Core Laboratories N.V. (CLB) on Q1 2021 Results - Earnings Call Transcript
Operator: Good day, and welcome to the Core Laboratories First Quarter 2021 Earnings Conference Call. . I would now like to turn the conference over to Larry Bruno, Chairman and CEO. Please go ahead.
Lawrence Bruno: Thanks, Tom. 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 2021 earnings call.
Gwendolyn Schreffler: Thank you, Larry. Before we start the conference this morning, I'll mention that some of our statements that we make during this call may include projections, estimates and other forward-looking information. This would include any discussion of the company's business outlook. These types of forward-looking statements are subject to a number of risks and uncertainties relating to the oil and gas industry, business conditions, international markets, international political climate and other factors, including those discussed in our 34 Act filings that may affect our outcome. Should one or more of these risks or uncertainties materialize or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For a more detailed discussion of some of the foregoing risks and uncertainties, see Item 1a Risk Factors in our most recent annual report on Form 10-K as well as other reports and registration statements filed by us with the SEC and the AFM. Our comments include non-GAAP financial measures. Reconciliation to the most directly comparable GAAP financial measures is included in the press release announcing our first quarter results. Those non-GAAP measures can also be found on our website.
Lawrence Bruno: Thanks, Gwen. First, our thoughts remain with all of those that have been affected by the global pandemic. There are still virus-related challenges with persistent or even rising infection rates in a number of geographic areas like Brazil, India, parts of Europe and other regions. There are certainly reasons for optimism as the vaccines become more widely distributed throughout 2021 and as demand for oil and gas continues to recover. However, virus-related issues are still causing unpredictable schedules in our clients' activities, travel complications and logistical hurdles for field services and product shipments as a number of countries enacted, reenacted or expanded precautionary measures, travel restrictions and even lockdowns during Q1. During the first quarter of 2021, a substantial winter storm event impacted oilfield operations across the North American mid-continent region. Core Lab operations were adversely impacted by this winter storm with facility closures in Alberta, Canada, Oklahoma, Northern Texas, the Texas Gulf Coast and even across into Louisiana, power disruptions from the storm, idle production lines at Core Lab's largest manufacturing facility in Godley, Texas for a week. On the service side of the business, a combination of extended power and water damaged the HVAC and frozen pipes forced laboratory closures and operational disruptions for even longer. Core's largest facilities in the Western Hemisphere were impacted by these disruptions. Large laboratories, such as the advanced technology centers in Houston and Calgary, are complex operations that require thermal stability in the lab workplace, power and water access, proper ventilation and fire suppression systems for safe operation. I want to thank the Core Lab staff to brave the elements and mitigated damage at the facilities through quick action. Because of their dedication, Core was able to affect remedial steps that helped reduce downtime. All operations are currently up and working, although a number of temporary measures are still being employed while more permanent facility repairs are awaiting replacement parts. Although there were inevitable workflow disruptions, no laboratory equipment or permanent facility damage was sustained, and we anticipate no negative operational impact on Q2 performance. Now to review Core Lab strategies and the financial tenants that Core Lab has used to build shareholder value over our 25-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 culture, which relies on innovation, leveraging technology to solve problems and dedicated customer service. While we navigate through the current challenges, Core will remain focused on its 3 long-standing, long-term financial tenants. Those being to maximize free cash flow, maximize return on invested capital and return excess free cash to our shareholders. Core's management team remains sharply focused on ensuring that our cost structure is aligned with client activity levels. Moreover, we will continue to meet all of our client project needs, and very importantly, we remain well positioned for the recovery in client activity that we anticipate in 2021 and beyond.
