Greetings, and welcome to the Select Energy Services First Quarter Earnings Conference Call. At this time all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] And as a reminder, this conference is being recorded. It is now my pleasure to introduce to you Chris George, Senior Vice President of Corporate Development, Investor Relations and Sustainability. Thank you, Chris. You may begin.

Thank you, operator. Good morning, everyone. We appreciate you joining us for Select conference call and webcast review our financial and operational results for the first quarter of 2023. With me today are John Schmitz, our Founder, Chairman President and CEO; 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 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 selectenergy.com. There will also be a recorded telephonic replay available until May 17, 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, May 3, 2023. And therefore, time sensitive information may no longer be accurate as of the time of the replay listening or transcript reading. In addition to comments made by management during this conference call may contain forward-looking statement within the meaning of the United States Federal Securities laws. These forward-looking statement 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 today. 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. Also, please refer to our earnings announcement yesterday for reconciliations of non-GAAP financial measures. Now, I'd like to turn the call over to our Founder, Chairman, President, CEO, John Schmitz.

Thanks, Chris. Good morning, and thank you for joining us. I am excited to be discussing Select again with you today. The first quarter saw a strong recovery from a challenging fourth quarter with revenues growing 9% and adjusted EBITDA growing 29% sequentially during the quarter. We benefited from a solid quarter contribution from our recent acquisitions, and also saw organic revenue growth during the quarter across every segment. This successful combination of factors led to a company record quarterly revenue of $417 million for the first quarter. Additionally, we nearly doubled net income to $14 million, while adjusted EBITDA increased to $67 million. Across our individual segments, we once again achieved record revenues in both our Water Infrastructure and Chemical segments, while our Water Service segment continued to improve margin to operational efficiency improvements and technology initiatives. Water Infrastructure was especially strong, seeing revenue growth of 32% for the first quarter. This segment benefited meaningfully from a mix of factors including, our recent acquisitions, the increased utilization of existing assets, and new Greenfield and brownfield organic project contributions. Water Services also saw a solid 5% revenue growth in a flat activity environment and continues to find efficient ways to improve its operations and grow market share. As importantly, we increased gross margins across the board, with each segment seeing at least a 200 basis point increase in margins relative to the fourth quarter and nearly 500 basis points of improvement in each segment related to the first quarter of the prior year. Looking forward while natural gas has seen some challenges, we continue to believe that the current commodity price outlook remains supportive of a productive activity environment for our customers with mobile service assets leading technology and strategic infrastructure across every basin, we expect to see modest revenue…

Thank you, John. And good morning, everyone. Select had a great start to 2023 as we push forward with new all-time high quarterly revenue performance. Margins also advanced notably across the board with oilfield chemicals reaching a record gross margins resulting from our continued market share gains and customer demand for our higher margin proprietary manufactured products supporting our fluid matched initiatives. Our net income nearly doubled, and we posted the highest quarterly adjusted EBITDA performance since 2018. While the macro environment settled from the high growth base of 2022, Select clearly still has positive company specific trends and secular growth drivers in our core business model of providing full lifecycle water solutions to a more complex and sustainable energy industry. Our business benefited from enhanced customer opportunities resulting from our recent acquisitions, and more efficient operations across the board, as well as a number of recently executed development opportunities across multiple basins. These combined to produce positive monthly progression throughout the quarter. 9% revenue increase was bolstered by having an additional month of breakwater operations relative to fourth quarter, but the bulk of the increase was driven by higher utilization and recent investments across our Water Infrastructure segment. As John discussed, we have contracts in place supporting attractive incremental investments into both new infrastructure and enhancements to existing assets that we expect will yield additional revenue and margin expansion through the year. Recent stock market dislocation related to non-energy sectors provided us with an attractive opportunity to authorize and initiate a $50 million share buyback program in addition to the remaining $8.5 million authorization we previously had in place, to fully executed the two buyback programs, in combination with the quarterly dividend at its current level would distribute over $80 million to shareholders this year. With our expectation of…

Thanks, Nick. Before we jump into the question and answers, I'd like to take a moment to once again thank our now over 4,000 employees, including our newest team members that have joined us in 2023. I firmly believe we have the best watering chemistry experts in the industry who are truly dedicated to solving the critical problems that our customers face every day. Thank you. And with that, we'll open it up to questions. Operator?

Thank you, sir. We will now be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Jim Rollyson with Raymond James. Please proceed with your question.

Good morning, guys. Nice, solid turnaround from last quarter.

Thank you, Jim. Good morning.

