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

Hello, everyone. We are here today to recommend that you approve the new revised plan of arrangement to enable the acquisition of the company by Air Canada more than a year after the initial plan was approved. It must be said that the world has certainly changed since the meeting of August 23, 2019. Since then, COVID-19 has struck, leaving 1.5 million people that -- or across the planet and ravaging certain sectors of the economy with the travel and air transport industry among those hardest hit. To contain the epidemic, governments, and in particular the Canadian government, introduced border restrictions and quarantine requirements for travelers. This resulted in a massive slump in demand for air travel, to such an extent that the Director General of the International Air Transportation Association, Mr. Alexandre de Juniac called 2020 the industry's worst financial year, bar none, and spoke of a devastating and unrelenting crisis. Airlines' overall sales for the year will decline by 61% with demand for cargoes, slightly compensating for a 66% drop in passenger kilometer volume. Overall, in U.S. dollars, air carrier sales will be down by more than $500 billion with a loss of some $119 billion in net profit this year, which is $66 per passenger. For Transat, the crisis meant a complete shutdown of operations from April 1 to July 23, with deployed capacity for the remainder of 2020 of between 5% and 15% of the highest level during the previous year. We have taken several measures to address this dramatic situation and preserve cash flow. We had to temporarily lay off up to 85% of our staff and, over time, transform some of those layoffs into terminations. We offered customers fully transferable travel credits with no expiry date on cancelled flights and packages. We renegotiated our supplier agreements, especially our aircraft and building leases, so as to reduce our commitments or defer payments. We reduced our investments wherever we could do so without damage. We also drew on our $50 million revolving credit agreement and set up a new $250 million short-term loan facility. We also accelerated the long-planned transformation of our fleet toward our objective, now almost achieved, of cockpit commonality across all of our aircraft, which is a guarantee of operational efficiency, and making room for the Airbus A321neoLR, a more efficient and less polluting aircraft that, with its 199-seat capacity, will be the ideal plane for a world recovering from the pandemic. That said, this crisis has severely shaken us, as it has every airline in the world. That context prompted us to revise our agreement with Air Canada and make it more robust, notably by increasing the likelihood of obtaining the necessary regulatory approvals, with the December 27, 2020, deadline established in the initial arrangement agreement fast approaching. The new share purchase price of $5 represents a premium of the 31.6% over the average price of Transat shares in the period preceding the signing of the new agreement. Most important, that arrangement included the option of receiving payment of the consideration Air Canada shares, on the basis of an exchange ratio calculation for a price of $17.47 per Air Canada share, meaning shareholders can benefit from subsequent increases in the value of Air Canada shares. Last year, when we asked for our -- for your vote, we laid out all the reasons why we believed joining forces with Air Canada was the best route forward for Transat. How it would allow us to be part of a North American leader and why that was the best choice for all parties involved: customers, employees, suppliers, the community and, of course, shareholders. All this is even more true today, as travel companies and air carriers need to be strong to withstand the crisis and perform well. I will conclude here, but not without thanking our Board of Directors and especially the members of the Special Committee, who have done a colossal job throughout this process over the past few months, in compliance with corporate governance best practices, as well as the advisors who have supported them in the process including National Bank Financial; BMO Nesbitt Burns; Fasken; Norton Rose Fulbright; Gide Loyrette Nouel; and NATIONAL Public Relations. I want to express my particular gratitude to Transat's personnel who have shown themselves to be exceptionally resilient this year. With many of them having been laid off and others having to work as part of drastically reduced teams. Throughout this storm, our employees have continued to deliver the best service to customers and safeguard Transat on a daily basis. Without them, we would be nothing. And I pay tribute to them today. Let's now move on to the formal portion of the special meeting of the company. In accordance with the company's bylaws, Jean-Marc Eustache, Chairman of the Board, President and Chief Executive Officer of the company, will act as Chairman of this meeting. First, I would like to ask the secretary of the company to provide us with [Audio Gap] Bernard?

