Perimeter Solutions, SA (NYSE:PRM) Q3 2022 Earnings Conference Call November 4, 2022 8:30 AM ET
Company Participants
Haitham Khouri – Vice Chairman
Edward Goldberg – Chief Executive Officer
Chuck Kropp – Chief Financial Officer
Noriko Yokozuka – General Counsel, Corporate Secretary and Compliance Officer
Seth Barker – Investor Relations
Conference Call Participants
Lucas Beaumont – UBS
Connor Lynagh – Morgan Stanley
Brian DiRubbio – Robert W. Baird
Operator
Ladies and gentlemen, greetings, and welcome to the Perimeter Solutions Q3 2022 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Seth Barker of Investor Relations. Please go ahead.
Seth Barker
Thank you, operator. Good morning, everyone, and thank you for joining Perimeter Solutions Third Quarter 2022 Earnings Call. Speaking on today’s call are Haitham Khouri, Vice Chairman; Edward Goldberg, Chief Executive Officer; and Chuck Kropp, 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, November 4, 2022, 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. Please refer to our earnings press release and presentation as well as our SEC filings, 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 Khouri, Vice Chairman.
Haitham Khouri
Thank you, Seth. Good morning, everyone, and thank you for joining us. As usual, I’ll start with some summary comments on our strategy. Then I’ll touch on our financial performance and capital allocation before turning the call over to Eddie and Chuck.
Starting with our strategy on Slide 3. As you’ve heard us say before, our goal is to deliver private equity like returns with a liquidity of a public market. 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, one, recurring and predictable revenue streams; two, long term secular growth tailwinds; three, products that account for critical but small portions of larger value streams; four, significant free cash flow generation with higher returns on tangible capital; and five, the potential for opportunistic consolidation.
We believe that these five economic criteria are present at Perimeter as described on Slide 4, and we also use these criteria to evaluate potential new acquisitions. As described on Slide 5, we seek to drive long-term equity value creation by a consistent improvement in our three operational value drivers, which are: profitable new business, continual cost improvement, and pricing to reflect the value we provide. 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.
Turning now to our financial results, starting with Fire Safety. We’ve consistently emphasized that within the predictable long term volume growth we expect in our Fire Safety business there exists an element of annual and quarterly variability, based primarily on the severity of the North America fire season. In a nutshell, while the long term Fire Safety volume growth is highly predictable and dependable, annual and quarterly growth is more variable. The 2022 North America fire season was mild, and the impact is reflected in our financial results. The mild ’22 fire season has no impact on our positive expectations for 2023 and beyond.
Turning to Specialty Products, the business continues to perform well, primarily due to solid implementation of our operational value drivers. We now expect ’22 Specialty Products adjusted EBITDA to exceed $50 million, which is more than double the business’s adjusted EBITDA in each of the prior three years.
I’ll now discuss our value driver implementation, more specifically. While we can’t control the fire season, we are laser focused on these three operational value drivers we can control. We refer to these as a three piece, profitable new business, pricing our products and services to the value they provide, and productivity improvements. It’s important to emphasize that this value driver focus is not a one-time response to a mild fire season. Rather, it’s a mentality that guides our approach to new business, cost, and pricing to value and which should drive financial performance at both our businesses on an annual basis going forward.
To this end, Perimeter has completed a reorganization into seven business units, two within our Specialty Products business, and five within our Fire Safety business. This structure is meant to ensure that we drive decentralized execution and accountability and maintain the geography and product specific focus and granularity necessary to drive continual operational value driver improvement across our entire business.
Turning now to cash and capital allocation. We ended the third quarter with approximately $166 million of cash on our balance sheet, up from $126 million at the end of the second quarter. We expect to continue generating free cash flow in the fourth quarter prior to any repurchases or acquisitions, primarily as a portion of our approximately $86 million receivable balance convert to cash.
We continue to operate in a unique capital markets environment with highly restricted access to capital almost across the board and therefore our available cash carries a significant premium. With this premium in mind, we repurchased approximately 300,000 shares in the third quarter for approximately $2.6 million dollars, and we purchased another 4.9 million shares in October for approximately $37 million.
