Q4 2020 Core Laboratories NV Earnings Call
$247 million or a decrease of $4 million in the fourth quarter.
Over the course of 2020, we reduced our net debt by $49 million from last year end.
Our debt is comprised of our senior notes at $150 million as well as of $111 million outstanding under our bank <unk>.
Revolving credit facility at December 31.
As stated earlier the company issued $60 million in new senior notes in January 2021.
These new notes were issued with the purpose of refinancing a portion of $75 million of senior notes maturing in September of 2021 the.
The company will continue with our longer term strategy towards reducing debt and core lab's debt leverage ratio.
Now looking at cash flow for the full year of 2020 cash flow from operating activities was $57 9 million and after paying for $11 $9 million of Capex for the year, our free cash flow in 2020 was $49 million, marking the 19th consecutive year in which the company has generated positive.
Free cash flow.
In the fourth quarter cash flow from operating activities included $21 million of cash payments that are unique to this quarter.
Included in the $21 million as of one time employee post retirement payment of $16 million that was associated with the distribution from the company's employee deferred compensation plan and the employees employment agreement.
Additionally, the fourth quarter includes a $5 million payment for our 2021 annual corporate insurance programs, which is prepaid to lower the annual premium costs.
For many years core lab has invested in company owned life insurance policies as an investment vehicle to fund our employee deferred compensation plan.
This is not an uncommon practice and these policies are often referred to as coli.
As intended the cash surrender value of these coli policies was access to help fund these payments and in the fourth quarter. The company converted $11 5 million of the cash surrender value to cash which was used towards funding. These payments. However, the cash received from the coli policies is treated.
As an investing activity and therefore is not included in our cash from operations or free cash flow.
As a result for the fourth quarter cash flow used in operating activities was $2 9 million and after paying for $3 3 million in Capex, our free cash flow in Q4 was a negative $6 2 million.
A couple of more important points on this topic.
As of December 31, 2020, our employee deferred compensation plan is fully funded through our investments in company owned life insurance policies. Additionally.
Additionally, our forecast of future employee distributions from this plan are expected to be immaterial for any one calendar year for quarter.
Now onto Capex for.
For 2021, the company anticipates that its capex for the next couple of quarters will be at similar levels to recent quarters.
<unk> is 2021 is expected to improve in the second half we.
We would also expect our capital expenditures to increase but stay in line with historical levels, while in the growth period.
Core will continue our strict capital discipline and asset light business model with capital expenditures, primarily targeted at growth opportunities and initiatives.
This also marks the 19th consecutive year core lab has generated positive free cash flow and we are projecting to continue generating positive free cash flow as we look ahead to 2021 and beyond.
We believe evaluating the company's ability to generate free cash 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.
Chris.
And as Chris mentioned for 2021 core will continue to focus on executing our strategic plan of generating free cash and reducing our net debt while maximizing return on invested capital. Additionally.
Additionally, as part of the company 2021 strategic focus we will continue to invest in targeted client driven technology. The aimed saw both client problems and capitalize on core growth opportunity.
We are optimistic about the company's international growth opportunities as the second half of 2020, Wang unfold and COVID-19 disruptions are expected to abate.
With core lab, having more than 70% of its revenue is exposed to international activity. The company remains active on international projects already underway.
Additionally, as core these early signs of growth in international markets trending higher in 2022 and beyond.
Combined with the international opportunities as well as the continued momentum of use of land for the company in the second half of 2021 and beyond we book the stream.
<unk> of the company's technology portfolio dedicated and talented work force and strong operating model is a nice backdrop for the emerging cycle.
Some of the emerging international growth areas.
<unk>, Brazil, Mexico, Qatar in various areas of the middle East.
For the first quarter of 2000 from 'twenty, one and consistent with historical trends.
Lower client activity due to seasonality. This seasonal pattern typically result in the decline in first quarter revenue.
Mid single digits.
We anticipate typical seasonal effects and COVID-19 restrictions to impact the first quarter of 2021 with the first quarter revenue projected to be flat to down low single digits sequentially.
In the projected decline in first quarter revenue is slightly less pronounced compared to historical trends as expected momentum in the U S land activity continue.
With reservoir description, we expect the reservoir fluid analysis, which accounts for more than 65% of the segment's revenue to remain resilient.
Once this work is diversified across the life of the reservoir and less reliant on drilling and completion of new wells.
