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Bristow Group, Inc. (NYSE:BRS)

F3Q08 Earnings Call

February 6, 2008 10:00 am ET

Executives

Linda McNeill – Treasury Manager and Investor Relations

William E. Chiles – President and Chief Executive Officer

Perry L. Elders – Chief Financial Officer and Executive Vice President

Analysts

James C. West – Lehman Brothers

Ian Zaffino – Oppenheimer & Co.

Daniel Burke – Johnson Rice & Company

Judson Bailey – Jefferies & Company

[Charlie Park – FTP]

Operator

Welcome to the Bristow Group Fiscal Third Quarter 2008 Earnings Conference call. During today’s presentation all parties will be in a listen-only mode, and following the presentation the conference will be open for questions. (Operator Instructions) This conference is being recorded, today Wednesday, February 6, 2008. I’d like to turn the conference over to Linda McNeill, please go ahead ma’am.

Linda McNeill

Good Morning and welcome to Bristow Group’s December quarter earnings conference call, my name is Linda Mc Neill I’m the Treasury Manager and IR contact for the company. With me today on the call is Bill Chiles, President and CEO and Perry Elders, Executive Vice President and CFO. Bill will provide an overview of our business and Perry will discuss the consolidated results for the December quarter. Following Perry’s remarks I will review business unit results.

We hope that you’ve seen our news release and 10Q which were filed yesterday afternoon. Both documents along with our revised growth update, which is now included in the appendix of our investor relations presentation are on the investor relations section of our website www.BristowGroup.com. Please note that no earnings guidance will be provided during this call.

Let me remind everyone that during the call Bristow Group management may make comments that reflects our intentions, hopes, beliefs, expectations or predictions of the future. These forward-looking statements are subject to certain risks which could cause actual results to differ materially from those projected. Additional information concerning these risk factors are contained in the 10Q filing with the SEC for the Quarter ended December 31, 2007 and the Form 10K for the fiscal year ended March 31, 2007. Additionally, to the extent that we discuss non-GAAP measures during this call, please see our 10Q, 10K or investor relations presentation on our website for calculations of these measures.

As discussed in our earnings call for the last quarter on November 2nd, we sold our Grasso business which is now presented as discontinued operations. Please note that our comments on this call will refer to results from continuing operations which excludes Grasso. With that I would like to turn the call over to Bill. Bill.

William E. Chiles

Good morning everyone, welcome to the call and thank you for participating. Although we are very, very pleased with our progress in almost every area of our operation, including our financial performance our safety performances is presenting some big challenges to us. To put this in perspective our air accidents rate, we’ve actually had three accidents in the last nine months. Our air accident rate stands at 1.36 year-to-date. That’s 1.36 air accidents per 100,000 flight hours. As you know we’ve talked before about our target zero initiative and we’re gonna drive that number to zero. So our numbers now exceed our plans, and exceed our goals. To put that in perspective in a different way, the helicopter industry civil rotary wing business globally runs at a rate of about eight accidents per 100,000 flight hour. But in the business that we’re in our customers expect us to be at zero, our employees expect us to be a zero, and the rate for all of those of us that fly offshore is around 1.2 in general. So we’ve got some work to do, a lot of initiatives going on to drive that down including examining the way we fly helicopters and also looking hard at our pilot turnover.

On the ground our total recordable incident rate which measures the number of recordable accidents which we have per 200,000 man hours, stands at 0.9. That’s in excess of our plan, and again to put that in perspective a really good drilling contractor, global drilling contractor would have a rate of less than 0.2. Our loss work case rate is 0.60 and again to put that in perspective a really good drilling contractor would have a loss work case rating of 0.1. So we have a lot of challenges and the reason this is so import is safety is our number one core value. It is the most important thing with respect to our customers and employees, and is really just so fundamental to our business.

