Tidewater Inc. (TDW) Q4 2008 Earnings Report, Transcript and Summary

Good morning. My name is Lakecia, and I will be your conference operator today. At this time, I would like to welcome everyone to the fiscal 2008 fourth 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 session. [Operator Instructions]. Thank you. Mr. Taylor, the Chairman, President and CEO of Tidewater, you may begin your conference, sir.

Thank you, Lakecia. Good morning, everyone, and welcome to Tidewater's fiscal 2008 fourth quarter and full year earnings conference call for the periods ending March 31, 2008. I am 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, Senior Vice President, Principal Accounting Officer and Chief Investor Relations Officer; Steve Dick, Executive Vice President, In-Charge of Strategic Relationships, Shipyard Operations, Vessel Acquisitions and Dispositions; Jeff Platt our Executive Vice President, In-Charge of Day-To-Day Marine Operations; and Bruce Lundstrom, my new Senior Vice President, General Counsel and Secretary. We'll follow our traditional format this morning. I will start with some comments about our earnings results released earlier this morning. Following my brief remarks, I'll turn the call over to Keith for a detailed review of the numbers as well as the status reports on our new build and vessel replacement program and our stock repurchase activities. I will then return with the discussion of our view of our markets and a review of our strategy. We will then open the call for questions. At this time, I will 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 or future performance to be materially different from that stated or implied by any comments that we may make today during this conference call. Dean?

Okay. Let's begin. Earlier this morning Tidewater reported earnings for the March 31, 2008 quarter, our fourth fiscal quarter of 2008 of $85.4 million or $1.63 per fully diluted share. Total revenues for the quarter increased 5.5% from the December quarter to $331 million. But our bottomline was below expectations. We did not hit on all cylinders due generally to the impact of a greater number of dry docking days, which impacted utilization rates of higher revenue generating vessels. Though we have mentioned it before, the revenue lost when higher day rate generating shifts undergo major maintenance has a significantly greater impact on our bottomline than in previous years when vessel day rates were substantially lower, and this quarter had too many of those vessels under repair for too long. For our fiscal 2008 we earned $6.39 per share, up from last year's $6.31 per share that included $0.37 a share of gains from the fiscal 2007 sale of 14 of our domestic tugs. Excluding that gain our consolidated net earnings this year were 4% better than last year. Overall, our bottomline results are being driven by the continuous strength of the international offshore market. International average fleet day rates increased almost 20.5% from fiscal 2007 and we're up 19% year-over-year in the fourth quarter. As Keith will detail, the strength of our international fleet results was diluted by continuing weakness in Gulf of Mexico shelf drilling activity, including a slowdown in the domestic offshore construction market. Internationally, our fleet utilization rate last year was about even with the prior year, and given the greater number of dry docking days, we had a respectable performance. In contrast, our domestic vessel fleet utilization rate was down by 3.5 percentage points. Between the drop in utilization and the decrease in average rates domestically, the result was that domestic revenues fell 30% year-over-year, while operating profit was off by two-thirds. On the other hand, our international revenues and operating profits were both up by 22% and 23% respectively over fiscal 2007. Our safety performance in the fourth quarter was excellent. For the full year we generated a total recordable incident rate of 0.24 for 200,000 man-hours of work, the second best year in the company's history. Within that statistic, however, were eight loss time accidents that resulted in six deaths, an unacceptable performance. Tidewater's management and field personnel are focused on improving our safety efforts. So far this current fiscal year we have had no loss time incidents. Let me now turn the call over to Keith to discuss in detail our financial results and where we stand on our fleet renewal program and share repurchase efforts. Keith?

