Core Laboratories Inc (CLB) 2003 Q3 法說會逐字稿

Good morning. My name is Sandra and I will be your conference facilitator today. At this time, I would like to welcome everyone to the third-quarter, 2003 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS). Thank you.

Mr. Demshur, you may begin your conference.

Good morning. As usual, I'm joined here by Dick Bergmark, our Executive Vice President and CFO. I'd like to welcome all of our shareholders, analysts and employees to Core Laboratories' third-quarter 2003 conference call.

As usual, the call will be broken down into five segments. For the first segment, Dick will make remarks regarding forward-looking statements. Then we will come back and give a consolidated Company overview on our operations. Then we will turn it back over to Dick and he will go through a detailed financial review, which I will follow with a detailed description of our three operating segments and the progress that we're making. Then finally, we will open the line for questions and answers.

I will turn it over to Dick with remarks regarding forward-looking statements. Dick?

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 relating to the oil and gas industry, business conditions, international markets, international political climate and other factors, including those discussed in our 34 (indiscernible) filings that may affect our outcome. These factors and other factors mentioned on this call could cause actual results to differ materially and we undertake no obligation to update or revise any forward-looking statement made in this discussion.

With that said, I'll pass the discussion back to David.

Thanks, Dick. I'd like to go over a consolidated overview of Core Laboratories for our third quarter and year 2003. We reported all-time quarterly high revenues of 106 million and earnings of 20 cents per diluted share. We look at this quarter as being a very good quarter, but still not a great quarter. What we were impressed with is that we are finding oil companies are spending CapEx dollars to continue to recover an incremental amount of hydrocarbons from their existing fields and in many cases, as opposed to drilling new wells, they are looking at their producing assets.

When we look at year-over-year growth, it continued at a 14 percent rate, and actually, for the first three quarters, we up 14 percent year-over-year.

We continued to see a number of positive operating trends in the quarter. International project remains strong, especially in the former Soviet Union, the Middle East, West Africa and Asia-Pacific. North American activity was strong, especially in Canada, and of course, this market is more closely related to drilling for natural gas. Projects (indiscernible) especially enhanced oil projects remains strong in Mexico.

Both internationally and in the Americas, Core continued to benefit from increasing market acceptance of our new technologies, like SpectraChem and our high-efficiency reservoir optimization, or HERO, perforating charges and gun (ph) systems.

Also, we continue to see increased market penetration of existing technologies like our SpectraChem and SpectraFlood services. They are used to optimize hydraulic fracturing programs and to ensure that we optimize the fuel-recovery programs in which enhanced oil recovery projects are taking place.

Operational execution also improved in Q3, as we saw margin expansion in reservoir description and production enhancement, and we continue to refocus reservoir management. We also continued the expansion of our services into new markets worldwide.

I will turn it back over to Dick before giving a detailed operational review. Dick will look at a detailed financial review.

Thanks, David. Revenues were 105.6 million, up almost 15 percent from 92.4 million in the third quarter last year and up 5.4 percent sequentially over the 100.2 million posted last quarter. This increase was due to the recent improvements in North American activity levels and continued growth in the international marketplace.

Services for the quarter were 84.3 million, up from 77.6 million in last year's third quarter. Sales were 21.4 million, up from 14.9 million in the prior year's third quarter.

Cost of sales for the third quarter was 80.8 percent, versus 89.5 in the prior year, and for cost of services for the quarter, 80.2 percent, which is relatively unchanged from the 79.4 in the third quarter of the prior year.

G&A for the quarter -- 5.6 million, up from last quarter by 100,000 due to expenses related to staffing additions and to the continued rollout of our global Oracle accounting system. We expect G&A to run about 22 million for this year, 2003.

Depreciation and amortization for the quarter -- 5.6 million, virtually unchanged from last quarter but up slightly from 5.2 million in the third quarter of last year. For this year, depreciation expense is expected to be approximately 22 million.

Other Income in the quarter was fairly small at 575,000. The single largest component was from foreign exchange gains, primarily from our Mexico and European operations.

EBIT was 10.2 million for the third quarter, which is up almost 26 percent compared to 8.1 million in the prior quarter and up $2.9 million, or 40 percent, when compared to a year ago.

