Bristow Group Inc. (VTOL) Q2 2014 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Bristow Group's Second Quarter Earnings Conference Call. [Operator Instructions] This conference is being recorded today, November 8, 2013. I would now like to turn the conference over to Linda McNeill, Director of Investor Relations. Please go ahead, ma'am.

Thank you, Richard, and good morning, everyone. Welcome to Bristow Group's second quarter fiscal year '14 earnings call. I am Linda McNeill, Director of Investor Relations. And with me on the call are Bill Chiles, President and CEO; Jonathan Baliff, Senior Vice President and CFO; Jeremy Akel, Senior Vice President, Global Operations; Mark Duncan, Senior Vice President, Commercial; Brian Allman, Vice President and Chief Accounting Officer; and Mike Imlach, Director of our European Business Unit. We hope you've seen our earnings release, which was issued yesterday afternoon. It is posted in the Investor Relations section of our website at bristowgroup.com. Let me remind everyone that during the call, Bristow Group management may make forward-looking statements that reflect our beliefs, expectations, hopes, intentions or predictions of the future. All forward-looking statements are subject to risks and uncertainties that are described in more detail on Slide 3 of our investor presentation. Additionally, to the extent we discuss non-GAAP measures during the call, please see our earnings release or the investor presentation on our website, for the calculation of these measures and GAAP reconciliation. With that, I'd like to turn the call over to Bill. Bill?

