Transat A.T. Inc.

Thank you, Frank. Hi, everyone, and welcome to the Transat conference call for the presentation of the financial results of the third quarter ended July 31, 2021.

I’m here with Annick Guérard, President and CEO; and Jacques Simoneau, our interim CFO. Annick will provide her comments and observations on the current situation and on the operational and commercial plans for the future, before Jacques reviews the financial results in more details.

We will then answer questions from financial analysts. Questions from journalists will be handled offline.

The conference call will be held 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.

Jacques may refer to it as he presents the results. 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, we invite you to consult our filings with the Canadian Securities Commission.

Forward-looking statements represent Transat’s expectation as at September 09, 2021, 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 Annick for our opening remarks.

Thank you Christophe. Good morning everyone.

We are announcing today our results for what will awfully remain transacts last quarter with close to no revenue. We have restarted our operations on July 30.

And the $12.5 million in revenues for third quarter stems mostly from our incoming to operating activities. Our results are comparable to those of the same quarter last year with variances or to do settlement and change in the fair value of fuel derivative contracts last year, and to the foreign exchange effect on our LEEFF liability.

This has resulted in an operating loss of $98 million or $51 million on an adjusted basis. We have good reasons to believe that we have seen the worst of the pandemic and that the situation will now only improve from here.

Even though the variance in the fourth wave forced us to remain cautious, we do expect to be operating on a much stronger basis this winter than we have done last year or since the beginning of the pandemic for that matter. We currently see good trends into booking, even if they tend to come in closer to departure dates than they used to.

To this point, our load factors and prices have been satisfying and better than we expected even if we are still operating limited capacities compared to pre pandemic level. People are still cautious and they decide at the last minute, but it is very clear that they are eager to travel.

As we say vacation is calling again and so is the desire to reunite with your loved one. It's time to make new memories.

Our progressive restart this fall allows us to deal in a sturdy way progressively recalling and retraining our teams to be ready for the winter season. For this summer season, we started with around 10 flights per week, steadily increasing to 50 flights per week in September, and we will go up to around 70 flights a week in October with 11 aircraft in operation.

We operate twinned [ph] routes on South Europe domestic and transporter programs. All these routes are upgraded with our Airbus A321, including nine LRs.

As we expected, the A321neoLRs proves to be exactly the versatile aircraft we needed. It gives us operational flexibility and efficiency like we've never had before.

And it's the perfect thing. And it is in perfect sync with Transat’s continued efforts for the environment.

It is certainly a clear game changer for the efficiency of our operations right now and for your future. We have started advertising again to make sure that our brand stays on top of the customers mind when we plan for travel, we are happy to see that our brand has retained most of its attraction power despite this long interruption.

Our customer’s awareness is still high, and our employees are still eager to come back to us. On another key topic, of course, we strongly believe that high vaccination rates are key to the safe restart of travel.

And with that in mind, we have since long strongly encouraged all our employees to get vaccinated as soon as they possibly could. We will make full vaccine protection or requirement for working on our planes or in our premises.

Everyone must do their part to ensure that we eventually overcome the virus. We are impatient to see the details of the plan legislation on the topic.

While restarting our operation, we continued working on the implementation of our five year plan. With the revamping on our fleet well underway we have started introducing changes in our network by announcing new transverter destinations for next winter.

At the same time, discussions around airline partnerships are progressing well. And we plan to tell you more about it in the near future.

Over the last month we have been working to make sure our systems and internal processes are adapted for these types of partnerships. We have made significant progress on that front and we are ready to move ahead.

As we previously announced, we have now shut down our hotel division, which its President Jordi Solé leaving the company on August 31. As for our capital structure, the refinancing of our debt remains a top priority as we are looking to gain more flexibility.

Part of our objectives was to reduce financial risks while exhibiting our business plan, manage our upcoming 2023 maturity and reducing debt burden associated costs and loss in value from lease warrants. On the team front, we are making sure we have the most solid team for the past.

The executive team will now include Michèle Barre, Vice-President Network Revenue Management and Pricing, as well as Joe Adamo, Chief Sales and Marketing Officer. This will make sure that we have the right people under the table when decisions are made.

We are also making good progress in the recruitment of our CFO, and I'm impatient to see such a core member of the team join us. In the meantime, Jacques Simoneau knows that very well as a board member as accepted to serve as an interim CFO.

Lastly, in late 2018, we announced Jean-François Lemay’s departure. Given the circumstances related to the proposed transaction with Air Canada and to the COVID-19 pandemic we had agreed to postpone his departure.

