Core Laboratories Inc (CLB) 2006 Q3 法說會逐字稿

Good morning. My name is Beverlyn and I will be your conference operator today. At this time, I would like to welcome everyone to the Core Labs Q3 2006 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 session. (OPERATOR INSTRUCTIONS)

Mr. Demshur, you may begin your conference.

Thanks. I would like to say good morning to all of our participants in North America, good afternoon to all those in Europe, and good evening to those listening in Asia-Pacific. We would like to welcome all of our shareholders, analysts, and, most importantly, our employees to Core Laboratories third quarter 2006 earnings conference call.

As usual, I am joined by Dick Bergmark, Core's Executive Vice President and CFO. But also today, we are joined by Core's Chief Operating Officer, Monty Davis, who will present the detailed operational review, as Monty has been the chief architect of Core's recent success in our operations.

The call be divided into five segments. First, Dick will start by making remarks regarding forward-looking statements. I will come back and give a brief, consolidated Company overview, touching on several financial and operational highlights. Then Dick will come back and give a more detailed financial overview, followed then by Monte, who will go over our three operating segments, detailing our progress, and discussing the continued successful introduction of new Core Labs technologies services, and then will go ahead and open it up for Q&A.

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

Thanks, David. Before we start the conference this morning, I will mention that some of the statements that we may 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] filings that may affect our outcome.

Should one or more of these risks or uncertainties materialize or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. For a more detailed discussion of some of the foregoing risks and uncertainties, see item 1A, Risk Factors, in our annual report on Form 10-K for the fiscal year ended December 31, 2005, as well as the other reports and registration statements filed by us with the SEC.

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

Thanks, Dick. I would like to give a consolidated Company overview. For the third quarter of 2006, Core's operations once again posted the most profitable quarter in the Company's 70-plus year history. It was an excellent quarter by our operations, but all of our operations managers believe we can still do better. So stay tuned.

These operations, under the tutelage of Monty Davis, delivered all-time quarterly records for revenue, operating income, net income, and operating margins that exceeded 23%.

The quarter marked the 11th consecutive quarter in which Core's operations posted record revenue and operating income total. During those 11 quarters, Core has spent approximately $45 million in capital expenditures, during which time the Company has generated over $200 million of operating income from our continuing operations.

Core's low CapEx needs -- our CapEx usually equals about our annual depreciation and amortization -- plus the leverage and scalability of Core's worldwide operations has enabled the Company to generate industry-leading amounts of free cash flow and free cash flow per share.

Just looking at the first nine months of 2007, you will see that Core earned $2.11 per diluted share, while free cash flow was actually $2.33 per diluted share, or $0.22 in excess of the net income earned. All of this occurred in a quarter during which Core showed its highest internal revenue growth rate of 21%, the highest since the first quarter of 2001.

Now let's update the leverage and scalability of Core's business model. Looking at a year-over-year nine-month basis, Core's revenues have increased about $68 million, Core's operating income has increased about $42 million, yielding incrementals of over 60%, industry-leading numbers indeed. During this period, Core has added a net -- and that's a net -- five employees. So we are able to use our large capacity and better capacity utilization to generate more EBIT dollars from the infrastructure Core Labs has. Once again in 2006, CapEx will total less than 4% of Core's total revenues.

After talking to our operations, we now believe with Core's current infrastructure that the Company can generate annual revenues in the $800 million plus range. So there is indeed still a good bit of growth that Core Labs can have before reaching a step function in CapEx needed.

On the new technology front, we think the main headline for Core's recent progress would be the increasing market penetration and market acceptance of recently introduced technologies and services has produced record operating margins and industry-leading incremental margins. These technologies are used to optimize reservoir performance.

We have been pleased by our progress and look forward to commercializing new technologies related to miscible-floods, and Monty will have a couple things to say about our new SUPERHERO perforating charge, being designed for some of the natural gas resource plays in organic-rich shales in North America in his detailed section.

Core's pipeline for new technologies and services indicates that Core will have indeed a bright future going into 2007. I will now turn it back over to Dick for the detailed financial review.

Thanks, Dave. If we begin with our financials, the P&L on revenues, $145.5 million in the third quarter versus $120.2 million in the third quarter of last year and $140 million last quarter. So revenues were up 21.1% year-over-year and up 3.9% sequentially.

