Tidewater Inc (TDW) 2004 Q3 法說會逐字稿

Good morning. My name is Holly and I will be your conference facilitator. At this time, I'd like to welcome everyone to the Tidewater 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. (Operator Instructions). Thank you. Mr. Taylor, you may begin your conference.

Thank you, Holly. Ladies and gentlemen, good morning. I'm Dean Taylor, Chairman and CEO of Tidewater and I will be hosting our conference call this morning. With me to assist with the call are Keith Lousteau, our Chief Financial Officer; Cliff Laborde, our Executive Vice President and General Counsel; Steve Dick, our Executive Vice President in charge of operations in West Africa and the North Sea; Jeff Platt (ph), our Vice President for Domestic Operations in South America and Joe Bennett, Vice President, Controller and Principal Accounting Officer.

I will begin the call this morning 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 brief description of where we stand in our new building and replacement vessel programs. I will then return with a brief overview of our markets and a review of Tidewater's strategy. We will then open the line for your questions. Before I begin, I'll ask Keith to read our safe Harbor statement.

Thank you, Dean. During today's conference, Dean and I and other Tidewater management may and will make certain statements which are not statement of historical facts and thus, they do 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 comments or any answers that we may give to you today. Back to Dean.

This morning, we reported fiscal third-quarter earnings of 32 cents a share. This quarter's number includes a reduction of recorded insurance costs that is a result of our very positive safety record. For comparative purposes, our September quarter earnings also included a reduction in those costs. You'll also note that our quarterly tax rate was reduced. Keith will address these issues in detail a bit later on in the call. For the quarter, our earnings run rate was approximately 28 cents a share. The increase in operating earnings quarter-over-quarter was mainly the result of a return to a more normalized level of international operating profit, as well as the substantial reduction in the operating loss in our domestic operations. While some of our international operating areas continue with challenges, we were pleased to see operations and profitability in Brazil return to better levels, and Venezuela (indiscernible) activity pick up slightly as well. We did not realize the goal of achieving breakeven results domestically. Though all of our domestic employees deserve to be congratulated on their efforts this quarter as they resulted in reducing our domestic loss by $2.5 million in an environment where the rig count was flat to them for the entire period and activity and November bordered on the pathetic. I had hoped that with a break in activity, we would have had earnings domestically. We did not get there, but we did better by half. We will continue to review our domestic cost structure to determine how to achieve profitability independent of an increase in activity. Before I comment further on our operations, I would like Keith at this point to walk you through our quarterly results in detail. Keith?

Just about 90 days ago, we sat here after having reported a disappointing 22 cents quarter. During that call, we cautioned you extensively not to assume that our business activity or business activity around the world in our industry had fallen from the previously reported June quarter to that level of activity. We felt like there were a number of kind of individual items that all lined up and worked against us in that one quarter. Today as you heard Dean say, we caution you again, but this time that goodness on the high side, we're reporting a 32 cents quarter to you here today -- no smoke and mirror, a real number -- but we will talk about a couple of items that are inherent in that number which would make a more normalized run rate for Tidewater for the quarter appear to have been about 28 cents.

We are reporting earnings today of 32 cents for the quarter. That is compared to a year ago for the December quarter where we reported 42 cents. For the nine months ended in December, we're reporting accumulated 86 cents per share; and once again for the same comparable nine months of last year, we had reported $1.24.

I need to be careful here after by opening comments to not do too many comparisons of the December quarter against the September quarter. As I have just said I felt like and Tidewater has felt like the September quarter was on the low side. But the human nature in the CFO and me will obviously get away from you occasionally here and I will have to state some comparisons between the December and September. I will also attempt to -- where obvious -- to make some comparisons going back to our June quarter, one where we felt was more indicative of the actual economics of the business in the world that we operate in today.

For the quarter ended in December, today we're reporting marine revenues of $162.1 million. This is about a $3 million increase from that which we reported in the September quarter of $159 million. Part of -- the good part of the numbers that we report to you today are operating costs, down at the $97 million level. That $97 million number is probably $2 million down from what would have been a normalized $99 million quarter, that being a direct result of a rebate of insurance previously expensed in the first two quarters that the benefit was then taken into the third quarter. Once again, our insurance programs are closely tied to our safety programs and results in the safety fields do end up with providing us with nice financial reporting results.

We can report to you that we do take a very conservative approach with insurance in that from quarter to quarter, we expense the maximum insurance potential that we have and our only so-called surprises or adjustments from quarter to quarter would be positive ones, ones where our performance actually beats the actuarially (ph) determined the costs for that quarter. Overall costs for the quarter came in at 144.7 million versus 149 million last quarter, or an increase in operating results of $8.8 billion.

As Dean previously alluded to, the domestic operations contributed an increase in operating profitability of $2.5 million and our international operations provided $6.3 million increase in operating income; the two of those making up the 8.8 million. Earnings before taxes for the quarter were up $7 million; that is a 38 percent quarter-on-quarter increase, and then the earnings for the quarter were up 50 percent to the $18.3 million number that we mentioned previously.

