Bristow Group Inc. FQ108 (Qtr End 06/30/08) Earnings Call Transcript

| About: Bristow Group (BRS)

Bristow Group Inc. (NYSE:BRS)

FQ108 (Qtr End 06/30/08) Earnings Call Transcript

August 6, 2008 10:00 am ET

Executives

Linda McNeill – IR Manager

Bill Chiles – President and CEO

Perry Elders – EVP and CFO

Analysts

Ian Zaffino – Oppenheimer & Co.

David Smith – JP Morgan

Arun Jayaram – Credit Suisse

Daniel Burke – Johnson Rice & Co.

Chris Agnew – Goldman Sachs

Brian Lancaster – Castle Peak

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Bristow Group first quarter 2009 earnings conference 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, Wednesday, August 6th of 2008. Now I'd like to turn the conference over to Linda McNeill, Investor Relations Manager. Please go ahead.

Linda McNeill

Thank you, Vince, and good morning. Welcome to Bristow Group’s June quarter earnings conference call. My name is Linda McNeill, Investor Relations Manager. With me on the call today are Bill Chiles, President and CEO, and Perry Elders, Executive Vice President and CFO. Bill will provide an overview of our business and our results for the June quarter and Perry will discuss the results for the June quarter in a little more detail. Following Perry’s remarks, I will review business unit results for the June quarter.

We hope you’ve seen our news release and 10-Q, which were filed earlier this morning. Both documents along with our revised growth update, which is now included in our Investor Relations presentation will be posted on the Investor Relations section of our website at 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 reflect 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 is contained in the Form 10-Q filed with the SEC for the quarter ended June 30, 2008 and the Form 10-K for the fiscal year ended March 31, 2008. Additionally, to the extent that we discuss non-GAAP measures during this call, please see our Investor Relations presentation for the calculations of these measures.

With that, I’d like to turn the call over to Bill.

Bill Chiles

Good morning and thanks to all of you for calling in today. I'm going to start off talking about our safety performance. As always, our air accident rate for the quarter ended up at 1.27. That’s above our expectation, but it was a result of one minor flight accident in one of our training aircraft when an aircraft rolled over on a hard landing with very, very minor injuries to the student. Our air accident rate in the rest of the world stands at zero for the quarter. So that’s very good. And our ground accident rates are also trending in a positive way where our total recordable incident rate for the quarter was 0.49 or 200,000 man hours and our loss work case rate of 0.30. So we are moving – we are making good progress toward our target zero goal of zero accidents and we are very happy, knock on wood, in terms of our performance for the quarter with the exception of the one aviation accident.

Revenue for the quarter – in terms of financial results, our revenue was little over $284 million at $284.1 million, up 23% quarter-over-quarter compared to the comparable quarter last year. Income from continuing operations of $22.6 million, up 3% over the comparable quarter, with a return on capital employed of around 14%. Diluted earnings per share of $0.72 from continuing operations, down $0.01 from the comparable quarter last year. Perry will go into more detail, give you more color on what – on the underlying reasons for that.

The results include a very positive impact of re-organization of our Mexico operations, which you remember we’ve talked about for a number of years, last several years. Offset – this impact was offset by higher operating losses from our centralized operations in the Eastern Hemisphere primarily due to foreign exchange issues and expected maintenance cost. And Perry will go into more detail on that in a minute.

In terms of the market, we are very pleased with the way the market is developing. We see no letup in demand with continuing emphasis on new production projects around the world. The demand for new aircraft continues to be very, very robust and is pretty much tracking with our expectations. And the incremental demand that we see is going to continue to exceed the order book for the foreseeable future. And we continue to receive contract awards that are pretty much in line again with our expectations.

As an example, during the quarter we contracted – we’ve got contracts or verbal commitments, strong verbal commitments for 17 medium and 5 large aircraft. These contracts range from three to five years in duration and meet our hurdle rates and include countries like Brazil where we contracted two S-76 C++s, Norway, Africa, the UK, Australia, and Mexico. These contract awards represent aggregate revenues of about $450 million for Bristow, plus another $150 million within our unconsolidated affiliates.

