Erickson Air-Crane's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Jul.29.13 | About: Erickson Air-Crane (EAC)

Erickson Air-Crane, Inc. (NASDAQ:EAC)

Q2 2013 Earning Conference Call

July 29, 2013 4:30 pm ET

Executives

Allison Thompson – ICR

Udo Rieder – President and Chief Executive Officer

Charles Ryan – Vice President and Chief Financial Officer

Analysts

J. B. Groh – D. A. Davidson & Co.

Yair Reiner – Oppenheimer Securities

Stephen E. Levenson – Stifel, Nicolaus & Co., Inc.

Andrew P. Casella – Imperial Capital LLC

Josh M. Goldberg – G2 Investment Partners Management LLC

Catherine M. O'brien – Deutsche Bank AG

Tony Bartsh – Park West Asset Management LLC

Joshua Goldberg – G2 Investment Partners GP LLC

Operator

Good day ladies and gentlemen. Thank you for standing by and welcome to the Erickson Air-Crane Incorporated Second Quarter 2013 Earnings Conference Call. At this time all participants have been placed in a listen-only-mode and the line will be opened for your questions following the presentation. Please note that this conference is being recorded.

And now I’d turn to turn the conference over to Allison Thompson of ICR. You may begin.

Allison Thompson

Thank you operator and good afternoon every one. Before we begin prepared remarks today, I'd just like to remind you of the Company's Safe Harbor language. Information discussed during this conference call might be forward-looking in nature and is subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. To understand the factors that could cause results to differ materially from those in the forward-looking statements, please refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 and reports subsequently filed with the Securities and Exchange Commission.

In addition to financial results presented on a GAAP basis today, the Company will also be discussing non-GAAP information that it believes is useful in evaluating the Company's operating performance. Reconciliations of these non-GAAP financial measures to the closest GAAP equivalent can be found in the Company's earnings press release that was released this afternoon and was also filed with the SEC under Form 8-K. A replay of this call can be accessed by dialing or through the webcast on the Company's website and the replay instructions were included in the Company's earnings press release this afternoon. Thank you for your attention to those items.

And I'd now like to turn the call over to Udo Rieder, President and Chief Executive Officer of Erickson Air-Crane. Udo?

Udo Rieder

Okay, thank you Alison, and thank you to everyone on the line for joining us today. So I’m pleased to report to you that we’ve had a very strong second quarter, and we’ve achieved several important strategic objectives. We executed well across the business and we drove strong financial results. We also gained a lot of visibility on our second half with a number of important contract option renewals for Evergreen Helicopters as well as our core Erickson business. This gives us the increased confidence in our full year guidance.

Additionally, we announced last week that we’ve reached the terms for the purchase of the Air Amazonia. This highly accretive transaction which will extend our leadership position from aviation for aviation services into the fast growing oil and gas markets, South America.

Well, I’d like to with the highlights from the quarter. First, our revenues were $69 million, which was an increase of 81% as compared to the second quarter of last year. While all segments performed well our growth was primarily driven by the addition of Evergreen Helicopters, which closed on May 2 of this year and is coupled with strong growth in infrastructure construction and timber harvesting. The acquisition of Evergreen Helicopters also provided us with a new level of diversification by customer, mission as well as geography.

Second, our profitability in the quarter was strong and in line with our expectations. Excluding acquisition-related expenses our adjusted EBITDA in the quarter was $17.2 million, an increase of 73% over the second quarter of last year. We plan to continue to build on this already strong level of profitability as we progress on integrating the two companies and as we realized the synergies we've identified.

On July 19 we announced the signing of the binding purchase agreement to acquire Air Amazonia. This strategic transaction gives us the infrastructure and a new large customer to accelerate our expansion into the oil and gas market in South America. So I'll elaborate more on the details of this transaction in just a minute.

I'd like to now give you some detail on our operational performance. But first, we continue to build our infrastructure construction business and again this quarter realized good organic growth in our oil and gas business in South America. The addition of a second air crane has generated an additional $3 million of revenues in the quarter and raised our profile and capabilities in this growing market.

Additionally, I'm pleased to report that timber harvesting was also at $3 million versus last year. This is primarily driven by increased demand in our Canadian business due to the strengthening of the U.S. housing market.

We also had an active fire season. We saw almost 600 hours in the second quarter mainly in the U.S. as you might recall last year was a record fire season but we continue to assume that the season as a whole will reflect historical average levels for 2013 as contemplated in our guidance.

Now, I’d like to talk a little bit about Evergreen and our work for the Department of Defense. For executing well and we’ve been successful with all contract renewals since acquiring the business including poor Transcom and Africom.

As we discussed previously over the past couple of years, Evergreen Helicopters are believed to replenish inventory and fund its working capital needs was limited. But the overall cash needs of the parent company. This resulted in pressure on operational readiness, which pled to penalties and missed revenue opportunities.

Under our management, we immediately address these deficiencies and we’re working toward maximizing operational readiness and overall customer satisfaction.

Our company has long pride in itself in delivering great performance in each critical situation and I’m confident that we’ll bring Evergreen up for high standard quickly.

We are actively engaged with our key customers including prime defense contractors, Transcom and Africom, and our major sub-contractors Fluor and Tancore. I think everyone recognized and appreciate the positive changes that we are making and the commitment to excellence that we embraced.

Strategic objective for us is our fleet rationalization efforts will lead to maximize our overall utilization of the fleet and make investment in returning air craft into service where the market demand dictates.

As we stated previously, we have a significant number of aircraft that are currently not under contract. And as we win business and create growth, we will bring these aircraft into service and deploy them to serve the demand, which brings us to Air Amazonia, the strategic transaction that enhances our presence in the oil and gas market in South America.

As outlined in our agreement we’ll pay $23 million at closing for the business in the heavy helicopter aspects including the fully operational fleet of six rotary-wing aircraft varying type and machine capabilities. And then we’ll pay an additional 3 million within 12 months of closing as the consideration for the achievement of certain milestones.

