Bristow Group Inc. (VTOL) Earnings Call Transcript & Summary

Good day and welcome to the Era Investor Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Crystal Gordon, General Counsel. Please go ahead.

Thank you, Emma, and good morning, everyone. Welcome to the investor call. I'm here today with our President and CEO, Chris Bradshaw; and my fellow Senior Vice President, Jennifer Whalen, Grant Newman and Dave Stepanek. Our colleagues Stu Stavley and Blake are in the field with our teams today. Let me remind everyone that during the call, management may make forward-looking statements that are subject to risks and uncertainties that are described in more detail on Slide 1 of our investor presentation. You may access our investor presentation on our website, erahelicopters.com. Era intends to file with the SEC a registration statement on Form S-4 that will include a joint proxy statement of Era and Bristow and the prospectus of Era. Investors are urged to read the joint proxy statement carefully as they will contain important information about the proposed transaction. You may obtain a copy when it becomes available without charge at the SEC's website or by calling Era at (713) 369-4700, or by going to our website, erahelicopters.com. Finally, Era, Bristow and certain of their respective directors and executive officers may be deemed to be participants in the solicitation of proxies from Era and Bristow stockholders in respect of the proposed transaction under the rules of the SEC. You may obtain information regarding the names, affiliations and interests of Era's directors and executive officers in Era's annual report on Form 10-K and its 2019 definitive proxy statement. With that, I'll turn the call over to Chris.

