BRS
#Thank you, <UNK>.
Good morning and welcome to our fiscal 2017 first-quarter earnings call.
My prepared remarks this morning will cover several key topics and issues related to Bristow.
Similar to the last number of calls, I will highlight the steps we are proactively taking to improve, but unlike the last quarterly update, I will not speak to each slide but instead more directly address key topics, including, one, safety; two, the market overview, especially given the H225 grounding; three, foreign exchange; four, a comment on our tax strategy; five, the financial outlook, especially for our very challenging fiscal year 2017 with respect to EBITDAR and EPS; and six, liquidity enhancements, including CapEx deferral and other positive cash flow impacts which impact FY2017, FY2018, and beyond.
Safety, I will begin with safety, our number one core value.
Bristow's FY2017 action plan, which is our strategy to survive this downturn, has three elements: first, safety improvement; second, aggressive cost reductions and revenue enhancements; and finally, prudent pursuit of opportunities, especially now, to improve liquidity.
The Company-wide focus on safety performance is the first part of that FY2017 action plan, and it's not just about safety compliance.
It's about that performance and it's yielding positive results.
As you can see on Slide 4, this quarter, our air accident rate was zero while our TRIR was an improved 0.29 with significant improvements in health, safety, and environmental performance in our global fixed wing and SAR operations compared to fiscal year 2016.
Much has already been spoken about concerning the tragic H225 accident in Norway and the resulting grounding of this important aircraft type.
On the safety front, I am proud of the collaborative efforts of my peers in conjunction with HeliOffshore to address industry issues following this grounding, especially the inauguration of a new HeliOffshore work stream that will work with OEMs and operators to improve industry system reliability and resiliency.
Market overview in Bristow performance ---+ for first quarter FY2017, we reported a GAAP net loss of $40.8 million and a diluted loss per share of $1.17 compared to a GAAP net loss of $3.3 million and a diluted loss per share of $0.27 for fiscal year 2016 first quarter.
For an adjusted result overview, we had a net loss of $12 million this quarter and an adjusted net loss per share of $0.34 for the first quarter FY2017 compared to adjusted net income of $19.8 million and adjusted net earnings per share of $0.56 for the first quarter of fiscal year 2016.
These results are most directly related to a 27% decrease in Bristow oil and gas operating revenue year-over-year, but were only down 1% sequentially from our fourth-quarter fiscal year 2016.
The decrease is due to continued lower global utilization of our services year-over-year and the ending of several contracts in our Americas region and LACE rate reductions, especially in our Asia-Pacific region.
We are beginning to see some stabilization of the oil and gas business in most markets except for Australia, which remains under pressure, particularly so because of the H225 grounding.
Sequentially, consolidated adjusted EBITDAR and EBITDAR margins were down but evidencing this relative stabilization, our Americas and Africa regions actually showed sequential improvement quarter-over-quarter.
Foreign exchange.
Let's talk about Brexit and the British pound per US dollar exchange rate impacts on Bristow.
First, Brexit is not expected to have any operational impacts on our North Sea business, whether it's our UK SAR contract or our UK oil and gas contracts.
Second, the depreciation of the British pound versus the US dollar in late June had limited impact on our first-quarter FY2017 operating and financial results as the change occurred late in the quarter.
However, there was a negative EBITDAR impact of $6.3 million due to balance sheet revaluations of British pound denominated balances.
Assuming the US dollar per British pound rate stays constant, we would not expect significant further impacts from the reevaluation of the balance sheet for the rest of our fiscal year 2017.
However, from a P&L translation perspective, if the US dollar per discount rate persists at the June 30 level for the remainder of fiscal year 2017, the translation of our British pound denominated operating results would decrease adjusted EBITDAR by approximately $15 million to $20 million for the remainder of fiscal year 2017, approximately half of which is from the UK SAR contract.
Remember our UK SAR contract revenue is in British pounds with the expenses predominantly in British pounds and euros and US dollars.
Finally, there has been market commentary concerning the exposure to the Nigerian naira versus the US dollar for Bristow.
Let me address that.
The devaluation of the Nigerian naira, which has been significant, has had minimal impact on our Q1 fiscal 2017 results as we are naturally hedged with the majority of our Nigerian revenue in US dollars.
So we are generally long US dollars and short naira in that business unit, and historically our naira revenues have been offset by our naira operating costs.
Tax.
There has also been some market commentary concerning our tax strategies.
Let me address this.
