Tidewater Inc (TDW) 2004 Q4 法說會逐字稿

Good morning. My name is Dawn and I will be your conference facilitator. At this time I like to welcome everyone to the Tidewater conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Dean Taylor. Sir, you may begin your conference.

Good morning everyone. I am Dean Taylor, chairman and CEO of Tidewater. And I will be hosting our conference call this morning. With me to assist with the call is Keith Lousteau, our CFO; Steve Dick, our Executive Vice President in Charge of Operations in West Africa, North Sea and Southeast Asia; Jeff Platt, our Senior Vice President in Charge of Operations in the Americas; and Joe Bennett, Vice President, Controller and Principal Accounting Officer.

We have a lot to talk about today. I will begin by asking Keith to read our Safe Harbor statement, after which I will comment on our just released quarterly results. Keith will then provide a review of the number, after which I will return with an overview of our markets and some further remarks on how we see things going forward. We will then open the line for questions.

During today's conference Dean, I and other Tidewater management may make certain comments which are not statements of historical fact and thus will 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 during the conference today. Back to Dean.

This morning we reported a fiscal fourth quarter loss of $7 million or 12 cents a share, which included a non-cash impairment charge of $26.5 million, $17.2 million after tax, or 30 cents a share on 83 of our older domestic supply vessels. Excluding the impairment charge, our quarterly net earnings were $10.2 million or 18 cents a share, in line with the guidance given in our earnings prerelease issued a couple of weeks ago.

Before I comment on our operating earnings I would like to discuss the vessel write-down. During our March 31st Board of Directors meeting we discussed as we always do the state of our markets. Examining again the Gulf of Mexico market and the continuing incongruity between high commodity prices and low levels of activity that has characterized that operating environment for more than a year. With no prospects on the foreseeable horizon for significant improvement, the board and management concluded that a return to a Gulf rig count that would be needed in order to put many of our staff supply vessels back to work is unlikely.

We decided that the best course of action was to look at the vessels that we had stacked in the Gulf and determine which of those vessels would probably never return to active service given the market conditions that have persisted for the last two years. We chose 83 older, lower horsepower and lower cargo capacity supply vessels, and wrote them down to an estimated current fair market value. Keith will go through the math of this write-down shortly.

I would like to emphasize a couple of points that relate to this write-down. The first is we're not abandoning the Gulf of Mexico. Though it seems that many of the operators have deemphasized or in fact have abandoned the Gulf, it will remain an important market for us.

Excluding the 83 vessels being written down, we will still have a fleet of supply vessels in the Gulf numbering approximately 45 units, as well as a total fleet count of some 100 vessels, including anchor handling, crew and tugboats. This will still be one of the largest fleets of offshore service vessels in the domestic market. And this area will continue to be an important market for Tidewater. Those some 16 supply vessels were remain stacked to be deployed in better times.

It is worthwhile to note that in the last three years Tidewater has committed over $400 million to the construction of 41 units for the Gulf of Mexico marketplace, 17 of which were either deepwater or replacement supply vessels.

Secondly, the total dollar amount being written down represents just over 1 percent of the net equity of our Company. The present and envisioned future market conditions that necessitated this decision was certainly not foreseen when we chose to implement our pricing strategy in 2001 to maintain rates at the expense of utilization. Nevertheless, they exist. We must react to them. We're pleased that Tidewater's balance sheet, the result of years of financial discipline is strong and flexible enough to allow us to respond to these unfavorable conditions with little financial repercussions.

Now I will move on to our quarterly operating results. Our domestic operating loss was $3.1 million, again disappointing. Continued cost cutting that included fleet wage reductions, salary cuts of line management up to and including myself, and insurance premium rebates could not overcome a Gulf rig count that was at its lowest level by the end of the March quarter in 10 years. The rig count has improved modestly since then, but more must be done to return to a domestic operating profit, and some further help from an improved rig count would be welcome.

On the international side of our business our operating profit fell to $13.1 million this quarter, in line with our previously issued guidance and was principally the result of poor utilization in Southeast Asia and west Africa in the earlier months of the quarter. The good news is the both areas have improved after January and February toward achieving activity and profit levels that approach those posted in the December quarter. I will speak in more detail about these markets after Keith's review of the quarterly numbers.

Good morning. Lots of individual items to be noted during my comments today so the flow of information may not be quite as tied together quite as the way we presented in the past, because when one looks at the quarter itself with the impairment write-down and some other unusual items in it, I think all of the items need to be noted so that one can have a better understanding of Tidewater in attempting to value us on a go forward basis.

I would remind everybody that we are in the process as we speak of filing our Form 10-K today. It will be available through the normal EDGAR Services -- online services as soon as the phone call is completed. We also make note of the two press releases that were made prior to this meeting today, the one on March 24, where we did issue guidance and the warning of international revenues being off substantially, and the press release that was issued this morning announcing the results for the quarter and for the whole year.

First a quick recap on what we did for the year. For the year ended March 31 we're reporting today a earnings per common share of 74 cents. That is compared to $1.57 for the March '03 year, a number that is barely 47 percent of the previous year's earnings.

Worth noting, because we got some questions on this last time, that actual vessel revenues between the two years were up slightly. One often gets the question, what is going on when vessel revenues went up and yet your profit was off so much. Well, obviously one of the main reasons for profit being off year-on-year was the, as Dean noted, the impairment write-down of 26.4 million, and the fact that the revenue being reported for the year was just plain generated by more vessels working. The real story was a diminishment in vessel revenues which was tied in with an increase in operating cost and depreciation during the year of an additional $46 million, which was tied to the extra vessels actually working.

