Q3 2024 Perimeter Solutions SA Earnings Call
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Greetings. Welcome to Perimeter Solutions third quarter 2024 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, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Seth Barker.
Head of Investor Relations. Thank you, you may proceed.
Seth Barker: Thank you, Operator. Good morning, everyone, and thank you for joining Perimeter Solutions' third quarter 2024 earnings call. Speaking on today's call are Haitham Khouri, Chief Executive Officer, and Kyle Sable, Chief Financial Officer.
Speaker Change: We want to remind anyone who may be listening to a replay of this call that all statements made are as of today, November 12, 2024, and these statements have not been nor will they be updated subsequent to today's call.
Speaker Change: 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.
Speaker Change: Please review our SEC filings for a more complete discussion of factors that could impact our results.
Speaker Change: The company would also like to advise you that during the call we will be referring to non-GAAP financial measures including adjusted EBITDA.
Speaker Change: 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.
Speaker Change: With that, I will turn the call over to Haitham Khouri, Chief Executive Officer.
Thanks for the intro, Seth.
Speaker Change: And thank you, as always, for the great work on this Fruits Step Deck.
Good morning, everyone. Thank you for joining us.
Speaker Change: I'll start on slide three with a summary of our strategy.
Speaker Change: Our goal is to fulfill our critical mission by providing our customers with quality products and exceptional service while delivering private equity like returns with the liquidity of a public market.
Speaker Change: We plan to attain this goal by owning extremely high-quality businesses and maximizing their long-term strength and value through consistent improvement in our three operational value drivers, which are
Number one, profitable new business.
Speaker Change: Number two, continual productivity improvements, and number three, pricing our products and services to the value they provide.
Speaker Change: 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.
Speaker Change: Slide four provides a snapshot of our three main product lines.
retardants, suppressants, and specialty products.
All of which share the following very attractive
structural traits.
Speaker Change: Each provides a mission-critical function where failure is not an option.
Each is a clear leader in its market.
Each serves an extremely challenging and complex end market.
Speaker Change: through an integrated solution offering that includes product, equipment, and service. And finally, each has an attractive organic or inorganic long-term growth profile.
before addressing our strong third quarter and year-to-date financial performance.
I'd like to touch on our operating performance.
I'll start on slide 5 with retardants.
Speaker Change: The retarded market is characterized by the intersection of extreme criticality and complexity.
starting with criticality.
Failure in this business is measured in lives and property.
Speaker Change: When we load and launch an air tanker, we're protecting a hotshot crew battling an active wildfire.
or a community threatened by an approaching fire.
or someone's home.
It's often all the above at once.
Speaker Change: Failure in what we do is simply not an option. Fulfilling our mission requires 100% reliability 100% of the time in every geography we operate and for every customer we serve.
Speaker Change: Slide six captures the great complexity amidst which we fulfill our critical mission
We must unfailingly meet very stringent service standards.
Speaker Change: in challenging and often harsh operating environments amidst extreme variability and unpredictability.
Speaker Change: Faced with this unique combination of criticality, excuse me, and complexity, customers across the world partner with Perimeter Solutions in their lifesaving missions.
Turning to slide 7.
Speaker Change: The reason every meaningful retardant program globally partners with Perimeter is our unfailing service record.
Speaker Change: I'll take a moment to walk investors through a couple of recent real-world examples
of Perimeter, serving our customer and fulfilling our mission.
Speaker Change: In August of 2023, the Canadian city of Yellowknife came under severe wildfire threat.
Speaker Change: and an evacuation order was issued for all 20,000 residents of the city.
Speaker Change: Yellowknife is a remote city in northern Canada. It's the capital of the Northwest Territories, which itself has a total of only 44,000 residents.
Speaker Change: There is a single two-lane road out of Yellowknife to the province of Alberta, to the south.
Speaker Change: Alberta's closest evacuee reception center was approximately 680 miles away from Yellowknife via that single passage.
Speaker Change: It was imperative to our customer, the Northwest Territories Forest Management Division, that this road remain secure for the evacuation of Yellowknife.
Speaker Change: We are operating in an extremely remote part of the world.
Speaker Change: We are also in the midst of the busiest Canadian wildfire season.
on record.
However, and as always, Perimeter was present and prepared.
Speaker Change: We responded on a dime and provided uninterrupted supply of retardant to six air tanker bases in the Northwest Territories.
Yellow eyes. Yellow eyes.
Hay River
or Simpson.
Fort Smith, Norman Wells, and Inovik.
Speaker Change: The tanker base at Norman Wells is only accessible by barge in summer.
