Good morning, and welcome to the Core Lab Q2 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today's presentation, there will 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, 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 second 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 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 in 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 calls and 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. 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 are also -- in our comments we 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.

Thanks, Gwen. Moving now to some high-level comments about the second quarter of 2023. Core continue to build on the operational momentum established over the past few quarters, while revenue was flat compared to Q1 at $128 million. We achieved sequential improvements in operating income, operating margins, net income, free cash flow, and earnings per share. At the same time, we continue to execute on our key financial strategies, including reducing net debt and strengthening our balance sheet. Year-over-year, the second quarter of 2023 showed a nearly 6% growth in revenue. Ex-items operating income for the second quarter was $15.6 million, up 62% year-over-year, and operating margins were 12% with year-over-year incrementals exceeding 85%. Second quarter of 2023 operating margins, as well as year-over-year and sequential incremental margins were particularly strong at reservoir description where demand for reservoir rock and fluid analysis across our global client base continues to rise. These improvements were partially offset by the clients in revenue and operating income due to a quarter-over-quarter reduction in both international products sales and lower than anticipated U.S. land completion activity. Still, production enhancement margins, ex-items held a 10% in the second quarter. Lastly, for the full company, ex-items EPS was $0.21 per share, up from $0.19 in Q1 of 2023. As we look ahead, Core will continue to execute on its key strategic objectives by one, introducing new product and service offerings in key geographic markets. Two, maintaining a lean and focused organization, and three, maintaining our commitment to delivering the company. Now to review Core Lab strategies and the financial tenants that Core used to build shareholder value over our 27 plus year history as a publicly traded company. The interest of our shareholders, clients and employees will always be well served by Core Lab's resilient cultures, which realize on innovation, leveraging technology to solve problems and dedicated customer service. I'll talk more about some of our latest innovations in the operational review section of this call. While we aggressively pursue growth opportunities, the company will remain focused on its three long-standing, long-term financial tenets, those being to maximize free cash flow, maximize return on invested capital and returning excess free cash to our shareholders. Before moving on, I want to thank our employees for their dedication, loyalty and adaptability in meeting all of our clients' needs and for the commitment that many have shown as we prepare for a more active market. I'll now turn it over to Chris with a detailed financial review.

Thanks Larry. Before we review the financial performance for the quarter, the guidance we gave on our last call and past calls specifically excluded the impact of any FX gains or losses and assumed an effective tax rate of 20%. So accordingly, our discussion today excludes any foreign exchange gain or loss for current and prior periods. Additionally, the financial results for the second quarter of 2023 include, one, a tax benefit of approximately $11.6 million associated with the company's redomestication of the parent company from the Netherlands to the U.S., and two, a gain of approximately $2.9 million associated with proceeds received from company-owned life insurance policies and a reversal of previously recognized stock compensation expense for certain performance share awards which are no longer expected to vest. These items have also been excluded from our discussion of the financial results. Now looking at the income statement. Revenue was $127.9 million in the second quarter, flat compared to the prior quarter, and up almost 6% year-over-year. Sequentially, international upstream projects continue to expand. However, this increase was offset by a decrease in product sales as the U.S. onshore activity softened during the second quarter. The year-over-year growth in revenue was primarily associated with improved activity on international upstream projects and also higher levels of activity in the U.S. when compared to last year. Of this revenue, service revenue, which is more international, was $93.3 million for the quarter, up over 2% sequentially, and up over 9% from last year. International service revenue was up 4% sequentially and up over 7% year-over-year as the activity on projects outside the U.S. continues to build across multiple regions. Additionally, service revenue associated with crude assay work performed in our European operations also had some recovery from the decrease last quarter. Service revenue…

