Transat A.T. Q4 2023 Earnings Call Transcript

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December 14, 2023

There are 8 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Transat AT Inc. 4th Quarter Results Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. Also note that this call is being recorded on Thursday, December 14, 2023.

Operator

And I would like to turn the conference over to Andre Agnies, Senior Director, Communications and Public Affairs, please go ahead.

Speaker 1

Thank you. Hello, everyone, and thank you for attending our earnings call for the Q3 ended October 31, 2023. I'm here this morning with Annick Guerra, President and CEO And Patrick Duis, 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. Patrick will have to cover our financial results in more detail.

Speaker 1

We will take questions at the end from financial analysts and 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 investor Presentation has been updated and is posted on our website in the Investors section. Patrick 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.

Speaker 1

They are based on assumptions and subject to risks and uncertainties. Forward looking statements represent Transat's expectations as of December 14, 2023, and accordingly are subject Our actual results could differ materially from any stated expectations. Please refer to our forward looking statement in Transat's Q4 news release available on transad.com and SEDAR Plus. With that, let me turn over the call to Annick for opening remarks.

Speaker 2

Good morning, everyone. Thank you for joining us for the Q4 year end conference call for fiscal 2023. We are highly encouraged by our financial performance in fiscal 2023 as Transat has solidified its position in the Canadian travel Industry. As market dynamics gain momentum throughout the year, our team focused on meeting growing demand And on further improving operating efficiency. By taking advantage of both external and internal drivers, we exceeded our profitability target for the year with adjusted EBITDA of feasibility target for the year with adjusted EBITDA of $263,000,000 or a margin of 8.6 Percent on revenues of $3,000,000,000 These solid results represent a major turnaround compared to fiscal 2022, which was still impacted by the persisting effects of the COVID pandemic.

Speaker 2

More importantly, we also exceeded 2019 levels on all these metrics. In 2023, we also generated more than €52,000,000 in free cash flow, reflecting in part land sale in Mexico that we used to reduce our debt level. Generating free cash flow has become a key strategic tool for deleveraging as we continue to work on refinancing plan to optimize our Patrick will provide you with more details in a few minutes, but this solid improvement in cash flow With a key step forward in executing our strategic plan during the past year, other notable achievements included Pursuing our plan to optimize the size of our fleet to support medium and long term growth. We ended fiscal 2023 with a total Of 40 aircraft up by 5 year over year and intend to deploy 44 aircraft for the 2024 winter season. Continuing to develop our network by strengthening our best performing routes, either by increasing frequency Or extending service to year round flights and launching service to new promising destination.

Speaker 2

Improving revenue management practices and increasing ancillary revenue sources continuing to establish strategic partnerships And alliances deploying our corporate social responsibility strategy, including our climate action plan. In fact, Transat will be releasing tomorrow its annual CSR report, a comprehensive document that presents our sustainability priorities and highlights our progress in terms of environmental protection, social engagement and good governance. As for the Q4, driven by robust yields, we delivered revenues of £764,000,000 10% above 2019 levels on 7% less capacity and with similar load factors. On the profitability side, adjusted EBITDA reached €89,000,000 capping off a strong second half in which Adjusted EBITDA exceeded CAD200 1,000,000 Looking ahead to the new fiscal year, Transat will continue to focus on A key objective of this plan is to grow customer traffic through alliances And our recently announced joint venture with Porter Airlines represent a major step forward in this regard. By combining our respective networks, this JV will offer travelers significant benefits, including enhanced travel options The speeder network strategy is designed to accelerate expansion in our respective key markets, which for Transat consist of international medium and long haul flights.

Speaker 2

At full potential, we expect porters connecting flights To account for 15% to 18% of Transat passenger traffic based on both airlines' current fleet growth plan. Turning to another important growth metric. We intend to increase available capacity by 19% in fiscal 2024. This will be achieved by a combination of 4 different drivers. 1st, continuing our ongoing efforts to improve fleet utilization 2nd, increasing the frequency of best performing routes and European destination from both Montreal and Toronto.