As David said, margins are improving. In this quarter, they were 10 percent compared to last quarter of 8 percent and last year's third-quarter margins of 8 percent. These improved earnings represent 22 percent in incremental margins when comparing year-over-year performance. Without considering the performance from our reservoir-management segment, our incremental margins would have been in the low 30s.

Interest expense of 2.1 million for the quarter -- up from last quarter's 1.8 million due to higher borrowings and from the 1.9 million incurred last year.

Income tax expense of 2.2 million was recorded based on a 27 percent rate and we expect the rate will remain at 27 percent for the year.

Net income for the quarter was 5.9 million, up by 1.3 million when compared to our 4.6 million in earnings last quarter and 3.1 million, or 90 percent, compared to the prior year.

Earnings per diluted share for the quarter was 20 cents, as David said, compared to 15 cents as reported last quarter and 9 cents last year in the third quarter.

Now, if we flip over to the balance sheet, I'd like to put out a few items of note. Cash was 15.9 million, up from the last quarter balance of 14.6 million and our year-end balance of 14.9. Receivables stood at 104.6 million, down slightly from last quarter but up from 100.6 million at year-end, as our sales have been increasing.

Our DSOs improved this quarter, now at 89 days, down from 96 days last quarter and 94 days at year-end. As was the case in Q3, we believe that collections will improve in the fourth quarter, further improving our DSOs and free cash flow.

Inventory continues to decline -- now at 33.9 million compared to last quarter's balance of 34.4 and the year-end balance of 34.5 million.

Other current assets are almost $15 million lower compared to year-end due to a reduction in prepaids, but mostly due to a reclassification of our deferred tax assets from current to long-term as the NOL carryforwards will be realized in periods later than 12 months. We then netted this long-term asset against our long-term liabilities, and that's why you see, in the Other Long-term Liabilities category, you see that drop by a corresponding amount.

The increase in other long-term assets is due to additions to goodwill from our recent Vilex (ph) and ADS acquisitions.

We go to the liability side of the balance sheet -- our Accounts Payables and other accounts that make up total current liabilities are generally in line with recent experience and our year-end balance. Long-term debt was one 125.6 million, up 25.3 million from last quarter and up by 37.6 million compared to year-end. Since year-end, the increase was used to fund acquisitions in the amount of 13.2 million and repurchase shares in the amount of 50.5 million.

Since the second quarter, the increase in indebtedness was used primarily to repurchase 36.9 million shares under our Stock Repurchase Program -- $36.9 million worth shares. More on that in a moment. Outstanding (inaudible) revolving credit facilities were $50 million, compared to 25 million last quarter.

Other long-term liabilities were down 9.4 million due primarily to the change in the classification of the tax asset that I mentioned earlier.

The balance sheet continues to be strong, as our debt-to-cap is at 34 percent, in line with the industry average of mid-thirties. Other long-term liabilities are virtually unchanged from year-end.

Shareholders equity ended the quarter at 224.3 million, down from the year-end balance of 258.1 million due to additions from earnings and reductions due to our stock buyback.

Capital expenditures for the quarter were 3.9 million. We continue to be on target for our 20 million CapEx program for 2003.

Looking at cash flow, cash provided by operations for the quarter was 15.4 million, generating 11.5 million of free cash flow after fully funding our 3.9 million CapEx program for the quarter. Year-to-date, we have generated cash from operations of 40.1 million and after funding our 16.8 million CapEx program, we have generated free cash flow of 23.3 million. Based upon these results and our view of Q4, we are raising our target of generating free cash flow during 2003 from 25 million up to a range of 27 to 30 million.

As we continue to generate free cash flow, we will pay down debt, acquire technologies, or repurchase company stock, all based on market conditions and corporate activities at the time.

We have been active in our stock buyback program. During the quarter, we purchased an additional 2.6 million shares at a cost of approximately $32 million. Through yesterday, we had purchased a further 314,000 shares at a cost of about 4.7 million. To date, we have purchased in the aggregate 5.1 million shares at a cost of approximately $60 million, which has been paid through a combination of our own generated free cash flow and borrowings under our credit facility. Our current shares outstanding are approximately 28.2 million shares.

