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spk06: Good morning and welcome to the Core Laboratories third quarter 2022 conference call. All participants will be in the 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 telephone keypad. To withdraw your question, please press star, then two. Please note that this event is being recorded. I would now like to turn the conference over to Mr. Larry Bruno, Chairman and CEO. Please go ahead.
spk09: Thanks, Faizan. 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' third quarter 2022 earnings call. This morning, I'm joined by Chris Hill, Core's Chief Financial Officer, and Gwen Gresham, 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 review of important factors in Core's Q3 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 of 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 CoreLabs 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 to Gwen for remarks and forward-looking statements.
spk12: 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 that could cause actual results to materially differ from our forward-looking statements. These risks and uncertainties are discussed 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. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Our comments also include non-GAAP financial measures, reconciliation to the most directly comparable GAAP financial measures is included in the press release announcing our third quarter results. Those non-GAAP measures can also be found on our website. With that said, I'll pass the discussion back to Larry.
spk09: Thanks, Gwen. For the third quarter of 2022, Coralab achieved sequential improvement in revenue, operating income, operating margins, free cash flow, EPS, and EBIT margins. Year over year, revenue increased by 7%. For the full company, EBIT margins for the third quarter grew to 11%, and operating margins improved sequentially in both business segments. Following Q2's strong 43% sequential incremental EBIT margins, even after accounting for currency devaluations of the euro and the British pound, full company sequential incremental EBIT margins for Q3 grew to over 55%, once again reinforcing the operational leverage available to Coralab, as global activity improves. Sequentially, EPS grew by 50% to 18 cents per share X items. In the third quarter, we saw modest sequential improvement in demand for lab work in our European, Ukrainian, and Russian operations as global trade patterns continue to realign. While we anticipate this trend will continue, the situation does pose uncertainties and potential volatility for both lab services and product sales the company's russian ukrainian and european markets aside from these uncertainties we expect continued improvement in both business segments across international arenas and in the u.s for the remainder of 2022 and into 2023 core continues to execute on its key strategic objectives by one introducing new products and services in key geographic markets two, maintaining a lean and focused organization, and three, maintaining a commitment to de-levering the company. Now to review CoreLab's strategies and the financial tenets that Core has used to build shareholder value over our 26-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. I'll talk more about some of our latest innovations in the operational review section of this call. While we navigate through the current challenges and pursue growth opportunities, the company will remain focused on its three long-standing, long-term financial tenets, those being to maximize free cash flow, maximize return on invested capital, and returning excess free cash to our shareholders. Before moving on, I want to thank all of our employees for their dedication, loyalty, and adaptability in meeting all of our clients' needs, and for the commitment that many have shown as we navigate the moment and prepare for a more active market. I'll now turn it over to Chris for the detailed financial review.
spk01: Thanks, Larry. 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. So now looking at the income statement, revenue from continuing operations was $126 million in the third quarter, up over 4% from $120.9 million in the prior quarter, and up almost 7% year over year. The sequential increase in revenue is driven by growth in both the U.S. and international markets. However, NICE growth in the underlying operations in multiple international regions has been partially offset by the devaluation of the euro and British pound, which I will expand on later in the discussion. Additionally, although we have seen some improvement, the Ukraine-Russia conflict continues to adversely impact service revenue in the affected regions. Of this revenue, service revenue, which is more international, was $87.9 million for the quarter, up 3% sequentially from $85.4 million last quarter. The growth in service revenue this quarter has come from multiple international regions, including some recovery from disruptions caused by the conflict in Ukraine. While underlying activity continues to grow, our international service revenue was negatively impacted by foreign currency exchange rates versus the U.S. dollar. using a constant U.S. dollar, international service revenue would have been translated into an additional $1.5 million when compared to last quarter and an additional $4.3 million when compared to Q3 of last year. The impact of these currency movements during the first nine months of 2022 was approximately $9 million compared to the same period in the prior year. Product sales. which are more equally tied to U.S. and international activity, were $38.1 million for