Latest / The Dutch Investors / #100 | Perimeter Solutions Deep Dive | w/ Joep Dikken from Tresor Capital

Transcript

#100 | Perimeter Solutions Deep Dive | w/ Joep Dikken from Tresor Capital · The Dutch Investors

• 0:00
  SPEAKER_01: Before we dive into perimeter solutions, a quick heads up.
• 0:05
  SPEAKER_01: During our conversation, unfortunately some of my audio got removed after about 27 minutes.
• 0:12
  SPEAKER_01: I tried to fix it and re-record most of it, but if there's a slight difference in voice, volume, or whatever else, I apologize for the inconvenience.
• 0:25
  SPEAKER_01: I hope you still enjoy this deep dive with Jup Dicken from Tresor Capital on perimeter solutions.
• 0:33
  SPEAKER_01: Imagine owning a business where your customer has to buy from you, has billions dollars to spend, and your only real competitor got kicked out because their chemical accidentally rusted airplane tanks.
• 0:48
  SPEAKER_01: This is part of perimeter solutions.
• 0:51
  SPEAKER_01: And if you've ever watched the news during fire season and seen a massive air tanker drop a plume of bright red liquid over a burning forest, you've seen perimeter solutions at work.
• 1:04
  SPEAKER_01: They are the brains behind Fosjack, the world's leading long-term aerial wildfire retardant.
• 1:11
  SPEAKER_01: I know that's a mouthful.
• 1:13
  SPEAKER_01: They basically hold a legal monopoly in North America, which we'll talk all about.
• 1:18
  SPEAKER_01: We chose to analyze Perimeter because it's a unique company in today's market.
• 1:24
  SPEAKER_01: They own mission-critical businesses and have massive pricing power and unique regulatory protection.
• 1:32
  SPEAKER_01: We have some unique insights for you.
• 1:34
  SPEAKER_01: From us, from Yupe, analyst at Treso Capital, and from Seth Barker, VP, Financial Planning and Analysis, and Head of Investor Relations at Perimeter Solutions.
• 1:45
  SPEAKER_01: So let's not waste any more time and let's jump into today's deep dive: Perimeter Solutions.
• 2:08
  SPEAKER_01: Another deep dive.
• 2:09
  SPEAKER_01: This time quite a bit different from Transmedics, yet it does have some similarities.
• 2:16
  SPEAKER_00: I mean it has some, but it's a very unique uh business on its own, obviously.
• 2:21
  SPEAKER_00: Um I would say a little bit more into up to my own alley with the work that I do at Tresor Capital.
• 2:27
  SPEAKER_01: Yeah.
• 2:28
  SPEAKER_00: Um one of the US serial acquirers that uh we've had on our radar for the past year.
• 2:36
  SPEAKER_00: And uh glad to be here and uh do some due diligence together with you.
• 2:41
  SPEAKER_01: Yeah.
• 2:41
  SPEAKER_01: Last time we uh we were thinking of doing a new deep dive, and this was one uh that was on your radar, and I didn't know it at first, but man, what a fun company to to dive into.
• 2:53
  SPEAKER_01: It it it it was pretty difficult at times.
• 2:56
  SPEAKER_01: There's a lot to due diligence on.
• 2:58
  SPEAKER_01: Yeah, we'll talk all about it in uh today's uh deep dive, and I'm glad to have you here, and uh I'm sure this will be a fun one.
• 3:05
  SPEAKER_00: Yep.
• 3:06
  SPEAKER_01: Perhaps let's start with a little background on Perimeter just uh to set the stage and then we'll dig into the business model.
• 3:13
  SPEAKER_01: The story of Perimeter is not your typical tech startup.
• 3:17
  SPEAKER_01: Usually it starts in a garret somewhere, but uh this is a bit different.
• 3:22
  SPEAKER_01: Because the formulation for FOSCEK, and you spell that as P-H-O-S, Czech, actually traces all the way back to 1963, when it was developed inside the laboratories of Monsanto.
• 3:37
  SPEAKER_01: And over the next several decades, the business actually shoveled around through various spin-offs and joint ventures and moving from Monsanto to Solucia, then Astartis, and later Israel Chemicals.
• 3:51
  SPEAKER_01: So it moved around a lot.
• 3:53
  SPEAKER_01: And while the owners kept changing, the red fire retardant built up a decades-long track record with the US government.
• 4:02
  SPEAKER_01: And this is, I think, the core of today's deep dive.
• 4:06
  SPEAKER_01: Then came the turning point, and in 2021, an investment team called EverArc bought the business for about$2 billion and brought it to the public markets.
• 4:18
  SPEAKER_01: And the guys running EverArc are legendary value investors.
• 4:24
  SPEAKER_01: The main person is now known as Nick Howley, and he built a company, we all know, and perhaps you do as well, TransDyme, which made a fortune buying up small essential airplane parts businesses where they were basically the only supplier.
• 4:43
  SPEAKER_01: And uh TransDime stock did pretty well, about 5,000% at one point.
• 4:49
  SPEAKER_01: So you could say uh pretty successful.
• 4:52
  SPEAKER_01: Now, Howley and his team brought the exact same strategy to perimeter.
• 4:57
  SPEAKER_01: One, buy a business that makes crucial, hard-to-replace products, raise prices based on the value it provides, not just what it costs to make, and then use the profits to buy other similar niche businesses.
• 5:13
  SPEAKER_01: And there you have a dupe, a great serial acquirer in the making, if you can do it right for a long time, and it sounds simple, but it's not right.
• 5:23
  SPEAKER_00: It is not.
• 5:23
  SPEAKER_00: I think there's a lot that can go wrong when you're a serial acquirer.
• 5:28
  SPEAKER_00: Um I think the main uh risk that serial acquires can make is buying, uh having a lot having a very big acquisition turn out to be a very bad acquisition that is the most value-destroying um risk when it comes to serial acquires.
• 5:46
  SPEAKER_00: Um I think on one leg, perimeter, perimeter.
