Transat A.T. Inc.

Bonjour, Mesdames et Messieurs. Bienvenue à la conférence Transat. Good morning, ladies and gentlemen, and welcome to the Transat conference call. Please note that this call is being recorded. I would now like to turn the meeting over to Andriane Gagne, Senior Director, Communications, Public Affairs, and Corporate Responsibility. Please go ahead, Ms. Gagne.

Bonjour et bienvenue à cet appel trimestriel de Transat. Hello, everyone, and thank you for joining us for our fourth quarter earnings call ended October 31st, 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 comment on the current operational situation and commercial plans for the future. Jean-François will then discuss our financial results in more detail. We will then take questions from financial analysts. Questions from journalists will be taken offline after the call. The conference call will be conducted in English, but questions may be asked in French or English. As usual, our supplementary disclosure has been updated and is available on our website in the Investor section. Jean-François may refer to it when he presents the results. Our comments and discussion today may include forward-looking information regarding 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 December 12, 2024, and are therefore subject to change after that date. Our actual results may differ materially from any stated expectations. please refer to our forward-looking statement in Transat's fourth quarter news release available on Transat.com and on CEDAR+. With that, I would like to turn the call over to Annick for opening remarks.

Good morning. Thank you for joining us for our fourth quarter conference call for fiscal 2024. Transat ended the year on a positive note with better than expected adjusted EBITDA of 123 million in the quarter. This result was mainly driven by growth in customer traffic, lower fuel costs, and financial compensation from Pratt & Whitney related to aircraft grounded over the last two years. Cisco Year 2024 presented numerous challenges, both specific to Transat and industry-wide, which have put pressure on our yields and overall financial performance. In response, as announced last September, we launched our elevation program, a comprehensive optimization plan designed to strengthen our operations and improve long-term performance. Looking ahead to fiscal 2025, we expect the industry to be disciplined with fairly stable capacity. Combined with declining interest rates and easing inflation, which signal potential relief for consumer budgets, this sets a favorable backdrop for further yield improvements in the upcoming fiscal year. We are seeing early signs of a gradually improving competitive landscape as demonstrated by better yields on a sequential basis in Q4. Our yield decreased 8.5% year-over-year in the fourth quarter compared to a decline of 9.7% in the third quarter. However, we remain in a context of high economic uncertainty, which leads us to take a cautious approach to our predictions for next year. Turning to our operating matrix in terms of available seat miles, Our capacity increased 4% year-over-year in the quarter and trended downwards from the third quarter. Transat reported customer traffic growth of 2.7% in the quarter and of 7.6% for the year, reflecting solid demand for leisure travel. Our load factor reached 87.2% in the quarter, down slightly from the same period last year. Consumers continue to have a strong appetite for travel, but as we have noted in previous quarters, they are looking for discounts before booking, such as those offered during Black Friday and Cyber Monday promotions. Revenues during this promotion increased by 9% compared to last year, highlighting the effectiveness of these discount periods in driving bookings. Yields are moving in the right direction with sequential improvement in the quarter, helped in part by more disciplined industry capacity conditions. Looking at our fleet, we took delivery of seven aircraft in 2024, including four A321LRs and three A330s. With no new deliveries expected in 2025, our fleet will remain stable throughout the year, resulting in moderate capacity growth. The current number of grounded aircraft due to Pratt & Whitney GTF engine issue remain stable at six since Q3. The delivery of two additional engines provided as part of the compensation from Pratt & Whitney allowed us to prevent additional grounded aircraft. While our priority in 2025 will be to strengthen our core network, we remain committed to identifying new opportunities to grow revenue. We are introducing two new destinations to our network, Tulum, Mexico this winter, and Valencia, Spain next summer. On the operational front, we're very pleased to report a 7 percentage points improvement in our on-time performance in Q4 compared to the same time last year. This marks the second consecutive quarter of significant progress largely due to the successful insourcing of passenger and ramp services at Montreal Trudeau earlier this year. Moreover, our commitment to improving customer experience continues to pay off as our customer satisfaction score rose again in the fourth quarter thanks to the quality of service delivered by our employees. Turning now to our elevation program. This is our primary focus and we are executing on it with full commitment and discipline. It is progressing as planned and it is on track to meet our targets. We have identified over 30 initiatives within the program that are being closely tracked and measured to ensure continuous value creation. As of today, we have implemented initiatives representing an annual runner rate improvement of 25 million in adjusted EBITDA, moving us steadily toward our goal of 100 million by mid-fiscal 2026. Three initiatives have already started generating value for the organization. First, the redesign of our structure removing several management positions, ensuring a leaner, more streamlined, and agile organization. Second, the deployment of productivity tools in our call center. By accelerating AI integration, we've enhanced efficiency, reducing average handle time, and freeing up 22% of agent capacity. Third, we are upgrading our distribution model by integrating new distribution capabilities, NDC, enabling direct connections with distribution partners. This is reducing distribution costs, increasing control over our offerings, and providing greater flexibility. It's important to emphasize that these three initiatives are simply illustrative example of the many actions already underway. Looking ahead, next-generation pricing strategies and holistic analytics and cost reduction will drive profitability in the later stages of the program. We will continue to work intensively over the coming weeks to reduce external spend on a sustainable basis through pricing, the optimization of procurement contracts, and the review of supplier performance. We will also continue to overhaul our revenue management practices by introducing AI into our systems, leveraging willingness to pay, price elasticity, and better customer segmentation. As we make steady progress, the efficiencies, focus, and streamlined structure established will accelerate our strategic execution. The launch of our GV with Porter is another key highlight of the past year. In fiscal 2024, we carried over 170,000 connecting passengers, marking a 175% increase compared to the previous year. Altogether, 4% of our passengers connected with Porter in fiscal 2024, and we expect a significant increase in connectivity in 2025. Turning to our outlook for fiscal 2025, we enter the year with cautious optimism, supported by industry-wide capacity discipline, which provides a positive backdrop, though tempered by high economic uncertainty. In line with this, we are planning a prudent 2% increase in available seat miles in 2025. For the first quarter, of 2025, we are seeing that unit revenues, or yield, have increased by 1%, while load factors are 1.1 percentage points higher compared to last year. In summary, Transat concluded a challenging fiscal year 2024 with an encouraging financial performance in the fourth quarter. Discussion with stakeholders and the review of all options to strengthen our balance sheet are ongoing and remain a key priority for Transat. Meanwhile, our focus is on delivering the elevation program and driving significant improvements in Transat's financial performance. While we are still at the early stages of the program, we have already delivered to 25 million of our 100 million annual adjusted EBITDA targets on a run-rate basis. Finally, I would like to thank our employees for their resilience, excellence, and dedication during this period filled with challenges and opportunities. This concludes my remarks. Jean-Francois will now present our financial results.

