Bristow Group, Inc. (NYSE:VTOL) Q2 2023 Earnings Conference Call November 3, 2022 10:00 AM ET
Company Participants
Redeate Tilahun – IR
Christopher Bradshaw – President, CEO & Director
Jennifer Whalen – SVP & CFO
Conference Call Participants
Operator
Good day, and welcome to the Bristow Group Reports Second Quarter Fiscal Year 2023 Results Call. As a reminder, today’s call is being recorded.
At this time, I would like to turn the call over to Mr. Red Tilahun. Please go ahead.
Redeate Tilahun
Thank you, Matti. Good morning, everyone, and welcome to Bristow Group’s Second Quarter of Fiscal year 2023 Earnings Call. I’m joined on the phone today with our President and Chief Executive Officer; Chris Bradshaw, Senior Vice President and Chief Financial Officer; Jennifer Whalen, Executive Vice President of Sales and Chief Transformation Officer, Dave Stepanek; Senior Vice President of EMEA and SAR, Alan Corbett; and Senior Vice President of Americas, Samantha Willenbacher.
Before we begin, I’d like to take this opportunity to remind everyone that during the course of this call, management may make forward-looking statements that are subject to risks and uncertainties that are described in more detail on Slide 3 of our investor presentation. You may access 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 will now turn the call over to our President and CEO. Chris?
Christopher Bradshaw
Thank you, Red, 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. The company once again achieved very good safety performance in the quarter. We are proud to have many of the most experienced and highly skilled pilots, technicians and support personnel in the industry. We are backed by Bristow’s Target Zero Safety culture, robust operating procedures and world-class training programs. I want to thank all of our Bristow team members around the world for their continued dedication to place safety first every day.
Turning to the business outlook. The strengthening fundamentals in the offshore oil and gas market support our view that we are in the early innings of a multiyear growth cycle. We have once again included some slides in our earnings presentation that summarize data from third-party analysts, supporting the outlook for a significant increase in upstream oil and gas spending over the next few years and a tightening market for offshore equipment, including helicopters. Despite the potential risk of an economic recession, we view long-term upstream spending plans as resilient given the global supply challenges and energy security concerns. This constructive outlook for offshore energy activity combined with new contract additions in our government services business and improved activity levels for our fixed wing business in Australia support our view that the underlying fundamentals for Bristow’s business are improving significantly. A strong U.S. dollar is unfortunately muting the full impact of these improvements in our calendar year 2023 outlook.
I will now hand it over to our CFO for a discussion of these foreign exchange impacts, a review of the quarter’s financial results and 2023 financial guidance. Jennifer?
Jennifer Whalen
Thank you, Chris. Today, I will begin the discussion with a couple of notes on foreign currency. As Bristow is located in many jurisdictions around the world, we’re affected by foreign currency fluctuations and particularly, the U.S. dollar’s continued strengthening over the past few quarters. In many cases, our foreign currency fluctuations are mitigated by natural hedges such as contracts partially denominated in U.S. dollars. However, in the U.K. and particularly our U.K. SAR business, we’re exposed to the British pound sterling.
There are 2 main ways that our financial results are affected by the fluctuation of the British pound. First is through revenues related to our U.K. business. I will discuss with some further detail in the overview on initiating guidance. Secondly, there are primarily noncash foreign exchange gains and losses that are reported in the other income line on the income statement. These foreign exchange gains and losses are, for the most part, from the revaluation of balance sheet items. While I have referenced the foreign exchange impact in the past, starting this quarter, we have presented our adjusted EBITDA to exclude the foreign exchange that is reported in other income to more clearly present the results of operations of the business.
Moving on, I’ll start with an analysis of the sequential quarter comparison of Bristow financial results. EBITDA adjusted to exclude special items, asset dispositions and foreign exchange gains was $33.9 million for the second quarter of fiscal year 2023 compared to $37.1 million in the first quarter or a decrease of approximately $3 million. Operating revenues increased $5.2 million, primarily due to increased activity in our fixed wing services, timing of cash collections related to Cougar and higher utilization in oil and gas services in Africa. Operating expenses were $6.9 million higher, primarily due to higher personnel costs, repairs and maintenance and other expenses.
General and administrative expenses were higher by $1 million, primarily due to higher professional service fees. We also sold or otherwise disposed of 3 helicopters and other assets for a net gain of $3.4 million. As noted in my opening remarks, other income is primarily comprised of noncash foreign currency gains, which we have excluded from our adjusted EBITDA calculation. As we announced last quarter, we have initiated guidance for calendar year 2023. In our earnings presentation, the details are on Slide 13 through 15.
