Perimeter Solutions Q4 2024 Earnings Call Transcript

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Provided by Quartr
February 20, 2025

Key Takeaways

  • Perimeter doubled its consolidated adjusted EBITDA to $280 million in 2024 versus 2021, achieving a 26% three-year CAGR and 1,100 bps margin expansion, underscoring the success of its value driver strategy.
  • In the Fire Safety segment, Q4 revenue rose 72% to $60.7 million and full-year revenue grew 93% to $436.3 million, with Q4 adjusted EBITDA up 289% to $27.2 million due to normalized North American fire activity and value-based pricing.
  • The Specialty Products segment delivered Q4 sales growth of 6% to $25.5 million and full-year growth of 29% to $124.7 million, while Q4 adjusted EBITDA increased 34% to $5.6 million as end-market demand returned to normal.
  • Perimeter acquired Intelligent Manufacturing Solutions (IMS), a printed circuit board manufacturer, for $33 million (~10× FY24 EBITDA) to bolster its specialty products platform and pursue aftermarket and bolt-on opportunities.
  • Capital allocation was highlighted by $172.9 million of free cash flow in 2024, record reinvestments in CapEx and OpEx, repurchases of ~3 million shares at an average $4.81, and maintaining net leverage of 1.7× with ~$198.5 million cash and a $100 million revolver.
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Earnings Conference Call
Perimeter Solutions Q4 2024
00:00 / 00:00

Transcript Sections

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Operator

Ladies and gentlemen, good morning and welcome to the Perimeter Solutions Q4 and Year-End 2024 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. If anyone should require operator assistance during the conference, please signal the operator by pressing Star and Zero on your telephone keypad. 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.

Seth Barker
Seth Barker
Head of Investor Relations at Perimeter Solutions

Thank you, Operator. Good morning, everyone, and thank you for joining Perimeter Solutions Q4 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, February 20, 2025, 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.

Seth Barker
Seth Barker
Head of Investor Relations at Perimeter Solutions

The company would also like to advise you that during the call, we will be referring to non-GAAP financial measures, including Adjusted EBITDA and Adjusted EPS. 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.

Haitham Khouri
Haitham Khouri
CEO at Perimeter Solutions

Thank you, Seth. Good morning, everyone. Thank you for joining us. As always, I'll start on slide three with a summary of our strategy. Our goal is to fulfill our critical mission by providing our customers with quality products and exceptional service while delivering private equity-like returns with the liquidity of a public market. We plan to attain this goal by owning extremely high-quality businesses and maximizing their long-term strength and value through consistent improvement in our three operational value drivers, which are: number one, profitable new business; number two, continual productivity improvements; and number three, pricing our products and services to the value they 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.

Haitham Khouri
Haitham Khouri
CEO at Perimeter Solutions

Slide four provides a snapshot of our three main product lines: retardants, suppressants, and Specialty Products, all of which share the following attractive structural traits. Each provides a mission-critical function where failure is not an option. Each is a clear leader in its market. Each serves an extremely challenging and complex end market through a tightly integrated solution offering that spans product, equipment, and service. And finally, each has an attractive organic or inorganic long-term growth profile. Turning to slide five, Perimeter reported a solid Q4 to close out a solid 2024. In my public remarks over the last two years, I have repeatedly asserted my confidence in the consistent and significant progress we've made to increase the normalized earnings power of our business via the consistent and rigorous application of our value driver operating strategy.

Haitham Khouri
Haitham Khouri
CEO at Perimeter Solutions

Specifically, we've increased our organic growth rate via significant and successful investments in profitable new business initiatives. We've increased the value our products, services, and solutions provide our customers and have shared in this value creation through value-based pricing. And we've driven significant operating efficiencies via our productivity initiatives, which have allowed us to maintain strong overall cost discipline while reinvesting record sums into activities that enhance customer value, including research and development, sales and marketing, and capital expenditures. 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.

Haitham Khouri
Haitham Khouri
CEO at Perimeter Solutions

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. I'm proud to report that our consolidated Adjusted EBITDA approximately doubled over this period, from $141 million in 2021 to $280 million in 2024. This represents a three-year Adjusted EBITDA CAGR of 26% and extends our Adjusted EBITDA CAGR since 2010 to 19%. Our consolidated Adjusted EBITDA margin expanded approximately 1,100 basis points over the three-year period, or approximately 360 basis points per year. Given our belief that both 2021 and 2024 represent normalized and comparable years, we are confident that the improvement in our Adjusted EBITDA over the three-year period is the direct and sustainable result of our value driver-focused operating strategy.

