Tidewater Inc (TDW) 2005 Q2 法說會逐字稿

Good morning, my name is Jessica, and I will be your conference facilitator. At this time I would like to welcome everyone to Tidewater's fiscal 2005 second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question press star then the number 2 on your telephone keypad. Thank you.

At this time I would like to turn the call over to Mr. Dean Taylor, chairman and CEO. Mr. Taylor, you may begin your conference.

Yes, thank you very much. Good morning, everyone, and welcome to the Tidewater fiscal second quarter 2005 earnings conference call. I'm Dean Taylor, Tidewater's chairman, president, and CEO, and I'll be hosting the call this morning. With me today are Keith Lousteau, our chief financial officer; Cliffe LaBorde, our general counsel; Steve Dick, our executive vice president in charge of operations in West Africa, the North Sea, the Middle East, and the Far East and no offense to any Yankee fans, but who is wearing, for some reason today, a Boston Red Sox ballcap; Jeff Platt, our senior vice president in charge of operations in the Americas; and Joe Bennett, our vice president and chief accounting officer.

As we usually do, I'll begin with some comments on our just-released quarterly earnings. Following my remarks, I'll turn the call over to Keith for a detailed review of the numbers and a status report on our build and vessel replacement program. I'll then return with an overview of our markets and some comments on our strategy. We'll then open the call for questions.

At this point I'm going to ask Keith to read our Safe Harbor statement. Keith.

During today's conference, Dean, I, and other members of Tidewater management may make certain comments, which are not statements of historical fact, and thus they constitute forward-looking statements. I know 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 that we state or imply by any of the comments we may make here today.

Thanks, Keith. This morning we reported fiscal second quarter earnings of 29 cents per share versus 23 cents last quarter. I am very pleased with this quarter's results not only because they reflect increased profitability in our international markets, but because we were able to achieve profitability in our domestic operation for the first time in nine quarters. I'll talk a little bit more about these numbers in a moment but before I do I'd like to focus on the announcement regarding the effect of the new tax bill on Tidewater.

The portion of the bill, which directly affects Tidewater and all U.S. shipping companies, essentially reverses a detrimental position which was part of the tax law enacted in 1975. The new bill repeals U.S. taxation on foreign shipping earnings and will thus substantially reduce our effective tax rate on earnings from our international operations. The passage of this bill by the House and the Senate, which we believe will be signed by the president in the near future, is enormously important for our company. In fact, it may be the most significant financial event since the OIL (ph) acquisition several years ago. As most of you are no doubt aware, substantially all of our earnings have come from our international markets in recent years, so the repeal of U.S. taxation on those earnings will have a big impact on our income, going forward.

Of equal importance, it also goes a long way toward putting us on a level playing field with our foreign-domiciled competitors who have enjoyed such a tax structure all along. Additionally, our tax treatment will now be much the same as most other U.S. companies including those in the oil service sector. While we are very proud that we've grown and prospered over the last 29 years, even under a more onerous tax structure, it is gratifying, nevertheless, that we will no longer have to do better to do as well as our peers and competitors. While we have not yet quantified actual numbers, Keith will detail in his comments what our perceptions currently are in terms of financial impact of this proposed bill, going forward.

Returning to our earnings, there is much about which to be pleased. Our revenue in the September quarter was up some $12 million over the last quarter, and our net income was up 26 percent over last quarter. Last quarter there was a large gain on vessel sales, further highlighting this quarter's operating improvement. As our overall operating expense number was relatively flat for the quarter, virtually all of the increase in earnings came from better revenue. It is also very positive that we were able to return Gulf of Mexico operations to profitability. We reported domestic operating profit of $2.8 million in the September quarter, up from a loss of $4 million last quarter.

I caution that because of upcoming drydockings with both increased expense and lost revenue, that we might not be able to duplicate this dramatic improvement over the immediate near term. We are, nonetheless, on the right track in the Gulf. Nor would I want you to come away from this call thinking that these results were a fluke domestically, because they simply weren't. They reflect those measures we initiated a year ago to reduce the costs and increase revenue. Nevertheless, the next couple of quarters could be impacted by the usual seasonal downturn in the Gulf of Mexico and, as I've said, a couple of unavoidable drydockings. Keith will detail these numbers in a moment.

An additional item to mention is that our domestic operations were not positively or negatively impacted, thus far, by the recent hurricanes that did damage in the Gulf of Mexico.

Our international results were also up nicely, as international operating profit increased by over 20 percent from the June quarter. No one specific operating area was responsible for the higher profitability. It was simply the result of our boats generating better revenues by putting in more work on better contracts. We have been steadily building and solidifying our international business over the last few years, having laid the foundation when we instituted our vessel new build and replacement program. I believe that what we are now seeing is the result of those efforts. Our international operations this quarter were also improved as the result of moving seven vessels out of the Gulf of Mexico to various international areas during the course of the quarter as we discussed during our last conference call.

Before I turn the call over to Keith, I'd like to underscore one additional recent event. We have taken delivery of the first large anchor-handling vessel from the yard in China. It has left the shipyard and is now in Singapore for final outfitting. It should be ready for work in the near future. As most of you know, this project has been beset by delays, but we have worked through them. I am pleased that delivery of the first vessel has been effected and that the vessel came in on budget. Progress continues with the remaining four vessels. In addition, on the new construction front, we should take delivery of four of our new replacement cost-cutter anchor handlers for the international market during this December quarter, two of which will proceed immediately to nice term contracts. We are pleased with the overall progress made at the various international shipyards that are constructing the remainder of our 10 replacement anchor handlers.

And now to Keith -- Keith.

Good morning, everyone. From the announcement perspective, I would tell everyone that our 10-Q is being filed as we speak. So those with EDGAR access, when the call is over, you should be able to pick up and detail all of the statistical information we provide. I remind everyone that we did put out a press release this morning with an income statement and a balance sheet that pretty well dictates or sets out the results of the quarter, and we did have a recent press release on October the 12th, as Dean mentioned, one where we attempted to inform the investing community of what we thought the significance of the tax bill would be. And getting into this quarter and, in particular, I'd like to say when I look at the numbers there is something in here for everyone.