Speaker 2

3rd, extending service to year round flights to key destinations. In this regard, we have announced year round service to Lyon, Merced, Costa Rica and El Salvador from Montreal, which further reinforces Air Transat's leading position in the Canadian market Such as Lima, Peru and Marrakesh, Morocco next summer. South America and North Africa both represent high potential markets for Transat. While optimistic about growing the business in 2024, we are aware of potential headwinds. First, We are assessing the full impact of the Pratt and Whitney engine issue, which is also impacting other airlines in the industry.

Speaker 2

This situation involves the anticipated inspection and removals of certain engines that power A321LR Aircraft. From a fleet of 15 LRs, we currently have 3 aircraft impacted and the number should reach 5 or 6 by the end of fiscal 2024. We have contingency plans in place to mitigate any impact and these plans will be adapted to reflect ongoing developments. These include extending and contracting aircraft leases, using our spare engines, Transferring certain routes to an Airbus A330. While these measures will involve short term incremental costs, Our objective is to maintain our position in the market.

Speaker 2

We are working in close collaboration with Pratt and Whitney. They have been supportive on all aspects, including future financial compensation. Further updates 2nd potential headwind, the uncertain economic environment, which has begun to affect the demand outlook of U. S. Airline peers, mainly in regard to domestic travel and off peak seasons.

Speaker 2

However, customer demand for international leisure travel from Canada remains favorable. This is supported by our booking curve that remains Solid when compared to last year. This is clear evidence that consumers want to travel, And we understand that in the current inflationary conditions, they are looking for a better price if it becomes available. At the moment, we continue to trend slightly above last year's strong yields for both the winter and summer seasons. Meanwhile, the cost of fuel continues to be volatile and the Canadian dollar remains weak.

Speaker 2

Although we have hedging programs in place for both, any excess volatility may affect profitability in the upcoming year. Finally, Air Transat has been negotiating with its flight attendants to reach a new collective bargaining agreement. We are confident to reach a satisfactory agreement that will not affect customers' travel plans. In closing, I want to thank our 5,000 plus employees for their dedication and hard work. Driven by their passion and talent, we delivered solid financial results in 2023.

Speaker 2

More importantly, we are also well positioned for accelerated growth in 2024 through our JV with Border, Before turning the call to Patrick, I want to take a moment to thank him for his contribution to the company during his tenure as Chief Financial Officer. His experience in financial management and constant commitment helped Transat improve its financial performance And make further strides towards improving its capital structure. We all wish him success in his future endeavors. We were pleased to announce earlier this week the appointment of Jean Francois Bruneau as Chief Financial Officer. Jean Francois has over 25 years of experience in executive growth at major Quebec and Canadian Companies.

Speaker 2

His extensive experience in leading financing strategies and the financial management of large scale companies will make him a valuable asset In the execution of our strategic plan, Jean Francois will join us in a few weeks on January 9. This concludes my comments. Patrick will now review our financial results.

Speaker 3

Thank you, Anik, and good morning, everyone. We are pleased With our Q4 results that exceeded expectations, demand remained healthy throughout the period, resulting in a Saw the load factor of 88.3% compared to 2019 levels. Meanwhile, favorable Pricing produced yields that exceeded 2019 levels by 25%. While pleased with the important revenue and profitability Achieving solid free cash flow was a key objective for fiscal 2023, and the outcome clearly validates Ongoing efforts to improve our financial situation. As we look ahead, our capacity to generate further free cash flow in fiscal 2024 Will enable us to actively reduce debt on our balance sheet, contributing to the ongoing improvement of our capital structure.

Speaker 3

We have also announced today that we have entered into an agreement to sell our 50% equity interest In the Marival Armani resort to our partner, the transaction is expected to generate proceeds of US15.5 million dollars Equivalent to CAD21.1 million. We anticipate the closing of this transaction to be finalized At the beginning of 2024 and the proceeds will be immediately used to repay senior debt. As we progress in deleveraging our balance sheet and enhancing our cash flow profile, we can currently continue to work towards Reaching a refinancing agreement. This is a complex process that involves many parties and requires time and patience. We remain confident of striking an agreement that will benefit all stakeholders.

