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Era Group (NYSE:ERA)
Q1 2019 Earnings Call
May. 08, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, and welcome to the Era Group reports Q1 2019 results. Today's conference is being recorded. At this time, I would like to turn the conference over to Crystal Gordon, senior vice president, general counsel and chief administrative officer. Please go ahead.

Crystal Gordon -- Senior Vice President, General Counsel, and Chief Administrative Officer

Thank you, Cecilia, and good morning, everyone. Welcome to Era's first-quarter 2019 earnings call. I'm here today with our president and CEO, Chris Bradshaw; our SVP and CFO, Jennifer Whalen; our SVP of strategy and corporate development, Grant Newman; our corporate controller, Tricia Schroeder; and our finance director, Seema Parekh. You may access our recent earnings press release and presentation slides on our website, erahelicopters.com.

Let me remind everyone that during the call, management may make forward-looking statements that are subject to risks and uncertainties that are described in more detail on Slide 3. I'll now turn the call over to our president and CEO. Chris?

Chris Bradshaw -- President and Chief Executive Officer

Thank you, Crystal, and welcome to the call, everyone. As always, I will begin our prepared remarks with a note on safety, which is Era's most important core value and our highest operational priority. We are pleased to report that Era achieved our dual goals of zero air accidents and zero recordable workplace incidents year-to-date 2019. The company has not experienced an air accident in the last three years, and we have now gone over 590 consecutive days without a recordable workplace incident.

We were honored to be recognized by the National Ocean Industries Association as the 2019 winner of the NOIA safety in seas culture of safety award, which recognized Era for instituting a robust safety culture. The credit rightly belongs to all of our Era team members in the field, who are dedicated to placing safety first every day. Turning to an update on our financial position. Era maintains a strong balance sheet and industry-leading financial flexibility.

We completed the previously announced sale of our 50% equity interest in Dart on April 1. Pro forma for the cash proceeds received from the Dart sale, Era's total liquidity as of quarter-end was approximately $210 million, including almost $90 million of cash on hand. With a strong balance sheet, limited debt maturities prior to 2022, manageable fixed-charge obligations and a flexible order book, Era remains well positioned for positive cash-flow generation. For a review of our Q1 financial results, I will now turn it over to our CFO.

Jennifer?

Jennifer Whalen -- Senior Vice President and Chief Financial Officer

Thank you, Chris. Turning to the financial highlights for the first quarter of 2019 compared to the fourth quarter of 2018, revenues decreased by $0.7 million. The primary drivers for this decrease were lower utilization of medium and single-engine helicopters in our U.S. oil and gas business partially offset by increased dry-leasing revenue.

Operating expenses were lower by $0.3 million due to decreased personnel and fuel costs. General and administrative expenses were $0.5 million lower primarily due to decreased compensation expenses. Equity earnings were lower by $1.6 million due to losses from our Dart joint venture. This decrease in equity earnings drove the sequential-quarter decrease in adjusted EBITDA.

As Chris mentioned, the sale of Dart closed on April 1. Moving on to the first-quarter 2019 compared to the first-quarter 2018 results. Revenues were lower by $6 million. The revenue decrease was primarily due to lower utilization of light and medium helicopters in oil and gas operations.

Operating expenses were $1 million lower primarily due to the -- to a reduction in headcount and the absence of certain costs recognized in the prior-year quarter. The decreases were partially offset by an increase in power-by-the-hour expense related to credits taken in the prior year. General and administrative expenses were $3.2 million lower in the current quarter due to a decrease in professional service fees related to a litigation that's now been settled. Finally, cash flow provided by operating activities was $2.6 million for the current quarter.

As the first quarter of the year is typically one of our lower-revenue quarters, this is a further representation of our ability to generate cash during difficult market conditions. At this time, I'll turn the call back to Chris for further remarks. Chris?

Chris Bradshaw -- President and Chief Executive Officer

Thank you, Jennifer. The company published my annual letter to Era's shareholders two weeks ago, and I will refer you to that letter for a more expansive discussion of Era's performance during the prolonged offshore industry downturn, current market conditions and the potential for consolidation in the helicopter industry. In today's call, I will focus my comments on a couple of updates. First, while Q1 is generally one of our weakest seasonal periods, we experienced a particularly soft first quarter this year.

Consistent with our historical seasonality pattern, we expect that customer activity will increase in Q2 and Q3 compared to the first quarter of the year. Over and above this typical seasonal increase, we also expect activity will be higher as a number of new customer projects are scheduled to commence over the coming quarters. Second, there is some uncertainty around the future ownership of Anadarko Petroleum given that two potential acquirers are bidding to purchase that company. As you know, Anadarko is our largest customer, accounting for approximately 30% of Era's 2018 revenues.