Thank you, Crystal, and welcome to the call, everyone. Before we discuss the exciting news of the announced merger with Bristow, I want to begin our prepared remarks with a note on safety, which will always be our most important core value and highest operational priority. We are pleased to report that Era achieved our dual goals of 0 air accidents and 0 recordable workplace incidents in full year 2019. The company has not experienced an air accident in the last 3 years, and we have now gone over 850 consecutive days without a recordable workplace incident. I want to thank and commend all of the hard-working Era team members for their focus and dedication to place-safety first every day. As you will have seen in our press release as well as the investor presentation that Crystal mentioned, we are very excited to announce that Era and Bristow have agreed to merge, forming a larger, more diverse and financially stronger global industry leader. The combination is structured as an all-stock merger and is intended to qualify as a tax-free transaction. The combined company will be named Bristow and will continue to be headquartered in Houston, Texas. Post transaction, Era shareholders would own 23% of the combined company and Bristow shareholders would own 77%. Under the merger structure, Era will issue shares to Bristow stockholders, and ERA shares will continue to trade on the NYSE. No outside financing is required to consummate the transaction. And the merger is expected to close in the second half of 2020, subject to shareholder and regulatory approvals and other customary closing conditions. I have been asked to serve as the President and CEO of the combined company, and I'm very excited about the future for the new enterprise. The combined board will be comprised of 9 total members, including 7 from Bristow and 2 from Era, including me. The Chairman and Vice Chairman of the Board will be appointed by Bristow. Both Era and Bristow enjoyed long and renowned legacies, and we look forward to building upon that rich heritage as a combined company. I want to emphasize that the 2 companies share a strong cultural alignment, including, first and foremost, an uncompromising commitment to deliver safe and reliable operations to our valued customers. These shared values will be an integral foundation for the successful integration of our 2 teams. Beyond strong cultural alignment, we believe the merger has very compelling strategic and financial rationale. The combined company will be the global leader in offshore helicopter operations, with significant presence in key geographic regions. We believe this combination represents the best strategic fit in the Americas region, with significant exposure to other attractive regions such as Norway, United Kingdom and Nigeria, among others. The merger will result in a larger, more diverse aircraft fleet, which benefits from a complementary mix of over 300 modern aircraft with the latest generation of technology and safety features. The combined company will be the largest operator of S92, AW189 and AW139 helicopters in the world. Furthermore, the pro forma balance sheet will be predominantly -- sorry, the pro forma fleet will be predominantly owned at more than 80%, with attractive lease rates on the balance of the fleet. In addition to our strong reputation and long-term relationships with key oil and gas customers, the combined company benefited from end-market diversification through significant exposure to government services contracts, including Era's BESI contract with the U.S. government and Bristow's U.K. SAR contract with the Maritime & Coastguard Agency. The U.K. SAR contract is one of the most prestigious assignments in the aviation industry, and it's an honor to serve the people of the United Kingdom. We look forward to being a part of that world-class program. From a financial perspective, that contract generates meaningful and stable cash flows and provide significant diversification from oil price volatility. For those who did not closely follow Bristow's Chapter 11 process, Page 9 of the investor presentation provides a helpful summary of the transformative impact of that restructuring process. During those proceedings, Bristow reduced total debt by approximately $900 million and eliminated its future aircraft capital commitments. Perhaps most importantly, through a combination of lease returns, lease rejections, aircraft purchases and the renegotiation of lease rates, Bristow reduced its annual rent expense dramatically, representing a roughly $70 million benefit when comparing the run rate adjusted EBITDA to their FY 2019 EBITDA. As a result, Bristow emerged from Chapter 11 with a healthy balance sheet, a projected run rate adjusted EBITDA of approximately $165 million and a positive free cash flow outlook. As we review the benefits of the merger, one of the clear highlights is the substantial value creation expected from at least $35 million of identified cost synergies. Not only are we saving substantial relative to the size of the business, we believe they are highly achievable, given that the significant majority are derived from eliminating fixed costs. This merger achieves more efficient absorption of the significant fixed costs required to run an air carrier and better positions the combined company to manage industry challenges. During the tumultuous and very challenging conditions over the last 5 years in the offshore oil and gas industry, we focused Era's strategy on being efficient, managing the business for positive cash flow and protecting the balance sheet. We delivered on those objectives by generating positive free cash flow throughout the downturn and reducing net debt by more than 80% over that 5-year period. As we have been evaluating potential consolidation opportunities over the last couple of years, we have emphasized the importance of maintaining a strong balance sheet and positive cash flow profile. This merger achieves those priorities by maintaining a strong balance sheet with approximately 2.5x net leverage and a large combined cash balance of over $250 million expected at closing. As outlined on Pages 11 and 16 of the investor presentation, the pro forma adjusted EBITDA for calendar year 2019 is expected to be approximately $165 million. When you factor in the incremental $40 million of rent savings based upon the full year impact of the new lease portfolio at Bristow and the $35 million of benefit from identified cost savings, the projected pro forma adjusted EBITDA for the combined company is approximately $240 million. In addition, we believe the run rate free cash flow generation of the combined business will be approximately $140 million, which should facilitate multiple opportunities to create additional value for shareholders, including further deleveraging and returns to shareholders. Going forward, we intend to continue to manage the business to generate positive free cash flow with a keen focus on capital discipline and shareholder returns. Finally, I want to reiterate that this combination will benefit all stakeholders, including customers, employees, lenders and shareholders. We have begun the outreach to each of these key constituencies and look forward to further discussing the compelling merits of this transaction. We believe this merger will create substantial value for stakeholders of both companies. And we are excited about the prospects of moving forward as a larger, more diverse and financially stronger global industry leader. With that, let's open the line for questions. Emma?

[Operator Instructions] Our first question comes from Bill Mastoris with Baird.

Congratulations, Chris. One of the things that a lot of offshore service companies have had problems with is that we've had these stops and starts with demand. And certainly, that's been the case in helicopters is, as you're much closer to it than I. But on Slide 19, one of the things that you show is an expected increase, right, in activity levels correlated to an expected increase in offshore spending. So my question is, do you have any plans to exercise any of the options that you have on some of newer, more efficient helicopters, given that expected increase? And if so, is that included also in your CapEx forecast, which would imply that's also included in your free cash flow forecast?

