Bristow Group Inc (VTOL) 2015 Q1 法說會逐字稿

Good morning. My name is Jessa and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter 2015 conference call. (Operator Instructions). Thank you.

Ms. Harmony Packard, Corporate Communications Manager, you may begin your conference.

Thank you, Jessa. Good morning, everyone, and thank you for joining Era's first-quarter 2015 earnings call. I'm here today with our CEO and CFO, Chris Bradshaw, our SVP, General Counsel, and Corporate Secretary, Shefali Shah; our SVP Operations and Fleet Management Stuart Stavley; our SVP Commercial, Paul White; and our VP and Chief Accounting Officer, Jennifer Whalen.

By now, you should have a copy of our earnings press release for the first quarter of 2015. The earnings press release is available under the investor relations link on our website, eragroupinc.com, and also on the SEC website, SEC.gov. If you have not already done so, I encourage you to access one of those sources to print or view a copy of the presentation slides that accompanied our press release.

Before starting the call, I would like to note that management may discuss forward-looking statements on this call. These forward-looking statements are subject to a number of risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed in or implied by the forward-looking statements, as described in our most recent annual report on Form 10-K, our subsequent quarterly reports on Form 10-Q, and the other filings we make with the SEC.

In addition, we may discuss non-GAAP financial measures during the call, such as adjusted EBITDA. Please see our earnings press release or the investor presentation on our website for the calculation of these measures and the appropriate GAAP reconciliation.

I would now like to turn the call over to our CEO and CFO, Chris Bradshaw.

Thank you, Harmony, and welcome to the call, everyone.

As usual, we will begin on a safety note. I would like to thank everyone at Era for their hard work in achieving our objective of zero air accidents in Q1 2015. Safety is the foundation of everything we do at Era, and we strive to maintain the highest standards of safety performance, operational excellence, and people management.

I would also like to highlight that the first annual meeting for HeliOffshore, the global offshore helicopter safety organization which we co-founded last year, will take place this coming weekend in Europe. We have a large contingent of key industry stakeholders scheduled to attend, and we look forward to sharing a robust dialogue on ways to enhance the already strong safety profile and track record of the offshore helicopter industry.

On our last earnings call, we talked a lot about the macro environment and there has not been a profound change in the trends that we identified at that time. We continue to face a challenging industry environment. Demand remains constrained. Our oil and gas customers remain focused on reducing their expenditures in the face of lower oil prices and we continue to see a surplus of helicopters in the industry.

In response to these challenges, we remain focused on, one, maintaining the best safety standards; two, maximizing the utilization of our helicopter fleet; and three, realizing efficiencies in our cost structure.

We believe that Era has a visible path to increased fleet utilization and improved financial performance that is not dependent upon an increase in the price of oil. Before outlining that path forward, I would like to briefly summarize Era's financial performance for the first quarter of 2015.

As previewed in our last two earnings releases, the current excess capacity for our medium helicopters is higher than it has been in recent periods, and the first quarter reflected the first full period impact of this lower utilization as operating revenues declined $12 million compared to Q1 2014.

Operating expenses and G&A expenses decreased by $6 million and $1.6 million, respectively, but these reductions and expenses were not enough to keep pace with the decline in revenues. EBITDA and net income decreased by $7.2 million and $4.5 million, respectively.

Our Q1 results were adversely impacted by foreign exchange losses of $3 million, primarily due to the strengthening of the US dollar, resulting in losses on our euro-denominated balances. Our euro balances were higher than normal specifically for the purpose of funding a portion of the purchase price related to the delivery and acceptance of the new AW189 heavy helicopters, which were postponed due to the delayed FAA certification of that new helicopter model.

We currently expect to take delivery and make final payment for these new helicopters in the second quarter.

I would note that our day-to-day operations do not have significant currency exposure.

Excluding the impact of foreign exchange losses, net income in the current quarter would have been $1.8 million or $0.09 per diluted share and EBITDA would have been $17.6 million.

On a sequential-quarter basis, revenues declined by $7.3 million, primarily due to lower utilization of helicopters in our oil and gas operations. OpEx decreased by $2.2 million, whilst G&A expenses were consistent between the two periods.