One quick note, the SEC had requested in our filing in our documentation in the past that we move in our financial statements where we presented a gain on loss on the sale of assets. So anyone just looking at the balance sheet, or looking at the income statement should note that total cost numbers to the Company year-on-year may appear to be a little different, and is only due to the fact that we were requested that we move the location of that item on our income statement. No effect on the numbers themselves.

Now looking at the quarter itself, in that March 24th press release we had announced that we thought international revenues would be off somewhere in the 14 to $16 million range. And unfortunately we were quite accurate. International revenues were off during the quarter by about $13.7 million or a 10.6 diminishment in the revenue numbers themselves.

Domestic revenues when compared to the December quarter were also off by about 12 percent, resulting in the whole quarter's revenue being off about 10.9 percent. And that revenue number pretty much flows all the way right down through the quarter itself. We did report the loss for the quarter, as Dean mentioned, at 12 cents. The net effect of the impairment write-down was a clean 30 cents itself. So therefore we would say that the quarter on a normalized basis came in at 18 cents. And that is because the impairment write-down itself should be tax effective at a clean 35 percent tax via the incremental tax rate at Tidewater.

So we've got a quarter that came in at 12 cents loss or 18 cents normalized versus the December quarter where we came in at 32 cents. Of note, operating cost came in pretty much in line with our previous guidance. And once again, gain on sale of assets for the quarter were up a little bit from the previous quarter where gain on sales came in at about $2.3 million before tax versus only $200,000 to once again make the fact that we are a real revenue driven Company. As Dean mentioned to you, operating loss for the Gulf of Mexico, or our domestic activity for this quarter was a loss of $3.1 million, which was 1.1 million greater loss than in the December quarter.

In the foreign areas our operating income was only 13.1 million compared to 28.2 million in the December quarter, or a decline there of 15.1 million. Once again you can readily see the operating income was off at Tidewater by about $16.2 million, which is almost perfectly in line with the $17.5 million shortfall in revenue quarter on quarter.

As Dean mentioned, we generally don't talk about months within quarters, but it is well worth noting that in our internal accounting revenues for the month of March were almost exactly in line with what the average month revenue would have been from the December quarter. So mathematically the statement that January and February were really poor months followed by a fair return to a market similar to what we enjoyed in the October to December market is a very factual one. And one which should be factored in in attempting to look at Tidewater on a go forward basis.

A couple of items to cover on the cost side. This quarter total operating costs came in right at about $96 million. We would expect that to be up a little bit in the June quarter, perhaps in the 98 to 99 million range. One of the effects of the impairment write-down, not one of the reasons for it, but certainly one of effects is that depreciation expense on a go forward basis will be lowered. Our next fiscal year, our fiscal '05 year the effect of the write-down will be to reduce depreciation costs in the future year by about $5.8 million or about $1.5 million per quarter.

I would estimate that depreciation costs for the June quarter should come in about $24 million. A number we generally don't talk about but due to the fact of the impairment and the change in a number, we thought we would put that one out there. So we think depreciation is going to be about 24 million and we think operating cost should be in the 98 to 99 range.

A little bit of specific information on day rate and utilization rates to kind of give you an idea of how good or how bad the quarter was. In the international arena the statistics on our deepwater fleet where day rate held pretty steady for the 30 vessels in that category. In December we averaged a day rate of $12,481. In the March quarter we averaged $12,434.

Utilization in the quarter though as we said fell from an 82.3 percent in December down to 72.5 percent at the end of the June quarter -- at the end of the March quarter, excuse me. At the moment we're back operating at about 79 percent utilization and the average day rate today is about $12,700, so a nice pick back up in the utilization and some small increase in the average day rate there.

The biggest factor for Tidewater, obviously our international towing and towing supply fleet of vessels, a total of about 190 vessels there, the average day rate in the quarter was off just a little bit from the December quarter. We reported $6,286, in this quarter we are reporting a number of $6,134. The significance to though being in December we had an utilization that averaged about 69.3. In the March quarter that utilization number only averaged about 64.8. Today in the world we would tell you that we are averaging utilization in that category at about 70.5 percent. And day rates have held steady at the 6,133 level. So a nice pick back up that is at least equal to, and in some cases, starting to exceed a little bit the December quarter.

Looking on the domestic side, our seven vessels that operate in the deepwater segment of the market enjoyed a little pickup in day rate during the quarter. The average day rate in December was $12,328. That average one up to 13,505 during the quarter. But once again the March quarter being one of the more difficult operating quarters in the Gulf of Mexico, utilization in that class was off from a December rate at about 89.1 percent to a March quarter at 81.6 percent.

Today day rates have remained in the $13,100 range, and utilization currently is running at about 81 percent. So some of that increasing day rate is still there, although we have not gotten the full utilization level back to where it was in the December quarter.

A statistic here that we going to have to find a new way to get it out to you next quarter, because this is the one that shows our towing and towing supply category in the domestic market where we were reporting 126 vessels in that category. After today's impairment write-down on 83 of those, we're self admitting they will probably never re-enter the market. Joe and I will probably look for a way of reclassifying those assets into a different class so that in the future whenever we give you the vessels in this class, it will be the active ones, plus a few that remain stacked ready to go back to work. And we think then the utilization statistics will be much more meaningful for you to determine how we are actually doing in the current market by doing that.

But one more time for the March quarter here the statistics are that that class of vessel in March enjoyed an average day rate of $5,900. That is compared to the December quarter where the average day rate was $5,763. Once again, utilization in that category was off a little bit during the quarter falling to 19.2 percent from the 21.9 percent that we enjoyed in December -- or we reported, I hate to use the word enjoyed -- to today where we are operating at about 21 to 21.5 percent in that category. So as you can overall see, day rates, utilization rates as we sit here today are pretty much back in line with where we were across the world on the average for the December quarter.

