Thursday, November 14, 2024

Q3 2024 Perimeter Solutions SA Earnings Call

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Seth Barker; Head of IR and VP, Financial Planning & Analysis; Perimeter Solutions SA

Haitham Khouri; Chief Executive Officer, Director; Perimeter Solutions SA

Kyle Sable; Chief Financial Officer and Principal Accounting Officer; Perimeter Solutions SA

Joshua Spector; Analyst; UBS Securities LLC

Operator

Greetings. Welcome to Perimeter Solutions third-quarter 2024 earnings call. (Operator Instructions) As a reminder, this conference is being recorded.
It is now my pleasure to introduce Seth Barker, Head of Investor Relations. Thank you. You may proceed.

Seth Barker

Thank you, operator. Good morning, everyone, and thank you for joining Perimeter Solutions third 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, November 12, 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

Thanks for the intro Seth. And thank you, as always, for the great work on the Spruce step deck. Good morning, everyone. Thank you for joining us. I’ll start on slide 3 with a summary of our strategy. Our goal is to fulfill our critical mission by providing our customers with quality products and exceptional service while delivering private equity-like returns with the liquidity of a public market.
We plan to attain this goal by owning extremely high-quality businesses and maximizing their long-term strength and value through 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 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. Slide 4 provides a snapshot of our three main product lines: retardants, suppressants and specialty products, all of which share the following very attractive structural traits.
Each provides a mission-critical function where failure is not an option. Each is a clear leader in its market. Each serves an extremely challenging and complex end market through an integrated solution offering that includes product, equipment and service. And finally, each has an attractive organic or inorganic long-term growth profile. Before addressing our strong third quarter and year-to-date financial performance, I’d like to touch on our operating performance.
I’ll start on slide 5 with Retardants. The retardant market is characterized by the intersection of extreme criticality and complexity, starting with criticality. Failure in this business is measured in lives and property. When we load and launch an air tanker, we’re protecting a hotshot crew battling an active wildfire or a community threatened by an approaching fire or someone’s home. It’s often all of the above at once. Failure in what we do is simply not an option. Fulfilling our mission requires 100% reliability, 100% of the time in every geography, we operate and for every customer we serve.
Slide 6 captures the great complexity amidst which we fulfill our critical mission. We must unfailingly meet very stringent service standards in challenging and often harsh operating environments amidst extreme variability and unpredictability. Faced with this unique combination of criticality, and complexity, customers across the world partner with Perimeter Solutions in their life-saving missions.
Turning to slide 7. The reason every meaningful retardant program globally partners with Perimeter is our unfailing service record. I’ll take a moment to walk investors through a couple of recent real-world examples of Perimeter serving our customer and fulfilling our mission. In August of 2023, the Canadian City of Yellowknife came under severe wildfire threat and an evacuation order was issued for all 20,000 residents of the city.
Yellowknife is a remote city in Northern Canada. It’s the capital of the Northwest Territories, which itself has a total of only 44,000 residents. There is a single two-lane road out of Yellowknife to the province of Alberta to the South. Alberta’s closest evacuate reception center was approximately 680 miles away from Yellowknife via that single passage. It was imperative to our customer, the Northwest Territories Forest Management division that this road remains secure for the evacuation of Yellowknife.
We were operating in an extremely remote part of the world. We were also in the midst of the busiest Canadian wildfire season on record. However, and as always, Perimeter was present and prepared. We responded on a dime, and provided uninterrupted supply of retardant to six air tanker bases in the Northwest Territories, Yellowknife, Hay River, Fort Simpson, Fort Smith, Norman Wells and Inuvik.
The tanker base at Norman Wells is only accessible by barge in summer. The water level was low, and the barge couldn’t sail. Instead, we flew totes of liquid concentrate to Norman Wells and kept the base fully stocked and pumping gallons throughout the evacuation operation.
The passage out of Yellowknife was secured and the evacuation operation was successful. Residents were able to return to their homes within a few weeks. Yellowknife is one example of Perimeter stepping up and fulfilling the mission as only we can amidst extreme criticality and great complexity.
I can recount countless similar examples from all corners of the world, be it North America, Central or South America, Europe, the Middle East, Australia or Asia. I’d also like to convey an operating example from the current year. The Western United States experienced a period of intense fire activity in mid-July of 2024. All our air tanker bases were open, yet customers requested additional resources. As always, we responded. We simultaneously deployed a dozen Mobile Retardant Bases or MRBs, including to California, Washington, Oregon, Idaho, Wyoming and Oklahoma.
MRBs are typically set up in remote areas that are difficult to reach from fixed air bases and in close proximity to an active wildfire. MRBs can also be used to increase firefighting capacity during periods of extreme wildfire activity.
We fully deployed MRB in under one day in any open space with a water source and can provide immediate air tanker retardant mixing and loading capabilities as well as dip tanks for helicopter operations. We staff MRBs with up to 10 employees and an MRB can remain deployed for weeks at a time in support of our customers’ firefighting operations.
In addition to the 12 simultaneously deployed MRBs, we deployed ground-applied retardant units, including 5 units simultaneously deployed to California’s Coffee Pot Fire. Finally, we activated our fixed Channel Islands air base and successfully supported the deployment of several C-130 air tankers under the US Air Force’s Modular Airborne Firefighting System program, typically referred to as MAFS.