You may recall that our Q4 2014 results benefited from a $1.1 million recovery of a previously reserved account receivable from a customer in bankruptcy. Adjusting for that bankruptcy recovery in Q4, G&A expenses would have been down approximately $1 million on a sequential-quarter basis.

During the current quarter, we sold five helicopters for cash proceeds of $5.4 million and gains of $3.4 million, whereas we did not recognize any material asset sales in Q4.

Foreign currency losses and derivative losses adversely impacted sequential-quarter results by $1.1 million and $800,000, respectively. As a result, EBITDA and net income were $4 million and $3.2 million lower, respectively, compared to the preceding quarter.

So that's a brief summary of where we have been. I would now like to focus on where we are going from here. To begin with, the first quarter is normally our weakest quarter of the year, due to seasonal factors. We typically experience an increase in activity in the second and third quarters of the year as daylight hours increase and weather conditions improve in the US Gulf of Mexico and Alaska and as our seasonal firefighting and flightseeing operations resume in Alaska.

Next, we expect to take delivery of four new AW189s and our first new S92 heavy helicopter during the second and third quarters and our second S92 in Q4. We expect all six of these new heavy helicopters to work on contracts in the US Gulf of Mexico. By the end of the year, we expect to have 15 heavy helicopters in our fleet, which represents a 67% increase over our current heavy fleet count.

Furthermore, we are poised to benefit from the ramp-up of our recent contract awards in Brazil. Of the seven contracts awarded in 2013 for AW139 medium helicopters with Petrobras, three began operations in December 2014, one began in March 2015, two began in April, and we expect the last one to begin in early June.

We currently expect the January 2015 contract awards for additional medium and heavy helicopters with Petrobras to begin in the second half of 2015 and early 2016.

All of the improvements I just outlined are specific to Era's business and they are not dependent upon a broader market recovery.

Turning now to a brief update on our capital structure and liquidity, our debt to total capitalization ratio was 40% and our debt to adjusted EBITDA ratio was 3.7 times as of March 31. We have over $240 million of available liquidity between cash on hand and available borrowings under our revolving credit facility.

During Q1, we repurchased $10 million of our 7-3/4% senior notes, which will reduce our annual cash interest payments. We believe that we have a strong balance sheet and ample liquidity to execute our committed new order book and comfortably weather even a prolonged market downturn.

We were pleased to announce and close the sale of our FBO in Alaska subsequent to March 31. We received a compelling offer for the business and we believe Era's shareholders will benefit from alternative deployment of this capital.

As you saw in our results of operations, we were also active in the secondary market for helicopter sales during Q1. Consistent with our historical practice, we sold these helicopters for a significant premium to net book value at the time of sale.

Based upon the market dynamics we currently see, it is likely that we will continue to remain active in the secondary market during 2015. The realization of cash proceeds from asset sales should reduce our net capital outlay for our committed new aircraft deliveries. This represents a continuation of the high grading of our helicopter fleet as we rotate capital from legacy assets into newer heavy helicopters.

In conclusion, we have a visible path to increase fleet utilization and improve financial performance. Beginning with Q2 2014 results, we cited a deceleration of growth. In our Q3 and Q4 2014 earnings announcements, we warned of excess capacity and the impact that lower utilization would have on our financial results. Even as we were announcing record results in 2014, we identified these observable trends that were threatening near-term financial results.

As those forecasts came to fruition in Q1, we are now looking at observable trends that point to a recovery in utilization and financial results.

The typical seasonal improvement in our business, the addition of our new heavy helicopter deliveries, and the ramp-up of our contract awards in Brazil represent internal improvements in Era's business that are not dependent upon an increase in the price of oil.

With that, let's open the line for questions. Operator?

(Operator Instructions). James West, Evercore ISI.

This is actually Cameron Schnier on behalf of James West. Good morning. So, I was wondering. Has the increase in competition in the helicopter leasing market that we have seen in recent years altered your long-term strategy of your own leasing business? And as a follow-up, have you noticed any sort of material flowthrough from lower lease rates to general market pricing in various services?

Yes, it's a good question. Certainly there has been a lot of new capital which has entered this space over the last four years, which has driven down leasing rates.

It used to be that we were one of the few participants in that sector and we were able to realize very attractive rates, but the increased competition has pushed those down. It has gotten to a point that if it is just about financing the asset, we really are not going to be competitive with the pure financial leasing companies. They are levered, these assets, 80% LTV and are targeting returns that are different than the way that we approach our return thresholds.