It was subsequently postponed until July 31 of next year. Jean-François has accepted to stay with us long enough to ensure a seamless transition.

Jean-François has lived at Transat for more than eight years after playing a major role in our relationships with our unions for many years. He has been instrumental in the redesign of our fleet, which is key to our strategic plan and in our weathering, weathering the COVID-19 crisis.

I am confident that with his help we will find the ideal replacement for his role. So overall, we have been very active, both on the restart of our operation, and on the planning for the future.

We are confident in our capacity to execute our plan and with Canadian borders having reopened this week for double vaccinated international travellers we look forward to welcoming our customers again, in ever increasing numbers. I will now give Jacques Simoneau the floor for more details on the quarter’s financials.

Thank you, Annick. Good morning, everyone.

As you likely know by now, on April 29, we signed an agreement with the Government of Canada that allows us to borrow up to $700 million in additional liquidity through the LEEFF program. The $700 million is composed of two parts, a $390 million facility to support operations, and a $310 million facility as support to reimburse travel credits granted to customers in compensation for flights cancelled due to the COVID-19 pandemic.

Although we now have access to these new credit facilities, preserving our cash remains one of our top priorities. We are constantly negotiating with our suppliers, including aircraft lessors.

Other costs saving measures have also been either implemented or continued during the quarter. Now about the results.

Again this quarter Transat’s results were significantly impacted by the COVID-19 pandemic, with one of the measures taken in response to the pandemic being the suspension of our airline operations from January 29 to July 29. So here are a few key accounting measures for the 2021 third quarter.

Revenues, our financial statements show revenues of $13 million, up from the $10 million in 2020 a year which was also greatly affected by the pandemic. These revenues for the quarter were mostly driven by our incoming tour operator in the sun destinations.

Our adjusted net plus is $116 million which compares with $140 million last year. Note that last year's quarter included expenses of $30 million for settlements of fuel hedging contracts put in place before the pandemic.

Overall, the adjusted net loss for the quarter is comparable to this year's Q1 and Q2. Our Q3 adjusted net loss takes into account an increase in our amortization expense as a result of the commissioning of three new Airbus A321neoLR during the quarter and an accelerated amortization on some of our fixed assets.

Now about the net loss attributable to shareholders. As shown in our financial statements, the net loss attributable to shareholders was $138 million, which compares to a lower loss of $45 million last year.

This $93 million difference is mainly due to foreign exchange losses and to the change in fair value of derivatives. Indeed, this year Q3 loss includes a foreign exchange loss of $16 million mainly related to the revaluation of our aircraft lease obligations as a result of the weaker Canadian dollars compared to U.S.

dollars, a loss which compares to a foreign exchange gain of $28 million last year. Also, last year, our third quarter net loss included an unrealized gain unchanged in the fair value of fuel derivative of 68 million caused by the recovery in the jet fuel price following the collapse in prices during the Q2 220 due to the COVID-19 pandemic.

Now about balance sheet and cash, corporation’s free cash totaled $429 million as of July 31, which is rather similar to the $426 million as shown on our balance sheet at the end of October 2020 or the end of our last financial year. This stability and free cash is due to the proceeds from borrowing $535 million during the nine month period with $365 million during the quarter.

Borrowings from the LEEFF program to compensate cash used for our operations during the same period. For the quarter, the cash used represents $20 million per month.

This amount does not consider the proceeds from borrowings nor the reimbursement customers nor the consideration paid for the purchase of traffic doors. For the rest of the year, the cash used is expected to be slightly higher on a monthly basis, mainly due to the cost of years of resuming the operation.

At the end of Q3, cash interest or otherwise reserved, total $126 million. Deposits for future travel stood at $263 million.

Of these deposits $159 million were travel credit vouchers granted to customers in compensation for flights cancelled due to the COVID-19 pandemic and $78 million was held in trust and obviously not included in our free cash of $429 million at the end of July. Now about debts and liabilities.

Lease liabilities stood that $977 million, which includes 10 A321neoLR of which three were commissioned during the Q3. Long term debt stood up $422 million fell to $208 million last quarter.

During the quarter, we drew an additional $100 million on our 390 million LEEFF facility. And we drew $265 million of the 310 million LEEFF facility for the purpose of reimbursing customers.

Noteworthy and like the accounting treatment for the $390 million LEEFF facility the accounting treatment of the drawings under this $310 million facility for customers reimbursements is also particular. Now bear with me for an explanation.

