Select Water Solutions, Inc.

Greetings and welcome to Select Water Solutions third quarter 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris George, Senior Vice President, Corporate Development, Investment Relations, and Sustainability. Thank you, Mr. George. You may begin.

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 2023. With me today are John Schmitz, our Founder Chairman, President and Chief Executive Officer, Nick Swyka, Senior Vice President and Chief Financial Officer, and Michael Skarkey, Executive Vice President and Chief Operating 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 by webcast and accessible from our website at selectwater.com. There will also be a recorded telephonic replay available until November 15, 2023. 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 1st, 2023, 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 our 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 reports on Form 10-Q to understand those risks, uncertainties, and contingencies. These refer to our earnings announcement released yesterday for reconciliations of non-GAAP financial measures. As a reminder, the company made certain changes to its segment reporting structure during the second quarter of 2023. These changes were driven by several operational and strategic factors. However, the changes in segment reporting have no impact on the company's historical consolidated financial position, results of operations, or cash flows. Prior periods have been recast to include the water sourcing and temporary water logistics operations within the water services segment and remove the results of those operations from the water infrastructure segment. Historical segment information recasted to conform to the new reporting structure is available as supplemental financial information in the Investors section of the company's website at investors.selectwater.com. Please refer to the company's current report on Form 8K filed with the SEC concurrent with our earnings release for additional information. Now I'd like to turn the call over to our Founder Chairman, President and CEO, John Schmitz.

Thanks, Chris. Good morning and thank you for joining us. I'm pleased to be discussing select water solutions again with you today. During the third quarter, we delivered substantial operating and free cash flow and continue to see steady growth in our water infrastructure segment. On the free cash flow side of things, I'm very pleased with the progress we made during the third quarter. Nick will touch on the components in a bit more detail, but our focused effort to reduce our working capital are paying off and help deliver $118 million of cash flow from operations during the third quarter. After accounting for the $34 million of net CapEx spent during the quarter, we were able to pull through about $85 million of free cash flow, well exceeding our adjusted EBITDA for the period. We made tremendous strides in our working capital reduction efforts during the quarter, substantially outpacing our full-year performance targets a quarter early. Strong third quarter free cash flow enabled us to execute on a number of capital allocation priorities, including repaying all the outstanding borrowings on our sustainability linked credit facility, increasing shareholder returns by raising our upcoming quarterly dividend payment by 20% and funding more than $35 million of capital expenditures heavily weighted toward our water infrastructure growth capital projects supported by long-term contracts with attractive returns. Having now repaid our remaining outstanding borrowings during the third quarter, I expect to see a growing cash position building towards the year end. Replenishing our cash war chest provides us with ample opportunities to review our capital allocation priorities, including continuing to weigh incremental shareholder returns against additional organic growth projects and bolt-on and strategic M&A opportunities. We remain steadfast in our vision to be the recognized leader and trusted partner in sustainable water management solutions and believe our continued dedication to achieving operational excellence across the entire organization will further enhance that vision. Our focus for 2023 has been on acquisition, integration, improving efficiencies, and operational margins across the organization and executing on infrastructure projects and free cash flow generation. While we have made great progress in many of these focus areas, especially around integration, infrastructure growth, and free cash flow, there is still more work to be done around the efficiency and operational excellence. While we did see some downward impact to the consolidated revenue of the business from more than a 10% decline in U.S. onshore completions activity, according to industry data, our water services and chemical technology segments both outperformed the activity levels overall with revenue declines well inside of the overall activity levels. Although we were able to hold chemical technology margins relatively steady during the third quarter, We took a modest step back in water services margins during the quarter. We can and must find continuing margin improvements in this segment, and I am firmly committed to getting to both our near-term and long-term targets of mid to high 20% gross margins before DNA respectfully. We continue to look closely at the entire scope and scale of the company where appropriate, make the continuing determination to consolidate facilities or relocate assets across our areas of operation for certain non-performing service locations, particularly around our water service segment. We remain attentive to every dollar of capital we deploy and will prioritize capital allocation to the most strategic areas of our business, especially where we have the most opportunity to add proprietary application of automation, chemistry, or recycling technology and integrate full lifecycle water infrastructure and chemistry solutions around our existing asset base. Our recent organic recycling and disposal infrastructure projects have delivered strong performance. including driving water infrastructure to 6% sequential revenue growth and 40% gross margins in the third quarter. We saw growth across all areas of water infrastructure segment during the third quarter of 2023, with recycling volumes increasing by 5%, pipeline volumes up nearly 12%, and disposal volumes growing by 2% as compared to the second quarter of 2023. By boosting network utilization across our high operating leverage systems, we were able to drive incremental gross margins of more than 80% on every incremental revenue dollar during the third quarter. I expect to see this momentum continue in the fourth quarter and beyond into 2024. In the past 12 months, the water infrastructure segment has seen revenues grow 86% and gross profit before DNA more than double in size, growing by 113% year over year. Water infrastructure now accounts for more than 25% of the gross profitability of the company, and I expect to see this segment continue to grow as a contribution percentage of the company's overall profitability in 2024. Even with the recent activity volatility, we continue to experience increased demand for our new infrastructure development opportunities across all basins as water infrastructure constraints remain to be a significant challenge for our customers. With our strategic infrastructure footprint, we are well positioned to strengthen the contractual relationship we have with our customers and expand the scope of integrated water and chemical solutions that we're able to provide around the infrastructure base. I believe our latest infrastructure project announcements demonstrate the value of our asset base and the continued opportunity to create long-term value for both our brownfield and greenfield investment projects across multiple basins. And as you saw in our recent Haynesville contracts, we also have a great opportunity to incorporate contractual service capture through these relationships as well. I am excited about what the future holds for Select and look forward to further executing on this vision through additional profitability growth and cash flow generations in the quarters ahead. Ultimately, these profits and cash flows will provide us with the further opportunity for incremental shareholder returns and opportunistic M&A execution in the coming quarters. And importantly, Select is uniquely positioned to continue to deploy technology and chemistry solutions around our growing contracted infrastructure footprint. We are firmly focused on these initiatives, as I discussed. and I look forward to unlocking more cash and enhanced profitability in the quarters ahead. At this time, I'll let Nick speak to our third quarter results and outlook in a bit more detail. Nick? Thank you, John, and good morning, everyone.