CEO.CA Chairman's Briefing

Third quarter results are up;
Acquisition of the Corporation is pending regulatory approvals

For the third quarter:

• Revenues of $698.9 million.
• Adjusted operating income¹ of $21.8 million (operating loss of $7.6 million). *
• Adjusted net income³ of $5.7 million (net loss attributable to shareholders of $11.0 million). * 
• The Corporation took delivery of its first two Airbus A321neoLRs.

For the nine-month period:

• Revenues of $2.2 billion.
• Adjusted operating loss¹ of $12.9 million (operating loss of $73.3 million). *
• Adjusted net loss³ of $36.6 million (net loss attributable to shareholders of $53.5 million). * 

Potential transaction:

• Arrangement plan with Air Canada to acquire the Corporation approved by 94.7% of the shareholders on August 23 and through the issuance of a final approval order by the Superior Court of Québec on August 28.
• Transaction expected to close by the second quarter of the 2020 calendar year if the required regulatory approvals are obtained and conditions are met.

MONTRÉAL, Sept. 12, 2019 /CNW Telbec/ - Transat A.T. Inc. ("Transat" or the "Corporation"), one of the largest integrated tourism companies in the world and Canada's holiday travel leader, announces its results for the third quarter ended July 31, 2019.

 "We're very satisfied with the strong support received from our shareholders and the final approval of the arrangement plan. The planned transaction is good news for our shareholders, our employees, our clients and our community, and we're currently working to obtain the required regulatory approvals to complete it," stated Jean-Marc Eustache, President and Chief Executive Officer of Transat. "Meanwhile, we remain focused on our operations and note an improvement in our adjusted results for the quarter compared with last year."

Third-quarter highlights

The Corporation posted revenues of $698.9 million for the quarter, up $34.3 million (5.2%) compared with 2018. This increase was attributable to the higher average selling prices and improved load factors across all markets. The number of travellers rose 4.3% in the transatlantic market, the Corporation's main market for the period.

Operations generated adjusted operating income¹ of $21.8 million, compared with $2.4 million in 2018, an improvement of $19.5 million. This increase was mainly driven by the higher average selling prices and improved load factors across all markets.

Net loss attributable to shareholders amounted to $11.0 million or $0.29 per share (diluted) compared with $5.0 million or $0.13 per share (diluted) in 2018. The net loss attributable to shareholders included professional fees of $6.0 million and compensation expenses of $7.7 million recorded in connection with the potential acquisition transaction of the Corporation by Air Canada. The compensation expenses are mainly related to the provisions recorded for stock-based compensation plans which include a change of control clause and to adjustments made to stock-based compensation plan provisions subsequent to the significant rise in the share price. Excluding non-operating items, Transat reported adjusted net income³ of $5.7 million ($0.15 per share) for the third quarter of 2019, compared with an adjusted net loss³ of $5.0 million ($0.13 per share) in 2018.

Nine-month period highlights

The Corporation recognized revenues of $2.2 billion, up $63.8 million or 2.9% from 2018. The higher revenues recorded during the winter season is mainly attributable to the increase in average selling prices across all markets, combined with a 2.8% rise in the number of travellers in the sun destinations market, resulting from the decision to increase capacity in that market. The increase in revenues was offset by a greater proportion of flight-only sales, which generate lower unit revenues than packages. For the summer season, the increase was attributable to the higher average selling prices and improved load factors across all markets. The number of travellers rose 4.3% in the transatlantic market.

For the nine-month period, operations generated an adjusted operating loss¹ of $12.9 million compared with $14.3 million in 2018, an improvement of $1.4 million. This increase resulted from the higher adjusted operating income¹ during the summer season, partly offset by the increase in adjusted operating loss for the winter season. The increase in fuel prices, combined with the weakening of the dollar against the U.S. dollar, and the additional costs incurred for the transition and optimization of the Corporation's fleet exceeded the increase in the average selling prices of packages during the winter season.

Net loss attributable to shareholders amounted to $53.5 million or $1.43 per share (diluted) compared with $0.3 million or $0.01 per share (diluted) for the corresponding nine-month period of 2018. The net loss for 2018 included a $31.3 million gain on the sale of the Corporation's subsidiary Jonview. Before non-operating items, Transat reported an adjusted net loss³ of $36.6 million ($0.98 per share) for the period ended July 31, 2019, compared with $37.7 million ($1.01 per share) in 2018.

