Roundhill Acquirers Deep Value ETF
Q3 2007 Earnings Call Transcript

Published:

  • Operator:
    Ladies and gentlemen, thank you for standing by, and welcometo the Superior Offshore Third Quarter 2007 Earnings Conference Call. At thistime all participants are in a listen-only mode. Later in today’s presentationwe will conduct a question-and-answer session and instructions will be given atthat time (Operator Instructions). As a reminder, this conference is being recorded today,Thursday, November 15, 2007. I’d now like to turn the conference over to yourhost, Ken Dennard, DRG&E. Please go ahead.
  • Ken Dennard:
    Thank you, Jerry (ph) and good morning everyone. Weappreciate you joining us for Superior Offshore International's conference callto review third quarter 2007 results. Before I turn the call over tomanagement, I have the normal housekeeping details to run through. You may have received an e-mail of the earnings releaseyesterday afternoon. If you did not receive that release or you would like tobe added to the e-mail distribution list, just contact our offices atDRG&E, and that number is 713-529-6600. Also, a telephonic replay of today's call will be availablefor seven days. The phone number and access code for that replay informationare in the news release. Also, it will be available via webcast in a couple ofhours on the company's website at www.superioroffshore.com. Please note that information reported on this call speaksonly as the today, November 15, 2007, and therefore, you are advised that timesensitive information may no longer be accurate at the time of any replaylistening. Also, statements made in this conference call are nothistorical facts, including statements accompanied by words such as will,believe, anticipate, expect, estimate, or similar words are forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995, regarding Superior Offshore plans and performance. These statements are based on management's estimates andprojections as of the date of this call, and are not guarantees of futureperformance. Actual results may differ materially from those results expressedor implied in these statements as a result of risks, uncertainties and otherfactors including, but not limited to the factors set forth in the company'sfilings with the Securities and Exchange Commission, including SuperiorOffshore's prospectus dated April 19, 2007. Superior Offshore cautions you to not place undue relianceupon forward-looking statements contained in this call. Superior Offshore doesnot undertake any obligation to publicly revise any forward-looking statementsto reflect future events, information or circumstances revised after the dateof this call. For further information, please refer to the company's filingswith the SEC. Now with that behind us, let me introduce this morning JimMermis, the company's President and Chief Executive Officer, and Roger Burks,Executive Vice President and Chief Financial and Administrative Officer. Now I’d like to turn the call over to Jim.
  • Jim Mermis:
    Thank you, Ken. Good morning everyone. I’d like to thank youall for joining us today on our third quarter conference call for the quarterended September 30, 2007. As you saw in our news release yesterday, we reportedrevenue of $75.5 million with adjusted EBITDA of $11.1 million and net incomeof $3.6 million or $0.14 per share for the quarter. These results are certainlyan improvement over those we reported for the second quarter. But they are still far short of where we ultimately expectto be once we have completed our transition from a Gulf of Mexico shallow wateroperator into a full service international subsea construction and projectmanagement company. As I said, we're not fully there yet but we have taken a lotof strategic steps to move forward, including the Ocean Flow acquisition, whichis expected to close by the end of November. This acquisition will allow us tooffer our customers engineering and project management services and has alsoprovided the potential to drive growth in our existing businesses and tostrengthen the end-to-end relationship with our customers. Ocean Flow will help transition us from a pure servicecompany to more of a project-driven company. And this will allow us to pursuelonger-term projects with higher revenues and margins. It’s also going to helpus further establish our deepwater track record, and this will leverage thefull capabilities of the Superior Achiever when it comes into the market in thesecond half of next year. Our goal is to win projects with greater complexity anddeeper water as market opportunities and technical expertise allow. We expectthis strategic repositioning of the company to enable us to increase revenuesand grow our operating margins in the future. Before I turn the call over to Roger to go through thefinancials, I’d like to highlight a few key drivers behind our third quarterresults. As everyone is aware, our Trinidad project was running fullsteam ahead during the third quarter. Three of our vessels, the Gulmar Condor,Seamec III, and the Crossmar 14 are still currently working there for BP. We also mobilized a work class ROV onto a third party vesseland provided services during the quarter to