Good morning ladies and gentlemen, and thank you for standing by. Welcome to Select Water Solutions 2024 First Quarter Earnings Conference Call. Please note this conference is being recorded.

Thank you, operator, and good morning everyone. We appreciate you joining us for Select Water Solutions conference call and webcast to review our financial and operational results for the first quarter of 2024. With me today are John Schmitz, our Founder, Chairman, President and CEO; and Michael Skarke, Executive Vice President & Chief Operating Officer. Before I turn the call over to John, I have a few housekeeping items to cover. A replay of today's call will be available by webcast and accessible from our website at selectwater.com. There will also be a recorded telephonic replay available until May 15, 2024. The access information for this replay was also included in yesterday's earnings release. Please note that the information reported on this call speaks only as of today, May 1, 2024, and therefore time-sensitive information may no longer be accurate as of the time of the replay listening or transcript reading. In addition, the comments made by management during this conference call may contain forward-looking statements within the meaning of the United States Federal Securities laws. These forward-looking statements reflect the current views of Select's management; however, various risks, uncertainties, and contingencies could cause our actual results, performance, or achievements to differ materially from those expressed in the statements by management. Listeners are encouraged to read our annual report on Form 10-K, our current reports on Form 8-K, as well as our quarterly reports on Form 10-Q to understand those risks, uncertainties, and contingencies. Please refer to our earnings announcement released yesterday for reconciliations of non-GAAP financial measures. As a reminder, the company made certain changes to its segment reporting structure during the second quarter of 2023. These changes were driven by several operational and strategic factors. However, the changes in segment reporting had no impact on the company's historical consolidated financial position, results of operations, or cash flows. Prior periods have been recast to include the water sourcing and temporary water logistics operations within the Water Services segment and remove the results of those operations from the Water Infrastructure segment. Historical segment information recast to conform to the new reporting structure is available as supplemental financial information in the Investors section of the company's website at investors.selectwater.com. Please refer to the company's current report on Form 8-K filed with the SEC concurrent with our earnings release for additional information. Now I'd like to turn the call over to our Founder, Chairman, President, CEO, John Schmitz.