Our financial results for the December quarter revenue of $262 million up 24%, income from continuing operations of $26 million up 164%. These numbers I’m comparing to the prior year comparable quarter, diluted earnings per share of $0.86 and that actually doubled from last year. Return on capital, which is the way we really run our business within the company, return on capital stands at 17%, compared to 15% in fiscal year 07. These results are really on target for our long term growth plan and compare favorable to our internal plan, and as Linda said, is reflected in our growth update in the IR section of our website, which shows that we expect to double our revenue by fiscal year 2011 and to reach a blended return on capital employee for the entire company of 20%.

Customer demand continues to be very strong and follow the development of offshore production as we’ve said before operating expenditures really drive our growth. Our recent customer demand studies that we update every quarter now, validate the demand is actually outstripping supply of new helicopters and that will continue for the next few years and will allow us to continue to push our return on capital employed. Our two remaining Fiscal year 08 deliveries for non-training aircraft are under contract with customers at six of the 17 fiscal 09 deliveries are under contract with customers, and those are contracts that are actually signed. The remaining 09 deliveries and all seven of the fiscal year 10 deliveries are dedicated to known customer needs. We don’t anticipate any problems putting those helicopters to work, because they are at this point dedicated to certain customers, even though we don’t have signed contracts.

On January 30th, just last month, our consortium that we call UK Air Rescue submitted its first round bid for a 30 year multi-billion dollar contract for search and rescue in the UK in the British Isles. We’re very optimistic about our chances, this is a very significant project to us. The contract award is expected in calendar of 2009, and the work will actually commence in 2012. I want to especially thank our partners in this consortium [Circo Agusta Weslin] and [Cabum] and the whole bid team that based in Hook, England for the excellent work they’ve done. This is a major, major effort to get these bids and they’ve done a fantastic job.

Let me shift for a minute to our aircraft deliveries, we delivered 12 new aircrafts during this quarter, 29 new aircraft over the last nine months year-to-date in the fiscal year. Seven of those were delivered to the Gulf of Mexico which includes three light aircraft and four medium aircraft, eight in the UK six heavy and tow medium aircraft, two in Nigeria which includes one fix wing aircraft and one medium helicopter; two in Malaysia, both medium helicopters; one each in Muratania, Turkmenistan, Brazil, Mexico and Holland, these are all medium aircraft, and five new training aircraft for Bristow Academy.

In the March quarter, in the current quarter we’re expected to take delivery of four aircraft, including two training aircraft and our 11th and 12th S-92s which are scheduled to be deployed in the North Sea in the Shetland Islands in this spring. We also recently receive a customer contract for a new S-92 scheduled to be delivered in June 2008 which will go to work in the Gulf of Mexico this summer. This will introduce a new heavy for us in the Gulf of Mexico to replace the aging Bell 214STs. Our order booked stands at December 31st with 28 aircrafts on order, total value of the order booked of $345 million. In addition to that we have 34 options with a value of $473 million and then we expect there will be other aircraft purchases that will come up from time-to-time that are not reflected in these numbers.

We currently operate 554 aircraft globally, including 408 aircraft in the consolidated companies and 146 that are operated by our unconsolidated affiliates. We’ve added 70 aircraft within the past three fiscal years which include fiscal 06, 07, and 08. We’ve also sold 11 aircraft during the nine months ending December 31, 2007. The average age of our fleet now stands at around 14 years, that’s down significantly from a few years ago where it stood in the high teens. By way of our global fleet management as we anticipate aircraft coming off contract we evaluate the cost and timing of the next major maintenance, potential new contracts and current or other countries, potential price if sold in the aftermarket. For example, now we are evaluating our single engine aircraft in the Gulf of Mexico and we really look at what the alternatives are for either selling aircraft or continuing generating a return on capital that is acceptable to us. Over the next several years you’ll see the number of helicopters in our fleet will remain fairly constant as we’ve said before but the mix will continue to skew toward the medium and large helicopters.

