Perimeter Solutions, SA (PRM) Q1 2023 Earnings Call Transcript

Perimeter Solutions, SA (NYSE:PRM) Q1 2023 Earnings Conference Call May 10, 2023 8:30 AM ET

Company Participants

Seth Barker - Investor Relations

Haitham Khouri - Chief Executive Officer

Charles Kropp - Chief Financial Officer

Conference Call Participants

Josh Spector - UBS

Operator

Greetings. Welcome to the Perimeter Solutions Q1 2023 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Seth Barker. You may begin.

Seth Barker

Thank you, operator. Good morning, everyone and thank you for joining Perimeter Solutions first quarter 2023 earnings call. Speaking on today’s call are Haitham Khouri, Chief Executive Officer; and Charles 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, 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. 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 Khouri, Chief Executive Officer.

Haitham Khouri

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 Charles, 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. We define uniquely high-quality businesses with 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, high 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 this criteria to evaluate potential new acquisitions.

As described on Slide 4, 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 productivity improvement and pricing to reflect the value we provide. In addition, two or three operational value drivers, we seek to maximize equity value creation to 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 first quarter and starting with Fire Safety. Recall that the first quarter is typically our smallest in fire safety and one in which the business typically reports an adjusted EBITDA loss. First quarter 2023 fire safety revenue, adjusted EBITDA and adjusted EBITDA margin were all roughly flat versus the first quarter 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 and May before transitioning to a mild season in late May and thereafter. This early start was reflected in our Q1 2022 by safety 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 for Q1 ‘23 results. Rather, Q1 2023 fire safety performance was driven by solid results in our global suppressants business as well as in our international retardant 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 3Ps value-based operating model.

Turning now to Specialty Products. As expected, the pronounced inventory destock activity we experienced in the latter part of the fourth quarter carried over into the first quarter, 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 first quarter, which is clear in our higher Q1 2023 revenue versus Q4 2022. Pricing and market share in our Specialty Products business remained 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 definitely temporary in nature and end when inventories are depleted, which will occur.

Turning now to cash and capital allocation. We repurchased approximately 116,000 shares in the first quarter at an average purchase price of $7.46. We continued our repurchase activity into the second quarter. And on a year-to-date basis, repurchased approximately 1.5 million shares at an average repurchase price of $7.36. We have approximately $90 million remaining on our existing repurchase authorization, and we ended the first quarter with approximately $92 million of cash on our balance sheet. We will not hesitate to continue repurchasing our shares at compelling returns. We also remain active on the M&A front.

While current market conditions are less conducive to larger acquisitions, we continue to build the M&A pipeline and feel good about our long-term M&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.

On our prior call, we stated that assuming an on-trend 2023 fire season, consolidated adjusted EBITDA of approximately $180 million is a reasonable expectation for this year. We also stated that to the extent the ‘23 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 and normalized first quarter results in Specialty Products nor will they be impacted by some continued destock activity in the second quarter since we are aware of this market backdrop when we provided our ‘23 financial stator.

Next, Fire Safety. Winter and early spring were particularly wet in sometime prone regions of North America, which we believe suggests a delayed start to the 2023 North America fire season. What isn’t clear is whether beyond a likely delayed start, the wet early conditions will impact the severity of the overall North America fire season. On a very high level, probabilistic basis, a likely later start to the season, coupled with greater overall moisture 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. As such, most predictive services forecast an especially severe ‘22 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 or a severe fire season as conditions dried out, leaving the West with significantly higher fuel loads. As such, apart from a probable labor start, the 2023 fire season is difficult to predict. Our team at Perimeter is, as always, will be prepared to meet our customers’ needs with 100% reliability in every potential fire season outcome.

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 turned out to be similarly mild to last season, we still expect to deliver notably improved year-over-year fire safety financial results in 2023 versus 2022.

And with that, I will turn the call over to Charles.

Charles Kropp

Thanks Haitham. Turning to Slide 6, first quarter sales in our fire safety business increased 1% to $18.7 million, while first quarter adjusted EBITDA was negative $3.4 million versus negative $3.3 million in the first quarter of 2022. As Haitham mentioned earlier, the first quarter is typically our smallest quarter in fire safety, where we typically expect the businesses to generate an adjusted EBITDA loss. First quarter sales in our specialty products business decreased 36% to $25.1 million, while first quarter adjusted EBITDA decreased 58% to $6.5 million. We are pleased with the businesses Q1 performance around price and market share and attribute the lower year-on-year results to lower volumes due to the aforementioned destock activity. First quarter consolidated sales decreased 24% to $43.8 million, while first quarter consolidated adjusted EBITDA decreased 74% to $3.1 million.

Moving below adjusted EBITDA, interest expense in the first quarter was $10.1 million, in line with our regular quarterly run rate. Depreciation was approximately $2.3 million, while amortization expense was $13.8 million. Cash paid for income tax was $10.2 million in Q1. CapEx was approximately $2.5 million in Q1. 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 $92 million and approximately 158 million basic shares outstanding. Slide 8 bridges between our basic and diluted share count. I won’t walk through the table in detail, so I will remind investors that our diluted share count of 169.5 million shares includes 100% of the 11.8 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 5 years.

With that, I will hand the call back over to the operator for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Josh Spector with UBS. Please proceed with your question.

Josh Spector

Yes. Hi. Thanks for taking my question. I want to follow-up on something you said, Haitham, about growth in fire safety with a mild season. So, just curious if you can walk through some of the drivers there, maybe some color on kind of what you have in the pipeline. And I mean obviously, some of that’s shown through in the first quarter with maybe what you did in international. So, any help there thinking about what you could do with the fire season were similar to last year, it would be helpful thinking about a downside scenario. Thanks.

Haitham Khouri

Yes. Hey Josh. Thanks for the good question. So, I am going to give you a very summary answer and then I will put a little more meat on the bone for you. But the summary answer is year-in and 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, rarely, any one of these a tremendous individual game-changing lever. But if you are excessively focused on all the little many things you can do in each of these three buckets in each if you are being used and truly drive that accountability across the enterprise, the aggregate impact ends up being quite material such that we are comfortable articulating it on an earnings call. The last thing I will add is, we go through essentially two processes when we build our annual budget. What 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 volume budget. So, we literally assume that every single unit sale across our entire business is identical year-over-year. 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 are highly confident you are 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. And like I said, if you just grind on the details on both of those at the most local level, which is enabled by our new reorganization, a lot of little things to add up to a 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.

Josh Spector

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 quarter 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.S. numbers?

Charles Kropp

So, two different answers, has your national business grown over the past several years, yes, absolutely. It’s growing both volume in existing markets. It’s grown as far as our ability to open and enter quite meaningfully 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 are very pleased with the results there. The second part of the question, international is not yet at a place where a strong season 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 is just sufficiently large actual arithmetic. But we are very happy with the year-over-year or quarter-over-quarter, excuse me, progress in our international business overall.

Josh Spector

Okay. Thanks. And I guess last one for me, and then I will 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 or stake in the business that they have. Does that change anything in your view?

Haitham Khouri

Yes. So, just – I think just out of respect for those guys, I will sort of 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 are 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 on 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. And 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 am very comfortable that we are going to deliver tremendous and improved value to our customers this year.

Josh Spector

Okay. Thank you.

Operator

And we have reached the end of the question-and-answer session. I will now turn the call back over to Haitham Khouri for closing remarks.

Haitham Khouri

Alright. Well, thank you everybody and talk to everybody again in three months.

Operator

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