Tidewater's (TDW) CEO Jeff Platt on Q4 2014 Results - Earnings Call Transcript

May.21.14 | About: Tidewater, Inc. (TDW)

Tidewater Inc. (NYSE:TDW)

Q4 2014 Earnings Conference Call

May 21, 2014 11:00 am ET

Executives

Joe Bennett - Executive Vice President, Chief Investor Relations Officer

Jeff Platt - President, Chief Executive Officer, Director

Quinn Fanning - Chief Financial Officer, Executive Vice President

Analysts

Jeff Spittel - Clarkson Capital Markets

Jon Donnel - Howard Weil

Matthias Detjen - Morgan Stanley

George O'Leary-Tudor, Pickering, Holt

Ian Macpherson - Simmons

Matt Conlan - Wells Fargo

J.B. Lowe - Cowen and Company

Gregory Lewis - Credit Suisse

Operator

Good morning and welcome to the Fiscal 2014 Fourth Quarter Earnings Conference Call. My name is Brandon, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded.

I will now turn it over to Mr. Joe Bennett. Mr. Bennett, you may begin.

Joe Bennett

Thank you, Brandon. Good morning, everyone, and welcome to Tidewater's fourth quarter and full year fiscal 2014 earnings results conference call for the period ended March 31, 2014. I'm Joe Bennett, Tidewater's Executive Vice President and Chief Investor Relations Officer, and I want to thank you for your interest in Tidewater.

With me this morning on the call are our President and CEO, Jeff Platt; Jeff Gorski, our Executive Vice President and Chief Operating Officer; Quinn Fanning, our Executive Vice President and CFO and Bruce Lundstrom, our Executive Vice President, General Counsel and Secretary.

We will follow our usual conference call format. Following these formalities, I'll turn the call over to Jeff for his initial comments, to be followed by Quinn's financial review. Jeff will then provide some wrap up comments and we will then open the call for your questions.

During today's conference call, Jeff, Quinn, I and other Tidewater management may make certain comments that are forward-looking statements and not statements of historical fact. I know that you understand that there are risks, uncertainties and other factors that may cause the company's actual future performance to be materially different from that stated or implied by any comment that we may make during today's conference call.

Additional information concerning the factors that could cause actual results to differ materially from those stated or implied by the forward-looking statements may be found in the Risk Factors section of Tidewater's most recent Form 10-K.

Having said all of that, I'll turn the call over now to Jeff.

Jeff Platt

Thank you, Joe, and good morning to everyone. Last night, we reported fully diluted earnings per share for our fourth quarter of fiscal 2014 of $0.88. Adjusted earnings per diluted share for the full fiscal year was $3.80, representing a 23% improvement from the previous fiscal year.

Quinn will provide you the items we are considering in comparing adjusted earnings per share between the two fiscal years. While Quinn will provide you with considerably more detail on our quarterly performance in a moment, I wanted to cover our vessel revenue performance a bit more than I normally do.

Our quarterly results reflect solid operational performance during the quarter in which the investor community has expressed its concern over an impending possible pause in growth or a lower trajectory of growth for the deepwater drilling sector.

Our vessel revenues of approximately $362 million in the fourth quarter were above our guidance provided on our last earnings call and reflect a strong 85% average utilization rate of our deepwater vessels along with an approximate $800 or 3% increase in our deepwater vessels' average day rates.

These operational improvements occurred despite the seasonality of our North Sea fleet during the winter months. That fleet is expected to rebound nicely as we move to the spring and into the normally stronger summer season.

As we have previously discussed, the continued rollover of legacy deepwater vessels contracts, along with the delivery of additional deepwater equipment has and should continue to push our average day rates at least modestly higher.

With respect to our active towing supply vessel class, our global average utilization has averaged approximately 85% over the last two fiscal years, including this current quarter. While we noted in past earnings calls that the quarter-to-quarter changes in average day rate have been relatively modest.

Over the last two years, average day rates have increased from around $13,300 in early fiscal '13 to approximately $15,000 per day in the last two quarters. In the prior up-cycle, the average day rates for this class of vessel peaked at approximate $20,000 per day, so we still a way to go to match or exceed prior cycle rates.

Sequentially, our total quarterly vessel revenues were slightly higher than December quarter, so please keep in mind that the March quarter had two fewer revenue days, which means we start our quarterly comparison almost $8 million behind.

Equally important, in the quarter, was our vessel operating cost of about $207 million, came in below the low end of our prior guidance. This positive result was not due to drydock deferrals, but rather to better operational execution including improved cost control and overall more efficient drydockings. That translated into a vessel operating margin of 43%, which again beat our previous guidance reflecting solid operational performance in the quarter.

Our quarterly bottom-line was also helped by a lower effective tax rate, which Quinn will coverage shortly. We also had solid safety performance during the March quarter. We completed fiscal '14 with three lost time accidents and total recordable incident rate or TRIR of 0.19 per 200,000 man-hours worked.

As I mentioned in previous quarterly calls, we started the fiscal year with a few safety incidents, which were used as motivation to refocus our efforts on operating the safest fleet in the industry. We have achieved zero loss time accident rate in past fiscal years and we strive to repeat this measureable performance every year.

Operating conditions encountered by our employees are challenging, but that means we must remain constantly vigilant into conducting our day-to-day operations. In reviewing our historic safety performance, I want to complement our global Tidewater team for recording six consecutive fiscal years with a TRIR of under 0.20, a phenomenal accomplishment considering the challenges we face in our day-to-day duties globally. We will rest on those, but will continue to prioritize our safety initiatives and learn from our own and other incidents.

Let me now turn to the status of our joint venture in Angola. As you are well aware, we executed a new joint venture agreement for Sonatide that has two-year term agreement that will commence once a new Angolan entity has been incorporated, a task which is still on track for late 2014.

