Good morning, and welcome to the Core Laboratories' Fourth Quarter 2021 Earnings Conference Call. [Operator instructions] Please note this event is being recorded. I would now like to turn the conference over to Larry Bruno, Chairman and CEO. Mr. Bruno, please go ahead..

Thanks Anita. Good morning in the Americas. Good afternoon in Europe, Africa, and the Middle East, and good evening in Asia Pacific. We'd like to welcome all of our shareholders, analysts and most importantly, our employees to Core Laboratories fourth quarter 2021 earnings call.

This morning, I'm joined by Chris Hill, Core's Chief Financial Officer; and Gwen Gresham, Core's Senior Vice President and Head of Investor Relations. The call will be divided into six segments. Gwen will start by making remarks regarding forward-looking statements.

We'll then have some opening comments, including a high-level review of important factors in Core's Q4 performance. In addition, we'll review Core's strategies and the three financial tenets that the company employs to build long-term shareholder value.

Chris will then give a detailed financial overview and have additional comments regarding shareholder value. Following Chris, Gwen will provide some comments on the company's outlook and guidance.

I'll then review Core's two operating segments, detailing our progress and discussing the continued successful employment and the introduction of Core Laboratories technologies as well as highlighting some of Core's operations and major projects worldwide. Then we'll open the phones for a Q&A session.

I'll now turn the call over to Gwen for remarks on forward-looking statements..

Thanks, Larry. Before we start the conference this morning, I'll mention that some of the statements we make during this call may include projections, estimates and other forward-looking information. This would include any discussion of the company's business outlook.

These types of forward-looking statements are subject to a number of risks and uncertainties relating to the oil and gas industry, business conditions, international markets, international political climate and other factors, including those discussed in our 34 Act filings that may affect our outcome.

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, please see Item 1A Risk Factors in our most recent annual report on Form 10-K as well as other reports and registration statements filed by us with the SEC and the AFM.

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

maximize free cash flow, maximize return on invested capital and returning excess free cash to our shareholders. Before we move on, I want to thank Core's management team and employees for their hard work during the unprecedented challenges of the past 21 months.

Even today, our operational teams are definitely juggling complications created by the recent increases in COVID cases. I also want to thank them for their dedication, loyalty and adaptability in meeting all of our clients' needs and for the personal sacrifices that many have endured as we navigate the moment and prepare for a more active market.

I'll now turn it over to Chris for the detailed financial review..

Thanks, Larry. Before we review the financial performance for the quarter, the guidance we gave on our last call and past calls specifically excluded the impact of any FX gains or losses and assumed an effective tax rate of 20%. So accordingly, our discussion today excludes any foreign exchange gain or loss for current and prior periods.

Now let's review the income statement. Revenue from continuing operations was $125.1 million in the fourth quarter, up over 6% from $118 million in the prior quarter and up 10% year-over-year. The growth in revenue was driven by increased activity associated with international projects which grew over 11% sequentially and over 14% year-over-year.

Although COVID-19 disruptions continue to persist, activities on international projects improved and continue to gain momentum in the fourth quarter. For the full year 2021, revenue was $470.3 million and is on a growth trajectory as we exited the year. However, it is down about 3% from 2020.

Of this revenue, service revenue, which is more international, was $89.3 million for the quarter, up over 5% sequentially from $84.8 million last quarter. As stated earlier, we had a nice improvement in activity levels on international projects, which increased over 6% and slight improvement in the U.S.

markets, which was led by a nice pickup in our Well Diagnostic Services. Product sales, which is equally tied to North America in the international activity, were $35.9 million for the quarter, an increase of over 8% from $33.2 million last quarter and up 46% year-over-year.

Product sales associated with perforating systems were up sequentially in both the U.S. and international markets. The fourth quarter included some large international orders, which can vary from quarter-to-quarter.

