Bristow Group Inc. (VTOL) Q4 2014 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Bristow Group's Fourth Quarter Earnings Conference Call. [Operator Instructions] This conference is being recorded today, May 22, 2014. I'd now like to turn the call over to Linda McNeill. Please go ahead.

Thank you, George, and good morning, everyone. Welcome to Bristow Group's Fourth Quarter Fiscal '14 Earnings Call. I'm Linda McNeill, Director of Investor Relations. With me on the call today are Bill Chiles, President and CEO; Jonathan Baliff, Senior Vice President and CFO; Jeremy Akel, Senior Vice President and Chief Operating Officer; Brian Allman, Vice President, Chief Accounting Officer; and Mike Imlach, our Vice President of Global Operations. 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. Our forward-looking statements are subject to risks and uncertainties that are described in more detail on Slide 3. 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 the GAAP reconciliations. With that, I would like to turn the call over to Bill. Bill?

Thank you, Linda, and good morning to all of you, and thank you for joining us today. I know there are other calls going on. We appreciate your time. I'm going to start on Slide 5, for those of you that have the slide presentation up, and focus on our safety performance for the year. Noteworthy that we had 0 aviation accidents for the year, and it also means we had -- well, in addition, we had no Class Bs. Class As are the -- are what count when you calculate the aviation accident rate. So we had no Class Bs as well. Now I will talk about one accident we had in the Academy in a minute. We're very proud of that. We actually reached Target Zero in our aviation -- our commercial flying business, very noteworthy. Also, our ground safety was excellent. We improved our Total Recordable Incident Rate to 0.26 for the year and our lost work case rate to 0.22. So I'm very proud of all of our employees out there who worked very hard to achieve these great -- a great record for the year. I'm always a little bit skeptical [ph] about talking about it, patting ourselves on the back, because I'm just a little bit superstitious about it. But a great year. And I would also like to specifically mention West Africa Business Unit as well as our centralized maintenance division for Target Zero performance for the full fiscal year in all safety measures. So that proves that we can actually reach Target Zero. So great work to those business units and to those employees who worked so hard to achieve that. It's also noteworthy -- although we are proud of the safety performance that I mentioned for the year, the corporate management team will receive 0 for 25% of our annual bonus because we set the bar very high, and I mentioned a minute ago we did have an aviation accident at our training academy in Florida, where we had a rollover with no significant injuries to the 2 people on board. But the fact that we had an aviation accident in the academy means that the corporate management team and the academy will receive no bonus for that portion of our annual incentive award. Please turn to Slide 6 and let me focus on our financial highlights for the year. Overall, our operational performance was very strong. Top line growth was excellent with operating revenue of $1.5 billion, which was a 12.8% increase from fiscal '13. Adjusted EBITDAR in fiscal '14 increased 13.8% from fiscal '13, and adjusted earnings per share increased 17.7% year-over-year. This is a testament to the passion and discipline of our teams around the globe. Fourth quarter fiscal 2014 GAAP EPS was $0.83 per share. Excluding special items and asset dispositions, our adjusted EPS for the fourth quarter fiscal '14 was $1.35 per share. We were able to generate $64.7 million in absolute BVA in fiscal '14, a $42 million increase over fiscal '13, which is the highest in Bristow's history. Our cash flow remains very strong with our overall liquidity at $529.9 million, and that's after we spent over $675 million on growth CapEx this year. We continue to invest in our business at record rates while delivering a balanced return to our shareholders. Our Board of Directors has approved a 28% increase in the company's quarterly dividend, resulting in a $0.32 per share -- resulting in $0.32 per share, up from $0.25 per share in the past year, which is doubling the quarterly dividend since 2011 when we initiated it in June of that year. The fourth quarter also saw a record amount of share repurchases as our stock traded at values management believes was very attractive compared to our overall net asset value. We believe Bristow can continue our solid performance into the next full fiscal year, 2015, and beyond. And today, we're announcing our adjusted EPS guidance range for the full fiscal year of 2015 of $4.70 to $5.20 a share, which excludes gains on -- or losses on aircraft sales and special items. Turning to Slide 7, and I'll focus on our European business unit. Our European business unit, is our largest business unit, continues with a strong performance in the fourth quarter of fiscal '14 with an increase in Large Aircraft Equivalent of 1 and an 18.7% LACE rate increase in the fourth quarter over the fourth quarter of fiscal '13 as new technology aircraft come online and older aircraft were moved into held for sale. Please keep in mind that LACE does not include fixed wing aircraft. We were able to recover $12.4 million in expense credits from our original equipment manufacturers that helped improve adjusted EBITDAR margins for Europe as well as Australia in the fourth quarter of fiscal '14. Additional credits may be recovered and received quarterly in fiscal '15. The credits received this quarter were expected and included in our -- as part of our fiscal '14 adjusted EPS guidance. 15 of the 20 EC225s that we operate globally have returned to revenue service, and 5 will be available for revenue service next month. Two out of the 5 will have the new, redesigned gear shaft. In quarter 4 fiscal '14, $21.2 million in operating revenue and $4.2 million in adjusted EBITDAR was contributed by Eastern Airways. As you'll remember, Bristow Helicopters acquired a 60% interest in Eastern Airways in February of 2014. Adjusted EBITDAR margin was 19.8%, which is lower than our oil and gas helicopter operations but in line with our expectations for this fixed wing business. We anticipate continued solid financial performance in our European business unit and expect adjusted EBITDAR margins to be in the low 30s for the full fiscal '15, which is slightly lower than fiscal '14 margin due to the inclusion of Eastern Airways' results. Looking forward, we expect a very robust market with many client activities that are -- that were delayed due to the 225 unavailability last year as -- but some of that work is starting to pick back up. We currently have 11 Large Aircraft Equivalent in fiscal '15 order book allocated to our European business unit to service these new opportunities. Please turn to Slide 8 and I'll give you a little