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Bristow Group Inc. (NYSE:BRS)

2Q09 Earnings Call

November 6, 2008 10:00 am ET

Executives

Linda McNeill – Investor Relations Manager

William E. Chiles – President, Chief Executive Officer

Perry L. Elders – Executive Vice President, Chief Financial Officer

Mark Duncan - Senior Vice President, Western Hemisphere Division

Analysts

Ian Zaffino - Oppenheimer and Co.

Arun Jayarum - Credit Suisse

David Smith - J.P. Morgan

Dan Goldberg- RBC Royal Bank of Canada

Inaudible Analyst - HIMCO

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Bristol Group’s second quarter earnings conference call. (Operator Instructions) I will now turn the conference over to your host, Miss Linda McNeill with Bristol Group. Please go ahead, ma’am.

Linda McNeill

Thank you, Chris. Good morning. Welcome to Bristol Group September quarter earnings conference call. My name is Linda McNeill, Investor Relations Manager. With me on the call today are Bill Chiles, President and CEO, Perry Elders, Executive Vice President and CFO, and Mark Duncan, Senior Vice President of our Western Hemisphere Division.

We hope you’ve seen our new release and 10Q which were filed this morning. Both documents along with our revised growth update which is now included in the investor relations presentation will be posted on the investor relations section of our website www.bristowgroup.com. Please note that no earnings guidance will be provided during this call.

Let me remind everyone that during the call, Bristow Group management may make comments that reflect on intentions, hopes, beliefs, expectations or predictions of the future. These forward-looking statements are subject to certain risks and may cause actual results to differ materially from those projected. Additional information concerning these risk factors is contained in our Form 10-Q filed with the SEC for the quarter ended September 30, 2008 and the Form 10-K for the fiscal year ended March 31, 2008.

Additionally to the extent that we discuss non-GAAP measures during this call, please see our investor relations presentation on our website for the calculation of these measures and GAAP reconciliation.

With that, I would like to turn the call over to Bill.

William E. Chiles

Thank you, Linda and welcome to all of you on the call today. I want to start off talking about our safety performance. We’re making great progress with our target zero initiative. We had two relatively minor flight accidents in our training operations that did not result in any serious injuries to anyone involved. We’re making progress there. We have had no flight accidents in our normal operations. Our ground safety, our total recordable incident rate is 0.4 for 200,000 man-hours and our loss work case rate is 0.25 for 200,000 man-hours which is pretty much in line with our plan, again moving towards zero.

Obviously, I don’t need to remind anyone on this call about the global financial crisis. It’s unprecedented as we all agree. However, we have experienced no negative impact to date, no indications from our customers in a change in their activity, although we certainly are not immune and do expect some reduction in activity by our customers. We just don’t know where that might occur. It will likely occur first on the exploration and development side rather than the production side. Fortunately, so much of our flying is production-related and driven more by major production projects around the world conducted by the national oil companies and the international oil companies.

We are monitoring our customers very closely to make sure we understand their plans for the future. We’re working with our consultants to tap into their knowledge base to make sure we see and are aware of any red flags that pop up.

Our financial condition is very solid. We have the capital on the balance sheet now to execute our growth plan and we’re being very, very disciplined about that and Perry will go into more detail in just a minute about our current financial situation.

Results for the September quarter, revenue of $291.7 million, income from continuing operations of $28 million, ROCE of around 14% which is consistent with the June quarter and in line with the indications that we gave you during the quarter, diluted earnings per share of $0.78, and Perry will cover that in more detail in just a minute.

I would like to introduce Mark Duncan who is also going to participate on the call. Mark Duncan is our Senior Vice President of the Western Hemisphere Division which includes the U.S., Gulf of Mexico, Arctic, Latin America, and the Western Hemisphere centralized operations. Mark will discuss the significant events that are happening or had happened in his division. Mark?

Mark Duncan

Thanks, Bill.