• 5:50
  SPEAKER_00: I think on one leg, perimeter solutions uh has a different structure because 75% of their business is this uh fire retardant business, um, which is a what as you already said, a legal monopoly.
• 6:05
  SPEAKER_00: It creates them a lot of value, a lot of money because they they're they have uh very high margins.
• 6:12
  SPEAKER_00: Over the year of 2025, they had about 59% Ibidah margin on the business, and it constitutes of 75% of their revenue.
• 6:24
  SPEAKER_00: So this is their cash cow, and then with that cash they can um buy the new acquisitions as they've also recently done.
• 6:33
  SPEAKER_00: I would say this is a serial choir still in the making, because um historically they've been and they still are a fire safety business, but more recently they've been executing a lot more and bigger acquisitions.
• 6:48
  SPEAKER_00: So I think this is uh still uh still to come.
• 6:51
  SPEAKER_01: The in uh early 2026 they bought a company called MMT, which we'll uh discuss later on, probably for about 685 million, if I believe, if I can remember correctly.
• 7:01
  SPEAKER_01: And this basically expanded from fire chemicals, which they are known for, into medical device um equipment.
• 7:08
  SPEAKER_01: So uh interesting to see how that plays out.
• 7:12
  SPEAKER_01: How about you break down their business model, Yup, and uh run us through it?
• 7:16
  SPEAKER_00: Yeah, so as we already said, it's mostly a fire safety business.
• 7:21
  SPEAKER_00: It's roughly 75% of their of their revenue in 2025.
• 7:26
  SPEAKER_00: And this is where they have their uh Foscheck um uh retardant.
• 7:33
  SPEAKER_00: This is uh this is a product that's focused on wildfires, especially in the north North America, but they've been diversifying away in Australia now as well.
• 7:43
  SPEAKER_00: And it is special for wildfires because it has an organic um organic structure where it goes into the organism, and then it's basically prevents further spreading of the fire.
• 7:57
  SPEAKER_00: So this is not something that would work on metal, for example.
• 8:02
  SPEAKER_00: This is they have a specific product for uh for what nature wildfires, and then they have a specific product for other um other wildfires for more industrial wildfires, for example.
• 8:14
  SPEAKER_00: And um, so this is their main business, and a lot of you would already think that's okay, so it's very dependent on on wildfires happening.
• 8:24
  SPEAKER_00: Um but uh that's that has been changing over the over the past years, where they went from a the variable product is the retardant itself, it's price per gallon consumed, so it's only recognized when it actually drops, basically, when it's used.
• 8:40
  SPEAKER_00: That's the part that genuinely depends on the fires, but then uh next to that, they are now moving more and more towards a uh fixed service and equipment lease um uh business model, where they are treated as a stand-ready obligation, um, which is more recognized over a straight line uh over the seasons, regardless of um how many acres are burned.
• 9:04
  SPEAKER_00: So this is where they have uh 150 bases in in the US, and then they equip them with employees that basically stand ready for when a plane arrives, they have to fill it up with their retardant, they have to service it, and then the plane leaves again towards the fire to uh to drop the uh to drop the product.
• 9:24
  SPEAKER_00: That is their um their wildfire solution, and as I said, over the years that they've been moving from this variable more towards fixed.
• 9:34
  SPEAKER_00: Um, the fixed part has been growing from 9% of revenue to 17% of revenue, something like that.
• 9:44
  SPEAKER_00: And then next to the wildfires, uh the fire safety business, they also have the specialty products, and this is basically their MA side.
• 9:54
  SPEAKER_00: This is where they acquire other types of businesses outside of fire safety, and that is the part which I already uh touched upon is growing, and that is where the MMT acquisition comes into play.
• 10:06
  SPEAKER_00: Um, and um that is I think the main two things of the business.
• 10:13
  SPEAKER_01: Yeah, it's at first sight, it appears like a company that just sells bags of red powder, but it's not it's not that simple.
• 10:20
  SPEAKER_01: Uh, this is what I meant with it looks a little bit like Transmatics, and it definitely doesn't, but they are becoming more and more vertically integrated.
• 10:28
  SPEAKER_01: They are just a full surface offering.
• 10:31
  SPEAKER_01: They they manage so much more than just selling these bags of powder.
• 10:35
  SPEAKER_01: I mean, just think about all these air bases, you have to fill up all these tanks, you have to manage.
• 10:41
  SPEAKER_01: Uh, you know, once a fire happens, you have to be be ready.
• 10:45
  SPEAKER_01: It has to work.
• 10:46
  SPEAKER_01: The tanks have to be full, uh, they have to be refilled.
• 10:50
  SPEAKER_01: Uh, let's say the fire spreads like crazy and the tanks are getting empty.
• 10:54
  SPEAKER_01: It's so much more than just dropping uh selling these red powder bags, and uh it's a hard business to run.
• 11:02
  SPEAKER_01: People can lose their homes, lose their lives.
• 11:05
  SPEAKER_01: It's uh it's very important, and it's uh that's why they've been doing this for a long time and they're the best and they've proven it, and that's why they basically have this monopoly in um that specific segment.
• 11:19
  SPEAKER_00: Yeah, I mean, there's there was recently a uh tweet I also sent to you um that someone basically said that there's no alternative uh solution that meets the standards.
• 11:31
  SPEAKER_00: Um I think we'll come to that later on as well, the competitive advantages.
• 11:35
  SPEAKER_00: Um maybe first we can tell something more about the sector in the industry.
• 11:40
  SPEAKER_01: Definitely.
• 11:41
  SPEAKER_01: Because it Perimeter Solutions is a serial choir and um they have more businesses than just the fire retardants.
• 11:51
  SPEAKER_01: It's it's useful to look at the different markets they play in.
• 11:55
  SPEAKER_01: So, first, obviously, fire retardants, that their main engine, and they have basically 100% of the North American market here for aerial retardants.
• 12:07
  SPEAKER_01: The total addressable market is somewhere between 2 and 3 billion.
• 12:13
  SPEAKER_01: Roughly it depends on what kind of season it is, and uh, you know, that makes sense.
