Good morning, and welcome to the Core Lab First Quarter 2023 Earnings Conference Call. [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, Danielle. 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 2023 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 in Core's Q1 performance. In addition, we'll review Core's strategies in the 3 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 2 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. Those non-GAAP measures can also be found on our website. With that said, I'll pass the discussion back to Larry.

Thanks, Gwen. I'd like to start the comments section today by saying a few words about the untimely passing of Dave Demshur on March 18. Dave was the central figure in building the Core Lab that we know today, serving as the Chief Executive Officer and Chairman of the Board over a 25-year period. Dave led the company through the challenges of a management buyout in 1994 and oversaw more than 20 acquisitions that grew Core into a multifaceted international oilfield service company. Having arrived at Core Lab through one of those acquisitions, I can personally attest to the fact that Dave always kept his word and honored every commitment. In doing so he set a standard to which we all still aspire. Over 4 decades, Dave built a legacy of loyalty and dedication to Core and its employees, along with setting high expectations and relentlessly pursuing the success of the company. Those of us that had the good fortune to work closely with Dave will all remember that he approached every workday with optimism and confidence, traits that still permeate through the culture of our company. Dave is survived by his loving wife Laureen, a long list of friends and the thousands of Core Lab coworkers whose lives he touched. Moving now to some high-level comments about the first quarter of 2023. Core overcame the typical first quarter seasonal decline in client activity as well as somewhat lower-than-expected completion activity in U.S. land to post revenue and operating income that were comparable to Q4 of 2022, which was the best quarter of last year. Revenue for the quarter came in at $128 million. Year-over-year, the first quarter of 2023 showed an 11% growth in revenue and ex-items, 100% growth in operating income with 56% incremental margins. Sequentially, the company's…

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 2023 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 eligible retirement age. First quarter also includes $1.7 million of costs associated with exiting a few facilities in efforts to consolidate these locations. These consolidations are expected to reduce future operating costs by more than $1.5 million annually. These items have also been excluded from the discussion of our financial results. So looking at the income statement, revenue was $128.4 million in the first quarter, a slight increase from $127.6 million in the prior quarter and up 11.3% year-over-year. The sequential growth in revenue this quarter was primarily associated with improved activity on international projects, which offset typical seasonal decline in a softer-than-expected U.S. land market. Of this revenue, service revenue, which is more international, was $91.1 million for the quarter, up over 2% sequentially and up almost 8% from last year. International revenue was flat sequentially, but up nicely year-over-year as improved activity on international projects offset typical seasonal decline in the first quarter as well as the ongoing impact from the conflict between Russia and Ukraine. Although global trading patterns for crude oil began to show signs of stabilizing late in the first quarter, activity levels for crude oil assay work are still below pre-conflict levels. Service revenue in the U.S. market also showed nice improvement…

Thank you, Chris. Looking forward, we see crude oil macro fundamentals continuing to support a multiyear recovery cycle for the oil and gas industry. For the remainder of 2023, despite recession concerns for key economies around the world, we also see supply and demand balance tightening as the year unfolds. Crude oil demand for 2023 as forecast by the International Energy Agency in April 2023 is projected to be a record 101.9 million barrels per day as consumption in China continues to grow. As crude oil demand is projected to exceed pre-COVID levels, crude oil supply is projected to tighten. With the recently announced OPEC+ production cuts, crude oil supply will be in a decline for the remainder of the year. In addition to the OPEC+ production cuts, production growth in other areas continues to face constraints due to prolonged underinvestment in many regions around the globe as well as natural decline of production from existing fields. As a result, we continue to expect international operators to expand their upstream spending plans for 2023 by mid-teens compared to 2022. This supports our outlook for continued improvement in international onshore and offshore activity, with projects emerging and underway, most notably across the Middle East, Latin America and West Africa regions. Turning to the U.S., U.S. land activity was somewhat weaker than expected in the early part of 2023. The lower-than-expected activity growth is associated with weak natural gas prices. However, we see ongoing challenges with crude oil supply, which should require increased spending by operators to grow and replace production. While operators remain focused on capital discipline, 2023 forecast continue to indicate upstream spending will increase approximately 15% year-over-year. In summary, we project Reservoir Description's second quarter 2023 revenue to increase by low single-digits. Continued volatility with crude oil trading patterns may impact our Reservoir Description segment's international growth within its Russian, Ukrainian and European operations. Our Production Enhancement segment's revenue is estimated to increase by mid-single-digits. We project second quarter 2023 revenue to range from $130 million to $135 million and operating income of $14.5 million to $17.5 million, yielding operating margins of approximately 12%. EPS for the second quarter of 2023 is expected to range from $0.20 to $0.24. The company's second quarter 2023 guidance is based on projections for underlying operations and excludes gains and losses in foreign exchange. Second quarter 2023 guidance also assumes an effective tax rate of 20%. Now I will 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 is the foundation of Core Lab's success. Turning first to Reservoir Description. For the first quarter of 2023, revenue came in at just over $80 million, up 3% compared to Q4 and up 7% year-over-year. Operating income for Reservoir Description ex-items was $7.8 million and operating margins were 10%. Margins ex-items expanded approximately 200 basis points sequentially and 450 basis points year-over-year. The segment's financial performance was underpinned by improving international client activity as well as indications that crude oil trading patterns had started to stabilize late in the first quarter, following sanctions that were imposed on Russian crude oil shipments late in 2022. We do see the Russia-Ukraine conflict still posing volatility and uncertainties for growth in our European, Russian and Ukrainian operations. The IEA recently updated its forecast for crude oil demand for 2023 to an average record high 101.9 million barrels per day, up by 1.9 million barrels per day from 2022 even after assessing global financial forecasts. This bodes well for growing demand for the Reservoir Description services that will be required to grow production and replace the natural decline of existing producing fields. As we look ahead, we see the growing international rig count over the past year as a harbinger of an improving landscape for Reservoir Description, a trend that we project will play out for the next several years, particularly in the Middle East, North and South America as well as most other regions. Early movers in the oilfield service sector that are more exposed to well construction have already felt the impact of this cycle shift. As projects progress into field…

