Ladies and gentlemen, greetings, and welcome to the Perimeter Solutions Q3 2022 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Seth Barker of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining Perimeter Solutions Third Quarter 2022 Earnings Call. Speaking on today's call are Haitham Khouri, Vice Chairman; Edward Goldberg, Chief Executive Officer; and Chuck Kropp, 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 4, 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 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. 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 Haitham Khouri, Vice Chairman.

Thank you, Seth. Good morning, everyone, and thank you for joining us. As usual, I'll start with some summary comments on our strategy. Then I'll touch on our financial performance and capital allocation before turning the call over to Eddie and Chuck. Starting with our strategy on Slide 3. As you've heard us say before, our goal is to deliver private equity like returns with a 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 at Perimeter as described on Slide 4, and we also use these criteria to evaluate potential new acquisitions. As described on Slide 5, we seek to drive long-term equity value creation by a consistent improvement in our three operational value drivers, which are: profitable new business, continual cost improvement, and pricing to reflect the value we 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. Turning now to our financial results, starting with Fire Safety. We've consistently emphasized that within the predictable long term volume growth we expect in our Fire Safety business there exists an element of annual and quarterly variability, based primarily on the severity of the North America fire season. In a nutshell, while the long term Fire Safety volume…

Thanks, Haitham. I'll start with our Fire Safety business and provide some high level context starting on Slide 6. The volume growth equation in our retardant business is a function of growth of acres burned plus growth in retardant per acre. As illustrated on this slide, measured over the past seven years, 2015 through 2021, our US retardant unit volumes have increased at a 10% CAGR. We use 2015 and 2021 as the start and end years for the analysis, as both years represent fairly normalized fire seasons, where acres burned excluding Alaska are within a few percentage points of their respective trailing seven year moving averages. As illustrated on Slide 7, over the 2015 to 2021 period, the first part of our retardant volume growth equation, US acres burned ex-Alaska increased at a 6% CAGR. This is in line with the long-term growth in US acres burned ex-Alaska. Using the longest time series available and utilizing a five year rolling average to capture the multi-year trend, US acres burned ex-Alaska have increased at a 5% CAGR over approximately three decades from a five year rolling average of 1.9 million acres burned in 1994 to a five year rolling average of 7.3 million acres burned in 2021. We expect that the long term trend in growth and acreage burned ex-Alaska will remain very dependable over the long term. As illustrated on Slide 8, over the 2015 to 2021 period, the second part of our retardant volume growth equation, retardant per acre burned, increased at 4% CAGR. As summarized on Slide 9, growth in retardant per acre is primarily a function of growth in the wildland urban interface, which increases the need to fight wildfires; and growth in the air tanker fleet, which increases the ability to fight wildfires, and continued…

Thanks, Eddie. Turning to Slides 13 and, third quarter sales in our Fire Safety business were $122 million, down 29% versus the prior year and $207 million year-to-date, down 13% versus the prior year. Third quarter adjusted EBITDA in our Fire Safety business was $60.4 million, down 38% versus the prior year and $81.2 million year-to-date, down 30% versus the prior year. As Haitham mentioned, we expect to absorb slightly more than $10 million in incremental public company cost in 2022. This is primarily comprised of internal and external expenses related to the insurance, accounting, audit, and legal requirements around public company reporting and compliance. Going forward, our goal is to reduce overall public company expenses by realizing annual productivity gains in excess of inflation. Switching to Specialty Products, third quarter sales in our Specialty Products business were $38.5 million, up 68% versus the prior year and $112.2 million year-to-date, up 42% versus the prior year. Third quarter adjusted EBITDA in our Specialty Products business was $15.3 million, up 512% versus the prior year and $42 million year-to-date, up 135% versus the prior year. Moving on to the Consolidated business, third quarter Consolidated sales were $160.5 million, down 18% versus the prior year and $319.2 million year-to-date, up 1% versus the prior year. Third quarter consolidated adjusted EBITDA was $75.6 million, down 25% versus the prior year and $123.3 million year-to-date, down 8% versus the prior year. Now moving below adjusted EBITDA, interest expense in the quarter was approximately $10 million, which is our regular quarterly run rate. Depreciation was approximately $2.7 million while amortization expense was $13.7 million. Taxes were $34.5 million in the quarter. CapEx during the quarter was approximately $2 million. Our long term expectations around interest expense, depreciation, taxes, CapEx and working capital are summarized on Slide 15. In 2022, we expect two differences versus these longer term expectations, one, related to cash taxes and two, related to working capital. We expect cash taxes to come in lower than expected. 2022 cash taxes should be approximately $15 million. On the other hand, we expect working capital to be a more significant use of cash this year, relative to the increase in sales than we typically expect, due in large part to higher inventory resulting from the weaker fire season coupled with longer purchasing lead times. We ended the quarter with approximately $675 million of Senior Notes, cash of approximately $166 million and approximately 162 million basic shares outstanding. Slide 16 walks investors through the differences between our basic and diluted share counts. I won't walk through the table in detail, though I will remind investors that our diluted share count of approximately 177 million shares includes 100% of the 14.1 million fixed shares we expect to issue under the Founder Advisory Agreement through Q1 2028. In practice, we expect to issue these shares ratably over the next six years. With that, I'll hand the call back over to the operator for Q&A.

