CHC Group Ltd. (NYSE:HELI), the parent company of CHC Helicopter, held its Q4 2014 earnings conference call on July 10, 2014. Here is the full transcript (Edited) of the event…
On behalf of CHC Helicopter, hello and welcome to the company’s fiscal 2014 fourth quarter earnings presentation. My name is Jessie and I will be your event manager today.
Before we get started, I’d like to mention that today’s event is being recorded and you are currently in a listen-only mode. I’d like to acquaint you with some of the ways that you can participate during the event. As a reminder, to view the slides you can either join the webcast portion or download the slide presentation at the investor relations website at chc.ca/presentation. We will have a question-and-answer session at the end of today’s presentation. (Operator Instructions)
Now I’d like to turn today’s program over to Lynn Tyson, VP Investor Relations.
Lynn Tyson – VP, Investor Relations
Thank you, Jessie. Good morning. I’d like to remind everyone that today’s discussion contains forward-looking statements based on the environment as we see it today and as such are subject to known and unknown risks and uncertainties. Our actual results might differ materially from those projected in those forward-looking statements. Please refer to our press release or page three of our earnings presentations and to our reports filed with the SEC for more information on specific risk factors that could cause actual results to differ.
Note that we are using certain non-GAAP financial measures in the presentation and on this call. The appropriate GAAP financial reconciliations are included in our earnings release and at the end of our earnings presentation, both of which are posted on our website. Note that all references to consolidated EBITDAR and margin on an adjusted basis, excluding the impact of special items and unless noted otherwise all growth rates refer to year-over-year progress.
On the call today we have Bill Amelio, our President and CEO; and Joan Hooper, our CFO. Bill will start with an update on our performance and overview of guidance and Joan will follow with a more detailed discussion on our fiscal 2014 results and fiscal 2015 guidance and long-term targets. After that we will open the call for questions and then Bill will close with some final comments.
With that, I’ll now turn the call over to Bill.
Bill Amelio – President and CEO
Thanks, Lynn. We have a lot of ground to cover today. We welcomed the chance to expand on our financial priorities we’ve outlined during our IPO in January and again in March during our third quarter earnings call. Also, Joan and I will provide guidance for CHC’s fiscal 2015 as well as longer-term financial targets.
However first, I want to talk about safety, which is the essential element of all that we do at CHC. The rolling five-year accident rate is a principal measure of safety performance in the offshore helicopter service industry. Through the last quarter, CHC’s 0.38 accidents per 100,000 flight hours were well again below the average rates for all twin helicopters as well as offshore and rotary wing operators.
Please turn to Page 5. Last September, CHC and other major offshore helicopter operators took a fresh approach to achieving even higher levels of global offshore helicopter safety. We formed a joint operating review or JOR, in partnership with leading helicopter manufacturers around the world.
The JOR is focusing on five areas: First, standardizing the requirements of oil and gas customers wherever possible; second, sharing safety information rapidly and regularly between operators and manufacturers; three, enhancing the monitoring of pilot performance and effectiveness of crew resource management; four, giving operators, including pilots a more direct voice in the design of aircraft systems; and five, refining the use of stabilized approaches in rotary wing flight.
We’re also making great progress in several areas. In the process we’re relying even on broader industry-wide attention to helicopter safety, specifically for refining the scope and objectives of what had been called European Helicopter Organization or EHA to take on the mission of raising safety around the world, everywhere helicopters fly.
Consistent with its name the New Heli Offshore is focused on offshore flights. Although its membership is open to any organization that is committed to help constantly raise helicopter safety.
Please turn to Page 6. Providing safe world-class service and accommodating expected long-term growth requires the right facilities. In May, we started operating from a larger hanger for our existing flying operations in Cabo Frio, Brazil, one of our three bases that we have in the country.
Cabo Frio is located in the Campos Basin which accounts for about 80% of Brazil’s oil production. With the new hanger there we will further improve and streamline customer and passenger services, will enhance maintenance operations and ensure that we have enough capacity for long-term growth in Brazil.
In early June, we formally opened a 65,000 square foot MRO hanger in Rzeszow, Poland where we had been operating previously in a temporary facility since February 2013. The new MRO hanger equips us to address current and anticipated needs of MRO customers with high quality, high efficiency and high value, especially customers that fly large capacity long-range heavy helicopters.
Before you hear from Joan, I want to provide my own perspective on fiscal 2014 and guidance about where CHC is heading.
Overall I am pleased with the direction coming out of our fiscal 2014. Our full year results were consistent with our March guidance to you with revenues up 1% and EBITDAR down 3%. This performance was in the midst of the largest industry-wide suspension of commercial helicopters, EC225. It began in October 2012 and continued until they were returned to service during the second half of calendar 2013. As you know, CHC has the world’s largest fleet of EC225s. So the suspension was a major disruption to our business and our customers.