Christopher Hill: Thanks, Larry. I will start with an update of our corporate capital structure as the company's continued efforts towards strengthening the balance sheet by reducing debt and improving our liquidity position. Excess free cash flow continues to be primarily focused on reducing net debt. However, we took additional steps as we fully executed our ATM during the first quarter, to which we issued a little over 1.65 million shares at a weighted average price of $36.19, netting proceeds of $59.1 million to the company. These proceeds were used to pay off the remaining outstanding balance borrowed against our credit facility. For the first quarter, net debt was reduced by $65 million, which also reduced our leverage ratio to a little over 2.3 as of March 31, compared to 2.82 in the prior quarter. As a reminder, the maximum leverage ratio permitted under our debt agreements is 3x through June 30, 2021, and then is reduced over the next 2 quarters down to 2.5 at the end of this year. As of March 31, there is $214 million of available capacity under our $225 million credit facility, and we will continue to focus free cash towards reducing net debt for the remainder of 2021. As Larry stated earlier, we anticipate improving market conditions throughout the remainder of 2021. And with the steps taken over the last 12 months towards reducing debt and creating additional liquidity, the company is now better positioned to continue with the expansion and commercialization of our new product and service offerings.
Gwendolyn Schreffler: Thank you, Chris. For 2021, as both Larry and Chris have discussed, Core will continue to execute our strategic plan with a focus on generating free cash and reducing net debt while maximizing return on invested capital. Additionally, as part of Core's 2021 strategic focus, the company will continue to invest in targeted client-driven technologies that aim to both solve problems and capitalize on Core's growth opportunities. The company remains well positioned with ample liquidity to invest in its global capabilities to meet the needs of our clients. These capabilities include Core's expanding proprietary databases along with innovations in artificial intelligence and machine learning, which are the foundation of Core's digital technology transformation. Core is optimistic about our international growth opportunities throughout the remainder of 2021 as crude oil markets rebound. With Core Lab having more than 70% of our revenue exposed to international activity, the company remains active on international projects already underway and is planning stage -- and is in the planning stages for new projects spooling up. Core sees momentum building in the international market, which will drive growth opportunities for the company throughout the remainder of 2021 and beyond. Some of these geographic regions include Turkey, South Atlantic margin, Mexico, Qatar and various other areas of the Middle East. While unpredictable disruptions related to COVID-19 are expected to persist in the near to midterm, Core remains optimistic that gradual improvement will follow over the remainder of 2021. Considering the continuing improvement with crude oil supply and demand and international activity, Core projects Reservoir Description revenue to be up mid-to-high single digits sequentially for the second quarter of 2021. Core expects sequential improvement in U.S. land activity, in part on a strong recovery in the U.S. frac spread following the winter storm, which has continued into the second quarter. As a result, Core Lab projects second quarter 2021 revenue to grow mid-to-high teens for Production Enhancement when compared to the first quarter of 2021. Core expects Production Enhancement to continue to track or outperform U.S. land activity level. Additionally, as Core's clients' activity increases and certain cost reductions are reinstated back into the company's cost structure, incremental margins may be softer in the near to midterm. However, once these costs are fully restored, Core expects the historical incremental margin performance or better. In summary, excluding near-term international challenges related to travel restrictions, Core sees activity levels and financial performance improving throughout the remainder of 2021. Core's growth opportunities are directly related to existing long-term projects returning to normal workflows as well as expanding client activity and new market penetration, particularly in international regions. The company's second quarter guidance is based on projections for underlying operations and excludes gains and losses in foreign exchange. Second quarter 2021 guidance also assumes an effective tax rate of 20%. With that, I'll hand it back to Larry.