Good morning. One announcement of housekeeping. We will not be filing our Form 10-K today. We anticipate filing our form 10-K later in the month, perhaps at the end of the second to last week of the month. So, in regard to that when that happens, we do publish an expanded press release which we did this morning, which has most of the operational statistics that everyone seems to be the most interested in. I want to start off right quick by saying my summation of the quarter that you see before you is one that I surmise as being one of lost revenue, but its not so much a quarter of increased cost, although we will talk about increased cost being up a little bit. I think when we go through the statistics on vessel day rates around the world, one will understand right quickly that day rates in almost all classes were either up during the quarter or since the end of the quarter have come back up quite nicely. What we're going to tell you this morning is a story, as Dean has alluded to, one of lost revenue days because of vessels being in dry docks for periods that were longer than we had originally anticipated, and the second story is the unusually large number of vessels that mobilized during the quarter. I'll give you some statistic that show you all those mobilization days don't generally result in lost revenue, they certainly result in revenue that is not up to a normal level that we would achieve through normal operations. As Dean mentioned, looking a little bit at year-on-year marine revenues for the fiscal year that ended March of '08 versus March of '07, those marine revenues were up 11%. Our earnings per share were up about 8% if one factor out the fact that we had sold a number of tugs during the last fiscal year. Once again, the numbers looking at last year showed a steady progression of Tidewater from domestic player or significance to one who has less, less and less significance in its domestic market. For the year ended in March of '08 barely 13.2% of our revenues came from domestic operations. That's down from 20.8% from domestic operations in the fiscal '07 year. And when we talk about the quarter that just ended, you'll see that 13.2% for the year is down even further. So, Tidewater, for the last year had about 87% of our revenues generated in the foreign areas. More importantly with our comments today are getting into and looking at the actual quarter, so for March marine revenues for the March 31, quarter were up... they were up 1.1% for the quarter, that all pretty much attributed to international where our marine revenues were up to $277 million up from $273 million in the '07 year. Marine revenues, as I said for the quarter were in total up barely 1.1% although overall revenues were up. I think our shipyard delivered a vessel during the quarter, so other marine revenues up. Tax rates for the quarter were pretty steady right at the 18 level... 18.1% I think maybe 18.2% and we've been averaging about 18% for the year. We would give guidance for the '09 year; we still think a tax rate in the neighborhood of 18% is probably a pretty good rate. We did have earnings for the quarter $1.63 a little bit unfortunately that was down from a $1.66 that we reported in the December quarter. Couple of events as we said, a lot of lost revenue we actually had the sale of two vessels that were concluded on April 2nd, as opposed to March 31st, an event that the buyer didn't cooperate very well and it literally cost us $0.02 or $0.03 in the quarter on having the revenue received two days late. Looking once again into some cost numbers now for the quarter. As we mentioned we had given guidance to expect the quarter to come in at $149 million to $151 million. We came in at $155 million right quick... quick summation of that the differentiation between the two revolves around... R&M costs came in about $2 million to $2.5 million higher than we had anticipated. Some of that was due to the longer time that vessels stayed in the shipyard and some of it was just plain fact that we under budgeted what the costs were going to be versus the final cost. One foreign country that we operated in did announce a tax amnesty program after the last conference call. We considered our basically payroll tax situation in that country. We took advantage of the amnesty as it existed. So, from what we had anticipated our crew cost came in about a million higher than we had anticipated. And as I will mention here in a minute, we ended up with a substantial number of mobilizations during the quarter, substantially higher than we had been averaging and that resulted in about a million of other costs, basically fuel and other type cost that we heap whenever we go on a mobilization for our own account. I wish that the cost numbers would stop here, because I have already mentioned that I think this quarter was a quarter of... the story was one of lost revenue. But I need to cover anticipated future cost here, right quickly because that the 155 number is not the end of the story as we see it right now. We actually anticipate operating cost for the June quarter to increase substantially higher than that and to come in as we now see it somewhere in the $166 billion to $167 billion [ph] range. Now a quick explanation of that has to be an order. Once again as we look over the next two to three quarters, this first fiscal quarter is one where we are going to have exceptionally high dry docks again in fact we expect dry docking costs in the June quarter to be about $5 million higher than it was in this just completed March quarter. We have the situation at hand right now where we have two vessels that are working in the Caspian. They have come to the end of their contracts. They have to be prepared to exit. They have to be prepared to