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Erickson Air-Crane Incorporated (NASDAQ:EAC)

Deutsche Bank 21st Annual Leveraged Finance Conference Call

October 2, 2013 18:30 ET

Executives

Udo Rieder - Chief Executive Officer

Analysts

Grant Newman - Deutsche Bank

Grant Newman - Deutsche Bank

So we are going to go ahead and get started. I am Grant Newman with Deutsche Bank. We are very excited to have Erickson Air-Crane here with us today and we have Udo Rieder, the Chief Executive Officer who will be presenting.

Udo Rieder - Chief Executive Officer

Alright. Thanks very much Grant and very happy to be here these past couple of days and we are very excited about our company and we are very excited about new investors in the company and it’s nice to see the level of interest that we have had over these last few days and expect that to continue as well. So we have got the forward-looking statement disclaimer in here that we all have and I would just point toward and make sure that you read that.

As Grant mentioned, I am the CEO of the company. I have been with the company now over five years and seen the company through a Phase 1 transition and now we are entering into a Phase 2 transition. And I am excited to tell you a little bit about that. We are a company that has very diversified global offering with very substantial barriers to entry I think from a standpoint of investors that’s always interesting, but many long-term customers, many that exceed 10 years. We have just completed couple of acquisitions that will help us present additional upside in the business. And we have a leadership team that’s well positioned to take us through this next phase that I am referring to, and ultimately, we have got a high growth model here that I’d like to share with you.

So first, April of last year, we took our company public. We had this sort of think about it as a 5-year taking the company from its roots in Southern Oregon and turning it into a sustainable business, a sustainable business model that’s gone very well for us and culminated with going public in April of last year as I have mentioned. Ticker symbol, EAC, 2012 pro forma with the Evergreen acquisition included, it’s about $379 million as well as then the adjusted EBITDA about $107 million. And we have got existing guidance out there for the combined company here, $385 million to $395 million with EBITDA up $108 million to $116 million.

And just what has happened here since the IPO last year, first half of the year was very strong for us, and also 2012 compared to the previous year was very strong for us. Nice growth in terms of revenues as well as with in terms of EBITDA and flight hours and we have added new air cranes to our fleet, which gives us more potential to generate more revenue. As I mentioned the first half of 2013 was very positive. This includes acquisitions up 61% in terms of revenue and then also up in terms of EBITDA 108%, again with those acquisitions. And since we have been public, we have consistently met or exceeded our guidance. So we are delivering the kind of results that our investors expect. And then in terms of acquisitions, we acquired Evergreen Helicopter to complement our baseline business as well as Air Amazonia in Brazil to complement the baseline business. I will speak a lot more about both of those.

So to talk a little bit here about our vision for what’s called the New Erickson, we have got this baseline business on the left hand side. It’s a heavy lift business. And we are very strong and industry leading in that business. We fly 20 of these heavy lift helicopters all around the globe. We have been doing it now for 40 years. We know this business extremely well. We are very good at it. And that establishes a very strong base upon which to build. So in this business, we do firefighting, we do logging, we essentially we lift things. There is an obvious – as we are going through our strategy, there was an obvious element that was missing and that is we didn’t transport people nor did we fly medium lift and light lift helicopters. Both of those being sort of obvious vacancies in the business and market share that we felt like we were leaving behind. In fact, some of the other medium lift guys that we work with complemented us and thanked us, because they said our sales guys were their best sales guys, because we referred so much business to them. This is medium lift business that we didn’t do, can’t do with our heavy lift helicopters.

So in the middle screen, you see Evergreen Helicopter. And what Evergreen Helicopters does, this is an acquisition that was completed May 2 of this year. It provides that needed medium lift and that needed light lift service that we didn’t have before. It also provides us with fixed-wing operations and it provides us with the certifications that are required to transport passengers, not only in the civilian world, but also importantly here for the Department of Defense, which is a big portion of the work. They already have a global presence. And what’s very attractive here as well is that they use about half of their fleet, about 50% of their fleet to generate about $200 million of revenue. The other half of their fleet is an opportunity for us, that’s an idled fleet is an opportunity to generate more revenues. So that was a necessary complement that we didn’t have on the heavy lift side that we now do have and I will talk a little bit more about that as well.

