Earnings Call Transcript - VTOL Q1 2023

Operator, Operator

Good day, and welcome to the Bristow Group Reports First Quarter Fiscal Year 2023 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, General Counsel. Please go ahead.

Crystal Gordon, Senior Vice President, General Counsel

Thank you, Tracy, and good morning everyone. Welcome to Bristow Group's first quarter fiscal year 2023 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. Before we get started, I would like to take this opportunity to remind everyone that during the course of this call, management may make forward-looking statements that are subject to risks and uncertainties that are described in more detail on Slide three 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?

Chris Bradshaw, President and Chief Executive Officer

Thank you, Crystal. Welcome to the call everyone and greetings from the U.K. where the Bristow Executive leadership team and Board of Directors have enjoyed the opportunity to spend time on the ground this week with our team in Aberdeen. 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. The company achieved very good safety performance in the quarter ended June 30th, with zero air accidents and a 50% year-over-year reduction in lost work days. I want to commend all of our Bristow team members around the world for their continued dedication to placing safety first every day. I also want to thank the Bristow team members, who have worked diligently over the last several months to successfully deliver on several of the company's strategic priorities and I would like to highlight a few of those successful outcomes here. At the two-year anniversary of the close of the merger of Era and Bristow, our team has successfully completed synergy projects, representing $60 million of annualized savings, well surpassing all targets within the specified two-year period. Work will continue on some additional projects related to IT system integration and further U.S. certificate integration, but this is the last time that we expect to update merger-related savings, now that we have reached the two-year mark. Next, we were very pleased to secure the highly important U.K. SAR 2G contract award with the Maritime and Coast Guard Agency. This new GBP1.6 billion, 10-year contract will see Bristow continue to provide critical search and rescue aviation services across the whole of the U.K. until at least 2037. This builds upon Bristow's recent success in winning new government contracts to provide critical SAR services throughout the Netherlands and the Dutch Caribbean region. In addition, earlier this week, we completed the GBP10.4 million all-cash acquisition of British International Helicopters Limited, which expands our government services offering to the Falkland Islands and establishes an important new relationship with the British Armed Forces. Meanwhile, we have continued to make investments to strengthen our business, such as the new long-term highly favorable maintenance support agreements for our global AW139 helicopter fleet, while at the same time returning capital to shareholders with $10 million of share repurchases executed over the last two months at an average repurchase price of $23.48 per share. Finally, looking more into the future, we were pleased to release Bristow's first sustainability report and to sign additional partnerships with leading developers of new electric vertical takeoff and landing aircraft, highlighting Bristow's role as a leader in sustainability within the vertical lift industry. The last few months have been a highly productive time for the company and I again want to thank everyone on the Bristow team for their efforts to achieve these successful outcomes for the company and our stakeholders. With that, I will hand it over to our CFO for a review of the financial results. Jennifer?

Jennifer Whalen, Senior Vice President, Chief Financial Officer

Thank you, Chris. Today, I will start by saying we are pleased to announce that our Board of Directors approved a change to our year-end from March 31st to December 31st. We believe this change will provide many benefits, including comparability between periods and relative to our peers. In addition, we intend to initiate financial guidance for calendar year 2023, when we announce our next quarter's earnings. Moving on, I'll begin with a discussion of the sequential quarter comparison of Bristow's financial results. EBITDA, adjusted to exclude special items and asset dispositions was $51.1 million for the first quarter of fiscal year 2023, compared to $35.9 million in the fourth quarter of fiscal year 2022, or an increase of approximately $15 million, driven by higher revenues and foreign exchange gains. Operating revenues increased to $18.6 million, primarily due to increased activity in our fixed-wing services, higher utilization in oil and gas in Africa and the Europe region, and increased activity from government services. Operating expenses were $6.8 million higher, primarily due to higher fuel and repairs and maintenance expense, driven by the increased activity. General and administrative expenses were lower by $1.5 million, primarily due to lower professional service fees and compensation expenses. In the current quarter, we recognized a loss of $5.2 million on impairment of intangibles related to the new power-by-the-hour arrangement signed during the quarter. In addition, other income increased by $3.8 million, primarily driven by foreign currency gains. Finally, Bristow continues to benefit from a strong balance sheet and liquidity position. As of June 30th, our available liquidity was $318 million and our net debt to last 12-months adjusted EBITDA ratio was less than 2 times. We generated $26 million of adjusted free cash flow for the quarter and as Chris noted, we repurchased $10 million of shares in June and July. As we have stated on many occasions, we still believe that this business model will continue to generate strong cash flow. At this time, I'll turn the call back to Chris for further remarks. Chris?

