Core Laboratories Inc (CLB) 2006 Q4 法說會逐字稿

Good morning. My name is Lawanna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Core Labs fourth quarter 2006 earnings conference call.

[OPERATOR INSTRUCTIONS]

Mr. Demshur, you may begin your conference.

Thanks, Lawanna, and I would like to say good morning to everyone in North America, good afternoon to everyone in Europe and good evening to everyone in Asia/Pacific. We would like to welcome everybody to our fourth quarter 2006 conference call. This includes our shareholders, analysts, and more importantly our employees.

Dick Bergmark and I are in San Francisco early this morning, and Monty Davis is in our operational headquarters in Houston, so we're going to try to coordinate this call between our two places, and Dick will be going over the financial results, Monty will be giving us an update on our operations, as he has just returned from an extended visit throughout the Middle East. The call will be divided up in to five segments, Dick start regarding remarks regarding forward-looking statements, then he'll come on and give a consolidated company overview touching on some of our financial and operational highlights, and then Dick will come back and follow with a detailed financial review. Then we'll turn it over to Monty, and he'll go over our three operating segments, detailing our progress and discussing the continued successful introduction of new Core Lab technologies and services highlighting Core's Middle East operation and our continuing plans for expansion there, and then we'll open the phones for a Q&A session.

I'll turn it back over to Dick for remarks regarding forward-looking statements. Dick?

Thanks, David.

Before we start this 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 political climate and other factors including those discussed in our 34 Act filings that may affect our outcome. Should one or more of these risks or uncertainties materialize or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in the forward-looking statements. We undertake no obligation to publicly update or revise any forward looking statement, whether as a result of new information, future events or otherwise. For more detailed discussion on 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 David.

Thanks, Dick.

I'd like to give a consolidated company overview. Core's operations, once again, posted our most profitable quarter in the company's 70-plus-year history. It was an excellent quarter, but our operations believe they can still do better, so stay tuned.

During the fourth quarter, Core's operations, under the tutelage of Monty Davis, delivered all-time quarterly records for revenue, operating income, net income, free cash, and operating margins that exceeded 24%. The quarter marked the twelfth consecutive quarter in which Core's operations posted year-over-year quarterly records for revenue and operating income totals from continuing operations. During those 12 quarters, Core has spent approximately $53 million for capital expenditures, during which time the company has generated over $247 million of operating income from continuing operations. During those 12 quarters, Core's share price has increased 11 of the 12 quarters with only a 4% decrease in the fourth quarter of 2004. So over the last three years only one quarter can a slight blemish.

Core's low CapEx needs, or CapEx usually equals or slightly exceeds our annual depreciation, plus the leverage and scalability of Core's worldwide operations, has enabled Core to generate significant amounts of free cash and free cash flow per share. Looking at 2006, Core earned $3.07 per diluted share while free cash flow reached $3.57 per diluted share. This occurred in a quarter which Core showed its second highest internal annual growth rate since the first quarter of 2001, only exceeded by our previous quarter. Once again in 2007 Core's CapEx will total less than 4% of Core's revenue. This will be invested to grow our international operations in the Middle East, North America, and Asia-Pacific. Over 70% of Core's revenue is sourced from the international theater and we expect this percentage to grow in 2007 and 2008. We believe with Core's current infrastructure, the company can generate annual revenues in the $800 million-plus range. Core's future opportunities continue to be in the international theater related to large crude oil projects.

On the new technology front, we continue to be pleased with the increasing international market acceptance and market penetration of Core's recently introduced technologies which include our pressurized fluid imaging system that defines the temperature and pressure envelope needed to ensure optimal hydrocarbon flow especially from deep water reservoirs. Also Core's Spectraflood sending knowledge is used to maximize hydrocarbon recovery in field floods has seen good acceptance around the world especially in the Middle East. Also Core's high efficiency reservoir optimization or HERO perforating charges and gun systems continue to do very well. Although these systems with designed for medium to shallow-depth natural gas wells, each of these completion systems have been found to be quite successful like in other hard rock combinations, like the carbonate reservoirs that are widespread in the Middle East.

We will give updates on two new promises technologies at the Q1 2007 earnings conference call. These technologies include Core's new Super HERO perforating systems which are specifically designed for gas shale reservoirs, and Core's missible gas flood technology which is showing great promise in some early Middle Eastern field tests.