A quick word about the impairment and how we came about some of the statistics of what we did there. As Dean said, certain operational criteria were selected as being probably levels where these vessels would never go back to work. From a fleet of about 95 vessels that were stacked at that point in time, and some of vessels that could be active today because if they had valid paper on them they were looked at and included as to the possibility of when that paper expired would they ever go back to work. A grouping of 83 vessels were selected that did not meet the minimum criteria that our operating people felt would be necessary to go back to work as they envisioned the market into the future.

In putting an impairment write-down number on that fleet, perhaps the hardest part of that whole equation is to reach a reasonable estimation of what the future realizable value of that fleet could be. Obviously when one starts with the conclusion that they probably will not work in the Gulf, and Tidewater has steadfastly held tight to its own internal rules of attempting not to sell vessels into a competing market anywhere in the world, the idea of disposing of 83 vessels became a difficult one to comprehend almost in any manner.

So in attempting to set an valuation on this fleet the first thing we did was we reached the realization that up to 50 percent of those vessels may ultimately have to be scrapped. They may have to go into the scrap yard, alternative uses outside of the oil patch totally around the world may not ultimately be able to found on those vessels. Once we concluded that we had a little bit easier task of attempting to value what we felt like the realizable value on the remaining one-half of the fleet would be.

For proprietary reasons I would rather not state as to what kind of numbers we ended up putting on that fleet. But I could tell you that going forward those 83 vessels are now carried on the books of Tidewater at a number of little less than $10 million. I throw that number out to you that that is somewhat less than 5 percent of their original cost, which we think is a very realistic number. In order to get to that point we only basically need to sell about 41 or 42 of the 83, even if we had to resort to scraping.

As I said, in the statistics we have not developed a full plan for the ultimate disposition of these vessels. We certainly don't think that that plan can be accomplished in 12 months. So unfortunately the accounting rules will require us to carry those vessels in the active fleet category. We cannot statistically take them out and say they are on a for sale list. So the idea of creating a separate class for people who do follow Tidewater closely and setting aside those vessels so that a zero utilization can be applied to them, is probably the best way we are going to be able to keep the public informed as to our progress in disposing of those vessels, and keep the public informed as to how well we're doing with the real active fleet at that point in time.

A couple of other kind of closing comments from me. We did take deliveries in the March quarter of three additional vessels. At the end of March 31 we had yet 20 vessels under our new construction program yet to be delivered. Those 20 vessels represent an investment of $354 million, of which only 167 is yet to be funded. We have actually paid 187 million of those.

In the fiscal year of '05 we expect 16 vessels to be delivered. We expect cash outflows to be about $134 million on those 16 vessels. And then the balance of our program as it exists today would be delivered in fiscal '06. That would be 4 vessels with cash requirements of about another 33 million at that point in time.

So kind of the highlight of the current year that we just entered into in '05 is the anticipated delivery of up to 12 international anchor handling towing supply vessels. Most of those are scheduled for much later in the year. Those 12 will probably be delivered kind of equally between our December and our March quarter. So not a lot of income help on the front end, but certainly the first wave of new replacement equipment for our international fleet.

And then the final comment that our long-term debt at the end of the quarter was $325 million with an equity that still remained very strong. As Dean mentioned, the write-down was barely 1 percent of our equity. Equity ended up at 1.36 billion. Our debt to total equity number of about 19.2 million.

One final comment was the kind of tax rate on a go forward basis. Because tax rate have been bouncing all over the place, the actual tax rate for the quarter would have been about 2 percent, once you factored out the impairment the tax rate for the year came in at about 23.5 percent. More likely than not the tax rate in the first quarter and for the next year is about 34 percent. We should be returning to our normalized rates. Strange things were happening to Tidewater towards the end of the year. We certainly had anticipated better earnings when the year started, so we basically over anticipated the tax rate going in. A new year, a new budget, a new feeling as to the Company is going. We think 34 percent is in line.

So I'm going to turn it back over to Dean, and Joe and I will certainly be available for any financial related questions at the end of his comments.

As Keith has detailed we're presently doing much better than we were in the early months of this calendar year. Profits in March from our Southeast Asian operation have returned to levels achieved in the December quarter. And the outlook for that market is positive. March was also a much good month in west Africa, and very early April numbers appear to show better results.

While we don't foresee a large upside -- excuse me, uptick in activity in this market over the next few months, we do expect good upside in west Africa long term. And as you probably heard from some of the rig contractors who have held conference calls over the last several days, Mid East and Far East markets hold good promise. And we expect our South American operations to continue to be strong contributors.

The domestic market is still a problem. I believe that our reconfigured fleet is in a better position to respond to current market conditions, yet depending upon operator activity more may yet need to be done.

As I have stated during past conference calls, I'm committed to return our domestic operation to profitability. Potential steps that could be taken continue to be evaluated. During this past fiscal year we added 22 new vessels to our fleet. And as Keith has said, 20 additional vessels are in various stages of construction in shipyards around the world, and should be delivered throughout the next year and a half.

We are maintaining the capital and operational discipline necessary to respond to industry changes and customer needs as they occur. We're doing all of this while maintaining a manageable level of debt, as Keith said, $325 million at the end of our fiscal year, and a debt to total capital ratio of approximately 19 percent.

Though we recognize that there are many challenges to maintaining our position as market leader in our sector, the new ships that we have purchased and built, those that we're building, and our financial strength will provide us with significant upside leverage as we continue to renew our fleet and to move forward. With that we will open the line to questions.

Bill Sanchez with Howard Weil.

Dean, I wonder if you could talk a little bit about you reference the conference calls here from some of the joint contractors and the discussions that relate to the North Sea, and maybe a lack of some summer pickup in drilling activity. I know it hasn't been a concern to date yet, but are you a bit concerned that there may be some vessel migration out of the North Sea into some of your international markets, which is West Africa, Southeast Asia that could put some pressure on rates there in those markets, certainly utilization?

