Bristow Group Inc. (VTOL) Q3 2015 Earnings Report, Transcript and Summary

Greetings. Welcome to the Bristow Group third quarter earnings conference call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Linda McNeill, Director of Investor Relations. Thank you. Ms. McNeill, you may now begin.

Thank you and good morning, everyone. Welcome to Bristow Group's Third 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. We hope that you've seen our earnings release, which was issued yesterday afternoon. It is posted on 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, 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 Jonathan. Jonathan?

Thank you, Linda. Good morning, and welcome to our December 31 quarter and earnings call for fiscal 2015. Let me begin by setting some context for this call. Bristow leadership is committed to making this particular call as useful as possible for the investment community. To this end, we are not going over every slide in this deck, especially in Jeremy's section, as we like to get through our commentary expeditiously to save time for Q&A where we can more efficiently, more effectively answer the most relevant questions for our current results, our exciting new addition to the Bristow Australia family, Airnorth, and as importantly, our perspective on the future and what Bristow is actually doing to differentiate ourselves for our clients' benefit and for our shareholders. Please turn to Slide 5, and I will begin by starting, as we always do, with a few comments on the critical topic of safety. Bristow's commitment to Target Zero safety is at the core of everything we do, and we are proud to recognize that in the first 3 quarters of fiscal year 2015, our global operations team recorded no air accidents and both our North American business unit, NABU, and West African Business Unit, WASBU, have achieved air and ground Target Zero year-to-date fiscal year 2015. So I want to send a particular shout out to Rob Phillips, the leader of NABU, and his team and Akin Oni, our leader of WASBU, and his team. Bristow did, however, have 4 lost work cases, mostly in the month of December. While not acceptable, our full year total recordable injury rate is 0.17, which is world-class and is a 51% reduction from our TRIR for the first 3 quarters of last year. Please turn to Slide 6. Our safety achievements to date would not have been possible without the hard work, dedication and attention to detail displayed by our global Bristow team. But I will also state that through HeliOffshore, our industry's global organization for safety collaboration, lessons learned are being shared with Bristow from other global and regional operators that are having a definitive, positive impact on our own safety results, both ground and in the air. So we want to thank Gretchen Haskins, the CEO of HeliOffshore, and her new team, but also our founding peer operators and new peer members. Thank you. Thank you on behalf of the Bristow family. Our collective efforts are having and are making a big difference. Page 6 also provides an update to you, the investment community, on this critical institution, but also shows HeliOffshore's results-to-date to our employees and other stakeholders. We're seeing more engagement, more results are occurring in addition to the important safety statistics I've already talked about, which have a tendency to be backward-looking. HeliOffshore is forward-looking. For example, one of our members, our new associate member, Airbus Helicopters, recently issued the industry's first standardized crew manual for a helicopter, their EC225. In addition, membership is quickly expanding globally to other operators, clients, OEMs and other partners around the world. Please turn to Slide 7 to discuss our financial results. As I said before, today's call is about the Q&A. So I will not go over all the details, like I've done in the past, for the third quarter fiscal '15 results on this slide. Let's look at some of the facts and then perspectives. Adjusted EPS was $0.70 for the current quarter, which was negatively affected primarily by noncash foreign currency exchange rates. GAAP EPS was a loss of $0.03 for the quarter, which was due to fleet rationalization and renewal. John will provide more details on the EPS in his prepared comments. Three qualities characterize our third quarter fiscal 2015 financial numbers. One, the results bear a lot of resemblance to our second quarter results; continued year-over-year revenue, BVA and operating cash flow growth despite the foreign currency headwinds that impacted adjusted earnings per share. Two, despite the strengthening of the U.S. dollar, the results of revenue, LACE rate, BVA and OP cash flow growth are better than management's expectations, both on an overall basis and, if you look in the back, also in most regions. Three, there were increases in G&A. But these are driven by this BVA and total shareholder return outperformance for this year, which has a direct implication on management and leadership's compensation, combined with growth projects and the cost of getting growth projects done, like Airnorth. Primarily due to the negative impact of these changes in FX rates, we are lowering our full year fiscal year 2015 guidance to $4.05 to $4.45. Please keep in mind that if you exclude the impact of foreign exchange, our new guidance essentially remains almost the same as our original guidance. In fact, we continue to expect strong operating performance in the final quarter of our fiscal year '15. Finally, the management and the Board of Directors, based a lot on continuing BVA and cash flow performance, continues to show a real commitment to a balanced return with our February 5, 2015, approval of the quarterly dividend of $0.32 per share. Also, during the quarter, we repurchased $37.4 million of our outstanding common stock. Please go to Slide 8. This page provides you with a more detailed market view than we have provided in the past and a little bit about what Bristow is doing to respond and help our clients in this downturn. On the commodity side, and we know we are not experts here, but given our capital intensity, we must and can take a view. Bristow believes that the overall weakness of the oil prices is not solely supply-driven, but is multidimensional, with one important driver being weaker global economic growth, particularly in China and Europe. Because there are a number of factors causing the rapid decline in oil prices for our clients this winter, we believe that the current market decline will be actually be more U-shaped than V-shaped. But let me say, and Bristow leadership has seen a lot of upturns and downturns. We come from all parts of the energy services value chain these past 20 to 30 years. We believe the snapback will be particularly dramatic upwards as it was downwards. And we are actually managing that eventual renewal because it takes about 3 years to actually build a helicopter. So let's talk about the aviation services market where we do have some expertise. We said in our second quarter call that if oil fell below $50 and there was significant dollar appreciation, the helicopter market would be impacted. And although Bristow does not have that much idle or available capacity, especially because we have SAR aircraft going to work in the United Kingdom in fiscal year '16, but we are seeing a short-term increase in available helicopters capacity in the overall market, especially in large aircraft. We are also at the start of a 3-phase client response to this downturn. They're retrenching now, asking for immediate discounts. They're recalibrating projects, especially deferring exploration projects. But eventually, they will renew and get back to the growth in their reservoirs. John and Jeremy will provide more details than I will now, but let me just provide my two or three cents. One, Bristow and the industry will remain very focused on safety, particularly in this downturn. Two, no downturn is ever like the past ones, and in aviation services, for example, we have some new factors in this downturn like the significant amount of assets that are earned -- owned by some of the new lessor companies. Three, Bristow's strong balance sheet, excellent partnership with our OEMs and lessors and our innovative team will allow us to thrive and actually maybe grow a bit faster in the medium and long term when we look back. The Airnorth acquisition is a perfect case in point, and I want to give kudos to the partnership of Don Miller, our Vice President for Mergers Acquisitions Implementation; Allan Blake, our Australian Business Unit Director; and Michael Bridge, the CEO of Airnorth, for accomplishing this combination, which will serve our clients fantastically in the downturn and beyond and creates more growth for Bristow when we look back. Expect more of these transactions in the future. Strong companies, innovative companies, in energy especially, do very well in the downturn if you're patient and you have the balance sheet to use it effectively for your clients. Because of this prudent balance sheet was designed for just this type of market, it will be a tool for Bristow to differentiate ourselves and help our clients. Now on to Jeremy.