Thanks, Chris. Good morning and thank you for joining us. I'm pleased to be discussing Select Water Solutions again with you today. It's been a very busy start to 2024. Overall, the business performed well during the first quarter, and we sit here in a strong position heading into quarter 2. Highlights of the first quarter included growing revenues and margins in both the water infrastructure and chemical technology segments, which supported sequential improvements in the consolidated gross margin and adjusted EBITDA, which came in ahead of our expectations. I'm especially pleased with the continual progress we have made toward the execution of our water infrastructure growth strategy. In addition to the three previously announced acquisitions in the Haynesville and the Rockies regions that we closed in January, we completed additional acquisitions in the Permian and Bakken regions in March and April. Each of these acquisitions demonstrates our ability to execute on strategic but value-oriented opportunities to efficiently expand our infrastructure network across the geographic footprint. With the recent Trinity acquisitions, we are adding more than 600,000 barrels per day of permitted disposal capacity, primarily in the Permian Basin across 24 active disposal wells and 9 additional disposal permits available for future development. This acquisition adds critical disposal capacity in both the Midland and Delaware basins, an area with some of our most robust growth opportunities. And with the nearly 100 miles of gathering pipelines already integrated in the acquired assets, we have significant optionality and development potential to integrate these assets with our existing Permian infrastructure networks. Disposal remains a necessary component of an efficient full lifecycle infrastructure solution, and these disposal assets will strengthen our ability to develop efficient and creative solutions for our customers. Additionally, we have continued to add to our solids waste management solutions as well, with four of the five acquisitions so far this year contributing additional assets to our waste solution capabilities. With Trinity, we have added additional slurry well in the Gulf Coast region that adds scale to our solids waste management business in East Texas, alongside the solids treatment and disposal assets and operations we acquired from Tri-State and Iron Mountain in January. Separately, with Buckhorn, we acquired two solid waste landfills in the Bakken with nearly 400,000 tons of annual capacity and more than 50 years of remaining potential useful life. These facilities are strategically located in North Dakota and Montana and add significant additional capacity to our existing landfill operations in the basin. Importantly, this acquisition also expands the scope of our service capabilities through the addition of a Class 2 landfill, one of the very few active TENORM disposal facilities in the U.S., as well as Class 1 industrial waste disposal permit presenting additional opportunities for future development. We believe the addition of the Buckhorn assets will also help us enhance the revenue and margin profile of our existing landfill operations with the integrated logistics and enhance customer relationships. These facilities allow Select to further capture the full water and waste lifecycle of our customers' operations, including environmental management and downstream remediation. I'd also highlight that with both Trinity and Buckhorn, we are also adding lean but very high performing operational teams with decades of experience in disposal and waste management solutions, and I welcome these new employees into the Select family. While we continue to grow our water infrastructure business through acquisitions, we also continue to grow through the organic business development execution. During the first quarter, we signed four additional long-term contracts for new pipeline gathering, recycling, and disposal projects that will integrate directly into our existing infrastructure in the Haynesville and the Permian. Each of these contracts can be tied directly to the strength of our existing networks in these regions, including from the recently acquired asset in each basin. While we have been quite active this year, we remain attentive to every dollar of capital we deploy and continue to prioritize capital to the most strategic areas of our business, especially where we have the most opportunity to integrate full lifecycle water infrastructure and waste management solutions around our existing asset base or add proprietary applications of automation, chemistry or recycling technologies. And as demonstrated by the breadth of our recent acquisitions and projects, I believe Select's operation and geographic diversity is one of our core strengths and competitive differentiators. It also provides us with a wide array of capital allocation prospects that allows us to make the best decision to drive long-term shareholder value. Importantly, each acquisition and project we've executed this year fits our strategy to grow and expand our production-based and long-term contracted revenue within our Water Infrastructure segment. We are well-positioned to continue to strengthen the contractual relationship we have with our customers and expand the scope of our end-to-end water services and chemical solutions that we've been able to provide around the infrastructure base. Our recent organic recycle and disposal infrastructure projects have delivered strong performance, as seen in the meaningful margin improvement in the Water Infrastructure segment during the first quarter. I'm very confident in our remaining multi-year backlog for both greenfield and brownfield infrastructure projects. We've seen this backlog more than double over the last two quarters, providing visibility into continuing expansion opportunities well into next year, and I'm very excited to add the newly acquired assets into our future business development planning as well. From a customer standpoint, we continue to see consolidation in the NP space. We believe this will drive continued demand for more sophisticated and comprehensive water management and waste solutions. While we oftentimes find ourselves working for both customers on both sides of the larger deals, we have generally aligned ourselves with the industry consolidators and have an extensive business development backlog in place to meet the needs of their growing infrastructure demands. Chris will touch on the first quarter's financial performance in more detail, but I'm proud of the continued outstanding results our team is achieving during the period of changing industry trends. We will continue to generate a strong return on assets and return capital to our shareholders while investing in and growing the business. At this point, I'll hand it over to Chris to speak to our first quarter financial results and remaining 2024 outlook in a bit more detail. Chris.

