Earnings Transcript for PRM - Q3 Fiscal Year 2024

Operator: Greetings. Welcome to the Perimeter Solutions Third Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce, Seth Barker, Head of Investor Relations. Thank you. You may proceed.

Seth Barker: Thank you, operator. Good morning, everyone, and thank you for joining Perimeter Solutions’ third quarter 2024 earnings call. Speaking on today’s call are Haitham Khouri, Chief Executive Officer; and Kyle Sable, Chief Financial Officer. We want to remind anyone who may be listening to a replay of this call that all statements made are as of today, November 12, 2024, and these statements have not been, nor will they be, updated subsequent to today’s call. Also, today’s call may contain forward-looking statements. These statements made today are based on management’s current expectations, assumptions and beliefs about our business and the environment in which we operate, and our actual results may materially differ from those expressed or implied on today’s call. Please review our SEC filings for a more complete discussion of factors that could impact our results. The Company would also like to advise you that during the call, we will be referring to non-GAAP financial measures, including adjusted EBITDA. The reconciliation of and other information regarding these items can be found in our earnings press release and presentation, both of which will be available on our website and on the SEC’s website. With that, I will turn the call over to Haitham Khouri, Chief Executive Officer.

Haitham Khouri: Thanks for the intro Seth; and thank you as always for the great work on the Spruce step deck. Good morning, everyone. Thank you for joining us. I'll start on Slide 3, with a summary of our strategy. Our goal is to fulfill our critical mission by providing our customers with quality products and exceptional service, while delivering private equity-like returns with the liquidity of a public market. We plan to attain this goal by owning extremely high-quality businesses and maximizing their long-term strength and value through consistent improvement in our three operational value drivers, which are

Kyle Sable: Thanks, Haitham. I'll kick off on slide 12, where growth figures shown are versus the prior year comparable period. For Fire Safety third quarter revenue increased 113% to $251.8 million, and year-to-date sales increased 97% to $375.5 million. Fire Safety Q3 adjusted EBITDA rose 181% to $157.5 million contributing to the year-to-date increase of 208% to $212.9 million. The majority of the increase in Fire Safety's Q3 and year-to-date revenue and adjusted EBITDA is attributable to our Retardants business. The year-over-year increases were driven by a combination of end market normalization as the 2024 fire season was significantly closer to normalized severity versus the 2023 season, as well as the impact of our value driver focused operating model. As Haitham noted, comparing our 2024 results with our 2020 and 2021 results, largely isolates and captures the financial impact of our operational value drivers. Our Suppressants business also grew in Q3 and year-to-date as we continue to benefit from the transition to fluorine-free foam where Perimeter is the clear market leader. In our Specialty Products business, Q3 sales increased 50% to $36.6 million helping to drive a year-to-date sales increase of 37% to $99.2 million. Specialty Products adjusted EBITDA grew 137% to $12.9 million, while year-to-date adjusted EBITDA increased 111% to $34.5 million. The market recovery we experienced in the first half of the year continued into the second half and we're now comfortable that 2023's de-stock activity is behind us and believe that 2024 represents a normalized end market demand year for Specialty Products. On a consolidated basis, Q3 sales increased 102% to $288.4 million and year-to-date sales increased 81% to $474.7 million. Consolidated adjusted EBITDA increased 177% to $170.4 million in the third quarter and increased 189% to $247.4 million in the year-to-date period despite record spending to support our customers in areas such as research and development and field service, which we expect to remain elevated for the foreseeable future as we invest in our capabilities in support of our customers' missions. Moving below adjusted EBITDA, slide 13 shows our long-term assumptions regarding free cash flow, which we define as cash flow from operations less capital expenditures. Q3 interest expense of $10.1 million, depreciation of approximately $2.6 million and amortization expense of $13.8 million were consistent with our long-term assumptions. While cash paid for income tax was $27 million in Q3, we expect our full year cash taxes to more closely reflect the 26% rate assumption. Our cash taxes in any quarter or year often vary due to the timing of payments. Capital expenditures were approximately $3.9 million in Q3, an acceleration in spend consistent with our increased goal of investing $10 million to $15 million of capital expenditures in our business in 2024. Our team drove substantial working capital improvements over the course of 2024, notably on inventory which declined $37.3 million year-to-date in accounts receivable. On ARR, while our sales increased nearly $145.8 million in Q3 2024 versus Q3 2023 our ARR for the comparable periods increased only approximately $25.5 million due to improved collection procedures. We expect that we will generate cash from net working capital in 2024 in contrast to our long-term assumption of consuming cash as the business grows. We will revisit and update as necessary, each of our long-term assumptions on our Q4 call. Our free cash flow for the third quarter was approximately $179.1 million. The seasonality of our business limits free cash flow generation early in the year, while Q3 and Q4 tend to be cash generative. Year-to-date, we have generated free cash flow of approximately $185.3 million. Capital allocation for the quarter included our increase in capital expenditures where incremental capital spend is tied primarily to productivity or profitable new business projects with IRRs at or above our long-term return target. The inflection in our LTM EBITDA has both validated our operational value driver strategy and created the necessary financing capacity to fully pursue M&A. Our team is actively searching for targets and after CapEx, we view M&A as the highest return generating use of capital. We repurchased de minimis shares in Q3. Year-to-date, we purchased approximately 3 million shares for approximately $14.4 million. Since our share repurchase program's inception, we've repurchased approximately 14% of the initial share count of the company at IPO at an average price of $5.90, generating a 137% return through last Friday on the approximately $127.4 million deployed. Finally, turning to our corporate structure, we expect to complete the re-domiciliation of our parent company from Luxembourg to Delaware in November. This move will better align our legal structure with our US operations, which generate the majority of our revenue and EBITDA. We expect the transaction to reduce our regulatory and reporting complexity, streamline legal, accounting and cash management and generate an improved tax profile. Turning to Slide 14. I'd like to highlight our highly attractive debt profile, comprised of a single series 5% fixed rate note, maturing in the fourth quarter of 2029, which doesn't carry any financial maintenance covenants. As of Q3, we were levered 1.7 times net debt to LTM adjusted EBITDA. We have substantial liquidity with cash and cash equivalents of approximately $223.1 million and an undrawn $100 million revolving credit facility. We ended the period with approximately 145.2 million basic shares outstanding. With that, I'll hand the call back to the operator for Q&A.

