Q1 2021 Core Laboratories NV Earnings Call

Associated with typical seasonal declines, but also elevated COVID-19 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 in 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 us 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 which is equally tied to North America and international activity were $24 4 million for the quarter relatively flat from the previous quarter inter.

The 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 ex 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.

His 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.

These two factors will impact our incremental margins for the near to midterm.

Cost of sales ex items in the first quarter was 84% of revenue and has improved from 86% last quarter and for the last three consecutive quarters.

<unk> product sales continue to improve and our cost reduction initiatives completed in 2020 are fully realized we would expect our margin to expand.

G&A ex 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 were able to restore employee compensation levels could also impact our G&A expense in future quarters.

Depreciation and amortization for the quarter was $4 9 million and pretty flat compared to $4 8 million last quarter.

EBIT ex 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 ex items was $3 2 million up from $2 $9 million in the last quarter, reflecting a higher blended interest rate apply to cost of 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 ex 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 ex 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 ex items was <unk> 15 per the quarter and GAAP earnings per share from continuing operations was <unk> 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 all 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 slow 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 in the international markets.

And now on to 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 31, two.

2021.

Our debt is now comprised of four series of senior notes two series totaling $150 million were issued back in 2011 of.

Of these 2011 notes $75 million 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 Delever the company.

And more specifically, our common shares and additional paid in capital increase by a little over $62 million during the quarter when compared to last year in and.

And as previously stated the company issued a little over one point.

The six 5 million shares for $60 million as we fully executed the ATM program during the quarter.

As a result of the company's outstanding share Count is now 40 624 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, we 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 the remain in line with historical levels, while end of period of growth.

Core will continue its strict capital discipline and asset light business model with capital expenditures, primarily targeted at growth opportunities and initiatives.

This also marks another quarter, where core lab 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 the 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 Christopher cash core will continue to execute our strategic plan with the focus on generating free cash and reducing net debt, while maximizing return on invested capital.

Additionally, as part of course 2021 strategic focus the company will continue to invest in targeted client driven technology. The aim to both the tough problems and capitalize on course growth opportunity the <unk>.

Company remains well positioned with ample liquidity to invest in its global capability to meet the needs of our clients.

These capabilities include core is expanding proprietary databases, along with innovation and artificial intelligence and machine learning, which are the foundation of core digital technology transformation.

Of course optimistic about our international growth opportunities throughout the remainder of 2021 as crude oil markets rebound.

With core lab, having more than 70% of our revenue expenses to international activity. The company remains active on international projects already underway and is planning.

And as in the planning stages for new projects Spooling up.

Core sales momentum building in the international market.

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 mid term 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.

Mid to high single digit sequentially for the second quarter of 2021.

Core expect success.

<unk> improvement in U S land activity in part on a strong recovery in the U S. Frac spreads following the winter storm, which has continued into the second quarter.

As a result core lab projects second quarter 2021 revenue to grow mid to high teens for production enhancement when compared to the first quarter of 2021.

Core expect production enhancement to continue to track our outperform U S land activity level <unk>.

Additionally, as core's clients activity increases and certain cost reductions of reinstated back into the companys cost structure incremental margins may be softer in the near to midterm. 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 of course, these activity levels and financial performance improving throughout the remainder of 2021.

Core <unk> growth opportunities are directly related to the 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 and foreign exchange second quarter 2021 guidance also assumes an effective tax rate of 20% with that I'll hand, it back to Larry.

Thanks Lynn.

First I'd like to thank our global team of employees from 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 as shiny through during the current challenges.

Turning first of 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 of our Spooling up as.

As global energy demand shifts away from coal and toward natural gas core lab seize opportunities in this transition in the first quarter of 2021 core lab under the direction of the Turkish Petroleum Corporation was engaged to provide laboratory analysis on conventional core recover from from the <unk> two well located in the deepwater.

Water Secretary of gas field in the Black Sea. This.

Of this multi well analytical program is leveraging core's proprietary and patented laboratory technologies.

Core has extensive global experience in evaluating cores from unconsolidated strata.

In addition, core lab's expansive proprietary datasets and the Caspian Black Sea region.

Are being used to rapidly calibrate reservoir properties.

These data sets combined with the new laboratory measurements will assist Turkish petroleum as they evaluate key geologic engineering and economic questions and this very significant deepwater natural gas discovery.