In conjunction with the acquisition we’re entering to a five year aerial services contract including annual renewal options with HRT to provide rotary-wing aircraft services to support their oil and gas activities in Solimões region of Brazil.

As we’re just describing we expected to deploy two currently idle aircraft to supplement the fleet that we acquired. The aerial services contract will provide us with a minimum revenue of $29 million per year.

We also have the right of first refusal to purchase any or all HRT’s remaining eight aircraft over the next 12 months and the right of first refusal on all helicopter services in all of Brazil including offshore from HRT.

While we have agreed on the terms of the acquisition on which time the binding agreement the closing is subject to customary closing conditions with no exact closing date yet determined. While we expect to close the transaction prior to the end of third quarter, we’ve not built the expected growth and deceration from the deal into our guidance.

I’ll the turn the call over to Chuck in just a minute, but before I do, I’d like to say that we’re really pleased with our rapid progress that we’ve made so far this year. Financially, we delivered strong results and we are on track to deliver our full year guidance.

Operationally, we’ve executed well for customers in every areas of business. We won important contractor renewals and we’re making rapid progress on integration work that will make us even stronger, leader, partner and competitor.

Strategically, we’ve completed a truly transformative and accretive acquisition and are closing in on a second highly accretive deal that will give us the big leg up in this fast growing region in South America.

Our balance sheet remains strong. We expect to continue to generate significant free cash flow from the combined businesses. I am confident that we’re not only driving or short-term performance, but they’re putting down a solid foundation from which to build value for industrious customers and other stake holders in the years to come.

We thank you for your time and now I’ll turn it over to Chuck Ryan, our Chief Financial Officer.

Charles Ryan

Thanks, Udo, and good afternoon to everyone. Let me walk you through the major items in the quarter and I’ll give you some details on our results and help you understand the reconciliation to the GAAP members and pro forma adjusted numbers is well the new recording segments.

So first let me cover the as reported GAAP numbers. Second quarter revenues were $69 million. This includes the Evergreen results from May 2 through the end of the quarter. As part of the integration with the Evergreen business, we have realigned out reporting structure into two new segments. The Government segment includes defense and security, firefighting, and transport and other government related activities. The Commercial segment includes timber harvesting, infrastructure construction, including oil and gas and MRO/Manufacturing.

So revenues from our Government segment in the second quarter were $43.9 million, which is comprised of $10.9 in firefighting, $28.8 in defense and security, and $4.2 million in transport and other government related activities. This compared to $18.3 million from the second quarter of 2012, which was comprised of $13.4 million in firefighting and $4.9 million in transport and other government services.

Revenues for our commercial segment were $24.7 million and it will comprise of $11.3 million in timber harvesting, $12.1 million for infrastructure construction, and $1.4 million in MRO and manufacturing. Commercial revenues for the second quarter of 2012 were $19.6 million, which was comprised of $8.2 million in timber harvesting, $10.1 million for infrastructure construction, and $1.3 million in MRO and manufacturing. Gross profit in the second quarter was $17.5 million or 25.5% of total revenues as compared to $10.3 million or 27.2% for the second quarter of 2012.

SG&A was $12.6 million or 18.4% as compared to $7.2 million or 19.1% in the prior-year second quarter. This includes $4 million of acquisition and integration related expenses for the quarter. Other expenses in the quarter were $7.7 million compared to $1.2 million last year. This was primarily due to increased interest costs associated with our new debt financing, including the $400 million senior notes issued in connection with the Evergreen Helicopters transaction.

Our net loss for the second quarter was $2.0 million or $0.20 per share excluding acquisition and integration costs of $4 million, our pro forma net income would have been $0.4 million or $0.04 per share. Adjusted EBITDA in the quarter was $17.2 million or 25.1% as compared to $10.0 million or 26.3% in the second quarter of 2012. This was in line with our expectations.

I’d now like to discuss the pro forma results for the second quarter and year-to-date 2013. These figures are assuming acquisition of Evergreen Helicopters that occurred as of January 1st, 2013, which is the basis for our guidance that we’ll cover in a minute. So, second quarter pro forma revenues were $84.3 million, of which $15.9 million were government and $25.4 million were commercial. Year-to-date, the pro forma revenues were $165.9 million, of which $117.2 million were government and $48.7 million were commercial.

Second quarter pro forma adjusted EBITDA was $80.0 million, a margin of 21.4% against pro forma revenues. Our year-to-date pro forma adjusted EBITDA for 2013 was $35.3 million, a margin of 21.3% against pro forma revenues. There was $4 million in the quarter and $6.2 million year-to-date of acquisition and integration costs that are excluded from adjusted EBITDA. These acquisition related expenses were both the Evergreen transaction and for the Amazonia transaction as well as the expenses related to integration projects.

So now, our guidance for the year. As we’ve mentioned, the second quarter performance was in line with our expectations and therefore we have increased our visibility in achieving our full-year guidance. On a pro forma basis, which again assumes the acquisition of Evergreen and associated financing that had occurred at January 1, 2013, the company is maintaining its guidance and expects full-year revenues in a range of $385 million to $395 million and adjusted EBITDA for the full-year in the range of $108 million to $116 million and earnings per share of $1.36 to $1.58 based again on an assumed share count of 13.8 million shares. The 13.8 million shares assumes a conversion of our outstanding preferred shares of approximately 4 million to common.

So as a reported basis, projected full year 2013 revenues are in the range of $325 million to $335 million, which again is in line with our previous guidance and we had an increase in our projected adjusted EBITDA for the full year in a range of $97 million to $105 million. The earnings per share are projected to be in the range of $1.54 to $1.75, based on again on assumed share count of 13.8 million shares.

So I will reiterate that we are not yet including the impact of the Air Amazonia transaction in our current guidance. We will do so once it does close. However, as stated in our press release this week, annual revenues on the HRT contract are at a minimum of $29 million and we are expecting adjusted EBITDA margins comparable to the base business.

So before we conclude the call, I’d like to also address our capital structure and funding of the Air Amazonia deal. So when we closed on our 8.25% $400 million second priority senior secured note facility due in 2020 on May 2, $45 million of this was reserved in escrow to fund the initial payment on the Air Amazonia transaction as originally contemplated.