Quickly I want to talk about our reorganization, on January 22nd we announced the retirement of Mike [Silda], and Bill Hopkins two very special members of our senior management team, we’re gonna miss them and we are working hard to fill their shoes and Mark Duncan who is currently Senior Vice President of Global Business Development will take over as head of the western hemisphere operations which will be headquartered here in Houston. We’re gonna divide the western hemisphere into four business units, including western hemisphere central ops, Perry is gonna go into more detail and that and how that compares to our eastern hemisphere operations. So the four business units in the west will be central operations, arctic business unit, Gulf of Mexico, and Latin America, formerly we called it South and Central America. This will allow more concentrated focus on the Gulf of Mexico. The Gulf of Mexico is gonna continue to run out of New Iberia and will continue to provide Gulf of Mexico operations and support for other business units within the western hemisphere and the eastern hemisphere for that matter. Patrick Corr, will take over for Bill Hopkins, who is currently Senior Vice President of Global Training will also take over the position over global safety and training standards and will continue to drive our efforts towards target zero in quality improvements, and also integration of our practices around the world so we standardize the way we do things around the world. We currently have a search going on to replace Mark Duncan as senior vice president of business Development.

So things are on track, we’re happy with our development except in the area of safety. We expect markets to continue very strong offshore operating expenditures continue to track as we expected and so we’re able to execute our growth plan and I think this bodes well for our shareholders. With that I’ll turn it over to Perry.

Perry L. Elders

In terms of the consolidated results consolidated operating income almost doubled. Income from continuing operations more than doubled to $26.2 million while diluted earnings per share was 86% which as almost triple the prior year quarter. Although the December 07 quarter included $4.1 million of gains from aircraft sales, during the June and September quarters immediately preceding there were no significant gains or loss, thus the December 07 quarter brought the year-to-date gains to the expected levels. The operating margin for the quarter on a consolidated basis was improved to $14.1 million versus $9.6 million in the prior year. The December quarter declined from the September quarter from a sequential basis due to several factors, $5.2 million of seasonal items and $12.5 million of out of period items. Of those $12.5million , $9.7 million we discussed last quarter that were unusual credits, if you will, in the September quarter and $2.8 million are discussed in this quarter as unusual costs in the quarter, so a total of $12.5 million swing during between September and December quarters for out of period items. In addition, we had the seasonality that was anticipated.

Linda will go through the business unit results in a moment, but on a consolidated basis the operating income was very much in line with our expectations. The business units were substantially in line with a couple of exceptions, but as I indicated Linda is gonna cover. So the big picture in understanding the operating results for the company is that when you take the sequential results from September to December in light of the factors that we pointed out, and I think that most investors that understand us, we’re well aware of last quarter, if you factor those out last quarter, we’re very much in line with what was expected for December. Looking forward to the March quarter, we continue to expect our growth to gradually take effect over the next few years with progressive growth reflecting the integration of the new aircraft Bill discussed.

In the March quarter is usually a seasonally slow period depending on weather. January was particularly in the Gulf Coast a difficult weather month and so we’ll have to see how weather proceeds in February and March, but depending on weather March does have some seasonal effect. In addition, in connection with the office retirements Bill discussed we intend to pay compensation costs in the March quarter to include an additional $2 million charge. Further, we expect a 33% effective tax rate for the full year ending March 08 and with respect to March 09 fiscal year, we’re expecting 32 to 33% effective tax rate. In terms of the cash flows from operations we generated EBTIDA of $57.7 million which was in 82% increase for the quarter, and brought the trailing four quarters to $227 million which is very much in line with our expectations. Cash flows from operations was $57.8 million for the nine months ended December 07.

In terms of investments, as Bill mentioned, we received 29 aircraft so far this year. We had capital expenditures of $288 million compared to $216 million for the nine months last year, of that cap ex this year, 89% was for new aircrafts. We do expect an additional $64 million in cap ex in the March quarter and that’s excluding additional aircraft option exercises which may occur. The December quarter also included a $42 million in proceeds from the sale of Grasso as well as aircraft sales. On the financing side, at December 31 we had leverage of 44% of capital or 3.3 times debt to trailing EBTIDA, both of those on an adjusted debt basis which includes our balance sheet debt, GE aircraft leases and our UK unfunded pension obligations. So we remain conservative capitalized, very consistent with our capital structure plans that we previously discussed.

