Good morning and welcome to the Core Laboratories Third Quarter 2022 Conference Call. All participants will be in the listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Mr. Larry Bruno, Chairman and CEO. Please, go ahead.

Thanks, Faizan. 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 third quarter 2022 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 Q3 performance. In addition, we will 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 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 introduction and deployment of Core Labs 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.

Before we start the 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 that could cause actual results to materially differ from our forward-looking statements. These risks and uncertainties are discussed 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. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Our comments also include non-GAAP financial measures. Reconciliation to the most directly comparable GAAP financial measures is included in the press release announcing our second quarter results. Those non-GAAP measures can also be found on our website. With that said, I'll pass the discussion back to Larry.

Thanks, Gwen. For the third quarter of 2022, Core Lab achieved sequential improvement in revenue, operating income, operating margins, free cash flow, EPS, and EBIT margins. Year-over-year, revenue increased by 7%. For the full company, EBIT margins for the third quarter grew to 11% and operating margins improved sequentially in both business segments. Following Q2's strong 43% sequential incremental EBIT margins, even after accounting for currency devaluations of the euro and the British pound, full company sequential incremental EBIT margins for Q3 grew to over 55%, once again reinforcing the operational leverage available to Core Lab, as global activity improves. Sequentially, EPS grew by 50% to $0.18 per share ex-items. In the third quarter, we saw a modest sequential improvement in demand for lab work in our European, Ukrainian, and Russian operations, as global trade patterns continue to realign. While we anticipate this trend will continue, the situation does pose uncertainties and potential volatility for both lab services and product sales in the company's Russian, Ukrainian, and European markets. Aside from these uncertainties, we expect continued improvement in both business segments across international arenas and in the US for the remainder of 2022 and into 2023. Core continues to execute on its key strategic objectives by: one, introducing new products and services in key geographic markets; two, maintaining a lean and focused organization; and three, maintaining a commitment to deleveraging the company. Now to review Core Lab's strategies and the financial tenets that Core has used to build shareholder value over our 26-plus year history as a publicly traded company. The interest of our shareholders, clients, and employees will always be well served by Core Lab's resilient culture, which relies on innovation, leveraging technology to solve problems and dedicated customer service. I'll talk more about some of our latest innovations in the operational review section of this call. While we navigate through the current challenges and pursue growth opportunities, the company will remain focused on its three long-standing, long-term financial tenets, those being to maximize free cash flow, maximize return on invested capital, and returning excess free cash to our shareholders. Before moving on, I want to thank all of our employees for their dedication, loyalty, and adaptability in meeting all of our clients' needs and for the commitment that many have shown 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 foreign exchange gains and 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. So now looking at the income statement. Revenue from continuing operations was $126 million in the third quarter, up over 4% from $120.9 million in the prior quarter and up almost 7% year-over-year. The sequential increase in revenue was driven by growth in both the US and international markets. However, nice growth in the underlying operations in multiple international regions has been partially offset by the devaluation of the euro and British pound, which I will expand on later in the discussion. Additionally, although we have seen some improvement, the Ukraine-Russia conflict continues to adversely impact service revenue in the affected regions. Of this revenue, service revenue, which is more international, was $87.9 million for the quarter, up 3% sequentially from $85.4 million last quarter. The growth in service revenue this quarter has come from multiple international regions including some recovery from disruptions caused by the conflict in Ukraine. While underlying activity continues to grow, our international service revenue was negatively impacted by foreign currency exchange rates versus the US dollar. Using a constant US dollar, international service revenue would have been translated into an additional $1.5 million when compared to last quarter and an additional $4.3 million when compared to Q3 of last year. The impact of these currency movements during the first nine months of 2022 was approximately $9 million compared to the same period in the prior year. Product sales, which are more equally tied to US and international activity, were $38.1 million for the quarter, up over 7% sequentially and up 15% from last year. US product sales for the quarter were up over 22% sequentially and up over 13% year-over-year. Our energetic product sales into the US markets continue to be the primary driver and were up over 19% sequentially and up over 27% year-over-year. International product sales, which are typically larger bulk orders and can vary from one quarter to another, decreased approximately 4% sequentially but were up over 16% when compared to the third quarter last year. Moving on to cost of services, ex-items for the quarter were a little below 77% of service revenue, which improved from 80% last quarter and 79% from last year. Cost of sales ex-items in the third quarter was 82% of revenue and also improved from 84% last quarter. The improvement this quarter was primarily driven by gains in manufacturing efficiencies and higher US sales. We anticipate improvement in the manufacturing absorption rate in future quarters to be