Select Water Solutions, Inc. (WTTR) Q3 2024 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call summary reveals strong financial performance, especially in the Water Infrastructure segment, with significant revenue and profit growth. Despite some operational downtime and macroeconomic challenges, the company's strategic focus on infrastructure and long-term contracts is promising. The Q&A section supports positive sentiment, highlighting efficient asset integration and new product wins. Increased dividends and capital return to shareholders further enhance the outlook. Considering the market cap, the stock price is likely to see a positive movement of 2% to 8% over the next two weeks.

Key Financial Performance

Revenue $82 million for Q3 2024, a 40% increase year-over-year compared to Q3 2023, driven by increased utilization of existing assets and new long-term contracts.

Gross Profit (before D&A) $47 million for Q3 2024, a 99% increase year-over-year compared to Q3 2023, attributed to operational improvements and increased recycling volumes.

Gross Margin (before D&A) 57% for Q3 2024, a 17 percentage point increase year-over-year compared to Q3 2023, due to improved operations and increased base utilization.

Net Income $19 million for Q3 2024, a 26% increase compared to Q2 2024, supported by reduced SG&A expenses.

Adjusted EBITDA $73 million for Q3 2024, an increase of $3.1 million compared to Q2 2024, driven by strong performance in the Water Infrastructure segment.

Free Cash Flow $20 million for Q3 2024, reflecting solid cash generation despite increased capital expenditures.

SG&A Expenses Decreased by more than 4% or $1.7 million relative to Q2 2024, contributing to net income growth.

Outstanding Borrowings $80 million at the end of Q3 2024, a $10 million reduction from the prior quarter.

Net Capital Expenditures $31 million for Q3 2024, down from $46 million in Q2 2024, with expectations for growth CapEx to increase in Q4.

Dividend Payment Increased by 17% to $0.07 per share, totaling approximately $30 million in annual dividends.

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Operating Highlights

New Product Development: We continue to generate strong free cash flow out of the Chemical Technologies segment, supported by our new product development and technology performance.

Market Expansion: In the third quarter, we entered into multiple new long-term contracts, adding an additional 25,000 acres under long-term dedication in the Permian Basin, and an additional 57,000 acres under right of first refusal.

Pipeline Connection Agreements: Executed 2 new pipeline connection agreements in the Bakken in the third quarter, further exemplifying our industry-leading footprint spanning all major Lower 48 land basins.

Operational Efficiency: We were able to reduce SG&A during the third quarter, supporting net income growth of 26% compared to the second quarter.

Gross Margin Improvement: Achieved a 57% gross margin before D&A for our Water Infrastructure segment this quarter.

Strategic Acquisitions: Completed a small disposal acquisition in the Northern Delaware Basin, adding approximately 10,000 barrels per day of disposal capacity.

Long-term Contracts: Our business development backlog has continued to increase in both size and certainty, with expectations for additional long-term contracts throughout 2024 and into 2025.

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Risk or Challenges

Operational Downtime Impact: The company anticipates a short-term downward financial impact from ongoing construction projects and facility upgrades during the fourth quarter, particularly affecting the Water Services and Water Infrastructure segments.

Seasonal Activity Slowdown: A seasonal activity slowdown in the fourth quarter is expected to impact the Water Services segment, although it may be offset by revenue and margin recovery in the Chemical Technologies segment.

Regulatory Environment: The regulatory environment is generally supportive for the industry, but potential changes in administration could impact customer operations, which in turn affects Select's business.

Supply Chain Challenges: The company is facing challenges related to operational downtime in the Asia Pacific region, which will affect water transfer, sourcing, recycling, and pipeline business.

Market Activity Outlook: The North American Lower 48 activity landscape may experience muted growth in the near term, impacting the Water Services and Chemical Technologies segments.

Commodity Price Fluctuations: Commodity prices and industry activity have presented challenges to the Water Services and Chemical Technologies segments, affecting overall profitability.

Competition and Market Share: The company is focused on gaining market share and improving operational efficiency in a challenging activity outlook.

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Guidance & Outlook

Revenue Growth in Water Infrastructure Segment: Water infrastructure revenues grew by 20% and gross profit before D&A increased by 33% compared to Q2 2024.

Long-term Contracts: Entered into multiple new long-term contracts, adding 25,000 acres under long-term dedication in the Permian Basin.

Acquisition: Completed a small disposal acquisition in the Northern Delaware Basin, adding approximately 10,000 barrels per day of disposal capacity.

Expansion Projects: New projects expected to be operational by the first half of 2025, enhancing the Northern Delaware network.

Business Development Backlog: Continued increase in business development backlog, with expectations for additional long-term contracts.

Fourth Quarter Revenue Expectations: Expecting a 10% to 15% sequential decline in water infrastructure revenue due to seasonal impacts and planned operational downtime.

Fourth Quarter Adjusted EBITDA Guidance: Expected consolidated adjusted EBITDA of $60 million to $62 million.

2024 Full Year Adjusted EBITDA Guidance: On track to achieve record adjusted EBITDA for the year.

2025 Growth Outlook: Expecting strong growth in Water Infrastructure segment, with more than 50% of profitability coming from this segment by the end of 2025.

Free Cash Flow Expectations: Expect to generate free cash flow within the range of 25% to 30% of adjusted EBITDA.

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Shareholder Return Plan

Quarterly Dividend Payment: The company announced a 17% increase to its quarterly dividend payment to $0.07 per share.

Total Capital Return to Shareholders: The total capital return to shareholders is expected to be about $40 million during 2024.

Annual Dividend and Distributions: On an annual basis, the dividend and distributions paid should total approximately $30 million.

Share Repurchase Focus: The company has lessened the focus on share repurchases this year as it continues to pursue accretive infrastructure investment opportunities.

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Key Q&A

Q:John, you set out with the 50% margin goal in that segment quite a while back for 2025, obviously, have exceeded it this year. Kind of curious as you look -- you've talked about the margin and the profile of these long-term contracted projects embedded in what your CapEx decisions and pricing and all that. Just kind of curious as you look forward over the next year or two, from this 56%, 57% kind of margin range, like where do we go from here?

A:The infrastructure piece and the investment piece is completely still intact. We continue to see good movement in being added assets to this whole opportunity to water balance, and some of those movements produce margins that are greater than other water balancing margins. We think long-term infrastructure business works in the 50% to 60% range.

Q:If you take ignoring the noise in the fourth quarter with some of the transition things that are going on, if you look at 3Q as kind of a base for water infrastructure, and then you layer on the contracts you've announced over the last couple of quarters, how does that kind of flex up your revenue run rate in that business?

A:The $150 million or so of growth capital that we've got slated to go into that segment over the course of the year and into early part of next year is going to be driving a key opportunity for both revenue and profitability growth.

Q:How much of an impact to fourth quarter EBITDA are those two facilities Delaware being taken offline? Is that pretty -- is that -- I know you kind of spoke about it a little bit more in the prepared remarks, but can you think about that $10 million step down that sequential step down from the third quarter EBITDA all stemming from that?

A:The majority of that decline is going to come from those kind of asset-specific downtime issues. Over half of that revenue decline in the fourth quarter is coming from those specific assets.

Q:Could you just discuss where -- kind of where those new product wins are occurring and why those wins occurred? And do you think that's something repeatable going forward?

A:We've really focused our team in targeting more of the E&P operators directly. We think we're taking market share through our products and through that direct conversation with the operators.

Q:What are the expected outcomes for the New Mexico recycling plant transition to an integrated system?

A:It's really around connecting everything and increasing the utilization on all facilities because you can move water from different parts of the region.

Q:Are you seeing operators more inclined to do long-term agreements with select because of your water balancing capability?

A:Yes, because of our water balancing capability and the assets we have on the ground, we're able to provide certainty that we can handle their water needs for 10-plus years.

Q:Do you see any regulatory areas that could be altered or changed in a new administration that would have a major impact on select business?

A:The administration support for the industry is a blessing for our customers, and we need customers. Our position on regulatory is we really deal with states and various localized some federal.

Q:Review of Unclear Management Responses

A:Management's responses lacked clarity on the specific financial impact of the two facilities being taken offline in the fourth quarter, as well as the expected outcomes for the New Mexico recycling plant transition to an integrated system.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

WTTR Transcript

Select Water Solutions, Inc. (WTTR) Q3 2025 Earnings Call Transcript

Positive11-5

The earnings call summary and Q&A indicate optimism, with strong growth projections for Water Infrastructure and new long-term contracts. Despite some declines in Water Services and Chemical Technologies, the company is focusing on high-margin projects and strategic initiatives. The Q&A highlights potential in lithium extraction and beneficial reuse, with positive sentiment from analysts. The market cap is small, suggesting a more pronounced reaction to positive news, leading to a predicted positive stock price movement of 2% to 8% over the next two weeks.

Select Water Solutions, Inc. (WTTR) Q2 2025 Earnings Call Transcript

Positive8-6

The earnings call highlights strong financial metrics, including improved gross margins and EBITDA exceeding guidance. The Q&A reveals growth opportunities in new contracts and infrastructure expansion, with optimistic guidance for Water Infrastructure revenues. Despite a decline in Chemical Technologies revenue, margin improvements and a unique market position in Peak business support a positive outlook. The company's strategic initiatives and new contracts suggest potential for future growth, justifying a positive sentiment rating.

Select Water Solutions, Inc. (WTTR) Q1 2025 Earnings Call Transcript

Unknown5-7

The earnings call shows strong financial performance with increased revenue and EBITDA, and improved margins. However, the lack of a shareholder return plan and increased interest expenses are concerns. The Q&A reveals management's cautious stance on risks related to tariffs, supply chain, and economic factors, with some ambiguity in responses. The market cap suggests moderate sensitivity to news, and the absence of guidance changes or partnerships keeps the sentiment neutral.

Select Water Solutions, Inc. (WTTR) Q3 2024 Earnings Call Transcript

Positive11-6

WTTR Report

Select Water Solutions, Inc. 10-K

10-K

2025-02-19

Select Water Solutions, Inc. 10-Q

10-Q

2024-11-06

Select Water Solutions, Inc. 10-Q

10-Q

2024-07-31

Select Water Solutions, Inc. 10-Q

10-Q

2024-05-01

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