e Laboratories (US:CLB)2020-07-23 17:03Financial Data and Key Metrics Changes - Revenue from continuing operations was $115.7 million in Q2 2020, down approximately 24% from $152.4 million in the prior quarter [22] - Free cash flow generated was almost $24 million, marking the 75th consecutive quarter of positive free cash flow [11][30] - Net debt was reduced by approximately $23 million, ending the quarter with a leverage ratio of 2.21 [18][29] - Income from continuing operations excluding items was $6.1 million, down 55% sequentially from $13.7 million last quarter [27] Business Line Data and Key Metrics Changes - Service revenue was $91 million for the quarter, down from $110 million last quarter, impacted by a significant decrease in drilling and completion of U.S. onshore wells [22] - Product sales were $24.7 million, a decrease of 42% from $42.4 million last quarter, with U.S. onshore market sales down over 60% [23] - Cost of services for the quarter was 74% of service revenue, consistent with the prior quarter, while cost of sales was 96% of revenue, up from 81% last quarter [24] Market Data and Key Metrics Changes - North America experienced a sharper decline of 44% in revenue compared to a 10% decrease in international revenue [22] - International activity is projected to be down approximately 10% to 15% year-over-year [35] - The company expects delays in project work and international shipment of projects to improve somewhat during the second half of 2020 [35] Company Strategy and Development Direction - Core Laboratories focuses on maximizing free cash flow, maximizing return on invested capital, and returning excess free cash to shareholders [10] - The company is committed to introducing new technologies and maintaining a strong internal pipeline for technological offerings [13] - Cost reduction initiatives are expected to benefit future financial performance significantly, with projected savings of over $9.3 million per quarter for Reservoir Description and over $5.9 million for Production Enhancement [37] Management's Comments on Operating Environment and Future Outlook - Management acknowledges the challenges posed by COVID-19, including reduced oil demand and operational disruptions [9] - There is cautious optimism for recovery in client activity as economies emerge from COVID-19-related restrictions [34] - Management expects that the cost reductions implemented will benefit financial performance in both segments moving forward [37] Other Important Information - The company executed an amendment to its revolving credit facility, increasing the maximum leverage ratio permitted from 2.5x to 3x through June 30, 2021 [18] - The company recorded charges of $13.3 million in Q2, primarily associated with inventory write-downs and severance [21] Q&A Session Summary Question: How do RD margins progress in the second half? - Management indicated that while current margins are strong, future margins could see fluctuations due to operational activity volatility [47][49] Question: Can you help size the impact of budget reductions versus COVID disruptions? - Management noted that most of the recent revenue shifts were largely COVID-19 related, with capital budget adjustments expected to manifest over a longer term [52][55] Question: What is required for Production Enhancement to reach breakeven margins? - Management stated that a slight improvement in activity could lead to breakeven EBIT, but sustained activity recovery is necessary [70][72] Question: Can you quantify the incremental benefit of cost savings moving forward? - Management explained that cost reductions were implemented earlier in Reservoir Description, while Production Enhancement would see more benefits in Q3 [68][72] Question: What changes have occurred in the organization to sustain fixed costs? - Management highlighted ongoing lab automation efforts and technology development as key strategies to maintain sustainable fixed costs [88]