Perimeter Solutions Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 10, 2023

There are 6 speakers on the call.

Operator

Greetings. 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. Please note this conference is being recorded.

Operator

I will now turn the conference over to your host, Seth Barker. You may begin.

Speaker 1

Thank you, operator. Good morning, everyone, and thank you for joining Perimeter Solutions' Q1 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 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.

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 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 Haitham Khoury, Chief Executive Officer.

Speaker 2

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 3. Our goal is to deliver private equity like returns with the liquidity of a public market. We plan to attain this goal by owning, Operating and growing uniquely high quality businesses.

Speaker 2

We define uniquely high quality businesses with the following 5 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 finally, 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 By a consistent improvement in our 3 operational value drivers, which are profitable new business, Continual productivity improvement and pricing to reflect the value we 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 for the Q1 and starting with fire safety. Recall that the Q1 is typically our smallest in Fire Safety and one in which the business typically reports an adjusted EBITDA loss.

Speaker 2

Q1 2023 Fire Safety revenue, Adjusted EBITDA and adjusted EBITDA margin were all roughly flat versus the Q1 of 2022. Despite the very similar year over year headline fire safety results, underlying performance In Q1 2023, differ meaningfully versus Q1 2022. Last year's North America fire season got off to an especially early and active start between roughly March May before transitioning to a mild season in late May and thereafter. This early start was reflected in our Q1 2022 Biosafety 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 to our Q1 'twenty three results.

Speaker 2

Rather, Q1 2023 fire safety performance was driven by solid results in our global suppressants business as well as in our international Tartan markets, including Chile, Australia and Europe. A strong start to the year by our Suppressants business As well as in our international retardant markets is a continuation of the positive trend exhibited by these businesses and markets over the past 15 or so months and reflect strong progress by our business unit leaders around our 3 Ps, value based operating model. Turning now to Specialty Products. As expected, the pronounced inventory destock Activity we experienced in the latter part of the 4th quarter carried over into the Q1, which is clear in our lower Q1, 2023 revenue versus Q1 of 2022. Also as expected, customer orders and sales activity began to recover in the Q1, which is clear in our higher Q1 2023 revenue versus Q4 2022.

Speaker 2

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 various specialty chemical end markets rather than a specific work down of our products. That said, inventory destocks are definitionally temporary in nature and end when inventories are depleted, which will inevitably occur. Turning now to cash and capital allocation. We repurchased approximately 160,000 shares in the Q1 at an average purchase price of $7.46 We continued our repurchase activity into the Q2 and on a year to date basis repurchased approximately 1,500,000 shares At an average repurchase price of $7.36 We have approximately $90,000,000 remaining on our Existing repurchase authorization and we ended the Q1 with approximately $92,000,000 of cash on our balance sheet.

Speaker 2

We will not hesitate to continue repurchasing our shares at compelling returns. We also remain active on the M and A front. While current market conditions are less conducive to larger acquisitions, we continue to build the M and A pipeline and feel good about our long term M and A prospects. Between our available cash balance 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, significant share repurchases or otherwise. I'll close with a comment on our full year 2023 expectations.

Speaker 2

On our prior call, We stated that assuming an on trend 2023 fire season, consolidated adjusted EBITDA of approximately $180,000,000 We also stated that to the extent the 'twenty three fire season is severe Or is again unusually mild, we'd 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 our businesses relative to the financial framework. First, Specialty Products. Our consolidated full year financial expectations are not impacted by the below normalized Q1 results in specialty products, nor will they be impacted by some continued destock activity in the Q2 since we were aware of this market backdrop We provided our 20 3 financials. Next, fire safety.

Speaker 2

Winter and early spring were particularly wet in The most 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 weather. Beyond a likely delayed start, the wet early conditions will impact the severity of the overall On a very high level probabilistic basis, a likely later start to the season, coupled with greater overall moisture This suggests a potentially milder season. However, the signal is weak as both the historical data as well as our experience suggests that the fire season can still end up anywhere between mild and severe this year. For context, at this time last year, the most fire prone regions of the United States had experienced an extremely dry several months And California has just experienced its driest January through March period on record.

Speaker 2

As such, Most predictive services forecast an especially severe 2022 fire season, and we experienced an especially early and active Start to the season seemingly validating these forecasts. Despite these leading indicators, the 2022 fire season was ultimately quite mild. Also for context, early 2017 was also unusually wet, yet 2017 turned out to be a severe fire season as conditions dried out, leaving the West with significantly higher fuel loads. As such, apart from a probable later start, the 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.

Speaker 2

Finally, I will reemphasize that irrespective of the severity of the fire season, we will press on our operational value drivers at both our businesses Such that should the 2023 fire season turn out to be similarly mild to last season, we'd still expect to deliver Notably improved year over year fire safety financial results in 2023 versus 2022. And with that, I'll turn the call over to Chuck.

