Ladies and gentlemen, good morning, and welcome to the Select Water Solutions Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Garrett Williams, Vice President, Corporate Finance and Investor Relations. Please go ahead, sir.

Thank you, operator, and good morning, everyone. We appreciate you joining us for Select Water Solutions conference call and webcast to review our financial and operational results for the third quarter of 2024. With me today are John Schmitz, our Founder, Chairman, President and Chief Executive Officer; Michael Skarke, Executive Vice President and Chief Operating Officer; and Chris George, Executive Vice President and Chief Financial Officer. Before I turn the call over to John, I have a few housekeeping items to cover. A replay of today's call will be available via webcast and accessible from our website at selectwater.com. There will also be a recorded telephonic replay available until November 20, 2024. The access information for this replay was also included in yesterday's earnings release. Please note that the information reported on this call speaks only as of today, November 6, 2024, and therefore, time-sensitive information may no longer be accurate as of the time of the replay listening or transcript reading. In addition, the comments made by management during this conference call may contain forward-looking statements within the meaning of the United States Federal Securities laws. These forward-looking statements reflect the current views of Select's management. However, various risks, uncertainties and contingencies could cause actual results, performance or achievements to differ materially from those expressed in the statements made by management. The listener is encouraged to read our annual report on Form 10-K, our current reports on Form 8-K as well as our quarterly report on Form 10-Q to understand those risks, uncertainties and contingencies. Please refer to our earnings announcement yesterday for reconciliations of non-GAAP financial measures. Now I would like to turn the call over to John.

Thanks, Garrett. Good morning, and thank you for joining us. I am pleased to be discussing Select Water Solutions, again with you today. During the third quarter, Select delivered another quarter of continued margin improvement and profitability gains while generating solid free cash flow. On a consolidated basis, we were able to grow revenues, improve gross margins and increased net income compared to the second quarter. Despite activity pullbacks and the broader macro environment as revenue and margin outperformance in our Water Infrastructure segment continued to fuel our unique growth story. In addition to these operational gains, we were able to reduce SG&A during the third quarter, supporting net income growth of 26% compared to the second quarter. At a segment level, we grew water infrastructure revenues by 20% and gross profit before D&A by 33% compared to the second quarter of 2024. And on a year-over-year basis, the third quarter delivered 40% growth in revenue and 99% growth in gross profit before D&A compared to the third quarter of 2023. We play a critical role in the market, and I am very pleased to see our continued execution, resulting in another quarter of record high revenue and gross profit for the segment. Underpinning our performance is a combination of improved operations, organic recycling and disposal infrastructure projects and highly strategic accretive acquisitions. On the operational side, we continue to increase base utilization, driving increased margins, resulting in a 57% gross margins before D&A for our Water Infrastructure segment this quarter. On the project front, we continue to add new organic business development wins. In the third quarter, we entered into multiple new long-term contracts, adding an additional 25,000 acres under long-term dedication in the Permian Basin, an additional 57,000 acres under right of first refusal. In addition to our…

Thank you, John, and good morning, everyone. During the third quarter, we achieved growth in our overall profitability, generating solid free cash flow and continue to execute on our strategic objectives in our Water Infrastructure segment. Accordingly, our Water Infrastructure segment continued its steady growth trajectory, once again achieving record high quarterly revenue and gross profit results during the third quarter. While commodity prices and industry activity have presented challenges to our Water Services and Chemical Technologies segments, our consolidated company remains very well positioned to achieve the milestones we set out at the beginning of the year. For example, we remain on track towards achieving record adjusted EBITDA and adjusted EBITDA margins, while handling record volumes in our growing Water Infrastructure business. We also continue to build a more infrastructure-based production-levered full life cycle water company that aligns our future profitability and cash flow generation with critical secular growth drivers unique to our business. Even though the North American Lower 48 activity landscape may experience muted growth in the near term, we expect our unique business model and successful water infrastructure investments to deliver outsized growth throughout 2025. Our Water Infrastructure segment continues to benefit from the increased utilization of existing assets, the integration and networking of strategic acquisitions as well as the overall secular industry trends, which require increased recycling, highly automated water networks and increasingly high volume and complex well completions. Combination of stable disposal volumes, growing solid waste management volumes and significantly increased recycling volumes, partially driven by the pull forward of activity John referenced earlier, generated an above expectations revenue growth of 20% to $82 million during the third quarter. Gross profit for the third quarter, which we customarily provide in terms of prior to depreciation, amortization and accretion, improved to $47 million for water…

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions] The first question comes from the line of Jim Rollyson from Raymond James. Please go ahead.