Thank you, John, and good morning everyone. During the first quarter of 2024, while we did see overall revenues modestly decline during the period as expected, we saw solid gains in our chemical technology segment and our Water Infrastructure segment continued its steady growth trajectory once again, achieving record high quarterly revenue and gross profit results during the first quarter. With the support of our latest strategic initiatives, we expect to see consolidated revenue and adjusted EBITDA growth during the second quarter and are well on track towards achieving our 2024 full year targets, including growing adjusted EBITDA year-over-year underwriting approximately 100 million of new organic infrastructure projects generating more than one-third of our revenues from production-related activities during 2024, growing water infrastructure revenue by 30% to 40% and profitability by 40% to 50% during the year, and supported by this growth, seeing our water infrastructure and chemical technology segments combined for more than 50% of our total consolidated profitability for the year. And to reiterate, we also expect to do this while pulling through more than 40% of our adjusted EBITDA into free cash flow after all maintenance and growth CapEx for the full year 2024. Even as activity levels have seen pressure in recent quarters and commodity prices remain unsettled, Select's ongoing transition to a more infrastructure-based production-levered full lifecycle water company has aligned our future profitability and cash flow generation with critical secular growth drivers unique to our business. These trends continue to benefit Select, including increased water recycling by our customers, demand for infrastructure networks, and commercial water balancing and EMP industry consolidation that demands high-quality partners with the size, scope, and networks to serve the largest operators. During Q1, the Water Infrastructure segment increased revenue by more than 4% to $64 million and gross margins, which we customarily provide in terms of prior to depreciation, amortization, and accretion increased by over 360 basis points to nearly 47%. We expect to see even stronger 10+ percent revenue growth during Q2, with significant 30% to 40% growth in our disposal and waste solutions volumes supported by our recent acquisitions and enhanced utilization of existing assets. Projects we announced yesterday demonstrate our ability to add value to our existing infrastructure networks through steady incremental commercialization. For the recycling and gathering pipeline network expansions in the Delaware basin, our existing systems comprising large acreage dedications and multi-customer gathering, recycling, distribution, and disposal operations, create both optionality and additional contracting opportunities with new and existing infrastructure customers. These expanded networks will see enhanced utilization and water balancing capabilities that make the expansions highly accretive. And even though natural gas prices have contracted, long-term gas demand is very robust, particularly with electricity demand rising rapidly and new LNG demand slated to come online in 2025 and 2026. Accordingly, in a gas basin like the Haynesville, long-term water gathering and disposal agreements from steady production sources remain an attractive growth option, especially when integrated with our market-leading disposal footprint supported by our uniquely positioned gathering pipeline network. While the second quarter may see some expenses related to integration and standardization of our newly acquired assets, we expect to retain steady margins in water infrastructure during Q2 and believe we can continue to push these margins up over the coming quarters into the high 40s. Looking out more medium-term, we continue to believe that with a very strong project and deal backlog, water infrastructure will become the largest component of our profitability by the end of 2025 underpinned by repeatable, predictable, high margin, and contracted revenue streams. Chemical technologies revenue grew by 4% sequentially in Q1 with margins back up to about 17%. The business benefited from the non-recurrence of certain insurance and inventory adjustment items that impacted Q4's results, but overall, it was good to see the strong recovery in margin performance. Looking forward to Q2, we expect to see continued low single-digit percentage revenue growth and margins improved to the 17%-19% range. We believe there are opportunities to continue to improve the operating efficiency of our manufacturing operations and enhance our in-basin delivery logistics, which should continue to provide modest margin improvement opportunities. While the more completions-levered water services segment was impacted by modestly lower activity levels during the first quarter, about 85% of the revenue decline during the first quarter came from our fluids hauling and well-testing service lines. These are more commoditized areas of the business where we continue to focus on cost efficiency and consolidation and elimination opportunities. We have made decisions in multiple regions across these service lines to consolidate operations and pare back certain non-core offerings and geographies such as fluid hauling in the Powder River Basin, Wyoming, for example. In order to streamline our operations, improve our margin performance, and focus on strategic service offerings that are critical to our full lifecycle solutions. These decisions will result in additional low single-digit percentage revenue decreases in the second quarter for water services. However, we should start to see the benefit of these decisions on the margin side, and we expect to see gross margins in water services increasing to 21% to 24% during the second quarter. SG&A during the first quarter decreased by 5% or $2.4 million as compared to the fourth quarter, while the rebranding costs slowed during Q1 relative to Q4. With the recent acquisitions, we continue to incur a balance of transaction-related costs during Q1. Looking forward, we expect SG&A to decline to the low $40 million range, though transaction costs related to our recent acquisitions will remain during Q2. Altogether for the second quarter of 2024, we expect consolidated adjusted EBITDA of $64 million to $68 million, a meaningful step up from Q1. Driven by the substantial continued growth in our Water Infrastructure segment over the course of 2024 and anticipated margin improvement in our services and chemical segments, we are firmly on track to continue growing our adjusted EBITDA on a year-over-year basis during 2024, even with the expected year-over-year revenue decline from water services. Looking at the balance sheet, we utilized our sustainability-linked credit facility in addition to cash on hand to help fund four acquisitions for $108 million during Q1, ending the first quarter with $75 million of outstanding borrowings. This has ticked up to $100 million outstanding since quarter end with the subsequent acquisition in April for approximately $29 million, but still leaves us with ample liquidity and a very conservative balance sheet. We will remain disciplined in our use of leverage, but with the growing contribution of our higher margin production-levered and contracted revenue streams, we have good visibility into our ability to repay these outstanding borrowings in a relatively short period of time while still generating cash flow to fund the growth of the business organically. We continue to return capital to shareholders with our increased dividend of $0.06 per share, equating to $7.5 million of capital return to shareholders during Q1. We have $21 million remaining authorized on our share repurchase program, and while we remain open to tactical buybacks from within cash flow in a strong balance sheet in the near-term, we are prioritizing execution on infrastructure projects and integration of our infrastructure asset bolt-ons as a primary use of capital, while we maintain our commitment to the recently increased regular dividend and overall capital allocation flexibility. As we reviewed last quarter, Select's growing and sustained profitability in recent years triggered an assessment of our taxable position at year-end, and we did transition into a book taxable position during Q1. This translated into an effective book tax rate of about 25% during the first quarter. However, to reiterate, we do not anticipate material cash tax payments during 2024 as our substantial tax attributes and carry forwards will provide significant benefits during the year. We anticipate cash tax payments in 2024 to be a relatively modest $4 million to $6 million including state taxes. Though our book tax expense applied to pre-tax operating income should remain at a percentage rate around where it was during the first quarter. From an accounting perspective, this forecasted tax expense would primarily impact existing deferred tax assets in 2024 and 2025 prior to becoming a cash outlay in future years, most likely commencing in 2026. Quarterly depreciation, amortization, and accretion should tick up modestly with the latest acquisitions to the $38 million to $40 million range, and quarterly interest expense should increase to $2 million to $3 million per quarter as we employ our sustainability-linked lending facility to execute our recent acquisitions. Net CapEx of $28.6 million was relatively flat quarter-over-quarter, though we may see a modest uptick during Q2 as our organic water infrastructure growth CapEx accelerates. However, our full year net CapEx guidance of $140 million to $160 million in 2024 remains unchanged at this time. We anticipate $50 million to $60 million of this CapEx going towards ongoing maintenance with the largest component of the remaining overall spend going towards infrastructure growth CapEx. We generated asset sales of about $5 million during the first quarter and remain on track to generate up to $20 million of proceeds from asset sales during 2024, supported in particular by the consolidation and elimination efforts in water services. While we invest in water infrastructure, we expect each of our water services and chemical technology segments to provide strong cash flows at low capital intensity during 2024, returning a combined 70% to 80% of profits and cash flows after CapEx, as we previously noted to help fund our water infrastructure growth. While the first quarter was not entirely indicative of this from a free cash flow perspective, as we incurred substantial seasonal cash impacts, including annual incentive program payouts, annual property tax payments, and other seasonal cash outflow items, we continue to generate positive free cash flow during the first quarter and anticipate this ramping through the back half of the year. As I've outlined previously, we firmly expect to exceed our 2023 adjusted EBITDA during 2024, and we remain well on track to achieve our full year cash flow target of pulling through more than 40% of our adjusted EBITDA into free cash flow for the full year of 2024 after accounting for all maintenance and growth CapEx. We have a tremendous amount of opportunity ahead of us, and I look forward to continuing to execute on our strategy. I'd like to wrap up by once again thanking all of our employees for their hard work and support, and with that, open it up to questions. Operator.