Bristow is a highly regulated company in over 10 separate national jurisdictions with both securities, air operating certificate and tax oversight, to name a few, and this is been the case for 50 years, over 50 years.
Our structure fully complies with the tax laws in all jurisdictions in which we operate.
Our long-standing tax and cash management strategy administers our tax rate and cash flow to maximize Bristow's operational efficiency and enterprise value for critical and life-saving services, as would be the goal for any international company.
H225 grounding.
I could use the rest of my prepared remarks here on this topic, but the team and me can address specific questions in Q&A.
Some important points to make though ---+ first, the accident remains under investigation with preliminary reports published but no root cause determined, and Bristow will not speculate concerning the accident's root causes.
The investigation is ongoing with no immediate timetable for an operational return to service from regulatory authorities.
Second, with one of the largest global fleets of relevant replacement aircraft for the H225 and, most importantly, crews to fly them and maintainers to fix them, Bristow is capitalizing on our unparalleled capabilities to service the critical needs for new and existing clients worldwide.
Third, while the North Sea oil and gas market remains challenging, we are seeing some increased activity on the contract side as summer maintenance activities rise compared to last year and our operational performance for existing and new customers has been outstanding and recognized.
We also have begun offering oil and gas to our services in the US Gulf of Mexico as well as putting aircraft in Nigeria to offer the service.
We view this as an integral part of our differentiated aviation services product offering in this downturn.
And although not easily seen due to Asia-Pacific and America's LACE rate decreases and the FX volatility I already spoke about, our European region is financially benefiting.
We recently signed a five-year renewal for five LACE and five ---+ in a five-year contract and a 1.5 LACE.
These contracts reflect higher historical or actually around the same historical European Caspian LACE rates.
Additionally, we were successful in winning some short-term contracts recently in Norway.
From a fixed wing perspective, the H225 grounding presented more fixed wing flying for Bristow.
For example, the S-92 gets paired with Eastern Embraers during this grounding to serve new and existing clients more effectively out of Scatsta and Sumburgh.
We also we recently added new routes for both Airnorth in Australia and Eastern in the United Kingdom.
Finally, let me be very straightforward.
Fiscal year 2017 will not be a good year for Bristow from an earnings and EBITDAR perspective and we will see a GAAP and adjusted net loss for earnings.
This first-quarter oil and gas results, specifically EBITDAR, are indicative of the next three quarters' expected performance with potential upside from already underway cost reduction initiatives offset by foreign-currency exchange rate depreciation.
Slide 9 shows other guidance metrics for UK SAR, for example, with adjustments in FY2017 for UK SAR due entirely to British pound weakness.
Despite rolloff of various aircraft from contracts in fiscal year 2017, especially in the Americas and Australia, we do not FY2018 upside for new ---+ we will see upsides from new contract wins in fiscal year 2018 and full UK SAR contributions which are expected to begin and have a positive EBITDAR operating cash flow and EPS impact in FY2018 and beyond.
Liquidity enhancement and CapEx deferral.
We continue to demonstrate success in our discussions with OEMs as, after June 30, we reached an understanding with them to defer approximately $95 million of oil and gas aircraft capital expenditures out of fiscal year 2017 and 2018.
This represents a decrease in our fiscal year 2017 and fiscal year 2018 committed aircraft CapEx spend of nearly 40%.
Our liquidity as of August 3, 2016 was $292 million with cash flow from operations now turning positive and over $11 million in proceeds from aircraft sales as well as future financings to be sufficient to satisfy our capital commitments, including our oil and gas aircraft purchase commitments and the remaining capital expenditures in conjunction with the UK SAR contract.
On a pro forma basis, as of today, our remaining aircraft CapEx for FY2017 adjusted for this oil and gas deferral I just mentioned as well as the payment we just made in July is only $25 million.
Please refer to the chart on Slide 8 for further details.
We also improved liquidity in other ways.
As I just said, we sold aircraft, but we also received a $28 million cash tax refund.
As I said, we did pay progress payments in July for four UK SAR or Leonardo 189s.
This payment represents virtually all of the UK SAR related CapEx for fiscal year 2017.
And with the FIPS certification of our Leonardo 189s, those become very financial, especially in the lease market, if we decide to go that route.
Covenant relief continues to provide us with ample financial flexibility, as shown on Slide 39.
With multiple financing options being evaluated, including the sale leaseback market anchored by our mostly unsecured UK SAR assets and a global owned fleet with $2 billion estimated value, all this continues to be available.
