Aug 12, 2016
Executives
Karen Keyes - Senior Vice President, 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 Brian Morrison - TD Securities Stephanie Price - CIBC Anthony Zicha - Scotiabank Drew McReynolds - RBC Robert Peters - Credit Suisse Adam Shine - National Bank Financial
Operator
Good morning. My name is Carol and I will be your conference operator today.
At this time, I would like to welcome everyone to the Aimia Second Quarter Results 2016 Conference Call. [Operator Instructions] I would now like to turn the call over to Karen Keyes, Senior Vice President of Investor Relations.
Karen Keyes
Thank you, Carol. 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, which can be found on Page 4. And finally, I just like to highlight that we will be using a slide deck that has a few new slides aimed at addressing some of the questions around long-term metric to manage the business that investors have asked us about.
We would welcome your feedback on these slides. And with that, I will hand you over to Rupert.
Rupert Duchesne
Thank you, Karen and good morning everyone. Over the last couple of quarters, we have emphasized our work to simplify and focus the business in order to deliver growth and shareholder value.
The work we have done in cutting costs, refocusing our capital spending and streamlining to focus on our core businesses is showing results, although it’s not a strong quarter, with a 7% decline in gross billings and that decline stemmed primarily from lower points issuance in Nectar for this quarter. Free cash flow was down due to lower gross billings.
Free cash flow per share was $0.26 in the quarter or $0.81 on a trailing 12-month basis. In line with our May dividend increase, we declared a quarterly dividend of $0.20 to common shareholders.
The dividend continues to be a fundamental part of our commitment to delivering returns to shareholders. We supported a strong payout ratio and free cash flow yield by our ability to consistently generate strong free cash flow of around $200 million or more in four of the last five years.
Our current outlook and reduced share count due to our completed share buyback program would see full year free cash flow per share increase in 2016. Looking at gross billings by division on Slide 8, we saw the strongest performance in the Americas Coalition, but gross billings were stable.
The two other divisions drove the decline in gross billings. Let me put out a few operational highlights here.
At Aeroplan, we saw a return to growth in the financial card base and retail also continued to be up supporting our expectation of full year growth for this business despite some weakness in travel and travel-related credit card spend. In Global Loyalty Solutions, we have been transitioning towards higher margin platform-based solutions with that portion of the business now representing close to 15% of GLS billings.
One example is the work that we announced yesterday with department store retail in Nordstrom, which has 329 stores in the U.S. and the Canadian expansion underway and annual net sales exceeding $14 billion.
Nordstrom’s expanded program available to all its customers is underpinned by the Aimia Loyalty Platform. New sign-ups to the rewards program are going very well with 1.7 million new members since May.
International Coalitions was slower in the quarter due to the phasing of bonusing campaigns towards the end of the year, along with the changes to British Gas, which we discussed previously. We are aligned with Sainsbury’s on where we will see the full year ending up, however and David is going to provide you more detail on that a little later.
So, let me talk a few minutes now about some of the actions we have taken to simplify the business. Today, we announced the sale of our Enhancement Services business to Sigma Capital for $15 million.
We also completed the transfer of the Cardlytics UK business back to Cardlytics at the end of June. And we continue to evaluate and consider further disposals of non-core investments and assets at the same time through our reorganization that took effect at the beginning of the year with fewer employees.
In fact, a 20% drop from the end of 2014 to the end of 2015 as well as a small executive committee, we have simplified the management of the business. Having already achieved some benefits in 2015, we remain on track for the additional $20 million of previously announced cost savings from the beginning of 2017.
Finally, we have also suspended our efforts to develop a U.S. coalition.
The competitive market factors affecting the key partner segment of growth rate and more general economic conditions led management of the board to conclude it was the right time to pause. We will continue to look for growth opportunities and markets for new coalition businesses, but only with appropriate time horizons to acceptable returns.
I should be clear though that we still consider the U.S. an important market for us.
We will continue to build out our GLS and our ISS businesses and some of that work gives the base for a potential coalition in the future if and as conditions improve. As we look forward to the remainder of the year and into 2017, we continue to monitor the economic context in our established markets.
One of the most significant events in the quarter outside of our business was the UK’s vote on Brexit. The resulting pound sterling weakness will impact our International Coalitions gross billings in the second half and is the largest single driver behind our adjustment to gross billings guidance for the year.
With the pound moving from the $1.9 to $2 range when we last spoke to you through $1.85 in the second quarter to its range today of closer to $1.70. Our current forecast assumes they will stay closer to vote levels through the second half of the year.
Overall in the UK, confidence remains fragile evidenced by last week’s move to cut both growth forecasts and interest rates, although grocery spend is somewhat less likely to be affected than other types of consumer spending. We have not currently assumed any weakening of consumer spend in our outlook for 2016, but we do remain mindful of what impact we might see in 2017.
