Q2 2021 Core Laboratories NV Earnings Call
[music].
Good morning, and welcome to the core lab Q2.2021 earnings call.
All participants will be on listen only mode shutting any assistance.
Any signal conference specialist by person historically, followed by zero.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then 1 on your telephone keypad to withdraw your question. Please press Star then 2.
Please note. This event is being recorded I would now like to turn the conference over to Mr.
Fair enough chairman and CEO of core lab. Please go ahead.
Thanks Ian.
Good morning, and 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 second quarter 2021.
Earnings call.
This morning, I'm joined by Chris Hill, Core's, Chief Financial Officer, and Gwen Schreffler, Core's Senior Vice President and head of Investor Relations the core.
Call will be divided into 6 segments, Gwen will start by making remarks regarding forward looking statements will then have some opening comments, including a high level review of important factors and core.
Of course Q2 performance. In addition, we'll review core strategies and the 3 financial tenets that the company employees to build long term shareholder value.
Chris will then give a detailed financial overview and have additional comments regarding shareholder value.
Following Chris Glynn will provide some comments on the companys outlook and guidance.
Ill then review course, 2 operating segments detailing our progress and discussing the continued successful introduction and deployment of core lab technologies as well as highlighting some of Core's operations and major projects worldwide. We will then open the phone for.
A Q&A session.
I'll now turn the call over to Gwen for remarks on.
On forward looking statements.
Before we start the conference. This morning, I'll mention that some of the statements that we make during this call may include projections estimates and other forward looking information.
This would include any discussion of the Companys business outlook. These types of forward looking statements are subject to a number of risks and.
<unk> relating to the oil and gas industry business conditions International markets International political climate and other factors, including those discussed in our 34 Act filings that may affect our outcome should 1 or more of these risks or uncertainties materialize or should any of our assumptions prove incorrect actual.
It's my very immaterial respects from those projected in the forward looking statements. We undertake no obligation to publicly update or revise any forward looking statement, whether as a result of new information future events or otherwise for a more detailed discussion of some of the foregoing risks and uncertainties. Please see.
Result on 1 a risk factors in our most recent annual report on form 10-K, as well as other reports and registration statements filed by us with the SEC.
M.
Our comments include non-GAAP financial measures reconciliation to the most directly comparable GAAP financial measures is included in the press.
Press release announcing our second quarter results. Those non-GAAP measures can also be found on our website with that said I'll pass the discussion back to Larry.
Thanks, Glenn first our thoughts remain with all of those who have been affected by the global pandemic. While there are certainly reasons for optimism as the vaccines become more widely distributed.
Distributed throughout 2021, and as demand for oil and gas continues to recover.
Global case counts hit their highest levels since the beginning of the pandemic during the second quarter of 2021.
Virus related issues are still causing unpredictable schedules and our clients' activities travel complications and logistical hurdles for field services and.
Product shipments, particularly outside North America.
Number of countries are core across our global operating network, such as Brazil, Indonesia, Malaysia, Kuwait, and India saw increasing case counts in many countries maintained enacted reenacted, our expanded precautionary measures travel restrictions and even lockdowns.
In Q2.
Even as we progressed through Q3, some countries are still at or near the highest caseload levels.
They have experienced over the course of the pandemic. Despite these hurdles core remains ready to fully service our clients' needs.
As discussed in our last current earnings release, no operational impacts of.
Downs on winter freeze were expected in Q2 and non occurred we did however, incur expenses related to temporary measures that has to be deployed at several facilities. Throughout Q2. These temporary measures are now concluded and permanent repairs have been affected.
Looking at core lab performance in the second quarter of 2021.
Q3 saw increased revenue increased EBITDA increased free cash flow increased EPS compared to Q1 at.
At the same time core continued to execute on on its strategic financial objectives by reducing net debt and improving its leverage ratio compared to the first quarter.
Client activity in both business segments.
Improved sequentially Reza.
Reservoir description, having greater international exposure did face some continuing pandemic related headwinds and project delays during the quarter.
Core's production enhancement segment exceeded sequential top and bottom line expectations with U S energetic sales nicely outpacing the growth in completions.
The company remains optimistic about the remainder of 2021 as activity in North America continues to show improvement in international activity builds momentum.
