Tidewater Inc. (TDW) Q2 2009 Earnings Report, Transcript and Summary

Good morning, my name is Janice and I will be your conference operator today. At this time, I would like to welcome everyone to the Fiscal 2009 Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] At this time, I would now like to turn the call over to Dean Taylor, Chairman, President and CEO of Tidewater. Please go ahead.

Thank you, Janice. Good morning everyone and welcome to Tidewater's fiscal 2009 second quarter earnings conference call for the period ending September 30th, 2008. I am Dean Taylor, as it already been stated, I am Tidewater's Chairman, President and CEO and I'll be hosting the call this morning. With me today are Quinn Fanning, Executive Vice President and Chief Financial Officer; Joe Bennett, Executive Vice President and Chief Investor Relations Officer; and Steve Dick, Executive Vice President in charge of Strategic Relationships, Shipyard Operations, Vessel Acquisitions and Dispositions. We'll follow our traditional format this morning. I'll start with some comments about our earnings results released earlier today and our assessment of the current business environment. We want investors and shareholders to understand how we're approaching today's business environment in light of the current credit market turmoil. And how Tidewater is positioned to work within it. I believe this background is important as you asses our recent results and consider our prospects for the future. Following my initial remarks I'll turn the call over to Quinn for a detailed review of the quarter's financial results as well as an update on our new build and vessel replacement program. I'll then return with a discussion of our view of our markets and how our strategy will deal with the current environment. We'll then open the call for your questions. At this time, I will ask Quinn to read our Safe Harbor statement and then we can get started.

During today's conference call Dean, I and other members of Tidewater Management may make certain statements which are not statements of historical fact and thus they constitute forward-looking statements. 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 make during today's conference call. For more detailed review of risk factors, I would ask that you refer to Tidewater's most recent filing on Form 10-K.

Thanks Quinn. Earlier this morning, we reported second quarter earnings of $1.85 per fully diluted share up $0.29 from a year ago. Earnings were $0.21 higher than in the June quarter. This quarter's results were $0.02 better than the latest first call consensus earnings this afternoon. Our financial results reflected another quarter of solid operational performance. Lead by our deep water vessels that achieved both higher utilization and day rates compared to the June quarter. Equally important in the September quarter our fleet of international towing supply vessels had an increase in average day rates at more than $700, reflecting the underlying strength of the international market. Quinn will give you the details. An equally important measure for Tidewaters is our safety performance. As we speak our TRIR is 0.18 per 2000 man hours worked, which is consistent with our historical safety performance record, and our goal to be the safest company operating offshore. I'd be remised if I did not point out that during the September quarter virtually all of Tidewater's domestic onshore facilities were affected by two significant hurricanes. Gustav and Ike. Fortune all of our people and our assets came through these storms without injury and with no significant damage. While many of our employees and their families suffered from loss of electricity and damage to their homes, the operational and financial impact on Tidewater was minimum. I commend the efforts of our domestic staff and cruise in fulfilling our responsibilities to our customers while dealing with their personal issues related to these storms. Turning to the present, it would be an understatement to say that we are operating in a virtually unprecedented business environment. We started the quarter with the world's financial system more visibly stressed than in prior quarters as financial institutions continue to deal with the twin challenges of deteriorating asset quality and the unwinding of accessible levels of financial leverage. From the perspective of the energy industry, oil prices were $140 a barrel. In the consensus view, it seemed to be the global economic activity would continue to grow at least modestly. At the time, even the down side case called only for subterranean line growth worldwide and assured a shallow recession in the United States and Europe. Little did we know or expect that a number of well known financial institutions would disappear in the worldwide credit market which seized up almost overnight, or that global oil prices would collapse by more than $40 during the quarter. In this span of just over 90 days, we went from record oil price of $145 a barrel to a 14 month lower in $65 per barrel. We applaud the efforts of the world's leading financial ministers to address the turmoil and the credit and financial markets that otherwise appeared to be bringing economic activity to a halt. We need however to acknowledge that the fall out from this turmoil would take a toll on global economic activity, which is reflected already in lower commodity prices. We are cognizant that lower oil and gas prices will impact the cash flows of our customers, and we are prepared for the possibility of reductions in future oil field spending. Just how much of an impact we cannot estimate at the present time. As this economic uncertainty is coming at a critical time for our business, a point in the year when most of our clients are concluding their capital spending budgets for next year our visibility beyond the near term is limited. Although it is our feeling that activity in the international markets will not be impacted as much or as soon as domestic activity and that domestic offshore activity may be bullied in the intermediate term by hurricane related repair work. As I noted at the front end of my remarks, we have yet to see a reversal of the recent positive trends in activity levels and vessel pricing in our business and our long term outlook remains rather positive. After a period of retrenchment, we would like to believe that the developed economies will again experience moderate growth and the developing economies will experience better than moderate growth as well. Reality of the supply side of the equation remains shrinking surplus production capacity and increased service intensity of each barrel or MCF produced. We also believe that offshore exploration and development will grow at a faster pace than onshore exploration and development. Nevertheless in the light of the near term economic and industry uncertainty, I'd like to review two strategic initiatives we discussed in last quarter's conference call. First, we addressed creating value for our shareholders. Under that initiative we announced the two-thirds increase in our quarterly dividend to $0.25 per quarter, up from $0.15. We've paid this quarterly dividend twice now, and intend to continue to pay it going forward. At the same time, we announced that our Board had authorized a $200 million share pro ... share repurchase program. Second, we indicated that our Board was supporting management in its goal to significantly expand the amount of funds we were prepared to commit annually for upgrading and expanding our fleet. In light of current financial market conditions and consistent with our long standing operational philosophy, Tidewater's foremost priority at the moment is to maintain maximum financial flexibility to deal with the uncertainty of today's credit market conditions. Accordingly, we did not purchase any shares in the quarter. And today, our $200 million authorization remains unutilized. In the quarter just completed, we did not add to our backlog of new vessel commitments as part of our ongoing fleet renewal program. This however was more matter of timing than a change in approach. We continue to actively monitor vessel and fleet acquisition opportunities and are prepared to make whatever adjustments to our fleet renewal program that we deem prudent. You can expect Tidewater to be judicious in the use and commitment of its capital. Our strong financial position has stood us in good stead in past times of financial turbulence. And we fully expect it to do so in this period as well. Let me now turn the call over to Quinn to detail the recent results.