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from the line of Joshua Spector from UBS. Please go ahead.

Good morning. This is Lucas Beaumont on for Josh. So I’d just like to start by discussing the performance of Fire Safety relative to the fire season if we could. So you guys had the acres burned numbers in there. I had something similar sort of down 50% for the year, year-to-date and 70% in the third quarter, I think in the regions that you guys are focused on. I think your sales and EBITDA were only down kind of 30% and 25%. So what was the driver of the outperformance there versus the market? Was it volume driven or price driven? Is there like an international markets impact on new products? And how should we think about that in terms of getting back to kind of the base earnings in 2023 with a normal fire season?

Yeah, good morning. Thanks for the question. So I think it's pretty typical in our business for volumes to outperform acres burned, particularly on the downside. It's a combination of increased capacity to fight fires and aggressive initial attack strategy by the agency. So I think you'll see that typically in our business where we are able to outperform acres in terms of retardant sold.

Okay, great. Thanks. And then, so in terms of the new buyback, you've announced, which is another 100 million is pretty substantial. It's like 9% of your market cap. Can you just kind of talk about that for us in the context of how you view your current leverage and how we should sort of think about you deploying that over the next year?

So we authorized that, we want to make sure that we've got the flexibility and the firepower to take advantage of opportunities when we think the buying back stock is the right way to use our capital. So it's an authorization to allow us that flexibility.

So, no worries. And then maybe shifting to Specialty Products, so your earnings there improved quarter-on-quarter, I mean, in other similar businesses at the moment, we’re sort of seeing expectations kind of start to weaken into the second half, particularly those with any exposure to Europe. So I was just sort of wondering what -- if you could talk about what's driving the strength for you here and how you see the second half trending?

Yeah, we've been working hard in our Specialty Products, across all of our value drivers, pricing to value, taking cost out of the system, and driving new business. And we feel really good about the progress that we're making in Specialty Products and we feel very good about the business in the second half and going forward.

And is that -- so and you guys, you flagged the $50 million sort of in EBITDA this year. I mean, I assume there's some overrunning going on there, from a pricing -- from the current pricing environment. Correct me if I'm wrong, but so I mean it’s if I sort of like, if I annualize the current quarter, I get sort of $60 million in EBITDA or like on an LTM basis, you sort of go $45 million to $50 million. So I mean, how should we think about the base earnings there, one to two years out, is it -- is this a new normal or I mean, does it go back to $30 million to $40 million? Or how should we kind of think about them?

Yeah, let me say a couple of things. So we had said previously that first quarter results were very good, because our customers were having very good results on their own, no production interruptions, etc. And the second quarter results were probably a little bit more typical of a mix of different customer behaviors. The third quarter did look a lot like the first quarter, but we still think on an ongoing basis, somewhere in the Q2 performance is probably the right way to look at this business. And we are optimistic that we're going to continue to make progress across all of our value drivers and continue to improve this business going forward.

Right, thanks very much.

Thank you. Our next question comes from the line of Connor Lynagh from Morgan Stanley. Please go ahead.

Yeah, thanks. So obviously, as you've highlighted, this was at least year-over-year, a very weak fire season. I'm wondering if you can help us think through, if we were to see normalized fire activity next year, how should we think through the various drivers of what you guys have done on pricing? What you guys have done on cost? Also the inflation pass-throughs that you've been dealing with, can you give us sort of a framework as to, should we think about EBITDA dollar growth or what's sort of the logical way to think through what the impact on EBITDA would be for your business?

Sure. So we believe that that what we've been saying all along will continue to hold true. When we return to normal fire season, we believe we'll continue to see mid-teens EBITDA growth. Going forward, really nothing has changed there. We continue to work, again, hard across the value drivers of making sure we price to value, taking very aggressive actions to take cost out of the system, and looking for new business. We continue to be protected in our ability to pass through unusual cost increases. So we feel good about that. And I think our performance will return to what's expected when and as we get to a more normal fire seasons.

And Connor, I'll just add real quick, it’s mid-teens EBITDA growth off of a normalized fire season. You just got to be careful on peak-ish or trough-ish years, which is what we know, is in the earnings call, if 2022 had been a roughly normalized fire season, we think roughly mid-teens growth off of the $141 million of adjusted EBITDA, we delivered last year would be reasonable. So that's a pretty good, albeit rough approximation of on-trend 22 EBITDA, and then mid-teens growth off that, makes good sense as a very preliminary starting point going forward.

And so just clarify that point. Thank you for the color -- just but just to clarify that. So if I were to call, just for example 2021, call it normal year, you think you've done underlying improvements to the business in 2022 that would have driven mid-teens EBITDA. And then if 2023 is a normalized year, you would not only have the volume benefit, but you would also have an incremental, mid-teens EBITDA growth, or is it just the one year worth of improvements? How do I think about that?