Haitham Khouri
Haitham Khouri
CEO at Perimeter Solutions

Moving to slide six, I'd like to acknowledge our team members who sprang into action to help combat the devastating January fires in Southern California. January is traditionally a quieter month for our North American retardant business, where we primarily focus on base build and upgrades, equipment maintenance, operational training and safety programs, and other preparedness activities. However, there is no off-season in wildland firefighting. As I've often stated, our job is to support our customers by loading 100% of air tankers with 100% reliability 100% of the time, irrespective of season, location, or any other variable. Our team sprang into immediate action when called upon in LA. We quickly had six air tanker bases open and loading air tankers: Santa Maria, San Bernardino, Lancaster, McClellan, Ramona, and Channel Islands.

Haitham Khouri
Haitham Khouri
CEO at Perimeter Solutions

We also deployed three fully crewed mobile retardant bases to support close-range helicopter operations, two at the Palisades Fire and one at the Eaton Fire, as well as several ground-applied retardant units. All six of our tanker bases, all three of our deployed MRBs, and all of our deployed ground-applied units remain fully inventoried and active during the wildfires. This was made possible by the virtually irreplicable breadth and depth of Perimeter's operational preparedness. We have the product, infrastructure, equipment, and personnel to respond and react with virtually perfect reliability in virtually any scenario. This incident also illustrates why a highly distributed and localized manufacturing footprint is essentially a requirement for any competitive retardant program. We continually supplied our air bases, our MRBs, and our ground-applied units from our manufacturing facility in Rancho Cucamonga, just east of Los Angeles.

Haitham Khouri
Haitham Khouri
CEO at Perimeter Solutions

We have five retardant manufacturing facilities located throughout the Western United States, with six under construction with expected completion in spring of 2025. We also have a retardant manufacturing facility in each of British Columbia and Alberta for a total of seven and soon to be eight retardant plants in North America. This distributed and localized manufacturing footprint is essential as we support our customers' wildfire response irrespective of location. Thank you to our team members who so valiantly responded to these wildfires, to the firefighters and first responders who stepped into harm's way to keep others safe, and to everyone still dealing with the challenging aftermath of these devastating fires. Moving to capital allocation on slide seven.

Haitham Khouri
Haitham Khouri
CEO at Perimeter Solutions

As I've repeatedly stated, we expect to deploy all of our free cash flow as well as the incremental leverage capacity we generate through organic EBITDA growth towards the highest expected IRR combination of internal reinvestment into our business, M&A, share repurchases, and special dividends. I'll recap our capital allocation results from 2024, starting with internal reinvestment into our business. We reinvested a record amount of capital back into Perimeter in 2024. This is most evident in our capital expenditures, which grew substantially versus our historical levels, with the growth focused on investments that we expect to drive attractive returns via profitable new business, value-based pricing, and productivity. Our higher OpEx reinvestment is less evident since this spend hits the income statement. However, we've significantly increased our sustainable OpEx spend levels on R&D, sales and marketing, field service, customer relations, and several other customer-facing and value-generating OpEx categories.

Haitham Khouri
Haitham Khouri
CEO at Perimeter Solutions

Moving to M&A. We closed our first acquisition since going public on December 24, 2024, when we acquired Intelligent Manufacturing Solutions, or IMS, for approximately $33 million. This purchase price represents an approximately 10 times multiple on IMS's 2024 Adjusted EBITDA pro forma for specific recurring expenses we're adding to the business to execute on our long-term strategy for IMS. Based in Manchester, New Hampshire, IMS is a manufacturer of highly specialized printed circuit boards, or PCBs. PCBs are electronic components which are critical to the functioning of much larger assemblies, including large medical devices, communications infrastructure, energy infrastructure, defense systems, and industrial systems. Our market research led us to PCBs as an excellent fit for our value driver-based operating strategy and highly consistent with our often-stated target economic criteria. Specifically, many of the largest PCB end markets could experience solid long-term organic growth. Excuse me.