Thanks, Jonathan, and good morning to everyone on the call. As Jonathan said, instead of discussing every business unit slide, I'm going to focus my commentary on a high-level discussion of the industry's state, how it's impacting Bristow and management's response. This will hopefully not only address what's on your mind but also leave you more time to ask us questions during the Q&A portion of the call. If you remember, on our last earnings update, we stated the oil price environment had not materially impacted our helicopter business nor was it connected with our underlying financial performance. As of today, this is still largely true. Our Q3 financial performance still reflects a business that has so far weathered the headwinds in the industry. However, we continue to be indirectly impacted through foreign exchange losses. That said, we are preparing for the next 12 to 24 months by rolling out a 4-point strategy that honors our Target Zero commitment to safety and protects Bristow's short- and long-term operational performance. The 4 pillars of the strategy are: one, to proactively engage our clients and assist them through this downturn; two, to stay focused on a successful startup of our UK SAR contract; three, to maintain a strict cost discipline in the business; and four, to continue to make strategic investments, as Jonathan mentioned, which include M&A transactions, such as Airnorth, IT upgrades and fleet renewal and expansion. Let me step you through each of the pillars in a little more detail. First, we are acutely sensitive to our clients' predicaments. We have developed a 16-point efficiency program that, if elements of it are implemented would result in win-win solutions that reduce our customers' costs. Some of these points include solutions that allow us to integrate our aviation services by bundling rotary- and fixed-wing operations as well as rightsizing their fleet where appropriate. Ideas like these deliver huge savings to our clients and help us preserve our margins at the same time. This efficiency program is already serving us and our clients well through this downturn. Second, we are laser-focused on successful UK SAR implementation, not only because it's so important to the citizens of the United Kingdom, but also because it represents a material BVA and income source for Bristow in FY '16 and beyond. In the next fiscal year, we will see 7 new bases completing construction and 14 aircraft commencing revenue operations. The first 2 bases will come online as early as April 2015. We continue to be on schedule and on budget for the startup. Third, to maintain strict cost discipline in the business, we have started initiatives to counter potential reductions in operating revenue. To highlight some of them, effective April 1, we will eliminate our other international business unit, and these operations will be absorbed into our remaining business units. This will provide a better alignment of our marketing and operations and reduce our operating and G&A costs. Also, effective April 1, our global maintenance and supply chain organizations will be restructured, aligning them closer to the business units. This will yield further cost savings and enhance inventory managements that create efficiencies without compromising our global service. These 2 initiatives alone will yield between $10 million to $20 million in pretax savings in FY '16. Finally, we will accelerate certain transformation initiatives that further streamline our G&A costs. Fourth and lastly, we will take a long-term view in our deployment of CapEx through this downturn. We will continue our commitment to operations transformation, fleet strategy and M&A. As a robust fleet strategy is now central to our long-term success and critical in the eventual upturn, we will assess our purchase opportunities and make a decision on a significant investment in our fleet's future at an appropriate time during this downturn. All these efforts are an example of the initiatives we're putting in place to prepare us and our clients for the downturn, giving us confidence we will weather the headwinds and come out stronger for our key stakeholders. We are taking the necessary steps to ensure we are prepared for the next 12 to 24 months. And now, please turn to Slide 15, as I would like to share some very exciting news with you. On January 29, Bristow acquired an 85% interest in Airnorth, Northern Australia's largest regional fixed-wing operator. We believe this is a great add-on business for us. Airnorth was established in Darwin in 1978 and has consistently grown over the period to become one of Australia's premier regional air carriers, with a fleet of 13 airplanes serving over 20 destinations in the region. Similar to last year's investment in the Eastern, this acquisition allows us to offer point-to-point, scheduled and chartered transportation service to our clients throughout Australia and beyond. This service offering is working well for new and existing clients in the U.K., and we believe will do the same in Australia and in the Asia Pacific region. We're expecting Airnorth operations to be immediately accretive to EBITDAR, BVA and EPS, as we anticipate consolidating this acquisition in the current quarter [ph]. Finally, this investment solidifies Bristow's ability to offer point-to-point transportation services in 4 of its 5 global business units, leveraging an integrated rotary- and fixed-wing services model that is proving to add value to our customers, especially in this downturn. And with that, I will turn it over to John for a review of our financial performance.

