Bristow Group Inc (VTOL) 2018 Q1 法說會逐字稿

Good day, everyone, and welcome to the Era Group reports first quarter 2018 results conference. Today's call is being recorded.

And now at this time, I would like to turn the conference over to Tomas Johnston. Please go ahead, sir.

Thank you, April, and good morning, everyone. Welcome to Era's First Quarter 2018 Earnings Call. I'm here today with our President and CEO, Chris Bradshaw; our SVP and CFO, Jennifer Whalen; our SVP Commercial, Paul White; our Corporate Controller, Tricia Schroeder; and our Finance 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'll 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 Era has achieved our dual goals of 0 air accidents and 0 recordable workplace injuries through the first 4 months of 2018. This follows the company's best safety performance year on record in 2017. I want to commend our entire team for their hard work and dedication in achieving this safety performance.

I will now provide a brief update on capital allocation and our financial stability. In addition to the previously announced sale of our flightseeing assets in Alaska, which closed in late February and consisted of 8 light helicopters, 2 hangars and related property and equipment, we sold 4 additional light helicopters in the first quarter. In total, asset sales generated $19.5 million in cash proceeds in Q1. We continue to prioritize the protection of our strong balance sheet, and these proceeds supported the $14 million reduction in net debt. We maintain ample liquidity and remain comfortably in compliance with the maintenance covenants under our revolving credit facility. In addition, 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.

Next, I should note that profitability in the first quarter was adversely impacted by $3.9 million of nonroutine professional services fees. As previously disclosed, Era filed a lawsuit in November 2016, taking damages from Airbus related to our purchase of H225 helicopters. We cannot predict the ultimate outcome of the litigation, and we may spend significant resources pursuing our legal remedies against Airbus. So long as this litigation is active, our professional services fees will create a drag on our profitability.

While I cannot comment on the details of the ongoing case, the company remains confident in the merits of our claim, and we believe Era's stakeholders should be compensated for the significant damages we have incurred as a result of the H225 situation. Importantly, the recent amendment to our credit facility revised the definition of EBITDA to permit an add-back for certain 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 in those aircraft.

I will now turn it over to our CFO to discuss our Q1 financial results. Jennifer?

Thank you, Chris. Turning to the financial highlights for Q1. Revenues in the current quarter were comparable to Q4 2017 as higher oil and gas revenues were offset by lower dry-leasing revenue.

Operating expenses were lower, primarily due to decreases in repairs and maintenance related to timing of repairs and the recognition of a credit related to removing helicopters from PBH programs following their sale. In addition, the preceding quarter included an adjustment related to the PERT tax program in Brazil.

General and administrative expenses were higher, primarily due to increased professional service fees. Adjusted EBITDA, excluding gains on asset sales, was $8.1 million in the quarter compared to $4.7 million in the preceding quarter. The increase in adjusted EBITDA was primarily due to the decrease in operating expenses previously discussed.

Moving on to the quarter over prior year quarter results. Compared to the first quarter of 2017, revenues were $2.8 million higher, primarily due to the increased utilization in oil and gas, partially offset by lower emergency response and dry-leasing revenues due to the end of contracts. Operating expenses were comparable to the prior year quarter. General and administrative expenses were $1.7 million higher in the current quarter, primarily due to nonroutine professional service fees.

Now moving to liquidity and cash flow. Cash flow used in operating activities was $1 million for the quarter. This was attributable to the changes in working capital, which drew $6 million of cash. This was primarily driven by timing, such as the increase in prepaid expenses and other receivables, in addition to a significant decrease in accounts payable. These changes in working capital are transitory in nature.

Based on the Q1 results, our total available liquidity is $113 million, which includes our cash and additional availability under the revolving credit facility. We believe we have sufficient liquidity to manage the business and execute our strategy.

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

Thank you, Jennifer. In regard to market conditions, the positive momentum in offshore oil and gas customer activity, which began in mid-2017, further accelerated in the first quarter of 2018 with oil and gas revenues 2% higher on a sequential quarter basis and 10% higher on a year-over-year basis.

