Perimeter Solutions, SA

Hello, and welcome to the Perimeter Solutions Q3 2021 Earnings Conference Call and Webcast. At this time, all participants are in 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's now my pleasure to turn the call over to Nori Yokozuka, Perimeter Solutions General Counsel. Please go ahead, Nori.

Thank you, operator. Good morning, everyone, and thank you for joining Perimeter Solutions' third quarter 2021 earnings call. Speaking on today's call are Nick Howley and Will Thorndike, co-chairmen of Perimeter, Kaysom Corey, vice chairman, Eddie Goldberg, chief executive officer, and Barry Lederman, chief financial officer. We want to remind anyone who may be listening to replay of this call that all statements made are as of today, December 14th, 2021. 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-YAP financial measures, including EBITDA. Please refer to our earnings press release and presentation, as well as the 10Q, both of which will be available on our website and on the SEC's website. With that, I will turn the call over to Nick Howley, Perimeter's co-chairman.

Good morning, everyone, and thanks for calling in. Since this is our first earnings call at Perimeter, Will Thorndike and I will each make introductory comments. Will and I do not expect to join every earnings call going forward. Starting on the first slide, our objective. As you've heard from us before, our goal is to deliver private equity-like returns with the liquidity of a public market. We define this as mid-teens or better long-term IRR on our equity. We plan to attain this goal by owning, operating, and growing uniquely high-quality businesses. We seek to strive long-term equity value creation by optimizing all three of, one, the performance of our existing operations, including consistent improvement in our three operational value drivers, that is, continual cost improvement, pricing to reflect the full value we provide, and new business generation. Two, the allocation of our capital. And three, the careful management of our capital structure. Now let me touch on specific roles and responsibilities going forward as well as our early impression since closing this business on this business about a month ago. We formed an executive committee consisting of myself, Will Thorndike, and our partner, Haytham Corey. The executive committee will work closely with Perimeter CEO Eddie Goldberg to implement our value-based operating methodology and While it's still very early days, we're encouraged by the value creation opportunities we see across the operational value drivers in the company. We're also very encouraged by our philosophical alignment with Eddie. Eddie has led this business for 20 years and has grown Perimeter into the excellent company it is today. We've already implemented our unique compensation system that closely aligns management with shareholders, and incentivizes sustainable long-term equity value creation. The Executive Committee will focus on optimizing value creation through the allocation of our capital and the management of our capital structure. To this end, the Board appointed Hathem as Perimeter's Vice Chairman, where in addition to his role on the Board and the Executive Committee, we'll focus primarily on Perimeter's capital allocation, capital structure, capital market activities, as well as long-term strategic priorities. Finally, I'll note that we're pleased with the business's financial results, which have exceeded our expectations from earlier this year. And with that, I'll turn this over to Will to touch a little more on our capital allocation plans. Thank you.

Thank you, Nick. As most of you have heard from us before, we evaluate potential acquisitions based on five very specific economic criteria. And given how important these criteria are to our capital allocation philosophy, we thought it would be helpful to walk investors through how closely we believe Perimeter fits them. So the first is recurring revenue streams, and Perimeter has exceptional scores on the qualitative metrics we use to evaluate a business's stickiness and long-term predictability, including customer churn and net revenue retention. The bottom line is that once you gain a retardant customer, you almost never lose them and you almost always grow them. Investors should appreciate, however, that within this overall pattern of revenue stickiness, there is an element of year over year variability, primarily tied to the intensity of the North American fire season. That said, over time, we expect long-term secular growth to continue and to sort of overwhelm any near-term variability. And we expect that this variability will diminish over time, particularly as we seek to grow our acyclical prevention and protection businesses and our potentially counter-cyclical international business. Second economic criteria for us is long-term secular growth tailwinds. And on this dimension, again, Perimeter has exceptional metrics. So the company has grown retardant volumes at an approximately 10% organic compound growth rate over the decade or so through 2020. And this volume growth has been driven by three primary factors. So the first is higher acres burned and longer fire seasons. The unfortunate result of... broader climate effects. And the second is a growing wildland urban interface, which increases the number of wildfires that must be fought in order to protect life and property. And I think a simple way to think about that is that many acres that would have been allowed to burn a decade ago must increasingly now be fought as populations begin to encroach further into wildlands at the perimeter of urban areas. And the third factor driving volume growth is increasing tanker capacity, which improves the ability to fight wildfires, of course. And air tanker capacity has consistently been a limiting constraint on retardant volumes during fire season, as evidenced by requests unable to fill data from the National Interagency Fire Center. And we expect these three key volume drivers to persist going forward, underpinning our confidence in perimeters long-term. volume growth prospects. Okay, the third economic criteria is we like products that account for critical but small portions of larger value streams, what Nick calls small into big, and perimeter, again, scores extremely highly on this dimension. Retardant is the active ingredient and a critical component in wildland firefighting, where failure, of course, is measured in loss of life and property potentially severe environmental damage. And despite its criticality, retardant consistently represents a low to mid single-digit percent of overall wildfire suppression costs, thus providing a tremendous customer value. Fourth economic criteria for us is significant free cash flow generation with high returns on tangible capital. With an approximately 40% EBITDA margin and low single digits, CapEx as a percentage of revenue perimeter is again excellent on this metric. Lastly is the potential for opportunistic consolidation. We see potentially significant M&A opportunity ahead of us, both inside and outside of core fire safety, driven again and guided again by these five core economic characteristics. Hatham will talk more about M&A and more broadly capital allocation in a moment. And with that, I will turn things over to you, Hatham. Thanks. Thank you, Will.

