Transat A.T. Inc.

Christophe Hennebelle - Vice President, Human Resources and Corporate Affairs Jean-Marc Eustache - President and Chief Executive Officer Denis Pétrin - Chief Financial Officer

Mona Nazir - Laurentian Bank Securities Benoit Poirier - Desjardins Securities Cameron Doerksen - National Bank Financial David Tyerman - Cormark Securities

Hi, everyone, and welcome to the Transat conference call for the presentation of the financial results of the third quarter ended July 31, 2016. I'm here with Jean-Marc Eustache, President and Chief Executive Officer; and Denis Pétrin, our Chief Financial Officer.

Denis will review the financial results and we will then answer questions from financial analysts. Questions from journalists will be handled offline.

The conference call will be in English, but questions may be asked in French or English. As usual, our investors' presentation has been updated and is posted on our website in the investors section.

Denis may refer to it as he comments. Today's call contains forward-looking statements.

There are risks that actual results will differ materially from those contemplated by these forward-looking statements. For additional information on such risks, please consult our filings with the Canadian Securities Commission.

Forward-looking statements represent Transat's expectations as of September 09, 2016 and accordingly are subject to change after such date. However, we disclaim any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise other than as required by law.

With that, let me turn the call over to Denis.

Thank you, Christophe. Good morning, everyone.

We are reporting today our numbers for the first half of the summer, third quarter for which the results are primarily driven by the transatlantic market. We will also say a few words with respect to the sales of our French and Greek entities as well as to our development plan.

Last June as we commented on our summer outlook, we said that if trends were to remain the same we expected to deliver inferior results compared with last summer which I remind you was one of the best summers ever for the company in term of results. In short, trends remained the same and results for Q3 are inferior to those of the same quarter last year.

As we highlighted in our previous call, there was a significant increase in the number of seats on transatlantic, 14% increase, this lead to lower load factors and to lower selling prices. So regarding our results for the quarter, as a reminder, because of the sale of our French and Greek entities, we are reporting French and Greek operations as discontinued operations assets held for sales and liabilities related to assets held for sales.

Accordingly, the following information refers to continuing operations unless mentioned otherwise. For Q3, our market combined result for continuing operations whereas follows: revenues were $664 million, down 5.9%.

We posted an adjusted operating income of $16 million compared with $45 million last year. The adjusted net income was $2.5 million compared with $27 million in 2015.

The net income attributable to shareholders as per financial statements was $9 million, which takes into account $4.2 million expense regarding lump sum payments related to collective agreements with the cabin crews and a $3.7 million expense regarding restructuring cost mainly related to the closure of certain call centers. On transatlantic routes, our main market during summer, we added 5% more capacity than last year.

Selling prices were down 5.7%. Load factors was down 4.7% at 86.1%.

A lower fuel price reduced our cost per passenger by 4.6%. In the end, margins were down 5.8% compared to Q3 last year.

On the Sun destination program, low season for us during the summer, our capacity was down 2%. Selling prices on our packages were 3.1% higher.

Our load factor was 93% which is 0.5% higher than last year. The impact on the USD net of fuel increased our cost by 2.7% on packages.

Taken into account the impact of a weaker Canadian dollar, margins were down 4.5% versus last year. In trends from discontinued operations, market conditions in trends remain difficult of low destinations such as Tunisia and Turkey suffered from geopolitical situation.

Although revenues decreased by $2 million, our net results increased by $1.7 million, thanks to better margins generated by the Poor's. Ocean Hotel now, which we own 35%, contributed $2.5 million to our quarterly results compared with $1.6 million in 2015 as a result of a stronger USD and improved profitability.

We have received during the quarter a dividend of $9.1 million. The book value at the end of the quarter was $99 million.

Now, our fourth quarter outlook, as we highlighted earlier, the increase on the transatlantic market, global capacity this summer is significant 14% and I think that both load factors and prices for Q4 transatlantic capacity is up 8%. 83% of that capacity has been sold.

Load factors are inferior by 3.5%. Fares are inferior by 9% and the impact of fuel net of currencies represent a favorable variance of 4.6%.

