Bristow Group (NYSE:VTOL) Q2 2022 Earnings Call

0:00 Thank you, Anna, and good morning, everyone. Welcome to Bristol 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 three of our investor presentation.

0:46 You may access our investor presentation on our website. We will also reference certain non-GAAP financial measures, such as EBITDA and pre-cash flows. 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. 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.

1:33 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 Aira and Bristow last year. As of September 30th, Energy 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 on a plan to deliver a more efficient cost structure for the company and our stakeholders.

2:26 As previously disclosed, in July of this year, Crystal repurchased approximately 550,000 shares for gross consideration $15 million, representing an average purchase price $27.24 per share. In addition, during the quarter, we paid approximately $5 million to extinguish debt on our Air North business in Australia. We continue to believe that our strong balance sheets and Robust Free Cash Flow Profile present multiple opportunities for great value for Bristow shareholders. With that, I will hand it over to our CFO for a more detailed review of financial results. Jennifer. Thank you, Chris. Today I will begin with a sequential quarter comparison of Bristow's financial results.

3:15 EBITDA adjusted to exclude special items and asset dispositions was $45 million for the second quarter of fiscal year 22, compared to $40 million in the first quarter, or 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 in Norway, and UK Star 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 deductibles 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.

4:19 Murder-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 would continue to have strong free cash flow. At this time, I'll turn the call back to Chris for further remarks. Chris?

5:20 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 multi-year investment cycle with oil and gas market fundamentals poised to remain constructive for at least the next few years. RISCO's financial results will benefit greatly from the expected increase in offshore oil and gas spending.

6:05 Beyond oil and gas services, we believe compelling 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 both Europe and the Americas. With that, let's open the line for questions. Anna? Yes, sir. Thank you. And if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star one if you would like to ask a question.

6:54 And we'll pause for just a moment. And once again, that is star one if you would like to ask a question. We'll take our first question from James West with Evercore ISI. How do you see that market tightening as we go into the offshore upcycle that you envision and certainly we agree with in 2022?

7:58 James, 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 idle capacity in the medium helicopter class. But as we see activity picking back up, and we're already starting to see signs of that in certain regions, and 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 you get down into the light helicopter categories, already a tight supply-demand balance. So, yes, excess supply very much concentrated in the heavies, the S-92s. We think that is likely a multi-year recovery process.

8:46 It'll be a combination of some equipment being phased out of operations as well as any benefit coming from increased activity as new exploration projects do move forward. Okay, gotcha. 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 Thank you very much. as well as, you know, versus the oil and gas opportunity.

9:38 Obviously, it's the future here, but I'm trying to understand kind of how you're envisioning this future. Thank you for the question, James. At this stage in the development of the advanced air 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. And we started this process a couple of years ago. I've 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.

10:24 Some of them will display current services that our fleet is doing, particularly on the lighter end, in our light singles and light twins 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. And we believe that Bristow is well-positioned to participate in a variety of channels throughout the value chain. That could range from models similar to what we do today, where we either own or lease the aircraft, and we are full operations and maintenance throughout the lifecycle of the aircraft. and other situations we may provide more discrete services for certain products in 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 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.

11:30 Okay, got it. Thanks, Chris. Very helpful. Thank you. We'll now take our next question from Dylan Benlani with SKF. 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? There's no particular reason. Got it. Okay. And then one other thing was, you guys, it looks like you're seeing some capital expenditure from the big majors come back, or is that still delayed because of some budgets for next year? I know you said it's a multi-year cycle. I was just curious what you guys are seeing.

12:18 Our view is that we believe a significant broad base in recovery and spending will begin in earnest next year, and we do think it'll be a multi-year increase in spending. What we're seeing now, early stages here in late 2021, are some green shoots, primarily concentrated in the Americas. And this is new exploration projects moving forward, increasing demand for helicopters from Brazil, in the Caribbean, also in the U.S. Gulf of Mexico. Again, at this stage, short-term exploration projects, but starting to develop a pipeline that will drive that more broad-based increase in overall activity beginning in earnest next year. Thank you. Thank you.

13:07 And once again, that is star one if you would like to ask a question. And we'll now take our next question from Adam Pritzer, a private investor. Hello. I had a question regarding the capped X in the quarter. You guys bought an S92 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 S92s? Good morning, Adam. Thanks for the question. This was tied to a particular lease, a one-off lease that existed has existed for some time where it had a put option where that 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 lease agreement.