more color on what you may have heard about as CAP 1145. On February 20, U.K.'s Civil Aviation Authority, or CAA, issued a series of rules known as CAP 1145 to improve the safety of offshore helicopter operations in the North Sea. In our 10-K, we are disclosing more on Bristow's perspective and the implications of these rules. To reduce the risk of loss of life when ditching, flights in sea states above 6 will be prohibited as of June 1, 2014. Bristow's current policy already restricts us from flying above sea state 6 anyway, so we do not anticipate any material impact by this rule. Further prohibitions against operating beyond a certified ditching performance of the aircraft go into effect on September 1. This restriction will impact our medium aircraft fleet, which will be limited to no greater than sea state 4. Also from September 1, 2014, the industry will only be allowed to carry passengers in seats adjacent to emergency exit windows unless the passengers are equipped with a Category A emergency breathing system. We expect Cat A emergency breathing systems to be available for use by this deadline, so minimal or no impact is expected. The Cat A emergency breathing systems will be compulsory for all passengers starting January 1, 2015. In April of 2015, the CAA will prohibit offshore helicopter operators from carrying passengers whose body size is incompatible with the dimensions of the emergency exits. Further work within the oil and gas industry participants [ph] is needed on this topic. Bristow believes that the regulations will make our industry safer, so we're working collaboratively with the CAA and other operators and our clients in the North Sea to evaluate and deploy solutions that meet these new safety standards. Please turn to Slide 9, and I'll focus on our update of our U.K. SAR operations. Turning to Search and Rescue, we are proud to report that since the start of the U.K. GAP SAR contract in June of 2013, we have conducted over 230 incident-free missions and rescued and/or assisted over 200 people from our 2 bases at Sumburgh and Stornoway. In the fourth quarter of fiscal '14, $12.6 million of revenue was generated from GAP SAR -- the GAP SAR contract, and over $37.7 million has been generated since the beginning of the contract. Construction has started on the bases at Inverness and Humberside, which are due to become fully operational in April 2015. All of the U.K. SAR execution elements are on schedule and on budget. We expect to complete lease financing of 11 SAR S-92s in the first quarter of fiscal '15 and several SAR AW189s by the fourth quarter of fiscal '15. We are actively pursuing private and public sector SAR opportunities elsewhere around the world. To update you on one of them, a bid was submitted for the Falkland Islands SAR contract with the U.K. government. It is expected to be awarded in early 2015 with a contract start date in calendar year '15 to calendar year '16. Please turn to Slide 10, and I'll focus on West Africa. In Nigeria, operating revenue improved by 13.2%. Adjusted EBITDAR and adjusted EBITDAR margin increased in the fourth quarter of fiscal '14 as we increased our Large Aircraft Equivalent, LACE rate and overall flying activity. We expect fiscal '15 adjusted EBITDAR margins to be in the low 30s. We continue to monitor a recent security situation in Nigeria. Currently, it is not in the areas of our operations, which are focused in the southern part of the country, and the current security issues are happening in the northern part of the country. And our outlook for this region is positive as we continue to renew existing contracts and get new work. Independent oil companies continue to invest in Nigeria, driving increased demand for Bristow's services. We are meeting this demand with medium helicopters. An introduction of new technology medium aircraft is expected in the first half of this fiscal year. Please turn to Slide 11, and then I'll focus on North America. North America operating revenue slightly decreased due to a decrease in our LACE aircraft in quarter -- in the fourth quarter of fiscal '14 to 34 from 37 compared to the fourth quarter of fiscal '13. Our LACE rate increased 11.8% year-over-year. Our North America Business Unit saw an increase in adjusted EBITDAR and adjusted EBITDAR margin that were driven by higher equity earnings from our investment in Cougar in Canada. We anticipate fiscal '15 adjusted EBITDAR margins to be in the low to mid-30s. We are proactively upgrading the standards of our North America Business Unit to meet and exceed the expectations of our global clients. And our higher standards will allow us to sustainably service our deepwater clients. Looking ahead, we expect to complete the exit of Alaska in the second quarter of fiscal '15. Please turn to Slide 12, and I'll focus on Australia. In Australia, our Large Aircraft Equivalent increased year-over-year from 19 in the fourth quarter of fiscal '13 to 22 in the fourth quarter of fiscal '14, while LACE rate declined year-over-year 21.2% to $6.76 million for LACE aircraft. This was the result of some delayed contract start dates while the aircraft were already ready in the country and ready to service the contracts. Adjusted EBITDAR and adjusted EBITDAR margin declined year-over-year from 26% in the fourth quarter of '13 to 24% in the fourth quarter of '14 but improved sequentially from 15% in the third quarter of this fiscal year. We anticipate fiscal '15 adjusted EBITDAR margins to be in the low 30s. We were awarded an oil and gas and SAR contract for 3 large aircraft for exploration opportunity in the Great Australian Bight in the Southern part of the country starting in January of 2016 for a 2-year period. Margin improvement is expected to continue with the Inpex contract under way in fiscal '15. And we continue to retire old technology LACE aircraft as part of our fleet plan. Please turn to Slide 13, and I'll focus on our Other International Business Unit. In our Other International Business Unit, LACE aircraft decreased from 27 in the fourth quarter of '13 to 24 in the fourth quarter of '14 with our LACE rate increasing 12.8% over the same period as some older assets were replaced with new technology aircraft and new contracts had commenced, including the award in Tanzania. Adjusted EBITDAR increased to $20.2 million quarter-over-quarter, and adjusted EBITDAR margin increased to 53.3% primarily due to higher earnings from our unconsolidated affiliates, which included a $2 million dividend from petroleum air services in Egypt and increased activity in Brazil and the start of operations in Tanzania. For the full fiscal year '15, we expect Other International Business Unit adjusted EBITDAR margin to be in the low 40s. The outlook remains positive, and we see opportunities in the regions where we operate, new regions like Guyana in the Caribbean, Suriname and Tanzania. We continue to introduce new technology aircraft with our Russian joint venture, Aviashelf. With that, I'll turn the call over to Jonathan to further review our financial results.

