Bristow Group Inc (VTOL) 2017 Q4 法說會逐字稿

Good day, and welcome to the Era Group Reports Fourth Quarter and Full Year 2017 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Tomas Johnston, acting General Counsel. Please go ahead, sir.

Thank you, Tiffany, and good morning, everyone. Welcome to Era's Fiscal Year and Fourth Quarter 2017 Earnings Call. I'm here today with our President and CEO, Chris Bradshaw; our SVP and CFO, Jennifer Whalen; our SVP, Operations and Fleet Management, Stuart Stavley; our SVP, Commercial, Paul White; our Corporate Controller, Tricia Schroeder; and our FP&A Manager, Seema Parekh.

You may access our recent earnings press release and presentation slides on our website, erahelicopters.com.

Let me remind everyone that during the call, management may make forward-looking statements that are subject to risks and uncertainties that are described in more detail on Slide 3.

I will now turn the call over to our President and CEO. Chris?

Thank you, Tomas, and welcome to the call, everyone. As always, I will begin our prepared remarks with a note on safety, which is Era's most important core value and our highest operational priority. We are pleased to report that 2017 was Era's best safety performance year on record. We achieved our goal of 0 air accidents. In regard to workplace injuries, we had 1 OSHA recordable incident, resulting in a world-class total recordable injury rate of 0.17.

Thus far in 2018, we have 0 air accidents and 0 workplace injuries. I want to commend our entire team for their hard work and dedication in achieving this safety performance. Understanding that our safety record must be earned anew each and every day, we remain focused on continuous improvement in 2018.

Next, I want to provide a brief update on our helicopter fleet. In January, we made the final progress payment and took delivery of our fourth S92 helicopter. This delivery concluded our firm capital commitments for new aircraft. In late February, Era sold our flightseeing assets in Alaska, which consisted of 8 single-engine helicopters, 2 operating facilities and related property and equipment for $10 million.

We were presented with a compelling value offer, and we believe Era shareholders will benefit from alternative deployment of this capital. On behalf of the entire management team, I want to thank the Era team members who successfully operated our flightseeing tours in Alaska on a safe, efficient and reliable basis. We believe the new owners will continue that strong tradition and be good stewards of the assets.

Turning now to an update on Era's capital structure. We are pleased by the support received from our bank group to secure the extension of our revolving credit facility until March 2021. This amendment helps ensure access to adequate liquidity and provides the company with enhanced, strategic and operational flexibility.

Importantly, the revised definition of EBITDA under the facility permits an add-back for ongoing litigation expenses related to the H225 helicopters, which helps facilitate the full and continued pursuit of our efforts to realize value for our shareholders on the significant investment that was made on those aircraft.

Next, I would like to highlight the company's continued financial stability despite the pressures of the prolonged downturn in the offshore oil and gas market. In Q4, Era generated positive operating cash flow for the 23rd consecutive quarter. In full year 2017, we generated $14 million of positive net cash flows from operating and investing activities.

We continue to prioritize the protection of our strong balance sheet and liquidity position. After giving effect to the recent facility amendment, total liquidity now stands at $100 million, and we remain comfortably in compliance with our credit covenants. As of today, we are not obligated to spend any additional capital on new helicopter deliveries, but we do maintain a flexible order book that provides optionality for growth should new market opportunities present themselves.

As the downturn has progressed, our financial stability has proven to be an important competitive advantage for the company.

I will now turn it over to our CFO to discuss the impact of recent tax developments as well as our Q4 results. Jennifer?

Thank you, Chris. I will start with a couple of significant items during the quarter related to tax. As I'm sure you are aware, during Q4 2017, there were significant changes to the U.S. tax code by way of the recent legislation. The effects, as it relates to our financial statement, was a noncash deferred tax benefit of approximately $70 million due to the changes in the tax rate from 35% to 21%.