Under the new agreement, we will be returning escrow funds to the note holders and we will fund the deal using our revolving line of credit which was expanded from $100 million to $125 million in total capacity in the second quarter. This not only gives us better flexibility with respect to future debt reduction, as we generate free cash flow from the combined businesses, but also reduces our total cost of debt.

So that concludes our prepared remarks and I thank you for all participating. Operator, we now are willing to entertain questions at this point.

Question-and-Answer Session

Operator

Absolutely. (Operator Instructions) And your first question will come from J.B. Groh with D.A. Davidson.

J. B. Groh – D. A. Davidson & Co.

Hey, afternoon guys.

Udo Rieder

Hey, J.B.

J. B. Groh – D. A. Davidson & Co.

Hey, I know you gave us some quick detailed share that’s right now pretty quick. What the revenue contribution was from Evergreen and it looks like it was a little bit lower than and maybe should have been. Is that due to the fact that you might have lost a little share because of aircraft built only and that sort of thing that’s maybe kind of a reverse as the service gets better?

Udo Rieder

You’re talking relative to what U.S. projected, J. B.?

J. B. Groh – D. A. Davidson & Co.

Well, I mean just relative to that run rate of what $200 and some million?

Udo Rieder

Yeah, I mean, so, Evergreen is pretty much on track of what we expected for the second quarter, and I will tell you that. So, there issue with the penalties, right, and the fact that Evergreen has over the last year or year and a half has incurred some substantial amount of penalties and there are similar key contracts.

So what you’ll see is for the first half of the year, that number is pretty high relative to what we expect in the second half of the year. And so, I’m not exactly sure how the analyst prorated that, but basically our run rate for the first half of the year is higher, but our second half, once we solve some of the major issues, which we have a vision on doing that, pretty much by the end of August, you’ll see a substantial reduction in the penalty occurrence and therefore a corresponding increase in revenues and obviously in the profitability.

J. B. Groh – D. A. Davidson & Co.

Okay, that makes sense.

Charles Ryan

I am sorry, all-in-all, nothing of a surprise to us. It’s just the matter of timing basically and how quickly we could get cash and inventory into the system and kind of turnaround the trend that Evergreen had experienced.

J. B. Groh – D. A. Davidson & Co.

Right, right, okay. Okay and then what’s the run rate or the interest in depreciation, amortization that’s embedded in your GAAP numbers?

Charles Ryan

So interest is going to be roughly about $36 million, $37 million on an annual basis on the total debt load. So you could project that basically for just the GAAP here you just pickup four months of that.

J. B. Groh – D. A. Davidson & Co.

Right.

Charles Ryan

Yeah. And I am sorry, what was your question on depreciation?

J. B. Groh – D. A. Davidson & Co.

Depreciation and amortization?

Charles Ryan

Yeah, so again on a pro forma basis for full year, you are looking at roughly about $40 million to $45 million of depreciation and amortization, mostly operational, but there is also some purchase accounting, say $2 million or $3 million for some of the valuation of assets, they were going to have to amortize over credit time plus our debt costs another couple of million. So I think of it about $45 million for sustaining full year basis and then take a [probation] of that for the GAAP period.

J. B. Groh – D. A. Davidson & Co.

Okay. And then one for Udo, you guys renew obviously a lot of contracts, anymore to expect there. Have you pretty well worked through everything that you were looking to renew?

Udo Rieder

You’re right. We have renewed quite a few and we’ve got a few more to go actually on both Evergreen as well as on (inaudible), but I will say that, we don’t have anything officially yet to announce, but the indicators are all solid, and so we’re feeling very good about all of the renewals.

J. B. Groh – D. A. Davidson & Co.

Thus far what’s been the biggest challenge with the integration?

Udo Rieder

I would say that the biggest challenge is so far, I think probably related to how quickly we are able to reduce penalties through the profits of infusing more cash and more inventory, and then the system that is currently being used at Evergreen to track parts, order parts et cetera, and so we are at kind of sum it up, is we do this very well, and we’ve done it in the 40 years. So I’m very confident that and we’re making great progress toward achieving the expected results in terms of ultimately reduced penalties. And but just these are the time that it takes with lead times from suppliers et cetera, it’s purely a timing issue, it’s definitely not a long-term issue for us?

Operator

We’ll take our next question from Yair Reiner with Oppenheimer.

Yair Reiner – Oppenheimer Securities

Thank you. So I think I didn’t see a cash flow statement this time, could you just kind of walk us through the major cash flow items for the quarter?

Udo Rieder

Yes, so here the way to think about 2013, it’s really going to be a normal year as far as cash flow right because we’ve got a lot of non-recurring type stuff going on with Evergreen and the integration of that, so just isolating the second quarter obviously we’re putting inventory into the system or we’re generating plans to fund, that we turned to service, some of the key aircraft that are not in service. I’m obviously refunded a lot of integration and acquisition cost and things lot may throughput.

The bottom-line is for the year, think about these two businesses, again it’s generating roughly $40 million to $50 million of free cash flow. If you think about is on the kind of the sustaining basis, that the normal CapEx and all those things but for 2013 obviously you’re going to see even you see, numbers that are going to be offsetting the sustaining name because of all the one-time efforts. We haven’t got any people in for all the cash then spend a lot of that cash in the second quarter to your initial question, a lot of will come in the second half, particularly on the return to service and the inventory interest system.

Yair Reiner – Oppenheimer Securities

Got it. And then, if we think about where you expect to be end of the year, I’ve recognized there is still lot of moving parts, but that you’ve given $45 million of the note back and you’re spending little bit less on Air Amazonia, kind of where do you expect the balance to be in 2013.

Udo Rieder

Yeah, so we expect, we project basically even after funding Air Amazonia through the revolver to be no higher than, call it $50 million to $55 million on our revolver, penetration, excluding the letters of credit, which we think is a really good situation. As you know, we upside the revolver to $125 million in capacity and so, that’s our latest projection and like I’ve said, the second half of the year, we’ll have a lot of sustaining cash flow but will also be generating a lot of cash into the system. So my latest, like you said is about $50 million to $55 million into the revolver by year-end.

