Bristow Group Q2 2024 Earnings Call Transcript

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August 7, 2024

There are 7 speakers on the call.

Operator

Good day, everyone, and welcome to Bristow Group Reports Second Quarter 2024 Investor Call. Today's call is being recorded. After the speakers' remarks, there will be a question and answer session. At this time, I would like to turn the call over to Red Tillahun, Senior Manager of Investor Relations and Financial Reporting.

Speaker 1

Thank you, Robbie. Good morning, everyone, and welcome to Bristow Group's Q2 of 2024 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 Whelan. Before we begin, I'd like to take this opportunity to remind everyone that during the course of 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.

Speaker 1

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? Thank you, Red.

Speaker 1

I want to begin by thanking all the Bristow team members around the world for their continued focus on safety, our number one core value and highest operational priority, which resulted in very good safety performance in the 2nd quarter. I also want to thank our global team for their contributions to Bristow's strong financial results in Q2, highlighted by the 50% sequential quarter increase in adjusted EBITDA. In conjunction with these results, we are pleased to raise the company's financial guidance for full year 2024 2025. This builds on the outlook we shared last quarter and is aligned with our conviction that we are in the early stages of a multiyear growth cycle. I will now hand it over to our CFO for a more detailed review of Q2 results and our increased guidance ranges.

Speaker 1

Jennifer?

Speaker 2

Thank you, Chris. Today, I will begin with the sequential comparison of Bristow's financial results. EBITDA adjusted to exclude special items, asset dispositions and foreign exchange was $71,300,000 for the Q2 of 2024 compared to $47,500,000 in the Q1 or an increase of approximately 23,800,000 dollars Operating revenues increased $23,100,000 primarily due to higher utilization and increased rates in offshore energy and fixed stream services, partially offset by government services. Operating expenses were $900,000 lower in the current quarter. Lower personnel and leasing equipment costs were partially offset by higher repairs and maintenance and other operating expenses.

Speaker 2

General and administrative expenses were $1,600,000 higher primarily due to higher professional service fees. As noted in previous earnings calls, the other income and expense line item is primarily comprised of non cash foreign currency gains and losses, which we've excluded from our adjusted EBITDA calculation. Our effective tax rate is approximately 25% for the current year compared to 86% in the prior year. The decrease in stabilization of our effective tax rate is attributable to the positive changes in our global mix of earnings. Of note, there are a few quarter specific items which benefited our financial results in Q2.

Speaker 2

These include a seasonal personnel cost benefit in Norway, the transition from cash basis recognition to an accrual basis of accounting for lease payments from Cougar, an adjustment for tax equalization in Suriname and the release of an insurance reserve. In aggregate, these items resulted in an $8,600,000 benefit to Q2 results. The change in accounting methodology for lease revenues from Cougar, our joint venture in Canada, will have the benefit of more consistent and stable earnings per quarter going forward. As a result of the 2nd quarter's earnings and the review of the forecast for the rest of the year, we have raised our 2024 adjusted EBITDA guidance to $210,000,000 to $230,000,000 In addition, we have raised our 2025 estimates for adjusted EBITDA to $230,000,000 to 260,000,000 dollars The increase is being driven by several factors. 1st and most impactful are higher rates and utilization in Africa.

Speaker 2

This region has outperformed over the last quarter and is expected to continue to perform well throughout the rest of 2024 and into 2025. Our UK OES business benefited from higher ad hoc activity during the first half of twenty twenty four. However, that is expected to reduce in the second half of twenty twenty four. The fixed wing business saw higher yields in scheduled passenger transport as well as a short term increase in charter activity. Our Americas OAS business benefited from short term projects with attractive rates.

Speaker 2

This is expected to reduce in the second half of the year. These positive drivers are partially offset by penalties related to availability in our government services business. These availability penalties are primarily due to supply chain challenges, namely delayed parts and repairs from the helicopter OEM. Due to the factors that I noted, we are pleased to be able to increase guidance for 2024 2025. Our targets for 2026 remain unchanged.