On the Sun destinations market, where it's the low season, Transat capacity is up 5%. 73% of that capacity has been sold.

Load factors are down 4.2% and selling prices are similar. The impact of a weaker Canadian Dollar from lower fuel cost will be an increase of 3.8% in the operating cost.

In France, bookings are up 8% on long haul destinations and up 4% in medium haul destinations. Selling prices are lower by 3%.

The corporation expects its fourth quarter results to be inferior to those of last year, which were best of the company in the industry. As part of our strategic plan leading to 2017, we will continue to reduce cost and improve margin to get to the $100 million over the three years compared to 2014 which represents $13 million this year and $25 million in 2017.

Aside from margins, the top priority is to invest in hotels and extend our footprint as an hotel company. The second priority is to enter the U.S.

market as a distributor. We expect to succeed selling our core operating units in France and Greece in the course of the year.

As announced on May 11, we received a firm offer from TUI for EUR54.5 million subject to working-capital adjustments at closing. We have obtained the Advisory of opinion of Transat France Works Council during the quarter.

We are in the process of obtaining the approval from the anti-trust authorities. We are reiterating that this transaction will not have any impact on Air Transat operation or on our transatlantic program.

We are still considering that the closing of this transaction, two or fewer around October 31. Now for balance sheet.

The corporation’s free cash totaled $470 million at the end of July for continued operations, versus $487 million a year ago, decrease of $17 million. Our credit specialties remain unused.

In addition, deposit from customers or future travel for continuing operation were $440 million, compared with $471 million at the same time last year. Of balance sheet agreement stood at $725 million at the end of the quarter.

Considering the environment and our plan to make acquisitions, we have elected to postpone our decision on the actual implementation of our NCIB progress. All this been said, it must be born in the mind that the transatlantic market is a major market.

The increase in capacity that we have seen this year has been too abrupt for such a market to absorb rapidly. Therefore despite the price simulation put in place to convince more people to travel the excess capacity has led to reduced low factors.

The combination of those two factors has obviously affected our summer results. It is not the first time in the history of the company that you are seeing that.

It is necessary to take a longer term view on the situation. We believe that our competitive positioning remains strong, thanks to our many advantages.

We are the lowest cost producer on the transatlantic. We are well distributed on both side of the Atlantic.

It is an example for us, France and the UK route or selling, we have sold this summer 55% of all the booking worth taken for European travelling to Canada. We have many direct routes and in many countries.

We are selling holidays, not only seats which give our clients the option to add other component if they decide to do it. And our unique fleet, which is flexible allowing us to serve transatlantic route during the summer when talking here above 900,000 feet using wide-body aircraft.

And to serve the sun destinations during the winter, million seats using a combination of narrow body and wide-body aircrafts. 50% of our clients now are travelling on narrow-body aircraft during the winter month to the sun destination.

This is key on lever markets because Canadian are mainly going south in the winter month for obviously reasons, and prefer to go to Europe in the summer. The fleet must be adapted to serve these two margins.

Adding to the – and as said earlier, our balance sheet is sound and allowing us to deliver on the initiative listed in our strategic plan that aims at growth in hotel ownership in the south and as a distributor in the United States. Let’s now proceed with your questions.

Good morning and thank you for taking my question.

Good morning.

So, my first question it has to do with your overall business you run a pretty solid operation historically in the summer, that has more than offset recent winter losses. I’m just wondering when in the quarter did you realize how wide the variance would be versus last year, did you have a lot of lead time or did the situation worsen towards the end of the period or was it pretty bad from the get go?

I am just trying to get a sense of how Q4 guidance contingent?

If we were to come back to June when we gave the outlook for the summer we said at that time that low sector were down 3.3%. And prices were down 6.3% for a total of 9.6% and we said also that a portion of it 4.5% will be kind of finance or cover by the reduction in the price of fuel the already in June we were seeing and that’s the indication that we have put in our outlook that yield were down then not to say that we’re happy with ourselves, but I would say that in line with what we said in June we’re not so surprised that the result of the third quarter is lower than the one of last year that’s too surprise.

Okay, but where you surprised with the magnitude of the variance?

