Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Perimeter Solutions Q1 2024 Earnings Call. 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.

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.

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's 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 '23. The year-over-year improvement in Fire Safety's revenue and adjusted EBITDA was primarily driven by our suppressants business, where our three P'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 has a 37% adjusted EBITDA margin, roughly in line with the business's margins prior to the destock period, illustrating the point we have 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 about 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 3 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 three P'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 three P'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 three P-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 regarding 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.

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 three P's implementation across our entire Fire Safety business. As is typical, our retardant sales were relatively modest in the first quarter and concentrated among 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 a 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 are 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.

Our first question is from Josh Spector with UBS.

It's Chris Perrella on for Josh. I wanted to follow up on the strength in specialty. Is there a restocking that took place in the business in the first quarter? Or should we think about that as a strong growth and a good run rate for the business for the rest of 2024?

Yes. Chris, Haitham here. So the latter. We don't think there was any restocking in Q1. We think it was a natural rebound off of the depressed levels of the last four to five quarters.

All right. No, I appreciate the color on that. And then switching over to Fire Safety. The fire season to date, you had the higher burn acreage in Texas. Given some of the noise in the first quarter, how would you think about the trends in the fire season and how it relates to PRM?

I don't think there's much, if anything, to extrapolate from Q1 into the balance of the year. The acres burnt due to the Texas and Oklahoma fires were significant. As Kyle pointed out, their financial impact on our Q1 was largely insignificant. And I think disconnected from what may or may not happen over the balance of the year. As far as what may happen over the balance of the year, Chris, it's just too early to tell. It's unpredictable, and we'll find out in the next 90 or 120 days here, but it's very, very hard to prognosticate with any confidence at this point.

No. No, I appreciate that. And then just one more on working capital. Where are you targeting that for the year? And is that going to be positive for 2024?

Yes, Chris, it's Kyle. We do expect that we will receive a benefit compared to our normal long-term guidance that we laid out on Slide 6 this year. And when we look through that, the timing of that is going to come through, and the big piece of that will come a little bit in Q2 and more predominantly in Q3. As we've talked about previously, we have a more robust inventory position that we usually hold, and a good portion of the reduction that will be made in that, to the extent that we're able to do so, will be during the fire season. So we'll see some of that benefit coming through predominantly in Q3.

Our next question is from Dan Kutz with Morgan Stanley.

I wanted to ask about the UAFA's request for the U.S. fire service to revisit and update its qualification process. First, are any of the PRM products at risk from this requalification process? I assume not, since the focus seems to be on new product qualification. I would like to confirm that. Secondly, many people are trying to understand the timeline for the U.S. fire service to potentially revise and improve this process, which appears quite outdated. I am curious if you have any recent experience with changes or updates to the QPL process and how that might relate to potential revisions now.

Thank you for your questions, Dan. Regarding the first point, we are quite confident in all our products on the Qualified Product List and do not anticipate any changes there. The air tanker community is advocating for more safety-focused testing in light of a concerning incident involving a competing product. We are fully aligned with the air tanker companies, the industry association UAFA, the forest service which is leading much of this reassessment, and the regulatory agencies that are rightly examining the situation to enhance safety, including NIST and NTSB. We view this as a very constructive process. Our industry is dedicated to a safety mission, and our company is fundamentally committed to ensuring the safety and effectiveness of our products. The safety of air tanker pilots who use our products, the firefighters risking their lives on the grounds, and the communities we serve is our top priority. We strongly support any initiative from industry associations, customers, or regulatory bodies aimed at reassessing the testing and approval process to improve safety and efficacy, and we are encouraged by recent developments over the past few weeks.

Great. That's really helpful color. And sorry to batter this again. But I just wanted to come back to the working capital and inventory question and just confirm, so if I look at past first quarters, you guys would invest a little bit in inventory, this quarter was basically flat. Is the interpretation of that, that there's maybe less runway than you've contemplated a quarter ago for the incremental tailwind versus your normal long-term working capital framework? Or are you guys still pretty confident that we're kind of in a similar place today as we were a quarter ago in terms of the magnitude of what you think that tailwind can be?

