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Bristow Group, Inc. (NYSE:BRS)

F1Q10 (Qtr End 6/30/09) Earnings Call

August 6, 2009 10:00 am ET

Executives

Linda McNeill – Manager of Investor Relations

William E. Chiles – President & Chief Executive Officer

Elizabeth D. Brumley – Vice President, Finance & Chief Financial Officer

Richard D. Burman – Senior Vice President, Eastern Hemisphere

Analysts

Ian Zaffino – Oppenheimer & Company

Arun Jayaram – Credit Suisse

Daniel J. Burke – Johnson Rice & Company

Adrayll Askew – Hartford Investment Management

Basili Alukos – Morningstar

Gary Lenhoff – Ironworks Capital

Operator

Good morning, ladies and gentlemen. Thank you so much for standing by. And welcome to the Bristow Group’s First Quarter Earnings Conference Call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions) And as a reminder, the conference is being recorded today, on Thursday, the 6th of August 2009.

I’ll now turn the conference over to Ms. Linda McNeill, Manager of Investor Relations. Please go ahead.

Linda McNeill

Thank you, Michael and good morning. Welcome to Bristow Group’s June quarter earnings call. I’m Linda McNeill, Manager of Investor Relations. With me on the call today are Bill Chiles, President and Chief Executive Officer and Liz Brumley, Vice President and Chief Financial Officer. Additionally, we have some Division Heads here Richard Burman, Senior Vice President from the Eastern Hemisphere; Patrick Corr, Senior Vice President for Global Training, Meera Sikka, Vice President for Business Development. Not on the call is Mark Duncan, Senior Vice President for the Western Hemisphere. He is traveling now in Brazil.

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

Let me remind everyone that during the call, Bristow Group management may make comments that reflect our beliefs, expectations, hopes, intentions, 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 June 30, 2009 and Form 10-K filed with our SEC for the year ended March 31, 2009. Additionally, to the extent that we discuss non-GAAP measures during this call, please see our Investor Relations presentation on the website for the calculation of these measures and GAAP reconciliations.

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

William E. Chiles

Thank you very much, Linda, and thanks to all of you for being on the call and for your support of Bristow. Before I begin, since I always begin with safety, I would like to say that we are extremely pleased with our financial results in a very difficult environment. Basically we’ve been cutting cost to match our volume of activity, and this is a result of lot of hard work and sacrifice by all of our employees around the world.

Our results also reflect the lower volatility than other oil service providers due to the percentage of the work of our work supporting production operations out of our customers operating expenditures as opposed to CapEx supporting E&P exploration and development.

Now to focus on safety. Our air accident rate per 100,000 flight hours was zero if you exclude our training operation. We had one minor accident in our training business, which did affect our overall rate. The rate that came in at 0.64, as opposed to 0.67 at the same time last year and had the same number of accidents last year at this time or through the first quarter, but we have fewer flight hours this year. So the number is a little bit different.

With respect to our ground safety, which is measured in terms of total recordable incidents per 200,000 man-hours, it did increase slightly to 0.49 for the 12-month period. This is still a good performance and this is based on a rolling 12-month period as opposed to the rolling 12-month period ending last June at 0.45.

Our lost work case rate, which is measured also by 200,000 man-hours increased slightly to 0.33 for the 12-month rolling period as opposed to 0.30 for the same period last year. We continue to strive for Target Zero in terms of no accidents, no harm to our people and no harm to the environment and we are moving forward and we will achieve that goal at some point in the near future.

As you know, it’s imperative that we continue to deliver very safe, high quality service on a global basis or we are basically out of business. There were three very serious accidents in the industry this year. I commented on those during the last call. I’m not going to comment on those actions again today, but you are obviously welcome to ask questions when we get to that point in the call.

Back to the financial results. Again we are pleased, difficult environment to say the least, but we are maintaining good solid operating margins, even though our flight hours are down which reflects the change in our operating costs to reflect the actual volume of activity. Our operating income is up about $5.5 million for the June quarter versus a year ago, and excluding special items related to severance costs and PAYE tax, we earned $0.72 per share this quarter.

Turn for a minute to the big picture. Fortunately oil is seems to be stabilizing in this range of mid-50s to mid-70s. Less volatility in oil prices, very good thing, we believe we’ve seen the bottom and we actually believe that oil will continue to trade in this range for some time, which is a good thing for most of the places around the world where we work.

Natural gas prices, however, are very challenged below $4 per Mcf. We believe there has been a paradigm shift in the land or, excuse me, in the North American natural gas business, which would probably spread globally with the success in the shale gas plays, the unconventional plays around North America and also North America including Canada. So we believe that natural gas prices are going to be severely challenged for the foreseeable future, which does affect our business on the Gulf of Mexico shelf.

