Earnings Call Transcript - VTOL Q2 2022

Crystal Gordon, Senior Vice President General Counsel

Thank you Anna, and good morning, everyone. Welcome to Bristow Group's second 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?

Chris Bradshaw, President and CEO

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 have achieved our target of zero air accidents thus far in fiscal year 2022. We are also continuing last year's progress on delivering fewer lost time incidents in the workplace. I want to thank and commend everyone on the Bristow team for their hard work and dedication to place safety first every day. The company continues to make significant integration progress, following the merger of Era and Bristow last year. As of September 30th, synergy projects representing approximately $46 million of annualized savings have been completed, which means that we have already captured over 90% of the target synergy projects identified with the merger. This progress is made possible by a dedicated group of Bristow team members who have worked diligently to analyze, design, and execute upon a plan to deliver a more efficient cost structure for the company and our stakeholders. As previously disclosed in July of this year, Bristow repurchased approximately 550,000 shares for gross consideration of $15 million, representing an average purchase price of $27.24 per share. In addition, during the quarter we paid approximately $5 million to extinguish debt at our Airnorth business in Australia. We continue to believe that our strong balance sheet and robust free cash flow profile present multiple opportunities to create value for Bristow shareholders. With that, I will hand it over to our CFO for a more detailed review of financial results. Jennifer?

Jennifer Whalen, Senior Vice President Chief Financial Officer

Thank you Chris. Today I will begin with the sequential quarter comparison of Bristow's financial results. EBITDA adjusted to exclude special items and asset dispositions was $45 million for the second quarter of fiscal year 2022, compared to $40 million in the first quarter, an increase of approximately $5 million. As Chris noted in our earnings release, our current quarter financial results were adversely affected by Hurricane Ida, pandemic-related travel restrictions in Australia, labor union settlement costs from Norway, and UK SAR 2G contract bid costs. Excluding these items, adjusted EBITDA would have been approximately $3 million higher. Operating revenues increased $1.8 million, primarily due to higher utilization in oil and gas services. Operating expenses were $4.3 million higher due to increased personnel costs, the recognition of insurance deductible following the impact of Hurricane Ida, and higher maintenance and fuel costs. General and administrative expenses were $1.5 million higher due to increased insurance costs and higher professional service fees. Merger-related costs were $0.6 million in the current quarter compared with $1.7 million in the previous quarter. Furthermore, other income was $15.3 million in the current quarter, primarily driven by a bankruptcy-related settlement of $9 million. Income tax expense was $14.5 million in the current quarter, primarily driven by the previously mentioned bankruptcy-related settlement, insurance proceeds, and aircraft sales. Finally, Bristow continues to benefit from a strong balance sheet and liquidity position. As of September 30th, available liquidity was $288 million and our net debt to LTM adjusted EBITDA ratio was approximately two times. In the last 12 months we have generated $158 million in adjusted free cash flow excluding net proceeds from asset sales and believe that this business model will continue to have strong free cash flow. At this time, I'll turn the call back to Chris for further remarks.

Chris Bradshaw, President and CEO

Thank you, Jennifer. As noted in our last two earnings calls and this year's 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 in earnest next year. Indeed, the recent strength in commodity prices and improving market conditions have enhanced our belief that we are on the precipice of a multiyear investment cycle with oil and gas market fundamentals poised to remain constructive for at least the next few years. Bristow's financial results will benefit greatly from the expected increase in offshore oil and gas spending. Beyond oil and gas services, we believe compelling growth opportunities exist in government and military services, offshore wind farm support, and advanced mobility. In particular, Bristow is well-positioned to win additional government SAR contracts in pending and upcoming tender processes in both Europe and the Americas. With that, let's open the line for questions. Anna?

Operator, Operator

We'll take our first question from James West with Evercore ISI.

James West, Analyst

Hey good morning everybody. So Chris, it looks to me if we look at the global market for the helicopters or the categories that you operate in that most are relatively tied at this point except for the S-92 class. I guess one, is that a fair statement? And two, how do you see that market tighten as we go into the offshore cycle that you envision and certainly we agree with in '22?

Chris Bradshaw, President and CEO

Jim, you're right. The excess supply in the industry is primarily concentrated in the heavy asset class, primarily the S-92 model helicopters. Beyond that, it is more constructive in terms of supply-demand balance. There is still some excess capacity in the median helicopter class. But as we see activity picking back up, and we're already starting to see signs of that in certain regions, we think it will accelerate next year. We believe that medium class, primarily AW139, supply-demand balance will tighten rather quickly. And as you noted, once we get down to the light helicopter categories, there is already a tight supply-demand balance. So yes, excess supply is very much concentrated in the heavies, the S-92s. We think that is likely a multiyear recovery process. It will be a combination of some equipment being phased out of operations, as well as any benefit coming from increased activity as new exploration projects move forward.