Yair Reiner – Oppenheimer Securities

Great. That’s very helpful. And then just one last spare question from me. In those of this uncertain cash position and now on the balance sheet, can you just discuss what that is, and kind of how that gets resolved over time? Thank you.

Udo Rieder

Yeah, Yair. So that’s related to the Evergreen transaction. So in a nutshell, that’s worth. That’s done in the 14s to our contracted [DynCorp] and we’re still sorting through that. So basically Evergreen book that transaction in their fiscal 2012 and we’ve taken that on to our books now and what we need to decide is basically do we need to pay taxes, are we obligated to pay taxes in the 14s or not and if we are, then we’ll realize that liability of an uncertain tax position and then the offset will be a foreign tax credit against the U.S. taxes. If we’re not then obviously we’ll take that off the balance sheet. But for now it’s on there and we’ll sort through that through the balance of this year.

Operator

And moving on, from Stifel we’ll hear from Steve Levenson.

Stephen E. Levenson – Stifel, Nicolaus & Co., Inc.

Thanks. Good afternoon, Udo and Chuck. Just in relation to Air Amazonia, on the contract, are any of the one-year options mandatory renewals or is that of the option of HRT?

Charles Ryan

No, they are the option of HRT. So the way to think about it is very similar to all our government contracts. Every year there is an option to renew and we go through a process and then we renew it. So it’s very similar to those.

Stephen E. Levenson – Stifel, Nicolaus & Co., Inc.

Okay. Thanks. And it’s a minimum of $29 million. Does anything change if the contract, if demand goes above $29 million?

Charles Ryan

Yes. There is a performance incentive as HRT reaches incrementally more levels of revenue. There is also incrementally more that we would paid out to them as a result of achieving those levels.

Stephen E. Levenson – Stifel, Nicolaus & Co., Inc.

And if you want to make an estimate of what the likelihood that would be?

Udo Rieder

Yes, so that depends on a couple of factors Steve. First, what they’ve done with [indiscernible] partnership is they have decided to do substantially more three-dimensional surveillance used in smaller helicopters. And essentially that seismic activity increases the odds of finding oil. And that’s why in fact why you’ve seen the contract structures the way it is right now. So assuming that they do in this first year, of course this first year, strike oil in the Amazon, then the likelihood of this going higher is extremely high. But that is what it is ultimately dependent on.

Stephen E. Levenson – Stifel, Nicolaus & Co., Inc.

In other words, you’ve been using larger helicopters for more hours in the future, if they were pointing success?

Udo Rieder

That’s exactly right. We would for example, in this first contract, we’re using four small helicopters to do seismic. Those helicopters might be reduced to substantially lower number, but based on adding S-61s or start adding 212 to the mix and yeah, those are higher revenue, higher profit helicopters. So that’s exactly right.

Stephen E. Levenson – Stifel, Nicolaus & Co., Inc.

Got it. Thank you. And as far as the Evergreen Helicopters that you’re working to return to service, are those being done in any sort of size or regions, smaller ones first larger ones later or the other way round.

Udo Rieder

Yeah, we are doing actually first and foremost, those who have the best revenue generating opportunities, and they would happen to also be the larger helicopters, and so that’s the top priority. Then also in that priority level is where we’ve agreed with our less source to bring these out of service aircraft up to a condition, those are top priority for visitor, it’s the contractual requirement around that and then the next would be the aircraft that we planned to sell, that we don’t think we’ll generate immediate revenue or near-term revenue and those happened to be mostly the smaller helicopters at this point but yeah, that’s the order we’re projecting this.

Stephen E. Levenson – Stifel, Nicolaus & Co., Inc.

Okay, thank you and one quick for Chuck. If we take the note issuance cost and some of the transaction cost out of SG&A does think it was a good run rate or have you done the rest of that and could you suggest one.

Charles Ryan

Yeah, I think if you take out the non-recurring, you’re roughly at 12% of revenue run rate Steve, that’s probably a good number, obviously that as reported numbers only have two months of Evergreen and there for the quarter, but if use the pro forma numbers, obviously they are different, but yeah, I would say that’s a pretty good run rate. The only caveat there is we are in a hiring mode for some critical positions, couple of EP levels, state (inaudible) and HR and things like that so, we want to give you some little cushion to accommodate that in the second half?

Stephen E. Levenson – Stifel, Nicolaus & Co., Inc.

Got it. Thank you very much.

Charles Ryan

Okay.

Operator

(Operator Instructions) Next we’ll go to Andrew Casella with Imperial Capital.

Andrew P. Casella – Imperial Capital LLC

Hi. Thanks for taking my question. I guess, just some housekeeping items, can you provide CapEx guidance for the year, and if you could break that down between maintenance and growth?

Charles Ryan

Yes Andrew again this business combined on a sustaining basis is going to be about $40 million of CapEx on a maintenance basis, and that’s going to encompass maintaining all the aircraft. The aircraft that are currently on contract right so that the size of the fleet that we are operating in Erickson, and the size of the fleet that is on contract with Evergreen. If and when we get successful and build more aircraft on to the contracts for Evergreen, then obviously we have to cut the poor rate to maintenance CapEx to go along with that.

But think about it’s around $40 million, from a CapEx this year it’s going to be a little bit higher because we are doing a couple of things, one we are doing a major maintenance on one of our S-64 aircraft that’s going to come out of the hanger by the end of the year, it drives around $5 million, and then we’ll also probably going to the closing on some additional hanger space to accommodate some other expansion, long lines of in-sourcing some of these work on the Evergreen side.

So I think the growth CapEx this year probably sums between $10 million and $15 million, we’ve got a cap in our credit agreement that we can with 25 and an annual basis. But I’d like to say again on a sustaining basis. I think the business can do about $40 million in maintenance and about $5 million, maybe $10 million on growth.