Just to update you on some significant events and I will start with the Gulf of Mexico. We have suffered from both Hurricanes Gustav and Ike during the period, Gustav affecting Louisiana only and Ike affecting both Texas and Louisiana. At this time, we have been back in operations, serving all customers. We did incur some damage to some of our facilities and bases, the worst of which was Galveston in Texas which basically was destroyed and needs completely reconstructed.

We’ve taken action from that and relocated our operations to nearby Brazoria County Airport which is a base we’ve operated from previously.

In Louisiana, Creole is our base most affected. We basically are using it only as a fuel stop at this time as reconstruction goes on. In the meantime, the aircraft that we were operating at Creole, we are now operating from our new IAB facility on Intracoastal City.

Intracoastal City itself is back up and operational. That is our second biggest base in the Gulf of Mexico. There are some minor repairs required but basically we’re back in operation there. Our biggest base in Louisiana, Galliano, was not affected by the hurricanes and has operated throughout.

When we are operating from these alternate locations, some of that involves additional flight time and we are being paid for those additional hours by our customers. There are however, some other incremental costs that we are incurring from these alternate locations and that are affecting us slightly. They are things like accommodating our pilots and staff in hotels that were previously provided by the company.

In the September quarter, a combination of the decrease of flight activity from the hurricanes and the increased costs resulted in $2.1 million in operating income. There is a potential future gain once we make some claims of $1.5 million that would offset that.

Summing up the hurricane situation, we obviously have hurricane evacuation plans that were put into place and work very well. People did a fantastic job in these very difficult circumstances.

Moving on in North America, the pilot union that we have that covers our operations both in the Gulf of Mexico and Alaska, we started renegotiating the contract and I’ve actually concluded those negotiations. We have a new two and a half year contract in place. This basically secures our largest single cost which is our pilot labor so we now will control over a prolonged period. The contract has been restructured and it’s approved our operating flexibility which will help offset the compensation increases that were part of the contract itself. As I also mentioned, the agreement covered our pilot workforce in Alaska on a similar basis.

Moving on, the significant event we mentioned before on the aircraft sale has now been closed. The 53 single-engine aircraft and related assets that were operating in the production management business have been sold for $65 million. Twenty percent of this was received at closing. The remainder will be paid in escrow as the titles of the aircraft are processed by the U.S. FAA and transferred to the new owner. Today, we have 15 aircraft that have already transferred and we expect by the close of business today that that will be 20 aircraft already transferred to the new owner.

The results of this transaction are a pre-tax gain of approximately $40 million or $0.72 per diluted share and these would be recognized in the December quarter. This transaction was very complex and a lot of hard work was done by our management team in our Gulf of Mexico business units supported from our corporate office in Houston as well. This transaction also closed through the extremely difficult financial crisis which we can move on from here. As we previously mentioned, this divestment was part of a strategy shift to move to the deep-water market with larger aircraft. We already have 2 S-92 aircraft in our Gulf of Mexico operation. One has been working successfully since August. The second will begin work in early December for another customer. We then take two more S-92s in the fourth quarter in our financial year, ’09, and will have several opportunities to indemnify for these helicopters.

In addition on new work, we recently agreed on a five-year extension with one of our largest Gulf of Mexico customers which are significant new business for us. In addition to this, we have been successfully negotiating extensions and price increases with several customers and again, these will take effect during the next quarter.

If I move geographically to South America, I’ll talk about Brazil. We consider Brazil as one of the largest single opportunities in our world-like market. In context, we considered it with growth potential like the North Sea was in the early ‘70s. It’s a really big plague.

We feel quite confident that activity is going to go ahead in Brazil, funding is going to be supported by the government through various banks there. On activity in Brazil, we have three major S-76 C++ aircraft tri-leased on multi-year contracts with a Brazilian contractor. These are operating with two IOC customers. We have secured three additional awards for three 76s which will bring the total to 6 aircraft. The three additional will go into contract in 2009, one in February and two towards the end of ’09. With that in Brazil, by the end of ’09, we will have the same number of aircraft in Brazil as we had a couple of years ago when we decided to exit our previous joint venture relationship.