Our first question is from Bobby Brooks with Northland.

So really impressive margin improvement on the Water Infrastructure segment, and I know that occurred despite some detractors like acquisition integration costs and organic spending. So I was just curious, could you discuss really what drove that 900 basis points year-over-year step up in margins, and are those pretty much the same factors that drove the 360 basis points sequential step up in margins for the segment?

Yes, I'll start and probably let Michael add on, Bobby. Certainly pleased with the progress we made earlier in the year on the water infrastructure side. The first quarter certainly benefited from the accretive nature of the acquisitions. There's certainly some more work to do around the integration and enhancement of the assets that we've recently acquired to get them integrated into the portfolio, so you may see some of that in the second quarter as well. But overall, we certainly think we've got the right path towards continued improvement up to the high 40s, as we indicated. It's certainly on a year-over-year basis contribute also by the enhanced utilization of the base business, the assets across the overall portfolio, and the projects that we continue to invest in are generally coming in on a creative basis relative to the second as a whole. So you're really seeing kind of the full benefit across the board year-over-year, and in the first quarter and second quarter, a lot of improvement driven by the accretive application of the acquisitions coming online.

And then I know that the pipelines of opportunities for both Greenfield and Brownfield for the infrastructure segment is really healthy and expanding. So could you just maybe help frame that pipeline for us and maybe it's best just to compare it to what it is now versus this time last year, even maybe what it was six months ago and just discuss a bit what's been the driver of that pipeline growth?

Sure. So Bobby, this is Michael. I'll take a first cut at it. What I'd say is that the opportunities that we've got in front of us are the largest it's ever been. Relative to six months or a year ago, I think John mentioned it's doubled. So we've got really high interest right now. One of the things we've seen recently is a lot more customer inbounds, which I think is really just a testament to what we've been able to create here in a relatively short period of time. In terms of kind of more specifics, we're looking at projects in every basin and across the recycling, disposal, and pipeline transmission segments. So we're really excited about it. We think we'll continue to be able to deliver projects on a regular basis through the rest of the quarter and really fuel continued improvement on infrastructure, both in top line growth and in margin as a result.