14:08 Got it. So it was put to you instead of you guys going out and buying it. How much did that put cost you? It was about $5.5 million. Great. Thanks. And I guess, you know, getting back to the last questionnaire, I know it's been a while since we've seen, you know, a good long cycle. What's the lag effect in terms of when, you know, we see an announcement for, you know, Transocean or Valeris announcing a new rig order starting up, let's say, in January? Do you guys see the orders for the helicopters needed, you know, immediately? or is there a lag in terms of when your business starts getting orders to supply those contracts?

15:00 There's definitely a lag. We are late cycle. 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 a new project, 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 as an overall increase in activity. Right. You could, obviously, you know, you could track all the announcements and, you know, rigs going to be placed over the next, whatever, six to 12 months, and you know, you know, with the lag, when you're going to start seeing that business, right.

15:46 Can you talk a little bit more about, you know, Guyana and Suriname? I mean, it seems like almost every area is needed. There's more discoveries there. You know, Exxon's talking about a $10 billion barrel basin. Can you tell us how many copters you have roughly there now and over the next, I don't know, number of years, what it may take to service that basin? 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.

16:35 We're not providing forecasts at this time in terms of how that helicopter will ramp over time. A lot of that's dependent on some 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. Right. That's pretty clear. I mean, could it double? Is that significantly? I know you never like to say this kind of stuff, but That's certainly within the realm of possibility. Again, no guarantees, but it's certainly within the realm of possibility. 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, I don't know, $180 million, $190 million.

17:34 So there's a $50 million, $60 million delta. Can you maybe talk about what areas... has caused the biggest drop-off, like is it Brazil or West Africa or Cougar? Maybe give us a little more color on how you get back to that 240 over the next year or two. Yes, 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. Please, the Commodity prices have recovered as much as they have now, and we think that is going to remain the case, is our constructive view, which you've heard. In terms of the areas that are 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.

18:32 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 U.K. market has been a difficult one, both in terms of overall activity as well as the competitive landscape. Some of that's been in the news in terms of the – 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, such as the Caribbean region that we mentioned, Trinidad, Suriname, Guyana.

19:25 Collectively, that Caribbean Triangle region has really 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, 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 levels, 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.

20:10 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 time at the end of 2023, 2024, 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. Okay. That's very helpful. I appreciate it. Keep up the good work. Thank you. Thank you. And as a final reminder, that is star one if you would like to ask a question. And we'll take our next question from Lenny Dunn with Mutual Trust Company of America.

20:57 Good morning, and you're doing a very good job of transitioning. But I had a couple of questions on the debt pay down. Are you going to get a little more aggressive with that so that the balance sheet, which is probably the thing restricting the stock, gets better? And the second part of that is, at what point then would you be able to start paying dividends assuming you got the balance sheet and it will go better today? Thank you for the question, Lenny. I appreciate that. We did pay down about $5 million of debt this quarter.

21:42 As of right now, we have really two primary securities in our debt structure. One are the senior notes, which don't mature until 2028. The other is some bank debt that we have with Lombard which is really attached to our UK SAR business. That does have an amortization schedule, so we will be adhering to that amortization schedule, so you will see a natural decline in that amount of debt over time. As we think about return of capital to shareholders, where we are at this stage in the cycle and the amount of visibility that we have, our preference has been towards share buybacks, specifically opportunistic share buybacks. Thank you very much. When you say opportunistic repurchases of stock, is there any harm in just doing regular open market purchases if the share price stays around the level it's at?

23:11 No harm in doing that. Indeed, our opportunistic repurchases have been done in the open market, and about $50 million has been executed over the last 12 months, ended September 30th. When we use the word optimistic, sorry, opportunistic, it's really to distinguish it from a more programmatic approach where we say, well, we're just going to buy X number of shares every quarter regardless. Rather, we've been more opportunistic exactly using the open market repurchases similar to what you referenced. Okay, and then the last thing is that I think the story is becoming pretty compelling. Are you going to be doing something with a physical roadshow as opposed to virtual contact?

24:00 We look forward to getting back on the road. Some of the conferences that we've really all of the conferences we've been able to participate in thus far have been hosted as full formats. Our hope and expectation is that those will start to happen physically as well. Beyond the conference aspect, when we think about roadshows, Yes, I think trips to New York, Boston, some of the money centers to sit down both with analysts and in large investment accounts, I think that we're interested in doing. I think your story is pretty compelling now, and you've been out of long enough that you have a track record, so I think it's time to do it, but that's my opinion.

24:46 Thank you. And it appears there are no further telephone questions. I'd like to thank everyone for their participation today, and you may now disconnect.