With regards to our working capital issue in Angola, we made progress during the fourth quarter and even further progress since March 31st, but as expected, we still have work to be done to collect all the revenue that we have earned over the last several quarters. We believe, we better understand the foreign-exchange laws and regulations now in place, and more importantly, the process required to reduce our large working capital investment.

This is an industry challenge and not something that is unique to Sonatide. Quinn will provide you more color on our working capital situation. Rest assured, this issue is a high-priority and we will continue to allocate the necessary resources to address and resolve this matter.

Let me now turn the call over to Quinn, to review the details of the quarter and how we see the next few quarters shaping up. I will then return to discuss our outlook for the offshore market and Tidewater's future. Quinn?

Quinn Fanning

Thank you, Jeff. Good morning, everyone. As Jeff mentioned, we issued our earnings press release after market closed last evening. We expect to file our annual report on Form-10K through the EDGAR filing service sometime before the close of business today.

Turning to financial results, we reported diluted earnings per common share of $0.88 for the March quarter versus adjusted EPS of $1.12 in the December quarter, which excludes the goodwill impairment charge related to our Asia-Pacific segment of $0.87 per share after-tax.

EPS for the March quarter of fiscal 2013 was $0.95. As Jeff mentioned, diluted earnings per common share for the 12-month ended March 31, 2014, was $3.80, exclusive of the previously referenced goodwill impairment charge as well as transaction costs related to the acquisition of Troms Offshore and a loss on the early retirement of higher cost debt that was inherited in the Troms Offshore acquisitions.

Adjusted EPS for fiscal 2013, which excludes a $0.07 per share lump sum pension settlement paid to our former CEO $3.10. As Jeff noted, the year-over-year increase in adjusted EPS was about 23%.

As Jeff also mentioned, vessel revenue for the March quarter at $362 million was a bit higher than the guidance range for the March quarter of $350 million to $360 million. For reference, vessel revenue for the March quarter was up about 12% year-over-year. Operating cost of approximately $207 million came in modestly below the vessel OpEx guidance range of $210 million to $215 million that I provided in February.

Vessel OpEx for the March quarter was up about 14% year-over-year, primarily reflecting the heavy drydocking schedule in the quarter we just completed. Looking at fiscal 2014 taken as a whole, vessel revenue and vessel operating expense were up 15% and 16%, respectively year-over-year. Vessel level cash operating margin was up about 16% or about 20 basis points year-over-year.

Key drivers of financial results in the March quarter relative to the December quarter included the contributions of vessel revenue and vessel operating margin from five new vessels added to the fleet in the December quarter and one vessel added to the fleet in the March quarter.

As expected, lost revenue due to vessels in drydock or otherwise undergoing repairs and major repairs expense was up substantially quarter-over-quarter, a trend that should somewhat reverse in the June quarter.

As previously mentioned, North Sea seasonality had a modest drag in the March vessel revenue and average day rates. There were also two fewer days in the March quarter than there were in the December quarter.

More broadly, utilization of the active fleet was 85.5% during the March quarter and average day rates were generally stable quarter-over-quarter. As just noted, average day rates for our deepwater vessels continued to trend modestly upward due to contract rollovers. I will also note that the quarter-over-quarter impact of lump sum mobilization and demobilization revenue was not particularly significant.

As to underlying the overall quarter-over-quarter trends, I'll note that lower utilization in the March quarter of our 12 deepwater anchor handling towing supply vessels at 74%, largely reflects a couple of vessels in drydock or in route to drydock, as well as non-technical off hire for a couple of additional vessels that were between term contracts during the March quarter.

Utilization of the larger deepwater PSV class equipment, which was comprised of new seven vessels on average in the March quarter, was about 86%, with essentially all vessels that were not in drydock, either working or mobilizing to known work.

Utilization of our active towing supply vessels, which on average represented 115 vessels in the March quarter was approximately 84% and was off very modestly quarter-over-quarter.

Reported utilization of the entire towing supply vessel fleet, including stacked vessels was actually up about four percentage points quarter-over-quarter, but this trend at least in part reflects sale of approximately 25 older and generally stacked vessels during the second half of fiscal 2014.

Turning to vessel operating expenses, as Jeff noted, we generally executed for large number of drydocks and major repairs that were planned for the March quarter within the cost and timeframe that included in our February guidance. As a result, the March quarter was not significantly impacted by the deferral of drydocks nor was it burdened by drydocks that we decided to put forward for fiscal 2015 beyond the two vessels that I discussed on our last earnings conference call.

Relative to expectations at the time our last earnings conference call, we had positive variances of a $2 million in crude cost during the March quarter, which at least in part was a results of reduced manning during drydocks and better scheduling of crew additions in advance of new vessel deliveries.

Other OpEx variances relative to expectations were generally positive in the quarter, but were also relatively small. A 43% vessel level cash operating margin was off about two percentage points quarter-over-quarter, but was approximately three percentage point higher than the guidance that was provided in early February.

Looking at our four geographic reporting segments, for the sub-Saharan Africa/Europe segment, which accounted for approximately 46% of consolidated fourth-quarter vessels revenues, vessel revenue was up about 2% quarter-over-quarter.

Within the segment, vessel revenue generated along the African coast was up about 2% quarter-over-quarter and the vessel revenue generated by the North Sea fleet was off about 5% quarter-over-quarter.

Overall, utilization of active vessels in the sub-Saharan Africa/Europe segment was 86% in the March quarter, which is up about four percentage points quarter-over-quarter. Average day rates in the sub-Saharan Africa/Europe segment had approximately $16,000 a day, or essentially flat quarter-over-quarter, reflecting the offsetting effect of seasonality in the North Sea, lump sum mobilization revenue and positive contract rollovers in Africa.