Turning to slide five, investment framing, which summarizes our long-term perimeter investment case. The top section of the slide lists our base case operating assumptions. Specifically, we expect base case volume growth in perimeters fire safety segment of mid to high single digits. This compares to approximately 10% volume growth over the last decade or so, with the drivers of prospective volume growth largely unchanged relative to those of historical growth. Again, these drivers are, one, longer and more severe fire seasons, two, growth in the wildland-urban interface, and three, increasing air tanker capacity. We expect base case price growth in Perimeter's fire safety segment of mid-single digits. This is roughly in line with Perimeter's historical performance and is primarily a function of our product's uniquely high criticality to cost ratio. We expect, sorry, our base case for the oil additive segment is approximately flat revenue and adjusted EVDA. This is roughly in line with the segment's historical performance. We expect Perimeter's consolidated adjusted EBDA margins to expand between 100 and 200 basis points annually. This, again, is in line with the company's historical pace of adjusted EBDA margin expansion. The graphic at the bottom of the page summarizes our expectations around long-term revenue and adjusted EBDA growth. We expect Perimeter to grow consolidated revenue approximately 10%, and to grow consolidated adjusted EVDA in the mid-teens, prior to any significant capital allocation or capital structure actions. Note that these outcomes are generally in line with the company's historical performance. Specifically, in the decade through 2020, Perimeter grew revenue at a 12% CAGR and grew adjusted EVDA at an 18% CAGR, with the vast majority of both these growth rates organic in nature. Hopefully the slide helps convey why we're confident in attaining our long-term return objectives at Perimeter. As we've noted, we will strive to enhance these base case returns through, number one, consistent improvement in our three operational value drivers, number two, disciplined and high ROIC capital allocation, and number three, the active management of our capital structure. I'll now take a moment to discuss our perspective on capital allocation on slide six. Note that the first three columns on the slide represent our three operational value drivers, which Nick referenced earlier, all focused on the rightmost column titled Capital Allocation. We understand how much value an active and consistently high ROIC M&A program can add to long-term equity returns, and we hope to capture this value on behalf of our shareholders. It's important to point out, however, that we believe we're in the very fortunate position of not requiring M&A in order to attain our long-term targets. Specifically, we expect to meet or exceed our long-term IRR target at perimeter through base case organic performance plus execution on our three operational value drivers, the management of our capital structure, and returning capital to shareholders by either buybacks or special dividends. To this end, our board authorized $100 million share repurchase program, which gives us the flexibility to implement a capital return strategy should we decide to do so. Given this confidence in our organic trajectory, two conditions must be present for us to deploy capital towards M&A. Number one, the target must be consistent with our five target economic criteria, and number two, The acquisition must be accretive to our projected standalone base case equity IRR where the standalone IRR includes capital structure management and either buybacks and or dividends. The combination of these two necessary conditions creates a high bar for acquisitions, especially in light of the standalone returns we expect to deliver at Perimeter. However, we will put forth a focused and consistent effort to identify acquisitions that clear this bar and create long-term equity value. We'll actively evaluate acquisitions both within and outside of fire safety. Our search will always be guided by our target economic criteria and will always be scrutinized against strict IRR hurdles. We do expect to identify attractive and IRR enhancing opportunities over time. When we do, we won't hesitate to swing the bat. I'll close my remarks on slide seven with a brief comment on the year-to-date performance of the business relative to our expectations from earlier this year. I'll start with fire safety. We're extremely pleased with the performance of our fire safety business, which delivered 13 percent year-over-year adjusted EVDA growth in both the third quarter and the nine-month period. As Nick mentioned, these results have comfortably exceeded our expectations and were achieved in the face of two uniquely challenging circumstances. First, 2020 was the highest acres burned year in recorded US history. We expect 2021 acres burned ex Alaska to end the year down approximately 25% versus last year and come in very roughly in line with the long-term trend line. Second, we faced significant challenges this year relating to supply chain, raw materials, and transportation. Despite these challenges, we delivered on our commitment to support our customers' efforts 100% of the time while also delivering excellent growth and margin performance. It's terrific to see the fire safety business off to such a solid start. Moving on to OA. The first half of the year was strong, though in large part due to lapping a COVID-impacted period from 2020. The third quarter was softer, though largely due to materially higher costs for transportation and certain raw materials. We expect to ultimately pass through these higher transportations and raw material costs. Year-to-date performance in the OA segment is roughly flat, which is in line with our expectations from earlier this year and consistent with our long-term expectations for the segment. With that, I'll turn the call over to our CEO, Eddie Goldberg.