Currency is also affecting our Americas Coalition business. In addition to affecting the top line in our non-Aeroplan business, volatility in the U.S.
Canadian dollar rate is affecting Aeroplan travel patterns. The weaker Canadian dollar is reducing travel demand for U.S.
dollar denominated destinations. This impacts our redemption mix and tends to result in lower gross billings both with Air Canada and on financial cards as cardholders spend less on travel and discretionary spend connected to travel.
Economic commentators are forecasting improving consumer spend in the second half. But given the pattern of downward revisions to economic forecasts in the last couple of years and wider global economic uncertainty post Brexit, we have not built a boost to card spend from household consumption encountered in trends into our forecast.
So, what does that leave us for the year? We now expect full year gross billings for International Coalitions to be down at least 10% on a reported basis from a year earlier as a result of a weaker pound sterling, leaving us to now expect consolidated gross billings between $2.3 billion and $2.35 billion.
About half of the revision to our top line guidance is currency mainly due to the drop in the pound. The disposals of Cardlytics UK and Enhancement Services in Canada will mainly impact gross billings together with accounting for a further $25 million of our adjustment.
We also are taking into account softer travel and travel-related spend at Aeroplan. And while we expect second half growth at Sainsbury’s, full year Nectar gross billings will end below – a little below what we had originally expected.
Other factors behind the year-on-year decline were already accounted for in our previous guidance. These include the $30 million regulatory-related reduction of British Gas and the $12 million decline from the wind down of Nectar Italia and the wind down of a single client in our GLS business.
The pressure on gross billings from our UK business when the pound falls is counterbalanced by a reduction in operating expenditures and capital expenditures that were occur – incurred in London including some of our global product development work. Finally, it’s worth remembering that with the shift of some Sainsbury’s campaigns to late in the year, the timing of accumulation payments will also shift to later in the year or the beginning of 2017.
This is what leads us to a narrowing of the free cash flow range for 2016. The simplification and cost reduction we are driving in the business, the additional cost measures we have taken taking as we have seen a weaker pound and the Nectar shift and lower capital spending should allow us to offset any impact on adjusted EBITDA and free cash flow.
Overall, we expected – we expect adjusted EBITDA margin of around 9.5% and expect to end the year in the range of $190 million to $210 million on free cash flow. So with that summary, let me hand you over to Tor, who will take you deeper into the financials.
Tor Lønnum
Thanks Rupert and good morning everyone. The second quarter came in $45 million or 7% lower than last year at $561 million.
The key driver was international coalitions, where we saw a $44 million decline primarily driven by lower points issuance at Sainsbury’s, issuance fell 33%. Sainsbury’s accounting role was 70% of the decline in Nectar transition, partly due to bonus activity shifting to later in the year as well as changes to the program accumulation in the early days of the quarter.
We expect higher levels of bonusing in the second half ahead of the important Christmas trading period. The positive element in the quarter was Americas turning to growth with a small overall increase of $2 million, primarily driven by Aeroplan financial cards performance and David will come to this in a moment.
The decline at GLS was $4 million or 7%. The wind down of a UK contract last year was the major contributor to top line pressure on the division despite some new business with existing new clients.
I wanted to come back to something I have said last quarter. There is always more to do on costs and operating discipline.
And these items will continue to be a priority for me. You will see in the slides the introduction of a waterfall chart detailing progress on operating expenses that we expect to cover every quarter.
We will also aim to cover the underlying drivers of operating expenses quarterly. In Q2, we were cycling last year’s one-off of $46 million related to the reduction in the migration provision we took when we did the deal with CIBC.
We have adjusted accordingly in the slides, so you can see the clean numbers. After adjusting for that, operating expenses overall were down $3 million or 1%, primarily driven by efficiency gains in Americas where we saw a greater than 10% reduction in year-to-date contact center operating costs, but also a small positive in International Coalitions.
However, the lack there was primarily driven by the wind down in Italy. Elsewhere, we have costs steady with some benefit from share based comp offsetting the timing of professional fees and severance costs in the quarter.
We also absorbed the costs related to our ongoing investments in the transition of our IT services under our outsourcing contract with HPE. Around $3 million of transition costs are included in the Q2 numbers.
Going forward, the ambition will be to adjust expenses more closely to expected medium-term top line developments. Adjusted EBITDA was $7 million or 12% lower than last year at $55 million.
In Americas, we saw an increase of $7 million or 13% primarily from higher gross billings, improved Aeroplan gross margin resulting mostly from lower unit costs. International Coalitions decreased by $9 million due mainly to lower gross billings.
The decrease of $4 million in corporate services was a result of the lighter PLM distribution last year. CapEx and cost of rewards are trending lower for the year with the latter due to lower Nectar redemptions.