Thank you Dean and again good morning everyone. First I'll call your attention to our earnings press release which we put out this morning prior to the market's opening. Before I move on to a financial recap of the fiscal second quarter, I also note that our 10-Q should be available through via the filing service no later than mid day today. Turning to quarterly result as of and for the period ended September 30th, I will follow the practice of my predecessor [Indiscernible] of revealing in summary fashion only our financial results for both the quarter and on a year-to-date basis. Rather than drag you through the press release from line by line basis, I will try to focus on what is driving results in terms of fleet profile, geography, rates and utilization, cost trends and otherwise. Obviously, we will continue to provide you with our best assessment of Tidewater's financial profile, it's capital commitments, available liquidity and to an extent possible key financial targets. In regards to the guidance, we expect to continue our historical practice of providing operating cost and vessel level cash operating margin guidance as well as our current expectation for corporate G&A and Tidewater's effective tax rate. There's also our intention to try and file our quarterly 10-Q on the same day as we press release our quarterly numbers and have these earnings conference calls. As we did this morning, we will continue to include the various schedules that were added to our earnings press release a couple of quarters ago so that the investment community will have an opportunity to see a good bit of our detailed financial and operation results prior to this conference call. As always Joe Bennett and I are available to discuss ways that you believe Tidewater can enhance our improvement communications with research analysis community and with investors. And I think that's it for housekeeping matters. Okay, somewhat repeating Dean's introduction, we reported diluted earnings per common share of $1.85 for the second quarter of fiscal 2009 which, as you know, ended on September 30th 2008; versus diluted earnings per common share of $1.64 for the first quarter of fiscal 2009 which ended on June 30th 2008 and diluted earnings per common share of $1.56 for the second quarter of fiscal 2008 which ended on September 30th 2007; that's an increase of 12.8% and 18.6% respectively. As you know, gains on vessel dispositions have historically resulted in some volatility in our earnings on a sequential basis. If however, on a just actual gains from amount in excess of or below the average quarterly gain on asset sales, the Tidewater has experience of last eight quarters of about $4.9 million and also assume a 35% rate on those average gains. Diluted earnings per common share would have been $1.84 for the quarter just completed as compared to $1.57 for 1Q 2009 and $1.59 for Q2 2008, implying quarter-over-quarter and year-over-year improvement of about 17% and 16% respectively. For the six months ended September 30th, 2008, diluted earnings per common share were $3.49 as compared to $3.11 for the six months ended September 30th 2007, a year-over-year increase of about 12%. Excluding actual gains in excess or below the average gain on vessel dispositions as was just discussed, diluted earnings per common share for the six months ended September 30th 2008 and 2007 was $3.41 and $3.12 respectively or a year-over-year increase of about 9%. The quarter just completed was characterized by a steady progression of rate for both our deep water vessels and for our fleet of towing supply and supply vessels. Steady and very good utilization really across the Tidewater fleet. Some progress in terms of our very serious efforts to better manage and forecast operating costs, that we'll say we're not yet where we want to be and quite frankly where we need to be. And finally some moderation around to the June quarter and proceeds from and gains on vessel dispositions. I also note that we have revised our estimate for Tidewater's effective tax rate for the year from 17%... excuse me from the 17% rate that we had used in the fiscal first quarter back to an effective tax rate of about 18%... excuse me it is 18% not about 18%. In any event, this modest upward revision reflects both a higher estimate of our effective tax rate internationally and an increase in foreign tax accruals. What the change in the tax rate does not reflect however is any reversal in the recent trend of Tidewater of its international operations growing at a rate that is faster than the U.S. operations. In fact, the contrary was true in the past quarter, as we mobilized three vessels out of the U.S., Gulf of Mexico to international markets. In addition, we accepted delivery of two new vessels in the quarter both of which have begun multi-year contracts in international markets. I underscore this point as we very much like the diversity and operating flexibility that is provided by our global foot print which results in good balance in terms of oil and natural gas exposure and we think a better mix of term contract opportunities and spot work. Looking at some specifics, vessel revenues for the quarter increased to $345 million. This represented a 5% increase over 1Q fiscal 2009 and nearly a 16% increase over 2Q fiscal 2008. Domestic vessel revenues were flat quarter-over-quarter and off about 7% year-over-year. This trend largely reflects the previously mentioned mobilization's international markets as activity and day rate trends are generally positive in U.S., Gulf of Mexico. In part due to the step up in hurricane related work, that was referenced in Dean's remarks. In terms of rate trends, our Deepwater and Towing supply and supply equipment, showed quarter-over-quarter day rate improvements of $790 a day and an extraordinary $1234 a day improvement respectively, implying a quarter-over-quarter improvement of about 3% for Deepwater and nearly 11% for Towing supply and supply. Current average day rates for the domestic fleet are in the range of $23,000 to $26,000 a day for Deepwater equipment, $13,000 to $14,000 a day for towing supply and supply vessels, that's up nicely from what we had averaged in the September quarter and in the mid to high $5000 range per day for crewing utility boats. Turning to our international operations, vessel revenues were up about 6% quarter-over-quarter and up nearly 20% year-over-year. International average vessel count was down a net six vessels quarter-over-quarter largely reflecting the three vessels move from the U.S., Gulf of Mexico and the disposition of eight international vessels during the quarter ... excuse me during the course of the September quarter. Day rate progression international has been a very soft ... has been very solid year-to-date with quarter-over-quarter improvements in Deepwater, Towing supply and supply and crewing utility vessels of $2,103 a day, $715 a day and $219 a day respectively implying quarter-over-quarter improvements of 8.5%, about 6% and about 4% respectively. Current average day rates for the international Deepwater vessels are pretty consistent with the September quarterly averages, right now that we've seen continued increases in our core international towing supply and supply class with current average day rates up about $250 relative to the September quarterly average. For your reference, average day rates for the quarter just completed were $26,831 a day for Deepwater vessels, $12,375 a day for Towing supply and supply vessels and $5,185 ... excuse me, $5,184 for crewing utility boats. Separate inner parts from vessel revenues are our other marine vessels which totaled $2.2 million for the quarter down from the prior quarter's $11.7 million and a year ago quarter of $21.7 million. As I'm sure you all know, other marine is primarily the outside work done at quality shipyard which tends to be rather lumpy in terms of revenue recognition. The hour is reasonably active with ... cost related to vessels built for third parties are recognized only when a vessel was delivered. Turning to operating costs which admittedly has been our greatest challenge in recent quarters, we reported total vessel operating cost in the quarter of about $175 million versus vessel operating cost of about a $177 million in the June quarter. As noted in my introductory comments at