Finishing off, just looking at some other markets in the hemisphere. We continue to see opportunity for long-term growth in the Arctic and we are poised ready for that to happen. In Mexico, our joint venture with Heliservicio was recently awarded two contracts by PanEx for 10 medium aircraft and these are 5-year contracts. We are very pleased with the position of Heliservicio in that market now.

With that, I will turn the call back over to Bill.

William E. Chiles

Thank you, Mark. I am going to concentrate on the Eastern Hemisphere starting with Europe. In the North Sea, likewise, we have a major extension with one of our largest customers in the North Sea for multiple years. We’ve also reached an agreement on our pilots and engineers on a three-year contract there as well, so we are also in the mode of controlling our costs and at least knowing what our costs will be.

The strengthening U.S. dollar has negatively affected our British pound operating results for contracts that are denominated in British pound. However, there were other improvements that more than offset the FX effect, so the margins have been very, very strong in the North Sea.

We previously mentioned that we withdrew from the search and rescue contract bid with our partners FBH, FB Wholeservices Circo and Augusta Westland, basically, because of reduced commercial upside, the fact that the government has chosen to commoditize the project. There is very high commercial risk with very little return and delays in the award with the process. So we decided to just withdraw. It was a lot of work and very little upside for a tremendous risk. We do remain committed to other search and rescue work in other parts of the world or wherever our customer wants search and rescue work to support oil and gas business.

We mentioned the North transaction earlier when we acquired the remaining 51% interest in Norsk Helikopters in Norway from our former partner. We believe this is a big success and will help grow our European business unit and it will also simplify our operations there. We will completely consolidate not only the results but the operations in Norway into our European business unit so there will be some synergies there that we have yet to identify but we will experience some synergies in those operations.

Turning to West Africa and Nigeria, recently there was a very large contract extension with a major customer in Escrobos. Escrobos is where we fly light helicopters in support of Chevron’s production operations. In addition, we’ve also recently had a multi-year award for the operation of two large S-92 helicopters and two medium S-76s. One of the S-92s will be in SAR configuration and this is in support of a major production operation in Nigeria. The union contract there is currently in negotiation and hopefully in the final stages.

Southeast Asia, particularly Australia, the disappointing margins were caused by a number of factors, primarily from delays in project start-up, unscheduled aircraft line maintenance, unreimbursed aircraft movements across the country, but also compensation increases from the union negotiations that we completed and payroll catch-up. Some of these costs are not expected to recur and those that are, we are in a process of controlling those costs and in discussions with our customers to increase our pricing to offset those costs.

The new work coming on in the next six months and year is at much better margins and it will further mitigate the effect of the cost increases. We are taking very active steps to make sure that we get Australia back on-track here.

Looking forward, we are in a strong position to withstand the current financial crisis. We have a large cash component on our balance sheet that Perry is going to go into. We can continue to execute our growth plan but we are going to be very disciplined about that and cautious. We’re very excited about some of the market developments around the world like Brazil. With that, I will turn it over to Perry.

Perry L. Elders

Thanks, Bill.

I just wanted to review the consolidated results for the quarter compared to the September 2007 quarter. The most significant items affecting the operating results were the negative affect of the hurricanes in the Gulf of Mexico that Mark mentioned as well as the high maintenance costs which continue in the Eastern Hemisphere Centralized Operations. The storms, Mark mentioned, affected around $2 million of operating income or $0.04 per diluted share. As he mentioned, we have an upside in future payment to a $1.5 million agreement.

In terms of Eastern Hemisphere Centralized Operations, we had higher maintenance costs of about $2.7 million or $0.05 per share in this quarter which was primarily driven by the Euro-based power-by-the-hour maintenance contracts and the exchange rate movements in the Euro of 2008 compared to 2007, and also, the additional heavy maintenance which was similar to the circumstances in June although to a much lesser extent. We had anticipated this and as we had discussed with investors in the June quarter call, this was expected to continue. We expected to be able to mitigate it and indeed it has continued but we have been able to mitigate it to some extent. Going forward, we have had CapEx exposure from further deterioration although the existing EfEx deterioration is expected to continue to hit us for the remainder of this fiscal year.

