Bristow Group Inc. (VTOL) Q4 2021 Earnings Call Transcript

Good day, and welcome to the Bristow Group Fourth Quarter and Full Fiscal Year 2021 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Crystal Gordon, Senior Vice President and General Counsel. Please go ahead.

Thank you, Olivia, and good morning, everyone. Welcome to Bristow Group’s fourth quarter and full fiscal year 2021 earnings call. I'm joined on the phone today with our President and Chief Executive Officer, Chris Bradshaw; and Senior Vice President, Chief Financial Officer, Jennifer Whalen. Let me remind everyone, 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 of our investor presentation. You may access our investor presentation on our website. We will also reference certain non-GAAP financial measures such as EBITDA and free cash flow. A reconciliation of such measures to GAAP is included in the earnings release and our investor presentation. I'll now turn the call over to our President and CEO. Chris?

Thank you, Crystal, and welcome to the call, everyone. As always, I will begin our prepared remarks with a note on safety, which is Bristow's most important core value and our highest operational priority. I want to applaud all our Bristow team members around the globe for their excellent safety performance in FY2021, despite the numerous potential distractions in the world around us. We achieved our target of zero air accidents in FY2021, and we realized a 57% year-over-year reduction in lost work days. This improved workplace incident rate included zero recordable incidents in the U.S. Gulf of Mexico, which is the region most impacted by the merger integration changes that occurred during the year. I want to thank and commend everyone on the Bristow team for their hard work and dedication to deliver safe, efficient, and reliable service to our valued customers every day. On our last investor call, we discussed the importance of protecting the company's strong balance sheet position. We were very pleased to complete a significant refinancing transaction in February when we closed a $400 million offering of 6%, 7%, and 8% senior secured notes due in 2028. We used the proceeds from that transaction, combined with $100 million of cash from our balance sheet, to repay approximately $500 million of existing debt. The benefits of this refinancing include a much cleaner capital structure and extended debt maturity profile, a reduction in mandatory amortization requirements, and the elimination of operational friction costs related to the former credit facility. Bristow continues to possess industry-leading financial flexibility, and this transaction further enhances our strategic and operational flexibility as well. The company continues to make significant integration progress following the merger of Era and Bristow in June 2020. We increased the amount of identified synergies to at least $50 million of annualized run rate savings. As of March 31, Synergy Projects representing $30 million of annualized savings have already been completed. We expect to capture over 80% of the total synergy projects by the one-year anniversary of the merger, resulting in a more efficient cost structure for the company. Turning now to our recent financial performance. In addition to challenging conditions in the offshore oil and gas industry, the company's current quarter results reflect a typical seasonality in our business, as the March quarter represents the period of lowest flight activity due to fewer daylight hours and more inclement weather days. Historically, the fiscal fourth quarter has accounted for approximately 20% of the combined companies' full year adjusted EBITDA. Despite the challenging industry conditions, we continued to generate a substantial amount of free cash flow in the quarter, further demonstrating the resiliency of our business model. I will now hand it over to our CFO for a more detailed review of financial results. Jennifer?

