Context Therapeutics Q3 2023 Earnings Call Transcript

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November 9, 2023

There are 6 speakers on the call.

Operator

Greetings. Welcome to the Perimeter Solutions Third Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded.

Operator

I will now turn the conference over to Seth Barker, Head of Investor Relations, thank you. You may begin.

Speaker 1

Thank you, operator. Good morning, everyone, and thank you for joining Perimeter Solutions' 3rd quarter 2023 earnings call. Speaking on today's call are Haitham Khoury, Chief Executive Officer and Chuck Cropp, Chief Financial Officer. We want to remind anyone who may be listening to a replay of this call All statements made are as of today, November 9, 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.

Speaker 1

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 We will be referring to non GAAP financial measures, including EBITDA. The reconciliation of and other information regarding these items and 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 Haitham Khoury, Chief Executive Officer.

Speaker 2

Thank you, Seth. Good morning, everyone. Thank you for joining us. I'll start on Slide 3 with summary comments on our strategy. As we've stated repeatedly, Our goal is to deliver private equity like returns with the liquidity of a public market.

Speaker 2

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. 1, recurring and predictable revenue streams 2, long term secular growth tailwinds 3, products that account for critical, but small portions of larger value streams. 4, Significant free cash flow generation with higher returns on tangible capital and 5, the potential for opportunistic consolidation. We believe that these 5 economic criteria are present at our current businesses, and we use these criteria to evaluate potential new acquisitions.

Speaker 2

As described on Slide 4, we seek to drive long term equity value creation via consistent improvement in our 3 operational value drivers, which are profitable new business, continual productivity improvements and pricing to reflect the value our products and services provide. In addition to our 3 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 and starting with fire safety. We've repeatedly stated that while we expect predictable long term growth in our fire safety business, we also expect Quarterly and annual variability tied primarily to the severity of the North American fire season. The 2023 U.

Speaker 2

S. Fire season was mild with approximately 2,100,000 acres burned ex Alaska through Q3. This is 43% below the same period in 2022, 62% below 2021, 71% below 2020 and 54% below the 10 year average. Despite the greater than 40% year over year decline in year to date U. S.

Speaker 2

Acres burned ex Alaska, year to date Fire Safety segment sales and adjusted EBITDA declined 8% 15% respectively versus the same period last year. The drivers behind this year to date sales and adjusted EBITDA outperformance Relative to the decline in acres burned are: 1st, improved unit economics throughout our global retardant business 2nd, continued strong performance in our international retardant markets and third, continued excellent performance in our Suppressants business. All three of these positive drivers are the result of the rigorous application of our 3 piece operating strategy, which we will continue to drive going forward, irrespective of end market conditions across our businesses. Moving to Specialty Products. As we've discussed previously, This business has experienced a uniquely weak demand environment, which we continue to believe is a temporary phenomenon Tied to inventory destocking activity in the specialty chemicals supply chain.

Speaker 2

While it continues to be difficult to predict Precisely when the destock will end, we believe that it should end once channel inventories are depleted. Turning to cash and capital allocation. We repurchased approximately 1,700,000 shares in the 3rd quarter At an average purchase price of $5.76 We have approximately $62,000,000 remaining on our existing repurchase authorization. Before turning the call over to Chuck, I'll reiterate the comment I made previously around the competitive environment in our retardant business. While we don't control what will occur around the potential introduction of competing retardant products.

Speaker 2

We do control how we prepare for potential competition. We are preparing vigorously. Perimeter is the gold standard as far as the efficacy and safety of our products, the quality of our service and the passion, dedication and integrity of our team. We will continue to relentlessly push to raise the bar on ourselves and we expect to thrive in any future environment. With that, I'll turn the call over to you, Chuck.

Speaker 3

Thanks, Haitham. 3rd quarter sales in our fire safety business were 118,300,000 down 3% versus the prior year and $190,200,000 year to date, down 8% versus The prior year. 3rd quarter adjusted EBITDA in our fire safety business was $56,000,000 down 7% versus the prior year and $69,200,000 year to date, down 15% versus the prior 3rd quarter sales in our Specialty Products business were $24,400,000 down 37% versus The prior year $72,500,000 year to date, down 35% versus the prior year. 3rd quarter adjusted EBITDA in our Specialty Products business was $5,400,000 Down 64% versus the prior year and $16,400,000 year to date, down 61% versus the prior year. Moving to the consolidated business.

Speaker 3

3rd quarter consolidated sales were $142,700,000 down 11% versus the prior year and $262,700,000 year to date, down 18% versus the prior year. 3rd quarter consolidated adjusted EBITDA was $61,500,000 down 19% versus the prior year and $85,600,000 year to date, down 31% versus the prior year. Moving below adjusted EBITDA. Interest expense in the Q3 was $10,400,000 in line with our quarterly run rate. Depreciation was approximately 2,500,000 while amortization expense was $13,800,000 in Q3.