Lawrence Bruno: Thanks, Gwen. First, I'd like to thank our global team of employees for providing innovative solutions, integrity and superior service to our clients. The team's collective dedication to servicing our clients is the foundation of Core Lab's success and is shining through during the current challenges. Turning first to Reservoir Description. For the quarter, revenue came in at $76.5 million, down nearly 9% compared to Q4. Revenue was negatively impacted by the typical downward seasonality, which was compounded by ongoing international travel complications and the winter storm in North America. Looking at operating income, the company was able to manage sequential decremental margins to just under 30%. New international projects for Reservoir Description are spooling up. As global energy demand shifts away from coal and toward natural gas, Core Lab sees opportunities in this transition. In the first quarter of 2021, Core Lab, under the direction of the Turkish Petroleum Corporation, was engaged to provide laboratory analysis on conventional core recover from the Türkali-2 well located in the deepwater Sakarya Gas Field in the Black Sea. This multi-well analytical program is leveraging Core's proprietary and patented laboratory technologies plus Core's extensive global experience in evaluating cores from unconsolidated strata. In addition, Core Lab's expansive proprietary datasets in the Caspian Black Sea region are being used to rapidly calibrate reservoir properties. These datasets, combined with the new laboratory measurements, will assist Turkish Petroleum as they evaluate key geologic engineering and economic questions in this very significant deepwater natural gas discovery. Upon arrival at the laboratory, these high-quality conventional cores were immediately scanned using Core's proprietary Non-Invasive Testing and Reservoir Optimization technologies branded as NITRO, Core Lab's proprietary Dual-Energy Computed Tomography along with High Frequency Spectral Gamma surface logging technologies, quickly provided Turkish Petroleum's experts with lithologic information as well as a wide range of critical petrophysical parameters for pay assessment. These NITRO deliverables were provided within a week of receipt of the core, helping to expedite analysis of the target's stratigraphic intervals. These early time datasets are being utilized in conjunction with Core's recently expanded machine learning, artificial intelligence algorithms to refine and enhance sample selection for the traditional time-honored laboratory program. The recovered cores are now progressing through a comprehensive program of physical measurements following consultations between Turkish Petroleum's and Core Lab's technical teams. Core Lab is pleased to be assisting Turkish Petroleum in this important natural gas discovery. Also, in the first quarter of 2021, Core continued its work on a large scale, multi-well integrated project for a national oil company in the Middle East. This study is evaluating an onshore unconventional reservoir, leveraging Core's experience in the region as well as best practices learned from Core's global portfolio of unconventional reservoir studies. A comprehensive laboratory program is underway to evaluate the hydrocarbon potential of this field. The project includes integration of Core Lab's proprietary digital technologies as well as a detailed analysis of rock types, fracture and deformation characteristics, petrophysical properties, organic content and geomechanical properties. Core Lab is incorporating these laboratory-measured parameters into a fully integrated petrophysical model that will include recommendations on completion strategies. In another expression of Core Lab's innovative technology development, industry adoption of Core's proprietary, high resolution, drilling-derived geomechanical information pressure modeling application, branded as D-Code, continued to increase during the quarter. This new methodology uses the physical forces that are generated as the drill bit encounters variations in rock properties. This feedback from the drilling process can then be utilized to derive geomechanical information and geologic variability using a proprietary method. During the quarter, projects were initiated on both conventional and unconventional reservoirs located in the U.S. and the Middle East. Among various deliverables, D-Code is being used by Core's clients to identify the location of fractures and faults, variations in formation pressure and variability in rock properties between completion stages. The ability to gain insight into geologic variability, along both vertical and horizontal wellbores, allows Core's clients to make effective time-sensitive decisions regarding wellbore stability and identify completion target intervals. This physics-based noninvasive approach is only possible because of Core Lab's proprietary, highly organized, extensive database of rock, fluid and formation pressure data. Moving now to Production Enhancement where Core Lab's strengths in both energetic systems and completion diagnostics were again on display. Revenue came in at $31.9 million, up 7% sequentially despite the negative impact of the winter storm to U.S. activity and the resultant temporary idling of Core's largest manufacturing facility. We are pleased that incremental margins came in at over 31% despite the inefficiencies caused by the storm. Core's clients are always looking to improve their completion techniques. In response, Core's Production Enhancement segment continues to expand and penetrate the market with its technologically advanced completions product line. Core's patented ZERO180 oriented perforating system continues to gain traction as the preferred method for perforating smart wells due