Costs associated with EC225 return to service also negatively affected the results for Heli-One. As EC225 issue played out, I was extremely proud of the active role of CHC people in helping to determine the underlying problem that led to the suspension. All CHC’s EC225 have been safely available for service since December.
Another area I am proud of is our ongoing transformation, which is simplifying and enhancing our operations around the world. That includes further rationalizing CHC’s fleet. During the year we made important investments in our business, including our supply chain. Those investments added to Heli-One’s cost in fiscal 2014 but they were necessary to achieve significant increases that we’re now seeing in aircraft availability.
In addition, we continue to expand our footprint with our customers. This past year we reentered the strategically important Nigeria market and strengthened our position in core regions around the world. Customers welcome the changes that we’re making.
Last month Statoil selected CHC to fly crews from the UK to its new Mariner field, which is about 250 kilometers off the Northeastern coast of Scotland. The service is expected to begin in mid-2016 and will span five years with options for up to three more years. Statoil’s Mariner project is an exciting one. It’s the largest oil and gas development on the UK Continental Shelf in more than a decade, and represents an anticipated gross investment of more than $7 billion.
Separately in May Statoil awarded a CHC contract to provide helicopter transportation to a new exploration rig in the Atlantic Ocean, off the coast of Newfoundland, Canada. The 18 month contract is expected to take effect later this year, with our crews operating Sikorsky S92 helicopters between our base in St. John’s and Statoil’s West Hercules rig.
Please turn to Page 7. These developments and other factors have positive implications for CHC in fiscal 2015 and beyond. As we’ve discussed with you we have three long-term financial priorities: First, to strengthen our balance sheet; second, to expand EBITDAR dollars and margin; and third, to drive disciplined growth in the business.
As we discussed on our last earnings call, we’ve intensified our focus on reducing leverage. Joan will provide more details about these priorities in a few moments.
Please turn to Page 8. The foundation for our fiscal 2015 and long term guidance, which is our framework for value creation is the high level of discipline to grow at a rate that optimizes profitability and free cash flow.
However we will not sacrifice high return growth opportunities but we are being very selective with our aircraft investments and making full use of other operating and investing cash flow levers. The benefits of this discipline will begin to accrue in fiscal 2015 with better than planned free cash flow, healthy growth and improved margins.
Please turn to Page 9. Our fiscal 2015 targets are the following: mid to high single-digit growth in revenue and a high single to low double-digit increase in EBITDAR. During the course of our fiscal 2015 through fiscal 2018 planning cycle, we’re targeted compound annual growth rates in the high single-digits to mid-teen range for revenue and in the high teen to mid-20% range for adjusted EBITDAR.
At the same time we expect to generate positive free cash flow in fiscal 2017 on a sustainable basis. This is very significant. We now expect to become free cash flow positive one full year ahead of what we originally planned.
With the benefit of that overview, Joan will now provide additional perspective about our fiscal 2014 results and our financial targets for fiscal 2015 and beyond. Joan?
Joan Hooper – CFO
Thanks, Bill. Please turn to Page 10. Let me quickly review our fourth quarter and fiscal 2014 results so I can devote most of my comments to our guidance for fiscal 2015 and longer term targets.
Our consolidated revenue and EBITDAR for fiscal 2014 were both within the guidance ranges we provided on our last earnings call. Total revenue was $453 million in the quarter and $1.77 billion for the full year, up 1% over last year. The revenue growth was driven by a combination of new higher return contracts in our helicopter services segment, including the Irish SAR contract and the Shell Globetrotter contract as well as new power-by-the-hour or PBH and MRO work in Heli-One.
Consolidated EBITDA was $132 million in the fourth quarter and $471 million for the year, down 3% year-over-year. As we previously discussed, the EC225 suspension adversely affected our results in fiscal 2014 because of lost revenue, additional costs to return the aircraft to service, increased maintenance and ongoing inspection expenses.
During this challenging time for the industry, most customers continued to pay their monthly standing charges to the operators. However starting in April of 2013 one of our customers, Petrobras, stopped making payments on contracts to CHC and other operators of 225s in Brazil until overwater flights with those aircraft resumed.
When we provided guidance for fiscal 2014, we included the recovery of certain payments from this customer because we were in the midst of discussions with them and had a high confidence level we would favorably conclude those discussions in fiscal 2014. However this did not happen in Q4 as expected, resulting in both revenue and EBITDAR falling at the lower end of our guidance ranges.
Please turn to Page 11. Free cash flow for fiscal 2014 was a use of cash of $128 million, a $22 million improvement versus fiscal 2013. Contributing to this year-over-year improvement were some timing benefits in both operating and investing cash flows. Year-end liquidity was strong at $651 million, up $291 million year-over-year and the leverage ratio was 5.3 times.
Please turn to Page 12. Now let me shift to our guidance. Prior to our IPO in January, our operating and financial plans were optimized to drive EBITDAR, which over time will contribute to positive free cash flow and a reduction in our leverage. Since our IPO, we increased our focus on accelerating our path to positive free cash flow.