Thank you, Linda. Good morning to all of you, and thank you for joining us on our fiscal year 2014 second quarter earnings call. And I'm going to start on Slide five, we are going to -- as always, begin talking about safety. As always, our commitment to Target Zero is our fundamental goal and serves as the cultural touchstone for our company. Touch wood, to this point year-to-date, our air safety performance has been consistent with our Target Zero goal, with no accidents or no incidents reported so far. Obviously, a great credit to the entire team around the world. However, we continue to be vigilant, and as I said, touch wood, highly collaborative outside -- within Bristow, and highly collaborative outside, which I will talk about in just a few minutes. Our goal is to improve safety performance, not only within Bristow, but also help improve the safety performance in the entire industry. On ground safety, we were challenged, we were able to continue to reduce our lost work case rate from an unacceptable high of 1.26 per 200,000 man hours in April to 0.44 in September. Good work on everybody's part to improve from a really bad start. We are highly focused on making improvements in the area of safety and to this end, I would like to formerly introduce Steve Predmore as Bristow's Vice President and Chief Safety Officer, who has just joined the company. Steve's job is to further our drive to Target Zero and work to improve safety across the entire industry, as I said, within Bristow and outside. Steve has a long and proven track record of outstanding leadership in aviation and ground safety, including 11 years with JetBlue Airways as Vice President and Chief Safety Officer, and 6 years with Delta Air Lines as Director of Safety Performance and Quality. Bringing in a world-class safety professional to further our air and ground safety capability will make Target Zero a reality sooner, and most importantly, more sustainable for our client, passengers and our employees worldwide. Please turn to Slide 6 for the financial highlights of the quarter. We experienced strong operational performance in the second quarter of fiscal '14, with growth in revenue and adjusted EBITDAR, driven by improvement primarily in Europe and West Africa, as well as the fiscal 2014 contribution from Cougar, an investment made in October of 2012. The second quarter fiscal 2014 GAAP EPS of $3.01 includes a gain on the sale of our interest in FB Heliservices in the U.K. of $1.85 a share. Our adjusted EPS for second quarter fiscal 2014 is $1.27, an increase of 58.8% over the second quarter of our last fiscal year 2013. Our adjusted second quarter fiscal 2014 EBITDAR improved 27.8% compared to the second quarter of last fiscal year and was driven by top line revenue growth with new and existing clients in Europe and West Africa primarily, combined with the addition of Cougar. In the first 6 months of this year, we invested a record $340 million in CapEx for organic growth in new and existing markets. This is a doubling of our historic average of CapEx. Notably, we increased our liquidity to an unprecedented $618 million at the same, a testament to our employees' focus on operational excellence, cash generation and management's commitment to prudent balance sheet management. As a result of our team's excellent first half fiscal '14 performance and our belief in continued solid second half performance, we are increasing our adjusted EPS guidance range for the full year '14 from $4.20 to $4.50 to $4.25 to $4.55, a $0.05 increase at each end of the range. We believe that this conservative and prudent, especially as we execute on the operational and commercial EC225 return to service. Please turn to Slide 7 and I will focus on the Super Puma fleet update. Regarding EC225 return to service, Bristow's regulatory-approved interim solutions are being implemented according to our plan, including aircraft modifications and new maintenance and operating procedures, and we expect the main gear shaft redesign to be available at the earliest in mid-calendar year '14, sometime next summer. Certain clients around the world have elected to utilize the Super Pumas and Bristow has commenced crew change flights for those clients. In addition, no client contracts have been cancelled in connection with the suspension of operations of the EC225 aircraft. Five of our EC225s returned to full revenue service in the second quarter of fiscal '14 and we estimate that the remaining 225 aircraft will be available for full return to revenue service in the second half of our fiscal '14. Previously, we had anticipated this would occur in the third quarter of fiscal '14. Subsequent to the AS332 L2 accident in August of this year, we, in conjunction with James Drummond of Avincis Bond and Bill Amelio, our counterparts, Bill Amelio of CHC, my counterparts in the 3 main operators in the U.K., initiated and support a joint operators review of safety to review current processes, procedures and equipment in order to identify and share best practices in the offshore helicopter industry focused on automation, monitoring, stabilized approaches, information exchange and oil and gas industry standards. The United Kingdom has launched a Parliamentary inquiry on helicopter safety which commenced November 6, just a few days ago. Bristow intends to readily and actively participate in this inquiry, with written submission to be provided by December 20, 2013. Please turn to Slide 8 and I'll focus on Europe. Our European business unit is our largest business unit, continuing to perform well in the second quarter of fiscal '14, with the addition of 8 new large aircraft over the course of the last 12 months, 4 of which were Gap SAR S-92s, 2 in Stornoway and 2 in Sumburgh. Operating revenue increased an impressive 25.1% over the prior year's quarter and adjusted EBITDAR increased 27.6% over the same period. EBITDAR margin of 35.3% increased from 34.6% in the second quarter, compared to 34.6% in the second quarter of fiscal '13, primarily due to the overall growth in this business unit, in terms of new contracts, increased pricing and utilization. We expect our results in Europe to continue to be strong in future periods and for adjusted EBITDAR margins to improve as a result of additional new contracts commencing and some possible new contract awards down the road. On July 14, as I mentioned earlier, we sold our 50% interest in FB Heliservices for GBP 74 million. The gain on this sale contributed $1.85 to GAAP earnings per share. The FB Heliservices generated $900,000 of adjusted EBITDAR in quarter 2 fiscal '14 and $2.4 million in the second quarter of fiscal '13. The aircraft associated with previously announced contract awards are now starting to enter service. An additional crew change S-92 has started service in Sumburgh in the Shetland Islands. We are now expanding the Sumburgh base for future growth opportunities in the east and west of the Shetlands. As mentioned previously, adjusted EBITDAR margin is expected to be in the