face value this represents progress relative to last quarter's results. The story beneath the surface however is a bit more complicated than we missed [ph] our approximate quarter operating to cross guidance of $166 to $170 million, which is mentally we just provided you at beginning of August. For a fair comparison last quarter, first I'll remind you of two items totaling about $5.5 million that were flagged as unusual in the first fiscal quarter. Number one, we had a government mandated retro act to salary increase in one of the foreign jurisdictions which we operate. This cost was about $2.5 million which was essentially re-billed the customer. So, while this item has the effect of inflating operating expenses and depressing operating margins, there was no bottom line earnings impact. Number two, as you may recall in the June quarter, we also had $3 million in one off cost to get two boats out of the Caspian. So comparing costs of a $175 million in second quarter to adjusted first quarter operating cost about $172 million, you'll see that we're up quarter-over-quarter by about $3 million. Peeling the onion back a bit on the September quarter's OpEx of a $175 million, there are two items that I would like to highlight as noteworthy. Though, at this point I hesitate to call this items quarter-on-quarter unusual. Number one, we had four vessels that we delivered either late in the June quarter or over the course of the September quarter. All of these vessels are under multi-year contracts and day rates that we consider be very attractive relative for our investment. That said, new vessels are generally moderate contributors bottom-line in the first quarter following delivery and in our case were probably not adequately factored into our August cost guidance. For these vessels, incremental OpEx of the quarter was nearly $3 million, spread essentially across all cost categories excluding R&M. Number two, repair and maintenance expense. Though R&M was down in 2Q from the peak levels of 1Q by about $3.1 million, the quarter-over-quarter improvement was off from both our internal estimates in the $6.5 to $7 million quarter-over-quarter improvement that we guided you toward in August. Number three, related R&M expenses, but obviously not an OpEx item as are days of hire in the associated loss revenue due to dry docks. For the quarter just ended av [ph] days off hire was about 2400 days which was comparable to the first quarter total, but approximately 800 days more than we had originally anticipated. We estimate loss revenue of approximately $25 million in the quarter, due to dry docking days versus $29 million in loss revenue in the first quarter. To be clear, we'll continue to have vessel deliveries in the coming quarters as part of our on going fleet renewal program and we recognize that with fleet additions, we will incur incremental operating cost beginning the first day out of the yard even if we do not generate sufficient revenue to realize the plus or minus 50% cash operating margins out of the gate. As you know that's a minimum target for us. In regards to R&M, we clearly have more work to do on reducing both dry dock costs and our days off hire. We also recognize that the investment community will also evaluate our team on the basis of what we do rather than what we say. So, I can only assure you visit us in the waters on Houston, you'll find us work diligently on this matter. That said, we believe that we're making progress at least in regards to performance measurement forecasting. As a result we believe that our ability to manage costs and the quality of our guidance has and will continue to improve overtime. And based on what we're seeing today, we also believe that the trends are moving in the right direction. Like operating cost, in the second quarter we've made some progress with respect to cash level, excuse me cash or vessel level operating margins. Negative variances in the operating cost line were some what offset by positive variances in revenue including fleets [ph] and the vessel deliveries. In particular, for the second fiscal quarter we reported a cash operating margin of 49.1% versus 46.2% in the first fiscal quarter. Again we are moving in the right direction but at a pace that is slower than what we would prefer. On a go forward basis we expect the operating cost for the third and fourth quarters of FY 2009 to be in the $172 to $178 million range or mid point estimate of a $175 million in vessel operating costs. In general terms, our cost guidance is based on the assumption of upward trends and operating costs associated with new vessel deliveries and some moderation in R&M costs primarily related to reasonable visibility on a reduced number of scheduled dry dockings in the second half of the fiscal year. With the expected lower level of dry dockings in the second half of this fiscal year, we also expect that the negative impact, the days off hire that is had on the revenue line will also be reduced. In regards to cash operating margins, our guidance remains an expectation for steady improvement over the next couple of quarters. In particular, our guidance range for vessel level cash operating margins in the fiscal third and fiscal fourth quarters is 50% to 52% and 51% to 53% respectively. Again, for the approximate quarter that would be 50% to 52%, and then following quarter that'd be 50 to... 51% to 53%. But I'm sure the audience knows this number excludes G&A, depreciation expense and gains or losses on sales of assets. The final comment that I would make in regards to P&L, is that at plus $35 million, our general and administrative expenses in the June and September quarter are a bit higher than our go forward expectation due to some non-recurring items including cost associated with my predecessor's retirement. For modeling purposes, a reasonable quarterly run rate is probably about a million dollars lower than recent results. Turning to the balance sheet, Tidewater continues to maintain a very conservative financial profile both in regards to leverage and liquidity. In the present market environment, we believe that this is a real competitive advantage. Total debt was $300 million at September 30th and cash at 930 was about $145 million. As a result, net debt is a bit over $150 million and net debt to net book capital is less than 10%. That to trailing EBITDA was about 0.5 times. We continue to maintain a $300 million revolving credit facility the entire amount of which was available at 930 for future financing needs. So based on our cash position and unused revolver capacity, total available liquidity was about $450 million at September 30th 2008. Against this liquidity, which we obviously expect to be supplemented with substantial operating cash flow, is our backlog of new construction which as of September 30th was spread across 57 vessels with an aggregate cost of $1.2 billion. $378 million of this amount has been funded at 930. Remaining payments on committed construction is about $778 million as of 930 of which $214 million is expected to be major in the remainder of ... excuse me during the remainder of fiscal 2009. $276 million is expected to be made in fiscal 2010 and the balance would be made in fiscal 2011 and beyond. Over the balance of fiscal 2009, we expect to take delivery of 15 vessels including 8 anchor handlers, 5 PSVs and 2 crew boats. Finally, as Dean noted, though there is a $200 million share buyback authorization in place, we are not buyers of our own stock in the second quarter despite our view that Tidewater is a very attracted investment in recent stock prices. We continue to evaluate a wide range of options including additional new builds, one off vessel and fleet acquisitions and selected corporate opportunities. Again, in the current environment, we believe that our strong financial profile provides Tidewater with a degree of strategic optionality that others in our sector may not enjoy. Wrapping up my comments in the near term, we expect to be cautious in regards to investments and acquisitions. However, if a rather bullish operating outlook remains unchanged in the coming months and if access to capital is not a significant constraint, we would expect to be optimistic if not assertive in terms of our fleet renewal program and our growth agenda. And with that, I'll turn it back to Dean Taylor.

