Tidewater Inc (TDW) 2004 Q2 法說會逐字稿

Good morning, my name is Stephanie, and I will be your conference facilitator. At this time I would like to welcome everyone to the Tidewater Q2 Conference Call. Now I would like to introduce Mr. Dean Taylor, CEO, Chairman and president. Mr. Taylor, you may begin your conference.

Thank you very much. Ladies and gentlemen, good morning. I'm Dean Taylor, our President and CEO. I'll be hosting our conference call this morning. With me to assist with the call are Keith Lousteau, our CFO, Cliffe Laborde, our Executive Vice President and General Counsel, Joe Bennett, Vice President, Controller and Principal Accounting Officer.

We'll follow our usual format in this morning's call. I'll begin with some comments on our just released quarterly results. Following my comments, I will turn the call over to Keith for a review of the numbers and a description of where we stand on our new build and replacement vessel programs.

I'll then return with some comments on our outlook for our markets and our future plans. We then will open the line for your questions. Please limit your questions to two at any one time so that everyone who has a question may have the opportunity to ask it.

Before I begin, I'll ask Keith to read our Safe Harbor statement.

During today's conference call, Dean, I and other Tidewater management may make certain comments which are not statements of historical fact and thus they constitute forward-looking statements. I know you'll 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 comments that we may make today.

Dean?

Thank you. Our earnings of $0.22 per share this quarter were in line with the recent guidance we provided in the press release put out earlier this month. These earnings are disappointing. As compared to last quarter's results, they are the consequence of a number of factors which are not immediately apparent on the face of things. Keith will provide the numerical follow-through. But what most impacted our results was an unforeseen falloff of international utilization related to 3 specific areas. Combined with an increase in operating costs that we foreseen and advised in our last call.

Specific areas where utilization was softer than expected were Nigeria, Venezuela and Brazil. The turmoil in Nigeria that has been manifesting itself in the performance of the rigs and other service companies finally caught up to us. We did a good job of staving it off, but with overall rig utilization in the area down as much as it is, our utilization in the area is now reflective of it.

Venezuela, as you know, is also in turmoil. Our results there, too, have held up pretty well in spite of that. Mainly due to the [Plataforma Deltona] project offshore of Venezuela, a high priority project of the Chavez government, to which we had the vessels assigned, but which came to a temporary conclusion during the quarter, causing our numbers there to be negatively affected.

In Brazil, an area that had been doing very well for us, a number of vessel dry dockings combined with the conclusion of a couple of term contracts that were not immediately renewed, negatively impacted our results there.

We had a better quarter in the Gulf of Mexico. Results for the Gulf improved substantially, but not enough to generate either a profit for the area, or to make up for the falloff in the activity of the international areas mentioned. More on that a little later.

Now I'll turn the call over to Keith as the numbers deserve a good review. I'll be back in a few minutes with an assessment of where we are, what we see in the near future, and our strategy going forward.

Good morning. I would like to remind everyone that we have, in the last few minutes, filed our 10-Q electronically this morning and that should be available to everyone including its volume of statistics that we include in that report. We did put out an early press release this morning highlighting the numbers for the quarter, and I guess you could read that in conjunction with the press release of October 9 that we did put out where we put out the warning that our numbers were going to be less than those anticipated.

For the quarter today, we are reporting a quarter that came in at $0.22, that's compared to last quarter where we reported $0.32, and compared to a year ago where the quarter was $0.41. Year on year for the six months to date we're reporting a $.054 for 6 months, versus $0.82 for the same six-month period of last year.

As Dean said, one, looking at the numbers in today's press release without hearing some of our comments certainly could reach an invalid conclusion. That the press release as it goes out today looks like a quarter where Tidewater was troubled with high cost. Costs were up in the quarter, but that's not the story coming out of the quarter.

In fact, one looking at the numbers could easily say that vessel operating costs were up $5.5m, interest cost was up about $.75m, and our G&A was up about $1m. And those three cost items almost jointly account for the $8.6m shortfall of this quarter versus last quarter. But once again, anyone looking at it in that capacity would not be hearing the right story.