However, given reservoir description strong international exposure COVID-19 disruptions present uncertainty for.
For near near to mid term client activity levels as travel restrictions fluctuate due to virus trends the.
The company see sequential improvement in U S land activity into 2021.
As the result, we project production enhancement first quarter 2021 revenue to increase sequentially.
Additionally, we expect production enhancement to continue to track or outperform activity levels in the U S land completions.
In summary, despite the near term international challenges related to COVID-19 restrictions, we see activity levels improving in 2021.
As in 2021 unfolds with higher incremental margins emerging in the second half of the year.
Our growth opportunities are directly related to the expanding client activity and new market penetration, particularly internationally.
Within that context, we remain focused on the ongoing development of new client driven technologies and market penetration as well as the continued focus on digitization and automation throughout the <unk> business the.
The company's first quarter 2021 guidance is based on projections for the underlying operations and excludes gains and losses and foreign exchange. This initial first quarter 2000 from 'twenty. One guidance also assumes an effective tax rate of 20%.
And with that I'll turn it back to Larry.
Alright, Thanks Glenn.
First I would 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 core lab's success and is shining through during the current challenges.
Turning first to reservoir description during the fourth quarter of 2020 core continued to perform highly specialized core and reservoir fluid analytical programs on samples originating from the offshore South Atlantic margin a region of core sees as a growth opportunity in 2021 and beyond.
Several international operating companies have obtained licenses for pre salt exploration and appraisal in Brazil signaling that this region will be of focus of near mid and long term capital deployment.
To support current and future programs core is in the final stages of commissioning of New laboratory facility in Rio de Janeiro, this level or for a wide range of rock and fluid testing capabilities, including Core's proprietary full visualization pressure volume temperature or pvt sell image instrumentation.
<unk> core is dual energy Cte rock evaluation technologies. This new lab secures core is positioned as the leading provider of advanced reservoir description services in the region and satisfy the growing demand for core patented and proprietary laboratory technologies and the growing Brazilian market.
Also of the fourth quarter of 2020 core conducted analytical programs on a variety of Sidoti <unk> injection projects for both carbon capture and sequestration as well as for enhanced oil recovery efforts.
Under the direction of the carbon net project core continued its laboratory analysis of conventional core from the Google are one appraisal well offshore southeast Australia, helping in the evaluation of this large scale carbon capture and sequestration project data generated by core is providing insight at the steel capacity.
Storage capacity Geo mechanical properties of the courses of properties of the rock and the targeted injection zone.
Also in the fourth quarter of 2020 core was engaged by a national oil company in the Asia Pacific region to evaluate <unk> injection opportunities as part of an enhanced oil recovery program in tight oil reservoirs core lab combined its proprietary high frequency nuclear magnetic resonance technology with physical law.
Laboratory core flooding experiments to determine of institute of hydrocarbon saturation during and after C of O two injection.
This data set is providing the operator with the detailed understanding of fluid displacement and fluid interactions throughout the cotwo flooding process. The two projects I've described here are representative of some of the various cotwo subsurface ingestion opportunities that exist for core and its clients.
Moving now to production enhancement, where core lab strengths in both energetic systems and completion diagnostics were again on display.
Of course clients are always looking to improve their completion techniques and response cores production enhancement segment continues to expand and penetrate the market with its technologically advanced completions product lines.
Recently several of course technologically sophisticated clients in the North America region have pursued opportunities to precisely align the perforation channels in the direction of maximum principal stress.
To meet the subjective Core's production enhancement engineering team developed the patent pending oriented gogan by providing both very high alignment accuracy and well thought well site efficiency. This technological advancement is designed to allow the frac energy to be focused in a manner that maximizes the frac, while minimizing torch.
<unk> the.
Of the innovative design of the oriented goes on also eliminates the need for orientations sub assemblies. This is a big advantage of the well site as it minimizes the number of required connections and saves time as the operator does not have to recapture and redress operating subs.
During the field trials, one of the operators deployed downhole cameras to compare of various pre assembled gun offerings and assess their ability to be preferentially oriented.
Core lab's oriented go gun proved to have the highest level of alignment accuracy, both for perforation to perforation and from stage to stage as a result of the superior performance of core technology. The operator has adopted the oriented go gun as their preferred perforating system.
