Bristow's (BRS) CEO Jonathan Baliff on Q3 2016 Results - Earnings Call Transcript

| About: Bristow Group (BRS)

Bristow Group Inc. (NYSE:BRS)

Q3 2016 Earnings Conference Call

February 09, 2016 10:00 AM ET

Executives

Linda McNeill – Director-Investor Relations

Jonathan Baliff – President and Chief Executive Officer

Don Miller – Senior Vice President and Chief Financial Officer

Jeremy Akel – Senior Vice President and Chief Operating Officer

Analysts

Dave Wilson – Howard Weil

Gregory Lewis – Credit Suisse

Cameron Schnier – Evercore ISI

William Thompson – Barclays

Daniel Burke – Johnson Rice

Joe Gibney – Capital One

Chase Mulvehill – SunTrust

Brandon Dobell – William Blair

Operator

Greetings and welcome to the Bristow Group’s Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Linda McNeill, Director of Investor Relations. Thank you. You may begin.

Linda McNeill

Thank you, Adam, and good morning everyone. Welcome to Bristow Group’s third quarter fiscal 2016 earnings call. I am Linda McNeill, Director of Investor Relations. With me on the call are Jonathan Baliff, President and CEO; Jeremy Akel, Senior Vice President and Chief Operating Officer; Chet Akiri, Senior Vice President and Chief Corporate Development and Strategy Officer; Don Miller, Senior Vice President and Chief Financial Officer; and Brian Allman, Vice President and Chief Accounting Officer.

We hope you’ve seen our earnings release, which was issued yesterday afternoon. It is posted in the Investor Relations section of our website at bristowgroup.com. Let me remind everyone that during the call, Bristow Group management may make forward-looking statements that are subject to certain risks and uncertainties that are described in more detail on Slide 2. Additionally to the extent we discuss non-GAAP measures, please see our earnings release or the Investor Presentation on our website for the calculation of these measures and the GAAP reconciliations. We have changed our formats for this call, as only Jonathan Baliff will deliver the prepared remarks to allow more time for questions and answers.

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

Jonathan Baliff

Thank you, Linda. Good morning and welcome to our December 31st quarter end earnings call for fiscal year 2016. Please turn to Slide 4 and we’ll update you concerning our operational safety. As many of you read, we’ve had an accident last week involving a controlled water landing in Nigeria. We’re thankful to the skill of our crews and passengers conducting this landing and all exited the aircraft safely, although a few had injuries needing further treatment. But make no mistake about it, this is an accident. We are fully cooperating with regulatory authorities, who have issued a temporary suspension of flight operations for the Bristow S-76 fleet type in Nigeria of which we currently operate 16.

We’re able to cover much of our clients needs utilizing other aircraft types that we operate in the region. The length of the suspension is not known at this time, but at this point, we expect the revenue impact to be immaterial. Operations of our S-76’s elsewhere in the world are not affected. As we reaffirm our trust in Sikorsky, their parent Lockheed Martin, and the S-76 family of aircraft, which has an enviable safety record spending many decades with over 6.5 million flight hours.

This was the second accident in Nigeria, this fiscal year. And as such, we are sending both technical and operations personnel intently focused on our Nigerian clients, employees, and the local community. Target Zero is our key core value. So any accident demands a comprehensive review and appropriate action in conjunction with our regulatory authorities. We are always focused as always on the safety performance throughout our global group.

Our total recordable injury rate for the nine months ended December 31 was 0.39, which is above where we ended in fiscal year 2015. The decline in year-over-year performance is largely due to the newly integrated performance of our fixed wing and search and rescue operations with our rotary operations at 0.15. We will continue to invest significantly and fully integrating these relatively new parts of our businesses into the Target Zero culture, systems and processes.

Following last week’s accident in Nigeria, HeliOffshore was invaluable in communicating relevant information to the global rotary community. And we thank Gretchen Haskins and her team for their assistance. As Linda mentioned, I’ll be delivering the prepared remarks to expedite this part of the call with specific pages covered to allow more time for Q&A.

Please turn to Slide 5. As we have seen these past six weeks, the market remains extremely challenging both on a macro and our specific sector level. Oil prices have declined further requiring additional CapEx and OpEx cutbacks by all of our oil and gas clients. This decline impacts the demand for offshore helicopter transportation services as our clients continue to reduce their activity levels, delay and cancel projects, and maximize efficiencies in their supply chains and crew-change rosters.

This can be seen through the 5% decline in our overall year-over-year LACE rates. Decline in this LACE rate, though less than others in the offshore services space, is predominantly due to the increasing number of idle helicopters on a global basis with discounts in monthly standing charges being secondary. These factors combined with future helicopter contract cancellations in some regions, like Brazil, have continued to put downward pressure on our revenue, both through the reduction of our aircraft on contract, utilization, and continued pricing pressure as our clients pursue efficiencies.

Please turn to Slide 6. In response to the oil and gas revenue declines, I just spoke about, Bristow continues to execute and successfully execute on the previously announced plan during this downturn. We continue to make important and necessary operational and financial improvements to increase our competitiveness. This includes global workforce reductions, OEM savings and other corporate cost management.

These initiatives are showing tangible results this quarter, as evidenced by the increase in our adjusted EBITDAR margin sequentially despite – again greater than 5% decrease on the top-line during that same period. We have also enhanced our liquidity position to whether this downturn through the previously announced term-loan and successful deferral of our capital expenditures.

In addition, this quarter the board significantly reduced our quarterly dividend in abundance of caution and in keeping with our prudent balance sheet management philosophy. The board has approved an 80% reduction in our dividend to $0.07 per quarter, beginning immediately, as we announced yesterday. While the board and management remain committed to a dividend, a sustained – a substantial reduction was deemed sensible to improve financial flexibility through this downturn.

Please turn to Slide 7. Similar to our cost cutting efforts, our diversification strategy is also showing tangible results as shown in the tenfold increase in non-oil and gas rotary revenue percentage from 2% in fiscal year 2014 to today’s more than 20%. Now let me say even with this downturn and it might sound like heresy today, but we like, we really like our oil and gas rotary transportation business. It’s global. It’s focused on safety. It’s got secular growth and it’s technologically dynamic. But our senior leadership also believes that this business has best grown in conjunction with other business lines like search and rescue, fixed wing for our clients and others that are operationally and commercially complimentary to the transportation business.

