Core Laboratories Inc (CLB) 2004 Q1 法說會逐字稿

Good morning. My name is Shakina (ph) and I will be your conference facilitator today. At this time I would like to welcome everyone for the Core Lab's first quarter 2004 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask to a question during this time, simply press start then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the conference over to David Demshur, President, Chairman and CEO of Core Laboratories. Please go ahead, sir.

Thanks Shakina. Good morning. We would like to welcome all of our shareholders, analysts, and most importantly our employees to Core Laboratories first quarter 2004 earnings conference call. I'd like to thank you for joining us. We are one of 380 companies reporting earnings today. As usual I'm joined by Dick Bergmark, Core's Executive Vice President and CFO for the call, which will be broken into five segments. First Dick will start by making remarks regarding forward-looking statements, second part we'll give a brief consolidated company overview of our operations, Dick, will come back and give a detailed financial overview of the company, and in the fourth session we'll go over Core’s three operating units detailing our progress and the actions that we've taken in the first quarter to improve results and then we'll follow-up with a question and answer period. Now I'll turn it over to Dick for his comments on forward-looking statements.

Thanks Dave. 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 Act 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 Dave.

Well, thanks Dick, I'd like to give a consolidated overview of the company. Core Laboratories in the first quarter, we had an excellent quarter, it was our best first quarter revenues in our history. However, our review will show that we can and do expect to do even better in the subsequent quarters in 2004. We had contributions from all three operating segments. All segments had double-digit year-over-year revenue growth and all segments significantly increased year-over-year profitability. This was led by production enhancement and yes our Reservoir Management Group that was aided by the sale of the under-performing assets within Reservoir Management. As you know, Core received $18.5m in cash from the sale of those assets. Our revenue growth and profitability were driven by, Number 1, increased demand for our proprietary and patented technologies used by our client to optimize reservoir performance. We also were successful in continued introduction of new technologies, which led to additional revenues and profitability. And Number 3, we had further market acceptance and penetration of recently introduced technologies worldwide. I'd like to turn it back to over to Dick for a detailed financial review.

Before I begin, I would like to point out that the numbers discussed today will be for the most part about our continuing operations. The financials in the earnings release are also formatted in typical discontinued operations presentation style. Results of the discontinued business can be found at the bottom of the statement of operations or on the balance sheet, in line items entitled Assets or Liabilities Held for Sale. We do not intend to present financial details on the discontinued operations today, as those details will be presented in our 10-Q and a further 8-K all in greater detail on or about May 7. So for today, our numbers are all about continuing operation. And just to be clear, all comparisons will be made against what would have been the results in prior periods for those same continuing operations.

So, in other words the year-over-year and sequential comparisons are all on an apples to apples basis. So, revenues were a $100.3m in the first quarter vs. $85.5m in last year’s first quarter, so revenues were up 17.4% year-over-year. If we break it down between services and sales, services for the quarter were $77.7m up 15.3% from $67.4m in last year’s first quarter. Sales were $ 22.7m versus $18.1m last year’s first quarter up 25.4%, cost of sales improved in the first quarter coming in at 79.4% versus 89.2% in the first quarter of last year. This also compares favorably to our cost of sales for all of 2003, which were at 85%. Cost of services for the quarter 79.8% an improvement when compared to 82.4% a year ago. G&A for the quarter came in at $6.2m down from last year’s first quarter on a percent of sales basis coming in at 6.2% of sales vs. 6.5%, we continue to believe that the G&A will run at levels of around $23m in 2004. Depreciation and amortization for the quarter $4.5m up slightly from $4.4m in the prior year’s first quarter, and for the year depreciation expense is expected to be approximately $19m to $20m.Other expense, this quarter is in the amount of $194,000, virtually the same as a year ago. Although we did experience a $550,000 loss on the Venezuelan B due to its devaluation in the quarter. We did experience offsetting gains in other currencies, which minimized the total amount of other expense. EBIT was $9.5m for the quarter providing margins of 9.4% which compares very favorably as David mentioned to the prior year’s first quarter even EBIT was $3.6m reflecting margins then of just 4.2%. So, year-over-year EBIT and margins more than doubled. Our incremental margins continued to improve, on a year-over-year basis incremental margins in reservoir descriptions were21.7%, while in production enhancement they were over 44%. They were not calculable or at least not meaningful in Reservoir Management due to the size of the loss a year ago compared to their earnings this past quarter. Interest expense was $2m for the quarter, up from the prior year’s quarter of $1.6m, the increase was due for the most part to higher debt outstanding $127.7m this quarter vs.$93.2m in the prior year. Income tax expense from continuing operations was $2m for the quarter vs., $557,000 for the prior year’s first quarter, and we expect the current rate of 27% to be used throughout 2004. Income from continuing operations for the quarter was $5.4m compared to last year's first quarter gain of $1.4m so we’re up almost four fold. After considering the discontinued operations we incurred a loss of $6.5m compared to a gain in the prior period of $1.2m, earnings per share from continuing operation for the quarter was $0.19 per share, almost 30% higher than first call mean street estimate of $0.15. These earnings are also 280% greater than the $0.05 earned per share in last year’s first quarter, and after considering the discontinued operations we incurred a loss of $0.22 per share compared to a gain in the prior year of $0.04 per share. If we look at the balance sheet, I just want to point out a few of the items that had changes year-over-year. Cash was at $14.5m down slightly from $16.2m at year end. Receivables stood at 89.5m virtually unchanged at year end. DSO’s were at the end of the quarter were 80 days. Inventory was 33.4m up from the year end balance of 31.3 as we have increased production of certain products in response to higher sales caused by the increased oil-field activity. You’ll note we have a separate line for assets held for sale, where the assets of the discontinued business are recorded. The difference from year end is due to the write down of asset values derived from the sales price of the business, and for the most part the other items on the balance sheet are unchanged from year-end.

On the other side though our accounts payable were some what lower from year-end more reflective of lower expense levels on a sequential quarter basis and we would expect this to rise as activity levels increase during the year. And our other current liabilities were about the same as the year end balance, we also have a line for liabilities of assets held for sale, it represents obligations that have been recorded for the business line that has now been sold. Long-term debt was $125.6m about the same as year-end level of $124.7, outstandings under our revolver were $50m at the end of the quarter but it is now at $34m after applying a portion of the proceeds from the sale of the discontinued business. The balance sheet continues to be strong as our net debt to cap was 32% at quarter end. On a pro forma basis assuming that we had received a cash proceeds from the sale of the business and repaid the debt at quarter end our net debt to cap would have been about 28%, which is more conservative than the industry average in the mid thirties. Our long-term liability were generally the same as last year.