Yes. Bobby, this is John. I'll add to a little bit of what Michael's talking about. What we really have now experienced is we really have created systems and as we're doing these acquisitions that you're seeing, we are really adding assets that are available to the systems, and as that happened, it created a lot of real value projects or value brought to our customers by hooking those assets up to those systems and bringing that economic value. And that is what, when Michael said we get inbounds, that's the inbounds we're seeing is the value that we can really bring to our customers because of interactions between those systems and those asset bases, whether they're both acquisition or added asset bases that we will do internally.

Just the last one for me, sticking with the pipeline and I think Mike just mentioned it as well, just with the multi-basin approach. In my opinion, that is a key distinguishing factor for Select is that you guys have this multi-basin asset base. So could you possibly just discuss which basins you see organic growth as more of the focus and which basins maybe we should expect more inorganic growth, and if it doesn't differ, maybe possibly some color on why that's the case and why it's agnostic to basins?

Sure. So just stepping back for a minute, we want to be opportunistic, and so whether that's organic or inorganic, we're really open to whatever is the right solution for the customer and the most accretive answer for us. So you've seen us be more acquisitive around disposals than around recycling, and that's because recycling is a newer business and we're largest business. And so putting organic capital to work has been much more attractive than anything inorganic. On the disposal side, we have more optionality. We've been able to do a number of acquisitions that have existing cash flow at or below replacement costs, and as John mentioned, we're acquiring assets. We are networking those assets and then we're trying to get those underwritten by customer contracts because we think they add a lot of value to that customer. So on the disposal side, whether regardless of the basin, we're going to be opportunistic between organic development and acquisitions. In terms of basins, we look at every basin similar. I mean, we do a full underwriting of the acreage of the customer, and then we decide what makes the most sense. And so that's why you've seen us make acquisitions or drill new wells in the Haynesville, but also in the Permian and everywhere else. Obviously, we're very focused on the Permian. That's where most of the capital's going to be spent. That's where the biggest water problem is. And so that's going to be key and central for us, whether we go organic or inorganic going forward, but it doesn't preclude us from doing some of the deals we've done outside of the Permian either.

Well, one thing I may just add on to that, Bobby, is, I mean, as Michael mentioned, I mean our general underwriting parameters are going to be consistent, whether that's recycling or disposal or pipelines. And generally we're going to take that approach across the full portfolio of opportunities here, and we're starting to see the margin profiles across each of those applications of the infrastructure business become fairly normalized across the board as well as we see the margin improvement and the contribution from the recent acquisitions. So generally that underwriting approach is going to be fairly consistent across the board, which gives us that opportunity to make the best decisions across the overall asset base.

Understood. And I'd agree that's definitely starting to show in the financials and congrats on the great quarter.

Our next question is from Jim Rollyson with Raymond James.

And I'll echo the same thing on great quarterly results. John, you've spent a little bit of time here lately, and you mentioned this in your prepared remarks focusing on some of the solids and landfill through your M&A activity. Just curious what's your big picture thinking? Is this just tying into making Select a more one-stop shop from water sourcing, recycling disposal and now you can deal with solids as well or are there some other underlying drivers there?

Well, Jim, it is an area that we're very interested in managing a whole lot of type of waste streams for our customer base. It is an area that fits together because whether you're working a solid surface facility and once you do the separation and extract either skim oil or solids for landfill or fluids for disposal, it fits within our footprint of our expertise and the asset base that we have on it. We also think there's probably an interaction between the landfill and our disposals and the value of that disposal because of the leachate. So we think it fits within the asset base and we think it fits within the thesis of value add for waste management for our customer.

And maybe just to add on that, it's really a natural vertical expansion for us because, as John mentioned, the solids management's often co-located with our existing infrastructure base. And so it's a very collaborative combination. And then from return profile, margin profile, it really fits, it's consistent with infrastructure. So we view them largely the same.

Yes, makes perfect sense. And maybe Michael, just going back to the backlog for new projects, as you guys have talked about, it continues to grow. As you look forward and build out your network through M&A and just unlock more opportunities there, I'm curious what you think of as becoming constraints to growth there because you've got so many potential opportunities. Is it capital? Is it people? Like, how do you think about what actually constrains your ability to pursue all these opportunities in backlog?