However, the significant drop in Q2 gross billings in International Coalitions meant that free cash flow for the quarter excluding $5 million of severance payments was 17% below last year at $49 million. The PLM distribution, we normally get in Q2 was also received a quarter early, i.e.
in Q1 this year. Quarter-to-quarter, gross billings and free cash flow are impacted by the timing of promotional campaigns and events.
However, there are observed seasonal patterns, which you can see on this slide. Typically, free cash flow is negative in the first quarter as this is when we see outflows from higher redemptions.
On average, 45% of Nectar point redeemed are in the fourth quarter and approximately 30% of Aeroplan miles redeemed are booked in the first quarter. Payments to fund these redemptions occur predominantly between December and March.
January is also a slower month for spend on our Aeroplan financial cards. Cash flow billed through the second and third quarter to fourth quarter typically has the strongest cash inflow due to bonusing at Nectar and underlying Aeroplan card spend during the December holiday period.
Our CapEx is also trending down. CapEx was $9 million lower than that same quarter last year and $5 million lower than in Q1 this year.
The 31% decrease in Americas Coalitions CapEx versus last year is mainly attributable to prior year contact center and real estate transformation initiatives with expenditures on furniture and fittings in the prior years as we merged offices. As you will know from previous disclosure, the Americas represents the most significant element of our CapEx at 42% in the quarter and supports the transformation of our platforms to provide features such as increased one to one personalization.
In 2016, we are also investing in a significant refresh of our ISS products. Given the current trend of spend on some foreign exchange benefits, we expect full year CapEx to land in the range between $70 million and $80 million, down from the $75 million to $85 million we have guided to previously.
And finally, let me speak to our balance sheet. At the end of the quarter, available cash was at approximately the same level as Q1, around $100 million to $130 million.
We are introducing a range to cater for the normal patterns fluctuations in working capital as we see through the year. The current level of available cash continues to build our capacity for possible debt repayments if we choose to do so.
And our covenants continued to be well covered and protect our investment grade rating. As I said at the Q1 call, I have been spending some time looking at the balance sheet we need for the future and intend to address overall approach to the balance sheet in Q3, which will naturally include balance around January 2017 maturities.
As I look at this and other investments we have made, I will also be very focused going forward on the return metrics by which we are able to demonstrate solid returns to shareholders over the longer term and allow you to track it directly. And with that, I will hand it over to you David.
David Johnston
Thanks Tor. Let me take you through some of underlying KPIs in each of the businesses.
Gross billings for Aeroplan, which contributes the lion’s share of our Americas Coalitions results rose $5 million in the quarter with miles issued up 4%. That real story was in our financial cards, where gross billings climbed $7 million or 3%, TD in particular rising 12% on strong new card acquisitions.
Miles issued on financial cards rose 7%. These results, combined with a strong performance from retail, in particular, our new partner Toyoto offset some softness in travel and discretionary spend connected to travel along with declines in other businesses within the Americas Coalitions division.
We continue to forecast growth in Aeroplan gross billings for the full year driven by a stronger active cardholder base. Our average 1 month active cardholder base at the end of June was up 4% from year end owing to both strong card acquisitions and lower attrition.
And you can see here, the longer term impact on the active card base jumping to a compound annual growth rate of 3% since the new card deal versus the historic rate of a 1% pre-deal. One contributor to people’s use of their financial cards is their plan members having satisfaction and that’s also been improving.
Program enhancements are driving positive member satisfaction. The important launches this year of new mobile app brand campaign are empirically proven claim of Get any Seat.
Fly for less, along with the introduction of cash free redemptions have all contributed to increasing member satisfaction. With the introduction of cash-free redemptions, we effectively removed a customer pain point, while continuing to deliver the best overall reward value in the market.
Our Aeroplan unit costs, is trending down contributing positively to gross margin and adjusted EBITDA in the quarter. Higher Aeroplan redemption expenses were driven by a 5% increase in miles redeemed in the quarter.
Put together, the higher miles issued and higher miles redeemed nicely illustrate the engage – the increasing engagement in the program. Our burn/earn ratio was seasonal, highest in the first quarter, when members typically redeem more and accumulate less and lower in the later quarters of the year when accumulation grows.
In Q2, burn/earn of 84% is in line with the 83% of the year-on-year. The ratio tends to be the inverse of breakage rate over the longer term.
Our core coalitions provide an important base for growth and Aeroplan’s second quarter illustrates the ways in which growth will come. Adding new partners to the coalition can be an important element of growth.
Toyota, which joined Aeroplan this year, drove strong growth in retail in the second quarter. We will continue to focus on expanding our partner base across verticals.
We are also focused on growth from our most significant partners, TD, for example, continued to market to new potential cardholders within their existing retail base and delivered good growth. Opportunities also exist to grow with other partners, of course.
