Bristow Group Inc. F3Q09 (Qtr End 12/31/08) Earnings Call Transcript

| About: Bristow Group (BRS)

Bristow Group Inc. (NYSE:BRS)

F3Q09 Earnings Call

February 04, 2009; 10:00 am ET


Bill Chiles - President, Chief Executive Officer

Perry Elders - Executive Vice President & Chief Financial Officer

Linda McNeill - Investor Relations Manager


James West - Barclays Capital

Ian Zaffino - Oppenheimer & Co.

Daniel Burke - Johnson Rice

Judson Bailey - Jefferies & Co.

Chris Agnew - Goldman Sachs

Ben Atkinson - Gagnon Securities

Edward Okine - Basso Capital

Adrelle Askew - Hartford Investment Management


Good morning ladies and gentlemen, thank you for standing by. Welcome to the Bristow Group third quarter 2009 earnings conference call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions and instructions will be given at that time. (Operator Instructions)

I would now like to turn the conference over to Linda McNeill, Investor Relations Manager. Please go ahead ma’am.

Linda McNeill

Thank you, Britney and good morning. Welcome to Bristow Group’s December quarter earnings conference call. My name is Linda McNeill, Investor Relations Manager. With me on the call today are Bill Chiles, President and CEO; and Perry Elders, Executive Vice President and Chief Financial Officer.

We hope you’ve seen our news release and 10-Q which were filed this morning. Both documents are posted on the Investor Relations section of our website at Please note that no earnings guidance will be provided during this call.

Additionally, Bill and Perry will provide new information on this call about our business in terms of the composition of our revenues and profits, which includes data substantiating the stability and durability of our business in down energy cycles. The information provided will be available in the transcript of this call. We anticipate updating this information on a quarterly basis.

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

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

Bill Chiles

Thank you Linda and I’d like to welcome all of you and thank you for calling in today. As customary, let’s start off by talking about flight safety and ground safety.

Flight safety, we look at air accident rates per 100,000 flight hours and our numbers are 0.88 year-to-date. That compares to an industry average for the oil and gas producers of about 1.5. Actually our accident rate in our normal revenue flying non-training is zero and the 0.88 is a result of two relatively minor flight accidents in our training business that resulted in no fatalities, so good progress there.

In terms of our ground safety, our total recordable incident rate is 0.4 per 200,000 man hours and our lost work case rate is 0.23; so we’re making good progress there. I will just quickly touch on the grounding of S-76’s by Shell in the Gulf of Mexico.

Shell is grounded. The S-76 is flying for them in the Gulf of Mexico as a result of the accident that happened about three weeks ago; I’m sure all of you have heard of that. It does not affect S-76 operations elsewhere around the world and this is just something that Shell is doing to be very cautious until they find out the actual facts of this accident.

Financial results for the quarter, our revenue was up 8% to $283 million; income from continuing operations of $47.6 million up 82%; diluted earnings per share of $1.34, double the prior year, primarily impacted by the gain on the sale of the Gulf of Mexico aircraft The 53 aircraft that we sold in the quarter resulted in a $0.69 benefit. FX exposure globally resulted in a $0.07 reduction in our quarter results and tax for out-of-period items, a $0.11 benefit.

So earnings-per-share would have been $0.61 without these items and, if you take out the effect of the offering that we did last June, we would add another $0.21 to earnings for a total of $0.82. Our return on capital employed for the nine months is around 15.5% and that does include the benefit of the gain on the aircraft sale in the Gulf of Mexico.

I don’t have to tell you a lot about the macro market. I think everybody pretty much understands what’s going on. We had figured that we would see $40 to $50 oil since we saw oil run up to $140 or so. In our models and the work we do internally we had expected and had cases based on $40 to $50 oil. What we didn’t figure that would be going on in conjunction with that obviously is the financial crisis that we’re in globally.

However, our customers are still basing their planning on $58 a barrel. For some customers that really hasn’t changed much even when oil ran up, but that has resulted in a reduction in activity primarily on the upstream end, exploration and development spending.

The global numbers that we’re seeing from surveys out there are down 11.8% or roughly 12% on average. However, the super majors as a group are generally down in North America and up internationally with the largest surprise coming out of Brazil with Petrobras’s new five year plan announced the other day with a 55% increase in their expenditures planned for the next five years. 55% as compared to the five-year plan they put out last year. The large European companies are down about 11% and the large US companies are down on average about 21%.

Oil is obviously currently trading around $40 a barrel. So we do expect our business to be affected by the reductions in the CapEx spending around the margin of our business where we fly through changes for drilling rigs.

What we’re seeing in the big CapEx projects is some of these projects are being deferred 12 to 18 months, but we also see some positives where some of the big major projects around the world like Agbami and Gorgan projects that are already started or continuing on and we’re actually seeing additional demand for flying out of these big production projects which drives a big part of our business.

