Tidewater Inc (TDW) 2009 Q1 法說會逐字稿

Good afternoon. My name is Michelle. And I will be your conference operator today. At this time, I would like to welcome everyone to the fiscal 2009 first quarter earnings conference call. (OPERATOR INSTRUCTIONS) After the speaker's remarks, there'll be a question-and-answer session. (OPERATOR INSTRUCTIONS)

Thank you, I would now like the turn the call over to Mr. Dean Taylor, Chairman and President and CEO of Tidewater. You may begin your conference.

Michelle, thank you very much. Good morning, everyone, and welcome to Tidewater's fiscal 2009 first quarter earnings results conference call, the period ending June 30th 2008. As Michelle said, 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 Executive Vice President and Chief Financial Officer; Joe Bennett, Executive Vice President and Chief Investor Relations Officer; Steve Dick, Executive Vice President in charge of strategic relationships, ship yard operations, vessel acquisitions and dispositions; Jeff Platt, Executive Vice President in charge of day-to-day marine operations; Bruce Ludstrum, our newly named Executive Vice President, General Council and Secretary; and Quinn Fanning, who will be assuming Keith's CFO role upon his retirement, previously announced to be approximately at the end of September.

We'll follow our traditional format this morning. I'll start the call with some comments about our earnings results released earlier today. Following my brief remarks, I'll turn the call over to Keith for a detailed review of the numbers as well as status reports on our new build and vessel replacement program, and our stock repurchase activities. I'll then return with a discussion with our view of our markets and a review of our strategies. We will then open the call for your questions.

At this time, I'll ask Keith to read our safe harbor statement and then we can get started.

During today's conference call, Dean, I, and other Tidewater management may make certain comments and statements which may be considered forward-looking. I know that you understand that there are risks, uncertainties and other factors that may cause the Company's actual future performance to be materially different from that stated or implied by any comment that we may make today during this conference call. Dean?

Thanks, Keith. Earlier this morning we reported $1.64 in earnings per share, up $0.09 from last year's comparable quarter and flat with our March 2008 quarter. Reported earnings exceeded the latest first call consensus estimate of $1.52. We expected, and had advised, that this was to be a transitional quarter. Solid in respects, lumpy in others.

As you know, we traditionally report gains on sales of vessels since we continually sell older vessels from our fleet that have been or will be replaced through our fleet renewal program. This quarter, about $8 million of the $10.4 million of gains we reported was above the normal quarterly rate of about $2.5 million per quarter that we had been realizing in recent years. Excluding these above normal gains, we still beat the street consensus estimate by a couple of pennies. On the other hand, the revenues rose nicely, industry-wide challenges with costs kept us from being an even better quarter.

Keith will walk you through all of the numbers. Before he does so, let me make several other points, some of which I will elaborate upon later in the call. First, our safety performance was improved in the quarter as we experienced no loss time accidents. There were no significant incidents in the quarter, in contrast to our unsatisfactory experience last year. We're thankful for the safety of this improved safety performance as it is more consistent with our long standing historical performance of providing the safest possible offshore work environment for our employees and our customers. I commend our management and our crews for a job well done, despite daily operational challenges in tough environments.

Second, we're happy to report that all 11 of our crew members were recently released unharmed following more than 30 days of captivity in Nigeria. Our vessel, on the other hand, was ransacked and damaged by the militants, but it is currently being repaired. While this was a very unfortunate event, it highlights the operational challenges we in the oil-field service industry confront working in certain geographic regions around the world where oil and gas activities are conducted. We would like to think that these events will not be repeated, but we remain diligent because of the risks inherent in certain countries where we work.

Third, our Board of Directors has just authorized a $200 million share repurchase program to replace the $250 million program just completed during the June quarter which Keith will detail. Tidewater utilized the entirety of the previous $250 million share repurchase authorization and was still able to invest $372 million in a fleet renewal program during the past four quarters, all the while maintaining a net debt to capitalization ratio of under 6%. In addition, we recently increased our quarterly dividend $0.25 per share, or $1 a share on an annualized rate. The new share repurchase authority, our increased dividend, and strong reinvestment programs speak to the current strength of our markets and Tidewater's strong financial position. But more importantly, it speaks to our positive view of the future. In that regard, our Board of Directors has recently endorsed and approved management's strategy of replacing, modernizing and expanding our fleet on an accelerated basis. In particular, the Tidewater Board is supportive of significant increase in our annual investment in new vessels in order for Tidewater to be able to satisfy the growing offshore equipment requirements of our clients around the world, and to maintain and enhance Tidewater's leadership position in this important element of a global marine services industry. I'll expand on this point later.

But now let me turn the call to Keith for a review of the financial results. Keith?