I mean, if we were to do that math and say that 3.3%, plus 6.3% equals 9.6% unfavorable because of the yield. I mean prices and those factors compensated by 4.5% for fuel remained a net of minus 5% find the average price of last year that people have failed to travel on our Transatlantic program $900 you do that math and by the numbers of passenger and you get kind of $40 million variance versus last year then it’s a little bit lesser than this that we end up by having during the quarter than - even in our internal outlook that was the kind of numbers that we were seeing at that time not to say that we were not hoping that booking as starting in June will get more and a better price, but that was the indication that we had at that time and kind of remain in line with what was said last June.

And do you think that your sent that results would be so much more this year is directly correlated towards the June to making acquisition whether fact B at hotelier or a U.S. tour operator.

And then just on that acquisition side the multiples for hoteliers are significantly higher than your current business and we’re in an environment where we are seeing some premium pricing at times. Looking at the size of some of the U.S.

targets and the fact that your excess cash could be depleted. Just any thoughts about how to fund the acquisition, if there’s any change to that strategy post results and given your outlook?

We’re very, very actively discussing with every people on the - in the market, so to end up by growing our involvement in the looking up industry obviously it’s a question of price. We want to have the right fit and the right price, you know that hotels are making solid profitability right now.

And it’s not a surprise that they’re asking high price for this and we’re not ready to pay any price. We want to make something that makes sense for the company and that’s why we have nothing to announce this morning, but we’re - really have been working actively in order to so deliver on this initiative that we consider key for the future of the company been more involved than on the 35% in the hotel industry.

We already have 35% in the JV that produce good results and it’s really a good start, but like we said in previous calls, we want our involvement to be more than that and that’s what we’re working on.

But now, the multiple will not be, for sure the multiple of transact we all know that. So we will have to pay the multiple of the hotel business, leisure hotel business in Caribbean and Mexico, part number one.

Part number two it’s like we said we are going to transform the company. Like we said the company will be, that’s why we decide that the operation that were not core to Transat will not stay in Transat anymore and that’s why we’re selling France and Greece and so the core of Transat will be one in airline Air Transat that’s we’re developing more and more with this flexible fleet, while I think it’s a very good idea.

Then number two would be distribution, distribution meaning distribution through store operator, travel agency, that we own franchise or we don’t own and without franchise the other and also the internet. That will be distribution and the third will be hotel.

And the hotel we will sell the hotel in Canada through our own distribution network, but we will say mainly the hotel to some other market and the main market as we all know the majority in Mexico it’s the American market. So, Transat will not be what it is today and that’s what we are changing and why we’re doing is because we know that there’s no future in Transat if we stay like we were and we’re going to change completely the company.

So for sure it takes time, why it takes time is because on one side we have to sell some of that, but like you see we put the asset in France and Greece a year ago on the market and we think that at the end of this year it will be done. So, it takes a year.

So to buy and asset like hotels where the market is very good so the price is high for sure and not everybody wants to sell most of the people want to keep their asset. So again it takes time you cannot do that in one year.

So that’s what we’re doing, but at the end of the day they will not be the same company at all. And at the end of the day we know that we are going to pay, how do you say that – more multiple than what Transat is undemiscible of today, but if we don’t do that there’s no future for Transat.

Okay, and just lastly I think you had said that your excess cash would be around $150 million, does that still hold true, is that still kind of your ballpark figure?

Yes absolutely.

Okay I’ll step back in queue. Thank you.

Thank you.

Thank you.

Yes, good morning gentlemen. Just to come back on the previous question the $150 million of excess cash at the end of the year does it include the $80 million that you will receive by the end of October?

Yes.

Okay perfect.

[Indiscernible]

Okay with the $80 million, okay so $150 in total okay that’s great. And just for Q4 obviously you provide a good color in your outlook about the dynamics in terms of pricing low factor.

If we look historically between Q3 and Q4 typically you’ve been able to multiply your adjusted EPS by 2 just wondering given the $0.07 you’ve reported whether it is kind of a $0.14, $0.20 you may reported or what we need to take into account in Q4 that will impact the quarter aside the color you provided in the outlook?

