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Bristow Group Inc. (NYSE:BRS)

F4Q08 (Qtr End 03/31/08) Earnings Call

May 22, 2008 10:00 am ET

Executives

Linda McNeill - IR

William E. Chiles - President and CEO

Perry L. Elders - CFO and EVP

Analyst

Ian Zaffino - Oppenheimer and Company

Mike Johnson - Federated Asset Management

Steven Carlo - Credit Suisse

Gerry Heffernan - Lord Abbett

Bob Fetch - Lord Abbott

Jason Stankowski - Castle Peak

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Bristow Group fourth quarter 2008 Earnings Call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions) This conference is being recorded, today Thursday, May 22, 2008. I’d now like to turn the conference over to Linda McNeill Investor Relation Manger, please go ahead.

Linda McNeill

Thank you, Britney and good morning. Welcome to Bristow Group’s March quarter earnings conference call, my name is Linda Mc Neill, Investor Relations Manger. With me on the call today are Bill Chiles, President and Chief Executive Officer and Perry Elders, Executive Vice President and Chief Financial Officer. Bill will provide an overview of our business and our results for the fiscal year ended March 31. Perry will discuss the consolidated results for the quarter and following Perry’s remarks I will review the business unit results for the March quarter.

We hope that you’ve seen our news release and 10-K, which were filed yesterday afternoon. Both documents along with our revised growth update, which is now included in our investor relations presentation are on the investor relations section of our website at 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 10-K filed with the SEC for the fiscal year ended March 31. Additionally, to the extent that we discuss non-GAAP measures during this call, please see our investor relations presentation on our website for the calculations of these measures.

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

William E. Chiles

Thank you Linda. I’d like to welcome all of you to the call. Thank you for your time this morning. Start of talking about our safety performance for the year. Our flight safety, our air accident rate which is the rate of accidents per 100,000 flight hours, ended up at 1.03 for the full fiscal year compared to the Oil and Gas Producers numbers of 2.62. So, we are doing very well related to the Oil and Gas Producers for all type of aircraft and that data of Oil and Gas Producers is over the time period 2002 to 2006.

In terms of our ground safety, our total recordable incident rate ended up at 0.79 for 200,000 man hours. That comparison will give you an index the IADC or International Association of Drilling Contractors, US water rate for 2007, calendar 2007 was 1.35 compared to our rate of $0.79. Our loss work case rate was 0.51 for 200,000 man hours, compared to the IADC numbers for ’07 for US water 0.28. So we are making good progress on the safety front. We are happy with the steady improvement. We are doing a lot better job in measuring our numbers now. We have a good handle on our numbers and we will continue to improve through our target zero initiatives and we are pushing to get our accident rate down to zero, particularly in the aviation area, which we believe we can do.

Turning to the financial results for the year, revenue topped out at just little over $1 billion, 20% increase year-over-year, which is the first time in the company’s history to see revenue over a billion. Income from continuing operations of $107.8 million were up 51% and our return on capital employed of about 16% for the full year. Diluted earnings per share of $3.53 from continuing operations, that's up 34% year-over-year. So for the second-consecutive year, revenues and profits set new record for the company. So we're very proud of that. And we're on track to meet our financial goals that we set two years ago when we look out into the future. Perry will go into a lot more detail on the market results shortly.

In terms of the overall customer demand in the market from the macro point of view, our customers continue to expand offshore production operations, which is really driving our growth. We see major projects coming on stream around the world, and as you know, you've heard us say in the past the primary driver of our business is operating expenditures or production expenditures rather than capital expenditures.

Demand for new aircraft continues to outpace the supply that we can get from our main suppliers. That number we keep talking about of about 400 aircraft seems to continue to go on and on. As we deliver new aircraft into the market, the 400 number that we talk about, which represents the excess demand over supply continues to stay fairly constant.

The demand is in excess of our order book, and we'll talk about that order book in a little bit, and that demand is really a result of the aging fleet and the fact that we can't just take old aircraft into the shipyard like you can not rig in a boat and refurbish them. These aircraft do get old and it becomes obsolete, much less efficient, and much less environmentally friendly. These are the things that drive customers to newer aircraft, and in addition the strong incremental demand as to the need to replace the older fleet.

The strong demand is not really dependent on $120,000 oil or the fact that 160 rigs under construction, all though those things are obviously important and helping support our market and will continue to exacerbate the need for additional helicopters, but we are primarily driven by again production expenditures.

To turn for a second to fleet expansion, we delivered 36 new aircraft during the year, breakdown of those aircraft to seven in the US Gulf of Mexico. I'd like to mention that we delivered in addition to the seven, included in this seven is an S-92 delivery in April of this year, which is our first new heavy helicopter. It will begin operations in the Gulf of Mexico in the next quarter.