Dean mentioned the progress being made in trying to eliminate operating loss through domestic operations. I would remind you now that the progression during the last three-quarters goes something like this. In the June quarter, we reported a loss of $8.2 million; in the September quarter, we reported a loss of $4.5 million and in this quarter, we're reporting a loss of $1.95 million. So as he says, over the past two quarters, we've been able to half and then half again the magnitude of the operating loss from domestic operations.

Operating income, going back to the June quarter where I said I thought was a more comparable quarter -- operating income for the December quarter is actually up 5.7 percent from that that we reported in the June quarter. Back then, we had reported $24.8 million of operating income. This quarter, we're reporting 26.2. And as I said, that is a about an $8.8 million improvement over the September quarter.

A little more detail on the revenue side of the equation. As Dean previously mentioned, November was an extremely difficult month. Domestic revenues fell from the September quarter's 33.4 percent number to $32.4 million, or about a 2.9 percent drop in domestic revenues; that being the period, though, that the domestic operating profits improved by the $2.5 million, meaning we obviously did an excellent job on controlling costs during the quarter.

Internationally, we're glad to report that international revenues for the quarter were up 3.2 percent, up to a magnitude of $129.6 million in the September quarter. We had reported 125.6 million, and going back to June, we had reported 129.4 million, a number that this quarter is up barely 1.1 percent over the number that we had reported back in the June quarter.

Operating costs came in for the quarter right at $97 million. As I said, that was influenced correctly so by changing of our estimated costs for the first two quarters on the insurance front of about $2 million. So a normalized quarter should have been at a running rate of about $99 million. During the quarter, we did 24 drydockings at a cost of $6 million. Going back to September, you might remember that was one of those months where a lot of the things -- one of those quarters where a lot of things worked against us. We had reported in that quarter 29 drydocks at a cost of $9.1 million. So as you can see, drydocking costs quarter on quarter from September to December were down 3 million. Dean has talked about the ability to control costs much better in the Gulf of Mexico, and I mentioned the $2 million insurance adjustment. Therefore, it is easy to see where the 104 million of operating costs we reported in September is now back down to the $97 million level. More importantly, trying to give you some guidance as to where do we think cost numbers may be going for the March quarter, I would kind of start off with normalizations saying about $99 million was kind of the normalized running rate. We are fortunate enough in this quarter that we will be taking delivery of a number of new pieces of equipment, new supply boats kind of coming up on the and of our new build program for domestic equipment. I will mentioned some numbers in a minute, but we would expect some increased costs from that. And on the other hand, we certainly as of this date, believe that we will be booking some additional insurance adjustments during the quarter. The insurance adjustment that we booked last quarter was conservative. Until the year is over, we would hope to have adjustments somewhat similar to the $2-$3 million during the quarter. So my best guess, depending on the final results of our safety program, which as you can well imagine, is a 365-day program. We make mention that a good year is 364 days, an excellent year is 365 days in that program. We would expect operating cost during the quarter to perhaps be as low as 98, but perhaps more realistically in the $100 million range. So somewhere in that range is where we would estimate costs to fall in for this quarter.

Looking more into some of the specifics, one of the things that I have omitted today in this quarter, you will note that we have virtually nil gains on sale of used equipment. The previous two quarters, we actually reported to $2.3 million pretax gain in those two quarters, so we go back to a normalized 28 cents. Well that is normalized without what I would say would be a normal quarter, and I would fully expect the March quarter to have gains more in line with the 1.5 million that we generally believe to be the case that we have already sold a couple of vessels this quarter that should have us on track for meeting that number.

Looking at some of these statistics on the fleet itself -- in the domestic deepwater classification, we continue to market seven vessels in that market. During the quarter, we actually saw a small decline in dayrates. In the September quarter, we quoted day rates on the average of $12,652. For the December quarter, we're reporting $12,328; that's about a $324 decline in the average day rate. But yet, we are glad to report that part of our push domestically has taken utilization up a little bit. In the September quarter, we reported 84.3 percent utilization. For the December quarter, we're reporting 89.1, an almost 5 percent increase. And we're glad to say that today, we're running right at that 89 and 90 percent utilization factor.

The supply and towing supply division in this quarter, we're reporting and count that's down one vessel from 124 to 123, but we're reporting once again a decline in domestic day rates in that class of $361. That is a decline (technical difficulty) 6124, down to 5763. Once again, a number that is not indicative perhaps of an actual movement in the market, but indicative of a mix of vessels that were actually marketed during the quarter and perhaps somewhat of a slower utilization of some of our stretch vessels during that quarter. Overall utilization numbers relatively small, but once again a slight uptick. In the September quarter, we reported utilization of 20.6 percent; this quarter, we're reporting 21.9 and currently are running at about 22.3 percent as we sit here today. So dayrates relatively flat, depending on the mix of vessels working on any given day; utilization sneaking at just a little bit.