With the information given in the outlook and we still have some seats to sell until the end of the year, but if trends remain the same we should end up by having numbers higher than two times a year than the number that we have reported in Q3 with the key behind measure as we speak.

Okay perfect, okay that’s great. And just for the winter you reported a very good color I understand that it’s still early most of the capacity or most of the player is supposed to be flat as opposed to your big competitor that will be up 29%.

So, I understand that it’s early, but what do you expect in terms of dynamics when it comes to pricing and when it comes to profitability in comparison to what you’ve report in the previous winter?

I think it’s very, very early to make any prediction for next winter we know that the results of last winter had been affected by few things like threat of the strike from our pilots have been a really, really bad time. But as of now it’s just the beginning of the season than to say to predict what will be the end results it’s kind of impossible.

What we know is that capacity is few point of percentage and most of the players as we speak have the same capacity than last year, but as you said that was one of our competitors that is having a lot and we’ll see what the result will be, but it’s just the beginning. And for some destination programs, we have seen many, many times that people are adjusting their capacity seeing the sales coming.

Then, it’s not given but the capacity showed in our presentation will remain as it is where the transatlantic airline tend to keep their capacity on the Sun often there is adjustment. Then, what we want to show to you is, the picture that we have as of now where there is one player who is hiding a lot and others have kept their capacity at same level than last year.

Okay, perfect. And just with respect to your hotel strategy it’s definitely your first priority, a lot of good color in the presentation.

It seems that with the excess cash you will be ending with about the $150 million of excess cash that could be deployed. But you also mentioned that you want to preserve some financing capacity to pursue future growth opportunity.

So just wondering what is the kind of the amount that you could deploy and assuming the hotel strategy is getting a little bit larger, would you be willing to tap the equity market or look at other financing alternatives?

Depending of the size of the investment, if it’s bigger obviously we’ll have easy shareholders and if we’re talking about something smaller, obviously, actually I’m not saying if you want to change the company we’re looking for something that has a certain size. And one could be surprised if we end up by going to see shareholders also to complete the acquisition.

Here is what we are saying that, we have some cash available, second; we’re talking about assets that could be financed in those country. It could put mortgage on those asset and if an amount is required to complete the transaction, then this is where we’ll go to see the founders [ph].

Okay, perfect. And just in your presentation you mentioned that related to your percentage of business that will be distributed through B2C, is it expected to grow from 17% in 2015 to 30% basically in 2018 with all the web initiatives that you put in place.

So just wondering what time of impact we might see on the profitability going forward whether it should be a driver to increase the profitability.

It’s included in our $100 million savings in cost and increasing margin. We are talking here about selling more directly.

And that we do is distribution cost, it’s not dispute on those channel but it cost less than using only the traditional one. In fact in the end what we want to do is to offer our products in every channel for the customers to decide where they want to buy.

And the last one, all the packages mainly are sold to travel agency, they are now sell along the internet. While they sell on the internet, it’s really the air that seeks.

So at the end of the day, this will continue and as you know in the Caribbean market the main thing that everybody is selling, it’s packages. So this go to travel agents and will continue even today to continue to travel agents, so that’s why we have our own travel agency.

That’s why we have a franchisee and that’s why also we sell to all the travel agency in Canada. So for us, this channel of distribution is more than important, it’s very important and it’s something that we will continue to work very closely.

And as you see, a company TUI AG covering more and more through the travel agency those days and even if you read what’s happening in the U.S. [indiscernible] sales were bigger and bigger in the day.

It seems that since a year now, a lot of the market is going back to the travel agency, so especially the travel agent at home because that’s in other channel. It was growing a lot especially in the phase which is coming to Canada.

So at the end of the day, yes, we will grow again especially on the air seats market that we will continue to work with the travel agencies.

Okay. Thank you.

Okay.

Okay. Very good.

And just a quick question, if we look at Q4 last year, you posted adjusted EPS of $1.44. But what would be the number once you exclude the France and Greece operation?

I just need a second to make this calculation, but what I could say is that that year the adjusted net earnings for the continued operation was $44.6 million where the total including France was $64.8 million than a year 20% less.

Okay.

But I will get the margin for season 2.

