Investor Presentation March 2009 A Confidential Presentation - - PowerPoint PPT Presentation

Investor Presentation

March 2009 A Confidential Presentation

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GROUPE AEROPLAN

Senior Management Team

Rupert Duchesne

President & Chief Executive Officer

David Adams

Executive Vice President & Chief Financial Officer

Patricia Moran

Head of Investor Relations

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GROUPE AEROPLAN

Forward-Looking Statements

Certain statements in this presentation may contain forward-looking statements. These forward-looking statements are identified by the use of terms and phrases such as "anticipate", "believe", "could", "estimate", "expect", "intend", "may", "plan", "predict", "project", "will", "would", and similar terms and phrases, including references to assumptions. Such statements may involve but are not limited to comments with respect to strategies, expectations, planned operations or future actions. Forward-looking statements, by their nature, are based on assumptions and are subject to important risks and uncertainties. Any forecasts or forward-looking predictions or statements cannot be relied upon due to, amongst other things, changing external events and general uncertainties of the business and its corporate structure. Results indicated in forward-looking statements may differ materially from actual results for a number of reasons, including without limitation, dependency on top four commercial partners that purchase loyalty marketing services, including Aeroplan Miles, Air Canada or travel industry disruptions, Air Canada liquidity issues, airlines industry changes and increased airline costs, reduction in activity, usage and accumulation of Aeroplan Miles, retail market/economic downturn, greater than expected redemptions for rewards, industry competition, supply and capacity costs, unfunded future redemption costs, failure to safeguard databases and consumer privacy, consumer privacy legislation, changes to the Aeroplan and Nectar Programs, seasonal nature of the business, other factors and prior performance, regulatory matters, VAT appeal reliance on key personnel, labour relations and pension liability, technological disruptions and inability to use third party software, failure to protect intellectual property rights, currency fluctuations, interest rate and currency fluctuations, leverage and restrictive covenants in current and future indebtedness, dilution of Groupe Aeroplan shareholders, uncertainty of dividend payments, level of indebtedness-refinancing risk, managing growth, as well as the other factors identified throughout the MD&A. The forward-looking statements contained in this discussion represent Groupe Aeroplan’s current expectations as of February 26, 2009, and are subject to change. However, Groupe Aeroplan disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required under applicable securities regulations. Dollar amounts are expressed in millions of Canadian dollars, except “Per Share” amounts, or unless specified otherwise.

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GROUPE AEROPLAN

About Groupe Aeroplan

• Global leader in loyalty management with a presence on three continents
• 25 years operating experience
• Financial highlights in 2008
• Gross billings of $1.4 billion
• Adjusted EBITDA of $317 million
• Free cash flow of $301 million
• Cash balance of $665 million
• Widely held and publicly traded company on the TSX (TSX: AER)
• Market capitalization of approximately $2 billion
• ACE Aviation sold remaining interest on May 28, 2008
• Successfully converted to a corporation in June 2008

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GROUPE AEROPLAN

1984 - 1990

Conversion of Aeroplan Income Fund to a Corporation (Groupe Aeroplan Inc.)

1984 1991 2001 2002 2003 2004 2005 2006 2007 2008 2009

IPO of Aeroplan Income Fund ($2B market cap) Voted World’s Best FFP by OAG (award also rec’d for 2002) Introduction

• f ClassicPlus

Flight Rewards Completed integration

• f Canadian Plus

members Aeroplan formed as stand-alone entity of Air Canada

Major Milestones

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GROUPE AEROPLAN

Groupe Aeroplan Overview

Travel, financial services, hotels, gas stations, grocery & consumer goods 1984 Data analytics with worldwide applicability Consumer goods, apparel, financial services Consumer goods, grocery, utilities, food & beverage Key Sector Focus 2007 2001 2002 Established LMG Insight & Communication Programs / Services

(60% ownership) (Air Miles Middle East)

LMG

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GROUPE AEROPLAN

Attractive Business Model

Member buys products

• r services &

“earns” miles “Cash Inflow” Commercial partners buy miles from Groupe Aeroplan Miles deposited in member’s account Member redeems miles with Groupe Aeroplan “Cash Outlfow” Groupe Aeroplan buys product

• r service from

partners Member enjoys rewards

Earning - Miles Redeeming - Miles

Investment Highlights

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GROUPE AEROPLAN

Investment Highlights

Global leader in loyalty management with a growth platform

• Aeroplan Program is Canada’s premier loyalty marketing program
• Nectar Program is UK’s largest coalition loyalty marketing program

