Q2 2023 Perimeter Solutions SA Earnings Call
Ladies and gentlemen, good morning, and welcome to the perimeter solutions second quarter 2023 earnings conference call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It does not my pleasure to introduce your host Seth Michael <unk> head of Investor Relations. Please go ahead.
Thank you operator, good morning, everyone and thank you for joining perimeter solutions second quarter 2023 earnings call speaking on today's call are Haytham, Corey 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 August three 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 hasten Corey Chief Executive Officer.
Thank you Sarah good morning, everyone. Thank you for joining us I'll start with summary comments on our strategy.
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 attain the school by owning operating and growing uniquely high quality businesses. We.
We define uniquely high quality businesses through the following five very specific economic criteria.
One recurring and predictable revenue streams.
Two long term secular growth tailwind.
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<unk> significant free cash flow generation with high returns on tangible capital.
And five the potential for opportunistic consolidation.
We believe that these five economic criteria are present 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 our consistent improvement in our three operational value drivers which are.
Profitable new business.
Continuous 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 to our financial results for the second quarter.
Starting with fire safety.
As we've noted in the past, while we expect predictable long term growth in our fire safety business we.
Also expect an element of quarterly and annual variability tied primarily to the severity of the North American fire season.
On our first quarter call, we observed that this past winter and spring, we're particularly wet in some of the most fire prone regions of the United States and therefore that the 20th twenty-three fire season would likely experience at the late start.
This expectation materialized as of the end of Q2 year to date U S acres burned extra Alaska, we're down 70% year over year and more than 50% below their 10 year average.
The very mild early U S fire season is reflected in our first half fire safety results.
Our second quarter and year to date, adjusted EBITDA decreased 32% and 37% respectively.
Fire safety results significantly outperformed the 70% decline in the U S acres burned ex Alaska for three primary reasons.
First our U S retirement business benefited from ongoing productivity and value based pricing initiatives.
Second our international Retardant results were strong with the second quarter, particularly active in Canada.
And third our global Suppressants business also delivered very strong results with significant year over year revenue growth and margin expansion.
We've commented previously on the solid organic revenue and profit growth in our international retardant markets, where again experiencing excellent results here in 2023 with international retardant revenue more than doubling year over year in the first half and adjusted EBITDA posting excellent growth as well.
We expect solid revenue growth and consistent margin expansion to continue in our international retardant markets going forward.
Let me also take a moment to discuss the performance of our global Suppressants business, while we won't make a habit of breaking out suppressants results I would like to highlight our progress over the past 18 months in order to provide another example of how our operating strategy is impacting our business is financial performance.
Yeah.
In 2021 are suppressants business delivered an adjusted EBITDA margin in the mid teens.
In the first half of 2023 are suppressants business delivered an adjusted EBITDA margin in the low thirties weeks.
We expect our full year of 2023 suppressants adjusted EBITDA margin to be in line with if not slightly above our low thirties first half margins.
This near doubling of sustainable margins over an 18 month period, coupled with an organic revenue CAGR well into the double digits reflect strong progress fire suppression business unit leaders and implementing all three aspects of our three Ts operating model.
First driving profitable new business, primarily through our market, leading flooring free form offerings.
Second, making solid progress on our productivity initiatives.
Third pricing our products and services to more accurately reflect the value they provide our customers.
Turning now to specialty products.
Evidenced by the fact that our Q2 sales didn't improve versus Q1, and we're down notably versus the prior year second quarter.
The inventory destock activity that commenced in late 2022 persisted throughout the first half of 2023.
Despite weak end market demand, we believe that pricing and market share in our specialty products business remains solid in the first half of this year.
As I mentioned on the Q1 call, while it's difficult to predict precisely when the inventory Destocking will abate there.
Our definition lead temporary in nature and should end when channel inventories are depleted, which we believe will inevitably occur in this case as well.
Before moving away from our operating results.
Let me make a summary comment reflecting on our first 18 or so months as a public company.
In summary.
We are very confident in our three P. S operating strategy and believe that we are driving significant improvement across each of our business lines through this operating strategy.
The results are very clear and suppressants.
The results are also very clear in our international retardant markets.
The results are clear and specialty products, when comparing 2022 to 2021.
Both of which we believe to be roughly similar market demand years.
As I just discussed the soft chemicals end market is temporarily obscuring the improvement so far this year.
The results are not yet clear to investors.
Our retirement business.