Fleet expansion aircraft deliveries during the quarter were seven. Seven new aircraft delivered; two large aircraft, one EC25 in Australia, one S-92 in the Gulf of Mexico. This S-92 introduction to Gulf of Mexico is very significant. It’s a new aircraft for us in the Gulf to replace our aging fleet of Bell 214STs and to also expand our presence in the deepwater in the Gulf of Mexico. We also delivered three medium aircraft during the quarter; two 76C++ into Brazil and one S-76 C++ in Nigeria. In addition, we delivered two training aircraft to Bristow Academy.

In terms of the order book, we ordered 11 additional aircraft during the June quarter, representing almost $150 million in CapEx and five in July – excuse me, during the June quarter we ordered 11 aircraft and five in July after the end of the June quarter. Three 76C++s to be Bell 407s, which represents another $30 million in CapEx. At June 30, our order book stood at 39 from orders, approximately $390 million in total value, and 51 option aircraft representing about $863 million in value. And we have contracts, strong verbal notification of contract awards for the 13 of the 35 non-training aircraft currently on order.

Our fleet stands as of June 30th at 544 aircraft within Bristow, including 411 in the consolidated fleet and 133 aircraft operated by unconsolidated affiliates. You also noticed this morning we announced the sale of 53 of our aircraft, single engine aircraft in the Gulf of Mexico that represents the flight operations for the production management customers. That sale was at 65 million, and this is expected to result in a pretax gain of roughly $40 million or $0.75 per diluted share after tax, hopefully to close over the next several months. In addition, in June we raised $335 million capital through the sale of almost 5 million shares of common stock and $115 million in senior notes. This capital puts us in position to take advantage of – continue to take advantage of the robust market conditions.

Looking forward, we expect the strong market fundamentals to continue in spite of the fact that oil prices have fallen from around $140 a barrel to $120. Production operations, which support our business to a great extent, remain very, very robust. And we don’t really see any letup in the span for OpEx offshore and also we don’t expect any letup – near-term letup in CapEx as well.

Therefore we continue to anticipate the need for new helicopters around the world to serve growth in offshore, particularly deepwater and international markets like Brazil. So we are going to continue to execute our growth plan and we think this means significant opportunities for our shareholders and employees.

So, with that, I will turn it over to Perry.

Perry Elders

Thanks, Bill. In terms of the consolidated results for June, as Bill mentioned, really the two significant items affecting the June quarter results were the favorable impact of the Mexico re-organization, offset by the negative impact of the results in the Eastern Hemisphere central operations. In Mexico, we re-organized our operations increasing our ownership in the entity that leases aircraft into Mexico, that’s RLR, and reducing our interest in the entity that operates aircraft in Mexico and that’s Heliservicio.

As a result, effective April 1st of 2008, we now consolidate RLR including $18 million of debt. We now apply the equity method of accounting to Heliservicio and had a $1.4 million gain during the quarter on the sell-down of our portion of interest in Heliservicio. We returned to accrual accounting for billings to Heliservicio resulting in $800,000 additional revenue and $3.6 million increase in earnings from unconsolidated affiliates.

In total, the Mexico re-organization added $0.12 in diluted earnings per share representing real cash earnings, but that are not expected to recur. This benefit was offset by operating losses in our Eastern Hemisphere Centralized Operation business unit related to three primary factors. First, higher expenses under our Euro-based Power-By-the-Hour maintenance contract as the Euro strengthened against the British Pound sterling. Although we cannot predict currency movements, we may see some moderation in this trend during the remainder of the year. And we also are evaluating potential hedging strategies.

Second effect in Eastern Hemisphere Centralized Ops was an increase in heavy maintenance activity, which will likely continue for most of the rest of the fiscal year. And the final item was impairment of obsolete inventory, which we do not expect that variance to recur for the rest of the year. So in total, the Eastern Hemisphere Centralized Ops items reduced earnings – diluted EPS by $0.14. Those were the two big items. Mexico re-organization and the Eastern Hemisphere Centralized Ops, which almost offset one another.

Income from continuing operations for the quarter also included interest expense from the bonds we sold last year, the 7.5% senior notes, as well as a small portion related to the bonds we sold this last June. We also experienced a $0.01 per share reduction in earnings from the sale of capital in June.

In terms of cash flow, it’s an excellent quarter. EBITDA was $57 million, which is a 25% increase for the quarter. Cash flow from operations was $30 million versus $2 million used in cash flow in the prior year. We invested $131 million in capital expenditures compared to $122 million in the prior year. This $131 million was in line with our expectations for capital expenditure program, which is fueling our business growth, with expected 16 aircraft excluding training aircraft being delivered during the remainder of fiscal ’09. 99% of the CapEx relates to aircraft and related equipment.

