Bristow Group (NYSE:VTOL) Q3 2021 Earnings Call

0:00 Good day and welcome to the Bristow Group Fiscal Q3 2021 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.

0:15 Thank you, Jordan, and good morning, everyone. Welcome to Bristow Group's third quarter fiscal year 2021 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. 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.

1:05 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. I want to thank and commend all of our Bristow team members for their focus and dedication to place safety first every day, despite the numerous potential distractions in the world around us. We have achieved our target of zero air accidents thus far in FY21 and remain committed to achieving the highest safety standards to ensure that all of our customers and employees return home safely.

1:52 We are also pleased with our financial results this quarter, which demonstrated resilient revenues and adjusted EBITDA performance. During the quarter, we repaid $41 million of debt and purchased over 100,000 shares of common stock. With our strong balance sheet, $345 million total liquidity, and continued positive free cash flow generation, Risto possesses industry-leading financial flexibility.

2:24 The company continues to make significant integration progress following the merger of Aera and Bristow in June 2020. We have increased the amount of identified synergies to at least $50 million of annualized run rate cost savings, which is $15 million higher than the original total.

2:48 As of January 31st, synergy projects representing $27 million of annualized savings have already been completed. We expect to capture over 80% of the total synergy projects by the one-year anniversary of the merger, resulting in a more efficient cost structure for the company. I want to take a brief moment to note that we do not expect a material impact to Bristow's business from the recently issued executive order that paused new oil and gas leases in federal waters. To begin with, Bristol is currently servicing just three drilling rigs in the U.S. Gulf of Mexico, which evidences our limited exposure to drilling and exploration activities.

3:34 With the exception of the few helicopters supporting those drilling rigs, the rest of our helicopter fleet in the U.S. Gulf of Mexico is supporting production work and other activities. Furthermore, the suspension announced in the executive order applies to the issuance of new leases, This is underscored by the fact that 22 new drilling permits have been issued in the Gulf of Mexico since President Biden took office. I will now turn it over to our CFO for a more detailed review of financial results. Jennifer?

4:11 Thank you, Chris. I will begin with a sequential quarter comparison of Bristow's financial results. EBITDA adjusted to exclude special items and asset dispositions was $47 million for the third quarter of fiscal year 2021 compared to $54 million in the second quarter, or a decrease of $7 million. This decrease was primarily due to foreign currency gains in the prior quarter. Revenues increased $4.6 million primarily due to part sales related to helicopters sold, and increased oil and gas revenues due to higher utilization in most regions. Operating expenses were $3.7 million lower due to severance costs recognized in the previous quarter partially offset by higher maintenance costs.

4:59 General and administrative expenses were $1.3 million lower due to lower professional services fees. In addition, there was an impairment charge of $52 million during the quarter related to the investment in Cougar in Canada which is considered a special item and not in adjusted EBITDA. As a reminder, the close of the merger was on June 11th, and due to the fact that Bristow was the accounting acquirer in the transaction, the previous year comparable quarter does not include results from Legacy Era Group, Inc. Prior periods only include operating results of Legacy Bristow Group, Inc. To help with the comparability of the periods presented, I will focus on the pro forma results as if Legacy, Bristow, and Arrow were merged in the prior year quarter.

5:47 With that reminder, I will move on to the current year quarter versus pro forma prior year quarter discussion. EBITDA adjusted for special items and asset dispositions was $47 million in the current quarter versus pro forma EBITDA adjusted for special items in the prior year quarter of $53 million. The primary driver for the decrease in pro forma EBITDA is higher foreign currency gains in the prior year quarter compared to the current year quarter. Revenues decreased $55 million primarily due to lower utilization in oil and gas and fixed green services. Operating expenses were $50 million lower due to decreased activity. General and administrative expenses were $14 million lower primarily due to lower compensation costs and professional services fees.

