Perimeter Solutions, SA

Greetings and welcome to the Perimeter Solutions second quarter 2024 earnings call. At this time, all participants are 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 on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Seth Barker, Head of Investor Relations for Perimeter Solutions. Thank you, sir. You may begin.

Thank you, Operator. Good morning, everyone, and thank you for joining Perimeter Solutions' second quarter 2024 earnings call. Speaking on today's call are Haytham Corey, Chief Executive Officer, and Kyle Sable, 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, August 1st, 2024, 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 Hatham Corey, Chief Executive Officer.

Thank you, Seth. Good morning, everyone. Thank you for joining us. As always, I'll start on slide three with summary comments on our strategy. Our stated 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 the following five very specific economic criteria. Number one, recurring and predictable revenue streams. Number two, long-term secular growth tailwinds. Number three, products that account for critical but small portions of larger value streams. Number four, significant free cash flow generation with high returns on tangible capital. And number five, the potential for opportunistic consolidation. We believe that these five economic criteria are present at our current businesses, and we use these criteria to evaluate potential new acquisitions. As described on slide four, we seek to drive long-term equity value creation via consistent improvement in our three operational value drivers, which are number one, profitable new business, number two, continual productivity improvements, and number three, pricing our products and services to the value they provide. In addition to our three operational value drivers, we seek to maximize equity value creation through a clear focus on the allocation of our capital as well as the management of our capital structure. Turning to our financial results on slide five and starting with fire safety. I've repeatedly emphasized the belief that our fire safety businesses' sustainable earnings power has increased significantly due to the rigorous implementation of our operational value drivers. I've also repeatedly suggested that this earnings power should be evident when comparing reporting periods with roughly similar levels of wildfire activity in our core North American market. While Q2 of 2024 experienced slightly lower US acres burned ex-Alaska versus Q2 of 2023, fire safety's increased earnings power is evident in the year-over-year comparison. Second quarter fire safety revenue increased 85%, while adjusted EBDA more than tripled year over year. Both our global retardants and global suppressants businesses contributed to this growth. The significant improvement in fire safety's financial results was driven by a combination of external and internal factors. On the external front, our retardant customers are increasingly utilizing aerial attack in their battle against wildfires. This was evident pre-season with robust air tanker contracting by our customers, as well as during the season with the active utilization of these aerial assets and by extension of our fire retardant. As I've referenced repeatedly, we believe that our customers' increasingly proactive posture towards aerial attack coupled with steady growth in the air tanker fleet, are two of the long-term secular volume drivers of our business, along with longer fire seasons, increasing acres burned, and growth in the wildland-urban interface. The external environment was also supportive in our suppressants business in Q2, with strong conversion activity from fluorinated to fluorine-free foams where perimeter is a clear market leader. On the internal front, fire safety second quarter financial results are directly tied to the rigorous implementation of our operational value drivers. To further illustrate this point to our investors, I'll provide examples that directly tie our Q2 financial results in each of our retardant and suppressants businesses to each of our individual value drivers, starting with suppressants and profitable new business We've significantly increased R&D investment into the business and focus this R&D spend on fluorine-free technologies, which we expect to drive significant customer value and therefore significant profitable new business. This strategy is clearly working. For example, we recently certified a fluorine-free foam for aircraft rescue firefighting at FAA 139 compliant airports. A meaningful portion of airports have converted to fluorine free aircraft rescue foam this year. And to date, 99% of these airports have selected perimeter solutions, including 10 of the 25 most traveled airports in the United States. We expect the majority of the 517 FAA 139 compliant airports to convert to fluorine free over the next several years. And we also expect to capture an outsized portion of these opportunities. As an example of suppressants productivity, we've worked very diligently to improve our cost structure and believe that America's suppressants average raw material cost per unit has decreased roughly 20% over the past 18 months. Finally, our fluorine free products are highly differentiated and aligned with our customers' objectives, and we price these products to reflect this unique value. Moving on to retardants, and again starting with an example of profitable new business. We're investing heavily in our airbases, including upgrading existing bases, building new bases, and converting bulk bases to full service. These investments increase the amount of retardant we deploy in support of our customer's mission. For example, we significantly upgraded our Albuquerque, New Mexico air tanker base prior to the 