Speaker 3

Cash paid for income tax was approximately $2,200,000 in Q3. CapEx was approximately $2,200,000 in Q3. Our full year 2023 expectations for interest expense, depreciation and tax rate are unchanged. We expect CapEx We expect working capital to be a use of cash for the year. We ended the quarter with approximately $675,000,000 of senior notes, Cash of approximately $72,000,000 and approximately 152,800,000 ordinary shares outstanding.

Speaker 3

Slide 7 bridges between our basic and diluted share count, which includes shares issuable under the Founder Advisory Agreement in in future periods. With that, I will hand the call back over to the operator for Q and A.

Operator

Thank you. Our first question is from Brian D'Arubino with Baird. Please proceed.

Speaker 4

Good Morning, gentlemen. Just a couple of questions primarily on working capital. I guess, you said it will be now a use of cash This year, just as we think about sort of the next couple of quarters and the particularly in inventory, are you still going to be running your plants Still full out, just trying to see how you're going to be operating your business just given the weak backdrop we've had?

Speaker 2

Jay, hey, Ryan, I'll take it. The short answer is no. We put a lot of effort into optimizing Our plans to, on the one hand, always meet demand and never felt slow in the air tanker, on the other hand, to be as Cost conscious as possible and when you have the amount of finished goods inventory we do today, You can do things to optimize how you run your plants.

Speaker 4

And is it just remind me on the accounting, Are you below a point on your operating rates where we're going to see a problem with fixed cost absorption? Or are you still above about 70% rate, just trying to get a sense of how this is going to flow through the next couple of quarters.

Speaker 2

It shouldn't flow through A whole lot different than what you've seen. We frankly had 7 consecutive mild quarters, Mild fire season. So what you see is what you get as far as the impact of High inventory and not great absorption on the reported financials.

Speaker 4

Got it. And just final question on Fire Safety. Just Would you mind, I know you break it out annually, but what the performance of Suppressants was in the quarter? Maybe just a percentage gain of revenue?

Speaker 2

No, we're not in the habit of breaking that out. We did last quarter just to give investors a snapshot. I expect we will in the future again break it out On a one off basis to give investors a snapshot, I'm not going to do it today, Brian, but at a high qualitative level, the presence had Just a tremendous third quarter top line and margin. We expect to have a tremendous 4th quarter based on our Backlog in order, we really feel very good about that business.

Speaker 4

Great. Appreciate all the color. Thank you.

Speaker 2

You bet.

Operator

Our next question It's from Josh Spector with UBS. Please proceed.

Speaker 5

Mr. Ferrella on for Josh. I apologize, I was having some The fire season and how it sets up, do you see it more as a return to trend or a return to average next year? And as I think about the fire safety business, what are the levers that are within your control to drive growth next year If we get a less than ideal setup for fire season.

Speaker 2

Yes. So on the 2024 fire season, I'm truly being direct and truly not trying to be cheeky. We just don't know. We think we have a tremendous business. We think our business has Very high likelihood, predictable long term secular growth, but it's not a business in which we can predict what the next quarter or In this case, looking out 5 quarters, it's going to look like it's just it's sort of a fool's errand to try to project that.

Speaker 2

As far as the levers within our control, it's the same three things. It's always and consistently The same three things. We try to grind out as much productivity as we can. We try to always price our products and services to reflect the value they provide to customers, and we always push hard to invest thoughtfully behind New business, so you're balancing obtaining new business with realizing high IRRs on sales and marketing or R and D or whatever it is you need to invest to drive that business and we're going to continue to just grind through all three of those and no matter what the fire season is like next year, I'm Fully confident we will drive value out of each price, productivity and profitable new business.

Speaker 5

And as I think about switching over to the specialties business, the how much visibility do you have into your customers' order patterns there? And what do you guys estimate inventory is relative to historical norms? Or Any sense of how close we're getting to the end of the destocking?

Speaker 2

We candidly don't have a great sense. We were surprised by the duration and magnitude With the destock, we're very comfortable that it's a destock. We're very comfortable that it's transitory and it will end. But we've frankly been wrong on magnitude and duration so far, and therefore, I'm hesitant to make a future projection on when it will end. I'm very comfortable that it will.

Operator

All right. Thank

Speaker 4

you very much.

Operator

There are no further questions. I would like to turn the conference back over to the management team for closing remarks.

Speaker 2

All right. Well, thank you everybody and See everybody again next quarter.

Operator

Thank you. This will conclude today's conference. You may disconnect your lines at this time and have a wonderful day.

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Earnings Conference Call
Context Therapeutics Q3 2023
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