Today, I’m excited to announce that Bristow’s entry into the global Unmanned Aerial Vehicle service market compliments that service with an investment in Sky-Futures, the leader in drone operations for the oil and gas and infrastructure industries. Sky-Futures is the leading provider of Aerial Inspection Services through its UAV fleet providing an integral safety oriented function to our mutual clients all while maximizing efficiencies through the avoidance of lost revenue caused by facility shutdowns associated with traditional manned inspections.

Our partnership with Sky-Future allows us to provide a differentiated cost saving solution for our oil and gas clients, which can be crossed-sold with our other products and services. Additionally, Sky-Futures has a world-class training program for UAV professionals, which combined with our expertise at Bristow Academy has unmatched potential. We view our small investment in Sky-Futures and also the shareholder agreement as an extension of Bristow suite of services that we can now offer to our clients, which includes not only transportation, but SAR, fixed wing, and now UAV services. This investment and the shareholder agreement are a key step in an emerging market that will gain importance with our global client-base in this downturn and in the eventual upturns.

Please turn to Slide 9. Our global business development team continues to find innovative ways to modify our service offerings to maximize efficiency and cost savings for our clients. This helps to mitigate our top-line declines, while we continue to pursue company wide-cost reduction measures. These measures are not only in the field, but also in our corporate offices and run the breadth and depth of our organization. Despite market challenges, operationally this was a successful quarter largely as a result of our progress of previously announced reductions, which are largely complete and reflected in our guidance. We are largely on track to achieve the remainder of these cost saving targets for the fiscal year.

We also continue to implement our operations transformation strategy with the launch of our global service center, or GSC, this January. The GSC provides 24/7 support to deliver a more efficient aircraft on ground or we call it AOG response and allows regional maintenance teams to better focus on execution and customer service. The GSC is expected to yield immediate cost efficiencies through reduced aircraft downtime and already proved itself in the first months of the operations. We want to thank John Cloggie and his team for bringing this online. It very much helped in a number of different operations, even in the last month both in safety and also making us more competitive in the future.

In the interest of time, I will forego any prepared remarks on the regional slides with the team providing information during our Q&A session. Please move forward to Slide 17. Our third quarter, GAAP EPS was $0.09 while our adjusted EPS was $0.67. This sequential improvement was almost all due to the efforts we outlined in the fall and margins have increased over 7.5% in the phase of the declines in our operating revenues. And this was largely in line with our expectations as we talked about the last half of fiscal 2016 would be better than the first half of fiscal 2016.

Please turn to Slide 19. This quarter, we can now demonstrate delivery on our promise to defer CapEx. Last quarter, while not yet finalized, we told you we were working with our OEM partners to defer about $100 million in committed capital out of fiscal year 2016. We were largely successful in this initiative and now have confirmed deferral of over $100 out of FY 2016 with the expectation to defer another $9 million from the last three months of fiscal 2016. Remember these deferrals do not affect our ability to successfully deliver on our commitment to the UK government as we look to complete the full implementation of the UK SAR contract.

Please move forward to Slide 20. Liquidity has always been critical to Bristow and we’ve shown this chart for many years before the downturn force many of our oilfield services peers to focus on liquidity. We ended the last quarter with $299 million of liquidity including $132 million of cash. During the quarter, we did spend $165 million on aircraft, which included remaining payments on the two extra UK SAR S-92s to facilitate implementation of the UK SAR contract. As well as approximately $30 million spent not included in the previous capital commitment to purchase three AW139s that we previously had on lease to move them to serve a new contract in Guyana.

Similar to much of our own fleet, we expect to be able to recover capital and create liquidity through future cost effective sale leasebacks of these and other aircraft, a market that is still open to us in this downturn. Although we do not need this liquidity with $299 million currently, this critical avenue allows Bristow to have in its back pocket available funds during the downturn. Remember the deferrals of CapEx do not affect our ability to deliver on the commitment to the UK government as we look to complete the full implementation of the UK SAR contract.

Page 21; even with the downturn, we are reaffirming our guidance LACE rate for FY 2016. We can do this as the weakness in our oil and gas rotary utilization in pricing is offset by the implementation of UK SAR and a number of new contracts. For example, as you have read last week, a major client recently announced their award of a five year contract per crew-change services that will commence starting in early fiscal year 2018. This announced contract revenue and the three incremental LACE, it represents, further strengthens our client partnerships in Norway. We plan to serve this contract with large aircraft already in our fleet and we will earn competitive market rates with them.

Please turn to Slide 23. We are reaffirming our fiscal year 2016 adjusted EPS guidance of $1.80 to $2.40. Our cost reductions, UK SAR implementation and maintenance of high levels of operation excellence with ops transformation initiatives like our global service center contribute to this affirmation. Remember, our guidance assumes constant FX rates as of December 31, 2015, pursuing a lot of volatility this year and again we give guidance based on a full year of EPS, but as we’ve seen in previous quarters, volatility and FX rates, as we conduct business, can have an impact on this EPS.

Please turn to Slide 24. In conclusion, so we can get to Q&A, our focus is on safety, especially in light of recent events in Nigeria and it’s more intense than ever. We have already started a global refresh of our Target Zero programs that will touch all aspects of our organization, including fixed wing and SAR operations and these were underway before the accident in Nigeria last week. We pride ourselves on safety and these recent accidents have been humbling, but have only strengthened our resolve.

The short-term view, including FY 2017, remains challenging. Access helicopter supply will continue as will the pressure on our clients to reduce costs and increase efficiencies. This will require further company-wide encompassing cost reductions including increased productivity from our union and non-union labor force as well as efficiencies with our OEM partners and also our lessor partners as we continue to optimize our business in the current environment.

The long-term outlook, however, remains positive as our cost reductions and diversification strategy continue to prove effective and give us confidence as we go through FY 2017 and 2018 and beyond. In addition, we have a lease strategy that allows for over $80 million in fixed cost reduction by fiscal year 2020. It makes us that much more competitive and allows us to emerge with strength.

And with that, we will open the call to questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Dave Wilson from Howard Weil. Please go ahead with your question.