We’re also taking steps to better manage the cost of the heavy maintenance and expect to see improvements in that area. As Bill mentioned, the core operating results in Australia cost us $0.12 a share this quarter but were substantially offset by higher revenue in Europe related to contractual rate adjustments and retroactive rate adjustments, applicable services performed in prior quarters that added $0.09. So if you take those four operating items together in the September quarter, they had a negative net effect of $0.12 per share. If you recall in the prior year quarter, the September ‘07 quarter, we had $0.24 of out-of-period positive items. If you exclude the negative items from this year’s quarter and the positive items from last year’s quarter, diluted EPS has actually increased $0.02 per share.

In addition, non-operating items, there were two significant changes and both of these are going to have a continuing effect going forward. We had a lower effective tax rate in this period. It was 26% compared to 35% last year, principally due to the lower UK statutory rate that is down to 28% now as well as the tax reorganization that we completed effective April 1 of ’08. So we expect the full year rate for fiscal 2009 to be around 29% and you will note that is about what our rate is for the six months ended September 30, 2008. That represents a substantial reduction from historical periods and a real improvement in the bottom line from a cash perspective. That provided, as I mentioned, a $0.10 per share benefit to the quarter that was offset by a $0.13 per share hit for the capital that we raised in June that you all were previously aware of. So those non-operating items kind of had a substantially offsetting effect during the quarter.

In terms of cash flow, we had an excellent quarter. EBITDA was almost $119 million. Cash flow from operations was $55 million compared to $43 million in the prior year and these are six month numbers that I am referring to here today. Likewise, CapEx, capital expenditures was $279 million versus $221 million which is inline with our capital expenditure program.

On the financing side, in light of Bill’s comments in regards to the global economic crisis, you know that over the past three years, we’ve raised $1.1 billion in capital. In light of the current financial market situation, we’re now benefitting from our conservative financial policies which include relatively low leverage and pre-financing CapEx via cash on-hand, available revolver capacity and a conservative estimate of cash flows. At September 30, we had leverage of approximately 43% of capital or 3.67:1 debt to EBITDA and both of those on our adjusted debt faces including the balance sheet debt, our off-balance sheet GE leases and our UK under-funded pension obligations.

So at September 30, our cash on-hand actually exceeded the remaining aircraft commitments at that point. We have $600 million in aircraft on order of which there was about $380 million left to be paid but $600 million in aircraft on order that we expect to come into the business and deliver growth. In addition to that, we have undrawn revolving credit facilities and a conservative estimate of future cash flow that provides uncommitted liquidity of approximately $425 million.

We remain disciplined in our capital program and have recently reassessed our investment opportunities. We do expect to spend this additional $425 million of uncommitted liquidity to grow our business by purchasing aircraft and taking advantage of strategic opportunities which may present themselves particularly as others struggle to obtain capital.

We’ve also proactively been managing the potential implications of the financial crisis for Bristow and that has included protecting the company’s liquidity by investing our cash in secure investments, monitoring the ability of our counter-parties to fill their obligations whether that is our lenders in the credit facility, EfEx hedge counter-parties or others. We’re also evaluating the funding requirements of our retirement plans and as Bill mentioned, staying close to our customers in terms of receivables collected.

With that, I’ll turn to the business units and just very briefly run through the business units and talk about what we see going forward for the next couple of quarters in terms of business units’ margins. Longer-term, we expect the margins to improve over what I’m about to mention but for the next few quarters, what we’re seeing in the Gulf of Mexico for example is the mid-teens, however, there could be some modest dilution from that as we provide services to the purchaser of the 53 aircraft at somewhat of a cost. So around the mid-teens, this is consistent with our previous guidance.