Additionally, on a go-forward basis, net operating losses will be carried forward indefinitely with limitations on annual uses, and bonus depreciation will be 100% on qualified assets until the end of 2022. In the past, we have performed like-kind exchange transactions with respect to sales and purchases of helicopters. With the new legislation, these have been eliminated for personal property. There are also limitations on the use of interest expense deductions going forward.

The second item I wanted to discuss was PERT. As previously discussed in our Q3 2017 10-Q, in late October 2017, our subsidiary in Brazil entered into a new tax program to settle certain income and non-income tax liabilities for installment payments of 24% and the balance settled with the utilization of net operating losses. This resulted in a $2 million increase in operating expense in Q4 2017, offset by a $3.5 million income tax benefit for a net income statement benefit of $1.5 million.

Turning to the financial highlights for Q4. Net income attributable to the company was $61.7 million or $2.89 per diluted shares on operating revenues of $57.5 million compared to a net loss of $81.4 million or $3.91 per diluted share on operating revenues of $61.4 million in Q3 of 2017. Revenues were $3.9 million lower versus Q3 of 2017, primarily due to the end of flightseeing season as well as lower utilization in the U.S. due to seasonal conditions. These decreases were partially offset by increased parts sales to dry-leasing customers.

Operating expenses were higher, primarily due to the increases of the $2 million related to PERT. This increase was partially offset by decreases in personnel, repairs and maintenance and insurance expenses. General and administrative expenses were in line with the preceding quarter.

Adjusted EBITDA, excluding gains on asset sales, was $4.7 million in the quarter compared to $6.7 million in the preceding quarter. Profitability in the fourth quarter was adversely impacted by $0.8 million of expenses to prepare helicopters for new customer contracts and $2.1 million of nonroutine professional service fees.

Moving on to the quarter over prior year quarter results. Compared to the fourth quarter of 2016, revenues were $1.2 million higher, primarily due to increased utilization in oil and gas, partially offset by fewer search and rescue subscribers and the end of air medical contracts since the prior year quarter.

Operating expenses were $6.6 million higher in the current quarter, primarily due to increases to engine overhaul expenses and the absence of the benefit from credits in the prior year quarter and the effect of entering into the PERT program in Brazil. General and administrative expenses were $1.5 million higher in the current quarter, primarily due to nonroutine professional service fees.

We've included a discussion of our full year 2017 financial results compared to 2016 in our press release, earnings call slides and in greater detail, in our recently filed Form 10-K.

At this time, I'll turn the call back to Chris for further remarks. Chris?

Thank you, Jennifer. In regard to market conditions, activity levels in the offshore oil and gas industry remained depressed compared to historical levels. There continues to be an excess supply of helicopters globally, and competition in the industry is fierce.

Against that backdrop, we have observed an increase in customer activity, which began in the third quarter of 2017 and continued into the fourth quarter. Our recent revenue results helped quantify this momentum. Q3 2017 oil and gas revenues represented a 15% sequential quarter improvement over Q2. Given the seasonality of our business, we believe it is helpful to look at Q4 revenues on a year-over-year basis. Our Q4 oil and gas revenues increased 10% over Q4 2016 levels.

Visibility in our industry remains limited. And pursuant to our long-standing disclosure policy, we do not provide financial guidance. However, we have observed and can share that this momentum in oil and gas customer activity has continued into the new year.

Oil and gas customer activity levels through the first 2 months of the year were significantly higher in 2018 compared to last year. This is primarily attributable to new customer projects that have commenced in the U.S. Gulf of Mexico, although we also benefited from a short-term project in Suriname.

I want to reiterate that we are not out of the proverbial woods yet. But we are encouraged by the recent increase in oil and gas customer activity and we'll continue to try to capitalize on these market opportunities as they present themselves.

In conclusion, I want to note that Era is celebrating our 70th anniversary in 2018. We are proud of our rich legacy as the longest-serving helicopter transport operator in the United States and our current status as one of the largest helicopter operators in the world.