Bill, I didn't mention the North Sea. Some of the drilling contractors have -- in fact one I think mentioned that they foresaw three rigs that they thought they would put to work maybe next quarter they are delaying a quarter. But I really feel like most of the migration that has occurred out of the North Sea has occurred, and I don't expect much more to occur. And in fact, we are actually seeing some vessels returning to the North Sea because they have gone into international markets and found they are not as conducive as they would have thought -- otherwise thought. So does that answer your question?

Yes, that's great. Has there been any thought process now that we have decided to go ahead and taken an impairment on these vessels? I know you have continued to struggle I guess with the pricing versus utilization question in the Gulf of Mexico. You may have touched on that in your opening comments, I apologize I was late to the call. Any comments there that you can share with us, any thought process that may have changed as it relates to your pricing structure in the Gulf of Mexico?

Well if you know our pricing, our average rate has actually gone up (indiscernible) towing supply vessel class in the Gulf, but it goes up and down. But we -- our strategy -- we have announced almost a year ago that we're going to (indiscernible) for volume or for valued customers we're going to make exceptions to our pricing strategy. We have maintained that strategy and we continue to feel like that is the strategy we will have.

Is it your feeling that to (indiscernible) profitability you are still going to be here near term more a function of continued cost cutting, or do you believe your utilization can continue to move up if you maintain I guess a higher pricing pressure threshold than where the market is in general right now?

Well, Jeff Platt is here with us. I don't know -- Jeff, do you want to take that?

The big cost cutting, as we have announced before we have already taken those steps. Certainly we're looking at everything on a day-to-day operation to try to continue to squeeze that down. And I think that really we will be getting very close to getting the domestic operation back to a profitable situation, but we certainly need some increase on the drilling activity. And that is what we really need.

If it doesn't -- I mean the implied question there, Bill, is what happens if drilling activity stays where it is? And as I said, we've got a number of things that we're looking at. I don't want to divulge them. Some would be strategic in nature. But I tell you what, I'm getting tired of telling you guys we are going to get this thing profitable. Well, we're going to get there. I'm tired of talking, I need to show you some numbers. And it is going to happen. How we're going to get there exactly -- some will depend certainly on the rig count. If we can get a little help from the rig count, boy, we're going to be really close quickly. If we can't, then hell, I hate to cut my salary again, but I guess that is something to look at. But we will be looking at everything.

Dean, my last question. Of the vessels that were impaired here here during the fourth quarter were any of those vessels from the recent ENSCO acquisition, or all of those are still in the active fleet?

Some more from the ENSCO acquisition.

Are you able to give a number there?

11.

Bill Herbert (ph) with Simons & Company International.

Dean, I'm going to push you a little bit more with respect to the strategy in the Gulf of Mexico.

I am not saying I am going to answer though.

I understand. Let me try. And you have been candid and forthright with respect to expressing your frustration over the challenges in the Gulf. And you have been candid also by admitting that you have been expressing that frustration for an extended period of time.

Assuming that the Gulf of Mexico drilling environment stays stagnant for the foreseeable future, how much longer do -- are we expected to wait until until a relatively momentous shift in strategy takes place in order to improve the returns in the Gulf of Mexico?

That is a question I really don't want to answer, Bill. It is a valid question, but I just feel like that there is so much up in the air right now. You know I get on some of our engineers around here that they are always asking what if, what if, what if, what if. And I keep saying well sometimes you know you just postpone answers for waiting to see sort of what develops. And I think that is sort of the situation that we're in. Certainly that is a question -- the question that you pose is one I ask myself. But it is not one that I really want to make public at this point.

Okay, that's fair.

The response to which I wouldn't want to make public.

I understand. Keith, with respect to arriving at the 18 cent number, to use your phrase, normalized EPS number for the March quarter. In arriving at the 18 cent number does that also presume a tax rate of 2 percent for the quarter, or does that presume a 35 percent tax rate on the operational numbers?

The SEC says that any time you do a non-GAAP providing of financial numbers you are supposed to provide reconciliation, so here I go. It is a simple as we reported, 12 cents loss. The impairment was for $26.5 million. You have a tax effect -- a tax benefit of 35 percent. You get that the impairment after tax was $17.2 million, or 30 cents itself. The difference between the 12 cents loss and an 18 gain is the 30 cents impairment. So it is merely the impairment accounted for -- had it not been for the impairment, earnings would have been a perfect 30 percent better than they were -- 30 cents better.

Okay. Thirty cents better. Forgive me for being obtuse, assuming a normalized tax rate of 35 percent?

That's actually correct.

Ken Sill with CSFB.

I wanted to push one more time, not so much on your strategy, but just based on what you have seen in the Gulf of Mexico, you know pricing is actually pretty good, because a lot of capacity is being held off the market. I guess the long-term issue is what kind of cash margin does it take to get people to actually start scrapping?

And I guess that is the biggest issue. You guys just wrote off 83 vessels. And I wanted to clarify you're probably -- half of those will end up being scrapped. The other the other half maybe sold. But you did say you're going to have another -- what was it -- 16 that you said would be available?

That's it. Sixteen stacked.

Sixteen stacked. And that is not part of the 83, right?

Correct.

So I guess that is the issue. What is it going to take to get rid of some of this old equipment? Or are you guys going to be the guys that do it all yourselves?

Hopefully, I mean we perceive ourselves as leaders. We hope that some other people will take some action themselves. But we're going to run this Company in the best interest of this Company, and if they don't follow, well that will be up to them. What is a going to take for those people? You would best ask them I would say. We're taking big steps and we will just see what happens at that point.