Chris Bradshaw, President and Chief Executive Officer

Thank you, Jennifer. Earlier in the call, I highlighted recent wins in Bristow's global leading government services business. I will now provide an update on the outlook for the offshore energy services market, with reference to three third-party industry expert reports. On Page 11 of our earnings presentation slides, we highlight recent comments and research reports from J. David Anderson at Barclays Research. David, who has covered the energy services sector for a long time, had been bearish on the space for a number of years, and rightly so, it should be noted. Last year, David changed to a bullish outlook, which predicted a multiyear growth cycle. That was his outlook prior to Russia's invasion of Ukraine and conviction has only grown following that geopolitical crisis and related oil and gas market dislocation. As noted on the page, Barclays expects a significant increase in upstream oil and gas spending over the next few years and David sees this as the best investment environment for energy services in almost 20 years. On Slide 12, we highlight recent comments and research notes from James West at Evercore ISI. James, who is one of the best-known and highly regarded analysts in the industry, is also bullish on the market outlook and sees the offshore sector building momentum over the next 18 months. Despite the risk of an economic recession, James sees upstream spending fundamentals as remaining strong and he notes that E&P upstream spending growth is being driven by ambitions to grow spare production capacity and not by short-term supply-demand dynamics alone. On the slide, we included a couple of charts which show the recent growth trajectory and the number of drilling rigs working offshore, which speaks to increasing demand for offshore helicopter services. We should also note that this positive market sentiment is shared by industry leaders, including Schlumberger, Halliburton, Transocean and others. Finally, on Slide 13, we are pleased to share new third-party analyst information on market dynamics specific to the offshore helicopter industry. Up until now, the type of industry supply, demand and utilization statistics that are readily available for drilling rigs and other energy services markets were not available from third-party analysts for the offshore helicopter market. Steve Robertson, Founder of Air & Sea Analytics, released a new report last month on the heavy and super-medium oil and gas helicopter market. It is an excellent report and we encourage anyone who is interested in this market to go to the Air & Sea Analytics website to purchase and read the full report. In the report, Steve notes that offshore helicopter utilization has recovered sharply, with super-medium types at or near full utilization and S92 model utilization firming up with expectations for continued tightening in that market as well. The utilization numbers presented in the chart are consistent with the qualitative comments that we shared on Bristow's earnings call last quarter. We continue to believe that the offshore oil and gas market is in the early stages of a multiyear growth cycle and Bristow's business stands to benefit significantly from this growth in our upstream spending. With that, let's open the line for questions. Tracy?

Operator, Operator

Thank you. We will take our first question from Josh Sullivan from The Benchmark Company. Please go ahead.

Josh Sullivan, Analyst

Hey, good morning, Chris, Jennifer.

Chris Bradshaw, President and Chief Executive Officer

Good morning, Josh.

Josh Sullivan, Analyst

Congratulations on the results here. But I wanted to start off with the UK SAR 2G award, clearly a big win, but how should we think of the potential incremental contribution versus the technical difficulty surrounding the vehicle? And then what do you think on additional SAR opportunities now that you have this marquee win under your belt?

Chris Bradshaw, President and Chief Executive Officer

Yes. Thank you for the question and the well wishes. We were very pleased to secure the SAR 2G contract award. As noted in the prepared remarks, this new 10-year contract has total expected revenues of GBP1.6 billion; that is an aggregate number which is lower than the aggregate U.K. SAR-H revenues, all of which is consistent with messaging from the MCA very early on that they were interested in efficiencies on the new generation contract. We at Bristow believe that we were in a favorable position as the incumbent given our established base footprint throughout the U.K., our established employee base, and the aircraft that we have in place, most of which will be used again on the new generation contract, and obviously have more age and some depreciation on them now. So we had a good position as the incumbent to deliver those efficiencies, while still generating attractive returns on capital that meet Bristow's financial return hurdles. In terms of additional opportunities, we are currently engaged actively in a tender for the Irish Coast Guard contract, which is another 10-year search and rescue contract to support the country of Ireland. And we believe that there are additional governments and military customers that will either be looking to privatize existing public services and/or award new private contracts for already privatized services. As some of those opportunities get closer to the contracting cycle, we may start to discuss them by name as well. But overall, we believe that the global government services market is a growth one.

Josh Sullivan, Analyst

Alright. Regarding the Pratt & Whitney maintenance agreements with Leonardo, GE, and Honeywell, how does this change the margin profile? Can we estimate what the incremental margin would have been if these agreements had been in place in the past?