in line with projected growth in product sales. G&A, ex-items for the quarter was $10 million, relatively flat compared to last quarter. G&A, ex-items is anticipated to be approximately $40 million for the full year of 2022. Depreciation and amortization for the quarter was $4.2 million and down a little from $4.4 million last quarter. EBIT, ex-items for the quarter was $13.3 million, up from $9.6 million last quarter, yielding an EBIT margin of 11% and up over 260 basis points sequentially. This quarter marked the company's highest sequential incremental margin since the COVID-19 pandemic. On a GAAP basis, EBIT was $14.6 million for the quarter. Interest expense ex-items was $2.9 million, up from $2.7 million in the last quarter. GAAP interest expense was $3.1 million, which includes writing off $210,000 of unamortized debt costs associated with renewing our credit facility during the quarter. Income tax expense ex-items at an effective tax rate of 20% was $2.1 million for the quarter and on a GAAP basis was $3.9 million for the quarter. Higher tax expense for the quarter was largely impacted by foreign currency gains primarily in the UK, where unrealized foreign currency gains associated with US dollar denominated receivables are subject to tax locally. The company has taken additional steps to further mitigate this type of foreign currency risk to reduce future tax expense associated with foreign exchange rates. The effective tax rate will continue to be somewhat sensitive to the geographic mix of earnings across the globe and the impact of items discrete to each quarter. However, we continue to project the company's effective tax rate to be approximately 20%. Income from continuing operations ex-items for the quarter was $8.3 million, up $2.8 million or over 50% from the last quarter. On a GAAP basis, we recorded income from continuing operations of $7.6 million for the quarter. Earnings per diluted share from continuing operations ex-items was $0.18 for the quarter, up from $0.12 last quarter and GAAP earnings per diluted share was $0.16 for the quarter. Turning to the balance sheet. Receivables were $100.2 million and up slightly from $99.1 million in the prior quarter. Our DSOs for the third quarter were at 67 days, which improved from 69 days last quarter. Inventory was $54.8 million as of September 30th, up approximately $2.2 million from last quarter end. Inventory turns for the quarter were at 2.3 compared to 2.4 in the last quarter. As previously highlighted, the company continues to experience an increase in cost that go into inventory. Additionally, challenges in the supply chain persist, so we continue to carry a larger amount of the inventory to help mitigate disruptions. We anticipate inventory turns will remain at similar levels with some improvement as we progress through the remainder of 2022 and into 2023. On the liability side of the balance sheet, our long-term debt was $185 million at the end of the third quarter. And considering cash of $14 million, net debt was $171 million, or a slight decrease from last quarter. At September 30th, our leverage ratio improved slightly and was 2.42 compared to 2.47 at last quarter end. We are projecting our leverage ratio to continue improving through year-end, with a more significant improvement in the first quarter of 2023. Our debt is currently comprised of our senior notes at $135 million, as well as $50 million outstanding under our bank revolving credit facility. Looking at cash flow, for the third quarter of 2022, cash flow from operating activities was $5.8 million. And after paying for $2.7 million of CapEx in the quarter, our free cash flow was $3.1 million or up $5.7 million from the last quarter. We expect the growth in working capital to moderate cash from operations to strengthen and for the company to generate positive free cash flow in future quarters. We will continue managing capital expenditures to be in line with activity levels for the remainder of 2022. For the full year of 2022, we expect capital expenditures to be in the range of $11 million to $12 million. Core will continue its strict capital discipline and asset-light business model with capital expenditures primarily targeted at growth opportunities and operating efficiency initiatives. Core Lab's operational leverage continues to provide for the ability to grow revenue and profitability with minimum capital requirements. Capital expenditures have historically ranged from 2.5% to 4% of revenue even during periods of significant growth. That same level of laboratory infrastructure, intellectual property, and leverage exists in the business today. We believe evaluating a company's ability to generate free cash flow and free cash flow yield is an important metric for shareholders when comparing and projecting 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. As the fourth quarter of 2022 unfolds, Core anticipates the crude oil commodity price to remain near current levels, but may fluctuate in response to the crude oil supply and demand uncertainties related to slowing global economic growth, inflationary pressures and government-imposed COVID-19 lockdowns in China. Over the long-term crude oil supply is projected to tighten as production growth faces limitations due to prolonged underinvestment in many regions around the globe. As a result, Core expects operators to expand their upstream spending plans into 2023 supporting Core's outlook for continued improvement in international onshore and offshore activity with projects emerging across most regions. These crude oil fundamentals are leading indicators for what Core sees as a strengthening multiyear international recovery. Turning to the US Core expects US onshore activity to remain steady and modestly grow in 2023 as operators remain focused on capital discipline and availability of additional frac crews and drilling rigs may be constrained. As a result, for the fourth quarter of 2022, Core's Reservoir Description segment revenue is projected to be flat to up slightly, while momentum in international activity continues to build near-term growth may be affected by two factors: volatility associated with the Russia-Ukraine geopolitical conflict and client-driven project delays. Production Enhancement segment revenue is estimated to increase by mid-to high single digits as US land activity is projected to remain steady and international growth continues. For the