Tidewater Inc (TDW) 2003 Q3 法說會逐字稿

Good morning, my name is Rebecca and I will be your conference facilitator. At this time I would like to welcome everyone to the fiscal 2003 third-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. If you would like to ask a question during this time, simply press star and then the number 1 on your telephone keypad. If you would like to withdraw your question, press star and then the number 2 on your telephone keypad. Today's call will be available for replay beginning at 2:00 p.m. eastern standard time today through midnight eastern standard time on January 22, 2003. The conference ID number for replay is 1-800-642-1687. Again, the conference ID number for replay is 7417767. Thank you. Mr. Taylor, you may begins your conference.

Thank you. Ladies and gentlemen, good morning. I am Dean E. Taylor, the President and CEO of Tidewater. I will be hosting our conference call this morning. With me to assist with the call are William O'Malley, our Chairman, Keith Lousteau, our CFO, Stephen Dick our Executive Vice President in charge of operations of West Africa, the North Sea and North America, and Joseph Bennett, our Vice President and Controller and Principal Accounting Officer. I will begin this call this morning with some comments on our recently released quarterly results. Following my comments, I will turn call over to Keith for a review of the numbers and a brief description of where we stand in our new build and replacement vessel programs. Then I will return with a brief overview of our markets and review of Tidewater's strategy. We will then open the line for questions. For previous calls, I ask you to limit your question to two at any one time so everyone who has a question has the opportunity to ask it. Before I begin, I will ask Keith to read our Safe Harbor statement. Keith.

Good morning. During today's conference call, Dean and I and other Tidewater management may, and probably will, make certain comments which are not statements of historical fact and thus, they constitute forward-looking statements. I know that you understand that there are risks, uncertainties and other factors that may cause the company's actual future performance to be materially different from that stated or implied by any of the comments that we may make to you today. So that housekeeping aside. Back to Dean.

I would like to begin by saying I am particularly pleased with the December quarter results. The quarterly earnings appear to be just up a penny from the September quarter's earnings of 41 cents a share. Our core operating earnings were actually a couple of million dollars above those of last quarter. The September quarter's results included a $3.3 million gain on vessel sales that added about 4 cents a share to earnings per share. Although some gain on vessel sales is normal for Tidewater, during the December quarter we booked far less income from vessel dispositions. So on our net basis, the quality of our income is actually better than immediately apparent. I am happy to talk about this as it is a result of one of the more controversial policies we have implemented here at Tidewater. I refer to our Gulf of Mexico pricing policy, which, as many of you know, has been to stack a large number of vessels during the soft market that we have experienced for over a year. We have done this to be able to maintain day rates.

We saw in the December quarter an increase in U.S. supply vessel utilization to 24%. 20.2% reported in the September quarter. This less than 4% supplied utilization vessel increase resulted in a revenue increase in our supply boat division of 27%, which is a clear indication that our pricing policy is working. In fact, our entire domestic operations posted a loss of just $1 million this quarter, versus an almost $6 million loss in the September quarter. These results are particularly gratifying as I believe they really validate the course of action that we have chosen, which is, as I said before, has been a debated one, that we at Tidewater have viewed and reviewed since its inception.

Now to our new build and replacement program, we took delivery of seven new vessels this quarter. These vessels had a combined value of $108 million and added only a total of $10 million in additional debt to fund them. Keith will give you the details of our ongoing new-build program, but there is one thing I would like to underscore before he does that: The fact that we were able in this difficult operating environment to fund over 90% of the cost of these vessels as well as our regular maintenance cap ex plus $8.5 million in dividend from internally-generated cash flow is as good a testament to the fiscal discipline and consistent hard work from everyone in our company that I can imagine. In the last three months, we further continued our fleet rationalization program. We scrapped a total of four U.S.-flag vessels and overall disposed of six vessels during the quarter. Now I would like to ask Keith to fill you in on the details. Thank you.