Dan, I think you just said it extremely well. We're in the same place we were a quarter ago regarding our working capital view for the year. The important point to recognize our working capital and the difference from our long-term assumptions is that inventory position. We entered the year with a substantially more robust inventory position than you normally would. When you look at the use of working capital, specifically as it relates to inventory, typically, Q2 is a reasonably meaningful use of cash for that as we build that inventory into the fire season. That trend in Q2 will be muted this year. And then we will likely see a reduction in that inventory in Q3 as the fire season gets going.

Got it. Super helpful and very clear. Maybe if I could just sneak one last one in, and Haitham, this might be for you. But I know sometimes some investors aren't huge fans of special dividends or special dividends versus buybacks. I was just wondering if you could talk us through what scenario or what the situation would be where special dividends might rank the highest in your capital allocation framework. Just broadly, what kind of would be the circumstances where that might be the preferred capital deployment method?

Another very good question. Let me explain a principle first, and then I'll describe the process we use to implement it. The first principle is that cash on our balance sheet represents capital that belongs to our shareholders, and we have a responsibility to effectively utilize that capital on their behalf at appropriately high internal rates of return. We consider cash sitting on the balance sheet, earning minimal interest, to be inadequate in terms of returns for our shareholders. This raises the question of what we plan to do with excess cash instead of hoarding it on the balance sheet. Our focus is on deploying it for high internal rates of return. We have a clear priority order for this. No company is as familiar to us as Perimeter, nor do we believe in any company more than Perimeter, where we have a clearer and more specific view on future value. When we believe that the internal rate of return for share buybacks exceeds our long-term return threshold, which we compare to private equity returns accessible in public markets, we will prioritize cash for buybacks. The next priority is mergers and acquisitions. We are increasingly confident that we can apply our approach of driving profitable new business, achieving consistent measurable productivity, and pricing our products based on their value to significantly enhance margins and cash flows in acquired companies. We have seen success with our three current businesses at Perimeter, and we expect the same with our retardant business when conditions normalize. We are prepared to implement this method repeatedly to create real value. Thus, when an acquisition opportunity arises that fits our strategy and meets our return expectations, we will pursue it. If we find that we are not buying back stock because the internal rate of return does not justify it, and we do not anticipate actionable acquisitions that meet our return criteria in the near to medium term, our options narrow to holding cash on our balance sheet or returning it to shareholders. In that case, the decision is straightforward: we will return it to our shareholders, who can then decide how to allocate it.

Our next question is from Josh Spector with UBS.

It's Chris Perrella again. Can you comment on your outlook for fire return pricing for the year?

The short answer is no. We don't discuss current year pricing. However, I want to highlight our consistent approach to pricing, which has always remained the same and will continue to do so. We are completely focused on listening to our customers, understanding their challenges, recognizing what they value the most, and working diligently with our teams to enhance our product and service to deliver more value. We believe we excel at this. When we provide more value, it makes sense for us to adjust our pricing accordingly, ensuring our pricing reflects the value offered to customers, which benefits everyone involved. When we address our customers' main issues and add substantial value, they are usually willing to pay a premium for that additional benefit, which is also beneficial for us. This approach satisfies our customers and positively impacts our bottom line and shareholders. While we won't comment on pricing for any specific year, straying from this strategy would mean we're not fulfilling our responsibilities. The direction we believe our pricing should take each year is clear.

I appreciate the color on that. And then just one quick one. For mil-spec, does that have an impact in 2024? Or is that a slow build for that product?

So I would say both. It had an impact in the second half of '23. It had an impact in Q1. It should certainly have an impact throughout the balance of the year, but mil-spec is not a one-shot thing. I referred to this on my prior call. Mil-spec, there are a number of chunky important mil-spec approvals, which are separate from one another. You have aircraft rescue, you have big system sprinkler, you have salt water, you have commercial airport, and so on and so forth. Our hope and certainly our plan over the coming quarters and years is to keep being first to market with these various approvals, therefore, unlocking incremental chunks of mil-spec and continuing to benefit from this opportunity over the long term as we clearly are in 2024.

Ladies and gentlemen, we have reached the end of the question-and-answer session and are out of time for today's call. I would like to turn the call back to Haitham Khouri for closing remarks.

Thank you very much, everyone, and talk again in 90 or so days.

Thank you. This concludes today's conference. You may disconnect your lines at this time.