In terms of liquidity with our existing cash, revolver, borrowing capacity and expected operating cash flow, we have a capital to exercise all of the aircraft purchase options that Bill mentioned but we continue to apply discipline in reserving our capital for aircraft orders until market demand is confirmed. We also have sufficient capital for small acquisitions, however, if we elect to extend our aircraft capital positions beyond the order book Bill mentioned or complete large acquisitions, additional capital may be obtained. Our ability to raise such additional funds may be constrained by the capital markets which has been unsettled since June 07, particularly the debt market. But as I mentioned, we’re financed for all of our commitments and options.

With that I’d like to add one other point with respect to the western hemisphere that Bill mentioned. We have been indicating for some time now that as we have central ops broken out in the eastern hemisphere that part of our business is embedded in North America operations in the west and so we’ve indicated for some time our intention to break that out separately and so, as Bill mentioned, we’ll be doing that, effective April 1st in connection with also breaking out the Gulf of Mexico and Arctic businesses. So we’re looking forward to that, we think that will provide investors with additional visibility to those important parts of our business, and additional focus from a management perspective. With that I’ll turn it over to Linda to review the business unit results.

Linda Mc Neill – Treasury Manager and Investor Relations

I am encouraged that our operating results from the December 31, 2007 quarter were largely in line with our expectations as indicated in last quarter’s earnings call, with a couple of exceptions. I’ll go through business unit by business unit to discuss these exceptions. North America – North American includes US Gulf of Mexico, Arctic and western hemisphere centralized operations, and as Bill said earlier, we expect to report these separate business units as of April 1. The 12% operating margin was higher than last year’s quarter but lower than the sequential quarter as a result of seasonality in the Gulf of Mexico as well as Alaska. As expected, our maintenance costs increased during the seasonally slow December quarter. And as Bill also mentioned, we recently received a customer contract to deploy S-92 heavy aircraft in the Gulf of Mexico beginning this summer. We continue to expect operating margins to be in the mid-teens, that’s depending on weather.

Now for Central America – The 25.1% operating margin was lower than the December 2006 and also September 2007 quarters but very much in line with our expectations which continues to be in the mid to low 20 range.

Europe – Operating margin of 21.8 was better than the December 2006 quarter due to the introduction of new aircraft which is a continuing improvement, but lower than the September 2007 quarter which included a higher level out of period retroactive price cancelation, we continue to expect margins in the high teens or low 20%.

West Africa which is Nigeria – out of period items in the December 2007 quarter included compensation costs, of $2.5 million which were partially offset by retroactive customer rate increases of $1.5 million. The operating margins were also down from the September 2007 quarter due to these same out of period as well as out of period items in the September 2007 quarter consisting of a $5.4 million sales contingency cost reduction which was partially offset by retroactive customer rate increases of $2.1 million. Without the out of period items, the December 2007 quarter margins would have been 17.9. Also in December a major customer of ours in Nigeria notified us of the termination of a fixed wing aircraft contract which will now expire on March 17, 2008. This contract provided operating income in Nigeria of approximately $2.5 million last year. However, we continue to expect margins to be in the mid to high teens in Nigeria.

South East Asia – The 21.6 operating margin was basically in line with our expectations. Union negotiations are still pending in Australia which could have an impact on operations, although we don’t expect them to have a negative impact.

Eastern hemisphere centralized operations – The $6.4 million operating loss included a $l.8 million impairment charge with inventory related to our F-61 aircraft, which was operated our prior UK Star aircraft which we expect to sell more of. We actually sold one of them in January. These results also reflected higher major maintenance cost in the September 2007 quarter. Over the long term we expect maintenance to breakeven with the business unit results being comprised of G&A costs partially offset by small technical service profits. Although individual quarters like this quarter may vary depending on the timing of major maintenance.

