Earnings Call Transcript - VTOL Q1 2022

Operator, Operator

Good day, and welcome to the Bristow Group Reports First Quarter Fiscal Year 2022 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.

Crystal Gordon, Senior Vice President and General Counsel

Thank you, Casey, and good morning, everyone. Welcome to Bristow Group's First Quarter Fiscal Year 2022 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?

Christopher Bradshaw, President and Chief Executive Officer

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. We achieved our target of 0 air accidents in the quarter ended June 30, and 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. The company continues to make significant integration progress following the merger of Era and Bristow last year. As of June 30, synergy projects representing $42 million of annualized savings have been completed, which means that we have already captured over 80% of the total synergy projects at the 1-year anniversary of the merger, placing the company well on the way to achieving our target of at least $50 million of annual run rate savings. In June and July, Bristow repurchased approximately 1.5 million shares for gross consideration of $40 million. Over the last 12 months, we have repurchased over 1.9 million VTOL shares for gross consideration of $50 million, representing an average purchase price of $25.92 per share. Bristow's continued generation of robust free cash flows facilitated this return of capital to shareholders. I will now turn it over to our CFO for a more detailed review of financial results. Jennifer?

Jennifer Whalen, Senior Vice President and Chief Financial Officer

Thank you, Chris. As you may have noticed in our filings yesterday, we have modified the revenues by line of service table to more accurately reflect how management views the company's lines of service. These changes include the addition of a government services line, and other services will now reflect revenues derived from leasing aircraft to nongovernmental third party operators, oil and gas contracts that do not materially fit into one of the 3 major oil and gas operating regions, and other services as they arise. With that, I will begin with a sequential quarter comparison of Bristow's financial results. EBITDA adjusted to exclude special items and asset dispositions was $40 million for the first quarter of fiscal year 2022 compared to $30 million in the fourth quarter of fiscal year 2021 or an increase of $10 million. This increase was primarily driven by higher revenues and lower compensation expenses. Revenues increased $7 million, primarily due to higher utilization in oil and gas and government services. Operating expenses were $4 million lower due to lower personnel and maintenance costs. General and administrative expenses were $3 million lower due to lower compensation expenses. Merger-related and restructuring costs decreased $15 million and $7 million, respectively. Furthermore, we recognized a loss on impairment of $22 million related to Petroleum Air Services and unconsolidated affiliates in Europe and certain helicopters held for sale. Also, we recognized a loss of $2 million related to the divesting of our subsidiary in Colombia. As a reminder, the merger closed in June of 2020. And due to the fact that Bristow was the accounting acquirer in the transaction, the previous year comparable quarter includes just 19 days of results from legacy Era Group Inc. To help with comparability of the periods presented, I will focus on the pro forma results as if legacy Bristow and Era were merged for the entire prior year quarter. With that reminder, the current year quarter versus pro forma prior year quarter EBITDA adjusted for special items and asset dispositions was $40 million for the current quarter compared to $48 million in the prior year results. The decrease in EBITDA of $8 million from the prior quarter is primarily due to lower operating revenues. Revenues decreased $8 million, primarily due to lower utilization in oil and gas. Operating expenses, excluding special items, were $3 million higher due to higher fuel and maintenance costs. General and administrative expenses were $4 million lower, primarily due to decreased professional service fees and lower compensation expenses. Finally, we generated adjusted free cash flow, excluding net proceeds from asset sales, of $39 million for the current quarter, which is consistent with the average for the 2 prior quarters. Since the merger last June, we have generated $180 million in adjusted free cash flow, excluding net proceeds from asset sales, and continue to believe that this business model will have strong free cash flow.

Christopher Bradshaw, President and Chief Executive Officer

Thank you, Jennifer. As noted in our last earnings call and in my recent letter to stockholders, we have a positive outlook on the future demand for our services. We continue to believe that a significant, broad-based increase in offshore oil and gas activity will begin next year. We also believe that the second half of calendar 2021 will be better than the first half of this year. Beyond oil and gas services, we believe strategic growth opportunities exist in government and military services, offshore wind farm support, and advanced air mobility. In particular, Bristow is well positioned to win additional government SAR contracts in pending and upcoming tender processes in Europe and the Americas. In conclusion, we expect the company will continue to generate a substantial amount of positive free cash flow, as demonstrated in our recent financial results. We believe that our strong balance sheet and robust free cash flow profile present multiple opportunities to create value for Bristow shareholders. With that, let's open the line for questions. Casey?