Ten aircraft in the UK, two in Nigeria, two in Malaysia, one each in Mauritania Turkmenistan, Brazil, Mexico, the Netherlands, and Alaska and nine new aircraft for Bristow Academy. Breakdown of that number in terms of the type aircrafts; eight are large or heavy helicopters, 14 medium helicopters, four small helicopters, and the nine training I mentioned for Bristow Academy. In addition, one fixed wing aircraft that we bought for to service one of our large customers in West Africa

The current order book as of the end of the year at March 31, we have 35 orders, firm orders representing $349 million, 50 options representing $802 million and 8 of the 17 fiscal '09 deliveries for non-training aircraft that are under contract with customers already. The remaining '09 and all '10, fiscal year '10 deliveries are dedicated to known customers and just waiting documentation.

We periodically purchase aircraft for which we really don't have options, so sometimes you will see that number change a little bit because we will buy aircraft that are not represented by the option or the current order book. So, our future aircraft purchases may exceed the 85 that I’ve talked about the 35 orders and the 50 options. We operate 548 aircraft including 406 that are in our consolidated numbers and 142 that are operated by unconsolidated affiliates. We’ve added 88 new aircrafts within the past three years, the three fiscal years 2006, 2007 and 2008. We’ve added 36 aircraft last year. We also sold 39, which is consistent with the story you've heard us talk about the fact that the fleet numbers will stay about the same as we retire smaller, older aircraft and bring in the newer mediums and new large helicopters. You could see we're holding over the type of aircraft we delivered last year. It skewed heavily toward the medium and large helicopters.

As result of the deliveries, the average age of the fleet is down around 13 years from the high teens three years ago. So, we are slowly taking weigh at the average age. Our strategy going forward is going to continue as it has in the past. We are going continue to grow through the additional new helicopters and some M&A activity in the future. Our five years strategy didn’t change in our latest review with the Board of Directors.

We see some any opportunities in oil and gas and search and rescue, related search and rescue that we are going to continue in our core business and might get off doing something outside of that. So, we see a very robust growth. One addition to our senior team, I’d like to mention Meera Sikka will be joining our senior management team next week as Vice President of Global Business Development. She comes from Shell, the Global Aviation. So, she brings a wealth of knowledge about the global aviation business not only with our international oil company customers but our national oil company customers. She is taking the place of Mark Duncan, who is transitioning into the role as head of the Western Hemisphere Division. So, looking forward we expect this growth to continue strong market fundamental supporting the growth. We are really more dependent on operating expenditures, which give us much better stability. So, we are very excited about the future and with that I will turn it over to Perry.

Perry L. Elders

Thanks Bill. I am going to discuss the quarter results, the March quarter consolidated results, where income from continuing operations and diluted earnings per share were basically flat with the prior year quarter, because growth in revenues and operating margins were offset by increases in interest cost as expected. There was some noise in the numbers this quarter. There were basically three items that reduced earnings by a total of $0.24 and three items that increased earnings by a total of $0.26, basically offsetting one another. The three items reducing earnings were cost of $4.5 million related to a claim by a former agent of ours who we terminated in connection with the internal review and that had a $0.10 negative effect.

The second item was a $4.5 million reduction in equity earnings from Norsk, our joint venture in Norway, due to a reduction in operating income of $1.2 million and several changes and estimates at year end of $3.3 million related to compensation, maintenance, customer billings, and taxes.

The third items hitting earnings was the previously announced retirement of two corporate officers for a total charge of $1.9 million $0.4 this year. So, those three items reduced earnings kind of for the quarter by $0.24. The three items increasing earnings related to tax items of $0.26 of reserve reversals related to employee taxes in Nigeria, and in Europe of $2.9 million. Also a reduction in UK corporate tax rate from 30% to 28% of the benefit of $2.5 million, and an internal reorganization benefited $3.5 million.

UK tax rate reduction in the internal reorganization will have a continuing benefit that I'll mention in a moment when we talk about the gulf war and expected effective tax rates. So those three positive items effectively offset the negative items. Although, for individual business units that Linda is going to discuss, they did affect their respective operating margins, but on an consolidated basis they offset.

The real story for the consolidated earnings from continuing operations for the March quarter was just that we had growth in our business and improvements in our margins which were offset by interest costs for the negative carry of the $350 million in senior notes we issued in June and November of 2007. So, excluding these affects our results are very much in line with the strategic plans that Bill mentioned and our expectations for long-term growth and margin improvement.

In terms of the cash flow in the quarter, we generated the $56 million of EBITDA and $230 million for the full year. Cash flow from operations was almost $30 million for the quarter, and almost $90 million for the year.

In terms of investments Bill mentioned, we're making investments in aircraft. The total expenditures were up to $338 million from $305 million, which again was in line with that capital expenditure program Bill mentioned. 97% of that $338 million related to aircraft and related to equipment.