to the systems advantages over competitive products. Smart wells utilize fiber optic cables attached to the outer wall of the casing in conjunction with downhole sensors, which are set in place during the well completion. These sensors relay real-time downhole data to the surface through the fiber optic cable, allowing operators to make critical decisions on fracking, well spacing and artificial lift programs. Following installation of the sensors and cables, the wells must still be perforated to allow for frac operations and subsequent hydrocarbon production. During the perforating operations, it's vital that the charges in the perforating guns are oriented with a high degree of accuracy. This ensures that the fiber optic cable will not be cut or damaged, which would lead to a loss of communication with the downhole sensors. During the first quarter of 2021, Core Lab worked with a major service provider and multiple operators to successfully perforate smart wells in a number of major basins in the U.S. and Canada. For example, in Q1, Core supplied an operator with a system consisting of 291 guns designed to perforate 35 stages in a smart well in the Mid-Continent region of North America. The job was completed without incident and with no damage to fiber optic cable or sensors, and significantly with no nonproductive time. Another operator in the Rockies utilized ZERO180 system where 350 guns were used to perforate 45 stages in a smart well. Here again, the job was successfully completed without incident or nonproductive time. To date, Core's patented ZERO180 perforating system has been used to perforate many hundreds of stages without incident and with 0 nonproductive time. Core's ZERO180 internally oriented perforating system has clearly distinguished itself as the leader when compared to traditional systems that rely on externally positioned eccentric weight bars. Those less sophisticated systems can require hours to correctly position and are particularly poorly sorted for use in deviated holes. Core Lab's patented ZERO180 oriented perforating system provides the versatility of multiple shot densities and orientation on multiple planes with a proven accuracy of plus or minus 8 degrees. Core's ZERO180 perforating system offers best-in-class performance for smart well completions. Also, during the first quarter of 2021, Core's completion diagnostic expertise was utilized by a client completing multiple wells in the Spraberry Formation of the Permian Basin in West Texas. The goal was to assess whether the target interval in the producing well and a superjacent water-bearing San Andres zone had been properly isolated by the cement job. The operator had been experiencing losses in both drilling mud and cement when completing these Spraberry producers, along with higher-than-expected water cut when the wells were brought on production. At the client's request, Core utilized its proprietary SpectraStim diagnostic technology to evaluate cement coverage across the 2 zones of interest. In the same completion operation, SpectraStim was also used to trace the drilling muds and spacer to help identify thief zones in 3 wells. Core's completion diagnostic engineers were able to confirm the location of the thief zones along with incomplete cement isolation of the water-bearing San Andres interval. The findings led the operator to change the design of their 2-stage cementing program. This resulted in more effective zone isolation, decreased water production and reduced water disposal costs. That concludes our operational review. We appreciate your participation, and Tom will now open the call for questions.
Operator: . And the first question comes from Blake Gendron with Wolfe Research.
Blake Gendron: Encouraging that the international opportunities are spooling up here. I'm not sure if it's appropriate now to start maybe thinking about for Reservoir Description, a run rate, quarterly revenue level. I know it's something we've done in the past. Obviously, the market has changed pretty vastly. But I'm just wondering maybe what your thoughts are for a medium- to longer-term target for revenue for Reservoir Description? And then it sounds like a lot of natural gas opportunities. So if the mix this cycle is heavier gas, where maybe the fluid opportunity isn't as large as it has been in cycles past. What that means for either incremental margins or just structural margins moving forward?
Lawrence Bruno: Yes, Blake, good questions. First, on the R&D quarterly, I think it's just too premature for that. There's still too much uncertainty in how our clients are going to progress on projects that they've got out on the drawing board. So don't want to get out over our skis yet in terms of outlook beyond what we gave in our outlook this morning for Q2. I'll question your -- the foundation, a bit of your question on natural gas projects having potentially less exposure to fluids testing. There are always fluid property questions that have to be addressed. We get into some of these. And for example, we talked about a number of gas projects, Australia over the last couple of quarters and then several others. In many cases, you have to look at whether you're going to have a critical fluid or near critical fluid in which phase behavior is still very important. In other words, if you drop the pressure on some natural gas opportunities, you'll start dropping liquids out across the dew point and that creates a third phase. So now you have water, gas and a liquid phase, hydrocarbon phase, in the pour space. So evaluation of the fluids is always going to be necessary to maximize the reservoir performance and to effectively model field production. So there's still that opportunity for us there, and we look forward to more gas projects as we move forward.