Speaker 3

Thanks, Atham. Turning to Slide 6. 1st quarter sales in our fire safety business increased 1% to $18,700,000 While first quarter adjusted EBITDA was negative $3,400,000 versus negative $3,300,000 in the Q1 of 2022. As Haitham mentioned earlier, the Q1 is typically our smallest quarter in fire safety, where we typically expect The businesses could generate an adjusted EBITDA loss. 1st quarter sales in our Specialty Products business decreased 36% to $25,100,000 while 1st quarter adjusted EBITDA decreased 58% to $6,500,000 We're pleased with the business' Q1 performance around price and market share and attribute the lower year on year results to lower volumes due to the aforementioned destock activity.

Speaker 3

1st quarter consolidated sales decreased 24% to $43,800,000 Our first quarter consolidated adjusted EBITDA decreased 74% to 3 point Moving below adjusted EBITDA. Interest expense in the Q1 was $10,100,000 in line with our regular quarterly run rate. Depreciation was approximately $2,300,000 while amortization expense was $13,800,000 Cash paid for income tax was $10,200,000 in Q1. CapEx was approximately $2,500,000 in Q1. Our full year 2023 expectations for Interest expense, depreciation, taxes, working capital and CapEx are unchanged.

Speaker 3

We ended the quarter with approximately $675,000,000 of senior notes, cash of approximately $92,000,000 Approximately 158,000,000 basic shares outstanding. Slide 8 bridges between our basic and diluted share count. I won't walk through the table in detail, though I will remind investors that our diluted share count of 169,500,000 shares Includes 100 percent of the 11,800,000 fixed shares we expect to issue under the Founder Advisory Agreement through Q1, twenty twenty eight. In practice, we expect to issue these shares ratably over the next 5 years. With that, I'll hand the call back over to the operator for Q and A.

Operator

Thank you. At this time, we will be conducting a question and answer A confirmation Our first question comes from the line of Josh Spector with UBS. Please proceed with your question.

Speaker 4

Yes. Hi. Thanks for taking my question. I wanted to follow-up on something you said, Hey, some about growth in fire safety even with a mild season. So just curious if you could walk through some of the drivers there, maybe some color on kind of what you have in the pipeline.

Speaker 4

And I mean, obviously, some of that shown In the Q1 with maybe what you did in international. So any help there thinking about what you could do if the fire season were similar The last year, it would be helpful thinking about a downside scenario. Thanks.

Speaker 5

Yes. Hey, Josh. Thanks for the good question. So I'm going to give you a very summary answer and then I'll put a little more meat on the bone for you. But the summary answer is Year in year out, truly irrespective of what's happening in the macro environment and otherwise, Our business unit leaders and their teams are just grinding on all aspects of productivity, all aspects of Profitable new business and all aspects of pricing to value.

Speaker 5

Rarely is any one of these a tremendous Individual game changing lever, but if you're excessively focused on all The little mini things you can do in each of these three buckets in each of your VUs 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'll add is we go through essentially 2 processes when we build our annual budget. 1 is we Have to take a base case view on the fire season and build a budget based on that. The other thing we do is we build a no volume budget. So we literally assume that every single unit sale Across our entire business is identical year over year.

Speaker 5

So every single 2023, for example, the assumption would be every single SKU sold across all products, all geographies, all be used is identical to 2022 and the only difference in the forecast is therefore what you're highly confident you're 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 of pricing to value And productivity, like I said, if you just grind on the details of both of those at the most local level, which is enabled By our BU reorganization, a lot of little things can add up to make material difference and that's exactly where the comment that our Performance will be notably improved in fire safety in a similarly mild season comes from.

Speaker 4

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 got some help there in the first Part of the Q1 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? And does that give you any confidence as you look over this next year relative to U.

Speaker 4

S. Numbers?

Speaker 5

So, 2 different answers. Has international business grown over the past several years? Yes, absolutely. It's grown both Volume in existing markets, it's grown as far as our ability to open and enter quite meaningful in some cases, New markets and then our profitability per market has grown quite nicely as we implemented price and productivity in an Equally focused manner in these international markets. So we're very pleased with the results there.

Speaker 5

The second part of the question, international is not yet at a place where a strong season You're going to compensate for a potential mild North America season. As the North America Season goes from a mild to severe perspective as directionally will our financial results go, it's just Sufficiently large, that's the arithmetic, but we're very happy with the year over year, quarter over quarter, excuse me, progress in our international business overall.

Speaker 4

Okay, thanks. And 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. Fire retardant market and maybe too early to comment, but obviously, Compass has kind of bought out their Remaining minority stake forsaken the business that they have, does that change anything in your view?

Speaker 5

Yes. So just I guess 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 are currently well On our way, well, through the process of opening all of our bases and preparing for a successful season At each of them, from a base perspective, we think 23 will look very, very similar to each of the last several years. So 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 serve this market. And therefore, our biggest competitor is always ourselves and we are looking to raise the bar Each and every season on product quality and on service quality and offer more value and superior service to our customer.

Speaker 5

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, I'm very comfortable that we're going to deliver tremendous and improved value to our customers this year.

Speaker 4

Okay. Thank you.

Operator

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

Speaker 5

All right. Well, thank you everybody and talk to everybody again in 3 months.

Operator

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

Powered by Quartr
Earnings Conference Call
Perimeter Solutions Q1 2023
00:00 / 00:00