Dave Wilson

Good morning everyone. Thanks for taking my questions.

Jonathan Baliff

No problem, Dave.

Dave Wilson

Jonathan, in the past, we’ve spoken about another – other potential SAR opportunities. And I’m wondering how those opportunities are developing and whether or not the capital outlay for such opportunities, given the current oil and gas market, has changed your thinking about those opportunities that are out there?

Jonathan Baliff

I mean, it’s a good question Dave. And one of the reasons why we’ve always maintained a very high level liquidity and also a low level of leasing in our portfolio is to be able to keep pursuing these types of diversifications with existing assets, even though many of them do need modifications. With that, we are currently pursuing a number. I would say that today we are seeing more opportunities for revenue in FY 2017, especially the end of FY 2017 and 2018. I don’t want to get too specific, they’re still commercially sensitive, but we’re very much having the aircraft available. We have the ability to do these and actually are looking to pursue them with vigor. And again that’s why we have liquidity we have in the access to a level of capital that many in the oilfield services don’t have.

Dave Wilson

Okay. So just to kind of rephrase, you are pursuing opportunities, but you don’t think you’ll need to go out and get incremental aircraft to – that could be competitive in those opportunities?

Jonathan Baliff

For a number of the ones that we’re thinking of right now, we don’t think that we would necessarily have to go out and get aircraft, some of that will make itself apparent. But even if we do – and let me qualify, even if we do, we have the liquidity to be able to do it.

Dave Wilson

Great, thanks for clarifying that. And then I guess this is an unrelated follow-up. I remember hearing, you know, peak revenue for UK SAR would be in fiscal 2018. You saw a nice increase in the revenue during the quarter. Just wondering what kind of sequential increase we can expect in the next quarter – just kind of near-term how is that progressed from one quarter to the next?

Jonathan Baliff

Well, as we talked about and take a look at the pages that I didn’t go over on UK SAR, but we are now operational with 10 of our 11 bases. And it’s only really starting this month that we have those 10 of the 11 bases working. And so, you should expect us – what I would direct you to is we had an Analyst Day, a number of – a couple of years back. That Analyst Day material is still relevant, especially as the aircraft and the contract comes online.

In the sequencing of that, I would direct you towards that information, but we are still looking for at least $1 of earnings, that’s what we’ve given and talked about over $100 million of EBITDAR coming from that contract when it’s fully operational. Dave, what I would say is, also once we come into our May or fiscal year-end, we will give you more information on UK SAR. So we can give you a better sense of what FY 2017 will look like.

Dave Wilson

Great, thanks Jonathan. I’ll turn the call back over.

Jonathan Baliff

You’re welcome.

Operator

Thank you. Our next question comes from the line of Gregory Lewis from Credit Suisse. Please go ahead with your question.

Gregory Lewis

Yes, thank you, and good morning. Jonathan, I mean, just wanted to follow-up on Dave's question. You focused on the Company's liquidity and the ability to go out and buy incremental aircraft if the opportunity presents itself. I know the focus is really on BVA here and just creating value, but just given your liquidity position, as you look at some of your corporate bonds, they're actually offering pretty attractive yields. And I'm just curious if that is something that is potentially – we could see as a potential sure-fire generation of returns by maybe buying back some of those bonds?

Jonathan Baliff

Look, Greg, I think it’s a good – I think you’re brazing a very good point. I want to highlight something concerning the liquidity and SAR. Much – even if we bid on these contracts that will provide us revenue in FY 2018, the actual spend would not happen for a while. And so, we look at all opportunities for use of that liquidity. I will tell you right now, given what we see in the market, the best place for liquidity is currently in our bank accounts, right. And so we will be very careful about spending any money on M&A, on any contracts, would we look at buying back bonds, I think that’s something that from a capital allocation strategy, we’ve been very clear, we want to build the liquidity we need and then we’ll use it. I can’t tell you right now if buying back debt is part of that.

For us right now, it’s really about maintaining a strong balance sheet as part of this downturn and serving the existing oil and gas clients. But I will say that we will be extremely careful about spending any money as we go through our cap – really published capital allocation strategy, which first and foremost is prudent balance sheet, then BVA, and then returning capital to our shareholders. I would say that the debt piece of that and buying back debt does provide us ability to prudent balance sheet manage, but it hasn’t currently been something we’ve been discussing internally. But you’re right, it is attractive in certain ways, Greg. Don, do you have any commentary? One second, I just want – Don?

Don Miller

I agree with everything you said. I mean, cash is king – and liquidity. And there’s a time and place for everything, but I would say at this point that’s not something that we’re really looking at this time, Greg.

Gregory Lewis

Okay, perfect. A much easier question: Jonathan, I think you mentioned in your prepared remarks that the Statoil contract was actually incremental to Bristow. I believe you have three helicopters already up there. But now, I guess that – first, I guess, if you could clarify that? And was that actually incremental work from the customer? Or did you win that work from an existing competitor?

Jeremy Akel

Hi, Greg, it’s Jeremy.

Gregory Lewis

Hi, Jeremy.

Jeremy Akel

I’ll take this question. Greg to answer, I guess, both questions, let me answer the second one first. Yes, I mean there was an incumbent that held a contract and we have been awarded the contract starting in 2017. It is incremental to us. I know there’s probably some confusion around the announcements and what that might imply on the economics. So it is too incremental aircraft for us – well, two – actually, three incremental aircraft for us. There is a sharing mechanism for that third. And I would just go out and say they are at market rates, if that answers all your questions, which is good for us, obviously, given this market environment and also gives us a better footprint in Norway.

Gregory Lewis

Okay, perfect, and then just one final for me. Clearly, you guys addressed, or Jonathan, you addressed, the issues in Nigeria and the ongoing investigation and the grounding of those helicopters. I feel like we have seen this before in other regions, and just in thinking what has happened in the past, is there going to be an opportunity to shift helicopters – I mean, I imagine utilization overall is down. Is there going to be opportunities to shift helicopters into that basin or into that country? And are we seeing opportunities for the non-grounded helicopters to actually – have we seen an increase in their flight utilization or flight hours, however you want to measure it, since that happened last week?

