Core Laboratories Inc (CLB) 2005 Q3 法說會逐字稿

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

Thanks, Tamara. Good morning in North America, and good afternoon in Europe and Asia-Pacific. We would like to welcome all of our shareholders, analysts, and most importantly our employees to Core Laboratories' third-quarter 2005 earnings conference call.

As usual, I am joined by Dick Bergmark, Core's Executive Vice President and CFO. The call will be divided into five segments. First, Dick will start by making remarks regarding forward-looking statements. We will come back and give a brief consolidated Company overview, followed by a detailed financial overview from Dick Bergmark. And then we will go over Core's three operating segments, detailing our progress and discussing the continued successful introduction of new Core Lab technologies and services. Then we will finish up with a question-and-answer session. Dick?

Before we start the conference this morning, I'll mention that some of the statement 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 34F (ph) 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 will pass it back to Dave.

Thanks, Dick. I'll give a consolidated Company overview. Core's operations posted the best quarter in the Company's 68-year history in the third quarter of 2005. It was a very good quarter, but yet not still a great quarter.

Operations delivered all-time quarterly records for revenue, operating profit, net income from operations of $0.48 per diluted share, and cash generated from operations. The quarter marked the seventh consecutive quarter in which Core's operations posted record revenue and earnings per share, and also marked the 11th consecutive quarter in which Core has either met or exceeded our own internal targets, so almost three consecutive years of outperformance.

Core posted a sequential quarterly gain in EPS of almost 30%, one of the highest in the small to midcap oil field service industry. The success emanates from our continued focus on delivering technologies and services that enable our clients to produce the incremental barrel or barrel equivalent from their producing assets. Our goal is to increase the daily production from the existing fields of our clients and, more importantly, have them produce the maximum amount of hydrocarbons over the life of that producing asset.

As highlighted in past conference calls, Core's operational management has been focused on operating margin expansion. As we said many times, we feel Core is still a margin story. These third-quarter results indicate that the focus is producing results. In the quarter, operating margins reached 16.8%, the second highest in Company history. Sequential quarterly operating margins increased by almost 300 basis points. And year-over-year quarterly incremental operating margins reached almost 60%.

A year ago, we spoke of high gradient regions in which Core's assets will produce the highest returns and highest margins for the Company. We redeployed assets from certain regions in Russia and certain countries in Central and South America to focus on higher margin projects. This strategy continues today and we believe that Core's operating margins can expand further owing to our industry-leading reservoir optimization technologies. We will further highlight this continued focus and the impact of our new technologies and services in the detailed operation reviews to follow.

I will now turn it back to Dick for a detailed financial review.

Thanks, Dave. The revenues were 120.2 million in the third quarter versus 108 in the third quarter of last year and 118.4 million last quarter. Revenues were up 14% year-over-year for the first nine months and up 10% for the quarter compared last year's third quarter. And in a moment, you will see the positive impact on earnings that our efforts to focus on higher margin services has had.

Of these revenues, sales were 29.9 million, up when compared to 25.8 last year. Services for the quarter, 90.3 million, up when compared to 83 million last year. Cost of sales in the third quarter decreased to 77% versus 83% last quarter and 82% for the full year of '04. And cost of services for the quarter were also 77%, up slightly from 75% in the last quarter but down from 78% for the full year of '04.

G&A for the quarter was 6.4 million, excluding the cost of the equity-based compensation incurred this quarter, down from 7.6 million last quarter and virtually unchanged from the 6 million in last year's third quarter. This decrease compared to last quarter was due in most part to reduced costs incurred relating to our Sarbanes-Oxley initiative. For 2005, expect G&A to come in around 28 million for the full year.

Depreciation and amortization for the quarter, 4 million, similar to the 3.9 million incurred last year in the third quarter. For 2005, depreciation expense is expected to total approximately 17 million for that full year.

We incurred an expense for equity-based stock compensation in the quarter due to our stock's good performance. The possibility of this expense was discussed on our last quarter's call. Specifically, our performance-based stock plan, known internally as the PSAP, and our restricted stock plan that replaced our stock option program, known as the RSAP.

As you may recall that the PSAP is a potential award of shares based on how well our stock provides a total return to our shareholders over a three-year time period compared to the total return provided by the companies that comprise the OSX. It is now our view that it is probable that our stock will continue to outperform the peer group through this year end, which is the end of the three-year measurement period.