Thank you, Bill. So let's go over some of the financial highlights from this quarter and this fiscal year. Please turn to Slide 15. Our fourth quarter fiscal year '14 adjusted EPS was $1.35, excluding special items and asset disposition effects, an increase of almost 34% over the fourth quarter of fiscal 2013 and a 50% -- a 58% increase sequentially over the previous third quarter of fiscal year 2014. Our full year fiscal year 2014 adjusted earning per share was $4.45, an almost 18% improvement over last year's record $3.78. This excellent fourth quarter result delivers on our annual fiscal '14 adjusted EPS guidance, ending the year at the middle of our already increased guidance range. The operational increases in our fiscal 2014 adjusted EPS have already been discussed and support our view, but while quarterly EPS results vary due to a number of factors, the best comparison of our results against guidance expectations is an annual comparison as this is in line with how we manage our businesses. The improvement in adjusted EPS performance year-over-year was also driven by corporate increases. Our corporate EPS improvement was driven by a lower effective tax rate and earnings we get from providing maintenance and other support services to our Cougar affiliate in Atlantic Canada. Please turn to Slide 16 for discussion of adjusted EBITDAR. On the strength of operating performance in Europe, West Africa and North America, our adjusted EBITDAR improved to a record level of $433.7 million, a 13% improvement year-over-year. Our fourth quarter adjusted EBITDAR improved by 19% over the prior year to $122 million, $22.9 million driven by Large Aircraft Equivalent rate increases across most of our business units. On a sequential basis, compared with our third quarter, adjusted EBITDAR improved by over $22 million or 22%. Our adjusted EBITDAR margin was 30.4%, an improvement from last year's fourth quarter margin of 29.4%. And this was also a sequential improvement from the third quarter of our 2014 fiscal year margin of 27%. This fourth quarter margin improvement was expected due to a number of items, including the start of certain contracts as well as our ability to recoup costs from certain OEMs for amounts that impacted our results earlier in the fiscal 2014 year. Please turn to Slide 17. In fiscal 2014, our overall LACE rate improved 11.8% year-over-year to $9.34 million per LACE primarily due to new technology aircraft additions that generally produce higher LACE rates, along with utilization improvements. Our LACE count, on the other hand, stayed flat year-over-year at 158 due to our fleet plan that leads to a significant amount of aircraft sales this year in fiscal 2014. It was offset by aircraft additions already spoken about. To review from last quarter's call, our fleet management plan aims to reduce the current 28 different fleet and sub-fleet types to 8 fleet types in approximately 5 years and 5 fleet types, approximately, in 10 years. The good news is that in fiscal 2015, we had a record 30 LACE firm orders, including the U.K. SAR aircraft, to be delivered. This will increase our LACE count as we continue our fleet management plan with also 10 LACE held for sale. This leads to our fiscal 2015 average LACE guidance to equal a 161 to 167 range at an average LACE rate guidance range of $9.5 million to $10.5 million per LACE aircraft as we add more new, larger technology aircraft. Please turn to Slide 18. Fiscal 2014 saw record Bristow Value Added, or BVA, performance with every quarter in positive territory for the second year in a row. The continued focus on capital discipline and working capital management created consistent returns above our cost of capital. The fourth quarter fiscal 2014 BVA was a positive $28.7 million, which is $19.3 million higher than the BVA in the fourth quarter of fiscal year 2013. This quarter led to our fiscal 2014 total BVA of a record $64.7 million, a year-over-year improvement of $42 million with consistent execution over all of the 4 quarters, a notable achievement by the more than 6,000 employees, including our unconsolidated affiliates, even in the face of many challenges like the EC225 suspension of operations and the record capital expenditures across the board. In absolute terms, as shown on the bottom right chart, fiscal 2014 saw the largest amount of BVA achieved in the past 5 years. A lot of this improvement was attributable to our Europe and West Africa business units as EBU generated $31.6 million of the improvement over the previous fiscal 2013 year and WASBU generated a $12.4 million improvement year-over-year. And the reason this is important is because, again, BVA is the primary way that our employees, management and we, even, talk to shareholders about how we look at our consistent improvement over time. It is the first metric we look at when we manage our business. Please turn to Slide 19. Slide 19 demonstrates why we focus so much on Bristow Value Added. It leads to improved cash generation even in the face of significant capital expenditures. As you can see, operating cash flow for fiscal year 2014 totaled $232.1 million. This is actually a very good result even though it looks like it's a decrease year-over-year from fiscal year 2013. And this is due, because including in fiscal year '14 are taxes paid of $35.0 million due to the sale of the FB Entities, which were significantly higher than the book value we had on our balance sheet, as well as cash payments related to the U.K. SAR contract award and also annual compensation payments. Without these investing impacts, operating cash flows would have been approximately $277 million, roughly $10 million over the previous year. It doesn't mean that we present that in our chart over here. We had $232 million of operating cash flow, which you can see had a positive impact on the right-hand chart, which is our total liquidity. During fiscal year 2014, 14 aircraft were put on operating leases with $246.4 million received in proceeds. This led to our overall fiscal 2014 ending liquidity of $530 million with cash on hand of $204 million. And this is including