Good morning, and welcome to the Core Lab Q1 2022 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference to Larry Bruno, Chairman and CEO. Please go ahead.

Thanks, Anthony. 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' First Quarter 2022 Earnings Call. This morning, I'm joined by Chris Hill, Core's Chief Financial Officer; and Gwen Gresham, Core's Senior Vice President and Head of Investor Relations. The call will be divided into 6 segments. Gwen will start by making remarks regarding forward-looking statements. We'll then have some opening comments, including a high-level review of important factors of Core's Q1 performance. In addition, we'll 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'll 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. Then we'll open the phones for a Q&A session. I'll 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 that could cause actual results to materially differ from our forward-looking statements. These risks and uncertainties are discussed 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. We undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Our comments also include non-GAAP financial measures. Reconciliation to the most directly comparable GAAP financial measures is included in the press release announcing our first quarter results. Non-GAAP measures can also be found on our website. With that said, I'll pass the discussion back to Larry.

Thanks, Gwen. As 2022 began, the global pandemic continued to impact our business landscape. During the first quarter, global caseloads rose very sharply as the Omicron variant spread across all regions. This impacted both our clients and internal Core Lab operations. More than 15% of Core Lab's global staff tested positive for COVID-19 in Q1, a more than 400% increase in cases among our employees compared to Q4 in 2021. In addition, other Core Lab staff had to quarantine because of either direct exposure to individuals that has tested positive or because of government-imposed shutdowns. On average, infected employees miss between 5 and 10 days of work. Being a business that runs on people more than, say, equipment rental day rates and mechanical horsepower, the high number of Q1 COVID-19 cases had a meaningful impact on our business. The sharp rise in COVID-19 cases and the associated quarantine requirements among Core Lab staff increased operating costs as overtime expenses among uninfected staff were incurred to meet project time lines. Fortunately, the recent COVID-19 illnesses experienced by our staff have largely been mild and of short duration with no deaths or hospitalizations reported in Q1. Cases peaked in January and February and declined throughout March. The surge in COVID-19 cases also negatively impacted our clients and continued to pose headwinds to project advancement. Still, global demand for hydrocarbons continues to rise, signaling positive trends for future oilfield activity over at least the next several years. Compounding the Q1 challenges caused by the sharp rise in COVID-19 cases, the military conflict in Ukraine impacted both of Core Lab's business segments. In Reservoir Description, cyber attacks against client facilities in Europe that preceded direct military engagement disrupted demand for crude assay laboratory work in Western Europe as well as in Ukraine and other…

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 first quarter of 2022 include a charge of $3.9 million for noncash stock compensation expense associated with the future vesting of performance shares for certain employees who have reached their eligible retirement age. The financial results for the first quarter also included a charge of $3.3 million for severance and facility consolidation expense and a bad debt expense of $800,000 associated with receivables due from clients in Ukraine. The severance and facility consolidation expenses are associated with our ongoing efforts to gain operational efficiencies and optimize Core's global network. These items have also been excluded from our discussion of the financial results. So now looking at the income statement, revenue from continuing operations was $115.3 million in the first quarter, down approximately 7.9% from $125.1 million in the prior quarter, but up 6.4% year-over-year. The sequential decrease is associated with typical seasonal decline that we experienced in the first quarter of each year. Additionally, our international operations were disrupted more than expected due to a strong resurgence of COVID cases during the quarter. The Russia-Ukraine conflict also progressed into direct military action during the first quarter, which negatively impacted both product sales and services. However, the U.S. land market continues to show strength, and although completion activity began the year at levels lower than last quarter, activity improved up and was up nicely as we exited the first quarter. Of this revenue, service revenue, which is more…