As per IFRS difference between the fair value of a drawdown of their descriptive facility calculated using the market interest rate for Transat nowadays, and its nominal value is recognized as a deferred government grant. Therefore, for this $265 million drawdown and amount of $123 million is included in our long term debt and $140 million is recorded as a deferred government rent.

Finally, off balance sheet agreements, excluding agreements with suppliers stood at $545 million, mainly related to the seven Airbus A321neos yet to be delivered as of July 21. More on reimbursements, total reimbursements up to until July 1 amounted to $361 million.

The difference between reimbursements and the total drawn under our credit facility to finance the reimbursements comes mostly from reimbursements made with cash held in trust. At the end of August, we had received requests for about 80% of the total amount of travel credits issued.

And we made refunds for more than 90% of amounts claimed. Customers add until August 26 to 2021 to submit their request refund.

Outlook, finally, as you can read in our press release this morning, we will not for now provide an outlook for the remainder of 2021 and the winter 2022. We will now proceed with your questions.

Thank you. Good morning.

Wonder if you can talk a little bit about what you're seeing so far. I guess in the summer since you've restarted operations, I mean, I appreciate it's a relatively small number of flights.

But what are you seeing as far as demand and load factors on the flights that you've operated so far to August into the early part of the September?

The level of booking that we have observed so far is encouraging. We are seeing definite recovery and demand first on the domestic groups but also on some key international routes such as Montreal, Paris, Toronto Pharrell [ph].

We look forward, of course, to a winter season that promises to be much busier than the last one. When we look at the summer steps right now, most of our little sectors are around 85% and the revenues per passenger or similar to what we saw [Indiscernible].

So of course, this is with a small level of activity that needs to be taken into consideration as we are deploying our program from assembly. But so far, the of course, the recovery of our business as coincide with the easing of some constraints in trouble.

And we will remain agile and are ready to adjust our program of that situation in the market change. And bookings are very last minute so we have had to adapt to that new pattern since last year.

But so far, it's going pretty well.

Okay, and on the I guess the sun destination bookings for the winter. If I go back to the last quarterly conference called things were looking fairly encouraging there has that does that trend continued?

Are you still seeing pretty good, I guess the steady state pace of bookings for the for the sun destinations.

Yes, we still see a steady pace for the sun destination. In total for next winter, we plan to operate flights to sun destination, we will operate of course, destination in the U.S.

It's still early for us to be able to comment, since the pattern the booking pattern is so last minute, but we are we are encouraged with the results we see so far. We are we remain cautious.

Of course, as I was saying in the introduction, because of the pandemic, the fourth wave and how the different governments around the world will react in terms of borders restriction. However, we feel confident that more and more of the consumer is becoming you know more with the confidence in terms of its safety on board our class and to go in the travel with us.

Okay, just a final kind of follow up question on the winter destinations. I mean, you've put out your schedule, I'm just wondering if you can give us a sense of what level of capacity you're going to be at this winter versus, say the pre pandemic level.

Just any kind of guidelines there as to, what level of operations you will be at during the winter?

Yes, what we have right now in terms of sales that are well, destinations that are open for sale, we are at minus 35% of capacity, compared to the winter of 2019 and 2020. Of course, this is what we have in terms of sales that are open.

We might had just up or down depending on how demand will react. I don't think we're going to go down, but we never know.

We don't -- difficult for us to predict what's going to happen with the COVID situation. And if they are opportunities as we saw, as we have seen for the summer season, where we were able for instance to increase the number of frequencies on certain destination in the month of August, such as Paris, such as Cancún and Punta Cana, of course, we will do we will readjust.

We will take all jump on all operating areas in the market.

Okay, just to clarify you said down 35% capacity for destinations that are open? I mean, relative to I guess winter 2019/20 what percentage of destinations are actually open?

We have about 23 sub destinations that are open five destination in the U.S. and 15 European destinations.

I would say about over 90% of the destination have been reopened.

Okay, great. Nice.

Very helpful. Thanks very much.

You're welcome.

Yes. Good morning, and thanks for taking my question.

Annick, you mentioned some potential airline partnership that could be announced. So I was just wondering if you could provide maybe a bit more details on those partnership and as well, in terms of timing, is it something that could be announced before the end of the current fiscal year?

Thank you.

Well, as you know, our network was designed to serve Point to Point traffic. However, as we grow, and we want to offer more destinations and options to our clients, we are looking, we have been looking at airline partnership to run on our offer.

In recent years as we centered our operation around our airlines activities, we have clearly understood the limitations of operating in isolation. So partnership and alliances will be key part of our network development strategy in the short, medium and long term.