Hey good morning gents and congrats on outstanding performance in Water Infrastructure. John, you set out with the 50% margin goal in that segment quite a while back for 2025, obviously, have exceeded it this year. Kind of curious as you look -- you've talked about the margin and the profile of these long-term contracted projects embedded in what your CapEx decisions and pricing and all that. Just kind of curious as you look forward over the next year or two, from this 56%, 57% kind of margin range, like where do we go from here? Because it seems like you're not -- even with the pullback in 4Q, you're still looking at healthy margins. I'm kind of curious how you see the margin trajectory over the next handful of quarters?

Yes, Jim, thanks for the nice remarks. Yes, the infrastructure piece and the investment piece is and what we start off with is completely still intact. And when you think about the margin base of our goal was 50% and we just printed a 57% and we continue to see really good movement in being added assets to this whole opportunity to water balance and some of those assets and some of those movements produce margins that are greater than other water balancing margins as you either recycle a barrel and deliver it for a frac job or you turn that barrel into storage or you send that barrel to a disposal. It's just different margin profiles. But within that 50% to 60% is where we're thinking this long-term infrastructure business works and some of it works at the higher end.

Yeah. I mean one thing I might add to it, Jim. When we think about what's been driving the efficiency so far, it's really kind of a combination of factors. The asset base we have in place today still has utilization, potential to increase overtime. And every incremental barrel we can pull-through that existing platform, can come through at a high incremental margin profile. We've been able to integrate assets, I think, efficiently as well, probably more efficiently than we were expecting from kind of a timeline standpoint. And then the underwriting, we continue to execute on from a new contract perspective continues to be additive to the segment overall. So I think that we still generate obviously a very attractive return anywhere in that 50% to 60% kind of range John spoke to, but we definitely feel good about where we're at now and things that we can maintain or find opportunities to continue to improve those levels over the next year or two.

Yeah. That's fantastic. And maybe as a follow-up, Chris, so if you take ignoring the noise in the fourth quarter with some of the transition things that are going on, if you look at 3Q as kind of a base for water infrastructure, and then you layer on the contracts you've announced over the last couple of quarters, and obviously, you continue to add to, but just taking the ones you know that you have in hand right now, how does that kind of flex up your revenue run rate in that business? Like by the time we get to late next year when all these projects are actually online and running, where do you think that revenue run rate is at that point before you add more contracts to it, I'm sure.

Yeah. Maybe the way I'd speak to it, Jim, is really looking at the capital investment opportunities is kind of a base driver of that growth. We do obviously have utilization uplift that we can execute on organically without a lot of material capital investment. But the $150 million or so of growth capital that we've got slated to go into that segment over the course of the year and into early part of next year is obviously going to be driving a key opportunity for that both revenue and more importantly, profitability growth. And that return framework that we're putting into place around that capital dollar is consistent with what we've spoken to before, around that three to four-year, cash-on-cash with opportunities to continue to improve that with commercialization and incremental utilization uplift. So thinking about it as a return framework similar to that alongside a mid-to-high-50s margin profile, kind of gives you the guardrails to kind of look at the outlook in next year and I think there's ways we continue to add on to that.

Pretty significant growth. Thanks for the color.

Thanks, Jim.

Thank you. The next question comes from the line of Bobby Brooks from Northland Capital Markets. Please go ahead.

Hi, good morning, guys. Thank you for taking my question. First thing I wanted to -- I just wanted to get a sense of how much of an impact to fourth quarter EBITDA. Are those two facilities Delaware being taken off-line? Is that pretty -- is that -- I know you kind of spoke about it a little bit more in the prepared remarks, but can you think about that $10 million step down that sequential step down from the third quarter EBITDA all stemming from – 0all stemming from that? Or how much maybe is just kind of the seasonal slowdown.

Yes. It's really kind of broken down into the segment components, Bobby. But on the infrastructure side, the majority of that decline is going to come from those kind of asset-specific downtime issues. So that's going to be over half of that revenue decline in the fourth quarter coming from those specific assets. You'll see some seasonal impact to that segment, but it's obviously got more stability to it overall. And we fully expect our disposal and solid management volumes to remain steady to the third quarter in Q4. So it's really coming from those asset areas. The services side of the business is going to have more specific seasonal impact to it. You will see some kind of affiliated impact to that segment from particularly our last mile logistics and water transfer business in the Permian Basin that we have that supports those infrastructure assets, but you are going to have more seasonal impact directly to that segment. Obviously, chemicals is a counterbalance to that with some recovery expected in Q4. But I'd certainly think it's fair to say that given the high-margin profile of that infrastructure segment and those discrete impacts, over half of that kind of decline is coming out of that specific kind of downtime issue.