Before we move on I want to thank core management team and employees for their hard work during the unprecedented challenges of the past 15 months I also want to thank them for their dedication loyalty and adaptability.
<unk> in meeting all of our clients' needs and for the personal sacrifices that many have endured 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.
Thanks, Larry before we review the financial performance for the quarter. The guidance, we gave on our last call and past calls specifically.
Included the impact of any FX gains or losses, and assumed an effective tax rate of 20%. So accordingly, our discussion today excludes any foreign exchange gain or loss per current and prior periods.
Now looking at the income statement revenue from continuing operations was $118.7 million for the.
Second quarter up almost 10% from $108.4 million in the prior quarter.
The increase is primarily associated with strong demand for our energetic products in both the U S land and international markets.
While we expect the growth in U S land activity to moderate we expect the current momentum for international activity to continue.
A new building for the remainder of 2021.
Of this revenue service revenue, which is more international was $86.3 million for the quarter up about 3% sequentially from $84 million last quarter.
The increase in service revenue is partially partially associated with the disruption caused by the winter storm in.
The first quarter.
However, as Larry stated earlier additional growth in the quarter was tempered due to ongoing pandemic disruptions and restrictions in many regions outside the U S.
Product sales, which is equally tied to North America and international activity were $32.5 million for the quarter.
Strong.
<unk>, 3% increase from the previous quarter.
Nice growth in the U S land activity resulted in an even stronger demand for our perforating and energetic products in the U S. <unk>.
Additionally, in our international product sales were also strong at some larger orders were completed in the quarter.
Moving on to cost of <unk>.
Services ex items for the quarter was just below 78% of service revenue compared to 76% from the prior quarter.
The increase in cost of services was negatively impacted as the company is in the process of restoring some temporary cost reduction measures.
Previously put in place during the pandemic.
As we.
<unk> third further into the recovery with operational activity and our laboratory utilization improving and employee costs are fully restored our incremental margins on service revenues will improve and trend towards historical norms.
Cost of sales ex items in the second quarter was 82% of revenue and has improved.
<unk>, 4% last quarter and for the last 4 consecutive quarters.
As product sales continue to grow manufacturing efficiency and absorption of fixed costs will also continue to improve.
G&A ex items for the quarter was $9.7 million compared to the last quarter of $7.7 million year.
Year to date G&A at.
From $18.4 million compared to 22 million for the same period last year.
As we progress through 2021, the timing and extent to which we have restored and continue to restore employee compensation levels could also impact our G&A expense for future quarters.
Depreciation and amortization for the quarter was Powerpoint.
$17 million and pretty flat compared to the $4.9 million last quarter.
EBIT ex items for the quarter was $13.2 million up 10% from $12 million last quarter, and representing an EBIT margin of over 11%.
Our operating income for the quarter on a GAAP basis was $12.8.
Aidan.
Interest expense was $2.5 million and down from $3.2 million in the last quarter ex items, reflecting the decrease of our long term debt at the end of last quarter.
Income tax expense for the quarter was $2.1 million at an effective tax rate of 20%.
Effective.
<unk> 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 $8.5 million up.
Approximately 22% sequentially from 7 million last quarter GAAP.
GAAP income from continuing operations was $8.2 million for the second quarter of 2021, which is comparable to last quarter.
Earnings per share from continuing operations ex items was <unk> 18 for the quarter also up 20.
A percent from last quarter.
GAAP earnings per diluted share from continuing operations was <unk> 17 per the quarter.
Moving on to the balance sheet receivables were $93.2 million on increased approximately $7 million from the prior quarter.
However, our dsos for the second quarter have improved to 64.
Which are down from 66 days last core last quarter.
Inventory ended the second quarter and at $38.9 million down slightly from approximately $39.1 million last quarter.
Inventory turns continue to improve with increased product sales.
For the remainder of 2 <unk>.
'twenty, 1 we continue to anticipate inventories to levels to decrease slightly how's.
However, less than previously expected as we are now projecting to carry larger quantities of raw material materials to help mitigate longer lead times and the supply chain and an increase in cost of raw materials.
On the.
