Q1 2022 Perimeter Solutions SA Earnings Call
Greetings welcome to perimeter solutions first quarter 2022 earnings call.
All participants will be in a listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero from your telephone keypad. Please note that today's conference is being recorded.
At this time I'll turn the conference over to Laurie.
Cause Luca nor you may now begin.
Thank you operator, good morning, everyone and thank you for joining perimeter solutions first quarter of 2022 earnings call speaking on today's call are Corey Vice Chairman Edward Goldberg, Chief Executive Officer, and Chuck <unk> Chief Financial Officer.
I want to remind anyone who may be listening to a replay of this call that all statements made are as of today may nine 2022, 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.
He used to view, our SEC filings for a more complete discussion of factors that could impact your results.
The company would also like to advise you that during the call we will be referring to non-GAAP financial measures, including EBITDA.
Please refer to our earnings press release and presentation as well as our SEC filings, both of which will be available on our website and on the SEC's website with that I will turn the call over to hit him Corey Vice Chairman.
Thanks Laurie.
Everybody and thank you for joining today.
As usual I'll begin with summary comments on our strategy then I'll touch briefly on our performance before turning the call over to Eddie to review, our Q1 results more fully starting with our strategy on slide three.
As you've heard from us before our goal is to deliver private equity like returns with the liquidity for public market. We plan to attain this goal by owning operating and growing uniquely high quality businesses.
We define uniquely high quality businesses through five very specific economic criteria, one recurring and predictable revenue streams.
Long term secular growth tailwind.
<unk> products that account for a critical but small portions of larger value streams.
<unk> significant free cash flow generation with high returns on tangible capital and five the potential for opportunistic consolidation.
We believe that these economic criteria are present at perimeter as described on slide four and we also use these criteria to evaluate potential.
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As described on slide five we seek to drive long term equity value creation by our consistent improvement in our three operational value drivers, which are as follows profitable new business.
Continuous cost improvement and pricing to reflect the value, we provide as well as a clear focus on the allocation of our capital and the management of our capital structure.
Moving onto our first quarter results and starting with fire safety.
We're pleased with our first quarter performance in fire safety, though I'll reiterate how modest the first and fourth quarters typically are in this business and I'll caution investors against reading too much into annual variations in our Q1 and Q4 by our safety results.
Moving on next to oil additives.
Prior earnings call. We noted that we had been encouraged by our initial findings in this business and believe that we're likely to see some upside in 2022 relatively relative to our expectations of flat revenue and adjusted EBITDA.
This upside is clear in our Q1 results with adjusted EBITDA, almost doubling versus the first quarter of 2021, which itself was a very solid quarter for the oil additives business for now we'll stick to what we've already said around potential 2020 to upside in our OE business relative to our initial underwriting expectations.
Ted I will observe that and we continue to be encouraged by what you learn and are constantly focused on enhancing our operating results.
I'll close by reiterating that 2022 framing I walked through on our prior call.
Roughly on trend line 2022 fire season, and incorporating our best assumptions around all other aspects of our business. We expect consolidated 2022, adjusted EBITDA growth consistent with and perhaps above our long term framework of mid teens growth and with that.
I will turn the call over to Eddie.
Thanks, Haytham before I address the quarter I'll briefly touch on two high level topics, primarily for the benefit of new investors, who aren't as familiar with perimeter.
First I'll briefly summarize the long term growth framework for our fire safety business.
Starting with volume growth.
Using the five year trailing average U S acres burned X, including Alaska have increased approximately 5% per year over the past 25 years from a five year trailing average of approximately 2 million acres and $19 95 to a five year trailing average of approximately $7 3 million acre.
In 2021.
Assuming this trend continues we expect this mid single digit growth in the U S acres burned excluding Alaska.
Form the baseline for growth in preliminaries retardant volumes.
In addition to growth in acres, we've also experienced consistent historical growth in retardant used per acre.
This is due to a combination of factors.
Mainly in increasing wildland urban interface that puts more lives and property at risk from wildfires.
A behavioral shift by our customers towards more aggressive initial aerial attack and a larger air tanker fleet.
We generally expect these trends to continue going forward and we therefore expect to continue to grow retardant used per acre. In addition to the growth in acres burned.