Okay. Got it. Thank you for that help. And then I know you guys mentioned some new product wins in chemical technologies with E&P customers. I was just -- could you just discuss where -- kind of where those are occurring and why those wins occurred? And do you think that's something repeatable going forward?

Sure, Bobby. This is Michael. So we had some challenges this past quarter with the pressure pump and the kind of some softness there, as John alluded to. We've really focused our team in targeting more of the E&P operators directly. And we think we're taking market share through our products and through that direct conversation with the operators. And that part of the business has just been a little more resilient In terms of where it's coming from, it's not one region. It's really across our footprint. But as you would expect, the majority of the wins are coming in the firm. That's where we're seeing the most strength in the business right now.

Okay. Got it. And then I was just curious on the pull forward activity in water infrastructure. I would have assumed that, that would be kind of a continuing benefit going forward given that, that's more focused on production activities, but then in the prepared remarks, you guys mentioned and in the press release, you mentioned of activity reduction in the fourth quarter for the expected activity reduction in 4Q for water infrastructure is partially driven by that pull forward work. So just given that am I right to think that, that pull forward in demand that happened in 3Q was maybe more associated with completion works by E&P or my off base? I'm just trying to understand that.

Yes. It's good question, Bobby. And you're right. The pull forward was weighted to the completions side of that, particularly associated with the pipeline that we're converting, that was historically a freshwater distribution pipeline selling – selling volumes into the completions activity. And that's been a great asset for us -- for many number of years, but we've got a great opportunity to convert that into a production, distribution line for treated water. And so that activity that we pulled forward was managing kind of development schedules in conversation with our customers to make sure we're not impacting activity or development planning for that asset. And then the other asset is a recycling facility where we had activity on the reuse and delivery side coming out of that facility that was – that is also managing on the completion space. So that is the primary impact there, but it also provides kind of the flexibility for us to ensure we continue to support the customer. But also gives us the chance to get the assets fully upgraded and integrate it into the network more broadly without disrupting the customers' near-term profiles.

Got it. And just to piggyback on that, and last one for me. Is just what are the expected outcomes for the New Mexico recycling plant transition to an integrated system. Just maybe some more clarity on what an integrated system means here? Does that mean connecting it to your larger network of infrastructure or maybe it's adding new capacity to the facility itself to handle more of a complex workload? Just any color on that.

No, it's really around connecting everything and increasing the utilization on all facilities because you can move water from different parts of the region. So as we think about it, standalone facilities are beholden upon the completion activity in their immediate vicinity. When you start having them interconnected, you can move water from one area to the next and really help you balance the long insures. And so we're very focused on building systems, connecting systems and making networks so that we can increase utilization and really maximize recycling and minimize disposal.

Yes. And that interconnection provides that geographic reach, but it also provides enhanced ability to provide that synthetic disposal through that footprint for that barrel coming in on a production base, but having more geographic reach and footprint allows you to have more ability to meet completion demand on the other side of that system to really manage that water balance more efficiently over a broader geographic footprint and more importantly, for more customers.

And in regards to the pipeline, obviously converting a system from a freshwater system, produced water handling, produce new life into that asset and extends the long-term value of it. But this one was even more than that because it really allows us to connect kind of the northern end of our New Mexico system to the southern end of our New Mexico system, which really allows us to move water north to south and south to north.

That's terrific color. It makes a lot of sense. Thank you guys for taking the questions and hats off on a great quarter.

Thank you, Bobby.

The next question is from the line of Tom Curran from Seaport Research Partners. Please go ahead. Tom, your line is unmuted from our end. If you can please unmute from your end and proceed with your question.

Sorry about that, guys. Good morning.

Good morning, Tom.

Chris, for your 2025 outlook for consolidated EBITDA to rebound to $73 million or higher as of 1Q and then ramp from there. What are you assuming for annual completions activity in terms of the year-over-year change? However you want to measure it in terms of spending, track activity, completion volumes. Just in that outlook, what are you assuming year-over-year changes in the annual level of completions?

From an overall industry kind of activity outlook, Tom, we're assuming a pretty neutral overall environment maybe modestly down. We're not expecting a material change year-over-year. You'll probably have a trajectory to that activity over the course of the year coming out of a seasonal Q4 period and into the first half of 2025. But on a full year-over-year basis, expecting it to be pretty steady to slightly down.

Got it. And it's pretty clear to all of us just how much have you lifting the continued expansion in the water infrastructure margin can deliver. But in that kind of environment, Chris, what are you expecting for the sequential progression in Water Services and completion technology margins over 2025?

