Bristow Group - Q2 2023

Transcript

Operator (participant)

Good day, everyone, and welcome to today's Bristow second quarter 2023 conference call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing the star and one on your touchtone phone. You may withdraw yourself from the queue by pressing star and two. Please note, this call may be recorded. I will be standing by if you should need any assistance. It's now my pleasure to turn the conference over to Mr. Red Tilahun, Senior Manager of Investor Relations and Financial Reporting. Please go ahead, sir.

Red Tilahun (Senior Manager of Investor Relations and Financial Reporting)

Thank you, James. Good morning. Welcome to Bristow Group's second quarter of 2023 earnings call. I am joined on the call today with our President and Chief Executive Officer, Chris Bradshaw, and Senior Vice President and Chief Financial Officer, Jennifer Whalen. 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 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 of our investor presentation. I will now turn the call over to our President and CEO. Chris?

Chris Bradshaw (President and CEO)

Thank you, Red, welcome to the call, everyone. As always, I will begin our prepared remarks with a note on safety, which is Bristow's number one core value and our highest operational priority. The company has achieved our target of zero air accidents through the first seven months of 2023. We also experienced a reduction in the total recordable incident rate, as well as fewer incidents resulting in lost work time. I want to thank all of our global team members for their continued dedication to place safety first every day. Turning to other operational highlights and outlook. The 35% sequential quarter improvement in adjusted EBITDA, excluding asset dispositions and foreign exchange losses, shows the building momentum for Bristow's business in the latter half of 2023 and beyond.

We continue to believe the offshore energy services market is in the early innings of a multi-year growth cycle. Offshore industry activity is increasing at a significant pace, as evidenced by the wave of recent project FIDs, subsea awards, and equipment contracting announcements. For Bristow, the increased market activity is resulting in higher fleet utilization and higher rates for our services. We expect the company's financial performance to be significantly better in the second half of this year, setting up positively for even stronger financial results in 2024. In our government services business, we are pleased to be selected as the preferred bidder for the EUR 670 million search and rescue contract for the Irish Coast Guard. We expect to finalize the contract signature soon.

This important new mandate, which has a base duration of 10 years, plus options to extend an additional three years, is scheduled to commence over an operational transition period beginning October 1st, 2024, through July 1st, 2025. To facilitate this new contract, Bristow will invest approximately $140 million of capital, most of which will occur during the remainder of 2023 and 2024. The Irish Coast Guard contract will represent the second-largest contract in our portfolio. It is expected to contribute a substantial amount of high-quality, stable cash flow. On slide number 13 of our investor presentation, you can see a summary of the world-class contracts in Bristow's search and rescue business.

We are executing on the opportunity to invest on attractive terms that will result in an extended and substantial cash flow yield for Bristow shareholders for the next decade and beyond. We believe the stability of our government business is a strong complement to Bristow's Offshore Energy Services business, which, after several years of challenging conditions, is now positively inflecting at the beginning of a new growth cycle. We'll now hand it over to our CFO for a review of the quarter's financial results. Jennifer?

Jennifer Whalen (SVP and CFO)

Thank you, Chris. Today, I will begin with an analysis of the sequential quarter comparison of Bristow's financial results. EBITDA, adjusted to exclude special items, asset dispositions, and foreign exchange, was $39 million for the 2Q 2023, compared to $28.9 million in the 1Q, or an increase of approximately $10 million. Operating revenues increased $18.6 million, primarily due to higher utilization in our offshore energy and government services businesses and higher lease payments from Cougar, as well as the strengthening of the British pound to the US dollar. Operating expenses were $13.9 million higher, primarily due to increased repairs and maintenance costs, other operating costs, and a one-time non-cash write-off related to legacy insurance policies, partially offset by lower fuel costs.

The one-time non-cash charge of $4 million to insurance is from pre-merger aviation insurance policies that had a good experience return provision. It has taken several years to reconcile and collect on those insurance policies, and as Bristow was finalizing the returns of premium, it was determined that we needed to adjust the receivable to reflect the amounts we expect to collect. Our current aviation insurance policies have a different structure, and we do not expect this type of item to recur. Moving on, general and administrative expenses were $2.1 million lower due to lower professional fees. As noted in previous earnings calls, the other income.

Other income line item is primarily comprised of non-cash foreign currency gains and losses, which we have excluded from our adjusted EBITDA calculation. We have affirmed our financial guidance for calendar year 2023. In June, we announced financial guidance for 2024, with an EBITDA range of $190 million-$220 million. The details are available on slide 15. As we have noted previously, our EBITDA guidance for 2023 is weighted toward the back half of the year. Slide 10 presents a walkthrough of helicopters commencing new contracts throughout 2023. Finally, Bristow continues to benefit from a strong balance sheet and liquidity position. As of June 30th, our available liquidity was $285 million.

We generated adjusted free cash flow of $17.9 million for the quarter, and as we've 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?

