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spk06: Greetings. Welcome to Perimeter Solutions first quarter 2022 earnings call. At this time all participants will be in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Please note that today's conference is being recorded. At this time I'll turn the conference over to Nori Yokozuka. Nori, you may now begin.
spk01: Thank you, Operator. Good morning, everyone, and thank you for joining Perimeter Solutions' first quarter 2022 earnings call. Speaking on today's call are Haitham Khoury, Vice Chairman, Edward Goldberg, Chief Executive Officer, and Chuck Kopp, 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 9, 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 your 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 Hatem Khoury, Vice Chairman.
spk04: Thanks, Nori. Good morning, everybody, and thank you for joining today. As usual, I'll begin with summary comments on our strategy. Then I'll touch briefly on our performance before turning the call over to Eddie to review our Q1 results more fully, 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 also use these criteria to evaluate potential new 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 as follows, profitable new business, continual cost improvement, and pricing to reflect the value we provide, as well as a clear focus on the allocation of our capital and the management of our capital structure. Moving on to our first quarter results and starting with fire safety. We're pleased with our first quarter performance in fire safety, though I'll reiterate how modest the first and fourth quarters typically are in this business, and I'll caution investors against reading too much into annual variations in our Q1 and Q4 fire safety results. Moving on next to oil additives. On our prior earnings call, we noted that we'd been encouraged by our initial findings in this business and believed that we are likely to see some upside in 2022 relative to our expectations of flat revenue and adjusted EBDA. This upside is clear in our Q1 results, with adjusted EBDA almost doubling versus the first quarter of 2021, which itself was a very solid quarter for the oil additives business. For now, we'll stick to what we've already said around potential 2022 upside in our OA business relative to our initial underwriting expectations. That said, I'll observe that we continue to be encouraged by what we learn and are constantly focused on enhancing our operating results. I'll close by reiterating the 2022 framing I walked through on our prior call. Assuming a roughly on-trend line 2022 fire season, and incorporating our best assumptions around all other aspects of our business, 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.
spk05: Thanks, Haitham. Before I address the quarter, I'll briefly touch on two high-level topics, primarily for the benefit of new investors who aren't as familiar with Perimeter. First, I'll briefly summarize the long-term growth framework for our fire safety business, starting with volume growth. Using the five-year trailing average, U.S. acres burned, excluding Alaska, have increased approximately 5% per year over the past 25 years, from a five-year trailing average of approximately 2 million acres in 1995 to a five-year trailing average of approximately 7.3 million acres in 2021. Assuming this trend continues, we expect this mid single digit growth in the U.S. acres burned, excluding Alaska, to form the baseline for growth in perimeters retardant volumes. In addition to growth in acres, we've also experienced consistent historical growth in retardant use per acre. This is due to a combination of factors, namely an increasing wildland urban interface that puts more lives and property at risk from wildfires, a behavioral shift by our customers toward more aggressive initial aerial attack, and a larger air tanker fleet. We generally expect these trends to continue going forward, and we therefore expect to continue to grow retardant used per acre in addition to the growth in acres burned. Finally, we expect to grow our international volume faster than our U.S. volume as more countries build out aerial attack capability and become perimeter customers. In conclusion and looking forward, combining our expectations for, one, increasing acres burned, two, increasing retardant use per acre, and three, our strong growth in our international markets, we expect to deliver high to mid-single-digit annual volume growth in our fire safety business. In addition to mid to high single-digit volume growth, we expect to deliver consistent price growth in our fire safety business to reflect the increasing value we provide to our customers. The next high-level topic I'll address is the typical quarterly cadence within each of our two businesses, starting with fire safety. The first quarter is typically our smallest