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Edited Transcript of TRZ.TO earnings conference call or presentation 13-Jun-19 2:00pm GMT

Q2 2019 Transat AT Inc Earnings Call

Montreal Jun 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Transat AT Inc earnings conference call or presentation Thursday, June 13, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Annick Guérard

Transat A.T. Inc. - COO

* Christophe Hennebelle

Transat A.T. Inc. - VP of HR & Public Affairs

* Denis Pétrin

Transat A.T. Inc. - VP of Finance & Administration and CFO

* Jean-Marc Eustache

Transat A.T. Inc. - Chairman of the Board, President & CEO

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Conference Call Participants

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* Jean-Francois Lavoie

Desjardins Securities Inc., Research Division - Associate

* Kevin Chiang

CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Analyst

* Turan Quettawala

Scotiabank Global Banking and Markets, Research Division - Director, Transportation and Aerospace, Equity Research

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Presentation

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Operator [1]

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(foreign language) Good morning, ladies and gentlemen. Welcome to the Transat conference call. (foreign language) As a reminder, this conference is being recorded, on Thursday, June 13, 2019. (foreign language) I would now like to turn the meeting over to Mr. Christophe Hennebelle, Vice President, Corporate Affairs. (foreign language) Please go ahead.

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Christophe Hennebelle, Transat A.T. Inc. - VP of HR & Public Affairs [2]

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Merci. 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 John-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 off-line. The conference call will be in English, but questions may be asked in French or English. As usual, our investors presentation has been updated and is posted on our website in the Investors section. Denis may refer to it as he comments.

Today's call contains forward-looking statements. There are risks that actual results will differ materially from those contemplated by these forward-looking statements. For additional information on such risks, please consult our filings with the Canadian Securities Commission. The call also contains certain forward-looking statements concerning a potential transaction involving the acquisition of all the shares of the corporation. The statements are based on certain assumptions deemed 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 a definitive agreement to the satisfaction of the parties, Air Canada's due diligence, the approval of the corporation shareholders, the approval of applicable regulatory and governmental authorities, court approval of a potential plan of arrangement, the execution of support agreements by certain shareholders and the satisfaction of other conditions customary for this type of transaction. In addition, statements regarding the results of a potential transaction will depend on the purchaser's plan following the completion of a potential transaction.

Forward-looking statements represent Transat expectations as at June 30, 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 financial 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.

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [3]

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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 destinations market. As usual, I will review the financial results and then share our outlook for the summer season.

At the end, I will also make some comments on the exclusivity agreement signed with Air Canada. But first, as I did last March, allow me to say a few words on the adoption of 2 accounting standards and the impact on comparative numbers. The corporation adopted IFRS 9 financial instrument and IFRS 16 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 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 were 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 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 at 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 deposits and deferred revenues and a $8 million increase in retained earnings.

From November 1, 2018, onwards, the adoption of IFRS 15 led to a modification of the balance of cash in trust or otherwise reserve is calculated. As at April 30, 2019, the impact is a $13 million increase of cash in trust and an equivalent decrease in our free cash position. More information, the adoption of IFRS 16 leases will be in January 2020. For all markets combined, Q2 results were as follows: Revenue of $897 million, up $30 million or 3.5%. And 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 as per financial statement includes the settlement of a litigation for an amount of USD 5 million without admission of liabilities. The rationale for settling was to avoid the risks 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, which is our main market during the winter, capacity was 1.7% higher, selling prices of our packages were 4.5% higher and our load factors were stable. The impact of a lower Canadian dollar combined with higher fuel cost was a 2.8% increase in operating costs. Margin 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 fuel effects, feeder program, et cetera, profitability was slightly lower than in 2018. Airline cost of our Sun destination and transatlantic programs include additional cost incurred for the transition and optimization of our fleet as in Q1, which are estimated at $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 adjustment to certain provisions related to stock-based compensation following the significant rise in the share price on April 30. With regard to 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%. Fare are similar to those of last year, and the combined effect of fuel cost and currency fluctuation does not currently result in an increase in operating expenses. On the Sun destinations market, our capacity is similar to last year. 60% of our capacity has been sold and load factor are similar to those of 2018. The unit margins are currently higher compared to those reported on the same date last year.