Haitham Khouri
Haitham Khouri
CEO at Perimeter Solutions

A very significant portion of PCB sales are what we describe as spares and repairs, which constitute a predictable and recurring aftermarket demand stream. PCBs are relatively inexpensive components, which are critical to the functioning of much larger and more expensive instruments and machines. A well-run PCB business could enjoy strong free cash flow margins and high returns on tangible capital. And finally, we believe that there's a long runway to acquire and license in production PCB product lines at attractive multiples. Bring these product lines into IMS for manufacturing, drive profitability improvements into these products via the implementation of our value driver operating strategy, and sell these products into established, recurring, and predictable aftermarkets. Note that we will report IMS in our Specialty Products segment going forward. I'll conclude the 2024 capital allocation discussion with share repurchases.

Haitham Khouri
Haitham Khouri
CEO at Perimeter Solutions

We repurchased approximately 3 million shares in 2024 at an average price of $4.81, representing an approximately 150% return on our investment. Since going public in late 2021, we've repurchased approximately 21.6 million shares at an average price of $5.90, representing an approximately 100% return. Looking ahead, we believe that we're very well positioned to drive shareholder value via active capital allocation as well as capital structure management. With that, I'll turn the call over to Kyle. Thanks, Haitham. I'll begin on slide eight, where growth figures shown are versus the prior year comparable period. For the Fire Safety segment, Q4 revenue increased 72% to $60.7 million, and full year revenue grew 93% to $436.3 million. Fire Safety Q4 Adjusted EBITDA rose 289% to $27.2 million, contributing to the full year figure of $240.1 million, an increase of 215%.

Haitham Khouri
Haitham Khouri
CEO at Perimeter Solutions

The majority of the increase in Fire Safety's Q4 and full year revenue and Adjusted EBITDA is attributable to our retardant products and associated services. The year-over-year increases were driven by a combination of strong execution of our value driver-focused operating model as well as end market normalization. If the 2024 North America fire season was of approximately normal severity versus the unusually mild 2023 season, our suppressants products experienced strong growth in 2024 as we continued to benefit from the transition to fluorine-free foam, where Perimeter is the clear market leader. In our Specialty Product segment, Q4 sales increased 6% to $25.5 million, helping to drive full year sales growth of 29% to $124.7 million. Specialty Products Q4 Adjusted EBITDA grew 34% to $5.6 million, while full year Adjusted EBITDA improved 95% to $40.2 million.

Haitham Khouri
Haitham Khouri
CEO at Perimeter Solutions

On a consolidated basis, Q4 sales increased 45% to $86.2 million, and full year sales expanded 74% to $561 million. Consolidated Adjusted EBITDA increased 193% to $32.9 million in the Q4, and totaled $280.3 million for the full year, up 190%, despite record spending to support our customers in areas such as research and development and field service, which we expect to remain elevated for the foreseeable future as we invest in our capabilities in support of our customers' missions. These results are a function of both the implementation of our operational value drivers and the status of our end markets. I'll spend a moment on slide nine, putting 2024's results into context. I'll start with Fire Safety by describing how we frame a normal fire season. As you can see on the left-hand side of this slide, U.S.

Haitham Khouri
Haitham Khouri
CEO at Perimeter Solutions

acres burned ex-Alaska averaged 6.1 million and 6.4 million over the past 10 and 5 years, respectively. As illustrated on the right-hand side of the slide, there's a multi-decade data-supported record of growth in the U.S. acres burned ex-Alaska trendline. Combining the 6.1 and 6.4 million averages from the last 10 and 5 years with the long-term growth trend suggests that a normalized U.S. fire season should fall roughly in the range of 6 to 7 million acres burned ex-Alaska. While acres burned ex-Alaska is a good directional measure of a fire season's intensity, it's an imperfect indicator, which at times embeds deviations so substantial as to be worth calling out. 2024 experienced such a deviation. 2024 U.S. acres burned ex-Alaska were 8.2 million. However, approximately 1.1 million of these acres resulted from the February 2024 Smokehouse Creek Fire in Texas and Oklahoma, the largest U.S.

Haitham Khouri
Haitham Khouri
CEO at Perimeter Solutions

Wildfire excluding Alaska in more than 100 years. A negligible amount of retardant was used in fighting this fire. 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. Moving to Specialty Products end markets, as we noted through most of this year, 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.