However, our revenues are less and less dependent on the Gulf of Mexico shelf as we move forward. As you recall, we sold 53 small aircraft in the Gulf of Mexico last fall, which were really focused on the production management business on the shelf in the Gulf of Mexico. Our emphasis is further and further offshore in deeper water harsher environments and our overall business is only 20% dependent on the Gulf of Mexico now. And whether, also when we shift, we talk about the macro view, we do believe we’ve seen the bottom in the global economy with a 1% contraction in the gross domestic product for the June quarter versus 6.4% for the March quarter. We’ve seen a significant slowdown in the deterioration and we should start seeing the global economy recover, and obviously recover in the U.S. as well.

The primary driver of our business in terms of the need for new aircraft continues to be the requirement to retire older aircraft. As you recall, a lot of these aircraft in the industry were put in business or put to work in the late 70s and early 80s. So the age factor does matter in our business. These aircraft do become absolute. So we have to continue to retire the older equipment and replace them with new.

However, even though our customers require new equipment with newer technology, more efficient and safer equipment. The demand for new equipment on new projects has slowed down, there is no question about that. A lot of the big projects have been actually moved out, not necessarily cancel, but move down. And we are responding to that with our suppliers by slowing down our delivery of new aircraft. And also at any point in time, we typically have a number of commercial aircraft. The aircraft that we are using in our commercial business out of service for maintenance or training or held for sale. In June that combined number is 24 versus 29 in March. So that number is coming down.

Our business is primarily production based, as I’ve mentioned before, mostly offshore and globally diversified with less than 20% relying on the domestic market. But obviously we are not totally insulated from the market conditions. So we have to continue to react very quickly to changes in the market.

Customers are obviously driving for cost efficiencies, so we have seen the delays that I just mentioned. Also I will mention that Petrobras has still not awarded the contract for the 30 or 35 or so medium aircraft and the up to 10 heavy aircraft. We expect these awards to be made in the forceable future, but we cannot predict what Petrobras may or may not do there. And we are optimistic that we will secure some of that work.

Customers are continuing to put pressure on us. Although the pressure is diminishing, pressure on us reduce pricing. We’ve resisted that pressure and we’ve been very successful with that. Our customers do have options to reduce the volume of their activity and that does give them the kind of a value in terms of controlling their costs. And they are becoming more flexible and more adept at doing the same amount of work with fewer aircraft.

And as long as we respond to that, it doesn't really materially affect our business, our results. The exploration-based activity obviously has continued to fall, although again, we see it stabilizing. Australia has been particularly hit by the reduction in exploration activity. So projects have been delayed, some major exploration projects have been canceled there. In the U.S. Gulf of Mexico, continues to encounter uncertainty, particularly on the shelf, as I mentioned, the part of the market is very sensitive to get natural gas prices. However when the market, there has been some additional work that we’ve been able to pick up on an ad hoc basis. So there have been times in the last six months where we have been out of aircraft. And we are in the middle of the construction season. So that’s a good thing. Fortunately, we have seen no hurricanes this year. Obviously, we are in the heart of the hurricane season, entering August, September. So certainly too early to predict, but we are very happy. A lot of people think we make money or we are happy when we have hurricanes. Not correct. Usually, it’s very neutral to us and we also have damage to our fixed facilities as well.

We continue to pursue new business around the world, around the globe, and we are competing for contract renewals. We have high hopes for Brazil, but that’s not the only market that we’re focusing on and are continuing to pursue new business. Looking forward, we see opportunities for growth in Mexico, as well as our Other International business unit, which is the Frontier business unit that we call our R&D business unit has small operations in many different emerging markets for example, Libya and some areas in West and East Africa from time-to-time.

On cost control measures, we obviously are not waiting for the market to bail us out. We are aligning our costs to make sure that we are right size. I hate to use that term as very common term these days. We are right size for the revenue base of the volume activity that we have and we have to be ready to respond upwards and downwards to that, to those changes as they happen. Our reductions in our workforce, as well as departure of an officer resulted in a $4.2 million charge for this current quarter, but we expect to realize an annual savings of about $7 million per year. During new work, we took delivery of 10 aircraft in the June quarter, 2 smaller aircraft, 4 medium, 3 large and one fixed wing aircraft, 7 of the aircraft already have contracts and opportunities exist for the others.

