Transat A.T. Inc.

Christophe Hennebelle - VP Corporate Affairs Jean-Marc Eustache - CEO Denis Pétrin - CFO

Mona Nazir - Laurentian Bank Cameron Doerksen - National Bank Financial David Tyerman - Cormark Securities Shawn Levine - TD Securities vin Chiang - CIBC World Markets Turan Quettawala - Scotiabank

Hi everyone, and welcome to the Transat conference call for the presentation of the financial results of the first quarter ended January 31, 2017. I’m here with Jean-Marc Eustache, President and CEO; and Denis Pétrin, our CFO.

Denis will review the financial results and we will then answer your 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 investor's 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 at March 16, 2017 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.

Finally, we may refer to IFRS and non-IFRS financial measures. In addition to IFRS financial measures, we are using non-IFRS measures to assess the corporation's operational performance.

It's likely that the non-IFRS financial measures used by the corporation will not be comparable to similar measures reported by other issuers, or those used by financial analyst as their measures may have different definitions. The measures used by the corporation are furnished to provide additional information and should not be considered in isolation or as a substitute for IFRS financial performance measures.

Additional information on non-IFRS financial measures such as their definition and their reconciliation with the more comparable IFRS measures are available in our quarterly report. With that, let me turn the call over to Denis.

Thank you, Christophe. Good afternoon everyone, as usual I will review the financial results and then share our outlook for the rest of the year.

Our results for the quarter are as expected. The trends that were visible at the beginning of December for Sun Destinations mid-fall [ph].

You will remember that bookings were then had compared with the previous year and unit margins were lower. The combined effect of U.S.

dollar and fuel have made our operating costs increase. For the quarter in Sun Destinations alone, it represents additional cost of 17 million or $44 per passenger.

This is quite typical of what we had seen over the past year, compared to three years ago our cost have increased by more than $100 million on Sun packages, due to the combined effects foreign exchange and fuel fluctuation. Unfortunately, these fluctuations upset all the efficiencies gains that we are achieving within the business.

For Q1 all markets combined results were as follows. Revenues were $689 million, down 5% following our decision to decrease capacity on Sun Destinations by 5.2% in Q1.

We posted an adjusted operating loss of 37 million versus 32 million last year. The adjusted net loss excluding non-operating items is $36 million compared with $30 million in 2015.

The net loss attributable to shareholders as per financial statements is $32 million compared with $61 million last year. On our Sun Destinations program, main market of [technical difficulty].

Capacity in Q1 was down 5%. Selling prices of our packages were 6.1% higher, but the mix was different year-over-year.

Our load factor was 94.4% or 1.7% higher than last year. The impact of the U.S.

dollar represents [indiscernible] $44 per traveler, the fuel has almost no effect this quarter. We managed to pass close to 60% of the cost increase on to customer.

Margins were than lower by 0.9% versus last year. On Trans-Atlantic routes, low season for us during the winter, we had 10% more capacity than last year in Q1, mainly on London and Paris.

Selling prices were down 2.1% and our load factor was down 4.2%. Profitability was lower than last year in Q1 for the Trans-Atlantic routes.

Oceans Hotel now that owned a 35%, contributed $3.6 million to our quarterly results compared with $1.9 million in 2016. The value of our investment, book values, stood at $99 million at the end of January.

So all-in-all no surprises waiting for us this quarter. Now our Q2 outlook, on the Sun Destination market or any in the winter, our capacity is similar to last year.

82% of that capacity has been sold, load factors are up 0.9%. The impact of the weaker Canadian dollar net from lower fuel cost will be a 3.3% increase in operating cost if the dollar and the fuel stay where they are today.

At this moment unit margins are higher by 0.6% compared with last year at the same day. On the Trans-Atlantic markets, Transat's capacity is up 9%.

72% of that capacity has been sold, load factor are the same than last year and fairs are lower by 0.5%. The impact of fuel, net of currencies, represent on the Trans-Atlantic, an unfavorable variance of 1.7%.

At this moment unit margins as for Q1 are lower. The 2016 winter from December onward was affected by many adverse events such as fears related to Zika virus, terrorist attacks and the possibility of a strike and our Air Transat pilots.