Blake Gendron: Absolutely. Helpful color there. Second question here just on capital allocation, really well-executed ATM offering. And it seems like the balance sheet, there's finally a light at the end of the tunnel here in terms of deleveraging. Can you just remind us what the target for leverage is? And you noted pursuing additional commercial opportunities expanding the portfolio, so should we expect maybe that you step up the R&D spend here a bit? Or is it going to be maybe heavier CapEx? Or would you consider maybe some M&A as we move forward here?
Christopher Hill: Yes. So I'll start us off here and then probably hand it off to Larry for your second part of your question. But we've historically talked about a 1.5x target. That would be, I would say, our goal is at the moment. But as things recover and you start to grow earnings and EBITDA, that doesn't necessarily mean we're going to add debt. So it could go below that once we get deeper into, let's say, a recovery. But we are definitely working towards that. Want to be below 2, working towards 1.5 over the next, let's call it, 12 months or so.
Lawrence Bruno: Yes. In terms of the R&D spend, it will be focused on new technology, rolling out things that we've been working on for a while, expanding service offerings into new regions. You've heard us talk about that over the last several quarters into Mexico, into Brazil, into Qatar. We've got a few others on the drawing boards. I will say that year-over-year, you're correct, we would expect to see a bit higher CapEx spending, particularly on the R&D side. But we'll stay in line with our historical capital discipline standards and don't expect anything unusual in terms of CapEx performance year-over-year, I'd expect it to be up compared to 2020.
Operator: The next question comes from Mike Sabella with Bank of America.
Michael Sabella: So you all have kind of alluded to modest incrementals here in the near term and just kind of pointed towards back half just getting back to normal. Are you able to just help us set some expectations for what that means for 2Q? And then as we look out to 3Q, is there still incremental margin pressure in 3Q? Or should it -- should we really be thinking about 4Q before it gets back to normal?
Lawrence Bruno: Yes. I think directionally, you're looking along the right path there. Mike, I think the thing that we've stressed over the last several quarters' earnings calls here is we've asked a lot of our staff to make personal sacrifices all across the organization in terms of compensation and benefit reductions. We've got to roll those back in. And we want to do that as quickly as we can. And so that's going to be a weight on incremental margins for the next quarter or 2. And then I think as we get a little further along and we get those back in, that's when you'll start to see us take steps to get back to. I think, Core Labs, historically, is very well respected, incremental margins at 50% or better. But it's going to be lumpy and lower than that for the near term.
Michael Sabella: Got it. Got it. And then first thinking about kind of Reservoir Description and this path back to 20% margins there. Are you able to kind of walk us through what sort of revenue recovery you think you'll need to be able to get back to 20% in that segment?
Christopher Hill: Yes. I think we've talked a little bit about that in the past as well. So if you go back to when we were at that $100 million a quarter level, we think we're going to be able to approach. It's a little too early to say exactly where we'll be on what the project mix will look like, but it could be that 20% level when we start reaching those kinds of revenue levels. Could be a little bit higher, but we would expect it to be in that range.
Lawrence Bruno: I think the important thing -- point we make is with the structural changes and efficiencies and the reorganizations that we've done in terms of our, let's say, lab infrastructure on the R&D side, we'll be able to achieve those margins at lower revenue levels than we have historically. And don't forget, we've been advancing automation in the laboratories to help control our labor costs. We've got a fair amount of operational leverage built into the system right now that we're holding on to in anticipation of increasing activity. So I think we'll get to the -- that 20% bogey on margins in R&D at a lower revenue level than we've historically achieved it. And then from there on look for, I would call it, very satisfying incrementals.
