Bristow Group Inc. (NYSE:BRS)
Q4 2016 Earnings Conference Call
May 26, 2016, 10:00 AM ET
Linda McNeill - Director of IR
Jonathan Baliff - President and CEO
Chet Akiri - Acting Senior Vice President operations and Chief Commercial Officer
Don Miller - Senior Vice President and Chief Financial Officer
Brian Allman - Vice President and Chief Accounting Officer
John Cloggie - Vice President, Operations Transformation and Chief Technical Officer
Cameron Schnier - Evercore ISI
William Thomson - Barclays
Brandon Dobell - William Blair
Zach Morrissey - Cowen and Company
Daniel Burke - Johnson Rice
Dan Orr - Balyasny
William Thompson - Barclays
Greetings and welcome to the Bristow Group’s Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions].
As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Miss. Linda McNeill, Director of IR for Bristow Group. Thank you, Miss. McNeill, you may begin.
Thank you, Michelle and good morning everyone. Welcome to Bristow Group’s fiscal yearend earnings call. I am Linda McNeill, Director of Investor Relations. With me on the call are Jonathan Baliff, President and CEO; Chet Akiri, Acting Senior Vice President operations and Chief Commercial Officer; Don Miller, Senior Vice President and Chief Financial Officer; and Brian Allman, Vice President and Chief Accounting Officer.
We hope you’ve seen our earnings release, which was issued yesterday afternoon. It is posted in the Investor Relations section of our website at bristowgroup.com.
Let me remind everyone that during the call, Bristow Group management may make forward-looking statements that are subject to risks and uncertainties that are described in more detail on slide 2. Additionally, to the extent we discuss non-GAAP measures during the call please see our earnings release or the Investors Presentation on the website for the calculation GAAP reconciliations.
With that, I’ll turn the call over to Jonathan. Jonathan?
Thank you Linda, good morning and welcome to our fiscal year 2016 year-end earnings call. Similar to previous quarters, I will deliver the prepared remarks for the team so we can use the bulk of our time for Q&A.
Please turn to slide four and we will update you concerning our safety report including actions to improve our fiscal year 2017 safety performance. Concerning safety, the last year was a difficult and disappointing one for Bristow in the industry. Although there were regional improvements like in Bristow Asia Pacific region, we experienced two accidents in Nigeria and fell short of our group improvement target for recordable injuries. As we noted on our Q3 fiscal year 2016 call, these events though humbling have strengthened our resolve to learn and improve our performance around the globe.
Indeed, since our last call, we have launched a comprehensive and detailed global improvement plan to enhance operational safety performance and not just compliance. We’ve done this in Africa and across the entire Bristow Group. Part of that plan includes bringing in independent experts to review our operations, maintenance and training practices in every region in support of incorporating the best practices of Bristow and the industry in safety and reliability.
While we remain focused on continuously improving our operational safety everywhere we operate in 2017, I want to congratulate our teams in Australia led by Dapo Oyeleke and Paul Doxey of our Trinidad leadership team for accomplishing Target Zero performance for all of FY 2016 in what continues to be a very challenging business environment.
It is also super to see HeliOffshore continue to deliver tools and information this year and make a real difference to our frontline troops such as the flight crew operating manuals to the FCOMs for the Sikorsky S-92 and the Airbus EC225 [ph] and additionally HeliOffshore developed and released a HUMS best practice users guide to provide expert information and guidance for executing a world class successful HUMS program. These two are testimony to the power of improved safety and performance through collaboration by all stakeholders in our industry.
Before turning to slide 5, I’ll touch briefly on our fiscal year 2016 results. Total operating revenue was $1.7 billion down 5.6% from fiscal year 2015. Adjusted for special items we generated $1.45 per share in fiscal year 2016, which includes the effect of the Sikorsky S-76 grounding in Nigeria, bad debt expense and certain other accounting adjustments.
Our fiscal year 2016 adjusted EBITDA and EPS were lower than our expectations and guidance. But this was due to a number of issues we didn’t anticipate that Don can speak to in Q&A, especially the grounding of the Nigerian S-76. Without these issues, we would have had results in line with our adjusted EBTIDA and EPS guidance and our own expectations even though the market significantly worsened in the first quarter.
But our cash flow as you see operational cash flow was outstanding for this quarter, so please turn to slide five.
From a financial results perspective, this was not a happy year for FY'16 as we talked about other than we did have positive Bristow value added and adjusted earnings and we fare better than many in our industry. While our year-end EPS results belie [ph] our teams significant cost reduction and successful efforts, the numbers will show that we ended Q4 with robust liquidity of $360 million due to those efforts and this is up 20% from the previous quarter. This was driven by strong operating cash flow of $64 million during the quarter, plus the proceeds of approximately $30 million from sale lease pacts of three AW139.