If the current trends hold, operating expenses for the second quarter could be slightly superior to last year. With regards to the summer 2017 outlook.

It's soon to draw a firm conclusion, but here are a few metrics. On the Trans-Atlantic market when compared with summer 2016 global capacity on the market is 4% higher.

Our owned capacity is up 6%. 33% from our capacity have been sold.

Bookings are up 6.6%. Load factor are then superior by 0.2%.

Fairs are lower by 4.8%. While the impact of fuel cost combined with currency fluctuation will not result in any increase in operating costs, if the cost of fuel and the dollar against foreign currencies remain where they are today.

I’ve said in the press release, we have observed over the past few weeks positive sign in the pricing for the Trans-Atlantic bookings. As part of our strategy plan for 2017, we will continue to work on our plan to control hotels in the Sun.

And discussions are ongoing with our partner in Ocean Hotels, we will shortly come to a decision, whether we will be able to achieve that target more efficiently by acquiring 100% of Ocean, or by selling our interest to H10 and use the proceeds for other investments. We will also continue to reduce costs and improve margin to get to our target of $100 million over three-year compared to 2014.

We will also continue to increase the competitiveness of our distribution, notably by reinforcing our product offering and network, continuing to increase our controlled sales and client intimacy and optimizing [technical difficulty]. Finally, we continue to improve Air Transat’s operational efficiency and plan for the optimization and renewal of our fleet.

Now a few words on our balance sheet. The corporation's free cash totaled $455 million at the end of January, an increase of $27 million versus a year ago.

And our credit facilities remains unused. In addition, deposit from customers for future travels were $598 million, compared to $609 million at the same date last year.

Off-balance-sheet agreements stood at $719 million at the end of January. In summary, the conditions in Q1 were not very different from what we expected earlier in December.

Competition remained fifth. Our priority is to continue working on the improvement of our winter season, which is the key to achieving overall profitability.

Beside our continuous operational improvement on cost, distribution and revenue management, we will take, as said earlier, a closer look at our position within Ocean and determine what is the best approach to this investment with a view to achieve our final goal of controlling our hotels in the Sun. Let’s now proceed with your questions.

So firstly, I just wanted to talk about the Ocean contribution that you saw in the quarter. It was 3.6 million, I know it's a significant increase year-over-year, I'm just wondering what's driving that.

And also just speaking about your Ocean JV, your plan is to increase the number of rooms from currently over 4,000 to about 5,600 over the next couple of years. What kind of related uptick in EBITDA can you expect?

Is it linear in that you increase rooms by 50% and we'll see that similar EBITDA increase?

To your first question Mona, on the Ocean Hotel result. Results were good during the first quarter, we expect the results in winter to be good also.

Currency fluctuation ended up by also affecting the profitability of Ocean Hotels. Most of the revenue are in U.S.

and it happens that sometimes when we compare quarter over quarter having expenses in other currency than U.S., but revenue in U.S. where we could end up having those kinds of variance.

Then it's superior to the 1.9 million achieved last year. I would say that operationally, probably get, not probably but we were having same kind of results, the improvement is more below the EBITDA level of Ocean when we look at their results specifically.

And we're very satisfied with the financial performance of the hotel. And then looking at your second question, detail of the profitability of Ocean, I already shared a few numbers on previous calls.

Ocean Hotels generate per day 100%, roughly 37 million of EBITDA that's in U.S. It generates roughly 20 million U.S.

of net-net profit. And as you know when we are taking our 35% and put that in our P&L, we're not adding to our own EBITDA, the EBITDA generated by Ocean, but we are taking net profitability of Ocean, the 20 million U.S.

bring that to Canadian dollars around 35%, this is how we get at the end of the year to our $6 million to $8 million of impact on our results. And this is a past performance of hotel in 2016.

Okay, that's helpful. And just secondly, kind of keeping on that Ocean discussion, you commented that your decision regarding the Ocean Hotel venture will be made in the coming months.

I'm wondering if your decision to purchase the balanced is related to what you are seeing out there for acquisitions. I mean given you already own 35%, I think it's safe to assume there is not really any due diligence, does it just allow you more time to assess what else is out there and get a lay of the M&A landscape?

So whether these actual assets, or multiples, or related financing?