The growth in perforating product sales in the fourth quarter was partially offset by a decrease in sales of laboratory instrumentation, which have longer lead times and can also vary from quarter-to-quarter. Moving on to cost of services, ex items for the quarter are 78% of service revenue and improved slightly when compared to 79% last quarter.

As discussed in previous quarters, cost of services were expected to increase as we restore some of the temporary cost reduction measures previously put in place during the pandemic.

As we progress further into the recovery with operational activity and our laboratory utilization improving and as employee costs are significantly restored, our incremental margins on services will improve and trend towards historical norms.

Cost of sales ex items in the fourth quarter was 75% of revenue compared to 78% last quarter and continues to improve as activity increases. As product sales continue to grow, manufacturing efficiencies and absorption of fixed costs will also continue to improve.

However, inflationary pressures on raw materials, labor, packaging and transportation have increased, which are expected to increase cost of sales for products. G&A ex items for the quarter was $10.9 million, up from $8.6 million last quarter.

The sequential increase in G&A cost is primarily due to restoration of employee compensation costs and a higher level of costs associated with maintaining and improving our cybersecurity. G&A ex-item was $36.9 million for the full year, down from $38.6 million for the full year 2020. For 2022, we expect G&A to be approximately $40 million.

Depreciation and amortization for the quarter was $4.4 million and comparable to last quarter. For the full year, depreciation and amortization expense was $18.5 million, down from $20.9 million in 2020. Capital expenditures were $3.5 million for 2021, up from $11.9 million last year.

However, the 2021 capital expenditures include approximately $2 million associated with repair damage facilities, which was primarily caused by the severe North American freeze in February of 2021. Damage to the facilities was substantially covered by insurance less our deductibles.

EBIT ex-items for the quarter was $14.2 million, up 9% from $13 million last quarter, representing an EBIT margin of over 11%. The company continued to restore personnel compensation during the quarter and was able to maintain EBIT margins at 11%. Our operating income for the quarter on a GAAP basis was also $14.2 million.

Full year 2021 EBIT ex-items was $52.3 million and generated EBIT margins of over 11% for the full year. Interest expense was $2.6 million comparable to last quarter, but down from $2.9 million in the same quarter last year. Interest expense ex-items for the full year was $11 million, down approximately 12% from $12.5 million in 2020.

The decrease in interest expense reflects the reduction of long-term debt throughout the year. On a GAAP basis, we’ve recorded interest expense of $9.2 million in 2021, down from $14.4 million in 2020. Income tax expense ex-items and using an effective tax rate of 20% for the quarter was $2.3 million.

On a GAAP basis, the company recorded income tax expense of $8.8 million. Higher tax expense for the quarter was largely impacted by foreign currency gains, primarily in Turkey where unrealized foreign currency gains associated with U.S. dollar-denominated receivables are subject to tax locally.

The company has taken additional steps to further mitigate this type of foreign currency risk and does not anticipate additional tax expense associated with foreign exchange rates to reoccur in future periods. Now looking forward to 2022, we project the company's effective tax rate to be approximately 20%.

The effective tax rate will continue to be somewhat sensitive to geographic mix of earnings across the globe and the impact of items discrete to each quarter. Income from continuing operations ex-items for the quarter was $9.3 million, up 12% sequentially from $8.3 million last quarter.

For the full year 2021, ex-items, it was $33 million, down from $35.3 million in 2020. GAAP income from continuing operations for the quarter was $2.8 million, and for the full year 2021 was $20.2 million.

Earnings per diluted share from continuing operations ex-items was $0.20 for the quarter, up from $0.18 last quarter and was $0.71 for the full year of 2021. GAAP earnings per diluted share from continuing operations was $0.06 for the quarter and $0.43 for the full year. Now moving on to the balance sheet.

Receivables were $96.8 million an increased approximately $1.5 million from last quarter. However, our DSOs for the fourth quarter improved and were at 65 days compared to 68 days last quarter. Inventory finished the year at $45.4 million, up approximately $1.3 million from last quarter end.