2024 fire season, replacing the existing 10,000 gallon tanks with new 25,000 gallon tanks, upgrading the pumps, variable speed frequency drives, and electrical infrastructure, building the capability to simultaneously load two air tankers versus previously only being able to load a single air tanker and introducing the capability to load VLATs versus previously only being able to load LATs. The results of this investment are reflected in our Q2 results. On June 18th, our Albuquerque air tanker base loaded over 100,000 gallons in support of our customer's efforts against the Salt and South Fork fires. This one day, 100,000 gallon throughput compares to Albuquerque's average annual throughput of approximately 144,000 gallons over the prior five years. This 100,000 gallon daily throughput would not have been possible without our significant pre-season investment into our base at Albuquerque. Albuquerque is one of several air bases we upgraded prior to the 24 season. and we plan to upgrade several additional airbases prior to the 25 fire season. Moving on to an example of retardant productivity. We recently introduced a new and proprietary retardant mixing system to our McClellan and Redding airbases. This technology increases daily retardant throughput while improving base labor efficiency and eliminating logistics and repackaging costs. We're rolling out this technology to additional airbases and expect to realize additional productivity benefits as we do so. Finally on retardants, we have more people spending more time with more retardant customers than ever before. We're building an ever deeper understanding of our customers' wants and needs and working diligently to deliver the products, services, and solutions to best address these diverse customer objectives. As long as we consistently deliver ever greater value to our customers, we should share in this value creation. I hope these examples give our investors a sense for the amount of rigorous operational value driver activity throughout our company. I also hope that our recent financial results provide a sense for how these initiatives are driving our financial performance. Optimizing our financial performance via rigorous value driver implementation is a journey rather than a destination. As long as we maintain the intensity with which we chase each point of opportunity at each of our individual business units, I'm confident that we'll continue to drive Perimeter's long-term earnings power sustainably higher. Turning to specialty products. Like fire safety, specialty products' year-over-year financial performance is markedly improved, with adjusted EBITDA roughly doubling in both the second quarter and first half of 2024. Also much like fire safety, the improvement was driven by a combination of external and internal factors. On the external front, the market continues to emerge from last year's inventory destock period. On the internal front, the rigorous implementation of our operating model is paying off. As I just did with fire safety, I'll provide specific examples tying specialty products financial results to specific 3Ps initiatives, starting with profitable new business. Our R&D team, driven by feedback from a key customer, developed a novel P2S5 SKU for wind turbine applications. This difficult-to-replicate product expands P2S5's addressable market and drives profitable new business. On specialty product productivity, one of specialty products' key raw material inputs is elemental phosphorus. We have invested significantly in logistics, plant capability, and process technologies to utilize elemental phosphorus from various sources. This has reduced our raw material costs and increased surety of supply while maintaining the industry's highest quality standards. And finally, an example of pricing our products and services to the value they provide in our specialty products business. Customer feedback pointed to operational challenges associated with the industry's most common bin closure valve. Our specialty products engineering team created a new patented closure valve, which is now standardized across our bin fleet. Customer feedback on our new valve technology and fully refreshed fleet bin is extremely positive, and we've shared in the value creation through value-based pricing. Turning now to M&A. We're confident that our operational value driver-focused operating strategy creates significant value when applied to the right businesses, as defined by the five target economic criteria articulated on slide three. This confidence is reinforced by our progress over the past 18 months at all three of our businesses at perimeter, suppressants, retardants, and specialty products. We're actively searching for the right M&A targets while also constantly evaluating the IRR trade-off between our various capital allocation alternatives. As I've stated previously, and consistent with our brief track record as a public company, we expect to deploy all of our excess cash flow as well as the incremental leverage capacity we expect to generate through organic EBITDA growth towards the highest expected IRR combination of M&A, share repurchases, and special dividends. I'll end my remarks by reasserting the conviction that Perimeter is the gold standard as far as the efficacy and safety of our products, the quality of our service, and the passion, dedication, and integrity of our team. I'll also reassert that we will never take our market leadership positions for granted. Rather, we will always relentlessly push to raise the bar on ourselves. Many of the examples I provided today are evidence of this always strive for better mentality. We serve our customers better each and every day and re-earn the privilege of serving them in their life-saving missions. With that, I'll turn the call over to Kyle.