Good morning, and welcome to the Core Lab Second Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Larry Bruno, Chairman and CEO. Please go ahead.

Thanks, Kate. 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' second 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 six 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 in Core's Q2 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 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, Gwen. In the second quarter of 2022 Core Lab's year-over-year revenue increased by 2% and sequentially revenue increased by 5%. For the remainder of 2022, we expect continued improvement in both business segments across most international arenas and in the U.S., although the conflict in Ukraine and the collateral impact into Core's European and Russian operations post headwinds to year-over-year growth prospects in those regions. Full company sequential margins for Q2 were 43% nicely reflecting the operational leverage available to Core Lab as global activity improves. During the second quarter of 2022, I visited with our major clients across the Middle East region. Key takeaways from those visits include: one, all of our clients have significant production growth plans over the next several years; two, project work for Core Lab has started to pick up and the growth in work volume is expected to accelerate as we move into the second half of 2022 and beyond; three, in addition to Core's traditional involvement with conventional reservoirs in the Middle East, there is a broad focus across the Middle East region on leveraging Core's expertise in unconventional reservoirs with opportunities in both Reservoir Description, as well as for completion products and completion diagnostics. And finally, multiple Middle East NOCs have begun engaging with Core Lab on their carbon capture and sequestration initiatives where Core Lab has established itself as an industry-leader in subsurface evaluation of prospective CO2 sequestration sites. Another important factor in Q2 with the military conflict in Ukraine that has impacted both of Core Lab's business segments. In Reservoir Description, the conflict and associated sanctions slowed demand for liquid hydrocarbon assay work in Ukraine, Russia, and across parts of Europe. While sanctions will likely continue to impact Russian exports to Europe and the United States, we still anticipate…

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 second quarter of 2022 include a non-cash adjustment of $3.3 million to reverse previously recognized stock compensation expense associated with performance shares, which are no longer expected to vest. This benefit from reversing the stock compensation has also been excluded from the discussion of our financial results. So now looking at the income statement, revenue from continuing operations was $120.9 million in the second quarter, up approximately 5% from $115.3 million in the prior quarter, and up almost 2% year-over-year. The sequential increase in revenue was driven by growth in both the U.S. and international markets. However, nice growth in the underlying operations in multiple international regions have been partially offset by the devaluation of the Euro and British Pound and continued disruptions as a result of the Ukraine-Russia conflict, which I'll expand on later in the discussion. So of this revenue, service revenue, which is more international, was $85.4 million for the quarter, up 1% sequentially from $84.7 million last quarter. While underlying activity has improved in multiple international regions, there are two primary factors impeding the overall service revenue growth; first, the conflict between Russia and Ukraine; and secondly, the devaluation of the Euro and British Pound. Revenue from our operation in Russia during the second quarter decreased approximately $800,000 sequentially and $2.3 million year-over-year. When looking at the first half of 2022 revenue from our operation in Russia has declined about $3.2 million when…