Vessel revenue in Sub-Saharan Africa/Europe segment was up about 18% year-over-year. The Americas segment, which accounted for approximately 30% of consolidated fourth-quarter vessels revenue, vessel revenue was basically flat quarter-over-quarter, following a good sequential growth in vessel revenue in the prior three quarters.

Utilization of active vessels in the Americas segment at approximately 85%, was off about one percentage point quarter-over-quarter, and average day rates at approximately $21,700 a day, were up about 2.5% quarter-over-quarter. Vessel revenue in the Americas segment was up about 26% year-over-year.

In the MENA segment, which accounted for approximately 14% of fourth quarter consolidated vessel revenues, vessel revenues were off about 4.5%% quarter-over-quarter after double-digit sequential growth from the September quarter to December quarter.

Utilization of active vessels in MENA at approximately 6% was up about three percentage points quarter-over-quarter, primarily reflecting the completion of mobilizations and the startup of new contracts in Saudi Arabia.

Average day rate at approximately $14,300 a day, were down about 7% quarter-over-quarter, primarily reflecting a couple of large [HDS] vessels in drydock, vessel transfers between areas and segments and resulting impact on the mix of active vessels in MENA.

Vessel revenue in the MENA segment was up about 25% year-over-year. I will note however, that average day rate from the segment in the March quarter and the quarter-over-quarter trend do not really reflect any softness in the MENA segment at least in regards to the OSV market.

In Asia-Pacific region, which accounted for about 10% of fourth quarter consolidated vessel revenue, vessel revenue was up about 4% with vessel revenue growth in Australia somewhat offset by a decrease in vessel revenue in Southeast Asia.

Utilization of active vessels in Asia-Pacific had approximately 85%, was off about 1 percentage point quarter-over-quarter. Average day rate at approximately $21,600 a day were up about 11% quarter-over-quarter, reflecting higher average day rate available in the Australia market which at least in part is a pass-through of higher labor costs.

Looking at relative profitability, vessel level cash operating margin in the March quarter for Sub-Saharan Africa/Europe region was about 40% of vessel revenue. Vessel level cash operating margin for the other three geographic segments fell in a range of 43% to 44%. As mentioned earlier, overall vessel level cash operating margin for the March quarter was about 43%.

Below the vessel operating margin line, G&A expense for the March quarter, which includes about $1 million of G&A for our nascent ROV operations was about $46 million and was basically flat quarter-over-quarter.

Gains and dispositions, net for the March quarter were about $2.5 million, which was down about $5 million quarter-over-quarter. Somewhat offsetting gains on dispositions net, we recognized an approximate $2.7 million foreign exchange loss in the March quarter, which primarily relate to an upper revaluation of non-denominated debt as a result of the strengthening of the Norwegian kroner relative to the U.S. dollar during the March quarter.

Finally, our effective tax for the March quarter was about 15%, reflecting an approximate 23.5% operationally rate for fiscal 2014 and discrete items, including the reversal of our previously established FIN 48 accrual for an uncertain tax position and the reversal of our previously established valuation allowance for foreign tax credits, which collectively reduced the effective tax rate for the fiscal year to 19%.

Turning to our outlook, the June quarter should be a solid quarter with good growth in vessel revenue, with stable to improving vessel level cash operating margins. As mentioned in our last earnings conference call, we do not expect dramatic increases in major repair costs in the fiscal year.

As of today, we are working off of a fiscal 2015 budget that contemplates R&M expense to be flat to up mid-to-high single digits year-over-year, with higher schedule drydocks and major repairs anticipated in the first and fourth quarters and lower repair activity in the second and third quarters.

I will caution however that R&M costs are exposed to emergency repairs, cost overruns and changes in timing due to commercial considerations and the availability of shipyards and technicians.

As Jeff noted, demand for newer vessels remained strong across geographies and asset classes. We expect that Tidewater fleet to continue to experience both, high utilization and average day rate that are generally stable if not trending modestly positive for the next couple of quarters.

Our 10-K will also highlight our expectations at this time to take delivery of about a dozen new levels over the course of 2015. The vessels should be revenue and margin-generative within a quarter or two following the stated delivery dates.

In this context, internal estimates currently the June quarters thank you letters revenue somewhere between $370 million and $389 with the current expectation of the first half of quarterly revenue each of the quarters

Like reasonably up-to-date related topics for the June quarter vessel revenue somewhere between $370 million and $380 million with a current expectation that we will see a further step-up in quarterly revenue in each of the quarters thereafter.

Likewise based on what we know today, vessel related OpEx for the June quarter will probably fall within a range of $210 million and $215 million. Based on vessel revenue and vessel OpEx guidance ranges provided.

Vessel level cash operating margin should be somewhere in the 42% to 45% area in the June quarter. Our current expectation is that vessel level cash operating margin will be something north of 45% for the second through fourth quarters of fiscal 2015.

Corporate, general and administrative expense should be in the area of $48 million to $49 million in the June quarter. This is also reasonable expectation for the remaining quarters of 2015.

Our June quarter is also expected to include negative gross margin from our newly organized subsea operations of $1 million to $2 million as well as the one is as well as $1 million each of subsea related G&A and depreciation expense.

Our current expectation is that following a couple of quarters of modest startup losses, our ROV operations will achieve a cash breakeven by the second half of fiscal 2015, and be modestly accretive to net income by the end of the fiscal year.

Combined vessel lease and interest expense should be $19 million to$20 million in the June quarter or down modestly quarter-over-quarter. As for an effective tax rate assumption for fiscal 2015, we are presently assuming a 23% to 24% tax rate, excluding any discrete items.

As noted earlier in my remarks, this is generally consists of our operational tax rate in the fiscal year just completed. However, recall my usual cautionary statements for the geographic mix of pre-tax earnings and margin trends can cause the tax rate to be volatile on a quarter-to-quarter basis.