We celebrate Carl Brady, who founded the company in Alaska in 1948 and was a true pioneer in the creation of the commercial helicopter industry.

Over the last 70 years, Era has operated a vast array of helicopter models across a diverse set of end markets and mission profiles in almost every region of the world. I want to thank all of the Era team members, both past and present, for their contributions in making Era one of the global leaders in our industry.

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

(Operator Instructions) We'll go first to Bill Mastoris with Baird & Co.

Chris, I wonder if you could give us a little bit of additional color on some of these contracts. Are these short-term contracts? Or are they a combination of short- and long-term contracts? Or are they short-term contacts, which have become long-term contracts? And then where is most of this activity taking place? Is it the deepwater, ultra-deepwater? And would that be part of the motivation for maybe taking that additional S92 and maybe even exercising some options?

Yes. Good morning, Bill. We have seen some contribution from long-term production-oriented contracts, including some that have not yet commenced but have been awarded. However, most of the activity, the primary contribution is from short-term contracts, which is exactly what we would expect at this point in the cycle. You don't start out with a greenfield and go directly to a production platform. Normally, what we would expect and what we have, in fact, seen is that activity starts with shooting seismic, collecting that data, then supporting short-term drilling projects. If those are successful, more exploratory wells will be drilled. And then you move into the development and eventually the production phase. So it's very much within expectations that we would expect, that the contract at this point in the cycle to be short-term in nature. What's really encouraging is really the volume or the cadence of the number of short-term projects that have commenced. And it's -- as that volume increases, that's the type of activity that will eventually lead to a more sustained utilization of the aircraft. In terms of where it's happening, for us, we're almost entirely deepwater. We do have a number of light aircraft in the Gulf of Mexico that are supporting our contract with the Bureau of Safety and Environmental Enforcement. But other than that, most of our aircraft are servicing deepwater markets, so that's where we are seeing the improvement in activity for us.

Okay, that's very helpful. And I'm just kind of wondering how much excess capacity you believe is still out there in the industry? Certainly, there's been a lot of returns to lessors, and there's a lot of aircraft which are grounded and because of the part-out component of that, may never get back into the air. So I'm just kind of wondering, when do you think that excess supply begins to become a little bit more in balance with demand? And I know that that's tough, but any color that you have there would be greatly appreciated.

Sure. In terms of excess capacity, I can speak qualitatively about this. It's important that we break the market down into the different asset classes: heavy, medium and then, light aircraft. On the heavy side is where there is more of an excess flood of supply today and where I think it will take longer to work through the amount of excess capacity that exists today. The story gets a little better when you get down into the new generation medium aircraft. And I think it's important to look at the ones that are really competitive for new work. So there are a number of old models that might be included in the total fleet count, but those models really are not competitive for new projects that are coming out today. You're primarily talking about the AW139 in the medium category, to a lesser extent, the S-76. The story is a little better there compared to the heavy aircraft. I think there will be a quicker recovery in the amount of excess capacity amongst 139s as market conditions continue to improve. In terms of the grounded aircraft, really, I think that plays into the commentary, which I was referencing about some of the legacy model, some on the heavy side but more so on the medium side aircraft that may never find their way back into the utilized market, at least for offshore oil and gas.

Okay. And then finally, Chris, to the extent that you can discuss it, and I know that negotiations and litigation could be very sensitive. Where are you in your discussions with Airbus on H225? I mean, is there kind of a range that's being established right now that would be reasonable, maybe based upon what happened with Bristow? I'm just wondering, where are we in that process?

Sure. I appreciate the question, and I obviously understand why it's asked because this is an important and material matter to the company. Pursuant to the advice that we've received from our legal counsel, we're not commenting on the status or progress of the 225 litigation. I would say from a fundamental standpoint, we do believe that we have been damaged significantly by the H225 situation, and we expect to be compensated for those damages. It's always been and remains our preference to settle that commercially. But outside of a viable solution there, we are actively pursuing our next best alternative, which is the legal case. On that front, we are encouraged by the amendment of the recent credit facility which provides for an add-back of any expenses related to 225; ongoing 225 litigation, ensuring that we have the flexibility to continue a full throttle pursuit, trying to realize value for our shareholders from the significant investment that was made in those assets.