Operator: The next question comes from George O'Leary with TPH & Company.
George O'Leary: Just you guys always do good work on the macro front and you touched so many facets of the oil patch. And so I'm just curious on the macro front with respect to North America, how you think about the activity level today and how that translates into crude oil production? And I think the base case is that we end up somewhere in a flat exit-to-exit crude oil production ballpark. And kind of the thing folks are wrestling with is, do we grow a little bit? Or are we at a point where we were trenching? And I think you can make an argument for all of them. I'm just curious what the house view from Core Lab is with respect to activity levels and how efficient they are to hold production flat, increase, or are we going to see it fade?
Lawrence Bruno: Yes. I think kind of putting our heads in the -- or viewing through the lens of our clients. I think for our -- for many of the sort of the larger sort of well-established companies, they're going to -- what they've expressed to us, and they've expressed publicly to the investment community is, they're going to have a lot of discipline in executing their plan for 2021. So I think they're going to have their budgets, and they're going to stick with those budgets. And I think that will weigh on growth in production. I think some of the smaller operators might seize the moment and look to take advantage of commodity prices in the range they're in, and that could push production up. Added 2 things together, I think that there -- the idea that we're going to see kind of flattish production is probably not unrealistic if prices stay where things are. I do think that the main driver, particularly for the larger operators, is going to be strengthen their balance sheet, pay down debt and stick with their plan.
George O'Leary: Great color. Your simul frac has been a hot topic of late. I'm just curious how this trend, which seems to be growing, and I realize it's still a small portion of the mix today. But how does simul fracs impact Core Labs? I imagine they would accelerate revenue velocity for you guys. Just given your broad presence in the U.S., how pervasive do you think simul fracs are at this point? I think estimates are anywhere from 8% to up to 20% of the mix. And then -- sorry, I ask a multi-parter, but do you think they'll grow as a percentage of the mix, much like zipper fracs did? Or you think they'll end up less pervasive? I realize it's early days, but just curious of your thoughts.
Lawrence Bruno: Yes. I think for us, it might create lumpier revenue in Production Enhancement. In other words, you get periods where there's sort of intense activity and then it slacks and it picks up again. So it's a bit early to tell going on -- going forward with that. I do think that with all new technology introduction, there's going to be an adoption phase, there's going to be a, call it, a washing out phase of problems and complications. And then we'll see where it goes. And I think that, that's probably a better question for our clients in terms of what they're seeing in terms of the efficiency gains.
Operator: The next question comes from James West with Evercore ISI.
James West: I'm curious what you're seeing on deepwater. You guys have good insight on planes, given you get some heads up on when you're going to receive the core samples. There's kind of mixed, I guess, views on deepwater as we go into the back half of this year, but there seems to be some momentum. Curious if you could kind of outline what you're seeing in deepwater, especially given that it gives you a bit of an outsized bump when you get those jobs.
Lawrence Bruno: Yes, James, good question. I think, I would call it the lingering effects of COVID, are, I would say, have pushed some things to the right. We haven't seen any clients cancel any projects. We just know that they come to us and give us an expected time frame, and then they'll -- it's not uncommon for them to say, hey, it's going to be a bit long before those things roll out. I think geographically, the mix that we've talked about is where we keep our eyes open, but I would throw in, for example, this deepwater discovery in Turkey that we've got involvement in. South Atlantic margin looks real strong for us. I would say Brazil may be offering some challenges given the flare-up in COVID there. That's, I would say, creating some uncertainty going forward. We still see things coming. It's just maybe not as a steeper ramp from what we can see right today. Yes, we'll also point out that we do have an extension of our deepwater Gulf of Mexico project. It's a deepwater Gulf of Mexico phase 2 project. We've had new subscription membership into that. And so our clients are planning on getting after these projects. Timing is a little bit unclear right now.