fourth quarter of 2022, Core projects US activity to remain stable and the recent improvement trends in international offshore and deepwater markets to continue. Core projects fourth quarter revenue to range from $126 million to $131 million and operating income of $13 million to $15 million, yielding operating margins of approximately 11%. EPS for the fourth quarter is expected to be $0.17 to $0.21. The company's fourth quarter guidance is based on projections for underlying operations and excludes gains and losses in foreign exchange. Fourth quarter guidance also assumes an effective tax rate of 20%. Now I'll pass the discussion 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 third quarter, revenue came in at $79 million, up 4% compared to Q2. When looking at growth in revenue for Reservoir Description, it is important to consider the sharp devaluation of the euro and the British pound. These currency devaluations lowered Reservoir Description revenue when translated into US dollars by approximately $1.5 million for the quarter as compared to Q2 and year-to-date by approximately $9 million for 2022 compared to 2021. Operating income for Reservoir Description, ex-items, was $8.4 million and operating margins were 11%. Even after accounting for the currency devaluations I just mentioned, quarterly sequential incremental margins for Reservoir Description were still over 70%. As we look ahead while still well below pre-COVID levels, we see the growing international rig count as a harbinger of an improving landscape for Reservoir Description, a trend that we project will play out for the next several years particularly in the Middle East, North and South America, and most other regions. Now for some operational highlights from the third quarter. Core continued to leverage its global reach, expertise, and proprietary technologies to evaluate core and reservoir fluid samples from a multi-well exploration program in the deepwater Orange Basin located offshore Namibia. Conventional core recovered from targeted stratigraphic intervals was scanned using Core Lab's Non-Invasive Technologies for Reservoir Optimization branded as NITRO. A wide range of critical petrophysical parameters for pay delineation were generated using Core Lab's innovative measurement and modeling techniques allowing for rapid delivery of data and early-time assessment of the recovered strata. Selected samples are now progressing through the traditional time-honored program of physical laboratory measurements. Recent successes in Namibia have generated renewed interest in Core Lab's regional study of reservoir and seal rocks from offshore Namibia. This study conducted in collaboration with the National Oil Company of Namibia includes geological analysis of samples from more than 20 wells. This study is just one of 22 multi-well, multi-company studies that Core Lab has conducted on sedimentary basins offshore Africa. In other developments, Core Lab is pleased to announce that during the third quarter of 2022, Quantum Energy Partners and Trace Midstream Management joined Core's Carbon Capture and Sequestration Consortium, bringing total membership to eight participants. These new members enhance the consortium's exposure to both private equity engagement and midstream operations expertise in the emerging carbon capture and sequestration market. The objective of the consortium is to analyze geologic risks and challenges associated with carbon sequestration leveraging Core's expertise and subsurface characterization. Regulatory entities that govern carbon sequestration projects require extensive site evaluation. Core's technologies ensure that the models for simulation and monitoring of CO2 injection and sequestration are built on robust data sets and are applicable for the permitting process. 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 $47 million, up 4% sequentially and up 20% year-over-year. Operating income ex-items was $4.7 million. Operating margins were 10% for the third quarter of 2022 and sequential incremental margins were 44%. During the third quarter of 2022, Core Lab continued to build on the success of its proprietary Plug & Abandonment Perforating System called PAC which is used for oil and gas well abandonment programs. Core Lab provides solutions that leverage its expertise in energetics as an alternative to traditional casing milling, which is slower and more costly. Thus far in 2022, Core successfully deployed its PAC technologies in over 30 wells in the North Sea. Core's PAC energetic solutions are often used in Perf Wash Cement applications. This technique enables the operator to selectively establish circulation in the annular space between casing strings, thereby creating pathways for setting the permanent cement plugs required for well abandonment. Over on the service side of Production Enhancement, operators continue to leverage Core's expertise in completion diagnostics for offshore wells during the third quarter of 2022. Core SpectraStim, SpectraScan, and PackScan downhole imaging technologies were utilized in deepwater Gulf of Mexico Miocene wells to evaluate single and dual zone frac pack completions. In addition to those technologies, Core's FLOWPROFILER oil diagnostics were used to assess the production in ultra-deepwater Gulf of Mexico reservoirs involving multi-zone completions. The costs associated with completing multiple wells in these high stakes deepwater wells necessitate confirmation that each frac pack is properly configured and each targeted zone is contributing oil production as per the completion plan. Recently, Core's Production Enhancement team was tasked to deploy a unique FLOWPROFILER diagnostic tracer in each of four frac pack completion zones. Core's proprietary laboratory analytical techniques on produced oil samples confirmed that all four zones were contributing to production. FLOWPROFILER also helped the operator understand how the reservoir was responding allowing them to adjust flowback procedures to achieve the drawdown pressures that would optimize production without damaging the reservoir. Core's completion diagnostics are a critical tool for determining whether planned completion programs were successfully executed downhole many thousands or even tens of thousands of feet away from the wellhead. That concludes our operational review. We appreciate your participation, and Faizan, we'll now open the call for questions.

Thank you very much. We will now begin the question-and-answer session. The first question comes from Stephen Gengaro from Stifel Financial Corporation. Please go ahead.

Good morning, Stephen.

Thanks, good morning, everyone. I have two questions, if that's alright. First, regarding the Reservoir Description side, I'm aware of the FX challenges. However, we consistently hear from other service companies and large E&Ps that we're on the verge of significant international growth in 2023 and 2024. How should we be assessing the RD business in that context? Should we anticipate consistent double-digit year-over-year growth in this area? I'm trying to understand how the growth rate might look based on historical trends, while also considering the various factors at play.

Yes, I agree with you. We're entering a multiyear upcycle that will significantly benefit Reservoir Description. As we've mentioned to you and other analysts and investors, Reservoir Description typically follows directional trends. We've noted this for some time. It remained resilient during the COVID pandemic when many service companies heavily involved in well construction experienced sharp declines. Reservoir Description performed well during that period. Currently, the indicators for increased activity, particularly the international rig count, are showing positive momentum. We expect this trend to continue, aligning well with our conversations with clients. As a result, Reservoir Description should see improvements in its margins, which were around 11% for Q3. While we anticipate that the growth may not progress as smoothly as we would all prefer, we believe this marks the start of a promising upcycle, allowing us to return to solid double-digit margins.

Great. Thanks. That's helpful. And obviously the quarter was really strong on the margin side. When we look at the Energetics business in the US land market, it sort of seems to have evolved. And there seems to be a lot of offerings on the sort of the integrated side, but you had a really good quarter there. Can you talk about some of the underlying positives that sort of drove the product sales in North America in the third quarter?