In terms of financing, as Bill mentioned, we completed the sale of common stock and convertible senior notes in June raising $335 million. That included 4,715,000 shares of common stock in an underwritten offering, plus another 281,000 shares to Caledonia, our major shareholder, in a separate private placement. We also issued $115 million in convertible bonds, which bear interest at 3%, mature in 2038 that can be redeemed beginning in 2015.

The form and timing of this offering was to comply with our commitment to the financial policies we’ve put in place three years ago, specifically to maintain a strong balance sheet, to allow us the financial flexibility to take advantage of significant growth opportunities. Also to pre-finance CapEx via cash on hand, available revolving capacity, and a conservative estimate of future cash flows. We needed to raise the capital this year to finance orders we expect to make during the remainder of the year before options expire this year.

As Bill mentioned in the June quarter and in July, we placed orders for $180 million of new aircraft. As a result, at June 30, we had leverage of approximately 42% of capital or 3.8 times debt-to-EBITDA multiple, both based on adjusted debt that includes the balance sheet debt, GE aircraft leases, and UK under-funded pension obligation.

Looking forward, we expect to continue to grow our revenue margins over the next few years as we take delivery of and integrate new larger aircraft.

In terms of the Gulf of Mexico sale that Bill mentioned, this is consistent with our growth strategy to redeploy capital into newer high technology aircraft capable of operating further offshore and in harsher environments. Last quarter we announced our intention to sell around 50 small aircraft in the Gulf of Mexico. And today we’ve announced that we’ve agreed to sell the portion of our US Gulf of Mexico business serving production management customers. As Bill mentioned, it includes 53 small single-engine aircraft, the related inventory, related offshore fuel station, assigning the related customer contracts, and facility leases at two of our bases.

The sales price is all cash and we anticipate using the proceeds to fund our CapEx program. We anticipate a pretax gain of roughly $40 million or $0.75 per share. However, the closing is contingent upon several items being completed, including the buyer obtaining financing, customer consents of effective commercial contracts, regulatory clearance, and other customary conditions. This business represents 4% of our consolidated revenues and around 18% of our US Gulf of Mexico revenue. The business is slightly dilutive to the operating margins in the US Gulf of Mexico. We expect the sale to close in September or October, as Bill mentioned.

So, excluding the gain on sale, we expect the primary impact on operating results in the Gulf of Mexico will be seen beginning in the December 2008 quarter. This represents about half of our single engine aircraft in the US Gulf of Mexico. So we’ll continue to operate about 50 small aircraft and 31 medium and large aircraft in the US Gulf of Mexico for E&P customers. We are also maintaining our robust infrastructure in the Gulf of Mexico, which includes these aircraft, the 81 that I just mentioned, as well as substantial supply chain and maintenance functions in New Iberia, Louisiana, as well as around ten other bases along the Gulf Coast.

In addition, looking forward, our effective tax rate this quarter was 31%, which was slightly better than expected due to the effect of the re-organization that we completed in March and April. We anticipate this rate is sustainable for the rest of this fiscal year. We also continue to reflect 1.2 million more shares in our diluted EPS share count than will be the case if our share price is at least $43.19 on September of 2009 when our preferred stock converts into common stock.

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

Linda McNeill

Thank you, Perry. I will now briefly review the business unit results. Please note that we’ve included in our press release – schedule, which reflects the breakout of our Western Hemisphere business unit for the past five quarters. Our US Gulf of Mexico business unit, the operating margin of 13% was lower than the 16.4% in last year’s June quarter, but basically flat with March 2008 quarter of 13.2%. This margin decrease resulted from an increase in maintenance allocations from our Western Hemisphere Centralized Operations business unit and also from higher salary levels. We continue to expect operating margins to be in the mid-teens depending on weather.

In our Arctic business unit, which is comprised of our Alaska operations, 12.2% operating margin was lower than the 15.5% in last year’s June quarter. The prior quarter included additional ad hoc flying, which raised margins in that period. The September quarter should improve in terms of activity, which was the case last year.

