Earnings Call Transcript - VTOL Q3 2025

Operator, Operator

Good day, everyone, and welcome to Bristow Group's Third Quarter 2025 Earnings Call. Today's call is being recorded. At this time, I'd like to turn the call over to Red Tilahun, Senior Manager of Investor Relations and Financial Reporting.

Red Tilahun, Senior Manager of Investor Relations

Thank you, Luke. Good morning, everyone, and welcome to Bristow Group's Third Quarter 2025 Earnings Call. I am joined on the call today with our President and Chief Executive Officer, Chris Bradshaw; and Senior Vice President and Chief Financial Officer, Jennifer Whalen. Before we begin, I'd 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 3 of our investor presentation. You may access the 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 the investor presentation. I'll now turn the call over to our President and CEO. Chris?

Christopher Bradshaw, President and CEO

Thank you, Red. To begin, I want to commend the Bristow team for their steadfast dedication to deliver safe, efficient and reliable services despite the persistent supply chain challenges that have plagued the aviation industry in general and the civilian helicopter industry, in particular, for the last 4 years. I appreciate our team's unwavering commitment to operational excellence and delivering the best possible outcomes for our customers and stakeholders. We are also pleased to report another quarter of strong financial performance with adjusted EBITDA of $67.1 million in Q3 2025. Looking forward, Bristow continues to have a positive outlook for offshore energy services activity. Deepwater projects are favorably positioned, offering attractive relative returns within the asset portfolios of oil and gas companies. And we believe offshore projects will receive an increasing share of upstream capital investment. This positive long-term demand outlook is paired with a tight supply dynamic. The fleet status for offshore configured heavy and super medium helicopters remains near full effective utilization levels. The ability to bring in new capacity remains constrained with production lines that must be shared with military aircraft orders and current manufacturing lead times of approximately 24 months. We believe the tight supply of offshore helicopters supports a more constructive outlook for our sector relative to some other offshore equipment sectors. In addition, 2026 represents an important inflection point for Bristow's Government Services business as we reach the full operational run rate under the Irish Coast Guard contract and continue the transition to the new UKSAR2G contract in the United Kingdom. While the costs incurred to effectuate these contract transitions have caused a negative drag on profitability in 2025, that impact inverts in 2026 with adjusted operating income from our Government Services business nearly doubling year-over-year. For the company as a whole, I would highlight that the midpoint of Bristow's 2026 adjusted EBITDA guidance represents a 27% increase over the midpoint in 2025, reflecting the robust growth expectations for our business. I will now hand it over to our CFO for a more detailed discussion of Q3 results and our financial outlook. Jennifer?