Speaker 2

Further details are available on Slide 78 of the presentation. Moving on to recent updates on capital expenditures for our new SAAR contract. As we have noted in our last several earnings presentations, we have a capital investment of approximately $300,000,000 related to the successful award of contracts with the UK and Irish Coast Guard. As of the end of July, we have completed $157,000,000 or just a little over half of the total investment required. In the Q2, we completed an additional financing with the United Kingdom Export Bank for up to €100,000,000 and very attractive rates.

Speaker 2

The financing will be used to support the Irish Coast Guard contract. With this new financing and the upside of our U. Star facility with NatWest earlier this year, we are well positioned to fund the capital that is needed for these two very important contracts. Finally, Bristow continues to benefit from a strong balance sheet and liquidity position. As of June 30, our available liquidity was $246,000,000 We generated adjusted free cash flow of $33,000,000 in Q2.

Speaker 2

And as we have stated before, we believe that our business model will continue to generate strong cash flows. At this time, I'll turn the call back over to Chris for further remarks. Chris?

Speaker 1

Thank you. As Jennifer noted, Bristow's business performing well today and we expect the company's growth to accelerate over the next 2 years. Our leading government services business is experiencing growth and diversification through the addition of key search and rescue contracts, and we are excited to launch operations for the Irish Coast Guard later this year. The investments we are making now will result in attractive long term cash flow yields for the company well into the middle of the next decade. In addition, the financial performance of our fixed wing business has improved over the last year, and we expect this improvement to continue.

Speaker 1

In Offshore Energy Services, where Bristow is the leading global helicopter operator, the industry fundamentals remain very positive, and we are experiencing an accelerating upcycle. Offshore basins offer very compelling return prospects with breakeven economic thresholds well under prevailing commodity price levels. As a result, offshore projects have seen renewed focus and investment from the upstream industry. And global offshore spending is expected to increase significantly over the next several years, as illustrated on Slide 11 of our earnings presentation. These positive market trends are occurring amidst the backdrop of a tight supply dynamic with limited new helicopter additions over the last 8 years and long lead times for new builds.

Speaker 1

The current effective utilization for the most relevant heavy, supermedium and medium helicopter models is at or near 100%, which has contributed to higher rates. The combination of these factors has increased Bristow's visibility for material improvements in margins, free cash flow and capital returns. As indicated by the company's guidance metrics, we expect to generate significant cash flows in the latter half of twenty twenty five and beyond. Bristow has a disciplined and focused capital allocation approach that will prioritize protection of our strong balance sheet, allow for attractive organic investments like the ones driving our increased financial guidance and facilitate the return of capital to shareholders. With that, let's open the line for questions.

Speaker 1

Robbie?

Operator

The first question is from Josh Sullivan from The Benchmark Company. Please go ahead.

Speaker 3

Hey, good morning. Congratulations on a great quarter here.

Speaker 1

Good morning, Josh. Thank you.

Speaker 3

Just looking at the sizable peak year for 2Q, why might have you not raised the guidance range even higher? Or maybe what are the major puts and takes? You did mention some of them there, but curious what the major ones are.

Speaker 2

Sure, Josh. Good morning. As I talked about in my prepared remarks, the parts of our business are performing better than expected and should continue to perform well. We did have the one time items that resulted in the $8,600,000 benefit for the quarter. Those were the seasonal personnel cost benefit in Norway, that changing Cougar back to an accrual basis of accounting, tax equalization and Suriname and a release of insurance reserve.

Speaker 2

We do expect to end the year strongly and our new midpoint of the range is approximately 30% over where we ended 2023.

Speaker 3

And then I guess those drivers for 2024, but as far as taking up the 25 guidance as well, you mentioned some increased visibility here in the release. Can you just expand on where you see that visibility?

Speaker 2

Sure. Thank you for the question. The 2025 guidance raise is being driven primarily by Africa. That region has really outperformed and we expect that to continue into 2025.