Our pipeline for new reservoir optimizing and technology services remain strong, which indicates a bright future for Core in 2007 and beyond.

I'll turn it back over to Dick for a detailed financial review. Dick?

Thank you David. Revenues for the fourth quarter $152.8 million versus $128.9 million in the fourth quarter of last year, and $145.5 million last quarter. So revenues were up almost 19% year-over-year and up 5% sequentially. For the full year revenues were $575.7 million up $92 million or 19% over the prior year of $483.5 million. Of these revenues product sales for the quarter were $38.1 million, up 12.6% when compared to $33.9 million in last year's fourth quarter. For the full year product sales were $145.6 million compared to $116.1 million in the prior year which represents a 25.4% increase. Services for the quarter, $114.7 million, which is up when compared to $95.1 million last year, or an increase of $19.6 million or 20.6%. And for the full year in 2006, services were $430.1 million, up from $367.4 million in the prior year.

Cost of sales -- in the fourth quarter they decreased to 72% of revenues, versus 74% last quarter, due to continued improvement of our incremental margins earned on our newer technology products and continued improvement in manufacturing efficiencies and inventory management. They were 73% for all of 2006, compared to 78% for the full year 2005. Looking at cost of services for the quarter, 69%, down from 73% in the last quarter. And for the year, they were 70%, down from 76% for the full year 2005. These improvements were primarily driven by our continued growth of our incremental margins as a result of additional revenues running through our relatively fixed cost structure.

G&A for the quarter was $7.6 million versus $11.7 million in last year's fourth quarter, and for 2006, G&A was $33.1 million, down from $37.8 million in the prior year, and this reduction, for the most part, related to $5.6 million in equity based compensation expense recorded in 2005, associated with our performance-based restricted stock program. For 2007, we expect G&A to come in around 33 to $35 million.

Depreciation and amortization for the quarter is $4.5 million, up slightly from $4 million incurred in last year's fourth quarter, and that reflects an increase in capital expenditures during 2006. And for 2006 depreciation and amortization expense was $17.3 million, and we expect depreciation in 2007 to total approximately $18 million.

Other income this quarter is in the amount of $2.4 million, compared with an expense in last year's fourth quarter of $1.9 million. For the year, other income was a gain of almost 5.3 million, compared to just about a break even in the prior year. Foreign exchange was the single largest change on the year-over-year basis, itself amounting to $3 million of that total.

EBIT from continuing operation was $36.8 million. These earnings are up $20.2 million or 50.2% compared to $24.5 million in the fourth quarter of last year. Now, this comparison adds back the stock-based compensation expense and debt repayment costs that we incurred in the fourth quarter of 2005 in order to give a better comparison from an operational perspective. Without making that adjustment, our year-over-year improvement was 121%. This quarter's EBIT is also up from $33.8 million last quarter, about 9% sequentially. Our fourth quarter EBIT represents operating margins of 24.1%, up over 1,000 basis points compared to margins of 12.9% in last year's fourth quarter. On a year-over-year basis our incremental margins in the quarter grew to 51.3%, by segment there were Reservoir Description 42.3%, Production Enhancement 70.6%, and Reservoir Management 25.7%. And on a full year basis our incremental margins in 2006 grew to almost 51.8%. Reservoir description was 60.7, Production Enhancement 57.4, and Reservoir Management 39.6%.

Our continued improvement in margins have been driven by the continued introduction of new technologies and services as well as through our focus 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 better utilization of our cost structure, the results are clearly demonstrated in our expanding margins. It's about creating greater value from each dollar of revenue.

Interest expense was $1 million for the quarter compared to $2.2 million in last year's fourth quarter, and we expect interest expense in 2007 to be approximately $2 million, significantly lower than the $5.8 million incurred in 2006. The decrease in the fourth quarter and the expected decrease for 2007 is the result of the retiring of outstanding amounts under our higher interest bearing revolver with proceeds received from the issuance of our 0.25% coupon $300 million convertible note offering in November.

Income tax expense was $10.6 million for the quarter compared to $3.1 million in the prior year's fourth quarter, primarily due to higher taxable earnings in that quarter. The annual effective tax rate for the year was 29.8% for the fourth quarter it was 29.6%, and we expect our effective tax rate in 2007 to be in the 30% range.