In terms of the financings of the Company, at March we had leverage of 45% of capital or a 3.4 times debt to EBIDTA, both on an adjusted basis which includes our balance sheet debt, GE aircraft leases and UK unfunded pension obligation. So, we remain conservatively capitalized and position to take advantage of our significant growth opportunities which Bill discussed.

In terms of liquidity, our existing cash revolver borrowing capacity and expected operating cash flow provide us with significant amount of liquidity. We continue to apply discipline in reserving our capital for aircraft orders until market demand is confirmed, although internally we've designated all of our available capital for the full amount of the aircraft commitments, the $349 million Bill mentioned, plus about a third of the options or around $260 million. We currently see customer opportunities, our customers and our markets, so it's not the total market, but we currently see customer opportunities which will require over $1.6 billion of new aircraft. So, we are financed for around $600 million out of the $1.6 billion of opportunities.

Our ability to exercise the remaining two-thirds of the options make a major acquisition or purchase substantially more aircraft would likely require us to raise additional capital.

However, if we were to raise additional capital, we would not expect to substantially increase or decrease our leverage.

In terms of general and administrative expense, we have completed our staff expansion and now have management team to operate the business at our current size plus the expansion we expect over the next couple of years. The March quarter G&A expense included a couple of the charges that I referred earlier, the $4.5 million ageing costs as well as the $1.9 million of officer retirement cost. So without those costs, G&A expense for the March quarter would have been around $25 million, which is the expected G&A expense run rate on a go forward basis. In terms of interest expense, we expect to earn interest income at a rate of 2% to 3% on the un-deployed cash balances. We also expect to incur interest expense on both the 608 and 7.5 bonds and comparable rates on the roughly $25 million of other debt that we have outstanding.

However, that interest expenses is offset, because we expect to capitalize a portion of that interest expense based on our construction and progress balances which were $183 million as of March 31, 2008. Though in total the interest expense number is expected to be just an excess of $40 million gross with just over $10 million capitalize. So, a net interest expense of around $30 million next year.

In terms of the effective tax rate I mentioned earlier, for the fiscal year ending March ’09, we expect that to be around 32% which is lower than the past and that’s reflecting the permanent benefit of the tax changes that I mentioned earlier. We continue to reflect $1.2 million more shares in our diluted earnings per share count then will be the case, if our share price is at least $43 a share in September of ’09, when our preferred stock converts into common stock. So, the accounting rules requires to take a conservative assumption there, which we do but our expectation is that our shares outstanding used for EPS purposes will go down by 1.2 million shares on September 15 of 2009.

With that I’ll turn it over to Linda to discuss our past and expected business unit margin.

Linda McNeill

Thank you Perry. I will now briefly review the business unit results.

The North American business unit currently includes the US Gulf of Mexico, Arctic and Western hemisphere Central operations. Going forward, and as mentioned previously, we will separate this out as of April 1.

The 7.1% operating margin was lower than 12.4% in last years March quarter. Margin was lowered by the officer retirement cost previously mentioned by Perry. Excluding this the operating margin would have been around 9%.

Remainder of margin decreased primarily resulted from seasonally reduced flying in Alaska, unlike the March 2007 quarter which was unseasonably strong. We continue to expect operating margins to be in mid-teens depending on weather. Additionally, we are exploring alternatives for accelerating the disposition of approximately 50 of our smaller aircraft in the US Gulf of Mexico.

Now, moving to the South and Central America business unit, which you referred to as the Latin America business unit beginning April 1, the 17.1% operating margin was lower than March 2007 quarter. The margin was lower by the officer retirement cost previously discussed and with out this would have been 19.2%. We also experienced lower business volumes in the prior year quarter in Trinidad and Brazil. With the Brazil decreased resulting from the previously reported sale of aircraft. We expect these two markets to recover to prior profit levels. For example, we are adding aircraft in Brazil in fiscal year 2009. Therefore, we continue to expect the Latin America operating margins to be in the mid to low 20s.

Moving to Europe, operating margin was 22.5, better than the March and December 2007 quarters due to the introduction of new aircraft. However, margin included the impact the reversal of accruals for employee taxes, as Perry mentioned, as well as the recovery of cost from insurance related to an aircraft damage in the North Sea in 2006. Excluding these items, operating margins would have been 19.5% which is in line with our expectation around 20%.

In West Africa, Nigeria, operating margins of 14.6% was lower than the margins December 2007 quarters. The March 2008 quarter included the reversal of approval for employee taxes as discussed by Perry which was offset by $2.5 million of severance costs related to the workforce reductions in Nigeria.

We expect cost savings in future periods from this reduction of workforce to more than recover these severance costs. Without these items, the March 2008 quarter margin would have been 17.3%. This margin was in line with our expectations of margins in the high-teens in Nigeria.