Upon arrival at the laboratory these high quality conventional cores were immediately scanned using core's proprietary noninvasive testing in the reservoir optimization technologies branded as Nitro.

Core lab's proprietary dual energy computed tomography <unk>, along with high frequency spectral gamma surface logging technologies quickly provided Turkish petroleum's experts with logic information as well as a wide range of critical Petro physical parameters for pay assessment. These.

Of 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 data sets are being utilized in conjunction with core has recently expanded machine learning artificial intelligence algorithms to refined and enhanced sample selection for the traditional time honored laboratory program.

The recovered cores and are progressing through a comprehensive program of physical measurements following consultations between Turkish Petroleum's and core Lab's technical teams core Lib is pleased to be assisting Turkish petroleum and this important natural gas discovery.

Also in the first quarter of 2021 core continued its work on the 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 has experienced in the region as well as best practices learned from core global portfolio of unconventional reservoir studies of <unk>.

Comprehensive laboratory program is underway to evaluate the hydrocarbon potential of this field. The project includes integration of core lab's proprietary digital technologies as well as the detailed analysis of rock types fracture in that formation characteristics petrochemical properties organic content and Geo mechanical properties core lab is it.

Corporate and these laboratory measured parameters into a fully integrated petrochemical model that will include recommendations on completion strategies.

And in other expression of core lab's innovative technology development industry adoption of Core's proprietary high resolution drilling derived the geo mechanical and formation pressure modeling application branded of D code continue to increase during the quarter. This new methodology use of the physical forces that are generated as the drill bit and cash.

As variations in rock properties the.

Feedback from the drilling process, and then be utilized to derive geo mechanical 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 the various deliverables D code is being used by core's clients to identify the location of fractures. It falls.

Variations of formation pressure and variability in rock properties between completion stages.

The ability to gain insight into geologic variability will own both vertical and horizontal well bores allows core's clients to make effective time sensitive decisions regarding wellbore stability and identify completion target intervals.

This physics based noninvasive approach is only possible because of the core lab's proprietary highly organized extensive database of rock fluid information pressure data.

Moving now to production enhancement, where core lab strength 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 result of temporary idling of cores largest manufacturing facility.

We are pleased that incremental margins came in at over 31%. Despite the inefficiencies caused by the storm.

Of course clients are always looking to improve the completion techniques and response of Core's production enhancement segment continues to expand and penetrate the market with its technologically advanced completions product line.

Of course patented zero 180 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 utilized fiber optic cables attached of the outer wall of the casing in conjunction with downhole sensors, which are set in place during the world <unk>.

<unk>.

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, but 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 the high degree of accuracy. This insurers of 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 core lab worked with the major service provider in multiple operators to successfully perforate smart wells and a number of major basins in the U S and Canada.

For example in Q1 core supplied an operator with the system consisting of 291 guns designed to perforate 35 stages and of smart well in the mid continent region of North America.

The job was completed without incident and with no damage the fiber optic cable of sensors and the significantly with no nonproductive time.

Another operating in the Rockies utilize the zero 180 system, where 350 guns were used to perforate 45 stages in a smart well here again, the job of successfully completed without incident or nonproductive time.

To date of course patented zero <unk> perforating system has been used to perforate, many hundreds of stages without incident and with zero Nonproductive time core.

Zero 180 internally oriented perforating system is clearly distinguished itself as the leader when compare to traditional systems that rely on externally positioned eccentric weight bars, those less sophisticated systems can require hours to correctly positioned and are particularly poorly sorted for Houston deviated holes.

<unk> patented zero 180 oriented perforating system provides the versatility of multiple shot the entities and orientation of multiple planes with the proven accuracy of plus or minus eight degrees core.

Zero of 80 Perforating system offers best in class performance for smart well completions.

Also during the first quarter of 2021 of course completion diagnostic expertise was utilized by our client completing multiple wells of the sprayberry formation of the Permian Basin in West, Texas. The goal was to assess whether the target interval in the producing well and of Superjacent water bearing San Andres zone had been properly.

By the cement job.

The operator had been experiencing losses in both drilling mud and cement when completing the sprayberry producers along with higher than expected water cut when the wells were brought on production.

At the client's request core utilizes proprietary spectra stem diagnostic technology to evaluate cement coverage across the two zones of interest.

And the same completion operation spectrum and was also used to trace the drilling mud cement spacer to help identify <unk> zones at three wells of course.