The other strategy we have is South America, more specifically, Brazil. We need to be in Brazil. We need to be in the oil and gas market in Brazil. It’s very lucrative and we have made that decision sometime ago. The acquisition of Air Amazonia gave us that opportunity. So a key point here to make is that to do business in Brazil, you have to have local content. It’s extremely restrictive within their system without having a local content. One example is our pilots or our mechanics cannot be in Brazil for over 6 months in a lifetime and then they are not able to return. So it’s very important that we have the locals there, the Brazilians, which is what we get with this acquisition. We enter into the important oil and gas market. In Brazil, it’s very exciting for us. And we get with this also a long-term contract. In this case, it’s a 5-year contract. It does have annual renewal options. I will get more into that.

So we combine these three companies, the baseline company, Evergreen and Air Amazonia to create right now what we are calling the New Erickson. We are in the process of renaming. This is no longer just Erickson Air-Crane, but it’s much broader and we moved some 20 aircrafts and now having 91 aircrafts. And we have an extremely comprehensive service offering, a one-stop-shop, if you will, for oil companies and others, which is very desirable. These guys don’t like to have multiple sources for these kind of services, because there is a lot of maintenance that’s required on their behalf like audits to ensure that we have safe practices on how we fly these helicopters. And they would rather do that with fewer providers as opposed to many.

Again, emphasizing here, we also get into this passenger transport space that we never had before. And we have got some pretty substantial synergies associated with it as well. We have identified $8 million of maintenance repair and overhaul synergies. This is simply a moving work that today is being accomplished to OEMs, to third-parties, where there is significant profit involved and utilizing our internal in-house capacity that’s available to do that work. And so you think about it as immediately shaving off 20% to 30% margins just by making that move assuming everything else is equal. And as I mentioned, we have got about 30 aircrafts in this process that are idle aircrafts, that are very attractive for us to be able to put back into service and to deploy in new spaces around the world. So that’s the New Erickson. I think it has substantial potential and we have the team at Erickson we are very excited about moving forward.

So this is graphically a little bit more about what this New Erickson looks like. On the left hand side, I have mentioned firefighting, which is a significant part of our business. In the overall New Erickson scheme here, it’s about 20% total. We also do construction all around the world, timber harvesting improving. We do this maintenance repair and overhaul process internally and now we are also into the oil and gas world. Now, we have introduced Evergreen, this medium lift and this light lift capability as well as fixed-wing things like you are seeing here, the Learjet type service that we offer with lighter helicopters, and we have introduced lower right hand side here, Air Amazonia in the oil and gas and passenger carrying as well as cargo markets. The helicopter on the left there that you see under Air Amazonia, you might recognize it’s the same helicopter it’s in Sikorsky S-61 that’s used by the President as Marine One, his helicopter transport.

So just quickly a little bit more about the baseline company. Erickson Air-Crane has been around for 40 years, a well-established company last year, about $160 million of revenue associated with flying these helicopters all around the world and about $20 million of revenue associated with maintaining helicopters for third-parties, for others out there. We are – we have the exclusive right and we are the only manufacturer of the air crane. We build these air cranes. We have got that exclusive right through a type certificate that we have purchased from Sikorsky in 1992. And that gives us this exclusive right. If there are anymore air cranes coming into the world that will be coming through our shops and be built in our shops in Southern Oregon. And we have got substantial capacity here to fill at this baseline business and the introduction now of these other businesses gives us an opportunity to leverage this baseline business that we have established over 40 years.

Little bit more about Evergreen Helicopter I’ve got a couple of the medium lift helicopters that are pictured here. It’s about $200 million of revenue last year, about $50 million of EBITDA last year. These fleet types, I will kind of identify them, the one on the left is a Bell 214ST, can carry 18, 19 passengers. And with this acquisition, what’s really important here is we gain about 12 of these helicopters. That makes us the largest operator of the Bell 214. That’s substantial, significant in a couple of different ways. There is obviously the inventory that we can leverage in this process, but also the in-house capability. Once you have a fleet size that’s of this order, it makes sense for us to do this maintenance internally. It also makes very good sense for us to do this maintenance for other operators. They have 1, 2, 3, 4 of these helicopters, so that’s something we will leverage and we are excited about. In total, we have added 50 helicopters as well as 13 fixed-wing aircraft here. And again, the exciting part is now we are able to service not only commercially, not only governments, but Department of Defense all around the world. Let me go through the acquisition highlights and why this makes sense? Some of which I have already covered here, but overall here the message is that it’s a good business, it’s a strong business. It has healthy margins. It generates cash. And together it’s of significantly more value in our opinion than separate as it was before.