Thank you, Chris. Based on conversations with the company's global client base, we maintain our constructive outlook on international upstream spending for the second half of 2023 and beyond. As a higher level of investment will be required to maintain and grow hydrocarbon production. The company anticipates spending to expand toward long cycle upstream projects in both onshore and offshore environments. In the near-term, the global crude oil market may remain volatile due to global recession fears and uncertainty about the extent and timing of China's economic recovery. The recent OPEC+ production cuts being implemented to support the current market are not expected to be maintained or required long-term. Additionally, production growth and areas outside of OPEC+ continue to face constraints due to prolonged underinvestment, as well as the loss of production due to natural declines from existing fields. We continue to anticipate a multi-year international recovery supported by increased spending on exploration in many regions around the world and expanded development of existing fields to fortify crude oil and natural gas reserves. This underlies Core's outlook for continued improvement and international onshore and offshore activity. With ongoing projects across the globe, most notably in the Middle East, South Atlantic margins and West Africa. Turning to the U.S. Land activity for the first half of 2023 was lower than expected as reflected by the declining U.S. rig and frac spreads counts throughout the second quarter. We see U.S. land completion activity for the second half of 2023 to be slightly down compared to the first half of the year. As a result, Core projects reservoir descriptions third quarter 2023 revenue to be up sequentially by low-single digits. While we expect our international revenue to increase sequentially, the segments revenue will be slightly softened by a projected decrease in U.S. activity. Client commitments on international projects have improved nicely year-over-year. However, the cadence at which these long-term projects are executed by Core's clients may vary from quarter-to-quarter as activity begins to accelerate. Additionally, the Russia/Ukraine continues to create uncertainties with respect to trading patterns of crude oil and associated crude oil assay services, which may impact reservoir descriptions, operations in Russia, Ukraine, and Europe. Now turning to production enhancement. Third quarter revenue is estimated to be flat to down by low-single digits sequentially. Growth in production enhancements, international sales may offset the projected decline in U.S. revenue. In summary, Core projects third quarter 2023 revenue to range from $128 million to $132 million and operating income of $15.2 million to $17.5 million, yielding operating margins of approximately 13%. EPS for the third quarter is expected to range from $0.21 to $0.25. The company's third quarter 2023 guidance is based on projections for underlying operations and excludes gains and losses in foreign exchange. Third quarter guidance also assumes an effective tax rate of 20%. And now I will turn the call 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 is a foundation of Core Lab success. In July, the IEA updated its forecast for crude oil demand for 2023 to average a record high 102.1 million barrels per day. That's up approximately 2 million barrels per day from 2022, even after assessing current global financial forecasts. This continues to vote 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 and 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 quarters, particularly in the Middle East, North and South America, as well as most other regions. Early movers in the oil field service sector that are more exposed to wealth instruction have already felt the impact of this cycle shift. Now for some operational highlights from the second quarter. Turning first to reservoir description of the second quarter of 2023, revenue came in at $83.4 million, up 4% compared to Q1 and up 10% year-over-year. Operating income for reservoir description, ex-items, was $13.3 million and operating margins were over 13%. Margins ex-items, expanded approximately 370 basis points sequentially and 680 basis points year-over-year. Sequential incremental margins for reservoir description exceeded 100%. Once again highlighting the operational leverage that exists in our reservoir description business model. The segment's finance performance in the second quarter was underpinned by improving international client activity, as well as indications that demand for crude oil and derived product assay work are continuing…

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Stephen Gengaro from Stifel. Please go ahead.

Thanks, and good morning, everybody.

Hi, Steven.

Two things for me. The first, just from a bigger picture perspective, when we think about the multiyear growth you're expecting, I think others are expecting internationally. How should we think about the RD growth relative to activity? And what does that mean for incremental margins?