Financial position

As at July 31, 2019, cash and cash equivalents amounted to $723.8 million, compared with $867.2 million on the same date in 2018. This change resulted primarily from the purchase of land in Mexico ($75.7 million), from the purchase of a replacement engine for the Airbus A321neoLR fleet ($16.8 million), from the change in the calculation of cash and cash equivalents to be held in trust following the adoption of the new revenue recognition standard IFRS 15 ($21.3 million), from the adjusted net loss for the past 12 months ($23.0 million) and from commissioning costs for aircraft added to the fleet ($13.8 million).

The working capital ratio was 1.19, compared with 1.41 as at July 31, 2018.

Deposits from customers for future travel amounted to $611.1 million, compared with $587.2 million as at July 31, 2018.

Off-balance-sheet agreements, excluding contracts with service providers, stood at $2.4 billion as at
July 31, 2019, compared with $2.5 billion as at October 31, 2018. The $152.8 million decrease resulted primarily from repayments made during the nine-month period, partially offset by the weakening of the dollar against the U.S. dollar.

IFRS update

On November 1, 2018, the Corporation adopted IFRS 9, Financial Instruments, and IFRS 15, Revenue from Contracts with Customers. The 2018 comparative figures have been restated to reflect these changes.

In short, the adoption of these standards resulted in a $2.6 million increase in shareholders' equity as at October 31, 2017. For the quarter and nine-month period ended July 31, 2018, the adoption of these standards resulted in a $1.0 million increase in net loss attributable to shareholders and a $3.6 million decrease in net loss attributable to shareholders, respectively. The main changes related to the adoption of IFRS 9 and IFRS 15 are described in note 3 to the interim condensed consolidated financial statements for the quarter ended July 31, 2019.

Outlook

2019 fourth quarter – The transatlantic market outbound from Canada and Europe accounts for a substantial portion of Transat's business during the summer season. For the period from August to October 2019, Transat's capacity is similar to that deployed on the same date last year. To date, 83% of the capacity has been sold, the load factors are lower by 0.9% compared with summer 2018 and selling prices of bookings taken are 2.1% higher than those recorded at the same date in 2018. The impact of currency variations, combined with lower fuel costs in U.S. dollars, will not result in a significant increase in operating costs if aircraft fuel prices remain stable and the dollar remains at its current level against the U.S. dollar, the euro and the pound.

On the sun destinations market outbound from Canada, for which summer is low season, 83% of capacity is sold and the load factors are 5.6% higher compared with 2018. Unit margins are currently higher compared with those recorded on the same date last year.

If the current trends hold, the Corporation expects its results for the fourth quarter to be slightly higher than those of last year.

2020 winter – On the sun destinations market, the Corporation's main market during the winter season, Transat's capacity is 9% higher than that deployed on the same date last year. To date, 27% of the capacity has been sold and load factors are 1.8% higher compared with 2019. The impact of lower fuel costs, combined with fluctuations of the Canadian dollar, will not result in a significant increase in operating costs if aircraft fuel prices remain stable and the dollar remains at its current level against the U.S. dollar.

The Corporation believes it is still too early to draw any conclusions regarding winter season results.

Discussions relating to the sale of the Corporation

On August 23, 2019, a significant majority of the Corporation's shareholders voted in favour of the special resolution approving the plan of arrangement entered into on June 27 pursuant to which Air Canada is expected to acquire all of the issued and outstanding Class A variable voting shares and Class B voting shares of Transat for a cash consideration of $18.00 per share.

On August 29, 2019, the Corporation announced that the Superior Court of Quebec issued a final order approving the plan of arrangement with Air Canada. The arrangement remains subject to certain closing conditions, including regulatory approvals described in Transat's management information circular dated July 19, 2019, as well as other customary closing conditions. In addition, a public interest assessment regarding the arrangement is being undertaken by Transport Canada with input from the Commissioner of Competition. If the required regulatory approvals are obtained and conditions are met, it is now expected that the transaction will close by the second quarter of the 2020 calendar year.

The management information circular dated July 19, 2019 contains additional information regarding the arrangement.

The Corporation has agreed to limit its undertakings and expenses related to the execution of its hotel strategy in the period leading up to the closing of the potential transaction.

Restatement 

On June 27, 2019, the Corporation announced that it needed to restate its consolidated financial statements and management's discussion and analysis ("MD&A") for the year ended October 31, 2018 as well as for the first quarter ended January 31, 2019 and the second quarter ended April 30, 2019. Management has concluded that a restatement of its consolidated financial statements was necessary regarding the carrying amount of the non-controlling interest in the Trafictours Canada Inc. subsidiary.