Yeah, it's a good question. I think on the chemical side, we've obviously seen an impact here more recently from the activity and customer-specific items we discuss as we continue to get some of those new product wins and enhance the manufacturing throughput of those plants, you're able to pull through some pretty clear uplift on that manufacturing absorption base. So we certainly think that getting that margin profile back up into the mid- to high teens is a good near-term objective for that business as we continue to look to grow and recover some of those volumes that we think are available to us. On the services side, you're going to maintain a pretty high overall correlation to the activity environment. That said, I think we're going to be pretty focused on ensuring that we can continue to capture value out of our infrastructure footprint through utilizing that service base that we have, particularly our last mile logistics and containment service lines, integrating those into our full life cycle solutions and have a pretty high focus on integrating those into our contracted footprint as well. So I think that there is upside to the overall activity environment to that services base. As we continue to build out this infrastructure footprint that is going to provide some idiosyncratic growth beyond the activity environment. But it will still obviously maintain a fairly good correlation to the completions environment overall.

Got it. And then just finally, for EBITDA to free cash flow conversion, can you give us an idea of what you're expecting for both 4Q and then 1Q as you rebound?

Yeah. 4Q should be a pretty neutral quarter on a free cash flow basis overall, looking to kind of come in full year at that 25% of adjusted EBITDA at the bottom kind of into the previous guide. Looking forward into 2025, the free cash flow outlook will be strongly dependent upon our ability to continue to add and execute additional contract opportunities that build on the backlog of growth, particularly in water infrastructure. We think there's still a very good strong backlog of opportunities there that continues to grow and the conversations continue to resonate with the customer base. So I think that you should probably expect to see a pretty similar pace of growth capital investment in 2025 that you see in 2024. And so that will obviously be a key driver of where our free cash flow outlook comes out for the year next year. But as we said earlier, if you look at the business on a maintenance-only standpoint, we're talking about a pull-through of 80%-plus cash flow generation before that growth CapEx. So, we expect to maintain that 80-plus percent out of the base business, and we'll be focused on how we allocate the capital from there for both new growth opportunities organically, continued opportunities to add bolt-on inorganic assets to the footprint and then obviously, continue to look at shareholder returns out of that cash flow base.

Got it. Thanks for you guys hitting that, that nice to see the ongoing re-rating of the stock. It's well justified and overdue. Thank you for taking my questions.

Thanks, Tom.

The next question comes from the line of Don Crist from Johnson Rice. Please go ahead.

Good morning, guys. How are you all?

Hey. Good, Don.

So, I wanted to follow-up on the Northern Delaware expansion. And I'll ask this way -- two different ways, and you can answer it how you want. But do you have like a utilization percentage once you complete the expansion? Or asked another way, do you have several years' worth of potential water growth on that system before you have to spend any additional capital? Just trying to drive that how much additional flexibility you'll have for years to come potentially?

Yes. Don, this is Michael. I'll answer it in a bit of a roundabout way. I'd start by just saying that the intensity and efficiency that the industry is seeing is really a benefit to us on the infrastructure side so that every barrel that you're using the increase in rate, the increase in volume from modern completions. We're generating revenue on a per barrel basis, and so it's just all upside to us. So we're really excited about the trends we're seeing in the Northern Delaware. And in terms of our system, I mean, we're basically adding to it each quarter. But we're not adding to it, because the system is constrained. We're adding to it from an expansion standpoint and the needs for our services are just becoming more and more apparent as we grow and invest in that system. And so I expect that to continue, as Chris alluded to, with what we think we can do next year in terms of spending a similar amount of capital. In terms of the specific utilization on the system, we still have capacity on this system. We're redeploying assets this quarter to make sure that we're preserving capacity and going to remain in front of the demand that we're seeing from our customers and in the basin in general. And so we think we have a lot of room to run with what we have in place today. The pipe that we're putting in is oversized, and so it's all large diameter pipe that will support multiple customers. So while we do have a model that we build around an Anchor Tenant, we reserve ample capacity for other operators to jump in and support the longs and shorts when we're bouncing out the water. So, all things kind of sum up here. We're really excited about the position. We think it's a market leading position. We've invested heavily. We're going to continue to invest heavily and we think we have a lot of room to run before we'll have to upgrade or make any sort of maintenance to continue to keep up with the market.

I appreciate all the color. All -- everything else has been asked. I'll turn it back.

Thank you, Don.

The next question comes from the line of Jeff Robertson from Water Tower Research. Please go ahead.

Thanks. Good morning. Michael, a quick couple of questions on the new contracts in the Northern Delaware, I think you have a 10-year to 20-year contract, you talked about in the press release. Are you seeing operators more inclined to do long-term agreements with select because of your water balancing capability?