mid-30s for fiscal '14. Turn to Slide 9 and I'll give you an update on SAR. Since the start of the contract in June, we conducted over 120 missions and rescued and/or assisted over 110 people. This is the first quarter which includes financial results from our 4 Gap SAR helicopters. In quarter 2, fiscal '14, $11.9 million of revenue was generated. The SAR market continues to evolve and we believe future outsourcing of civilian SAR services to the private sector will continue, as it is successfully deployed for governments. The clients for SAR services include both oil and gas industry and government agencies. Bristow now includes additional disclosure for SAR-configured aircraft commitments in our 10-Q. So you will find an expanded explanation there. $376 million has been committed to this project over the 2 fiscal -- the next 2 fiscal years. And we're finalizing lease documents for those aircraft. We see up to 16 SAR aircraft opportunities in various countries, including Australia, Brazil, Libya, the Netherlands and Nigeria. We can confirm we've been pre-qualified to bid for the Falkland SAR contract. With the successful start of the Gap SAR contract, we are now focused on execution of the future U.K. SAR contract. Please turn to Slide 10 and we'll focus on West Africa. In Nigeria, the second quarter operating revenue increased a notable 16.2% year-over-year, due to increased pricing, ad hoc flying and increased activity. Adjusted EBITDAR increased 33.4% year-over-year and adjusted EBITDAR margin increased to 30.4% in the second quarter of fiscal '14, from 26.5% in the second quarter of fiscal '13, due to an increase in revenue and decrease in import duties that were partially offset by an increase in base repairs and maintenance expense, along with aircraft maintenance. We continue discussions with several IOCs for additional deepwater support. Additionally, ongoing renewal tenders for 12 older-technology, medium aircraft with new technology aircraft, are coming. We continue to be a market leader in Nigeria, with the right assets, infrastructure and leadership in place, and we expect fiscal '14 adjusted EBITDAR margins to remain in the low-30s. Please turn to Slide 11. We'll talk about North America. Our operating revenue increased by 5.9% year-over-year, with most of the revenue increase coming from Cougar, our affiliate in Canada, which continues to perform exceptionally well. It was partially offset by a decline in revenue from other North American operations, including the Gulf of Mexico. Adjusted EBITDAR increased 58.9% to $18.7 million in the second quarter of fiscal '14, from $11.8 million in the second quarter of fiscal '13 and adjusted EBITDAR margin increased from 20.7% in the second quarter of '13 to 31% in the second quarter of fiscal '14. Gulf of Mexico adjusted EBITDAR margin was flat at 20.9% in the second quarter of '14 on a sequential basis and 3.6% down on a year-over-year basis. In the process -- we're in the process of existing, excuse me -- exiting non-core businesses, for example, Alaska. By the middle of next calendar year, we will be out of Alaska. We recognize that the current operating environment in the Gulf of Mexico is challenging, for reasons we have spoken about in the past and we are restructuring this business and selling smaller aircraft with a long-term strategy of improving BVA through operating larger aircraft to service deepwater client contracts. During the second quarter of fiscal '14, we sold 2 small aircraft that had been operating in this market and classified 12 small aircraft as held for sale, increasing the total number of small aircraft held for sale to 19 in this business unit. Additionally, we recently signed an LOI for the sale of the entire fleet of our Bell 206 L4s, as we focus on future deepwater growth in higher-margin, medium and large aircraft. Even with this restructuring, we expect adjusted EBITDAR margins to improve in the North American business unit to the low-30s in fiscal '14. On to Slide 12 and we'll talk about Australia. Operating revenue for Australia decreased to $35.3 million in the second quarter of fiscal '14, from $38.4 million in the second quarter of fiscal '13, due to the end of some short-term contracts and the unfavorable impact of foreign currency exchange rates. We continue to incur costs as we prepare for the introduction of the S-92 into this market and the initiation of the large INPEX contract at the end of this fiscal year. Second quarter of fiscal '14 adjusted EBITDAR decreased to $7.4 million, compared to the second quarter of fiscal '13 of $10.8 million, primarily due to the end of short-term work and the contract startup costs incurred for the INPEX contract. This quarter saw a recovery in the adjusted EBITDAR margin from first quarter of fiscal '14 level of 17.7%, due to other contract work starting up. Two S-92s will arrive this month for new work, starting in the second quarter of fiscal '14 -- fourth quarter of fiscal '14. We are currently pursuing 2 new oil and gas SAR opportunities in this market as well. Additionally, our business development team is pursuing exploration opportunities that have started to materialize in the Great Australian Bight. We expect adjusted EBITDAR margins to be in the low-20s for the full fiscal year '14. Please turn to Slide 13 and we'll talk about our Other International business unit. This business unit's second quarter operating revenue slightly increased compared to the second quarter of fiscal '13 due to increased activity in Trinidad and Brazil that was partially offset by the end of a short-term contract in Guyana and fewer aircraft on contract in Malaysia. Adjusted EBITDAR decreased to $12.6 million in the second quarter of fiscal '14, from $14.2 million in the second quarter of fiscal '13, due to a decline in aircraft on contract in Malaysia and an increase in maintenance expense in Russia, offset by increased activity in Brazil and Trinidad. Additional potential contracts in East and North Africa, Russia, Trinidad and the Falklands are materializing. Regarding Brazil, Bristow's earnings from Líder were $2.1 million in the second quarter of fiscal '14, somewhat impacted by the volatility in FX rates in that market as well. Líder's EBITDAR remains very strong. Petrobras is expected to issue a bid for SAR aircraft in calendar year '15 or '16. And earlier this month, the Brazilian government auctioned off the giant Libra pre-salt field, the first under a production-sharing contract regime, and IOCs are part of the winning consortium, with more than 40% stake in this field. On November 21, we will host an Investor Day in New York, where Líder's President and CEO, Eduardo Vaz, will be there and our team will discuss this market in a lot more detail. So we hope you will join us. Again, that's November 21 in New York. For the full fiscal year '14, we expect this business unit's adjusted EBITDAR margin in the low- to mid-40s. With that, I'll turn the call over to Jonathan for a review of our financial performance.

