CHC Group Ltd (HELI) Q4 2014 Earnings Conference Call Transcript

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…

 

Operator

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.

ALSO READ:   Constellation Brands' (STZ) CEO Robert Sands on Q2 2015 Results - Earnings Call Transcript

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.

Please turn to Page 16. Now let me turn to our third financial priority of strengthening our balance sheet which includes growing incremental cash flow and reducing leverage. We expect to be free-cash flow breakeven before expansionary CapEx by the end of fiscal 2016 and we are targeting to be free-cash flow positive in fiscal 2017, one full year earlier than previous estimates. By fiscal 2018 we expect our leverage ratio to be below four times.

As Bill stated, we will not forgo high return growth opportunities simply to accelerate becoming free cash flow positive. We will be disciplined and grow at a rate that optimizes profitability and liquidity.

In addition to driving profitable EBITDAR growth, we are also focused on five initiatives that span operating, investing and financing cash flows. The first is to optimize our lease terms. There is an unprecedented amount of capacity in the helicopter leasing market. CHC is well equipped with a team of industry leading leasing experts to benefit from this increased competition through attractive pricing and other terms.

The second is to lower interest expense. Since February of this year we have redeemed a total of $195 million of senior secured notes through our call option and open market repurchases which lowers our interest expense related to these notes by $18 million annually. In February of 2015 we have the option to call an additional $130 million of our senior secured debt at 103.

The third initiative is to improve working capital. Over the last two years we’ve reduced our day sales outstanding by six days and each day is worth of about $4.5 million. We are targeting to take out an additional three plus days in fiscal 2015 with further improvements in the future. We can achieve this through improved payment terms upon contract renewal and designing our current system to better track and monitor collections. And once deployed we plan to leverage the electronic flight bag technology to improve flight data timeliness and accuracy which can help us accelerate our invoicing process.

The fourth initiative is lowering our CapEx spending through supply chain efficiency and disciplined capital allocation. One category of our capital spending is maintenance CapEx or investments to replenish existing assets. This includes aircraft base maintenance, replacement of rotables and enhancements of existing buildings bases. We’ve been successful in keeping our maintenance CapEx relatively flat in the past several years despite consistently growing our fleet with higher valued aircraft.

As discussed earlier, we have significant efforts underway to more efficiently distribute and return parts to accelerate cycle times to repairing rotables and returning them to service. These enhancements will allow us to become more efficient with our maintenance capital.

And the fifth driver to improve free cash flow is to accelerate the disposals of certain legacy aircraft types from our fleet. In addition to improving free cash flow this also drives improved margins. All five of these initiatives are in our control and are fundamental to de-levering and improving free cash flow.

So let me summarize our long term guidance and put it in perspective. We intend to accelerate when we become free cash flow positive by one full year while delivering strong EBITDAR growth and expanding margins from a healthy top line growth.

ALSO READ:   Citigroup's (C) CEO Michael Corbat on Q3 2014 Results - Earnings Call Transcript

Now operator, we’d like to open up the call for questions.

Q&A Section

Operator: (Operator Instructions) Our first question is coming from the line of David Anderson with JPMorgan. Please proceed with your question.

David Anderson – Analyst, JPMorgan

Very encouraging to see moving up the free cash flow positive timeline from 2018 to 2017. I was just wondering if you could, Joan, maybe perhaps you could focus in a little bit on that timeline of what’s in your control, some of the levers. You just mentioned the five different initiatives on free cash flow. If you accelerate these initiatives, do you have the ability to move up that timeline from 2017 up even further? I’m curious. You listed the five different elements. It seems like working capital could be one of the areas that might be the biggest lever on there. Could you talk about how you see those things playing out over the next year or two?

Joan Hooper – CFO

Sure. Well obviously we built some of those improvements in to be able to accelerate the timeline by one full year but to your point we’re going to continue to look for opportunities to do even better than this. One example, in addition to working capital would be the bonds. And so we have not built into our guidance anymore repurchases of senior secured notes. I mentioned we have the option to do another call next February but we have not built that in. So we will continue to monitor for opportunities like that and obviously if we were to pull the trigger on that that would reduce interest expense.