Okay, great. And then finally, any additional cost cuts that you see maybe on the operating side? Or right now, do you feel as though you have an infrastructure that's established for the current level of activity?

We've done a lot of work throughout the downturn to continuously and on a dynamic basis, adjust our cost structure for what we foresee the level of activity being. That required some very difficult decisions early on in the cycle in terms of headcount reductions and, as and when necessary, we've made other reductions. We've also worked a lot with our vendors and have secured better terms on some agreements with OEMs, both the helicopter OEMs as well as some of the subcontracting vendors. And those efforts have continued. I think we'll continue to see some benefit come through our cost structure, and that will remain a focus for us. I would note that Q4 profitability was depressed somewhat because of some factors which are not expected recur. For example, we spent about $800,000 in the quarter to prepare new aircraft for contracts that haven't yet started. We also continued to have some timing of repair, contribution from things such as engine overhauls, which were particularly heavy in October but then settled down. But in terms of the overall cost structure, we do think, at a high level, the company is appropriately sized now for the level of activity we see.

We'll go next to Adam Ritzer with Pressprich.

Just a quick couple of follow-ups on the 225 issue. Is there an approach that you guys are taking versus the approach that Bristow took? They got a settlement. You guys are still working through that. Is there any significant differences you could point to?

I think for each company, they have a different set of facts and circumstances. Some people own their aircraft, some lease them. Some have the ability to bring a suit in the U.S. We're 1 of only 2 parties who has that ability because we bought our aircraft through the U.S. That's a significant difference in your prospects filing in the U.S. versus filing in Europe against Airbus. Some also had large order books for other Airbus aircraft that could come into play for commercial leverage. In our case, we're fortunate in that we don't have an order book, a committed order book for new aircraft. We do have the ability to file in the U.S. So I think it's a matter of different companies have different facts and circumstances. And we need to pursue the best alternative to realize value, and we prefer that via commercial settlement. But absent a viable alternative there, we're going to pursue -- continue to pursue our next best alternative, which is this case.

Got it. That's very helpful. Also in terms of the EC225s, is -- I know you guys took a $117 million write-off. Is there any 225 value left in your fair market value of helicopters currently?

Yes, it's approximately $38 million that remains.

Okay, so not much. I also noticed that Total took out a contract for 2 225s with a Brazilian operator. Is there potential for other guys to get back in the market and use 225s down in Brazil?

Ultimately, I think time will tell. It's our view that this is really a one-off situation. Total obviously is a large French company, and I think they're dealing with an operator there who was willing to put the aircraft back in service. In our case, and I think it's the case for the majority of the Western operators, helicopter operators, we don't believe that there is a detailed safety case that exists today that would justify a return to service for those aircraft. So we don't have any plans to put them back in operations. I would also note that Petrobras, in their recent tenders that they've issued for offshore helicopters in Brazil, did not include the 225 as eligible aircraft.

Okay. I was going to ask you that. Great. The recent delivery you took of the S92, is that -- do you have a contract for that?

So that delivery is a contractual commitment that we were obligated, which was signed back in 2013. So we had been successful in working with Sikorsky, who's a long-term partner of ours, to defer some of these deliveries. This was the last scheduled one that we had committed to in the contract. So we paid the $2.8 million in January, took delivery of the aircraft. And it will become part of our actively marketed fleet. And we'll seek to put it to work, either on short-term ad hoc work or potentially a contract at some point.

Got it. And what about the 189s? I think there's a couple left in '18 and 1 more in '19. Are you planning on taking those? Or what's your thoughts on what to do with those?

