Transat A.T. Inc. (TRZ) Earnings Call Transcript & Summary

[Foreign Language] Good morning, ladies and gentlemen. Welcome to the Transat conference call. [Foreign Language] This call is being recorded. [Foreign Language] I would now like to turn the meeting over to Mr. Christophe Hennebelle, Vice President, Corporate Affairs. Mr. Hennebelle, [Foreign Language], please go ahead.

Hello, everyone. Welcome to the Transat conference call for the presentation of the financial results of the third quarter ended July 31, 2020. I'm here with Jean-Marc Eustache, President and CEO; Annick Guérard, COO; and Denis Pétrin, our CFO. Jean-Marc will provide his comments and observations on the current situation, followed by Annick, who will focus on our operational and commercial plans for the future before Denis reviews the financial results in more detail. We will then answer questions from financial analysts. Questions from journalists will be handled off-line. 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. Denis 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 these forward-looking statements. For additional information on such risks, we invite you to consult our filings with the Canadian Securities Commission. The call also contains forward-looking statements concerning a transaction involving the acquisition of all the shares of our operation by Air Canada. 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 the control of the corporation, which may cause actual results to vary materially. In particular, the completion of the transaction with Air Canada will be subject to customary closing conditions, including regulatory approvals, particularly authorities in Canada and the European Union. These approval processes are ongoing, and the details of the transaction with Air Canada will be discussed in a few minutes. Forward-looking statements represent Transat's expectations as at September 10, 2020 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 they measure -- 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 Jean-Marc for his opening remarks.

Thank you, Christophe. Good day, everyone. This is our second quarter into the COVID crisis, and it's now very clear that its effects are going to be long-lasting ones. We had put our operations on pause on April 1 and restarted on a very limited basis only on July 23, which means that the quarter includes 9 days of operations at extremely reduced capacity, so we're looking at revenues of $9.5 million, down 99% from last year. We had said that we expected to reverse a significant amount of the unrealized losses generated by the price of oil and the value of the Canadian dollar on the last day of the second quarter, and that has actually happened, limiting our net loss attributable to shareholders to $45 million when our net adjusted loss is $140 million. Those are appealing numbers, but they do not come as a surprise when IATA estimates that the industry will lose USD 419 billion in global revenue this year, where it -- just as every other airline or travel company in the world. Our restart in July allows us to be back in the game and be ready to answer the demand when it will ramp up again significantly. For now, it remains low and we do not expect any significant upturn before the restrictions of the Canadian borders are lifted. We will continue to monitor and adjust on a day-to-day basis as we move into the fall and winter. What really matters for now still is our liquidity. And we have continued to implement the drastic measures that we have detailed in the last quarter. We are having continued negotiations with our lessors to defer aircraft rent and return certain planes. We are accelerating the realignment of our fleet around the Airbus 321neo long range. We are, of course, discussing with all our other suppliers as well. We have granted our customers future travel credits for flights canceled due to this -- the exceptional situation that we have now made transferable and valid without limitation in time. 2/3 of our Canadian staff is still on temporary layoff, down from 85% when our operations were halted. Our approach is to use the Canada Emergency Wage Subsidy to delay, and if possible, avoid permanent redundancies as much as we can. But we currently expect that we might eventually have to terminate the employment of at least 2,000 employees or 40% of our staff if the situation does not improve rapidly. We're also maintaining the 10% to 20% voluntary pay cut for the Board and the management. On the financing side, we have dropped down our $50 million revolving credit facility agreement, and our discussions for additional financing are at an advanced stage, bearing in mind that its implementation may require Air Canada's consent. All in all, cash and cash equivalent amounted to $576 million on July 31. About the transaction, we are still waiting regulatory approvals. On the European side, the commission is now satisfied with the information received and has handed the deadline suspension on August 19. The provisional deadline is now set at December 11, 2020. In Canada, the decision may come at any time. Consequently, we have extended the outside date to September 27 and intend to use the provisions of the arrangement agreement to extend it further as necessary. So we are moving [ onto ] the current difficulties and getting ready for better days when we think we have numerous assets to recover. However, I'd like to underline that the situation is especially difficult in Canada. Restrictions at the border are particularly stringent with the closure for -- to foreigners and mandatory quarantine for Canadians coming back from any other country in effect until at least September 30. The user-pays principle is putting an enormous pressure on the system when there are so precious few users, leading in turn to unvariable consequences for the airlines, like the 30% increase in NAV CANADA charges, when the overall infrastructure costs for them were already amongst the highest in the world. There is no specific sectoral support for the industry, contrary to what happened in many countries in the world where it is estimated that about USD 120 billion to USD 130 billion in aids are being handed out to airlines. While we are very supportive of the objective of putting public health first, we think that there could be a different approach to it. A recent study, for instance, show that countries that airport testing may be more efficient than quarantine in reducing infection rates. Borders could be also reopened on a reciprocity basis. We are very grateful for overall program like CEWS, which has done a lot of support -- to support our employees [ or lease ], which may help with long-term financing. But we see that our foreign competitors are receiving tremendous sector-specific support from their government and that in the current circumstances, the playing field might not be level when demand comes back. With this, I will now turn the discussion over to Annick and Denis to talk more about our operation results and plans. Annick, please?