Shareholder's equity ended the quarter at $205.9m, down from the year-end balance from $224.4m. The reduction in the balance was due to additions from earnings and reductions due to the losses stemming from the discontinued operations and repurchases of our shares through our stock buyback program. Our return on equity for the quarter using EBIT was an annualized 18.4%, which is higher than the 15.1% return we posted for 2003, and also it is significantly higher than what we have seen posted on average by the members of the OSX group which have reported so far this first quarter. Capital expenditures for continuing operations for the quarter were $1.3m and in line with our full year 2004 estimate of $15m. This compares to our expected full year depreciation of $19m to $20m. We look at cash flow, cash provided by operations for the quarter was $6.9m, a 93% improvement over last year's first quarter, cash from operations of just $3.6m. So, after paying for $1.3m CAPEX program in this quarter, our free cash flow from continuing operation is $5.6m. And we use the free cash primarily to repurchase our shares in the quarter, which brings us to our share repurchase program. We have been active with the program again this quarter. We purchased an additional 580,000 shares at a cost of $10.8m and through yesterday we purchased a further 136,000 shares in the second quarter at a cost of $3.2m. From inception of the program, we have purchased in the aggregate 6.3m shares at a cost of approx $81m. Our current shares outstanding now stand at $27.5m and our diluted share count at the quarter end was 29.1m. This has been a very successful program as it has contributed to our shares increasing in value over 200% since inception in October 2002, which is also significantly higher than the performance of the OSX, which rose 48% or the S&P 500, which runs 40%. And all our financial ratios are strong with net debt to capital on a more conservative side of the industry range along with having OSX leading returns on equity and invested capital. And of course our industry leading returns to our shareholders in terms of stock price appreciation since the initiation of our share repurchase program. As disclosed beginning back in 2002, the supervisory board of Core Lab initiated a performance based restricted stock plan to closely align management incentives to the rewards our shareholders enjoy. Although the structure of the plan has been disclosed in our proxies and 10-K's and 10-Q's since then, I would like to highlight the success to date of the program in delivering shareholder returns. Rather than an incentive based on a particular current year's return, this plan is longer term in nature and calls for a measurement period that last three years. The measurement is based on how well our stock performs in terms of price appreciation by the end of that three-year measurement period when compared to how well the OSX's 15-member stock performed by the end of that same period. We must outperform the 50th percentile return to begin vesting any of the shares. And at that level, only 20% of the shares would be awarded. In the event we outperform or add above 75% of the OSX members, then all of the shares would be awarded. To date, three tranches under the plan have been made. One in 2002, 2003 and again in 2004, each having their own separate three-year measurement period. In each of those three years, the potential maximum award to the executive team is 90,000 shares in the aggregate. The first tranche of awards could vest at the end of this year. This will represent the end of the first three-year measurement period, which began back in 2002. [Inaudible] It will only vest if the performance hurdles, which I mentioned before, are met. So we have no way of knowing at this point whether the performance hurdles will be met on the measurement date. Consequently, no expense has been taken at this time. Once it is probable that our performance has provided our shareholders return in excess of the 50th percentile of the OSX members return to their shareholders, then we will record the respective value of those potentially awarded shares as compensation expense. At that time we will make that expense visible to you on our financials or within the footnotes.

To date, Core Lab's stock price appreciation places it above the 75th percentile for the 2002 tranche and above all OSX company stock price appreciation in the 2003 and 2004tranches. Therefore at the measurement date or at end of the first quarter, rather than the respective year end for each tranche, the charge to stock based compensation expense for all three tranches would have been $7.4m, but just $2.4m for the first trench whose measurement period ends this year. Naturally all of our financial targets that we have discussed have excluded any expense that may be recorded as a result of these strictly performance-based incentives. Now, we would like to go over our internal financial targets with you. Based on our discussions with our clients, our view of industry spending in 2004 is unchanged from our thoughts, which we discussed on the last call. We still believe that activity levels in North America will continue at these more healthy levels, if one uses rig count as a proxy for the health of a cycle. Further, we see the international markets continuing to improve at a slower rate than that of North American activity. We believe that the majority of the improvements within our operations will come from increases in the North American markets with benefit coming from the other international markets as well. So what does this mean for internal financial targets? Over the near term, with our strong start this year in terms of revenues and earnings, we must remain cognizant of the seasonal factors, which impact virtually all oil service companies with operations in North America. There is a typical flattening in the rate of growth due to Canadian breakup. Our second quarter revenue target is in $100m to $105m range representing potential sequential revenue growth of about 5%. EPS from continuing operation and without regard to any potential stock based compensation expense is expected to be about $0,21 to $0.23, reflecting improvements in earnings from incremental margins on those potentially higher revenues. These revenue and earnings targets are, of course related only to our continuing operation. For the full year, on a continuing operations basis, we believe revenues will increase to the $425m to $435m range, which is up from the revenue target we discussed on our last call, which was for revenues to be in the $415m to $425m range. With this view in mind, this means that we believe our annual revenues could increase by more than 10% growth over 2003 revenues that we discussed on the last call. We now believe that based on the improving activity levels, our year-over-year growth rate could move upwards to 14%. This is almost double the expected 7% spending increases for our clients' CAPEX programs as projected in the annual spinning surveys, suggesting secular growth in a cyclical industry yet again this year, just as we have historically enjoyed. We also expect that earnings will improve over the targets we discussed on the last call. We now believe, based on the current improving activity levels, that our full-year continuing operations and again without regard to any potential stock-based compensation expense, may earn $0.89 to $0.93 per share rather than the range we provided on the last call of $0.85 to $0.92 per share. With that I'll turn it back to Dave for a more complete operational review.