We anticipate revenues to be in the range of $1.15 billion to $1.275 billion with an adjusted EBITDA, excluding asset dispositions and foreign exchange, of $148 million to $160 million when using an average pound to the U.S. dollar exchange rate of 1.16. As I noted previously, foreign currency has a significant effect on our earnings. For example, each GBP 0.01 movement in the British pound to U.S. dollar exchange rate will impact projected calendar year 2023 adjusted EBITDA by approximately $1.5 million. In addition, if we were to apply the average exchange rate for the British pound, the U.S. dollar in the last 12 months to the projected results for calendar year 2023, the adjusted EBITDA guidance range would be $158 million to $175 million.
The midpoint of that currency equivalent range is approximately 25% higher than the LTM adjusted EBITDA, which is consistent with our view that the fundamentals for our business are improving next year. Finally, Bristow continues to benefit from a strong balance sheet and liquidity position. As of September 30, our available liquidity was $251 million after cash outflows of $31 million related to PBH buy-ins, $12.6 million from the purchase of BIH and share repurchases of $6.3 million, that were all funded with available cash. As we have stated before, we still believe that this business model will continue to generate strong cash flows.
At this time, I’ll turn the call back to Chris for further remarks. Chris?
Christopher Bradshaw
Thank you, Jennifer. The last few years have been very challenging for our sector. Nevertheless, as was the case with pre-merger Era Group, we have demonstrated that financial discipline and our resilient business model can weather these difficult market conditions while continuing to maintain a strong balance sheet and positive cash flow. We now see the previous industry headwinds turning into support of tailwinds, and the fundamental outlook for Bristow’s business is improving significantly. While the strong U.S. dollar is somewhat masking the full magnitude of this improvement, we are confident that increasing offshore oil and gas activity, a growing government services business and a recovering fixed wing business will drive robust cash flow generation going forward. We continue to believe that Bristow’s leading market position, financial strength and growth opportunities present multiple avenues to create value for the company’s stakeholders.
With that, let’s open the line for questions. Matti?
Question-and-Answer Session
Operator
[Operator Instructions]. We’ll take our first question from [indiscernible].
Unidentified Analyst
Just wanted to dig into some of the drivers of the new guidance here. Maybe if we could start off with government services. Clearly, you guys won some interesting awards through the year. You have the large recompete under your belt. Can you just expand on the exact drivers throughout this year?
Christopher Bradshaw
Yes. Thank you for the question. The primary driver of the growth in our government services would be the new contract awards that we were successful in winning. That includes what will be the full year benefit of the Netherlands SAR contract, which is scheduled to begin at the end of this week as well as the Dutch Caribbean Coast Guard contract, which just began last month. In addition, there is a rate increase in our U.K. SAR contract, which is tied to an inflation index. But as noted, the primary driver for the growth there are the new contracts that we’ve been successful in winning in our government services.
Unidentified Analyst
And then what does the pipeline look like for — I know at one point you’re following the Irish award. Are there others? Or just what are the other opportunities throughout the year? What does that pipeline look like?
Christopher Bradshaw
There is an attractive pipeline there. We are actively participating in the tender for the Irish Coast Guard contract. We expect that, that award will be announced by next summer, the summer of 2023, and there is additional opportunities behind that. We recently acquired British International Helicopters, or BIH, which has a contract with the U.K. Ministry of Defense in the Falkland Islands. That presents a new growth opportunity for us with other U.K. MOD contracts and other aspects — other regions of the world, whether that be Cyprus, Brunei or potentially in places like Oman. Beyond that, we think there are other governments that will look at the success that has occurred in the U.K., in the Netherlands and some of these other jurisdictions and look at the opportunity to privatize some of these critical services to operators such as Bristow.
Unidentified Analyst
Got it. And then just on the BIH assets and some of those other opportunities, would you get into things like transport? Or can you cover those opportunities with your current asset classes? Or would you need to invest in any new capabilities to kind of pursue some of those opportunities?
Christopher Bradshaw
I think it will be a mix, for example, with the search and rescue award that we picked up in the Netherlands. We are bringing in a new helicopter from Leonardo. Also using some existing assets. For the Dutch Caribbean Coast Guard work, that is existing helicopters that we have in the fleet. Any new work for government clients is likely to require a new factory delivered aircraft to support that work, whether that be conventional models or new generation aircraft. We are using some Unmanned Aerial Vehicle in our U.K. SAR contract today. I would expect that UAVs will be an asset class that will be more heavily used by government customers going forward. And as that requirement comes in, we would need to order those aircraft to bring them into the fleet. And if we think even longer term, I think some of the new generation, electric powered or hybrid power, maybe eventually hydrogen-powered aircraft will become relevant for delivering some of those solutions as well.
Unidentified Analyst
Got it. And then switching over to the oil and gas side, which regions do you see as the largest drivers this year and then maybe over the next 3?