Yes. I think, Steve, the first is, it's a really good question, and I think it's a lot of focus within our company on that, too. The first thing I think that I want to get across here is, as much as, and I said this last quarter, I think. As much as we'd like it to be, it's not Y equals MX plus B yet. The linearity that we would all like to see is just not there yet. The client pacing on projects from the time we're awarded or even throughout the projects is not quite up to what we've historically come to expect, but it's picking up in a nice term here. I think what we see is that we can get on a path to getting into, call it high teens margins over the next year, year and a half, and I think the growth there is going to accelerate pretty quickly once we get more projects sort of shingled in at the same time. Right now, if a project slips, and we just had a project in, for example, for Q3 that we incorporated into our guidance thinking, we had a project, a multi-well core project, offshore South Atlantic margin, and it just pushed, the client just informed us, it pushed from Q3 to Q4. If we had more projects going at one time, you probably wouldn't see that in the results, but right now, that still affects the performance for the quarter. So I think we're on a nice path of growth there. I don't know that I'd get 100% incremental margins every quarter, but I do think that what we just accomplished and what we accomplished in the previous few quarters, seeing high incremental margins just shows the operational leverage in that group. We'll achieve that, and I think we can see segment margins, EBIT margins getting into the mid to high teens within the next year, year and a half.

Great. Thanks. That's good color. And then the other question, if you look at Core Lab historically, the returns on capital and the free cash flow generation were extremely good, and over the last several years, it's been less so. But I think, and I was just kind of looking for validation and thoughts on this, but I think a lot of that has to do with the RD business internationally being a real big driver of free cash flow. Am I thinking about that right? And so should we start to see the free cash flow profile change if RD does what we think it's going to do?

Yes, I think that's right. I mean, the margins in that group and our business model in that group are going to put cash down very nicely. The cost of doing that business, we don't need any more roofline. We've got some expansion that we're doing. I talked about it in release. We're introducing some new services into the Middle East. But yes, I think that's going to be the bulwark of driving free cash. And Chris, anything you wanted to add to that?

No. I think that's exactly right. High incremental margins turns into free cash, because there's not much CapEx required to grow from where we're at. So, just the last several years, we've been at this sort of base level where we've got a similar footprint than when we had before. We have reduced staff. But again, we're kind of at a low level and free cash will grow significantly from there driven by reservoir description.

And on the production enhancement side, the service side of that business also can yield nice incrementals and generate nice free cash out of that as well. And then, as we see demand internationally growing for more projects, we think absorption in our product manufacturing will also generate higher margins.

Good. Thank you for the details.

Sure. You're welcome, Steve.

[Operator Instructions] The next question comes from John Daniel of Daniel Energy Partners. Please go ahead.

Hey, guys. Good morning. Quick question on the X-Span technology you referenced in your release. You noted it was used with an Australian operator. I'm just curious how often you see that used in the lower 48?

Yes, we see it used over the global sort of field of play here. And it's got a lot of applications for where people have sort of split casing or they're trying to isolate a zone where they've got corrosion problems like the case that we talked about in the example from Australia. We'll see X-Span deployed. And it uses an energetic trigger to emplace that patch. And it's a material science expertise in the company, too, that creates that bond between the pipe and the patch. So, I think if we look over any place where there's older fields or where there's highly corrosive production, either very high salinity, poor fluids or H2S, things that can lead to the corrosion of tubulars, and there's X-Span opportunities.

Okay. And when you look at some of the -- I don't know the economics of X-Span and all the numbers behind it. But is there a certain category of wells where it doesn't make sense because the production is so low? I'm just trying to get a feel for like old stripper wells and opportunity sets longer term?

Yes. I think with older stripper wells you get to a point here where remediation just doesn't make sense at all and it's just simpler to think about plug and abandonment.

Yes.

I'd say, probably the biggest field of play for us is on higher dollar more complex wells.

Right.

So offshore.

But it's definitely a less expensive alternative to replacing casing or doing other forms of remediation. So, it could be an opportunity.

Okay. Got it. And then one just big picture as you look across you know what looks to be in a much improving international market. Are there any markets that to this point have disappointed you and when would you expect them to kick in?