Okay. Thank you for the time.

Thank you.

Yes, thanks. Good morning.

I guess first a clarification just on the sale of the France and Greece operations. Is the only approval that you’ve left to get is the antitrust?

Is that the only thing you need to complete before completing the sale?

Yes.

Okay.

But it takes time, [indiscernible] on Europe, we don’t do that in one day. So we wait for deal authorization and when the authorization, it’s finished, [indiscernible].

Okay. Second question, just on - looking to your 2017 cost reduction or margin improvement initiatives, I guess there is sort of an additional $25 million to go in 2017.

A big part of that is the ancillary revenue and the cargo revenues. I’m just wondering if you can talk about the progress there?

I mean are things set up in place to generate that improvement in 2017? Or is there still something else you need to do there.

No. It’s – everything is in place and that first 12 week like crazy, so it’s good at the end.

And really the last thing that we were having to do and we see it’s now the people that’s when they travel, the air only business on the Caribbean and Mexico will have to pay to put the login on the bay, something that others were doing and we can start doing. Now, it’s finished, it’s done, that’s what the air only business for the packages, for the crews business, the luggage will like it is today.

But like we said where we really had a lot of business, the Air Transat business on the Caribbean and Mexico, something that we were not doing before. So we start that two years ago.

It’s going to be our third year that we’re selling more and more air only to the Caribbean to Mexico and from Caribbean from Mexico. And for those people, they will have to for the luggage.

So everything is done and it’s going to start 01 November with the New Year, financial calendar.

Final question from me and it’s a long term looking ahead to next summer obviously that competitive environment to this summer is a real challenge, so all the capacity being added. But if I look at Air Canada routes, they intend to grow further next summer.

It sounds like West Jet would like to grow its white body fleet. So it would seem as though from a competitive capacity of view, next summer is not going to be an improvement, it’s more to likely going to be again a growth in capacity.

So I guess my question is, what you have to do differently next summer to improve the profitability? Is there specific initiatives that you can talk about?

Do you need a lot more domestic speed or alliances that can push more travelers through your network? Just anything you could talk about to tell us what you’re going to do differently next summer?

Okay. First, we’re going to have a lot of capacity at Transat, number one.

Number two, we’re going to concentrate more the flying of Transat. So where we have one side weak, we’ll not do that anymore.

So that’s why we are taking out some of the guys. That’s where we’re going in one slide a week.

Third, we’re going to grow the domestic by far. By far, it’s working very well and fourth, we’re going to have agreement.

In July an agreement with some other airline that we’re working on. So for sure, we will fly through new destination.

Through those size of agreement, the auto thing – looking at the sketch very carefully. It’s we’re going to stand some of this schedule.

And the scheduling also have been applied to new [indiscernible] charter selling the slides from let’s see to give you an example to London from Toronto. At any time of the night and coming in London at anytime of the day.

Today, we got to be always leaving at the same time, arriving at the same time, leave along same time, arriving in Toronto at the same time. So we’re going to make a lot of change in the scheduling that we are not doing before.

So think that at the end we are going to have a lot better schedule than what we have today. So, we think that at the end of the day, we can improve our financial results a lot in doing all those things and we have other things that we are doing right now, but I’m not ready to talk about it.

And the last thing I would say it’s nobody in the world even in Canada can grow its business 15% to 20% every six months and develop like that. So at the end of the day, as you told, that at one point, somebody will look at the numbers and will see that it’s impossible to do that.

And when you see the result of everybody, everybody – I don’t understand why the people are surprised with our earning. Because when you look at everybody, all the competition went down, I don’t remember, one was 37%, the other one was 40%, so everybody went down.

So in the end of the day – and even they have auditing like domestic or of regional or I don’t know what, at the end of the day their profitability is going down. So these – all the profitability of everybody is going down.

I suppose at one point somebody will stop that and say we have to be little bit careful. And if you look at the airline industry, when you look at United States, why in the States they make more money – the airline, it’s because everybody is careful about the capacity, is putting the right capacity on the market, not growing the capacity like crazy and everybody is making money at the end of the day.