In the business case like this one. The first -- one of the first step is to agree with the other party on the price, another one is to see how much financing is available at destination what condition you could obtain.

And typically, in that kind of investment in the financing will come locally than we have -- they have hotel or we have hotel together in Mexico and Dominican Republic than, lots of work, lots of people involved, takes time for the evaluation, for everyone than this proceed is just continuing. And does it take too much time?

I don’t think so, it just takes time and at the end having collected all this recent formation, we will decide what the best trends are. And we are just in the process of doing that and it just takes time and not necessarily by our resources, but everyone around, like financing, like everything.

Appraisal is a priority, time to obtain the appraisal and for a banker to obtain their appraisal and it just takes time.

And lastly for me, before I hop back in queue. I see year-over-year your cash is up, but that incorporates some funds from the France and Greece sale.

If this business continues and even if you factor in some cost reductions, offset by CapEx, I'm potentially seeing cash burn. I'm just wondering if you could comment on, if that's correct, what this figure might be and where excess cash stands today?

Thank you.

A year-ago excluding the cash that we had, but with the containing operation, only the continuing operations excluding France and Greece from our numbers last year, our cash balance at the end of January was 428 million. This year we ended the quarter with 455, and there is a positive variance of 29 million between those two.

If we dig a little bit more, we have received cash from the sale of our France and Greek operation, as we see 86 million net of the proceeds, net of fees and reconciliation between the two, we have to consider the losses that we have had over the last 12 months, which is roughly 25 million, and two other items to reconcile completely. The first one is, the fact that we had over of the last 12-month more CapEx than depreciation.

20 million, I already explained with the retirement of the aircraft that we own, the 310, we intend to operate them for another three, four years, than lots of repair has to take place today in order to keep with the date and there will not be a lot of CapEx at the end, but in order to have those planes, doing the seacheck [ph] and maintenance on the engine and the landing gear and everything, it’s frontloaded. Than we have used like $20 million of cash for this.

And the last one is in the working cap items and one of the interesting thing is that, there was the negative variance on the working cap, roughly 25 million, is coming from income tax recoverable that will be recovered in Q3. And it’s not permanent, it’s just temporary, than we will recover this one.

Than in summary, we’ve got the amount for sale of France and Greece positive one, results are what it is, and we have burned like 25 million for this. The working cap, it’s something that is just timing, we will recover that in a few months from now in Q3 we think.

And the last one is CapEx it's more frontloaded, but we could expect in ’18 and ’19 to have a lot less. Than this is how we reconcile the last 29 million, for the last 12 months.

That is very helpful. Thank you.

Just to come back on the previous question on the surplus cash, a very good explanation on a year-over-year basis. But basically you ended the Q4 was about 150 million of surplus cash.

So if the outlook for this summer and Q2 is in line with what you are kind of expecting, I'm just wondering where your surplus cash could evolve at the end of Q4 this year Denis?

So we don’t expect to have special items in 2017, and no big variance between CapEx and amortization. Income tax is something for 2016, than really the cash will be affected by the result that we'll end up by having net.

If results are positive this year cash will increase, if results are negative this year cash will decrease. But it will not increase or decrease a lot more or very differentially and the results of 2017.

Okay. Perfect.

And obviously you’re expecting decision, a short decision which respect to Ocean. But aside this potential opportunity with Ocean Hotels, any other potential opportunities you’re looking at, Denis, from M&A standpoint?

Ocean Hotel is our priority, then we gave all our resources to this one, then we're looking always at lots of things, but let's say that 99% of our energy is on Ocean right now.

Okay, perfect. And for the summer you provided a kind of -- I know it's too early, you provided some comments about the summer, but when you look at -- it gives me the impression that the summer is expected to be weaker than what you reported last year.

So just wondering if you could comment about the magnitude given basically the pricing is down for the summer so far.

Pricing was very low at the beginning, but we started to see very positive signs in the recent weeks and even last month, call it the last four weeks, where numbers seem to come that compares favorably with the one of last year than. We have 33% of the inventory book we're still behind, but we're seeing positive signs, week per week bases.

Quite honestly with 33% of the inventory sold it’s very hard to say where we will end and I will not try to do that, but let's say two things that we could say, we are behind, but signs are very positive in the recent week.