Okay. Thanks Richard. I would like to now look at a detailed operations review for our three segments, starting with reservoir description. I would like to remind everybody that this is an international, mainly an international business with crude oil related technology focus, the highest first quarter revenues ever. However, we must say that we're disappointed with the margin performance at 7%. Margin improvement for this business is a top priority and margin improvement is expected throughout the remainder of 2004. If we look at the revenue from this unit, this is a top priority of a 1% margin improvement in reservoir description equals an incremental $0.015 to EPS. So it can have a significant impact as we improve those margins. Projects of note, we continue to do well in the former Soviet Union. We have a myriad of projects underway relating to historic formation damage problems caused by some of the production schemes under the old Soviet regime. These problems are now limiting the upward growth in production gains that we've seen over the past several years out of the former Soviet Union. In the Middle East, we continue to tackle problems of the increasing water cut in some of our large fields. These problems have been prevalent since the mid-1990s and they are now being addressed. With respect to Iraq, we now believe that it will probably be early next year before we see intervention down in the reservoir where Core Laboratories will get involved in looking at some of the reservoir problems that they are now facing. In West Africa, we have another number of interesting projects underway dealing with the complexities of these deepwater reservoirs. Some of the problems are due to these reservoirs being too porous and too permeable, so gravity effects do have an effect on how the crude oil, natural gas and oil flow in the reservoir. Within Asia-Pacific, we're working on a number of projects that were tied to water floods and future enhanced recovery projects, specifically in the Malaysia and Indonesia area. Looking at production enhancement in detail, remember this is primarily a North American natural gas related business with a technology focus on trying to produce incremental amounts of natural gas and improving natural gas flow. Production enhancement had its highest quarterly revenues ever, margins were at 14%, and as Dick said, year-over-year incremental margins were almost 45%. This is the story of new technologies, leading and expanding markets.

Our SpectraFlood tracer technology has been a large success. With some of the projects that we worked on in Mexico we have been able to identify millions of barrels of bypassed oil that the client will now be able to attack and recover. We have newly introduced this service in West Africa and we have a project underway right now in Nigeria. Our HERO line of perforating charges and gun systems has been a tremendous success. These High Efficiency Reservoir Optimization charges mitigate formation damage during the perforating event. The perforating tunnels are longer and cleaner, and if you look at a project that we were working on in the Wind River basin, this formation went perforated by conventional perforating charges did not flow gas into the wellbore. However, in a recent perforating event using our HERO charges, the well started to come in immediately with natural gas even before the fracturing event. Our recently dedicated Godly Plant (ph) is now working round-the-clock to try to keep up with demand for these HERO charges. We were recently at our Godly Plant for its dedication and it was interesting to see the Core Lab number one, which is a well being drilled into the Barnett shell is going down, and yes they will be using our HERO charges to go ahead and complete that well. Turning to Reservoir Management, this unit did benefit from the sale of the under performing assets that was completed in mid April, and it is finally and will be a contributor to the bottom line in the first quarter and throughout 2004. We have a strong engineering project backlog and we have initiated the Deep Shell study which is going to be looking at a number of reservoirs below the 18,000 foot target area, you're talking about $20m wells here, but you're also looking at the potential of 50 plus Bcf targets that they are searching for, and we're also looking for significant margin improvement to come out of the Reservoir Management group. With that complete, detail of our operations. What I would like to do now (ph) is go ahead and open the phones for questions.

At this time, I would like to remind everyone. In order to ask a question, please press star then the number one on your telephone keypad. We'll pause for a just a moment to compile the Q&A roster. Your first question comes from the line of James Wicklund with Bank of America Securities.

Good morning, guys.

Morning, Jim.