First, I would like to start off by reminding everybody that shortly before the conference call this morning, we did file our quarterly 10-Q, and we filed a separate form 8-K. The form 8-K was filed -- to file with the SEC the required officer certifications that companies are now required to file along with their financial statements. I would like for people to -- who really want to understand what's going on with Tidewater, especially this quarter, to kind of take a look at that 10-Q and for the first time, I hardly from ever, make any reference in numbers nine months on nine months last fiscal year to this fiscal year, but I think to get a real feel for what's going on within Tidewater, one can look at those comparisons, particularly nine months on nine months international and within the United States, and it might give you a much better feel of items that I personally won't be covering this morning. We also had a press release early this morning which Dean said which highlighted the performance for the quarter and that is available. A quick review of the quarter as Dean says, one needs to look at the numbers because a net income of 42 cents versus 41 cents of last quarter doesn't tell the story the way we certainly would like it to be heard.

During the quarter, quarter-on-quarter on the September quarter, we had a net gain in revenues of $4.5 million; this was a nice 3% gain that we -- that we picked up during the quarter. Once again, showing the high leverage of Tidewater's earnings to the revenue line of this $4.5 million, $3.7 million of it fell directly to the operating income line; so we were up operations-wise at $3.7 million. This is a nice 12% gain in operating income for the quarter. Where the distortion comes in is at the stage of the game where we had a net difference of almost $3.4 million in vessel gains -- gain on sales that we had last quarter that we did not have this quarter. So the nice $3.7 million pickup in operating income turned into a net-income income of $409,000 for the quarter or the 1 cents in the quarter. So that the quarter-on-quarter, somewhat misleading but one as Dean said we were -- we were fairly happy with. Looking a little more in the details of the quarter, it needs to be pointed out that domestic sales during the quarter were up almost $7 million. As Dean said, most of that was tied to a pickup in the supply boat division where, in a few minutes when we go into statistics on utilization, you'll see a slight pickup on utilization there resulted in this almost 30% pickup in revenues for the whole domestic operations. Domestically, the other divisions, the towing divisions and the crew boat divisions, also had a pretty good quarter.

Internationally, sales were down $2.1 million or 1.6%, and it is easy to attribute this to one customer in Mexico. We've often spoken of one customer where we historically have had collection problems, and with that customer, collections this quarter were right at $2 million less than what was realized from that customer in the September quarter. So the $2 million kind of shortfall from quarter to quarter there. And this was one of the areas I would encourage you to kind of go to the -- to the 10-Q for the quarter to look at it, because by looking at that, one can see that international sales, although for the last couple of quarters may have appeared to be relatively flat, when one looks at the nine-months-on-nine-months results on international sales, we are really up over $17 million from where we were at this point last year or a nice 5% growth element in net. And one -- one looks at the statistics, you will see that that's tied to both the day rate increase on the nine-months-on-nine-months and a pickup in utilization in most of our international equipment. So revenue growth, even in this market of domestic turmoil is nice and growing at a nice 5% rate there.

Operating costs for the quarter were almost directly in line with the previous quarter and came in at $90 million. We were able, during the quarter, to somewhat control, as best we could, major dry docks. We had anticipated a few more than actually happened. We actually had 20 during the quarter or total R&M came in at $16.7 million. For the next quarter, some of that control during the previous quarter. And some of the pickup in activity in the Gulf of Mexico has necessitated dry docking a few vessels. We anticipate to March quarter to have about 24 dry docks at a cost of almost $10 million. So we are anticipating a pickup in R&M for the March quarter of somewhere between $3.5 million to $4 million and from that, I would conclude that we -- we would give you some guidance on cost for the quarter that I think should come in somewhere around $93 million.

Looking at a little bit more of the individual statistics for the quarter, in the domestic market, our Deepwater vessels continue to do well. We have an average day rate there of $13,081 compared to 12,745 in the previous quarter. We ended the quarter even with the delivery of a new vessel; one of the vessels, one of the seven that Dean talked about, began its first contract. So the number of vessels went up. Day rates went up, and utilization from the quarter went up from a previous quarters of about 78.4% up to 95% for the December quarter. And at that point in time, probably today and the last couple of days, we actually had 100% utilization on those vessels. So those vessels continue to -- to find homes, as they come out of the shipyard. Domestically, our towing supply and our supply division, as Dean said, we saw a nice pickup during the quarter particularly late in the quarter utilization, which went from a reported 20.2% in September to 24%; and we were able to maintain a fairly high day rate, where the day rate for the quarter averaged $5800. Certainly a rate that was much higher than one that we would have been able to achieve had we chased utilization during this down period. That $5800 a day compares to $6050 the previous quarter. So even though the day rate did slip a little bit there by $200, the nice pickup in utilization added to what we had was an overall 30% increase in revenues for the quarter.