Haitham Khouri
Haitham Khouri
CEO at Perimeter Solutions

To better assist investors in understanding our underlying earnings power, we are introducing Adjusted earnings per diluted share, or Adjusted EPS, as outlined on slide 10. This metric shares many of the same adjustments as our Adjusted EBITDA metric, but then deducts interest, depreciation, and taxes, net of the tax impact of the adjustments, to yield Adjusted net income. Our share count is adjusted to exclude the share impact of these adjustments. We will report this metric quarterly going forward, and investors can find the details of these calculations as well as the Adjusted EPS figures for each quarter of 2024 in our press release and investor presentation. For Q4 2024, our GAAP EPS was $0.90, and our Adjusted EPS was $0.13. Full year 2024 yielded a GAAP loss per share of $0.04 and an Adjusted EPS of $1.11 per share.

Haitham Khouri
Haitham Khouri
CEO at Perimeter Solutions

Adjusted EPS allows investors to make comparisons to peers that report similar metrics, as well as highlights the efficiencies we expect to generate from our low capital intensity, prudent capital structure, and improving tax profile. Turning to free cash flow, which we define as cash flow from operations less capital expenditures, we are adjusting our long-term assumptions as shown on slide 11. Annual interest expense remains at approximately $40 million, and Q4 interest expense was consistent with that figure at $9.2 million. We expect our depreciation, amortization, and other tax deductions to be in the range of $20-$25 million in 2025, driven by increased CapEx and greater tax amortization. Q4 tax-deductible D&A was $2.7 million. Q4 GAAP depreciation was approximately $2.8 million, and Q4 GAAP amortization expense was $13.7 million. Cash paid for income tax was $43.1 million in Q4 and $74.6 million for the full year.

Haitham Khouri
Haitham Khouri
CEO at Perimeter Solutions

In addition to the streamlined legal, accounting, and cash management operations that drove our redomiciliation transaction that closed in November, we expect to generate an improved tax profile from the move. Matching our legal domicile with most of our operations and earnings allows us to broaden the scope of tax-deductible expenses and increases the degrees of tax structure and freedom. As such, we anticipate our cash expenditures on income taxes will approximate 20%-25% of our Adjusted EBITDA after deducting tax-deductible D&A and interest expense. This general framework will vary year to year and particularly quarter-to-quarter due to timing impacts and income fluctuations, but should provide a useful way to think about the improvement in our tax profile over a multi-year period.

Haitham Khouri
Haitham Khouri
CEO at Perimeter Solutions

Moving to CapEx, we have found attractive capital expenditure projects with strong returns throughout our business in 2024 and continue to find additional opportunity in 2025. As such, we are moving our CapEx assumption up to $15-$20 million annually, and note that Q4 2024 CapEx of approximately $6.5 million is consistent with this increased capital expenditure target. We anticipate investing 10% of any annual increase in revenue in net working capital over time, although note that this figure varies quarter-to-quarter given the seasonality of our business. While that is our long-term assumption, in 2024 we outperformed that metric, consistent with remarks throughout the last year. Our team drove substantial working capital improvement over the course of 2024, notably on inventory, which declined $29.3 million for the full year. In total, we generated free cash flow of $172.9 million in 2024.

Haitham Khouri
Haitham Khouri
CEO at Perimeter Solutions

The inflection in our 2024 Adjusted EBITDA has both validated our operational value driver strategy and created the necessary financing capacity to pursue M&A. Our team is actively searching for targets and, after CapEx, we view M&A as the highest return-generating use of capital. Turning to slide 12, I'd like to highlight our highly attractive debt profile, comprised of a single senior 5% fixed-rate note maturing in the Q4 of 2029, which does not carry any financial maintenance covenants. As of Q4, we were levered 1.7 times net debt to LTM Adjusted EBITDA. We have substantial liquidity with cash and cash equivalents of approximately $198.5 million and an undrawn $100 million revolving credit facility. We ended the period with approximately $147.8 million basic shares outstanding. I'll close by noting that Perimeter exists to serve two complementary purposes: to fulfill our sacred and life-saving mission and to drive shareholder value.

Haitham Khouri
Haitham Khouri
CEO at Perimeter Solutions

We are exceptionally proud that our team delivered on both elements in 2024 and remained focused on those two aims for 2025. With that, I'll hand the call back to the operator for Q&A.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you'd like to ask a question, please press Star and one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star and two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Ladies and gentlemen, we will wait for a moment while we poll for questions. The first question comes from the line of Josh Spector from UBS. Please go ahead.

Chris Perrella
Chris Perrella
Analyst at UBS

Hi, good morning. It's Chris Perrella on for Josh.

Chris Perrella
Chris Perrella
Analyst at UBS

Could you dig in a little bit more about the PCB market and how it fits into Perimeter's strategy?