Turning to financing and investment issues, cash flow from operations for the 12-month ended March 31st was approximately $105 million. As discussed on our earnings conference call in February, cash flow from operations in fiscal 2014 reflects a buildup in working capital tied to our Sonatide joint-venture in Angola.

As Jeff noted in his remarks, we and Sonatide team in Angola have made some progress implementing procedures to affect payments of Tidewater and to begin reducing large working capital investments related to our Angolan operation.

During the fourth quarter of fiscal 2014, we collected approximately $40 million from the Sonatide joint venture. Thus going to March 31st, we collected an additional $66 million, so the total collections since December 31 are approximately $80 million.

Our March 31st balance sheet will highlight a due from affiliate and a due to affiliate of approximately $429 million and approximately $86 million, respectively, so the net investment in working capital related to our Angolan operations was about $340 million dollars as of March 31st or up about $50 million quarter-over-quarter.

Noting that our Angolan operation continues to generate plus $300 million in annualized vessel revenue, recent collection should allow access working capital to stabilize in the current quarter and hopefully trend downward in the September and subsequent quarters, likely through a combination of selective redeployment of vessels, further improvements in the payment process and some form of split contracts that provide for a combination of onshore and offshore payments.

As to non-operating uses of cash in fiscal 2014 CapEx, including the Troms' purchase net of assumed debt was about $722 million, 45% of which has been funded by asset dispositions including sale lease transactions that collectively generated about $271 million in proceeds and about $98 million in deferred gains.

4 of the 10 sale lease transactions were completed in the March quarter. Somewhat in response to questions that we have received regarding the sale lease transactions, we completed in fiscal 2014, I will note that our leasing program is not intended to drive a go-forward funding strategy.

That said, the sale lease transactions that were completed in fiscal 2014, allowed us to realize good value for the vessels that were sold and the capital gains that were realized for tax purposes allowed us to utilize expiring foreign tax credits.

In addition, relative to other financing alternatives, the lease structure provided us with an attractive cost of operatorship. Any additional sale lease transactions that we may consider will be evaluated using a similar cost-benefit analysis, but my sense is at least the activity will remain a relatively small element of our overall funding strategy.

As to go-forward funding requirements based on commitment at March 31st, CapEx related to vessels on the construction and vessel acquisitions for fiscal 2015 is estimated at about $370 million, of which we expect to fund approximately $53 million in the June quarter.

Total unfunded capital commitments at March 31st were approximately $573 million. This total includes 30 vessel construction projects. Also, note that this total with grow with commitments made subsequent to March 31st, including $137 million in vessel commitments that we will highlight in our 10-K and are related to three vessels that will be targeting opportunities in the North Sea and other cold water markets.

As to financing activity, our only new financing in the March quarter other than sale lease transactions was an approximate $50 million non-denominated financing related to the delivery of the Troms' to us, which was final vessel that was under construction when we completed the Troms' transaction in the first quarter of fiscal 2014.

Total debt at March 31st was about $1.5 billion. Cash at 3/31, was about $60 million and net debt to net booking capital at 3/31, was about 35%. We have no significant debt maturities in fiscal 2015.

Total liquidity at 3/31, was in excess of $650 million, including full availability under our $600 million bank credit facility, which is available to the company until fiscal 2019.

With that, I will turn the call back over to Jeff.

Jeff Platt

Thanks, Quinn. Our fiscal results for the fourth quarter and for all of fiscal 2014 reflect improved operational performance within an extended offshore industry up-cycle.

Nonetheless, a number of recent data points suggest that certain segments of the offshore services industry may experience a pause in their pace of long-term growth. While these data points are disconcerting to many analysts and investors, they reflect a typical pattern of development of the industry during the cycle, something we have experienced in the past and will likely experience again in the future.

It is important to remember, the offshore industry is made up of multiple subsectors and not all of them move at the same time with the same pace. At various points in the expanding phase of the industry up-cycle, some subsectors may over expand temporarily resulting in a pause or even a slight dip in day rates earned by the equipment in one subsectors or another.

Pauses reflect temporary imbalances between supply and demand. Operators occasionally slow their activity levels to reassess future drilling plans and as a result of political, technical or other issues, which obviously impacts demand for oilfield equipment and services.

Equipment and service providers have also been known to become overly enthusiastic with their investments in manufacturing capacity and new capital equipment and the resulting excess supply then need to be worked off.

From a broad perspective, we believe there are several key points to keep in mind as you consider the possible impact of the offshore drilling industry's current status. First, global energy demand continues to grow as the pace of worldwide economic activity slowly accelerates.

This growth in demand supports crude oil prices, which is a primary driver for offshore exploration and development activity. The recent rebound in domestic natural gas prices is further helping produce the cash flows above what was expected at the end of last year.

Despite all of the talk about onshore shale plays, producers also continue to look to a relatively unexplored offshore region for new large oil and gas fields to boost the reserves and grow their future production.

Second, while the demand side of the offshore business looks relatively healthy, in recent years there has been significant new capacity added to both, the offshore drilling and vessel fleets. That trend will likely continue for at least the next two years. In particular, there are about 250 new offshore drilling rigs scheduled to enter the world fleet during the next two years or so.

While it is very likely that some of these new rigs will force older lower-specification rigs out of the market, most industry observers expect the working offshore drilling rig count to increase over the coming quarters. We view that expansion of the working offshore drilling rig fleet as healthy and it will provide Tidewater with excellent new business opportunities.

The global order book for OSVs under construction is approximately 450 ships. Most of which were also under the operational fleet within the next two years and will likely accelerate the continued retirement of older, lower-specification vessels.

Tidewater has disposed about 140 older, small and less capable vessels during the past three fiscal years and other vessels have done likewise. These vessels have generally gone to other marine markets outside of the oilfield or to scrap yards.

While additional older equipment both, rigs and vessels will likely need to be removed from the oil and gas market. We think this process is relatively advanced at least in regards to the OSV sector.