Well, you guys because of your financial strength are probably in a lot better position than some of your competitors are, in terms of your options. And I guess that's another thing I don't expect much of a comment on, but clearly industry consolidation of some of these weaker players is something that you could do with your balance sheet. Do you foresee that, or do you just going to have to see some people drift into a little bit more trouble before anything happens there?

Well, you know, heck, a year ago -- listen, we thought -- it wasn't a year. A year and three months ago when we bought the ENSCO fleet we sure as heck didn't see -- we didn't foresee this market of today. I don't think anybody did. And there are plenty of smart people on this phone call, and a few smart people around this room, and nobody saw it.

We consolidated 26 units into our fleet in the Gulf of Mexico a year ago. We will do so again if there is the right opportunity and we think that we think that it makes sense. But you've got to have a willing seller as well as a willing buyer, and the numbers have to make sense. We're not going to do something that is just going to benefit everybody else. We are going to try to do something that benefits us. And a lot will just depend on the opportunities as they present themselves. So we have the balance sheet. We're willing to use it if the right pricing and the right opportunity presents itself, but otherwise we are going to keep running this Company like we have been running it.

And then one last question on the strapping. Has steel cost had much of an impact on the value of scrap vessels? And also I guess what are rising steel costs to the costs of some of the new builds? Could that make may be choke off a little bit of the incremental supply that is being talked about?

I don't think steel cost has had an impact in either case. Certainly not in our -- in our new construction program we have fixed-price contracts and we've got guarantees. And we feel pretty confident that the prices for which we contracted our new equipment will remain firm. Whether it will choke off new building or not, I don't know. I would sort of doubt it. But that is something else that we will be seeing through the time. But my guess is that it is not going to choke off any new construction.

Do you have a rough estimate of how much the steel in the hull represents to the cost of the built platform supply boat?

I don't think -- I'm going to guess 20. I don't know. (multiple speakers) 25 to 30 percent maybe.

And even less for like an anchor handler with more equipment and stuff, right?

Right. The equipment, particularly when you get into those anchor handlers it is the wenches. The other ancillary equipment, that is where the big numbers are, and of course the labor is a big component.

And then a couple of housekeeping questions for Keith. Any guidance on G&A and interest expenses sequentially? I guess G&A came in a little bit light versus expectations, and interest expense was a little bit higher than I thought.

G&A costs is relatively stable around here. It runs about $17 million a quarter. Hell, I am going to give you every number here pretty soon.

That makes our job easier, right?

We don't see the G&A changing much -- as you have not seen it change much quarter to quarter over the last year or two. We don't see that number changing a whole lot. You'll see a few little ups and downs, but nothing substantial.

On the interest side, we have been saying that because of the amount invested in our construction in progress, a number coming down, that we are able to capitalize a little less interest cost on the quarter to quarter basis.

I don't think -- you'll see that interest expense portion go up slightly probably quarter to quarter, but that will depend on exactly what we have invested in shipyards at any point in time as we progress through the year.

And we can also make the left-handed complement that I'm looking forward to the day that interest expense goes up because what it will mean is we taken delivery of our anchor handlers from China.

And so on the interest expense creeping up, I guess, are the delivery of the boats scheduled mostly for the second half, that is when you would expect to see that shift more?

That's correct. The June quarter is going to be relatively stable, and then September and December quarter, unless we put some more new construction on the books. But unless we do that, we would expect the number to go up only in the September and then December quarter, and another little tick up after September.

Pierre Conner with Hibernia First Water's Capital (ph).

Hello, Pierre, when did you switch companies?

I don't know what that was. But good morning guys. My first questions are housekeeping things here for Keith and Joe. The one number on the domestic towing and towing supply you gave us December and March averages. What is the current, or maybe I missed it, the current average day rate on your towing and towing supply domestic?

Today as we sit here it is about 5950. So you can see, as Dean said -- and that number varies with the mix not so much that 180's are getting more number money, but it was 5950 as we see here today and current utilization is running 21, 21.5 percent coming for the month of April. And that is still based on the full 126 class. That is before we were able to back out all of these impaired vessels.

Okay, thank you. And another (indiscernible) this will be in your Q of course but just a quick overview on the domestic tugs. Was there anything significant in their March quarter numbers there different from the December's quarter?

The utilization of the tug fleet domestically is always down in the March quarter. If there's any seasonality in the domestic tug business it happens during this March quarter, and then normally picks back up again as construction and rig moves and so forth start happening again. So we did see a reduction from kind of 43 percent in the December quarter down to about 35 percent during this March quarter.

Okay, but less construction work. And then on the Capex side then, Keith where did you end '04 and what is currently in that budget for '05?

For '04 you would like to know what the total amount that we ended up spending on Capex?

Sure.

Additions to property, plant and equipment that would not only be all new construction, that could be some capitalized R&M, but the total was 297 million. And that included almost 80 million for ENSCO. So the number would have been about 210 for us, 80 for the ENSCO acquisition. And of the 210 probably about 20 to 25 was capitalized to R&M. That is somewhat of a guess here this morning. So 180 to 185 discretionary additions last year.

Okay.

Going forward it is about -- for the vessels that we have under construction today it is about $134 million that we would expect to pay on those. In addition to that we always have a little bit of capitalized R&M, things like that. Probably add another 20 or so million for the full year in regards to that. So somewhere around 150 million, again, for what we have in the shipyards today.

Okay. Great. Thanks Joe. And, Dean, then back to a little bit about the Gulf of Mexico. Maybe for (indiscernible). So the 15 -- 15, 16 I guess boats that you have idle or -- how many of those are crude, I guess is what I want to ask? Are any of them crude?

None.

What would -- just say about the current market then in terms of other idle equipment in the Gulf in that class, two and tow supply, typical crude and non-crude remaining?