Net income from continuing operations for the quarter was $25.2 million compared to $22.4 million in the last quarter, and last year's fourth quarter income of $15.4 million on a comparable basis. On that basis net income for the fourth quarter was up almost 12.5% on a sequential quarterly basis and up 63.6% on a year-over-year basis.

Income for the full year 2006 was up 160.6% at $82.7 million, compared to $48.7 million in 2005. Again, the 2005 numbers have been adjusted to add back the charges we spoke of earlier to place the comparisons on a more operational basis. Using actual reported net income for 2005 would indicate our year-over-year improvement in the fourth quarter was over 375%. Earnings per share from continuing operations for the quarter was $0.98 per share compared to $0.95 reported at First Call Main Street's estimate, and this also compared to the $0.55 earned on that comparable basis from continuing ops in Q4 of last year. So earnings were up 78% year-over-year.

Sequentially, EPS is up $0.15 or about 18%. Now let's walk through some history on our EPS expectations for this fourth quarter versus our internal targets as the year developed. On our earnings call for the third quarter we issued targets of $0.85 to $0.90 EPS on revenues of 150 to $155 million. Then 10 days later on November 7th after completing the convertible note offering, we released new targets as the transaction created significant value to our shareholders, given its accretiveness, perhaps as much as 10% accretion. On that date we raised or fourth quarter views to $0.90 to $0.95 per share.

This increase came from two attributes of the offering. First, a lower share count which contributed about half of the increase to our earnings per share and second the interest expense reduction contributed to the other half of the increase, and now our actual results are $0.98 for the quarter, clearly outperforming even the improved targets we last gave to the market. Our operations continue to improve in their performance.

Now let's go over the balance sheet. Cash was up by $40.5 million to $54.2 million, compared to the prior year end balance of $13.7 million, this increase in cash came from our free cash flow and from proceeds from our $300 million convertible note offering last November. Receivables stood at $112.1 million, up from $99.1 million at the prior year end due to our increased revenues for the year. Importantly though, DSOs continued to improve, now down to 66 days at the end of the fourth quarter. For the full year, DSOs were 70 days compared to 74 days for full year 2005. Inventory was up slightly year-over-year, but only by $1 million, while our product sales were up about 13%. And that reflects about a 13% improvement on our inventory turns compare to prior year. On other-- on other current assets, there are $29.1 million up from $11.3 million at last year end primarily due to an increase in deferred taxes for the convertible note hedge, and an increase in income tax receivables along with moving long-term asset held for sale into current. And other than a general increase of $6.4 million in PP&E due to additions from our CapEx program there are no other material changes to PP&E or intangibles and goodwill. Other long-term assets increased by $27.9 million primarily as the result of our $300 million convertible note issuance. We reported $24.4 million in deferred tax assets associated with the convertment note hedge and deferred debt acquisition cost of $6.6 million in connection with the issuance of notes themselves.

Now on the liability side of the balance sheet. Accounts payables were $37.5 million, up about $4.9 million when compared to the prior year end balance of $32.6 million, all reflective of our growing business. Other current liabilities increased from the 2005 year end balance by about $14.5 million, primarily due to an increase of $3.7 million in unearned revenues, $3 million of other local tax, and $7.3 million in payroll accruals.

Long-term debt ended the year at $300 million, up from the prior year-end balance of $86.1 million, and this increase came from the issuance in November of our convertible note offering which carries a coupon of a 0.25% interest with final maturity in five years. Because of that offering, our coverage ratios have improved dramatically. For 2006 they are 21 times compared to 7 times in 2005.

Other long-term liabilities ended at $40.5 million, up from $24.7 million from prior year end primarily due to an increase in compensation related liabilities by $5.9 million along with $3.1 million recorded from liabilities associated with certain tax provisions. Shareholders equity ended the year at $71.8 million down from the prior year end balance of $214.3 million; the reduction was caused in most part from our share repurchase program, including the 1.3 million shares repurchased on the offering of the notes. Using annualized net income for the fourth quarter, our return on equity for the year was just over 140%, up from about 10% from prior year and this is certainly one of the highest returns earned in the industry.

Capital expenditures for the quarter were $8.1 million and for the full year were $24.2 million, up from $19.1 million for the prior year, all indicative of our efforts to commit capital in support of our growth objectives, particularly as you will hear from us about our Middle East region. And we expect CapEx in 2007 to fall in the 20 to $22 million range.

