Transat A.T. Inc.

Hello, everyone, and welcome to the Transat conference call for the presentation of the financial results of the fourth quarter and year ended October 31, 2019. I’m here with Jean-Marc Eustache, President and CEO; Annick Guérard, COO; and Denis Petrin, our CFO.

Denis will review the financial results and 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 those 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 transaction involving the acquisition of all the shares of the corporation. These statements are based on certain assumptions deemed reasonable by the corporation, but are subject to certain risks and uncertainties, several of which are outside of the control of the corporation, which may cause actual results to vary materially.

In particular, the completion of transaction will be subject to customary closing conditions, including regulatory approvals, particularly those of Canada and the European Union. Notably, a public interest assessment regarding the arrangement is being undertaken by Transport Canada with input from the Commissioner of Competition.

If the required regulatory approvals are obtained and conditions are met, it is expected that the transaction will be completed by the second quarter of the calendar year 2020. Forward-looking statements represent Transat’s expectations as at December 12, 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 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 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 half of the summer, our fourth quarter for which the results are primarily driven by the transatlantic program. As usual, I will review the financial results and then share our outlook for the next winter.

At the end, I will also make some comments on the plan of arrangement signed with Air Canada. But first, as I did last September, let me just say a few words on the adoption of the two accounting standards and the impact on comparative numbers.

Corporation adopted IFRS 9, Financial Instruments, and IFRS 15, Revenue from Contracts with Customers, on November 1, 2018, and restated the 2018 figures. But the main changes are described in the note 4 of our financial statements.

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

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

Prior to the adoption of IFRS 15, revenue from certain airport taxes were reported gross and a corresponding expense was recorded. The impact for the quarter ended October 31, 2018 consisted in $1 million increase in revenue and a $4 million decrease in EBITDA.

On our statement of financial position, from November 1, 2018 onwards, the adoption of IFRS 15 led to a modification of all the balance of cash in trust or otherwise reserved is calculated. As of October 31, 2019, the impact is a $14 million increase of cash in trust and an equivalent decrease in our free cash position.

For more information, starting next quarter, the adoption of the new standard IFRS 16 from leases will be reflected in our financial statement. Now, the fourth quarter.

Globally results were in line with the outlook expressed last September. For all programs combined, Q4 results were as follows: Revenues of $693 million, up $24 million or 3.6% from 2018, and adjusted operating income of $51 million with $31 million last year; the adjusted net income was $27 million compared with $14 million in 2008.

On our transatlantic routes, our main program during the summer, our capacity was the same than last year, selling prices were up 1.8%, our load factor was down 0.7%, the combined effect of fuel cost and currency fluctuations did not result in an increase in operating expenses. Consequently, margins were higher than last year.

On our sun destination program, capacity was 3% lower. Selling prices of our packages were 3.9% higher.

And our load factor was up 1.7%. Again here, margin were higher than last year.

Globally, due to higher average selling prices and ancillary revenues, even taking into account more maintenance events than last year, profitability for the quarter was higher than in 2018. Looking now at the entire summer.

We reported an adjusted operating income of $73 million, compared with $34 million a year ago. Our adjusted net income was $33 million versus $9 million in 2018.

The improvement of our summer 2019 results was driven primarily by higher average selling prices and load factor across all our programs and growth in ancillary revenues. For financial statement, we recorded a net income of $9 million, compared with $2 million in 2018.

This summer, the increase in operating income as per financial statement was partially offset by the costs associated with the transaction with Air Canada totaling $24 million. For the year, revenue were $2.9 billion, an increase of 3% compared to last year.

Our adjusted operating income was $38 million compared with $17 million in 2018. We recorded and adjusted net loss of $9 million compared with $24 million a year ago.

And as for financial statement, we recorded a net loss of $33 million versus a net income of $6 million in 2018. This year results included after tax expenses of $18 million related to the transaction with Air Canada, while net income for 2018 included a $31 million gain on the sale of the corporation's subsidiary Jonview.

A glimpse at the winter 2020 outlook now. On the some destinations, when compared with winter ‘19, global capacity is 5% higher, Transat capacity is up 7%, and on that capacity 56% has been sold.

Currently, bookings are up 13% and load factors are up 3.4%. Combined effect of U.S.

dollar fluctuation and fuel costs does not currently have a significant impact on operating expenses. Taking account all those metrics, unit margins are slightly higher than those recorded on the same date last year.

On the transatlantic program were against the low season during the winter, 55% of the capacity has been sold, loads factors are up 1.6%, and prices are also up 4.2%. These trends hold, results should be slightly improved compared to those of last year.