In fiscal year 2016, we were also successful in deferring $100 million of aircraft CapEx which yields our decades low non-U.K. SAR aircraft CapEx of approximately $50 million for fiscal year 2017. As we are continuing ongoing negotiations with our OEM partners regarding the remaining aircraft CapEx, we look forward to FY'17 and those disperals and possible cancellations in our oil and gas book.
Also, in late fiscal year '17, our first aircraft leases reached their exploration at which time we will be able to return aircraft to lessors and begin reducing our lease expense, market demand pending. As previously disclosed, the P&L impact is relatively small for fiscal year '17 but increases significantly in FY'18 and beyond as more aircraft roll off.
Turning to U.K. SAR. We are in the final stages of the successful contract start up year. As we have discussed previously, we have yet to take delivery of the remaining 8 AW189 and expect to once the full icing protection system is certified by June 30th of this year. The total remaining CapEx for those aircraft is approximately $115 million, split evenly between FY'17 and FY'18.
In addition, there’s approximately $50 million of non-aircraft CapEx remaining to finalize the U.K. SAR contract start up, bringing the total remaining spend for U.K. SAR to only $165 million. Overall the contract start up has been executed smoothly and efficiently and we have benefitted from excellent and flexible leadership with Sam and her team close partnership with the MCA, the REF and the Royal Navy as well as synergies and efficiencies with our global oil and gas operations and supply chain.
Please turn to slide six. We have been and are continuing to implement the FY'17 action plan which focuses on one, improving safety performances I spoke about, two, reducing structural cost to become even more competitive and three, pursuing prudent opportunities especially capturing global market share gains. Ongoing cash flow optimization and capital deferral or elimination similar to the success of our FY'16 efforts are expected in FY'17 due to this action plan.
Despite the challenging market, we have seen recent contract wins that reflect our ability to be flexible and responsive to our clients critical and changing needs. Many of these wins represent market share gains for us, and we also seen ability to leverage our extensive Global S-92 fleet and other aircraft to serve clients critical needs during our H225 suspension which I’ll talk about in a minute.
As part of this FY'17 action plan, I want to personally thank the commitment and confidence shown by our bank group for their partnership in amending our bank facility, financial covenants. We are currently in complete compliance with our old covenants, but we wanted even more flexibility to thrive in this downturn.
Under the terms of the amendment which Don can speak about later in Q&A, we have eliminated the leverage test and the interest coverage test and replaced them as you can see on this page. Further as to as being transparent, we have included the calculation and relevant reconciliations of the amended test in the appendix of this presentation. As you will see these new financial covenants give us tremendous financial flexibility with significant EBITDA headroom to manage our business through a more negative and protracted downturn.
The concept and execution are simple. We now have the flexibility in the case the downturn worsens to cross the next 12 to 18 months and so we start giving back significant aircraft, reducing significant CapEx and that saves us tens of millions of dollars in cost, it makes us more profitable, makes us more competitive, so please turn to slide seven and we can talk about it further.
On April 29, 2016 an accident occurred with an Airbus H225 model helicopter operated by another helicopter company. The cause of the accident is not yet known, is under investigation by the authorities in Norway. The Norwegian Civil Aviation Authority and the U.K. Civil Aviation Authority issued safety directives on April 29, 2016 requiring operators to suspend public transport operations of all H225s. The safety directives permit continued search and rescue flights.
As a result, we will continue to operate four H225 model aircraft in Norway solely for search and rescue missions, but we will not be operating a fifth H225 model aircraft in Norway until further notice.
The H225 is not used by Bristow for search and rescue flights in the United Kingdom. As a precautionary measure though and until we have more technical information we have voluntarily suspended operations of our Global H225 fleet, which further impacts Asia Pacific region specifically our operations in Australia.
In response, we are using other fleet types especially our mostly owned S-92 fleet, which includes search and rescue continues to operate globally. We expect to increase utilization of these in region aircraft and are implementing contingency plans designed to safely and quickly minimize or eliminate the impact on our client’s critical operations.
It is too early to determine the positive or negative financial impacts of this, but please note we have had to respond to similar needs in calendar year 2012 and 2013 with the most important result being safe operations while broadening and deepening client relationships.
Please turn to slide eight. We continue to see the results of our diversification strategy especially as we are in the cyclical downturn in our oil and gas businesses. U.K. SAR and Fixed Wing now represent 24% of our operating revenue in fiscal year 2016 and will go up in the future and this is compared to only 4% just two years ago. Keep in mind, there is an additional U.K. SAR base to come online and two GAP SAR basis that will transition to the full U.K. SAR contract in fiscal year '18, at which point it will reach our full run rate for LACE rates for this contract.
We continue to expect though long-term run rate EBITDA margins for this contract of mid-40%. Our Fixed wing businesses continue to perform in line with our expectations. Keep in mind, Eastern Airways business is partially reliant on the Northsea energy industry so it is not fully insulated, but it also is not as acutely financially impacted as our rotary oil and gas businesses in that region due to offsetting cost reductions.