Okay, and with respect to the surplus cash what kind of cushion would you like to keep with respect to the 150? Given the current market environment, would you be willing to let's say invest the 150 million or basically would like -- how do you see your flexibility right now with respect to the 150 million?

Lowest point of the season is mid-December for us. We had in the last December $300 million of cash in our bank account.

Of that 150 million, what we call our cushion and 150 million is cash ready to be deploy in the Ocean project, it's the project that we are looking at right now. Then we consider that the cushion of 150 million the first one is the one is the one [Multiple Speakers].

Okay, perfect, well that's clear enough. And maybe last one for me, obviously, a lot of talks about Trump and the impact on Mexico, you derive about 34% of your revenue from Mexico with respect to Sun Destination, so just wondering what type of implication you see with respect to the travelers, hotels, valuation on the Mexican market?

Canadian people -- for the Canadian market, Mexico is a big market and we have seen strong demand for Mexican destination in the Cancun and the Puerto Valletta for this winter. For us and honestly we don't want to comment on decision that could be taken on the other side of the border, anyway for us United States is not a big destination market, the only product that we are selling over there are cruises, where people are boarding in Fort Lauderdale, but they don't stay really most of them, they just take a cruise.

And the other product that we're selling is Disney, Orlando. Else of this, we don't really have products through the United States.

Then obviously the American or big customer and occupy lots of rooms in Mexico and Dominican Republic and it's the biggest market. They are taking most of the rooms, and as of now we have not seeing any shortage of rooms or than it's kind of a -- we have not noticed any impacts recently, I would say.

Okay, and maybe just a quick one. I know there has been change on the foreign ownership rules in Canada with the intent of lowering fares.

I know it's not the main focus, but do you see any positive or negative implication so far and what could be the potential opportunities for you down the road?

My understanding is that there are intentions to move the 25% to 49%, but it's not done yet. We understand that two airlines company have changed, that they have received the go ahead, even if the modification of the route [ph] was not done.

I would say, no real impact for us, as for the market that we are serving, I mean the Trans-Atlantic market mainly in the summer and the Sun Destination manly in the winter, we have not seen changes coming from what you just said. And anyway it's just the beginning, but we don’t see the big impact because of that.

Okay, Thank you very much for the time, Denis.

Just want to come back to the pricing counter you've got on the Trans-Atlantic for the summer. You mentioned that you are starting to see some improvement in the recent weeks.

Do you have any explanation as to why you are seeing that improvement is there something that's happened in the industry or what's your opinion I guess on why it might have started to improve in the last week or month or so?

It's Phenomenon that we have seen a couple of times, does not mean that it will happen also this year or it will remain like it is today, but it's not rare that at the beginning of the season all the players are making sure to fill say a portion of their seats and after that this -- let's say they all start to yield up. It's probably -- it could be this, demand is on the Trans-Atlantic products is relatively good on both sides.

I mean for European coming to Canada, it seems to be a place to go this year and for Canadian to go to Europe and so on very interesting. Then there is a lot of products offered to customers and the demand is really there.

Again, it's tough to say what next week will be or the end of the season, but pricing generally speaking is good for the last few weeks.

Okay. Just a question on the, I guess the hotel investments.

If you were to acquire the majority stake in Ocean Hotel, you’d have I think in a couple of years as mentioned 5,600 or so rooms. What percentage of your total room demand for the winter would that represent and if we think about that.

What percentage is kind of the ideal number that you want to control under that vertical integration strategy?

We’d like to be in the 15% to 25%. Between 15% and 25% will make sense.

Even if we were to go to our other hotels, obviously, we’ll have lots of loans occupied by people coming from the U.S. and we’ll also share the local market and also the European.

But we will make sure to reserve for us, a portion of the room in that magnitude, 15% to 25%.

Okay. And do you get there with 5,600 rooms?

Let’s say we will be in the 15 and the plan in the hotel is not to buy three hotel and stay there for five years. The plan is to grow the order chain and achieving the 25% at the end.

Okay. Finally for me, just maybe on the winter, I mean, obviously if you were to execute on the vertical integration strategy, you would certainly be helpful for the profitability point of view in the winter.