International, the focus continues to be international for everybody; you guys have been focused international for a while. What are your biggest acceleration areas, not where you are doing business now particularly, but where are you going to accelerate your business most over the next three or four years, and kind of how will you do that?

Jim, if we look at actually the most recent period and perhaps extrapolate that since you are asking about the future. So, if we look at year-over-year for the first quarter, our biggest area of growth, FSU, up almost 30%. North America if you include Canada up about 26%.

That is the same old cyclical recovery that will whipsaw you and kill you.

That's true and that's why as I mentioned FSU is about 30, Europe, Africa, and Middle east, and as we talked about those as big growth areas for us, it's turning out that way, and going forward I think if we throw in the mix China, you're going to see a very international footprint.

Can you just then give me – I don’t want to belabor it; in Russia it's an interesting environment. How do you actually grow your presence there in the face of national owned companies and emerging public companies, that don't know this technology, and in the Middle East 10% growth year-over-year, with everything that is going on over there, doesn't seem terribly robust. Can you address that market as well?

Yes, first Jim in the FSU. Currently, now our revenue base there is almost totally on reservoir discretion. And we had recent management visits from our production enhancement guys, really looking at fractured diagnostics and also from the Spectra Flood standpoint if some of these water floods that they are looking at. So the expansion in the FSU will come from being able to put more services through our infrastructure there. With respect to the Middle east, we do expect to see a ramp up, as Dick said just here quarter-over-quarter in the Middle east, the 10% is not impressive, but the number of projects that we have there in backlog that we will see come to fruition here, second, third, and fourth quarter. I think we will see gains there year-over-year in the high teens, maybe low 20 gains.

Where are you headquartered in the Middle East?

Our biggest operation is in Abu Dhabi, but we also have operations in Kuwait and actually putting an operation now into Saudi Arabia.

Okay, guys thanks much.

Okay, Jim.

Your next question comes from the line of Robert MacKenzie with Friedman, Billings, Ramsey.

Good morning all.

Hello Rob.

I wanted to explore your guidance here a little bit, in terms of your revenue guidance and I understand, part of your conservatism may be the expected charge on the stock compensation plan. But, if I'm just looking at the kind of revenues you're talking about in my model, and just applying not even current incremental margins, but typical ones in the past when you still had some greater inefficiencies in the system. I can come up with numbers significantly higher than your EPS forecast. Can you help reconcile that for me?

Actually, mathematically we can understand how you got there. Our views are we want to look at the operations, as they are performing now and the incremental margins that we're seeing, we want to see those develop over the quarters and perhaps these numbers change next quarter. But, it's just our view as of today.

Okay. And confirm for me again. The stock compensation plan, is that - those expenses will be taken typically in the fourth quarter of each year?

The rules are when it's absolutely measurable and it's possible, it's going to happen, you do have to take the charge. What we did today was because we think it's reasonably certain. We wanted to make sure that people were well aware that even though it's been in our filings since 2002. So, when it's probable, meaning that we can make a reasonable estimate of what the cost should be on a measurement date then we will do it. And our thoughts were depending on the volatility of the market, and we won't know for certain, if we will be in the money if you will. So, perhaps it is a fourth quarter event. But, it looks like as of today each tranche (ph) is about $0.06 a share.

Okay. But, again you would expect those to -- based on certainty and your comfort with that that it is probably going to be a third or fourth quarter event in each of the given years.

That's correct.

Okay. In terms of Reservoir Management, I think you had mentioned last quarter that excluding the loss making businesses, which you've now sold, that business, the pure engineering business had mid-teens margins. Is that all of which you have left or is there something else in there that dampened the margin this past quarter which was lighter than might otherwise be expected?

Yes. Couple of things there Rob. There is another business in there that does provide some down-hole measurement of temperature and pressure, and so that did dampen margins plus Dick mentioned the foreign exchange hit that we took in Venezuela that affected that group to the tune of maybe a couple or $300,000 and the add-backs from other currency changes on plus side actually helped the production enhancement and reservoir description event. So, those are the two reasons. Yes, we expect those margins to be mid-teens as we go forward.