Christopher Bradshaw
As we look forward to 2023, some of the areas that are contributing some positive aspects of oil and gas business would be the U.S. Gulf of Mexico oil and gas activity. That’s somewhat offset by what we think will be a reduction in COVID flights in our search and rescue business, given the pandemic effects receding. But overall, we see the U.S. Gulf of Mexico being a growing market next year as we do with Nigeria, which is recovering off of more trough-like levels of activity. In addition, we were successful in winning some new contracts recently in Brazil. Those are not going to commence until mostly the latter half of 2023. And similarly, we were successful in winning a multiyear search and rescue contract to support Equinor in Norway. That contract begins in September of 2023. So again, more of a latter half of next year contributor, which speaks to a broader point, which is that we expect the ending run rate in the latter half of 2023 for our oil and gas business to be stronger than the beginning of the year.
Unidentified Analyst
And then when you were doing the buildup, what were some of the more macro elements that you were putting into that guidance outlook, just given some concerns just on the broader economy? What are some of the risk corridors that you’re looking at?
Christopher Bradshaw
Mainly that view is informed about what we think are some global supply challenges and an increasing focus on energy security, which is supported by conversations with our customer base. So in our projections, we’re not necessarily referencing a specific price deck for oil, but more spending plans that we anticipate coming from our customers and some projects that we see in their pipeline, which we believe will be mostly disconnected from near-term volatility in the spot price because, again, we think the major issue is a medium- to long-term supply challenge as the global excess capacity for oil production is expected to be less than 2% of total global demand as we close out this year. So there’s a clear need, in our view, to add new supply. A good portion of that will need to come from offshore sources and that will drive an increase in demand for our services.
Unidentified Analyst
Got it. And then on the fixed wing operations, the recovery looks like it’s coming along nicely. How are you projecting outwards with this segment? Is there booking trends you’re looking, new mining projects in key destinations?
Christopher Bradshaw
One of the major improvements would be the reopening of borders in Australia, and the pandemic effects receding and more travel occurring. We are seeing an increase in bookings and demand for people to travel now that, that opportunity is again available to them. So that’s the retail side. On the charter side, I think you rightly point to a growth opportunity for us as we see whether it’s mining or oil and gas companies who are operating in Australia and have a need to continue to meet the supply that will be required to bring on those commodities we are seeing some charter opportunities in Northern Australia as well.
Unidentified Analyst
And then just on the EBITDA guidance, can you just dig into the reasons for presenting adjusted EBITDA net of fixed gains and losses and then why now?
Christopher Bradshaw
Sure. The issuance of guidance is one of the primary reasons that we are showing the adjusted EBITDA, excluding foreign exchange gains and losses. As Jennifer mentioned, we are impacted by FX in various ways. Part of that would be in our flows and the revenues that are coming in from areas like the U.K. contracts. The other aspect is really mostly noncash revaluation of balance sheet items, which flow through our income statement in the other income line. In the past, those have been either positive or negative depending upon the quarter. However, given the strong U.S. dollar, particularly over the last couple of quarters, those have generated some significant gains, and we’re showing the impact of that in our presentation of adjusted EBITDA. Going forward, with our guidance, we’re not taking a view directionally on foreign exchange. So we’re presenting the guidance for adjusted EBITDA neutral as it relates to that other income FX gain and loss impact.
Unidentified Analyst
Got it. And then obviously, you have significant operations in the U.K. and I get the dollar impact, but are there any offsets to the business?
Christopher Bradshaw
We do have an order book for aircraft that mostly consists of aircraft that were coming from European manufacturers, and those are denominated in euros. We will be purchasing that with U.S. dollars. So there is a benefit to us in that regard with the capital and that we’re using a stronger U.S. dollar to fund those euro-denominated purchases. That will ultimately lead to better returns — financial returns over the life of the asset, if we bring those in at a lower U.S.-denominated value.
Unidentified Analyst
Got it. And then lastly, I just want to check in on advanced air mobility opportunity. You guys have been a leader in orders and working with developers. Just curious on your view throughout the last quarters. Any interesting developments or just how you’re looking at that market currently.
Christopher Bradshaw
We remain optimistic about the potential for advanced air mobility, which is obviously an industry that doesn’t yet exist, but one that we expect to develop and develop rapidly as some of these new aircraft become certified. We expect the first certifications to occur around the 2024 timeline. We think that Bristow, as the global leader in vertical flight solutions, has a good opportunity to benefit from these new aircraft and incorporate them into existing operations for customers as well as use them in new market opportunities to expand the services that we’re providing both to our current customer base as well as a new class of customer. So in terms of the recent developments, we have signed recently some additional partnerships. We are supporting a number of the developers of these new asset types as they look to both develop those aircraft, certify them and bring them into the market. And we are — we do remain optimistic about the potential for that industry as well as what it means for Bristow.