Thank you, Bill. So let's review some of the financial highlights from this quarter. Please turn to Slide 15. Our GAAP earnings were a record high this quarter, due to the gain on the sale of our interest in FB Heliservices of a $1.85 previously spoken about. We received cash of $112.2 million on an asset that was on our books for approximately $8 million. Excluding the impacts of this sale and a few other special items and asset disposition effects, our adjusted EPS was $1.27, a 59% increase over last year's $0.80 and a sequential increase of 27% over the first quarter of fiscal '14. Operational and commercial performance in Europe, in West Africa and the addition of Cougar drove much of this improvement. Corporate and Other decreased $0.06 per share, driven by an increase in information technology and other corporate expenses. This was partially offset by an increase in revenue from Cougar for maintenance support and an increase in military training revenue at our Bristow Academy. The second quarter also had a $2.1 million or $0.06 per share benefit due to the revaluation of a deferred tax liability, as a result of the enactment of a tax rate reduction in the United Kingdom. As previously discussed, Líder's standalone performance was very strong, but foreign exchange movements had a negative EPS impact of $0.08, primarily due to the impact of the reais-U.S. dollar rate on our earnings from Líder. At November 21's Líder Investor Day, we will go into more detail about the impact of these currency exchange rates on our equity and earnings and we will go into more detail about Lider's excellent standalone performance. Second quarter fiscal 2014 adjusted EBITDAR was $108.5 million, which is a 28% improvement from second quarter of fiscal 2013, an almost 6% sequential quarter-over-quarter improvement due to mostly higher operating revenue in Europe. As Bill discussed previously, Europe's adjusted EBITDAR margins improved sequentially. As we promised in our August earnings call, it went from 30.3% in the first quarter of fiscal '14 to 35.3% in the fiscal second quarter of 2014. Please turn to Slide 16. For the 6 months ended September 30, 2013, our adjusted EPS was $2.28, excluding special items and asset disposition effects. This is a 43% improvement over last year's $1.60 and we are very proud of the continued performance between the first and the second quarter for an excellent first half. This marked improvement in the first half year-over-year, is driven by LACE rate improvements in West Africa and Other International business units, partially offset by the decrease in equity earnings and increases in salary and benefits, primarily due to stock price outperformance. Year-to-date, adjusted EBITDAR was $211.8 million, which is a 25.5% improvement from fiscal year '13, driven by growth in our operating revenue in Europe, West Africa and North America. Of particular note is the improvement in first half adjusted EBITDAR margins to 28.7% from last year's 26.1%. This is a record for overall adjusted EBITDAR margin in recent memory. Please turn to Slide 17. During the second quarter of our fiscal 2014, 2 large and 3 medium aircrafts were added to our fleet and 12 small and 1 medium aircraft were moved to held for sale. For the remaining 6 months of fiscal 2014, we have 5 medium and 8 large aircrafts on order and we anticipate selling more small aircraft, similar to the recently signed Letter of Intent that Bill spoke about. This Letter of Intent is to dispose of our entire fleet of Bell 206 L4s, as we focus on future deepwater growth with higher-margin, medium and large aircraft, and higher BVA. Due to these aircraft sales, we decreased our LACE guidance to a range of 160 to 164, from 173 to 177, and this reflects the shift Bristow is executing in our fleet management to exit these smaller aircraft and improve our overall Bristow value added or BVA. Correspondingly, Bristow's overall LACE rate increased to $9.07 million per LACE aircraft year-over-year this quarter. Growth in the LACE rate demonstrates our fleet management execution, the ability to achieve better terms and higher utilization on oil and gas, crew change and the Gap SAR startup. We see continued improvement in our LACE rate and are increasing our LACE rate guidance from fiscal '14 $8.3 million to $8.6 million per LACE to $8.95 million to $9.25 million per LACE, reflecting our confidence in fleet management, top line growth and BVA improvement. Please turn to Slide 18. Bristow's continued focus on operating margins and operating excellence, our commercial and operating lease strategy and working capital management, led to another positive quarter for BVA. The second quarter fiscal 2014 BVA was a positive $20.6 million, which reflects a record improvement of $18.5 million from the second quarter of fiscal 2013. This result demonstrates what can be achieved when many of the factors that impact BVA improve simultaneously. Top line growth and margin improvement, combined with capital efficiency and Líder's contribution, offset this quarter's significant capital expenditures and are the key drivers of our BVA improvement while also significantly growing the organic fleet. This improvement follows consistent positive BVA over the last 8 quarters, which is an outstanding accomplishment of every employee in operations, our commercial groups and support functions, especially considering the cost to maintain fleet availability through the EC225 suspension of operations. Specifically this quarter, West Africa, Europe and our Other International business units were the key geographic performers behind this positive BVA result. Turning to Slide 19. Bristow's focus on BVA leads to improved cash generation. Operational cash flow totaled $132 million during the second quarter of fiscal 14, which although flat compared to second quarter fiscal '13, is driven by sustainable growth in underlying revenue and cost control. Combined with proceeds from the recent sale of our interest in FB Heliservices we have increased our overall liquidity by 49% to $618 million, which includes primarily cash on hand and the undrawn borrowing capacity in our revolver. And this number is after the record $340 million of organic CapEx year-to-date. This record liquidity and prudent balance sheet management philosophy allows us to recommit today to the 20% to 30% annual quarterly dividend payout ratio, which should provide a doubling of the quarterly dividend every 3 to 5 years. But today, we can also confirm that our board has extended the $100 million stock buyback authorization and when combined with our liquidity position, management has another tool to provide a higher and balanced return for our shareholders. Please turn to Slide 20. Today we are increasing our annual adjusted EPS guidance for fiscal 2014 to $4.25 to $4.55 per share, which excludes the impact of aircraft sales and special items. This is a nickel per share increase at each end of the range. Keep in mind this does not include the impact that foreign currency exchange rates may play. As far as other guidance numbers, we already discussed revised LACE and LACE rate guidance on the previous pages. G&A expense guidance has increased to $160 million to $170 million, due to our stock price outperformance and the impact this has on our incentive-based compensation plan. The second quarter also had a $2.1 million or $0.06 per share benefit to the revaluation of our deferred taxes as a result of the enactment of a tax rate reduction in the U.K. If you exclude this item, our effective tax rate decreased to 15.4% and 18.2% for the 3 and 6 months ended September 30, 2013, respectively. This provides us confidence in the 21% to 24% fiscal 2014 tax rate guidance range. So what does this guidance mean for the second half? As you well know, Bristow management provides only annual guidance, but we do expect a solid similar second half and given we are, number one, conservative, for example on assumptions of our 225 return to service; and number two, we are prudent, i.e. we deliver on what we say we can deliver in lots of different operational and economic scenarios; and number three, we are multi-year focused. This should give the investor public confidence that we can deliver on this expectation. Combined with U.K. SAR execution, our new dividend policy and the now reaffirmation extension by the board of our stock buyback program, management is upbeat about our future prospects. And now, I will turn the call back to Bill for final comments.