quarter in fire safety and one in which the business typically produces modestly negative adjusted EBITDA. The next smallest fire safety quarter is typically the fourth quarter. Q4 is usually notably larger than the first quarter and is typically adjusted EBITDA positive, but it is modest relative to the full year. The second and third quarters are our most significant fire safety quarters as they capture the heart of the fire season in the majority of our markets. Note that the third quarter is typically significantly larger than the second quarter, as it typically captures the heart of the North America fire season. Oil additives, on the other hand, typically operate at a steady quarterly cadence. Quarterly variations in the oil additives business are primarily tied to the timing of customers' annual maintenance-related facility outages. Specifically, if several of our large customers happen to schedule their maintenance-related outages in the same quarter, we'll experience a slower volume quarter, which we'll typically make up for over the balance of the year. Now turning to our first quarter performance, starting with fire safety. First quarter revenue more than doubled year over year, while adjusted EBITDA loss improved from $4.6 million in the first quarter of 2021 to $3.3 million in the first quarter of 2022. Year-over-year revenue growth in the first quarter was driven in roughly equal parts by our fire retardant and fire suppressant businesses. Incremental margins in our fire safety businesses were somewhat impacted by incremental public company costs, the impact of a more benign COVID environment on expense items, including travel and office expenses, and that the impact of cost pass-through is primarily related to transportation. I'd also like to go behind the numbers and briefly note a few of the things that we accomplished in the first quarter that once again demonstrate our commitment to serving our customers and highlight the value that Perimeter Solutions brings to our stakeholders. Once again, early season fires threatened communities in Mexico. Working with TenTanker Air Carrier, with whom we have a long, very successful relationship, we provided close in retardant capability to support DC 10 operations in Mexico. Deploying one of our custom designed mobile retardant bases to Texas, we loaded tens of thousands of gallons of retardant that were applied to save lives and property in Mexico. The operation was very successful and demonstrates once again the exceptional response that Perimeter always provides. Second, Perimeter partnered with the National Guard to provide the equipment and systems to build out a large, high-capability retardant base in the Channel Islands in California. This base will allow the National Guard to support firefighting operations with a fleet of eight C-130 Hercules aircraft equipped with modular airborne firefighting systems, or MAFs, as well as other large and very large air tankers. The project was completed as promised and is ready to fight fire in California this season. Finally, recognizing the extreme supply chain challenges the world continues to experience, we took steps to accelerate supply of raw materials and production, bolster our distribution and transportation network, and ensure we are ready to support firefighting operations with the reliabilities our customers demand and expect of us. Turning to oil additives, first quarter revenue increased 50% year over year, while adjusted EBITDA increased 97%. We focused intently on the implementation of our operational value drivers in the oil additives business over the last two quarters. These value drivers include winning profitable new business, both with existing customers as well as with new customers and in new applications, delivering productivity gains to improve our cost structure and support our margins, and pricing to reflect the value we provide to our customers. We saw tangible progress around each of these three value drivers in the first quarter and are pleased to report the impact on our operating results. We are operating in a uniquely dynamic macro environment, and as such, as Haitham mentioned, I'll reiterate that we're encouraged by developments in the oil additives business and believe that we'll see upside in 2022 relative to our historical performance as well as to our expectation of roughly flat revenue and adjusted EBITDA. Finally, I'd like to take this opportunity to introduce Chuck Kropp as our recently promoted chief financial officer. Chuck has been with us as corporate controller for four years and previously served as corporate controller at Aclara and Watlow. Chuck has been an integral part of our successful transition to becoming a public company and a key partner in the initial implementation of our value driver based operating philosophy. And with that, I'll turn the call over to Chuck.
