Ladies and gentlemen, good morning, and welcome to the Perimeter Solutions Second Quarter 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Seth Barker, Head of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining Perimeter Solutions second quarter 2023 earnings call. Speaking on today's call are Haitham Khouri, 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 3, 2023, 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. 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. I'll start with summary comments on our strategy, then discuss our financial performance and capital allocation before turning the call over to, Chuck. Starting with our strategy on slide three. 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 high returns on tangible capital; and 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 four, we seek to drive long-term equity value creation via consistent improvement in our three operational value drivers, which are: profitable new business; continual productivity improvements; and pricing to reflect the value we provide. In addition to our three operational drive 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 to our financial results for the second quarter, starting with Fire Safety. As we've noted in the past, while we expect predictable long-term growth in our Fire Safety business, we also expect an element of quarterly and annual variability, tied primarily to the severity of the North American fire season. On our first quarter call, we observed that this past winter and spring were particularly wet in some of the most fire prone regions of…

Thanks, Haitham. Turning to slide six. Second quarter sales in our Fire Safety business were $53.1 million, down 20% versus the prior year and $71.9 million year-to-date, down 15% versus the prior year. The decline was driven by lower fire retardant sales in the United States, partially offset by higher international retardant sales and higher suppressants sales. Second quarter adjusted EBITDA in our Fire Safety business was $16.5 million, down 32% versus the prior year, and $13.2 million year-to-date, down 37% versus the prior year. Second quarter sales in our Specialty Products business were $23million, down 33% versus the prior year, and $48.1 million year-to-date, down 35% versus the prior year. Second quarter adjusted EDITDA in our Specialty Products business was $4.5 million, down 61% versus the prior year, and $10.9 million year-to-date down 59% versus the prior year. As Haitham noted, we believe that our pricing and market in Specialty Products are similar to last year, and that the first half weakness is primarily attributable to temporarily soft end market demand. Moving on to the consolidated business. Second quarter consolidated sales were $76.1 million, down 25% versus the prior year and $120 million year-to-date, down 24% versus the prior year. Second quarter consolidated adjusted EBITDA was $21 million, down 41% versus the prior year, and $24.1 million year-to-date, down 49% versus the prior year. Moving below adjusted EBITDA. Interest expense in the second quarter was $10.3 million in-line with our regular quarterly run-rate. Depreciation was approximately $2.4 million, while amortization expense was $13.8 million. Cash paid for income tax was $8.2 million in Q2. CapEx was approximately $1.9 million in Q2. Our full year 2023 expectations for interest expense, depreciation, taxes, working capital and CapEx are unchanged. We ended the quarter with approximately $675 million of senior notes, cash of approximately $22.1 million, and approximately $154.5 million basic shares outstanding. Slide eight bridges our basic and diluted share count, which includes shares issuable under the Founder Advisory Agreement in future periods. We expect our second half cash generation to be strong, as we draw down from our peak inventory levels. Even if like the second half fire season is relatively mild, such that the 2023 U.S. fire season looks like the mild 2022 U.S. season, we expect to generate approximately $100 million or more in second half 2023 free cash flow, and end the year with over $120 million in cash on our balance sheet. This figure will of course change, if the second half of the fire season is extremely mild or if we deploy capital towards M&A or share repurchases. With that, I'll hand the call back to the operator for Q&A.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Josh Spector with UBS. Please go ahead.

Yes, hi guys. Thanks for taking my question. So, I actually want to follow-up on one of the last point that Chuck made just on free cash flow. So, $100 million in second half, that you have similar year-on-year performance. What's the implied EBITDA behind that?

You asked what the EBITDA assumption is behind that?

Yes.

We haven't disclosed that, Josh. I mean, it's not the hardest thing in the world to back solve to, but we haven't disclosed it.

Yes. I guess the variable is working capital. So, I assume in that scenario, you'd have a pretty significant working capital release. Can you size that?

So, definitely going to convert some inventory to cash, no question, but in terms of overall working capital, in-line with our expectations.

Okay. Let me try it a different way here. So, I mean, Haitham, if you were, it's helpful to kind of understand your view we get back to a normal fire season? I mean, is there a way to think about things are similar year-on-year or still remain down 50%. I guess, what levers are in your control to have EBITDA growth? Because you talked about, I think, delivering growth even in that scenario, maybe exclude specialties. I think we can make our own assumptions on de-stocking there within fire solutions. I think probably the uplift you described in suppressants is maybe a few million. I guess what on the retardant side gives you conviction that you could deliver growth in that scenario?

It's just a question of unit economics. Josh, at this point in the fire season, frankly the cake is largely baked on I don't know what the unit economics are. What we sort of harvest today are the effort we've put in over the past 12 months, 18 months. And the question is just what we've been able to do, as far as number one, offering more value to our customers and being fairly compensated for that value in the form of pricing. And number two, reducing and improving our costs through productivity, the net of both of those is unit economics. And we feel like we've done enough on a unit economic basis to do meaningfully better than last year, all things being equal. It's almost impossible to do enough on unit economics to overcome the 70% decline in acres we had in the first half. So, the ultimate second half result will be based on the ultimate second half severity or lack thereof of the fire season. But we feel very good about the work we've done on what we control here which is unit economics per gallon sold.

Okay, thanks. And if I could just ask one more and just go on to hit specialty briefly. I mean, imagine you're not going to want to break out price or volume for us. So, I just asked like with what we're seeing majority de-stocking, has anything changed on the pricing side in terms of what you're getting? So when destocking ends, is that unit economic for you guys better or worse than where you exited last year?