the quarter, up over 7% sequentially and up 15% from last year. U.S. product sales for the quarter were up over 22% sequentially and up over 13% year over year. Our energetic product sales into the U.S. markets continues to be the primary driver and were up over 19% sequentially and up over 27% year over year. International product sales, which are typically larger bulk orders and can vary from one quarter to another, decreased approximately 4% sequentially, but were up over 16% when compared to third quarter last year. Moving on to cost of services, X items for the quarter were a little below 77% of service revenue, which improved from 80% last quarter and 79% from last year. Cost of sales X items in the third quarter was 82% of revenue and also improved from 84% last quarter. The improvement this quarter was primarily driven by gains in manufacturing efficiencies and higher U.S. sales. We anticipate improvement in the manufacturing absorption rate in future quarters to be in line with projected growth in product sales. G&A X items for the quarter was $10 million, relatively flat compared to last quarter. G&A X items is anticipated to be approximately $40 million for the full year of 2022. Depreciation and amortization for the quarter was $4.2 million and down a little from $4.4 million last quarter. EBIT X items for the quarter was $13.3 million, up from $9.6 million last quarter, yielding an EBIT margin of 11% and up over 260 basis points sequentially. This quarter marked the company's highest sequential incremental margin since the COVID-19 pandemic. On a GAAP basis, EBIT was $14.6 million for the quarter. Interest expense, X items, was $2.9 million, up from $2.7 million in the last quarter. GAAP interest expense was $3.1 million, which includes writing off $210,000 of unamortized debt costs associated with renewing our credit facility during the quarter. Income tax expense, X items at an effective tax rate of 20%, was $2.1 million for the quarter, and on a gap basis was $3.9 million for the quarter. Higher tax expense for the quarter was largely impacted by foreign currency gains, primarily in the U.K., where unrealized foreign currency gains associated with U.S. dollar-denominated receivables are subject to tax locally. The company has taken additional steps to further mitigate this type of foreign currency risk, to reduce future tax expense associated with foreign exchange rates. 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 each quarter. However, we continue to project the company's effective tax rate to be approximately 20 percent. Income from continuing operations X items for the quarter was 8.3 million, up 2.8 million or over 50 percent from the last quarter. On a GAAP basis, we recorded income from continuing operations of $7.6 million for the quarter. Earnings per diluted share from continuing operations, X items, was $0.18 for the quarter, up from $0.12 last quarter. And GAAP earnings per diluted share was $0.16 for the quarter. Turning to the balance sheet, receivables were $100.2 million and up slightly from $99.1 million in the prior quarter. Our DSOs for the third quarter were at 67 days, which improved from 69 days last quarter. Inventory was $54.8 million as of September 30th, up approximately $2.2 million from last quarter end. Inventory turns for the quarter were at 2.3 compared to 2.4 in the last quarter. As previously highlighted, the company continues to experience an increase in costs that go into inventory. Additionally, challenges in the supply chain persist, so we continue to carry a larger amount of inventory to help mitigate disruptions. We anticipate inventory terms will remain at similar levels with some improvement as we progress through the remainder of 2022 and into 2023. On the liability side of the balance sheet, our long-term debt was $185 million at the end of the third quarter, and considering cash of $14 million, net debt was $171 million, or a slight decrease from last quarter. At September 30th, our leverage ratio improved slightly and was 2.42 compared to 2.47 at last quarter end. We are projecting our leverage ratio to continue improving through year end with a more significant improvement in the first quarter of 2023. Our debt is currently comprised of our senior notes at $135 million as well as $50 million outstanding under our bank-revolving credit facilities. Looking at cash flow for the third quarter of 2022, cash flow from operating activities was $5.8 million, and after paying for $2.7 million of CapEx in the quarter, our free cash flow was $3.1 million, or up $5.7 million from the last quarter. We expect the growth in working capital to moderate, cash from operations to strengthen, and for the company to generate positive free cash flow in future quarters. We will continue managing capital expenditures to be in line with activity levels for the remainder of 2022. For the full year of 2022, we expect capital expenditures to be in the range of 11 to 12 million. CORE will continue its strict capital discipline and asset light business model with capital expenditures primarily targeted at growth opportunities and operating efficiency initiatives. CORE Labs operational leverage continues to provide for the ability to grow revenue and profitability with minimum capital requirements. Capital expenditures have historically ranged from 2.5 to 4 percent of revenue, even during periods of significant growth. That same level of laboratory infrastructure, intellectual property, and leverage exists in the business today. 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 and projecting 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.