6:35 Finally, we generated adjusted free cash flow excluding net capex of $27 million for the current quarter. The adjusted free cash flow excluding net capex was lower than the previous quarter, primarily due to changes in working capital due to the timing of payments. The average of the two quarters is approximately $42 million in free cash flow, normalizing for timing of payments. In addition, we generated $11 million in net proceeds from the sale of helicopters during the quarter. At this time, I'll turn the call back to Chris for further remarks. Chris?

7:12 Thank you, Jennifer. Following our recent merger, the combined Bristow is a larger and more diversified company with aircraft located in 15 different countries. We enjoy cash flow stability resulting from our government services contracts and an oil and gas business that is more than 80% weighted The last two quarters of combined company financial performance clearly demonstrate the benefits of the merger, and future periods will benefit from additional synergy capture as we ramp up to the full $50 million run rate savings. Going forward, we will continue to execute a capital-disciplined approach focused on generating positive cash flow, protecting the balance sheet, and opportunistically returning capital to shareholders.

8:07 With that, let's open the line for questions. Jordan? Absolutely. So if you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using the speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that's star one to ask a question. And I'll pause for just a moment to allow everyone that opportunity. and it does look like we have our first question from Adam Ripser. Please go ahead.

8:39 Hi, good morning. Thanks for taking my question. I guess just starting off, the whole lease effect in the Gulf of Mexico, how are they still granting permits if they said they don't want any more leasing? Could you maybe give a little more detail on what's really going on down there?

9:03 Sure. So the difference between a lease and a permit is that a lease is the right to that plot of water and the seabed underneath it. Those are awarded in auctions that take place periodically over time. A permit would be specific to a well and activity that the oil and gas company is performing on the lease that the company has the rights to. So a The permits that have been issued, and again, 22 of them since President Biden took office, have been issued. Those are for existing leases. So effectively, what the current suspension does is pause the issuance of new leases or rights to work on new plots of water in the underlying seabed.

9:55 Got it. OK, thanks for the explanation. Question on Guiana Suriname. It seems like almost every day there's new wells being drilled, new companies being active in that trend. Can you maybe talk about how many copters you guys have down there now and potentially what that might look like over the next, I don't know, three to five years?

10:27 Sure. So the Caribbean Triangle has certainly been one of the bright spots for us and remains a bright spot for us globally. First, in Trinidad, where we've had the leading presence for more than 60 years now, that market has been fairly stable over the last 12 months, despite the overall challenges in the broader oil and gas industry. And then across the waters in Ghana and Suriname, which you mentioned, where Bristow is currently the sole operator today of offshore helicopter support, to the oil and gas companies who have had such success finding the prolific reserves in those two countries thus far. We currently have a handful of helicopters servicing a customer in Ghana and a few servicing a variety of customers in Suriname on their exploration projects.

11:23 That market has grown during the last downturn. It's growing now, and we expect it will continue to grow. In terms of a specific number, we're not quoting or targeting a specified aircraft count by a certain date. But I do think globally this will be perhaps the highest growth rate offshore oil and gas region that we see.

11:44 Okay, great. I'm sure you guys listened to the recent air and sea analytics calls. I think they said there's potentially over 100 aircraft over the next 10 years. You talk about anything that you have going on there or potentially what your plans might be to participate in the wind growth?

12:13 Yes, we are optimistic about that model. We do think that offshore wind will be an important part of the global energy transition over the next several years. It's already a fairly mature market in Europe and Asia, but one that's expected to continue to grow rapidly in those regions. The market is very much a nascent one here in the US, but again, it's expected to grow significantly with multiple projects and billions of dollars scheduled to be invested, and we believe more on the heels of that. Today at Bristow, we do not have any exposure. In the U.S., that's because the one operating wind farm today is so close to shore that it's supported by boats. But the new wind farms that are scheduled to be developed are going to require offshore helicopter support.

