Bristow Group, Inc. F2Q10 (Qtr End 09/30/2009) Earnings Call Transcript

| About: Bristow Group (BRS)

Bristow Group, Inc. (NYSE:BRS)

F2Q10 Earnings Call

November 5, 2009 10:00 am ET


Linda McNeill – Manager of Investor Relations

William E. Chiles – President and Chief Executive Officer

Elizabeth D. Brumley – Chief Financial Officer

Richard D. Burman – Senior Vice President, Eastern Hemisphere

Patrick Corr – Senior Vice President of Safety and Training

Mark Duncan – Senior Vice President for the Western Hemisphere.


Arun Jayaram – Credit Suisse

Ian Zaffino – Oppenheimer & Company

Daniel J. Burke – Johnson Rice & Company

Adrayll Askew – Hartford Investment Management


Welcome to the Bristow Group Second Quarter Earnings Conference Call. (Operator Instructions). And now I would like to turn the conference over to Ms. Linda McNeill.

Linda McNeill

Welcome to Bristow Group's September Quarter Earnings call. This is Linda McNeill, Investor Relations Manager. And with me on the call today are Bill Chiles, President and CEO and Liz Brumley, Chief Financial Officer. Also joining us for the question and answer session today are Richard Burman, Senior Vice President of the Eastern Hemisphere, Patrick Corr, Senior Vice President of Safety and Training and Mark Duncan, Senior Vice President for the Western Hemisphere.

We hope you've seen our news release and 10-Q, which were released last evening. Both documents are on the Investor Relations section of our Website at Please note that no earnings guidance will be provided during this call.

Let me remind everyone that during the call, Bristow Group management may make comments that reflect our beliefs, expectations, hopes, intentions or predictions of the future. Additional information concerning these perspectives is contained in the Form 10-Q filed with the SEC for the quarter ended September 30th, 2009 and the Form 10-K filed with the SEC for the year ended March 31, 2009. Additionally, to the extent that we discuss non-GAAP measures during the call, please see in the investor presentation which will be posted on our Website for the calculation of these measures in the GAAP reconciliation.

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

William E. Chiles

Thank you, Linda, and thanks to all of you for being on the call. We're very pleased with our financial results for the quarter. Ninety-two cents was a very good quarter for us. It indicates that our hard work over the last year is paying off in a very challenging environment where our customers are still pushing for price reductions and we've seen the activity fall.

However, we do see the market stabilizing and actually looking better for next year. Excluding the special items for the quarter, the results were about $0.87. And Elizabeth Brimley will go into more detail on that in a minute.

Operating income, $11.1 million for the three months ended September '09. Year-over-year versus the June quarter, operating income was up $8.8 million. This compares to $0.77 for the September '08 quarter and $0.66 for the June '09 quarter. The June '09 quarter included $0.06 that was attributable to severance costs, to give you a better apples-to-apples comparison.

As I said, we're very pleased with these results and continue to perform reasonably well in a challenging market with pricing pressure, although we have seen that pressure fall off in the last several months. So the business model is working well, trying to contain cost, continue to win some work when we can and improving operating margins.

On the safety side, consolidated for the 12 month period or the 12 month rolling period, our aviation accident rate is 0.39, which is down from the June quarter at 0.72. And so as we fly more hours and have no accidents, those numbers continue to come down. So the accident we've had this year was a minor accident in our training operations.

In our commercial oil and gas operations, we have an aviation accident rate of zero. Our total recordable incident rate increased slightly to 0.54 from 0.51 in the June quarter and we're working hard with our target zero program to move those numbers closer to zero.

In our lost work case rate was flat at 0.35, which was the same for the June quarter. We're stepping up our safety focus again on our ground safety this year with our target zero workshops. So we will see some dividends from that soon.

In terms of the overall macro market, we're cautiously optimistic. Oil seems to be hanging in at around $80 a barrel. And natural gas is surprisingly higher than it was in the last quarter, up from around $3 to $5 per thousand cubic feet. That's very surprising.

However, since only about 16% of our operating income comes from North America, all through the Gulf of Mexico and Alaska, we're very heavily leveraged to oil. And oil seems to have stabilized around the $80 mark with some volatility as the dollar has been moving up and down.

Our expectation is a measured, slow recovery for the next few years. We do see some opportunities starting to come on back on the radar screen. A good example of that is Gorgon on the Northwest Shelf of Australia, which is certainly a major, major gas development project. And there are some other related projects on the Northwest Shelf that are somewhat connected to Gorgon, so we expect that activity to continue to grow and grow.

