Perimeter Solutions SA
NYSE:PRM
Earnings Call Analysis
Q4-2023 Analysis
Perimeter Solutions SA
Towards the end of 2023, the Specialty Products business reported an upturn in quarterly sales, reaching $24.1 million, reflecting an 11% year-over-year increase. However, the broader picture paints a less sanguine scenario with full year revenues sliding down 28% compared to 2022. Similarly, while the fourth quarter adjusted EBITDA improved from the previous year, the overall 2023 figures were disheartening; a 57% plummet in EBITDA compared to 2022, driven mostly by lower volumes and surplus inventory along with the burden of high fixed costs. The fiscal year concluded with consolidated sales dipping by 11% and EBITDA by 23%, confirming a sizeable contraction in the business operations.
Interest expenses held steady at $10.5 million for the fourth quarter and cumulatively $41.4 million for the year, aligning with the company's anticipated financial pathways. Amortization and depreciation together accumulated to just over $65 million for the year. The balance sheet closed with a cash reserve of $47.3 million against a considerably grander sum of senior notes, specifically $675 million, framing the company's debt profile. With plans to benefit from the working capital adjustments in 2024, stemming from a potentially excess inventory position, the financial strategy is clear on maintaining a stable cost structure.
The company appears to remain alert and opportunist in the acquisition arena, with small, strategically fitting mergers and acquisitions (M&A) identified as active pursuits if they can be financed through on-hand balance or projected cash flow. On the matter of larger scale acquisitions, the company subscribes to a disciplined approach, hinging decisions on anticipated internal rate of return (IRR) metrics when contrasted with share repurchases or alternate cash deployments. The cost of capital, influenced by both equity and debt markets conditions, stands as a crucial determinant for such substantial transactions, with executives expressing readiness to pounce on opportunities that present a superior IRR profile.
Providing forward-looking insights, especially concerning the severity of upcoming fire seasons that can impact demand for the company's fire safety products, can be a speculative endeavor. However, early observation suggests no extraordinary indicators that would imply a caveat or boon for this business segment. It underscores an inherent business uncertainty, as the natural factors influencing fire seasons remain unpredictable and can significantly affect company performance.
The mention of the 'mil spec win' in the earnings call hints at an advanced niche the company is carving out within the fire suppressant marketplace. Having secured a military specification approval, the company is positioned for an increased stream of sales from both initial product installs and the ensuing supply of consumable products. Boasting this hard-to-achieve certification, the company not only underscores its research and development capability but also prepares to capitalize on forthcoming opportunities as they continue to navigate through approvals that no competitor has yet secured. It's a testament to the company's strategic focus on long-term market capture and delivering innovative solutions that meet rigorous standards.
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Hello, and welcome to the Perimeter Solutions Q4 and Full Year 2023 Earnings Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Seth Barker, Head of Investor Relations. Please go ahead, Seth.
Thank you, operator. Good morning, everyone, and thank you for joining Perimeter Solutions' Fourth Quarter and Full Year 2023 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 maybe listening to a replay of this call that all statements made are as of today, February 22, 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. The 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 Haitham Khouri, Chief Executive Officer.