We are currently working on different opportunities. We have been in discussion with several partners potential partners, we believe that Transat is a real gem in North America.

We have strong assets to offer potential partners looking to increase their footprint between America and Europe and/or the sun destination. And our approach is to start with simple bilateral, bilateral agreements which will allow us to make quick wins while building a relationship of trust and this may lead these partnerships to evolve into something more important as strategic.

In terms of timing, these discussions have been going on for many months. And we are planning to be able to announce something in the fall more than one more than one alliances.

Okay, that's great color. And thank you very much.

And with respect to the current financing that you're looking to do is restructure or refinance completely. Do you need to appoint your CFO or this is something that could be counsellor or contemplated in the in the near term as well.

It's being done in parallel. We have redesigned the I would say the strategy of their refinancing.

Our goal is really to reduce the financial risk, and proactively, of course, manage the upcoming 2023 maturities. We want to be able to potentially seek additional liquidity for working capital needs as well and reduce the debt burden associated costs overall.

So there are there is work that has been that is being done right now, we want to make sure that we progress on that front. However, of course, when the CFO gets in place, the person will have a word to say on the strategy that we have started designing.

So we're managing different parallel and make sure that everything is going to be coherent with the arrival of the new CFO and the strategy that we are working right now with the external advisors.

Great, perfect. And then my last question, given that the auto strategy has now been stopped, I was wondering if there was any opportunity to monetize some assets.

I knew there was two lands in the south. So maybe there's an opportunity to monetize those assets to strengthen the balance sheet?

So any color on that front would be helpful? Thank you.

So as we've explained, we have closed the division during the last quarter Q3. So the and now we are the land will be put for sale when the market is favorable.

We are waiting a little bit because of the pandemic the timing is not the best. However, we have started discussing with different brokers to help us find the potential buyers.

So this is in progress. We are working, that's going to be part of our priorities for the upcoming month.

There a market picks up and we will make sure that we execute on that plan.

Great, thank you very much, and congrats for the cash management in the quarter.

Thank you.

Thanks and good morning, everyone. So maybe just a clarification first.

So I heard on the call -- said I think 80% of the travel credits have been requested for refunds. But and the presentation I think it says about 90% of the credits that we have issued have been requested for refund.

So just confirming the numbers, is it 90% refund request and you have fulfilled 80% or is it the opposite?

Okay. What we have been able to refund our customers who want in it that thanks of course to the loan of the federal government with the 310 million.

At the end of August, we had made refunds for more than 90% of their request that had been made by our customers. So customers had from April 29 to August 26 to request a refund using the form on our website of course, and customer deposits as of July 31 included these travel credit vouchers for cancelled trips related to COVID of course amounting to 159 million compared to compared with 505 million as of April 30, 2021.

So we have received a request for about 80% of the amount of credits issued and made refunds for more than 90% of the amounts that have been claimed at the end of August 2021. So I'm not sure.

I'm not sure this is clear enough for you.

No that that's good. I just saw something a little bit different the presentation.

So making sure thanks Annick for that. And then on the cash burn guidance, I think similarly; I've heard you guys are expecting a slight increase in cash burn for the remainder of the year, as you ramp up operations.

The kind of forward bookings you're looking at right now. And maybe 80%, or 90% of the requests you have received for refunds are almost kind of fulfilled.

Like if you if you go further out, maybe over the winter period, would you anticipate, at some point to be cash breakeven, instead of burning cash, or it's still too soon to call that?

Well, I would say it's a little too soon to say. Of course, we were able to drop our cash burn from if we recall last year 35 million to 40 million per month to 20 million per month.

Need to take into consideration as well that there's a onetime cost to the resuming of our operation, which is mostly due to the training of our pilots. There's about 20 million in cost and additional cost to be able to restart our operation.

So that's, that's one time costs. We are pleased right now when we look at the operation, of course, it's still early to say but our operation is able to cover more than the variable cost.

So it's, it's compensating for some of our fixed costs as well. So we are pleased to see that but at the same time, as I'm saying, there is additional costs onetime cost for the training.

So we anticipate that we should be around. This is about the only prediction that we make at this point, but we are – we anticipate to have a cash burn around 20 million per month for the upcoming -- for the fourth quarter.

Of course, we're going to try to beat that. We have all the measures taken to delay all the payments with all the suppliers, especially with the cross lessors.

We are very strict on all cost management measures, payments, and this isn't twice and this will remain in place for many months to come and then within many years. So this is what we anticipate for now.