Now if we ever, when and if we build another airplane that can spike up, and that’s always a possibility. We are not building a new airplane today, but like you said overhauling one in the hanger, and which is going through heavy maintenance.

Andrew P. Casella – Imperial Capital LLC

Got it. That’s great. Thank you. And when do you think about the Air Amazonia EBITDA contribution without stating the obvious. Will you be using a 20% margin just on what you’re doing at consolidated basis or somewhat closer to the 30%, I guess that was originally contemplated in the road show for the bonds?

Udo Rieder

Yes, I feel pretty confident that 25% plus range. So I don't think, definitely will be better than 20%. Right now it's kind of well enough to around 25%, somewhere between 25% and 30%. So we feel pretty confident about that.

Andrew P. Casella – Imperial Capital LLC

And then finally if you could just give us an update on the synergies, I know during the road show there was about $10 million of cost synergies and then also some aircraft availability that was going to reduce itself. If you could give us a sense of what's been realized and what's still to go and how much you included in your guidance?

Charles Ryan

Right, yeah. So to start with the synergies, we've got for this year a very, this is the $10 million we're referring to. A very small portion of that is included this year and that's just simply a timing issue and we've inducted a first Puma aircraft into our hangar known as center point and that will start this process. And so, as we're forecasting out into the future we're very confident we'll achieve what we expect to achieve and we know how to do this and it's our core business and central point. And so, again a very small portion of that, Tim may know, is included for this year in the guidance.

Then in terms of the aircraft into service, yeah, we're making very good progress there. We've already returned several aircraft that have been out for maintenance, two contracts that are active, for every aircraft that we’d take all at 3 plus that returned to a contract that are out for maintenance, increases revenue and also decreases penalties. So, very happy about that. We’re also making good progress in terms of returning aircraft that are idle back into service and getting them ready for revenue opportunities and we’re also very, very happy with that progress.

And then finally, we are very focused on ensuring that we have the product support, the buffer levels, the inventory buffer levels, if you will, out in the field to ensure that we get the rest of these penalties that are out there. So, yeah, feel very good about the progress all the way around.

Andrew P. Casella – Imperial Capital LLC

Great. Thanks. I’ll get back in the queue.

Operator

And next we will go to Josh Goldberg with G2 Investment Partners.

Josh M. Goldberg – G2 Investment Partners Management LLC

Good afternoon, guys. Just a couple of quick ones. First of all, your EBITDA contribution for the first six months of the year, correctly is $24.2 million. That’s the right number?

Charles Ryan

Hold on, we’re just checking it out. You mean just per as reported?

Josh M. Goldberg – G2 Investment Partners Management LLC

Yes.

Charles Ryan

Yeah. We got. You said first six months?

Josh M. Goldberg – G2 Investment Partners Management LLC

Yes.

Charles Ryan

$24.2 million.

Josh M. Goldberg – G2 Investment Partners Management LLC

Okay. And you’re raising your EBITDA as reported guidance from $93 million to $101 million to $97 million to $105 million. So an increase by $4 million. Is that just better activity that you are seeing in the back half of the year whereas the first half is in line?

Charles Ryan

No. So it has to do the penalties that I mentioned earlier. So simply stated the first half of the year, particularly January to April on a pro forma basis has a much more heavily weighted in terms of penalties. And the second half of the year where we’re now starting to make progress and getting those penalties levels down has more opportunities. So you see kind of a shift or basically when we raised our guidance on a pro forma basis, for the stub, which is the May to December piece, that piece is getting better because the first four months got a little bit worse as far as penalties. So it’s a shift to penalties from the first half to the second half.

Josh M. Goldberg – G2 Investment Partners Management LLC

You’ve been around the company in the first five months.

Udo Rieder

Well, yeah, but that’s the difference between pro forma for the year and then just [coming] the stub, right. So we held the pro forma for the year, right, as if we own the company from day one, but when you’re just doing as reported, right, we’re able to say at this point that to make the full year or as reported the last eight months of the year is going to be better than we originally anticipated, because we’re shifting penalties, because we are...

Josh M. Goldberg – G2 Investment Partners Management LLC

Okay. So just two additional questions to that. So basically if you go to the midpoint of that EBITDA guidance, you are assuming it’d be somewhere around $75 million in the back half of the year?

Udo Rieder

$75 million, I was trying to…

Josh M. Goldberg – G2 Investment Partners Management LLC

Okay. That $75 million is made up of what in the third versus the fourth quarter. Could you give us some sort of breakdown to that for investors?

Udo Rieder

Yeah, I can give you. If you want I can give you kind of on a pro forma basis. That’s what I have in front of me. I can tell you that, so I said on a pro forma basis for the year, arrange the revenues, right, $385 million to 395 million. So think about the third quarter, think about the first half generates about over, call it, 42% of the total year. And so, they’re obviously back into the second half. And then think about the third quarter is around, say, 35%, 33% to 35% and think of the fourth quarter around 25%. So from that respect…

Josh M. Goldberg – G2 Investment Partners Management LLC

And that’s all revenue or EBITDA?

Udo Rieder

That was revenue. That was revenue I gave.

Josh M. Goldberg – G2 Investment Partners Management LLC

Okay. And then, just, I guess the last question, just sort of philosophically, I mean, you’ve announced obviously a lot of new contract renewals here in the last three months. It sounds like you feel more comfortable without the Evergreen opportunity, especially with some of the recent opportunities that you’re seeing out there going forward. However, you’ve only maintained really your guidance here. Was all of this good news kind of expected when you originally gave your guidance on first week of May or did you – is there a sign that kind of pushed that was then pushed off that kind of is sort of evening out what seems to be a lot of positive moves the last few months?

Udo Rieder

Yeah, so as far the renewals, all the renewals were as expected and we’re built into the guidance, okay. Major contracts like the floor and Transcom and things like that and those were major contracts that had renewal options this year and that had comfort version as we expected as we forecast in our guidance. That’s just kind of the nature of the Evergreen business.