Good morning, everyone. I would like to start off with a little bit of housekeeping comments here. You will notice that in the last 24 hours we have had press releases covering our earnings release this morning. We've had a press release concerning the declaration of the dividend at the newly improved rate. Earlier today, we did have another press release on the addition of our fourth consecutive annual stock buy back program and you'll see a couple of press releases out there yesterday and today on personnel, personnel promotions and new personnel welcomed to Tidewater. We are able, today, to get back to our preferred historical practice of filing our form 10-Q. Our form 10-Q should be available through the Edgar filing services no later than sometime mid day today. It's a preferable program and one that we're glad to be able to get back to of earnings release and full 10-Q disclosure at the same time.

We think this morning's earnings release is one of -- as advertised in the conference call after the end of the March quarter, we told the investing community that we expected it to be one with unusually high cost. Unfortunately, the unusually high came in even higher than we anticipated, but revenue numbers also seem to beat the anticipation at about the exact same level. Certainly, there's a lot being said about the unusually high gain on sales we reported for the quarter. We reported $10.4 million. We acknowledged that that's an unusually high number. I remind those analytical minds looking at it, that those are all taxed in the United States. They're taxed at a full 35% tax rate, so I would say that the proper calculation, to my way of thinking, of calculating the gain on loss as it relates to EPS included in our $1.64 we reported, being a total gain on sale of about $0.13. And as Dean alluded to in some of the early reports on Tidewater, have alluded to a normal quarter being more in line a gain of $2.5 million, that would equate to about $0.03 at that level. So we're talking about an extraordinary rate of about $0.10 off of the $1.64, therefore getting down to the $1.53, $1.54 that Dean mentioned earlier.

We are experiencing, already in the September quarter, again, unusually high gains on sales. Not as high yet as last quarter, but we would anticipate, for those modeling out the company, the gains on sale for the September quarter will be at least in the $5 to $6 million range.

Another item of note at this stage - the effective tax rate for the year, although we had projected it to come in at 18%, we have now adjusted that to believe that the rate will be, this year, something closer to 17%, and the financial statements released today do have that anticipated annual rate. That annual rate, is once again, indicative of the shift of Tidewater from the ratio of our US operations to our international operations. When we talk about cost here, in a second, I will mention at that point in time the fact that we have an additional three vessels that operated in the US Gulf even during the first quarter that are, as we speak today, moving to an international site, two of our bigger deep water vessels. That type movement is what's affecting the projected tax rate for the year. A little more about those vessels whenever we get into the costs numbers. Once again, we think the normalized quarter was at about $1.54.

Looking at some specifics, revenues for the quarter increased to $328 million. That's a nice 4.5% gain from last quarter. When we get into individual class day rates, it'll be quite obvious as to where that's coming from. Our story is very similar to what you've been hearing from some of the other US operators' revenues. Revenues in the Gulf of Mexico and other domestic sources really increased during the quarter at 8.8%. Day rates in the Gulf of Mexico and domestic operations are up nicely across the board for all operators across the industry.

International revenues grew during the quarter at a 4% rate. Of note is that, at the end of the June quarter, or the revenues for the June quarter, barely slightly over 12% was generated from domestic activities and 88% generated from international activities, the continued movement of Tidewater into international operations.

Looking at actual cost numbers a little bit. As we started off this call, we had given guidance to expect operating costs to be up significantly from the previous quarter. But unfortunately, we had given guidance in the $166 to $170 million range. We actually came in at $176.7, or close to $177 million range. A few unusual items that could not have been anticipated ahead of time were involved in the increase above the anticipated level. In particular, in one of the foreign countries where we operate, the government dictated that all union laborers be given a retroactive salary increase. The bad news was that that cost was $2.5 million. The so called good news was that we were able to pass that on to our customer, so any effect the $2.5 million, which went straight into crew costs, also went into international revenues having no effect on the bottom line, but hurting margins. Repair and maintenance, once again, in particular dry docks was up at a greater level than we had anticipated.

I didn't want to spend, this morning, an awful lot of time going into the individual components of costs, because cost increases are an industry-wide problem for all the service companies. Almost everyone on their phone calls are acknowledging them. And instead of talking about the individual components that caused us to get to this level, I wanted to reiterate my thoughts on projected costs for the September and December quarter. You will remember that, as we said here in March, our story was -- or after the March quarter, excuse me -- was to expect increased costs but then to expect some abatement of those costs as we move into the year. As we projected, the September quarter three months ago, we told you to expect a number of $164 to $165 million. That number, in absolute terms, I'm going to have to update a little bit to give you a number. I expect it to be $166 to 170 million, but you will notice that it's still substantially down from last quarter.