So the backlog is very robust, and we're really excited about it. The returns that we've mentioned in the underwriting previously, but they're attractive. And so I'm confident between cash flow and potentially some other sources we will be able to continue to fund it and take advantage of that growth. People are always a challenge, but it's not near the challenge it was a year or two ago. So I really don't see that as a constraint either. One of our challenges is just, it takes a while to sign a long-term contract with Chief, with an operator, and then it takes a while to construct that asset or link it up, network it, and then to work out the bugs and really deliver the cash flow. So I think one of the challenges just for us is we see this opportunity set in front of us, but the earnings aren't going to fully materialize for several quarters.

I think one thing I might add, Jim, to kind of your question is particularly as we're adding assets through acquisition here, I think it's a pretty different stage of acquisition integration than where we were a couple of years ago where we were adding companies. And lots more application of systems, process, and people. These are really adding assets on a discrete basis into an existing platform that can be integrated pretty efficiently and fairly streamlined from an acquisition integration standpoint. So certainly should be a more straightforward exercise than we went through a couple of years ago from a balance sheet and a liquidity and a cash flow management standpoint as well.

Right. Much more plug and play versus what you were doing before. I look forward to seeing this kind of unfold over the next 24 months with the backlog you've got going now.

Our next question is from Tom Curran with Seaport Global Securities.

I'll just start with two follow-ons to Jim's question about your newly expanding solids management and waste solutions portfolio here. Do you expect there to be opportunities, and if so, would you be interested in moving into minerals and metals extraction on that side? And then could this also enhance the array of prospects that the industrial solutions group has beyond the oil and gas sector?

The solids management, as we mentioned, we really think it fits infrastructure because it's largely co-located. It's a space that we've been slowly building or in a position we've been slowly building with the landfill from Nuverra in the three saline injection wells that we acquired from the recent disposal acquisitions. One place that I do think it expands to would be around beneficial reuse. So this is something that we've been focused on for some time; we've evaluated multiple solutions and multiple companies. We've got a signed commercial contract with a large operator. We've got a successful pilot in a Permian. And so there is opportunity there.There's still certainly challenges as it relates to the economics. And there's no silver bullet, but the interest continues to grow. One of the challenges with desalinization or parcel desalinization is the salts. And so whether you're managing the salts or the iron or other solids, that's something that is a challenge with most of those solutions. And so as we think about expanding solids management beyond drill cuttings, oil and water based mud, soil reclamation, tank bottoms, that's one area where I kind of see near-term expansion into.

Makes sense. I can see the beneficial reuse angle there. But turning to water services, could you give us an idea of how far along you are with the rationalization and margin enhancement initiatives and when you would expect to have that business' composition where you want it to be in terms of having completed all of the yard closures, the field ops consolidation, the non-core disposals, just where are we at and when are you targeting to have that all finished?

Yes, good question, Tom. We certainly picked up the pace of some of that decision making in the first part of the year here, and that's carrying into the second quarter. The consolidation elimination efforts are focused around narrowing the scope of particularly some of the more commoditized service offerings that we mentioned like fluids hauling and geographies that may be a little less non-core to the overall full life cycle solutions, particularly around the infrastructure platform. We can also continue to look at opportunities and areas where we can enhance the segment via automation and technology. But the overall focus is on the core application of the business around the maintenance light, less labor-intensive, and higher margin areas of service that are going to be critical to the overall full lifecycle solutions with infrastructure. But that assessment is being made today, it's well underway. We saw some of that in the first quarter, and in the second quarter we're going to see the benefits of that on the margin side of up to 21% to 24%. So we're going to start to see some of the pull-through of those decisions. But we're going to continue to make those here in the first half of the year, but I think we should largely have made most of those by the time we get to the middle end of the summer here. Ultimately, if something's not core or not earning a return on assets worthy of a replacement investment dollar, relative to our other alternatives, particularly around infrastructure, as Michael talked about we're looking at all of this capital competitively, and some of those things are probably things we don't need to be spending time on. So we're making those decisions now and should see the benefits in relatively short order.

Yes, this is John. I want to add one thing to this. I mean, anytime you have technology moving around activity, moving around the type of equipment, it never stops, Tom, right? You keep busy all the time and trying to figure out what you need to be doing and what you need to not be doing. But in our business, margin enhancement is not just on the elimination side. If we can really pull value to our customers through our water transfer, through those infrastructure or above-ground containment, there are pieces that really enhance margins because of the value we can bring that are not necessarily elimination margin value.