[Operator Instructions] The first question comes from Samantha Hoh of Evercore ISI.

I love all the information about just all the technical progress that you guys are making. I was wondering for Reservoir Description, it kind of looks like things have turned a corner with international and maybe offshore starting to try some lift on the revenue growth here. Are there fairly any reasons why revenue wouldn't keep growing sequentially? And I was wondering if you could actually also weigh in on just sort of what you're seeing on the exploration activity side. I mean, clearly, maybe as a benefit here, but what other basins are you starting to scale a little bit more inbound on exploration work?

Yes. Samantha, great question. I think as much as we don't like to see linearity and the simplicity of why [indiscernible] forecasting, I don't think there's quite the backlog and advancement of projects to really see the, I'll call it, the confidence in the inflection point sequentially. Longer term, no doubt about it, it's definitely building. And so a little bit of caution there. The other thing I'd add, and I think Gwen and Chris and I all touched on it here is we do have some uncertainties about the crude oil assay work. That's a little bit of an uncertainty in terms of Reservoir Description performance. But long term, the pattern is clearly very strong and up for Reservoir Description. You saw some very nice year-over-year results there, see that moving along in the right direction. On the exploration side, we do see projects emerging in a number of places around the planet. Historically, Core Lab's wheelhouse is not exposure to exploration projects for a variety of reasons. Coring and fluid sampling early in exploration projects is complicated and not often done at high levels. The wheelhouse for Reservoir Description is when we get into field appraisal, field development and then into production. And so as projects move out of exploration and last year 2022 was the biggest year in a decade for exploration spending -- the next steps will be -- those will move into appraisal, development and eventually production. That's really the wheelhouse for Reservoir Description. So again, a little bit later in the cycle than folks that are involved in, say, geophysics, seismic analysis, well construction. We'll be a little later in the cycle, but you can start to see the foundation for Core Lab's engagement on those projects really starting to gain traction.

Okay. And then the next thing I was kind of curious about was just the inventory build for the large international projects that kind of surprised you a bit because I didn't think there was that much product. I mean that sounds like a more product-driven bill. Can you maybe talk a little bit about -- more about that? I mean is it associated with all the water EOR-type projects that you're working on?

Samantha, this is Chris. So when you think about international product sales for us, I would put those into 2 categories. A lot of times, we're manufacturing that stuff in bulk orders here in the U.S. and then it ships. And those can happen a couple of times a year and they kind of will swing Production Enhancement's results from quarter-to-quarter. This is a little bit different where it's a longer-term arrangement and there will be a more steady supply of products in the region. And then to support that, we're actually having to build some inventory in those locations so that it's not being shift. It's going to be shipped maybe on a quarterly basis, but the supply to the customer is going to be done from that international location. So we're having to build some stock in that location and you see that happen in this quarter. In our release, we gave some details on one of those big projects that's in Thailand, new relationship there should serve us very well over the next several years and I think beyond. And then in addition to that, what I would add is a little slower. We saw the frac spread drop off, call it, the back end of November, really take a hard hit in December. We had anticipated a bit quicker snapback early into the year. It was slower to recover. It really lasted until the only building started kind of late February and then March was pretty strong. So a bit of inventory build on the product side there, too.