The carrying amount of the non-controlling interest is related to the Trafictours Canada Inc. subsidiary and the right of the minority shareholder to require the Corporation to purchase the Trafictours Canada Inc. shares it holds at a price calculated in accordance with a pre-determined formula, subject to adjustment based on the circumstances, payable in cash. The estimated repurchase value of this option is taken into account in the carrying amount of the non-controlling interest. The difference results from the application of a different formula than as per the contract for the calculation of the purchase price of the minority interest. As a result, the Corporation restated its financial statements to increase the liability for the non-controlling interest reported under Trade and other payables in the consolidated statements of financial position which was undervalued by $25.9 million, $23.3 million and $20.5 million as at October 31, 2018, January 31, 2019 and April 30, 2019, respectively. The recording of these adjustments had no impact on the Corporation's consolidated statements of income for the aforementioned periods as these adjustments are recorded as equity transactions in Retained earnings.

As part of the restatement of its consolidated financial statements as at October 31, 2018, the Corporation had to review subsequent events up to September 11, 2019, the new date of authorization to publish the financial statements for the year ended October 31, 2018. On June 5, 2019, the Corporation settled without admission of liability, for an amount of US$5.0 million [$6.7 million], a litigation whereby plaintiffs alleged misappropriation of confidential information and solicitation of employees. The amount was recorded under Special items in the restated consolidated statement of income for the year ended October 31, 2018. This adjustment is included under Trade and other payables and Retained earnings in the consolidated statements of financial position as at October 31, 2018. No provision was recorded in the financial statements as at October 31, 2018 as initially published as it was not possible to determine with any degree of certainty the extent of any financial liability that would have arisen had the Corporation been unsuccessful in its defence of this lawsuit.

Additional information

The Corporation adopted IFRS 9, Financial Instruments, and IFRS 15, Revenue from Contracts with Customers, on November 1, 2018, and restated the quarterly financial information shown in the table below for 2018.

The results were affected by non-operating items, as summarized in the following table: 

Hedging – The Corporation records in the statement of income any gains or losses resulting from
mark-to-market adjustments of the derivative financial instruments used to manage aircraft fuel-price risk, as well any gains or losses resulting from mark-to-market adjustments of certain hedging instruments used to manage exchange rate exposure. For the third quarter of 2019, this resulted in a $8.8 million non-cash loss ($6.5 million after income taxes), compared with $0.1 million ($0.1 million after income taxes) in 2018. For the nine-month period, this resulted in a $9.1 million non-cash loss ($6.7 million after income taxes), compared with an $8.9 million gain ($6.6 million after income taxes) in 2018.

As needed, the Corporation uses derivative financial instruments to mitigate exchange rate exposure arising from its expenses and/or revenues in foreign currencies. Accordingly, under applicable accounting standards, any fluctuations resulting from the effective portion of mark-to-market adjustments of these instruments that are designated as hedging instruments are recorded in the consolidated statement of financial position and consolidated statement of comprehensive income (loss) rather than in the consolidated statement of income (loss). For the third quarter of 2019, Transat recorded a loss of $6.1 million ($4.5 million after income taxes) on these foreign exchange derivatives, compared with $4.2 million ($3.1 million after income taxes) in 2018. For the nine-month period, Transat recorded a loss of $10.3 million ($7.6 million after income taxes) on these foreign exchange derivatives, compared with $3.8 million ($2.8 million after income taxes) in 2018.

About Transat

Transat A.T. Inc. is a leading integrated international tourism company specializing in holiday travel. Under the Transat and Air Transat banners, the Corporation offers vacation packages, hotel stays and air travel to some 60 destinations in over 25 countries in the Americas and Europe. Transat is firmly committed to sustainable tourism development, as reflected in its multiple corporate responsibility initiatives over the past 12 years, and obtained Travelife certification in 2018. Based in Montréal, the Corporation has 5,000 employees (TSX: TRZ).

NOTES

The following are non-IFRS financial measures used by management as indicators to evaluate ongoing and recurring operational performance.