Diversified and recurring revenues with long-term agreements

• Aeroplan and Nectar Programs are partnered with over 85 leading

companies representing over 170 brands

Predictable and flexible business model

• Significant control over the value and mix of rewards available for

redemption

Track record of strong free cash flow generation

• Generated $301 million of free cash flow in 2008

Strong cash position

• Cash, cash equivalents & short-term investments of $665 million as at

December 31, 2008

Committed to investment grade profile

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GROUPE AEROPLAN

• Aeroplan Program is Canada’s premier loyalty marketing program with 25

years of experience and more than 4 million active members

• Nectar Program is UK’s leading coalition loyalty program with more than 10

million active members

• Rewards Management Middle East is the operator of Air Miles program in the

fast-growing Middle Eastern markets

• LMG Insight & Communication provides analytical services to retailers and

their suppliers using leading edge technology with worldwide applicability

Global Leader in Loyalty Management

(Air Miles Middle East)

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GROUPE AEROPLAN

Strong Growth Platform

• Complementary businesses which leverage retail, travel, financial and

customer data analytics services expertise across three continents

• Owner of Air Miles trademark in a number of jurisdiction, including

Canada

• Track record of launching new programs with international expansion
• Aeroplan: leading loyalty program with strong travel and financial

sector expertise and potential to further broaden its partner base

• Nectar: leading coalition program with strong retail expertise

– Potential to add key partners in important verticals (airlines and financials)

• LMG Insight & Communications: I&C technology and service
• ffering with worldwide applicability
• Air Miles Middle East: Further expansion in the fast growing Middle

East market by attracting partners in key market categories

• Provides platform for other international operations and opportunities

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GROUPE AEROPLAN

Loyalty Marketing Partner of Choice

• 85+ partners representing 170+ brands

(Air Miles Middle East)

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GROUPE AEROPLAN Other 11% Amex 12% CIBC 52% Air Canada 25%

Diversified Revenue Base

• The LMG acquisition allowed Groupe Aeroplan to diversify its revenue base,

expand geographically and gain retail expertise

• Ability to leverage cross sector know-how: financial, retail and travel
• Reduced exposure to Air Canada with gross billings representing 17% in

2008 from 25% in 2007, and reduced dependence on others Gross Billings Break Down

Air Canada 17% Other 18% Amex 10% CIBC 38% Sainsbury’s 17%

2007A 2008A Gross Billings: $952M Gross Billings: $1,421M

Post LMG Acquisition Pre LMG Acquisition

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GROUPE AEROPLAN

Selected Long-Term Agreements

Long standing relationship since 1991 10-year agreement expiring in 2013 with renewal option Largest premium card issuer in Canada

CIBC

Agreement entered into in 2003 for co-branded charge cards and membership reward conversions 10-year agreement expiring in 2014 with renewal option

American Express Sainsbury’s

Represents over 17% of 2008 gross billings Strategic partnership agreement Minimum annual gross billings

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GROUPE AEROPLAN

Strategic Relationship With Air Canada

• Air Canada is Canada's largest full-service airline
• Air Canada is a founding member of Star Alliance, the world's most comprehensive air

transportation network

• Aeroplan manages Air Canada’s frequent flyer program
• Air travel is #1 reward choice of Aeroplan members – as a result, Aeroplan is

Air Canada’s largest customer. In 2008, Groupe Aeroplan purchased approximately $490 million in rewards tickets

• Reciprocal exclusivity
• Classic and ClassicPlus Flight Rewards give members unrestricted access to available seat

inventory across the Air Canada network in both economy and business class

• Initial term of arm’s length commercial services agreement is for 15 years (expiring in 2020) plus

automatic 5 year renewals (1)

• Sale of Aeroplan Miles to Air Canada – subject to minimum annual commitments based on 85% of

the trailing 3 year average

• Minimum annual purchase commitment – based on value of rewards purchased during the 3

preceding calendar years ($397 million for 2008)

• In November 2008, Groupe Aeroplan announced a temporary acceleration of its payment terms to

Air Canada for flight reward tickets issued. The agreement for acceleration of payment terms expires in May 29, 2009. This resulted in the Company paying Air Canada $63 million in advance

• f normal settlement terms
• The impact will reverse in 2009 upon expiry of this agreement

(1) Unless either party provides written notice to the other of its intention not to renew at least 12 months prior to the expiry of the initial term or the then current renewal term

