that again this year in the future quarter or was that a one-time event?

Rupert Duchesne

Yes. Steve, let me just say with that, I will give you to address that.

Steve Leonard

Yes, that was just the refund that we got related to prior recruitment of prior tax. It’s a one-time event. We are not expecting to get that going forward.

Stephanie Price

Okay, thank you. And then in terms of the Aimia Loyalty Platform, I know that it’s relatively small percentage of revenue right now, but can you talk a bit about the pipeline there and the third new client that you just signed?

Rupert Duchesne

Sure. We have got a very strong pipeline for that product. And actually, we now have a broader suite of loyalty products and both the quality of the products and how they integrate and the reference services that we provide are how we are winning in the marketplace. I would love to be able to give you more sort of client by client, but what we find is some of our clients are very happy for us to disclose their name and talk about what we are doing. Others regard it as commercially sensitive for them. So, I am not going to get into individual names. What I will say is we have got some real acceleration and momentum as we are able to reference some clients in the marketplace, but it is a long sales cycle. This is a – an enterprise are relatively large implementation for our clients, so it’s a relatively long sales cycle. And we are however, delighted also this year to being as I said in the script, put the Airmiles Middle East program on to ALP. And that both helps us in improving the efficiency of the program as well as providing another great reference on the quality of the technology.

Operator

Your next question comes from the line of Anthony Zicha from Scotiabank. Please go ahead.

Anthony Zicha

Hi, good morning. With reference to Aeroplan, could we get some more color on terms of the redemptions front, David mentioned that consumers seem to be deferring travel because of the weakness in the Canadian dollar, are consumers staying closer to home and does this have, I guess positive impact on cash flow and also could you provide some more color on the fact that the frequent fliers are choosing more Tango fares and less international, is this also tied to the domestic travel?

David Johnston

So I will answer the redemption question first, redemptions are usually a bit stronger in Q1, but tend to be affected at times when we see a softer economy and a stronger U.S. dollar. And so as a result, we are seeing that the low Canadian dollar reducing leisure travel outside of Canada and both in trans-border and Europe destinations and a slight decrease on domestic travel, sorry a slight increase in domestic travel as Canadians are obviously staying at home and spending at home in Canadian dollars. So those are the trends impacting redemption.

Rupert Duchesne

Yes. And along the year, I think we – you – not you personally, but we generally talk a span of that there are really two sources of Mile purchased by Air Canada and there are, obviously the frequent flyers who are the heavy accumulators other than the occasional flyers. I would suggest very strongly that the behavior of the frequent flyers, which is primarily business travel, that really hasn’t changed at all, so frequent flyers are not accumulating less. What you are seeing in terms of the Tango fares and the Tango fares are aimed at primarily leisure travel and that is where the mix of miles awarded for various kinds of travel between different elements of the network have decreased a little bit, so I just want to be really clear that not to mix up how frequent flyers accumulate versus how leisure travels accumulate and then really is momentum of traveler we saw the Tango effect.

Anthony Zicha

Okay. And my second question refers to Nectar UK, so is there any impact tied to potential Brexit and how important is technology playing in terms of overcoming Nectar’s challenges?

Rupert Duchesne

So we see no impact from Brexit this year and no real impact for the international coalitions overall and no real impact on the Nectar program. And obviously, there maybe a little more economic uncertainty at Brexit happens. But we see no impact on our 2016 performance and Sainsbury’s themselves, obviously the largest partner, have also said publicly that they are – they take a neutral position on Brexit, which would indicate that they see the same. Obviously, the votes on June 23 and so by the time that we are reporting our second quarter, the result will be known and things should be much more clear. On your second question, we have talked quite a bit about this and we will continue to do, but you are absolutely right, technology is a fundamental part of how we are modernizing the Nectar program and setting it for growth. We are really happy with the results of the 1.7 million downloads, but not just the level of downloads, but the level in that sort of engagement that we are getting from customers. And the fact that we are actually adding new customers who are coming to us via the app and says to me that we are really on the right track with that program.