Thank you, Chris. I will begin with a sequential quarter comparison of Bristow’s financial results. EBITDA adjusted to exclude special items and asset dispositions was $30 million for the fourth quarter of fiscal year 2021 compared to $48 million in the third quarter, representing a decrease of $17 million. The three main contributing factors to the decrease were $10.5 million from our joint venture Cougar, $3 million from foreign exchange, and $2 million catch-up accrual of incentive compensation. Revenues decreased by $18.8 million primarily due to lower utilization in oil and gas operations, including a $9 million decrease due to a change in revenue recognition from Cougar, all of which directly impacted EBITDA. Operating expenses were $8.7 million lower due to decreased personnel costs resulting from headcount reductions during the quarter. General and administrative expenses were $3.1 million higher, primarily due to incentive compensation expenses. Additionally, there were merger-related and restructuring costs of $16.5 million and $7.9 million, respectively, related to reductions in force. I will also note that we recognized a loss on extinguishment of debt related to our refinancing that occurred in February. This loss was primarily non-cash and related to accounting adjustments from the fair value of that. As a reminder, the close of the merger was on June 11, 2020, and due to Bristow being the accounting acquirer in the transaction, the previous year comparable quarter does not include results from legacy Era Group Inc.; prior periods only include operating results of legacy Bristow Group Inc. To help with the comparability of the periods presented, I’ll focus on the pro forma results as if legacy Bristow and Era were merged in the prior quarter. With that reminder, the current year quarter versus pro forma prior year quarter EBITDA, adjusted for special items and asset dispositions, was $30 million for the current quarter compared to $31 million in the prior year results. The prior year quarter results were impacted by $16.5 million in net foreign currency losses versus $2 million in the current year quarter results. Revenues decreased by $50 million primarily due to lower utilization in oil and gas. Operating expenses were $32 million lower due to decreased activity and lower headcounts. General and administrative expenses were $8 million lower, primarily due to lower compensation costs. In addition, the prior year results included $6 million of equity earnings versus a $400,000 loss in the current year. Finally, we generated adjusted free cash flow of $55 million for the current quarter. The adjusted free cash flow was higher than the previous quarter, primarily due to changes in working capital. The average of the two quarters is approximately $46 million in free cash flow, normalized for timing of payments. Since the merger last June, we have generated $141 million in adjusted free cash flow net of CapEx and continue to believe that this business model will have strong free cash flow. At this time, I’ll turn the call back to Chris for further remarks. Chris?

Thank you, Jennifer. Looking beyond seasonal activity trends and currently depressed offshore oil and gas customer activity, we have a positive outlook on the future demand for our services. We believe global oil demand will recover as pandemic effects recede. Inventory levels will continue to decline, creating a positive macro environment for oil prices. As a result, upstream spending will recover, and additional spending will likely be required to address a supply gap following years of under-investment. Essentially, all industry indicators are trending in a positive direction, including increased offshore equipment orders and improved utilization levels for offshore drilling rigs. While we do not claim to have a crystal ball, our current expectations are that in the next few quarters we’ll see middling offshore activity as oil and gas companies maintain spending restraints in 2021. But we believe this will be followed by a multi-year growth period beginning in 2022 and beyond. Bristow will benefit from this multi-year growth cycle, as idle equipment goes back to work and drives improved financial results. In the interim, we expect the company will continue to generate a substantial amount of positive free cash flow, as demonstrated in our current quarter results. With that, let’s open the line for questions. Olivia?

Thank you. Our first question is coming from James West with Evercore. Please go ahead.

Hey, good morning, guys.

Good morning, James.

Chris, this fiscal first quarter or the calendar first quarter, is it more seasonal than a typical one or about the same? I'm just curious about the combined company and then we’re still kind of working through the client company financials.

Sure. Certainly, the March quarter is our lowest activity quarter in a given year due to fewer daylight hours and more inclement weather days. So we would always expect some seasonal weakness in the March quarter. Of the decline in oil and gas revenues, which is really accounting for the majority of our decline, our other service lines were actually positive on a sequential quarter basis. But in oil and gas, revenues were down about 10%. Of that amount, we would say that between a third and a half of that would be consistent with typical seasonality patterns that we would expect. In addition to that, the change in revenue recognition at Cougar, the joint venture in Canada that Jennifer spoke about, accounts for about a third of that sequential decline as well. The balance would be more just the full period impact of some activity declines that we witnessed in prior periods.

Okay. Fair enough. And then as we look out into the balance of this calendar year and into next year, obviously, more and more about cyclical recovery, offshore activity improvements. How should we see the magnitude of the improvement in flight hours or revenue, however you want to describe it, as we think about next year?