At this time, the outcome of the Anadarko sale process is not certain. Furthermore, it is too early for us to speculate on whether a particular transaction will have a positive, negative or neutral impact on our business. We believe Era is well positioned to deal with challenges should more arise. In the meantime, our priorities are unchanged.

We remain laser focused on delivering safe, efficient, and reliable helicopter operations to all of our customers every day. In conclusion, we have positioned Era such that the company is secure in a stand-alone scenario despite the challenging industry conditions and also well positioned to participate in value-accretive consolidation opportunities should they become actionable. We continue to believe that our strong balance sheet and cash-flow profile present multiple opportunities to create value for Era's shareholders. With that, let's open the line for questions.

Cecilia?

Questions & Answers:


Operator

Thank you. [Operator instructions] Our first question today comes from Bill Mastoris of Baird & Co.

Bill Mastoris -- Robert W. Baird and Company -- Analyst

Thank you, and good morning, Chris and Jennifer. First question I have has to do with, Chris, as you see kind of an expected increase in activity levels and as you hear about more rigs now being placed with the prospect for additional further increases in the second half of this year, does this kind of change your thinking just in terms -- and also with the increased heavy utilization, does it change your thinking as far as maybe purchasing one of the AW189 aircraft or really even the -- any of the other aircraft that you have on order right now?

Chris Bradshaw -- President and Chief Executive Officer

Hey, good morning, Bill, and thanks for the question. As you know, we've built in a lot of flexibility in our order book, and it's given us a lot of optionality to respond to market demand as it may arise. We have a while before we need to make the decisions whether or not we take delivery of the AW189s or the other aircraft in our fleet, and so we'll let that play out and see if the market opportunities present themselves. If they do, we have the ability to go get those aircraft and bring them into the fleet.

As of right now, hypothetically, if we had to make a decision about these deliveries tomorrow, we would probably cancel the orders because there's not a need for them today. But this is a dynamic market and as things change, we'll continue to evaluate the potential need for those 189s, and we'll be able to capitalize on that optionality should we need it.

Bill Mastoris -- Robert W. Baird and Company -- Analyst

OK. So my next question relates to kind of the allocation of funds with now an abundance of liquidity, and as you mentioned, a lot of financial flexibility. In the allocation of funds, how are you going to proceed there? Is this going to be something where maybe you'd reduce debt a little bit further, maybe buyback of bonds? How do you see that playing out?

Chris Bradshaw -- President and Chief Executive Officer

Yes. So we think that the strong balance sheet we have, the cash balance, and our cash-flow profile present multiple opportunities for us to create value. And we'll look at all of those potential allocation opportunities, which could involve debt pay-down, whether addressing the public notes or some of the bilateral notes that we have. It may also involve a return of capital to shareholders.

All of those opportunities are on the table. Right now, one of the potential alternatives that we're quite focused on is what we believe is potentially a once-in-a-generation opportunity to affect consolidation in the industry. We think consolidation, in addition to enhanced scale and diversification, which are important, brings the potential to create value for shareholders from realizing synergies. And we think that in addition to addressing the excess capacity that address -- that exists in the industry today and also consolidation that is -- affords the opportunity to better absorb the significant fixed cost required to run an air carrier.

So we're evaluating, and we will continue to evaluate some of the opportunities out there. Long term, if none of those end up coming to fruition, then we certainly have other ways that we can deliver value for our stakeholders.

Bill Mastoris -- Robert W. Baird and Company -- Analyst

All right. Yes. It's a nice segue into my question on consolidation. Do you see an acceleration of consolidation now that you've had some of your larger competitors actually fall on very difficult financial times? And is there a rule for private equity here to kind of step in? And kind of as a tag onto that, it sounds like your interest is really in being a consolidator.

Do I have that correct?

Chris Bradshaw -- President and Chief Executive Officer

So in terms of the acceleration, there are a number of things about M&A that are difficult to predict and uncertain. Obviously, timing is one of those. There are the two parties involved, by definition, and you only control one side of that equation. So the exact timing is difficult to predict, but we do see developments in the industry that would lead us to believe that consolidation is absolutely needed in our space and we believe that it should happen.

With regard to your private equity question, I would say that as we look at potential consolidation opportunities, one of our priorities is continuing to protect our strong balance sheet. We've worked very hard over the last four and a half years to preserve and protect that balance sheet, and we're not going to put ourselves in a position where we, as stewards of your capital, can't sleep at night because of the level of leverage of the company. So we're going to look at maintaining a sustainable and strong balance sheet. We do believe, based upon conversations that we've had with a number of potential capital providers out in the market, whether on the debt side, the equity side and so forth, it is our belief that there will be capital available to help affect the consolidation, which we think needs to happen in the industry.

