Q3 2023 Select Water Solutions Inc Earnings Call

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 on a contract. It is now my pleasure to introduce your host Chris George Senior Vice President corporate development Investor Relations and sustainability.

Thank you Mr. George you may begin.

Yeah.

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 Chief Executive Officer, Nick <unk>, Senior Vice President and Chief Financial Officer, and Michael Sharkey 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 select water Dot 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 one 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 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.

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 Companys 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 recast to conform to the new reporting structure is available as supplemental financial information in the investors section of the company's website.

Investors select water dot com.

Please refer to the company's current report on form 8-K 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 Schmidt.

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 continued to stay 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 and a bit more detail, but our focused effort to reduce our working capital are paying off and helped deliver a $119 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.

Statutorily outpacing our full year performance targets.

At corridor a quarter early.

Strong third quarter free cash flow enabled us to execute on a number of capital allocation priorities, including.

Repaying all of the outstanding borrowing 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 all remaining remaining outstanding borrowings during the third quarter I expect to see a growing cash position building towards year end right.

Replenishing, our cash war chest provides us with ample opportunities to review our capital allocation priorities, including continued 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 debt 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 for more.

Then a 10% decline in U S onshore completions activity. According to industry data, our water services and chemical technology segment, 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 nonperforming service locations.

Particularly around our water service segment.

We remain attentive to every dollar of capital, we deploy and we'll 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.

Apologies 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.

<unk> driving water infrastructure to 6% sequential revenue growth and 40% gross margins in the third quarter.

We saw growth.

Cross 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 are 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 D&A more than double in size growing by hiring a 13% 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 has 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 has 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 the integrated water and chemical solutions that were you 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. I am pleased to report that our intensified focus on generating cash out of both the business and working capital produced operating cash flow of $118 million during the third quarter.

After adjusting for net capex yielded free cash flow of $85 million.

With this some we completely retired the balance on our credit facility, leaving us with $25 million cash on hand.

In this era of rising interest rates and capital markets volatility.

<unk> pristine balance sheet and abundant liquidity through our undrawn sustainability linked credit facility enables us to both advance shareholder returns as well as expand our water gathering recycling and distribution systems across multiple basins.

Excited to announce new dedicated acreage and pipeline volume additions to our northern Delaware and Haynesville systems this quarter as well as the 20% increase to our regular quarterly dividend.

Growing both our infrastructure footprint and shareholder returns within annual cash flow from our solid balance sheet is the model, we expect to deliver for 2023 in the years ahead while.

While the water infrastructure segment met our expectations of a solid quarterly step up in both revenue and margin the industry's activity backdrop softened over the summer and into the third quarter impacting our water services and chemical technologies segments.

Overall consolidated revenues declined just under 4% to $389 million during the third quarter from $405 million in the second.

With net income of $15 3 million and adjusted EBITDA of $63 million during the third quarter.

With drilling and completions activity appears to be bottoming, along with the benefit of a more robust commodity price environment than we saw over the last couple of quarters. We believe that 2024 will resume upward momentum in other parts of the business in tandem with the continued positive secular growth of our water infrastructure segment.

In the interim the near term remainder of 2023, you should see some customer budget and seasonal constraints.

Our priority for the water services side will be a continued focus on operational excellence closely evaluating peripheral or low performing locations driving down costs through procurement and operational efficiency initiatives and working closely with customers to deliver advanced solutions with technology and automation.

Industry data suggests that the third quarter saw average rig count and completions activity each declined by about 10%.

Against this backdrop, our water services segment's revenue declined by a little under 5% with a portion of this decline coming from closed yard operations to $252 million in the third quarter from $265 million in the second.

Gross margins, which we customarily speak of in terms of before depreciation and amortization declined from 21, 9% to 25%.

We expect the fourth quarter to bring mid single digit percentage revenue declines with stable margins, which are poised to positively inflect in 2024 back towards our near term target of mid Twenty's with high Twenty's remaining our longer term target for this segment.

Chemical technologies was also affected by the macro environment with revenue declining a bit over 6% to $79 million sequentially.

So our manufactured volumes at our plants were down about 10% sequentially, our higher dollar proprietary product demand held revenues inside of that volumetric decline and our efficient manufacturing process held margins essentially flat just above 20%.

We anticipate modest low to mid single digit percentage seasonal declines to revenue and margins of 19% to 20% in Q4, but continued product research and development at our laboratory facilities, along with a stable to improving activity environment in 2024.

To support the resumption of the segment's growth beyond next quarter's results.

Our water infrastructure segment delivered to our forecast growing revenue, just under 6% or $3 1 million quarter over quarter.

<unk> just beyond our targeted gross margins of 40%.

The backlog of development opportunities for this segment remains very strong in addition to the multiple new contracts announced yesterday, we are actively evaluating well over a dozen additional organic opportunities in partnership with customers as well as other growth avenues. We expect this segment to grow sequential revenue by mid single digits again during the fourth.

<unk> and to advance margins, another 200 to 300 basis points on higher utilization and continued system build outs.

As previously outlined a couple of 2023 targets related to cash flow and working capital.

First we targeted to reduce accounts receivable by $100 million between the end of Q1, and 2023 year end and second we plan to exit the year with a debt free balance sheet.

I am pleased to report that we exceeded both of those goals a quarter in advance with accounts receivable declining by 137 million since Q1, and us having paid down the remainder of our credit facility balance during the third quarter with $25 million of cash on hand leftover.

As our systems integration efforts progress our consolidated accounts receivable days sales outstanding reduced to a level not seen since the third quarter of 2021 before we began our recent M&A acceleration.

So, let's now has ample liquidity to capitalize on a range of potential strategic opportunities and we expect to continue making additional progress on the cash flow and working capital front to finish the year.

I am pleased with the progress we've made I do believe there is continued opportunity to improve DSO further in 2024.

Additionally, with the investments we've made the company is in a much better position to manage and absorb future acquisition integrations.

SG&A increased sequentially to $39 million up $4 7 million from Q2, due primarily to an approximately $3 million increase in transaction and rebranding costs, we'll be finishing the current rebranding initiative and related costs by year end, which should provide for a modest reduction in SG&A from current levels by early 2000 <unk>.

Four.

Our third quarter net capex of $34 million was similar to the previous quarter was $36 million with new infrastructure development, representing the majority of that number we.

We are actively investing in our strategic infrastructure development in multiple basins, where we feel we have strong advantages such as our established Permian and Haynesville systems.

Accelerating the build out pace of our systems were backed by long term contract opportunities is a core priority for 2024 are.

Our 2023 net capex forecast remains within its previous range with a tightening to a $120 million to $130 million after giving effect to roughly $15 million in expected full year asset sales.

We expect depreciation and amortization expense to continue at around $35 million per quarter, and both tax and interest expense to remain minimal through 2023.

We added more than $55 million of liquidity during the quarter to finished with approximately $250 million of total liquidity.

Coming one year after its initiation, we recently announced an increase in the regular quarterly dividend by 20% to six cents a share.

We plan to continue to evaluate our dividend on an annual basis at a minimum in addition to the dividend we have about $12 $5 million remaining capacity on our stock buyback program in.

And may seek to utilize or add to that capacity as we monitor operating and capital market conditions.

With shareholder returns that are core and substantial infrastructure growth investment opportunities ahead, we believe our blended model of growing both committed and tactical shareholder returns, while deploying enhanced cash flow into long lives contracted water solutions networks across multiple basins all accomplished from a solid balance sheet will do.

Operator: 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.

A liver substantial value to investors over the long term.

Thank you and with that we'll open it up to questions operator.

Operator: If anyone should require operator assistance doing the conference, please press star-zero on your telephone keypad. As a reminder, this conference is being recorded.

Sure.

Thank you.

We'll now be conducting a question and answer session.

I would like to ask a question. Please press star one on your telephone keypad.

Christopher George: It is now my pleasure to introduce your host, Chris George, Senior Vice President, Corporate Development, Investor 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's Chief Executive Officer, Nick Swyka, Senior Vice President and Chief Financial Officer, and Michael Skarke, Executive Vice President and Chief Operating Officer.

Inflammation tone will indicate your line is in the question queue.

You May press Star two if you would like to remove your questions from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star piece one moment, please pull for questions.

The first question comes from the line of Jim Rollyson with Raymond James. Please go ahead.

Good morning, gentlemen, and nice to see the beating the targets ahead of schedule on the free cash flow and our working capital stuff.

Nick you mentioned, a little teaser about evaluating more than a dozen new contract opportunities in the water infrastructure segment any way to just kind of frame up what the maybe total size or capex kind of associated with that is so we can think about that what the future revenue opportunity might look.

Christopher George: 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 15th, 2023. The access information for this replay was also included in yesterday's earnings release. We've known 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.

Like.

Sure, Jim and as you've seen from this this press release and then earlier ones that there is a fair amount of <unk>.

Variation and the total capital investment in.

And these projects we've done projects pipeline as high as $40 million, we have a $2 million.

Christopher George: 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. The listeners encouraged to read our annual report on Form 10K, our current reports on Form 8K, as well as our quarterly reports on Form 10K to understand those risks, uncertainties, and contingencies.

Minimum.

Announced for this quarter.

So youre kind of working within that window. There. So when we're talking about a dozen those do vary there is some on the kind of mid single digits. There and there are some that are.

Well into the double digits.

I'd say on average.

Yes.

Putting those together that that could reach triple digits.

Obviously, we probably won't have all of those reach fruition at the same time, we have.

Some very early stage discussions that some of which.

They lead to projects in 2024, so great opportunity set in front of us.

Christopher George: These refer to our earnings announcement released yesterday for reconciliation of non-gap financial measures.

More we're adding on to our networks across multiple basins. The more opportunities we have and we're looking to take advantage of our our first mover status in a lot of these basins, but and this is Michael <unk> I think it's fair to say that infrastructure Capex youre going to see growth in that relative to what we had this year in a scenario where.

Christopher George: 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 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 investor's section of the report.

Mentioned in the past, we think a vast majority of our growth Capex will go there because of the opportunity set that Nick mentioned and the backlog that we continue to see developing behind it.

Yeah, and the margins aren't exactly terrible either.

On the on the Dsos. Nick You mentioned, obviously you made great strides this year and you mentioned more more potential progress next year, where do you think dsos should normalize here over the next few quarters.

Christopher George: Please refer to the company's current report on Form 8K filed with the SEC concurrent with our earnings release for additional information.

Sure. So as you noted we've achieved those goals faster than we anticipated a lot of hard work across the organization to do that so we're effectively back where we were before M&A.

John Schmitz: Now I'd like to turn the call over to our founder chairman, president CEO, John Schman. 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 continued 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.

I think we do have some opportunity ahead of us it's not the same size of the opportunity that we have.

Successfully taken advantage of this year.

But I think we can get that down into the mid seventies.

Our customers do customarily.

Have some terms and conditions that we have to live by as far as waiting for invoices and so that.

John Schmitz: Nick will touch on the components in a bit more detail, but our focused effort to reduce our working capital or paying off and help deliver $119 million of cash flow from operations during the third quarter. After accounting for the $34 million in that cap act 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.

Think that that will effectively bottom us out there in the mid 70 days of Dsos, but if were successfully firing on all cylinders here.

We can get get to that mid seventies figure, which would put us.

With another $30 million or so off of a or from where we currently stand.

Very helpful Fantastic and one last question.

The two other business lines water services and mechanical technologies, obviously kind of market headwinds didn't didn't help margins this quarter.

Go to maybe where you were hoping or where you're ultimately long term goals are but as we think about getting both those divisions back on track to move to the mid twenties, where higher margins. As you guys are kind of targeting do you is this all something that can happen from internal moves that youre doing.

John Schmitz: 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 link 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 remaining outstanding borrowings during the third quarter, I expect to see a growing cash position building towards your end.

Or do you also need the market to bounce back a bit to get there I'm just trying to think about how this impacts over the next few quarters as you guys drive to get to mid Twenty's margins, yes.

Yes, Jim This is Michael Squawky chemicals, I think we've got into kind of 'twenty, which is really where we are we think that we can kind of hold in that despite some seasonality in Q4 and have upside to it over the near and medium term as we look at manufacturing processes and re formulations of our technologies on the services side.

We have guided to mid or high twenties, and we think that where the market is today, that's still very achievable through kind of just organic kind of grinding and operational efficiencies were very focused on implementing further automation on yard rationalization on leveraging strategic relationship.

John Schmitz: 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 both on and strategic emissions. 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.

With infrastructure contracts.

And just gets down to doing what we do but doing it a little better and so we're focused on it theres going to be some near term friction there's going to be a little bit of of a topline destruction as we look to rationalize yards, but we think the gross margin will follow and trend upwards after that.

And then any tailwind you get from the recovery.

Outlook for next year is just bonus points I presume.

<unk>.

Great I'll turn it back let someone else ask questions. Thank you.

Thank you Jim.

Thank you next question comes from the line of Luke Lemoine with Piper Sandler. Please go ahead.

John Schmitz: 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 US onshore completions activity, according to industry data, our water services and chemical technology segments both outperform the activity levels overall with revenue declines well inside of the overall activity levels.

Hey, good morning.

Just following on Jim's first question and water infrastructure, you've had pretty explosive year on year growth this year.

You sign up a number of notable projects this year and talked about.

The Dawson.

Projects, you're evaluating both brownfield and greenfield that could be coming in the coming months.

Kind of with these current and future investments how should we start thinking about.

The outlook for 'twenty four within this segment.

From a from a margin perspective, I mean, we.

We're at 40%, which is where we kind of said we'd be we've guided kind of medium term to to 50%.

John Schmitz: All though we were able to hold chemical technology margins relatively steady during the third quarter, we took a modest step back and 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.

I don't know that we're going to hit 50% for the full year like obviously, a big jump on where we are today, but we've got a lot of projects that are coming online. Some this quarter that are going to be accretive to that margin, we still plan on infrastructure and chemicals being a majority of our gross profit for next year with infrastructure really being the lion's share.

<unk> of the increase.

So we're pretty aggressive in terms of what we think we can do both topline and from a gross profit standpoint, and infrastructure just because of the asset base, we've put together and the opportunity set that we've seen in front of us.

Luke I would add that this quarter between the revenue increase in that segment and the margin increase we grew gross gross profit about 12% quarter on quarter.

And that was done as I mentioned with a not so favorable macro backdrop.

John Schmitz: We remain attentive to every dollar 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 life cycle 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.

And so you see that.

I think we will see similar.

Steps forward here as we get quarter over quarter at these new projects and continue to work that margin higher.

So that as Michael mentioned to that 50% and we're in the early stages of pulling together our thoughts for 2024, but I don't think it's unreasonable to think that infrastructure could be a third of the gross profit for next year.

Okay.

Got it perfect. Thanks, so much.

Thank you next question comes from the line of Tom Curran.

He put the search partners. Please go ahead.

Good morning, guys.

Yeah.

For the water services Division, Nick and Michael when it comes to these three main levers.

John Schmitz: 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% has 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.

You expect to pull internally to expand the division's gross margin to the mid twenties.

Next year, and then beyond that to the high <unk>.

You've got technology enhancements like the pumping manifold automation.

Wyszynski initiatives centralizing procurement moving third party support internally and then leveraging the growing infrastructure network.

Each of those three could you expound on how far along do you think you are and just you know.

Phase one is getting to the mid <unk>.

How should each of the three contribute in the mid <unk> and then as we look from the mid <unk> to the high <unk>.

John Schmitz: 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.

There will be a shift in terms of the weightings of the three.

No. It's a great question, Tom and I wouldn't I couldn't have articulated better I would add that there is a fourth lever there, which is really yard consolidation or rationalization. So.

We've put a lot of assets together and a lot of yards together and there is some overlap in their shrank leaves some underperforming and so that is going to be a material lever that we're just now really starting to get into we had a few that occurred this quarter, but we're expecting more and I think that one's going to be material and we're very early innings in <unk>.

Dressing it.

In terms of leveraging infrastructure contracts and relationships.

John Schmitz: 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.

That's also one that's relatively early in terms of us addressing.

I would point to in the announcement yesterday, we had the announcement in the Haynesville, where we secured a long term service contract.

At the customer's request off of the infrastructure contract that we put in place and so we think those kind of opportunities exist.

Exist and thats going to be market share, but also margin accretive for both for both segments.

Supply chain that was something we put in place this year really centralizing supply chain moving to something Thats more formalized instruction, Nick I'd, probably look to you as to where you think we are in that development.

As far as the getting the contracts in place and the.

Procurement centralized we're in early innings I think in terms of seeing the results financially.

John Schmitz: 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 MNA execution in the coming quarters. And importantly select as 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 enhance profitability in the quarters ahead.

Very very early there. So I think the bulk of that will come in 2024, that's probably contributing just a few basis points in the current service margin and then the final one you mentioned Tom was automation and Thats. The one that I would say that we're furthest along we've really been.

A pioneer in terms of of water solution automation.

That we think is a differentiator, it's something that way that we can do something safer.

More cost effective and more reliable than relying on.

Sometimes well we're still labor.

And so it's something that we're while we're further along than the other initiatives. It's one that you are never done it there's always more and so that one would be later endings, but still pretty good runway.

Got it.

Nicholas Swyka: At this time I'll let Nick speak to her third quarter results and outlook in a bit more detail Nick. Thank you John and good morning everyone. I'm pleased to report that our intensified focus on generating cash out of both the business and working capital produced operating cash flow of 118 million during the third quarter which after adjusting for net capex yielded free cash flow of 85 million with this sum we completely retired the balance on our credit facility while leaving us with 25 million cash on hand.

Helpful breakdown and additional color there thanks for that and then.

Nick I realize.

You are still finalizing the plan and expectations to provide formal 2020 for guidance, but maybe just some preliminary.

Metrics here for cash flow in 2024 are you still targeting conversion rate for EBITDA to free cash flow of about two thirds and expecting maintenance capex to run about.

$50 million per quarter give or take $5 million to $10 million.

Nicholas Swyka: In this era of rising interest rates and capital markets volatility selects pristine balance sheet and abundant liquidity through our under on sustainability linked credit facility enables us to both advance shareholder returns as well as expand our water gathering recycling and distribution systems across multiple bases. We're excited to announce new dedicated acreage and pipeline volume additions to our northern Delaware and hangs those systems this quarter as well as a 20% increase to our regular quarterly dividend.

Tom I'd see maintenance Capex is lower than that.

Say again preliminary basis I'll talk more about it next quarter, but we're probably looking at $60 million for the full year maintenance capex, but for now give me $10 million on either side of that and we'll get a little more direct next year I think the two thirds free cash flow of EBITDA that was partially driven by the working capital.

<unk>, we had for this year.

So I think for next year, it's probably going to be a little lower but as I think about our our free cash flow for this year, we had 75 million debt outstanding.

Nicholas Swyka: Growing both our infrastructure footprint and shareholder returns within annual cash flow from a solid balance sheet is the model we expect to deliver for 2023 in the years ahead. While the water infrastructure segment met our expectations of a solid quarterly step up in both revenue and margin the industry's activity backdrop softened over the summer and into the third quarter impacting our water services and chemical technology segments. Overall consolidated revenues to climb just under 4% to $309 million during the third quarter from 405 million in the second what with net income of 15.3 million in adjusted EBITDA 63 million during the third quarter.

In the first quarter, we've taken that to zero with $25 million cash on hand.

Paid out over $65 million shareholder.

Shareholder returns this year on top of that.

And then we've executed on our Capex budget and stay within that budget, while adding some really critical projects. So this is a strong cash flow generating business here.

It'll be strong next year I think we do probably have.

Initial growth infrastructure projects as Michael mentioned that are likely to come in higher than this number this year's number.

Nicholas Swyka: With drilling and completions activity appearing to be bottoming along with the benefit of a more robust commodity price environment than we fall over the last couple quarters. We believe that 2024 will resume upward momentum and other parts of the business and tandem with the continued positive secular growth of our water infrastructure.

I'm excited about that and we're going to do that as always with a very conservative solid balance sheet and look at all the opportunities both organic and potentially.

M&A related as well and do one point just to reiterate on the growth infrastructure projects for next year, you know those projects have strong contractual long term contracts around them.

Nicholas Swyka: In the interim, the near-term remainder of 2023 should see some customer budget and seasonal constraints Our priority for the water services side will be a continued focus on operational excellence, closely evaluating peripheral or low-performing locations, driving down costs or procurement operational efficiency initiatives, and working closely with customers to deliver advanced solutions with technology and automation Industry data suggests that the third quarter saw average rig count and completion locations activity each declined by about 10 percent against this factor up our water services segments revenue declined by a little under 5 percent with a portion of this decline coming from closed yard operations to $252 million in the third quarter from 265 million in the second press margins, which we customarily speak of in terms of before depreciation and amortization decline from 21.9% to 20.5% we expect the fourth quarter to bring mid single budget percentage revenue declines with stable margins which are poor boys who positively inflect in 2024 back towards our near-term target of mid 20s with high 20s remaining our longer term target for the second. Chemical technologies was also affected by the macro environment with revenue declining a bit over 6% to $79 million sequentially.

They're generally production weighted or being driven by secular trends such as recycling. So we feel really good about those.

Those investments in a flat or even slightly down market because of the contractual support and because of the production and secular trends that exist there.

Got it and just to be clear I was saying 15 million per quarter or $60 million for the year. So it does sound as if that's unchanged.

Sorry, I misheard you there Tom so that 15 per quarter maintenance capex. It sounds like a good number there are not fiber.

<unk> 52.

Right, Yes, exactly alright, thanks, guys I'll turn it back thank.

Thank you Tom Thank you.

Thank you next question comes from the line of Don Crist with Johnson.

Johnson Rice. Please go ahead.

Yes.

Good morning, gentlemen.

I wanted to ask about specialty chemicals I know, it's been a couple of quarters now since you've been doing the tailored solutions per formation and Youre getting more data back pullback that et cetera, any kind of updates there and is the demand increasing still in that specialty chemical segment.

Yes couple of things on that Donna first we're seeing operators continue to be more and more focused on chemistry and its compatibility with produced water and just well results and so we're getting really good reception as we have those conversations with with our customers in terms of the <unk>.

Nicholas Swyka: So, manufactured volumes in our plants were down about 10 percent sequentially our higher dollar proprietary product demand held revenues inside of that volumetric decline. And our efficient manufacturing process held margins essentially flat just about 20%. We anticipate modest low to mid single digit percentage seasonal declines to revenue and margins of 19 to 20% in Q4 but continued product research and development at our laboratory facilities along with a stable to improving activity environment in 2024 should support the resumption of the segments growth beyond next quarter's results.

<unk> that we've seen I mean, we're pretty happy with the improvement in market share and margins, we've seen with chemistry over the last few quarters, and we really contribute it to what we're doing in terms of creating.

More water tolerant solutions designed for produced water and so we've gotten some pretty good feedback with the customer with our with our customers on that we've got direct open dialogue.

Nicholas Swyka: Our water infrastructure segment delivered to our forecast growing revenue just under 6% or 3.1 million quarter over quarter pressing just beyond our targeted gross margins of 40%. The backlog of development opportunities for this segment remains very strong. In addition to the multiple new contracts announced yesterday we are actively evaluating well over a dozen additional organic opportunities in partnership with customers as well as other growth avenues. We expect this segment to grow sequential revenue by mid single digits again during the fourth quarter and to advance margins another 200 to 300 basis points on higher utilization and continued system buildouts.

With both operators and pressure pumper.

And Additionally, just more as you know the more produced water you have the harder it is on chemistry, the more their need is for specialty chemistry, and frankly, one of our bigger customers internal we're providing the chemistry for all of our recycling and so theres been a number of kind of tail winds are around that special.

Chemistry, that's delivered the returns where we are we took a step back this quarter. It is completion, driven but we're still pretty excited about it.

Nicholas Swyka: I previously outlined a couple of 2023 targets related to cash flow and working capital. First we targeted to reduce accounts receivable by 100 million dollars between the end of Q1 and 2023 year end. And second we plan to exit the year with the debt free balance sheet. I'm pleased to report that we exceeded both of those goals a quarter in advance with accounts receivable declining by 137 million since Q1. And us having paid down the remainder of our credit facility balance during the third quarter with 25 million dollars of cash on hand left over.

I appreciate the color there and John maybe one for you obviously, there's been some large M&A in the basin are in the Permian basin in particular and any thoughts on that consolidation and how that may benefit select going forward is it is it better for you.

Given your larger company bias.

Yeah, Dan we think it is.

A lot of those transactions youre, saying, we're on both sides because.

We are.

Nicholas Swyka: As our systems integration efforts progress are consolidated accounts receivable days sales outstanding reduced to a level not seen since the third quarter of 2021 before we began our recent M&A acceleration. Select now has ample liquidity to capitalize on a range of potential strategic opportunities and we expect to continue making additional progress on the cash flow and working capital front to finish the year. While I'm pleased with the progress we've made, I do believe there's continued opportunity to improve DSO further in 2024.

Sizable when we do have a good customer base.

But just as important.

We're also integrated a lot with a lot of our customers infrastructure now so we.

Now have integrations to take our asset bases are different wells pipes recycling facilities.

Hum.

In our system.

That system just got larger.

With this so.

Yeah.

I'll also say that.

The acquirers here that we keep saying our very good customers for us with alignment because.

Nicholas Swyka: Additionally, with the investments we've made, the company has been in a much better position to manage and absorb future acquisition integrations. SG&A increased sequentially to $39 million, up $4.7 million from Q2, due primarily to an approximately $3 million increase in transaction and rebranding costs.

The size of our either automation the technology the sources.

The movement within it.

And there.

They're doing this primarily with produced water and we all know produced water has a different environmental effect to it and we're very focused on whether it's host development automation control.

Nicholas Swyka: We'll be finishing the current rebranding initiative in related costs by year-in, which should provide for a modest reduction in SG&A from current levels by early 2024. Our third quarter net capex of $34 million was similar to the previous quarter's $36 million with new infrastructure development representing the majority of that number. We're actively investing in our strategic infrastructure development in multiple basins where we feel we have strong advantages, such as our established Permian and Hainville systems.

Lee.

Detection.

That environmental application risk profile is favorable to the buyers here.

And John if I may add I mean I.

Don I'd point, you to the release, we had in August with endeavor, where we are we announced 300000 barrels a day of recycled water delivering almost $8 5 million barrels to a single location.

Nicholas Swyka: Accelerating the build out pace of our systems we're backed by long-term contract opportunities is a core priority for 2024. Our 2023 net capex forecast remains within its previous range with a tightening to $120 to $130 million after giving effect to roughly $15 million and expected full-year asset sales. We expect appreciation and amortization expense to continue at around $35 million per quarter and both tax and interest expense to remain minimal through 2023. We added more than $55 million of liquidity during the quarter to finish with approximately $250 million of total liquidity.

That's a really sophisticated.

Technical highly engineered solution.

Moving produced water from multiple sources and there's just not a lot of companies I don't know that there is another company that can pull off the job like that.

And so it's going to be the larger companies that are going to do things at that kind of scale.

And in doing that they're going to look to a trusted partner that can they can accomplish a project like that and I think that select water.

I appreciate the color I'll turn it back thanks, guys.

Thank you.

Nicholas Swyka: Coming one year after its initiation, we recently announced an increase from the regular quarterly dividend by 20% to six cents a share. We plan to continue to evaluate our dividend on an annual basis at a minimum. In addition to the dividend, we have about $12.5 million remaining capacity on our stock 5-Eck program and may seek to utilize or add to that capacity as we monitor operating in capital market conditions. With shareholder returns at our core and substantial infrastructure growth investment opportunities ahead, we believe our blended model of growing both committed and tactical shareholder returns while deploying enhanced cash flow into long-lived contracted water solutions networks across multiple basins, all accomplished from a solid balance sheet will deliver substantial value to investors over the long term.

Thank you next question comes from the line of.

John Daniel.

Daniel Please go ahead.

Hey, guys. Thanks for having me.

Away from making Peter So I don't have all the data in front of me, but I'm curious can you remind me what your recycling capacity is today.

Sort of what the utilization of that capacity is and then just.

A reasonable growth rate that you would expect over the next couple of years.

We've got about 3 million barrels or so of daily capacity.

Roughly half of that is going to be fixed facilities half of that is going to be mobile facilities.

Where we're adding to both but really focused on the fixed facilities because those are going to be the ones that are supported by <unk>.

Operator: Thank you and with that, we'll open it up to questions. Operator. Thank you.

Long term contracts.

A majority of those facilities are in the Permian as you are aware John.

Operator: We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your questions from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we pull for questions.

There's one in the DJ where a majority of the current opportunity set we're looking at are in the Permian, but there are several that are outside of the Permian.

And as those other basins transition the opportunity for our cycling just continues to expand in terms of where we can take it.

We're pretty ambitious we think that the market is going to continue to transition is going to need an industry leader and I think thats us.

James Rollyson: The first question comes from the line of Jim Rollison with Raymond James, please go ahead. Good morning, gentlemen, and nice to see the beating the targets ahead of schedule on the free cash flow and AR working capital stuff. Nick, you mentioned a little teaser about evaluating more than a dozen new contract opportunities in the water infrastructure segment.

I'd, probably stop short on saying, where we're going to be this time next year, but if it's not materially higher everyone. In this room would be very disappointed.

Yeah Fair.

Fair enough and then a little bit of an add on or follow on to John's question.

When you all start building out the recycling capabilities is it safe to assume that the.

The larger.

Are they more sophisticated operators who are this.

John Schmitz: Chairman. Any way to just kind of frame up what the maybe total size or capex kind of associated with that is so we can think about that, what the future revenue opportunity might look like. Sure, Jim. And as you've seen from this, this press release and then earlier ones that there is a fair amount of variation in the total capital investment in these projects. We've done projects pipeline size 40 million. We have a $2 million.

Are the clients and not the small guys or am I mistaken on that.

It's actually kind of interesting because we really we have interest in all of our cycling solutions from the largest operators to some that I really honestly it wasn't aware of until the discount Mercedes took off I think there is more opportunity on the larger because.

The economies of scale that exist, but there is certainly the ability to pull together a couple of smaller opportunities and still underwrite or.

John Schmitz: $1 million minimum announced for this quarter. So you're kind of working within that window there. So when we're talking about a dozen, those do vary. There's some in the kind of mid single digits there. And there's some that are well into the double digits. So I'd say on average, you know, that putting those together that could reach triple digits. Obviously, we probably won't have all of those reach fruition. At the same time, we have some very early stage discussions that some of which may lead to projects in 2024.

Our commercial recycling facility and move forward and further integrated into other solutions. So.

I wouldn't ignore the small ones, but it's definitely heavier weighted to mid size and larger.

Yes.

Really there.

Constraints that the value of this spring.

It's great for the environment, it's more sustainable it's leaving freshwater in the ground.

Addressing seismicity, but it's also reducing cost for our customers and we do this at scale economically and whether you are a small operator, a large operator, we can help your wells be more productive at a lower cost and I think that's a good point Nick.

John Schmitz: So great opportunity set in front of us. The more we're adding on to our networks across multiple basins. The more opportunities we have, and we're looking to take advantage of our our first mover status on a lot of these basins.

The larger and midsized operators are generally those that are more focused on the stewardship.

Michael Skarke: But the agent, and this is Michael Skarke. I think it's fair to say that infrastructure capex, we're going to see growth in that relative to what we had this year. In an area where we mentioned in the past, we think of that's majority of our growth capex will go there because of the opportunity set that Nick mentioned and the backlog that we continue to see developing behind it. Yeah, and the margins aren't exactly terrible either. On the DFOs, Nick, you mentioned, obviously you made great strides this year. And you mentioned more more potential progress next year.

The environmental component.

Alright.

A bias towards them as well.

Great.

In this case the consolidation is actually a positive for you Simplistically right Jonathan.

Got it it's very big positive and you can point to.

One of the past ones that we actually announced and that that's one of the <unk>.

Acquired companies that just got announced and at <unk>.

Has that acquired company got announced we added two more deals to that recycling facility because of the scale and scope of the surrounding acreage that got put in the deal.

Nicholas Swyka: Where do you think DFOs should normalize here over the next few quarters? Sure. So as you noted, we've achieved those goals faster than we anticipated. A lot of hard work across the organization to do that. So we're effectively back where we were before M&A. Now I think we do have some opportunity ahead of us. It's not the same size of the opportunity that we've successfully taken advantage of this year. But I think we can get that down into the mid 70s.

Got it a final question I think you mentioned in your response to a question was.

A portion of your customers are in fact, the pressure pumping companies did I hear that correctly.

On the chemical side, so chemical technologies works for both.

Pressure pumper is as well as direct operators.

Okay.

Having or seeing any signs of payment issues with any of the smaller pressure pumping companies.

Nicholas Swyka: Our customers do customarily have some terms and conditions that we have to live by as far as waiting for invoices. And so that I think that'll that'll effectively bottom us out there in the mid 70 days of DSOs. But if we're successfully firing on all cylinders here, I think we can get get to that mid 70s figure which would put us, you know, with another 30 million or so off of off of AR from where we currently stand.

No John we're not.

Part of the circle.

Circle back to an earlier question there.

James Rollyson: Very helpful, fantastic.

<unk> and our DSO get.

When we do sell to pressure bumpers that are in turn paid by operators through chemical technologies Division, which has both operators and pressure bumpers as customers.

Yes.

That dynamic there is one of the things that keeps us from getting call. It below 75 days eventually however, the payment issues.

James Rollyson: And one last question on the two other business lines, water services and the chemical technologies. Obviously kind of market headwinds didn't didn't help margins this quarter go to maybe where you were hoping or where you're ultimately long from goals are. But as we think about getting both those divisions back on track to move to the mid 20s or higher margins as you guys are kind of targeting. Do you is this all something that can happen from internal moves that you're doing or do you also need kind of the market to bounce back a bit to get there. I'm just trying to think about how this unpacked over the next few quarters as you guys tried to get the mid 20s margin.

We're having the same performance that we've typically had there no no sign of deterioration.

We do work for a lot of very large successful pressure bumpers and theyre paying on schedule.

Yes, and I would expect that with them, but <unk> seen the carnage in the spot Frac market I just didn't know if there is super Super small frac.

Frac players, we're having any issues.

Good question.

Really don't do a whole lot with the Super small frac players, we have a hard time.

On that side would be chemistry, just given the size of those tickets.

Got it okay. Thank you.

Fair to say John We also don't do a lot of business with even larger companies that are heavily weighted to spot.

Michael Skarke: Yeah, Jim, this is Michael Skarke. Chemicals, I think we've got it at kind of 20s, which is really where we are. We think that we can kind of hold in that despite some seasonality in Q4 and have, you know, upside to it over the near and medium term as we look at manufacturing processes and reformulations of our technologies. On the services side, you know, we have guided to mid or high 20s and we think that where the market is today, that's still very achievable through kind of just organically.

Fair enough.

Well, thank you for including me and for your time today.

Thank you Jonathan.

Thank you next question comes from the line of Jeff Robertson Walter.

Walter <unk> as such please go ahead.

Thank you good morning.

The revenue split is about 70% completion and 30% production Michael do you see that changing over time as companies drill longer laterals. It may be.

Michael Skarke: It's kind of grinding and operational efficiencies. We're very focused on, you know, implementing further automation on yard rationalization, on leveraging strategic relationships with infrastructure contracts, and just gets down to doing what we do, but doing it a little better. And so we're focused on it. There's going to be some near term friction. There's going to be a little bit of a top line destruction as we look to rationalize yards, but we think the growth margin will follow.

Even if they are drilling bigger pads do you see the amount of water that they'll have to move off locations increased.

And is that an area that will drive your.

Margin opportunity in the water infrastructure business.

Yes, I think Thats a good question, Jeff and there's really two parts. So we do see continued longer laterals and more water per pad as I mentioned with the endeavour job that we released a couple of months ago.

That's certainly an opportunity for us as they are.

Michael Skarke: And trend upwards after that, and then any kill when you get from the recovery kind of outlook for next year is just bonus points. I presume, correct. Great. I'll turn it back with some more of those questions. Thank you. Thank you, Jim. Thank you.

Water management company in providing the water and managed in the water and taking it away.

In terms of the split between completion and production I really look at that a little differently I do see the production weighting continue to increase and Thats largely as a result of our focus around infrastructure and that's really where as I mentioned, that's what we're going to spend a majority.

Luke Lemoine: Next question comes on the line of Luke Lamoyne with Piper Sandler. Please go ahead. Good morning. Just follow up on Jim's first question in water infrastructure. You've had pretty explosive year in your growth this year. And you sign up a number of notable projects this year and talked about kind of the dozen projects you're evaluating, but brownfield and greenfield that could be coming in the coming months. I guess kind of with these current and future investments, you know, how should we start thinking about, you know, the outlook for 24 within the second?

Our growth capital for next year and a good portion of that is going to be.

Related or really derived from production revenue and so I think that's what's going to drive us.

Something more towards a 60 40 in the near term.

So Michael is that increases.

I think you alluded to earlier that also could help drag up margins in water services and maybe even the chemicals business is that right. That's exactly right, we're really looking to leverage those infrastructure relationships and long term contracts.

Luke Lemoine: From a from a margin perspective, I mean, we were at 40%, which is where we kind of said we'd be. We've guided kind of medium term to 50%. I don't know that we're going to, you know, 50% for the full year that goes to be a big jump on where we are today. But we've got a lot of projects that are coming online, you know, some this quarter that are going to be a creative to that margin.

To provide more opportunities for services and chemistry.

And it's not it's not really a bundling unbundling is usually a cost base approach. This is a service logistics based approach, where we can provide the complete solution at the correct price.

All of the customer.

Luke Lemoine: We still plan on infrastructure and chemicals being a majority of our growth profit for next year with infrastructure really being the lion share of the increase. So we're pretty aggressive in terms of what we think we can do both top line and from a growth profit standpoint and infrastructure, just because of the asset base we put together and the opportunity set that we've seen in front of us. Luke, I'd add that this quarter between the revenue increase in that segment and the margin increase.

And then just lastly.

I'd refer everyone to what we did in the Haynesville I mean, we were asked to provide that solution by our customary it wasn't it wasn't a bundled offer it was it was the answer they need it and we were grateful to be able to do it for them.

My last question kind of.

Take all of that as you see consolidation in the industry or you see some of your customers, who only want to deal with.

<unk> water company and allow you to put more of your offerings in front of them at a better margin opportunity for select.

Luke Lemoine: We grew growth growth profit about 12% quarter on quarter, and that was done as I mentioned with a not so favorable macro backdrop. And so you see that I think we'll see similar steps forward here as we get quarter over quarter, add these new projects and continue to work that margin higher and grow that as Michael mentioned to that 50%. And we're on the early stages of pulling together our thoughts for 2024, but I don't think it's unreasonable thing that infrastructure could be a third of the growth profit, for next year. Okay. Got it. Perfect.

Yeah, I think John really really nailed the question about consolidation and how we think about it I mean to your point there when you're working for the largest operators out there.

Luke Lemoine: Thanks a bunch.

Safety environmental automation.

Size scale reputation all of these really matter.

And Theres only a few companies that can they can check those boxes and Fortunately, we're one of them and so we're not afraid of consolidation. We're embracing eight were proactive we think it creates opportunities for us.

On really all three segment services infrastructure and chemistry.

Thomas Curran: Thank you. Next question comes on the line of Tom Curran with seaport to search partners. Please go ahead.

I would add onto that I mean, Nick talked about our efforts in the procurement area for this company one of the focuses with centralized procurement is too.

Michael Skarke: Good morning guys. For the Water Services division, Mick and Michael, when it comes to these three main levers, you expect to pull internally to expand the division's gross margin first to the mid-20s next year and then beyond that to the high-20s. You've got technology enhancements like the pump and manifold automation efficiency initiatives such as centralizing procurement, moving third-party support internally, and then leveraging the growing infrastructure network. For each of those three, could you have found on how far along you think you are and just, you know, if phase one is getting to the mid-20s, how should each of the three contribute to the mid-20s and then as we look from the mid-20s to the high-20s to there be a shift in terms of the weightings of the three.

Two.

Do more with less on the vendor side.

For us our customers are doing the same thing they are very much focused on.

More of a partnership approach, especially in the infrastructure piece, but as it relates to chemicals and water services. They look as that is a value as well.

It to doing business with fewer companies and.

More strategic value add.

As we move forward in the area that we're in which is this water solutions business.

Thanks for taking my questions.

Thank you Jeff.

Okay.

Thank you.

There are no further questions at this time I would like to turn the floor over to John Schmitz for closing comments.

Yeah, Thanks to everyone for joining the call. Thank you for your interest in learning more about select water solutions.

Michael Skarke: No, it's a great question, Tom. I couldn't have articulated better. I would add that there's a fourth lever there, which is really yard consolidation or rationalization. So, you know, we put a lot of assets together and a lot of yards together and there is some overlap and there's frankly some underperforming. And so that is going to be a material lever that we're just now really starting to get into. We had a few that occurred this quarter, but we're expecting more.

And we look forward to speaking to you again next quarter.

Okay.

Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

[music].

Michael Skarke: And I think that one's going to be, you know, material and we're very early in ink to addressing it. In terms of leveraging infrastructure, contract, and relationships, you know, that's also one that's relatively early in terms of us addressing. You know, I would point that in the announcement yesterday, we had the announcement in the Haynesville where we secured a long-term service contract at the customer's request off of the infrastructure contract that we put in place.

Okay.

Yes.

Okay.

[music].

Michael Skarke: And so we think those kind of opportunities, you know, exist. And that's going to be market share, but also margin of creative for both for real segments. Supply chain, that was something we put in place to the issue. You're really centralizing supply chain. Moving to something that's more formalized, instruction, Nick, I'd probably look to you as to where you think we are on that development. Yeah, I think as far as the getting the contracts in place and the procurement centralized, where in early innings, I think in terms of seeing the results financially very, very early there.

Michael Skarke: So I think the bulk of that will come in 2024. That's probably contributing just a few basis points in the current service margin. And then the final one you mentioned, Tom, was automation. And that's the one that I would say that we're furthest along. We've really been, you know, on a pioneer in terms of water solution automation. It's something that we think is a differentiator. It's something that way that we can do something safer, more cost effective and more reliable than relying on, you know, sometimes, well, we're still labor. And so it's something that we're while we're further along than the other initiatives, it's one that you're never done in. There's always more. And so that one would be later innings, but still pretty good runway.

Thomas Curran: I've got a helpful breakdown and additional color there, thanks for that.

Thomas Curran: And then Nick, I realize, you know, you are still finalizing the plan and expectations to provide formal 2024 guidance, but maybe just some preliminary metrics here for cash flow in 2024. Are you still targeting conversion rate for EVA data free cash flow of about two-thirds and expecting maintenance cat-backs to run about 50 million per quarter, give or take five to 10 million. Tom, I'd see maintenance cat-backs as lower than that. I'd say, again, preliminary basis, I'll talk more about it next quarter, but we're probably looking at 60 million for the full year maintenance cat-backs, but for now, give me 10 million on either side of that and we'll get a little more direct next year.

Thomas Curran: I think the two-thirds free cash flow of EVA, that was partially driven by the working capital opportunity we had for this year. So I think for next year, it's probably going to be a little lower, but as I think about our free cash flow for this year, we had 75 million debt outstanding in the first quarter. We've taken that to zero with 25 million cash on hand. We've paid out over 65 million shareholder returns this year on top of that, and then we've executed on our cat-backs budget and stayed within that budget while adding some really critical projects.

Thomas Curran: So this is a strong cash flow generating business here. It'll be strong next year. I think we do probably have initial growth infrastructure projects, as Michael mentioned, that are likely to come in higher than this number, this year's number. So I'm excited about that, and we're going to do that, as always, with a very conservative solid balance sheet and look at all the opportunities both organic and potentially M&A related as well.

Thomas Curran: In one point, just to reiterate, on the growth infrastructure projects for next year, you know, those projects have strong contractual long-term contracts around them. They're generally production weighted or being driven by secular trends, such as recycling. So we feel really good about those investments in a flat or even, you know, slightly down market because of the contractual support and because of the production and secular trends that exist there. Got it. And just to be clear, I was saying 15 million per quarter or 60 million for the year.

Thomas Curran: So it does sound as if that's unchanged. Sorry, I miss urge you there, Tom, so that 15 per quarter maintenance capital sounds like a good number there, not 50. Yeah, it's 52. Right, yeah, exactly. All right, thanks guys.

Thomas Curran: I'll turn it back.

Thomas Curran: Thank you, Tom. Thank you.

John Daniel: Next question comes on the line of John Chris with Johnson Lace, Peace Corps Ed. More in gentlemen, I wanted to ask about specialty chemicals. I know it's been a couple quarters now since you've been doing the tailored solutions per formation and you're getting more data back, flow back, data, et cetera.

Michael Skarke: Any kind of updates there and is the demand increasing still in that specialty chemical sector? Yeah, a couple of things on that, Donna. At first, we're seeing operators continue to be more and more focused on chemistry and its compatibility with produced water and just well results. And so we're getting really good reception as we have those conversations with with our customers in terms of the results that we've seen. I mean, we're pretty happy with the improvement in market sharing margins we've seen with chemistry of the last few quarters.

Michael Skarke: And we really contributed to what we're doing in terms of creating more water tolerant solutions designed for produced water. And so we've gotten some pretty good feedback with our customers on that. We've got direct open dialogue with both operators and pressure pumpers. And additionally, the more produced water you have, the harder it is on chemistry, the more their need is for specialty chemistry. And frankly, one of our bigger customers is internal.

Michael Skarke: We're providing the chemistry for all of our recycling. And so there's been a number of tailwinds around that special chemistry that's delivered the returns where we are. We took a step back this quarter. It is completion driven, but we're still pretty excited about it. I appreciate the color there.

John Schmitz: And John, maybe one for you, you know, obviously there's been some large M&A in the basin or in the Permian Basin particular. Any thoughts on that consolidation and how that made benefits select going forward? Is it is it better for you given your larger company bias? Yeah, Don, we think it is, you know, a lot of those transactions are seeing we're on both sides because we are, you know, we are sort of, you know, sizable when we do have a good customer base.

John Schmitz: But just as important, you know, we're, we're also integrated a lot with a lot of our customers infrastructure now. So we, you know, have integrations to take our asset bases, our different wells, pipes, recycling facilities and put them in a system. And that system just got larger with this. So I'll also say that the acquires here that we keep seeing are very good customers for us with alignment because of the size of our either automation, the technology, the sources, you know, the movement within it.

John Schmitz: And they're, they're doing this primarily with produce water and we all know produce water has a different environmental effect to it. And we're very focused on whether it's host development automation control leak detection that environmental application risk profile is favorable to the buyers here. And John, if I may add, I mean, I've done, I'd point you to the release we had in August with the never where we announced 300,000 barrels a day recycled water delivering almost eight and a half million barrels to a single location.

John Schmitz: I mean, that's a really sophisticated, technical, highly engineered solution moving, you know, produce water from multiple sources. And there's just not a lot of company. I don't know that there's another company that can pull off a job like that. And so it's going to be the larger companies that are going to do things at that kind of scale. And in doing that, they're going to look to a trusted partner that can they can accomplish a project like that. And I think that select water. I appreciate the color.

John Schmitz: I'll turn it back. Thanks, guys.

John Daniel: Thank you.

John Daniel: Next question comes on the line of John Daniel with Daniel Energy. Please go ahead. Hi, guys. Thanks for having me. The way from my computer said I don't have all the data in front of me, but I'm curious to remind me what your recycling capacity is today, sort of what that utilization of that capacity is. And then just, you know, a reasonable growth rate that you expect over the next couple of years.

John Daniel: You know, we've got about 3 million barrels or so of daily capacity, you know, roughly half of that's going to be fixed facilities, half of that's going to be mobile facilities. We're adding to both, but really focused on the fixed facilities because those are going to be the ones that are supported by, you know, long term contracts. A majority of those facilities are in the Permian as you're aware, John. There's one in the DJ, where a majority of the current opportunity set we're looking at are in the Permian, but there are several that are outside of the Permian.

John Daniel: And as other basins transition, you know, the opportunity for recycling just continues to expand, you know, in terms of where we can take it, you know, we're pretty ambitious. We think that the market's going to continue to transition is going to need an industry leader. And I think that's us.

John Schmitz: I probably stopped short on saying where we're going to be this time next year, but if it's not materially higher, everyone in this room will be very disappointed. Yeah, fair enough. And a little bit of an add-on or follow on to Don's question. Like, when you all start building out the recycling capabilities, is it safe to assume that the larger, I'm going to say, more sophisticated operators are the clients and not the small guys or am I mistaken on that?

John Schmitz: It's actually kind of interesting because we really we have interest in our recycling solutions from, you know, the largest operators to some that I really honestly wasn't aware of until the conversations took off. I think there's more opportunity on the larger because the economies of scale that exist, but there's certainly the ability to pull together a couple smaller opportunities and still underwrite a commercial recycling facility. And move forward and further integrated into other solutions.

John Schmitz: So, you know, I wouldn't ignore the small ones, but it's definitely heavier weighted to mid size and larger. And I'd add really there the demonstrates that the value this brings. It's, you know, it's great for the environment. It's more sustainable. It's leaving fresh water in the ground. Addressing seismicity, but it's also reducing costs for our customers and we do this at scale economically and whether you're a small operator or a large operator, we can help your wells be more productive at a lower cost.

John Schmitz: And I think that's a good point Nick. The larger and mid size operators are generally those that are more focused on the stewardship and the environmental component. Right, so that would be a bias towards them as well. And in this case, the consolidation is actually a positive for you, simplistically, right? John, it's very big positive and you can point to one of the past ones that we actually announced and that that's one of the, you know, acquired companies that just got announced. And as that acquired company got announced, we added two more deals to that recycling facility because of the scale and scope of the surrounding acreage that got put in the deal.

John Schmitz: Got it.

John Daniel: A final question, I think you mentioned in your response to a question was a portion of your customers are in fact the pressure pumping companies. Is that correct? On the chemical side, so chemical technology works for both pressure pumpers as well as direct operators. Okay. Are you having or seeing any signs of payment issues with any of the smaller pressure pumping companies? No, John, we're not part of the circle back to an earlier question there and how low can our DSO get when we do sell the pressure pumpers that are in turn paid by operators through chemical technologies division, which has both operators and pressure pumpers as customers.

John Daniel: That dynamic there is one of the things that keeps us from getting, you know, call it below 75 days, eventually. However, the payment issues, you know, we're having the same performance that we typically had there, no, no sign of deterioration. We do work for a lot of very large successful pressure pumpers and they're paying on schedule. Yeah, I mean, I would expect that for them, but you've seen the sort of the carnage in the spot frack market.

John Daniel: I just didn't know if those super, super small frack players were having any issues. Yeah, I think the question. We really don't do a whole lot with the super small frack players. We have a hard time on that side with the chemistry, just getting the size of those tickets. Got it.

John Schmitz: Okay. I think it's fair to say, John, we also don't do a lot of business with even larger companies that are heavily weighted to spot. We don't have that fair enough.

John Daniel: Well, thank you for including me and for your time today. Thank you, John. Thank you.

Jeffrey Robertson: Next question comes from the line of Jeff Robertson with water dollars such, please go back. Thank you.

Jeffrey Robertson: Good morning. About the revenue split is about 70% completion and 30% production. Michael, do you see that changing over time as companies drill longer laterals and maybe even if they're drilling bigger pads. Do you see the amount of water that they'll have to move off locations increase? And is that an area that will drive your large and opportunity in the water infrastructure business? Yeah, I think that's a good question, Jeff. There's really two parts.

Jeffrey Robertson: So we do see continued longer laterals and more water per pad as I mentioned with the endeavor job that we released a couple months ago. And so that that's certainly an opportunity for us as a, you know, water management company and providing the water and managing the water and taking it away in terms of the split between completion and production. I really look at that a little differently. I do see the production waiting continue to increase and that's largely as a result of our focus around infrastructure.

Jeffrey Robertson: That's really where, as I mentioned, that's where we're going to spend a majority of our growth capital for next year and a good portion of that's going to be related or really derived from production revenue. And so I think that's what's going to drive a split, something more towards a, you know, 60-40, in your term. Michael, is that increases that you alluded to earlier that also could help drag up margins and the water services and maybe even the chemicals business?

Jeffrey Robertson: Is that right? That's exactly right. We're really looking to leverage those infrastructure relationships and long-term contracts to provide more opportunities for services and chemistry. It's not not really a bundling. A bundling is usually a cost-based approach. This is a service logistics based approach where we can provide the complete solution at the correct price for the customer. Again, I prefer everyone to what we did in the Hainesville. I mean, we were asked to provide that solution by our customer.

Jeffrey Robertson: It wasn't a bundled offer. It was the answer they needed. And we were grateful to be able to do it for them. My last question is to take on that. As you see consolidation in the industry, are you seeing some of your customers who only want to deal with one water company and allow you to put more of your offerings in front of them at a better margin opportunity for select? Yeah, I think John really nailed the question about consolidation and how we think about it.

Jeffrey Robertson: To your point, when you're working for the largest operators out there, safety, environmental, automation, size, scale, reputation, all of these really matter. There's only a few companies that can check those boxes. Fortunately, we're one of them. We're not afraid of consolidation. We're embracing it. We're proactive. We think it creates opportunities for us on really all three segments, services, infrastructure and chemistry. You know, I would add on to that. I mean, Nick talked about our efforts in the procurement area for this company.

Jeffrey Robertson: One of the focuses with centralized procurement is to, you know, to do more with less on the vendor side for us. Our customers are doing the same thing. They're as relates to chemicals and water services. They look at that as a value as well, into doing business with fewer companies and more strategic value as we move forward in the area that we're in, which is this water solutions business. Take my questions. Thank you. Thank you, Jeff. Thank you.

Operator: There are no further questions at this time.

John Schmitz: I would like to turn the floor over to John Schumitz for closing comments. Yeah, thanks to everyone for joining the call. Thank you for your interest in learning more about what select water solutions. And we look forward to speaking to you again next quarter. Thank you.

Operator: This concludes today's teleconference, you may disconnect your lines at this time. Thank you for your participation. .