Transat A.T. Inc. - Results for third quarter 2017

An excellent start to summer

For the third quarter:

• Revenues of $733.2 million, compared with $663.6 million in 2016.
• Operating income of $41.0 million, compared with an operating loss of $3.0 million in 2016.
• Adjusted operating income¹ of $59.1 million, compared with $16.0 million in 2016.
• Net income attributable to shareholders of $26.6 million, compared with $9.4 million in 2016.
• Adjusted net income³ of $26.9 million, compared with $2.5 million in 2016.

For the nine-month period:

• Revenues of $2.3 billion, compared with $2.3 billion in 2016.
• Operating loss of $24.8 million, compared with $57.2 million in 2016.
• Adjusted operating income¹ of $23.5 million, compared with an adjusted operating loss¹ of $20.7 million in 2016.
• Net loss attributable to shareholders of $13.8 million, compared with $76.7 million in 2016.
• Adjusted net loss³ of $17.3 million, compared with $39.7 million in 2016.

MONTREAL, Sept. 7, 2017 /CNW Telbec/ - Transat A.T. Inc., one of the largest integrated tourism companies in the world and Canada's holiday travel leader, posted revenues of $733.2 million for the quarter ended July 31, 2017, compared with $663.6 million for the same period in 2016, an increase of $69.6 million, or 10.5%. The Corporation recorded adjusted operating income¹ of $59.1 million, versus $16.0 million in 2016, and net income attributable to shareholders of $26.6 million ($0.72 per share basic and diluted) for the third quarter of 2017, against $9.4 million ($0.26 per share basic and diluted) in 2016. Before non-operating items, Transat reported adjusted net income³ of $26.9 million ($0.73 per share) for the third quarter of 2017, compared with $2.5 million ($0.07 per share) in 2016.

"The third quarter was very positive," said Jean-Marc Eustache, President and Chief Executive Officer of Transat. "First, as we announced on August 21, our results are back up to the levels we saw in the years prior to 2016. Second, our projects have taken huge steps forward with the announcement that we will be leasing new A321neo LR aircraft and the news that we are selling our interest in Ocean Hotels."

Third-quarter highlights

The Corporation posted revenues of $733.2 million, compared with $663.6 million for the same 2016 quarter. The increase of $69.6 million (10.5%) was driven by an 8.7% rise in total travellers in the transatlantic market, the Corporation's main market for the period, resulting from a 7.2% increase in its product offering in that market. The increase was accentuated by a 1.9% increase of the product offering in sun destinations market, resulting in a 2.9% rise in total travellers in that market. In addition, average selling prices increased across all markets.

The Corporation reported adjusted operating income¹ of $59.1 million, compared with $16.0 million in 2016. This $43.1 million improvement resulted primarily from higher average selling prices, especially since the beginning of June, combined with increases in total travellers and load factors across all markets, as well as to a decrease in air costs, due in particular to a better utilization of wide-body aircraft.

On July 19, 2017, the Corporation entered into an agreement with H10 Hotels to sell its 35% minority interest in Ocean Hotels for an anticipated amount of US$150.5 million ($183.6 million). As at July 31, 2017, this interest represented an asset amounting to $100.7 million, reported as an asset held for sale in the statement of financial position. The agreement entered into with H10 Hotels, which already owns 65% of the company formed in 2007, is enforceable and subject to certain customary conditions. The selling price is subject to adjustments upon closing, which is expected to take place by November 2, 2017 or afterward if necessary. Transat remains committed to becoming a full-fledged hotel operator and sold its minority interest in Ocean Hotels to accelerate the development of its own sun-destination hotel chain.

Together, Transat's shares of the income of Ocean Hotels and Rancho Banderas All-Suites Resort, the Corporation's hotel businesses, accounted for $1.6 million, compared with $2.5 million for the corresponding quarter in 2016. The decrease for the quarter was attributable to an unfavourable foreign exchange effect.

Nine-month highlights

As announced on August 21, the Corporation's third-quarter revenues were superior to those of 2016, which offset the decrease recorded during the winter season. For the nine-month period, the Corporation posted revenues of $2.3 billion, compared with $2.3 billion in 2016.

The decrease in revenues in winter resulted from a higher proportion of flight-only versus holiday package sales compared with 2016. During the winter season, the 1.4% decrease in total travellers to sun destinations, the Corporation's main market for the period, resulted primarily from the decision to reduce the product offering in this market by 2.3%. The impact of this decrease was offset by the 9.6% increase in the Corporation's transatlantic market product offering which led to a 6.5% rise in total travellers. During the winter season, average selling prices increased in the sun destinations market but decreased slightly in the transatlantic market.

For the nine-month period, the Corporation reported adjusted operating income¹ of $23.5 million, compared with an adjusted operating loss¹ of $20.7 million in 2016, an improvement of $44.2 million. The increase in adjusted operating income¹ originated from the summer-season, driven primarily by higher average selling prices, combined with increases in total travellers and load factors across all markets, as well as to a decrease in air costs. During the winter season, the higher operating loss resulted from the increase in air costs and an unfavourable foreign exchange effect which, combined with an increase in fuel prices, resulted in a $39.3 million increase in operating expenses that the higher average selling prices for sun packages could not offset.