Looking at cash flow. Cash flow from operating activities in the quarter was $40.2 million and after paying for our $8.1 million in CapEx, our free cash was $32.1 million, or about $1.25 per diluted share in the fourth quarter and annualized per share yield at year end on this quarterly cash flow was just over 6%. For the full year cash flow from operating activities was $120.3 million while free cash flow after paying for our CapEx program was about $95.9 million.

And now to your stock buyback program. During the quarter we purchased an additional 1.9 million shares off the market at a cost of $147 million. This total includes 1.3 million shares purchased in conjunction with the offering, for the full year repurchased approximately 3.6 million shares, at a cost of $235 million. From inception of the program we have purchased in the aggregate approximately 13 million shares off of the market at a cost of just over $400 million or about 35% of the shares outstanding at the time the program began in October of 2002. Again, this has been a very successful program for our shareholders. By year end it has contributed to our shares increasing in value over tenfold, with our share price moving from $8.05 at inception of the price to $81 at year end. The return to our shareholders from inception has been over 900%, significantly higher than the OSX which rose 171% or the S&P 500 which rose 76%.

No we all know a stock buyback program alone cannot carry the day in creating shareholder value. So let's look for a moment at the operational performance of the company over that same time period from 2002 through today. Our revenues in 2002 were $330 million and now we believe they may well double that perhaps reaching 650 to $670 million in 2007. For the most part that is all from organic internal growth without acquisitions. A real tribute to our internal technology development and acceptance by our clients of those technologies. Our EPS back in 2002 was just $0.29 per share, now we believe that in 2007 our earnings may range from $4.10 to $4.30 per share. Further, our free cash flow back in 2002 was less than $27 million, and now we believe it will be up about four-fold, now exceeding $100 million in 2007.

So what are our intentions about the continuation of creating shareholder value? Well, in a nutshell, we're continue to develop our technology, we'll continue to utilize our global platform to deliver those newly developed technologies, and we'll provide proper fiscal management to the company.

So now finally, let's go over our internal financial targets with you. Core's executive management and board of supervisory directors beneficially own about 10% of the company's outstanding shares. We continue to be dedicated to creating shareholder value by continuing to execute our business strategy employing the company's free cash.

With this in mind, let's examine Core's fourth quarter issuance of its convertible notes and the positive effect on projected earnings for 2007. At the end of the third quarter of last year, Core issued full year 2007 earnings target of $3.60 to $3.80 per diluted share. Shortly afterwards, upon issuing of convertible debt, which was immediately accretive to 2007 projected earnings by reducing interest costs by $6 million annually and by backing back 5% of the shares outstanding, Core raised its earnings target for 2007 to $3.96 to $4.15. With an improved business outlook and some further share repurchases since the note issuance, Core now anticipates that its full year 2007 earnings may be in the range of $4.10 to $4.30. The combination of executing our business plan and employing our free cash, and in the case of our note issuance, by monetizing the asset of volatility of our stock, we have created significant shareholder value for all of Core's shareholders. In 2007, we will continue to drive further enhancement to shareholder value.

And now with that, I'll pass the discussion over to Monty for a more in-depth review.

Thanks, Dick.

I want to start by thanking our employees for their sterling efforts to make this the best year over for Core Labs. As Dave said, I recently returned from a visit from our Middle East operations and customers, so I'll update you on that visit while giving a detailed review of the operations starting with Reservoir Descriptions. You'll remember this is the unit that provides services using technologies that describe the reservoir system, which is comprised of 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 $82 million, 14% growth over the fourth quarter of last year. Operating margins reached 21% in the quarter, a 300 basis point improve over 2005 fourth quarter.

The formal opening of our Dhammam, Saudi Arabia lab was well attended by over 50 customers including managers, engineers and geologists from Aramco, Total and Shell. The group was very impressed with the new facility and the services being offered. We have received the first significant volume of core for analysis to help our customers optimize production from their reservoirs.

Our lab in, near Doha, Qatar, also opened in Q4, to analyze gas from the Supergiant North field. This is a multi-year project and involves four mobile off-shore labs placed around the field as well as the lab near Doha. These new operations will provide growth for this business unit in an area where activity is increasing in 2007. We had the opportunity while in Doha to meet with Sheik Faisal al-Fani of the Qatar Foundation to discuss Core Labs possible participation in the developing Qatar Science and Technology Park. We are receiving a proposal from the Qatar Science and Technology Park board regarding our participation and look forward to that as the year goes on.