Based on the expected growth in the working rig count, very limited interest on the part of most customers to charter older lower specification vessels in our multi-year effort to upgrade our fleet and dispose of all the lower spec equipment, my sense is the current supply/demand dynamic and outlook for the OSV industry are a bit better than most analysts and investors currently believe.

For Tidewater, bidding activity for our deepwater equipment in particular has been robust and we continue to record consistently strong utilization of this vessel class and modest growth in average rates, which are already at historical high levels. We expect that to continue to be the case as we progress through fiscal 2015.

The growth of the offshore market is also why we have elected to enter the subsea business in order to support our customers' growing needs and to broaden the contract appeals of some of our vessels. We continue to examine other opportunities to expand our capabilities in order to better serve our customers while helping improve the efficiency of their offshore operations.

An example of this type of expansion was our Troms' fleet acquisition that coupled with our new build ice-class vessels enables us to follow our clients into the cold water in Arctic offshore markets being targeted for exploration over the next few years.

Tidewater benefits from an unmatched global footprint that allows us to move vessels that might encounter a slowdown in one region to new contracts elsewhere in the world where demand is stronger.

As opportunities to do so become available, we will lengthen contract terms and lock-in good day rates in order to protect current and future earnings power, but we have no contracting strategy that is based on a significant reversal of the generally positive trends of the last 18 to 24 months.

In fact, we remain generally bullish in regards to the outlook for the offshore support vessel industry, in general, and for Tidewater in particular. As a result, we generally disagree with the overly negative sentiment that a number of analysts and investors that follow the offshore sector have expressed in recent months.

We had a strong financial position and sufficient liquidity to address near-term challenges and to pursue longer term growth opportunities that we believe will create sustainable value for our shareholders.

With that, we are now ready to take your questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question and answer session. (Operator Instructions) From Clarkson Capital Markets, we have Jeff Spittel on line. Please go ahead.

Jeff Spittel - Clarkson Capital Markets

Thanks. Good morning, guys.

Jeff Platt

Good morning.

Jeff Spittel - Clarkson Capital Markets

Maybe if we could start of in the Americas, I think Quinn had referenced that some lump sum mobilization in prior few quarters favorably impacting day rates, yet we a nice move again this quarter on a sequential basis. Can you talk through the moving parts in Brazil, the Gulf of Mexico and then maybe from a vessel mix perspective there that drove that improvement?

Quinn Fanning

In Brazil, I think, we've got everything that has moved into place pretty much that we had talked about from a year ago, on a pretty bigger award that we were very happy with Brazil. All of those parts and pieces have got into Brazil and are on contract now, so I think that's pretty much wrapped up.

We do have and there has been some recent public notice that we have won another large anchor handler that we will be moving into Brazil. That will be happening probably in the September quarter, when you will see the effects of that, so our Brazil activity is at a good level. That's kind of getting to a stable state, if you will.

Gulf of Mexico, we have in the past moved some equipment over. I think that there might be a little bit more of that coming up moving into some term contracts, but overall I think what you're seeing is again the increased day rates in Brazil on the contract and we also took delivery in the December quarter of two large U.S. flag vessels and you see the effect of that in the Gulf of Mexico. Those two large boats are on term contracts.

Jeff Spittel - Clarkson Capital Markets

Good news. Then maybe transitioning to the North Sea, I would imagine there is a at least a lot of things we hear seem pretty favorable about the way construction season is shaping up. Maybe a refresher on what your contracting exposure is there and what your outlook is over the next couple of quarters.

Jeff Platt

We are about half and half with respect to terming and playing what is the spot market there and we kind of like that balance. Again, for Tidewater, this is the new with the Troms' acquisition and I think you're right. Everyone is pretty optimistic that it would be a good season coming up and of course that's really going to be helped by really two things that are going on.

One, some of these Arctic cold water projects which is going to take a pretty large number of vessels out of the traditional market. Then again the award by Petrobras of some large anchor handlers that I think will take down a couple of anchor handlers that are currently in the North Sea as well, so you put all that together and it looks like it's shaping up at least from the beginning of what should be a nice season for us up there.

Jeff Spittel - Clarkson Capital Markets

Appreciate it, Jeff. Nicely done this quarter.

Jeff Platt

Thank you.

Operator

From Howard Weil we have Jon Donnel online. Please go ahead.

Jon Donnel - Howard Weil

Good morning, guys.

Jeff Platt

Hi, Jon.

Jon Donnel - Howard Weil

Appreciate the update on the Angola JV. It looks like just kind of comparing the sequential movement of the day rates utilization probably got some pretty nice new contracts there as well. I was wondering if you did the new collections that you got since March 31st, and really good year-to-date have been driven more by these new contractors or is it a function of somebody the older collections that have been outstanding as well…

Jeff Platt

No…

Jon Donnel - Howard Weil

…change on either contract terms to collect better?

Jeff Platt

No. I would say none of that collection is with new contract. That is old legacy contract that we finally are getting the process where you registered a contracts that allow you to move the dollars or turn quanza into $100 and get that out of country, so it really has nothing to do with any of the new contracts.

Jon Donnel - Howard Weil

Okay. The new contracts are basically still being paid on the same terms as the older ones?

Jeff Platt

Well, some of the new contracts are actually new startups, so there is no legacy or trailing payment issues with those per se. Now, there are some subcontract rollovers, where we are having increases in the day rates that partially account or take up the increased cost and risk exposure with the local currencies, but I don't think we have really had seen much of that really to-date.