Sure. Gwen, why don't you get into some of the details here.

Yeah, Stephen. So in spite of the completion activity, I mean increased a bit, but it was a little bit anemic compared to other quarters. With our energetic sales, though we outperformed the activity both completions and frac spreads kind of as our markers there. And so with our US sales we were up about 19% sequentially and 27% year-over-year. So that's penetration into the market with our existing energetic products that we have. And then we also did pretty well internationally. And as you recall, those can be bulky and they can move quarter-to-quarter. And so in Q3 we had some nice shipments there as well.

And just real quickly on that front, anything on the pricing front around the Energetics business right now in North America?

Yes. Getting some pricing improvements. As you know that area of the market was hit pretty hard during COVID. And we've been working with operators wireline companies since and we've seen some nice, let's say modest pricing improvements to date.

Great. Thanks for the color.

Okay. And Stephen I might add to that that we are seeing really nice penetration and demand for our premium energetics, which has always been sort of the bulwark of our products business.

Thank you. The next question comes from John Daniel from Daniel Energy Partners. Please proceed.

Hey, John.

Hi, guys. Thanks for putting me in. Just two questions for you this morning. You noted renewed interest in some of the studies. And I'm curious, as you look back historically, as you've seen interest rise for reviewing and study purchases, how long does that translate into more business, whether for you or just for the industry at large?

Yeah. So, interesting model that we have on those, John. We collaborate on their international studies. We collaborate with national oil companies. And we deliver those to the original participants when we complete the analytical program. And then we retain a resale right on that data. So it was a cabin off-the-shelf sale, which yields some pretty high margins when we do that. We're usually sharing those with our collaborative partner with the national oil companies. But what we see on those is I would say after a quiet several years of interest in these offshore studies from the Africa offshore Africa market all of a sudden that's picked up pretty nicely in the last quarter or so. So we think we're early in the reconnaissance phase where people are starting to reengage and look at opportunities that they might have had on the shelf during a period of turbulent activity in the industry.

Okay. Fair enough. And then you also noted the success of the PAC system. And as I read the commentary on that, it sounds like it's more of a system designed for offshore wells in the P&A process?

Primarily that's correct. Yes, we do have some offerings that we would use in land business. But the big market and what we focus our efforts on, the sort of the big upside for us on the well abandonment and plug and abandonment programs is on the complex offshore wells. I referred to this at times as there's an energy transition aspect to this. It's going to take decades to plug and abandon all of the offshore wells that have been drilled. And so we're still adding new ones. The rig count is going up, and new wells are being added. It's going to be a very nice long horizon. And so we focused some efforts on making sure that we are well represented there with our innovative technologies.

Okay. The reason I ask about it is that when I speak with people in the field, they often mention that in the onshore market, E&P companies typically choose the lowest bid when it's time to plug and abandon a well. I'm curious, given the current emphasis on ESG and doing things correctly, whether you anticipate greater adoption of technology or sophistication in onshore P&A moving forward. What's your perspective on this?

Yes, I think there will still be some evolution in the design of onshore wells. While I hesitate to call it simple, it is less complex compared to offshore wells with multiple casing strings and completion zones. I agree with your point that there is a costly way to manage these effectively, which is where we have concentrated our efforts, such as with the PAC system and our plug and abandonment solutions. We have saved clients significant amounts of money and rig time by avoiding the need to mill out tough steel and casing strings, instead using our energetic systems to establish the necessary pathways for cement plugs. So, yes, cost is a priority, and we are utilizing our technologies to lower expenses and save time.

Okay. Awesome. Thanks, Larry. Thanks, Gwen.

Yes. You’re welcome, John.

Thank you. Next question comes from Don Crist from Johnson Rice. Please proceed.

Hey, Don.

Good morning. How are you?

Good.

