Q3 2021 Core Laboratories NV Earnings Call
Good morning, and welcome to the core laboratories third quarter 2021 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
Yeah.
To Oh after today's person quotation there will be an opportunity to ask questions to ask a question. You May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference.
Her to Larry Bruno Chairman and CEO. Please go ahead.
Thanks Debbie.
Good morning in the Americas, Good afternoon in Europe Africa, and the Middle East and good evening in Asia Pacific, We'd like to welcome all of our shareholders analysts and most importantly, our employees to core laboratories third quarter 2021 earnings call.
This morning, I'm joined by Chris Hill, Core's, Chief Financial Officer, and Gwen Schreffler, Core's Senior Vice President and head of Investor Relations.
The call will be divided into six segments, Gwen will start by making remarks regarding forward looking statements will then have some opening comments, including a high level review of important factors and Coors Q3 performance.
In addition, we will review core strategies and the three financial tenets that the company employs to build long term shareholder value.
Chris will then give a detailed financial overview and have additional comments regarding shareholder value.
Following Chris Gordon will provide some comments on the companys outlook and guidance.
I will then review Core's, two 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.
Then we'll open the phones for Q&A session I'll now turn the call over to Gwen for remarks are forward looking statements. Thank you Larry before we start the conference. This morning, I'll mention that some of the statements. We make during this call may include projections estimates and other forward looking information.
Include any discussion of the company's business outlook.
These types of forward looking statements are subject to a number of risks and uncertainties relating to the oil and gas industry business conditions International markets International political climate and other factors, including those discussed in our 34 Act filings that may affect our outcome should one or more of these risks are uncertain.
These materialize or should any of our assumptions prove incorrect actual results may vary in material respects from those projected in the forward looking statements. We undertake no obligation to publicly update or revise any forward looking statements, whether as a result of new information future events or otherwise for a more detail.
A discussion of some of the foregoing risks and uncertainties. Please see item one 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 and the AFM.
Comments include non-GAAP financial measures reconciliation to the most directly comparable GAAP financial measures is included in the press release announcing our Q3 quarter results.
That is non-GAAP measures can also be found on our website with that said I'll pass the discussion back to Larry.
Thanks Quinn.
Our thoughts remain with all those that continued to be affected by the global pandemic during the third quarter Global case loads rose and approached the highest levels recorded over the course of the pandemic.
This negatively and unevenly impacted global commerce and continued to pose headwinds to oilfield activities.
Still global demand for hydrocarbons continues to rise and inventories continue to decline signaling positive trends for future oilfield activity.
Iris related issues are still conflict still causing unpredictable schedules in our clients' activities travel complications and logistical hurdles for field services and product shipments.
A number of countries across our global operating network saw increasing Covid case counts and many countries maintained enacted re enacted or expanded precautionary measures during Q3.
Despite these hurdles core remains ready to fully service, our clients' needs and we see a gradually improving landscape for client activity.
During the third quarter tropical weather systems resulted in disruptions in and along the Gulf of Mexico significantly reducing client activity for several weeks.
Multiple core lab offices, along the Gulf Coast were affected by storm related closures and subsequent power outages. Many lasting for weeks I'm happy to report that all of our employees are safe and that there was only minor temporary impact on the company's physical infrastructure we.
We appreciate the hard work of our employees along the Gulf coast to both mitigate damage and spool up operations as quickly as possible.
Looking at <unk> performance in the third quarter of 2021, the company saw increased cash from operations and increased free cash flow.
In addition, operating margins expanded in both segments during the quarter.
At the same time core continued to execute on its strategic financial objectives by strengthening its balance sheet, reducing net debt and improving its leverage ratio compared to the second quarter.
Reservoir description, having greater international exposure continues to deal with the uneven progression of already committed project work as some clients are only now beginning to return to normal work schedules due to COVID-19 accommodations.
Now to review core lab strategies, and the financial tenants that core has used to build shareholder value over our 26 plus year history as a publicly traded company.
The interest of our shareholders clients and employees will always be well served by core lab's resilient culture, which relies on innovation leveraging technology to solve problems and dedicated customer service, while we navigate through the current challenges core will remain focused on his three long standing long term financial tenants.
Those being to maximize free cash flow maximize return on invested capital and return excess free cash to our shareholders.
Before we move on I want to thank cores management team and employees for their hard work during the unprecedented challenges of the past 18 months I also want to thank them for their dedication loyalty and adaptability and meeting all of our all of our customers' 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 excluded 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 for current and prior periods.