Elsewhere in production we do see some cutbacks in flying. For example, if someone has a drilling rig on a platform doing development drilling or a step out or a wildcat, we’re seeing some reductions there. We are getting pricing pressure from our customers, although we’re resisting that because our margins aren’t nearly what we see in other segments of oil service.

The downturn for us obviously is exacerbated where we fly for smaller independents that have a need for capital and can’t raise it and we have a case in the North Sea where an independent is in financial difficulty and we had to write off some of the revenue related to that contract. You’ll see that affect in the quarter results. Parry will go into more detail in a minute.

As far as the aftermarket, as expected we’re seeing softening; although we’re not seeing nearly the softening that you may know about in the fixed wing business. There are sufficient buyers out there, but lack of credit is precluding many of the transactions.

Also prices are off, but not significantly. We’re seeing around 5% reductions in valuations for the higher end equipment and for the older equipment about 20%. So for example, if we have some old model 76’s around, we’re not saying that we see those prices falling much more dramatically than we see in a new 76 or some of the more desirable models like the 332’s.

In terms of our business, we’re going to give you a little bit different color of how we look at things. As we have said in the past, our overall revenue is roughly two thirds production based which is really related to operating expenditures rather than CapEx exploration and development. One third is exploration development that comes out of the CapEx and about a quarter of that is development and about three fourths is exploration. So you can see where we will be affected on the margin.

About 60% of our revenues come from majors, international oil companies and national oil company customers, while only about 40% comes from independents. In terms of revenue, a further breakdown; about 60% of our revenue is embedded in the fixed monthly charge. We earned about 40% of our revenue based on the variable flight hour charges, but that represents a less than 30% of our operating income. Therefore most of our profit, around 70% comes from fixed fees which should not fluctuate based on flight hours.

Our customer contract links are generally three to five years long term, but in some cases seven years. In the shallow water US Gulf of Mexico the contracts are generally month-to-month and effectively ever green. Although our customers do have certain cancellation rights under certain contracts that we have around the world, we have over $600 million of revenue under contract for fiscal year ‘10 and over $500 million under contract for fiscal year ‘11.

In terms of the new aircraft market, the need for new aircraft, the primary drivers continue to be the requirement to retire older aircraft, which do actually get retired in new major development projects around the world, where people need new equipment to fly long distances. For example, Brazil, some of the new finds are over 200 miles out you need new technology, large helicopters to do that.

Previously we’ve discussed with you our visible demand of over $2 billion of new aircraft on the radar screen over the next five years. With the recent downturn this has softened and still remains almost $2 billion. The probability that some of that falling off is there; although we’ve done an analysis and feel that quite a large percentage of that work will continue on; it may get delayed to some extent.

Of the new aircraft expected to be added, 70% is for new work and about 30% is replacement of existing work. Also of the new aircraft, just over half is for production work while the remainder is for exploration development. So that’s generally the mix that we see of the aircraft coming on in terms of production. It doesn’t represent our mix and our company, but it represents the mix within the opportunities that we see.

In terms of utilization of our fleet, at any point in time we typically have a number of aircraft out of service for maintenance or training. However, currently we also have 24, mostly older aircrafts waiting for customer work or a disposition including eight large aircraft, 14 medium and two fixed wing. Some of those we’re holding for sale and we are waiting because the aftermarket just isn’t there for us at this point. This represents about a 92% effective utilization of available aircraft and that number could vary slightly because at any point in time we have aircraft that are held as reserve for aircraft that go AOG.

So as discussed in the past, our business is primarily production based. We have a global diversity of our revenue base with mostly large customers, long-term contracts with the majority of the profit from the fixed charges; thus our revenue and operating income is less volatile to commodity price fluctuations, but certainly we’re not isolated from these market conditions.

What are we doing to respond? Our existing work, we’re going to continue to focus on Target Zero and Fly Safely, that’s number one to us. We’re going to continue to look at improving our customer service and deliver quality operations. Without those things we really don’t have a business. We’re going to hold the line on pricing, which hopefully we’ll be able to push through the annual modest increases that we plan.

Demonstrating to our customers a very open book on our contract profitability, we really center our discussions with them about return on capital employed. Over the past 10 years our prices have increased modestly and our profitable is reasonable with operating margins in the low teens.

While both companies have seen margins of 30% to 50% and rig companies over 50%, we have less volatility and do not expect the downside risk that they may experience. Our shareholders require prudent ROCE, return on capital employed, just like our customers do as well. So we center the discussion around ROCE and it’s a pretty simple discussion.