Thank you, Jonathan. Turn to Slide 20 -- 21 for some concluding remarks. Safety continues to be our #1 core value. As you well know, we are working very, very hard to achieve Target Zero and we will achieve Target Zero. Bristow is well-positioned in the markets that have the highest growth for helicopter services for offshore drilling, and also, we're looking very hard at growth in search and rescue, as I mentioned earlier. Confidence in continued revenue growth and excellent cash flow from our core business and significant current liquidity will allow us to increase our adjusted EPS guidance this quarter. So we look forward to good operational performance in the future. We have some confidence in our Lider affiliate in Brazil and to this end, I am looking forward to seeing you all on Investor Day on November 21 in New York, and there will be more information on that in the next few weeks, next week or so. We'll provide greater color on Lider's operations in Brazil. As I said earlier, you will hear from Eduardo Vaz, Lider's CEO and President. You will hear about Brazil's aviation growth outlook and a lot more information about what's going on within Petrobras and outside with the IOCs. So with that, operator, I will turn it back over to you for questions. Thank you very much.

[Operator Instructions] Our first question today comes from the line of James West from Barclays.

Quick question on your share buyback, so we moved or we continued the $100 million authorization. Your liquidity is enormous right now. Should we expect you to be more aggressive in the market buying back stock at this point and I mean, I think historically, you've been a little bit less aggressive?

Yes, I think, I don't like using the term aggressive on a phone call James, but let's talk about the stock buyback and what influences management's decision. The first is, obviously, our liquidity position, which we are obviously very pleased with the operational and commercial performance to get us there. So from that standpoint, you are absolutely right, we have enough to do a number of things. We also do care about the value that we get for shareholders, so we don't just have an automatic stock buyback. We also look at the price of our stock also. But we will say this, we do believe that a number of factors that precluded us from really buying back stock last year, which really dealt with U.K. SAR, the Cougar integration, these are now behind us. And so, without being too specific, we look forward to the next year, where again, like we previously said, we will be able to provide this tool, this stock buyback tool, as another way to get a good, balanced and enhanced return for our shareholders.

Okay. So if we take aggressive off the table and say more active, is that a reasonable statement?

Yes.

Okay, all right. And the BVA increase sequentially, obviously very impressive and you had a good run here, of 8 quarters in a row, being positive on BVA. How sustainable do you believe these types of levels of BVA to be going forward?

I'll answer from a financial standpoint, but I would like for Bill to answer from his and we have obviously got Jeremy and Mark here. But this is not just a financial tool for evaluation and if you look at the BVA improvement that we have gotten, a lot of it has been associated with operational margin improvement, which is a testament to the commercial and operational activities that we have going on. And we think, and we will talk to you in our third quarter call, about a number of the things that Jeremy and his teams are doing as part of efficiency programs, both driven by technological change within the company, but also driven by simplification and standardization of process globally. So we think there are still lots of room to move and as we've talked about in the past, there is no impact of U.K. SAR. You are starting to see the impact of Gap SAR in our BVA, but that U.K. SAR is also a big one.

Yes, James, when I think about what's driving this, to me is just 3 things. If we look at our financial performance over the last several years, it's the passion, the fire in the belly that our teams have around the world. I mean, examples are winning the SAR contract. But they have a passion to be the best at what we do. I know that sounds -- everybody is going to say that, but it really is happening at Bristow. Second is the first time that we've seen really good interdependency between operations, commercial, finance, legal and administration. These various teams are working together like I have never seen before. And the third driver is the focus on BVA, our BVA concept at Bristow. It's really amazing what that's done to improve discipline and operational performance. So to me, those are the 3 big areas, and so I do -- to answer your question, I do expect that this performance is sustainable, and I would like to -- I don't want to be the lady who doth protest too much, but Jeremy, you might want to comment on opportunities that Jonathan mentioned in operations.