Pierre, I'll take a stab at that.

Okay.

What we found is that sort of in 2001 when the market had about 171 rigs working in the Gulf, which was a high point. It has never been higher than in 2001, the summer of 2001. There were about 350 supply vessels working. And through time, even as the rig count has gone down to -- now is close to 9089 I think was the last, it is still running about two vessels per rig.

So that is the number of vessels that are sort of excessed through the market as compared to back in 2001 whatever (indiscernible) 90 times 2 is 180 from 360, so you've got 180 vessels that are sort of excess to what was the market in 2001. Now of those 180, a good number were ours. And we are now taking 83 out of that. And we're taking -- we had 16 that are stacked. But you can still see that there is a fair amount of capacity that is sitting out there.

Now one of our privately owned competitors this week -- I won't mention any names -- but you are a pretty smart guy, you can probably guess -- put 20 boats up for sale. And so whether they come out of the market immediately or they continue to try to operate them, it is hard to say. But it is not going to do take -- our feeling -- our general feeling here at Tidewater, it is not going to take much of an uptick in rig actively is for us to look at putting those 16 boats back into the market. But we've got to see some uptick and to the country. I mean the rig count just keeps going down.

I was thinking of something -- I was trying to think of something clever to say about the Gulf of Mexico market, and one thing that occurred to me was sort of Maurice Ravel, the famous French composer, was once asked what he thought about his famous music, Bolero. And he said it is wonderful music, except there's no music. And I sort of thing that about the Gulf of Mexico. It is a great market except right now there is no market.

You know if you look at it coldly any market that's got 80, 90 rigs working is a pretty damn good market. It is just that in comparison to where it was in 2001, there is no music. There is no market. So that is what we're dealing. We're not the only ones. Other people with older fleets will certainly be dealing with this.

I think that some people are not going to be able to put the repair and maintenance money into some of those old ships. Some may get some credit to do so, but I really think there is a really good chance that this market could become stabilized with not much increase in rig activity. So when that happens -- I know lots of people on the line are mark-to-market every day, and I sympathize with all of them. But we can't run this business in that fashion. We've got to run the business in a little bit -- we don't know exactly what quarter things are going to start to make sense. But we've got to run the business for sort of the longer-term, what makes sense longer-term for our Company, and that is what we're doing.

Right. Okay. I appreciate it. And into the international -- again either for you or Steve -- is the significant incremental activity likely in the Middle East associated with say Ross Gas (ph) and a number of other people picking up, we have heard in the neighborhood of 8 to 10 incremental jack ups. Is that from your experience, Dean, a two rig per -- two boats per rig tight market as well? Or is there something different in there that we should think about relative to any incremental demand?

And then kind of expanding on that, how does that market gets supplied if there are incremental vessel needs? Are they closer to home -- closer to that area availability?

Well, in the Middle East you've got of a lot of old junk that is out there that goes back -- it predates even some of the stuff that was -- that we have considered now impaired. But what is interesting is that in the Middle East now the uptick in activity much of that is going to be driven by the majors. And we're seeing almost all of the majors putting age restrictions on the equipment that they will allow to serve them. Which is going to eliminate a lot of that stuff that has been out there sort of been an overhang on the Middle East market for a long time. So I view that as very positive.

Your question as to number of boats per rig. It is at least two, depending on spacing between rigs and sort of what their program looks like. If it is just one rig and is not too far offshore, two is a good number. If they've got a couple of rigs and they are not too close together, sometimes they even have more than two, but two is a pretty good number for you to use in just sort of your thought process.

Good information. Well, I appreciate it guys. I will turn it back. Thank you.

Well, we are sorry you switched companies, but we're still glad to hear from you.

Jed Bailey with Jefferies & Co.

Actually my last question with just answered. Thank you.

Tom Aset (ph) with Richard Capital.

I will let Dean relax and take a drink of water. Keith, two things. One I was writing furiously when you're talking. But I think I have jotted here in the Gulf of Mexico you had seven deepwater vessels during the quarter averaging 13,500. Did you say that?

Yes, I did say that.

And that number -- that is a mix of some number of anchor handlers and some number of kind of towing supplies? Do you divulge which is which there, because there sort of two different classes in that deepwater number, isn't there?

Yes, you remember we obtained -- but only one of the big anchor handlers that we obtained from ENSCO went into that class. So the biggest anchor handler we have goes into that class along with the four deepwater supply boats that we built at Quality, and then a couple of others that were built early on that we classified in the deepwater, (indiscernible) and such. So that is basically supply boats with the one -- the Carl Thorn being one that kind of influences the overall average, but no more in this quarter than in prior quarters.

Right. That is one anchor handler and six big supply vessels then?

Yes.

And then second question. You know this old fleet of 83 vessels that you are writing down, we have all been watching the scrap steel market, and I think if memory serves it has jumped up to 250 to $300 a ton. That may be not accurate, but it is close. I don't know how much these vessels weight, but what is the economics of taking one 180 foot supply vessel and selling it for scrap steel. If you can get $250 a ton for it, that would seem to be pretty good economics. Is that possible? Is a rational strategy to dispose of that equipment?

We can air freight the stuff to China. You know you have -- they weigh about 1,000 to 1,100 tons each, just for your information. An issue is how do get it there and so you almost -- you have to subtract that cost from what you would get gross. And then finally -- we actually have some ships that are on our for sale list that are over in the Far East, and we've gotten some offers for those ships pretty much for scrap. And we're not getting nearly sort of the values that you think for scrap steel. So we have turned down the offers.

We're not quite sure what the disconnect is there. Your idea is a good one. It is one that we are pursuing, but so far we don't see -- we would see it first with the vessels that are in Southeast Asia. If people were willing to pay sort of scrap steel prices for just the ship itself and all the accoutrements that are contained inside, we would see it there. But we're not seeing it just yet. Now that doesn't mean that we won't see it. And it doesn't mean we won't pursue that. But that is what we have seen so far.

Okay, thank you. What we have heard is the Chinese are cutting up everything that stands still for more than an hour. But maybe that hype or the frenzy on scrap steel is perhaps past now. It may be abating somewhat.

I'm not sure that that is right. But so far we just haven't seen it get to ships yet. Now an interesting thing that has happened, and Keith was reminding me yesterday that some of his sources were telling him that there no more tankers being scrapped these days. So it could be that people have gone to the tanker market -- the old tankers that were being scrapped and that those sort of -- that sources is now exhausted. And maybe they will be coming down the food chain to us, but so far we have not seen it.

Joseph Agular with Johnson Rice.

I don't know your breakout in depreciation between international domestic but I would assume that where you are today in your domestic operations you are cash flow positive. If that a fair assumption?

Yes.

Okay. And I don't know also if you had mentioned earlier, Dean or Keith, but did you -- of the 83 boats did you mention how many of them had their certificates -- Coast Guard certificates that were active and how many of them have maybe passed that point?

We didn't mention it but the score is 0 to 83. None have any active certificates.

Okay. This is something that was still done voluntarily by you all, or is it something that maybe -- and I ask this really because the entire industry may be -- are the auditors getting stricter on determining whether or not you can keep assets like that on your books or not?

No. It was not an accounting dictate. We had always treated the 180's and 190's as a class of assets -- one class. And as we talk, I mean we have 10 of those boats working today. We're keeping 16 of them additional stacked for the future. We could have easily accounting-wise justified keeping the class because future cash flows made sense. But economically and from an operational point of view when you look at certain -- call it a subclass within that group, it was strictly a voluntary decision. And it was one that we felt was almost necessary because when we look at the future market those boats just plain will probably never go back to work. So the auditors -- we were under absolutely no pressure from any outside source to do that.

Okay. Thanks for clarifying that. And given your current utilization and day rate structure, internationally obviously things have bounced back kind of nicely. Dean, I was wondering also beyond where we are today are there any other big customer alliance type markets -- not market, but jobs out there -- new work where you may be able to say reach an agreement with a customer you're not doing a lot of business with today, that type of thing?

There are some, but I sure don't want to alert our competitors to (indiscernible). Hopefully, they will just see the dust -- they will see our wake and that is it. But there are some out there, yes.

And in general it sounds to me -- I don't want to put words in your mouth, but it sounds to me like you would expect over the course of fiscal '05, at least on the international side, your utilization to improve maybe a little bit each quarter? Is that a fair comment?

You are putting words in my mouth.

Okay.

But what I would say is that we're not pessimistic.

Andy Parr with Hanover Capital.

I have a good question to follow-up on the (indiscernible). Can you remind me how many boats you bought in the ENSCO transaction?

26.

And so I assume -- I believe they had stretched a fair amount of those vessels. I assume that those -- the remaining vessels that you have you do not impair the (indiscernible).

Well there were 16 of the older vessels, 6 stretches and 4 anchor handlers is my recollection. And took 11 of the 16 of the older ones they have been impaired. And that will leave the remainder in our active fleet.

Fred Deese (ph) with Deese Starson Capital Group (ph).

Dean, you got more than one Catch-22 out there. You had suggested that when this new build program was ended that there was a high probability that you would announce another one. Can you talk about that?

I don't know that I suggested that in today's call.

No, history.

Well, historically in any of our presentations we have said that barring an acquisition, and our intent is for the right acquisition at the right price. That is our primary goal. Barring an acquisition, we've got a number of older ships in our fleet that we have to replace the earning power of those ships. So barring an acquisition, we are going to have a program on a go forward basis of approximately $150 million a year dedicated to new construction. That is what we had said. We have said that it is a program that we revise every year depending on how we see cash flows looking. We're not going to get into a position where we gain substantially our debt to capital ratio. A lot of it is going to be driven by cash flow. But that is sort of the general plan that we have outlined. And we review it and we of course reserve the right to review it pretty much on a continuing basis. But that is the program that we have announced in various forums, yes.

And of the non-Tidewater boats do have an intelligence on the aging -- how many of these are coming up for their reclassification or certification, where their owners are going to require capital spending?

We have some. And I guess I would just as soon keep to ourselves. I hope you don't mind, but we do have some.

But they are coming to the fork in the road at some point?

Yes, and it is going to be interesting to see how that develops.

John Chappell with J.P. Morgan.

Donna, we're really having a hard time hearing you and it is hard to identify from whom the question is coming.

Can you hear me now, sir?

Much better.

John Chappell with J.P. Morgan.

I just got a good quick question regarding the new vessels that are coming on in the next several quarters. Can you give us a sense of the market allocation when those new vessels coming online? And whether they are going to be used basically to replace some of your older capacity, or whether they're going to be used to help further your presence in those markets?

Almost everything will be international. Some exceptions, but for the time being almost everything is international.

And is there a certain breakout, Southeast Asia, Middle East?

No. We don't do that.

Okay. Is it part of the fleet modernization or will it be to build market share?

No, it is fleet replacement is what we have said. We're always trying to build market share.

Josh Porter with GSC Partners.

Just a quick question on the impaired boats. Was there a cutoff age or sort of what is the youngest boat that you guys decided because of the age that you put it in the group that you impaired?

Keith will --.

We did have very strict criteria, but age was not one of the criteria. We did capacities in terms of cargo carrying capacity and liquid mud carrying capacity. Now we looked at age, but toward the market that we see for the time being, we don't see that age is necessary the driver. So for the vessel we didn't. I don't know if that answers your questions. If you want more specifics, if you do then --.