In Latin America, the June 2008 quarter results were impacted by the Mexico re-organization as discussed by Perry. Excluding this, we expect margins in this business unit to be in the mid-20s compared with the 32% operating margin in the June 2008 quarter. We also experienced lower business volumes than in the prior year quarter in Trinidad due to reduced customer activity level. In Brazil, we had a decrease resulting from the prior year’s sale of older aircraft. However, we expect Brazil to grow significantly as we add the aircraft, as Bill discussed earlier.

Now our Western Hemisphere Centralized Operations business unit. Operating loss of $0.7 million compared with operating income of $1.3 million in the June 2007 quarter. Lower recovery of maintenance cost from the other Western Hemisphere business units resulted from reduced flight activity. We expect this business unit to break even over the long-term with the exception of Western Hemisphere envisioned G&A cost.

Moving to Europe. Operating margins of 18.3%, better than the June 2007 quarter margin of 17.5% due to increased rate under new and existing contracts. This improvement was partially offset by increased labor rate and the loss of our search and rescue work. Our expectations for margin in Europe continue to be around 20%.

West Africa, Nigeria. The operating margin of 15% was improved from the June 2007 quarter margin of 8.4%, reflecting the increased rate in this market last fiscal year. This margin was lower than our expectations, to continue to be in the high-teens as a result of higher than expected maintenance, travel and freight cost, as well as several customer business disruptions from their labor disputes, which is not unusual at all for this market.

Moving to Southeast Asia. 11.4% operating margin was lower than prior period and was reduced by compensation costs, some of which will not recur in future periods. We continue to expect operating margin in Southeast Asia to be in the high-teens to around 20%.

Our other international business unit, which is our smallest helicopter service business, saw a decrease in margin to 9.2% from the June 2007 quarter’s margin of 19.8%, which was driven by the increase in operating costs across the number of countries.

In our biggest market, Russia, we recently settled contractual escalation claims, which resulted in a $1.2 million of additional revenue this quarter. Also we negotiated a new one-year contract with higher rates in Russia and expect to see improving margins. This business unit is expected to continue to be our smallest helicopter service business unit and the one in which we will essentially make frontier-type investments in growth market. So the operating results are expected to continue to be relatively nominal and somewhat unpredictable. In the Eastern Hemisphere Centralized Operations business unit, Perry discussed the major component affecting this quarter’s results.

Finally, Bristow Academy. Bristow Academy contributed $0.5 million in operating income this quarter, which was as anticipated. The Academy provided us with 11 pilots for our helicopter services operations this quarter and that is the real strategic value we expect to achieve from this position going forward.

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 a question. So with that, we’ll turn it back over to you, Vince.

Question-and-Answer Session

Operator

Thank you, ma’am. (Operator instructions) Our first question is from the line of Ian Zaffino with Oppenheimer & Co. Please go ahead.

Ian Zaffino – Oppenheimer & Co.

Great, thank you. Perry, you broke out the higher cost in the central ops as a free bucket. Can you actually quantify how much each bucket accounted for? And then as far as the maintenance, was this planned? Is this something that just happened during the quarter that came up and bit you, or – and what type of spending do you look at going forward for that?

Bill Chiles

Yes, thanks, Ian. In terms of quantification, you’ll notice on page 33 of the 10-Q, we do break out the total effect on operating income and income from continuing operations. We’ve not disclosed the effect of each individual of the three items. I think what I can say is that the currency movements on the PVH was about half of the miss for the quarter. So it was fairly significant. As you know, historically the Pound and the Euro have been fairly closely linked and they began to separate with the Euro strengthening relative to the Pound recently. And so that was a significant element of it. The maintenance was the next biggest piece. And these were, to answer your question, aircraft that we expected to come in for maintenance. However, they required more maintenance and this is the heavy maintenance. This is not the normal line maintenance that goes on at the bases. This is the major refurbishments that go on periodically. So we knew these aircrafts were coming in because of their hour counts, so it was planned in that respect. What was unplanned was the extent of the maintenance required on a couple of aircraft we received this period, which as we mentioned kind of had a double effect in terms of reduced revenue in the flying businesses, because we couldn’t get the helicopters back to them, but also additional maintenance cost. And the inventory item was the smallest of the three, which as I said we are not expecting to be a recurring item.

Ian Zaffino – Oppenheimer & Co.

Okay. That’s very helpful. And you alluded to just having this heavier maintenance going forward. From our standpoint and from your standpoint, is there anything else on horizon that could catch us off guard like did this quarter, anything – anywhere in the business that you think or identify that could catch us off guard again?