Jeremy Akel

Yes, Greg, I’ll take this one again. The answer is yes, we will be mobilizing assets, I guess, that’s a strength that we have. We’re able to do that when we have a problem in a certain region to cover for the suspension. There is uncertainty around the length of time. So, we are definitely in motion already to move assets in. And then it’s still a little too early to say yet will the covered assets increase in utilization, but I think the assumption is yes because we’re already starting to I guess sweat the assets on the ground already a bit more. To what magnitude of utilization, I couldn’t tell you, it’s too early, but you will see an increase in utilization on those assets already.

Gregory Lewis

Okay, thank you very much for the time.

Jonathan Baliff

Hey, thanks, Greg.

Operator

Thank you. Our next question comes from the line of Cameron Schnier from Evercore ISI. Please go ahead.

Cameron Schnier

Hi, good morning guys.

Jonathan Baliff

Hi, Cam.

Cameron Schnier

Jonathan, sorry if I missed this, but did you quantify how far along you guys are in the $150 million of identified cost reductions so far?

Jonathan Baliff

What we said is that on an incremental quarterly basis that we were largely on track. We still have one more quarter to go. We’re in the midst of that quarter and it’s going well. We have a number of different types of cost reductions that will manifest themselves in this quarter. So, what I said is we’re largely on track to be able to get the cost reductions and those are baked into the guidance that we reaffirm today.

Cameron Schnier

Okay. So does that – I mean, like, over half so far?

Jonathan Baliff

Yes, we’re over a half way through the year, so yes.

Cameron Schnier

All right, got it. Thanks. And unrelated, but all else equal, have we sort of reached the point within the cycle in which a reduction in flight hours is no longer a margin-positive event for you guys?

Jonathan Baliff

Well, just I don’t want to do math in public on that. Restate the question so that I understand it. Are you saying – say it again, Cam.

Cameron Schnier

I guess previously, given the two-tiered contract structure, because there is a greater proportion on the fixed side, if there was a reduction in flight hours, it would be positive for margins. But now, given the increased utilization of a smaller sort of fleet the customers are using, is that no longer the case?

Jeremy Akel

Cam, this is Jeremy, good morning.

Cameron Schnier

Hi, Jeremy.

Jeremy Akel

It depends on the market. And each market has sort of a different formula relating to flight hour charges. But it’s safe to say the answer would be trending towards the yes to answer your question. To what extent, it’s obviously - it takes a little work to kind of calculate.

Jonathan Baliff

You can give an example for, like, Gulf of Mexico; it might not be because…

Jeremy Akel

Yes, Mexico, for example, we tend to put some returns in the hourly, just because the market itself is that – structured that way. Whereas in other markets, say in Nigeria or the North Sea, you might get a smaller margin off the hourlies. So it's going to be a blended in a way, calculation. But I think you're thinking about it the right way.

Cameron Schnier

Okay, thanks. Thank you.

Jonathan Baliff

I mean, Cam, just to get – one of the points that you're bringing up is we’re not stopping on the cost reductions, although if you think that we’re more or well more than halfway through because we’re three quarters of our year through. FY 2017, obviously, is looking that much more challenging. So what we plan on trying and succeeding at is continuing these cost reductions and actually accelerating and increasing them with productivity gains, with our union and nonunion employees as we go into FY 2017 and beyond.

And so for us we still have a lot of levers that we haven’t pulled waiting to be able to do a number of things for FY 2017 and beyond. And so, we’re going to continue to do that. And we have a lot of confidence in our ability to do that, just because we – as you can tell, with the margin improvement this year, we feel we can continue those into 2017 and beyond.

Operator

Thank you. Our next question comes from the line of William Thompson from Barclays. Please go ahead.

William Thompson

Hey good morning Jonathan. I just want to go back to Slide 19 and just kind of bridge from last quarter, the CapEx, obviously a positive in the sense that you've got the $100 million in CapEx deferrals and it sounds like another $9 million on top of that as of January. Just help us understand – I want to make sure I capture this. The $165 million includes the two UK SAR 92s? And then is it $30 million incremental that sort of wasn't budgeted for another search and rescue contract?

Don Miller

Will, hi, good morning, it’s Don. I'll take this, yes. So, just tying out, if you think about what we talked about last quarter where we were at $250 million for the remainder of the year that didn't include the $30 million that Jonathan talked about buying back those three 139s off of lease. So that’s the delta there.

Jonathan Baliff

So that is not a SAR contract…

Don Miller

Yes, that’s not a SAR contract, that's a contract we have talked about in the past. So if you – I mean, if you, in effect, neutralize for that, we spent around $137 million last quarter on aircraft capital. So, if you just do the math from that you're basically – we didn't push $100 million into 2017 and beyond, that leaves you down to around $15 million of which we've already identified we’ve pushed another $9 millioninto a far period. So that's how the math works.

William Thompson

Okay, that's helpful. And then just regarding the other purchase obligations that are outside the aircrafts. Just on the – I think its facility, spare parts, and power-by-the-hour obligations. Do you have any sort of wiggle room to just defer some of those expenditures?

Don Miller

I mean, Will, on a regular basis we're kind of – I am sorry, Will, we are, on a regular basis, engaging with our OEMs as part of our cost reductions. And so that’s part of what we're looking at going into FY 2017. And then on the additional aircraft commitments that we have in 2017 and 2018, I would say we’re in regular engagement with them around other ways to optimize those capital payments to time them better with the aircraft deliveries.

William Thompson

And just…

Jonathan Baliff

But Will, I mean – Will some of those – some of that CapEx, especially in 2017, are for aircraft that we will put on contract. I mean, we’re very, very focused on making sure that any dollar that goes out the doors for an aircraft that can go on contract.

William Thompson

And just last quick one on the same topic. It's just that the press release indicated a target to achieve cash flow neutrality for the year. I just want to make sure I understand that correctly, given the fact that obviously the cash flow – free cash flow deficit for this quarter – just to be – is there sale leasebacks baked into that for fourth quarter?

