Select Water Solutions, Inc.

Greetings and welcome to the Select Water Solutions 2023 fourth quarter and year-end 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, Investor Relations, and Sustainability. Thank you. 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 fourth quarter and full year 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 Starkey, 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 March 6, 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, February 21, 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 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. A 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. Please 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 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 these results of 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 investor sections of the company's website at www.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 am pleased to be discussing Select Water Solutions again with you today. Overall, 2023 was a record-setting year for Select. I'd like to start by highlighting some of our key achievements over the past year, and we'll let Nick speak to the fourth quarter in a bit more detail. During 2023, we grew revenues by 14% and adjusted EBITDA by 33% year-over-year, finishing the year with total revenues of approximately $1.6 billion and adjusted EBITDA of $258 million. As importantly, we also finished the year with record net income, earnings per share, and free cash flow. Each of our segments saw year-over-year revenue and gross profit gains during 2023. Most critically, we made tremendous progress accelerating the growth and profitability of our water infrastructure segment. With contributions from a number of acquisitions in late 2022 and early 2023, as well as organic projects that came online throughout the year, we grew water infrastructure revenue by 84% and gross profit by 162%. during 2023 as compared to 2022. Operationally, we significantly exceeded our expectations by growing recycled volumes by more than 100% year-over-year, while disposal volumes and systems utilization increased materially as well. We also continue to find ways to capture market share and improve the efficiency of our capital light water services and chemical technology segments, growing gross margins by more than 200 basis points in each segment during 2023 and generating a significant amount of cash flow from these segments to fund our growth strategy. With record operating cash flow, we were able to fund a diverse capital allocation strategy throughout 2023, including funding our modest maintenance CapEx needs, expediting our growth CapEx plans, particularly around our water infrastructure segment, increasing our base dividend by 20% during the year, expanding our share repurchase program, while also executing six small bolt-on acquisitions. Importantly, we were able to execute these capital allocation priorities while also repaying all of our outstanding debt throughout the year and building a substantial $57 million cash position on the balance sheet at year end. The strength of our recent financial performance, including the strong free cash flow generation, from our water services and chemical technology segments positioned us to continue to execute a number of strategic priorities already in 2024, including funding a trio of additional strategic asset acquisitions during the first quarter of 2024, while also announcing a number of additional organic capital projects. The recent acquisitions for Tri-State and Iron Mountain in the Haynesville, as well as additional disposal and recycling assets in the Rockies, provide accretive operations and further development potential for two of our critical regional infrastructure networks. The addition of the slurry and solid treatment facilities also expand the scope of select capabilities in the Haynesville region broadening our full lifecycle waste stream management capabilities for our customers and adding incremental value across our pro forma position in the basin. Importantly, each deal fits our near-term strategy to grow and expand our production-based and contracted revenues within our water infrastructure segment. Most significantly, following our latest acquisition, we expect more than 90% of our Hainesville revenues to be production-oriented during 2024, representing stability in the basin that may face near-term drilling and completion activity disruption from recent natural gas price volatility. As a company, we expect to see more than a third of our overall revenues come from production-related activities during 2024. This is a tremendous strategic shift for our business in the span of only a few years, as less than 10% of our revenues were production weighted during our previous peak revenue years. From an organic project standpoint, I am pleased to get several additional long-term contracts to the finish line in recent months. In the Permian, we were able to add substantial incremental acreage dedication to one of our largest Midland Basin recycling facilities while we added additional contracted pipeline connections into our recently completed flagship Delaware Basin recycling facility. In the northeast, we added additional acreage dedication with a targeted minimum volume commitment to supplement the long-term income stream of an existing disposal asset. The largest project, both from a capital spend and long-term value creation standpoint, however, is our Thompson Pipeline System in the Bakken. This project is supported by a 225,000-acre dedication from a blue chip operator in the region. This pipeline will utilize the third and last remaining federal permit we have off of Lake Sakakawea in North Dakota. As many of you may recall, this has been a very lengthy permitting and business development effort, but I am very pleased we've been able to partner with a premier operator in the region to underwrite the development of the system which should come online late summer of 2024. While the Permian clearly remains the largest portion of our business and the greatest area for additional opportunities, so far this year, we've already announced new projects and acquisitions in the Hainesville, Northeast, Rockies, and Bakken regions in addition to the Permian. Additionally, these opportunities have encompassed a comprehensive range of select capabilities, including water recycling, pipeline distributions, gathering and disposal, water transfer, fluids handling, and solids waste management. Despite recent commodity price and activity volatility, we continue to experience increased demand for new infrastructure development opportunities across all basins as water infrastructure constraints remain a significant challenge for our customers. I believe SELECT's operational and geographic diversity is one of our core strengths, providing us with an array of capital allocation prospects that allow us to make the best decisions to drive long-term shareholder value across a portfolio of opportunities. With a very strong backlog of additional greenfield, brownfield, and both on infrastructure systems, projects, and acquisitions, Select's water infrastructure segment is positioned to be one of the fastest growing infrastructure franchises in the industry. Accordingly, we expect to see annual water infrastructure segment revenues grow by 30% to 40% during 2024, with segment gross profits growing by 40% to 50% on a year-over-year basis. We expect about half the segment growth to come from M&A and the remaining half to come from organic projects. With continued organic growth and other potential strategic efforts, I believe we could potentially see water infrastructure gross profits reach as high as 50% of our consolidated profitability on a standalone basis by the end of 2025. Similar to the growth in our production-weighted revenues, this would represent a significant achievement for a segment that represented a mere 7% of the company's profitability during our previous peak revenue year in 2018. While we maintain a high level of conviction around the continued growth opportunities in our water infrastructure segment and the oil prices remain attractive at current levels for our customers, recent volatility in the natural gas prices and anticipated declines in our customers' budget on a year-over-year basis are likely to have impacts to the completions weighted revenues within our water services and chemical technology segments. Though we believe we can continue to find opportunities to improve the margin profile of each segment on a year-over-year basis in 2024. Additionally, as we look for ways to further improve our margins and stabilize our cash flows, we will continue to evaluate our water services segment in particular for underperforming or non-strategic locations for potential consolidation during 2024, which when combined with the modest declining macro activity outlook will drive water service segment revenues down on a year-over-year basis. Our water services business remains critical to our overall success as we must drive free cash flow and strong return on assets out of this segment. If there are yards or components of this segment that we determine cannot achieve these objectives, we will look to redeploy those personnel, resources, and capital into other regions or parts of our business that can. We expect our water services and chemical technology segments to generate more than 70 to 80 percent of the their gross profit into free cash flow, providing a very attractive source of capital funding for our water infrastructure growth initiatives. Accordingly, driven by the substantial continued growth in our water infrastructure segment over the course of 2024, we firmly anticipate growing our adjusted EBITDA on a year-over-year basis during 2024 and expect to pull through at least 40% of this adjusted EBITDA into free cash flow after accounting for all maintenance and growth capex, providing substantial optionality for additional strategic incentives or incremental shareholder returns. We will remain attentive to every dollar of capital we deploy, and with this free cash flow, we will prioritize capital allocation to the most strategic areas of our business, especially where we have the most opportunity to grow our production-weighted and long-term contracted revenues, expand our proprietary application of automation, chemistry, or recycling technologies, and integrate full lifecycle water infrastructure and chemistry solutions around our existing water infrastructure asset base. I firmly believe in the infrastructure growth strategy we've undertaken recently, which I believe best positions select to drive long-term shareholder value and ultimately I believe that Select remains uniquely positioned in a competitive energy landscape to advance the integration of water and chemical technology solutions with high margin, long-term contracted infrastructure. I am very excited about what the future holds for Select and look forward to executing on this vision during 2024. At this point, I'll hand it over to Nick to speak about our financial results and 2024 outlook in a bit more detail.