Transat A.T. Inc.- Results for Fourth Quarter and Fiscal 2014

"A very satisfying, second-best summer ever"

For the fourth quarter:

• Revenues of $844.7 million, compared with $808.6 million in 2013.
• Adjusted operating income¹ of $72.9 million, compared with $80.6 million in 2013.
• Adjusted net income³ of $49.4 million, compared with $54.8 million in 2013.

For the 12-month period:

• Revenues of $3.8 billion, compared with $3.6 billion in 2013.
• Adjusted operating income¹ of $91.8 million, compared with $116.6 million in 2013, a decrease of $24.8 million (the decline in value of the Canadian dollar alone resulted in an increase in operating expenses of $36.0 million during the winter season).
• Adjusted net income³ of $45.2 million, compared with $62.6 million in 2013.

MONTREAL, Dec. 11, 2014 /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 844.7 million for the quarter ended October 31, 2014, compared with $808.6 million in 2013, an increase of $36.1 million, or 4.5%. The Corporation recorded adjusted operating income¹ of $72.9 million, compared with $80.6 million in 2013; and net income of $30.6 million ($0.79 per share on a diluted basis), compared with $54.7 million ($1.40 per share on a diluted basis) in 2013. Before non-operating items, Transat reported adjusted net income³ of $49.4 million in 2014 ($1.27 per share on a diluted basis), compared with $54.8 million ($1.40 per share on a diluted basis) in 2013.

"We recorded very good results on the transatlantic market, and we recorded a profit on sun destinations and in France. In spite of a 10% increase in supply on our European routes, our numbers for the summer are among our best," commented Jean-Marc Eustache, Transat's President and Chief Executive Officer, adding: "In the entire history of the company, we've done better only once, last year, which was a record. We delivered on all fronts, including costs, product, marketing, yield management, and the outcome is a very satisfying summer season."

"For the year as a whole, our results also reflect initiatives stemming from our cost reduction and margin improvement plan, through which we delivered a favourable variance of $55 million in 2014 compared to 2011, including $20 million in 2014, partially offset by the decrease of the Canadian dollar and market conditions," added Mr. Eustache, who said the broad guidelines of Transat's strategic plan for 2015-2017 will be unveiled in March.

Fourth-quarter highlights

The Corporation posted revenues of $844.7 million, compared with $808.6 million in 2013, an increase of $36.1 million, or 4.5%, and adjusted operating income¹ of $72.9 million, compared with $80.6 million for the same period of 2013. During the quarter, the number of travellers increased by 5.4% compared with last year. Average selling prices were up, and the euro and pound traded higher against the Canadian dollar. The lower adjusted operating income is attributable to the conditions on the transatlantic market, where the overall capacity was 10% greater compared with 2013.

Revenues of North American business units, which are generated by sales in Canada and abroad, increased by $28.8 million (5.0%) compared with the same period in 2013. The increase stemmed from an increase of 3.3% in the number of travellers and higher average selling prices. During the quarter, the Corporation's capacity was similar to the previous year on the transatlantic market, and up by 7% on sun destinations. North American business units recorded an adjusted operating income of $55.5 million, compared with $69.1 million in 2013. The decline in value of the Canadian dollar versus the U.S. dollar, the euro and the pound led to an increase in operating expenses, partially offset by the Corporation's efforts to increase efficiency, but the decrease in adjusted operating income is attributable above all to the impact of a substantial increase in capacity on the transatlantic market.

Compared with 2013, revenues of European business units, which are generated by sales in Europe and in Canada, increased by $7.2 million (3.0%), owing to a 15.1% increase in the number of travellers, mainly in the medium-haul market segment, and to the strength of the euro and pound against the Canadian dollar. Measured in local currencies, average selling prices were slightly lower than in the same period in 2013, due to variances of the product mix. European operations generated an adjusted operating income of $17.4 million, compared with $11.5 million in 2013.