Additionally, the financial results for the third quarter of 2021 include a charge of $6 5 million for noncash stock compensation expense associated with the future vesting of performance shares for certain employees, who have reached their eligible retirement age.
Although these performance shares share awards continue to be subject to future vesting schedules and company financial performance metrics full recognition of the expense as required by U S. GAAP for employees when they attain their eligible retirement age.
Now, let's review the income statement.
Revenue from continuing operations was $118 million in the third quarter comparable to $118 7 million in the prior quarter and up 12% year over year.
Geographically the U S market continued to grow but this was offset by a sequential decrease in international revenue.
Year over year International revenue for the quarter is up 9% in the U S is up almost 20%.
As Larry mentioned earlier, there continues to be challenges with supply chain and workflow disruptions associated with the pandemic have also continued to have an impact on progression of projects in our international operations and an international shipment of products.
Third quarter results were also adversely impacted by the severe weather events in the Gulf of Mexico.
Of this revenue service revenue, which is more international was $84 $84 8 million for the quarter down slightly from $86 3 million last quarter.
The decrease in service revenue is primarily associated with the ongoing disruptions and does delays caused by the pandemic and many regions outside the U S. But was also adversely impacted by the storms in the Gulf This quarter.
Product sales, which is more equally tied to the U S and international activity were $33 2 million for the quarter up 2% sequentially.
Coming off very strong growth in the second quarter.
Our perforating and energetic products remain in high demand. However, the growth in the sales to the U S market in the third quarter was partially offset by a decrease in international sales.
Second quarter included some large international orders, which can vary from quarter to quarter.
It is also worth mentioning that challenges with supply chains for our materials continue and did impede some growth opportunities during the quarter for both the U S and international markets.
Longer lead times in short supply for certain raw materials limited the growth in our manufacturing and production capabilities during the quarter.
Moving on to cost of services ex items for the quarter was 79% of service revenue and fairly consistent to prior quarter.
As discussed during our second quarter earnings call cost of services are expected to increase as we restore some temporary cost reduction measures previously put in place during the pandemic as.
As we progressed further into the recovery with operational activity and our laboratory utilization improving and then went employee costs are fully restored our incremental margins on services will improve and trend towards historical norms.
Cost of sales ex items in the second quarter was just below 78% of revenue and has improved from 82% last quarter and for the last five consecutive quarters as product sales group continue to grow manufacturing efficiencies and absorption of fixed costs. We will also continue to improve.
G&A ex items for the quarter was $8 6 million compared to last quarter of $9 7 million.
Year to date, G&A is $26 million compared to 31 million for the same period last year and 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 the next few quarters.
G&A ex items for the full year of 2021 is expected to be between 35% to $37 million, which is about a decrease of 10% from last year.
Depreciation and amortization for the quarter at $4 5 million was slightly lower compared to $4 8 million last quarter.
EBIT ex items for the quarter was $13 million comparable to last quarter, and representing an EBIT margin of over 11%. Our operating income for the quarter on a GAAP basis was $6 6 million, which was impacted by the accelerated accounting recognition of the noncash stock compensation expense.
Interest expense was $2 7 million comparable to last quarter, but down from $3 1 million in Q3 of 2020 as we continue to reduce long term debt.
Income tax expense ex items and using a 20% effective tax rate was approximately $2 1 million for the quarter on a GAAP basis income tax expense was $3 million for the third quarter.
As mentioned earlier the third quarter includes a $6 5 million of noncash stock compensation expense that was recognized for accounting purposes and is not deductible for tax purposes. The recognition of this expense in the quarter also increased the effective tax rate for the third quarter.
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 for the fourth quarter of 2021, 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 3 million down slightly from $8 5 million last quarter.
GAAP income from continuing operations was $1 million for the third quarter and includes the $6 5 million of stock compensation expense mentioned earlier.
Earnings per diluted share from continuing operations ex items was <unk> 18 for the quarter comparable to last quarter.
GAAP earnings per diluted share from continuing ops was <unk> for the quarter.
Moving onto the balance sheet receivables were $95 3 million and increased approximately $2 million from prior quarter. Our dsos for the third quarter were 68 days up from 64 days last quarter.
Inventory ended the quarter at $44 1 million up a little over $5 million from $38 9 million last quarter.
Inventory turns for the quarter were $2 five compared to $2 seven in the last quarter.