James West, Analyst

Okay. Got you. That's very helpful. Thanks. And then maybe a little bit unrelated follow-up. You recently announced an order for electric vertical aircraft and I know you're exploring some other market opportunities there. Could you maybe help us with what the size of the capital commitment could be? What markets you think are more attractive or maybe even least attractive for Bristow's already 70-plus year history of aviation? And kind of how you think about getting into the electric market as well as versus the oil and gas opportunity? Obviously it's the future here, but I'm trying to understand how you're envisioning this future.

Chris Bradshaw, President and CEO

Thank you for the question, James. At this stage in the development of the advanced mobility industry, we are not making any firm capital commitments. However, what we are doing is working with the companies that are developing these aircraft. We started this process a couple of years ago and have really accelerated efforts this year on our diligence to determine which aircraft developers we think are going to be the leaders for the relevant mission profiles, developing relationships there. We've signed some partnerships. We're also having some other discussions that may become publicly announced at some point. We believe that these aircraft will be used in a variety of applications. Some of them will displace current services that our fleet is doing, particularly in the lighter end of our light singles and light twin side of the fleet. Other mission profiles will be an expansion of additional services for existing customers and other mission profiles will be an expansion into new end markets with a different set of customers. We believe that Bristow is well-positioned to participate in a variety of channels throughout the value chain. That could range from a model similar to what we do today where we either own or lease the aircraft and we operate and maintain them throughout the life cycle of the aircraft. In other situations, we may provide more discrete services for certain products and certain geographic regions. We do think there will be a spectrum from geographic region to geographic region and from end market to end market. But we believe that on the whole, this is potentially a very large market for the global industry and we believe that Bristow is well-positioned as the world's global leader in flight to participate actively throughout the supply chain.

James West, Analyst

Okay. Got it. Thanks Chris. Very helpful.

Chris Bradshaw, President and CEO

Thank you.

Operator, Operator

We'll now take our next question from Dilip Badlani with SKM.

Dilip Badlani, Analyst

Hi guys. Thanks for the time. I just had a question regarding the treasury stock. Is there any reason you guys are not canceling the shares?

Jennifer Whalen, Senior Vice President Chief Financial Officer

There's no particular reason.

Dilip Badlani, Analyst

Got it. Okay. And then one other thing was you guys looks like you're starting to see some capital expense from the big majors come back, or is that still delayed because in terms of budgets for next year? And I know you said it's a multiyear cycle. Just curious what you guys are seeing.

Chris Bradshaw, President and CEO

Our view is that we believe a significant broad-based recovery in spending will begin in earnest next year, and we do think it will be a multiyear increase in spending. What we're seeing now, early stages here in late 2021, are some green shoots, primarily concentrated in the Americas. This includes new exploration projects moving forward, increasing demand for helicopters from Brazil in the Caribbean, and also in the US Gulf of Mexico. Again, at this stage, it's short-term exploration projects, but we're starting to develop a pipeline that will drive a more broad-based increase in overall activity beginning in earnest next year.

Dilip Badlani, Analyst

Thank you.

Chris Bradshaw, President and CEO

Thank you.

Operator, Operator

And we will now take our next question from a private investor.

Unidentified Analyst, Analyst

I had a question regarding the CapEx in the quarter. It looks like you guys bought an S-92 that was coming off-lease. Is there a reason why you decided to acquire that or just let it roll off and use one of your existing S-92s?

Jennifer Whalen, Senior Vice President Chief Financial Officer

Good morning Adam. Thanks for the question. This was tied to a particular lease, a one-off lease that existed and has been a good fit for some time, where it had a put option where the helicopter was put to us and we were happy with the value that we were able to acquire that helicopter for, but it was part of the base agreement.

Unidentified Analyst, Analyst

Got it. So, it was put to you instead of you guys going out and buying it. How much did that cost you?

Jennifer Whalen, Senior Vice President Chief Financial Officer

It was about $5.5 million.

Unidentified Analyst, Analyst

Thanks for your insights. I want to revisit the previous question. It's been some time since we've experienced a substantial long cycle. When Transocean or Valaris announces a new rig order, for example in January, do you see the orders for helicopters coming in right away, or is there a delay before your business starts receiving orders for those contracts?