James West: Okay. Okay. Got it. And then, Larry, there's the kind of global mix of activity shifts a little bit more towards gas versus oil. Could you just remind us kind of -- does it have any real impact on your revenue or margins, whether it's gas or oil? I'm pretty sure it doesn't. But just can you talk a little bit about that change in mix and how that could change? Or if it doesn't change your revenue and margin outlook?
Lawrence Bruno: Yes. So around the edges, it -- oil projects, I would say, tend to be a little bit more higher value for us. Things like 3 phase relative permeability, where you've got liquid oil and gas and water. You've got 3 phases that can be moving in the rock. That requires some extra lab testing to be done. When you've got a dry gas project, it's a little simpler. That's -- you've got gas and you've got water. Often what we're dealing with is gases that can -- where liquids can drop out, condensates, wet gases, where liquids can drop out. And in those cases, you're looking at very similar protocols and testing requirements as you would in an oil reservoir. So I think it depends a little bit on the nature of the gas project, gas quality as to what that's going to be in. The second thing is, on the rock side, the variability in the rock properties are not determined by the fluids that are in the holes in the rock. And so if the rocks are very variable, I hate to say this for our clients, but tough on our clients, good for Core Lab. That really will drive the amount of core analysis and the depth of core and geologic studies that have to get done.
Operator: The next question comes from Scott Gruber with Citigroup.
Scott Gruber: I wanted to follow James' question and just thinking about international growth in the second half of the year and where we could exit in terms of rate of change. Last call, you guys were optimistic that we could see double-digit growth internationally for core. Do you guys still retain that view? Or is there going to be a little bit of a kind of slower ramp up, just kind of given the color you just gave?
Christopher Hill: Yes, I don't really think we've changed our perspective on that. And I think the way it was framed up the last time this was as that was sort of year-over-year. So when you look at second half of '20 compared to second half of 2021. But currently, we would not disagree with projections that would suggest double-digit growth, low double digits, it could be higher for the second half of this year compared to second half of last year.
Scott Gruber: Got you. And it appears maybe I'm just pulling hair so much as the -- beyond some of the onshore projects are moving maybe a little bit faster at this point, if there's a little bit of sluggishness offshore?
Lawrence Bruno: Depends on the region, depends on the client, depends on COVID, depends on a lot of things there. So I don't know that we've seen a trend of onshore versus offshore tilt in client behavior there.
Scott Gruber: Got you. And just prospects for an acceleration into '22, can the '22 rate of change eclipse, call it, 10% to 12%, can we get into the mid-teens based on the project queue that's coming together?
Lawrence Bruno: Yes. Let's not get too ahead of ourselves here. I think we see some encouraging signs for Q2 and for the rest of the year here. I'm a little bit hesitant to talk about if there's a -- we said we encountered a third black swan in the storm that hit in the U.S. Let's see if there's a fourth black swan out there. But I think we'll stick with what we said. We see improvement throughout the remainder of 2021 into 2022. Right now, our client contacts are improving, giving us a fair amount of optimism for that. And I think the numbers that Chris threw out there in terms of year-over-year, I think that's about as far as we want to get right now in terms of guidance.
Operator: The next question comes from Sean Meakim with JPMorgan.
Sean Meakim: Maybe just to clarify on that last point. You're confident we're going to see continued progress in R&D, double-digit growth in the back half of the year, half-on-half, back half '21 versus back half '20. Implies R&D to get back to maybe something like a $90 million or something close to that run rate per quarter. Is that kind of within the range of expectations? I'm just trying to get a sense for -- it's quite a build off of the 1Q results. Just to make sure I have a good sense of what that range can look like?
Lawrence Bruno: Yes. I think that's right. I mean, I think we -- the guidance that Gwen gave shows we see improvement quarter-over-quarter lining up for Q2, and we think that accelerates a bit in the back half of the year.
Christopher Hill: And there's some assumptions -- I was about to say, there's some assumptions in there, though, that these COVID infections and lockdowns that those start to dissipate in the second half of the year. That is built into our assumptions.
