Core Laboratories Inc (CLB) 2014 Q1 法說會逐字稿

Good morning. My name is Tasha, and I will be your conference operator today. At this time, I would like to welcome everyone to the Core Labs Q1 2014 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.

Thank you, Tasha. I would like to say good morning to everybody in North America, good afternoon to all those in Europe, and good evening to the listeners in Asia-Pacific. We'd like to welcome all of our shareholders, analysts, and most importantly our employees to Core Laboratories first quarter 2014 earnings conference call. This morning I'm joined Dick Bergmark, Core's Executive Vice President and CFO, and Core's COO, Monty Davis, who will present the detailed operational review.

Also this morning I have the pleasure once again of introducing Chris Hill, to the new participants. He will be helping Dick and me with all of our investor relations efforts. Chris has been with Core Lab for over seven years, most recently after Global Corporate Controller located in the Netherlands. Prior to joining Core Lab, he worked at E&Y for eight years and Halliburton for six. Many of you have already met Chris at investor conferences, and I know he looks forward to working with you and meeting more of you in the future.

The call will be divided into five segments. Chris will start making remarks regarding forward-looking statements. Then we'll come back and give a brief investor update and highlight the three financial tenets by which Core's executive management team executes the Company's growth strategies. We believe these three tenets have produced industry-leading shareholder returns and returns on invested capital. We will also discuss Core's long-held philosophy of returning excess capital back to our shareholders.

Then Dick will follow with a detailed financial overview and additional comments regarding building shareholder value, Core's second quarter 2014 outlook, and a general industry outlook, as it pertains to Core's continued growth prospects in 2014. This outlook confirms our confidence in the trends of increasing activities internationally and deepwater, and projects tied to large complex crude oil developments, also unconventional tight oil reservoirs in North America, and emerging plays in Russia, North Africa, Australia, among others. Core also sees exceptional opportunities in the deepwater Gulf of Mexico developments including the potentially prolific but technologically challenging Lower Tertiary fields.

Then Monty will go over Core's three operating segments, detailing our progress and discussing the continued successful introduction of the new Core Lab technologies that we believe will be disruptive and are tied to completing, stimulating, and producing horizontal wells, and then highlighting some of Core's operations in major projects worldwide. Then we'll open the phones for a Q&A session. I'll turn it over to Chris for remarks regarding forward-looking statements. Chris?

Thanks, Dave. Before we start the conference this morning, I'll mention that some the statements that we make during this call 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 related to the oil and gas industry, business conditions, international markets, international political climate, and other factors including those discussed in our 34 Act filings that may affect our outcome.

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 our foregoing risks and uncertainties, see Item 1A, risk factors, in our annual report on Form 10-K for the fiscal year ended December 31, 2013, as well as other reports and registration statements filed by us with the SEC and the AFM.

Our comments include non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures is included in the press release announcing our first quarter results. Those non-GAAP measures can also be found on our website. With that said, I'll pass the discussion back to Dave.

Thanks, Chris. I'd like to give a brief investor update. Core's operations produced the Company's most profitable first quarter ever in the history of the Company. We continue to benefit from our continued focus on international and deepwater activities, and unconventional oil plays in response to seemingly high oil prices and dwindling global spare capacity. The focus on crude oil related projects continue to build, as Core's revenue mix now is more than 80% oil related, and less than 20% natural gas related.

Moreover, most of the natural gas related projects emanate from international theater and are LNG related, with major projects in the Eastern Mediterranean, East Africa, and Western Australia. Core is also deeply involved with several natural gas projects in the Middle East, with these countries looking to replace the use of crude oil with natural gas for power generation and to run their desalinization plants.

Reviewing the Company's first quarter results reveals Core's growth strategy of progressively working in more established and new field developments, while continuing to offer new technologies and services will lead revenue growth up 200 basis points to 400 basis points higher than the increase in worldwide activity levels. Year-over-year quarterly revenue and operating profit growth for the first quarter of 2014, in spite of weather disruptions, is testament to the validity and robustness of the Company's growth strategy and are underpinned by operational excellence.

We believe these trends to outperform at market activity levels to hold, and we're optimistic for North America and international growth trends for the remainder of 2014. Therefore our growth strategy and the execution by our operating units continue to serve our clients, our employees, and our shareholders as well. Core's continued focus on high return international crude oil related developments, especially those in deepwater environments, unconventional oil resource plays, and the continuing internal development of new technologies and services has lead to multiple years of sustained growth and increased profitability.