Once again, we had a relatively flat or normal quarter on gain on sale of assets. We reported about $0.03 from gain on sale of assets on a net after tax basis. Tax rate for the quarter stayed in at 33% with no change in that area.

Looking at some of the individual numbers, this is where the real story of the quarter starts to come into focus. Revenues for the quarter, although revenues for the quarter appear on paper to be almost flat, down only about $1m quarter-on-quarter, that the real story is that during the quarter we are in the process of taking delivery of a lot of our new equipment. And new equipment actually accounted for about $3.7m of sales during the quarter.

So if one were to take the falloff plus factor back the new equipment into it, you can see there was a significant falloff from what might have been anticipated going into the quarter.

Domestically, you heard us on our last conference call talk about flexibility, domestic flexibility in pricing, and some new things that we might be doing. We're glad to report to you today that domestic revenues were up about $2.5m from the previous quarter. Domestic revenues were up to about $33.5m, and if one were to check that, that's up almost $10m from the same quarter a year ago.

We are glad to report to you as we said in last quarter's conference call, last quarter we reported a domestic operating loss of $8.2m. This quarter we were able to chop that down to $4.5m, a 45% improvement on that domestic operating loss. So the attention that's being paid, and Dean will talk about it, is certainly benefiting us. Unfortunately, if we add a rise in domestic revenues of $2.5m that was offset by an international decrease for the quarter in revenue of about $3.8m.

When one takes $3.8m actual decrease, and factors in that international market, new vessels actually contributed $2.3m of additional sales, to come back right quick to the fact that we came up about $6m short on international revenues, merely to have maintained the position that we were in the last quarter. So the revenue numbers, disappointment. Sub-story, some improvement domestically, but certainly a disappointment in the international area. And when we talk about vessel classes here in a minute, we'll further identify as to where that came from.

Operating costs for the quarter came in right at about $104m, which was within the range that we gave you on the last conference call. That was up $5.5m from the previous quarter. Basically made up of two items. We had substantially more dry-docks during this quarter. In fact during this quarter we had 29 dry-docks that cost us $9m versus last quarter, we only had 21 dry-docks that came in at about $6m.

Once again, just the mere fact of 8 dry-docks, dry-docks take 20-25-30 days. You can see that there were some 240 days, perhaps 200-250 days of vessel downtime during the quarter where vessels were not available to actually work, and therefore that was one of the items that affected utilization during the quarter. You take that increase in R&M along with some vessel crew cost increases during the quarter, vessel crew cost increased by $2.4m, tied to a couple of items. New equipment, new boats in the fleet, additional crews there. Plus some of the severance pay that we had to record. Some of the cost of doing some of the cost curtailment that Dean will further talk about. So, operating costs were relatively in line with where we anticipated, and I would purport to you that for the coming quarter, we think operating costs should be right back in the exact same mode. We think it should be in the $103-104m range.

We say that because we will be adding some more vessels during the quarter, but the bulk, the real feel for the cost cutting measures that were taken here domestically will not be, were not felt for the whole quarter, in fact much of the crew activity took place much later in the quarter. So we will have our first full quarter of those domestic cost savings. So we would anticipate dry-docks relatively in line with last quarter, and overall operating cost of about $104m in the December quarter.

Looking at some of the individual statistics, utilization and day rates, first going through the domestic market, the domestic deep water market, one of the markets where we really talked about last quarter as having a utilization problem. Part of our new strategy of pricing, our marketing aggressiveness is showing some fruition here. We averaged 7 vessels in our deep water marketing effort domestically during the quarter. Where we saw a day rate average that fell from $13,300 in the June quarter, down to $12,650 during this quarter, we saw a substantial increase in utilization in that fleet.

Last quarter we reported to you 68% utilization. Today we're reporting 84.3% utilization. So, we certainly have covered some good ground in getting the deep water boats better utilized. Our backbone fleet, our towing supply and our supply boats in the Gulf of Mexico, first statistic in one that I don't want anybody to get too excited about, day rate average increased from $5,470 last quarter, to this quarter we're reporting $6,125. You can see a quick $650 increase in day rate. Not a lot to be read into that number except that the mix of boats working in the Gulf of Mexico today is different quarter-on-quarter.