Jonathan Baliff

Well, are you talking about – when we talked about cash neutrality for the year where we're talking really about FY 2017. On FY 2016, just given the nature of the capital expenditure that you see on Page 19, and a lot of that is for UK SAR. I don't think we ever said that we would be cash flow neutral for the 2016. What we're trying to do for 2017 is to be cash flow neutral. And we do have a lot of levers we can pull. And frankly in 2017, when we say cash flow neutral, we're actually not talking about being able to do any sale leasebacks or depend on the financing markets at all. We want to do that internally with the levers that we're talking about cost savings with productivity, with union and non-union, G&A savings, O&M savings. And also I don't want to leave out further CapEx deferrals as we work with our OEMs. So does that…

William Thompson

Okay.

Jonathan Baliff

That make sense, it's really for 2017.

William Thompson

Yeah. That makes more senses. Thank you.

Operator

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

Daniel Burke

Good morning, everyone.

Jonathan Baliff

Hi, Daniel.

Daniel Burke

Just to pick up right where we left off there, in terms of targeting free cash neutrality in 2017, it's helpful to have the updated aircraft commitment schedule in terms of CapEx for next year. But are you in a position to maybe share some thoughts on non-aircraft CapEx that you guys expect to incur in 2017? And maybe also talk about expectations for working capital? Just trying to tie that that free cash flow neutral objective together.

Don Miller

In terms of – Daniel, hi good morning. This is Don.

Daniel Burke

Good morning.

Don Miller

In terms of non-aircraft CapEx, the non-aircraft CapEx really ties to aircraft mods, some IT investment we make. Typically what we have – we tend to look at that on more of a percentage of depreciation, almost like maintenance CapEx. And we – internally, we budget in and around $50 million on a pretty much of run rate basis. So, I mean, at this point, that's the best estimate we can give you for FY 2017.

In terms of working capital, we've seen some movements particularly in this – I would say over the last couple of quarters as customers really become – our customers become much more focused on maintaining their capital, but that we don't think over the long run that's going to be a – something that’s going to be sustained. So but as this – as the oil and gas business, in effect, gets a little bit smaller, as it consolidates a bit, we actually do think we'll be able to pull additional capital out of working capital.

Jonathan Baliff

We're very efficient, Daniel, with working capital. If you remember, five years ago, the company had roughly three times the inventory. It had a big differential between days receivable and days payable. With BVA, we've eliminated that. And I and my predecessor would talk about raising $400 million, $500 million of equity over the past six years because of our real efficiencies on working capital, and I would argue that they’re really industry leading.

Unfortunately, you can't say that we can keep doing that forever. As the business shrinks a bit this year, we should be able to get some of that, but in that cash flow neutrality, we're not really looking at working capital. It doesn't mean that we won't beat it up like we're trying to look at all parts of our cost structure, but I would say there is a lot more levers that we know we can pull to get to that cash flow neutrality and it's not. We don't believe that's a Herculean effort. We have enough levers to pull in different parts of our cost structure and otherwise to be able to do that and maintain this pretty nice liquidity as we go into this downturn.

Don Miller

Daniel, if I could just add on – this is Don, again. If I could add on, if you go back, I know our business has changed, and the mix of our business has changed, but if you go back really, prior to this downturn, and look at our EBITDAR levels, our cash flow from operations was regularly $200 million to $250 million. Now, we have obviously increased our overall lease exposure, but as Jonathan highlighted in his opening remarks, over the next several years, we’ve got a lot of optionality around those leased aircraft to turn those – those leased aircraft back in, and in effect begin to work down that that lease cost in our income statement.

Daniel Burke

Okay, that's helpful. So to summarize, I think what I heard on that answer was a lot of levers on the P&L side, not to say you're not managing working capital. But, I mean, will working capital be a source of funds next year, or is it just too early to tell?

Jonathan Baliff

I think it's too early to tell. But you asked a direct question; I'm going to give you a direct answer. We think yes, as businesses shrink, you should be able to pull some working capital out of it. We just think that the levers that we can pull and again in the idea of kind of under-promising and over-delivered and we think those are much more on the P&L, they’re much more with our lease portfolio, and then in partnership with our suppliers. We think there's more there than working capital. But, again, when you say that it makes – it sounds like we're not going to be beating up the working capital, we will, and we'll look at it, but we really have made a good level of progress, very proud of the teams over the last five years in doing that.

Daniel Burke

Jonathan, I appreciate that one. And then maybe one last one, maybe it's for Jeremy and maybe it is a little unfair. But is there a way to think about the – I know you said the revenue impact should be immaterial, but is there any way at this point to think about the incremental costs you might incur in West Africa here in the quarter?

Jeremy Akel

Daniel, no question – no question is unfair. So, but thanks for giving me a pass. Yes, we are thinking about that. I would just say it is preliminary, but it will be in and around obviously – that we’re looking at potential insurance, what the implications that might have. And we’re also looking in other areas like, as Jonathan mentioned in his opening remarks, we are moving a lot of resources to respond to this because we'll leave no stone unturned on this one. And so that there might be a surge in some G&A costs and some travel expenses. Sorry, we can’t quantify them for you yet, because it’s early days. But as we start to get a better handle on it, I’m sure we’ll be able to give you guys some guidance there.

Daniel Burke

Great, I appreciate all the color guys. Thank you.

Jonathan Baliff

Yes, and sorry, Daniel – I mean, we’re much more concerned. It doesn’t mean that we’re not concerned about the dollars here, but we’re much more concerned about the human element and the confidence that we have in our 76 fleet. And so being able to reinforce that with our clients, with our employees, with our communities is very important to me and the rest of Company. So that’s our priority.

Operator

Thank you. Our next question comes from the line of Joe Gibney from Capital One. Please go ahead.

Joe Gibney

Thanks. Good morning. Jonathan, a couple questions around sales and disposition outlook. Just in particular, I think it would be helpful as we try to triangulate on forward LACE count, which is ever-vexing modeling exercise, but could you refresh us, maybe, on where we stand on model-type kind of exit strategy? This is a fluid market, obviously, but as you’re – is it sort of accelerating your mindset on whittling the fleet down to a lower number of aggregate model types that you had sort of laid out in the past? And then I was also curious on just if you could get a little more granular on the lease roll-offs? I guess specifically the number of aircraft that are rolling off in fiscal 2017 would be helpful as we try to triangulate a little bit on LACE count.