Now, I'd like to go over our internal financial targets with you. Based on discussions with our clients, our view of industry spending for the last part of 2003 is unchanged from prior guidance at our last call. Activity levels in North America have begun a recovery and activity levels are now reaching cyclical highs while the international markets seem to be continuing to improve, albeit at a slow rate, but still at levels slightly higher than last year. We believe that the majority of the improvements within our operations will come from increases in the North American markets with some benefit continuing to come from the other international markets.

So, what does this mean for our internal financial targets? Although we do see an improving market, the rate of improvement has ameliorated, causing a corresponding rate of improvement in our revenues and earnings. We do expect improved earnings in the fourth quarter, perhaps with earnings in the 21 to 25 cents per share range. We expect that revenues in the fourth quarter will be in the 105 to $110 million range. With this view in mind for the fourth quarter, we continue to be believe that our annual revenues will be in excess of 400 million for an increase of about 10 percent over 2002 revenues. Given these revenues and earnings targets for the fourth quarter, we believe that our EPS for 2003 will be in the 66 to 70 cent EPS range. As discussed on prior calls, this assumes a pro forma EPS of 10 cents is used for the first quarter.

We had mentioned on prior calls the we expected to generate approximately 25 million free cash flow in 2003 from a combination of these earnings and improvements in working capital, and this is after paying for our projected 20 million CapEx program. Given that we've already generated 23 million free cash flow through the first nine months, we have raised our internal target for this year's free cash flow to a range of 27 to 30 million.

What are the risks to our view for the last quarter of the year? On the upside, oftentimes, the activity levels of our clients accelerate as the year closes, seemingly to spend the final amount of their budget for the year. On the downside, at other times, some clients will just defer work until next year, seemingly to afford themselves a better view of the future. In that situation, they may defer purchasing decisions or contract signings until the new year. We have, in the targets that we gave you, considered them to be, in our view, the most likely outcome for this upcoming quarter.

What about 2004? We've not finalized our internal budgeting process for 2004, so we are neither in a position to give you our views in general nor our company targets specifically. As part of our budgeting process, though, we have concluded our capital expenditure budget, which indicates that we will not need to spend as much as we have in the last two years, as we do not plan on building any new facilities as we did in Moscow in 2002 and Fort Worth as we did this year. Consequently, we believe we will probably underspend depreciation by about 6 million next year. We believe our capital budget will be about $15 million with most of that being attributed to newer services that can be directed to new markets within our existing international distribution system.

We believe that our free cash flow next year will fall in the range of 33 to 35 million due to a combination of earnings, improvements in working capital, and the 6 million in depreciation underspend versus capital that I just mentioned.

With that review, I will turn it back to David.

Thanks, Dick. What I'd like to do now is go through a detailed operational review, looking at reservoir description. This was a solid quarter led by international crude oil-related projects. It was the highest quarterly revenue ever reported by reservoir description. Operating margins expanded and reached 13 percent but dropped a couple hundred basis points sequentially from Q2, 2003.

Projects of note were we still see the continuation of field rehabilitation projects in the former Soviet Union, and also interesting -- in the Middle East, we're seeing a return to robust activity as operators there now seem to be more troubled than ever by increasing water production. This is a significant change from a decade ago, when increasing water production was not considered a problem.

Number three, we see Asia-Pacific remaining strong, as activities both in oil and natural gas for LNG export projects continue. West Africa's shelf and deep water developments also added to the quarter. We also have established a presence in Baghdad, looking for opportunities there in the oil field. However, at this time, we see most of the work being directed there for infrastructure repair and development. We believe that Core Laboratories' involvement in trying to repair some of the extensive damage done to the producing formations will be a second half '04 event, but right now, we are positioning ourselves to do that work.

If you remember, a couple of years ago, we did a study of 26 fields in Iraq for the United Nations under the Oil For Food program, so we believe that we are well situated when those fields -- those reservoirs start to be worked -- that we will have a map laid out for increasing production from those fields.

Also, I'd like to note projects in Mexico -- Pemex projects continued in reservoir description. A lot of the data that we were generating there is going to be used for production-enhancement projects. They've been very successful in a number of fields, but they have been flooding, and I think they are the penultimate example of money being spent to increase production for the incremental barrel as opposed to drilling new wells. When (indiscernible) look at the Cantarell field and the increase in production there from when they started that enhanced recovery project -- that field was producing about 1.1 million barrels per day. It is now producing in excess of 2.1 million barrels per day, and it is the world's most successful nitrogen flood.

