Bristow Group Inc. (VTOL) Q2 2015 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Bristow Group's Second Quarter 2015 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, November 7, 2014. I would now like to turn the conference over to Linda McNeill, Director of Investor Relations. Please go ahead, ma'am.

Thank you, Yolanda, and good morning, everyone. Welcome to Bristow Group's Second Quarter Fiscal '15 Earnings Call. I'm Linda McNeill, Director of Investor Relations. And with me on the call are Jonathan Baliff, President and Chief Executive Officer; Jeremy Akel, Senior Vice President and Chief Operating Officer; John Briscoe, Senior Vice President and Chief Financial Officer; and Brian Allman, Vice President and Chief Accounting Officer. The format has changed slightly as the operational highlights will now be discussed by Jeremy. 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 www.bristowgroup.com. Let me remind everyone that during the call, Bristow Group management may make forward-looking statements that reflect our beliefs, expectations, 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 discussed 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 reconciliations. With that, I'd like to turn the call over to Jonathan. Jonathan?

Thank you, Linda, and good morning, everyone, and welcome to our September 30 quarter and earnings call for fiscal 2015. Please turn to Slide 5 in the deck that we posted this morning. And I will begin by starting as we always do at Bristow with a few comments on the critical topic of safety. Bristow's commitment to Target Zero safety continues to be at the core of everything our leaders and employees do. We are proud to recognize that in the first half of fiscal year '15, our global commercial operations team recorded no air accidents and a single medical treatment injury resulting in a world-class recordable injury rate of 0.11. This amounts to an 80% reduction in our TRIR from last year as shown on the chart above. At Bristow, we are committed to improving industry-wide safety and not just our own company safety and are proud to join 4 other leading operators in the creation a HeliOffshore, which was launched on October 21, 2014. HeliOffshore is an institution that will use cross-industry collaborations as a platform for enhancing the offshore helicopter industry's overall strong safety record by sharing best practices, developing and applying advanced technology, and with our clients, encouraging common global flight safety standards. Gretchen Haskins, a highly respected aviation and safety executive, is HeliOffshore's Chief Executive Officer. Bill Childs, our CEO emeritus, is the first Chairman of the HeliOffshore Board of Directors. An area that demonstrates recent success in industry collaboration is the September 1 adoption of a new emergency air breathing equipment and procedures stated in the U.K. CAA CAP 1145, with minimal effect to our operations. Finally, talking about Bristow, we don't just think of safety in terms of our specific businesses. I'm proud to report that our global operations team and WASBU employees performed successfully above and beyond the call of duty in their response to the Ebola crisis in West Africa. The Ebola pandemic posed a significant health threat to the population in the region during our second quarter. However, due to innovative and courageous leadership and prompt action, we successfully managed through the crisis with robust procedures and contingency planning to protect both our clients and employees in the impacted areas. We continue to monitor conditions as Nigeria has been declared Ebola-free. Please turn to Slide 6. The second quarter of fiscal 2015 was characterized by continued excellent revenue growth and BVA in the face of volatility that impacted our quarterly EPS. Operating revenue was $440.5 million, which was a 16.3% increase from the second quarter of fiscal year '14 while adjusted EBITDAR during this period was $112.1 million, a 3.3% increase year-over-year. The increase in revenue and adjusted EBITDAR was driven by new contracts with better terms and higher activity levels in our Europe, Australia and West African Business Unit as well as a favorable shift in the mix to larger aircraft in our North American business unit. Before we talk about earnings per share or EPS, I want to make one thing clear. Adjusted EPS matters. At Bristow, we managed annualized BVA and cash flow. But we do not overlook EPS. And our second quarter fiscal 2015 GAAP EPS at $0.73 per share and our adjusted EPS of $0.87 per share came in below our internal expectations. Even though revenue growth and BVA for the quarter were actually above our internal expectation. I will let John Briscoe explain more of this in his section. But GAAP and adjusted EPS were primarily impacted by unfavorable changes in FX rates, and this is primarily in Brazil. In spite of those GAAP earnings and adjusted earnings, we generated $26.1 million in absolute BVA in quarter 2 fiscal year '15. And this was a $3.7 million increase over quarter 2 fiscal year 2014, above our internal expectations and primarily due to the previously mentioned operating revenue and EBITDAR growth combined with excellent capital management. Our cash flow, which follows BVA, remain strong, with our liquidity at $613 million at September 30, 2014. Because of this year-to-date strong cash flow performance and the outperformance in our first quarter and the perspective that our second half of fiscal year 2015 will be better than our first half, we are reaffirming our full fiscal year 2015 adjusted EPS guidance range of $4.70 to $5.20, which excludes gains or losses on aircraft dispositions and special items. Finally, the management and Board of Directors continue to show commitment to a balanced return with our November 6, 2014 approval of a quarterly dividend of $0.32 per share. Also, through November 6, we have repurchased the full $133.4 million of shares authorized previously as our stock traded at price levels management believed were very attractive. And on November 6, our Board of Directors has both renewed and increased our repurchase authority to a record $150 million for the next year. Please turn to Slide 7. Due to the recent decline in commodity prices and traditionally on this slide, we want to provide Bristow's perspective on the offshore services outlook and specifically, impacts on our market. Look, we are not experts at predicting oil price movements. And the good news is, we do not need to be experts. Our production-oriented, infrastructure-like business model works well even in the face of extreme commodity price volatility. We always tell new investors and stakeholders, we do not have leverage to an increasing or improving commodity environment. But we also do not suffer the downside of such. We and our peers are in investment on the secular demand for our clients to operate safely and efficiently offshore. Now if you push us, we would say recent oil prices and those declines are mostly supply-oriented. And we believe short term in nature. And many of our clients are insulated in the short term by having much of their upstream production hedged at prices 15% to 30% higher than today's WTI and Brent. Further, our prospective is that increasing finding, lifting and other production costs will ultimately lead to a medium and long-term sustainably higher price of oil. Even given that, our clients were already proactively dealing with cost of capital -- I'm sorry, cost and capital restrictions well before these recent commodity price moves. Although the long-term outlook for their business remains very positive, competing capital needs were pushing to the right a number of big capital projects in the 1 to 3-year horizon. We and our peers have talked about this before, with the impact on us manifesting itself in a decrease in the rates of growth on leading-edge pricing for our services. But we continue to see strong demand for our production-oriented helicopter services, evidenced by the fact that the value of future helicopter opportunities we have identified has remained consistent over the past 3 to 6 months, similar to what we last presented. Additionally, demand for Bristow helicopters continues to exceed supply and utilization actually has increased, with LACE rates increasing year-over-year. As reported before, we continue to receive certain rescue increase and continue working to bring these opportunities to successful contract award in the near future. With that, I turn it over to Jeremy to take us through the specifics of the geographic operations. Jeremy?