We have relocated and expanded our advanced technology center in Abu Dhabi, with where we support the region with a more advanced core analysis and reservoir fluid lab services. We are seeing substantial growth in enhanced oil recovery projects in the Middle East, and are expanding our projects to perform those projects in Abu Dhabi, including new capital equipment specifically for EOR studies.

Our Production Enhancement unit works with clients to optimize production from the reservoirs over the life of the reservoir. Revenue from this unit reached an all-time high of $60 million in the quarter, 25% growth over Q4 of 2005. Operating income reached a record $18 million, yielding margins of 30%, which is also a record, and is 1,000 basis points higher than 2005. In Oman, our patented fracture diagnostic technology is being used to ensure that complex multizone fracture stimulations are performed as effectively as they are engineered. Clients are recognizing that fracture diagnostic technology is a necessity for optimizing their hydrocarbon production.

A customer in southern Iraq used our patented and proprietary Shogun perforating systems including 20,000 charges, and the unique spiral delivery system, to recomplete oil producing zones to enhance production of oil from those reservoirs.

Our Reservoir Management group integrates our technologies to provide unique solutions for clients either on a proprietary or consortium basis. This unit grew 21% over 2005 Q4, to $10 million and generated an operating margin of 17%.

We have been commissioned to develop a county-pride petrophysical rock catalog for Kuwait Oil Company. Kuwait Oil Company will be able to use this rock catalog to improve pay zone recognition, improve the accuracy of reserve estimates, identify reservoirs for enhanced recovery, and examine deep natural gas potential. The company continues to lead the industry in unconventional reservoir analysis including tight gas sands and gas shale where we were working on an industry study of over 7 miles of gas shale cores from 40 companies and oil shale reservoirs on a proprietary basis.

In conclusion, we are very pleased with another record quarter, and with that, we'll open the conference call to questions.

[OPERATOR INSTRUCTIONS]

Your first question comes from James West of Lehman Brothers.

Hi, good morning, guys.

Hello, James.

David, and perhaps Monty, on the Middle East, you highlighted a number of contracts and some significant ongoing business in the region. I guess my question is is the genesis of the highlights that Monty and his team just got back, or are we really at an inflection point in that part of the world.

The way we break down our revenue is looking at Europe Africa Middle East. It's 21% of our revenue, and that revenue grew 27% last year. We think that the large potential there in the supergiant fields that are not exempt from the laws of physics and proven petroleum engineering practices provide great opportunity for us. I think the national oil companies and operating companies in that area recognize the need for Core Lab services, Reservoir Description and Production Enhancement and looking at their field on a country-wide area using our Reservoir Management. So we have found increasing interest-- and I think that certainly in the fourth quarter we have probably reached a turning point where recognition that these reservoirs are going to need quite a bit of technology to maintain-- at least maintain production, and also they will be challenged to increase the productive capacity of even the giant fields.

Okay. Understood. On the Production Enhancement business, you had very nice incremental margins. Are these margin levels where we are now at the 30% range, is that sustainable going forward?

Well, we believe they are providing that we have got a new-- couple of new technologies rolling out in 2007 and Monty will speak to that at the end of our first quarter earnings call this is the new Super HERO charge, which is being designed specifically for each individual gas shale reservoir, and the client acceptance of that will do a lot with what those incremental margins are, and what the margins are, and then also, our miscible gas flood technology. So James if they are as successful as we think those margins will be sustainable, because we believe that incremental margins within Production Enhancement will stay high.

Okay. Understood, and then last question, on the share buyback program, when is your next shareholder meeting where you could receive authorization to step in and buy back more stock?

James, we have got it scheduled for early April.

April. Okay. Great. Thanks, guys.

You're welcome.

Your next question comes from James Wicklund of Banc of America.

Hi, guys. Tuan Pham here on behalf of James Wicklund. Couple of questions.

Hi, Tom.

Wondering if you guys were going to increase head count plans for 2007, given the positive comments we heard in Mideast?

Yes, right now our plans for expanding head count, I think year-over-year in all of 2006, our head count probably expanded maybe 50 people from 4700 to 4750. We have no large-scale plans for increasing head count in the Middle East. We believe through multi-tasking, automation, that the productive capacity there can generate far more revenue with the staff and the brick and mortar we now have in place. So our plans on expanding staff are not great.

Okay. Okay. And also just-- my other question was how low can oil prices go before it starts to have a material impact on your business given that, you know, most of your business is overseas and across the all parts of the world?

Yes, we found over the years that most of our international projects related to crude oil, the spending tends to be fairly inelastic, and our estimates would be anywhere between $40 and $70 per barrel. We find the spending on these projects pretty inelastic. These are long-term projects, large projects so they tend not to swing on the swing of commodity prices. So we feel pretty good, pretty insulated from the vicissitudes of the commodity market.

Great quarter. Thank you very much.

Yes, thank you.

Your next question comes from Kevin Pollard of JPMorgan.

Hey, good morning, guys.

Hey, Kevin.

I wanted to follow up on this Middle East expansion, specifically related to your comments both in the press release and your prepared remarks about your work with Aramco, it sounds like the spoke of what you are potentially doing there is changing for the better. I was wondering if you could elaborate of where you have been with Aramco and where you see that business going.

Yes, Kevin we have always continually worked for Aramco, and about a year and a half ago they asked us to enlarge our facilities within Aramco specifically with our ability to handle core and advanced rock property testing for dynamic flow tests related to Production Enhancement in these fields throughout the kingdom. They had actually asked us at one time if we would manage their facilities-- because Aramco has internal core analysis and reservoir fluid facilities. We thought it would be better that we just expand our facility there which was done in Dhammam and as Monty visited last quarter, where we had our official opening, in which time we received samples representing thousands and thousands of feet of core. So we believe that this is an indication that they realize that the productive capacity of these fields needs to be studied, and for any increased productive capacity, they were going to need a lot of petroleum engineering data, specifically these dynamic flow tests that we'll perform for them either in Dhammam, Abu Dhabi and we still do quite a bit of work back in Houston, Texas for them as well. We believe this is a very good positive indication in the Middle East that certainly they realize these reservoirs are not exempt from the laws of physics and we think this is a good thing for our company named Core Laboratories.

It sounds like all of our expansion efforts are just now starting to show up in the revenue stream. Is that a fair characterization?

That is correct.

Okay. I had another question-- on the Reservoir Management side, the margins were a little lower than what I expected. I was wondering if you could tell us what was going on there and what you see for the outlook there throughout '07.

Yes, Kevin I think Reservoir Management, those margins there, tend to be a little choppier than some of our others, and it's just depending on the mix and the timing on which projects are delivered to the clients, so I don't think there's real-- any real indication there, could well be that those margins are up significantly in quarter one. So I wouldn't think this would protend any long-term trend there. It's more of a timing in mix issue.

There's no reason to think on a year-over-year basis margins would been up in the normal incremental range.

We expect that for next year, that's correct.

And a final question, just a housekeeping issue -- with all of the share repurchase activity, where did you end the quarter-- you know, what was the final share count?

The final share count at the end of the quarter?

24 million.

24.8. 24.842 somewhere around there.

So about 24.8 is the starting point for your fully diluted shares?

Yes.

Great. That's all I had, thanks, guys.

Your next question comes from Robert MacKenzie of Friedman Billings.

Good morning, guys.

Good morning, Robert.

Question on beating a dead horse here the expansion plans you talked about in the Middle East and elsewhere, how does that, you know, impact your expectation for costs going forward in 2007? Is there going to be some up front costs? Is that why we saw a little bit lower margin in reservoir sequentially this quarter and should we expect that to continue through in '07.

Yes, I'll make a comment, and actually I can turn it over to Monty for a little bit. Yes, on Reservoir Description, I think the margins sequentially were down a little over 100 basis points. And again, I don't think that's any trend that we should look at. Yes, we probably have some start-up costs in the Middle East because we have had quite a bit of expansion there, not only in the Middle East, but also some other places.

I'll turn it over to Monty for a comment on just margin expectations going forward in Reservoir Description.

Monty?

Yes. We had incurred in the second half of last year, you know, a new lab in Saudi Arabia, and certainly there's costs to get that going. The Qatar project, you know, there's a cost to get that up and running, get-- get these new mobile labs out in the field get the new lab established near Doha and we moved our advanced technology center in Abu Dhabi in to a bigger facility, and so all of that has happened in '06, and is in place for '07.

Yes.

We-- we certainly expect to see some more margin improvement in '07 over where we were in '06.

Okay. Thanks, and then, Dave, coming back to your guidance, it looks like you have very strong expectations for the first quarter. Normally, if I recall correctly, we tend to see more of a seasonal dip than you are forecasting in your guidance this year what is the primary driver between that relatively modest seasonal impact?

I think it's contributions, Rob, from west Africa, north Africa, Middle East and Asia-Pacific being more pronounced, certainly last year and we expect to see that in the first quarter this year. Yes, as you know we always had a sequential down fourth quarter to first quarter. The first nine years of the quarter as a public company. The first time that changed was last year. We continue to see strong gains from west Africa, north Africa, Middle East, and Asia-Pacific, and that has changed that dynamic a bit.

My next question is one you have heard before and answered before, but I figured I would try it again, looking at the incremental margins you are implying for the first quarter are kind of 60% to 65% in your guidance range, yet for the full year it's coming down to 35%, what are the factors plus or minus that would swing that on the upside from your guidance or on the down side from your guidance.

One against we'll take Rob's question on incremental margins.

Each quarter, Rob, as you know we put up a signpost on what our expectations are. You are correct incremental margins, if we meet our midway guidance for Q1 will be somewhere in the 60% range. If the uptake of our Super HERO charges and our miscible gas floods among other technologies that we don't talk about-- but-- adds-- like our Spectracam and Spectraflood continue in the international theater, our incremental margins throughout the year will be higher. If the uptake is not as successful as we believe, incremental margins could be lower. So at this point that's our best outlook. I think that's the exact way we answered it last year.

Sure. Okay and then final question is what-- of the new technologies you talked about, has your opinion changed at all as to which one might have the most acute near term impact?

I think those two probably are the lead. We are quite pleased with what we're seeing, actually in Q1 for the Super HERO charge, and the reports coming out of the Middle East on a couple of field tests we have on miscible gas floods. We'll give you an update, Monty is going to specifically talk on that at the end of our first quarter conference call, and we're-- we'll certainly pleased with what we see at this stage.

Okay. Thanks, keep it up.

Your next question comes from Robert Christensen of Buckingham Research.

Bob?

Mr. Christensen, your line is open. Robert Christensen, your line is open.

Yes. The foreign exchange benefit of $3 million, can we expect more of this? I mean, the fourth quarter saw the U.S. dollar, I think weaken about 6.5%. It's continuing to weaken. I mean, would there be any change-- I would think no-- on this if the dollar keeps weakening, given where you do most of your business. Can you just articulate a little bit more on this? Thank you.

Yes, hello, Robert. Our views on foreign exchange is we try to do natural hedging in the locations where we are required to take local currency. As you know we're a dollar-based company, dollar-functional company, and from time to time, based on local currency movements we are going to have gains or losses. It just so happens that when we looked at it on a year-over-year basis, it was just a swing from a loss last year to a gain this year, which made that number look, you know, comparatively large. So we don't think on an ongoing basis there should be much of a change.

If the dollar keeps weakening here, you know, as yesterday-- I mean--

That's right, and so we're going to have some impacts from that.

And where do you do most of the local currency?

Most of the local currencies would be in Europe and UK, some in Russia, and then where you are required to in Venezuela. And of course Canada. I mean, just-- the bigger energy markets play in their own currency.

Got it. Great quarter. Thank you.

Okay. Bob.

Thank you.

[OPERATOR INSTRUCTIONS]

Your next question comes from Kevin Pollard of J.P. Morgan.

Thanks, guys, just a quick follow up. On the Super HERO, I know you want to talk about that more next quarter, but is that a product that is now commercial-- you are actually selling in the market? Or is it still in the testing phase? Can you tell us a little detail on where you at least stand on the development of it.

Yes, I'll turn that question to Monty.

Yes, we have had our first sales of that product. So it is a real product, customers are using it, and we-- we expect to have an update at the end of the first quarter where we'll have a little track record with that acceptance, and also give you a little technical update on that product. I think, we have been very pleased and I think you will too.

Okay. Thanks. That's all I had.

Thank you. At this time there are no further audio questions.

Okay, Lawanna

I think, in summary, Core has posted our most profitable quarter in the company's seven-year history. We have never been better technologically positioned to help our clients expand their existing production base. 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 in 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 some of the morning with us, and we look forward to our next update at the end of the first quarter of 2007. Thanks for joining us and good bye.

Thank you. This concludes today's Core Laboratories 2006 earnings conference call. You may now disconnect.