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

[Foreign Language] Good morning, ladies and gentlemen. Welcome to the Transat conference call. [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.

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 Guerard, 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 these 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 expectations as at September 9, 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 be -- 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 hopefully remain Transat's 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 tour operating activities [indiscernible]. Our results are comparable to those of the same quarter last year with variances [ owed to a ] settlement and change in the fair value of fuel derivative contracts last year and to the foreign exchange effect on our lease liabilities. 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 variants and the fourth wave force 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 in the 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 prepandemic level. People are still cautious and they decide at the last minute when it is very clear that they are eager to travel. As we see vacation is calling again and so is the desire to reunite with our loved ones. 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 20 routes on South Europe domestic and transborder programs. All these routes or operated with our Airbus A321 including 9 LRs. As we expected, the A321neoLR proves to be exactly the versatile aircraft we need. It gives us operational flexibility and efficiency like we've never had before. And it's the perfect sync -- 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 the future. We have started advertising again to make sure that our brand stays on top of the customers' mind when they plan for travel. We are happy to see that our brand has retained most of its attraction power despite this long interruption. Our customers' 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 strongly encourage all our employees to get vaccinated as soon as they possibly could. We will make full vaccine protection a requirement for working on our planes or in our premises. Everyone will do their part to ensure that we eventually overcome the virus. We are impatient to see the details of the planned legislation on the topic. While we're starting our operation, we continued working on the implementation of our 5-year plan. With the revamping on our fleet well underway, we have started introducing changes in our network by announcing new transborder 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 months, 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 with its President, Jordi Sole 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 objective [ are ] to reduce financial risks while executing our business plan, manage our upcoming 2023 maturity and reducing debt burden associated costs and loss and value from lease warrants. On the team front we are making sure we have the most solid team for [the Air Transat ]. The executive team will now include Michele 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 at the table when decisions are made. We are also making good progress in the recruitment of our CFO and I am impatient to see such a core member of the team join us. In the meantime, Jacques Simoneau who knows Transat very well as a board member has accepted to serve as an Interim-CFO. Lastly, in late 2018, we announced Jean-Francois Lemay 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-Francois has accepted to stay with us long enough to ensure a seamless transition. Jean-Francois has led Air Transat for more than 8 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 the COVID-19 crisis. I am confident that with [indiscernible] 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 travelers, 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 2 parts, a $390 million facility to support operations and a $310 million facility as support to reimburse travel credits granted to customers and compensation for flights canceled 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 cost-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 into sun destinations. Our adjusted net loss 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 3 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 on change in fair value of fuel derivatives of $68 million caused by the recovery in the jet fuel price following the collapse in prices during the Q2 2020 due to the COVID-19 pandemic. Now about balance sheet and cash. The 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 in free cash is due to the proceeds from borrowing $535 million during the 9-month period, with $365 million during the quarter, borrowings from the LEEFF program to compensate cash use 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 to customers nor the consideration paid for the purchase of traffic tours. 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 resuming the operations. At the end of Q3, cash in trust or otherwise reserved totaled $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 flight canceled due to COVID-19 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 debt and liabilities. Lease liabilities stood at $977 million, which includes 10 A321neoLR of which 3 were commissioned during the Q3. Long-term debt stood at $422 million, compared 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, unlike the accounting treatment for the $390 million LEEFF facility, the accounting treatment of the drawings under this $310 million facility for customers reimbursement is also particular. Now bear with me for an explanation. As per IFRS, the difference between the fair value of a drawdown of their discredit 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, an amount of $123 million is included in our long-term debt and $140 million is recorded as a deferred government grant. Finally, off-balance sheet agreements, excluding agreement with suppliers, stood at $545 million, mainly related to the 7 Airbus A321neo, yet to be delivered as of July 31. More on reimbursement. Total reimbursement up to until July 1 amounted to $361 million. The difference between reimbursement and the total amount 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 have received requests for about 80% of the total amount of travel credits issued and we made refund for more than 90% of amounts claimed. Customers had until August 26, 2021, to submit their requests 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.

[Operator Instructions] [Foreign Language] Our first question comes from Cameron Doerksen with National Bank Financial.

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 through August and into the early part of the September.

The level of booking that we have observed so far is encouraging. We are seeing definite recovery in demand, first, on the domestic routes, but also on some key international routes such as Montreal-Paris, Toronto- Faro. 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 stats right now, most of our load factors are around 85% and the revenues per passenger are similar to what we saw prepandemic. So of course, this is with a small level of activity that needs to be taken into consideration as we are deploying our program progressively. But so far, the -- of course, the recovery of our business has coincided with the easing of some constraints in travel and we will remain agile and are ready to adjust our program as the situations 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 call, things were looking fairly encouraging there. Has that trend continued? Are you still seeing pretty good, I guess, steady state pace of bookings for the sun destinations?

Yes. We still see a steady pace for the sun destinations. In total, for next winter, we plan to operate [indiscernible] destination. We will operate, of course, destination to the US. It's still early for us to be able to comment since the pattern -- the booking pattern is sold last minute. But 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 the consumer is becoming -- more, I would say, confident in terms of their safety onboard our aircraft and to go and travel with us.

Okay. And just maybe 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 prepandemic 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 adjust 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 there are opportunities, as we just 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 Cancun and Punta Cana, of course we will [indiscernible]. We will take all -- jump on all opportunities there is 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, 5 destination in the US and 15 European destination. I would say that over 90% of the destination has been reopened.

Our next question comes from Jean-Francois Lavoie with Desjardins Capital.

Yes. 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 partnerships and -- as well in terms of timing, is it something that could be announced before the end of the current fiscal year?

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 an offer ]. In recent years, as we re-centered our operation around our airlines activities, we have clearly understood the limitations of operating in isolation. So partnership and alliances will be a 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 south destination. And our approach is to start with simple bilateral agreements which will allow us to make quick wins while building a relationship of trust and this may lead this partnership to evolve into something more important and 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 1 alliances.

Okay. That's great color. And with respect to the current financing that you're looking to restructure or refinance completely, do you need to appoint your CFO or this is something that could be considered or contemplated in the near term as well?

It's being done in parallel. We have redesigned the -- I would say, the strategy of the 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 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 this in parallel and make sure that everything is going to be current with the arrival of the new CFO and the strategy that we are working right now with the external advisers.

Great. Perfect. And then my last question. Given that the hotel strategy has now did stop, I was wondering if there is any opportunity to monetize some assets. I know there was 2 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 will be helpful.

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 who should 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 months. The market picks up. And we will make sure that we execute on that plan.

Great. And congrats for the cash management in the quarter.

Thank you.

Our next question comes from Konark Gupta with Scotiabank.

So maybe just a clarification first. So I heard on the call [ you mentioned ], I think 80% of the travel credits have been requested for refunds. But in the presentation, I think it says about 90% of the credits that you have issued have been requested for refunds. So just confirming the numbers, is it 90% refund request and you have fulfilled 80%? Or is it the opposite?

Okay. Well, we have been able to refund our customers who wanted it, thanks, of course, to the loan of the federal government, the $310 million. At the end of August, we had made refunds for more than 90% of the requests that have been made by our customers. So customers had from April 29 to August 26 to request refund using the form on our website, of course. And customer deposits as of July 31 included these travel credit vouchers for canceled trips related to COVID, of course, amounting to $159 million compared with $505 million as of April 30, 2021. So we have received requests for about 80% of the amount of credit 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 this is clear enough for you.

No. That's clear, yes. Just saw something a little bit different in the presentation. So making sure. Thanks, Annick for that. And then on the cash burn guidance, I think similarly I heard you guys are expecting a slight increase in cash burn for the remainder of the year as you ramp up operations. [ Like with the ] kind of forward bookings you're looking at right now and maybe 80% or 90% of requests you have received for refund about almost kind of fulfilled, like 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 out?

Well, I would say it's a little bit too soon to say. Of course, we were able to drop our cash burn from, if you recall, last year, $35 million to $40 million per month to $20 million per month. We need to take into consideration as well that there is 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, in additional cost, to restart our operations. So that's onetime cost. 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 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 cost, 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 aircraft lessors. We are very strict on all cost management measures, payments and this is in place and this will remain in place for many months to come and I would say many years. So this is what we anticipate for now.

Okay. That's good color. 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 lessors. 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, impact.

Okay. That's great. And last one for me before I hand over. You mentioned domestic is recovering faster than international routes, which is kind of obvious in these environment conditions. But I just wanted to understand, in terms of your kind of short-term capacity as well as your 5-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%?

[ The plan that ] we have designed so far, the domestic market represents around -- well, depending on [indiscernible] passengers and -- if you look at overall capacity, it represents a little more than 15% in the time we've designed for the upcoming units. 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 the 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 [ third ] 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 a little more than 15%, depending on the alliances equally be adjusted.

Our next question comes from Tim James with TD Securities.

I'm just wondering if I can follow up on some questions about what you're seeing in terms of bookings. I'm just wondering 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 sight 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 announcement or more the announcement around the fourth wave, around delta, around the new -- as well the new variant. We haven't seen less of a pickup in the bookings. The trend has remained steady over the last months for summer bookings as well as for winter bookings. Actually, we -- it has gone up a little bit because of the easing of the restrictions of the border, the Canadian border, which was conducted in 3 phases, the last being this week. And we saw a small pickup this week, especially on European destination for the upcoming weeks and on the winter season. So of course, this is what we're seeing at this point. Depending on how the situation will evolve, there's still a lot of uncertainty in the market, [ we'll ] readjust. But so far, the trend is steady.

Okay. Annick, and then just one last question. I'm just thinking about your remaining 321 LR purchase commitments. Would you ever consider delaying those deliveries at this point in order to preserve cash? And I'm just thinking if the recovery stalls, things taking 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 6 to 12 months?

Part of these -- well, first of all, to the -- the A321 is the key, key, key asset for us in the recovery and in the execution of our plan. It allows us to, as I said, to bring -- give us a lot of flexibility and it gives us a strong competitive advantage in North America compared to all of our competitors. The A321 LR allows us, of course, to reduce the operating, maintenance and training costs, but it will allow us to attain as well cockpit commonality, which provides several advantages, including the mix fleet flying concept with Airbus. So this is extremely important for us. As for delays, we have among the 7 that are to come we have delayed them. They will be delivered between 2022 and 2024. They were delayed and we renegotiated with the higher capital suppliers to delay them for a while and we will adapt. We will adapt and see what's possible and what's not depending on demand. So we are being very careful. Of course, when we look at our plan right now, our 5-year plans, we don't have enough aircraft to be able to execute our plans as we are at 33 aircraft and the plan goes -- if we look at 5 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 XLRs that will be in the market and a [ mix up-ed ] well of the narrowbody, the ceos -- A321ceos or A321neos. So this is something we are all looking at right now. We are adjusting. Of course, we've done a 5-year fleet plan but we have made sure that we have flexibility with the loans, the lessors to be able to delay or even -- or advance, move up the delivery. In parallel, of course, we have delivered all the payments with all the different lessors to make sure we protect our cash.

There no further questions at this time.

Thank you. So thank you, everyone. And with that, let me just remind you that our fourth quarter results will be released on December 9, 2021. Thank you. Have a good day.

Thank you very much.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. [Foreign Language]