Other international – Keeping in mind the relative small size of this business unit, the 6% operating margin was below our expectation and was affected by several small items that had a large margin affect due to the small size of this unit. Our results in Russia were essentially breakeven due to high employee costs. The contract to a significant customer in Russia expires in May 2008, and if not renewed could result in a significant reduction in this business units operation, as Russia represent 50% of revenue for the other international business unit.

Bristow Academy – The $137,000 loss was reduced from prior quarters and was effectively breakeven. We continue to expect Bristow Academy to be profitable in the long term. Bristow Academy has already provided us with 36 pilots to our helicopter services operations this year, which is the real strategic value we expect to achieve from this division. Partnership with the International Oil and Gas Producers, OGP we’ve been developing in oil and gas industry specific curriculum for pilots and we expect to announce progress soon.

Corporate G&A costs declined from December 2006 quarter due to SEC investigation cost reductions, but increased from September 2007 for a principally - because the December 2007 quarter benefited from the $1 million reversal from the resolution of the SEC investigation. We are now ready to take questions; we ask that you limit them to two questions or one question and one follow-up per person.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of James West of Lehman Brothers. Please go ahead.

James C. West – Lehman Brothers

Bill, I had a couple of question on the M&A outlook, you guys at least, if I look at M&A I think of it as kind of three legs. I know that you guys are very consistent and methodical really with respect to ordering new aircraft, hitting options with the majority of your aircraft coming to the market with contract or at least for orders with contracts, and this has been a great growth driver for you guys and your competitors has been adding equipments as well, but the industry itself is still short capacity which allows you to raise price in returns. I guess first off, is there opportunity to purchase equipment from the secondary market, the non oil service market and utilize these assets in the oil and gas business. And then secondarily, could you give us an update on the potential to acquire some of your unconsolidated affiliates and then is there the potential to purchase oil company owned assets and pull those into your fleet.

William E. Chiles

What was the third leg of the question?

James C. West – Lehman Brothers

Some of your customers that operate their own helicopters themselves, do you have the ability to purchase those assets from them and run their fleet for them to outsource their fleet?

William E. Chiles

The first question you asked is do we have the ability to purchase aircraft from other secondary market. The answer is that every industry that uses helicopters now is flat out, whether that’s surveillance for police work, security, logging, firefighting, air medical, and others. There are aircraft out there but they’re older aircraft generally like 206s and maybe some 407s and 212s, some older 412s, and S-76A models. So we’re not gonna purchase the older aircrafts unless we have some specific need and we just have to have one. We have from time to time purchased aircraft from the used market, but they’re generally smaller aircraft and aren’t gonna have any significant impact on our business.

We’re continuing to evaluate the integration of unconsolidated affiliates, the potential for doing so and whether it make sense, we want to be very careful about that. Those discussions kind of continue to go on and on, we will do that when the timings right. I think you’ll see over time James as we work off our order book and the options in this demand for new aircraft it’s just no way it’s gonna continue to go on and on and on. You’ll see a shift from organic growth introduction of new aircraft more to the M&A and that would be focused on unconsolidated affiliates and M&A in areas where we need a foothold where we don’t currently have a foothold. Customer owned aircraft, there are few customers that still operate their aircraft we don’t see any additional threat from our customers expanding their fleet, we do see potential opportunity for buying aircraft from our customers, one in particular. But they’re very, very reluctant to let it go, they’ve got an infrastructure there and their senior management seems to just wanna maintain the status quo.

Perry L. Elders

And If I could even compliment that Bill, to say that what we’ve seen James is where our customers do have aircraft, like in the case of Nigeria where we have operated those aircraft for them, when those aircraft gets to the end of their life from a technological standpoint, the customer is asking us to buy new aircraft to replace the aircraft that they no longer want to own. So there’s a little bit of that going on, but if anything, it’s continuing to outsourcing.