Now, I will introduce Air Amazonia. Air Amazonia was the in-house operator providing helicopter support for a company called HRT. It’s one of the larger oil and gas exploration companies in Brazil. They made the decision that they wanted to exit out of the helicopter space and let operators – let helicopter operator control that. And so we had an established relationship with them. We leverage that relationship and it’s going very well for us. With this acquisition as I mentioned before has a guaranteed revenue stream of $29 million annually. Then you can think of it as sort of 25% margins associated with that. We have 6 aircraft as well as almost 60 people, that’s pilots, mechanics and support people. And what’s attractive here as well is this longer term contract, this 5-year contract that is an important part of that business.

One big emphasis here is that our strategy is to be in Brazil and to be in the oil and gas market in Brazil and to expand there. This is the means by which we do that. So we are not doing this just for the sake of HRT, but also the other customers will be able to leverage in that area. And one of the first ones on the target list here is Petrobras as one example. We also have couple of other points that I would make here that are really very important. We get with this first right of refusal for all of the helicopter work that’s being done in Brazil with HRT. And we get first right of refusal for all of the other helicopters that they own in the event that we want to buy those. So it’s an attractive deal overall. And we are excited to get started. That just closed September 3. So we are excited about moving forward and in the integration process now.

So again, I think I have mentioned most of the sort of rationale around why this makes sense. The overall price of the acquisition was $26 million. The EBITDA associated with that will be $7 million to $8 million. And generally, you can think about here and it’s a nice add on and it’s complementary to the existing business that we have.

As an investor I think it’s also very exciting to show what we look like in this sort of new Erickson post acquisition in terms of end markets as well as in terms of geographies. Overall, our key message here is that every piece of the pie on these charts has gotten smaller and it’s gotten I think more attractive, less concentration from the standpoint of investors it makes us a – I think a higher potential investment. Large pieces of this on the left hand side is Department of Defense, DoD in Afghanistan specifically always lots of questions about Afghanistan, so we have separated that out just to give you an idea though about how attractive this is for us. Firefighting is now 20% of the business. Pre-acquisition firefighting was over 50% of the business and that’s seasonal, somewhat seasonal business. And I think we have a very strong operating model that makes it very attractive. Nevertheless the annual contracts that we have in oil and gas and the DoD and the government world will help offset essentially that seasonality that we had before.

You see on the right hand side what the distribution is in terms of geographies. The two elements on both of these slides that I think have significant growth potential are oil and gas on the left and then South America on the right. We have high expectations. We have proposals that are in work that leverage this new combined fleet that we have and this new one stop shop and while we are not ready to at this point announce anything, when that time comes obviously we will make that known publicly as well.

It gives you an idea page 14, about the new geography, we are very much global. It’s a couple of points that I’ll make on this page is that one barrier to entry that we have that’s very substantial is our operating model. We have the scale and the span across the globe that no one else has. Someone trying to use one or two aircraft for example to fulfill requirements around the globe would be very prohibitive. People have tried it, it just doesn’t work. We have these 91 aircrafts already in these geographies as the work becomes available, the opportunities become available where, we are able to leverage that location. We are also able to move these aircraft very quickly, it’s part of what we do and it’s a core to our process. For example we use helicopters every year fighting fire and you have probably seen them here in the last few months in places like Idaho, Colorado, and California. When our season ends in North America we move those helicopters to south of the equator to Australia and we service the needs of Australia during their fire season which is opposite to ours that helps us to maximize our utilization. Now the point is we are able to redeploy these helicopters very effectively and we do that very well.

I mentioned earlier we have long-term customers. In fact 40% of our total of the customer base has been with us 10 years or more. And we have a very strong retention rate about 95% of the time we will contracts back. Once you are with us you tend to stay with us long-term, very difficult for anyone else to break into this business. We do have some competitors out there, but we enjoy I think a space that we are extremely competitive in. I will first maybe mention there is an adjacent helicopter space that we are not in. One of those is offshore oil and gas, so these are guys like PHI, Era, Bristow that fly long distances offshore. I mean requires a heavy investment in helicopters, it also requires a completely different operating model, we are not in that space at this point, we are not planning on being in that space and a similar kind of concept with air ambulance.

Now, where we are and where we enjoy a nice competitive advantage is in the utility helicopter space. So that’s this combination of what we do extremely well these heavy lift and medium lift cargo type transport helicopters, DoD transport, which includes the passenger type transportation as well as in the offshore – the onshore rather oil and gas. The part that’s on here is there is also a – I will say a short distance offshore oil and gas that could be pretty interesting for us it doesn’t require those expensive helicopters and it’s not in that same space that we have seen on the upper right here.