We are obviously experiencing good utilization, in particular with the new stretch fleet that we picked up in the [Inskal] acquisition. Those boats generate a higher day rate than the old 180s. Some of our new build supply boats have gone into this category. So, substantial increase in day rate. Basically add to the mix in vessels, not to any overall increase in day rate domestically in the Gulf of Mexico.

Utilization in that class during the quarter, once again, unfortunately fell from 24.1% in the previous quarter to about 20.6% currently for the 9/30 quarter. And currently we're continuing to average something in the 23% range.

And in the deep water boats, today we continue to average anywhere from 80-90% on a given day. So, overall the domestic, as we said, revenues were up about $2.5m, a nice increase in domestic revenues for the quarter. The backbone of today is called 'International Results for the Quarter,' The deepwater boats, we saw a slight increase. We're reporting 29 vessels, a slight increase in day rate.

Last quarter we reported an average day rate of $11,805. This quarter we're reporting $11,580 average day rate. Utilization ticks down slightly in that class from last quarter-we reported 80.8%. This quarter we're reporting 78.2%.

Once again, I ask you not to read a lot into that number, because we are at the moment in the process of taking re-delivery of most of the [Sanko] purchase vessels that were out on bareboats. In fact, I would purport to you that financially in many cases we are better off taking back the bareboat where we might only report 80% utilization to you, we can actually make more money at 80% utilization in full charter, as opposed to what were 100% utilization when the boats were out on bareboat. So, a good solid quarter for the deepwater fleet.

The real story as Dean has as alluded to, and you'll hear a little bit more, really revolves around our towing supply and supply vessels. We had 187 of those during the quarter. Saw a small decrease in day rate. Day rate average went from $6,544, down to about $6,448. Right about $100 a day. But the most important statistic of the day is utilization. Whereas last quarter we reported about 73.2% utilization of that fleet.

Today we're reporting the quarterly number of about 69.3%. So about a 4% diminishment there. If there's a good side to it, today that fleet is back up, utilization has crept back up into about a 71% average on a week-to-week at the moment.

We usually don't throw this number out because there are obviously plenty of numbers here, but if one wanted one statistic to walk away from this phone call, it would not be the increased cost. Increased cost by and large, R&M, when it comes from dry-docks are almost a good thing. Those are boats that we are dry-docking to go back under a fixed contract, or to go onto a new contract. Increased crew costs, not a bad thing, as long as it's from utilization of your vessels. But here internationally, we report a total fleet internationally of 337 vessels. Total of all classes.

Day rate in the June quarter was $5,904. For the September quarter was $6,011. So you can see internationally, 337 boats, we actually experienced a day rate increase of about $100 a day. Unfortunately, that utilization bug jumps back up whereas last quarter we reported total international utilization at 72.5%. This quarter among all classes we're reporting 67.8%.

The quick mathematician says that that's about 4.7% decline in international utilization on 337 vessels. The quick calculator takes that and just multiplies it out and says that that was a shortfall in revenue of $8.8m, right at $6m post-tax, right at $0.10 per share. If one wants to know why we were at $0.22 and not at $0.32 for the quarter, I think it's the most revealing item of all the numbers we're throwing at you today.

To move a little bit beyond operating statistics, our balance sheet continues quite strong at Tidewater. We have $300m of long-term debt outstanding. That equates to an 18% debt to total CAP. And if one were to take off the cash that we were showing on the books because we still have some extra cash from our private placement back in July, you get back to a net debt to total CAP number that's only 16.1%.

Tidewater, if you listened to us a year ago, we expressed that one of the greatest challenges for management in the forthcoming 12 months would be marketing. Marketing of new equipment. I'm reporting to you, and reminding you, that in the September quarter we took delivery of 6 new vessels. In the December quarter, we will take delivery of an additional 6 new vessels, plus we have 3 of the [Sanko] bareboats coming back into our marketing fleet. So, over a period of 6 months, we're adding 15 pieces of new equipment to the active marketing program here at Tidewater. So quite a challenge on our hands, and one that I think we're handling pretty well.