Thanks, Jonathan, and good morning, to everyone on the call. It's a pleasure to personally report to you our operational performance and outlook. Before I go into the operations discussion, I'm pleased to announce that we have recently added Mike Sim [ph] to our global leadership team to serve as vice president of business development. Mike has a successful 35-year track record as a leader in the oil and gas industry. His commercial leadership at Bristow will further extend our ability to serve and exceed our clients' expectations around the world. We look forward to Mike's contribution to our growth at Bristow. With that, let's get started with Slide 9 in Europe. Europe continued with strong performance in the second quarter of FY '15, resulting from high demand for our services. We added 8 LACE and increased our operating revenues 32% year-over-year. We continue to meet the demand for premium services in this market as we prepared to serve our customers in Norway and in the Falklands with new contracts. We were also able to swiftly respond to the changing standards of CAP 1145 by replacing older with newer technology aircraft in the southern North Sea. Eastern Airways met our performance expectations by contributing $39.5 million in operating revenue and $9.6 million in adjusted EBITDAR in the second quarter of fiscal year 2015. Furthermore, they were recently named European Airline of the Year by the Regional Airline Association for their profitability, innovative business model and responsiveness to their customers. We anticipate solid financial performance in Europe and expect adjusted EBITDAR margin to be in the low 30s for the full fiscal year of 2015, which is slightly lower than the fiscal year '14 margin due to the inclusion of Eastern Airways. But overall, the North Sea remains a robust market for Bristow. Please turn to Slide 10, and we'll discuss Search and Rescue. Through the outstanding efforts of our start-up team, U.K. SAR implementation continues on schedule and on budget. Remember, U.K. SAR is anticipated to gradually ramp up to an incremental $1 of EPS by fiscal year 2018. As of today, management believes we're on track to achieve this value creation. We're actively pursuing short and long-term opportunities around the world. These opportunities range from responding to specific request for proposals to active dialogue with interest parties in our SAR capabilities. We're optimistic that we can extend our SAR footprints to other markets over the next 5 years. Some of these specific request for proposals include a 10-year Falkland Islands requirement for 3 LACE and a 5-year U.K. oil and gas requirement for 2 LACE, which were both expected to be awarded in the middle of calendar 2015. Please turn to Slide 11, and we'll continue with West Africa. In Nigeria, increased demand for our services drove operating revenue up 5.5% year-over-year. These revenue improvements, combined with efficiency gains, led to a 7.8% increase in adjusted EBITDAR year-over-year. We also saw a marked increase in EBITDAR margin in sequential quarters from a 25.6% in the first quarter of fiscal year 2015 to 31.1% in the second quarter of fiscal year 2015. The increased demand for our services also resulted in contract renewals with key clients for 2 LACE aircraft. We are excited to be introducing new technology aircraft in addition to a new fixed wing service in Nigeria in the fourth quarter of fiscal year 2015. These 2 initiatives demonstrate our global fleet management and capital strength to mobilize assets to serve our clients with innovative solutions in this market. We expect fiscal year 2015 adjusted EBITDAR margins to be in the low 30s and continue to have a positive outlook for this market. Please turn to Slide 12 as we moved to North America. Our North America Business Unit continues with its game-changing transformation to become the premier helicopter service provider in the region. We are constructing a state-of-the-art facility and adding new technology aircraft to meet the needs of our deepwater clients. Even though adjusted EBITDAR declined slightly to $18.1 million in this quarter, EBITDAR margin actually increased to 32.4% from 31% in the second quarter of fiscal year 2014. This is reflective of our ongoing transformation efforts, driven by a change in our fleet mix. Additionally, we are moving 2 more LACE into the Gulf and 1 LACE to Canada in the second half of fiscal year 2015 to start up new contracts. 2 of these LACE are coming from Brazil, and the other is an order that is not reflected in our option in order book. Finally, I'm very pleased to announce that our affiliate, Cougar, has renewed its long-standing contracts in St. John's commencing fiscal year 2016. The contract contains additional scope and up to 9 LACE at an overall value worth $1.1 billion, including options. Management continues to believe there's additional upside for us in the Gulf of Mexico and Atlantic Canada. We anticipate fiscal year 2015 adjusted EBITDAR margins to be in the low-to-mid 30s. Please turn to Slide 13 to review our Australia Business Unit. In Australia, LACE increased year-over-year from 19 to 22 in the second quarter of fiscal year 2015 and LACE rate increased year-over-year to $8.7 million per LACE from $7.7 million per LACE. This is mostly due to the ramp up of the impacts contract. Additionally, INPEX exercises option for a SAR LACE that commenced revenue service this past October. This, in addition to the LACE commencing this month, will bring the total LACE servicing this contract to 7 from the previously anticipated 6. We are also enjoying incremental demand through a recently awarded contract for one more LACE commencing in the first quarter of fiscal year 2016. All of our EC225s have been fitted with a new shaft and are now back in service in this market. This is accelerating the retirement of our AS332s as we continue to modernize the fleet. Our startup efforts are on schedule and on budget for the previously announced contract for 3 LACE in the Great Australian Bight. We are enthusiastic about this project. We expect to see more activity in this region in the years to come. Finally, we anticipate fiscal year 2015 adjusted EBITDAR margins to be in the low 30s -- excuse me, low 20s. Please turn to Slide 14 as we turn to the Other International business unit. Our new contract in Tanzania, combined with increased activity in Trinidad, improved our LACE rate by 31% year-over-year, while LACE decreased from 28 to 23 over the same period. Adjusted EBITDAR reduced to $6.6 million in the second quarter of fiscal year 2015, compared to $12.6 million in the second quarter of fiscal year 2014, primarily due to a decrease in earnings from Lider driven by adverse movements in the reais-dollar exchange rate. The underlying business though in Lider remains strong, which I will elaborate on the next slide. We continue to have line of sight of the opportunities, not only Brazil but also in the Caribbean, Africa and in the Black Sea, all of these projects are key to our strategic clients. For the full fiscal year 2015, we are revising OIBU's expected adjusted EBITDAR margin from a low-40s to the mid-30s due to volatility of the Brazilian reais exchange rates. Please turn to Slide 15 and have a closer look at the Brazilian affiliate, Lider. But before I go into the details, let me remind you that the following information for Lider is on a calendar year basis. These results reflected earnings from unconsolidated affiliates line in our Other International business unit P&L. As of September 30, 2014, Lider's LACE rate increased 5.5% year-over-year to $7.7 million. However, Lider's EBITDAR increased to this due to this favorable movement due to the reais exchange rate but not in Lider's cash flow, which remains strong. Lider's cash on hand was $67 million as of September 30, compared to $65 million on June 30 of 2014. Lider actually recently renewed 1 LACE for 2 years and is responding to tenders for 33 aircraft with contract start dates ranging from mid-calendar 2015 to mid-calendar 2016. These opportunities demonstrate the continued momentum of the Brazilian market and Lider's upside potential in the medium term. Before I turn it over to John, I would like to leave you with 3 key takeaways. One, we are tooling up for $4.3 billion worth of contract start-ups, and we're still positive about the long-term outlook of our sector. Two, we are meeting client needs with innovative fleet and facility solutions that validate our strategy of being the premier aviation services provider in our market. And finally and most importantly, the recent oil price environment has not materially impacted our helicopter business nor is it connected with our underlying financial results this quarter. With that, I will turn the call over to John for a review of the financial results.