Now for our balance sheet. Corporation’s free cash totaled $565 million as of October 31, 2019, the decrease of $29 million versus a year ago which is mainly due to the adoption of IFRS 15, which led to a modification of how the balance of cash interest or otherwise reserve is calculated for $14 million, the acquisition of a spare engine for the introduction of the Airbus A321neo fleet for $17 million, the acquisition of a parcel of land adjacent to the one purchased at the end of 2018 in Puerto Morelos in Mexico for $16 million, and professional fee related to the transaction with Air Canada of $10 million, finally the settlement of a litigation in the court, the state of New York that happened earlier this year for $7 million.

Obviously with that cash position, our credit facilities remain unused. The deposit for future travels stood at $561 million compared with $517 million at the same date last year.

Off-balance sheet agreements stood at $2.2 billion as of October 31st. The decrease of $297 million is due to repayment made during the year combined with the decrease in long-term interest rates used to estimate rents for Airbus A321neo to be added to our fleet by 2020.

As said earlier, IFRS 16 leases will be applied as of Q1 2020, next quarter. The net present value of the future lease payments will be accounted on the balance sheet and as an asset and as a liability.

Furthermore, cost of major maintenance; engines, fuselage, landing gears will be capitalized and amortized over their useful life. This will eliminate the need for a provision for overall of leased aircraft as presently shown on our balance sheet.

The application of IFRS 16 will have a major impact on our financial statements. We have completed the scoping exercise, and lease review.

And we are currently finalizing the quantification of the application on our consolidated financial statements. You may refer to the note 5 on the future changes in accounting policy in our financial statements for further details.

A few remarks on the transaction with Air Canada. On August 23, 2019, a significant majority of our corporation shareholders voted in favor of the special resolution approving the previously announced plan of arrangement, pursuant to which Air Canada would acquire all of the issued and outstanding voting shares of Transat for a cash consideration of $18 per share.

On August 29, 2019, the Corporation announced the Superior Court of Quebec issued a final order approving the plan of arrangement with Air Canada. The arrangement remains subject to customary closing conditions, including regulatory approvals, particularly those of Canada and European Union.

If the required regulatory approvals are obtained and conditions are met, it is expected that the transaction will be completed by the second quarter of the calendar year 2020. The corporation has, among other covenants, agreed to limit its investment related to the execution of its hotel strategy in the period leading up to the closing of the transaction, but continue carrying on the related work in keeping with the arrangement agreement.

In conclusion, we are still expecting the transaction to close in the second quarter of calendar 2020 if the required regulatory approvals are obtained payment and conditions are met. In the meanwhile, we remain fully focused on our operations and note that this year's results show some improvement compared to last year, thanks to higher prices, better load factors and increased ancillary revenue.

For the winter season, the outlook is also slightly favorable compared to last year. We will now proceed with your questions.

Hi. Thanks for taking my question here, and good morning.

Maybe just first one for me, when I look at -- or in regards to your upcoming winter schedule and maybe even how you think about the 2020 summer schedule. I'm wondering, if you're taking into consideration or contemplating what capacity looks like with the grounding of the MAX?

Are you able to take advantage of some of your competitors having had to constraint capacity and are you able to act more nimbly? And when you look at your schedule over the next year, how are you trying to build that into your own forecast here?

Well, at this point, we have a good look at what the winter capacity looks like. It's a little bit too early for us to speculate on the next summer.

We have a couple of numbers, but people are still -- competitors are still changing their capacity. As for winter, the overall market is plus 5% on the south.

So, we haven't seen the effects of the 737 MAX. Most of carriers are able to find other options to replace its capacity.

So, they're still able to grow. So we -- I would say that we haven't been beneficiating of a decrease of capacity from their part.

As for next summer, I think, it's a little bit too early. We'll follow the 737 MAX trial and to what's going to happen.

There might be some decrease in specific market, potentially on domestic and transborder. But as for now, it's a little bit too early for us to see any impact on our results.

And then, you provided good color in terms of -- and also you have a good slide on kind of M&A timeline and the regulatory approval update. I'm just wondering, if you could provide any color on how the public interest assessment is going in terms of feedback you may be hearing from other stakeholders?

I'm not sure if there's anything you can provide in terms of color there?

Honestly, I don't think that we could have anything more than what we have said this morning or put in our press release or other -- the process is continuing. We collaborate to give all the information that they are asking.

But more than that, everything seems to proceed according to the plan.

Okay. So, things seem -- continue to proceed towards that second quarter 2020 planned closing date.

So, that's helpful. And just lastly for me.

There's been a number of these recently some Quebec-based companies in the consumer arena that have been highlighting that they're seeing a slowdown in the Quebec consumer, at least modestly. Just wondering, when you look at your booking curve, are you seeing anything that suggests a slowing Quebec consumer, given your exposure to that province?