Maybe just a last one, if I could please that in since we're talking about U.S. track now. I think there's also a bit of a debate in terms of whether or not we're at a completions level where production can keep growing or are we sort of turning over the production growth? What are your takes on that? Like is this a completion activity type level that we can keep growing oil supply here in the U.S.?

Yes. Samantha, before I answer that, one other point on that, we're still facing some supply chain uncertainties. We're having to operate product inventories on a just in case rather than a just-in-time mentality, especially for some specialty steels and things like that. To your broader question about completion levels, we think they have to go up. I've gained some either inform or no variety maybe for saying that -- phrasing it this way, that unconventionals are a very unforgiving treadmill. The decline rates are so quick on these wells that you have to keep drilling wells. And the more wells you have, you have to spool up more wells to maintain that level of production. We think that drilling has to pick up. We think that completions has to pick up if we're going to maintain and certainly if we're going to try to grow production in the U.S. But I would add to that that not within Core Lab, but within the folks that are involved in drilling and completing the wells, the actual heavy-duty hardware, we're still seeing some physical limitations on the availability of that heavy hardware. That may be a constraint. But when our clients are ready to complete wells, we'll be ready to provide products.

The next question comes from John Daniel of Daniel Energy Partners.

Just to -- the first is a quick one following Samantha. Larry, you alluded to some of the -- still some of the supply chain headwinds. I'm curious when you see that being relieved at all.

Yes. I've got some thoughts on it. Chris may add on it. So John, I think the way to look at that is what was a 3 or maybe 4 month lead time to get some specialty steels. We're still running into cases where the providers of steel are calling us up and saying, hey, we're going to do a run now and delivery is going to be 9 months out. So we're having to keep more of that type of steel in stock than we might -- than certainly than we want to, but more than we would normally have to when we had a shorter delivery. I think there's -- there are signs that those are improving. There are fewer of those obstacles out there. But when you're dealing with specialty products, you're kind of at the whim of right when the supplier says they're going to do a run.

The only thing I would add is that just in general, just normal steel, not even the specialty stuff, the lead times are much longer than they used to be and we're not really seeing that change right now. So I don't know if we'll get back to pre-COVID kind of lead times or not. So we've just sort of adjusted ourselves to this 12-month or 12-month-plus lead time, just about on anything like that, whether it's the content that go into making the explosives or whether it's the steel that goes into making the gun systems or any other components that are going downhole.

Okay. Got it. And the second question, totally unrelated is there's been lots of people writing and talking about the whole concept of Tier 1 inventory and trying to estimate how much more do we have and the implications. I'm just curious, Larry, if you can line for a few minutes on your views on Tier 1 inventory in the U.S., the runway? And then when we -- when that runway starts to come to an end, if you will, the implications for Core and the opportunities.

Yes. So I think there's less Tier 1 property out there that is often discussed or described. It's a bit of a gray area because as technology advances, quality, the quality of rock that can produce acceptable results over time has gotten a little bit lower. In other words, they're able to complete more efficiently in lower quality rock and get similar results with more investment in the completion process.

They went to their most productive gardens and picked the vegetables and fruit out of that. They use their best quality properties. So I think over the next 3 to 5 years, I think that becomes even more apparent that Tier 1 properties are getting consumed. What it means for Core Lab, I think on the Production Enhancement side, completion intensity will have to go up. So longer laterals continued, more product sales, more diagnostic sales to make sure that these more challenging completions are executed properly. And then on the Reservoir Description side, we have a number of clients that we've done a proprietary study and we've got a multi-company consortium study on EOR opportunities where we use a combination of vaporization and condensation injecting engineered gases to increase production from these unconventional wells. You can't use a waterflood or a sweet flood like you historically would in a conventional reservoir, but the technology that we've demonstrated to work in the laboratory are being utilized right now by some clients. I think that's going to be a growing topic, specifically EOR on unconventionals, where containment exists, that's going to work.

Just I'm trying to dumb this down because I'm not that bright, but it just seems to me that the need for more intense study grows over time. Is that -- am I wrong on that?

Yes. I mean, we've established for those that have engaged with us on this and bought our laboratory testing, we've demonstrated that they can get substantial improvements in ultimate recoveries. If they can make these EOR processes work, containment is a big issue. For example, some operators have put away oceans of blended gases into some fields and got nothing back, including the gas that they injected is just gone. And so containment, it's a little bit out of Core Lab's wheelhouse, if you will. That's more of an oil company looking at their size, they're looking at fractures and fault patterns and things like that. But we do know that there are a number of places where EOR is being successfully deployed following the lead that we've demonstrated in the laboratory or what types of gas and how to inject it at what rates and things like that. It's a multi-cycle process.