MAFS is an emergency program where when all commercial air tankers are activated, but further assistance is needed, the US Air Force activates their C-130 air tanker fleet out of our Channel Islands air base to provide additional emergency aerial resources. It’s difficult to find a greater intersection of criticality and complexity than what we faced this July with over 100 active air bases, a dozen simultaneously deployed MRBs, a large fleet of simultaneously deployed ground-applied retardant units and an active MAFS program out of Channel Islands. Yet we did what we always do at Perimeter. We stepped up and served our customers in support of their sacred mission.
Turning to Suppressants on slide 8. Our Suppressants business shares many attributes with our Retardant business, where extreme criticality intersects with great complexity and where we address our customers’ needs through an integrated solution offering encompassing product, equipment and emergency response.
Perimeter has also emerged as a clear market leader in Suppressants on the back of our pioneering R&D breakthroughs in fluorine-free foams and systems. This product leadership has led to an extremely high win rate of fluorinated to fluorine-free facility conversion projects, including our approximately 99% win rate at FAA 139 compliant airports.
Given the largely razor-razor blade nature of the Suppressants business, where aftermarket foam sales are largely spec-ed in with the installed equipment and service network, our fluorine-free project win rate is creating a large installed base of customers into which we expect to sell aftermarket product far into the future. We couldn’t be prouder of the operational execution by our Suppressants business as well as their continued extremely strong financial performance.
Slide 9 touches on Specialty Products. This is another business where you must consistently meet stringent customer and regulatory standards, where we serve our customers through a comprehensive and integrated offering spanning product, equipment, and service and where Perimeter is the clear market leader with over 50% of all installed OECD capacity.
We’re also very proud of Specialty Products’ operational execution. We’ve delivered approximately 10,000 bins in 2024 with a single-digit number of product issues or returns. This issue rate in a global business with very tight product specifications and extremely complex logistics and transportation requirements is a testament to the team’s exceptional execution. We’re also proud of Specialty Products’ financial performance this year, which speaks for itself.
Turning now to Slide 10, which provides a snapshot of Perimeter’s adjusted EBITDA track record over the past 15 years and highlights of our 18% adjusted EBITDA CAGR over this period. Please note that we’re using LTM adjusted EBITDA of $259 million as a placeholder for 2024 adjusted EBITDA. The vast majority of the improvement in our adjusted EBITDA over the past two to three years is the direct result of the rigorous application of our value driver focused operating model.
This is clear when comparing either 2020 or 2021 with the LTM period. 2020 and 2021 witnessed approximately 36% higher and 7% lower acres burned ex-Alaska, respectively, versus the LTM period. Yet the LTM period delivered roughly 85% to 90% higher adjusted EBITDA versus 2020 and 2021 due to the successful implementation of our operational value drivers. These comparisons isolate the impact of our value drivers and provide clear evidence that our operating strategy works.
As I’ve consistently stated, the implementation of our operating model is a journey, not a destination. We will keep our foot on the gas, and we are confident that we will drive higher adjusted EBITDA in any future year with similar end market conditions to the LTM period.
I’ll close on slide 11, discussing capital allocation. Driving shareholder value through high IRR capital allocation is a core tenet of our strategy. As I’ve stated previously, we expect to deploy all of our 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 internal reinvestment into our business, M&A, share repurchases and special dividends.
We’re clearly well positioned for capital allocation with over $200 million of cash on our balance sheet, LTM net leverage of 1.7 times and the expectation that 2025 will be another strong free cash flow year. Our capital allocation priorities are listed on slide 11.
Our first priority is always to reinvest in our business via both OpEx and CapEx. First, in order to best support our customers’ missions and next, to fund high-return, profitable new business and productivity initiatives. We expect to deliver on the higher 2024 CapEx budget we guided to earlier this year.
2024 will mark a new high for reinvestment into our business, not only through the aforementioned increase in CapEx, but also through several key OpEx line items, including R&D and field service. We will maintain this higher level of reinvestment into our business. However, we expect to generate meaningfully more free cash flow and create meaningfully more leverage capacity via organic EBITDA growth than we can possibly reinvest internally. Therefore, we will look beyond internal reinvestment for capital allocation opportunities.
Our next capital allocation priority is M&A, as evidenced by the improvement we’ve driven across Retardants, Suppressants and Specialty Products, we are confident that our value driver focused operating strategy will create significant value when applied to the right business. We’re actively searching for targets with the right economic criteria, specifically where we can significantly increase EBITDA and free cash flow via the rigorous application of our value driver operating strategy. We won’t hesitate to swing the bat when we find the right opportunity.
Our next priority is share repurchases. As we’ve proven during our three years as a public company, we will double down on perimeter when the market provides an especially attractive opportunity to do so. Finally, and in the highly unlikely event that we’re unable to allocate sufficient capital to the three aforementioned avenues of internal reinvestment, acquisitions and share repurchases, we would expect to return capital to our shareholders via special dividends.
With that, I’ll turn the call over to Kyle.

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