Our SAR assets in particular, whether UK SAR or oil and gas SAR, both aircraft and infrastructure, remain attractive potential sources of liquidity with the market very open to Bristow.
So, in conclusion, fiscal year 2017 will not be a good year for Bristow from an earnings and EBITDAR perspective as the P&L impact of the reduced utilization seen in the first quarter combined with the British pound depreciation will be realized in the future periods, future quarters of this year, especially if the US dollar British pound rate remains at current levels or depreciates further.
We have an FY2017 action plan, which is Bristow's strategy in this downturn to survive as the global sector leader with three elements.
One, improve safety performance, not just safety compliance.
Two, aggressively right size our cost structure to continue to serve clients globally while also capturing revenue with our global presence.
And three, prudently pursue opportunities, especially liquidity enhancements.
The priorities of this strategy are to focus on re-enforcing Target Zero safety, improve the liquidity position of Bristow, continue to reduce direct and G&A costs to achieve or improve the oil and gas rotary business and, finally, preserve Bristow's global capability for long-term diversification and growth.
Look.
FY2017 will be a difficult year from an earnings perspective as the FY2017 results are expected to be indicative, as I spoke about.
But I can tell you right now that Bristow does indeed have the proven tools to survive this downturn as the global sector leader, and we demonstrated this during the quarter with our global team members' response to the H225 grounding, the partnership shown by our OEMs and CapEx deferral, and our leadership's continued ability to right size the cost structure, reduce cash burn while still pursuing and capturing revenue in this market.
With that, we can begin Q&A.
I'm going to let <UNK> answer some of that, but let me begin by saying we are seeing especially stabilization in our markets.
Asia-Pacific, we've lost some short-term contracts mostly due to utilization.
But for the most part, we are flying for maintenance for our operating and production parts of our clients' value chain.
We are continuing to do that.
There are certain markets where we have flown and continue to fly for exploration, but it's been reduced.
And that's why you see the reduction in Americas which for us has still been very exploration oriented, or more exploration oriented, and Asia-Pacific too, which in Australia has a tendency to be more exploration with natural gas.
So we are still flying more especially this quarter for production.
Exploration you saw in those markets drop off.
I think the thing that you're seeing Greg and you are seeing it from reports by other peers, whether it be boats or aircraft, is that we are kind of bumping ground now at the bottom.
The calendar year ---+ we are a fiscal year but if we start after February with the significant reduction in oil prices, which is really what our clients use to forecast and put in their CapEx plans and OpEx plans for the rest of this year, that just ---+ now we are seeing the impact of that fully in our fourth quarter and first quarter.
Now we are kind of bumping around, kind of sawtoothing down at the bottom is the way I would describe it.
One thing with us is we have given our clients pretty good help when it comes to our escalation costs and also discounting.
And what ended up happening is then you've seen over the last let's say three or four quarters them then reduce activity levels.
So that's what's happened.
And now we are starting to adjust our cost structure to be able to get some of that back slowly.
But unlike boats and maybe other companies, we have a very high operating leverage to this market.
It helped us in the upturn but it's hurting us now in the downturn.
But I think you are seeing the industry start to adjust a lot of that cost structure although it's not easy to get some of it, especially labor costs, and so you sort of see that starting to see stabilization.
It's not to say ---+ and again, I don't want to remain too positive ---+ it's not to say all this is going to happen FY2017, but that's what you're seeing in the marketplace, if it helps you.
It's still mostly production.
We've seen drop-off in exploration, but I think it's bumping around the bottom.
And now for us it's about capturing revenue back, given our global presence, and doing that mostly with ---+ because we have aircrews and aircraft available, especially replacing the 225, and that we are working to satisfy existing clients who are being asked by new clients to help do some work with them, especially in the last three or four months.
<UNK>, any other commentary on that.
Sure, Greg, good morning.
This is <UNK> <UNK>.
How are you.
Good.
Just to add a bit of color to what <UNK> mentioned and really around your question on the drivers of the increases, I'll take two of our regions.
First is the North Sea.
Given the summer maintenance activities, we have seen increased flight hours in the North Sea, so with existing customers seeing upside on the flight hours.
In addition, we've also seen a good pickup of new clients in the region, and so it's coming from a combination of flight hours from existing clients as well as picking up new contracts.
The other region you saw an uptick on is Africa, and the same there.
We had a bit of a downturn in the first couple of months of the year based on the incidences there, but since then, the flight hours have picked up but we've also picked up additional contracts.
There's been a lot of competitive issues happening in the region and we have been fortunate enough to be there to pick up those incremental client contracts.