spk02: Thanks, Eddie. Turning to slide seven. First quarter sales in our fire safety segment increased 141% to $18.5 million, compared to $7.7 million in the prior year quarter. Substantially, all of the revenue growth in the segment was organic. The adjusted EBITDA loss in our fire safety segment shrunk to $3.3 million in the first quarter compared to a loss of $4.6 million in the prior year quarter. As Eddie observed earlier, our fire safety business typically produces negative adjusted EBITDA in the first quarter. Switching to OA, first quarter sales increased approximately 50% to $39.3 million compared to $26.3 million in the prior year quarter. First quarter adjusted EBITDA increased 97% to $15.3 million compared to $7.8 million in the prior year quarter. Moving on to the consolidated entity. Sales increased 70% to $57.8 million during the first quarter compared to $33.9 million in the prior year quarter. Adjusted EBITDA increased to $12 million during the first quarter as compared to $3.1 million in the prior year quarter. Interest expense in the quarter was approximately $10 million, which is a good quarterly run rate. Depreciation was approximately $2 million in Q1, while amortization expense was $14 million. Taxes were an approximately $10 million benefit in the quarter. CapEx during the quarter was approximately $1 million. Our prior expectations around 2022, interest expense, depreciation, taxes, CapEx, and working capital are unchanged and are summarized on slide eight. We ended the first quarter with approximately $675 million of senior notes, cash of approximately $153 million, and approximately 163.2 million basic shares outstanding. Finally, I'll spend a moment on our diluted share count calculation, which is described in the table on slide nine. The table's top row shows our first quarter weighted average basic shares outstanding of 160.3 million. The next row, labeled one in the table on slide nine, captures the dilutive impact of performance-based employee stock options as well as warrants, which cumulatively add approximately 400,000 shares to our diluted share count. The following row, labeled 2, captures the dilutive impact of the fixed shares issuable under the Founder Advisory Agreement. This figure includes 100% of the maximum number of fixed shares issuable between Q1 2023 and Q1 2028. While in practice we expect these shares to be issued ratably over the next six years, The accounting treatment is such that the entire maximum future amount is required to be included in the fully diluted share count each reporting period. The row labeled three captures the dilutive impact of variable shares issuable under the founder advisory agreement. This is calculated on a mark-to-market basis relative to the payment price, which is essentially a high watermark on the variable incentive amount. The final row in the table shows our first quarter weighted average diluted shares outstanding of 174.8 million. I'll reiterate that this figure includes 100% of the 14.1 million fixed shares, which, in practice, we expect to issue ratably over the next six years. With that, I'll hand the call back over to the operator for Q&A.
spk06: Thank you. At this time, we'll now be conducting a question and answer session. If you'd like to ask a question today, please press star 1 from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to move your question from the queue. For participants who are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions, and let's go to star 1. Thank you. Thank you. Our first question comes from the line of Josh Spector with UBS. Please proceed with your question.
spk07: Yeah, hey guys. Thanks for taking my question and congrats on a strong start to the year here. So just wondering if you could give us a little bit more detail on what's going on in oil additives. I mean, pretty meaningful step up in sales, EBITDA and margins. So just trying to think about how much of that is pricing, if you could share that and then Is there anything abnormal in the quarter? I guess my assumption is raw materials probably move up and you may be priced a little bit ahead of that, but you're so far above where you've been the past couple years, trying to assess how much of this is sustainable and where things kind of normalize to as you move through the balance of the year.
spk05: Yeah, sorry. Thanks for the question. Can you hear me okay?
spk07: Yes.
spk05: Okay. As we mentioned in our prepared remarks, we did focus very intensely over the past couple of quarters on our key operational value drivers. We worked very hard on adding profitable new business. We worked very hard on our cost structure to reduce our overall cost and worked on pricing that reflects more of the value that we provide. And you can see those results in the numbers. It's the result of a lot of hard work. over the last couple of quarters. And while we don't really talk about specific volume or price or cost information, we're very pleased with the progress that we've made on all of these fronts.
spk07: I apologize. You cut out there at least for a second on my end. In terms of those various dimensions, Is there any one that was more dominant? I guess I don't think about oil outages as having a lot of volume driver. Did you win a lot of new business, or was it the other factors, productivity and pricing, more so?
spk05: Again, we don't really discuss the details between volume, price, and cost, but I'll say we've made progress on all three of those, and I think the team's doing a great job driving new business, reducing our overall cost structure, and really driving price for value.