As previously highlighted last quarter. The company continues to experience longer lead times, and the supply chain and increase in cost of raw materials materials and supplies and in some instances short supply.
The majority of the increase in inventory this quarter is associated with carrying larger quantities of raw materials in an effort to help mitigate the challenges in the supply chain.
Additionally, some larger international product sales anticipated to ship this quarter were delayed at some some of the challenges with international shipments continue.
On the liability side, our long term debt was $190 million at the end of the third quarter of 2021, and considering cash of $19 million net debt was reduced to $171 million or a decrease of $5 4 million from June 30.
Our leverage ratio was two one as of September 30, which is down from $2. One eight last quarter and continues to improve as we work to Delever the company.
At September $30 million to $75 million of 10 year private placement notes, which were issued back in 2011 matured and were retired.
These notes settled we're settled using a combination of $20 million from cash on hand, and $55 million drawn from our credit facility. Our debt is now comprised of $135 million in senior notes and $55 million outstanding on our credit facility or.
Our credit facility remains fully available with over $159 million in borrowing capacity.
Looking at cash flow for the third quarter of 2021 cash flow from operating activities was $11 9 million and after paying for $3 1 million of Capex for the quarter. Our free cash flow was $8 8 million, which is up from $6 6 million in the second quarter.
Excess free cash was primarily used to reduce long term debt and $2 6 million and repurchasing shares associated with our long term share based incentive programs.
Capex for 2021 will continue to be aligned with activity levels and growth opportunities. The company continues to anticipate anticipate activity levels will build for the rest of the year and beyond and we would also expect our capital expenditures to modestly increase but remain in line with historical levels, while end of period of growth.
For the full 2021 year, we expect capital expenditures to be in a range of $12 million to $14 million.
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 and we are projecting free cash to grow as we look ahead to the remainder of this year and beyond we believe evaluating our company's ability to generate free cash flow and free cash flow yield are important metrics 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.
Global crude oil market continues to tighten as demand for crude oil or <unk> pre COVID-19 level, resulting in noticeable increases in the crude oil commodity prices.
Current crude oil commodity prices should also support a higher level and more accelerated pace of investment in international offshore crude oil development projects for 2020 pain and beyond.
<unk> crude oil market fundamentals are reflected in the gradual increase in the international rig count with more oil field equipment coming under contract as the cycle strengthens and IOC NOC and independent expand their investment and maintenance of existing field and development of new field our field.
Extensions, we anticipate operators to increase capital spending by 15% to 20% for North America and double digits for international in 2020 team.
<unk> is well positioned to capitalize on this growth opportunity given our global presence and proprietary technology with core lab, having more than 70% of its revenue exposed to international activity. Both business segment to remain active on international projects.
As additional field development in marriage wells need to be drilled and reservoir rock and fluid samples before reservoir description more fully participate in the cycle.
As disruptions from the pandemic abates.
Expansion of International development provides growth opportunities for both segments into 2022 and beyond with a particular focus on the topic of Atlantic margin.
Latin America, and the Middle East.
As Chris mentioned international revenues.
9% year over year for the third quarter.
The fourth quarter 2021 core expects continued growth and year over year International revenue.
Additionally growth in U S activity is projected to moderately progress 2021 comes to a close.
Core projects fourth quarter revenue to range from $121 million to 124 million and operating income of 13 million to 13 to $15 5 million, yielding operating margins of approximately 12%.
As previously discussed and Coors Prior earnings earnings calls financial performance and incremental margins will be temporarily impacted as some cost reduction measures and now.
2020 continue to be rolled back.
Once these costs are fully restored core expects its historical incremental margin performance to return as client activity expand.
For the fourth quarter of 2021 is expected to be approximately 18 to 22.
In summary core.
<unk> remains committed to its strategic plan and expanding market penetration by introducing new technologies and targeting new market opportunity.
<unk> remains focused on generating free cash flow and reducing net debt, while maximizing return on invested capital as part of course 2021 strategic focus the company will continue to invest in targeted client driven technologies that aim to solve problems and capitalize on our core growth.
The opportunity there.
The company remains well positioned to meet the needs of its clients as the energy industry cycle.
Paul.
The company's fourth quarter 2021 guidance is based on projections for underlying operations and excludes gains and losses and foreign exchange fourth quarter 2021 guidance also assumes an effective tax rate of 20%.
Now I will turn it back over to Larry.