Haitham Khouri
Haitham Khouri
CEO at Perimeter Solutions

For our strategy, as you've witnessed, we've been extremely patient, keeping the bat on our shoulder, so to speak, as far as pulling the trigger on M&A over the past couple of years. That's because we set both a very high and very specific bar for ourselves. We want to buy assets we describe as exceptionally high quality, and we want to buy assets that fit very, very neatly into what we do best, which is significantly driving post-acquisition value through the implementation of our operational value driver strategy. We're very clear about what that means.

Haitham Khouri
Haitham Khouri
CEO at Perimeter Solutions

We've clearly and repeatedly articulated five target economic criteria, and we believe when we find the business consistent with the five, again, often articulated and repeated target economic criteria, that means it's a great fit for our strategy. That means it's an exceptionally high-quality business, and very specifically, that means we think our operational value driver playbook is highly applicable, and I ticked through all five in my prepared remarks. We think PCBs fit hand in glove based on the first four, which talk about the intrinsic business quality both of IMS and of the PCB market, and the number five is the potential for opportunistic consolidation within any industry we enter, and we think that's one of the true highlights of IMS.

Haitham Khouri
Haitham Khouri
CEO at Perimeter Solutions

While IMS itself is a very high-quality asset and a very attractive business where we think we can drive significant value, we additionally believe that 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, and each time we acquire or in-license a product line, we'll look to add real value to our customers and share in that through value pricing. We'll look to innovate and drive profitable new business, and we'll look to deploy our productivity playbook and grind down costs.

Chris Perrella
Chris Perrella
Analyst at UBS

I appreciate that, Haitham.

Chris Perrella
Chris Perrella
Analyst at UBS

And then I guess as a follow-up, the higher CapEx spending, is that a function of investments in Fire Safety, or is that your expected step up to grow the potential PCB business organically, realizing I know that you're going to do some bolt-ons and you're going to use it as an M&A platform? Just, I guess, what's driving the uptick in CapEx?

Kyle Sable
Kyle Sable
CFO at Perimeter Solutions

Hey, Chris, it's Kyle here. Thanks for the question. Excellent question. I think when we think about this, it's predominantly in that Fire Safety platform where we see the increase in CapEx. We've already spent a lot of dollars on both OpEx and CapEx working to kind of better fulfill customer missions, drive improved products, and expanded services. And that's what we're seeing here. We're very excited about the projects that we're seeing in our CapEx pipeline. They do two things.

Kyle Sable
Kyle Sable
CFO at Perimeter Solutions

They help us fulfill our customers' missions, and they come with extremely attractive IRRs. 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.

Chris Perrella
Chris Perrella
Analyst at UBS

Thank you. I appreciate that. I'll jump back in the queue.

Operator

Thank you. The next question comes from the line of Dan Kurz from Morgan Stanley Investment Management. Please go ahead.

Dan Kurtz
Analyst at Morgan Stanley Investment Management

Hey, thanks. Good morning.

Kyle Sable
Kyle Sable
CFO at Perimeter Solutions

Hey, man.

Dan Kurtz
Analyst at Morgan Stanley Investment Management

So I feel like you guys have already kind of addressed this question, but I think it's on a lot of folks' minds. So I figured it's still worth asking. And firstly, thoughts and prayers go out to the families impacted by the Southern California wildfires. But basically, the question is, it seems like undoubtedly the California catastrophe will catalyze an increased focus on resilience and preparedness.

Dan Kurtz
Analyst at Morgan Stanley Investment Management

And basically, what I'm trying to ask is, are there any implications for Perimeter's business as there's kind of heightened efforts around fire suppression, fire prevention? Or is it, as you've kind of consistently reiterated, that you are committed to and have executed on loading 100% of their tankers 100% of the time, basically 100% preparedness? Just wondering if there's any implications for Perimeter specifically as the country kind of bolsters its wildfire fighting efforts.

Kyle Sable
Kyle Sable
CFO at Perimeter Solutions

Thanks. Hey, Dan. It's Kyle. Thanks for the question. First, let me note that any fire that takes lives or consumes property is a tragedy, but the scale of the LA fires, it's breathtaking. Our hearts go out to those affected, and we're really proud that we've been able to support our customers' efforts to contain the fires.