Because of our water balancing capability and the assets we have on the ground, we're able to provide certainty that we can handle their water needs for 10-plus years, and they're happy to lock in the space on our system and the rates today plus annual inflation for that duration as well. So we've been very pleased in our ability to get that contractual support as we make these investments and build up the systems.

And maybe to put some anecdotal data points around it. If you think about one of our more recent recycling facilities we've put in place in the Delaware Basin, thinking about that anchor tenant and the water balancing application that we can bring to bear with additional third parties. One of those assets, we've seen about 75% of the volumes come into the facility on a produced water basis for synthetic disposal come from that anchor tenant. But the inverse on the treated barrels on the outflow being redeployed into new activity, you've seen about 60% of that demand for the treated barrels coming out of the facility go to other third parties on a new commercialized basis. So that ability to really broadly add to that, not only inflow of volumes with third parties, but more importantly, to create that demand for the outflow of a treated barrel and really get that water balancing managed efficiently across not only one but two, three, four, five operators really creates an efficiency out of that asset base that not only creates value to the customer, but improves our margin profile and gives us more visibility and flexibility into managing the produce apparel.

And that example is not unique. I mean, that's something we see across our facilities, and it really speaks to the importance of the interconnections that we have, the relationships we have and the ability we have to water balance to make sure we're matching longs and shorts across the region and not across a single operator or two operators.

In simple terms, is it fair to think that you're basically taking high margin cash flow for water infrastructure and reinvesting or compounding it into investments that increase utilization, which generate it sounds like even higher margin cash flow. So the margin protection or the margin upside is pretty permanent?

Some of it's investing in increased utilization, Jeff, but some of it's obviously also going into pure expansion and growth. So we can certainly use that asset base that we have in place, continue to tie in and brownfield invest around that to not only increase existing asset utilization, but more importantly, we can continue to expand the breadth, reach and I think stability of an asset over a broader geographic footprint and a longer duration period of time.

And backing out from just infrastructure, we also have a services business and a chemical business that are throwing off free cash flow, and we're able to take that and invest in infrastructure as well, which is part of the reason we've been able to spend as much CapEx and secure the contracts we have, while maintaining a very low leverage position.

And if you think about how we continue to build out the footprint, it's through these long-term contracts, no different than our customer’s think of it. What we're really doing is also adding inventory to the business over time. So through these acreage dedications and right of first refusal agreements, we're adding hundreds of thousands of acres of dedication, which adds long-term inventory to the asset base over 10 plus years here forward. So it's continuing to add not only near-term momentum in utilization and margin, but it's adding to the times return and the longevity profile of the business over time.

I guess, Chris, that longevity profile of earnings growth and your earnings and cash flow generation capacity of the company, it really what underpins an attractive shareholder return program.

Yes. I mean the more we can continue to build out this capability and contracted revenue base, adding more production levered revenues over time, which you've continued to see, it's going to give us, I think, a lot more flexibility around how to manage the capital structure of the business and look at shareholder returns over time as well.

And lastly, since the election was yesterday in the results early this morning, do you see any regulatory areas that could be altered or changed in a new administration that would have a major impact on select business?

This is John. The way I'd say it is the administration support for the industry is a blessing for our customers, and we need customers. And so it brings values to their acreage, it brings value to their longer-term views and intensity for us as the business is selects in. Our position on regulatory is we really deal with states and various localized some federal, but most regulatory application in our space is positive at the moment of trying to figure out what are balancing a beneficial reuse and what we could do with a waste stream to a usable stream.

I think the general trends around the regulatory environment are around trying to find solutions around managing the produced water waste stream in the industry overall. So that state, local and regional level of oversight is really where we spend most of our time. We obviously understand and stay close to the potential impacts of the federal regulatory environment. But I think that's more to John's point, of a customer direct impact, and we focus more on that localized level where water is really a tangible tactical resource that impacts the communities that we operate in, and that's how we think about it.

We should point out a big portion of our revenue does come from the Permian Basin, about half, and the Permian Basin does have some effects from all the water injection they're dealing with. As far as Select is concerned, we have not had any effect other than the effect on more need for recycling and pressure on our ability to water balance and move water and reuse water properly.

Thank you, John.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I will now hand the conference over to John Schmitz for his closing comments.

Thank you to everyone that joined our earnings call today and for your continued support and interest in learning more about Select Water Solutions. I look forward to speaking with you again next quarter.

Thank you. The conference of Select Water Solutions has now concluded. Thank you for your participation. You may now disconnect your lines.