Thank you, Jeremy. Please turn to Slide 17. Before I review the results, I want to lay out 3 key messages for the next several slides. First, while the first quarter is below Street estimates, we remain on track to meet our fiscal 2015 financial objectives and our guidance. Second, our liquidity remains strong and cash flow returns continue to grow and third, we continue to execute on our capital deployment objectives. Our adjusted EPS of $0.87 for our current second quarter compares to $1.27 for the prior year's second quarter and $1.32 for last quarter. The decrease from the prior-year second quarter is primarily the result of a non-cash FX impact from our investment in Lider, accelerated maintenance cost and higher information technology cost associated with our ERP implementation that went live in October 2014. Our adjusted effective tax rate increased to 19.5% as compared to the prior year adjusted ETR of 12.4% due to an exceptionally low ETR in the prior year quarter. We manage our business on a long-term basis and provide guidance on an annual basis. But we understand the nature of public company reporting, so I will reconcile the quarterly results to our expectations. Our adjusted EPS was $0.87. And we had a $0.23 impact from the non-cash FX, primarily from our investment in Lider. We also had higher maintenance cost in the second quarter, primarily for work planned for the third quarter, higher IT cost and the net impact of taxes. This gets you to about $1.24 per share. Our revenues, while excellent, were still below our expectation, primarily due to delays in the introduction of a new aircraft type. Our adjusted EBITDAR was $112.1 million for the current year second quarter, an improvement of over 3% from adjusted EBITDAR of $108.5 million in the prior year second quarter. This Q2 EBITDAR improvement was due to strong performance in Europe with the addition of Eastern Airways, the start of several contracts in Australia, improved contract terms in West Africa and a favorable shift in the mix of large aircraft in the U.S. Gulf of Mexico. We also recouped cost during the second quarter from an OEM for amounts that negatively impacted our results in Europe and Australia in prior years and continue to impact the current year. These improvements were significantly offset by the negative impact from foreign exchange rates, accelerated maintenance and higher IT expenses previously discussed and the expiration of a contract in Malaysia. We expect additional OEM credits to have a positive impact on our results in the same regions during the third quarter although at reduced levels. We see OEM credits as part of our ongoing operations, and we periodically receive credits for various operational issues. Please turn to Slide 18. This was an excellent quarter for revenue despite the fleet delays and was above our expectations. Our LACE or Large Aircraft Equivalent count and LACE rates continue their upward trend. In Q2 fiscal 2015, our overall LACE rate improved 4% year-over-year to $9.43 million per LACE, primarily due to new technology aircraft additions that produced higher LACE rates, improved contract terms and improved utilization. During Q2 fiscal 2015, we took delivery of 2 large aircraft for the U.K. SAR contract. These aircraft, plus additional deliveries for the UK SAR contract, will negatively impact the European Business Unit LACE rate until they begin generating revenue in early fiscal 2016. However, the consistent delivery of high LACE rates is testament to the high utilization and client service of our European unit employees and what they deliver. Now go to Slide 19. EBITDAR margins, as shown on Slide 38 in the appendix, continue to be strong and our adjusted EBITDAR for the first half of this fiscal year increased 14% to $239.7 million, compared to $211.8 million for the first half of last year. The year-to-date increases include the items impacting the current quarter plus the reversal of $4.4 million in bad debt expense in the first quarter of 2015 from our North America Business Unit. I want to highlight our Other International business unit EBITDAR margins would be 42.8% in the current second quarter if the FX losses are excluded, compared to 41.6% in Q1. Our adjusted EPS for the first half of fiscal 2015 was $2.19, compared to $2.28 for the same period last year and was similarly impacted by the items impacting the second quarter variances. It's important to note that even with the second quarter variances, the first half fiscal 2015 performance was very close to our original expectations due to the exceptional performance in the first quarter. Turning to Slide 20. Our gross cash flow returns remained above 13% for the second consecutive quarter, increasing to 13.1%. This continues our upward trend as improving cash returns from our gross invested capital. Our cash returns continue to improve even though we added aircraft for UK SAR without any incremental cash flow. We believe our gross cash flow returns will continue to grow as we begin to monetize the UK SAR investments in the June 2015 quarter and achieve compounding returns on our investments in our oil and gas services. At Bristow Value Added or BVA, measures are cash returns above our capital charge of 10.5%. BVA for the second quarter was a positive $26.1 million, which is $3.7 million higher than the second quarter last year and sequentially improved by $1.6 million. This year-over-year improvement was primarily driven by EBITDAR and revenue growth, partially offset by the addition of new aircraft and other capital expenditures. Most of the improvement in BVA and similarly, gross cash flow returns, was from our European business unit as it generated $6.8 million improvement over Q2 fiscal 2014. This was partially offset by small declines in other business units. Please turn to Slide 21. Operating cash flow for the first half of this fiscal year was $101 million and is 23% lower than fiscal 2014 but is above our internal expectations. The decrease in net cash flows from operating activities was primarily due to U.K. SAR pre-operating cost, which were capitalized and accelerated payments to vendors in September in advance of our ERP startup. We also improved our already excellent day sales outstanding from 52 days at June 30 to 46 days at September 30. For the second quarter, total capital expenditures were $101.7 million, with $65.4 million spent on aircraft. Our total liquidity increased to $613 million, primarily due to $380.7 million we received from the sale-leaseback of 14 of our large aircraft. We maintain significant levels of liquidity to provide flexibility to reinvest in our business, pursue accretive growth opportunities and return cash to shareholders. We are committed to provide balanced returns to our shareholders, and we paid dividends in our common stock of $11.3 million, repurchased shares totaling $33.3 million in the second quarter and through November 6 and fully completed our $133.4 million share repurchase authorization. Yesterday, our board authorized a new $150 million share repurchase plan effective until November 2015. Also, during the second quarter and through November 6, we repurchased $37.2 million of our 6.25% senior notes. We believe our share price does not fully reflect the compounding value of investments in our business, the expected growth of our annual EPS and the growth of our dividend. We have also brought back a slide that highlights the fair market value and the book value of our shares as compared to our share price, and it is on Page 35 of the appendix and we believe this further supports repurchasing shares at low prices. Now turn to Slide 22. We expect to achieve increasing cash flow returns, strong adjusted EBITDAR and EPS results for the remainder of the year. We are reaffirming our adjusted EPS guidance for fiscal 2015 of $4.70 to $5.20, which excludes the impact of aircraft sales and special items. We currently expect to see a stronger second half of the year from adjusted EBITDAR, adjusted EPS and BVA perspective, similar to the second half of the prior year. We have updated our guidance ranges on other financial metrics and have highlighted in blue each guidance item that has changed. We also reiterate our anticipated adjusted EPS growth of 10% to 15% per year and our 20% to 30% dividend payout policy based on forward adjusted EPS. Now I'll turn it back to Jonathan for final comments.