Operator, Operator

Our first question will come from Andres Menocal with Evercore ISI.

Andres Menocal, Analyst

Regarding your government services revenues this quarter, it seemed particularly strong. Can you break down some of the drivers behind that? And is that what we could expect going forward? Or was that somewhat of an anomaly, just given the prior period comparisons?

Christopher Bradshaw, President and Chief Executive Officer

One important thing to note is that we have done a reorganization of how we report our revenues by line of services. So there are now additional contracts that are reported in government services. Within that, we include not just the U.K. SAR contract, but also the contract that we have with the U.S. Bureau of Safety and Environmental Enforcement, or BSEE, as well as a number of other government contracts that we have in various countries around the world. So we're now highlighting the government services line for all government-related customer contracts that we have. Within that, even normalizing for the adjustment that we're showing, the increased activity is mostly an increase in flight hours, with a small benefit from foreign exchange as well.

Andres Menocal, Analyst

Okay. Great. Second question is just regarding your fleet. Where do you feel like you are in terms of innings for just continued asset sales? Just trying to think about if the size of the fleet continues to shrink, how I could think about the revenue trajectory for total oil and gas revenues?

Christopher Bradshaw, President and Chief Executive Officer

Asset sales will remain a component of our business model, though I don't anticipate them being as frequent as in the past 12 months. When we merged, we combined two large fleets, which allowed us to optimize certain fleet models and sell off nonperforming assets to reinvest the cash in more lucrative opportunities. Therefore, the volume of asset sales moving forward is expected to be lower than it has been recently, but it will still be integrated into our business strategy. We've always considered ourselves as managing a pool of capital or assets to maximize returns. We have various approaches to achieve this, such as operating helicopters or fixed-wing aircraft for our customers to generate cash flow, leasing aircraft to third-party operators for additional cash flows, and selling aircraft in the secondary market. It's a straightforward process, but we will evaluate these three opportunities and opt for the one with the highest net present value, which could involve selling helicopters. Consequently, we are consistently assessing the residual value of our fleet and proactively managing the sale of certain helicopter models over time. This practice will persist, though we expect it to be at a reduced pace compared to the last year.

Andres Menocal, Analyst

Okay. Great. Just my last question for now. Do you have any high-level just qualitative color around following the M&A market, whether on a regional basis, or just the ability in doing this for other operators out there to engage in those kinds of conversations?

Christopher Bradshaw, President and Chief Executive Officer

Certainly. So at a high level, we remain optimistic about the potential for attractive consolidation opportunities in our industry, particularly in certain regions around the world. There are certain regions such as the U.K. sector of the North Sea or Brazil, where there continues to be an overcapacity of equipment and a number of operators. We think that the industry would benefit from, and in many ways actually needs, consolidation to reach a more sustainable state in those areas. Again, we're optimistic about that. We think Brazil is as well positioned as anyone to participate in a consolidation.

Operator, Operator

The next question comes from John Deysher with Pinnacle.

John Deysher, Analyst

I was just curious, Chris, on the share repurchase. We are very happy that you spent $40 million buying back stock. And I was just wondering, is there anything left on that authorization of $50 million? Or maybe you can help with what's outstanding there?

Christopher Bradshaw, President and Chief Executive Officer

Certainly. So last September, the Board approved the total $75 million share repurchase grant. As of now, we've used $50 million of that. So we do have $25 million remaining in the Board-approved plan as of the end of July. We also have additional financial capacity beyond that. But of course, that would need to be a new plan, which would be publicly disclosed if and when we initiate that.

John Deysher, Analyst

Okay. Great. The assets held for sale, $7.4 million, is that exclusively helicopters at this point?

Jennifer Whalen, Senior Vice President and Chief Financial Officer

Yes. John, yes, that's just helicopters held for sale.

John Deysher, Analyst

The investment in unconsolidated subsidiaries is $19.4 million, down from around $90 million a year ago. Which subsidiaries does this include? Is it Cougar or others?

Jennifer Whalen, Senior Vice President and Chief Financial Officer

That is Cougar. That is also Líder, our investment in Brazil as well, and the unconsolidated subsidiary we have in Egypt as well.