Great. And can you also, kind of building on Jim's question a little bit. Based on the strength we've seen in production enhancement this quarter, can you give us the current run down as to your approximate geographic split of revenues in each segment perhaps on a destination basis, not so much on SEC basis?

From - -

In the first quarter here.

Right. If you look at production enhancement, essentially probably had 70% of those revenues based in let’s say North America, whereas, but if you look at reservoir description, probably 80% of those revenues were based outside of North America.

Okay. And Reservoir Management?

Reservoir Management is a mix of projects worldwide. So, right off the top of my head Robert, probably say 50-50, but it being just 5% percent of our business. Probably, it won’t sway the [Inaudible] numbers one way or the other.

Okay. Great. Thank you.

Your next question comes from the line of Neal McAtee with Morgan Keegan.

Good morning guys.

Hi Neal.

Are you tired – do you miss not talking about the Reservoir Management as a lost leader (ph) .

Yes. Well actually we are going to a follow-up conference call and talk to them for hours.

On Reservoir Management, I mean how much growth say from this 5m quarterly run rate do you expect through the year? I mean is this something that now -- that you have gotten rid of this division, I mean the segment that was losing money, is it something that maybe you have a couple of quarters where they are regrouping and it's flattish or can it be 7m or 8m run rate by the end of the year?

Yes, I think you can get to 7m by the end of year, Neal, we would look at significant margin improvement there, but you've got to remember this is a group where the one that we sold a couple or three years ago was doing $40m in revenues. We have been cranking that down, so this is what's left there and there is no reason from the $5m base that this can't show a significant increase in its run rate and growth. So if we finish the year with $7m quarter, it wouldn't surprise us.

And then, is it safe to assume that based on your comments the production enhancement revenue year-over-year, maybe grows a little bit faster than that 14% number and reservoir descriptions may be a little less than the 14% and that's the way you get to 14% overall growth rate?

Neil, that's right. We think that North America driver will lead on this, so that’s probably not bad.

Okay and then thirdly, if I just want to put in some incremental margins, can you get to an EBIT margin overall for the company in the 12 range?

Our goal is certainly to get it there and higher by the end of the year, and you have your normal ramp up during the year, Neal as we have those revenues going up quarter-over-quarter and our fixed cost structure staying relatively flat. So, we would expect to see that.

Okay.

And hence you mathematically can understand how Bob, might get his model to fall out the way it does.

Yes, I can understand that.

All right, good job guys and look forward to the rest of this year.

Okay.

Your next question comes from the line of Lisa Hackman with Lehman Brothers.

Good morning. In terms of reservoir description margins, could you discuss the problem areas that you see in this quarter and then what your point of action is to improve the margins there?

Yes, actually we don't see a problem area; this is the highest these margins have been since 2001. What we would like to do is see better execution in a number of the areas, for instance we have had some expenditures for expansion of our footprint in the FSU and most recently in China. I think we'll see some of those expenditures come to fruition as we see increasing margins for this business for the remainder of the year. If we look at the margins that that business finished last year at that would be something that we can certainly achieve, we hope this year in the third quarter an excess at a higher level.

Okay. The production enhancements margins were quite strong for the quarter particularly given the first quarter, is that a sustainable level or are you expecting to see a drop-off in the second quarter?

Improvements should happen quarter-over-quarter but I would not expect to see that same rate of improvement given the typical seasonal patterns of second quarter.

And what are the drivers of your margin expansion in the Reservoir Management for continuing operations there?

Yes, I think for that, Lisa just as these projects for instance like the Deep Shelf project start to roll-on, those are higher margins and we'll see those actually manifest themselves here over the next several quarters. Actually, if you would back out the FX affect that unit saw here in the first quarter, you would see margins in the double-digits.

Okay. That’s all I had. Thank you.

Thanks Lisa.

Your next question comes from the line of Max Baxter (ph) with Winfield Capital.

Good morning guys.

Hello Max.