go through the channel system that you have to go through to come out of the Caspian, and we will have some mobilization cost of getting those two vessels out and going to their next job of about $3 million. We do have mob revenue covering a large piece of that from the customer, but from an accounting perspective, that $3 million of other costs will be an incremental cost in the quarter. We have on the positive side; we have commenced quite a few new charter hires in Australia. We generally don't like to talk about areas of operation, but Australia is an exceptionally high cost area of operations, where all of your crews are union members. Day rates increased somewhat proportionate to the increase in operating cost, but we would anticipate crew cost to be up about $2 million during the quarter because of the increased activity that we have in Australia, and then we will have about four new vessels anticipated to be delivered in this quarter. We had four new vessels that were delivered at the end of the last quarter, so both the incremental cost of those vessels we expect to be another $1 million to $2 million. So, the Caspian mob, being kind of an unusual item but we're going to start off that today by telling you that we think operating costs for the quarter may go as high as $166 million to $167 million. So as to not cause, I guess, panic in the streets, we felt like we really needed to talk about cost at the moment because that is a substantial increase quarter-on-quarter and particularly quarter from the prior quarter. As we have looked at cost here very extensively over the last few days, we would in addition today give you some guidance that we think cost for the September quarter are going to moderate and be back down into the $164 million to $165 million range and we think finally by the December quarter this kind of rush of dry dockings that we are having to manage as best we can right at the moment. We expect the December operating cost numbers to be back down into the... into above the $157 million range. So we're looking at, last quarter being up we're looking at really high operating cost, the next quarters and then down substantially in the December quarter as we now see it from an operating point of view. I've seen in some of the early releases today that people were talking about our cash operating margins, which did fall to about 50.5% this quarter, were based on the operating cost numbers just given to you. You should not be surprised to see that perhaps even dip a little further in the June quarter, perhaps down into the 47.5% or 48% range. And then we envision with those new boats and the fact that we will have 14 new vessels delivered between now and the December quarter. We expect that the cash operating margins to turn and to go back up to historical norms. We would anticipate operating margins in the September quarter then going back up into the 51% or 52% range and perhaps by the December quarter being back in our historical... recent historical operating range of anywhere from 53% to 55%. So as you can see, we anticipate an increase in operating cost for some period followed by a diminishment, but that diminishment will be counterbalanced substantially by the additional revenue of new vessels being introduced into the fleet during that period. A quick comment. Last quarter we actually had, going back to the lack of revenue numbers, we were off charter on our best estimate about 2,050 days due to dry dockings. We think that cost us lost revenue in the neighborhood of $22.5 million to $22.6 million. For the June quarter, even though I have just mentioned the fact that we expect dry docking cost to be up by about $5 million, we're currently anticipating the days of off charter to be about 1,850 days and about the same level, about $22.4 million to $22.5 million worth of revenue. So, we expect the revenue shortfall that was caused by dry docking days to be somewhat stagnant from where it was last quarter. One of the things I wanted to mention, as I said earlier, was the fact that during the quarter we actually mobed or moved vessels. 19 vessels moved from one area that where they were operating to a new area. When you add the fact that we added four new vessels during the area, we literally had 23 vessels that changed operational areas during the quarter. To give you an idea as to is this unusual or not, for the first nine months of the fiscal year, we actually had 23 vessels that mobed from one area to the other. That's not in counting the new vessels, but that was just the older vessels. So, that 23 for nine months is compared to the 19 that we mobed in this quarter. And to just give you right quick a statistical example of what that means to us, moving those 23 vessels from one area to the next area, we had operating cost on those vessels of about $15.3 million. As we mentioned earlier and as our press release showed, we operated at about a 50% margin during the quarter. One could then anticipate that $15 million of operating costs should have generated about $30 million worth of income, but those 21 vessels generated barely $19.0 million during the quarter. So, a story of a short-term diminishment in revenue by moving from one area to another area. None of those were speculative. All of those would go to new contracts. So, a substantial loss of bottomline profit for moving vessels at an unusually high level. This quarter and the June quarter as we sit here today we've mobed five vessels from one area to the other. So it seems like this quarter, as we know it today, will be much more in line with historical results of probably moving somewhere from 8 to 10 vessels from one area to another during the quarter. On the very positive side, once again, now looking at day