Chris Bradshaw, President and Chief Executive Officer

Yes. We were pleased after a long period of negotiations following the merger of Era and Bristow to sign at the end of June these new maintenance support agreements for our global AW139 fleet. I should take a minute to explain the context and history which is that the legacy Era AW139 fleet was maintained based upon a limited power-by-the-hour program for the airframes with Leonardo and we did not have power-by-the-hour coverage for the engines with Pratt & Whitney. Those were maintained on a time and cost of materials basis. The legacy Bristow AW139 fleet was maintained under multiple, disparate power-by-the-hour agreements for both the airframe with Leonardo and the engines with Pratt & Whitney. What we've accomplished in these new agreements is to bring everything together under one comprehensive maintenance program for Bristow's global AW139 fleet, which will see all the aircraft and engines maintained on a consistent power-by-the-hour coverage, essentially a full tip-to-toe power-by-the-hour program. The net result which we were able to accomplish using our increased buying power and some leverage related to bringing the two fleets together is that we will lower our overall maintenance cost over the full lifecycle of the aircraft. So that will reduce expenses and we believe that the cash-on-cash returns are quite attractive for us, approximately 20% on an unlevered cash-on-cash return basis. In addition to those specific investment benefits, we also see benefits from having more predictable cash flows as our repairs and maintenance expenses will be more directly correlated with the actual flight hours. Furthermore, we believe that having these aircraft under consistent full tip-to-toe power-by-the-hour programs makes them more fungible and therefore more valuable, should we reach a point of sale for the aircraft. So we're very pleased with the overall benefits achieved by signing these new agreements.

Josh Sullivan, Analyst

And then kind of related, we've heard some aerospace participants this quarter about constraints in castings and forgings and titanium. Are you seeing any impact on OEM delivery times or spares availability?

Chris Bradshaw, President and Chief Executive Officer

Yes, we have. For most of the helicopter models we operate, the supply chain constraints have been consistent with what we're seeing in other sectors. I want to recognize that most of the OEMs we work with have done an admirable job continuing to deliver to Bristow and our peers, despite the broader supply chain challenges. Most have managed these issues fairly well. The exception is the S92 model helicopter with Sikorsky, where we have faced more significant problems due to late and incomplete deliveries of parts. As a result, we have had to find our own solutions. Bristow is in a strong position as the largest operator of S92 model helicopters, but we have been affected by Sikorsky's lack of support for the product.

Josh Sullivan, Analyst

And then just one last one, you know, as far as the partnerships you're forming with advanced air mobility players, which of these do you think is closest to being an operating asset for Bristow?

Chris Bradshaw, President and Chief Executive Officer

Yes, that's a valid question. I'm hesitant to make predictions at this stage of the development cycle. We've dedicated a significant amount of time, and I believe we've achieved substantial progress over the past 18 months in assessing opportunities, building relationships, and identifying the right teams equipped with the appropriate technology and financial resources to collaborate with. These partners will need to provide aircraft that not only align with operational requirements but also suit Bristow's mission objectives. However, it's important to note that there is still a considerable amount of regulatory certification risk, and in some instances, ongoing technology de-risking is necessary before we can discuss specific timelines for individual aircraft.

Josh Sullivan, Analyst

Got it. Thank you for your time.

Chris Bradshaw, President and Chief Executive Officer

Thanks, Josh.

Operator, Operator

We will now take our next question from John Deysher from Pinnacle Value. Please go ahead.

John Deysher, Analyst

Hi, good morning everyone.

Chris Bradshaw, President and Chief Executive Officer

Good morning, John.

John Deysher, Analyst

A couple of quick questions. Lots of good information in the report. On the SARs contract, the amount in total $1.6 billion, does that all go to Bristow, or do you share that with your two other partners? How exactly is that structured?

Chris Bradshaw, President and Chief Executive Officer

We will share some of those revenues, particularly with our fixed-wing partner at 2Excel. The significant majority of the revenues do go to Bristow. We are the prime contractor working with our valued partners to deliver that service under the new generation contract.

John Deysher, Analyst

What percentage, would you say, goes to Bristow?

Chris Bradshaw, President and Chief Executive Officer

We haven't disclosed the percentage at this time. We will be releasing financial guidance beginning with next quarter. And so overall, the expectations for Bristow will be incorporated in the future financial guidance that we plan to provide.

John Deysher, Analyst

Okay. So you will provide more clarity with the guidance?

Chris Bradshaw, President and Chief Executive Officer

Yes, we will have overall additional financial guidance that will be included in that, and we do anticipate issuing that when we report next quarter's earnings in either late October or early November.

John Deysher, Analyst

Okay, fair enough. On the BIH contract, do you plan any significant changes to that operation, or will it continue as business as usual? I don't know how it fits into the overall Bristow platform, but are there any major changes in terms of shifting helicopters around or reducing headcount or anything like that, or is it business as usual going forward?