spk07: Okay. All right. Thanks. And I guess just a second question here is, you know, since we launched coverage of you guys, you know, we received a lot of questions about the competitive dynamics and U.S. fire retardants. So wondering if you could provide some thoughts on your positioning today and if there's been any evolution in the competitive environment. Thanks.
spk05: You know, I will say that really from our perspective, nothing has really changed. You know, we remain extremely confident in our long-term competitive position and You know, I think I've said this before, but it's worth repeating. You know, I've been doing this for about 20 years now, and there's hardly been a day that someone hasn't been trying to compete to get into this business. And I expect there will always be somebody trying to do it, and I don't expect that to change. You know, at the same time, we're the only company to sell a commercially significant amount of retardant over the last 15 years, and I don't see that changing going forward.
spk07: Okay, thank you.
spk06: Thank you. As a reminder, you may press star 1 to ask a question. The next question comes from the line of Brian DeRubio with Baird. Please proceed with your question.
spk03: Good morning. In your prepared remarks, you had mentioned that you're seeing some growth, faster growth internationally than in the U.S. Is that northern hemisphere countries? Is that southern hemisphere? I'm just trying to get a sense of how much – your seasonality is either going to be a little bit more balanced out, or it's going to be even more exasperated between the second and third quarter versus the first and fourth?
spk05: Sure. It's a great question. So, you know, we continue to see the same kind of fire issue that we see in North America spreading around the world. And we see that in all of the countries that we've traditionally served. So that's in Europe, South America, and Australia. Of course, those markets have been traditionally smaller, so when we see increases in those businesses, they tend to be bigger on a percentage basis. These are countries that are really building out and expanding their program. So I don't know that I would say it's going to be one region versus another, where we're seeing general growth both in our traditional businesses around the world, northern and southern hemisphere, and the addition of new customers as the wildfire problem continues to grow around the world.
spk03: Got it. And then just, you know, during the last quarter call, we had a conversation, you know, talked about some of the inflationary pressures that you were seeing across the business. Those remain the same. Are you seeing new pressures? Are you seeing relief from other areas? Just trying to get a sense how that overall environment is evolving for you on the inflation front.
spk05: Yeah, we continue to see the same kind of inflation that, you know, the rest of the world is seeing across our businesses in terms of raw materials and other costs. But we do have contractual mechanisms across our contracts to be able to pass those costs through. So we don't really believe that we will see an impact on our financial results based on those cost increases.
spk03: Perfect. That's all I have. Thank you so much.
spk06: Thank you. Once again, as a reminder to ask a question, you may press star 1. Our next question is from the line of Matt Pickering with Select Equity. Please proceed with your question.
spk00: Hi, thank you for taking my question. Just wanted to go back to a comment you made about the hard work around supply chain initiatives, given the seasonality of your business. Is there any detail you can share there, maybe contextually, about kind of what you've done and kind of what it means for your outlook? Clearly, supply chain can be disruptive, and I know you guys are doing a good job there, but any more detail would be helpful. Thank you.
spk05: Yeah, you know, we have one mission in this business, and that's to make sure that we serve our customer with 100% reliability. And as we go into each season and look at some of the challenges that we might be facing from a supply chain standpoint, we make sure to react very early to what we're seeing so that we ensure we have no disruptions. And this year is certainly no different, although it's a little bit more extreme than we've seen in the past. So we went through a lot of efforts to bolster our raw material supply, to make sure we were ordering materials earlier. We have a good, diverse group of suppliers across all of our key raw materials, so we made sure those relationships were strong and that our supply chain was serving our needs on a real-time basis. And we've also expanded our transportation network to ensure that we can deliver the products to our customers in real time, as we have always done. It's really the results of that whole team effort across all facets of the supply
spk00: Thank you.
spk06: Thank you. At this time, there are no additional questions. I'd like to turn to Florida Management for any further closing remarks.
spk05: Well, I want to thank everybody for joining the call. We look forward to talking to you again next quarter and reporting our results. Thank you very much. Have a good day.
spk06: This will conclude today's conference. You may disconnect your lines at this time and log off your computers and have a wonderful day.
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