an undrawn borrowing capacity of $326 million. This was a 27.7% higher liquidity number than the last fiscal year end 2013. And this is after we spent $628.6 million on organic CapEx and $44 million on external growth activities in fiscal year 2014. In the fourth quarter of fiscal 2014, Bristow also spent $61.3 million to repurchase over 820,000 shares of our common stock at an average price of approximately $74. Subsequently, from April 1 to May 16, we bought back an additional 126,000 shares for $9.4 million. And as of May 16, we had almost $50 million of remaining repurchase authority by our Board of Directors. In April and May 2014, we also redeemed or repurchased $11.3 million of our 6.25% senior notes. We saw it as attractive value at the time, and it also keeps our adjusted debt-to-total capital at an industry low of 43%. Please turn to Slide 20. This is a slide and information that you, our investors, are familiar with, but we thought it would be important given the record share buybacks, to talk about it once more. Management employs this page or this analysis for 2 purposes. First, the red line, which is the net asset fair market value, or FMV, demonstrates the resilient value of our primary assets or our helicopters. These have a value outside of their use in oil and gas offshore industry, and this durable helicopter residual value underpins the significant capital our lessor partners have raised to help our industry finance these long-lived assets while we're in this period of significant growth. Second, the chart demonstrates our share repurchase strategy. When the green line, representing our average stock price, falls close to or closer to or even sometimes below our red FMV line, we will buy back more stock. As the green line moves above the red line, we will buy back less stock. Keep in mind that this green line is the fair market net asset value today and does not include the U.K. SAR aircraft. And we represent that by this little helicopter up at the top, which adds net fair market value for a total of $83. And we look at that number also when executing the current repurchase strategy. We provide these calculations for the most recent fair market value numbers in the appendix on Slide 36. Also, keep in mind we include the fair market value of our leased aircraft as well as our leased imputed debt. We can talk about this further, but we do this because of the significant flexibility we have in our lease contracts to create synthetic ownership, including purchasing these aircraft in the future or extending the leases unilaterally. Our commitment is to deliver consistent and predictable improvements in performance year-over-year. We believe that we -- if we continue to extend our track record of shareholder value creation, not only will our fundamental performance improve but also there may be room for additional multiple expansion as well, as investors gain confidence that we as a company that have both logistics and infrastructure characteristics can not only sustain a high-level performance in many different types of markets, but continue to improve over time. Companies with similar earnings and dividend growth rates tend to trade at much higher multiples, which also underpins our opportunistic share repurchases at an average price of approximately $74. We feel confident that the secular growth in our industry, combined with our strong market position and the ramp-up of UK SAR, continue to make share repurchases at an attractive value position at these current prices. Please turn to Page 21. This is a new chart for fiscal year 2015, and we anticipate that fiscal year 2015 will continue to deliver strong BVA, EBITDAR and operating cash flow and EPS results as we had a full return to revenue service of all of the EC225s, and there are another 30 LACE aircraft delivered, including 10 UK SAR aircraft that will start on contract in fiscal '16. We mentioned the UK SAR aircraft, because they will be delivered in our '15 fiscal year, but they will not be able to achieve full EBITDAR and therefore, EPS until fiscal year '16. Because of this investment, today, we're announcing our annual adjusted EPS guidance range for fiscal '15 of $4.70 to $5.20, which again excludes the impact of aircraft dispositions and special items. As we discussed in April 2013 at our UK SAR Analyst Day, Bristow's fiscal year 2015 is a year of growth in anticipation of what UK SAR and that contract will bring in fiscal year 2016 following the past 2 years of record CapEx, these aircraft deliveries and some costs that we will take in 2015 in anticipation of the contract startup with its EBITDAR and cash flow in 2016. Remember that UK SAR will provide an incremental $1 per share of EPS when it's fully on contract on top of the long-term adjusted EPS growth that we give you guys up 10% to 15% per year as we promised in fiscal year '13. As always on this page, we are also providing other annual financial metrics guidance that you expect from Bristow every year around this season. One item of note is our aircraft lease rental expense, which we're guiding you to $137 million to $142 million in fiscal '15 compared to the aircraft lease number in our 10-K of $84 million. The lease strategy has been successful beyond our initial expectations, and our treasury team led by Joe Baj, our Vice President Treasurer, has done an exceptional job putting in place about 25% of our LACE fleet on flexible and low-cost operating leases. The pace of this lease strategy origination will slow as we arrive at our 30% to 35% of the LACE fleet lease in the coming year as UK SAR leased aircraft come online. We will now move to the portfolio management phase of our lease strategy, where we'll use leases on a proportional basis of roughly 1/3 and 2/3 owned aircraft in the future. It is also important to note that our non-aircraft lease expense will stay around $20 million to $25 million for fiscal year '15. I know that's a lot of financial information, but it is characteristic of this earnings call that we give you a lot of information. Now I will return the call back to Bill for final comments.