Liability side of the balance sheet, our long term debt was $210 million at the end of the second quarter and considering cash of $33.6 million net debt was reduced to $176 million or a decrease of $5.8 million from prior quarter and.
Our leverage ratio was 2.18 as of June.
<unk>, which is also down from $2.33 last quarter and is anticipated to continue decreasing.
Our debt is now comprised of 4 series of senior notes.
Of these notes $75 million is coming due on September 32021, and will be retired using excess cash.
Cash in excess capacity on our $225 million credit facility.
Currently there are no borrowings and over $214 million in borrowing capacity under the facility.
We will continue with our longer term strategy to Delever the company.
Looking at cash flow for the second.
Winter of 2021 cash flow from operating activities was $9.5 million and after paying for $2.9 million of Capex for the quarter. Our free cash flow was $6.6 million up from $5.2 million in the first quarter.
Capex for 2021, we will continue to be aligned with activity levels and growth.
<unk>. The company continues to anticipate activity levels will improve in the second half of 2021, and we would also expect our capital expenditures to increase but remain in line with historical levels, while on a growth period.
Core will continue its strict capital discipline and asset light business model with capital expenditures.
<unk> is primarily targeted at growth opportunities and initiatives.
This also marks another quarter, where core lab generated free positive.
Positive free cash flow and we are projecting to continue generating positive free cash as we look ahead to the remainder of 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 those shareholders, who utilize discounted cash flow models to assess valuations.
I'll now turn it over to Gwen for an update on our guidance on outlook. Thank you Chris for the remainder of 2021.
But he will continue to execute our strategic plan with a focus on generating free cash flow and reducing net debt while maximizing return on invested capital. Additionally, as part of the company's 2021 strategic focus we will continue to invest in targeted client driven technologies that aimed.
And kind of solve problems and capitalize on cores growth opportunity.
The company remains well positioned to meet the needs of our clients with ample liquidity to invest in its global capability.
These capabilities include our expanding proprietary databases, along with innovation in.
Aimed to official intelligence and machine learning, which are the foundation of core transformation digital technologies.
With the rapid onset of COVID-19 variant and continued market disruption the pace of economic reopening has slowed however, we remain optimistic about.
Our growth opportunities throughout the remainder of 2021.
As the momentum for international crude oil markets continues to build in U S activity continues to moderately progressed.
Strong crude oil commodity prices, the lack of investment in international and offshore crude oil development and.
On increasing crude oil demand continue to support a recovery of the energy industry over the mid to long term. These crude oil market circumstances are resulting in an increase in the international rig count and heavy oilfield equipment coming under contract, which are leading indicators of a growing international cycle.
Michael with having more than 70% of our revenue exposed to international activity, we remain active on international projects.
As additional field development projects emerge wells need to be drilled and reservoir rock and fluid sample before reservoir description realizes a revenue.
Opportunity.
Expansion of the international market provides growth opportunities for the company into the second half of 2021 and beyond with a particular focus on the South Atlantic margin, Mexico, and the Middle East.
Considering the improvement in international activity in the U S land.
Tivoli projected to grow modestly from the second quarter level, We project third quarter revenue to range from 122 million to 126 million and operating income of 14 million to 15 million, yielding operating margins of approximately 12% with.
With incremental margins ex items of 20% to 25%.
As stated during the second quarter outlook in April 2021, as employee costs are reinstated into the companys cost structure incremental margins will be temporarily impacted once these costs are fully restored.
The land that we will expect our historical incremental margin performance or better.
For the third quarter 2021 is expected to modestly improve to approximately 19 to 21.
Core's third quarter, 2021 guidance when compared to our third quarter.
<unk> thousand 21, 2020 performance represents double digit international and company growth and revenue.
In summary, we see activity levels and financial performance improving throughout the remainder of 2021.
Core growth.
Growth opportunities are directly related to existing long term projects returning to normal workflows as well as expanding client activity and new market penetration, particularly internationally.
The company's third quarter 2021 guidance is based on projections for underlying operations and excludes.
2 the gains and losses and foreign exchange.
Third quarter 2021 guidance also assumes an effective tax rate of 20%.
Now I'll turn it back to Larry.
Thanks, Greg.
First I'd like to thank our global team of employees for providing innovative solutions integrity.