Airnorth, our Australian fixed wing business has an energy component as well, but again these had inherent cost reductions that increase the detriment and keep our margins where we expected them and that preserves those margins, it’s important to our overall business. As we have previously reported, we continue to bid on new non-oil and gas contracts in North America and Europe, while also expanding critical SAR services in the Gulf of Mexico, in Nigeria for our oil and gas clients.
Please turn to slide 9. This is the earnings call that we usually give full year guidance, especially EPS guidance ranges. But market conditions are highly dynamic at this time. We are facing unprecedented levels of commodity and foreign exchange volatility, plus the uncertainty surrounding the H225 suspension. These impact us as well as other market participants and present both upsides and downside scenarios that are compelling us to suspend this forward FY'17 adjusted EPS guidance ranges.
While most of our OFS peers are also not giving EPS guidance or other financial measures for the future due to lack of visibility our diversification and the stability that it brings means that we are in a position to provide some FY 2017 guidance measures and they are presented on this page dealing with revenue and EBITDAR streams and other fixed costs.
So as you can see on this slide, we are providing revenue and EBITDAR guidance ranges for the U.K. SAR contract, our other fixed-wing businesses, as well as several selected below the line items.
Please turn to slide 10. So, in inclusion let wrap up, so we can get to Q&A. Our focus on safety especially in light of our recent events in Nigeria is more intense than ever. A global refresh of our Target Zero program is underway that will touch all aspects of our organization including fixed-wing and SAR operations. We pride ourselves on safety and these recent accidents have been humbling and have strengthened our already determined resolve in Target Zero.
We believe our current liquidity position and cash flow generating capabilities position us well during the time of extreme market uncertainty, volatile commodity prices, reduced demand for our services in this fourth quarter, but we're seeing an increase in demand for our services specifically with aircraft to support the H225 service interruption.
Long term, we are still bullish on deepwater activity. It is expected to play a critical role in global oil supply growth over the longer term and it's require to replace depleting reserves and meet future project demands for our clients.
Major deepwater products [ph], which are still continuing remain key to long term growth prospects within IOCs and NOCs portfolios. However, we continue to intent to pursue our diversification strategy as well as our cost reduction strategy which includes expanding our suite of services, including search and rescue, by leveraging these core competencies as new opportunities presents themselves.
We believe our strong management team and our stable management team, our financial strength on a relative basis and liquidity position positioned us well. While fiscal year 2017 will be another difficult year, we are persevering, acting in accordance with our core values especially safety, anticipating future opportunities and gaining market share as we partner with our clients through this downturn to satisfy their changing, but also critical needs in the offshore space.
And with that, we will call for Q&A. Turn it over to the operator.
[Operator Instructions] Our first question comes from the line of James West with Evercore ISI. Please proceed with your questions.
Hi, guys. This is Cameron in for James.
No problem, Cam. How are you?
I'm good. I was wondering, if the non-aircraft CapEx guidance of $50 million reflected by the other purchases obligation line in the table on slide 44, meaning that there is only $150 CapEx for FY 2017?
I'll turn it over to Don to answer that question. Give us a second here.
Hey, Cam. So, the non-aircraft CapEx is intended to be as we've got it historically in and around $50 million a year of non-aircraft CapEx, because aircraft CapEx is laid out in our aircraft CapEx table.
And we do have some level of control to differ or cancel that too. We're just being prudent at the beginning of the year given the dynamic nature of the market.
Do you have any sort of internal target about like a percentage that you'd like to defer ideally?
Not at this time, Cam.
Not – I'm sorry, not at this time that we're going to disclose to you.
Right, I got it. Well, can you provide an update on the secondary aircraft market and also maybe the leasing market? It appears as if the latter is at least pretty active based on the three lease backs in the quarter?
Sure. I'll take those -- first question, used aircraft market, obviously we have some success in this most recent fiscal year selling some – selling used aircraft. As you know we tend to talk about it in two segments. One is kind of end-of-life aircraft market, which you know, it’s probably slower than it has been prior to the downturn, but there's still demand out there for the older Bell models that we find a way through the year to monetize. So that market is still pretty active.
The new generation market that being primarily 225s and 92s and 139s is where you're seeing more of the weakness in this downturn as reflected just by the pure supply demands dynamics. So Cam, is that helpful?
And the leasing market is still pretty active?
I mean the leasing market -- look, the leasing market on the backdrop of what's going on in the industry is an ever evolving market. But what we did? We are in regular contact with the lessors, they remain very interest in the Bristow credit exposure to Bristow and they take really -- I mean, they tend to take a longer term view kind of through the cycle.
