Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Bristow Group's Third Quarter Earnings Conference Call. [Operator Instructions] This conference is being recorded today, February 7, 2014. I would now like to turn the conference over to Linda McNeill. Please go ahead. .

Thank you, George, and good morning, everyone. Welcome to Bristow Group's Third Quarter Fiscal '14 Earnings Call. I am Linda McNeill, Director of Investor Relations.

With me on the call are Bill Chiles, President and CEO; Jonathan Bailiff, Senior Vice President and CFO; Jeremy Akel, Senior Vice President, Global Operations; Mark Duncan, Senior Vice President, Commercial; 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 on 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 reflect our beliefs, expectations, hopes, intentions or predictions of the future. All forward-looking statements are subject to risks and uncertainties that are described in more detail on Slide 3..

Additionally, to the extent we discuss non-GAAP measures during the call, please see our earnings release or the investor presentation on our website for the calculation of these measures and GAAP reconciliations..

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

Bill?.

Thank you, Linda. Good morning, and thanks to all of you for joining us on our December 31 quarter end earnings call. We're going to start on Slide 5 if you have the slide deck in front of you or on your screen. .

As always, Bristow's commitment to Target Zero is our #1 core value and serves as the cultural touchstone for our company. To this end, our safety performance through December 31, 2013, has been consistent with our Target Zero goal, with no air accidents reported. .

However, on January 21, 2014, in the course of a routine pilot training maneuver, a Schweitzer 300CBi operated by Bristow Academy experienced a rollover, damaging the aircraft. Both individuals on-board were uninjured, and we are currently working with the authorities in their investigation.

In spite of this, we continue to be vigilant within Bristow, and are highly collaborative outside of our organization to significantly improve air safety in our industry for our passengers and crews alike. .

On ground safety, we were able to continue to reduce our lost work case rate from an unacceptable high of 1.26 in April to 0.32 in December, and a total recordable injury rate dropping from 1.57 in April to 0.35 year-to-date in December.

We have not experienced a recordable injury since August of 2013, and we are proud to report that our West Africa business unit has had over 14 months of complete Target Zero performance with no air accidents and no lost work cases or recordable injuries. Great job to the West African team. .

Okay, please turn to Slide 6, and I'll give you some highlight for the quarter. This quarter, fiscal 2014, GAAP earnings per share of $0.51 includes lower equity earnings from Líder -- from a tax payment Líder made to the Brazilian government of $0.3 -- or $0.34 per share.

Excluding this and other special items, our adjusted EPS for our third quarter fiscal 2014 were $0.85. Overall, operational performance in the third quarter of fiscal '14 was not as strong as our third quarter in fiscal '13, which is a record quarter for Bristow. .

Top line growth was excellent, over 7% higher than the comparable quarter. However, the adjusted EBITDAR and adjusted EPS decreased year-over-year and sequentially. Much of this decrease was expected by management as EC225 and contract startup expenses were planned in the second half of this fiscal year.

However, for the third quarter, LACE rates declined sequentially in 4 out of 5 of our business units as contract revenue moved into the fourth quarter. .

And cash flow remains very strong with our overall liquidity of $617.2 million, a record for our company. And that is after we spent $526 million on organic CapEx for this year. It should be noted that our 9-month year-to-date financial results are much higher than fiscal 2013 and are exceeding management's expectations. .

We believe in continued solid performance for the full fiscal year 2014, and are therefore reaffirming our adjusted EPS guidance range for the full year fiscal '14 of $4.25 to $4.55 as several important contracts begin revenue service in the fourth quarter. .

Turn to Slide 7, and we focus on Europe. Our European business unit, which is our largest business unit, continue with strong performance in the third quarter of fiscal '14, with LACE and LACE rates increasing sequentially and year-over-year as new technology aircraft come online.

This drove adjusted EBITDAR higher by 14.1% compared to the third quarter of last fiscal year..

Adjusted EBITDAR margin decreased to 35.3% in the current quarter, as we were impacted by higher maintenance and salary costs associated with the EC225. We anticipate continued solid financial performance in our European business unit, and expect adjusted EBITDAR margin to be in the mid-30s for the full fiscal year '14. .

Looking forward, we're expanding our oil and gas presence in Sumburgh as we see new growth opportunities west of the Shetlands. This includes ongoing U.K. tenders for 4 large aircraft equivalent, combined with 2 new technology SAR aircraft tenders in the Netherlands expected in fiscal year '15..

And now please turn to slide 8, and I'll expand on our UK SAR business for a moment. Turning to Search and Rescue, we are proud to report that since the start of the UK Gap SAR contract in June of 2013, we have conducted over 169 incident-free missions and rescued and/or assisted over 151 people from our Sumburgh and Stornoway bases. .