Thank you. Thank you, Annick. Good morning, everyone. Despite industry-wide challenges such as overcapacity, an uncertain economic environment, and the Pratt & Whitney engine issue, Transat delivered adjusted EBITDA of $194 million on revenues of $3.3 billion in fiscal 2024, representing an adjusted EBITDA margin of 5.9%. Clearly, we are not satisfied with these annual results, which is why we proactively designed and started the implementation of our elevation program during the summer months. The elevation program is expected to have a more significant impact on operating results starting in the second half of fiscal 2025 and beyond. At this stage, we estimate that approximately 60% of the 100 million adjusted EBITDA run rate target will come from cost reductions, while 40% will be generated through revenue enhancements. Turning our attention to the fourth quarter, we are encouraged by the growth in adjusted EBITDA and revenue performance. In terms of liquidity, we increased our cash position through the sell and lease back of four engines, including three agreements that closed before the end of fiscal 2024. These transactions generated approximately $118 million in cash to strengthen our balance sheet while improving our operating flexibility through the availability of spare engines to support our core A321LR fleet. Now, let's take a closer look at our four-quarter result. Revenues reached $789 million, up 3.2% from last year. This growth is mainly attributable to a 2.7% increase in traffic expressed in revenue passenger miles. As Annick mentioned earlier, network capacity rose 4% in the fourth quarter compared to the same period last year. Our revenue line also benefited from nearly $34 million in financial compensation from Pratt & Whitney in the fourth quarter after reaching an agreement with the engine manufacturer related to our grounded aircraft during the 2023-2024 period. These factors were partially offset by an 8.5% year-over-year decrease in our yield. However, in the transatlantic network, which is our main market during the summer, Yield improved sequentially by 2.4% compared to the third quarter. Adjusted EBITDA, meanwhile, grew more than 39% to $123 million, up from $89 million in the fourth quarter of 2023. This significant increase mainly reflects our revenue growth, along with a 22% drop in fuel prices compared to the same period in 2023. These factors were partially offset by a lower yield and higher operating expenses resulting from year-over-year capacity expansion. Net income totaled $41 million or $1.05 per share in the fourth quarter of 2024 compared to $3 million or $0.08 per share in the fourth quarter of 2023. Moving to cash flow and financial position, Cash flow used by operating activities amounted to $108 million in Q4 2024, compared to $56 million used in the fourth quarter last year, mainly due to seasonal unfavorable changes in working capital balances. After accounting for investing activities and repayment of lease liabilities, free cash flow was negative $102 million in the fourth quarter of 2024, versus a negative $84 million for the same period in 2023. Turning to our balance sheet, cash and cash equivalents stood at $260 million as at October 31, 2024, down from $362 million at the end of Q3. This sequential decrease in our cash position in the fourth quarter is typical due to seasonal patterns. Cash and cash equivalent in trusts or otherwise reserved, mainly resulting from travel package bookings, increased to $454 million at the end of the fourth quarter, up from $275 million at the end of Q3, reflecting solid travel package bookings during the period. Long-term debt and deferred government grant amounted to $803 million at the end of fiscal 2024, down from $816 million at the end of the previous year. Recall that during the year, Transat repaid its subordinated credit facility related to operations. This repayment totaled $46 million. The company also reduced its sleep secured facility by repaying $11 million to the federal government. As previously mentioned by Annick, ongoing efforts are being deployed to improve our capital structure. Rest assured that we are continuing to work diligently to find a solution that is beneficial to all stakeholders. We will provide you with an update once we have material information to report. So this concludes my prepared comments. We will now open the call for questions from analysts.

