Select Water Solutions, Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Highlights: Improved profitability and cash flow, with net income up 22% and adjusted EBITDA up 13%. Consolidated gross margins improved by nearly 2 percentage points. Signed large long-term agreements for water projects in New Mexico, adding scale and revenue potential.
• Strategic Moves: Completed OMNI transaction to grow infrastructure and rationalize Water Services, with OMNI acquiring Select's trucking operations and Select acquiring assets in the Bakken region. Launched Peak Rentals as a stand-alone operating company and is evaluating strategic alternatives for it. Expanded New Mexico infrastructure with new contracts, including asset conveyances from customers, leading to significant recycling throughput capacity and acreage dedication.

Segment Performance

• Water Infrastructure: Increased net income by 22% and adjusted EBITDA by 13%. Revenues increased 12%, gross profit before D&A grew 15%, and gross margin before D&A was 55%. Contributed significantly to top and bottom line growth.
• Water Services: Revenues decreased approximately 4% sequentially in Q2, driven by weak activity levels. However, margins held relatively flat. The OMNI transaction reduced the trucking footprint, and Peak Rentals is being evaluated for strategic alternatives. For the trailing 12 months ended June 30, 2025, divested trucking operations represented over 1/3 of Water Services' revenue and 1/5 of its gross profit before D&A.
• Chemical Technologies: Sequential revenue decline of approximately 11% in Q2, but gross margins before D&A of 17.5% exceeded guidance. Expected low to mid-single-digit revenue decline in Q3 with margins steady at around 15%-17%.

Guidance

• Water Infrastructure: Expected steady Q3 activity with anchor tenants, potentially slight revenue decline, but strong Q4 with double-digit sequential growth. Targets 20% year-over-year growth in 2026.
• Water Services: Anticipates ~25% revenue decline in Q3, with margins flat to prior quarters.
• Chemical Technologies: Expected low to mid-single-digit revenue decline in Q3, with margins steady at 15%-17%.
• CapEx: 2025 net CapEx expected $225M-$250M, bias to higher end, with growth CapEx backlog into 2026, and $50M-$60M of CapEx for maintenance and margin improvement.

Risks

• Macro factors impacting activity levels in Water Services and Chemical Technologies, potentially affecting revenues.
• Uncertainties in executing strategic initiatives like Peak Rentals carve-out and asset divestitures.
• Regulatory or market changes that could impact water infrastructure projects and their timelines and profitability.

Q: Jim Rollyson asks about the opportunity inning and macro impact on water contracts.

A: Christopher George and Michael Skarke discuss progress in the build-out, strong backlog, and ongoing opportunities in New Mexico's water infrastructure.

Q: Derek Podhaizer asks about Peak Rentals fleet size and 2026 CapEx.

A: John Schmitz and Michael Skarke talk about Peak's fleet of smaller portable diesel power generations and CapEx plans for 2026, with backlog projects under construction.

Q: Robert Brooks asks about customers conveying assets and economic benefits.

A: Michael Skarke and John Schmitz discuss the network effect and customer benefits from conveying assets, emphasizing better operation and system value.

Q: Don Crist asks about other divestiture candidates.

A: Michael Skarke and John Schmitz talk about asset rationalization in the Water Services segment, focusing on strategic alignment with infrastructure and maintaining a strong balance sheet.

Q: Jeff Robertson asks about Peak separation and water infrastructure.

A: John Schmitz discusses how Peak separation allows support for water infrastructure electrification needs.

Q: Unidentified Analyst asks about Chemical Technologies outlook.

A: Christopher George talks about Chemical Technologies' resilience, product development successes, and potential to grow market share with steady margins.