Chris Bradshaw (President and CEO)

Thank you, Jennifer. We remain highly encouraged by the improved growth outlook for both our offshore energy and government services businesses. As noted, the EBITDA run rate at year-end 2023 is expected to be significantly higher than the first half of this year, setting up positively for even stronger financial results in 2024 and beyond. With that, let's open the line for questions. James?

Operator (participant)

Thank you. At this time, if you'd like to ask a question, please press the star and one on your touchtone phone. You may re-remove yourself from the queue at any time by pressing star two. Once again, that is star and one to ask a question. We'll take our first question today from Josh Sullivan with The Benchmark Company.

Josh Sullivan (Managing Director)

Hey, good morning. Congratulations on the quarter.

Chris Bradshaw (President and CEO)

Good morning, Josh. Thank you.

Josh Sullivan (Managing Director)

Just looking at that step-up in the second half here, you know, how is reconfiguring, transitioning to the aircraft assets, progressing, you know, to some of these contracts? Any, any hurdles to note in rebasing or, or maybe are you ahead of schedule anywhere?

Chris Bradshaw (President and CEO)

Thankfully, no hurdles to note. We remain on track to meet the schedule that we have to start up these contracts, which, again, are evidence of the building momentum that we see in our business over the latter half of this year.

Josh Sullivan (Managing Director)

Got it. Then, and then given the recent Irish SAR win, you know, how much government services TAM is there really left for you to go after and capture? Or maybe what opportunities are on the horizon that you guys are tracking right now?

Chris Bradshaw (President and CEO)

Thank you for the question, Josh. We're really pleased by the growth in our government services portfolio. If we look back a couple of years, it was really the one cornerstone contract with the UK Search and Rescue program. Since then, we've added the Netherlands, the Dutch Caribbean region, et cetera, and very excited to now add the Irish Coast Guard contract, which will become the second-largest contract that we have anywhere in the company. If we look forward, we continue to believe there'll be a growth in this trend for governments around the world considering to outsource this critical but highly specialized service, which is search and rescue.

There is a sizable contract in Australia providing government SAR work, that we expect to come to market, sometime over the next couple of years, although we don't have a firm timetable on that one yet. That's likely to be the next active opportunity. Again, looking forward, we, we think that this trend, for the outsourcing of this critical but very specialized service, is likely to continue with, with other governments considering doing the same.

Josh Sullivan (Managing Director)

Got it. How do you plan to fund the incremental CapEx need here, just on the Irish SAR operations? What other details could you provide on the contract itself?

Chris Bradshaw (President and CEO)

We're in an advantageous position and that we have multiple opportunities, multiple alternatives to fund this growth investment. We'll use a combination of cash on hand, operating cash flow that we're still to generate, likely some new debt financing, potentially some aircraft leasing options. But we're in advanced discussions with various capital providers around those alternatives, looking to provide the most efficient solution from a cost of capital standpoint, as well as other terms and conditions. Encouraged by those conversations. As we do finalize them over the next few quarters, we'll be pleased to announce more of the details.

Josh Sullivan (Managing Director)

Got it. With the U.K. SAR CapEx investment, you know, there was more of a need to get the orders in early, just given what was going on with the supply chain. How have negotiations, if you've entered them with the Irish aircraft needs, how has that proceeded with the manufacturers?

Chris Bradshaw (President and CEO)

They're going well. We were announced as the preferred bidder at the end of May. We're working closely with the Irish Department of Transport to finalize and sign the contract. At the time that we do that, we'll move forward with placing the orders with the OEM to have the aircraft delivered on time. Very good discussions with what is a long-term partner that we have with the manufacturer.

Josh Sullivan (Managing Director)

I guess, relatedly, you know, how have spares generally looked or availability looked? Any, any movement allowing you to, to put more assets into service?

Chris Bradshaw (President and CEO)

Unfortunately, not a material change in the supply chain condition. If we look at the aviation industry and certainly the rotary wing helicopter segment, for which we have the largest portion of our business, there have been some challenges with supply chain over the last few years, as has been the case with a number of industries. The most significant of those has really been specific to the S-92 parts and repairs support. That continues to be a challenge for us, so no material change there, although from our discussions with Sikorsky, the manufacturer of the S-92, you know, we believe and we're working with them to hopefully get to a place where 12 months from now, we're at a more normalized state where the repairs and services. can be completed as needed.

Chris Lee (Research Analyst)

Great. Thank you for the time.

Chris Bradshaw (President and CEO)

Thanks, Josh.

Operator (participant)

Next, we'll hear from Chris Lee with Evercore ISI.

Chris Lee (Research Analyst)

Good morning, team.

Chris Bradshaw (President and CEO)

Morning, Chris.

Chris Lee (Research Analyst)

Just curious on the announcement on additional base.

Chris Bradshaw (President and CEO)

Sorry, Chris, I think, we lost you there for a, for a second. Which, which announcement?

Chris Lee (Research Analyst)

Oh, yeah, the, the additional bases in Brazil, which pretty much doubles the number of aircraft that you're previously operating. Like, what kind of opportunities do you see in, in Brazil?