spk12: Thank you, Chris. As the fourth quarter of 2022 unfolds, Hoare anticipates the crude oil commodity price to remain near current levels but may fluctuate in response to the crude oil supply and demand uncertainties related to slowing global economic growth, inflationary pressures, and government-imposed COVID-19 lockdowns in China. Over the long term, crude oil supply is projected to tighten as production growth faces limitations due to prolonged underinvestment in many regions around the globe. As a result, CORE expects operators to expand their upstream spending plans into 2023, supporting CORE's outlook for continued improvement in international onshore and offshore production activity with projects emerging across most regions. These crude oil fundamentals are leading indicators for what CORE sees as a strengthening multi-year international recovery. Turning to the U.S., CORE expects U.S. onshore activity to remain steady and modestly grow in 2023. as operators remain focused on capital discipline and availability of additional frack crews and drilling rigs may be constrained. As a result, for the fourth quarter of 2020-2022, Corps' reservoir description segment revenue is projected to be flat to up slightly. While momentum and international activity continues to build, near-term growth may be affected by two factors. Volatility associated with the Russia-Ukraine geopolitical conflict and client-driven project delays. Production enhancement segment revenue is estimated to increase by mid to high single digits as U.S. land activity is projected to remain steady and international growth continues. For the fourth quarter of 2020-22, CORE projects U.S. activity to remain stable and the recent improvement trends in international offshore and deepwater markets to continue. CORE projects fourth quarter revenue to range from $126 million to $131 million and operating income of $13 million to $15 million, yielding operating margins of approximately 11%. EPS for the fourth quarter is expected to be 17 cents to 21 cents. The company's fourth quarter guidance is based on projections for underlying operations and excludes gains and losses in foreign exchange. Fourth quarter guidance also assumes an effective tax rate of 20%. Now I'll pass the discussion back over to Larry.
spk09: 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 has been very visible during the current challenges and is the foundation of CoreLab's success. Turning first to reservoir description, for the third quarter, revenue came in at $79 million, up 4% compared to Q2. When looking at growth in revenue for reservoir description, it is important to consider the sharp devaluation of the euro and the British pound. These currency devaluations lowered reservoir description revenue when translated into U.S. dollars by approximately $1.5 million for the quarter as compared to Q2 and year-to-date by approximately $9 million for 2022 compared to 2021. Operating income for reservoir description X items was $8.4 million and operating margins were 11%. Even after accounting for the currency devaluations I just mentioned, quarterly, sequential, incremental margins for reservoir description were still over 70%. As we look ahead, while still well below pre-COVID levels, we see the growing international rig count as a harbinger of an improving landscape for reservoir description, a trend that we project will play out for the next several years, particularly in the Middle East, North and South America, and most other regions. Now for some operational highlights from the third quarter. CORE continued to leverage its global reach, expertise, and proprietary technologies to evaluate CORE and reservoir fluid samples from a multi-well exploration program in the deepwater Orange Basin located offshore Namibia. Conventional CORE recovered from targeted stratigraphic intervals were scanned using CORE Lab's non-invasive technologies for reservoir optimization, branded as NITRO. A wide range of critical petrophysical parameters for paid delineation were generated using Coralab's innovative measurement and modeling techniques, allowing for rapid delivery of data and early time assessment of the recovered strata. Selected samples are now progressing through the traditional time-honored program of physical laboratory measurements. Recent successes in Namibia have generated renewed interest in Coralab's regional study of reservoir and seal rocks from offshore Namibia. This study, conducted in collaboration with the National Oil Company of Namibia, includes geological analysis of samples from more than 20 wells. This study is just one of 22 multi-well, multi-company studies that Coralab has conducted on sedimentary basins offshore Africa. In other developments, Coralab is pleased to announce that during the third quarter of 2022, quantum energy partners and Trace Midstream Management joined CORE's Carbon Capture and Sequestration Consortium, bringing total membership to eight participants. These new members enhanced the consortium's exposure to both private equity engagement and midstream operations expertise in the emerging carbon capture and sequestration market. The objective of the consortium is to analyze geologic risks and challenges associated with carbon sequestration, leveraging CORE's expertise in subsurface characterization. Regulatory entities that govern carbon sequestration projects require extensive site evaluation. Core technologies ensure that the models for simulation and monitoring of CO2 injection and sequestration are built on robust data sets and are applicable for the permitting process. Moving now to production enhancement, where CoreLab's strengths in both energetic systems and completion diagnostics help customers optimize their well completions. Revenue for production enhancement came in at $47 million, up 4% sequentially, and up 20% year-over-year. Operating income X items was $4.7 million. Operating margins were 10% for the third quarter of 2022, and sequential incremental margins were 44%. During the third quarter of 2022, CoreLab continued to build on the success of its proprietary plug-in abandonment perforating system called PACC. which is used for oil and gas well abandonment programs. CoreLab provides solutions that leverage its expertise in energetics as an alternative to traditional casing milling, which is slower and more costly. Thus far in 2022, Core successfully deployed its PAC technologies in over 30 wells in the North Sea. Core's PAC energetic solutions are often used in perf wash cement applications. This technique enables the operator to selectively establish circulation in the annular space between casing strings, thereby creating pathways for setting the permanent cement plugs required for well abandonment. Over on the service side of production enhancement, operators continued to leverage CORE's expertise in completion diagnostics for offshore wells during the third quarter of 2022. CORE SpectraStim, SpectraScan, and PacScan downhole imaging technologies were utilized in deep-water Gulf of Mexico Miocene wells to evaluate single, and dual zone frac pack completions. In addition to those technologies, CORE's flow profiler oil diagnostics were used to assess the production in ultra deep water Gulf of Mexico reservoirs involving multi-zone completions. The cost associated with completing multiple wells in these high stakes deep water wells necessitates confirmation that each frac pack is properly configured and each targeted zone is contributing oil production as per the completion plan. Recently, CORE's production enhancement team was tasked to deploy a unique flow profiler diagnostic tracer in each of four FracPak completion zones. CORE's proprietary laboratory analytical techniques on produced oil samples confirmed that all four zones were contributing to production. Flow profiler also helped the operator understand how the reservoir was responding, allowing them to adjust flow back procedures to achieve the drawdown pressures that would optimize production without damaging the reservoir. Of course, completion diagnostics are a critical tool for determining whether planned completion programs were successfully executed downhole many thousands or even tens of thousands of feet away from the wellhead. That concludes our operational review. We appreciate your participation, and Faizan will now open the call for questions.
spk06: Thank you very much. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our rosters. The first question comes from Stephen Gangaro from Stifel Financial Corporation.
spk00: Please go ahead. Thanks. Thanks. Good morning, everybody. I think two questions from me, if you don't mind. And if we could start on the reservoir description side, and I understand the FX issues and headwinds. What we are kind of consistently hearing from – other service companies, and even large EMPs is we're on the cusp of kind of pretty strong international growth in 23 and 24 likely. How should we be thinking about the RD business in that environment? I mean, should we start to see consistent double-digit year-over-year growth in that business? I'm just trying to get a sense for for how the growth rate should look. And I mean, looking at history, that would seem to be reasonable, but I'm trying to put together the, the puts and takes here.
spk09: Yeah, Steven, I think that's right. It's, um, we're, we're, we, uh, agree that, that, uh, we're starting off for a headed into a multi-year upcycle that, um, is going to really benefit reservoir description as we've talked about with you and with, with, with, uh, other analysts and investors. Reservoir description, by its nature, tends to lag directional trends. We've been saying that for a while. It held in very well when COVID hit, and a lot of the service companies that were more exposed to well construction and all really went down sharply. Reservoir description held in very well. And now those leading indicators of an increased activity, the international rate count being a very good bogey for that, is Gaining traction, we see that going forward. That aligns very well with our client discussions. And so reservoir description is gonna start making headway there in terms of its margins, which were, what, 11% or so for Q3. And we think it may not be as linear as any of us would like, but we think that it's the beginning of a nice upcycle and getting back into some nice double-digit margins.
spk00: Great. Thanks. That's helpful. And obviously the quarter was really strong on the margin side. When we look at the energetics business in the U.S. land market, it sort of seems to have evolved and there seems to be a lot of offerings on sort of the integrated side. But you had a really good quarter there. Can you talk about some of the underlying positives that sort of drove the product sales in North America in the third quarter? Sure. Gwen, why don't you...
spk09: Get into some of the details here.
spk12: Yeah, Steven, so in spite of the completion activity, I mean, it increased a bit, but it was a little bit anemic compared to other quarters. With our energetic sales, though, we outperformed the activity, both completions and frack spreads, you know, kind of as our markers there. And so with our U.S. sales, we were up about 19% sequentially and 27% year over year. So that's penetration into the market with our existing energetic products that we have. And then we also did pretty well internationally. And as you recall, those can be bulky, and they can move quarter to quarter. And so in Q3, we had some nice shipments there as well.
spk00: And just real quickly on that front, anything on the pricing front around the energetics business right now in North America?
spk12: Yes. Getting some pricing improvements. As you know, that area of the market was hit pretty hard during COVID, and we've been working with operators, wireline companies since, and we've seen some nice, let's say modest pricing improvements today.