Tor Lønnum

Yes. I will just make a little comment on and to close that answer around currency. Clearly, if there were a Brexit, then one might expect the weakening of the British pound that currency guys are assuming. As you know, that might erode on a relative basis, our gross billings and a little bit more modesty on the adjusted EBITDA, but also we do quite a lot of development work in the UK and that would actually have the reciprocal effect of reducing our costs of technology development. So as David said from an operating point of view, we don’t really expect much impact one way or the other, but from a currency perspective, I wouldn’t say that we are sort of naturally hedged, but certainly it’s not as much as a problem as you might assume it would be where there to be a significant decline in the pound sterling.

Operator

[Operator Instructions] Your next question comes from the line of Brian Morrison from TD Securities. Please go ahead.

Brian Morrison

Good morning. Just a confirmation and follow-up of a couple of questions, if I can, so in terms of the credit card portfolio, just want to see if you get confirmation here, it looks like we have turned the corner on the card accumulation, as we lap in or change reform we are going to see sustainable growth in gross billing here and that’s been to drive free cash flow in the second half of the year. One, I wanted to confirm that that’s correct. And then part B, is this what’s giving you such comfort to raise the dividend here, your free cash flow derivation both Europe and Canada looks that it’s going to be second half driven, the yield is also fairly healthy, so maybe just walk me through the board process there, is it just simply that they have a tremendous amount of confidence in the outlook?

David Johnston

So Brian, it’s David, I will take the first part of that question and broadly the way you characterized the performance is correct and what we are seeing with key partners in the financial card space is this. First as volume continues to show year-over-year growth, primarily driven by TD’s performance, which is pretty much in line with the market, CIBC purchased volume was above expectations and both TD and CBIC delivered stronger than expected new card acquisition in the quarter and that also is like I said had an increased proportion of higher value cards. So yes, we see good performance on the card portfolio and we expect that through the balance of the year.

Rupert Duchesne

Yes. And Brian also to reiterate what I have said earlier, in the way that we look at this, we strip out the one-time items from the free cash flow. And we look very carefully at what the sort of multiyear pattern is on free cash flow growth. And thereby determine whether it’s appropriate to distribute more of that cash to investors through a dividend increase. And clearly, we have a mix of investors. We have investors who are lot of us to buyback stock. We bought back a lot of stock last year, if you remember. And we have a little pretty – really appreciate the dividend and that’s how we determine where we are at. And then sort of the underlying element here as well is clearly the stock in our view remains materially undervalued given our free cash flow profile as well as the asset base we have. And so yes, the yield is high at this time, but we are trying to look over a longer cycle as to what’s an appropriate yield should be given the underlying performance of the business, notwithstanding the recent volatility in the share price.

Brian Morrison

Okay. On a different note, one further question, so good news with respect to expanding the coalition with Toyota and the BRIC online here, it seems like a new – a refocus really on expanding the coalition offering, what verticals do you feel you have the best opportunity and potentially in the near-term or that you need to address?

Rupert Duchesne

Brian, I think we are probably going to say little there because that really does get into competitively sensitive territory. But I will say that when you look at the asset base, we now have in terms of not only the membership of the program, but the really detailed data we have and we share and we work within our partners, it is very clear that, that level of granularity and the data is immensely useful to potential partners who want to increase their share in the premium consumer sector in Canada. And that is why for example, Toyota sounds very interesting because we have – obviously, Toyota has a very broad spread of brands and positioning regularly across the market. So it really is – you are right to notice this sort of increased focus on expanding the coalition and that is driven by the quality of the data that we now have and analytics tools that we have developed to create and develop marketing programs from it. And frankly, the early news from Toyota has been exceptionally successful. Toyota is thrilled and as are we, so we have got a very good proof of concept here of using this new quality of data and analytics to drive performance in sectors, but historically we haven’t had a good argument to support they are being part of Aeroplan. We now did.

Operator

Your next question comes from the line of Robert Peters from Credit Suisse. Please go ahead.

Robert Peters

Hi, thanks very much. Maybe just looking at the Nectar UK, when we look at the last couple of quarters, there has been a little at least from my observation, there has been a bit of an FX tailwind helping out the top line there. I was just wondering how we should think about the trends on an organic basis and in terms of lapping the change in bonusing at Sainsbury’s, what else you need to see to drive a more meaningful top line growth from the business there?