In our international markets, once again in the deepwater markets, we marketed 30 vessels during the quarter, the same number of vessels as the previous quarter. We are glad to be able to report a slight uptick in dayrates of $494 from the September quarter where we reported $11,825 as the average day rate. This quarter, we're able to report $12,481. And as we sit here today once again, we are running at a rate of about $12,900. Utilization numbers crept up a little bit in the deepwater market from 78.2 percent to 82.3 percent. And today, we continue to run at about 82 percent. I want to caution you -- there's that word again -- a little bit inherent in that substantial day rate increase is the fact that during the quarter, we took re-delivery of three other vessels that we had originally purchased from Sanko (ph) back in 2001. Those vessels had been out on bare boat (ph) charters. Bare boat charters generate high utilization and dollar for dollar profit generally with the bare boat rate, but those rates obviously would obviously be lower than a charter rate. As those vessels have come back into our fleet, they have gone out and found charters at higher rates, therefore creating some of the increase in dayrates in the deepwater markets. Dean can comment a little bit more or will comment a little bit more on the deepwater markets and all of the international markets.

In the supply and towing supply division, internationally, we added one vessel to our vessel count. We are going to be reporting to you today 190 vessels as opposed to 189 vessels last time. The day rate average in that class, the kind of backbone of our international operations, was down $162. In the September quarter, we reported an average rate of $6448. Today, we're reporting to you an average rate of $6286. And perhaps the most disappointing news of the day is the fact that all utilization in the December quarter came in dead on the 69.3 percent utilization that we reported to you in September. You might remember of all of the disappointing news in September, that 69.3 number was really highlighted because in the June quarter, we had been running at about 74.3 percent and that loss of 4 percent on the utilization factory equated to substantial $8 million of revenue at that point in time. Obviously, when that is your largest number class, that utilization number is significant. So flat utilization in the international mid-size vessel range.

Moving on a little further, our balance sheet is basically unchanged quarter to quarter. Our stockholder equity has grown to $1,377,000,000; that is after having paid our standard 15 cents per share dividend. Long-term debt was basically unchanged and we're reporting $310 million. The debt to total cap number is basically unchanged at 18.4 percent. Don't expect that number to change on any given day. As shipyard commitments come due, we may be utilizing the revolver or paying back the revolver. But we are pretty steady, right at that $300 million mark.

During the quarter in December, we did take delivery of four pieces of equipment. As we sit here today, we have an additional 21 vessels that are under construction. Those 21 vessels have a shipyard value of $374 million, of which 230 million have already been paid. That leaves us with barely $143 million of commitments to get deliveries of 21 pieces of equipment, and these are 21 pieces of choice equipment. We're not talking crew boats here; we're talking about nice larger supply boats and our large anchor handlers. That commitment of $143 million is made up of about $29 million of commitments in this next quarter, our March '04 quarter. During that quarter as we sit here, we expect to take delivery of six vessels; that is four PSVs that are all coming out with U.S. flag potential to work in the domestic market and two anchor handlers, one of which would be our first anchor handler from China, and one other from Singapore that we have taken delivery of. And then the balance of the program that we would be expanding during march of '05 year is about $115 million; that is made up of 15 additional vessels at that time, that is one more PSV, two of our fast supply vessels and 12 anchor handlers, the beginning of the replacement program for our international mid-sized anchor handling towing supply fleet. So construction program continues to go well, we're obviously well ahead of the financial curve by having already funded $230 million. The fact that we barely have 143 million left on 21 choice pieces of equipment bodes well for potential increases and additional revenues for this company over the next 12-18 months.

I want to remind everybody in signing off that we did file our 10-Q electronically this morning. We also filed an 8-K which included nothing more than a copy of our press release. And when you go EDGAR, you're going to find another 8-K filing of Tidewater. Today, we're busy beavers in inundating the SEC with paper. We filed an 8-K today acknowledging the fact that Tidewater's audit committee has decided that for our fiscal year march of '05, not for the balance of the current '04 year, but for the year of March of '05, that Tidewater will be changing outside audit firms. We will be switching firms. No news in that. It is a filing requirement. Under the current SEC regulations and pretty much post all of the new is Sarbanes-Oxley regulations, the current audit firm, the current partner in the current audit position was facing mandatory rotation. The firm had to take that partner off of the job anyway. Our audit committee viewed that as an opportunity to solicit professional interest in the New Orleans market, and after some excellent presentations by a number of firms, just decided that they were going to be changing for the fiscal '05 year. So nothing inherent in the filing. The current audit firm acknowledges that there are no items of disagreement on either accounting issues or estimates or anything, so just want you to be aware, when you go to your EDGAR site today, you will see a lot of things being filed by Tidewater. I'm going to be available for questions later on, but turning the call back to Dean now.

Thank you. I would just like to comment further on our domestic operations.