We are not complacent on technological innovation, as indicated by Core's recent introduction of our FLOWPROFILER technologies. These technologies are being applied to increase daily hydrocarbon production rates and increase the estimated ultimate recovery rates, not only in tight oil reservoirs, but conventional reservoirs worldwide.

Turning to Core Lab's performance, Core has always followed and will continue to follow three key investment tenets that has led to industry-leading returns. These three important tenets which are now starting to receive attention from other companies and analysts in our oilfield services sector are, number one, to maximize free cash flow through fiscal discipline.

Core follows a strict discipline for allocating capital for investment in growing our business. Unless certain return of investment capital standards are met or exceeded, the capital expenditure is disallowed. This strict capital discipline produced quarterly levels of free cash flow of nearly $58 million in the first quarter.

In fact, Core's free cash flow nearly equaled net income in the quarter as Core converted over $0.22 of every revenue dollar into free cash. Core's free cash flow to revenue conversion rate of 22% far exceeds many pretax operating margins of most oilfield service companies.

For 2014, Core still expects that free cash flow will exceed $300 million, all of which we return to our shareholders. As our top 20 shareholders say, and own 70% of Core Lab shares, free cash flow matters.

The second financial tenet is to maximize return on invested capital. Core's Board has initiated an incentive compensation program for Core's executive and senior management teams, based on the Company producing a return on invested capital in the top decile for the oilfield services industry. Core's Board believes that stock price performance over time is directly related to return on invested capital levels.

Based on the most recent calculations available from Bloomberg, Core's return on invested capital was the highest of any company in the oilfield services comp group listed by Bloomberg. Also, Core's ratio of return on invested capital to our weighted average of cost of capital was the industry's highest. Core's annual shareholder return over the past 18 years exceeds 25%. As our top 20 shareholders say, high returns on invested capital matter.

Our third financial tenet is to return all excess capital back to our shareholders. During the first quarter, Core returned over $69 million to our shareholders in the forms of quarterly dividends and the repurchases of shares. At the end of the quarter, Core's outstanding diluted share count fell below 46 million shares, levels not seen since the third quarter of 1997. Collectively, we have lowered our share count by over 37 million shares.

During the quarter, Core returned over $1.52 per share to our shareholders. Since October 2002, Core shareholder capital return program has returned over $1.73 billion or for over $38 per diluted share to our owners. When the program started, Core's market capital was approximately $300 million. Today, we are now around $9 billion.

We will continue to follow these three tenets in 2014, which should enable Core to continue to produce industry-leading returns for all of our shareholders. As our top shareholders say, returning capital matters. I'll now turn it over to Dick for a detailed financial review. Dick?

Thank you, David. Similar to other oil service companies with exposure to North America and Northern Europe who have reported this earnings season, we too experienced weather and project delays. While ours was less than most, it nonetheless impacted our results. These issues understandably caused our revenue to fall below our prior guidance which, based on our analysis, impacted our EPS this quarter by 5% or about $0.07 per share.

We do believe that much of the work will be regained later this year, rather than just being pushed out. Our increased quarterly guidance is reflective of that view. Please see our reconciliation tables at the end of our earnings release for our non-GAAP information.

Within the first quarter by month, we saw the impact of the weather and project delays rollout during the quarter as one would expect, with February being our slowest month, as the weather had the greatest impact during that month. Further, that also seem to be the period of greatest introspection by the IOCs and NOCs regarding their deepwater and other international projects, all of which appears to have been short lived in duration as we saw a return to more normal activities in March, with this particular March being one of our best recorded.

We believe the transitory issues felt by the industry are truly temporary in nature and are pleased with the return to more expected levels which we experienced in March. All that being said, we delivered solid execution in the quarter, which drove the expansion of not only our operating margins but also our return on invested capital, and we expect to see this trend continue throughout the remainder of the year.

Now, looking at the income statement, revenues were $262.9 million in the first quarter versus $260.9 million in the first quarter of last year. Revenues were up about 1% year-over-year in spite of the weather issues felt by the other oil service companies in the quarter. Notwithstanding that, our results reflect an all-time record revenue for a first quarter. Of these revenue services for the quarter $188.7 million, up about 3%, when compared to $182.5 million last year or an increase of about $6 million.

Product sales for the quarter were $74.2 million, down primarily due to weather conditions when compared $78.4 million in last year's first quarter. Although revenues were depressed our cost structure management enabled us to show improving margins. For example, our cost of services for the quarter were 58.6% of revenue, an improvement from the 60.4% in last year's first quarter. Our cost of product sales were 68.9% of revenues, just slightly higher than the 68.2% reported in last year's first quarter, due to the absorption of fixed costs on weather related lower revenue in the current quarter.