Eddie? Thanks, Hatham. I'll start by discussing some of our notable accomplishments during the year. I'll then provide updates on more strategic and operational items. And finally, I'll review our quarterly and year-to-date results by business segment before turning it over to Barry. Alongside our strong financial performance, I'm proud of what we've accomplished so far this year, as we summarized on slide eight. Most importantly, we met our commitments to our customers with 100% reliability, in support of their mission to save lives, property, and the environment. In what was an extremely challenging supply chain and logistics environment, we delivered every load and loaded every air tanker, all without any disruption. We completed the qualification process for our new FosCheck Fortify product. Designed to provide durable, season-long protection, we believe Fortify is a game changer in the fire prevention and protection market. We continued this successful transition to our new FosCheck LCE20FX liquid concentrate retardant. LCE20 is the world's first technical-grade liquid concentrate and provides improved safety, health, and environmental characteristics, increased effectiveness, and improved stability. In our fire suppressant business, we introduced new fluorine-free Class B firefighting foams. and we continue to make great progress as we work to move the industry toward a fluorine-free landscape. As we look forward to the next several years and beyond, we continue to see great consistency in the trends driving the global wildfire business relative to the last decade or so. Those trends are increased fire severity and longer fire seasons, continued growth in the wildland-urban interface, and expansion of air tanker capacity. And we expect these trends to continue to drive growth in retardant demand over the long term. As the most effective way to keep fires small and protect people's lives, property, and the environment, we believe aerial attack with our long-term retardant will become even more mission critical in the future. And we are working hard alongside our agency partners to increase our capabilities to support increasing demand. And the growth that we are seeing in the U.S. is not unique. The rest of the world is seeing similar trends in wildfire. In Australia, one of the fastest growing regions, we acquired our distributor earlier this year to enable us to work more directly with the agencies to better support the growth in their aerial programs. And over the coming years, we expect to see expansion in this market and growth in our retardant volumes. Finally, I want to provide a little more color on our prevention and protection business. The same way that our traditional fire retardant products work to slow or stop active wildfires, they can be used to prevent fire ignitions and to protect property from potential fire danger. For fire prevention, we focus on high-hazard industries like electrical utilities, railroads, and departments of transportation to provide proactive retardant treatment in high-risk areas. from equipment failures or sparks, and stopping large devastating fires from starting saves lives and communities. Our new Fortify product, applied before or early in the season, can provide protection all season long. In addition, Fortify can proactively be applied to protect high-value assets and critical infrastructure from the danger of wildfire. In August of this year, Perimeter treated the Reagan Ranch outside of Santa Barbara, California with Fortify to protect the structures on the ranch from wildfire danger. As the Alisal Fire in October threatened the ranch, heroic efforts by local firefighters along with our retardant ensured the ranch did not suffer damage. We expect over the next several years to see demand for our prevention and protection products and services to increase. Let me now touch briefly on our market position. Hardly a day has passed over the last 15 years without someone trying to qualify and sell a competing retardant product. Some have attempted to compete quietly while others have done so quite loudly. What has remained consistent is that no one other than Perimeter has sold a commercially significant amount of retardant, and not one of our historical would-be competitors is active in the market today. We're sure that other aspiring entrants will come and go in the future, and while we always take potential competitors very seriously, we are as confident as ever in our long-term market position. I'll now review our revenue and adjusted EBITDA growth and margins by segment, as you can see on slide 9. I'll start with our fire safety segment, which accounted for over 95% of our adjusted EBITDA in Q3 and over 85% in the year-to-date period. Fire safety delivered Q3 revenue growth of 14% and year-to-date revenue growth of 11% compared to the prior year periods. Adjusted EBITDA in our fire safety segment increased 13% in both the third quarter and year-to-date periods compared to the prior year periods. And fire safety adjusted EBITDA margin expanded approximately 100 basis points in the year-to-date period, which is in line with our long-term expectations. Fire safety adjusted EBITDA margin was flat at 57% in both Q3 2021 and 2020, primarily due to a lower margin product mix in Q3 2021 versus Q3 2020. We're pleased with the performance of our fire safety segment in both the quarter and year-to-date period. The 2020 revenue comparison was extremely challenging, yet our retardant volume significantly outperformed Acres Burn as we clearly experienced the benefit of the long-term structural volume drivers that we've discussed, namely a longer fire season, a continued strategy of aggressive aerial attack, and continued growth in the air tanker fleet. We also faced supply chain, raw material, and transportation challenges during the year, yet we managed to expand margins in the nine-month period and hold margins steady in the third quarter. Turning to our oil additive segment, which accounted for less than 5% of our adjusted EBITDA in the quarter and less than 15% of our adjusted EBITDA in the year-to-date period. OA revenue declined 1% in the third quarter and increased 13% in the nine-month period. The year-to-date revenue comparison was positively impacted by lapping a depressed period related to COVID impacts in 2020. Q3 revenue performance was slightly weaker than expected, though roughly in line with our long-term expectations for flat performance in this segment. Adjusted EBITDA in our OA segment declined in the third quarter and margins compressed. This was primarily due to slightly weaker than expected revenue, as well as materially higher costs for certain raw materials, as well as transportation. And we expect to pass on these raw material and transportation costs and therefore expect headwinds to be transitory. We continue to expect our OA segment to be roughly flat, both in 2021 and over time. On a consolidated basis, revenue increased 12% in both the quarter and the year-to-date period, while adjusted EBITDA increased 9% in the third quarter and 12% in the year-to-date period. Now let me spend a moment on the high-level distribution of EBITDA throughout a fiscal year. year to give investors a better understanding of the seasonal impacts on our business and financial results. Our fire safety business, which accounts for over 80 percent of our adjusted EBITDA, tends to generate approximately 80 to 90 percent of its annual adjusted EBITDA in the second and third quarters combined, with a stronger weighting toward the third quarter. Only 10 to 20 percent of fire safety adjusted EBITDA is typically generated in the first and fourth quarters combined. Our oil additives business, which accounts for less than 20% of our adjusted EBITDA, has fairly consistent EBITDA distribution across quarters, though can experience quarterly impacts based on the timing of customers' facility closures for plant maintenance. I'll close with a quick comment regarding our approach to forward guidance. We believe that our business is highly recurring and predictable over the medium and long term. As such, we're comfortable sharing and, as necessary, updating our long-term assumptions and expectations. However, as we've noted, our annual performance is subject to fluctuations in the severity of the North American wildfire season, which we cannot predict. We will therefore refrain from providing annual or quarterly guidance. And with that, I'd like to turn the call over to our Chief Financial Officer, Barry Lederman.

