Era Group, Inc. (NYSE:ERA)
Q2 2014 Earnings Conference Call
August 6, 2014 10:00 AM ET
Christopher Bradshaw – EVP and CFO
Sten Gustafson – CEO
Charles Fisher – LF Partners
Good morning my name is Steve and I will be your conference operator today. At this time I would like to welcome everyone to the ERA Group Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions) Thank you. Chief Financial Officer, Chris Bradshaw you may begin your conference.
Thank you Steve. Good morning and thank you for joining our conference call today. I’m here with our CEO, Sten Gustafson; General Counsel, Shefali Shah; SVP of Fleet Management, Stuart Stavley; Chief Accounting Officer. Jennifer Whalen; and VP Finance Ben Slusarchuk.
By now you should have a copy of our earnings press release for the second quarter of fiscal year 2014. The earnings press release is available under the Investor Relations link on our website, eragroupinc.com and also on the SEC website sec.gov.
If you’ve not already done so I would encourage you to access one of those sources to print or view a copy of the presentation slides that accompanied our press release. We will be referring to certain slide numbers during the course of our prepared remarks.
Before starting the call I would like to note that management may discuss forward-looking statements on this call. These forward-looking statements are subject to a number of risks, uncertainties and other factors that could cause actual results to differ materially from those expressed and/or implied by the forward-looking statements as described in our most recent Annual Report on Form 10-K, our subsequent quarterly reports on Form 10-Q and the other filings we make with the SEC.
In addition we will discuss non-GAAP financial measures during the call, such as adjusted EBITDA. Please see our earnings release or the Investor presentation on our website for the calculation of these measures and the appropriate GAAP reconciliation.
Now I would like to turn the call over to our CEO, Sten Gustafson, Sten?
Thanks Chris and welcome everyone to the call. In reviewing our quarterly highlights as our business does have a fair amount of seasonality, that you’ll see is particularly pronounced as we move from the first quarter to the second quarter, I will compare to the second quarter of 2014 versus both the second quarter of 2013 and the first quarter of 2014. As we saw in the last quarter this will also highlight the impact of the full return to service of our EC225 during the current quarter. As you may recall none of our EC225s were working in the second quarter of 2013 but all of them were earnings revenues through both the entire first and second quarters of this year.
You also have note that we have bolstered our disclosure with the inclusion of a table of flight hours by line of service for the past five quarters in both our press release and in the appendix of this presentation. Although of course not all flight hours are created equal and none of the hours of our leased aircraft, such as in Brazil are captured here, we hope that net-net our investors will find such information helpful in understanding our business.
Turning to our operational highlights for the first quarter on page five, I’m happy to say that our streak of record revenues continues with another strong operating performance this quarter, resulting in record second quarter of operating revenues of over $86 million, a 17% increase over the prior year’s quarter driven primarily by increased activity in our U.S. Gulf of Mexico operations.
Net income to Era Group this quarter was $5.2 million or $0.26 per diluted share relative to $5.1 million or $0.26 per diluted share in the prior year’s quarter which represents an increase despite both a pretax $2.5 million impairment charge, representing a reserve against the note receivable, and a $1.3 million decrease in gains on asset dispositions. When you exclude the impact of this impairment charge our net income would have been $6.7 million or $0.33 per diluted share this quarter.
Operating income, which includes gains on asset disposition but is not burdened by the impairment charge increased by 26%. Excluding the impact of gains on asset dispositions, adjusted EBITDA, which also excludes the impairment charge, increased 19% relative to last year’s quarter. In comparing this quarter’s results with the first quarter 2014’s results our operating revenues increased by $7.1 million or 9% primarily driven by normal seasonal factors such as start of Flightseeing and Firefighting activities in Alaska and longer daylight hours for oil and gas operations in both Alaska and the Gulf of Mexico.
Our net income increased by approximately $800,000 over the first quarter of 2014 despite the impairment charge. Excluding the impairment charge the increase would have been $2.4 million or more than 50%. Relative to the first quarter 2014 our operating income and adjusted EBITDA increased by $3.5 million and $3.8 million respectively, due largely to increased activity and improved margins.
Our results are broken out by activity on the next couple of slides beginning with oil and gas on slide six. Our oil and gas service line currently represents nearly three quarters of our business and our operating revenues from that service line this quarter were $61.2 million, representing a 25% increase from the prior year’s quarter and an 8% increase relative to last quarter. Most of that, over $51 million came from the Gulf of Mexico operations, 35% above the prior year’s quarterly results, reflecting the significant impact of the redemption of operation of our EC225 as well as higher rates for our medium helicopters and increased activity for our single engine helicopter.