In the third quarter of fiscal year '14, $12.1 million of revenue was generated from the Gap SAR contract, and over $25 million has been generated since the beginning of the contract, as aircraft availability has been higher than expected. .

On UK SAR, construction of the Inverness and Humberside bases will commence with groundbreaking in the fourth quarter of fiscal '14. We're also pleased to report that Bristow has signed sales contracts for 7 UK SAR S-92s in the third quarter.

The monies have been received, which improves our overall liquidity, while at the same time significantly reducing the financial risk of this important project for Bristow Helicopter Limited.

Expect final lease documentation to be completed in the fourth quarter, with the remaining 7 Augusta West and 189 leases completed by the fourth quarter of fiscal year '15. We continue to stay focused on the other important execution elements of UK SAR, including pilot, crew and engineer training, which are all on schedule and on budget. .

Please turn to Slide 9, and I'll talk about our recent acquisition. Today, we're also announcing some exciting news for our European business unit and Bristow as a whole. Bristow Helicopters Limited has acquired a 60% interest in Eastern Airways International Limited. .

Similar to Bristow, think of Eastern Airways as an oil and gas services company whose service is fixed wing transport. Because of their underpinning of oil and gas contracting revenue, much of -- with our clients, there's a natural commercial and operational fit. This investment represents a major step in furthering Bristow client promise.

We will able to better serve our clients and provide a complete suite of point-to-point transportation services, safely facilitating the customer transport experience from home to offshore locations and back again. .

Looking to the future, it will also enable us to grow our business as opportunities continue to increase in the Shetland Islands and further our drive to be the most innovative aviation logistics provider to our oil and gas partners..

Turn to Slide 10, and I'll spend a little bit more on Eastern. This investment builds on our already long-standing relationship with Eastern Airways dating back to 1999, especially our integrated service to Scatsta, 200 miles north of Aberdeen, in support of our clients in the integrated aviation consortium..

Most important, we both share a strong commitment and culture of safety. Combining Bristow Helicopters and Eastern Airways' operations in the U.K.

can provide clients with the attractive option of a single logistics provider offering a cost-effective single-source solution and a seamless experience for offshore oil and gas industry passengers, as we expect to pursue several opportunities where this unified service will really help. .

Finally, financially, this is a relatively small investment, with a total cost of about equivalent to a large -- a LACE aircraft. However, we are expecting intermediate positive impact to EBITDAR, DBA and EPS, as we will consolidate this acquisition in the fourth quarter of this fiscal year. .

Please turn to Slide 11, and we'll focus for a moment on West Africa. In Nigeria, operating revenue improved year-over-year to almost $80 million in the third quarter due to an increase of LACE in the region.

Adjusted EBITDAR and adjusted EBITDA margin decreased slightly in the third quarter of fiscal '14, primarily due to annual increases in salaries and benefits of $2.6 million, as we increased our LACE and overall flying activity. .

As the new aircraft are online for the full quarter, expect fiscal '14 adjusted EBITDAR margins to remain in the low 30s. Our outlook for this region is positive, as we continue to renew existing contracts.

There are also tenders for new technology aircraft expected in the first quarter of fiscal '15, while new offshore developments are still on hold pending clarification of the petroleum industry bill for our clients. .

Please turn to Slide 12, and I'll focus on North America. LACE for North America increased slightly in quarter 3 to 34 versus 33 in quarter 2, with LACE rate declining sequentially in the quarter with lower revenue for small aircraft. Year-over-year, LACE rate is up 16% with the addition of aircraft operating for Cougar.

Our transition to a mix of more large and medium aircraft will improve LACE rate further. .

Our North American business unit saw on increase in adjusted EBITDAR and adjusted EBITDAR margin that were driven by higher equity earnings from our investment in Cougar. We anticipate fiscal '14 adjusted EBITDAR margins to be in the low 30s. .

We are proactively restructuring our North America business unit to adapt to the challenging -- the challenges facing the current operating environment. By exiting our noncore Alaska market and selling smaller aircraft for the long-term strategy of operating a larger aircraft, we are better positioned to service deepwater client contracts. .

Looking ahead, we expect to complete the exit out of noncore business in Alaska by the second quarter of fiscal '15. This quarter, we sold 10 small aircraft and classified 2 small aircraft held for sale, increasing the total number of small aircrafts held for sale in North America to 11.

There's a tender currently underway for long-term contract of 2 to 3 LACE with a start date for this fourth quarter of fiscal '15. .

