Noriko Yokozuka - General Counsel, Corporate Secretary & Compliance Officer Haitham Khouri - Vice Chairman & Director Edward Goldberg - CEO & Director Charles Kropp - CFO & Principal Accounting Officer

Thank you, operator. Good morning, everyone, and thank you for joining Perimeter Solutions' Second Quarter 2020 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, August 5, 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, Nori. Good morning, everyone, and thank you for joining us today.

As usual, I'll start with summary comments on our strategy, then I'll touch on 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 from us before, 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: 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 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 via consistent improvement in our 3 operational value drivers, which are as follows: profitable new business, continual cost improvement and pricing to reflect the value we provide, plus a clear focus on the allocation of our capital and the management of our capital structure.

Moving on to our financial results. Our consolidated adjusted EBITDA is up 39% year-to-date, with solid growth in both our Fire Safety and Specialty Products businesses.

Note that Specialty Products is the new name for our Oil Additives business, and Eddie will elaborate on the name change later in this call. Adjusted EBITDA in our Fire Safety business is up 11% year-to-date.

Adjusted EBITDA in our Specialty Products business is up 74% year-to-date. Our Specialty Products business has generated almost $27 million in adjusted EBITDA over the first half of 2022, which comfortably exceeds the adjusted EBITDA generated by this business in each of the last several fiscal years.

As such, we're now confident that our Specialty Products business should deliver solid year-over-year adjusted EBITDA growth this year. Turning to our full year expectations for the consolidated business.

We've consistently stated that, assuming a roughly on-trend 2022 fire season and incorporating our best assumptions around all the other aspects of our business, we expect consolidated adjusted EBITDA growth consistent with, and perhaps above, our long-term framework of mid-teens growth. We've also consistently highlighted that within the highly predictable and dependable long-term growth we expect in our Fire Safety business, we also expect quarterly and annual variability tied primarily to the severity of the North America fire season.

As we approach its halfway point, we'll observe that the North America fire season through the end of July has been soft. According to the National Interagency Coordination Center, excluding the Alaska and southern areas, both of which historically use relatively little retardant, year-to-date, U.S.

acres burned through the end of July are down over 35% year-over-year. Despite the slower early fire season, strong execution on our operational value drivers has driven year-to-date adjusted EBITDA growth above our mid-teens long-term framework.

In fact, we now expect to deliver 2022 consolidated adjusted EBITDA growth consistent with and perhaps above our long-term framework of mid-teens growth assuming flat to modestly down volumes, as the benefit from our operational value drivers should offset modest potential softness in the fire season. That said, and consistent with what we repeatedly emphasized regarding near-term variability tied to the severity of the fire season, while we expect to offset modest seasonal weakness in 2022 and deliver results in line with our long-term targets, we still expect our financial results for the year to move in line with any significant year-over-year variability in the severity of the North American fire season.

I'll close this discussion by noting that we don't believe the slow start to the fire season has much predictive value to the balance of the season. In fact, climate conditions across much of the Western United States remain conducive to an active season, although that has not necessarily transpired to date.

Regarding capital allocation. As you're all aware, we're in the midst of a challenging period across global capital markets, with meaningfully restricted access to capital essentially across the board.

In this environment, we're especially pleased to have significant dry powder on hand with approximately $126 million of cash on our balance sheet at the end of Q2 and an expectation that we will generate significant free cash flow in the second half of the year, almost irrespective of the strength of the fire season. We greatly value this financial flexibility, specifically as it relates to potential M&A opportunities.

Therefore, the bar for allocating capital to buybacks or dividends is especially high at the moment. With this high bar in mind, we repurchased approximately 600,000 shares in May at an average price of $8.36 for total consideration of approximately $5 million.

The valuation opportunity proved short-lived, however, and we remain disciplined. With that, I'll turn the call over to Eddie.

Thanks, Haitham. We're pleased with our strong first half performance with consolidated EBITDA up 39% year-to-date.

I'll review our financial performance for the quarter and the year-to-date period for each of our 2 businesses, starting with our Fire Safety business. Second quarter and year-to-date revenue increased 16% and 31%, respectively, while adjusted EBITDA increased 3% in the quarter and increased 11% year-to-date.

Adjusted EBITDA margins were negatively impacted by roughly 450 basis points in the year-to-date period. We're experiencing significant raw material inflation in 2022.