13:00 We think Bristow is very well positioned for that, given our extensive experience operating in difficult offshore conditions and, importantly, the thousands and thousands of hours that we have with hoist experience, which is incredibly important when you get into the operating environment. and maintenance phase of the wind farm. So a very much nascent but will be growing market in the U.S. We think we're well positioned there. In Europe, post-merger, this is going to be a strategic priority for Bristow to penetrate that market and take advantages of some of the growth opportunities that we see there. And so we're working now to position ourselves. We do think there will potentially be some more and other near-term work that will be available in Europe, given the already well-established nature of that.

13:46 So no exposure today, but definitely a new strategic priority for the company and one that we're opportunistic about the potential in that market.

13:58 Great. Do you have copters in the fleet now that can service some of those things you mentioned, or would that require additional cat-ex?

14:10 So it's really two important phases to the lifecycle of an offshore wind farm. At the beginning in the development and construction phase, the helicopters that are used to support the work, which are really transporting those construction crews to and from the offshore facilities, are very much what we have in the fleet today. The most competitive model would be an AW139 in crew change configuration. definitely within our wheelhouse. As you know, we're the largest operator of 139s in the world today. After the field and the wind farm is operational, you transition into the operations and maintenance phase or O&M phase of the lifecycle. For that work, the mission profile is hoisting the maintenance technicians down to the top of the pistol to do the work that they're required for either scheduled or unscheduled maintenance. and for that the most likely helicopter models would be new variants of light twin model helicopters.

15:12 So those would be either H145s or AW169s that are the most popular in that industry today. And for that we would need to go and spend some capital to bring those new variants into our fleet. But we think the The returns and the attractiveness of that would justify that new capex if we are successful in winning the work.

15:37 Got it. And I would assume, knowing you for a number of years, without contracts, you wouldn't be purchasing any of those new copiers. Would that be a fair statement?

15:48 We will remain disciplined with our capital. I think, as you referenced, this is not a build-it-and-they-will-come type approach. We're going to be disciplined with how we look to deploy capital because we do believe we have other attractive uses for capital allocation.

16:05 Got it. What happened with Cougar? I looked in the queue real quick. It said you lost a significant customer. Is that why you guys wrote it down all of a sudden instead of during the Bristol bankruptcy? Jennifer, do you want to talk about Cougar?

16:25 Yeah, Adam, good to talk to you. As we've disclosed in our previous filings, we monitor our equity investments for other than temporary impairment. There were events during the quarter that led us to determine that the Cougar investment was other than temporarily impaired, most notably the loss of a customer who also charged an impairment of about $425 million and the consolidation of the market up there, which which led us to impair this investment. We do continue to lease aircraft and facilities into Cougar to support their operations and expect to do so going forward but the market up there has just deteriorated quite a bit during the quarter.

17:10 Okay, got it. And is there any update on what's going on with the leader negotiations on getting that sold and finished up?

17:20 No update there, Adam. We have exited our shareholder position and leader. We are working through the procedural process there to recoup money for our former interest, but no material update there.

17:34 Okay. Is there anything new going on in the consolidation game? I noticed that PHI said they've hired a banker that might just be for their EMS bids, Babcock. is reviewing everything. You know, there's rumors of EHC going chapter 22. Can you perhaps give us any color or comments on the consolidation next phase?

18:03 Well, I can't comment on any specific situation, but I would say that we continue to believe that the industry needs and would benefit from additional consolidation. You know, a lot of the rationale that that underpin the logic of the Bristow Era merger would apply in other combinations in different parts of the world where there is an excess amount of capacity, too much equipment, too many operators, and we believe the market would benefit from consolidation. From our perspective, we continue to see interest there. And if there's another transaction that has some similar benefits of consolidating a market creating value from synergies by eliminating overlapping costs.

18:50 We would be interested in that. But any potential M&A opportunity would need to fit within our financial parameters as well and our strategic priorities of maintaining a strong balance sheet and positive free cash flow profile. So as we've been in the past, we're going to be disciplined in any approach to consolidations.

