Transat A.T. Inc.

Hi, everyone, and welcome to the Transat conference call for the presentation of the financial results of the second quarter ended April 30, 2019. I’m here with Jean-Marc Eustache, President and CEO; Annick Guérard, COO; and Denis Pétrin, our CFO.

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 Commissions.

The call also contains certain forward-looking statements concerning a potential transaction involving the acquisition of all the shares of the Corporation. These statements are based on certain assumptions deemed at reasonable by the Corporation, but are subject to certain risks and uncertainties, several of which are outside the control of the Corporation, which may cause actual results to vary materially.

In particular, the completion of the transaction will be subject to the negotiation and execution of the definitive agreement to the satisfaction of the bodies Air Canada’s due diligence, the approval of the Corporation shareholders, the approval of applicable regulatory and governmental authorities, court approval of the potential turnover panel arrangements, the execution of support agreements by certain shareholders and satisfaction of all the conditions customary for this type of transaction. In addition, statements regarding the results of the potential transaction will be turn on the -- plan following the completion of that potential transaction.

Forward-looking statements represent Transat’s expectations as at June 13, 2019, 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 or non-IFRS financial measures. In addition to IFRS financial measures, we are using non-IFRS measures to assess the Corporation’s operational performance.

It is 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 analysts as their measures may have different definitions. The measures used by the Corporation are intended 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 annual report. With that, let me turn the call over to Denis.

Thank you, Christophe. Good morning everyone.

We are reporting today our numbers for the second quarter for which the results are primarily driven by the sun destination market. As usual, I will review the financial results and then share our outlook for the summer season.

At the end, I'll also make some comments on the exclusivity agreement signed with Air Canada. But first, as I did last March, allow me to say few words on the adoption of two accounting standards and the impact on comparative numbers.

The Corporation adopted IFRS 9, Financial Instruments, and IFRS 15, Revenue from Contracts with Customers on November 1, 2018 and restated the 2018 figures. The main changes are described in the note 3 of our financial statements.

Here are the most important ones. On our statement of income, revenue and related costs from the land portion of holiday packages are now recognized over the course of the stay.

Prior to the adoption of IFRS 15, revenue were recognized when passengers departed. All airport taxes are now reported on a net basis.

Prior to the adoption IFRS 15, revenue from certain airport taxes were reported gross and the corresponding expense was recorded. The impact for the quarter ended April 30, 2018 consisted in a $35 million decrease in revenue and a $6 million increase in EBITDA.

On our statement of financial position. As of April 30, 2018, the main impacts are a $14 million increase in prepaid expenses, $30 million decrease in trade and other payables, a $16 million increase in customer deposit and deferred revenues and a $8 million increase in repaying earnings.

So November 1, 2018 onwards, the adoption of IFRS 15 led to a modification of balance of cash interest or otherwise reserve is calculated. As at April 30, 2019, the impact is a $30 million increase of cash in trust and an equivalent decrease in our free cash position.

For information, the adoption of IFRS 16 leases will be in January 2020. And for all markets combined, Q2 results were as follows.

Revenue of $897 million, up $30 million or 3.5%. Adjusted operating income of $3 million compared with $12 million last year.

The adjusted net loss was $6 million compared to 500,000 in 2018. And the net income as per financial statements was $2 million compared with $8 million last year.

The net income for financial statement includes the settlement of litigation for an amount of $5 million without admission of liabilities. The rationale for settling to avoid the risk and uncertainties of a jury trial in the courts of the state of New York, the amount was recorded as special items in the consolidated statement of income during the quarter.

On our sun destination program, our main market during the winter, capacity was 1.7% higher, selling prices of our packages were 4.5% higher, and our load factor was stable. The impact of the lower Canadian dollar combined with higher fuel costs was a 2.8% increase in operating cost.

Margins were slightly lower than last year. On our transatlantic route, low season for leisure travelers, our capacity was 6% lower, selling prices were 4.3% up, load factor was up 6%.

However, after taking into account during FX, feeder program, et cetera profitability was slightly lower than in 2018. Airline costs of our sun destination in transatlantic programs include additional costs incurred for the transition and optimization of our fleet as in Q1, which are estimated $8 million to $8 million during the quarter.

Finally, second quarter includes expenses of 2.5 million related to the potential acquisition of the Corporation, comprising professional fees and adjustments to certain provisions related to stock-based compensation following the significant rise in the share price on April 3rd with regard this summer '19 outlook when compared to 2018. On the transatlantic market, global capacity from the market is 6% higher.