All markets combined, if these first trends hold, results for the third quarter should be slightly better compared to 2018. However, it is still too soon to draw conclusion about the fourth quarter outlook because of the low share of reservations taking this early in the season. Now for our balance sheet. Corporation free cash totaled $796 million as at April 30, 2019. That represent a decrease of $107 million versus a year ago and this variance is explained by 2 components. First, development of our hotel chain in Q4 of '18 and in Q1 '19, the corporation acquired 2 adjacent parcels of land to be combined into one in Puerto Morelos, Mexico for a total of $77 million. Second one, the commissioning cost on 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 remains unused. Deposit for future travel stood at $630 million compared to $605 million at the same date last year. Off-balance sheet agreements stood at $2.5 billion as at April 30, a $53 million decrease when compared to year-end due to repayments made during the 6-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. The net present value of the future lease statements 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 life. This will eliminate the need for a provision for overall of leased aircraft as presently shown on our balance sheet.

To remark on the exclusivity agreement with Air Canada. On May 16, Transat announced that it 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 will complete its due diligence review and the parties will finalize the negotiation of a definitive agreement regarding this transaction. The period will end 30 days after the beginning of the formal due diligence process.

That process has officially started on May 27, meaning that period will end on June 26. We have taken note of the press release of Group Mach on June 4, but have not received any formal proposal in relation to it. Therefore, we do not have 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 and, 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 with 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's no assurance that a definitive agreement will be reached in relation to any transaction following the exclusivity period and the ongoing discussions. No assurance may be given that the transaction will occur in the relation to the proposed transaction or otherwise or revising the definitive terms of such transaction if any. During the exclusivity period, Transat operations continue in the normal course and there will be no change for our 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 comment and the press release contain all the information about the transaction process that we will be able to share at this time, so we will not be able to answer any further questions on that topic.

Coming back to our results to conclude. As for Q1 -- 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 cost incurred for the transaction and the optimization of our fleet. For the third quarter of '19, the outlook is slightly favorable when compared to last year. We will now proceed with your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) (foreign language) (Operator Instructions) Our first question comes from the line of Kevin Chiang from CIBC.

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Kevin Chiang, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Analyst [2]

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Just two quick ones for me as it relates to your outlook. You're just sticking to your Q3 -- the 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 going a little bit faster than in previous years. Your own capacity is a little bit more muted and you have -- now fuel going the other way for you relative to where it was at the beginning of the here. Just wondering why we shouldn't see a more significant improvement in your third quarter earnings on a year-over-year basis, especially when Q3 of fiscal '18 that earnings stream was quite low.

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [3]

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Looking at bookings, prices, cost for the third quarter, comparing that where we were last year at the same time, we're seeing -- we have indication in those KPIs that results of Q3 this year, we're better positioned than we were at the same time last year. This really was beyond the outlook for the third quarter. We decided -- because as you know in the industry, prices are high, but margin are low, many factors and having sold -- having the booking in the end per day. We thought that it would be better to focus on Q3 instead of already talking about Q4 because for Q4, lots of booking remains to be done. It's normal for when you are selling leisure. The inventory is, at this point of the year, sold at like 50% and with 50%, it's difficult to -- really to conclude where we will be at the end. The results will be better than this. This is what we -- this is the indicator that we have today.

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Kevin Chiang, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Analyst [4]

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And if I maybe drill down 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 3 players, including yourself, there's definitely a slowdown in that growth rate. Does it feel like you can regain some pricing power here in a more rational market? Or do you think you're limited in how much you can raise fares even with capacity -- the 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 if capacity is acting a little bit more rationally over the transatlantic market?