Our new build program, you did see one more press release during the quarter where we have gone into what I would call, probably, phase 3 of the new build program. Since the year 2000, excluding our [Inskal] acquisition, our new build and acquisition program now stands at 93 vessels, for a total of $1.15b. 79 of those vessels have been delivered. We have 24 under construction. We have written Tidewater checks from internally generated cash of about $750m to date for so much of what's been delivered.

As of today, and going forward, as I said, we have 24 vessels under construction. We have 9 of those vessels will be delivered over the balance of this fiscal year, fiscal '04. I mentioned 6 in this quarter and 3 in the next quarter. Cash commitments for that 6 months is about $69m.

Over the balance of fiscal '05 we have 15 pieces of equipment scheduled for delivery. The commitment on that is $112m. So as you can see, those two, we have about $181m of un funded commitments at the moment. That's what's left to be paid on the 24 vessels. The 24 vessel have a cost of right at $400m. So those 24 are more than 50% paid for at this point in time.

As I've said, during the quarter, the latest press release was one that we had signed contracts to build around the world a number of mid-sized anchor handlers. That's kind of phase 3. If you'll remember, phase 1 was a deepwater expansion program in 2000 and a little of 2001.

2002 was probably highlighted by signing new construction contracts for platform supply boats intended to be the basis of our domestic Gulf of Mexico replacement fleet. Those are in a delivery process as we speak. And then, kind of the phase 3 was paying attention to our international backbone, international anchor handlers. And the ones being constructed there certainly should be considered to be replacement vessels.

That's it for my comments. I'm going to turn it back to Dean, and certainly will be available to answer some questions later on after you get all these numbers digested. Dean?

Thank you. Before turning the call over to your questions I'd like to share a few thoughts with you on Tidewater's strategy going forward. While market conditions in the Gulf are clearly weaker than we'd like to see, we've made some changes that have started to affect our results in the quarter upon which we are reporting. But they should make themselves fully apparent in the quarters to come.

On the top side, we have restructured both our shore support staff and our fleet personnel in such a manner that we should achieve between $5-6m in annual savings. In effect, we have right-sized our operation for today's market. We are no longer structured for a market that may or may not come.

On the revenue side we believe that there, too, the flexibility that we advised last quarter would now be a part of our pricing policy, has been a factor, and will continue to be in the quarters to come. Contrary to market rumors, you can see by the average day rate numbers that Keith just reported, that we have not thrown in the towel when it comes to the pricing for our domestic services.

On the other hand, as we previously advised, we're not making the guarantee that we will provide a market parachute or umbrella. We will continue to review our pricing strategy as we see that it best fits conditions in the market.

With the changes that we have made in our cost structure, and the flexibility that we have with our marketing strategy, and finally with some of the new equipment that we have coming into our domestic fleet, I believe that we have a very good opportunity to return this division to profitability in the very near future. Even with the flat rate count and count.

Internationally, you surely are asking whether the falloff in utilization that we experienced this quarter is temporary, or to be expected going forward. I'll start off by saying as I did at a recent analyst conference, that there's no silver bullet that I can give you that will provide you with tranquility that all is going to be better immediately for our industry.

I'll review each of the 3 problem areas that we had this quarter to give you a specific assessment of them, as they are the causes of our earning shortfall as compared to last quarter. On the other hand, though I refer to a lack of a silver bullet in general terms, I think it is instructive to point out all of the things that this company has done, and continues to do that will eventually provide nice rewards to those that stay the course.

First, to the specifics of Nigeria, Venezuela and Brazil. In the short term Nigeria and Venezuela are question marks. We're a month into the new quarter. And not seeing much happening in either place yet. There's some nice projects coming up in each area, but how soon and whether we are the successful bidders remains to be seen. We will not abandon either area, however, and will ultimately be glad we stayed in each.