two other operators in Trinidad.Once the BP project is completed, we've got another project lined up in theregion. Trinidad is a market that we expect to remain active, and we haverecently opened an office there. We also see the Ocean Flow acquisition playing an importantrole for us in Trinidad with its subsea completion, design, engineering andproject management expertise. We saw an improvement in our overall fleetutilization for the third quarter. The good news is as of today all of our DP vessels are onhire, except for the Toisa Puma, which is in drydock. The Superior Endeavorteam out of drydock in September, but did not begin generating revenues untilOctober due to weather delays and delay in the commencement of a project thatwe anticipated would start by mid-September. She is on her second project since coming out of drydock andis currently installing a 24-inch riser in 750 feet of water on the ShellAmberjack project. We are currently securing backlog for the Endeavor, and weexpect to see good utilization through the end of the year. The Gulmar Falcon was in drydock for all of the thirdquarter. We placed the boat back into service in the Gulf of Mexico, and it hasbeen generating revenues on saturation diving projects since November 1st. We're also generating backlog for her and expect her to workthrough the end of the year as well. The Falcon comes up for recharter in Aprilof '08, and assuming DP vessel utilization remains as strong as we expect, wewould anticipate that we’ll renew that charter. The Adams Surveyor had strong utilization, providing ROVservices in the U.S. Gulf during the third quarter, and we have workcommitments for her through the end of the year as well. The Gulmar Condor sawa near full utilization in the third quarter in Trinidad, and we completedinstallation of a SAT system and ROV during that quarter to assist in theTrinidad project. This vessel has a deepwater heat-compensated crane, and weare currently bidding her on projects that will capitalize on the synergiesthat will be provided by Ocean Flow. The Condor is a vessel that can help usmake the final transition into deepwater and give us a secure track recordbefore the final commissioning of the Superior Achiever next year. The Seamec III also had full near utilization in Trinidadduring the third quarter, and we see opportunities to keep her working in theregion after we have completed the BP project. The Crossmar 14 is working inTrinidad as well, and we're in the process of securing additional work for thisconstruction barge either in Trinidad or in the Gulf of Mexico after completionof the BP project. We have not generated any revenue from the Toisa Puma, andwe’re currently in arbitration with the vessels owners over the ship'scondition upon delivery. The market for four-point vessels in the Gulf ofMexico still remains soft. We were able to find some additional work during thequarter, which helped utilization rates for these vessels, and we improved ourutilization over the second quarter. You need to remember that our four-pointvessels are surface diving vessels. And we do not have a saturation diving capability at thispoint, but we are currently refurbishing a portable SAT system to be installedon a vessel of opportunity within the next six months or so. We have ordered two Perry Slingsby XLS 200 horsepower 4000meter ROVs for the Superior Achiever and expect delivery of those systems inJune of 2008. These are the newest, most powerful ROVs built by Perry, andthese are the first that they have designed as far as I am aware that have thecapacity to work in 4000 meters of water. I’d also like to mention that we are continuing to pursuedual accreditation of ADCI and IMCA for our international and U.S. divers. Thiswill give us a significant advantage as we move into other internationalmarkets. We already have 300 international divers who aredual-certified and a total of 60 U.S. divers that are now in the process ofbeing IMCA certified. We are also working on IMCA certification for the rest ofour American divers as we speak. A couple of other items worth pointing out. We upgraded ouroperational staff by adding significant talent to the management team. At thesame time, we reduced staffing in a few other areas during the third quarter,which will help reduce our overhead costs in those areas going forward. As a result, though, we will see some increase severance expensesfor the third quarter. We also outsource many of our IT utility functions suchas desktop support, e-mail and network management, and this will allow us toreduce in-house IT staffing. This move should save us about $0.5 million ayear. In August to improve efficiency and reduce costs in ourconstruction and fabrication operations, we sold the Belle Chasse facility andconsolidated the work there with our larger more efficient Amelia andBroussard, Louisiana fabrication facilities. This will save us about $1 million a year also. We're in theprocess of expanding the bulkhead for loadouts in the Amelia fabrication yard,and this is going to accommodate larger loadouts and will increase our abilityto fabricate higher value projects. Now I will ask Roger Burks to run you through the financialsin more detail.