As part of our long term planning process, we conducted a rigorous review of our P&L, balance sheet and cash flow with the expressed goal of accelerating when we become free cash flow positive.
Let me address the targets we have for each of our financial priorities, starting with disciplined growth, then increasing EBITDAR and margin, and finally strengthening our balance sheet. All of our targets are in the earnings presentation, so I’ll just touch on the highlights.
First on disciplined growth. In fiscal 2015, we’re targeting revenue growth in the mid to high single digit range. We typically start each year with over 70% of our flying revenue secured through fixed monthly charges. Our contracts are typically four to five years in length thus providing a very stable and predictable stream of revenue.
In addition, our strong record of availability, reliability and safety support our new contract win rate of over 50% and a retention rate above 90% for contracts under renewal. Within this 2015 revenue target, we expect growth in Helicopter Services in the mid-single digit range and growth from Heli-One third party revenue in mid-teen to low 20% range. The growth in Helicopter Services will be driven by our deployment of new technology aircraft, which command higher HE rates as well as growth in key regions such as Americas and Nigeria.
Our HE count will be relatively flat as we take planned deliveries of 13 to 15 aircraft while divesting of about 20 to 25 legacy aircraft. Please see our earnings deck for additional information on our fleet.
We expect the growth in Heli-One to be driven primarily by third party PBH revenue. We’ve already secured some of this work in fiscal 2014 by signing several long term PBH contracts with helicopters operators, including NHB which have roughly 30 heavy and medium aircraft.
Since we manage our business for the long term we don’t give quarterly guidance. However, as we enter fiscal 2015 it’s important to give you some perspective on the categorization of our expected revenue growth for this year. We expect consolidated revenue to be up in the low to mid-single digit range for the first quarter and then accelerate through the fourth quarter as we deploy more new technology aircraft.
Please turn to Page 13. Now let me turn to our second financial priority of expanding EBITDAR and margin. For fiscal 2015 we’re targeting a high single to low double digit increase in EBITDAR. We plan to achieve this goal by doing the following: First, upgrading our fleet enhances EBITDAR and margin because new aircraft with the latest technology command higher HE rates while the costs to operate these aircraft are comparable to those of the older aircraft.
Second, we can increase EBITDAR through re-pricing as legacy contracts roll-off and extensions and renewal are priced to current market rates. And third, through our transformation efforts, such as base transformation, centralized flight operation and the continued roll out of our IT applications we’ll further improve the efficiency of our overall operations. These improvements benefit EBITDAR as well as free cash flow.
Please note that our FY’15 EBITDAR guidance includes a full year of ongoing stock comp expense versus roughly one quarter in fiscal ‘14. The impact of this annualization of stock comp expense reduces our FY ‘15 EBITDAR growth by over two points.
Please turn to Page 14. In addition to revenue and EBITDAR, here are some additional details of our fiscal 2015 guidance. We’re targeting interest expense in the range of $135 million to $150 million, lease expense in the range of $275 million to $295 million, and taxes in the range of $30 million to $40 million.
In fiscal 2015, we expect free cash flow to be use of cash in a range of $180 million to $210 million. This reflects net expansionary CapEx of $105 million to $135 million, and maintenance CapEx of $90 million to $110 million.
As I just mentioned fiscal ‘14 included some timing benefits that led to a year-over-year decline in free cash flow versus the guidance for ‘15. If you normalize for these timing items the midpoint of our free cash flow guidance for fiscal ‘15 is approximately $25 million higher than last year.
Now the fiscal ‘15 revenue and EBITDAR estimates I just provided are lower than current consensus. This is driven by two factors. The first is that we’re facing more currency headwinds than we expected in previous estimates. This primarily impacts revenue and accounts for more than one-half of the difference between current consensus revenue and the midpoint of our guidance.
The currency fluctuations are driven by the strengthening of the U.S. dollar against Norwegian, Australian and EU currencies.
The second factor is a delay in the ramp-up of our operations in Nigeria. The pipeline for demand there remains strong but the oil and gas tenders are being pushed out due to the Nigerian regulatory process. We remain very optimistic about the long term prospects in Nigeria but this delay has reduced our near term revenue and EBITDAR expectation and accounts for close to half of their revenue shortfall and the majority of the EBITDAR shortfall versus current consensus. It is important to note that the free cash flow guidance I just provided is better than our previous expectations and many models.
Now let me turn to longer term financial targets. Please turn to Page 15. From fiscal 2015 through fiscal 2018 we are targeting compounded revenue growth in the high single digit to mid-teen range. This is driven by mid to high single-digit growth in HE count as we continue to invest in key regions such as Nigeria, Brazil and Canada and high single-digit compounded annual growth rate in our HE rate driven by an improved mix of geographies and aircraft.
For the same time period we are projecting EBITDAR to grow on a compounded basis in the high-teen to mid-20% range driven by revenue growth, improving returns and the continued benefits of our transformation initiatives.