David Johnston

I will let Steve comment on the FX first and then I will answer the operational question.

Steve Leonard

Yes, I mean, we do give you the information by segment and overall in a constant currency, so you do get to see the underlying performance of the business. And going forward, as we have said, there are some challenges at British Gas and the lapping this year of the change in the accumulation for better part with the first quarter. So, those things are working against us. And going forward, we are expecting to see the level of decrease go down over the rest of the year to a more stable level.

David Johnston

And operationally, I mean I think of growth in let’s say three ways. We have talked about it already. But first, we are materially improving the member experience. And as I said, we are starting see that impact levels of member engagement and even bringing new members to the program. So, we are very encouraged by that. We are going to continue on that journey. Secondly, we still have real opportunity to see growth from our existing partners in miles issuance. And we have up to this quarter still been lapping old levels of Sainsbury’s issue. And as we get into quarter two, three, four, we will be lapping the new program, it will be easier to rate how issuance sits. And we are obviously working with our partners on the use of bonus miles and where and how to use bonus miles, albeit as we have said before, the move from a base-led program to a more bonus-led program does drive a little bit more volatility from quarter-to-quarter. We have got a headwind, a little bit of a headwind in that, which I have mentioned already, which is food price deflation in the UK in the retail, in the UK food retail in particular is still a deflationary environment and we don’t expect that to correct. At very least in the second half of this year, it may be a bit later.

The third source of growth I have talked about is adding new partners to the program. We have got a good history with partners like eBay, British Gas and others being added to the program. It’s a huge focus for the management team this year and into next. And while I can’t talk about who or what is in the pipeline, we have got a strong pipeline. And again, as sort of as Rupert alluded to with Aeroplan, the digital transformation that we are making on the program and the level of data that we are now able to generate from the program means that we have got a bit of a stronger proposition as we talk to new potential partners than we did before, because we have got much richer data assets than we did before. These are the sources of growth actually for Nectar.

Robert Peters

Perfect. Thank you very much. And maybe Rupert, I think if we look back to last year and the first quarter, we saw there was a lot of kind of economic uncertainty that had kind of an impact over the back half of the year. Just wondering looking to kind of what you have seen in the economic trends in the first quarter, are those in line with your expectations and kind of your forecast for the year?

Rupert Duchesne

Well, look I think Dave talked earlier about the British economy in Brexit, etcetera. So, I will restrict my comments to Canada and clearly that it’s a significant engine of the business. We have seen choppiness. And I think you remember from previous two quarters, both November and February, we talked about the choppiness of card spend behavior in Canada from the second half. Basically from August of last year, as Canada went through really bumpy times with the federal election, etcetera and we made our guidance for 2016 on the basis of that being effectively carrying on through some of this year and that’s exactly what we have seen. Now, if you speak to the economist or you read the various reports around the economy, it does suggest that, that choppiness is still very much there. But as we have said, our guidance was based on the current level of choppiness. Obviously, if it gets worse then we might have some top line pressures, but frankly from what we see now and from the card spend statistics that we see, we feel comfortable about what we have said about the Canadian business.

And one of the very encouraging things and this is very much what we intended when we did the cards renewal was to have a great customer proposition and to make rewards easier to achieve. And then we knew that, that would drive cardholder growth and acquisition. And we have seen the acquisition as we said earlier stabilize and actually very attractive net rates going into 2016 and that will drive the future growth of the business even if the Canadian economy is choppy. So, the key – one of the key statistics we look at internally is, what is the net card acquisition rate or what is the quality of those cardholders? And as David said, that’s very good. That takes a while to ramp up, but that’s what gives us underlying encouragement about the prospects for growth. And we are very confident that Aeroplan will grow this year.

Robert Peters

Perfect. Thank you very much. If I could maybe just follow-up briefly to your comment on the cardholder or the net cardholder acquisition rate, you provided that active cardholder growth in the past. Are you able to provide that again for us this quarter?

Karen Keyes

Rob, I think we have given you sort of a trend line. We haven’t really given you numbers for a while. And it’s – we were giving you that to try and give you an idea of the trend. I am not going to promise we are going to give you that going forward.

David Johnston

I think it’s the trends that we will be talking about going forward.