G&A for the quarter was $10.5 million, which runs about 4% of revenue, and it's down slightly from last year, primarily due to decreases in compensation cost. We expect G&A to be in the low $50 millions in 2014. Depreciation and amortization for the quarter, $6.6 million, up slightly from $6 million in last year's first quarter as a result of growth in our client directed CapEx program. We expect depreciation in 2014 to total approximately $27 million. Other expense of $1.3 million this quarter included foreign exchange losses of $1.6 million.

The guidance we gave on our last call for this quarter specifically excluded the impact of any FX gains or losses, so accordingly our discussion today excludes the impact of this FX translation. Excluding our FX losses to conform to our guidance places EBIT for the quarter at $84.4 million, which is up $5.4 million or 6.8% year-over-year, which generated margins of 32.1%, an increase of 180 basis points over the 30.3% margins earned in last year's first quarter. This increase in margin was greater than expected and should be positive to our business outlook. This EBIT represents a record for any first quarter.

GAAP EBIT was $82.8 million which is up $3.8 million or 4.8% year-over-year. Interest expense was $2.4 million for the quarter, similar to last year. Income tax expense for the quarter was $19 million based upon an effective tax rate of 24%. We continue to expect our full year 2014 annual effective tax rate to be approximately 24%. Net income, ex FX, for the quarter was $62.3 million compared to $56.5 million in last year's first quarter, an increase of over 10%.

Earnings per share for the quarter was $1.45 on the same basis that our guidance was given by excluding FX, but also weather and project delays. Our EPS is up year-over-year by $0.23 or almost 19%, excluding those items. GAAP EPS was up by $0.13 or 11%, and this represents record EPS for any first quarter.

Now going over to the balance sheet, cash was $23.3 million compared to the prior-year end balance of $25.1 million. Receivables stood at $209.2 million, up slightly from year end. Inventory was also up slightly from year end at $50.9 million. Our inventory increased as weather conditions impacted our clients' completion activities.

Other current assets were $35.1 million, up from the year end balance of $30.6 million, for the most part as a result of an increase in income tax prepayments of $3.7 million, reflecting the timing difference between when statutory tax payments are required to be made to the various tax offices and the corresponding current tax provision recorded under GAAP rules for our financial statement.

PP&E was $141.8 million, up from year end balance of $138.8 million due to continuing investments on our part on our business assets. There are no material changes in intangibles, goodwill, and other long-term assets.

On the liability side of the balance sheet, accounts payable for the quarter were $53.7 million, up slightly from last quarter end, and other current liabilities for the quarter were $94.7 million, up from $84.9 million primarily due to an increase in unearned revenue of $6.6 million, relating to some reservoir management consortium studies, where we have received cash from the clients but have not yet recognized revenue.

Our long-term debt stood at $279 million compared to $267 million last quarter, and is comprised of $150 million in senior notes and $129 million drawn on our bank revolving credit facility. As of today, those drawings under the credit facility are $130 million. Other long-term liabilities ended at $86 million, a decrease of $2.9 million over the previous year end, due in part to a decrease in deferred tax liability.

Shareholders' equity ended the quarter at $166.9 million, and that's down slightly from year end, primarily due to additions from earnings being offset by share repurchases and dividends. Using annualized net income for the first quarter, a return on equity was over 155%, making it one highest returns earned in the industry.

Capital expenditures for the quarter were $7.7 million. We expect our CapEx program in 2014 to be approximately $37 million as a result of an expected continued improvement in industry activity, particularly in the markets where we operate. Our CapEx growth is client directed for the most part, meaning that we will increase our capacity for locations or for increases in technology on the basis of discussions with clients about their specific needs. That's one of the reasons why we've been able to generate our high returns on invested capital.

Looking at cash flow, cash from operating activities in the quarter was $65.6 million and after paying for our $7.7 million in CapEx, our free cash flow was $58 million. In the first three months of 2014, as David mentioned, we turned 22% of our revenues into free cash flow, and that's one of the highest cash conversion rates in our industry. During the quarter used our free cash flow and cash balances to pay $22.5 million in quarterly cash dividends and to repurchase 254,340 shares for $46.8 million which had a VWAP of $184.40 per share.

Our use of cash continues to be designed to enhance shareholder value. Free cash flow generation such as this gives companies like Core Lab significant optionality to enhance shareholder value. And a recent example of that is the dividend increase of 56% of the dividend paid in the first quarter of this year compared to our dividends last year.

Now let's review our second quarter and full year 2014 guidance. We anticipate a continuation of the improving trend experienced in the latter part of the first quarter, which began in March. Since that time, North American activity and that in the international arena have increased as well. We believe that second quarter 2014 North American activity levels will continue to ramp up from the weather affected first quarter levels which will drive our expected earnings higher than previous implied guidance based on our prior full year 2014 outlook.

Therefore, we expect second quarter revenue to range between $280 million and $286 million which would be up about 8% year-over-year. Using the range of revenue guidance and applying approximately 35% to 40% sequential incremental margins, second quarter 2014 EPS guidance would range from $1.48 to $1.53, which would be up over 14% year-over-year.

Free cash flow in the quarter is expected to be approximately $70 million, once again exceeding net income for the period. This operational guidance excludes foreign currency translations or any shares that may be repurchased in the second quarter. A 24% effective tax rate is assumed for the quarter. Based on the anticipated increases in worldwide activity levels, we believe that full year 2014 revenue will range between approximately $1.155 billion and $1.175 billion, up 8% year-over-year, with full year EPS ranging from approximately $6 to $6.25, up 15% year-over-year.

Operating income margins are expected to expand to 33%, increasing approximately 200 basis points over 2013 levels. We expect free cash flow to exceed $300 million in 2014, with our client directed CapEx program to be slightly greater than in 2013, and it would be more than offset by improvements in working capital efficiencies. Now with the guidance taken care of, let's turn the discussion over to Monty, who will have a more detailed operational review.

Thanks, Dick. Quarter 1 2014 was our most profitable first quarter in Company history. I want to thank our employees for their contributions to setting another record. First quarter revenue of $263 million shows growth of 1% over Q1 2013 despite the setbacks in North America and North Sea due to severe weather. Operating earnings excluding FX losses grew 6.8% and generated margins of 32.1%, up 180 basis points over Q1 2013.

Reservoir description revenues were only slightly improved over Q1 2013 due to weather impacts, but we were able to grow operational earnings excluding FX by 2% to yield margins of 28.2%, up 40 basis points over Q1 2013. Our reservoir description labs in the Middle East are currently performing a large sampling and compositional analysis project in Kuwait. The project is being performed as part of a large scale pilot project monitoring the effect on reservoir fluids during steam injection. The project includes compositional analysis of pressurized gases and liquids, and includes trace contaminant analysis.

In addition, we are performing simulated distillation and detailed hydrocarbon analysis on liquid samples to determine optimum refining methods and economic values of the production. Continuing with the Middle East, we are working with oil companies in Abu Dhabi to assess undeveloped, unconventional reservoirs, conducting geochemical analysis, x-ray diffraction, mineralogy, and thin section analysis to determine the potential of these fields and the best exploitation methods.

Our reservoir description fluids labs in the US are conducting several high-pressure enhanced oil recovery analyses for ultra-deepwater Gulf of Mexico projects in pressures up to 21,500-psi which includes the determination of minimum miscibility pressures, physical measurements of fluids after they are contacted with injection gases, and thermodynamic testing for reservoir simulation models. These fluids are also tested to ensure production deposition and formation damage does not occur using Core Lab's proprietary pressurized fluid imaging system, providing complete high-pressure EOR and flow assurance testing in our labs.

EOR work is also ongoing in the continental US where secondary and tertiary recovery in liquid rich shale basins and more mature oilfields will be necessary for these basins to reach their full production potential. Work is currently ongoing in the Eagle Ford, Permian, and [Paradis] basins. Core Lab's mobile laboratories are providing essential real time sample quality and key fluid properties parameters for the deepwater and ultra-deepwater drilling programs to our clients. Data is provided within hours instead of days.

Properties that can be determined on-site by mobile laboratory analysis include: gas-oil ratio, hydrocarbon sulfite content, oil-based drilling, mud contaminations, fluid compositions, and pressurized viscosities which allow operators to make decisions as to the commercial viability of their reservoirs. Our Midland, Texas, lab recently received a compliment from a key client, and I quote, "On behalf of my company, I just wanted to thank you and the Core Lab Midland staff for an outstanding job on our Woodford core. I know you and others spent considerable amount of your time working on our core, and we greatly appreciate your efforts. It is people like you that keep Core Lab the premium core analysis company it is." That's the end of that quote.

Production enhancement revenues for Q1 grew 2.7% despite the severe weather setbacks. As has been reported that Bakken well completions were down 50% in January and February, compared to 2013. Operating earnings excluding FX grew 11.4%, and margins improved to 34.6%, an increase of some 270 basis points over Q1 2013.