How do I maintain credibility after having missed numbers? How can I project to you that numbers are going to be down? Well, the basis -- to explain to you my basis for projecting you down in total costs for the quarter, comes from three specific items. We know we had the $2.5 million very unusual cost number last quarter. We told you about a $3 million one-off cost to get two boats out of the Caspian, and one of the items we have a pretty good handle on, dry docking scheduled for this quarter, appear to be where they're going to be down another $6.5 to $7 million from last quarter. I feel quite confident that we can take last year's quarter, reduce those three items, which takes you back to a similar rate of $164, we've added some vessels so now we're giving guidance of $166 up to $170. And hopefully we feel -- hopefully I guess, as we sit here at the end of next quarter, we will have returned to some level of credibility and being able to predict those numbers. On the positive side of that, when we talked about the September quarter, a quarter ago, we gave guidance that we expected margins to start returning to more historical margins. We had told you to expect September margins, even with increased costs to return to 51% to 52%. I reiterate, today, that we still really do believe that margins are going to return to the 50% to 51% level.

Looking out one additional quarter into December, we certainly have got to raise the absolute guidance that we gave. We had given an absolute guidance for December of where we thought the numbers might go back up to $157 -- $157 million. We're now going to give guidance in the $163 to $165 range, but, once again, we think margins by the December quarter are going to get back to their historical ranges. We had previously given you margin guidance for December in the 53% to 55% range, those are cash operating margins. We now tell you we believe quite strongly that the margins in December are going to be in the 53% to 54% range. The margins for the quarter just ended fell to 46.1% rate, we had given guidance in the 47% range, 47.5%. So we missed it a little bit, but a lot of what we're seeing are move costs, some additional costs on getting new boats out into the market and those generally are offset by some sort of additional revenue.

One additional side note that that kind of flows from, the additions and the reduction in costs was last quarter, we ended up having really a more substantial loss of revenue from days in dry dock than we had anticipated. As it comes out, we believe that dry dock days actually cost us something in the range of about $29 million, and we had about 2400 days off charter. For the September quarter, we now estimate that those days off charter are going to be more down in the 1600 days in lost revenue on a comparable basis, should be in the $18 to $19 million range. And the significance of that is at last quarter we had bigger, more expensive boats in dry dockings. We had two of our biggest VFs 486s that were earning $55,000 a day that we had lost revenue on, just to give you an example. So last quarter, the dry dock days were costing us near $12,000 a day. We anticipate that to be closer to $9,000 a day. So obviously, kind of guiding up here that we expect financial fortunes to have turned at the end of last transitional quarter. We're anticipating costs being down and we are certainly anticipating less lost revenue due to the dry dockings cycle we've been going through.

Looking at individual day rates, once again it's a very positive story. It's a positive story that you've heard for a number of quarters and a number of years now. Our deep water segment of our vessels in the Gulf of Mexico saw an average day rate of $24,500. That was up about $600 from the March quarter. We will have two of these vessels will be mobilizing from the Gulf of Mexico and will be going to an international location for what's about a 20% increase in day rate and for three year fixed contracts. I would say that that mobilization should have no affect on our average day rate as those two vessels were averaging in the $24.5 to $25 range. That class of vessel, to give you an idea of current, current day rates in the gulf Gulf for us, that class of vessel during the month of June, not the quarter, but for the last month in the quarter averaged $25,000 per day. We currently have 100% utilization going on with that class of vessel.

Once again, as you've heard from most operators, the towing supply section of our domestic operations saw a substantial day rate increase. Day rates increased up to $11,633 for the quarter. This was a noticeable $1770 per day increase from the March quarter. So obviously across the board, increased day rates in the Gulf of Mexico, we're seeing a little bit better utilization in that fleet to where we reported right at 50%, 49.8% for the June quarter. And today we're operating at a little over 51%.

Internationally -- statistically the day rate for the deep water vessels, the 31 that we had -- statistically the day rate went down a few dollars, but let's be careful. We fell from an average day rate the previous quarter of $25,474, down to an average of $24,728, about a $700 decrease. But as mentioned in the loss revenues section of my comments earlier, we had two of our absolute highest revenue generating boats in dry dock, one for almost the whole quarter and one substantially for the quarter. Take two vessels out of average day rate, both earning $55,000 a day, and take a third one that was averaging $35,000 a day, and your average day rate will come up with an average that can be misleading if you don't watch it.

Today as we sit here, our average day rate, now that the bigger boats are back at work, is right on the edge of $26,000 a day. That's the kind of rates we're expecting today, that we're generating today. Utilization for the quarter was absolutely flat with the previous quarter at 83.6%, and utilization as we sit here currently is in the 81% to 82% range. So, basically, unchanged. The only thing that's going to happen in this class, as I said, we're going to be adding two boats from the Gulf of Mexico are going to move into this class. And they're going to bring with them average day rates slightly above $30,000 a day.

