Tidewater Inc. (TDW) Q3 2019 Earnings Report, Transcript and Summary

Good morning and welcome to the earnings conference call, third quarter 2019. My name is Sheryl and I will be your operator for today’s call. [Operator Instructions] Please note, that this conference call is being recorded. I would now turn the call over to Jason Stanley. Sir, you may begin.

Thank you, Sheryl. Good morning, everyone, and welcome to Tidewater’s earnings conference call for the period ended September 30, 2019. I’m Jason Stanley, Tidewater’s VP of Investor Relations and I would like to thank you for your time and interest in Tidewater. With me this morning on the call are our President and CEO, Quintin Kneen, our Chief Accounting Officer, Sam Rubio and our General Counsel and Corporate Sector Secretary, Daniel Hudson. Also I will cover a few formalities, I will turn the call over to Quintin for his prepared remarks, we will then open up the call for you to ask questions. During today’s call we may make certain comments that are forward-looking and not statements of historical fact. There are risks and 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. Please refer to our most recent Form 10-Q for any additional details on the these factors. This document is available on our website or through the SEC at sec.gov. Information presented on this call speaks only as of today November 12, 2019, and therefore you are advised that at any time-sensitive information may no longer be accurate at the time of any replay. Also during the call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in last evening’s press release. Now with that, I will turn the call over to Quintin.