I wanted to ask about just the geographic leverage. I mean, obviously, we're seeing activity pick up in Brazil, West Africa, Middle East, et cetera. Is there one area that you have more geographic leverage to than another? And should we monitor where rigs are going into Brazil might be better for you all versus West Africa, et cetera?

Not particularly, John. I believe we have a broad international presence with operations in Brazil, various countries in the Middle East, Asia Pacific, and Africa. This positions us well. While a sprawling infrastructure can be a drawback during challenging times, it allows us to capitalize during favorable conditions. To provide more insight, the Middle East is currently seeing a significant uptick in activity. We operate in four different countries there, but I won't delve into specifics as I only have one client in some of those locations, which could make it easy to identify them. Overall, the Middle East is advancing faster and more significantly compared to other regions. The South Atlantic margin has also been beneficial for Core Lab over the years and appears to be improving. We've expanded our operations in Brazil and I would keep an eye on both sides of the Gulf of Mexico for potential opportunities. Additionally, West Africa has been relatively quiet for us lately, but I believe there is renewed interest as people reassess opportunities, particularly in offshore and some onshore projects in Africa.

Yes. The only other thing I would keep in mind is that the rocks and fluids are mobile. So it's pretty often that they'll come to one of our advanced technology centers for the more advanced testing.

The hub and spoke structure has served us very well. So we want to be close to where the activity is. And then to maximize our utilization of our technologies we'll ship those samples around to our major centers.

I appreciate all that detail. And just one final one for me. Obviously, there's still a lot of tension in Europe with the Russia situation. And we're coming up on a decision point here on December 5. But the assay work on Russian crude, is that completely out of your model today i.e. if Russia quits exporting crude, that will not hurt you going forward? Is that a correct statement?

No, I don't think that's correct. We still have clients, including those in Europe, who want us to be part of their activities. This includes Russian crude. From my perspective, both sides need to keep the crude flowing; the Russians need to maintain their exports, and the rest of the world relies on the oil coming from Russia. If that doesn't happen, we could see a spike in oil prices. I believe there will be some arrangement made to ensure the flow continues. We have tried to assess the risks and uncertainties that could impact us, but predicting the near to mid-term is challenging. However, I am optimistic that the principles of supply and demand for crude oil will prevent Russian oil from being excluded for an extended period.

Okay. I appreciate the color. I will turn it back. Thank you.

Okay.

Thank you. The next question comes from Simon Galligani from Awilco. Please proceed.

Hi, Simon.

Good morning. Hi. Just a brief question. You announced the ATM in early June and then later you announced the debt refinancing. Can you guys elaborate on your current thoughts on the ATM? Thank you.

Sure. This is Chris. We have not sold any shares under the ATM. I would say we're not planning to sell any shares unless we need to. So that was put out there with what happened I think during the first quarter and you see how that impacted us the conflict and whatnot but we've recovered partially from that. But keep in mind we do have $75 million of notes that come due next year. And we're working to improve the liquidity in the company and how we're going to retire that or sort of refinance those. So we're keeping multiple options open, but we're going to try to do it without utilizing the ATM.

And just to expand on one point that $75 million note that comes due next September was a 12-year note. So set up in a different time, but it just happens to be coming due now. And so I wanted to have options and if we needed to, but as Chris mentioned we have not sold the shares under the ATM.

Okay. Thanks very much.

You’re welcome.

Thank you. The next question comes from Dan Kutz from Morgan Stanley. Please proceed.

Good morning, Dan.

Good morning, Gwen. So I just wanted to kind of follow up on the kind of capital allocation a lot of questioning. I guess, considering that you have the maturity next year, if you put the leverage target out there of 1.5 times. So appreciating that those two are factors. I was just wondering if you could help us think through your calculus and thoughts around potential increases in shareholder returns, what you would need to see to feel comfortable starting to consider that? And what would kind of be your preference between raising the normal dividend or buybacks or some kind of special dividend? Just generally, your thoughts around shareholder returns would be great.