The old backbone of Tidewater's historical business, our international supply and towing supply vessels, have once again exceeded expectations by showing an average day rate increase of $543 for the quarter, up to an average of $11,660. The month of June, once again, the average day rate for those 225 vessels was about $11,800, showing you that the ending day rates were better than average day rates for the quarter. And certainly, as we sit here today, the $11,800 would be an applicable rate, or perhaps a few dollars less than what we might be enjoying today. Basically no utilization changes in that class. We reported 77.2% utilization for the June quarter. And today as we sit here, we're operating right at 78%.

So, nice growth in day rates across all segments. Projected fewer days of dry docking time. Projected dry docking of a mix of smaller vessels during the next quarter. We think the future beholds some pretty good things for revenue growth within Tidewater.

Once again the balance sheet remains extremely strong. We continue to carry only about $310,000 of debt, or only about $160 billion of net debt, a gross debt ratio (inaudible) capitalization under 14%.

I want to kind of wrap up my financial comments and certainly will be available for additional questions, and get into talking a little about our new construction program. Personal feeling is that Tidewater and Tidewater is not being given credit to the level that I think the significance of our --of the backlog of new builds we have at the moment. One reading the Q and looking at the press release we put out this morning, you'll come across the fact that we now have 59 vessels under construction around the world. Those 59 vessels have a total cost of right at $1.2 billion, $310 million of that has already been funded. We have ongoing capital cash requirements of only $881 million yet to be funded. The funding of that is spread out evenly. The balance of fiscal '09, we think we have cash requirements of $314 million. For the fiscal 10 period, cash requirements on these vessels are about $278 million, and then the balance of that fleet itself of about $289 million will be spent over the year 2011 and 2012.

We have, as I said, 59 vessels under construction today. That's made up of 25 anchor handlers, 28 platform supply vessels, four crew boats, and two tugs. For the balance of this fiscal year '09, we'll deliver and take into the fleet 17 of that 59 vessels. Over the next three quarters we will be taking in 10 anchor handlers, five PSBs, and two crew boats. As I said, I don't feel that Tidewater's being given ample credit for this on an equal footing basis. These 59 vessels, based on today's economics, do not pie in the sky day rates. Reasonable day rate, reasonable utilization rates, those vessels today, were they in the market today, they would be expected to generate at right at [$0.5] billion dollars of revenue, not over their life, not over their contracted life, but annual basis. That's a number that would add about 40% to the revenue stream of Tidewater, and on an earnings basis, on the same pro forma revenue and same pro forma expense basis, that fleet stands to be able to add up to $4.75 to the operating profits. That's $4.75 on an EPS basis calculated on operating profits basis. So, a significant asset of Tidewater. One that is joining the fleet now, joining the fleet at a time of increasing day rates and strong utilization. Once again, certainly a strong future for Tidewater in revenue and earnings generation.

During the quarter, last comment, we did buy back 916,000 shares of stock. We spent $53 million, which was the balance of our $250 million that we were authorized. We had an average price of $58.56. Over the last three fiscal years, we've spent $516 million buying back $9.5 million. When you take the $516 million and add to it slightly over $100 million of dividends we paid during that period, over the last 12 quarters we returned to our stockholders something in excess of $620 million. So, not only have we seen significant growth of the fleet, we've done it at the time by paying attention to total returns to stockholders.

I'll be available to answer any specific questions, but will turn the mic back to Dean for the rest of his comments.

Thank you. Before we go any further, let me acknowledge that this may be Keith's last conference call, as he will soon be retiring. Keith has been a part of the Tidewater family for several years, a personal friend for 30 years and our Chief Financial Officer for eight years. We, and I personally, want to thank Keith for his valuable contributions to Tidewater's success through the years. We will all wish him well in his retirement.

Let me also officially introduce Quinn Fanning as Tidewater's new Executive Vice President who will assume the CFO title when Keith retires. Keith is joining -- excuse me, Quinn is joining Tidewater after having worked for 20 years within the financial services industry, the last 12 of which were with Citigroup where he was Managing Director of Citi's energy investment banking practice. Quinn's responsibilities at Citigroup included leading the execution of a wide variety of M&A, strategic advisory, and capital markets transactions, with clients across all sectors of the global energy complex. The remainder of our senior financial management team, Joe Bennett, Craig Demarest and Kevin Carr remains in place. So we expect this transition to be seemless. Welcome aboard, Quinn.