Of course completion diagnostic engineers were able to confirm the location of the <unk> zones, along with incomplete cement isolation of the water bearing set address interval the.

<unk> led the operator to change the design of the 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 one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys.

If at any time of your question has been addressed and you would like to withdraw your question Press Star then two.

At this time, we will pause momentarily to assemble our roster.

Okay.

The first question comes from Blake Gendron with Wolfe Research. Please go ahead.

Good morning Blake.

Good morning morning, Thanks, Good morning, everybody.

The encouraging that the international opportunities are spooling up here.

Not sure if it's appropriate now to start may be thinking about for reservoir description of run rate 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 of the mix. This cycle is heavier gas well.

Where maybe the fluid opportunity is as large as it has been in cycles past what that means for either incremental margins for just structural margins moving forward.

Yes, Blake good questions first.

On the R&D 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 out of the drawing board.

So don't want to get out over our skis yet in terms of.

The.

Outlook beyond what we gave.

In our outlook this morning for Q2.

Question Your the foundation of 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.

Get into some of these and for example, we talked about a number of gas projects, Australia over the last couple of quarters in the several others in.

In many cases, you have to look at whether you're going to have a critical fluid or of near critical fluid in which phase behavior is still very important in other words, if you drop the pressure on some natural gas.

The opportunities Youll start dropping liquids out of the across the do point and that creates.

A third phase I know you have water gas and a liquid phase of.

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.

There's still that opportunity for us there.

And we look forward to more gas projects as we move forward.

Absolutely helpful. Helpful color. There. The second question here, just on capital allocation really well executed ATM offering and it seems like the balance sheet other.

Finally, the light at the end of the tunnel here in terms of the deleveraging can you just remind us of.

What the target.

Leverage is and 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.

Yes, so I'll start us off here and then probably of hand, it off to Larry.

For your second part of your question, but we've historically talked about of one five 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 that so it could go below that once we get deeper into let's say of recovery.

But we are definitely working towards that want to be below two working towards one five over the next let's call it 12 months or so.

Yes in terms of the R&D spend it will be focused on new technology rolling out of things that we've been working on for a while expanding.

The 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 are correct, we would expect to see of bit higher capex spending, particularly on the R&D side of what we will stay in line with our historical <unk>.

Capital discipline standards.

Don't expect anything.

Unusual in terms of Capex performance year over year, I would expect it to be up compared to 2020.

Understood appreciate the time and all of the operational detail I will turn it back thanks.

Thanks Blake.

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

One of my good morning, good morning, everyone.

So you're all of 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 <unk> and then as we look at the <unk> is there still incremental margin pressure.

In <unk> or should it.

Should we really be thinking about for Q before it gets back to normal.

Yes, I think I think directionally, you're looking in the along the right path there.

Mike I think the I think the things that we've stressed.

Over the last several quarters' earnings calls here as 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 a roll of those back in and we want to do that as quickly as we can.

And so that's going to be of weight on the 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 lab's, 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.

Of course thinking about kind of reservoir description in the path back to 20% margins there or are you able to kind of walk us through what what sort of revenue what sort of revenue recovery, you think youll need to.

To be able to get back to 20% in that segment.

Yes, I think 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 of quarter level. We think we're going to be able to approach. It's a little too early to say exactly where it will be on what the project mix will look like but it could be that 20%.

Net level, when we start reaching those kinds of revenue revenue levels could be a little bit higher, but we would expect it to be in that range.

The important point to make is.

The structural changes and efficiencies in the reorganizations that we've done in terms of our our sale of lab infrastructure on the R&D side.

We will be able to achieve those margins at lower revenue levels than we have historically and don't don't forget we've been advancing automation in the laboratories.

To help control of our labor costs.

We've got a fair amount of of operational leverage built into the system right now that we're holding on to.

In anticipation of of <unk>.

Increasing activity. So I think we'll get to the 20% bogey on margins in R&D at a lower revenue level than we've historically achieved it.

And then from there on look for.

I'd call it very satisfying incrementals.

Okay understood. Thanks, everyone.

Thanks, Mike.

The next question comes from George O'leary with Tpa and company. Please go ahead.

George Good morning, everyone.

Good morning, everybody Ral.

Good day.

Just you guys always do the work on the macro front and you touched so many facets of the.

Of the oil patch and.

And so I'm just curious on the macro front load the spec to North America, how do you think about the activity level today, and how that translates into two crude oil production.