Yes. Looking forward to 2022, we do expect a more broad-based recovery globally. And I just want to point out before getting there that we are seeing some projects move forward even today in 2021, including exploration projects that are moving forward in our Guyana and Suriname basin, as well as the U.S. Gulf of Mexico, where we are supporting some new drilling projects today. But again, those are more isolated in 2021. In 2022, returning to your question, we expect that there could be a broader-based, stronger global recovery. We’ve seen declines in activity over the last 12 months, as an example in Nigeria, where customer activity has declined about 40% year-over-year. While I cannot predict if all of that will return in one year or next year, we expect that the market will recover, and Bristow will benefit significantly from that recovery when it happens. So that gives you an order of magnitude frame around some of the decline we’ve seen in certain business areas around the world.

Okay. That's very helpful. Maybe I can squeeze one more in here. Chris, as you look at additional search and rescue outsourcing opportunities, how should we think about those firming offers over the next couple of years? I know there was a lot about to be bid pre-pandemic, and as we get back to normal, should we expect to see additional awards and wins in that part of your business?

Yes. We expect that will continue to be a nice growth opportunity for our business. We believe Bristow remains very well positioned there as a global leader in search and rescue to support government customers. In terms of timing, no material contract updates to give at this time, but we do believe that the winner of the Dutch SAR Contract Award supporting the Netherlands should be known by the end of the summer. The UKSAR2G, which is also a very important contract that we support, has initial proposals due at the end of this summer. Depending upon the contract timeline, which is subject to some variability, it’s likely that we won’t know the winner of UKSAR2G until the end of calendar 2022. In between now and then, there are some other opportunities in the Dutch Antilles in the Caribbean, where we think represents good opportunities for Bristow to leverage our existing experience and presence in the SAR market.

Okay. Got it. Thanks, guys.

Thank you.

Next we will go to Adam Ritter, a Private Investor. Please go ahead.

Hey guys, thanks for taking my call. One of the questions I had is, it seemed like Q4 had a lot of noise in terms of charges, expenses, costs, etc. Is this because it’s the end of the year, or do you expect things to get a little cleaner going forward?

Hey, good morning, Adam. Some of it is related to the merger, and some of it is related to the refinancing transaction. To just answer your question, going forward—particularly once we get past the one-year anniversary of the merger—we do think that some of these non-recurring one-time items will be much wider. In the period that we’ve just reported on, there were merger-related costs that Jennifer spoke of, about $16.5 million, as well as additional restructuring costs of about $8 million. Then we had a large charge related to the extinguishment of debt linked to the refinancing transaction that we completed during the March quarter. So those were very much one-time non-recurring items.

Okay. I guess the other thing is, I know you talked about your savings so far with the synergies, but if you look at your G&A expenses, sequentially, year-over-year, you don’t really see much of an improvement there. Is that hidden somewhere because of costs, or do you think that’s going to start coming down over the next year?

So we are realizing a significant portion of the synergies from corporate and in G&A. If we compare Q4 of FY2021 to pro forma Q4 of FY2020, G&A expenses are down about 16% year-over-year. So you're seeing a significant amount of costs coming out of that portion of our cost structure as well. As we proceed through the remainder of the synergy projects that we are making good progress on, we expect that to only increase.

Okay. Because it looked to me that 2020 versus 2021 was flat at $153 million versus $153 million. But maybe I’m looking at it the wrong way. What about the buyback? I know you guys have a lot of excess cash; you’re generating a lot of free cash plus asset sales. Why not be more aggressive on the buyback now that the refinancing is done?

In terms of capital allocation, the March quarter presented us with a great opportunity to really clean up our balance sheet and position it for the future, which we did. We deployed $100 million of cash as part of the refinancing, which significantly reduced our gross debt. We believe we’re in a great position now, given the capital and the cash that we allocated to those balance sheet needs in the March quarter. Going forward, returning capital to shareholders, including through some opportunistic share repurchases, will be an important consideration for us, along with continued protection of the balance sheet and keeping an eye on M&A opportunities, as we believe there are still attractive consolidation opportunities that could provide long-term value creation for the company.

Okay. In terms of M&A, have you guys seen any differences yet in terms of bidding or less competition with the Babcock sale to CHC?