The next question comes from Don Crist of Johnson Rice.

I just wanted to ask one follow-up on the answer you just gave to John's questions. Where are we from a basin perspective? I know it's probably too early in the Permian, but in the Bakken and the Eagle Ford, are you starting to see some engagement prior to re-fracs or kind of EOR discussions there? Or when does that kind of time cycle start from your perspective when they're going back in?

Short answer is yes. We are seeing engagement there. We've done a number of projects in those areas and others. I think the time from proof of concept, if you will, in the laboratory to deployment, that's really out of our control. Our engagement does not take the processes to the field. That's what the operators -- they're better at controlling pumps and compression and delivering gas supplies to the wells than we are. We validate in the laboratory that if you use this recipe of gases, you can increase production over multiple cycles of injection, which lead to vaporization of oil into the gas that's been injected. And then when that gas is enriched gas is withdrawn, dropped the pressure and liquids fall out. And so that's really more of a question, I think, for the operators about what their plans are and where they're going with it. We just tell them, if you put this gas in this rock and this oil and cycle it the way we suggest, you can increase recovery by this much.

Okay. But it's safe to say it's probably not in the first 5 years or so of a shale well life?

Well, actually -- so there are some -- traditionally -- Don, it's a very good question. Traditionally, EOR projects come in very late in the life of a conventional field. There are some companies that are trying to maybe see whether that can be cost-effective different processes now that that could be cost effective earlier in the life of the field. The thing about these unconventional wells is with the steep decline curves, it's not going to be a 5-year period before they say, hey, I'd like to get a little more out of these with 60%, 70% drop off early on, they're going to be thinking about that earlier in the life of the wells.

Okay. And one kind of follow-up unrelated. Obviously, you had the $1.7 million charge in the first quarter for facility exit and consolidation. I'm assuming that was in Europe just given the flow or the trading of oil patterns have changed. But kind of building on that and the redomestication of the company in a couple of days. Can you just talk about costs going forward? Obviously, there's a lot of moving pieces there. But I'm assuming that the redomestication is going to help with cost coming down and then some facility exits will probably help as well.

Yes. So Don, no, the facility costs that we talked about in the release were in the Americas, in North America specifically. And a lot of that was just consolidation. We had some leases that were winding down. We accelerated some of those and moved people into vacant space in other facilities. So just cleaning those things up. We'll do those as quickly as we can as cost-effectively as we can. We've relocated some people and some lab operations into Houston, making use of unused space we had here. So a variety of knobs. We're always looking to turn those. We'd like to go -- we would have liked to have gone faster on some of those, but some of the leases were challenging to, I'll call it, escape from. And so we've got more of those in the queue, but I think a nice step taken, I think, a good investment in getting costs down going forward. I think we're talking about somewhere between over $1.5 million a year in annual savings from the facilities that we exited in the first quarter. So I think good use of cash to get out of those buildings and clean up some of the leases. I'll let Chris talk a little about the redomestication costs.

And so we've talked about this a little bit, Don. And it's probably between $1.5 million and $2 million of annual savings when we get everything completed. That's not a 2023 number. It's probably more a 2024 number and beyond. So think about we had a double -- a small corporate office in Europe, in the Netherlands, that's going away. We had to do audits at the consolidated level for both the U.S. and Europe. So IFRS, one of those is going away. But it's not just that. It's the savings of potential future costs going forward as well as regulations and reporting requirements around ESG get elevated. They're accelerating fast in both Europe and the U.S. and they're not aligned. So you're having to dance to 2 sets of regulations. And that's on every front, whether it's tax laws, reporting laws, things like that. So it's not just what we've experienced in the past. It's reducing the potential elevation of future costs as well.

Yes, I just add on to that. Yes, just to add on to that concept, Don. So during COVID, we actually had to take down some of our, I'll call it, presence in the Netherlands. We were going to have to rebuild that. And that was going to be a costly proposition for us to get back to what it was pre-COVID. So by doing this, we've cut some costs. We've also limited costs that would have been coming back into the system. And I think that adds up more into the $3 million to $4 million a year when we look at what that -- what it would have cost us to get back to full compliance.

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

Okay. We'll wrap up here. In summary, Core's operational leadership continues to position the company for improving client activity levels in both the U.S. and international markets for 2023 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 this 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 are proud -- 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 has now concluded. Thank you for attending today's presentation. You may now disconnect.