Relative to the first quarter 2014 again where we have a full quarter of EC225 operations we saw a 5% increase, driven primarily by increased flight hours with longer summer days. In Alaska we generated operating revenue of $9.3 million, basically flat relative to the prior year’s quarter and a 50% increase over the first quarter of 2014 due to the aforementioned seasonality. Our international revenues were $200,000 this quarter as our contract in Uruguay, which began in late January of 2013 ended in March of 2014.
The deepwater rig count in the U.S. Gulf of Mexico continues to decline in past pre-moratorium levels and is expected to continue to grow in contrast with some of the other offshore regions around the world. We certainly keep a very close eye on some of the recent dislocation in the offshore drilling sector as deepwater newbuilds continue to arrive while some international deepwater projects get moved to the right because obviously today’s drilling is tomorrow’s installation and production.
But it is important to point out the dynamics that the new rigs coming on have a meaningful higher POB, or persons on board counts than the older smaller rigs that they are displacing. Anecdotally one of the large players in the Gulf of Mexico has reduced its rig count in the Gulf from 13 to 10 rigs but because they added newer larger rigs while letting go of some older smaller rigs. They did not reduce their heavy aircraft counts by a single aircraft.
Let’s turn to slide seven to review our other service lines. Operating revenues this quarter from our dry leasing business decreased 12% year-over-year to $11.5 million primarily due to some dry leases that have ended since the prior year’s quarter. Sequentially however we saw a 5% increase. Consistent with our strategy of seeking the highest returns for the equipment those aircrafts whose dry lease has ended have either returned to go to work here in the U.S. or have been sold.
Revenues from Aeróleo and a customer in India continue to be recognized on a cash receipt basis due to liquidity issues experienced by both customers. Relative to last year’s quarter search and rescue or SAR revenues increased 47% to $5.1 million with the addition of new subscribers and a third SAR helicopter being placed in to service. Relative to the first quarter of this year however our revenues decreased by 17% due to fewer SAR missions flown. Revenues of our Air Medical business were $3.1 million essentially flat relative to last year’s quarter and the first quarter of this year.
Finally while sightseeing is a seasonal business as you can appreciate in Alaska, so it does not contribute anything in the fourth or first quarters of each year. Relative to the prior year’s second quarter however we saw a 5% increase due to higher rates. Our FBO business saw this quarter’s revenue increased 3% and 1% relative to last year’s quarter and the first quarter of 2014 respectively due to higher fuel sales.
Turning to slide eight, you will find an updated tables of our future capital commitments. We continue to have ten AW189s on order with options for another 10. As a reminder we are the launch customer in the U.S. and are first three are scheduled to arrive before the end of this year. And we’re working with the manufacturer, Agusta Westland and the FAA to assist in the AW189 getting certified by the FAA here in the U.S.
Based on the dialog we are having with our current oil and gas customers due to increasing activity in the Gulf as well as our dry leasing customers we are confident that at least our first four AW189s will be utilized as soon as they are ready and of course obviously as soon as they are certified by the FAA. In terms of additional heavies you may recall that we have entered into an agreement with Sikorsky to add the S92 to our fleet, expanding and diversifying our heavy aircraft fleet offering to enable us to pursue a broader universe of market opportunities in the deepwater.
We have a total of four aircrafts on order with options for five more where we’ve managed to get the delivery date for the first aircraft moved up to late next year with the next two scheduled to arrive during 2016. We continue to add the versatile AW139 to our fleet with another arriving during the second quarter. As we continue to watch the offshore oil and gas market closely we start to maintain as much flexibility and optionality as possible. To that end you can see that half of our committed expenditures remain cancelable with de minimis financial impact and we have another $400 million of options should the market strengthen.
Turning to slide nine, we wanted to provide you some detail on our recent exit of our Lake Palma joint venture. Lake Palma, as you may recall was a joint venture owned 51% by Era and 49% by our partner, FAASA, a Spanish firefighting operator. Effective July 24th we sold our 51% interest in Lake Palma to FAASA for a total consideration of $9.2 million comprised of $2.9 million in assigned debt and $6.3 million of cash. We expect to record a booking of $2.3 million in the third quarter and the sale will reduce our fleet count by seven single engine aircraft, resulting in a pro forma June 30 fleet count of a 159 aircraft. After the transaction we still have another ten aircraft under our lease in Spain.