I don't have any specific comments on individual situations. However, we’ve spoken about the benefits that the industry will realize from consolidation, due to the excess capacity that has existed—too much equipment and too many operators. We think consolidation is positive for our industry overall. Therefore, we expect there will be additional opportunities for that, and hopefully, Bristow can participate in that, as well as benefit more broadly in the industry.

Okay. There aren’t that many players left, it seems like. Is there any progress on the leader sale or closing out leader down in Brazil?

No material updates on that situation.

Okay. Then one last question. I know CapEx looked like it was about $15 million last year. What do you expect it to be for 2022? And what about cash taxes? Did you pay cash taxes last year? Do you think you’ll become a cash taxpayer?

Hi, Adam. It’s Jennifer. On the CapEx front, in our S-4 and merger document we expected CapEx to be between $20 million and $30 million, which I still think is a reasonable expectation. From a cash tax perspective, we expected somewhere around $15 million to $20 million, primarily in other jurisdictions, not in the U.S. That is all conditioned upon us selling more aircraft, etc. But as it stands today, that $15 million to $20 million range is a reasonable expectation.

Okay, great. Thanks very much for answering the questions. I appreciate it.

Thank you.

Next, we will go to Jason Stankowski with Clayton. Please go ahead.

Hi guys. Thanks for taking the call. When you look at where you were right before the merger last year around this timeframe to today, do you see this year as being worse than the previous year? Is the environment less healthy on a year-over-year basis, or is it kind of flat? I know you think 2022 is going to improve, but just trying to understand whether we’re still searching for the bottom or if we kind of hit it in the last nine months of calendar 2020.

Certainly, the overall industry and the impacts on our business have declined significantly due to the pandemic and the related impact on global oil demand. The level of decline has varied in different parts of our business. In our government services business, for example, it’s been fairly flat or consistent, with no direct impact. In our oil and gas services line of business, the impacts have varied from market to market. As I referenced earlier, Nigeria was particularly hard-hit, with activity levels down more than 40% year-over-year. In contrast, we’ve seen better stability in other markets such as Norway, and even some growth in frontier regions like the Guyana and Suriname basins. Overall, the oil and gas businesses are at much lower activity levels than what we witnessed pre-pandemic. You’re seeing that in our financial results as well. We do expect a recovery, and we're expecting that recovery to begin in earnest next year, creating a multi-year growth period of upstream spending that will flow through to our business. However, we are currently observing the impacts, including in the March quarter, which saw the full period impact of some activity declines that occurred in earlier periods, along with the typical seasonality we've mentioned that always appears in our March quarter.

Okay. That’s helpful. On the M&A side, can you characterize the opportunity set regarding wind projects globally? Are there dozens of companies you would be looking at? I think you’ve alluded to making a bolt-on acquisition in that space to give you a toehold for future business and awards. What does the opportunity set look like? Can you build it if you can’t buy it?

Yes. I appreciate the question on offshore wind, which we view as a long-term growth market opportunity. The industry is at various stages of development in different regions of the world. In the U.S., it’s still a nascent industry, with no helicopters supporting offshore wind projects today, but that’s changing. Recently, the first commercial-scale offshore wind farm in the U.S., Vineyard Wind, received final approval to move forward. We’re excited about that milestone development for the industry. So in the U.S., we would likely focus on organic growth. We have the experience needed from operating in difficult offshore environments as well as extensive hours of experience from our search and rescue business that will be relevant in the offshore maintenance phase of wind farms. Concerning Europe, which is a more mature market today, we have a decision to make between the options to buy or build. Many of the existing players are smaller companies, so we may evaluate potential acquisitions rather than attempting to grow organically in that market. In terms of the number of players, I would describe it as a handful of companies that we would evaluate during that analysis.

Okay. That’s helpful. I’ll follow up with any other things I have in the queue later, but I appreciate your time.

Thank you.

Our next question is coming from Brian Joseph with Empyrean. Please go ahead.