Moving to Southeast Asia; the 23.1% operating margin was higher than prior periods, primarily driven by our operation of four new aircraft in Malaysia. This was partially offset by a decline in Australia margins from the March and December 2007 quarters, as a result of higher labor and maintenance costs. Completion of union negotiations in Australia increased our labor rate some of which were fresh or active. Withstanding this cost increase, we expect operating margins in the Southeast Asia business unit to be approximately 20%.

Our smaller helicopter services business unit is other international. Operating loss was driven by several items, cost incurred as a result of a claim by our former agent of $4.5 million as discussed by Perry, additional amortization of intangible asset unidentified for our prior acquisition in Russia totaling 1.5 million.

Excluding these two items operating margin for other international would have been approximately 7.9% which is in line with our December 2007 quarter. This business unit is expected to continue to be our smallest helicopter service business unit and the one in which we make essentially front tier type investments in growth markets.

The operating results are expected to continue to be relatively nominal and somewhat unpredictable. In the Eastern Hemisphere Centralized operations $0.5 million operating income is in line with our long-term expectations.

Finally, Bristow Academy, we incurred small loss in the Bristow Academy in this quarter. Bristow Academy has already provided us with 47 pilots for helicopter services operations this year which is the real strategic value expect to achieve from this division.

We are now ready to take questions. Please only ask one or two questions and then re- queue as a courtesy to others waiting to ask the question.

So, with that I will turn the call over Bill

William E. Chiles

Okay, we are ready for questions. So, operator you can go ahead and take the first question.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question and answer session

(Operator Instruction) And our first question is from Ian Zaffino with Oppenheimer and Company. Please go ahead

Ian Zaffino - Oppenheimer and Company

Great and thank you. I have done a little bit late try, I don’t know if you went over this or not, but the step up and depreciation quarter-over-quarter, what was attributable to that? Is that what we should be modeling going forward? I think, if you can just explain that a little bit that will be helpful?

Perry L. Elders

Yeah, Ian if you take a look at the income statement, depreciation for the quarter was $18 million and Linda just mentioned in our international, we had about $1.5 million of additional expense related to kind of catch up into accounting there. So, without that it was $16.5 million which is about the run rate we think going forward.

Ian Zaffino - Oppenheimer and Company

Okay and the $1.5 million was just solely depreciation, to catch up?

Perry L. Elders

Well it was amortization, which is depreciation amortization in the same line.

Ian Zaffino - Oppenheimer and Company

Okay. All right and thank you.

Perry L. Elders

Thank you.

Operator

Thank you. One moment for our next question. And our next question is from Mike Johnson with [Federated] Asset Management. Please go ahead.

Mike Johnson - Federated Asset Management

I just have question on the recent news with the activity expected in Brazil and what is your expectation are for each work there?

William E. Chiles

Okay, you may recall, Mike, that we exited our joint venture in Brazil about a year ago and we think Brazil -- we know Brazil is a very, very important market. Therefore we establishing ourselves in Brazil with a new company, actually the largest company that operates in Brazil. We are now leasing some aircraft in there and we will continue to expand the position and make sure that we take advantage of that important market and important customer, and Petrobras is actually moving outside Brazil around the world. So that is very important market and you will see our presents in Brazil expand.

Mike Johnson - Federated Asset Management

Thank you.

Operator

Thank you. (Operator Instructions) and do we have a follow up question from Ian Zaffino with Oppenheimer & Co. Please go ahead.

Ian Zaffino - Oppenheimer & Co.

A follow up on that depreciation question. We are still assuming a 60% jump pretty much year-over-year, even if you backed that out. But your assets haven't really gone up by 60%. How does that reconcile things?

Perry L. Elders

Yeah, thanks Ian. I think what you are probably seeing is the effect of assets having a lot of construction in progress. If you recall, I mentioned that we had a $183 million in construction progress on the books. That is actually recorded on the balance sheet, but again being depreciated when the asset, when the aircraft goes into operations. So, even though you may not see the same increase in kind of total assets, you are starting to see those additional aircraft go into operation. So, that is why the depreciation is increasing.

Ian Zaffino - Oppenheimer & Co.

Okay. Then just a last question would be as far as the contracts and I do not know if you discloses or not, if you can help us now to understand, what portion of the business is fixed under contract versus variable, based on flight hour. In other words, if production stopped in a certain region, how does that impact your -- how shall we view that as an impact in the company?

William E. Chiles

Ian, we do not disclose exactly how that breaks down, although the model that we prefer today is, as you heard as say in the past, is that we contract the aircraft on a fixed monthly charge that includes a return on capital and really covers all of the fixed cost and gives the return that we want, which is the concept that where customer has call on the capital. So, whether the aircraft flies 120 hours a month or zero hours a month, we still get the returns that we are looking for because the hourly charge would only cover variable cost. It is more prevalent in West Africa, North Sea and more stable foreign markets and the Gulf of Mexico is really more sensitive to the flight hours, where a larger percentage of our revenue comes in through the flight hour charge. I can't really give you a number. I would say that, overtime we are going to emphasize more of the former rather than the later, as we enter into new contracts wherever it might be, even including the Gulf of Mexico with the medium and large helicopters.