So, as evidence by the 139s, we did just in the last quarter or so, that's supports that whole theory. And that's still a market that we consider available to us as a source of liquidity as we work through the next couple of years. So, we have -- as evidence by those 139s, the residual value on these aircraft even though probably under pressure a bit during this downturn, they do tend to hold their value over the longer term.
Yes. We have more offers right now, well over more offers to do leases then we have desire to do leases. And those pricing and the rates on those have only come down actually as the down manifest itself in the fourth quarter. There's very strategic desire by many of the lessors on our U.K. SAR assets and then other assets too.
But we're kind about our current maximum if anything where we wanted to be. If you take out U.K. SAR leases where we want and as aircraft start to roll-off in the coming years we're going to keep looking at what that percentage is, but again, we like – for the oil and gas assets, we like kind of three-quarter owned, one quarter lease model. And then on the SARs you've seen that we have liquidity to lease on very highly competitive rates, higher percentage given the contract length is higher too. But we can do more to even enhance liquidity if we need to it; it’s not a market that we've seen suffers much as others from a pricing standpoint for example.
Got it. And one more if I can just sneak it in. I know you elected to withhold margin guidance, but is there any way that you could sort of frame some of the different regions that have been lumpier like Africa and the Americas?
Cam, I mean, I will say that it just very difficult right now given -- and it really does surround a lot about the H225, suspension of operations. We see positives and negatives to our EBITDAR margins in different regions. And it is still a very challenge market in certain way, so don't – just not going to give that right now, Cam, so bear with us.
Okay. Thanks. That's all from me. Thanks a lot.
Our next question comes from the line of William Thomson with Barclays. Please proceed with your questions.
Hey, good morning, just maybe for Don, just a quick housekeeping question. The new covenant -- secured leverage covenant, is it against EBITDA or EBITDAR?
Hi. Good morning, Will. Good question, this is actually great chance. We've included for the first time in the package on page 39, the actual calculation. So, as the way you think about it and the way we talk about it, it’s more -- it is EBITDAR, but in bank credit agreement you end up with defined terms and the way its define, its defined as EBITDA, but if you actually and others will look at page 39 it will actually tie out to what we've done is started with our adjusted EBITDAR, 417 and then walked everybody back up to the number.
Okay. So we should think about EBITDAR not EBITDA?
Yes. Plus adjustment, so again, check adjustments because there's a lot of adjustments there which actually increase that number.
Okay. That's helpful. And then I think last quarter we were talking about cash flow neutrality for next year, so thinking about 2017. I mean, can you just talk about some of the levers? I think Jonathan mentioned the still availability to do sale lease backs. But is cash flow neutrality still a sort of target? Obviously you have the overhang of the EC25s that you were probably thinking about before. Would you just help us walk through that?
Let me just tell that absolutely is on the table and if anything – again we're seeing positive/negatives to the operating cash line just to be very specific. The EC225s are suspended in Norway and the United Kingdom. We still are getting client payments for those, many of them are SAR aircraft. So, and then we have to find replacement aircraft, which then, we – although we're going to help our clients.
They're going to need to pay rates dealing with an MSC and a flight hour charge and many of those aircraft for us have been taken out of storage, started to work again. So that provides -- but then there are also other regions that are feeling pressure like the Gulf of Mexico and Nigeria. So, we have cost cutting that we're going to do there.
So we're going to either make it up through improved utilization of the assets with the 225 not taking advantage of it, helping our clients in their critical time of need, but then if you can't we're going to get cost reductions and then absolutely looking at CapEx deferral and eliminations.
And I think through those we can do that without looking necessarily at third parties to provide us that liquidity, but we also have availability, the banks themselves have shown that partnership in that confidence. And we showed you with the AgustaWestland 139 that's really the tip of the iceberg, our ability to tap that market if we need to. But we feel that we can get it through revenue primarily and then obviously cost reductions which is part of the FY 2017 action plan and then deferrals of CapEx combined within some ability to improve the business overall with working capital.
And if I can take one more.
You saw that in the four quarter too.
Okay. That's helpful. And then just if I sneak one more in. Understanding the lack of visibility on the oil and gas front, and I appreciate the guidance on the fix wing and the U.K. SAR. But just going back to oil and gas, can you talk about the – obviously activity levels are coming down offshore, but can you just talk about some of the other structural thing going on with regards to headcount reductions from some of your customers in the North Sea and then crew rotation schedules and kind of what that -- when we'll see the bottom of that?
Well, we've kind of seen the bottom of that. The fourth quarter, if you look at the activity levels which indicate the reduction in EBITDAR and revenue especially in North Sea in Nigeria, even if you correct Nigeria's numbers for the 76 has being suspended. You're still seeing that activity level. We don't see that getting a lot worst or at least the level of decline in 2016, we don't expect to actually happen, that just that acceleration of decline that you saw in FY 2016 in the 2017. But we do and are anticipating some decline, right, which is way we're continuing the FY 2017 action plan and getting more cost cuts while we improve our safety first and foremost. So, I don't know, Chet if you want to comment on that.