In looking at production enhancement, year-over-year, third-quarter revenues were up almost 40 percent. Of course, this was bolstered by North American natural gas drilling. We saw better penetrations of some of our new technologies -- those being SpectraChem and our HERO, or high-efficiency reservoir optimization perforation charges and guns systems. We see both of these playing a large role in our success as we look forward to the fourth quarter.

Also, increasing acceptance of some of our existing services played a large role in the successive production enhancement in the third quarter. We saw our zero wash fractured diagnostics technology and our SpectraFlood services, especially in Mexico, continue to have further acceptance with our clients. This led to sequential margin improvement, as we saw continued efficiencies from some of our manufacturing processes in Canada, and as Dick mentioned, with a completed (indiscernible) facility in Fort Worth, they are consolidating a number of facilities there, increasing our efficiencies and decreasing our costs.

Turning towards reservoir management, operations continue to show a loss but we have completed a large number of contracts that were troubling. As we look at the fourth quarter, we do have a couple of three projects left. We are winding those up, so we to see a light at the end of the tunnel. Looking to the future in our integrated reservoir solutions projects, which are on schedule, there are an increasing number of engineering-focused, multidisciplinary studies that we're doing at good margins. This will continue to position reservoir-management for 2004.

Now, summing up operations, our third quarter was a very good quarter and we like the way our technology and services are being used on a worldwide basis. With companies emphasizing spending CapEx dollars on increasing their production from their existing assets and producing the incremental barrel of oil and the incremental amounts of natural gas, we believe Core Lab is well positioned for the fourth quarter and for 2004.

Sandra, what I'd like to do now is open the system for questions!

Okay! (OPERATOR INSTRUCTIONS). James Wicklund of Banc of America.

Reservoir management -- I mean, do you have to own it? Is there a market for selling it?

What we're trying to drive here, Jim, is that it does generate a lot of work for reservoir description and production enhancement in the multidisciplinary studies that we're doing now, so you do get some internal benefit in the other two segments.

Incremental to overcome the management time, management effort and losses?

Well, where we are positioned today --.

I understand. I admire you guys. I think you're doing a yeoman's job in trying to get this fixed and flow through as (indiscernible) a lost leader, you know, has value.

The view isn't a lost leader. What David was trying to describe is -- or did describe -- is where we're going with the unit. What we're seeing is wrapping up some of the predecessor issues so that we continue on a of where David's trying to take us.

Unfortunately, Jim, if you look at -- for instance, we were working on a large project in the Middle East. There has been (indiscernible) creep on the projects by the client. We're going to finish the project here in the fourth quarter. It's something that we can't do a bad job on because that's a large client for us. So, when we do wrap those and get into the new integrated reservoir solutions projects, we see this as a -- not as a lost leader, but as a profitmaker that can generate low-teen to mid-teens EBIT margins. We see that next year. So, we're going to hang in there; it's been a long, brutal slog, but we do see the light at the end of the tunnel and we don't think it's the train.

I do apologize. Mr. Wicklund disconnected himself from the conference. You next question comes from Mary Suffrye (ph) of Karl Forzheimer (ph).

Good morning. I have a question about -- you mentioned -- if I understood -- that your capital expenditures next year will be geared more to developing new markets. You mentioned earlier something about new markets. So, I'm wondering which new markets and what kinds of things would you put there. Also, are you noticing any changes in your customer base?

What we're referring to is, for example, the successes that we're having in production enhancement and a lot of the new services David talked about that were working well for us. Those are aimed primarily at North American markets. Our view is we need to expand those services internationally into markets where they could be easily excepted. So we need to build new supporting equipment instrumentation to be able to do that.

The specific new markets we would target, Mary, going into next year, would be expansion in Asia-Pacific and also looking to expand our operations in China. So, those would be the two specific markets that we are going to try to build further next year.

This would be production enhancement?

Well, I think Dick mentioned a specific but certainly from the standpoint of reservoir description as well. We do currently have a project in reservoir-management from that area as well, and so I think it would be all of our services across the board.

What about changes in your customer base? Are you seeing more national oil companies or more independents, or --?

No, we really haven't seen a change in our customer base. If you look at -- we generate about 70 to 80 percent of our revenue from the 30 big international, national oil companies around the world, and we've not seen that change.