rates and day rates did progress nicely during the quarter. As we generally recap here, we're looking at the domestic day rates. We had 8 vessels working in deepwater. Day rates in the deepwater segment of the Gulf of Mexico moved from last quarter. We reported an average of $23,256. Today we are reporting that the March quarter had an average day rate of $23,904, an increase of about $650 a day. And as we sit here today that same fleet of 8 vessels is in the Gulf earning an average of about $24,050 a day, so some further $150 increase since the average of last quarter. In the March quarter we had good utilization out of those 8 vessels. We averaged about 97.5% utilization. And today, that class continues to enjoy that same type of utilization about 97.5%. The one down side, once again as Dean has mentioned, was in the supply and towing supply division operating in the Gulf of Mexico where we had 34 vessels active last quarter. In the December quarter, we have reported a day rate of $10,400. For the March quarter that average day rate was down to $9,863 or a loss of about $550. Since the end of the quarter, as you've heard from some of… I think, our competitors, rates in the Gulf have firmed up a little bit too where we are now today back averaging about $10,750 per day. Our stretch class of vessels which make up a bulk of that 34 have enjoyed a pretty good comeback in the last six weeks. Utilization of that class in the March quarter was at about 46.2%, and as we sit here today we're averaging about 49%. So, day rates are back up a little bit on the domestic supply, towing supply, class, and utilization is up a tad from where we averaged in the last quarter. Internationally, the story is just as good on the revenue day rate side of our picture. We operated 31 vessels internationally in the deepwater segment during the quarter. During the December quarter, we reported an average day rate for that class of $24,980. For the March quarter, we are reporting that the day rate average went up to $25,474, again about a $5,000 per day increase. And as we sit here today, we're averaging about $26,175. So, our shortfall, once again, in revenue for the quarter did not come from any back off in international day rates. Utilization, as you would anticipate, for the March quarter though was down to 83.5%. That was down from what we had reported at 91.4% for the December quarter. That's where those excess days… in this and our other international class, this is where the access days in the dry dock and some of the days when we were in the mobilization really came home to roost. Today, we continue to show… the utilization in this class that's running about 80%, it's down a little bit today from the average of last quarter, not to employ that we expected to be down for the whole quarter, but that's just where we are today. Our bigger class of vessels, as you know, is our international supply and towing supply vessels where, once again, we enjoyed for the third quarter in a row nice substantial day rate increases. In the December quarter, we have reported an average day rate of $10,455. For the June quarter we are reporting that that average day rate was up to $11,117 or about $660 increase. And today, those same vessels are averaging about $11,340, so an increase for the quarter followed by another increase today. Utilization in that class was also down last quarter due to that dry docking that we keep talking about. It was down to about 76.7%, and today it's averaging about 75%. So it's still… both classes of our international vessels are little bit today below the average of last quarter, not necessarily anticipated to finish the quarter there. Few balance sheet comments, kind of basically unchanged at Tidewater from where we have been. Basically, we're still carrying about $300 million worth of debt, which is almost totally offset by the balances that we have in our cash accounts. Our gross debt to total equity today is about 13.8% and the net debt is in it at about 2%. Little bit on our construction in process. Once again it can be picked up from the press release that went out today. As we sit here today we have 49 vessels under construction. Those 49 vessels represent a total cost or a total investment to the company of $959 million of which $731 million has not been funded yet. Of the 49 vessels we have 4 Crewboats being built, we have 18 Anchor handlers, we have 24 PSVs and we have 3 Tugs being built. The $731 million of cash commitments is broken down, basically about $358 million is due to be paid during our fiscal '09 year. About $226 million is scheduled to be paid during our fiscal '10 year and the balance of $147 million is paid out generally in the '11 year, so $731 million yet to go. We do have 19 vessels scheduled for delivery over our March of '09 fiscal year. We did continue to buyback some shares last quarter. We bought back 354,000 shares at a cost of $18.9 million on average cost of $53.39. I do point out that when one looks at the cash flow statement for last year, one final comment that you'll see cash flow from operations last year almost hit the $0.5 billion point. It came in right at $490 million. So those are my comments. I hope that I am giving you extra cost numbers and a little bit of the insight as to what it looks like around here for the next couple of quarters. We hope people to kind of understand that we are going through a little tough time on some regulatory dry dockings, managing them as best we can, but remember that all these vessels are under contracts. Customer demands, customer time-off all has to be worked into the system. So, what we hope to be some temporary diminishment in operating results, scheduled to pickup quite substantially later in the year. Back to Dean.

