Transat A.T. Inc. - Results for Second Quarter of 2018

For the second quarter:

• Revenues of $902.0 million ($884.3 million in 2017).
• Operating loss of $8.7 million ($15.1 million).
• Adjusted operating income1 of $6.6 million ($1.5 million).
• Net income attributable to shareholders of $6.7 million (net loss attributable to shareholders of $8.4 million)
• Adjusted net loss3 of $4.5 million ($8.1 million).

For the first six months:

• Revenues of $1.6 billion ($1.6 billion in 2017)
• Operating loss of $54.5 million ($65.7 million).
• Adjusted operating loss1 of $24.5 million ($35.6 million).
• Net income attributable to shareholders of $0.1 million (net loss attributable to shareholders of $40.4 million)
• Adjusted net loss3 of $38.4 million ($44.1 million).
• Sale of the subsidiary Jonview Canada Inc. for $48.9 million on November 30, 2017.

Transat A.T. Inc., one of the largest integrated tourism companies in the world and Canada's holiday travel leader, announces its results for the second quarter ended April 30, 2018.

"On a comparable basis versus last year, our adjusted operating income1 improved by $7.8 million for the quarter and $16.7 million for the winter season, despite the impact of hurricanes. We're satisfied with the improvement in our results, particularly in our sun destination market, while the transformation of our fleet will only take effect starting in summer 2019," stated Jean-Marc Eustache, President and Chief Executive Officer, Transat.

"Our hotel project is also moving forward satisfactorily. We've identified the first opportunities and we're setting up the structures of our division."

Second Quarter Highlights

The Corporation posted revenues of $902.0 million, compared with $884.3 million in 2017, an increase of $17.7 million or 2.0%. The increase was driven by a 4.8% rise in the number of travellers in the sun destination market, the Corporation's main market for the period, and of 10.7% in the transatlantic market. In addition, average selling prices were slightly higher in the transatlantic market and remained relatively unchanged in the sun destinations market. The increase in revenues was partially offset by the sale of the Jonview subsidiary and by the achievement of the Corporation's objective for flight-only sales compared to 2017.

Operations generated an adjusted operating income1 of $6.6 million compared with $1.5 million in 2017. This $5.1 million improvement was primarily due to an increase in the number of travellers, combined with slightly higher average selling prices in the transatlantic market, as well as the favourable foreign exchange effect (net of an increase in fuel prices) which reduced the operating expenses by $17.1 million. The improvement in adjusted operating income1was partially offset by lower load factors across all markets.

On a comparable basis, excluding the businesses sold recently (Ocean Hotels and Jonview), the adjusted operating income1 improved by $7.8 millioncompared with the previous year.

Net income attributable to shareholders amounted to $6.7 million or $0.18 per share (basic and diluted) compared with a net loss of $8.4 million or $0.23per share (basic and diluted) in 2017. Excluding non-operating items, Transat reported an adjusted net loss3 of $4.5 million ($0.12 per share) for the second quarter of 2018, compared with $8.1 million ($0.22 per share) in 2017.

Six-month Period Highlights

The Corporation recognized revenues of $1.6 billion, up $54.1 million or 3.4% from 2017. For the six-month period, the increase was mainly driven by a 5.4% rise in the number of travellers in the sun destination market, the Corporation's main market for the period, accentuated by a 14.8% increase in the number of travellers in the transatlantic market. In addition, average selling prices have slightly increased across all markets. Higher revenues were partially offset by the sale of the Jonview subsidiary and by the achievement of the Corporation's objective for flight-only sales compared to 2017.

For the winter season, operations generated an adjusted operating loss1 of $24.5 million compared with $35.6 million in 2017, an improvement of $11.1 million. The decrease in adjusted operating loss1 was primarily due to an increase in the number of travellers, combined with slightly higher average selling prices across all markets, as well as the favourable foreign exchange effect (net of the increase in fuel prices), which reduced operating expenses by $30.4 million. The decrease in adjusted operating loss1 was partially offset by lower load factors across all markets.

On a comparable basis, excluding the businesses sold recently (Ocean Hotels and Jonview), the adjusted operating loss1 decreased by $16.7 millioncompared with the previous year.