James C. West – Lehman Brothers

Okay that’s very helpful, if I could offer one follow up here, on the pilot side I think the strategy with Bristow Academy is really the right move here, are there additional opportunities to acquire some of these smaller training schools?

William E. Chiles

Well we did acquire Vortex recently and that added to our Bristow Academy offering. We don’t anticipate any further acquisitions in the near term, although at some point in the future it could happen where we see a benefit. To answer that more directly, I would expect that kind of acquisition would be in some foreign market where we see we really need to establish a school to get outside the US market. That being said about 70% of our students at Bristow Academy are foreign students that are trained for a different license a JAA or a CAA license as opposed to FAA.

Perry L. Elders

In addition to M&A which is probably less likely James, we are investing capital in the infrastructure in Bristow Academy to expand its capabilities. Bristow Academy is basically flat out operating at full capacity and so we believe that we can expand that capacity through some additional facilities and we’ve got four campuses now and so we will be placing more capital into Bristow Academy but more through expanding the infrastructure more likely than that than through M&A.

James C. West – Lehman Brothers

Okay how many pilots are currently training and what kind of capacity increase do you expect?

Perry L. Elders

At any one point in time James there’s about 200 pilots in the program in Bristow Academy and there’s different rotations, they’re not all on the same curriculum so it’s kind of a nine month program start to finish. Although some instances were doing training for foreign military for example, that just may be a four week course. So you’ve got those in there. So you’ve got some people that are in their first month of their nine months, others that are in their sixth month, and others that are in their nine month. So it’s not that you have a full class of 200 and then the next class starts, but on average it’s around 200. The additional capacity that could be coming through has not yet been quantified or announced so we do expect some expansion but we’ve not indicated what that is yet.

Operator

Thank you. Our next question comes from the line of Ian Zaffino with Oppenheimer. Please go ahead.

Ian Zaffino – Oppenheimer & Co.

Just as you look at the unconsolidated affiliates how many can you potentially roll off? You know how many are you precluded from doing because of local government regulations, etc? And of that number how many did you look at doing?

William E. Chiles

Well, in Mexico we’re restructuring there which you’ll learn more about later. We don’t anticipate Mexico being able to buy a majority ownership of our Mexican joint venture. And then let’s talk about another one in that category controlling our services in Egypt we don’t anticipate being able to increase our ownership percentage there. In Norway the laws have changed which allow us to increase our ownership to 100% of Norway, allows foreigners non-Norwegian citizens to own 100%. And Coniston we effectively consolidate.

Perry L. Elders

It’s unlikely we’ll change our ownership percentage there. And the others we have a training joint venture in the UK with [Cabum] that we’re unlikely to change our interest.

William E. Chiles

We’re 50-50 there. And Brazil you know we’ve sold our interest in Aurelio in Brazil and we are examining our position with Petrobras and with the Brazilian market to see if we need to do something there. So that’s about it.

Ian Zaffino – Oppenheimer & Co.

Okay, and the rationale behind rolling these up would be what because under your management you could get better returns, or the returns are so good already that you want to own more? Or, what’s I’m sure it goes case by case but what’s the general thrust here?

William E. Chiles

Well first, we would want to buy those entities, based on a price that gives us the return to meet our hurdles. Second, the market has to represent a significant growth opportunity for us for example, in the Arctic or in South East Asia possibly or West Africa. The Arctic is an area, you’ve heard us say before, an area that we’re very very focused on so an acquisition there would make sense to us but it has to meet several criteria. We’re not just going to go out and buy something because it’s there. We want to make sure it fits well within our strategy and we can initially get the returns were looking for and actually expands those returns as time goes on.

Perry L. Elders

And Ian just to amplify that generally what’s happening is we’re getting pulled into these markets instead of us targeting and pushing ourselves in and trying to find a way to buy a company there. Generally what’s happening is our customers are operating there and they lack the access to a global operator with the kind of standards we have around quality and safety and the access to the newer equipment coming out in manufactures. And so our customers are asking us to find ways and pulling us if you will, into additional markets and into expanded roles in current markets.

