Core Laboratories Inc.

Good day, and welcome to the CORE Laboratory's first quarter 2021 earnings conference call. 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 a touchtone phone. To withdraw your question, press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Larry Bruno, Chairman and CEO. Please go ahead.

Thanks, Tom. Good morning in the Americas, good afternoon in Europe, Africa, and the Middle East, and good evening in Asia Pacific. We'd like to welcome all of our shareholders, analysts, and most importantly, our employees to Core Laboratories' first quarter 2021 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 six segments. Gwen will start by making remarks regarding forward-looking statements. We'll then have some opening comments, including a high-level overview of important factors in Core's Q1 performance. In addition, we'll review Core's strategies and the three financial tenets that the company employs to build long-term shareholder value. Chris will then give a detailed financial overview and have additional comments regarding shareholder value. Following Chris, Gwen will provide some comments on the company's outlook and guidance. I'll then review Core's two operating segments, detailing our progress and discussing the continued successful introduction and deployment of Core Labs technologies, as well as highlighting some of Core's operations and major projects worldwide. Then we'll open the phones for a Q&A session. I'll now turn the call over for Gwen for remarks on forward-looking statements.

Thank you, Larry. Before we start the conference this morning, I'll mention that some of our 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 markets, 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 respects from those projected in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, 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 in 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 first 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, our thoughts remain with all of those that have been affected by the global pandemic. There are still virus-related challenges with persistent or even rising infection rates in a number of geographic areas like Brazil, India, parts of Europe, and other regions. There are certainly reasons for optimism as the vaccines become more widely distributed throughout 2021 and as demand for oil and gas continues to recover. However, Virus-related issues are still causing unpredictable schedules in our clients' activities, travel complications, and logistical hurdles for field services and product shipments as a number of countries enacted, reenacted, or expanded precautionary measures, travel restrictions, and even lockdowns during Q1. During the first quarter of 2021, a substantial winter storm event impacted oil field operations across the North American Mid-Continent region. CoreLab operations were adversely impacted by this winter storm, with facility closures in Alberta, Canada, Oklahoma, northern Texas, the Texas Gulf Coast, and even across into Louisiana. Power disruptions from this storm idle production lines at CoreLab's largest manufacturing facility in Godley, Texas, for a week. On the service side of the business, a combination of extended power and water outages, damage to HVAC and frozen pipes, forced laboratory closures and operational disruptions for even longer. Core's largest facilities in the Western Hemisphere were impacted by these disruptions. Large laboratories, such as the Advanced Technology Centers in Houston and Calgary, are complex operations that require thermal stability in the lab workplace, power and water access, proper ventilation, and fire suppression systems for safe operation. I want to thank the CoreLab staff that braved the elements and mitigated damage to the facilities through quick action. Because of their dedication, CORE was able to effect remedial steps that helped reduce downtime. All operations are currently up and working, although a number of temporary measures are still being employed, while more permanent facility repairs are awaiting replacement parts. Although there were inevitable workflow disruptions, no laboratory equipment or permanent facility damage was sustained, and we anticipate no negative operational impact on Q2 performance. Now to review CoreLab strategies and the financial tenants that CoreLab 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 well served by CoreLab's resilient culture, which relies on innovation, leveraging technology to solve problems, and dedicated customer service. While we navigate through 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's management team remains sharply focused on ensuring that our cost structure is aligned with client activity levels. Moreover, we will continue to meet all of our client project needs and, very importantly, we remain well positioned for the recovery in client activity that we anticipate in 2021 and beyond. Our outlook for improving market conditions throughout 2021 particularly in international regions, remains positive. Central to our long-term growth strategy is the continued introduction of new technologies. CoreLab's internal pipeline for new technologic offerings in both reservoir description and production enhancement remains very strong, and the unique collaborative relationship that Core maintains with its technologically sophisticated client base has always allowed Core scientists to provide innovative solutions to address industry needs. New collaborative efforts to develop Problem-solving technologies are currently and always underway, and I'll touch on some of these in the operational review section of this call. Before we move on, I want to thank CORE's management team and employees for their hard work during the unprecedented challenges of the past year. I also want to thank them for their dedication, loyalty, and adaptability in meeting all of our client needs and for the personal sacrifices that many have endured as we both navigate the moment and prepare for a more active market. I'll now turn it over to Chris for the detailed financial review.

Thanks, Larry. I will start with an update of our corporate capital structure as the company has continued efforts towards strengthening the balance sheet by reducing debt and improving our liquidity position. Excess free cash flow continues to be primarily focused on reducing net debt. However, we took additional steps as we fully executed our ATM during the first quarter, to which we issued a little over 1.65 million shares at a weighted average price of $36.19, netting proceeds of 59.1 million to the company. These proceeds were used to pay off the remaining outstanding balance borrowed against our credit facility. For the first quarter, net debt was reduced by 65 million, which also reduced our leverage ratio to a little over 2.3 as of March 31st, compared to 2.82 in the prior quarter. As a reminder, the maximum leverage ratio permitted under our debt agreements is three times through June 30th, 2021, and then is reduced over the next two quarters down to 2.5 at the end of this year. As of March 31st, there is 214 million of available capacity under our 225 million credit facility. And we will continue to focus free cash towards reducing net debt for the remainder of 2021. As Larry stated earlier, we anticipate improving market conditions throughout the remainder of 2021, and with the steps taken over the last 12 months towards reducing debt and creating additional liquidity, the company is now better positioned to continue with the expansion and commercialization of our new product and service offerings. Now, 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 and 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 first quarter of 2021 include a gain reflected as a reduction in our interest expense of $1.9 million, which is associated with the settlement and restructuring of our interest rate hedging instruments, as well as a charge of $750,000 for stock compensation expense associated with the future vesting of performance shares for employees who have reached their eligible age of retirement. These two items have also been excluded from the discussion of our financial results. So with that said, let's look at the income statement. Revenue from continuing operations was $108.4 million in the first quarter, down approximately 4.7% from $113.7 million in the prior quarter. The decrease is primarily associated with a seasonal decline that we normally experience in the first quarter of each year. Additionally, our international operations continue to be challenged with delays and disruptions associated with international travel restrictions and logistical challenges. The U.S. land market continued to strengthen, and although negatively impacted by the winter storm, recovered fairly quickly and was up nicely as we exited the first quarter. Of this revenue, service revenue, which is more international, was 84 million for the quarter, down approximately 6% sequentially from 89.2 million last quarter. The decrease in service revenue is primarily associated with typical seasonal declines, but also elevated COVID restrictions and disruptions in many regions outside the U.S. As Larry stated earlier, the winter storm not only impacted drilling and completion activity in the U.S., but also impacted some of our largest facilities in the North America. Operations were disrupted during the quarter as two of our advanced technology centers and several regional labs were temporarily shut down, and some experienced minor storm-related damage. Our flagship advanced technology center, located here in Houston, one of the facilities impacted, is where we perform service work on both U.S. and international projects. Currently, our global network of laboratories is fully operational, and we continue to meet all of our clients' project needs and deliverables. Product sales, which is equally tied to North America and international activity, were $24.4 million for the quarter, relatively flat from the previous quarter. International product sales were up slightly compared to the prior quarter, and although the backlog of international orders continues to build, the delivery of product remains challenged by logistical implications. Product sales to the U.S. land market strengthened, and although negatively impacted by the winter storm, showed significant growth as we exited the quarter. Moving on to cost of services, X items for the quarter was just below 76% of service revenue comparable to last quarter. And considering the operational challenges created by COVID and the winter storm upheld pretty nicely. As operational activities improve, our laboratory utilization will also improve. However, additional costs associated with COVID-19 protocols continue in the current environment. Additional costs will also be absorbed as we begin to unwind our furlough program this year. These two factors will impact our incremental margins for the near to midterm. Cost of sales, X items, in the first quarter was 84% of revenue and has improved from 86% last quarter and for the last three consecutive quarters. As product sales continue to improve and our cost reduction initiatives completed in 2020 are fully realized, we would expect our margin to expand. X items for the quarter was $7.7 million, comparable to last quarter of $7.6 million. Again, as we progress through 2021, the timing and extent to which we are able to restore employee compensation levels could also impact our G&A expense in future quarters. Appreciation and amortization for the quarter was 4.9 million and pretty flat compared to 4.8 million last quarter. EBIT X items for the quarter was 12 million, down from 13 million last quarter, and given the current circumstances, continues to represent best-in-class EBIT margin of over 11%. Our operating income for the quarter on a GAAP basis was 11.6 million. Interest expense X items was 3.2 million, up from 2.9 million in the last quarter, reflecting a higher blended interest rate applied to cost our long-term debt. On a GAAP basis, interest expense was 1.4 million for the quarter, which includes a reduction in interest expense of approximately 1.9 million associated with the settlement and restructuring of our interest rate swap agreements during the quarter. Income tax expense for the quarter was at an effective rate of 20%, and X items, was $1.7 million for the quarter and on a GAAP basis was $1.2 million. The effective tax rate will continue to be somewhat sensitive to the geographic mix of earnings across the globe and the impact of items discrete to each quarter. However, we continue to project the company's effective tax rate to be approximately 20%. Income from continuing operations X items for the quarter was $7 million down approximately 14% sequentially from $8.1 million last quarter. GAAP income from continuing operations was $8.2 million for the first quarter of 2021 compared to $13.9 million last quarter. Earnings per diluted share from continuing operations, X items, was $0.15 for the quarter, and GAAP earnings per share from continuing operations was $0.18 for the quarter. Now we'll move on to the balance sheet. Receivables were 86.6 million and increased approximately 3 million from the prior quarter. Our DSOs for the first quarter were at 66 days, and although below our historical average, were up compared to the impressive 62 days achieved last quarter. Inventory in the first quarter was 39.1 million, up approximately 1 million from last quarter. The increase is primarily due to continued delays of some international product sales caused by logistical disruptions. Additionally, the consumption of raw materials used in products targeted for the U.S. land market was slowed during the quarter by disruption caused by the winter storm. We continue to anticipate inventory turns will improve as we progress through 2021, in line with improved activity levels for U.S. land and international markets. And now onto the liability side of the balance sheet. Our long-term debt was 210 million at the end of the first quarter of 2021. And considering cash of 27.8 million, net debt was reduced to 182 million, or a decrease of 65 million in the first quarter. Proceeds from issuing shares through the ATM program, as well as proceeds received from the issuance of new senior notes in January of 2021, were used to reduce the outstanding balance on our credit facility down to zero at March 31st, 2021. Our debt is now comprised of four series of senior notes. Two series totaling 150 million were issued back in 2011. Of these 2011 notes, 75 million is due September of 2021 and will be retired using our credit facility and excess cash. The second 2011 series is due in September of 2023. The two new series of senior notes totaling $60 million were issued in January of 2021, of which $45 million is due January 2026 and $15 million is due January 2028. We will continue the longer-term strategy to deliver the company. Equity, and more specifically our common shares and additional paid-in capital, increased by a little over $62 million during the quarter when compared to last year in, And as previously stated, the company issued a little over 1.65 million shares for $60 million as we fully executed the ATM program during the quarter. As a result, the company's outstanding share count is now 46.24 million. Looking at cash flow, for the first quarter of 2021, cash flow from operating activities was 8 million, and after paying for 2.8 million of CapEx for the quarter, our free cash flow for the quarter was 5.2 million. CapEx for 2021 will continue to be moderated with activity levels and growth opportunities. The company continues to anticipate activity levels will improve in the second half of 2021, and we would also expect our capital expenditures to increase, but remain in line with historical levels while in a period of growth. Core will continue with strict capital discipline and asset-light business model with capital expenditures primarily targeted at growth opportunities and initiatives. This also marks another quarter where CoreLab generated positive free cash flow, and we are projecting to continue generating positive free cash flow as we look ahead to the remainder of 2021 and beyond. We believe evaluating a company's ability to generate free cash flow and free cash flow yield 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. For 2021, as both Larry and Chris have discussed, Core will continue to execute our strategic plan with a focus on generating free cash and reducing net debt while maximizing return on invested capital. Additionally, as part of Core's 2021 strategic focus, the company will continue to invest in targeted, client-driven technologies that aim to both solve problems and capitalize on Core's growth opportunities. The company remains well positioned with ample liquidity to invest in its global capabilities to meet the needs of our clients. These capabilities include Core's expanding proprietary databases, along with innovations in artificial intelligence and machine learning, which are the foundation of Core's digital technology transformation. Core is optimistic about our international growth opportunities throughout the remainder of 2021 as crude oil markets rebound. With CoreLab having more than 70% of our revenue exposed to international activity, the company remains active on international projects already underway and is in the planning stages for new projects spooling up. Core sees momentum building in the international markets. which will drive growth opportunities for the company throughout the remainder of 2021 and beyond. Some of these geographic regions include Turkey, South Atlantic margin, Mexico, Qatar, and various other areas of the Middle East. While unpredictable disruptions related to COVID-19 are expected to persist in the near to midterm, CORE remains optimistic that gradual improvement will follow over the remainder of 2021. Considering the continuing improvement with crude oil supply and demand and international activity, CORE projects reservoir description revenue to be up mid to high single digits sequentially for the second quarter of 2021. CORE expects sequential improvement in U.S. land activity in part on a strong recovery in the U.S. rock spread following the winter storm, which has continued into the second quarter. As a result, CoreLab projects second quarter 2021 revenue to grow mid to high teams for production enhancement when compared to the first quarter of 2021. Core expects production enhancement to continue to track or outperform U.S. land activity levels. Additionally, as CORE's client activity increases and certain cost reductions are reinstated back into the company's cost structure, incremental margins may be softer in the near to mid-term. However, once these costs are fully restored, CORE expects the historical incremental margin performance or better. In summary, excluding near-term international challenges related to travel restrictions Core sees activity levels and financial performance improving throughout the remainder of 2021. Core's growth opportunities are directly related to existing long-term projects returning to normal workflows, as well as expanding client activity and new market penetration, particularly in international regions. The company's second quarter guidance is based on projections for underlying operations and excludes gains and losses in foreign exchange. Second quarter 2021 guidance also assumes an effective tax rate of 20%. With that, I'll hand it back 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 CoreLab's success and is shining through during the current challenges. Turning first to reservoir description, for the quarter, revenue came in at 76.5 million, down nearly 9% compared to Q4. Revenue was negatively impacted by the typical downward seasonality, which was compounded by ongoing international travel complications and the winter storm in North America. Looking at operating income, the company was able to manage sequential decremental margins to just under 30%. New international projects for reservoir description are spooling up. As global energy demand shifts away from coal and toward natural gas, CoreLab sees opportunities in this transition. In the first quarter of 2021, CoreLab, under the direction of the Turkish Petroleum Corporation, was engaged to provide laboratory analysis on conventional core recovered from the Turkali 2 well located in the deepwater Sakurai gas field in the Black Sea. This multi-well analytical program is leveraging Core's proprietary and patented laboratory technologies, plus Core's extensive global experience in evaluating cores from unconsolidated strata. In addition, CoreLab's expansive proprietary datasets in the Caspian Black Sea region are being used to rapidly calibrate reservoir properties. These datasets, combined with the new laboratory measurements, will assist Turkish Petroleum as they evaluate key geologic, engineering, and economic questions in this very significant deepwater natural gas discovery. Upon arrival at the laboratory, these high-quality conventional cores were immediately scanned using core's proprietary non-invasive testing and reservoir optimization technologies, branded as NITRO. CoreLab's proprietary dual-energy computer tomography, along with high-frequency spectral gamma surface logging technologies, quickly provided Turkish Petroleum's experts with lithologic information, as well as a wide range of critical petrophysical parameters for pay assessment. These nitro deliverables were provided within a week of receipt of the core, helping to expedite analysis of the target stratigraphic intervals. These early-time datasets are being utilized in conjunction with core's recently expanded machine learning artificial intelligence algorithms to refine and enhance sample selection for the traditional time-honored laboratory program. The recovery cores are now progressing through a comprehensive program of physical measurements following consultations between Turkish Petroleum's and CoreLab's technical teams. CoreLab is pleased to be assisting Turkish Petroleum in this important natural gas discovery. Also in the first quarter of 2021, Core continued its work on a large-scale multi-well integrated project for a national oil company in the Middle East. This study is evaluating an onshore unconventional reservoir leveraging CORE's experience in the region, as well as best practices learned from CORE's global portfolio of unconventional reservoir studies. A comprehensive laboratory program is underway to evaluate the hydrocarbon potential of this field. The project includes integration of CORE Labs proprietary digital technologies, as well as a detailed analysis of rock types, fracture and deformation characteristics, petrophysical properties, organic content, and geomechanical properties. CoreLab is incorporating these laboratory measured parameters into a fully integrated petrophysical model that will include recommendations on completion strategies. In another expression of CoreLab's innovative technology development, industry adoption of Core's proprietary, high-resolution, drilling-derived geomechanical and formation pressure modeling application, branded as DECODE, continued to increase during the quarter. This new methodology uses the physical forces that are generated as the drill bit encounters variations in rock properties. This feedback from the drilling process can then be utilized to derive geomechanical information and geologic variability using a proprietary method. During the quarter, projects were initiated on both conventional and unconventional reservoirs located in the U.S. and the Middle East. Among various deliverables, decode is being used by Coors clients to identify the location of fractures and faults, variations in formation pressure, and variability in rock properties between completion stages. The ability to gain insight into geologic variability along both vertical and horizontal wellbores allows Coors clients to make effective, time-sensitive decisions regarding wellbore stability and identify completion target intervals. This physics-based, non-invasive approach is only possible because of CoreLab's proprietary, highly organized, extensive database of rock, fluid, and formation pressure data. Moving now to production enhancement, where CoreLab's strengths in both energetic systems and completion diagnostics were again on display. Revenue came in at $31.9 million, up 7% sequentially, despite the negative impact of the winter storm to U.S. activity and the resultant temporary idling of Core's largest manufacturing facility. We are pleased that incremental margins came in at over 31% despite the inefficiencies caused by the storm. Core's clients are always looking to improve their completion techniques. In response, Core's production enhancement segment continues to expand and penetrate the market with its technologically advanced completions product line. Core's patented 0180 oriented perforating system continues to gain traction as the preferred method for perforating smart wells due to the system's advantages over competitive products. Smart wells utilize fiber optic cables attached to the outer wall of the casing in conjunction with downhole sensors, which are set in place during the well completion. These sensors relay real-time downhole data to the surface through the fiber optic cable, allowing operators to make critical decisions on fracking, well spacing, and artificial lift programs. Following installation of the sensors and cables, the wells must still be perforated to allow for frac operations and subsequent hydrocarbon production. During the perforating operations, it's vital that the charges in the perforating guns are oriented with a high degree of accuracy. This ensures that the fiber optic cable will not be cut or damaged, which would lead to a loss of communication with the downhole sensors. During the first quarter of 2021, CoreLab worked with a major service provider and multiple operators to successfully perforate smart wells in a number of major basins in the U.S. and Canada. For example, in Q1, CORE supplied an operator with a system consisting of 291 guns designed to perforate 35 stages in a smart well in the mid-continent region of North America. The job was completed without incident and with no damage to fiber optic cable or sensors, and, significantly, with no non-productive time. Another operator in the Rockies utilized a 0180 system where 350 guns were used to perforate 45 stages in a smart well. Here again, the job was successfully completed without incident or non-productive time. To date, CORE's patented 0180 perforating system has been used to perforate many hundreds of stages without incident and with zero non-productive time. CORE's 0180 internally oriented perforating system has clearly distinguished itself as the leader when compared to traditional systems that rely on externally positioned eccentric weight bars. Those less sophisticated systems can require hours to correctly position and are particularly poorly sorted for use in deviated holes. CoreLab's patented 0180 oriented perforating system provides the versatility of multiple shot densities and orientation on multiple planes with a proven accuracy of plus or minus eight degrees. CoreLab's 0180 perforating system offers best in class performance for smart well completions. Also during the first quarter of 2021, Core's completion diagnostic expertise was utilized by a client completing multiple wells in the spray bury formation of the Permian Basin in West Texas. The goal was to assess whether the target interval in the producing well and a superjacent water-bearing San Andre zone had been properly isolated by the cement job. The operator had been experiencing losses in both drilling mud and cement when completing these spray bury producers, along with higher than expected water cut when the wells were brought on production. At the client's request, CORE utilized its proprietary SpectraSTEM diagnostic technology to evaluate cement coverage across the two zones of interest. In the same completion operation, SpectraSTEM was also used to trace the drilling mud cement spacer to help identify thief zones in three wells. CORE's completion diagnostic engineers were able to confirm the location of the thief zones along with incomplete cement isolation of the water-bearing San Andreas Interval. The findings led the operator to change the design of their two-stage cementing program. This resulted in more effective zone isolation, decreased water production, and reduced water disposal costs. That concludes our operational review. We appreciate your participation, and Tom will now open the call for questions.

Thank you. We will now begin the question and answer session. Again, as a reminder, to ask a question, press star then 1 on your touchtone phone. 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, press star then 2. At this time, we will pause momentarily to assemble our roster. And the first question comes from Blake Gendron with Wolf Research. Please go ahead.

Morning, Blake.

Morning. Morning. Thanks. Good morning, everybody. you know, encouraging that the international opportunities are spooling up here. I'm not sure if it's appropriate now to start, you know, maybe thinking about for reservoir description, a run rate, you know, quarterly revenue level. I know it's something we've done in the past. Obviously, the market has changed pretty vastly, but I'm just wondering maybe what your thoughts are for a medium to longer term target for revenue for reservoir description. And then it sounds like a lot of natural gas opportunities. So if the mix this cycle is heavier gas, where maybe the fluid opportunity isn't as large as it has been in cycles past, what that means for either incremental margins or just structural margins moving forward?

Yeah, Blake, good questions. First, on the RD quarterly, I think it's just too premature for that. There's still too much uncertainty in how our clients are going to progress on projects that they've got on the drawing board. So don't want to get out over our skis yet in terms of outlook beyond what we gave in our outlook this morning for Q2. I'll question the foundation a bit of your question on natural gas projects having potentially less exposure to fluids testing. There are always fluid property questions that have to be addressed. We get into some of these, and, for example, we talked about a number of gas projects, Australia in the last couple of quarters and several others. In many cases, you have to look at whether you're going to have a critical fluid or a near-critical fluid in which phase behavior is still very important. In other words, if you drop the pressure on some natural gas opportunities, you'll start dropping liquids out. You'll cross the dew point, and that creates... a third phase, so now you have water, gas, and a liquid phase, hydrocarbon phase, in the pore space. So evaluation of the fluids is always going to be necessary to maximize the reservoir performance and to effectively model field production. So there's still that opportunity for us there, and we look forward to more gas projects as we move forward.

Absolutely. Helpful color there. Second question here just on capital allocation. Really well executed ATM offering, and it seems like the balance sheet, there's finally, you know, light at the end of the tunnel here in terms of the leveraging. Can you just remind us what the target for leverage is? And, you know, you noted pursuing additional commercial opportunities, expanding the portfolio. So should we expect maybe that you step up the R&D spend here a bit, or is it going to be maybe heavier CapEx, or would you consider maybe some M&A as we move forward here?

Yeah, so I'll start us off here and then probably hand it off to Larry for your second part of your question. But we've historically talked about a 1.5 times target. That would be, I would say, our goals at the moment. But as things recover and you start to grow earnings and EBITDA, that doesn't necessarily mean we're going to add debt. So it could go below that once we get deeper into, let's say, a recovery. But we are definitely working towards that, want to be below to working towards 1.5 over the next, let's call it, 12 months or so.