Inventory turns for the quarter remained consistent at 2.4, which is comparable to last quarter. As previously highlighted, the company continues to experience an increase in cost of raw materials, labor, packaging and transportation costs, which are increasing the cost of inventory.

Additionally, challenges on the supply chain persist which will continue to require carrying a larger amount of inventory to help mitigate disruptions. On the liability side of the balance sheet, our long-term debt was $190 million at December 31, 2021, significantly reduced from $261 million at the end of 2020.

And considering cash of $18 million, net debt was $172 million at year-end or a decrease of $75 million from last year-end. Our leverage ratio was 2.08 as we exited 2021 and down from over 2.8 last year.

As Larry mentioned earlier, the company made significant progress during the year as we will continue to maintain our efforts towards reducing the debt leverage of the company. Our debt is currently comprised of our senior notes at $135 million as well as $55 million outstanding under our bank revolving credit facility.

Looking at cash flow for the fourth quarter of 2021, cash flow from operating activities was $7.2 million and after paying for $4.8 million of CapEx, our free cash flow was $2.4 million for the quarter. CapEx for the fourth quarter also includes $1 million associated with facility repair costs, which were covered by insurance.

Additionally, cash from operations for the quarter was negatively impacted by a build in working capital which includes a $4.3 million prepayment to renew the company's corporate insurance programs for 2022.

Looking forward to 2022, we expect CapEx to modestly expand but will continue to be aligned with activity levels and remain in line with historical levels while in a growth period. For the full year of 2022, we expect capital expenditures to be in the range of $15 million to $18 million.

Core will continue to -- our strict capital discipline and asset-light business model with capital expenditures primarily targeted at growth opportunities and initiatives.

This also marks another quarter and the 20th consecutive year, Core Lab has generated positive free cash flow, and we are projecting to continue generating positive free cash as we look ahead to 2022 and beyond.

We believe a company's ability to generate free cash and free cash flow yield is an important metric for shareholders when comparing company's financial results, particularly for those shareholders who utilize discounted cash flow models to assess valuations. I will now turn it over to Gwen for an update on our guidance and outlook..

Thank you, Chris. The global crude oil market continues to tighten as demand for crude oil approaches pre-COVID levels, resulting in noticeable increase to crude oil commodity prices.

Current crude oil commodity prices may also drive a higher level of investment in urgency and international onshore and offshore crude oil development projects in 2022 and beyond.

These crude oil market fundamentals are reflected in the gradual increase in the international rig count with more oilfield equipment coming under contract and expanded capital spending for 2022. Core sees this as a leading indicator of a growing multiyear international cycle.

As the cycle strengthens in IOCs, NOCs and independents expand their investments in maintenance of existing fields and development of new fields or extension, we anticipate operators to increase capital spending by 15% to 20% for North America and double digits for international.

We also anticipate the Omicron disruptions will dissipate as the year unfolds, and we are well positioned to capitalize on the growth opportunity, given our global presence and proprietary technologies.

With Core Lab having more than 70% of its revenues exposed to international activity, both business segments remain active on international projects as additional field development projects emerge, wells need to be drilled and reservoir rock and fluid sample before reservoir description more fully participate in the cycle.

As pandemic disruptions abate, the expansion of international development provides growth opportunities for both segments in 2022 and beyond, with a particular focus on the South Atlantic margin, Latin America and the Middle East. However, for the first quarter 2022, Core Lab expects lower client activity due to seasonality.

The seasonal pattern typically results in a decline in first quarter revenue by mid-single digits. The projected decline in first quarter revenue is slightly less pronounced compared to historical trends as the company expects momentum in the U.S. land activity to continue.

As such, Core anticipates typical seasonal impact to the first quarter and project revenue to be down low to mid-single digits sequentially. While our guidance includes some assumptions for business interruptions due to the pandemic, our guidance anticipates the abatement of the disruptions as the quarter unfolds.