We're already seeing an improvement in our results from Brazil, and expect a better quarter there. Long-term activity in Brazil should remain robust. Our business in Mexico improves. And I believe that it will continue to do so. You are aware of the influx on rigs in Mexico. It has yet to be fully reflected in an increase in boats, but it's starting to happen.

Whether proportional increase in the number of boats occurs as compared to the increase in rigs remains to be seen. And projecting activity out past the next presidential cycle in Mexico is risky. But on the whole the Mexican market also should be strong for the next couple of years.

Activity in the remainder of West Africa, not including Nigeria, should be relatively constant in the short-term, with a fair amount of upside longer term. You are hearing as I am what the drilling contractors are saying in that regard. Ditto for the Middle East and the Far East.

The North Sea, an area where we have a minimal presence, shows little prospect of an immediate revival. Although [tax] regime changes could cause relatively rapid change there, if they were to occur. Though even if they did, seasonal conditions will probably prevail until the spring of 2004.

Let me get back to my silver bullet, if I may. On the whole, I don't believe in them. Though I acknowledge that from time-to-time there are occasions where silver bullets work, I think that usually they're effects are short-lived, and that in the long run fundamentals rule. I'd like to take a minute to re-emphasize what Tidewater is doing with fundamentals in what is an asset intensive service business. A business in which the assets have proven to be 25 year lived assets, if not more.

I've already mentioned what is going on in the Gulf of Mexico. We will get our business right there for the market that exists. If activity improves we will be ready for it. If not, well, we're ready for that too. We continue to renew an aging fleet. Keith has told you the numbers of vessels that continue to come into our possession. From where the future profitability of this company will come. We continue to do this while maintaining an outstanding balance sheet. We are not going to become over-leveraged in an asset intensive business.

We also continue to add these vessels, at, on the whole, very attractive acquisition prices. We continue to be ready to fund our company acquisitions. If one comes along under the right circumstances and pricing. Finally, you know what a great job that Keith and his team just did in getting what little debt that we have at very attractive market rates.

We are truly a global company, with the vast majority of our revenue and income coming from the international arena. Our management, infrastructure and ability to do business in various languages, cultures and physical environments is unmatched in our industry. We have all ranges of equipment to serve our customers in all conditions.

Finally, there may be some short-term sloppiness in global fleet size. But the fundamentals are that the global fleet is aging rapidly. Demand for this equipment, even if it remains constant, with no worldwide growth, will in the near future outpace supplies as a result of the aging of the worldwide fleet. We're already seeing many customers placing age restrictions on their vessel requirements.

This trend will continue, especially with the major operators. This causes us to believe that our vessel replacement program, together with our disciplined scrapping vessel sales program is going to reap real rewards. We intent to continue each program in the disciplined manner that we have exhibited to date, while maximizing the value and utility of the mature tonnage presently in our fleet.

In closing, I hope I have given you some idea of what to expect going forward. In a word, there is room to be optimistic that there will be no repeat of this quarter. And that things will be better next, for all of the reasons stated. How much better depends on lots of factors, so I hesitate to make a call.

With that, I open the lines for questions.

Your first question comes from Ken Sill.

Good morning. Busy day today. One question, I guess particularly on the Gulf of Mexico which seems a little bit isolated from the world market given the Jones Act. There is a lot of old equipment. It is getting close to 25 years old. People seem reluctant outside of yourselves to scrap it. How low do you think the rate has to go, or the cash margin for some of this older low-end stuff before you see some of the stuff actually get scrapped. Do you have any view on that?

Ken, we've seen, in the past, we've seen rates get down to cash break even, and people don't hardly scrap them. A lot depends on what people owe to the banks and how leveraged they are. But if you remember back in the 80s, you're probably not old enough to do that, but I am. And, back in the 80s the only thing that happened, if somebody went out of business the equipment stayed in the market simply because the banks took it over and just gave it to somebody else to operate. So, we don't look for our salvation to be people going out of business.

