Full Year 2022 Perimeter Solutions SA Earnings Call

Greetings and welcome to the perimeter solutions fourth quarter 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. If anyone should require operator assistance during the.

The conference lease spreads as far as zero on your telephone keypad as a reminder, this conference is being.

It is now my pleasure to introduce your host Jeff Barker. Thank him. Mr. Parker you may begin. Thank you operator, good morning, everyone and thank you for joining perimeter solutions fourth 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 February 28, 2023, 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.

Company would also like to advise you that during the call, we will be referring to non-GAAP financial measures, including EBITDA.

A 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 website with that I will turn the call over to Haytham Corey Vice Chairman.

Good morning, everyone and thank you for joining us.

Let me start off by introducing SaaS Barker, our recently appointed head of Investor Relations.

That is a perimeter of veterans.

Previously led both our specialty products and suppresses businesses.

That is currently our vice president of financial planning and analysis, where he plays a key role in corporate and business unit level financial planning measurement analysis and reporting in addition to his role as VP of S. P. N a S.

It's also assuming primary responsibility for perimeter as Investor relations function, where he will work closely with Eddie Chuck and I as we engage with our debt and equity investors congratulation Seth and thank you for the continued excellent work.

Let me now make summary comments on our strategy before turning to our financial performance and capital allocation, starting with our strategy on slide three.

Our goal is to deliver a private equity like returns with the liquidity a public market.

We plan to attain this goal by owning operating and growing uniquely high quality businesses, we define uniquely high quality businesses through the following five very specific economic criteria.

Recurring and predictable revenue streams.

Long term secular growth tailwind.

<unk> products will account for critical but small portions of larger value streams.

Significant free cash flow generation with high returns on tangible capital.

The potential frock machinists to consolidation.

We believe these five economic criteria are present at perimeter as current businesses and we use these criteria to evaluate potential new acquisitions.

As described on slide four we seek to drive long term equity value creation by our consistent improvement in our three operational value drivers, which are profitable new business continue will productivity improvements and pricing to reflect the value we provide.

In addition to our three 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 financial results and starting with fire safety.

As we've discussed previously the 2022 North America fire season was mild with U S acres burned ex Alaska down, 36% and Canadian Hector's burned down 66%. The fourth quarter was even milder with U S acres burned ex Alaska down 47% and am.

Minimal fire activity in our markets outside of the United States.

The impact of the mild 'twenty two fire season is reflected in our full year and Q4 biopsy it yourselves.

While 22 fire season has no impact on our expectations for 'twenty three and beyond.

Turning to specialty products business had a solid year with adjusted EBITDA more than doubling year over year.

However, specialty products missed our expectations in Q4. This was due to a sudden and unexpected year end inventory reduction across our lubricant additives and market in fact, a couple of our large customers temporarily shut down their facilities late in Q4 as they focused on working off.

Inventories.

I'll note that our specialty products businesses unit economics remained solid in the fourth quarter and that we're comfortable that that this destock activity is temporary in nature.

Turning now to cash and capital allocation.

We repurchased approximately five 5 million shares in Q4 at an average purchase price of $7.55 for total consideration of approximately $42 million, we repurchased approximately $6 4 million shares in the full year of 22 at an average price of $7 65.

And for total consideration of approximately $49 million, we have approximately $100 million remaining on our repurchase authorization and ended 2022 with about $127 million of cash on our balance sheet.

Between our available cash balance and the significant free cash flow, we expect to generate in 2023, we believe that we are well positioned to take advantage of any potential compelling capital allocation opportunities that might arise, including potential acquisitions significant share repurchases.

Otherwise.

Let me now comment on our full year 2023 expectations. Our policy is not to provide forward financial guidance.

However, given the modeling challenges the mild 'twenty two fire season might create I'll provide a high level framework for 2023.

We've stated that we expect to grow consolidated adjusted EBITDA in the roughly mid teens range annually over the long term when comparing one on trend fire season to another.

We consider that 2021 fire season fairly on trend assuming the 'twenty two 'twenty three fire season is also on trend.