The water level was low and the barge couldn't sail.
Speaker Change: Instead, we flew totes of liquid concentrate to Norman Wells and kept the base fully stocked and pumping gallons throughout the evacuation operation.
Speaker Change: The passage out of Yellowknife was secured and the evacuation operation was successful.
Speaker Change: residents were able to return to their homes within a few weeks.
Speaker Change: Yellowknife is one example of Perimeter stepping up and fulfilling the mission as only we can amidst extreme criticality and great complexity.
Speaker Change: I can recount countless similar examples from all corners of the world, be it North America,
Central or South America
Europe, the Middle East, Australia, or Asia?
Speaker Change: I'd also like to convey an operating example from the current year.
Speaker Change: The Western United States experienced a period of intense fire activity in mid-July of 2024.
Speaker Change: All our air tanker bases were open, yet customers requested additional resources.
As always, we responded.
We simultaneously deployed a dozen Mobile Retardant Bases, or MRBs,
including to California, Washington, Oregon, Idaho, Wyoming, and Oklahoma.
Speaker Change: MRBs are typically set up in remote areas that are difficult to reach from fixed air bases.
and then close proximity to an active wildfire.
Speaker Change: MRVs can also be used to increase firefighting capacity during periods of extreme wildfire activity.
Thank you.
Speaker Change: We fully deploy an MRB in under one day, in any open space with a water source, and can provide immediate air tanker retardant mixing and loading capabilities, as well as dip tanks for helicopter operations.
Speaker Change: We staff MRBs with up to 10 employees, and an MRB can remain deployed for weeks at a time in support of our customers' firefighting operations.
in addition to the 12 simultaneously deployed MRVs.
Speaker Change: We deployed ground-applied retardant units, including five units simultaneously deployed to California's Coffee Pot Fire.
Speaker Change: Finally, we activated our fixed Channel Islands Air Base and successfully supported the deployment of several T-130 air tankers under the U.S. Air Force's Modular Airborne Firefighting System Program.
typically referred to as MAPS.
MAPS is an emergency program.
Speaker Change: Where, when all commercial air tankers are activated, but further assistance is needed, the U.S. Air Force activates their C-130 air tanker fleet out of our Channel Islands Air Base to provide additional emergency aerial resources.
Speaker Change: It's difficult to find a greater intersection of criticality and complexity than what we face this July.
with over 100 active airbases.
a dozen simultaneously deployed MRBs
a large fleet of simultaneously deployed Ground Applied Retardant Units
and an active MAPS program out of Channel Islands.
Yet we did what we always do at Perimeter.
Speaker Change: We stepped up and served our customers in support of their sacred mission.
Turning.
to suppressants on slide 8.
Our Suppressants business shares many attributes with our Retardant business.
where extreme criticality intersects with great complexity.
Speaker Change: and where we address our customers needs through an integrated solution offering encompassing product, equipment
and Emergency Response.
Speaker Change: Perimeter has also emerged as a clear market leader in suppressants on the back of our pioneering R&D breakthroughs.
and others in foreign-free phones and systems.
Speaker Change: This product leadership has led to an extremely high win rate of fluorinated-to-fluorine-free facility conversion projects.
Speaker Change: including our approximately 99% win rate at FAA 139 compliant airports.
Speaker Change: given the largely razor razor blade nature of the suppressants business.
Speaker Change: where aftermarket phone sales are largely specced in with the installed equipment and service network.
Speaker Change: Our fluorine-free Project Winrate is creating a large installed base of customers.
Speaker Change: into which we expect to sell aftermarket product far into the future.
Speaker Change: We couldn't be prouder of the operational execution by our suppressants business, as well as their continued extremely strong financial performance.
Slide 9 touches on specialty products.
Speaker Change: This is another business where you must consistently meet stringent customer and regulatory standards.
Speaker Change: where we serve our customers through a comprehensive and integrated offering spanning product, equipment, and service.
Speaker Change: and Wear Perimeter is the clear market leader with over 50% of all installed OECD capacity.
We're also very proud of Specialty Products' operational execution.
Speaker Change: We've delivered approximately 10,000 bins in 2024 with a single-digit number of product issues or returns.
Speaker Change: This issue rate in a global business with very tight product specifications and extremely complex logistics and transportation requirements is a testament to the team's exceptional execution.
Speaker Change: Turning now to slide 10, which provides a snapshot of Perimeter's adjusted EBDA track record over the past 15 years and highlights our 18% adjusted EBDA CAGR over this period.