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [5]

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It's important to say that today we're in transition, transition for fleet. For the fleet, we are waiting the order of the Airbus A321neo long-range version to reach our fleet, and it would have been, let's say, difficult to bring more of the 330 and other type because as we explained in many occasions, we are aiming for a fleet that will be composed on A330 and A321 mainly, and we think that the amount of A330 that we have, we don't need to have on this side. It's more on the smaller plane that we'll have for the A321. And then that's the reason why this year, increasing more the volume was not the avenue that we chosen because of the transition, but we feel and we're very confident about the future by bringing the A321neo, an aircraft that will be smaller, that will be able to reach the other side of the ocean. Because the aircraft will be smaller, it will surely be able to benefit from all the initiatives that was done, account and revenue management. That's an aircraft that we'll be able to fly like every day, every season, an aircraft that we'll be able to use also during the winter. But 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 relative position versus the competition. The 321 is really a game changer for us.

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Kevin Chiang, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Analyst [6]

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And maybe just a 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 talked about suspending your hotel strategy. Have you suspended anything else in terms of some of these longer-term objectives that you're looking to accomplish as a stand-alone companies? Has anything else been suspended here as you negotiate with Air Canada and potentially look to sell yourselves?

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Jean-Marc Eustache, Transat A.T. Inc. - Chairman of the Board, President & CEO [7]

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No, no. The only thing we agree with Air Canada is to continue the hotel business, but not to construct -- to start the construction. We should have started the construction beginning of June and because we have this agreement nonbinding, they ask us not to do the construction. So we are not doing the construction right now for this month, but the rest will continue. We're still looking at land. We're still negotiating. We have -- we're still doing all the rest that we have to do, but we don't invest big money for the construction. That's the only thing...

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Operator [8]

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Our next question comes from the line of Turan Quettawala with Scotiabank.

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Turan Quettawala, Scotiabank Global Banking and Markets, Research Division - Director, Transportation and Aerospace, Equity Research [9]

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

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [10]

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For the 321neo, the first aircraft was added to our fleet at the end of the quarter, like April. It was even the first day of May and really no impact at all on the cost of -- for the period. But let's say like we are referring to in the disclosure today, in the preparation for the pilots and everything, that in the end, I need to answer better your question, ending up by increase our cost. Then aiming for a fleet of 321 and 330 is we entered that's absolutely not what we are having. We are having a mix of 330, 310, 737 that we have lease for a couple of years, plus seasonal coming from different sources. And also the agreement with Thomas Cook that started, and where they were sending us fewer Airbus A321. Then that's what we qualify as cost of transition than -- to be clear, it was not related really to the neo long-range order. But let's say, the transition to get there makes our fleet more complex, our schedule more complex, managing revenue is more complex also, and this is what added to our estimation of $8 million in the quarter.

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Turan Quettawala, Scotiabank Global Banking and Markets, Research Division - Director, Transportation and Aerospace, Equity Research [11]

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

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [12]

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$8 million.

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Turan Quettawala, Scotiabank Global Banking and Markets, Research Division - Director, Transportation and Aerospace, Equity Research [13]

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Oh, in the quarter. Okay, that's helpful. And then I guess it's not going to continue you think into Q3 or is that going to go down?

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [14]

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No, it's for -- let's say, the main amounts were for the winter period because of our strategy of bringing seasonal plane 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 narrow-body planes are all returned to their operators mainly in Europe, then not a lot of cost for transitioning our fleet in the summer month. In fact...

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Turan Quettawala, Scotiabank Global Banking and Markets, Research Division - Director, Transportation and Aerospace, Equity Research [15]

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Okay. I got it. Okay. So this is not really to the 321neo? This is just the optimization and the transition cost? Is that -- okay, I got it.

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [16]

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Clearly, the transition.

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Turan Quettawala, Scotiabank Global Banking and Markets, Research Division - Director, Transportation and Aerospace, Equity Research [17]

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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's also some stock-based comp. I assume that's just a last kind of day or 2 that the stock went up at the end of the quarter. Do you have a sense of how much more that would be in Q3 stock-based comp?

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [18]

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Should not be an issue for -- it's based on the value of the shares on the market that I don't anticipate with the inflow that we have today that it's our expenses in a significant way during Q3.