Thanks Quinn. While Quinn has detailed our solid operational and financial performance in the last quarter, I suspect most listeners on his call are more interested in our assessment of the future. As I mentioned at the outset of the call, these are certainly amazing times. We know that the future will not be as we thought it would be nearly ninety days ago. Weaker global economic activity has already taken its toll on oil and gas prices. We believe our customers will be reassessing their spending plans going forward. But believe that they will do so cautiously, as we are. It's our belief that many of our larger customers will stay the course for now. But that those with either neutral or negative cash flows; will be adjusting their activity to be more in line with their ability sell fund projects. That said, I would like to point out that Tidewater's global footprint is a significant asset in helping us to be better prepare to weather economic turbulence. Our long history at most of the major worldwide off shore oil and gas regions is another strength upon which we should be able to rely. While some geographic markets will be more impacted than others from the challenges that may arise, we have the operational flexibility to shift vessels from region to region to address them. Importantly we also have the financial capability to fund those ships. In Tidewater's a long history of serving the international oil and gas industry we've lived through other turbulent periods, such as the industry depression of the 1980s and the early 1990s dead sea period in the Gulf of Mexico when natural gas prices fell below $1 in MCF. More recently we experienced the 1997, 1998 market collapse as crude oil prices fell to $10 a barrel in response to the Asian currency prices. Each time Tidewater emerged from those turbulent times a better and stronger company. I fully expect we will do so again this time and I expect that there will be some nice opportunities for us to expand while others may need to contract. How can we do that? It will be because we've entered this period with a strong balance sheet. As Quinn said, net debt as a percentage of total invested cap remains at about 7% and we continue to generate strong cash flow. We still have an unutilized $200 million share repurchase authorization. Most importantly, we have retained our financial flexibility which we believe will enable Tidewater to capitalize on whatever future business opportunities that may appear. We systematically work to renew our fleet. And we now possess the largest number of new vessels in the industry. When pointed out, we have commitments to add 57 new vessels through our fleet over the next two plus years which we believe at present market economics we can finance out of our future cash flows, available cash and our existing un-drawn $ 300 million revolving credit facility. Rest assured that we will monitor our fleet renewal plan. And made... and are prepared to make whatever adjustments are appropriate given our assessment of future industry conditions, our cash flows and available opportunities. The Senior Management team in the 8000 plus worldwide employees of Tidewater remain focused on delivering the quality of service and support that our clients are accustomed to receiving. Our strategy for the future recently characterized perhaps as overly conservative remains unchanged and appropriate for the current environment. We will continue to strive to provide the safest offshore working environment for our customers and employees. We will guard our solid financial position while remaining prepare to utilize our balance sheet and our financial flexibility to capitalize on future business opportunities to grow Tidewater. We will work hard to provide an attractive financial return for our shareholders and our recently increased quarterly dividend demonstrates this commitment. Though we maybe in the middle of a global financial maelstrom right now, Tidewater fully anticipates exiting from it a stronger and better company. Let me end here and ask that the phone lines to be opened for your questions, Janice? Question And Answer