Alain Brooks (ph) of CIBC World Markets.

Good morning, guys. I was intrigued by your comment about the Middle East returning to robust activity because of concern about water. Can you elaborate on that, Dave?

Yes. You have a number of fields there that produce -- carbonate fields, a number of which are indeed fractured. When you start to make water in these fields, if you do have a change in the weatherability of these reservoirs -- which does happen -- you tend to start producing a lot of water more quickly. In a number of fields, that is indeed the case. So whereas operators before would look at drilling additional wells in other parts of the field, they are looking at trying to mitigate that water production. In places where they don't have a lot of water production, they want to make sure that it doesn't start. So, that is really a change that we've seen over the last two or three years and that works very nicely for Core Laboratories.

Okay. Now, this year, your revenues have ramped up very nicely, as you reported record quarterly revenues. You commented on the shift in -- or I guess reallocation, maybe, by the producers of your CapEx directed to producing assets. Do you worry that that shift could go the way next year as you work through your budgeting at this point?

We're really seeing no signs of that right now. With the budget that we're constructing, we're seeing a lot of these long-term projects continuing on. So, at this point, Alain, we don't see any change.

Okay, so you're seeing a lot more longer-term projects as opposed to shorter term? (multiple speakers).

A lot more related to field-wide development in, for instance, the Poza Rica field in Mexico -- we continue to work there. This is a waterflood that we're using our SpectraFlood on, where Pemex thought they had a good understanding of the flow dynamics of the field that they were flooding. As it turns out, the sweep efficiency is not very good, and we are able to go ahead and improve that and actually, we will continue to work on that field into the year 2004. So, we have been active there now over a year and we see that continuing.

One last question -- the market for acquisitions in their space, what are you seeing, or what do you think you're going to see?

Well, just as Dick mentioned, looking at technologies that are available, we see some smaller companies that might be interesting to us in technologies related to -- more closer to the well site activities, so that's what we would be focusing on. This would be in the production-enhancement area, because the Go-X (ph) acquisition has worked very nicely for us. So I think if we were looking at concentrating in any one area, it would be in production-enhancement.

Jeff Eberwein (ph) of Cumberland Associates.

Congratulations on a good quarter. It's nice to have at least one company in the sector have a positive earnings surprise rather than a negative one.

On reservoir-management, I guess one thing that could help us out is, in the fourth quarter, are you expecting to be profitable in that division?

Right now, we are expecting to be profitable. If we can wrap up the projects and we don't have any Scope creep (ph) we anticipate at worst a breakeven, but we anticipate being profitable.

Okay. What might the exit rate be? Say, at the end of the year, you finished all the bad contracts and now you're onto the new stuff, what would be exit rate for the end of the year?

Yes, if all of the stars were in a line, we could exit at 8 percent EBIT margins.

Okay. That sounds pretty good; that would be a pretty big turnaround.

It would be a nice incremental add.

In your press release, you talk about how the uses for free cash flow -- acquisitions, paying down debt or share repurchases -- I was hoping you could give us a little more color on that. For example, the last 12 months, you guys have elected to do a pretty sizable share repurchase program, so what led you to do -- to use your free cash flow in that manner rather than some of the other options? How will you go about making that decision in the future?

If we do a review of year-to-date, what we've done with our free cash flow, we have generated, as we said, 23 million. We have increased our debt by 37 million. So, we've had cash available of about 60 million. It's pretty simple. We bought back 50 million in stock and 10 million in acquisitions. It's all based on our review at a point in time -- at any point in time -- what is the best for the Company and its shareholders on how to spend that available cash? We took a view that, on October 10 of 2002, that one of the primary best uses of cash was to buy back stock, to get our returns back up, not just returns on our balance sheet equity, but our returns to our shareholders in the form of stock price.

As a mathematical just kind of view of accretion on what makes sense -- and since we started the program, we are up on our VWAP (ph) over 30 percent while maintaining debt-to-cap of just 34 percent. So, we feel the balance sheet is in great shape and we've seen, over the last several quarters, our returns on equities move up much quicker than the industry and now surpasses the industry and all the while keeping our balance sheet in good shape.

Rob Mackenzie (ph) of Friedman Billings Ramsey.