As expected, we're successfully passing on this inflation through contractual mechanisms in place across the vast majority of our Fire Safety business. While this is a powerful feature of our business that protects our EBITDA dollars during inflationary periods, it also serves to dampen our reported margins as the inflation pass-throughs grow revenue while keeping EBITDA flat, which leads to reported margin compression.

This dynamic, coupled with the incremental public company costs we are adding this year, is impacting our reported margins. Despite this, Fire Safety had a solid first half with 11% year-to-date adjusted EBITDA growth, and we believe the business is well positioned assuming an on-trend line 2022 fire season.

Let me take this opportunity to note some of the key accomplishments in our Fire Safety business during the second quarter. We continued to demonstrate our expertise, experience and reliability in support of our customers' wildland firefighting efforts.

We supported aerial firefighting activity throughout North America as well as in various countries around the world, ensuring a continuous supply of fire retardant to all of our customers, air bases and facilities without fail, and providing our own mobile retardant bases, or MRBs, when called upon to do so by our customers. Let me spend a moment on our international business.

We've been extremely pleased with the performance of our international wildfire business over the last few years. Our consistent experience is that as fire severity increases around the world, it's more a question of when rather than if most fire-prone countries adopt the use of retardant, and therefore become Perimeter customers.

Our experience is also that when a country makes the necessary investments to use retardant, they rarely switch away and typically exhibit meaningful growth over time. We therefore make a concerted and consistent effort to engage with various countries and help them progress along the retardant adoption curve.

We've continued to see this strategy and investment pay off in 2022, and I'll touch on 2 examples. Greece has historically used cheaper and less-effective foam products rather than retardant to combat wildfires.

As their wildfire problem grows in severity and after significant consultations between the Greek authorities and Perimeter Solutions this year, Greece has contracted for one of our mobile retardant bases and the associated fire retardant for the 2022 fire season. This is often an important step toward more meaningful adoption of Perimeter's fire retardant products and services.

We've also made significant progress this year in Italy. For the past several years, Italy has also primarily used cheaper and less-effective foam products, with minimal and sporadic use of retardant.

After concluding that retardants are the superior solution to their growing wildfire issues and after significant consultations with Perimeter, Italy made the decision to switch their entire aerial firefighting effort to retardant starting this year. Furthermore, Italy is implementing a model very similar to the full service model in the United States, where, in addition to providing the fire retardant, Perimeter Solutions also provides the logistics, equipment and staffing necessary to run a national retardant operation.

We continue to be very positive around the long-term growth potential of our international wildfire business. Our prevention and protection business is making good progress.

We are once again partnering with Orange County Fire Authority to support their Quick Reaction Force, or QRF, program that provides protection, quick response to emissions and the ability to conduct night retardant operations. We are now also working with San Diego County to provide retardant services for fire prevention and protection of critical infrastructure.

In our suppressant business, we have developed and commercialized several new fluorine-free firefighting foams this year, and we continue to demonstrate our leadership in the growing fluorine-free foam market and expect to further expand our product portfolio over the coming months. Now turning to Specialty Products.

First, let me address the name change in this business. As we mentioned on previous calls, we're working very diligently to expand the applications and end markets for our P2S5 product line beyond the traditional oil additives market with encouraging results.

P2S5 currently serves diverse end markets and applications, including lubricant additives, various agricultural applications, various mining applications and emerging electric battery technologies. As such, we renamed the segment Specialty Products to better represent this diversity of applications and end markets.

Please note this is strictly a name change with no associated impact to current or historical financial results. Now addressing the financial performance in our Specialty Products business.

Second quarter and year-to-date revenue increased 15% and 31%, respectively, while adjusted EBITDA increased 50% in the quarter and increased 74% year-to-date. Our strong performance in the Specialty Products business stems from our continued focus on our operational value drivers, specifically, winning profitable new business with both existing and new customers, improving our cost structure via productivity gains and pricing to reflect the value we provide to our customer.

We expect to continue to deliver solid performance in our Specialty Products business this year and should comfortably exceed the approximately $24 million of adjusted EBITDA this business delivered in each of the prior 2 years. And with that, I'll turn the call over to Chuck.

Thanks, Eddie. Turning to Slide 7.

Second quarter sales in our Fire Safety business were $66.6 million, up 16% versus the prior year; and $85 million year-to-date, up 31% versus the prior year. Sales of retardants and fire suppressants both increased in the second quarter as well as in the 6-month period.

Second quarter adjusted EBITDA in our Fire Safety business was $24.2 million, up 3% versus the prior year; and $20.9 million year-to-date, up 11% versus the prior year. Switching to Specialty Products.