  • Roger Burks:
    Thanks, Jim, and thank you all for joining us today. I'mgoing to give you a rundown of financials for the three month ended September30, '07. As Jim said, revenues totaled $75.5 million in the thirdquarter. This is compared to $41.9 million in the second quarter of '07 and$64.4 million in last year's third quarter. Third-quarter 2007 revenues weresignificantly enhanced by the ongoing BP Trinidad project, but we were negativelyimpacted by the drydockings of the Endeavor and the Gulmar Falcon. As Jim said, both vessels have returned to service and arecurrently on hire, although neither generated any revenue in the third quarterof '07. Four-point surface diving vessel utilization and dayrates, along withcallout diving services, were significantly lower in the third quarter of '07compared to the same period in ‘06, as the demand for the surface divingsupport in the Gulf of Mexico remains soft. Looking at some of the expense items, our selling andgeneral administrative expenses totaled $10.3 million this quarter, of which$3.3 million was related to non-cash stock-based compensation expense. Thiscompares to $10.8 million in the second quarter of '07, which included $2.2million of stock-based compensation. Depreciation and amortization was $2.2 million. The previousquarter was $1.2 million. Putting this altogether, the Company reported netincome of $3.6 million or $0.14 per share in the third quarter of '07. This iscompared with net income of $13.7 million or $0.92 per diluted share in thethird quarter of '06. Included in net income for the third quarter of '07 wereone-time charges totaling $900,000 or $0.03 per share related to the sale ofthe Belle Chasse facility and the Sarbanes-Oxley implementation. Adjusted EBITDA was $11.1 million in the third quarter of'07. This compared with $22.8 million in the third quarter of '06. Thedrydockings of the two vessels mentioned earlier and the lower four-point andcallout diving services demand significantly reduced our third-quarter '07adjusted EBITDA as compared to the third quarter of '06. Total capital expenditures through the third quarter throughSeptember 30 were $117 million, which includes outlays for the construction ofthe Superior Achiever and maintenance and upgrades to our existing fleet. We expect $17 million in capital expenditures during thefourth quarter of '07. Thereafter, we will owe approximately $39 milliontowards the completion of the Achiever. Based on our current estimates and the timing of our projectwork and current market conditions, the Company expects that full-year 2007revenue will range between $265 million and $275 million. For the fourthquarter of '07, adjusted EBITDA is expected to be between $16 and $18 million,and earnings per diluted share for the fourth quarter is expected to range from$0.12 to $0.16. This EPS includes one-time charges related to severancecosts and extinguishment of debt, which is expected to be between $0.16 and$0.20 per share. The Company estimates 2008 revenue will be between $320 and$350 million. This estimate does not include any revenue from the SuperiorAchiever, which is expected to be placed into service sometime in the secondhalf of '08. Our total long-term debt as of September 30 was $59.2million. And currently the Company is negotiating the refinancing of its termloan facility with an alternate lender. Yesterday the Company amended and restated certain financialcovenants under its revolving credit facility and obtained a waiver of certaincovenant violations for the September 30 reporting period from both itsrevolving credit and term loan lenders. We anticipate receiving a commitment letter from analternative term loan lender in the near future. Accordingly we will be filinga Form 12b25 to extend the deadline for our timely filing of our 10-Q toNovember 19, '07. With that, I will turn it back to Jim.