Alaska, as expected, Alaska had a great quarter in September but also expecting for the December and March quarters a significant falloff as we’ve seen in the past. Latin America will continue to expect kind of the low to mid-twenties and the Western Hemisphere Centralized Operations, you will note that we had a profit this quarter which was due to reduced maintenance during the storms so we expect to have actual net costs in the Western Hemisphere Centralized Ops for the next few quarters.

Moving to Europe, our expectations of margins in our legacy UK and Dutch business continues to be around 20%, however with the consolidation of Norsk, we expect total Europe margins to reduce a few percentage points. In Nigeria or West Africa, we continue to expect margins to be in the high teens to around 20%. For Southeast Asia, as Bill mentioned, we do expect recovery, partial recovery in the December quarter and a full recovery in the March quarter. The other implication for us in Southeast Asia is a strengthening of the dollar, as Bill mentioned in Europe, we are having a similar effect on the Australian dollar and that has a negative effect on the quarter. As that dollar strengthens, expect it to continue for the next couple of quarters.

In our other international business unit, we expect it to continue to be our smallest business unit and the one in which we essentially make frontier-type investments and growth, so our operating results in this business unit are expected to be exceedingly relatively nominal and somewhat unpredictable.

In the Eastern Hemisphere Centralized Operations, we already discussed that, but we do expect to continue to see losses from the EfEx as well as heavy maintenance for the next several quarters. Bristow Academy, we expect to see better results in the December and March quarters as the military training plans in the first half of the year has been shifted to the latter half of the year.

With that, we’re now ready to take questions so if I can ask you to ask one question and a follow-up question, we would appreciate it. Operator, we will turn it over to you.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Ian Zaffino with Oppenheimer and Co. Please go ahead, sir.

Ian Zaffino - Oppenheimer and Co.

I need reconcile from something Bill you said and Perry. Bill, you mentioned, I forget the exact words, but you’re going to judiciously expand or consider expansion opportunities and Perry mentioned that everything as far as expansion and the new aircraft that you want to bring on is fully funded and going forward. Was there something else that you were referring to, am I just not getting that right or if you could help me reconcile that would be helpful?

William E. Chiles

We currently have on order, as Perry mentioned, around $600 million of aircraft on order which we have about $390 million left to pay. We expect to continue to deploy those aircraft over the next few years. Those projects that are identified connect directly to those aircraft. We expect to continue to go on and we have alternate uses for those aircraft if the specific projects don’t go forward. With respect to the additional capital that we have coming on over the next few years, we’re going to be very careful and judicious. We expect to continue to grow. We have opportunities identified around the world that far exceed our ability to deliver aircraft to those projects with the current order book so we’re going to watch it very closely. Obviously, if those opportunities fall away because of the current situation, we would not exercise options or continue to fund additional orders. Does that answer your question, Ian?

Ian Zaffino - Oppenheimer and Co.

Yeah, that’s helpful. The other question would be, in your discussions with customers, whether they exist or new projects or they’re just new opportunities, does the price of oil as far as their marginal costs of production, do those conversations ever come up? If so, can you kind of give us a broad stroke on what your exposure is kind of each price point or each kind of bucket of oil prices or gas prices and how they might move so we can think about it?

William E. Chiles

What we’ve previously said to all of you is that we were comfortable that our business has stayed very robust with oil above $100 a barrel. When you start going below $80 a barrel, in between $80 and $100 a barrel, things are going to move on. There will be a few projects that will fall off but the number that we have talked to you about, we have identified around the world is about $2 billion worth of projects that require capital or projects that require about $2 billion in capital. If you compare that to what we’re actually executing, a little less than $1 billion, there are quite a few projects. The question you’re asking is what will happen below $80 a barrel, will the opportunities drop by half is very hard to tell. Obviously, the very high cost projects in the Arctic will likely not be executed, however, in places like Brazil, West Africa, Southeast Asia and relatively benign environments with friendly countries, the threshold is probably closer to $50 a barrel or so. These projects will continue to go forward. If you talk to our customers, a lot of them are using the even lower threshold numbers than that to determine negating items to determine whether they execute or not. We’re fairly confident that we’ve got enough market demand out there even with oil hovering around $60 a barrel to keep our business very, very strong.