Chris Bradshaw (President and CEO)

Yes, thank you for the question. We believe that the Brazilian market is likely to grow as fast, if not faster, for offshore helicopter support needs than any other sizable offshore oil and gas market anywhere in the world. We were successful in winning 6 new contracts in tenders that occurred last year. Those contracts are starting up this quarter, the one that we're in now. Looking forward, we continue to believe there'll be a lot of attractive growth opportunities in Brazil. If we look at the next few years, there are approximately 20 new floating production storage and offloading vessels scheduled to come into the Brazilian market.

All of those platforms will need helicopter support, and that's not even speaking to the drilling rigs, which we also expect to be active during this period of time. We're excited about the growth prospects in Brazil and what that could mean for additional opportunities for Bristow's business there.

Chris Lee (Research Analyst)

Gotcha. Then how should we take this positive offshore energy outlook for 2024 and apply it regionally to better understand the various countries you're currently operate in?

Chris Bradshaw (President and CEO)

As we look across the various regions in which we operate around the world, the most growth opportunities that we see today are really in places, like Brazil, which we just discussed, as well as the west coast of Africa, including Nigeria, where we have a large business that's been doing much better in recent quarters. The U.S. Gulf of Mexico is also another area where we've added some aircraft on contract here this year and expect there will continue to be more opportunities going forward in terms of increased demand here in the U.S. Gulf of Mexico. Across our portfolio today, those are three of the regions that I would highlight.

Chris Lee (Research Analyst)

Gotcha. Makes sense. Just another quick follow-up question here. Are, are any of the Irish SAR revenues included in your 2024 guidance?

Chris Bradshaw (President and CEO)

No. We do not expect the Irish Coast Guard contract to have a material impact on our P&L in 2024. It's really 2025 and beyond, the next decade plus, where we'll see a material benefit from the Irish Coast Guard contract. There was nothing included in our 2024 guidance for for Ireland.

Chris Lee (Research Analyst)

Gotcha. Great. fully appreciate the color.

Chris Bradshaw (President and CEO)

Thanks, Chris.

Operator (participant)

Our next question will come from Steve Silver with Argus Research.

Steve Silver (Senior Equity Research Analyst)

Good morning, congratulations on the Irish Coast Guard and the 2024 outlook. Just looking at 2024 government services, it looks like it's expected to account for about 25%-30% of revenue, which is pretty consistent with the 2023 outlook. While you've mentioned an attractive outlook for offshore energy, I was just wondering if you could talk a little bit about your current thinking on any long-term targets for revenue composition across the various segments, given the differences in fixed costs and other economic benefits.

Chris Bradshaw (President and CEO)

Good morning, Steve, thank you for that note. If we look at our government services business, it is a growing business for us. We've added some contracts recently. We're seeing the full year benefit this year from Netherlands and Dutch Caribbean. Irish Coast Guard contributions really kick in in 2025 and beyond. We are seeing growth in that business, which is encouraging. On our offshore energy side, which has really had a number of challenging years up until now, that sector is really just now positively, in fact, inflecting. We do think that we're in the early stages of what should be a multiyear growth cycle in offshore energy services.

Because we see so much potential there, we actually see the growth rates for that segment being higher than any of our other service lines at this time. It's likely that offshore energy rate of growth will be the highest that we have across our, our service lines. We have 2024 guidance out there, including revenues by line of service. When we do issue 2025 guidance, we'll do something similar, which will provide more granularity around the individual contribution of each of the service lines.

Steve Silver (Senior Equity Research Analyst)

That's helpful. Great. One housekeeping question, if I can. You've guided for approximately $20 million-$25 million in cash taxes for the year. Yet it looks like you've paid about $3.6 million in the first half. I was just trying to get a sense as to second half payments, if they are expected to be more evenly weighted across the quarters, or if there's any differentiation between the quarters. Really just in general, how we should be looking at the timing of tax payments for the business in general.

Jennifer Whalen (SVP and CFO)

Thank you, Steve. Good to hear from you. So you know, we operate all over the world, and each jurisdiction has a different timing of when these are really, in most cases, estimated tax payments for income that is created throughout the year. Typically, they wait to the back half of the year. I, I don't think you can assume that they would be evenly distributed over the back half of the year, but, you know, typically, closer you get to the end of the year, the more you've pulled together what your, what income looks like for the year. Therefore, we've, we've guided the $20 million-$25 million in cash taxes and then have affirmed that guidance.

Steve Silver (Senior Equity Research Analyst)

Okay, appreciate that, and congratulations again.

Chris Bradshaw (President and CEO)

Thank you, Steve.

Operator (participant)

It appears we have no further questions at this time. I will now turn the conference over to Mr. Chris Bradshaw for any additional closing remarks.

Chris Bradshaw (President and CEO)

Thank you, James, and thanks, everyone, for joining for the call this quarter. Look forward to speaking again next quarter. In the meantime, I hope everyone stays safe and well.

Operator (participant)

This does conclude today's program. Thank you for your participation. You may now disconnect.