Thanks, Bill. Yes, essentially in operations, where we have been over the past couple of years very focused on identifying and driving efficiencies through the business, largely driven by the premise that we can simplify our business model and standardize it in such a way that continues to meet our key customers' needs and still allows us to drive up asset utilization. Those initiatives are in place and they will continue. And we think there is intrinsic value in their implementation that we'll see over the next 3 to 5 years.

And our next question comes from the line of Jon Donnel from Howard Weil.

I had a question on these incremental SAR opportunities that you called out in the press release and in the slides here. It seems like you are clearly getting a lot of new interest from places beyond the North Sea. And I'm wondering if you can maybe help us a little bit with what we should expect in terms of the timing of the potential new contracts here. I think we previously thought that getting the U.K. SAR underway and then showing success in that was going to be a requirement for getting new work. But given the number of new inquiries that you are clearly getting is, should we be thinking about that as possibly being accelerated here over the next couple of years as opposed to maybe 5 or 6 years down the road?

Jon, Mark Duncan will take that question.

Jon, we'd previously outlined that SAR was active before we had acquired the U.K. SAR contract. The U.K. SAR contract is big and is the first real sizable outsource by a government. And we expect future outsourcing of that type to rely on the success of that project. In the meantime, as our oil and gas customers are going to new locations where SAR may or may not be well developed, they have a requirement to provide that service to their workforce that is offshore and that's driving most of the incremental opportunities that we mentioned in the call. These are oil and gas opportunities where the clients are going in, drilling and producing, and they are nice size opportunities, because they're not a big apple to bite, like the U.K. SAR is. We can incrementally add them. The lead time on a SAR project at the moment to get aircraft, because all of these tend to be new aircraft, is 2 years. So we're bidding those projects now. You can expect those to be awarded and then 2 years later they start. The only non-oil and gas SAR opportunity that we see right now is the Falkland Islands and that is an extension of the U.K. government's SAR coverage, because of course, the Falklands is part of the U.K. And we mentioned that last year, when we won the contract, as a potential opportunity to supplement that contract.

Okay, great. That's helpful. And then I guess, could you give us a little idea on the scope of this, the U.K. inquiry here into helicopter safety and maybe kind of the general plans for what they're going to talking about and maybe chances of that impacting your operations, either in the shorter or longer term in the U.K.?

Am going to let Mike Imlach, Mike Imlach is Director of our European business unit and he is here so, he is in the middle of that -- in that area and that inquiry.

Jon, we visited, just now, with the various authorities in United Kingdom, Civil Aviation Authority, and also we're heavily involved with the U.K. oil and gas helicopter safety group and also as Bill mentioned, the initiative with our competitors, Bond and CHC. And I think it's going to be very positive for our industry in the United Kingdom and also globally. We feel we are going to definitely add a contribution to that. And I think we're seeing the value of other safety and training regimes within the company, showing through our recent incremental awards. So we are very, very supportive to be a part of that and if we can increase our, other safety aspects within the U.K. and elsewhere, we truly believe we will get value and the industry will get value from it as well.

And our next question comes from the line of Ryan Fitzgibbon from Global Hunter Securities.

Kind of thinking about the guidance, I know you guys are generally conservative, don't like to move that number much from the first half of the year and want us to think on an annual growth basis. But with LACE rates trending up, EBITDAR margins going higher, what do you view as the major risks that would preclude Bristow from actually posting better results in the second half versus the first half?

Go ahead, Jonathan.

Go ahead, Bill. I will take it. Ryan, the first thing I would say to your question is, first I appreciate you recognizing management's, really, emphasis on annual guidance. And we understand as you go into the year, it becomes more like a quarterly or next half guidance. But again, we're focused on multi-year value creation with the company, which I hate to harken back to one of your peer's questions, but it also gets back to being able to give you a higher growth dividend and also buying back shares as part of this. Obviously, that has an impact on guidance, but as we've spoken in the past, we don't give you guidance based on buying back shares. That's the first thing I would say. The second thing I would say is in the past we have always said that the second half -- I say in the past, in the recent past, we've said second half is generally stronger than first half, and that is a possibility here also. But because of the number of issues associated with the fleet management, with the return to service of the EC225, and then I would say a third thing, which is, there has been a lot going on in the industry, as Mike Imlach spoke about, we want to be conservative, we want to be prudent on other possibilities, we're still very positive about the business. And so we hope to be able to obviously meet this expectation of a nickel on either end increase, but other than, it's very unusual for us to raise guidance in the second quarter. We've done it because we have such good positive feelings about the rest of the year and then even FY '15 and beyond. So that's the best way I think I can answer that question, but don't forget about that first, there are other value creation ways, with higher dividend and stock buyback.