Cost control measures, we’re continuing to push our maintenance efficiency; you know that’s a big area this year in this fiscal year that we’ve been focusing on, making sure we right size our operations and we respond to the current market conditions. We’re imposing a management salary freeze, the management team and all of the people within our incentive population around the world will get no increase in their salaries this year.

We’re particularly focusing on our G&A costs. Again rightsizing the G&A for the current market conditions and looking at ways to better manage our FX losses and gains to try to neutralize or minimize the volatility.

During the quarter we took delivery of 11 aircraft. We have 31 aircraft on order at this date, with two large aircraft deliveries expected in the March quarter and 20 additional aircraft over the next 12 months after the March quarter. We expect to put these aircraft to work and with softer market conditions most of these aircraft or a higher percentage of these new aircraft will be used to replace older aircraft then, for new work.

We’re very close to our customers and their contract demands. The market is changing every day, so we have to stay in very close contact with them to make sure that we understand exactly what’s going on. We’re not going to order further aircraft without firm demand from our customers, without a contract in place or a firm commitment.

We’re just not going to order a new aircraft at this point, so the question that you’re going to ask or may be asking about our options; the options are going to be subject to getting the right terms and getting the right commitment before we exercise those. We are working hard to convert opportunities into customer contracts, to reduce our exposure and we’re also working with our OEMs, the helicopter manufacturers to defer orders and to make sure we hold onto the options and just push them out in time.

With all the aircraft that we have on order, it totals about $407 million, they’re all pre-financed. We have additional available liquidity of around $400 million and the alternatives we have for that capital, aircraft purchases, investment and acquisitions or other businesses, buyback of bonds or shares, hold cash until the market is more clear or a combination of the above. We continue to be disciplined in our application of return on capital employed with the idea that we want to continue to steadily improve that over time not withstanding the current market conditions.

We’ve been very selective about our investments and sometimes the best investment is no investment. So we’re trying to be very prudent with the capital we have on the balance sheet. We’re continuing to execute our growth plan; we’re being much more prudent; we expect our revenue to hit the $1.5 billion in fiscal year 2011, but ROCE improvements are going to be slightly slower due to the current market conditions.

With that I’ll turn it over to Perry.

Perry Elders

Thanks, Bill. I’m going to review the four largest business units and attempt to take those data points that Bill gave you about the consolidated company and talk about those as it relates to these business units, so that you’ll have a qualitative sense for each of these parts of our business.

The first of which is the North Sea operation, it’s our largest market representing 34% of our revenues year to date and in this market we have 41 large aircraft and 11 mediums and 22 of those large aircraft are new Eurocopter 225 or S-92 aircraft. In this market three-quarters of our work is production based and 85% of the revenue comes from international oil companies or national oil companies.

In addition, most of our profits are from fixed monthly fees which are about half of our revenues. So as Bill mentioned, more of our profit in the fixed fees that are not variable based on flight hours. We do have a unionized pilot and engineer workforce there, but we have long term contracts in place that I’ll touch on in a moment.

Our operating margin this last quarter was 15.9% in this market. Currently we have about 90% utilization, again as Bill mentioned, excluding training and maintenance time. The legacy business that we have in Europe, which is principally a UK business, generated almost 20% margins this quarter as expected.

Also as expected and as we had stated in last quarter’s call, the acquisition of Norsk Helikopters at the end of October diluted the combined results for the North Sea down to the 15.9% and combined with that was a $1.3 million write-off from the customer that went into receivership that Bill mentioned earlier.

In addition, we had a dramatic strengthening of the US dollar in the December quarter, by almost 20% relative to the British pound and that reduced operating income in this business unit by $3.6 million. Although it did not have a margin effect, it did reduce operating income by $3.6 million.

The outlook for this market going forward is that we have about half of the expected revenues for the next two fiscal years already under contract. We also have two more large aircraft and a medium aircraft expected to be delivered in calendar 2009.

Indicating some of the softness Bill touched on; we did have an independent customer to notify us of reductions in their production platform drilling work in the June quarter which will result in the release of one aircraft. We have received the price reduction request from customers, but as Bill mentioned we’re holding firm on our pricing.

We did receive a Statoil contract in Norway that begins in June. It’s a six-year contract with three one-year options and then a year following in June of 2010, so the older aircraft working on that contract will be replaced by two new aircraft. We expect to integrate Norsk and that is very much in progress at this stage.

On the cost side we have contracts in place with our union through 2011 that provide for approximately 4% annual escalations and then in Norway we have union contracts in place through to December ‘09 and other contracts in place through March of 2010 with approximately 6% to 10% escalations.

So in total for this business unit what we expect is operating margins to continue kind of in this mid teens area for the next several quarters and then as the Statoil contract comes on and the Norsk integration takes effect we’ll have improving margins back to the higher teen as we have historically.