Thanks, Eddie. Turn to slides 10 and 11. Third quarter sales in our fire safety segment were 172.4 million, up 14% versus the prior year. Year-to-date sales in our fire safety segment were 237.3 million, up 11% versus the prior year. Substantially, all revenue growth in the segment was organic in both the third quarter and the year-to-date periods. Third quarter adjusted EBITDA in our fire safety segment was $97.8 million, up 13% versus the prior year. Year-to-date adjusted EBITDA in our fire safety segment was $116.7 million, also up 13% versus the prior year. Switching gears to oil additives. Third quarter sales in our oil additive segment were $23 million, down 1% versus the prior year. Year-to-date sales in our oil additive segment were 79.2 million, up 13% versus the prior year. Third quarter adjusted EBITDA in our oil additive segment was 2.5 million, down from 5.6 million in the prior year. As Eddie referenced, raw material and transportation costs impacted this result in Q3. We expect to pass on these costs, therefore expect profitability in this segment to recover in 2022. Year-to-date adjusted EBITDA in our oil additive segment was $17.9 million, up from $17.2 million in the prior year. Now for the consolidated entity. Third quarter consolidated revenue was $195.4 million, up 12% versus the prior year. Year-to-date consolidated revenue was $316.5 million, also up 12% versus the prior year. Third quarter consolidated adjusted EBITDA was $100.3 million, up 9% versus the prior year. Year to date consolidated adjusted EBITDA was $134.6 million, up 12% versus the prior year. Interest expense in the quarter was approximately 8.1 million. Going forward, based on our new senior credit facility, we expect annual cash interest expense of approximately $40 million. Depreciation was 1.9 million in Q3, while amortization expense was 13.3 million. Going forward, we expect tax-deductible depreciation and amortization of between seven to 10 million annually. Our tax rate during the quarter was 26.4%. Based on the current information we have, the expected ongoing affected tax rate excluding lost jurisdictions that we are unable to utilize the benefits and excluding the impacts from purchase accounting as well as transaction related costs will be approximately 26%. CapEx during the quarter was 1.6 million. We expect approximately 10 million of annual CapEx going forward. We suggest investors model the annual change in working capital going forward at approximately 10 to 20 percent of the change in sales, such that a $10 million change in sales should lead to a $1 to $2 million change in working capital. Please note, that the timing of when the sales occur will influence these numbers. We ended the quarter with debt of $696.5 million and cash of $39.6 million. Though these are prior to our recapitalization and listing, on a consolidated level, we expect to end the year with net debt of approximately $450 million. We currently have approximately 157 million shares outstanding. With that, I'll hand it back over to the operator for Q&A.