Second quarter sales in our Specialty Products business were $34.4 million, up 15% versus the prior year; and $73.7 million year-to-date, up 31% versus the prior year. Second quarter adjusted EBITDA in our Specialty Products business was $11.5 million, up 50% versus the prior year; and $26.8 million year-to-date, up 74% versus the prior year.

Moving on to the consolidated business. Second quarter consolidated sales were $101 million, up 16% versus the prior year; and $158.7 million year-to-date, up 31% versus the prior year.

Second quarter consolidated adjusted EBITDA was $35.7 million, up 10% versus the prior year; and $47.7 million year-to-date, up 39% versus the prior year. Now moving below adjusted EBITDA.

Interest expense in the quarter was approximately $12 million. Of this, approximately $1.5 million was a onetime noncash accounting accrual item.

Depreciation was approximately $2.9 million, while amortization expense was $13.8 million. Taxes were an approximately $0.6 million benefit in the quarter.

CapEx during the quarter was approximately $2.7 million. Our expectations around interest expense, depreciation, taxes, CapEx and working capital are largely unchanged and are summarized on Slide 8.

We ended the first quarter with approximately $675 million of senior notes, cash of approximately $126 million and approximately 163 million basic shares outstanding. Let me spend a moment on Slide 9, which walks investors through the differences between our basic and diluted share count.

The table's top row shows our second quarter weighted average basic shares outstanding of 162.9 million. The next row, labeled 1 in the table on Slide 9, captures the dilutive impact of performance-based employee stock options as well as warrants.

Since as of the end of the reporting period the contingencies related to the options had not been met and the effect of the warrants would have been antidilutive, they are excluded from the period's diluted share count calculation. The following row, labeled 2, captures the dilutive impact of the fixed shares issuable under the Founder Advisory Agreement.

This figure includes 100% of the maximum number of fixed shares issuable between Q1 in '23 and Q1 2028. While in practice, we expect these shares to be issued ratably over the next 6 years, the accounting treatment is such that the entire maximum future amount is required to be included in the diluted share count each reporting period.

The row labeled three captures the dilutive impact of the variable shares issuable under the Founder Advisory Agreement. This is calculated on a mark-to-market basis relative to the payment price, which is essentially the high watermark on the variable incentive amount.

Since the contingencies related to the variable [shares] had not been met in the reporting period, they are excluded from the diluted share count calculation for the period. The final row in the table shows our Q2 weighted average diluted shares outstanding of 177 million.

I'll reiterate that this figure includes 100% of the 14.1 million fixed shares, which, in practice, we expect to issue ratably over the next 6 years. With that, I'll hand the call back over to the operator for Q&A.

This is Lucas Beaumont on for Josh. I just wanted to start on Fire Safety, if we could.

So your sales are sort of up 16% in the quarter, but EBITDA only grew 3%. So can you just kind of help us understand why the drop-through, the EBITDA was much weaker this quarter than we've seen historically, touching on sort of the price and volume impacts from growth in the quarter and the price cost dynamics related to the higher [rules] that you mentioned earlier?

And then just how we should think about that dynamic as we progress through the year?

Sure. So as we talked about during the call, we experienced a significant amount of inflation of which we were able to, through our contract mechanisms, pass through those additional costs in our pricing to our customers.

The net effect of that is, as we said, increase in revenue without an associated increase in EBITDA, which tends to depress margins quite significantly. In addition, again, as we said, we are -- we have added some costs related to our public company operations, which is also observed to depress margins -- margin-related percent.

I think we can expect to see similar results going forward in terms of our ability to pass through those raw material costs, which will again protect our EBITDA dollars but tend to depress margins.

Great. And so I suppose then, in terms of the raw materials, I guess either at the total company level or by segment if you think it's quite different, could you give us a feel for sort of like what the impact was in the quarter and the outlook for the rest of the year, either like in dollars or a percentage basis?

Yes. So you can see what's kind of going on in the world from a raw material standpoint or a general inflation standpoint and the impact around the world on the commodity markets and the pricing there.

While I can't get into specifics for raw materials or even by segment, I think we expect to continue to see similar types of costs through the remainder of the year. We're, of course, hopeful like everyone is hopeful that those costs will moderate as we go into next year.

But we are expecting to see similar costs for the remainder of the year and the similar ability to pass those costs through.

Okay. Great.

And I guess just on the volume side. So U.S.

acres burned sort of 50% above the 10-year average, I think, year-to-date and up 77% or so year-on-year. So I was just curious if you could kind of help us understand why that doesn't seem to have flowed through to higher volumes sort of so far.

