Perimeter Solutions, SA

And welcome to the Perimeter Solutions fourth quarter 2021 earnings 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, General Counsel. Please go ahead, Nori.

Thank you, Operator. Good morning, everyone, and thank you for joining Perimeter Solutions' fourth quarter 2021 earnings call. Speaking on today's call are Hatham Corey, Vice Chairman, Edward Goldberg, Chief Executive Officer, and Barry Lederman, 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, March 24, 2022, and these statements have not been or 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 the 8K, most of which will be available on our website and on the SEC's website. With that, I will turn the call over to Hakim Khoury, Vice Chairman.

Hakim Khoury Thanks, Nori. Good morning, everybody, and thanks for calling in today. I'll briefly cover three topics before turning the call over to Eddie and Barry. First, I'll make some summary comments on our strategy. Next, I'll briefly comment on our fourth quarter performance in fire safety. Finally, I'll close by sharing a few thoughts on 2022, starting with our strategy on slide three. As you've heard from us before, 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 through 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 high returns on tangible capital. And five, the potential for opportunistic consolidation. We believe that these economic criteria are present at Perimeter, as described on slide four, and we'll also use these criteria to evaluate any future acquisitions. As described on slide five, we seek to drive long-term equity value creation via consistent improvement in our three operational value drivers, which are profitable new business, continual cost improvement, and pricing to reflect the value we provide, as well as an intent focus on the allocation of our capital and the management of our capital structure. Now, to address our Q4 performance in fire safety. As we stated on our prior call, the first and fourth quarters typically contribute a very modest portion of our fire safety segment's annual adjusted EBDA. Regarding the fourth quarter specifically, if a few late-season fire events occur in North America and or if Australia has an active early fire season, fire safety tends to have a strong Q4. If these potential late season North American fire events don't occur, however, and or if Australia has a slow December, fire safety tends to have a slow Q4. Q4 2021 witnessed extremely low fire activity in North America, with acres burned down over 50% year over year, and almost no December fire season in Australia. As such, Q4 2021 was a very slow quarter for us. Because the numbers are relatively small in Q4 and Q1, the year-to-year variations can appear large. We caution investors against reading too much into annual variations in our Q4 and Q1 fire safety results. Finally, I'll close with a few comments on 2022. As we mentioned on our last call, we expect our fire safety segment to grow volume meet the high single digits annually over the long term. We remind investors, however, that within the highly predictable long-term secular growth that we expect in fire safety, there exists an element of year-to-year variability tied primarily to the intensity of the North American fire season, which we can't predict. As such, we don't provide guidance on a quarterly or annual basis. Now, with that said, I'll share with investors some of our current thinking around 2022. First, on fire safety. We consider 2021 to be a fairly normalized year in fire safety, with acreage burned across our markets very roughly in line with the long-term trend line. As such, assuming another roughly around trend line year in 2022, we believe that mid-to-high single-digit volume growth is not an unreasonable expectation for this segment. Next, on oil additives. We're encouraged by our initial findings in this segment and believe that we're likely to see some upside in 2022 relative to our expectation of flat revenue and adjusted EBITDA. Moving on to consolidated adjusted EBITDA. We believe that adjusted EBITDA growth in either dollar terms or percent turns, will be the best metric by which to judge our 2022 performance. Conversely, while we expect to expand underlying adjusted EVDA margins in both our segments this year, we believe that adjusted EVDA margins can be a less informative measure of our 2022 performance. This is because we may experience significant cost inflation in 2022, a meaningful portion of which we expect to pass through. These inflation pass-throughs, however, can distort a reported margin performance as zero margin revenue hits the P&L and can artificially compress margins. The more cost inflation we experience and pass through, the lower a reported adjusted EBDA margin will therefore appear. Adjusted EBDA growth, however, should generally be unimpacted by these inflation pass-throughs. In closing, and remaining on the topic, 2022 Consolidated Adjusted EBDA. Assuming a roughly on-trend line 2022 fire season and making our best assumptions around oil additives performance, inflation pass-throughs, underlying margin performance excluding the impact of inflation pass-throughs, incremental public company costs, and other financial assumptions, we expect Consolidated 2022 Adjusted EBDA growth consistent with and perhaps above our long-term framework of mid-teens growth.

