Christopher Bradshaw - President, CEO & Director Shefali Shah - Senior VP, General Counsel & Corporate Secretary.

William Schnier - Evercore ISI William Mastoris - Baird Hyunjae Lee - International Value Advisers DeForest Hinman - Walthausen & Co. Christopher Hagedorn - Redwood Capital.

Good day, and welcome to the Era Group Reports Second Quarter 2017 Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Shefali Shah. Please go ahead..

Thank you, Evan. Good morning. Thank you for joining Era's Second Quarter 2017 Earnings Call. I'm here today with our President and CEO, Chris Bradshaw; our VP and CFO, Jennifer Whalen; our SVP, Commercial, Paul White; our SVP, Operations and Fleet Management, Stuart Stavley; and our FP&A Manager, Seema Parikh [ph].

If you have not already done so, you may access our most recent earnings press release and presentation slides on our website, erahelicopters.com, or the SEC website, sec.gov.

Forward-looking statements expressed on this call are subject to a number of risks, uncertainties and other factors, including those described in our most recent annual report on Form 10-K and the other filings we make with the SEC.

These risks, uncertainties and other factors could cause actual results to differ materially from those expressed in the forward-looking statements. In addition, we will discuss certain non-GAAP financial measures such as EBITDA and adjusted EBITDA.

Please refer to our earnings press release or the presentation slides for the calculation of these measures and the appropriate GAAP reconciliation. I'd now like to turn the call over to our President and CEO.

Chris?.

Thank you, Shefali, 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 goals of 0 air accidents and 0 OSHA recordable incidents through the first 7 months of 2017.

The hard-working men and women of Era have continued to demonstrate teamwork and a commitment to excellence throughout the offshore industry downturn, and I want to thank them for their dedication and focus in achieving our key objectives.

The next topic is an update on the operational status of H225 and AS332 L2 model helicopters, which continues to be a major safety-related issue, impacting the offshore helicopter industry, following the fatal accident off the coast of Norway in April 2016. The root cause of the accident remains under investigation via the AIBN.

Last month, the Civil Aviation Authorities in Norway and the United Kingdom, the major European markets for the H225, published new directives that set forth the requirements with respect to the return to service of these helicopter models, including an operator's compliance with relevant EASA directives and the development of a detailed safety case, as a part of the return to service plan that must be approved by the relevant regulatory authority.

By way of reminder, the aviation authorities in the markets in which we historically operated H225s lifted their operational suspensions in the fourth quarter of last year.

While the regulators have published directives permitting a return to service, we believe H225 helicopters have only returned to service in offshore oil and gas missions in a few countries in Asia.

Beyond regulatory approval and the completion of the accident investigation, the other key milestones for a potential broad-based return to service of these helicopters include confidence amongst the helicopter operators, our oil and gas customers and the labor unions representing their employees.

Era will not operate the H225 helicopters in our fleet unless and until we can develop a detailed safety case that demonstrate the aircraft can be operated safely. As previously disclosed, Era filed a lawsuit in November 2016 seeking damages from Airbus related to our purchase of H225 helicopters.

We cannot predict the ultimate outcome of the litigation and we may spend significant resources pursuing our legal remedies against Airbus. Turning now to Q2 financial highlights.

Adjusted EBITDA was $12.5 million, which represents a $5.5 million increase from Q1 of this year, primarily due to gains on asset dispositions as well as lower general and administrative costs.

While Q2 revenues benefited from $3.7 million of lease return charges on helicopters returned to us upon the conclusion of dry-lease contracts, this benefit was offset by higher repairs and maintenance cost related to the timing of repairs.

A portion of the higher R&M expense relates to the preparation of helicopters for new customer projects with the largest single driver is a high volume of engine overhauls coming due in 2017.

Despite the persistence of very challenging conditions in the offshore oil and gas industry, Era generated positive operating cash flow of over $9 million in the second quarter. We continue to prioritize the protection of our balance sheet and liquidity position with total liquidity of $163 million as of June 30.

We maintained an order book that provides optionality for growth, which is market opportunities present themselves, while limiting our non-cancellable capital commitments to just $5.5 million.

In addition, we continue to realize value from the sale of unutilized assets here in Q2 with the disposition of a hangar in Alaska, 2 helicopters and parts for cash proceeds of $5.6 million. Beginning in the months of July and August, we are experiencing an increase in customer activity in our U.S. oil and gas operations.

To clarify, from a scale standpoint, we are not saying that this is a dramatic increase. And from a scope standpoint, we are not saying that this is a broad-based increase throughout the market. What we are observing, for the first time in a long while, is a clear upward trajectory in activity levels amongst our oil and gas customers in the U.S.

This is expected to result in higher utilization of the existing contracted fleet, as well as additional helicopters being placed on contract beginning the third quarter and continuing into the fourth quarter.

In conclusion, Era has demonstrated the ability to generate positive cash flows even at depressed oil and gas activity levels and our financial stability has proven to be a competitive advantage.