Please turn to Slide 13, and I'll focus on Australia. In Australia, LACE remained mostly flat sequentially at 20 for the third quarter, with LACE rate declining due the short-term contract work with Eurocopter 332Ls coming to an end. We expect recovery in LACE rate, as new contract work has started in the fourth quarter of fiscal '14. .

Adjusted EBITDAR and adjusted EBITDAR margin declined as we continued to incur costs including salaries and benefits, depreciation, insurance training and lease costs in anticipation of contracts that started during this fourth quarter, including the INPEX contract. .

Given 2 LACE have arrived in this region and started new revenue work, we anticipate an adjusted EBITDAR margins will approximately -- will be approximately in the low 20s for the whole fiscal '14.

We're also seeing new oil and gas SAR opportunities and are awaiting award decision for 3 LACE for exploration opportunity in the great Australian Bay starting in January of 2016..

Please turn to Slide 14, and I'll talk about our Other International business unit. In the Other International business unit, LACE remained flat at 28 sequentially, with LACE rates declining slightly as activity levels reduced in Malaysia and Trinidad to be offset by our contract in Tanzania in the fourth quarter. .

And adjusted EBITDAR and adjusted EBITDAR margin decreased, primarily due to a decline in aircraft on contracts in Malaysia and costs in Tanzania mobilization that will be recovered as a contract -- as that contract begins in January of 2014. This is partially offset by higher activity in Trinidad and Brazil. .

For the full fiscal '14, we expect the Other International business units adjusted EBITDAR margins in the low to mid-40s. The outlook remains good for this region as we see additional new opportunities for both -- opportunities in both the north and east African markets, as well as Russia.

Two additional AW139 aircraft are also being deployed to Trinidad as part of the fleet renewal. .

In Brazil, Petrobras is expected to issue a bid for 2 to 4 LACE SAR aircraft starting in calendar year '15 to calendar year '16, and opportunities for oil and gas and SAR are being pursued, with the U.K. government in the Faulkland Islands starting in calendar year '15 and calendar year '16. .

With that, I'll turn the call over to Jonathan for a review of our financial performance and our operational excellence efforts.

Jonathan?.

Thank you, Bill. So let's review some of the financial highlights from this quarter. Please turn to Slide 16. Our third quarter fiscal 2014 adjusted EPS was $0.85, excluding special items and asset disposition effects. The third quarter '14 adjusted EBITDAR was $100.7 million, which is an 8% decrease from the third quarter of fiscal 2013. .

Although top line growth was excellent, over 7% higher than the comparable quarter, adjusted EBITDAR and adjusted EPS decreased year-over-year and sequentially, and as Bill said, much of this decrease is timing and was expected by management..

Let me explain these results by providing some context. Last quarter, our second quarter, we had results only slightly higher than management's expectations, but we were well above quarterly Wall Street analyst consensus.

This quarter, our third quarter, our financial results were sequentially lower than the second quarter, but much of this sequential decline was expected by management, again due to timing on nonrecurring expenses or planned in the second half of the fiscal year. This is why we increased annual guidance, only a small amount, back in November. .

So management believes, as always, that it's best to look at the fiscal year 2014 and fiscal year 2014 results for the 9-month year-to-date as an indication of performance as comparison to our yearly guidance. .

For the 9 months ended December 13, 2013, our adjusted EPS was $3.11, a record for a 9 month for us as you can see on Slide 17. This was a much larger improvement than the third quarter alone would imply, and it is a 12% improvement over last year's $2.77. .

Year-to-date, adjusted EBITDAR was $311 million, also a record, with a 12% improvement from fiscal year '13, driven primarily by growth in operating revenue in Europe, West Africa and North America.

And again, let me repeat, this improvement in adjusted 9-month EBITDAR and EPS was expected by management, and it is close to an annual and not quarterly way that we forecast and run our business..

As for the rest of fiscal 2014, contract revenue has already begun in places like Tanzania and Darwin, Australia. We also expect to recover some of our EC225 expenses in the fourth quarter, especially as they begin full monthly standing and hourly revenue in our European business unit and our Australian business unit. .

Please turn to Slide 18.

During the third quarter of fiscal 2014, our overall LACE rate improved 5.6% year-over-year to $8.97 million per LACE, primarily due to EBU new technology aircraft additions, while the LACE count, as shown in this page, increased by 8 year-over-year, from 154 to 162, reflecting our confidence in fleet management, top line growth and BVA improvement.

.

Four large and 3 medium aircraft were added to our fleet. In the Q3 fiscal 2014, as Bill talked about, we also sold 10 small aircraft, in line with our fleet management strategy as we exit Alaska and restructure the Gulf of Mexico..

