CA - Transat A.T. Inc. (TRZBF) Q4 2023 Earnings Call Transcript
2023-12-14 12:02:10 ET
Transat A.T. Inc. (TRZBF)
Q4 2023 Earnings Conference Call
December 14, 2023 10:00 AM ET
Company Participants
Andréan Gagné - Senior Director Communications and Public Affairs
Annick Guérard - President and CEO
Patrick Bui - CFO
Conference Call Participants
Cameron Doerksen - National Bank Financial
Konark Gupta - Scotiabank
Kevin Chiang - CIBC
Benoit Poirier - Desjardins
Presentation
Operator
Good morning, ladies and gentlemen and welcome to the Transat A.T. Inc. Fourth 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. [Operator Instructions] Also note that this call is being recorded on Thursday, December 14, 2023.
And I would like to turn the conference over to Andréan Gagné, Senior Director Communications and Public Affairs. Please go ahead.
Andréan Gagné
[Foreign Language] Hello everyone and thank you for attending our earnings call for the fourth quarter ended October 31, 2023. I'm here this morning with Annick Guérard, President and CEO; and Patrick Bui, 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 after cover our financial results in more detail. 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 investors 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. They are based on assumptions and subject to risk and uncertainty. Forward-looking statements represent Transat's expectation as of December 14, 2023, and accordingly, are subject to change after such date. Our actual results could 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 SEDAR+.
With that, let me turn over the call to Annick for opening remarks.
Annick Guérard
Good morning, everyone. Thank you for joining us for the fourth quarter and 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 gained 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 $263 million or a margin of 8.6% on revenues of $3 billion. These solid results to represent a major turnaround compared to fiscal 2022 which was still impacted by the persisting effects of the COVID pandemic. More importantly, we also exceeded 2019 levels on all these metrics.
In 2023, we also generated more than $162 million in free cash flow reflecting in part land sale in Mexico that we use 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 capital structure. Patrick will provide you with more details in a few minutes, but this solid improvement in cash flow was 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-around flights and launching service to new promising destination; 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 fourth quarter, driven by robust yields, we delivered revenues of $764 million, 10% above 2019 levels on 7% less capacity and with similar load factors. On the profitability side, adjusted EBITDA reached $89 million, capping off a strong second half in which adjusted EBITDA exceeded $200 million.
Looking ahead to the new fiscal year, Transat will continue to focus on executing its strategic plan. 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 across the markets we serve. This feeder network strategy is designed to accelerate expansion in our respective key markets, which for Transat consist of international, medium and long haul flights. At full potential, we expect Porter's 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: First, continuing our ongoing efforts to improve fleet utilization; second, increasing the frequency of best performing routes and European destination from both Montreal and Toronto; third, extending service to year-around flights to key destinations. In this regard, we have announced year-around service to Lyon, Marseille, Costa Rica and El Salvador from Montreal, which further reinforces Air Transat's leading position in the Canadian market for travel to Europe and Latin America. Fourth, beginning service to promising destinations 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 & Whitney engine issue, which is also impacting other airlines in the industry. 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. We are working in close collaboration with Pratt & Whitney. They have been supportive on all aspects including future financial compensation. Further updates will be provided as the situation evolves.
Second 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. However, customer demand for international leisure travel from Canada remains favorable. This is supported by our booking curves that remain 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. 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. More importantly, we are also well positioned for accelerated growth in 2024 through our JV with Porter, capacity expansion initiative and increased operating efficiency.
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-François Pruneau as Chief Financial Officer. Jean-François has over 25 years of experience in executive roles at major Quebec and Canadian companies. 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-François will join us in a few weeks on January 9th.
This concludes my comments. Patrick will now review our financial results.
Patrick Bui
Thank you, Annick, and good morning, everyone. We are pleased with our fourth quarter results that exceeded expectations. Demand remained healthy throughout the period, resulting in a solid 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 improvements for the quarter and the year, I am even more satisfied with Transat's significant cash flow generation throughout fiscal 2023. 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.
We have also announced today that we have entered into an agreement to sell our 50% equity interest in the Marival Armony Resort to our partner. The transaction is expected to generate proceeds of US$15.5 million 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 be used to repay senior debt.
As we progress in deleveraging our balance sheet and enhancing our cash flow profile, we concurrently 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.
Now let's turn to our fourth quarter results. Revenues reached $764.5 million, 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 million representing an 11.6% margin compared to a loss of $11.5 million in the same period last year. Of note, this significant year-over-year improvement was achieved despite higher fuel costs and a weaker Canadian dollar versus U.S. dollar. For the second consecutive quarter, net income was positive, totaling $3.2 million in Q4 2023 compared to a net loss of $126.2 million in Q4 2022.
Adjusted net income, which excludes items that affect comparability, was also positive, reaching $15.7 million compared to an adjusted net loss of $75.9 million in the fourth quarter last year. Cash flow from operating activities totaled $321.8 million in fiscal 2023 as opposed to negative $177.9 million in 2022, mainly driven by improved profitability and better working capital. Free cash flow reached $162.4 million in 2023, compared to negative $320 million in 2022. This year's free cash flow also includes proceeds from the sale of land in Mexico completed in the fourth quarter, which was used to reimburse $53 million 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 $162.4 million generated in the 12 month period ended October 31, 2023 marks an improvement from $152.7 million achieved in the 12 month period ended last July.
Moving on to our balance sheet. Reflecting solid cash flow generation, our cash position totaled $435.6 million as at October 31, 2023, up from $322.5 million a year earlier. Based on steady demand and higher average selling prices, customer deposits for future travel stood at $754.2 million at year-end, up 25% from the end of 2022.