<unk> superior service to our clients the team's collective dedication to servicing our clients is the foundation of core lab's success and has been very visible during the current challenges.
Turning first to reservoir description for the quarter revenue came in at $78.3 million up 2.3% sequentially. However, operating.
Income and margins were negatively impacted as the company is in the process of reinstating temporary cost control measures and pandemic related project delays.
Continue to weigh on operational efficiencies international projects have progressed at a slower and less linear pace than anticipated thus far.
By the nature of the business.
Reservoir description performance historically has lagged directional changes in client activity looking back to 2020.
Reservoir description margins averaged over 15% for the full year at a time when many industry.
At a time with industry activity contracted sharply and many oilfield service company struggled to maintain profitability.
As industry activity recovers reservoir description will respond more slowly than say oilfield service companies with direct exposure to well construction and other early cycle client spending.
As we look ahead, we see the growing international rig count as a harbinger of an improving landscape for reservoir description a trend that will project that we.
Project will play out over the next several quarters and throughout 2022 now.
Now to some operational highlights during the second quarter of 2021 core lab under the direction of reconnaissance Energy Africa Limited was engaged to provide laboratory analysis on conventional cores from exploratory wells in the <unk> basin.
In north and northeast in Namibia. The laboratory program for this Recon Africa project is leveraging a number of proprietary and patented technologies such as core lab's rapid zoom service to assess rock properties and identify perspective reservoir targets over a thick interval of predominantly marine strata.
Rapid zoom.
<unk> allows the scientists involved in the project to collaboratively examine the core samples at high resolution, revealing details on lithology sedimentary structure and stratigraphic relationships all while working from remote locations.
The analytical program for these <unk> basin cores also includes Core's proprietary.
Native state electrical properties laboratory testing, which allows for both improved calibration of downhole electric logs and expedited assessment of oil in place.
<unk> is very pleased to be assisting the technical experts at Recon Africa and their evaluation of potential reservoirs in this expansive onshore sedimentary basin.
Also in the second quarter core lab continue to see growing opportunities related to carbon capture and storage.
Core is immediate opportunities in this area are in evaluating the storage systems. Specifically. These include evaluating the geologic attributes of the rock that form the storage container as well as the rock that form the seal.
<unk> or the lid on the on the stratigraphic container core.
Core is also tasked with determining reactions that occur between the injected cotwo in the rocks as well as the flow efficiencies of <unk> as it passes through the core systems of the rock.
In addition laboratory tests are needed to identify reactivity between the <unk> and.
Patrick Carbons and ore formation brines that are present in the ports of the rocks.
Where hydrocarbons are present to the storage rock such as in depleted or partially depleted crude oil reservoirs the impact of cotwo on the hydrocarbon system needs to be evaluated with laboratory testing.
This testing will determine if the injected cotwo.
<unk> will positively impact oil production that is present in enhanced oil recovery opportunity or negatively impact oil production by perhaps causing asphaltene precipitation and resulting in permeability impairment.
<unk> is currently assessing Sidoti <unk> injection and <unk> opportunities for our clients on a project in.
<unk>, Canada using proprietary reservoir fluid miscibility in core flooding technologies core Lubbock core lab is determining the interaction between the remaining crude oil in place and the injected cotwo in order to assess the economic feasibility of this potential EUR opportunity.
This is just 1 example of the carbon capture and storage.
The western opportunities that are emerging for core lab in all carbon capture and storage programs direct physical laboratory measurements of the rocket fluid properties will be an essential part of evaluating subsurface cotwo injection opportunities.
Moving now to production enhancement, where core lab strengths in both energetic.
Net ex systems and completion diagnostics help customers optimize their well completions.
Revenue for production enhancement came in at $40.5 million up over 27% sequentially exceeding company's second quarter 'twenty 1 projections.
Operating income was $3.9 million up over 100% sequentially operating.
Operating margins were 9.5% for the second quarter of 2021 up over 380 basis points sequentially.
During the second quarter of 2021 core lab, so expanding market acceptance of its innovative proprietary pulse wave technology.
Pulse wave system was used to generate perforations in.
Capex injection well.
Pulse wave uses a unique energy transfer technology to trigger multiple unevenly spaced perforating guns in a single downhole trip.