Thank you, Seth. Good morning, everyone. Thank you 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 5 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 higher returns on tangible capital; and number five, the potential for opportunistic consolidation. We believe that these 5 economic criteria are present at 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 3 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 3 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. 2023 presented challenging demand environments in both our Fire Safety and Specialty Products businesses. Starting with Fire Safety. The 2023 fire season was very mild, with 2.3 million acres burned ex Alaska. This represented an almost 50% decrease versus 2022, which itself was a mild season and was almost 60% below a 10-year U.S. average. We believe that the mild 2023 season was primarily driven by idiosyncratic weather events, including record aggregate rainfall and snow pack in some of the most fire-prone regions of the United States in the first half of the year and unique storm activity during the fire season, including tropical storm Hilary in August. Despite the almost 50% year-over-year decline in U.S. acres burned ex Alaska, 2023 Fire Safety revenue, adjusted EBITDA and adjusted EBITDA margin were all roughly flat versus 2022. Fire Safety's 2023 financial result outperformed the decline in acres burned, principally due to: first, improved unit economics throughout our retardant business; second, continued particularly strong performance from our international retardant markets; and third, continued excellent performance from our suppressants business. We believe that these 3 positive drivers are the direct result of the rigorous application of our 3P's operating strategy, which I summarized on Slide 4, and which we will continue to drive going forward in all corners of our business, irrespective of end market conditions. Our Specialty Products business also experienced a weak demand environment in 2023. We believe this was principally driven by inventory destocking activity in the specialty chemical supply chain. This weak demand environment is reflected in our '23 Specialty Products financial results, with full year revenue down 28% and adjusted EBITDA down 57% versus the prior year. We will continue to refrain from real-time commentary or timing predictions around the market recovery, though I will reiterate our confidence that demand for our products should recover. Before moving on from our '23 financial results, I'll note that while both our businesses experienced weak end markets in '23, both also reap the benefits of a couple of years of strong execution on our 3P's value driver strategy. The resulting '23 performance establishes a credible base EBITDA in a soft end market scenario. Turning to cash and capital allocation. We repurchased approximately 6.3 million shares in the fourth quarter at an average price of $4.21. We repurchased approximately 12.2 million shares in 2023 at an average price of $5.24. Our Board of Directors has approved a new $100 million share repurchase authorization, which replaces our prior authorization. Let me spend a moment now on capital allocation more generally. We're confident that our 3P's operating strategy will create significant value when applied to the right businesses as defined by the 5 target economic criteria on Slide 3. This confidence is based on the underlying improvement was delivered in each of our retardants, suppressants and Specialty Products businesses over the past 2 years. The improvement in our retardants business is evidenced by Fire Safety is approximately flat 2023 financial performance, despite the almost 50% year-over-year decline in U.S. acres burned ex Alaska versus 2022. The improvement in our suppressants business is evidenced by the fact that we've approximately doubled adjusted EBITDA margins between 2021 and 2023 and have well more than doubled adjusted EBITDA dollars over this period. The improvement in our Specialty Products business is best evidenced by its strong performance in 2022 prior to the aforementioned destock activity. As enthusiastic as we are about M&A-driven value creation, we are constantly evaluating the IRR trade-off between actionable acquisitions and share repurchases. As evidenced by our actions, in particular, over the latter part of 2023, we've deemed shrinking our share count to prevailing valuations to be the best use of our capital to date. We will continue to constantly evaluate our capital allocation alternatives and 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 IRR combination of M&A, share repurchases and special dividends. As I've done the last couple of earnings calls, I'll now comment on the competitive environment in our retardant business. We believe that Perimeter is the gold standard as far as the efficacy and safety of our products, quality of our service and the passion, dedication and integrity of our team. Despite a high degree of confidence in our business, we will not fall into the standard incumbent trap of ignoring, dismissing or minimizing potential competition. We believe that only the paranoid survive, and we take every potential competitive risk no matter how remote seriously. Between the clear superiority of our products, services and people, our competitive spirit and our ever vigilant mindset, we believe that we will thrive in any future environment. I'll close by noting that we will refrain from providing annual guidance, both for 2024 and as a go-forward policy. As is hopefully clear from our 2023 results relative to end market conditions as well as from the commentary around our businesses, we feel good about our prospects and expect to report solid financial results in a normalized demand environment. With that, I'll turn the call over to Kyle.