Sure. Well, this is Chet Akiri. So, we see -- again as Jonathan mentioned, there is kind of positives and negatives to the environment. And so we see in some areas like a Gulf of Mexico, additional softness, but in another areas like the North Sea, we are seeing some and Asia Pacific some increased activity simply based on the recent dynamics in the industry. So, lots of puts and takes. But at this point and I'd say we need to just kind of wait and see in terms of where it all lands out.
Our focus is continue to operate on a very safe basis, to be close to our clients and to make sure in time of crisis our clients globally are very much served and served well by Bristow, and as Jonathan mentioned, really focused on the cost structure of the company to ensure that regardless of the region we're right-sized for the topline expectations of that region.
Okay. Thank you.
No problem, Will.
Our next question comes from the line of Brandon Dobell with William Blair. Please proceed with your question.
Thanks. Good morning. Maybe focus on the 189s for a second. Sounds like you're confident on the certification process there. But what's the range of outcomes if that doesn't go according to plan and kind of what is the spillover effect that you think about if things don’t go as you think they should.
Okay. I’m going to take that one and it’s a bit tricky right now because we are in close partnership and they have been a very good partner. I’m talking about Leonardo Aviation, which is the renamed AgustaWestland helicopter. And so we are in close coordination with them as they seek certification, primarily of the FIPS to get the AW-189’s fully certified by June 30th. We have spoken with our client and we have back-up plans in place. In essence, we are working on that.
We are working under that back-up plan right now with four 139s operating and then also back-up S-92s in place of the current 189s. We could continue that. We want to start flying this 189 aircraft. The crews like flying it. But if it’s not certified by June 30th, we have other conversations we are going to have with Leonardo in conjunction with our client to make sure that we continue to service. We have everything in place to serve the citizens of the United Kingdom in case that certification does not happen.
Okay. And as you think about -- let's say the timeframe isn't met, what is the cash flow or the -- I guess the P&L impacts? Or do you have any opportunities to change the dynamics of what capital needs to go out the door if those things aren't certified on time or if there is a delay in certification?
Brandon, again, similar to the question that one of your peers has had, I can’t answer that question right now, not because I don’t have some concepts. We are in good partnership with Leonardo. We are in good partnership with the MCA but I won’t publically answer that question right now.
Very well. Okay. And then a final one for me is as you guys think about BVA, and I know it is a tougher metric to hit all that is going on. But given the past couple of years and how much you have learned about how BVA has impacted the organization and the cultural change that it's kind of driven. Have you made any real tweaks looking on a go-forward basis to how you've thought about either the internal compensation structures or how to drive more BVA, anything noteworthy relative to what the past couple years have looked like?
That’s a great question and it’s a question that we talk about with our Board of Directors really for the last year and a half because BVA did incent the proper behavior in an upturn, making this capital efficient and in improving the performance of the company, both from primarily a cash driven and making the company run as if we own everyone of these assets personally. And I really like that about BVA and the question is would it incent that same level behavior in the downturn where cash preservation and liquidity preservation are critical and then judicious even more cost reductions and the answer is yes.
So, as you know, the management team and in conjunction with partnership with the Board of Directors eliminated our bonuses, recommended eliminating the bonus for the year and you saw in 8-K concerning that. That was independent of BVA but I can tell you, if you look at the calculations in this presentation, BVA is doing the right thing in that, even if we didn’t take that step, we would not get 50% of our target bonus due to the BVA being negative year-over-year. So it’s doing the right thing. In many ways, it’s doing the right things in a more advanced way than EPS because on an adjusted basis we actually do have positive EPS for the year.
And so we think BVA is a very hard taskmaster in the upturn. It’s a very hard taskmaster in the downturn. I can’t tell you how that’s going to manifest itself through FY ’17 and ’18 but we have high confidence in partnership with the Board that it’s not -- we are rewarding management in a downturn where we shouldn’t be and it’s rewarding us for the right behaviors about cost reductions, about margins, capital efficiency, CapEx deferral, sale of aircraft. These are the things that BVA focuses you on and if anything it’s showing that in our compensation where BVA has its most direct use but it also directs ourselves in how we price new products and how Chet is getting the FY’ 17 action plan including price with our regional directors.
Okay. Great. Thanks Jon. Appreciate it.
Our next question comes from the line of Zach Morrissey with Cowen and Company. Please proceed with your question.
My question has been asked. Thank you.
Can ask another one?
Our next question comes from the line of Daniel Burke with Johnson Rice. Please proceed with your question.
I still have a few.
Dan, go ahead.