So again in Africa both from flight hours as well as from new contracts.
Does that help, Greg.
One thing, Greg, I need to mention is that some of these contracts that we picked up in the last let's say six to nine months and really helps us in FY2018, so I want to b I got a little tongue-tied there in my prepared remarks, but I want to be clear.
FY2018 upside is from new contract wins recently, and also we will get the full effect of our FY2017 action plan cost reductions whereas some of those from last year we are getting this year, but we're really more in that area of time been able to right size over the last let's say six months and we'll get the full impact of that in FY2018.
Greg, it's negative to Bristow.
We are talking about work, but we still have costs associated with the 225.
We are still spending ---+ we still have ---+ correct me if I'm wrong ---+ we have nine on lease, so we are paying those lease rates.
We have reduced the cost of the 225s by putting them into storage and we quickly also reset some of our costs in labor and other places, but it's not a positive for us.
And obviously, we'll be working with our partners to be able to reduce those costs or get back those costs over time depending on what happens here, but I don't want you to think that it's been a net positive.
And I think I mentioned it in my prepared remarks, especially in Australia where it's been difficult for us to overcome some of that and we are taking costs that's we are still trying to recover.
So I don't want you to get an impression that ---+ the grounding that happened three years ago with the H225 was a much tighter market and although and the nature of that was different, we were able to more rapidly serve our client base there, and I think here it's not as quick.
I just don't want you to think that it's all positive.
I don't want to get into ---+ it has some commercial sensitivities associated with it.
But just one of the things I do want to comment on the overall market is that this is still an oversupplied market.
I mean it is more in balance with the 225s grounded.
There's approximately 200 of them that fly for oil and gas.
We've been able to be blessed with crews, excellent crews, and maintainers and the aircrafts themselves to be able to supply.
But there's still a workout of that replacement supply to tap in.
There is still excess supply even with that.
So it's going to take through the rest of the year.
I don't want to get too specific about that, but I think we have one of the largest replacement fleets with both S-92s, 189s and other aircraft.
And really for me, the thing that I think is outstanding is we've been able to satisfy our clients, our clients, especially in SAR where there are a number of H225 SAR aircraft that have been now grounded, being able to do that life-saving, critical service is important.
I'm going to basically answer broadly and then <UNK> can answer more specifically.
But I would say that it's tighter but I wouldn't call it tight because I remember when the market five, six years ago, that was a tight market, right.
When the S-92 was used to replace the 225s when they were grounded before, that was a very tight market.
I would not call this market that tight.
I would just say it's tightening and again, that's what we're seeing globally.
I think other peers might have different views.
Hopefully that benefits everybody.
I would prefer to have that view, to be honest, but just we are not seeing it, so I don't want you to get that impression.
And then as far as does it allow us to do S-92 sales better.
Yet to be determined.
I'll turn it over to <UNK>.
It definitely helps on the financing of these S-92s, I think.
If we were to do more sale-leasebacks or other types of financing that were secured, a lot of that $2 billion of capacity for us is S-92s and other types of aircraft.
<UNK>.
That's right, <UNK>.
So there are about 290 S-92s just in the civilian market.
Of those, about 218 are in the oil and gas market.
So prior to the 225 grounding, there were a number that were in essence on the ground not being utilized.
And so what this has done, and I think <UNK>'s comment is correct, it's the event really had the effect of absorbing some of that excess capacity of S-92s in the market.
We were in a position where we were long S-92s and so, as we saw decreased activity for example in Gulf of Mexico, we had S-92s in that region that we were able to mobilize and move to other regions like ECR.
And so we have seen a I'd say shrinking of the overcapacity, but like <UNK> said, I wouldn't say it's tightened to the point it's too extremely tight.
I would say it has tightened on a relative basis.
I'm going to let <UNK> primarily answer, but the best thing I would say is we don't really comment on what we're trying to do specifically.
We would just say we're evaluating options.
I think the important piece is those options are very available to us, both from what we see in the marketplace, from the type of assets we have, especially non-oil and gas assets.
But I would also say I think there's been some commentary that the oil and gas sale-leaseback market, the secured market, is not available and it is available.
I wouldn't say it's the same as it was, again, three, five years ago, but it's still available.
So <UNK>.
Good morning, Will.
So I would broadly just describe it not so much as whether it's sale-leaseback or exactly how we'll utilize the inherent value in either the oil and gas assets or the UK SAR assets.