Thank you, Jason. Good morning, everyone, and welcome to the third quarter of 2019 Tidewater earnings conference call. I’m excited to be leading this call today, a lot has happened since we last spoke and we have more positive change and progress that I believe will make you as excited as I am. Tidewater is determine to lead the offshore industry through the remainder of the recovery. We have the industry’s leading balance sheet which we are taking steps to enhance even further. We have led the industry thus far and consolidation and we are preparing our infrastructure, capital structure to consolidate the industry even further. We will use the improving industry fundamental to get day-rates back to where they need to be to properly compensate our capital providers and we will continue to lead the industry in recycling and capital discipline. As previously announced, we recently streamlined our corporate management team. In addition to the publicly announced management changes, we also made significant reductions in staff at our corporate office at the end of October. These organizational changes will result in a five Managing Directors responsible for the Company’s primary operating segments to report directly to the CEO. And we are in still in a corporate culture where the function groups that remain at corporate or charter defined ways to support and enhance the productivity of the five leading Managing Directors. One of our primary goals is to reduce bureaucracy in orders to increase the speed of decision making and empower people closest to the vessel to make decisions and take ownership. To that end, since the merger in November of last year, we have also been redesigning and implementing the state of the art shore base information management system. I’m the strong believer in leveraging technology to create stabilization and scalability and to reduce what we refer to internally as [indiscernible]. This dedication to creating efficiency with technology extends across both financial information and strip base management system. These transformational changes aren’t responsible changes in the industry. Tidewater had been successful in the past focusing on utilization and a price taking philosophy that generated sufficient cash flows to keep the business running. Over the past five years, the industry has shrunk. Tidewater’s business has shrunk and the profit margins generated by a basic price taking philosophy have shrunk considerably. To respond to industry conditions today, we needed to change the business and the financial incentive to empower those closest to the vessel or push day-rates back to where they need to be to support our capital investments and to incentivize those - years to grow cash flow positive business. The process of significant cultural transformation doesn’t happen with small incremental changes. You have to break it before you could fix it. You have to take big bold steps to redefine the culture and that is what you have done. As a result, it requires key agents within the Company to wear multiple hats for a limited time, it is nothing that these individuals have done before including myself. Along those lines, it is probably appropriate to mentioned that it is not my intention to go and have a CFO, although I do like the lower G&A cost that results, the recruiting process for CFO is underway and I anticipate that we will conclude the search by early in the first quarter of 2020. Having said all this, I have some prepared remarks on how we are approaching our operations today and on current market conditions, I will go through these and then discuss the quarterly numbers before opening it up for questions. Getting to the highest return possible on the portfolio of vessels we operate today is a key a priority for Tidewater. We have always been everywhere geographically and this has been a positive attribute for Tidewater for decades. I have no problem being anywhere were paid well to be, but that is not happening in today’s market and it has been the case in some geographic markets. Vessels are real assets that have frictional cost every location and some are under long-term contracts that requires to keep them in a location where we would otherwise move them more quickly out of. So the process of reallocating the portfolio will take some time. But swapping assets with other large players, we are selling off regional as an alternative to working ourselves out of a position in a less desirable market. Each region of the world has attributes that needs to be considered. Areas such as Brazil and Australia can be luring due to the headline day-rates in those regions that often being - what those headline day-rates are often well above the world averages, but the ultimate cash return in those regions are often less than desirable. Other areas such as Southeast Asia have historically been very appealing, but the oversupply of vessels has enhanced protection and restrictions in the region and has diminished the appeal at least for now. So, much like many of our customers, we are focusing on the regions and activities that we believe will provide the best opportunities and returns on capital. We are likewise taking the disciplined approach to our decision regarding the dry-docking of vessels and service and what to do with that vessels and layer. One of the challenges facing owners in our industry Tidewater included, is the number of dry-docks required to be completed in 2019 and 2020. For example, we have 158 vessels in service during the third quarter. Vessel require major dry-dock every five years, which equates to 32 vessels per year on average. The average dry-dock cost is approaching 1.2 million, which equates to 38 million per year of room investment in the fleet on average or 9.5 million per quarter. This year, we are estimating to spend over 60 million on dry-docks not all this would be paid in 2019, but 44 million has been paid year-to-date and the 15 million was paid in the third quarter. As a reference cash rental on dry-dock for the full-year of 2018 was 26 million for a fleet of 142 active vessels. The lumpiness of the dry-dock cycle was due to the delivery dates of the vessels and 2009 and 2014 were big years for vessel delivery. Consequently 2019 is a big year for a five and ten year old vessels going to their first inspection special service. Key to us at Tidewater are doing to dry-dock in the most cost-efficient manner and only doing dry-docks if the vessel’s economic outlook justifies the investment. We have 60 vessels in layup and managing that idle fleet cost us approximately $400 per day per vessel or 8.8 million per year. I can tell you with near certainty that these