Speaker 3

Now let's turn to our 4th quarter results. Revenues reached $764,500,000 up 33.4% from the previous year. This increase reflects improved market conditions driven by sustained customer demand and higher selling prices compared to last year. Adjusted EBITDA amounted to $89,000,000 representing an 11.6% margin compared to a loss of $11,500,000 in the same period last year. Of note, the significant year over year improvement Was achieved despite higher fuel costs and a weaker Canadian dollar versus U.

Speaker 3

S. Dollar. For the 2nd consecutive quarter, net income was positive, totaling $3,200,000 in Q4 2023 Compared to a net loss of $126,200,000 in Q4 2022. Adjusted net income, which excludes items that affect comparability, was also positive, reaching $15,700,000 compared to an adjusted net loss of $75,900,000 in the 4th quarter last year. Cash flow from operating activities totaled $321,800,000 in fiscal 2023 As opposed to negative $177,900,000 in 2022, mainly driven by improved profitability And better working capital.

Speaker 3

Free cash flow reached $162,400,000 in 20.23 compared to negative $320,000,000 in 2022. This year's free cash flow also includes proceeds from the sale of land in Mexico Completed in the Q4, which was used to reimburse $53,000,000 in debt. Given the important seasonal variations in Transat's cash flow patterns, free cash flow is looked through a rolling 12 month window. On that basis, the $162,400,000 generated in the 12 month period ended October 31, 2023, Marks an improvement from $152,700,000 achieved in the 12 month period ended last July. Moving on to our balance sheet.

Speaker 3

Reflecting solid cash flow generation, our cash position totaled 430 $5,600,000 as at October 31, 2023, up from $322,500,000 a year earlier. Based on steady demand and higher average selling prices, customer deposits for future travel stood $754,200,000 at year end, up 25% from the end of 2022. Following debt repayment, Transat's long term debt and deferred government grants stood at $815,800,000 At the end of fiscal 2023 compared with $833,200,000 at year end. Long term debt and deferred government grants, net of our growing cash position, amounted to $380,200,000 Down significantly from $510,700,000 last year. Turning to our outlook.

Speaker 3

Considering the current business and macroeconomic environments, we are setting a fiscal 2024 adjusted EBITDA margin target of 7.5% to 9%, which exceeds our historical levels and on the right path to achieve our double digit Medium term margin goal. Our outlook also assumes a 19% increase in available capacity Through recent and planned aircraft additions as well as further optimization in fleet utilization. This capacity will mainly be deployed to expand frequency and annualize best performing routes And to service recently added new destinations. Our main assumptions in deriving this forecast include A weak GDP growth in Canada, an exchange rate of CAD1.33 to US1 dollars And an average price per gallon of jet fuel of CAD4. It also assumes that we reach a satisfactory resolution To renew the collective bargaining agreement with flight attendants and that the Pratt and Whitney engine issue follows a planned schedule, Which currently involves 3 grounded aircraft and should increase to 5 or 6 aircraft by the end of the fiscal year.

Speaker 3

In closing, as you know, this is my last week at Transant. I'm very proud of the progress accomplished The entire organization since I joined in 2021. Transant has become a much stronger and resilient company that rests On a more solid financial foundation, thanks to the dedication of its teams. Despite the industry headwinds, Transat can rely on a clear and robust strategic plan and strong leadership that will enable it to continuously strengthen This concludes my prepared remarks. We will now open the call for questions from analysts.

Speaker 2

Maybe just before we take questions, there is a recent development to share We are very happy about we have just reached an agreement in principle with QP, the union representing our flight attendants. Union members have been informed and details will be presented in the upcoming days. So we are very satisfied with the result and happy That our customers can enjoy their travel plans with peace of mind. I think that now we can take questions.

Operator

Thank you. And the first question will be from Cameron Doerksen at National Bank Financial.