An expense in the amount of 3.7 million, or $0.10 per share net of tax, was taken to reflect the probable nature of our stock's continuing outperformance. This amount assumes all 125,000 shares awarded will vest as of the upcoming year-end.

And the vesting of the 130,000 shares in the RSAP program occurred at the end of September, as the share price exceeded the stock price target established when the grant under the RSAP was made. The amount of this expense relating to these RSAP shares was 2.4 million, or about $0.06 per share net of tax.

As discussed on prior calls, all of our financial targets we have mentioned have excluded any expense that may be recorded as a result of these equity-based incentives, along with the related tax treatment.

Other income this quarter is in the amount of 1.6 million. The largest nonoperational component came primarily from the sale of assets, a building in Bakersfield, California with a gain of about 600,000. The remainder were typical operational items such as foreign exchange gains, minority interest and the like. This compares to a gain in last year's third quarter of 362,000.

EBIT from continuing operations was 14.1 million, or 20.2 million, excluding the equity-based compensation, and these earnings are up 6.6 million, or 48%, compared on the same basis to the third quarter of last year. It is also up 23% sequentially over last quarter.

This EBIT represents operating margins of 16.8%, up 420 basis points compared to margins of 12.6% in last year's third quarter. Our continued improvement in margin has been driven by our focusing on obtaining commercial contracts that deliver higher product and service margins, thereby creating higher levels of incremental margins earned on those revenues. And combine this with the better utilization of our cost structure, the results are clearly demonstrated in our expanding margins.

On a year-over-year basis, our incremental margins in the quarter grew by 57.6%, and by segment, they were for Reservoir Description, 49.5%; Production Enhancement, 62.1%; and Reservoir Management there at 46.3%.

Interest expense was 1.9 million for the quarter, down slightly when compared 2 million in last year's third quarter. Income tax expense was 4.7 million for the quarter, compared to 3.1 million in the prior year's third quarter, due primarily to higher earnings in this quarter and an increase in the effective tax rate.

As mentioned as a possibility on last quarter's call, the annual effective tax rate is now 31%, given the expense for the equity-based compensation. This new annual effective rate of 31% is slightly greater than the 27% rate used previously, as the equity-based compensation had not occurred and there was no certainty that it would be incurred. So for this quarter, we need to use a tax rate that brings the year-to-date average to that 31%; so that is why the rate this quarter is about 39%.

Income from continuing operations for the quarter was 7.5 million, or 13.3 million before the equity-based compensation expense, compared the same basis to last year's third quarter income of 8.5 million. So on that basis, net income was up 57.6%.

Earnings per share from continuing operations for the quarter was $0.27 per share, or $0.48 before the equity-based comp. This is $0.07 above First Call's Main Street estimate of $0.41, which compares to the $0.30 earned from continuing operations before equity-based comp in Q3 of last year. So earnings are up 60.8% year-over-year. Sequential EPS is $0.10, or 27%.

Now going over to the balance sheet. Cash was up 3.1 million to 19.1, compared to year-end balance; virtually the same as last quarter. Receivables stood at 97.7 million, up by 2.3 million from 95.4 at year-end, but importantly, DSOs improved to 73 days compared to 80 days for the full year of 2004. Inventory was up slightly from year-end due to increased business activity. Then again, importantly turns improved 14% from full year 2004 levels.

Our current assets were down 2.2 million, primarily due to the timing of corporate insurance. And there are no real changes in PP&E or intangibles, goodwill and other long-term assets.

Onto the liability side of the balance sheet, our account payables for the quarter were down about 1.8 million compared to year-end, primarily due to the timing in vendor payments. And other current liabilities increased from the 2004 year-end balance by just about $1 million.

Long-term debt was 90.1 million, down more than 20 million from the year-end balance of 110.2 million and down by about 12 million from last quarter. Our net debt to cap at the end of the quarter stood at 23.3%.

Outstandings on our revolving credit facility were down 37% from year-end, with a quarter-end balance of 22 million compared to 35 million at the prior year-end. During the quarter, we also repaid the first 7 million installment under our 75 million senior notes. As has been the case for the last several quarters, our debt continues to come down, while at the same time we have continued our share repurchase program. More on that in a minute.

Other long-term liabilities were 24.1 million, up 3.5 million from year-end, primarily due to an increase in deferred comp by about 1 million and deferred revenues by 2.3 million. Shareholders' equity ended the quarter at 215.2 million, up from the year-end balance of 190.3. Our return on equity for the quarter, using an annualized EBIT before equity comp expense, was 37.6%, up from 29.3% in the same quarter last year.