Finally, we expect to grow our international volume faster than our U S volume as more countries buildout aerial attack capability and become perimeter customers.
In conclusion looking forward.
Binding our expectations for one increasing acres burned two increasing retardant used per acre and three our strong growth in our international markets, We expect to deliver high to mid single digit annual volume growth in our fire safety business.
In addition to mid to high single digit volume growth, we expect to deliver consistent price growth in our fire safety business to reflect the increasing value we provide to our customers.
The next higher level topic I'll address is the typical quarterly cadence within each of our two businesses starting with fire safety first.
The first quarter is typically our smallest quarter and fire safety and one in which the business typically produces modestly negative adjusted EBITDA.
The next smallest fire safety quarter is typically the fourth quarter.
Q4 is usually notably larger than the first quarter and is typically adjusted EBITDA positive, but it is modest relative to the full year.
The second and third quarters are our most significant fire safety quarters as they capture the heart of the fire season in the majority of our markets.
Note that the third quarter is typically significantly larger than the second quarter as it typically captures the heart of the North America fire season.
Oil additives on the other hand typically operates at a steady steady quarterly cadence quarterly variations in the oil additives business are primarily tied to the timing of customers' annual maintenance related facility outages.
Specifically, if several of our large customers happen to schedule their maintenance related outages in the same quarter will experience a slower volume quarter, which will typically make up for over the balance of the year.
Now turning to our first quarter performance, starting with fire safety.
First quarter revenue more than doubled year over year, while our adjusted EBITDA loss improved from $4 $6 million in the first quarter of 2021 to.
To $3 $3 million in the first quarter of 2022.
Year over year revenue growth in the first quarter was driven in roughly equal parts by our fire retardant fire suppressant businesses.
Incremental margins in our fire safety businesses were somewhat impacted by incremental public company costs, the impact of a more benign COVID-19 environment on expense items, including travel and office expenses.
And the impact of cost pass through is primarily related to transportation.
I'd also like to go behind the numbers and briefly note a few of the things that we accomplished in the first quarter that once again demonstrate our commitment to serving our customers and highlight the value that perimeter solutions brings to our stakeholders.
Once again early season fires threatened communities in Mexico.
Working with 10 tanker air carrier with whom we have a long very successful relationship we provided closer in retardant capability to support D. C 10 operations in Mexico.
Deploying one of our customer design mobile retardant basis to Texas, we loaded tens of thousands of gallons of retardant that were applied to save lives and property in Mexico. The operation was very successful and demonstrates once again the exceptional response that perimeter always provides.
Second perimeter partnered with the National National Guard to provide the equipment and systems to build out a large high capability retardant base in the channel Islands in California.
This space will allow the national guard to support firefighting operations with a fleet of eight C. 130, Hercules aircraft equipped with modular airborne fire fighting systems or maps as well as other large and very large air tankers.
Project was completed as promised and is ready to fight fire in California. This season.
Finally, recognizing the extreme supply chain challenges the world continues to experience.
We took steps to accelerate supply of raw materials and production bolster our distribution and transportation network and ensure we are ready to support fire fighting operations with the reliability as our customers demand and expect of us.
Turning to oil additives first quarter revenue increased 50% year over year, while adjusted EBITDA increased 97% we.
We focused intently on the implementation of our operational value drivers in the oil additives business over the last two quarters.
These value drivers include winning profitable new business, both with existing customers as well as with new customers and new applications.
Levering productivity gains to improve our cost structure and support our margins and pricing to reflect the value we provide to our customers.
We saw tangible progress around each of these three value drivers in the first quarter and are pleased to report the impact on our operating results.
We are operating in a uniquely dynamic macro environment and as such as Haytham mentioned I'll reiterate that we're encouraged by developments in the oil additives business and believe that we'll see upside in 2022 relative to our historical performance as well as to our expectation of roughly flat revenue in <unk>.
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Finally, I'd like to take this opportunity to introduce Chuck crop is our recently promoted chief financial Officer.
Chuck has been with us as corporate controller for four years and previously served as corporate controller at a claro and Wadlow Chuck has been an integral part of our successful transition to becoming a public company and a key partner in the initial implementation of our value driver based operating philosophy and with that I will.
Turn the call over to Chuck.