• 12:19
  SPEAKER_01: And North America represents roughly 60% of that global market.
• 12:25
  SPEAKER_01: Now, within that, North America, within that, the North American aerial chemical retardant generates somewhere between 300 and 500 million annually for perimeter, depending on fire season seasonality.
• 12:42
  SPEAKER_01: Now, over the long run, this market grows about 5 to 9% a year.
• 12:50
  SPEAKER_01: Fire seasons are getting longer, it's getting hotter on Earth, more people are building houses closer to forests, just uh to name a few things.
• 13:00
  SPEAKER_01: Second, you have firefighting foams, so don't confuse those with retardant.
• 13:06
  SPEAKER_01: Retardant is dropping ahead of a forest fire to stop it from spreading, and foam is sprayed directly on fires by city firetrucks, for example, or uh at airports.
• 13:18
  SPEAKER_01: Now, foam, firefighting foams, which we're talking about right now, is much more competitive.
• 13:24
  SPEAKER_01: It's lower margin, um, and the total addressable market is somewhere between 1 and 1.5 billion.
• 13:33
  SPEAKER_01: It's grown a bit faster, which makes sense.
• 13:36
  SPEAKER_01: Uh these fires happen more often than forest fires, somewhere between 8 and 12% kegger.
• 13:43
  SPEAKER_01: But governments are banning old foams made with toxic forever chemicals, known as PFAS, which are used to also be used in pans, for example.
• 13:54
  SPEAKER_01: And perimeter is leading here with uh fluorine-free alternatives.
• 14:00
  SPEAKER_01: So I would say a tailwind for perimeter, and it's good that they're moving away from these toxic chemicals.
• 14:06
  SPEAKER_01: Then, third is the specialty chemicals and medical equipment.
• 14:12
  SPEAKER_01: Now, the specialty chemicals has a dam of about 1.5 billion, pretty low growth, somewhere between 4 and 6% kegger.
• 14:24
  SPEAKER_01: Now, this is not my favorite part of perimeter.
• 14:28
  SPEAKER_01: For example, this specialty chemicals demand is tied to the internal combustion engine from uh from cars used to in anti-ware motor oil additives.
• 14:41
  SPEAKER_01: I know it's not really my expertise anyway.
• 14:44
  SPEAKER_01: They are also being used in agricultural uh pesticides.
• 14:48
  SPEAKER_01: Now, obviously, you could think of long-term EV adoption, it's a very big headwind here.
• 14:53
  SPEAKER_01: Perimeter is only has one real competitor here in North America and one in Europe.
• 14:58
  SPEAKER_01: Uh, and in medical devices, they built custom gear to make catheters.
• 15:03
  SPEAKER_01: I think that's how you pronounce it.
• 15:05
  SPEAKER_01: Catheters, I think.
• 15:06
  SPEAKER_01: Catheters, okay.
• 15:07
  SPEAKER_01: But I'm not sure.
• 15:08
  SPEAKER_01: And secondly, medical equipment.
• 15:10
  SPEAKER_01: This is a bigger town, somewhere between 1.5 and 2 billion.
• 15:14
  SPEAKER_01: Chinese market, high single to low double-digit organic growth should um should be possible here, somewhere between 8 and 12 percent.
• 15:24
  SPEAKER_01: You know, the medical world is moving towards invasive surgeries, um, and medical device giants are outsourcing their machinery tooling, so this is where perimeter solutions um can expand.
• 15:40
  SPEAKER_01: I have a lot more work to do on specifically the specialty chemicals and medical equipment to better understand this segment.
• 15:47
  SPEAKER_01: But fortunately, it's still pretty small part of perimeter, so it's not the most important um business for now.
• 15:56
  SPEAKER_00: Yeah, I think I I agree you have to basically get a sense of what the fire safety part is, where it's moving towards, and then the rest, the other 25%, is let them execute their MA strategy, see where it wet heads, but like it's less important indeed, yes.
• 16:16
  SPEAKER_01: Yeah.
• 16:17
  SPEAKER_01: And and and if we mention competition or lack of competition, you know, can't another chemical company just copy their red their red fire powder?
• 16:28
  SPEAKER_01: Well, a competitor named Fortress tried a couple years ago, and they actually got government approval to sell a competing retardant, but during uh the 2023 fire season, when uh when they mixed um Fortress chemicals with leftover traces from perimeter solutions, inside the airplanes, it actually caused uh a severe chemical reaction and burned through the through the airplanes, and uh it created a thick paste in the metal tanks, and it was just bad for uh uh for um nature overall, and they got banned overnight, and perimeter went back to having a complete monopoly.
• 17:11
  SPEAKER_01: But what do you think?
• 17:12
  SPEAKER_01: Is it uh possible for uh another company to just copy what they're doing and be competing in a couple uh months?
• 17:21
  SPEAKER_00: It's it's very difficult, and this brings me back to the competitive advantage that they that they have.
• 17:26
  SPEAKER_00: Um, they're very mission critical, they're very high cost of failure, as you already said.
• 17:31
  SPEAKER_00: Like people would lose their houses, and their current product is proven to be of the highest quality, the best product.
• 17:41
  SPEAKER_00: And even if competitors say, like, oh, you there's this monopoly going around in this segment, um, they have very high margins.
• 17:50
  SPEAKER_00: Let's also move towards that.
• 17:52
  SPEAKER_00: It would take them at least three years, probably closer to five, in order to get approved with their product, if they have one ready already.
• 18:02
  SPEAKER_00: Um, probably still have to research, fine-tune, etc.
• 18:05
  SPEAKER_00: But they first have to be approved, obviously, proven that it is uh a valid product, that it can compete in in the open market, that already takes roughly like estimated three to five years.
• 18:18
  SPEAKER_00: And then you're only talking about the product, and then they might have a competing product, but it's much more than that.
• 18:28
  SPEAKER_00: It's it's more about um the scale, the scale of the operations.