John Deysher, Analyst

If you decide to sell any of those, would they transition to assets held for sale? What would happen if you decided to sell any of them?

Jennifer Whalen, Senior Vice President and Chief Financial Officer

They would just be sales and would not shift to assets held for sale. That falls under a different category by the account.

John Deysher, Analyst

Okay. Can you share with us whether any of those are for sale?

Christopher Bradshaw, President and Chief Executive Officer

We have exited our investment in Líder, so it is now recorded as zero on the balance sheet. We previously took a significant impairment charge related to Cougar, resulting in a relatively small remaining balance. Additionally, we recorded a $60 million impairment on PAS in Egypt during the current period, which, along with Cougar, is the remaining balance. We do not have plans to sell at this time. Despite the current impairment, the business in Egypt holds a strong market position with a 25% minority investment that has historically provided good dividends. While the impairment for Cougar was due to the decline in the offshore oil and gas market on the East Coast of Canada, we remain optimistic about the company's market position. Bristow continues to benefit from the cash flow generated through leasing aircraft and other assets to Cougar in Canada.

John Deysher, Analyst

Okay. What about the fixed-wing business in Australia? Is that a core asset moving forward?

Christopher Bradshaw, President and Chief Executive Officer

So our investment in Airnorth is one that's going through a transition period right now. The fleet is actually transitioning from an E170 model of regional jets to E190s over the next couple of years here. We think that's an important transition for the business to make. We think it will result in much better EBITDA generation and allow for growth of the Airnorth business. The team there has a good plan to execute upon that. Once that transition is complete, I think we'll be in a good position where we can make an evaluation at that time, whether it's best to benefit from those better cash flows or look at other alternatives for the business.

John Deysher, Analyst

And when will that transition be complete?

Christopher Bradshaw, President and Chief Executive Officer

We're anticipating by early 2023.

John Deysher, Analyst

All right. Good. And I guess, finally, we're hearing good things about offshore drilling, Guyana, Suriname, Trinidad. Can you bring us up-to-date as to what's going on down there?

Christopher Bradshaw, President and Chief Executive Officer

Yes, happy to do that. It continues to be one of the bright spots for the global offshore oil and gas industry. The reserves that have been discovered by Exxon, in particular, in Guyana are absolutely world-class and prolific. They continue to make prolific discoveries. There are now other oil and gas companies becoming involved there in Guyana. Suriname, which is just across the border, has very similar characteristics and similar success in early drilling programs there from Apache, Total, PETRONAS, and others. Really, it is looking a lot like Guyana, just a few years behind it in terms of the development of where they are in the life cycle there. Trinidad is an area where Bristow has enjoyed a leading market position for the last 60 years and continues to be a fairly stable and active basin for us. So that Caribbean triangle region of Trinidad, Guyana, Suriname, where we have very much the leading position, is one that generates a nice cash flow return for the company.

Operator, Operator

We'll take our next question from Adam Ritzer, Private Investor.

Unidentified Analyst, Analyst

I know you guys have done a great job on managing the balance sheet, refinancing, generating cash. Glad to see the buybacks are going and, hopefully, that will get finished off soon. But I guess, one of the questions I had is in regards to how come there's not any more improvement in margins? For example, a year ago, you guys did $296 million of revenues and did $48 million of EBITDA, and the revenues were only down $8 million year-over-year, and you're doing $40 million of EBITDA. So it's almost 100% decremental margins. Is there any reason for that? Like why you're not a little more profitable with all but $40 million of cost saves?

Christopher Bradshaw, President and Chief Executive Officer

Adam, thank you for your question. When we examine the margin between the two periods on a pro forma basis, it's important to note that this pro forma information is included in the slide deck we shared. I recommend reviewing that comparison for the most accurate analysis. As Jennifer mentioned, the reported numbers in the quarterly report for the period ending June 30, 2020, only reflect 19 days of legacy Era Group Inc. On a pro forma basis, the EBITDA margin has decreased by roughly 240 basis points, primarily due to operating expenses as a percentage of revenues, with fuel being a significant factor. Fuel prices have risen, contributing to this, but it's not the sole reason. The global pandemic began in early 2020 and soon affected the global oil market. However, in our business, there was a delay in the decrease in customer activity and the decisions made regarding the reduction of aircraft. We've been seeing monthly standing charges rolling off during this time, and the current period more accurately reflects the full year's impact of those roll-offs compared to prior periods. This has also played a substantial role. As you might remember, in a typical contract, the monthly standing charges represent the majority of our revenues compared to the variable flight hour component.