Speaker 3

And then can we just maybe get a little more color on the penalties in your government services business, partially offsetting some of the success here, but how long should we expect those penalties to last? And then maybe how should we think about potential financial impact long term?

Speaker 2

Sure. So the penalties that we're experiencing in our government services business are primarily being driven by these supply chain issues that we've been talking about for quite some time now. We do expect them to continue into the future and we have a level of that expectation that is factored into our guidance. So if they end up being better than what we have in that, it would bias us to the higher end of that of our guidance range or vice versa if they're worse than what we expect they would be on the lower end of that range.

Speaker 3

And then just as we look at the cadence of investments for aircraft here, how should we think of 3Q and 4Q and then even into Q1, how dramatically does it fall off?

Speaker 2

I mean, we have we expect to continue to take the delivery of the helicopters related to both of the SAR contracts, mostly over the next couple of two quarters, it does drop off. I think we have it in our earnings presentation where we get into 2025 and it drops off quite dramatically. I think there's only $18,000,000 $20,000,000 left into 2025 related to the big SAAR contracts that we have.

Speaker 3

And are you confident in those deliveries just given the overall supply chain issues? I mean, are the OEMs providing you with confidence those dates are going to be met?

Speaker 1

Yes, Josh. As of this time, we're expecting the aircraft and the deliveries to arrive on time.

Speaker 3

Got it. Great. Thank you for the time.

Speaker 1

Thank you.

Operator

The next question is from Chris Lee from Evercore ISI. Your line is now open.

Speaker 1

Hi, team. Thank you for taking my questions.

Speaker 3

Yes.

Speaker 4

Good morning.

Speaker 1

I guess my first question is, could you provide some context on offshore helicopter utilization rates? And do you anticipate utilization to stay tight as the cycle continues and the pace of S-ninety two fleet attrition increases? Yes. Thank you for the question, Chris. If we think about the relevant helicopter models for our business, particularly for any new projects that we're bidding on.

Speaker 1

We're really talking about the super mediums, that being the AW189s, the H175s, the medium category leader being the AW139 and then the S92 on the traditional heavy category. For each of those relevant helicopter models, current effective utilization levels are at or near 100%. Now there is a dynamic related to the S-ninety two where there are a number of idle airframes today, which probably could be working, but they are not serviceable as they're awaiting delayed parts and repairs from the OEM. As that supply chain situation is rectified over time, we do see those S92s coming back into the market and we see them being readily absorbed at the leading edge rates that we're seeing in the market today. Got you.

Speaker 1

And have you observed a shift towards greater utilization of large capacity transfer devices for offshore transportation? So such as like growing preference for crew transfers via boats over helicopters? Really the personnel transportation market for offshore facilities is pretty well segmented between helicopters, which obviously is what we do and then the marine options. It's really well segmented by geography and then in some cases by distance from shore. So we don't end up competing against marine vessels on a day to day basis.

Speaker 1

In one area where we do geographically have some overlap such as the U. S. Gulf of Mexico, the facilities that are being supported by marine vessel for crew transportation are really on the shelf in shallow water and that's not a market that Bristow services today. In the Gulf of Mexico, our crew transportation services that we're providing via helicopter are really all deepwater. So again, on a day to day basis, we're not competing against the marine vessel option.

Speaker 1

Those markets tend to be fairly well segmented. Right. And I guess my last question is that recently energy prices have been trending lower. So how significant a risk are current and potentially lower energy prices to Bristol's outlook? We believe the thesis for a robust and long duration offshore energy upcycle is firmly intact.

Speaker 1

Really, if we look at the offshore basins that we're servicing, most of the breakeven economic thresholds are at levels well below current prevailing commodity prices. So we believe, again, while Brent is at $77 $78 a barrel today, expectations for really long term prices would have to be substantially below that before it would start to impact the attractive economics of most of the offshore projects we're servicing. So again, we believe the thesis for a long duration strong offshore upcycle is firmly intact. Got you. Perfect.

Speaker 1

Thanks. Thank you so much. Thank you.