Jennifer Whalen, CFO

Thank you, Chris, and good morning, everyone. As Chris noted, we are pleased to report another quarter of strong financial results with total revenues reflecting an increase of $9.9 million and adjusted EBITDA reflecting an increase of $6.4 million on a consolidated sequential basis, both of which were primarily driven by our Government Services and Other Services segments. We have also updated and tightened our 2025 and 2026 outlook ranges, which I will discuss further on during this call. Turning now to our sequential quarter segment financial results, beginning with our Offshore Energy Services or OES segment. Revenues and adjusted operating income were both $2.4 million lower this quarter. Revenues in Europe and Africa were $6.6 million and $1.5 million lower, respectively, primarily due to lower utilization, while revenues in the Americas were $5.7 million higher, primarily due to higher utilization. The lower revenues were partially offset by lower general and administrative expenses due to a decrease in professional services fees. Overall, operating expenses were consistent with the preceding quarter, primarily due to higher personnel costs of $7.3 million due to the absence of a seasonal personnel cost benefit in Norway in the preceding quarter and higher benefits and overtime costs in the current quarter. These increases were offset by lower repairs and maintenance costs of $5.3 million, driven by higher vendor credits and a decrease in other operating expenses of $2.3 million. Moving on to Government Services. Revenues were $8.4 million higher, primarily due to the ongoing transition of the Irish Coast Guard contract as an additional base commenced operations in the third quarter. Operating expenses were $2.8 million higher and largely comprised of higher subcontractor costs, increased amortization of deferred costs and higher personnel costs, all of which were related to the new government services contract. Repairs and maintenance costs, however, were $4 million lower due to higher vendor credits and the timing of repairs. General and administrative expenses were $0.8 million higher, primarily due to higher professional services fees and personnel costs related to contract transitions. Adjusted operating income for this segment was $4.8 million higher this quarter. Before we move on to our Other Services segment, I'd like to provide color on the references to vendor credits in our OES and Government Services segment. In our industry, OEM or vendor credits are common practice and generally provided for reasons such as credits tied to asset purchases, particularly when a customer has placed orders for several aircraft, OEM performance and delays and incentives when entering or extending long-term maintenance contracts or as refunds when exiting such contracts. While we have historically received vendor credits and applied them towards aircraft and inventory parts purchases or ongoing maintenance, we benefited more materially from such credits this quarter and continue to value our strong relationships with our OEMs. As a reminder, Bristow is the world's largest operator of S92, AW189 and AW139 helicopter models, which remain the most in-demand models for both offshore crude transportation and SAR missions. Finally, revenues from other services were $3.8 million higher, primarily due to higher activity in Australia of $4.8 million, partially offset by the conclusion of a dry lease contract. The higher revenues were partially offset by higher operating expenses of $1.9 million related to the increased activity in Australia. As a result, adjusted operating income was $1.9 million higher this quarter. Moving on to Bristow's financial outlook. You may recall from our previous earnings calls that the primary factors that could bias results to either end of our guidance range include supply chain dynamics that impact aircraft availability, customer activity levels influenced by global energy demand, new contract transitions and the exchange rate of foreign currencies relative to the U.S. dollar, namely the British pound sterling and to a lesser extent, the euro. As such, we are tightening our 2025 adjusted EBITDA range to $240 million to $250 million on total projected revenues of $1.46 billion to $1.53 billion. For 2026, we are tightening our adjusted EBITDA range to $295 million to $325 million on total projected revenues of $1.6 billion to $1.7 billion. This represents an approximately 27% increase in adjusted EBITDA from the 2025 to 2026 midpoint. Given better visibility into operating costs and expected customer activity levels, we are updating the adjusted operating income guidance ranges for our OES segment to approximately $200 million for 2025. Despite current market conditions in the energy sector, we expect strong performance from this segment to continue in 2026 as evidenced by the updated adjusted operating income range of $225 million to $235 million, representing a 15% year-over-year increase from the midpoint. While margins in our Government Services segment improved this quarter and the capital investment for our 2 new government contracts have largely concluded, we expect this segment will continue to feel the effects of new contract transitions until they are fully operational. The strong margins and earning potential of this business will continue to improve as the operations and revenues for the contracts continue to ramp. The 2026 midpoint for our adjusted operating income range reflects a 76% increase compared to 2025. And in other services, we expect the improved economics of our regional airline in Australia to persist and for this segment to remain consistent and cash flow accretive. Turning now to cash flows. Operating cash flows generated approximately $122 million year-to-date 2025 compared to $126 million in the prior year. Working capital continues to be impacted by increases in inventory to support new contracts and mitigate risk related to supply chain constraints and an increase in other assets primarily related to start-up costs for new government services contracts. However, we expect working capital to improve over time as supply chain constraints subside and our new contracts conclude their transition periods and reach their full operational run rate. Additionally, as of the third quarter, our unrestricted cash balance was approximately $246 million with a total available liquidity of $313 million. Moving on to our previously announced capital allocation targets. We made an additional $25 million of accelerated principal payments on the U.K. SAR debt facility in the current quarter, bringing the total accelerated payment to $40 million this year. In summary, we remain focused on meeting our financial and operational targets and executing our capital allocation strategy while continuing to benefit from and work to maintain a strong balance sheet and liquidity position. At this time, I'll turn the call back to Chris for further remarks.