Sean Meakim: Right. Yes, that's completely fair. So then maybe just coming back to incremental margins to dial in a little more clarity there. Historically, you preferred investors to focus on year-over-year incrementals rather than sequential. So if we look at 2Q '20, it's a bit -- the math is a bit messy, just given RD margins were still fairly elevated versus where they are today, P went negative for a quarter. So you're guiding to, say, 50% incrementals medium-term, near-term something lower. Presumably, that's on a sequential basis for the next couple of quarters. Just mathematically, how are you guiding investors around how the margins progress?
Lawrence Bruno: Yes. I think that's -- you've got the right view on it there. I think you've summarized it pretty well there. It's going to be choppy. And I would say, toward the low side on incrementals for the next quarter or 2. Then as we sort of get back to -- get those costs dialed back into the system, revenue continues to grow. You'll see us start that path back toward historic incremental margins. I don't know that it will happen in a step function fashion, but I think it will build from there. And what we look at is what are our opportunities to leverage the automation and the cost savings and the cost efficiencies that we've dialed into, I'll call it, the restructured arrangement of our lab network, and we see those as being very high. But I think the message that we want to convey to everybody is that it's going to be -- we've got to take care of some employee sacrifices that have been made. And I can't tell how fulfilling it is to see the loyalty that's been displayed to us by our employees as we've navigated this. We want to take care of them as soon as possible, and that's going to be a wait for the next quarter or two.
Christopher Hill: Right. And Sean, the only thing I would add to that is that when we've been in periods where there's big swings like we've had the last year, we'll tend to gravitate to more of a sequential sort of comparison. As we get into environments where it's a little bit more steady, then we probably kind of shift back to sort of year-over-year comparisons.
Operator: The next question is from Connor Lynagh with Morgan Stanley.
Connor Lynagh: I think this was asked, but I'm not sure I caught the full extent of the answer, but I had left the last call with the impression, and you can let me know if I misconstrue this here, that the ATM was more so you guys could play offense as opposed to play defense. I think you had mentioned freeing up some optionality for M&A or some other types of strategic investments. I think you talked about the organic strategic investments. But are you seeing opportunity or anything interesting on the M&A front? And is that why you went relatively fast on this program? Or how would you frame that?
Lawrence Bruno: Yes. I think you've summarized it pretty well there. I mean, we were in a period where we were, I would say, having to navigate the leverage ratio in terms of our -- how aggressive we wanted to get on investments for growth, whether it be internal or external. And so we like the idea of getting those constraints off of us. We're always looking. We're always evaluating. Some of you know this, I came to Core Lab more than 20 years ago through an acquisition. I understand how -- when the right opportunity presents itself, you want to take advantage of that. I would say that whenever we look at opportunities, though, the same discipline that Core Lab has historically applied to acquisitions of, is it in our wheelhouse technologically and can we get the proper return level is going to guide us as to whether or not we make that investment. Internally, historically, our internal project -- product and service development has offered us very high returns. I would say that's our priority. But we're always looking, always interested to look for opportunities to add on complementary technologies. Okay. I think we're ready to wrap up right now. In summary, Core's operational leadership continues to position the company for improving client activity levels throughout 2021 and into 2022. While there are still operational uncertainties in the near to midterm, there are many opportunities ahead. We have never been better operationally or technologically positioned to help our global client base optimize their reservoirs and to address their evolving needs. We remain uniquely focused and are the most technologically advanced, client-focused reservoir optimization company in the oilfield service sector. The company will remain focused on generating free cash and returns on invested capital. In addition to our quarterly dividends, we'll bring value to our shareholders through growth opportunities driven by both the introduction of problem-solving technologies and new market penetration. In the near term, Core will continue to use free cash to strengthen its balance sheet. So in closing, we thank and appreciate all of our shareholders and the analysts that cover Core Lab. The executive management team and the Board of Core Laboratories give a special thanks to our worldwide employees that have made these results possible. We'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.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