This is primarily because our first couple of wildfire seasons have been very much.
With 2022 U S acres burned ex Alaska down 36% year over year.
In first half 2023 acres burned down a further 70 per cent.
That's it.
With everything we've learned over the past 18 months, we feel strongly that our retardant business fits our long term a criteria for business, because we want to own and as a business in which our value creation playbook applies.
We feel excellent about the underlying improvement in our retirement business.
And we are confident that this improvement will be visible to investors in a more normal fire season.
Turning now to cash and capital allocation.
We repurchased approximately 4 million shares in the second quarter at an average purchase price of $6.58.
We have approximately $71 6 million remaining on our existing repurchase authorization and we ended the second quarter with a product with approximately $22 million of cash on our balance sheet.
Turning to M&A.
Over the past 12 months to 18 months capital markets have been challenging and overall M&A activity has been tepid.
This challenging market backdrop combined with the consecutive mild fire seasons over the same timeframe have impacted our M&A efforts. However.
However, we believe that slow M&A markets and soft fire seasons are transitory phenomena.
In the meantime, we are honing, our operational playbook and building our M&A pipeline.
We are confident that we will eventually acquire the right business. We are a three piece playbook applies and therefore, where we expect to drive improvements in line with what we've delivered at our different businesses so far at perimeter.
M&A remains a key part of our long term value creation playbook.
Between our available cash balances and the significant free cash flow, we expect to generate in the second half of 2023, which Chuck will touch on here. Shortly we believe that we're well positioned to take advantage of any potential compelling capital allocation opportunities that might arise including.
Potential acquisitions.
Difficult share repurchases or otherwise.
Let me now comment on the on the competitive environment in our with Hart business.
We don't control what will occur around the potential introduction of competing retardant products.
We do however control how we prepare for a potential competition.
And we are preparing vigorously.
Perimeter is the gold standard as far as the efficacy and safety of our products qual.
Quality of our service and the passion dedication and integrity of our people.
However, we will not get complacent, we are pushing harder than ever to raise the bar on ourselves in every aspect of our business.
We believe this competitive mentality will make us an even better company irrespective of what when and how.
Potential competition.
Turning finally to our full year 2023 financial expectations.
We're confident that the unit economics of all our businesses are improved in 2023 versus 2022.
Therefore, we're confident that with similar year over year and market conditions in 2023 versus 2020 to each of our businesses should deliver notably improved year over year financial results.
That said, our 2023 of the financial results will largely depend on these end market conditions, namely the severity of the U S fire season, and the timing of the normalization of the specialty product and market.
Specifically, if the second half of the U S fire season is severe COVID-19.
A point, where it compensates for the mild first half.
The overall 23 U S fire season is an on trend fire season.
And if the specialty product and market normalizes in the second half we are comfortable that consolidated adjusted EBITDA of approximately $180 million is a reasonable expectation for 2023.
That said if these end markets fail to recover as I just articulated in the second half we.
We would expect to deliver.
Soccer here.
In either case, we will focus on what we can control we will continue to press on each of our value drivers across each of our business units and grow our latent long term earnings power.
With that I'll turn the call over to Chuck.
Thanks Haytham.
Turning to slide six second quarter sales in our fire safety business for $53 $1 million down 20% versus the prior year and $71 $9 million year to date down 15% versus the prior year.
The decline was driven by lower fire retardant sales in the United States, partially offset by higher international Retarding sales and higher suppressant sales.
Second quarter, adjusted EBITDA, and our fire safety business was $16 $5 million down 32% versus the prior year and $13 $2 million year to date down 37% versus the prior year.
Second quarter sales in our specialty products business were $23 million down 33% versus the prior year.
And $48 $1 million year to date down 35% versus the prior year.
Second quarter adjusted EBITDA in our specialty products business was $4 $5 million down 61% versus the prior year.
$10 $9 million year to date down 59% versus the prior year.
Noted, we believe that our pricing and market share and specialty products are similar to last year and that the first half weakness is primarily attributable to temporarily soft end market demand.
Moving on to the consolidated business.
Second quarter consolidated sales were $76 $1 million down 25% versus the prior year.
And $120 million year to date down.
Down 24% versus the prior year.
Second quarter consolidated adjusted EBITDA was $21 million down 41% versus the prior year and $24 $1 million year to date down 49% versus the prior year.
Moving below adjusted EBITDA.