Core projects first quarter revenue to range from $117 million to $122 million and operating income of $11.9 million to $14 million, yielding operating margins of approximately 11%. EPS for the quarter is expected to be approximately $0.16 to $0.20.

In summary, as we look ahead further into 2022, Core remains committed to our strategic plan of expanding market penetration by introducing new technologies and targeting new market opportunities. We remain focused on generating free cash flow, reducing debt, while maximizing return on invested capital.

Additionally, as part of Core strategic focus, we expect as activity levels translate into revenue opportunity for the company, and we navigate the inflationary pressures, incremental margin expansion and underlying EBIT margins to improve.

The company's first quarter 2022 guidance is based on projections for underlying operations and excludes gains and losses in foreign exchange and assumes an effective tax rate of 20%. With that said, I'll turn it back over to Larry..

Thanks, Gwen. First, I'd like to thank our global team of employees for providing innovative solutions, integrity and superior service to our clients. The team's collective dedication to servicing our clients has been very visible during the current challenges and is the foundation of Core Lab's success. Turning first to Reservoir Description.

For the fourth quarter, revenue came in at $80.1 million, up 2% sequentially. Operating income ex-items, was $7.1 million and operating margins were 9%. Restoration of employee costs, along with the COVID-related costs and inefficiencies impacted margins during the quarter.

By the nature of the business, Reservoir Description's performance historically has lagged directional changes in client activity. As industry activity recovers, Reservoir Description will respond more slowly than, say, oilfield service companies with direct exposure to well construction and other early cycle client spending.

The increase in COVID cases in Q4 has continued into Q1. This particularly impacts the Reservoir Description segment as quarantine requirements and government reimposed lockdowns weigh on these staff-intensive operations that must be conducted in the laboratory environment.

As we look ahead, we see the growing international rig count as a harbinger an improving landscape for Reservoir Description, a trend that we project will play out throughout 2022 and beyond. Moreover, long-delayed projects are beginning to spool up across many regions.

For example, during the fourth quarter of 2021, Core began the initial work on a large, long planned reservoir evaluation project in the Middle East. This significant project has been delayed over the past 1.5 years by local government-imposed shutdowns related to the COVID-19 pandemic earlier in '19 and into '20.

Core invested to expand analytical capabilities in the host country to service this extensive program during '19 and '20, along with other emerging opportunities in country.

The analytical program for this multi-well conventional reservoir project will employ the full range of basic and advanced rock properties testing including Core Lab's proprietary methods and technologies. Work on this project will grow over the next several quarters and continue throughout 2022 and into 2023.

This is just one of several investments in the Middle East region that will begin to bear fruit as we move through 2022. Also during the fourth quarter of 2021, demand for subsurface evaluation services to support the oil industry's energy transition and decarbonization efforts continue to grow.

Core has a variety of carbon capture and storage projects and initiatives gaining traction. We'll be discussing these in more detail in the very near future. Coordination and planning efforts are underway with a number of U.S. and international companies on projects aimed at evaluating potential sites for CO2 sequestration.

Core Lab's role in these projects is to evaluate the geologic, petrophysical and engineering aspects of the rocks and formation fluids, all critical inputs into modeling and identifying the subsurface risks that are unique to each potential sequestration site.

During the fourth quarter, Core initiated a core evaluation program for an applied technology company on a 180 feet of conventional core and associated sidewall cores from a potential sequestration site in Illinois.

Core will continue to utilize its advanced rock and fluid analytical technologies to refine the client's understanding of this carbon sequestration opportunity as well as to optimize CO2 injection methodologies.

This project is a great example of how Core Lab's unmatched expertise and subsurface evaluation which has historically been used for oil and gas exploration and development are creating opportunities in the emerging projects tied to CO2 sequestration.

Moving now to production enhancement, where Core Lab's strengths in both energetic systems and completion diagnostics helped customers optimize their well completions. Revenue for production enhancement came in at $45 million, up 15% sequentially. Operating income ex-items was $7.1 million, up 43% sequentially.