Now moving onto the service side of the production enhancement Core's proprietary completion diagnostic services are most often used to evaluate well completions for producing oil and gas wells in the fourth quarter of 2020. These services were used for an untraditional application as part of of natural gas storage project being developed.
The loan the U S Gulf Coast.
The core lab was engaged by the operator to deploy its completion diagnostic services and assessed the effectiveness of Frac pack completions performed on a number of wells and this large gas storage field core.
Core utilized its pack scan density logging technology to determine the competency of the annular packs that were placed in these wells and one of these wells of course pack scan density log revealed insufficient coverage of the perforated interval and a completely uncovered sand control screen Core's engineers identified these potential failure points.
And recommended of proppant top of treatment to remediate. These areas of concern the operator agreed and within a week a successful top off treatment of was performed resulting an optimum proppant coverage above the top of the sand control screen.
It is critical that these gas storage wells be effectively fracked and the annulus completely packed in order to ensure their long term functionality for both injecting and withdrawing natural gas over the life of the storage field core Lab's pack scan technology, and the resulting top off treatment avoided costly completion remediation remediation program.
This is a new market for this proprietary core of lift technology and has applications for both natural gas storage and carbon sequestration projects as in both applications Wellbore stability must be both maintained and assured for many years.
That concludes our operational review, we appreciate your participation and ideally we will now open the call for questions.
We will now begin the question and answer session to ask the question you May Press Star then one on your Touchtone phone.
We're using a speakerphone please pick up your handset before pressing the keys.
So withdraw your question. Please press Star then two.
Our first question today will come from George O'leary with P. H <unk> company.
Good morning, George Good morning, guys.
Hey, guys. How are you all the George.
The the 65% increase and energetic sales quarter on quarter was particularly striking complete.
The completions activity was clearly a big but was this an example of a case for your wireline customers were kind of caught short inventory and had to both the service projects plus restock that inventory of or is this more of a.
Our market share shift type of dynamic just curious what drove the super strong bounce there.
Yes, I think the wealth that might be of better question for some of the wireline companies to give you a definitive answer on there may be a bit of both going on there, but I think as we look over the longer period of time, what we see as our energetic sales tracking and in almost every case exceeding the.
The trends in completion, so we see completions that were probably up a little bit fuzzy still on some of the numbers seems that most people are thinking that number's around 40% or so and so we think we nicely exceeded that.
<unk>.
We attribute a substantial part of that to penetration of new products and offerings.
Okay, Great. That's helpful and then just on the the.
Q1 seasonality that you mentioned apologies if youre my Kid in the background of virtual learning instead of asking these questions.
Okay.
The Q1 seasonality that you mentioned just went back and looked at the last 10 years.
It kind of jumps around the Q over Q sequential change in revenue and I realize theres different drivers across different years, but could you frame, maybe what drives the seasonality whether thats something that from a regional perspective on the international side or year end of sales that you might get in the fourth quarter kind of abating as we progress into that first quarter.
Any color there would be.
It would be helpful.
Yes, I think we look at maybe even a longer view than that.
The 15 20 years go back in it's a pattern that we see play out pretty consistently.
That jumping around you see.
On occasion is usually attributed to a sharp upward move in the commodity price.
The late in the year.
Like coming out of a steep of Frac holiday and the.
Then you'll see things.
That will buck that trend, but very frequently we've got clients that are trying to wrap up budgets of our projects in the year historically, the fourth quarter of the year is our busiest year in our highest revenue year.
And we see that new projects take a little time to spool up.
Some companies are still refining budgets and plans so a little bit of a drag sort of out of the gate in the first quarter is what we've come to expect.
For core lab and in particular in reservoir description.
And so we see that is playing out this year and then we throw a little bit of uncertainty about COVID-19, disruptions, how those going to unfold or the pace at which those will abate and that leads us to think that the first quarter.
We'll be flat to down slightly now we normally would see that that seasonal rollover in the mid single digits.
Let's say when we even when we include some of those sort of average years.
But we think that will be mitigated or lessened in the first quarter of 2021.
And then more of an art.
As far as locations at all and some of our underlying reasons. So often it's it's northern hemisphere areas that we see some of the seasonality related to planning for weather conditions that might impair activity. Some clients just say hey, no point in getting those started and fighting predictably bad.
Weather patterns, so they push those out of little bit and that slows things down.
No that's very helpful, Larry, especially of the North Sea.