Interest expense in the second quarter was $10 $3 million in line with our regular quarterly run rate.
Depreciation was approximately $2 4 million, while amortization expense was $13 $8 million.
Cash paid for income taxes was $8 2 million in Q2.
Capex was approximately $1 $9 million in Q2.
Our full year 2023 expectations for interest expense depreciation taxes, working capital and Capex are unchanged.
We ended the quarter with approximately $675 million of senior notes.
Cash of approximately $22 $1 million and approximately $154 5 million basic shares outstanding.
Slide eight bridges, our basic and diluted share count, which includes shares issuable under the founder advisory agreement in future periods.
We expect our second half cash generation to be strong.
As we draw it down from our peak inventory levels.
Even if the second half fire season is relatively mild.
Such that the 2023 U S fire season, it looks like the mild 2022 U S season.
We expect to generate approximately $100 million or more in second half 2023 free cash flow and end the year with over $120 million in cash on our balance sheet.
This figure will of course change if the second half of the fire season is extremely mild or if we deploy capital towards M&A or share repurchases.
With that I'll hand, the call back to the operator for Q&A.
Thank you.
Ladies and gentlemen, we will now be conducting a question and answer session.
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Ladies and gentlemen, we will wait for a moment, while we poll for questions.
[noise]. Our first question comes from the line of Josh Spector with UBS. Please go ahead.
Yeah, Hi, guys. Thanks for taking my question.
Actually want to follow up a little last points that Chuck maybe just on free cash flow so $100 million in second half that he had similar year on year performance, what's the implied EBITDA behind that.
You asked what the EBITDA assumption is behind that.
Yes.
We haven't we haven't disclosed that Josh and it's not just about the hardest thing in the world.
Backs off too, but we haven't disclosed it.
Yeah, I guess the variables working capital so I assume in that scenario that you would have a pretty significant working capital release can you size that.
Yeah.
So definitely going to convert some inventory to cash no question, but in terms of overall working capital in.
In line with our expectations.
To do.
As far as number one offering more value to our customers and being fairly compensated for that value in the form of pricing and number two.
Reducing and improving our costs through productivity.
None of that out of both of those as unit economics and.
We feel like we've done enough on a unit economic basis to do meaningfully better than last year, all things being equal.
It's almost impossible to do enough funding in economics to overcome that 70% decline in acres, we had in the first half of the.
The ultimate second half result will will will be based on the ultimate second half severity or lack thereof of the fire season, but we feel we feel very good about the work we've done on what we control here, which is good economics per gallon salt.
Okay, and if I could just have one more than just stolen his.
Specialty briefly.
And that you are not going to want a breakout price or volume for us. So.
Catholic with what we're seeing majority Destocking has anything changed on the pricing side in terms of what you're getting so Wednesday stopping and.
That you and an economic for you guys better or worse than where you like with your last year.
Wish you a very good very good that it is no worse.
Then last year, he or you need economics, if anything have improved.
Versus last year, everything you're seeing there is lower volume.
I will add you can have you have lower volumes at a lower market demand or lower market share and we feel very good that it is not a function of lower market share, but rather a function of of Destocking, which has persisted throughout the first half but.
But you said in the prepared remarks will will end at some point heart.
Hard to predict when exactly.
Okay. Thank you.
Thank you.
Next question comes from the line of Brian <unk> with Bad. Please go ahead.
Good morning, gentlemen, just a couple of questions for me on.
Focus on working capital and specifically just the inventory build over the last year.
By my numbers inventories are up about 32.5%.
Can you help us get a sense of.
I understand the fire season has been crushed.
Crush versus last year, probably versus expectations, but just love to get a sense of what that inventory is comprised of how much is that is retardants versus maybe specialty products how's that going to impact your plant operating rates going forward, just love to get the dynamics here.
Sure majority of it is in the fire safety retardant market. There is some impact on specialty products with the destock, but not nearly as impactful as fire safety.
And you know there is some impact to the operations, but in terms of just being prepared for the customer that's what we're focused on and that's what that inventories. Therefore.
Okay understood and just as we think.
Think about you know cash flow cash needs capital allocation, what's the minimum liquidity level that you're comfortable running the business that over a year period.
I'm not gonna give you an exact number bryan but the answer is not.
Not much at all we ended the second quarter with little over 20 million on the balance sheet and are very very comfortable at that level. So it's some number meaningfully lower than that and keep keep in mind you. A 100 million dollar revolver, which is undrawn that is in fact never never been drawn.
