Perimeter Solutions 4Q24 Business Update

4Q24 Update.

PRM reported 4Q24 and the stock dropped 15% over the next couple days. While it is always hard to understand what the market is pricing in, there is little in their results that would suggest such a move was warranted.

4Q revenue increased +45% y/y and their Fire Safety segment grew +72% y/y. This drove a +193% y/y jump in Adj. EBITDA.

For the full year, Perimeter Solutions generated $561mn in revenue and $280mn in Adj. EBITDA. These figures represent +74% y/y and +190% y/y growth, respectively.

We see below that Fire Safety is now 78% of their total revenues, up about 800bps y/y. This is generally a positive as the Fire Safety segment (specially the fire retardant business) is a higher quality business than their oil additives business that is the crux of the Specialty Product Segment.

While many things broke during Los Angeles wildfires, Perimeter’s operations didn’t. They deployed 3 mobile retardant bases and had 6 other tanker bases that remained fully inventoried and active during the entire firefighting period. This helps exemplify the importance of a geographically dispersed manufacturing base, the closest of which was just East of Los Angeles and helped ensure the critical fire retardant solution was fully stocked for firefighting operations. Perimeter currently has 5 retardant manufacturing facilities with 1 more currently under construction (to be completed by the end of 2025). They also have two more plants in Canada.

They did note that relative to the total acreage burned in a year, the Los Angeles fire’s financial impact to them was relatively modest. However, they note that virtually every firefighting season the nation runs out of aerial capacity. Given the visibility and damage the Los Angeles fire caused, it is likely that more will be invested in aerial assets, which could help perimeter (and firefighting efforts) longer term.

Perhaps even more important than their strong financial results was the announcement of their first acquisition since going public, which gives them a foothold into a new industry and extends their capital allocation opportunities. This puts them one step closer to following the Transdigm model.

As a reminder, Transdigm Founder Nick Howley and The Outsiders Author William Thorndike created an acquisition vehicle that took Perimeter Solutions public (more on this in our report here). They were looking for companies that met their 5 target economic criteria of: 1) recurring and predictable revenues, 2) long-term secular growth tailwinds, 3) products that are critical but account for a small portion of the total products end cost, 4) significant free cash flow generation with high ROTC, and a 5) potential for opportunistic consolidation.

CEO Haitham noted on the 2Q24 call that all they care about is finding businesses that meet these criteria and they will search in any industry to find such businesses.

We say all of this because it is possible some market participants viewed the entry into a new industry as a negative or a deviation in strategy. This is not true. Perimeter Solutions stated intention has always been to own and operate businesses that meet these 5 criteria and try to deploy as much capital in new opportunities that are consistent with them.

The acquisition came in December, when they acquired Intelligent Manufacturing Solutions or IMS, for approximately $33 million or 10x adjusted EBITDA. IMS is a manufacturer of a highly specialized product called printed circuit boards or PCBs. PCBs are electronic components which are just one critical part of a larger product. Similar to the Transdigm model, they want to find products that have very high importance and value but are an overall small portion of the products total end cost. PCBs are used in large assemblies, including large medical devices, communications infrastructure, energy infrastructure, defense systems and industrial systems. They note it is a fit for “value driver-based operating strategy”, which is typically code for latent pricing power.  

Haitham continues that they believe there is a “long runway to acquire and license in-production PCB product lines at attractive multiples” and “drive profitability improvements into these products via the implementation of their value driver operating strategy”. In the Q&A, Haitham emphasizes that he believed IMS is going to be “an excellent platform for us to deploy meaningful capital going forward, acquiring or in-licensing in production PCBs to greatly expand the portfolio of essentially IP ownership of PCBs”.

Outside of acquisitions, they continue to see opportunities on the Fire Safety side. As CFO Kyle Sable noted “our capex pipeline is filled with a lot of value-creating opportunities, largely in the Fire Safety side for right now, and we’ll expand that scope as we go forward.” Nevertheless though, capex is relatively small at just $15-20mn against operating cash flow (after reducing for SBC) of $175mn.

In short, the business continues to operate well and very strong results have been a byproduct of operational improvements and a more “normal” fire season.

Valuation.

Looking at their net income is misleading because the accounting for the founders shares causes large P&L distortions. Stripping that out, we calculate normalized net earnings to be about $165mn. This figure is very similar to their free cash flow, after reducing for SBC. For this calculation, we add back all D&A and subtract out capex, since their capex costs (growth and maintenance) are much lower than D&A. We treat all SBC as an expense and tax Perimeter Solutions at 21%. We also assume more share dilution from the founders agreement, which gets us an estimated fully diluted share count of ~160mn. This puts our normalized EPS figure at $1.04 per share, slightly lower than the company’s adjusted EPS of $1.11. (Adjusted EPS is a new metric they rolled out this quarter).

After selling off ~15% post earnings, PRM now trades at $10 a share. This means they currently trade at ~9.5x normalized earnings. As we noted in our research report, a high single digit earnings growth rate is very achievable overtime before considering M&A. Success with M&A, especially entering a new vertical with ample acquisition opportunities, could really springboard the company into Transdigm territory over a long enough period of time.

Call Notes

Efficiency Improvements

  • “Virtually, every time, I’ve asserted my confidence in our operational improvements, I have also asserted confidence that this progress should be evident to investors when we experience normalized end-markets, which allow for more apples-to-apples comparisons versus our historical financial results. While no comparison is perfect, we believe that 2021 and 2024 are comparable years with roughly normalized demand environments in both our Fire Safety and Specialty Products businesses in both years.”
    •  Consolidated adjusted EBITDA approximately doubled over this period from $141 million in 2021 to $280 million in 2024.

Specialty Products end-markets

  • “We’re comfortable that 2023’s destock activity is behind us and believe that 2024 represents a normalized end-market demand year for the business. Accordingly, we believe that both of our segments experienced end-market demand in the normal range in 2024 and that 2024’s results are sustainable if we experience similarly normalized end-market demand.”

Acreage Burned

  • “Adjusting for these acres, 2024 U.S. acres burned ex-Alaska were approximately 7 million, which approximates the high end of what we believe to be a normal fire season. I’ll note that 2021 acres burned ex-Alaska were 6.9 million, which is why we believe the 2021 to 2024 comparison is appropriate.”
  • “The long-term growth trend suggests that a normalized U.S. fire season should fall roughly in the range of 6 million to 7 million acres burned ex-Alaska.”

Leverage and Liquidity

  • As of 4Q24 levered 1.7x net debt to LTM adjusted EBITDA
  • Debt profile comprised of a single series 5% fixed rate note maturing in the fourth quarter of 2029
  • Substantial liquidity with cash and cash equivalents of approximately $198.5 million and an undrawn $100 million revolving credit facility.
  • “On the target leverage, yes, we would like to have a higher leverage ratio here, and I think your range [3.5x] is a perfectly fine place to think about it. “

Tariffs

  • “Our supply chain is extremely resilient with multiple redundancies up and down the entire system. I don’t think you’ll see any impact from tariffs or really any other new governmental policy.”
  • “We have a fairly informed opinion that there should be negligible impact on our business”  

As a reminder, we named our research firm Speedwell Research after the ship that helped ferry passengers to the Mayflower. The idea is that we want to help you take your journey, but ultimately you are on your own in the decisions you make. An investor must judge for themselves whether they believe the opportunity is worth it and accepting the potential risks that could materialize.

*At the time of this writing, one or more contributors to this report has a position in PRM. Furthermore, accounts one or more contributors advise on may also have a position in PRM. This may change without notice.