Jonathan Baliff

You’ve got a lot going on there in this question, Joe. So I want to be able to answer each of them. And we’re going to address your vexing comment here in a second. Let’s talk about the sales of aircraft, Jeremy will take that. The leases, Don will take that. And I will take the vexing comment. Go ahead on the sales.

Jeremy Akel

Joe, good morning. Let me just quickly back up and give a little context. We’re constantly reviewing our fleet strategy. We realize especially now, in the face of sort of some capital and some obviously market changes in our reality. So we continue, though, to operate under the premise that we will continue to rationalize our fleet over the next five years, right. So that said, how does that play into your question about accelerating or decelerating certain aircraft types? Our view today actually is it’s going to decelerate some of the aircraft types that we rationalize out of because we believe there’s broader utility over the next five years, given where the market is heading.

There are other aircraft types that we will continue to come out of, and those are what we call sort of the legacy aircraft – the 412s, 332s, the light aircraft, which we’ve constantly signaled. Those are continually being exited. And to your point on the aftermarket, yes, it has slowed, but it’s not dead, especially for those aircraft types. We do see some transactions and some activity. And we’re going to continue to pursue them and continue to exit the aircraft on that basis. Does that answer your question on this piece before I hand it over to Don?

Joe Gibney

No, that’s helpful. I appreciate it.

Jonathan Baliff

Yes, I would also just say from a cash flow neutrality standpoint, we’re not depending on a lot of sales next year to be able to achieve cash flow neutrality. So, I want to make sure people understand that. Go ahead, Don, on leases.

Don Miller

Yes, hi, Joe. So on leases, I think your question was just a little more insight into what the outlook looks like in terms of roll-off. For FY 2017, they really start to roll-off in Q4, February and March. And we think about it on LACE-rate basis, because most of our leased aircraft, setting aside UK SAR for a moment, are 92s and 225s. We’ve got a few 139s in there, but for the most part 92s and 225s. But it’s single-digit almost every year, starting late FY 2017, starting around five LACE, ramping up to a little under 10 the next couple of years. But I would go back and say, look, this is an option that we consider.

And it fits in, really, to what Jeremy referenced earlier, which is our fleet plan and our fleet management strategy in terms of aircraft need and what we have in terms of fleet and access to it at that point in time. But as we look at it today, over the next kind of three to four years, we’re in a position to really roll out of kind 20 to 30 aircraft pretty easily.

Joe Gibney

Okay, that’s helpful. Thank you, Don.

Jonathan Baliff

Yes, and let me address the vexing comment, because it’s not – we get it is what I’ll tell you. I mean, first and foremost, we are focused on safety; and we are focused on doing a number of the initiatives we’ve already talked about. But second, we were the ones who came up with LACE rate. We’re the ones who came up with a number of different things to be able to help you guys model this bespoke industry. But we also realize we need to change based on our own business and how it’s changing.

And so our commitment to you, my commitment to you, is we will be making changes to how the Company presents itself in FY 2017 to bring clarity to the UK SAR contract, to bring clarity to the diversification and make it easier for you guys to understand us, whether it’s a downturn or an upturn. And so, we’ll be doing that, giving you guys a little bit of a sense of that right now. But we hear you, Joe, on the vexing. It’s not easy to model us, given that the LACE rates do change based on UK SAR versus oil and gas. So we want to bring more clarity to that as we talk to you guys in FY 2017. It’s a commitment we’re making to you.

Joe Gibney

I appreciate it, Jonathan. And then last one for me. Just curious on your fixed wing trend line and outlook – specifically, it sounds like Airnorth seems pretty consistent in terms of your outlook and expectations from both top line and EBITDAR. I was just curious on Eastern specifically, you had sort of a sequential dip in EBITDAR, somewhat similar to what transpired last fiscal year. I was just curious if this is seasonality, if things sort of changed from the Eastern outlook? And I know this is a minor point, but I’m just trying to triangulate a little bit better on fixed wing.

Jeremy Akel

Sure, Joe, Jeremy here. Eastern has more exposure, call it, to the oil and gas market. They are sort of part of the integrated model. So that dip you’re seeing in Eastern is related to that. That said, though, Eastern has the ability obviously to seek to reallocate aircraft to different regions within the Bristow system. It has ability reallocate assets into more of, call it, the retail model to fill certain networks; and then specific charters outside of oil and gas. All of those are on the table right now, which gives us sort of that optionality, but what you’re seeing there is really related to the oil and gas piece.

Joe Gibney

Okay, helpful. I appreciate it, guys; I’ll turn it back.

Operator

Thank you. Our next question comes from the line of William Thompson from Barclays. Please go ahead.

William Thompson

Hi, thanks. Just one more follow-up. I believe the Statoil release or press release on the new contract mentioned more efficient flight program. I just want to touch base on where things stand from the North Sea on a – guys sort of changing their crew rotation schedules, and how that could maybe impact demand this year?

Jeremy Akel

Yes, Will, Jeremy here again. The answer is it’s been impacting us, the last – tail end of this year, fiscal year, and it’s going to impact us next year. North Sea, as you can probably surmise, is under a serious amount of stress to make sure their fields remain economic in this oil price environment. And we’re helping them. We’re helping our clients. We’re trying to find ways to be more efficient, and it is impacting us from an activity standpoint.

And it’s impacting their decisions around what aircraft types they might choose for certain missions, and even the way they price. Even our pricing models – we’re looking at some innovative ways to help them through our pricing models and the ability to allocate certain assets for certain flights. So I think in short, yes, activity and their efficiencies are there already. And you’ll probably see more of that in the next 12 months to 18 months is what I would tell you.

Jonathan Baliff

Just so you know, Will, for those types of crew changes to the rotations – so it’s has already been taken into account with our FY 2016 guidance, so the nature of those revenue reductions were already assumed. And then a number of different things – as we bring more clarity to FY 2017 in May, we’re assuming those types of crew rotations also. We’re not assuming anybody is getting back to the more frequent rotations. In fact, if anything, we’re planning on having it be a little more pervasive, but we can offset it with some of the other levers that we’re talking about pulling.

William Thompson

And is that crew rotation schedule programs – are those bleeding out to any other regions?