Thank you, Chris. As the Russia-Ukraine geopolitical conflict continues and the sanctions on Russia have expanded, the global crude oil market continues to tighten with demand for crude oil approaching pre-COVID-19 levels, resulting in higher crude oil commodity prices. With consistent elevated crude oil commodity prices and the tightening of crude oil supply, the industry is preparing for an increase in activity, driven by demand, resulting in a multiyear cycle. These crude oil market fundamentals are reflected in the gradual increase in the international rig count with more oilfield equipment coming under contract and expanded capital spending plans for 2022. Core sees these as leading indicators of a growing international market. With Core Lab having more than 70% of its revenues exposed to international activity, both business segments remain active on international projects. As additional field development projects emerge, wells need to be drilled and reservoir rock and fluid sampled before Reservoir Description participates in the cycle. The expansion of international development, both short- and long-cycle projects, provides growth opportunities for both segments into 2022 and beyond, with a particular focus on South Atlantic margin, Latin America and the Middle East. Core's North America revenue is correlated to completion and stimulation events with large-scale reservoir rock and reservoir fluid characterization studies rather than with immediate changes in rig count. Wells need to be drilled and subsequently completed, stimulated and cored or have fluid samples collected before we can realize a revenue event. Core projects to continue benefiting from increased onshore activity, albeit led by private operators and somewhat moderated by capital discipline for larger publicly traded operators. For the second quarter of 2022, Core projects our business to improve, primarily from increasing levels -- activity levels in the U.S. and moderate improvement in international, offshore and deepwater markets, potentially offset by uncertainties associated with the Russia-Ukraine conflict. Core projects second quarter 2022 revenue to range from $119 million to $125 million and operating income of $9.4 million to $11.8 million, yielding operating margins of approximately 9%. EPS for the second quarter of 2022 is expected to be $0.12 to $0.16. The company's second quarter 2022 guidance is based on projections for underlying operations and excludes gains and losses in foreign exchange. The second quarter guidance also assumes an effective tax rate of 20%. Looking forward, Core's outlook for the remainder of 2022 remains positive with sequential improvement expected in the second quarter, followed by further acceleration during the second half of the year. Furthermore, we continue to anticipate a multiyear international cycle unfolding, supported by crude oil market fundamentals. With that, I'll turn it back over to Larry.

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 has been very visible during the current challenges and is the foundation of Core Lab's success. Turning first to Reservoir Description. For the first quarter, revenue came in at $74.8 million, down 7% sequentially. Operating income ex-items was $3.9 million and operating margins were 5%. Restoration of employee costs, along with the COVID-related costs and inefficiencies as well as the disruptions tied to the Russia-Ukraine conflict, impacted margins during the quarter. The sharp increase in COVID-19 cases in Q1 slowed in the early part of Q2 across many regions, although parts of Europe and Asia Pacific are still experiencing relatively high caseloads. As previously mentioned, Core Lab operations in Ukraine have been suspended and demand for some services in Europe and Russia are being impacted by the military conflict and the associated sanctions. As we look ahead, while still well below pre-COVID levels, 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, particularly in the Middle East and North and South America regions. During the first quarter of 2022, Core conducted a large core and reservoir data analysis workshop for the Kuwait Oil Company. This comprehensive week-long workshop was the culmination of a multiyear, multiwell analytical program that included proprietary Core Lab technologies and interpretation techniques. The focus was on hydrocarbon potential and pay recognition in prospective unconventional and tight conventional reservoir targets. Core Lab leveraged its proprietary Oracle-based, web-enabled, RAPID database platform to organize well, geological and petrophysical data. Fracture analysis and interpretation was conducted utilizing Core's proprietary…

[Operator Instructions] Our first question will come from Stephen Gengaro with Stifel.

A couple of things for me, if you don't mind. And what I would start with is when we think about the macro, and you sort of -- it seems like a lot of the large integrated oil service names you're talking about, mid-teens, international growth in the back half of 2022 and honestly, probably for the full year as well. How should we think about your RD business in the context of that?