That's going to be a huge construction project. We currently fly that contract and we are in the process of rebidding for Chevron in Australia as we speak. So that's an example of the kind of projects that are coming back on the radar.

There are some big contracts also coming out. We're seeing – I think all of you probably know very well what's going on in Brazil, but also in Gulf of Mexico, West Africa and other parts of Asia where some big floating production projects are coming back up and major tenders related to CapEx.

And as you know most of our flying is related to operating expenditures. So when we see the CapEx numbers starting to come back and people actually going out and doing these big projects that's a very, very good sign. And as you likely know continued drilling rig tenders for exploration and development in Brazil.

In terms of our more specific – more specifically related to our business, the primary driver continues to be positioning of new aircraft as they come on, to take advantage of these opportunities as well as retirement of older aircraft.

We'll talk later about aircraft held-for-sale and aircraft down. Our overall utilization went from 92% in the June quarter to 88% for the September quarter and I'm sure we'll get some questions about that. How we managed to get lower utilization but better results so we'll talk about that more later as well.

Demand for new aircraft on new projects continue to – have been as you know skewed, as we've said before, skewed to the right. And we are seeing some of those projects start coming back on stream. We are working hard to match up our order book and our options to those new projects. So as they move right we try to move our orders right and move our options to the right as well.

Pricing pressure will continue even though oil is holding in there at $80 barrel, our customers still are pushing for price reductions because they got used to $130 and you've seen their results over the last few weeks and they're under a lot of a pressure. And sometimes that's not coming from the E&P side it's coming from refining and marketing. But nevertheless their results are down so they're going to push us on pricing.

We're continuing to successfully push back on price reductions. We are working with our customers to try to help them be more efficient with the way they use the aircraft. There are several large bids that are going to be in play during the third quarter. North Sea remains steady, it's been kind of a big surprise to us but it's held up so well in the last year. And in connection with the North Sea for example, we are in discussions with a key client for a five-year extension that we believe will be confirmed in the next 60 days and this will be at very good returns.

And as I said the way we're able to achieve that is – and in some cases get a price increase – is where we work with a customer to make their use of the aircraft more efficient, reduce the flight hours to some extent that they're using and we take and we sell those hours to someone else.

So in affect it's a win-win, the customer is able to reduce their cost and we are able to increase the flight hours and actually get price increases. So that's an example of how we're becoming more efficient in helping our customers become more efficient.

We believe U.S. Gulf of Mexico has found bottom, it's been a little bit unpredictable. We generally thought we'd reached bottom last spring and we've seen further deterioration, as you've seen in our quarter-over-quarter performance. We actually believe we've found bottom and we're optimistic about the deep water. We see quite a number of projects coming back on the screen.

We've had no hurricanes this year. It's amazing. I don't remember in my life time when that's happened before. We really didn't have a named storm. I know we had one tropical storm in the Gulf but nothing of any consequence. So that was a good thing because, as we've told you before we do not make a lot of money during hurricane evacuations and re-manning. We generally break even because we spend a lot of time bringing people in and we shut down for three or four days and we spend a lot of time getting people back out there so we generally – it's a generally neutral to us.

I mentioned the activity in Australia; Australia's held up relatively well, although it as you know it's a very sensitive to CapEx rather than OpEx because a lot of those projects on the North West Shelf are in the very early stages and it's very good to see the CapEx coming back.

And with respect to Brazil, Lider produced net income as expected. Little disappointed with the Petrobras bid. Lider was awarded 8 out of the 16 mediums. Those 8 aircraft were already working for Petrobras and the good news is – so there were no additional mediums awarded to Lider.

They just basically renewed the eight they already there, but these are substantially higher rates. That's a very good sign that they were able to role these contracts over at substantially higher rates. The final contracts haven't been signed on these awards yet, however, all of the 12 large aircraft that were awarded were awarded to others so that was not good news.

There is a silver lining, we've been able to continue to deploy are heavy aircraft elsewhere so we are generally - we do not generally feel that we are long heavies now. And additional good news, Petrobras has a new tender out that was put out last week for two to four large helicopters and four to six medium helicopters starting generally, immediately.

The way we see this is they only had enough money in their budget to award the previously mentioned 12 large and 16 medium helicopters. They were able to release some more funds and pick up some additional helicopters that they really need. So we're very optimistic that we've got a good shot at those.