The improvements in the U.S. Gulf of Mexico market were even more pronounced, up 4% on a sequential quarter basis and 21% higher on a year-over-year basis. We are encouraged by this increase in oil and gas customer activity and will continue to capitalize on these opportunities as they present themselves.

I should note that visibility in our industry remains limited. The offshore market recovery might be slow and choppy, but it may well turn out that we are positively surprised to the upside.

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

(Operator Instructions) We'll first hear from Bill Mastoris of Baird & Company.

Chris, are you hearing any sort of increase in offshore spending by any of the national or multinational companies at this point? And kind of as a follow-up to that, any of the short cycle, long term -- or any of the short-cycle contracts becoming long-term contracts? And just again, a logical follow-on, where are you seeing the most activity in the Gulf? Is it deepwater? Ultra-deepwater? And then I may have another question.

Sure. What we've seen is that in the Gulf of Mexico, beginning in mid-2017, and certainly that momentum has increased in Q1 of 2018, we have seen an increase in offshore spending by a spectrum of customers, which includes NOCs, independent E&P companies and multinationals. If we look at the other markets in which we participate, such as Brazil, Suriname, Colombia, the remainder of 2018 appears more lackluster than what we're seeing right now in the Gulf of Mexico. However, if you look into 2019, based upon what we're seeing today in terms of the timing of projects that are scheduled to begin tender cycles, et cetera, there's a lot more to be excited about in 2019 in markets like Brazil, Mexico, Colombia and other parts of Latin America.

On the question about short-cycle projects, it all depends on what the results are. If the short-cycle seismic project produces compelling data, it's likely to lead to drilling projects. If those short-cycle drilling projects are successful with their wells, they're likely to turn into development work and eventually production. So it's all going to depend on the success of the activity for that given customer's project.

In terms of where the activity is occurring in the Gulf of Mexico, it is, for us, a deepwater story. I should note that we have very little, essentially almost no exposure to shallow water E&P work in the Gulf of Mexico. Our light aircraft in the Gulf of Mexico are primarily working for the exclusive contract that we have with the Bureau of Safety and Environmental Enforcement of the U.S. government or they're working for pipeline companies. So we don't really have much exposure at all to shallow water E&P activity. Therefore, the impact that we're seeing is really a deepwater story and it's across multiple customers.

All right. With that in mind, Chris, and the inability to use the EC225s, are you going to go ahead and exercise some of those options if activity levels are picking up and maybe we see a bright future in 2019 away from the Gulf?

We've worked hard with our partners at the OEMs to negotiate a lot of flexibility and optionality in our order book. And we're pleased with the way that, that order book looks today in terms of not obligating us to spend any additional capital, but providing us the optionality for growth if the market opportunities present themselves. Based upon what we're seeing as of this very point in time, if all the options expire tomorrow, we would not exercise any of them. We would use our right to cancel those orders.

However, that being said, we still have significant option time left on those flexible orders that we've negotiated, and we'll preserve that optionality so long as we have it.

Okay. And then lastly, are you seeing any type of pricing leverage that is finally beginning to take hold in any of your contracts?

So consistent with our longstanding policy, we don't comment on rates or our pricing in any detail for competitive reasons. I would note, though, that globally this is still a market where you're likely not going to win business by pushing rates. It remains the case globally that there is an excess supply of helicopters. For us, it's really about a utilization story. And you've seen that, if you look in our management discussion and analysis and our filings, the improvements are really being driven by better utilization, more aircraft on contract and higher flight hours for contracted aircraft.

Next we'll hear from Adam Ritzer of Pressprich.

Let's see, so I wanted to -- you said professional fees were $3.9 million this quarter, is that correct?

Well, the non -- we called out the nonroutine professional services fees, and those nonroutine professional services fees were $3.9 million in Q1.

Right. So your adjusted EBITDA number of $8 million, that includes those fees? Is that correct?

Correct. It's burdened by that $3.9 million of spend.

Got it. So actually, without that, you would have done $12 million?

That's right.

Okay. What was the math in Q4? What were those, call it, non-ongoing professional fees?

We spent $2.1 million in nonroutine professional services fees in Q1 of 2017.