Our portfolio of long-term contracted Aeroplan from a significant base of gross billings certainty with such partners accounting for about 44% of consolidated gross billings in 2015. TD, CIBC and Air Canada each have at least 3 years to run and about one-fourth of Aimia’s consolidated gross billings and half of Aeroplan gross billings are from TD and CIBC with contracts that run to 2023.
Our history of contract renewals demonstrates a solid pattern of maintaining and strengthening these relationships. Looking at results for our Internationals Coalitions business, you will see the impact of reduced points issuance at Nectar just having not just from Sainsbury’s, but also at British Gas regulatory changes contributing to the decline to Nectar.
This will continue to impact us through the rest of the year. On Slide 26, we have illustrated how the issuance of points in Sainsbury’s this year is weighted to the second half.
Grocery price deflation in the UK that has weighed on Nectar for a couple of years also continues. However, the most significant factor in the year-over-year drop in the second quarter, the Sainsbury’s delay of some campaigns towards the end of 2016 where similar campaigns such as a 10x fuel push occurred in the first half of 2015.
And remember, there was some extraordinary bonus in Q2 during the program – Q2 2015 during the program change last year. We expect to see major campaigns and additional personalized communication running through the next two quarters meaning the second half will obviously be stronger than the first.
That will close most of the GAAP against last year that exists at the half year mark. The expected decline of 3% points issuance versus 2015 reflects a grocery pricing and the implementation of the newer accumulation strategy last year.
As with Aeroplan, member satisfaction has increased with the re-launch of Nectar’s digital first and product changes will improve margins over time. Finally, turning to our Global Loyalty Solutions business, we continue to evolve this business out of low margin commoditized offerings towards higher margin business with scale clients.
We have gained business from new and existing customers in both the United States and Asia and I am particularly proud to announce our engagement with leading U.S. retailer, Nordstrom.
Overall, the transition to a new mix of clients weighted towards product-based solutions with recurring revenues is going well. For example, by the end of 2016, we expect revenue associated with smartphone to be 4x the size of the revenue base that we acquired in 2013 and we continue to broaden our work with existing clients as well as having a strong pipeline for that platform.
We are cycling through the wind down of a UK contract last year, which represented gross billings of $4 million in Q2 2015 and around $20 million for the whole year. And with that, let me hand you over to Rupert.
Rupert Duchesne
Thank you, David. Look, to sum up, we knew this is going to be a challenging year.
The results this quarter were driven mostly by Nectar for all of the reasons that you have heard and so it wasn’t a great quarter. So, we are looking forward to a stronger second half and notwithstanding the currency effects on the top line.
Our strategy at Aeroplan is delivering good results at the midpoint of the year and the investments that we and our partners have made are really starting to show traction. As consumer confidence improves and the trends in travel turn, we will see the full effect to our accomplishments in that business through the coming years.
All up, we are very aware of the fragility of the global economy to the various political and economic variables at play and the work we have done to adapt to such forces thus far has insulated our profitability and free cash flow as it should. And if we are required to take further action on costs, we, of course, will.
We are quite focused right now on delivering. And so when we take a look at where we are halfway through the year we are quite comfortable with where we are headed for 2016 which is reflected in our revised guidance and beyond with our simplified and focused business.
And with that, I will hand over to the operator to take your questions.
Operator
[Operator Instructions] Your first question today comes from Kenric Tyghe from Raymond James. Your line is open.
Kenric Tyghe
Thank you. Good morning.
Rupert Duchesne
Good morning.
Kenric Tyghe
Rupert, talking just – dive straight in on the Sainsbury’s discussion here and the bonus and bonus phasing, certainly initially with the switch to bonusing, which seem to be something that will be driven around key seasonal events. And it seemed to have some lumpiness in it, but not necessarily phased or weighted towards the end of the year.
That seems to be something of a shift or a changing of the goalpost as the year has moved. And I am just curious the commentary with respect to the points issuance being some 3% below ‘15 year-on-year, is that – what’s the level of confidence around that number with it being weighted towards the end of the year?
And is that going to be driven off the three campaigns that are currently scheduled? Will those three companies get you there?
Or will they need to be something beyond those three campaigns that is not yet sort of on the card, so to speak? And if you could just generally speak to your sort of confidence around how this landscape appears to have shifted through the year and perhaps why it appears to have shifted through the year in terms of the Sainsbury’s dynamic?
Rupert Duchesne
Yes, look I am going to ask David to answer that, because he is right there and then I will top off if there is anything else to add, but we actually see this as a high-class problem. It’s a phasing issue.
It’s not a health issue. But let me ask David to dive into the detail on that for you.
David Johnston
Yes, I think, Kenric, you talk about shifting goalposts, so what hasn’t shifted is what we have been saying since the change to a more bonus-led campaign is that points issuance will be more volatile and therefore – and somewhat more difficult to predict from certainly from the outside. And what we are seeing here as we said, first of all, the change in issuance happened in April last year.