Moving to the US Gulf of Mexico, that represents 20% of our revenues year-to-date and in this market we have six large aircrafts, 27 mediums and still 56 small aircraft. We have new equipment, three new large aircraft and 19 new medium aircraft in the Gulf of Mexico.

The S-92’s we’ve been talking about for the last couple of quarters, we have one of them that’s been working since August, another one began work in January and two other S-92’s are expected to be received shortly and are bid for new work that we expect to commence.

We did sell the 53 small aircraft in October which is a continuation of our shift occurring globally to larger aircrafts that are suited for future growth in deep water. The remaining small aircraft in the Gulf of Mexico, the 56 that I mentioned, are working for customers with both deepwater and shallow water activity.

Approximately 40% of our revenue and now comes from deep water and 70% of our revenue in the Gulf of Mexico comes from production. We do work mostly for independent customers in the Gulf with the exception of one super major, Chevron and 60% of our revenues and profits come from fixed monthly charges. So again, most of our revenues and profits are tied to the fix.

On the operating margin for the December quarter we earned 16.2% and we currently have approximately 94% utilization of the fleet, excluding training and maintenance time. The 16.2% margin was slightly better than expected and it was also slightly diluted by $1.8 million in billings without revenue for transitional services to the buyer of those 53 small aircraft.

The outlook in the Gulf is that about half of our next two fiscal years’ revenue is under contract and as I mentioned, we have two large S-92’s that are on bid. We also have two 76’s that are mediums on order and expect it to come in as fleet renewal as replacement aircraft.

On the cost side we have a union contract with our pilots in place through mid-2011, with an annual 6% escalation and we are looking to manage costs and looking for efficiency opportunities in this and all of our markets.

We continue to expect operating margin in the mid-teens for the next couple of quarters and then longer term we expect to see improvement as we benefit from more profitable deep water work depending on whether the Gulf of Mexico market experiences any softening.

Moving on to Nigeria, what we call our West African business unit, it represents 16% and it’s remarkable to note that West Africa is now almost the same size of revenues as the Gulf of Mexico. So it’s an important market for us. We have two fixed wing in the country that are doing customer movements and then we have two other fixed wings that are held for sale in Nigeria.

In terms of rotor wing helicopters, we have four large aircraft, 29 mediums and 12 small, and this includes some of the new aircraft model types, one new heavy and eight mediums. 90% of our work in Nigeria is for production base and 95% is for IOCs.

Roughly 35% of our revenues is on fixed monthly charges and in this market, unlike most of our others; most of the profits come from the hourly rates instead of the fixed monthly charges. We do have unionized local staff and separate agreements with pilots and engineers.

Operating margin for the quarter was a fantastic 26% and we’re currently at about 94% effective utilization. The margins were helped during the quarter because of the strengthening dollar which reduced cost by $3.5 million and without that benefit the operating margin in Nigeria would have been 19.1%, which was in line with our expectations of a strong quarter for Nigeria.

The outlook going forward is that about 60% of fiscal year ‘10’s revenues are under contracts. We expect another large 92 aircraft to join the SAR work later this year. Our union contracts really are under annual negotiations there and we had a 5% increase in our most recent period.

We do experience periodic disruptions from civil unrest, particularly in the delta region, but we do expect margin improvement to continue and be sustained and therefore we expect margins around 20% or better going forward with periodic volatility for the disruption.

The final market I wanted to touch on is Southeast Asia which is really Australia and Malaysia. It represents 12% of our revenues and in these markets we have four aircraft operating in Malaysia on a lease basis and we have in Australia 15 large aircraft, eight mediums and two smalls, including two new large aircraft and two mediums.

Two thirds of the work is for exploration and development and two thirds of the work is also based on the fixed monthly fee and it’s an even higher percentage of our profits. Roughly 90% of our customers in Australia are independent, while we have IOC customers that represent about 10% of our revenues and we have a unionized pilot work force there.

Operating margins during the December quarter were 17.6% and we’re currently at about 80% utilization in this market. This is one where the FX did have a negative affect, the Australian dollar was down to the US dollar 23% since March and almost half of that fall occurred in the December quarter. So it reduced both our revenues and expenses. Margin would have been around 15.9 without the FX hit.

This quarter represents the turnaround that we expected. If you recall, in the September quarter we had some challenges in this market and we indicated in this December quarter we would see significant improvement with further improvement expected in the March quarter and that continues to be our expectation.

We do have about half of the fiscal 2010 revenues under contract and two of three of the large aircraft that are new that are expected to be delivered this year are for new work. The pilot union runs through June of 2010 with annual increases at 5%. So we continue to expect margins to be closer to 20% going forward.

In terms of the rest of the company, it represents about 18% of our revenues across several business units. It’s in 15 countries including Latin America and those markets we’re more heavily weighted to exploration and those businesses are growing in line with expectations. We have about 11 aircraft that we expect to put out of our order book into these markets.