Thanks Keith. As Keith has outlined, our financial results were negatively affected by greater number of dry docking days of high revenue generating vessels and our R&M cost associated with those dry dockings, primarily in the international fleet than we expected. That said, despite the dry docking impact, vessel operating margins were still in excess of 50% for the quarter. While good, this performance can be better and results will show when we are firing on all cylinders. One might question what it really means for Tidewater to be firing on all cylinders. As you have seen in some of our recent quarters, we have had challengings with our dry dockings, which now appear to be more capable of repetition than we previously thought. Dry dockings are being performed on vessels that are under contract, as Keith said. So, our challenge is to do a better job of managing those maintenance days. We will look to improve our internal processes to confront the increasing condition of more expensive regulatory dry dockings or other necessary major repairs. Shipyard pricing has increased due to inflation and the heavy workloads that those shipyards are generally causing vessels to remain in the yards for longer periods of time. Unfortunately we don't see that shipyard situation changing much in the foreseeable future. So, we just simply need to do a better job of managing it. Given that scenario, we now foresee that we are likely to have higher repair cost and greater negative impacts on our revenue line, with some consequent reductions to our operating margins and bottom-line. We would of course, prefer this not to be the case but on the other hand, our decisions to continue to perform necessary dry dockings on many of our mature vessels should send a positive signal that these vessels are still very much in high demand. As we view things today, we foresee high levels of dry dockings over the next two fiscal quarters, which will reduce somewhat our operating margins, and that would affect our bottom line in the short term. We do however anticipate a reduction in major repairs during the second half of this fiscal year, which would along with the new vessels being delivered to our fleet over that same time frame. As Keith pointed out, returned our operating margins back to the mid-50% range and be more reflective of this company hitting on all cylinders. Focusing on market fundamentals, we see healthy international markets continuing. The strength of the international vessel market is demonstrated by the over $650 quarterly sequential day rate increase for our core fleet of towing supply, supply vessels. The fourth quarter continued the pattern of higher average day rates for this class of vessels, moving from almost $9,500 in our first quarter to $11,100 in the fourth. In contrast, the weakness of the Gulf of Mexico shelf market can be seen in the inverse day rate pattern for this same class of vessels that we saw steadily decline each quarter from almost $12,000 in the first quarter to slightly under $9,900 in the March quarter. We anticipated the possibility of that scenario developing, and have repositioned about two dozen domestic vessels into international markets where we could secure attractive longer term contracts under better economic terms. We're now seeing more capital investment for drilling and exploration being dedicated to the Gulf of Mexico, and we also see new operators seeking to work offshore in the Gulf of Mexico, as well as more international companies targeting the Gulf of Mexico. Those trends suggest increased vessel demand and requirements for more capable vessels and thereto for our shrinking market in the longer term. Our fleet renewal program saw us add 19 new vessels to the fleet last year and we plan to add another 19 vessels this fiscal year with 30 additional new builds scheduled for delivery thereafter. Steve Dick, who is here on this call today continues to scout the world market seeking new vessels that will fulfill our customer's requirements and we could secure at reasonable prices. Finally as Keith pointed out, Tidewater remains very strong with nearly as much cash at yearend as our $300 million with long term debt. We continue to generate significant cash flows that support our fleet renewal program and our share repurchase efforts. Our goal has been to commit between $300 million and $500 million to new build vessels each year, either through out right purchases or by entering into construction contracts with some of the yards that construct the vessels. During the March quarter, we continued the reinvestment in our own business, by repurchasing, as Keith said 354,000 shares of our own stock, at a share price of $53.39, leaving approximately $53.6 million remaining in our current authorized share repurchase program, which expires June 30th of this year. We and our Board of Directors will be reviewing soon our capital program for the coming year and that review will include a review of our share repurchase program and our dividend payout as well. Our goal remains one of generating superior long-term returns for our shareholders, and review the combination of solid earnings growth through time, dividend and stock repurchases as a balanced plan to achieve it. Before opening up the call to your questions, I wish to note the recent announcement of the impending retirement of Keith as our Chief Financial Officer. Keith has been a part of our Tidewater family for 31 years and our Chief Financial Officer for 8 years. We and I personally thank Keith for his many and varied contributions to Tidewater successes through the years, and we will all wish him well on his retirement. I will miss having a good friend at my side. We have commenced to search for Keith's replacement and are working to have the position filled before his September 30 target retirement date. Keith will remain an active member of Tidewater's management in the interim. With that, Lakecia, we're ready for your questions. Question and Answer