vessels are not all going back to work and our intention is to whittle down those fleet and layup to the dozen or so vessels that will certainly return to service. Our intention for the vessels, we do not keep, is to sell them out of the industry or send them to do recycling yard. The cost to reactivate these vessels is approximately 19 million. So it is not just the $400 per day, but the continued escalating costs of reactivation as the vessels continue to age and deteriorate and every year the remaining economic life decreases. The false hope presented by the low-cost option of keeping vessels in way that are not economically viable tends to lure owners into keeping vessels longer than they should. Focusing on our balance sheet and all those assets that are working and tightening up the global fleet will provide us more long-term benefits than paying 8.8 million per year for vessels that are unable to work today and unlikely to ever work in the future. The other very real fact for owners to consider is that the human capital market throws in is how much quickly more quickly than the capital holders of those idle vessels. The Mariners in this industry in 2015 that were elected have moved on, others sort out higher pay on shore or another shipping sectors. Around the world today, there is a shortage of Mariners in the offshore industry. The industry reduce wages significantly during the downturn, which is one of the many levers we use to get through a downturn, but the global market for Mariners extends well beyond the oil and gas industry. Wage pressure in today offshore vessel market is a force all owners will need to deal within the future. As a result, the global fleet and layup will not result in incremental cash flows to capital providers, because Mariners wages will have to increase significantly in order to crew the incremental vessels. In 2009 to 2012 a prior expansion period in the industry, Mariner rates in some regions like the U.S., Gulf of Mexico rose 30% to attract Mariners back into the industry. And remember, you don't just adjust the wages for the one vessel you are reactivating, you are adjusting for the entire regions in Mariner group. So, it is not just that the industry is unlikely to get back to the drilling level required to deploy the vessels in layup today, it is that even if we were to do so, the return to capital providers won't be there, because it will be absorbed by increased Mariner wage trades. Similar to what has been experienced in the past, adding active vessels to the fleet holds down vessel day-rates and increases Mariner wages and perpetually pushes out the return on capital to providers. The best option for capital holders to get out of this predicament is through consolidation. There are too many management teams protecting too many vessels that have too much debt. By creating a truly scalable infrastructure, Tidewater can solve at industry. We can remove excess G&A and we can rationalize the global fleet. So my message is that, Tidewater will not be shy in taking a blowtorch to the fleet and layup and my message to owners and capital holders outside of the Tidewater is that consolidation and fleet rationalization is the best way to maximize your investment. We have no required CapEx. We have no vessels under construction. Every investment we make is our decision based on today's economics. We continue to work on optimizing our balance sheet and our focus on keeping our low net debt position, which is truly noteworthy and unique in our industry. You may have seen that we launched a upon consent solicitation to modify certain terms of our existing 350 million face value, 8% 2022 senior secured bonds. We are asking for about 16 topical modifications including using the ability to operate internationally, improving administrative efficiency and lowering the required financial coverage ratio. We have also launched a separate tender offer condition on the successful consent for 125 million of the issue for a tender premium of up to 8.5%. This is the first of several step to reset our debt capital structure so that is in a position to be strategically refinance and in addition to providing meaningful improved operational flexibility the note modifications allow for our revolve credit facility and the ability to refinance the other outstanding debts. In addition to seeking modification to the indenture, we intensify our two S-III shelf registration statements over the next few weeks, the first S-III will be to register some of the warrants that are outstanding from the restructuring in the 2018 merger. The second S-III will be a customary universal self registration statement registering various forms of debt and equity securities and providing us with the increase flexibility to our opportunistically and efficiently access the capital markets. The steps we are taking or planning to take with respect to the 2022 notes under registration statements are being done to provide the flexibility to facilitate an optimal capital structure and industry consolidation. As it pertains to industry as a whole, over the next two quarters, we are entering into the softer quarters of the year. The fourth quarter will be a step down from the third quarter and the first quarter will be step down from the fourth quarter. The best thing I could say about this is that it tells me that the world is getting back to normal slowly, but getting back to more normal offshore work patterns the reflects the preference of doing work in the warmer times of the year. We saw limited seasonality in the debts of the balance, as the operators were only doing required offshore maintenance, which is consistent throughout the year but at a lower level of activity. The North Sea and Mediterranean Sea markets performing well in the third quarter when active utilization approaching 93%. In early November, one customer charted over 10 vessels, which will help tighten up the market there through the remainder of 2019. I remain optimistic about the North Sea market as I look into 2020, we did see average day-rates declines in North Sea from the second quarter, but that was due to contract roll off I mentioned on our second quarter call. Activities in the Middle East and Asia Pacific were also continuing to improve, this is the one region where we saw average day-rates increased from the second quarter due to an increase in the deepwater vessels operating in the regions during the third quarter. I continue to see improvement in this market as we go into 2020, its not generally a high day-rate region, but our team there has been successful in getting long-term contracts for deepwater vessels and getting our customers prepay for