Mexico is a particular note where we have a wonderful quarter, 29.7% margins and I’d also continue to comment that Brazil is an area of continued expected growth. We have three aircrafts there now with further investment plans.

In terms of just guidance for your models, we do expect an effective tax rate going forward in the range of 25% to 28% and we expect our consolidated G&A cost to continue to run as it has been for the last few quarters of $25 million to $27 million a quarter.

With that operator, we’re ready to take questions now and we’ll ask participants to either ask two questions or one with a follow up. So Operator, I’ll turn it back to you.

Question-and-Answers Session


(Operator Instructions) Your first question comes from James West - Barclays Capital.

James West - Barclays Capital

Thanks for all the great information on the call so far. A couple of questions; one, I think if I look at the offshore rig market and that’s a very visible market, we see monthly fleet updates and we’ve seen a real lack of new contracts signings.

Now part of that is the shallow water market is weak and there’s no jobs, part of that is deep water as a lot of that is contacted, but I think some of that, particularly in the deep or in the mid water market is just a lack of I guess negotiation ongoing; a lack of bids coming to fruition in here.

On the aviation side is the same thing happening? Is it the same type of trend where you’re seeing oil companies just saying I’m not sure what to do right now so let’s push it out a few months?

Bill Chiles

We’re really not seeing it to that extent in the aviation side. We’re seeing customers continue on and keep in mind that most of our flying is for production anyways. So the softening that we see right now where our utilization rate has fallen a little bit is a result of exactly what you said; rigs are not being contracted, rigs are being stacked. So we do see that on the margin, but it’s not impacting us like the drilling companies.

We see some of the deep water exploration; particularly in places like Brazil, Deepwater Gulf of Mexico, West Africa continue to go on. So those rigs seem to continue working. You saw Anadarko announce the other day they’re going to continue on in the deep water and others are doing the same. So the real exposure is the shallow shell and then in areas where there’s a lot of exploitation going on like the North Sea, we see rigs coming down there as well.

James West - Barclays Capital

Okay and then how is that impacting leading edge pricing? I mean certainly you’re getting push backed from your customers on pricing, which even as oil prices are going up you still get pushback, but are you able to still secure price increases on contract rollovers?

Bill Chiles

We have not really had a contract rollover recently. We’re in discussion on a couple right now and we expect to get the increases that we had factored in a few months ago. We are getting pushed back; we’re making the case that when you compare our margins to the drilling companies and the boat companies, they’re really kind of barking up the wrong tree.

We’ve been very transparent on our return on capital employed numbers with our customers, so, so far so good. I won’t say James, that we’re going to be able to hold the line in every single case, but we are holding the line and we’re continuing to see those increases.


Your next question comes from Ian Zaffino - Oppenheimer & Company.

Ian Zaffino - Oppenheimer & Co.

As far as what you have on order, can you just go through the type of penalties you would have to pay if you were to just not go through with them or if conditions deteriorate further? Also, as far as the contracted revenue you have globally or the contracts you have with the oil companies how are those revenues and those contracts? What’s the nature of them? How do they work? Can we see those also being reworked or adjusted? Thanks.

Perry Elders

Thanks Ian for your comments. In terms of the order book from the OEMs, as we mentioned, we’ve got 31 on order, about $407 million of aircraft of which $298 million remains to be paid and we see about $62 million of that being paid in this March quarter and the majority of it, $224 million being paid in fiscal year ‘10.

We do have the option to cancel one of those orders for a relatively small fee of around $1 million and that would take out I think around $22 million, $24 million of cost from that. So that’s just at our option.

In addition to that, as Bill mentioned on the prepared comments, we’re working with the manufacturers to look at alternatives to not only deferring the exercise date on some of the options, but also other opportunities with respect to these flights. For example, the OEMs have come under pressure from other non-oil and gas customers canceling orders and that we believe may create some flexibility and some opportunities for us, both in terms of delivery times, payment terms and ultimately price as well.

So, those are all levers that we are pushing. It’s very early in this process. Over this last quarter we really did not have a lot of commitments to make and so over the next six months we’ll have a much better sense as we work through this with the OEMs. Other than that one aircraft, the other 30 aircraft on order, and six of those are training, so really it’s 25 oil and gas related aircraft. Of the other 24, our contractual commitments are firm without specified cancellation right.

In terms of your question about our customer contracts and the cancellation provisions in those, most of our contracts do have cancellation rights. They vary in terms of the notice periods from our customers, from the very short in our small market like the Gulf of Mexico of around one month notice to three months or longer in other markets and so those contracts are cancelable, but certainly we have not seen that in the past and being principally production based we do not anticipate that being the case going forward.