So we believe we’ve got a very balanced plan. It accelerates free cash flow, it delivers very healthy top line growth, expanding margins and strong EBITDAR but we’ll obviously continue to look to improve that, so Bill, do you have some comments?

Bill Amelio – President and CEO

Yes, I think when you look at fourth lever that we talked about which is our efficiency. We’re at about 80% implemented a lot of our centralized systems and we’re right at the position now where we’re going to start accelerating our benefits. So I think we have put in place modest benefits in front of us, that we have an opportunity there to squeeze out a bit more, improve our rotable turnaround times which will decrease our maintenance CapEx and therefore help us with respect to what we can do with the cash flow positive [inaudible].

David Anderson – Analyst, JPMorgan

Okay and regarding kind of the growth CapEx element there, I mean it sounds like, I think you talked about perhaps on some of the options you’re not going to be taking all the options. Is that something you’re thinking about, maybe tempering that a little bit in terms of kind of the balance I guess between your growth and versus where you want to be in terms of your balance sheet, and cash flow?

Bill Amelio – President and CEO

Absolutely, it’s exactly what we did. We said it was more important for us to make sure that we had healthy growth but yet be able to go cash flow positive sooner. So we essentially cut back a bit on our aircraft purchases.

David Anderson – Analyst, JPMorgan

Perhaps, could you just expand a little bit on the re-leasing opportunity? In terms of say terms that are out, maybe give us a sense as to — I’m not sure how you want to do this. If you think about, if you were to lease an aircraft today versus what some of your legacy leasing terms are, would it be possible to just to give us a sense, as to how much better they are? Clearly, there’s a lot more lessors out there than there have been in the past. Maybe give us a sense as to what the difference is between those?

Joan Hooper – CFO

Yeah, it’s probably easier as opposed to legacy, so obviously some of the leases go back eight, ten years and so the rates were very different eight ten years ago. But if I think about the market rate, looking now versus let’s say 12 to 18 months ago, I think it’s at least a point lower on the lease rates.

David Anderson – Analyst, JPMorgan

Wow. That’s a pretty big number. Okay. That’s great. I know a little bit of a shortfall this quarter, in terms of EBITDAR related to the 225 issues with Brazil. Do you expect to get that money back? Is that in your guidance for next year?

Joan Hooper – CFO

It’s not in our guidance but obviously we continue discussions. Petrobras is a really important customer for us. We have a good relationship, as I mentioned this was not unique to CHC. This was an action they took against all operators with the 225. So we’ll continue discussions with them but to be prudent we did not put anything in our guidance to reflect any recovery.

Operator: (Operator Instructions) Our next question is coming from the line of Praveen Narra with Raymond James. Please proceed with your question.

Praveen Narra – Analyst, Raymond James

Could you guys give us a little more color on the HE rate assumptions? It looks like this year came in flattish, and should increase a mid-single range in 2015 and then accelerate from 2015 to 2018 to high single digits. So can you walk us through what is leading the 2015 improvements in out year acceleration, how much is mix shift, and how much is better contracts?

Joan Hooper – CFO

Yeah, I don’t have the 2015 in front of me but if I think about the kind of the trend in the longer term guidance we gave the majority of the improvement will come from of the technology shift. So again as you deploy the new aircraft and it’s a return on capital placing model we get higher rates, you not only do get the HE improvements but that’s part of the explanation, obviously the margin expansion.

And then in addition, there are normal escalations built in the contracts. So that helps as well and then there is re-pricing of existing contracts. But I would say the majority of it is going to come from the technology shift.

Praveen Narra – Analyst, Raymond James

Okay. So just to be sure we’re not, let’s say taking in any improvements in industry rates?