Operating margins were 16% for the fourth quarter of 2021, up over 300 basis points sequentially. These are the highest operating margins for production enhancement since the pandemic began. Now for some operational highlights.

During the fourth quarter of 2021, Core Lab was approached by an operator conducting business in the Austin Chalk and Eagle Ford formations to provide expertise when perforating -- when performing completions in smart wells.

Smart wells use fiber optic cables attached to the outer wall of the casing as well as downhole sensors and valves, which are run and cemented in place during the completion.

These sensors relay real-time bottom hole data through the fiber optic cable to the surface, allowing the operator to optimize production rates and make critical decisions on fracking, well spacing and artificial lift programs.

Following installation of the fiber optic cables, the smart well must still be perforated to create communication between the wellbore and the formation.

Precise alignment of the perforating system is critical to ensure that the fiber optic cables are not cut when the energetics are triggered as cutting the cables would lead to a loss of communication with the downhole centers and valves.

The operator selected Core's proprietary 0180 oriented perforating system, along with Core's HERO PerFRAC charges for these smart wells. This oriented perforating system and energetic design provides the most accurate oriented system available in the industry, yielding an advantage over competitive products whenever smart wells are being constructed.

Core's expertise supported the completion of over 50 stages without damage the downhole smart well components. Over on the service side of production enhancement, our completion diagnostic team continues to innovate solutions for value-adding well completions and reducing well costs.

During the fourth quarter of 2021, Core's completion diagnostic experts were called upon by multiple operators in the deepwater Gulf of Mexico, to provide a more efficient approach to identifying the top of cement on intermediate casing strings.

The traditional approach to identifying top of cement is by running cement bond logs, which can be time consuming and costly. Core's completion diagnostic engineers in conjunction with two major deepwater operators developed a technique by which the top of cement is marked with Core's proprietary SpectraStim tracers.

The operators then log the interval with their logging well drilling tools as they resume drilling below the intermediate casing. This eliminates the rig time and expense of running a separate cement bond log, once the intermediate casing has been set. The cost savings realized by the operator were in excess of $150,000 per casing string.

This application has now extended from two intermediate casing strings for the two original operators to tracing three and potentially four intermediate casing strings. To-date, this technology and the resulting operational efficiency have been adopted by six deepwater operators. That concludes our operational review.

We appreciate your participation, and Anita we’ll now open the call for questions..

[Operator Instructions] The first question today comes from John Daniel with Daniel Energy Partners. Please go ahead..

Good morning.

Can you hear me okay?.

Yes..

Two questions for you.

One sort of a big picture one, which is if we assume we are in the multiyear up cycle, I'm just curious, what do you see as the sort of the most consequential opportunities for Core just with a 2 to 3-year view?.

Well, I'd say the first thing is geographically, is the resumption of activity to near normal levels. And I would highlight a few regions of specific on that. The Middle East, Asia Pacific and Latin America, it looked like they've got considerable upside for us.

And the project I referred to earlier, that's been sitting on the sidelines, Actually, Core has been out of the ground waiting to get into our hands as it had to pass through an intermediate government agency before we could start our work on it.

I think that's a great example of something that's sort of a COVID casualty for us that's going to clear up. I also think that opportunities in Brazil and Guyana and Suriname are firming up.

We see some very nice opportunities there as well as other parts of Latin America, where just a lot of upside as old fields get into decline, and they're going to have to bring on new wells and new production to fill that declining production from old fields..

Okay. Fair enough. And then here's the sort of the dumb guy question this morning. What percent of the sequestration opportunities are non-energy related businesses? And then the follow-on to that is the E&P space is really good at beating up service companies on price.

How sensitive are these non-energy players for what you can provide?.

