Select Water Solutions, Inc. Q4 FY2024 earnings call

Management Statement and Operational Highlights

• 2024 was a record year operationally and financially, with 26% revenue growth and 62% gross profit growth in water infrastructure. Moved over 1.5 billion barrels of water and recycled volumes far outpaced sustainability targets.
• Signed 8 major organic infrastructure projects and over a dozen bolt-on contracts in 2024, with $150 million of growth capital planned for 2024-2025. Water Infrastructure segment has over 2.5 million acres of produced water handling opportunities.
• Announced $62 million investment in Colorado municipal, industrial, and agricultural water markets, consolidating senior water rights and storage assets. This includes rights to cover 16,300 acre-feet of source water per year.
• Water Infrastructure segment expects 15%-25% growth in 2025, with strong backlog of greenfield, brownfield, and bolt-on projects.

Segment Performance

• Water Infrastructure: In 2024, achieved 26% annual revenue growth and 62% gross profit growth. Signed 8 major new organic infrastructure projects under long-term contracts worth approximately $150 million for 2024-2025. Expected 15%-25% annual revenue and gross profit growth in 2025. Contributed significantly to consolidated adjusted EBITDA and margins.
• Water Services: Saw revenue decline in 2024, with Q4 gross margins before D&A at 16.4%. Anticipates recovery in 2025 with low to mid-single-digit percentage revenue increase and margins returning to 21-22% range.
• Chemical Technologies: Experienced strong sequential revenue growth of 14% in Q4 2024, driven by new product development and market share gains. Margins at 13% in Q4 but expected to improve in 2025 as production volumes increase.

Guidance

• Water infrastructure segment revenue and gross profit expected to grow 15%-25% in 2025. Anticipate stronger adjusted EBITDA growth in 2025, with at least 30% converted to free cash flow after maintenance and growth CapEx.
• Colorado investment expected to generate $20-$30 million consolidated annual net income initially from anchor contracts, with potential for more than double that upon full commercialization. Expect low volatility and high-quality cash flows from Colorado investment.
• Target to recycle over 400 million barrels of produced water annually by 2029, more than eight times the original target set in 2022.

Risks

• Regulatory Uncertainties: Varying state regulations regarding water disposal and treatment could impact operations and expansion plans.
• Market Fluctuations: Energy market activity levels can fluctuate, affecting revenue in water services and chemical technologies segments.
• Long-Term Transition Risks: Colorado municipal water investment has longer payback periods compared to existing water infrastructure investments, introducing uncertainty in realizing returns.

Question and Answer

• Q: James Rollyson asks about the Colorado venture's timeline and return profile compared to recycling. A: John and Chris discuss high margins, long-term contracts (up to 50 years), and repeatable, predictable cash flows from Colorado investment, contrasting with traditional recycling projects.
• Q: Bobby Brooks asks about the development of the Colorado opportunity. A: Chris and Mike explain the opportunity developed by leveraging existing capabilities and strategic partners to consolidate water rights and storage assets in Colorado, targeting municipal, industrial, and agricultural markets.
• Q: Jeffrey Robertson asks about demand in Colorado and regulatory requirements. A: Mike and Chris discuss high demand in Colorado, leveraging state programs, and existing regulatory experience in water management to address requirements.
• Q: John Daniel asks about M&A in municipal water and Haynesville capacity. A: Chris and Michael discuss organic strategies for growth, resource consolidation in Colorado, and readiness to handle increased activity in Haynesville with existing pipeline and disposal infrastructure.