Thank you, Chris. As we look forward to the second half of 2022, and into 2023, we anticipate that crude oil commodity price will remain elevated, but to be more moderately bought as volatile as crude oil supply, and demand may be impacted by uncertainties related to slowing global economic growth. Crude oil supply is projected to tighten as production growth basis limitations due to prolong underinvestment in many regions around the globe. These crude oil market fundamentals are reflected in the year-over-year increase in international onshore and offshore rig counts with oil fields drilling programs being executed and capital spending plans expanding for 2022, 2023, and beyond. We see these as leading indicators of a growing international multi-year cycle. With having more than 70% of our revenue exposed to international activity, both business segments remain active on international projects. The company will have revenue opportunities when wells are completed, stimulated and once reservoir rock or fluid samples have been collected. We continue to see modest improvement in client activity across many international regions, including the South Atlantic margin, Latin America and the Middle East. However, our Russia, Ukraine and Western Europe laboratory networks presents some uncertainty as the Russia-Ukraine geopolitical conflict continues and sanctions on Russia expands. We expect Reservoir Description revenue to improve by low-to-mid single-digits in the third quarter of 2022. Year-to-date the international rig count has been flat. When the international rig count sustains improvement and our clients' drill and sample their reservoirs, Reservoir Description is expected to outperform the changes in industry activity levels. Now turning to Production Enhancement, which is more exposed to U.S. onshore activity and typically correlate with well stimulation and completion programs. We expect the third quarter 2022 U.S. rig count to increase sequentially. However, the rate of growth for completion may potentially be limited by the availability of third-party frac equipment and crews. Consequently, Production Enhancement revenue is projected to increase sequentially by mid-to-high single-digits. In summary, we project continued improvement in U.S. activity and moderate improvement in international offshore and deep water markets. The realignment of crude oil supply lines is projected to continue into the third quarter of 2022 having a sequential positive impact on Reservoir Description's assay laboratory testing in the affected region. As a result, we project company revenue to range from $123 million to $129 million, operating income $10.1 million to $13.33 million, yielding operating margins of approximately 9%. EPS for the quarter is expected to be $0.13 to $0.18. Our third quarter 2022 guidance is based on projections for underlying operations and excludes gains and losses in foreign exchange. Third quarter 2022 guidance also assumes an effective tax rate of 20%. With that said, I'll pass the discussion back 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 success. Turning first to Reservoir Description. For the second quarter revenue came in $75.8 million, up slightly compared to Q1. As Chris mentioned, when looking at the sequential growth in revenue, it is important to consider the sharp devaluation of the Euro and the British Pound during Q2. These currency devaluations lowered CLB revenue when translated into U.S. dollars by $1.1 million as compared to Q1. Comparing the first half of 2022 to the first half of 2021, the currency devaluation in the Euro and the British Pound, lowered revenue when translated into U.S. dollars by $4.8 million. The Reservoir Description business segment absorbed most of this currency exchange impact to the top-line. Operating income for Reservoir Description ex-items was $5 million and operating margins were 7%. Even with the challenges posed by the Russia-Ukraine conflict, sequential incremental margins for Reservoir Description were just over 100% as revenue improved and costs were reduced. After accounting for the currency devaluations just discussed, sequential incremental margins were still approximately 100%. 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. The trend that we project will play out throughout 2022 and for the next several years, particularly in the Middle East and North and South America regions. Now, for some operational highlights from the second quarter. Energy transition opportunities that leverage Core's expertise in Reservoir Description continue to emerge. During the second quarter of 2022 Core Lab under the direction…

We will now begin the question-and-answer session. [Operator Instructions]. Our first question is from John Daniel of Daniel Energy Partners. Please go ahead.

Thank you for including me. I've got two questions. The first one, Larry, it relates to your comments on the lithium extraction --?

Yes.

Of course that you took. Can you just help me understand what the -- what's the market potential for that?

So clearly, lithium is going to play a big role in creating efficient batteries. And so historically, most of the lithium on the planet, or a good percentage of it, has come from really hard to reach areas in a -- a big one being in, what's called a lithium triangle in the high Andes, the Atacama Desert. So a hard place to get to, hard place to work at given the altitude and the logistics of that. So folks started looking for sources of lithium closer to where those batteries are -- can be made and closer to the market where they'll have to be deployed. And so a great geologic opportunity exists in the Great Basin. And so there are a number of lithium evaluation projects going on and some active -- at least one active mine. So I think it's a nice project in the early stages of evaluation. The key here for us is just like with an oil and gas reservoir, understanding the geology, understanding the ability of brines to flow through rock, in this case, rather than oil and gas, are going to be important to making an economic assessment in understanding how to produce these wells. So I'd say, over time, I could see that growing to maybe 5% plus of Core Lab's revenue. I think if we look over our energy transition opportunities including CCS, I can see that over time. It's hard to predict the time I would say, but I can see that growing to maybe 10% of Core Lab's revenue.

Okay. Great. That's helpful. And then the last one for me, it's just on the Helios product that you referenced.

Yes.

Is that -- this a dumb question, so I apologize. Is that specifically designed for just the North Sea or is there an application across all offshore well projects. Just any color there?

Yes. So good question. The Helios will work in any, I would say, offshore well plug-and-abandonment program. A couple of comments there on that. One is Core Lab use its move or expansion into more plug-and-abandonment work as a derivative of an energy transition play. Even if oil and gas starts to decline in demand over the next number of decades, it's going to be many, many decades of plug-and-abandonment work on producing well. So we see that as a nice position for us. And so I would say the technology is probably not greatly applicable to sort of onshore unconventional wells in North America but anywhere you have a complex well, like an offshore well or deepwater well, Helios has a role to play and a substantial economic opportunity for cost savings from the operator. So we a nice arc for that going forward. And some more P&A innovations coming out of Core Lab. Stay tuned.