Operator: [Operator Instructions]. Our first question is from Josh Spector with UBS. Please proceed.

Josh Spector: Yes, good morning and congrats on the solid results in the quarter here. I wanted to ask kind of where to from here as we think about fire safety. So, I assume given the strength in the fire season, you probably couldn't fill all the orders you had. So, were your volumes maximized and that you sold everything you possibly could? Or how do you think about that relative to the fire season? And then longer term, what would drive higher volumes for you in that business over time?

Haitham Khouri: Yes, hey Josh. Thank you for the questions. This is Haitham by the way. Thanks for the question and very good question. So it depends on time frame, there were certainly periods in Q3 where the entire aerial firefighting industry was running at max capacity. One of the best pieces of evidence for that by the way is the activation of the Air Force's MAX program which can only happen when all commercial air tankers are accounted for. So, you can't generalize and talk about the 90 days as sort of a monolith, but there were certainly periods, where we could have sold more Retardants had there been more industry capacity. Now, on a go-forward basis, there is capacity very consistently being added. A big part of that comes from our partners in private industry, the air tanker companies that are consistently adding capacity to the air tanker fleet. Not only do you have more air tankers, but you have bigger, faster air tankers and therefore, it's quite attractive from the total industry capacity perspective. You have our public customers adding capacity as well. CalFire is very roughly planning to double capacity over the next few years and put the first large air tanker into service in the 2024 fire season. And then you have our own investments. We're working extremely hard to increase our capacity at our air bases. That means adding more loading pits. That means upgrading our equipment so we can load planes faster. That means upgrading lab basis to add VLA capabilities, all sorts of things. So these are all long-term secular processes. You're not going to see a huge inflection in capacity one year to another. But if you look historically, you've seen significant year-over-year growth, consistent and significant year-over-year growth in industry capacity. All the secular investment drivers behind those are intact and we most certainly, expect to see that continue going forward.

Q – Josh Spector: All right. Thank you. And if I could just ask on the cash deployment side of things. I mean obviously you're pretty clear, you're looking at M&A and other options. But, how do you think about the timing of when you think about a special dividend or doing something else to get leverage back to your target, versus waiting for the right M&A target? So should we expect something either M&A or something to return your leverage to the target range, in the next quarter or so? Or is that more of a longer-term thought process?

Haitham Khouri: More of the latter, Josh. We're going to be patient appropriately, patient with capital allocation. On both sides of the ledger by the way, right? You saw us, optically highly levered, a year ago yet, we repurchased $100 million of our stock you see us clearly under levered, today. And if we need to be patient waiting for the right M&A opportunity, we'll do so. Now you can't do that forever. An efficient capital structure is like an efficient SG&A base. It's just a prerequisite to drive shareholder value. It's sloppy to run our capital structure any other way. And therefore, if over the passage of time, we do not believe we can allocate significant capital to internal reinvestment M&A and attractive buybacks, certainly, we'll eventually lever up and return capital to shareholders via a special dividend.

Q – Josh Spector: Got it. Thanks. Haitham

Operator: Our next question is from Nate Hilton [ph] with Morgan Stanley. Please proceed.

Q – Unidentified Analyst: Hey, so firstly, congrats on a great quarter. Looking at it now, we're roughly halfway through 4Q. And so far, like data on US, ex-Alaska acres burn has been above the historical average trends fairly meaningfully and substantially. And we also appreciate that Perimeter has strategically, relocates assets to different regions based on the different fire seasons whether that be the Northern or the Southern Hemisphere. So given those factors, we're hoping that you could comment maybe on whether or not US ex-Alaska wildfire activity quarter-to-date, could potentially drive an increase in 4Q year-over-year fire safety results.

Haitham Khouri: Yes, Nate, you’re new on these calls and so I applaud you for trying, but we are not going to comment on an in-process quarter.

Q – Unidentified Analyst: Got you. No, that's all right. Just generally speaking, can you also remind us on which regions Perimeter focuses on outside of the peak US wildfire seasons, and also the general timing of the historical peak severity wildfire seasons in those regions?

Haitham Khouri: Sure. It's very broad. Central America, is a good market for us although the seasonality there tends to run very similar to North America. South America, certain locations within South America have been excellent long-term markets for us and run counter seasonal to North America. So they are just entering their peak wildfire season. Europe, the Middle East, Asia are important; many countries in those markets are very important for us. And then, Australia is a very important market for us. And Australia, like South America runs counter seasonal to the US, Europe and the Middle East and that we're just entering their fire season.

Q – Unidentified Analyst: All right. Thanks.

Operator: With no further questions in the queue, I would like to hand the conference back over to management for closing remarks.

Haitham Khouri: Yes. Thank you, operator and thank you to our shareholders for the continued support. We very much appreciate it. We continue to work very hard for you and speak next quarter. Thank you.

Operator: Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.