1. Adjusted operating income (loss): Operating income (loss) before depreciation and amortization expense, restructuring charge and other significant unusual items, including premiums for fuel-related derivatives and other derivatives that matured during the period. The Corporation uses this measure to assess the operational performance of its activities before the aforementioned items to ensure better comparability of financial results.
2. Adjusted pre-tax income (loss): Income (loss) before income tax expense before change in fair value of fuel-related derivatives and other derivatives, gain (loss) on business disposal, restructuring charge, asset impairment and other significant unusual items, and including premiums for fuel-related derivatives and other derivatives matured during the period. The Corporation uses this measure to assess the financial performance of its activities before the aforementioned items to ensure better comparability of financial results.
3. Adjusted net income (loss): Net income (loss) attributable to shareholders before net income (loss) from discontinued operations, change in fair value of fuel-related derivatives, gain (loss) on business disposal, restructuring charge, asset impairment and other significant unusual items, and including premiums for fuel-related derivatives and other derivatives that matured during the period, net of related taxes. The Corporation uses this measure to assess the financial performance of its activities before the aforementioned items to ensure better comparability of financial results. Adjusted net income (loss) is also used in calculating the variable compensation of employees and senior executives.

Conference call

2019 third quarter conference call: Thursday, September 12, 2019 at 10:00 a.m.
Dial 1-800-926-9801. Name of conference: Transat. Webcast: https://www.transat.com/en-CA/corporate. The archived call will be available at 1-800-558-5253, access code 21916624, until October 11, 2019.

The fourth-quarter results will be announced on December 12, 2019.

Non-IFRS financial measures

Transat prepares its financial statements in accordance with International Financial Reporting Standards (IFRS). We will occasionally refer to non-IFRS financial measures in the news release. These non-IFRS financial measures do not have any meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers. They are intended to provide additional information and should not be considered as a substitute for measures of performance prepared in accordance with IFRS. All dollar figures are in Canadian dollars unless otherwise indicated.

Caution regarding forward-looking statements

This news release contains certain forward-looking statements regarding the Corporation's expectation that travel reservations will follow the trends. In making these statements, the Corporation has assumed that the trends in reservations and selling prices will continue, and that fuel prices, other costs and the value of the Canadian dollar against foreign currencies will remain stable. If these assumptions prove incorrect, actual results and developments may differ materially from those contemplated by the forward-looking statements contained in this news release. Results indicated in forward-looking statements may differ materially from actual results for a number of reasons, including without limitation, economic conditions, changes in demand due to the seasonal nature of the business, extreme weather conditions, climatic or geological disasters, war, political instability, real or perceived terrorism, outbreaks of epidemics or disease, consumer preferences and consumer habits, consumers' perceptions of the safety of destination services and aviation safety, demographic trends, disruptions to the air traffic control system, the cost of protective, safety and environmental measures, competition, the Corporation's ability to maintain and grow its reputation and brand, the availability of funding in the future, fluctuations in fuel prices and exchange rates and interest rates, the Corporation's dependence on key suppliers, the availability and fluctuation of costs related to our aircraft, information technology and telecommunications, changes in legislation, unfavourable regulatory developments or procedures, pending litigation and third party lawsuits, the ability to reduce operating costs, the Corporation's ability to attract and retain skilled resources, labour relations, collective bargaining and labour disputes, pension issues, maintaining insurance coverage at favourable levels and conditions and at an acceptable cost, and other risks detailed from time to time in the Corporation's continuous disclosure documents.

This new release also contains certain forward-looking statements about the Corporation concerning the transaction involving the acquisition of all the shares of the Corporation by Air Canada. These statements are based on certain assumptions deemed reasonable by the Corporation, but are subject to certain risks and uncertainties, several of which are outside the control of the Corporation, which may cause actual results to vary materially. In particular, the completion of a transaction is subject to the approval of applicable regulatory and governmental authorities and the satisfaction of other conditions customary for this type of transaction. In addition, statements regarding the results of a potential transaction will depend on the purchaser's plans following the completion of a potential transaction. The Corporation disclaims any intention or obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, other than as required by securities laws.

These forward-looking statements, by their nature, necessarily involve risks and uncertainties that could cause actual results to differ materially from those contemplated by these forward-looking statements. The Corporation considers the assumptions on which these forward-looking statements are based to be reasonable, but cautions the reader that these assumptions regarding future events, many of which are beyond its control, may ultimately prove to be incorrect since they are subject to risks and uncertainties that affect the Corporation. For additional information with respect to these and other factors, see the restated MD&A for the year ended October 31, 2018, filed with Canadian securities commissions. The Corporation disclaims any intention or obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, other than as required by securities laws.

SOURCE Transat A.T. Inc.

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