Traditionally operators would place a series of inert guns between the line guns to create a continuous communication strength. This is a time intensive.
Process, requiring multiple downhole trips. These types of configurations may lead to extended rig times and it can have lower reliability.
In the second quarter of 2021, our client expressed a need to complete a horizontal well with predetermined unevenly spaced stages with an aim to maximize injection efficiencies.
On a comp utilizing the pulse wave system perforating guns were loaded with up to 20 perforating charges per gun with intervals varying from 125 to 284 feet between each line gun by.
By using pulse wave to sequentially triggered a lot of guns the system eliminated the need for hard wired gun to gun connections and thus potential.
Multiple potential failure points.
Perforation operation was performed as planned and resulted in the client savings over 30% on the cost of consumables.
Reduced rig time, the client was very satisfied with the high reliability and effectiveness of the pulse wave system there.
They are currently making plans to expand the use of pulse.
<unk> multiple for future injection wells and potentially for repurpose rating existing hydrocarbon producing wells pulse.
Pulse wave is just 1 of many core lab energetic technologies that were developed by our internal team of experts of course cost efficient internal pipeline of new technology offerings as a cornerstone of the company's success stay.
Wave for more details on new client driven energetic solutions that are being developed by the core lab team.
Also in the second quarter of 2021 course completion diagnostic services were on display core.
Of course, <unk> Gan technology was used in an offshore South Atlantic margin development project to assess the effect.
And this of an open hole horizontal gravel pack.
In offshore environments operators, often complete wells using a gravel pack. The goal is is to gravel pack the screen annulus space in order to stabilize the formation and control the entry of formation volume during production the traditional method for assessing the competence.
Stay tuned on gravel packs as a standard density logs, which measures the relative density across the gravel pack.
To better assess the quality of the gravel pack core deployed its proprietary high resolution pack scan tool to detect even minor gravel pack anomalies.
The <unk> tool identified avoid in the annular pack that would have.
Screen erosion and ultimately a failure of the completion.
After reviewing the pack scan log core's diagnostic engineers recommended that the operator bring the well onto production at a lower rate, which would enable the annual avoid to be filled in from the ample reserve gravel that was in place to above the producing interval.
Based on core.
Core's recommendation by using this data driven approach the client decided to bring the wells production on slowly minimizing risk of a very expensive completion failure that.
That concludes our operational review, we appreciate your participation and Ian will now open the call for questions.
Moving now begin the question on.
Led sessions.
You May press Star then 1 on your telephone keypad.
You're using a speaker phone please pick up your handset before pressing on the keys.
To withdraw your question. Please press Star then 2.
At this time, we will pause momentarily to assemble our roster.
So your first question comes from Continental.
Corner, Illinois.
Morgan Stanley. Please proceed.
Yes. Thanks good.
I wanted to talk about.
Good morning, Good morning, I wanted to talk about reservoir description.
International was the big driver there.
We've got some fairly explicit guidance or at least long term.
Jeremy estimates of activity growth from Crimson and the large GAAP service providers out there I'm curious.
How should how should investors think about this on a on a structural basis would you say that you're going to grow at a similar rate, but at a lag like you are alluding to do you think.
Maybe a bit more muted because of the well construction.
Thanks.
Higher growth. This cycle, just just high level framework for how people should think about that.
Yeah. Good question.
Tried to we tried to.
Get that message out it's often easy to just sort of look at the macro trends from some of the bellwethers in the industry and say hey, everybody should be moving.
At the same pace and it's just.
In that segment of our business.
The heavy metal guys have to get into play before reservoir description gets its turned it back so the way I would try to to clarify that even further as to say, we will tend to lag the well construction side of the.
Then, we'll eventually catch up and then well I would say we will go back to what you saw on our core lab, historically, which is we will tend to be at or above by a few hundred basis points the growth rate of the cycle.
And then as we saw last year.
When the industry inevitable.
Business hopefully comes many many years from now where the industry goes into a downturn reservoir description will lag on the way down just like it did last year. So I think the perspective is.
We're going to lag behind the well construction will eventually catch up and exceed the rate growth.
In well construction and then that should carry us well into the next cycle.
Cycle got it that's helpful context.