So a couple thoughts on that John, a good question here. So, we've talked about obviously the Middle East, South Atlantic margin being real bulwarks for us. Offshore West Africa we talked about, Namibia projects and a few others. I think all those look good. We did see some recent announcement about discoveries in Malaysia. And so, I'd say that's been an area that had been lagging, but it's nice to see some discoveries being announced, because that -- as we've talked about for Core Lab, we're not really an exploration exposed company that much. When things get into development, I'm sorry, appraisal development and production that's really the wheelhouse for our two business segments. So I think AsiaPac is hopefully starting to get back into play here after a pretty long, prolonged period of being quiet. I would also point out the, we didn't really highlight it in this release, but our carbon, capture and storage business continues to grow very nicely. Saudi Aramco has joined our consortium project. And so between the consortium and a number of proprietary projects we've got going on. That's bringing some nice play both in the U.S. and from an international perspective as that sort of emerging project spending on carbon, capture and storage is attracting reservoir rock and fluid evaluation.

Okay. Thank you for letting me ask some questions.

Sure, appreciate it, John.

The next question comes from Don Crist of Johnson Rice. Please go ahead.

Good morning, Don.

Morning guys. How are you all this morning?

Great, Don, good.

I wanted to ask about the Middle East. Obviously, it sounds like you got a lot of engagements across several different countries in the Middle East. But how different is the drilling now going into the kind of unconventional type reservoirs versus what they've been doing in the past? And kind of where are they in that transition from your opinion?

Yes. So, they're very capable. All the NOCs are very capable there. But their attention over decades has been on conventional fields. And that -- proportionally that means a lot fewer wells in the past and they're going to need to exploit unconventional resources. And so, I'd say, they're quickly getting up to speed, understanding what it's going to take to properly drill and complete, stimulate horizontal wells, multi-stage horizontal wells, thinking about things about maximizing or optimizing well spacing. That plays right into our expertise and what we can bring to bear. One of the things that within Core Lab, within our reservoir description section is, we've done these multi-company unconventional reservoir studies in every basin in the U.S. and a number of international basins. And so, what we see some of these NOCs in the Middle East doing is, they're buying. We own that data from these consortiums. They're interested in acquiring some of that knowledge from us so they can rank, hey how does this compare to an Eagle Ford or how does this compare to a Marcellus. Or how does it compare to a Barnett or one of the Permian basin targets. They want to know and rank what they're getting, what they're finding in their local resources compared to some proven unconventional fields. And so, tied to that is there's quite a bit of drilling and coring and fluid sampling going on with these unconventional reservoirs. And that's what we talked about in the release. We're bringing some of these technologies that were developed primarily for the U.S. market. Now we get a chance to move those into an emerging unconventional market. I'll add one other thought to that Don is, I don't think outside of the Middle East. There's many places where unconventionals are going to have a big sort of upside. There's too many difficult things that have to come together. You have to have the resource base. You have to have an accommodative government that's going to allow or land ownership that's going to allow for thousands and thousands of wells to be drilled. And you're also going to need an incredible pipeline of people and material to support the high cadence that goes along with an unconventional project. So the operators in the Middle East can clearly get that done. They've got the expertise, the will and the sort of accommodative thoughts toward drilling the wells. That'll work. They've got the natural resource to do it. A lot of other places on the planet it'd be tough to replicate that model, that's worked in the U.S.

Right I agree. We saw that in the France basins, right?

Right.

But turning back to the Middle East, where are they in that process of evaluating the unconventional resource? Are we still in the first or second innings of that or how far down the pipeline are they?

I think that's right. In the first few innings on that I'd say not everybody's in the same spot. Maybe some people in the third or fourth inning, some in the first or second inning of that. We've had a long-term. I'll call it over the last couple years, we've done a project for one of the NOCs evaluating a whole basin for them with multiple unconventional targets. And I'd say they're a little closer to getting to call it the point of production.

I appreciate all the color. Thank you. I'll turn it back.

Sure, Don.

Thank you, Don.

Seeing that there are no further questions, I would like to turn the conference back over to Mr. Bruno for closing remarks.

Okay. I think we've got a pretty active earnings call day today. A lot of other calls going on. And so, I think 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 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.