Thanks, Haitham. Fourth quarter sales in our Fire Safety business were $35.4 million, up 81% versus the prior year and $225.6 million for the full year 2023, approximately flat versus 2022. Fourth quarter adjusted EBITDA in our Fire Safety business was $7 million, up from a loss of $3.9 million the prior year and $76.2 million for the full year 2023, down 1% versus 2022. We are pleased with our Fire Safety results in the fourth quarter, but are mindful of the fact that our fire business' seasonality for the fourth quarter typically generates less than 10% of annual EBITDA, exaggerates small changes in both revenue and profitability. Approximately half of the improvement in our year-over-year Q4 financial performance was due to our suppressants business and half was due to retardants. The improvement in suppressants was largely driven by strength in fluorine-free foams, aided by our recent mil-spec qualification. While the improvement in retardants was primarily due to strong performance in our international markets and improved unit economics across geographies, each of these components be it international growth in retardants, successful new product introductions in suppressants or improved unit economics across our various Fire Safety products and services is the direct result of the rigorous and successful application of our 3P's operating strategy. Fourth quarter sales in our Specialty Products business were $24.1 million, up 11% versus the prior year and $96.6 million for the full year 2023, down 28% versus 2022. Fourth quarter adjusted EBITDA in our Specialty Products business was $4.2 million, down 30% versus the prior year and $20.6 million for the full year 2023, down 57% versus 2022. 2023 revenue was impacted by lower volumes due to inventory destock activity and 2023 EBITDA was impacted by lower volumes compounded by high fixed costs. Q4 2023 EBITDA margins were below Q4 2022 due to the timing of certain charges and expenses. Moving to the consolidated business. Fourth quarter consolidated sales were $59.5 million, up 44% versus the prior year. Full year 2023 consolidated sales were $322.1 million, down 11% versus 2022. Fourth quarter consolidated adjusted EBITDA was $11.2 million, up from $2.1 million the prior year. Full year 2023 consolidated adjusted EBITDA was $96.8 million, down 23% versus 2022. Substantially all of the year-over-year decline in consolidated revenue, adjusted EBITDA and adjusted EBITDA margin is due to what we believe to be destock-related volumes in our Specialty Products business. Moving below adjusted EBITDA. Interest expense in the fourth quarter was $10.5 million, in line with our quarterly run rate. Full year interest expense was $41.4 million, also in line with our long-term expectations. Depreciation was $2.6 million in Q4, while amortization expense was $13.8 million. Depreciation was $9.8 million for the full year, while amortization expense was $55.1 million. Cash paid for income tax was approximately $5.4 million in Q4 and $26 million for the full year. CapEx approximately $2.8 million in Q4 and $9.4 million for the full year. 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 are unchanged as well, although we expect to receive a benefit from working capital in 2024, given our robust inventory position. We ended 2023 with approximately $675 million of senior notes, cash of approximately $47.3 million and approximately 146.5 million ordinary shares outstanding. With that, I'll hand the call back to the operator for Q&A.
[Operator Instructions] Our first question today is coming from Dan Kutz from Morgan Stanley.
So I just wanted to kick it off, Haitham, you talked a lot about capital allocation priorities and how M&A fits into that. I guess my question is, against kind of the prevailing debt and equity capital markets backdrop and cost of capital for Perimeter, is kind of smaller bolt-on M&A still on the menu? And then, I guess, maybe more importantly, what would some of the milestones or what would you need to see for bigger M&A opportunities to kind of potentially look more attractive? Is it just a factor of maybe a more normal severity fire season and the stock reflecting -- better reflecting the earnings power of the business or anything that you could help us with in terms of what would make bigger M&A more attractive in the capital allocation stack?
Yes. Dan, thanks for the question. So to quickly hit your first one, yes, small tuck-in M&A, anything we can do from balance sheet cash or expected free cash generation is absolutely on the table and we're always looking for small deals like that, which tend to be very good when you can find them. Larger deals, it really is strictly a function of expected IRR. If we had one on the table today that was a higher expected IRR then share repurchases or alternative uses of cash and we believe we could finance it, we do. We're open for business for large transactions. Now that said, to the extent we do need to issue debt or equity securities to finance a larger acquisition then a lower share price and a higher cost of debt, those are adverse inputs in any model and will lead to a lower IRR. So there is -- there's certainly is some circularity to it. And the better our stock does and the lower our cost of debt is from just mathematically more likely it is that a large deal will clear the hurdle, but there's no magic stock price or cost of debt or there is a magic IRR hurdle, where if a deal clears that hurdle, pro forma for financing assumptions and is a superior IRR to buying back our own stock, we'll swing the bat.
That's great. That's all super helpful, and I appreciate that color. And then maybe just quickly, I appreciate it's early in the year and -- but just wondering if there's anything you could share in terms of what kind of like the snow pack and precipitation indicators might signal thus far this year relative to maybe some prior years or the historical normal trends, is there anything to garner thus far in terms of the potential severity of this fire season from those indicators?
