Greetings, and welcome to the Select Water Solutions 2023 Fourth Quarter and Year End Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Chris George, Senior Vice President, Corporate Development, Investor Relations and Sustainability. Thank you. You may begin.

Thank you, operator and good morning everyone. We appreciate you joining us for Select Water Solutions conference call and webcast to review our financial and operational results for the fourth quarter and full year of 2023. With me today are, John Schmitz, our Founder, Chairman, President and Chief Executive Officer, Nick Swyka, Senior Vice President and Chief Financial Officer, and Michael 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 selectwater.com. There will also be a recorded telephonic replay available until March 6, 2024. The access information for this replay was also included in yesterday's earnings release. Please note that the information reported on this call speaks only as of today, February 21, 2024, and therefore time-sensitive information may no longer be accurate as of the time of the replay listening or transcript reading. In addition, the comments made by management during this conference call may contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views of Select's management. However, various risks, uncertainties, and contingencies could cause our actual results, performance, or achievements to differ materially from those expressed in the statements made by management. The listener is encouraged to read our annual report on Form 10-K, our current reports on Form 8-K, as well as our quarterly reports on Form 10-Q to understand those risks, uncertainties, and contingencies. Please refer to our earnings announcement released yesterday for reconciliations of non-GAAP financial measures. As a reminder the Company made certain changes to its segment reporting structure during the second quarter of 2023. These changes were driven by several operational and strategic factors. However, the changes in segment reporting have no impact on the Company's historical financial position, results of operations or cash flows. Prior periods have been recast to include the water sourcing and temporary water logistics operations within the Water Services segment and remove these results of operations from the Water Infrastructure segment. Historical segment information recasted to conform to the new reporting structure is available as supplemental financial information in the Investors section of the company's website at www.investors.selectwater.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 Schmitz.

Thanks, Chris. Good morning and thank you for joining us. I am pleased to be discussing Select Water Solutions again with you today. Overall, 2023 was a record-setting year for Select. I'd like to start by highlighting some of our key achievements over the past year and we'll let Nick speak to the fourth quarter in a bit more detail. During 2023, we grew revenues by 14% and adjusted EBITDA by 33% year over year, finishing the year with total revenues of approximately $1.6 billion and adjusted EBITDA of $258 million. As importantly, we also finished the year with record net income earnings per share and free cash flow. Each of our segments saw year-over-year revenue and gross profit gains during 2023. Most critically, we made tremendous progress, accelerating the growth and profitability of our water infrastructure segment with contributions from a number of acquisitions in late 2022 and early 2023, as well as organic projects that came online throughout the year. We grew Water Infrastructure revenue by 84% and gross profit by 162% during 2023, as compared to 2022. Operationally, we significantly exceeded our expectations by growing recycled volumes, by more than 100% year-over-year while disposal volumes and systems utilization increased materially as well. We also continue to find ways to capture market share and improve the efficiency of our capital live Water Services and Chemical Technology segments growing gross margins by more than 200 basis points in each segment during 2023, and generating a significant amount of cash flow from these segments, to fund our growth strategy. With record operating cash flow, we were able to fund a diverse capital allocation strategy throughout 2023, including funding our modest maintenance CapEx needs, expediting our growth CapEx plans, particularly around our Water Infrastructure segment, increasing our base dividend by 20%…

Thank you, John, and good morning, everyone. As John mentioned, 2023 marked a record year for Select across many annual financial metrics. These include $1.6 billion of revenue, $74.4 million of net income, $0.73 earnings per share, $258 million of adjusted EBITDA and finally, $285 million of cash provided by operating activities. These record financial results enabled us to provide $87 million of total returns to shareholders over the course of the year, raised our quarterly dividend by 20% and retire our outstanding debt balance, finishing the year in a strong net cash position and with $307 million of liquidity. Importantly, we achieved this success despite the steady headwind from declining levels of drilling and completions activity over the back half of the year. Select's ongoing transition to a more infrastructure base production levered full lifecycle water company as aligned our profitability and cash flow generation with critical secular growth drivers unique to our business, increased water recycling by our customers', infrastructure networks the balanced water supply and demand across customers and regions, and industry consolidation that demands high quality partners with the size, scope and networks to serve the largest operators, all continue to benefit Select Water Solutions, even as activity levels have softened with recent commodity price volatility. While the more completions levered Water Services and Chemical Technologies segments were ultimately impacted by industry activity declines. The fourth quarter saw continued revenue and profitability gains in the Water Infrastructure segment. During Q4, the Water Infrastructure segment increased revenue by more than 4% to $60.8 million. And gross margins, which we customarily provide in terms of prior to depreciation and amortization, increased by over 300 basis points to 43%. The projects we announced yesterday exemplify our ability to add value to our existing infrastructure networks through steady incremental commercialization.…

Thank you. [Operator Instructions] Our first question comes from the line of Jim Rollyson with Raymond James. Please proceed with your question.