I mean you’ve done a lot to reduce your costs, but still pretty sizeable loss expected for the winter as a whole and we're only seeing for a number of years now. So what beyond the vertical integration strategy and additional cost cuts can you due to get the winter back to profitability?

Is this just really a function of maybe a less competitive environment and some foreign exchange changes or is there something else you can do to actually make some money in the winter?

We would be more and more in hotel company and an airline company and distribution would be less and less important. So we will be different company completely in three to five years from now.

So at the end of the day, we will sell more and more direct, we will grow the EBITDA of the hotel and downsize the [indiscernible] the way that we just reviewed right now the product.

Okay. That’s all for me.

Thanks very much.

My first question is on the guidance on the cost side for the Trans-Atlantic for this summer. You indicate the cost will be flat based on current trends.

Is that flat in dollars? Meaning do you expect the cost to be flat even though you have 6% more capacity or do you expect the percentage to be flat?

David, what we have and maybe it was not clear enough, what we have tried to say there is that as of now there is no impact, positive or negative relative to the fuel and currency. It's not a call on indexation of cost and efficiencies by adding more plane, more capacity and not also initiative to improve costs and increase ancillary revenue, because it's early in the game.

The comment that we've made, where we're trying to give some colors in the summer is that the U.S. dollar and the fuel has, as we speak, no impact on costs this summer and we know that like in the winter as an example in the last three winters the U.S.

dollar net of fuel has increased our cost $100 million, and we have said here that summer '17 versus summer '16, as we speak, no impact of fuel and FX on costs.

Okay, so that sounds like you're staying with the same volume as last year, but your volume is going to be higher, so you would use more fuel, obviously, for example?

Yes, we'll have more of variables, but by having -- by adding to the volume usually you generate some -- the cost to produce the last seat as not as high as to produce the first one. Then we should generate some savings by doing that.

Then volume is a positive one as you know, cost inflation is a negative one, but efficiencies earned by our initiatives on margin and costs will have a combined effect of all of this. We'll give some colors in June for all other impact [technical difficulty].

Okay, my second question was just on the -- again, on the guidance for the summer for the transatlantic. So you've sold 33% of capacity, last year it was 72% at the same time I think from the press release.

It sounds like a very big difference, is there a significant risk that you will run into?

We'll check that, but the capacity this summer, the inventory sold as of now is 33%, last years was 32.5% or 32.6% or we're ahead by less than 1%, but we're not trailing at all for the bookings. We're slightly ahead.

Okay, that's fine. The other question I had was just on the hotels and financing and how we should think about that.

Is this a business where you would expect us to fund the majority of it through debt and some with equity, and -- or is it some other way we should we thinking about that?

We're in the process of looking at all of this. Obviously, debt is the first vehicle, if we could do every -- if we do the project and we could do that project with debt only this is what would choose.

Okay, so very high proportion if possible?

Yes.

Okay, and then the last question I had, just again going back to the summer what do you see on the Sun Destinations in the summer?

This one is very early because for the Sun Destination during the summer, customers tend to book very close to departure date, then as of now and we'd says that we have 15% of the inventory sold of our Sun products, we're ahead versus last year. But it's very, very early in the game.

15% Sun as of now, slightly ahead than last year.

Okay, that's great. Thank you.

One of the factors that you highlighted is impacting revenue year-over-year was the higher proportion of flight only bookings. I'm just wondering relative to last year was this within the normal range and would that trend be expected to persist in Q2?

The answer is yes. We have saw in Q1 a higher proportion of seat only versus packages.

These numbers are not very big, but as we expect when we are selling packages, it's in the range of $1,500. Whereas when you're selling seats only, it's a lot less than that, like half of this.

Than in the quarter like Q1 where we have increase our proportion because the client has asked for it. The proportion of seats only it reduces -- an entire margin that we are generating on seats only is at least equivalent to the win that we are doing on packages.

Than margin no impact, but on the revenue it changed a little, assuming liquidity everything else remain equal, you'll have seen our revenue going down because of the mix, but not necessarily the margin. Than that's why we decided there was -- it would be important to indicate that we have a higher proportion, not a huge one, but a higher proportion in Q1 and in Q2 of seats only.