Yes, I think the base cases that we ended up somewhere in a flat exit to exit crude oil production.

<unk> Park.

And kind of the same folks are wrestling with is do we grow a little bad or are we at a point, where we retrench and I think you can make an argument for all of them just curious what the house view from.

From the core lab is with respect to activity levels in the house sufficient there to hold production flat increase or are we going to see a fade.

Yes, I think kind of putting 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 have expressed to us and they have expressed publicly to the investment community is theyre going to of a lot of discipline in executing their plan for 2021.

I think they're going to they're going to have their budgets and they're going to stick with those budgets and I think that will weigh on growth in production 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.

The two things together.

Think that there.

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.

The main driver, particularly for the larger operators is going to be strength of their balance sheet balance sheet pay down debt and stick with their plan.

Great color. Thank you Larry.

The final fractured zone.

Hot topic of late I'm, just curious how of this trend, which seems to be growing and I realize it's still small while small portion of the mix today, but how does time of action packed 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 some of the XR at this point I think as the answer anywhere from eight to up to 20% of the mix and then sorry to ask a multi part of it but do you think they'll grow as a percentage of the mix looks like the number of Frac sand or do you think bond up less pervasive.

I realize it's early days, but just curious where all of thoughts.

Yes, I think I think for us it might it might create.

Lumpier.

Revenue in production enhancement in other words, you get periods, where there is sort of intense activity and then and then it slacks and the picks up again so.

It's a bit early to tell going on going forward with that I do think that.

With all new technology introduction.

Theres going to be an adoption phase, there's going to be a call it of washing out phase of of problems of complications.

And then we'll see where it goes and I think 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, Thanks George.

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

Good morning, James.

Hey, good morning, good morning, guys.

<unk>.

Very curious what youre seeing on on deepwater you guys as they have good insight on.

Plans.

Given you get some heads up on when youre going to receive the core samples.

There is kind of mixed.

I guess views on deepwater as we go into the back half of this year.

But the seems to be some momentum here's where you kind of outline what youre seeing in deepwater, especially given that it gives you a bit of outflows bump when you get those jobs.

Yes, James Good question I think of.

I would call it the lingering.

Effects of Covid are I would say has pushed some things to the right.

We haven't seen any clients cancel any projects, we just know that they come to us and give us of unexpected timeframe and then the.

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 deepwater 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 true.

And I would say, creating some uncertainty going forward, we still think see things coming it's just the.

Maybe not as as of.

As steep of ramp from what we can see right today.

Okay I will alter.

I will also point out that we do have an extension of our deepwater Gulf of Mexico project, It's deepwater Gulf of Mexico Phase II project, we've had new subscription <unk>.

<unk> into that and so our clients are planning on getting after these projects timing is a little bit unclear right now.

Okay, Okay got it and then.

The head of global mix of.

Activity shifts a little bit more towards gas.

Versus oil.

Could you just remind us kind of does it have any real impact on you.

Your revenue or margins, whether it's gas or oil I'm pretty sure it doesn't.

You talked a little bit of that.

Of that changing mix of how that could change if it doesn't change your your revenue and margin outlook.

Yes so.

So around the edges at oil projects I would say tend to be a little bit.

More.

Higher value for us.

Things like <unk>.

Like three phase relative permeability, where you've got liquid.

The oil and.

Gas and water you got three phases of that can be moving in the rock that requires some extra lab testing to be done where you have 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.

As our liquid gases that can with liquids, Ken dropout condensates, wet gases, where liquids can drop out and in those cases, you are looking at very similar protocols of testing requirements as you would in.

In an oil reservoir, so I think it depends a little bit on the nature of the gas project.

The gas <unk>.

Quality as to what that's going to be in the second thing is the 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 of very variable I hate to say this for our clients, but tough on our clients good for core lab.

That really drive the amount of of core analysis of the depth of core geologic studies that have to get done.

Okay got you. Thanks.

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

Morning, Scott Good morning.

Morning.

One of the followed James's question.

And just thinking about.

International growth in the second half of the year, and where we could exit it in terms of the rate of change.

Call you guys.

Optimistic that we could see double digit growth.

Internationally.

The core.

Do you guys still retained net you or is there going to be.

We're a little bit of a slower ramp up just the kind of given the color of your scale.

Yes, 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 'twenty compared to the second half of 2021.

But currently.

We would not disagree with projections that would suggest double digit growth low double digit to 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 selected the beyond some of the onto our projects.