Predicting fire seasons in February is a fool therein, but I'm -- but the risk of standing like a fool, I will. Our product -- at a very high-level comment -- I would say this looks pretty normal, but there are no indicators flashing particularly mild or particularly severe. So it's generally very hard to make a prediction in February and it's even harder this year because nothing particularly unusual is going on as far as we can tell.
Your next question is coming from Josh Spector from UBS.
So I first want to just ask a clarification. Just when you talked about the Fire Safety business in fourth quarter, I think you said it was roughly half suppressants and retardants. I wasn't sure if that was referring to the year-on-year growth or the mix in the quarter. So can you clarify that, please?
Thanks, Josh. Now when we're speaking about that, we are talking about the improvement and the performance of the business, not the overall mix of the business in the quarter.
Okay. That's helpful. And I guess just related on suppressants, when you talk about the mil spec win, how much of that would you say now is in the numbers, I guess, at least in the second half of this year versus further opportunity as you look at next year?
So it's very hard to quantify precisely because mil spec a very large market and the nature of our product in suppressants tends to be razor, razor blade. So even if you penetrate the market with upfront installs, you're then setting yourself up for a very nice long-term fairly captive stream of foam sales. So it's hard to answer the question. But at a high level, we got no spec approval pretty late in 2023. And therefore, while it did help us nicely late in the year, it really was for only a few weeks of 2023. So we're pretty excited about mil specs going forward. But the last thing I'll say on mil spec, Josh, is not all of the mil spec is a single approval. We got -- we were the first to get a specific mil spec approval in late '23, which was great. And by the way, tremendous, tremendous effort over the past couple of years by our suppressants, R&D team and this is very difficult chemistry and a hell of an accomplishment to be first to market here. But it's the first of a couple of other potential meaningful, mil spec approvals, which also nobody has yet. And we feel pretty good about our odds of being first to market and doing quite well, there the first-mover advantage as well. Now we'll see, we've got to execute, but we certainly have the R&D team for it.
I appreciate that. I'll ask a couple more and then turn it over. I guess, first, just I wanted to ask on the contracts for the 2024 season. I think your competitor flagged that there was some delays in going out. I'm not really sure what that means for you guys and what your view is on share repricing. So just curious on any color there.
It really doesn't mean anything for us, Josh. We -- the last thing I think we want to be doing as a company is commenting customer by customer and contract by contract. So we're not going to do it today, and we really never going to do it. That said, no, those comments have no impact on our business. From a competitive share perspective, listen, you heard my comments in the prepared remarks. On the one hand, we feel really, really, really good about our business. I'll put up our people against anybody in the world. I'll put up our product against anybody in the world. I'll put up our service against anybody in the world, and I'm very confident in spending lots of time with our customers that they agree with that assessment. Second thing I'll say is we really do believe that only the paranoid survive. And if there's any glimmer of risk anywhere in our business, competitive or otherwise, we're going to take it super, super, super seriously. So we feel good about '24, but we're also ever vigilant.
[Operator Instructions] Our next question is coming from Brian DiRubbio from Baird.
A couple of questions for me. Just first off, Kyle, I think you mentioned that 2024, you will see a working capital benefit. Can you give us any sense of how much of that inventory is in Fire Safety versus Specialty Products?
Sure, Brian. Just given the size of the relative businesses and where we're at right now, the bulk of the inventory that we see here is going to be in our Fire Safety business. As far as the impact that it's going to have this year to our free cash flow, it's really hard because it depends on both the severity and the timing of the fire season, but we wouldn't have called it out if it did have potential to be meaningful.
Okay. And are you going to manage that aggressively this year? Or put another way, you're going to reduce operating rates to make sure you get that benefit?
Yes, Josh, when you think about our business, the first focus for us is always 100% of the time, we need to have retardant available to deliver. So I just want to start by saying there's no scenario where we would ever endanger that priority. That said, yes, listen, we've talked about this several times now. This is a focus for the company and for us to really work through that inventory. We're going to need more of a fire season than we saw last year. If that materializes this year, we expect we'll see a benefit from inventory.
Understood. And then final question for me. Earlier this month, the U.S. Forest Service released a record decision about how they want to attack wildfires on national forest lands basically calling for using more water and less toxic suppressants -- sorry, retardants. Just sort of any thoughts on how that can affect your business overall? I think one of the comments they made in the ROD was that it impact about 20% of the land-based system.