Now, scrapping will happen, but it's going to happen in a different way, I think. It's going to happen because customers are simply going to say-We want better, newer equipment. And we're seeing that happen all over the world. And that's going to happen in the Gulf eventually. There will be some of the independents, the smaller independents will take whatever is out there. But the big guys are going to continue to demand better and better equipment. So the scrapping will happen, but from the demand side, rather than the supply side.

Okay, and I actually do remember the days when you could walk across the [Speen] River on stacked rigs and boats. Next question. Just in terms of, it seems like your mix is improving the day rates. And you're going to continue to renew your fleet. Are you seeing any competition out of any Chinese or Russian service companies in the Asian markets in the boat business?

We're not in the Chinese market, Ken. Because there are some Chinese companies in the business, and they're just, their cost of labor is so cheap it's difficult to compete with them. But they're in China, they're nowhere else.

So they haven't come out into Southeast Asia yet?

No.

And there's no indication that's happening right now?

No, we saw some Russians in the market 5 or 6 years ago, and they didn't perform very well, and they kind of went away. So, performance is pretty important, particularly for the major operators. You go out and have one problem that causes them to shut down their [spread] for a day or so, you're not going to work with them.

So, yes, there is potential for some low-priced competition, but they have to perform. And they don't acquire all this experience overnight in our industry. So, there is some preoccupation there, but not over .

Okay, thank you.

Your next question comes from Pierre Connor.

Good morning, Dean, Keith. First, question for you all. I wanted to explore a little bit more on the dry-dockings. You had 8 incremental this last quarter, and I believe you alerted the fact those were maybe some in anticipation of term contracts coming up. Verify that, and then play that into the fact that you gave us guidance of looking at a similar number of dry-docks in the current quarter. Is that in anticipation of additional term, or are we just hitting some windows on some of this equipment that's mandatory by regulations to hit dry-dock?

Well, I think the answer is most of it is jut regulatory in nature. We obviously are in a world where you try and push those as far as you can. Dean spike of Brazil, and Brazil was one of the areas where we either had 3 or 4 dry-docks during the quarter. Those vessels that were either getting ready to start the second leg of a contract or were getting ready to go on a new contract.

So, nothing that you would consider absolute new incremental type work. But, work where we were doing work on the vessel-we didn't spend any money for a vessel to tie it up in anticipation of it having a job, it was all something that was either going back on a job, or was going to take a new job and you wanted to get it done before. So, nothing that would incrementally stretch out the average length of our contract, sorry if that was the implication.

Oh, no, I may have misunderstood. Okay.

And likewise, this quarter. We've got a scheduled number of 27. 2 or 3 of those are scheduled for much later in the quarter. It may or may not come to pass. But then on the other hand you may have one or two emergencies that do come to pass during the quarter. But budgeted as of today's 27, at $9m, so there shouldn't be any incremental effect on utilization because of the dry-docking factor.

No incremental right, I understand. And then, Keith, more on the numbers side. Do you think, again, on the international-going from the $6,544 to $6,448-is that some of the spot rates that rolled down or was it really more the mix, i.e. the Brazil boats are in at higher rates and there's a little bit of downtime between contracts, took out and affected that average.

No meaningful movement on day rate lore during the quarter. Just anytime you got a little bit of utilization pressure, the management in the field would tend to take several hundred [to two dollars] a day cheaper to get the utilization numbers back up probably as they should. But, Pierre, there was nothing-there's nothing of any significance-we haven't seen any further deterioration from that $6,450 number, something like that.

Gotcha. That's helpful. And then the last one. Dean, back to Pemex in Mexico, could you quantify the-you said the Mexican business is looking better. Could you give us, or can you disclose how many boats you had last quarter, and then currently. And then also take that in a little bit further. I know that were some thought about Pemex looking to maybe-or thought they might have someone build some boats for them. Can you comment on that?

I can. It wasn't too long ago we had about 34-35 ships in Mexico. They were only about 50% utilized. That utilization has increased substantially. I won't say to exactly how much. But, it's increased substantially. Day rates have gone up pretty well. There are a number of tenders outstanding in Mexico, some for some new construction, Mexican flag equipment that will actually, I think, the economic opening will be tomorrow.

