Perimeter Solutions, SA (NYSE:PRM) Q1 2024 Earnings Call Transcript

Perimeter Solutions, SA (NYSE:PRM) Q1 2024 Earnings Call Transcript May 10, 2024

Perimeter Solutions, SA isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen and thank you for standing by. Welcome to Perimeter Solutions Q1 2024 Earnings Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Seth Barker, Head of Investor Relations. Thank you. You may begin.

Seth Barker: Thank you, operator. Good morning, everyone and thank you for joining Perimeter Solutions' first quarter 2024 earnings call. Speaking on today's call are Haitham Khouri, 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 May 9, 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 adjusted 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: Thank you, Seth. Good morning, everyone and thanks for joining us. As always, I'll start on Slide 3 with summary comments on our strategy. As we stated repeatedly, 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 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 with higher returns on tangible capital; and five, the potential for opportunistic consolidation.

We believe that these five economic criteria are present in our current businesses and we use these 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: number one, profitable new business; number two, continual productivity improvements; and number three, pricing to reflect the value our products and services 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 now to our financial results on Slide 5 and starting with Fire Safety. Recall that the first quarter is usually Fire Safety smallest quarter of the year and a quarter in which the business has typically historically reported an adjusted EBITDA loss.

Fire Safety delivered markedly improved year-over-year financial results in the first quarter of 2024 much as the business did in the prior quarter. Fire Safety revenue increased 34% year-over-year in Q1, while the business was close to breakeven on an adjusted EBITDA basis versus a negative $3.4 million adjusted EBITDA loss in the first quarter of 2023. The year-over-year improvement in Fire Safety's revenue and adjusted EBITDA was primarily driven by our suppressants business, where our 3P's operating strategy continues to drive performance. Specifically, our focused R&D investments into fluorine-free technology is driving profitable new business by our market-leading product portfolio. Our focus on pricing our products as a significant value they provide is driving higher per unit revenue and profitability.

And finally, our rigor around eliminating excess costs via consistent and measurable productivity initiatives is contributing to adjusted EBITDA growth in excess of revenue growth. Turning to Specialty Products. After several slow quarters, which we attributed to destock activity throughout the specialty chemicals supply chain, Specialty Products delivered solid financial results in the first quarter. The business is 37% adjusted EBITDA margin roughly in line with the business' margins prior to the destock period illustrates the point where we repeatedly emphasized around Specialty Products' resilient underlying unit economics through the destock period. While we're clearly encouraged by Specialty Products' first quarter performance, we've also been candid around our surprise at the depth and duration of the destock.

As such, we will allow more time to pass before offering projections around end market demand in this business. Turning to cash and capital allocation. We repurchased approximately three million shares in the first quarter at an average price of $4.79. Recall that we repurchased approximately 12.2 million shares last year at an average price of $5.24. We have approximately $97 million remaining on our existing repurchase authorization and we ended the first quarter with approximately $34 million of cash on our balance sheet. As I did last call I'll touch on our approach to capital allocation including M&A. We're confident that our 3P's operating strategy will create significant value when applied to the right businesses. The right businesses are defined by the five targeted economic criteria I covered on slide 3.

Our confidence in M&A-driven value creation is based on the improvement our 3P's operating strategy has delivered in each of our retardants, suppressants and Specialty Products businesses over the past two years. Much of this improvement is evident in our reported results and commentary including in Specialty Products and suppressants. We expect the balance of this 3P-driven improvement particularly in our retardants business to be evident in a more normalized fire season. As enthusiastic as we are about M&A-driven value creation we're constantly evaluating the IRR trade-offs between our different capital allocation alternatives. We ultimately expect to deploy all of our excess free 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.

Finally and as I have done over the last several earnings calls I will reassert our 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. This is reflected in our ongoing strong market positions. I will 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. Between the clear superiority of our products, services and people our fiercely competitive spirit and our ever-vigilant mindset we expect to thrive in all future environments. And with that I will turn the call over to Kyle.

Kyle Sable: Thanks, Haitham. First quarter sales in our Fire Safety business increased 34% year-over-year to $25.2 million, while first quarter adjusted EBITDA was negative $0.2 million an improvement from negative $3.4 million in the first quarter of 2023. As Haitham noted consistent with the past several quarters the year-over-year improvement was driven by a particularly strong year-over-year performance in our suppressants business as well as continued solid 3P's implementation across our entire Fire Safety business. As is typical our retardant sales were relatively modest in the first quarter and concentrated amongst customers in South America and Australia. I'll call out the significant February fires across Texas and Oklahoma drove very modest Q1 retardant activity due primarily to the fact that regional air bases were not open when the fires ignited and quickly spread as well as significant turn in weather conditions once bases did open.

First quarter sales in our Specialty Products business increased 35% year-over-year to $33.9 million, while first quarter adjusted EBITDA increased 91% to $12.4 million. The year-over-year improvement was due primarily to higher market demand as well as continued strong unit economics driven by our pricing and productivity actions. First quarter consolidated sales increased 35% year-over-year to $59 million while first quarter consolidated adjusted EBITDA increased almost fourfold year-over-year to $12.1 million. Moving below adjusted EBITDA. Interest expense in the first quarter was $10.6 million in line with our quarterly run rate. Depreciation was $2.6 million in Q1, while amortization expense was $13.8 million. Cash paid for income tax is approximately $800,000 in the first quarter.

CapEx was approximately $1.6 million in the first quarter. Our long-term expectations for interest expense, depreciation, tax rate and CapEx are unchanged and summarized on slide 6. Our long-term expectations for net working capital is also unchanged, although as I've noted previously, we expect to receive some benefit from working capital in 2024 given our significant inventory position. We ended the quarter with approximately $675 million of senior notes, cash of approximately $34 million and approximately 145 million basic shares outstanding. With that, I'll hand the call back to the operator for Q&A.

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