Thanks, Jonathan. Turning to Slide 23, actually it's 22 on my set, for final comments. As you know, safety continues to be our #1 core value. We will continue to strive for Target Zero, and as you've heard me say often, if you don't have a good safety record in the aviation business, you're basically out of business. So Target Zero is where we're headed. As I said earlier, we were able to achieve Target Zero at several of our business units, and have been able to do so consistently year-over-year. So it is possible. Management and the board is going to continue to focus on execution, as you've seen over the last several years. With the introduction of BVA in 2010, we strengthened our capital allocation strategy and developed a culture of ownership in our management team in the pursuit of operational excellence, the results of which could be seen in our consistent delivery over the last several years that I mentioned earlier. As you all likely know, this is my last earning call for Bristow as CEO, probably very highly likely, my last earnings call ever as a public company -- as CEO of a public company. And when I look back over the past 10 years, I'm very proud of what our management team has been able to achieve. When times are really tough, everybody out there in the field were going out there day in and day out and doing their job and doing it safely. I'm very, very happy about the financial strength we built, the discipline around BVA, and our relentless focus on innovation, the customers have really -- for the customers which set -- has really set us apart in the industry. Every employee has contributed to our success, and I'm sure it will continue under Jonathan's leadership as we have an excellent management team here. And I really need to get out of the way so these younger guys can take it to the next level. Personally, I have a long-term view, and I'm not a seller, and I mean, I'm not a seller. You'll not see me selling shares in the market, except to the extent I need to, to pay my taxes. And finally, let me really focus on those of you that have been there for us throughout this period and before. I want to thank all of you who have been there in the -- to name a few, Caledonia Investments who've really had an investment in Bristow since the early 90s, and actually, the history goes back longer than that. Caledonia Investments is in London, management team is led by Will Wyatt, and we have 2 current shareholders on our board, Stephen King and Matt Masters. Steve Raineri, Franklin Templeton, John Rogers and Anthony Walker at Ariel Investments. Joel Tillinghast and Shadman Riaz at Fidelity have been there with us for a long time. Gerry Heffernan, formerly of Lord, Abbett, and currently John Hardy with Lord, Abbett. And on the sell-side, Jim Crandell with Cowen; Daniel Burke, Johnson Rice, James West with Barclays; Arun Jayaram, Crédit Suisse. Greg Lewis of Credit Suisse, Ryan Fitzgibbon, formerly with Global Hunter; Jess Patel with Clarkson, and last but not least, Dave Wilson and Jon Donnel at Howard Weil. Again, I want to thank all of you for being there. It's been a great and enjoyable time for me at Bristow. A lot of you were around when I was in the drilling business, and I will say that I am not, and I'll say it one more time, I am not going into the drilling business again. I've got plenty to do to keep me busy. I am going to hang around Bristow for a few more years, primarily focused on unifying the industry around the International Offshore Helicopter Association, which is sorely needed in our industry to give the global offshore helicopter flying business a voice at the table. So that's going to be my primary focus over the next couple of years, get that association up and running. So with that, we've accomplished a tremendous amount, and just again, I want to thank all of you, and thank all of the employees of Bristow. With that, operator, I'll turn the call over for questions.