And whoever wins, if somebody were to win all of that, all of those bids, they'd have to go out and build about $100m worth of equipment. So it could be a potentially big order.

We don't have, right now, that much business directly with Pemex. We work in a lot of different ways down there, but not much directly with Pemex. Just about anything that we would get in that tender would be incremental. If we don't get much, well we don't lose much, because we don't have much. But don't misread that tender.

That equipment won't be delivered for a year and a half at best. And then it will come in 2-3 months after that in onesies and twosies. So, even if we were to announce some time next quarter, or in a press release that we won a substantial portion of that, it's not going to immediately effect earnings any time soon. Also, I suspect that the bidding will be relatively competitive and I don't know how profitable it's going to be, and for whom. But, that just remains to be seen.

Gotcha. Okay. I guess I will let you go. Keith, any update on cash collections out of Mexico with your other-I notice you didn't mention it, obviously, then it must not be an issue.

There was no effect on the financial earnings last quarter, Pierre. We didn't collect a bunch of money or lose a bunch of money on the balance sheet. The customer is in as good a shape today as they have been with Tidewater in the last couple of years. We are doing substantial work for them at the moment.

In fact, at one point last quarter we had 6 or 7 boats working for them. So, that's an indication that that relationship is back at least temporarily on some pretty good solid ground. They're paying their bills on a current basis.

And that's a good thing. Great, guys, thanks for the time, I'm going to turn it back.

Good, Pierre. Thank you.

Your next question comes from Tommy Scott.

Good morning fellows. A couple of questions that relate to these 15 incremental vessels you're going to have in this next period. A number of new builds plus the vessels coming back from [Sanko. The question is this. How much of a challenge will this be in pricing the new equipment? Market activity obviously has been somewhat soft. Is it, could this put further downward pressure on pricing as you attempt to interject this equipment into the marketplace? Or will be able to retire enough other equipment that this wouldn't have any real net negative effect.

Well, there's not much deepwater equipment being retired. There is some, there's some stuff, it was built in the North Sea 20 years ago, but there won't be much equipment that's retired. There a number of large projects coming into play around the world, for which a good part of this equipment could be utilized.

So, in terms of pressure on rates, there's always pressure when new equipment is coming into the market, if the market is staying the same. If the market is growing and we think that there will continue to be deepwater market growth in the near future, on the international scene for sure. It's going to be challenge to market it. We've had a challenge to market all this stuff that we've taken so far. But we've done it pretty well, and we intend to continue to do that.

Are all 15 of those units going to be in the international market?

There are 6 to be delivered this quarter of which 3 will be supply boats with domestic flags on them. Where they will end up is yet to be determined. There's one being delivered in Brazil, so of those 4, one has to be international. And then there are 2 crew boats, Tom one's an international crew boat, and one is a domestic crew boat. So, the bulk of it still continues-except for those supply boats that are going to enter the market, the rest of it would be international.

Okay, thank you.

Your next question comes from [Warren Clifford.

Yes, I understand that some of your competitors, including [Neighbors] have tax advantages over you folks and that they've been able to get around the Jones Act at least to some extent. What is your response to this, or how do you handle it?

Well, remember that [Neighbors] is really a drilling company. vessel component of [Neighbors] is pretty small stuff. And they, whether they're long-term in the business or not who knows. The vessels were already out in the marketplace when [Neighbors] took over those vessels. So in terms of effect on the marketplace, there's not really much effect.

In terms of whether you like them having a tax advantage, you don't particularly like that. And whether additional companies go international or not, a lot is going to depend upon how the US government handles the Jones Act situation. If they continue to let people come in, and compete with those sort of unfair advantages, then we might see other people trying to do what [Neighbors] did.

A lot is still to be determined. It's a situation that's very much in flux. And I think we're going to wait and see sort of how the US government handles all of this before we make any determination as to what exactly our response will be.

So, if the government doesn't do anything, would you then have to consider going offshore as well?