• 18:33
  SPEAKER_00: If you have a product that's in Florida, but you need to uh you need to uh get to a fire in Seattle, well, it's impossible to to get the powder in Florida and then go all the way to Seattle.
• 18:46
  SPEAKER_00: You need to be local in every single state where there's a high risk of of wildfires.
• 18:52
  SPEAKER_00: So these 150 bases that um that uh perimeter has are crucial to the business.
• 18:59
  SPEAKER_00: It's not only the product, it's the logistics of it as well.
• 19:03
  SPEAKER_00: So I would say it there's a mode on the product and there's a mode on the logistics.
• 19:07
  SPEAKER_00: And obviously the logistics mode can be disrupted fairly easily by just a competitor um setting a base as well, but that also takes time.
• 19:19
  SPEAKER_00: So I think analysts um estimate that it probably takes around three to five years to get a product and to get like the logistics ready to even be able to compete.
• 19:31
  SPEAKER_00: And then we haven't even talked about switching costs.
• 19:34
  SPEAKER_01: Yeah, and I think uh it's a lot harder than what you make it sound like.
• 19:39
  SPEAKER_01: I think uh it's a lot of regulatory um files have to be submitted to even just get a new airbase up and running or get your product to be approved and used there, almost like an intangible mode as well.
• 19:54
  SPEAKER_01: They basically have like local monopolies as well, besides having a product monopoly, they have like local monopolies as well, where you are the sole provider on that airbase, which and you're protecting the the forest in I don't know, a 100-200 kilometer radius.
• 20:13
  SPEAKER_01: I don't know how far these planes can go with all the the filling, but um this is you talking about fire retardants.
• 20:22
  SPEAKER_01: So, what do you think about the modes from the firefighting foams, the specialty products, the medical equipment?
• 20:29
  SPEAKER_01: Do you think it's the same level of mode, or what do you think?
• 20:33
  SPEAKER_00: I think the mode for the fire foam, what you already touched upon, is less present basically due to higher competition.
• 20:43
  SPEAKER_00: Um, I'm not entirely sure how how high of a quality their current foam is compared to others that also have foam without the uh PAFAS in it.
• 20:56
  SPEAKER_00: But like like like you already said, there's uh there's a massive tailwind happening over there.
• 21:02
  SPEAKER_00: That there are just regulations that every single uh fire station in in the US has to switch to this non-damaging chemical, and that's a massive tailwind, nevertheless, if they're the best or not.
• 21:17
  SPEAKER_00: Yeah, agreed.
• 21:18
  SPEAKER_01: Yeah, and and the firefighting work uh foams actually work through uh tender bits where price is king, and uh that's why margins are so much lower there uh actually.
• 21:29
  SPEAKER_01: So uh even if they are offering the right product, they will never get high margins on on that specific uh products.
• 21:39
  SPEAKER_01: Uh okay and specialty products and medical equipment?
• 21:44
  SPEAKER_00: Uh specialty products is quite diverse, like I already said.
• 21:47
  SPEAKER_00: This is the MA part.
• 21:49
  SPEAKER_00: So in specialty products, you have um an acquisition that they did in end of 2024.
• 21:55
  SPEAKER_00: It's IMS, I believe.
• 21:57
  SPEAKER_00: Um, this is like a circuit board.
• 22:00
  SPEAKER_00: Uh acquisition.
• 22:01
  SPEAKER_00: So uh I'm not sure about like the mode over there, and same goes for the MMT acquisition, um, a relatively larger acquisition for perimeter.
• 22:13
  SPEAKER_00: It's more that I view this segment as the serial acquisition part of the business, and this is where I trust management and their experience uh from TransDime, Nick Howley, uh Thorndike, um, of the board, where I just say, Okay, this is where you can acquire businesses.
• 22:36
  SPEAKER_00: I trust that you acquire great businesses for a fair price um and that they look into the mode itself, obviously.
• 22:45
  SPEAKER_01: Yeah.
• 22:45
  SPEAKER_01: Yeah, for the specialty products, you know, if we if if we would rate this on like a uh on a five stars, I would say fire retardants is a five out of five stars.
• 22:55
  SPEAKER_01: It's yeah, basically currently a bulletproof monopoly.
• 22:59
  SPEAKER_01: I would say firefighting phones probably two out of five stars, although they might have like a tailwind um in this specific segment.
• 23:08
  SPEAKER_01: There's not really something that there's no regulatory wall protecting them there.
• 23:15
  SPEAKER_01: For specialty products and medical equipment, I would say probably very average, somewhere in the middle, three out of five stars.
• 23:22
  SPEAKER_01: You know, for specialty products specifically, these are PS uh P2S5, for example, are volatile, toxic, dangerous to transport.
• 23:31
  SPEAKER_01: And they have shown over the past 70 years that they know how to ship these safely and how to use it.
• 23:38
  SPEAKER_01: And for medical equipment, I did a little bit more research because it's so new.
• 23:43
  SPEAKER_01: So when a medical company like Abbott, for example, or starts using MMT's machinery, that machine design is written directly into their official FDA and European regulatory filings.
• 23:58
  SPEAKER_01: And replacing that with another supplier is very hard, very costly.
• 24:04
  SPEAKER_01: What I found out is that in emerging markets, uh, I read this through an in-practice interview with a former um director at uh Perimeter, there is no real strict regulatory enforcement.
• 24:17
  SPEAKER_01: So Chinese copycats like Balloon Tech sell direct knockoffs of MMT at like 50% discounts.
• 24:27
  SPEAKER_01: So that's why I grade this three out of five stars, uh, because the mode is pretty strong in the US and Europe, where rules are very strict, but in emerging markets there is not really this enforcement of rules.
• 24:42
  SPEAKER_00: So But I assume it's a relatively smaller part of the revenue of MMT.
• 24:48
  SPEAKER_01: But would you say ignoring specialty products and metal equipment just as optional and fire retardants as the main um core part of perimeter?