Got it. Okay. Could you also explain to me, I noticed revenues in Q4 were $57 million, they're also $57 million in Q1, yet your adjusted EBITDA was almost 2x in Q1 versus Q4. Is there costs that you had, that you didn't have in Q1? Any reason for the big difference in EBITDA margins?

There are several different items. The primary driver is timing of repairs. As we noted in Q4 and in Q3 last year, our repair cost, related to primarily engines, was higher than it has been historically. We had a difference of $3.2 million between timing of repairs between Q4 and Q1. We also, in Q4, had a $2 million charge related to the Brazilian tax program -- the PERT program that we discussed in Q4. Those 2 items make up like $5.2 million.

We also had -- we had some $0.8 million related to nonrecurring costs to get some helicopters ready for a contract in Q4 that we didn't have in Q1 as well.

Okay. So I guess, it would be fair potentially to add back the $2 million charge and the $800,000 charge to what you reported and maybe split the repair costs kind of between the 2 quarters just because it was pushed out, is that a reasonable way to look at it?

So in the adjusted EBITDA number that we reported in Q4, we did adjust for that $2 million charge in Brazil for entering into the PERT program since that -- it was a nonrecurring item. In regard to the repair and maintenance side and the timing of repairs, we're going to have lumpiness from quarter-to-quarter as it relates to timing of repairs. By way of reminder, if you look at the various models of helicopters in our fleet, some of them we maintain using power by the hour, or PBH programs, where we pay a consistent rate per hour flown. And then for a portion of the fleet, we maintain those on a time and cost of repair basis. And because of that, there will be some lumpiness from quarter-to-quarter depending upon the maintenance that comes due.

As Jennifer noted, the back half of last year was adversely impacted by an unusually high volume of engine overhauls that piled up during those periods. And we called those out at the time. We did not see nearly that amount of activity on engine spend in Q1.

Got it. Yes. I'm just trying -- I know you guys don't give guidance. I'm just trying to figure out, is your adjusted EBITDA -- I mean, it seems like things are pretty close to the bottom. I know nobody ever wants to call the bottom, but are we running $7 million of EBITDA? Are we running $10 million of -- I'm just trying -- you know what I'm trying to figure out, right?

Sure. So I think if you look at the Q1 results, adjusted EBITDA was $8.1 million. As you rightly note, that's burdened by the $3.9 million of the nonroutine professional services fees, which are not recurring items. We don't have to spend that. We're choosing to spend it because we think it's very important in realizing value for our shareholders on the 225 investment that was made. And then if you look at OpEx, there are various onetime items that occur in any quarter. And as we've talked about, there will be a difference in the timing of repairs and when certain credits are recognized from our vendor relationship, so that will cause some lumpiness in the R&M line. But really, as Jennifer walked through, those are the main differences in OpEx between Q4 and Q1.

Right, okay. Moving on, I mean, if we're near the bottom, you have no CapEx left basically, you're generating free cash after interest expense, potentially maybe a settlement coming on the 225s, where do we go from here? I mean, do we just kind of sit back and see if and when things get better? Is there a bigger plan here going forward? Like maybe you can talk about that.

Sure. We haven't been sitting back at any point during the downturn. We started very early on in the downturn in 2014 and taking costs out of the system to become the most efficient helicopter operator in the industry, and we continue to keep a focus on that strategy of maintaining efficiency.

Throughout the downturn, we have made prudent investments to continue to grow the business. For example, during the course of the downturn, we introduced the S92 helicopter to our fleet. We introduced the AW189 helicopter to our fleet. We think both of those models are being well received by our customer base and should provide additional upside as more of them get placed on contracts going forward. We also, during the downturn, opened up our super base in Houma, Louisiana, which was a significant investment. But is really, as we planned for it to be and our actual experience is, in fact, demonstrating, that's a real competitive advantage for us in the Gulf of Mexico market. It's been very important for us in retaining existing customers through the course of the downturn and also adding new customers.

There are 2 super major oil and gas companies that were not doing business with us prior to the downturn that are now doing business with us which started during the course of the downturn. And I don't think that, that would have happened were it not for that super base investment that we made in Houma. So that's been critical for us.