In a moment, you'll see the positive impact on earnings from our focus on higher-margin services and from the leverage we deliver on our international based fixed cost structure. Of those revenues, sales for the quarter were $35.6 million, up 19.0% when compared to $29.9 million last year.

Service for the quarter, $110 million, up almost 22% when compared to $90.3 million last year. Cost of sales in the third quarter, they were 73.9% versus 78.1% for all of last year. Cost of services for the quarter, they also improved to 67.5% compared to 75.5% last year.

G&A for the quarter, $6.3 million, down from $10.9 million in last year's third quarter. This decrease compared to last year in the third quarter was due to lower stock compensation expense in 2006 as a result of adopting FAS 123(R). And for 2006, we expect G&A to come in around $34 million to $36 million, or about 6% of revenue.

Depreciation and amortization for the quarter was $4.5 million, or about $500,000 higher than the $4 million incurred last year in the third quarter. We expect depreciation in 2006 to total approximately $16 million or $17 million.

Other this quarter amounted to an expense of $447,000, or about $0.01 per share, compared to a gain in last year's third quarter of $1.6 million. Current quarter expense was primarily related to foreign currency losses.

Operating income was then $33.8 million. These earnings are up $19.7 million, or about 140%, compared to the third quarter of last year, and are also up $5.2 million, or 18.1%, sequentially over last quarter. This operating income represents operating margins of 23.2%, up some 1140 basis points compared to margins of 11.8% in last year's third quarter.

Now for a more apples-to-apples comparison to last year's third quarter, one could remove the $6.3 million in stock-based compensation that was incurred in that quarter under the old FAS 123 rules. And if you do that, operating margins last year would've been 17% rather than the 11.8%. But that would still mean our margins have increased over 620 basis points, or an improvement of 36.5%.

So our continued improvement in margins has been driven by our focusing on jobs with newer Core Lab technology that deliver higher product and service margins, thereby creating higher levels of incremental margins earned on those revenues. And combine this with better utilization of our cost structure, well, the results are clearly demonstrated in our expanding margins.

On a year-over-year basis, our incremental margins in the quarter were just over 77%. And by segment, they were for Reservoir Description, 68.5%; Production Enhancement, 59%; and Reservoir Management, they were over 38%.

Interest expense was $1.9 million for the quarter, similar to last year's third quarter. We expect interest expense in 2006 to run in the range of $5 million or $6 million.

Income tax expense was $9.5 million for the quarter compared to $4.7 million in the prior year's third quarter, primarily due to higher taxable earnings in this quarter. As mentioned on the prior call, the annual effective tax rate is expected to fall in around 30% for all of 2006.

Net income for the quarter was $22.4 million compared to $19 million in the last quarter, and last year's third quarter net income was $7.5 million. So that income is up almost 18% on a sequential basis and up 199% on a year-over-year basis.

Earnings per share for the quarter was $0.83. This is $0.04, or 5%, above First Call's Main Street estimate of $0.79. It also compares to the $0.27 earned from continuing operations in Q3 last year. So earnings are up 212% year-over-year. And sequentially, EPS is up $0.13, or about 19%, one of the highest for the oil field service sector so far for this third quarter.

Now, if we look at the balance sheet, cash was down by $1.2 million to $12.5 million compared to the year-end balance of $13.7 million. Receivables stood at $111.1 million, up by $12 million from $99.1 million at prior year-end. Importantly though, as revenues have grown, our DSOs have continued to improve, now at 69 days compared to 74 days for the full year 2005.

Inventory was $31.8 million, up $2.7 million, or 9%, from $29.1 million at the prior year-end. But remember that our product sales were up over 19% on an annualized basis, so inventory turns improved at a rate even faster than revenue growth.

If you look at other current assets, they were down $1.5 million from the second quarter, but are up $1.9 million when compared to the prior year-end balance of $11.3 million. The increase is primarily the result of reclassifying evaluation reserve on certain NOLs from long-term to current. And there are no material changes in PP&E or intangibles, goodwill, and other long-term assets.

Let's go to the liability side of the balance sheet. Our Accounts Payables were down $1.8 million when compared to the prior year-end balance of $32.6 million, and this was primarily due to the timing of vendor payments. Other current liabilities increased by $8.4 million from last quarter and from the prior year-end balance by approximately $18.9 million.