Kyle Sable
Kyle Sable
CFO at Perimeter Solutions

Second, while that was a widespread and near instantaneous response from us and it was critical for fulfilling our mission, in the near term, it had a relatively modest financial impact relative to our full-year earnings power. The LA fires impact would account for only a small fraction of the variation we typically see in the full-year fire season. And so it's not a near-term impact to our financial statements. Over the longer term, though, I think Haitham would probably want to add some to that.

Dan Kurtz
Analyst at Morgan Stanley Investment Management

Yeah, thanks, Kyle.

Kyle Sable
Kyle Sable
CFO at Perimeter Solutions

Yeah, Dan, longer term, the LA fires will almost inevitably attract more attention, more focus, more proactiveness, and ultimately more resources towards wildland firefighting in general and towards the aerial element of wildland firefighting in particular. And that's just going to greatly benefit our nation and certainly our industry and as part of that Perimeter.

Kyle Sable
Kyle Sable
CFO at Perimeter Solutions

As we've often stated, we are a capacity-constrained industry. We run out of air tanker capacity at least eight points in time, if not multiple points in time, literally every single fire season. We need to have, should have as a nation, more air tankers, more helicopters, more MRBs, more ground-applied units, more preventative retardant application, etc. And it's hard to believe that the attention the LA fires and the spotlight they've put on the importance of these preparedness and resiliency activities won't lead to more investment, which simply increases industry capacity and industry response capability, of which Perimeter is a critical part. And I'll tell you, we have a part to play here. Part of it is air tankers are added and we indirectly and very clearly benefit.

Kyle Sable
Kyle Sable
CFO at Perimeter Solutions

Part of the onus is on us to continually build bigger, more capable bases, add VLAT capability, add multi-pit loading, add newer equipment. And we've been very, very aggressively doing that over the past couple of years. And you really saw that impact in LA. Channel Islands is a brand new base we built a couple of years ago that played a huge role. San Bernardino is a base we put a lot of investment in over the past couple of years, which played a huge role. McClellan's a base we've put tremendous investment into over the past couple of years. Again, played a huge role in the LA fire. So we will do our part. I think quasi-inevitably, others will as well going forward. And I think the industry and the nation will benefit.

Dan Kurtz
Analyst at Morgan Stanley Investment Management

Awesome. That's all super helpful color.

Dan Kurtz
Analyst at Morgan Stanley Investment Management

Then for the next question, kind of two parts, but both related to the new administration in the U.S. I guess firstly, any implications for the Perimeter manufacturing, supply chain, kind of input costs from tariffs and trade wars? And then I guess more broadly, are there any implications from proposed or implemented policies from the new administration that could impact Perimeter's businesses one way or another? I guess the one that comes to mind is that kind of the less supportive electric vehicle legislation seems like a tailwind for ICE miles driven and Specialty Products demand. But yeah, basically just thoughts on tariffs and trade wars and more broadly policies from the new administration in terms of the implications for Perimeter's business lines. Thanks. Yeah.

Kyle Sable
Kyle Sable
CFO at Perimeter Solutions

Yeah, good question, Dan. So we really don't think so.

Kyle Sable
Kyle Sable
CFO at Perimeter Solutions

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. Not that we don't pay very, very close attention. We do, of course. We spend a lot of time in Washington. We're all over the stuff. And as a result, we have a fairly informed opinion that there should be negligible impact on our business, but we also stay vigilant and eyes wide open. On your question specifically on electric vehicles and Specialty Products, look at it as a rounding error. Might you see a small uptick in percent of new vehicle sales that are internal combustion engine and a small downtick that are electric? Maybe, maybe not. Even if you did, the impact on the car park is negligible in any given year.

Kyle Sable
Kyle Sable
CFO at Perimeter Solutions

This is really tied to total internal combustion engines miles driven, call it, across the entire OECD. So any small change in the distribution of U.S. new vehicle sales in any one or two years is just sampling error.

Kyle Sable
Kyle Sable
CFO at Perimeter Solutions

Sure. That all makes sense. Again, really helpful. Appreciate the color, and I'll turn it back.

Operator

Thank you. The next question comes from the line of Chris Fiddick from Pacific Asset Management. Please go ahead.

Chris Fiddick
Analyst at Pacific Asset Management

Hi, good morning. Thanks for taking my questions. Just a couple housekeeping ones, probably for Kyle on the financials. The first one is just, Kyle, there's a bit of, it looks like noise with taxes and the cash flow statement this year. Cash taxes look like they've gone up. There's a big drawdown on deferred income taxes. Is that related to the re-domicile? Is there something different?