• 25:00
  SPEAKER_00: How I look at it is that the fire retardant business is currently still 75% of revenue, so that is your main value driver, and um I think it's it will be very hard for um management to get that down uh to let's say 50-50 because one year of um a lot of acres burned would already increase your revenue a lot, um, and you would have to do a lot of acquisitions with a lot of volume, a lot of revenue in eBITDA to diversify away from this very aggressively.
• 25:39
  SPEAKER_00: So towards the future, I would still value it as a fire safety fire retardant business.
• 25:46
  SPEAKER_00: Um and from the MA side, the specialty products and the MMT, that's more of a they still have to prove themselves a little bit on how they can execute these type of acquisitions.
• 25:58
  SPEAKER_00: I think MMT is therefore the perfect example to just keep an eye on okay, how the company is doing.
• 26:03
  SPEAKER_00: Um what what are the effects of perimeter stepping in, buying the company?
• 26:09
  SPEAKER_00: Um I think it's uh they already said last earnings call.
• 26:15
  SPEAKER_00: We we asked Mr.
• 26:16
  SPEAKER_00: Barker about uh MMT because in in last earnings call they already said that the uh the full year results are probably gonna exceed initial expectations.
• 26:26
  SPEAKER_00: And I was curious on whether this is um more of MMT um outputting more products because it's a product launch business.
• 26:37
  SPEAKER_00: They basically like they launch new update updated machines, um and they are planning on doing more product launches this year than previous years, or is it more that perimeter playbook is already taking effect?
• 26:50
  SPEAKER_00: Obviously, as a good investor relations um, it's mainly the latter the latter.
• 26:56
  SPEAKER_00: So that would already be one of the um one of the uh cases that I would like to see in the upcoming years, basically, of them actually improving the business.
• 27:06
  SPEAKER_00: While I do think that's gonna be quite difficult because MMT is already before the acquisition was already a um a very solid business with strong margins, and they also didn't really pay cheap multiple for it.
• 27:19
  SPEAKER_00: So I think that deal would be the perfect example of okay, let's see how they do in in in MA.
• 27:26
  SPEAKER_00: And um and would be more of the optional side when it comes to uh comes to the valuation to get back to your point.
• 27:33
  SPEAKER_00: Yeah.
• 27:33
  SPEAKER_01: Now let's head on over to management and governance, because when you buy perimeter stock, you aren't really investing in a traditional company and CEO.
• 27:43
  SPEAKER_01: You are basically paying a group of legendary investors to manage your money.
• 27:48
  SPEAKER_01: Co-chairman Nick Howley, for example, is famous for compounding returns at over 30% a year at TransDime, while co-chairman William Thorndike, who wrote The Outsiders, a famous book on capital allocation, also is present at Perimeter.
• 28:07
  SPEAKER_01: These guys know how to extract the maximum value from niche businesses and are very familiar with operating a serial choir.
• 28:16
  SPEAKER_01: But we have to address the major elephant in the room here, how these managers get paid.
• 28:22
  SPEAKER_01: While the CEO, Corey, takes a pretty normal salary, the founding team signed a special deal called the Founders Advisory Agreement back in 2019.
• 28:35
  SPEAKER_01: It's a bit of a puzzle to fully figure out at first and explain, but how about you give it a shot, Yup?
• 28:42
  SPEAKER_01: What does that agreement mean?
• 28:44
  SPEAKER_00: Yeah, so the founder agreement, it's as it already implies in the name, this is for the people that founded the company towards the stock exchange, right?
• 28:53
  SPEAKER_00: The EverArc um entity that you talked about.
• 28:58
  SPEAKER_00: And um, they get paid on two different pillars.
• 29:02
  SPEAKER_00: They have a fixed component and they have a variable component.
• 29:05
  SPEAKER_00: And the fixed component is basically 1.5% of the shares that were initiated at the start of the company, at the start of the listing, they get paid that every year, no matter what the company does.
• 29:20
  SPEAKER_00: So if it's a bad year or if it's a very good year, they get paid 1.5% of the founding shares.
• 29:27
  SPEAKER_00: So that means the shares can obviously go up, but they just get 1.5% of the shares in value.
• 29:36
  SPEAKER_00: And then the variable part is the more interesting part because this is where they receive 18% of share price appreciation above a high watermark.
• 29:49
  SPEAKER_00: So it's basically like a private equity structure where they have a high watermark that is set at the end of last year because last year was a uh higher end, basically.
• 30:00
  SPEAKER_00: And then they check the next year onwards, is this above the high watermark that we currently have set?
• 30:07
  SPEAKER_00: If so, yes, then they get paid 18% of that share price appreciation above that high watermark, and then the new watermark gets set for future years, obviously.
• 30:18
  SPEAKER_00: So, just as a simple explanation, if your high watermark is uh is$30, and um your share price increases by 10% the upcoming year, so your next year's high watermark is uh$33, then above that 10%, they get paid 18%.
• 30:38
  SPEAKER_00: So every 10% of share price appreciation above the high watermark, you're basically paying a 1.8% percentage point fee.
• 30:46
  SPEAKER_01: Yeah, yeah.
• 30:47
  SPEAKER_01: Yeah, think so think of the agreement like a heavy fee charged basically by a private hedge fund, where every single year the company gives the founders 1.5% of the founding shares, regardless of how well the business did, which I think is important to add there.
• 31:06
  SPEAKER_01: Yeah.
• 31:06
  SPEAKER_01: And on top of that, whenever the stock price breaks a previous new high record, the managers get paid 18% of that gain in brand new stock.
• 31:18
  SPEAKER_01: So, in 2025, for example, because the stock went up, the management payout reached a staggering$435 million, and that single payout forced Perimeter to report an official accounting net loss of$206 million, even though the actual business had a record-breaking operational year.
• 31:41
  SPEAKER_01: Management argues that this fee structure aligns them with shareholders because they only get huge payouts when the stock goes up.
• 31:50
  SPEAKER_01: But I disagree, the reality for investors is quite simple.
• 31:54
  SPEAKER_01: Every time the company succeeds, you somewhat succeed as well, obviously, but a lot of new shares get printed for the founders as well, which dilutes existing owners heavily.