dry-docking which is an important consideration for us and the decision for reactivate the vessels. The West Africa region has significant dry-dock activity during the third quarter as well as the second quarter which has the kept profitability down in that region for the past six months. We anticipate operating margins returning to what we would expect for the region in the low 40s during the fourth quarter, activity increases in the region during the first half of 2019 were significant, but we anticipate a low in activity increases until the second quarter of 2020 when new drilling programs are set to commence. The Americas region was another region that has significant dry-dock activity in the second quarter and third quarters, nonetheless active utilization stayed in the mid-80s, which is very good based on the number of dry-docks in that region over the past six months. Activity in the Southern Caribbean a subset of the Americas region is expected to be improved significantly in the fourth quarter even though we typically see a slight downturn in the fourth quarter due to regional seasonality. So with all those backdrop, let me walk through the third quarter and talk about how I see the business over the next few quarters. Revenue for the quarter was 120 million down six million from the second quarter, two big factors further decrease, we have those very lucrative five year contracts that will cut in 2014 that rolled off in the second quarter and we had five fewer vessels operating during the quarter. The fewer vessels operating during the quarter, reflects the fact that market conditions for over tonnage is still weak. As our older tonnage rolls off contracts, they are going into layup. We are simultaneously reactivating higher specification vessels with beginnings to offset the decline, but the market conditions today are only good enough to reactivate a select group of vessels in layup. As it pertains to the fourth quarter, we see a similar number of net vessels going into layup. As I look into the first half of 2020, I see tightening in the West Africa and Middle East markets that will allow several of the vessels that go on into layup in the second half of 2019 to be reactivated. We are also pushing day-rates particularly on the larger vessels, and my expectation is that the day-rate trend will begin to increase again as we go through the first half of 2020. Vessel operating cost of $81 million was essentially flat in the third quarter, although the number of vessels dropped by five vessels or approximately 3%. This is due to the simultaneous mobilization and layup vessels. Vessels just coming out of reactivation and vessels going into the layup of higher than average per day cost. Our expectation is that, we will see OpEx per active day level off over the next two quarters. As I mentioned above, included in the 81 million is approximately 2.2 million or 8.8 million per year of cost related to managing the fleet and layup. So, as a result, gross margin for the quarter at the vessel level was 39 million or 32%. General and administrative expense was 30 million in the third quarter, but reflects a number of big ticket items that are nonrecurring. It includes $6.3 million of severance related costs due to the staffing changes we affected before the end of the quarter, including the wages and benefits of those individuals for the fourth quarter. It also include 650,000 of professional service fees related to the implementation of the SAP system. We did another substantial reduction force at the corporate office in October. So, those wages and salaries are also in the third quarter numbers and a portion of them are along with our severance will be in the fourth quarter numbers as well. We set our year-end annual run rate objective at $87 million or $21.8 million per quarter and the changes enacted in the second half of 2019 make me extremely comfortable that this objective will be met. Tidewater's goal is to lead the offshore industry out of the current oversupply situation and reshape the sector, so that an acceptable return on capital becomes the norm. Our vision for Tidewater is to be the Company with the highest return on capital in offshore vessel industry. We have the industry's leading global footprint and our new information systems give us a truly scalable infrastructure platform. Our financial strength, global scale and low-cost infrastructure positions us to consolidate the industry and incrementally grow our consolidated return on capital. Tidewater has the industry's strongest balance sheet. We are dedicated to keeping it. Doing so requires us to develop a business that is free cash flow positive and requires that any potential consolidation be done principally on a stock-for-stock basis and that these stocks are appropriately relatively valued. We closed the quarter with 364 million in cash. We have 430 million of debt, the bulk of which matures three years from now in August 2022, but we are easily able to service the debt and can readily refinance the debt given our cash on hand. As a result of our gross cash and debt position, we have been incurring a negative carry of over 6% per year on the balance. For this reason, and the other reasons indicated earlier, we launched the consent intender. Importantly, our path to acceptable for free cash flow generation is predicated our recovery in the drilling market, it is based on designing our shore-based infrastructure to be efficient and fully scalable. It is based on focusing our vessels in the fewest regions possible while driving the highest margin on those vessels. It is about tightly managing the required investment in those vessels. It is about rationalizing the fleet and layup. And last, but certainly not least it is about keeping the net debt lower and keeping working investment at a minimum. We are transforming Tidewater to be the highest return on capital offshore vessel Company in the world. That transformation requires substantial changes to the organizational structure, which are largely complete, it requires a cultural transformation to reduce bureaucracy, improve decisiveness and enhance accountability which is underway and enabled by the new organizational structure and our new information system. It requires the optimization of the investment in physical location of the assets, which will occur overtime and which is in process and it requires to right capital structure which we are addressing through the indenture modifications and the S-III registrations statements. And all of this can be significantly enhanced through sensible consolidation of the industry. And with that Sheryl, would you please open the call up for questions.