Operator

Your next question comes from the line of Adam Shine from National Bank. Please go ahead.

Adam Shine

Thanks a lot. Just one more for you, Rupert, any update on the non-core assets? I know, obviously, you have engaged advisers mentioned probably for maybe two or three quarters now that the process evolves, but I am not going to press you on what assets are being targeted here, but maybe the scope of the assets, the level of market interest, expressions of interest and the potential of timing? Is this also obviously skewing into more of an H2 event or should we naturally maybe even assume some spillover of some asset sales into 2017? Thanks.

Rupert Duchesne

Unfortunately, I really can’t comment. The process is going well. In fact, it genuinely is going well. But we can’t comment on either scope or timing from the scope point of view sort of give the game away and we are going to be very careful about the competitive nature of the situation. From a timing point of view, we really can’t comment on that, because when asset sales become certain you have various accounting obligations. We are not at that point yet that we want to do that. So, all I would say is yes, the process has started – and not only it has started, it’s well advanced. We can’t really say anything more on that till we actually have a conclusion.

Operator

Your next question comes from the line of Drew McReynolds from RBC Capital Markets. Please go ahead.

Drew McReynolds

Thanks very much. Adam, meet me to the punch, but Rupert, one last one maybe just if you can give an update on new potential Greenfield coalition programs and specifically just if there has been any progress from your perspective on the U.S. market on that front? Thank you.

Rupert Duchesne

Yes, I will answer that one. I mean, on Project 11, what we would say at this point is that there would be no impact in 2016 from Project 11, which is the U.S. coalition. So even if we were to sign this year, we are now past the point where you would completely launch in 2016, so expect anything on the U.S. coalition front in this year.

Drew McReynolds

Thank you.

Operator

There are no further questions at this time. I turn the call back over to the presenters.

Rupert Duchesne

Thank you. Look, it’s – I am sorry just getting to the right spots here. What I would like to do just before I close and I have a few sort of closing remarks is to give Tor, our new CFO, a chance to share some initial thoughts. As I said, he has been on the ground for 10 days. So, he is very new, but obviously he is a quick study. And I thought it will be very helpful for you all to hear his voice and hear his initial thoughts. So Tor, please go ahead.

Tor Lønnum

Thank you very much, Rupert and good morning everyone. As many of you will know, I worked for a couple of large listed Nordic insurance companies before joining Aimia last week. And as Rupert said, not a lot of experience yet, but today I would just like to share some very initial observations. To me, Aimia is a company with a strong base in its Canadian hold market with a fantastic recognition in the Aeroplan brands. In addition, the company has attractive positions in other markets. It has a strong management team, with deep knowledge and insights into the loyalty industry. In my mind, it’s going to be important to simplify the business and our disclosure going forward in order for investors to better understand what is going on. The company has started that journey and we will continue on that path. There are several initiatives started to create the more cost efficient business, but it makes sense for me to emphasize and strength in that area.

And finally, the dividend level is healthy and it’s supported by the consistent cash generation of the business. Coming from another company with a high capital distribution, it is something that I feel is extremely important for a value stock like ours. Karen and I will be on the road to meet as many of you as possible. I will look forward to those meetings. I want to understand your comments, questions and concerns in order to cater for an open and frank dialogue with our shareholders. Thank you very much and back to you, Rupert.

Rupert Duchesne

Thank you, Tor. So, look I will just close with a few comments reiterating what I said earlier. We came into this year with a much more focused and disciplined approach. We came in with a significantly lower cost base and we will continue to pursue that. We are investing in our core businesses, which are worth last year demonstrated had appropriate returns on capital. We will dispose of assets to reconsider non-core and we believe that the business going forward has a good trajectory in terms of generating improved free cash flow. So, notwithstanding some of the comments that were asked and made around the fragility of some of the economies in which we operate, we feel comfortable with where we are in the quarter was as we expected and we look forward to talking to you over the coming quarters. Any of you who are listening into the Annual General Meeting in a while, we will hear some of that repeated again, but that again bears repeating, so look forward to talking to you then and obviously meeting a number of you on the road over the next month or so. Thank you very much.

Operator

This concludes today’s conference call. You may now disconnect.

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