Our capital expenditures for the quarter were 3.7 million. For the first nine months, they were 12.3 million, up from 7.2 million in the same period last year, as we continued to invest in support of our growth objectives. We expect CapEx in 2005 to closely match depreciation, falling in the $17 million range.

Looking at cash flow, cash provided by operations in the quarter was 26.2 million, and after paying for a 3.7 million in CapEx, our free cash flow was $23 million, or about $0.80 per diluted share. The annualized per-share yield on this quarterly cash flow was about 10.7%.

So how did we use the free cash in the quarter? We gave about 11 million back to our shareholders through our share repurchases and paid down debt by about 12 million with the rest.

Now to the stock buyback program. During the quarter, we purchased an additional 348,000 shares at a cost of almost 11 million. And through yesterday, we repurchased a further 261,000 shares in this 4th quarter at a cost of 7.6 million. So from inception of the program, we purchased in the aggregate almost 9.1 million shares at a cost of just over $150 million, or almost 25 percent of the shares outstanding at the time the program began in October if 2002.

So it has been a very successful program for shareholders. It has contributed to our shares' quadrupling in value since the inception of the program. The return to our shareholders from inception has been just over 300%, significantly higher than the OSX, which rose 125%, or the S&P 500, which rose 48%.

Over the past year, our financial ratios strengthened further. For example, our return on shareholders' equity this quarter improved to 38% compared to 29% in last year's third quarter. And our net debt to cap is down to 23.3% from 32.8 a year ago. So we continue to further improve our balance sheet and financial position while providing our shareholders with one of the highest cash returns in the industry.

And with that, I will turn it back to Dave.

Okay, thanks, Dick. I would like to give a detailed operations review, starting with Reservoir Description. Reservoir Description now represents 58% of Core's revenue, which is down from the mid-60s percent of several quarters ago.

Remember this is a business with an international focus, and the projects that they work on are mainly crude oil related. However recently, the group has been developing new technologies related to the exploitation of nonconventional natural gas reservoirs. More on that in a bit.

Reservoir Description posted a solid quarter. It is the highest third-quarter revenue total ever. Operating margins were 14.7%. There was a 260 basis point increase sequentially in margins and 300 basis point increase in margins year-over-year.

These operations have benefited the most by the redeployment of assets. You remember during the third quarter of last year and fourth quarter of last year, we were talking about downsizing significantly in Mexico and also portions of Russia. We have moved those assets and personnel where they now are producing higher returns and higher margins for the Company. So in these areas, revenues are down significantly, but the redeployment of the assets has sharply increased our operating margins. We will continue to do that.

If we look at some of the Reservoir Description projects and technologies that we would like to highlight, as we previously mentioned, Core's new QRP, or Quick Rock Properties, technology is increasing Reservoir Description's exposure to the North American natural gas market. QRP technology is being utilized in nonconventional natural gas reservoirs by many natural gas focused independent exploration companies; for instance, like Ultra Petroleum.

The technology has enabled these independents to more effectively identify, number one, the most productive and economical pay zones in these nonconventional gas reservoirs; accurately determine the research potential in these reservoirs; and define the highest permeability zones in which to complete and stimulate these wellbores. Simply put, QRP technology can help maximize natural gas flow and recoveries from nonconventional natural gas reservoirs.

Another area to highlight is the Asia-Pacific and its operations. Core recently held a global operations meeting in Singapore to focus on opportunities in the Asia-Pacific Theatre. Areas of note, that we look at the oil discoveries and enhanced recovery projects that are occurring in Malaysia; the increased activity in India; a potential natural gas field development in Indonesia -- read that LNG; and increased activity levels in Australia and offshore China.

We would like to emphasize offshore China because we believe that the geologic makeup of the intermontane basins of China do not lend themselves to good applications or massive applications of Core Lab technologies. These crude oils tend to high pour point crude oils and enhanced recovery projects are very, very complex due to the absence of miscible gases and natural gas.

Turning now to Production Enhancement, it is now 37% of Core's revenue. Of course, this is the growth engine of the Company. The differential growth rates have now increased its revenues to near 40% of all Core's revenue. This is a high water market and reveals the growth through the new technology introductions. North American natural gas focus mainly for these technologies, although this technology can travel to the international market.