Having said that, we do believe that we retain a competitive advantage with leasing customers who need something other than the pure financing on the helicopter. For example, if it is a company who is looking to introduce a new helicopter model to their fleet, they oftentimes need help with training, both of pilots and mechanics. They oftentimes need help with temporary flight crews as they ramp up the operations of that new model.

We are uniquely positioned as both an operator and a lessor where we can step in and provide that full operational support solution and still earn the type of returns that we target in our business.

Okay, that's helpful. And so, have you seen any sort of leak through into general pricing yet?

I think the leak through would be more in the way of contracts that have terminated and not been renewed because they were able to secure, for those customers who were just interested in financing the asset, able to secure the asset at a lower rate from someone else.

Okay, and just one more. When you say that the six helicopters are expected to work on contract, is there some timing or visibility as to when?

Sure. We're currently on the 189s working through the technical acceptance and delivery of those machines with AgustaWestland. Our current expectation is that we will take delivery of the machines by the end of Q2.

We are taking delivery of those aircraft in a more complete state than we have with some of our other aircraft in the past, so we believe it will be about a 30-day turnaround from when the aircraft arrives at our bases in Louisiana to when they go to work for the customer.

And then on the S92, the first one is expected to arrive in August. It will be about a similar 30-day turnaround, because of the way we are taking delivery of the machine, before it goes to work on the designated customer contract. The delivery date for the second S92 we expect before the end of the year and it again will be a same 30-day lag before it goes to work on the contract.

Okay, great. Thank you very much.

Sam Ensslin, Midwood Capital.

Thanks for taking my question. I appreciate the roadmap you've provided to improving utilization. I think that's helpful. And I guess without committing to specific guidance or anything along those lines, do you feel like we can assume or it is safe to say that Q1 here represents the low point for utilization, given all the factors you cited with Brazil coming online, these new deliveries on contract turning around quickly, combined with the overall seasonal tailwind?

Sure. In an environment like this, things can always change, but based on the facts we know now and for the reasons that we outlined -- the delivery of the new heavies, the fleet management initiatives that we have in place, the contracts which are ramping up in Brazil, we do expect that by this time next year utilization should have improved significantly and that will be reflected in the financial performance of the Company. So based upon the facts as we observe them today, I expect that things will only improve from our Q1 results.

Okay, thanks. And that was going to be my next question, actually. Is it possible to put bookends on when we may achieve full utilization? Is it Q1 2016 or is that the right time frame?

Again, things being subject to change in this kind of market, but based upon what we know today and the awards which are ramping up in Brazil in the second half of this year and the very beginning of 2016, based upon the delivery of the heavies that are coming into the Gulf of Mexico, a couple of other opportunities which we have either signed or believe we are in good position to sign shortly, based upon what we know today our utilization at this time next year should be at the lowest level since I have been at the Company.

Okay, great, thanks. And then, last question for me here. Just touching back on the concept of sale-leaseback, as well as the nice gains on sale you guys recognized on the assets that you did dispose of, I'm just trying to understand how aggressive you might get through the market here in terms of doing a more strategic sale-leaseback to take advantage of that or selling an even larger, more strategic portion of the mediums. I mean, you recognized such a nice gain on sale there, demonstrate to the market the huge gap between your net asset value -- your net book value and the stock today?

Yes. We were pleased with the valuations that we were able to realize on the five helicopters that we sold in Q1. Based upon what we are seeing in the secondary market as of today, I would expect that this level of activity will increase during 2015 for us.

As it relates to now a sale-leaseback transaction, which obviously we'd do a little bit differently than an outright sale of the asset, we are continuing to evaluate that option. We believe that as some of the contracts are signed in Brazil, for example, those can present attractive opportunities for financing via sale-leaseback. We will continue to evaluate those alternatives.

I would point out that in a sale-leaseback, which is different than an outright sale, you are entering into a fixed obligation, so it may not be on balance sheet debt. It is an additional fixed obligation, which the Company's cash flows will have to service, and we are -- of course, we remain mindful of our leverage profile particularly in a market like this, so that consideration will need to be taken into account when evaluating large sale-leaseback transactions as well.

Sure, okay. Thanks a lot.

Saidal Mohmand, GrizzlyRock.