1 thing that I guess is a bit different this time around you guys have historically talked about a lot.
A portion of our.
R&D being related to producing fields and obviously there is a fair bit of production off line in previously producing fields. So I guess I'm curious is there.
There is there a significant portion of the revenue down drop that you've seen that sort of related to those producing fields that shape, maybe lead or is that putting too fine a point on it.
No I think youre seeing in the right way I mean, we still have clients that are out of the office.
And it's hard to predict.
Where that's going to pop up next.
We had we had situations.
On.
In Asia Pacific where.
Large clients to shut their office for a couple of weeks because the country was basically put into lockdown and so thats going on thats been unpredictable as much is whether you're a financial analyst covering the oil industry section or manager trying to.
Operation.
In the sector, it's not as linear the recovery from the pandemic is not nearly as linear as any of us would like and the hard part for US is the unpredictability of where it's going to pop up next and where we have projects that we think are going to happen.
Next week or next month may slip into.
Until the following quarter. So its just an unevenness of project.
Expansion or progression I guess is the best way to put a progression.
Okay. Thank you very much I'll turn it back.
Thanks, John.
And our next question comes from John Daniel of Simmons John. Please proceed.
Management.
Thank you no longer Simmons.
So very quick question for you on.
Because I'm not well versed on current Africa oil and gas development, but just if you could elaborate on the granular base in Yorkshire opportunity.
Years ago, if you remember there was always.
From excitement when day would introduce a new shale opportunity in North America I'm. Just curious are we about to see this or just any color on that would be helpful. Yeah. So.
John it's.
This is.
I am going on I'm going to default to core lab's normal answer on this is <unk>.
For details on the on the play.
Hey.
Prospect, it's best to go talk to the good friends our good friends.
At Recon Africa for any sales, but what I can say, though is this is a.
Very intriguing sedimentary basin on.
Onshore.
That has.
Got a lot of opportunity for a variety.
T of.
Perspective.
<unk> horizons and traps.
So that's as far as I'll go on that and direct you to Recon Africa, but it's a big it's a big Big basin with a fixed section of sedimentary mostly marine Australia.
Right a lot of things to pick through there.
So we're.
We're glad to be helping them.
Okay.
I've got 2 more quick 1 for you just on the close rate.
How widespread.
Promise.
Recently, we just sort of a FERC run of it and then what's.
The opportunity set and does it potentially.
Actually cannibalize any of your existing products.
No.
We've talked about it in prior releases going back over the last couple of years.
I think what we're seeing is people are starting to recognize the advantage of.
Having.
Tubing between sections of.
Of of live guns, rather than a series of an art guns with a bunch of of connections between them.
So, particularly where there is uneven spacing that might occur in a re completion.
We see that.
As a real advantage in that the assembly time to put that altogether is much better.
So the consumable costs are lower the rig time is lower and we get very high efficiency without the call at all the potential weak links of having so many core.
Connections in the down downhole perforating strength, so we don't see this as a.
Cannibalizing anything in that all of that.
Ting is out of this system is an art guns, not a big deal for us.
So still have to buy guns delta by charges, you're still going to need all of the other components that make that work. The pulse wave system. Just allows you to do that with all that sort of.
Unreliable connect.
Connection.
Between the line.
Guns.
Okay.
And so.
I think theres a lot of growth opportunities for us, but I would still say the big part of that story is ahead of us rather than what's happened already.
Hey.
Thank you.
The last 1 on the surplus to good growth.
With your question.
And then just as it relates more towards your North American operations.
Are you on the camp that we see.
Normal Q4 seasonality.
The potentially late this year or do you see an acceleration as people prepare for next year, just I know, it's early but just on yeah.
Yes, so I think the I'd start by answering that is that the feedback we're getting from our clients right now and recognizing that maybe.
Some different players have different client mixes, but from our clients, which tend to be more of the name brand clients that are technologically focused are willing to pay a bit extra for technology what.
What we're not seeing lineup for the end of the year at this point is a frac holiday 2018 to 19 Frac holiday.
Having been around.
For 30 years, there's always a tendency for a bit of a okay. It's Christmas time.
We're missing a part or something or there's a delay of the rig let's just kicked us to next year I would expect that to play out.
Over the last couple of weeks.
