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[Foreign Language] Good morning, ladies and gentlemen. Welcome to the Transat Conference Call. [Foreign Language] This conference is being recorded. [Foreign Language] I would now like to turn the meeting over to Mr. Christophe Hennebelle, Vice President of Corporate Affairs. Mr. Hennebelle, [Foreign Language].
Hello everyone, and welcome to the Transat Conference call for the presentation of the financial results of the fourth quarter and year ended October 31, 2019. I'm here with Jean-Marc Eustache, President and CEO; Annick Guérard, COO; and Denis Pétrin, our CFO. Denis will review the financial results, and we'll then answer questions from financial analysts. Questions from journalists will be handled off-line. The conference call will be in English, but questions may be asked in French or English. As usual, our investor's presentation has been updated and is posted on our website in the Investors section. Denis may refer to it as he comments. Today's call contains forward-looking statements. There are risks that actual results will differ materially from those contemplated by those forward-looking statements. For additional information on such risks, please consult our filings with the Canadian Securities Commissions. The call also contains certain forward-looking statements concerning a transaction involving the acquisition of all the shares of the corporation. These statements are based on certain assumptions deemed reasonable by the corporation, which are subject to certain risks and uncertainties, several of which are outside of the control of the corporation which may cause actual results to vary materially. In particular, the completion of a transaction will be subject to customary closing conditions, including regulatory approvals, particularly those of Canada and the European Union.Notably, 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 expected that the transaction will be completed by the second quarter of the calendar year 2020. Forward-looking statements represent Transat's expectations as at December 12, 2019, and accordingly, are subject to change after such date. However, we disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, other than as required by law. Finally, we may refer to IFRS and non-IFRS financial measures. In addition to IFRS financial measures, we are using non-IFRS measures to assess the corporation's operational performance. It is likely that the non-IFRS financial measures used by the corporation will not be comparable to similar measures reported by other issuers or those used by financial analysts as their measures may have different definitions. The measures used by the corporation are intended to provide additional information and should not be considered in isolation or as a substitute for IFRS financial performance measures. Additional information on non-IFRS financial measures, such as their definition and their reconciliation with the more comparable IFRS measures are available in our annual report. With that, let me turn the call over to Denis.
Thank you, Christophe. Good morning, everyone. We are reporting today our numbers for the second half of the summer, our fourth quarter for which the results are primarily driven by the transatlantic program. As usual, I will review the financial results and then share our outlook for the next winter. At the end, I will also make some comments on the plan of arrangement signed with Air Canada. But first, as I did last September, allow me to say a few words on the adoption of 2 accounting standards and the impact on comparative numbers. Corporation adopted IFRS 9 financial instruments and IFRS 15, revenue from contracts with customers on November 1, 2018, and restated the 2018 figures. The main changes are described in the Note 4 of our financial statements. Here are the most important ones. On our statement of income, revenue and related costs from the land portion of holiday packages are now recognized over the course of the stay. Prior to the adoption of IFRS 15, revenue was recognized when passengers departed. All airport taxes are now reported on a net basis. Prior to the adoption of IFRS 15, revenue from certain airport taxes were reported gross and a corresponding expense was recorded. The impact for the quarter ended October 31, 2018, consisted in a $1 million increase in revenue and a $4 million decrease in EBITDA. On our statement of financial position, from November 1, 2018 onwards, the adoption of IFRS 15 led to a modification of all the balance of cash and trust or otherwise reserved is calculated. As of October 31, 2019, the impact is a $14 million increase of cash interest and equivalent decrease in our free cash position. For more information, starting next quarter, the adoption of the new standard IFRS 16 on leases will be reflected in our financial statement. Now the fourth quarter. Globally, results were in line with the outlook expressed last September. For all programs combined, Q4 results were as follows: revenues of $693 million, up $24 million or 3.6% from 2018. And adjusted operating income of $51 million compared with $31 million last year. The adjusted net income was $27 million compared with $14 million in 2018. On our transatlantic routes, our main program during the summer, our capacity was the same than last year. Selling prices were up 1.8%, our load factor was down 0.7%, the combined effect of fuel costs and currency fluctuations did not result in an increase in operating expenses. Consequently, margins were higher than last year. On our Sun Destination Program, capacity was 3% lower, but selling prices of our packages were 3.9% higher and our load factor was up 1.7%. Again, here, margins were higher than