spk00: Great. Thanks for the color.
spk09: Stephen, I might add to that that we are seeing really nice penetration and demand for our premium energetics, which has always been sort of the bulwark of our products business. Okay.
spk05: That's helpful. Thank you.
spk04: Thank you.
spk06: The next question comes from John Daniel from Daniel Energy Partners. Please proceed.
spk03: Hey, John. Hey, guys. Thanks for putting me in. Just two questions for you this morning. You noted renewed interest in some of the studies. And I'm curious, when you look back historically, as you've seen interest rise for reviewing and study purchases, how long does that translate into more business, whether for you or just for the industry at large?
spk09: Yeah, so interesting model that we have on those, John. We collaborate on our international studies. We collaborate with national oil companies. And we deliver those to the original participants when we complete the analytical program. And then we retain a resale right on that data. So it was kind of an off-the-shelf sale, which yield some pretty high margins when we do that. We're usually sharing those with our collaborative partner with the national oil companies. But what we see on those is, I would say, after a quiet several years of interest in these offshore studies from the offshore Africa market, all of a sudden that's picked up pretty nicely in the last quarter or so. So we think we're early in the reconnaissance phase where people are starting to re-engage and look at opportunities that they might have had on the shelf during a period of turbulent activity in the industry.
spk03: Okay. Fair enough. And then you also noted the success of the PAC system. And as I read the commentary on that, It sounds like it's more of a system designed for offshore wells in the P&A process.
spk09: Primarily, that's correct. Yeah, we do have some offerings that we would use in land business, but the big market and what we focus our efforts on, sort of the big upside for us on well abandonment and plug-in abandonment programs is on the complex offshore wells where there's multiple casing strings. And I've referred to this at times as, there's an energy transition aspect to this. It's going to take decades to plug and abandon all of the offshore wells that have been drilled. And so we're still adding new ones. The recount's going up. New wells are being added. There's going to be a very nice long horizon. And so we've focused some efforts on to making sure that we are well represented there with our innovative technologies. Okay.
spk03: The reason I ask about it is when I A lot of times as you drive around the field and talk to folks, they'll say in the onshore market, you know, the E&P company typically just goes low bid when it's time to P&A well. And I'm curious, you know, just kind of given the emphasis these days on ESG and doing things right, if you see somehow greater adoption of technology or sophistication when it comes to onshore P&A moving forward. That's a big picture question. Just your thoughts.
spk09: Yeah, I think that's still going to have to evolve a bit. I mean, the design of the onshore wells, and I hate to use the word simple because they're certainly not, but compared to a very complicated offshore well with multiple strings of casing and multiple completion zones, it's a much more complicated task. I don't disagree with your assessment that there is a highly prized approach to doing these cost-effectively. And that's what we focused our efforts on, like on the PAC system and our other plug and abandonment offerings. We saved the clients substantial dollars in rig time from going in and trying to mill out some very hard steel, all those casing strings, and then having to pull the casing by using our energetic systems to create those communication pathways to allow those cement plugs to be set. So yes, you're right. Cost is a priority, and we're using our technologies to help lower costs and save time. Okay. Awesome. Thanks, Larry. Thanks, Glenn. Yeah, you're welcome, John.
spk04: Thank you. Next question comes from Don Christ from Johnson Rice.
spk06: Please proceed. Hey, Don.
spk10: Morning, everybody. How are you all? I wanted to ask about just the geographic leverage. I mean, obviously, we're seeing activity pick up in Brazil, West Africa, Middle East, etc. Is there one area that you have more geographic leverage to than another? And should we monitor where rigs are going into Brazil might be better for y'all versus West Africa, etc.? ?
spk09: Not particularly, John. I mean, I think we have a really broad international footprint. And so we have operations in Brazil. We have operations in multiple countries throughout the Middle East. We have operations in Asia Pacific and in Africa. So we are well positioned. Now, during tough times, that works against you. You've got that kind of sprawling infrastructure. But during good times, that's when you really harvest the benefit of holding in there during turbulent times in the industry. And so I would say, to give you a little more color, I would say the Middle East is at the forefront of what we're seeing as a pickup in activity. Now, we are in four different countries. I don't get into too much detail about those because in some of those countries I only have one client. And so you can do a little geographic assessment to figure out where those are. But I'd say the Middle East is an earlier mover and a bigger mover than we're seeing other places. Certainly the South Atlantic margin has been very good for CoreLab for the last number of years, and it looks like it's improving. We actually expanded operations in Brazil. I would also maybe also keep an eye on both sides of the Gulf of Mexico. I think there's some opportunity there. And as I mentioned in the call earlier, West Africa has been kind of quiet for us for a while. And I think renewed interest as people start to reevaluate opportunities, particularly offshore, but also some onshore Africa plays.