Chris Bradshaw, President and Chief Executive Officer

A good question. For context, currently BIH operates two contracts, the largest by far is a contract in the Falkland Islands with the Ministry of Defense here in the U.K. There they provide both search and rescue services using two SAR-configured AW189 new generation helicopters. They also provide crew transportation services using three S61 helicopters. And then here in the U.K., they have a smaller contract using one medium-type, an AS365 helicopter. It would be our expectation that over time in consultation with the customer that there will be some fleet changes, mainly related to the S61 model helicopters in the Falkland Islands, which I think there is interest from the customer, and certainly we're interested in replacing those with newer generation aircraft. The contract here, the smaller one in the U.K. with that AS365 again likely to be replaced by a newer generation aircraft. I think there's, again, an opportunity and also interest to do that. From an operational standpoint, we will be integrating BIH into our operations. They will adopt the Bristow name and brand throughout their operations and we will look over time to combine the operating certificates and workforces. So there will be some operational changes in that regard.

John Deysher, Analyst

Okay. And the contracts there are yearly contracts or how long do they last?

Chris Bradshaw, President and Chief Executive Officer

The contract in the Falklands is a long-term agreement that still has several years left with the extensions, while the smaller contract in the U.K. has a shorter duration remaining.

John Deysher, Analyst

Okay, great. Regarding the maintenance buy-in, the $55 million that will be paid between now and year-end, how is that treated from an accounting perspective? Is it capitalized or would it not be expensed?

Jennifer Whalen, Senior Vice President, Chief Financial Officer

I can take this, Chris. Yes, John, hello, good morning.

John Deysher, Analyst

Good morning.

Jennifer Whalen, Senior Vice President, Chief Financial Officer

Yes, it will be capitalized on our balance sheet as an asset and amortized over the life of the new agreement, that's typical power-by-the-hour accounting that any aviation company uses.

John Deysher, Analyst

Okay, good. And I guess finally, your CapEx is going to be ramping up over the next couple of years, as you fold in these different contracts. Can you give us a feel for what the CapEx budget is for the balance of this year, for the back half through December, and what you're looking at for 2023 in terms of CapEx?

Chris Bradshaw, President and Chief Executive Officer

We did include in the materials, the expected schedule for the U.K. SAR2G CapEx, giving that as a single contract, the largest share that we have. We've also noted that the firm capital commitments, a relatively small amount that we do have, as disclosed in our filings, relate to a new delivery of an AW189 helicopter that we're putting to use on the Dutch SAR contract. We expect that helicopter to be delivered later this month and we'll make the final payment then. In terms of more specific guidance on CapEx, that would be included in the financial guidance that we plan to roll out with our next quarter's earnings.

John Deysher, Analyst

Okay, that's good. We can wait until then. Thank you very much and good luck.

Chris Bradshaw, President and Chief Executive Officer

Thank you, John.

Operator, Operator

Apologies, we have another follow-up question from Josh Sullivan from The Benchmark Company. Please go ahead.

Josh Sullivan, Analyst

Hey, just a quick question regarding the strength in the African market this quarter. Previously, that's been a region where lower-cost competitors had made some inroads. Do you expect a reversal in that trend going forward?

Chris Bradshaw, President and Chief Executive Officer

We do, Josh. In fact, the increase that you saw this quarter is exactly that. So for context for everyone, the support market for Africa is one that has contracted significantly over the last couple of years during the downturn. The overall addressable market is about half, maybe a little less than half of what it was prior to the last downturn. So you've had some significant overall market contraction in addition to that. Bristow did lose a couple of contracts with oil and gas customers to a smaller local competitor that charges significantly lower rates. What we've seen more recently is a failure to deliver for the customers there, and so those customers have come back to us and we're looking for helicopter support. The additional activity pickup that you saw in the June quarter reflects us recommencing support activities for those pre-existing customers. So we think that this is reflective of what is likely to be a broader market emphasis going forward on availability and reliability of services and not just on price.

Josh Sullivan, Analyst

Got it. Thank you.

Chris Bradshaw, President and Chief Executive Officer

Thank you.

Operator, Operator

There appears to be no further questions. At this time, I would like to turn the conference back to Chris Bradshaw for any additional or closing remarks.

Chris Bradshaw, President and Chief Executive Officer

Thank you, Tracy. And thanks again everyone for participating in the call. We look forward to speaking again next quarter. And I want to say a final thank you to the Bristow team around the world, again first and foremost, for providing a great level of safety and customer service that was delivered again this quarter, as well as successfully accomplishing the outcomes I mentioned earlier in the call. Thank you very much. Stay safe and well. Bye for now.

Operator, Operator

This concludes today's call. Thank you for your participation, you may now disconnect.