And with that, I'll turn the call over to Eddie. Thanks, Haitham. I'll start by discussing our most notable accomplishments of 2021. In an environment where early, aggressive aerial initial attack is critical for keeping fires small, saving communities, and protecting people's lives, our customers depend on us to load every air tanker 100% of the time, And we take this mission very seriously. We've built over many years, a supply chain network that includes supply of raw materials, production, distribution, tanker base operations, and delivers near perfect reliability year in and year out. 2021 was no exception. I've mentioned this before. Most tanker bases, the airports where air tankers are loaded, only have enough inventory for one, maybe two days of operation. Our robust and extensive network delivers retardant nearly anywhere in North America in hours to support firefighting operations. This level of service has been our focus and our mission for many years. We have proven over the last two very challenging years our ability to respond even in the most difficult times. In 2021, when many companies could not get materials, find labor to make their products, or get trucks to deliver them, And when lead times ballooned, we shipped thousands of truckloads of retardant during the fire season successfully and without disruption. This is the performance our customers expect and they recognize that we are uniquely able to perform in a way that no one else can. And while this is all very matter of fact and what we do day in, day out, we see the extraordinary ways perimeter people support firefighters and their communities and the positive impact we have on people's lives. Here are just a few examples. The Dixie Fire burned over 963,000 acres and significantly damaged a number of California towns, including Greenville, which was nearly destroyed, and Chester. The Chester tanker base was threatened and forced to close, and five of our tanker base operators lost their homes. Perimeter brought in mobile retardant bases to support firefighting operations, and those five Chester tanker base operators came back to work to ensure that we could continue aerial operations. Early in the season, fires raged in Mexico. We partnered with TenTanker, who flies four DC-10 Very Large Air Tankers, to quickly set up a mobile operation in Texas and support aerial firefighting operations and protect a highly populated village in the state of Nuevo León. In just a few days, we delivered over 100,000 gallons of retardant. And in an innovative new program, we partnered with Orange County Fire Authority in Southern California to stand up a new quick reaction force capable of retardant operations 24 hours a day. Night retardant operations were completed on a number of incidents, keeping potentially devastating fires small and saving lives and property. These are just a few examples of the good that our company and our people do every day in partnership with firefighters and communities. I'm also very proud of the financial results we delivered last year, especially in our fire safety segment. 2020 witnessed the highest acres burned in recorded U.S. history, as approximately 59,000 wildfires consumed over 10 million acres. 2021 was a far more normalized year, where a similar number of wildfires consumed a little over 7 million acres, or 30% fewer acres burned year over year. Against this challenging comparison, we grew our 2021 fire safety adjusted EBITDA by 5%. And we believe that our ability to grow adjusted EBITDA in light of a 30% lower U.S. acres burned was the result of significant contributions from our secular volume drivers, namely a continued strategy of aggressive aerial attack by our customers and continued growth in the air tanker fleet. Our fire safety results were also aided by our strong performance in our international markets and our long-term strategy of pricing to reflect the value we provide to our customers. The fourth quarter was challenging for our fire safety segments. Fire activity was extremely limited in North America, with U.S. acres burned down approximately 55% year over year. Australia had a wet December and therefore experienced essentially no early fire season. Although fire safety results, again, significantly outpaced acres burned, the significant decline in acres burned, coupled with the inherently low margin nature of the fourth quarter, led our segment results to decline year over year. Q4 fire safety revenue declined 23%, while Q4 adjusted EBITDA declined materially. Fluctuations based on the intensity of the fire season in a given quarter is a feature of our fire safety business and can be especially pronounced in the much smaller fourth and first quarters, as evidenced this Q4. Turning to our OA segment, which accounted for 17% of our 2021 consolidated EBITDA. OA revenue increased 7% for the year and declined 11% in the fourth quarter. The growth for the year was primarily due to lapping COVID impacts from 2020. The decline in the quarter was primarily due to the timing and pace of customer orders. OA adjusted EBITDA declined 2% for the year and 16% for the quarter. As we discussed on our prior call, second half 2021 segment margins were impacted by materially higher costs for certain raw materials, as well as for transportation. We also mentioned that we expected to pass on these raw material and transportation costs in 2022. And therefore, these headwinds will be transitory. We're confident that we've passed substantially all of these costs through as of Q1 2022. In fact, as Hatem alluded to, we're optimistic around this year's potential performance in oil additives. And finally, I'll address the impact of the supply chain disruptions associated with the situation in Ukraine. Both of our segments are experiencing raw material disruptions directly related to this situation. However, given our policy of multisourcing our key inputs, we currently expect minimal disruption to our ability to serve our customers and a very modest to immaterial impact on our 2022 results. With that, I would now like to turn over the call to our Chief Financial Officer, Barry Lederman.