• 32:07
  SPEAKER_01: This can go up to like 5, 10, even 20% in a single year, which I think is ridiculous.
• 32:15
  SPEAKER_00: There is an ending to it.
• 32:16
  SPEAKER_00: The the fixed component ends at the end of fiscal year 2027, and the variable component ends uh at the end of fiscal year 2031.
• 32:29
  SPEAKER_00: And because all the technical aspects of the payments are known, publicly known, obviously, um, you can just calculate this into your valuation, and then that's also what Barker told us.
• 32:41
  SPEAKER_00: Like everyone knows how you can calculate, how you can um check if if it's worth it for you, even after the fee.
• 32:50
  SPEAKER_00: Um, and that's what you should do when when valuing um when valuing uh perimeter.
• 32:55
  SPEAKER_00: It's it must be said that obviously like it can run up to very high numbers, this founder's fee, and it's not a direct cash leaving the balance sheet because they have to at least pick 50% in stock.
• 33:09
  SPEAKER_00: And historically that has been more closer towards 80% in stock and 20% in cash.
• 33:15
  SPEAKER_00: Um, but still, like you said, it has a massive accounting impact on the balance sheet, which is um which which looks quite ugly.
• 33:25
  SPEAKER_01: Yeah, so that's the uh founders advisory agreement.
• 33:29
  SPEAKER_01: I don't really have anything to add here.
• 33:32
  SPEAKER_01: Um would you like to go to the financials, or do you think it's worth uh digging a little further into the agreement?
• 33:38
  SPEAKER_00: Well, maybe before we do that, let's uh quickly uh talk about a little bit more about this advisory structure because I think it's it's very important for the people also to understand.
• 33:48
  SPEAKER_00: Like obviously, we ask a lot of questions to Barker, to uh Mr.
• 33:51
  SPEAKER_00: Barker, and um to me, what what is really astonishing is that um Thorndike and Howley are the main receivers of this founder fee, and they're also in the board, but you also have board members that are not paid with this founder's fee because they're simply not part of the EverArc entity.
• 34:14
  SPEAKER_00: And to me, that's very strange because the board's sole objective should be to advise and strategically allocate capital as a group, but some members of the board are paid like very extensively more than others, and that's quite strange to me.
• 34:35
  SPEAKER_00: So we asked about it, and obviously, like Seth gave a very politically correct answer that all the board members are incentivized in their own way and motivated.
• 34:44
  SPEAKER_00: But that's I can imagine that that there could be some friction among board members because they have the same goal, they do the same work, but others are paid a lot more solely because they have been in this entity, and obviously they are the one advising.
• 35:01
  SPEAKER_00: Um, probably like obviously they are the ones that have the experience and the knowledge and the the respect of advising the company, obviously, but still.
• 35:15
  SPEAKER_00: I'm just wondering like how much extra value are they extracting from these founders compared to the other board members?
• 35:22
  SPEAKER_00: That's just very it's very astonishing.
• 35:24
  SPEAKER_00: And it's because I think the question pops up because the difference is just so big between the pay of the founders and the board members.
• 35:33
  SPEAKER_00: It's it's astonishing.
• 35:34
  SPEAKER_00: I mean, there's the one good thing is that we also asked Barker if there will be like a new agreement once these two end in in 2027 and 30 uh 2031.
• 35:46
  SPEAKER_00: And he basically said there is no new agreement and there will be no new agreement because it is expected that these founders uh will then be incentivized enough.
• 35:57
  SPEAKER_00: I sure, I sure hope so.
• 35:59
  SPEAKER_00: Uh with the shares and the cash they've received to stay at the company and stay in their current role.
• 36:04
  SPEAKER_00: So that is a good thing.
• 36:06
  SPEAKER_00: Um, but we'll see how that uh turns out.
• 36:09
  SPEAKER_01: Yeah, I get what you're saying.
• 36:12
  SPEAKER_01: It's definitely a sort of a deal breaker for me personally, just because I want management and the board to be aligned with my incentives.
• 36:21
  SPEAKER_01: But I think if you bake this into your valuation, and for some reason the stock is valued at such a ridiculously low price at a good valuation, and the return even though the agreement is so outrageous, the return seems to be attractive enough.
• 36:41
  SPEAKER_01: I think you'll be fine, and even at like a reasonable valuation, I think you'll do pretty well for this company.
• 36:50
  SPEAKER_01: Maybe not market beating, but pretty, pretty good.
• 36:54
  SPEAKER_01: Since uh the board is incentivized to focus on an increasing stock price, whether that's good for the business or not, is a second thing, but they are incentivized to increase the stock price.
• 37:08
  SPEAKER_01: So, you know, if you if you buy it at today's price, you you'll probably do fine for the coming years.
• 37:14
  SPEAKER_01: Um but uh I don't think it's uh it's for me.
• 37:17
  SPEAKER_01: Yeah.
• 37:18
  SPEAKER_00: Yeah.
• 37:18
  SPEAKER_00: So like you said, you have to bake it into your valuation, and like I said, it's it's quite simple to do that, um, because the tech the technical aspects of it are known.
• 37:29
  SPEAKER_00: I think towards the future, uh coming back to the question of um going towards like the most important financials.
• 37:37
  SPEAKER_00: Um the fire retardant businesses, you would I think you would just have to view that as more of the same because margins are good, growth is solid.
• 37:48
  SPEAKER_00: Um and then um I'm I think I'm stepping ahead a little bit on risk and opportunities here.
• 37:54
  SPEAKER_00: Um, but it's there's a massive baseline that you can expect from this business, and there's a lot of potential upside that's very hard to model into your valuation because the upside is is a lot of wildfires, because a lot of wildfires obviously they need to resupply um all the planes, all their bases, and that would be a massive upside.
• 38:17
  SPEAKER_00: So, from that business point of view, you would like to see margins just flat or um or increasing very steadily, but margins are already very high, so I don't expect a lot of increasement there.
• 38:31
  SPEAKER_00: And then from the specialty product business, is I think what you would want to see there is again, like the there would there what you want to see there is more specifically margin increase because that's uh um a lower margin part of their business.
