Transat AT Inc Q2 2023 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Konark Gupta - Scotiabank - Analyst : Thanks, operator. Good morning, everyone. And congrats on great execution overall. Maybe my first question for you, Annick. You guys noted the bookings are still looking pretty strong, and we all know this summer is going to be extremely good this year. But you also said the winter is also, at this point, tracking well with respect to historical patterns. I'm just curious as to -- can you share any thoughts why are we seeing so much strength in consumer behavior here? Or are you seeing any pockets of weaknesses here and there, in light of this inflationary environment and in a lot of things going on in the macro side of things? So any color you can share with respect to what's driving this much resilience? And a lot of people thought the pent-up demand is over, but it seems like it still is continuing here. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JUNE 08, 2023 / 2:00PM, TRZ.TO - Q2 2023 Transat AT Inc Earnings Call

Question: Konark Gupta - Scotiabank - Analyst : That's a very good color, Annick. Thanks so much. Appreciate it. And then maybe my follow-up for Patrick perhaps. With respect to balance sheet, the last two quarters, you guys have put out a pretty significant free cash flow. And I understand that seasonality in the second half and all that, but it seems like you're on a pretty good track of naturally increasing your liquidity position through operations. My question is on the deleveraging side. What exactly do you need to start paying down some of the debt that's out there, including the government debt and the credit facilities? I mean, are you looking for more confidence in the operations? Or is it more liquidity that you need or you are just waiting for perhaps some of the milestones that you have with these lenders?

Question: Konark Gupta - Scotiabank - Analyst : That's great color. Thanks so much, and thanks for the time, guys.

Question: Kevin Chiang - CIBC Capital Markets - Analyst : Hi, good morning. Thanks for taking my question, and I echo Konark, so congratulations on a strong winter season there. Maybe if I can look past this fiscal year, obviously, you raised your margin targets. It sounds like your adjusted CASM is trending better than what we're hearing from other players in the industry, given some of your internal levers. What do you think margins can get to here as we look out further into this recovery? Do you have a sense could this -- could your business be a -- if I look pre-pandemic, it looked like it peaked up close to 8%. Could this be a 9%, 10%-plus EBITDA margin business given some of the puts and takes? Or some of those things you're dealing with now transient, right? Like a lot of pent-up demand. I suspect wage inflation is probably a little bit higher here than it was in previous cycles. Just how do you think about maybe margins longer term?

Question: Kevin Chiang - CIBC Capital Markets - Analyst : Okay. That is super helpful, and obviously, a lot of momentum there. Maybe if I ask the debt question a little bit differently. When you think of the normalization, also even better than normalization of your earnings because you're obviously looking to hit higher highs here. What do you think the optimal capital structure here is? Only because you have a large leased fleet, so that and of itself is potentially over $1 billion of liabilities; you obviously have a long-term debt there. Is there a leverage ratio you'd like to get down to -- if I look at -- and I know they're not real -- they aren't direct peers, but focus some of the other airlines out there looking to get to investment grade or something close to that. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JUNE 08, 2023 / 2:00PM, TRZ.TO - Q2 2023 Transat AT Inc Earnings Call I guess I am challenged to see how you take $2 billion of total debt, with half of that being leases, and even as earnings continue to recover, how you might get to a leverage ratio close to that? Or maybe that's not the right bogey for your type of business model? You let me know.

Question: Kevin Chiang - CIBC Capital Markets - Analyst : That's super helpful. I'll leave it there. Best of luck as you get through the summer here, and congrats on a good Q2.

Question: Tim James - TD Securities - Analyst : Thank you. Good morning. Just wondering, first of all, if you could talk a little bit about your -- the flight crews and your staffing. How are you doing in terms of meeting pilot requirements? And maybe if you can comment on natural turnover and how that compares to historical trends.

Question: Tim James - TD Securities - Analyst : Okay, that's helpful. Thank you. My next question -- I'm just looking at the yield graph line on slide 7; a bit of a moderation in yields versus 2019 over the past couple of weeks. I'm just wondering how we should think about that. Just -- again, we don't have the equivalent graph for 2019, but is there -- is that just a normal seasonal change? Or how should we think about that moderation in the graph in the last couple of weeks? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JUNE 08, 2023 / 2:00PM, TRZ.TO - Q2 2023 Transat AT Inc Earnings Call

Question: Tim James - TD Securities - Analyst : Okay, that's really helpful. And then my last question, if I might, and it ties into that a little bit. I'm thinking about longer-term margins and profitability and the ability to generate free cash and just maybe goes to the comment about believing EBITDA margin potential is ultimately in the double digits. How do you think about the balance between capacity or driving traffic and revenue versus margins? Should investors view a low double-digit margin as the ultimate goal and that -- if it seems like the market requires less capacity in order to achieve that goal that you would slow down capacity additions? I mean, should we assume that that is more important than topline growth and traffic, ultimately?

Question: Tim James - TD Securities - Analyst : Thank you very much. That's very helpful.

Question: Cameron Doerksen - National Bank Financial - Analyst : Yeah, thanks very much. Good morning. I guess I have a question -- maybe a follow-up question on the balance sheet. Patrick, I'm just wondering if you can discuss your thinking around the unsecured LEEFF credit facility. Because obviously, the rate goes up at the end of this year, but even at 8%, in the context of the current market, it's still not bad. But by the same token, you can repay that earlier and reduce the [warrant] exposure. So I'm just wondering how you're thinking about that piece of the debt.

Question: Cameron Doerksen - National Bank Financial - Analyst : Okay, makes sense. Just on the, I guess, operations and particularly on the unit cost. I mean, it's something you highlighted that utilization of the fleet was significantly higher; I think 22% in the past winter versus 2019. Can you just discuss what increase in utilization you expect to see on the fleets during the summer period? I would imagine you'll also see a fairly significant improvement.

Question: Cameron Doerksen - National Bank Financial - Analyst : Okay, that's helpful. And are you seeing any impact from, I guess, some of the parts shortages and engine issues that seem to be affecting other airlines? I'm just wondering if that's somewhat of a risk for the operations this summer for you.

Question: Cameron Doerksen - National Bank Financial - Analyst : We're seeing some other airlines who are operating some of the newer generation aircraft having parts shortages and some issues around their engines on some of the planes. I'm just wondering if you're seeing any of those problems in your fleet.

Question: Cameron Doerksen - National Bank Financial - Analyst : Okay. No, that's good to hear. That was all for me. Thanks very much.

Question: Michael Kypreos - Desjardins Capital Markets - Analyst : Hi. Congratulations on the quarter, and thank you for taking my question. Maybe just, Patrick, on the $150 million that you had mentioned last quarter from collecting from credit card processors, do you have any update on that? Maybe what are the expectations moving forward?

Question: Michael Kypreos - Desjardins Capital Markets - Analyst : All right. Thank you. That's helpful. And maybe just a last one on -- you had mentioned that Europe comprises 80% of that activity you're expecting for the third quarter. How does this compare versus historical pre-pandemic [measures]?

Question: Michael Kypreos - Desjardins Capital Markets - Analyst : Yeah. The 80% of activity expected for the third quarter coming from Europe and international travel, how does that compare with these pre-pandemic measures? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JUNE 08, 2023 / 2:00PM, TRZ.TO - Q2 2023 Transat AT Inc Earnings Call

Question: Michael Kypreos - Desjardins Capital Markets - Analyst : All right. Thank you. That's helpful. Congrats again.