For the nine-month period, Transat's shares of the income of Ocean Hotels and Rancho Banderas All-Suites Resort, the Corporation's hotel businesses, have accounted together for $11.0 million, compared with $10.6 million in 2016. The increase was attributable to Ocean Hotels' higher operating profitability, partially offset by an unfavourable foreign exchange effect.

Financial position

As at July 31, 2017, the Corporation's free cash totalled $580.7 million, compared with $470.1 million at the same date in 2016. The working-capital ratio was 1.26, versus 1.05 as at July 31, 2016. Deposits from customers for future travel amounted to $509.9 million, versus $440.4 million a year earlier; the increase is attributable to the higher number of bookings compared with last year, and to higher selling prices. Off-balance-sheet agreements, excluding contracts with service providers, stood at $1,410.3 million as at July 31, 2017, compared with $710.3 million as at October 31, 2016. The $700.0 million increase reflects the agreements entered into during the quarter to lease 10 Airbus A321neo LR aircraft, to be gradually integrated into the Air Transat fleet starting in spring 2019, as the carrier's Airbus A310s are retired—as well as agreements entered into during the nine-month period for four Airbus A330s. The increase was partially offset in part by the repayments made and by the strengthening of the dollar against the U.S. dollar.

Outlook

Summer 2017 – 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 2017, total industry capacity is higher by 5%, while that of the Corporation is higher by 8%. To date, 80% of that capacity has been sold, load factors are lower by 0.7% versus those of summer 2016, and selling prices of bookings taken are higher by 3.2% than those recorded at the same date in 2016. The impact of increased fuel costs, combined with currency exchange fluctuations, will result in a decrease in operating expenses of 1.3% if 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, Transat's capacity is higher by 4% than that marketed at the same date last year. To date, 73% of that capacity has been sold, load factors are higher by 5.8%, and selling prices are higher by 6.5%. The impact of increased fuel costs, combined with currency-exchange fluctuations, will result in a decrease in operating expenses of 1.5% if fuel prices remain stable and the dollar remains at its current level against the U.S. dollar. Unit margins are currently higher by 6.0% compared with those recorded at the same date last year.

If the current trends hold, taking into account the costs of implementing Air Transat's feeder flights program, and despite the recent increase in fuel prices following hurricane Harvey, which will be attenuated by the hedging program, the Corporation expects its adjusted operating income¹ for the fourth quarter to be similar to 2015, which was $70.8 million for continuing operations. It is especially worth noting that other hurricanes, like Irma, could impact these forecasts.

Winter 2018 – For the winter season, 20% of capacity on the sun destinations market has been sold to date, versus 18% at the same date in 2016. Moreover, the outlook for the Canadian dollar's value against its U.S. counterpart is far more favourable compared with the same date in previous years. Despite these indicators, the Corporation considers that it is too soon to provide any indication regarding winter season results.

Additional information

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

Highlights and impact of non-operating items on results
(in thousands of $ Cdn)
CONTINUING OPERATIONS		Third quarter		First nine months
		2017	2016	2017	2016
Revenues		733,152	663,591	2,306,794	2,277,535
Operating income (loss)		40,952	(2,990)	(24,780)	(57,233)
	Lump-sum payments – collective agreement	—	4,200	—	4,200
	Restructuring charge	1,350	3,700	1,350	3,700
	Depreciation and amortization	18,077	12,111	49,435	35,335
	Premiums related to derivatives matured during the period	(1,324)	(1,057)	(2,521)	(6,723)
Adjusted operating income (loss)^1		59,055	15,964	23,484	(20,721)
Income (loss) before taxes		37,731	11,755	(18,996)	(95,064)
	Lump-sum payments – collective agreement	—	4,200	—	4,200
	Restructuring charge	1,350	3,700	1,350	3,700
	Fuel-related derivatives and other derivatives	341	(13,922)	(3,533)	24,042
	Loss on disposal of a subsidiary	—	—	—	843
	Asset impairment	—	—	—	15,809
	Premiums related to derivatives matured during the period	(1,324)	(1,057)	(2,521)	(6,723)
Adjusted pre-tax income (loss)^2		38,098	4,676	(23,700)	(53,193)
Net income (loss) attributable to shareholders		26,588	9,439	(13,839)	(76,668)
	Net (income) loss from discontinued operations	—	(1,735)	—	5,645
	Lump-sum payments – collective agreement	—	3,074	—	3,074
	Restructuring charge	988	2,708	988	2,708
	Fuel-related derivatives and other derivatives	250	(10,190)	(2,586)	17,600
	Loss on disposal of a subsidiary	—	—	—	615
	Asset impairment	—	—	—	12,222
	Premiums related to derivatives matured during the period	(969)	(773)	(1,845)	(4,921)
Adjusted net income (loss)^3		26,857	2,523	(17,282)	(39,725)
Diluted earnings (loss) per share		0.72	0.26	(0.37)	(2.08)
	Net (income) loss from discontinued operations	—	(0.05)	—	0.15
	Lump-sum payments – collective agreement	—	0.08	—	0.08
	Restructuring charge	0.03	0.07	0.03	0.07
	Fuel-related derivatives and other derivatives	0.01	(0.28)	(0.07)	0.48
	Loss on disposal of a subsidiary	—	—	—	0.02
	Asset impairment	—	—	—	0.31
	Premiums related to derivatives matured during the period	(0.03)	(0.02)	(0.05)	(0.13)
Adjusted net income (loss) per share^3		0.73	0.07	(0.47)	(1.08)