So now that we've made the final payment in January and taken the fourth S92, the rest of our order book can be canceled in its entirety without further damages other than forfeiture of previously paid deposits of approximately $2 million. So we're not obligated to spend any additional capital on new aircraft from this point forward. We do have some flexibility that's been built into the order books. So we have the option, if new market opportunities present themselves, to take some additional aircraft. It's the orders that you referenced. We also have options for 10 additional 189s. That will all be dependent upon market conditions. If we had to make a decision today, if all of them were expiring today, it's unlikely that we would take any additional aircraft based upon current customer opportunities. However, we do have some time left on these options and we value the flexibility that, that provides us to capitalize on the growth opportunities, should they present themselves.

Got it. In terms of your cash flow for last year, do you currently pay any cash taxes? And is there any maintenance CapEx that you guys do not expense?

We have not been a cash taxpayer in the U.S. historically, and we don't have expectations of becoming one in the near term. In terms of capital expenditures, anything related to maintenance of our aircraft is fully expensed. We don't capitalize those items. That includes major overhauls. We expense all of maintenance-related items. Now if there's a conversion or an upgrade of an aircraft that changes the nature of the aircraft, that is something that we would capitalize in that instance. But any regular maintenance of the aircraft, including major overhauls, gets expensed.

Got it. So basically, your free cash is your EBITDA minus interest expense and then any additional, call it, growth CapEx on top of that, right?

That's right. And it's -- and in instances where we have asset sales such as the $10 million that was monetized in February, that would offset some of the new helicopter spend as well.

Got it. And my last question, sorry to ask so many questions. In terms -- you mentioned a couple of things about the current Tax Act. Is there anything that you think is significantly good or significantly bad for you guys within all those changes?

This is Jennifer. Generally speaking, it's good. The rate dropped from 35% to 21%. And on a go-forward basis, that's a real benefit. We also took a -- we had a large deferred tax liability, which we got to reduce by downsizing the rate. The bonus depreciation, the 100% bonus depreciation is also a positive for us. It can offset any profits that we have. The couple of items that are -- and the net operating loss, just the fact that they're indefinite now, there is -- with some limitations, is also good. The 2 items I spoke about earlier, the like-kind exchanges, that allowed us to defer gains into the future, which have been eliminated for personal property. However, as we have this 100% bonus depreciation, which more than offsets that. And the only other one is this interest deduction limitation. It's limited to some adjustable taxable income going forward. So it -- we could be limited on being able to take that deduction.

We'll go next to Cameron Schnier with Evercore.

Most of my questions have already been answered. But I was wondering if you could just tell us what OpEx and G&A were for flightseeing in 2017?

So we have -- we don't break out our expenses by line of service. We do provide a revenue disclosure for lines of service. But we've taken the approach that we don't have business segments since these aircraft are mobile, and we can move them around from one line of service to the next. So we don't break out expenses or profitability by line of service. What I can say is we are very pleased with the valuation that we received for the assets that we sold on the flightseeing side. Raising the $10 million was, in our view, a very compelling value, and we'll put that capital to better work elsewhere. Looking at the flightseeing business, given the reduction in our footprint in Alaska over the last few years as the oil and gas market has contracted so much, it had become more and more difficult to efficiently operate a seasonal flightseeing base business on a profitable basis. So we're happy to have the $10 million. I think the impact on recurring cash flows will not be material, given those profitability challenges that I referenced for the business.

Okay. So just safe to assume that the margins were lower than the total company margins?

In recent years, that's certainly been correct.

The next is Christopher Hagedorn from Redwood Capital.

I just had a quick question on operating expenses. I think, Chris, you alluded to that you had a bit higher expenses to get aircraft ready for service, some maintenance overhauls. Can you just give us a sense like any -- what -- how we should think about the, I guess, the operating expense line? I think it has gone from $40 million a quarter to like $45 million, $45 million-ish, I guess. Yes, any color would be helpful.