spk01: Yeah. The only other thing I would keep in mind is that the rocks and fluids are mobile. So it's pretty often that they'll come to one of our advanced technology centers for the more advanced testing.
spk09: The hub and spoke structure has served us very well, so we want to be close to where the activity is, and then to maximize our utilization of our technologies, we'll ship those samples around to our major centers.
spk10: I appreciate all that detail. And just one final one for me. You know, obviously there's still a lot of tension in Europe with the Russia situation, and we're coming up on a decision point here on December 5th. But, you know, the assay work on Russian crude, is that completely out of your model today? I.e., if Russia quits exporting it crude, that will not hurt you going forward. Is that a correct statement?
spk09: No, I don't think that's correct. I mean, we still have European clients included in that that want us to be part of their activity. That includes Russian crude. I guess I take a perspective that I think both sides. The Russians need to keep the crude flowing, and the rest of the globe needs that oil that's going to come out of Russia. If not, we're going to see a spike in oil prices. And so I think what will happen is there'll be some accommodation there to keep things flowing. But we've tried to risk assess some of the uncertainties that we see that potentially could impact us. But it's a crystal ball question for what's going to happen in the near to midterm. But I think we're kind of optimistic that the realities of supply and demand for crude oil don't allow for Russian oil to be excluded from that for very long.
spk10: Okay. I appreciate the call. I'll turn it back. Thank you. Okay.
spk06: Thank you. The next question comes from Simon Golugny from Ovilco. Please proceed.
spk12: Hey, Simon.
spk07: Good morning. Hi. Just a brief question. You announced the ATM in early June, and then later you announced that refinancing. Can you guys elaborate on your current thoughts on the ATM?
spk01: Sure. This is Chris. We have not sold any shares under the ATM. I would say we're not planning to sell any shares unless we need to. So, That was put out there with what happened, I think, during the first quarter. And you see how that impacted us, the conflict and whatnot. But we've recovered partially from that. But keep in mind, we do have $75 million of notes that are coming due next year. And we're working to improve the liquidity in the company and how we're going to retire that or sort of refinance those. We're keeping multiple options open, but we're going to try to do it without utilizing the ATM.
spk09: And just to expand on one point, that $75 million note that comes due next September was a 12-year note. So it was set up in a different time, but it just happens to be coming due now. And so I wanted to have options if we needed to, but as Chris mentioned, we have not sold the shares under the ATM.
spk05: Okay, thank you very much. You're welcome.
spk06: Thank you. The next question comes from Dan Kurtz from Morgan Stanley. Please proceed.
spk02: Good morning, Dan. Good morning, Glenn. Good morning, guys. So I just wanted to kind of follow up on the kind of capital allocation issue A lot of questioning. I guess, considering that you have the maturity next year, if you put the leverage target out there of 1.5 times, so appreciating that those two are factors. I was just wondering if you could help us think through your calculus and thoughts around potential increases in shareholder returns, what you would need to see to feel comfortable starting to consider that and what would kind of be your preference between raising the normal dividend or IBACs or some kind of special dividend. Just generally your thoughts around shareholder returns would be great.
spk01: Sure. I don't think that has really changed. We've tried to message that consistently. I think when we think about raising the dividend, we want to do that in a way where we think it's sustainable. So I think as we get into a recovery, the way we would return cash to shareholders is through our buyback program. Initially, it does provide a little bit more flexibility, if you will, versus committing to a dividend. But I think once we get the leverage ratio down and that's sort of not – a consideration with respect to that and we're comfortable with the forecast, you would see us start to consider to raise the dividend.
spk02: Great. That's really helpful, Culler. And then I saw in the press release that you guys are making progress in the CCS Consortium, added two members, I think. Just wondering if you could give us an update in terms of the opportunities that you're In the CCS space for CoreLab, and if you could remind us anything you've said kind of on what the medium or longer-term prospects could be in that market. Thank you.