And then we have got nice upside from these acquisitions in addition to that $8 million of synergies that I talked about before. And I will highlight that the Erickson aircraft utilization has been very strong and growing. So we are able to in this case in 2012, we are able to 66% of the time have these aircraft under these contracts using that operating model that I have referred to earlier. This year, we will approach something closer to 70% in excess of 70%. So we have great utilization of this equipment. Within Evergreen Helicopters, that utilization is closer to 50% when we took it over. So half of their aircraft are essentially generating revenue per year as compared to ours, as we apply our operating model and as we redeploy the 30 aircraft that I mentioned earlier, these numbers will move in the right direction, and I think will be more effectively able to utilize the aircraft.

The other part is operational readiness down below. 96% of the time or greater when we are required to be ready for customer, we are ready. And when we are not ready, there are penalties associated with that. In our business those penalties were about $250,000 last year and is by way of comparison in the Evergreen business last year about the same kind of revenue base, there were $17 million of penalties that hit top line as well as bottom line. So $17 million of revenue was lost, $17 million of EBITDA was lost. That’s the bad news. The good news is we know how to do this and we are going to be able to substantially reduce that number down to a run rate, I will call it, sort of $2 million to $3 million annually from that $17 million. It’s a great opportunity that will hit revenue that will hit EBITDA, just by applying our model. And again, we know how to do this. We see our way clear in terms of how to do it.

We have got a great leadership term. I am excited about the people that we have on board. And they are excited about the company. This is the team that will take us through this second phase that I have been referring to here. This is a team that when we think about running a business that’s $500 million and then growing that business to become over five years, call it, $1 billion, which is sort of directionally correct here. They have been there. They have done that. They have been with Fortune 500 companies and they know how to lead and how to manage a business of that size using process KPIs, facts and data and transitioning from a more tribal knowledge-based company to a much more process-based company. So I think we are well equipped and well prepared and excited about doing this.

So again, in combination reiterating the profitability as well as the revenue and the sources of revenue, we I think have very key and very strong sort of financial focus moving forward and excited overall about the business. And I think I referred to most everything on page 19 previously. Just a little bit more historically, we have done very nice here in terms of revenue for the baseline business. We are growing that about 24% over the past several years moving in through calendar year 2012, a similar kind of growth, about 17% on the Evergreen business. And then the EBITDA has grown also substantially with that. So the historical business is moving in the right direction. And we expect that to continue going forward. And then again overall aggregate EBITDA for this business is mid 20s to high 20s. And these acquisitions complement that overall as well. And just to give you and kind of reiterate guidance that we have got out there, it’s about $385 million to $395 million in revenue that was provided at the end of July and then about $108 million to about $116 million of EBITDA also provided at that same time.

So the closing slide here, just sort of reiterate how we expect to leverage this combination of businesses, increased utilization, moving this utilization from 50% to something closer to 80%. And by just order of magnitude the 50% of aircraft that Evergreen uses today generates $200 million of revenue. So we are not going to get another $200 million out of the other 50%, but can we get those – can we get into numbers that are substantially higher than we are today by utilizing those aircraft I think absolutely we can. Redeploying these aircraft across the – their customer portfolios so that in South America for example they are anywhere in the world for that matter, they have complete access to our entire fleet of aircraft not just the mediums, not just the lights but all aircraft. So much more comprehensive offering, utilizing more effectively our facilities that we have in place in Southern Oregon and that process has started already here as well, and then the $8 million of combined cost reductions that we talked about when we bring these businesses together.

So it’s a I think an attractive upside, it’s very real, it’s very doable and just in terms of – I’ll also mention it’s not on the slide but that was interesting to note in terms of just downside protection not that we will need it, but the assets of the combined companies here is actually something that approaches $800 million, that’s the helicopters, that’s the inventory, it’s the hangers, it’s the space that we have so I think a lot of protection overall. And then just reiterating where we started here, it’s an exciting company, an exciting business and I think very interesting from the standpoint of investors. So with that I’d be glad to take a few questions from anyone. (Kathleen).