I wanted to revisit fiscal year '17 CapEx and appreciate all the detail. But I wanted to make sure I was arriving at the right place. On slide 43, as we sit here today, aircraft commitments are $105 million. Understand that you are still in discussions with some OEMs. We have about $105 million, plus you have got $50 million of base CapEx and maybe there is some room to flex that down but that is outstanding.
And then you have got, if by my subtraction $50 million of remaining non-aircraft spend associated with the U.K. SAR, I would assume the majority of that comes in fiscal year 2017. Are those the three components, is there anything else to consider in terms of arriving at a fiscal year ‘17 CapEx forecast as we sit here today?
I wanted to revisit just fiscal year ’17 CapEx and appreciate all the detail but I wanted to make sure I was arriving at the right place. On slide 43, as we sit here today, aircraft commitments are $105 million. I understand that you are still in discussions with some OEMs but we have about $105 million plus you’ve got $50 million of base CapEx and maybe there is room to flex that down but that's outstanding. And then you’ve got if by amount of subtraction $50 million of remaining non-aircraft spend associated with the U.K. SAR, obviously a majority of that comes in fiscal year ’17. Are those the three components? Is there anything else to consider in terms of arriving at a fiscal year ‘17 CapEx forecast as we sit here today?
Daniel, hi. Good morning. It’s Don.
So, just taking those one at a time, the way we typically lay this out just as you’ve indicated is the aircraft CapEx is as laid out on page 43. The non-aircraft CapEx is, as you described and I think we’ve guided towards a $50 million year kind of annual run rate. And in the last $50 million you picked up on was the U.K. SAR spend, up and above the aircraft that Jonathan referenced earlier. And that actual spend is not necessarily all spent in ’17. In fact, it’s not all spent in ’17. It is spent some in ’17, ’18 and then a small amount in ’19. So, as you think ahead, a majority of that is spent actually in FY ‘18 as opposed to FY ’17.
Okay. All right. A majority of that --
And it flows and it primarily flows through, as you know, in terms of how this shows up on the either of the cash flow statement or the balance sheet. A large part of that actually flows through in pre-op costs.
Great. Understood. Okay. But the majority of that actually doesn’t hit until fiscal year ’18.
Okay. That’s right. It has a tendency -- Dan, it has a tendency to follow the basis, right. So as you could see, we had heavy CapEx there or heavy capital outlays for pre-op costs because of the startup, which was heavy in FY’ 16. You don't really have anything in ‘17 although we have to do some training there, especially for the 189 pilots and then you really ramp it up in ’18. So, hopefully that helps.
YES. That does, Jonathan. Thanks. And then U.K. SAR specific, just to be clear, the U.K. SAR guidance that you all have provided for fiscal year ’17, that's inclusive of both GAP SAR and U.K. SAR, correct?
Yes, that is correct.
Okay. And then on the EBITDAR margin guidance there, not a surprise to hear the comments about you mid-upper 40%, that’s consistent with what you all have stated. But I was just curious on the revenue run rate. It looked like the U.K. SAR contracts did $62 million in revenue in the just concluded quarter. Was curious why there is that -- it seems like then revenue would step down on the average quarter next -- or in this fiscal year? What’s the driver of that?
It’s just the way the contract -- really the first year revenues in terms of how the revenues came in during the first year as this bases came online.
Okay. All right. That’s helpful. And then maybe last one for you, Don. I guess Jonathan had a mentioned right at the beginning of the call that without issues results would have been in line with guidance. And I was just wondering if you could expand on that, I guess more specifically, what, if any issues did you all encountered during the quarter outside of Nigeria. I just want to make sure we have the right sort of baseline on the oil and gas side to think about moving into fiscal year ’17?
Sure. And they really fall into two buckets. One is Nigeria and the other I would say is in around the Americas unit. As you know, Lider has historically invoked a certain amount of FX, kind of volatility into our income statement and so we actually highlighted in the release the FX for the quarter that was primarily Lider related, which ended up being closer to $0.12. And then we ended up with a smaller -- it was a small client, small operator in the Gulf of Mexico that has recently gone into bankruptcy, that at the time we put the numbers together we did not think they were going to go into bankruptcy.
And as you also know, we've been starting up a SAR operation there as well. So those two combined and it being around $0.10, so that alone is around, is 20 plus cents and then when you get into Nigeria, it ended up being closer to $0.17, about a little under $7 million of EBITDAR from the suspension of S-76.
YES. Dan, I don’t want you to get a sense that we knocked it out of the park if add those. And as you know, we are very loathe to include things just to make numbers. For example, BVA would not count a lot of that and therefore, we wouldn’t get necessarily a compensation BVA for that. So, we were very -- but we want to give people a sense of the things we had control over and what we're trying to do to minimize it.
Obviously, the accident in Nigeria was something we have control over. We don't believe that any accident, every accent is preventable in our minds and target zero safety culture. And therefore, I don’t want you to use any of what Don just said that is an excuse. But we want to give people the math as we presented it and as we thought about our own expectations for the year.