The creation and the ultimate exit of the Lake Palma joint venture are in keeping with our overall strategic goal of generating the highest return profitable whether it means adding or disposing of aircraft depending on the situation. Our partner approached us with a compelling offer with the cash proceeds representing a premium to our proportionate share of the fair market value of the aircraft. In addition, the timing was attractive as the joint venture has not been a cash tax payer to-date due to the depreciation shield associated with the assets but it was expected to start paying cash taxes in 2015. In short the joint venture served its purpose well when we had an excess of idle A119s and the time had come to exit at an attractive price.
With that I will turn it over to Chris to go through a more detailed review of our financial results.
Thank you. Sten. Looking at slide 11 of second quarter expenses increased on an absolute basis compared to the second quarter of 2013. The growth in revenues outpaced the increase in expenses, resulting in margin expansion between the two periods. Operating expenses increased $7.7 million but were flat as a percentage of revenues. As you know repair and maintenance expenses and personnel costs are the two largest components of our OpEx.
Personnel cost increased by $2.7 million or 16% due to pay scale and benefit plan adjustments that we implemented at the beginning of 2014 in response to a competitive labor market. R&M expense increased by $1.2 million or 7% period over period which was a net function of a $2.8 million increase in PPH expense due to the EC225 helicopters resuming operations, partially offset by the recognition of a $1.6 million credit related the settlement agreement with Airbus helicopters with respect to the suspension of operations of the EC225s.
Administrative and general expenses increased by $0.5 million or 5% due to increased compensation cost. As a percentage of revenues G&A expenses declined from 13% in Q2 2013 to a less than 12% in the current quarter.
Turning to gains on asset dispositions this quarter’s sale of a Bell 212 medium helicopter is a good example of the way helicopters can retain their value over an extended period of time. This helicopter was originally manufactured in 1979. Our acquisition cost for the aircraft was $900,000 and it had a net book value of $300,000 at the time of sale. We sold it for cash proceeds of $3.4 million resulting in gains of $3.1 million. In Q2 of last year we sold two helicopters and related equipment for total proceeds of $18 million resulting in gains of $4.5 million.
Interest expense decreased $800,000 primarily due to increased capitalized interest related to additional deposits on helicopter orders. As Sten previously noted we’ve recorded a pretax $2.5 million impairment in Q2 on a note receivable that was extended to a foreign company to facilitate the establishment of a helicopter operating certificate in connection with the joint submission of the bids for international contracts.
While collection efforts will continue we believe this note receivable is a probably loss as of June 30th. Income tax expense increased $400,000 due to higher pretax income and a higher effective tax rate in the current quarter. Our effective tax rate was 38% in Q2, 2014 compared to 36% in Q2 of last year. Excluding the impairment charge this quarter and the impact of gains on asset dispositions from both periods adjusted EBITDA increased 19% and the adjusted EBITDA margin improved to 26%.
Slide 12 highlights the key variances between Q2 and Q1 of this year. Operating expenses were $5 million or 10% higher primarily due to an increase in personnel cost and R&M expenses. G&A expenses were $1.3 million lower primarily due to share based compensation expenses related to changes in senior management that occurred in Q1. Q2 results were adversely impacted by the previously noted impairment charge. Excluding the impairment charge this quarter and the impact of gains on asset dispositions from both periods adjusted EBITDA increased 19% and the adjusted EBITDA margin improved from 24% to 26%. This improvement is a result of the higher utilization of our equipment due in large part to the seasonal factors that Sten mentioned.
Turning to slide 13, our liquidity position and credit statistics remain strong, providing us with flexibility to deploy capital for attractive opportunities whether that be growth, via organic CapEx or strategic acquisitions or the return of capital to shareholders. As of June 30th we had cash balances of $15 million and total debt of $284 million. At quarter end our total liquidity was approximately $260 million, our total debt-to-adjusted EBITDA ratio was 3.2 times, our interest coverage ratio was 5.7 times and our total debt to total cap is 39%.
Slide 14 depicts Era’s net asset value which primarily consists of the fair market value of our helicopter fleet. As usual we have shown NAV per share of both with at $34.34 per share and without at $44.74 per share the deferred tax liability so that investors can make their own determination of how much, if any, the NAV calculation should be burdened by the current amount of this liability. With that I’ll turn it back to Sten for concluding remarks.
Thanks Chris. Once again I want to thank everyone on the call for joining us this morning and with that I’d like to go ahead and open the lineup for questions. Operator if you please open up the lines please.