We're very comfortable with our liquidity situations.
Okay, maybe you could just if you don't mind put it a different way would you be comfortable drawing a revolver for the right opportunity in terms of capital allocation.
Temporarily we wouldn't I don't I don't think you wanted to run long term with a prawn revolver as part of your permanent capital structure.
But it wouldn't be go into our revolver to capture a very high IRR short term opportunity with good visibility into paying it down relatively quickly yeah, we would.
Great that does it for me thanks for the call to color.
Yeah. Thanks Ryan.
Ladies and gentlemen, if you wish to ask a question please star and one.
Our next question comes from the line of Dan thoughts with Morgan Stanley . Please go ahead.
Hey, Thanks, good morning.
And then so.
So I just wanted to ask on I'm.
I'm sure you guys been getting a lot of questions that we have on on.
This is the air Canada wildfire season, and I appreciate that.
Maybe you know you.
You guys kind of revenue and earnings in that market is maybe less of a direct correlation two acres burn than it is in the U S. Because of the way because of differences in the way that.
I cannot quite small buyers, but I just wanted to ask the question if there's anything that you could.
Sure that might help us kind of.
The potential benefits parameter of.
Significantly above trend.
The wildfire season, you know for for a business that has kind of been a mid.
Digits business.
I can see you guys historically.
So so thanks for bringing that topic of them. The first thing I'll say is how just remarkably proud I am and we all are of what our team is done.
Up in Canada, and it just.
Just unbelievably hectic stressful yet critical time and they they they delivered with that with absolute perfection didn't Miss a single load we sent a bunch of production folks from all over the world teams from Australia teams from the U S.
Spend up to two months worth being Canada has been.
It's been an incredible exemplary example of what perimeter solutions and only perimeter solutions can do for our customers.
As far as quantifying it for you.
As soon as you can look at our last couple of K as Canada is roughly 5% of our business from a revenue perspective.
I made the comment it's prepared remarks international business.
More than doubled in the first half clearly Canada was a big part of the actual revenue growth and profit growth in Canada were excellent in the first half, though it wasn't it wasn't only story of can truly truly was quite strong in the first quarter, Australia was quite strong in the first quarter.
A lot of good stocking activity in Europe in the second quarter as they stock up a lot more based on how severe last fire season was so those broad based strengthening international but Canada that was clearly.
Stand out.
Beck said like I said, Canada is roughly 5% of our business and as as.
As well as it has done this year, it's just not gonna mathematically upside down 70% acres.
And the U S.
And so I'm really helpful. I appreciate it and then maybe just one on capital allocation, specifically M&A you kind of.
Minus or or just you know hi.
High level of plot through when you're building the M&A pipeline.
What.
What kind of puts and takes our.
[noise] of what you're looking for is it.
Geographic expansion vertical integration.
Things that might.
<unk> <unk>.
Cor.
Retarded and also specialty products businesses or are you guys kind of indifferent to the end market and you're.
Just looking for for opportunities to check the.
Target economics.
And kind of value drivers, how do you think through you know.
Those different.
Those different puts and takes when you're when you're building your enemy pipeline. Thanks.
It is 100%.
Question of long term equity value creation.
[noise] simply are no. Good there simply are no qualitative criteria.
Criteria, we're not looking to get bigger we're not looking to get smaller we're not looking for synergies, we're not looking to tell a story.
We're looking for businesses.
Fit the five target criteria, because it's a business fits the <unk> target criteria.
We are very confident we can apply the three piece playbook and as evidenced by our.
Precedence margins, which has doubled in 18 months, our specialty products margins, where we've doubled EBITDA in our first year if.
If we find the right business consistent with the criteria, therefore, where the three-piece playbook is applicable we can materially increase profitability.
Relatively short period of time, and do so sustainably and therefore create sustainable equity value and shareholder value and that's that's really the one that truly the one input into the into the evaluation.
Alright understood. Thanks, a lot I'm trying to think.
Thank you.
Ladies and gentlemen, a reminder, if you wish to ask a question. Please press star and one.
[noise] [noise] [noise] [noise] [noise] has that are no further questions I would not have had the confidence silver to hate them coffee for closing comments.
Thank you very much everybody and talk to everybody 90 days from now.
I can't.
Confidence of Petting me tell solutions has now concluded. Thank you for your participation you may now disconnect your lines.
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