Going forward, there's still additional upside based upon our existing fleet in putting some underutilized AW139s, and to a lesser extent, S92s to work on new contracts. And we're actively engaged in commercial efforts to do that in the various regions in which we operate and also through our leasing business in other regions around the world. We also will continue to evaluate all of our assets as we've always done for a potential sale. And we look at those 3 alternatives: what we can make operating it ourselves, what we can make leasing it out to other operators and what it's worth in a secondary sale today. And it's pretty straightforward, but we generally take the highest NPV proposition of those alternatives.

And we've been realizing a good amount of cash since the downturn began, specifically from the beginning of 2014 through March of 2018. We generated approximately $90 million from asset sales. We recognized in the aggregate net gains of approximately $25 million on those aircraft sales at a time, I would note, when more often than not our competitors have been recognizing losses on sales. And we've used those proceeds to help fund approximately $120 million reduction in debt since the beginning of 2014.

So we think we're in a good place now in terms of the financial stability of the company. We do have additional upside on the existing fleet by continuing to improve the utilization of the helicopters that we have in place. We also, since the downturn began, have expanded to Colombia, have expanded to Suriname. Those are new markets for us. We think entering new markets, primarily in the Americas, where we do have a critical mass and, we think, a competitive advantage in terms of the efficiency with which we can operate, provides us with additional upside.

And then more broadly, as we look at the industry, we do believe the industry would benefit from consolidation. And that the consolidation should happen both at the operator level and at the lessor level, since the lessors now control a significant portion of the assets in the industry. And we are actively engaged in strategic dialogue and looking at various opportunities to help consolidate the industry in a way that would lead to a better business model for us and really for the industry as a whole. Of course, I can't comment -- I'm not at liberty to comment on any of those specific opportunities, but that's the other opportunity set that we're looking at on a go-forward basis.

Next we'll hear from HJ Lee, International Value Advisers.

If I look at the rate per hour on a quarterly basis, it has been showing some sequential improvements including first quarter 2018. I'm trying to understand the reason because flight hour or activity has not been too strong. Is this rate improvement on an hourly basis coming from increasing portion of fixed-rate agreement? Or is it coming from the improving market environment? I also have one other question.

It's primarily a function of mix of fleet. So not all flight hours are created equal. We make a lot more flying heavy helicopter per hour than we do flying a single-engine helicopter per hour. And a twin engine will make more than a single engine. A medium class will make more than a light twin. And the heavy will make more than the medium. So it's really a story of the mix. And there's been -- if you look at utilization in Q1 of '18 compared to Q1 of '17, for example, an increase in the utilization of heavy and medium helicopters servicing the oil and gas industry and slightly lower utilization of the light helicopters. So that explains the change in the rate per hour that you're observing.

Another question is on your credit metrics. I see that senior secured debt-to-EBITDA was 2.9x in 2018 first quarter and EBITDA over interest expense -- interest cover was 2.5x. And if I calculate EBITDA based on these 2 metrics, I actually get 2 different numbers. Could you remind me the difference in definition of EBITDA for these 2 metrics?

Sure. As with most credit facilities, there's a very specific definition of EBITDA that's used per that agreement with our banks. I won't get into all the details of the formula right now. But to specifically address your question, the biggest difference between the EBITDA number that's used for our senior secured leverage ratio and the EBITDA that is used for interest coverage ratio is that we're able to use cash proceeds from asset sales in the EBITDA definition for the leverage ratio, but cash proceeds from asset sales are not calculated in the EBITDA that's used for the interest coverage ratio.

Understood. And also the litigation expense that you can add back to EBITDA, is that starting from second quarter of 2018 or has that been made -- has that been adjusted in first quarter as well?

It will have been adjusted from the time that we executed the credit facility, which was in early March of 2018. But the calculation is a 12-month look-back, so we're able to add back litigation expenses that have occurred over the last 12 months, subject to a cap of $8 million in the aggregate.

(Operator Instructions) And it appears there are no further questions at this time. I'll turn the conference back over to our presenters for any additional or closing comments.

Thank you, April, and thanks, everyone, for joining the call. We look forward to seeing you again next quarter. Stay safe.

That does conclude today's conference. Thank you all for your participation. You may now disconnect.