We are not concerned about those aircraft sitting around very long. And those include 3 for Brazil, and the West African business unit, and two each for the Gulf of Mexico and the North Sea. As of the June 30th, we have 17 aircraft on order, with 14 aircraft expected to be delivered over the remainder of fiscal year ’10. 9 of those are large aircraft, 4 medium, and 1 small and the other 3 medium in fiscal year 2011. And we continue to work closely with our customers to position these aircraft for the best results. And as I mentioned, we are working with our suppliers to slowdown or reduce the total number of deliveries for aircraft that we do not have any need for in the foreseeable future.

A conservative policy, regarding aircraft orders remains in place. We declined to order further aircraft from OEM without firm customer commitments. So that’s an ongoing process and we are much focused on maintaining our cash balances and getting to the point where we are generating free cash flow.

Okay. Subsequent to the June 30th, quarter, we agreed with OEM to delay, as I said, delay delivery of two large aircraft until 2011, and we obtained an option to convert these orders into options with no penalty, which would reduce the previously mentioned 17 aircraft to 15.

In terms of our investments, we made our $179 million investment in Lider in Brazil, which includes the transaction cost on May 26, 2009. The investment added $1.3 million of pre-tax earnings for the June quarter that show up in our earnings from unconsolidated affiliates.

All aircraft on order, which is about a $169 million, are pre-financed with cash available under our revolver in future operating cash flows. We have cash on hand of $138 million and fully available $100 million revolver as of June 30. We are executing our growth plan, but continue to be as I said prudent and realistic, and making sure we can have some flexibility on future deliveries. We continue to sell used aircraft to the secondary markets and book gains. This quarter, we’ve realized $6 million in gains on the sale of aircraft versus gains in the March, ’09 quarter of $1.7 million. Although we are selling aircraft at a profit, the after market pricing is lower than it was a year ago. And a lot of the people although demand exists those that desire to buy aircraft are struggling to get financing as you would expect.

So with that, I will turn it over to Liz. And Liz will discuss our financial results in greater detail.

Elizabeth D. Brumley

Thank you, Bill. Revenues were $290.5 million for the quarter, which was 6% over the March 2009 quarter, despite a decrease in flight hours. Net income was $23.7 million versus $25.9 million for the fourth quarter of ’09. [RSCE] for the quarter is around 12% and this compares to 14% for the March 2009 quarter.

Several presentation and accounting changes were made this quarter, which I wanted to highlight. The gains and losses on disposals of the assets are now reflected in a separate line below operating expense, but they are still within operating income. Earnings from unconsolidated affiliates is now included in operating income. And with respect to our segment reporting, there is no longer a Southeast Asia business unit instead. Australia is now a separate business unit, while Malaysia, China and Vietnam operations are now included and Other International business unit.

These changes were made to better reflect our management views the business. We also adopted FSP 14-1, which has to do with accounting for convertible debt instruments. This required us to separately account for the equity component in our 3% convertible senior notes issued in June 2008. Among other changes, this resulted in recording additional interest expense at a market rate of 6.9% on the date of issuance versus the 3% coupon rate. So you will see higher interest expense from what we have seen in the previous periods. In addition to making all of these changes in the June 2009 quarter, prior periods have been adjusted, and that has been reported in this earnings release in our form 10-Q, so that will have the comparable information.

I will now focus on our five largest business units. And then conclude with a brief review of the remaining business units. In Europe, this represents 39% of our revenues in the quarter and it’s our largest markets. We have 41 large and 12 medium aircraft in this market.

Operating margins were 16% in the quarter, about 94% of available aircraft under contract, which excludes training and maintenance time. The legacy European business, that mean excluding Norway, generated about a 20% margin this quarter. Margins from Bristow Norway improved from the 11% in the March quarter to 14% in the June quarter. So we are real pleased that we are making progress there.

The ad hoc flying that we did for bonds during the quarter added about $6.4 million in revenue. This work ended however before by the end of the quarter. Margins were also impacted by higher maintenance expense as the rates that are being charged by our Centralized Operations business unit reflected increases over the rates charge in fiscal year 2009. And you will see the same impact in the other business units within the Easter Hemisphere. There is a favorable impact from stronger pound, which increased operating income by around $2 million versus the March 2009 quarter.

Looking forward, we have two large aircraft, expected to be delivered in fiscal year 2010. Bristow Norway has potential opportunities to gain market share over the next several years. A number of bids in the North Sea are currently coming out. The majority of which could be new work for us with starting days beginning in mid calendar 2010 through 2012.

We expect margins to drop to the low teens for the next several quarters due to lost work with BP and then improving to the mid-teens if we continue to be successful in maintaining our pricing in aircraft under contract and integrating Norway. Nigeria represents 19% of our revenues in the quarter. In this market, we’ve got 5 large, 32 medium and 12 small aircraft, as well as 5 fixed wing aircraft.