Bill Chiles

No. We pointed out that the heavy maintenance and reason we said that is, it’s expected to continue for the rest of the year because these aircraft that we are working on are not – were not all complete at June 30th. And we have some other similar aircraft to rework before the end of the fiscal year. And that's why we wanted to put you on notice that we could have these kind of incremental costs in the remainder of the fiscal year. We have in the past experienced costs that we consider to be non-recurring or infrequent in our maintenance operations. But as well, as Linda just mentioned in other international as well as in Nigeria, I mean our business is not totally predictable. We're not a utility with locked-in 25-year contracts. So we manage it. The global diversity being in 20 countries and no business unit representing more than a third gives us some hedge against any one piece having an overly dramatic effect. But in the individual business units, there is some volatility.

Ian Zaffino – Oppenheimer & Co.

Okay. Thank you very much.

Bill Chiles

Thank you, Ian.

Operator

Thank you. Our next question comes from the line of David Smith with JP Morgan. Please go ahead.

David Smith – JP Morgan

Hi, good morning.

Bill Chiles

Good morning, David.

David Smith – JP Morgan

Wondering what you are seeing in terms of the lead time for client demand on the large helicopters, maybe how that’s changed over the past year.

Bill Chiles

David, we really haven’t seen much change. It’s been – the demand for large aircraft has been strong. And the delay and delivery from the time we order aircraft, a heavy aircraft is still about two to three years. So we don’t see much change. And as you know, we are now introducing a new heavy aircraft in the Gulf of Mexico. We’ve got one operating now and either two or three more to come in the next six months or so. So, demand is there. Customers see the need, particularly when they need to go further offshore, particularly – deepwater Gulf of Mexico, for example, for these new heavies coming in here, when you are talking about flying off 200 miles, 200 nautical miles, that can be done with two 76s, but it’s much more easily done with one S-92 or one 225. So we really don’t see any letup in the demand for the heavies and the lead time is still about where it always has been.

David Smith – JP Morgan

Okay, appreciate it. We’ve got a couple of storms in the last month come to the US Gulf, causing evacuations but no real damage. How did these storms affect your Gulf operations?

Bill Chiles

They had limited effect. One, the first storm came in around Brownsville only affected Rockport Base. And we evacuated some of the platforms and rigs that we are operating in. Western Louisiana and Eastern Texas, and then South Texas off Rockport, but it had limited effect. And you may recall from previous calls, we don't really see flying during the hurricanes to be much of a benefit and certainly don't – we don’t hope for a strong storm season because we fly a lot to get crews in and we shut down for a few days, then we fly a lot to get them back out there. So the net effect is neutral. This recent storm that just came in came up so quickly that we scrambled and did some evacuations in the Highland and Galveston areas, but everybody else pretty much stayed put in the Eastern Gulf. So it was, again, another limited evacuation. Fortunately it wasn't much of a storm. We expected the storm to come through Houston yesterday and we just had a lot of rain and very little wind. So not much effect so far. Of course, we are just entering the peak period, August, September, so we still have ways to go.

David Smith – JP Morgan

All right. Well, thank you and stay dry.

Bill Chiles

Thank you.

Operator

Thank you. Our next question is from the line of Arun Jayaram with Credit Suisse.

Arun Jayaram – Credit Suisse

Hi, good morning.

Bill Chiles

Good morning, Arun.

Arun Jayaram – Credit Suisse

Perry, I was wondering if you could quickly elaborate a little bit on the Mexican re-organization. In the press release you indicated that the operating income was up $0.8 million, but the income from continuing operations was up $3.7 million. So I just want to understand the pieces there.

Perry Elders

Sure. It is a little confusion. Let me try to clarify it. A few years ago in 2005, we went to the cash basis for recognizing our billings to our venture down there. And so, as we’ve been disclosing our Q for the last several years, we had an amount of unrecognized billings to that venture. And with the combination of this re-organization and including that venture getting caught up on their outstanding receivables to us where they are current, we went from the cash basis to full accrual basis. And what that meant was some of the aircraft we lose directly to Heliservicio and that previously unrecognized amount was only around $800,000. In addition, we lease aircraft to Heliservicio through RLR, which is an asset asset-owning company. And in that respect there was about $3.7 million of unrecognized – and that’s just our share of the unrecognized billings for the prior period. So when we converted to accrual accounting, the $3.7 million gets recognized in equity and earnings. And then immediately – effectively immediately following that, we started consolidating RLR. So this is the revenue that RLR billed to Heliservicio prior to us consolidating RLR. And that’s why it ends up showing up on two lines on the P&L. But they are both related to the same thing going from cash to accrual basis for our billings to Heliservicio.