As we said earlier, they’re long-term contracts. They have annual renewals and so we basically back the renewals as expected. That’s not to say that there is not a lot of new businesses out there that we’re bidding on those as far as future opportunities, but at this point our guidance is pretty much assuming that will come in as originally expected. If we win some of this new work that could help this year, but more than likely it will be a bigger picture for 2014.

Josh M. Goldberg – G2 Investment Partners Management LLC

Got you. Okay, great thanks so much.

Udo Rieder

Thanks, Josh.

Operator

From Deutsche Bank, we’ll go to Catherine O'brien.

Catherine M. O'brien – Deutsche Bank AG

Hey. Maybe a little bit of a follow-up to that last question. I was thinking about the integration of the two companies and going out there and bidding on business. Can you talk a little bit about RFP process now that you guys are together and to do what opportunities you do see out there for the combined company in late 2013 and early 2014.

Udo Rieder

Yeah, sure. Hi, Catherine. We are actively responding to RFPs, especially and most actively in South America. So it's just a lot of activity and there's a lot of activity that contemplates the use of this mixed fleet that we talked about, this position that went to be the sole provider of the mixed heavy medium and light fleet.

So I don't want to go through the names of each one of these, but as I sort of look down on what's already been proposed and submitted in Q2, now one contract for one heavy, two mediums, one light; another contract for one heavy, two mediums and light one, another one for one heavy, one light and that's part of the list, but the list just keeps going. So there are several out there. We're not obviously not going to win everyone. We're trying hard to win everyone of these, but we're probably not going to win every one of these, but it just, it highlights the activity that is already proposed. That's the first phase.

Then the second phase of it is we'll have new opportunities that come along that have not yet been revealed. The examples of that are when we for example, when we bid let’s say something like Australia. Australia has the need for heavy, medium, and light.

We have only in the past submit a proposal for the heavies, because it felt we had and this current contract, which is up for renewal here and we are waiting a feedback on it happened actually about six months ago and this is pretty this deal, so we could not include mediums in that one, but there is more of those that are coming that we expect going forward we will be able to respond to in favorably with this more comprehensive offering.

Catherine M. O'brien – Deutsche Bank AG

Okay. And then just one question about the market down in South America and which transaction in the Air Amazonia transaction, is the fact that you took fewer helicopters from them, did I effectively make that market tighter, so it helps you bit more projects now because HRT is not going to really be utilizing us other aircraft as really because they are not going to be in the helicopter business really more. So have you effectively tightened your market down in South America by not taking on those additional aircraft in the way or how should I think about that?

Udo Rieder

Well, if you think about this way, we have the same opportunities that we had before for the aircraft as well as for new business, and what we put off there at least over the next 12 months is actually having to acquire the aircraft, so we still have the same market opportunities, we just don’t have to go out and invest in the aircraft until we see our way clear to contracts that would utilize those aircraft.

So what it really does for us, it give us I think a tremendous amount of flexibility when these opportunities come up now we’ll look at – okay, we have aircraft available from Air Amazonia and that these aircraft types and that we have the evergreen aircraft also available, the ones that are idle that we’re now bringing back to mission ready status and he will make the best decision based on that. There is really no tightening of the market that that creates per se and I think it just offers us less risk and more flexibility.

Catherine M. O'brien – Deutsche Bank AG

I guess it is open to you more optionality that is otherwise not available to a competitor?

Udo Rieder

Yeah, that’s just right. I mean key car business is having mission ready aircraft available in a timely fashion, because most of these bids are reasonably short, by reasonably short I mean, six months. So you either have to have an aircraft available or you have to have access to an aircraft and that’s the key advantage for us.

Catherine M. O'brien – Deutsche Bank AG

And how does that right of first refusal on those additional aircraft but how and what’s the time frame that you have to react then?

Udo Rieder

Yes we have one year over the next year we have the right of first refusal and so we can work a deal if they decide to sell the aircraft and then we exercise that right. What we would look at is the kind of progress we’re making returning our aircraft into service and the kind of aircraft that we have available for the most near-term opportunities and then just to make a decision on whether or not we will exercise what was that mostly just all of business.

Charles Ryan

That was all legacy Erickson core business.

Catherine M. O'brien – Deutsche Bank AG

Okay. Great. Thanks very much.

Udo Rieder

All right. Thanks Kevin.

Operator

(inaudible) finally we go to Alex (inaudible).

Unidentified Analyst

Good evening. The vast majority of my questions have been answered, but can you give us the price value of the six aircraft that are coming from Air Amazonia?

Udo Rieder

Yeah, there are roughly around $120 million, Alex.

Unidentified Analyst

So, if it ends up being a one-year contract, you get $20 million of aircraft plus one years’ worth of EBITDA basically?

Udo Rieder

Yeah, plus some ground stuff a couple of hangers come with it and parts and inventory and things like that.

Unidentified Analyst

So, it’s a push.

Udo Rieder

Absolute kind of look out, yes, worst pace and obviously we’re not hoping to that, yeah.

Unidentified Analyst

I am just worst case.

Charles Ryan

Yeah, yeah, worse case, that’s right. In the way we think of this Alex is, this is an opportunity to enter into a market that’s extremely difficult and high barriers of entry, so, if we get the aircraft, we get our customer and we get the capability to perform this work in Brazil. If, it’s some point in future, we’re not working for HRT that definitely doesn’t, does not pull us out of the Brazil game.

We want to be in the Brazil game, HRT is an important customer, no doubt, and it’s our entry there but we’re immediately began to have discussions, serious discussions with for example, Petrobras, who is focusing more and more their efforts into Brazil about performing work for them and other oil and gas companies that are in the region as well. So it really is a good, having tactical move, but it’s also I think a very good strategic move for us.

Unidentified Analyst

And then can you spend a minute and just help us with the process for the 135 license?

Udo Rieder

Yes, so the way this works is, while we’re only flying for HRT, we don’t require the 135, so that’s why they don’t have it today. The guys who are down there actively registering for that 135 certification, we think it’s probably a few more months out, but not more than that, it’s not a lengthy – we’re not expecting it to be a lengthy process, it doesn’t involve the government and that’s why we’re just little bit careful about the final timing. And they requires a hanger ownership of a hanger to conduct this maintenance.