Speaker Change: Please note that we're using LPM adjusted EVDA of $259 million as a placeholder.
for 2024 Adjusted EVA-DA.
Speaker Change: The vast majority of the improvement in our adjusted EBDA over the past two to three years is the direct result of the rigorous application of our value driver focused operating model.
Speaker Change: This is clear when comparing either 2020 or 2021 with the LTM period.
Speaker Change: 2020 and 2021 witnessed approximately 36% higher and 7% lower acres burned ex- Alaska, respectively, versus the LTN period.
Speaker Change: Yet the LTM period delivered roughly 85-90% higher adjusted EBITDA versus 2020 and 2021.
due to the successful implementation of our operational value drivers.
Speaker Change: These comparisons isolate the impact of our value drivers and provide clear evidence that our operating strategy works.
Speaker Change: As I've consistently stated, the implementation of our operating model is a journey, not a destination. We will keep our foot on the gas, and we are confident that we will drive higher adjusted EBITDA in any future year with similar and marked conditions to the LTM period.
I'll close on slide 11.
discussing capital allocation.
Speaker Change: Driving shareholder value through high IRR capital allocation is a core tenet of our strategy.
of internal reinvestment into our business.
M&A
share repurchases, and special dividends.
were clearly well-positioned for capital allocation.
Speaker Change: with over 200 million of cash on our balance sheet, LTM net leverage of 1.7 times, and the expectation that 2025 will be another strong free cash flow year.
Our capital allocation priorities are listed on slide 11.
Speaker Change: Our first priority is always to reinvest in our business via both OPEX and
and CapEx.
First, in order to best support our customers' missions.
and next
Speaker Change: We expect to deliver on the higher 2024 CapEx budget we guide it to.
earlier this year.
Speaker Change: 2024 will mark a new high for reinvestment into our business, not only through the aforementioned increase in CapEx, but also through several key OpEx line items, including R&D and field service.
Speaker Change: We will maintain this higher level of reinvestment into our business.
Speaker Change: However, we expect to generate meaningfully more free cash flow and create meaningfully more leverage capacity via organic EBITDA growth.
then we can possibly reinvest internally.
Speaker Change: Therefore, we will look beyond internal reinvestment for capital allocation opportunities.
Our next capital allocation priority is M&A.
Speaker Change: as evidenced by the improvement we've driven across retardants, suppressants, and specialty products.
Speaker Change: We are confident that our value driver focused operating strategy will create significant value when applied to the right business.
We're actively searching for targets with the right economic criteria.
Speaker Change: specifically where we can significantly increase EBITDA and free cash flow via the rigorous application of our value driver operating strategy.
Speaker Change: We won't hesitate to swing the bat when we find the right opportunity.
Our next priority is share repurchases.
Speaker Change: As we've proven during our three years as a public company, we will double down on perimeter when the market provides an especially attractive opportunity to do so.
Finally...
Speaker Change: And in the highly unlikely event that we're unable to allocate sufficient capital to the three aforementioned avenues of internal reinvestment, acquisitions, and share repurchases,
Speaker Change: We would expect to return capital to our shareholders via special dividends.
With that, I'll turn the call over to Kyle.
Kyle Sable: Thanks, Haitham. I'll kick off on slide 12, where growth figures shown are versus the prior year comparable period.
Kyle Sable: For fire safety, third quarter revenue increased 113% to $251.8 million, and year-to-date sales increased 97% to $375.5 million.
Kyle Sable: Fire Safety Q3 Adjusted EBITDA rose 181% to $157.5 million, contributing to the year-to-date increase of 208% to $212.9 million.
Kyle Sable: The majority of the increase in fire safety's Q3 and year-to-date revenue in adjusted EBITDA is attributable to our retardants business.
Kyle Sable: The year-over-year increases were driven by a combination of end market normalization, as the 2024 fire season was significantly closer to normalized severity versus the 2023 season, as well as the impact of our value driver focused operating model.
Speaker Change: As Haitham noted, comparing our 2024 results with our 2020 and 2021 results largely isolates and captures the financial impact of our operational value drivers.
Speaker Change: Our suppressants business also grew in Q3 and near to date, as we continue to benefit from the transition to fluorine-free foam, where Perimeter is the clear market leader.
Speaker Change: In our specialty products business, Q3 sales increased 50% to $36.6 million, helping to drive a year-to-date sales increase of 37% to $99.2 million.
Speaker Change: Specialty products adjusted EBITDA grew 137% to 12.9 million dollars while year-to-date adjusted EBITDA increased 111% to 34.5 million dollars.