Thank you, John. Please turn to our conclusion on Slide 23. Safety continues to be our #1 core value as we strive to achieve Target Zero. I am proud of our membership with my peer CEOs in HeliOffshore, and Bristow is excited for the new future in offshore safety that is characterized by industry-wide safety through collaboration. We also wish Gretchen our best as HeliOffshore's chief executive and look forward to an excellent and productive working relationship in the coming years. We remain focused on our clients' issues and look to create innovative solutions, such as fixed and rotary-winged logistics solutions, oil and gas and civilian Search and Rescue and helping to manage our clients' capital and cost commitment through optimal aircraft fleet selection. Our differentiated value proposition, strong -- exceptionally strong balance sheet and passionate team continue to drive demand for our services and meet or exceed our client expectations. We manage our business on a multiyear basis. Fiscal year 2015 was always going to be characterized by record high investment levels for Bristow, with the cash flow and earnings mostly coming in fiscal year 2016 and beyond, creating a growth wedge that matches our growing capabilities. We have $4.3 billion of contracts currently in the implementation phase, including UK SAR, the 9 LACE contract in Canada and the recently won Falklands oil and gas contract for 3 LACE. Even with this significant fiscal year 2015 investment and this is required to serve new and existing clients, we continue to grow EPS in fiscal year 2015, and we'll give you more information about that fiscal 2016 growth wedge in the coming months. Our results in the first half of fiscal year 2015 were slightly below our internal expectations on an EPS basis. However, we remain positive about the remainder of the fiscal year. We are reaffirming fiscal year 2015 adjusted EPS guidance range at $4.70 to $5.20. But we also reaffirm our proven commitment to prudent balance sheet management as witnessed by our new record liquidity and debt paydowns during this quarter. And finally, we reaffirm our commitment with our board to a balanced return with a growing dividend currently $0.32 this quarter, at a record authorization for further $150 million in share buybacks in the coming year. And with that, operator, I would like to turn the call over to you for questions.