spk09: Yeah, I think it's very early in the process. I think CoreLab focused on maybe not getting out over our skis and this. We wanted to wait until we were actually generating revenue profitably on this activity. And so we took a multi-pronged approach. If you go back and look at an earnings release from a little while ago, you'll see we signed a strategic alliance with Talos. I think Talos is well positioned to be a leader in CCS projects going forward, and we had a great relationship with them through our activity on their upstream production, oil and gas production side, and so that was a natural fit for us. And then we put together this consortium in collaboration with the University of Houston to really focus on where CoreLab has its applicable expertise, and that is in understanding what happens when people try to put for 30, 40, 50 years or longer, try to put large volumes of CO2 in the ground. That's going to react with the pore fluids. It's going to react with the rocks. If you bubble CO2 through water, the water gets more acidic, and that's going to create rock fluid and fluid-fluid compatibility issues. So that's kind of the technical side of what we're focusing our engagement on, evaluating the seal rock and containment and formation sensitivity to injecting the CO2. So from a dollar perspective, we're still saying that as this matures, we see that this could become 5% to 10% of CoreLab's business over time. Not there yet, but I think we are in a more concrete position than some companies that are talking about future engagement there. We're actually doing projects and see more projects building in We've got more projects on our board now than we've done to this point. Let's put it that way.
spk14: Great. That's great to hear. Thanks, Larry. Thanks, Chrissy. Go ahead and I'll turn it back. Okay, you're welcome. Thanks, Dan.
spk06: Thank you. The next question comes from David Smith from Pickering Energy Advisors. Please proceed.
spk12: Hi, David.
spk13: Hey, good morning. Good morning. Thank you for taking my question. So apologies, I jumped on the call a little late, so sorry if I missed this. Did I hear that U.S. production enhancement revenue was up 19% sequentially, or was that just a reference for energetics?
spk12: That was a reference for energetics.
spk01: Okay. The U.S. product sales were up 20-plus percent sequentially. Yes.
spk13: Yeah, I was just wondering if you gave any details on the total U.S. growth sequentially, because even that level of product growth would kind of suggest a decline in total international for the segment. And I was just wondering if that maybe lines up with just the FX impact.
spk01: Yeah, so this is Chris. So U.S. was up over 20% sequentially last But international product sales out of PE were down this quarter. And when we talk about that, those are larger bulk orders, and they can be a little lumpy from quarter to quarter. And those are not as subject to the FX impact like our service revenues that are coming through Europe and whatnot. Those are usually billed in dollars, so there's not as much currency impact in our production enhancement segments. Just to put that in perspective, the international product sales were up 16% year over year. They're just down and can be a little lumpy quarter to quarter when you're looking sequentially.
spk13: Got it. Makes perfect sense. Thank you. And the follow-up question is solid incremental margins for production enhancement this quarter. Is that a function of a better mix with the energetics growth? Is that just the segment getting to you know, the kind of incremental margins you would normally expect?
spk01: Well, I think we had a really nice pickup in the U.S., which is the primary market for the manufacturing. So some nice manufacturing efficiencies. And we have had some pricing traction. I would say the pricing isn't keeping up with inflation, but it's a combination of manufacturing efficiencies as price product manufacturing expands, but then also some benefits from some pricing picking up. We don't model that kind of incremental margin going forward, but when we have a nice quarter, it can get up to those levels.
spk09: I think more consistently we would look at margins on the manufacturing side, on the product side of the company, which is almost entirely in P.E., look at that for 25-35% incremental margins.
spk01: Right. And our services side of that segment also had some nice growth, too. So when they start to pick up, we talk about on the service side, the incremental margins can be stronger, so it can actually improve the sequential incremental margins for the segment as well. Right.
spk09: So to be clear on production enhancement, the incremental margin is a blend of the manufacturing margins and the service margins.
spk13: Got it. Thank you. If I could sneak one more in. Sure. Did you provide any characterization of the essay work in Q3 relative to Q2? I mean, I saw the modest improvement referenced in the press release, but just wanted to ask if you could provide any rough numbers on the revenue improvement.
spk08: Yeah, up mid-single digits. Right.
spk05: Great. Thank you so much. Sure, sure.
spk04: Thank you. The next question comes from Samantha Ho from Evercore ISI.
spk06: Please proceed.
spk11: Hey, guys. Just a quick little housekeeping. The CapEx guide, I mean, it seems like, you know, it's kind of just worked its way down from the initial $15 million to $18 million guide for the year. Can you maybe talk to, you know, what is driving that? Is it a timing issue? Is some of it rolling to next year? And and just also where your CapEx is going towards these days?