Kyle Sable
Kyle Sable
CFO at Perimeter Solutions

Yeah, Chris, you have it exactly right.

Kyle Sable
Kyle Sable
CFO at Perimeter Solutions

It's related to the re-domicile. A little bit on the DTA and DTLs, the deferred taxes, that's a re-domicile impact. When you look at the cash tax impact, Chris, it's largely just a matter of timing.

Chris Fiddick
Analyst at Pacific Asset Management

Okay. Super. And the other one, thanks for the disclosure about adjusted net income. Would you be willing to offer any kind of guidance on a long-term basis about the relationship between free cash flow and adjusted net income? Would it be 90%, 100%, 80? Is there any kind of range we should be thinking about in terms of cash per dollar of adjusted net income, please?

Kyle Sable
Kyle Sable
CFO at Perimeter Solutions

Chris, on that specific ratio, we will not. However, what we do do is give you a fair bit of detail on how we think about converting from Adjusted EBITDA to free cash flow in our earnings stack.

Kyle Sable
Kyle Sable
CFO at Perimeter Solutions

You should be able to go through and take any underlying business assumptions that you make, bring that to Adjusted EBITDA, and then use that slide to go from there to free cash flow.

Chris Fiddick
Analyst at Pacific Asset Management

Fair enough. No problem. Thank you very much.

Operator

Thank you. The next question comes from the line of Josh Spector from UBS. Please go ahead.

Chris Perrella
Chris Perrella
Analyst at UBS

Hi, everybody. It's Chris again. Just to follow up on the leverage ratio, it's lower historically. You've grown into the leverage. I think, do you have a target there? Do you want to get back to about three and a half or over three and a half times levered? And how quickly, now that you have the PCB business acquisition in, do you think M&A will progress as part of the strategy?

Kyle Sable
Kyle Sable
CFO at Perimeter Solutions

Sure. Thanks, Chris. On the target leverage, yeah, we would like to have a higher leverage ratio here.

Kyle Sable
Kyle Sable
CFO at Perimeter Solutions

And I think your range is a perfectly fine place to think about it. The other data point I'd point you to is the leverage ratio when we IPOed, since we effectively picked that at the time of IPO. And yes, the main driver that we expect to get back to that leverage ratio will indeed be M&A. We're pretty active in that. We know we have an extremely high-quality portfolio of businesses, and we're very focused on maintaining that quality of businesses and specifically the applicability of our operational value drivers strategy to any potential acquisition. We're out there looking for a lot of potential targets. And as we put it, we're going to kiss a lot of frogs until we find our prince.

Chris Perrella
Chris Perrella
Analyst at UBS

Fair enough. So it's not just focused on PCB at this point. You're still scouring for other businesses that fit the strategy. 100%,

Kyle Sable
Kyle Sable
CFO at Perimeter Solutions

Chris. That's exactly right. I think what you should take away from the IMS acquisition is that when we see an asset that we're extremely excited about, we're going to go out and do that. We have a pretty broad aperture, both in size and in the types of businesses that we're going to evaluate at the top of our funnel for M&A. And this is just the first step on what we hope will be a series of acquisitions where we can put more and more kind of raw material into our operational value drivers framework and continue to drive the sort of value creation you've seen over the last three years in our existing portfolio of businesses.

Chris Perrella
Chris Perrella
Analyst at UBS

All right. Appreciate the color.

Kyle Sable
Kyle Sable
CFO at Perimeter Solutions

Thanks, Chris.

Operator

Thank you. Ladies and gentlemen, if you wish to ask a question, please press Star and one.

Kyle Sable
Kyle Sable
CFO at Perimeter Solutions

As there are no further questions, I will now hand the conference over to Haitham Khouri for his closing comments.

Haitham Khouri
Haitham Khouri
CEO at Perimeter Solutions

Thank you, everybody, for your time this morning. And thank you, as always, to our investors for your trust and support. We remain very, very hard at work to drive value for you. Thank you. Thank you. Ladies and gentlemen, the conference of Perimeter Solutions has now concluded. Thank you for your participation. You may now disconnect your line.

Executives
Analysts
    • Chris Perrella
      Analyst at UBS
    • Chris Fiddick
      Analyst at Pacific Asset Management
    • Dan Kurtz
      Analyst at Morgan Stanley Investment Management
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