[Operator Instructions] Our first question will come from Greg Lewis with Crédit Suisse.

I was -- can we dig a little bit more into Europe? I'm just trying to get a sense of how that market is progressing. It looks like the LACE kind of moved down in that region. Was that a timing issue? Or am I just kind of -- any color you can provide on that, that will be pretty helpful.

I can give you some color and then I'll let Jeremy or Jonathan make comments as well. One of the key things driving our LACE rate there is that we began taking delivery of UK SAR aircraft during September. So these aircraft go into our LACE count, but they're not generating any revenue and will not begin generating any revenue until about April of next year. And I just want to make sure you're aware, we're also going to take deliveries of additional aircraft for UK SAR during the remainder of the year over the next 2 quarters. And so that will continue to have an impact on the UK SAR LACE rates but in no way impacts our views, very strong views for the future of that region.

Okay, so we just really need to think about that as sort of being a lag where it's going to be a little bit soft for a couple of quarters as LACE builds out and then we'll see, I guess we'll see sort of a spike. Is that the right way to kind of envision that happening?

Yes. I would even put it that you would expect to see a little bit of a supercharging in fiscal 2016 as these aircraft that were currently taking delivery for UK SAR, using for training purposes. Then start rolling on. We actually add a significant number of these aircraft. In fact, it's the majority of the total UK SAR aircraft commenced cash flow operations during fiscal 2017 -- 2016, sorry.

And then in the prepared remarks, obviously you guys mentioned that there was an incremental aircraft that moved into the GOM and you mentioned it was an option and wasn't on the order book. So if you could just provide some insights into where that unit came from?

Sorry, Greg. This is Jeremy. The aircraft itself is a leased aircraft. We were able to pick that up on the market on the lease market, and it was to basically serve a contract requirement that we met. An opportunity came up. We bid on it. Obviously, we won, and we secured the aircraft on a short time basis there.

Let me add a little bit to that Greg. Because I think there's an underlying question. It's a question that we want to make sure is out there, which is, we see the Gulf of Mexico is really picking up some steam even in the face of some of these macro issues that our clients are facing. And so that contract, which came up fairly short term, because of our capital strength and the ability to have good partnerships with our lessors, we were able to secure that aircraft even though it wasn't in our order option book. And that -- I think that's an example of having a balance sheet that we can quickly use to create some flexibility and the good partnerships that we have with lessors like Milestone.

And I guess really also what I was wondering was, are there other opportunities for you to find these helicopters from other -- from, I guess, the lessors that are willing to -- that you can opportunistically take advantage of lessors to put out additional helicopters to work, or is that sort of a one-off type opportunity, do you think?

No. I think that we would say that's representative of things that we are seeing in this marketplace. Given the capital constraints and some of the cost constraints of our clients, we're finding that some of the demand, although it's shifting a bit, we're seeing a lot more shorter term but quick to market, asked by our clients and the key is for us to deliver that in a financially prudent way. What I will say is, if you notice, we are starting to get up to our 30% to 35% LACE lease percentage and we obviously look at other financial metrics. What I will say is, we see demand but we're not going to satisfy that demand by also then diluting our excellent credit strength. So we have to just be careful about what were saying -- we do see the demand, but I want to put a limit around that we won't do it at the expense of our prudent balance sheet management philosophy.

Our next question will come from Jon Donnel with Howard Weil.

I was wondering if you could tell us a little bit more about the sale-leaseback transaction during the quarter. The prepared slides, there were 4 of those that were the SAR aircraft, but I was just wondering if you can give us some more details on maybe which aircraft these were, what kind of contracts they have underlying them and just given the value, kind of on a per helicopter basis, little surprised that there wasn't more potential gains on that sale transaction too. So maybe if you can give us some more details on that, that’ll be helpful. And then also I guess that just flows into you're now kind of at the top end of your 30% to 35% target range for LACE on a lease basis. So if you could just maybe give us some updated thoughts on how that can be unfolding, given the ongoing delivery of the UK SAR aircraft here.