And certainly a great year from a free cash flow and capital return perspective. John on your comments when I look at water infrastructure which is clearly the growth driver here with a lot of outlook for incremental capital projects that's all backed by contract, you're kind of talking about mid single-digit growth in the first quarter for revenues but 30% to 40% growth for the full year. Can you maybe just kind of lay out the time line of how the combination of M&A that you recently completed, plus growth projects. How that kind of drives revenues throughout the course of the year. Just trying to think about, how we step up from modest growth in 1Q to getting to the 30% to 40% for the full year?

Yes. So Jim, it's a combination of some of these M&A things that we've done or assets that are being utilized and are performing well within the guidance that we're applying here and has an effect. Some of the M&A our assets that once they're in our system, they will provide that kind of margin improvement and stability as well. But we have to lay pipe to hook them up or to make the system if you will. If you just look at our general, organic application, it's all going to be from four months to eight months. The time you approve the AEFA get the right to start building the facility laying the pipe and then bringing that system online and then getting the utilization fully up to speed. So, it's going to be a progression across the whole year to get the margin improvement that we're looking for, that we think shorter period, we'd think that we can get that up in the 40 and 45 and headed toward our goal of 50 as we walk through this period of development and interconnection. But I'm going to let Michael speak on it a little bit to Jim to make sure, he is direct with me on the operational side the company.

Yes, thank you, John. So Jim, as an example, the Thomson pipeline that we announced, that's not going to contribute in the first half of this year, but we do expect it to be a meaningful contributor in the back half of the year. And that's not to say that's the difference, but that's just an example. We have a number of other projects that we're working on and expect to come to fruition that we think would be contributing in the back half of the year as well. So it's really just kind of a steady ramp, as we integrate the assets we've acquired, we increase the utilization and expand upon the assets we acquired. And then we're successful in executing the construction projects that we've already announced, as well as some that we hope to announce in future quarters.

Got it. So it's a pretty radical step up throughout the course of the year as that stuff hits and with all the new kind of project announcements that you see, it's kind of an ongoing growth story from that perspective. I presume the contracting strategy that you guys have had for some time on payback periods is still in place. As you talk about things like the Thompson pipeline project and the Delaware Basin recycling project, et cetera, that kind of contracting strategy and implied margin and payback period embedded there is still, still something we should expect?

That's correct. It's the same. It's the same investment thesis we've had on all of the projects we're bringing on are accretive from a margin standpoint and you're seeing us kind of bounce around our footprint because we really have asset optionality between recycling and distribution and gathering and disposal. We've got geographic you know our geographic diversification across our footprint. So we're really looking for the right project, the right investment, the right strategic fit and we'll do it organically or inorganically. And so, it's really trying to make sure that we have the right solution across a pretty wide arrangement of investment opportunities.

And I might add that, on expansion opportunity, those are those are even more accretive. I see at the Thomson Greenfield, large dollars, great margin living within those contracting guidelines we set out when we talk about the Midland Basin expansion, the Delaware Basin network expansion, those are very quick paybacks because you have a smaller capital outlay, but higher utilization on the system from that.

Right. And then just one last question, Nick, last year you obviously got a lot of benefit from getting your working capital efficiency kind of down to where you wanted and certainly contributed a lot to the free cash flow. Maybe as you switch into '24, I think you mentioned in the press release, you won't get the same incremental working capital benefits. So, how are you thinking about free cash flow in absolute or maybe relative to your 2023 levels? I know you gave the 40% flow through from EBITDA, but you didn't give us full year EBITDA. So, I'm just kind of trying to understand how you're thinking about year-over-year free cash flow?

Good observation, Jim. So certainly, cash flow and returns to shareholders are a core priority to us. Did not give the full year EBITDA guidance, but I think from that trajectory, you can you can indicate -- you could assume that we are indicating a higher adjusted EBITDA through the quarters and that's backed by the infrastructure projects that we listed, as well as Michael said, the ones that are currently on discussion and the incremental investments we're making in the acquisitions that take those assets, we've acquired at a very reasonable prices and then boost the utilization through connecting them to our network. So, correct, we don't have the same working capital opportunity this year. That's a positive reflection on the overall health and efficiency of the company. But we do see a continued opportunity to generate substantial free cash flow with our strong balance sheet. We'll have multiple options to not just invest that free cash flow and highly accretive infrastructure, long lives contracted investments there, would also continue our legacy of nearly $90 million in 2023, shareholder returns through regular dividend through tactical share buybacks. So, that's all on the table, and we'll continue progressing that kind of.

