Perimeter Solutions SA Q1 2023 Earnings Call

Greetings and welcome to the perimeter solutions Q1, 2023 earnings call. At this time all participants are 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 on your telephone keypad. Please.

Please note this conference is being recorded.

Now I'll turn the conference over to your host Jeff Barker you may begin.

Thank you operator, good morning, everyone and thank you for joining perimeter solutions first quarter 2023 earnings call.

Speaking on today's call are hate inquiry, Chief Executive Officer, and Chuck <unk> Chief Financial Officer.

Once you remind anyone who may be listening to a replay of this call that all statements made are as of today May 10, 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.

The company would also like to advise you that during the call we will be referring to non-GAAP financial measures, including 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 Haytham, Corey Chief Executive Officer.

Thanks, Seth good morning, everyone and thank you for joining us I'll start with summary comments on our strategy, then discuss our financial performance and capital allocation before turning the call over to Chuck.

Starting with our strategy on slide three.

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 following five very specific economic criteria.

<unk> recurring and predictable revenue streams to long term secular growth tailwind.

<unk> products for the council critical but small portions of larger value streams.

<unk> significant free cash flow generation, but high returns on tangible capital and.

And finally, the potential for opportunistic consolidation.

We believe that these these.

These five economic criteria, our president at our 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 a consistent improvement in our three operational value drivers, which are profitable business continue with productivity improvement 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 to our financial results for the first quarter and starting with fire safety recall that the first quarter is typically our smallest in fire safety and one in which the business typically reports an adjusted EBITDA loss.

First quarter 2023 fire safety revenue adjusted EBITDA and adjusted EBITDA margin were all roughly flat versus the first quarter of 2022.

Despite the very similar year over year headline fire safety results underlying performance in Q1 2023 different meaningfully versus Q1 2022.

Last year's North America fire season got off to an especially early and active stark between roughly March and May before transitioning to a model season in late May and thereafter.

This early start was reflected in our Q1 2022 safety results.

Conversely, and as is typically the case North America experienced minimal fire activity in Q1, 2023, and therefore, our North America retardant business contributed much more modestly for Q1 'twenty three results.

Rather Q1, 2023 fire safety performance was driven by solid results in our global suppressing <unk> business as well is that our international pardon markets, including Chile, Australia and Europe .

Strong start to the year fire suppression business as well as in our international markets.

<unk> a positive trend exhibited by these businesses end markets over the past 15, or so months and reflect strong progress by our business unit leaders around our three PS value based operating model.

Turning now to specialty products.

As expected the.

The pronounced this inventory destock activity, we experienced in the latter part of the fourth quarter carried over into the first quarter, which is clear in a lower Q1 2020 fee revenue versus Q1 of 2022.

Also as expected customer orders and sales activity began to recover in the first quarter, which is clear in our higher Q1 2020 revenue versus Q4 2022.

Pricing and market share in our specialty products business remains solid in Q1.

It's difficult to predict precisely when the inventory destock will abate, primarily because we believe that we're experiencing broad based inventory reduction actions across our various specialty chemical end markets rather than a specific work down of our products that said inventory destock.

Our definition really temporary in nature.

When inventories are depleted, which will inevitably occur.

Turning now to cash and capital allocation, we repurchased approximately 160000 shares in the first quarter at an average purchase price of $7.46.

Continued our repurchase activity into the second quarter and on a year to date basis repurchased approximately one 5 million shares at an average repurchase price of $7.36.

We have approximately $90 million remaining on our existing repurchase authorization and we ended the first quarter with approximately $92 million of cash on our balance sheet.

We will not hesitate to continue repurchasing our shares at compelling returns.

Also remain active on the M&A front, while current market conditions are less conducive to larger acquisitions, we continue to build the M&A pipeline and feel good about our long term M&A prospects.

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

Share repurchases or otherwise.

I'll close with a comment on our full year 2023 expectations.

On our prior call we stayed intact, assuming an on trend 2023 fire season consolidated adjusted EBITDA of approximately $180 million is a reasonable expectation for this year.