Most of my questions were asked. I have two small ones. You said that the stock based compensation, did I get this right, is $90,000 per year on a three-year basis so far, so that would be a total of $270,000 if all three years came to fruition the way you, we all hope it will actually?

Max, the $90,000 related to the four executives, in the aggregate it's probably about $350,000.

And that would be over this three-year period, is when it’ll be staggered?

That is correct.

Sort of evenly staggered?

That's correct.

Okay, thanks. Next question, give me a little color -- give us all a little color if you will on the North American business which was particularly strong, I mean just in the geography and type of wells you were doing? I mean how much of it is Canada, how much of it is Gulf, and how much it is in the water?

Yes, for production enhancement first quarter Max, you can really look at three areas, I would say almost all onshore, and certainly Mexico. Onshore US and Canada, and if you look at the particular strengths in the US, we probably saw gains of somewhere on the order of a 20% pickup, Canada even larger, maybe approaching a 40% pickup. Now, I don't think we will see that level of change continue as Dick said with the breakup in Canada, we will see some leveling off and probably a decrease here in the second quarter. Although we do have a large job for export coming out of Canada with our perforating guns and some of our perforating charges that will be going international, we will fill some of that void. So, the strength was onshore hard rock reservoirs primarily in Canada and the US and then also some strength in Mexico.

Well, thank you very much. Congratulations on the full utilization of Godley plant.

Yes, thanks Max.

Your next question comes from the line of Allen Brooks with CIBC World Markets.

Good morning, guys.

Good morning, Allen.

David, I will tell you I'm absolutely shocked that you value your employees more than you value the analysts. But on an other note, now that you have gotten Reservoir Management, kind of behind you, what's the strategy for expansion opportunities, are there acquisitions out there or other business areas, business lines you want to try and fill out?

Well, historically, we have been able to show internal growth 200 to 300, 400 basis points above what the industry spending is, so we rely on that on some of the secular growth that the company has shown historically. If we look at from the standpoint of what technologies we might want to add, we -- we are and have been in discussions with technologies that would relate to adding niche technologies. These primarily right now, Allen are focused on Reservoir Description and probably concentrated in production enhancement. And we are looking at trying to get additional services to the well site. So from our standpoint that is our production enhancement group. I don't think anything is shattering but nice $5m to $10m add-ins that we will be looking at over the next year, year and half.

Okay. Last question is the Deep Shelf project that you mention in your press release, which you are kicking off, I guess?

Right.

What's the timing of some thing like that getting done, I would think there would be a high degree of interest since it looks like the majors are gearing up to do a lot more drilling in those horizons?

Yes. Certainly, they are signing up companies as we speak and so that project has been initiated and underway and typically in this Allen with the additional discoveries that they have and certainly we are rooting for New Field and their Treasure Island venture. Once you have additional discoveries at depth of 50, 60 BCF reservoirs, usually get the herding effect in the industry and a large number of companies joining, as we did see in the Deepwater, where we had 38 companies joining at and I think the last companies were joining at between $600,000 and $700,000 a subscription.

Okay. Can you also -- how many companies you have in the Deep Shelf at the moment?

I think in Deep Shelf, we have in the range of five to seven.

Okay. Very good, thanks.

Okay, Allen Brooks.

Once again, I would like to remind everyone in order to ask a question, please press star then the number one on your telephone keypad. At this time, Mr. Demshur there are no further questions. I will now turn the conference back over to you for closing remarks.

Great, Tina. Thank you. In summary, Core posted an excellent first quarter as all of our operating segments contributed to our record revenues. Our continued focus will be on reservoir optimizing technologies which positions Core for a great year in 2004. Our main focus and priority will be increasing our margins, especially in Reservoir Description as each percent margin improvement yields an incremental $0.015 earnings for Core. We would like to thank all of our shareholders', the analysts and especially all of our employees for sharing their morning with us and we look forward to talking with you on our next conference call. Thanks for joining us. Bye-bye.

Thank you. This now concludes today's Core Labs first quarter 2004 conference call, you may now disconnect.