Material changes from last quarter are an increase in accrued payroll by $3.3 million, $5.1 million in taxes payable, offset by about $600,000 reduction in debt. Long-term debt was $107 million, up $20.9 million from the year-end balance of $86.1 million, as it was more accretive to our shareholders to invest proceeds under our revolver to buy back additional shares under our share purchase program. Today, our long-term debt is lower than at quarter end; it now stands at $103 million. Our net debt-to-cap at the end of the quarter was 30.6% compared to 23.7% at year-end.

Other long-term liabilities have increased slightly, from $34.7 million last quarter to $36.9 million, and remained up from $24.7 million at year-end. Again, this increased level is primarily due to items like deferred revenue being higher by $2.5 million, and $4.6 million for compensation expense accrual, and approximately $3.1 million for taxes.

Shareholders equity' ended the quarter at $190.4 million, down from prior year-end balance of $214.3 million, primarily again from our share buyback program, offset by additions from, among other things, our earnings.

Our annualized return on equity for the third quarter was 71%, using EBIT, up from 26.3% in 2005. Capital expenditures for the quarter, $6.5 million; and for the first nine months, they were $16.3 million, up 33% from the $12.3 million invested in the prior year's first nine months. This is indicative of our efforts to commit capital in support of our growth objectives. We expect CapEx in 2006 to be slightly higher than our depreciation, falling perhaps in the $18 million range.

Looking at cash flow, cash provided by operations in the quarter was $28.6 million. And after paying for $6.5 million in CapEx, our free cash flow was $22.1 million, or about $0.82 per diluted share, in the third quarter. The annualized per-share yield for this quarterly free cash was 5.1%, substantially higher than that earned by the group.

How did we use the free cash flow in the quarter? We gave it all back and then some to our shareholders through our share repurchases. And now to that stock repurchase program. During the quarter, we purchased an additional 414,500 shares at a cost of $26.8 million. These third quarter purchases represent 1.6% of our quarter-ending share count.

Our program continues to be one of the most aggressive, if not the most aggressive, in the industry. So from inception in the program, we have purchased in the aggregate almost 11.3 million shares at a cost of just over $260 million, or about 33% of the shares outstanding at the time the program began in October of 2002.

This has been a very successful program for our shareholders, as it has contributed to our shares' increasing in value almost eightfold since inception. The return to our shareholders from inception has been over 690%, significantly higher than the OSX, which rose 152%, or the S&P 500, which rose just about 66%.

So what are our intentions about this program? In a nutshell, more of the same. As you'll hear a little later about our views on future earnings, we believe this program is a very accretive way to return excess cash to our shareholders. That, in combination with our view on future earnings, should continue to enable us to deliver more of our industry-leading returns.

Over the past year, our financial performance continued to strengthen. For example, our return on shareholders' equity, using EBIT to remove tax rate differences, this quarter improved to 71% compared to 28.4% for all of 2005, while providing our shareholders with one of the highest cash returns in the industry.

Now finally, I would like to go over our internal financial targets. We are again raising our revenue target for full-year 2006. We now believe that our revenues should approximate $574 million to $579 million, which is just about 20% higher than in 2005, once again, exceeding the growth and activity levels by our clients. And we are again raising our targets for earnings per share to the range of $2.96 to $3.01. If we hit those targets, our earnings this year would be about 170% greater than our earnings in 2005.

For the fourth quarter, our revenue target is in the $150 million to $155 million range, and this is up 18% from the fourth quarter in the prior year. For EPS, we expect it to be around $0.85 to $0.90. These results, if attained, would reflect over a 400% increase in earnings per share over the $0.17 posted in the fourth quarter of last year.

Our early view for 2007, based on preliminary discussions with certain clients, is that revenues may range in the $650 million to $670 million, with diluted EPS in the range of $3.60 to $3.80, an increase over 2006 of approximately 20% to 27%.

Our 15% increase in revenue assumption is based on oilfield activity levels being about 12% higher than in 2006. So once again, our revenue growth is projected to exceed that of the industry's growth in activity. And this is even though most are only suggesting rig count will be up 8% or so.

Our earnings targets continue to assume strong incremental margins for this projection in the mid 30 range, which has been our historical run rate for incrementals through cycles. Further, we assume no change in share count.

These preliminary targets for 2007 will be updated on future quarterly earnings calls. Now I will turn it over to Monty Davis, who will provide a more in-depth operational review.