Petrobras awarded two other medium contracts during the last quarter, one for crew change and one short-term crew change and one long-term for air ambulance and medevac. And these awards in Brazil, specifically the 12 heavies that were awarded plus the two to four they're going to award is pretty much mopping up all the supply of heavies around the world of excess heavies. In addition, I'd like to mention Mexico. First we're seeing our first opportunities for deep-water work beginning next year in Mexico. So that's good news as well.

On the cost control side, as we've downsized our business and our utilization rate has fallen and we've pulled aircraft out of the market, we have been pretty nimble at matching our costs with the number of aircraft working. We can continue to do and we are looking for additional ways to become more and more efficient at a time when we hopefully can get higher rates from our customers, help them become more efficient and also help ourselves become more efficient. Our cost cutting has specifically been targeted at the U.S., Gulf of Mexico, Trinidad and Europe.

Turn to the fleet update we delivered four aircraft during the quarter, three large and one small. As of September 30 we have 12 aircraft still on order. Six aircraft will be delivered over the remainder of our fiscal year ending March 31. Of those six, two are large and four are medium. Three medium and three large aircraft are to be delivered in fiscal year 2011 reflecting the delayed delivery of two large aircraft agreed during the September quarter. We mentioned on the last call that we were working with our suppliers to delay deliveries.

In addition we expect to finalize an agreement to purchase three AW139s in the next few weeks. Let me just make sure everybody understands that, even though we do not like buying aircraft or we said we were not buying any aircraft without contracts, we found ourselves in a position that if we did not have AW139 capability within the organization, we were going to be eliminated from competition in several very important bids.

So we decided that we needed to get AW139 experience because with these specific bids they are asking for AW139s, so we needed to get some experience there. And we also already know generally where these aircraft are going to be deployed in the next few months.

During the quarter, also we think it's good news that we were able to achieve $4.9 million in gains on aircraft sales during the quarter. The total versus the June quarter of $6 million, but it shows that we are still able to sell aircraft from our fleet-held-for-sale.

With that, I'll turn it over to Liz.

Elizabeth D. Brumley

Let me first give a recap on the earnings. Revenue for the September quarter was $291.6 an increase $1.1 million over the June quarter despite having a 2,000 hour decline in flight hours, so we were really pleased with that. Net income came in at $33.2 million versus $23.7 million for the June quarter, so up quite a bit. ROCE that was unchanged at 12% from the June quarter. So operating income, net income and EPS improved over the June quarter.

Some of the items that are affecting comparability between the June quarter and the September quarter are transactions gains and losses for FX. That was $1.1 million so $0.03 per share. In addition, if you caught the earnings release, we had a bad debt reserve related to Kazakhstan operations of $2.5 million or $0.05 a share that was reversed this quarter. That's a one-off item.

And then equity and earnings that improved as a result of our Mexico operations, $1.3 million or $0.03 per share. We wouldn't expect that to reoccur in the future. And then lastly, we had some charges for tax contingencies and valuation allowances that was $2.1 million net or $0.06 per share. So if you exclude those items, we came in at $0.87 per share.

In addition, in comparing to the June quarter, a couple of things were affecting results. Eastern hemisphere centralized operations was up $5.1 million, and that was the result of reduced maintenance costs, as well as some credits related to PBH contract terminations. Over time we expect the eastern hemisphere centralized ops and western hemisphere centralized ops to recover the maintenance costs from the other business units.

But there's also G&A costs on top of that that they do not recover. For the eastern hemisphere, we expect that to be around $14 million on an annual basis, and for the western hemisphere around $10 million.

The quarter was unfavorably impacted by a reduction in operating incomes in the North Sea and that was because the first quarter had some strong – was strong because of the BP work which was temporary, and as well as the lower results for the Gulf of Mexico. There was $1.1 million decrease in gains on sales of assets which Bill touched on earlier. FX was slightly favorable this quarter versus the June results. So we are seeing some improvement in the exchange rates.

Now I'm going to go through and cover some of the regional variances. In Europe, this is where we have 39% of our revenue, so our largest business unit. Operating margins were 12% this quarter. We were impacted – again the June quarter had been favorably impacted by the temporary BP work. The Norwegian sector, the margins there remain unchanged at 14% versus the June quarter. After a strong first quarter, we're seeing a reduction in flying hours, revenue and operating income. A slight change in the FX rate from the June quarter, but unfavorable versus the September 2008 quarter.