Quinn Fanning

The preponderance of our revenue in collections in Angola will ultimately be in quanza. I mean, we on a contract-by-contract basis trying to migrate toward at least some element of dollars offshore payments, but I think as you will see with our filing, we are so waiting for clarification from Angolan Central Bank as to what contracting and payment mechanisms will be committed, so really the collections that you are seeing today result from legacy contracts and that's ultimately, I won't quite say cracked the code, but we've made some progress in terms of the documentary requirements of the Central Bank and so on and so forth as other service companies and equipment providers are doing and we are starting to see a bit of a trickling out as a result of the progress on that front.

Jon Donnel - Howard Weil

Okay. Then in terms of just as you talked about mitigating some of that risk, I think you had mentioned the potential for moving some vessels out of that market if necessary. Do you have sort of a target for maybe a total number of vessels or total revenue exposure that you might want to limit in Angola right now or is that not on the radar screen until present time?

Quinn Fanning

I think go back to our previous comments on the last call, which is the payment mechanisms, the day sales outstanding as a result of the slow payment processes introduced a new element in the Angolan market, and when we have any vessel come up on contract, we evaluate the suite of opportunities for it.

Obviously, all things being equal, when you elevated the risk in one market versus another, you will start to see some ties going to other areas. I would guess just as we look in the rearview mirror, the March quarter had a handful of vessels exit Angola on a net basis which is up a bit relative to the previous three quarters, but we have no plans to dramatically roughly [out] of Angola, but my suspicion is that we would shrink that lead over time just because of the effortless return profile, but it's not a broad reaching strategy that has as a target exiting the Angolan market, which we expect to participate in for a long time.

Jon Donnel - Howard Weil

Okay. Great. Thanks a lot. Appreciate taking my questions.

Jeff Platt

Thanks Jon.

Operator

From Morgan Stanley, we have Matthias Detjen on the line. Please go ahead.

Matthias Detjen - Morgan Stanley

Good morning, gentlemen. Congratulations on the good quarter. I wanted to ask you a bit more about the ROVs and you gave some updates in saying that you would be breakeven by the second fiscal quarter. I was wondering if you could maybe give us a bit more color how that's benefiting and how you plan to grow that business and if there has been any changes since the last update.

Jeff Platt

No real changes in the last update and we were continuing to scale up with our operational capabilities. There is certainly licenses and things like that you have to work through to be able to support these operations outside of the United States. That technology has - used to it. We are getting all of that lined up and again we have the six ROVs that we have talked about additionally, we placed an order for two more units to augment that. Again, it's just getting out of the gate and no real change in previous quarter.

Matthias Detjen - Morgan Stanley

Okay. Great. Thank you for that. Then on your expansion strategy, it looks like you - so you ordered three more vessels this time for the North Sea, is that where you currently see the best opportunities for growth or would you also consider other regions right now?

Jeff Platt

I think, if you go back, it's for the North Sea, really cold markets. We are trying to scale up. We have got the right management. We think the industry as a whole continues to have success in the cold water environments with that will fit nicely into that portfolio, so it's not the North Sea-specific, certainly North Sea is part of that, but you have other Arctic markets that we think will present nice opportunities on a go forward basis.

Matthias Detjen - Morgan Stanley

Beyond these, that's what you would see further growth or are you saying would this sort of like…

Jeff Platt

We are always looking for opportunities. I don't think I really want to outline exactly what our strategy is. Listen to this call, it's certainly when we purchased Troms, as we talked about, we felt with that management team in place we certainly have the ability to scale up their operations, we did do actually. Before the Troms acquisition, we bought three vessels that fit nicely into it and this is just the further development of that strategy to expand it.

Matthias Detjen - Morgan Stanley

That makes sense. Thank you very much for the update.

Jeff Platt

Thank you.

Operator

From Tudor, Pickering, Holt, we have George O'Leary online. Please go ahead.

George O'Leary-Tudor, Pickering, Holt

Good morning, guys.

Jeff Platt

Good morning, George.

George O'Leary-Tudor, Pickering, Holt

Good color on deepwater and kind of your outlook for rates moving up modestly. I was wondering if you could you expand on that a little bit and kind of quantify what you think of it as rates moving up modestly as we look at '15 and then there are also the opportunity for utilization new hire for the new hire for the overall deepwater fleet and potentially any regions driving that optimism?

Jeff Platt

We are not going to drill into any specific regions. I mean, deepwater as a whole has been great and continues across all as Quinn said. I think with respect to utilization, we are effectively at full utilization. When you get north of 85%, when you take into effect, you do have regulatory drydockings, you do have some movement between different regions. There is not a whole lot of growth to get above that. You may spike a couple of points in the quarter, but we are effectively sold out on deepwater.

With respect to the day rate progression, Quinn, do you want to give any color on that or a look at that?

Quinn Fanning

Yes. I think as we have said in the previous calls, that I think Jeff providing kind of a two-year retrospective on the 25. We had probably helped people understand kind of what that sector has done and [recently], but by and large, we are not seeing dramatic movements in the towing supply rates. We see full utilization effectively and stable rates.

Hopefully with the rising jack-up count, we will start to see some progress there as well, but on the deepwater side, as Jeff indicated and I mentioned in my comments all of the available equipment that's not in drydock or on its way to drydock is either working or on its way to a job, but doesn't necessarily mean that we won't have the normal contract roll over quarter-to-quarter and our recent experience was that those contract rollovers provide a bit of positive trajectory in terms of average day rates, but again we are not seeing in our bidding activity significant spikes, we are also not seeing any reversals, so we remain optimistic it will be the available equipment busy at pretty decent rates.

Jeff Platt

George, understand that that we had told people for quite a while now that we expected the rollovers of legacy contracts for our deepwater vessels for the most part it to be completed by this March quarter that in fact has largely happened, so I think the quick acceleration of day rates in the deepwater fleet that you have seen over the past year or two on a quarter-to-quarter basis, we fully expected that pace to slowdown and that's exactly what we are saying now.

It's not to suggest that we don't have opportunities to push day rates up, add more equipment into our fleet that was the bigger nature and therefore push that average rate up because of their size etcetera, so that's kind of what we are seeing right now.