The balance of my comments will be brief as I prefer to allow more times for questions as a better way for us to address any thoughts or issues in light of the current turbulence in the market. On the revenue front, our performance in the quarter was solid, with vessel revenues advancing, as Keith said, year over year by 12%, reflective of the overall strength of the global offshore oil and gas business. Internationally, our vessel revenues increased 15% driven by a 17% increase in the average fleet day rate. As Keith pointed out, while our domestic vessel revenues were down year-over-year, they increased 9% over the March quarter. Gulf of Mexico activity is greater than most observers anticipated even six months ago, as natural gas prices climbed back to double digit levels.

Industry forecasts call for an additional 3 to 5 multiple drilling rigs to return to the Gulf over the balance of 2008, suggesting further strengthening in activity. While we've been optimistic that the legal impediments to opening up more of the US OSC to drilling would eventually ease, we're almost as surprised as most observers by the rapid shift that's measured by recent public opinion polls and public sentiments favoring more offshore drilling. It remains to be seen whether state and federal leadership will submit the modification of the offshore drilling moratorium. The growing public, however, support for offshore drilling as a way to address America's high energy costs will force, in my opinion, some change at some point, and probably sooner than we are currently expecting. This growing attitude shift means the long term outlook for our business should improve, as increased US activity will expand opportunities, both for our customers and for ourselves. We're not yet making operational decisions on the basis of this expectation, but we will continue to monitor the situation closely.

On the operating side, as Keith noted, we are experiencing increased inflation and costs, both labor and materials, much like every other oil-field company. We continue to work diligently to control these cost increases as the key to our financial successes, not only optimizing day rates and to sustain high fleet utilization, but to be disciplined with our operating costs as well. Offsetting the negative earnings impact from having higher revenue generating vessels off hire, due to routine maintenance and repair, remains a challenge. We feel we're gaining on it. Inflation and ship yard costs also continues, for reasons well known. What Tidewater needs to improve upon is getting our vessels into and out of ship yards in fewer days. As we gain experience with dry docking our new large vessels, learning curves should improve our future performance, helping to control our repair and maintenance expense and to minimize days off hire.

As you saw this quarter, and as Keith mentioned, our vessel operating margin fell to 46.1%, which was slightly below the range we had suggested during our last conference call. We believe that with the easing of repair and maintenance expenses over the next several quarters and the elimination of specific costs incurred in the June quarter, such as the Caspian demobilization expense in Venezuela and retroactive wage payments, our vessel operating margin trends should be on the upswing in the September quarter, and return to more historical levels by the December and March quarters.

The oil prices have pulled back recently. The energy industry continues to struggle to boost oil and gas supply and to meet global demand. Wether oil trades at $150, $125, or $100 per barrel, it's almost beside the point. Even allowing for a substantial pull back in commodity prices, we believe that offshore drilling and development activity will continue to grow at a brisk pace for the foreseeable future. Our customers, largely oil and gas companies and sometimes contract drillers, will, in turn, require more new vessels with greater carrying capacity and work capabilities. As I said earlier in today's call, we're committed to meeting our customer's expanding requirements, to maintaining Tidewater's leadership position in our industry.

Present apparent stock market sector rotation not withstanding, we believe that industry needs continue to create a very positive outlook for Tidewater. Our Board of Directors share its management's positive outlook. The Tidewater Board supports management strategy of taking the necessary steps to capitalize on these business opportunities, by authorizing a significant increase in our annual fleet investment programs. Capital investment will be front loaded, but disciplined, and could include both accelerated new-building activity and fleet acquisitions. As for program size, we're disinclined to provide specific new build or acquisition targets, but note our current strong financial position and our belief that Tidewater has sufficient financial capacity to support a $1 billion annual investment in its fleet for the intermediate term. Customer demand, ship yard economics and other considerations justify such an investment Tidewater is prepared to make.

In regards to acquisitions, I'd like to make three points. One, we view new construction and fleet acquisitions as somewhat interchangeable. In both new construction and acquisitions, we're looking for the same types of vessels, same quality of vessels, and the same returns. Two, in general terms, if we are prepared to annually invest $1 billion or more in the fleet, $1 invested in M&A is a dollar that not likely will be invested in construction and visa versa. And finally, while we, obviously, will not comment on specific opportunities, Tidewater is prepared to be an assertive consolidator if transaction economics results in accretion of shareholder value. At the same time, Tidewater will be as disciplined in capital management as it is in capital investment. We have increased our dividends, completed substantial share repurchases. We have now announced a new share buy back authorization.