Sure. I don't think that has really changed. We've tried to message that consistently. So I think when we think about raising the dividend, we want to do that in a way where we think it's sustainable. So I think as we get into a recovery, the way we would return cash to shareholders is through our buyback program. Initially, it does provide a little bit more flexibility if you will versus committing to a dividend. But I think once we get the leverage ratio down and that's sort of not consideration with respect to that, and we're comfortable with the forecast you would see us start to consider raising the dividend.

Great. That's really helpful color. And then, I saw in the press release that you guys are making progress in the CCS Consortium. You added two members, I think. Just wondering if you could give us an update in terms of the opportunities that you're seeing in the CCS space for Core Lab. And if you could remind us anything you've said on what the medium- or longer-term prospects could be in that market? Thank you.

Yes, it's still early in the process. Core Lab is being cautious and waiting until we can profitably generate revenue from this initiative. We have taken a multifaceted approach. Previously, we announced a strategic alliance with Talos, which is well positioned to excel in CCS projects in the future, and we have a strong relationship with them from our work in their oil and gas production. This made sense for us. Additionally, we formed a consortium with the University of Houston to leverage Core Lab's expertise in understanding the long-term effects of injecting large volumes of CO2 underground. This process will interact with pore fluids and rocks, making the water more acidic and potentially causing compatibility issues between rocks and fluids. Our focus is on the technical aspects, such as evaluating seal rock and assessing how formations respond to CO2 injection. Financially, we believe that as this sector develops, it could represent 5% to 10% of Core Lab's business in the future, though we are not there yet. However, we are in a stronger position than some firms discussing future opportunities, as we are actively involved in projects and have more initiatives in the pipeline than we've had up to this point.

Great. Thank you, Chris and Larry. Thanks. Gwen, I’ll turn it back.

Okay. You’re welcome. Thanks, Dan.

Thanks, Dan.

Thank you. The next question comes from David Smith from Pickering Energy Advisors. Please proceed.

Hi, David.

Good morning. Thank you for taking my question. So apologies I jumped on the call a little late. Sorry if I missed this. Did I hear that US Production Enhancement revenue was up 19% sequentially, or was that just a reference for Energetics?

That was a reference for Energetics.

The US product sales were up 20-plus percent sequentially.

Yes.

Yes. I was just wondering if you gave any details on the total US growth sequentially because that – even that level of product growth would kind of suggest a decline in total international for the segment. And I was just wondering if that maybe lines up with just the FX impact.

Yes. So this is Chris. So US was up over 20% sequentially. But international product sales out of PE were down this quarter. And when we talk about that, those are larger bulk orders and they can be a little lumpy from quarter-to-quarter. So – and those are not as subject to the FX impact like our service revenues that are coming through Europe and whatnot. Those are usually billed in dollars. So they don't – there's not as much currency impact in our Production Enhancement segment. Just to put that in perspective, the international product sales were up 16% year-over-year. They're just down and can be a little lumpy quarter-to-quarter when you're looking sequentially.

Got it. Makes perfect sense. And the follow-up question is solid incremental margins for production enhancement this quarter. Is that a function of a better mix with the Energetics growth? Is that just the segment getting to the kind of incremental margins you would normally expect?

Well, I think we had a really nice pickup in the US, which is the primary market for the manufacturing so some nice manufacturing efficiencies, and we have had some pricing traction. I would say the pricing isn't keeping up with inflation but it's a combination of manufacturing efficiencies as product manufacturing expands but then also some benefits from some pricing picking up. We don't model that kind of incremental margin going forward. But when we have a nice quarter, it can get up to those levels.

I think more consistently we would look at margins on the manufacturing side. On the product side of the company, which is almost entirely in PE, look at that for 25% to 35% incremental margins.

Right. And our services side of that segment also had some nice growth too. So when they start to pick up, we talk about on the service side the incremental margins can be stronger so it can actually improve the sequential incremental margins for the segment as well.

Got it. Thank you. If I could sneak one more in?

Sure.

Did you provide any characterization of the SA work in Q3 relative to Q2? I mean I saw the modest improvement referenced in the press release. But just wanted to ask if you could provide any rough numbers on the revenue improvement.

Yes, up mid-single digits.

Right.

Thank you so much.

Yes, sure.