Got it. And then chemical technologies, could you give us an idea of what percentage of CT's sales are being generated as part of water infrastructure's produced water related operations? Could you give us an idea of sort of where that's at today versus say a year ago?

Yes, so it's increased from a year ago for sure because our recycling has increased materially over the last year, Tom, but it's still a relatively small portion of chemical technologies revenue. It is an important portion for us because it's stable and we're able to get attractive rates to support our infrastructure. But the vast majority of chemical technologies is to the operator and with a lesser extent directly to the pressure pump.

I think the important nuance to that is that chemical technology that's being distributed to the operator now has transitioned from a more commoditized application to a more specialty application around that benefit or around that recycling reuse application of produced water. So it's become a bit more of a complex application of decision for the operator when they're reusing produced water. You're not only treating that barrel of water to make it usable, but you're matching that with more specialty chemical application in that completion fluid system that's going down hold to complete the well.

And this is something we've talked about in the past. I mean, it was really a big part of the driver we experienced in the second half of '22 and in '23, that transition is fully underway and largely taking place in the Permian. We haven't seen that really unfold in the other basins yet. We've seen it start, but not unfold. So as that continues to materialize in the DJ or the Bakken or elsewhere, we do think that our custom chemistry will be more competitive in that market.

And I think it's also important that as you talk about the application of recycling and growth there and the transition towards more advanced treatment over time around beneficiary et cetera, we do view our chemicals application as a competitive advantage relative to the overall landscape as really the only integrated water and chemistry platform. So we do think that our R&D capabilities and specialty application of chemicals does continue to benefit us as we transition more towards advanced chemical reuse.

Our next question is from Don Crist with Johnson Rice.

I just wanted to ask about the ramp up in water infrastructure. I mean, obviously you have a lot of projects going on, and we're going to see somewhere in the neighborhood of a 10% uplift in the second quarter, but as we look towards the back half and into '25, do you see a kind of linear ramp up or is it going to be kind of lumpy as we kind of move towards your goal of being over 50% in that segment?

Yes, you'll certainly see a pretty steady trajectory of growth done over the next couple of quarters. There could be some stair-step benefit from some of the larger projects like the Thompson Pipeline that we spoke about last quarter, should be coming online during the third quarter as a very large Greenfield project that has a chance to provide a bit of a stair-step benefit once that comes online. The remaining projects we announced this quarter are a little bit smaller on an individual basis starting to benefit in Q3 and Q4, and we should see a continued backlog of execution, smaller and potentially larger projects coming online over the next handful of quarters. But we'll certainly see a fairly steady growth application, particularly as we get the acquired assets integrated and start to enhance the utilization of those assets over time as well.

Yes, I think the stair-step approach is the right way to think about it, Don. I would say that with the acquisitions, the project opportunities we have, and the construction projects coming online in the next six months, we are confident that over 50% of our gross profit before depreciation in 2025 will come from infrastructure. We are also optimistic about achieving our target margin of 50% in infrastructure.

I appreciate that color. And just one further one from me, if I heard correctly, it sounds like the free cash flow is kind of dedicated more towards future M&A and debt payback possibly, and not towards share buybacks at least initially. Is that the right way to think about it, or can you expand on that any?

Yes, good question. Certainly, the first half of the year here, the capital allocation was certainly weighted towards these acquisitions. We do still have the open authorization of $21 million today for share repurchases, and we'll continue to look at a tactical application of that as part of our overall shareholder return strategy. Obviously with the recently increased dividend, we're strongly committed to shareholder returns over time here. And we do think that we've got a strong organic investment backlog that will be well within free cash. And then what we do with that remaining cash will be a continued decision on a quarter-by-quarter basis here. So we certainly view it as part of the overall allocation strategy, Don, but certainly the first half of the year here, we were focused on M&A; back half of the year, probably going to be more heavily focused on investing in the organic growth. But that should still leave ample free cash over the back half of the year to make some decisions around.

Our next question is from Jeff Robertson with Water Tower Research.

John, you talked a little bit about the systems in water infrastructure, and I'm curious as to whether you continue to build out infrastructure systems that can offer more solutions to your customers. Is that really what's driving the margin uptick in water infrastructure, or is it adding contracts to existing systems?