Thanks Quinn.
First I'd like to thank our global team of employees for providing innovative solutions integrity and superior service to our clients. The team's collective dedication to servicing our clients has been very visible during the current challenges and is the foundation of core lab's success.
Turning first to reservoir description.
For the third quarter revenue came in at $79 million up slightly sequentially opt.
Operating income ex items was $8 6 million up 14% sequentially and operating margins ex items improved to 11%.
These segment improvements occurred despite disruptions caused by Gulf coast storms and the global pandemic.
But the nature of the business reservoir descriptions performance historically has lagged directional changes in client activity.
As the 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.
Okay.
As we look ahead, we see the growing international rig count as a harbinger of an improving landscape for reservoir description a trend that we project will play out throughout 2022 and beyond.
Now to some operational highlights during.
During the third quarter of 2021, Core's Advanced Technology Center in the United Kingdom launched an analytical program to provide both core and fluid analysis on our client for our clients operating in the North Sea conventional core was recovered from sandstone strata in the targeted reservoir interval.
Once the cores reach the rig floor upon recovery from the subsurface they were stabilized using proprietary core lab techniques that assure that the natural rock fabric and pore fluids were retained during handling and transportation.
Upon arrival at the laboratory of course were scanned using core's proprietary noninvasive testing and reservoir optimization technologies branded as Nitro.
Nitro includes proprietary dual energy computed tomography and high resolution spectral gamma logging.
The results quickly provided core's clients with little logic information as well as a wide range of critical Petro physical parameters for pay delineation.
Nitro deliverables are normally available within a week of receiving the core.
These initial analyses are being utilized in conjunction with <unk> recently expanded machine learning artificial intelligence algorithms to refine and accelerate sample selection for the traditional time honored physical measurements program.
Single Phase subsurface reservoir fluid samples from the same north Seawell were also brought to the advanced technology Center for testing.
The analysis included detailed determination of contamination levels from the drilling mud compositional profiling of the hydrocarbons speciation of sulfur compounds and measurement of physical properties, including density viscosity gas oil ratio of bubble point.
Quick turnaround on the resulting rock and fluid analytical datasets allowed core's clients to make timely decisions supporting two upcoming sidetrack appraisal wells.
In other international areas Core's laboratory in Rio de Janeiro is now offering an expanded range of testing capabilities, including many of Core's proprietary and patented technologies that are in high demand throughout Coors global client base.
These proprietary offerings include Coors dual energy Cte rock evaluation technologies, and Core's automated digital imaging system, which robotically captures high resolution images of core material.
The Cte datasets in photographic images are being delivered to the clients.
Core's proprietary web enabled data management system known as rapid these.
These technologies and the rapid data management system were utilized in the third quarter on Brazilian projects, including a fully integrated study of Brazil's northeastern offshore basin.
This multi client study incorporates stratigraphy geochemistry reservoir geology, and seal rock analysis across several offshore depo centers.
With the rapid data management system multidisciplinary teams located around the globe are efficiently accessing data and collaborating on analytical results.
Moving now to production enhancement or core lab strengths in both energetic systems and completion diagnostics helps clients optimize their well completions.
Revenue for production enhancement came in at $39 2 billion down 3% sequentially that was driven by lower international sales compared to the second quarter, plus some supply chain or hurdles and suspension of rig operations tied to weather events in the Gulf of Mexico.
Operating income ex items was $5 million up 29% sequentially operating margins were 13% for the third quarter of 2021 21 up over 320 basis points sequentially.
Now for some operational highlights.
Oriented perforating technology is gaining widespread acceptance among U S land operators as the preferred method to optimize frac stimulation.
Testing shows that well performance is highly correlated to perforating gun alignment accuracy.
Moreover, downhole images have shown suboptimal results for perforating systems that require manual alignment of guns and the gun string.
During the third quarter Core's production enhancement team was engaged by a Permian basin, operator to deploy core's innovative patent pending oriented gogan. This.
This next generation design provides a plug and play system that removes inaccuracy associated with Emmanuel alignment of the guns as required with other gun system offerings.
Harry Spectra stemmed tracers and spectra scan logging technologies to compare the degree of rack fluid containment and a horizontal well in which casing rotation was employed during the cementing operation.
That well was then compared to adjacent wells and which no casing rotation have been deployed.
Course completion diagnostics engineers were able to confirm more uniform cement placement and better containment to frack fluid when Piper rotation was employed.