And here in Canada, I don’t know what happened, somebody took too much wine or I don’t know what, but inside that we grow, we grow, we grow by 15% every six months and we are going to take all the market alone, I should also, something like that. So this happened a couple of times before in the last four years in this business and at one point as you know we will have to stop.

And saying about Transat, Transat will keep like we said 150 million in case something goes wrong, we will use the excess cash to buy an hotel business, for sure, we would not have all the money to buy the hotel business, but we have financial people that are already to finance part of that that we know we talk with them, they are ready to do it. And if we have to fight another year like this year, we will do it.

And if we have to fight another year after, we are still going to do it and we will still going to do that. So at the end of the day, I’m not worried about what we have to do and we have a plan, we have to follow the plan and we have to continue to fight and I will fight.

I remember one guy between 87 to 93, he fought for seven years and he’s right there and I can give you 10 examples like that.

Okay, that’s very helpful. Thanks very much.

Yes, good morning, gentlemen. My first question, you cited quite a few factors that impacted you in Q3, how industry capacity breaks at terrorism, threat of the flight attendance strike and the engine issue that’s negatively impacting profitability.

I’m just wondering is this really mostly about the industry capacity growth being the issue or did the other factors also have significant impacts?

No, really, really, clearly, for sure, the outer factors have impact, but really it’s the overcapacity. You cannot grow the capacity from one day to another by 13% or 14% or something and saying that tomorrow everything will be the same, it’s impossible.

Right.

And you see the result of everyone…

Yeah.

So really it’s the capacity.

So that’s helpful. Thank you.

And then just on the U.S. tour operator, I definitely get the sense that the hotels is more import of those few things right now for you.

Can you give an idea of are you actively working on the U.S. tour operator right now?

Or is it really hotels first and then tour operator later, just some idea of how we should think about the tour operator side?

Priority number one, by far, hotels. Priority second, not by far, tour operator.

Okay. Are you working on that right now?

On the tour operator?

Yeah.

Yeah, we talk to people, but I talk more with the hoteling.

Okay.

Hotel in Caribbean and Mexico.

Okay, that’s helpful. Thank you.

And then third question, it’s on the winter. Do you have any sense as to whether Zika will be a bigger issue this year than last year?

That’s the second question because we are reading a little bit more those days about Zika especially in Florida like you saw it, it’s going to be – don’t go there very much in Florida, we just go there to [indiscernible] a little and for the cruises, so that’s not bad for us. That’s not bad you will see.

It’s really difficult. Right now we don’t see too much – how do you say that – too much – yes, the people are worried, yes, they called, yes, we have a program, we are saying to the people especially the ladies, if you are pregnant or if you want to have child, please don’t go in the Caribbean and Mexico and wait.

So we are very careful about what we are saying about that. But really to say that something that we see and it’s a big thing, we don’t see too many things right now to be clear.

Okay. Thank you.

And then the last question I had, Denis, you gave some good detail on hotels, are you those numbers still roughly correct, I think US$100 million in revenue, 35% EBITDA margin, 20% tax rate something like that? And then the other question related to that is will you be providing a greater break-out on the hotels side at some point in your financials?

For sure, yes, the figures are still there. They are still the same and for sure it will be like I said, we are in the – I don’t know how to say that, we are in a move of changing the company, so we cannot change a company in one day, we would like to do that, but it’s impossible.

But for sure, like I said, it will be three conglomerate: airline, hotels and distribution and distribution, to be clear, not just a store operator, will be distribution as store operator, travel agencies and internet. So this will be the three business and for sure we will give the right guideline from the hotel because that’s going to grow like – it’s going to be the major change in Transat.

So, Jean-Marc, just to be clear then would you expect that you would start to provide more detail once you’ve been able to progress the hotel initiative further?

You don’t know how much I will be happy to tell you the deal, that’s the deal, and we are on it. It’s – but I cannot talk if I have very close discussion, but I will be more than happy to say it.

For me it’s a frustration not able to talk about it, but I cannot talk more than that.

Okay, very good. Thank you.

Thanks everyone. Let me just remind you that our third [ph] quarter results will be released on December 14, 2016.

Thank you and have a nice day.

Thank you, everyone.

Thank you.