Q2 2024 Earnings Summary
- Perimeter Solutions' operational value driver strategy is resulting in high incremental margins and improved earnings power, leading to higher earnings even in like-for-like volume scenarios.
- The company is benefiting from increased customer use of aerial firefighting and from their own investments in capacity and capabilities, leading to better-than-expected sales even when overall acres burned are down.
- Perimeter Solutions is investing in high-IRR capital projects and has a disciplined M&A strategy focused on high-return opportunities where they can apply their operational expertise to create significant shareholder value.
- Management expressed caution about the predictability of third-quarter results despite a strong start in July, highlighting that early indicators may not translate into strong quarterly performance. Haitham Khouri stated, "We're 30 days into a 90-day quarter and July... is not the most important month... the book on Q3 is very, very far from written."
- The company's growth potential may be limited by constraints in aerial firefighting resources, which are often exhausted during severe fire seasons. Khouri mentioned, "It's very common... to run out of aerial resources... We've certainly seen some of it so far in July." This indicates that even with increased fire activity, limited aerial capacity could cap revenue growth.
- Planned increases in capital expenditures for airbase upgrades and expansions may elevate costs and impact free cash flow in the near term. The company intends to "lean into that opportunity over both this year and hopefully next..." investing in projects like the Albuquerque airbase upgrade, which suggests CapEx could exceed the previously guided $10 million to $15 million range.
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Third Quarter Outlook
Q: How will Q3 volumes compare to prior years?
A: Management cautioned that while acres burned in July were above the 10-year average , it's too early to predict Q3 performance. They emphasized that only 30 days into a 90-day quarter, "the book on Q3 is very, very far from written". They expect improved unit economics due to operational improvements but advise to "hold our horses" until Q3 unfolds. -
Margins and Sustainability
Q: What drove high Q2 margins; are they sustainable?
A: The 85% incremental margins in Q2 were driven by three factors: profitable new business, cost reductions, and value-based pricing. Management noted cost per unit on suppressants decreased by over 20% in the past 12–18 months. They believe these initiatives support sustainable margin improvement. -
M&A Strategy and Approach
Q: Are you seeking synergies in M&A?
A: Management focuses on businesses where they can apply their operational value driver strategy rather than seeking synergies. They target companies where they have a "clear right to win," regardless of industry or geography, and do not plan to integrate acquisitions into existing businesses. -
CapEx Guidance and Investments
Q: Will CapEx exceed the $10–15 million guidance?
A: Management reaffirmed the $10–15 million CapEx guidance. They are investing in projects like the Albuquerque airbase, which support customers and deliver high IRR. They plan to "lean into that opportunity" over this year and next. -
Drivers of Q2 Performance
Q: What factors boosted Q2 Fire Safety sales?
A: Q2 volume performance was driven by proactive customer actions, Perimeter's capacity investments, and favorable fire timing. Customers aggressively used aerial resources, while Perimeter invested in air tanker base upgrades like Albuquerque and Colorado Springs. A more severe end to Q2 increased retardant usage. -
Aerial Capacity Constraints
Q: How do capacity limits affect fire response?
A: Management noted that running out of aerial resources is common, especially during severe seasons. This constraint can limit the ability to fight fires aerially, impacting retardant demand.