Hey guys, just with the questions on capital returns and comments about fortifying the balance sheet, how much cash do you actually need pro forma on the balance sheet to operate the business?

We think in terms of day-to-day operations, anywhere from $125 million to $150 million of cash would be adequate for our global cash management needs. We do have more cash on the balance sheet today. We utilized a significant portion,$100 million, in March for the refinancing transaction. However, we will continue to explore other capital allocation alternatives for the available cash.

Got it. Okay. And I just want to confirm, given how satisfied you are so far with how the merger is going, if another deal came up, would you consummate it?

We think we’re in a position to capitalize on M&A opportunities should they present themselves. We’re making great progress on the integration of the Bristow Era merger and are positioned to move forward on additional M&A if it’s feasible and can be completed on favorable terms.

Perfect. Thank you.

Right.

Our next question comes from John Deysher with Pinnacle. Please go ahead.

Good morning. Thanks for taking my questions. On the wind side, does any portion of the fleet have to be reconfigured to service the construction of an offshore wind farm? Or is it the same fleet that you already have?

Hey, good morning, John. There are two separate phases of offshore wind farm support for helicopters. The first is in the construction and development phase, where we’re moving construction crews. This part of the business is very similar to our offshore oil and gas crew transportation. Therefore, we would use existing aircraft and configurations to support that phase of the wind farm. Once the wind farm becomes operational and transitions to its maintenance phase, it typically requires a different type of aircraft, specifically the latest variants of light twin helicopters, namely the AW169 and the H145, which are best suited for hoisting technicians to the tops of the turbines for maintenance tasks. So that phase of wind farm support would likely require new additions to our fleet in the future.

Okay. So you would manage the construction aspect with the current fleet?

That’s correct.

On the 2022 multi-year growth cycle, what should we, as outside investors, be looking at to see how that’s materializing? There’s no backlog disclosed. I know 80% of your business is contract-based. What are the indicators that align with what you’re forecasting?

Well, upstream spending by our oil and gas customer base is ultimately what drives our revenues, so analyzing budgets and spending plans for offshore oil and gas companies will be essential. Indicators include offshore equipment orders for things like subsea trees. Other indicators could be offshore drilling rigs that are being deployed on exploration projects. However, the best indicators for our revenue will emerge from upstream spending by our customers.

And right now that spending is stable? It’s neither increasing nor decreasing, correct?

Correct. Spending levels are expected to be roughly stable in 2021, with the majority of third-party estimates we've seen indicating an increase beginning in 2022.

Okay. Thanks, that’s helpful. Just a couple of financial questions. How much is left on the share buyback program at this point?

The Board approved a $75 million program in the fall. Of that amount, through March 31, we had utilized $10 million, so there's $65 million remaining under the currently approved program.

Okay. Good. And there was discussion of SG&A. What’s a reasonable run rate on a quarterly or yearly basis for SG&A that we should consider?

Thanks, John. This is Jennifer. There’s still quite a bit of noise ongoing as we run through the synergy. It’s likely to be less than the quarter we just completed. We don’t necessarily provide guidance but, directionally, it should stabilize in the next few quarters as we complete approximately 80% of the synergies. It will be less than what it is today on an adjusted basis for special items.

Significantly less? I mean, you were at $28 million in Q2, $36 million in Q3, and now it’s $40.7 million. Should we anticipate a significant decline?

There are special items in that number. You'll need to strip out those to ascertain the run rate. It won’t be half or anything extreme, but it will decrease on an adjusted basis for special items.

Okay. Great. Thanks very much and good luck.

Yes.

Thank you, John.

Thank you. That concludes today’s question-and-answer session. Mr. Bradshaw, at this time, I will turn the conference back to you for any final remarks.

Thank you, Olivia. I appreciate everyone joining the conference call today and for the questions and discussions. I hope everyone stays safe and well. We look forward to connecting on our next call. Have a good day.

This concludes today’s conference. Thank you all for your participation. You may now disconnect.