Obviously, the flying we do on the margin for drilling rigs in the exploration/development area will likely fall off first. We haven’t had enough time and feedback from our customers to really make a strong assessment. You know we work with PSC Energy and they’re doing the same for us as well.

Operator

Our next question is with Arun Jayarum with Credit Suisse. Please go ahead.

Arun Jayarum - Credit Suisse

I wanted to see if you could elaborate on the impact from the pilot labor agreements in the Gulf of Mexico and in the North Sea or internationally on here on your cost structure.

Mark Duncan

It’s Mark Duncan here. We have concluded our agreements and the vote has taken place with union membership. It passed with a large majority. We have in place a two and a half year contract which has annual escalations. The average of those escalations in terms of base salary increases is 6%.

Arun Jayarum - Credit Suisse

Per annum?

Mark Duncan

Six percent per year.

Arun Jayarum - Credit Suisse

How about outside of the Gulf of Mexico?

William E. Chiles

It’s roughly the same. The impact is baked into our numbers so that when we look at our plan, we already got those numbers in there. So we don’t see any impact to our plan. You would ask what about relative to actual results, we believe we’ve got escalation clauses, contract escalation clauses and normal price increases that we’ve already executed and will execute that which will more than offset those costs.

Arun Jayarum - Credit Suisse

Bill, in terms of the overall business model, looking back at Bristow historically, it never really generated much free cash flow as you have been in growth mode. I was wondering given the global financial situation, how do you adjust the business model and when do we see you guys start to generate some free cash flow or are you going to continue to be outspending your EBITDA as you continue to add aircraft?

William E. Chiles

The way we look at it, if we can execute and deliver the internal capital employed that we expect and you expect, that gives us a good margin over our cost of capital and we will continue to do so. If pricing for some reason falls and we’re not able to get a good spread over our cost to capital with good secure contracts, we’ll slow down the growth or stop the growth. We’re not going to be adding capacity that is not extremely secure and gives us that good spread. It’s hard to say when that would happen, if it would happen. We expect it to continue right now but I’ll tell you we’re not freely spending money without any regard for the current situation. We’re looking a lot harder at our contract terms and making sure that before we commit new capital that we have a solid commitment from a customer in-hand.

Arun Jayarum - Credit Suisse

Just a real quick follow-up, in terms of the options that you have over the next 12 months, Perry can you give an update on what that number is and I guess the decision process on whether to exercise those options or not?

Perry L. Elders

Yes, Arun. We do not have any options expiring in the December quarter. We have a few that expire in the March quarter. We currently have a number that expire in the June ’09 quarter. However, we are watching the effect of the economic crisis on our OEMs and we have in the past been able to negotiate deferral of option exercises when we come to them and we’re not prepared to exercise them. So currently contract expiration dates, there are a few of them in the March quarter and others in the June quarter and others beyond that but our expectation is that with our purchasing power with the OEMs as well as potentially some softening in the market with the financial crisis that we’re not going to lose those slots if we chose not to exercise all of them as they come up.

Operator

Our next question is with David Smith, J.P. Morgan. Please go ahead.

David Smith - J.P. Morgan

Question for you Bill or maybe for Mark as well. Thinking back to past cycles that rolled over quickly and maybe the late ‘90s is the right example, how did pricing and margins change for the medium and large helicopters, maybe from peak to trough?

William E. Chiles

We have seen historically since none of us were here then that when we plotted those numbers from the past, we didn’t see, and we’ve actually shown this in some of our investor presentations, we plot our pricing versus pricing on a gross basis, for example in the Gulf of Mexico versus rigs and boats, you see the fact that we don’t see dips in our pricing. What happens though is that the flat irons start falling on the margin where we are flat, we fly to drilling rigs, so the actual margin numbers, I don’t know Perry, you might want to answer that. Going back that far, I don’t know what the margins look like.

Perry L. Elders

We do see some margin compression during down-cycles but it is because of the pricing pressure as Bill mentioned. What we don’t see is a dramatic fall-off and if anything, what it typically calls us to do is just to hold pricing firm and not have pricing decreases. As you know over the last few years, particularly in the Gulf of Mexico, we have been raising price not dramatically but 8%-10% a year in a down market in the past. Instead of raising the price, we held prices flat. That’s the kind of effect that we would expect.

David Smith - J.P. Morgan

Can you remind us what the average contract duration is outside of the U.S. and also if you provide some color on the security of those contracts? Are they take or pay, do they have cancelation clauses? How do we think about that?

Perry L. Elders

Outside of the Gulf of Mexico, on average, three to five years. Nigeria, two to three years. We do have some contracts that are longer than five years. As you know, in the Gulf of Mexico, they are shorter-term than that, typically. The contracts do have cancelation provisions. It ranges depending on the market from 90 to 180 days generally. However, that generally is not, we’ve certainly not seen that in the last four years and don’t anticipate that going forward. They’re not literally take or pay contracts as you might traditionally think of take or pay contracts, but they do have capital protection in the form of monthly retainers so that even when the customers don’t fly, we’ve seen this circumstance in a couple of instances in the past in Nigeria due to violence, where we have not had the variable rate for the flying hours. We’ve continued to receive the monthly retainer and so it’s not take or pay, but we do have that guaranteed margin built into the capital part of those contracts.

Operator

Our next question is with Dan Goldberg, RBC Royal Bank of Canada. Please go ahead.

Dan Goldberg- RBC Royal Bank of Canada

Just following along on the capital question and your future investments. I would imagine given the current environment, given that the cost of capital has gone up tremendously, you are boosting the necessary return of capital required from your new investments. Would that be the case?

Perry L. Elders

Yes, Dan, we’re taking a close look at that and we’re not dogmatic about this. We don’t set fixed, rigid, we look at every individual circumstance. They are each individually unique. We’re confident in achieving our long-term goal of a positive 20% return on capital but each individual contract differs. If the long-term contract is in a very stable market from a major international customer, we might have a different view than a shorter term contract in a more high risk market. We’re not dogmatic about it but we certainly are taking a harder look at those margins. As Bill said, we’re effectively high-grading the opportunities to put this capital to work.

Dan Goldberg- RBC Royal Bank of Canada

At this point, you are not specifically saying you require more than the 20% return on capital that you were looking at six or nine months ago?

Perry L. Elders

What we said before is that the 20% is a composite average. There are some markets that are slightly below that and some markets where we are substantially ahead of that. That continues to be the case. I might also note that the 20% is an expected long-term goal and we expect to achieve our financial goals of doubling the size of the company by fiscal ’11, by the end of March 2011. The 20% return on capital will likely be achieved in several years following that, probably not by March 2011, but we still expect to achieve that in the longer term.

Operator

Our next question is from [Adrell Askew] with HIMCO. Please go ahead.

Inaudible Analyst – HIMCO

Can you talk about your terms on the Gulf of Mexico contracts? You said those were shorter terms. Can you provide a little bit of detail there?

Mark Duncan

In the Gulf of Mexico, we have a market there which most of it is annual contracts that are evergreen. So every year they get renewed for another year. For example, we have some contracts there, one-year contracts that have been in place since 1993. We stay very close to the customers to make sure we know their plans and the significant item I mentioned when I made my discussion points earlier was we are seeing some customers moving to five-year contract terms significantly to secure the provision of helicopters that they need for their future operations. That trend is something that we’re seeing with several other customers as well.

Inaudible Analyst – HIMCO

What percentage of that would you say is what you are currently seeing?

Mark Duncan

As an example, the S-92 that we have flying since August is on a 3-4 year contract which is an indicator of that change.

Inaudible Analyst – HIMCO

Represented of the total business in the Gulf of Mexico is one aircraft, right?