Looking forward, ad hoc work continues to utilize the available aircraft. The north North Sea, south North Sea, we're seeing increased opportunities to bid on new work. And then next year we're hopeful that we'll see some additional opportunities to get additional ad hoc work in Norway which should improve margins there. Looking out over the next few quarters, operating margins should be in the low teens for several quarters.

Turning to Nigeria, this is really our bright spot. Revenues around 18% of our total revenue. The current fleet provides limited available capacity in this market so very highly utilized. Operating margins this quarter around 28% and this is despite the fact that the flight hours are down from the June quarter and down from the September quarter last year. This reflects a reduction in activity with major customers, but it was partially offset by the fact that we had some pricing gains and increased activity in our ad hoc work.

In the short term, the competitive landscape in Nigeria is very positive. We got an additional S-92 earlier this quarter contracted for crew change and now we've got two S-92s contracted there in the market. The naira continues to remain week, as was the case in the June quarter and as a result, we're able to keep our local costs down. Margins going forward, we expect those to be in the high 20% range. Sometimes they may bump up into 30%.

Turning now to Australia where we've been very pleased with some improvements there. This represents 10% of our overall revenue. The margins were 23%, not a significant change from the June quarter. Flight hours appear to have stabilized so we're not seeing any further declines there. We expect going forward that the margins will be in the high teens to the low 20% range. And as Bill mentioned, we're seeing some pick up in the expiration activities.

The delivery of the EC225, which was contracted in November 2009 with auxiliary fuel tanks, should continue to improve results there. This will replace older aircraft and so we'll get higher margins on that. And then we had one additional large aircraft delivered in the October – this month.

So the Gulf of Mexico, revenues here are making up about 15% of our total revenue mix. Operating margins were 13% this quarter versus 14% for the June quarter, and that reflects the weakness in the market. This is probably our weakest market overall, but despite that I think we did very well keeping the margins at 13%. Three of four S-92s are under contract so we've got an opportunity for a fourth S-92 in this market or we may place that aircraft internationally.

We continue to expect operating margins to be in the mid-teens. There's a significant international oil company bid released that's going to require new technology aircraft's starting in 2011, so we're seeing some real opportunities in the future.

Turning to Latin America, this represented 7% of our overall revenues but 14% of our operating income. Overall, there's some capacity in Latin America, depending on the market. Operating margins are around 35%, keep in mind that these are higher because we lease aircrafts into that market and then we get equity in earnings from our unconsolidated affiliates there.

The increase in the flight hours from the June quarter is primarily a result of additional aircraft in Brazil and then increased activity in Mexico. Leader had $1.5 million equity in earnings. This was somewhat what we were expecting from Leader. Equity in earnings will pick up in the future we're expecting as a result of the higher rate from the Petrabras contracts, but that will be impacting the fourth quarter more than the third quarter.

As mentioned, equity in earnings from Mexico was higher than we expected $1.4 million. HC is having increased flight hours so that's helping. And then looking out in the future, we would expect the margins to be around 30%.

In Trinidad, we continue to look for ways to keep the cost down there, so we're undertaking further reductions in workforce and we're hopeful to get a contract in the future, TTAG, which Mark will be able to elaborate on later on in the call. We see a lot of opportunities in Latin America, particularly in Mexico where there's seismic and deep water work, and then in the Santos station in Brazil.

Other international, 5% of revenues overall. We had a 41% operating margin in this market. This is where we see our opportunities in emerging markets. Typically, we operate through strategic alliances here, especially in Malaysia. We would expect to see the operating margins to be around 20%.

The earnings here are somewhat choppy, just because occasionally we get short-term contracts and so we'll get a nice pot from say a contract in Libya or Mauritania and candidly this market is a little bit difficult to predict just because of that. Centralized ops, regional overhead costs reductions there and as we reorganize the move to operations to Aberdeen.

Turning now to Bristow Academy, the operating margin was 10%. We're real pleased with the result there. We've gotten some benefits from some military training contracts. And then on some other matters, cash still very strong at $143 million and we've got a fully undrawn $100 million revolver.

The September quarter provided net cash from operations of $58.6 million and then net cash for investing activities was $43 million, so we've got free cash flow of $15.3 million, the first in a long time for the quarter.