Following debt repayment, Transat's long-term debt and deferred government grant stood at $815.8 million at the end of fiscal 2023, compared with $833.2 million at year-end. Long term debt and deferred government grants, net of our growing cash position, amounted to $380.2 million, down significantly from $510.7 million last year.
Turning to our outlook. 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 US$1; 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 & 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.
In closing, as you know, this is my last week at Transat. I'm very proud of the progress accomplished by the entire organization since I joined in 2021. Transat 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 its financial profile quarter after quarter.
This concludes my prepared remarks. We will now open the call for questions from analysts.
Annick Guérard
Maybe just before, we take questions, there is a recent development to share that we are very happy about. We have just reached an agreement in principle with CUPE, 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.
Question-and-Answer Session
Operator
[Operator Instructions] And the first question will be from Cameron Doerksen of National Bank Financial.
Cameron Doerksen
So maybe just a couple of questions on yields that you're seeing. If I go back to what you reported in Q3 as far as the winter outlook, your book to load factor was up I think 2 points of that time, yields up about 7%. And then with the update this morning, your book to load factor 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?
Annick Guérard
Yes. 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 percent points compared to last year, but it needs to consider that we have increased capacity by 20%. 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. Promotion reached a record sale, a 20% increase versus 2022, which is excellent. Clearly, people are looking to get possible value for money. We have witnessed slower 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.
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.
Cameron Doerksen
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 this 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?
Annick Guérard
They're similar. It's similar. What we see right now on Europe. Transatlantic is similar to what we see on the South. We have increased our program to transatlantic routes, it is performing well. 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.
Cameron Doerksen
No, that's great. I'll pass the line and just want to pass on my appreciation to Patrick, all the best in your new endeavors. Thanks.
Operator
Next question will be from Konark Gupta at Scotiabank.
Konark Gupta
I echo my congratulations to Patrick for his retirement. Just wanted to first maybe follow-up on the yield question Cam asked. Can you help us understand like the sequential trends in yield? I understand you had a promotion last month from Black Friday and Cyber Monday. But like 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?
Annick Guérard
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.
Konark Gupta
And sequentially, Annick, would you say like sequentially the yields have changed a lot versus last few months?
Annick Guérard
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 is 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. And we see more of a normalizing conditions in the market in terms of pricing.
Konark Gupta
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?
Annick Guérard
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 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 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 yields and load factor, it's trending in the right direction.
Konark Gupta
And last one for me on the capacity front. You have some grounding of A321LRs due to Pratt issue, and I think you'll see incremental 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? Like is it more front end loaded or back end loaded?
Annick Guérard
It's mostly across the year. Of course, with the Pratt & 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 ACMIs as well, being able to use our spare engine. So that has allowed us to maintain the capacity in the market.
Operator
Next question will be from Kevin Chiang at CIBC.
Kevin Chiang
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 fiscal 2024, you laid out 4 buckets. Are you able to kind of delineate how you'd segment that? Is it -- I suspect it's about 25% each. But like if you looked at what were the biggest drivers of that 19%, is it primarily the increase in service to new destinations and increased 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?
Annick Guérard
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 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. So we are very comfortable with the capacity increase we've put in the market.
Kevin Chiang
And I guess just a competitive response or any of that you might be seeing as you've taken a pretty step function increase in capacity. Are you seeing anything from your competitors that service the 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 then you're earning more money off the back of this?
Annick Guérard
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 South 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 than a 1/3 of growth to the South is generated by a low cost airline and Transat has an advantage with a strong customer their base looking for packages that these airlines do not offer. So it's difficult for low-cost airlines to win market share without a tour operator business for South market. And this is a service by the way that we will offer our partner Porter Airlines.
Kevin Chiang
I know it just kind of hit the wire as the call started and I know it'll go in front of the rank and file for the union and they'll vote on it. But does that impact -- or maybe I'll ask it this way, the way 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?
Annick Guérard
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.
Kevin Chiang
And maybe just last one for me, I know a lot of questions on yields this morning. When you look at, I guess, the cadence of the yields as it progressed versus what you guided to on the fiscal 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?
Annick Guérard
Exactly. This is exactly what we had anticipated for the upcoming winter.
Operator
[Operator Instructions] And next will be Benoit Poirier at Desjardins.
Benoit Poirier
Just in terms of guidance, I appreciate the guidance. But are there any other elements we should consider for fiscal year '24? 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?
Patrick Bui
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. There is a notion of catch up with heavy maintenance with respect to our aircrafts. 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.
Benoit Poirier
And obviously, you've signed the new alliance with Porter is scheduled to begin to be implemented gradually throughout 2024. I was wondering if you take into account any impact or assumption for this in your new guidance? And any color about the timing on when do you expect the 15% to 18% growth from quarter to start bearing fruit?
Patrick Bui
Yes. So, with respect to Porter, to be clear, so 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 code share 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 18% 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.
Benoit Poirier
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?
Annick Guérard
This is an element that is extremely important for us. Currently, we are evaluating various options to create a Transat loyalty program. The expected timeline for implementation would 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.
Benoit Poirier
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-François and looking forward to meeting you.
Operator
Thank you. And at this time, we have no further questions. Please proceed.
Andréan Gagné
Thank you. No more questions, Sibi?
Operator
No more questions. Please proceed.
Andréan Gagné
Thank you. Thank you, everyone. Lastly, let me inform you that our first quarter 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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Transat A.T. Inc. (TRZBF) Q4 2023 Earnings Call Transcript