We maintain our average full year LACE guidance of 160 to 164, at an average LACE rate guidance of $8.95 million to $9.25 million per LACE aircraft. For the remaining 3 months of fiscal '14, we have 2 medium and 2 large aircraft to be delivered, and we anticipate selling more small aircraft, similar to last quarter. .

Please turn to Slide 19. For 9 consecutive quarters in a row, we were able to achieve positive absolute BVA, as Bristow continues to focus on operating margins, lease strategy and working capital management. The third quarter fiscal 2014 BVA was a positive $12.1 million, which reflects improvement of $2.8 million from the third quarter fiscal 2013. .

This result demonstrates what can be achieved when many of the capital factors that impact BVA improve. Yes, there was margin improvement in Europe and West Africa, but we also had the sale of FBH, and also continued strong BVA for Líder, which were partially offset by the maintenance and other costs already spoken about. .

Líder contributed $3.4 million of BVA in the third quarter of FY '14 and $14.4 million in our year-to-date 9-month BVA, as their BVA and in-country cash flow generation are not as impacted by Gap and foreign exchange distortion. .

Please turn to Slide 20. Our focus on BVA leads to cash generation. Operating cash flow totaled $137.3 million during this third quarter of FY '14.

The decrease in year-over-year cash flows compared to last year provided by operating activities is primarily due to an increase in income tax paid of $28.8 million on the sale of those FV entities, as well as cash payments of $6.4 million related to the UK SAR contract award, both of which Bristow must classify in our operating cash flow..

In the third quarter of FY '14, we also did 6 aircraft on sale leaseback, and received $72.4 million in proceeds. So as you can see on the right, our overall liquidity is $617.2 million, with cash on hand of $323 million, and undrawn borrowing capacity of $294 million.

This is a record for our company, and this is after we spent $526 million on organic CapEx in the first 9 months of this year. .

Please turn to Slide 21. We continue to anticipate that our fourth quarter will deliver very strong results, as several new aircraft begin revenue service and we recover costs incurred on the Q3, especially recovering them in our fourth quarter, especially as we return the EC225 to full revenue service.

Because of this expectation, we are reaffirming our annual adjusted EPS guidance for fiscal year 2014 of $4.25 to $4.55 per share, which excludes the impact of aircraft sales and special items. .

We also remain confident in generating a long-term adjusted EPS growth rate of 10% to 15% annually, while committing to grow the dividend at 20% to 30% payout ratio, while buying back stock opportunistically..

Speaking of share buybacks, during the last 3 months, Bristow has spent $33.4 million to repurchase almost 450,000 shares of our common stock at an average price of approximately $75.

This is more than we've repurchased in over 1.5 years, and we continue to believe that the stock presents a great value, and our board agrees, given that we have reduced the financing risk of associated UK SAR aircraft financing.

Two days ago, our Board of Directors increased the remaining repurchase amount to $100 million of shares of our common through November 5, 2014. .

Please turn to Slide 22. On our previous earning calls, we have mentioned our operation -- operational excellence initiatives, and indicated that we will provide an additional information on this call. Here are some initial information that will begin our conversation over the next number of years..

Our Operation Excellence effort is an evolution, not a revolution, and is in keeping with our promise to clients for continued improvement.

These initiatives involve focusing on innovation, simplification and standardization to create a step change in safety and operational performance, while reducing financial risk and increasing performance predictability to create an infrastructure-like return for our shareholders. .

Our Operation Excellence initiatives include measured multiyear changes to many of our assets, including IT infrastructure and overall fleet composition. The implementation of 2 efforts started in 2012, eFlight, our new electronic flight bag and invoicing system; and SAP, our new enterprise resource planning system.

These are being rolled out throughout Bristow in an intentive, measured way over a number of years. .

Other business transformations are also well underway and include fleet rationalization, as shown on this chart to reduce the number of fleet types by over 65%. And this will be presented and explained as appropriate in the future. .

All of these efforts are primarily meant to reduce risk and reinforce our long-term 10% to 15% adjusted EPS growth without UK SAR through BVA and EPS accretion..

Please turn to Slide 23. And I'll turn it over to Bill to make final comments. .

Thanks, Jonathan. Please turn to Slide 23 for some concluding comments.

Safety continues to be our #1 core value as we strive to achieve Target Zero, and I'm proud of our teams across the world who have so improved this fiscal year, especially in ground safety, particularly since August, where we've gone basically Target Zero, with the exception of the air accident in the Academy in January. .

Confidence and continued revenue growth and excellent cash flow from our core business allow us to reaffirm our adjusted EPS guidance in fiscal '14.