We also stated that to the extent the twenty-three fire season severe or was again unusually mild we would expect to see the impact reflected in our financial results.

Both of these expectations are unchanged and I'll provide a little more context around both of our businesses relative to the financial framework.

First specialty products.

Our consolidated full year financial expectations are not impacted by the below normalized first quarter results and specialty product nor will they be impacted by some continued destocking activity in the second quarter. Yes, we were aware of this market backdrop, when we provided our 'twenty three financial thing.

Next fire safety.

Winter and early spring, where particularly wet exempt almost fire prone regions of North America, which we believe suggests a delayed start to the 2023 North America fire season.

What isn't clear is whether beyond a likely delayed start the wet early conditions will impact the severity of the overall North America fire season.

On a very high level of probabilistic basis are likely later start to the season, coupled with greater overall moisture suggests that potentially milder season.

However, the signal is weak as both the historical data as well as our experience with <unk>.

Yes at the fire season, you can still end up anywhere between mild and severe this year.

For context at this time last year, the most fire prone regions states had experienced an extremely dry several months and California had just experienced its driest January through March period on record as such most predictive services forecast an extreme in especially severe.

<unk> 22 fire season, and we experienced an especially early and active start to the season seemingly validating these forecasts.

Despite these leading indicators that 2022 fire season was ultimately quite mild.

Also for context early 2017 was also unusually wet.

2017 turned out to be a severe fire season as conditions dried out, leaving the west with significantly higher fuel loads.

As such our park for a probable labor start to 2023 fire season is difficult to predict.

Our team at perimeter is as always we'll be prepared to meet our customers' needs with 100% reliability in every potential fire season outcome.

Finally, I will reemphasize that irrespective of the severity of fire season, we will press on her operational value drivers at both of our businesses such that for the 2023 fire season turned out to be similarly mile to last season, we still expect to deliver notably improved year over year biopsy.

Safety financial results in 2023 versus 2022.

And with that I'll turn the call over to Chuck.

Thanks Haytham.

Turning to slide six first quarter sales in our fire safety business increased 1% to $18 $7 million, while first quarter. Adjusted EBITDA was negative $3 4 million versus negative $3 3 million in the first quarter of 2022.

But as I mentioned earlier, the first quarter is typically our smallest quarter and fire safety, where we typically expect the businesses to generate an adjusted EBITDA loss.

First quarter sales in our specialty products business decreased 36% to $25 $1 million, while first quarter adjusted EBITDA decreased 58%.

The $6 $5 million.

We're pleased with the business as Q1 performance around price and market share.

We attribute the lower year on year results to lower volumes due to the aforementioned destocking activity.

First quarter consolidated sales decreased 24% to $43 $8 million, while first quarter consolidated adjusted EBITDA decreased 74% to $3 1 million moving.

Moving below adjusted EBITDA.

Interest expense in the first quarter was $10 1 million in line with our regular quarterly run rate.

Depreciation was approximately $2 $3 million <unk>.

Amortization expense was $13 8 million.

Cash paid for income tax was $10 $2 million in Q1.

Capex was approximately $2 5 million in Q1.

Our full year 2023 expectation for interest expense depreciation taxes, working capital and Capex are unchanged.

We ended the quarter with approximately $675 million.

The senior notes.

Cash of approximately $92 million and approximately 158 million basic shares outstanding.

Slide eight bridges between our basic and diluted share count.

Walk through the table in detail.

I will remind investors that our diluted share count of $169 5 million shares.

<unk>, 100% of the $11 8 million fixed shares we expect to issue under the founder Advisory agreement through Q1 2028 and.

In practice, we expect to issue these shares ratably over the next five years.

With that I'll hand, the call back over to the operator for Q&A.

Thank you 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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One moment, please while we poll for questions.

Our first question comes from the line of Josh Spector with UBS. Please proceed with your question.