spk09: Yeah, so I don't think any major change there. It may be a little bit lighter. We are trying to, I think at CoreLab, we are extremely thrifty when it comes to capital investment. We have to see a very rational reason and appropriate returns to make us move forward. But that being said, having sort of grown up through the lab network in CoreLab as sort of my responsibilities improved, no good idea goes unfunded. And so we have also rationalized our geographic footprint, and with that consolidated some locations. So that's helped to reduce some of the capex that we might have had to put into facilities. And so I think no big change in that as we, it's one of the benefits of staying asset light. We don't have a lot of rusting metal to replace over time compared to some other types of oil field service businesses. And so I think it's a combination of our natural thoughtfulness about capital expenditure trying to be cognizant of free cash that we're trying to generate as we focus on de-levering the company, and also some operational efficiencies that have come through reorganizing and restructuring and re-geographically balancing our footprint around the world.
spk12: And Sam, when you look at the numbers, You could, in terms of modeling, if you want, in terms of where the dollars go, to Larry's point with no good idea going unfunded, there's about two-thirds of that that goes towards new technology and maybe about one-third that goes towards things that lose their life in the laboratory environment.
spk11: Okay, that's super helpful. Okay, maybe switching to some of the newer stuff that you're doing. On the CCUS consortium, It's really interesting to see that you're adding private equity and midstream partners. Curious if this is sort of like, if this is something that has happened in the past with some of your other studies where, you know, sort of non-upstream partners or members get involved early on, or do they tend to get involved later after a field starts to, or a project starts to mature and you're actually bringing that project online there?
spk09: Yeah, so to be clear, this is the first non-upstream consortium project that we've done. Everything else that we've done, the hundreds of multi-company studies that we've done over decades have all been focused on subsurface reservoir characterization, seal evaluation. Some have had implications on completion design, say in the in the Permian Basin, and all evaluating the rocks and fluids and how to get the most out of that. This is the first one that's not focused on some upstream application. So, like, for example, EOR and unconventionals, that was a technology study, but it was still focused on upstream oil and gas production. The CCS Consortium is not focused on upstream oil and gas production. We're very happy to see I would call it a very nice blend of some very well-known and respected nameplates on the oil and gas operator side that are seeing CCS opportunities either for their own initiatives or to become a player in that arena. But also getting some private equity and midstream engagement here I think broadens the discourse for us on how companies are going to develop effective economic models for CCS projects.
spk01: Yeah. The only thing I would add is that historically with our traditional projects there, I don't remember any midstream type companies buying in, but as assets were changing hands, private equity firms have bought those studies in the past. That's correct.
spk11: Okay. And then, you know, one thing that I'm kind of surprised I haven't heard you guys mentioned is a geothermal company. That just seems to be a trend that I would think would fit into your wheelhouse. Can you maybe elaborate? Is there an opportunity there for you guys to get involved in that space?
spk09: Sure. So this could be a long conversation, and we only have a few minutes left, but there's really two broad categories of geothermal. There's what I would call the hot rock, hot fluid ones, and the warm rock, warm fluid ones. Most of the ones over time, say like the geysers in California, a pretty long-term geothermal project, those are very hot rock projects. So shallow areas that are relatively shallow, and by this I mean hundreds to thousands of feet deep, not tens of thousands of feet deep, and they provide hot rock fluids from the earth that allow for warming of water to create a steam environment and generate electricity. We do on occasion get involved in those hot rock projects. They tend to, so we've done some, for example, in Indonesia. They tend to be in tectonically active areas where those hot rocks are close to the surface. One of the complications there is it's pretty tough to core wells when you're talking about 700 or 800 degrees temperature. And so not a whole lot of coring. Sometimes they'll core on the flanks of those projects and we'll evaluate the rocks. So we do have some offerings in there looking at fluid and rock compatibility, but not a big business for us.
spk11: Okay, great. Thanks so much, guys.
spk09: Okay. I think we'll wrap up there. In summary, Core's operational leadership continues to position the company for improving client activity levels in both the U.S. and international markets for the remainder of 2022 and beyond. 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 oil field service sector. The company will remain focused on maximizing free cash and returns on invested capital. In addition to our quarterly dividends, we'll bring value to our shareholders via growth opportunities driven by the introduction of problem-solving technologies and new market penetration. In the near term, Cora will continue to use free cash to strengthen its balance sheet while always investing in growth opportunities. 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.
spk06: Thank you. Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
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