While I remain unsatisfied with our Gulf of Mexico results, I am pleased that we were able to achieve a substantial reduction in our operating loss. In our last call, we estimated that our cost reduction efforts could achieve $5-$6 million in annual cost savings. This past quarter, we cut our losses by $2.5 million at a time when domestic revenues were $1 million less than the previous quarter due to the sluggish rig count. We will have to push harder, though I think we're a lot closer to our goals if we get any help from the rig count at all or from a decrease in available competitive vessels, though I don't necessarily predict that we will. Our return to domestic profitability could happen very quickly. If we don't, our profitability objective is still achievable but harder to accomplish. I remain committed to the goal of returning our domestic operations to profitability and aim to achieve it soon.

Internationally, as Kith has pointed out, we were able to boost our profitability by some $6 million. It was certainly a positive change. Yet challenges remain to be faced in our foreign operations. We continue to see our business in Mexico improve, though projecting activity levels there longer-term, as well as some customer payments, requires consistent monitoring. Of the three areas that we talked about last quarter as being our more disappointing areas, one has as expected, improved, but the other two are still troublesome. Brazil has shown a marked increase in activity for us, while improvement in Venezuela continues to be very slow. Activity in Nigeria, as you probably already know, remains depressed. Outside of Nigeria, activity levels in the rest of West Africa, while not declining, have remained pretty flat. We expect good upside in West Africa long-term. Short-term, we expect to see activity levels remain relatively constant. The Middle East shows good promise longer-term, as does the Far East. We don't expect to see any significant ramp-up in activity in the North Sea anytime soon.

It appears that worldwide drilling activity on the whole will not dramatically increase in the near-term. Steady growth in the international marketplace, coupled with a no-growth scenario for the time being in the Gulf of Mexico seems to be the outlook for which we should plan to continue to develop our business. We will continue to upgrade our fleet, to enhance our positions in all of our markets for our customers and maintain the global market positions that constitute our solid revenue base. We plan to respond to our customers' needs with all types of equipment in nearly every market in the world. We will remain disciplined in our scrapping and vessel disposition program as the other side of our ongoing fleet enhancement program and we will maintain the high quality of service in all of our markets that our customers have come to expect. We also will maintain our disciplined capital structure so that presented with the right opportunity to increase our size in this business, we have the capability to do so, should prospects appear favorable. We will also continue to take those measures that we deem most prudent in relation to the ongoing challenges to the domestic Jones Act (ph) and our overall tax structure. With that, I will open the line for questions. Holly?

(Operator Instructions). Ken Sill, CSFB.

Good morning, guys. A couple of questions, particularly with the Gulf of Mexico. You guys have done a good job of kind of clawing your way back to near breakeven. Given the capacity out there both in your fleet and the competitors', do you see the Gulf of Mexico being a significant profit contributor in the next year or so, assuming activity just kind of gradually continues to improve, our do you think you're going to be breakeven to a little bit better there?

When you sort of look out at what we see the activity levels top be, Ken, I think the only way it becomes a much bigger profit contributor is if for some reason, some of our competitors lay out some of the equipment that they're presently operating. And you cannot count on that to get to your profitability levels. So I think your question related to the near-term to next year out, and I would say I don't see the Gulf of Mexico being a very big contributor during that time frame. Although that could change, but we are not counting on it. We're going to continue to work -- Jeff Platt (ph) is here with us today and Jeff and his team have done a great job in reducing their cost and we are continuing to look at it from that direction. So I remain optimistic and committed to becoming profitable. How soon it happens, I don't know. The costs are getting a lot more difficult, the cost improvements are getting a lot difficult to achieve, but that's where we're going.

Just a follow-up on the capacity issues. How much construction outside of your program is still expected to come into the market, both in the U.S. and internationally over the next 12-18 months? I assume that is starting to ramp down a little bit, but is there still some more coming?

The U.S. is probably 20 pieces of equipment still to come. Some of it, it is unclear whether it will be able to work in this marketplace. We are not counting on whether it can or it can't, but at least it seems to be destined to be for this marketplace. Internationally, it's probably up into Europe is both the exchange with the euro and the tax subsidies in Norway having ended, there's no more coming from Europe. There is some equipment being built out in the Far East, and I would say there is probably another 30 pieces of equipment out there of any size, but some of that is ours. So I'm not too concerned about additional equipment coming into the marketplace at this point. It is something that is of concern, but I don't think it is of an overriding concern. The market has absorbed probably over 200 pieces of equipment over the last couple of years.

And as you look out, is there any scenario where you reasonably expect any of your competitors, particularly in the Gulf, to stack capacity, or do you think that consolidation is probably going to be the most likely way to deal with this market?

Hard to say. Some of our competitors are facing financial challenges. It depends on whether they want to continue to invest money in old boats. So that is an issue, whether they put money in new boats is something else. But it is hard to say, Ken. I don't know if that answers your question. But I would say that (indiscernible) for people to withdraw equipment from the marketplace, they're going to have to be financially challenge to do so, I think.

All right. Thank you very much.

Pierre Conner, Hibernia Southcoast Capital.

Good morning, guys. Just a couple of questions. First, Keith, just mechanically on a couple of things. Could you tell us on the tax rate -- it seemed to be a little different than we expected. Was there something affected in that with say these insurance rebates? They seem to be a little lower.