Arun Jayaram – Credit Suisse

Okay. And then following that, then earnings from the unconsolidated, so it should revert to more normalized levels, is that correct? Does that make sense?

Perry Elders

That’s right. We have in – from April 1st forward. So in the entire quarter, we – in addition to that $0.12, we are now consolidating RLR. We are recognizing Heliservicio’s profits on a accrual basis. And so the results that you see for Latin America reflect once you exclude these items, these non-recurring items. They reflect kind of the run rate, if you will, for that Latin America business.

Arun Jayaram – Credit Suisse

That’s helpful. And second one is for Bill. Bill, from your catbird seat, has anything changed in terms of how you think about operating costs versus three or six months ago, recognizing there is always volatility? But does anything change maybe structurally, which make you think maybe margins may not be good going forward because of just general oilfield inflation, et cetera?

Bill Chiles

Arun, I do not think we’ve had any structural change in the market, meaning that we believe we can still continue to push pricing, which we are doing, and we don’t see that we are going to get a lot of push-back on that. You go back and look at our price increases over the last four, five years compared to oil prices and compared to rig rates and boat rates, we are still far below in terms of percentage increase. So we still believe we can push the pricing. And maybe we’ve – had I pushed pricing as quickly as we’d like to, we are going to continually aggressively go out and push. On the cost side, what two fundamental things going on in Bristow that they are maybe pushing up our cost in the near-term that we believe will pay off in the long-term, we ramped up our overhead at the end of last year in human resources and also in our standards group to try to get uniform standards around the world and also to get – to drastically improve our performance in terms of turnover, keeping people, safety, and so on. So we've ramped up human resources and standards, and also the central operations, or central ops teams around the world really support a much larger company than we are today. And we’ve done that intentionally. In central ops what we’ve done there is set up organizations in the west and east to start taking a finer look at our maintenance cost, our cost per hour, per man hour, and our cost per flight hour to see how we could do it more efficiently, to really understand what is causing us from a holistic point of view, in other words, looking not only at the man-hour cost, but also looking at the downtime involved. So we made an investment in the near-term, which shows up in our overhead costs and central operations cost, not only in the east but in the west well, that we believe we’ll pay huge dividends down the road in terms of improving our maintenance efficiency, allow us to decide how much we want to outsource if not all of it. And I know the outsourcing word sometime is unpopular, but if we can do the work more efficiently by outsourcing, we will. It’s surprising to us – and I’ll finish off by saying, it is surprising to us that when we arrived here four years ago now, helicopter companies really didn’t understand much about the maintenance cost from – in the way that you would expect them to. So we are really trying to get much more scientific about it and look at using some management techniques that you heard about lien technology and other things like that, to make it more efficient. So, all of that cost us money on the front end, but we believe we’ll pay huge dividends on the back end.

Arun Jayaram – Credit Suisse

Okay, Bill. Thank you.

Operator

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

Daniel Burke – Johnson Rice & Co.

Good morning all. First the specific one. Linda, you mentioned some non-recurring comp cost in Southeast Asia I think. Can you quantify that? I mean, was that a notable number or figure?

Perry Elders

Yes, Daniel, if I could help on that, there was two pieces you mentioned. There was non-recurring piece and then if you recall we were in negotiations in Australia with our union there and we concluded those earlier this calendar year. So there is a good chunk of that that’s recurring. And so that’s – what we tried to do is – Linda commented on, we expect the margins to be in the high-teens to 20% going forward that reflects kind of the run rate after you take the non-recurring out.

Daniel Burke – Johnson Rice & Co.

Okay, okay. So that was – that gap is basically the non-recurring that we see there in the current quarter we just completed?

Perry Elders

Yes.

Daniel Burke – Johnson Rice & Co.

Okay. And then Bill, it’s actually sort of a follow-up on the question you just responded to. But in terms of attaining sort of your 20% return on capital employed, it seems like, as you just mentioned, you are confident that you can get the pricing needed in the business. But is there any push-back in terms of the time you think it will take to reach that level versus what you targeted in the past?