Christopher Bradshaw, President and CEO

Thank you. In conclusion, we are pleased to highlight the company's robust growth outlook for 2026 as evidenced by expected adjusted EBITDA growth of approximately 27% year-over-year. This outlook is supported by the growth and stability of our Government Services business, the heavy weighting of our offshore energy services business to more stable production support activities and the breadth and diversity of the geographic markets we serve. With that, let's open the line for questions. Luke?

Operator, Operator

Our first question will come from Jason Bandel with Evercore ISI.

Jason Bandel, Analyst

I want to start by asking about your guidance in OES. I commend you for providing two-year forward guidance on most areas, while you have only one quarter forward. Given the lower utilization in OES during the quarter and the tightening of the forward guidance that you mentioned, Jennifer, which could be somewhat lower, what implications should we draw about the market based on this? Is this an indication that customer demand for helicopters is starting to decline in the short term? How should we approach this?

Christopher Bradshaw, President and CEO

Yes. Thanks for the question. As you noted, we did tighten the range this quarter. That's consistent with how we generally approach as we near the end of a period/beginning of a new one, we'll look to narrow that range. In this case, that updated guidance did impact the midpoint by about 2%. But in terms of the guidance around the OES business specifically, I would point to 2 main factors. First, we have experienced some persistent supply chain challenges that are impacting aircraft availability. In some cases, that might result in lost revenue opportunities. In other cases, particularly on some legacy contracts, it may result in some contractual penalties under the contract related to aircraft availability. And then the second category I would point to is fewer aircraft, a small number on contract in the North Sea and the U.S. But overall, again, still expecting positive offshore energy services activity and growth for our business. And overall, for the company, really highlighting that we're expecting 27% growth in our adjusted EBITDA year-over-year, which I think within our sector, within a peer group is a real positive differentiator. I'm not sure that anyone else is pointing to that kind of growth in the next year.

Jason Bandel, Analyst

Yes. I agree, Chris. And as a follow-up to that, I guess this is more of a kind of a macro level. Can we discuss your current outlook for your main OES markets and regions given some of the seasonality you have in your business? And if you can kind of just go around and what you're seeing out there would be helpful.

Christopher Bradshaw, President and CEO

Yes, happy to do that. I would probably start with Brazil, which is a market that we believe continues to have some of the best, if not the best growth prospects for any of the offshore regions. Really right near there in the same category would be Africa, where we're seeing continued demand and a need for additional aircraft in our business there. And I'd also add the Caribbean to that list, which is still growing. So each one of those markets is still growing. We're seeing net aircraft inflows, meaning that we're mobilizing additional capacity into those markets to meet the demand. The U.S., I would say, is mostly stable, though with less ad hoc work. So the U.S. Gulf is an area where we typically would see a lot of ad hoc aircraft over and above the contracted fleet count. That has admittedly decreased some, which I think is an indication of stable activity that's able to be addressed by the contracted fleet levels. And then finally, on the less positive side would be the North Sea, which is softer in terms of activity.

Jason Bandel, Analyst

That was helpful. And just one last quick one since you brought up in the prepared remarks on the vendor credits since some might not be as familiar with those. Why were those materially higher this quarter? And do you guys typically include that in your guidance?

Jennifer Whalen, CFO

Sure. It's an indication of the increased activity we've had. I mentioned several ways that credits come about, such as buying aircraft, incentives from long-term maintenance contracts, or exiting aircraft from those contracts, along with OEM performance and delays. This is a combination of all those credits. This isn't something new; we have always experienced these credits. As activity levels continue to increase, there's likely to be a higher level of credits in the near future.

Operator, Operator

Our next question comes from the line of Josh Sullivan with JonesTrading.

Joshua Sullivan, Analyst

So how many aircraft are you aiming to take delivery of for each of your segments? And then I guess if you could just touch on maybe the timing and location where these aircraft are expected to be deployed?