Our business outlook, whether short, medium or long-term, continues to be positive even in the face of headwinds for oilfield services as we have a unique product, passionate people and financial strength to serve our clients better. Operational excellence efforts in the investment in Eastern Airways are prime examples we've shown you today. .

As you might have already heard on February 3, we announced that the Board of Directors has selected Jonathan to succeed me as the next President and Chief Executive Officer of Bristow when I retire from those positions at the upcoming annual meeting on July 31, 2014. .

Jonathan has a proven track record of excellence in execution; clear, strategic vision; and an understanding of aviation safety in the international marketplace. I've come to know Jonathan well since he became CFO in 2010, and I could personally attest to his unwavering commitment to safety, client promise and continued financial strength..

Jonathan will, of course, be working side-by-side with our deep and talented senior management team during a thoughtful and appropriate transition process until August 1. Until then, I look forward to seeing all of you, and speaking about the excellent things going on at Bristow. With that, operator, I'll turn the call over for questions. .

[Operator Instructions] Our first question is from the line of Jon Donnel with Howard Weil. .

I was wondering if you can give us more details on the Eastern Airways acquisition here. Specifically kind of talk about the contracts coverage that they have, and how maybe that differs from the existing base business in Europe in terms of standing fees or whatnot, just sort of the certainty that we have around that $160 million revenue target.

And maybe also in conjunction with that, just sort of -- is there any of the synergies and opportunity that you described for additional contracting opportunities already embedded in that $160 million forecast?.

John, it's a very good question. We are going to be presenting more on Eastern Airways in the future. It's obviously a very busy quarter for us. But the one thing we will say is they have both a scheduled airline service, and they also have contracted service with virtually all of our clients.

Much of the scheduled service actually flies a lot of our passengers that end up going on our helicopters anyway also. So there's a very high stability to those scheduled services also, especially if any of you have been to Aberdeen and seen the significant coverage that Eastern Airways has at that location. But it's a significant contract coverage.

The contract outside of the scheduled service work very similar to ours, with the equivalent of a monthly standing charge, and also an hourly that helps recover a lot of their costs, including fuel.

So we think the stability is probably not as, at least from a pure contract standpoint, as high as Bristow, but because of a lot of the scheduled service, you really don't have as many other carriers going up to Aberdeen.

It has a level of stability in its scheduled service that is much higher than what you would see in other airports or other services. .

Okay, that's helpful. And then I appreciate the commentary around a lot of the transitory issues that you had during the quarter.

I wonder if -- as we look ahead into fiscal '15 for you guys, should we be thinking of specific timing around contract rollovers that may have a similar impact that we saw in this quarter? Are there any big projects where we could be seeing a gap in service as we look ahead?.

This is Mark Duncan. I will take that question. We're watching our clients closely in their plans, and we're obviously looking at the market. The ability to delay projects that are already underway is very, very unlikely. So we don't see an immediate short-term issue here.

We're looking further out, and some projects have moved slightly to the right, but they're not going to affect us in the next fiscal financial year at all. You have to remember that 2/3 of our business is production-related, which isn't subject to these projects being delayed. So we're very confident that there's going to be continued activity.

In fact, we've got multiple tenders in our European business, and also multiple tenders expected to come out of Brazil very soon. .

And our next question is from the line of Gregory Lewis with Credit Suisse. .

So Mark, if we could touch a little bit more on Australia. Clearly, there were some issues in the quarter that negatively impacted the quarter.

At this point -- I mean, how confident are we or how confident should we be that, that is kind of behind us, and that as we move forward into the next quarter that the margins can push higher, and that -- clearly, the buildup in crew and support staff is there, that we're going to see these contracts start and have they already -- have any of them already started?.

This is Jeremy. I'll field this question. I think that the short answer to your question is pretty confident. This, in a sense, was sort of a retooling quarter, getting us ready for the INPEX contract as you very well know. There was a couple of projects that moved to the right as you guys probably know already.

We have some exposure in Australia to exploration, and we saw that. But fundamentally, we're not seeing anything structural in Australia that would conclude -- have us conclude that we're going to see a repeat event here. .

Greg, it's Mark here as well. Just so you know, the contracts that Jeremy talked about that were delayed have actually now started, so they will be revenue flowing in the next quarter. .

Okay, perfect. And then... .

It's Jonathan also. And a lot of the expenses that we assumed for the third quarter, we assumed, right.

When we talk about things moving into the fourth quarter, we're not talking about that much, right? A lot of this was timing that management expected, again because we felt that the second half was not going to be better than necessarily the first half.

It was going to be about same, so we tried to signal that on the November call, maybe we should -- again, we absolutely run this business on a yearly basis.