Thank you. As stated, we will now take questions from the analysts. If you are an analyst and would like to register a question, please press star 1 on your telephone keypad. And if you would like to withdraw, please press star 2. Nous allons maintenant commencer la période de questions. Si vous êtes analyste, appuyez sur étoile 1. Si vous désirez vous retirer, appuyez sur étoile 2. Please go ahead and press star 1 now if you have any questions. And first, we will hear from Conrad Gupta at Scotiabank. Please go ahead.

Thanks, Albert. Good morning, everyone. My first question, I think, is for the Brett and Whitney compensation. I wanted to understand the engines you got as well as the compensation you got, the cash. Is there anything outstanding from Brett and Whitney's side of things? I mean, are you expecting any more compensation that's pending in terms of either cash or engines? And does the compensation you received so far, does it conclude the settlement?

Yeah, good morning. In terms of the compensation agreement that we executed in September, essentially it covers the period of 2023 and 2024. So for any aircraft on the ground in the following years, 2025, 2026 and on, there's a new compensation agreement that will have to be settled with Pratt & Whitney. So the $25 million U.S. compensation that we got is, you know, we expect not the end since we still expect to have aircraft on the ground for the next year.

Okay, that's great. And you probably don't have a figure right now, right? So for the future compensation, because it's a moving target, maybe.

No, we don't have any figure yet. We expect that we will resume our discussions with Pratt over the next few weeks in the coming year, I would say. So we still don't have any number on the table as we speak. Obviously, what we want to do is to get the most or the biggest compensation to compensate the full cost that we had to incur due to this situation. But it's a two-party negotiation, so we'll see. Okay, great. Thank you.

On the balance sheet side, I guess, you know, it seems like you guys are continuing to, you know, negotiate maybe with your lenders and the government as well. Any progress update you can share with us at this point in terms of, you know, what exactly are you looking for and when in terms of timing can we expect some sort of conclusion on the financing? Yep.

I would say that we've made significant progress over recent months and recent weeks. First, in evaluating potential solutions that would be the most optimal for our stakeholders. And as you can imagine, many discussions have taken place with our main creditor, the federal government, with the objective to find a win-win solution. But I would say yet we got to that point. So, you know, putting in place an optimal capital structure remains our top priority, as you can imagine. Rest assured that we are saving no effort to find a solution that will optimize our capital structure. And when new information and material information is known, you know, by us, we will obviously report that.

Okay, that's great. Thanks and all the best for that. Thank you.

Next question will be from Kevin Chang at CIBC. Please go ahead.

Hey, thanks for taking my question, and good morning, everybody. Maybe just on customer behavior as my first question, obviously a big move in the FX rate here. Just wondering if you're seeing any change in traveler behavior just given the weaker Canadian dollar.

Not so far. We keep seeing a sustained demand for travel. as we saw over the last year. But again, like we said in the introduction, given the ongoing economic uncertainty and volatility, especially around the Canadian dollar, we remain cautious around the demand for testing. We haven't seen any effects so far, but this is something that we're going to be tracking and assessing along the way. At the same time, there are lower rates. So these lower rates are expected to ease consumer discretionary budgets, supporting a more favorable yield environment. And for sure, what we're seeing as being very positive right now is a disciplined approach from the industry around capacity deployment. The one that we're seeing right now, I think, will help all the players.