• 38:47
  SPEAKER_00: It's currently at like 25% Ebida margin.
• 38:50
  SPEAKER_00: That's very solid.
• 38:52
  SPEAKER_00: Um, but you want to see that with the new acquisition of MMT and potential future new acquisitions, they would want to keep that margin stable or improve it by acquiring higher quality businesses.
• 39:07
  SPEAKER_00: I think that is the most important part, and then for the fire retardant business, like keep an eye out on on wildfires, as bad as it might might may sound.
• 39:17
  SPEAKER_00: But that's yeah, that's that's a very nice upside for for for the company.
• 39:23
  SPEAKER_00: Um, what do you think?
• 39:25
  SPEAKER_01: Yes, it's a good question.
• 39:27
  SPEAKER_01: Because perimeters accounting can look super confusing if you only look at the headlines or the figures in the report.
• 39:35
  SPEAKER_01: If you open their financial reports, the first thing that hits you is quite a stark contrast.
• 39:41
  SPEAKER_01: On one hand, like the underlying business is an absolute cash machine, they have consolidated gross margins, around 57%.
• 39:51
  SPEAKER_01: That means for every dollar of product they ship, whether it's fire retardant or medical supplies, more than half of it stays with the company as profit before operating costs.
• 40:05
  SPEAKER_01: Full-year adjusted Abeda reached 332 million in 2025, which was up 18% year over year.
• 40:14
  SPEAKER_01: Yet they still reported this gap net loss of$206 million.
• 40:19
  SPEAKER_01: So obviously, that is has to do with the founders' advisory agreement.
• 40:24
  SPEAKER_01: But I think when you look at perimeter solutions, you have to look at the operational reality for instead of the accounting mechanics.
• 40:32
  SPEAKER_01: Usually I'm not a big fan of looking at the adjusted figures, but to really have a good sense of what perimeter does, and I think you can trust management.
• 40:44
  SPEAKER_01: I think the adjusted figures are not that crazy to look at.
• 40:49
  SPEAKER_01: But um, to answer your questions, the KPIs I would personally track is um like the federal wildfire suppression budget.
• 40:59
  SPEAKER_01: Well, obviously, this is bad for the environment, but it's beneficial for a perimeter.
• 41:04
  SPEAKER_01: So monitoring burnt acres in the United States is probably the most significant driver of retardant volume.
• 41:11
  SPEAKER_01: I would check if specialty products growth is organic or acquisition driven.
• 41:16
  SPEAKER_01: So maybe strip out the uh MA contribution to calculate the organic growth.
• 41:22
  SPEAKER_01: So you can actually see if management can successfully apply the playbook.
• 41:26
  SPEAKER_01: I would take a look at gross margins.
• 41:29
  SPEAKER_01: You want to see them increase or just margins in general, you want to monitor them.
• 41:34
  SPEAKER_01: You want to monitor their ability to pass through the uh material costs, and uh, if gross margins hold steady during inflation periods, their mode, it's a good sign that the mode is intact.
• 41:46
  SPEAKER_01: And like I mentioned, although I typically dislike the adjusted figures, I would say that adjusted ebada and adjusted EPS um are pretty good ways to track perimeter in this case.
• 42:01
  SPEAKER_01: Um we checked it and it's not that outrageous.
• 42:04
  SPEAKER_01: I think you should ignore net income since it's so heavily skewed.
• 42:09
  SPEAKER_01: But uh yeah, that's what I would check.
• 42:11
  SPEAKER_00: I think you what you want to see is just them executing on the MA side and then the via retarded business, like just business as usual.
• 42:19
  SPEAKER_00: Because as you said, and as we already mentioned a couple times, like the MA part, they've just been getting started with with their MA acquisitions.
• 42:28
  SPEAKER_00: And um I would have to say that their return on invested capital and their um uh reinvestment rates rate still has to stabilize.
• 42:39
  SPEAKER_00: Um, it's not a very traditional serial choir yet, and you can see that in their chunky reinvestment rate, uh, like it's very volatile, and their ROIC is not really up to standards, in my opinion, for it to be like on par with um with other serial choirs like transdime, like Heiko, um as the most traditional ones.
• 43:05
  SPEAKER_00: Um so that that are uh those two KPIs are um are quite important, I would say.
• 43:12
  SPEAKER_00: Yeah.
• 43:13
  SPEAKER_01: So um I think it's time to head on over to the risks and opportunities.
• 43:18
  SPEAKER_01: I'll uh I'll take you through the risks I see, the most major risks.
• 43:24
  SPEAKER_01: Uh obviously, the number one is uh weather dependency and uh seasonal volatility, right?
• 43:31
  SPEAKER_01: Most obvious risk.
• 43:32
  SPEAKER_01: Perimeters fire safety segment depends on the active wildfire seasons.
• 43:37
  SPEAKER_01: So if North America experience a cold or rainy summer like they did in 2023, where Aikers burned drop by like 50%, retarded volume sales plummet short term.
• 43:52
  SPEAKER_01: Now, obviously, the business will recover long term, but it creates lumpiness in these quarterly or even annual earnings.
• 44:01
  SPEAKER_01: I think another big risk is like the constant equity dilution, where the founders' advisory agreement that runs through at least 2031.
• 44:12
  SPEAKER_01: So every time the stock price surges, the founders collect a big fee.
• 44:18
  SPEAKER_01: And this just acts as a continuous drag on per share compounding for us, for shareholders, for investors.
• 44:27
  SPEAKER_01: Now maybe a couple other risks.
• 44:29
  SPEAKER_01: I think the long-term EV transition is a risk for the P2S5 division of uh perimeter.
• 44:37
  SPEAKER_01: And uh low-cost Chinese copycats for medical gear.
• 44:42
  SPEAKER_01: Just like we mentioned before, MNT is protected by the FTA regulation in Western markets.
• 44:48
  SPEAKER_01: But uh in international and emerging markets, this is not the case.