While we value the M&A related flexibilities that our cash balance affords us, we will continue to allocate our capital to our share repurchases when presented with very compelling opportunities, as we have at various points this year. To that end, and given that we utilized approximately half of our initial $100 million repurchase authorization, our Board has authorized a new $100 million share repurchase authorization.
I’ll close with a comment on our full year financial expectations. We faced two significant headwinds in 2022. The first and the more material is the mild fire season, with the relevant US acres burned, down significantly year-over-year. The second is new public company costs, which we estimate at slightly more than $10 million for the full year and as Chuck will elaborate on shortly.
Given these two headwinds, we now expect full-year 2022 consolidated adjusted EBITDA to be down single digits in percent terms versus 2021. If we exclude estimated public company costs to get a true measure of like-for-like performance, we expect to deliver very roughly flat consolidated 2022 adjusted EBITDA versus last year, despite the material decline in acres burned.
As I referenced earlier, we will continue to press on our operational value drivers. And we hope and expect to improve our financial performance when a similarly mild fire season next occurs. In closing, and with the year largely behind us, I reiterate our prior view that had the ’22 fire season come in roughly on trend line, we had expected to deliver mid-teens or greater percent growth in 2022 consolidated adjusted EBITDA versus the approximately $141 million we reported in 2021.
With that, I’ll turn the call over to Eddie.
Edward Goldberg
Thanks, Haitham. I’ll start with our Fire Safety business and provide some high level context starting on Slide 6. The volume growth equation in our retardant business is a function of growth of acres burned plus growth in retardant per acre. As illustrated on this slide, measured over the past seven years, 2015 through 2021, our US retardant unit volumes have increased at a 10% CAGR. We use 2015 and 2021 as the start and end years for the analysis, as both years represent fairly normalized fire seasons, where acres burned excluding Alaska are within a few percentage points of their respective trailing seven year moving averages.
As illustrated on Slide 7, over the 2015 to 2021 period, the first part of our retardant volume growth equation, US acres burned ex-Alaska increased at a 6% CAGR. This is in line with the long-term growth in US acres burned ex-Alaska. Using the longest time series available and utilizing a five year rolling average to capture the multi-year trend, US acres burned ex-Alaska have increased at a 5% CAGR over approximately three decades from a five year rolling average of 1.9 million acres burned in 1994 to a five year rolling average of 7.3 million acres burned in 2021. We expect that the long term trend in growth and acreage burned ex-Alaska will remain very dependable over the long term.
As illustrated on Slide 8, over the 2015 to 2021 period, the second part of our retardant volume growth equation, retardant per acre burned, increased at 4% CAGR. As summarized on Slide 9, growth in retardant per acre is primarily a function of growth in the wildland urban interface, which increases the need to fight wildfires; and growth in the air tanker fleet, which increases the ability to fight wildfires, and continued aggressive aerial attack by the fire management agencies. We expect these secular growth trends to persist into the future.
As summarized on Slide 10. Looking forward, we expect our retardant volumes to grow mid-to-high single digits annually, or were not up a normalized base, driven by continued dependable long-term growth in both acreage burned and retardant per acre.
Moving to Slide 11, as we compress the time horizon, it’s clear that within this predictable long-term secular volume growth, there exists an element of short-term variability based on the severity of any individual North America fire season. The year-to-date 2022 US fire season illustrates this short term variability. The chart on the left hand side of the slide shows Q3 US acreage burned ex-Alaska, which are down 64% versus Q3 of 2021.
The chart on the right hand side of the slide illustrates year-to-date US acreage burned ex-Alaska through the end of September, which are down 33% versus the same period last year. It’s difficult to overcome this magnitude of short-term variation in the US fire season. As such, third quarter and year-to-date, Fire Safety revenue decreased 29% and 13% respectively, while third quarter and year-to-date Fire Safety adjusted EBITDA decreased 38% and 30% respectively.