12-month period highlights

For fiscal 2014, the Corporation posted revenues of $3.8 billion, compared with $3.6 billion in 2013, and an adjusted operating income¹ of $91.8 million, compared with $116.6 million in 2013. The impact of the Corporation's decision to reduce capacity in its sun destinations, transatlantic and France markets and of lower load factors was offset by higher average selling prices and the conversion in Canadian dollars of revenues generated abroad ((given the increase in value of the euro and pound against the Canadian dollar). A significant portion of the Corporation's expenses is in U.S. dollars, euros and pounds. The increase in value of those currencies against the Canadian dollar led to increased operating expenses. The combined effect of increased selling prices plus efficiency gains was not sufficient to entirely offset the effects of those expense increases.

For the winter season, Transat posted revenues of $2.0 billion, versus $1.9 billion in 2013, and an adjusted operating loss¹ of $27.8 million, compared with $18.3 million in 2013. Capacity on sun destinations was similar to that of 2013, but the Corporation reduced its capacity on other markets, hence a 3.6% decrease in the number of travellers. Average selling prices were higher, and the euro and pound increased in value against the Canadian dollar. The increase in value of the US dollar against the Canadian dollar from the first quarter of 2014 led to increased operating expenses. The combined effect of increased selling prices plus efficiency gains was not sufficient to entirely offset the effects of those expense increases.

For the summer season, Transat posted revenues of $1.8 billion, versus $1.7 billion in 2013, and an adjusted operating income¹ of $119.7 million, compared with $134.9 million in 2013. The increase in revenues stems from the conversion of revenues recorded abroad (given the rise of the euro and pound compared to the Canadian dollar), higher average selling prices and a 2% increase in the number of travellers. The decrease in value of the Canadian dollar against the US dollar, euro and pound led to increased operating expenses, offset in part by efficiency gains, but the decrease in adjusted operating income¹ stems mainly from a 10% overall capacity increase in the transatlantlic market, which had a negative impact on selling prices and load factors.

Financial situation

As at October 31, 2014, the Corporation's free cash totalled $308.9 million, compared with $265.8 million at the same date in 2013. The increase is attributable to the past 12 months earnings, the impact of exchange rates on the cash balances of European business units and to new agreements with European credit card processors. The working capital ratio was 1.12, compared to 1.10 as at October 31, 2013, and deposits from customers for future travel amounted to $424.5 million, compared with $410.3 million as at October 31, 2013. Off-balance-sheet agreements, excluding contracts with service providers, stood at $690.3 million as at October 31, 2014, compared with $655.8 million as at October 31, 2013⁴, the increase being attributable to leasing agreements for 8 seasonal Boeing 737 aircraft, and the rise of the US currency, partially offset by payments made during the period.

Outlook

On the Sun destinations market outbound from Canada, Transat's capacity is approximately 6% lower than that offered last year and 41% of that capacity has been sold. Load factors are up 1.2% and selling prices are 1.4% higher compared to last year at the same date.

On the transatlantic market, where it is low season, Transat's capacity is down 2% compared to that offered last winter. To date, 44% of that capacity has been sold. Load factors are up 2% and selling prices are similar.

In France, also in low season in winter, bookings are down 5% and selling prices are similar compared with last year at the same date.

The impact of the weaker Canadian dollar, net from lower fuel costs, will be a 1.3% increase in operating costs if the dollar and fuel costs stay at their current level.

In summary, the sun destinations market, where margins are especially thin and volatile, accounts for a very significant portion of Transat's business in the winter. The following factors make forecast difficult: the overall supply is more than 10% superior to the previous year, a significant portion of the capacity remains to be sold, bookings are last-minute, the Canadian dollar is weakening, and fuel costs are decreasing. To date, margins are similar to those of the previous year at the same date. Knowing that a sudden decrease of the Canadian dollar, which started at the end of December last year, had a significant negative impact on the Corporation's results in 2014, it is difficult to make any comparative forecast for the winter.

Cost-reduction and margin-improvement initiatives

The Corporation is continuing to implement its initiatives to reduce operating costs, improve margins, and make changes to its systems and processes, including internalization at Air Transat of a flexible fleet of narrow-body aircraft. These measures had, as expected, a favourable impact of $20 million on the margin in 2012, $15 million in 2013 and $20 million in 2014, or $55 million over three years. Cost-control efforts will continue in the coming years as part of the 2015-2017 strategic plan, including additional savings and gains totalling $20 million in 2015. The Corporation will disclose the thrust of its 2015-2017 strategic plan in March.