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GROUPE AEROPLAN

• Groupe Aeroplan estimated that a 10% capacity reduction by Air Canada

would only have an impact on Groupe Aeroplan’s gross billings in the single digit millions

• To date, Air Canada has announced capacity reductions of 9 – 11%,

mostly on routes where Aeroplan does not have excessive demand for reward seats

• Air Canada has forecast capacity reductions of 2.5% – 3.5% for 2009
• Similar to actions taken during previous periods of slowdown, Air Canada is

issuing additional Aeroplan Miles as an incentive to stimulate demand

• Allocation of additional Classic seats assists the airline in maximizing load

factors and revenue without eroding pricing environment

• The rate Aeroplan pays for Classic seats is not affected by higher fuel prices

– Aeroplan collects a fuel surcharge on Air Canada’s behalf

• With respect to ClassicPlus Flight Rewards, as ticket prices (which include a

built-in fuel surcharge) fluctuate, Aeroplan’s dynamic pricing model adjusts for changes in prices on a real-time basis

Minimal Impact from Air Canada

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GROUPE AEROPLAN

Strong Base of Members with Attractive Demographics

Strong base of over 4 million active members Attractive demographics of membership base

• Majority of Canadian households

with annual income ≥ $100K

• 92% of Canadian frequent business

travelers 1 In 2008, approximately 84 billion Aeroplan Miles were accumulated by members Strong base of approximately 10 million active members Represents approximately 50% of UK households It is estimated that nineteen Nectar cards are swiped every second of every day Nectar has given back £1 billion of “treats” to Nectar collectors

Aeroplan Program Nectar Program

(1) Greater than 6 trips per year

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GROUPE AEROPLAN

Flexible Business Model

• Groupe Aeroplan retains significant control over the rewards available

for redemption, providing it with a number of levers which enhance financial flexibility

Number of members & partners Engagement of members Sale price for miles Service fees and other revenue

Revenue

Rewards mix Rewards availability Cost of rewards / price grid

Redemptions

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GROUPE AEROPLAN

Aeroplan Program - Stability of Miles Issued

• vs. Miles Redeemed
• Aeroplan Program was not significantly affected during the period Air

Canada was under CCAA protection from April 2003 to September 2004

• Over the past six years, Aeroplan miles issued and redeemed have

remained relatively stable and predictable

• $400 million Aeroplan Miles Redemption Reserve to supplement cash flows

in times of unusually high redemption activity (never been used) Historical Miles Issued vs. Miles Redeemed Analysis

– 5.0 10.0 15.0 20.0 25.0

Q1 2002 Q2 2002 Q3 2002 Q4 2002 Q1 2003 Q2 2003 Q3 2003 Q4 2003 Q1 2004 Q2 2004 Q3 2004 Q4 2004 Q1 2005 Q2 2005 Q3 2005 Q4 2005 Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008

Billions of Aeroplan Miles Issued Billions of Aeroplan Miles Redeemed Air Canada - CCAA SARS

Financial Highlights

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GROUPE AEROPLAN

Adjusted EBITDA Matches Cash Cycle

Recognized on an estimated basis when miles sold Recognized when miles redeemed

Redemption Costs

Recognized when miles sold and cash received (Gross billings) Recognized when miles redeemed, not when miles sold and cash received

Revenue Adjusted Basis GAAP

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GROUPE AEROPLAN

Financial Performance

Gross Billings Adjusted EBITDA and Margin (1)

• Groupe Aeroplan generated gross billings and adjusted EBITDA of $1,421

million and $317 million, respectively, in 2008

• Gross billings CAGR of 23.5% from 2005 to 2008
• Adjusted EBITDA CAGR of 23.5% from 2005 to 2008
• Adjusted EBITDA margin declined to 22% in 2008 reflecting the program

diversification following the LMG acquisition

In C$ millions In C$ millions

(1) Adjusted EBITDA margin calculated on gross billings

$395 $1,025 $755 $852 $952 $1,421 2005 2006 2007 2008

Canada Europe / Middle East

$38 $279 $168 $216 $249 $317 22.3% 25.4% 26.2% 22.3% 2005 2006 2007 2008

Canada Europe / Middle East Margin

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GROUPE AEROPLAN

Breakage

• Breakage represents miles which are not expected to be redeemed
• By its nature, breakage is subject to estimates and judgment
• The consolidated weighted average estimated breakage factor for 2008

is 17%

• Aeroplan Program breakage: recognized over the estimated life of a

mile, currently 30 months, which represents the average period elapsed between the sale of a mile and its redemption for rewards