Good morning, guys. I'll start off with some housekeeping questions. Just so I get my number right, what's your current shares outstanding for the year?

Current shares outstanding were 28.2, I believe.

I got it. Now, I'm going to -- I know you indicated your budgeting process wasn't complete, but you did give some guidance for free cash flow for next year of, I believe, 33 to 35 million. If I just do a back-of-the-envelope calculation, assuming some continued gains, harvesting of working capital, perhaps that implies EPS somewhere north of $1, maybe $1.10. Is that realistic, given the muted outlook we're seeing for a lot of the U.S. markets right now and some caution expressed internationally by some of the bigger service companies?

Rob, remember, in that, you have 6 million in underspend on CapEx., so pull that off, you're at 33 to 35. Pull off any other improvements in working capital, then divide that by the share count.

Okay, so you're not guiding somewhere north of $1 in terms of EPS?

No, we're giving no earnings guidance and when we run those numbers, we don't get there -- just today, looking at what you just said.

Okay. Breaking down into the different segments, you indicated that a big part of your growth is expected to continue to come from North America with a little bit from the international markets. Was that comment directed at the fourth quarter, or was that also directed at 2004?

That was fourth quarter specifically.

If you had to make a general comment along those lines on 2004, how would you characterize where your growth next year would largely be coming from?

We probably would see that more on the international theater as opposed in North America, because if we get a leveling off of drilling activities -- which we -- at the levels they are in North America right now are very kind to our production-enhancement group -- it would be logical that our growth we would look at would be further expansions in the former Soviet Union and Asia-Pacific and continuing with our projects in Mexico, the Middle East, Deepwater West Africa.

I do apologize, sir. Continue.

Let's just explore the Deepwater West Africa a little bit. What is your viewpoint on some of the project delays we've seen there? Is there anything unusual about those, or do you expect (inaudible) Block 18, etc. Are those going to be awarded and be significant contributors to some of these big projects coming up to '04, or is that more of an '05 event year for you?

I don't want to comment on any specific blocks or projects, but I'll just say that, in general, these are very complex reservoirs. So, with what appears to be the creeping developments there, I think it's due to the complex nature of these reservoirs. So, if it seems to be going a little slow, I think they are being a little more cautious in trying to maximize recovery over the life of those fields. They are wonderful reservoirs, but very complex.

Okay. Then finally, if you could -- you know, we saw some good strength in production enhancement this quarter. I'm wondering if you could characterize, maybe give us a little bit of feel how much of that strength was Owen versus the rest of the segment, whether one part of it was significantly stronger than the other?

As we have said, production-enhancement mainly related to North American natural gas. Both Owen and ProTechniques (ph) did very well in the quarter. We saw a margin expansion within Owen; we saw capacity utilization increase there. ProTechniques just continued with some of their new SpectraFlood and SpectraChem technologies adding, so I would pretty much split it right down the middle that both were significant contributors.

Even with the Gulf of Mexico being weak where I know (indiscernible) gets a good portion of its revenues?

Yes but you know, Rob, they've done a nice job and have expanded their business model into Mexico very nicely, and that technology is transportable and they did do a number of international projects. So, they remain very strong, very robust -- great year, great quarter!

You have a follow-up question from James Wicklund of Banc of America Securities.

Hi, guys. This is Hashish (ph) Gupta. Sorry about earlier. Our phone line got cut off.

We didn't mean to scare Jim away!

Just a follow-up on production enhancement -- what percentage of revenues come from Canada, or what was the percentage this quarter -- last quarter?

You've got to excuse us. We've got a (indiscernible) game here. We are up in New York. We are going to speak at an energy conference this afternoon, so we're just scrambling for that. About 12 percent.

About 12 percent? I believe last quarter, it was -- I forgot the numbers from the last quarter.

They were probably more like 10. I think, off the top of my head, I think that would be pretty fair.

So I guess you could say that a lot of the reason for the positive performance in production could have been because of Canada.

Canada, the U.S. and Mexico.

Incremental margins for the region were 26 percent. Now, that's a little lower than what it has been historically. What do you expect for that segment, going forward?

Yes. On the incremental markets, we do -- and I did talk about that -- we do target low 30s -- a little lower, just (inaudible) some mix for this quarter.

Okay. I believe that's it, guys.