Again, as Bill mentioned, we stay very close to the customers, so the likelihood of a customer surprising us and just walking away from a contract is not very high. By staying close with the customers we know where they’re headed long-term and we can position aircraft and anticipate these kinds of fluctuations.

Bill Chiles

Ian, let me further support what Perry just said about customer contracts. It is quite a bit different than changing out a drilling rig. If you have a drilling rig under contract at a very high day rate and you want to put pressure on the contractor to renegotiate, it’s a very simple matter. Sometimes even in the middle of a well, we temporarily abandon the well and bring on another rig. So there is intense competition there.

In our business there is so much interaction and infrastructure involved, it’s very difficult to stop flying with Bristow and then bring some other operator in quickly. It just takes months and months and months to change out the infrastructure and to change all the training and go through all the steps you have to go through to replace us. We will work with our customers to the extent we need to, but we don’t expect the situation that you described.


Your next question comes from Daniel Burke - Johnson Rice.

Daniel Burke - Johnson Rice

Just a quick one on the North Sea Perry, just to clarify, I think you said you were overall expecting mid teen margins, then moving back to the higher teens over time. I guess my question was how much of the mid-teens near term adjustment is due specifically to the Norsk conclusion and how much of it is due to I guess just a softer outlook for that market currently?

Perry Elders

It’s principally the Norsk acquisition and the integration of that. There is some softness as I mentioned. We had that one independent customer go into receivership and we have gotten notices from another customer that they plan to curtail production-related drilling operations in June. So there is some softness, but the lion’s share of the margin contraction in the North Sea is from Norsk, which again we believe is kind of a few quarters here as we get Norsk under our belt and get them integrated with our operations.

Daniel Burke - Johnson Rice

Okay and then I guess my next question is, if I look at the, I think it’s about 20 aircraft that are scheduled to be delivered during 2010 that are firm, I think if I’m reading the Q correctly you’ve got four of those committed to customers. Can you specify whether those are mediums or large and maybe elaborate a little on comments you made earlier about how you were beginning to anticipate that more of those aircraft might be used for replacement business rather than new business? I think that would be useful.

Perry Elders

Sure. Yes, there are 20 aircraft expected in fiscal year ‘10, one small, eight mediums and 11 large aircraft and as we’ve discussed in the past, all 20 of those slots are designated or reserved for specific customers and known opportunities. So they’re not completely on spec.

On the other hand we’ll have contracts for only four of them. So as Bill mentioned, we’re working vigorously with our customers in order to hold that slot to get them to go ahead and convert the opportunity into a contract, but as we sit here today, there are four out of the 20 under contract.

Bill Chiles

Let’s talk about Brazil quickly, because it has a big impact on our order book. Right now Petrobras is out for bid for nine to 10 new heavies; new meaning S-92’s or 225’s. Some of those we expect to start operations this summer. We are actively involved in that bid process; we’re going through clarifications now. So Brazil could have a big impact on demand for heavies for us, as well as other Operators.

In addition, Petrobras just issued a tender for 30 medium aircraft of which if I remember, 13 replace existing contracts or rollovers and the balance of 17 are new additional supply required in that market. We are obviously going to participate in that bid and that could as well take up a big chunk of our medium aircraft on order.

Daniel Burke - Johnson Rice

Thanks and then I guess just this one follow, Bill. I appreciate the color on Brazil. Do you anticipate you would be able to put aircraft to work their and fulfill sort of your return on capital employed long term targets?

Bill Chiles

Yes, we do. We have three on contract there now and three more that we know up to date, three more medium aircraft going in there that are committed on contract. We’re getting our returns that we expect on those contracts and would expect to continue that with these new bids as well.


Your next question comes from Judson Bailey - Jefferies & Co.

Judson Bailey - Jefferies & Co.

First I’d like to echo the earlier comments. Thank you again Perry for the additional disclosure, it’s very much appreciated. My question actually is a follow-up. Would you mind repeating when you went over the West Africa statistics, what percentage of your revenue I believe came from fixed charges and what came from hourly?

Perry Elders

Sure, the fixed charges is 35% and 65% is hourly, so that’s on the revenue side Jud, but the profits are more weighted to that 65% that’s coming from the hourly. So again, this is a little bit of an anomaly in our consolidated business. In all of our other markets most of our revenues and even more of the profits come from the fixed part of the business and just because of the way we’ve been operating in Nigeria for 50 years now and because some of the challenges there, we have a slightly different orientation of the contracts.

Judson Bailey - Jefferies & Co.

Okay. My follow-up is where you expected margins to be over the next few quarters? Can you give us a sense of what you’re assuming as far as flight hours and activity? In other words, if we see a real substantial drop in activity, understanding a lot of your revenue is already somewhat booked, how much of that could bring margins down relative to what you’re expecting at this point?