Speaker 4

Yes, thanks. Good morning.

Speaker 3

Good morning. Good morning.

Speaker 5

So maybe just a couple

Speaker 4

of questions on yields that you're seeing. If I go back to what you reported in Q3 as far The winter outlook, book to load factor was up, I think, 2 points at that time, yields up about 7%. And then with the update this morning, Your book load pattern down a bit and yields up 2.4%. I'm just wondering what you've seen, I guess, more recently with bookings for Sun Destinations. I mean, it sort of feels like there's been maybe some downward pricing pressure in that market in more recent bookings?

Speaker 2

So we see a demand environment that remains favorable overall. When we look at the booking curve For winter 2024, it is still a strong booking curve. Consumers clearly continue to prioritize Travel despite inflation. As we mentioned, yields are up 2.4% compared to last year. And load factors are a little bit below 1.3% points compared to last year, but It needs to consider that we have increased capacity by 20%.

Speaker 2

So this is still very good results so far. We see, of course, slower price growth, but prices are still tracking above last year. What's interesting to know as well when we look at the booking in October is we had a Black Friday and Cyber Monday promotions that deliver Robust results. The promotion reached a record sales, 20% increase versus 2022, which is excellent. Clearly, people are looking to get Possible value for money, we have witnessed lower price growth compared to last year, And we believe it will continue into 2024 because of the economic environment and the high interest rates that prevail.

Speaker 2

However, when we look at our numbers so far, we're pretty much confident that we're going to maintain a strong performance. And we believe that 2023 prices reflected a revenge travel demand on a limited capacity, whereas 2024 is returning to a more normal conditions, I would say.

Speaker 4

Okay. No, that's helpful color. And then Just on yields, I'm just wondering if you can talk a little bit what you're seeing on the non Sun destination. So I guess, just transatlantic and some of the other North American routes that you have, Just what you're seeing for the winter on some of those routes?

Speaker 2

They're similar. It's similar. What we see right now, Europe, transatlantic is similar to what we see on the South. We have increased our program to transatlantic routes. It is And as you know, for summer, next summer, the transatlantic program is way more important than In winter and with what we're seeing so far, the booking curve is ahead of last year and The yields are there as well ahead of last year.

Speaker 4

Okay. No, that's great.

Operator

Next question will be from Karnataka at Scotiabank. Please go ahead.

Speaker 6

Thanks, operator. Good morning, everyone, and I echo my congratulations to Patrick, for his retirement. Just wanted to first maybe follow-up on the yield And Cam asked, can you help us understand like the sequential trends and yield? I understand you had a promotion last month from Black Friday and Cyber Monday, but if you look at yields this month Versus, let's say, September, October or even November, how do you see the yields trending? Like, are they trending flat or down?

Speaker 2

I would say that there's a little bit higher than what we saw last year. So they're not tracking down. We're still up compared to last year.

Speaker 6

Okay. And sequentially, Annick, would you say like sequentially, the yields have changed a lot versus last few months?

Speaker 2

Over the last few months, yes, this is we've been witnessing slower price growth Compared to last year, and of course, this is no surprise to us or the consumers because the economic environment It's unstable and with what's happening in the economy, we were expecting that. But Fortunately, we're still able to offer the right product at the right prices. So we're not At this point, we're not very, I would say, unsecure about What's going on? We see more of a normalizing conditions in the market in terms of pricing.

Speaker 6

Okay. That makes sense. And in the business plan that you laid out for 7.5% to 9% EBITDA margin, I know there are a lot of variables usually, but in the 19% capacity growth, Are you assuming the yield and load factors overall to be down slightly for the full year?

Speaker 2

No, we are not expecting them to be down. As we explained in the introduction, The increase in 19% is driven mostly by The fact that we've received a new delivery and we will receive new delivery of A321LRs during 2024, We strongly continue to improve fleet utilization. So that's a good improvement. And basically, the growth that we are Putting in place in 2024 is really concentrated on Transat's historical high performing routes, So with very limited risk. So we are comfortable with the capacity increase that we've put in the market and with the trends that we see so far On the booking curves, both in terms of yield and load factor, it's trending in the right direction.