I’ll reemphasize that we don’t believe there’s anything about the 2022 fire season that informs future fire seasons, either positively or negatively. The 2022 and 2023 fire seasons are independent variables. And we’re planning for a 2023 fire season consistent with the long-term trend line, while also preparing to respond to a milder or more severe season. For reference, 2019 was the softest US fire season of the past roughly 15 years, with 2.1 million acres burned ex-Alaska. It was followed by the 2020 fire season, which was the most severe in recorded US history at 10.1 million acres burned ex-Alaska.
Moving on to Fire Safety margins, which declined year-over-year in Q3 2022, due primarily to the impact of inflation pass-throughs on our reported margins. As we’ve discussed on each of our calls this year, we experienced significant raw material inflation in 2022. We successfully passed on this inflation via contractual mechanisms in place across the vast majority of our Fire Safety business. While this is a powerful feature of our business that protects our EBITDA dollars during inflationary periods, it also dampens our reported margins as the inflation pass-throughs grow revenue while keeping EBITDA flat, which leads to reported margin compression.
Let me now touch on profitable new business opportunities we’re actively pursuing in Fire Safety. We made solid progress this year on international growth within our retardant business, including important wins in Italy and Greece, which we referred to on our prior call. We’re also pleased with developments in Prevention and Protection, where we continue to expand business with current customers as well as broaden our portfolio of new customers.
For a second year, we partnered with Orange County Fire Authority to support and expanded Quick Reaction Force program. While it’s still too early to publicly quantify what this business can mean for our financial results, we believe it has the potential to be a significant financial contributor over time. Finally, we continue to develop and commercialize new fluorine-free firefighting foams in our suppressants business, and expect to continue to grow our fluorine-free portfolio.
Moving to Specialty Products, this business is performing well. Third quarter and year-to-date revenue increased 68% and 42% respectively while adjusted EBITDA increased 512% in the quarter and 135% year-to-date. As illustrated on Slide 12, we expect 2022 Specialty Products adjusted EBITDA to exceed $50 million, more than double the business’s adjusted EBITDA in each of the three prior years. This performance is a result of our operational value driver implementation, which as Haitham noted, is now part of our culture and should drive incremental value on an annual basis going forward across all of our businesses and business units.
And with that, I’ll turn the call over to Chuck.
Chuck Kropp
Thanks, Eddie. Turning to Slides 13 and, third quarter sales in our Fire Safety business were $122 million, down 29% versus the prior year and $207 million year-to-date, down 13% versus the prior year. Third quarter adjusted EBITDA in our Fire Safety business was $60.4 million, down 38% versus the prior year and $81.2 million year-to-date, down 30% versus the prior year.
As Haitham mentioned, we expect to absorb slightly more than $10 million in incremental public company cost in 2022. This is primarily comprised of internal and external expenses related to the insurance, accounting, audit, and legal requirements around public company reporting and compliance. Going forward, our goal is to reduce overall public company expenses by realizing annual productivity gains in excess of inflation.
Switching to Specialty Products, third quarter sales in our Specialty Products business were $38.5 million, up 68% versus the prior year and $112.2 million year-to-date, up 42% versus the prior year. Third quarter adjusted EBITDA in our Specialty Products business was $15.3 million, up 512% versus the prior year and $42 million year-to-date, up 135% versus the prior year.
Moving on to the Consolidated business, third quarter Consolidated sales were $160.5 million, down 18% versus the prior year and $319.2 million year-to-date, up 1% versus the prior year. Third quarter consolidated adjusted EBITDA was $75.6 million, down 25% versus the prior year and $123.3 million year-to-date, down 8% versus the prior year.
Now moving below adjusted EBITDA, interest expense in the quarter was approximately $10 million, which is our regular quarterly run rate. Depreciation was approximately $2.7 million while amortization expense was $13.7 million. Taxes were $34.5 million in the quarter. CapEx during the quarter was approximately $2 million.