Perry Elders

Are you asking about Nigeria, Jud or --?

Judson Bailey - Jefferies & Co.

I’m sorry, the four main markets that you had mentioned.

Perry Elders

Well, obviously in the Gulf of Mexico we’re in transition this quarter. The December quarter was a mix, if you will. We had a month in there where we had those 53 aircraft. So you didn’t have a full pure quarter and you also had that $1.8 million of no margin billing. So going forward in the Gulf of Mexico we would expect ours to drop because we won’t have one month’s worth of those 53 aircraft hours in there, but as you saw in this quarter as well, the revenue per hour increase in the Gulf of Mexico and that’s because of the mix shift that’s going on there.

I might also comment while I’m talking about that mix shift in the North Sea, the revenue per hour went down in the sequential quarter, December compared to September. That’s not because our prices went down, that’s because we consolidated Norsk and Norsk has a heavier number of hours per aircraft and so it’s really just a mix change. With the consolidation of Norsk, it wasn’t like prices fell at Bristow or something like that.

Back to your question in terms of the Gulf of Mexico, that’s kind of what we expect in the North Sea. What we expect is some softness and remember that the month of December and the month of January are typically seasonally down periods of time and so the December quarter and the March quarter, both in various of our markets will have seasonally lower hours anyway, all other things being equal, but on top of that we have some of the softness that Bill was referring to.

So we would not be surprised to see hours fall slightly in the North Sea in the March quarter. Although we expect that margins will kind of hold in this neighborhood and longer-term like I said improve with respect to the integration of Norsk and certainly beyond the March quarter as we complete that integration of Norsk and get on to working on the Statoil contract in Norway, further improvement.

In Nigeria, we’ve just begun operations on a large contract for an IOC there with new equipment. We put an S-92 in there and as I mentioned, we have another coming for SAR work now. SAR work, Search and Rescue work is by nature primarily fixed revenue and a few flying hours.

So when that aircraft joins the Nigerian fleet that will have an impact, you’ll have higher revenue per hour because there’ll be fewer hours for that aircraft and it will be primarily fixed fees, but the combination of the one that’s coming and the one we put in there recently working on this contract, we expect not only the margins but also the revenue per hour to continue to improve in Nigeria.

Then in Australia, really what’s going on in Australia is a significant fleet renewal. It’s been the fleet that lags the rest of the business in terms of most of our older aircraft or I should say the mix of our fleet in Australia is principally older aircraft. So we have a longer way to go if you will, in terms of bringing new aircraft in there.

We brought a few in, we have more coming, but the mix in Australia is not yet to the same mix of proportion of new aircraft that we have in these other three markets. So that over the next year or two will be changing as we kind of change out that fleet in Australia.

Judson Bailey - Jefferies & Co.

So would it be fair to say Perry that if you were to see a real material slowdown in your flight hours, maybe the margins won’t be impacted as much as some would think because you’re obviously going to benefit from the new aircraft coming in, but we could still see a deterioration from the levels you kind of indicated on the call. Is that a fair statement?

Perry Elders

Jud, it’s possible. I wouldn’t say that it’s fair though, because there’s a couple of things that will mitigate that. First of all, as Bill mentioned, our adjusting or rightsizing the company to fit the business and looking for efficiencies in the organization. So we’re not just going to continue to operate or stay the course if there’s a softening in the market. So there will be some of that cost management going on. In addition, the new aircraft that are coming in, I remember you made this point, they will kind of mitigate that fall off.


(Operator Instructions) Your next question comes from Chris Agnew - Goldman Sachs.

Chris Agnew - Goldman Sachs

Really to follow up on the new orders; what are your plans for the older aircraft, if I’m right, to your comments that you said you’d be replacing them?

Bill Chiles

It really depends on the type of aircraft. If we’re replacing a 332 for example, which is the Eurocopter, a large helicopter that operates primarily in the North Sea, we’re not as inclined to sell those as we would say if we were replacing an old Bell 212 or a 76A model. Those aircraft we will sell depending on the aftermarket and as we said earlier, there is some something in the aftermarket and we’re not going to just give them away.

So we’ll mothball them and hold them if we can’t sell them, but most of the 332s that come off contract will be replaced with new equipment. Depending on how we see the market developing over the next 12 months, it would likely be held for a while. Some might be sold; some of the older ones, the ones that are in worst condition, would likely be sold.

Chris Agnew - Goldman Sachs

Are there any implications in terms of any write-offs, given the weak aftermarket with these older aircrafts?

Perry Elders

The market has softened, but Chris as you probably recall, we’ve been experiencing or enjoying I should say, gains on the aircraft sales in the past and certainly that’s possible that we’ll have aircraft losses, but we’re coming from a position of not breakeven on aircraft sales, we’ve been making money.