Speaker 6

Great. And last one for me on the capacity front. You have some grounding of A321 LRs due to Pratt issue, and I think you'll see Grounding maybe toward the end of the fiscal year. Can you help us understand the cadence on capacity growth? How should we Think about 19% split over the 4 quarters.

Speaker 6

Like is it more front end loaded or back end loaded?

Speaker 2

It's mostly across the year. Of course, with the patent Whitney issue, we've been able to work on several mitigation measures. We've been very, very proactive, As we said, in extending some of our leases of A330s, we've contracted Additional ACMI as well, being able to use our spare engines. So that Has allowed us to maintain the capacity in the market.

Speaker 6

Perfect. Thanks so much. I'll turn it over. Thank you.

Operator

Thank you. Next question will be from Kevin Chiang at CIBC. Please go ahead.

Speaker 5

Good morning. Thanks for taking my question and best of luck, Patrick. Thank you for all your help During your tenure here at Transat, maybe I can ask, the 19% capacity growth into I suspect it's about 25% each, but like if you looked at what were the biggest drives that 19%, is it primarily The increase in service to new destinations and increasing utilization versus I think what investors are typically more concerned about, which is Just increasing frequency on the same route, which I think could yield a different economic output for you than maybe some of the other Levers that you called out here for the 19% capacity growth?

Speaker 2

A little bit more than 90% of what we've deployed in the market In 2024 is based on increasing frequency On the historical network, so this is where we are getting the best return on investment and this is why I was saying that we have limited risk. These are routes that we where we already perform very well and that where we know that the market Can accept more capacity. And we have the right tools, the right aircrafts And the right schedules as well to be able to increase our performance on these routes. Then, of course, we have opened only 2 new routes, Lima, as you know, and Marrakesh. But these 2 new routes have a strong VFR and leisure component, which is our core business, but it's very minimal in the whole scheme of things.

Speaker 2

So we are very comfortable

Speaker 1

with the competitive increase we've put in the market.

Speaker 5

And I guess just the competitive response or any that you might Seeing as you've taken a pretty step function increase in capacity, are you seeing Anything from your competitors that service these same markets That you'd want to call out here or as you mentioned, these are good markets for you and they can kind of absorb more capacity And net net, you're earning more money off the back of this?

Speaker 2

These are markets where we are very strong, Where we know we have competitive advantage against competition, when we look, for instance, at winter And the SALT program, the overall market has increased by a little bit more than 20%. But we need to consider that in this environment, there's a lot of ULCC that have put their capacity More more than a third of growth to Dassault is generated by a low cost airline and Transat as an advantage We had a strong customer base looking for packages that these airlines do not offer. So it's difficult for And this is a service, by the way, that we will For our partner, Porter Airlines,

Speaker 5

Didier. Okay. That's helpful. Just on I know it just kind of hit the wire as the call started, but and I know it will go in front of the rank and file The collective agreement that was agreed to this morning, any implication on the margin goalpost you've provided here? Or Would you suggest that the collective agreement is in line with what you would have assumed in your 7.5% to 9% margin?

Speaker 2

No, no. We've reached a satisfactory agreement. We are very pleased. And no, it will not have Impact on the guidance that we've put in the market that we've announced this morning.

Speaker 5

Okay. And maybe just last one for me. I know a lot of questions on yields So this morning, when you look at, I guess, the cadence of the yields as it progressed versus what you guided to on Q3 call versus what you've highlighted here for the winter season. I guess when you look at Historical seasonal trends, I would have anticipated yields to kind of slow as you kind of fill in the curve here. I mean, I guess, how much of that do you think played a role in the sequential decline in yield versus Anything in the demand environment or maybe put another way, I suspect when you had the 7% yield increase that you called out in fiscal Q3, I don't think you anticipated to hold that for the full Winter season as you close in that curve, the way it's coming in now, is that more in line with what you would have anticipated 2 to 3 months ago?