Thanks, Eddie turning to slide seven.
First quarter sales in our fire safety segment increased 141% to $18 5 million compared.
Compared to $7 7 million in the prior year quarter.
Substantially all of the revenue growth in this segment was organic.
The adjusted EBITDA loss in our fire safety segment shrunk to $3 $3 million in the first quarter compared to a loss of $4 6 million in the prior year quarter.
Is there any observed earlier, our fire safety business typically produces negative adjusted EBITDA in the first quarter.
Switching to our first quarter sales increased approximately 50% to $39 $3 million.
Paired to $26 3 million in the prior year quarter.
First quarter, adjusted EBITDA increased 97% to $15 3 million compared.
Compared to $7 8 million in the prior year quarter.
Moving on to the consolidated entity.
Sales increased 70% to $57 8 million during the first quarter.
<unk> to $33 $9 million in the prior year quarter.
Adjusted EBITDA increased to $12 million during the first quarter as compared to $3 1 million in the prior year quarter.
Interest expense in the quarter was approximately $10 million, which is a good quarterly run rate.
Depreciation was approximately $2 million in Q1.
While amortization expense was $14 million.
Taxes were an approximately $10 million benefit in the quarter.
Capex during the quarter was approximately $1 million.
Our prior expectations around 2022 interest expense depreciation taxes, Capex and working capital are unchanged and are summarized on slide eight.
We ended the first quarter with approximately $675 million of senior notes.
Cash of approximately $153 million and approximately $163 2 million basic shares outstanding.
Finally, I'll spend a moment on our diluted share count calculation, which is described in the table on slide nine.
The tables top row shows our first quarter weighted average basic shares outstanding of $163 million.
The next row labeled one in the table on slide nine captures the dilutive impact of performance based employee stock options as well as warrants, which cumulatively add approximately 400000 shares to our diluted share count.
Following row labeled two captures the dilutive impact of the fixed shares issuable under the founder Advisory agreement.
This figure includes 100% of the maximum number of fixed shares issuable between Q1 2023 in Q1 2028.
While in practice, we expect these shares to be issued ratably over the next six years. The accounting treatment is such that the entire maximum future amount is required to be included in the fully diluted share count each reporting period.
The ROE labeled three captures the dilutive impact of variable shares issuable under the founder Advisory agreement.
This is calculated on a mark to market basis relative to the payment price, which is essentially a high watermark on the variable incentive amount.
The final ROE and the table shows our first quarter weighted average diluted shares outstanding of $174 8 million I'll reiterate that this figure includes 100% of the $14 1 million fixed shares which in practice, we expect to issue ratably over the.
Next six years.
With that I'll hand, the call back over to the operator for Q&A.
Alright. Thank you at this time, we'll now be conducting a question and answer session.
If you'd like to ask a question today. Please press star one from your telephone keypad, a confirmation tone will indicate your line is in the question queue you.
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One moment, please while we poll for questions and what's kind of the star one thank you.
Thank you. Our first question comes from the line of Josh Spector with UBS. Please proceed with your question.
Yeah, Hey, guys. Thanks for taking my question and congrats on a strong start to the year here.
So just wondering if you could give us a little bit more detail on what's going on in oil additives, I mean pretty meaningful step up in sales EBITDA and margins.
So just trying to think about how much of that is pricing. If you could share that and then is there anything abnormal in the quarter I guess my assumption is raw materials, probably move up and you maybe price a little bit ahead of that.
You're so far above where you've been in the past couple of years trying to assess how much of this is sustainable where things kind of normalized two as you move through the balance of the year.
Alright. Thanks for the question can you hear me okay.
Yes.
Okay.
As we mentioned in our in our prepared remarks, we just focused very intensely over the past couple of quarters on our key operational value drivers.
We worked very hard on adding profitable new business, we work very hard on our cost structure.
To reduce our overall cost.
<unk> worked on pricing that reflects more of a value that we provide so and you can see those results in the numbers and as a result of a lot of hard work over the last couple of quarters.
Well, we don't really talk about specific volume or price or cost information.
We're very pleased with the progress that we've made on all of these fronts.
I apologize you cut out there at least for a second on my end.