Thanks, Dick. Our employees have been working hard to develop technologies that our customers are valuing, and at the same time to improve our efficiency and productivity. I want to start by thanking them and commending them for making these results happen.

I will give a detailed review of our operations, starting with Reservoir Description. This is the unit that provides services using technologies that describes the reservoir system, which is comprised of the porous and permeable rock of the reservoir and the three fluids contained within the reservoir, those being natural gas, crude oil, and water.

Quarterly revenues for this unit reached an all-time high of $81 million, 17.2% growth over the third quarter of last year. Operating margins reached 22%, which is also a record, and an 800 basis point improvement over 2005.

This unit is focused mainly on international crude oil related developments. Some areas of note include projects in West Africa, where we continue sophisticated tests to help clients develop critical large fields. Another large area is the oil sands in Canada, where we have processed over 30 miles of core this year from these huge reservoirs. Our data is critical to design the Steam-Assisted Gravity Drainage systems to recover oil from in situ reservoirs and to delineate sands for economical mining of those reservoirs.

We expect significant growth in the oil sands, most of which is already committed. These are some of the largest reservoirs in North America and are strategically very important.

We are working also on several enhanced oil recovery projects throughout the Middle East. These are miscible-flood projects where combinations of gases are injected into the reservoir to increase the recovery of hydrocarbons for mature fields, boosting the ultimate recovery from those reservoirs. These incremental barrels are the most profitable barrels for our customers.

The Company continues to lead the industry in unconventional reservoir analysis, including tight gas sands and gas shale, where we are working with an industry study of over seven miles of gas shale cores from 40 different companies, and most recently, oil shale reservoirs on a proprietary basis.

Our Production Enhancement unit works with clients to optimize production from their reservoirs. This unit grew revenue 23.5% over 2005, to $55 million, and improved their operating margins by nearly 800 basis points to 25%. Both of these are new quarterly highs.

While we saw record quarterly revenues from this unit in the United States, the faster growing segments are the international regions. Our SpectraScan and SpectraStim services are used to determine the effectiveness and efficiencies of multizone reservoir fracture stimulation programs. These patented technologies indicate zones that have been ineffectively stimulated or bypassed altogether. This information is used by clients to refracture the reservoir to reach the optimum potential production from all these zones.

These services are in great demand to optimize production from reservoirs in many areas of the world. We recently used these services on six wells in China for a Chinese client, to help them optimize their fracture program. The results revealed very valuable information to them that they are using to reevaluate their fracing methods.

Our HERO premium performance perforating charge continued gaining market share as more customers realized the value of these load of recharges. Demand for these premium charges is growing from our international customers, Asia, West Africa, and the Middle East, and continues strong in the United States. Our employees are not resting on their laurels, but are busy developing new charges to improve operating performance.

Our SUPERHERO charges will be introduced to the market in early 2007, and will retain the HERO feature of minimizing formation damage, while yielding industry-leading depth of penetration. These are specifically valuable in the shale plays in North America.

Our Reservoir Management group is very busy integrating our technologies to provide solutions for our clients. Year-over-year third quarter growth was 46%. Margins improved 700 basis points to 22%.

This morning, Core will be hosting a technical meeting composed of 150 oil company clients receiving the latest information from our geophysical, petrophysical, and geomechanical properties of tight gas sands studies, which will focus on stimulation and production techniques to optimize these unconventional reservoirs.

As previously mentioned, we continue work on this steady study and our gas shale study, as well as smaller industry studies and proprietary reservoir studies for a number of clients. These proprietary projects are looking at issues that are wide-ranging, from stimulation technologies and production practices to maximized production to the definitive water saturations so they can properly determine the reserves. We expect to have more clients with more unconventional reservoirs in the quarters to come.

In conclusion, we are pleased with another record quarter. With that, we will open the conference call to questions.

If you could open the line for questions. I would like to say that we do have a very, very high participation rate this morning. So if we can limit each question and a follow-up to each participant, I think that would help everybody get a fair chance to ask questions.

(OPERATOR INSTRUCTIONS) James West, Lehman Brothers.

I wanted to talk about the incremental margins. They have obviously been very high the last several quarters. I think that from perspective of your different operating segments, you are either at or above what we talked about before as target margins for most segments. How do you see this playing out over the next several quarters and how much room, how much further can we go on the margins?

Good question. On the incremental, certainly the upside surprise over the last several quarters has been provided by higher incrementals. These incrementals have been driven by the acceptance of some of the new technology that we have added; moreover, the market penetration in North America and in the international marketplace.

Our guidance next year is using 35% incrementals. If we continued to see that adoption rate and our penetration into the market, yes, indeed, they could be higher. So when we look at trying to calculate what incremental margins we have, it has a lot to do with the market.

But right now -- traditionally, those have been high 20s, low 30s. We have given guidance now in the mid 30s range. So I think the signposts will come quarter after quarter on how long we could sustain higher incremental margins. I think it is a little dangerous to go ahead and try to predict incremental margins will stay in the 50% to 60% range quarter after quarter after quarter, and that is why our guidance is at 35% for next year.

Okay, great. Thanks, David.

Rob MacKenzie, FBR.

A question for you, David, or Monty, I guess. In your guidance for next year, how much, if any, have you included for sale of your Eocene/Paleocene study in advance of what is now a deferred central gulf lease sale next March?

For that study, Rob, if we look right, we have got 15 participants in that, if you look at the block holdings out there. There are a potential maybe another five individual companies that might be interested in that study, maybe as many as 10. But we've got five targeted. So we've really put no specific numbers in our guidance for next year with respect to that study, because you just don't know if they're going to participate or not.

We do believe with the continued successful development of those lower tertiary sands in the Walker Ridge area that yes, that does lead to additional participation. We tend to look at those sales, though, when they do happen, as to try to project them into our numbers.

Okay, fair enough. My follow-up question comes back to your talk about having increased exposure into the shale gas plays in North America. Are you seeing any signs of potential weakness there? Can you describe to us how your conversations have been with your clients in the lower natural gas price environment we have been through the past couple of months?

I'm going to turn that one to Monty, Rob, because he is a little closer to the gas shale play.

Rob, first thing you have to remember, we have 40 clients in this study. They are committed. They have paid for the study upfront. So we have quite a body of work that we're working on ourselves. But in the general market sense, talking to clients, I see no reluctance.

They are not maybe as bullish as they once were, a few. But most of them are saying, hey, for their company, they are going ahead with their plans. And I think that we see a strengthening of gas prices in the last month or so, and I do not expect to see a big falloff in that area.

We would hope, Rob, that they could use the results from these studies to make those plays more economical. If you just look at some of the mineralogical differences between the Fayetteville, the Barnett, the Woodford, specifically the silica content in these rocks and how it is related to how brittle these rocks are and how they frac, I think provide enormous information for cutting what their development costs are for an Mcf of gas. So I think this study will help lower the bar for the economics of those shale plays.

Great. Thanks, guys.

James Wicklund, Banc of America Securities.

And this is what happens when you don't have your conference call up against somebody else; you get oversubscribed.

And we have the A team from Banc of America.

I don't know about that. In the second quarter, in the June quarter, your Other was a loss of $1.5 million. I know the gain this time was FX. What was that loss, Dick?

It was -- in that second quarter, it was a gain of $1.5 million.

A gain of 1.5, I'm sorry. If I take those out and just assume let's just look at operations, your EBITDA margins increased by 19% sequentially. How do you do that?

Jim, I think it is driven by just really our year-over-year and sequential margin growth. It is the --

I understand that, but what is driving -- are you really pricing and sequentially that much better? Did you have startup costs for a study that you sold a lot of in this quarter? I guess I am kind of asking, is this a sustainable run rate, jumping up 19% sequentially, which is fabulous. But just trying to understand what comprised that margin expansion.

I do not think that that is sustainable, although we would like to keep it as high as we can, Jim. I think it owes more to the acceptance of a number of the technologies that we have talked about and it is increasing market penetration.

For instance, if we look at Production Enhancement and some of the gains they have made there, this is technologies, as you know, that have mostly exposure to North American natural gas. However, we found in this quarter the most rapidly growing area of that business has been in the international theater. This has had to do with some field floods in West Africa, some in North Africa and Asia-Pacific.

So the acceptance of things like the HERO charge, SpectraStim, SpectraFlood, SpectraChem, and the project that we ran in China --.

So it is more the SpectraChem and those types of -- the perforating charges, more of those mechanical product sales, rather than studies or core analysis and fluid analysis were?

No, I would say a combination of both, Jim. Really, the service work is up substantially. Actually, our incremental margins are higher on our service work. If you look at Reservoir Description, which is all service work, you'll see that the incremental margin sequentially once again ran over 50% for the fourth consecutive quarter.