Our long term expectations around interest expense, depreciation, taxes, CapEx and working capital are summarized on Slide 15. In 2022, we expect two differences versus these longer term expectations, one, related to cash taxes and two, related to working capital. We expect cash taxes to come in lower than expected. 2022 cash taxes should be approximately $15 million.
On the other hand, we expect working capital to be a more significant use of cash this year, relative to the increase in sales than we typically expect, due in large part to higher inventory resulting from the weaker fire season coupled with longer purchasing lead times. We ended the quarter with approximately $675 million of Senior Notes, cash of approximately $166 million and approximately 162 million basic shares outstanding.
Slide 16 walks investors through the differences between our basic and diluted share counts. I won’t walk through the table in detail, though I will remind investors that our diluted share count of approximately 177 million shares includes 100% of the 14.1 million fixed shares we expect to issue under the Founder Advisory Agreement through Q1 2028. In practice, we expect to issue these shares ratably over the next six years.
With that, I’ll hand the call back over to the operator for Q&A.
Question-and-Answer Session
Operator
Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from the line of Joshua Spector from UBS. Please go ahead.
Lucas Beaumont
Good morning. This is Lucas Beaumont on for Josh. So I’d just like to start by discussing the performance of Fire Safety relative to the fire season if we could. So you guys had the acres burned numbers in there. I had something similar sort of down 50% for the year, year-to-date and 70% in the third quarter, I think in the regions that you guys are focused on. I think your sales and EBITDA were only down kind of 30% and 25%. So what was the driver of the outperformance there versus the market? Was it volume driven or price driven? Is there like an international markets impact on new products? And how should we think about that in terms of getting back to kind of the base earnings in 2023 with a normal fire season?
Edward Goldberg
Yeah, good morning. Thanks for the question. So I think it’s pretty typical in our business for volumes to outperform acres burned, particularly on the downside. It’s a combination of increased capacity to fight fires and aggressive initial attack strategy by the agency. So I think you’ll see that typically in our business where we are able to outperform acres in terms of retardant sold.
Lucas Beaumont
Okay, great. Thanks. And then, so in terms of the new buyback, you’ve announced, which is another 100 million is pretty substantial. It’s like 9% of your market cap. Can you just kind of talk about that for us in the context of how you view your current leverage and how we should sort of think about you deploying that over the next year?
Edward Goldberg
So we authorized that, we want to make sure that we’ve got the flexibility and the firepower to take advantage of opportunities when we think the buying back stock is the right way to use our capital. So it’s an authorization to allow us that flexibility.
Lucas Beaumont
So, no worries. And then maybe shifting to Specialty Products, so your earnings there improved quarter-on-quarter, I mean, in other similar businesses at the moment, we’re sort of seeing expectations kind of start to weaken into the second half, particularly those with any exposure to Europe. So I was just sort of wondering what — if you could talk about what’s driving the strength for you here and how you see the second half trending?
Edward Goldberg
Yeah, we’ve been working hard in our Specialty Products, across all of our value drivers, pricing to value, taking cost out of the system, and driving new business. And we feel really good about the progress that we’re making in Specialty Products and we feel very good about the business in the second half and going forward.
Lucas Beaumont
And is that — so and you guys, you flagged the $50 million sort of in EBITDA this year. I mean, I assume there’s some overrunning going on there, from a pricing — from the current pricing environment. Correct me if I’m wrong, but so I mean it’s if I sort of like, if I annualize the current quarter, I get sort of $60 million in EBITDA or like on an LTM basis, you sort of go $45 million to $50 million. So I mean, how should we think about the base earnings there, one to two years out, is it — is this a new normal or I mean, does it go back to $30 million to $40 million? Or how should we kind of think about them?
Edward Goldberg
Yeah, let me say a couple of things. So we had said previously that first quarter results were very good, because our customers were having very good results on their own, no production interruptions, etc. And the second quarter results were probably a little bit more typical of a mix of different customer behaviors. The third quarter did look a lot like the first quarter, but we still think on an ongoing basis, somewhere in the Q2 performance is probably the right way to look at this business. And we are optimistic that we’re going to continue to make progress across all of our value drivers and continue to improve this business going forward.
