Core Laboratories Inc.

Good day and welcome to the CoreLab Q2 2020 earnings conference call and webcast. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone telephone. To withdraw your question, please press star then two. Please note this event is being recorded. At this time, I would like to turn the conference over to Larry Bruno. Please go ahead.

Thanks, Hayley. Good morning in North America, good afternoon in Europe, and good evening in Asia Pacific. We'd like to welcome all of our shareholders, analysts, and most importantly, our employees to Core Laboratories' second quarter 2020 earnings call. This morning, I'm joined by Chris Hill, Core's Chief Financial Officer, and Gwen Schreffler, Core's Senior Vice President and Head of Investor Relations. The call will be divided into five segments. Gwen will start by making remarks regarding forward-looking statements. We'll then have some opening comments and review core strategies and the three financial tenants that the company employs to build long-term shareholder value. Chris will then follow with a detailed financial overview and additional comments regarding shareholder value. I'll then go over core's two operating segments, detailing our progress and discussing the continued successful introduction and deployment of CoreLabs technologies, as well as highlighting some of Core's operations and major projects worldwide. Then we'll open the phones for Q&A session. I'll turn the call over to Gwen for remarks on forward-looking statements.

Before we start the conference this morning, I'll mention that some of the statements that we make during this call may include projections, estimates, and other forward-looking information. This would include any discussion of the company's business outlook, These types of forward-looking statements are subject to a number of risks and uncertainties relating to the oil and gas industry, business conditions, international market, international political climate, and other factors, including those discussed in our 34 Act filings that may affect our outcome. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respect from those projected in the forward-looking statement. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. For a more detailed discussion of some of the foregoing risks and uncertainties, see Item 1A, Risk Factors, and our most recent annual report on Form 10-K, as well as other reports and registration statements filed by us with the SEC and the AFM. Our comments include non-GAAP financial measures. Reconciliation to the most directly comparable GAAP financial measures is included in the press release announcing our second quarter results. Those non-GAAP measures can also be found on our website. With that said, I'll pass the discussion back to Larry.

Thanks, Gwen. First, I'd like to say that our thoughts are with all of those that have been directly affected by COVID-19, particularly among our employees, our industry colleagues, and their families, as well as the medical professionals and others serving on the front lines. While there are clear headwinds across the entire oil and gas industry due to a combination of reduced oil demand and oil field operational disruptions tied to COVID-19, CoreLab's dedicated staff continues to safely and efficiently provide all the vital services and products required to meet the needs of our global client base. Now to review CoreLab's strategies and the financial tenets that Core has used to build shareholder value over our 25-plus year history as a publicly traded company. The interests of our shareholders, clients, and employees will always be served by CoreLab's resilient culture that relies on innovation, leveraging technology to solve problems, and dedicated customer service. While we navigate the current challenges, Core will remain focused on its three long-standing, long-term financial tenants, those being to maximize free cash flow, maximize return on invested capital, and return excess free cash to our shareholders. Core generated almost $24 million in free cash in the second quarter of 2020, marking the 75th consecutive quarter of generating positive free cash. Core's asset-like business model continues to focus on maximizing returns on invested capital. Excluding one-time adjustments for asset impairments, Bloomberg's calculation of Core's ROIC was 8.5% among the best in the industry. As described in recent communications, Core will continue to use free cash to reduce debt and further strengthen its balance sheet. In the second quarter, Core reduced net debt by approximately $23 million. The company very quickly undertook major steps to align its cost structure with client activity levels. Compared to 2019, structural costs have been reduced by $61 million on an annualized basis, and most of these reductions have already been implemented. All of the announced cost control measures will be completed by the end of the third quarter. While this is a challenging task in this uniquely volatile market, CORE's management team remains sharply focused on rightsizing its cost structure while still maintaining workplace safety for our employees. Moreover, We will meet all of our client project needs and, very importantly, remain positioned for the recovery and client activity. Central to our long-term growth strategy is the continued introduction of new technologies. CoreLab's internal pipeline for new technological offerings remains very strong, and the unique collaborative relationship that Core maintains with its technologically sophisticated client base has always allowed CoreLab scientists to provide innovative solutions to address industry needs. Before we move on, I want to thank CoreLab's management team for their decisive actions to address the unprecedented challenges in the industry. Those of us that have been around the oil field for several decades certainly understand there could be no predetermined playbook to prepare for the events of the past four and a half months. I also want to thank all of our employees for the dedication and adaptability in meeting all of our client needs and for the personal sacrifices many have endured as we both navigate the moment and stay prepared for a more active market. I'll now turn it over to Chris for a detailed financial review.