Speaker 2

Exactly. This is exactly what we had anticipated for the upcoming winter.

Speaker 5

Okay. That's helpful. Leave it there. Thank you very much and congrats on a strong end to the year here.

Speaker 2

Thank you.

Operator

And next will be Benoit Poirier at Desjardins. Please go ahead.

Speaker 7

Yes. Good morning, Anik. Good morning, Patrick.

Speaker 2

Good morning.

Speaker 7

Just in terms of guidance, I appreciate the guidance, but Are there any other elements we should consider for fiscal year 2024? Just wondering if there's any Catch up in CapEx and amortization and maybe additional color about interest expense and free cash flow would be great.

Speaker 3

Yes. So just when you think about 2024 beyond that guidance, I think you also need to think about top line. We are deploying 20% more capacity. So that should be reflected in the top line. When you think about Going down in terms of cash flow, there is a certain increase in CapEx.

Speaker 3

There is a notion of catch up with Heavy maintenance with respect to our aircraft. So we wouldn't use last year as a goalpost in terms of CapEx This year, it will be heightened versus last year. Think of what type of CapEx we had in previous Years prior to the pandemic and should give you a better sense of what we're thinking in terms of CapEx for 2024.

Speaker 7

Okay. And obviously, you've signed the new alliance with Porter scheduled to begin to be implemented gradually Throughout 2024, I was wondering if you take into account any impact or assumption for this And your new guidance and any color about the timing on when do you expect the 18% growth from porter to start bearing fruit?

Speaker 3

Yes. So with respect to porters, to be clear, We've announced that a few weeks ago, but we're going to start we're going to take the year to implement all of the parts of the JV. There's many pieces to that, but recall that we have a codeshare already in place. So we do expect some benefits from that Starting in the summer, and that's factored into our numbers. When we think about the 15% to 8% Full potential of the JV, again, we need to take time to implement these, but we think we'll get there In a few years, think of 2026, 2028 framework to get the full potential of this JV.

Speaker 7

Okay. And last one maybe for me. Any update about the timing on your Fidelity programs that you're About to launch and maybe talk about the benefits it could bring to Transat going forward.

Speaker 2

This is an element that is extremely important for us. Currently, we are evaluating various options to create A Transat loyalty program, the expected time line for implementation We'll be beginning of 2025. It is too early at this point to share any more information, But this is definitely something that's going to give us an additional, I would say, tool to be able to Be competitive in the markets against the competition that we have.

Speaker 7

Okay. That's great color. And Patrick, it's been a pleasure to deal with you. Good luck in your new role and welcome, Jean Francois. Looking forward to meeting you.

Speaker 3

Thank you. Thank you, Baral.

Operator

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

Speaker 1

Thank you. No more questions, Susie.

Operator

No more questions. Please proceed.

Speaker 1

Thank you. Thank you, everyone. Lastly, let me inform you that our Q1 results will be released on March 14, 2024. Thank you, everyone, and have a great day.

Operator

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

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Key Takeaways

  • Transat delivered a major turnaround in fiscal 2023 with adjusted EBITDA of $263M (8.6% margin) on $3B in revenue, generating over €52M in free cash flow and surpassing 2019 levels.
  • The airline plans a 19% capacity increase in fiscal 2024 by expanding its fleet to 44 aircraft, optimizing utilization, boosting frequencies on top routes and adding new destinations.
  • Transat’s new joint venture with Porter Airlines aims to combine networks and is expected to drive 15–18% of passenger traffic through connecting flights at full potential.
  • Inspection and removals of Pratt & Whitney engines are grounding up to 5–6 A321LRs by end of fiscal 2024, prompting contingency measures that will incur short-term incremental costs.
  • Management warns that volatile jet fuel prices, a weak Canadian dollar and broader economic uncertainty could pressure profitability despite hedging programs and strong demand trends.
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Earnings Conference Call
Transat A.T. Q4 2023
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