Internationally, kind of backing up quarter-on-quarter, being relatively flat, Deepwater fleet stayed at about 26 vessels although we did take delivery of two vessels late in the quarter that was part of the seven that Dean talked about, their financial affect on the quarter were almost negligible. The average day rate was almost unchanged from 11,446 last quarter to 11,400 this quarter; and utilization remained relatively flat, we reporting 87.7% versus the previous quarter of 89.3%. The most positive, I guess, in the whole international aspect here beside the delivery of, you know, a nice fleet of additional equipment late in the quarter was in the statistics for our supply and our towing supply vessels of which we are reporting 186, a number that was unchanged during the quarter. We had a nice $43 overall increase in day rates, up to $6314. The previous quarter averaged $6271. We saw noticeable, although slight, increase in utilization from 78.1% to 79.3%, and that's a utilization that today is -- has picked up a little bit more and is approximating 80% and the day rate has come up a little bit to where today the average is $6396 or another $80 on top of the 43 for last quarter.

Internationally as I said earlier, one looking at nine-months-on-nine-months number, there has been some real steady progress during the year, both attributed to the addition of new equipment coming into the fleet and a nice steady pickup throughout the whole nine months for our supply and towing supply divisions. A little bit of a balance sheet recap, as Dean noted, the debt kind of snuck up from 109 to $119 million. Company net equity was $1.34 billion, so our debt-to-total-equity number inched up to 8.2%. Obviously a number that is still very, very low in this industry and as Dean said, one where we are paying a nice dividend and we are adding equipment -- substantial amounts of equipment -- at this stage. The seven vessels delivered last quarter was in line with what this phone call talked about last quarter. We talked about having eight scheduled -- the one vessel that was not delivered during last quarter was our first delivery of what we are calling our new fast supply division vessel. It was delivered on January 13. It is in the dock today being outfitted with it's DP system and outlook for revenue generation during the quarter at this stage is pretty good.

The balance of our new construction program, as it exists today, is made up of 27 vessels. We have shipyard commitments signed up for that are now down to about $172 million. And the balance of this fiscal year, which happens to be the March quarter, we expect -- we have to fund about $51 million of that program. We expect five vessels to be delivered, three more PSVs and two crew boats; that does include the one that was carried over into the 13 days for this quarter. Next fiscal year, our '04 fiscal year, we are scheduled to take delivery of 18 vessels; and cash flows budgeted are $108 million. That 18 vessels is made up of 9 new PSVs, 7 crew boats, and 2 of the big anchor handlers and that's kind of the influx of our first replacement fleet in the Gulf of Mexico where we kind of get serious and the balance of the program is about $13 million of expenditures, carried over into '05 where we will take delivery of 4 vessels which would be 3 of the big anchor handlers and 1 of the PSVs. As noted last month, we certainly have gotten on top of the curve of funding our new construction program. As I mentioned, 27 vessels have $172 million yet to be funded, but when one totals up the total shipyard value of those contracts you come up with the total of $392 million. So we have got 27 vessels that are basically about 60% paid for that are going to be delivered into the company.

So as you can see, the commitments, the amount of cash flow that they will require is coming down substantially and nice additions to the fleet over that -- over that period of time over the next 15 to 18 months. Once again, to kind of finish up the number recap by reminding everybody that we continue to go along with our dividends up to 60 cents per share level. Dividends are something that certainly have come into bode with the President's proposal with, perhaps, making dividends nontaxable. We certainly think that making dividends nontaxable will be an event that will take and add great exposure to the Tidewater shares. You know, not many companies in the oil service business pay dividends. Not many of our competitors appear to be financially able to pay dividends at the level that we are able to pay them, and we certainly think that perhaps a whole new breed of investor will be attracted to the industry where one can get the effective rate of 3%, 3.5% equivalent of a taxable return and yet be able to play the stock returns, you know, that this industry has seen the highs and the lows over a period of time. We have no intent on doing anything that would lower the absolute amount of the dividend payout, and I was told to tell you today that everybody at Tidewater is working awfully hard to lower your yield on the dividend payouts. With that comment, I will turn it back over to Dean.