Okay. Thanks, Larry. And as Larry stated, throughout the second quarter, the company continued to align our cost structure with current activity levels in the industry while remaining focused on the company's liquidity position and reducing our debt. I will first briefly summarize the modified financial covenants associated with our credit facility that was executed through an amendment on June 22nd, then the company's current liquidity position, and then provide the overview of our operational performance for the second quarter, material items in the balance sheet, and cash flow. As previously announced on June 23rd, we executed an amendment to the company's revolving credit facility. The credit facility, which limits the company's leverage ratio, was amended and increased the maximum leverage ratio permitted from 2.5 times up to three times leverage through June 30, 2021. The maximum leverage ratio has then stepped back down to 2.5 times at the end of 2021. During the second quarter, the company reduced net debt by 23 million and ended the quarter with a leverage ratio of 2.21 as calculated under the agreement. If current market conditions and industry activities do not significantly deteriorate, we believe the amended facility and financial covenants provide sufficient latitude for the company to navigate these current challenges. The size of the credit facility was also adjusted from $300 million to $225 million, under which we had borrowed $138 million at June 30, and the ability to draw $73 million if needed. However, we continue to project CoreLab will remain profitable and generate free cash, which will continue to be focused on reducing debt for the foreseeable future. We also continue to evaluate CoreLab's long-term debt structure. I would like to reiterate the comments that Larry shared earlier and that we are very pleased with how the organization has responded in their efforts to execute and implement the cost reduction initiatives. These efforts and actions continue to demonstrate Core's ability to adapt to the ever-changing and challenging conditions faced by the energy industry. The factors described above with the cost reduction initiatives implemented by the organization and the company's ability to remain profitable and continue generating positive free cash flow are all positive indicators that CoreLab will continue to be in a much stronger financial position than many other companies within the energy sector. Before we review the financial performance for the quarter, the guidance we gave on our last call and past calls specifically excluded the impact of any FX gains or losses, and assumed an effective tax rate of 20%. So, accordingly, our discussion today excludes any foreign exchange gain or loss for current and prior periods. Additionally, the financial results for the second quarter of 2020 include charges of $13.3 million, primarily associated with the write-down of inventory and additional severance as we expanded our cost reduction plans during the quarter. These items have been excluded from the financial results to provide a clear understanding of the performance from the underlying operations. Now looking at the income statement, revenue from continuing operations was $115.7 million in the second quarter, down about 24% from $152.4 million in the prior quarter. The decreased activity and disruptions associated and caused by COVID-19 pandemic resulted in a sharper decline of 44% in North America as compared to a 10% decrease in the international revenue, which was more resilient. Of this revenue, service revenue, which is more international, was 91 million for the quarter, down from 110 million last quarter, or about 17% sequentially. Service revenue was most notably impacted by the significant decrease in drilling and completion of U.S. onshore wells. Our network of laboratories across the globe have remained operational throughout the second quarter as we advance existing projects for our clients. However, the COVID-19 pandemic has created additional challenges for operators and service companies to navigate the travel restrictions and develop, implement appropriate protocols and procedures at the well site. This has resulted in delays for advancing existing projects and starting new projects during the second quarter, which is also expected to have some impact in future periods. Now moving on to product sales, which is tied more to North American activity, with 24.7 million for the quarter, a decrease of 42% from 42.4 million last quarter. Product sales associated with the U.S. onshore market were down in line with the decrease of over 60% in well completion activity. Our product sales to international markets were more resilient, and are not as dependent on drilling and completion of new wells. We continue to experience delays of delivery of products and instrumentation caused by disruptions with air freight carriers and travel restrictions associated with the COVID pandemic. Moving on to cost of services for the quarter are 74% of services revenue, which is consistent with prior quarter as the decline in service revenue was mitigated by cost reduction initiatives implemented during the quarter. Cost of sales in the second quarter was 96% of revenue, which is up from 81% last quarter due to the sharp decrease in product sales to the U.S. onshore market. Cost reductions implemented throughout the second quarter will become more fully realized in future periods, and with reduced costs, we would expect an improvement in our cost of sales. G&A X items for the quarter was $9.2 million, a 30% decrease from the $13.1 million last quarter. The decrease in G&A costs for the quarter is primarily a result of the expanded cost reduction initiatives. Depreciation and amortization for the quarter was $5.4 million, which is comparable to the last several quarters. In 2020, we would expect depreciation expense to be slightly lower when compared to prior year levels, and our capital expenditures are projected to be down approximately 50% from last year. EBIT X item for the quarter was $10.7 million, and given the current circumstances, continues to represent best-in-class EBIT margins of over 9%. Our operating loss for the quarter on a gap basis was $2.6 million, which includes a non-cash charge of $9.9 million associated with the write-down of inventory and $3.4 million of additional severance and other charges as we expanded the company's cost reduction initiative. Income tax expense, X items, and using an effective tax rate of 20%, for the quarter was $1.5 million. On a GAAP basis, the company recorded an income tax benefit of $300,000. For the remainder of 2020, the effective tax rate will continue to be somewhat sensitive to the geographic mix of earnings across the globe and the impact of items discreet to the quarter. Income from continuing operations, X items, for the quarter was $6.1 million, down 55% sequentially from $13.7 million last quarter. Gap operating loss from continuing operations was 5.7 million for the second quarter of 2020. Earnings per diluted share from continuing operations, X items, was 14 cents for the quarter. And the gap loss per diluted share from continuing operations for the second quarter was 13 cents. Now we'll move on to the balance sheet. Receivables was 101.5 million and decreased approximately 25 million from prior quarter. Our DSOs are up slightly from last quarter at 74 days for the second quarter. We will continue to monitor our collections closely, as we currently do not expect any significant changes in payment practices from our client base. Inventory was 41.5 million, down approximately 10.7 million from last quarter, which includes the 9.9 million write-down primarily associated with excess inventory. The company's inventory is primarily dedicated to serving the U.S. onshore market, and excluding the inventory write-down, our team did a nice job working the inventory levels down slightly during the quarter, despite the sharp and significant decrease in U.S. onshore activity. On to the liability side of the balance sheet, our long-term debt at quarter end was $288 million, and considering cash of $21 million, net debt was reduced to $267 million, or a decrease of $23 million. Our debt is comprised of our senior notes at $150 million, as well as $138 million outstanding under our bank-revolving credit facility. As stated earlier, management's focus for the foreseeable future is to direct excess free cash flow towards reducing debt. Looking at cash flow, in the second quarter, cash flow from operating activities was $27 million, and after paying for our $3.1 million in CapEx, our free cash flow for Q2 was $23.9 million. For 2020, the company anticipates that its CapEx will be down approximately 50% as compared to 2019. As we project cash flow for future periods, we would expect less contribution from working capital. However, also reduced cash payouts for severance and lower operating costs as the implemented cost reduction initiatives will be more fully realized. This also marks the 75th consecutive quarter CoreLab has generated positive free cash flow, and we are projecting to continue generating positive free cash flow as we manage the organization through these challenging markets ahead. We believe evaluating a company's ability to generate free cash flow is an important metric for shareholders when comparing companies' financial results, particularly for those shareholders who utilize discounted cash flow models to assess valuations. I will now turn it over to Gwen for an update on our guidance and outlook.

Thank you, Chris. CORE believes the actions taken by E&P companies during the first half of 2020 in response to the decrease in crude oil prices confirm lower overall activity in 2020 versus 2019, particularly for U.S. land. As the third quarter unfolds, crude oil production quotas and targets previously announced by the OPEC Plus members continue to provide balance to the crude oil market, which should support crude oil prices at current levels for the near to mid-term. As economies emerge from the COVID-19 related restrictions beginning late in the second quarter, increasing mobility and business activity has led to improvements in global crude oil consumption, which have also helped bring more balance to the market. However, demand will likely not be enough to materially alter EMP spending plans in the near term. Although crude oil prices improved from the lows seen in April, EMP companies further reduced their 2020 capital expenditure plans, especially in the U.S., as we have seen a steep decline in the frack spread index and completion activity has declined over 60%. As the third quarter of 2020 began, U.S. land improved slightly from the lows experienced during the middle of the second quarter and have shown some stability over the last several weeks. In addition, while we remain cautiously optimistic, unpredictable travel restrictions and workflow disruptions associated with COVID-19 may continue to delay international project activity. For continues to project, international activity will be down approximately 10% to 15% year over year. The company expects delays in project work and international shipment of projects to improve somewhat during the second half of 2020 from the Lowe's experience mid-second quarter. For reservoir description, we expect reservoir fluids analysis, which accounts for more than 65%, of the segment's revenue to be more resilient given the work is not solely tied to drilling and completion of new wells. Production enhancement has a wide range of innovative product offerings with ongoing projects unrelated to drilling and completion, including a large international plug-in abandonment and well remediation program. Production enhancement should track or outperform future improvements, and U.S. land completion. As described earlier by Chris, CORE has implemented substantial structural cost reduction plans, which will benefit the financial performance of both segments. So when projecting the future financial performance of CORE Lab, it is important to consider the following. The cost reductions will benefit reservoir descriptions, future financial results, by over $9.3 million per quarter or $27.9 million for the remainder of 2020. And for production enhancement, cost reductions will benefit future financial results by over $5.9 million per quarter and over $17.9 million for the remainder of 2020. Now I will pass the discussion over to Larry.

Thanks, Gwen. First, I'd like to thank our global team of employees for providing innovative solutions, integrity, and superior service to our clients. The team's collective dedication to servicing our clients is the foundation of Coralab's success and is really shining through in the current challenges. Turning first to reservoir description, in the second quarter of 2020, Coralab was engaged by a US-based shale operator to conduct a large integrated project to evaluate a stacked play opportunity focused on heavy oil production in the mid-continent region of the U.S. Over 1,100 feet of conventional core was recovered from the vertical well and transported to the laboratory, where the rocks were immediately scanned using several of core's non-invasive technologies for reservoir optimization, branded as Nitro. This package of technologies included dual-energy CT scanning, high-frequency spectral gamma logging, and continuous scanning X-ray fluorescence. The combination of these technologies quickly provided the client with high resolution, three-dimensional images of the core, detailed millimeter scale lithologic and mineralogic determinations, as well as a wide variety of model petrophysical and geomechanical properties. These fast turnaround nitro deliverables also serve as a basis for expedited sample selection for traditional laboratory testing methods. The data generated The datasets generated with the NITRO technologies, along with other lab measurements, were then used in combination with machine learning-based multidimensional cluster analysis to classify and rank stratigraphic intervals in terms of both reservoir quality and geomechanical properties. The result will be used to identify optimum target zones for FRAC stimulation. The ongoing laboratory analysis, along with analog reservoir data from CORE's proprietary RAPID database, and CORE's experience in stacked plays will be used to provide the client with recommendations on landing zones and completion strategy. Moving now to production enhancement, where CORE Labs' uniquely combined strengths in both energetic systems and completion diagnostics were on display. During the second quarter, an offshore Gulf of Mexico operator had a large well completion plan. This completion plan was to perforate multiple stages with a large-diameter, high-shot density pattern with perforating charges provided by a third party. Each zone would then undergo a frac pack. The operator then planned to evaluate the completion with CoreLab SpectraSTEM, SpectraScan, and PacScan completion diagnostic services. On the initial stage, the operator experienced problems pumping into the zone after using the third party's perforating services, charges, and equipment. A remedial program was attempted, spotting acid into the perforations. However, this was unsuccessful, and communication with the formation was still not achieved. The operator then decided to pull the sand control screen and attempt to surge the well to clean up the perfs to establish communication. CoreLab well site engineers, already on site to perform the completion diagnostic services, rallied experts from across Core's production enhancement teams. problems with the initial perforating program were identified, and CoreLab energetic solutions were offered. Within hours, a CoreLab proposal was presented to meet the new completion design, penetrating past near-wellbore damage by using Core's ultra-high shot density perforating system, along with Core's proprietary Super Good Hole Hero charges. Core began manufacturing the solution immediately after approval was given, and had the products ready to be delivered in less than 24 hours, thus minimizing costly offshore rig time. After shooting the core lab perforating system, the well immediately began taking completion fluid, confirming communication with the formation, and achieving injectivity for the subsequent frac pack operation. The completion was then evaluated using spectra stem, spectra scan, and pack scan diagnostic services, which indicated a successful completion had been achieved. This stage of the well was perforated and frac-packed before any of the other service providers could have mobilized their perforating solutions, thus leading to a $1 million savings in rig time alone. Due to the success of CORE's perforating solution on Stage 1, the operator changed the completion design for Stage 2 and specified CORE's large diameter, super high density, super good hole systems. Stage two was successfully perforated and completed according to plan without any additional equipment, time, or cost. Core's team of experts, technology, and responsiveness to an operator's problem helped reduce delays and unplanned costs for the completion, ultimately improving the client's return on investment. That concludes our operational review. We appreciate your participation, and Haley will now open the call for questions.

We will now begin the question and answer sessions. To ask a question, you may press Start then 1 on your touch-tone telephone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press Start then 2. At this time, we will pause momentarily to assemble our roster. And the first question comes from the line of Scott Gruber of Citigroup. Please go ahead. Good morning, Scott. Yes, good morning. How are you?

Morning. Morning.

Really impressive margin performance.

Yeah, Scott, we're having a problem. You're breaking up. All we heard was your comment about margins. Hello?

Still there?

Can you hear me now? Yes. Now we can. Okay.

Quickly, RD margins in the second half, how do they progress from here? And then, you know, if you get back to the 100 million run rate and revenue, what kind of RD margin do you think is achievable?

Yeah, so I think, you know, we've got to be a little bit cognizant of the volatility that we've seen in operational activity. We've had a number of cases, and we're still going through this right now, Scott, of what I would call go, stand by, go, situations of launching to well sites. So I think that it's very difficult to look at performance on a sequential quarter basis necessarily. I think things will kind of balance out over the back half of this year. I think the margins that you see today are very admirable. Great job by the team. Could be a little bit of a bobble in there, but I do think that the big picture is that with the cost structure we have now and the incremental margin opportunities that reservoir descriptions always had, 60% plus incremental margins on future revenue are not a stretch by any measure. Sorry, Scott, we're breaking up again there. If you maybe want to dial back in and we'll try to get back in. Okay, thanks very much.

The next question is from Sean Meekim of J.P. Morgan. Please go ahead.

Good morning, Sean. Hey, good morning. Good morning. So I'm thinking about the international expectations that you laid out. Overall spend down 10% to 15%. Seems pretty consistent with the broader industry view. a couple pieces to unpack. Could you help us size how much of that you think is due to reductions in budget that's elected versus COVID-related disruptions? It'd be helpful to kind of see how those pieces come apart. And then, you know, where do you see, depending on what that range could fluctuate on those types of factors, how do you expect CORE's RD business affair relative to that. You pointed to maybe potentially some improvement in the back half of the year. I'm just curious how those pieces move together as we go through the rest of the year.

Yeah. So I think, Sean, you're exactly right. There are two knobs here that have to be sort of dialed into the equation here. There's a capital spending reduction and activity-related change tied to that. And then the other knob is the short-term, hopefully short-term noise from COVID-19. And so I would say most of what you saw, as we've talked about openly, reservoir description tends to be a bit of a lag to market changes. So what you saw from the first quarter to the second quarter was largely COVID-19 related shift. Now, it does mean also that new work coming into the lab has slowed down for the moment, but we expect that to pick up as operations start to spool back up, and we are seeing some green shoots on that. I think the – so our view on the longer-term reduction in spending tied to capital budget adjustments, that'll manifest itself out over a bit longer term. in terms of reservoir description, which is our most internationally exposed segment. So think near term, the effects being mostly COVID-19 related, a little longer term, the changes in the budget and spending plans. And so it'll be a little choppy for us. I think that's fair to say, you know, quarter to quarter. I think that's one of the, some of the foundations of why we didn't feel comfortable giving guidance. We've got some cautious optimism in For the longer term, we look out over two and three quarters. I would say the preponderance of conversations we've had with our clients, the vast preponderance has been about delays and not cancellations. So we'll still have to wait and see how that plays out, but we think that's supportive of us longer term. And then with Reservoir Description's broad reach and its incremental margin opportunities, when people get back to business, we'll turn that into cash very nicely.

Right. Okay. Fair enough. Thanks, Larry. I appreciate all that detail. Thinking about production enhancement, I'd be curious to see a little bit more detail on how you all would perceive the relative outperformance versus what we saw in terms of rig or certainly completions activity. And then looking forward, you know, how much of an activity improvement is required to get that business back to break even margins? and how much of it is within your control?

Yeah, so I think what you see there is that, and you've heard us talk for a long time, and it's been an accurate description, that production enhancement had been one-third international, two-thirds U.S.-based. That's obviously shifting over some time right now, tilting more to international. So the resilience you see there is kind of tied with the international work that's ongoing. Some of that's related to P&A, some of that's related to completions. I think our first goal there, one that we're sharply focused on, is getting to EBITDA break-even. That's our first sort of our short-term goal there. And if we get a little bit of tailwind, maybe getting into EBIT positive in the near term. We did see, if you look at the various, I will call them trends in frack spread, I still think it's a little bit fuzzy as to how accurate, particularly in a volatile environment, completion numbers and frack spread numbers are. But if you look at that, it appears the industry bottomed somewhere in May time, and we did see a little bit of lift off of that coming into June. That seems to be continuing into the early part of the Second, the third quarter, your guess right now is unfortunately as good as ours on where do we go from here? Is it up or is it sideways?

Okay, fair enough. I appreciate the feedback.

Sure.

Thanks, Sean. But, hey, yeah, just on that, the only thing I would add is that if we do get a little top line growth in production enhancement, we could get to break even EBIT. That's right.

The next question is from Mark Beniki of Cohen. Please go ahead.

Morning, Mark. Hey, good morning. Thanks. On the revenue progression, totally appreciate that there's a lot of unknowns, but just to try to understand for us a little bit, you had this COVID impact in second quarter, which I'm guessing probably didn't really start to occur and until we got well into April. So there was still a decent part of the quarter that was unaffected. As you roll to third quarter, just speaking to the COVID impact specifically, I mean, is the base case assumption that kind of on average that's a larger hit to third quarter than it was in the second quarter, just because there's kind of one month in the second that wasn't hit? And then kind of similar question as we think about production enhancement with the, you know, you mentioned about climbing out of the bottom there in May. would you anticipate that it requires a really sharp acceleration during the third quarter to kind of be flat?

Okay, so first, Mark, I think I might question some of the assumption there about when we started seeing activity impairment. It actually showed up before the end of the first quarter very quickly. We had people and equipment ready to launch to rig sites in March, and those got interrupted. So it clearly had an impact on work inflow and revenue opportunities throughout the second quarter and, in fact, the end of the first quarter. So I think – so where do we go from here, I guess, is everybody's trying to get their heads around. And so, as I mentioned earlier, we're dealing with what I would call this go, stand by, go, or go, hold, go process with a number of particularly international projects where a client calls up and says, hey, get your team ready. We assemble our gear, assemble equipment, ready to go. And a client calls up and says, hey, we've got a transportation issue that we have to address, or we've got a rig problem. protocol issue that we're still trying to work through in terms of how we're going to deal with COVID-19. So that impacts our ability to predict the short-term work progression. How that plays out is going to have to be determined by how quickly these operational disruptions clean up. And I don't think it's got a clear direction on it just yet. although we do see, as I said, some green shoots that things are spooling up.

But just to hit on that real quick, it's not necessarily worse in the third quarter than it was in the second quarter. It's just continuing.

Well, that's right. But here's what you need to dial into that, I think, and that's the concept that reservoir description in particular tends to lag inflections in the market. So the slowdown in our ability to get to rigs and well sites in Q2 will carry through into the work that we can perform in Q3. Okay? Got it. Now on the production enhancement side, I don't think it'll take much to see an improvement quarter over quarter. Sequential performance in that group we think is – we feel very – constructive about that at this time without a big inflection in activity.

Yep. Okay, great. And then the other one I had just was on the cost savings. And thanks for putting all the numbers out there. If I just try to think about the incremental benefit as we roll from second quarter to third quarter, and then from third quarter to fourth quarter in terms of how much these cost savings will benefit your profitability in Removing all the you know other things that are happening in the market and just talking about the incremental cost savings Can you provide a number there? So maybe it's two million dollars or something like that a benefit as we go from two to three and another Two million of incremental and three to four something like that would be very helpful Yeah, this is Chris.

I think I think what I'd offer up there is that I if you look at the two segments and The cost reductions were probably implemented earlier for reservoir description in the second quarter, so not as much of a change going forward. But for production enhancement, I would say those were rolled out more throughout the quarter, and some of those really didn't get implemented until June or even late June. So I think you'll see more of a benefit in production enhancement and not as much in reservoir description.

Got it. Okay, thanks for that, guys. I'll turn it back. Thanks, Mark.

The next question is from Kirk Hallett of RBC. Please go ahead.

Hey, good morning, everyone. Hey, morning, Kirk. Hey, just to follow up on Mark's question there, you know, so I guess, you know, based on what you were saying before, it doesn't appear that production enhancement could get back to, say, an EBIT break-even level, even with the cost reduction dynamics, unless you get some sort of activity or sustained activity recovery. So that's question number one. Do I understand that correctly?

Well, I think what we're trying to communicate that we did see a pickup from where it bottomed out, right? And if that holds the rest of the quarter or a slight pickup, then we would say we're optimistic about hitting a break-even EBIT. If there's any falter in that, if it goes back down again, then it'll be difficult.

Okay. And that's very helpful. And then in the context of reservoir description, right, so you mentioned that the cost-saving dynamics came into play very early in the second quarter, so not much of a benefit in the third quarter. So, even though it's $9 million a quarter, that's not really $9 million incremental from here. I'm just trying to kind of understand the dynamic.

Yeah, Kurt, that's right. I think we almost fully realized the benefit of those cost reductions in reservoir description in Q2. Those got implemented pretty quickly. I think they were, on a relative basis, the cost reductions had to go a little bit deeper in production enhancement, and that took some more time to roll that out throughout the quarter. So there will be more benefit in Q3 over Q2 for production enhancement, not so much for reservoir description.

And one other thing. Yeah, Larry. At Deckard, maybe the way to look at it is we come out of the blocks with cost reductions to react as quickly as we can. We put phase one out there. All of those phase one reductions and cost savings were completed by the end of Q2. In Q2, we saw a need and opportunities for additional cost reductions that led to, which we announced, I think, on the 23rd of June during our press release. Those have largely been implemented but will be completed by the end of the third quarter. So everything that we've talked about in phase one and phase two will be completed by the end of Q3.

Okay, got it. That's great. Great color. That's it for me. Thanks, guys.

Okay, Kirk. Appreciate it.

The next question is from George O'Leary of TPH and Company. Please go ahead.

Morning, guys. Good morning, Gwen.

Hey, George.