Sure. We don't -- our long-standing disclosure policy, we don't price forward-looking guidance. We did discuss, there was this $0.8 million in Q4 related to getting these helicopters ready. There's also the $2 million for PERT, which is a nonrecurring item -- noncash, nonrecurring item for the most part. So there were some additional items in there that weren't necessarily retained.

Got it. I guess, I'm just looking -- I mean, if I look at adjusted EBITDA, which I guess is prior to asset sales around $4 million versus, I guess, historically it's been like in the quarter. I mean, 2016, it was around $10 million, $11 million. I'm just trying to figure out, like, okay, so you talked about the $800,000 for aircraft readiness. I think there was a $1.5 million professional services. I mean, maybe can you just be a little bit more detailed in terms of specific items that this quarter were, what you would consider exceptional? I understand the PERT, that, that's -- I think that's a part of it that's being adjusted out, but like if there were other items as well.

Yes, the -- if you're looking at adjusted EBITDA, excluding gains from asset sales, the PERT item is already adjusted out. The -- some factors that are impacting profitability are, first, you have that $2 million that we disclosed in the nonroutine professional services fees related to that ongoing litigation. So as long as that case is active, it will continue to be a drag on profitability. But as we've already discussed in the call, we think that's in the best interests of shareholders to pursue value for that significant investment that was made in those aircraft. So that's about $2 million of noise in the G&A line affecting adjusted EBITDA. And then after you adjust for PERT, so if OpEx in Q4 was 77% of revenues, if you pull out PERT, it's 73.5%. If you pull out the $800,000 that Jennifer referenced for -- to prepare new -- our helicopters for new customer contracts, it takes the OpEx as a percentage of revenues to about 72%. And then we also should note that there were some additional R&M items, just timing of repairs in Q4, which can sometimes be lumpy. So some of that heavy engine overhaul expense did carry over into October. So I think it's more consistent with Q3 in terms of percentage of revenues, but still again with some noise in there for the factors that we just discussed.

Got it. And then last thing I'll ask is, can you quantify the timing of repair line item?

Yes. So I think it depends on which comparison you want to make. On a year-over-year basis, the timing of repairs increased our repair and maintenance expense by about $3.6 million. And by way of background there, in our helicopter fleet, we maintain helicopters in 2 principal ways. There are some models that we have on power by the hour, or PBH agreements with the OEM, where we're paying a fixed rate per hour flown. And so there's more consistency in the expenses for the R&M for those models. For other models, we find it more efficient to maintain them on a time and cost to prepare basis. In those instances, there will be some lumpiness just from quarter-to-quarter, depending upon what items become due for service. Whether it's a flight-hour interval or a calendar interval. So that's why you do see some variability in the R&M line, driven by the timing of those repairs.

(Operator Instructions) We'll take our next question from Bill Mastoris with Baird & Co.

Chris, a quick follow-up to a comment that you made a little bit earlier about the activity levels in deepwater and ultra-deepwater and fully acknowledging that the S92 that you just took delivery of does not have a contract. I'm wondering though, if you needed additional lift for deepwater, ultra-deepwater, would you then consider maybe some used aircraft as maybe a less expensive alternative? Would that be in the future plans instead of maybe purchasing new aircraft?

Yes, if you're talking about heavy helicopters in particular, the world doesn't need more heavy helicopters for oil and gas operations today. So for incremental needs that might arise there, we would definitely look at the secondary market for preowned aircraft, also at leasing aircraft from some of the leasing companies if that make sense. So I think we're likely to look at those 2 options as potentially efficient ways to bring on new capacity until there's a more fundamental change in the supply-demand mix on that -- on the heavy aircraft side.

We have no further questions at this time. I'd like to turn it back over to our speakers for any additional or closing remarks.

Thank you, Tiffany, and thanks to everyone who joined. We look forward to speaking to you again next quarter. Be safe.

This will conclude today's call. Thank you for your participation. You may now disconnect.