We have to demonstrate that we have that hanger and we have that now as well we have the first right of refusal basically and our HRT is funding part of that as part of this deal as well. So it’s identified and we’ve got the option on it and it’s just the matter of starting nice, crossing [it] with respect to the government process.

Unidentified Analyst

Okay. And my last question, lots of press about U.S. military involvement in Africa, sort of being under represented. Are there contracts out there and are you bidding on these?

Udo Rieder

Yeah, we are in active discussions and I’d say we are in the early stages of those discussions and perusing opportunities in Africa, but definitely as they come up, yeah, we are serious contenders.

Unidentified Analyst

Okay, thank you guys.

Operator

(Operator Instructions) (inaudible)

Unidentified Analyst

Hey, thanks for taking the question. Just want to get a little bit more color on why you have reduced the size of the number of aircraft purchased? It looked that 830 is I talking about divesting a lot of assets and their need for cash. So it seems to need they would want you that cash with the opportunity, and then as a follow-on how quickly did you enter into discussions to use those aircraft in different ways if they were to restructure? Thanks.

Udo Rieder

Yeah, sure. What drove the fewer aircraft came from our side and that was, as I mentioned earlier, an opportunity for us to reduce our risk level and so that consequently is what drove also then the end of purchase price from what was $65 million to $75 million down to where it is today, which is at least at a starting point here at $26 million. And so that was purely a de-risking move on our part. I think actually HRT would gladly sell us the remainder of the aircraft at the original kind of pricing today, but again it emphasized that this gave us a lot more flexibility and a lot less risk.

And In terms of how quickly we would deploy these aircraft, again we've got contracts already out that as soon as we get positive indication of which contracts in which regions and they are all around the world, it's not only South America, but it is concentrated in South America, but as we get confirmation of which aircraft and which aircraft combinations we’ll make decisions. So that confirmation process could start this quarter and also into next quarter without likely recognizing revenue until next years.

Unidentified Analyst

Okay. Thank you.

Operator

And next we’ll take a follow-up from J. B. Groh with of D. A. Davidson.

J. B. Groh – D. A. Davidson & Co.

Hi, Chuck. Apologize if you’ve gone over this before, but could you give us sort of a fleet utilization rate in the core original Erickson business, and then maybe talk about Evergreen in the quarter and sort of expectations for the second half given the lower penalties and that kind of thing?

Udo Rieder

Yeah, we’ll take that. We’ve got some staffs in front of us. Yeah, you recall that we expected in the core Erickson business to in excess of 70% and which is our maximum utilization. We subtract these numbers by 75% and now we have to start thinking about where we would, as we have more demand, where we would get those aircraft. You heard Chuck mentioned earlier that we’ll bring one aircraft back into service. That will happen sort of towards the tail end of this year and that helps us to alleviate the issue of being short on capacity. That puts another aircraft that was out in maintenance back into service. And then as we need more aircraft beyond that, as Chuck mentioned, we’ll consider that as well in terms of the cash expenditures associated with building a new one.

Then when we started the business on the Evergreen side, in terms of utilization we were about 50% overall utilization and the way you kind of think about we’re making really very good progress around that and putting aircraft back into service, we put several back on contracts, and then we’ve also put several back into service that were on short-term contracts and then we’ve also put several back into service that are weighing than just the sale of the aircraft.

In terms of where we might be looking sort of towards the end of this year, that 50% number will definitely has and will continue to progress in the right direction. I think pretty quickly here would be north of call it, 60% kind of numbers. And that’ll continue every month that I think will continue to make positive progress there.

Then will also make that idle aircraft and we’re also are making good progress around the operational reliability rates, the ORRs and that is for those aircraft that are under contracts already or they’re ready to go and you might recall that our numbers are in the high-90s, our numbers being airs and core business and the high 90s, and you can think of Evergreen because of this part issues and because of aircraft that are down for maintenance issues were sort of in the mid-60s and I think for the second quarter, we made actually good progress, several percentage point bump on that.

We expect that to continue as well. I think by the time we approached in to this year, we’ll be closer to those contractual obligated type of numbers of 85% and then that will consequently reduce the revenues to the level that Chuck talked about earlier as well.

So, we feel good about that. We know how to do it and this is strictly a timing issue, how long does it take us to get there, but good progress and we fee good about it.

J. B. Groh – D. A. Davidson & Co.

Great. Thanks, Udo.

Udo Rieder

All right. Thank you for your time.

Operator

And we'll go to Tony Bartsh with Park West

Tony Bartsh – Park West Asset Management LLC

Hi. Thanks for taking my question. What will be your cash tax rate on kind of a normalized basis once we get out to 2014?

Charles Ryan

Yeah it's good question. So we're going to enjoy some pretty good cash versus both tax ratios from the next couple of years. So I would give you just a ballpark basically. I think of cash taxes for the combined business are going to be somewhere in the range of $5 million and obviously both taxes are going to be much higher than that and the reason being mainly a couple of things.

Obviously we get some (inaudible) going up for tax purposes that helps tax versus book accounting, but also more importantly the goodwill transaction or the personal accounting transaction were Evergreen is going to give us a nice spark and the ability to recruit some of that investment from a tax standpoint. So free amortization. So I would use that kind of relationship on cash versus book, say 2014 and into 2015.

Air Amazonia will be a little bit different because obviously they’re operating in Brazil and so like cash taxes will also be less than book in Brazil, because again we'll have some ability to accelerate some things and offset the purchase accounting, but the numbers, I just gave you are pretty much for that – EHI for Evergreen and Air since going.

Tony Bartsh – Park West Asset Management LLC

Okay. So if I start with your adjusted EBITDA number, the pro forma number for the year, $112 million and back out, $5 million for cash taxes, $36 million for interest expense, $40 million for maintenance CapEx. I guess something closer to kind of $30 million run rate on free cash flow and is there an assumption that I am missing that would get us closer to that $40 million number.

