Q3 2022 Perimeter Solutions SA Earnings Call
Ladies and gentlemen, greetings and welcome to the betting meet our solutions Q3, 2022 earnings call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Seth Buckle of Investor Relations.
Please go ahead.
Thank you operator, good morning, everyone and thank you for joining perimeter solutions third quarter 2022 earnings call speaking on today's call are Haytham, Corey Vice Chairman Edward Goldberg, Chief Executive Officer, and Chuck crop 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 4th 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.
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 EBITDA.
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 hasten Corey Vice chairman.
Thank you Seth good morning, everyone and thank you for joining us as usual I'll start with some summary comments on our strategy then I'll touch on our financial performance and capital allocation before turning the call over to Eddie and Chuck.
Starting with our strategy on slide three as you've heard us say before our goal is to deliver private equity like returns with the liquidity of a public market.
We plan to obtain the skull by owning operating and growing uniquely high quality businesses.
We define uniquely high quality businesses through the following five very specific economic criteria, one recurring and predictable revenue stream.
<unk> long term secular growth tailwind.
Three products that account for critical but small portions of larger value streams for significant free cash flow generation with high returns on tangible capital and five the potential opportunistic consolidation.
We believe that these five economic criteria are present at perimeter as described on slide four and we also use these criteria to evaluate potential new acquisitions.
As described on slide five we seek to drive long term equity value creation by a consistent improvement in our three operational value drivers, which are profitable new business.
<unk> will cost improvement and pricing to reflect the value we 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.
Turning now to our financials.
Starting with biopsy.
We've consistently emphasized that within the predictable long term volume growth, we expect in our fire safety business. There exists an element of annual and quarterly variability based primarily on the severity of the North America fire season.
In a nutshell, while the long term fire safety volume growth is highly predictable and dependable annual and quarterly growth is more valuable to <unk>.
22, North America fire season was mild and the impact is reflected in our financial results.
The mild twenty-two fire season has no impact or a positive expectations for 2023 and beyond.
Turning to specialty products. The business continues to perform well primarily due to solid implementation of our operational value drivers. We now expect 22 specialty products adjusted EBITDA to exceed $50 million, which is more than double the businesses adjusted EBITDA in each of the <unk>.
Three years.
I'll now discuss our value driver implementation more specifically, while we can't control. The fire season, we are laser focused on these three operational value drivers we can control.
First of these is a three piece profitable new business pricing, our products and services to the value they provide and productivity improvements. It's important to emphasize that this value driver focus is not a one time response to a mild fire season.
Rather it's the mentality that guides, our approach to new business cost and pricing to value and which drive financial performance at both of our businesses on an annual basis going forward.
To this end perimeter has completed a reorganization into seven business units to within our specialty products business and five within our fire safety business.
This structure is meant to ensure that we drive the decentralized execution and accountability.
And maintained the geography and product specific focus and granularity necessary to drive continual operational value drive for improvement across our entire business.
Turning now to cash and capital allocation.
We ended the third quarter with approximately 166 million of cash on our balance sheet up from 126 million at the end of the second quarter, we expect to continue generating free cash flow in the fourth quarter prior to any repurchases or acquisitions, primarily as a portion of our approximately 86 million.
Receivables balance converts to cash.
We continue to operate in a unique capital markets environment with highly restricted access to capital almost across the board and therefore, where our available cash carries a significant premium.
With this premium in mind, when you repurchased approximately 300000 shares in the third quarter for approximately $2 $6 million and repurchased another $4 9 million shares in October for approximately $37 million.
While we value the M&A related flexibility there a cash balance affords us we will continue to allocate our capital towards share repurchases when presented with a very compelling opportunities as we have at various points. This year to that end and given that we utilized approximately half of our initial 100 million.
Repurchase authorization, our board has authorized a new 100 million dollar share repurchase authorization.
I'll close with a comment on our full year financial expectations. We faced two significant headwinds in 2022, the first and the more material is the mild fire season with irrelevant U S acres burned down significantly year over year. The second is new public company call.
Costs, which we estimate at slightly more than $10 million for the full year. It was Chuck will elaborate on shortly.
Given these two headwinds we now expect full year 2022 consolidated adjusted EBITDA to be down single digits in percent terms versus 2021.
If we exclude estimated public company costs to get a true measure of like for like performance, we expect to deliver very roughly flat consolidated 2022, adjusted EBITDA versus last year. Despite the material decline in the air.
Chris burnt.
As I referenced earlier.