And then where do you think that's going to kind of hit the peak third quarter of the season, or how we should sort of think about that dynamic.

Yes, sure. It's a good question.

As we have said before, acres burned is a -- typically a generally okay way to look at overall fire season severity, but is not necessarily reflective of our efforts of our retardant sales. And the reason for that is very well illustrated this year.

So a couple of things on acres burned. A significant amount of those acres were burned in areas, as Haitham mentioned in his talk, in areas that typically are lower retardant use areas -- Alaska, Texas, the South, et cetera.

So the effective acres for us were not up nearly as much as the total acres reported. In addition, because much of the activity in the second quarter was early in the quarter, that's a period of time before most of the tanker bases are open or most of the tankers are on activation.

So activity early in the quarter doesn't generate as much business as activity later in the quarter, and the late part of the quarter was much less significant from an acreage burned standpoint. Generally, we are in the middle part of the fire season right now.

And while up until now, the season has been relatively softer than average, that's really not an indication of what we may see in the period, August, September, October. So as Haitham mentioned also, the conditions are such that we could expect to see an active season or an on-trend line season going forward.

But up until now, we haven't experienced that.

Yes. Just to close out the conversation on the cost escalators, is the right way to think about this that you're sort of protecting a dollar of EBITDA margin per ton of retardants sold?

What's -- how exactly are these designed?

I'm sorry, I didn't hear. Can you repeat the last part of your question?

How basically are the -- are your contracts designed? Because basically, it seems like although your percentage margin is coming down year-over-year, the dollars of EBITDA generated are flat to up.

So I guess is the way to understand it is that your revenue line item might move a lot, but your EBITDA per units sold are going to be relatively protected in a given year?

That's exactly right. So these contract mechanisms -- and we do have a number of contracts.

And although the mechanisms in each one are a little bit different, generally, they're designed to protect our EBITDA dollars when we experience these kinds of inflationary periods. So exactly what you'll see is as we pass through these cost increases, it has -- you'll see revenue go up, but no impact on EBITDA, so we are protected from a dollar standpoint, but it does tend to depress margins.

Right. Yes.

Okay. That makes sense and seems logical.

So just one high-level question that we get a lot on your story. So can you speak to the competitive environment within the U.S.

as a starting point, just how successful are you seeing competition as something to make inroads into the industry? And then I guess the flip side is in the international markets where you're making inroads, what type of competition are you generally going against?

From your comments, it sounded like entirely different products, but are there competing solutions similar to yours in many international markets?

So let me take the first part of that question first. So relative to competition in the U.S.

or in North America, our perspective really is unchanged from our previous discussions. It's still unknown whether or when a potential competitor can get qualified.

But assuming that they do get a qualified product, we do still believe it's going to be very difficult for them to win market share in North America. From an international market perspective, similar dynamics.

The methods of wildfire fighting, the use of different products -- foams, retardants, et cetera, are basically the same as they are in North America, and we maintain a very good position in our international markets relative to wildfire fighting. And as we talked about in the call, we're very happy with some of the programs that we're seeing, the expansion of programs in Italy and France, new programs in countries like Greece.

We're very optimistic about our international markets and our efforts are paying off.

Makes sense. Maybe I'll throw one more in here.

Just on the market expansion on Specialty Products, could you speak to some of the big areas you're targeting? And have you guys assessed the addressable market or the market size relative to what you're currently selling into?

So we talked about the addressable market or the end markets that we're really focusing on. Lubricant additives has traditionally been our largest end-user market.

But we're making a lot of good progress in agricultural, mining and new emerging technology markets, which we think could add significant new business to our -- to the company. I don't know that I can really detail the size of that other than to say we're seeing good success across those opportunities.

And we expect to see more success as time goes on, particularly in some of these new emerging applications.

It's okay if you want to just punt on this, but I guess I'm just wondering, are these new markets similar size? 10% of the size?

I mean just order of magnitude relative to the lubricants market.

I would say it's too early to say. The lubricant market has traditionally been our biggest market.

These are, right now, smaller than the lubricant market, but are -- there's a lot of potential growth there. So I think it's too early to say how big these markets could be, but we're very excited about some of the opportunities.

Starting off on the Specialty Products business. I know you touched on it further, but what gives you the confidence that the current run rate of EBITDA there is sustainable over the near to medium term?