Morning. Just having on to a few of the prior questions to make sure we're thinking about this correctly. With respect to the production enhancement segment, could you maybe frame how much better April was from a revenue standpoint versus May or June? That just may help us kind of calibrate how realistic it is that Q3 revenue could grow sequentially. I think the assumption is April is a better month than June. May and June in that production enhancement business in particular, given just the shape of completion throughout the quarter. But if that wasn't the case and April was just as bad, then I could understand how that gives you a lower bogey to clear and you could see sequential revenue growth.

Yeah, this is Chris. So no, April was definitely stronger than May, right? So we were coming down, things were winding down, and it kind of bottomed in May. And then a slight improvement in sort of June. But you got to remember, we were pretty close to the bottom there. So if that holds, let's say that rate holds the rest of the quarter, quarter over quarter would be down slightly, right? So I think there is some expectation there's going to be a slight improvement from where we're at by the time we get through the end of the quarter. And if that happens, it'll be close for U.S. onshore. We're talking about U.S. onshore activities. it could reach similar levels that we saw in Q2. But it was definitely falling, bottomed out in May, came back a little bit, and it's holding right now. If it comes back up a little bit, then we should be close to sort of level.

And I'd add to that that let's not forget that we do have international exposure there, and that can be a stabilizing influence when you look at it compared to U.S. activity, but it can also be a complicating influence when we deal with travel disruptions and all that we're still encountering. So there's some uncertainty there on our ability week to week to get off the beach and onto the rig, so to speak, with some of the production enhancement projects internationally.

Great. That was super helpful. The rest of my questions have been asked and answered, so I'll leave it there. Okay, George. Thanks, George.

The next question is from Ian McPherson of Simmons. Please go ahead.

Hi. Good morning. Thanks. Larry, with the structural redefinition of the U.S. market, it's going to be harder for production enhancement to even cyclically to regain the contribution that it's enjoyed during the last cycle. And I wonder if you're considering any – anything with respect to adding on to the portfolio to make it more robust, you know, essentially acquiring more earnings that are symbiotic with that in order to round out that production enhancement offering, or if Coalab is best served really just focusing on operational streamlining and getting the best out of the margins based on what the business has under the tent today.

Yeah, certainly, Ian, it's not a mystery to anybody that that's a challenging environment. I will say that the add-ons that we are focused on are technology developments that we've had underway for a while, some of which we think are getting pretty close to getting to market, and things that no one else in this space is able to bring together. And so remember, our business in production enhancement is a combination of the diagnostic services and the perforating energetics. And so we've got some opportunities there, like the story that I played out in our review today, where we bring those two technologies into play for clients, and we've got some different ways of approaching that, that we think that organic growth is still possible there. The second part of that is we had started even before, call it the fateful day in March, we had started a very strong drive to expand our service offerings internationally on the production enhancement side. So we're going to continue to lean on that long-term strategy. I think that's a real growth opportunity for us there. And I do think in the bigger scheme of things, our energetic performance is going to be the main driver for our product's performance in terms of market penetration. And we've got some twists on that that stay tuned for.

Thanks, Larry. I appreciate that. Look forward to seeing what comes down the pipe next. Can I just ask a quick follow-up, Chris, with respect to the vestigial phase one cost outs and Phase 2, which was largely put in late in Q2. Can you quantify any restructuring or write-downs that we should be thinking about for Q3 at this point?

Yeah, I think we feel like the plans that we've put in place get us where we need to be unless things change from where they're at today. So I think we've done everything we think we need to do to right-size the organization for the sort of the levels we're seeing today and some expected uptick here, let's say later in this year into next year as COVID, you know, this COVID pandemic sort of dissipates a little bit.

Very good. Thank you all. Stay well. Appreciate the color today. Sure, Ian. Thank you.

The next question is from Connor Linnert of Morgan Stanley. Please go ahead.

Yeah, thanks. Morning, all.

Morning, Mark.

Wondering, your comments around the, you know, return to normal incremental margins in reservoir description suggest that there's been some pretty significant structural changes if a lot of these costs don't come back. So I was wondering if you could just elaborate on, you know, what's really changed within the organization that, you know, the fixed cost level now is sustainable for the future. And Is there a way we can think about what revenue level would require you to add back some of those costs or anything along those lines for thinking about the longer term here?

Yeah, so first, let's not lose sight of the fact that if you go back and look at reservoir description performance over time, the incremental margin opportunity has always been, we call it industry leading. You know, there's, I think last quarter, year second quarter i may get the quarters a little bit juggled here second quarter incrementals might have been 138 i was caution people don't get used to that but even in the third quarter following that was north of 60 or 65 so there's a big incremental margin opportunity in there unfortunately a lot of the costs you've had to take out are people cost that's that's our main cost as a company and so when you look at reducing costs you have to take out people Now, one of the ways that we're going to be able to mitigate that is through controlling the pipeline for a lot of the technology we use. We build ourselves in our instruments division. And so not only do we use those ourselves, but we sell that equipment to national oil company labs, IOC labs. And so we have a great technology pipeline and the ability to make the equipment that we use for a lot of our testing. Embedded in that has been, if you've followed our story for a while, has been a multi-year drive to increase lab automation. And so that was going on long before the current noise in the industry. We saw that as a strategic direction that we needed to go to drive margins higher from where they were. And so we'll continue to roll out lab automation as a way to get more work through the lab with the same number of people, and that's really our driver there.