And Brian, I just don't know the report you're referring to and I'm sitting in conference room here with a big swath of our management team and none of us know the report you're referring to. Our product has been -- just for its work, our retardant products have been developed in true partnerships with our large customers, very consultatively over many, many years [ and undergo ], where our customers are environmental conservation first and foremost. Our products have got through rigorous testing and blessing by them, and therefore, there's something collaterally consistency in sort of the premise of your question, but let's follow up offline, and we glad to read anything out there.
Yes. I'll send you a copy of the report. It was posted on their website, the U.S. Forest Service website in early February, I think it was February 2, sort of detailing how they want to change their approach. I'll pass along so we can follow up offline.
Okay.
Next question is a follow-up from Josh Spector from UBS.
So I just wanted to ask about the international growth in retardants. Are there specific markets or products you'd call out that helped you in the fourth quarter? And I'm just wondering if that's any read of any flow-through of wins, et cetera, for next year? Or something just within this fire season in those countries for this quarter?
Yes. I'll answer the second part first, which is there's really no read-through from Q4 into Q1, not to say that Q1 is going to be particularly mild or severe, just the events that led to good retardant sales in Q4 were further -- were pretty idiosyncratic and don't say much about what Q1 of '24 might look like. As far as markets that were strong for us, Australia was solid for us in Q4, not particularly unusual, but it was a good market for us as were a couple of markets in South America.
Okay. And just a follow-up on the working capital part of it. I guess if I look at where you ended, working capital looks like it's about 50% of sales. Historically, it's closer to maybe 25%. I guess, very rough math, if your sales are flat, should we think about getting that working capital percentage down to that historical level as about the right framework? And I guess, if you were to grow sales, do you actually get a working capital benefit or you just grow into that? Just curious on those 2 points?
Thanks, Josh. Yes, to the second point and I'll take that first, you've generally got the right way to frame it that. If we grow sales, normally, we'd have to invest in working capital like any business. We have an inventory position that allows us to slow those initial purchases. It allows us to build into some of the inventory that we already haven't used that. To your question on if we hold sales flat, do we release inventory. The hope would be that we would be able to release some amount of inventory. The question just, it really depends on the severity and timing of the fire season.
Okay. Fair enough. And just a couple on Specialty. So I guess the sales were up, but the EBITDA wasn't. So I'm curious if there's anything you could share about why that was the case?
Yes, Josh, it really was down to a little bit of charge timing, what came in and out of the quarter right around quarter end. When we look at the underlying economics of the business, we don't think there's anything meaningful that's changed either quarter-over-quarter or year-over-year other than the deleveraging we would see from an operating perspective, right?
Okay. And I mean, since you don't disclose price or volumes, I don't know if there's a way you can roughly frame where are the volumes in that segment today versus -- I think you said '22 was normal. Can you frame that at least, so we can understand what a recovery might look like?
I'll try to take that, Josh. So I'm not going to comment on today, but I'll comment on last year. Last year was down -- and we're not -- again, we're not going to quantify it, but last year volumes that the destock was severe. Our volumes were down significantly throughout '23 versus '22. We have said before and I'll say again, from a 3P's value driver perspective, we did well. Our unit economics are similar, if not better, in '23 versus '22, which does suggest some element of positive pricing, and therefore, a large portion -- more than all of, et cetera, the revenue decline is volume.
Okay. Fair enough. And the last one to me, just kind of a picky one here. On the share count, you presented in your slides, I assume that reflects the current share count with the full buyback. So as of January versus the December quarter average and does that include the roughly a couple of million shares that will be added with the founder of share structure?
To keep it simple, Kyle, so we just give end of '23 basic shares outstanding.
Yes, at the end of '23 for basic shares outstanding, we had 146.5 million, I believe, shares outstanding at the end '23, net of everything.
Okay. But that doesn't -- if the founder shares will be added this year or is that already in...
It does not include founder share issuance in Q1 of '24 and any other potential buyback or issuance activity in the first quarter of '24.
We reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.
No, just thanks again for the time, everybody. Thanks for the support, and we'll be back here soon.
Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.