Cash on hand and forecasted cash from operations are expected to be adequate to fund the remaining $119 million for aircraft currently on order. I know one item that's a focus for this call is going to be the effective tax rate. We had an effective tax rate this quarter of 25% for the September quarter versus 28% for the June quarter. And as noted earlier, we had some special contingency items. If you exclude those, the effective tax rate was around 20%.

Looking forward for the third and fourth quarters of the year, I would guide you to 22% to say 24% for the remaining quarters, but then there will be some provisions some tax law provisions at sunset at the end of this year. And without making any further changes to our current structure, we would expect the effective tax rate to be closer to 30%. As everyone is well aware of, there's a lot of corporate tax legislation proposals that are on the table and those could effect the tax rate further and push that and drive it higher in the future.

With that, we'll turn it back to the operator and take some questions.

Question-and-Answer Session


(Operator Instructions) Our first question comes from Arun Jayaram – Credit Suisse.

Arun Jayaram – Credit Suisse

Liz, I was wondering if you could help us understand this sequential swing in the eastern hemisphere centralized ops numbers, and perhaps just give us a sense of what your thoughts are going into the December quarter, because that was a favorable swing?

Elizabeth D. Brumley

It was a favorable swing and there is some choppiness in those results and it's mainly because you end up with some lower – you may have some engines or things of that nature that you expense in one quarter and then the next quarter you don't have any big items, so part of it was being driven by that.

Part of it was also being driven by the cancellation of a Power By The Hour contract, so a little bit of an element that's a one-off. So that's why long-term, I would say you need to look at the hub element being breakeven, and then tack on something for the G&A cost.

Arun Jayaram – Credit Suisse

You said $14 million and $10 million for each hemisphere right, and I didn't pick up, which was the eastern hemisphere?

Elizabeth D. Brumley

At $14 million, and Richard, do you want to add any color to that?

Richard D. Burman

Well, I think what we continue to strive for is efficiencies in that business unit and we've been quite effective. We've actually relocated from Red Hill to Aberdeen, as part of the process. So it's an ongoing initiative to drive down costs and create efficiency, so I think we're hoping for more in the future certainly. It may not be to that extent, but certainly we're continuing to look for additional improvement wherever we can.

iHifkdkdklArun Jayaram – Credit Suisse

Bill, I was just wondering if you could perhaps just elaborate a little bit on the Brazil opportunity. So some of the awards have already been made, but can you just comment on that, and also what's still outstanding.

William E. Chiles

I'm going to start off and I'll let Mark Duncan answer the end of the question. But yes, there were 12 heavies awarded, nine to one operator and three to another, obviously, our competitors. We were trying to achieve a higher return on capital. And what's happened now is Petrabras has come back out for bid for two to four heavies and we feel like we're in pretty good shape, because the initial bid has mocked up all the available supply we believe, Mark.

Mark Duncan

I think as Bill stated earlier, the way that Petrabras bidding works and there was all sorts of delays on this process, as you're aware, but they agree a big budget with our board and that's the maximum dollars they can spend. And depending on the prices, that dictates how many aircraft they can contract. It doesn't mean they didn't have more money, it means it wasn't approved through their administrative process. So what's happened here is they need more and they've gone back and gotten a new bid budget and come back out.

The tenders are very short-term, based on the same criteria as the previous bids and are due for submission this month. And we expect an airway award and that will conclude Petrabras' main requirements for the next few years, although depending on how many of these drill rig contracts and FPSOs actually start coming on, there may be further tenders coming out next year for startup the following year.

iHifkdkdklArun Jayaram – Credit Suisse

Bill, how does this change – you have 12 aircraft's I believe on order and 47 under options. How should we think about the options and the potential exercise of future options down the road?

William E. Chiles

We're not yet able to answer that. We're getting ready to go through a process, and it's starting in the next two days here with our management team to look at the opportunities and rematch the opportunities with our options. So we will be in a better position over the next several months to give you a little bit better guidance on the growth that will come from those aircraft.

You may recall a run in that we were talking about up to $2 billion in opportunities that we saw over five years. We started talking about that a couple of years ago. That number when you look at the same five year periods or the last three years of that five year period, the opportunities certainly are down but they're no down significantly.

But we've go to make sure we understand how firm those projects are so we can give you a better idea of our expectation with respect to exercising those options, keeping the current fleet working and also whether that would translate into need from work for additional capital but we just can't give you a good answer today.

Arun Jayaram – Credit Suisse

Bill on the AW139. How many aircrafts did you purchase? What market? And perhaps a little bit of color on the opportunity set with this customer that you mentioned.