Operator

The next question is from Steve Silver from Argus. Your line is now open.

Speaker 5

Thanks, operator, and good morning and thanks for taking the questions. Congratulations on the quarter and the raised outlook. First question, given the fact that the 2026 targets were unchanged despite the raising of guidance for 2024 and 2025, Can you just remind us of the underlying assumptions behind the wide range in 2026, given that the new SAR contracts coming online will be more fixed rate in nature and that the outlook for contract renewals in offshore energy remain positive?

Speaker 2

Sure, Steve. Good morning. As you know, last quarter we put out these longer term financial targets through 2026. And as you noted, there is a quite a large range for 2026. This is due to the long term nature that we put out there.

Speaker 2

So if things continue this way, we could buy us up to the higher end of that range, but we've seen we deemed it reasonable to leave the targets as is for now.

Speaker 5

Great. Thanks. And given the strong performance in Q2, the recent financing now behind you, and now being more than halfway through the contract investments for the new SAAR contract, is there any change in your thinking in terms of potential timing on capital allocation and shareholder returns?

Speaker 1

No material change, Steve. I think it affirms the framework that we have for thinking about capital allocation, namely that we want to ensure that we protect our strong balance sheet. We are, via our significant exposure to the offshore energy services space, exposed to volatility from oil and gas cycles. So we want to make sure that we have a strong balance sheet that would withstand various cycles over time. We also want to make sure that we have the ability to continue to invest in attractive organic investments like the ones that are driving our higher guidance ranges.

Speaker 1

And then we also believe we'll be in a position, particularly in the latter half of twenty twenty five and beyond, to return capital to shareholders via share buybacks, whether that be programmatic or opportunistic and potential dividends.

Speaker 5

Great. And one last one, if I may. Can you provide any update on the timing of the overall fleet expansion? You've mentioned the tight supply dynamics around the industry. Looks like the overall fleet was down 4 aircraft from last quarter and the presentation sites nearly 40 aircraft either under construction or on order.

Speaker 5

So is there anything thinking in terms of the timing over the near term of returning to an expansion of the overall fleet?

Speaker 1

Yes. On a net basis, we expect the fleet will be growing over the next couple of years. I'll start first with our government services business. So we in total for Irish Coast Guard, we're taking delivery of 5 new builds, our configured AW189s. Those will be delivered this year and next.

Speaker 1

For UK SAR 2 gs, we are taking delivery of a total of 6 SAR configured AW139 model helicopters, which we expect to take delivery of this year. We have also ordered 5 Light Twin H135 Helicopters to support a key offshore energy services customer And those aircraft will begin delivery later this year in Q1 of 2025. And then on the sticking with the OAS space, we also have an order book for AW189 Supermedium Aircraft, which we believe is a very helpful competitive advantage to have access to those orders as they are finite and become pretty valuable delivery slots over the next couple of years. With long lead times, we think we're well positioned to actually have deliveries next year in 2026 for those supermedium AW189s. So the timing of those, again, will begin next year and then have more that we expect to be delivered in 2026.

Speaker 5

Great. Thanks for the color and congratulations again.

Speaker 1

Thank you, Steve.

Operator

The next question is from Patrick Fitzgerald from Baird. Your line is now open.

Speaker 6

Hi, thanks. Thanks for taking the question. Could you talk a little bit more about the growth you saw in Americas and Africa oil and gas flight hours on a year over year basis in the quarter? Is that a big change in behavior, number of jobs, one off issues or the accounting change or could you just talk a little bit about that?

Speaker 1

Yes. Thank you for the question, Patrick. Happy to address that. So specific to Africa and the Americas, overall, I'd say that the trend is on theme with the activity ramp up that we've been talking about, which is both increased utilization of aircraft as well as increased rates on new contracts that we've signed. So in Africa, really market activity has picked up there.

