Tidewater Inc. (TDW) Q1 2009 Earnings Report, Transcript and Summary

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. 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. I would now like to 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 for the period ending June 30, 2008. As Michelle said, 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, Executive Vice President and Chief Investor Relations Officer; Steve Dick, Executive Vice President in charge of Strategic Relationships, Shipyard Operations, Vessel Acquisitions and Dispositions; Jeff Platt, Executive Vice President, in charge of day-to-day Marine Operations; Bruce Lundstrom, our newly named Executive Vice President, General Counsel 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 will 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 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 your 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 future performance to be materially different from that stated or implied by any comments 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 investments 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 have 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, our revenues rose nicely, industry wide challenges with costs kept this 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 lost time accidents. There were no significant incidents in the quarter in contrast to our unsatisfactory experience last year. We're thankful for this safety... this improved safety performance as it is more consistent with our longstanding 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 further highlights the operational challenges we in the oilfield 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 previous $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 its 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 to $0.25 per share or $1 a share on an annualized rate. The new share repurchase authority, our increased dividend and strongly 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 Directives has recently endorsed and improved... 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 the global marine services industry. I'll expand on this point later, but now let me first turn the call over 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 early today. We did have another press release on the addition of our fourth consecutive annual stock buyback program, and you will see a couple of press releases out there yesterday and today on 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 sometimes mid-day today. It's a preferable program and one that we're glad to be able to get back to you of having 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 a 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 is a lot being said today about the unusually high gain on sales that 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 into my way of thinking of calculating the gain on loss as it relates to EPS included in $1.64 that we reported being a total gain on sale of about $0.13. And as Dean alluded to and some of the early reports on Tidewater have alluded to a normal quarter being more in line, a gain of $2.5 million; that will equate to about $0.03 at that level. So we're talking about an extraordinary rate of about $0.10 off of $1.64, therefore getting down to $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 that gains sale for the September quarter will be at least in the $5 million 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 U.S. operations to our international operations. When we talk about costs 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 U.S. Gulf even during the first quarter that are, as we speak today, moving to an international site, three... two of our bigger deepwater vessels; that type movement is what is affecting the projected tax rate for the year and little more about those vessels whenever, as I said, whenever we get into the cost 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 will be quite obvious as to where that's coming from. Our story is very similar to what you have been hearing from some of the other U.S. operators; revenues in the Gulf of Mexico and other domestic sources really increased during the quarter at 8.8%, dayrates in the Gulf of Mexico and domestic operations are up nicely across the board for all operators across the industry. Our 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% was generated from international activities that continued movement of Tidewater into our international operations. Looking at actual cost numbers a little bit as we started off this call, we had given guidance to expect operating cost to be up significantly from the previous quarter, but unfortunately we had given guidance in the $166 million to $167 million range. We actually came in at $176.7 or closer to a $177 million range. Few unusual items that could not have been anticipated ahead of time we're 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 us $2.5 million, the so called good news was that we were able to pass it on to our customer, so in effect the $2.5 million which went straight into crude cost also went into international revenues having more effect on the bottom-line, but hurting margins. Our 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 then and instead of talking about the individual components that caused us to get to this level, I wanted to reiterate my thoughts on projected cost for the September and the December quarter. You will remember that as we said here in March our story was... or after the March quarters excuse me, was to expect increased cost but then to expect some abatement of those cost as we move into the year. As we projected the September quarter three months ago, we told you it takes back a number of $164 and $165 million, that number in absolute terms is... I am going to have to update a little bit today give you number I expected it to be $166 million to $170 million, which you will notice that its still substantially down from last quarter's reported 177. How do I maintain credibility after having these numbers, how I can 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 cost for the quarter comes from three specific items; we know we had the $2.5 million dollar very unusual cost number last quarter, we told you about $3 million one off cost to get two boats out of the Caspian, and one of the items that we have to put [ph] good hand alone drydocking schedule for this quarter appear to be where they are going to be down another $6.5 to $7 million from last quarter. So 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 we're not we're not giving the 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 in 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 where we thought the numbers might will back up to $157 million. We are now going to give guidance in the $163 to $165 range, but once again then 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 still 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 a 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 are seeing are mob costs, some additional cost of getting our new boats out into the market, and those generally are offset by some sort of additional revenue. One additional side note that kind of flows from the additions and the reduction in cost was last quarter we ended up having really a more substantial loss of revenue from days in drydock than we had anticipated. As it comes out, we believe that drydock days actually cost us something in the range of about $29 million. And we had about 2,400 days off charter. But the September quarter, we now estimate that those days off charter are going to be more down in the 1,600 days in lost revenue on a comparable basis, should be in the $18 million to $19 million range. And the significance of that is last quarter we had bigger, more expensive boats in drydockings, we had two of our biggest VS486s that were earning $55,000 a day that we had lost revenue on, just to give you an example. So, last quarter, the drydock 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're certainly anticipating less lost revenue due to the drydocking cycle that we've been going through. Looking at individual dayrates, 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 deepwater segment of our vessels in the Gulf of Mexico saw an average dayrate of $24,500. That was up about $600 from the March quarter. We will have two of these vessels we'll be mobilizing from the Gulf of Mexico and we'll be going to an international location for what's about a 20% increase in dayrating for three year fixed contracts. I would say that that mobilization should have no effect on our average dayrate as those two vessels were averaging in the 24.5 to 25 range. That class of vessel, to give you an idea of current dayrates in the Gulf for us, that class of vessels 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 supply... tooling supply section of our domestic operation saw a substantial dayrate increase. Dayrates 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 dayrates in the Gulf of Mexico, we're seeing a little bit better utilization in that fleet to where we reported right at 50% and 49.8% for the June quarter and today, we are operating at a little over 51%. Internationally, statistically, the dayrate for the deepwater vessels, the 31 that we had, statistically, the dayrate went down a few dollars, but let's be careful. We fell from an average dayrate the previous quarter of $25,474, down to an average of $24,728, about a $700 decrease. But as mentioned in the loss revenue section of my comments earlier, we had two of our absolute highest revenue generating boats in drydock, one for almost a whole quarter and one substantially for the quarter. You take two vessels out of your average dayrate both earning $55,000 a day and take a third one that was averaging $35,000 a day, and your average dayrate will come up with an average that can be misleading if you don't watch it. Today, as we sit here, our average dayrate now that the bigger boats are back at work, was right on the edge of $26,000 a day. So 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 dayrates slightly above $30,000 a day. The old backbone of Tidewater's historical business, our international supply and tooling supply vessels have once again I think exceeded expectations by showing an average dayrate increase of $543 for the quarter up to an average of $11,660. The month of June, once again the average dayrate for those 225 vessels was about $11,800, showing you that the ending dayrates were better than the average dayrate 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 dayrates across all segments. Projected fewer days of drydocking time, projected drydocking 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 million of net debt... a gross debt ratio to total capitalization of 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 bit 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 that 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 clearly evenly. The balance of fiscal '09 we think we have cash requirements of about $314 million. For 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, 4 crew boats and 2 tugs. For the balance of this fiscal year '09, we will deliver and take into the fleet 17 of that 59 vessels. Over the next three quarters, we will be taking in 10 anchor handlers, 5 PSVs and two crew boats. As I said, I don't think... I don't feel that Tidewater is being given ample credit for this. On an equal footing basis, these 59 vessels based on today's economics, not pie in the sky dayrates, a reasonable dayrate, reasonable utilization rates, those vessels today, were they are in the market, they would be expected to generate right at $1.5 billion of revenue not over their life, not over their contracted life, but on an 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 of $4.75 on an EPS basis, calculated on an operating profits basis. So a significant asset of Tidewater, one that is joining the fleet now, joining the fleet at a time of increasing dayrates and strong utilization once again certainly a strong future for Tidewater in revenue and earnings generation. During the quarter, and 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 paid an average price of $58.56. Over the last three fiscal years, we have spent $516 million buying back $9.5 million. When you take the $516 million and you add to it the slightly over $100 million of dividends we paid during that period over the last 12 quarters, we have returned to our stockholders something in excess of $620 million. So not only have we seen significant growth of the fleet, we have done it at the time by paying attention to return... total returns to our stockholders. I will be available to answer any specific questions, but we'll turn the mike back over to Dean for the rest of his comments.