Operating margins were 26% in the quarter nearly 94% of available aircraft are under contracts. As mentioned for our North Sea operations, maintenance expense has increased at a higher rate charged by the Centralized Operations BU. We continue to see the results of previous mid contract negotiations as reflected in higher pricing. However, flight hours were down from about 10,000 for the March 2009 quarter to around 9,000 for the June quarter, as fewer aircraft were on contract.

And looking forward, another large aircraft is expected to be delivered this summer for crew change work. Recently, we signed a five-year contract with annual escalations with a major customer to provide fixed wing aircraft service at a very favorable margins. All three major customers in this market have asked for extensions of their current contracts. MEND, the resistance group in the Niger Delta has signed a 60-day cease-fire. However, we continue to expect periodic disruptions from civil unrest in this region. Because of the risk of operating in Nigeria an above average portion of our profit in this region comes from the monthly fixed fee. Assuming current exchange rates margin should continue to be in the high 20% range.

In the U.S., Gulf of Mexico generated 16% of our revenues in the quarter. We have 7 large, 26 medium and 60 small aircraft in this market. Operating margins were around 14%. This compares to 15% in the March 2009 quarter. Over 80% of available aircraft are under contract looking out two thirds of our revenue from the Gulf of Mexico is production based. The Gulf of Mexico shelf rig count continues to drop due mainly to the price of natural gas, which Bill discussed earlier. And the drilling activity represents a third of our total Gulf of Mexico revenue and nearly 60% of this revenue is deepwater.

Two additional S-76C++ are on order for longer-term fleet renewal. Three of the four, S-92 that were delivered to the U.S. Gulf of Mexico are currently under contract and we expect to force to be contracted by the end of the year. We continue to expect operating margins to be in the mid-teens for the next few quarters. And longer-term, we expect to see improvement as we benefit from more profitable deepwater work assuming no further softening in the market.

Australia represents 10% of our revenues in the quarter. In this market we’ve got 15 large, 9 medium and 2 small aircraft. Operating margins were 22%. The Australian dollar improved to about 20% versus the March 2009 quarter, adding about $1.7 million to operating income. Flight hours are down and therefore maintenance expense is lower, but the rates that are being charged again by the Centralized Operations business unit are higher. So on an hourly basis; you will see that to be a little bit higher than last year.

We expect margins in the low to mid-teens going forward and this market continues to be particularly affected by the reduction in the exploration activity. As Bill mentioned, we continue to be impacted by delays in customer projects and lower activity, however we are beginning to see some improvement. We have recent contracts for two S-76C++, one to end in 2012, replacing an older aircraft and the other in June 27.

Latin America represents 7% of our revenues in the quarter, but 11% of our operating income. We had 12 large; 35 medium and 5 small aircraft in our consolidated fleet. And then in the unconsolidated fleet, there are 92 aircraft. Most of which are attributable to Lider.

Operating margins were 24%. For Lider, we’ve recognized $1.3 million in equity in earnings. For the full June 2009 quarter including the period prior to our acquisition, Lider had EBITDA of $7 million, compared to $12.5 million for the March quarter. While flight hours and aircraft sales and revenues improved quarter-over-quarter, there were higher maintenance expenses and the current quarter included some costs related to our transactions. I want to point out however and clarify that those costs were not included in the equity in earnings that we picked up, because those would be pre-acquisition.

In Mexico, we saw an operational strength and an increase in flight hours. Further devaluation in the Mexican peso could affect receivable collections. So we will continue to watch this closely. Our joint venture partner Heliservicio Campeche was just awarded a contract for two aircraft. In Trinidad, we have seen a decrease in flight hours. We’re taking a hard look at operational efficiencies in this region and we are hopeful to win additional launch on work, which could begin in the September, October 2009 timeframe.

Looking forward, we’re working to increase the utilization of our aircraft in the current fleet and on the order in this market including aircraft to be leased to Lider. We expect to see positive contributions from Lider subject to managing foreign exchange. We are optimistic about upcoming contract awards in Brazil and Mexico, where demand continues to be very strong. We continue our strategy of exiting countries in Latin America where we are leasing aircraft to operators that we don’t have close relationships with. We thought it worth mentioning that we do not operate in Venezuela; where recent political developments have increased have created major issues for companies operating there.