This stability is largely due to our adherence to 4 key priorities, maintaining the highest safety standards, maximizing the utilization of our helicopter fleet, realizing operational efficiencies and cost savings wherever possible; and protecting our balance sheet and liquidity position. With that, let's open the line for questions.

Evan?.

[Operator Instructions]. Our first question comes from Cameron Schnier from Evercore..

Chris, the increase you're seeing in the U.S.

oil and gas business, is that a product of seasonality? And does that anticipate Anadarko releasing one deepwater rig at the end of August?.

So above and beyond the normal seasonal pattern that we experienced in our business this is a non-seasonal, clear upward trajectory in customer activity in our U.S. oil and gas operations. Anadarko maintains 3 deepwater drilling rigs in the Gulf of Mexico.

The one that they released was -- had been previously working off the coast of Colombia and then it moved to West Africa, so it was not a Gulf of Mexico asset at the time..

Got it.

And the helicopters that are being placed on contracts, can you specify what type of helicopters those are?.

We're not commenting specifically on types. Although these are oil and gas operations, which tend to be skewed more towards our medium and heavy aircraft..

Okay.

And for the international business during 2Q, any reason why it's sort of down from 1Q other than just a dip in utilization?.

Brazil was down about $1.5 million due to lower utilization primarily, and then Suriname was down $1.5 million due to the end of a short-term contract. So the primary driver is really just being the cadence of customer projects and resulted impact on utilization of our helicopters in those markets..

Okay.

And would you expect the new contract in Colombia to sort of offset the delta?.

Yes. The new contract, which began in Q2, began last month in Colombia and is expected to run for the balance of the third quarter, did not exist in Q2..

Okay. And just one more.

After the disposal of the hangar and 2 helicopters in Alaska, what's left of the flightseeing business? Is like the revenue ability impaired after that sale at all?.

No impact on the flightseeing business. The assets that were sold had not previously serviced our flightseeing operations in the state of Alaska. They were separate..

Our next question comes from Bill Mastoris from Baird..

I'm just wondering, when you talk about broad-based increase and a trajectory, I mean, is this a byproduct of increased production? Or are there any signs out there of exploration-related activity? I mean, what's driving this?.

It's a combination of exploration activity and production activity and some -- actually, some other specific short-term projects. So it's really a mix, I would say, Bill..

Okay. And are you seeing now a little bit better supply-demand balance? I know one of your competitors, on their conference call, talked about the fact that within certain sub-segments of helicopters, heavy, medium and light, there are different dynamics that are going on. Any color that you could provide there would be greatly appreciated..

Yes. I would definitely not say that the global helicopter market is in a state of balance between supply and demand. But the level of balance has certainly improved off lower levels, more depressed levels, and that's varied somewhat from model to model and region to region.

But overall, the global market for the most marketable oil and gas assets such as S92s and AW139s has improved..

Okay.

And then, lastly, with this increased activity and more helicopters on contract, would it be a fair statement to say that you would expect the continuation of positive operating cash flow and even positive free cash flow for the full year?.

Well, while I can't provide specific quantitative numbers consistent with our long-standing disclosure policy of not providing financial guidance, what I can observe is that even during the more depressed quarters of activity, during the severe oil and gas market downturn, Era has continued to generate positive operating cash flow.

It was even true during Q2, which remained a very difficult quarter for us. And then thinking about free cash flow, we're now at a point where we're down to just $5.5 million of non-cancellable capital commitments in our order book. So we have good optionality in our order book.

But in terms of dollars that we are required to spend, it's just $5.5 million..

Okay. And then, finally, any updates on the appraisal? I mean, the last appraisal, I think, that you mentioned was back at the tail end of 2015. I'm assuming that appraisers are very reluctant, at this point, to value the H225s. But any color that you could give us there would be greatly appreciated..

Yes. You're right, Bill, in observing that this is related to the H225 situation.

When we have historically disclosed net asset value, that's based upon the market value of our own helicopters as determined by a third-party appraisal plus the book value of our other assets and liabilities and for the purposes of that market value of our fleet, we utilized and relied upon an annual appraisal conducted by Ascend Worldwide.

And Ascend is taking a policy, given the current situation, where they are not providing appraisals for H225 helicopters. That's a global policy. It's not specific to Era by any means. So without having a complete third-party appraisal, we're not in a position to be able to provide that disclosure that we had previously..

Our next question comes from HJ Lee from International Value Advisers..

Regarding the asset disposal that you did during the quarter, how much of disposal proceed come from Alaska hangar instead of helicopter sales?.

Consistent with our long-standing disclosure policy, we don't break out specific assets. We do believe that one of the ways that we're able to realize value is by buying and selling assets at attractive levels. And so we don't provide transparency to the market on how we're doing that as we like to trade around those positions.

But it was a mix of the helicopters and the hangar in Alaska as well as some related helicopter parts..

Do you have any other hangars that you're not using in Alaska right now?.

I would say, at this time, that we do not have any physical facilities in Alaska that are on the market for sale..

Okay. Maybe two more questions. One is, I believe there was some loss of medical service contract. I wonder if this is temporary and maybe there are foreseeable recovery of medical service contract going forward? And my second question is I believe your competitor sold S92 helicopter at reasonably high price, something like $40 million for the unit.