Absolutely (Operator Instructions). Thank you. And your first question comes from the line of Charles Fisher with LF Partners. Your line is open.
Charles Fisher – LF Partners
Good morning gentlemen thanks for taking my phone call. I think you guys are really doing a great job and I really love the position that company is in. I was wondering if you guys could talk a little bit about capital allocation, especially how you’re managing your capital in an environment where there are some interesting opportunities you had stock below 26 and NAV north of 35?
Sure, yeah we see that chart, that kind of begs the question certainly. As we indicated really for the moment that we’ve gone off and became public the share repurchase and another means of returning capital for this shareholders when it make sense is definitely something that will be in arsenal I would point at the fact that our Chairman, Charles Fabrikant has a long history of that with SEACOR and I think most of his investors who by virtue of the spin or as many of our investors would agree that at the appropriate time he returned capital and this is something that we expect that we will have in our arsenal as well.
But yeah as we look at opportunities I would say is really strategically as I mentioned on the order book slide, purchase ability optionality are really key strategic strengths of ours and we try to make sure this so that both from the capital structure standpoint from our availability to access capital if needed but not get in a position to get over levered because if opportunities present themselves you want to have that flexibility to do so. So I would say we constantly balance but certainly are paying close attention to where the stock price is relative to the NAV.
Charles Fisher – LF Partners
Is it fair to say am I correct that you can do 1030 warrant exchanges on the older helicopters when you move in to the newer helicopters so that tax liability kind of becomes almost a permitted assortment?
That’s correct. We are able…
Sure thanks, Sten. We are able to take advantage of 1031 exchange rules in certain circumstances. They have to be like kind assets and they have to be identified and delivered within the specified period of time per the regulations. But we can and do often take advantage of that treatment when we make asset sales.
Charles Fisher – LF Partners
Great and when you guys think of about the service area obviously the Gulf of Mexico is our primary area, are you considering expanding that area or is there enough business in the Gulf to keep you busy?
I guess what I’m saying the answer is yes, all the above. The Gulf is an excellent place to be. We’re very positive about what we see going forward for the foreseeable future in the Gulf. That said, from a diversification standpoint obviously we think there is also opportunities, different places around the world. Now as we’ve mentioned from the time that we spun off, as we look internationally now remember because of partly unique hybrid model of being a lessor of assets as well as an operator of assets we have a couple of different avenues by which we can access the international markets, really based on really what makes the most sense.
So in some of the markets that are very competitive already pretty full of competition for instance in the North Sea, you will see us leasing aircraft into that market and let other folks fight that out instead just lease into those markets. And then where we’re trying to expand internationally from an operating standpoint, these are going to be the areas where there’s going to be, relatively nascent, where you don’t have five or six operators already operating, but we can essentially follow in our existing customer base in some of these international locations that are starting up for instances we saw in Uruguay that went through – we were supporting a seismic project there and of not [inaudible] then sign projects and that moves into drilling phase where we are the incumbent in those locations.
So the answer is really all the above the Gulf is a great place to be where we continue to add aircraft into the Gulf frankly those first for AW189 once they come in and of course once certified, those will go to work there in the Gulf.
Charles Fisher – LF Partners
And if I could ask one more question, can you talk a little bit about how adding the new plane type like the Sikorsky will help you as you try to get more business?
Sure it helps on a variety of levels. One is, it’s kind of really just kind of fundamental concept, the example I always use is to say that at the end of the day some people are Ford people and some people are Chevy people and you can’t – there’s just nothing you can do to convince them that you should be trying the other. And customers that are same way, there are some customers who adamantly preferred the 225 and there are some who adamantly preferred the 92 and there’s no matter of data you can show and will convince them otherwise. So if want to be able to truly be a global operator and access all the opportunities that we see in the deepwater you really need to be able to provide both.
Secondly, it’s really the risk diversification standpoint as we saw quite painfully from the ECG supply that there is an issue and there are with about every model at some point there has been during the course of the service flight some sort of issues comes up. If you are all in on only one type of aircraft as we saw with the 225 that means and you’ve got – you’re going to have start backing it up with mediums and so forth. And so it’s also a risk diversification as well as a client diversification aspect.
Charles Fisher – LF Partners
Terrific, thank you very much. Keep up the work guys.
Thank you and there are no further questions at this time. Presenters I hand the call back to you.
Great thank you, Steve, well we appreciate the participation and Charles thanks for the question and we look forward to speaking to everyone again next quarter.
And this concludes today’s conference call. You may now disconnect.
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