Net income attributable to shareholders was $0.1 million or $0.00 per share (basic and diluted), compared with a net loss of $40.4 million or $1.10 per share (basic and diluted) for the corresponding period of the previous year. Excluding non-operating items, Transat reported an adjusted net loss3 of $38.4 million ($1.02 per share) for the first six months of 2018, compared with $44.1 million ($1.20 per share) in 2017.

Sale of Jonview Canada Inc.

On November 30, 2017, the Corporation completed the sale of its subsidiary Jonview, which has an incoming tour operator business in Canada, to Japanese multinational H.I.S. Co. Ltd., which specializes in travel distribution. Under the terms of the agreement, the selling price was adjusted downward owing to a working capital adjustment of $0.6 million, paid to H.I.S. Co. Ltd. on March 29, 2018, and totals $48.9 million, of which $47.3 million was received in cash on November 30, 2017. The Corporation recognized a gain on business disposal of $31.3 million, net of transaction costs of $0.5 million and of $3.7 million due to the Fonds de Solidarité des Travailleurs du Québec [the "Fonds"], as an additional consideration to the repurchase price of the 19.93% interest held by the Fonds in December 2016.

Financial Position

As at April 30, 2018, cash and cash equivalents amounted to $903.3 million, compared with $566.3 million on the same date in 2017. The increase of $337.0 million was primarily due to the proceeds from the disposal of Ocean Hotels and Jonview as well as to positive cash flows generated by operations. The working capital ratio was 1.40, compared with 1.14 as at April 30, 2017. Deposits from customers for future travel amounted to $588.9 million, compared with $523.8 million as at April 30, 2017.

Off-balance-sheet agreements, excluding contracts with service providers, stood at $1,796.5 million as at April 30, 2018, compared with $1,745.2 million as at October 31, 2017. The $51.3 million increase resulted from the agreements entered into during the first quarter to lease two Airbus A321ceos and two Airbus A330s. The increase was partially offset by the repayments made and by the strengthening of the dollar against the U.S. dollar.

Outlook

Summer 2018 - 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 May to October 2018, the Corporation's capacity is higher by 15%. To date, 64% of the capacity has been sold, load factors are similar to those of summer 2017, and selling prices of bookings taken are lower by 1.0% than those recorded at the same date in 2017. Higher fuel costs, combined with currency variations, will result in an increase in operating costs of 7.2% if jet fuel prices remain stable and the dollar remains at its current level against the U.S. dollar, the euro and the pound. On March 15, 2018, the rise in jet fuel costs resulted in a 1.3% increase in operating expenses. Since the beginning of April, the price of jet fuel increased by 11%.

On the sun destinations market outbound from Canada, for which summer is low season, Transat's capacity is higher by 5% than the previous year. To date, 53% of that capacity has been sold and load factors are ahead by 1%, when compared to 2017. The impact of increased fuel costs, combined with the dollar fluctuations, will result in an increase in operating expenses of 2.3% if jet fuel prices and the dollar level against the U.S. dollar remain stable. Unit margins are currently slightly lower than they were on the same date last year.

If current trends hold, and considering the recent significant increase in jet fuel costs, Transat expects that its global results for the second six-month period will be lower than last year.

Additional Information

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

Hedging - The Corporation records in the statement of income (loss) 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. In the second quarter of 2018, this resulted in a $14.8 million non-cash gain ($10.9 million after income taxes), compared with a $0.9 million loss ($0.7 million after income taxes) in 2017. For the six-month period, this resulted in a $10.6 million non-cash gain ($7.8 million after income taxes), compared with $3.9 million ($2.8 million after income taxes) in 2017.

The Corporation uses hedging 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 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 second quarter of 2018, Transat recorded a gain of $16.0 million ($11.7 million after income taxes) on these foreign exchange derivatives, compared with $11.4 million ($8.3 million after income taxes) in 2017. For the six-month period, Transat recorded a loss of $1.1 million ($0.8 million after income taxes) on these foreign exchange derivatives, compared with a gain of $5.7 million ($4.1 million after income taxes) in 2017.

Refer to full documentation in attachments box, located at the top left, below the headline.