And comparing oil production between the rotated pipe well and the wells of which no pipe rotation had been performed the client observed an increase of 800 barrels of oil per thousand feet of treated well and just the first 80 days of production from the rotated pipe well.
With these favorable results the operator elected to implement pipe rotation and subsequent cementing operations.
Of course completion diagnostic technologies are an invaluable tool for assisting operators and their assessment of innovations and completion techniques.
That concludes our operational review we appreciate your participation in Debbie will now open the call for questions.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If you are using a speaker phone please pick up your handset before pressing the keys too.
To withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
Uh-huh.
The first question comes from an Macpherson with Piper Sandler.
Please go ahead.
Good morning, good morning, everyone.
Larry when you when we think about the <unk> the.
The upstream spending growth rates that you're contemplating for next year, which are.
And the fold of.
Others are saying, if not a little bit more conservative.
We know that service pricing needs to increase.
Pretty substantially to recover the inflation that you're experiencing and so when you think about it.
Total spend.
Minus Oss pricing it doesn't seem to to leave enough dollars left in the Piggy bank for the requisite activity increase that we need to.
To balance oil markets next year. So curious on your thoughts on how this unfolds with pricing recovery for core lab and how you think those spending growth rates that you talk about should translate toward.
<unk> revenue opportunity next year and disinflationary context.
Okay. Good question, Ian So so first maybe frame where we think.
What we're seeing today.
With in our client conversations about our outlook.
Going into next year for 2022, so we'd say U S activity likely to grow 15% to 20%.
Still some conversations going on with both our domestic and international clients, but we think that that's a reasonable growth rate that's going to occur in the U S. And then on the international side from what we see today, we're comfortable saying that it's going to grow double digits.
And so I think we'll dialect in I think one of the things.
Certainly.
I think a need across the industry for improvement in pricing.
I think that'll come.
I think one of the unique situation with Korolev is we've got a lot of operational leverage in our organization and that with the automation that we put into the system. We can generate a substantial about more revenue without having to grow our head count.
Proportionally so while I do think prices will firm up as demand and activity levels pick up I think the way we've structured the company coming out of this call. It period of of upheaval has us well positioned to see incremental margins.
Start to trend back toward our traditional levels it won't happen overnight and it won't happen in one or two quarters, but we'll see that start to rise back into the call at 50% for reservoir description and call. It.
20% to 30% or a little bit more on the product side.
That's really helpful. Thanks, Larry.
Now that the world is obviously your margins need need some time to normalize but just from a total health of the market and demand growth perspective things normalize you've gotten your balance sheet.
On more solid footing than last year, how are you thinking about the opportunities strategically for the company with respect to M&A or other.
Strategic opportunities for core lab in a market that is now positioned for growth rather than contraction.
Sure I'd I'd say first of all.
Our attention is always drawn toward our internal pipeline for technology development. It is a foundation for where we go we've got a number of very intriguing technology, some including nuclear physics.
Sort of revolutionary approach to how we will address core analysis in the future and.
And then on a product side, a number of innovations both on diagnostics and an energetic systems. So first of our attention goes to growth opportunities. We have an investment opportunities. We have there we're always looking and always listening.
Two opportunities on the <unk> side I.
I can say that.
We go through a rather rigorous evaluation of the technical and financial consequences of M&A as we as we look at things as you mentioned, we now have called the balance sheet flexibility to act on those things. The one thing I would say in terms of M&A as.
As we as we look over the landscape of opportunities that are out there if korolev acts on an MAA opportunity it'll be something that you look at and go well that makes sense that sticks close to core labs wheelhouse of things. We know what you won't see US do is get adventurous into things that have you scratching. Your head is why is korolev think they know anything about that.
Great answer Hey, Thanks, Larry I'll pass it over.
Okay sure I think we've got a pretty.
Full earnings release.
Agenda. This morning with other companies going so.
Since there's no more questions will wrap up here.
In summary cause operational leadership continues to position the company for improving client activity levels in both the us and international markets in 2022 and beyond.
We have never been better operationally or technologically positioned to help our global client base optimize their reservoirs and to address the revolving needs. We remain uniquely focus and are the most technologically advanced client focused reservoir optimization company and the oilfield service sector. The.
The company will remain focused 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 in Newport market penetration in the near term core will continue to use free cash to strengthen its balance.
Sheet.
So in closing we thank and appreciate all of our shareholders and the analysts 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 their continuing 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.