Thank you. We will now being the question & answer session [Operator Instructions] Our first question comes from [indiscernible] from Clarksons. Your line is now open.

Good day, Quintin. I have a couple of questions for you.

Good day to you.

So, previously you have guided on G&A run rate target of 87 million per year, but in light for the recent announcements around organizational changes and all that, do you see potential for improving that target for 2020 or what is your thoughts around that?

I believe that the target that we set for ourselves will easily be beat. And I look forward to updating you in Q1 on where I think we can push that number long-term.

Okay. That is positive, thank you. And in this quarter you have some extraordinary cost related to organizational changes. Do you expect the level of those cost to remain the same in the fourth quarter or higher or lower?

They will be lower in the fourth quarter, but they will be there, they will be those. Obviously taking out the Section 16 officers that we publicly announced back in September has a higher cost. But the reorganization and reduction in force that we did in October also check out a significant number of people and there will be some investing of shares and so severance related to that. Most of that similar to this time will be non-cash.

Okay. Thank you. And you reported that you have reactivated five larger high specification vessels in this quarter. So I just wondered what is the average reactivation cost per vessel and in case you have the contract in-hand for these vessels, could you say something about the average duration and the EBITDA margin for the contract and also what is the -?

Yes. I will tell you the reactivation cost has fluctuated between just under one million to over three million per copy on those vessels. So, it is hard to generalize right now, because a lot of it has to do depend on the quality, the build in the vessels as well as how long it was in the layup. So, we will tell you that the range in there has been on average about 1.5 million to 2.5 million, but we have seen it over three million and we have seen it under one million. The vessels that remain in layup today, are the ones that are more expensive to reactivate. So for example, the next large vessels that we expect reactivate will be closer to that $3 million range to the higher freeze almost $4 million range. So, when I talk about the reactivation of vessels in the global fleet and layup not just ours, that's a very significant cost to overcome. So, you only want to do it when you have a vessel that you know you can continue to work over the next five to 10-years, and a lot of vessel just don't meet that criteria today. So the margins have been very good, and most of those have been reactivated, in fact all of those have been reactivated under long-term contracts.

Okay. Thank you. And one last question for me. So, the market is showing some modest signs of recovery with a broad-based taking rates, especially for larger vessels within the third quarter, average day-rates for your fleet decreased, actually it has been by something downward re-pricing of the legacy contract as you mentioned. Do you expect that the mark-to-market effect of vessels role on in new contracts will be possible going forward in the form of increased average day-rates or can you still see some quarters with significant effect of legacy contracts being re-priced downwards?

No. I don’t see, what we saw from Q2 to Q3 is a stepped down. You know we had some very nice lucrative contracts that rolled off during Q2, at the end of Q2 and as a result, I don't expect to see that again. Now, it is always difficult as you roll into Q4 and Q1, because you jus don’t know exactly where the spot market is going to go in some regions of the world and this is softer period of the year. In my prepared remarks, I was talking about the trends increasing and I generally believe that. I mean, everything that we are pricing out today, especially for tonnage that is thousands square meter deck, and even tonnage that is 850 square meter deck and above, is pricing up nicely above where it is today. So, in the $2,000 to $3,000 a day range higher. So, that rule-one effect when that occurs we will be nice. I don't think, we are going to see it printed in the quarterly P&Ls and so until kind of first quarter or second quarter of 2020.

Okay. That's understood. Thank you very much Quintin. Have a good day.

Thank you.

Our next question comes from Patrick Fitzgerald from Robert W. Baird. Your line is now open.

Hi. Hello. How are you?

Good Patrick.

So, just few items first, dry-dock 60 million this year, I believe next year is a kind of a higher amount. Could you update us on what that's going to be looking like?

So, we are under a long review on dry-docks for 2020. I don't believe, it will be higher than what we are seeing in 2019. But it will be high relative to what I think the average would be. So, as a results, I can't give you a number today. It is obviously going to be as high as what we experienced in 2019, overdoing as we go through our budgeting process for 2020 is scrutinizing heavily those dry-dock investments, and what we are trying to do is make sure that every one of those investments is justified. So I'll be able to give you a little bit of more clearly when we do the Q4 call.

