Release Date: July 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Improved consolidated operating margins by 2 percentage points sequentially.
- Reduced SG&A by 11%, contributing to a $11 million increase in net income and $10 million increase in adjusted EBITDA.
- Water infrastructure segment achieved record high revenue and gross profit, with an 8% increase in revenue and 17% increase in gross profit before D&A sequentially.
- Completed strategic acquisitions adding over 615,000 barrels per day of permitted disposal capacity, enhancing infrastructure in six primary operating regions.
- Signed multiple new contracts in the Northern Delaware Basin, significantly expanding water recycling capacity and geographic footprint.
Negative Points
- Natural gas prices have been challenging, impacting overall activity levels in the first half of the year.
- Water Services and Chemical Technologies segments faced a more challenging activity outlook, with a 9% decline in manufacturing volumes in the Chemical Technologies segment.
- Certain permitting delays impacted the construction timeline of the Thompson pipeline in the Bakken region, pushing its expected contribution to the end of 2024.
- Continued trimming of revenues from legacy fluids hauling service line, impacting overall revenue growth in the Water Services segment.
- SG&A costs, while reduced, will continue to incur modest transaction and integration-related costs in the third quarter.
Q & A Highlights
Q: You all detailed the 2 new projects in the Delaware and kind of the growth CapEx associated with that. How do you balance this? And how should we think about the returns of other North American service companies, and they don't have the growth lag that you do?
A: This is Michael Skarke. Part of the growth profile is really the core focus we've got around infrastructure and probably more specifically, recycling as it relates to the Northern Delaware. We're seeing a lot of traction there. The returns are really consistent with what we've said in the past. We're trying to get a 3-year return on our capital under the underwritten contract with the ability to connect it beyond that with other operators to improve upon that return. Most of the projects we've announced, unfortunately, there's a long lead time. But we are expecting a meaningful contribution from the capital spend this year for next year. And then as we build out that system and that network, we're finding more opportunities, more extensions, more connections, more optionality with operators. All of that is what's really driving our backlog and really the enthusiasm we have around water infrastructure as we look forward to 2025.
Q: The water infrastructure margins hopped over the 50% mark, which is pretty important, and it happened a lot sooner than we expected. Could you just talk about what drove the acceleration there and allowed that to happen quicker than expected?
A: Certainly, I was very pleased to see us get to that 50% point here in the first half of the year. We were striving to get there potentially in 2024, but certainly targeting getting there by 2025. It was contributed by a couple of things. When you think about the incremental utilization of existing capacity within the base infrastructure business, every incremental barrel of throughput through a piece of fixed pipe or a facility provides a pretty attractive incremental margin. We were able to drive revenue growth in the first half of the year through both organic business development as well as bringing on accretive acquisitions that contributed to the segment on a margin basis, that's higher than where we've been. We've been able to take costs out of some of the recent acquisitions faster than anticipated. So, there's still a little bit of work to get them integrated into the networks, particularly out in east Texas. But generally speaking, the assets that we've been able to bring into the system, we've been able to utilize quickly and get some costs out sooner than we anticipated. So, all of that's really contributing. But I think, first and foremost, it's just a continued ability to drive volumetric throughput through the assets at a higher rate, and we expect to see a material continued pace of that into Q3 here that I think should stabilize those margins above 50% and give us clear visibility into continuing to take those further over the next year or so.
Q: Just maybe circling back on water infrastructure. You talked about just this quarter didn't quite get to the sequential growth you originally hoped for, and you talked about Thompson pipeline as it relates to third quarter guidance. But if I recall correctly, kind of start of the year, you were thinking water infrastructure revenues are probably going to be up somewhere between 30% and 40%. Curious if you still think that given the kind of delay in the Thompson pipeline?
A: The Thompson pushing into the fourth quarter is certainly going to impact the top line contribution expectations for the year. So, probably coming in towards the bottom end of that guide. But I think importantly, the profitability has improved at such a pace that we're likely tracking towards something that's at the top end or potentially exceeding the top end of the growth on the profit side, which was expected to be 40% to 50% year-over-year growth. So, I think we're in a position we might be able to push above the top end of that range on the profitability side. So, on a gross dollar basis, still on track or potentially ahead of where we expected to be at this point, even if the top line is going to be a little lower than we might have liked. But obviously, that's really just a timing question of getting some of those assets up and running. And certainly, once they come online in Q4 and the new projects in Q1, we should see a pretty heavy pace of growth in the next 6 to 9 months from those new projects, and those should be -- continue to be additive to the margin profile as well.
Q: If you're ahead on margins in Water Infrastructure, should we think that you will accelerate your goal of getting to the plus 50% on gross profitability before year-end 2025?
A: I think it certainly gives us an opportunity to get there faster. And obviously, with the activity environment, providing a little more of a governor on the completions parts of the business around services and chemicals, it provides an additional layer of profit weighting out of infrastructure in the relative near term. I'd say that based on the backlog of projects we see and the timeline of when we expect to get those projects underwritten and deployed, I think that's still an appropriate way to frame our expectations here. But certainly, as we look into 2025, I think there's an opportunity for us to pull that timing forward potentially, but it would certainly require some additional contracts getting under our belt here in the back half of this year.
Q: As you think about the business over the next several years, with an increasing share of revenue and cash flow being underwritten by long-term infrastructure projects. Does that impact the way you think about capital budgeting and cash return to shareholders plan and just the ability to compound that growth into continuing to expand the Water Infrastructure segment?
A: We certainly think that we've got an ability to deploy the growth capital we have in front of us this year out of free cash flow. We've been able to grow the dividend over the last year. We've -- we were quite active from a repurchase standpoint last year, a little bit more constrained from a buyback standpoint this year as we've been picking up the pace of the organic capital deployment. Looking now 12 months from now, I think that getting more underwritten contracts in the books is definitely going to give us more optionality and flexibility into how we underwrite the business, both in terms of taking a look at the capital structure on the balance sheet as well as the stability and opportunity for shareholder return growth. So, I think for now, we've certainly kind of shifted focus from an M&A standpoint in the first half of the year towards an organic capital deployment standpoint in the back half of this year. We remain with a $21 million authorization on the share repurchase that we'll continue to have for tactical deployment. But I think the pace of opportunity in front of us from an organic project standpoint is picking up at a rate that that's the best opportunity for us to put good capital to work here if we can continue to add long-term 10, 15-year underwritten contracts for new growth in water infrastructure.
Q: Regarding
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