No, we had been running about a 33 percent tax rate, Pierre. You need to understand that you have some certain permanent differences that you do not have to provide income taxes on. And as you begin the year, you're kind of trying to estimate where you think the markets are going to be by the end of the year. When we looked at the year going into this year and thought we were going to have about a 33 percent tax rate, we certainly thought, as did many people, that domestic operations, the Gulf of Mexico would have come back in a much more profitable area by now. We have obviously downgraded those internal expectations. And as you look at where you think your financial earnings may come out, those permanent differences in your tax rate have a more meaningful position. So we changed our annual rate to 31 percent. The fourth quarter will be 31 percent. But when Dean and I talked about a normalized 28 from 32, 2 cents of that was a catch-up in the tax rate that falls through -- this quarter actually ended up with a tax rate of about 27.4 percent, but that is something of a catch-up for the first two quarters. So those are my two items that I would say that could be factored out of the current numbers, would be the 2 million of insurance adjustment and the 2 cents of tax adjustment to get to 31. (multiple speakers) 31 going forward.

On foreign currency exchange, would there be something there that's one-time, or is that going to be -- that is just as a result of recent changes?

That was a result of the U.S. dollar in the December quarter having a real bad time against international currencies. We've seen it come back a little bit, the U.S. dollar, on a worldwide basis. But ours was more tied a little bit to a slowness of payment in Venezuela. In Venezuela, as you know, the whole thing is still a little bit unsettled. We have had a number of invoices on the books that we've been pushing for dollar collections as opposed to taking local currency. The loss from exchange in this quarter is abnormally high. I certainly don't expect it to repeat. I would hope that it would be less than half of what it was for the March quarter.

Less than half, okay. Dean and Keith, can you help us with the math a little bit on the international deepwater fleet that allowed the Sanko -- how many Sanko boats came in at what rate? I'm just trying to get from driving the average dayrate from 11.8 (ph) up to 12.4, and then trying to basically obviously break out what of that is due to those boats? And then what is sort of the underlying rollover rate there? And the question could be Dean, what absent those boats, what would the average international deepwater vessel rate have done?

Well, there was a couple of things. Once again, it was that item of bringing those boats in at more of market rates, Pierre. And another thing was we were off to a somewhat slow start with some of our new VS-480s (ph). Some of the bigger boats that were built in Singapore, last quarter, they were pretty much a drag. They went back to work during the December quarter and they came in at dayrates that were higher than some of the things they had done earlier. I think -- I will give it back to Dean here in a minute -- but the fact that we're running at about 12.9 or $12,900 today, is a pretty good indication of where we think it is today.

So the answer to that would be a sort of a sustainable number?

In today's market, we don't know of any reason. Utilization is more of a problem today keeping the boats utilized than fighting the dayrates. I think as Dean has said, lots of new books entered the market. There was some pressure on dayrates. That seems to have somewhat stabilized at this point in time.

Dean?

When you say sustainable kin this business, I hesitate to latch onto it. But sustainable is as best we can tell in a business that is noted for some unpredictability. But on the whole, I don't want to -- some of the stuff I hesitate to respond directly to simply because I don't want to give the competition too much information. And we know that we get five or six competitors listening in to this call. It is going to -- it is always a struggle. Competition is tough, but I think we have some great ships, we have outstanding management around the world, a wonderful safety record. The customers seem to be more willing to pay attention to. So if you look if you're looking for a number for your model, Keith just give you some hints. But I'm optimistic longer-term we're going to put that equipment to good use for our shareholders.

Okay, Thanks. Dean, if you could expand a little bit on some of the issues, and I know this may delve -- could get pretty deep, but the Jones act challenges, but I had understood that the Coast Guard was expected to issue supplemental notes to propose rule making early in '04, again, maybe somewhat incorrect on that but that that would begin to address "loopholes." Can you update us a little bit more detail than just if you all continue to work on that? Was there some rules that should have been or have recently been noted by the Coast Guard?

Well, there was potential legislation in the last Congress that could have address the issue, and for lots of reasons, it didn't occur. The Coast Guard of course would much prefer that the issue be addressed legislatively, rather than administratively. They have some precedent outstanding that they probably maybe wish they had another look at. But they can't because it is already done. And like any bureaucratic organization, they hate to go back and say that maybe they made a mistake. So there is inertia there that sort of works toward the Coast Guard not wanting to do anything. How it is all going to play out, it is awfully hard to say. It is (indiscernible) politics, there's lobbyists involved and there's lots of competing interests and whether ours prevails or not, who knows. And we just need to continue to do the best we can to represent our interests and those of our shareholders. And I would love to be able to say that I had the issue licked, but I don't. We're fighting it as best we know how.

So nothing recent though, Dean, from the --

I have some correspondence from the Coast Guard that says that they're going to address some of these issues when some of these boats start getting delivered later on in the spring and that they are mindful of the Jones Act and they are mindful of the intent of Congress, but that could be a lot of mush. It is hard to say. There's plenty of political grappling that is going on up there and we're just going to see how it plays out.