[Operator Instructions] Your first question comes from the line of Jim Campbell of Barclays Capital.

Hi Jim.

Good morning, Dean. Dean, first question is what are you seeing in terms of a more active interest in the part of new vessel builders in terms of increase to sell their vessels to you and what evidence do you have I guess at this point that certain vessel builders are running into financing issues?

Well, Jim we've seen a lot of answer your first question a lot of evidence and I let ... you've already seen one Norwegian shipyard clear bankruptcy but Steve's here, Steve deals with stuff everyday and is probably better prepared to give a more specific answer than I am, so let me pass the microphone to him please.

Good morning Jim.

Good morning Steve.

We are seeing an increase in the shipyards coming to us with possibilities trying to develop sales, some of it is as a result of people that had a made the placed ... the orders, I think some of the financial crisis is affecting them in funding what they need to fund, but it hasn't ... I haven't seen it translate very much into making the office a lot more competitive but we are getting a lot of it. My guess is that there has been some cancellations, some options that are further out that, that will not be taken up by builders, but I think we're just beginning to see some of this play out and my expectation is that we're going to start seeing a lot more offers coming again and having the availability of the equipment.

So Steve, just to summarize what you said there's a lot ... you're getting a lot more contact with them but the prices really haven't changed much from what you've experienced over the last six to twelve months?

That's correct, there's a little bit of softening, there's more room for negotiation is how its put in some cases but it hasn't been significant in changing what the market is at the moment.

But I feel like Jim ... just to amplify that just a tad, I feel like pricing is on the precipice. I really feel like that we are likely to see prices for asked equipment move pretty dramatically, pretty soon so I think that I would qualify Steve's remarks with that.

Do you have any senses, I am sure you have a sense but is there ... what is your estimate for of the 700 plus vessels that are being built today, how many of those might be spec vessels and not owned by operators around the world?

My guess about a 150, Jim. Unlike in the 80s which you and I can both remember there's not been nearly as much equipment ordered on speculation, this time as they were as there was in the early 80s. Most of the equipment that's been ordered has been ordered by established operator nevertheless there are a number of KSA's in Germany and Norway. And there is some Far Eastern shipyards that have built on speculation and so I would guess about a 150 units.

Dean and Steve, would you expect that in addition to these 150 built on speculation that certain vessel owners may have gotten themselves to leverage then you may see these companies show interest in selling as well?

Yes.

Okay and would those be primarily Scandinavian firms or with a global phenomenon?

Jim I was reading Trade Winds [ph] this morning, they had couple of Scandinavian firms that didn't have very good results and the shipyard what was surprising is that the, one shipyard that had declared bankruptcy is Norwegian, we've heard some rumors that another Norwegian shipyard is about ready to declare bankruptcy, so that would be part but I think its going to be split around pretty evenly, Steve would you agree with that?

Yes, I think it will as well again in the Far East there's been some people who've stretched themselves a little bit and leveraged themselves outside. I think I think we'll be getting at, we'll be getting some signals from just about everyone.

Okay. Very interesting, thank you.

Thanks Jim

Your next question is from Judd Bailey of Jefferies & Co.

Hi Judd. Judson Bailey - Jefferies &Co.: Good morning Dean, question for next year when you look at the commodity price environment outside of the Gulf of Mexico, is there any particular region you're more concerned with your customers and maybe scaling back their budgets going forward?

Not really. Judson Bailey - Jefferies &Co.: No I mean outside of the Gulf there's some regions there will be more I guess sensitive to you saw in the independence or even national oil companies who could alter their spending plans?

Not ... we are not seeing it yet Judd, and I guess, if I had to pick one it would probably be the Middle East, although for that ... Middle East is more a function of too much local competition and too much political influence. Maybe Southeast Asia some of the independence through out the Southeast Asia but I'm not too contrary. I think in fact some regions should actually because of just sort of internal political issues have to increase activity, so no, I'm not concerned about anyone particular region, if I have to pick one and it would be the Middle East. Judson Bailey - Jefferies &Co.: Okay, and you mentioned in your prepared comments you were going to be a bit cautious, I believe going forward, just given there the credit environment and what not. Is there anything in particular you would wait ... that you would want to see before you get more aggressive perhaps on the M&A front or being more aggressive in going after some these vessels that they are under construction and maybe sold off at distress prices?

It's sort of like being a good stock digger [ph] Judd. I mean fundamentals are pretty simple model level and so high. Most of the stuff you do by feel and nothing in particulars that I want to out-line over the call but we'll know when we see some good deals. Steve knows when he see a good deal he could smell one and we'll know when we see one in terms of an acquisition opportunity. We've then ... its funny, we were flow on the draw in terms of in the uptick and it looks like that may have paid off for us, because I think we are going to have some much better opportunities as time goes forward but we'll know when we see it and we'll feel it and its just to try to define it specifically I think would probably be am injustice to both ourselves and the opportunity. So let me leave it at that. Judson Bailey - Jefferies &Co.: Okay, and if I may my last would question would be any update on what's going on in Brazil as far as their plans to ramp up spending, there been a bit of mixed signals coming out or has there been any change on their vessel needs going forward?

