Perimeter Solutions SA

NYSE:PRM

Earnings Call Transcript 2024-Q3

[Operator]

Greetings. Welcome to Perimeter Solutions Third Quarter 2024 Earnings Call. [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, executive]

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, executive]

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 3 operational value drivers, which are: number one, profitable new business; number two, continual productivity improvements; and number three, pricing our products and services to the value they provide.



In addition to our operational value drivers, we seek to maximize equity value creation through a clear focus on the allocation of our capital as well as the management of our capital structure. Slide 4 provides a snapshot of our 3 main product lines: retardants, suppressants and specialty products, all of which share the following very attractive structural traits. Each provides a mission-critical function where failure is not an option. Each is a clear leader in its market. Each serves an extremely challenging and complex end market through an integrated solution offering that includes product, equipment and service. And finally, each has an attractive organic or inorganic long-term growth profile. Before addressing our strong third quarter and year-to-date financial performance, I'd like to touch on our operating performance.



I'll start on Slide 5 with Retardants. The retardant market is characterized by the intersection of extreme criticality and complexity. starting with criticality. Failure in this business is measured in lives and property. When we load and launch an air tanker, we're protecting a hotshot crew battling an active wildfire or a community threatened by an approaching fire or someone's home. It's often all of the above at once. Failure in what we do is simply not an option. Fulfilling our mission requires 100% reliability, 100% of the time in every geography, we operate and for every customer we serve.



Slide 6 captures the great complexity amidst which we fulfill our critical mission. We must unfailingly meet very stringent service standards in challenging and often harsh operating environments amidst extreme variability and unpredictability. Faced with this unique combination of criticality, and complexity, customers across the world partner with Perimeter Solutions in their life-saving missions.



Turning to Slide 7. The reason every meaningful retardant program globally partners with Perimeter is our unfailing service record. I'll take a moment to walk investors through a couple of recent real-world examples of Perimeter serving our customer and fulfilling our mission. In August of 2023, the Canadian City of Yellowknife came under severe wildfire threat and an evacuation order was issued for all 20,000 residents of the city.



Yellowknife is a remote city in Northern Canada. It's the capital of the Northwest Territories, which itself has a total of only 44,000 residents. There is a single 2-lane road out of Yellowknife to the province of Alberta to the South. Alberta's closest evacuate reception center was approximately 680 miles away from Yellowknife via that single passage. It was imperative to our customer, the Northwest Territories Forest Management division that this road remains secure for the evacuation of Yellowknife.



We were operating in an extremely remote part of the world. We were also in the midst of the busiest Canadian wildfire season on record. However, and as always, Perimeter was present and prepared. We responded on a dime, and provided uninterrupted supply of retardant to 6 air tanker bases in the Northwest Territories, Yellowknife, Hay River, Fort Simpson, Fort Smith, Norman Wells and Inuvik. The tanker base at Norman Wells is only accessible by barge in summer. The water level was low, and the barge couldn't sail. Instead, we flew totes of liquid concentrate to Norman Wells and kept the base fully stocked and pumping gallons throughout the evacuation operation.



The passage out of Yellowknife was secured and the evacuation operation was successful. Residents were able to return to their homes within a few weeks. Yellowknife is one example of Perimeter stepping up and fulfilling the mission as only we can amidst extreme criticality and great complexity.



I can recount countless similar examples from all corners of the world, be it North America, Central or South America, Europe, the Middle East, Australia or Asia. I'd also like to convey an operating example from the current year. The Western United States experienced a period of intense fire activity in mid-July of 2024. All our air tanker bases were open, yet customers requested additional resources. As always, we responded. We simultaneously deployed a dozen Mobile Retardant Bases or MRBs, including to California, Washington, Oregon, Idaho, Wyoming and Oklahoma.



MRBs are typically set up in remote areas that are difficult to reach from fixed air bases and in close proximity to an active wildfire. MRBs can also be used to increase firefighting capacity during periods of extreme wildfire activity. We fully deployed MRB in under 1 day in any open space with a water source and can provide immediate air tanker retardant mixing and loading capabilities as well as dip tanks for helicopter operations. We staff MRBs with up to 10 employees and an MRB can remain deployed for weeks at a time in support of our customers' firefighting operations.



In addition to the 12 simultaneously deployed MRBs, we deployed ground-applied retardant units, including 5 units simultaneously deployed to California's Coffee Pot Fire. Finally, we activated our fixed Channel Islands air base and successfully supported the deployment of several C-130 air tankers under the U.S. Air Force's Modular Airborne Firefighting System program, typically referred to as MAFS.



MAFS is an emergency program where when all commercial air tankers are activated, but further assistance is needed, the U.S. Air Force activates their C-130 air tanker fleet out of our Channel Islands air base to provide additional emergency aerial resources. It's difficult to find a greater intersection of criticality and complexity than what we faced this July with over 100 active air bases, a dozen simultaneously deployed MRBs, a large fleet of simultaneously deployed ground-applied retardant units and an active MAFS program out of Channel Islands. Yet we did what we always do at Perimeter. We stepped up and served our customers in support of their sacred mission.