Our patented FLOWPROFILER service continued its growth trend in the first quarter. First quarter growth was predominantly from increased activity in the Permian Basin. Adoption of this new service continues to be strong. Full value has yet to be recognized, and new applications are still in development. We are field testing new tracers and expect them to add to our offerings sometime in the second quarter.

Our recently introduced PT3D software is making it easier for our clients to evaluate the FLOWPROFILER data which makes it easier for them to determine optimal well placement and stimulation design. PT3D, our new three-dimensional software was unveiled in the first quarter to help our clients interpret inter-well communication using our SPECTRASCAN and FLOWPROFILER data. This is been utilized in the Bakken, Niobrara, and West Texas fields. It is still in development but is being very well received.

In two separate offshore completions for two different customers, our SPECTRASTIM and PACKSCAN services identified serious problems with the gravel pack sand control completions. Our diagnostic services allowed both customers to remediate the problems prior to bringing the wells on production, saving potentially hundreds of million of dollars in damages.

Reservoir management operating earnings excluding FX grew 7.2% over Q1 2013 and generated margins of 38.6%, an improvement of 370 basis points over Q1 2013. In Q1, reservoir management initiated two new joint industry unconventional projects. The first, Eaglebine play reservoir characterization and production properties, is an extension of our highly successful South Texas Eagle Ford project and is focused on the Eagle Ford shale extension into East Texas and the overlying Woodbine sandstones. Most of the operators in that play have joined the project.

The second project is focused on the liquids window of the Woodford shale in the Permian basin in Oklahoma. This project is designed to evaluate the prospectivity of the Woodford in areas not currently being exploited by operators. In the quarter, we also added members to our Permian basin projects, bringing the total number of participating companies to 66.

Internationally, reservoir management has continued to focus on West and East Africa exploration projects. We completed the second phase of our Tanzania project and Uganda study, culminating in workshops and seminars for the member companies. We also initiated new projects in Mozambique and Senegal. These studies are directed at providing data sets consisting of biostratigraphy, geology, reservoir quality, petrophysical properties, and seal evaluation with ties to seismic data for companies exploring the deepwater.

We recently completed the successful deployment of 110 of our patented CT-MORE monitoring systems for the Husky Sunrise Thermal Project. Located near Fort McMurray, Alberta, Sunrise is considered a world class reservoir with estimated reserves of 3.7 billion barrels of bitumen, and production is anticipated over a 40-plus year lifespan. Sunrise will use in situ steam assisted gravity drainage technology to recover the bitumen with minimal surface land disturbance.

Steam injection into the reservoir heats the bitumen so it moves more easily, allowing it to be pumped to the surface. Our high temperature ERD pressure and temperature sensors will provide the data required to assist engineers to optimize injection rates, and maximize the production.

Despite the severe weather setbacks in the first quarter, we remain optimistic for 2014. Activities in the major US unconventional plays will be robust. In addition, we expect to see very strong activity in deepwater Gulf of Mexico and off both coasts of Africa, throughout the Middle East, and in most markets in Asia-Pacific for the remainder of 2014. Tasha, we will now open the call for questions.

(Operator Instructions)

Rob MacKenzie.

Dick or David, I wonder if you could give us a feeling for how the disruptions in terms of weather and project delays came upon you in the quarter, and also if you will the relative size? I guess I'm a bit surprised that when you gave guidance in January that they weren't apparent at that time given most people said January was the worst month in the quarter.

Hi, Rob. When we looked at our business activities, it did begin to show evidence in February. You're right. We gave guidance, I think, on January 30. Actually, if you go to your temperature charts you'll see that February was the worst month.

We saw the lowest activity levels in February having dropped from January, but importantly we saw that recovery in March. As I mentioned in my prepared comments that was one of our best Marches recorded ever. Unfortunately, the impact was after our guidance, but now we see the recovery and view it as transitory as we had mentioned.

Great. Thank you. I guess as part of that, the margin performance was quite positive in the quarter given that the revenue shortfall. Can you give us a more color in terms of how that was delivered?

I think when you look at our incremental cost to deliver services, particularly if we have our staff fully employed and onsite, and our costs are fixed, so we did not experience decremental margins as a result of the lower revenues. I think the operating guys did a super job of containing their costs during the downturn period.

Right. Thank you. That's my two questions.

Kurt Hallead.

Good morning. I was wondering if you could give us a little more color on what's happening out there with these deepwater project delays? Is there some light at the end of the tunnel that these projects are going to start to move forward perhaps this year?

Yes, Kurt. We have mentioned this over the last several quarters that we were disappointed in the amount of delay to some of these projects owing to redesign of some of the production facilities. You can point to West Africa, deepwater gulf of Mexico as classic areas.