Christopher Bradshaw, President and CEO

Yes. I would say there are really 2 categories of pending deliveries. The first are aircraft that we've actually already taken delivery of from the OEM, but are not yet placed into our operating fleet count as we're completing final configuration and modifications on those aircraft. In our Government Services business, that would be the right category for the pending deliveries. So we've taken delivery of 5 aircraft that are, again, undergoing final modifications now before being placed into operations. 2 of those are AW189s that are going to the Irish Coast Guard contract in Ireland. And 3 of them are AW139 aircraft that are going to the new SAR2G contract in the United Kingdom. The second category of pending deliveries are aircraft that are still under construction by the OEM. We have not yet taken physical delivery of these aircraft. That category would characterize the remainder, which is 7 offshore, so OES configured AW189s that we have on order. We know where those are going. Those locations are going to be split between Brazil, Africa and the North Sea.

Joshua Sullivan, Analyst

Got it. Can you tell me where the main supply chain bottlenecks are currently, particularly between those two groups or more generally?

Christopher Bradshaw, President and CEO

We're still experiencing significant supply chain issues across the board, unfortunately, which is impacting the aftermarket. There are delays for parts and components necessary to maintain and operate the aircraft. In recent years, we faced this challenge primarily with the S-92 heavy helicopter, but that situation has improved somewhat. However, we're now encountering similar issues with other helicopter models, such as the AW189. This is affecting aftermarket support and the timing of new deliveries. This is less of an issue for government orders as we’ve already received those aircraft, but we expect delays for the offshore configured AW189s coming off the production line. This is largely due to the complexity of the modern aviation supply chain, where the original equipment manufacturer has over the years outsourced to more subcontractors and vendors. As they work to produce these aircraft, they are struggling to source components on time to meet delivery schedules. Thus, both aftermarket support and new deliveries are being affected by these industry-wide supply chain issues.

Joshua Sullivan, Analyst

And I guess maybe a related question, just what does CapEx maybe look like in '26 as a result?

Christopher Bradshaw, President and CEO

We see total CapEx in '26 of about $100 million. So that's in round numbers, roughly $20 million of maintenance and another $80 million of growth on a net basis, which is really related to those offshore configured AW189s that I mentioned. The one thing I would highlight there is if you take that full $100 million of CapEx growth and maintenance, run it through the waterfall of the guidance we've provided, you're still looking at approximately $140 million of free cash flow in 2026 at the midpoint of guidance, which on a company that has an equity market cap of roughly $1 billion, $140 million is a pretty healthy free cash flow yield in our view.

Joshua Sullivan, Analyst

Yes. And then I guess just one last one. Just any updates on the advanced mobility trials, BETA, Elroy, others? Just how is that dynamic progressing?

Christopher Bradshaw, President and CEO

Yes. Thanks for the question. I'd say that's going very well. As you may be aware, we launched in August a Norway Sandbox project, which really represents a first-of-its-kind real-world flight testing of precertified aircraft that's being sponsored by the Norwegian government in partnership with the OEM, which in this case is Beta Technologies. And congratulations to our friends and partners at Beta Technologies for their IPO on the New York Stock Exchange yesterday. It was a nice milestone for them. And here in the test arena in Norway, we're using the Beta CX300 all-electric aircraft that's being operated by Bristow. So what this is allowing us to do is collect real-world data to validate assumptions and learn. So what's the aircraft, what are the batteries actually doing in different temperatures at different altitudes, et cetera, and take that, incorporate that again into the learnings, which, again, first of its kind test arena, we see this as being an important step in commercializing advanced air mobility. And we see this type of model being probably likely replicated in other countries and with other AAM model aircraft as well.

Operator, Operator

Our next question is from Steve Silver with Argus Research.

Steven Silver, Analyst

They are mostly housekeeping. Just in terms of the asset sales that you guys reported this quarter and then also the proceeds from the sale of 2 helicopters, I was hoping you could provide any color just on the nature of these sales and whether we should expect any further activity like this over the coming years?

Jennifer Whalen, CFO

We sell assets when they are no longer necessary for our operations, usually older assets that have exceeded their useful life in our markets. These assets are typically sold to other sectors, such as utilities or firefighting. We also explore sale-leaseback transactions when they are appropriate for our helicopters. In this quarter, we completed a sale-leaseback transaction on one of our new search and rescue aircraft, which contributed significantly to our sales proceeds this quarter, and we also sold an older asset.