Turning to Suppressants on Slide 8. Our Suppressants business shares many attributes with our Retardant business, where extreme criticality intersects with great complexity and where we address our customers' needs through an integrated solution offering encompassing product, equipment and emergency response. Perimeter has also emerged as a clear market leader in Suppressants on the back of our pioneering R&D breakthroughs in fluorine-free foams and systems. This product leadership has led to an extremely high win rate of fluorinated to fluorine-free facility conversion projects, including our approximately 99% win rate at FAA 139 compliant airports.



Given the largely razor-razor blade nature of the Suppressants business, where aftermarket foam sales are largely spec-ed in with the installed equipment and service network, our fluorine-free project win rate is creating a large installed base of customers into which we expect to sell aftermarket product far into the future. We couldn't be prouder of the operational execution by our Suppressants business as well as their continued extremely strong financial performance.



Slide 9 touches on Specialty Products. This is another business where you must consistently meet stringent customer and regulatory standards, where we serve our customers through a comprehensive and integrated offering spanning product, equipment, and service and where Perimeter is the clear market leader with over 50% of all installed OECD capacity.



We're also very proud of Specialty Products' operational execution. We've delivered approximately 10,000 bins in 2024 with a single-digit number of product issues or returns. This issue rate in a global business with very tight product specifications and extremely complex logistics and transportation requirements is a testament to the team's exceptional execution. We're also proud of Specialty Products' financial performance this year, which speaks for itself.



Turning now to Slide 10, which provides a snapshot of Perimeter's adjusted EBITDA track record over the past 15 years and highlights of our 18% adjusted EBITDA CAGR over this period. Please note that we're using LTM adjusted EBITDA of $259 million as a placeholder for 2024 adjusted EBITDA. The vast majority of the improvement in our adjusted EBITDA over the past two to three years is the direct result of the rigorous application of our value driver focused operating model.



This is clear when comparing either 2020 or 2021 with the LTM period. 2020 and 2021 witnessed approximately 36% higher and 7% lower acres burned ex-Alaska, respectively, versus the LTM period. Yet the LTM period delivered roughly 85% to 90% higher adjusted EBITDA versus 2020 and 2021 due to the successful implementation of our operational value drivers. These comparisons isolate the impact of our value drivers and provide clear evidence that our operating strategy works.



As I've consistently stated, the implementation of our operating model is a journey, not a destination. We will keep our foot on the gas, and we are confident that we will drive higher adjusted EBITDA in any future year with similar end market conditions to the LTM period. I'll close on Slide 11, discussing capital allocation. Driving shareholder value through high IRR capital allocation is a core tenet of our strategy. As I've stated previously, we expect to deploy all of our free cash flow as well as the incremental leverage capacity we expect to generate through organic EBITDA growth towards the highest expected IRR combination of internal reinvestment into our business, M&A, share repurchases and special dividends.



We're clearly well positioned for capital allocation with over $200 million of cash on our balance sheet, LTM net leverage of 1.7x and the expectation that 2025 will be another strong free cash flow year. Our capital allocation priorities are listed on Slide 11. Our first priority is always to reinvest in our business via both OpEx and CapEx. First, in order to best support our customers' missions and next, to fund high-return, profitable new business and productivity initiatives. We expect to deliver on the higher 2024 CapEx budget we guided to earlier this year.



2024 will mark a new high for reinvestment into our business, not only through the aforementioned increase in CapEx, but also through several key OpEx line items, including R&D and field service. We will maintain this higher level of reinvestment into our business. However, we expect to generate meaningfully more free cash flow and create meaningfully more leverage capacity via organic EBITDA growth than we can possibly reinvest internally. Therefore, we will look beyond internal reinvestment for capital allocation opportunities.



Our next capital allocation priority is M&A, as evidenced by the improvement we've driven across Retardants, Suppressants and Specialty Products, we are confident that our value driver focused operating strategy will create significant value when applied to the right business. We're actively searching for targets with the right economic criteria, specifically where we can significantly increase EBITDA and free cash flow via the rigorous application of our value driver operating strategy. We won't hesitate to swing the bat when we find the right opportunity.



Our next priority is share repurchases. As we've proven during our three years as a public company, we will double down on perimeter when the market provides an especially attractive opportunity to do so. Finally, and in the highly unlikely event that we're unable to allocate sufficient capital to the three aforementioned avenues of internal reinvestment, acquisitions and share repurchases, we would expect to return capital to our shareholders via special dividends. With that, I'll turn the call over to Kyle.

[Kyle Sable, executive]

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 destock 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 U.S. 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 1.7x 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 Joshua Spector with UBS.

[Joshua Spector, analyst]

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, executive]

Yes. Josh. 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.

[Joshua Spector, analyst]

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, executive]

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.

[Operator]

Our next question is from Nate Hilton with Morgan Stanley.

[Nathan Hilton, analyst]

So firstly, congrats on a great quarter. Looking at it now, we're roughly halfway through 4Q. And so far, like data on U.S. 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 U.S. ex-Alaska wildfire activity quarter-to-date could potentially drive an increase in 4Q year-over-year fire safety results.

[Haitham Khouri, executive]

Yes, Nate, your view on these calls, and so I applaud you for trying, but we are not going to comment on an in-process quarter.

[Nathan Hilton, 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 U.S. wildfire seasons and also the general timing of the historical peak severity wildfire seasons in those regions?

[Haitham Khouri, executive]

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 U.S., Europe and the Middle East and that we're just entering their fire season.

[Operator]

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

[Haitham Khouri, executive]

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.