[Operator Instructions]. Your first question comes from the line of Pierre Conner with Capital One.

Hello, Pierre.

Good morning, gentlemen. My first question is for Keith. I think that on the fuel cost, when you're in transit like that, are you… is the fuel on your ticket… I mean, even though you are going to a set contract is that what's driving that?

Yes, Pierre. That is specifically for our accounts, specifically new vessels and most of the vessels there we go from mob area to area. In fact, whenever we attempt to negotiate a mob fee with our customers and a de-mob fee, if it's going to kind of an unusual situation, we generally store it with our fixed cost being the biggest one being fuel to be reimbursed, and then try and pick up some portion of the day rate in addition to that. But fuel is our biggest cost on our own ticket going from area to area.

Okay. Next one is a guidance question. I appreciate all the fire on the clause. Anything, what would you say about G&A? Was there some adjustments on this last fiscal quarter, what would we expect going into next quarter?

Pierre, that's a tough one. As you know, we've had a year long FCPA investigation kind of going on at Tidewater. And to be honest with you, that's been running us a substantial portion of that G&A cost. Much of the increase that you've seen kind of year-on-year has been that number. We would hope that later in this quarter, certainly later in the year, that that would be curtailed, that those results would be out there and it would reduce G&A a little bit. What I expect it to be down this quarter, at best, perhaps $1 million from last quarter, but then on a go forward basis down $2 million from last quarter into September in December.

Okay. One for Steve, and then on your order book I think on your net vessels adds, could you give us some detail about what you've added to the order book in terms of the class of vessel type?

I think as Keith pointed out where we ended up in our order book right now is we've got 18 PSVs… sorry, anchor handlers, and 24 PSVs, 3 tugs and 2 crew boats. So, that's kind of spread out pretty much over the next couple of years, although there is a couple… there's one or two that's spilled over into the year after that. But that's where the order book is and we are looking all the time… I am… to kind of fill that in with the various needs. Some of them are Deepwater boat vessels, some of them are larger PSVs and anything from the medium size anchor handlers to the larger anchor handlers, and that's kind of what we are looking at and then trying to fill in.

But Pierre, to get specific, what we added last quarter were deepwater vessels.

Got it, got it, that's... okay and the last one Dean is kind of general, but could you just tell us the dynamics in South-East Asia market? It looks like that the numbers of vessels working in the area continue to move up, utilization is tight, rates move up there, but yet we're not adding a lot of drilling rigs yet. So what's the dynamic going on in South-East Asia?

Jeff is on the call with us, Jeff, would you like to take that?

Well, Pierre, we keep waiting to see, when everyone else is going to do that, but again we're not seeing any real fall off in the market. Now a lot of the new builds that are coming in have migrated through South-East Asia to some other areas. But overall the South-East Asia market, again the market keeps ramping up and then down in Australia. Keith said we are seeing some real life activity picking up down there for us.

I'm sorry, what kind of activity?

Real nice.