Thank you, Jeremy. Please turn to Slide 20. As Jonathan said, this quarter's results are very similar to our second quarter fiscal 2015 financial results. Q3 fiscal 2015 adjusted EPS was $0.70 compared to $0.85 in Q3 fiscal 2014. The current quarter EPS was negatively impacted by changes in foreign exchange rates, which also decreased revenues by about $9 million. Exchange rate changes decreased adjusted EPS by $0.28 compared to Q3 fiscal 2014 and $0.31 resulting from current quarter exchange rate changes. Our adjusted EBITDAR was $109.1 million for the current year third quarter, an improvement of over 8% from last year's Q3 adjusted EBITDAR of $100.7 million and down 2.7% sequentially. This Q3 EBITDAR improvement, as compared to the prior year third quarter, 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 to larger aircraft in the U.S. Gulf of Mexico. These improvements were significantly offset by the negative impact from foreign exchange rates and an increase in general and administrative costs. The increase in G&A cost is primarily related to increased incentive compensation, as our BVA and total shareholder return have outperformed our internal targets and our market peer performance and represent a $0.20 EPS impact to the quarter. On a GAAP basis, we recognized an impairment of $24.5 million on 10 AS332 aircraft that are currently held for sale. The anticipated disposal of these aircraft are in line with our fleet rationalization strategy. We can speak about this more in the Q&A. Please turn to Slide 21. Q3 fiscal 2015 was another excellent quarter for revenue and utilization improvements despite the macro headwinds we are facing. Even with our fleet rationalization strategy that includes significant LACE sales, our current LACE count increased 10 aircraft over fiscal 2014 and 2013. 5 of the 10 additional LACE are related to our UK SAR contract and the other 5 represent incremental demand in oil and gas, 3 of which were not in our order book. Specifically, during this third quarter of fiscal 2015, we took delivery of 3 LACE for the UK SAR contract in addition to 2 LACE accepted in Q2 fiscal 2015. As we have said in the past, our LACE rate is affected by these 5 LACE aircraft, as they are included in our LACE count but are not yet generating revenue on the UK SAR contract. Excluding the effect of these 5 LACE, year-to-date Q3 LACE rate would have been $9.62 million, an improvement of 7.3% over the prior year quarter. Please turn to Slide 22. Our gross cash flow returns remained above 13% for the third consecutive quarter, increasing to 13.2%. We believe our gross cash flow returns will continue to grow as we begin to receive revenue on the UK SAR investments, beginning in April 2015. Bristow value added, or BVA, measures our cash returns above our capital charge hurdle rate of 10.5%. BVA for the third quarter was a positive $19.7 million, which is $7.6 million higher than in the third quarter last year and down sequentially by $6.4 million but better than our internal expectations. This year-over-year improvement was primarily driven by EBITDAR growth and an increase in operating leases, partially offset by the addition of new aircraft and other capital expenditures. The sequential decline is driven by the incremental capital charge from the additional aircraft deliveries in advance of the UK SAR contract. One thing of note, our BVA generally outperforms our EPS when the dollar strengthens, as BVA is a cash flow performance metric and normalizes for certain noncash foreign exchange impacts, such as our investment in Lider in Brazil. BVA also focuses on our current investments in CapEx and M&A and corresponding returns, normalizing for equity accounting methods like Lider. Please turn to Slide 23. Our progress on BVA yields stronger operating cash flow for growth and our capital allocation strategy. Operating cash flow for the 9 months ended December 31 was $162 million, an 18% increase over the same period in fiscal 2014 and also exceeds our internal expectations. For the third quarter, total capital expenditures were $197.2 million, with $165.3 million spent on new aircraft. Our total liquidity remains strong at $412 million and gives us financial flexibility and stability through these volatile times and reflects our UK SAR startup investments and costs. Please turn to Slide 24. We are lowering our fiscal 2015 full year adjusted EPS guidance to $4.05 to $4.45. While our revenue and EBITDAR performance for the 9 months ending Q3 fiscal 2015 were strong and roughly met our expectations, adverse effects from the strengthening dollar and increased incentive accruals have impacted our adjusted EPS guidance. If you consider only the EPS impact of foreign exchange for the full year 2015, our adjusted EPS would have improved by $0.60 and we would be within our original EPS guidance range. We will continue to be exposed to further strengthening of the U.S. dollar, and our guidance assumes currencies will remain at December 31 levels. We have updated our guidance ranges on other financial metrics and we have highlighted in blue on each guidance item that has changed. Now let's talk about 2016. We know our views to 2016 are important to you, and I want to give you some color to how we see fiscal 2016 based on what we know at this time. This does not include many of the cost benefits Jeremy discussed earlier. In fiscal 2016, we will benefit from the startup of 14 aircraft on the UK SAR contract, generating an expected $70 million to $80 million of EBITDAR, and we will also benefit from a full year contribution from Airnorth of roughly $20 million of EBITDAR. Based on what we see today, we expect approximately flat oil and gas revenue in fiscal 2016. However, we are concerned with further market deterioration, which creates a sense of urgency in aligning our cost structure to help our customers in fiscal 2016. As we expected, our CapEx will decline in fiscal 2016 because of the significant reduction in UK SAR ramp-up spending. As a result, we currently expect fiscal 2016 BVA and cash flow to both improve over fiscal 2015 levels. As Jeremy previously mentioned, with the Other International Business Unit and major maintenance restructuring, we have already implemented certain cost control measures, and others will be implemented, and we will provide upside as we further align our cost structure to meet our clients' needs. For example, just as our clients are working with their suppliers to reduce cost, we will apply the same process to our partners. Medium and long term, we continue to commit to an adjusted EPS compound annual growth rate of 10% to 15% over the next 3 to 5 years. And with our 20% to 30% forward dividend payout policy, we expect to double the dividend over the same period. Now I'll turn it back to Jonathan for some final comments.