Yes. It's a really good question, John. So a big picture answer there is that, one of the changes that we've seen in the CO2 sequestration business is that historically, every year or 18 months or so, some non-oil industry-related company would approach us about a project and we would do our work on it and move on from that.

And it's the same type of work that we would do for an oil company just on the CO2 sequestration project. What's changed is that now our traditional clients are calling us -- oil and gas companies are calling us about their CO2 sequestration initiatives.

The project I talked about today though was for a non-oil and gas company -- applied technology company without direct oil and gas connection. The CarbonNet project, which you've heard us talk about, and we'll be talking about some more, probably in the next quarter, in Australia, that's a non-oil industry project for us.

That's a large network that's being built to capture all kinds of industrial CO2 emissions and put them in the ground. So the short answer to your question is we're seeing a broadening base of opportunities there. One is that now we've got oil companies or traditional and gas companies asking us to collaborate with them.

And I made a note in our earnings release where they're going back and saying, hey, you know those fields that we may have depleted in the Gulf of Mexico and the Miocene, we want to review that data now to look for CO2 sequestration opportunities. And then beyond that, we've got non-oil and gas companies that are approaching us.

We're going to have a lot more to say in a couple of weeks, maybe a month or two on these topics. So stay tuned for more details. And your question about pricing, we're always looking to provide value. And I'd say you're right, there's been a lot of pricing pressure here on service companies.

I think the path there is that we will see prices improving over time. Core Lab has historically, I would say, avoided big peaks and valleys that might be associated with a driller or day rates on heavy equipment, but I do think that we'll see prices firming up as we move forward..

Fair enough. It would seem to me that the stuff that you're doing, the sequestration could be potentially much better margin than sort of the traditional work just given the big pressures, if you will, out there on moving to emission-friendly, reduced emissions, et cetera. So just a statement, you don't have to answer it..

Yes, I think there's some validity in that. But -- and I also think we've got some different approaches that we're going to be applying to CO2 injection through the rock that will be engaged in a different way with the sequestration projects, whether it's for an oil and gas company or whether it's for a non-oil and gas company..

Awesome. Thank you for your time. .

Thanks John. .

The next question comes from Ian MacPherson with Piper Sandler. Please go ahead..

Good morning Larry and everyone, how are you. .

Thanks. Good morning. .

I wanted to delve into the Q1 guidance a little bit as we extend from the Q1 outlook to the stronger second half internationally that you expect for the business.

And I would -- correct me if I'm misinterpreting this, but I would imagine that production enhancement will be up sequentially in the first quarter, which would imply an above-average rate of decline for reservoir description in Q1.

And you referred to seasonality, but that's also in the face of improving cycle tailwinds across all markets, but I know you still have some COVID interference as well.

So is that a correct starting supposition that production enhancement is going to be up a little bit in the first quarter and then you would see -- if that is the case, what kind of acceleration in growth rates in R&D should we think about when the world opens up more in your big projects accelerate more in the second half?.

Yes. So John, I might -- the one thing I think you might have taken out of the consideration there on the production enhancement side is international activity. So I think U.S. activity, although we got off to a pretty slow start, looking at the frac spread and the completion rates, we see that improving.

But we did have some substantial international sales in Q4. We've always talked about those can be lumpy. If you look back over last year, we had a pretty good international product sales for production enhancement in Q2 and then in Q4. And so those don't repeat consistently. It's not a linear direction on those or linear pattern on those.

So there's ups and downs there. So I don't know that I would lean too heavily on the assumption that we're going to see quarter-over-quarter growth in production enhancement. Okay, and then you're right, the COVID issues are something that we've got on our mind. We've got quite a number of employees across our global network that are out of the office.

Fortunately, as I mentioned, the cases seem to be mild, but it still creates disruptions in staffing. We've got to pay overtime to those that are in the office and unaffected by COVID at the moment. So there's just inefficiencies created with that.