Good morning, Bill, and thank you for the question. I want to start by mentioning that nothing about this merger is counting on a significant recovery in the offshore oil and gas market. We believe this combination not only works, but it's highly compelling based upon current levels of market activity. That being said, as you note, multiple third-party sources are noting that the offshore oil and gas market has stabilized and is showing signs of recovery. Indeed, within the last week or so, the 3 major oil field services companies, Schlumberger, Halliburton and Baker Hughes, have each noted that they see a growth in offshore spending in 2020. With respect to your question about our aircraft order book, I think the combined company is in a very fortunate position, and that between the 2 companies, the only orders that we have are completely flexible, really options to call an aircraft should there be market demand for those. As of now, we are not expecting and not factoring into the numbers that you mentioned any new aircraft deliveries, but there are compelling opportunities where the returns justify the capital investments. We have the capability to go out and bring those aircraft in to meet the demand.

Okay. Then my second question, Chris, would be maybe you could outline your plans for your 7.75% of senior secured notes, which are due in 2022, but they have a park call coming this December. What are your plans there? You are going to have, obviously, the wherewithal to go ahead and take those out.

Given the strong balance sheet and the positive free cash flow profile of the company, we do believe we'll have multiple opportunities to address those maturities. So we have a fortunate position of being able to take an opportunistic approach, monitor conditions and pursue something if market conditions warrant that. That being said, we also have the option, if necessary, where we could pay off that maturity with cash.

Okay. And what's going to be that criteria as to whether you take it out or not? I'm just curious. Could you dig a little deeper there?

Sure. I think it depends on the rates and other key terms that are available given the prevailing market conditions and sentiments that exist in various market segments where capital may be available.

[Operator Instructions] Our next question comes from HJ Lee with International Value Advisers.

Congratulation with the merger. I have some questions about SAR contract that Bristow has. Just would like to understand how many fleet of Bristow is related to the SAR contract? And if you compare the SAR's profitability, is it comparable to what you make in -- for Mexico?

So the U.K. SAR contract is a very important part of Bristow's stand-alone business, and certainly, a part of the combined company story here. Today, those -- that contract serves 10 bases with a total of 21 SAR-equipped heavy helicopters, which are -- an even -- roughly even between S92 and AW189 helicopters. We note the contribution from revenues here. I won't get into specifics about the cash flow contribution, but there is a good profit in those numbers. And so the actual cash flow contributions will be greater than the stated revenue contribution.

Okay. Are there any major CapEx remaining for SAR?

No, not as of today. Actually, Bristow bought into SAR-configured AW189 at the end of December. So there is no remaining material capital requirements going forward.

Okay. So another question is, if you combine Bristow and Era in Gulf of Mexico, what would be -- the total market share would be? Do you see any antitrust issues?

So we don't follow market share specifically, and I can't comment on that. I would say that we are very confident in the merits of this transaction and really the need for the consolidation. And the fact of the matter is that we operate in a highly competitive global industry and servicing a group of customers that have a lot of purchasing power. Our industry faced a lot of challenges over the last several years, including several companies that have had to go into Chapter 11 restructuring. But I think this combination is really the right fit in the U.S. Gulf of Mexico. We're confident in the merits and confident in the fact that it should close.

Okay. The last question that I have is the fixed-wing operation. Just would like to understand if this business is making free cash flow? And how -- is there any synergy that you can create with this asset portfolio?

I don't want to get into the specifics of individual business line profitability at this time. As we move forward together as a combined company, there will be more information available at the -- on the business. But for now, we're going to stick to the level of detail that we presented in the presentation.

Our next question comes from Adam Ritzer, private investor.

Chris, congratulations. I know you've been working on something like this for a long time. Can you just give us the pro forma share count of the combined companies, please?

It's going to be a little over 90 million shares.

Okay. And will the reorg equity investors from the Bristow debtholders -- are there going to be any restrictions on their selling shares after the merger is completed?

There are no lockups attached to those shareholders. We've enjoyed getting to know some of those parties over the last several months, and believe that we have a high degree of alignment around the long-term strategy for this business. And certainly, they see the potential. They put a lot of money behind the investment and they are committed to this transaction. So I believe they're going to be good partners for the combined business going forward.

Okay. And the $35 million of synergies seems a little bit low. Are you guys lowballing that? Do you think it could be higher? Can you give us any guidance in terms of how you came up with the $35 million?