No, we have -- of course we are very big in terms of the capacity in Quebec province. But no, on the contrary, we've been very pleased with the booking so far.

Our bookings are in advance, both on all of our markets, whether it be Europe, south USA as well. So, no -- we see that the intentions are still very favorable for people to travel.

And so, the answer is not from our part.

So, let me start with the first on the Thomas Cook agreement. Could you please provide an update on where that agreement stands right now?

Does it still hold? I mean, are you expecting a settlement, because it has canceled untimely?

And it's kind of related to that. I know you're leasing six A321 jets to cover the shortfall.

But, are these leases short term, and are you planning to sign another similar agreement with some other airline? Thanks.

Yes. So, the contract we had with Thomas Cook ended when the company went bankrupt.

So far, we were able to replace the aircrafts that were required for our winter season. And we hadn’t affected our program nor our customer’s.

So, we have found this necessary seasonal aircraft. And in addition to that, we are using more of our wide-body aircrafts such as the A330.

So, overall, we were able to replace everything that went --that came from Thomas Cook. So, we're all set for this winter.

Thanks to a lot of work done by our operational team.

Again, thanks. And what do you think are the lease terms for the A321s that you have from air lease?

Are they for the next four or five years or are they for longer term?

No, they are short term than summer just for the winter, and coupled, we decided secure for -- to the question that you were raising before, some will be kept in our fleet for the coming winter, not this one, but the next one. We're still in reviewing our needs and looking what will be the appropriate time to decide how many aircrafts and when and with who for -- depending of the evolution of the situation, we’re in control of everything that has to be performed.

Okay. Thank you.

And then secondly on the IFRS 16, I know you said you are undergoing quantification of the impact, but just to get some early sense on what it does to your EBITDA and net debt. So, I know you have some $140 million in aircraft rent that could probably be gone from the income statement, largely speaking, but any other number that we should be looking at?

I think, maintenance is one which you said will come down as well. So, like the EBITDA number should go up by the aircraft rent amount as well as some on maintenance side.

Any sense you can provide on EBITDA and net debt impact, please?

We -- not this morning, I will say we're still finalizing the exercise, but probably before mid March, we will schedule something in order to explain to you and all other people interested the impact on leases and on also on the cost of maintenance, where like I said earlier, instead of making provision for the next shop visit of an engine with the application of IFRS 16, cost of maintenance will be capitalized and amortized over the period. And it's really big change and that will affect our financial statement in next quarter.

And like I said, we're planning to schedule a call before to provide you with more -- with the detail of the numbers.

And lastly, for me, can you help us from modeling perspective for fiscal 2020, how much aircraft rent and CapEx for leisure and hotel business you expect? Thank you.

Okay. We’ll get back to you on those two.

Just looking at your guidance, your outlook for the winter, as I look at the individual components, it seems to imply to me good demand, as you've talked about, but maybe some pressure on yields in the sun destination market in particular. I'm thinking given your bookings are up 13% and capacity is up 7%, sort of suggest to me that pricing may be lower.

Is that correct? And if so, are there particular destinations or regions that you could point to that are causing that dynamic?

No, overall, I would say -- well, first of all, we took booking way more in advance this year. We wanted to capture as much of booking as we wanted.

So, of course, we put a little bit more pressure on pricing to be able to increase our load factor. But, we're seeing slowly but consistently an increase in pricing.

We've seen that over the last week. So, we're pretty confident that we will be able to increase our pricing during winter.

And as for the different markets, overall markets, whether it's Mexico, whether it be Mexico, Cuba, Dominican Republic or a little bit similar than last year in terms of pricing, we're seeing a slight increase on Jamaica, there is more demand on Jamaica, so the -- we're pushing the pricing up a little bit. But overall, we're pretty confident that we're going to be able to increase -- continue to increase the pricing over the next weeks.

So, is it fair to say then of those that those bookings of 13% increase in bookings year-over-year, those that you have now, is pricing on those lower or higher than last year?

Well, it depends because -- it depends where the bookings -- for which period the bookings have been done. So, for instance, at this time of year, last year, we had more bookings for the peak season, such as the school break.

Right now, we have a little bit more booking for the low season, and we were expecting that as well because we increased a lot of capacity during shoulder, so the -- especially in November up to December, these our periods of the year where the pricing is always lower because we still stimulate demand. But we did that voluntarily to increase aircraft utilization.

So, we were expecting at this point that we would take more bookings during November up to December 20th. These bookings will have lower pricing.

So, when you look at our numbers to date, we're pretty satisfied with our strategy. And we were able to increase aircraft utilization significantly.

So, thank you, everyone. Let me remind you that our first quarter results will be released on March the 12, 2020.

Thank you and have a good day and very nice holiday season.