So somewhere between what you said is the average of 38 million and 60 this year.

That's correct.

Okay. And are you seeing competitors midst dry-docks or push them out potentially leasing less supply in the markets where you operate, or are they basically coming up with ways to hit those dry-docks kind of creatively?

Well, they are for the most part finding ways to hit those dry-docks, but there has definitely have been perhaps less than 10, but there have been situations where vessels that are approaching their five year survey have actually gone into layup, because they didn’t feel that they could either justify those dry-dock or couldn’t find the money for dry-dock. Unfortunately, I mean this is a little bit of the tone of the prepared remarks, what I see happening is capital holders and capital providers still trying to hold out. And I don’t just agree on the younger vessels, but the older vessels in particular people need to throughout the talent on. But there hasn’t had the measurable effect in 2019 of decreasing the supply of modern tonnage.

Okay. And then any sense of what - you have done a really great job generating cash from selling some assets that you are not going to be able to use or scrapping them. Can you keep up that pace or is that going to be a little bit slower next year do you think?

Two things, which relates to that, my intention is to get more aggressive in selling the vessels. So of the 60 that we have getting rid of another 45 as early as we can in 2020 would be important to me. Prices on the tonnage that we remain are as lower, just because it is easier to sell the better tonnage and so that tonnage has already left. Okay. And I do expect that there would be some of the tonnage, a disproportionate number of that will go into scrap as we go into 2020. So I still expect to have a significant number and that number could easily be 30 million a bit difficult to make that number 50 million.

Okay. No thanks that is helpful. And then just in terms of the consent solicitation and tender. You need 50% to consent correct, but you don’t need to consent to participate in the tender. But you do need more than 50% to consent to do the tender. So, yes, am I understanding that correctly?

You are understanding that correctly, but I will say that precisely 50.1 is what I need if you will. So I mean about 50%, so once the tender is - once the consent is confirmed the tender will be activated.

Okay. And then you highlighted some of the keys that you want through this process, operate in internationally easier, ability to refinance the debt. I haven’t seen all the documents yet at this point, but is there - could you provide anymore color on like what exactly the current indenture doesn’t allow you to do that would be nice to be able to do?

Sure. I will give you some general comments, but we can also forward you a summary of it, just because there are 16 modifications and we get go from here.

Yes. Right.

- today. And then we have you e-mail address and so we will do that and of course anyone on the call that wants to, we will do that as well. But there are certain things that are overly restricted. For example, we can't re-flag a Jones Act vessel out of the Jones Act, okay. Now, the reasons that creditors want to do that because it is actually easy to mortgage a vessel in the us on the U.S. So, what happens is the smaller vessels that we have in the U.S. that would ideally be working in Mexico or in Southern Caribbean or even Africa. What it would require means you either not be able to work there, because there are flag state requirements in those local jurisdictions - to keep them crew with U.S. mariners, which is an expensive proposition. So, it decreases my opportunities there because we are competing with local vessels of those situation and that's one example of it. There is a few more examples related to how we operate internationally from a cash consolidation standpoint, and what we would like to do is make sure that we can easily manage the cash flows and not have to maintain any type of bureaucratic infrastructure in certain areas of the world. So, that's another element that you just see in those 16 modifications. One of the bigger ones that most people will focus on is the reduction in the required EBITDA to interest ratio. Obviously, we printed 80.5 million of EBITDA this quarter, our interest on an annual basis, probably are approaching $32 million so we are easily over two times today, which is the maximum of that ratio gets up to. But what I don't want to be forced to do is work those just to create EBITDA. There's phenomenon in our industry, which is, you know I can actually be cash flow neutral on a vessel, but create EBITDA because what ends up happening is I'll spend as much on the reactivation of the vessel, as I will earn in EBITDA and create EBITDA for me, but it doesn't create cash flow. And I don't want to be put into those positions. So, one of the reasons for getting some flexibility on that ratio is just to make all those sensible decisions and withhold capacity from the market when it is appropriate to do so. But, let me send you the list that way you can take a look at it and if you have any questions you can call us.