Okay. That's helpful. And then just one tiny one to follow-up on your answer there, Don. In terms of Lider, I understand year-over-year FX would've been negative but was FX a negative sequential comp as well?
Yes. There is two elements to that. In terms of how the FX rolls through the income statement and when you ended up in effect rolling up to the income statement, it was a negative for the quarter.
Okay. All right guys. I appreciate all the time. Thank you.
Our next question comes from the line of Matt Polyak with Balyasny. Please proceed with your question.
Hey guys. This is actually Dan Orr here from Balyasny.
Hey, guys, this is actually Dan Orr here from Balyasny. A few questions -- I know you went over it, but I think I just want to make sure I fully understand it. There seems to be some market confusion. For in the 8-K, it talked about the senior secured debt plus NPV of the leases divided by EBITDA. And then here we see that is actually EBITDAR. Can you give some -- maybe just go over again to how the terminology works? I know you mentioned something about how there is different terminologies with the banks. I think that would be helpful. And then I have a couple others for you.
Sure. Thanks Dan. So, on the senior secured debt side, it's really -- there is three tranches of senior secured bank debt that are included and that’s it. And then the PV of leases, which is something we’ve talked about for years here in terms of how we calculate that. And again, on page 39 that’s laid out. So that is the total calculation on the numerator. And on the denominator, it is actually just our adjusted EBITDAR, the way we presented it as opposed to building you up from net income. It is adjusted EBITDA actually with a number of different kind of cash and non-cash add backs, which actually increase the number in this case.
Just to throw out a couple of numbers, I mean, you go from adjusted EBITDAR of $417 million to almost covenant EBITDAR of a little under $500 million, which is -- unfortunately, it's very simple math and you can do it pretty quickly. And you realize there is almost a couple hundred million dollars almost of EBITDAR room there. So, we’ve got a lot of flexibility given the backdrop that Jonathan talked about with the dynamic nature of the oil and gas business today is we look forward.
Great. And then -- I fully understand why you don't want to give guidance on the oil and gas side. But when you look at internal forecasts companywide, like are there any scenario -- like if it was your worst-case scenario where the covenants become tighter given there isn't as much leeway, do you feel that it will be the last amendment you likely need?
Again, just so you understand, Dan, we are currently in compliance with the previous covenant and in the previous quarter we were in compliance with even the one that we had before that. So, we are doing this as a precautionary measure and there are absolutely scenarios that have us getting tighter but this gives us a lot more flexibility than those scenarios. There are also scenarios that we have that give us more positives for example and keep us well inside the current or at least the old ratios now.
So, unfortunately, it is just dynamic. If you really look at the amount of capacity that’s been taken out of the system right now with the H225, the work that we have been doing that’s been capturing global market share, I don't know if there's probably another subsector in oilfield services. But generally has real good stability of our contract structure, great client relationships but still dynamic, not that we can’t give our consolidated EPS range, which we’ve been really good to try and do that and do it consistently over the past five, six years since you and I know each other. But I would say -- okay.
Yes. I was just wondering more if it is like when you guys look at -- I am sure you have internal forecasts. I didn't know if you guys thought this would fully cover it or if it is up in the air?
Yes. It fully covers it but just know it’s a dynamic marketplace. So, I don't want to -- don't put us in a box here but I do want to say to this broad stakeholder base that is on this call is that we feel we now have the flexibility to survive even longer and lower downturns. And so for us, especially with the amount of liquidity we generated in the fourth quarter, for me we get through the next 12 to 18 months, our banks were very supportive. They continue to be supportive. I feel good about what we can do in the space.
Perfect. And then with the eighth amendment to the -- with the minutes of the credit facility into the loan, it seems like you guys would get some additional benefits where over a certain leverage ratio you can monetize different assets. And I was wondering just any color around that. And in particular there is a comment about ability to monetize non-aircraft.
So, I was wondering if you could just talk about what assets those are, kind of it looks like the relative size is around like 600 based on one of your slides. I would just be curious on the ability to monetize that to shore up liquidity.
YES, Dan. This is Don. So there is a lot of flexibility around the covenant -- actually with our bank deal. As you know it’s a secured bank deal and we’ve added incremental, a small amount of aircraft relative to our total fleet as additional collateral. But what this does allow us to do, it doesn't prevent us from selling assets at all, whether they be aircraft or facilities or whatever the case may be if we can and if and when we so choose to do that.
So, I’m not sure that specifically answers your question but it gives us -- again, we knew the nice thing in effect about doing an amendment right now and I want to -- I do want to thank the banks. I know a number of the banks were on the phone and the support they showed Bristow in the midst of what’s a very challenging market in the OFS space in general. But they showed an abundant amount of support for Bristow as we work through this process and gave us the flexibility we need at this point in the cycle.