William E. Chiles

Maybe I can help with this. Prior to the sale of these 53 aircraft, about half of our revenues in the Gulf were shallow-water and half-deep, roughly speaking. With the sale of these 53 aircraft, we’ll still have the significant presence in the shallow water. We’re not leaving the shallow water but it does reduce our small aircraft fleet in half in the Gulf of Mexico in the shallow water. The shallow water is typically where the shorter-term contracts are. The further offshore like the ones that Mark referred to on the S-92s, those are the longer term contracts. We don’t publish contract lengths but maybe that will help you frame it.

Inaudible Analyst – HIMCO

So with half-shallow, half-deep, what would you say that breaks out now? Is it all deep water?

Mark Duncan

It’s not all deep water. Certainly more than half of it is deep water, for sure.

Inaudible Analyst – HIMCO

Let me ask another question. Talk about your business mix as it relates to the exploration versus production projects. Can you give me a total percentage of costs for the entire business or within certain regions? Can you give me an indication there?

Perry L. Elders

We don’t have that quantified and we don’t report that. The reason why is when we fly for customers, they have the aircraft reserved and they will have us fly to both. In some flights, we actually fly to multiple facilities offshore, some production, some exploration so there is not a specific quantification of it. We believe the majority of our flying is for production base because there are 9,000 production facilities in the world and only around 700 rigs. So the exploration flying is important to us but it’s certainly a smaller part of our business. We don’t report specific numbers on it.

Inaudible Analyst – HIMCO

I mean from a risk mitigation standpoint, as a management team, how do you guys think about your exposure to exploration projects? How do you size that up? When you sit down and think about it, how much business can go away at $40 oil, how do you size that up?

Perry L. Elders

Like I said, the vast majority is unaffected by commodity prices unless it gets below the $50 that Bill mentioned. Also, maybe as importantly to kind of connect some of the questions here together, the growth plans in terms of the CapEx that we’re doing, the opportunities that we see that Bill mentioned that are roughly double what capital we currently have available to us are principally production-based projects. They’re projects that we believe will go forward based on the commodity price expectations that we’re seeing from everybody. So we’re not seeing commodity price expectations from our customers as yet that we believe would cause any substantial declines in either our existing business or the new business that we see coming on.

William E. Chiles

Let me see if I can expand and tie those questions together and the question that Dan had. We are being very disciplined about the capital. We are very aware of what’s happened to the equity returns and with multiple compressions the expected equity returns are higher. We’re very sensitive to that and that’s why Perry said earlier, we’re high-rating the projects that come up, so we’re effectively addressing the higher cost of capital. We’re also being very disciplined about the projects that we’re focusing on in the future to make sure they’re more insulated from commodity price fluctuations. For example, Mark mentioned Brazil. We believe that the projects in Brazil even including the subsalt projects or what they call presalt, will continue to go forward and we believe, and we’ve looked into this in detail, the financing is there to support those projects.

To get to your specific question about production flying periods, for example, a S-92 or S-76 that flies for Chevron will on its daily routine will stop on several drilling rigs, come back to shore, go to several production platforms, come back to shore. It’s a little bit difficult right now to properly assess exactly how much of our business in a given market would be susceptible to a falloff in drilling activity and we’re going to continue to work on that.

In the frontier areas that Perry mentioned were under other international areas will probably be affected to some extent because a lot of those projects are pure exploration and may be withdrawn, but we have very little exposure in the other international business unit.

Inaudible Analyst – HIMCO

When you say frontier area, can you tell me specifically what those are and that will be my last question?

William E. Chiles

I will give you an example, Mauritania-Libya.

Perry L. Elders

Madagascar.

William E. Chiles

Madagascar. Places like that.

Operator

At this time, we show no further questions.

William E. Chiles

If we show no further questions, thank you very much. We understand people are focused on a lot of negative press out there. There is stuff going on but we are going to continue to be optimistic with regard to our growth plans and believe me, we are going to be very, very careful and very, very disciplined about it. We’re happy to enjoy the financial strength that we have today. Again, thank you and we will continue to talk to all of you during the next few months. Thank you very much.

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Source: Bristow Group Inc. 2Q09 (Qtr End 09/30/08) Earnings Call Transcript

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