Okay. Yes. Sorry. Just one more. Do you have a specific number of cash on the balance sheet that you want to keep. So, that you wouldn't want upsize this tender if you get good support for it?

Well, I think I do believe that we have very good support for the tender and taking out the bonds of 108.5 to me is a good balance for both the bondholders and the equitable today. I expect that we will leave about $200 million of cash on the balance sheet as a result of this transaction, which is still a bit of a negative carry. But to me, as I mentioned earlier in prepared remarks, this is the first step of two or three step process of writing the capital structure. So, taking all the bonds out today is not practical. I think that I want to take out as much as I can, if I can upsize it, I may. But then you would look to us to do some other activities like putting in the revolver that we are now allowed to do as well as taking out the bonds before their maturity in call it the 2021 timeframe.

Okay. Thank you very much.

Thank you.

Our next question comes from [indiscernible]. Your line is now open.

Thank you. Hi. A quick question, in the second quarter call you guidance for average vessels being I think 11 down in this quarter and another six in the fourth quarter. Now that turned out to be a bit less with only five vessels left. So could you elaborate a bit on what change there, was there better employment, prospects, vessels you expect to see go idle. What was behind that?

It was a combination of numerous factors, one is some of the vessels that we were expecting would roll off or actually get extended on their existing contract. So as a result, they didn’t roll off in the third quarter or their rolled off much later in the third quarter. So as result, it didn’t impact the average number is much as we anticipated. We are able to keep more boats and we put a couple of more boats to work that I was anticipating at higher day-rates so that is a news encouraging as well.

Okay. And then on the vessel margin that you guided in the call to - last quarter call to something like 34, that came in - it has had lower and you also mentioned that you expect this to ramp up again in the fourth quarter. Is this still on-track or is this more difficult to achieve right now, the improvement into the fourth quarter.

So the improvement, a couple of things are happening that brought that down. One is, when we are reactivating those vessel, that we were just talking about, it just cost a little bit more money when you are initially reactivating those vessels. And so that burned up some of the margin that we were anticipating being saved in Q3, we do, because we think obviously we are going to make more money on reactivating the vessels and keeping the vessels working as we go through Q4, Q1 timeframe. I do still expect the general trend on the older vessels in our fleet to drop out. So the vessels that I anticipated dropping out in the Q3 and in Q4, a portion of them I was expected to actually get reactivated in the first half of 2020. And the way that it is working out is some of the older boats are being extended on the new contracts, the ones that are truly kind of on their last contract if you will, maybe they don’t fall out our service in Q3, they fall out of service in Q4 or Q1, but when they fall off a service they are going to go on to layup. So, some of those are just being [attachable] (Ph). What I’m hoping for is those vessels continue to extended are extended to a period of time when we can also reactivate some of the newer tonnage so that the overall dropping active vessels count isn’t as significant. But as I look to Q4, I’m still seeing about another net five. And that to me feels right, obviously we are a month into the quarter. Q4 is always a softer quarter anyway so it is harder to extend anything that actually matures in those quarters. So, my anticipation is that we will be down five.

Okay. And then final question. We have the vessels operating right now, if I understand it correctly some of those will roll off contract and then go either into layup will be scrapped. Then you mentioned 12 to 16 of the vessels currently stacks are vessels you want to keep. So, if then let’s say the roughly 170 number of vessels the fleet size going forward that you see right now?

Well I do have a rule of not doing math on the conference recall, but I think that you got it right, which is essentially we will take out 45 in the existing fleet and that will result in an overall vessel count in the 170 range.

Okay. Thanks.

[Operator Instructions] And speakers at this time, I show no further questions in queue.

Sheryl, thank you very much. Thank you everyone for participating on the call today and we look forward to updating you in the Q1, 2020 timeframe. Thank you.

Thank you. Ladies and gentlemen this concludes today's conference. Thank you for your participation. You may now disconnect.