Got it. Thanks for answering my questions guys.

Thanks, Jim.

Thank you, Jim.

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

Good morning, guys. Dollars in the door indeed. A few questions on your Water Infrastructure operation in the Bakken, is the anchor tenant behind this contracted build-out of the Point Thompson branch, a historical user of either of the other pipelines to Charleston or Hybris in branch? And then, would you expect any of the customers on that block in sourcing and pre-frac water transfer networks can lead to produced water handling or recycling opportunities in the Bakken? And just where are you at in the Bakken in general on the produced water handling and recycling side in terms of opportunities?

Sure, John. This is Michael. I'll take the first cut at it. So, very astute question. You're showing your tenure with the company by this question. The short answer is yes. The customer that we're contracting is going to underwrite the Thomson for us is one of the legacy our customers under our Charleston system and is a long-term relation for us labor force in North Dakota. We are excited about the opportunity has been in the works for a very long time. It's the right solution for them, that's going to allow them to unlock a lot of the acreage north of the river the Lake, and we're going to be able to provide the water and provide the water transfer. So, it's an Infrastructure Service solution that we're excited about. And we think that we'll have the opportunity to continue to expand it beyond that anchor tenant. In terms of the second question around produced water, North Dakota, I think we've talked in the past, is one of the more challenging basins to migrate towards produced water. Part of it is the constituents of the flowback and produced water. Part of it is state regulations on transferring that water. But we do expect to see a produce produced water reuse occur in North Dakota like we're seeing frankly in every other basin. And I think despite this contracted position, we are well positioned to serve our customers there just like we're doing everywhere else. So it -- I would still say, it's an opportunity for us to help these customers on those in North Dakota.

Got it. And then, Michael off, I'll stick with you for my second one as well. A bit of a -- I step out here to a longer-term topic, but on the topic of surface water discharge staying Two Rivers and Creeks and potential beneficial reuse such as for agriculture, the state of Colorado, New Mexico and Texas have each formed a produce work consortium to study where the science and technology are at and consider whether it's become sufficiently viable too proposed regulatory changes, you know, it has a time started to arrive. I know that Select has been involved in several aspects of this R&D, including multiples smaller scale pilot projects. Would you just update us on when and where you might see the first meaningful commercial opportunities related to surface water discharge and or beneficial reuse? And then what Select is currently focused on to help the industry reach the point at which that necessary level of treatment and filtration can be done economically and at scale?

Great question, Tom. So we're aware of all the organizations and consortiums that you mentioned were active members and all of them. We have a very strong and seasoned technical team that's participating in those commissions tried to make sure that that Select in the industry arrives at the right spot. We've got an R&D team that's invested millions of dollars over the last couple of years to try to make sure that we're aware of the leading solutions in the market and working to drive the cost down. It really has not been a technical issue. It's been a cost issue and a reliability issue. So we've been working hard to try to bring the capital costs as well as the operating costs down to something that might not necessarily compete with disposal, but provides a certainty. And so if you think about an insurance premium on top of disposal, it could be viewed as somewhat economic. We're working with a number of operators on that. We haven't done many press releases, and I don't think you will because it still is kind of in the R&D phase for us. But we're very active. We're a participant. I think we'll be one of the leaders in the space that brings the solutions to the market. We're looking at multiple. I mean, there's really three technologies that people believe are viable, and we're participating in studies in all three. In terms of your last question, where we will see that first, I still think it'll be the Permian Basin. That's where you have the largest amount of produced water coming out per barrel of oil. You've got the most benches. As of recently, you've had the most induced seismicity. And so for a number of reasons, and from an economic standpoint, it's going to be one of the most competitive areas. So from a number of reasons, I think that's going to be where you'll see the majority of the pilots, and they will be a first mover to this solution, much like they were a first mover around produced water reuse.

Very helpful. Thorough answer and Michael. Thank you. I'll turn it back.

Our next question comes from the line of Jeff Robertson with Water Tower Research. Please proceed with your question.

Thank you, good morning. John, you talked about the notion that Select's business will transition over time to more and more long-term revenue backed by contracts. Can you talk about how the system integrations that you all have in various producing basins really underpin that idea? I've been able to help operators balance their supply demand needs?