Yeah, Hi, Thanks for taking my question I wanted to follow up on something you said haynesville about growth in fire safety with a mild season. So just curious as big a walk through some of the drivers there maybe some color on kind of what you have in the pipeline and I mean, obviously some of that shell it through in the first quarter with maybe what you did in.

So any help there thinking about what you could deal with the fire season were similar to last year. It would be helpful. In thinking about a downside scenario.

Yeah, Hey, Josh Thanks for taking my question so.

Give you a very summary answer and then I'll turn a little more meat on the bone for you, but the summary answer is year in and year out truly irrespective of what's happening in the macro environment and otherwise.

This unit leaders and their teams are just grinding.

All aspects of productivity.

We expect profitable new business and all aspects.

As you can to value.

Rarely any one of these a tremendous individual game changing lever, but as your obsession we focused on all the little things you can do each of these three buckets and each of your views and truly drive that accountability across the enterprise.

The aggregate impact ends up being quite material such that we're comfortable articulating it on an earnings call.

The last thing I will add as we go through potentially two processes when we build our annual budget what is.

Pat to take base case view on fire season, and build a budget.

Based on that the other thing we do is we build a volume budget. So we literally assumed every single unit sale across our entire business.

<unk> year over year. So every single phase III for example, the assumption would be every single SKU.

Q so across all products all geographies all be use is identical to 2022.

The only difference in the forecast is therefore, whats youre highly confident youre going to get on productivity and pricing to value and the change in revenue in that flat volume model should reflect pricing to value and the change in EBITDA should reflect the cumulative impact.

So if pricing to value and productivity.

And as you just grind on.

Sales in both of those at the most local level, which is enabled by.

Youll reorganization.

A lot of little things add up to make material difference and thats exactly where the comment that our performance will be notably improved in fire safety and a similarly mild season coming up.

Okay, and I guess, I mean can you expand a bit on.

Maybe the international side of the business. So I mean, it seems like you've got some help there in the first part of the first quarter relative to the fire season, I guess, how much has that grown as part of the business over the past few years is that meaningfully different.

Does that give you any confidence as you look over the next year relative to the U S numbers.

So.

Two two different answers.

Has his international business growing over the past several years, yes, absolutely.

It's growing both.

Volume in existing markets growing as far as our ability to open and enter are quite meaningfully in some cases, new markets and then our profitability per market is growing quite nicely as we implemented price productivity equally equally focused manner in these international markets.

Very pleased with the results there.

The second part of the question.

National is not yet at a place where a strong season compensate for a potential mild.

Okay.

As the North America season goes from a mild to severe perspective.

Direction, we will our financial results go is sufficiently large to be arithmetic.

But we're very happy with the year over year quarter over quarter excuse me progress in our international business overall.

Okay. Thanks, and then I guess last one for me and then I'll hop back in the queue is just any update you can give on some of the competitive dynamics within the U S higher.

Our target market and maybe too early to comment, but honestly compass has kind of bought out there.

The remaining minority stake.

And the business that they have does that change anything in your view.

Thank.

Thank you so out of respect for those guys.

I'll refrain from commenting on their transactions and sort of leave that to them and focus on our own business.

Regarding 2023, we're currently well on our way well through the process of opening all of our basis and preparing for a successful season at each of them.

From a base perspective, we think 'twenty three will look very very similar to each of the last several years. So no no material change at all this year.

Over the long term.

We're very very confident Josh that we are the gold standard at perimeter, both as far as product quality and as far as service quality and you need to be lights out both simultaneously all the time to share of this market and therefore, our biggest competitor is always ourselves.

Were looking to raise the bar each and every season of product quality and on service quality and offer more value and superior service to our customer and as long as we do that I feel very comfortable with our long term market position and based on our fire season preparation so far this year.

Very comfortable that we're going to deliver tremendous and improved value for our customers. This year.

Okay. Thank you.

And we have reached the end of the question and answer session now I'll turn the call back over to Nathan Kroeker for closing remarks.

Alright, well thank you everybody.

Talk to talk to everybody again in three months.

Yeah.

And this concludes today's conference and you may disconnect your lines at this time.

You for your participation.

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