Chris Bradshaw, President and CEO

There's definitely a lag. We are late cycle. Thus, the degree or period of the lag will vary from situation to situation. But typically speaking, when an oil and gas company is looking to move forward with new projects, securing the drilling rig is one of the first things they'll do, and oftentimes securing the helicopters is one of the last things that they'll do. So there will be a lag over time. But it does create a pipeline which provides some visibility for us of an overall increase in activity.

Unidentified Analyst, Analyst

Obviously, you could track all the announcements and know a rig is going to be placed over the next six to 12 months. And you know with the lag when you're going to start seeing that business, right? Can you talk a little bit more about Guyana and Suriname? I mean, it seems like almost there's more disturbance there. Exxon is talking about a $10 billion barrel basin. Can you tell us how many tops you have roughly there now? And over the next number of years, what it may take to service that basin?

Chris Bradshaw, President and CEO

Well, as of now, between the two countries, we have roughly 10 helicopters. This remains a region that we're very excited about in terms of growth going forward. Bristow today is the sole helicopter service provider in both those countries. We believe that they will continue to grow in terms of demand. We're not providing a forecast at this time in terms of how the helicopter will ramp over time. A lot of that is depending on some factors that we don't have good visibility on over the medium and long-term. But we do have enough visibility to say it will grow, and we believe it will grow significantly. This is the area of the world that's had the most prolific deepwater discoveries over the last several years, and activity is only going to increase.

Unidentified Analyst, Analyst

Right. That's pretty clear. I mean, could it double that significantly, or I know you never like to say this kind of stuff, but...

Chris Bradshaw, President and CEO

That's certainly within the realm of possibility. Again, no guarantees, but it's certainly within the realm of possibility.

Unidentified Analyst, Analyst

Got it. Right. Okay. And then, I know when you guys announced the merger with Bristow. You were talking about like $240 million of EBITDA run rate. Now you're at $180 million $190 million. So there was a $50 million $60 million delta. Can you maybe talk about what areas have caused the biggest drop-off? Like is it Brazil or West Africa or Fugo? Maybe give us a little more color on how you get back to that twofold over the next year or two?

Chris Bradshaw, President and CEO

Yes. So we're happy to speak about that directionally. Obviously, it's been a very large impact to the overall industry over the last 18 months, with what's happened with the pandemic and then the oil market crisis. Pleased that commodity prices have recovered as much as they have now. And we think that is going to remain the case, which is our constructive view. In terms of the areas that you're driving some of the biggest increases, certainly West Africa is one of those. If you look at our business in Nigeria, revenues are down about 40% year-over-year. This is typical for that market. It typically moves the fastest and the most both up and down in up cycles and down cycles. Another area that's been particularly hard hit is Canada and the Cougar business, and we've made some disclosures there about the impairment and the move to recognizing revenues on a cash collection basis. So, that's been an area significantly impacted down percentage-wise even more than the Nigeria market that I referenced. The UK market has been difficult both in terms of overall activity as well as the competitive landscape. Some of that has been in the news in terms of the trading of contracts for price concessions there. So that's been an area that's been more challenged. In contrast to that, we have had some areas that have held up fairly well, such as Norway and the Caribbean region that we mentioned Trinidad, Suriname, and Guyana. Collectively that could be a triangle region that continued to grow even throughout this difficult period of time. In terms of your question about when we get back to a run rate, what I would say directionally and again to provide some historical context here, you will be familiar that we've expressed before our view is that if one looks at the activity levels in offshore helicopters back in 2014, we view that as a high watermark. We don't think we're going to get back to the 2014 levels. However, as we look at the activity levels in 2019, which were pre-pandemic, right around the time that we were announcing the merger, it is our belief that the industry will both get back to those levels and surpass them. Precisely when that will happen is hard to say. We do think that recovery begins in earnest next year. We think it builds through 2023. It could be by the end of 2023 or 2024 that you're back to that sort of level pre-pandemic. But again, we're not speaking with any kind of specificity. What I would say directionally is we do think we get back to and surpass the 2019 levels at some point.

Unidentified Analyst, Analyst

Okay. That’s very helpful. I appreciate it. Keep up the good work, Thank you.

Chris Bradshaw, President and CEO

Thank you.

Operator, Operator

And it appears there are no further telephone questions. I'd like to thank everyone for their participation today and you may now disconnect.