In Other International, there is two large aircraft in Libya that are likely to staying country if we are successful in the upcoming bid and we have reentered Ghana. Centralized Operations, I just wanted to note that we anticipate G&A of approximately $13 million for the Eastern and Western hemispheres. Bristow Academy had an excellent quarter as high margin military training activity increased. Additionally, the Academy was recently awarded a U.S. Department of Defense contract to train Mexican Air Force pilots convincing at the end of August.

For Arctic, the flight hours have been greater than expected on a year-over-year basis. A couple of other items to note, cash flow from operations was around $35 million. Our effective tax rate was at 28% in the June quarter. And for the full year, we expect the effective tax rate to be between 27% and 29%. Also, I want to point out that our mandatory preferred convertible stock converts to common shares in September after the final dividend is paid. At the current stock price, the number of common shares will be $6.5 million, which is already reflected in the shares used for fully diluted earnings per share.

We are now ready to take questions. So we will turn the call over to the operator.

Question-And-Answer-Session

Operator

All right. Thank you. Ladies and gentlemen at this time we will begin our question and answer session. (Operator Instructions) Our first question is from the line of Ian Zaffino with Oppenheimer & Company. Please go ahead.

Ian Zaffino – Oppenheimer & Company

Hi, thank you. I want to get into the Gulf of Mexico a little bit more. If you, where are you as far as where you want to be with your fleet and you shifted to the large aircraft? And then I have a follow-up.

William E. Chiles

Okay, Ian, we are continuing to evaluate our, how much focus we have on the shelf production business. Obviously, that business will continue. What we are seeing is really no drilling activity on the shelf now. You have probably watched the rig count. I think the last time I looked, the jack-up count in the Gulf of Mexico was down around 15. It may have gone down more since I looked a week or so ago. And that’s just a significant change from just a few short years ago. So we have to be very careful about watching that market and make sure we respond to the slow production that will see in production activity as that production matures and goes off-line. So we are looking that all the time. As I said, we sold the 53 aircraft last fall. We are continuing to monitor that and move further into the deepwater business, whether it be exploratory work or development. We mentioned we have four S92’s operating in the Gulf of Mexico, up from zero a year ago. So those aircraft are generally flying for deepwater production and drilling operations. So we will continue to move in that direction. We see growth opportunities in the deepwater, but it will continue to be a challenging market, there is no question about it. It is mature, and of course the deepwater activity doesn’t have as much potential growth as you would see maybe on Brazil, West Africa and other places around the world.

Ian Zaffino – Oppenheimer & Company

Okay. All right. Thank you very much.

William E. Chiles

Thanks, Ian.

Operator

All right. Thank you. Our next question is from the line of Arun Jayaram with Credit Suisse. Please go ahead with your question.

Arun Jayaram – Credit Suisse

Good morning guys. Nice results.

William E. Chiles

Thanks, Arun.

Elizabeth D. Brumley

Good morning.

Arun Jayaram – Credit Suisse

Bill, I know you don’t provide specific guidance, but based on the relative level of stability that you are seeing, obviously, flight hours down a little bit, and with some more aircraft additions coming later in the year, does it feel to you somewhat that the earnings power should be relatively stable, all else being equal?

William E. Chiles

We believe we have seen the bottom and we see good stability from here and actually with some good luck on some of the bids. We are working on now. We would see improvements. So we are cautiously optimistic. Barring a major meltdown in crude prices, which we do not expect. I know some people out there are predicting crude going back to the 30s and some even in the 20s. I don’t believe that I think people that are saying that are not really focused on the both sides of the equation. Demand clearly is down, but supply is the big unknown. So we are feeling pretty good about going forward. We’ve found we’ve really been able to respond quickly to changes in volume and reduce our cost accordingly. So we are going to be watching that closely and responding quickly, and making sure that our results continue to improve or at least stabilize.

Arun Jayaram – Credit Suisse

That’s helpful. Second question, obviously, the Brazilian tendered one of the potential catalysts for the stock. Just are you all bidding this now through Lider to satisfy some of the local content rules? Is that how you are structuring the tender, or is just through just Bristow?

William E. Chiles

No, all of our bidding activity in Brazil is through Lider because of the requirement that a Brazilian operator has to be 80% owned by local Brazilians or 80% control. So you have to bid through a Brazilian company. So we are going to continue to do so. Now these bids are based on leasing. We lease aircraft in the Lider. And the Lider turns around and bids those aircraft on operating basis to Petrobras or to other operators down there. So we will continue to do that. And if we were successful on these two large bids, we would lease aircraft to Lider. Some of the aircraft may be sold to the joint venture where we would own them jointly with Lider and then the joint venture would lease the aircraft to Lider. So there are several ways we could go, but generally they are going to be leased into Lider.