Thanks Keith. 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 31 years and a personal friend for 30 years and our key financial officer for 8 years. We, and I personally, want to thank Keith for his valuable contribution to Tidewater's success through the year. We will all wish him well on 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 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 for 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. We expect this transition to be seamless. Welcome aboard Quinn. The balance of my comments will be brief as I prefer to allow more time 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 Steve, 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 dayrate. 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 today 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 mobile 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 U.S. OCS to drilling would have eventually ease, we're almost as surprised as most observers by the rapid shift as measured by recent public opinion polls and public sentiment favoring more offshore drilling. It remains to be seen whether state and federal leadership will permit the modification of the offshore drilling moratorium. The growing public support, however, 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 U.S. activity will expand opportunities both for our customers and for ourselves. We are 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 in costs, both labor and material, much like every other oilfield company. We continue to work diligently to control these cost increases as the key to our financial successes, not only optimizing dayrates 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. But we feel we are gaining on it. Inflation in shipyard costs also continues, for reasons well known. What Tidewater needs to improve upon is getting our vessels into and out of shipyards in fewer days. As we gain experience with drydocking our new large vessels, the learning curve 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 to you during our last conference call. We believe that with an easing of repair and maintenance expenses expected over the next several quarters and the elimination of specific one-off costs incurred in the June quarter such as the Caspian demobilization expense and the Venezuelan 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. Though oil prices have pulled back recently, the energy industry continues to struggle to boost oil and gas supply to meet global demand. Whether oil trades at $150, $125 or $100 per barrel, it's almost besides 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 capability. As I have said earlier in today's call, we're committed to meeting our customers' expanding requirements to maintaining Tidewater's leadership position in our industry. Present apparent [ph] stock market sector rotation notwithstanding, 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's strategy of taking the necessary steps to capitalize on these business opportunities by authorizing a significant increase in our annual fleet investment program. Capital investment will be front loaded, but disciplined and could include both accelerated new building activity and fleet acquisitions. As to program size, we are 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 the $1 billion annual investment in its fleet for the intermediate term. Custom demand, shipyard economics and other considerations justify such an investment. Tidewater is prepared to make it. In regards to acquisitions, I would like to make three points. One, we view new construction and fleet acquisitions as somewhat interchangeable. In both new construction and acquisitions, we are looking for the same types of vessels, same quality of vessels and same returns. Two, in general terms, if we are prepared to annually invest $1 billion or more in the fleet, a dollar invested in M&A is a dollar that not likely will be invested in new construction and vice versa. And finally, while we obviously will not comment on specific opportunities, Tidewater is prepared to be an assertive consolidator if transaction economics result 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 dividend, completed substantial share repurchases and have now announced a new share buyback 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 are 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 for questions. Question And Answer

[Operator Instructions]. Your first question comes from the line of Jim Randall [ph] 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. First, 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 are seeing in terms of the wear and tear on your vessels as they get older? I know you are still seeing some outstanding increases in dayrates on older vessels, yet you are taking many out of service. Are you finding that 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. 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 is nothing magical about it. We have got vessels now in South America that are over 34 years old and is working quite fine for a nice customer. It depends almost on, and it's an ad hoc decision almost in every case. Every time a vessel comes up for drydocking, what we do is we review the economics of its future prospects. And then if we don't see that the drydocking is going to be paid for in the next 30 months, plus a reasonable return on our capital expenditures, we stack to that. And then if we stack it we... in time we will decide where 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 Great Lakes that are 100 years old and working quite nicely. So it's not really a question of age like airplanes, also can work depending upon how much you want to continue to reinvest in them. But trick is to make the reinvestment where you get a return on your capital, where we have a very disciplined process about how we go about that. And so every time a vessel that's older than, say 25 years, comes up for a drydocking, we go through a disciplined process, review it, determine whether it's going to pay out over the next 30 months. And then based on that, we 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 in, to drydocking, what percentage of them, as they go to drydocking, are you think... do you still need the 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 it will be a wear-and-tear issue, Jim, I think if it does grow, it's going to be a market issue. And we will be provoked... could be proved by an awful lot of new tonnage coming into the market, balancing that we have a lot of new rigs coming into the market FPSO. 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 has 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 and 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 towing supply, supply fleet in our international segment. It was up $500 over the quarter, quarter-on-quarter. So 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 considerable 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? Dayrates 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, how long do you see this continuing based on what you see now?

Jim, we're pretty optimistic. 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 here 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 that is going to be provoking additional demand. We're not seeing a slowdown in the rate of change of... if you look over our last four quarters and just what has happened to the dayrate of our traditional vessels, it's phenomenal. And, quarter-after-quarter we continue to see that same progression in dayrate increase. Now on the other hand, we've had some challenges with costs. And that's kept us from taking full advantage of those dayrate increases. And 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 dayrate 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. If we're going to get, to be able to pass them onto our shareholders. So that's our view.

Okay. That's great. Thank you, Dean.

Thank you.

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

Hi Judd.

Hi good morning. A question on the cost guidance, you had a pretty decent jump in labor cost, sequentially quarter-to-quarter. And you explained the $2.5 million 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 rates have increased in labor cost, factoring out the new vessels that's about 9%, I still think that that's right. Although, there is pressure, I mean there... 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 and sales you're moving two deepwater 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 deepwater side?

Well, what we're seeing and what we're going to see is pretty... skies are pretty blue. There are, as you well know about 80 deepwater rigs under construction that will be delivered over the course of the next two to four years. And we think that those are going to provoke even more demand for the deepwater vessels. We think some deepwater vessels are going to return to... deepwater 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 Africa. You see it in Southeast Asia. So, our view is that the demand for deepwater vessels and many other vessels that we presently have under construction will be specifically targeted for deepwater, our view is very positive.

Okay. And just one last question if I may. Your... the number of newbuilds 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's our guy that deals with that day-to-day judgment [ph], let him comment.

Okay.

It's not 49, by the way it's 59...

Yes, it is 59 and it was 49 at the end of fiscal '08 and since then, as of today it's 59. But it's a combination of both, 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 with them to finish it and then we will take delivery at the end. So there's a combination of things that we're doing this... acquiring existing and also acquiring after delivery or after satisfactory sea trials. And there's a combination of both of those and we are also ordering what... we've had a design that we liked and gone to shipyards, received quotations back and then maiden would... to be delivered 2010 and 2011 so, there is a combination of all of those.

Great, thank you. I'll turn it back to somebody else.

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

Good morning, Pierre.

Good morning gentlemen. We got the question on the labor cost side that... just appreciate that. Keith, maybe or where we're on the newbuilds I know that you've previously given us a scheduled deliveries in the press release. I'm assuming that's going to show up in the Q this time,

Yes sir.

And just generally, do you see any delays in the previously 49 newbuilds or they are... will you still be impacted by shipyard delays?

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

Okay.

There's no... in terms of delays, additional delays from the end of last quarter to this quarter.

Yes

There's been no additional delays.

Okay. That's actually, yes that's what I was looking for, so don't expect that table to be significantly different than the one from the prior time.

No sir.

Except for the addition of the 10 newbuilds.

Correct.

Other just housekeeping, Keith with the two vessels moving from the U.S. 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, fuel and such you will see financially to get the boats to there. And on the other hand, you are going to see more revenue is going to come through the revenue line, that's almost equal to what the 30 day travel time, $35,000 a day would equate to. We're going to have more of 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 have experienced obviously, is they've been rising with steel cost, construction cost as well, rates are continuing to improve, but do you see in divergence in that trend?

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

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

Okay

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

Okay and then within the last year, your assumptions as to what you think vessels could get per rate, obviously should have been continuing to improve, given your confidence on 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 get some. So that's where we struggle with, but I think we just feel like that there is going to be some opportunities and 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. Just first question, on the cost side, we 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?

What we saw... we just renewed a labor contract in Brazil. That was one and that was about a 10% increase, I think across the board. So that was one. There's pressure everywhere. The market for crews is almost global in the international side. And the guys know what each other make in various regions where they are working. So, if one area is hot and we respond to pressures to favorable pressures in one area, it's not long before the word gets out to another area. And guys in the other areas are saying, what about us. So, the pressures are there. But I would say that the... I think the 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've crews that already trained and we can transfer... 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 in that to that extent. But we had a 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 $1 billion annually seems to be a bit of a step change. So 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 then 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? Because it seems like you're shifting to more of discernible growth mode here.

Just what we had on the order book last quarter. 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 in every case upon a review of the fundamentals of the market in which a boat happens to be and including what it's going to cost to keep it in service. Answer on to your second question is even with our order book as of last quarter with the 49 vessels, those 49 vessels we are 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 in this quarter, our earnings per share, just using today's economics, should go up about $4.75, presuming everything of course that these boats and some are not going to come into the market for a couple of years, two to three years depending upon which vessel, where. But presuming today's economics, we have already replaced the earnings power of our fleet. So 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 2. So there was a net gain of 10 in the backlog, but that's the... and those 12 boats have a contracted price of $260 million just to give you an idea of how we are attacking the expansion of that earnings capacity of the company.

Great. Thank you for the answers.

Okay, thank you.

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. Thanks.

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