Ian Zaffino - Oppenheimer and Company

Thank you. That's really helpful color. Then, just one last thing here is, when you are talking about the return you want, you are talking about that 20% bogie right?

Perry L. Elders

We have talked in the past about the fact that our return expectations vary by country, and that's really a reflection of the risk related to the countries around the world within which we operate. For example, Nigeria would be at the top end of the scale in the high 20s, and Gulf of Mexico and North Sea and maybe other markets that are more stable like that, and with fiscally conservative governments the return maybe in the mid-teens.

Ian Zaffino - Oppenheimer and Company

Okay.

Perry L. Elders

Go ahead, sorry.

Ian Zaffino - Oppenheimer and Company

No, no, that's fine. That's very helpful, I appreciate it.

Operator

Thank you. Our next question is from Steven [Carlo] with Credit Suisse. Please go ahead.

Steven Carlo - Credit Suisse

Hey, guys. I think Perry you said, $1.6 billion in commitment and I think $600 million you had financed. Can you talk about the -- how you would finance the rest of that and expose the mix between equity and debt?

Perry L. Elders

Okay. Just to be clear Steven. I did not say it $1.6 in commitments, I said $1.6 million in opportunities. So that's the demand, the opportunities that we see out there for $600 million of capital that we've raised and are in the process of deploying. So, it's roughly -- the opportunities are roughly three times the dollars of capital that we have already raised.

This relates to the second part of your question, I mentioned that we are not looking to de-lever or lever -- increase leverage in the company. So, we are comfortable at this level of leverage in this range kind of the multiple of EBIDTA, three to three and half times EBIDTA. If we were to raise additional capital we would not be looking to change that significantly.

Steven Carlo - Credit Suisse

Sorry for the confusion. Then the second thing on the contracts, just kind of following up a bit, what was the pass-through and can you talk about the impacts that where a fuels or passed, can you about the impacts of higher costs and how that kind of runs through and if that runs through as opposed sales line. Can you talk about some of the incremental impact that will have as we look at margins?

William E. Chiles

Yeah, Steven, our long-term contacts, lets talk about outside the Gulf of Mexico, our long-term contracts particularly in the North Sea, West Africa, Southeast Asia, including escalation clauses that protect us as costs go up. As you said, we are protected on the fuel increase, fuel cost to increase. So, that is really not an exposure except for the non-revenue hours we fly, which are very small component of our total operation.

In markets where we are less dependent on those escalations, like the Gulf of Mexico, we typically have price increases annually that cover those cost increases. We mentioned in our earlier call that we had typically 8% or 9% price increase -- revenue increase in the Gulf of Mexico every year, price increases on price list. So that really how we cover our operating cost. We, as Linda said earlier we do not expect the margins to be impacted by increases in cost because we believe we can protect ourselves one way or the other.

Steven Carlo - Credit Suisse

Thank you.

Operator

Thank you. Our next question is from Gerry Heffernan with Lord Abbett. Please go ahead

Gerry Heffernan - Lord Abbett

Good morning everybody.

William E. Chiles

Hi Gerry, how are you?

Gerry Heffernan - Lord Abbett

Good, good. The 39 deliveries that you spoke up, you gave an indication of the numbers that are already under contract when they are delivered. Could you repeat that please?

William E. Chiles

Yes, Gerry we talked about, let me go back here, eight of the 17 that are non-training aircraft for the '09 deliveries are already under contract. The remaining fiscal '09 and '10 deliveries that are covered in that 8, 9 will say are -- we are in discussion with customers and customers have generally committed for those aircraft on a verbal basis.

Gerry Heffernan - Lord Abbett

Okay. In regards to Brazil you pulled out from the partner you had there earlier. You spoke to Petrobras being an important customer long-term. You are looking to pair up right now with what you have phrased as the largest player down there. Why do you need to pair up with somebody? I mean given the size of the [Bristol] and the world coverage, why must you be with somebody else down there?

William E. Chiles

What we look at Jerry in first of all in a country like Brazil which is fairly typical around the world, the law requires that 80% of the Aviation Company of Brazil is controlled by Brazilian citizens. So, that's the first issue. The second issue is in a well developed market like Brazil, we have to look at how much value or where can Bristow add value. There are very, very good operators in Brazil that have good safety records, good equipment, and perform well for the customers down there. So, we have to go in and work with the player down there. That's already in the market. That seize value that Bristow can bring and that’s really how these relationships develop. An example, where we wouldn’t do that are markets say, like the Middle East in the Gulf where we don’t see that we really add any value and we don’t bring any capital or any particular position in the order book. So, Brazil is a market where we can add some value, we can team-up with the player down there who does a good job with the customers and that’s really the way that it worked in that particular market.