Neal Mcatee of Morgan Keegan.

Good morning, guys. Let me just pursue this sort of -- I think where Jim was going with the reservoir-management. You know, I was at the SAG (ph) yesterday and talked to a bunch of you guys in the reservoir-management. I mean, they are very excited about all of these multidisciplinary studies. I talked to a number of guys who had been hired in the last six months, so it's apparent you guys need more people in that area. When I talked them about some of the projects they're working on, it sounded like that they have some pretty profitable work, at least the way they measure it. So then you come in this morning and then you see, once again, a loss in the reservoir-management. It dawned on me, maybe I need to raise the revenue estimates for reservoir description and production-enhancement and just lower expectations on reservoir-management. Maybe it's never a mid-teen EBIT business, which is fine, but maybe the way to look at it is some of these other divisions could ultimately be a lot bigger, from a revenue perspective, a lot sooner than we thought. I mean, is that that throwing in the towel too soon on the reservoir-management, or maybe that's the way to look at it?

I think it is throwing in the towel in a little too soon there, Neal. We are optimistic. You talked to a number of our guys up there. They are the fortunate ones; they are working on the good, new, exciting projects. You didn't meet the guys that are slugging down in the trenches trying to finish up a couple of these larger projects that might have been not as profitable or as exciting to work on. So, I think that we make it to the end of the year, we finish up a project in the Middle East and a couple in South America, and we see what the power of reservoir management is. I mean, let's face it; over the last eight quarters has been a very tough road. I think, right now, to throw in the towel would be too early.

Remember that these new multidisciplinary projects do generate revenues for reservoir description and production enhancement, so we are not looking at this as a lost leader; we're looking at this as a profit base. We still believe that this could be a low EBIT -- low mid-teens EBIT business. If the Stars align in the fourth quarter, we could see about an 8 percent exit rate on the EBIT for reservoir management. So, we're keeping our fingers crossed.

Okay. For next year, I mean, I would assume that if revenue continues to grow and given that you've done a good job of getting your DSOs down and inventory down, that there's probably not too much more room to harvest cash from the balance sheet. In fact, I would think, if revenue takes another, whatever, 5 to 10 percent increase, that you might actually need some cash on the balance sheet, even if the DSOs remain flat. Is that reasonable?

Neal, if look at the capacity utilization for us to push out services, we are nowhere near a step function in having to add capital or working capital to the Company. So, if we just look at a neutral balance sheet, I think that's the way that we would look at it at this time point.

Okay. What's your cost on that 125 million of debt? To me, that seems to be the key question as to -- (technical difficulty) -- whether you buy stock back or not?

There are two components, Neal, 75 million fixed rate at 8.16 percent and then the 50 million of floating off LIBOR -- 1.25 or 1.5 over LIBOR, so it's 2.5, say, percent.

Okay. I assume the increase at the end of the year is all in that floating portion, right?

The increase in Q3 was that we haven't borrowed to repurchase stock in some time just because our free cash flow has been so strong. We don't anticipate borrowing through the end of the year, either.

Okay. I was just trying to do the math. If you're free cash flow was 11 million and you bought -- what? -- about 30 million last quarter, I guess that's year-to-date, right?

We bought 32 million in the quarter for Q3 and we bought $50 million year-to-date, so we did borrow in the quarter to be able to buy that much stock, most of which was in the first two weeks of July.

Oh, okay.

So we really haven't borrowed to buy stock for some time, and we don't anticipate. So, I imagine our debt will continue to be at 125 million in total unless, for whatever reason, we use cash to pay down debt rather than buy back stock.

(OPERATOR INSTRUCTIONS). At this time, there are no further questions.

In summary, I think Core posted a really solid quarter here, showing excellent revenue growth. Our operations will stress margin expansion as we go forward into the fourth quarter, as everybody seems to be rooting for getting reservoir-management back on track and making it profitable. Our target for Q4 will be 105, 110 in revenue, and we believe that that will be driven by continuing operations in North America and internationally. We're looking for improved business, operational execution, which should produce an excellent fourth quarter for Core.

I'd like to thank all of our shareholders, the analysts and especially our employees for joining us this morning. Thank you. Good-bye.

Thank you. This concludes the third-quarter 2003 earnings conference call. You may now disconnect.