Thank you, John. Please turn to Slide 25. Safety continues to be our #1 core value as we continue to strive to achieve Target Zero this year and beyond. We also remain focused on our clients' issues and look to create innovative solutions such as fixed- and rotary-wing logistics solutions with Airnorth, our most recent example of innovative actions we can take and will take in this downturn. We continue to work with our clients to help them through the downturn, establishing ourselves as an indispensable partner. Our strong balance sheet, ample liquidity will allow us to take advantage of opportunities that will arise during these down-cycles. As Jeremy spoke about, we also have specific levers we can pull to adjust our cost structure in both the short and long term to both help our clients, maintain our credit BVA and EPS targets for you, our shareholders. And do not forget, we have the cash flow not only to maintain but grow the dividend, which the board and management commits to and intends to double every 3 to 5 years. And also, don't forget about UK SAR, which provides both diversified cash and EPS in this downturn for fiscal year '16 while also giving us avenues for future growth in government service, which we intend to ramp up following the successful start of our important U.K. contract. Governments are already calling us to discuss what we can do for them. And to this end, we are welcoming our newest board member, the Honorable David Gompert. David's extensive service to our country at the highest levels of the U.S. government is a welcome addition, and we are honored to have him as part of our Bristow family. Look, although we have financially lead and manage ourselves on BVA and cash flow, earnings per share matter to us. So do not think we are happy about reducing our guidance to the foreign exchange. But we do not intend to chase our tails by hedging translational EPS risk either. We care about cash. We intend to continue our tradition of providing you FY '16 adjusted EPS guidance in the fourth quarter and we'll give you other measures, too, to aid you in this downturn and understanding our business and how we can both survive, thrive and actually grow as we continue the Bristow way. Thank you very much. With that, operator, I'd like to turn the call over to you for questions.

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

Appreciate all the detail, as always. And I was hoping to maybe talk about some of the growth that you guys were talking about here, especially for 2016, specifically with the Airnorth, I guess, we could start with. It looks like the price you guys are paying and the suggested EBITDAR implies that you can get a pretty fast payback on these assets. I was just wondering if you could give us some more color around what maybe contracts are underlying those assumptions in terms of the revenue and EBITDAR and kind of how you see that market unfolding. And along with that, too, the extra earnout provisions that are in that purchase price. Or would those be something that would be accrued if you hit those kind of targets? Or would you have to go above and beyond those expectations to reach those earnout levels?

Well, Jon, do you have anything else? I know we're allowing you more Q&A here. You're [indiscernible].

Yes, one question in 16 parts. So just...

Okay. I -- Look, I -- let me take this, and then John and Jeremy can help out here. But look, anytime we do these fixed-wing acquisitions, it obviously looks quite almost one-to-one purchase price versus, for example, the EBITDAR. And that's because, one, we're taking advantage of a number of market conditions. And frankly, we're going to allow the Airnorth management to really enjoy a very, very strong earnout. We don't give the specifics of the earnout, but just know this: Similar to Eastern and other acquisitions we've done in the past, if they benefit, trust me, we benefit even more from an accretion standpoint, both from BVA and EPS. And I can't be specific now just because generally, we don't do that for this type -- this size acquisitions. But just know, it would be better than what we've talked about. As far as the actual accretion itself, we've given you the EBITDAR. A lot of it does flow to the bottom line in EPS, and we'll be considering that when we give you our FY '16 guidance. But again, a lot of this transaction isn't just about the numbers, Jon. It's about being able to reinforce the client relationship. This company, Airnorth, looks and feels very much like Eastern, except that you're traversing thousands of miles in the north between Darwin and some of both the mining, which they do have significant contracts with them. Remember, mining has already come out of its downturn in many ways. So they're enjoying some nice growth there. And again, they have oil and gas clients, too. Probably not as a percentage as much as Eastern, but we'd like to grow that with Allan Blake and Michael taking the particular charge of doing that. Again, given the, what I call, the tyranny of distance in Australia, we think we can really make a dent in the cost structure of our clients because then they don't have to waste time in layovers and other things where we can combine these 2 services in pretty remote areas.

Okay, and now the contracts that are underlined, those revenue expectations. Are there contracts? Or is it more of just a spot-based business there relative to the helicopters?

Let me give you a contrast, and maybe Jeremy can also add a little bit. One, they probably have fewer contracts than Eastern. Eastern has firm capacity contracts for roughly 30% of their load. But one of the things that Airnorth has is they have pretty exclusive rights into certain airports, where it would just not be economic for you to have so many different competitors in. So even their chartered service, although I don't want to give you the impression that it has contracts, it has a pretty stable base because Airnorth really does serve a customer base that's pretty unique in both Australia and, I would even say, the world. A little bit similar to what some of the airlines in the United States serve in the Prairie and northern-tier states.