Continue to press on her operational value drivers and we hope and expect to improve our financial performance when a similarly mild fire season next of course.
In closing and with the year largely behind us.
Iterate our prior view that had the 22 fire season come in roughly on trend line, we had expected to deliver mid teens or greater percent growth in our 2022 consolidated adjusted EBITDA versus the approximately 141 million we reported in 2021.
With that I'll turn the call over to Eddie.
Thanks hate them.
I'll start with our fire safety business and provide some high level context, starting on slide six.
The volume growth equation, and our retardant business as a function of growth of acres burned plus growth in retardant per acre.
As illustrated on this slide measured over the past seven years 2015 through 2020, one our U S. Retardant unit volumes have increased at a 10% CAGR.
We used 2015 in 2020, one as the start and engineers for the analysis as both years represent fairly normalized fire seasons, where urquhart acres burned excluding Alaska are within a few percentage points of their respective trailing seven year moving averages.
As illustrated on slide seven over the 2015 to 2021 period. The first part of our retarding volume growth equation U S acres burned ex Alaska increased at a 6% CAGR.
This is in line with the long term growth in the U S acres burned ex Alaska.
Using the longest time series available and utilizing a five year rolling average to capture the multiyear trend U S acres burned ex Alaska have increased at a 5% CAGR over approximately three decades from a five year rolling average of 1.9 million acres burned in 1994 to a five.
Five year Rolling average of $7 3 million acres burned in 2021.
We expect that the long term trend in growth in acres burned ex Alaska will remain very dependable over the long term.
As illustrated on slide eight over the 2015 to 2021 period. The second part of our retarding volume growth equation retarding per acre bird increased at a 4% CAGR.
As summarized on slide nine gross in retarding per acre is primarily a function of growth in the wildland urban interface, which increases the need to fight wildfires and growth in the air tanker fleet, which increases the ability to fight wildfires and continued aggressive aerial attack by the fire management agencies, we it.
Expect these secular growth trends to persist into the future.
As summarized on slide 10, looking forward, we expect our retardant volumes to grow mid to high single digits annually or for more of a normalized base driven by continued dependable long term growth in both the acres burned and retardant per acre.
Moving to slide 11, as we compressed the time horizon, it's clear that within this predictable long term secular volume growth.
There exists an element of short term variability based on the severity of any individual North America fire season.
The year to date 2022 U S fire Susan illustrates this short term variability.
The chart on the left hand side of the slide shows Q3 U S acres burned ex Alaska, which are down 64% versus Q3 of 2021.
The chart on the right hand side of this slide illustrate.
Year to date U S acres burned ex Alaska through the end of September which are down 33% versus the same period last year.
It's difficult to overcome this magnitude of short term variation in the U S fire season.
As such third quarter and year to date fire safety revenue decreased 29% and 13%, respectively, while third quarter and year to date fire safety, adjusted EBITDA decreased 38% and 30% respectively.
I'll reemphasize that we don't believe there's anything about the 2022 fire season that informs future fire seasons, either positively or negatively the 2022 and 'twenty 'twenty three fire seasons are independent variables and we're planning for 2023 fire season, consistent with the long term trend line.
While also preparing to respond to a milder or more severe season.
For reference 2019, it was the softest U S fire season of the past roughly 15 years with two 1 million acres burned ex Alaska.
It was followed by the 2020 fire season, which was the most severe and recorded U S history at $10 1 million acres burned ex Alaska.
Moving onto fire safety margins, which declined year over year in Q3, 2022, due primarily to the impact of inflation pass throughs on our reported margins.
As we've discussed on each of our calls this year, we experienced significant raw material inflation in 2022, we successfully passed on this inflation to be a contractual mechanisms in place across the vast majority of our fire safety business well.
While this is a powerful feature of our business that protects our EBITDA dollars during inflationary periods. It also dampens our reported margins as the inflation pass throughs grow revenue, while keeping EBITDA flat, which leads to reported margin compression.
Let me now touch on profitable new business opportunities, we're actively pursuing and fire safety.
We made solid progress this year on international growth within our retardant business, including important wins in Italy, and Greece, which we referred to on our prior call.
We're also pleased with developments in prevention and protection, where we continue to expand business with current customers as well as broadened our portfolio of new customers.
For a second year, we partnered with Orange County Fire authority to support an expanded quick reaction force program.
While it's still too early to publicly quantify what this business can mean for our financial results. We believe it has the potential to be a significant financial contributor over time.
Finally, we continue to develop and commercialize new flooring free firefighting foams are suppressant business and expect to continue to grow our flooring free portfolio.