And around the time of the change in issuance, there was a massive bonusing campaign in order to effectively solidify the new scheme and we are lapping that right now, which is one of the things that makes quarter two look a little bit weak. And if you think about the Sainsbury’s, what will be the reason they wanted to move to a more bonus-led structure is that they can use the points to support various promotions and seasons in their business.
And really what you are seeing in the shift in phasing is that the majority of those campaigns now weight into the second half of the year. So, this is – it’s really a question of one of our partners choosing when to get the best return on investment and the points.
And I would expect to see quite a lot of campaigns in the autumn period and then the run up to Christmas and you understand the seasonality of the grocery business and why that would make sense. As I said, the other – there is another underlying variable here, which is that food pricing remains a deflationary environment in the UK.
So that is frankly, a bit of an unwelcome pressure on the overall level of issuance through the year. That factor compared with – obviously, you are right to say that with the weighting of campaigns into the second half of the year, makes it a little bit – gives it a bit of a higher risk profile.
So the combination of that and the level of inflation is why we have taken a view on the 3% reduction through the year.
Rupert Duchesne
Ken again, the only other thing I would add is that this isn’t sort of we are hoping for campaigns to happen in the second half of the year. We have meticulously planned with Sainsbury’s exactly which campaigns we are going to have and when, which gives us the confidence on the full year numbers.
And so this is a result of incredibly detailed joint planning work for the remainder of the year learning from what happened last year and how effective the campaigns were at what particular points in order to absolutely maximize the bang for the buck with the consumer in the critical trading periods of Sainsbury’s. So there is a lot of science behind this and the base plus bonusing is working.
It’s as David said, it’s just less predictable from the outside in, but rather understandable on a full year basis.
Kenric Tyghe
Thanks Rupert. And then if I could just switch gears back to Canada quickly, what are the dynamics that play between the spar [ph] performances of the CIBC and TD products given that both our premium card products with TD puts up a double-digit comp in the quarter and CIBC anything but, could – I am struggling to reconcile quite why we are seeing such despotic performances from two premium segment focused Visa products?
David Johnston
Yes. I mean what I would say is that, what TD have done a particularly good job in the quarter is card acquisition.
Card acquisition at TD has been particularly strong and I see that as a reflection of things that we have talked about in previous quarters in terms of the alignment we have with TD on marketing and the level of focus that both ourselves and TD have put on the marketing of the card portfolio. And so I think TD are particularly successful because of the success in card acquisition.
Card spend at TD and CIBC is actually broadly stable, so I think really the story is about the success of TD, an acquisition, which you would expect given the nature of the relationships.
Operator
And your next comes from Brian Morrison from TD Securities. Your line is open.
Brian Morrison
Good morning. Rupert, if I can just follow-up on the Sainsbury’s question, how far in advance do you see the campaigns or the lack thereof, the reason I ask is the bonus issuance is only in euro, but I want to know what the track record of campaigns being delivered upon are both recently and historically, because you mentioned the detailed planning, but I think most are going to be quite surprised here by the issuance decline with other being telegraph last quarter?
Rupert Duchesne
This is a difficult one to answer because not because the answer isn’t clear, but we are not going to be telegraphing to Sainsbury’s competitors when Sainsbury’s is going to have campaigns. That – yes, it is concerning to investors, we totally understand that.
But to say Q2 is going to be lower in terms of bonus issuance is a signal that Sainsbury’s would be furious with us for giving to the market because their competitors listen to what we say about Nectar. So we are slightly and obviously importantly, beholden to them about just how much we can say about the timing and the magnitude of promotions and it would be competitively foolish for us to be any different.
So what we have said from the beginning of the year is that this will be lumpy. We have said that we expected to be roughly what it was for the previous year and it will be within a couple of percentage points.
But we are not going to be more specific on the timing of this because it would just be damaging to their business and by implication to our business.
Brian Morrison
Okay. Thank you.
And then a follow-up question here and perhaps this is for Tor, I just looked at Page 23 of the handout and David illustrated the trend at Aeroplan of the burn/earn moving towards the inverse of breakage, with the trend moving towards 89% in the graph, I would have thought this would have been a prolonged process, can you just detail the horizon you see this unfolding?
Tor Lønnum
The – I think there is a couple of things that I would like to highlight. Number one is and Karen alluded to that as a part of the introduction, it’s really important to say that the reason for introducing the slide is not because anything has changed, it’s just to sort of provide additional information that has been requested by various investors.
Now, in terms of the pattern that you are alluding to as far as I have gotten sort of in terms of looking into the various parts of the balance sheet, I would say that this is an area where I have been able to sort of look into it in quite a bit of detail and I feel relatively confident that this is the long-term assumptions that we are making here is holding very well.