William E. Chiles

Okay, we're ordering three aircraft and we're likely to deploy one of those aircraft in one market and two in another market. And the opportunities range from West Africa, Gulf of Mexico, Brazil, and Southeast Asia, Australia. So we've got multiple opportunities to put additional 139's to work and we certainly had to have the experience under our belt to qualify for these bids. That was the main driver of the decision.

Arun Jayaram – Credit Suisse

Okay, is this a medium or a heavy type of aircraft?

William E. Chiles

It's a medium aircraft, so it's not as if we're going out and buying three $25 million aircraft. Mark, do you want to comment.

Mark Duncan

The agreement we have with [Agusta] includes multiple options that are exercisable at our call. Just to put the demand in perspective, we have a tender that was mentioned which is calling for seven of these aircrafts starting in 2011 and that's an example of a specified requirement. So we need these aircrafts to attend that customer.

William E. Chiles

And when we looked at it we identified between 30 and 40 specific requirements for 139's on bids that are be coming over the next couple of years.

Arun Jayaram – Credit Suisse

Okay, sounds like you're just dipping your toe preparing for these opportunities.

William E. Chiles

That's right.


Our next question comes from Ian Zaffino – Oppenheimer & Company

Brian Bitner in for Ian Zaffino – Oppenheimer & Company

This is Brian Bitner sitting in for Ian. My first question relates to the North Sea. I understand the dynamics that brought down operating income year-over-year, but it seems like revenue flight hours still really strong. It seems like demand is still really strong in the region. Can you just talk a little bit about what's driving that?

William E. Chiles

Richard, would you?

Richard D. Burman

Well, I think fundamentally the Norwegian sector is very, very stable, largely driven by production. It's a somewhat similar situation in the UK sector as well, largely driven by production. We're fortunate to have a lot of long-term contracts, which are generally in the five year range so that provides us some stability and security through down periods.

So what has happened in the past year the expiration activity in the southern North Sea dipped a little bit primarily because of the cost of the rigs and that's now bouncing back and we've seen some positive signs there. So, I think it's largely driven by length of contracts we have on the production aspect of the overall volume we drive there.

William E. Chiles

I would also, Brian, add that it is an exploitation market. There is some exploration and development going on around the fringes but it's an exploitation market that can be somewhat volatile depending on what the tax regime is, and also depending on what the majors do with their properties.

There are companies like Apache that are in there and very optimistic as long as they can continue to get properties like [Forties] where they have squeezed out substantial additional production. We've predicted the decline of the North Sea for a number of years now and it just seems to continue to hold up and in some cases get better.

Brian Bitner in for Ian Zaffino – Oppenheimer & Company

It seems very strong there. And then my second question, you guys talk a lot about how you've seen pricing pressure in certain regions and you talk about how some of your customers are feeling pressures and you're working with them to increase their efficiency. I know you kind of talked about this a little bit but can you just elaborate on that. What are you really doing with them to help them become more efficient? To help so you don't have to give them those huge price reductions.

William E. Chiles

Well, the first line of defense on the price reductions is when we show them our margins relative to the drillers and the boat companies during the upswing we show them that we don't get the opportunity to push the EBITDA margins to 40%, 50%, 60%. So once they understand that, they generally back off. But we do always push to work on their efficiency. A good example is in an area of the North Sea where we have a contact for six large aircraft with a consortium.

We can actually increase pricing and to the current people in the consortium help them make their use of the aircraft more efficient to reduce their flight hours which actually reduces their cost. And then we add another party or two into the consortium that will share the fix costs and actually get the flight hours up for the aircraft.

That's what I described earlier as a win-win scenario. And that happens various places around the world, where we tell a customer let us work with you on your roster. Yet we can generate excess flight hours and we'll go out and find a customer that's willing to fly those additional flight hours or even more flight hours.

Brian Bitner in for Ian Zaffino – Oppenheimer & Company

My last question, it seems as though the aftermarket for selling your older fleet of helicopters still remains strong, still booking gains on aircraft sales. What market is strong? Where are you selling these aircraft into right now?

William E. Chiles

For example an old S-61, the S-61's that are the old generation heavies that we had in the North Sea generally. Those aircraft are in high demand for fire fighting, surveillance, anything that doesn't require a long range and a high speed but where the payload is very important. So if we have S-61's available for sale generally we can sell those at good prices.