Gerry Heffernan - Lord Abbett

Okay, so by law, there is requirement that 8% of the entity be owned by domestic, is that correct?

Perry L. Elders

That’s correct.

William E. Chiles

That’s correct.

Gerry Heffernan - Lord Abbett

Okay, and so, just because perhaps not all that quick here today, what exactly are you bringing to this group of Brazil? I mean, given that the business outlook seems to be so strong, why do they need to review?

William E. Chiles

We have a strong order book and we have a global presence, global footprint that helps them with the International oil companies that are coming into Brazil. As you know, for a while, International oil companies have been in and out of Brazil. They go in there and then they leave because they don’t feel that Petrobras has really given them a fair shake and that are growing back in rows because Petrobras is making, is leveling the playing field. So, now you see a large number of International oil companies in there and the players need a company to come in and partner with them that has a good relationship with those customers.

Gerry Heffernan - Lord Abbett

Okay. And lastly, if I may, one issue that that confuse me, in speaking of the extraneous items that occurred during the period, there was the item as a $4.5 million decrease in equity and earnings from Norsk, the unconsolidated affiliate at Norway. And then at one point I thought, Perry indicated that $4.5 million charge was an increase to SG&A, and that confused me, because I would have thought that would have been a decrease to equity income from unconsolidated affiliates. Could you guys just clear that up for me, please?

Perry L. Elders

You're correct, Gerry. If I said that, I missed spoke, the $4.5 million was a reduction in our equity and earnings line. What I intended to say was that there was $1.2 million of that related to the operations of that unconsolidated affiliate and $3.3 related to as changes in accounting estimates for comp and maintenance, customer billings and taxes.

Gerry Hebermann - Lord Abbott

Okay. But all of that $4.5 would be a reduction to equity income?

Perry L. Elders

That's correct.

Gerry Hebermann - Lord Abbott

Okay. I just wanted to make sure, I understood that. Thank you. I'll go back in queue.

Operator

Thank you. Our next question is from Bob Fetch with Lord Abbott. Please go ahead.

Bob Fetch - Lord Abbott

Hey, good morning. Gerry asked a couple of good questions as usual. In regards to the cost side, what kind of pressure are you seeing on the wage side -- wage cost pressure?

William E. Chiles

Well, as both Perry and Linda mentioned, we just completed our negotiations with our pilot union in Australia. So, we're pretty much set there for the next few years. And we are obviously, always getting pressure on the cost side because that's we're in a very robust market with high demand and there is high demand for our people as well, not only in oil and gas but also in other industries that use helicopters. And the OEM cost continues to go up with our manufacturers. So, we are getting cost pressure, so let me share for minute and tell you that I feel very good. We feel very good about being able to keep up with the cost in our revenue as we said earlier through our escalations clauses, through basing our return on capital that we get from our customers on the value of the equipment as the value goes up. We actually re-value that equipment every year internally based on the fair market value, so our business units are required to continue to give us return on capital compared to the hurdle rates based on the actual market value of the equipment. And when you look at the growth in our revenue, our compound annual growth rate of revenues has been about 17% or so since in the last three years and our EBITDA the growth has been about 22%. So we're expanding our margins, we expect that to continue and the guidance we give to the street in past and we'll continued it. As we bring new equipment in, we expect bring equipment in after hurdle rates are better and we expect see the return on capitals improve slowly over time on the existing fleet that we keep in service.

Bob Fetch - Lord Abbott

Got you, but to just have sense on to what degree inflationary forces are, what level approximately are we talking double-digit increases or the high single-digits for average wage cost increases?

William E. Chiles

It's just kind of an order of magnitude. When we see a double-digit increase in labor rates, we've seen some markets that results in a single-digit increase the lower low single digit increase in our overall operating cost.

Bob Fetch - Lord Abbott

Okay. And, the current number of pilots that you have and how many do you expecting to add in the next 12 months and then the following 12.

William E. Chiles

What we've said in the past and this still holds. We are looking to, because of our growth in the fleet and the retirements and the attrition, we expect to have somewhere between 700 and 900 pilots over the next five years. That's the primary driver why we wanted to get back into the training business. We can fill those seats with pilots. We cannot fill those seats with quality pilots that will give us, that will meet our target zero goals and we will meet our, the quality goals that we expect.

I mean, right now we've got a little over 1000 pilots globally. So, you could surmise what I’ve said that we'll have almost a complete turnover of our pilot work force. So, some of this is driven by the turnover rate in Gulf of Mexico, which is higher than we're willing to expect. If we can derive that turnover rate in the Gulf of Mexico down to an acceptable level that will drastically reduce the number I quoted a while ago.

Bob Fetch - Lord Abbott

Okay. And then lastly, if you can just touch on the Nigeria, you know the state of affairs there and whether you expect that this business to grow over the next year or not and what some of the current issues may continue to be that you are dealing with?