Sure. Let me take a first shot at this and Jonathan can make some comments at the end. But the sale-leaseback was never designed to generate a gain. This is something that we've been working on for some time with our lessor. We've anticipated that these aircraft would be sold and leased back for some time. So the transaction just wasn't structured that way to generate a big gain. So if you are looking for one, it just wasn't in the cards the way that it was structured. But the other leases that we had were really new aircraft that we took delivery of. We took delivery of a number of aircraft during the quarter. And these were for long-term opportunities, opportunities that -- many of which had been awarded. These were mostly not opportunities that came up in the short term primarily, except the one in the Gulf of Mexico. And then your second question around getting close to our 35% guidance that we've given, this is not something that concerns us. This is something that we're managing around through the use of our balance sheet as well as working with our OEMs, working with our lessors. We do see opportunities from time to time and may be able to swap slots with the lessor, accelerate delivery in one area, take a later delivery in another area. But again, this is part of our overall balance sheet management. So the 35% is a target for us. And we don't see that limiting our ability to meet customer needs or customer demands. But we are going to continue to put a premium on maintaining a strong balance sheet and maintaining our strong financial discipline.

Okay, so just to be clear, of the new helicopters the delivery that are now on the leaseback program, did those all have contracts underlying them currently?

Absolutely, yes. Absolutely.

And then, for those particular ones, they're particular longer contracts. If you look at it, again, because the U.K. SAR contract, is much longer than some of the oil and gas contracts, which had a tendency to be located in some of our Commonwealth countries, is longer dated too. So they match up pretty nicely.

Okay, good. And regarding the other international segment, in particular the Brazil tenders and contracts that are still outstanding, can you maybe give us an update on the timing of those compared to the current contract, I think, status for those aircraft. So are we looking at the potential for just some downtime or underutilization as those new contracts get led, and how many of the 33 or I guess, something like that you said, in terms of LACE, are going to be incremental from the existing fleet?

Yes, Jon, this Jeremy. So I'll try to answer -- I heard several questions in there. So I'll try to get them all. And if I don't, please let me know. First of all, to your incremental question. From an absolute market standpoint, there are only 3 incremental aircraft in those 33. However, to us, from a relative market share basis, there's a lot of upside here for our affiliate, Lider, against those 33. So that's why we think there's plenty of upside here for us. The delay in a sense, because of that, the delay doesn't necessarily affect utilization of the aircraft because what Petrobras will do is extend those contracts to a point where, when they turn over through the renewal process, aircraft won't be sitting idle at any point in time if that makes any sense. So that said though, the process for the tender is being postponed and delayed, not so much because of any second thoughts from Petrobras on its commitments to take these aircraft to renew them, but more because of sort of the usual bureaucratic clarification process that exist in the tender process. So that said, it has not pushed out the start-up dates which we, I think, briefed everyone on the last call of mid-calendar 2015 to mid-calendar 2016 start up. I think that answers most the questions you asked, right?

Yes, I think that did, my one question in 7 parts.

Our next question will come from Jim Crandell with Cowen.

Jonathan, if it were sustained, does $75 to $80 oil measurably change the outlook for Bristow going forward and if the answer to that is no, at what price does -- what price do you think in your judgment would measurably change the forward outlook for Bristow?

Sure, Jim. And that's a very good question and it's one, we anticipated and two, one that we've answered in the past. So yes, if it is a sustained at $75, looking at our business and we've been at $75 for even on an inflation-adjusted basis, we do not think it has a material impact on our business especially in the short-term, even in the medium. And maybe even long-term too, just given the nature of some of the clients that we fly for. That still works for their very large offshore finds, because these are very large productive reservoirs that we fly to from on production. We historically have said that we're kind of good down to $50. And that's based on both some analysis that we've done but also anecdotal evidence previously that where we went below $50 for a decent amount of time in the past, where we did start to see some level of production, less production flying. But that's generally what we've said, that's generally what we've seen and that's what we expect.

Jim, I'll add one thing. This is John Briscoe. If you look back to the 2009 downturn period where crude prices did get down into the 40s, as I recall, the company actually continued to increase, grow its revenues during that period, although at a lower rate.

Yes. What I would say is that when that happens, Jim, we talk and have talked about the costs and capital constraints in our current clients before $75 having some impact on the growth rate of leading edge. What I would say is, as we work through contracts at a very low oil price, that probably affects some of the trailing edge too. But historically, it didn't affect -- it didn't create a retraction. It just was again a slowing and kind of plateauing of the growth rate. And there's another...

I am sorry -- Jonathan, you don't really see any of your significant customers slowing down or pushing out exploration projects and if you don't see that, there isn't, in your opinion, much of a risk of you having idle equipment when your equipment is ready to come out? Because some of the projects have been pushed down?

Yes, that's correct. I think it should be noted that Brazil provides a little bit of a push on the overall balloon here. So that having a global fleet is one of the keys, having global fleet management, having capital strength, so you have the ability to move aircraft to capital. So you're not depending so much on -- generally our leases don't restrict us operationally. But we found that it is slightly advantageous to sometimes have operational aircraft that we can move into different regions. As that price would decline down to $50, being a global player really does matter here because we do see the possibility of some aircraft being less utilized, maybe not fully idle for many years, but less utilized. If you have a global, nimble fleet management, combined with a strong balance sheet, you can really maintain that high utilization in LACE rates.

But you're saying that less utilization scenario is something down towards $50, not something you expect to be operative at $70, $75?

That's correct, that's correct. Especially on a global basis, especially on a global basis.