I'm sure that we would consider it, whether we would do it or not depends on lots of things. But if they just sort of do away with the Jones Act, then you surely would wonder why you would be paying US taxes on income that's really generated outside of the United States.

Okay, thank you.

Thanks.

Your next question is from Bill Herbert.

Good morning. This is actually is actually Justin Tugman. Dean, I want to talk a little bit about the Gulf of Mexico. Can you talk a little bit about what you're seeing in terms of day rates and day rates on the deepwater. I think some of your private competitors have had some vessels [lay down]. I just want to get your sense of what you're seeing.

Justin, I don't think it's any secret that rates on deepwater equipment have come down. And I don't know how much farther they will go down. But the real issue there is the fact that deepwater activity has diminished. So you had a situation that was pretty much balanced in terms of supply and demand, well the demand went down, you've got too much supply. So there's going to be pressure on the rates. I don't know whether you're referring to the private competitor that's large or small, but it's fair to say, rates have come down.

Yeah. Also, on the Gulf of Mexico, on your cost cutting efforts. You mentioned you would be saving $5-6m annually. Is there a potential that you may have further cost cuts down the road, have you wrapped this up?

I think we've pretty much wrapped it up for the time being. And we've sort of, as I said, we've right-sized our business. We could probably operate maybe another 10 vessels from what we're presently operating with. Sort of the staff, and crews we have. And wouldn't certainly be limited by staff. I think the limiting factor at this point would be crews. We pretty much downsized our crews. But we do have the ability to get up probably another 10 vessels with the crews that we have on hand.

Okay. How much of the cost savings did you realize in the 2nd quarter?

Really not a whole lot. I don't know the exact number. Joe's here, if Joe could take a stab at it if he'd like.

Justin, most of the activity that happened in the cutbacks happened during the month of September. So the answer to the question is that there was very, very minimal amount of cutbacks as far as dollars during the September quarter. But it's not a phased in thing. You will see the full impact of it in effect during this December quarter and onward from there.

Okay. And final question. Given that you're looking at saving $5-6m annually in cost savings, in the second quarter we lost $4.5m in the Gulf of Mexico. Do you have internally an estimation of when you think you might get back to profitability in the Gulf of Mexico?

Justin, I'll probably hoist myself on my own petard here, but I think we've got a really good shot at it this coming quarter. Now we may not make it, but I think we got a really good shot at it and we're really shooting for it. That doesn't specifically answer your question, but we're going to make a good run at it this quarter.

Okay, thanks very much.

Your next question comes from [Beau McKenzie].

Hi guys. I'll have a follow-on to that question. But in the international arena, given what you're seeing, I know you guys have a small presence in the North Sea, can you tell anything from North Sea operators, or competitors up there, given the kind of dismal outlook in the next 6 months with the weather factors and so forth, whether or not you're seeing much being bid out of the North Sea into some of your international markets with some of the North Sea class big vessels that could come into deepwater markets and drive prices down there?

Well, I'll tell you. I've been surprised we're not seeing nearly as much of it as I thought we might. One or two operators sort of either moving or bidding stuff out of the North Sea. Almost everybody else is laying stuff up. There's a fair amount of equipment for sale up there.

Still at prices that don't reflect, I would say, the market and the prospects there. We're not seeing that. But there are a couple of outfits that are bidding some stuff, and they bid it around, and there's actually one that has moved one or two pieces of equipment out. But there's not been that much movement and there's not that much bidding activity.

Is there a chance to go in with like a management contract, and make them field some of this idle equipment, in Brazil, West Africa, maybe the middle of next year, or something like that, where the opportunities, given the fact that, the kind of North Sea outlook is maybe out, but not great. That even without a sale there's a chance to make some money out of the idle assets?

Sure, as soon as we get the 15 that we're taking delivery of extend the deadline. We'll start working on somebody else's!

All right, guys, thanks a lot.

At this time there are no further questions.

Okay, well, thank you everyone for participating in the call, and thank you for your interest in our company. We wish you well. Thanks.

This concludes today's Tidewater Q2 earnings conference call. You may now disconnect.