Bill Mastoris -- Robert W. Baird and Company -- Analyst

OK. Thank you very much. I do appreciate it.

Chris Bradshaw -- President and Chief Executive Officer

Thank you, Bill.

Operator

[Operator instructions] We'll go next to Adam Ritzer, a private investor.

Adam Ritzer -- Private Investor

Hi. Thanks for taking my call. I just -- I'm not going to ask any more questions about the once-in-a-generation opportunity. Like you say, it takes two to tango, and right now, it doesn't look like anybody else is willing to dance with you guys.

But hopefully, they will. Can you give us any more information about Dart now that it's closed, how much annualized equity earnings it was contributing?

Chris Bradshaw -- President and Chief Executive Officer

Good morning, Adam. Nice to speak with you. Regarding Dart, we're pleased with the valuation that we received for our 50% equity interest in Dart. Essentially, all of the equity earnings line item that you've seen reported on our P&L over the last several quarters is coming from Dart, so that gives you an indication of what our 50% of their net earnings were.

So that's -- I think that's the best place to point you to is just the equity investments line on our P&L over the last several quarters.

Adam Ritzer -- Private Investor

OK. Is that about equal to what you've received in Q1? I just don't have it in front of me. I could look, but maybe you could just tell me.

Chris Bradshaw -- President and Chief Executive Officer

Yes, Q1 was a bit of an anomaly in that Dart had a very difficult quarter. As a reminder, that sale transaction closed on April 1, so we were -- we picked up all of our equity earnings from Dart for Q1 through the end of March. So you can see that it was about negative $1 million in equity earnings from Dart in Q1 of this year. And that difficult quarter was primarily related to slow sales at the company which were significantly below historical levels and below expectations that the company had.

I think it's meaningful to point out that the sequential quarter change in equity earnings from Dart, which was a negative $1.6 million variance, is really what's driving essentially all of the sequential quarter decline in our reported adjusted EBITDA from Q4 of 2018 to Q1 of this year.

Adam Ritzer -- Private Investor

Right, right, right. OK. I'll go back and take a look. I guess, obviously, another very important thing going on right now is the whole Chevron-Anadarko Oxy situation.

I know it's too early to speculate, but can you help us understand, I know Chevron, as far as I know, you may know otherwise, is one of the only major oil companies that has its own fleet of helicopters. Obviously, the concern is that they can service Anadarko with their own fleet and wouldn't need you guys. What I heard may be otherwise that they might not be able to service the Anadarko wells. Can you discuss that at all and maybe give us some more factual information?

Chris Bradshaw -- President and Chief Executive Officer

I can confirm that Chevron does operate their own fleet of company-owned and managed helicopters in the Gulf of Mexico. I can also say that no other operator in the Gulf of Mexico, whether it's Chevron or any of our peers in the Gulf of Mexico, have the ability to absorb Anadarko's fleet as it exists today, as we are supporting it today. So any of those parties, if they were going to pick up the fleet, would have to go get additional aircraft to do that in the same way that Anadarko is being supported by us today. All of that being said, I really do want to emphasize that it's really too early for us to speculate about the implications of a potential sale of Anadarko.

Obviously, the counterparty is not yet known. And for any transaction, regardless of who the counterparty is, we think that the implications for helicopter transport will not be decided within those companies until much later in the integration process. So I think we have a while before we will really know. And right now, it would just be preliminary for us to speculate on whether any of these potential transactions has either positive, negative or neutral impact for our business.

Adam Ritzer -- Private Investor

OK. Can you tell us how the structure of the Anadarko contracts is currently? Are these month-to-month, are they longer term? Can you talk about that at all?

Chris Bradshaw -- President and Chief Executive Officer

So by matter of policy, we don't discuss terms of individual customer contracts. I would say that as you would expect, given the percentage of our revenues that come from Anadarko, we are supporting them and their needs in the Gulf of Mexico with a diverse fleet of aircraft spanning heavies through the medium category. And this has provided them with a lot of flexibility and being able to run their workforce logistic operations in the most efficient way possible. And it's a significant investment that we had to make.

And again, none of the other operators out there are in a position where they could pick that up today without having to change the mix of their fleet to support Anadarko in the way that they are today.

Adam Ritzer -- Private Investor

OK. That's helpful. And my final question has to do with industry conditions. I know, usually, you guys talk about this.