For those of us on the phone call or for those of you who consider themselves to be a realist, we reported, as Dean said, earnings today of 29 cents. Last quarter we reported earnings of 23 cents. So, from an SEC filing from keeping our books, those are the absolute real numbers. That's a nice 26-percent gain in income from quarter-on-quarter.

For those of us and perhaps including myself who think of themselves as a normalist, a normalized earning saying, you know, last quarter we had an abnormally high gain from the sale of vessels. If one were to take the position that I generally take, that a quarter normalized has about 2 cents gain from sales on vessels, this quarter we would have come in at 27 cents; last quarter we would have come in at 17 cents. That's an even nicer 60-percent gain on income without exceptional vessels sales.

For those who may consider themselves to be a purist and who wants to see numbers without any vessel gains in it, the quarter would have been the same -- 27; last quarter would have been 15 cents, and that would have been an even nicer 87-percent gain in profit from quarter-to-quarter.

And there is one fourth class of those out there who I class as being the "written press," those people -- the daily newspapers, perhaps the "Wall Street Journal," the people who pick up the press release and report year-over-year -- well, whenever you see those numbers, you're going to see, for the same quarter last year, we reported 22 cents. That, compared to the 29 cents of this quarter, is a 32-percent gain. So depending on how you view the company, we either had a gain of as high as 87 percent from operating income, or a realist down to 26 percent. You can't lose in reviewing any of those numbers.

Revenue for the quarter was up nicely once again. Revenue was up to a total of $161 million, about a 7.6-percent increase. I'll break that down in a minute between domestic and international a little better. We were able to hold operating costs relatively flat at the $98 million level as we hoped and projected that we would. We had no change in our effective tax rate. The quarterly rate was the same as the annual rate of 32 percent -- so nothing unusual in this particular quarter from our perspective. Gain on sales were pretty much in line at just about 2 cents with a kind of a normal rate over the last four or five years.

At this stage, I want to remind everybody that when we had this phone call last quarter, and I need to explain this in order that you can better understand the numbers you are about to hear. We told you at that time we were in the process of moving about eight pieces of equipment out of the Gulf of Mexico to international operations. Seven of those pieces of equipment did move. The eighth one, the contract was not canceled, but we were able to, at the last minute, locate equipment within a foreign jurisdiction to take the job, so we did cancel one from moving out of the Gulf and, thank goodness, because keeping it in at the time turned out to be to our benefit. Keep that in mind, because I'm going to report here that domestic revenues during the quarter increased by $1.5 million. They went from $28 million to about $29.8 million, but that $1.5 million in revenue ended up, as Dean mentioned earlier, in an increase in operating income of $6.8 million.

Now, Jeff Platt did a great job, but he's no Houdini in turning $1.5 million of revenue into $6.8 million. You need to understand he did that revenue with fewer vessels and, therefore, the operating cost on those seven vessels is now associated with the international fleet. So a little bit of a reconciliation of the numbers there on your behalf.

Internationally, we did fairly well, but remember we had some additional boats there. International revenues went from $121.5 million up to $131.4 million, or a nice revenue increase of $9.8 million. That was reflected in an increase in foreign operating income of $3.8 million. So not as impressive as the domestic, but, remember, some of the revenue in the costs were the actual shipping of vessels.

Overall, the $11.3 million increase in marine revenues resulted on a worldwide basis in a 74-percent increase of operating income, an amount that increased by $10.5 million over the last quarter. So we have always said on these phone calls and to anyone who would listen that revenue, revenue, and revenue is the leverage within Tidewater. You give me a dollar of revenue; we'll certainly take it to the operating income line and then to the bottom line and, in the future, a little more efficiently with the new tax regime.

Operating costs, in total, came in right at $98.3 million, almost perfectly in line with last quarter. For those who do a 10-Q scrutiny of the operating income, when you look at the components, you're going to have a few questions, because crew costs, as a component of that $98 million will give you a little bit of a startling effect when you look at it. Crew costs were up about 10 percent during the quarter, and so I thought a word here of explanation as to why it was important. First of all, we've all, in the oil industry and the service industry, are aware of union problems in Nigeria. During the quarter we did negotiate, hopefully, a settlement with our negotiations with our union there, and that resulted in a, hopefully, at one time catch-up charge to labor costs.

We also had some Brazilian labor claims that were settled during the quarter that cost us some money, and, more importantly, and on the good side is we have about $2 million to $3 million of increased labor cost here due to increased activity in the country of Australia. We generally don't like talking about individual areas, but Australia is the highest vessel crewing-cost area in the world and, fortunately, a little bit -- that extra cost, which can run as high as $2,000 to $2,500 per day -- is generally reflected in your revenue from country to country. That cost, we generally are able to build it in on a revenue side and on a cost side. So those items kind of make up for it. Our labor costs certainly have not grown by anything equating to 10 percent during the quarter. To somewhat offset that obviously high number was the fact that our safety program continues to pay dividends, our deductibles -- the amount of money that we have to pay for below insurance -- below insurable claims was reduced from prior quarters, and we didn't move as many vessels around the world as we had in the previous quarter. So our fuel and lube costs were down by about a million dollars.

So the $98 million guidance we had given you, came in online, for which we are thankful, and in attempting to give some guidance for next quarter, I think it's prudent to kind of estimate that number moving up in the next quarter, probably to the $100 million to the $101 million range. We're going to talk here in a minute about the four and five new vessels entering our fleet during the quarter. They're not a real reason for that. Those vessels will have very little effect on financial results of the December quarter, but won't really enter the earnings stream until the March quarter, but we just think that -- you've heard some reference to increased drydocks here domestically. We think it prudent, for future projection purposes, to think more in line in terms of $100 million and probably to $102 million -- somewhere in there.