Transat capacity is higher by 1%. Currently, 64% of our capacity has been sold.

Bookings are up 1.8% while load factors are up 0.7%. There are similar to those of last year and the combined effect of fuel costs and currency fluctuation.

That's not currently resolved in an increase in operating expenses. On the sun destination market, our capacity is similar to last year, 60% of our capacity has been sold and low factor are similar to those of 2018.

The unit margins are currently higher compared to those recorded in the same day last year. For all markets combined, this first trends hold results for the third quarter should be slightly better compared to 2018.

However, it is still too soon to draw a conclusion about the fourth quarter outlook, because of the low share of reservations taking this early in the season. Now for our balance sheets, Corporation's free cash total $796 million as of April 30, 2019.

That represents a decrease of 107 million versus a year ago and this variance is explained by two components. First, development of our hotel chain, in Q4 of '18 and in Q1 '19, the Corporation acquires two adjacent parcels of land to be combined into one important milestones Mexico for a total of $77 million.

Second one, the commissioning cost on the aircraft added to our fleet during the last 12 months for a total of $19 million for which a total -- for which a portion will be recovered from lessors in the coming months. Our facility -- credit facility remain unused.

Deposit for future travels stood at $630 million compared to $605 million at the same date last year. Off balance sheet agreements stood at 2.5 billion, as of April $30, a $53 million decrease when compared to yearend due to repayments made during the six month period, partially offset by the weakening of the dollar against the U.S.

dollar. As I said earlier, IFRS 16, on leases will be applied as of Q1 2020.

Net present value of the future lease payments will then be accounted on the balance sheet as an asset and as a liability. Furthermore, cost of major maintenance engine, fuselage landing gear et cetera will be capitalized and amortized over their useful lights.

This will eliminate the need for a provision for overall of leased aircraft as presently shown on our balance sheet. To enlighten the exclusivity agreement with Air Canada, on May 16th, Transat announced that they agreed to a period of exclusive negotiations with Air Canada pursuant to a letter of intent contemplating a transaction by which Air Canada will acquire all the shares of Transat at a price of $13 per share.

During such exclusivity period, it is contemplated that Air Canada would complete its due diligence review and the parties will finalized the negotiation of a definitive agreement regarding this transaction. The period will end in 30 days after the beginning of formal due diligence process.

That process has officially started on May 27th meaning that period will end on June 26. We have taken note of the press release of bookmark on June 4th, but I have not received any formal proposal in relation to it.

Therefore, we do not add any comment to make on it. Should any further acquisition proposal be communicated to the Company before or after the end of the exclusivity period, it will be addressed by our Board of Directors in consideration of their duties then obviously the agreement with Air Canada.

In the Air Canada letter of intent, Transat has agreed to limit its undertakings and expenses relating to the implementation of its hotel strategy during this exclusivity period. Any definitive agreement Air Canada will also contain numerous conditions customary for this type of transaction including applicable regulatory approvals and the approval of the shareholders of Transat.

There is no assurance that definitive agreement will be reaching relation to any transaction following the exclusivity period and the ongoing discussion. No assurance may be given that the transaction will occur in relation to the proposed transaction on otherwise or regarding the definitive terms of such transaction extending.

During the exclusivity period, Transat operation continued in the normal course and there will be no change for clients, suppliers, and employees. In particular, travelers and clients of Transat can continue to travel and book their vacation package and flight with Transat as usual.

My previous comments and the press release contain all the information about the transaction process that we will be able to share this time. So, we will not be able to answer any further question on that topic.

Coming back to our results to conclude, as for Q2 '19 adjusted results were lower than last year comparative period. For the winter in spite of higher average selling prices of packages and seats, our operating loss increased due to the increase in fuel prices combined with the weakening of the Canadian against the U.S.

dollar and the additional costs incur for the transaction and the optimization of our seats. For the third quarter of ’19, the outlook is slightly favorable as compared to last year.

We will now proceed with your question.

Hi, thanks for taking my questions. It's just to two quick ones for me, as it relates to your outlook.

You're just sticking to your Q3 window right now and you're calling for a slight improvement in earnings at least based on what you're seeing today. But when I look at the underlying fundamentals and some of the restructuring you've done, it seems like the market is growing a little bit faster than in previous years.

Your own capacity is a little bit more muted and you have now fueled going the other way for you relative to where it was at the beginning of the year. Just wondering why we shouldn't see a more significant improvement in your third quarter earnings on a year-to-year basis especially when Q3 of ’18 that earnings stream was quite was quite low?

Looking at bookings, prices, costs for the third quarter comparing that where we were last year at the same time. We're seeing, indicating, we have indications in those KPI that results of Q2, Q3 this year were better positioned that when we were at the same time last year.

It was behind the outlooks for the third quarter. We decided that is you know, in the industry prices are high, but margin are low, many factors than having sold -- having the booking in the ends today.

We felt that it would be better to focus on Q3 instead of only be talking about Q4 because for Q4, that's a booking remains to be done. It's normal for when you're selling lessor.

The inventory is at this point of the year so that's right 50% and with 50%, it's difficult to so ready to conclude where we will be, where we will be at the end. Then, the results would be better than this.

This is what we -- this is the indicator that we have today.

And if maybe a drilldown, maybe more specifically on pricing in your transatlantic business, you're looking at pricing being similar. I know that in your slide you have overall seats in the market increasing by 6% year-over-year, which is lower than we've seen in some of the previous summers.

And it looks like, when I look at the big three players including yourself, there's definitely a slowdown in that, slowdown in that growth rate. Does it feel like you can regain some pricing power here in a more rational market?

Or are you, do you think you're limited in how much you can raise affairs either with capacity? Do you feel capacity growth decelerating?

And I know you have a bunch of ancillary revenue opportunities. Just wondering, again, why you shouldn't be able to increase pricing here a little bit more capacity is actually a little bit more rationally over the transatlantic market?

It's important to say that today we're in transition, transition for our fleet. For the fleet, we are waiving the order of Airbus A321, Neo long range version to reach our fleet.

And it would have been, I'd day, difficult to bring more of the 330 another time because as we explained in any occasion. We are remained for three that will be composed of A330 and A321 mainly.

And we think that the amount of A330 that we have, but we don't need to have on this side, it's more on the smaller planes that will have for the A321. And there's a reason why this year, increasing more the volume was not the absolute that's been chosen because of this transition.

But where we sail and we're very confident about the future by bringing the A321 Neo and aircraft that will be smaller, that will be able to reach the other side of the ocean. Because the aircraft will be smaller, will surely be able to benefit for, from all the initiatives that's done by revenue management.

That's an aircraft that will be able to fly like every day, every season, and aircraft that will be able to use also during the winter. It's a big, big driver for us of improvement in the coming years putting aside all other initiatives in the business to improve our related position versus the competition, and 321 is really a game changer for us.

And then maybe last question for me. I know, I mean you have a multipoint strategy.

I think 9 or 10 points here of what you want to do. You've talked about suspending your hotel strategy.

Have you suspected anything else in terms of some of these longer term objectives that you're looking to accomplish as a standalone companies? Has anything else been suspended here as you negotiate with Air Canada and potentially look to sell yourself?

No, no. The only thing we agree is to continue the hotel business, but not to construct to start a construction.

We should start the construction in the beginning of June. And because we have this agreement, non-binding, they asked us not to do the construction.

So we are not doing the construction right now from this month. But the rest continue, we're still looking at land with some negotiating.

We have, still now doing all the rest is we have to do, but we don't invest the big money hotel construction.

I guess firstly, Denis. Could you give us a sense of what the expenses were related to the 321 Neo kind of coming into the fleet as well as the expenses into the transactions in Q2?

For the 321 Neo, the first aircraft was added to our suite at the end of the quarter like it was in the first day of May then really no impact at all on the cost for the period. But let's say, like we are reasoning to in disclosure today, if the preparation for the pilots and everything that in the end, I need to answer better your question and being up by increase our costs than aiming for a fleet of 321 and 330 is we entered that's absolutely what we were having.

We were having a mix of 330, 310, 737 that we have leased for a couple of years plus seasonal coming from different sources. And also the agreement with Thomas Cook that started in where they were sending us a fewer Airbus A321 then that's what we qualify as cost of transition then to be here was not related really to the new long range order.

But the transition to get there make our fleet smaller more complex, our schedule more complex, many general news more complex also, and this is what had to estimation state resolvers in the four quarter.

I'm sorry. Denis, I didn't catch the number there.

$8 million.

In the quarter, okay, that's helpful. Thanks.

And then I can, is that going to continue you think into Q3 or is that going to go down?

