Good morning and welcome to the Core Lab Q2 2021 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Larry Bruno, Chairman and CEO of Core Lab. Please go ahead.

Thanks, Ian. Good morning to you in the Americas, good afternoon in Europe, Africa and the Middle East, and good evening in Asia-Pacific. We would like to welcome all of our shareholders, analysts, and most importantly, our employees to Core Laboratories second quarter 2021 earnings call. This morning, I am 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. We will then have some opening comments, including a high-level review of important factors in Core’s Q2 performance. In addition, we will review Core’s strategies and the three financial tenets that the company employs to build long-term shareholder value. Chris will then give a detailed financial overview and have additional comments regarding shareholder value. Following Chris, Gwen will provide some comments on the company’s 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’s technologies as well as highlighting some of Core’s operations and major projects worldwide. We will then open the phone for a Q&A section. I will now turn the call over to Gwen for remarks 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 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 or uncertainties 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 detailed discussion of some of the foregoing risks and uncertainties, please see Item 1A 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. Our comments include non-GAAP financial measures. Reconciliation to the most directly comparable GAAP financial measures is included in the press release announcing our second quarter results. Those non-GAAP measures can also be found on our website. With that said, I will pass the discussion back to Larry.

Thanks, Gwen. First, our thoughts remain with all of those that have been affected by the global pandemic. While there are certainly reasons for optimism as the vaccines become more widely 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 in our clients’ activities, travel complications and logistical hurdles for field services and product shipments, particularly outside North America. A number of countries across our global operating network such as Brazil, Indonesia, Malaysia, Kuwait and India, saw increasing case counts and many countries maintained, enacted, reenacted or expanded precautionary measures, travel restrictions and even lockdowns during Q2. Even as we progress 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 the Q1 winter freeze were expected in Q2 and none occurred. We did however incur expenses related to temporary measures that have to be deployed at several facilities throughout Q2. These temporary measures are now concluded and permanent repairs have been affected. Looking at Core Lab’s performance in the second quarter of 2021, the company saw increased revenue, increased EBITDA, increased free cash flow, increased EPS compared to Q1. At the same time, Core continued to execute 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. 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 and international activity builds momentum. Before we move on, I want to thank Core’s 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 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 will 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. 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 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 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, a strong 33% increase from the previous quarter. Nice growth in the U.S. land activity resulted in even stronger demand for our perforating and energetic products in the U.S. Additionally international product sales were also strong as some larger orders were completed in the quarter. Moving on to cost of services, ex items, for the quarter was just below 78% of service revenue compared to 76% for the prior quarter. The increase in cost of services was negatively impacted as the company…

Thank you, Chris. For the remainder of 2021, the company 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 aim to both solve problems and capitalize on Core’s growth opportunities. The company remains well positioned to meet the needs of our clients with ample liquidity to invest in its global capabilities. These capabilities include our expanding proprietary databases, along with innovation in artificial intelligence and machine learning, which are the foundation of Core’s transformation digital technologies. With the rapid onset of COVID-19 variants and continued market disruptions, 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 and U.S. activity continues to moderately progress, strong crude oil commodity prices, the lack of investment in international and offshore crude oil development and 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. 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…

Thanks, Gwen. First, I’d like to thank our global team of employees for providing innovative solutions, integrity and superior service to our clients. The team’s collective dedication to servicing our clients 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’s 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 when industry activity contracted sharply and many oilfield service companies 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 – that we project will play out over the next several quarters and throughout 2022. Now to some operational highlights. During the second quarter of 2021, Core Lab, under the direction of Reconnaissance Energy Africa Ltd, was engaged to provide laboratory analysis on conventional cores from exploratory wells in the Kavango Basin in Northeastern Namibia. The laboratory program for this ReconAfrica project is leveraging a number of proprietary and patented technologies, such as Core Lab’s RAPIDZoom service, to assess rock properties and identify…

[Operator Instructions] It looks like your first question comes from Connor Lynagh of Morgan Stanley. Please proceed.

Yes. Thanks. I wanted to talk about – good morning. I wanted to talk about Reservoir Description. Obviously, international is the big driver there. We’ve gotten some fairly explicit guidance or at least long-term estimates of activity growth from some of the large-cap service providers out there. I’m curious, how should investors think about this on a structural basis? Would you say that you’re going to grow at a similar rate but at a lag, like you’re alluding to? Do you think you think it’s maybe a bit more muted because of the well construction side of things is a bit higher growth this cycle? Just a high-level framework for how people should think about that.

Yes. Connor, good question. And we try 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 kind of 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 turn to bat. So the way I would try to clarify that even further is to say we will tend to lag the well construction side of the business. Then we will eventually catch up. And then we will – I would say we will go back to what you saw out of 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 inevitably and hopefully comes – many, many years from now, when 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, we will eventually catch up and exceed the rate of growth in well construction, and then that should carry us well into the next cycle.

Got it. That’s helpful context. One thing that, I guess, is a bit different this time around, you guys have historically talked about a large portion of R&D being related to producing fields. And obviously, there is a fair bit of production offline in previously producing fields. So I guess, I’m curious, is there a significant portion of the revenue downdraft that you’ve seen that’s sort of related to those producing fields that should maybe lead or is that putting too fine a point on it?