Thanks, Eddie. Turning to slide seven. Full year, 2021 sales in our fire safety segment increased 7% to $261.2 million as compared to $245 million in the prior year. Fourth quarter sales in our fire safety segment decreased 23% to $23.9 million as compared to $31.1 million in the prior year. Substantially, all revenue growth in our segment was organic in both the fourth quarter and full year periods. Full year 2021 adjusted EBITDA in our fire safety segment increased 5% to $117.9 million as compared to $112 million in 2020. Fourth quarter adjusted EBITDA in our fire safety segment decreased 87% to $1.2 million as compared to $9.2 million in the prior year. Now switching to oil additives. Full year 2021 sales increased 7% to $101.2 million as compared to $94.6 million in the prior year. Fourth quarter sales decreased 11% to $22 million as compared to $24.8 million in the prior year. Full year 2021 adjusted EBITDA decreased 2% to $23.6 million as compared to $24 million in 2020. Fourth quarter adjusted EBITDA decreased 17% to $5.6 million as compared to $6.7 million in the prior year. Now for the consolidated entity. Full year 2021 sales increased 7% to $362.3 million in 2021 as compared to $339.6 million in 2020. Fourth quarter sales decreased 18% to $45.9 million during the fourth quarter as compared to $55.8 million in the prior year quarter. Full year 2021 adjusted EBITDA increased 4% to $141.4 million in 2021 as compared to $136 million in 2020. Fourth quarter adjusted EBITDA decreased 57% to $6.8 million during the fourth quarter as compared to $16 million in the prior year quarter. Interest expense in the quarter was approximately $21.5 million of which $12.4 million is non-cash deferred financing fees. As I mentioned on a prior call, we expect full year 2022 interest expense of approximately $40 million. Depreciation was $2 million in Q4, while amortization expense was $14 million. We expect tax deductible depreciation and amortization of approximately $7 to $10 million in 2022. We had a $3.7 million tax benefit in the fourth quarter. Based on the current information we have, the expected ongoing effective 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 approximately $3 million. We expect approximately $10 million of CapEx in 2022. As a reminder, we suggest investors model the annual change in working capital going forward at approximately 10 to 20% 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 the timing of when the sales occur will influence these numbers. We ended the fourth quarter with approximately 675 million of senior notes and cash approximately of $226 million. We currently have approximately 163 million shares outstanding. With that, I'll hand it back over to the operator for Q&A. Thank you.

Thank you. And I'll be conducting a question and answer session. If you'd like to be placed into 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 star 1. One moment, please, while we poll for questions. Our first question today is coming from Josh Spector from UBS. Your line is now live.

Yeah. Hey, everyone. Thanks for taking my question. I guess first, maybe to drill into some of the comments on 2022 EBITDA, and I understand the volatility year on year. You're trying to get some directional thoughts here, but just wondering what drives the comments on potentially higher than your long-term algorithm potentially playing out next year, particularly in light with the comment that you mentioned on higher public company costs. Is there something, is it price raws recovery? Is there some new product launch or What drives the confidence in that comment this early in the year?

Yeah, thanks for the question. We're very confident that our secular drivers that we look at each year in terms of severity of the fire season, the aggressive initial aerial attack that the agencies are using as a primary policy for fighting fire, along with increased air tanker fleets, are going to continue to grow the business as we expect. We do expect to be able to recover all of our increased costs as well. And we're hitting our value drivers very hard in terms of driving price for the value that we provide in terms of reducing costs and looking at new business. So with all of those factors, we are very confident that we will be able to perform out or above what we expect in the long term. Subject, of course, to the severity of the fire season, which is the biggest variable in the business.

Okay. I guess maybe just to follow up then, in terms of some of the discrete items outside of the fire season and the intensity there, Can you quantify any comments of when we look year on year 22 versus 21, is there a line item we should be thinking about for higher public company costs? That's maybe different than what was filed earlier. And then also on logistics and raw materials, how negative of an impact was that last year and how positive could that recovery be next year? And is it more in the oil additives or does it also apply to the fire retardants as well?