Jeremy Akel

No, not in the same way that the North Sea is, but, of course, other regions, Will, are trying to do sort of similar type of things, but not in that exact way in terms of extending rotations.

Jonathan Baliff

And many regions already had extended rotations before the downturn even began, Will. So the North Sea was one of the ones that had a shorter rotation. So we keep track of that a lot, but that’s really where the impact is the most.

William Thompson

Okay, thank you.

Jonathan Baliff

No problem.

Operator

Thank you. Our next question comes from the line of Chase Mulvehill from SunTrust. Please go ahead.

Chase Mulvehill

Hey, good morning and thanks for let me in. So I guess I want to follow up on the free cash flow neutrality question for fiscal 2017. If we can kind of walk through, maybe, some of the components? So as we look to FY 2017 and we think about rent expense, it looks like maybe in FY 2016 it’s going to come in $210 million to $215 million kind of in that range. As we look to FY 2017, what would expectations be for cash rent expense?

Jonathan Baliff

We will give that to you at a later date and appreciate you asking. I would say that we are – we know you’re focused on it, and so are we. And that’s some of the things that Don talked about that that we look to try and be able to maybe reduce it through working with our lessor partners, but you’re going to have to wait on us. I appreciate the question, but it’s what historically done…

Chase Mulvehill

Do you think there’s an opportunity for it to be materially down? I know you all put that slide, but I’m thinking, if I remember correctly, that was more of a FY 2018 reduction in rent expense and not a FY 2017. So, I guess, remind me of that, I’m trying to find the slide.

Jonathan Baliff

Yes, I mean, there are two elements to it, Don will talk about it in a second. But one is these are partners of ours, right. This is not a bond market, right. This is a market in which these lessors are partners. And so, you have an ability to work with them, similar to our OEMs and other partners to bring the costs down, but also we have an ability to get back the aircraft when the lease is up. And our leases have a tendency to be a little bit more shorter-dated than most. Don, can you?

Don Miller

Chase, hey it’s Don. You’re right; there’s a slide we put out there – the last update was probably in September or October that talks about the step down in lease cost and that really does a kick in FY 2018 in earnest. And that’s really because of the fact that we turn – the first opportunity to potentially release aircraft is in, as I said earlier, Q4 of FY 2017. But to Jonathan’s point, this is the optionality that we always – part of the leasing strategy was having this optionality as we think through our fleet management. And so, this is that optionality separate and apart from working with lessors just kind of day in, day out.

Chase Mulvehill

Okay, all right. And as we think about your covenants – I get a bunch of questions on the covenants. So can you kind of just walk us through the calculation of how the – you know, bank EBITDA. I think it is, like, EBITDAR minus rent expense. I imagine you can exclude some severance and non-cash comp, and maybe the FX? So if you can just kind of talk to that a little bit, just so we can get a better understanding about what’s exactly in bank EBITDA, and if that – and I think you capitalize your operating leases in there as well.

Jonathan Baliff

Let me answer first and foremost, we are in full compliance not only with our bank covenants; we are in compliance with our old covenants. You remember we expanded them this last quarter.

Chase Mulvehill

Yes.

Jonathan Baliff

And then Don will answer more of your question concerning that, although I would say some of this is not information that we generally put out in the market. Go ahead.

Don Miller

And so, Chase, to Jonathan’s point, we’re actually – you know, we amended our covenants back in late September. And as of December 31 we were still in compliance with the original covenant levels on both max leverage ratio and the minimum interest ratio. So, we’re pleased with that. And that’s really reflective of our underlying business model and the cash we can generate. I would say, look, we haven’t in the past talked through the detail, because these are very bespoke covenants. And they are actually, just to clarify a point, they are bottom-up covenants, meaning you start at net income and you work back up. So it’s not as simple as saying EBITDAR less this or less that. And so at this point, we’re going to leave it with that and not really get into the detail of how we calculate our covenants.

Jonathan Baliff

But we will say this, the debt metrics we do give you are actually more difficult, right. They don’t exclude that much. So if you look disclosure in the appendix, Chase, you’ll see us calculating covenants. Those covenants, for lack of a better word, are more aggressive. The bank covenants are a bit easier because of some exceptions, but just wanted to put that out there too.

Chase Mulvehill

If I throw a number out there, can you guys comment on it? If you were to do $400 million of EBITDAR in FY 2017, do you still feel comfortable – will you still have a lot of comfort level in your covenants?

Jonathan Baliff

Look, I appreciate trying to figure this out and I do empathize; you have a job to do. We want to help you do your job. But these are questions and hypothetical that we just – we are not going to answer. But appreciate it, you guys can keep asking them.

Chase Mulvehill

I understood. I just get the questions, so I need to try to know how to answer them. Thank you. And FX, non-cash FX during the quarter: what was that non-cash number? You called out a lot of FX, but I’m just trying to – there’s a revenue translation, and there’s a balance sheet translation, right? So what was the kind of balance sheet translation?

Don Miller

Net of about $1.5 million or so. It was a very – in a lot of ways a very calm quarter.

Chase Mulvehill

Okay. And that was a gain, right, $1.5 million?

Don Miller

Yes, it helped.

Chase Mulvehill

Okay. Yes. And then the last one: it looks like that SAR EBITDAR came in really strong at 62%. And I’m not – so as we kind of move forward, you’ve got two bases that started up in January. So how should we think about the margin profile over the next few quarters for SAR? And if there – should it trend down, flat? I mean, how should we think about this?

Jonathan Baliff

First of all, I would not think of it as a quarterly number, right? Because there’s little bit of noise in there as the implementations take into effect. We’ve always said that the SAR EBITDAR margins are higher than our oil and gas margins globally, although I would say that we still have margins in some of our oil and gas because of cost reductions that we are able to maintain in the downturn. So you’ve got to look at it more on an annualized basis. We’ve given you some of those numbers in the past. And again, coming in May – it gets back to the previous analyst’s question about trying to make your modeling easier to do – we’re going to be focused on helping you do that, especially with UK SAR.

Chase Mulvehill

Okay, okay. Any help on the rent expense associated with UK SAR?

Jonathan Baliff

And when you say rent expense, you saying like break it out separate, apart from the other?

Chase Mulvehill

Yes, yes. Have you all ever done that or disclosed that anywhere?