I appreciate that. And then second question for me is on the EC225s, and maybe 2 parts. First, how would you say customer behavior has been so far in terms of reactivating those aircraft? And then secondly, what should we be modeling for the cadence of the, call it the final 15 aircraft, being returned to service in the back half of this year?

Ryan, it's Mark here, I'll take that question. We are being very prudent on the return to service. So we are doing that in conjunction, working with our customers. So we've got 5 back in service, which are fully in conjunction with the customers. We have other aircraft that are ready to go and we are working through with the customers associated with those contracts that are still in place and making sure that they're ready to go and what's delaying that is the customers getting to their workforce and making sure the workforce are confident in the safety of the aircraft and the operation, and they're fully involving Bristow in briefing those offshore employees. That said, those that are waiting to go on contract are still obtaining MSCs that we've disclosed previously. Of the remaining aircraft that are being, continue to be modified ready for service, we have a large opportunity map ahead of us. We do put that there on our presentations, but the opportunity map over the next year or 2 is very healthy versus the number of aircraft that we have available. So we have some 225s still to contract that weren't on full time contracts, so are off revenue and we have additional orders that are coming in to deliver and we've gone and exercised some addition options recently. So we have confidence that we'll be able to put all those aircraft to work. This will be in conjunction with, in the mid-short to medium-term, retiring our older 332s. They were very useful in keeping our operations going, but our plan was originally to exit those aircraft and that will be the case and the 225s will be obviously a part of backfilling those as well.

And our next question comes from the line of James Crandell from Cowen Group.

This is Peter Hatfield filling in for Jim.

Okay.

My first question is that you've mentioned that you're looking at more global contracts with some of your large customers. So wondering if you can go into little bit more detail on how these contracts are or will be structured and what the mix of global contracts will be, in your view moving forward?

Peter, it's Mark, again. Let me take that one, because I am involved in several discussions in that regard. We have customers who recognize the potential differentiation and advantage that we bring by being a global operator who is present or can be present in the areas they are going to and then they are working in. And they are recognizing the excellent service that we are providing as part of our client promise and they are recognizing the safety we provide, the reliability and efficiency that we provide on the service itself. We have a large focus on that at the moment and that's driving benefit that they are recognizing and they want that service everywhere and they don't always find it everywhere when they go around the world and they work with a disparate group of different companies. It also fits their category management style, where they want to reduce the number of providers that they have, because it helps them reduce and control their supply chain. So that all plays well into discussions to look at global agreements. We wouldn't say that, that's going to become prolific, but there are certainly opportunities out there. And it doesn't have to be fully global, it doesn't mean we'll get all the work in the world with one company. But it does mean we'll have an effective way of communicating with those customers to get early warning of those opportunities, so that we can position to increase our chances of success. And that's all done by proving the value we provide to them. So we are very encouraged by that. And I'm not going to tell you which companies we're talking to, because that's obviously competitive and confidential.

And our next question comes from the line of Brandon Dobell from William Blair.

Wondering if we could focus on North America for a second, given all the puts and takes there, with selling some aircraft and the margin profile? If we look out 18 months or 2 years, what do you think the fleet looks like and how does that or how should we think about that impacting what the margin profile might look like in North America?

I'll let Jeremy Akel answer that.

Yes, the North American shift is one to -- is one consistent with our continued evolution of our delivery model. We are, in a sense, repositioning ourselves to better serve our key clients in deepwater. And make that operation much [indiscernible] with our delivery model globally. So the answer to your question is, you'll start to see a shift towards more twin-engine, medium and heavy over time, and as we start to target deepwater with earnest in North America.

Okay. Any sense of timing on the LOI to sell the 206 aircraft and how do you think about the, I guess, the potential revenue impact of that small aircraft fleet going off your books?

You in a sense have already seen the revenue impact. The majority of the aircraft are, have been decommissioned, if you will. And there is a few that will remain until mid-next year and then we'll be completely out of the L4s in the Gulf of Mexico.

Okay.

And let me add to that, Brandon. For example, in West Africa, where we are operating some of these L4s in Escravos, Nigeria, we will replace, we are not going to drop those contracts, we'll replace those aircraft with Bell 407s.

Got it. Okay

Which is an enhanced version of the 206 L4, 4-bladed prop, little more power. So we're not going to give up, so the revenue is not going to actually go away on good sustainable contracts that we have for those L4s.

Got it. Okay. And then as the fleet migrates to a larger average size, do you think you've got the opportunity to extend the average contract duration, kind of from that 3 to 6 months to 1 to 2 year, to mirror more the rest of the contracts you have in different regions, or is it going to be still stuck at that shorter duration?