  • Jim Mermis:
    Thank you, Roger. Before we take questions, I'm going tospend a few minutes talking about what we're seeing for the rest of 2007 andwhat we see going into 2008. Our projects in Trinidad are going very well, andas I mentioned earlier, we currently have three vessels in Trinidad; two DPsaturation vessels, the Gulmar Condor and the Seamec III; and an anchoredconstruction barge, the Crossmar 14. We expect the work on the current project to be completedaround the end of this year or sometime during the first quarter of 2008. It isimportant to note that ever since our arrival in Trinidad back in June we havebeen in discussions with other operators in the region, and we feel pretty goodabout future business opportunities for diving and ROV surfaces in this part ofthe world. More than 80% of our third-quarter revenues came fromnon-U.S. contracts compared with 66% in the second quarter and 0 this time ayear ago. The steps we have taken in Trinidad, the new office we have opened inthe Middle East, the pending Ocean Flow acquisition all move us closer to ourgoal of becoming an international full-service offshore construction andproject management company. We expect the Ocean Flow acquisition to close during thefourth quarter, and this is a stock for stock transaction. The acquisition isgoing to give us significantly greater strength and capabilities in deepwaterconstruction, pipeline engineering and project management. Ocean Flow and our other existing services should begin tobuild on one another. This is going to allow us to compete for a broader rangeof large-scale projects, once again with longer-terms and higher margin. It isalso going to greatly enhance the business development opportunities for theSuperior Achiever. We're looking forward to adding the Achiever to our fleet inthe second half of next year, and the Merwede shipyard tells us thatconstruction is on schedule. The hull is expected to go in the water in thefirst quarter, and then they will begin the installation of the cranes andA&R winches, and we will probably see the boat begin sea trials sometime inthe fall of 2008. We are already talking to a number of operators aboutengaging the Achiever on long-term contracts, and we've had very good response.The Achiever is going to be our first DPIII vessel, and it’s going to allow usto work at any depth in any harsh environment location in the world. In the Gulf of Mexico, barring a major hurricane or otherunforeseen event, we're not forecasting any significant improvement in thefour-point anchored vessel market. We are evaluating opportunities to move someof these vessels to other markets, including Africa and the Middle East, andalso refurbishing the SAT system to go on a vessel of opportunity. Right now we are working through the vessel flagging issuesthat will enable us to move the four- point boats to foreign waters. In themeantime, we hope to pick up additional Gulf of Mexico business as a result ofour callout diving marketing program we recently reactivated where we canprovide 24/7 services on an emergency callout basis. And with that, I think we're ready to open the call forquestions.
  • Operator:
    (Operator Instructions) First question comes from the lineof David Smith of JPMorgan. Please go ahead.
  • David Smith:
    Hi, good morning.
  • Jim Mermis:
    Good morning, David.
  • David Smith:
    I wonder if you can talk about what opportunities you mightsee for the four-point vessels internationally?
  • Jim Mermis:
    Right now we are negotiating an opportunity to move one ofthe four points to Africa. We see that there is a need for equipment there. Theutilization and the day-rates are better. We are working with a contractor thatis going to help us move into that country they are already established. They have shore basis. They have logistical support. Theyhave local content, and essentially it is going to be an opportunity for us tomove equipment into that market and open the doors for us to moveinternationally DP vessels into West Africa. We're also working on the same type of deal for the MiddleEast, and we think that those projects are going to come to fruition and giveus some good opportunities for entry into those markets.
  • David Smith:
    Okay. Also, congrats on the Ocean Flow acquisition. It lookspretty good. I'm wondering if you can talk about any efforts you have madeinternally to beef up your engineering capabilities?
  • Jim Mermis:
    We have hired some in-house engineers. We’ve hired a guynamed Toby Selcer and Amanda Selcer. They both have a background in deepwaterwinch design. They worked for Dynacon. They have worked for Perry Slingsby.They bring us a capability for design and the opportunity to manufacture ourown sub-sea tooling for our ROVs, and we're pretty excited to have themonboard.
  • Roger Burks:
    In addition, Dave, the Ocean Flow brings 26 deepwaterproject engineers and project managers, and we're looking to continue that willimprove our flow of bids. Also, improve just the level of deepwater engineeringthat Jim laid out in the IPO road show.
  • David Smith:
    Okay. Thank you very much.
  • Operator:
    Here next question comes from the line of Alan Laws ofMerrill Lynch.
  • Alan Laws:
    Hi guys, good morning.
  • Jim Mermis:
    Good morning.
  • Alan Laws:
    I have got a few questions here for you. I don't know howmuch you are going to want to answer some of them, but the first one has to dowith the international, in your international contracts and what you see orwhat you have as bids in hand, and when do you expect to announce additionalcontracts here to establish maybe some backlog to back up you should 320 to 350revenue forecast for next year?
  • Jim Mermis:
    Yes, Alan, we are very actively biding projects in WestAfrica and the Middle East. We’ve got some $300 million worth of bids out. Weexpect awards to start happening pretty soon. To tell you we have a project inour hand for Africa and the Middle East, we do not. But within the next few weeks, we believe that projects willbe awarded, and we have been shortlisted and told that we were the frontrunnerfor some of the significant projects we are bidding. We’ve also got work in hand in Trinidad, half of the BPproject, and as I said previously, we have already picked up other work inTrinidad for two other operators there with an ROV vessel. So we're feelingpretty good about the future coming up internationally.
  • Alan Laws:
    Okay. Last quarter you had mentioned a $100 millionthree-year contract out of the Middle East. Where is that? Is it still outthere, or did that go away?
  • Jim Mermis:
    No, no, that contract is still out there with the MiddleEast religious holidays, etc., it has not been awarded yet, but once again, weanticipate that is going to be awarded in the near-term future.
  • Alan Laws:
    Okay. The second question, a little harder here, this is thesecond quarter in a row that you are in violation or default of your debtfacility covenants, and now it looks from the text of your comments here todayon the call that from the release that you are having trouble securing thefinancing that you will really require through the next year. Can you talk a little bit about your liquidity and how youare going to firm that up a little?
  • Roger Burks:
    Sure. I will talk to those. Roger Burks. We had a covenantviolation related to the capital expenditures and because of the secondquarter, and to expand we also had it on EBITDA. We are working with our banksthat are currently in place. The revolver, the revolving credit facility bank, which isChase, we have adjusted the covenants and the go forward for our liquidity on aworking capital basis. As far as the term loan, we currently have one bank thatis in there. They offered us certain options, and we decided to goforward with another choice. That choice we thought we were very close tosigning the commitment letter, and accordingly we are very comfortable with ourliquidity position going into next year. As you can see the first nine months of this year, we had$117 million of capital expenditure. We have two payments right around the endof the year for the Achiever, totaling right around $16 million, and then weare effectively in very solid shape going into the next year for our capitalexpenditure plans.
  • Alan Laws:
    Okay. But for CapEx last quarter you said $26 million forthe balance. You spend $29 million in the third quarter. What is the CapExbalance for fourth quarter?
  • Roger Burks:
    $17 million.
  • Alan Laws:
    $17 million? And then for next year, we have something like50 to 60 for the completion of the Achiever. Is that not right?
  • Roger Burks:
    I believe that number is $38.6 million or $39 million, $38million for the rest of the Achiever. The Achiever is being met. We have, asyou noticed, in the management release, Tom Armstrong joined our Company. He isthe Vice President of special projects, and his first special project is tofocus on the Achiever. We have other items that we are focusing on, but a few ofthe moves that have been made is the upgrading of the complete management teamhere from finance to administration to operations. And so we feel verycomfortable going into next year about that we're going to meet our CapEx, wewill meet our expenditures, and we will have plenty of liquidity to grow thisCompany.
  • Alan Laws:
    Okay. So $39 million for the Achiever, maintenance and thenyou had one more shipyard going into '08, so what would total CapEx be nextyear?
  • Roger Burks:
    That is a hard number to guess at this point I mean toestimate at this point. I will tell you our maintenance CapEx runs right around$12 million a year and so you have the 38, plus the 12 and…
  • Alan Laws:
    And the 30-day shipyard?
  • Jim Mermis:
    The shipyard in '08 is for a chartered vessel. So, we reallydo not have any shipyard work coming up here next year at all.
  • Alan Laws:
    Okay. All right. So you are looking at $50 million, $60million of the CapEx next year off of a $320 million revenue base and any guessat what your EBIT margin is? You are 10% now. That looks like a net consumptionof capital going into next year.
  • Roger Burks:
    Well, we are not ready to project out our adjusted EBITDAfor next year at this point.
  • Alan Laws:
    Okay. All right. The last question I had has to do with your10b51 filing. With all the turmoil you have experienced over the last couple ofquarters here and the additional charges that now you have laid out in thefourth quarter, I wonder if you could talk a little bit about the wave ofinsider selling over the last few weeks at sub-IPO prices? I know we're getting a lot of calls about this. I think itis probably a good forum for you to maybe talk about this a little.
  • Jim Mermis:
    This is Jim Mermis, and as we set up the IPO here, theexecutive management received restricted stock. That stock vests over a fourand a half year period. The first tranche came six months after the IPO, andfor me a third of the stock sales represent income taxes that are due. And therest foe myself is to diversify my personal investment holdings. I think it is important, though, for everyone to realizethat executive management guidelines for me indicate that I need to retain fivetimes my yearly compensation in Company stock value. I currently hold overeight times my yearly earnings in Company stock.
  • Alan Laws:
    All right. Thanks for clearing that up, Jim. That is all Ihave got for questions. Thanks.
  • Operator:
    Thank you. Michael Marino, Johnson Rice.
  • Michael Marino:
    Good morning
  • Roger Burks:
    Good morning.
  • Michael Marino:
    I was wondering if you could shed some light on the Gulf ofMexico. If I look at you guys' quarter, 80% of your revenue was frominternational markets. So presumably the Gulf of Mexico was a pretty big dragon earnings. I am wondering if you could put some numbers on that I guessin terms of how much operating income did you lose in the quarter in the Gulfof Mexico?
  • Roger Burks:
    This is Roger. The Gulf of Mexico continued to be soft forus. One, because of the vessel, I'm sorry, the surface diving four-pointvessels. In addition, the Endeavor and the Falcon being in drydock in the Gulf,I'm sorry, being in drydock in the third quarter. They now are deployed in deepwater projects in the Gulf ofMexico. We and Jim mentioned in his call that the callout diving services,which really relates to the shallow water, we're re-instituting that plan. Ithelps us in a few ways. It keeps our name out, and it also helps us improve andretain divers. The Gulf of Mexico has been a tough market for us, and thatis why the strategy of being geographically diversified makes sense. But in thefourth quarter, we anticipate our revenue mix being 60-40 international to theGulf of Mexico. And it was not a lost quarter, but if we can institute ourcallout diving services I think Jim has and Dave Weinhoffer, our Executive VicePresident of Commercial Operations, we have increased our sales force fourtimes in the last two and a half months with experienced business developmentpeople focusing on different areas throughout the world and in the Gulf.
  • Michael Marino:
    Okay. I guess what I'm trying to figure out is, as we lookinto next year in your guidance, the Gulf of Mexico is going to have tocontribute somewhat I guess beyond the Endeavor and the Falcon. Do you have much, what are your expectations I guess for thefour-point fleet next year in the Gulf of Mexico or I know you mentioned youmight move some of those vessels. But is there much expectation in the Gulf ofMexico beyond the Endeavor and the Falcon for next year in your guidance?
  • Jim Mermis:
    No. As we said, we are refurbishing SAT 1, the portable SATsystem that came off of the Endeavor. We're getting that system ready to put ona vessel of opportunity. Hopefully that is going to be in the Gulf of Mexico. But our strategic plan is to do a lot like the Europeancompanies and move our vessels around the world where the opportunities arebetter, where the margins are higher and the work is longer-term. If the Gulf of Mexico turns around and there is a hurricane,we can certainly move equipment back into the Gulf. But at this point, we'regoing to try to go out there and get longer-term projects at higher margins.
  • Michael Marino:
    Okay. Where do you see your revenue mix next year in termsof Gulf versus international?
  • Jim Mermis:
    You know, realistically it is tough to foresee what is goingto happen in the Gulf of Mexico. But, let's say, we are 70% international deepwaterand 30% Gulf of Mexico.
  • Michael Marino:
    Okay. Thank you very much. That is all I have for now.
  • Operator:
    (Operator Instructions) Okay. The next question comes fromthe line of Terrence Chun (ph). Please go ahead.
  • Terrence Chun:
    Good morning guys.
  • Roger Burks:
    Good morning. Terrence.
  • Terrence Chun:
    First, I wanted to inquire a little bit more about yourstock comp. And is that the level that you have seen in the second quarter andnow third quarter sort of a run-rate to use for '08 also, or is it going tofall off after these sort of initial IPO stock comp awards fall away?
  • Roger Burks:
    You know, we can talk through that. Number one, on thestock-based compensation, that is the FAS 123R, which you estimate the value asof grant date. The run-rate in '08 will not be as high as '07 because we havehad certain people leave the company. And their stock will no longer be part of our compensation.I would anticipate the stock-based number to be somewhere around $9 millionbased on what current awards are, $9 million going into '08 for the full year.
  • Terrence Chun:
    Okay. Sorry about that. Alright. Also then, if I look atyour revenue growth implied by your '08 versus '07 of almost 25% or so revenuegrowth, should I then expect that, and I think you touched on it earlier. But EBITDA margins for instance in the third quarter wereadjusted EBITDA margins somewhere around 15%, and fourth quarter are going tobe somewhere around 18%, 19%. Is there any reason I should not expect those toincrease theoretically in '08 versus those levels?
  • Roger Burks:
    I will say we have not given '08 guidance on that. But letme talk a little bit about the third-quarter adjusted EBITDA. A few items itreally impacted, when the boats like the Endeavor and the Falcon are indrydock. Not only do you use loss the revenue and the margin fromthat, but you are keeping a cost, a fixed cost component here, which relates tothe Marine crew and other items that you have to keep the vessel ready for thisdrydocking to come out. So without the drydockings next year and having those boatsat the normal utilization should improve. Jim mentioned earlier also, and wehave been doing this all the way through '07, is training, upgrading andobtaining experienced offshore personnel. The costs that we are putting intotraining the divers to get them cross-certified IMCA, ADCI and such areinvestments that we're baking into the future. We would hope to be able to find areas of efficiency, Ithink, we have the team in place. The growth has been captured to move usforward. Jim, do you want to speak to this a little bit?
  • Jim Mermis:
    Well, we are out there as we speak trying to developlong-term strategic alliances and customer relationships. We're looking forways to capitalize the company more efficiently, which will allow us to bringmore assets into play and certainly, we think that the future is pretty brightfor us.
  • Terrence Chun:
    All right. Well, I guess, I'm just trying to get at withalmost 25% revenue growth; I would think that margins should expand healthfullygiven that as well. I was just trying to get a feel for that. And lastly, depreciation and amortization, why did that jumpup so much this quarter versus last quarter?
  • Roger Burks:
    Of the Endeavor went back into service.
  • Terrence Chun:
    Okay.
  • Roger Burks:
    We had depreciation on higher value.
  • Terrence Chun:
    All right. Great. That is it for me now. Thanks.
  • Operator:
    Next question is from the line of Dimal Amin. Please goahead.
  • Dimal Amin:
    A quick question, I don’t know if I missed this earlier, butwhat was the revenue contribution from the fabrication business?
  • Roger Burks:
    For the third quarter?
  • Dimal Amin:
    Yes.
  • Roger Burks:
    The third-quarter fabrication numbers, I am sorry we do notshow that on there is $2.5 million of revenue.
  • Dimal Amin:
    2.5, what do you guys expect in Q4?
  • Roger Burks:
    We expect a similar run-rate that we have had.
  • Jim Mermis:
    If you look at the Ocean Flow acquisition, Ocean Flow isgoing to bring opportunities for us to increase our fabrication revenues. Atthis point, we're just really trying to get our hands around everything and getit headed in the right direction. And once the Ocean Flow acquisition is finalized, we canreally get aggressive and try to move ahead on that.
  • Roger Burks:
    And that’s a important point here is the Ocean Flow as Jimtalked about moves us further up the chain when decisions are made in ourfabrication and a lot of our services will take a benefit. Our projections in '08 and for the fourth quarter of '07 donot include any synergies from Ocean Flow and it does not include any revenuefrom the Achiever. We anticipate synergies, but we would rather prove it andsee how it is going. Part of the diligence team, Jim Mermis has the Ocean Flowgroup reporting to him with Steve Singer, who is our Senior Vice President andGeneral Counsel working with Karl Winter, who is the Founder and President ofOcean Flow, working on making sure the synergies are captured within theCompany. And so we hope to be able to report more later.
  • Dimal Amin:
    All right. Thanks, guys.
  • Operator:
    (Operator Instructions) Our next question comes from theline of Rajesh Gorodia (ph), Thomas Weisel Partners. Rajesh.
  • Rajesh Gorodia:
    I just wanted to understand what is the guidance number for2008? Does it include Toisa Puma as well?
  • Roger Burks:
    I did not understand that. What?
  • Jim Mermis:
    No, the guidance number does not include the Toisa Puma for2008.
  • Roger Burks:
    No.
  • Rajesh Gorodia:
    Okay. Great. And can you tell me what the utilization ratesfor the four-point vessels were for this quarter?
  • Roger Burks:
    Sure. For the third quarter?
  • Rajesh Gorodia:
    Yes.
  • Roger Burks:
    The utilization rates let me pull my exact number here. Theutilization rates for the third quarter were 32% for the four points, and thesecond quarter of '07, they were 29%. Our DP vessels continue to be between 80and 85% for the first, second and third quarter.
  • Rajesh Gorodia:
    And how much would be the revenue contribution fromshort-term charters if you could talk about that?
  • Roger Burks:
    Well, let's call it callout diving services, which changedour vernacular, is our callout diving services, and this is a refocusing.Callout is normally for shallow water work or work that there is not enoughfour-point vessels or vessels in general to support all the diving services. Because of our shallow water four-point reduction inutilization, there has been a significant drop-off of our callout. Now Jim and Dave Weinhoffer have reinstituted the activitybase, calling and making sure that we have our opportunities on these, what Iwould call responsive revenue items. Do you want to talk on that some, Jim?
  • Jim Mermis:
    You know, at this point the Gulf of Mexico is not reallyactive. You have got winter coming up. You have got weather coming up. Andtypically historically callout diving services have a tendency to fall off inthe winter. We are aggressively, what happened is basically after thehurricanes came in and the focus was on hurricane remediation work and puttingflowlines back into production, we put all of our efforts into marketing ourvessels, acquiring other assets and moving equipment for the highest dollarrevenues we could possibly get. At this point or at that point, we somewhat abandoned thecallout diving market and it is something that we're putting an effort to getback into full swing. So I don't think that this point we can give you arevenue number.
  • Rajesh Gorodia:
    Okay. Also, would you be able to give me the revenues runrate for Ocean Flow?
  • Jim Mermis:
    You know, the Ocean Flow acquisition is not complete yet,but I think …
  • Roger Burks:
    We are hoping to close that by the -- we will close in thefourth quarter, and then we will give more information on that.
  • Rajesh Gorodia:
    Okay. That is great. And when a vessel is in drydock likethe Gulmar Falcon, do you continue to pay the charter costs on it?
  • Jim Mermis:
    You know, we paid some charter costs on the Falcon. It hadto do with accrued maintenance days. But typically, when we have got achartered vessel, the Seamec III is coming up to go into drydock. That is avessel that we project one month's drydock next year. We will not have any real significant costs there.
  • Rajesh Gorodia:
    Sure. How much would be the charter costs you paid for theGulmar Falcon for this quarter?
  • Roger Burks:
    I do not have that off the top of my head, but it is lessthan our normal charter rate but it is still money.
  • Rajesh Gorodia:
    Okay. That helps. Great. Those are my questions. Thank you.
  • Operator:
    Ladies and gentlemen, at this point we would like to turnthe conference back over to management. Please go ahead.
  • Jim Mermis:
    Well, we would like to thank you all for joining us andshould anybody have any questions, please feel free to contact Roger or myself.
  • Operator:
    Thank you. Ladies and gentlemen, this concludes the SuperiorOffshore third-quarter 2007 earnings conference, we thank you for yourparticipation. You may now disconnect.