Depreciation for the quarter increased a little bit. We didn't have very many vessels enter the fleet in the September quarter. We had one small crew boat, but in the previous quarter we had had substantial fleet additions. We think the number that we reported for the quarter, that when you see it, which was about 24.7, will move up into the 25 to the 25.1 range. The drydockings for the quarter are kind of scheduled to be flat, quarter-on-quarter but, unfortunately, for Jeff and the domestic operations, a disproportionate pro rata of those will be conducted in the United States.

Of note, and, once again, as you can tell, it's obvious when one holds costs steady, it increases revenue. We've had our best quarter-on-quarter year-to-date cash operating margins -- the best quarter that we've had in a long time. Cash operating margins increased during this quarter to 39 percent from last quarter, where they were at 34.2 percent and a year ago when they were at 34.7. So, once again, the importance of holding costs steady while growing your revenue numbers.

Looking at a little more of the actual statistics of the fleet and the makeup of utilization and day rates, first going through some domestic numbers, and these are all, obviously, included in the 10-Q as filed. Our deepwater fleet in the United States during the quarter was reported at six on the average. Today it's five that's due to one of those deepwater vessels having left the Gulf late in the quarter to go to an international assignment. So we are reporting six for the last quarter but in kind of modeling the December quarter, you should drop it to five.

Day rates held relatively flat in the Gulf of Mexico during the quarter. Remember, these are average numbers where we are reporting an average deepwater rate of $12,575, a comparable number in the June quarter with $12,675 so, actually, a loss about $100 on the average. To date, the average current rate for that equipment is about $13,050 but, more importantly, utilization in the June quarter was right at 75 percent. We're reporting 94-percent utilization for the September quarter and are running right at that number, to date -- 94 percent being effectively about the best you can do in this business. Time off between jobs, time off a little bit repair work -- so that division doing pretty well, and you can see some increase in day rates there.

Our supply and towing supply division in the Gulf -- the number of vessels held study at 50 and is holding steady at 50 for the coming quarter. We have seen a nice little tick up in day rates during the quarter. For June we reported $5,570. Today we are reporting a June average right at $5,800, and we are reporting, today, activity at about the $6,200 level. Utilization picked up at the same time a little bit from the previous quarter. We reported 50.7; for the September quarter we are reporting 54.6 and are running at about 55 percent, to date. Once again, pretty much full-out utilization except for the 15 supply boats that we continue to have stacked that are included in our statistics. The increase in day rates, Dean will probably talk about a little bit more, but the mix of fleet kind of stayed the same from the older 180s to the newer 220s, and the story you're going to hear is pretty much rate increases, pretty much across the board, of all of the different types of equipment that make up this class.

Switching to the international sector a little bit more -- our deepwater fleet, where we reported 31 vessels during the quarter and, going forward, we will report 32 -- that's the one vessel that moved from the Gulf. Average day rate was down a little bit. Average day rate that we reported in the June quarter was $12,700. In this quarter we are reporting an average rate of about $11,850. And, as we speak today, that's back up to about $12,200. You will hear in my statistics that we kind of took some lower day rates in order to get the utilization factors up, realizing that, you know, utilization generally drives day rates in the final say-so. In the June quarter we reported utilization for that deepwater fleet of 72.6 percent, while the September quarter we're reporting 88 percent and today we're continuing to run at the 89-percent to 90-percent level which, once again, is almost effectively full utilization of our deepwater fleet for around the world in many different jurisdictions.

The real, once again, backbone of our international earnings capacity, our supply, including supply fleet, has held steady at 198 vessels for the quarter and going forward. And, once again, some small pickup here in day rates, where in the June quarter we reported a day rate for that class of $6,050. For the September quarter, we are showing a pickup in reporting about $6,200, and we're still at that point. We're at about $6,250 today. Utilization in that class was absolutely flat during the quarter. In June we reported 68.7. For September we're reporting 68.5, and today we continue to run at the 67 percent level. So you see here that the pickup in day rate is meaningful because it's over a number of vessels, but the one area of the report today where we are lagging is the statistics in this supply and towing supply class on an international basis. Utilization has not picked up on that class to any noticeable significance around the world.

Flipping a little bit to our balance sheet -- long-term debt at the end of the quarter stood at $80 million. That, on top of stockholder equity at $1.4 billion leaves us with a debt-to-total-cap ratio of 21.5 percent basically unchanged from previous quarters. It means we're doing a pretty good job of paying for all of our new construction with immediate cash flows.

To bring you up to date on the new construction a little bit -- as Dean mentioned, although we took physical delivery of the first big anchor-handler from China, in our statistics we did not treat it as being delivered. It is in a different shipyard, it is being outfitted, it will enter the statistics in the December quarter, along with four of our new mid-size anchor-handlers. So in this quarter we will be adding five pieces of equipment. One of those will go into the international deepwater statistics; the other four will go into the international supply, towing supply class. Our new construction program, as it stood on October the 1st, was we had 20 vessels under construction. They represented a value of $314 million shipyard cost of which $209 million had already been funded. So, once again, we continue to get the bulk of the current commitments behind us.

For the balance of this fiscal year, for the March '05 fiscal year, we expect to take delivery of eight vessels. That's the five vessels that we just mentioned. We will take two more anchor-handlers in the March quarter and one crew boat, and over that six-month period of time the cash commitments are about $57 million. That leaves us with a mere $48 million of funding for an additional 12 vessels to be delivered in the '06 fiscal year. That's made up of an additional seven anchor-handlers and five crew boats. So you can see, 20 vessels left to be delivered. We're way ahead of the game in paying for them. It's going to be a nice addition to the earnings capacity of the company, as those get delivered into the fleet.