Steven Silver, Analyst

Great. And one more, if I may. On the income tax benefit in Q3, I was hoping you could just discuss the future outlook on the tax line, especially on the effective tax rate and what your thoughts are as the net income position of the company continues to grow?

Jennifer Whalen, CFO

Sure. In this quarter, we reviewed the attributes of our different tax positions across various jurisdictions. We determined that the valuation allowance on our Australian operation could be lifted due to positive results in that part of the business. This removal of the valuation allowance was the main reason for the one-time tax benefit. I wouldn't expect this to happen again. As our profitability increases, our tax rate will be closer to a normalized level. Since we operate in multiple jurisdictions, the average tax rate will be just above the U.S. tax rate.

Operator, Operator

Our final question will come from the line of Colby Sasso with Daniel Energy Partners.

Colby Sasso, Analyst

A number of larger integrated E&Ps have talked on their conference calls about a need for more exploratory drilling over the next few years. Do you see this as a focus for your customers moving forward?

Christopher Bradshaw, President and CEO

Yes. Thanks for the question. Yes, we do see that as a focus moving forward. Our business is really much more weighted to production support activity with 85% of our revenues from offshore energy services driven by production activities. For the remainder, though, we are exposed to exploration. And I'd say our view is probably mostly in line with consensus and that we continue to believe that deepwater projects are favorably positioned with attractive relative return prospects within our oil and gas customer portfolios. And so we see an increasing share of capital investment from the upstream going into deepwater and offshore projects. And we see that as being a solid long-term driver and outlook for the business. And in our case, really coupling that with a very tight supply picture with a limited number of available heavy and super medium offshore configured helicopters today.

Colby Sasso, Analyst

Makes sense. And as a quick follow-up, you noted a new aircraft headed to the North Sea, but several drillers have moved their rigs out of Norway in recent years, setting no near-term upside in rates or utilization in that market. Additionally, E&Ps are not bullish on the U.K. energy industry either. Can you expand on why you see the need for new builds going into that market?

Christopher Bradshaw, President and CEO

Yes. Fair question, and I appreciate the opportunity to expand upon that. So I would say that we do not see upside or growth in the North Sea necessarily. It is a mature market that over the long run is more likely to decline than otherwise. However, what's going on in this situation is that these are helicopter fleet replacements. So namely new AW189 that will be replacing legacy S-92s that are aging out of the fleet. And so we have customers, upstream oil and gas companies that are looking for a more reliable aircraft, a more modern aircraft and so it's an opportunity for us to provide that on a secure long-term contract with enhanced profitability, better returns than what they're replacing. So while not growth, this is certainly value accretive for the company.

Operator, Operator

This concludes our question-and-answer session. I'll now turn the call back over to Chris Bradshaw for closing remarks.

Christopher Bradshaw, President and CEO

Thank you, Luke. And I appreciated the opportunity earlier to talk about what's going on in advanced air mobility and the important developments in that new industry sector for all-electric and hybrid aircraft platforms. As I mentioned, there are some important milestones and developments happening right now. We expect the first aircraft models in that sector to be certified next year, 2026, really just around the corner. In theory, Bristow might take delivery of the first of those aircraft in 2026. However, we think that's less likely. We're not contemplating any contributions in our guidance for next year. It's probably more likely that Bristow would take its potential first deliveries in the 2027, 2028 time frame. But we do believe that advanced air mobility and both all-electric and hybrid aircraft are going to be a part of the future of aviation. And as the global leader in vertical flight for the last 75-plus years, we believe there's a role for Bristow to play there and are excited about the partnerships we're developing with some of these OEMs and pursuing market opportunities together. We also remain excited about the growth that we're projecting for the business next year with that 27% increase in adjusted EBITDA, which we see as really a positive differentiator for the company. With that, we appreciate everyone's time today. I hope you stay safe and well. We'll talk again next quarter. Thank you.

Operator, Operator

This concludes today's call. You may now disconnect at any time.