last year. Globally, due to higher average selling prices and ancillary revenues, even taking into account more maintenance events than last year, profitability for the quarter was higher than in 2018. Looking now at the entire summer. We recorded an adjusted operating income of $73 million compared with $34 million a year ago. Our adjusted net income was $33 million versus $9 million in 2018. The improvement of our summer 2019 results was driven primarily by higher average selling prices and load factor across all our programs and growth in ancillary revenues. For financial statement, we've recorded a net income of $9 million compared with $2 million in 2018. This summer, the increase in operating income as per financial statement was partially offset by the costs associated with the transaction with Air Canada totaling $24 million. For the year, revenue were $2.9 billion, an increase of 3% compared to last year. Our adjusted operating income was $38 million compared with $17 million in 2018. We recorded a net adjusted net loss of $9 million compared with $24 million a year ago. And as per financial statements, we recorded a net loss of $33 million versus a net income of $6 million in 2018.This year results included after-tax expenses of $18 million related to the transaction with Air Canada while net income for 2018 included a $31 million gain on the sale of the corporation's subsidiary Jonview.A glimpse at the winter 2020 outlook now. On the Sun destinations, when compared with winter '19, global capacity is 5% higher, Transat capacity is up 7%. And on that capacity, 56% has been sold. Currently, bookings are up 13%, and load factor are up 3.4%. Combined effect of U.S. dollar fluctuation and fuel costs does not currently have a significant impact on operating expenses. Taking account all those metrics, unit margin are slightly higher than those recorded on the same date last year. On the transatlantic program were against the low season during the winter, 55% of the capacity has been sold, load factors are up 1.6%, and prices are also up 4.2%. These trends old results should be slightly improved compared to those of last year. Now for our balance sheet. Corporation's free cash totaled $565 million as of October 31, 2019. A decrease of $29 million versus a year ago, which is mainly due to the adoption of IFRS 15, which led to a modification of how the balance of cash interest or otherwise reserve is calculated for $14 million. The acquisition of a spare engine for the introduction of the Airbus A321neo fleet for $17 million, the acquisition of a parcel of land adjacent to the one purchased at the end of 2018 in Puerto Morelos in Mexico for $16 million and professional fee related to the transaction with Air Canada of $10 million. Finally, the settlement of a litigation in the court, the state of New York, that happened earlier this year for $7 million. Obviously, with that cash position, our credit facilities remain unused. The deposit for future travel stood at $561 million compared with $517 million at the same date last year. Off-balance sheet agreements stood at $2.2 billion as of October 31. The decrease of $297 million is due to repayments made during the year, combined with the decrease in long-term interest rates used to estimate rents for Airbus A321neo to be added to our fleet by 2022. As said earlier, IFRS 16 leases will be applied as of Q1 2020, next quarter. The net present value of the future lease payments will be accounted on the balance sheet as an asset and as a liability. Furthermore, cost of major maintenance, engines, fuselage, landing gears, will be capitalized and amortized over their useful life. This will eliminate the need for a provision for overall of leased aircraft as presently shown on our balance sheet. The application of IFRS 16 will have a major impact on our financial statements. We have completed the scoping exercise and lease review and we are currently finalizing the quantification of the application on our consolidated financial statements. You may refer to the Note 5 on future changes in accounting policy in our financial statements for further details. A few remarks on the transaction with Air Canada. August 23, 2019, a significant majority of our corporation's shareholders voted in favor of the special resolution approving the previously announced plan of arrangement pursuant to which Air Canada will acquire all of the issued and outstanding voting shares of Transat for a cash consideration of $18 per share. On August 29, 2019, the corporation announced that the Superior Court of Québec issued a final order approving the plan of arrangement with Air Canada. The arrangement remains subject to customary closing conditions, including regulatory approvals, particularly those of Canada and European Union. If the required regulatory approvals are obtained and conditions are met, it is expected that the transaction will be completed by the second quarter of the calendar year 2020. The corporation has, among other covenants agreed to limit its investment related to the execution of its hotel strategy in the period leading up to the closing of the transaction, but continue carrying on the related work in keeping with the arrangement agreement.In conclusion, we are still expecting the transaction to close in the second quarter of calendar year 2020 if the required regulatory approval or obtainment conditions are met. And meanwhile, we remain fully focused on our operations, and note that this year's results show some improvement compared to last year's, thanks to higher prices, better load factors and increased ancillary revenue. For the winter season, the outlook is also slightly favorable compared to last year. We will now proceed with your questions.