George O'Leary-Tudor, Pickering, Holt

Okay. That's very helpful color. Then over the last few quarters you guys have highlighted customers looking to lock-up vessels three to six months before they actually deliver it and just kind of given your robust new build program, has that continued or has there been any change in customer behavior?

Jeff Platt

I'll tell you over the last you know 6 to 12 months, I haven't seen a whole lot. You do have some issues. I talked about it before in the U.S. market. Last year was very good market. We took that opportunity to lockup some U.S. flagged equipment that was under construction. We didn't place the spot market for say. Some others have done, we like that, but overall with the exception of that U.S. market, I really haven't seen a whole lot of change in what we have done.

George O'Leary-Tudor, Pickering, Holt

Thanks very much, guys.

Operator

From Simmons, we have Ian Macpherson on line. Please go ahead.

Ian Macpherson - Simmons

Hi. Thank you. Jeff, you mentioned two or three times that the analyst community isn't really square with reality in terms of the outlook for the business. At the same time, I mean, the Wall Street consensus for fiscal '15 is more than double the earnings from fiscal '14, so I know you are guiding earnings specifically, but can you kind of reconcile those comments and sort of what's baked in, in the Street expectations at this point based on steadily improving day rates?

Jeff Platt

Yes, Ian. My comments were more towards the drillers have come on and certainly there has been some softness and their future contract and I think you again, the overall rig count our thesis and our basis for our optimism is not that all of these 250 rigs that are under construction are going to be incremental.

Certainly day rates on drilling rigs at least on the contracting side is have come down what have been historic highs, but from our standpoint a working rig still need support vessels, still needs all the services for, so whether that rig is at $680,000 or $650,000 a day or $450,000, we think as long as it's working, it's the key, so I think my comments were more to the very negative sentiment that started early in the quarter when some of the drillers came out and were talking really about some of the issues on the forward marketing success or locking it up.

Now, recently we have seen some of the drillers have come out and added to the contracting backlog. Again, they are not increasing the day rates or going above it, but nonetheless, the working rig for us is still much better than certainly in a idle rig. I think, that was really what my sentiment is, because when you look at Tidewater, we got punched I think pretty hard even more than some of the drillers did, when the drillers came out with some of that commentary earlier in the year, so that's really where I coming from.

Ian Macpherson - Simmons

Got you.

Quinn Fanning

At least, estimates that we are looking at on the first call was at 479 for the fiscal 2015. That looks like a relatively steep slope when you look at earnings on a non-adjusted basis, but we certainly had no expectation where we sit today of another goodwill impairment, transaction expense associated with Troms, or the early retirement of Troms that we inherited in the transaction, so if you at least go off of the creating adjusted number that Jeff used and the 479 is the first call that I see, about a 26% year-over-year improvement and we are not providing earnings guidance, but I don't see that as a doubling or even the 70% Growth that you will see on 479 relative to the unadjusted numbers we reported.

Ian Macpherson - Simmons

Yes. That's fair.

Quinn Fanning

…the earning a little bit.

Ian Macpherson - Simmons

Yes. No, I was looking at the fiscal '16 against your GAAP earnings for fiscal '14, which I appreciate were subdued for the non-recurring reasons. One more if I may quickly, Quinn, you said that your total commitment in the 10-K will read 573 as of March 31st and then to 137 for the three cold water vessels will be additive to that amount?

Quinn Fanning

That's correct and just remember that 573 is not a total commitment to see remaining payment on commitments made as of March 31. I think the total commitments are a $200 million higher. The difference obviously being payments that we have already made.

Ian Macpherson - Simmons

Right. Got it. Okay. Thank you very much.

Quinn Fanning

Thank you.

Operator

From Wells Fargo, we have Matt Conlan online. Please go ahead.

Matt Conlan - Wells Fargo

Hi, guys. Also a congrats on a good operational quarter in March quarter. Just tell you, within the deepwater fleet the anchor handlers, you know, rates there had been pretty flat for the last 18 months, but they jumped 7% in the quarter. Realizing you had lower utilization than normal was this just a mix issue, where the vessels with lower rates were the ones that were down driving up the average day rate or do we actually have a new baseline of rates for this vessel class?

Jeff Platt

I think, it was the fact there was a mix issue and you are right, we had some vessels that are in our deep water anchor handling class that are the smaller vessels in that class that had some drydockings. Although we had in effect moved some of our bigger, the very bigger ones to some new contract that we'll some increases on at the end of the day, but you haven't seen the effect of that, so it's a mix issue in the quarter we just completed.

Matt Conlan - Wells Fargo

Okay, so we shouldn't extrapolate that. If you are going for if that going to come down a little bit as those smaller vessels come back.

Jeff Platt

That's correct. As those smaller vessels move onto their contracts and finish their regulatory drydockings, you will see that day rate come down, but you will see the utilization pick up as they come back on charter.

Matt Conlan - Wells Fargo

Okay. Great. Changing gears, there has been some speculation of course the majors are looking at how to improve their rates of return and in that process, with speculation that they might shift expenditures more towards development programs than exploration. My sense is that would be positive, a positive change for the vessel class, but am I my right on that?

Jeff Platt

I am not sure that it is necessarily positive. What it does is just as that rig is now instead of drilling and exploration well maybe drilling the development wells and again an offshore deepwater development, so it may not be a positive, for say, because it keeps the rig working and that's certainly the key point for us.

Then obviously as the development drilling moves on, there are other knock on services pipelines, the FPSO, however the field is being developed that in fact could be a pull through to increase the overall demand, but your point is right. As they move from exploration to development drilling, it's certainly not a negative for us.

Matt Conlan - Wells Fargo

Yes. That was my point that there would be the associated construction and installation work that would take up some vessel time.