I'm just trying to figure out how it did, I guess is what I'm saying, Dick. Was all of a sudden there a big rush of people saying, geez, I have got to have this, that were not saying it three months ago? Are the margins on the incremental sales you made sequentially that high?

Jim, I think you are onto something when you say over the last three months or so. It is the adoption over the last -- we have been chatting about some of these over the last four or five quarters. And it is the acceptance, meaning the increased use of these services, and those are priced with better margins than other services. And remember, our fixed cost structure is not going up that much.

Yes, you do have that leverage.

We do not add a lot of folks. We keep our capital in line with depreciation. So consequently, that fixed cost structure stays in place, so any incremental revenue that you put on top of that is going to drive these higher incrementals.

For instance, Jim, year-over-year, we have only hired five net employees. Listen to the other conference calls, where --

I know. It's just amazing, isn't it?

Companies are hiring legions. We don't know where they are getting these people from. And certainly our hiring plan over the next year is for a net another 50 people. So we think we can keep the incrementals, and that is why we increased our guidance on incrementals from mid to high 20s, maybe 30, into the mid 30s, because we think we can sustain those.

I appreciate the detail. Fabulous quarter.

(OPERATOR INSTRUCTIONS) Thad Vayda, Stifel Nicolaus.

You speak about in your presentations, I think that you're in -- and correct the numbers if they're wrong -- approximately 800 fields worldwide. You've said periodically that you would like to expand that into additional 400 or so.

That is correct.

Can you tell me what that 800 number was, say, two years ago, number of fields that you were in?

Probably somewhere on the order of 700ish. I do not have that exact number, but that is what I would guide you to.

Okay, and this incremental 400 fields, is this sort of a strategic objective? And if so, how do you get there and over what time frame?

Okay, what we have looked at here, Thad, just some history, a decade ago, Core operated in about 400 of the 4000 fields worldwide. Right now, we believe we operate in over 800 of those 4000. And what we have done is we have got a strategic plan. We have identified what we believe are 400 additional fields that we can add over the next decade.

Remember, our revenue is up by an order of magnitude over the last decade from 50 some million to over 500 million. So our plan would be to identify these additional 400, which we have -- all outside of North America, mind you, because these are actually oil and gas fields, so no individual natural gas fields.

But what we're going to do is we would go to the operator and present a project that we think that they ought to do. And that over time, we would hope that we would be able to add those additional fields.

So we have put forth really a sophisticated program of our best technical engineers. And this program we talked about our last conference call, which is our large account management program, where we have teams of our best engineers that lay out a project, go ahead and present that project to that, really, production manager in the field, and that's the way we'll target these additional 400 fields.

Will we work in all of them? Probably not. Will we work in some of them? For sure. So if we could add another 400 over the next ten years, I think we will be very pleased.

Okay. And I don't know if this is even related, but you've talked about your revenue-generating capacity. It's inched up over the past several quarters or so to this 800 million number. What is the step function investments that you anticipate having to make when you get there, if there is one? And sort of what is the nature of that investment?

What we're trying to do is provide guidance based on our current view and based on our current CapEx program. And that view now is around 800 million. We're not saying there is a line in the sand and that at 800 we need to build a new facility, expand all of them, hire thousands of people. We're not saying that at all. We're just saying that, based on today's view, we could run that through the shop.

And you'll notice in our CapEx, it includes growth. So for example, in our CapEx program a couple years ago, it included the building of a manufacturing plant for these HERO charges. Well, in that year, our CapEx equaled depreciation, so there was no step function doing that. We do not anticipate a step function.

What we plan to do is just keep you advised of our visibility on the capacity on any given day. And that is what we did with that 800 million.

Great, that's helpful. Thank you.

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

Great. In summary, Core posted our most profitable quarter in the Company's 70-year history. We have never been better technologically positioned to help our client base expand their existing production. We remain uniquely focused and are the most technologically advanced reservoir optimization company in the oilfield services sector.

This positions Core well for continued growth throughout 2006 and into 2007. So in closing, we would like to thank all of our shareholders, the analysts that follow Core, and especially all of our hard-working employees for spending their morning with us. We look forward to updating you at the end of Q4 here in 2006. Thanks and goodbye.

Ladies and gentlemen, that concludes today's conference call. You may now disconnect.