It's reasonable to apply this mid teens CAGR to the 141 million of adjusted EBITDA, We recorded in 2020, one compounded over two years to imply a 2023 consolidated adjusted EBITDA.

This figure should then be adjusted slightly downward to account for the impact of the stronger U S. Dollar on the roughly one quarter of our business.

Internationally.

At a very high level just framework suggests that consolidated adjusted EBITDA of approximately $180 million is a reasonable expectation for 2023 again, assuming an on trend fire season.

To the extent the 2023 fire season, it's Steve here.

As again unusually mild we'd expect to see the impact reflected in our financial results.

Finally, I'll emphasize that irrespective of the severity of the fire season, we will press on with our operational value drivers at both our businesses as such should the twenty-three fire season turned out to be similarly mile to the 'twenty two season, we still expect to deliver notably improve.

The year over year fire safety financial results in 'twenty three.

Versus 'twenty two.

In closing.

After our first full year as a public company I'll note that we believe are our long term thesis is very much on track.

Fire safety business experienced two consecutive years 2021 and 2022 of U S acres burned ex Alaska down over 30% at the same time like most businesses, we experienced significant inflationary pressures and logistics challenges yet fire safety.

These financial performance proved resilient.

Most importantly, we met our commitments in support of our customers' mission to save lives property and the environment by loading every air tanker with 100% reliability, 100% of the time, we believe the future is bright for our fire safety business.

And specialty products year over year numbers.

For themselves, while we were negatively surprised by the Destocking activity in Q4, we know that it will pass and we're excited about specialty products as future.

Thank you and with that I'll turn the call over that.

Thanks, Haytham I'll jump directly into the financial results, starting with our fire safety business.

First quarter and full year of fire safety revenue decreased 18% and 13% respectively.

Fire safety adjusted EBITDA was negative $3 $9 million in Q4 and declined to 34% for the full year.

As we've noticed noted these declines were driven primarily by the mild 2022, North America fire season.

U S acres burned ex Alaska decreased 36% for the full year 2022 and decreased 47% in the fourth quarter.

Canadian Hector's burned decreased 66% for the full year 2022, with very minimal minimal fire activity in the fourth quarter.

Australia is our primary Q4 retardant market outside of North America, and we recorded zero retardant product sales in Australia for the fourth quarter due to an unusually wet early season, which delayed wildfire activity across the region.

In summary for 2022 fire season was mild across most of our key markets in Q4 was especially so and the impact is evident in our financial results.

I'll reemphasize that we don't believe there's anything about 2022 fire season that informs future fire seasons, either positively or negatively to 2022 and 2023 fire seasons are independent variables and we're planning for 2023 fire season, consistent with the long term trend line why.

As always preparing to respond to milder or more severe seasons.

For reference 2019 was the mildest U S fire season of the past roughly 15 years with $2 1 million acres burned excluding Alaska. It was followed by the 2020 fire season, which was the most severe and U S recorded history at $10 1 million acres burned ex Alaska.

I'd now like to highlight our Q4 performance in our suppressive business. Our suppressant business is much less seasonal than a retardant business and is therefore, an area where our year over year progress is much clearer.

Suppressant sales increased 14% in the fourth quarter, driven primarily by innovation in our flooring free products strong system sales and pricing actions to reflect the true value of our life saving solutions.

Suppressing EBITDA increased meaningfully more than sales in Q4, as our value pricing and productivity initiatives drove significant year over year margin expansion.

Our suppressant business is becoming an increasingly relevant component of our fire safety business, which helps drive consistent growth and dampen the impact of the wildfire season.

Fire safety adjusted EBITDA margins were down in 2022 and this was.

Primarily driven by three factors first.

As we've discussed throughout the year, we successfully passed on significant raw material inflation in 2020 to be a contractual mechanisms in place across the vast majority of our fire safety business.

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 leading to reported margin compression.

Second the mild fire season drove negative fixed cost leverage and fire safety and third we incurred over $10 million of incremental public company costs in 'twenty two.

A significant portion of which is allocated to fire safety.

I'll close the fire safety discussion with a comment on competition.

While we will let our reported numbers speak for themselves I will emphasize our confidence in our fire safety market position, both this year and into the future.

