Select Water Solutions(US:WTTR)2023-08-03 20:55Financial Data and Key Metrics Changes - Select Water Solutions reported a sequential net income increase of 65% to $23 million and adjusted EBITDA rose to $70 million, a 4% increase from the first quarter of 2023 [9][34] - Revenue for the second quarter declined by 3% to $405 million, but gross margins improved, leading to higher profitability [34][28] - The company generated $102 million in cash flow from operations, with free cash flow nearly matching adjusted EBITDA at $66 million after accounting for $36 million in net CapEx [10][11] Business Line Data and Key Metrics Changes - Water Services revenue decreased by approximately $10 million sequentially, or nearly 4%, while prioritizing higher profitability over top-line growth [37] - The recalibrated Water Infrastructure segment is expected to see revenue gains in the third quarter by mid-single digits and gross margins before depreciation and amortization (D&A) are projected to improve by 200 to 400 basis points [38] - The Chemical Technologies segment achieved an all-time high gross margin exceeding 20%, with expectations for steady results in the third quarter [39] Market Data and Key Metrics Changes - The company noted a modest decline in rig and completion activity during the second quarter, yet maintained steady pricing and profitability among customers [35][28] - Accounts receivable decreased by $62 million during the quarter, with a new target to reduce AR by $100 million by year-end [32] Company Strategy and Development Direction - The company is focused on acquisition integration, improving efficiencies, and operational excellence, with a strategic emphasis on sustainable water management solutions [14][15] - Select Water Solutions aims to enhance its infrastructure and specialty chemistry solutions, with expectations that over 50% of profitability will come from sustainable recycling solutions and contracted pipelines by 2024 [26][25] - The company is prioritizing capital allocation to strategic areas, particularly where proprietary applications of automation and chemistry can be integrated [16] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to advance profitability despite macroeconomic headwinds, with expectations for continued cash flow momentum and project impacts in the latter half of 2023 [35][28] - The company is optimistic about the growth prospects in the Water Infrastructure segment, with a strong project backlog and anticipated project completions in late 2023 [20][19] Other Important Information - The company has made changes to its segment reporting structure, reallocating certain operations to better align with core service offerings [6][18] - Select Water Solutions is committed to sustainability and has published its 2022 sustainability report, outlining its achievements and future targets [23] Q&A Session Summary Question: What are the expected margins for the Water Infrastructure segment? - Management anticipates reaching a 50% run rate for margins by late 2024, driven by contracted projects with healthy EBITDA contributions [44] Question: What is the outlook for M&A opportunities? - The company is focused on enhancing its existing asset base and will consider M&A opportunities that align with this strategy, particularly those that can add value to its infrastructure [50] Question: How is the company addressing operational efficiencies in Water Services? - The company aims for mid-20s margins in the near term, focusing on integration and operational efficiency, including the consolidation of unprofitable locations [54] Question: What is the current utilization of existing sites in Water Infrastructure? - Utilization is estimated at 50% to 60%, with ongoing efforts to tie in more customers and leverage capacity [57] Question: Are there new potential projects outside current operating areas? - Yes, there are opportunities in existing basins and new areas, with a focus on full lifecycle water projects [68]