Sure. The way I think about it and where the value is really driven toward the sustainability or reduced cost to the operator is when it becomes a system with optionality. So a system of gathering large quantities with effective choice of where that volume could be driven to, whether it's disposal, recycle, out of basin movement across other asset bases becomes part of the system. And when it does, it really brings them a real value to either at least operating expense or through authority for expenditures on the drilling completion side of the business on it. So that's the way that we really have been able to come up with these ideals, opportunities, conversations that turn into contracts as we've taken all these assets out of these different transactions and started building systems out of them with real value add or choices to be made with that volume of water.

Maybe just to expand on that, Jeff, a little bit. I mean, we really like the infrastructure, the contracted cash flow, the production related cash flow from infrastructures. That's why it's been a strategic initiative of ours to grow that. We like the ability to provide that along with the service, to provide the full solution. So it's an infrastructure service solution. And we've had a really strong service business historically, but as John mentioned here a few minutes ago, at our previous revenue peak infrastructure was 7% of gross profit. And this year we expect infrastructure chemicals to be north of 50% and infrastructure alone to be 50%. So we're really looking to expand that. And then once we have that built out, it will just provide the optionality that Nick spoke to earlier, as well as the ability for us to have kind of contracted and uncontracted volumes flowing through our system. So, that's truly the archetype of what we're working on. Q – Jeff Robertson: Hey, Michael..

Jeff, sorry… Q – Jeff Robertson: I was going to say does the pricing policy? You mentioned pricing volatility and obviously, affecting operator budgets. But this pricing volatility and consolidation it, is having an impact on the type of conversations Select has with its customers over duration of contracts or how contracts are structured?

Not necessarily. I don't think that's the case. I mean there are implications for consolidations for sure. We're -- if you look at our customer base, we work for everyone, but we have a bias towards the larger operators. And so consolidation is something that we certainly welcome because we believe scale seeks out scale and a lot of times, larger operators are ones that are really looking ahead kind of a long-term solution. And so it allows us to have a very productive conversation around, an expansive or extensive economic. Fixed asset expansion excuse me, or an existing or expansion of our existing assets. And when we do that we obviously need a partner to underwrite it. So. we're having those conversations. I think with more consolidation. there will be more of those to be had.

Jeff, one thing that I'd add to Michael's, I mean there is consolidation. There is movement. We're all watching it. We're feeling it, but what we're very focused on is how we can do something that will bring value. And when we bring value, we want to make sure that we share that value properly. We believe there is value in these systems and we prove that and continue to find opportunity to prove it. And we also bring there -- we believe there's real value in being able to -- pull those services through that contract just like Michael talked about and the system we're putting on the north side of Lake Sakakawea, water transfer will be part of that overall solution which is a value to that acreage in that customer. Q – Jeff Robertson: Thanks. And the last question you -- just on the some of the adjusted EBITDA outlook for 2024 that you mentioned, does that outlook only includes the three acquisitions you announced in the first quarter? Or are you factoring in the expectation of other acquisitions and how you're talking about 2024 adjusted EBITDA?

No Jeff, that's purely the acquisitions we've made. And then the projects, we've given here now in our overall growth CapEx for Water Infrastructure we have a number of projects under discussion. If they all come to fruition that CapEx number would move higher, if none of them do than that would move lower. I certainly don't expect either of those outcomes there. But we do we do anticipate that a number of conversions, of new infrastructure projects that we look forward to announcing in the next few quarters. Most of those that are announced over the next quarter or two, will have some impact in 2024. Q – Jeff Robertson: Thank you.

Our next question comes from the line of John Daniel with Daniel Energy Partners. Please proceed with your question. Q – John Daniel: Hi. Can you hear me okay.

Hi, John. Q – John Daniel: Just one question on. I'm curious, if you're starting to see are any signs of distressed opportunities from a consolidation perspective particularly in places like the Haynesville?

Yes, this is John. I would say, there's the -- the acquisitions and the opportunities have ingredients in them in various ways. But you know, the downturn or the activity, traction that we're seeing right now is definitely had a positive effect on those conversations. Yes, as we go forward. But, we I'd also tell you that a lot of these assets that you're watching us do, they really fit into our system extremely well and their value is either getting diluted by these systems or their value is could be enhanced, but they got to be part of the system and that's driving these conversations as well, John. Q – John Daniel: Okay. That's all I had. Thank you for including me

Since there are no further questions at this time, I'd like to hand the call back to John Schmitz for closing remarks.

Thanks to everyone for joining the call and your interest in learning more about Select Water Solutions. Look forward to speaking, with you again next quarter.

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