Okay in terms of those various dimensions is there any one that was more dominant I guess I don't think about oil additives as having a lot of volume driver did you win a lot of new business or was it the other factor is productivity and pricing more so.
Again, we don't really we don't really discuss the details between volume price and cost.
I'll say, we made progress on all three of those.
And I think the team is doing a great job driving new business, reducing our overall cost structure and really driving price for value.
Okay alright. Thanks.
I guess just the second question here is since we launched coverage of you guys.
A lot of questions about the competitive dynamics in U S fire Retardants. So wondering if you could provide some thoughts on your positioning today and if there's been any evolution in the competitive environment.
I will say that really from our perspective, nothing has really changed we remain extremely confident in our long term competitive position.
I've said this before but it's worth repeating and I've been doing this for about 20 years now.
There has hardly been a J that somewhat hasnt been trying to compete to get into this business and I expect they'll always be somebody trying to do it and I don't expect that to change.
At the same time, which only company to sell it commercially significant amount of retirement over the last 15 years and I don't see that changing going forward.
Yes.
Okay. Thank you.
As a reminder, you May press star one to ask a question.
The next question comes from the line of Brian <unk> with Baird. Please proceed with your question.
Good morning in your prepared remarks, you had mentioned that you are seeing some growth faster growth internationally than in the U S.
Northern Hemisphere countries was that southern hemisphere, I'm, just trying to get a sense of.
How much.
Your seasonality is either going to be a little bit more balanced out or it's going to be.
Even more exasperated between.
The second and third quarter versus the first and fourth.
Sure Great. That's a great question so.
We continue to see the same kind of fire issue that we see in North America spreading around the world.
We see that in all of the countries that we do.
We've traditionally served so thats in Europe , South America and Australia.
Of course, those markets have been traditionally smaller so when we see increases in those businesses as they tend to be bigger on a percentage basis. These are countries that are really building out and expanding their program. So I can't I don't know that I would say, it's going to be one region versus another where we're seeing general growth both in our traditional businesses around the world.
Northern and southern Hemisphere and.
And the addition of new customers as the wildfire problem continues to grow around the world.
Got it and then just.
During the last quarter call. We had a conversation you had talked about some of the inflationary pressures that youre seeing across the business are those remain the same and are you seeing new pressures, we've seen really from other areas just trying to get a sense of what that how that overall environment is evolving for you on the installation front.
Yes, we continue to see the same kind of inflation. The rest of the world is seeing across our businesses in terms of raw materials and other costs.
But we do have contractual mechanisms across our contracts to be able to pass those costs through.
No.
Don't really believe that we will see an impact on our financial results based on those cost increases.
Perfect. That's all I have thank you so much.
Thank you once again as a reminder to ask a question you May Press Star One. Our next question is from the line of Matt Pickering with select equity. Please proceed with your question.
Hi, Thank you for taking my question just wanted to go back to a comment you made about the hard work around supply chain initiatives.
Given the seasonality of your business is there any detail you can share there maybe contextually about kind of.
What you've done and kind of what it means for your outlook clearly supply chain can be disruptive and I know you guys are doing a good job there, but any more detail would be helpful. Thank you.
Yes, we have one mission initiatives that's to make sure that we serve our customer with 100% reliability and as we go into each season and look at some of the challenges that we might be facing from a supply chain standpoint, we made sure to react very early to what we're seeing so that we ensure that we have no disruptions and this year is certainly no.
Different although it's a little bit more extreme than we've seen in the past. So we went through a lot of efforts to bolster our raw material supply to make sure we would order the materials earlier.
We have a diverse group of suppliers across all of our key raw materials. So we made sure that too.
Make sure those relationships are strong and that our supply chain was serving our needs.
On a real time basis, and we've also expanded our transportation network to ensure that we can deliver the products to our customers in real time as we have always done and it's really the results of that whole team effort.
All facets of the supply chain that led us to be comfortable that we will be able to support the business regardless of how busy the season.
Thank you.
Okay.
Thank you at this time there are no additional questions I'd like to turn the floor to management for any further or closing remarks.
Well I want to thank everybody for joining the call and we look forward to talking to you again next quarter and reporting our results. Thank you very much have a good day.
This will conclude today's conference you may disconnect. Your lines at this time and log off your computers and have a wonderful day.