The year like it has over many many years I.
I don't think Theres any reason why that wouldn't happen again, you, sometimes throw a little bit of weather in there too depending on where you are but I think the good news is from here we see.
Modest growth continuing.
I think it'll be a more stable year overall than we had when the frac holidays showed up call. It October November time, and really put the.
Brakes on Q4 activity, but I do think a little late in the quarter and the fourth quarter rollovers not unlikely okay.
Thank you all very very much.
Thank you John Okay John.
As a reminder, if you have a question. Please press Star then 1.
Our next question comes from Mike Sabella Bank.
America proceeds.
Hey, good morning, everyone, Hey, Mike.
So it looks it looks like the guide here is implying some pretty decent incrementals at the segment level and <unk> sort of beyond what the 2025% that you quoted assumes if we just assumed corporate and other goes back to kind of normal levels.
I know this has been the commentary the Incrementals would pick up in the second half of the year and some of these costs that.
You all alluded to came back in the first half.
Are we now back to an area, where we can start expecting strong incrementals at the segment level or you know could we still see some noise in the near term.
Yeah, Hey, Mike.
Mike This is Chris and yeah. That's that's a good observation. We did we did have some benefit in the second quarter that was sort of other income and we typically do not forecast that to come through those are usually a handful of things that are not directly tied to the underlying operations. So I think.
Good observation that at the segment level, the incrementals are a little bit higher than what we had forecast for the total company and right in line with what you were saying assuming sort of G&A and other income as sort of comes in it's sort of a net zero.
Incrementally.
With respect to your comment on the timing.
So we talked about that in the last quarter that those would start to roll in the second quarter, but it was going to take us several quarters to kind of do that and the pace at which the activity level sort of picks up will kind of dictate the pace at which we can restore employee costs other temporary cost measures.
That's coming back in so that is still in play for the third quarter that is putting a little bit of downward pressure on the incrementals as we start to bring employees in some of these other cost and kind of get back to sort of fully cost loaded as we get a little further into the recovery you'll receive youll see us turn back to sort of normal.
Or is that more traditional incrementals and we've talked about that that can be 50% to 60% plus.
So that's a little bit later.
It could start to pick up in Q4, but I would say youll really start to see that more in 2022.
Okay.
Got it got it thanks.
And then I was.
Kind of hoping maybe we could just step back and you'd give us an update on what the competitive landscape looks like in reservoir description I know in the past you've said, it's really your number 1 competitor is the customer and if they do this work in house or not is that still the case you know have you noticed any change in income.
And customer pattern.
As you know kind of day, they are looking to keep their own costs down.
Yes.
No no major change I would just reiterate that over over decades here. The progression has been for companies to during during down cycles to eliminate internal laboratory.
Capabilities.
And farm it out when they need it and so that trend has continued through this cycle.
And we don't see any change in that direction there are no.
No major changes in the landscape whatsoever.
Just simply an activity.
On a pace of progression.
Testing, we're having to manage our way through with reservoir description it's.
It's frustrating at times, but our conversations with our clients on their projects are continuing.
There is no move toward more in housing of work.
That has historically been and if anything.
There has been.
That was in housing of work as some companies have downsized internal laboratories overtime, we think that sets up very nicely for us into the next cycle.
Understood. Thanks, everyone.
Okay.
I guess I think it's a pretty busy earnings.
Ben let lease morning here so.
We can wrap up here in summary, Core's operational leadership continues to position the company for improving client activity levels throughout the second half of 2021 and into 2022, while there are still operational uncertainties in the near to midterm. There are many opportunities ahead.
We have never been better operationally or technologically positioned to help our global client base optimize their reservoirs and to address their evolving needs.
We remain uniquely focused.
And are the most technologically advanced client focused reservoir optimization company in the oilfield service sector. The company will remain.
<unk> on generating free cash and returns on invested capital. In addition to our quarterly dividends will bring value to our shareholders via 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 strength of its balance sheet. So in closing.
We thank and 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 a worldwide employees that have made these results possible.
We're proud to be associated with a continuing achievements. So thanks for spending time with us and we look forward to our next update goodbye for now.
When the driver on the conference is not included thank you for telling today's presentation you may now disconnect.
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