Select Water Solutions(WTTR) - 2023 Q4 - Annual Results

markdown [Financial & Operational Highlights](index=1&type=section&id=Financial%20%26%20Operational%20Highlights) [Full Year 2023 Performance Summary](index=1&type=section&id=Full%20Year%202023%20Performance%20Summary) Select Water Solutions achieved record FY2023 financial results, driven by Water Infrastructure growth and robust capital returns Full Year 2023 Key Financial Metrics | Metric | FY 2023 Value | Year-over-Year Change | | :--- | :--- | :--- | | Consolidated Revenue | $1.6 billion | +14% | | Water Infrastructure Revenue | $230.0 million | +84% | | Operating Cash Flows | $285.4 million | +$252 million | | Capital Returned to Shareholders | $86.7 million | N/A | - The company achieved **record highs** in **consolidated revenue**, **net income**, **adjusted EBITDA**, and **operating cash flow** for the full year **2023**[2](index=2&type=chunk) - **Capital allocation** in **2023** included funding **capex**, increasing dividends by **20%**, executing **share repurchases**, completing six bolt-on acquisitions, and repaying all outstanding debt[2](index=2&type=chunk) [CEO's Statement and Outlook](index=1&type=section&id=CEO%27s%20Statement%20and%20Outlook) [2023 Performance Review](index=1&type=section&id=2023%20Performance%20Review) The CEO highlighted 2023 as a **record year** with all segments showing **revenue** and **gross profit** growth, led by Water Infrastructure - All **business segments** experienced year-over-year growth in both **revenue** and **gross profit** during **2023**[3](index=3&type=chunk) Water Infrastructure Segment FY 2023 vs. FY 2022 Growth | Metric | Growth Rate (YoY) | | :--- | :--- | | Segment Revenue | 84% | | Segment Gross Profit | 162% | - The company successfully executed its M&A strategy and made organic infrastructure investments, positioning it for future opportunities[12](index=12&type=chunk) [2024 Outlook and Strategy](index=2&type=section&id=2024%20Outlook%20and%20Strategy) For **2024**, Select projects continued strong Water Infrastructure growth, targeting over **50%** consolidated profitability - Targeting net **capital expenditures** of **$140 – $160 million** for **2024**, primarily for high-margin, long-term contracted projects in the Water Infrastructure segment[5](index=5&type=chunk) 2024 Water Infrastructure Segment Growth Forecast (YoY) | Metric | Expected Growth | | :--- | :--- | | Segment Revenues | 30% – 40% | | Segment Gross Profit | 40% – 50% | - Expects Q1 **2024** consolidated **Adjusted EBITDA** of **$52 – $56 million**, with full-year **Adjusted EBITDA** anticipated to grow year-over-year[9](index=9&type=chunk) - The company aims for Water Infrastructure and Chemical Technologies to generate over **50%** of consolidated profitability in **2024**[10](index=10&type=chunk) - On a consolidated basis, the company targets converting more than **40%** of its **2024 Adjusted EBITDA** into **free cash flow**[11](index=11&type=chunk) [Financial Results](index=3&type=section&id=Financial%20Results) [Consolidated Financial Performance](index=3&type=section&id=Consolidated%20Financial%20Performance) The company reported strong year-over-year and sequential financial performance, with increased **revenue** and **net income** Full Year 2023 Consolidated Results For FY2023, **revenue** grew **14%** to **$1.6 billion**, with **net income** and **Adjusted EBITDA** also significantly increasing Full Year Consolidated Financials (2023 vs. 2022) | Metric | Full Year 2023 | Full Year 2022 | | :--- | :--- | :--- | | Revenue | $1.6 billion | $1.4 billion | | Net Income | $79.2 million | $54.9 million | | Gross Profit | $231.7 million | $160.8 million | | Gross Margin | 14.6% | 11.6% | | Adjusted EBITDA | $258.3 million | $194.8 million | - **SG&A** increased to **$155.5 million** in FY2023 from **$118.9 million** in FY2022, largely due to a rise in **non-recurring transaction and rebranding costs** from **$8.9 million** to **$20.5 million**[15](index=15&type=chunk) Fourth Quarter 2023 Consolidated Results In Q4 **2023**, **revenue** was **$374.9 million**, with **net income** surging to **$27.6 million** due to a significant tax benefit Fourth Quarter Consolidated Financials (Q4'23 vs. Q3'23 vs. Q4'22) | Metric | Q4 2023 | Q3 2023 | Q4 2022 | | :--- | :--- | :--- | :--- | | Revenue | $374.9 M | $389.3 M | $381.7 M | | Net Income | $27.6 M | $15.3 M | $7.6 M | | Gross Profit | $54.6 M | $56.3 M | $41.6 M | | Gross Margin | 14.6% | 14.5% | 10.9% | | Adjusted EBITDA | $58.3 M | $63.0 M | $52.2 M | - The significant increase in Q4 **2023 net income** was primarily due to a **$61.9 million** release of a valuation allowance on deferred tax assets, partially offset by a **$38.2 million** expense for **tax receivable agreements**[17](index=17&type=chunk) [Segment Performance](index=5&type=section&id=Segment%20Performance) In Q4 **2023**, Water Infrastructure showed strong sequential growth, while Water Services and Chemical Technologies saw declines Q4 2023 Segment Revenue and Gross Margin before D&A | Segment | Revenue (Q4 2023) | Gross Margin before D&A (Q4 2023) | Sequential Revenue Change | | :--- | :--- | :--- | :--- | | Water Services | $241.8 M | 22.3% | -4.0% | | Water Infrastructure | $60.9 M | 43.3% | +4.2% | | Chemical Technologies | $72.3 M | 14.1% | -8.6% | - Water Services **revenue** decline of **4.0%** outperformed the overall **7.9%** decline in **completions activity**. For Q1 **2024**, a mid-single-digit **revenue** decline is expected[21](index=21&type=chunk) - Water Infrastructure **revenue** growth was driven by an **11.2%** increase in **disposal volumes**. For Q1 **2024**, a mid-single-digit **revenue** increase is anticipated[22](index=22&type=chunk) - Chemical Technologies **gross profit** in Q4 was impacted by **$2.4 million** in non-recurring **inventory write-downs** and **insurance adjustments**. For Q1 **2024**, low-single-digit **revenue** growth is expected[23](index=23&type=chunk) [Cash Flow, Capital Expenditures, and Balance Sheet](index=6&type=section&id=Cash%20Flow%2C%20Capital%20Expenditures%2C%20and%20Balance%20Sheet) [Cash Flow and Capital Expenditures](index=6&type=section&id=Cash%20Flow%20and%20Capital%20Expenditures) The company generated a **record $285.4 million** in **operating cash flow** for FY2023, with **net capital expenditures** of **$119.0 million** Cash Flow and Capex Summary | Metric | Full Year 2023 | Full Year 2022 | | :--- | :--- | :--- | | Cash Flow from Operations | $285.4 M | $33.2 M | | Net Capital Expenditures | $119.0 M | $40.6 M | | Cash Flow from Operations less Net Capex | $166.4 M | N/A | - The significant increase in **2023 operating cash flow** was aided by a **$102.3 million** inflow from reduced **accounts receivable balances**[24](index=24&type=chunk) - Financing activities in **2023** included **$61.8 million** in **Class A share repurchases** and **$24.9 million** in **dividends and distributions**[27](index=27&type=chunk) - In Q4 **2023**, the company acquired legacy **revenue royalty interests** in the Bakken for **$3.5 million** and a **disposal offload facility** in East Texas for **$0.8 million**[26](index=26&type=chunk) [Balance Sheet and Liquidity](index=7&type=section&id=Balance%20Sheet%20and%20Liquidity) As of Dec **31**, **2023**, Select significantly improved its **balance sheet** with **$57.1 million** cash and no credit facility borrowings Balance Sheet and Liquidity Comparison (Year-End) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Cash and Cash Equivalents | $57.1 M | $7.3 M | | Borrowings Outstanding | $0 | $16.0 M | | Available Borrowing Capacity | $250.3 M | $206.1 M | | Total Liquidity | $307.4 M | $213.4 M | [Business Development and Strategy](index=7&type=section&id=Business%20Development%20and%20Strategy) [Water Infrastructure Projects](index=7&type=section&id=Water%20Infrastructure%20Projects) Select announced four new long-term contracted Water Infrastructure projects, including the Thompson Pipeline in the Bakken - **Bakken Thompson Pipeline**: A new **24-mile**, **~$25-27 million** pipeline project backed by an **8-year** contract and a **~225,000-acre** dedication. Expected to be operational by Q3 **2024**[31](index=31&type=chunk) - **Northern Delaware Basin Expansion**: A new **2-mile** produced water gathering pipeline supported by a **10-year** contract, expanding a previously announced recycling system[33](index=33&type=chunk) - **Midland Basin Expansion**: Expanded a fixed recycling facility, more than doubling throughput capacity to **120,000 bpd** and dedicated acreage to **~24,000 acres**[34](index=34&type=chunk) - **Northeast Disposal Agreement**: Entered a multi-year disposal contract with a large public independent, adding long-term **revenues** to a previously acquired asset[35](index=35&type=chunk) [Segment Reporting Changes](index=8&type=section&id=Segment%20Reporting%20Changes) Effective Q2 **2023**, Select realigned its reportable segments to better reflect its strategy, recasting historical data - The company realigned its reportable segments in Q2 **2023** to better reflect its **business strategy** and provide greater **financial visibility**[36](index=36&type=chunk) - Certain services previously in the Water Infrastructure segment were moved to the Water Services segment. Historical data has been recast, with no impact on consolidated financial results[36](index=36&type=chunk)[37](index=37&type=chunk) [Non-GAAP Financial Measures](index=14&type=section&id=Non-GAAP%20Financial%20Measures) [Reconciliation of Non-GAAP Measures](index=14&type=section&id=Reconciliation%20of%20Non-GAAP%20Measures) The company uses non-GAAP measures like **Adjusted EBITDA** and **gross profit** before D&A to provide supplemental financial information - The company uses **non-GAAP measures** like **Adjusted EBITDA** and **gross profit** before D&A to help users of financial statements compare **operating performance** on a consistent basis[49](index=49&type=chunk) Reconciliation of Net Income to Adjusted EBITDA (Full Year) | Metric | Full Year 2023 ($M) | Full Year 2022 ($M) | | :--- | :--- | :--- | | **Net income** | **$79.2** | **$54.9** | | Interest expense, net | $4.4 | $2.7 | | Income tax (benefit) expense | ($60.2) | $1.0 | | Depreciation and amortization | $141.1 | $115.7 | | **EBITDA** | **$164.5** | **$174.2** | | Adjustments (TRA expense, impairments, transaction costs, etc.) | $93.8 | $20.6 | | **Adjusted EBITDA** | **$258.3** | **$194.8** | Reconciliation of Gross Profit to Gross Profit before D&A (Full Year) | Metric | Full Year 2023 ($M) | Full Year 2022 ($M) | | :--- | :--- | :--- | | **As reported gross profit** | **$231.7** | **$160.8** | | Plus: Depreciation and amortization | $138.8 | $113.5 | | **Gross profit before D&A** | **$370.5** | **$274.3** |