To lean -- and I'm leaning a little bit on John's comment about -- are there any quarterly -- we just -- we don't give quarterly guidance, and so to give you a sense of that seasonality, which we don't even manage our business to or quarterly would not reflect how management thinks about the business in general. .

Okay. Yes, it makes sense. And then if we could touch a little bit on Eastern. I guess a couple of things in terms of how this transaction came to fruition, a little bit on the color of that. And then I guess we mentioned that the business is a 30 aircraft business serving the North Sea.

Is there a potential to expand that business beyond that initial level? Is there something that Bristow could leverage elsewhere outside of the North Sea? Or is this more of just a niche business that is just going to continue to serve the North Sea?.

Greg, this is Bill. I'll take the call, and then other people can comment. I mean, I'll take the question. We do not see this as an acquisition of a fixed wing airline. In other words, Bristow is not getting into the fixed wing commercial airline business per se.

We're getting into -- in extent -- this acquisition is an extension of our logistics -- suite of logistics offerings, whereby we can now cover -- we can go to a customer and say, "Look, don't worry about getting your clients from A to B, and then from B to C." We'll do the full range of transportation, essentially from their home, all the way to the platform or the rig.

So it fits very well into what we do, and the culture is very similar to Bristow. We've worked so closely with them over a number of years, as you can see since '99. And so we just said, "Look, this is a natural fit in what Bristow is all about." We don't see ourselves in the future as just flying helicopters.

We see ourselves as providing solutions to customers to get passengers and small freight from point A to point C, D and E. So that's the way we view it. And Mike Imlach, the way this came about -- Mike Imlach, he runs our European business unit, has developed a great relationship with the management team. Richard Lake, primarily the CEO of Eastern.

And as I said earlier, similar cultures, a lot of great synergies that go on between the 2 companies in the operation.

So anybody else want to comment?.

Greg, it's Mark. What I'd tell you is that we are actively pursuing several additional opportunities that are not existing Eastern business and receiving very good responses from our customers and a lot of interest in the seamless provision of those services where the customers perceive a risk of moving the people and getting stuck in the middle.

So we're very optimistic that this is going to become a real differentiator for Bristow. .

Okay, perfect, Mark. And then just one other follow-up, final question, more on the -- you mentioned that the potential tender for, I guess, a multi-aircraft package in North America. Can you provide any more color about that? I mean, in other words, I guess it starts in late fiscal year '15.

Would this be incremental helicopters that would need to be placed? Or is this sort of part of your existing order book that could fund those -- or service that package?.

Greg, it's Mark again. Let me take that one. This particular tender is a piece of business the aircraft on the contract today required to be replaced and renewed or renewed and replaced.

It's a 5-year contract with options, so it's going -- continuing with the trend that seems to be there in the Gulf of Mexico where we're getting longer-term commitments. So we mentioned it just as a theme because in the last few calls, we've talked about picking up additional deepwater contracts that are longer term.

This is another opportunity we are going to pursue, and hopefully be successful and that we expect others to follow. But this is new business. .

And our next question is from the line of Jim Crandell with Cowen. .

Bill, congratulations on your retirement. You've had a great career. Jonathan, congratulations on your promotion. This isn't a question I don't think I've asked before, and I know this isn't the way you probably look in the business.

But any sense industry-wide, if you look at capacity being added to the market in 2014 and 2015, with the magnitude of the capacity growth or net capacity growth is, and what percentage of that capacity that's being built to serve the oil and gas industry is already contracted?.

Jim, it's Mark. How I would answer that question is to say that we still have more opportunities than we have aircraft coming. And we think that's exactly the same position for our competitors. .

Yes, Jim, is your question around manufacturing capacity or... .

No, it's just -- if you take the number of helicopters adjusted for sizes the way that you measure it and look at how much are being built industry-wide, what's the relative magnitude of the capacity build? And then of all that, that's being built, what's your estimate as to how much is already under contract and how much, at least right now, does not have a contract?.

Jim, it's Mark again. You're probably talking about 50% of the aircraft that have been committed to, with the manufacturers already having contracts, and the other 50% being speculative against an opportunity set that's probably for Bristow is well in excess of 4x or 5x the number of aircraft we've got coming. .

Okay.

How does that 50-50 in the industry, Mark, compare with Bristow's position is in terms of aircraft being built that now have a contract versus available?.

Yes, Jim, I'll just comment. We have 64 aircraft on order, including our SAR aircraft, and we have 57 options. So that pretty much matches up with our high probability contract awards and our expected contract awards. We believe that those metrics are similar for our big competitors. I think that's what Mark was saying. .

I think you're saying basically... .

I think, Jim -- this is -- go ahead. .