Speaker 1

Customers are working more. We've also had some customers who had previously left Bristow for a lower cost competitor in the country come back to Bristow, which has helped with the utilization levels of our fleet there. So Africa is certainly a market that as Jennifer referenced has improved significantly and we expect that performance improvement to continue well into next year and beyond. And in the Americas, overall, we've increased utilization, particularly with some new contracts that started in Brazil as well as some short term projects that we've seen in places like Trinidad and the Caribbean. So utilization is better.

Speaker 1

And then again, any opportunity that we've had within this window to sign new contracts, those rates have been higher on average, roughly 25% higher than the legacy rates that they were replacing. So overall, again, it's both higher utilization and higher rates driving the better improvement in both Africa and the Americas.

Speaker 6

Okay. And then if you kind of reprice your contracts every 20% every year and you're repricing them 25% higher than the previous level. What are we year 2 or 3 into that process? So there would be an additional like 60% of contracts that would be repriced higher. How should we think about that?

Speaker 1

So within our OES contract portfolio, as of now, we've reset about 30% of the contract mix. So we still have 70% to go in terms of the runway of what's left to be reset. I think you referenced a good rule of thumb just at a high level. However, of course, in any given year, there'll be some variability there. In 2024, a lot of the improvements that we're seeing are the full year run rate impacts of new contracts that were signed last year.

Speaker 1

2025 is seeing some growth, but it's not as active as of a renewal and new contract year as 2026 is. 2026 is really a more active period for us where we expect to be starting new contracts. And that's one of the reasons when you look at our 2026 target levels that there's such a large improvement in the OES revenues and the overall company EBITDA ranges.

Speaker 6

Okay. Yes, that's helpful because I was actually going to ask about that. How much of your so how much of the 2025 guidance, I guess, is contracted versus still kind of I guess in the spot market in terms of things change you would see that fall back a bit?

Speaker 1

Overall, looking at our EBITDA ranges for 2025, one of the bigger impacts is that we're launching our Irish Coast Guard contract beginning later this year. It's a large contract with a long transition period. So we'll begin the transition in October of this year. It won't be completed with the final base in Ireland until the middle of 2025. But a good component of the improvement in 2025 EBITDA is range is contracted, although there is some component from spot or short term work in there as well.

Speaker 6

Okay. And thank you for the detail on the detailed guidance in general and the guidance for the SAAR CapEx spend. So I guess just doing the math you have like $125,000,000 more of that CapEx for the rest of this year and then $18,000,000 next year. And then you have you said, I believe, a couple of quarters ago or something, you expected to spend $250,000,000 on oil and gas helicopters from $25,000,000 to $29,000,000 Just wondering about the cadence of that as well as we kind of think about what your CapEx looks like in the out years and free cash flow, etcetera?

Speaker 1

You want to take that one, Jennifer? Or I can address it too and then Jennifer can complement me. So as you noted, we expect to be largely complete with the government services capital investments for both UK Star 2 gs and Irish Coast Guard by Q1 of next year. We have identified an opportunity and we did note in an earlier question twin helicopters. It also includes an order book for AW189 helicopters that we see being demanded by customers.

Speaker 1

The numbers we expect to be significantly below the threshold that you referenced. And next year, it will be it would be under $100,000,000 and then maybe a similar size in 2026. We do have some good flexibility within that order book from a timing standpoint if we need to move orders around to match up with customer opportunities.

Speaker 6

All right. Last one, just if you do the guidance reflects those new helicopters being in the fleet in 2025 and 2026?

Speaker 1

It does for a for certainly the light twins that I referenced and then for a smaller number, a handful of AW189s by the end of 2026.

Speaker 3

All

Speaker 6

right. Thanks very much.

Speaker 3

Thank you.

Operator

The next question is from Josh Jain from Daniel Energy Partners. Your line is now open.

Speaker 4

Thanks. Good morning. Good morning. First question I want to ask is just on the financing side. You guys have obviously been successful with a couple of equipment financings year to date.

Speaker 4

A little bit different for you as they're backed by significant contracts. But could you just talk us through the financing market today? What you're seeing, your expectations going forward and how you're thinking about that?