Okay, thank you. And then the last question for me is just with regard to the reinvestment opportunities in other hotel projects.

So depending on how the negotiations or discussing with those in hotels go, if it ultimately culminates in you acquiring the other 65%, how soon after that would you be looking to further expand the hotel portfolio? Would it be, you wait a few quarters and digest the acquisition or would you be looking to grow it further almost immediately?

Almost immediately. In Ocean Hotel's today and the JV there are piece of lands and the purpose would be to start the construction within I would say 12 to 18 months and the purpose is really to continue.

If we jumped in, we will continue into that direction and we'll have one hotel, every 12 to 18 months.

Okay. Thanks very much.

Just a clarification one for me actually, I think it was back to Cameron’s question on pricing and what you’ve seen in the past few weeks here. good to see some pricing growth, just wondering maybe if I could ask it this way.

Are you leading the market, are you putting in pricing and then others are matching your pricing or is it that one of your competitors are increasing pricing and you’re out there matching it in the marketplace? I’m just wondering, who is leading the charge on pricing in your -- when you look at your book of business?

It’s depends on other market. I think if you look at between Canada and UK fully, there are British Airways on one side from the UK and the other one is West Jet, so it depends.

If you look at the market of France, we’re going to follow Fox Air [ph] is the leader on the price and after that we will look at -- after that Air France, it should be Air France. So it's depending on the market.

If we look at Portugal, the leader will be as Azores Airlines, [indiscernible]. If we look at Italy, it will be between Air Canada Rouge or Air Canada.

Greece, it will be Air Canada Rouge, depending on the market. And unusually we are between the highest and the lowest, closer to the lower guy for the price.

Okay. That’s very helpful color.

Thank you very much for that. And when I look at your Q1, you had a pretty good, I guess recovery in the sense that, in Q1 you noted that there was a $17 million headwind when it comes to FX in fuel and your yield management got your back about 13 million.

So that’s about 75% coverage. How do you think about that coverage evolving as we get through the next three quarters?

Is that a good rate to use or should we expected it to increased given some of the pricing inflation you’re seeing in the market, just wondering what your thoughts are there?

You see as of now, everything included, when we compare our margin including the fuel and FX and everything, the cost of hotel and the proportion of seats only and packets. Margin as we speak are slightly higher than last year for all the booking taken.

If this trend were to continue, we will end up by having results to be slightly better than the one in Q2 of last year. Than it would have been negative like in Q1, we are now trending on the positive side, but slightly.

Okay, okay. That’s helpful for me.

That’s it for me. Thank you very much.

Thank you.

I had just a couple of clarifications as well. I guess firstly, Denis you said that in the Sun destination market you saw a lot of ticket only sales, just wondering, can you give us a sense of why that might have been the case this year, as to why you're seeing so much more seat only sales versus the hotel?

We’re more focused on that. We were selling packages in the past and this was our main focus and were really yielding to the same extent the seats only, we're stared last year and the year before, more attention on it and realizing that it's a market that, anyway we're flying to those destinations and there are people in Canada here will have their own condos in Puerto Vallarta, and we say okay this is -- we're seeing this is a market that we should address with more attention.

Just because of it I think then we have been able to increase that proportion entrusting more Canadian people to travel with us, to get to the place that they own or the arrangement that they have made by themselves.

Okay got it. [Multiple Speakers].

It's not 50% of what we're selling, we're talking about in the 15% to 20%, but it's important.

Okay got it. So these people were just traveling maybe on some other airline and now they're traveling with you just as an airline?

I guess I'm wondering if, maybe I'll ask it differently, I'm wondering if it's more like AirBnB or something that's kind of coming into the market and having a bigger impact?

I don't know, when you fly to Cuba for example or you fly to Puerto Vallarta, you don’t know many people have made their own arrangement like this, but there is a market and I think if we -- we're flying to all of those destinations and we have nothing else to do then, to make sure to be competitive and to offer good products and to try to attract people and it seems to be, we could be successful doing that. And this is something that we intend to continue, if the margins are good and if they are we're pushing that also.

Great perfect, thank you very much, that's all I had.

Okay, thank you.

Thank you everyone, and with that let me just remind you that the release of our second quarter results, will be released on June 8th 2017, thank you and good day.