One final aspect of my comments today was I asked Dean to kind of let me do a little bit of talking on the new tax law, and having joined Tidewater 28 years ago in the tax department, you can well imagine that it's a subject that's near and dear to my heart, in particular. I have to immediately agree with Dean's comments that, from my perspective, it certainly is one of the most significant financial events in recent history at Tidewater. It certainly has to be gauged in significance up there with the combined new build construction program of over 100 vessels and almost $1.3 billion of costs. So those two events are certainly the noteworthy ones of Tidewater's recent history.

In trying to explain the significance of the new tax act today, I came across some testimony where an executive of one of the U.S. shipping companies before Congress in trying to help get some onerous provisions removed, when asked to describe the tax system, he said from his perspective it was similar to playing a game of Monopoly. He said, "Can you imagine that you and your competitors, for some 29 years, are running around the board, and every time you pass 'Go,' you collect $200. But, unfortunately, for the U.S. competitor somebody called 'the tax man' reached out and grabbed $70 of your $200." So he said it was not a game you could play very long with much of an intent to win. So that's our kind of view of it, and I thought that explained it in a pretty good fashion.

I want to tell everybody -- to remind everybody -- this is not a special-interest provision. The shipping industry did not go to Congress and say, "We want some special provision," or "We want some special tax rates." We went to Congress, and we asked for relief from what had been onerous provisions and asked to be given a level playing field with the rest of the industry in the United States and, in particular, our competitors on a worldwide basis.

Tidewater, kind of, the history since 1986 -- we have had no ability to not pay taxes. We have had no ability to reinvest earnings in foreign markets in any type of assets. Since that point in time, the bell rings every March 31st, and worldwide earnings, regardless of where earned or regardless if earned by foreign subsidiaries or U.S. subsidiaries, it has been immediately taxable. Therefore, the 32 percent to 35 percent tax rates and the magnitude of our cash tax payments, you know, that's been the driving force behind Tidewater. Unlike the guy in Washington who used the Monopoly analogy, I'd say I used the headache analogy. We've all heard in our lifetime that the best thing about a headache is that it feels so good once it's gone. That's kind of where I am. I think we've been relieved of a headache.

To get down to the economics at Tidewater, what does this really mean for Tidewater? I want to try and explain right quick here and get off the phone. The difficulty that we have in giving you absolute guidance -- I know that the analysts who follow the company and the analysts who follow the company in their numbers from their own investment, they want to know what kind of tax rate can we rely on in the future? Well, remember, this bill is basically saying that foreign earnings of foreign subsidiaries need not be taxed currently if they are reinvested -- not even reinvested -- if they stay overseas. With our shipbuilding program going on at the moment, our ability to keep foreign earnings invested in shipping assets overseas is beyond a doubt. We will have a substantial amount of earnings that will certainly be reinvested internationally for the foreseeable future. That's the easy part of it.

In our foreign operations, though, as we have foreign flag vessels operating foreign, we've got foreign flag vessels that are owned by U.S. companies operating foreign, and we have some U.S. flag vessels that are working foreign. U.S. companies will still be taxed currently on their foreign operations. Our U.S. flag vessels, if they work overseas, will continue to be taxed. You might ask, "Well, why would we do that?" We do that because with the hopes and the belief that the Gulf of Mexico market will one day return. So the cost of having some insurance, the cost of having equipment available to return to that market, will be to keep the U.S. flag on it, even while it's working foreign in the hopes that one day we will be able to bring it back and effectively use it in the United States. That's one way of protecting against over-capacity in the United States and the cost will be taxation in a situation where you otherwise would not have been taxable.

But someone says, "Tidewater, break it all down. Tell me what's your effective tax rate for next year," and in doing that, I throw it right back in your laps. I ask you to tell me where am I going to work next year and how profitable am I going to be there? It's best to say that we will have a blended tax rate. Hopefully, the domestic market will return to its historic levels of making up one-third of our income. If it does that, and today it doesn't, but, at that point, it will be fully taxable at 35 percent. When I get to international earnings, I need to ask you which country will I make it in? We have very significant operations in foreign countries where we pay zero tax. We have significant operations in foreign countries where we pay 20 percent or 30 percent tax on income, and in some foreign countries we pay a tax deemed on -- it's a "D" (ph) profit that you pay on gross. So from year to year-to-year, it's going to be a very difficult situation to give guidance as to what we think it's going to be.

It has been easy for Tidewater and other companies to say, roughly, to start with 35 percent of world earnings from a tax rate and tell you we think we can save a little bit and come out with 32 percent -- not so easy in the future. We try to give some guidance that says historically we've paid about 18 percent effective tax rate in foreign countries, but I remind you that's historical fact, but we've been under no benefit, we've been under no pressure to attempt to keep foreign taxes down in the past. It didn't matter if I paid 18 percent or 22 percent in the UK, because that same dollar was going to be topped off up to 35 percent in the U.S. I tell you, our life is a little more difficult. We're certainly happy that it's more difficult, under the circumstances, being forced to kind of give some guidance for the first fiscal year, and this is effective for us on April the 1st. We would hope to be able to restructure our foreign operations; we would hope to have some profitability in the Gulf of Mexico. I certainly think, kind of, starting off with a conservative tax rate in the 20-percent to 25-percent range for that year is my best guess at the moment, with about 12 caveats lined up behind that.

So knowing people wanted something, that's about the best I can do today, and as we get closer to next year, as we go through our budget and get a better feel for where we're going to earn our earnings next year, we will give you the guidance as soon as we can. So it's an exciting time. It certainly has tremendous future benefits for this company when the president signs it, but the ability to quantify it right now is somewhat limited. Back to you, Dean.

Thanks a lot, and I would re-emphasize what Keith said. You know, this isn't a giveaway of the U.S. Congress to our industry or the shipping industry. To the contrary, it's a situation where we're being allowed, for the first time in a long time, to compete on a level playing field rather than having to run uphill against our competitors in international operations. So, Keith, that was a nice job.