[Operator Instructions] Our first question is from the line of Jon Donnel with Howard Weil.

Bill, first of all, congratulations on your successful tenure here at Bristow, and you'll certainly be missed here from our side, and I appreciate the kind words as well in your opening statements there.

Thanks, Jon. I appreciate it.

Okay. Going to the Europe, the safety regulations and update there, could you talk a little bit about how the operators are factoring into this scenario with the discussions with you guys. And to the extent that may be they are participating on some of the cost side too, certainly, there's not going to be cause for you to retrofit all of the aircraft here. I was wondering maybe how their input is factoring into the decisions on what ultimately gets done, and also how they may be participating, whether it's from helping you out on the capital side or a change in the contract structure going forward.

Okay. Jon, I'm going to let the horse's mouth speak here. We've got Mike Imlach in the room who is formerly -- I guess he's currently still Managing Director of Bristow Helicopter Limited in our European business unit. He's taking over global operations according to Jeremy shortly [ph]. He's been in the middle of the mix on CAP 1145. So I'll let him comment on it.

As you're probably aware, that's quite a number of recommendations, and came out of the Civil Aviation Authority report. The 2 main ones would be working to a specific sea state for each aircraft type that the CAA have mandated. Fortunately, that's not going to affect us in heavy aircraft. We worked to the sea state 6 that's mandated as a standard operating procedure anyway. The one that's probably going to give the most short-term party is the emergency breathing systems for passengers. That was due to come in, in the June 1, and has now been delayed to the September 1. The recommendation there is a Category E commercial in breathing system, which currently is not available in the market, or certified to category. So there's various tests going on with specific equipment in the moment, and we believe that is going to be ready in time for the September 1 deadline. That breathing system will be part of the life jacket that the passengers currently wear, and that will then be rolled up from, we suspect August, September onwards until the end of the year. If the EBS does come in, it removes some of the requirements, for example, additional safe [indiscernible] on the helicopter until a later date. We're working with clients just now, because we've got 3 months breathing window here, it's actually eased it a little bit for us and the clients. We are looking at taking in -- we have some additional aircraft to take up any capacity constraints that may come out of this and also trying to maximize routes and flight patterns, so we can move the maximum amount of passengers in any one day for our clients.

Okay. I guess, along with that I noticed that you've held some additional large aircraft for sale in the Europe business unit. Are those ones that could be brought back to work should you need to have more aircraft if these new considerations cause some supply disruptions or some capacity disruptions?

Yes. Potentially, we could. The ones we would held for sale are the old technology, what we used to call the Bristow Tiger, the ES 332. We have 5 of them held for sale just now and another 2 are continuing to work through July to help us out during this period. We can continue those longer if required. However, our focus is on returning the 225 back to service and by the end of August, beginning of September, we should have a complete fleet with 2 of the new gearbox shafts fitted by that date. So we feel pretty comfortable where we are with the aircraft at the moment.

Okay, great. And then...

I'll add one of the reasons for the 3-month reprieve was the summer months are very strong flying months, because that's when a lot of the maintenance is done on platforms offshore and the North Sea. So the argument was that they may be increasing the risk by limiting the number of passengers per aircraft. We actually did a risk analysis, risk assessment with the other operators in Aberdeen, and feel that we could have handled the increased number of flights. However, as Mike said, we're able to move passengers around. There will be more flying this summer though, in any event, which is what happens in every year. But fortunately, the restrictions will -- are being held off until September when we get through those summer months to get that flying done. We do have additional aircraft if we need to bring them in to meet increased demand if we have to after September.

Okay, great. And then moving towards the fair market value calculation that you guys put in on Slide 20, and the backup on Slide 36, I think most of the numbers are relatively straightforward, maybe except for the leased imputed debt number. Just so kind of getting to that net asset value for the leased aircraft, can you maybe give us a little more color on some of the inputs that go into that calculation for you guys, so we can better reconcile those numbers as we move forward through our models?