Thank you. Before we get to questions, I would like to briefly discuss the general energy market conditions as they pertain to Tidewater's operations. Keith just -- as Keith just detailed, our international operations remain strong. While we have not seen some of our customers move as quickly as we'd like on a few major international oil projects, we remain confident that a number of these projects will be started during the course of this year, and Tidewater will continue to participate in many of them. We are doing everything possible to maintain our substantial presence and infrastructures in such important overseas areas as West Africa, South America, and southeast Asia, and we are in the best position to do so. These areas continue to represent a consistently large portion of our earnings. We believe that they can, in time, continue to grow.

The potential for war in Iraq and the possible consequences on oil prices, as well as the ongoing strife in Venezuela continue to impact our industry as well as our company. As many of you know, I lived and worked in Venezuela, and the situation there is one that I am asked about as Tidewater has had a significant presence there for many years. This quarter, we generated $6 million from Venezuela which translated to less than $300,000 for less than 1% of worldwide operating income during the period as compared to a normal contribution of more than $1 million per quarter. Because of the weakness of the currency and the situation where we are not receiving full revenue for some of our services, results there are worse than normal for this reporting quarter. Personally, I don't think things will get better there in the immediate future. Currency as well as labor cost issues will continue to challenge us in addition to the balancing act we will need to achieve between our customer, Petavesa (ph) and the government. Recently, we have had to evacuate the families of our expatriate managerial staff because of the overall level of unrest. Situations where the government is telling us, sometimes at gunpoint, to work and our customer is asking us not to work are never pleasant for those who must deal with that. And we, at times, have been placed in that situation in the past weeks.

Overall, my feeling is that the -- is that the commotion will continue and that there is a genuine risk of either a Civil War or a Cuban-style dictatorship that destroys the capitalist system in the country. I responded recently for a couple of analysts requests for my thoughts on the situation. I don't think President Chavez will go away easily nor do I expect that the Petavesa (ph) strikers will give in any time soon. Prior to the advent of the Chavez regime, Petavesa (ph) was one of the most professionally managed of all of the national oil companies. The gutting of its management and the lack of maintenance work in the producing fields will surely not be remedied quickly. Nevertheless, despite of it all, we expect to maintain our presence in that country, although we certainly can't say when and if that area will return to what will pass for normal operations. There will certainly be challenges in the short run. In the Gulf of Mexico, the near-term future is also somewhat uncertain, although when I look a couple of quarters out, I am more optimistic than I have been during the past year. The start of this year has been a little slower than the end of 2002. But I can say that we will continue to adhere to our disciplined pricing policy.

A note concerning major repairs and maintenance expenses is in order. If the inevitable domestic upturn occurs, we will have to dry dock, depending on demand, most of the vessels placed in our stack fleet. We will judiciously monitor how we remove vessels from this fleet and put them in operational status, to make sure that the expense is justified by the likely income. We will keep you apprised of our efforts in this regard. Overall, and I can't say when, I believe there will be much more work in the Gulf of Mexico in the year to come. We are ready for it. Finally, considering the large question marks relate together oil and gas markets today, I am reluctant to give specific guidance for next quarter's earnings, other than to say at this time we anticipate that they should be roughly similar to those we just reported. But with the caveat that because of Iraq, Venezuela, and the situation in the Gulf of Mexico, there is probably a greater probability of change, either up or down, then there was during the quarter just reported. On the whole, I am confident that good times are coming. We will continue our disciplined approach to readying our company for them. Now I would like to ask our coordinator to open the call up for questions. Hopefully, we will be able to take them today without the resort to a separate call. Rebecca if you would please take the questions

At this time, I would like to remind everyone if you would like to ask a question, please press star and the number 1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from Ken Seal of CNSB.

Hi, Ken.

Good morning, guys. I wanted to kind of follow up on something you talked about last quarter, and that's what is it going to take in the Gulf of Mexico to drive utilization, let alone pricing, up. I think last quarter you had indicated that kind of 15 to 20 rigs going to work would improve that market. I think actually if you look at the contract, your numbers were down a little bit from there. You know, what kind of activity levels do you see from here needing to -- to -- do we need to get up to to get your pricing and utilization better here.