As far as public company costs, we're not going to get into the details of our cost structure, but those are costs that we factored in to our model and our forecast for 2022. In the fire safety business, as we discussed the last time, we were able to recover our increased raw material costs in 2021. We expect to do the same in 2022. Of course, you can see what's going on in inflation this year, so we do expect that cost recovery year than last year. And in oil additives, as we mentioned previously, we did see in the fourth quarter in particular significant increase in both raw material and transportation costs, which did have a lag in recovery. As we mentioned, we expected to begin recovering those costs in the first quarter of 22, which we are successfully doing now. And we're optimistic that we'll be able to recover all of those costs as we go forward into the year.

Thanks. I guess if I could squeeze in one more, I guess, you know, I noticed you guys had an announcement of a lot of new partnerships on the Foscheck Fortify product. Just curious if you could talk about that, like where sales are in that business now and what that market can kind of grow to in your view longer term. I'm assuming that opens up kind of another avenue, which is different than what you've had in the past. So I'm curious if you could kind of give some expanded thoughts on that. Thanks.

Sure, yeah, thanks for that question. The prevention and protection business is a big initiative for us going forward. Recognize that it is a startup business for us. The Fortify product was just qualified kind of mid last year, so we're just kind of getting started. I would say sales in 2021 were, you know, very modest, you know, low single digit millions of dollars. We do expect to see significant growth. year over year, and we do believe, although I don't want to give you a specific number, I do believe that could be a material business, you know, over the coming, you know, four, five, six, ten years. In terms of the announcement that we made with partnerships, that business is focused on, you know, large, potentially hazardous industries as well as more local service where we engage partners to provide protection for communities and That was just one example of a partnership that we established with a company that provides that kind of service. So it is a multifaceted approach to the market.

Okay. Thank you.

Thank you. Our next question is coming from Brian DeRubio from Beard Your Line is now live.

Good morning, gentlemen. A few questions for myself. Just on raw material inflation, can you point to any of the specific raw materials where you're seeing the worst of that inflation right now?

Well, you know, we are closely tied in our businesses to the commodities market, and you can see what's going on in the commodities industry. That industry has seen significant inflation over the last few months, continues to see some inflation. Again, we believe we've got a good handle on what's going on with our raw materials. We are multi-source, so we feel very secure in our supply and the ability of using competition to keep those increases to a manageable level. And of course, Whatever increases we do experience, we do expect to be able to pass those through.

Okay, nothing more specific on the particular raw materials that you're exposed to? I think in your disclosures, you had phosphate was your largest?

Yeah, so ammonium phosphate is the largest raw material that we use in the fire safety business. It's something we keep a close eye on. The data regarding ammonium phosphate pricing and supply is well-published. so you can kind of see what's going on in that market. You know, we are a player in that market. But, again, as we look at our supply, we get supply from a number of different suppliers. We've got the benefit of pretty good competition between those suppliers, and we are able to pass those costs through.

Okay, that's helpful. Just on, I know during the last call there was a little bit of back and forth you know, how much you're going to disclose. And I know you're reticent to provide too much detail, especially if it pertains to volume. But could you possibly let us know, like, how many fire events occurred in the fourth quarter of 2021 versus 2020?

You know, that data is published on the U.S. Forest Service website. I would refer to them. I don't have those numbers in front of me. But they publish the statistics online. for number of fires and acres burned. I believe the number of fires was about consistent with history, the number of acres burned slightly below the 10-year average in the U.S., but not too far off of the trend line.

Okay, that'll be helpful. Thank you. And then what are you seeing in the M&A environment right now?

Hey, Brian. This is Haytham. We don't want to comment specifically on what we see on every given call. That said, we're active. We're looking. We're very focused on it. And when we have something, clearly the market will see it for us.

Okay. And just finally, I know you previous caller asked about the pretreatment and the protection solutions. You know, that's going to be obviously a small portion, but You know, as you know, probably given some of the large insurance companies pulling back fire insurance for homeowners for fires, that should be a great business for you guys going forward. So excited to hear about that growth in the coming quarters and years. Yeah, great. Thanks. Thanks for the time.

Thank you. Thank you. We reached the end of our question and answer session. I'd like to turn the floor back over to Edward for any further closing comments.

Great. Thank you. I appreciate everybody calling in to our earnings call. Look forward to talking to you again next quarter. Thank you.

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