Yes, Brandon, it's Mark here. Let me clarify that for you. The larger helicopters are only being offered on longer-term contracts.

Okay.

So the last 2 S-92s that we brought in were on 3-to-5 year commitments. The one that we announced recently as part of the large amount of rewards we have, there was one in the Gulf of Mexico there, it's due to start up next May, I believe. It's a 3-year plus option contract and we're bidding contracts today that are 5-years plus. So there is a definite theme change there with those larger types and we expect that to continue. Now that said, the Gulf of Mexico, as far as we're concerned, is competing with other opportunities that we have in the other business units for that finite amount of aircraft. So we want the pricing in the Gulf of Mexico to be better as well. But we see the amount of rig activity and the amount of commitments our clients are making to drilling rigs, pushing that demand to a point where supply and demand are going to be hopefully in our favor.

Okay. Great. And then a final one, Jon, any sense of how CapEx needs in the back half of the year should look or compare to the first half of the year here?

So we do and have disclosed to you the capital liquidity and how many aircraft we have on order. I think, if you just look at the total amounts we've disclosed in the past, it's probably not going to be at the same rate in the second half as the first half, just given the mathematics of it. So you should expect it still to be much higher than average, but probably not the doubling that we saw. And I would just reference you to that disclosure.

[Operator Instructions] And our next question comes from the line of David Anderson from JPMorgan.

I'm trying to true-up your guidance on the LACE with your earnings guidance. Now you lowered the number today, presumably it's the 60 small aircraft coming out of North America. But I'm looking at my EBITDAR numbers going for the rest of the year. Does EBITDAR stay flat here for the rest of the year, that's kind of what it looks like on my numbers and I had it going up?

We don't give you specific EBITDAR, we've given you EBITDAR guidance, where a lot of these small aircrafts have been either put in held for sale or actually on LOIs. We've said expect it to be in the low-30s, really, because in North America, that includes our Cougar affiliate, which is doing quite well. And so we kind of kept to that number, right now, David. I think you will see us give a little bit more clarity once we're in the third quarter for that specific, but you're hitting the exact right point, which is, just given the nature of these aircraft, even though they're small, from a LACE standpoint, they do -- they do impact the LACE number. But again, because we are redeploying the monies in more positive, Bristow value added ways, combined with the aircraft -- a number of aircraft are coming on service, you're seeing that LACE rate go up commensurately. I think if you did the math there with within your models, you'll see that we'll stay within that guidance range, that increased guidance range that we've just given.

As the EC225s come back into service, is there additional cost associated with bringing them back into service? You kept your margin guidance in all the different regions flat from last quarter. So it doesn't seem to be in there, is there additional cost there?

David, we are going to see -- this is Jeremy. We're going to see some cost, but I wouldn't call it material cost. There is some additional checks and maintenance activities we need to do as part of the redeployment program, but I don't anticipate seeing any additional dilution, I guess you would say, as a result of that.

And lastly, on your percentage of leased aircraft, you're now above 20%. You've been targeting 30%. It looks like you're going to kind of blow through that pretty quick. Is there a new target that's out there? I mean, it looks like you're going to be well above 30% by this time next year. Am I wrong?

Yes, I mean, we have a changed our disclosure. When you look at the amount of LACE aircraft, if you check in the Q. We've moved from that 20% to 30% previous disclosure to recognize 2 things with the lease market. One, we've got a lot of lessors who want to work with us and we want to show partnership. But more importantly too, it really has lowered our overall cost of capital, given the advantages that we have as an investment-grade secured company. And so for us, that's something we want to take advantage of it. It's also a low interest environment and so, you're right, you're going to see us move through that. That being said, we like the residual value of our helicopters. We like owning more helicopters than leasing. We appreciate the partnerships that it gives us and the capital efficiency, but we like owning helicopters and that's [indiscernible] area...

Let me -- I want to make sure people understand, we have certain -- the board and the management team are very conservative in terms of our capital structure. So we are not going to violate or blow through any of our coverage ratios. We will maintain a very strong rating, our strong ratings, so the debt equity ratios, debt-to-cap and the coverage ratios or going to remain very, very strong. So we're not using leasing to blow through that, because as you know, we consider leases a fixed obligation, even though we don't put them on our balance sheet. We do our metrics. In Bristow, we use our unfunded pension liability and all the other things, all the bells and whistles out there to calculate our metrics. We're going to remain very conservative.

And I show no further question in the queue. I'd like to turn it back to management for any closing remarks.

Well, thank you, everyone. I appreciate your support and perseverance over, during times when we overpromised and under-delivered, so we are happy to continue this. And have a great holiday season. We hope to see all of you on November 21 in New York. Thank you very much.

And ladies and gentlemen, this does conclude the Bristow Group's Second Quarter Earnings Conference Call. ACT would like to thank you for your participation and you may now disconnect.