I do like to understand what you think about the transaction that they made and possibly the price on their helicopter model..

So starting, first, with air medical. It's certainly possible that we could get new contracts.

But I would say the wind down of our existing air medical contracts in the U.S., which we had talked about for several quarters in our disclosures, was part of a long-term trend which relates to, really, the state of the development of the air medical market in the U.S. and how that compares to our strategy and our strengths as a company.

So the market in the U.S. for air medical services has moved more away from traditional market where you operate exclusively for hospitals to more of a community-based market which is one which we have decided not to participate.

It's become a very difficult, highly competitive market with further challenges from the Affordable Care Act and some of the collection issues and public visibility of those collection issues. And in summary, just not a market that we found very compelling in recent years and so it's been a long-term wind down of that market.

We are pursuing air medical opportunities outside of the U.S. in markets that have dynamics we find more favorable. One of those is via a partnership in India that we had previously publicly disclosed, but there are also other end markets we believe to be attractive.

In terms of your question about the asset sale, I don't want to get into specifics of another competitor. I would note that if you're talking about a large aircraft which is configured for oil and gas operations, there's really not much of a market for those today in the secondary market.

As you move down into lighter aircraft that have better diversity of end markets, there is better liquidity in more active markets and you're seeing secondary asset sales. There are going to be situations where you have a very specific need.

In a situation where H225 helicopters are suspended and there were a lot of SAR-configured H225s in the market, heavy SAR-configured aircraft that remain, do have more value. And if you have a particular situation where the buyer has to buy an asset to replace one that's been lost, that can affect the value that's realized..

Our next question comes from DeForest Hinman from Walthausen and Company..

A couple of questions.

Trial date, looking through the public disclosures, is it set for March 26, 2018? Is that the date we should be looking forward to? Or is that subject to change?.

That's not the date. But I would say, more generally, per the advice of legal counsel, we're not going to make any comments on the progress or specific status updates of any ongoing legal disputes..

Okay. Separate line of questioning.

Can you talk about the priorities for the use of free cash flow going forward?.

Sure. In recent periods, and then we expect this will be the case in the immediate near term, we've prioritized the use of free cash flow to pay down our revolver balance, which is what our credit covenants are based upon today, senior secured debt. This is a dynamic sector in which we operate, so things can change quickly.

And we will continue to take an opportunistic approach about how free cash flow should be allocated, whether that continues to be the revolver or bond repurchases or other potential uses of cash. But today, it's been the revolver..

Our next question comes from Christopher Hagedorn from Redwood Capital..

Actually, a lot of the stuff I wanted to ask have already been asked. One thing, Bristow talked from their call that the AW139 market is getting tight because a specific regulatory issue with the S-76, I want to say.

Can you clarify -- I mean, maybe you don't know, but like can you clarify or do you have any idea what they're talking about when they say the AW139 market is getting tight?.

Yes. Chris, thanks for the question. I am familiar with the regulation that you're referring to. Important to note, for everyone's benefit, that regulations to do vary from region to region, depending upon the regulatory authority and the standards that they set in that given market.

That particular regulation you're referring to has significantly impacted S-76 demand in the North Sea, but it doesn't apply in other areas of the world. For example, it's not an issue today in the Gulf of Mexico or in Asia or other areas of the world. I would say that the 139 market has improved.

I don't know that I would call it tight today, but there is excess capacity that exists globally amongst both operators and the lessors. But the market for that asset has improved and there are certain micro markets where perhaps they could be characterized as tight within that particular micro market..

Got it.

Is there like -- is there the chance for you guys to take advantage of that through, I guess, the dry-leasing business potentially? I mean, I understand you guys were not operating in the North Sea, but is there some angle how we can -- I know there are a lot of AW139s, so is there an angle we could play this or not?.

Generally speaking, one of the things we like about our dry-leasing business is that it does allow us to capitalize on demand for markets where we don't have existing infrastructure or operations, and that certainly included over the years the 139. As we sit here today, our utilization of medium helicopters has improved in recent periods.

We are continuing to actively market medium helicopters, including 139s, for both our own operations as well as leasing opportunities..

Got it. And the secondary -- and a follow-up question on the AW139. You said for a large -- for a heavy aircraft, there's pretty much no market in the oil and gas equipment.

For the medium, for AW139, is there -- would you stand by that comment for the medium helicopters? Or is the market, the secondary market is slightly better there?.

Yes. There is definitely a sliding spectrum. So on the heavy side, it's the most challenged. As you get down to the medium category, it gets better. And when you get into the light aircraft, there's even more liquidity there because of the diversity of end markets.

That being said, I will reiterate that on a global basis, there remains, today, an excess supply of 139s that are in offshore oil and gas configuration amongst certain operators and certain lessors, but the market has improved..

And there appears to be no more questions at this time..

Great. Thank you, Evan. I'll try to salvage my voice for the rest of the day. I appreciate everyone's patience and look forward to speaking to you again next quarter..

And this does conclude our conference for today. Thank you for your participation. You may disconnect..