Sure. The lease imputed debt is calculated consistently with how we've talked to you guys for the last 2 or 3 years. We take the lease rental streams and then do a net present value at a 6% discount rate. So that rental stream, which is a corporate commitment. If you remember, our leases don't have financial covenants in them. We keep it that way, because we make the actual rental streams themselves a corporate commitment. Because of that, we'd like to use 6% because then we use the same thing calculations for our rating agencies, for our shareholders, for our internal BVA calculation. So for us, we stay consistent in how we approach this, and it's actually probably academically, probably more conservative than weighted average cost of capital. But that's how we come up with the -- with those numbers as of the dates that we talk about. We also use the non-aircraft lease rentals, which are not insignificant, to come up with that.

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

Mainly want to focus on cash flow expectations for '15, given kind of some the back and forth between 2013 and '14. How do we think about some of maybe the, not one-time, but just special items that will impact both operating and free cash flow this fiscal year as we try to figure out our models?

Sure. I mean, I think that '15 again will be a very -- first of all, as you know, we don't give guidance for operating cash flow, but you can probably deconstruct it a bit and get there because of the EBITDAR numbers, and again, because we're kind of coming to the end of our lease origination. I think that's one of the areas where we try to do a good job, we'll do an even better job of getting the street comfortable with the amount of annual pretax lease payments. But in the end, '15 is probably going to look a lot like '14 from the standpoint of cash flow, operating cash flow generation. We're not going to be able to sustain very high increases in operating cash flow generation, mostly because of a lot of what I would call the investing impacts of UK SAR, which gets put into operating cash flow. That being said, we continue to see very positive BVA. Our expectation is that we will improve the BVA from this year to next year, we don't give BVA guidance, but you could assume that we are pretty incented as a management team to only really looking at earning above that capital charge, which still remains at 10.5% globally even though we know that our cost of capital is probably well below that. So for us, use a marker of '14 for operating cash flow, and maybe it's not going to be quite that high, just given again significant amounts of cost in anticipation of the UK SAR aircraft coming online, and then -- but I will tell you in '16, that's really when things get very interesting, because we're starting to -- we'll start to get returns on all this investment on UK SAR as the contract goes on online.

Got it. And maybe just a segue from that, you mentioned kind of reaching that threshold for 1/3 of the aircraft leased. Is there a reason you don't want to go above that? Is there a financial reason or an operational flexibility reason that 1/3 of the aircraft is the right number, and that's not 40% or 45%?

Yes. I -- the best way I can answer that is, we're not 10%, 15% smart on this, but I will tell you it is not because -- it is also, I will tell you not because of any operating flexibility. Our lease partners like Milestone and others really provide us a tremendous amount of flexibility on our leased aircraft versus our owned aircraft. The reason why we don't do it is because $150 million even in a large company like ourselves, is a very high fixed cost. And as you know, that fixed cost has to get paid no matter what's happening in the marketplace. And so for us to sleep at night, to stay consistent with our prudent balance sheet management philosophy, we look at lots of downside scenarios in which certain really bad things can happen to this marketplace. And so with those downsides, we want to be able to not just thrive, and we want to really succeed and have extra cash flow frankly available for opportunities. Because in those downturns, that's where companies like ourselves can really -- can also not just survive but thrive. But that's -- it's a combination of prudent balance sheet management and having cash flow available so that we can use it strategically in times of maybe distress in the industry.

Okay. And then final one for me, as you think about bringing the EC225s back online, was there any residual costs that you guys had in the fourth quarter, anything that we should expect in the first quarter just that might skew the quarter-on-quarter or year-on-year comparisons in the European business unit or elsewhere I guess?

Let me take the financial, I think your question has a financial feel to it, and then I'm going to let Jeremy talk about maybe some of the operational. From a financial standpoint, this is really important, these costs are not considered special items or the cost recovery from our OEMs, and I have to emphasize, it wasn't just one OEM. The cost recovery of our OEM partners was really something that we've been thinking about for the last 1.5 years. These are credits associated with maintenance costs that we had to undertake above and beyond normal operating costs, and one of the reasons why you saw our third quarter actually lower in margin in certain markets like Australia and Europe. We knew that we were going to be able to get these OEM credits back because they're great partners. That has happened. We are not necessarily, depending on future OEM credits for us, for our account in the '15 guidance. But I will say that we do have some left over, but it is really going to be dependent on the operations of -- with those OEMs. I'll hand it over to Jeremy.

Brandon, not much more to add from what Jonathan said, only to the extent from a maintenance perspective, we don't expect anything material on a quarter-to-quarter that would skew the numbers. [indiscernible].

And our next question is from the line of Jeff Spittel with Clarkson Capital Markets.

Bill, I'd just like to echo what my friend Jon said. Wish you nothing but the best in the future and certainly appreciate all your support over the years.

Thank you very much for that.

If we could talk a little bit about the dead horse from the last quarterly conference call, maybe preemptively in terms of LACE rates and pricing, is it still fair to say that the increase that we're envisioning over the next year or so is primarily a function of the contract rollovers from longer duration work, and then the beneficial mix shift as you introduce the new technology, rather than in this environment where E&Ps are maybe a little margin constrained, being able to purely push pricing on new aircraft.