We saw the good news from Total, in the Kaombo on the block 32 ultra-deepwater, Angola. We think we will see the initiation of more of those start to take place. If you look at the redesign of some of these surface facilities and development costs, one project in the Gulf of Mexico in the deepwater tertiary area, the development costs have been lowered by over $5 billion.

With these plans now in place, we ought to see a number of projects get initiated later this year that we would've thought would've been going or actually starting up at the end of the first quarter, and certainly be robust in the first quarter. As we look at the deepwater, it is still significant to Core Lab. These developments will occur. We look at the redesign of some of these making these projects back into the very economical for the major companies developing those.

Thanks, David. Just as a follow-up to that, I guess a two-parter on my question number two, but the dynamic here, is there now a template set for these major oil companies that they can push forward on these projects without additional delays on other projects? The second part of that dynamic is can you help me understand how Core Labs is impacted? My understanding on most of these project delays, they are capital costs related and the services that you provide help them understand what they can ultimately get out of the reservoir. Before they can go through the whole cost analysis, they need to utilize what you guys have. What am I missing?

On the part A, I believe that all these offshore developments are going to be regional in nature, and so if the template could be put in place, one would be put in place let's say for the deepwater tertiary developments in the Gulf of Mexico. The template would be different in West Africa. Yes, indeed, those are going in the plays, and I think the design programs and specifications will actually be sped up.

With respect to how delay in these projects affect us, we figured by now we would have very robust deepwater reservoir fluid projects going on. Monty referred to a couple of those. We referred to a couple of those in the release. If you look at the amount of fluids work we did from the deepwater, we expected much more to occur in Q1. We expect to see that now starting in Q2 and Q3.

When these projects are rolling out there's always incremental rock to look at, but more importantly more and more deepwater fluids where they're trying to determine what is the best way to not only maximize daily rates, but their ultimate recovery from those reservoirs. It's just ongoing work that would've been pushed out.

Thanks for that color. I appreciate it.

Byron Pope.

Good morning.

Good morning, Byron.

I have a question on your development of mobile offshore reservoir fluids labs. It's intriguing. I guess my question related to that is are you seeing an industry trend or a customer preference toward more real time analysis of the reservoir fluids in deepwater and ultra-deepwater applications?

Yes, Byron, when we look at, for instance, the deepwater Gulf of Mexico, if you remember back a number of years ago, we were looking at building cylinders that could withstand pressures up to 30,000 PSI. At that time I think a lot of people thought maybe we were off our rockers. But indeed we are now approaching those pressures.

If we can measure some of those properties offshore in real time decisions can be made about a wellbore or treatment for a wellbore, that's going to save spread costs of several days. If you look at a spread cost, its somewhere between $1 million and $1.2 million per day. We have had demands for more and more well site fluid analysis especially those at ultrahigh pressures and temperatures.

Okay. It sounds like some of these mobile labs have already been deployed, and if so, I'm assuming you're focusing on the deepwater golden triangle?

That is correct. Most of them right now are in the deepwater Gulf of Mexico, but we will see that technology exported to the other two points of the triangle over the next couple of years.

Okay. A second question for me, your production enhancement services revenue, you said had phenomenal growth over the past several years, 25% to 30% annual growth. Given that US E&P operators seem to be migrating toward, which you all have been recommending, closer well clusters and whatnot, my question is what have been the drivers of that robust growth on the production enhancement services size? It would seem as though you guys would be setting up for fairly robust growth again in 2014, just given North American activity levels.

Very good points there, Byron. Essentially, this FLOWPROFILER service has enabled us to see how each individual stage is actually flowing or not flowing. That coupled with rock analysis, we can determine how much of the reservoir that we're effectively draining with these stages. We now know that we need additional stages to drain that reservoir. We're going to ask for again longer laterals and stages that are even closer together to effectively drain that reservoir.

Also, the technology that we mentioned in the release, owing to deepwater developments, when we look at some of these lower tertiary reservoirs, they are friable nature. When we flow from these reservoirs, we know that we are mobilizing sand grains that are abrasives, and the combination of these technologies in this deepwater is enabling us to ensure that the operators have robust gravel packs in place when they begin their multiyear production. The combination of all of those, you're right on. It is setting up for robust growth.

With respect to this quarter being that they are more closely tied to the development of unconventional reservoirs, they were indeed, their revenue stream was affected the most. Essentially, as Monty talked about, if you look at the number of well completions in the Bakken during the first part of this year, they were down 50% year-over-year. A well has to be completed and stimulated for our production enhancement group to realize revenue. As we get back to normality and even more stages, it should set up for robust growth going forward.

Very helpful. Thanks, guys.

Jim Crandell.

Good morning. Dave, you've had such success with your new products and your production enhancement business, and there's been such a flow of them. It's almost difficult to keep track of. But what percentage of that business would you say is coming from new products introduced in the past, let's just say, three years?

I would say 70% of the revenue is coming from new products over the last three years. Jim, I would say over the last five years, it's probably closer to 90%.

Particularly when you think that many of them are evolutions of existing ones, so improvements. As an example, in the product line our HERO line of charges which you know is our low-debris charge that we've improved multiple times, it now represents two-thirds of all charges that we make. It's really done a super job of just supplanting old lower margin technology.

In that business, guys, what percentage roughly of that business would you say is shale related, of the entire production enhancement business?

Related to the development of shales?

Yes. Used in horizontal drilling in the shale versus for the deepwater or versus other applications?

Unconventional reservoirs, probably 70%.

About 70% from unconventional. Okay. Once you get up to the margin territory that you're in there, it becomes extremely difficult to increase margins, but I assume that all of these new products that are coming out really contain margins that are higher than the group average. As they make up a higher percentage of the total, it just has the natural effect of enhancing margins, is that a way of looking at it?

Correct, Jim. We always price for incremental margins that are going to be in the range that we talk about, 35% to 45%. Of course, some of these new products because they are such a value-add have been at the higher end of that range, or in some cases above that range.

Jim, particularly on the service side, where we are doing diagnostics, if we can add a service maybe through an additional addition to our existing tools string, we're only adding slight amount of depreciation to conduct that job. It's the same number of engineers going out to the site to conduct that job which gives us incremental revenues with extremely high incremental margins. Those incremental margins are also going to drive the underlying EBIT margins. That's how we also get margin expansion too. It's not just trying to price the new technology with the highest possible margin, but it's also be cognizant of how well you can integrate those services to drive the highest incrementals.

Okay. That's well said and very helpful. Thank you.

Veny Aleksandrov.

Good morning, guys. My first question is on the guidance for the year. Your revenue guidance is slightly off what you gave last time, but you kept the EPS guidance, so you have confidence in better margins. Is it because of the deepwater projects moving in Q2 and Q4? Or improvement in all of your margins? I'm sorry for the background noise.

That's fine. It is improvement across the board, driven also by those incremental margins that we were talking about. For our guidance for 2014, it's in essence similar to what we gave last time, but keeping in mind that our Q1 turned out to be lower than our prior guidance. What that means is we've actually raised our guidance for Q2, Q3, and Q4 to come up with virtually the same 2014 guidance.

All right. Thank you. My second question, and my questions have already been asked about on the [mobile] offshore (inaudible) labs, but can you give us a little bit more detail? It's very interesting. Do you send you own people, your own equipment? How big the equipment is? Where this can go? How many labs like that you can set up in the next three years installed?

Veny, the labs are in a container type setting. It is our equipment, the whole laboratory, all the equipment in it. The people are our people that go out and man the laboratories, take the samples, and do the analysis.

They are set on rigs or platforms. Not every rig can accommodate the room, but there are a lot that do. The savings to our clients is pretty phenomenal versus the price. It's a great value-add to the client when they can take these mobile laboratories to the rig or platform in place them on there to do the analysis they [have] upcoming. It lets them make much quicker decisions and change what they're doing without losing any rig time, which as you know is very expensive. We expect to see that growing, that business growing, as we see the pickup in the deepwater activity that we also alluded to earlier.

As Byron Pope spoke of earlier, we'll see that migrate from mainly deepwater Gulf of Mexico to West Africa and also offshore Brazil.

Thank you so much.

Blake Hutchinson.

Good morning, guys. Just to round out a lot of the pieces that have been put together here and talked a bit about, with regard to the guidance, with 1Q out there and Q2 pretty dialed in, I'll look at the back half and all what we talked about here would lead me to believe that your guidance for the back half would entail incremental margins that are certainly at the higher end of the range, your historical range, if not maybe beyond that. We've got some indication of scale and mix improvement. Is there also shift in your top line more towards your North American businesses actually in that revenue number as well? Just to make sure we come away with the right message, am I characterizing that correctly, that the increment should be pretty outsized in the back half of the year?

Yes, I think that's right, Blake. If you look at where we're generating our highest incremental margins and our highest margin, it happens to be in production enhancement. That of course has greatest exposure to North American unconventionals. That growth rate has been higher, so we will see more of that revenue flow through production enhancement, higher incrementals pushing the underlying margins. Moreover, with the back end loaded with some deepwater work, we know those incrementals are also up at the top of that range. What you've laid out is exactly what we expected to occur in Q3 and 4 of this year.

Okay, great. I guess attached to that, you did, Dick, point out a little more sluggish receivable in inventory levels, but with your Q2 guidance as well suggests that you need to make up some ground on the working capital front, with regard to achieving your free cash goals. Is that more or less the continuation of greater efficiency over the year? Or is there some annual collection process that kicks in? What gives you the confidence that we can still reach that $300 million plus goal for free cash?

There is some seasonality on the receivables in the first quarter. That's why we mentioned about the deferred revenues. We billed the clients, but have not recorded the revenues and would expect those to be paid during this quarter. Naturally, you begin to see a reduction in A/R as the year progresses.

Regarding inventory, that's just a result of we have inventory to sell, and as Monty mentioned, there are 50% less completions. We believe as the activity levels begin to improve, those inventory levels will again recede and be contributors to working capital that we believe will get us to that $300 million plus free cash flow.

Nothing striking outside of that and the continued process? (inaudible)

No. No. Remember the customer base we work for, these are all extremely credit worthy clients. We don't have collection credit issue.

Okay. I appreciate that, guys. Thanks for the time.

Rob Mackenzie.

My follow-up question was asked and answered. Thank you.

Okay, Rob. Tasha, we'll take one more question.

Yes, sir. Your final question comes the line of John Daniel.

Good morning. I just want to follow-up a little bit on the mobile labs, if I may. Can you guys quantify how many labs you have right now, and how many you expect to deploy over the next 12 to 18 months?

Right now, we have a few labs in the Gulf of Mexico, North Sea. We expect to deploy a few more. It's not huge numbers. We don't expect every rig have one, but they move to where they're needed.

It's not like equipment that is permanently on the rig. These are mobile, and they move rig to rig for the different testing programs the different companies have lined out. It's not a piece of equipment that's permanently on a rig. We don't expect to have huge numbers, huge CapEx, going into that. We expect to get utilization numbers out of it that yield us a good return.

With all the interest in these mobile labs, we'll go ahead and give more color certainly next quarter on those.

Okay. Is it safe to assume, guys, that it's higher margin just by virtue of (inaudible) being out there?

Yes. That's correct.

Great. All of our services throughout the Company, we're looking at the value-add and trying to give our customers a great value. The higher the value, the higher margin we're going to have, as you might expect. That's our philosophy throughout. That's why you see FLOWPROFILER with higher margins, mobile labs with higher margins. Some of these EOR projects have higher margins. It's the value-add we bring to our clients.

You guys are the first ones to have the mobile labs doing this?

Yes. Some of these pressures and temperatures, what we're running these fluid at, we're really the only Company on the planet that can do that. That gives us a real nice market niche.

Fair enough. Just a last one for me, Dave, if you look at the volumes within fluids studies business, if you will, how would you characterize the growth rate in recent quarters? How does that growth rate evolve over the next two to three years, excluding of course the weather issues in Q1?

Yes, when you look at the reservoir fluids market worldwide, it certainly is expanding. When you analyze core samples, you analyze them once. Reservoir fluids samples are dynamic in nature. We have one client in the North Sea that we test his reservoir fluid samples every two weeks. These used to be done maybe once a year. We're seeing more and more of this data be used to ensure that they're getting maximum flow rates, but more importantly, maximum recovery rates.

Fair enough. If I recall I think you mentioned this that part of the business tends to carry higher margins in the core analysis. Is that correct?

Slightly higher. That's correct.

Okay. That's all I've got. Thanks.

Okay. Very good. In summary, Core's operations posted another solid quarter but we know we can do better. We have never been better operationally or 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 service sector. This positions Core well for the challenges ahead.

For 2014, we continue to be encouraged by recent activity trends in the international and especially deepwater arenas and the growing activity levels in the deepwater Gulf of Mexico, especially the lower tertiary sequences, and remain confident that activity levels will return to unconventional plays in a robust nature. The Company remains committed to industry-leading levels of free cash generation and returns on investment capital with excess capital being returned to our shareholders.

In closing, we'd like to thank all of our shareholders and the analysts who follow Core. As Monty Davis has already noted, the executive management and the Board of Core Laboratories give special thanks to our 5,000 worldwide employees that have made these outstanding results possible. We are proud to be associated with their continuing achievements. Thanks for spending your morning with us, and we look forward to our next update. Goodbye for now.

Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.