Well, I'm seeing the same mixed signals that you are Judd, but I would say this having grown our business in Brazil in the early 80s and experienced a pretty severe downturn back then, whether this would be the same or I don't know. But I would guess that Brazilian activity will remain robust. Now what will be challenging activity from Petrobras and from the majors that are down there, but I think will challenge, will be the ability of shipyards to get funding to meet some of the commitments in terms of the FPOS's, the FSO's, the drilling rigs and the boats. And the National Development Bank of Brazil has said that it is going to fund ... what it says it was going to fund, so at least the word is from them that they continue to be able and willing to finance some of the activity. But I think that's going to be a challenged, I think financial markets as a whole will be challenged and I think that will apply as well to the Brazilian ... financing opportunities in Brazil. So I think the activity will be robust because Brazil needs it to be robust, they don't want to be net importers of product and their economy is such that they need to be active in order for them to fulfill their own needs. But whether the financial markets will be able to finance all of the locally built construction that was previously advertised I would sort of doubt it. Judson Bailey - Jefferies &Co.: Okay, great, thank you.

Thank you

Your next question comes from Pierre Conner of Capital One.

Hi Pierre.

Good morning gentlemen. First question about the ability to move vessels in different geographic regions without tipping off competitors where you might be going [ph]. So you have three quarter left the Gulf of Mexico what is your outlook for the current quarter, do you have some open tenders, you could move more equipment or what would be your perspective on that?

Here this, our Gulf of Mexico equipment except for deep water equipment doesn't translate that well into foreign markets. There are some opportunities in West Africa in the Middle East and in South East Asia where we can move sort of shallow water equipment from the Gulf of Mexico out of the Gulf of Mexico to other markets but they come up sporadically. I can't think of any off hand that we are working on right now to move any shallow water equipment from the Gulf to other areas but I actually am of the belief that shallow water activities is going to increase in the Gulf this quarter because of the hurricane related activity. So would be ... we each opportunity on an ad hoc basis, I think it would be more likely that we would be looking to keep our equipment in the Gulf for the time being because rates are doing nicely and we think that there is going to be at least for the time being a fair amount of activity here.

Okay, related at one of the areas of cost that you didn't mentioned Quinn was fuel used [ph] in supplies and vessels are moving between regions that fuels on you, was there an impact in the quarter associated with these three vessels, was that strictly just inflation on your ... the fuel that you do carry?

I think I mentioned that the operating expense associated with the new deliveries was really across the cost category is which we've included fuel.

Okay. So more of that impact then. Okay, thanks and then the other, the last topic Dean, is on your order book; the 57 vessels you have coming I'm assuming you are in discussions about contracting those. Can you give us some color on what of those are say letter of intent or contracted, numbers or percentages to what degree?

We don't like to contract vessels too early in the process, because some ... with some customers you get yourselves in a penalty situation and well with shipyard delivery has been somewhat not always as firm as we would like them to be. We don't like to put ourselves in position of having a contract but being reliant ... relying upon the shipyard to deliver the vessel in time for the contract. What I can say is that we've delivered roughly 140 vessels, in the last three years ... three to four years, and everyone has come out and gone through a contract and most of the time through a term a contract at pretty good rates.

The ones that delivery, a 52% of those deliveries of this year, have contracts.

Steve's pointing out ... go ahead Steve.

Of the vessels that are delivering this year and the ones that have already delivered and the 15 that remain of that group, 52% of that group is contracted for some term.

Alright, okay that's helpful Steve.

But let me emphasis Pierre, the emphasis I would hope would be, that we expect everyone to go onto a contract by the time that they are delivering.

That's correct.

Understand.

This team that are being delivered I think the schedule that was put out this morning as part of our press release is five are expected to be delivered in this December quarter and ten March quarter. So following Dean's comments of us trying to wait kind of long as we can do contract these vessels with ten of these coming in that March quarter. Yeah we would be getting to the point now of starting to get those under contract. So kind of consider all of that in coming to whatever conclusion you may have.

Okay well, now that we've opened it up a little bit and then I'll win [ph] but relative to you term contract, and I think this is a topic in the market is we all don't know how much slowdown that'll be but where customers might turn back activity. What can you say about the strength of your term contracts Dean, sort of anything relative to sort of an average duration in an international market and again exclude understand the Gulf, but what is an average duration are we in two years and what kind of strength is in the contract rate wise and level of activity?

Pierre I'll answer it this way. We have as good of contract coverage today as we had three months ago, three months before that, three months before that; three months before that. So we've not see anything to date, that would indicate that our contract coverage is weakening. We have about ...I want get two precise that we have a 50% of our fleet contract it's for the next year. And we expect at least for the intermediate term to be able to continue to report those numbers. Of course that ... I mean a lot depends. We can have somebody with a firm contract come to as in say Dean we like you and we like your company and we need to develop and we now we understand we've a firm contract but we need to help from you. And depending upon the customer, who we need to re-evaluate whether we would try to give them some help or not, but we're not seeing any of that right now Pierre now whether that comes three months from now, six months from now, nine months from now; that's going to be hard to say but a lot will depend up on the depth and breath of the economic turmoil as we go forward.

Alright, thanks for the perspective gentlemen

Great, thank you Pierre.

Your next question comes from Richard Spencer of ODF Heathrow Capital [ph].