Yes, I mean, I'll let Bill answer, because I think some of the questions deal with the historical perspective of this industry. But the best way I can answer it is yes.

I agree with all of the above.

Everything you said.

What you see is when we replace -- give you a mathematical example, we replace a 332 with an S-92 or 225, you're going from $4.5 million, $5 million in value to $25 million to $33 million in value. So that's why the LACE rates continue to go up as we replace aircraft. The other thing going on when we retire the small aircraft, and as you recall 4 small aircraft equal 1 LACE aircraft. Those 4 aircrafts in total are not making near the LACE rate of the aircraft that replace them in the medium and heavy category. So you see a lot of that going on. Also as you suggested, we have the dynamic of coming off older contracts with old legacy aircraft, but even some older contracts with new aircraft, they are rolling over and getting the rates that have been around for the last year or so. That's what's happening rather than actually pushing the ultimate marginal rate in the market. We're not -- we don't see that. We're really trying to focus more on finding ways to make our customer's businesses more efficient. For example, we tell our customer in Trinidad that if we can make a good transition to all AW139s as opposed to the old 412, we will be able to reduce the number of aircraft from -- by 1 or 2 or 3 possibly. And they -- that's the kind of -- that's what they really want to hear. We're focused on reducing their total cost of operation and even reducing our capital. We can move that capital elsewhere, we have to work elsewhere. So that's what we're really trying to focus on now is looking for ways to produce the total cost to our customers, because we know the pressure that they're under with flat commodity prices and increasing costs, increasing rates on rigs, of course, unfortunately the rates on the rigs and then some of the other equivalent focus on exploration are going down. But even though we make up a small portion of their costs, it's our job to find ways to make them more efficient. So that's what we're really focusing on today.

Appreciate it, that's helpful. And then maybe if we could touch on Brazil a little bit. It seems like Petrobras is trying to focus a little bit more on enhancing the existing production at the fields that are already online and maybe doing some more workover sort of activity, which would suggest to me that, that would be beneficial for your business rather than them focusing more on exploration. Is that a fair characterization? And is that what you're seeing down there today?

Jeff, this is Jeremy. Actually, we're seeing a bit of a mixed bag. We still anticipate Petrobras to continue to -- in a way re-fleet and move to heavier aircraft. And that -- part of that is tied to some of their development work. They are -- they have been probably going a little slower than we thought they would, but we still believe that in the next 12 months, we'll see some significant uptick from an end [ph] perspective from Petrobras.

[Operator Instructions] Our next question is from the line of Pike Howard with Johnson Rice.

Most of my questions have been answered. I just was curious, I thought I heard you guys break out the Eastern Airways contribution this quarter. I didn't see it in the slide deck. I was just curious if you could run through that one more time.

Yes. So we did break it out and I think it's on the European slide. Take a look at that and in our specifics, which you'll see on the transcript, but it is in fourth quarter, we had $21.2 million in operating revenue and $4.2 million in adjusted EBITDAR contributed by Eastern Airways. This is important because it does contribute a little bit of EPS. And I think you're getting at a point, which has a broader implication, which is we have committed to the market as of last year a 10% to 15% EPS growth rate. And that was somewhat independent, at the time, of any M&A and this is M&A. So if you really look at some of the small EPS contribution, it really wasn't that much EPS contribution of that this quarter. You can see that we would have been a little bit lower from the $4.45 without Eastern. I think that's important when you then compare our guidance of $4.70 to $5.20, that we're well within that 10% to 15% or even beyond -- above that 10% to 15% when you take Eastern into account. Now Eastern is taken somewhat into account for next year, given that we will have the full benefit of Eastern. But we know that there are still also costs of integration and other things like that, which we don't necessarily take as special items. So for us, we did Eastern really not because of the financial benefit, because of the strategic benefit that we think it'll bring our clients and customers in logistics solution that is already starting to bear fruit in Europe.

Right. No, and you hit the nail on the head. That's kind of where I was going. I was just trying to get a better feel for how to think about Eastern going forward so, appreciate it.

I think the important thing on Eastern too, is it's not included in our LACE rates. Right, it's a fixed wing, it has different economics. We're not going to break it out all that much, we decided to do it here, but it's really being run as an integrated solution and hopefully, what ends up happening is we get better LACE rates out of our helicopters, because we are combining a logistics solution with our clients.

. And I'm showing no further questions. I'll turn the call back to Bill Chiles for closing comments.

Okay. Thank you, George. I appreciate it, and thanks to all of you for joining the call this morning, and again, thank you for your continued support year in and year out and look forward to great things from the management team going forward after I'm out on July 31. So personally thank you for all your support of me over the years. And hopefully, we'll run across each other down the road. Thank you very much.

Ladies and gentlemen, this concludes our conference. Thank you for your participation. You may now disconnect.