Then also in fact I’ll comment, I approved this morning the sale of an aircraft, a 76, which is being sold for parts and that’s not uncommon at all and as part of the way we manage through and mitigate any aircraft aftermarket softness.

So we in this case are saving the rotor blades and taking the registration plate off and returning it to the manufacturer. It cannot be used then for flying operations, but the rest of the equipment is being sold in pieces or for spare parts and so that is allowing us to realize a higher sales price for that fuselage, if you will, relative to what we could get if we just said we’re going to hold on until we can sell that aircraft in an entirety and that’s not a new phenomenon.

In this case it was an S-76A model. We’ve been selling those for parts for the last few years. So because of the critical mass that we have in the fleet and the connections that our people have with brokers and other Operators, we have excellent access to different techniques if you will, to realize or maximize the value from these sales.

Chris Agnew - Goldman Sachs

Got it and very quickly, any view on timing for the potential Brazilian opportunities?

Bill Chiles

Yes, the new heavy bid for 10 aircraft requires the first delivery in Brazil, in operation, in June/July and then it follows sequentially from there, where I believe if I remember correctly; all 10 of those aircraft, nine or 10 depending on what they take will be in full operation by the end of calendar year ‘10.

With the mediums I’m not real sure about the delivery schedule, although those, obviously the 13 aircraft that are on rollover contracts would roll over this year. The additional 17 will start coming in I believe later this year and continue on through the following two years.

Perry Elders

And if I could just add and this is a point to clarify; in Bill’s opening comments we were talking about safety and the 76 grounding by Shell, that’s not grounding of any Bristow aircraft, that’s one of our competitors that he was referring to and I know most of you on the call are familiar with that situation, but in terms of Bristow’s business we’ve not had any aircraft grounded by Shell or any other customer.

Bill Chiles

And I’ll add that the regulatory agencies have not called for grounding of the aircraft either and they’re very, very cautious.


Your next question comes from Ben Atkinson - Gagnon Securities.

Ben Atkinson - Gagnon Securities

I just wanted to understand if you could help us; how many helicopters might be bidding for those nine or 10 slots? Are there 20 other folks beside you, 20 other helies or 100 out more and how many companies are legitimate candidates to win that contract?

Bill Chiles

There are five local helicopter competitors in Brazil. We believe all five are bidding. However, I would guess that each company is bidding on average three to five aircraft and not a full complement of nine or 10. So I would say there may be 50 aircraft competing for that bid and those aircraft come from various places.

For example, our major competitor in the world, CHC, will be bidding through their affiliate down there and then the manufacturers are supporting some of the bidders. So I don’t know Perry, you might have a different answer.

Perry Elders

As you’re saying only two of us have the order book to bid up to 10. The other guys are probably bidding one, three or five and we don’t know specifically and then obviously this is a regulated bidding process by a national oil company. So, the way the bidding process works, we’re pretty optimistic, but obviously we’re speculative of what’s going to happen.

Bill Chiles

My math was incorrect; I think five times five is 25 and not 50; although sometimes that math comes in handy.


Your next question comes from Edward Okine - Basso Capital.

Edward Okine - Basso Capital

I was just wondering if you can spend a little more time on the aftermarket. Is it a case where transactions are taking place, but at much lower prices or is it a case where everybody is holding firm and transactions are just miniscule?

Perry Elders

What’s going on in the aftermarket is there is significant need for the equipment. There are a number of potential buyers for the aircraft. Unfortunately some of those buyers are unable to get financing and it is really unique as Bill was mentioning to the model type.

For example, the 76A’s are very versatile aircraft, but generally what we’re finding is that the price is softening a little bit, but the main issue is not the absence of buyers, but the absence of financed buyers and so maybe you can estimate what you think is going to happen in the global capital market and when credit will free up and take a view about that, but absent that we don’t feel it’s going to have a significant constraining effect on our business but it is an impact.


Your last question comes from Adrelle Askew - Hartford Investment Management.

Adrelle Askew - Hartford Investment Management

Yes, in the particular situation with Shell, that it is impacting a competitor, but the Sikorsky aircraft, how many of those do you guys have in your fleet, how many of those do you operate?

Perry Elders

We operate 25 of the A models, 44 of the C models.


Thank you and there are no further questions at this time. I would like to turn the call back over to management for any closing remarks.

Bill Chiles

Okay, thank you all for being on the call today. I know that we’re in challenging times, we have a lot going on and we appreciate your support and interest and we look forward to better days. I think you can all agree to that. So thank you very much and we’ll talk to you again in three months.


Thank you. Ladies and gentlemen, this concludes the Bristow Group third quarter 2009 earnings conference call. We thank you for your participation. You may now disconnect.

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