I was wondering if you could provide some color on the upcoming consolidation of the Brazil unit and perhaps the impact, if any, on reported EBITDA?

Sure. So as you know, currently we report our Aeroleo business in Brazil as a below-the-line equity investment. We have signed an agreement with our existing partner to swap that partner out with a new partner, who is a local Brazilian qualified to own the interest in an aviation company over -- under the local laws in Brazil. However, this is a party who really we're bringing to the table and will effectively serve as our agent in Brazil.

Because of the change in the facts and circumstances once that transaction closes, we do expect to consolidate Aeroleo fully into our financials.

Based upon what we know today, we're expecting that transaction will be approved by the Brazilian court sometime around midyear. At that point in time, we would start consolidating Aeroleo's financials and it would look the same on the face of our P&L as our results do in the Gulf of Mexico or in Alaska, wherein it's the revenues from the ultimate end customer, whether that be Petrobras or Saipem, [Restol] or other customers in Brazil, and then reflecting the expenses that we have actually on the ground in Brazil.

As that consolidation happens, if we had been either recognizing revenue from Aeroleo on an accrual basis or if we had been collecting all of the cash that was owed to us per the existing contract, there really would not be a change in the consolidated EBITDA number. However, because of the way that we have been reporting the revenue from Aeroleo, which is only as cash is collected, it is likely that if we were to consolidate, for example, 2014 results, the reported EBITDA would have actually been higher than it was.

Got it. And then, okay, so we should just assume that dry leasing line item is going away and replaced above the line with the Brazil new line item going forward. So that's how we should be thinking about it?

We will still have some dry leasing revenue from the other operations that we have. We currently have helicopters leased in the North Sea, in Spain, and in India, so that will continue, but you are right that when the transaction closes, Brazil will move from that dry leasing line item up to our international oil and gas line of service.

Perfect. And then maybe a follow-up question, too. Now are you seeing any impact on, I guess, helicopter values for the [A139s] or any other medium helicopters, given some of the excess capacity?

One thing I would note about the helicopter market is that the oil and gas segment only represents about 20% to 25% of the civilian helicopter market.

That's one of the nice things about the asset class and one of the reasons that helicopters do retain a significant portion of the value over time is that they can be used for a lot of other different missions, including end markets such as air medical, firefighting, flightseeing, search and rescue, VIP transport, et cetera.

We continue to see an active secondary market for the helicopter sales. You saw that come through in some of our Q1 results and we're optimistic, based upon what we see as of today, that there will be other opportunities to realize good values for helicopters during 2015.

Perfect, thanks.

Jeff Spittel, Clarksons Platou Securities.

Maybe if we could start, Chris, you referenced the contracts that are kicking in, commencing here over the next few quarters, and then we have got obviously a change in the mix of the fleet with the heavy deliveries. Can you talk, I guess, in general terms about what the implications are there from a pricing standpoint? And I guess I am thinking about maybe how competitive the market dynamics are for heavies as opposed to mediums, as well.

Sure. So certainly what will have the biggest impact on our financial results is the actual utilization of our fleet. So having the contracts ramp up in Brazil will have a big impact on that.

Also, the introduction of the new heavy helicopters, as you referenced, will have a big impact on our financial results. The margins for those helicopters and the financial returns that we earn on them tend to be significantly higher than medium helicopters, for example.

A lot of the expenses that you have, as you might imagine, are really consistent between the two. You still need to have two pilots on board. You have a number of mechanics that are maintaining the asset, but the capital cost of the asset is much higher. It performs, generally speaking, a premium mission and therefore the pricing and the resultant margins and returns on those heavy helicopters are better.

So, both of the things that you identify, the ramp-up of the contracts in Brazil, the other things that we have going on which will improve the utilization of the existing fleet, plus the introduction of these new heavy helicopter models, should have a significantly beneficial impact on our financial results.

Excellent, and then maybe switching gears, maybe more of a big-picture question. Given there is a little bit of softness now in the oil and gas piece of the market, can you talk a little bit about what's out there from a search-and-rescue standpoint and, I guess, just how you evaluate that opportunity in the context of your portfolio?

Sure. We continue to be very happy with our search-and-rescue business. We earn nice returns there by providing a great service to our customer base in the Gulf of Mexico.