I, again, thank Keith for his important role in establishing Tidewater's currently strong financial profile which positions us well for the many opportunities we see before us. Consistent earnings growth and continued fleet renewal should help improve our current stock valuation, which we believe is the remaining key ingredient in our efforts to provide an attractive total return to our shareholders. We're excited about the future opportunities we see on the horizon for the industry. Tidewater is committed to securing a large share of those opportunities.

With that, Michelle, we are now ready questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of [Jim Randall] of Lehman Brothers.

Good morning, Jim.

Good morning. First, congratulations Keith on your retirement and for your outstanding service to Tidewater over the years .

Thank you.

Dean, my first question concerns retirements of vessels. Maybe I missed it, but how many vessels did you, in fact, retire during the quarter? And then can you comment, as you look at your fleet, over what you're seeing in terms of the wear and tear on your vessels as they get older? I know you're still seeing some outstanding increases in day rates on older vessels, yet, you are taking many out of service. Are you finding as they hit or approach this 30 year mark, that you are seeing substantial wear and tear and many, or most, need to be retired as they approach that age?

Jim, I don't think it's really a question of age, but let me get back to your original question. In terms of our active fleet, we had but one vessel reduction in our active fleet in the quarter.

30-year mark, there's nothing magical about it. We have vessels in South America that are over 34 years old, and it's working quite fine for (inaudible) customer. It's an ad hoc decision almost in every case. Every time a vessel comes up for dry docking, what we do is we review the economics of its future prospects, and then if we don't see that the dry docking is going to be paid for in the next 30 months, plus a reasonable return on our capital expenditure, we stack the vessel. If we stack it we, in time, we either decide we're going to look to actively promote selling it or look to move it to another area where we can get the right return on it.

30 years -- there are boats in the Great Lakes that are 100 years old working quite nicely. So it's not really a question of age, like airplanes. Vessels can work, depending on how much you want to continue to reinvest in them, but the trick is to make the reinvestment where you get a return on your capital. We have a very disciplined process about how we go about that. Every time a vessel that's older than, say, 25 years comes up for dry docking, we go through a disciplined process, review it, determine whether it's going to pay out over the next 30 months and then, based upon that, decide whether we'll do it or not. Does that answer your question?

In part, Dean. How about if you looked at all your older vessels and as they come into dry docking. What percentage of them, as they go to dry docking, are you saying you don't need to cut and they'll be retired? Do you think that percentage will grow in coming years because of the wear and tear issue, particularly in international waters?

I don't think it'll be a wear and tear issue, Jim. I think if it does grow, it's going to be a market issue and we'll be provoked -- could be provoked by an onslaught of new tonnage coming into the market. Balancing that, though, you've got a lot of new rigs coming into the market, FBSOs. So, it's going to be interesting to see how it plays out.

I think you and many other observers on this call have been surprised. We've not necessarily been surprised, but I think there have been many people who have been surprised by the durability of the earnings power of what we call our traditional vessels. People who have been predicting for years now that some of the earnings power of our traditional vessels would be falling off a cliff. They're not doing it. You're not seeing it now. You didn't hear it in Keith's summary of what's happened to our average rate of our towing supply, supply fleet and our international segment. Heck, it was up $500 over the quarter, quarter on quarter. That's not showing a diminishment in demand for that type of vessel.

Now eventually, at some point in time, some of these boats will start falling out of the fleet, but we've got considerably new earnings power coming into the fleet with the vessels that we presently have under construction and our feeling is that our earnings power is going to be increased, rather than decreased, through time as we don't feel that the traditional vessels are going to be falling out as fast as our new ships are going to be coming in and adding earnings power to our revenue base.

Okay, Dean, one other question if I could. Could you comment whether you think the tightness in global markets has changed at all in the last two or three quarters? Day rates are rising faster than I've estimated that they would. Are you seeing an even tighter market? Are you seeing projects waiting on supply vessels and if so, or if not, do you -- how long do you see this continuing based on what you see now?

Jim, we're pretty optimistic. The -- as we look around, certainly some markets are softer than others. But they're all high. And including on the Gulf of Mexico has slowed down some and, yet, it's come back relatively significantly. And I think if they open up the OCS, even a few states, that's a game changer. They've got a fair number of jack-up rigs coming into the fleet this year provoking additional demand. We're not seeing a slow down in the rate of change of -- Heck, if you look over our last four quarters and just what has happened to the day rate of our traditional vessels, it's phenomenal. And quarter-after-quarter we to see that same progression in day rate increase.

Now, on the other hand, we've had challenges with cost. That's kept us from taking full advantage of those day rate increases. But as Keith said, we think we're getting these costs under control. We think the next few quarters we're going to demonstrate that. We've got to prove it. We've got to show that. But our feeling is that we're just about ready to get this tiger by the tail and that the day rate increases that our sales force and our country managers have been so successful in achieving are not going to be all passed onto our contractors. We're going to get -- be able to pass them onto our shareholders. That's our view.