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Turan Quettawala, Scotiabank Global Banking and Markets, Research Division - Director, Transportation and Aerospace, Equity Research [19]

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I see. So you've written the stock -- on the stock-based comp, you've written it up all the way to $13, is that what you're saying? Or did you write it up to what it was on April 30?

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [20]

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To what it was at the end of the day on April 30. That remained a portion, but the most significant portion affected Q2.

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Turan Quettawala, Scotiabank Global Banking and Markets, Research Division - Director, Transportation and Aerospace, Equity Research [21]

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

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [22]

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I think so. Yes.

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Turan Quettawala, Scotiabank Global Banking and Markets, Research Division - Director, Transportation and Aerospace, Equity Research [23]

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Okay. And then, again, just last question for me, I guess, similar to Kevin's is, are you seeing any pricing pressure from WestJet here at all? I know there's a significant amount of capacity increase obviously coming from them. I know they're still small, but are you seeing any pricing pressure from them?

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Annick Guérard, Transat A.T. Inc. - COO [24]

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We are seeing pressure, of course, from WestJet on Europe this summer. They have added additional flights 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 for us. So we are -- it's -- they are increasing their presence, not only WestJet, of course, others as well. So yes, there's been increased pressure on the pricing.

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Operator [25]

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Our next question comes from the line of Jane-Francois Lavoie with Desjardins Securities.

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Jean-Francois Lavoie, Desjardins Securities Inc., Research Division - Associate [26]

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I was wondering if we come back 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, please?

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Annick Guérard, Transat A.T. Inc. - COO [27]

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Yes. In terms of Q3 and Q4, we are expecting our second A321neo long range at the end of June, so that's going to be the second one, and we will operate summer, so Q3 and Q4 with those 2 A321neo long range. The following one will arrive more during next winter.

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Jean-Francois Lavoie, Desjardins Securities Inc., Research Division - Associate [28]

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

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Annick Guérard, Transat A.T. Inc. - COO [29]

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No.

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Jean-Francois Lavoie, Desjardins Securities Inc., Research Division - Associate [30]

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

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Annick Guérard, Transat A.T. Inc. - COO [31]

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Yes. We were expecting and this is what we had communicated in the past, however, we're still in discussion with Airbus in terms of 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 when exactly these aircrafts will arrive.

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Jean-Francois Lavoie, Desjardins Securities Inc., Research Division - Associate [32]

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Okay, perfect. And maybe Denis, on the $6.7 million for the settlement cost that you have, I was just wondering if you could talk a little more about that, please.

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [33]

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That relates to a subsidiary that was created in Transat, and we did in Mexico and then we decided to close in...

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Annick Guérard, Transat A.T. Inc. - COO [34]

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2014.

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [35]

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2014. Many years ago. And we had discussions with suing us on allegation that we thought that obviously, we're not right. But I decided to -- it was 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 statement of the previous month, we were estimating that the guys who were suing us for USD 30 million. Then it is in front of a jury here in the United States, then we thought it was in our best interest to settle that. Obviously, with no admission or any -- or anything on their side, but we thought it would be better to eliminate the risk of this note that we have in our financial statement now for some time. This litigation that we were estimating. The guys were trying to get USD 30 million, and we settled that for that reason and it closed completely. The chapters of this subsidiary that we have created closed, like 5, 6 years ago.

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Jean-Francois Lavoie, Desjardins Securities Inc., Research Division - Associate [36]

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

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Annick Guérard, Transat A.T. Inc. - COO [37]

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The Atlantic market, if we look at the past semesters, we were able to increase our revenues per available seat mile in a significant way. And when we look at the beginning, Denis was referring to Q3. We are still confident that Q3 as well are in practices that we've put in place in terms of pricing and revenues managements are paying off. 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 then that everything we put in place so far in terms of revenue management practices is paying off. It will depend, of course, on what's going to be happening at the peak season, July and August. We are seeing fierce competition. Some competitors are lowering their price at this point.

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Operator [38]

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There are no further questions at this time.

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [39]

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

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Operator [40]

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Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone.