Transat A.T. Inc.

Bonjour, Mesdames et Messieurs. Bienvenue à la conférence Transat. Good morning, ladies and gentlemen. Welcome to the Transat conference call. Note that this call is being recorded. And I would like to turn the meeting over to Ms. Andréanne Gagné, Senior Director, Communications and Corporate Affairs. Please go ahead, Ms. Gagné.

Thank you, Sylvie. Bonjour et bienvenue à cet appel trimestriel de Transat. Hello, everyone, and thank you for attending our earnings call of the second quarter ended April 30, 2024. I'm here this morning with Annick Guérard, President and CEO, and Jean-François Pruneau, our Chief Financial Officer. Annick will provide an overview of the quarter and share comments on the current operational situation and commercial plans for the future. Jean-François will have to cover our financial results in more detail. We will then take questions from financial analysts. Questions from journalists will be handled offline after this call. The conference call will be held in English, but questions may be asked in French or English. As usual, our investor's presentation has been updated and is posted on our website in the investor section. Jean-François may refer to it as he presents the results. Our comments and discussion today may contain forward-looking information about Transat's outlook, objectives, and strategies that are based on assumptions and subject to risk and uncertainty. Forward-looking statements represent Transat's expectations as of June 6, 2024, and accordingly are subject to change after such dates. Our actual results could differ materially from any stated expectations. Please refer to our forward-looking statement in Transat's second quarter news release available on Transat.com and on TEDAW. With that, let me turn the call over to Annick for opening remarks.

Good morning, everyone. Thank you for joining us for our fiscal 2024 second quarter conference call. Transat delivered double-digit revenue growth for a second straight quarter in Q2 2024 on the strength of sustained customer traffic. On the profitability side, adjusted EBITDA decreased to $38 million due to well-documented industry-wide and company-specific issues, including a highly competitive environment creating downward pressure on yields and the ongoing impact of Fred & Whitney engine issues. We promptly responded to the situation by implementing initiatives to mitigate the impact of these challenges that will remain over a longer period. In terms of our financial position, We continued our ongoing deleveraging efforts, which totaled approximately $110 million in debt repayments in the last three quarters. Jean-François will provide you with more details in his financial overview. Turning to operating metrics for the quarter, customer traffic increased 12% from the second quarter of 2023, while overall capacity grew 13%. Capacity offered for sub-destination, our main programs during the quarter, also increased 13% year-over-year. Our load factor of 85.5% for the second quarter remained largely in line with last year. However, yield decreased 7.5% year-over-year due to increased competition industry-wide, the ongoing economic slowdown, the negative effects of potential strikes on revenues and inefficiencies related to grounded aircraft. Regarding our on-time performance, despite an increase in flight volume year over year, second quarter results showed a marked improvement by 9 percentage points. This demonstrates our operational teams unparalleled focus and execution. As we look ahead to the second half of the fiscal year, we are fully prepared from an operational standpoint to welcome passengers for the summer season. Our team has worked diligently to ensure our operations are seamless and efficient. First, we recently completed the process of bringing in-house passenger and rent services at Trudeau's International Airport. The Montreal airport represents a key hub for Transat where we have a strong footprint and operate a high volume of flights. We firmly believe this strategic move will improve customer service and enhance our well-earned reputation in this area. We have already seen an increase in customer satisfaction as a result. Second, we've just launched this week the first phase of our joint venture with Porter Airlines, which will generate incremental customer traffic. Travelers can now book direct and connecting flights with either Air Transat or Porter. Our co-chairing partnership results so far have been in line with our expectations, so we are confident about the added potential of this GV. Third, we are taking delivery of seven additional aircraft for this summer, including four A321LRs, bringing the total to 19, and three A330 aircraft on permanent leases to mitigate the impact of grounded planes. Turning to key indicators, load factors for the summer seasons are currently down 2.1 percentage points from the same period last year, while yields are 8% lower. Reflecting current market conditions and aircraft availability, we have adjusted our capacity expansion plans slightly for fiscal 2024 from 13 to 11%. Our flight portfolio, however, remains the same, with a total of 45 destinations covered this summer, including the addition of Marrakech and Lima. In summary, we delivered encouraging top-line results in the second quarter, despite prevailing challenges, both industry and customer specific. We are highly optimistic about our commercial joint venture with Porter, which is expected to generate incremental bookings. We reimbursed $110 million in debt during the last three quarters to improve our overall financial position. However, it is clear that this year is a challenging one for Transat. We are facing multiple external factors, some beyond our control, but also some in areas where we can make a significant difference. We are proactively implementing measures to navigate these turbulent times effectively. In an industry that has endured significant damage stemming from the pandemic, including severe supply chain disruptions, patience and resilience are crucial. It is not a straightforward journey, but with our dedicated team and strategic initiatives, we are confident in our ability to overcome these obstacles. Before I close, I would like to thank our loyal customers and recognize the unwavering commitment of our team in providing outstanding customer service, which remains at the core of everything we do at Transact. This concludes my remarks. Jean-Francois will now review our financial results.