We look forward to reporting these results.

Moving to specialty products fourth quarter sales decreased 1%, while full year sales increased 32%.

Fourth quarter, adjusted EBITDA increased 7% and full year adjusted EBITDA increased 104%.

As discussed fourth quarter adjusted EBITDA in our specialty products business came in several million dollars shy of our expectations due primarily due primarily to inventory destocking actions, resulting in plant shutdowns by our customers towards the end of the quarter.

These destocking actions were a sudden and unexpected event in Q4.

That said such actions were not uncommon across the specialty chemicals industry late last year.

We expect destocking activity to persist so he's in the first quarter and to eventually normalize.

With that I'll turn the call over to Chuck.

Thanks, Eddie turning to slides five and six fourth quarter sales in our fire safety business decreased 18% to $19 $6 million in full year sales decreased 13% to $226 $6 million.

Fourth quarter, adjusted EBITA, and our fire safety business was negative $3 $9 million and full year, adjusted EBITDA decreased 34% to $77 $4 million.

Fourth quarter sales in our specialty products business decreased 1% to $21 $7 million and full year sales increased 32% to $133 $9 million.

Fourth quarter adjusted EBITDA in our specialty products business increased 7% to $6 million in full year, adjusted EBITDA increased 104% to $48 million.

Moving on to the consolidated business.

Fourth quarter consolidated sales decreased 10% to $41 $3 million in the fourth quarter and.

Full year consolidated sales decreased 1% to $365 million.

Fourth quarter consolidated adjusted EBITDA decreased 69% to $2 $1 million and full year, adjusted EBITDA decreased 11% to $125 $4 million.

As we noted on our prior call, we absorbed over $10 million and incremental public company cost in 2022.

Excluding these costs our consolidated adjusted EBITDA would have been close to flat on a year over year basis.

As we also noted on our prior call. Our go forward goal is to reduce the public company expense bucket by realizing annual productivity gains in excess of inflation.

We have a detailed productivity plan to accomplish this goal in 2023, and we will hold ourselves to this productivity target annually going forward.

Now moving below adjusted EBITDA interest expense in the fourth quarter was $10 million in line with our regular quarterly run rate.

Interest expense for the full year 2022 was approximately $42 $6 million, which includes $35 $5 million of cash interest expense and approximately $7 1 million of noncash interest expense.

Assuming no significant financing activities, we expect interest expense in 2023 and beyond to look very similar and quantum and composition to 2022.

Depreciation was approximately $2 $6 million, while amortization expense was $13 $7 million in the fourth quarter, and $10 7 million and $55 $1 million, respectively for the full year.

We expect D&A to be similar in 2023 and beyond.

Cash paid for income taxes was $5 $9 million in Q4, and $13 $5 million for the full year.

We suggest investors model 2023, and beyond income taxes at approximately 26%.

Working capital, which includes the net change in inventory receivables payables and short term prepaid and accrued expenses and taxes increased by $13 million in the full year 2022.

As noted on our prior call. This is a more significant use of cash relative to the change in sales and was primarily driven by higher inventory, resulting from the mild fire season.

The emergency services nature of our business requires us to build sufficient inventory in order to meet our customers' needs with 100% reliability as we always do should have severe season transpire.

Assuming an on trend 2023 fire season, we expect networking capital to only increased modestly year over year.

Capex was approximately $2 $6 million in the fourth quarter and approximately $8 $6 million for the year.

For 2023, and beyond we suggest that investors model $10 million to $15 million of annual Capex.

As evidenced by the prior three years, our annual Capex requirement is roughly $7 million to $10 million covering both maintenance and growth capex.

However, we are actively evaluating several strategic capital projects, which if greenlighted should deliver attractive project I are ours and cash on cash returns by our productivity savings.

By modeling Capex in the $10 million to $15 million range investors will capture these potential projects and their financial projections to the extent that these projects do not move forward, we expect capex to remain in our historical annual range of $10 million or below.

We ended the quarter with approximately $675 million of senior notes cash of approximately $127 million and approximately 157 million basic shares outstanding.