Arun Jayaram – Credit Suisse

Okay. And if I think the acquisition, you’ve got about 36 days or so of contribution from Lider. If we were to just take your earnings and to extrapolate that on a full quarterly basis that a good run rate, Liz in terms of kind of where the equity from income could be?

Elizabeth D. Brumley

No, I don’t know that I would use that as a run rate. The maintenance expenses were a little higher than what they’ve historically been. And we’ve also got impact from FX. For example, they’ve got a U.S. dollar loan and they have to mark that the FX rate, because their functional currency is the Reais. So we are looking at ways to where we can kind of limit the volatility from those kind of effects, but we haven’t implemented anything at this point. So the earnings maybe a little bit unpredictable going forward, until we get that accomplished.

Arun Jayaram – Credit Suisse

Okay, a couple of other questions. You commented that margins could be down, I believe in the U.K. or the North Sea, because of the loss of a contract with BP. Could you maybe comment on that?

William E. Chiles

We made a couple comments. I am going to let Richard follow-up. But we made a couple of comments about flying for bond and then loss of the contract with BP. As you know bond had a serious accident on April 1, as result of the accident, following the accident BP and other customers move their work temporarily to Bristow and to CHC. And then that work has gone back to bond. Richard you want to?

Richard D. Burman

That’s exactly what’s happened. Our work actually ended June 30. So that minor uptick has been completed basically.

Arun Jayaram – Credit Suisse

Okay. That makes sense. And then last question, Liz, is on the income or the pardon me on the balance sheet you’re showing $24 million of deposits on assets held for sales?

Elizabeth D. Brumley

Yeah.

Arun Jayaram – Credit Suisse

Is that future aircraft, which will be sold, or what you did in the quarter?

Elizabeth D. Brumley

No. One of the aircraft that we sold in connection with the Lider transaction, titles did not technically transfer until after the end of the quarter. And so we got the cash. So we show it is a deposit, but we don’t recognize the gain on it until next quarter.

Arun Jayaram – Credit Suisse

Okay. Thanks a lot guys. I appreciate it.

Operator

Thank you. Our next question is from line of Daniel Burke with Johnson Rice. Please go ahead.

Daniel J. Burke – Johnson Rice & Company

Good morning all.

William E. Chiles

Good morning, Daniel.

Elizabeth D. Brumley

Good morning.

Daniel J. Burke – Johnson Rice & Company

I wanted to return to Australia and Other International. What is the percent of aircraft that you currently have under contract in Australia? Has that fallen off? I didn’t hear that statistic?

Elizabeth D. Brumley

Hang on while I shuffle my paper.

Daniel J. Burke – Johnson Rice & Company

And then Liz while you are doing that my follow-up would be, given the mix shift here in Other International. Any guidance for where we should expect margin to be? It looks like on a restated basis here that’s been a pretty volatile segment in terms of margin expect or margin actuals over the last five quarters?

Elizabeth D. Brumley

On the utilization, we didn’t give that information out this quarter, but it is somewhat lower than some of our other business units.

Daniel J. Burke – Johnson Rice & Company

Are you looking to move equipment out of Australia?

Richard D. Burman

Yeah, let me its Richard here. We are looking to sell some aircraft from Australia some older aircraft, which are temporarily down. We’ve replaced them with newer aircraft in the last couple of years. And on Other International, you asked about the margin. I think our feeling is that the margins are strong at the moment and they will remain strong going forward.

Daniel J. Burke – Johnson Rice & Company

Okay. So what we saw in the June quarter should be sustainable, I assume then in the mid-20s?

Richard D. Burman

Certainly through the next quarter, especially I would say, yes.

Daniel J. Burke – Johnson Rice & Company

Okay, great. And then Bill going back to your efforts to sort of it looks like you’ve been successful in pushing out your options on average by about a year each. I was curious if you could give us a little more color on maybe two things. Of the two aircraft that I think you mentioned delivered without contract, what size are those? Are those larger or mediums? And then with the prospect we are deferring additional of the large aircraft out of 2010 into 2011?