I would just more broadly refer to it as a like an equipment financing or equipment-based financing, i.
e.
that there is value in the assets, underlying assets.
And again, we've got ---+ <UNK> alluded to it, but we've got $2 billion of effectively unencumbered assets, both PP&E and aircraft.
So, again, it's really our goal here as we kind of worked through our action plan, i.
you are now just seeing the CapEx deferral and as we move along, the plan here is to really leverage the inherent value in those assets.
But you are on the right track.
UK SAR assets basically zero correlation to oil and gas business.
So lessors and lenders look at that and appreciate the difference between the two.
To answer your last question, we've seen no change in interest from potential financiers around the UK SAR assets given Brexit.
Just something ---+ to answer a question, which I think the market has had some commentary about ---+ what we're trying to do is not lever up this company to survive.
What we're trying to do is push out maturities and create a profile for us similar to what our CapEx deferral did.
And that's a simple as that.
If we can grab some cheaper liquidity by doing that, that's okay too, but that's kind of what we're trying to do here.
We've always been a company that has espoused lower leasing, prudent balance sheet management.
And don't get me wrong.
I'm not happy with where the leverage is right now, but <UNK> and myself and a number of the executives, we've been through these cycles before and know what you need to do as far as keeping your secured capacity available to be able to survive as the global sector leader, and that's really what we're trying to do.
Okay, Dan.
Again, first of all, I appreciate it.
Usually you are joined with a few other peers who want us to give guidance.
There is a reason why we did not give guidance for the full Company consolidated EBITDAR.
It's because it's still a very volatile marketplace.
As I said, there's been stabilization, but I don't want anybody leaving this call thinking that we're positive about FY2017.
We've got a lot of issues concerning the pound that still are not sorted out.
There's still utilization that has declined in certain markets even though we've seen a little bit of an uptick in others.
So I am not going to actually satisfy your question, Dan.
Just know I think we've been pretty explicit that what we are trying to do is keep to kind of this first-quarter run rate, that the Brexit impact on the pound will be offset by cost-cutting as we see it today.
But most importantly, most importantly, outside of FY2017, we have enhanced our liquidity.
We'll continue to enhance our liquidity.
We have the tools to do it to continue to survive as the global sector leader.
So that to me is ---+ it's two stories that we're trying to tell here, but I don't want anybody to leave this call with the first story being so positive for FY2017.
I think we'll improve in FY2018 because we have some self-help that we can do with new contracts and reductions in CapEx.
But anyway ---+
Yes, I think that we are ---+ I'll let <UNK> talk about Asia-Pac, but I would say that's the market that we see the most weakness.
And we're still in discussions concerning improving the costs, frankly getting some revenue back from those costs with the contracts.
We are still in the midst of pretty sensitive discussions to be able to do that.
And all those discussions have been done in true partnership, whether it be with our clients or OEMs.
And so to answer that specifically would be difficult other than to tell you that we have an intent and we are seeing some success in the second quarter.
But, <UNK>, anything else.
No, I think you covered it.
Okay.
<UNK>, I'll let <UNK> answer that question.
Good morning, <UNK>.
The answer is, no, there's not.
Basically <UNK> alluded to it.
We've guided $15 million to $20 million from FX from Brexit and about $10 million of that is what he was alluding to earlier into UK SAR.
So we are still in that mid---+- we've always guided to that mid-40% EBITDAR margin.
And so whether it moved by 100 bps or so in there, that was ---+ it was more just kind of the math rather than anything.
So nothing going on there from an operating performance.
That's certainly the intent and even ---+ so let me just step back.
You've raised the whole covenant issue and clearly our max is 4.25%.
We finished up the quarter at 2.79%, so we've got a lot of room there, a lot of EBITDAR room.
Around the FX, to be specific around your question, it's more related to the balance sheet impact, but we've quantified on the call today we think the view of the impact from Brexit.
I'm going to let <UNK> answer that.
So, I don't think we are giving specific guidance around the numbers, but I can tell you we are aggressively going after our cost structure, particularly in regions where we need to right size it to meet the current environment from a revenue perspective.
And so we are doing things like eliminating layers of managements.
We are right-sizing our operations from a piloting and crewing standpoint.
And by the way, we are also growing significantly deep into both our corporate costs as well as our business unit G&A.
So this is really a broad-based and aggressive look at our cost structure to make sure we are aligned with the market realities today.
No remarks, ma'am.
I think we are ready to get going for the rest of FY2017.
Thank you very much for your support of Bristow and be safe.