Okay, that's great. Thank you Dean.

Your next question comes from the line of Judd Bailey, Jefferies and Company.

Good morning. Question on the cost guidance. You had a pretty decent jump in labor costs sequentially quarter-to-quarter, and you explained the $2.5 million that was basically forced upon you in one country. What are your assumptions or what should we think about as far as further labor cost inflation over the next few quarters?

That's a good one Judd, when we looked at it from quarter-to-quarter and we took out the extraordinary costs in Venezuela and then we looked at it from country to country, there were some regions that had more issues than others. We've said, for the last two conference calls I believe, that we think that the rate of increase and labor costs factoring out the new vessels is about 9%. I still think that's right. Although, there is pressure. I mean, as new vessels come into the worldwide fleet, there's plenty of pressure. But I think that we're going to stand by that number for the time being.

Okay. On the vessels themselves, you're moving two deep water vessels out of the Gulf, nice term contracts. Can you comment on other opportunities for those types of vessels? Are you seeing additional ones on top of that? Can you just, maybe, give a little more color on what you're seeing on the deep water side?

What we're seeing and what we're going to see is pretty -- the sky's are pretty blue. There are, as you well know, about 80 deep water rigs under construction that will be delivered over the course of the next two to four years. And we think those are going to provoke even more demand for the deep water vessels. We think deep water vessels are going to -- some deep water rigs will return to the Gulf of Mexico. Some will end up in Brazil. You know all about Brazil. You know what's going on in west West Africa. You see it in southeast Asia. Our view is that the demand for the deep water vessels, and many of the vessels we presently have under construction will be specifically targeted for deep water. Our view is very positive.

Okay and just one, one last question if I may. The number of new builds jumped up to 49 vessels. Can you say if those were all new orders or did you purchase some slots or some -- that were already under construction by other parties?

Steve, Steve's our guy that deals with that day-to-day, Judd, let's let -- It's not 49 by the way, it's 59.

It's 59. And it was 49 at the end of fiscal '08 and since then, as of today, it's 59.

But the -- it's a combination of those. Some of them we were taking over construction contracts. Other ones were vessels that were under construction for various operators and we've entered into agreements for them to finish it and then we will take delivery in at the end. There's a combination of things we're doing. Acquiring existing, and also acquiring after delivery, or after satisfactory sea trials. There's a combination of both of those. And we're also ordering -- we had a design that we liked and gone to ship yards, received quotations back and then made an award to be delivered 2010, 2011. So it's a combination of all of those.

Okay, great, thank you all. I'll turn it back to somebody else.

Your next question comes from the line of Pierre Conner with Capital One.

Good morning.

Good morning, gentlemen. We've got the question on the labor cost side that was interesting so I appreciate that. Keith, maybe, or whoever on the new builds. I know that previously you had given us a schedule of deliveries in the press release, I'm assuming that's going to show up on the Q this time.

Yes, sir.

Generally, do you see any delays in the previously 49 new builds? Are we -- will we still be impacted by ship yard delays?

This is Steve Dick. We have had some delays. I think it's an industry-wide problem and there's a couple yards, because of equipment deliveries and also in one instance a change in ownership and some of the management being in a little bit of turmoil, but we think we've got that pretty well under control. And other than those instances, there's been some drag and some delay, but other that those few vessels, everything else appears, at least at this point, to pretty much be on schedule.

Okay--

Pierre, in terms of delays -- additional delays from the end of last quarter to this year.

Yeah.

There's been no additional delays.

Okay, that's actually, that's what I was looking for. So don't expect that table to be significantly different than the one-- ?

No, sir.

Except for the addition of the 10 new builds?

Correct.

Other, just, housekeeping. Keith, with the two vessels moving from the US to the international, just, kind of, ballpark for us some of the steaming time or off charter time that would be involved or are the customers--?

Pierre, I wouldn't even, financially, I wouldn't be too concerned about it. As it turns out, it's probably going to cost us $2 million of other vessel costs, fueled and such. You'll see financially to get those two there. On the other hand, you're going to see more revenues will come through the revenue line. It's almost equal to what the 30 day travel time times $35,000 a day would equate to. We're going to have more revenue and the cost.

Okay. The last one is more general about the acquisition markets and, not to disclose sort of what your exact thinking is, but what do you see in terms of asset prices changing here, are they continuing to rise? What we experienced, obviously, is that they've been rising with steel cost, construction cost, as well, rates are continuing to improve, but do you see any divergence in that trend?