Speaker 2

Sure. Thank you for the question. And it's a bit of a unique situation for us with these search and rescue contracts that we have. So we've been able to go to these banks and in the case of this newest financing to an export bank, which is a government backed sort of organization and be able to get financing where they look basically through our credit quality to the credit quality of the government that's backing us. These are 10 year long term, at least 10 year contract cash generative and there's a lot of security there.

Speaker 2

So we're able to get very attractive terms for this specific equipment financing related to both the UK SAAR and the Irish SAAR contract. So that's the reason we went down this path for this financing. It really is the newest one is the best that we have out there today. As we move forward, we don't really as of this time see a need for any additional debt to partake to work on as we take these other deliveries, we have sufficient cash flows to manage that CapEx.

Speaker 4

Okay. And then on the Offshore Energy Services side, I mean, if we just do rough math based on your Q2 top line for where you were, when we think about the offshore drilling market going forward, a lot of the offshore drilling calls over the last couple of weeks sort of highlighted, let's call it, the flattish activity over the next 12 months. When I look at your guidance, I'm going to ask the guidance on 25 question a little bit differently. When I see where you were in Q2 and even if we're in a flattish rig count environment, it seems very reasonable, even without some material price increases to be at the $1,000,000,000 level of top line in the offshore energy business. Would you confirm that?

Speaker 4

And then also maybe elaborate a little bit on your expectations for rig activity in 2025 and 2016 beyond, especially in West Africa, where we would expect to see a decent amount of growth?

Speaker 2

Mean, I'll go back to a big portion of our offshore energy business is production related. So that does put some stability into that offshore energy. As Chris talks about in one of the other questions around rate increases and where those rates are going to go, there's a lot more in 20 26 than there is in 2025. So we have priced in for 2025 a fairly stable number based on the fact that we're not going to have likely as many rate increases, but we will not have as many rate increases as we will on 2025. And a lot of our growth today in Africa is in Nigeria, which is really related to customers we already have or customers that came back to us, not necessarily the growth in the rigs that are coming into that region.

Speaker 1

Yes, I would just add that I think we have a similar view that you referenced, Josh, in terms of the activity levels in Africa. We expect that it's a market that will continue to see a pretty high level of activity from the upstream customers and we're working to ensure that we'll have the capacity and the fleet availability to meet that need.

Speaker 4

Okay. And then just for my final question, could you update us on lead times today for helicopters across the industry? So if things start getting ordered today, when ultimately they could be delivered? I'm just trying to think about competition from the standpoint of how long the cycle could remain tight and just potential issues with lead times and things of that nature. If you could just update on that so we could think about the supply demand balance would be helpful.

Speaker 4

Thanks.

Speaker 1

Sure. And thank you for the question, Josh. I think it is a good opportunity to update on the status of what potential new builds look like. So if we look at the heavier side of the market today, the S-ninety two production line has been closed for a couple of years now. What is really being manufactured today that could be available to meet the future needs of the industry and the growth that we've been talking about is primarily focused on the super medium category.

Speaker 1

So that would be both the AW189 and the H175, the first being a Leonardo product, the second being an Airbus product. Both of those production lines have relatively finite numbers they can produce a year. I'll quote as a broad reference around 20 aircraft per year for the AW189. And that production line needs to be shared between the military customers, which are significant in terms of their orders as well as the civilian market, so for folks like Bristow. Because of that relatively tight production capacity, lead times are long, I'd say 24 months or more.

Speaker 1

So it will be a while if you were to turn up at the OEM today and want to order a supermedium like a 189 before you would actually have an opportunity to receive that. This is one of the reasons that we're pleased to have the order book that we do with Leonardo for those AW189s and the ability to actually deliver aircraft in 20252026 has become a scarce and valuable delivery slot. So we think that positions us well.

Operator

There are no further questions in the queue. I will now turn the call back over to Christopher Bradshaw for closing remarks.

Speaker 1

Thank you, Robbie, and thank you, everyone, for joining the call. We look forward to speaking again next quarter. Stay safe.

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