Good morning. One quick question on revenue guide. Obviously, you kind of flattish for Water Services and Water Infrastructure and up mid-single-digits for oilfield chemicals. But margins are improving kind of across the two flat revenue businesses. And I think Nick, you did a good job of explaining some of what's driving that expansion. Just maybe how we think about or how you guys are thinking about margin expansion over the balance of the year, because obviously, I think you're expecting as some of these projects come on, as your utilization improves, et cetera, that revenues are actually going to grow in the back half of the year relative to first quarter. And I presume some of that will be carrying additional margin improvement with it. So I'm just trying to think about how maybe where exit rate margins might be for your business segments as we go through this year.

Sure, Jim. Thanks for the question. On Water Services, we mentioned the efficiency improvements there. The good thing about a flatter environment versus a high growth environment is you can really focus your energies on getting those costs out of the system on addressing areas where you have opportunity to standardize across your operations, rebuilding things like centralized procurement that can help lower costs throughout your operations. And so we're focused on that front. And so, we have a very large revenue base in Water Services, and applying few more points of margin through the year really has a good opportunity there to push more dollars through to the bottom line. So we'll continue working on that. We didn't -- don't have explicit guidance for the back half of the year. But I think certainly building upon the 100 to 200 basis points that we expect in the second quarter, getting closer to the mid-20s in the back half of the year, certainly achievable. Water Infrastructure, so we've had the $34 million of new projects announced between this call and last. Those are all highly accretive. We continue to engage in a large number of active discussions with our customers. I'm sure in our next call, we'll have some new projects to announce that are also accretive and put substantial dollars to work. So that will continue to drive that segment higher beyond the 30% that we are targeting for the second quarter here. Finally, in Chemicals. So that's been a very strong performer for a number of quarters now both in revenue and margin.Given the nature of the business, its manufacturing, capital life doesn't require a lot of CapEx. We do have existing roof line existing facilities there that can continue to be expanded at relatively low cost. So I think we do have the potential there to drive some continued margin improvement. Of course, we have the revenue growth in second quarter that we're anticipating. And I think we can get into the low-20s there as we move through the year with a stable, constructive commodity environment like we have today.

That's very helpful. Thanks, Nick. On the new projects, you've said, I think both of you guys have said this multiple times, so they're highly accretive. So clearly margin performance there is pretty strong. They're backed by contracts, obviously drive some of the longer term growth and enhance the utilization of your existing infrastructure. I'm curious when you think about -- you have a CapEx budget for this year, but as we kind of go forward, it seems like there's quite a bit of opportunity beyond even just the additional projects you announced this quarter. Maybe, how do you balance that desire by your customers with the capital needs and your kind of budget et cetera?

Hey, Jim. This is Michael Skarke. I'll take a shot at it. So just to start off, we still expect maintenance CapEx of $50 million to $60 million on the year. And then we've gotten into something that's roughly equal to that from a growth CapEx standpoint. But we've acknowledged that the growth CapEx will be largely determined by our Water Infrastructure projects. So the more successful we are at bringing those in, the more likely we're going to hit it kind of the high-end of the initial range. And then to the extent that we were less successful be on the low end of the range. But given the fact that we've already announced I think, close to $35 million in CapEx this year, with the intent of continuing to develop in the Permian Basin and beyond our full lifecycle water solutions. We're hopeful that we can continue to expand that contracted revenue and grow the business that way.

Right. And then the last one for me just kind of related to that, on the your most of your growth CapEx for organic brownfield greenfield projects, to date have been kind of Permian-focused, but obviously, the announcements this quarter are pretty much all outside of the Permian. Curious where you see, just is the margin and return opportunities outside the Permian, similarly strong to what you've been experiencing in the Permian.

Sure, so most of our focus has been the Permian and most of our focus going forward will continue to be the Permian just because of the amount of water and activity there. But we're still very focused on full lifecycle Water Solutions outside of the Permian. We've announced in the Haynesville, we've announced in the DJ, we've announced in Midcon and we're not solely or exclusively focused on those basins. So we're really going to pursue opportunities across our entire footprint that we've put together over the last two years. From a return standpoint, the returns are competitive with the Permian. And they're competitive with other uses of capital. All of these investments are high margin, employee-light, high ROI investments. And we think it's cool. We're in central to kind of our theme and thesis and what we're trying to achieve

Fantastic, thanks for color.

[Operator Instructions] The next question comes from the line of Don Crist with Johnson Rice. Please proceed with your question.