Great. That's a helpful color. Just given the focus on some of the products, businesses in your portfolio over the past few quarters here, I was wondering if you could just clarify the inventory right down. Is that related to any significant new technologies? Is that largely legacy technologies? What's sort of the driver there?

Yeah, this is Chris. So it's a little bit of both, but I would say it's mostly some of the legacy stuff where it just looks like we have excess. And then a portion of that is also, you know, not to get too detailed, but when you're building equipment like that, you use a costing methodology. And with the slowdown right now, so that caused also a revaluation on how we standardized the cost.

Okay, understood. So no major, you know, specific product that was affected or anything like that.

No, that was across the board, just a review, given the sharp decline and kind of sort of outlook based on where we're at today with activity levels. And the U.S. market is really the primary sort of market for those products.

All right, understood. Thanks for the comment.

Yeah, and Conrad, I'd add to that sort of a broader statement. There are no technology initiatives that we have derailed. in CoreLab. It's the foundation of where we go as a company, and we're sticking to that.

Got it. Thank you.

The next question is from Blake Gendron of Wolf Research. Please go ahead. Hey, Blake.

Thanks. Hey, thanks, Glenn. Good morning. Thanks for getting me on here. I'm going to take another stab at reservoir description. I know you break out roughly 60% fluids 40% rock fluids are accretive on the margin there. I don't know if you've broken it out before, but if you could just remind us roughly how much is tethered to just global oil volume, so oil demand. And then within that, if we have our own forecast as to how oil demand recovers from here, how does that portion of reservoir description track, I guess, global oil demand? And then for the drilling completion portion of the business, you know, Larry, in the no-go situation, you stay on the beach completely. Are these activity levels that are materially lower than the 2Q level, or is it roughly flat?

Yeah, so let's take the first part there in reservoir description. And so you've heard us talk about that during sort of the last phase one of the downturn, if you will. over the last several years, where we were using about 100 million barrels of oil per day on the planet, the reservoir description had sort of a base revenue of about $100 million. Those numbers are somewhat coincidental to one another. You can't tie a barrel of oil usage to a dollar of revenue within CoreLab. Directionally, obviously, the more oil that's produced, the more oil that is put in play around the planet, the better it'll be for our business. And so I don't think there is a dollar value or I'm sorry, there is not a specific oil consumption level that we would pay to a particular revenue expectation within reservoir description. But I do think directionally that they will follow one another. And you've got to take the near term sort of second quarter maybe into third quarter noise out of it. Hopefully we're beyond the operational disruptions and things get back to projects begin to spool back up and then reservoir description will naturally lag that. The rigs have to get going and then we get our opportunity at that. I don't see right now a shift moving on to the on the beach statement. I don't see commentary from clients yet that there's a big change in direction on the projects that they said they're ready to go forward on. It seems to be largely tied to transitory operational disruptions. And so we haven't yet had a case where we were put on call to go that eventually turned into a cancellation. We have had a few projects canceled here and there, but as I said earlier, the preponderance of those are, of the conversations from clients have been, we're delaying this project. And underlying that is a very important concept, and that is that physical measurement of the reservoir properties is something that always has to be done to validate reserves and true up your economic picture. And so as long as there are people that are developing reservoirs, there's going to be strong demand for what CoreLab provides. It's a vital service. I think we're right about the end of our call here. And so, Haley, if you want to – I think we're done with the calls at this point. So we'll move on to our wrap-up here. Okay. In summary, CORE's operations continue to position the company for anticipated activity levels in the second half of 2020, as well as for the opportunities that lie ahead. We have never been better operationally or technologically positioned to help our clients maintain and expand their existing production base, We remain uniquely focused and are most technologically advanced, client-focused reservoir optimization company in the oilfield service sector. The company remains committed to industry-leading levels of free cash conversion and returns on invested capital. We'll return value to our shareholders via growth opportunities, dividends, and future opportunistic share repurchases. As free cash flow levels expand, in the near term, CORE will use free cash to continue to reduce debt. So in closing, we thank and appreciate all of our shareholders and the analysts that cover CORE. The executive management team and the board of CORE Laboratories give a special thanks to our worldwide employees that have made these results possible. We're proud to be associated with their continuing achievements. So thanks for spending time with us, and we look forward to our next update. Goodbye for now.

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