William E. Chiles

We are dealing, I have made here three and half years and I have been working around in and out of Nigeria since the mid 80s. And I guess, in the macro view haven't seen Nigeria really change much although the level of unrest is steadily increased in South, I don’t really see a change in our business in the next, in the foreseeable future let’ say. Long-term, none of us can predict where the country is going, but we expect our business to continue, we expect our margins to be in the high teens as we said. We believe it will grow. There are opportunities in Nigeria for large offshore production development projects. So, we think that the real difficulty in Nigeria right now happens to be on land. You noticed that Angola, just surpassed Nigeria on the production last month and that’s because Nigeria has got some much production shedding. We believe that the offshore environment will continue to be strong and we will be able to continue to operate there. So, we don’t have any plans to starting looking for a way out of Nigeria.

Bob Fetch - Lord Abbott

Thank you.

Operator

Thank you. Our next question is from Brian Lancaster with Castle Peak. Please go ahead.

Jason Stankowski - Castle Peak

Hi, this is Jason for Brain. I wonder if you could go into the, what happened at Norsk that caused you to reassess your assumptions and kind of how we should view that going forward?

Perry L. Elders

Yeah, Jason thanks for the question. There was, as I mentioned, two parts to the $4.5 million in Norsk and 1.2 million of it was a disappointing quarter with respect to operations. The 3.3 million related to the compensation, maintenance, customer billings, and taxes really relates to some year end pension assumptions. It relates to some overtime accrual estimates, some maintenance disputes with customers and some billing disputes with customers that kind of got resolved in the year end. These are not the type of things that we expect to recur 3.3 million. The 1.2 is more fundamental to the operations. We believe that business is in a restructuring mode. We've talked about that in the past and we expect longer term not to recur the 1.2, but for the next quarter or two we may not have as stronger results from Norsk as we would like or expect in the long-term. The 3.3 is what we consider to be non-recurring this period.

Also in regards to Norway, our Norwegian affiliate has a consolidated subsidiary who look transport and if you recall we've sold, or should I say, Norsk sold a portion of group transport about six months ago in Sweden. We're looking to sell the other part of group transport which is the Norwegian part of group transport. And basically, we expect to build and sell that around book value. We’re not expecting big gains or losses out of that. However, that is to simplify that Norwegian business to just helicopter services to oil and gas.

Jason Stankowski - Castle Peak

Okay. And are you controlling the accounting or is that done by your partner and they change the assumptions or did you kind of push down to change some of the assumptions on the pension etcetera?

Perry L. Elders

The venture has its own accounting that we do not control. And the assumptions are some thing that's looked at year end with the auditor and with the actuaries. So that's not something that Bristow push down to them.

Jason Stankowski - Castle Peak

Okay. And lastly, on the payout to the employee, I guess there was -- should we look that as basically, that employee was dismissed presumably for being involved in something and then its come to, I guess, your attention that that was not a problem and that is sort of a settlement of that dispute, it seems like a rather large item for one individual?

Perry L. Elders

Yeah. So, that was not an employee, that was an agent. So just to be clear, it was not an employee. And we had a contract with this agent, part of this management team arrival and upon investigation during the review, we concluded, as we previously announced to terminate all of our agent relationships around world and that was done in 2005. This was a lawsuit that agent brought against us that was resolved in this period, and so that's -- it was not an employee.

Jason Stankowski - Castle Peak

Okay, thanks.

Operator

Thank you. Our final question is a follow-up question from Gerry Heffernan with Lord Abbett. Please go ahead.

Gerry Heffernan - Lord Abbett

Thank you again. I would like to dive into the operating results in the Americas a little bit more if we could. Starting with North America, and there was a charge that shows up in that segment as far as the operating income and operating margins. It was stated that the operating margin would have been around nine without the charge, but that's still a decrease from we had been for the nine months previously and the year-ago period. I guess the indication was that there were some difficulty in Alaska, but still just -- help me understand why we weren't closer to a 12, 15 number in that area?

Perry L. Elders

Yeah, Gerry, you are recalling it exactly right, in that if you look at our margins and recall also, I think Linda mention as well, this is one of the reasons we're breaking out, our North American business unit beginning in April. So our next quarter you will see Gulf of Mexico standalone. You will see the Artic, which is Alaska and you will see the Central ops. So this will be much more visible and transparent in the next quarter. And in that regards our margins in North America, as you mentioned would have been 9% had it not been for this [offshore] retirement cost that was announced, I think in the late January or early February, I'm not sure the analyst all picked it up in their numbers, but that had been previously announced and the amount had been announced.

And then and it was Alaska that was the primary contributor to the fall off in North American margins and it is typical that in Alaska, in the winter months that there is not a lot of flying because of [light-out] periods and because of polar, the Artic cap freezes down to the north slope. And there is not as much need for our services more to weather conditions than as much of our services. So Alaska was the principal contributor and when you break North America down to a quarter, although, Alaska is not a huge part of the business, it did have an effect on the quarter.