Okay, thanks. One last one, if you could update us on the status of any Mexican tenders?

Well, there was some tender -- there was a tender for some new construction in Mexico that is for both the political maelstrom. In Mexico itself, there's been no awards. Whether an award will be made or not is unclear at this point. And we would have gotten a couple of those awards, but there have been no awards and it is unclear when and if an award will be made. I would say that the longer an award is not made, the more likely it is that a re-tender situation occurs. But so far, it is just lots of indecision.

Okay, great. Thank you for the information, guys.

Justin Trugman, Simmons & Co.

Good morning, Dean. Dean, could you talk briefly about Mexico, and then as well as regarding the possible new tenders, can you further elaborate on that market and the potential that it has, as well as how many vessels you currently have and what you think that could go up to say over the next year?

Justin, that's a tough question. Let me see if I can't respond to it with some of the experience that I had in Mexico when I used to run that business. In Mexico, you pretty much have to look at election cycles to determine sort of the probability of activity. The election cycle there is about six years, and so typically what happens is that years 2 through 5 of an election cycle are pretty good. Pretty decent sums of money are spent, and typically year one and six, not as much is spent, and in fact pretty drastic slowdowns occur. So we are now in year -- Fox (ph) is in year four, starting year four of his six-year term. So I would say that the prospects are pretty good that there is continued activity.

There was something that came out last week about potential drying up of funding from the Mexican Congress to PayMex (ph). That could mean a couple of things. One, it could mean that they're going to slow down sort of their big ramp-up that they've recently had. Or two, it could mean that PayMex is just going to have to go to the financial markets to get money that otherwise they would have gotten from the Mexican government. My own feeling is that the activity levels in Mexico will continue to improve and that there is a relatively nice upside that will occur. We have about 30-plus vessels in the market right now. We have had in the past during various election cycles, as many as 62 units in Mexico. Whether we get there again or not, it is hard to say. A lot will depend on what type of activity occurs, whether it is construction or drilling. But there's still I think a fair amount of upside in Mexico. I don't whether that answers your specific question or not, but that is probably as good as I can give. do.

I think I would agree with you that there's certainly some uncertainty regarding any accuracy in forecasting, so I appreciate that. Dean, let me turn attention to the Gulf of Mexico. You definitely made strides in getting closer to breakeven or even a profit in the Gulf of Mexico. Can you tell me how much of your 5-6 million annualized cost savings you were able to achieve in Q3? And based on what you have seen so far, do you think you may be able to take that 5-6 million number and increase it on an annualized basis?

I'm going to let -- Joe's done a pretty good job in all that, and I'm going to let Joe handle this one.

I think the numbers, first off, the reductions in costs that we talked about happening happened in about mid-September. At the October phone call, we said that everything had been done at that time and you would really see the benefit this quarter. I would say without giving you a specific number, I would say that on a going rate saying that we had estimated it to be about $1 to $1.5 million a quarter going forward, that we did a little bit better than that already in this first quarter. So what was supposed to happen did, and a little in excess of that. We believe that we can maintain that going forward. Obviously, things like drydocking costs and all come into play and we did not have much of that during this quarter. As we move forward, we may have some. So things like that can have a big impact on the number. But the pure operations, the cost savings were primarily in crewing costs, and those should continue. And as Dean has said already, we're looking at ways of even improving that further going forward.

In relative terms, the easier staff has been done. It is getting progressively more difficult to make significant improvement on what we have done. But we're not finished yet. And I think it is going to be tough, it is not going to be easy, but we have a great team working on it and we're going to see what we can do.

Dean, what would you have (technical difficulty) a timetable in terms of possibly looking to cut additional cost in the Gulf of Mexico?

Well, we'll see some more effect this quarter.

Okay. Final question. Can you talk a little bit more about the deepwater side of the Gulf of Mexico? It looks like we saw some increase in the dayrates. But what's your feeling for that market as we head into calendar year 2004?

We are a pretty small player in the deepwater in the Gulf of Mexico. We have a presence, but it is not a significant presence. There is one private operator, as you well know, that has a very big presence and they sort of drive the market. And we sort of react to it and there's another company that is in the deepwater market, and they sort of react to it too. I don't see -- (technical difficulty). We're not seeing a whole lot of increased tendering (ph) for deepwater equipment right now, and I sort of feel like deepwater is going to be sort of flat for the foreseeable future in the Gulf of Mexico. We hear that Shell is drawing in their horns (ph). Some other people are a little bit more active. But you know Shell has been a major mover in the deepwater for a long time in the Gulf. And with them drawing in their horns a little bit, I don't see things getting significantly better. Does that answer question?

Yes. Just a quick follow-up to that. Your large private competitors -- are you seeing them become more aggressive on the pricing side of the question, especially given the fact that Shell is pulling in their horns?

Yes.

Bill (ph) McKenzie, Stearn Agee (ph).