Rupert Duchesne
And I would just remind you that when we introduced the changes in the Aeroplan program in early 2014, we did say it would take approximately 3 years for the stuff to stabilize and that is what you are seeing. From what we see now, the 11% is really solid.
If anything, it may be slightly too conservative, but it is the right place. And by slight too conservative I mean it might be slightly too low.
But frankly, we are going to keep it where it is and over the next year as things finish sort of stabilizing with new business model, we will continue to look at it carefully. But we are very happy with where it is right now and the earn/burn trends that underpins the long-term forecast on breakage.
Tor Lønnum
So that was in my words very fully.
Rupert Duchesne
Yes, but just getting used to the different streams Scandinavian and Canadian English here.
Operator
Your next question comes from Stephanie Price from CIBC. Your line is open.
Stephanie Price
Good morning.
Rupert Duchesne
Good morning.
Stephanie Price
I was wondering if you could talk about additional cost efficiencies, you mentioned that a couple of times in your prepared remarks, what else can you do here?
David Johnston
I think again, we have talked about this a little bit in previous quarters. Last year, we restructured from each of the divisions and took quite some headcount out of the business.
This year, as we have said, our primary focus is more on property and procurement, so we are rationalizing our property footprint both in Canada and elsewhere. We have already done that in Toronto.
We have got plans in place in a number of locations. So a pretty material property savings and we are also working hard on procurement, particularly in the IT space, but not just in the IT space.
And I will also say that while headcount savings aren’t a major focus of how we are taking costs out this year. You will – you have seen I think Rupert talked about it in his remarks an overall reduction in headcount through the year.
Rupert Duchesne
The other thing I think I have said first, a number of quarters in a row is with the disposals that we are undertaking, we are obviously taking the costs associated directly with those businesses out but we are also taking out related costs. And until those businesses are gone, it’s a little hard exactly to quantify those.
But these are businesses that do require technology support and other related support. So as those businesses transition out, we expect to find some additional savings related to them.
And as we have said their businesses don’t fit our new more focused strategy and they don’t have the margin or the growth profile that we expect from our existing core businesses.
Stephanie Price
Okay. And then could you give us a few more details on the Nordstrom partnership and how you are thinking about the GLS business at this point?
David Johnston
Sorry, I didn’t hear the second half of that question.
Rupert Duchesne
How you are thinking about the GLS business?
David Johnston
Right, okay. So Nordstrom first of all, a marquee client and from our point of view significant both for what it represents of itself, but also significant for what it indicates to the market from our point of view from a business development point of view.
So with Nordstrom, we have helped them re-launch their program. It runs on the Aimia Loyalty Platform across their total base.
And as you heard in the remarks, they are recruiting new members into that program, there are 1.7 million members and to-date with Nordstrom we have very ambitious targets for what that number will grow to. So, it’s a great example of what we call platform and wraparound services with a revenue model that’s anchored in on a recurring revenue stream going forward.
So, we are very proud of that, but also obviously what that does is it really helps our credentials deck and as we go run the market. Nordstrom is the first major retail clients on our Aimia Loyalty Platform.
When we are talking to the next client and obviously that really improves our sales credential, because we have got that use case, we have got that reference case there. And more broadly, it’s a further demonstration of what we have been talking about for a while and what we are doing in trying to – in reshaping the GLS business.
The business was historically anchored in low margin and primarily rewards fulfillment business. We are working hard to shift the mix out of that low margin primarily rewards business into higher margin recurring revenue platform and wraparound services.
And quarter-on-quarter, I won’t go back and list all the names, but pretty much every quarter, we have been able to tell you about a new marquee brand name that demonstrates that blue chip companies like what we are offering, which gives us optimism in the growth and ultimately the positive returns from that business.
Operator
Your next question comes from Anthony Zicha from Scotiabank. Your line is open.
Anthony Zicha
Good morning. David, could you give us a bit of an idea relating to Aeroplan’s 4.9 increase in redemptions?
Specifically, how much of that increase would be related to the air reward redemption whereby consumers would be using their miles to pay for taxes and fees and could this trend accelerate over time?
David Johnston
Well, some of that increase is due to people using miles for taxes and fees and we see that as a key part of building the value proposition of the program. And as we have talked about removing sort of pain points that are there as consumers look at the program.
And cashless redemption, which is another factor is also has been up in Q2 and was another positive development for the program and after we really breakout within the 4.9 the contribution of each of those individual drivers.
Anthony Zicha
Okay. What was the main driver behind the margin, the 20% margin increase during the quarter?
Was it more of a mix of non-air versus air? And have this event played a factor?
Rupert Duchesne
It really was a mix issue within air, Anthony, as opposed to air, non-air. So, a heavier mix towards classic which as you remember has a slightly higher margin to us so that is the primary positive factor there.