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 mitigate exchange-rate exposure stemming from its expenses and/or revenues in foreign currencies. For the third quarter of 2017, this translates into a $0.3 million non-cash loss ($0.3 million after income taxes), compared with a gain of $13.9 million ($10.2 million after income taxes) in 2016. For the nine-month period, this translates into a $3.5 million non-cash gain ($2.6 million after income taxes), compared with a $24.0 million loss ($17.6 million after income taxes) in 2016.

The Corporation uses hedging instruments to mitigate exchange-rate exposure stemming from its expenses and/or revenues in foreign currencies. Accordingly, under applicable accounting standards, any fluctuations resulting from mark-to-market adjustments of these instruments are recorded in the consolidated statement of financial position and consolidated statement of comprehensive income rather than in the consolidated statement of income. For the third quarter of 2017, Transat recorded a loss of $23.8 million ($17.4 million after income taxes) on these foreign-currency hedging instruments, compared with a gain of $11.8 million ($8.7 million after income taxes) in 2016. For the nine-month period, Transat recorded a loss of $18.1 million ($13.2 million after income taxes) on these foreign-currency hedging instruments, compared with a loss of $23.4 million ($17.1 million after income taxes) in 2016.

Summary of non-operational items – Before non-operating items, Transat posted an adjusted net income³ of $26.9 million for the third quarter of 2017 ($0.73 per share), compared with $2.5 million for the third quarter of 2016 ($0.07 per share). For the nine-month period, the Corporation recorded an adjusted net loss³ of $17.3 million ($0.47 per share) compared with one of $39.7 million in 2016 ($1.08 per share).

Transat A.T. Inc. is a leading integrated international tourism company specializing in holiday travel and active in air transportation, accommodation, travel packaging and distribution. It operates mainly in Canada, Europe, Mexico and the Caribbean, with some 25 destination countries, and distributes products in over 50 countries. Based in Montreal, the company has 5,000 employees. Transat is firmly committed to sustainable tourism development, as reflected in its multiple corporate responsibility initiatives over the past 10 years, and was awarded Travelife Partner status in 2016. The vacation travel companion par excellence, Transat celebrates its 30th anniversary in 2017 (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 (adjusted operating loss): Operating income (loss) before depreciation and amortization expense, restructuring charge, lump-sum payments related to collective agreements and other significant unusual items, including premiums for fuel-related derivatives and other derivatives matured during the period. The Corporation uses this measure to assess its operational performance before the impact of the above-mentioned factors, thus ensuring 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 disposal of a subsidiary, restructuring charge, lump-sum payments related to collective agreements, impairment of assets and other significant unusual items, including premiums for fuel-related derivatives and other derivatives matured during the period. The Corporation uses this measure to assess its financial performance before the impact of the above-mentioned factors, thus ensuring better comparability of financial results.
3. Adjusted net income (adjusted net loss): Net income (loss) attributable to shareholders before net income (loss) from discontinued operations, change in fair value of fuel-related derivatives and other derivatives, gain (loss) on disposal of a subsidiary, restructuring charge, lump-sum payments related to collective agreements, impairment of assets and other significant unusual items, including premiums for fuel-related derivatives and other derivatives matured during the period, net of related taxes. The Corporation uses this measure to assess its financial performance before the impact of the above-mentioned factors, thus ensuring better comparability of financial results. Adjusted net income is also used in calculating the variable compensation of employees and senior executives.

Conference call

Third quarter 2017 conference call: Thursday, September 7, 10:00 a.m. Dial 1-800-926-9801. Name of conference: Transat. Webcast: www.transat.com. The archived call will be available at 1-800-558-5253, access code 21846663, until October 7, 2017.

Non-IFRS 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 furnished to provide additional information and should not be considered as a substitute for measures of performance prepared in accordance with IFRS. All amounts 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. Factors that could lead actual results to differ include, among others, extreme weather conditions, fuel prices, war, terrorism, market and general economic conditions, disease outbreaks, demand fluctuations related to seasonality in the travel industry, ability to reduce operating costs and workforce, labour relations, collective agreements and labour conflicts, issues related to pensions, exchange rate, interest rates, future funding, evolution of legal environment, introduction of unfavourable regulations, lawsuits and legal challenges, and other risks detailed from time to time in the Corporation's continuous disclosure documents.

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 Annual Information Form and Annual Report for the year ended October 31, 2016, 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.

Media: Christophe Hennebelle, Vice-President, Human Resources and Corporate Affairs, 514 987-1660, ext. 4584; Financial analysts: Denis Pétrin, Chief Financial Officer, 514 987-1660