No. I think you’re seeing it 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. I mean we had situations in Asia Pacific where large clients shut their office for a couple of weeks because the country was basically put into lockdown. And so that’s going to – that’s been unpredictable. As much as – whether you’re a financial lands covering the oil industry section or a manager trying to manage an 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 the following quarter. So it’s just an unevenness of project expansion – or progression, I guess, is the best way to put it, progression.

Okay, thank you very much. I will turn it back.

Thanks, Connor.

Your next question comes from John Daniel of Simmons. John, please proceed.

Thank you. No longer at 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 Kavango Basin and the offshore opportunity? Years ago, if you remember, there was always some excitement when Dave 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?

Yes. So John, it’s – this is – I’m going to default to Core Lab’s normal answer on this is for details on the play or the prospect, it’s best to go talk to the good friends – our good friends at ReconAfrica for any of the details. What I can say though is this is a very intriguing sedimentary basin onshore that has got a lot of opportunity for a variety of prospective productive horizons and traps. So, that’s as far as I will go on that and direct you to ReconAfrica. But it’s a big, big basin with a thick section of sedimentary, mostly marine strata, and a lot of things to pick through there. And we are glad to be helping them.

Okay. I have got two more quick ones for you, just on the Pulse Wave. How widespread is this product? Is it – was it just recently? Was this sort of the first run of it? And then what’s the opportunity set? And does it potentially cannibalize any of your existing products?

No. It’s – we have talked about it in prior releases going back over the last couple of years. I think what we are seeing is people are starting to recognize the advantage of having tubing between sections of live guns rather than a series of inert guns with a bunch of connections between them. And so particularly where there is uneven spacing that might occur in a recompletion, we see that as a real advantage in that the assembly time to put that all together is much better. So, the consumable costs are lower, the rig time is lower, and we get very high efficiency without the, call it, all the potential weak links of having so many connections in the downhole perforating strength. So, we don’t see this as cannibalizing anything in that all that’s missing is – out of the system is inert guns, not a big deal for us. And so still have to buy guns, still have to buy charges, you are still going to need all the other components to make that work. The Pulse Wave system just allows you to do that with all that sort of unreliable connection between the live guns. And so I think there is 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.

Okay. Thank you. And then the last one is sort of just a big picture question. And this relates more towards your North American operations. Are you in the camp that we see normal Q4 seasonality, thus potentially a dip late this year or do you see an acceleration as people prepare for next year, just – I know it’s early, but just your thoughts?

Yes. So, I think the – I would start by answering that is that the feedback we are 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 we are not seeing line up for the end of the year at this point is a frac holiday, a 2 18, 2 19 frac holiday. Having been around for 30 years, there is always a tendency for a bit of, okay, it’s Christmas time. We are missing a part or something or there is a delay at the rig, let’s just kick this to next year. I would expect that to play out over the last couple of weeks of the year, like it has over many, many years. I don’t think there is 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 will be a more stable year overall than we have 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 – in the fourth quarter rollovers, not unlikely.

Okay. Thank you very much.

Okay, John.

[Operator Instructions] Our next question comes from Mike Sabella, Bank of America. Please proceed.

Hey, good morning everyone.

Hi Mike.

So, it looks – it just looks like the guide here has implied some pretty decent incrementals at the segment level in 3Q sort of beyond what the 20% to 25% that you quoted assumes, if we just assume corporate and other goes back to kind of normal levels. And I know this has been the commentary that incrementals would pick up in the second half of the year as 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 could we still see some noise in the near-term?

Yes. Hi Mike, this is Chris. And yes, that’s a good observation. 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 that’s a 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 sort of comes in at 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 these employee costs, other temporary cost measures that are 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 and some of these other costs and kind of get back to sort of fully cost loaded. As we get a little further into the recovery, you will see us turn back to sort of normal, more traditional incremental. And we have 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 you will really start to see that more in 2022.

Got it. Thanks. And then I was kind of hoping maybe we could just step back and maybe you give us an update on what the competitive landscape looks like in Reservoir Description. I know in the past, you have said it’s really – your #1 competitor is the customer and if they do this work in-house or not. Is that still the case? Have you noticed any change in customer pattern as kind of they are looking to keep their own cost down?

No major change. I would just reiterate that over decades here, the progression has been for companies to – during down cycles to eliminate internal laboratory testing 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. No major changes in the landscape whatsoever. It’s just simply an activity and a pace of progression that we are having to manage our way through with Reservoir Description. 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 less in-housing of work as some companies have downsized internal laboratories over time. We think that sets up very nicely for us into the next cycle.

Understood. Thanks everyone.

Thanks Mike.

Thanks Mike.

Okay. I guess, I think it’s a pretty busy earnings release morning here, so I guess 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 mid-term, 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 focused on generating free cash and returns on invested capital. In addition to our quarterly dividends, we 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 strengthen 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 our worldwide employees that have made these results possible. We are proud to be associated with the 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.