The same thing would apply, Jonathan, towards your review on pricing, is that your -- you've said many times about you're doing renewals at 10% to 30% increases. Lower oil prices really have no effect on that?

That's right. Down to $75 and we feel that, again, as those trailing edge prices get repriced in the market, that's really very production-oriented, very much still based on the cost of these helicopters and the supply and demand. We have seen supply still not quite meet demand. But let me not put a full rose-colored glass on this. If there was sustained low pricing, Jim, I think that supply would probably catch up with demand. But that's not true for many, many years yet.

Our next question will come from Brandon Dobell with William Blair.

Maybe for John Briscoe, if you were to somehow extract the impact of the UK SAR, bringing the aircraft on and the expenses. If you were somehow able to extract that, how would gross cash flow returns look the past couple of quarters? It seems that's how you're seeing the biggest uptick in capital invested without any subsequent revenues or profits from those? I guess I'm just trying to get a figure or feel for how that I should call it, supercharged impact, what we should expect cash flow returns to look like now or the next couple of quarters given the impact of U.K. SAR?

That's actually a great question. It's not something I'm going to answer with a specific number. But I think that it's definitely a topic that we may consider providing some guidance as we go forward on. But what you should consider, as you look at this equation is, one, during the second quarter, we started taking delivery of aircraft. And so that process has started. We will ramp up even more over the next 2 quarters. And so, we're going to have capital that I'm going to say, it's idle. We're actually using this aircraft for training. So it's important part of preparing for the contract as we have anticipated. But we've also invested other costs in constructing the facilities, 2 facilities that are under construction now. We've also had training cost, other salaries that we have incurred related to ramping up for that. So while I'm not going to give you a specific number, I think it's really important to note that as I give you this laundry list of cost that we have incurred, we continue to grow our cash flow. Now one thing I do want to point out is a lot of these cost, training and some of the other cost that have impacted our cash flow, have been deferred, so they have not flowed through our P&L. Now when we get to next year and we start operating under the contract, these cost will start flowing through our P&L or still show significantly improved EPS as a result of beginning the contracts. But the important thing is our cash flow is actually going to be supercharged because we'll have expenses going through the P&L that the cash flow actually has been incurred in this year and in some cases, in the prior year.

Okay, that makes sense. I think [indiscernible].

Let me get to -- there's a follow-on answer to your question, which underlines other things that Jeremy and I talked about, which is FY '15 would be better from a return cash flow EPS, BVA basis had we not been spending $4.3 billion for new and existing clients. And that's worthwhile, right? Because we're going to get that growth later on in FY '16. However, we're still delivering some growth. In fact all of this was expected as part of our FY '15 planning process.

That's helpful. ERA [ph] I think mentioned -- I guess, modest overcapacity or supply demand imbalance in the medium aircraft. Do you guys see that same kind of dynamic going on? Do you think that's a function of either too much production, volume for the aircraft manufacturers or is it a change in demand i.e. medium aircraft continue to seek share to large aircraft at a faster pace than the manufacturers may have expected?

Yes. I really cannot comment on their disclosure. I can't and I won't. I will comment that our Gulf of Mexico business, we're seeing, as you saw in the LACE rates and cash flow, we're seeing better, frankly, than our initial expectations for FY '15. And into our Gulf of Mexico business, with the inclusion of this new LACE helicopter, with utilization of our C++ fleet and introduction of other new aircraft, our expectation was actually to have a little bit better revenue. But we've had some delays on some of that revenue. So we're seeing nice stuff in Gulf of Mexico. And I want to clarify what I have said before. We are spending money this year on projects for our clients that are generating $4.3 billion. We're not spending $4.3 billion this year. I just wanted to clarify that.

Final one from me. Given currency volatility into the puts and takes you guys talked about for this quarter, how should we think about those same items as we think about third and fourth quarter modeling? Particular, the FX impact out of Brazil. Is this third quarter going to be a similar headwind? Is there a bit of a reversal? I just want to make sure we are doing the adjustments or thinking about the adjustments in the right way.

Do you really want us to read that really boring paragraph at the end of our press release which talks about what management does and expects.

No, I don't want to do that.

But to be honest, I will put you there because we've always been very specific in providing guidance. We don't include the significant impacts of foreign exchange generally over a yearly basis and even on an annual basis. The foreign exchange has a tendency to equalize out a bit. And as we've said before, we're naturally hedged on an ongoing cash flow and BVA basis. But what you're asking, I'll let John answer a little bit more detail, we do expect for the guidance we are giving that the foreign exchange would stay roughly where it was on September 30. And that significant decreases or increases could have an impact on our EPS. I can't say that they'd be noncash for cash. We will have to wait until we do it. But historically, they've had noncash impacts because of the way the account for the 42.5% Lider investment.

Right. And of course, the simple answer is that there's no way that we can project what's going to happen to exchange rates in Brazil. There's so many factors that can cause that move one way or the other. But this exposure for us is a noncash exposure. So it's not something that we would try to hedge because then we'd be spending cash to hedge something that is a noncash exposure and tends to balance out over time. When you look at long-term or even medium-term cycle, exchange rates will go up, exchange rates will come down. And it has no cash impact either way.

And just to repeat, we naturally hedge. So because we are not in the business of expertly predicting currency fluctuations, we naturally hedge that cash flow, and Lider who controls their balance sheet and other things, but works with us, they have the same prudent balance sheet philosophy of making sure that the cash flow is naturally hedged. And so we don't want to you think that we don't do anything. We obviously think about this but doing it in a way that's part of a natural hedging through the contracts and expense matching.