Thank you, Mr. Chair. Hello, everyone. So for the first time, due to the exceptional circumstances associated with the unprecedented public health impact of COVID-19, the Board of Directors has chosen to hold this meeting virtually only. This is the first virtual meeting of the company, and the procedure is, therefore, different from previous years. We've taken care to ensure that a procedure followed for this virtual meeting is in accordance with best corporate governance practices and that it respects [Audio Gap] You can send your questions in English or French. Submitting progresses by selecting the messaging icon at the top of your screen. Enter your question in the text box at the bottom of the messaging screen [Audio Gap] to consider, and if deemed appropriate, to approve with or without variation, the special resolution reading relating to the new plan of arrangement, the full text of which is set forth in schedule A to the circular for the approval of the arrangement pursuant to Section 192 of the Canada Business Corporations Act in connection with the acquisition by Air Canada of all the -- of the issued and outstanding voting shares of the company. To take effect, the special resolution must be approved in the first instance by at least 2/3 of the vote cast in respect of the arrangement resolutions by holders of Class A variable voting shares and holders of Class B voting shares voting together as a single class, present in person or represented by proxy at the meeting and entitled to vote. And secondly, by a simple majority of the votes cast in respect of the new plan of arrangement resolution by the holders of Class A variable voting shares and Class B voting shares voting together as a single class, present in person or represented by proxy at the meeting and entitled to vote, with the exception of Mr. Jean-Marc Eustache. As described in the circular, securities law require the exclusion of Mr. Eustache from this vote because of the ancillary benefits related to employment that will result from the transaction. AST has provided me, as secretary of the company, with proof of the mailing to all registered shareholders for the notice of meeting, the circular, the form of proxy, including the statement of ownership, the letter of transmittal and election form. These documents were sent in accordance with the laws and regulation governing in the company. And the copy of them and proof of sending will be kept with the minutes of the meeting.

Thank you. We now turn to the matters submitted on an extraordinary basis in connection with a special resolution to approve the proposed new plan of arrangement under the Section 192 of the Canada Business Corporations Act in connection with the acquisition by Air Canada of all of the issued and outstanding voting shares of the company. As further described in the circular, if the new arrangement is approved and receives the required regulatory approvals, you would receive for each voting share you hold in the company either $5 in cash or an Air Canada share consideration, consisting of 0.2862 of a share. Please note that your choice will be rounded up and will not be subject to proportional distribution. The Air Canada shares issued to shareholders pursuant to the arrangement will be issued at a reference price of $17.47 per share. Before voting on the resolution, I would ask the secretary to briefly explain the new plan of arrangement in question. Bernard?

On October 2020 due to the worldwide COVID-19 pandemic, the company and Air Canada were required to enter into a new definitive arrangement agreement. As indicated in the circular of arrangement, given the uncertainty surrounding COVID pandemic and the ongoing second wave, continued restriction on nonessential travel and border closures as well as the rapid depletion of the company's cash position, the company needed to find new sources of financing. The company's ability to do so without Air Canada's approval was restricted by the terms of the 2019 arrangement agreement. The new arrangement agreement allowed the company to put in place a new $250 million short-term loan facility and make certain key changes to its existing senior loan facility, which now provides the company with greater flexibility in the current market and economic environment. Another key factor in the company's decision to enter into this new arrangement agreement was the low likelihood of obtaining the required regulatory approvals prior to the December 27, 2020, deadline provided for under the original transaction, given the significant impact of the pandemic on Air Canada's original incentive to complete the transaction at the originally fixed price. Currently, it is expected that the new arrangement will be completed by mid-February 2021. However, the completion of the new arrangement is dependent on many factors, and it is not possible at this time to determine precisely whether or when the new arrangement will become effective. The Board of Directors of the company has unanimously determined following the unanimous favorable recommendation of the special committee that the new arrangement is in the best interest of the company, taking into account all stakeholders and fair to the shareholders. The Board, therefore, recommends that the shareholders of the company vote in favor of the special resolution. The recommendations of the Board of Directors is based on the factors and element detailed in the circular.

We are now on the question period. I would like to remind you that Mr. Leblanc, Mr. Bussières and myself are available to answer your questions. [Operator Instructions] We will take a short break to allow you to submit your questions at this time. [Break]

Thank you. We have compiled the questions received via the online platform. We will now respond to shareholder questions submitted during this virtual meeting. I would ask the moderator, Christophe Hennebelle, to read the first question.

Yes, Mr. Chair, the first question is from Willie Gagnon acting for the Movement of Education and Defense of Shareholders of Transat. The question is the following. Yesterday, the media were talking about what Transat probably received in terms of other offers beside Air Canada. This morning, you confirm through communicate that you just received one other offer. However, you don't say more about it. What other offer was -- rather, was that other offer higher than Air Canada's offer? Would it have allowed us to maintain competition with Air Canada? Who made the offer? Media are talking about Pierre Karl Péladeau. Is he the one or a company of his? The shareholders want to know, why don't you tell us?