So moving maybe a little bit faster at this point.

But there is a little bit of sluggishness offshore.

Heads 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 the trend of onshore versus offshore.

Tilt in client behavior there.

Got you and just prospects for an acceleration in the 'twenty two can be.

Wanted to rate of change the clips of call it 10% to 12% from you get into the the mid teens based on the project Q that's coming together.

Yes.

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.

Little bit hesitant to talk about.

If there is a we said we encountered the third black Swan and the storm that hit the U S. Let's see if there's a fourth of <unk> one out there, but I think we'll stick with what we've what we said we see improvement throughout the remainder of 2021 into 2022 right now.

Of our client contacts or are improving giving us fair amount of optimism for that and I think the numbers that Chris throughout there in terms of year over year, I think thats about as far as we want to get right now in terms of guidance.

Got it understood I appreciate the color. Thank you Scott.

Okay.

The next question comes from Sean <unk> with Jpmorgan. Please go ahead.

Good morning, Sean Thanks, Ron and good morning good.

Morning, maybe just to clarify on that last point.

You're you're constantly we're going to see continued progress in R&D.

The double digit growth in the back half of the year half on half back.

Back half of 'twenty, one of ours back at 20.

Implies R&D could get back to maybe something like a $90 million.

There is something close to that run rate per quarter.

That kind of within the range of expectations I'm, just trying to get a sense for.

It's quite a buildup of the <unk> results as you make sure I have a good sense of what that range can look like.

I think Thats I think thats right I mean, I think we the guidance that Glen gave shows we can always see improvement quarter over quarter are lining up for Q2, and we think that accelerates a bit in the back half of the year right. Okay that makes sense. Okay. Thank you and then there are some of the sorry go ahead, David some assumptions in there though that.

Of these COVID-19 infections and Lockdowns.

That those start to dissipate in the second half of the year that is built into our assumptions.

Right, Yes, that's completely fair. So then maybe just come back the incremental margins to dial in a little more clarity there historically.

The new preferred investors to focus on year over year Incrementals, rather the sequential.

So when we look at 2020, it's a bit the maps of bit messy, just given our the margins were still fairly elevated versus where they are today.

The went negative for a quarter, so youre guiding to say, 50% Incrementals medium term near term something lower presumably that's on the sequential basis for the next couple of quarters, just mathematically how are you.

Guiding investors around how the margins progress, yes, I think I think that's you've got the right.

Our view on it there I think <unk>.

Summarized it pretty well there it is going to be choppy and I would say towards the low side.

On Incrementals for the next quarter or two.

Then as we sort of get back to get.

Get those cost dialed back into the system revenue continues to grow you will see us start that path back towards historic incremental margins I don't know that it will happen in a step function fashion, but I think it will it will build from there and what we look at is what what would our 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.

Got to take care of of some employee sacrifices.

That have been made and I can tell fulfilling it is to see the loyalty thats been display to us of our employees as we navigated. This we want to take care of them as soon as possible and thats going to be of 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 will tend to gravitate to more of a sequential sort of comparison as we get into environments, where it's a little bit more steady than we probably kind of shift back to sort of year over year comparisons.

Very helpful understood. Thank you.

Thanks, Shaun I think we've got time for.

At least one more let's keep going.

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

Yes. Thanks, good 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 misconstrue. This year at the FDA ATM was more so you guys can play offense as opposed to play defense.

I think you mentioned freeing up some optionality for for M&A or some other types of strategic investments I think you've talked about the organic strategic investments, but are you seeing opportunity or anything interesting on the M&A front is that why you weren't really relatively fast on this program or how would you frame that.

Yes, I think you've summarized it pretty well there.

We were we were in a period, where we were I would say having to navigate the leverage ratio.

In terms of or how.

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.

Of some of you know this I came to core lab more than 20 years ago through an acquisition I understand how and when the right opportunity presents itself you want to take advantage of that.

I'd say that that.

Whenever we look at opportunities, though the same discipline that core lab has historically apply 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 internally are of historically are internal.

The project on our 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 of 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 mid term. There are many opportunities ahead, we have never been better operationally or technologically positioned to help our global core.

Client base optimize their reservoirs and to address the 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 will 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 of strengthened its balance sheet.

In closing, we think of appreciate all of our shareholders and the analysts that cover core lab, 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 has now concluded. Thank you for attending today's presentation you may now disconnect.

[music].

Okay.