I got preempted on that last one. You had mentioned a little bit of rig pressure and improved utilization in deepwater in the Gulf. Is that a term -- I guess you just inferred that that is a trend that you would expect to consider to continue happening in the future, that you might see a little bit further rate pressure in an effort to keep utilization up in the deepwater Gulf?

Bill, we're working like hell to push those rates the other way. But sometimes, you know you have an opportunity to do so, sometimes you don't. As I have said all along, we target our opportunities in terms of what we do with the rates. Sometimes, we're willing to be a little bit more aggressive in trying to get jobs than others. And I frankly don't think -- well, it depends on whether some of this new equipment does come into the marketplace or not. But I frankly don't think that rates, the pressure -- downward pressure on rates is going to be that much greater than it is right now. That's just a -- it's a seat of the pants guess, but that's what I think.

Second unrelated question. Those guys on the sell side, and I'm sure you guys too, had a very difficult time of (indiscernible) ascertaining what is really going on internationally, in terms of vessel mobilizations. Some of the rig guys have talked about pickups in activity in the Middle East and India, places like that. Is there any kind of generalization you might be able to tell us as to what you might see competitively in vessels maybe being bid out of West Africa and tightening that market up by your competitors or even by you in an effort to kind of shore what is a little bit of a weak market (indiscernible) in hopes of seeing you get better somewhere down the road, or is it just cost prohibitive to mobilize vessels around like that?

No, we mobilize vessels all over the place. At any one time, any day of the week, we probably have 10-20 different tenders outstanding where we're bidding stuff, sometimes moving it halfway around the world. So we work diligently at that. Sometimes, you don't get your full mobilization from the customer. (indiscernible), you'd sort of target your opportunities as to what you aim at and what you not. But it is entirely conceivable that the West African market or any other market could tighten up just by equipment moving out.

Are you seeing anybody trying to do that? Any of your competitors or even you looking at bidding equipment out of West Africa into other markets right now?

I don't see people doing that on a conscious basis. People do it and reaction to opportunities as they present themselves elsewhere. I don't think people are taking any sort of position that well, we're going to move equipment out to tighten this market up.

One final question. Obviously, you talked about the foreign exchange losses in the quarter being high. What internationally -- how does your cost structure work? Are your contracts largely dollar-denominated? And is so, what do you take in terms of local currency cost, local currency revenues? In other words, how much dollar exposure is there? Should we see a continuing weaker dollar or improvement of the dollar in margins, not just in foreign exchange?

Keith will take this one.

We have a pretty natural hedge in this business in that by and large, most of the customers that we work for get paid in U.S. dollars. So our ability to demand a large portion of our payment in U.S. dollars is generally honored. A number of foreign countries -- Brazil, Nigeria, -- to be competitive, you're required to collect a portion of your dayrate in foreign currency, but nowhere in the world today, other than in Venezuela. Venezuela is the only place in the world where we actually take foreign currency in, in excess of local operating costs, and then look for ways to hopefully go to the central bank and convert it to U.S. dollars and send it back to the United States, so that is a pretty good position tom be in. Occasionally say in the Brazil situation where you have some open local currency receivables, you'll take a financial state adjustment if the U.S. dollar got weaker. But by the same token -- as soon as that money comes in and you spend it locally, you have lower operating got by about the same factor. So Tidewater itself has very, very limited exposure to foreign currency risk. Only in very limited circumstances do we take local currency and ever have to convert it into U.S. dollars to send it back to the United States. Very low risk business (multiple speakers).

Let me ask that a different way, because I think -- I understood the question you're answering, maybe I just didn't word mine right. If the dollar is devalued and you have cost denominated in local currencies, then theoretically you could see a bit of a margin squeeze unless you are taking part of your contracts, revenues in local currencies to cover your local costs in other international markets. I guess what I'm trying to figure out is the dollar is devalued and your local cost stayed the same -- is there margin issue to deal with, or is there a hedge built in and the way that you collect your receivables, even in dollar-denominated contracts where you're taking a portion of it and whatever local currency there is to cover your local costs?

For 25 years, my career has been around collecting as many U.S. dollars as possible and only worrying about sending it back for the cost side for keeping as many dollars as you can here and not collecting local currency, because historically, the game has been win 99 times having the U.S. dollar versus winning once -- that the local currency actually gets stronger against the U.S. dollar. So I'm not aware of any situation in those markets that we operate in where the U.S. dollar has hurt us in actual operating costs, the dollars that we've had to send back and pay for more. Singapore is an area where we do that and it has fluctuated a little bit, but it's kind of only back to historical norms.

Where it really hurts us is in -- could hurt us -- would be in our new construction program. Norway is a country that they generally want to do their contracts in kronor or something like that which has made them very expensive. We have no exposure to that at the moment. But we have very, very little exposure where the local currency that we would need to send has grown in value against the U.S. dollar. The North Sea would have been an area for great concern, but we have very few boats working there, and we have been collecting some revenue, sufficient revenue in UK pounds from our Sanko charters to cover any UK or pound or any kronor or any Euro exposure that we do have. That has not been a problem for us.