Europe, Canada, those can all be influenced in the first quarter.
Got it that makes sense and the.
Sneak in one more if I could tuck the decent bid in the prepared remarks about free cash flow generation.
And deleveraging clearly primary goals for you guys as.
As we move forward, how do you think about it.
Is there a year end target of 2022 of 2023 target on the deleveraging for US and then could you maybe frame the moving pieces for free cash flow in 2021 comment on the heels of a pretty powerful free cash flow generation here in 2020.
Yeah, I'll get started on that so directionally, we are aiming to try to get that leverage ratio below one and a half we think thats of more comfortable position maybe go lower than that.
Depending on market conditions.
Certainly get it down to what I would call it.
A cooler balance sheet.
And now that will be helped as well obviously of as activity picks up and our EBITDA growth that will that will they'll have a there'll be a virtuous cycle on that leverage ratio, but we will and we are committed to as we work throughout 2019 and continued on the sorry, and as we continue into 'twenty 'twenty, one and as we were in 2020, we're committed to for the time.
Being applying free cash too.
Two reducing our net debt and so Chris with the relationship to the forecast and the timing on those yes, I think I think Larry did a great job summarizing that longer term, that's the kind of of the target.
Whether we get there by the end of this year or next year seems to be very achievable.
To get to those levels by the end of 2022.
But this year it will really depend on how it unfolds in and kind of how how much time. It takes to get sort of this COVID-19 in the rearview mirror and really the global economy kind of moving back towards where we were pre COVID-19.
Thanks, very much for the color guys.
Thanks, George for George Thanks.
Our next question comes from Mike Sabella with Bank of America.
Good morning, Mike Hey, Good morning, Glen Good morning, everyone.
Okay great.
I was wondering if you can kind of try to help frame the magnitude of higher how youre thinking about the second half recovery in international.
Some of the larger guidance been pointing to kind of up double digits second half of 'twenty, one over second half of 'twenty.
How do you how do you see your opportunity set and kind of playing out in the second half yes.
Yes, I mean, I think there's maybe a little bit of built in caution as we as we look in some of the unpredictability, but we wouldn't necessarily disagree with with some of the forecast that of put out there we see that trend developing.
Particularly as you look at it or the year over year basis.
Okay.
Perfect and then.
Core kind of thinking about reservoir description.
And thinking about the segment in the context of.
How it performs as OPEC starts kind of bringing production back online.
Can you talk about what the opportunities for the fluids business are sort of earlier in that process.
Kind of versus.
Maybe later.
What's kind of the lowest hanging fruits mantech.
Yes, I think theres, a little bit of a potential.
Bump upward there, particularly where there has been wells shut in.
And people want to assess.
Assess what the current.
Gas oil ratios are.
What the pressures of doing how it's affecting the fluids and the borehole. So there could be a little bit of of a flurry unfold on that I don't think its going to be a big needle mover, but we are well positioned to handle that.
We are also expanding our fluids.
<unk> capability right now in the Middle East.
As well as the Brazil.
The market that I talked about earlier, so I think the fluid side of the business. We are let's let's maybe frame. This in a bigger context here. We are in our fluids heavy phase of for core laboratories go back and contrast say core laboratories 2000.
10 to 2015, when there was a lot of of <unk>.
New rock having to be evaluated in unconventional that was of rock heavy cycle. We're in now more of of harvesting mode and so we're more of a fluid heavy cycle and I'd say historically, if you look back over core lab as we look back over it.
Kind of swings between about a one third two thirds of blend of one of the other of the services over time and so we're kind of at the tilted heavily toward the fluid side of the business at the moment.
That's that's the cycles of inevitably wind down and as new fields have to be developed and appraisal has to go on it swings back toward the rock side of the business. So I think fluids are real anchor for our business through.
What's a down cycle like we've been through and are experiencing right now.
And I think it will stay that way, although what we see as we look out longer over several years is a new cycle of appraisal.
To bring new fields on of new zones and fields on we'll have to unfold and that will swing the pendulum back a bit towards the rock side of the business.
Perfect. Thanks, everyone.
Thank you welcome.
Our next question comes from Scott Gruber with Citigroup.
Good morning, Scott.
Yes, good morning, everybody.
Okay.
Good morning.
Just a little bit more color on the.
On one Q.
When we think about the split on segment revenue trajectory you guys thinking about the Rd potentially down kind of mid singles and P/e up 10% to 15%.
Is that fair or a little bit different.
I think I think that's broadly framed it I think the the short term upside for us as a continuation of improving conditions in the U S land and that will that will certainly lean toward production enhancement.
The substantial part of that business.
And then on the reservoir description side.
For the first quarter that seasonality is going to play in.
Two.
<unk>.
Of regular pattern that we anticipate there and then we've got just I guess, what everybody is dealing with the the lack of core.
Clarity on what country is going to be next in putting a lockdown are posing a restriction on the business activities that might impact us.
So I think broadly you are correct, there I don't know that.
Extend the downside in reservoir description quite that much but it's not out of the realm of what we might expect.
Got you.
And then just some color on the.
On the Incrementals for both cost of coming back into the system for everybody.
As things start to turn the quarter here, so any color on incrementals in <unk> and then.
If you think about <unk>.
Obviously, you guys mentioned stronger incrementals in the second half sales like getting back to those normal healthy incrementals for core labs in the second half.
But in <unk> do you still have costs coming back into the system.
Or is there just a lack of clarity on growth.
<unk> right now.
Or maybe the Incrementals just aren't that relevant how do we think about both of <unk> and <unk> before we get the.
Better incrementals in the second half.
Sure of this this is Chris so.
It's a combination I think you have to look at it segment by segment.
We are projecting cost of kind of come back in a little bit in Q2, and maybe even more so I mean in Q1 and a little bit may be more slowing into Q2, but.
So it is going to soften the incrementals.
For the company as a whole you start to get into also a different mix of the segment. So production enhancement is kind of in more of an of growth mode and that is carrying lower margins. So company overall, it is going to impact the incrementals and kind of how the two segments sort of play out.
Anything you want to add to that yes, I would just say that it is a bit choppy right now in the skin is going to be remain that way with the incrementals were still in this but if you go back and refer back to of our calls over the last few quarters. We're still seeing this stop go stop go effect, it's just unpredictable, where it's going to happen or if the.
The product delivery shipment of.
Or well site job is just going to get shut down because of the virus activities were not let those people go those cost remain in the system, we've got to be ready to go when the client says go.
And so it's somewhat inefficient.
The phase here I'll take it over the the strict steep downward trend that we've had.
In activity, but it's still a bit chaotic in terms of of.
How activity is going to rollout and so we're carrying.
<unk>.
A cost structure that we think we've got broadly aligned with what we need to to execute the program, but it's still a little choppy in terms of how the work projects going to enroll as we look further out I think the traditional.
Incrementals that you've come to expect out of core lab, 50%, 60% are very achievable and I'll go on to say that if you look at the structural costs that we've taken out of the company from G&A all the way through operations. We are set up to be very well positioned to convert a dollar of revenue into <unk>.
Or much better in terms of.
EBIT.
Got it I appreciate all of that in the silver lining is that the.
This needs to be light at the end of the total now.
Yes.
Could sweep sneak one more in Chris on on Capex.
You guys haven't.
Made the decision on the second half, but should we think about maybe $6 million in the first half and.
It is starting the first starting point, maybe 10 in the second or can you provide some clarity on how you guys are thinking about second half capex, maybe maybe relative to revenues.
Yes, you know the.
The numbers that you threw out there those are definitely in the range that we're kind of looking at there is some flexibility there. So we have the ability to flex.
Some things if we need to accelerate some things we will do that so anything that looks like a a good investment with good returns we're going to go ahead and move forward with that and if needed.
There are some levers we can pull to do that so.
But those are those are kind of close to what were thinking could be a little higher if things don't don't take off in the second half as quickly as we're projecting then we have the ability to dial that back a little bit.
And I think the only thing I'd add to that I think Chris covered very well as expect core lab to stay with it is traditional.
The percentage of of <unk>.
Capital to revenue ratios.
Normally around 335% during.
Down cycles.
The below three during normal cycles, and sort of hey, we've got to get after some.
Say lab build out or things like that to face client needs. It.
Tick up but we're talking about fractions of a percentage of but we're going to stay very close to our asset light capital disciplined business, we know that very well how to run that and and we're pretty disciplined in how we evaluate.
Opportunities and how we deploy that capital.
So it wouldn't go above 4% sales in the second half of any type of churn.
The kind of restart spin.
Look back over time, it would be it would be of rare case when.