We think you can take 2021, which was $141 million spot for, had this year been normal or at least a normalized fire season, it will be roughly mid-teen, the EBITDA growth that'll get you to 141.4 times 1.15, right, to be very specific. And then wherever that number is, assume mid-teens growth in ’23 over ’22 assuming ’23 is a normalized fire season.

Got it. Thanks. And then obviously one of the big conversations on your stock is competition. So I'm wondering if you could just provide an update on what the state of competitors attempting to enter the market and qualify for use is right now?

Yeah, so first of all, I can say that you can look at on the Fire Service website and see nothing's really changed in the last quarter. I will repeat what I've said before, barely a day has gone by in the last 20 years that I've been running this business that I haven't -- there hasn't been somebody trying to get into it. Some companies are noisier than others. I think there's quite a bit of noise in the system right now. But we feel very good about our market position going forward.

Alright, I'll turn it back. Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Brian De Rubio from Baird. Please go ahead.

Good morning, just a few questions for me. I'd like to just drill down on Specialty Products for a second. May have missed this but can you just give us maybe just generically, what were the drivers? It was -- are you seeing better volumes of that business or is it price? Just love to know what the various drivers have been there?

Yeah, so as I mentioned previously, we are working hard to improve the business across all of our value drivers that includes driving price to value, it includes taking costs out of the system and looking for profitable new business. We've made good progress over the last year, in all -- across all three value drivers. You can see that in the results. And we think that we'll continue to make improvements going forward across all aspects of that business.

Maybe that's another way, you know in that business, what's sort of the capacity? What's the operating rate today? And you do have the ability to drive more volumes or is this going to be more of a price driven story going forward?

We believe we have the ability to take on profitable new business that we're working on, we feel good about that.

Okay. Wanted to touch on a non-cash item but you know, as it relates to your M&A activity, both this quarter and last quarter, you guys took actually non-cash gains on the contingent earn-outs. Last quarter was $9.4 million, this quarter was, I think like $3.6 million. Obviously, when that happens, that means one of your M&A targets has not performed as well as you thought. So we'd love to get maybe a little bit more details on what exactly happened there, and how are you thinking about M&A sort of today?

Yeah, good morning. This is Chuck. Yeah, thanks for the question. Yeah, in terms of the historical M&A, really, that's just as simple as shift of product from earn-out eligible product to not earn-out eligible, so the decrease in the liability there.

And, Brian, going forward, our view on M&A is completely unchanged. We're very focused on it. We'd love to get very high quality transactions done. When we do it, we create significant shareholder value as we find the long-term free cash flow per share. On the one hand, it's a very good M&A environment with less competition, restricted access to capital and we're in a great cash situation both on the balance sheet and forward expectations of cash generation. On the other hand, it's just more challenging to get things done and price things loose in this environment, and we're working, we're working super hard at it and stay tuned.

Got it. Just one final question for me and I have been [indiscernible] know the answer. But the ticker symbol of your bonds changed in the last couple of months. Is there any reason for that?

That’s above our take rate.

Okay, just confused everybody. They were looking for [Peri MS], they got locked to HLD. Everybody's calling me up, was like, what's this new bond I own? So, but okay.

Okay. If you're asking me on the earnings call, it sounds like it's important to our bond holders, and therefore it's very important to us. Let us figure that out. And you'll get an e-mail from us, Brian with a clarification. Thanks for pointing it out.

Yeah, appreciate it. Thank you much.

Thank you. Our next question comes from the line of Joshua Spector from UBS. Please go ahead.

Hey, guys, its Lucas, again. Just wanted to ask a follow-up, so just wondering if you could talk about what visibility you have at the moment into increases in the aerial fleets for fire retardants over the next couple of years? So I know maybe this year isn't the right year given that the acres burned are down so much but in a more normal year, would you say as well, I guess, are you seeing unmet demand from a materials perspective due to the lack of plans? So as we get more rollout, that's going to sort of be a positive benefit as well. And I guess is that sort of -- would you say that's probably been captured in the 4% sort of retardant growth per acre CAGR or how do you guys kind of think about the dynamics on that side? Thanks.

Sure. So, you know, we do look at air tanker capacity as one of the key drivers in the in the volume growth of our business. And we do continue to see an increase in air tanker capacity year-over-year. You know, in terms of visibility into what that is specifically, you should probably look to what the air tanker companies are saying, because they're all pretty public in kind of their expansion plans both the private air tanker companies, and you can see the CAL FIRE is currently working on adding seven C-130s to their fleet over the next couple of years. So we see that as very positive. It does contribute to retardant per acre increases, and it also just increases the peak of what we can sell during the peak of the fire season. So we see that as a key driver of the business and one of the secular growth trends.

Right, thanks very much.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And now I would like to turn the conference over to Mr. Edward Goldberg, CEO, closing comments.

Thank you all for joining our third quarter earnings call. We're looking forward to talking to you again in a few months to report fourth quarter and full-year 2022 earnings.

Thank you. The conference of Perimeter Solutions has now concluded. Thank you for your participation. Have a lovely day.