Yes. Good question, Stephen. I think maybe let's go around the world here. So I think we're in line with those expectations, but I'll put an asterisk on that now. So as we look around the planet, so for North America, so outside the U.S., no change in our perspective. So in line with the ranges that I think are pretty broadly held around the industry. South America, no change, maybe a little upside there. Middle East, no change, maybe a little upside there. Asia Pacific, no change. The asterisk I would put on is our view of the international market as it relates to Russia, Ukraine and Europe. We'll have to soften those expectation from this point based on what we see today. So when we add it all up, I think double digit growth for the segment now becomes more challenging and maybe unlikely.

And have you said or can you give us some color on kind of the amount of business you're doing or were doing in Russia? And how you're handling that?

Yes. So what we've said is in Russia and the near Russia region, that historically has been 5% to 8% of our business.

Okay. Great.

Stephen, sorry, just one other qualifier on that. So beyond the work directly in the region there, in Russia and the Ukraine and nearby areas, the -- we see this realignment as Russian oil is not reaching Europe because of sanctions. We think it has to realign with oil coming from other areas because the demand has not gone down, if anything, it's probably inching up. And so we think that has to realign. That could pose, call it, a rebound in the demand for crude oil assay work into Europe that we saw a drop off in the first quarter.

Okay. That was going to be one of my follow-ups was sort of what you're seeing to offset, but that's one of them. Okay. And the other question, just on the incremental margin front or the margin front going forward, the headwinds you're seeing albeit look like in both segments in the first quarter. How do they sort of start to fade away as you get into the second and third quarters and you start to get more normal incrementals? What's the visibility on that and what's sort of driving that?

Well -- and this is Chris, Stephen. And we do feel more confident going forward now that we've kind of restored employees' base compensation. They're still not fully restored. There's a little bit coming through, if you think about restoring the match on retirement plans, think of that as 401(k) plans. But that is -- those are smaller add back. We're also looking at whether or not we need to make sort of annual merit adjustments later this year as well. So we're evaluating that, I think, as the year progresses, but those are going to be some headwinds. But the big things that we've done, get employees back to full pay are kind of behind us. So as you start to see top line grow, we should start to see incremental margins, not only improve, but start to trend back. I think we've talked some about inflation. That's real, not just here in the U.S. but around the globe. So costs are going up. It's probably impacted our Production Enhancement group and the inventory more than some of the services, but it's real. So that's some of the headwinds we have. But really nothing's changed. The leverage is still there in our Reservoir Description group and we would still expect manufacturing efficiencies and things to improve as you start to expand top line in Production Enhancement as well.

And just one final quick one there just because you mentioned this, you said fundamentally, nothing's changed. So I just -- the competitive landscape internationally on the RD business and the way the world has evolved the last couple of years with COVID and all the issues we've dealt with, has anything changed sort of competitively or fundamentally in your international RD business?

Steve, it’s all on activity levels from the clients. So yes, I think COVID played on their activity pace projects that may have been on the drawing board got pushed to the right. We are seeing things pick up in places, but it’s largely an activity level. The operational leverage is still there in the – particularly on the RD side of the business.

[Operator Instructions] Our next question will come from Taylor Zurcher with Tudor, Pickering, & Holt.

First question, Production Enhancement. I'm really just curious about the sort of margin road path or glide path forward. So in the back half of last year, I mean, you were doing pretty solidly in the double digits from an operating income margin perspective. And obviously, there were some issues at play here in Q1. But in the background, you've got a really constructive U.S. land completions activity backdrop. So volumes should be improving quite nicely over the back half of the year. And Chris, you highlighted some of the inflation dynamics at play. But just curious, exiting this year, if we compare that to the second half 2021 or the 2021 exit and what that might look like for Production Enhancement this year on a year-over-year basis?

Yes. I think just first off and then others might have some stuff to add, but we're still kind of looking at Production Enhancement from sort of resetting in Q1, I would say, margins where we would still expect margins to expand in that 25% to 30% on products, and they can be a little bit higher on the services side. So if you start to kind of dial that in, you can take a view on where we might be at the end of the year. But inflation, I would say, has been the biggest factor. We did have manufacturing disruptions in Q1. So there should be some improvement, let's say, those disruptions don't reoccur in Q2 and going forward, there should be some improvement there. But hopefully, inflation sort of starts to stabilize, and we don't see that continuing.