Nice, nice.

Okay, gentleman thanks for the time, and I'm going to turn it back and let some other folk go. I appreciate it.

Thanks Pierre.

Your next question comes from the line of Bill MacKenzie with Loepick [ph] Capital.

Hello, Bill.

And with the credit markets tight right now and the large number of speculators that are out there in the OSP market. Are you guys seeing much coming [ph] available potentially for sale as some of the spec builds are coming due for financing?

Well, we're seeing more people offering equipment than we've seen in prior quarters. Steve, would you like to comment?

Sure, I think we're seeing more of the speculators interested in moving some of the equipment. I think that we try to keep ourselves disciplined and I think some of their expectations are little lofty, but there is more of them being exposed [inaudible].

So this applies up a lot in terms of what's being offered to the market as pricing hasn't come in yet?

Yeah, the pricing is again, we think too high but we're getting more of the ones that used to sit on the fence and let time go by and then try to do something little later may be attempting to try to do that earlier, that's what it seems.

All right and there has... have been noticed much in the way of cancellations perhaps out of the 720 or so vessels that are on order right now as a result of the tightening credit conditions?

Well, I don't know if it's because of the tightening credit conditions, but there was one in India that productions were ticking up, but the rest of them you really don't find out a bottom until the shipyards start calling you to fill the slot, so and that hasn't happened too frequently yet.

One last thing on that front if you don't mind, could you tell us what the shipyard terms have done recently in terms of down payments, progress payments and relative cost on vessels? Thanks.

It all depends on the deal. It depends on what they're building and what your relationship with the yard is. With some of the far eastern yards, you're seeing them wanting more money upfront only because of the exchange rate of the dollar and they have to buy the equipment, but other than that we don't vary it too much as few percentage points maybe on the progress payments but haven't seen a really big push towards that in the market.

Well, that's all. Thanks a lot.

Well, there is more concern on the part of the yards about the value of the U.S. dollar.

All right.

That's fair to say.

All right. Thanks a lot.

Okay. Thank you.

Your next question comes from the line of Jud Bailey with Jefferies & Company.

Hi, Jud. Jud Bailey - Jefferies & Company: Dean, could I get… when you talk about your operating cost and you're expecting the trend down for the December quarter, what's your level of confidence in there that the mid 150s? And if I could ask what is your underlying, kind of, core growth assumption as far as your labor cost and your… I guess organic cost increases you're seeing across the board?

Jud, this Joe Bennett. Jud Bailey - Jefferies & Company: Hi.

I'll try to take this one. We've done considerably more work than even normal to try to understand what our cost components will be going forward. And so, we do feel comfortable recognizing that obviously the challenges with dry dockings continue. Timing of dry dockings is still difficult for a company like ourselves that have so many going on. But even said all of that, we feel pretty good about the numbers that Keith had given before looking forward for the next few quarters. I think from the standpoint of labor, there's been a lot said about that, I am going back and looked at our own numbers historically, and of course, when you factor out the additional labor charges that have come about because of new both entering the fleet and new personnel added to the Company, I get back to and we said this on the last phone call having an inflation rate of about 8%, we're just not seeing the percentage increases that some of the driller are that I hear on conference call et cetera. So, we continue to address that through both good and bad times. We spend a lot of time talking about labor and hear about ways of… we employ people from, I think over 80 different nationalities around the world. And that helps us to try to maintain that cost line. So, those are the numbers that I have been able to kind of review and put together. I think that inflation of kind of 8 or so percent is valid. Jud Bailey - Jefferies & Company: Okay.

Is that okay? Jud Bailey - Jefferies & Company: Yes.

This is Dean. I didn't mean to be dodging your question, but Joe had already done considerable amount of work on it. Since he was closest to it, I wanted him to respond first. Jud Bailey - Jefferies & Company: Okay, I understood.