Our basic shares outstanding are down from approximately $162 million at the end of the third quarter due primarily to the aforementioned buyback activity during the fourth quarter.

Slide eight bridges between our basic and diluted share count.

I'll walk through the table in detail, so I will remind investors that our diluted share count of 175 1 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.

Thank you.

We will conduct a question and then sorry, Sachin if you would like to ask a question. Please press star one on your telephone keypad a confirmation town.

Keith Your line is in the question queue.

You may prices, sorry, Kim if you would like to remove your question from the Q4, if I still spend hidden speaker.

It may be necessary to up your handset before pressing the star keys.

One moment, please why a little quick question.

Our fist question comes from Josh that start right.

Please go ahead.

Yeah, Hi, good morning, Thanks for taking my question.

Just wondering if you could expand upon your comments on the competitive dynamics within fire Retardants. It's obviously been a pretty big focus for investors. So just curious to hear if you could have any comment on specifically, maybe the 2023 contract negotiations anything around pricing number of bases or anything that changed that you can talk about this year versus prior years.

Yeah.

Yes, Josh Thanks for the question, Yes, we really can't comment on individual basis, our market share expectations at this time.

So the season kicks off we just don't know exactly what's going to happen phase.

Phase wise, but with that said and as I said in my opening comments.

We're very confident in our market position.

When we get a little bit further into the season, we will have more we'll have more specifics that we can discuss.

Okay, Alright, if I could ask then on within specialty I mean, I guess sulfur costs are down pretty materially does that have any impact on your earnings thoughts for next year in terms of margins or pricing or how would we see that flow through.

Sure. So overall in specialty products raw materials.

Some costs there are some costs that are down generally we're able to pass through increases we give back some of the reductions in overall I would say there'll be a relatively modest impact overall on profitability.

Okay, and if I could sneak in one more here and then I'll pass. It on is just I was interested in your comments on if the fire season is weak. This year are similar to last year, you expect EBITDA to be up I think you said meaningfully but please correct me if that's not what you said.

What what drives that and that's what gives that level of confidence for you guys and within that context, what would your free cash flow look like if you had a similar fire season of this year.

Yes, I don't think we can.

Quantify it specifically right now but.

We've put a lot of effort over the last say 18 months into our three p's pricing to value.

Productivity improvements and profitable new business and we wouldn't make the statement that we did if we didn't feel really good about showing the results of these efforts should be have a similarly slow season.

Josh This is haytham.

On your free cash flow question.

I won't give you a number but it's essentially in chuck's prepared remarks, it's as simple as that.

Take your EBIT.

EBITDA.

And then subtract they.

Uses of cash that Chuck walks through which are which are comprehensive cash interest expense cash taxes.

Opex and a modest increase in net working capital to the extent the fire season.

As on trend, there's really no more to it than that.

Yeah.

Okay, Alright, thanks, I'll pass it on thank you.

Our next question comes from.

Brown Thomas Jonsson.

Morgan Stanley . Please go ahead.

Alright, Thanks for taking my question first one here just touching on the competitive dynamics again.

Outside of just receiving full qualification could you maybe kind of give us an overview.

Where you see your key competitive advantages whether that be supply chain.

Obviously operational history, but maybe even just installed logistics across different airbases.

Thanks.

Sure you bet. So first of all let me say that.

We're very confident that we have the best product in the industry on virtually every measure and that it isn't even close so we've got a long history of delivering effective safe.

And environmentally.

Favorable product in this industry.

And Thats really kind of the ante to the game.

Built over time as an infrastructure bolt in manufacturing distribution and <unk> services.

We built over many years that delivers.

Near a 100% reliability.

We deliver retardant 24, seven throughout the year, we can deliver almost anywhere in North America within hours.

We basically own and operate the largest air tanker basis or the equipment and facilities at the largest air tanker basins in the U S. So what we've built is meant to deliver.

Extremely high reliability.

Whenever the fire season or whenever the fires are burning all year long.

That said, we don't think can be reproduced.

In any material way without tremendous investment in time.

Great. Thank you and then just the last one here I know that international expansion is more of a long term goal for the fire business, but we kind of have another quarter here, where unfortunately, there has been severe wildfire activity outside of the core market.