Moving to specialty products. This business is performing well.
Third quarter and year to date revenue increased 68% and 42% respectively.
Adjusted EBITDA increased 512% in the quarter and 135% year to date.
Illustrated on Slide 12, we expect 2022 specialty products adjusted EBITDA to exceed $50 million more than double the businesses adjusted EBITDA in each of the three prior years.
This performance is a result of our operational value driver implementation, which as Haytham noted is now part of our culture and should drive incremental value on an annual basis going forward across all of our businesses and business units.
And with that I'll turn the call over to Chuck.
Yeah.
Thanks, Eddie turning to slides 13, and 14 third quarter sales in our fire safety business were $122 million down 29% versus the prior year and $207 million year to date down 13% versus the prior year.
Third quarter, adjusted EBITDA, and our fire safety business was $64 million down 38% versus the prior year and $81 $2 million year to date down 30% versus the prior year.
As Haytham mentioned, we expect to absorb slightly more than $10 million and incremental public company cost in 2022.
This is primarily comprised of internal and external expenses related to the insurance accounting.
Got it and legal requirements around public company reporting and compliance.
Rowing forward our goal is to reduce overall public company expenses by realizing annual productivity gains in excess of inflation.
Switching to specialty products.
Third quarter sales in our specialty products business were $38 $5 million up 68% versus the prior year and $112 $2 million year to date up 42% versus the prior year.
Third quarter adjusted EBITDA in our specialty products business was $15 $3 million up 512% versus the prior year and $42 million year to date up 135% versus the prior year.
Moving on to the consolidated business.
Third quarter consolidated sales were $165 million.
Down 18% versus the prior year and.
And $319 $2 million year to date up 1% versus the prior year.
Third quarter consolidated adjusted EBITDA was $75 $6 million down.
Down 25% versus the prior year.
And $123 $3 million a year to date.
One 8% versus the prior year.
Now moving below adjusted EBITDA.
Interest expense in the quarter was approximately $10 million, which is a regular quarterly run rate depreciation was approximately $2 $7 million.
Amortization expense was $13 $7 million.
Taxes were $34 $5 million in the quarter.
Capex during the quarter was approximately $2 million.
Our long term expectations around interest expense depreciation taxes, Capex and working capital are summarized on slide 15.
In 2022, we expect two differences versus these longer term expectations, one related to cash taxes and two related to working capital.
We expect cash taxes to come in lower than expected two.
2022 cash taxes should be approximately $15 million.
On the other hand, we expect working capital to be a more significant use of cash this year relative to the increase in sales than we typically expect due in large part to higher inventory, resulting from the weaker fire season, coupled with longer purchasing lead times.
We ended the quarter with approximately $675 million of senior notes cash.
Cash of approximately $166 million and approximately 162 million basic shares outstanding.
Slide 16 walks investors through the differences between our basic and diluted share count I won't walk through the table in detail. So I will remind investors that our diluted share count of approximately 177 million shares includes 100% of the $14 1 million.
Fixed shares we expect to issue under the founder Advisory agreement through Q1 2028.
In practice, we expect to issue these shares ratably over the next six years.
With that I'll hand, the call back over to the operator for Q&A.
Yeah.
Thank you.
Ladies and gentlemen at this time, we'll be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad.
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For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star Keith.
Ladies and gentlemen, we will wait for a moment, while we poll for questions.
Our first question is from the line of Joshua Spector from UBS. Please go ahead.
Good morning. This is Lucas I went on for Josh. So I'd just like to start by discussing the performance of five safety relative to the fire season, if you could say.
You guys had the idea has been numbers in there.
Something similar is sort of down 50.
50% a year.
70% in the third quarter I think in the ratios that you guys are focused on.
Thank you your sales and EBITDA were down kind of 30%.
5%. So what was the driver of the outperformance there versus the market was it volume driven price driven is there like an international market's impact on your products and how should we think about that in terms of getting back to conduct the dice earnings in 2023 with a normal pace.
Yes. Good morning. Thanks for the question. So I think it's pretty typical in our business for volumes to outperform acres burned, particularly on the downside.
The combination of increased capacity to fight fires and aggressive initial attack strategy by the agencies. So I think youll see that typically in our business, where we are able to outperform acres in terms of <unk>.
Arden sold.
Yeah.
Okay, great. Thanks, and then.
In terms of the new buyback you've announced.
Which is another 100 million is pretty substantial it's like 90% of your market cap.
Could you just kind of talk about that for us in that context.