[Operator Instructions] Our first question comes from the line of Kevin Chiang with CIBC World Markets.
Maybe just first one for me. When I look at or in regards to your upcoming winter schedule and maybe even how you think about the 2020 summer schedule, I'm wondering if you're taking into consideration or contemplating what capacity looks like, with the grounding of the MAX? Are you able to take advantage of some of your competitors having had to constrain capacity and you're able to act more nimbly and when you look at your schedule over the next year, how are you trying to build that into your own forecast here?
Okay. Well, at this point, we have a good look at what the winter capacity looks like. It's a little bit too early for us to speculate on the next summer. We have a couple of numbers, but people are still and competitors are still changing their capacity. As for winter, the overall market is plus 5% on the south. So we haven't seen the effect of the 737 MAX. Most of carriers are able to find other options to replace the capacity. So they're still able to grow. So we -- I would say that we haven't been beneficiary of a decrease of capacity from their part. As for next summer, I think it's a little bit too early. We'll follow the 737 MAX file as to what's going to happen. There might be some decrease in specific markets, potentially on domestic and transborder. But as for now, it's a little bit too early for us to see any impact on our results.
That's helpful. And then you provided good color in terms of -- and also you have a good slide on kind of the M&A timeline and the regulatory approval update. I'm just wondering if you could provide any color on how the public interest assessment is going, in terms of feedback you may be hearing from other stakeholders. I'm not sure if there's anything you can provide in terms of color there.
Honestly, I don't think that we could add anything more than what we have said this morning or put in our press release or other -- the process is continuing. We collaborate to give all the information that they are asking, but more than that, everything seems to proceed according to the plan.
Okay. So things continue to proceed towards that second quarter 2020 planned closing date. So that's helpful. And just lastly for me. There's been a number of -- at least recently, some Québec based companies in the consumer arena that have been highlighting that they're seeing a slowdown in the Québec consumer, at least modestly. Just wondering when you look at your booking curve, are you seeing anything that suggests a slowing Québec consumer, given your exposure to that province?
No, we have, of course, we are very big in terms of our capacity in the Québec province, but no, on the contrary, we've been very pleased with the bookings so far. Our bookings are in advance. Both on all of our markets, whether it be Europe, South USA as well. So no, we see that the intentions are still very favorable for people to travel. And so the answer is no from our part.
Our next question comes from Konark Gupta with Scotiabank.
So let me start with the first on the Thomas Cook agreement. Can you please provide an update on where that agreement stands right now? Does it still hold? I mean, are you expecting a settlement because it has canceled untimely. And it's kind of related to that -- I know you're leasing 6 A321 jets to cover the shortfall. But are these leases short term? And are you planning to sign another similar agreement with some other airline?
Yes. So the contract we had with Thomas Cook ended when the company went bankrupt. So far, we were able to replace and -- to replace the aircraft that we -- that were required for our winter season. And we hadn't affected our program nor our customers'. So we have found this necessarily -- necessary seasonal aircraft. And in addition to that, we are using more of our wide-body aircraft such as the A330. So overall, we were able to replace everything that went -- that came from Thomas Cook. So we're all set for this winter, thanks to a lot of work done by our operational team.