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 CAD)
		Fourth quarter		12-month period
		2014	2013	2014	2013
Revenues		844,654	808,616	3,752,198	3,648,158
Operating margin		54,227	70,096	38,746	71,838
	Depreciation and amortization	14,475	9,959	46,702	39,068
	Restructuring charge	4,161	507	6,387	5,740
Adjusted operating income^1		72,863	80,562	91,835	116,646
Result before taxes		37,958	72,519	29,824	80,712
	Impact of fuel-hedging accounting	21,105	(516)	23,822	493
	Restructuring charge and goodwill	4,530	507	6,756	5,740
Adjusted after-tax income^2		63,593	72,510	60,402	86,945
Adjusted net income attributable to shareholders		30,607	54,723	22,875	57,955
	Impact of fuel-hedging accounting	15,360	(364)	17,355	324
	Restructuring charge and goodwill	3,386	465	5,012	4,288
Adjusted net income^3		49,353	54,804	45,242	62,567
Diluted earnings per share		0.79	1.40	0.59	1.51
	Impact of fuel-hedging accounting	0.39	(0.01)	0.44	0.01
	Restructuring charge and goodwill	0.09	0.01	0.13	0.11
Adjusted net income per share^3		1.27	1.40	1.16	1.63

Hedging – The Corporation records any gains or losses resulting from mark-to-market adjustments of the derivative financial instruments used to manage aircraft fuel-price risk in the statement of income. For the fourth quarter of 2014, this translates into a $21.1 million non-cash loss ($15.4 million after income taxes), compared with a gain of $0.5 million ($0.4 million after income taxes) in 2013. For the 12-month period, this represents a non-cash loss of $23.8 million ($17.4 million after income taxes), compared with $0.5 million ($0.3 million after income taxes) in 2013.

The Corporation also 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 fourth quarter of 2014, Transat recorded a $20.1 million gain ($14.7 million after income taxes) on these foreign-currency hedging instruments, compared with a $1.6 million gain ($1.2 million after income taxes) for the corresponding quarter in 2013. For the 12-month period, Transat records a gain of $12.9 million ($9.3 million after income taxes) on these foreign-currency hedging instruments, compared with a $3.8 million gain ($2.9 million after income taxes) in 2013.

Summary of non-operating items – Before non-operating items, Transat posted an adjusted net income³ of $49.4 million ($1.27 per share on a diluted basis) for the fourth quarter of 2014, compared with $54.8 million ($1.40 per share on a diluted basis) in 2013. For the 12-month period, the Corporation is recording an adjusted net income³ of $45.2 million ($1.16 per share on a diluted basis), compared with $62.6 million ($1.63 per share on a diluted basis) in 2013.

Transat A.T. Inc. is an integrated international tour operator with more than 60 destination countries and that distributes products in over 50 countries. A holiday travel specialist, Transat operates mainly in Canada and Europe, as well as in the Caribbean, Mexico and the Mediterranean Basin. Montreal-based Transat is also active in air transportation, accommodation, destination services and distribution. (TSX: TRZ.B, TRZ.A)

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 (operating loss) before depreciation and amortization expense, restructuring charge and other significant unusual items.
(2)	Adjusted after-tax income: Income before income taxes, impact of fuel hedge accounting, gain on disposal of a subsidiary, restructuring charges, impairment of goodwill andother significant unusual items.
(3)	Adjusted net income: Net income attributable to shareholders before impact of fuel hedge accounting, gain on disposal of a subsidiary, restructuring charges, goodwill impairment and other significant unusual items, net of applicable income taxes.
(4)	The off-balance-sheet agreements amount as at October 31, 2013, as reported in the news release for the fiscal year ended October 31, 2013, included commitments under agreements with air suppliers in the amount of $112.5 million. That amount should have been excluded from the off-balance-sheet agreements.

Conference call

Fourth quarter 2014 conference call: Thursday, December 11, 2014, 10:00 a.m. Dial 1-800-954-0604. Name of conference: Transat. Webcast: www.transat.com. The archived call will be available at 1-800-997-6910, access code 21743204, until January 10, 2015.

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 press 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 press 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, 2013, 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: Debbie Cabana, 514 987-1616, ext. 4662; Financial analysts: Denis Pétrin, Chief Financial Officer, 514 987-1660; (www.transat.com)