Core Laboratories Inc. 2026 Q3 Earnings Call

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 2026 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'll review Core strategies and the three financial tenets that Core Lab 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 introduction and deployment of Core Lab's technologies, as well as highlighting some of Core's operations, recent client interactions, 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. 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 third quarter results.

Those non-GAAP measures can also be found on our website. With that said, I will pass the discussion back to Larry.

Thanks, Gwen. Moving now to some high-level comments about our third quarter 2026 results. Compared to the second quarter, operational performance improved nicely with higher revenue, operating income, operating margins, and earnings per share. Core continued to execute its strategic plan of technology investments targeted to both solve client problems and capitalize on Core's technical and geographic opportunities. The ongoing military conflict in the Middle East, which began during the first quarter of 2026, continued to affect operations, causing project delays and logistical disruptions across several countries where the company operates. Reservoir Description experienced the greatest impacts of the Middle East conflict as crude assay work and reservoir characterization projects depend on predictable field operations, active maritime hydrocarbon trade and transportation, timely sample acquisition, and access to client facilities.

The intermittent closures of the Strait of Hormuz and the widespread disruption to maritime hydrocarbon transportation routes throughout the third quarter extended beyond the Middle East region as the global movement of hydrocarbon cargoes was impacted. There was some improvement in the movement of hydrocarbon shipments in the last weeks of the quarter, but activity remained below pre-conflict levels through quarter end. In addition, escalating attacks on energy infrastructure in Russia and Ukraine, together with evolving sanctions, created further headwinds. Production Enhancement remains comparatively less impacted by these geopolitical conflicts, although some product shipments have been delayed and Middle East field operations have been suspended from time to time. Looking at Reservoir Description, third quarter revenue was up 7% from Q2 of 2026, but down 4% compared to Q3 of last year. Third quarter operating margins in Reservoir Description ex items were 10%, up from 5% in Q2.

Despite the multiple factors impacting Core Lab's third quarter results, Reservoir Description achieved higher sequential revenue, operating income, and operating margins. Throughout the quarter, the company maintained its focus on creating new technology offerings, maximizing operating efficiency, and leveraging its global network to support client operations. In Production Enhancement, third quarter revenue was up 4% compared to Q2 of 2026. Third quarter 2026 operating margins in Production Enhancement ex items were over 9%, down from 12% in Q2 of 2026, reflecting a greater proportion of product sales versus higher margin diagnostic services when compared to the second quarter. Even in this challenging operating environment, product sales improved during the quarter in both U.S. land and international markets, reflecting continued operator adoption of Core Lab's advanced completion technologies.

The company maintained its longstanding commitment to shareholder returns during the quarter, returning free cash to our shareholders through our quarterly dividend and by repurchasing approximately 88,000 shares of company stock, representing a value of $1.1 million. Q3 marks the eighth consecutive quarter of share buybacks. Core intends to continue to use free cash to fund our quarterly dividend, pursue growth opportunities, reduce debt, and improve shareholder value through opportunistic share repurchases. Considering current market dynamics and looking out over the mid and longer term, Core Lab has decades of experience supporting clients through periods of geopolitical uncertainty. The company's longstanding presence in the Middle East, along with its proprietary technologies and dedicated employees, will allow Core Lab to continue serving its clients across this strategically important region. Moreover, despite near-term headwinds, Core's global operations, asset-light business model, and diversified technology portfolio position the company for long-term success.

For 90 years, Core Lab's resilience, technical leadership, and unwavering focus on client service have enabled the company to deliver differentiated solutions that help our clients de-risk their operations and their operational decisions. As we move ahead, Core will continue to execute on its key strategic objectives by, one, introducing new product and service offerings in key geographic markets. Two, maintaining a lean and focused organization. And three, maintaining our commitments to returning excess free cash to our shareholders while preserving the company's strong balance sheet. Core's strengths, together with disciplined capital deployment, continued free cash flow generation, and the company's commitment to returning excess capital to its owners, will drive long-term value creation for Core Lab shareholders. The interest of our shareholders, clients, and employees will always be well-served by the company's resilient culture, which emphasizes innovation, the application of technology to solve complex problems, and dedicated customer service.

I will talk more about some of our latest accomplishments in the operational review section of this call. Now to review the company strategies and the financial tenets that have guided Core Lab shareholder value creation through our 31-year history as a publicly traded company. While we continue to pursue growth opportunities, the company will remain focused on its three longstanding long-term financial tenets. Those being to maximize free cash flow, maximize return on invested capital, and returning excess free cash to our shareholders. I will 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 excluded the impact of any FX gains and losses and assumed an effective tax rate of 25%. Accordingly, our discussion today excludes any foreign exchange gain or loss for current and prior periods. The comparison periods for the second quarter of 2026 and the third quarter of 2025 also include items that were discussed on those calls and highlighted in our earnings release for those periods. These items have also been excluded from our discussion of the financial results today. You can find a summary of those items in the tables attached to our press release for the third quarter of 2026. Now looking at the income statement.

Revenue was $132.1 million in the third quarter, up 6% compared to the prior quarter and down 2% year-over-year. Sequentially, we saw growth and demand for our completion products in both the U.S. land and international markets, while service revenue increased in several international regions. The conflicts in both Russia, Ukraine, and the Middle East have continued to primarily impact service revenue. Of this revenue, service revenue, which is more international, was $96 million for the quarter, up 2% sequentially and down 5% year-over-year. Our service revenue associated with crude assay services and proprietary studies continue to be impacted by the geopolitical conflicts in the Middle East and Russia, Ukraine, which are the primary reason for the year-over-year decrease. However, growth in other regions outside these affected areas offset some of the impact.

Sequentially, service revenue is up as we continue to see increased demand for our reservoir rock and fluid analytical programs in nearly all international regions, including the Middle East. However, the increase was partially offset by a lower level of well completion diagnostic services as several large projects scheduled for the third quarter were delayed due to changes in the client's schedule. Product sales, which are more equally tied to North America and international activity, were $36.1 million for the quarter and were up 19% sequentially and 8% year-over-year. Sequentially, we saw improved demand for completion products and a growing adoption of our proprietary completion technologies in the U.S. International product sales were also up nicely and up 31% compared to the second quarter. As a reminder, international product sales are typically larger bulk orders and can vary from one quarter to another.