Right. That's obviously positive for yields going forward. Maybe just my second question. If I look at your partnership with Porter, I think one of the key benefits strategically is it kind of extends both your networks. And I'll say from Porter's perspective, it gives them access to to transatlantic sun destination markets that they themselves don't have to fly point to point. I guess, how do you balance that partnership and the long-term strategic benefits of effectively extending out your respective networks versus managing your yield and you're going to grow capacity relatively modestly this year? I guess, how do you balance that? Because I suspect your partner, and correct me if I'm wrong, would prefer if you flew to more places. It gives their customers options as they move on from Porter to Transat. But you're also trying to manage your capacity relative to the yield environment today.

Yeah, that's an important point. We have a strong collaboration between the two teams where we work at balancing the, I would say, the interest of each company We were able to reach a 4% passenger connection in 2024. For 2025, we are working more closely to better align our schedule. So it's a give and take, I would say, to make it a win-win situation. So to help Porter, we changed a little bit of our network. changes its network, adapts its network to help us on the Atlantic. So at the end, it's a win-win. It's not easy, of course, to make those decisions, but we have extremely strong governance in place that makes us to be able to generate, to maximize revenues on both sides.

Okay. That's very helpful. Maybe just my last question and a follow-up to Conarch's question around, I guess, as you look to create the capital structure that you think is more optimal for Transat, I appreciate things are fluid and you can't give me a specific time, but I guess maybe, Jean-Francois, from your perspective, a lot of this debt starts becoming current as we get through 2025 and and the unsecured one specifically, I think goes current, I guess we'll get to April of next year. Would your preference be for there to be a solution before this long-term debt shows up as a current liability? Would that be a preference, or does that not matter to you guys?

It's certainly a preference. It's never fun to have a current debt on your balance sheet, so obviously if we can extend... amend and extend, you know, those debt facilities that would certainly be favorable to us. But, you know, at the end of the day, we're looking at all the potential solutions. You know, like I said, amending and extending the terms of our existing debt with our current creditors. You know, it's been part of our recent discussions. And the objective that we're looking at is essentially to provide us with the flexibility or the necessary flexibility to focus on you know, the implementation of our elevation program, our strategic plan, and, you know, without having near-term maturities, you know, in the way. So that's certainly something that we're looking at. Yeah, that would be it, yeah.

Yeah, that makes sense. All the best as you execute against this, and happy holidays, everybody.

Thank you very much. You too. Next question will be from Cameron Dirksen at National Bank Financial. Please go ahead.

Yeah, thanks. Good morning. I just wanted to follow up on the engine compensation question from earlier, and I'm just wondering if the compensation you've received so far, I guess which covered 2023 and 2024, actually reflects the costs that you incurred? I guess the question maybe is, obviously you took two years' worth of compensation in fiscal 2024, so I'm just kind of wondering what the actual cost might have been in 2024 for you so we can get a gauge of what kind of the underlying margin would have been.

Yeah. No, unfortunately, it didn't cover the full cost that we had to incur over those two fiscal years. You know, for 2023, though, the number of aircraft on the ground was minimal. There was only one, to be honest, and for part of the year. But obviously, you know, we've talked about on a quarterly basis, we've talked about the number of aircraft that we had on the ground. We're currently, you know, at six. And I can tell you that it's unfortunate, but we haven't been able to recover 100% of our costs. You know, for future compensation, when we're going to be negotiating the next settlement with Pratt, we will be looking to compensate, you know, the full cost that we had, the additional cost that we had to incur. But at this stage, we have no guarantee.

We need to understand that there are direct costs, of course, of having aircraft on the ground But what we realized throughout the years which affected our performance as well is the impact on revenue. So not being able to maximize our yield, not having the right aircraft in the air to operate our program. So the costs overall are very high. As for the settlement, with what we understand, I think we're pretty much in line with what other carriers that have been affected. the problem would be the GTF engines have received as well.

Okay, that's helpful. But do you have, I guess, maybe with that in mind, kind of a rough number of what you think the EBITDA margin might have been in 2024 had you not had these aircraft on the ground? Is that something you can even calculate?

Yeah, it's something that we have an estimate, but we will not disclose.