We didn't use age as a factor, but by happenstance the remaining vessels, the ones that were not impaired, the oldest vessels in that category go back to being built in 1983. They still have an average life of the non-impaired vessels still are in 20 to 21 range. The impaired vessels had an average life of about 23.5 years.

Jed Bailey with Jefferies & Co.

I decided I did have a question. I wanted to circle back on the Middle East. If we expect 8 to 10 more rigs to go in that area, and it is being driven by the majors and they essentially need some newer equipment. Then I guess it is fair to say that we will have roughly 20 new vessels going into that market over the next year or so? Is that fair to say?

I don't know that that is fair to say, Jed. I would say that maybe half of that number could be new vessels entering the market. I don't know what the sort of the market idle capacity is just as we speak for the Middle East. But I would presume some will come from that region that is already there, maybe move around and maybe ten new vessels will move there.

So 10. What about in a market like India? Are they pretty well taken care of on the vessel side, or will they need another few vessels?

That's a good question. One thing we're seeing is that all ONGC (ph) is doing a couple of things. On,e they're not necessarily favoring Indian owners, which is something that they used to do. So that is a nice prospect. And second, it does look to me like they are operating their fleet, and so I think there are some nice opportunities there. And they're also some deepwater -- there are some deepwater projects that will be interesting off of India. I that want to be more specific than that, but I hope that answers your question.

Certainly. And one other market, a different part of the world, Mexico. Do you see them taking more boats in this year? And if so, roughly how many?

I do see them taking more vessels in this year. It is going to be interesting to see how that plays out because they canceled the better part of their new construction program. They (indiscernible) did that it looks like. And much will depend on how they structure the rebid of that. And in addition to that they will probably be other tenders for other equipments, but I think that the rebid for the new equipment is going to drive to some extent what they do in the interim for other equipment. So I do believe that there will be new equipment going in.

Would the rebid be in the same magnitude as it was for the cancellation?

I don't know, you better ask them. But I would expect that it would. It could be even more. Because I really -- we have seen that in Mexico there have been rigs waiting on boats. And somebody one of these days down there is going to wake up and see that doesn't make a whole lot of sense. When that happens they are going to need some more equipment. You know it hasn't happened much yet. It has happened some, but it hasn't happened nearly as much as we would have thought by this time.

Pierre Conner with Hibernia South Coast Capital.

But just a quick follow up, Keith, I meant to ask you earlier about tax rates. You know you have been running about 33 percent in an area where the Gulf of Mexico segment was much more profitable. You told us you thought it would be a 34 percent tax rate for the next quarter, if I understood that right. And so I wanted to reconcile those as opposed to I think last quarter we talked about the fact that given the lack of profitability in the Gulf or a more reasonable level that that number would be more in the 30 percent. And I know it is kind of net (ph), but it seemed like we're moving back up on taxes even though we haven't pushed significantly on profitability in the Gulf.

We're going back up on the tax rate out of a speculative reason. There is distinctive legislation on the plates in Washington at the moment that in one set of legislation it is detrimental to me. That could actually push my tax rate above 35 percent. And there is other legislation that would, if enacted would enable me to come down on my tax rate and some. So I hate to collect kind of middle of the road expecting maybe the worst as opposed to the best to come out of Washington these days, but with the realization that 35 percent is where we start. I mean our income around the world, bit it domestic or international, starts with 35 percent being taxable at the United States statutory rate. And then we have limited amount of certain items where we're not taxable on them.

A higher tax rate is a good sign for Tidewater. Those permanent differences are fairly well fixed from year to year. And as our income goes up they have a smaller and smaller effect of reducing that 35 percent rate down. So the movement from domestic to international is of absolutely no significance. The movement up from a kind of historical 33.5 to 34 is an indication that we expect better worldwide earnings. I hate to put that way.

Joseph Agular with Johnson Rice.

Actually, that is what I was going to ask. Isn't there -- there's something going on in the Senate with respect to maybe your foreign source income for the shipping industry being exempt from taxes?

Yes, there is some conditions, but yes, there something going on. Decent probability is it might even happen. So we are I would say mildly optimistic, but you hate to get too optimistic about anything in Washington, because there is so many variables, so many factors. And we just play it by ear.

And, Joe, remember there's going to be distinction between paying taxes currently and providing financial taxes. What you're speaking of would be a mechanism that would allow us to differ our foreign earnings until sometime in the future. Now certain of our competitors and certain companies take the position that that is permanently invested, and therefore they don't provide taxes. We didn't do that in the past. We would have to evaluate Tidewater's situation. It would be great from a cash flow perspective to run into deferrals. So we watch that development. But the first reaction would be even if what you're thinking about passes, that doesn't automatically mean the financial tax rate would be lowered.

One follow-up to your earlier question. Domestic depreciation has been running about $8 million per quarter. We have been running about 25.5 million per quarter, and that has been about 8 domestic, 17.5. So if you finally get back to a domestic cash flow number, you could use that to factor back. And if you remember, I said that because of the impairment on an annual basis the domestic depreciation ought to come down by almost 6 million. So that is all the depreciation numbers I got.

Thank you, Keith. And, Dean, has there been any further clarification on some of the Jones Act foreign ownership issues of U.S. supply vessels?

There are some rumors. And I heard a rumor yesterday that is probably decent. At least one of the vessels that has been in construction over which there's some question as to its ultimate ownership has been at least temporarily denied documentation. Now how true that is I'm not going to say. It is secondhand, but it is out there. But all that means and how all that plays out I don't want to opine, but that is the latest information that I have.

Thank you all very much.

Thanks everyone for your interest in our Company, your participation in in today's call. And we wish all of you well. Thanks a lot.

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