19:12 Okay, great. Thanks. I'm sorry to ask so many questions. I'll jump back in line. Thank you. Great.

19:18 Thank you, Adam. And again, that is star one to ask a question. If you find your question has been answered, you may remove yourself from the queue by pressing star two. And we'll take our next question from Jason Spann with Clayton. Please go ahead.

19:35 Hi, guys. How are you this morning? Hi, good morning. Can you hear me? Yes, you're good. Can you elaborate a little bit more on Cougar? I guess, was it just one customer leaving that forced you to have the write-off? Just trying to get a sense of, are we bottoming with regard to pricing and customers and the cycle here, or are we still trying to find the bottom?

20:11 Specific to Cougar, which is in East Canada, there has been consolidation there. That market is challenged. I'm not sure we can predict where the market bottoms at, but we did have a significant customer that did an impairment at the same time we are doing the impairment and a couple other customers that consolidated, which really shrinks that market.

20:38 I would add globally to that that I think we're pleased with the resiliency that we've seen in our revenues over the last couple of quarters. You can see that we were actually up a modest amount sequentially. So I think beyond just Canada on a global basis, we are seeing signs of the market stabilizing off of obviously what are lower activity levels, but stabilizing We're not expecting any broad-based significant market recovery in calendar 21, and that's okay because Bristow will still generate a substantial amount of free cash flow this year, even with oil prices where they are. As we get into 2022 and beyond, we are more constructive about what will be a need for a growing offshore oil and gas.

21:29 and we're very much positioned to benefit significantly from that upside when the market recovery does come. Okay, that's helpful.

21:39 And the NAV slide that you put on slide 13 is kind of interesting. The NAV and the net book value. Is there a net margin which you guys Think about is appropriate to earn off of that NAV. If I look at GATX, how should we be comping you or thinking about the expectation of a net margin for Bristow and your goals going forward for returns on that capital?

22:23 Sure. So we haven't disclosed and don't discuss externally a specific return threshold that we're targeting for competitive reasons. I would note that the industry as a whole has really struggled to earn its cost. Any return. Yeah. But I think clearly in the case of Bristow, what you're seeing now is a real cash flow generating company. And we think that we're going to have an opportunity to earn Okay. Okay.

23:13 And I guess lastly, can you talk a little bit to capital allocation? Are you able to buy back your higher cost debt? And when should, I guess, between buyback, I was surprised you didn't buy back more stock in the quarter. And then what are the limitations on your ability to buy back the high cost debt relative to our cash earning nothing? Just the balance that you guys are thinking about there and the sense of urgency you have.

23:50 Sure. So first, I'll review where we see our capital allocation alternatives and then going to talk about what we've done recently and also what we're looking at. So we think that in this environment, given the challenging conditions in the broader oil and gas market and the limited amount of visibility, that Priority 1A should be protecting the balance sheets. We also believe that we'll have opportunities to return capital to shareholders on an opportunistic basis. And then beyond that, we do believe that for M&A, having a strong balance sheet for some of the consolidation opportunities that we spoke about earlier in the call is an important strategic advantage. And then finally, CapEx for new aircraft is not expected to be a significant source of capital allocation.

24:42 in the near to foreseeable future. However, caveat there, if we do win a new government search and rescue contract or an offshore wind opportunity that we talked about earlier in the call, then we might have a very focused need for new aircraft there if the returns are right. So that's how we see our alternatives. Recently, we've very much been both protecting the balance sheet with debt paydowns. We've paid down a great deal of debt since the merger closed last June. At the same time, we've also returned some capital to shareholders through targeted share repurchases on an opportunistic basis. Since we announced the $75 million share repurchase program this past September, we've bought back about $10 million worth of stock. So again, we think given our strong balance sheet, our high visibility of continued positive free cash flow generation, that we can both protect the balance sheet and repurchase some shares.