Operator
Your next question comes from Drew McReynolds from RBC. Your line is open.
Drew McReynolds
Yes, thanks very much. Maybe Rupert or David, just high level, when you look at the dynamics in the U.S.
in terms of putting that on pause and then obviously Italy shutting down and then some growth headwinds in the grocery sector from Nectar UK. The theme here looks as if that coalition model that’s based around grocery certainly not as maybe promising as it was before.
Is that an incorrect statement? Can you maybe just provide additional context around the growth outlook for, particularly Nectar UK once the dust settles, but also the potential to create more loyalty programs out there around the grocery sector?
David Johnston
Yes, look it’s just a fair question, but I wouldn’t make the correlation. So, let me take the sort of three things you talked about in turn, because I think the drivers are a little bit different.
UK, a large market – a large and primarily fragmented grocery market, we always said that you need a grocery to launch. And at this point, the sort of competitive dynamics in the U.S.
have sort of impeded our progress on getting a grocer and therefore, we, at least for now suspended our efforts. We still think there is an opportunity in the U.S., but the dynamics in grocery at this point mean that we didn’t see clear line of sight to returns at this point, so we pulled back.
I think those factors are frankly quite specific to the UK and I would love to go into more detail here, but I can’t, frankly more specific to the dynamic as some of the individual major players within the U.S. market.
So, I think it’s very much of factors within that market. The Italy situation was different.
Italy suffered greatly from the recession in 2008, 2009 and the hypermarket market was even more – and impacted by the recession in Italy and the south of Italy was even more impacted and our grocery partner skewed towards hypermarkets and skewed towards the south of Italy. So, there was a triple whammy on macros in that market, which in the end just unfortunately meant that the program wasn’t really sustainable.
I think those are two very different things and we have talked really about the UK environment, which I see very differently. We still have clear growth plans for growth in the UK.
What we are dealing with this quarter and through the rest of this year is a phasing issue not a health issue and we are investing to make Nectar more digital program and we are quite happy with some of the metrics we see both from a consumer point of view and even from a redemption margin point of view through those developments. So, I understand why you might – it’s tempting to make the correlation.
I don’t see that correlation there. And if I look at our longer term business pipeline, we have got gross – we are talking to grocers in other markets right now about potential developments in the future.
So, the grocery sector is still very switched on to loyalty.
Rupert Duchesne
Yes, let me just add two other comments. Remember, there was quite extraordinary growth in Nectar for a couple of years up until just very recently when the UK economy got difficult.
And the primary sort of basis element here was the regulatory change with British Gas that cost – that took $30 million worth of gross billings loss not because the partner didn’t love the program. And in fact the partner has done their very best to reinvent the program within the rules, but simply because of a regulatory change.
So, I don’t think that says anything about the health. I think the health of the business in the UK is determined by the engagement of consumers for our big partners like Sainsbury’s and BP and they are very happy with where we are.
The second point I would make is to do loyalty and the way that we do it in a best practice sense in the UK with Nectar requires a full digital mobile solution that is deeply integrated with the grocer’s technology platforms and point-of-sale. European grocers and frankly in a number of other jurisdictions around the world who develop these technologies, these point-of-sale technologies more recently are well ahead of the state of the art in the U.S.
And what we have found with essentially with digital Nectar is that, that is what consumers want. But if you can’t support that with the technology both from the loyalty company, which we obviously have through what the ALP and through what we do with Nectar, you need the grocery partner to have the same capabilities and they are not as advanced as they might be.
So, that’s a really important consideration here. And some other countries in the world to sort of put in their point-of-sale systems much more recently to actually have these capabilities, so it could be that in the years to come, we find that there are opportunities elsewhere in the world with some of the more traditional markets because of the technology gap just aren’t quite ready.
Drew McReynolds
Yes, that’s very good color from both of you. Thanks for that.
A quick one follow-up just on the GLS, can you give us a sense of when we see the declining contribution from rewards fulfillment just play out? Is there a kind of revenue mix breakdown you can provide between the legacy piece and the growth piece?
Rupert Duchesne
Look, it’s a great question. Let us come back to you with that in a future quarter because it’s not something we have previously talked about.
Clearly, you heard us talk about where the sort of the super new platform business has reached, that’s 15% of gross billings. But let us come back to you with a more considered answer on that, because we haven’t really talked about that in a way and I would like to make sure that we are giving you a very clean and crisp answer.
Operator
Your next question comes from Robert Peters from Credit Suisse. Your line is open.
Robert Peters
Thanks very much for taking my question. Rupert, just given the cardholder growth we saw at Aeroplan in the quarter, I was wondering if you could provide us an update on churn trends and maybe if you could remind us what a normal number of cardholder acquisitions would be to get back to 2014 cardholder levels, I believe that’s kind of indicated by Slide 21 in the presentation?