At the end of November, indeed, Transat received a unsolicited offer from a private investor. And as usual, with this kind of agreement plan, and we have to see with a trust of shareholders, the kinds of arrangements that we can have with Air Canada. It really describes the conditions under which the Board of Directors can consider another offer, an unsolicited offer and then determine whether that offer constitutes a superior proposal. Transat, any proponent have confidentiality agreement. And under the terms of that agreement, we cannot give the name of the proposer. Following the signature of that agreement, the proposer did their due diligence, both legal and financial, and had access, without restriction, to all the same information available to Air Canada. And Transat had several discussions with that proponent. So we have scrupulously analyzed that proposal from the new bidder with the advice of our financial and legal counsel and determined unanimously at the Board of Directors' level that, that new proposal was not in the best interest of Transat and partners and did not constitute a superior proposal.

The next question is from [ Louise Gray ]. Mr. Chair, can you give us more details on the way that the $5 value has been determined in the second arrangement instead of the $18 that was set in the first plan?

Okay. I'm going to ask the Chair of the Special Committee to answer the question, Mr. Chair.

Yes, as Mr. Eustache mentioned, in his opening to the shareholders, things have changed a great deal since the original agreement was signed in July, August 2019, and our position has changed a great deal since this pandemic arrived in March 2020. It became obvious that the regulatory approvals would not be obtained before December 27 this year, and that the original transaction could not be signed. As in addition, as mentioned, Air Canada had to agree to what Air Transat would do in terms of financing and had to approve the financing. So with the new economic situation and the new market conditions, this increases the probabilities of getting the approval before the next deadline, which is February 15. So then the Board of Directors said that this new proposal offers us the best chances of continuing to develop Air Transat and continue to retain a maximum employment.

The next question is from [ Pierre Jean Croix ]. Is it true that in case of refusal of the arrangement plan, the company would go into bankruptcy?

Well, we will not declare bankruptcy. We believe in our strategic plan that was drawn up to ensure our survival at Transat. But it depends on the implementation of the plan and what is happening in terms of the pandemic. Certainty is low, but we know that eventually, there will be recovery. So we need to be able to mobilize $500 million for 2021. And that is why we are working now under that assumption. It is agreed that Transat has already taken out a loan of $150 million that would enable us to get at least to March 31, if not farther. And then after that, with the new implementation of the new loan, and we don't need -- by the way, we don't need the $500 million on March 31. We have planned that the $500 million would be useful for 2021 and 2022. So this amount, well, we put it to the maximum because we do not know when the pandemic will be over. We have heard that Canadians will all be vaccinated. Those who agree to be vaccinated will be vaccinated by the end of September 2021. We don't know what's going to happen in the rest of the world. So of course, we have established a conservative prudent plan to make sure we have the money to be able to continue. We have gone through a number of crises since Air Canada came into existence. Air Canada -- Air Transat was founded 42 years ago. And we, in those years, have lived through many crises. Don't forget that we never asked the government, any government, to help us through these crises. We got through them ourselves. That being said, this one is an unbelievable, unimaginable size of a crisis. And we are, of course, asking help from the government, like all corporations are doing, in our field and in other fields. So for me, for today, the Canadian government, and to my knowledge, is the only government in the world that did not help its companies in recreation, tourism and air industry. The American and Asian and European governments all helped their companies. So I just want to say, and was said publicly by the minister, Mr. Garneau, that about a month ago, said that they are now putting together a plan to help, especially to help airlines, and that we would see more news about it in the next few days. Of course, we still do not have that, but I'm asking Mr. Garneau again. Mr. Garneau, I'm available night and day to answer your call. That being said, Transat, thanks to its employees, thanks to its resilience, thanks to its products, thanks to its name and its reputation, thanks to the changes that we are now making, we will, once again, if this transaction didn't go through, we will still get through this crisis. But of course, there is no doubt that it would be much easier, that it would be much more favorable that this transaction does go through. And the Board of Directors, and I'm sure, by the way, that all the management and employees of Transat do agree with me, that this transaction with Air Canada is the best transaction. I hope I answered your question. But this being said, believe me, Air Transat will be there no matter what happens.