You hear your current leverage and how we should sort of think of that you're deploying that over the next year.
Yes, so we.
We also arise that we want to make sure that we've got the flexibility and the firepower to take advantage of.
Opportunities when we think buying back stock is the right way to use our capital. So it's an authorization to allow us that flexibility.
Yeah.
Oh no worries.
And then maybe shifting to specialty products. So your earnings there improved quarter on quarter I mean in other similar businesses at the moment, we're sort of seeing expectations kind of start to wake and into the second half, particularly those with any exposure to Europe .
But just sort of wondering what if you could talk about what's driving the strength for you here and how you.
The second half trending.
Yes, we've been working hard in our specialty products business across all of our value drivers are pricing to value taking cost out of the system and driving new business and we feel really good about the progress.
We're making specialty products and we feel very good about the business in the second half and going forward.
And is that so I mean, you guys you flagged the $50 million instead of an EBITDA.
Yeah.
I mean, I assume there's some overriding going on there from a pricing from the current pricing environment I'm correct correct me, if I'm wrong, but so I mean, if I sort of like if I annualize the current quarter I can't sort of $60 million in EBITDAR or like on an LTM basis, you should have got 45 to 50 or so I mean, how should we think about the <unk>.
Is there.
One to two years out is it like is this a new normal or I mean does it go back to that.
30 to 40 million or how should we kind of think about them.
Well, let me say a couple of things. So we had said previously that first quarter results were very good because our customers.
Very good results on their own no production interruptions et cetera in the second quarter results were probably a little bit more typical of a mix of different customer behaviors.
Third quarter didn't look a lot like the first quarter, but we still think on an ongoing basis.
Somewhere in the Q2 performance is probably the right way to look at this business.
And we are optimistic that we're going to continue to make progress across all of our value drivers to continue to improve this business going forward.
Yeah.
Alright, thanks very much.
Yes.
Yes.
Thank you.
Our next question comes from the line of Cornell Linac from Morgan Stanley . Please go ahead.
Yeah. Thanks.
So obviously as you've highlighted this was.
Year over year very weak higher season.
I'm wondering if you can help us think through where you are.
See normalized fire activity next year.
How should we think through the various drivers of why you guys have done on pricing, where you guys have done on cost.
Also the inflation pass through that <unk> been dealing with <unk> can you give us sort of a framework is it should we think about EBITDA dollar growth or what's what sort of a logical way to think through what the impact on EBITDA would be for your business.
Sure. So so we believe that what we've been saying.
All along we will continue to hold true when we return to normal fire season. We believe we will continue to see mid teens EBITDA growth.
Going forward really nothing has changed there.
To work again hard across the value drivers.
Making sure we price to value I'm, taking very aggressive actions to take cost out of the system.
<unk> for new business, we continue to be protected in our ability to pass through.
Unusual cost increases so we feel good about that.
Our performance will return to what is expected.
We get to a more normal fire seasons, and Conor I'll just add real quick it's mid teens EBITDA growth off of a normalized fire season, you just got to be careful on peak ish or crawfish years, which is why we noted in the earnings call.
22 has been a roughly normalized fire season, we think roughly mid teens growth off of the $1 41 of adjusted EBITDA, We delivered last year would it be reasonable so that's a pretty good, albeit rough approximation.
On trend 22, EBITDA, and then mid teens growth off that.
It makes it makes good sense is a very preliminary starting point going forward.
And so just just to clarify that point. Thank you for the color, but just to clarify that so if I would call. Just for example, 2021 a quote normal year.
You think you've gotten underlying improvements to the business in 2022 that would have driven mid teens EBITDA and then 2023 of the normalized here you would not only have the volume benefit but you would also have an incremental mid teens EBITDA growth or is it just the.
The one year worth of improvement how do I think about that.
We think you can take <unk>, 2020, one which was 141 spot for.
And this year being normal.
We've seen there and watched fire season, you'd see roughly mid teens EBITDA growth that will get you to 141 four times, one five right to be very specific.
And then whatever that number is a few mid teams growth in 'twenty three over 'twenty, two assuming 23 using normalized viruses.
Got it thanks, and then obviously one of the big.
Conversations on your stock is competition. So I'm wondering if you could just provide an update on what the.
State of competitors attempting to enter the market and qualify for four years is right now.
Yeah. So.
First of all I can say that.
Look on the <unk>.
For our service website, so nothing's really changed in the last quarter.
I will repeat what I've said before.
Early in days gone by in the last 20 years that I've been running this business that I haven't.