Uh, this is Steve Dick again. I don't see it. The prices are pretty healthy. It's a heated market. It continues to be that way. It appears that some of the orders for the ship yards have been slowing down in the last six months or so, but the actual level of the cost of the equipment is still pretty high.

It hasn't changed significantly in the last six months or so?

It's gone up in the last six months.

Pierre, the only thing we're seeing financially is that those -- the really highly leveraged real strong speculators who went out and signed up 20/25, 25/30 ship yard contracts, the financial markets, since the subprime crisis started last fall, we're starting to see where some of those individuals are starting to have a little less available credit. They've got boats that they paid 20% down, 80% upon delivery and we haven't seen a good deal that we want to do yet, but the brokerage community is starting to show some signs of cracking on the high speculative guys who are going to have to turn their fleets. There's no way they're going to be able to put financing in place. Perhaps some early signs there.

Okay.

And the other comment I'd make, Pierre, is that I do think the rate of change and increase of asset costs has slowed down. I don't think that it's quite as robust as it was, say, a year ago or six months ago. The rate of change has slowed down.

Ok. And then, within the last year, your assumptions as to what you think vessels could get for rates, obviously, should have been continuing to improve given your confidence in the market and the performance.

It has. Of course the trick is to make sure that in an acquisition all the benefits don't transfer to the seller and the buyer gets some. That's what we struggle with, but I think we just feel like that there's going to be some opportunities and we, we hope to be able to act upon them.

That's very helpful. Keith, all the best to you. Thank you. Best wishes and welcome to Quinn and good luck.

Thanks, Pierre

Your next question comes from the line of Daniel Burke with Johnson Rice.

Hello, Daniel.

Good morning, guys. This first question, on the cost side. We've got the details by line item. But what about on a regional basis? Are there any regions where you're seeing changes or more dramatic escalations than others that are worth pinpointing.

We saw -- we just renewed a labor contract in Brazil. That was one. That was about a 10% increase, I think, across the board. That was one.

There's pressure everywhere. The markets for crews is almost global in the international side. And the guys know what each other make in various regions where they're working. So, if one area was hot and we respond to payroll pressures in one area, it's not long before the word gets out to another area and guys in the other areas are saying "well, what about us?" So, the pressures are there.

I would say that -- I think indicative of the 10% increase in Brazil, which is a damn hot market --we were able to settle at a 10% rate. I think is indicative of about what's going on worldwide. Now, it's going to continue to be a challenge as new vessels come into the worldwide fleet. We are a little bit hedged, more hedged than some other companies, because as we retire some of our older ships, we have crews that are already trained -- sometimes we have to upgrade their training to the newer vessels, without having to go back into the market to get more people. So, we have some advantage to that extent.

But, we had the 10% increase in Brazil. We had the retroactive readjustment in Venezuela. Other regions are relatively -- Africa of course is hot. Southeast Asia is hot. I mean, it's around the world.

I see. And then, as a follow-up. Indicating a willingness to invest a billion dollars annually seems to be a bit of a step change. Sort of two questions. One, does that decision indicate anything about the speed at which you are interested in selling out of some of the older equipment? And, as a related question, what level of annual CapEx do you think, Dean, you need to deploy to maintain sort of your current earnings power? It seems like you're shifting to a more discernible growth mode here.

Just what we had on the order book last -- first let me answer your first question. The answer to the first question is, no. We do not think that we're going to be more rapidly shifting out of old vessels. We'll do it on a case by case basis as I described earlier in the call. And we'll do it upon a review of the fundamentals of the market in which a boat happens to be, including what it's going to cost to keep it in service.

Answer to your second question is, even with our order book as of last quarter with the 49 vessels, those 49 vessels we're going to replace all of the earnings power of our entire traditional fleet. Those 49. As Keith pointed out in this call, when we added another 10 this quarter, our earnings per share, just using today's economics, should go up about $4.75. Presuming everything -- and some are not going to come into the market for couple of years, two to three years, depending upon which vessel and where. But presuming today's economics, we have already replaced an earnings power of our fleet. If we advance or accelerate is probably a better word -- if we accelerate the rate of the growth in our fleet, in our new fleet, then I would expect that our growth prospects will significantly enhance.

Dan, just a quick mathematical point. We added 12 boats during the quarter. We took delivery of two. So there was a net gain of 10 in the backlog. But that's -- and those 12 boats have a contracted price of $260, just to give you an idea of how we are attacking the expansion of the earnings capacity of the company.

Great, thank you for the answers.

Okay.

There are no further questions.

Thanks everyone for your participation in our call this morning. Thank you for your interest in our company. God bless you and have a great day

This concludes today's fiscal 2009 first quarter earnings conference call. You may now disconnect.