Lucas Beaumont
Right, thanks very much.
Operator
Thank you. Our next question comes from the line of Connor Lynagh from Morgan Stanley. Please go ahead.
Connor Lynagh
Yeah, thanks. So obviously, as you’ve highlighted, this was at least year-over-year, a very weak fire season. I’m wondering if you can help us think through, if we were to see normalized fire activity next year, how should we think through the various drivers of what you guys have done on pricing? What you guys have done on cost? Also the inflation pass-throughs that you’ve been dealing with, can you give us sort of a framework as to, should we think about EBITDA dollar growth or what’s sort of the logical way to think through what the impact on EBITDA would be for your business?
Edward Goldberg
Sure. So we believe that that what we’ve been saying all along will continue to hold true. When we return to normal fire season, we believe we’ll continue to see mid-teens EBITDA growth. Going forward, really nothing has changed there. We continue to work, again, hard across the value drivers of making sure we price to value, taking very aggressive actions to take cost out of the system, and looking for new business. We continue to be protected in our ability to pass through unusual cost increases. So we feel good about that. And I think our performance will return to what’s expected when and as we get to a more normal fire seasons.
Chuck Kropp
And Connor, I’ll just add real quick, it’s mid-teens EBITDA growth off of a normalized fire season. You just got to be careful on peak-ish or trough-ish years, which is what we know, is in the earnings call, if 2022 had been a roughly normalized fire season, we think roughly mid-teens growth off of the $141 million of adjusted EBITDA, we delivered last year would be reasonable. So that’s a pretty good, albeit rough approximation of on-trend 22 EBITDA, and then mid-teens growth off that, makes good sense as a very preliminary starting point going forward.
Connor Lynagh
And so just clarify that point. Thank you for the color — just but just to clarify that. So if I were to call, just for example 2021, call it normal year, you think you’ve done underlying improvements to the business in 2022 that would have driven mid-teens EBITDA. And then if 2023 is a normalized year, you would not only have the volume benefit, but you would also have an incremental, mid-teens EBITDA growth, or is it just the one year worth of improvements? How do I think about that?
Chuck Kropp
We think you can take 2021, which was $141 million spot for, had this year been normal or at least a normalized fire season, it will be roughly mid-teen, the EBITDA growth that’ll get you to 141.4 times 1.15, right, to be very specific. And then wherever that number is, assume mid-teens growth in ’23 over ’22 assuming ’23 is a normalized fire season.
Connor Lynagh
Got it. Thanks. And then obviously one of the big conversations on your stock is competition. So I’m wondering if you could just provide an update on what the state of competitors attempting to enter the market and qualify for use is right now?
Edward Goldberg
Yeah, so first of all, I can say that you can look at on the Fire Service website and see nothing’s really changed in the last quarter. I will repeat what I’ve said before, barely a day has gone by in the last 20 years that I’ve been running this business that I haven’t — there hasn’t been somebody trying to get into it. Some companies are noisier than others. I think there’s quite a bit of noise in the system right now. But we feel very good about our market position going forward.
Connor Lynagh
Alright, I’ll turn it back. Thank you.
Operator
Thank you. [Operator Instructions] Our next question comes from the line of Brian De Rubio from Baird. Please go ahead.
Brian DiRubbio
Good morning, just a few questions for me. I’d like to just drill down on Specialty Products for a second. May have missed this but can you just give us maybe just generically, what were the drivers? It was — are you seeing better volumes of that business or is it price? Just love to know what the various drivers have been there?
Edward Goldberg
Yeah, so as I mentioned previously, we are working hard to improve the business across all of our value drivers that includes driving price to value, it includes taking costs out of the system and looking for profitable new business. We’ve made good progress over the last year, in all — across all three value drivers. You can see that in the results. And we think that we’ll continue to make improvements going forward across all aspects of that business.