Hasn't been somebody trying to get into at some some companies are noisier than others.
I think there's quite a bit of noise in the system right now, but we feel very good about our market position going forward.
Alright, I'll turn it back thank you.
[noise]. Thank you Lee.
Ladies and gentlemen, if you wish to ask a question. Please press star one.
Our next question comes from the line of Brian <unk> from Baird. Please go ahead.
Good morning, just a few questions for me I'd like to just drill down on specialty products for a second.
Missed this but could you just give us maybe just generically what would drive as it was.
See better volumes in that business or is it price just love to know what the the various drivers in from there.
Yeah. So as I mentioned previously we are working hard to improve the business across all of our value drivers I think that includes driving price to value. It includes taking cost out of the system is looking for for profitable new business. We made good progress over the last year.
And all across all three value drivers you can see that in the results and we think that will continue to make improvements going forward.
All aspects of that business.
Maybe asked another way you know that business, what's sort of the capacity whats the operating rate today, you do have the ability to drive more volumes or is this going to be more of a price driven story going forward.
We believe we have the ability to take on.
Both new business that we're working on and we feel good about that.
Okay.
Wanted to touch on a noncash item, but it is.
As it relates to your M&A activity.
This quarter last quarter, you guys took actually noncash gains on the contingent earn outs.
Last quarter was $9 $4 million. This quarter was I think like $3 6 million, obviously when that happens that means one.
One of your M&A targets not performed as well as you thought so would love to get maybe a little bit more detail on what exactly happened there.
How are you thinking about M&A sort of today.
Good morning. This is John yes. Thanks for the question in terms of the historical M&A really that's just a simple as shift of product from earn out eligible both product to not eligible.
Decrease in our liability there.
And Brian going forward, our view on M&A.
Unchanged.
Very focused on and we'd love to get.
High quality transactions.
Diamond.
Do they create significant shareholder value as defined in the long term free cash flow per share on the one hand, it's a very good M&A environment with less competition and restricted access to capital and we're in a great cash situation both on the balance sheet and.
Forward expectations of cash generation on the other hand, it's just more challenging to get things done in price things loose in this environment and we're working we're working super hard at it and stay tuned.
Got it just one final question for me I'm not even sure. If you know the answer but the ticker symbol of your bonds changed in the last couple of months was there any.
Any reason for that.
Thanks.
That's above our take rate.
Okay.
Confused everybody a they were looking for Perry MFS, They got Lux H L D. A.
It's called me up with like what is this new bond I own so.
Okay.
Okay.
If youre asking on the earnings call. It sounds like it's important to our bondholders and therefore, it's very important to us let us let us figure that out and you'll get you'll get an email from us Brian .
Clarification, thank you for pointing it out.
Yeah I appreciate it thank you much.
Thank you.
Our next question comes from the line of Joshua Spector from UBS. Please go ahead.
Oh, Hey, guys Lucas just wanted to ask a follow up so I'm just wondering if you could talk about.
What visibility you have at the moment into increases in the Aero plate supplier Todd.
Couple of years, So I know, maybe this year isn't the right yeah, given the iqos brand or a dance that much but.
In a more normal year.
Would you say is well I guess, what you're saying.
Demand from a materials perspective due to the lack of clients.
As we get more rollout.
That's going to sort of be a positive positive benefit as well.
And I guess is that sort of would you say, that's probably being captured in the <unk>.
In the.
4% set a retardant growth per acre CAGR or how do you guys kind of think about the dynamics on that side. Thanks.
Sure. So we do look at air tanker capacity as one of the key drivers and the volume growth of our business and we do we.
We do continue to see an increase in air tanker capacity year over year.
In terms of visibility into what that is specifically you should probably look to what the air tanker companies are saying.
Because they're they're all pretty public.
Kind of their expansion plans, both the private air tanker companies and you can see the Calfire is is currently working on adding <unk> to their fleet over the next couple of years. So we see that as very positive and it does contribute.
Retarding per acre increases it also just on <unk>.
<unk>.
Pete.
What we can sell during the peak of the fire season. So we see that as a key driver of the business and one of the secular growth trends.
Alright, thanks very much.
Yeah.
Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session.
Now I would like to turn the conference over to Mr. Edward Goldberg CEO for closing comments.
Yes. Thank you all for joining our third quarter earnings call. We're looking forward to talking to you again in a few months to report fourth quarter and full year 2022 earnings.
Yeah.
Thank you the conference self betterment of solutions has now concluded. Thank you for your participation.
Have a lovely day.
Yeah.
Okay.
[music].