Yes. We're optimistic that there is additional upside in terms of additional efficiencies that can be realized. For now, this is the number that we're communicating. We did do a joint review of synergy opportunities with Bristow and Era. And this is the number that we have confidence in, and we're focused and committed to deliver this number.

Okay. You guys in the presentation talked about the H225 sale. Is that in process already? When does that close? And what do you think proceeds are going to be?

So it's under firm contract at the moment. The closing of the individual assets will be staged as those individual assets close. I'm not going to comment on the specific proceeds. I would note having sold a number of 225s ourselves, and having followed that market, we believe Bristow is receiving a very attractive deal.

Okay. Are there any other assets in their portfolio that you think you guys can sell and generate any cash? Anything expected there?

Well, as you know, Adam, we've always viewed, at Era, that part of our job is to manage this -- a portfolio of assets, the aircraft that we have, we think a lot about residual values, which model types we want to have exposure to, what the relative opportunities are to operate and lease or sell those. And I think that mindset will carry over. Certainly with the fleet of more than 300 aircraft, there may be opportunities over time to realize proceeds from rationalizing the fleet.

Okay. Do you -- I mean, you guys are going to have a lot of cash on the balance sheet, will leverage. What about the debt refinancings? I know Bristow has some pieces of debt that -- [ L plus 5 ]. Do you guys have your bonds outstanding? Any talks about some kind of a global refinancing of everything, making it easier and pushing out maturities?

So as part of the consideration for this transaction, we did have a number of conversations with relevant parties. I can relay that we expect the pro forma company to have an upgraded credit rating relative to where Era's stand-alone rating is today. We also believe, based upon our conversations with multiple large money center banks, that we're going to have some alternatives for how we want to manage the capital structure going forward. I think there are some nice ways in the Bristow's capital structure today. And again, we're in the fortunate position where we don't have to do anything. So we can monitor the market and be selective in terms of how we want to approach that, whether there is a large refinancing or whether we'd be patient. I think we're fortunate because of the strong balance sheet, the cash balance you mentioned, and importantly, the continued free cash flow generation, where we can afford to be patient.

Got it. And last question, can you give us a walk-through of the free cash flow from the $240 million of EBITDA in terms of interest expense, CapEx and taxes? How did you arrive at that free cash number?

So we can provide at a later date more detail around that. For now, we're disclosing the $140 million. It is net of the things that you mentioned, interest, CapEx and a small amount of cash taxes.

Our next question comes from Steve Jones with BTIG.

I was wondering if you could tell me how is the Bristow preferred going to get treated in this transaction? I don't see it in the pro forma cap stack.

We -- it will be converted into common as part of the merger.

Our next question comes from Dilip Badlani with SKM.

Yes. I was wondering, what should the pro forma shareholders' equity be?

It depends on where our stock price is. But I think the market will ultimately determine. That -- what we believe is that this transaction creates a lot of value. We believe this is the right combination at the right time, and that the value creation potential from the synergies is substantial.

Got it. And as far as our debt-to-cap, are you guys looking at that? Or is it something you just focus on from debt to EBITDA because Era obviously is trading well below its replacement value. So I was just wondering where should combined entity be trading.

So again, I think we...

Based on the $900 million of value that you have.

Yes. I think we are very focused on creating value, and we leave it to the market to determine how to assess that value. To your comment on leverage, we're on a pro forma basis expecting to be around 2.5x net leverage. When we get up to the run rate numbers that we've talked about, that should lower to about 2x net leverage. And I think we're comfortable at that or even higher if there's something opportunistic to do with the knowledge that the company is going to generate a substantial amount of free cash flow that could be used to delever over time.

I would now like to turn the conference back over to Chris Bradshaw for closing remarks.

Thank you, Emma. I appreciate everyone's time today. We look forward to continue this discussion, explaining more about the merits that we see in this very compelling combination to create a stronger global industry leader in the helicopter space. Thank you. We'll talk again next time.

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.