Thank you, Annick. Good morning, everyone. Before reviewing our financial results, I would like to highlight improvements to our financial position in the second quarter. We diligently continue to deleverage our balance sheet by voluntarily paying off our high interest subordinated debt of $36 million in the quarter, which will allow us to save $5 million of interest costs annually. Of note, this latest payment flowed from our operations, not from a land sale or external sources. As Anik mentioned earlier, total loan payments have amounted to $110 million in the last three quarters, so we continue making progress in reducing our debt level. We have also extended our secured debt maturity from 2025 to 2026, providing Transat with added flexibility to secure our refinancing. In that respect, we are engaged in continued discussions with our main debt holder, the federal government. Our refinancing remains top priority. Now let's turn to our second quarter results. Revenues in the second quarter of 2024 reached $973 million, up 12 percent from the second quarter of 2023. The revenue growth reflects sustained demand for leisure travel driven by a 12 percent increase in traffic and additional capacity of 13 percent year-over-year. However, growth was tempered by intense competition, challenges in revenue management stemming from the Pratt & Whitney engine issues, the negative impact on bookings of employees strike threats, and the economic slowdown, which all apply downward pressure on airline unit revenues. As a result, yield declined 7.5% year-over-year. Net loss total $54 million, or $1.40 per share, in the second quarter of 2024, compared to a loss of $29 million, or $0.76 per share, for the same period in 2023. Meanwhile, adjusted EBITDA amounted to $38 million in the second quarter of 2024, compared to $56 million in the second quarter of last year. The valuation is mainly due to the fall in airline unit revenues and to higher operating expense associated with capacity expansion and expenses caused by the Pratt & Whitney engine issue, including additional temporary aircraft lease during the quarter to replace grounded aircraft. These factors were partially offset by lower fuel expenses, reflecting a price decline of 11% year over year. It should be noted that we are still in negotiations with Pratt & Whitney to obtain compensation for grounded aircraft. To date, load factors for this summer are 2.1 percentage points lower than in 2023, and yields are 8% lower than last year. Moving to cash flows and financial position, Cash flow from operating activities amounted to $183 million in the second quarter of 2024, compared to $191 million in the second quarter of 2023. The slight decrease can mainly be explained by lower operating income this year and to a decline in net change in the provision for return conditions. These factors were partially offset by higher liquidity generated by net change in non-cash working capital balances, as well as in other assets and liabilities. After accounting for investing activities and repayment of lease liabilities, pre-cash flows reached $110 million in the second quarter of 2024 versus $154 million in the same period last year. In terms of our balance sheet, cash and cash equivalents stood at $529 million at the end of the second quarter of this year, up from $453 million at the end of Q1 2024. Following the debt repayment that I referred to earlier, Transat's long-term debt and deferred government grant stood at $781 million at the end of the second quarter, compared to $806 million at the end of the previous quarter. Consequently, we strengthened our cash position and reduced our long-term debt in the second quarter of 2024. Finally, long-term debt and deferred government grants Net of cash and cash equivalents declined to $252 million as of April 30, 2024, down $100 million from the end of Q1 2024. So this concludes our prepared comments. We are now ready to take questions.

Thank you, sir. We will now take questions from the analysts. If you are an analyst and would like to register for a question, you will need to please press star followed by one on your touchtone phone. And if you would like to withdraw from the question queue, you will need to please press star followed by two. Mesdames et messieurs, nous allons maintenant prendre les questions des analystes. Si vous avez des questions, s'il vous plaît, appuyez sur l'étoile suivie du 1. Et si vous désirez vous retirer, vous devrez appuyer sur l'étoile suivie du 2. Vous pouvez maintenant appuyer sur l'étoile 1 si vous avez des questions. You may now press star 1 if you have any questions. And your first question is from Conrad Gupta at Scotiabank. Please go ahead.

Thanks, operator. Good morning. My first question is on the capacity. You went down from 19% growth to 13% recently and then now 11%. Just curious if this incremental capacity cut is all driven by the union noise that we are hearing and then the Pratt & Whitney continued issues there? Or is there something else in these cuts?

Well, it's not only... Good morning. It's not only the impact of the union, but it's also the impact of a change in program that we have to make due to Pratt & Whitney issues. So we had to revise some downward capacity on the routes. We had to cut some routes. Some of the aircraft that were supposed to be delayed earlier as well, the A321LRs. So because of the delay, we had to get to cut on capacity. So it's a mix of different factors. The union, Clayton Whitney, and late deliveries in our aircraft as well.

Okay, now that makes sense. And is there any specific area or region where you had to cut more capacity because of these issues?

I would say mostly on the U.S. Western U.S. destinations like San Francisco, Los Angeles. Of course, we cut as well on domestic, but that was part of the plan. We had to reduce some frequencies on the European program because we don't have necessarily the right aircraft to be operating on specific routes. So that's about it.

Okay, that's very helpful. Thank you. And then last one for me before I turn over. Jonathan, so if we can dig into the debt side of things. You repaid some over the last three quarters, which is pretty good, I guess, but you still probably have a few more things to take care of in the next few quarters. Can you help us understand what opportunity do you see now on the debt side to deliver the balance sheet further in this new sort of interest rate cut environment that we are starting to see now finally? Does it help you?

Yeah, of course it helps. Some of the debt is on a flowing rate basis. Obviously, the rate cut is going to help on the interest expense. That being said, there's no magic. Free cash flow generation is the magic. we definitely have to generate positive free cash flow to be able to reduce our debt level. That being said, as I mentioned in my prepared comments, we are in ongoing discussions with our main creditor, the government, and we're still confident that we are able to execute on a refinancing plan that's going to be helpful for the company. That's great. Thanks, guys.

Thank you.

Next question will be from Cameron Dirksen at National Bank Financial. Please go ahead.

Thanks very much. Good morning. Question on the Porter JV, which is now good to see that it's approved and underway. But you're sort of characterizing, I guess, as the first phase of the joint venture. Can you talk about what additional phases there will be with this relationship?

Yeah. So the first phase was to increase our capability to connect the North American network of Porter with our European network. So that's the first phase. So making sure that we align schedule, making sure that we align pricing as well, and that we coordinate the commercial efforts at both sides. What was announced as well yesterday is that both carriers are now able to to commercialize each one's full network. So that's good news as well. In terms of phase two, what we're looking at is approaching the US market on routes that we have in common. So especially on Florida, so we're gonna have to work on that. So phase two is gonna come more in fall. And phase three is looking at how we will work together on south destination. That's going to be in 2025 as well, as we have previously mentioned. We will be doing the tour operator business for Porter. Porter will deploy capacity in some destinations. So we will see, we will have to work to make sure we coordinate our efforts effectively on the stock market. So these are the three phases. So by the end of 2025, we should have pretty much everything in line. Adding as well some alignment on loyalty. Supporter will be able to burn their points, customers of Porter will be able to burn their points on our network and eventually we will be able to do so as well once we have our loyalty program launch next year.

Okay, that's great detail. Just a second question for me on the salaries and benefits costs. They were up quite a bit year over year, 30.5%, but also a pretty big sequential increase as well from Q1. So just wondering if there's anything unusual going on there.

Yes. Well, obviously salaries reflect added capacity, so we're We're hiring based on the capacity I want to deploy, so it's obviously on a year-over-year basis explaining most of it. But it's true, we had a one-time cost in our salaries that boosted the expense in Q2. It was a $5 million one-time cost. Okay.

And bringing some of the airport operations in Montreal in-house, does that affect the headcount and will also affect that loan item?

Absolutely. It's true. I should have mentioned it, but it's true. The fact that we internalize ground and lean operations, ramp operations in Montreal, we added employees, obviously, on our payroll.

Okay. That's very helpful. Thanks very much. Thank you.

As a reminder, ladies and gentlemen, please press star 1 if you have questions. De nouveau, mesdames et messieurs, si vous avez des questions, veuillez appuyer sur l'étoile et le 1. The next question will be from Tim James at TD Cowan. Please go ahead.

Thank you. Good morning. Just wondering if you could talk a bit about what you're seeing. You've called it competitive pressure. Could you just talk about kind of regionally where you see that being the most significant or maybe I guess in reference to your various hubs across the country, if there's any particular regions where that's more significant than other locations?

I would say that it's really across all programs, all destinations. I think that when we're looking at overall capacity, of course on one side we are seeing sustained demand for travel, but I think we all believe, I would say the market all believe that last year's urge for travel would persist this year in the same way, and obviously capacity was deployed with that assumption. You know, what we see, we still see a lot of uncertainty in the market from an economic standpoint. Canadians continue to feel the negative impacts of high inflation, high interest rates on their budget. We see even some postponing their spending. overall result is that there is significant increase in capacity, but all of this has put a lot of pressure on yield because the demand is there, but it's not at a growth rate that is as strong as last year.

Then on the same topic, the 7.5% decline in yield, is that a pretty good indication of the year-over-year change in fares or packages, or is there anything in terms of mix and route additions that would be influencing that as well? I'm just trying to disaggregate between maybe what's just really year-over-year changes in the price that the customers are facing versus any other influences that drive that yield number.

No, it's really... Yields are tracking below last year. It's really not a question of mix. It's really year over year what we're seeing compared to last year. Understanding that last year was exceptionally strong. So the comparison is a little bit difficult to do. And we need to bear in mind as well that we're still ahead of pre-pandemic levels. So the comparisons with the 2023 is a little bit difficult.

Okay. And my last question, have any changes in Porter's capacity plans been a contributing factor to your changing sort of capacity plans or your financial guidance for this year? I'm just wondering if that your assumptions that have been put into your business plan regarding the timing of Porter and how it would ramp up have changed at all or if it's kind of tracking to your original assumptions?

No, not from 2024. And we are very well aligned on our growth plan. Of course, we know their plan. We know they're expanding quickly in North America, domestic and transborder. And as we expand on our side, we are working at coordinating that capacity together and making sure that we create as much value as possible. But there haven't been any changes, significant changes in order plans that had an impact on us.

Thank you very much. Thank you. Next question will be from Michael Kiprios at Desjardins Capital Market. Please go ahead.

Good morning, and thank you for taking my question. Maybe on CapEx, for the first six months of the year, you spent around $79 million on CapEx, primarily for aircraft maintenance. It's a pretty nice step up versus last year. Could you maybe just give us an update on your expectations for CapEx free cash flow generation for the balance of the year? And if there are any plans to kind of scale down some of this, given the lower expected probabilities?

Sure. Well, in terms of the maintenance calendar, obviously, like I think we said in the past, due to the pandemic, our calendar is unfavorable this year. So it's obviously had an impact. On top of that, we have increased capacity in more airplanes or more aircraft in our fleet. So it also has an impact on the capex related to maintenance. And the fact that we internalize our ground operations at the Montreal airport We obviously had to spend more on capital expenditures and, in fact, for the first two quarters of the year, and it's almost over now and we still have some few things to do, but I would say it's pretty minor, but the total for the first semester, the first two quarters of the year, is a total of $10 million related to the investment for ground-ending operations in Montreal. So that should be almost over. In terms of next year, obviously it has to reflect the fleet. We might have some reduced needed for maintenance related to our current calendar, but I wouldn't expect that to be material.

Thank you. I appreciate it. Thank you.

Thank you. And at this time, we have no other questions registered. Please proceed.

Thank you, everyone. Before we close the line, let me remind you that our third quarter results will be released on September 12th. Thank you, and have a great day.

Thank you. Ladies and gentlemen, this does indeed conclude the conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.