Good morning, gentlemen. I wanted to ask about speciality chemicals. I know it's early days in creating specific formulas for different formations in the Permian. But how is that business progressing? Are you getting traction amongst customers that wants specialty chemicals more than that in the past? And? And are the results from those wells starting to bear out that, that you're actually sweeping more oil out of the formation?

Sure, Don. This is Michael and thank you for the question. I think we've seen a step change in our revenue margin in our Chemical Group. And it's primarily because of our investment in technology with the secular tailwinds of transitioning from produced water efficiently from freshwater produced water driven by the Permian. And it all central it's all central to fluid match, we've really pivoted from what was a lower margin kind of more distributed -- distribution-oriented business, to one that is very technology-focused and custom chemistry. And that's what's driving the revenue. That's what's driving the margin improvement over the last few quarters. It's been largely focused on fresh introducer and new well completions. But we are bringing that technology into some of other solutions like cement additives and surfactants. We think it's been -- it's not exclusive to the Permian either. I mean, that's where we've seen most of the transition of produced water, but with our kind of our technology solutions in the fluid match is applicable beyond the Permian. In terms of specific reserves, we are working and had been trialing products that are really trying to match the chemistry to the rock. So we started with matching the chemistry of the water. And we're trying to work on matching it to the actual reservoir to improve hydrocarbon recovery. It's early days, but we're very excited about the results and are involved in meaningful conversations with multiple operators, some of the biggest and some of the smaller ones. Because obviously improving recoverable reserves, everyone's interested in that.

I appreciate the color there. And just one final one for me. John, are there any kind of bite size acquisitions out there that would greatly enhance any of your operations or you kind of set where you want to be right now from an M&A perspective? I know you've done a lot over the past couple quarters. I didn't know if that's kind of slowing down, are there still opportunities out there?

We always keep our eyes open, but we have put together a very unique position with assets across multiple basins. And it's very tightly with what Michael just described. So our focus is on our asset base, what we can do for our customers and value add across those asset base now, while we can do with the integration efforts that Nick talked to whether it's, in the large piece of money on the Water Services side, or very important to management of our working capital, when streamlining our processes, and now we put these assets together and these companies together. I wouldn't say there's nothing and we will keep our eyes open. But right now, we have really got a unique position. And we're going to focus on that position.

I appreciate all the color guys. Good work on the quarter. And I'll get back in queue.

Thank you, Don.

And the next question comes from the line of Luke Lemoine from Piper Sandler. Please proceed with your question.

Hey, good morning. You talked about some of the full life water recycling projects and your CapEx budget and how these are highly accretive. Just want to see if you could talk about how you think about paybacks or returns when you're targeting some of these new investments.

Sure, thanks, Luke. So we're aware that every project is different, different geology, different types of contracts, customers opportunities to develop the on that anchor tenant. So obviously, we want to maximize all of that upside and minimize the risk in any project, we look at. However our capital allocation priorities, we have about $80 million allocated towards full potential shareholder returns. That's critical to us. And I think that's a strong yield based on our current market cap. As we've discussed here, and we're actively signing new contracts for long-term contracted mixed production related revenue as well with customers at very high returns. Certainly, we apply internal hurdles that are think very attractive and accretive from a margin basis, total returns basis paybacks within -- versus our weighted cost of capital here. So overall, we're applying great type standards to it. We have some projects that don't make it to the finish line, whether that's customer related or returns driven. But Michael, you can discuss a little more on the individual project criteria here.

Sure. So just thinking about full lifecycle Water Infrastructure projects, the ones we've announced and the ones we're working on. There's a couple of key ingredients, whether it's a brownfield or greenfield investment. And first, it's got to have the contractual support. So we're really looking for an anchor tenant or several anchor customers to underpin the contract, or underpinning the investment. Second, it's got to be strategic, it's got to be cool and central to what we do and an area where we can do it well and better than anyone else. And then we're really focusing largely around gathering through pipelines, the recycling, the redistribution and disposal. And then from strict return standpoint, we're underwriting them inside of a three-year payback, with as Nick said, room to commercialize that was all set operators that would improve the returns. And then the only other thing I'd add is we're always looking to the geology as well. We want to understand the reservoir to the extent that we can to make sure that we know the number of economical targets and the volume of water that's coming back so that we can manage that makes sure that we size that story appropriately. So that's kind of a little more specifics about how we think about the underwriting of the projects we've announced and the ones we're working on.

Okay, got it. Thanks, Mike. Thanks, Nick.

And the next question comes from the line of Tom Curran with Seaport Research Partners. Please proceed with your question.