Okay, great. And then, if I could just get a little bit of clarification on the guidance, then, as well, too. For the UK SAR, when you mentioned the $70 million to $80 million of EBITDAR for fiscal '16, was that incremental to 2015 -- fiscal 2015? Or is that just in total? And then, also, I just want to make sure that the exchange rates that you're working off of, would you say that was a December 31 number as opposed to February 5?

You're correct. December 31 FX are the numbers that we're baselining off of. We're not going to try to predict what's going to happen with foreign exchange. And the $70 million to $80 million of EBITDAR from UK SAR is totally additive and incremental to FY '15. We generated no EBITDAR from UK SAR, and in fact, we're having negative impacts to our EPS and to our CapEx and BVA through the ramp-up and investments and getting ready for the UK SAR contract.

John, we always knew this quarter and the last quarter, third and fourth quarter, were always our very heavy CapEx for UK SAR. We're taking deliveries. We're making lease payments on aircraft that are used for training. So we always knew there was going to be some level of drag to both BVA and the EPS. That was already planned in the guidance we gave last May. So don't think we're trying to use that as an excuse. Know that it does have an impact on the growth rates in this year, probably the most heavy year. Next year, we actually will see some of that in the first quarter, right? But as the aircraft come online in the second, third and fourth quarter, you start to offset some of those very, very heavy CapEx and lease rates with revenue.

Our next question is from the line of James West with Evercore Partners.

This is actually Cameron Schnier filling in for James. So I was wondering if you could just talk a little bit more about the current and long-term supply-demand dynamic for heavy helicopters. Is the supply of heavies still somewhat constrained versus the level of demand? And maybe a little bit of color on the regional level.

Yes. I'll let Jeremy answer, and then, I'll add a little bit of color.

Yes, Cameron, good morning. Certainly, the supply-demand relationship in the short-term is starting to move towards supply than it was, say, over the past 12 months. That said, over the long term, our view is -- remains bullish on that relationship. The demand for the heavy aircraft is going to continue to grow as deep offshore continues to grow over the long term. So I think what we're seeing here is probably, perhaps, a little bit of a blip. But over the medium and long term, we're pretty confident this relationship will still work in our favor.

And just to add a little bit of color to that, I was talking to a friend earlier in the month in the helicopter space, and he mentioned, on the second quarter call, Jonathan, you seemed a little bit more positive than some of the peers. And the truth is that we were. Because one, we, if you look at our at LACE count, we really didn't buy that many aircraft for oil and gas over the last 1.5 years. We were already starting to back that down a bit because we saw some of the uncertainty even at $100 oil. But because of UK SAR and other Search and Rescue contracts that we're going to be serving, like in the Falklands, we just had a -- we have a confidence that we've gotten the capital right. But I will say this, and this is the second piece of this, the imbalance, i.e., the very tightness in the market has eased up very quickly. There's a lot of excess capacity in the market that's coming on the market. We do think it's short term, i.e., 12 to 24 months, and I think the very interesting thing, when I talk to some of my peers in other parts of oil and fuel services, we are getting the requests for discounts on our service, whether it be exploration or production. But almost every meeting I've been to, and I talked to Jeremy and our commercial teams, they usually ask for that, and then they ask for incremental aircraft at the same time. And so there still is demand for this product. It has the tendency to be dynamic, very short-term in nature, maybe not these long 3- to 5-year contracts, but we are seeing incremental ask for aircraft, especially in the, what I call, medium and super-medium categories.

So is there a region where the imbalance might be more pronounced right now? Or...

Cameron, I would argue that -- or I would submit that the Gulf of Mexico is seeing a very, very bullish environment relative to the rest of the world right now.

So we see tightness in NABU. But I would say, probably some extra aircraft coming around in our EBU markets.

Our next question comes the line of Brandon Dobell with William Blair.

I got a question on your comment at the outset about kind of reworking utilization and capacity. Maybe some anecdotes or some color about how you'll work that with the customers, if they're going from, I guess, an exclusive arrangement to not landing as many hours. How fast can you adjust the aircraft capacity you have? And I guess, in terms of the flight hours and people and things like that, spread the aircraft across more customers? Or how does their pressure on price turn into better, I guess, total hours for that customer? Maybe some anecdotes or what you think you can do in '16 to offset some of these, either pricing or risk kind of total demand pressures?

Yes. Brandon, this Jeremy. I think, to the first part of your question, the answer is very fast. It really doesn't take -- there's not a lot of sort of retooling time or anything like that in our industry that allows us to institute sharing programs. It's really much contingent upon the customer's willingness to trade flexibility for predictability and cost, and they usually have -- that is usually the source of the -- of any kind of delay, if there is any. But from a Bristow Group point of view, fortunately, our infrastructure, our availability of various types of aircraft allow us to leverage that into quick, quick sharing mechanisms and available as cost savings to our customers.

Okay. And then, Jonathan, you referenced the U-shaped -- the potential for a U-shaped recovery. Maybe contrast that with how '08 and '09 looked for you guys. As you went through that cycle, if you want to call it that, how did pricing and your ability to move aircraft around look then, and how do you think a U-shape versus a V-shape recovery changes that?