Thank you. The next question comes from Samantha Hoh from Evercore ISI. Please proceed.

Hey, guys. Just a quick for the housekeeping. The CapEx guide, I mean it seems like kind of just worked this way down from the initial $15 million to $18 million guide for the year. Can you maybe talk to what is driving that? Is it a timing issue? And just some of it roll into next year? And just also where your CapEx is going towards these days?

I don't anticipate any significant changes in our capital expenditures. They may be slightly lower, as we are very careful with our capital investment decisions at Core Lab. We require solid reasoning and appropriate returns before proceeding with any investments. However, it's important to note that no good idea goes unfunded within the lab network at Core Lab. We've also streamlined our geographic presence by consolidating some locations, which has helped minimize the capital expenditures we would have otherwise incurred on facilities. Thus, there isn't a substantial shift in our approach; one of the advantages of being asset-light is that we do not have to replace a lot of outdated equipment over time, unlike some other oilfield service companies. Overall, our cautious approach to capital spending reflects our goal of generating free cash flow while focusing on reducing the company's debt and achieving operational efficiencies through reorganization and geographic optimization.

And Sam, when you look at the numbers, in terms of modeling where the dollars go to Larry's point about no good idea going unfunded, approximately two-thirds of that is allocated towards new technology and about one-third goes towards projects that lose their life in the laboratory environment.

That's very informative. Now, turning to some of your newer initiatives, it's fascinating to see the CCUS Consortium expanding to include private equity and midstream partners. I'm curious if this approach of involving non-upstream partners early on has been utilized in past studies, or do they typically come in later as projects begin to mature?

Yeah. So to be clear, this is the first non-upstream consortium project that we've done. Everything else that we've done, the hundreds of multi-company studies that we've done over decades have all been focused on subsurface reservoir characterization seal evaluation. Some have had implications on completion design say in the Permian Basin and all evaluating the rocks and fluids and how to get the most out of that. This is the first one that's not focused on some upstream application. So, like for example, EOR in Unconventional that was a technology study but it was still focused on upstream oil and gas production. The CCS Consortium is not focused on upstream oil and gas production. We're very happy to see a, I would call it, a very nice blend of some very well-known and respected nameplates on the oil and gas operator side that are seeing CCS opportunities either for their own initiatives or to become a player in that arena, but also getting some private equity and midstream engagement here I think broadens the discourse for us on how companies are going to develop effective economic models for CCS projects.

Yeah. The only thing I would add is that historically with our traditional projects there, I don't remember any midstream type companies buying in, but as assets were changing hands, private equity firms have bought those studies in the past.

That's correct.

I'm surprised that geothermal hasn't been brought up yet, as it seems like a trend that would align well with your focus. Could you provide more details on this? Is there a possibility for your company to engage in that area?

Sure. This could be a lengthy discussion, but we have limited time. Geothermal can be divided into two main categories: the hot rock hot fluid systems and the warm rock warm fluid systems. Projects like the Geysers in California are examples of long-term geothermal projects that utilize very hot rock. These projects are located in relatively shallow areas, typically hundreds to thousands of feet deep, and they extract hot fluids from the earth to heat water, creating steam that generates electricity. Occasionally, we participate in these hot rock projects, having worked on some in Indonesia. They are usually found in tectonically active regions where hot rocks are nearer to the surface. However, a challenge arises when trying to core wells at temperatures around 700 to 800 degrees, making it difficult to collect core samples. While we sometimes analyze rocks on the periphery of these projects, our involvement in this area is limited, and we have some capabilities in assessing fluid and rock compatibility, but it does not represent a significant part of our business.

Okay, great. Thanks so much, guys.

That concludes our operational review. We appreciate your participation, and Faizan, we'll now open the call for questions.

Thank you very much. We will now begin the question-and-answer session.

I think we'll wrap up there. In summary, Core's operational leadership continues to position the company for improving client activity levels in both the US and international markets for the remainder of 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 maximizing free cash and returns on invested capital. In addition to our quarterly dividends, we'll bring value to our shareholders via growth opportunities driven by 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 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.

Thank you. Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.