As you've seen from Keith's review, we have a good reason to be positive about our operations, going forward. While the pace of new work has not picked up enormously, our international business continues to improve, and we have done our best to position our vessels to take advantage of slow but steadily increasing business. As I said to you last quarter, I believe that utilization pickup and day rate increases internationally will most likely continue to occur slowly. We are, nonetheless, pleased that the rise we have seen in earnings seems sustainable.

As many of you have heard on conference calls this quarter from drilling operators, several markets, including West Africa not including Nigeria, the Middle East and Southeast Asia continue to strengthen and will continue to be positive for Tidewater. On the neutral side, Nigeria continues to be a depressed market and is dealing with civil strife and labor matters that have slowed their recovery.

While the domestic market remains problematic, we will continue to focus on keeping our fleet ready to take advantage of any upturn that occurs. Utilization and day rates for our core fleet are inching up, and we have had very good results from our larger vessels in the Gulf. We are evaluating at this time whether to add incremental vessels to our active fleet by removing vessels from stack. This decision will depend upon our evaluation of both the drilling and the construction markets.

In sum, I believe that this quarter's results have begun to show the results of our work building a solid core of vessels that will lead Tidewater into the future. We will continue to work to improve upon this new foundation and look forward to working to sustain and enhance the earnings growth evidenced this quarter. And now I'll be happy to take your questions.

(OPERATOR INSTRUCTIONS)

Your first question comes from Jim Crandell with Lehman Brothers.

Good morning, Dean. Dean, can you talk about the differences in rate improvement by types and class of vessel as well as geographically and generally what you're seeing in the market?

Jim, I can. I guess I'm a little bit loathe to do it for competitive reasons, but, in general, I mean, what's happening, I think, is that the newer vessels, the ones in which we've made a substantial investment in the recent years and for which, you know, we've received a lot of criticism. A lot of people have said, "Well, why don't you just pay that money in dividends and buy back stock?" We felt like we simply had to renew our revenue-generating capability -- those would be first because they're doing best.

And then, depending on which market and the availability of equipment in that particular market -- as those markets tighten, you know, we have opportunities to move rates in some places better, in some places not so well. So I think that generally answers your question, but I won't get into specific classes or areas because I'd rather let people figure that out.

Okay, Dean, can you address the general trend you're seeing in industry-wide new supply vessel construction? If you were to look at the industry over the course of this year and look at new-vessel orders from the industry, what would you note from looking at that?

Well, not much is occurring in the North Sea; not much is occurring here in the United States. There is a fair amount occurring in the Far East, and that would be occurring in sort of the mid-size range, and so that describes what we're seeing. Does that answer your question?

Yes, and let me follow-up -- if you were to say amount of new capacity added '04 versus '03, where would you say it would be in rough percentage terms industry-wide?

This is Steve Dick, and Dean asked me to -- I would say industry-wide, it's a bit less for 2004 than 2003. I'm talking about international -- and right now, with the order books, as Dean indicated, the Far East is the place that is placing a lot of orders and looks to be putting about the same amount of equipment, maybe a little bit more into the market, going forward from here.

Okay, and if you looked at the fleet in terms of numbers of vessels, not necessarily adjusting for vessel size, what percent of the fleet would you say has been taken out of service over the course of '04?

I don't know that -- we don't -- you know, Tidewater's information I can talk about a little bit, but other people, what they're doing and what they're taking out of service, we really don't have any way to put a number on that.

Jim, in terms of percentage, it's hard to say, but I think the fact that our utilization and rates are -- in the towing supply vessel, as Keith pointed out, our utilization is flat, but rates are going up, and in the other classes, our utilization is going up, and our rates are going up. So that should tell you that more is falling out than is coming in.

Okay. Just, in general terms, Dean, do you see other companies following your lead to any significant extent and taking older supply vessels off the market?

No, but, you know, there are a couple of companies -- one may be for sale, and one is reorganizing in bankruptcy, and how exactly their equipment is going to remain in the market is unclear. But I would say that in each case it's going to be positive for the industry.

Okay. Thank you very much.

Your next question comes from Ian McPherson with Simmons and Company.

I wanted to talk to you about the vessels that you've impaired over the prior year -- the 83 or so. What's the (indiscernible) with the number of disposals from that number, and where do the, sort of, the scrap metal and your sale values stand today with respect to moving some of those old boats out the door?

Ian, today of the 83, we have 83. We have not changed the position of the company one iota. Those vessels are still highly unlikely that they would ever return to service. We continue to maintain about 15 somewhat similar but up-spec vessels in cold stack. So with scrapping numbers and with potential sales on the vessels, we are a little bit more active now in the marketing of them, looking into opportunities, but we certainly have not just given up on the FAC (ph) and started accepting $25,000 to $40,000 for a scrapping number, which is what the market is for that type of equipment, to date.

Remember that when we wrote down the fleet, we wrote it down to an average of about $120,000 per vessel, and we certain believe today that the liquidation value of those 83 vessels is probably still in line with that number, even though we haven't disposed of any of them.

Okay, thank you very much. Moving sort of back for a moment to the capacity situation in the Gulf of Mexico -- it sounds like that's tightening, and day rates are reflecting that and unstacking is maybe getting to be under consideration for that market. Are we seeing it dwindling now of boats migrating out of the Gulf to international waters?

I'll ask Jeff Platt to take that.

Thank you. Tidewater, in the quarter that we just finished, we moved some vessels internationally. There were some other operators that have done the same thing. Those deals were probably in the works and consummated before the quarter. At this point, I don't see a large continued exodus out of the Gulf of Mexico. Things seemed to be in very fine balance today with the number of vessels operating and the amount of activity out here.

What's interesting, though, Ian, is that the rig count is just flat as it can be. It's 87 on the Baker Hughes count, and so that -- Jeff's and my numbers are -- in spite of the fact that the rig count has just been flat.

Okay. Do you see the shift towards deeper water deployment continuing for your boats into the next several quarters?