Bill Chiles

We still – no, we still believe we can meet that hurdle rate, that target rate. We’ve got the negative carry of the additional capital we've raised, which is affecting that number. But if you look at it, if you exclude the dilutive effect of the offerings in the cash we have on the balance sheet, we are well on our way to getting there. And that means we have to be careful of our costs, we have to contain our costs, we’ve got to start getting some real benefit out of the central ops organizations, and we have to continue to push pricing with customers. On the new technology, the new aircraft coming out, we are getting our hurdle rates. So that’s working well. We need to continue to push on the existing contracts in the older aircraft to get price increases to cover increased costs and keep these margins up. But we believe we are totally committed to getting there, meeting that goal, we believe we can do that.

Daniel Burke – Johnson Rice & Co.

Okay, great. I’ll turn it back. Thanks.

Operator

Thank you. (Operator instructions) And our next question is from the line of Chris Agnew with Goldman Sachs. Please go ahead.

Chris Agnew – Goldman Sachs

Thank you very much. Good morning. And Perry, I was wondering – I think you mentioned that the aircraft that you are selling in the Gulf of Mexico, you gave us the revenue numbers and you said it’s moderately dilutive. I was wondering, can you give us any more details to help us frame the amount of costs that will be coming out as a result?

Perry Elders

Well, what we’ve reported is that that portion of our business generated $42.5 million last fiscal year in revenue. And that our entire Gulf of Mexico for the last two quarters has earned operating margins in the 13% range. And so you can get a sense of kind of the contribution of that business to the bottom line. And so we expect the related cost to move with that.

Chris Agnew – Goldman Sachs

Would you expect a slight margin uplift with the portion you are selling?

Perry Elders

Yes, because it was slightly dilutive and that’s why Linda gave the guidance that she did, that we expect Gulf of Mexico margins to be around 15% going forward.

Chris Agnew – Goldman Sachs

And then a follow-on, what’s happening to the pilots operating? Are some of them transferring, or are you able to redistribute them within existing business?

Perry Elders

The buyer anticipates offering positions to not only the pilots, but the ground support staff, the maintenance staff. And so between now and closing, we believe they will identify those people, make those offers, and hopefully subject to regulatory requirements, those people will be able to move across with the aircraft when we close.

Chris Agnew – Goldman Sachs

And then finally, can you provide any update on the UK research and rescue contract? And maybe – is there any change to the timing or updates to the timing?

Bill Chiles

Question is, can – is it public information? I believe so.

Perry Elders

I believe it is.

Bill Chiles

Perry is on that board, so I’ll let you –

Perry Elders

Sure. We had – we’ve been notified from the customer, which is the IPT, that the down-select from the three bidders that we had thought might occur and we understood would occur in the spring did not occur. There may still be a down-select coming. But the process moves forward. They have down selected the alternatives. If you recall, we’ve discussed before that there were a number of – each bidder provided a multiple number of alternative solutions and the customer has down selected the alternatives. And so we are now entering into the phase of clarifying our bid with respect to the alternative that they have specified. The time frame for final award has strung out a period of time from what we had thought would be mid 2009, and now it looks like it’s going to be in 2010. But I would say this is fairly fluid at this point. And remember, that was originally for work that was expected to begin in 2012, so four years from now. So we have not yet heard whether the actual start date for the commencement of work has been deferred. But the formal selection has slid from the customers' perspective.

Chris Agnew – Goldman Sachs

Okay, great. Thank you.

Operator

Thank you. (Operator instructions) And our next question is from the line of Brian Lancaster with Castle Peak. Please go ahead.

Brian Lancaster – Castle Peak

Questions have been answered, thank you.

Bill Chiles

Thank you, Brian.

Operator

Thank you. And at this time, there are no additional questions. I’d like to turn it back to management for any closing remarks.

Bill Chiles

Okay. Thank you very much for being on line with us this morning. We know that there is some concern about the choppiness in the numbers, but we feel – we're very confident we are on track to beat the goals, the long-term goals that you know very well. So, with that, again thank you for coming online and we’ll talk to you again soon.

Operator

Thank you, sir. Ladies and gentlemen, this concludes the Bristow Group first quarter 2009 earnings conference call. Thank you for your participation. You may now disconnect.

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