Okay. Thank you for including me. That's all I had.

Okay. Thanks, John.

The next question is from Chase Mulvehill of Bank of America. Please go ahead.

Good morning, Chase.

Hey, good morning. I guess what did -- we've been on a lot of the calls so far this earning season and obviously heard a lot of positive commentary around the offshore market. So just wanted to kind of dig in and kind of try to understand what's going on with your offshore business. And obviously this is heavily kind of Reservoir Description. But I would think that this uptick in offshore activity and your more sanctioning of projects, I mean we just talked to FTI, and obviously they had really big orders from the subsea side. Would think that this would start kind of driving some better revenue growth when we think about your rock analysis business in Reservoir Description? So if you could just step back and kind of tell us what you're seeing kind of behind the scenes. I know there's a little bit of a lag, but kind of what you're seeing behind the scenes on the offshore side and what it can mean for the Reservoir Description business.

Yes, really good question, Chase. And you're right. We will lag, I'll call it the metal intensive operators or metal intensive service companies access to an improving market. Couple things on the offshore international rig count that kind of flattened out a little bit in the first half of this year, after I'd say a pretty nice growth arc call it from over -- year-over-year. And so what we're seeing now forming up is more activity lining up South Atlantic margin looks real nice. The Gulf of Mexico looks very promising for us. And then I would say the -- in the Middle East onshore and offshore both look promising for us. Asia-Pacific, I'd say there's a little bit of opportunity there. But I'd say right now the bigger opportunities South Atlantic margin, Gulf of Mexico, and some offshore stuff in Asia-Pac. And then, North Sea as well, there -- there's opportunities there. We just talked about one on a completion side or plug-and-abandonment side, but there's also we've got projects with where rock and fluid awards have been made to us from the North Sea. That'll show up over the next couple of quarters.

Okay. If I could just kind of follow-up on that real quick and thinking about Reservoir Description, I guess kind of depending on what happens in the back half, I mean we'll call it kind of flattish revenues this year. But if we kind of get into 2023 and you're seeing kind of this momentum that you just mentioned about, like how -- what kind of growth should we expect on the R&D side? Could you get double-digit growth or should we still kind of think single-digit growth for Reservoir Description. And sorry, I know that's a bit away, but just trying to get some color as we look to 2023.

Yes. I think double-digit growth on the international side in particular and the offshore side in particular is well within grasp. I think the spool up time of project engagement that we see lining up for us would indicate that getting to double-digits is well achievable. And just a little bit of refinement on your premise there, what we're seeing is Reservoir Description across most of our global reach, we're seeing growing business opportunities that we think is, will start showing up 2020 -- back half of 2022 and into 2023. That's going to be offset a bit by let's call it uncertainties in Russia-Ukraine and Europe related to that crude assay work so a little bit of a counterbalance there as that sorts out. Longer-term, what we see going to happen with sort of the global supply lines, those are going to realign. And we think that Russian crude oil is finding a home and will continue to find home in other places. And Europe will be backfilling with sources of oil from places where they hadn't been necessarily sort of filling the wagon with crude oil. And so that realignment is going on right now. It's having an impact on that aspect of our business. But we think that's going to settle down between the rest of this year and into next year. And then it starts to become a different, but sort of more normalized world in terms of demand for that part of our Reservoir Description business.

Okay. Just one follow-up and I'll turn it back over. I'm sorry, the kind of all related here. But when we think about the Russia levered crude assay work, can you talk about pre-Russia conflict where it was? Where it is today? Just so we kind of understand how much could kind of further bleed out, and then if that business were to actually come back like what mag -- like what kind of magnitude that would impact your P&L?

Sure. And Chase, this is Chris. So when you look at last year, we did about a little over $28 million in our Russia operation there locally. So it was a right around $7 million maybe a little bit per quarter. And that came in just under $5 million this quarter. But what I would say there is that the impact to that group was harder earlier in the conflict and what we've seen more recently is that's actually turning and picking back up. So it is difficult to say where it might be for this next quarter or beyond, but there's about $5 million of revenue. I would say their profitability has been impaired, but we've put some action plans in place. They've been partially executed to minimize that, but we're trying to be thoughtful as we do this because it is so fluid both on the Europe side and inside of Russia and Ukraine for that a matter. It's a lot smaller in the Ukraine, but we've continued to hold our employees and trying to watch it and monitor and our guys on the ground are sort of looking at that before they execute any plans.

Okay. All right. Appreciate the color and sorry about asking all the follow-ups, but thanks, Chris. Thanks, Larry.

Yes.

Yes. You're welcome. Thanks Chase.

The next question is from Don Crist, Johnson Rice. Please go ahead.

Good morning, Don.

Hey Don, good morning.

Good morning. I wanted to ask a follow-up to John's question on the Helios product that's new. Does that work on shallow water Gulf of Mexico, because I know that shallow water Gulf of Mexico P&A work is really ramping up now, as you know a lot of wells were put back to original operators through bankruptcies and it looks like there's probably going to be a $700 million or $800 million market going forward. Is -- does the Helios product have any impact there?

Yes, it sure does. I would probably draw the line at relatively simple onshore or U.S. land wells, probably not going to be a target for us there. But offshore wells, whether it's on the shelf or in deepwater globally are target environments for us for Helios. Just a better way of plugging and abandoning these complex wells, especially where there's multiple wells off of say a production platform and they're going to abandon one of those wells. They can execute it much more quickly and efficiently with the Helios product. So we see a nice arc ahead of us for that.

Great. And just one on the international ops, obviously you're talking about a multi-year cycle starting up there. Can you just kind of walk through the indicators that you're seeing right now? Is that -- is it so broad-based that, that it probably doesn't stop anytime soon with a recession or any other kind of pull back in oil or is it more impacted by oil moving around if you will.

Yes. Don, I draw a difference. I think the potential to be impacted by shorter-term economic sort of volatility, probably poses more risk to onshore land projects mostly in North America. I think we -- you have to look at the backdrop of underinvestment that's now been going on for more than half a decade in international arenas. What we've said for a long time and I'll admit very candidly that it's been slower evolving. And of course, there's the uncertainties of COVID is that the next cycle of investment that was going to come into the industry was going to be international. It was going to be conventional reservoirs and it was going to be offshore primarily. That's right in Core Lab's wheelhouse. And so the conversations that we're seeing are picking up globally on that and we like those types of projects, they tend to be a little more lucrative for us because the risk profile for our clients are higher. They have to reduce that geologic risk if you will. And that means more robust datasets and that fees right into more coring, more sampling at all. And so we're not going to be a leading indicator there. Reservoir Description always lags, directional changes in industry activity. The -- that may be a little frustrating for folks that are saying, hey, we're hearing about the drillers that are picking up where's Core Lab's role in this. We're going to be a little bit later in the cycle, but the flip side to that is you look how Reservoir Description held in say, as COVID hit. And there was a deep downturn. You saw Reservoir Description hold in there very well. You can't lag on the way down and then lag on and then proceed on the way up. That's a pretty lucrative business model if you can find one. So we'll lag a bit. But the -- it's building up and it's going to be across many, many sectors, geographic sectors.

Hey, Don, we -- the leading indicators there, one, Larry mentioned, the international offshore rig count. And we're also monitoring data like from Wood Mackenzie regarding FIDs and then those projects that we know are under discussion with our clients. And those are happening pretty much in a lot of the major pockets around the world.

Great. I appreciate the color. I'll turn it back.

Thanks, Don.

Thanks, Don.

[Operator Instructions]. The next question comes from Stephen Gengaro of Stifel. Please go ahead.

Thanks. Good morning. Good morning, everybody. Thank you for taking the questions. So two things, if you don't mind. The first is centers around the RD discussion and just sort of from a bigger picture perspective, when we think about that business over the last, I don't know, five, six years, the growth rates haven't been what we've expected. And I think clearly part of that is just international activity. But if we compare that business to, prior upturns, is there anything structurally different in that business, either what the competitors are doing or what you're doing, who you're working for, et cetera? Or is it simply related to just underlying activity trends?

Yes. I'd say nothing's changed structurally in the in the business. It's simply a reflection of activity levels. I do think that the IOCs, the International Operating Companies, have been, I will call it, extraordinarily measured in their reengagement on projects. However, the NOCs are emerging as being more aggressive or they're getting -- there -- they're much closer to engaging at a higher level. So I think there's a little bit of that going on. I think the economics of some of these bigger projects gave some pause when people were focused on repairing balance sheets, and doing what they needed to do to recover after COVID. But I do think that the commodity price at WTI this morning was around $100, Brent roundabout, a little on $110, I think. And so I think the economic model that will support these longer cycle projects has emerged. It's -- I think the rationale view of global demand for oil and natural gas for the next several decades is going to support investment in those types of projects. Just a little slow get started on it.

Great. No, that's helpful color. Thank you. And in general here, when we think going forward, and this is a question, I think on both segments, when we think about, historical incremental margin performance, I know there's a lot of moving pieces in the very short-term. But as we think about 2023, assuming things to kind of normalize a bit, where do you think those year-over-year incremental should play out given what you see and what the cost structures look like?

Yes. I think, I'll get started maybe and let Chris fill in there. I think Reservoir Description; we see the great operational leverage that that Group has. Let's get it clear; we're not going to see 100% incremental every quarter for that Group. I think you have to look at a little bit quarter-over time -- a quarter-over-quarter or over multiple quarters, but I think we -- that operational leverage is strongest in Reservoir Description, where it's just more rock and more fluids through the existing infrastructure. And that's going to translate into very nice incrementals 50% and above. We've achieved that historically. I think it can be even a little bit better going forward because of how we've streamlined the organization. On manufacturing, I think a bit of a headwind early on there with supply costs, raw material costs, inflationary costs that we're navigating right now. And so they're not going to be on the product side. They won't be as high as we can see -- we achieve on Reservoir Description. But I still think we could see incremental margins there, 25% to 35%, probably not a reasonable. Chris, you want to add anything to that.

Well, I just want to remind folks that, definitely as we went through COVID and we had these temporary cost reductions in place that, kind of, artificially lowered the cost base for Reservoir Description. And as we were working through last year, we started to restore some of that. I think of that mainly be an employee compensation costs. And our largest group of employees is in the Reservoir Description Group. So it's more impactful for that Group. And then it was, as we started this year, we completed that almost. So we had these costs coming in, in Q1 and then these other events happen in Q1. But now we've, kind of, I would say, reset the baseline, if you will, for the cost structures in Reservoir Description. And now as you start to see top-line growth in that group, you will see those incremental margins that we've seen historically. So that's really what we kind of had to work through over the last several quarters. But now we feel like we've got a pretty good baseline. There are some inflationary costs. And we are expecting labor costs to increase. We have to give our employees a merit to, to, kind of, be in line with where inflation has been. So that'll be a little bit of a headwind. But as that Group picks up momentum, like Larry was talking about, as we get deeper into the recovery, absolutely, we would expect incrementals to be where they historically were.

Great. No, thank you. That's great color. Thank you, gentlemen.

Hey, Stephen, if I could, just one point I failed to make in your first question about the landscape here. If anything, we saw a continuation over the last couple of years of downsized internal laboratories within our, call it, our IOC client base, where fewer projects can be handled internally, as they as they downsize their internal infrastructures to accommodate the cost. This is a -- this has happened through every previous downturn cycle over my -- I'm shaking my head, as I'm saying, it's 37 years in the industry, every time there's a downturn IOCs have looked at their internal lab structures, and said, hey, let's go buy this when we need it. Let's not have it internally. The same thing happened during this cycle. And so I think we're even better positioned going forward, in that there are fewer internal opportunities to do work within the company's laboratory structures, those that still have them.

Got you. That makes sense. Thank you.

Okay.

This concludes our question-and-answer session. I would like to turn the conference back over to Larry for now for closing remarks.

Okay. We'll wrap up here. In summary, Core's operational leadership continues to position the company for improved client activity levels in both U.S. 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 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 maximizing free cash and returns on invested capital. In addition to our quarterly dividends, we'll 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, while always investing in growth opportunities. 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're proud to be associated with their continuing achievements. So thanks for spending time with us. And we look forward to our next update. Goodbye for now.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.