No, actually, I think we're going to see the increase is going to be more on the shelf side. The deep-water equipment is pretty much matched with the rigs that are here now. There are some other rigs that may be coming in, not a whole lot, but I look more at the shelf activity is really where -- and I'm cautious to use the word "growth," because I think the big problem for the Gulf of Mexico is where do the rigs come from? But I don't see, incrementally, a lot on the deep-water side, moving forward.

Great, thank you. That's all I have.

Your next question comes from Ken Sill with CSFB.

Good morning, guys. A couple of question -- I wanted to follow up on the capacity side. I had heard a rumor that there was a fairly large $200 million to $250 million order pending in a Norwegian shipyard, and you guys didn't say anything about expanding or extending your new build program. What are your plans in terms of the fleet replacement and new build program post what's on the schedule right now -- the 20 vessels?

Well, we sort of look at that -- what our plans are, we look at that sort of every year, Ken, and decide -- we have said, for a number of years, that, barring an acquisition, we would look at somewhere between $150 million and $200 million in new equipment on a go-forward basis, but that would be reviewed in an annual basis. So we're in the process of that review, and probably for some competitive reasons, again, I probably won't say exactly where we are on that.

In terms of the big order in Norway, I think that's for a couple of very specialized vessels that are probably related to ice-breaking, supply vessels that will work in Sakhalin Island off of Russia, and the cost of those vessels is very significant, and so it's not a big number of vessels; very specialized, and they will be relegated to one market from which it would be difficult to move them.

And then a follow-on there -- North Sea has never been a big market for you guys. It sounds like that market is going to be a little bit more active next year. Is that still going to be an area where it's just not one of the Tidewater core areas? You're not really looking to expand there?

Well, you know, a lot of the equipment that we're building can move in there quite nicely if the market gets better, particularly the boats in China and some of the replacement cost-cutting anchor-handling vessels, they could work there. And certainly the large BSVs that we built or bought -- they can work there. So we're glad not to be there right now because it's not much of a market, but if it does improve, as is advertised, we're not seeing it yet. I've told some people on the road that I don't see it until next spring, maybe, and then maybe next summer, but if it does improve, and it tightens up, we've certainly got equipment that can work there. So I hope it does improve. That will also lessen the tendency of some people who have gotten desperate up there to leave, we could probably keep them at home. So I hope those are prognostications of profit.

Well, yeah, I mean, I agree with you on that, because most of these high-dollar rates you're seeing for the rigs are actually not for contracts that start until next year, late Q2, Q2, so that's consistent. I kind of half expected to see a little benefit in late Q3 and maybe into Q4 in you all's end of the business for repair and maintenance and stuff after the hurricane. You guys said that didn't really have any impact. Does it have any impact on this quarter's utilization or activity?

You say this quarter -- this past quarter?

No, the one we're in right now.

I think a lot of the repair work -- the operators are still evaluating how bad the damage was and lining up the remedial activities, but at this point the activity that we think is going to remain very good at the levels we're at in the Gulf, we don't see, incrementally, a whole lot from the storm damage for Tidewater.

Okay, and then I'd read somewhere -- was it Port Fourchon has been stilted up a little bit so some of the bigger boats can't get out fully loaded? Is that true? Is that impacting -- that's not impacting you all at all, is it?

It would impact our operators in the fact that we would have some limitations on the cargo capacities on the vessels and, of course, that wouldn't be just Tidewater -- that's to all deep-water fleet that moves in and out of Port Fourchon.

But have you seen it?

I don't know. I honestly can't tell you that I've seen that.

Ken, I haven't heard of it. I do think, though, that it does point out -- I mean -- a hurricane hitting Port Fourchon could be really, really detrimental to the industry as a whole. I mean, you've got one two-lane road going there, and a lot of the deep-water activity is serviced out of there. So it just points up sort of the fragility of the infrastructure as it's presently constituted. But we're not seeing -- I've not heard of any lessened ability to load cargo on any of the big boats after the storm.

Okay, I'd just seen that one line on it, and then never heard anything after that. A final question -- the brokered vessel revenues were down. I know that number is kind of hard to predict, but this is, I guess, the lowest quarter since Q2 last year for you all. Any visibility to what's going to happen there?

But, Ken, look at the ratio of other revenue to other cost. The revenue was down because we had one special project in West Africa. One of our big boats was acting as an accommodations unit, a floating hotel, so to speak. We had a nice job that lasted 150 days, and the job kind of completed right at the end of the quarter or earlier in the quarter. So that's where it was from. It wasn't the world's most profitable operation. Once again, kind of, other marine revenues over other marine cost runs -- $1.5 million, $2 million net per quarter -- and the shipyard, whenever it closes out a job or whenever it does third-party work, kind of flows through that number also.

And we also had a vessel, a North Sea deep-water anchor-handler that we had chartered in to front-run a job that we were doing in West Africa, and that finished in this quarter.

So this is a, you know, the number will probably be a little bit lower, going forward, than what you did this quarter?

We're certainly off the $8 million number that we did in June. We're back into $4.5 million to $5 million.

That's still about a $1.5 million -- $1 million to $1.5 million of contribution out of that business.

That's what we hope for. Historically -- that's like my gain on sales. That's about the number we would expect.

Okay, all right, thanks, guys.

Your next question comes from Pierre Conner with Hibernia Southcoast Capital.

Good morning, everybody. I'm glad, Keith, the tax issues are near and dear to your heart.

Somebody's got to give a darn.

Keith, anything you would see -- associated costs -- with any of the restructuring you might consider to maximize the efficiency of that change?

We will incur some money. Two things going on -- I omitted it when I went through it -- and not to change the subject -- I'm actually pretty proud of us, when you look at the G&A line, because it's flat, and on every conference call and every corporate executive you listen to today, all you get is bitch, bitch, bitch about the cost of Sarbanes-Oxley and Section 404 reporting. We are no different than anyone else. We are far advanced in that process. We have been able to utilize to a major extent internal sources, but the audit itself is a half a million dollars over the course of the year. So, G&A, we're doing a pretty good job. Yes, one can imagine the reaction to your question -- one can imagine the reaction of the Internal Revenue Service. Two-thirds of our fleet today are made up of vessels that have an international flag on them. One-third is made up of U.S. flags. We are going to attempt to do our darndest to take those two-thirds and, by April the 1st, in some form or fashion, move them into a structure that is non-taxable.

Obviously, our boys and girls from the Internal Revenue Service are going to scrutinize that transaction every way they possibly can, up and down, because it's their last bite at the apple. We are going to have to get appraisals to support some inter-company sale numbers, which will have no financial effect, but from a tax perspective they're going to want to look at, we're certainly going to want the best tax advice we can get. Just the re-documentation of 150 vessels from one owner to another is going to be a monumental task. I don't have an estimate for you. I talked to Dean about this yesterday, but it's certainly a cost that we're going to be delighted to incur. We're not going to short-change it. You'll see it in the fourth quarter. You won't see it in the next quarter. We're going to be doing our planning over the next 90 days. I view this as having six months to undo 29 years of tax planning. So the first three months we're going to think a lot, and the last three months we are certainly going to work a lot.

So you'll see a bump-up, and by the time we give you guidance for the fourth quarter, we'll be a little bit better, but maybe $250,000 to $400,000 -- just a real number.

I understand, and I completely appreciate the money well spent and hard to quantify, but I just wanted to verify. Thank you. And then if I could get a couple of numbers from you, Keith, on the current utilization and rate on two other classes -- domestic crew?

And I am happy to give you those. I skipped them, but --

-- and tugs.

And if one is looking for a real --

Do you have to give the tugs?

I'm wondering what's going on there in terms of the big moves and a lot of stuff getting to the shipyard. Was there any activity right there at the end?

Well, let's go to the crew and utility where we had 20 boats during the quarter. We have 20 going forward. The one contract that got canceled internationally, by the way, was one of our larger crew boats. So it played right into our hands here. In the June quarter we reported utilization of 68 percent and a day rate of $3,035. For the September quarter, we're reporting utilization of 80.3 percent and a day rate of $3,357, so a 10-percent increase on the day rate, and a 12-percent increase in utilization. As we sit here today, we're closer to $3,450 on the average day rate and utilization at 90 percent. The only non-utilization in that class is between jobs. Those boats are very, very active, and the only time is a day here, a day there, or some repair time.

Tugs in the Gulf of Mexico -- we did sell -- we sold one -- no, we moved one internationally. It went from here, probably, to Mexico. We reported 19 during the quarter. We're down to 18. Day rates moved up a little bit. They went from $7,385 in the June quarter to $7,565 in the September quarter, and utilization was almost flat. We reported 28.6 percent in June and for September we're at 28.3. And that's the class of tug -- that's the class of boat that if there were a lot of construction hurricane insurance work, we would see it in that class. A lot of that work is being done by tugs and barges as opposed to supply boats, which are pretty well tied up in the oil and gas business today, as Jeff said. There's such a good balance in the offshore supply fleet, that if there was a real one, this is where we would see it. We didn't see it. We saw a small pickup in day rates, so not much of a change for us there.

And no change currently then?

No change -- day rates are still roughly at $7,000, and utilization 26, 27 percent. That's one that changes weekly. You send two tugs out, it's meaningful.

Thank you. And any quantifiable utilization impact during the quarter -- those seven boats, Dean or Keith, that were in transition?

They all (indiscernible) up flat. They were working here in the Gulf -- oh -- what were the effects in the statistics? Utilization in both areas was probably okay, but statistics in both areas are not totally valid. Those boats moved throughout the quarter. We had one moving the last week of the quarter; we had two move at the beginning of the last month. So the international and the domestic statistics are a little bit skewed as to what the next quarter would be in comparable to the previous, but they had all moved. And when I gave you the go-forward numbers, the go-forward numbers as we exist today, no more movement is planned at the moment.

Great, thank you. And then, Dean, going back to -- and I think maybe Jeff spoke of -- we were talking about watching carefully on the shelf, and there's a lot of discussion about deep shelf. It seems to me there's going to be something that occurs with the intensity of support. So any perspective on boats per rig, you know, as we move towards deeper drilling. You know, I can't imagine how many boats it takes to put 30,000-foot casing string on. What do you think is a -- is there anything happening yet, and do you see something occurring there?

I'm not hanging our hopes on that. If it happens, it will be very nice. But, you know, there's been a fair amount of talk about it, but not much walk. I think there are only about 40 rigs that can drill deep shelf wells in the Gulf. I think only about 20 of them are actually drilling deep shelf wells now. That it means you could have, conceivably, if that became a profitable endeavor for the operators that conceivably 20 boats could come off of the shallow shelf, go into deep shelf drilling, they'd have to be backfilled by 20 rigs -- boy, there's nothing that we'd like to see more. But, really, I'm not seeing it yet. What it's going to take, I think, is a couple of operators to have some really nice success and, so far, we've not seen it, but one would think that if the oil prices and the product prices that seem to be not only for today but for the foreseeable future, that there will be more activity on the deep shelf, and when it happens, we will be ready for it. We've built equipment for it, and it will be nice to see.

And kind of further on maybe the mix issue as much domestically -- as the bigger boats have potentially left or moved to deep-water, if you consider boats coming out of stack, as you think through that, is there a multiplier effect that requires -- or is it just a one-for-one? Does that make sense?

Well, certainly, the capacities of one larger vessel today, you're looking at two, three, four times the size of what is a traditional 1E (ph). But, again, I'm not so sure that you're going to have that knock-on effect with a number of vessels coming out. The deeper water fleet, I think, again, is pretty well matched up with a lot of the deep-water rigs that are here. I don't see a whole lot more migration of the very big vessels moving off the shelf, because, quite frankly, I don't think they were doing a whole lot on the shelf to begin with.

One thing I would ask you to keep in mind, Pierre, we have a number of U.S. flag vessels that were built for this market. They are of higher capacity that are presently working in lucrative contracts outside of the United States, and we can bring those back. We'd have to backfill them with other vessels, some other vessels that we're building in foreign shipyards. It would certainly be a possibility, but we've got equipment that we can bring back to this market when we feel that the time is right. So if the deep shelf takes off, we'll be ready to service.

Okay, one more quickly, then, on the international side, Dean. Brazil, some high-profile FPSOs sailing soon -- is there any incremental support vessel requirements there? Or is that just enough within the mix of what's already there? Will they be bringing boats into the region, I suppose?

Jeff Platt also runs that part of the world. Jeff, would you like to spot?

Well, certainly, Brazil has been and remains one of our key areas for Tidewater. We've been very fortunate to do well down there. The FPSOs that are coming in, I think you will see more of an upgrade in some of the existing fleet -- not exactly an increase in numbers but an increase in the mix of vessels in Brazil.

Great, thanks, Jeff. Thanks very much, guys, I'll turn it back.

Your next question comes from Kevin Pollard with RBC Capital.

Most of my questions have been answered here, but I did have just a couple of more quick ones. First of all, you referenced some drydockings coming up in the next quarter in the U.S. I was wondering if you can kind of give us an idea of what the impact -- you know, how many boats you're planning on doing and what the impact on utilization might be?

I'm getting a shaking head here. Our regional manager doesn't want to give that information out.

My next question -- not to keep harping on the Gulf of Mexico, because I realize it's a relatively smart of the business these days, but since you are at basically 80-percent utilization of your unstacked fleet on the supply boat, I'm wondering what your thinking is as far as when you might -- what sort of level of utilization you might need to start unstacking those 15 boats, and what the costs to unstack those boats are?

Well, the cost will be about $0.5 million per unit, roughly, and at what level of utilization -- Kevin, I'd like to tell you, because I know that would be useful for your model, but that's something that we're not going to telegraph, and we're going to do that when we see fit, and we won't telegraph our funds.

Well, I kind of thought that was going to be your answer, Dean, but I had to ask the question. One last one, just for Keith -- on the tax bill -- based on my understanding of it, you know, there are a number of manufacturing companies that are going to have the opportunity to repay foreign profits one time at really low rates, like, 5 percent and some change over the next one or two years. I was wondering -- does that apply to you guys as well or is that limited to manufacturers?

It would apply, but you weren't listening, and I don't mean that derogatory, please. Since 1986, we have had zero opportunity to earn money overseas and not bring it home. We have no foreign earnings that are locked up in foreign accounts that have never been taxed. So the opportunity for us -- the tax law applies to anybody, basically, as I understand it. It was written for a very few people -- perhaps Dell Computer, perhaps Microsoft who have got billions and billions of dollars of cash overseas. They have had the opportunity to leave their money overseas; to either invest it in any business they wanted, or to bring it home and, literally, in dealing with Congress, they just said, "Guys, we'd like to bring home $6 billion. We'll create jobs here. We're all going to get positive press out of it, but it's going to cost you something. Let me bring it home." So they get a 5-percent tax rate to bring that money home. Once again, that's our whole point. We haven't had that playing field. We haven't had those opportunities. So it applies to us, but there is nothing in it for us.

Okay, thanks a lot. That's all I had.

Again, if you would like to ask a question, please press star followed by the number 1 on your telephone keypad. Your next question comes from Bo McKenzie with Sterne Agee.

My questions have been answered. Thank you very much, though.

Your next question comes from Joe Agular with Johnson Rice and Company.

Good morning. Keith, I missed what you said the current spot rate was for the domestic deep-water supply.

Well, let me see my numbers so I'm not inconsistent here. The number right at 13,000 -- 13,050, I might have said. I've got a printout here -- 13,050 is the number I think I said, and we're running right at 94 percent, and Jeff Platt is saying that that was a current number when this was printed. If he were turning over a vessel today, it would be slightly higher than that.

Okay, so that -- I guess on a percentage increase, it seems like the biggest increase from your second quarter average to spot today is in your domestic supply vessels. It sounds like it's up, like, $400 a day, on average, so far?

Yes, but remember what that is. That's a mix. That's 10 of the old 180s, and that's all of our new 205s and 208s and 220s, so that's across the board pretty much from all of those. Don't read the average today of $6,200 as being the 180s or being the big boats. We've got our stretch boats in that; we've got our new boats in that. So if you need more information -- I'm not sure Jeff wants to give you any by class, but $6,200 across the board there.

That's fair. I know the number bounces around depending upon mix, but I guess I was just trying to --

But that is about a 20-percent increase. The real story in the deep-water boats, as you know, is once utilization gets to 94, 95 percent, once Schwess (ph), once Hardback (ph), once Diewater (ph) reach that point, then the natural progression from that point forward is the day rate side of the business.

I think one other point, too, on the deep-water side, the one vessel that came down in that class that went international was one of our very large supply boats. That's the very high-revenue boat. So taking that down, percentage-wise, you're going to see a decrease in the day rates.

Okay, well, in terms of deep-water, overall, though, I mean, it is obvious that you had a rig contractor yesterday or whenever it was, announce that they were bringing a rig out of stack. Is the fleet there to serve the rigs that are coming out?

Yes.

Thank you.

There are no further questions at this time.

Well, thank you, everyone, for your attendance to our call today, and we thank you very much also for your interest in our company. Be well.

Thank you for participating in today's Tidewater conference call. This call will be available for replay beginning at 2 p.m. Eastern time today through 11:59 p.m. Eastern time on October 22, 2004. The conference ID number for the replay is 1032025. Again, the conference ID number for the replay is 1032025. The number to dial for the replay is 1-800-642-1687 or 706-645-9291. Again, the number to dial for the replay is 1-800-642-1687 or 706-645-9291. Thank you, you may disconnect at this time.