And many of them we are going to give us even more. But at this point in the game, Dan, we didn’t feel like we needed it. And so if the support didn’t come at a cost of reducing our liquidity facilities, in fact, if anything, it allows us more flexibility on that part. But I will say that many in the bank group were willing to do other things for us and look, we want to be measured here when it comes to what we need, when we need and so.
But just to be specific, Dan, so any type of prepayment really ties into -- from an asset sale really ties into, if you felt in effect sell collateral but you also have the right to substitute if so needed. But, again, the ultimate number of aircraft and the value of the collateral of aircraft uses part of this facility is less than 20% of the overall FMV of our aircraft. So, we’ve got a lot of room here.
Sounds good. Thanks a lot, guys. That is all I have for you.
Our next question comes from the line of William Thompson with Barclays. Please proceed with your question.
Hey. Thanks for sneaking me again. I just want to actually follow-up on Dan's question just regarding the pledged helicopters. It sounded like they are coming from your U.S. subsidiaries. Does that mean those helicopters are based -- I know that some of them seem like the S-92s are probably outside the U.S., but just want to get a sense on where those helicopters are and maybe what that implies for restrictions on further leasebacks for anything that is based in the U.S. versus outside the U.S.
There is a couple of questions there. Let me take one at a time. So the helicopters in fact are the ones based in U.S. and Canada to answer your question. But those are the ones that are pledged to the banks. Doesn’t mean we can’t do other sale leasebacks. Historically, as you know, we've done some sale leasebacks in the U.S. but I would say the large part of our sale leaseback market is outside the U.S.
So, I don't want you to -- I’ve got a sense that perhaps because we were pledging the U.S. assets to the banks that was going to limit our ability to do future sale leasebacks and that is not the case at all. In fact, there is more assets outside the U.S., that we’ve done sale leasebacks on in the U.S.
And just to kind of put a bit of final point on there, as it’s included in our package, the FMV of our aircraft fleet, over $2.1 billion and we pledged right at $400 million. He was part of this package. So it’s a small amount of the overall fleet that we’ve had to pledge here, which again does reflect I think where our bank group is as it relates to the Bristow credit. So, in addition to that you know we’ve got a number of assets that are all around the globe, land and buildings, so a lot of opportunity there to take advantage of that as needed.
And then just one final one. Just, I think it was alluded from Cameron's question on the other purchase obligations. And I guess my question is how much of that is around sort of fixed power by the hour contracts. Or just help me understand the variable versus fixed part of power by the hour and what that can mean from just your fixed cost?
YES, I’m not -- sorry, so well I’m not sure Cam was, I think his was in and around our CapEx. But I think what you are referring to if I can was we actually provide a lot of detail in and around our commitment table which is on page 44 and I think you are referring to the other purchase obligations. Something to keep in mind, YES something to keep in mind there is that will actually flow through our income statement above EBITDAR. So this page 44 includes a number of items that some of them are -- we would consider to be traditional CapEx others are more debt amortization, but some of this flows through above EBITDAR through PBH payments which are all part of our maintenance expenses, we actually expense prior to an EBITDAR type calculation.
I guess as a follow-up, so understanding it is an OpEx cost, but the non cancellable part of the power by the hour contract, if those helicopters aren't flying is there still -- do you guys have the availability sort of to defer any of that or how may that work just looking at the size of the other purchase obligations?
YES, I’m going to let John Cloggie answer that, but it’s called Power by hour which means if you don’t fly, you don’t pay. Right, I mean it’s an hour John give it
That’s exactly correct. The contract that we haven’t placed with a number of our OEMs are based on an hourly flight chart. So if we don’t operate the aircraft then we don’t have to pay the hourly chart, so it’s entirely a variable cost in connectivity.
This was a problem in past years; you know especially kind of in early 2000s as these new aircraft came in. You know we needed to make a fixed cost to create a more predictable cash flow stream but also more importantly you just got to exactly the point, we needed to make it more variable not fixed based on the component fixing part of it and so we made this more variable. The reason they have to have, almost it looks like it’s fixed on that table is because we do have to estimate the hours that we’re going to fly as part of that.
Okay. That’s helpful. Thank you.
There are no further questions at this time. I would like to turn the call back over to management for any closing remarks.
Just wanted to say you know thank you for the questions and again, we believe a safe culture is a transparent culture and the management team hopefully showed that today. I want to very much thank our employees by doing more or probably a lot more over the last year in FY'16 and into '17 with less people and we recognize that and the hard work and dedication especially to safety.
And then finally, I will say this we are a management team that feels really confident about our ability and our ability to have leverage that we can pull to improve the financial performance of this company. We showed that in '16, it wasn’t to a level that we would like, but in '17 we still see those levels and even more given the market conditions that are presenting themselves. So, stay tuned and look forward to obviously talking to you through this quarter. Thank you very much.
This concludes today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.
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