• Nectar Program breakage: recognized over the estimated life of a point,

which is 15 months

• Groupe Aeroplan, assisted by a third-party expert, has developed a

predictive econometric model to measure an estimated breakage

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GROUPE AEROPLAN

$321 $308 $323 $299 $292 $301 2006 2007 2008 Operating cash flow Free Cash Flow

Strong Cash Flow Generation

• Track record of strong operating and free cash flow generation
• Strong cash flow generation provides significant financial flexibility to

Groupe Aeroplan

• Generated $323 million and $301 million of operating and free cash

flow, respectively, in 2008 Operating and Free Cash Flow ($M)

(1) Free cash flow is defined as cash flow from operations less maintenance capital expenditures

(1)

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GROUPE AEROPLAN

Strong Cash Position

• Groupe Aeroplan has always maintained a significant cash position even

after the LMG acquisition in Q4 2007

• Cash, cash equivalents and short-term investments amount to $665

million as at December 31, 2008 (including the $400 million reserve) Cash, Cash Equivalents & Short-Term Investments ($M)

$620 $644 $670 $718 $579 $533 $545 $627 $665 $563 $423 $442 $465 $470 $498 Q2/05 Q3/05 Q4/05 Q1/06 Q2/06 Q3/06 Q4/06 Q1/07 Q2/07 Q3/07 Q4/07 Q1/08 Q2/08 Q3/08 Q4/08

Acquisition

• f LMG

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GROUPE AEROPLAN

Redemption Reserve

• Aeroplan Program
• Considered prudent at time of IPO to establish the $400 million reserve to

provide safety net in the event of unusually high redemption activity or loss

• f a major partner
• To date, Groupe Aeroplan has not had to use the funds held in the reserve
• Policy is to conservatively invest in securities possessing strong investment

grade ratings (was unaffected by ABCP crisis)

• The reserve is not required under agreements with commercial partners
• Reserve is not restricted according to the GAAP definition of “restricted

cash”, and therefore is not segregated on the balance sheet

• Nectar Program
• Working capital coverage ratio of 90% (including the £40 million Notes

receivable due from a major Partner) of the outstanding unfunded points

• liability. It is not a cash reserve
• At December 31, 2008, the reserve as well as other assets held to comply with

a contractual covenant with a major Partner represented approximately 45% of the future redemption liability, while total cash balance represented approximately 54% ($665M / $1,235M) of the future redemption liability

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GROUPE AEROPLAN

neg. 0.5x 0.1x 2006 2007 2008

Investment Grade Profile

• Groupe Aeroplan obtained two investment grade ratings in the Fall of 2008
• S&P: BBB- (positive outlook)
• DBRS: BBB (stable)
• Committed to maintaining an investment grade profile
• Target leverage of approximately 2.5x Total Debt to Adjusted EBITDA

Total Debt / Adjusted EBITDA Net Debt / Adjusted EBITDA

1.4x 2.5x 2.2x 2006 2007 2008

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GROUPE AEROPLAN

Capital Structure

• Short-term priority is to refinance the $300 million bridge facility that can be

extended to December 2009 of which an amount of $100 million may be further extended at the Company’s option to June 2010

• Groupe Aeroplan maintains the ability to repay the $300 million bridge facility

at maturity with cash on hand and cash flow generated

• Undrawn capacity on its revolving facility of $150 million
• Revolver (Authorized: $150 million)

100 Acquisition Facility 300 Bridge Facility 300 Term Loan 2.2x Total Debt to Adjusted EBITDA 0.1x Net Debt to Adjusted EBITDA Leverage Metrics $ 700 Total Debt Outstanding Debt $ 665 Cash, Cash Equivalents & ST Investments Dec 31, 2008

(in millions, except where indicated)

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GROUPE AEROPLAN

Investment Highlights

Global leader in loyalty management with a growth platform

• Aeroplan Program is Canada’s premier loyalty marketing program
• Nectar Program is UK’s largest coalition loyalty marketing program

Diversified and recurring revenues with long-term agreements

• Aeroplan and Nectar Programs are partnered with over 85 leading

companies representing over 170 brands

Predictable and flexible business model

• Significant control over the value and mix of rewards available for

redemption

Track record of strong free cash flow generation

• Generated $301 million of free cash flow in 2008

Strong cash position

• Cash, cash equivalents & short-term investments of $665 million as at

December 31, 2008

Committed to investment grade profile