Now what Linda mentioned was that we had unusually strong quarter in Alaska in the March '07 period. And that's why maybe it was a less expected by people outside the company. This is very comparable to the prior year, the March '06 quarter in terms of the results in Alaska. And what we would expect on a go-forward basis typically because of weather conditions there.

Gerry Heffernan - Lord Abbett

So, you would say this year in Alaska was closer to normal?

Perry L. Elders

Yes.

Gerry Heffernan - Lord Abbett

Okay, then just to help us out and I don’t want to infer by none statement, how exactly did the Gulf of Mexico region do on a comparative basis?

Perry L. Elders

In terms of comparison to the prior year March quarter, it was within a fraction of a point of thing. And, in terms of the sequential quarter, meaning the December '07 quarter, the margin was very comparable. It was down about a percentage point, but very comparable.

And again Gerry, you will see those when we publish our June results.

Gerry Heffernan - Lord Abbett

Okay, and then if we could have the same discussion on the South and Central America, I mean I understand that we did ended relationship in Brazil when you ends things like that really does it end on a clean cost cut zero basis but, I mean, the drop in the operating margin in that area is seems to be pretty severe.

Perry L. Elders

Yeah, so, yeah there are couples of things. One again, we had previously announced that we have sold the aircraft in Brazil and that that margin was going away. And so, we were expecting this decline in the margins in Brazil. As Bill mentioned, it's viewed to be temporary. It may suffer this for a quarter or so until we get those additional aircraft back in or the new aircraft in Brazil are not going back. We sold older aircraft and we are putting a new aircraft with a different partner. So, once those aircrafts are on line, we think the Brazil portion of the Latin American margins will stabilize and kind of return to historic levels.

Gerry Heffernan - Lord Abbett

Okay, Perry I am not trying to be tensed about this. If you sold the aircraft, I mean often when you shutdown a business or operation like that - yes, you stopped the revenues, but there is a leakage in cost because of assets that you still have, but in this case you sold the assets. So, why is there a margin compression? What's the overhead that's not being covered if you got out of the business and sold the assets?

Perry L. Elders

Yeah. So, there goes back to kind of the former business. The assets that we sold were really being leased in there, Gerry.

Gerry Heffernan - Lord Abbett

Okay.

Perry L. Elders

So, we had very high margin and really the only significant costs we had there was depreciation. So it's not like a business where you got a full cost structure that you're kind of thinking of where you've got residual cost dribbling through, if you will. And, so when you take away those lease revenues, it does have a significant and immediate effect on margins.

Gerry Heffernan - Lord Abbett

Okay. So, it was basically a leasing business and it had significantly higher margins than the some of the other operating businesses that you were seeing in the other lines?

Perry L. Elders

Yeah, that was a biggest piece of what affected us in Brazil.

Gerry Heffernan - Lord Abbett

Okay. In Central America?

Perry L. Elders

Trinidad was the other portion that Linda mentioned, where our business has been growing and doing extremely well in Trinidad. There was a fall off in Trinidad this quarter that Linda mentioned related to - we worked for Repsol, as well as BP in Trinidad, and we have I believe six aircraft working for BP. So I am not sure, unless I look it at. And it depends on their business volumes. BP has had some contraction in Trinidad, but our understanding and expectations are in the longer term that the level of business we're doing in Trinidad and the profitability of our business in Trinidad will be very much in line with kind of historic levels. And so, we don’t expect the decline in margins in Trinidad to be recurring.

Gerry Heffernan - Lord Abbett

Okay. And when you said Repsol and BP you talked, are they joint venture or are they two separate entities here?

William E. Chiles

That is, Gerry, they are two separate entities.

Gerry Heffernan - Lord Abbett

Okay. So what happens with Repsol then?

William E. Chiles

Repsol is continuing to fly. Nothing really happened to Repsol. It's just a smaller part of the operation. And we expect the Repsol fees to grow over time and BP is really the big player down there and there business is not going anywhere. So, Perry said it right. It was unusual quarter, but we expect the margins to continue in the future as in the past.

Gerry Heffernan - Lord Abbett

Okay, thank you very much for going into that in detail.

William E. Chiles

Thanks, Jerry.

Operator

Thank you ladies and gentlemen. This concludes our question and answer session. I would like to turn back to management for any closing remarks.

William E. Chiles

Okay, thanks operator and I want to thank all of you that gave us your time on the call this morning and to reiterate what we said, we are very happy with the year results and we expect the growth to continue and the results to continue to improve and improve over time. So again, thank you very much and we will see you next quarter.

Operator

Thank you ladies and gentlemen this concludes the Bristow Group fourth quarter earnings conference call. Thank you for your participation. You may now disconnect.

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Source: Bristow Group Inc. F4Q08 (Qtr End 03/31/08) Earnings Call Transcript
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