No, it's a force, let's say, demand miles for the winter period because of our strategy of bringing seasonal and to reducing the utilization of 330 in the same period. When we get to the summer all our aircraft A330 are fully used and seasonal now everybody saying are all return to their operators and in Europe than no wealth cost or transitioning our seat in the summer month.

So, this is not really to 321 Neo, this is just the optimization and the transition cost. Is that okay?

Yes, it depends of course.

Okay, okay fair enough. Okay, and then, I guess you said this $2.5 million related to the potential acquisition of the Corporation comprising professional fees and then there is also some stock-based comp.

I assume that's just the last kind of day or two that the stock went up another quarter. Do you have a sense of how much more that would be in Q3 the stock-based comp?

It do not have -- it should not be an issue for -- you know, it is based on the value of the shares on the market. I don’t anticipate with the inflow that we have today that it's our expenses in the significant way during Q2.

I see so you've written the stock -- on the stock-based comp, you've written in up all the way to $13. Is that would just same or due to right to that to what it was on April 30th?

To what it was at the end of the day on April 30 that remain a portion, but the most significant portion of I think due to…

Okay, that's okay. So it will be less than 2.5 I guess into Q3?

I think so, yes.

Okay, thank you. And then I guess just last question from me.

I guess similar to Kevin's. Are you seeing any pricing pressure from Westjet here at all?

I know there is significant amount of capacity increase all that is coming from them I know there is still small but are you seeing any pricing pressure from them?

Yes, we are seeing pressure of course from Westjet on Europe. This summer, we have added additional flight from Calgary to Paris, Dublin and Toronto.

Out of Toronto, Gatwick, Barcelona as Well, so of course we are following the situation very closely it's more capacity. So, we are its -- they are increasing their presence not only we are just of course others as well.

So yes there has been increase pressure on the pricing.

Yes, good morning everyone. I was wondering if we come on the fleet optimization initiative.

Could you talk about the assumptions for Q3 and Q4 in terms of new aircraft that will enter the fleet-fleet?

Yes, in terms of Q3 and Q4, we are expecting our second quarter A321 Neo Long Range at the end of June, so that's going to be a second one. And we will operate in summer Q3 and Q4 for with those two A321 Neo long range.

The following one will arrive more during next winter

Okay. So in Q4 you won't receive any aircraft?

Nope.

Okay. And in next year, how many aircraft I think it was 12, right, next year?

Yes, we were expecting and this is what we had communicated in the past. However, we're still in discussion with the Airbus in terms of an exact delivery date.

We know that we're going to have additional one for the winter season and of course for next summer, summer 2020.However, we're still in discussion with Airbus in terms of winning exactly these aircrafts will arrive.

Okay. Perfect, and maybe Denis on $6.7 million for the settlement that you have, I was just wondering if you could talk a little bit more about that please?

That relates to a subsidiary that was created in Transat in Mexico, and we decided to close in 2014 and many years ago. And we had we have this person was suing us allegations.

Obviously we’re not right, but we decided to bring that in front of a jury in New York. And we thought that taking the risk of the judgment because as indicated in our financial statements of this month.

We’re estimating the guidance was enough for $30 million U.S. then in order in front of the jury in the United States.

Then we thought that it was in our best interest to sell that. Obviously with no admission anything other side, but we thought it would be better to then, eliminate the risk of this know that we have in our financial statement now for sometimes.

This mitigation that we were estimating, the guys was trying to get $30 million U.S. and we settle that for that reason then it close completely of this subsidiary that we have created and close like five, six years ago.

Okay, perfect. And maybe the last one for me, I was wondering if you could provide an update on the yield management initiative and currently going around the transatlantic market fleet?

On the Atlantic market, if we look at the past semester, we were able to increase our revenues per -- in significant way. And when we look at the beginning, Denis was referring to Q3.

We are still confident that Q3 as well our practices that we’ve were in places in terms of pricing and revenue managements are paying us. As for Q4 on the Atlantic market, it is still too soon to comment on how we will be able to increase pricing in the weeks to come.

However, overall when you look at our past winter, and when we look at the beginning of the summer, we are confident that everything we put in place so far, it's just an operating management practices paying us. It will depend of course on what's going to be happening at the peak season, in July and August.

We are seeing fierce competition. Some competitors are lowering their price at this point.

Okay. Thank you very much for the color.

Okay. So, thank you everyone.

Let me remind you that our third quarter results will be released on September the 12th, 2019. Thank you and have a good day.