Unidentified Analyst, Analyst

Okay. In terms of fuel, so the contracts don't have pass-throughs on fuel increases, I guess?

Christopher Bradshaw, President and Chief Executive Officer

Most of them do. And then we have some non-revenue hours that we incur for either training or ferry flights from time to time. But yes, most of our customer contracts do have pass-throughs.

Unidentified Analyst, Analyst

Okay. And I guess, on a big picture, like you just mentioned, all the drilling companies, the offshore services companies are all pointing to things really getting going, and even '22, hopefully, being much better in a new cycle. I know you guys don't give guidance per se, but can you perhaps walk us through what it would take to get to the $1.5 billion and $240 million of EBITDA when you first announced the Bristow deal? Like how much more activity do you need that some of the things you're saying indicate when and what we need to do to get there? Can you help us understand the upside?

Christopher Bradshaw, President and Chief Executive Officer

Yes. Look, without getting into financial guidance, as you referenced, Adam, we don't give financial guidance. Directionally, we believe that the second half of this calendar year 2021 will be better than the first half. We don't believe that a material broad-based recovery in offshore oil and gas activity will occur until next year in calendar 2022. We are optimistic about that. We think it will be a multiyear recovery in activity, and Bristow will benefit greatly from that as we have currently idle aircraft that go back to work and improve the cash flow generation capacity of the company. We also, over that period of time, on the expense side, we'll be looking to continue to optimize expenses as much and wherever possible. That includes the expenses we have on aircraft leases. We have a number of aircraft that have lease maturities coming up over the next 12 months. With the exception of a few aircraft that we need to keep to support customer activity, we will otherwise move aircraft around to facilitate the return of aircraft to lessors, which will result in an improvement in cash flows for Bristow.

Unidentified Analyst, Analyst

Right. So let me rephrase it. If you do see what you're saying and what the other companies in the industry related areas are saying, how much revenue upside is there? I mean is there 10%, 20%, 30%? Historically, I know you haven't owned Bristow for more than a year, but how much revenue upside could a new cycle bring to you guys? Like, I think that's what people are trying to figure out, how good could things do? And how much better can it be from here?

Christopher Bradshaw, President and Chief Executive Officer

Yes. I appreciate the background behind the question. Consistent with our long-standing policy, we don't provide financial guidance. So any quote about percentages with cost to guidance, which we don't do. But there is significant upside, and really better utilization of the fleet is what's going to drive most of that upside.

Operator, Operator

And we'll take a follow-up question from Andres Menocal with Evercore ISI.

Andres Menocal, Analyst

Just a couple, I guess, just housekeeping questions, or just how to think about a couple of line items on the P&L. It seemed like D&A just jumped up a fair amount, which you provided color around in the press group release. But how should we think about D&A going forward? Is what we saw in the most recent quarter reflective of how we'd be from here on out? I understand that you don't give financial guidance.

Jennifer Whalen, Senior Vice President and Chief Financial Officer

We had a small adjustment to depreciation for previously undepreciated assets during this period, which included $4.2 million of nonrecurring expense.

Andres Menocal, Analyst

Okay. Perfect. And just one more, if I may. Regarding taxes, it doesn't really have a significant impact on your valuations, but I'm trying to understand it from a cash flow perspective. I know you have some net operating losses, but it seems like over the past six quarters, it has fluctuated between positive and negative. I'm just looking for clarity on how to approach the tax position moving forward.

Jennifer Whalen, Senior Vice President and Chief Financial Officer

From a cash tax perspective, we mentioned in our S-4 that we anticipate cash taxes to be between $10 million and $15 million. Our taxes recorded on the income statement can vary from time to time based on different jurisdictions and their profitability. However, we do expect to pay a consistent level of taxes annually, which could be around $15 million.

Operator, Operator

And at this time, I'm currently showing no further questions.

Christopher Bradshaw, President and Chief Executive Officer

Thank you, Casey, and thank you, everyone, for participating. We look forward to speaking to you again next quarter. I hope everyone stays safe and well.

Operator, Operator

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect your phone lines.