Jeff Platt

Yes. That's right.

Matt Conlan - Wells Fargo

Okay. Great. Thank you.

Operator

From Cowen and Company, we have J.B. Lowe online. Please go ahead.

J.B. Lowe - Cowen and Company

Hi. Good morning, guys. I just a quick question on the towing supply business, your utilization has bounced around the mid-80s for the past couple of years, but what is a good take for day rates to really get going there? Are we looking that utilization in the high-80s or something like that?

Jeff Platt

J.B., I hate to keep saying things that we have. I think as the jack-ups are delivered and to the extent that they are incremental that's what's going to hit that inflection point on it. It's certainly not for the lack of trying and we very much want to see it move up. As I stated in my comments, while expense subdued, I mean, we have moved from that 13.3 a day up to 15,000, we could go to get to that 20,000 feet that we saw last month. That's where we are and I think as the jack-ups continue to be delivered and we are hopeful to see those be a large portion of those would be incremental that's certainly going to bolster that effort.

J.B. Lowe - Cowen and Company

Okay.

Jeff Platt

We talked about in previous calls, I think, one of the things that, we believe may benefit the supply/demand dynamics in the towing supply market is that the number of towing supply type vessels that are in the construction queue relative to the number of jack-ups that are in the construction queue is pretty modes.

J.B. Lowe - Cowen and Company

Correct, so for long-term purposes you guys are expecting utilization to pick up here which would be followed by rates?

Jeff Platt

Again, you are in that mid-8% JV that you could squeeze maybe a 1% or 2% out of it, but there is not a whole lot more juice on the utilization side.

J.B. Lowe - Cowen and Company

Okay. I guess, that's my question then. If there is not that much more juice to be had on the utilization side then how come rates haven't really gone up that much?

Jeff Platt

That's for our feet, J.B.

J.B. Lowe - Cowen and Company

Okay.

Quinn Fanning

We report our numbers, where (Inaudible) is our largest competitor also reports a similar segment and they have got high. Understand the combined, we are still a small percentage of the overall numbers of the total supply, so what that suggest J.B. that we said is the rest of the operators are in that mid-operating percent

J.B. Lowe - Cowen and Company

Got you. Okay. Just a quick question on new build North Sea vessels you bought. Is that going to be under the Troms' flag? Is that going to be kind of being run by those guys?

Jeff Platt

The anticipate today is will be. That is certainly our cold water expertise is under the Troms group and that's where those vessels are intended to ultimately end up. Now, not necessarily in the North Sea, that our cold water activity was going to be centered out of Troms' management team.

J.B. Lowe - Cowen and Company

All right. Thanks so much. That's all I had.

Joe Bennett

Thanks, J.B.

Operator

From Credit Suisse, we have Gregory Lewis online. Please go ahead.

Gregory Lewis - Credit Suisse

Thank you and Good morning. Jeff, clearly I think it was alluded to that earnings are going to be ramping up. At least that's the expectation. Is there any way we should think about the earnings going higher with potentially increased shareholder returns dividends?

Jeff Platt

I didn't quite understand the question. Could you repeat it please?

Gregory Lewis - Credit Suisse

Okay. I mean, I'll ask it a different way. If we think about cash flow, as I look back over the last couple years it looks like from, let's call it, calendar year 2012 through calendar year little last like what's that, 13 quarters? It looks like the pay out of cash flow from the dividend is, let's call it, high-teens as sort of we look forward into 2015 and 2016 that the cash flow that Tidewater is going to be kicking off looks like the example not only for - building out your fleet, servicing your debt, but it also looks like there will be additional cash flow for additional dividend increases. Is that something that management is thinking about or are you just comfortable with the existing buyback that's sorted out there?

Jeff Platt

I can tell you that discussions we had with investors and internally with our board is when we get, it will be finalized your fleet build out and again we are not at the end yet, but we are much closer to the end than we have been. Certainly that free cash flow, what is the best way to return that value to the shareholders.

We understand that it is shareholders' money at the end of the day. Management is not here to just play with it. Dividends are certainly an option, share buyback - I can just tell you that my feeling on that is, in the service sector, we've got lots of operational risks in the business that we do. Okay?

When you increase the dividend that is something that you are very much reticent to take back. Where we are at with that dividend? I can say that today my feeling is more looking at potential share buyback or getting ahead ourselves, but it is a discussion that we have with the board on a regular basis and with investors. I can tell you sentiment with the investors is all over the place, increased the regular dividend, look at special dividends and share buyback. That discussion depending on who is in the room, you will have that many different flavors of what be the optimum way to do that.

Again, we believe that we are headed to that free cash flow. We have little debt maturities on the horizon, so we are getting closer to making those decisions and being in a position where we need to implement it.

Gregory Lewis - Credit Suisse

Okay. Then just real quick, I know it's [12 O'clock]. Just as we think about the opportunity the Middle East, I mean, clearly there is this expectation of a ramp up in activity in the Middle East, not only by ONGC, increased activity by ARAMCO. When we think about Tidewater's fleet in the Middle East, I mean, do you sort of view the fleet appropriately sized for the Middle East or is this an area where we could actually see some growth over the next one, two, three years.

Jeff Platt

I think, you will see growth which has been, I think, pretty tremendous. When you look at what we've done in the Middle East, and that's all new equipment, high-spec equipment. Our story in the Middle East and with ARAMCO in particular I think is one that we are very proud of. Lots of hard work to get there and it's continuing, I think, to pay dividends for us and our shareholders, but we look at that as a growth area.

Gregory Lewis - Credit Suisse

Okay, guys. Thanks for the time and nice quarter.

Jeff Platt

Thank you.

Operator

Thank you. We will now turn it back to Jeff Platt for final remarks.

Jeff Platt

I want to thank everybody for their interest in Tidewater today. With that, we will end the call.

Operator

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

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