Ken, I don't have an exact answer, but I will say this, I was actually surprised with the pick up in activity that we had at the end of the last quarter upon which we were reporting. That was sort of a surprise in that really, you know, the activity levels were going down, and yet our utilization was going up. It seems to -- it seems to relate to perhaps other companies coming up against dry docking on their equipment. I am not quite sure what. But I -- I think that as compared to last quarter, I would say that the probabilities are that the number of rigs that need to go back to work in order to improve our utilization, that not so many rigs need to go back to work now. So that's sort of how I view that.

And that could be because of the mix of your fleet or just because what's going on in the competition?

It seems to me that it relates to the competition more than the mix of our fleet. Now we have had some boats constructed for our Gulf of Mexico replacement program delivered, but unfortunately, they are pretty popular overseas. They haven't helped us as much domestically as they could have.

And you still aren't -- I mean before you guys had indicated you didn't expect to see much of the high-end North Sea equipment coming into West Africa because of size and draft restrictions. Is that still what you guys are seeing?

I will let Steve respond that, but on the whole, I would say yes. Steve?

There has -- good morning. There has been some migration out of the North Sea on the PSV side, and to a lesser extent on some of the anchor handlers, but we have also had some pretty good success with our -- our Deepwater fleet that we have in placing some of those vessels. It is kind of been a mixed bag, but there haven't been as much -- as much migration as one might expect.

Okay, thank you.

Thank you and good talking to you

Your next question comes from Neal Herbert of Simons International.

Hi, Bill.

Dean and Keith, with respect to Venezuela, can you review for us basically the state of play in Venezuela as it relates to Tidewater? I believe you essentially have two classes of vessels down there. You have some high-end AHTSs a couple of those and, what I would call, more standard equipment on the lake. I am just wondering if you could just review for us whether those boats are working, one. Whether they are earning day rates or standyby rates, and if not, are you getting your costs covered. And then lastly, what -- I guess this is more for Keith, what is the total cost burden in Venezuela, because what I am trying to get to is if basically if you weren't paid any day rates, if none of your labor costs were getting covered, what would be the cost burden and basically the earnings hit?

That one question, or how many.

The question is related to one subject.

Well, I will answer some of your first questions first and then on the numbers, Keith and Joe will give you the details.

Thank you.

But in general as you properly pointed out, we have sort of two classes of vessels. There is the -- they are some vessels -- three vessels that are related to an offshore program, you might say, working to the north of Venezuela, northeast of Venezuela, close to Trinidad. And that's the gas project. Those vessels are still working. And we recently -- we recently received a payment for those vessels while they were working, even though they -- lots of other contractors were getting paid. So that's -- that's pretty positive. Now we are expecting another payment pretty soon, and, you know, that's -- we are monitoring that. Whether we'll get it, how soon we will get it, I am not quite sure but everybody knows there is turmoil in the Petavesa (ph) organization. On lake Meracaibo (ph) we have a number of smaller units. Most of those are in what is properly described as a standby mode. We have been assured that we would be paid for our standby costs. Although it is a little bit unclear because some of the people that signed the orders authorizing the standby rate have now been terminated.

Okay.

And what's going to happen when their replacement -- if they are replaced -- come to review those contract amendments, let's say, it is unclear. Although I guess -- I guess I am still confident that those things will be respected because they were signed when the individuals still had jobs.

Okay.

In terms of the numbers of our costs and all that stuff, Joe or Keith, would either of you like to respond?

Bill, as you say very difficult. The one thing I will say is December 31, we had $5 million of total receivables on our books for Venezuela. So our total financial risk, I guess, in a worst-case nationalization, would be the fleet of vessels and the $5 million. Historically, our insurance programs have covered us pretty well under those situations. It is not unlike when, I guess, the Shah of Iran fell and our operation there was confiscated although the numbers this time would be somewhat larger. Absolute worst case would be something along $5 million of receivables would be the financial numbers kind of at risk. G&A kind of ongoing administrative cost in Venezuela run about a million dollars a quarter.

Okay.

In rough terms. So one would say last quarter we reported net operating income of about $250,000 as Dean said, it was kind of less than 1%. And that was on $6 million of revenue. So one could -- one could, I guess, if we continued on, worst case that those three boats continue to work and we continue to incur costs, and we didn't end up getting paid for them, we could lose $2 million to $2.5 million during the quarter but kind of a shut-down mode if nothing else happening, we would lose a million to $1.5 million from Venezuela which would be about -- 1.7, 1.8 swing from what we reported last quarter. I don't know how to be more precise than that.