Hello, Richard

Good morning, I was wondering, are you expecting any delays or early delivery in existing new built schedule?

We've... the revised schedules we've had some vessels in the Far East that did experience some delay and we've got the new delivery date for those vessels and it looked that they all looked to be on track at the moment and we also did have on we're building some vessels in Europe as well and we've got early delivery on two of those vessels so, it's certainly the new deliveries didn't outstrip the delay to deliveries but there is some good news in deliveries.

Richard nothing significant.

Okay.

It is, it's not because of the cost was more, it was more of a case of shipyards having booked more work that they can handle and it's pushing up the deliveries, pushing up the deliveries a little bit.

Did you say that there'll be no additional new bills announced this quarter?

We said that we had made no additional commitments this quarter, we did not... we did ... we said that that was just a matter of timing. And it was not a matter of change of approach.

I was wondering.

The comment relates to the September quarter, it was not a comment regards to our plans prospectively.

Okay, I was wondering if you guys had any feelings on the announcements of a possible e-navigation rules coming out of the IMO. I understand its still in development?

Think we're going to wait till that defines itself a little bit better.

Okay.

Before we make any comments.

Alright, well thank you very much for your help gentlemen.

Okay Richard, thank you very much.

Your next question is from Dan Boyd of Goldman Sachs.

Hi Dan.

Hi how are you. Out of the those 50% of your fleet that's contracted over the next year, can you comment on how the average day rate compares to what you reported this quarter?

Well we did comment on rates in Quinn's remarks and I think we'll just leave it at there, I mean the rates have been ... I'll look retrospectively rather than perspectively if you look back at our rates over the last year they've increased substantially and then I think as of right now rates are up from the end of the quarter. But what we want to say in terms of where they are for the next year I think we'll leave that for future conference call.

Okay, and then out of this 57 new builds that you kind of have planned, is there any flexibility in there if the market deteriorates materially could you cancel some of those, is there any room to renegotiate vessels that are going to be delivered late from the shipyards?

Well we, I am sure that there is probably some room for something but we believe in making ... we believe in commitments and we hold the shipyards feet to the fire [ph] when they don't meet their commitments and we would expect them to hold our feet to the fire if for whatever reason, things turned really bad and then would be a subject of negotiation, as it is a subject of negotiation when they can't deliver on their end. But, we intend to take delivery of those 57 ships and we intend to pay the prices for which we contracted in.

Okay thanks.

Okay thanks.

The next question is from Daniel Burke of Johnson Rice.

Hi Daniel.

Good morning guys. Just a couple of specific questions yet, but on this dry dock issue that cropped up in the quarter, is it taking you longer to get vessels out of dry dock and does that points you ... persist structural issue or did you have some a couple of unexpected things come up to explain that variance in the quarter?

There is a little bit of both I guess, there's always the unexpected or emergency dry dock. But I think what we've been challenged by is both shipyard inflation and also number days off hire. What we've ... I think done a better job at recently is tracking it on somewhat granular basis, so we can at least have the information allows us to be more real time in terms of reactions. But that the cost item in particular we were talking about, the operating cost item was actually moving in the right direction relative to last quarter, but $3.1 million is really just not to the extent that we had anticipated that would in our prior quarter's guidance.

And then part of that Daniel is related to vessels, a different number of vessels being dry docked that we had forecasted at least internally. We ended up dry docking more consequently, the dry docking cost went up. Some of those were emergency, some of those were for convenience, but we actually dry docked more vessels than we had anticipated dry docking.

Daniel some of those as is always the case in the quarter actually consisted of accelerations of dry docks for whatever the reason that we decided to do it, from future quarters into this quarter. So as we always talk about that's a ... it's a very moving target of moving some dry docks up, moving some back; having some excesses on some. So its really a mixed bag as Quinn had said.

But obviously the size of the vessel has a lot to do with the cost to dry dock, and that where we sit today we've had 2400 days off hire approximately for last two quarters. The expectation in the back end of the year is that that number is going to come down and with that the days off hire and the lost revenue obviously. But we continue to work on the cost of item and that's really still work in process at this point.

That's seems good [ph] and one last question, Dean, you going to be opportunistic but you've also used the word cautious. Is the word cautious really apply to the pacing of any decisions you could make or to ... or does it also apply to magnitude? Is a billion dollars per year, still a threshold you are comfortable with, or is that a little bit less comfortable a number as the ceiling?

On a cash basis I would say, we're less comfortable with that number. On an equity basis probably less comfortable as well simply because our equity isn't worth as much as it was. In general I think Daniel, if the right opportunity presents itself, I don't think we're going to be limited either, by equity or cash to be able to fund it. Now it's probably one that I would like to do that we've made or we probably have to be done on an all equity basis, simply because it would be too big to fund by cash. But the billion dollars was set a different time at a different time, no one envisioned what has subsequently occurred, at the time that we set that $1 billion target, and so clearly we've scaled back our expectations in terms of what we're able to fund at least immediately.

That's use full thank you.

Okay. Thank you.

Your next question is from Arum Jayaram of Credit Suisse.

Hi.

Good morning guys. Dean I was wondering if you could comment on any changes or reductions to replacement costs from shipyards, given changes obviously in raw material costs et cetera, for new [Indiscernible].

Steve was talking to me this morning about an opportunity in Europe where some people weren't quite, well nearly quite as impressed with their equipment as they had been there before, so Steve?