When we were in a sort of of hyper growth cycle, where it might have.
Out of gotten gotten up in that range, but that's that's a good bogey.
Got it I appreciate all the color. Thank you.
Thanks Scott.
Our next question comes from Connor Lynagh with Morgan Stanley.
Thank you Alex.
Good morning, good morning.
I just wanted to talk a little bit more about the balance sheet and cash flows I guess.
I noticed that you guys have not chosen to.
Do anything with the aftermarket equity program.
In light of Chris your comments on <unk>.
Some pretty good confidence on Delevering organically.
How should we think about how you guys are planning to use this as the just an option out there for flexibility.
I guess I guess, how should we think about whether or not you guys will be utilizing that program or not.
Yes, I think we.
We've talked a little bit about that is out there.
We're always looking at opportunities.
<unk> internally and externally so.
We're constantly evaluating that I think we wanted to have the flexibility.
To make sure we're progressing on some of these internal growth initiatives, but also in case something externally comes across that we want to execute on we want to have that flexibility.
And although we are projecting to stay within our financial covenants.
It is it is tighter than we would like it to be and we just don't want to be restricted from doing something that we think is a good long term decision for the company because we got to manage a little tighter to the debt the debt leverage ratio for the next quarter or two.
So it is there and if we feel like we need to access it that is what it is therefore theres still a lot of uncertainty over the next couple of quarters with respect to how we're going to plow through the virus.
And when we're really going to kind of half of that behind us.
Understood understood.
I guess I guess, if we sort of think about the world and where you sort of get to those target leverage ratios you were discussing earlier.
It seems like Youre talking about seeing some internal and external growth opportunities. There's also the potential for incremental capital return can you just discuss your sort of framework around that and specifically on the growth opportunities where do you see.
Within your portfolio of the more interesting avenues right now.
We look across the.
Across the landscape there I would say core lab is the.
The cost of our position.
Global footprint, we are somewhere between regularly approached and bombarded with the <unk>.
The external opportunities we take a very.
Calculated look to how things might fit in.
We're more interested in our internal pipeline.
Growth opportunities, we think that thats extraordinarily good and some of those and as we get through the year, we'll be talking about the more some of those of our concepts that individual clients that we have great relationships with have come to us and said hey, what about this and we're working on with them together core level, one of the IP and Malone the <unk>.
Say opportunity for.
For us so we want to make sure that we have the ability to fund those and as Chris said I think frames of very nicely. We don't want to have to manage the company and Miss.
Or delay growth opportunities because we are trying to navigate what I would call it of transient.
The.
Tight point and the leverage ratio.
Not good for the long term to be had.
Handcuffed like that and miss or delay opportunities.
Right makes sense.
I will turn it back thank you.
Thanks Connor.
Our next question comes from Sean <unk> with JP Morgan.
Good morning, Sean Sean Good morning.
Sean Let me just to continue back on the margin progression discussion.
You indicated cost savings will help incrementals.
At least on the year on year basis, even if it sounds like there's a bit of a headwind sequentially in the first half of.
It all sounds reasonable as you think about.
Potential peak margin for 'twenty, one versus the average.
As I think about R&D are high teens of possible peak in 'twenty, one even if perhaps maybe we're going to average in the more like mid teens could we just talk about that dispersion potential.
Yes, I mean, I think if things unfold the way, we expect them to and the virus.
Abates kind of with the idea of that hey, things will be will be improving into the second quarter beyond I think an exit rate for R&D in the mid to high teens is achievable.
We just did 15 last quarter.
In.
And I think of the quarter before that with two consecutive quarters of that and so I think from there get past the sort of the maybe a little bit of the seasonality issues in the first quarter, we should go up.
Okay that sounds reasonable. So then just continuing that.
Your line of shrimp Shawn.
John I would add I would just reinforce one thing on that is.
I said earlier that when we look at the structural cost.
Net we've taken out of the system, all the way up and down the organization.
That of that will reinforce that what we can do with that extra dollar of revenue that will come with an increase in activity.
Fair enough. So then just.
On that line of thinking but now for for PD.
Nice bounce back on margins in <unk>, you had good volume growth.
How do you think about the potential cadence of activity in U S. Onshore. So do we think we.
We will see a peak in volumes middle of the year <unk>.
Risk of budget exhaustion at year end.
Do you anticipate more of a level load and then the read through to margins would be interesting. So.