William E. Chiles

Okay. On the first question there is one medium and one large. We have one large aircraft without a contract in the Gulf of Mexico and we are working on that, as we speak and we believe that aircraft will be contracted. Obviously that aircraft is also bid in to Brazil. So that heavy bid down there is pending. We are really focusing in terms of delaying deliveries. We are focusing on the larger aircraft, because the mediums come in, for example, the C++ come in and we can easily replace old A models, and put the A models on the market and get rid of them. So it’s a good time to take advantage of retiring old equipment. Although slowly, we are continuing to see some success in the sale of those aircraft’s. So in terms of delaying deliveries, we are focused on the large aircraft, where we want the flexibility to get our capital back, or hold on to the capital we haven’t paid. So we are delaying delivery with the option of cancelling delivery, or we are actually cancelling delivery. And not have to pay big penalties on those cancellations. So the OEMs are working with us and we are really focusing on preserving our cash and making sure that we don’t have a large aircraft sitting around. And just cover on that note. We are not in, we don’t like being in the antique aircraft business. So we are going really work hard, as long as we do it, we are not just out of control, we are going to continue sell aircraft and not try to hold up for the highest possible price, and work on that denominator as well. Because those aircraft sitting around and just getting older and older, probably won’t be a lot of easier to sell a year from now than it is now. So we are trying to push those aircraft out the door.

Daniel J. Burke – Johnson Rice & Company

Great. Thanks very much for the comments.

William E. Chiles

Thanks, Daniel.

Operator

Thank you. Our next question is from Adrayll Askew with Hartford Investment Management. Please go ahead with your question.

Adrayll Askew – Hartford Investment Management

Yeah. Can you talk about the sequential margin deterioration in West Africa kind of highlight that what’s going on there?

Elizabeth D. Brumley

A lot of that is being driven by just changes in the DMC rate is being charged from the Centralized Operations business unit. So if you look at it from a global standpoint, there isn’t that much decline. And Richard do you want to add to that?

Richard D. Burman

There has been some minor deterioration in the FX position as well, and the trouble in the Delta area has cut back the operations slightly in terms of flight hours. But it is performing tremendously well. We’ve got 26% operating income, 22% roughly this quarter. So we are happy with the performance to date.

Adrayll Askew – Hartford Investment Management

Okay, thanks. And after closing on the Lider transaction, how would you assess the near-term challenges there. Obviously, you had a higher maintenance expenses there. What other challenges do you see there?

William E. Chiles

We are into the maintenance expenses to make sure we fully understand them. So we will continue to monitor that situation. We don’t believe they will continue. Of course the big question mark down there is what’s Petrobras going to do with these two outstanding bid for the 30 or 35 so mediums and up to 10 heavies. Those are very important to us. We believe they will be awarded at some point or they will rebid. But the demand for those aircraft is obviously still there, because Petrobras activity is very, very strong coupled with the activity of the other international oil companies that are down there and large independents that are down there working. So there is not much that is keeping is really up at night about Brazil, we are very pleased with the operation; high quality company; high quality operation. We just got to continue to push for better and better results as we go forward and that will come from the growth.

Adrayll Askew – Hartford Investment Management

What are you hearing about the expected timing for Petrobras on these bids?

William E. Chiles

Well, they asked for another 60-day delay? We had already delayed until July 31, and we are delaying for another 60 days. So we are just trying to get some color on what’s behind the delay. Mark, as we mentioned in the introduction, Mark Duncan is in Brazil, so we will get some information in the next several weeks about where that, what the timing of those awards.

Adrayll Askew – Hartford Investment Management

Okay. That’s great. Very helpful. Do you guys have a target liquidity number? Where you guys kind of gauging liquidity?

Elizabeth D. Brumley

Well, our objective is not to drop below $50 million in cash and a $100 million in the revolver. So leave that revolver undrawn.

Adrayll Askew – Hartford Investment Management

All right. That’s very helpful. Thank you.

Operator

Thank you. (Operator Instructions). Basili Alukos with Morningstar. Please go ahead with your question.

Basili Alukos – Morningstar

Hi, good morning.

William E. Chiles

Good morning, Bas.

Basili Alukos – Morningstar

Thank you for taking my question. This is kind of just like a longer-term question not necessarily anything that happened during the quarter, but will happen for the next year. But as the United States and the rest of the world kind of mulls clearer energy alternatives and they kind of had a cut back on using oil. How do you see Bristow’s business kind of evolving in the scenario where we cut back on oil consumption? And then two what are your thoughts just kind of on the idea of using alternative energy?

William E. Chiles

Okay. Using alternative energy or renewable energy is a great idea in theory. It’s impossible; we believe to achieve energy independence in this country. However, I will say that the issue about focusing away from fossil fuel is a big mistake. The administration needs to focus on natural gas as the way in the near term out of the box and out of the heavily dependent on foreign sources of oil. So yes, we will see if that happens, we will see less dependence and demand for oil domestically. But if you focus on and there are a lot of predictions about that, but if you focus on the supply side, look at what's happening in Mexico with Cantarell and other places around the world. And with the delay on the normal cycle of getting this new Brazilian production online, you are going to see, again demand imbalances where prices will spike up for oil. So in the long-term, we believe oil will still be a very important commodity around the world. It’s very difficult to wean the world off demand for fossil fuels. So we, all and theory, believe that wind power, solar power, a heavier use of nuclear power for electrical generation and other sources are a good thing. However the whole idea of energy independence in this country is really a myth within the foreseeable future.