Thank you. We'll now be conducting a question and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that's star one to be placed into question Q. Our first question today is coming from Michael Press from Tiger Eye Capital. Your line is now live.

Hi, good morning. Good morning. As you mentioned earlier, Acres Burn is down 25% year-over-year this year and below the 10-year average. Yet you grew fire safety revenues by 14% in the third quarter, despite the tough comp to the record setting 2020. It seems we don't have to bet on record fire years in order for PRM to grow nicely. Can you discuss more specifically how air tanker capacity is driving your growth? What is the outlook for future growth in air tanker capacity?

Sure. That's a great question. Thank you. As you mentioned, the amount of retardant, the revenue for the business, outpaced, acres burned. We continue to see this consistent with the drivers that we have, which are longer fire seasons, growth of the wildland-urban interface, and the increase in tanker capacity. We do expect to see those drivers to continue consistently with our expectations over the long term. And as those move forward, we do believe that we will continue to see growth that becomes more in excess of acres burned trends.

Thank you. One quick follow-up. On the operational side, can you discuss ways in which PRM is now utilizing the trans-dime playbook to enhance profitability?

Sure. You know, we are very focused on doing the things that are included in those value drivers. We pay a lot of attention to making sure that we price our products for the value that they create. We're laser focused on looking at operational efficiencies and reducing our costs. And obviously, as we discussed, we've got a number of significant growth opportunities that we're focused on in our business. So those are all very consistent with those value drivers.

Thank you. As a reminder, that's star 1 to be placed in the question queue. We've reached the end of our question and answer session. I'd like to turn the floor back over to management for any further or closing comments. Great. Thank you.

Yeah, I want to thank everybody for dialing in to our first earnings call. I look forward to talking to you again when we report fourth quarter and full year 2021 earnings. Thank you.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.