We see an opportunity to add another major oil and gas customer to that consortium base during 2015. We also see potential to export the model we have developed, the subscriber base, that covers really your fixed expense and provides a nice return on the assets, while also being available for ad hoc callout charter work for other customers is a model that has proven to be successful in the Gulf of Mexico and also can be exported to other markets around the world where there are a concentration of oil and gas customers who need a similar type service for their operations.

All right, I appreciate the color, Chris. Thanks.

(Operator Instructions). [Bill Mastoris], Baird & Co.

To follow up a little bit, Chris, on the very last question, I am just wondering whether you're going to pursue a little bit more aggressively with the excess capacity tenders maybe in the air medical field or the search-and-rescue field with the excess capacity, or are you are just going to right-size your operations so you fit with what you feel is a reasonable run rate contract level in each one of those industries?

And I guess a follow-up question would be, would you consider pursuing tenders maybe outside that industry with any excess capacity?

Yes, it's good question. We do not view ourselves as simply an oil and gas customer. One of the things that we like about the helicopter industry is that the assets can service a number of different end markets, so we have consistently had an air medical business, a flightseeing business; we do firefighting work. We are doing search and rescue over the last few years in the Gulf of Mexico.

So we like the diversity of the end markets that are available to us and we will continue to chase opportunities really across all of those end markets, not just within oil and gas.

I would say that in some of those markets, it is more difficult than it is in the oil and gas market to get the type of returns that we need on the assets that we have. But we are pursuing other opportunities as well.

As it relates to air medical and SAR specifically, the US air medical market has gotten very competitive, and given what the dynamics which have been driving that industry, a lot of the market has moved really down-market to single-engine helicopters, more community-based models.

That's not the area of the market where we want to be a player. We operate our air medical business in the hospital-based model. We are providing a dedicated service specifically to a hospital system and we are doing that with twin-engine aircraft. So we are offering more of a premium service, which based upon what's going on -- what has been taking place in the market, including the impact of the Affordable Care Act, has become a smaller portion of the market in the US.

Now there are other markets, air medical markets, around the world, whether it be in Europe or in India, which are growing for twin engines, and while we may not choose to operate in those markets, it does present a nice potential end market for our leasing business.

On the search-and-rescue front, taking that up next, I think that if it is a situation where you have a country which is looking to privatize its entire search-and-rescue model, like what you saw more recently with the UK, it's less likely, given the size of our Company, that we're going to be competitive in that type of process.

However, we believe that we have developed a very nice model here in the Gulf of Mexico that is based upon a subscriber base of oil and gas companies who need this service for their operations and benefit from having a pooled asset with which to get that service, rather than having to pay for their own dedicated search-and-rescue helicopter.

So, we have a model which has been working for us in the Gulf of Mexico. We see growth opportunities here for it domestically and also opportunities to export it to other international oil and gas markets.

Okay, and Chris, a follow-up question and just digressing ever so slightly would be just in terms of leverage, certainly it is difficult to overcome macroeconomic trends, even though you have a very nice pipeline out there. What should we expect just in terms of maybe some lumpy leverage numbers that might go up or what type of range would you like to maintain through what is a much more difficult than traditional operating environment?

Yes. You'll notice that our leverage increased as of March 31 to 3.7 times debt to EBITDA. As we work through our committed new order book, it is likely that number will move up closer to 4 times.

We need to see how the new committed deliveries play out vis-a-vis some of the asset sales that have and may happen, but I think something around that 4 times level is an appropriate expectation. We are comfortable at that level.

We are obviously cognizant of what's going on in the broader market, and if you look at our sector, I think those companies that have been deemed to be highly levered seem to have been punished in the stock market since the downturn began and we certainly don't want to get to a point where our leverage profile and credit statistics start to introduce risk in the mind of shareholders. So we believe that 4 times debt to EBITDA rate is a comfortable one for us, but going well north of that is something that, particularly in the current environment, I think we would be wary of.

Okay, thank you for the very complete answers. I appreciate it.

There are no further questions at this time. I turn the call back over to the presenters.

Okay, thank you, Operator, and thanks, everyone, for joining. We look forward to seeing you on next quarter's call. Also, we are holding our annual shareholder meeting on June 24 in Houston for anyone who is able to attend. Thanks again.

This concludes today's conference call. You may now disconnect.