I will say on the offshore project, there are rumors they are going to shut that down.

Okay. I mean --

Whether that happens or not is still up in the air. They are looking for contractual reasons to do so. If they do so, but that's still question mark. You need to I think follow everything, though, with the possibility that this thing could be resolved, and there will actually be an uptick in activity when it is resolved one way or the other. As I said earlier, we are going to stay there. We have been there a long time, we don't intend to leave. We intend to weather this storm.

Okay, thank you

Your next question comes from James Stone of UBS Warburg.

Good morning, guys. Dean, could you just talk a little bit about the change that you are seeing in terms of Deepwater utilization in the Gulf of Mexico. Because it doesn't appear that we have seen much change in the overall rig environment. Are you seeing your boats going on as replacements for other people's equipment?

I don't know whether -- they must be replacing somebody else's equipment, because the activity level is relatively flat, as you probably have found out. For a long time, we were shut out of that market, and it is really nice to be able to have -- to have some equipment that can work there. So, you know, we've seen a real nice reception of our equipment -- of our equipment in the marketplace. The boats are doing a fantastic job and overall we are pretty enthusiastic although you know we have strong competition.

Can you just update us as follow-up on some of the large international tenders that are going on -- that are still outstanding. You talked about a series of them during the last call. I was wondering if you could update us on some of those projects.

I will let Steve respond relating to West Africa which is where most of them are. In terms of Saculan (ph), that has gone quiet for time being although it is still smoldering, you might say, but for the time being, it's quiet. The Caspian is relatively -- relatively quiet, although what we expect actually to be starting some work there in the relatively near future on the construction side of the business. Steve will -- Mexico, there is a number of -- there are a number of tenders out for vessels there. That could be -- that could be something that would be interesting, although as many of you saw in the "New York Times" this morning, payments are indeed a problem sometimes in Mexico. Steve, why don't you tell us about Africa.

On some of the African projects, there are -- there are four outstanding at the moment. There was one that was recently awarded, and we were successful with two vessels going to work in equatorial Guinea -- Deepwater vessels. One of them was a new vessels, one of the new construction vessels slated for work in the U.S. Gulf, but as Dean said, they are proving to be pretty popular for the operations in West Africa. The others are kind of hanging fire. We are awaiting confirmation of a Deepwater support vessel in Angola that is forthcoming in the next day or so, and the others are still under evaluation and have probably pushed out a few more months, but there's nothing concrete on any of that yet.

Thanks very much.

You are welcome.

Your next question comes from Tom Escott of Pritchard Capital.

Hi, Tom.

Good morning, everybody. A quick follow-up on Mexico. You have done a good wrap-up of the pending projects in the other counties, but in Mexico, they are tendering for a lot of new rigs to go to work over the balance of this year. Can you give us an idea, you know, how many vessels have you bid on those various projects. And then related to that, if you win those bids, would you then have to ramp up a significant amount of spending on those vessels to get them ready to put back in service.

Tom, what's been interesting in Mexico, with all the rigs that have gone down there to date, they have not increased -- they have increased about less than a handful of the number of vessels that are in their fleet. And, in fact, our guys down there say they haven't increased any. Now I am not quite sure that's exactly right, but it is close to right. They put all those rigs to work without increasing their vessel fleet, which leads us to believe that this year they are going to have to do a fair amount of upgrading to their vessel fleet. Right now, there are about 11 vessels being bid for work in Mexico, but I really sort of feel like that's just sort of a start, and I think there could be as many as 20 vessels going into that marketplace as -- as time goes on, and this excludes construction activity. Construction activity actually was down last quarter in Mexico, and I think that there will be a pickup of that either this quarter or next quarter in Mexico. So that will also be a nice opportunity for us to participate sort of in increasing numbers in that market.

Thank you.

Your next question comes from Pierre Conner of Hibernia South Coast Capital.

Question toward the new-build program if you could. If you have had seven deliveries and I appreciate about three of those really were coming in right at the end of the quarter.

Is that a question, Pierre?

It is, I wanted to verify that and make sure I got that right.

Yes, that's correct.