Brian DiRubbio
Maybe that’s another way, you know in that business, what’s sort of the capacity? What’s the operating rate today? And you do have the ability to drive more volumes or is this going to be more of a price driven story going forward?
Edward Goldberg
We believe we have the ability to take on profitable new business that we’re working on, we feel good about that.
Brian DiRubbio
Okay. Wanted to touch on a non-cash item but you know, as it relates to your M&A activity, both this quarter and last quarter, you guys took actually non-cash gains on the contingent earn-outs. Last quarter was $9.4 million, this quarter was, I think like $3.6 million. Obviously, when that happens, that means one of your M&A targets has not performed as well as you thought. So we’d love to get maybe a little bit more details on what exactly happened there, and how are you thinking about M&A sort of today?
Chuck Kropp
Yeah, good morning. This is Chuck. Yeah, thanks for the question. Yeah, in terms of the historical M&A, really, that’s just as simple as shift of product from earn-out eligible product to not earn-out eligible, so the decrease in the liability there.
Edward Goldberg
And, Brian, going forward, our view on M&A is completely unchanged. We’re very focused on it. We’d love to get very high quality transactions done. When we do it, we create significant shareholder value as we find the long-term free cash flow per share. On the one hand, it’s a very good M&A environment with less competition, restricted access to capital and we’re in a great cash situation both on the balance sheet and forward expectations of cash generation. On the other hand, it’s just more challenging to get things done and price things loose in this environment, and we’re working, we’re working super hard at it and stay tuned.
Brian DiRubbio
Got it. Just one final question for me and I have been [indiscernible] know the answer. But the ticker symbol of your bonds changed in the last couple of months. Is there any reason for that?
Edward Goldberg
That’s above our take rate.
Brian DiRubbio
Okay, just confused everybody. They were looking for [Peri MS], they got locked to HLD. Everybody’s calling me up, was like, what’s this new bond I own? So, but okay.
Edward Goldberg
Okay. If you’re asking me on the earnings call, it sounds like it’s important to our bond holders, and therefore it’s very important to us. Let us figure that out. And you’ll get an e-mail from us, Brian with a clarification. Thanks for pointing it out.
Brian DiRubbio
Yeah, appreciate it. Thank you much.
Operator
Thank you. Our next question comes from the line of Joshua Spector from UBS. Please go ahead.
Lucas Beaumont
Hey, guys, its Lucas, again. Just wanted to ask a follow-up, so just wondering if you could talk about what visibility you have at the moment into increases in the aerial fleets for fire retardants over the next couple of years? So I know maybe this year isn’t the right year given that the acres burned are down so much but in a more normal year, would you say as well, I guess, are you seeing unmet demand from a materials perspective due to the lack of plans? So as we get more rollout, that’s going to sort of be a positive benefit as well. And I guess is that sort of — would you say that’s probably been captured in the 4% sort of retardant growth per acre CAGR or how do you guys kind of think about the dynamics on that side? Thanks.
Edward Goldberg
Sure. So, you know, we do look at air tanker capacity as one of the key drivers in the in the volume growth of our business. And we do continue to see an increase in air tanker capacity year-over-year. You know, in terms of visibility into what that is specifically, you should probably look to what the air tanker companies are saying, because they’re all pretty public in kind of their expansion plans both the private air tanker companies, and you can see the CAL FIRE is currently working on adding seven C-130s to their fleet over the next couple of years. So we see that as very positive. It does contribute to retardant per acre increases, and it also just increases the peak of what we can sell during the peak of the fire season. So we see that as a key driver of the business and one of the secular growth trends.
Lucas Beaumont
Right, thanks very much.
Operator
Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And now I would like to turn the conference over to Mr. Edward Goldberg, CEO, closing comments.
Edward Goldberg
Thank you all for joining our third quarter earnings call. We’re looking forward to talking to you again in a few months to report fourth quarter and full-year 2022 earnings.
Operator
Thank you. The conference of Perimeter Solutions has now concluded. Thank you for your participation. Have a lovely day.
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