Okay, fair enough. Just a second question on the elevation program. You've highlighted that 40% of the $100 million is going to be coming from revenue initiatives. I just wonder if you can just walk us through what the biggest drivers of the revenue enhancements are going to be. You've provided a little bit of information in the prepared remarks, but if you could just maybe review in a little more detail what the biggest components of that 40% coming from the revenue.

Yeah, for sure. Overall, I would say that we're taking advantage of AI to significantly improve our systems. We have a highly detailed plan with experts around the table with complementary backgrounds with people from operational research, revenue management, and AI. And we are mainly focusing on four levers. The first one is that we are upgrading our revenue management system, PROS, implementing a new version that will allow us to improve demand forecast and consumer willingness to pay. So the new solution determines selling price by considering, of course, historical information like performance, but most importantly, customer willingness to pay. So that's a new feature. Simply said, the system will allow us to give priority to clients that are willing to pay high fares over low factor. So that's the first one that's being implemented as we speak. The other one, the other lever is that we have developed an additional tool to better integrate market price elasticity into our errand decisions. The model tells us precisely how close our fair should be to other carriers to maximize revenue. We are also increasing and refining consumer segmentation, automating seasonal and intra-week pricing matching. increasing the level of precision, sophistication within the pricing that we do. And the other one is that we are refining the pricing of our branded fares according to the willingness to pay. So basically with data analytics defining the optimal buy-up amount for each OND. So this seems a little bit theoretical the way I present it, but The proof of concepts and all the pilot testing are being conducted as we speak, and we will be able to start sharing data, example, evidence, and demonstration of real value creation in the upcoming quarters, surely in the next quarter. And all these improvements will be progressively implemented between January, this upcoming January, between January and May of next year.

Okay, no, that's really great detail. Within the 40%, is anything, I guess, for growth with the porter relationship in that, or is that something separate from the revenue enhancements from the elevation program?

This is something totally separate.

Okay. Great, I will pass the line. Thanks very much.

Thank you. Thanks, Cameron. Once again, ladies and gentlemen, if you do have any questions, please press star followed by one on your touchtone phone. Next, we will hear from Michael Kiprios at Desjardins Capital Markets. Please go ahead.

Thanks, and good morning. Taking into consideration all those improvements you just mentioned on the revenue side, as well as a more disciplined industry and a positive indicator in the first quarter that your yield is positive, do you expect yields for the year in 2025 to be positive or more towards flat?

No, we expect them. With what we see today, we expect them to be positive. But again, we want to be cautious. The situation right now is not extremely stable in the economy. We don't know exactly what's going to happen when Trump is going to be in this position. But as we look at our data right now, load factors are up. and RASM are up as well. So I think we're pretty much confident that that's going to be a better year than 2024.

Perfect. That's helpful. And maybe just on the CapEx, I know 2024 was a heavy year in terms of maintenance of your fleet. Should we expect something less in 2025, similar in the same ballpark?

No, we're expecting something less. You know, as you mentioned, the biggest... CAPEX component is maintenance, which is obviously non-discretionary, but the calendar was very heavy this year. This year should be lighter.

I appreciate it. Thank you. Thank you.

Next question will be from Tim James at TD Cowan. Please go ahead.

Thank you very much. Good morning. I just have one question, actually. Thinking about your initiative to come up with the optimal capital structure. Is that dependent at all or is there any consideration around what's the optimal strategy and the optimal operating structure for the company? I'm just wondering if obviously your capital structure in part sort of determines or enables the business strategy. Is the business strategy and the operating plan sort of fixed at this point? This is really just a question around capital structure or could be those other parts of the business be altered or tweaked or adjusted depending on where you land in terms of a capital structure?

That's a good question. There's obviously always a link between the capital structure and the operating model. At this stage, I think it's critical that we find the optimal capital structure. It's not right as we speak. We're looking at all the potential options that can be presented to us. You know, the most obvious one that, you know, one would think about is the federal government and the existing debt and how we can amend and extend and, you know, look at the TNCs. But there's certainly other options, you know, that could be on the table that could involve an external investor as well. So, you know, we need to think about all the options. And it's a question of, you know, fitting in you know, everything to find the most effective and optimal way to build a capital structure that will be optimal for our stakeholders.

Thank you very much.

Any additional questions, Tim?

No, that's everything for me. Thank you.

Thank you. There are no further questions at this time. Please proceed.

Thank you, everyone. As a reminder, our 2025 first quarter results will be released on Thursday, March 13th. Thank you and have a good day.

Thank you. Ladies and gentlemen, this concludes conference call for today. We thank you for participating and ask that you please disconnect your lines.