Udo Rieder

What did you use for…

Tony Bartsh – Park West Asset Management LLC

I just used that midpoint of that pro forma EBITDA of $112 million and then $36 million for interest expense and $40 million for maintenance CapEx and $5 million for cash taxes.

Charles Ryan

Right, right. So I think the first thing, when I tell you $40 million to $50 million, the first thing is, when you look at 2013, like I said earlier, this penalty situation is really is effecting 2013 in a very negative way, right. So last year and 2012 we incurred about $17 million in penalties through the Evergreen business deal. This year we are going to make a lot of progress in that run rate, but we are still going to be pretty high, somewhere in the $15 million to $16 million range for the whole year, but going forward, we are hoping to bring that number way, way down, right.

As we said earlier, somewhere in the run rate of between $2 million and $4 million, right that’s our goal and our objective. So right there, you are going to pickup around $10 million plus in pure cash, because we are not generating that as far as revenue and I think the other thing is, the interest. I think it sounds like the interest number may be a little higher.

The number I gave earlier did not assume the return, I assume that as a business structure today, but when we turn to $45 million of that notes, right that’s going to take a big chunk of interest up off the table and also the revolver in itself is going to come down as we kind of repeat cash flow going into next year. So I would use an interest rate, our cash interest is more around $30 million, and who knows of course you probably get closer to the number that I have ballparked for you.

Tony Bartsh – Park West Asset Management LLC

Great. Thank you very much.

Charles Ryan

Yeah, no problem.

Operator

And we’ll go to Andrew Casella with Imperial Capital.

Andrew P. Casella – Imperial Capital LLC

Hi, thanks. Just a quick follow-up, I believe, I heard correctly your year-to-date revenues on pro forma basis were about $165 million and EBITDA was $35 million. Could you just break it down between Evergreen – yeah, just a contribution from Evergreen for that pro forma period?

Charles Ryan

Yeah, so for the pro forma period, Evergreen is– first half basically, that’s what you’re asking?

Andrew P. Casella – Imperial Capital LLC

Yes.

Charles Ryan

Yes, the first half of 2013 Evergreen is about $90 million in revenues and the base EAC base is about $76 million, that’s makes up about $165 million, that’s on a pro forma basis.

Andrew P. Casella – Imperial Capital LLC

When do you have that also for EBITDA contributions alternative in the first half?

Charles Ryan

Yeah, I do. We’re not tracking it that way but I can give you basically these again, we’re going to new segments and things like that. So I can give you ballpark but going forward, we’re going to track it obviously including how we operate the business but I see roughly Evergreen and EHI were about almost equal about $18 million, $17 million to $18 million of adjusted EBITDA between the two each.

Andrew P. Casella – Imperial Capital LLC

Got it. Thanks. And then, when, for the redemption of the bond, is that a pre-payment penalty or those would just be redeemed at par along with accrued and paid interest?

Udo Rieder

So the redeemed at par that was accrued interest up to the point of the release.

Andrew P. Casella – Imperial Capital LLC

Great, thanks.

Udo Rieder

You’re welcome.

Operator

And we do have one final question left in the queue and that will come from Josh Goldberg with G2 Investment.

Joshua Goldberg – G2 Investment Partners GP LLC

Hey guys, just two quick things. One is when you do close the Air Amazonia deal, I believe you think it’s going to happen in the third quarter. One is, can you give us the timing of that and do you expect it to do conference call to update your guidance once that deal closes?

Udo Rieder

Yeah, your timing is right. We expect it to be third quarter and we don’t have a definitive date. We got several things that are still being worked in terms of timing only. Yeah, again these are all just traditional closing items and so we are not concerned about any of that other than predicting the exact timing. And then, yeah, that point once that’s been completed, we will put out new guidance for the year, for the combined companies.

Joshua Goldberg – G2 Investment Partners GP LLC

Okay, and just back to the previous callers question regarding the Erickson Air-Crane standalone and Evergreen. Based on what you’ve mentioned there, Erickson did about 76, it seemed liked you did about [453091] in Erickson in the second quarter, up about a 1 million year-over-year, is that fairly consistent with what you have?

Udo Rieder

Yes, we were about a 1 million, that’s correct.

Joshua Goldberg – G2 Investment Partners GP LLC

And the slowdown in growth was basically this fire fighting is still strong last year?

Udo Rieder

Yeah, it’s exactly [how it is], we have really nice growth and again that the businesses that we can obviously control, which is the construction in the oil and gas and then logging like you’ve said is up and that’s going nicely with housing and what not but, firefighting was a huge quarter last year, pretty much one of our best ever. So, could you allow do that, we didn’t expect it, we didn’t put guidance into it, we didn’t forecast it. So it was a good quarter, the quarter came in pretty much how we expected it to come in.

Joshua Goldberg – G2 Investment Partners GP LLC

Okay. And then, just add to that, just a little bit, just the Erickson business, obviously you had a great third quarter last year on firefighting as well. That is highlighted that would not be repeated. Do you have confidence in Erickson on a standalone basis we’ve grown in the back half of the year?

Udo Rieder

Yeah. Like I said, our guidance is based on a firefighting projection for the back half of the year, that’s kind of consistent with historical averages and that’s we projected. And right now, we’re tracking to it. It’s been a somewhat of a average to above average year right now, except for Australia. Australia this year was huge for us. Right, but we’re already enjoyed that I was in the first quarter but, yes, what we’re seeing, we’re seeing basically back half of the year, consistent with what we expected and it’s kind of tracking.

Joshua Goldberg – G2 Investment Partners GP LLC

Got it. Okay. Great. Thanks so much.

Udo Rieder

No problem.

Operator

And at this time, there are no further questions.

Udo Rieder

Okay, well thank everyone. We appreciate your calls and we appreciate your support and continued investment in our company and as we started today, we’re excited about our near-term opportunities as Erickson Air-Crane and Evergreen combined and we’re excited about the addition now of Air Amazonia and I think with all of this put together, we’re very excited about our long-term aspirations. So thank you and we look forward to seeing you again soon.

Operator

Ladies and gentlemen that does conclude today’s presentation. We do thank everyone for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!