25:42 However, given the limited visibility in the broader market I discussed earlier, Priority 1A will be protecting the balance sheet. On that note, as you've pointed out, we do have a large cash balance today. We are evaluating options for our debt structure. We are aware that there have been some tightening attractive market conditions in the financial markets over the last couple of months. If we have an opportunity to go out and do something that would benefit the company in terms of simplifying the balance sheet, maybe extending some maturities, and all of that can be accomplished on an attractive rate, then I think that's something we're going to be interested in pursuing. We're actively monitoring our opportunities there.

26:33 If we see something, we're going to try to take advantage of that. Okay.

26:39 I guess just lastly on the debt side, is the debt liquid enough for you to buy in the open market or is it just not really trade, the high cost piece?

26:54 Yeah, the 7.75% notes are very thinly traded. We were able to buy back $12 million base value of those notes in November at a slight discount so far. We bought them back at $97.50. So we're really pleased to bring those back in. But your point, they are very thinly traded. And I think some of the holders are happy to just to carry them because I think many people view it as just money good. Right. All right.

27:26 Thanks so much. Appreciate your time. Thank you. Okay. And we'll take our next question from John Dazier with Pinnacle. Please go ahead.

27:38 Good morning, everyone. Hi, John. Good morning. Good morning. I'm just curious, Chris, what is your visibility for calendar 2021 versus 20? I know probably most of the offshore oil and gas budgets of your customers have been set. And I think you alluded to this earlier, but how does 2021 look? versus 2020 for the offshore oil and gas market?

28:13 If we look at the two most recently reported quarters, our fiscal Q2 and Q3 quarters ended September and December, respectively. I think what we've observed, John, is that the activity seems to have stabilized. Revenues were consistent between the two periods, actually up a little bit, a modest amount sequentially. So we are seeing some stabilization in the market. For calendar 21, we're really not counting on any broad-based significant increase above where things are today, which again is okay because we're going to generate a substantial amount of cash flow this year regardless. Where we start to be more constructive on...

28:58 additional spending from our customer base is in 2022 and beyond. We know there needs to be another spending cycle here because today's level of underinvestment is not sustainable. It's going to result in higher commodity prices and that will see, we think, more dollars go to work in deep water projects around the world and that should benefit our business.

29:21 Okay, great. Can you remind us As of December 31st, what percentage of the business offshore oil and gas was contract versus spot? And do you anticipate any contracts rolling off in the next 12 to 18 months that might impact your business?

29:49 I'll let Jennifer comment on the approximate mix of How much is contracted? I would say in terms of what's coming up, from time to time, we have both new contract opportunities and contracts that are rolling off, but there's nothing that we expect to have a material business. Obviously, we're focused not just on retaining our existing work, but also on winning the opportunities that are available out there. Jennifer, do you want to comment on the contract versus ad hoc?

30:22 I don't have precise percentages, but there's a couple of markets where we have more spot activity than others, Gulf of Mexico being one of those. It's a low percentage number, especially of the overall revenues around the world today. Gulf of Mexico and a couple other places have some spots, but it's not a large part of the overall revenues.

30:50 Okay, so contract might be, what, 80% or 90% of the business overall offshore?

30:55 Yeah, that's directionally correct. Okay.

31:00 And you don't anticipate anything rolling off that would material impact the business going forward?

31:09 Not that we're aware of today. We have some shorter-term projects we're supporting. We have others that are scheduled that may be ending, and we have others that are scheduled to pick up. Okay. There will be some pluses and minuses throughout the course of any year, but we're not looking at any kind of material impact to the business at this time.

31:30 Okay. Great. Thanks and good luck.

31:34 Thank you. And it would appear that there are no further questions on the phone lines at this time.

31:44 Great. Thank you, Jordan, and thank you, everyone. Hope everyone continues to remain safe and well, and we look forward to speaking again next quarter. Take care. And this does conclude today's call. Thank you for your participation. You may now disconnect.

31:59 Thank you for calling.