Yes. I'd add to that, to Chris' comments there, and Taylor, thanks for reinforcing how well the -- our business did last year on the Production Enhancement side and a real strong year, I think, outperformed the sector. Part of that is we had a very strong fourth quarter with international sales. We try to get across that point here that those can be a bit lumpy. So we did not have a repeat of that in Q1. We expect that in subsequent quarters this year plus we had product sales into Ukraine, which obviously -- that were planned for the first quarter, obviously, didn't happen. And so I think to echo Chris' points there, we're going to have -- there's a little bit of natural lumpiness as international orders ship. We didn't have that in Q1. We expect them in some of the upcoming quarters. So I think we'll see -- if you look at the trend, you'll see an improving performance there over the next several quarters.

Understood. And my follow-up is on CCUS, you highlighted in the script some of the progress you made during Q1. And I just got a simple question, which is what's next? You've made a lot of progress thus far. I imagine it's going to take time to generate some meaningful revenues from all things CCUS moving forward, recognizing that you're already working on some projects as we speak. But just curious what's next on CCUS and how that might look moving forward?

Yes. I think it's execution time for this. It was a -- some of it -- and Taylor, just to maybe refresh on the audience a little bit is over the past 15 years or so, we've done the occasional carbon capture storage evaluation program, core and fluid analysis. A couple of things have changed in the landscape. One is government regulations are driving many more of those projects than existed over the last, say, couple of decades. And the other thing that's changed is what had been, I'll call it, nontraditional clients approaching us about those projects when they came up is now our traditional oil and gas clients are dialing that into their portfolio of projects that they're going to be working on. So the inaugural 6 members of our CCS consortium study are all oil and gas companies. That would not have had any carbon capture and storage dialed into their plans several years ago. So I think across the oil industry and across the non-oil industry, the client base for the CCS projects is growing. Most of those are in the planning phase still. As those start to go into the assessment phase, that's when we hit our sort of our stride there when they're actually taking core and fluid samples. And now we're very well set up to do that with our strategic alliance with Talos, our consortium study plus, I'll call it, proprietary work that we're doing like the CarbonNet Project that's been going on for several quarters. There's more of those in the queue. I would say that our target board for projects is probably 8 to 10x what it was just 18 to 20 months ago.

That's encouraging. One last question for me, if I can, which is on GoTrace. It might be early days, but I just have never really heard much about that sort of technology out there in the market. So I'm just curious if you could highlight for us the sort of value add that, that technology provides that you highlighted, the work you're doing with Total. But curious if there's any other anecdotes you can share as it relates to customer conversations you might be having with customers outside of Total? But it sounds like an intriguing technology and would love to hear a little bit more about it.

Yes. So a lot to like about that and, boy, you talk about a Core Lab-like example of how we run our business and drive innovation. It really motivates a lot of the staff to brainstorm problems. And so one of the problems with completion diagnostics in the past – I won’t call it a problem, more limitations is probably a better way to put it, is you would pump in tracers at the stage level. And so you did not get the granularity. As the number of clusters and stages have gone up, you didn’t know whether – you could tell if the stage was contributing, but you didn’t know the individual clusters. So that prompted some look at how we might get that better granularity more at the cluster level. And so we had to figure out whether we could get our diagnostic tracers to survive that very energetic event when the gun is triggered and the energetic goes off so as to not destroy the tracers that we were trying to in place at that same moment. And so as I mentioned in the call here, for the first time in the industry, there’s now an opportunity to perforate and place the energetics into those perforations all at the same time, do that simultaneously. And so what the clients are seeing there is the saving on rig time opportunity on this and that you don’t have to perforate and then come out of the well and then pump down tracers into the perforations to see if they’re in communication. And so there’s an advantage there and the granularity that they’re getting. And the reason you didn’t hear about it was we were holding it pretty quiet and confidential. We’re the only company that does both energetics and…

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