Can you perhaps tell us about what's going on in the industry, proposals that are out there? I know in the past, you've given us good color. Can you talk about that a little bit and what's going on out there?

Chris Bradshaw -- President and Chief Executive Officer

I think at a high level, we would agree with the observations that have been made by multiple other parties, including third-party research firms, other significant participants in the offshore industry such as the drillers or the three largest diversified oil field services companies. We generally agree with their observations that the offshore oil and gas recovery is under way. We still believe, as we've noted in the past, that the recovery will not be linear. They are likely to see some variability from quarter to quarter.

We also think you'll see a lot of variability in terms of the slope and pace of recovery from different geographic regions. To provide some commentary there, obviously, in the recent quarters, the activity and the level -- activity levels in our Gulf of Mexico operations have softened a bit. Brazil has also been relatively flat or consistent from -- in recent quarters. We are seeing good demand coming out of markets such as Mexico, where we're leasing aircraft into the country and also in the Suriname Guyana basin, which is a place where we're currently operating aircraft for a customer contract.

So the story does vary from quarter to quarter and from market to market. I would say that our dry-leasing business has been, if you look at the last months of 2018 and the first few months of 2019, that dry-leasing business has probably been one of our strongest businesses, which I think is a validation of our unique hybrid model where we're both an operator and a lessor. If we have aircraft in the Gulf of Mexico that don't have demand for new work in this market, we do have the flexibility to move that into other markets through our leasing business in areas where we don't have an AOC, where we don't have the fixed cost of running a separate air carrier there. And so this flexibility between operating and leasing has really allowed us to maximize the utilization of our fleet.

Adam Ritzer -- Private Investor

Got it. And one last thing, I'm sorry. With -- obviously, which PHI in bankruptcy and Bristow, they look like they're about to file any day now. Have you seen any inquiries that maybe you're getting that maybe people might not want to do business with distressed companies? Could you talk about that at all?

Chris Bradshaw -- President and Chief Executive Officer

Not with any specificity about the other competitors or individual customer conversations. I would note, though, directionally that we are seeing evidence that our financial strength and our industry-leading financial flexibility is increasingly becoming a competitive advantage for us. And so we'll look to try to capitalize on that the best that we can.

Adam Ritzer -- Private Investor

OK. Great. Thanks very much. Appreciate your time.

Chris Bradshaw -- President and Chief Executive Officer

Thanks, Adam. Take care.

Operator

Our next question comes from Roger King of CreditSights.

Roger King -- CreditSights -- Analyst

Hi, folks. I just have a couple affable questions. First of all, is the Chevron fleet for sale at a price?

Chris Bradshaw -- President and Chief Executive Officer

Hi, good morning. I'm not going to comment about any specific situations like that that would involve M&A with any one party.

Roger King -- CreditSights -- Analyst

OK. Then I have another one that's about past M&A. I'm not trying to be aggressive, I'm just curious. In previous calls, you talked about purchasing like leasing operations besides, like a PHI or an offshore logistics operating operation.

And I didn't see you -- I didn't see your name attached to the wayfair breakup. Is that still something that you're thinking about, purchasing like various smaller groups of helicopters that are being leased?

Chris Bradshaw -- President and Chief Executive Officer

So we do believe that consolidation is needed in the industry, both among the operators and lessors. So we view Macquarie's acquisition of most of Waypoint's leasing portfolio as a positive for the industry. And we think that that will help be part of the solution to address some of the excess supply, which exists in the industry today, particularly on the heavy aircraft side. For ourselves, we would look if the conditions and terms are right at potentially expanding our leasing business via acquisition, so that's on the table all the possibilities.

We also are very interested in potential consolidation opportunities where we have a significant amount of overlap today in terms of servicing the same end markets, servicing the same geographic areas. And we think those are the opportunities where we can potentially create the most value from synergies by realizing cost savings, and so we're obviously evaluating those sorts of opportunities as well. And I would point out that the nature of running an air carrier and the fixed costs required to do that are such that the synergies are really a significant component of any of these potential transactions. And so we think there's an opportunity for both sets of stakeholders to benefit and create value from those synergies benefiting both sides.

Roger King -- CreditSights -- Analyst

Right. I think everybody in the call and all the investors are on the same bus you are. I was just curious like there were several groups of helicopters in the Waypoint thing that did not go with Macquarie and they were likely themed by the banks as one that, specifically, those groups were for sale.

Chris Bradshaw -- President and Chief Executive Officer

Again, by matter of policy, we're not going to discuss specific situations that might exist, but I would reiterate my comments that potential leasing portfolios and assets are something that we would look at as well.

Roger King -- CreditSights -- Analyst

All right. Thanks a lot.