Rupert Duchesne
I am not quite sure we actually – the line is a little crackly. I am not sure exactly I heard the question, would you mind – I think it was around what is the normal level of cardholder acquisition versus we have seen, but I actually – we didn’t get because none of us in the room here got the question.
Robert Peters
Can you hear me better now?
Rupert Duchesne
Much better, yes.
Robert Peters
Sorry, must be an issue with my headset. I was essentially saying if you could give us an update on churn trends in the cardholder base in Aeroplan and then remind us what like a – what a normal level of acquisitions would be just if...?
Rupert Duchesne
Okay. That’s – we have now totally get the question.
We saw very, very high levels of attrition in ‘14 and ‘15 as a result of the some sort of massive sign-up of cards we saw in ‘14. Those attrition levels are now back down to a normal level.
And in a typical year, we would normally expect to add something like 100,000 new credit cards. It has been higher than that because of the extraordinary ongoing success of – but we are well ahead if net acquisition compared to where we were in 2013.
And we do expect to continue to see effective acquisition by TD. Exactly what the attrition rate will look like from the cards they have acquired in the last 12 months and since we passed through the interchange level, it takes a year for that to wash through, but these are better quality cards and the spend happens we are building on them.
So we think that this is actually a really healthy sign for the business.
Robert Peters
And Rupert, maybe to follow-up and talk about the average spend, so it sounds like it was higher than the original TD cardholders when the new program launched, but could you give us any kind of or is it – how is it compared relative to your legacy cardholders?
Rupert Duchesne
We are not – I think what I would like to say there is that it is still early days on these new acquired cardholders. In other words, the overall spend in the program essentially was flat this quarter.
We have talked a little bit about why that was and it was sort of up on non-travel stuff and down on travel stuff, which essentially gave us flat spend. What we are focusing on now is share of wallet by credit card, so the average spend on these cards is below the historical average spent per card that it is building and the secret there is for us to encourage people when they have these cards to concentrate their spend on the Aeroplan card and there are programs in market to encourage that.
Operator
[Operator Instructions] Your next question comes from Adam Shine from National Bank Financial. Your line is open.
Adam Shine
Thanks a lot. Good morning.
I guess I will go back to the flip side of Anthony’s question, we see cost per mile going down for the second quarter this year, part of it I guess goes back to Rupert’s response in terms of more classic within travel and then perhaps also to what David was talking about in terms of miles for tax and fees, are there any other elements worth highlighting, how should we see the trend evolving in the back half of this year and maybe any telegraphing of trend in terms of continuation into ‘17? Thanks.
Rupert Duchesne
Look, I – sorry, go ahead.
David Johnston
Well, I think he captured the key drivers in the question.
Rupert Duchesne
Yes, well answered. Your answered your own question very well.
David Johnston
Sure.
Rupert Duchesne
It was basically flat.
David Johnston
I would probably say that trends broadly flat going forward.
Rupert Duchesne
Yes. I mean one thing we are seeing at the moment is a little bit of additional classic being given to us to account and particularly on international routes.
So that is part of the equation that you saw and we expect that to continue through the course of the year given what Air Canada has said publicly about the way their global network is performing. So I think you should basically expect that to be flat to H1.
Adam Shine
Great. Thank you for that.
Operator
And we have no further questions in queue at this time. I will turn the call back to Mr.
Rupert Duchesne for closing remarks.
Rupert Duchesne
Thank you. So where I would like to end here is just to sort of reiterate what I said before we went into questions.
This is a challenging year. The global economy as everybody knows is fragile.
But underneath that, we actually feel the pretty aggressive actions we have taken over the last 18 months to focus and simplify the business, get the cost base trimmed and really focus on our core businesses is working. We have – we believe we are going to weather the currency and foreign exchange issues very well.
Notwithstanding having spent a little bit more through the transition of our technology through the outsourcing agreement with HPE that helps us with the longer term cost base. And Aeroplan in a pretty flat Canadian economy is performing very well.
So we actually feel very good about the revised guidance notwithstanding we had to bring the top line down so the combination of factors we talked about, which is currency, disposals and a little bit of economic caution. We are confident around our adjusted EBITDA being in pretty much where we said at around the 9.5% that’s slightly better and the free cash flow Tor talked to you through the bridge.
So at this point in the year and after frankly, a lot of very meticulous work on what the next six month is going to look like because we obviously did not want to repeat of what happened last year. And the management feels that the company is in a good place and the results will come notwithstanding the lumpiness that you saw in this quarter because of commercial decisions that were right for us and our partners around Nectar in the UK.
So we look forward to speaking to a number of you individually over the coming weeks and we will be back to you in November on a formal basis. Thank you very much.
Operator
This concludes today’s conference. You may now disconnect.