We feel very good, very good that it is no worse than last year, our unit economics if anything have improved versus last year. Everything you're seeing there is lower volume. And I'll add you can have lower volume due to lower market demand or lower market share and we feel very good that it is not a function of lower market share, but rather a function of a destock, which has persisted throughout the first half, but like I said in the prepared remarks, we'll end at some point hard to predict when exactly.

Okay. Thank you.

Thank you. Our next question comes from the line of Brian DiRubbio with Baird. Please go ahead.

Good morning, gentlemen. Just a couple of questions for me. I want to focus on working capital and specifically just the inventory build over the last year. I think by my numbers, inventories are up about 32.5%. Can you help us get a sense of, I understand the fire season has been crush versus last year and probably versus expectations, but just love to get a sense of what that inventory is comprised of how much of that is retardants versus maybe specialty products? And how's that going to impact your plant operating rates going forward? Just love to get the dynamics here?

Sure. Majority of it is in the fire safety retardant market. There is some impact on specialty products with the de-stock, but not nearly as impactful as Fire Safety. And there is some impact to the operations, but in terms of just being prepared for the customer, that's what we're focused on, and that’s what the inventory is there for.

Okay, understood. And just as we think about cash flow, cash needs, capital allocations, what's the minimum liquidity level that you're comfortable running the business at over a year period?

I'm not going to give you an exact number, Brian, but the answer is not much at all. We ended the second quarter with little over $20 million on the balance sheet and are very, very comfortable at that level. So, it's some number meaningfully lower than that and keep in mind the $100 million revolver, which is undrawn that has, in fact, never been drawn. So, we're very comfortable with our liquidity situation.

And maybe just, if you don't mind, put it in a different way, which would you be comfortable drawing your revolver for the right opportunity in terms of capital allocation?

Temporarily, we would. I don't think you want to run long-term with a drawn revolver as part of your permanent capital structure. But wouldn't we go in our revolver to capture a very high IRR short-term opportunity with good visibility into paying it down relatively quickly? Yes, we would.

Great. That’s it for me. Thanks for all the color.

Yes. Thanks, Brian.

[Operator Instructions] Our next question comes from the line of Daniel Kutz with Morgan Stanley. Please go ahead.

Hi, thanks, good morning.

Hi, Dan.

So, I just wanted to ask on, I'm sure you guys did get a lot of questions, let me have one on the severe Canada wildfire season, and I appreciate that, maybe you guys kind of revenue and earnings in that market is maybe less of a direct correlation to acres burned than it is in the U.S. because of the way -- because of differences in the way that Canada fights wildfires. But I just wanted to ask a question, if there's anything that you could share that might help us kind of triangulate the potential benefits Perimeter of -- the significantly above trend Canada, wildfire season, for a business that has kind of been a mid-high-single-digit business for market for you guys, historically? Thanks.

So, thanks for bringing that topic up, Dan. The first thing I'll say is how just remarkably proud I'm, and we all are of what our team has done, up in Canada. It’s just unbelievably hectic stressful, yet critical time and they delivered with absolute perfection, didn't miss a single load. We sent a bunch of production folks from all over the world, teams from Australia, teams from the U.S. Some spend up to two months working in Canada. It's been an incredible exemplary example of what Perimeter Solutions and only Perimeter Solutions can do for our customers. As far as quantifying it for you, you can look at our last couple of Ks, Canada's roughly 5% of our business from a revenue perspective. I made a comment in the prepared remarks that our international business more than doubled in the first half. Clearly Canada was a big part of that. So, revenue growth and profit growth in Canada were excellent in the first half. So, it wasn't only a story of Canada, Chile was quite strong in the first quarter. Australia was quite strong in the first quarter. We had a lot of good stocking activity in Europe in the second quarter as they stocked up a lot more based on how severe last fire season was. So, there was broad based strength in international, but Canada was clearly the stand out. That said, I guess that, Canada is roughly 5% of our business and as well as it has done this year, it's just not going to mathematically offset down 70% acres in the U.S.

Got it. That's all really helpful. Appreciate it. And then maybe just one on capital allocation and I guess specifically M&A. Could you kind of remind us or just high level talk through when you're building the M&A pipeline? What the kind of puts and takes are in terms of what you're looking for? Is it geographic expansion, vertical integration, things that might bolster your core retarded suppressing and also Specialty Products businesses or are you guys kind of indifferent to the end market and you're just looking for opportunities to check the -- your target economic criteria and kind of value drivers. How do you think through, those different those different puts and takes when you're building your M&A pipeline? Thanks.

It is 100% a question of long-term equity value creation. There simply are no qualitative M&A criteria. We're not looking to get bigger. We're not looking to get smaller. We're not looking for synergies. We're not looking to tell a story. We're looking for businesses that fit the five target criteria, because if a business fits the five target criteria, we are very confident we can apply the 3Ps playbook and as evidenced by our suppressants margins, which have doubled in 18 months, our Specialty Products margins, where we've doubled EBITDA first year. If we find the right business consistent with the criteria, therefore, where the 3Ps playbook is applicable, we can materially increase profitability in a relatively short period of time and do so sustainably and therefore create sustainable equity value and shareholder value. And that's really the one input into the evaluation.

Great. Understood. Thanks a lot. I'll turn it back.

Thank you. [Operator Instructions] As there are no further questions, I will now hand the conference over to Haitham Khouri for closing comments.

Thank you very much, everybody, and talk to everybody in 90 days from now.

Thank you. The conference of Perimeter Solutions has now concluded. Thank you for your participation. You may now disconnect your lines.