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 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 higher 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 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. 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…

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…

Thank you. [Operator Instructions] Our first question today is coming from Dan Kutz from Morgan Stanley. Your line is live.

Hey, thanks. Good morning. 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? Thanks.

Yes. Hey, 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? Thanks.

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.

Fair enough. And really appreciate that color. Thanks a lot, guys. I will turn it back.

Thanks, Dan.

Thank you. Your next question is coming from Josh Spector from UBS. Your line is now live.

Yes. Hey, guys. Good morning. 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.

Thanks, 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 will put up our people against anybody in the world, I will put up our product against anybody in the world, I will put up our service against anybody in the world, and I am very confident in spending lots of time with our customers that they agree with that assessment. Second thing I will say is we really do believe that only the paranoid survive. And if there is any glimmer of risk anywhere in our business, competitive or otherwise, we are going to take it super, super, super seriously. So, we feel good about ‘24, but we are also ever vigilant.

Okay. Thanks. I have no questions, I will leave it there. So, I will jump back in the queue.

[Operator Instructions] Our next question is coming from Brian DiRubbio from Baird. Your line is now live.

Good morning gentlemen. 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 are 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 are going to reduce operating rates to make sure you get that benefit?

Yes, 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 is no scenario where we would ever endanger that priority. That said, yes, listen, we have talked about this several times now. This is a focus for the company and for us to really work through that inventory. We are going to need more of a fire season than we saw last year. If that materializes this year, we expect we will 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 are referring to and I am sitting in conference room here with a big swath of our management team and none of us know the report un are 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, we have our customers are environmental conservation first and foremost. Our products have got through rigorous testing and blessing by them, and therefore, there is something collaterally consistency in sort of the premise of your question, but let’s follow-up offline, and we are glad to read anything out there.

Yes. I will 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 2nd, sort of detailing how they want to change their approach. I will pass along so we can follow-up offline.

Okay.

Great. Thank you.

Thank you. Next question is a follow-up from Josh Spector from UBS. Your line is now live.

Hey guys. So, I just wanted to ask about the international growth in retardants. Are there specific markets or products you would call out that helped you in the fourth quarter? And I am just wondering if that’s any read of any flow-through of wins, etcetera, for next year, or something just within this fire season in those countries for this quarter?

Yes. I will answer the second part first, which there is 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. Thanks. 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 two points?

Thanks Josh. Yes, to the second point and I will take that first, you have generally got the right way to frame it that. If we grow sales, normally, we would 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 have and 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 am curious if there is 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 is 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 is 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 will try to take that, Josh. So, I am not going to comment on today, but I will comment on last year. Last year was down and we are not – again, we are 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 will say again, from a 3Ps 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, etcetera, 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 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.

Got it. It makes sense. Thank you very much.

Thanks Josh.

Thank you. We reached the end of our question-and-answer session. I would 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 will 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.