So as we look out a little further in the year, we've laid out some directions that we see for the company. U.S., we'd say, up 15% to 20% and international, we're saying right now, we're just saying low double digits, maybe a little bit of upside to that as we get a little further into it.

And some of that is projects that have been on the sidelines spooling up and some of that is regions that we see opening up that have been sort of deferred until normal activity could be completed..

That's helpful. Thanks a bunch Larry. Chris mentioned, reminded us that there is cost inflation in your inventory right now that's going to weigh on you as you get through this year and you told John on the last question, you are getting -- expecting to get pricing power, but probably with the lag.

Does that take us outside of your normal paradigm with regard to expected incremental margin expansion on revenue growth? Or do you think that those two sort of offset one another and we can use our old algorithms on incremental margins once the cycle gets going in here?.

Yes, Ian, I think we're projecting that once we get past Q1 kind of into Q2 that we should see normal type historical incrementals, slightly different again for the two segments because production enhancements more product sales. So those again are probably in that 25% to 35% range.

So, there is inventory costs are going up, that is one of the more competitive parts of our business. But I think the industry recognizes that and those inflationary costs are trying to be passed along through pricing..

One other point to that, Ian, and that is that with the cost efficiencies that we've put into the company over the last couple of years and that we'll continue to put into the company, say, over the next couple of quarters, we think that we'll get to historic margins at lower revenue levels, say, in reservoir description.

I think that's a lot of attention on that. So we'll be getting margins at lower revenue levels compared to historical patterns..

The next question comes from Taylor Zurcher with Tudor Pickering & Holt. Please go ahead..

Good morning, Taylor. .

Hey morning Larry. Hi, Chris and Gwen. Thanks for taking my question. My first one is a bit of a big picture one as it relates to how you see this, the dynamics of this cycle unfolding between the two segments. So historically, I mean if you just look at R&D, about 60% to 65% of your operating income in prior years.

You're exiting 2021 at a bit of a low point for R&D and a high point for PE and closer to a 50-50 percentage type split.

And as I think about production enhancement, I mean, clearly, you've had success particularly on the new products and technologies with things like the GoGun and likely have continued strong growth in those sorts of markets over the course of 2022.

So I guess my question is a long-winded way of asking, as we think about the next couple of years for Core Labs.

Is it reasonable to assume that production enhancement as a percentage of total might be more balanced for Core Labs in the coming years?.

I think you'll see the biggest mover will be growing reservoir description as a proportion of the revenue for the company. And I would -- I'd say one thing maybe for people that look at the numbers historically over time.

If you go back and look at reservoir description going into the downturn, you'll see that it hung in for several quarters after the downturn hit, production enhancement dropped off very fast and has responded pretty quickly coming back and those of you that have listened to me for a while have heard me say this.

If you find a business that lags on the way down, it proceeds on the way up, buy it. And let me know because I want to buy it, too. Reservoir description lagged on the way down, it's going to lag on the way back up. But what we're seeing here is the lack of investment, and this has played out over many, many cycles over my career.

The lack of investment starts getting traction and people spool up projects and start getting investments going. And then the wheelhouse for reservoir description is in appraisal and development and in early stages of production.

And then finally, when we get later in a project, we get back to enhanced oil recovery programs and late in the life of fields. So that cycle will start building up. And we think reservoir description will be growing at a faster rate than production enhancement over the next couple of years..

Understood, fair enough. And a follow-up just on RD. Chris, I think you said the cost headwinds you're facing in that segment are likely to continue into Q1, maybe into Q2, but just start to get back to more normalized incrementals as we get into the back half of 2022. So it feels to me like double-digit margins exiting the year are pretty attainable.

And I'm just curious if you could help us put some goalpost on what's reasonable for the end of 2022 from a margin perspective.

Do you think you can get back to sort of the mid-teens type operating income margins or just double digits for the time being?.

Yes. I think once we get past Q1, which we talked about a seasonal decline, I think we're going to do a nice job managing detrimental margins in Q1. And then what we're projecting out is that you would see our historical norm -- incremental margins kick in, in Q2 and beyond.