Thank you, Jean-Marc. On the operational front for this summer, we are currently operating 17 destinations on a weekly basis to Europe, to the south and on the domestic market. Without surprise, we are not dealing with record performance results. For July, our load factor was at 58%, and for August, we completed the month at 53%. When we look at the IATA figures for July, the overall load factor was at 46% for international traffic with only 34% out of North America. So despite very low results, our load factor still shows better than the industry, which at least means that we have some traction on demand. We are currently operating a very light program, as we know, with 6 Airbus A321neo long range. And we are carefully, every day, adjusting the capacity on an ongoing basis to optimize our results. Our operation, even if it's minimal, gives us an understanding of demand not only from a quantitative perspective but also from a qualitative one, and this allows us to adapt our operation and commercial approach to the new environment. So when we analyze bookings today, we see that the trend has shifted, of course, towards more of a last-minute pattern. On the average, we also are looking more at a younger traveler with the main purpose of the trip being to visit friends and families. We are very pleased with the introduction of our customer care travel program, featuring enhanced health and safety measures throughout the customer journey. So far, we have received extremely positive feedback on this program from our customers. And we've not had issues with customer compliance, especially when it comes to wearing the mask on board. When we look at the upcoming winter season, with a lack of clear visibility on future demand, especially with travel restrictions in place, we have prepared multiple scenarios ready to be deployed. Our goal at this point is really to maintain -- to remain as flexible as possible and be able to adapt to the unforeseen, which means being able to add and reduce capacity in a short period of time in an efficient way while maintaining a very lean organization in place to protect our liquidity. On the fleet side, we are very active and progressing well on negotiations with aircraft lessors for anticipated returns of our Boeing 737 and some of our A330s. The goal is to accelerate our fleet simplification and quickly move towards 2 types of aircraft by 2021 from 5 types in 2019, bringing significant operational efficiency, agility and reduction to our cost structure. Meanwhile, the new A321neo long range with its versatility will be a strong advantage for our competitiveness during recovery. Recent studies tend also to demonstrate that leisure travel will return to 2019 levels in a few years. Talking about 3, 4, 5 years, there's still a lot of speculation on the when. We don't exactly know when demand for travel will be back to 2019 levels, and we might be surprised about its resurgence once a vaccine for COVID becomes available and travel restrictions have been lifted. We do not believe that there will be structural change in leisure demand in time, unlike what seems to be anticipated for business travel. Fortunately, at Transat, we have a 100% leisure class product and therefore are not stuck with long-haul business class products, such as luxury cabin, seats, exclusive lounge and loyalty program, which can represent, as we know, significant costs for an airline. We believe today that with the quality of our brand, our client satisfaction that remains at very high levels, even in these challenging times with a much lighter cost structure, we should find ourselves within the leading pack of the race once we get out of this crisis. Of course, we look forward for the wind to pick up again. I'll now turn to Denis for the financial results.

Thank you, Annick. Good morning, everyone. A few additional comments on results and obviously liquidity. Third quarter results were significantly impacted by COVID-19 pandemic as we suspended our airline operation from April 1. On July 23, we partially resumed our airline operations after 4 months of inactivity. Consequently, the third quarter results were reduced to 1 week of operations when capacity deployed was a fraction of the one of 2019. Q3 results were then as follows: revenue of $10 million, down from $699 million in 2019, an adjusted net loss of $141 million compared with a net income of $11 million last year. The adjusted net loss of the quarter included amortization and interest for $63 million mainly on aircraft leases, settlement of fuel hedging contracts put in place before the pandemic for $28 million, salary for $23 million. The remaining $27 million was composed of fixed cost and those incurred to resume operations. For financial statements, the net loss attributable to shareholders was $46 million and include an unrealized gain on change in fair value of derivatives of $68 million caused by the strong ascent of jet fuel prices after the collapse during Q2 and also an unrealized foreign exchange gain of $28 million mainly related to the reevaluation of aircraft lease obligation or IFRS 16 following the increase of the Canadian dollars versus the U.S. dollars since April 30. Let me remind you that those unrealized gains were, in fact, offsetting unrealized losses incurred during the previous quarter. Now for our balance sheet. Corporation free cash totaled $576 million versus $734 million at the end of April. The variance of $157 million for the quarter was partially attributable to settlement of hedging contracts for the period, $28 million, like I said earlier. The remaining cash burn was coming from payments to suppliers for amounts due when operations were suspended and fixed costs, salary, aircraft rent, others, after initiatives. Cash in trust or otherwise reserved totaled $281 million. The deposit for future travel stood at $638 million compared with $611 million at the same date last year. Of the deposit for future travel, as of July 31, travel credit vouchers granted to customers in compensations for flights canceled due to the COVID-19 pandemic amounted to $564 million. Long-term debt stood at $50 million and lease liabilities, $909 million, which now includes 6 Airbus A321neo long range. Off-balance sheet agreements stood at $847 million as at July 31, mainly related to the 11 Airbus A321neos to be delivered. During the quarter, we have continued to implement decisive financial measures aimed at preserving our cash, issuing fully transferable travel credit vouchers without expiry date or deposits from customers, as earlier mentioned. Negotiation with aircraft lessors have also continued. As a precautionary measure, considering the unknown resulting from the COVID-19 pandemic, like many of our competitors, we are having discussions with our bankers and the various levels of government. As said in our press release, we are in advanced discussion to set up additional financing. As per the arrangement agreement, Air Canada's consent may be required. Since we are not making any final announcement this morning, we will not be in a position to comment further this morning on the matter. Finally, as you can read in our press release this morning, we will not, for now, provide any outlook for the remainder of the summer 2020 nor winter 2021. We will now proceed with your questions.

[Operator Instructions] Our first question comes from Konark Gupta with Scotiabank.

So first one maybe on the CEWS. Looks like you recognized about $54 million in Q3. What was the cash amount received during the quarter? And what do you expect for the CEWS, either P&L or cash in Q4?

For Q3, on the total amount, around $25 million remain to be received.

And what is the amount for, Denis, for Q4 that you expect to recognize in the -- [ some recent ] benefits?

I don't have the detail for Q4. In fact, as you may know, this program, that was announced to extend the CEWS until December. We know how it will work for the month of August. But for after August, that means for September up to December, we still need to -- everyone, not only ourselves, still needs to obtain the detail of the program to be able to identify which percentage and which amount will be paid for the period. And we don't have -- that's the reason why we cannot communicate to you the amount that we think that we will receive for Q4.

Okay. No, that's fair. And the EBITDA number that you reported for Q3, the $79.9 million loss, does that include this $54 million CEWS or it is net of that number?

Yes, absolutely. The -- all amount received or to be received for the CEWS -- from the CEWS have been put in our P&L and have been deducted from the salary.

Okay, makes sense. And then on the cash burn side -- so thanks for the details on the cash burn, the fixed costs and other costs that you provided. Can you remind us what was the monthly cash burn during the quarter, if I have missed that? And what kind of improvements have you seen in August?

For the quarter, cash burn was, in total for the 3-month period, $157 million. It's always dangerous to put that in months because it varies from 1 month to the other, depending what you are paying during the month. It obviously includes fixed cost after initiatives that still have to be paid but also amount that you pay to supplier, especially for the amount that was due when the operation was suspended. Then depending on the month, the amount are different. And -- but for the entire period, like I said earlier, the amount was $157 million.

Okay. And like my point was basically, are you expecting that cash bond to improve sequentially in Q4?

Like you saw, we have not communicated any amount for Q4. Again, it will be composed of the same element. And also customer deposit, we may have to or we will have to pay to get back to customer that we're still working on, then this one could also affect the disbursement on -- for the fourth quarter.

Okay. And last one for me on the bookings and refund trends. It looks like the customer deposits increased sequentially quarter-over-quarter. Is that entirely driven by new bookings? And have you handed out any cash refunds during the quarter? Also, what's driving these new bookings? Like are they coming from Europe? They're coming from Canada? What is this driven by?

I'll take the first one of the -- first part of the question. It's true that during the quarter, customer deposits have grown if we compare that with the amount that we were having at the end of April, not significantly though. We have been able to get some bookings from customers during the period. Portion of it was coming from when we start -- when we announced the program. We were having some traction in terms of booking. Now I would say that the bookings, and Annick will have some comments to this, but the bookings to come will be linked to it, development of COVID and also restrictions that will be put in place or will be taken out by the government. Then I would say that the amount versus -- at the end versus April is -- have increased but not a lot.

As for the volume, the highest level of activity is on the domestic market followed by European destination, mostly France, Portugal as well, where we have deployed most of the capacity; and then south, which is a very small program that we're offering this summer. So south, Punta Cana, Cancun and Port-au-Prince are following.

Okay. Sorry, Denis, I think on the refund side, did you have anything to offer? Did you pay out any cash refunds during the quarter?

Yes, some were made during the quarter, but I would say not a very significant amount up to now.

Our next question comes from Mona Nazir with Laurentian Bank Securities.

So Annick, you spoke about a new environment, which has more last-minute patterns, younger travelers visiting family and friends. The over 20 routes that you began to offer at the end of July was very much in keeping with your traditional kind of summer programs and the destinations. With the A321neos that offer greater flexibility, has there been any discussion to shift or change your destinations perhaps to more or higher proportion of domestic routes?

When we look at the overall network today, we took into consideration that with the restriction potentially that would be extended, that the domestic market would be more in demand, which is exactly the factor right now. And overall, worldwide, the domestic market is recuperating much faster than the international market. So that's why when we designed the network for this summer, we put a lot more emphasis, I would say, on the domestic market. As for the European market, we made sure that we would go with VFR because with the surveys we had put in place, the consumers, Canadian consumers who are telling us that visiting friends and family would be the first reason for travel. So that's why we came up with a lot of routes on France, Portugal and the U.K., for instance, Port-au-Prince and Haiti was as well, taking this into consideration. So this is how we design the program. Initially, we had a little bit more capacity on destinations such as Cancun and Punta Cana. These are less of a leisure -- less -- more of a leisure market, less of a VFR market and we had to downgrade the program to adapt to the reality. But scale -- with the capacity that we have right now on south destinations, we are not -- I wouldn't say we are not, of course, in the existing context satisfied with our results, but the south is not going so badly at this point.

Okay. That's interesting. And then just I know you mentioned you're preparing multiple scenarios in regard to kind of the winter operations. And I'm just wondering if you could speak about your thought process. And I understand you're not going to be giving outlook commentary, but are those scenarios keeping the weighting towards the summer destinations market just given your comments? Or could there again be a shift from that -- on that pending travel restrictions are lifted?

Yes. We are -- and like every other airlines, we are, of course, designing multiple scenarios to be ready to deploy according to what's going to happen. We have no clear visibility on what's going to be the upcoming demand. We are taking a step-by-step approach and waiting until the last minute to be able to make changes. So far today, we are open in terms of sales. We are open to sell on multiple destinations. We have a program that represents minus 25% of capacity versus last year. We know at one point that we might have to modify this program. We see that the south market is picking up compared to the summer program. So of course, we will make sure that we have strong destinations such as Cancun, Punta Cana and various destinations that are very popular during wintertime. At the same time, we expect that for consumer, there's going to be insurance available. There's already insurance available in the market. So we are confident that with the program that we have today and the modification that will be upcoming, we will be able to adjust depending on demand. It's difficult to say at this point what's going to be the final program to operate. We're waiting like everybody else to the last minute to make changes.

Our next question comes from Benoit Poirier with Desjardins Securities.

Yes. First question, could you help us to reconcile what could potentially be or the burn rate in the fourth quarter? When we look at the $157 million, are there any big items we should remove that are not sustainable through Q4? And maybe could you provide some comments about the refunds that you need to make in Q4 that we should be taking into account?

Well, like we said earlier, there are many elements to consider in the cash burn. Obviously, what we -- what's easy to forecast is the fixed cost after initiatives. You forecast what you will have to pay. I think I already shared numbers with you on the fixed cost on the previous quarter. And all efficient initiatives that we were putting in place, where to be versus the cash, where it's a little bit more complicated to make [indiscernible] here is for payable and customer deposits than -- obviously, at the end of next quarter, those numbers will be included in the cash burn of the period. And as we speak, considering the restriction program, the willingness of people to travel, the fact that people will take their [indiscernible] voucher and apply it to their next holidays, again, depending of the evolution of the pandemic and depending also the restriction from the government, it's very, very difficult to forecast this. Then this is the reason why because it's not only not to share those numbers with you, but this is the reason why we were saying this morning that we were in advanced discussion in terms of improving our liquidity. We have no more ready to say this morning because we're not ready to announce anything yet. But this is the reason why again, to be -- to have a prudent approach, being difficult to make any -- to set up any programs for next winter. And repeating everything I just said earlier, we have had discussion. And today, we are at advanced stage in those discussion. As soon as we have more to say on the financing, obviously, we will make the proper announcement.