Steve, do you expect that to be then those other three incremental go forward or is there replacement going on with that equipment versus the older stuff? In other words, the three that came in late this quarter, will they be incremental?

They will be incremental, Pierre.

Okay. With -- with that Dean, do you think there is some other offers in Venezuela or other areas like that that gives you the perspective of for a flat quarter-to-quarter, you know, or just want to set it that way and look for the upside to come as it comes?

Well, keep in mind that the rig activity internationally is about 80%. So let's assume that you have 90% sort of full utilization. With, you know, upgrades and dry dockings and all that stuff. There is not that much upside internationally. What's nice for us is our international fleet is so big it does not take much of a percentage increase in international activity to translate into a nice potential or revenue and income increase for ourselves. On the whole, some of these projects have got to be -- some of these things sort of as Steve said hanging fire have to be awarded for there to be a big pickup in international activity, I think.

Okay. And in a follow-up, maybe for Keith, specifically just some numbers things. On your sale on gain of assets, anything going on there structurally to effect a change in your run, a million, million quarter per quarter or just happens to be the timing when things occurred for this quarter.

Pierre, we have a couple of proposals that are on the table that lead me to believe that we should be in our normal, what I've always said a million and a quarter to a million and a half gain. Last quarter we had a whole new company that came to the Gulf coast in the scrapping business. So our scrapping of four vessels last quarter and having to write out the remaining book value was a little unusual. We did have some sales during the quarter, but the scrapping program kind of negated them. We thought it was very important for a new competitor for a new source of scrapping to set up in the quarter so we went ahead and got a little aggressive. You will continue to see that from us but I think a return to more in line with the normal million two to a million five is probably in line with where I expect us to be for the quarter.

Okay, great.

I want to go back and address your first question, Pierre. Last quarter of the seven boats -- and we mentioned it earlier -- we really had very, very little revenue from all seven of the boats. In fact the total revenue from those boats was only $1.2 million for the quarter out of 160 million worldwide. So incremental pickup from the seven, it better be there this quarter. You know five of them came on and started some fairly decent contracts when they came in. We had a little bit of down time in moving one of the bigger boats that was built in Singapore to West Africa. So there certainly is some incremental gain to come from those seven, you know, in this quarter.

Okay. Great, I will turn it back. Thank you.

Thanks, Pierre.

Your next question comes from David Snow of Energy Equities.

It was already answered. Thank you

Your next question comes from Joe Aguilar from Johnson Rice.

I wanted to see if we could touch on a couple of items which are sort of moving parts within the sequential quarters, both from, you know, previous quarter to this one and into the next one. Keith, you mentioned the $2 million revenue decrease in international attributable to Mexico.

Yes, sir.

I was trying to understand, is that -- you are not booking revenue until you collect it? Or -- could you maybe just explain exactly what happened there.

Well, as we have always said, we have one customer that's kind of boom or bust. They are an offshore construction company in Mexico, and at one stage prior history when a receivable ran up to $12 million, we were very uncomfortable with booking revenue and then having to consider reserve for bad debts. So a number of years ago, five, six, seven years ago, in order for it to pass the GAAP realization test, we kind of went on a cash basis. That customer seized their fortunes through their PMEX (ph) contract, who they work for, kind of rise and fall. The $2 million shortfall in earnings this quarter was a real one. We actually did collect $2 million less from that customer this quarter, but it's not because of -- of a real shortfall in cash payments. We did book -- we did incur -- we rendered about $400,000 more service during the quarter than we actually billed out. In the 10-Q we saw the footnote go up by $400,000, and we booked $2.8 million of revenue when we really did 3.2 the previous quarter. They were just a better customer.

In the previous quarter they needed an awful lot of tugs that were kind of hit a seasonal peak and had $4.8 million from that customer. $2 million shortfall as it turned out did not come from an accounting quirk at all. It just came from somewhat shortfall in the business of that customer. When one picks up the 10-Q, go to the international statistics and look at the decline in day rate and the decline in utilization for offshore tugs during the quarter and it will explain 100% of the changes in net revenues from the quarter. And as I said, it -- it was a quarter where we took delivery of new equipment, but we took it so late in the quarter, and even though most of it had good contracts to go on, it was not able to come up and overcome the shortfall, so the one Mexican customer, who at the moment is under going some renewal of their construction contracts with PMEX (ph) so where they run this quarter versus last quarter is an additional question. Somewhat similar to Venezuela but not quite as serious.