Operator

Our next question comes from Bryan Dutt of Ironman Energy.

Bryan Dutt -- Ironman Energy -- Analyst

Good morning. Could you discuss briefly the secondary helicopter market? Do you see any trends to the extent that sales are going outside of the oil field? What kind of prices are received for helicopters at this point?

Chris Bradshaw -- President and Chief Executive Officer

Yes, good morning. Really, we need to break it down into the different asset classes as the story is different for heavy, medium and light helicopters. On the heavy side, we still see an industry that's characterized by excess supply, and it may take multiple years to work through all of that excess supply to put those aircraft back to work. When you get down into the medium category, breaking it down by model, the AW139 market is an area where we've seen significant improvement over the last year in the supply/demand balance, and the amount of available or idle 139s is pretty limited today among both the operators and the lessors.

And we see that as an opportunity for our fleet to drive better utilization, which will increase our revenues and cash flows as we put some of those aircraft to work. Some of the other models in the medium category like the 76 are being phased out in certain geographic regions in the world, and that's impacting the supply/demand balance. And we believe some of those aircraft will need to find their way into other end markets, whether it's air medical or firefighting or other utility operations. And then when you get down to the light aircraft category, that's where you have the most potential to work in different end markets.

So those light aircraft, oil and gas only represents a small percentage of the total end markets that those aircraft address, and you have a very constructive supply/demand balance for those light aircraft.

Bryan Dutt -- Ironman Energy -- Analyst

In terms of consolidation, especially in the oil patch, I've always thought that the producers will always want competition, and if it is eliminated, they will introduce it one way or the other. Are you afraid that if the devil happened, that you will foster some new entrants into the market? Or is that not a concern?

Chris Bradshaw -- President and Chief Executive Officer

Well, we think today, if you look at the state of the industry, it's not sustainable. There, you've seen already a number of industry players forced to face financial restructuring. We think that there may be others who will also file for protection under Chapter 11. So I think you see an industry that's not sustainable.

We believe that consolidation would be good for all stakeholders involved in the industry, customers and everyone else.

Bryan Dutt -- Ironman Energy -- Analyst

And if you don't want to answer this question, I'd certainly appreciate. I really don't even want asking it on a public call. But with consolidation, you don't think there'll be any antitrust issues?

Chris Bradshaw -- President and Chief Executive Officer

Yes, I've predicted it's not a topic that we'll cover on the call. But we do note that there is -- the industry is where it is because there's an excess amount of equipment available out in the market today. We think there are a number of operators, and we think the industry and all of its stakeholders, including customers, would benefit from consolidation.

Bryan Dutt -- Ironman Energy -- Analyst

Congratulations on your safety record and keep working work hard for us. Appreciate it.

Chris Bradshaw -- President and Chief Executive Officer

Thank you, Bryan.

Operator

We'll take a follow-up from Bill Mastoris of Baird & Co.

Bill Mastoris -- Robert W. Baird and Company -- Analyst

My question's been answered. Thank you very much.

Chris Bradshaw -- President and Chief Executive Officer

Thanks, Bill.

Operator

[Operator instructions] And we'll go to Larry Callahan of Wheelhouse Securities.

Larry Callahan -- Wheelhouse Securities -- Analyst

Yes, good morning. I was just wondering if you could give me some idea of Occidental's current presence in the Gulf, and whether they're a significant customer of any of the current helicopter companies? And any other insight into their Gulf of Mexico operations?

Chris Bradshaw -- President and Chief Executive Officer

Sure. Occidental does not have a significant presence in the Gulf of Mexico today and is not an employer of helicopters today in the Gulf of Mexico market.

Operator

Mr. Callahan, any other questions?

Larry Callahan -- Wheelhouse Securities -- Analyst

No, thank you.

Operator

And with no further questions in queue, I'd like to turn the call back over to Chris Bradshaw for any additional or closing remarks.

Chris Bradshaw -- President and Chief Executive Officer

Thank you, Cecilia, and thanks, everyone, for joining the call. We look forward to speaking to you again next quarter. Stay safe.

Operator

[Operator signoff]

Duration: 30 minutes

Call participants:

Crystal Gordon -- Senior Vice President, General Counsel, and Chief Administrative Officer

Chris Bradshaw -- President and Chief Executive Officer

Jennifer Whalen -- Senior Vice President and Chief Financial Officer

Bill Mastoris -- Robert W. Baird and Company -- Analyst

Adam Ritzer -- Private Investor

Roger King -- CreditSights -- Analyst

Bryan Dutt -- Ironman Energy -- Analyst

Larry Callahan -- Wheelhouse Securities -- Analyst

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