Speaker Change: The market recovery we experienced in the first half of the year continued into the second half and we're now comfortable that 2023's destocked activity is behind us and believe that 2024 represents a normalized end market demand year for specialty products.
Speaker Change: On a consolidated basis, Q3 sales increased 102% to $288.4 million, and year-to-date sales increased 81% to $474.7 million.
Speaker Change: Consolidated Adjusted EBITDA increased 177% to $170.4 million in the 3rd quarter and increased 189% to $247.4 million in the year-to-date period.
Speaker Change: despite record spending to support our customers in areas such as research and development and field service, which we expect to remain elevated for the foreseeable future as we invest in our capabilities in support of our customers' missions.
Speaker Change: Due 3 interest expense of $10.1 million, depreciation of approximately $2.6 million, and amortization expense of $13.8 million were consistent with our long-term assumptions.
Speaker Change: While cash paid for income tax is $27 million in Q3, we expect our full-year cash taxes to more closely reflect the 26% rate assumption.
Speaker Change: Our cash taxes, in any quarter or year, often vary due to the timing of payments.
Speaker Change: Capital expenditures were approximately $3.9 million in Q3, an acceleration in spend consistent with our increased goal of investing 10 to 15 million dollars of capital expenditures in our business in 2024.
Speaker Change: Our team drove substantial working capital improvements over the course of 2024, notably on inventory, which declined $37.3 million a year to date, and accounts receivable.
Speaker Change: On AR, while our sales increased nearly $145.8 million in Q3 2024 vs. Q3 2023, our AR for the comparable periods increased only approximately $25.5 million due to improved collection procedures.
Speaker Change: We expect that we will generate cash from networking capital in 2024, in contrast to our long-term assumption of consuming cash as the business grows.
Speaker Change: We will revisit and update, as necessary, each of our long-term assumptions on our Q4 call.
Speaker Change: Our free cash flow for the third quarter was approximately $179.1 million.
Speaker Change: The seasonality of our business limits free cash flow generation early in the year, while Q3 and Q4 tend to be cash generative.
Speaker Change: Year-to-date, we have generated free cash flow of approximately $185.3 million.
Speaker Change: Capital allocation for the quarter included our increasing capital expenditures, where incremental capital spend is tied primarily to productivity or profitable new business projects with IRRs at or above our long-term return target.
Speaker Change: The inflection in our LTM EBITDA has both validated our operational value driver strategy and created the necessary financing capacity to fully pursue M&A.
Speaker Change: Our team is actively searching for targets and after CapEx we view M&A is the highest return generating use of capital
We repurchased De Minimis shares in Q3.
Speaker Change: Year to date, we purchased approximately 3 million shares for approximately $14.4 million.
Speaker Change: Since our share repurchase program's inception, we've repurchased approximately 14% of the initial share count of the company at IPO at an average price of $5.90, generating a 137% return through last Friday on the approximately $127.4 million deployed.
Speaker Change: Finally, turning to our corporate structure, we expect to complete the redone affiliation of our parent company from Luxembourg to Delaware in November.
Speaker Change: This move will better align our legal structure with our U.S. operations, which generate the majority of our revenue in EBITDA.
Speaker Change: We expect the transaction to reduce our regulatory and reporting complexity, streamline legal, accounting, and cash management, and generate an improved tax profile.
Speaker Change: Turning to slide 14, I'd like to highlight our highly attractive debt profile, comprised of a single series 5% fixed rate note, maturing in the fourth quarter of 2029, which doesn't carry any financial maintenance covenants.
Speaker Change: As of Q3, we were levered 1.7 times net debt to LTM adjusted EBITDA.
Speaker Change: We have substantial liquidity, with cash and cash equivalents of approximately $223.1 million in an undrawn $100 million revolving credit facility.
Speaker Change: We ended the period with approximately 145.2 million basic shares outstanding.
Speaker Change: With that, I'll hand the call back to the operator for Q&A.
Speaker Change: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone.
Speaker Change: will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment while we pull for questions.
Speaker Change: Our first question is from Josh Spector with UBS. Please proceed.
Josh Spector: Good morning and congrats on the solid results in the quarter here. I wanted to ask kind of where to from here as we think about fire safety. So I assume given the strength in the fire season, you probably couldn't fill all the orders you had. So were your volumes maximized in that you sold everything you possibly could?
Josh Spector: Or, how do you think about that relative to the fire season, and then longer term, what would drive higher volumes for you in that business over time?
Speaker Change: Yeah, hey Josh. Thank you for the question. This is Haitham, by the way. Thanks for the question and very good question.