I was just going to say, what you're saying is that the majority of your helicopters that you are building have contracts, and the ones that don't, you have identified things or you have high probability jobs that you think that those can go on?.

Yes, that's right. That's exactly correct. We've got line of sight on more -- many more opportunities than we have aircraft available to fill those that are not currently contracted.

And we expect there are several awards mentioned in our earnings call there, that should be decisions on next quarter, which would change the ratio you're talking about if we were to be successful. .

Now because of the operator focus on safety in the business, yourself and one other major competitor have a majority of the overall market.

Given that, do you see demand outpacing the supply that's being built into the markets for the next couple of years?.

Well, if you just look at our order book and our option book, and what we said about the fact that we've got most of those orders or the orders pretty much committed or have high probability, that would indicate that the supply is still tight. If you order a heavy aircraft today and you're looking at 2-year delivery before you can get it.

So that pretty much says it all. Let me just say one thing about competition. We have -- even though there are 2 large global competitors, we do have local competition in every market within which we operate. And there are a couple of operators that are just a notch or 2 below us in terms of global reach and size.

So there are a lot of competitors around, and they have various number of aircraft on order, they're seeing the same a market dynamics we have.

But if you go back -- you know that chart we gave you, Jim, on showing the total opportunity set and how we funnel that down, that -- those metrics are still more or less the same today as they were 6 months ago.

So even though we're seeing some projects move out to the right in a little bit year or so, the overall theme of that chart showing the regions of the world where those opportunities exist, and then you remember the upside-down pyramid that shows how we translate those into opportunities.

Take another look at that and I'll give you a good idea of where we are. .

So is it fair to say that the market is relatively tight now and should remain relatively tight, not necessarily get even tighter, but should remain relatively snug?.

I would agree with you with that statement, Jim. .

Okay.

And so Mark, as my logical follow-up on that, if that is so, then over the next at least 2 years, are you expecting, on a global basis, to continue to see a favorable environment for prices versus cost over that -- over the next 2 years?.

We treat every opportunity on its own merits, Jim, and we put in the best proposals to our customers. Our strategy will remain providing superior service on a differentiated basis and creating value for our customers. And that will be rewarded in pricing that they're willing to sign up contracts with us. .

And I'll just follow up. From a financial standpoint, Jim, to give you a more finer point. Remember, many of our contracts that are renewing are 4 or 5 years old. And so they're renewing into a higher pricing market today as prices could increase in the future. But we don't see prices decreasing.

We don't have that view that there's that much flexibility in the supply that prices could go down. .

Okay. But Mark, I was asking, I understand that you're always responding to opportunities.

But still, I mean, there must be an overall dynamic with supply and demand, and how much equipment is available to build that makes you believe that either prices will increase more rapidly than costs or prices will increase less rapidly or more in line with costs, given that Bristow is an extraordinarily high-quality operator?.

That's a fairly simple question for me. In the environment within which we find ourselves today, I believe we're going to see a flattening of pricing over the next couple of years because of the sentiment in the market that our customer is going to push all of us. Forget market dynamics.

We're going to get a lot of pressure from our customers to hold prices low because you've seen what's happened to our customer's profit margins over the last year or so with flat commodity prices, increasing cost. Now obviously, our service, fortunate for us, is only a very small percentage of the overall cost.

So the ones that are going to get most of the pressure are the drilling contractors and the large service providers, but so we've seen this movie before. Typically in this environment, regardless supply and demand dynamics of helicopters, we're going to get pressure, and that's just the way it is. We know what it looks like.

However, as we said earlier, a lot of the new aircraft coming on over the next few years for Bristow are already contracted at the current pricing, which should improve -- will continue to improve our financial performance. .

Okay. And just a quick last question from me. Maybe, Mark, you're best equipped to answer this.

But what's your plan for sort of integrating the Eurocopter 225 back into the fleet? Will they -- and what kind of jobs will they serve as backup aircraft, and maybe you could refresh my memory too, on how many you have, and where you see those going?.

Jim, we've got approximately 20 aircraft 225s, with 3 more coming into the fleet this year, which have already got contracts. We have 13 aircraft back in service. The rest of them are there and will go back into service in a combination of replacing 332s as we bring them back out of the fleet.

Remember, the 332s were put back in to cover for the 225s when -- during the grounding. So the 225s will go back in, in place of the 332s, and then there are additional opportunities now, and most of the clients have accepted the 225 as an acceptable aircraft now. So it's back in the ring as it were. .

[Operator Instructions] Our next question is from the line of Brandon Dobell with William Blair. .

Maybe I wanted to take the LACE question a little bit of a different direction.