Good morning, guys. Starting with Water Infrastructure, when it comes to your existing asset base, everything that's already been constructed as online and/or acquired. Where would you say you're at as a percentage of realizing the total estimated earnings power of that existing Water Infrastructure asset base? And, when it comes to capturing the remaining upside, what are the key levers you'll be focusing on over 2023? Is it -- how much of it is just getting to full effective utilization on the existing recycling facilities? How much of it is capturing opportunities to tie in proximate customer infrastructure, or perhaps add additional customers to existing facilities. Just to expand upon if you're able to fully achieve that estimated remaining upside over 2023 pre-existing asset base? What would you expect the mix of contributing factors to look like?

So Tom, this is Michael. If we just step back now over the last few years, we've contracted and commercialized and underwritten five fixed facility infrastructure recycling centers, we've acquired another four. And we've been aggressively expanding the ones that we initially -- the ones we acquired as well as the ones we've developed. And so that capacity, that throughput, the storage is always changing, which makes it hard to kind of define and look at from a utilization standpoint. So I mean, today, we're almost 3 million barrels of throughput capacity. If you include the project in the northern Delaware, we announced last quarter with 14 million barrels of [Indiscernible] produced water storage. We still have room to expand the recycling facilities or excuse me -- we're room to utilize the recycling facilities within the existing current framework of storage and throughput. And we still have the ability to add capacity, throughput capacity and storage at that market continues to grow. And they become more interconnected. The disposal sides a little different, because it's not as easy to expand an existing disposal well. But again, over the last few years, we've acquired 1.3 million barrels of permitted capacity per day across all of our -- all the basins in our entire footprint. And it was pretty underutilized when we acquired it, which provides obviously meaningful upside. So I think we've increased from Q1 of last year at Q1 of this year, our disposal utilization by 50%, which gives you some extent of what we've been able to do in a relatively short period of time. And we're still making investments, we're still upgrading wells, increasing connectivity to make sure that we continue to expand. As we look going forward, I mean, the first thing is, you mentioned connectivity, the more operators you connect with, the broader your geographic reach, whether you're gathering water, recycling water, redistributing water, so that's a primary focus for us. Reliability and redundancy in terms of interconnecting facilities to make sure that you have that backup and that you are a foolproof solution for your customer. And then obviously, new facilities, whether that's a step out to expand existing reach with the offset from an existing facility, or a new geography. In terms of the breakdown, I think we will be more heavily weighted to utilizing and expanding our existing facilities, then drilling out new greenfield projects. I'm probably uncomfortable providing an exact number or percentage at this point. But we're very focused on expanding what we've built and acquired because there's plenty of room to run.

Got it? That additional detail is helpful. Thanks, Michael. And then on the Water Services side, you've talked a lot about the inward focus for that division and improving its operational efficiency, some of the streamlining and cost out initiatives underway. But in John's opening remarks, he also emphasized what you're pursuing on the technology front. Could you update us on what the technology initiatives are for the division this year? And how far along are which of them specifically you accomplished in the first quarter?

So, Tom, this is Michael, again. The revenue guide is relatively flat, but we're excited about expanding margin in Water Services, even with the pressures that exist on the gassy side. And it's largely because of the technology investments we're making. There's also some operational efficiencies that Nick alluded to on the call. In terms of specifics, we're rolling out kind of expansion and upgrade of our automated water transfer. It's really the leading solution in the market today. We just rolled out to new kinds of best in class sand management solutions for our well testing program, an automated standard scale, some new sand capture solutions for draw the completion work that we've run up against kind of the market leaders in ours it performed as well or better than anything else. And then we've, over the last quarter or two have been rolling out our new waste management solution for our accommodations business. And so we're looking at all of these as a way to really start to expand our market share in Water Services and what's going to be flat the choppy market, but also to expand margin. And I think that'll be the bigger part of the contribution to the bottom line.

I guess I'd add, there's kind of one ancillary benefit to that, and that would be on the environmental side. With the technology, we're seeing reduced emissions, reduced miles driven, less likelihood to spill water, which is obviously important as we move to produce water. So there are some ESG benefits with the technology and reduction in labor, other efficiencies. But ultimately -- generally speaking, technology solutions that we're providing allow us to capture a higher margin and provide a better, safer, or cheaper solution to our customer.

Right. Got it. Thanks for taking my questions. I'll turn it back.

This now concludes our question-and-answer segment. And I'd like to turn the floor back over to John for any closing comments.

Yeah, thank you for joining today. I look forward to speaking with you again next quarter officially under the new banner name of Select Water Solutions.

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