So if you look at the progress that we're making in our Specialty Products business, it really is the result of us working on all 3 of our value drivers -- working hard on productivity, generating new business and getting the value for what we provide to our customers in terms of price. And I firmly believe, and I'm very confident that the work that we're doing across the entire spectrum of the business, we'll continue to benefit and be sustainable certainly over the medium term.

And as I mentioned just a few minutes ago, I think there's a lot of long-term opportunity to grow this business into new end markets, which could have benefits for us long into the future.

So none of this -- and I guess the question I'm getting is, none of this has been driven by sort of any near-term volatility, especially given some of the disruptions in Europe?

I would say no. I think this is the result of efforts that have been going on for quite a while and are starting to pay dividends for us.

And I believe that the progress that we're seeing is going to be sustainable.

Fair enough. Fair enough.

Switching gears. Wondering if you could just -- I know you said you're holding off on dividends or buybacks in terms of capital allocation.

But what are you seeing on the M&A front? .

Ryan, it's Haitham here. So we tend to like M&A environments like this.

It's more challenged for most potential buyers and we find ourselves very well capitalized with a good amount to dry powder on the balance sheet and the expectation that, that should grow significantly between now and year-end. That said, in these periods of swift public capital market dislocations, both equity and debt, the first reaction in the private market is almost always freezing up.

Buyers tend not too quickly -- excuse me, sellers tend not to quickly capitulate and drop prices in line with declines in the public equity markets, and buyers tend to be constrained for various reasons, primarily more challenging credit availability. So we think our position is quite attractive in a market like this.

Activity, however, is slower. And that means 2 things for us going forward.

One is eventually activity will have to pick up. Private markets can pause transactions, but can't cease transactions.

So in time, that will take care of itself. Number two, this is up very much on us to be proactive in times like this.

If we think most buyers are somewhat sidelined and we're not, which we do not believe is the case, less stuff will come to us, that means we need to hustle harder and knock on doors and shake things loose. And we're putting maximum effort into that process, and we'll see what happens.

Got it. And just final for me.

Just the cash portion of the founders fee, what is that expected to be?

So what portion, I beg your pardon?

The cash portion -- the cash payment related to the founders fees, what is that expected to be?

Based on the current stock price, roughly maximum of $13 million approximately.

That's for the full year, correct?

Yes.

And just remind me, that gets paid out in the first quarter of next year, correct?

Correct.

Yes.

I take the point that it matters where the acres burned are obviously closer to the urban interface, there's more attention paid from the municipalities. That said, I have an idea that there's going to be far more focus on protecting forests for carbon capture and other reasons.

And the Biden administration has been heavily focused on this, with some declarations, executive orders on forestry. And kind of buried in the revised management bill is some money for "protecting forest", although it's very vague.

Any thoughts on the potential for all of that?

Yes, it's a great question. And it's completely consistent with both our view of the long-term trends and our experience over the last few years where we see continued growth in acreage burned, continued growth in spending on fighting wildfires, continued growth in the resources, including air tankers that are used to fight fire, and we think that those trends are solid and will continue.

Some of the money that is now being allocated toward forest health and forest protection, we think there's opportunity there for -- to help us grow our prevention and protection business. So from what I can see, all of those things that you're talking about really just support and maybe even accelerate the trends that we see going forward.

Understood. And maybe it's just too early, but have you had any discussions with municipalities or otherwise, where they're saying, look, we also have to protect the deep forest for carbon capture reasons, not just the stuff that's closer to residential areas?

Or is that not coming up yet?

No, I think there's a general recognition at both the federal state and local levels that something has to be done to prevent fires, improve forest health, protect communities but also deal with climate change. So carbon capture or just the general view of climate change and forest health is definitely a very -- it's a large focus right now, along with the other focuses relative to firefighting.

So it's -- I wouldn't say that it's the primary focus, but it is definitely becoming a bigger focus in terms of the money being spent on dealing with forest health at all levels. And we are working at the local community, municipality, county, state level, so that -- the organizations that are focusing on this have definitely been -- are definitely broader than they have been in the past.

Yes. Understood.

I mean I would just say, I think the European market is obviously a material opportunity, and you've already noted some growth there. I would say, equally, it could just be the depth with which we decided to protect forests beyond the urban interface could also be a material opportunity given the field to travel on net zero and the carbon capture focus.

So that's why I asked the question.

Totally agree.

Yes. Thank you.

I want to thank everybody for calling in and participating with our second quarter earnings call, and we look forward to talking to you again next quarter. Thank you.