Question-And-Answer Session

Unidentified Analyst

(Question Inaudible)

Udo Rieder

Sure, sure, okay. So it’s kind of a broad question that I might maybe just refer to as how is integration going, right and there are many elements of that. So first in terms of supplier and customer relationships they were stretched when we bought the company I think we bought the company right about the right time and so we are glad we got in there when we did. And I want to emphasize here that the source of all of this problem was related to lack of capital from the parent company or even the other way around the parent company Evergreen International which we did not buy was sweeping cash from Evergreen Helicopter and therefore they were starved from the standpoint of capital investment that they needed to run the business. That resulted in these penalties that resulted in stretched customer relationships and stretched supplier relationships. That has all been mended the customers just to give you an idea, all of these customers have the option every year to renew or not. So that’s, that can happen obviously, if they don’t – if they are not confident in us providing these services they wouldn’t renew. At this point 95% of the next year’s revenues have been renewed and the others are in process. So I think that’s a key dimension to look at in terms of how well we are doing with customers. Similar kind of thing now with suppliers, they had receivables all those receivables have been brought to-date so that’s we’re very, we feel very good about that.

Moving into sort of the other elements of integration, we’ve got tactical integration or operational integration that’s everything from telephones to systems to the payroll process, ERP system, emails, facilities everything else has now been materially completed by the end of this month will be complete. So that I can just define that operational integration is going very well. The synergies that we talked about earlier are also going very well. We’re finding that they’re going faster than we expected and they are more substantial than we expected. Just one quick example of that is we have an OEM that we have an existing relationship with where we are actually their dealer as well. So we get 15% discount automatically on parts we have payment terms, we are now applying that to what Evergreen had to do before which is cash up-front, full price for parts as well as then a premium because of having to expedite those parts. And so applying our model obviously has a substantial impact and it’s been very positive and we expect that to continue as well.

Penalties something we’re very focused on and we’re making progress, we’re chipping away at it. As we peel back the onion there are a few things that are taking us a bit longer than we originally expected mainly around lead-times for some of these parts that haven’t been ordered in sometime. So now we’ve got the cash, we know how to get the parts, where to get the parts and some of these are just taking longer to get just through our supply chain process. No question about it, we see our way clear in terms of how to reduce these down to levels that I talked about, we understand this, we actually have applied. Our financial resources and a number of our leadership resources to the process here as well. We’ve got about a dozen or so of Erickson employees that are now part of Evergreen helping us do this process. In terms of utilization we have I mentioned we have 63 aircraft in that fleet, about half of them are idle when we bought the company.

And we’ve now moved all of those idle assets that we’re spanning the globe all back to facilities where we conduct maintenance, repair and overhaul and we are able to return them back into service. And they are in line to return back into service based on prioritization according to the potential market value that they have in terms of services or in terms of selling the helicopters, so that’s in process. We’re at about 55% utilization has gone up just a bit here, that will take a while, by the time we get all of these back into service and we make the investment needed to bring them back into service and then put them into work that is what’s going to move that 55% number to higher numbers going forward. I think that’s covered all the questions that you had, Kathleen.

Unidentified Analyst

Yes. Just one follow-up.

Udo Rieder

Sure.

Unidentified Analyst

(Question Inaudible)

Udo Rieder

No, the way this works in all government contracts, so we’re very familiar with this, all government contracts around the world as well as DoD type contracts is they budget in annual sort of planning years not more than that. So in some cases they will give you three or four or five year contract but they are always renewed annually like this. So there were none that they decided to wait none that I’m aware of, they decided to wait and not give us a three or a five year contract for example these are all just routine annual renewals. Yes and they were – they could see immediately that we’re investing, they could see immediately that the results were – that we’re achieving. They had enough time to see that we’re very customer-centric and many of them actually knew a lot about us in the commercial world and we’re confident in our ability to be able to provide this service. Okay, (others), yes.

Unidentified Analyst

(Question Inaudible)

Udo Rieder - Chief Executive Officer

Yes, it’s a good question and I’ll answer it’s a combination, I think there will be growth from new customers and the biggest one I’ll say is back to South America that 11% number I talked about earlier I expect that to grow and that will come from new customers that are drilling and then have production activity in South America that require the kind of equipment that we have. And then I think there will be some existing customer growth as well in places like Alaska is one that kind of stands out. And as we’re able to offer this more comprehensive fleet to our firefighting agencies which is here before we’ve only done with the heavy-lift helicopters, we’re now able to go back to them and say we also have mediums, we also have lights and every customer that we have in firefighting all fly mediums and lights, so existing customers will be able to grow as well. And I think I’m about out of time here. So I thank you all for your questions and for your attention today. Thanks.

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