Ian Zaffino – Oppenheimer & Co.

Okay and then the last question will be on the search and rescue bid. Would you be able to provide - you know say you were to win it would you have to add additional aircraft or can you satisfy that contract with your aircraft?

William E. Chiles

We’ve previously indicated Ian that his would be incremental and depending on the solution that the customer, which is the UK government chooses it could be 20 to 30 additional aircraft. But this would be in an unconsolidated affiliated, UK Air Rescue. It would be done through kind of project financing if you will without recourse to Bristow.

Operator

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

Daniel Burke – Johnson Rice & Company

Perry, I wanted to follow up on a comment you made earlier I think for the customer that you operated the fix wing aircraft with the contract that was cancelled, you also operate some helicopters for them. What’s the timing on that piece of contract? And what’s the outlook there?

Perry L. Elders

Your right we did for that customer and just to be clear, what happened with the fixed wing contract that the customer terminated, is I mean they had a contractual right to do that, that was not particularly surprising to us and they had been using these aircraft to fly from Lagos to other parts of Nigeria. They’ve expanded there business in Nigeria and now commercials flight s are more viable an economic solutions for them than the fix winged aircraft they owned. So the termination of that contract in no way is an indication of there dissatisfaction with our service or anything like that. So our other business with this customer is very secure and expanding. The other business that we’re doing for them for rotowing services was part of the contract renewals that we’ve announced over the last two quarters, at increased rates and extended contract terms. So that business is very secure.

William E. Chiles

Let me just comment. Those two aircraft were not owned by Bristow. We actually we’re operating that aircraft on behalf of that customer and the aircraft were actually causing issues that were not very serviceable. The manufacturer is basically out of business and so it was a problem. And so as Perry said, it had nothing to do with our operation or will not in any way affect our helicopter business there at all. So hope that answers your questions Daniel.

Daniel Burke – Johnson Rice & Company

That helpful and then my second would be you may have touched on this earlier, but you’re adding heavy and medium sized aircraft pretty specifically, looking at the Gulf of Mexico is there a fleet replacement plan for the smaller Bell. I know it’s not a lot of capital but there’s a fair number of them.

William E. Chiles

The answer is we’re looking at a fleet replacement plan and among other things we are evaluating our business in the Gulf of Mexico by helicopter type and size and we need to make sure that the businesses are the type of flying that we’re doing in the Gulf of Mexico fit our criteria and that would be safety, return on capital and pilot turnover. If those businesses, if we can’t sustain those businesses because they no longer meet our criteria and that may cause us to go down one path but there is a fleet replacement plan that we’re starting to work on now with the manufactures to see if we can develop a light aircraft single or twin engine aircraft that’s reliable safe and will be able to fly economically in this shallow water market.

Operator

Our next question comes from the line of Judd Bailey with Jefferies and Company. Please go ahead.

Judson Bailey – Jefferies & Company

Bill, a follow up on the Gulf of Mexico it’s just a bigger picture question, can you comment on maybe discussions you’re having with your customers in the Gulf. We have so many deep water rigs coming in over the next three or four years. Can you comment maybe on the visibility you’re getting or the sense of demand you’re seeing for the bigger aircraft as we go out to 2010 and 2011.

William E. Chiles

That’s where the future market is in the Gulf of Mexico Judd. The shelf as everybody knows is flat to down. Although if anyone every finds deep gas on the shelf in sufficient quantities there may be a play there long term but the deep water is continuing to expand and so that will be our focus for example these two S-92’s we’re brining to the Gulf, one this summer and one later, are targeting the deeper water. Our deep water operations now we’re flying these old 2-14 STs and they’re running out of gas effectively because there just no longer supported by Bell. And then where we use S76 new C++s they’re fine except customers are wanting aircraft that have additional range, additional fuel capacity and obviously additional customer capacity so we expect the deep water to continue to expand. You know very well about the rigs coming in and we’re going to get our fair share of that.