The other area for demand is in the Middle East where people need aircraft for military support – in support of military operations and also security and surveillance. So generally it's the large aircraft that we can sell although we've got a number of the old Super Puma's the 332 L1's for sale that we're holding for sale. But that's starting to pick up a little bit.

Where we see real softness though are in for example the old S-76A models. Those are somewhat difficult to sell right now. And we're also still working on selling the 214-ST's, which are Bell products, that were the old heavy helicopter that Bell used. We've got people interested in those aircraft but they can't get financing.


Our next question comes from Daniel J. Burke – Johnson Rice & Company.

Daniel J. Burke – Johnson Rice & Company

Just to go back to Brazil real quickly to clarify. So the opportunity set for incremental work is two to four large and four to six medium.

Richard D. Burman

That's with Petrobras.

Daniel J. Burke – Johnson Rice & Company

With Petrobras specifically, okay.

Richard D. Burman

There are additional opportunities with some of the IOC's who are continuing to move forward with their exploration and development.

Daniel J. Burke – Johnson Rice & Company

Is that incremental opportunity say equivalent in magnitude to the current incremental at Petrobras or is it really one or two larges and a couple mediums.

Richard D. Burman

Well with the IOC's it will tend to be one or two aircraft at a time as they bring rigs in or they complete development of their field and then it moves in to the long-term. So an example of that would be [OGX] which is a new oil company in Brazil that wasn't there before has started drilling in two fields has already confirmed they've got some finds.

And they've taken two aircraft that I expect they would double to four at some point in the next couple of years. Shell is also very active there as are Exxon, Chevron, and [BG] Devon. All the IOC's are starting to pick up activity in Brazil and at the moment there's maybe 10 or 12 aircraft that support the IOC's today. And as they explore and find and develop I would expect that to probably double but doubling from 10 to 20 is dwarfed by Petrobras who's probably got something like 80 helicopters today.

Daniel J. Burke – Johnson Rice & Company

I understand there's a broader review of the option portfolios set to take place here but, Bill, was wondering if you had any near-term comments on the options you have to cancel the two large aircraft in early 2010. Are you thinking at this point that you do keep those on the order book or are those likely to lapse?

William E. Chiles

It's hard to say - it depends on what happens in Brazil on these bids. So what we do with those two aircraft will really depend on Brazil. And the other problem is that there are other – some of these opportunities are starting to pop up kind of unannounced. We just – all of a sudden a customer will want a heavy here or a heavy there.

Also big question mark is Australia. We've got several bids outstanding there for additional heavies. So

it's a little bit early to tell. When we go through this next - this strategy update that I mentioned earlier to Arun, we'll have a better feel for what we're going to do with those aircraft, and hopefully, we'll be able to give you better guidance during the quarter on our expectation related to the near-term order book and the options.

Daniel J. Burke – Johnson Rice & Company

You mentioned that the pricing pressure has fallen off in the last six months, is that an observation about the international market or does it also hold true in the Gulf of Mexico?

William E. Chiles

Mark, you want to take that one on for the Gulf of Mexico?

Mark Duncan

It tends to be bid-specific so, you know, we see trends on the pricing internationally. In the Gulf of Mexico, it's been driven by a decline and aircraft becoming available and people driving to keep those aircraft working. So on occasions where there's been short-term work that's come up, we've seen some of our competitors dropping their rates to keep those aircraft flying or to get those aircraft flying.

We've, to a large extent, resisted that and our utilization has dropped on the total number of aircraft in the fleet. But we are still flying the aircraft that are flying quite hard. So we've taken an approach that says we're not going to drop our price and we are going to let aircraft sit there and keep flying the aircraft – so that we're more efficient with the utilization of our overall fleet. But it isn't every bid is the same.

We're seeing pricing moving around quite dramatically, and the Gulf of Mexico I'm talking about there, because it's the market that has a lot of short-term requirements that come up rather than what Richard described in the North Sea where you've got fundamentally five-year long contracts. So we're absolutely on top of the market there and we're doing well with the situation as it is. We do expect some of the drilling to start commencing in 2010 so we are hopeful that we can improve.

Daniel J. Burke – Johnson Rice & Company

Great, thanks. And I have one last question and it is a bit specific. But it looked like in your financial filing that maybe you've got a little bit of an issue here in the near-term in Kazakhstan. Is that something to watch in Q4 or would it be remedied quickly?