Operator
We’ll take our next question from [indiscernible].
Unidentified Analyst
A couple of questions. One, how many shares are left on the buyback program at this point for dollar amount?
Christopher Bradshaw
We have a total of $40 million of potential share repurchases that have been authorized and could be used over time.
Unidentified Analyst
$40 million remaining?
Christopher Bradshaw
Correct.
Unidentified Analyst
Okay. Good. Chris, on your comments regarding the oil and gas outlook, I think you said that you expect a stronger run rate exiting 2023 than going into 2023. What is that based on? Is that based on third-party research reports? Or is it based on contracts that you’re winning that will start to kick in, in 2023?
Christopher Bradshaw
Yes. Thank you for the question, John. It’s mostly based upon the timing of contracts ending and commencing. So we do have a contract that we’re servicing now in Guyana that’s expected to end at the end of this calendar year. On the inverse, we have some new contracts that have been awarded in Brazil that mostly commenced in the latter half of 2023. We have a new search and rescue contract for Equinor in Norway, which will commence in September of 2023. We have some other contracts in the U.K. and Nigeria that will really show a full benefit for the full calendar 2023. But because of the cadence of those contracts starting and ending, again, heavily influenced by Brazil, Norway and a little bit the U.S. Gulf of Mexico. We will see a stronger run rate at the end of ’23 than the beginning.
Unidentified Analyst
Okay. Could you give us some idea of perhaps in a range of how much higher the oil and gas hours might be before 2023? I ask because the drillers are reporting some pretty robust results, I mean significant upticks. And I’m just curious as to if you can give any kind of range as to how much higher you think the hours might be in ’23 versus ’22?
Christopher Bradshaw
So we’re not providing an hour disclosure. However, I would note, we are seeing a strengthening market throughout 2023. It is the case that the offshore drillers tend to sign contracts for their rigs before our services are procured. And so you will see more visibility in their business earlier than you will for the helicopter support. But we do think that there is — in the areas that I mentioned, a clear uptick in activities to support the growth in oil and gas demand in 2023. And I want to emphasize that we think that year is really just the beginning of what is going to be a multiyear growth cycle for oil and gas spend.
Unidentified Analyst
Okay. That’s helpful. So you think the second half of ’23 is going to be stronger than the first half in the oil and gas sector. Is that fair?
Christopher Bradshaw
We do. We think there’s going to be a clear back half of the year weighting to the uptick in oil and gas support.
Operator
And we do have one more question left.
Unidentified Analyst
So when you announced the ERA-Bristow merger just right before COVID emerged, you targeted $240 million of medium-term EBITDA. Given your comments on the strong fundamentals in the industry, is that a level of EBITDA that you still view as achievable over the cycle?
Christopher Bradshaw
Yes. Thank you for the question. I mean that’s — obviously, those numbers are now 3 years old. Those projections were put together in late 2019. So the world has changed profoundly since then. What we’re providing guidance on is really 2023, which we see as being the beginning of a recovery, but without providing to a bridge a 3-year stale number, we think that recovery will continue to grow in 2024 and beyond. If you look at this, I would reference — there’s a slide in our investor deck, which speaks to overall upstream spending. I think the slide number is #10 in the deck, and that shows an overall market spend that is recovering this next year and will increase in 2024, 2025 to levels commensurate with the pre-pandemic. But for now, the guidance we’re providing is relevant to calendar ’23.
Unidentified Analyst
Boeing, Airbus, a lot of the aerospace supply chain continues to talk about issues with particularly castings and labor and some other issues. As your customers are looking at longer-term contracts, is your pool of available aircraft and spares? Is that part of the conversation? Are they concerned at all about the supply chain and your ability to service? Is that a selling point?
Christopher Bradshaw
Yes. Thank you, Josh. I think that is certainly becoming an increasing part of our conversations with customers as they are coming to an appreciation that we’re no longer in a position where helicopters are in overabundance. And that there needs to be planning involved, if we’re going to bring, for example, some idle S-92s back into operation that will take time and cost, and that cost will need to be born clearly by the customer as well as the fact that as we think about future growth, whether it be for government contracts or oil and gas, once all of the existing equipment is absorbed, that will eventually require new orders, which we don’t really see a backlog for at the moment, but that will come. So I think there is, yes, to your point, an appreciation that we are in a constrained global labor force market. We are in a tightening equipment market, and that will require more careful planning going forward as the overabundance is quickly getting absorbed.
Operator
We have no further questions at this time.
Christopher Bradshaw
Thank you, Matti, and thanks for joining, everyone. Stay safe and well. Talk to you again next quarter.
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