Jonathan Baliff

I don’t think we – no, we have not. It’s a very good suggestion; and again, we are looking to trying to make UK SAR much more easier for you guys to model in the future. And let’s just hold that off till May, when we start to give you guys some, what I would say, different organizationally looking exposure to information on SAR and other diversification with our oil and gas.

Chase Mulvehill

Okay, all right. Thanks, Jonathan; thanks Don. Really appreciate it.

Operator

Thank you. Our next question comes from the line of Brandon Dobell from William Blair. Please go ahead.

Brandon Dobell

Thanks for squeezing me in here. Maybe backing up to the –.

Jonathan Baliff

Take your time here, Brandon.

Brandon Dobell

No worries. The expense management – appreciate you guys continuing to break that out for us for fiscal 2016. And given your comments about opportunities or the need to do more, any sense of how large those opportunities are relative to the magnitude of what you’ve already done? You know, just mindful of starting to cut to a point where it’s detrimental to the business, either from a safety or an operational point of view? Or maybe it’s how fast you can rationalize the fleet types, and maybe there’s a big opportunity there versus your prior thinking, given how tough things have been?

Jonathan Baliff

Well, again, you asked a straightforward question; I’m going to give you a straightforward answer. We have really attacked a lot of our cost structure using headcount reduction and G&A reduction that has been focused on productivity gains, both with our nonunion and our union employees. There is still a lot of levers to be able to look at in productivity improvements with our union employees. We’re going to be focused on that. That is an area, but I will say we have a great workforce. We are conscious that we have many agreements worldwide. But this is the market by which everybody as a team is going to be looking at how we effectively manage what is our largest cost, which is labor. And so we don’t view these things as zero-sum games.

We – a long time ago – feels like a long time ago, back in 2013, we gave every employee at Bristow $1,000, whether you were involved in UK SAR or not, to show our appreciation for what was a very good year in a number of ways, especially from a safety and economic. And so we want to be able to be all in this boat together and we have to make some changes. There was another CEO in another industry talked about, we can bank left, or we can bank right. We can go into a certain direction with all our employees in which we will lose margin and be less competitive. And that is not something that we are going to do. We’re going to work together as a team. We’re going to persevere during this downturn as a leader and as a team together.

And there are lots that we can do, Brandon, in that productivity aspect of our business. And then there’s other work that we can do in conjunction with our OEM and lessor partners. I would agree with you. We are coming to levels where we – especially in G&A in other areas, where we are taking out some redundancies in the system that we need to have to respond to a number of different important projects and safety in the Company and we are watching that very closely. But there’s still a lot of productivity gains that we can probably get with our union and nonunion employees.

Brandon Dobell

Okay. That’s helpful.

Jonathan Baliff

Sorry let me let me just get…

Don Miller

Yes, yes Brandon and so real quickly I want to highlight as well that I know we’ve made reference to it earlier on that call, but as you move into FY 2018 the thing that I want to say almost naturally happened that being the two GAAP SAR bases become full UK SAR bases; we open up our last UK SAR base. So, we have some natural uplift in revenues there, independent of what Jonathan has said.

Brandon Dobell

Okay.

Jonathan Baliff

An independent of market recovery.

Brandon Dobell

Right, right.

Don Miller

That’s right. And then on the cost reduction side, again, we have the leases going in our favor. So in effect we have two forces that are working well together there potentially.

Brandon Dobell

Okay. And then as you look at the – let’s call it the last couple of months of your discussions with OEMs, some aircraft acquisitions, sale-leaseback conversations. How do those conversations or the activity inform you guys about what is probably the real, I guess, market-clearing prices for some of the aircraft?

Obviously, there’s a pretty big disconnect between stock price and your expectation around fair market value. Just want to get a sense of – where is that disconnect? Is it just – do you think it’s a temporary issue, just given the turnover supply of aircraft? But in particular, have your conversations informed you, I guess, better or worse, relative to what the real market out there is for medium and large?

Jonathan Baliff

Well, I’ll take the first part, and then Jeremy will talk about it. Again most of the issues associated with the reduction in our EBITDAR is associated with idle equipment, right. I’m not saying it’s not associated with LACE rate from a pricing standpoint, but most of it is idle equipment, which then – obviously, they’re not mutually exclusive. I will say this. We have an ability Brandon to really significant reduce the size of this fleet without a material cost to us in the next four years, right. And although that seems like a long time, the bulk of it happens in next 3.5 years. And that is an exit ramp independent of market recovery that removes $80 million to $100 million of fixed cost out of this business and makes us incredibly competitive as this downturn lengthens, so that we don’t have to spend any CapEx on UK SAR.

So you hit the nail on the head. This is a very short-term phenomenon for Bristow. And if you define long-term, which in the public equity markets in the United States have a tendency to be one or two years, but if you are defining the long-term, we really have an ability independent of market recovery. Notice that during this whole call, we did not talk about market recovery. We need to handle these issues ourselves in working with our clients and our other partners. So, we feel very confident in that way. And being able to get costs out of the system this year gives us confidence as we also do the short-term work that we need to do in 2017 and 2018. Jeremy?

Jeremy Akel

Yes. And Brandon, the way I would answer sort of my side of the question to you is that it’s probably fair to say that the bid-ask spreads are increasing between buyers and sellers on the aircraft. We don’t see a deterioration in asset values commensurate with share price, if that is what you’re asking, right now out there on the market. But it is a function of aircraft type. Not all aircraft are the same. So a legacy aircraft might have a – trade at a bigger discount then sort of the new generation ones. But overall, I think that’s kind of where we stand in our conversations with the OEMs. They are still holding, I guess, to some extent – not at sort of 2014 rates, but not to the level that’s reflected in this industry in the sector share drop.

Brandon Dobell

Okay, that’s helpful. Thanks a lot.

Operator

Thank you. Ladies and gentlemen, we have no further questions in queue at this time, and we have reached the end of our timing for a conference. I would like to turn the conference back over to management for closing comments.

Jonathan Baliff

Thank you very much for your questions and look forward to speaking with you during the quarter and getting the important work we need to get done on safety, and then also, obviously, the operational and financial improvements. Thank you very much.

Operator

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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