Richard Burman

I'll take that one if you like.

William E. Chiles


Richard Burman

Yes, we've lost our AOC at the moment in Kazakhstan. We lost it I think it was October 16th. We're working on various options to get that back through the government agencies and possible partners. At this point, we don't have a solution, and it could impact future business there for sure.

Daniel J. Burke – Johnson Rice & Company

I mean, is it fair to say that this is a licensing issue but that the demand for those aircraft still exists or are both in question at this point?

Richard Burman

The demand for the aircraft exists and the outlook for that country is actually quite positive with increased activity. So we're eager to stay, but we're also challenged by political problems there and seeking the right partner basically.

William E. Chiles

But Daniel, just to clarify, we have two aircraft in Kazakhstan. It's been very good for us. Although it's a small operation, the outlook's good. But as you all know it's becoming very, very challenging to work in the former Soviet Union and in areas where there's very little rule of law, and we are challenged.

We have a very strict COBI, code of business integrity, and in these areas people like Bristow are having to pull out, if they've got a very, very strict COBI. So it's challenging and when the competitor is a local guy who could do whatever he wants to do, it's difficult.


Our next question comes from Adrayll Askew – Hartford Investment.

Adrayll Askew – Hartford Investment Management

Can you talk more specifically about the improvement in Australia? How much of that cost reduction over longer term is sustainable and then also talk about the drivers of the top line in Australia?

Mark Duncan

We changed the management out there April 1 and there's been a significant focus on not only incremental business, but also on the cost efficiencies. The cost efficiencies we've put in place are sustainable and they are long-term.

And we've obviously been successful in picking up three or four incremental contracts in the last quarter. So I think it's a combination of various things but certainly the new leadership there has made a significant impact which we expect to be sustained.

Adrayll Askew – Hartford Investment Management

Switching gears to Brazil, talking about the re-bids there, over the near-term, are there any other contracts that are coming up that will roll – that are , I guess, off market as the eight that kind of rolled off were?

Mark Duncan

We mentioned in the call that there were two contracts that started up for this quarter for medium aircraft, but those were contracts that we had won, both using new aircraft. One was a short-term requirement. It's not clear if that's going to roll off. It was an initial six-month requirement. The tendency in that market is that those six-month emergency short-term contracts do tend to roll a couple of times so we expect that aircraft to continue.

The second one was an air ambulance contract which was a long-term. I think it was three years with options for an air ambulance basically to be on call to medevac people from the Petrobras platforms. That contract wouldn't fly a lot of hours but it's quite a healthy contract in terms of being sitting there and not flying. Sometimes those are actually the best contracts to have.

With additional requirements, as I've mentioned the IOC's are starting to look at Brazil on the longer term. Up until now it's been difficulty getting a rig and they farm out for three months or six months and then they just look for an aircraft for that period. They're starting to start considering looking at longer term prospects here. The [LUGX], for example, awarded a contract for, I think, it was two or three years.

Those contracts sort of will continue. In terms of rollovers, there are a number of contracts coming up for renewal next year with Lider with IOC's. We do expect those to roll. So they aren't going to go away, the requirement's going to remain. And being the incumbent is normally a big advantage. Did that answer the question?

Adrayll Askew – Hartford Investment Management

Yes. Did I hear correctly that you guys had eight contracts – I don't know if it was with Petrobras – that rolled over at a higher renewal?

Mark Duncan

Yes. Petrobras had two bids; there was a heavy bid which Bill mentioned, the 12 machines awarded. The medium bid, it wasn't clear how many were going to be awarded. At one point, it was thought to be up to 30 aircraft but it tuned out Petrobras awarded 16.

Lider won 8 of those and 1 other operator won the other 8, and that was at very substantially higher rates for Lider. So those aircraft are going to start this month. They're already flying for Petrobras and they just flip over onto the new rates from this month onwards.


There are no further questions at this time. I'd like to turn the conference back over to management. Please continue.

William E. Chiles

Thank you very much, Operator, and thanks to all of you for joining today, and we look forward to talking to you further during the quarter and, certainly, in three months. Thanks again, and have a great day, and congratulations to the Yankees in New York.


Thank you, ladies and gentlemen. This does conclude the Bristow Group Second Quarter Earnings Conference Call. If you'd like to listen to the replay of today's conference call, please dial 303-590-3030 or 1-800-406-7325 with the access code of 4175233. Thank you for your participation and for using ACT. You may now disconnect.

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