So if you kind of start to model that, 50% to 60% incrementals for that segment and kind of model that out quarter-by-quarter as you take a view on top line there, you'll see that we'll get to double-digit margins, and it could start approaching mid-double digits depending on how quickly things start to grow in the back half..

Good to hear. Thanks for the answers. .

Thanks Taylor..

Okay, Taylor. Appreciate it. .

The next question comes from Marc Bianchi with Cowen. Please go ahead. .

Good morning, Marc..

Hey, Marc..

Hey, how’s doing everybody. So I just want to go back. Larry, you mentioned some market – or you mentioned some growth rates, I guess, for 2022. I just want to confirm that those are growth rates for Core and not the market or maybe they're the same, but I just want to make sure that there are also growth rates you expect for your business.

You said like 15% to 20% for U.S. and low to mid-teens for international.

I mean, is that what you're thinking your revenue in those respective regions would be doing as well?.

Yes. I'd say for Core Lab as a whole up double digits. So 15% to 20%, we think that growth is potential for the company in U.S. operations. And then international, right now, we're just saying low double digits and with a little bit of optimism, probably a little bit better than that..

Yes. I mean -- I guess the follow-on to that is the seasonality that hits you in the first quarter, understandable. And then you're talking about this improvement in the second.

I mean what's the -- I know you guys don't want to guide to a quarterly progression, but just give us a steer if you could, on what the uplift in second quarter is because if it's not a huge uplift, it really implies like a pretty sharp increase in the back half of the year, which -- that my next question is going to be on the increase.

But if you could talk to second quarter to some degree, that would be great..

Yes. Not ready to give second quarter guidance there. There's still a fair amount of uncertainty in how COVID is going to progress and how quickly projects are going to spool up. There's still a bit of start and stop that we're hearing from clients.

And so we do see improvement, I would say, nice improvement from Q1 to Q2 currently, although we're not going to -- we're not in a position to put numbers on that yet. But we do see the second half as being considerably stronger than the first half..

And would you say, what proportion of that outlook for the second half is kind of backed by firm backlog. We don't see orders in backlog for you guys, so it's harder for us on the outside to do that.

But I suspect in RD, there's a fair amount of backlog and production is a bit more kind of transactional and you got to take a view on what the market is going to do to make that projection.

Could you just sort of talk through that a little bit?.

Yes. So we talked about our project board here and understand that a project Board is when clients say, hey, we're going to need you to be ready to go, and we think it's on third week of June. And so whether as we get closer to that, whether their plan slips or not, we can't -- we have no control over that.

But the job board is filling up in a way that gives us confidence in the second half of the year, and we're preparing our business to be ready to accommodate that increase starting, I would say, well, now, but or so in Q2..

Okay. Super thanks so much for the answers..

This concludes our question-and-answer session. I would now like to turn the conference back over to Larry Bruno for any closing remarks..

Okay. We'll wrap up here. In summary, Core's operational leadership continues to position the company for improving client activity levels in both the U.S. and international markets in 2022 and beyond.

We have never been better operationally or technologically positioned to help our global client base optimize their reservoirs and to address their evolving needs. We remain uniquely focused and are the most technologically advanced client-focused reservoir optimization company in the oilfield service sector.

The company will remain focused on generating free cash and returns on invested capital. In addition to our quarterly dividends, we'll bring value to our shareholders through growth opportunities driven by both the introduction of problem-solving technologies and new market penetration.

In the near term, Core will continue to use free cash to strengthen its balance sheet while always investing in growth opportunities. So in closing, we thank and appreciate all of our shareholders and the analysts that cover Core Lab.

The executive management team and the Board of Core Laboratories give a special thanks to our worldwide employees that have made these results possible. We're proud to be associated with their continuing achievements. So thanks for spending time with us, and we look forward to our next update. Goodbye for now..

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect..