Greetings, and welcome to the Select Energy Services 2021 Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris George, Vice President, Investor Relations and Treasurer. Thank you, Chris. You may begin.

Thank you, Operator, and good morning, everyone. We appreciate you joining us for the Select Energy conference call and webcast to review our financial and operational results for the second quarter of 2021. 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 Skarke, Executive Vice President and Chief Operating Officer. Before I turn the call over, 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 selectenergy.com. There will also be a recorded telephonic replay available until August 18th, 2021. The access information for this replay was included in yesterday's earnings release. Please note that the information reported on this call speaks only as of today, August 4th, 2021, 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 for the year ended December 31st, 2020, our current, our current reports on Form 8-K, as well as our quarterly report on Form 10-Q to understand those risks, uncertainties and contingencies. Also, please refer to our second quarter earnings announcement released yesterday for reconciliations of non-GAAP financial measures. And now, I would like to turn the call over to our Founder, Chairman, President and CEO, John Schmitz.

Thanks Chris. Good morning and thank you for joining us. I'm excited to be discussing Select Energy with you today. We have been very active over the past few months. And I am pleased with the progress we've made on executing our strategy. We are continuing to strengthen our position as market leader in sustainable full lifecycle water and chemical solutions. Since the first quarter, we realize notable achievements in each of our key strategic priority areas, which are first improving and bolstering the base business. Second, advancing our technology ESG initiatives and diversification efforts. Third, executing on strategic M&A. First off, looking at the performance of the base business, the second quarter financial results saw a notable growth in top line with a 12% revenue increase over the first quarter. This revenue growth was led by Oilfield Chemicals at 23% and our Water Services with 19%. While our Water Infrastructure took a step back in the second quarter, driven partly by the Bakken seasonality, we anticipate a very strong third quarter from his segment. On a consolidated basis margins held flat overall, has cost pressures including labor, fuel and raw materials continue to weigh in on the margins. Looking forward, we are continuing to engage with our customers and have had positive recent discussions around pricing improvements. As a result, we expect to see margin uplift in our base business during the third quarter. In the third quarter, we also expect to benefit from the increasing contributions from our recently announced recycling projects. The first two projects were completed late in the first quarter with a subsequent expansion of one of these projects just starting in the late in the second quarter. The next three projects should be completed by the end of the third quarter, though their financial…

Thank you, John, and good morning, everyone. The underlying base business took a big step forward in terms of gaining market share with accretive incremental margins in a recovering market, though cost pressures also impacted the second quarter financial results. As we execute on the new investments and acquisitions John discussed, we expect to see meaningful accretion in our earnings along with strategic benefits, all while maintaining our strong balance sheet. Overall revenue growth of 12% quarter-on-quarter to $161 million encompasses some divergence between our segments. Water Services and Chemicals had especially strong quarters, both growing the top line around 20% well in excess of industry activity growth. Water Infrastructure, however, declined 12% driven primarily by seasonal factors and short term breaks and activity in some of the areas served by our pipelines. As I'll discuss in more detail shortly, we expect a strong rebound in revenue for this segment in Q3. Looking at the segments, the Water Services segment grew its revenues by 19% and its gross margins before D&A from 3% to around 8%. We expect further upside in both of those numbers in the third quarter. The Complete acquisition has the largest projected forward impact on this segment, and brings more production waiting to balance the completions leverage of many of our services. These assets along with activity and pricing gains lead us to expect revenue growth of over 30% in this segment for the third quarter. In regards to pricing gains, we expect margins progressing into the low to mid-teens during the third quarter for Water Services driven by recent pricing gains and moderating labor pressures. We secured a number of pricing adjustments in recent months. Though were primarily in response to the rapid labor and fuel price escalation of the first half of the year.…

[Operator Instructions] Our first question comes from Tom Curran with Seaport.

Good morning. First one, a two part question for Water Services on a 30% plus sequential revenue growth you expect, the first when it comes to the anticipated gain, in average realized pricing from 2Q to 3Q, how much of that increase has already been implemented and taken effect with customers? And then second, where are you at with staffing relative to the workforce that would be required to achieve that level of utilization.

So, Tom, I'd say a lot of that pricing increase has been implemented. But that doesn't show up a lot in the 2Q numbers. So June was a month where we had a notable number of pricing adjustments. Those have continued into July and August. So there's a little bit of difference in the run rate we currently have or the run rate you're exiting second quarter with versus the overall second quarter of revenue. As far as the pace of those price increases and labor cost inflation. As I mentioned, it's moderated a bit recently, it's still an issue, and it will be an issue going forward. For Water Services, it's more on the labor side and for chemicals more on the raw material side. But with extended benefits running out, we will see less urgency and a more steady plateau of labor pressures versus the real sharp pressures we had earlier. Sorry, Tom, what was the second part of your question?

I mean, I think you mostly covered it. It was just about in terms of your current workforce size, where are you at today versus where you would need to be in order to achieve the level of utilization that your 3Q guidance assumes?

And Tom, this is Michael Skarke; I would say that we're largely there today. Recently with, as Nick mentioned with labor, we've been able to secure people, CDL drivers, some of the things that really haven't been available over the last few months. And so our headcount is trending up to support our estimates going forward.

All right, that's reassuring. Thank you for that, Michael. And then for Water Infrastructure, just another two parter. Nick, would you please tell us how this seasonal impact in the Bakken this year compared to the pre 2020 norm, say for 2018 and 2019? And then could you also quantify the margin impact of starting up the recycling projects? Just how many basis points today collectively cost the division?

Yes, so I'd say versus pre 2020 the seasonal impact was pretty severe for the second quarter here in the Balkan. We expect that to get better. But certainly that was an area that dropped off pretty notably as it does most years. But this year may have been a little more. Going forward as far as the recycling project cost, it will have a few basis points of impacts on the third quarter here. Those projects are accretive and we expect them to be fully operational and running by the end of the quarter. You're not going to see that impacts really in the third quarter numbers other than the cost side though.

The next question is from Ian MacPherson of Piper Sandler.

Good morning, everyone. You mentioned Nick that Complete will mainly fall into Water Services. I imagine there's a portion of it that doesn't but unpacking that inorganic layer as well as this most but not a full quarter contribution from that acquisition. Can you describe to us what your organic top line growth in Q3 from your base business looks like in the third quarter? Ballpark or 5%, 15% et cetera.

It's -- so chemicals, of course, isn't directly impacted by the Complete acquisition on a third quarter revenue basis, although it certainly helps, support further chemical growth organically going forward. If you take that $100 million annual run rate number and break it up into quarterly, you can see where we're falling out on a segment basis for the other two. Generally, for services, its high single to low double digit, organic x Complete growth, completed as I mentioned, are overwhelmingly services oriented. In the current breakdown here, going forward, there's a lot of opportunity to invest on the infrastructure side, they have a good platform of assets that are generally close together. Some of those are piped others have the opportunity to be networked and then to develop organically recycling infrastructure around them. And so that's where we see the bulk of the growth coming from. But currently, right now, it is more services related, but 60% leveraged to production versus completion. So it brings a little bit of a different mix into our services business, that's probably a little more stable and predictable, longer term.

That's great. Thanks Nick. You've highlighted for us really attracted economics on your acquisitions, but also in organic one, the organic side with the recycling projects, both of them from where we sit appear to be pretty rapidly scalable from what you've announced so far. Can you speak to the opportunity -- the relative pipeline, breadth of opportunity between building more recycling yourself versus other deals that could be comparable or maybe larger, potentially, than Complete?

Yes, this is John. There is other potential acquisitions that have the same kind of ingredients that we just executed with Complete, which are assets that we can build off of more on the infrastructural side through gathering lines and long term contracts around that asset base, as well as the ability to add the new position into that footprint of recycling, again, that recycling position that we've been able to execute and scribed today as it comes with long-term contracts as well. So we expect more of it. And we're going to continue to look at it. As far as the organic piece of it, we continue to have a lot of conversations around opportunities to put organic money to work in the conversion of disposal to recycling in long-term contracts around those. So we expect that we'll put more money there, and that pipeline is pretty strong too, Ian.

That concludes our question-and-answer session. I would like to turn the floor back over to John Schmitz for closing comments.

Yes, thanks everybody for participating today. We appreciate your time and your effort and the questions and we look forward to talking to you the next quarter, and our progress and our continuing development of the company. Thank you.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines. And have a wonderful day.