Yeah, in terms of the RD spend, it'll be focused on new technology, rolling out things that we've been working on for a while, expanding service offerings. into new regions. You've heard us talk about that over the last several quarters, into Mexico, into Brazil, into Qatar. We've got a few others on the drawing boards. I will say that year over year, you're correct, we would expect to see a bit higher CapEx spending, particularly on the RD side, but we'll stay in line with our historical capital discipline standards and don't expect anything unusual in terms of CapEx performance. Year over year, I'd expect it to be up compared to 2020.

Understood. Appreciate the time and all the operational detail. I'll turn it back. Thanks, Blake.

The next question comes from Mike Sabella with Bank of America. Please go ahead.

Hey, good morning.

Good morning, everyone.

I know. So you all have, you know, kind of alluded to modest incrementals here in the near term and just kind of pointed towards back half, just getting back to normal. Are you able to just help us set some expectations for what that means for 2Q? And then, you know, as we look at the 3Q, is there still incremental margin pressure in 3Q or should it, you know, should we really be thinking about 4Q before it gets back to normal?

Yeah, I think directionally you're looking along the right path there. Mike, I think the thing that we've stressed over the last several quarters, earnings calls here, is we've asked a lot of our staff to make personal sacrifices all across the organization in terms of compensation and benefit reductions. We've got to roll those back in, and we want to do that as quickly as we can. And so that's going to be a weight on incremental margins for the next quarter or two. And then I think as we get a little further along and we get those back in, that's when you'll start to see us take steps to get back to, I think, the core labs historically very well respected incremental margins, 50% or better. But it's going to be lumpy and lower than that for the near term.

Got it. Got it. And then, you know, If we're thinking about kind of Resmar description and this path back to 20% margins there, are you able to kind of walk us through what sort of revenue recovery you think you'll need to be able to get back to 20% in that segment?

Yeah, I think we've talked a little bit about that in the past as well. So if you go back to when we were at that $100 million a quarter level, we think we're going to be able to approach. It's a little too early to say exactly where we'll be on what the project mix will look like, but it could be that 20% level when we start reaching those kinds of revenue levels. Could be a little bit higher, but we would expect it to be in that range.

I think the important point we make is with the structural changes and efficiencies and the reorganizations that we've done in terms of our lab infrastructure on the RD side, we'll be able to achieve those margins at lower revenue levels than we have historically. And don't forget, we've been advancing automation in the laboratories to help control our labor costs. We've got a fair amount of operational leverage built into the system right now that we're holding on to in anticipation of increasing activity. So I think we'll get to that 20% bogey on margins in RD at a lower revenue level than we've historically achieved it. And then from there on, look for, I would call it, very satisfying incrementals. Okay, understood.

Thanks, everyone.

Thanks, Mike.

The next question comes from George O'Leary with TPH and Company. Please go ahead.

Morning, George. Morning, everyone. morning everybody how are y'all good um just you guys always do good work on the macro front and you touch so many facets of the of the oil patch um and so i'm just curious on the macro front with respect to north america how you think about the activity level today and how that translates into crude oil production i think the base case is that we end up somewhere in a flat exit to exit crude oil production, uh, ballpark. Um, and kind of the thing folks are wrestling with is do we grow a little bit or are we at a point where we were trench? And I think you can make an argument for all of them. Just curious what the house view from, from core lab is with respect to activity levels and how sufficient they are to, to hold production flat increase, or are we going to see it fade?

Yeah, I think, uh, you know, kind of putting our, our, our, our, heads in the in the or viewing through the lens of our clients, I think for our for many of the sort of the larger sort of well-established companies, they're going to what they've expressed to us and they've expressed publicly to the investment community is they're going to have a lot of discipline in executing their plan for 2021. So I think they're going to they're going to have their their budgets and they're going to stick with those budgets. And I think that will will weigh on growth I think some of the smaller operators might seize the moment and look to take advantage of commodity prices in the range they're in, and that could push production up. Add the two things together, I think that the idea that we're going to see kind of flattish production is probably not unrealistic if prices stay where things are. I do think that the main driver, particularly for the larger operators, is going to be strengthening their balance sheet, pay down debt, and stick with their plan.

Great call. Thank you, Larry. Your final facts have been a hot topic of late. I'm just curious how this trend, which seems to be growing, and I realize it's still a small portion of the mix today, but How does simulfrax impact core labs? I imagine they would accelerate revenue velocity for you guys. Just given your broad presence in the U.S., how pervasive do you think simulfrax are at this point? I think estimates are anywhere from 8% to up to 20% of the mix. And then, sorry to ask a multi-parter, but do you think they'll grow as a percentage of the mix, much like zipperfrax did, or do you think they'll end up less pervasive? I realize it's early days, but just curious for your thoughts.

Yeah, I think for us, it might create lumpier revenue in production enhancement. In other words, you get periods where there's sort of intense activity, and then it slacks, and then it picks up again. So it's a bit early to tell going forward with that. I do think that with all new technology introductions, There's going to be an adoption phase. There's going to be a – call it a washing out phase of problems and complications. And then we'll see where it goes. And I think that that's probably a better question for our clients in terms of what they're seeing in terms of the efficiency gains.

Thanks for the color. Sure. Thanks, George.

The next question comes from James West with Evercore ISI. Please go ahead.

Morning, James.

Hey. Hey, good morning, Glenn. Good morning, guys. Morning. Very curious what you're seeing on deep water. You guys usually have good insight on plans, given you get some heads up on when you're going to receive the core samples. You know, there's kind of mixed, I guess, views on deep water as we go into the back half of this year. but there seems to be some momentum. Here's where you kind of outline what you're seeing in deep water, especially given that it gives you a bit of an outsized bump when you get those jobs.

Yeah, James, good question. I think I would call it the lingering effects of COVID are, I would say, have pushed some things to the right. We haven't seen any clients cancel any projects. We just know that, you know, they come to us and give us an expected timeframe and then they'll It's not uncommon for them to say, hey, it's going to be a bit long before those things roll out. I think geographically, the mix that we've talked about is where we keep our eyes open. But I would throw in, for example, this deep water discovery in Turkey that we've got involvement in. South Atlantic margin looks real strong for us. I would say Brazil may be offering some challenges given the flare-up in COVID there. That's, I would say, creating some uncertainty there. going forward. We still see things coming. It's just maybe not as steep a ramp from what we can see right today. I will also point out that we do have an extension of our Deepwater Gulf of Mexico project. It's a Deepwater Gulf of Mexico phase two project. We've had new subscription membership into that. And so our clients are planning on getting after these projects. Timing's a little bit unclear right now.

Okay, okay, got it. And then, Larry, is the global mix of activity shifts a little bit more towards gas versus oil? Could you just remind us, does it have any real impact on your revenue or margins, whether it's gas or oil? I'm pretty sure it doesn't, but could you talk a little bit about that changing mix and how that could change or if it doesn't change your revenue and margin outlook?

Yeah, so around the edges, oil projects, I would say, tend to be a little bit more higher value for us. Things like three-phase relative permeability, where you've got liquid, oil, and gas, and water. You've got three phases that can be moving in the rock. That requires some extra lab testing to be done. When you've got a dry gas project, it's a little simpler. You've got gas and you've got water. Often what we're dealing with is our gases where liquids can drop out, condensates, wet gases where liquids can drop out. And in those cases, you're looking at very similar protocols and testing requirements as you would in an oil reservoir. So I think it depends a little bit on the nature of the gas project, gas production. quality as to what that's going to mean. The second thing is on the rock side, the variability in the rock properties are not determined by the fluids that are in the holes in the rock. And so if the rocks are very variable, I hate to say this for our clients, but tough on our clients, good for CoreLab. That really will drive the amount of core analysis and the depth of core and geologic studies that have to get done.

Okay. Gotcha. Thanks.

The next question comes from Scott Gruber with Citigroup. Please go ahead.

Morning, Scott. Good morning. Good morning. I wanted to follow James's question and just thinking about international growth in the second half of the year and where we could exit in terms of rate of change. Last call, you guys were optimistic that we could see double-digit growth internationally for core. Do you guys still retain that view, or is there going to be a little bit of a kind of slower ramp-up just kind of given the color you just gave?

Yeah, I don't really think we've changed our perspective on that, and I think the way it was framed up the last time this was is that was sort of, year over year, so when you look at second half of 20 compared to second half of 2021. But, you know, currently, we would not disagree with projections that would suggest double-digit growth. Low double-digit, it could be higher for the second half of this year compared to second half of last year.

Gotcha. And maybe I'm just splitting hairs too much with some of the onshore projects. They're moving maybe a little bit faster at this point. There's a little bit of sluggishness offshore.

Depends on the region. Depends on the client. Depends on COVID. It depends on a lot of things there. So I don't know that we've seen a trend of onshore versus offshore tilt in client behavior there.

Got you. And just prospects for an acceleration into 22, can the 22 rate of change clips, call it 10% to 12%, can we get into the mid-teens based on the Project Q that's coming together?

Yeah, let's not get too ahead of ourselves here. I think we see some encouraging signs for Q2 and for the rest of the year here. I'm a little bit hesitant to talk about – We said we encountered a third black swan in the storm that hit the U.S. Let's see if there's a fourth black swan out there. But I think we'll stick with what we said. We see improvement throughout the remainder of 2021 into 2022. Right now, our client contacts are improving, giving us a fair amount of optimism for that. And I think the numbers that Chris threw out there in terms of year over year, I think that's about as far as we want to get right now in terms of guidance.

Got it. Understood. Appreciate the call. Thank you.

Sure, Scott.

The next question comes from Sean Mecham with J.P. Morgan. Please go ahead.

Morning, Sean.

Thanks, Sean. Morning. Morning. Let me just clarify on that last point. You know, you're confident we're going to see continued progress in R.D., double-digit growth in the back half of the year, half on half, back half 21 versus back half 20, implies RD could get back to maybe something like a $90 million or something close to that run rate per quarter. Is that kind of within the range of expectations? I'm just trying to get a sense for, you know, it's quite a build-up of the 1Q results. I just want to make sure I have a good sense of what that range can look like.

Yeah, I think that's right. I mean, I think the guidance that Gwen gave shows, you know, we see improvement quarter over quarter lining up for Q2, and we think that that accelerates a bit in the back half of the year.

Right. Okay. That makes sense. Okay. Thank you.

There's some assumptions in there, though, that, you know, these COVID infections and lockdowns, that those start to dissipate in the second half of the year. That is built into our assumptions.

right yeah that's completely fair so then maybe just come back to incremental margins to dial in a little more clarity there you know historically you preferred investors to focus on year-over-year incrementals rather than sequential so if we look at 2q20 it's a bit you know the math's a bit messy just given uh rd margins were still fairly elevated versus where they are today p you know went negative for a quarter so you're guiding to say 50 incrementals medium term near-term something lower. Presumably that's on a sequential basis for the next couple quarters. Just mathematically, how are you guiding investors around how the margins progress?

Yeah, I think that's, you've got the right view on it there. I think you've summarized it pretty well there. It's going to be choppy and I would say toward the low side on incrementals for the next quarter or two. Then as we sort of get back to Get those costs dialed back into the system. Revenue continues to grow. You'll see us start that path back toward historic incremental margins. I don't know that it'll happen in a step function fashion, but I think it'll build from there. And what we look at is, you know, what are our opportunities to leverage the automation and the cost savings and the cost efficiencies that we've dialed into, I'll call it the restructured arrangement of our lab network, and we see those as being very high. But I think the message that we want to convey to everybody is that it's going to be we've got to take care of some employee sacrifices that have been made, and I can't tell you how fulfilling it is to see the loyalty that's been displayed to us by our employees as we've navigated this. We want to take care of them as soon as possible, and that's going to be a wait for the next quarter or two.

Right. And, Sean, the only thing I would add to that is that when We've been in periods where there's big swings, you know, like we've had the last year. We'll tend to gravitate to more of a sequential sort of comparison. As we get into environments where it's a little bit more steady, then we probably kind of shift back to sort of year-over-year comparisons.

Very helpful. Understood. Thank you.

Thanks, Sean. I think we've got time for at least one more. Let's keep going.

Great. The next question is from Connor Lina with Morgan Stanley. Please go ahead.

Yeah. Morning. Thanks for squeezing me in. I think this was asked, but I'm not sure I caught the full extent of the answer, but I had left the last call with the impression, and you can let me know if I've misconstrued this here, that the ATM was more so you guys could play offense as opposed to play defense. You know, I think you had mentioned freeing up some optionality for, for M&A or some other types of strategic investments. I think you talked about the organic strategic investments, but are you seeing opportunity or anything interesting on the M&A front? Is that why you went really relatively fast on this program, or how would you frame that?

Yeah, I think you've summarized it pretty well there. I mean, we were in a period where we were, I would say, having to navigate the leverage ratio in terms of our – how aggressive we wanted to get on investments for growth, whether it be internal or external. And so we like the idea of getting those constraints off of us. We're always looking. We're always evaluating. Some of you know this. I came to CoreLab more than 20 years ago through an acquisition. I understand how when the right opportunity presents itself, you want to take advantage of that. I would say that that Whenever we look at opportunities, though, the same discipline that Coralab has historically applied to acquisitions of is it in our wheelhouse technologically and can we get the proper return level is going to guide us as to whether or not we make that investment. Historically, our internal product and service development has offered us very high returns. I would say that's our priority. But we're always looking, always interested to look for opportunities to add on complementary technologies.

Got it. I'll leave it there in the interest of time. Thank you.

Okay. I think we're ready to wrap up right now. In summary, CORE's operational leadership continues to position the company for improving client activity levels throughout 2021 and into 2022. While there are still operational uncertainties in the near to midterm, there are many opportunities ahead. We have never been better operationally or technologically positioned to help our global client base optimize their reservoirs and to address their evolving needs. We remain uniquely focused and are the most technologically advanced, client-focused reservoir optimization company in the oilfield service sector. The company will remain focused on generating free cash and returns on invested capital. In addition to our quarterly dividends, we'll bring value to our shareholders through growth opportunities driven by both the introduction of problem-solving technologies and new market penetration. In the near term, Core will continue to use free cash to strengthen its balance sheet. So, in closing, we thank and appreciate all of our shareholders and the analysts that cover CoreLab. 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.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.