I think particular what is going on now, there is going to be some opportunities for us, Dean mentioned as just today there was a price point for a vessel and it couldn't be brief, it couldn't be broached and that's what it is, and of all the sudden, there's more interest and lets talk about and see what we can do. So I think that's going to happen probably across the Board. It's just the timing, who knows what the timing is, but there will be some timing to it and I think we're going to have some nice opportunities to be able to manage, some acquisitions.

That's fair enough. Quinn in terms of the guidance, it looked like from what I had in my model it was a 150 or a couple of 100 basis points lower than you provided last quarter. Is that just from a assuming higher cost or did you, do you think that are using lower day rate assumptions?

You are talking about the guidance regardless to cash operating margins?

Yes

That the primary driver is revised cost guidance. We remain bullish if could use that word in regards to day rate trends but there is not substantial movement in our assumptions on the top-line in order to get the margin numbers that were provided. I think what you'll see over the next couple of quarters is up side potential in terms of operating margin will ultimately be driven by progress we make or do not make in regards the cost, relative to that $175 million mid point estimate.

Okay in terms of vessel sales, any feeling of how many sales you can have this quarter and what the gain, an estimates of the gain?

We won't provide guidance on a go forward basis, we had indicated that the average that we've experienced over the last 8 quarters was about $4.9 million against to give some granularity in terms of what we've done last two quarters. Certainly you can see P&L to see what the gain numbers were, those were $10.4 million and $5.9 million for the 630 and 930 quarters respectively. The associated proceeds from that was $12.1 million and $8.5 million. It's impossible to forecast what the proceeds or the gains will be on a go forward basis but at least where we sit today the activity levels are a pretty solid and obviously yearly, but its we have no expectation of a dramatic surprise relative to the base point average on the upside or the downside at this point.

Okay, fair enough thanks.

Your next question from David Griffus of Copia Capital.

Hey David.

How you're doing guys?

Not bad like, how about you?

I am doing well, just a quick question obviously kind of the equity market risk premium kind of gone to the rift here lately, with what's happened with equity prices and I wonder if that sort of changed the way you evaluate investments, not only new builds and potential acquisitions but also as you look to your current portfolio and you bring in ships for extensive dry dockings and I just wonder if does this accelerate it all the retirement of some of your older vessels, where you could kind of take the cash and may be buy back stock or increase the dividend, just wondering if it's sort of changed your capital budgeting thoughts and what you think kind of your give required returns are on your different types of investments that you making the business?

Million dollar question David, what is, what's the cost of debt and what's cost of equity here and it's a really good question. I think for the time being we're going to ... we've increased sort of our hurdle rates in both cases, I want evidence what we using as our hurdle rate but we are a AVA company, every vessel every time it goes to dry dock we evaluate the prospective earnings of the vessel as versus what it cost to put it into dry dock or what we estimated will cost and we don't get positive EVA out of the equation, we don't re-stock to this and we're continuing to do that and we will as on a go forward basis continue to modify what we think is our lack and where that mean I'll be grateful to you for any advice you have as to what the cost of equities is these days, because I think it depends upon the audience to which I'm speaking is all over the math and you got any idea?

I wish I knew. I wish I knew if you ever wanted equity these days.

That's ... there are number of people that believe the sky is falling. This sky really is following we're probably making some decisions that may not prove to be good ones in the long run. We are not of that deal. We don't think the sky is falling, we think longer terms that the world will rectify itself. And that business we were in is going to be, continue to be a good business and we think we're going to provide some really super return for those people who're hanging in there, but we could be myopic, we could be. But that's not our view.

Has is affected yet any of your kind of the decisions that you've made, kind of on the marginal vessel yet, has there been a vessel that maybe twelve months ago you would have said, yeah, lets go ahead and dry dock it, but now you kind of look at your stock price and you look at, at your cost of capital and you maybe have changed your mind.

It did affect. We were looking at an acquisition opportunity that certainly affected our view.

Okay.

And it has not...I don't think we've gotten this granular yet where we've decided not to dry dock a particular vessel because we thought we felt that the economics didn't justify it. But we ... I mean that's a ... that's something that we do on a day-by-day basis and we may get to that point, but to this point we've not done it on a vessel-by-vessel basis yet. We've not passed on an opportunity to spend the life of the vessel because what we felt, it were economics, it didn't justify because of the change of the cost of the equity or the cost of debt. Does that make sense?

It does. I believe you have got a great cover of finance guy in Quinn so I'm sure you guys will make the right decision.

Well, thanks very much.

Your next question is from Mike Glauco of Fore Capital [ph].

Hi Mike.

Good morning gentlemen. Sorry for prolonging the call. Customarily, you've given snapshot of utilization. Could you provide that assuming you have those figures Andy?

Relative to what was reported in the quarter? The schedules obviously are there for the utilization for the quarter in terms of our current numbers relative to that.

No, I am referring to the current numbers.

That was clarifying your question. So if you got the September numbers, numbers that we're seeing on leading edge if I use that term or a quarter or more recent data points. Its pretty much on line with what we've seen as reported in the press release. And ultimately what you'll see in the queue. Talking about ten, tens of percentage points and things like that.

So the current utilization in late October that's for make sure I understand you is inline with what you reported for the September quarter?

I don't know if I could characterize that as late October but the latest data that I've got in front of me is very consistent with the September quarter.

Got it. Thanks a lot guys.

Thanks Mike, good talking to you.

There are no further questions at this time.

Thank you everyone for your interest in our company, we wish you well and god bless you, thanks.

This concludes today's conference you may now disconnect. .