Another question from MEDAC. Transat, was Transat forced to reconsider the first arrangement? Or would they have been able to refuse to reconsider their first offer? This question to answer is from Mr. Willie Gagnon.

Mr. Gagnon, I'm always happy to be with you and to answer your questions. Please, however, allow me to ask the Chairman of the Special Committee to answer that question.

Yes. Thank you, Mr. Eustache. We did consider -- and of course, I explained the economic situation. Mr. Eustache explained it in depth as well, the devastating effect of this pandemic. And the transaction, the initial transaction, could not go through. And we consider that another revised transaction, the one that you know, was in the best interest of the company, our employees and clients and in the best interests of the shareholders as well. As Mr. Eustache explained, we believe in our business plan. But given the level of risk that's related to implementing this business plan that could be created by the uncertainty of -- with respect to getting back into operations, this transaction proposed with Air Canada is advantageous in these circumstances for the company and for the shareholders.

Another question, [ Pierre Jean Croix ]. You mentioned that the company had uniformized the cockpits of its planes with a fusion, that disadvantage will disappear. Is that true?

I will answer to that question. Does it disappear? You'd have to ask Air Canada because Air Canada has different types of planes. They do have the 330s, the 320s, the 321s. And then all the 737, 847, 377, so -- Boeing. So I mean, personally, I'm sorry, I can't answer the question. Sorry.

I have 2 questions from [ Maria Timos ] that are very close. I'll read both of them. So in the context of the sale, do you believe that converting our shares to Air Canada shares is a way for us to recuperate all the money that we will have lost from the $18 proposal? And then if the stock price goes up, will the price of our action -- of our shares go up? Since the same way that it was reduced, will it then go up?

Okay. I'll ask the Chair of the Special Committee, Mr. Leblanc, to answer that question, madame. Mr. Chair.

Yes, thank you, Mr. Eustache. So you know that the ratio of conversion is 0.262 at the closing of shares on Air Canada last night. The equivalent, therefore, of -- at Transat was 747 (sic) [ $17.47 ]. So we cannot speculate on what's going to happen in the future. It can go up or not. So we consider that this feature of the transaction with Air Canada is an element that it will benefit the shareholders of Air Transat.

Mr. Chair, there are no further questions.

Thank you. So as there are no further questions, we will now continue the meeting. And we're now at the voting portion of the meeting. I would ask a shareholder to submit a proposal to vote on the special resolution.

Mr. Chair, my name is Christophe Hennebelle and I move that the special resolution related to the new plan of arrangement as set forth in Appendix A of the circular be adopted.

Is there anyone to second this motion?

Mr. Chairman, my name is Bernard Bussières, and I second the motion.

We will now proceed to the vote. I remind you that only persons who were shareholders at the close of business on November 10, 2020, or their proxies will be able to vote at the meeting. Be sure to complete the resident's questions on the forum so that your vote can be counted. You will have an additional 3 minutes to complete the vote. We will come back after the short break. [Voting]

I now declare the voting period closed. I ask you to wait just a few more minutes so that we can confirm the results of the votes. The scrutineer's report confirms that 91.05% of the shares were voted before or during the meeting in favor of the adoption of the special resolution for a proposed new plan of arrangement under Section 192 of the Canada Business Corporations Act in connection with the acquisition by Air Canada of all the issued and outstanding voting shares of the company. Since the scrutineer's report is that the required majorities have been achieved, I declared a special resolution to approve the new arrangement adopted. Before we leave, I would like to say a few final words. You have voted by a very large margin in favor of the plan of arrangement that we put to you, and I thank you for doing so. You have made the right decision. We will now work to secure as soon as possible the regulatory approvals needed to finalize this transaction before the February 15 deadline. Following that, we will be free to work at full strength with the Air Canada teams to rebuild a great, exceptional company that will be well positioned to respond to the recovery and demand, which is something we are all eagerly looking forward to. There being no other business on the agenda, I would now like to invite a shareholder to present a motion to adjourn the meeting.

Thank you. Mr. Chairman, my name is Bernard Bussières, and I move that the meeting be adjourned.

Is the motion seconded?

Mr. Chair, my name is Christophe Hennebelle, and I second the motion.

I declare the motion carried, and I declare the virtual special meeting adjourned. Before we leave, I would like to thank you for your presence for being here and for your support, and I wish you an excellent day and good holidays, and especially, stay well. [Statements in English on this transcript were spoken by an interpreter present on the live call.]