Speaker Change: So it depends on time frame. There were certainly periods in Q3 where the entire aerial firefighting industry was running at max capacity.
Speaker Change: One of the best pieces of evidence for that, by the way, is the activation of the Air Force's MAPS program, which can only happen when all commercial air tankers are counted for. You can't generalize and talk about the 90 days.
Speaker Change: as a monolith, but there were certainly periods where we could have sold more retardant had there been more industry capacity. Now on a go-forward basis
There is capacity very consistently being added.
Speaker Change: A big part of that comes from our partners in private industry, the air tanker companies that are consistently adding capacity to the air tanker fleet. Not only do you have more air tankers, but you have bigger, faster, more efficient, more efficient, more efficient, more efficient, more efficient, more efficient, more efficient
Speaker Change: air tankers, and therefore it's quite attractive from the total industry capacity perspective.
Speaker Change: You have our public customers adding capacity as well. CAL FIRE is very roughly planning to double capacity over the next few years and put the first large air tanker into service.
Speaker Change: our capacity at our air bases. That means adding more loading pits, that means upgrading our equipment so we can load planes faster, that means upgrading lab bases to add VLAB capabilities.
Speaker Change: all sorts of things. So these are all long-term secular processes. You're not going to see a huge inflection in capacity one year to another, but if you look historically you've seen significant year-over-year growth, consistent and significant year-over-year growth.
Speaker Change: in industry capacity and all the secular investment drivers behind those are intact and we most certainly expect to see that continue going forward.
Speaker Change: Got it. Thank you. And if I could just ask on the cash deployment side of things, I mean, obviously you're pretty clear you're looking at M&A and other options, but how do you think about the timing of when you think about a special dividend or doing something else to get leverage back to your target versus waiting for the right M&A target? So should we expect something, either M&A or something to return your leverage to the target range in the next quarter or so, or is that more of a longer-term thought process?
Speaker Change: more the latter. Josh, we're going to be patient, appropriately patient with capital allocations.
Speaker Change: On both sides of the ledger, by the way, right, you saw us optically highly levered.
a year ago, yet we repurchased $100 million.
Overstock
Speaker Change: You see us clearly under-levered today, and if we need to be patient, waiting for the right M&A opportunity, we'll do so. Now, you can't do that forever. An efficient capital structure is like an efficient SG&A base. It's just a prerequisite to drive growth.
Speaker Change: should hold her value. It's sloppy to run your capital structure any other way, and therefore, if over the passage of time we do not believe we can allocate significant capital to internal reinvestment, M&A, and attractive buybacks,
Speaker Change: certainly will eventually lever up and return capital to shareholders via a special dividend.
Thank you.
Got it. Thanks Haitham.
Speaker Change: Our next question is from Nate Hilton with Morgan Stanley. Please proceed.
Hey, so firstly, yeah, congrats on a great quarter.
Speaker Change: Looking at it now, we're roughly halfway through 4Q, and so far, like, data on U.S.-esque Alaska acres burned has been above the historical average.
Speaker Change: friends fairly meaningfully and substantially, and we also appreciate that Perimeter has strategically, you know, relocates assets to different regions based on the different fire seasons, whether that be the northern or the southern hemisphere.
Speaker Change: So given those factors, we're hoping that you could comment maybe on whether or not US X Alaska wildfire activity quarter today could potentially drive an increase in 4Q year-over-year fire safety results.
Speaker Change: Yeah, Nate, you're new on these calls, and so I applaud you for trying, but we are not going to comment on an in-process quarter.
Speaker Change: Generally speaking, can you also remind us on which regions Perimeter focuses on outside of the peak U.S. wildfire seasons and also the general timing of the historical peak severity wildfire seasons in those regions?
Sure, it's very broad. Central America...
Speaker Change: is a good market for us, although the seasonality there tends to run very similar to North America.
Speaker Change: South America, certain locations within South America have an excellent long-term markets for us and run counter seasonal to North America So they are they're just entering their peak wildfire season
Europe, the Middle East
Speaker Change: Asia are important. Many countries in those markets are very important for us and then Australia is a very important market for us and Australia, like South America, runs counter seasonal to the US, Europe, and the Middle East in that we're just entering their fire season.
All right, thanks.
Speaker Change: With no further questions in the queue, I would like to hand the conference back over to management for closing remarks.
Speaker Change: Yeah, thank you operator and thank you to our shareholders for the continued support. We very much appreciate it. We continue to work very hard for you and speak next quarter. Thank you.
Speaker Change: Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.
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