Joan Hooper – CFO

Not really, no it’s — we’re not assuming other than the normal escalations which are tied to cost in the fees in the various regions, we’re not assuming any big improvement in just overall market pricing.

Praveen Narra – Analyst, Raymond James

Okay, and then just a kind of follow up on the previous question, it looks like you expect the mid to high single digit count growth in out years and so with that how do you kind of think about net expansionary CapEx beyond ’15?

Joan Hooper – CFO

Yeah, we didn’t provide specific guidance on that. I think we could probably help a little bit with some of the models offline but it’s consistent with, if you take a look at the count growth and you kind of assume average cost per aircraft is going to be pretty consistent to that. But obviously we do lease finance most of our new aircraft.

Operator: Thank you. The next question is coming from the line of Angie Sedita with UBS. Please proceed with your question.

Angie Sedita – Analyst, UBS

So first clearly it’s great to see the acceleration to becoming cash flow positive by a full year, so well done on that. The question is Bill, really for you, I mean given the concerns in the offshore drilling markets, could you talk a little bit about what you are seeing in the offshore markets, how it differs, conversations that you are having with the IOCs, what you’re seeing on industry demand and how much visibility you have going into 2015?

Bill Amelio – President and CEO

Over the course of the past several months we essentially refreshed all of our plans with every one of the major customers. So we have fresh insight on their plans with respect to production opportunities as well as exploration and development opportunities. And it’s still pretty robust. We haven’t seen anyone really pulling back on any areas that they are doing businesses with us with. And we have opportunities essentially spanning across the globe. So every one of the regions whether it’s the North Sea or whether it’s in Africa, Australia or Brazil we’re seeing improvement.

Just take Brazil as an example where there was — last time on the call we had mentioned that we hadn’t got a tender from Petrobras for almost 18 months and we’ve now had two tenders come out in the past month and one is for medium, one’s for heavy helicopters, which is very promising. We have a rich pipeline in Nigeria. It’s unfortunate that NAPIMS who is the regulator that Joan mentioned in her remarks has put various different hurdles in place for the oil and gas companies to actually put the tender in process but the demand is there, significant demand. And if I look across the world the pipeline is extremely healthy and we can see out for about five years the first 12 months it’s very firm and very reliable. So we’re pretty bullish on what we see across the world with respect to opportunities.

Angie Sedita – Analyst, UBS

And the retention rates and all your other historic statistics continue to be as strong as they were a year ago. So there has been no change whatsoever in what you’ve seen in your contracting?

Bill Amelio – President and CEO

No, change, we’ve mentioned in our remarks we’re 90% plus with respect to retention of existing contracts and our win rates are about 50%.

Angie Sedita – Analyst, UBS

Okay. And then on Nigeria, is it possible, do you have any clarity when you think those contracts would eventually come through or any thoughts?

Bill Amelio – President and CEO

We’re looking at — potential what our original plans were like a three to six month delay is what we believe. We think that there are some great opportunities that can burst through this year that will give us uplift. So we are really very, very encouraged about what we saw. We just had some of our senior team over in Nigeria spending time with every one of the customers and they’re very excited to have CHC in that market. We’re flying one long-term contract today, we’re also flying ad hoc and we are planning to put more helicopters in that market in the coming months.

ALSO READ:   Arrowhead Research Corporation (ARWR) Q4 2014 Results Earnings Call Transcript

Angie Sedita – Analyst, UBS

Okay, and then so if you won any incremental contract, would that be upside to 2015 and then is it already in your 2016 assumption?

Bill Amelio – President and CEO

It’s already in our 2015 assumptions and 2016. We got to win a few of them to get — to make our plan.

Operator: Thank you. The next question is coming from the line of Hilda Maraachlian with Cormark Securities. Please proceed with your question.

Hilda Maraachlian – Analyst, Cormark Securities

On the re-pricing of the contracts that you mentioned that is going to drive the EBITDAR growth, what percentage of contracts are you talking about that will be re-priced in the near term?

Joan Hooper – CFO

I don’t have the precise percent but if you’ll think about our contracts on average, for production contracts of four to five years, if that was ratable it would be roughly 20% a year and it’s fairly consistent in that regard.

Hilda Maraachlian – Analyst, Cormark Securities

Okay, that’s good. And the guidance in the revenue and EBITDAR growth guidance, obviously the lower than expected guidance was because of Nigeria and the FX that you guys are talking about, but the longer term guidance, has anything changed in your assumptions from before? Basically, what is driving and how comfortable you are, and if there is any change in your assumptions of that guidance?

Joan Hooper – CFO

Well again if you step back and look at the long term guidance which is provided relative to our previous guidance through the IPO process, we essentially accelerated the breakeven point for free cash flow. We had essentially consistent EBITDAR growth throughout that time horizon and slightly slower but still healthy revenue growth. So we did do a little bit of trade off on the revenue growth in order to accelerate free cash flow but we were able to maintain the EBITDAR growth because we now believe there is even more upside in the transformation efforts we have in terms of cost efficiency.

Operator: Thank you. The next question is coming from the line of George O’Leary with Tudor Pickering Holt. Please proceed with your question.

George O’Leary – Analyst, Tudor, Pickering, Holt

Good morning, guys. A little nit from me. I noticed the revenue in the Americas region ticked down quarter on quarter. You note in the presentation that some legacy contracts rolling off, also that Brazil and Canada had good opportunities for you going forward. Can you talk a little bit more about the repricing opportunity there, and where sort of the leading edge rates are versus the legacy contracts that rolled off?

Bill Amelio – President and CEO

Sure, if you look at — let’s take in two pieces, first East Canada, we got our first opportunity in Canada with Statoil and a couple of aircraft there, that will be priced at current market rates. So that’s a great contract for us. We’re very happy to get back in the East Canada market. East Canada looks a lot like the North Sea did 20 years ago. There’s plenty of opportunities there. The reserves are massive and you just got to be able to tap into them and all of a sudden that market will grow pretty dramatically. So we’re glad to be there.

And with respect to Brazil as you know that’s a healthy growing market and I just mentioned the fact that we had two tenders that came forward with respect to Petrobras and we will be exiting out of some of the older legacy medium contracts that were in fact lower priced and moving towards the new mediums that will be at market rates as well as the heavies which tend to be a much better opportunity for us.

George O’Leary – Analyst, Tudor, Pickering, Holt

And just one more question, in Brazil are you guys seeing any opportunities with IOCs or operators outside of Petrobras?

Bill Amelio – President and CEO

Yes we are.

Operator: Thank you. The next question is coming from the line of Greg Obenshain with Apollo Capital Management. Please proceed with your questions.

Gregory Obenshain – Analyst, Apollo Global Management

Thanks for taking my call. Just — thanks for the color on lease expense and the rates coming down to 1% it sounded like. It looks like on page 14 in your guidance you’re guiding to a higher lease expense for 2015 and it looks like it’s shaping up a little more than the EBITDAR guidance. Wondering if that’s just a temporary year-over-year and how that trends going forward how should we think about that lease expense?

Joan Hooper – CFO

Yeah it’s really just a function of the timing in terms of when we take the aircraft in and lease it, we start those payments and typically there are some month lags before they are actually put in production and then obviously you wrap up a new contract, EBITDAR growth comes in a little bit after the fact, so it’s just really timing.

Operator: Thank you. Our final question of the day is coming from the line of Jacob Dweck with Fore Research. Please proceed with your question.

Henry Voskoboynik – Analyst, Fore Research

Hi, it’s Henry Voskoboynik for Jacob. Couple of questions. Given your cash balance today, and the guidance for free cash flow for next fiscal year, and the bond repurchase that has already been completed, it looks like cash comes down to maybe $50 million at the end of fiscal 2015. Is that correct? And then again, in 2016, still the negative free cash flow. How do you plan on funding the company? What’s the minimum cash that’s needed to run the business?

Joan Hooper – CFO

So I would focus on liquidity not on cash balance. So from a liquidity standpoint, obviously we’ve got our cash but we’ve always had lines of credit that as necessary we’ll draw upon, we have a $75 million line of credit. So we’re not worried about our liquidity at all on our path to positive free cash flow.

Henry Voskoboynik – Analyst, Fore Research

Okay and on the liquidity, please remind me if the credit lines are $350 million?

Joan Hooper – CFO

$375 million.

Henry Voskoboynik – Analyst, Fore Research

$375 million and they are untapped today?

Joan Hooper – CFO

They’re currently untapped.

Henry Voskoboynik – Analyst, Fore Research

Okay, and there is a covenant there, I believe, of 2.5 times senior secured leverage, is that correct?

Joan Hooper – CFO

On the — you are talking about, on the revolvers?

Henry Voskoboynik – Analyst, Fore Research

Yes.

Joan Hooper – CFO

There are some covenants on the revolvers but I guess the overall covenants is we’re not concerned with our any of our covenants, as we continue on our long-term guidance to free cash flow.

Henry Voskoboynik – Analyst, Fore Research

So basically there is no plans to raise any additional capital?

Joan Hooper – CFO

Yeah. That’s a good point, I should have clarified. All of this guidance assumes obviously no new debt issuances, no equity issuance, et cetera, so it’s all basically we’re able to achieve positive free cash flow without any additional equity or debt raises, other than accessing the revolver as required.

Henry Voskoboynik – Analyst, Fore Research

Understood. Also, on the new build program, if you can help us out a little bit. It is my understanding that there were commitments, I believe, of close to I think $100 million on the HEs through 2016 and I believe close to $800 million plus on other new builds. Can you give us a little more color on where that stands, and what deliveries do you plan on taking in the next 12 months?

Joan Hooper – CFO

Well, again we’ll be filing our 10-K there later today, or tomorrow and you’ll see that. So we have commitments if I think about fiscal ‘15 our committed aircraft is about 15 aircraft and then obliviously the order book goes out beyond ‘15. So our plan contemplates the commitments we have and it’s consistent.

Henry Voskoboynik – Analyst, Fore Research

Understood, okay. And in terms of the disposition of some of the old aircraft, is there any positive or negative charges that are expected to be taken in that?

Joan Hooper – CFO

To the extent that we expected to have a non-cash write-down we would have probably done that already in terms of assessing the aircraft. So at this point I wouldn’t expect any but obliviously those aircraft aren’t all sold yet. And so we go through this every year, we sell quite a lot of helicopters, but in general I would say the market has stayed pretty firm in terms of the value of aircraft when we go to sell them.

Henry Voskoboynik – Analyst, Fore Research

Okay, last question from me. On the Nigerian market, is there any issues with local content at all that a part of the delays or is it just permitting issue, any more color that you guys can give us?

Bill Amelio – President and CEO

I think you specifically talked about Nigeria, there is no issues with local content there, we in fact will have the appropriate level local contract, the pilots there will be local and all of our operations are local there, the management’s local there, the partner that we have there is a superior partner, so we’re in great shape to get started. And as I said we already have a long term contract that we are operating today as well as running ad hoc operations for several customers.

Operator: Thank You. Ladies and gentlemen we have reached the end of our question-and-answer session. I would now like to turn the floor back over to Mr. Amelio for any additional concluding comments.

Bill Amelio – President and CEO

Thanks Jessie. Well we appreciate everyone’s questions and your interest in CHC. While the information that we covered during the Q&A is still fresh, I’d like to close with a strategic point that I made a little bit earlier.

Everything that we are doing is aligned with us simultaneously first and foremost strengthening our balance sheet, including becoming free cash flow positive. Second, expanding our EBITDAR dollars and margin and three, driving disciplined growth. Well I want to thank everyone for joining our call today and I look forward to speaking with each of you again soon. Thank you.

Operator: Thank you. Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time.

Multi-Page

Leave a Comment

Scroll to Top