If you look at the year-to-date performance and then the kind of where the year is expected to finish it out, what could drive that $0.30 range? Is it just timing on some of the 225s that come back in, or is it some of the Australia contracts that are now ramping or that have ramped back in? I guess I'm trying to get a sense of how that variance could play out to either end of the range at this point?.

Let me take that, Brandon, and I appreciate it. Again, year-over-year, the LACE rates have improved significantly. Sequentially, as Bill said, we like -- we report quarterly, but we guide to annual.

And so if you really look at a lot of the LACE rate decreases sequentially, a lot of that, we've always said LACE rates really move based on 2 major factors, one is the overall pricing of new aircraft coming on, and then utilization of existing aircraft.

If you look at a lot of what's going on in some of those LACE rate declines, especially in Australia and North America, those are really utilization issues.

The pricing environment in both of those are good as the new INPEX contract comes on, and as North America sheds the small aircraft, sheds Alaska and puts on some of the large aircraft that we've talked about going on, on contract. So -- but I think that the full year guidance for LACE rate, that plus or minus, is going to be there.

And again, we already increased it once. A lot of that has to do with higher utilization between the third and the fourth quarter. And so that's what we'll say, Brandon. As always -- we always tell people we only give annual guidance except for one quarter, and that's this quarter.

So I want to give you a sense that we understand the reality of what we're trying to tell the market. .

Got it.

So then of the -- I guess the contract renewal conversations that you've had the past several quarters, maybe the point about the E&Ps pressuring everybody on price just to protect their own margins, but at the same time it's a relatively tight market, how have those conversations in those renewals gone, especially if their contracts that have been in place for 3, 4, 5 years when LACE pricing was a lot lower? Are you seeing that pressure from the E&Ps, or is that just perspective commentary? That you expect to see it in the future, but you haven't seen it so far?.

Yes, I'm going to let Mark answer from the commercial sense and, I'll wrap it up with a financial kind of perspective. .

Yes, Brandon, the customer is always trying to get the price lower, and our job is to maximize our price for our shareholders. And we do that by proving the value we deliver. So the discussions with the customers about reducing our price are offset by our ability to prove our value.

And we have not reduced any prices in the last 2 years, and we've only done the opposite. .

One is specific to the industry, and one is specific to Bristow. What helps the industry is we have long-term contracts that are renewing, and those contracts are at lower pricing right now. So even if we stay in the same pricing environment, even a slightly better pricing environment, we'll see price increases.

The second thing is the overall market is very tight on supply, and there is a limited production from the Sikorskys, Augustas and Eurocopters of the world. And that creates an embedded secular supply shortage right now as we go more and more offshore, no matter what happens to the overall E&P environment.

The last thing is, from a Bristow standpoint, this is one of the reasons why we don't lease all of our fleet.

It's one of the reasons why we have been very measured in making sure our leasing is low, because if we do face environments in the future that could put pressure on pricing or start to reduce LACE rates, we've got a very large equity cushion, and a lot of owned aircraft that we can make available, and then allow our clients and us to thrive -- for us to thrive, and for them to work well to produce cash flow through their production.

And so that's how I kind of classify that for us also. .

Okay. And then final one for me. Given the cost you incurred, various source of cost this quarter, a couple of things.

With more of the 225s coming back in the service in Q4, should we expect any even kind of modest expenses to get those aircraft back in the service here in the fourth quarter? And is there anything else, either around Australia, or I guess in Africa probably there, that we should be aware from a cost point of view that'll hurt a little bit.

Not as much as obviously Q3, but just trying to make sure I've got the phasing correct. .

Well, I think you're getting the phasing right by saying that most of these costs were in the third quarter. And most of these costs were expected by us. There were some costs associated with Tanzania that we actually thought would maybe be incurred in the fourth quarter while revenue came on board, but actually happened in the third quarter.

But for example, a lot of the Australian costs for INPEX, we already knew about, they happened. We had a little bit of a revenue shift into the fourth quarter with some other aircraft. But again, a lot of this was expected.

Now as far as the EC225 is concerned, a lot of those expenses have already been levied, and so we're expecting as those aircraft go on contract in the fourth quarter, we'd start to get the higher MSC, we'd start to get the hourly, and then through that, a lot of that expense is recovered. .

And I'm showing no further questions. I'll turn the call back to management for closing comments. .

Well, I'll just say, on behalf of Bristow team, I'm both honored and in many ways humbled about the appointment. But as importantly, I look forward to meeting with all of you in the future, and again with the same level of transparency and enthusiasm in the past. Talk to you later. .

Ladies and gentlemen, this concludes our conference. Thank you for your participation. You may now disconnect..