Production Enhancement had a great quarter. All-time quarterly highs for revenue, operating profit, and operating margins. The key to that continued success has been the focus on natural gas production from nonconventional reservoirs. These are tight gas sands and gas shales that have cutoff velocity limits of 6% or less, micro to nanodarcy permeability ranges. A decade ago, we used to call this rock here at Core Lab tombstone, and now we are producing billions of cubic feet from this tombstone every day.

Core is now coupling several newly-introduced and some existing technologies, which are enabling our clients to have higher than average initial production rates, or IP rates, while lessening the effects of the decline term. The Barnett Shale is a great example. We recently had a client that drilled three horizontal wells in the Barnett Shale and coupled Core's High Efficiency Reservoir Optimization, or HERO, perforating charges and gun (ph) systems with SpectraStim, Core's zero wash (ph) frac technology, SpectraScan, Core's frac diagnostic technology, and SpectraChem, Core's frac fluids cleanup technology.

The results from all three wells through the first eight months of production data have been very encouraging. All three wells had higher IP rates, above the average for Barnett Shale wells, and all three wells had less sloping decline curves, thus maximizing the production and the ultimate natural gas recovery from the areas around these wellbores.

And finally, looking at Reservoir Management, representing 5% of Core's revenues, remember this is a business that is engineering focused, project oriented on a field-wide or basin-wide scale. It is important to note that most of their projects -- almost all of their projects utilize significant datasets and the newest technologies from Core's two other reporting segments, Reservoir Description and Production Enhancement.

Reservoir Management operations had a great quarter, posting all-time quarterly highs for revenue, operating profit, and margins. Two multi-client projects that we would like to highlight, again both related to nonconventional natural gas reservoirs, are the reservoir characteristics and production properties of gas shales, to which now there almost 30 participating companies; and Core's tight gas sand study, which now there are over 25 participating companies.

The high level of participation in these studies reveals that today's nonconventional natural gas reservoirs are quickly becoming tomorrow's conventional natural gas reservoirs.

And with that, Tamara, we would like to open up for questions.

(OPERATOR INSTRUCTIONS) Robert MacKenzie, FBR.

My question for you, I guess, is for Dick first off here. Reservoir Description revenues were actually down sequentially, yet your profits were up quite dramatically in terms of your operating income. I was wondering if you could give us a little bit more color surrounding that, what kind of mix led to the sequential decline in revenues? You had much stronger operating profit.

Rob, that is a result of the things we have been talking about over the last several quarters about how we have been focusing on areas that are going to give us the highest level of profitability. You've heard us talk about redeploying assets. For example in Russia area, CIS, as a result of some of the YUKOS issues. We talked about that several quarters ago. In Mexico, Latin America, where we have had some redeployment of assets. So what you're seeing now is a positive results of those actions.

I think, Rob, really the significant factor there would be a comparison of the sequential and year-over-year revenues in Mexico and what we were producing out of those from an EBIT standpoint. We took a lot of revenues that were neutral to maybe losing EBIT during the quarter and removed those. So essentially you're seeing more of a clean slate from the levels we expect to operate in Mexico going forward to where we were at in the past.

Okay. So from second quarter to third quarter, where did revenues decline?

Revenues would have declined certainly in Mexico, and probably throughout some other areas in Latin America, and also sequentially in parts of northern Russia.

Okay. And so if this really is a result of your focus on much more profitable areas, these kind of year-over-year incremental margins, 60% incremental margin year-over-year on a blended rate, 50 for Reservoir Description, 62 for Production Enhancement, those should be sustainable, right?

If we can continue to find projects that can produce those incremental margins, I think that is correct.

Okay. I wanted to go into your guidance that you put in your press release for next year. I recognize this is probably a month earlier than you normally put out '06 guidance.

That is actually why we put on there preliminary. And why don't I turn it over to Dick and he has some comments on guidance.

Rob, you raise a good point. Our internal budgeting process for '06 is just underway within the Company. So our initial preliminary review of '06 does indicate that the typical revenue and earnings trends should remain the same as in prior years. So for example, Q1 revenues and earnings will always be slightly lower than the preceding Q4, as our clients wrap up their CapEx budgets for the year.

And then as has been the historical case, the revenues should ramp up during the year and we should experience those incremental margin increases as the year progresses.

But you're right. Our internal budgeting process is just underway, so it is early. But we have had some discussions with some clients, so we have some ideas of the activity levels they're going to have, the related projects in '06 that we can work on to help them in their reservoir optimization efforts.

So it is a little early to be too definitive, but we are prepared to suggest that in Q1 maybe it is 120 million in revenues, EPS in that $0.37 to $0.39 range. And for the full year, we're just putting out there just broad views. Certainly revenues will be over 500 million. And we kind of confirm the numbers that are out there now on EPS of $1.85 to $1.90. Certainly as time progresses, we will be able to fine-tune this, but we just wanted to let people know kind of a broad overview.

Fair enough. I wanted to go back to Dave, what you talked about in your Reservoir Description summary about your Quick Rock Properties technology being used for nonconventional gas. I assume you mean by that shales and tight gas sands.

First off, when was that introduced? And how does that compare, for example, against, say, a logging tool or something like that in a wellbore?

I would say that it started to generate significant revenues in Q2 of this year, and now being more widely accepted in Q3. It is a direct measurement of porosity, and from that we can derive water saturation, which is very important.

I think, Rob, when we look at it, it is a much, much more accurate view of the pore network as from what can be defined or described from a logging tool. In many cases, we are using these data sets to once again calibrate these logging runs. And without the database to do that, I think the logs would have little value.

How does this compare against just a conventional core analysis? It sounds like it is just a new way of taking a test on a core sample.

Yes, well, if we look at past core analysis techniques, we were not equipped to handle micro and nanodarcy levels on permeability. It just wasn't thought about to be a conventional reservoir. And so now we have had to adapt different levels of technology to deal with that.

That's interesting. Okay. On the Production Enhancement, again you're also making progress there. Stepping back, would you say that that new test is a big part of your incremental operating profit third quarter over second quarter?

There is no question about it. When we linked those technologies that we mentioned in the press release and then on the conference call, they are the big push in the incremental. So from the acceptance, the continued acceptance of the HERO charge and then further penetration of our fractured diagnostics technology, no doubt leading to those higher incrementals.

Great. And then acquisition front, are you guys looking for any acquisitions, small or large? If so, what is the market like?

We always have our eyes open for that, Rob. I would say that right now our focus, our continued focus would be providing additional field services out of the Production Enhancement area. And right now, a lot of the private companies have pretty high valuations on them. So as we go forward, we will continue to internalize within Core, but we always have our eyes open for good opportunities to add a tuck-in technology, specifically in Production Enhancement.

On the financial side, Dick, can you give me the performance-based stock compensation plan expenses or the equity-based combined? What are the pre and post tax numbers? You had a post tax EPS, but what is the post tax of the absolute dollars?

Spread between the two programs, the PSAP share was $0.10 and the RSAP was $0.06.

Okay, and what is the tax effect of those when we back those out?

Those include a 27% rate.

Okay, great. And on the share repurchase program, in your press release you mentioned at the end of the quarter you had 26.103 basic shares outstanding. What was the average basic share count for the quarter? I've got the diluted. Do you have the average basic share count?

26,103,000.

That's what you said it was at the end of the quarter.

Well, we bought back another 260,000 shares, so on average -- an average the number is probably down to 180,000 (ph).

Okay, great. I'll turn it back.

Jim Wicklund, Banc of America Securities.

Good morning, guys. Actually this is Chris Gibson (ph). Jim is stuck on another couple of calls.

I guess this question is directed at Dick. How should we look equity-based compensation going forward? How are you looking at it in light of FAS 123? I guess my last question is what level would be a permanent fixture with regard to equity compensation going forward?

123R is proposed to become effective starting next year, and that is one of the reasons why we have highlighted the comped expense this year, so people can deal with it on apple's basis compared to those companies that still use stock option plans. As you know, we have really cut back on stock options and replaced them with these restricted shares.

So 123R comes into effect next year. What people are looking at are the valuation methodologies right now, and they're all trying to come to terms with how it will impact them. But we have done a quick run for next year and if we look at our two stock-based plans, the PSAP and RSAP, if we do similar awards as the ones we just talked about -- 120 some thousand shares for the PSAP and, maybe 140,000 shares for the RSAP -- you could be looking at maybe a $0.06 charge each year, or $0.06 expense each year.

And certainly that is not final. That is just our view at this point, and it depends on the valuation methodologies on Black Scholes, etc. Does that help you, Chris?

Chris A little bit. So, going forward just is the PSAP award going to continue to be as substantial of an impact? It is going to continue to have as substantial of an impact on earnings as the RSAP? How will those balance each other out moving forward?