Sure. I mean, I think that -- I mean, the V was very, very tight, right, in '09. Demand snapped back pretty quickly. And if you remember, we put a very large medium aircraft order in for the 35 76C++ so and that benefited us in the '10, '11 and '12 time frame. so we -- again, we talked a little bit about doing some of that in this downturn. Because some of this also has, really, a bifurcation with some type of financial crisis, we do believe it's going to come back. I think the real issue, though is the cost structures of our clients will take time to adjust. And whether you talk about shale, which we come off quickly but the actual production does take at least a year, if you talk about a number of other issues associated with our clients who weren't doing great from a return standpoint, even at a $100 oil, there is a number of cost-structure initiatives they have to get through. We want to help them. And I think that's going to take longer, right? And don't get me wrong. If it ends up being V-shaped, all the better. That's one of the reasons why we're very, very careful about making sure that we fleet-manage correctly, get, in essence, rid of some of our older aircraft faster, have these new aircraft ready to go. And for us, that's being prepared, because of the capital intensity. But also managing our cost structure. I think that's one thing you're hearing differently in third quarter than second quarter. Because we think it's you, we really do have to get at our cost structure, come -- because unlike others that we really admire in the oil subservices space, who have less capital intensity, maybe more technology-oriented companies, they don't have the capital intensity. And therefore, we had to look at both our cost structure if we believe it's U-shaped. We don't have the luxury, in many ways, of hoping that it's V-shaped. We have to plan for something that's U-shaped that has some cost structure adjustments. And know this; the elimination of OIBU, the restructuring of our maintenance, that actually started in August, right? We couldn't announce this today. These things take a number of months, and we've already, in many ways, prepared for other things that Jeremy's not going to be specific for over the last 6 months, seeing that our clients weren't doing well last summer, anyway.

Okay. From a supply of aircraft perspective, your conversations with the OEMs, do you get a sense that they are dialing back their throughput on this kind of U-shape scenario? Or are they just going to keep the supply coming as they've got it scheduled, and that's just going to put pressure looking out maybe fiscal '17 or '18 when these -- they just keep plugging away in the market as a couple of years of trying to absorb the extra aircraft?

Yes. No, we see them being fairly rational. They were even rational in the upturn. We're not talking about the OEMs, which -- I don't sometimes like speaking for our OEM partners. And so you call them -- but what we do know is that they didn't expand significantly any of the lines. The lines that were expanded were really associated with new aircraft like the AW189 or the EC175. Most of them were staying fairly cautious, even though a number of these aircraft also have military variance that have some level of capacity that needs to be served. So we didn't see huge amounts. We saw them, obviously, bring up the amount that can get off the existing lines. But we didn't see them create new lines, which is, really, what you're talking about to dramatically put a significant number of aircraft in the marketplace. The only thing I will say, and it's important that I -- that we talk about this, that in the last 4 years, we have a lot of the production that's also owned by lessors. And so how that transpires in this marketplace is a bit of an unknown. And I don't want to give you a sense that even we had a sure understanding of how that's going to manifest itself. But there is a decent amount of that production that is going to end up, and is already ending up, with some lessors.

Okay, got it. And final one for me. As you think about fiscal '16 versus '15, the impact of Lider and some of the recent tenders versus the currency, maybe some color. And John, about how we should think about the puts and takes you're trying to model for the next 12, 18 months?

I'll actually hand that one to Jeremy.

Yes. Brandon, I'll speak a little bit to the environment in Brazil as it relates to Petrobras and your question there. Certainly, as maybe you may or may not know, the bid -- the latest round of bids have been closed in late January for the helicopters. We're receiving zero indication that everything that's going on with Petrobras is impacting that adversely at this time. Our view as of today is still -- from a helicopter point of view, is business as usual. So we're not -- again, as of today, this is kind of what our line of sight is. The process is going forward, and soon enough, I think the results will be public on who won and who lost, so to speak, on that bid. We believe Petrobras in the long term -- is there for the long term regardless of what's happening. And through FY '16, I mean, whatever problems they have will be resolved and they'll get back on and support their mandate to continue increasing their production. Economically, they have a very competitive lifting cost compared to the rest of the world. And so their incented to keep pressing on the gas. So I mean, I hope that kind of answers your question of how we see FY '16 with respect to Lider.

Yes, and I'll add one additional comment to that. When you -- while we're seeing impacts through foreign exchange related to the U.S. dollar debt that Lider has, their BVA is up quarter-over-quarter. And they're continuing to generate good local cash flow and good BVA.

Our next question is coming from the line of Daniel Burke with Johnson Rice.

On -- thanks for the directional indications on fiscal year '16. On the UK SAR, that looks like a healthy EBITDAR contribution as you guys ramp towards full contract base. Can you get me closer to what that EBITDAR contribution in year '16 equates to on an EPS basis?

Not breaking it down into EPS at this time. You should expect in May, we're going to give more detail, more color with guidance for '16. But I did just want to, I'm going to say, get you started, maybe whet your appetite a little bit to what we see coming as really great contribution from UK SAR that will translate into a great EPS because we're looking at -- look at very good margins coming from that contract.

Let's give Daniel a little bit more. So let's give you the -- so one of the things, obviously, that -- on the EPS side is foreign exchange. And again, although we're-- look, it's -- this is the reality that were living in, but we don't -- at Bristow, the Bristow way is not to make excuses. We don't like this either. But I will say this. For FY '16, we're going to probably assume some pretty conservative, i.e., pretty strong dollar as we give you guidance. And so as part of that and remaining conservative, I don't want to give you a sense that we're going to revert to some mean over the last 5 years. We're going to be pretty conservative as we look at it. Not overly conservative. We want to -- we don't put layers in. But I do feel, Dan, that owe you that one a little bit, too, so...

That's fair, Jonathan. I appreciate it. I'll take one other crack at it. Can you give me a sense of what the DAR would be next year?

DAR.

DAR, I'm sorry. Can you help me there?

Yes. Just the DNA plus rental expense. I'm guessing I won't get there, but...

Oh, okay. No, I'm not going to wade into that much detail on '16 at this time.

Dan, are you talking about UK SAR in particular? Or are you talking...

Oh, yes. Yes, yes. UK SAR, specifically.

Oh, I actually don't have that number in front of me so I can't give it to you.

I apologize. We don't have that in front of us. And frankly, if we did, we probably wouldn't give it to you, anyway, but...

Fair enough.

But I appreciate you asking. And just know that the UK SAR aircraft and the overall leasing strategy sits at about 33%. We actually have, for UK SAR, more aircraft leased, just given the nature of the contracts. It's a longer contract. We got very attractive lease rates from our primary lessor, Milestone. So we did want to do a little bit more leasing there. So that -- you can say that DNA is going probably be -- or the rental piece of it will be a little bit -- will be higher than the overall company, for example, as a percentage.

Okay. That's helpful. Also, one other one just on that, that '16 outlook. In terms of thinking about the oil and gas top line as roughly flat. Should we assume that means that the LACE count moves higher and the LACE rate does come down? Or should LACE count remain about flat as you all sort of optimize the fleet and LACE rate similarly flat?

We're going to have to get...

Yes. We're still taking information from what we're seeing in the market to try to develop, I'll call it, a crisp answer to that question. As Jonathan mentioned, we continue to see requests for additional demand from our customers. As Jeremy mentioned, we're trying to do things to help our customers improve their utilization and help them be more efficient with how they schedule. And so we're working both sides of this equation, and I don't want to really kind of tie our hands with guidance that may be a little premature because we're still -- we're still working with this. But all of that being said, we're not seeing anything that gives us real negative concerns from a LACE count point of view.

No, I mean, Daniel, if you do look at the LACE count, we're up 10 this year. We said 5 from oil and gas, 5 from SAR, and those are all aircraft that are working. UK SAR will end up working in the next number of months. But -- and then the CapEx dropped dramatically, as you can tell, for oil and gas, especially over the last number of years. In many ways, I wouldn't say that we were pressured [ph] in anticipation of a downturn. We just did not -- we did not want to do aircraft purchases the way we'd done in the past. We generally always done our aircraft purchases in 10 batches. And we really do want to look at this downturn as a way to really change the way we, at Bristow purchase our aircraft in a much more airline-like, large aircraft order. We've been thinking about it for a while, and Jeremy alluded to it in his commentary. And so that's what we're really looking at doing. So it also provides excellent support agreements. And so that's -- but that has benefited us in this downturn, in that we didn't lease or own aircraft too much on spec as we came into the downturn.

Okay, okay. That's helpful. Maybe a last one, and it is, maybe a little bit more straightforward. But particularly looking ahead to next year, fixed-wing operations going on in the U.K., now in Australia. Modest operations in West Africa plus, I guess, Lider. What's your fuel exposure? Do you all have a sense for that on a -- on sort of a -- every $10 a crude barrel or something similar? Is it a factor worth reflecting on at this point?

Let's get back to you on that. I mean, the only part I would reflect is that for the most part, even with the acquisition of these 2 companies who, don't get me wrong, have more fuel exposure than our helicopter fleet. Because with their contracts they get pass-through, on just the parts of the contract similar to helicopter pass-through of fuel prices. But we're going to have to get back to you on that one, Daniel. We're just not -- even with them, we're just not that sensitive to fuel. I will say this, though, and it's important from a client's standpoint, is that one of the things that helps our clients during this downturn is given that they're the ones taking the fuel pricing risk, they are getting the benefit in this downturn because kerosene/aviation fuel has come down a lot in price. So as this downturn manifests itself, they will be helped by that as we go forward.

Our next question comes from the line of Gregory Lewis with Crédit Suisse.

Hey, so I wanted to touch a little bit more on the leasing environment. I mean, you mentioned on -- in your prepared remarks that there's large aircraft availability in certain parts of the world. Just under that dynamic, have you seen an increased appetite from leasing -- from lessors to provide discounts on equipment as it's rolling off contract to you and other helicopter companies? I guess you would just note the yield.

I mean, let me answer that a little bit. There's no doubt that there is -- there are a lot more lessors than 5 years ago, and so it's extremely competitive. I would say that, that competitive dynamic, frankly, probably has more to do with, I'd say, improving lease rates over the past 3 to 4 years. This downturn, if you [indiscernible] see how that's going to manifest itself, Greg, obviously, leasing is a -- even in our own company, it's a bit of a venture between fleet management and financing. And given that there are partners like Milestone and Waypoint that are important to us, it involves me also. That being said, the nature of our leases at Bristow are very different than the rest of the markets. We've always said that we have, what we call it, kind of a Bristow-standard lease. So both from a pricing standpoint. But we -- in many ways, we, in the past, have also sacrificed a little bit probably in price to get better structure, better renewals, better buyout, making this much more flexible asset for our clients. And so I wouldn't say that we've seen a downturn in pricing [ph] due to the market. We've seen -- at least that we're seeing today. But we've seen definitely more competition amongst lessors, which creates better pricing [indiscernible] and I think, probably for the overall market.

And we think that's going to continue going forward as well.

Yes.

Okay. But so you're not seeing lessors coming to -- no lessors have approached you, offering you better lease or -- lease-in rates than you were getting, say, 6 months ago?