I do have one last follow-on question. We've seen steel costs kind of shoot up across the world. Are your shipyard contracts turnkey, or is there a risk with an increase in steel costs that you might have some overages on some of the new constructions (ph) left out there?

Absolute turnkey, no provision for supplier increases, all with financial guarantees and substantial liquidated damages for late deliveries. So no, we have no risk on the vendor cost to the shipyard. We're all on a turnkey basis.

Excellent. Thanks a lot.

Tom Ascot (ph), Pritchard (ph) Capital.

I know we've talked about a few of these issues here. But of the foreign dayrates for standard supply vessels -- been under a little bit of pressure, even while the deepwater vessel, the average pricing firmed up a little bit due to mix as you mentioned. Question really revolves around the basic 190 vessels in that fleet. Do you expect that the dayrates at this point can be stabilizing over there as well, or will the new equipment and vessels coming out of some of these markets like the North Sea, do you expect that to exert continuing downward pressure on pricing in the near-term?

They are really different animals. New equipment is typically bigger and doesn't really affect the rates for the older equipment that much. There's some, but not much. What is probably a concern is the fact that customers are now requiring newer and newer ships. We continue to see around the world customers putting age limits on their ships that they will contract. And so that sort of has some sort of effect on the dayrates of the older ships. But it is not -- the pressure does not really come from the new ships. Some of the newer ships being built or approximate some of the classes of the older ships, but there are not that many at this point that make that significant a difference.

So does that imply that as we go forward and there's attrition of those older vessels, you should expect those prices to begin to firm up, all other the things being equal?

Yes.

All right, thank you. That is all I have.

James Crandall, Lehman Brothers.

Good morning. How many of your six new vessels that are being delivered this quarter do you have contracts on?

Probably zero. We have one, I am told.

Is that one of the deeper water international vessels, or one of those earmarked for the Gulf?

Just reminding Dean -- we have four supply boats and two international anchor handlers (multiple speakers) and the (indiscernible).

There's two answers to your question, Jim. One is a technical and one is probably a practical answer. Technically, we don't have contracts yet; practically, we probably do for two of the six.

Would that be a mix of anchor handlers and supply towing (indiscernible)?

No, it would be two anchor handlers.

Would those be expected to start up in the next month?

1 of them will start in the next month it is being made through the job now.

One of them will start in the next month. It's (multiple speakers) do the job now.

Second question Dean -- you didn't believe that there was going to be a pickup in the Gulf of Mexico from let's say the next 18 months, would you be running your Gulf of Mexico business any differently today, and what would you be doing?

I'm probably going to take a pass on that question. I have four or five things that are sort of in the works and I don't want to divulge any of them. So if you will forgive me, I would ask your forbearance. But I just think those are items that are strategic in nature and I'm going to pass on that.

Okay. Isn't it true, Dean, if you look at the market, that the traditional older 180-foot supply vessels that the utilization and the industry, particularly your utilization, is very, very low at the present time?

Is sure it is.

Much lower than the 20 percent uneven? The number of vessels of the older 180-footers coming in for drydock this year in the industry, you alluded to one of your financially leveraged competitors has a lot of vessels coming in. Do you think in general in 2004, there is quite a few more vessels that are coming in for their five-year inspection this year?

Well, the cycle is twice every five years and you can either go two or three years in between drydocks, but it is twice every five years in total. I don't know about everybody else. We have some ideas about some of our competitors. But I can tell you this -- almost everything that Tidewater has, with very few exceptions, has to be drydocked. So I would presume that the same situation applies to our competitors. And every drydock that comes up, we look at it pretty closely as to whether we're going to do it or not, simply because the costs are pretty significant and the likelihood of long-term employment is uncertain. And I would resume that other prudent operators are faced with sort of the same questions when their drydockings arise.

Would you think that at the end of this year Dean, that if demand is flat in the Gulf of Mexico, given that there's 20 additional units coming into the Gulf of Mexico, that the overall actively marketed supply would be higher or lower at the end of the year than it is now?

Again, of the 20, it is unclear whether half will actually be permitted to work in the Gulf. I am presuming that they are and presuming that the rig count stays flat, both assumptions of which have some probability of occurrence. That is probably right, Jim. There will continue to be pressure on the rates for the equipment that is out there.

Do you think that it is conceivable, Dean, or even likely that we could see as many as 30-plus older 180-footers taken out of the market this year, just because they're coming up on their inspection requirements and their older vessels and it just does not justify paying the money?

Yes.

Last question, Dean. Given the overall flatness in the market globally, have you given any consideration to stretching out the new build program?

Not really. Let me take that back. Yes, we consider it, but when we do consider it, we feel like for the time being that the course that we have set is still a good one. We continue to monitor it in terms of our cash flows and our activity levels, but we think for the time being, replacement program will stand.

Thank you.

Okay, thank you everyone for your interest in our company we wish you well and today to you.

Okay, thank you. Thank you for participating in today's conference call.