Our next question will come from Jeffrey Spittel with Clarkson Capital Markets.

Maybe if we could start out kind of thinking about the full year EPS guidance, with the understanding that the EPS number this quarter was impacted by a bunch of nonoperational items, can you walk us through the swing factors that could maybe help you still get to the high end of that guidance? Obviously, you still think it's achievable for the year.

I can give some initial color and then I'll Jeremy and Jonathan add to that. The things that really impacted the quarter. First, foreign exchange, we don't see that reoccurring. But we also had maintenance cost that were accelerated into this quarter that we originally expected are forecasted to occur in the third quarter. The additional IT cost that came through in September, a chunk of those, and I would say a good chunk of those, we had originally expected for third quarter and fourth quarter. And so those are coming out of the third and fourth quarter and coming into -- came into September, but we do have some additional IT-related costs and other costs that came into the second quarter that were not anticipated, but were the right thing to do to make sure that we stood up our ERP system properly. So we actually see the remainder of the year better than we had initially seen it when we started out the year. Even though the first year has actually come in pretty good when you look at the 2 quarters, we're now seeing the second half of the year a little bit better. But that gets you to our original guidance of $4.70 to $5.20.

I mean, to talk about things that could, I mean, that we impact, right? Because I don't want to talk about exchange rates and other things because if we do get a significant depreciation of the dollar, we do generally, although again it's not perfectly predictable because it's noncash, would see an increase in that foreign exchange and that would have an impact on adjusted EPS. For the things that we control in servicing our clients, I think Jeremy can give you some details, but a lot of it is based on utilization and being able to really optimize utilization for our clients' benefit, that both increases their productivity, it decreases our penalties but also increases some fight-hour work, which we can get a little bit incremental EPS and then also, frankly, expense management. We want to manage and continually look at our G&A which benefits both, really benefits our clients. But also benefits you, our shareholder.

Makes sense, I appreciate that. It's a little bit off the reservation, but the West African Business Unit has continued to perform pretty well even though Nigeria has had this petroleum bill in process in one form or another for a long time. Can you speak about how you would think, if it ultimately does get passed, that might impact your business on a go-forward basis?

Yes, Jeff, I mean, this is Jeremy. I think there's several scenarios around the petroleum investment bill. However, the one we're kind of landing on, I think for the consensus from a strategic standpoint is, that, if and when it passes, it will actually be upside for us because of what it will do is give clarity around the investment regime of our clients and in a sense will lower their risks of investment and development of the Deepwater field, which has been effectively on hold for the past 2 to 3 years as a result of this uncertainty around the [indiscernible]. So we see that generally speaking as upside.

Our next question will come from Daniel Burke with Johnson Rice.

Just to stay on Nigeria for one sec. I thought I heard mention to a fixed wing expansion service there. Nigeria is a big market for you guys. Can you -- if heard that correctly, could you maybe describe a little bit more in greater detail what you're contemplating?

Sure, Daniel, Jeremy here. Nigeria is a big market. And on the fixed wing side, logistically speaking, we have a lot of clients that essentially are -- I'll just kind of simplified here very quickly, land in Lagos have to make it to one of the outreaching basis like Port Harcourt or Eket or some of these other locations. And they have to typically rely on the local infrastructure to get there. After very, very involved conversations with our clients, it became very evident that we could add a lot more value to their -- and security in a sense of the way they transport their employees if we sort of contain them within our own sort of logistics process ourselves. So the thought process here is to do something similar to what we do with Eastern in the North Sea, and that is deliver our clients from when they land at an airport or from when they depart at an airport all the way to the platform. That's the kind of overall model. Specifically speaking, what we're contemplating is placing 2 aircraft into Nigeria in the quarter, in the fourth quarter, to start to service our clients' needs.

Okay, great. That's helpful. And then maybe last one for me. I guess one other question we had, Jonathan, I think you were referring specifically to the Gulf of Mexico. But you talked about seeing a lot more short-term requests from clients. I guess I want to clarify, was that Gulf of Mexico specific and then what does that tell you?

Well first, it is mostly Gulf of Mexico. So -- and some of that is, because the Gulf of Mexico has had a tendency to be a shorter-term market both in term of contracts and just the nature by which our clients have had their needs served. So for us, it's a bit of a natural occurrence to have this call out. What we're seeing is, the callouts used to be for very small aircraft, 407s, even maybe 76s. Now the callouts are coming for 92s. As we've said in the past, we don't like to do a callout for a large aircraft like that on very short contract. However, if we get a longer contract term, if we can get a term that has more of the monthly standing charge, for clients that we both have currently and future and new clients, which this contract actually ends up going forward, we really want to do that for them. Outside of the United States, we see it but not as intensely. But we are seeing that affect a bit too.

And with no further questions in our queue at this time, I'd like to turn the call back over to management for any additional or closing remarks.

On behalf of the leaders and employees of Bristow, we really want to say thank you for the call and also, again, wish HeliOffshore in its launch a fantastic start and look forward to a great collaboration through safety with that organization. Thank you very much.

Ladies and gentlemen, this concludes Bristow Group's second quarter 2015 earnings conference call. If you'd like to listen to a replay of today's conference, please dial the toll number (647) 436-0148 in Canada and either (719) 457-0820 or (888) 203-1112 in the United States. Reference confirmation code 9780350. The conference center would like to thank you for your participation. You may now disconnect.