Basili Alukos – Morningstar

Great, thanks for that color. Obviously, I asked because you deal with those types of customers. And I'm sure that is a topic that is on everyone's mind. And along those lines, I know you mentioned earlier kind of natural gas, but what is the potential for offshore exploration of natural gas going forward? And then also what part if you have been able to break that down, as Bristow’s business to natural gas versus oil?

William E. Chiles

We do not have a breakdown of that metric yet, but we are working on it. And it depends on whether you’re talking domestically or internationally. A lot of the work we do for example in Australia on the North West shelf is natural gas is converted to LNG. The LNG market will continue to be important, because LNG works at $3 to $4 per Mcf. So, and you’ve got areas around the world that have really no natural resources, or excuse me, fossil fuel natural resources like Japan. So, demand for natural gas in places like that will continue to be very, very high. So it really depends on where you are, North American gas, we believe will continue to be challenged from the standpoint of price, because of all the gas that is being found in resource plays. We’ve gone from a shortage of natural gas in this country two years ago to a glut, and it is not necessarily because of the downturn in economy. There is just a lot of supply out there and people are touting that in some of the shale plays, you’ve got enough gas to supply the country for 15 years, just a lot of natural gas out there. So in the domestic market, we have got to be careful of any sensitivity, we’ve got to be sensitive on what’s going on in the shelf from the Gulf of Mexico, because there is a natural gas market and back historically the shelf has produced about 20% to 25% of the natural gas burned in North America. So it is concerned, it is something we have to watch long-term.

Basili Alukos – Morningstar

Great. That’s all my questions. Thank you.

Operator

All right. Thank you. And our next question is from line of Gary Lenhoff with Ironworks Capital. Please go ahead.

Gary Lenhoff – Ironworks Capital

Thank you. It looks like gain on sale in the quarter added about $0.12 a share in earnings, if I’m doing my match right. Can you just give us some sense in the next several quarters? Should that number be running closer to the $2 million to $3 million that it had previously or should we expect numbers closer to the $5 million or $6 million given the activity of what’s going on?

Elizabeth D. Brumley

The gains on sales are somewhat hard to predict. I mean we have several aircraft that we older aircraft where we are trying to optimize our fleet and all of that. And you end up with spikes from quarter-to-quarter. I mean if you look back historically. So you could take some averages from the last year, but honestly, we are not good at predicting that number ourselves, because it just depends on the timing because we are not going to sell the aircraft unless we feel like we get a good price for them and that takes a little time to find the right customer.

Gary Lenhoff – Ironworks Capital

Okay. I guess, am I being to fine in asking it, if you were to get those right prices. Should we expect the number to run closer to the $6 million in the quarter to the next quarter or two, at least?

Elizabeth D. Brumley

I don’t think you can I mean you just can’t predict it.

Gary Lenhoff – Ironworks Capital

Okay. That’s fair enough. Other question, could your corporate expenses were a bit higher in the quarter than they had been previously; I think the corporate loss was about $10 million. Is that because of all the activity that was going on with Lider and others, or what should we be using that number going forward?

Elizabeth D. Brumley

Yeah. That’s mainly the severance costs from the departure of an executive officer. In total our severance costs were around $4.2 million and substantially all of that was at the corporate level.

Gary Lenhoff – Ironworks Capital

Okay. So we should expect to see that number go back to the $6 or $7 million level?

Elizabeth D. Brumley

Yes.

Gary Lenhoff – Ironworks Capital

Great. Okay. Thanks very much.

Operator

All right. Thank you. (Operator Instructions) Management, there do not appear to be any further questions at this time. Please continue with any closing comments you may have.

William E. Chiles

Okay. Thank you very much to your comments and your questions. And also thank you for your support of Bristow. And we are all hoping for a continued steady recovery in the economy and our business as well. So, thanks again and we’ll talk to you in about 90 days.

Operator

All right. Thank you. And ladies and gentlemen, this concludes the Bristow Group’s first quarter earnings conference call. If you would like to listen to a replay of today’s conference you can do so by dialing 1800-406-7325 or 303-590-3030 and put the access code 4114028. ACT would like to thank you much for your participation. At this time you may disconnect. Have a very pleasant for rest of your day.

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Source: Bristow Group, Inc. F1Q10 (Qtr End 6/30/09) Earnings Call Transcript
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