We standby by what we said last quarter and it's something that it's hard to pry apart the excess training costs that we're incurring for new vessels coming into the fleet. We've got a lot of extra positions around the world where we have an excess in complement of crews, where we're training people for the new vessels coming into the fleet. We're not seeing in general the same numbers of older vessels dropout of the fleet as we are new vessels coming into the fleet. One could reasonably say, well, we just take people from the old vessels and put them on the new vessels if they're dropping off one to one. Well, they're not dropping off one to one. And then, of course, the newer vessels are generally all dynamically positioned require greater training to achieve that certification. There is some fudge that we have to pry loose from the numbers in order to come up with a decent estimate for you. But as I said, we're going to stand by that about 8% cost inflation. Jud Bailey - Jefferies & Company: Okay. I appreciate the color. My next question is on the utilization. Keith noted where you stand for your international fleet both deepwater and supply and that's obviously still down because of the dry docking. Can you give us a sense of when we should expect that to start to trend back up to where you were in the last couple of quarters because demand is obviously still very high?

We think it's going to happen sort of… this quarter we're going trend down. And then next quarter, we should start trending up, probably more in the later half of the quarter than in the beginning half. And then after that, I think we're going to be hitting on all ceiling as we're going to see nice numbers. But, there are lot of people that are mismanaging their business and are promising better results in a couple of quarters, and they just never get there. We're going to deliver on that. And we fully intend to and we're just going to have to go do it. Jud Bailey - Jefferies & Company: Great. Thank you. I'll turn it back and let somebody else to ask.

Thank you, Jud.

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

Hello, Daniel

Good morning, Dean. A question on the dry dock. I'll stick with that topic, experience in March and in June, and even pushing it out further ahead, is this an abnormal peak even on a multi-year basis or as we forward cast even into the next fiscal year, are there going to be period where we see 80% type utilization figures?

Well, one thing that's happened is that, all those ships that we've bought in 2002 and 2003, they were more sophisticated deepwater vessels. They're all getting to their first five year special survey. And so that's happening. We are having some teething problems with some of our larger anchor handlers that kept them from developing their full potential in terms of generating revenue and profits. We're facing some challenges in some areas in terms of just getting dry dock space when we can get the boat from our customers. So there is some wasted time there. I think that some of these, I mean, particularly the coincidence of a lot of the vessels that were built in 2003 needing to be dry docking by 2008, that's there. But I don't want to promise that that's going to go away forever because these large deepwater vessels are now going to be part of our fleet. I think that we will see some trending down. I don't think we're going to see this lump stuck in through at all the time, but there will be lumps from time-to-time. It's just going to be lumpy and we're still digesting exactly how the effect of the larger vessels is blending in with the rest of our fleet. I do think that it is rather unusual though that we're getting all these sort of in tail end of 2007, 2008. I do think it relates a lot to the 2002 vessels that were build in 2002 and 2003. Now, toward the latter half of the year, we've taken, we've scrubbed the areas pretty hard, And we're pretty confident that numbers will come down toward the latter half of the year, but that, touchwood, borrowing no significant incidence, no failures of any engines, no wrench failures. I mean, there is plenty of equipment, plenty of sophisticated expensive equipment that can break down and at any one time that can cause a change, but we feel pretty confident of the numbers that we've given you so far today.

Fair enough. And then as the follow-up, going through a broader macro question. Regarding the order book, are you now seeing a slowdown in the pace of new build order being place.

Yeah.

And why do you think that that's beginning to occur?

I think people are wanting to see if the worldwide fleet can adjust to its coming. As we've said, Daniel, if there is anybody in good position for over building and we've made some statements that we don't think that over building could be as bigger problem as some people think or just even presuming that that it is and that's not a presumption that we support. We're in pretty good position to be able to take advantage of that if it should occur. So, but the pace… to answer your original question, the pace of new builds has slowed down pretty dramatically. I mean the number has been flat lined at roughly 700 vessels for the last six months. Now, there have been some new deliveries that have occurred in the meantime and there have been some new orders that are taking place while those deliveries were occurring, but pace of orders has slowed down pretty significant.

Great. Thanks for your comment.

Thank you.

There are no further questions

Well, I thank everyone for your time this morning, your interest in our company and we wish you all well. Thanks very much.

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