Yes. As far as the asset base and the systems that would be adding contracts and new extensions to existing systems. So you buy assets that are a good fit but not necessarily hooked up to the system yet. You contract around those assets. You have to put some infrastructure in to get them part of the system itself, and that creates a new contract of length as far as the margin is concerned. I think we've been clear we have a certain return value in the contracts, whether they're both new contracts for recycling or existing things that we've closed on in M&A or even putting just pipelines into hook up disposal wells into long-haul pipeline systems into different areas of disposal. Those are all underwritten very similarly to each other and that underwriting delivers that 50% gross margins that Michael's talking about. It's also important to say again, in the sense of what creates the backlog, once the value is being able to be recognized by our customers, those inbounds are looking for the value that we're creating to their LOE or their AFE as well as the return profile that we're getting. So it's very value add to our customer.

John, is the customer willing to contract services for longer periods of time as you build out more solutions in these systems?

Yes. I mean, when you have various issues that are attractive to you, the repeatable, predictable, it's not just in the earnings power of this company, but it's also in the operational power of our customers. They know they got stability in a very important part of their LOE and their AFE. The flexibility of the systems itself, whether you're taking the water back to a newly developed well, or stacking the water up into reserves for the next newly developed well, or taking it to disposal, that is a very big value add to our customer base. And so it's in that optionality as well as just the repeatable, predictable, and then the actual cost to their LOE or extension of their economic values.

It's the infrastructure service model so that you provide the certainty and the cost efficiency of fixed infrastructure with the flexibility of service. And by providing that together, you have a higher certainty of execution and just better communication. So it gets back to the one-stop shop model. And so to John's point, we have and think we will continue to see benefits to water services through the success in water infrastructure.

And Michael, on the beneficial reuse you touched on, have any of the issues around injection and seismicity, has that accelerated any of the work that you're seeing done on to try to overcome some of the economic challenges of beneficial reuse? Or is it just kind of a steady state march toward what the industry hopes will be a solution?

I think it's accelerating interest among our customers in those solutions and in our progress in evaluating companies and technologies and success of pilot programs for sure. I mean, it's something that the industry is aware of and in order to protect the oil coming out of the ground in the Permian Basin, the operators have to secure a place for that water and its formations' pressure up, or the regulatory railroad commission reduces injectivity. You're going to have a harder and harder challenge of getting rid of that water and beneficial reuse could be one of the answers.

Our next question is from John Daniel with Daniel Energy Partners.

I know you mentioned in the back half you're going to sort of shift more towards organic versus acquisition, but I'm curious, when you look at sort of the turmoil in the broader market out there, if you might actually see some opportunistic opportunities pop up. Are you seeing any signs that might potentially play out where the strategy might pivot a little bit back to M&A versus organic?

Yes. John, this is John Schmitz. We believe that is a very possible outcome as we travel through the next six to nine months that whether it's market conditions or whether it's systems that belong together to bring value both to the investor base of this company or the other company as well as our customer base. We do believe that what you're describing could develop over the same time that we're executing a large amount of this backlog that Michael and Chris and I are talking about. So something we keep our minds open, our phones available, and I do believe it could happen, John.

Okay. You mentioned that you have closed five deals this year. How many deals have you turned down? When you decide to turn them down, is it usually due to valuation issues, or do you find environmental concerns after further investigation? What typically leads to a deal not going through?

Yes, I would say first that if you look at the deals that we've done, especially as Chris said, the first ones we were doing were really companies. And the companies were the companies that you know John, that we like bought whole companies. What we're buying now is really assets that fit those systems in that, and they're very identified before we go into really trying to either evaluate or buy the asset base. So we don't go through a lot of deals to come up with the one deal that fits us well. We really can identify the deals that fit us real well and spend time on them. As far as the environmental and logically the due diligence, yes, we've had a few things that we looked at that we just couldn't stomach, or we found that they didn't fit, and it was things that we thought were strategic, and we had to turn them away for various reasons. But it's either going to be a systems fit or an environmental or conditioned down hole or things of that nature that probably kills most of our deals, John.

And John, this is Chris. I maybe add to that some of these opportunities as well as we've mentioned, we're able to buy some of these assets at below replacement costs, which in and of itself is oftentimes replacing what is growth capital that we might otherwise be interested in organically investing. If we can go find an asset that's a strategic fit, underutilized, and buy it in a manner that's going to be competitive against what would've already been a need for an organic project, that's going to be a continued opportunity for us to add to the portfolio.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to John Schmitz for closing remarks.

Yes. Thank you everyone for joining the earnings call today. I continue to add on thanks to our employees, the customers, the investors, and we really look forward to talking to you about Select in the next quarter. Thank you very much.

Thank you. This concludes today's conference. You may disconnect your lines at this time.