Let me explain what we believe to be one of the changes in the treatment as you go into 123R on a plan like this. Rather than it being a one-off event based on probability of attaining targets, it will be based more on an amortization over that measurement period.

So for example, the PSAP has a measurement period of three years. So under the new rules, our belief is that we will need to amortize or incur a third of that each year. And the RSAP plan is like a stock option plan, but it uses stock but it vests over seven years, so each year we would take 1/7 of that.

The issue that companies are struggling with right now -- or analyzing, I should say -- is what is the value that you then amortize? And that is that Black Scholes concept or the binomial method concept. So you establish a value for the awards in the case of the PSAP; you amm it over three years. In the case of the RSAP, you amm it over seven years.

So you won't have the one-off event like we've seen this quarter unless you have an acceleration event because of excellent performance that would say you need to take the expense all at one time because they've vested because you have met some type of performance target.

Slightly different than the way we've handled it up to this point in time, but not materially different.

(indiscernible) the acceleration feature makes it pretty hard to gauge going forward, more or less?

Yes, but the acceleration feature is a known target, so people can see that. They can make judgment on whether they think it will occur or not. For example, the RSAP had a target of $25 per share. So you know what it is. You can see it, but you need to attain it before it would accelerate. And before that, you are amming it every quarter.

I appreciate it, guys. That's all I've got.

(OPERATOR INSTRUCTIONS) Will Foley, Sidoti & Co.

Just a question on I guess the top line for Reservoir Description. I guess as mentioned earlier, it is down a little sequentially. Is there any reason to believe that that number may flatten out? Or is there still a good opportunity that you'll see top line for Reservoir Description grow at a similar rate over the next 12 months as we have seen in the past?

I think that is right, Will. I think as we go forward, the activity level, we believe, will be up next year -- not as much as the CapEx spending because we think there will be a divergence now between CapEx spending from our clients and the activity levels owing to just some significant price increases from let's say the drillers and the pressure pumpers.

So the algorithm that we have used in the past for the entire Company has always been we would grow 3 to 400 basis points higher than the CapEx growth rate by our clients. We think that there will be a little bit of a disconnect there, so we're going to pay a lot more attention to activity levels and tee off of that for what the growth rates are.

I think off of those activity levels, we will see no difference in the 3 to 400 basis points growth for the entire Company, maybe being higher in Production Enhancement and Reservoir Management as opposed to Reservoir Description, but certainly a top-line growth there of 10% plus certainly is in the works.

Okay. And that kind of new approach is the same for North America and internationally?

Yes, that's correct.

In terms of -- obviously, margin improvement is an important part of your improved earnings. Do you anticipate -- I don't know how specific you may want to get here -- but how much further margin improvement can you guys get? Where are you in the process in terms of improved margins? And do you think we can continue to see margins improve at the rate we've seen or are we getting to the point where that rate of improvement is likely to slow down materially? How should I think about that?

We think that margins can continue to improve. And we talked in the past about the prior peaks that we have had in margins and we're not quite there yet in any case. But we have said that the technologies today are better than the ones we had then. So we think the business structure that we have is better. Our cost structure is better. So we think we can continue to improve our margins. We don't see this as the top.

Can you remind me what those prior peaks were?

They were high teens, 19ish.

Okay. And sorry, you mentioned comments about the tax rate in the fourth quarter. Can you just clarify what you anticipate for a tax rate in the fourth quarter and for 2006 also please?

Sure. 31%.

All right. And also on SG&A and depreciation for 2006, can you give me some thoughts there, please?

Yes, sure.

28 million for SG&A and 17 million for depreciation.

But for 2006, I think that they were the numbers you give for 2005.

We don't see a big change in G&A or CapEx. CapEx, our rule off the bat is it ought to match depreciation.

Very good. Thank you so much.

At this time, there are no further questions. Mr. Demshur, are there any closing remarks?

Yes, thanks. In summary, Core posted our best quarter in the Company's history. The Company has never been better technologically positioned to assist our worldwide clients to expand their existing production base. With the worldwide challenge to produce more hydrocarbons becoming more difficult every day, Core's decade-long laser focus on providing reservoir optimizing technologies has the Company dynamically positioned for continued growth throughout 2005 and into 2006.

So in closing, we would like to thank all of our shareholders, the analysts, and especially all of our hard-working employees around the world for spending part of their day with Core and we look forward to visiting with you again at the end of our fourth quarter. Thank you very much and goodbye.

This concludes today's Core Labs' third-quarter 2005 earnings call. You may now disconnect.