Well, again, because we -- 2 things. One, the answer is yes. We have seen better pricing over the last 6 months. I just don't want to give you the impression that's just due to the market. I can't -- I'm not smart enough to figure that out. But I can't -- that's what I'm saying. I think it might also be due to competition, which has increased over the last 6 months.

Yes. I think it's much more due to the competition. In fact, it may be solely due to the competition in the lessor market, just amongst themselves.

The second thing, Greg, I do want to emphasize is we're kind of at the end of our leasing strategy when we went from 0 to 60 in 2.5 seconds, right? We went from no leases less than 5 years ago to one of the larger lease portfolios in the dollar amount, even though it's about 1/3 of our fleet. So -- but we're there. Right now, it's a part of a tool that we will actually play off on the overall markets, whether it be bond financing or other financing that we have in the capital markets [indiscernible]

Sure. And then just, I mean -- and you mentioned, the -- working with suppliers. And just thinking about your order book, I mean, I guess anything that's coming in '15 is coming in -- coming on time. Is there any flex you have for deliveries in, say, the back half of '16 or the one you have in early '17 where just, in this environment, you have the potential to maybe push that out, push those deliveries out a quarter or 2? And would -- is that even something you'd even consider doing?

Greg, yes. This is Jeremy. The short answer to your question is yes on both fronts. We do have some flexibility. And not only that, our relationship, our strong relationship with our OEM partners and our credit gives us a little bit more sort of, call it, goodwill to have them accommodate us when need be. And we've -- there's precedent for that with us. And we would continue to employ that flexibility tactic if we felt it necessary.

I mean, that's very important. You're actually bringing up a very critical competitive advantage for us, in that we don't depend on the lessors or the lessors' purchase books. We generally depend on our order books. And as John talked about, it might have been overlooked. We actually took delivery of aircraft that were not in the order book last -- this past quarter that came off of an order book in -- from somebody else. We can do that because we're not depending on lessors to finance us. We can do it off of existing cash or our revolvers. And we'll continue to look to do that to both either push CapEx, because that ability allows us to actually purchase an aircraft but get better terms, or also be able to bring an aircraft on fairly quickly for a client who needs it in this very -- still very dynamic market.

Correct. And then just one final question, probably to Jeremy. When we think about the options that you have and the fact that pricing from the suppliers, let's just say, it's not going up from here. How far in advance do you need to give them notice on the options in the order book? Is it 12 months? Is it 6 months? So like if the first 2 are like June 16 deliveries, at what point do you have to confirm that you actually want that equipment?

So Greg, there's sort of what we would call, I guess, the written rule of thumb. And that's usually a 12-month period. But then again, we can be very practical about what's going on in the market. And again, back to the -- our ability to be -- to create some flexibility with our OEM partners, sometimes we can shrink that, if need be. And again, we've been able to do that in the past, and we can do that now. That obviously helps us with our CapEx strategy significantly in a volatile period.

Our next question comes from the line of Jeff Spittel with Clarkson Capital.

I was wondering if we could touch on, from a pricing standpoint, you referenced some of the customers requesting discounts. As you're well aware, a lot of times, from a competitive standpoint, a lot of the smaller and less well-capitalized competitors are the guys who are leading the charge lower. Are you starting to see some evidence of maybe a little bit less disciplined pricing behavior on their parts? And if that's the case, is there any particular [indiscernible] geographic area where you're seeing that most notably?

Jeff, this is Jeremy. We don't like to really comment about pricing. So -- but that said, I don't think we can point to a specific trend out there in the industry.

Okay, fair enough.

I mean, look -- and we're -- let me also just put some numbers to it. If you look at our LACE rates, which both take pricing and utilization into account, you're seeing that the leading edge is probably staying about the same. However, we wouldn't be talking about cost and capital controls if we felt that, that was going to exist forever. We do believe in this U-shaped type recovery and we are very intent on making sure that our cost structure and our capital structure reflect that. So although -- what Jeremy said is absolutely true. We're actually trying to manage to some of the possible uncertainty that you're bringing up. Although, I will say anecdotally, we haven't seen it to date. And there are some tenders that are kind of outstanding, and we're at least seeing some level of cost discipline, although we're definitely not planning on it.

Okay, I appreciate that. And in the U.S. Gulf of Mexico, you mentioned, and I think this is the second quarter and we've heard from other companies, that, that seems to be a pocket of meaningful strength. Is that driven, in your view, a little bit more on what's going on, on the production side with new products coming on? Is it some incremental drilling activity? Or is it more all of the above?

Let me -- and there's a bit of an all of the above plus a third dimension, Jeff. So if you recall, I think, maybe on the last call or the call before that, we discussed the transformation and the restructuring of the -- of our Gulf of Mexico operation led by Rob Phillips. What you're seeing is -- well, is not only that demand sort of growth that we're getting in -- with our clients. But you're also seeing the results of Rob's leadership and his efforts to restructure that operation, rightly position us and create a cost structure that supports that market. So there's a bit of an internal, and then there's a more macro story. And the macro story is, really, an off-the-shelf or deepwater story in terms of where we're seeing that pick up.

At this time, I will turn the floor back to management for closing comments.

Well, I mean, thank you very much, and I think that management felt this format is something that we'll probably keep with in the downturn but also as we go forward. More Q&A, making sure that your questions, your relevant questions that we can answer, we will answer. And again, I want to thank everybody, and appreciate, again, HeliOffshore's and my -- our peer operators in working towards and really having a significant impact on Bristow safety. So be safe out there, and we'll talk to you out there soon. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.