I guess what I am trying to tie together is if you look from last quarter to the one you just reported, you actually had, you know, a nice $3.7 million increase in operating income, and you attributed most of that to the Gulf of Mexico improvement, yet you seem to cite Mexico as an area where one customer seemed to fall off a little bit and you obviously did not have any gain in sales below the line, below the operating income line. Going forward, it sounded like you are saying this next quarter should be sort of like the one you just reported, yet you're going to have another quarter of -- a full quarter essentially of the new deliveries that happened at the end of the last quarter. I guess what I was trying -- you outlined obviously increase in expenses already. What I was trying to get at is if this customer in Mexico my turn around to being as good as they used to be in the coming quarter.

Well, what Dean said when he talked about flattish, he said that the likelihood of the up or the down was more likely than in the past.

Right.

And, yes, that customer now being behind in their cash payments, not only could we -- a return to the last summer operating levels could have a substantial financial effect, but more for us it will be the cash collected during the quarter. We don't know what their cash payment is going to look like. You know, a big article in the "New York Times" about PMEX (ph) and its payments to its contractors. This customer is suffering in cash collections; that slowed down their payments us to. You know, we -- we try to be honest from quarter to quarter as to -- you know, whenever we have an abnormal quarter, where we collect a lot more than the service we render it looks good on paper but the next quarter we will have to try to overcome that. So that customer, will they pay us more than we book during the quarter, will their bookings return to normal and they pay us what they book? There are two different pieces of that and we are sorry, we don't know their payment cycle.

Keith, my point is you're always doing well despite the troubles with that particular customer at the present.

We don't want to speak too much about the customer, but he has historically been in the top ten customers for this company for the last 12 years.

If I can indulge a new question. The new delivery vessels, are you all pleased with the day rates you are still getting on those?

We are all -- I would say we are. We have taken delivery of a lot of equipment. We have put them to work almost immediately in almost every case. So on whole, we are pretty satisfied with what's happened. And you can ask an extra question since you summarized the content of our call so well.

Okay. Thank you. That's it.

Thanks.

Your next question comes from Bill Sanchez of Howard Weil.

Dean, I was hoping you could update us how construction is progressing on the five large anchor handlers in China.

Not progressing as fast as we like. We are optimistic, and I have been, that we are on the right track, but it is not going as fast as we would like. But remember, they are pretty big and pretty sophisticated pieces of equipment. We expected some of this when we signed up.

Is your feeling the quality issues that had been a concern to you earlier, you have gotten that resolved now?

We are still getting to the complicated part of the construction so that's something we will have to monitor. I will say this, I am more confident in the overall situation than I have been quite a while.

No cost overruns expected on those units, is that correct?

That is correct. I do not expect any cost overruns.

Thanks, Dean.

Your next question comes from Paul Pender from Forest Capital.

Hi, Paul.

During -- during 2000, can you -- calendar year, can you tell us industry-wide how many boats were scrapped and how many were brought in new? Any sense of that?

I can't. I wish people would do more of what we are doing. We don't -- we don't see much of that. But I really can't answer your question. If you would like, we will try to take a swat at that in maybe next call.

How much did you do?

In the year 2000?

Or year-to-date if that's better for you

You mean 2002, the current year, how many vessels to date?

Yes.

Probably eight or ten. Are you talking about just scrapping or sales outside of the industry or what?

Well, I guess preferably all, but how many are gone and how many can still reappear and then how many did you bring on?

I don't have the exact answer for 2002, but we recently did a little look on sort of going back the last three years and we did about 140 ships the last three years. Those are pretty -- between sales and scrappings. Those are pretty much out the industry. We don't -- we work very hard to make sure that when we sell something, it's to someone who is not going to bring it back to haunt us at cheap rates with customers that are willing to take sort of cheap rates and shoddy service. So 140, I would say almost all of them are out the industry. Things get to be really blown and gone, some of them may squirt back into the industry. They might, but a lot of the stuff that we sell is pretty old when we sell it, and I don't think it will be too much utility to --

Thank you.

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Thanks, everyone. Thank you for your interest in our company and we wish you well. Thank you very much.