Can we peak at a double digit of double digit margin.
Or would you characterize maybe high single is.
The best we could hope for in 'twenty one.
Hey, Sean this is Chris so we're kind of projecting more of a gradual kind of build as we move throughout the year.
And maybe that starts to kind of flatten out as you get towards the back half, but if you if you make assumptions around where commodity prices are going to be and let's say they stay at current levels or strengthened throughout the year that would be our expectation and we're still not to sort of levels, where we are.
We really have full efficiencies in our manufacturing facilities. So we would expect margins to continue to expand.
There are little bit incrementals can be a little bit lower for on the product side. So I wouldn't get too aggressive there maybe in the historically, 25% to 30% range has been achievable for US and then on the services side that can be a little higher.
So.
As you kind of blend that out and forecast that out we would expect.
High single digits to low double digits to be achievable.
If you projected continued growth through the rest of the year.
Okay.
And so it sounds like Youre not expecting much of the kind of mid year peak in our budget roll off more of.
A plateau, perhaps at some time at the current towards that another year not at the current commodity prices.
Yes.
Okay, Great I appreciate the feedback Sean I would just just to reinforce something Christmas said earlier here. We do have some costs that are going to have to come back into the system and that's going to impact our incrementals will call. It the near term until we get back to a more normalized world. We've still got employees that are on furlough we're slowly.
Winding those back in the got employees that have.
The demonstrated great loyalty to us taken pay cuts.
To navigate the difficult time.
It's a priority for us to as soon as possible.
Turn people hoped either in steps or in whole get them back to where they were.
And so we want to make sure that we do that and don't neglect the sacrifices that they've made to.
To help navigate this difficult moment.
Okay.
We've got time for one more call.
And our next question will come from Stephen King of <unk> with Stifel.
Thanks, David.
Good morning, everybody.
For slipping me in here.
Really I think it was only one of them left of really wanted to ask you about the.
The.
We have heard that there was a lot of.
A lot of sort of component inventory in the channel on the perforating side over the last.
A couple of quarters, especially because of the massive drop off from <unk>, while net had kind of impact of the pricing dynamics there.
Do you have any thoughts on that.
Where the inventories stand.
Especially for some of these.
More probably commodity component manufacturers and how the pricing dynamic currently sits within the perforating business.
Yes kind of circle back to.
The Georges question earlier, there might be of better question to ask of some of the wireline companies, where they stand on their on the inventories Theyre holding there I imagine.
They are trying to run pretty lean inventories.
So I think they are trying to work on adjusted time opportunity. They don't want to have capital tied up sitting in inventory.
So for US it's been a combination of system sales and component sales.
And our new offerings that are coming on to the market that we're having a nice reception to.
And so I think it's a it's a complicated world out there I am glad that core lab is in the business of selling both components and systems.
Thanks.
Within that context are you seeing any.
The acceleration or acceleration in the adoption of the integrated systems versus components.
Because I've heard of data kind of slowed down because of that phenomenon earlier in the year of B C.
Sort of for example, the gogan regain some traction.
Yes.
About.
One expression of that here with the oriented go gun.
That's coming to market.
Now.
So that was a desire on the part of the client that was using our free assemble system, but said hey, our objective for the moment is to make sure that we get precise alignment of the of.
Of the perforating tunnels before we go into the practice thing and so thanks to that relationship they came to us and said.
Here's what we're trying to do can you help us get there and that led to the oriented go gun and stay tuned more to come on that.
Very good thank you.
Okay. Thanks, David Okay.
Okay, I think we'll wrap up from there in summary cores operations leadership continues to position the company for improving client activity levels in 2021, while there is still operational uncertainties in the near to mid term. There are many opportunities ahead, we have never been better operationally or technologically positioned to help our clients maintain and expand.
Their production base and address the revolving needs, we remain uniquely focused and of the most technologically advanced client focused reservoir optimization company in the oilfield service sector. The company will remain focused on free cash conversion and the returns on invested capital. In addition to our quarterly dividends will bring value to our shareholders. The.
The 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 reduce debt.
So in closing we thank and appreciate all of our shareholders and the analysts that cover core the executive management team and the board of core laboratories give a special thanks to our worldwide employees that have made these results possible, we're proud to be associated with their continuing achievements. So thanks for spending time with us and we look forward to our next update goodbye for now.
Now.