Judson Bailey – Jefferies & Company

Okay. My follow-up question is to clarify something on your other international operations. I guess first for the Russian component which was breakeven do we expect that to be more profitable in this quarter or is that going to gradually move back up? And then on top of that the renewal you have coming up, if you were not to win that contract is it save to assume you would reallocate those aircraft to another segment?

William E. Chiles

We’re taking a long hard look at our Russian operation. We’re there because we have a major customer that wanted us there to supplement for the recent, as Perry mentioned earlier, the local operators. If the western customers in the international oil companies are pushed out then the value we bring becomes less and less important and that obviously happening now. So we don’t want to mislead you, it’s possible that we will pull back and reallocate assets elsewhere. Some of the aircraft we operate there are owned by our partner, some are owned by us and so those aircraft would likely not work outside of Russia so we would exit the ownership of those aircraft likely and redeploy the capital elsewhere.

Perry L. Elders

So just to even be more explicit, Judd in answer to your question, the operating cost in Russia are expected to be at similar levels going forward so Russia will continue to breakeven. But in the past you may recall in prior quarters we have indicated price escalations that we have contractual rights to and when we get them they come in lumpy. And so you know we’re in negotiation with our customer both related to price escalations as well as contract extension beyond May 08. So you know it’s possible that the contract will get extended and/or will get price escalation. So I guess the downside case is it’s consistent with this quarter but there’s potential if we get price escalations or an extension that it will improve beyond that.

Operator

(Operator Instructions) Our next questions from the line of Charlie Park with FTP. Please go ahead.

[Charlie Park – FTP]

Can you just give me a feel for where the increase in the operating margin is coming from, whether it’s a specific geography or whether it’s purely in the increasing pricing on the old fleet as opposed to the new fleet coming in? Can you just give me a bit of guidance on that?

Perry L. Elders

The principal driver for the operating margin improvement is the addition of new aircraft at higher return, but we have been pushing price on the existing fleet and have been successful over the last couple of years in improving returns on the existing fleet. We’re kind of at a fairly mature point in that process of re-pricing the existing aircraft and so going forward the margin improvement that we expect to move from our 17% return on capital that Bill mentioned we achieved so far year-to-date, to that 20% target we believe that movement will come from the introduction of further new aircraft and potentially the retirement of some of the older equipment. So, most of the drive in margin improvement is from the new aircraft.

I’d like to clarify one point at this pause in the conversation related to a comment Linda made about the out of period $1.8 million inventory charge. I just want to be clear that what we had was inventory related to a UK search and rescue contract, the old contract that we’re working off and transferring bases on. What we did was we will be selling those S-61 aircraft over the next few quarters and as Linda indicated in fact, have sold one in January. For accounting purposes we had to evaluate the inventory and took an impairment charge in the December quarter of 1.8 but in fact we did experience a gain in January when we sold the first of those S-61 aircraft and anticipate further gain over the next few quarters as we sell another half dozen or so of those aircraft. So the US GAAP rules that required us to take a loss this quarter didn’t allow us to match it up if you will with the gains that we’re expecting when we sale the aircraft. That’s disclosed in the 10Q but I wanted to make sure that all the investors understood that kind of accounting nuance to the reported numbers.

Operator

(Operator instructions)

William E. Chiles

Okay, if there are no further questions we want to thank all of you for joining us and we appreciate your support and look forward to talking to you again during the quarter and at the end of next quarter.

Perry L. Elders

Thank ya’ll.

Operator

Ladies and gentlemen this does conclude the Bristow Group fiscal 2008 third quarter earning conference all. If you’d like to listen to a replay of today’s conference please dial 800-405-2236 or 303-590-3000, using the access code of 11106959 followed by the pound key. AT&T would like to thank you for your participation. You may now disconnect.

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Source: Bristow Group, Inc. F3Q08 (Qtr End 12/31/07) Earnings Call Transcript
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