Again, thanks. And what do you think are the lease terms for the A321s that you have from Air Lease. Are they for the next 4, 5 years or are they for the longer term?
No, they are short term, then some were just for the winter and couple, we decided to secure for -- to the question that you were raising before. Some will be kept in our fleet for the coming winter, not this one but the next one. We're still in reviewing our needs and looking at what would be the appropriate time to decide how many aircraft and when and with who for -- depending of the evolution of the situation. We're in control of everything that has to be performed. Yes.
Okay. And then secondly, on the IFRS 16. I know you said that you will -- you are undergoing quantification of the impact. But just to get some early sense on what it does to your EBITDA and net debt so I know you have some $140 million in aircraft rent that could probably be gone from the income statement, largely speaking. But any other number that we should be looking at, I think maintenance is one, which you said will come down as well. So like the EBITDA number should go up by the aircraft rent amount as well as some on maintenance side. Any sense you can provide on EBITDA and net debt impact, please?
We -- not this morning, I will say, we're still finalizing the exercise, but probably before mid-March, we will schedule something in order to explain to you and all other people interested the impact of -- on leases and also on the cost of maintenance, where, like I said earlier, instead of taking provisions for the next shop visit of an engine, with the application of IFRS 16, cost of maintenance will be capitalized and amortized over the period. And it's really a big change. Just that it will -- that will affect our financial statement in the next quarter. And like I said, we're planning to schedule a call before to provide you with more -- with the detail of the numbers.
Okay. And I understand, thanks for that Denis. Lastly for me, can you help us from a modeling perspective for fiscal 2020, how much aircraft rent and CapEx for leisure and hotel business you expect?
Okay. We'll get back to you on those 2.
Our next question comes from Tim James with TD Securities.
Just looking at your guidance, your outlook for the winter. As I look at the individual components, it seems to imply to me, good demand, as you've talked about. But maybe some pressure on yields in the Sun destination market, in particular. I'm thinking, given your bookings were up 13% and capacity is up 7%. It sort of suggest to me that pricing may be lower. Is that correct? And if so, were there particular destinations or regions that you could point to that are causing that dynamic?
No, overall, I would say -- well, first of all, we took booking way more in advance this year. We wanted to capture as much booking as we wanted. So of course, we put a little bit more pressure on pricing to be able to increase our load factor. But we're seeing slowly but consistently an increase in pricing. We've seen that over the last week. So we're pretty confident that we will be able to increase our pricing during winter. And as for the different markets, overall, the markets, whether it's Mexico -- whether it be Mexico, Cuba, Dominican Republic all were a little bit similar than last year in terms of pricing, we're seeing a slight increase on Jamaica. There is more demand on Jamaica. So the -- we're pushing the pricing up a little bit. But overall, we're pretty confident that we're going to be able to increase -- continue to increase the pricing over the next weeks.
So is it fair to say that of those that -- those bookings, the 13% increase in bookings year-over-year, those that you have now, is pricing on those lower or higher than last year?
Well, it depends because it depends where the bookings are -- for which period of the bookings have been done. So for instance, at this time of year, last year, we had more bookings for the peak season such as the school break. Right now, we have a little bit more booking for the low season. And we were expecting that as well because we increased a lot of capacity during shoulder. So the -- especially in November up to December. These are period of the year where the pricing is always lower because we still stimulate demand. But we did that voluntarily to increase our aircraft utilization. So we were expecting at this point that we would take more bookings during November up to December 20. These bookings would have lower pricing so when you look at our numbers, to date, we're pretty satisfied with our strategy, and we were able to increase aircraft utilization significantly.
There are no further questions at this time. I will now turn the call back to you.
So thank you, everyone. Let me remind you that our first quarter results will be released on March 12, 2020. Thank you, and have a good day and a very nice holiday season.
That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day. [Foreign Language].