Okay, and that's good color. Thanks, and just if I can clarify on that cash burn guidance you provided.

At any point in the near future do you have any, delayed payments that you negotiated with the leasing companies? Would you have to start making those payments this year?

Not for this year, not for 2021. They have all been delayed late 2022 more in the fall, following strong negotiations that we had with the lead source.

For some of them, we were able to reduce overall payments, but most of them it was more around protecting our cash. So no impact on the cash, on the P&L, but significant impact on the cash flow for the upcoming 12 months, positive impact.

Okay, that's great. Thanks.

And last one for me, before I hand over. You mentioned domestic is recovering faster than international dollars, which is kind of obvious in this in these environment conditions.

But just wanted to understand in terms of your kind of short term capacity as well as your five year plan, where do you see domestic as percentage of your overall network. Where does it fit?

Like is it going to be something like 20% of your business overall? Or could that be more than 20%?

In the plan [ph] we have designed so far, the domestic market represents around well depending on our passengers and that if we look at overall capacity, it's represents a little more than 15% in the plan we've designed for the upcoming years. However, as we move along with potential partnership, this percentage might change.

So this is something we're going to keep evaluating as to what's best for us to operate it by our own network or is it better in terms of return on investment to share part of our domestic with others. I'm just saying this as an example.

It's going to be the same on the target market, the same on the transborder and the European market. So to answer your question, at this point, what we have in the program is losing more than 15% depending on the alliances, we could re-adjust.

That's great. Thanks for all the answers and all the best.

Thank you.

Thank you.

Thanks. Good morning.

I'm just wondering if I could follow up on some questions about what you're seeing in terms of bookings. I'm just wondering if, if in recent weeks, you've seen or believe you've seen any impact on bookings coming from the pickup in COVID cases or the fourth wave specifically, just as some other airlines around the world are kind of starting to cite some softness in the recovery trend, have you seen anything?

Or can you attribute anything to that?

We haven't seen since the I would say the announcements or more the announcements around the fourth wave around Delta, around in new as well, the new variants. We haven't seen less of a pickup in the bookings; the trend has remained steady over the last month for summer bookings, as well as for winter looking.

Actually, it has gone up a little bit because of the easing of the restrictions at the border and the Canadian border, which was conducted in three phases. The last being this week, and we saw a small pickup this week, especially on European destinations for the upcoming weeks and on the winter season.

So of course, this is what we're seeing at this point. Depending on how this situation will evolve there's still a lot of uncertainty in the market, we’ll readjust.

But so far the trend is steady.

Okay, thank you Annick. And then just one last question.

I'm just thinking about your remaining 321LR purchase commitments. Would you ever consider delaying those deliveries at this point in order to preserve cash?

And I'm just thinking if you know the recovery, stalls things take longer? Or do you feel those aircraft are crucial regardless of how the recovery how strong or how weak the recovery is over the next kind of six to 12 months?

Part of these. Well, first of all, to the A321 is the key asset for us in the recovery and the in the execution of our plan.

It allows us to, as I said to bring it to give us a lot of flexibility. And it gives us a strong competitive advantage in North America compared to all of our competitors.

The A321LR allows us of course to reduce the operating maintenance and training costs but it'll allow us to attain as well -- communality which provides several advantages, including the mix week flying concept with [Indiscernible]. So this is – it’s really important for us.

As for delays we have among the seven that are to come, we have delayed them. They will be delivered between 2022 and 2024.

They were delayed we negotiated with the IF Capital suppliers to delay them for a while and we will adapt we will adapt and see what's possible and what's not the depending on demand. So we are being very careful.

Of course when we look at our plan right now our five year plans, we don't have enough aircraft to be able to execute our plan, as we are at 33 aircrafts and the plan goes if we look at five years from now, we will move up to more than 50 aircraft. So at one point we will have to reorder new aircraft.

These will be a mix of LRs and XLR that will be in the market and mix up as well. The narrow body A320 [Indiscernible] A321neo.

So this is something we are all looking at right now. We are adjusting of course we've done a five year fleet plan.

But we have made sure that we have flexibility with the loan, the delay source to be able to delay or even when or advance, move delivery. In parallel of course, we have delivered all the payments with all the different resource [Ph] to make sure we would put the….

Okay, that's very helpful. Thank you.

Thank you. So thank you, everyone.

And with that, let me just remind you that our fourth quarter results will be released on December the 9, 2021. Thank you.

Have a good day.

Thank you very much.