Calls are talked about the progress that we've made in Greece.

We're over over many years, we've worked with them to develop a retirement program and they became my retarding the customer in 2022. So we continue to be excited about our international markets. We're going to continue to serve those traditional markets and help them grow their programs.

But also work with new and emerging markets to help them.

Deal with the wildfire issues that are expanding geographically around the world.

[noise] got it thanks, I'll turn it back now.

Wow.

Mhm.

Oh.

Wow.

Awesome.

Yeah.

Alright.

Good morning, gentlemen couple of questions for me just first of all.

W.

You came to market you broke out some of the reviews of suppressive Retardants. Obviously, you made some commentary about that break out today is that something that you'd be willing to disclose this even the right new line, how much sales was coming from suppressants retarded.

[noise], probably not [noise].

Not on this call that said keep your our 10 case should be out soon and there is more retirement versus compression disclosure. There. So you will you will have an answer in your hands.

Shortly although not.

Quite on this call.

Okay and is that gonna be just an annual update that you can provide or is that something that you're gonna provide more disclosure on a quarterly basis.

As it stands now with our disclosure we tend to breakout oppression versus Retardee Andrew.

Annually.

There's no we won't get into specifics consideration too.

Adjusting.

That that's that's what I think you should assume going forward.

Okay Fair enough just switch you give some specialty products business.

As you've noted very store results there last year.

Just.

Is this a business.

Can sustain the you know the mid thirties EBITDA margin that is generating right now.

Or were there any factors last year that may not repeat going forward, just look to get a better sense of the sustainability out of business given its step monster change your profitability.

Yeah.

I think we've talked about this a little bit before we we did a lot of work in this specialty products business over the last 18 months really working on time, the three piece driving driving a higher price for value.

Working on productivity improvements and looking for opportunities for new business and we were.

Largely successful in 2022.

Improving that business across multiple fronts were.

Although it's still I mean, we're a year into it it's still a little bit early but we're pretty confident that what we've been able to achieve in that business.

Can be sustainable.

Into the future.

I don't expect to see the same kind of step change growth in 2003 that we saw in 2002.

But I do expect to see the gains that we made in 2000 to carry on through 23.

Fair enough that that is helpful. There and then just two quick ones.

How would you describe the current M&A environment today in terms of target in terms of what expectations are revaluation look through them thoughts on that.

Hey, Ryan.

I would describe the M&A market activity more more broadly as I'm surprisingly very very quiet.

There has been minimal I would say price discovery, largely because not much has transacted. If you ask sellers multiples are unchanged from 12 months ago, because nothing's traded in evidence to the contrary buyer.

Buyers, they they point to public markets and other things.

And argue that multiples are down so there will be an inevitable falling at some point in multiples will settle where they will and activity will pick up but we're we're just not at the thong stage. We're at the sort of remain in this standoff state, which is which is a very very typical.

For this point in the M&A market cycle, I would say at perimeter.

There's there's a lot we can do in a market low like this <unk>.

Largely around planting seeds for future capital allocation harvesting.

And we're extremely busy doing it I'm extremely pleased with our internal progress.

And we we.

We hope to have more tangible progress eventually I knew in in front of him good about it.

Okay. Thank you and then it just final question would be you know.

And again going back when you came to market for the bond issue you mentioned in the O M. Yet about the full service fire basis.

In the in the North American market does that number is the constant since then.

Yeah.

Yeah. So I don't know I don't know about 50 is the right number I think it's closer to 40.

Okay.

Yeah.

Basis, each year some basis.

Become full service or the odd base comes off a full service, but generally that numbers relatively stable year over year.

Perfect.

<unk>. Thank you so much.

Thanks, Brian .

Yeah, I know Friday questions at this time I would like to turn to fly back <unk> back for closing comment. Please go ahead.

Yeah. Thank you all very much for joining us on this call.

We're looking forward to the start of the fire season, and talking to you again to report our next quarter results. So have a great day.

[noise] sounds good.

You may disconnect Caroline <unk>, Thank you for that.

And have a great day.

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