• 44:52
  SPEAKER_01: Like Balloon Tech sells knockoff versions of MM of MMT's uh catheters machines at like a 50% discount in Asia.
• 45:01
  SPEAKER_01: So it sort of caps international growth, but uh those are the risks I see.
• 45:07
  SPEAKER_01: Anything uh you wanna add there or I uh I missed?
• 45:11
  SPEAKER_00: Ooh, um not that I can think of from the top of my head.
• 45:18
  SPEAKER_00: I mean, right now it's also a bet on a jockey with Nick Howley and and Thorndike, and they're incentivized at least until 2031.
• 45:27
  SPEAKER_00: So more towards the future.
• 45:30
  SPEAKER_00: If obviously like the business will look very different, but if they're still very dependent on those two, then it will be a little bit of um of key man risk or like key advisor risk towards them.
• 45:42
  SPEAKER_00: But then I would argue that the business has developed um to be like a very standalone business that they don't really need them anymore, but something like that, maybe.
• 45:53
  SPEAKER_00: But other than that, no.
• 45:54
  SPEAKER_00: I think those are the main risks.
• 45:56
  SPEAKER_00: I mean, opportunities I already touched upon it uh briefly.
• 46:00
  SPEAKER_00: The the biggest opportunity is something you can't really forecast, and that is like wildfires.
• 46:06
  SPEAKER_00: Um resupplying the bases, resupplying um the planes.
• 46:12
  SPEAKER_00: Um, you can see that in years where there are a lot of uh wildfires, so in the year 2020 and I believe 2024 as well, you can see their revenue just spikes.
• 46:23
  SPEAKER_00: Um and like I said, it's really hard to model this.
• 46:27
  SPEAKER_00: So that is a big upside.
• 46:29
  SPEAKER_00: That is that is one of the biggest opportunities, I think.
• 46:32
  SPEAKER_01: And maybe just to add to that, um, the transition to uh fluorine-free foams, where regulators worldwide are banning these legacy forever chemicals, like uh the ones, for example, PFAS is pretty well known, which was often used in firefighting foams.
• 46:50
  SPEAKER_01: Airports, military bases, and refineries are legally forced to replace their entire foam inventories now.
• 46:58
  SPEAKER_01: And Perimeter is the market leader here, giving them uh a pretty good runway.
• 47:03
  SPEAKER_01: And we didn't touch on this in the risks, but it's also an opportunity.
• 47:07
  SPEAKER_01: Obviously, Perimeter is a serial acquirer, so yeah, successful MA.
• 47:11
  SPEAKER_01: MA is a big opportunity where they can grow for a long, long time and keep um if they can reinvest cash flow, but obviously it's also a big risk if they don't find opportunities or do large value destructive MA.
• 47:29
  SPEAKER_01: So yeah, that's uh that's about it for risks and opportunities, I would say.
• 47:33
  SPEAKER_00: Yeah, so valuation-wise, normally I would um because it's a serial acquire, I would look at the reinvestment rate, I would look at the ROIC, I would look at uh Nopat, but it's a very young serial acquire which distorts the numbers quite a lot, um, especially with this founders-free structure where you would have um negative net income because of it.
• 47:58
  SPEAKER_00: Um so that's that that changes the valuation a bit.
• 48:02
  SPEAKER_00: If you just try to make a simple DCF, then you can basically say, Okay, I expect this Kagger from the stock, but then you have to take into account the founder's fee on top of that cagger, obviously.
• 48:16
  SPEAKER_00: Just to give you a quick example, if the uh stock price moves uh 50 percent 15, so 15% a year from today's price um all the way up until uh 2031, just to give the people a sense of how much this founder's fee is, the founder's fee will probably move towards 1 billion uh dollars.
• 48:41
  SPEAKER_00: So obviously that is like 50-50 or 70-20 in in uh stock slash cash, but that shows the significance uh and the impact of this founder's fee.
• 48:53
  SPEAKER_00: Um so you effectively lower your Kagger on it.
• 48:58
  SPEAKER_00: So just looking at my own assumptions, I think I took some relatively realistic assumptions, appear multiple compared uh with a DCF, and I am not really convinced.
• 49:13
  SPEAKER_00: Um and I think that has to do with the potential upside that is just very hard to model.
• 49:21
  SPEAKER_00: Um right now, like if you would assume revenue growth of like 35 to 25 percent a year, um that can be heavily underestimating if there's a couple of good fire, uh a couple of good uh years with a lot of acres burned.
• 49:43
  SPEAKER_00: And I think when you're doing your own valuation on this, you also have to take into consideration that the company is diversifying away from fire retardant and fire safety, but they're diversifying away into specialty products, and um, I don't think they can match the margin of um of the fire safety products.
• 50:04
  SPEAKER_00: Um, so that means that the more they diversify, the lower the margin will get towards the future of the overall business.
• 50:11
  SPEAKER_00: So that's something you have to take into account in your in into your valuation.
• 50:15
  SPEAKER_00: But I think right now, if you would buy the stock right now, the baseline is very solid, and you can get a solid return, but for it to be an exceptional return or like a fairly accepted return of like 12% a year for investors, you would need some good years with uh a lot of acres burns.
• 50:38
  SPEAKER_00: That's my view on it.
• 50:40
  SPEAKER_01: Yeah, so my my ending thoughts here.
• 50:43
  SPEAKER_01: When I first started analyzing perimeter solutions, there was so much to like effectively 100% monopoly in North America and aerial fire retardants uh with FOSCEC, good gross margins, like an all-star management team following the trends dime, which is proven to work, the trans dime playbook.
• 51:05
  SPEAKER_01: But after digging it deeper into the financials, the mechanics, the corporate structure, my enthusiasm has cooled off significantly.
• 51:14
  SPEAKER_01: If you can look past all the complicated accounting and accept the heavy management fees, and the valuation lets it, you're essentially buying into a protected monopoly run by some of the best capital allocators in the world.
• 51:31
  SPEAKER_01: But I don't know.
• 51:33
  SPEAKER_01: Valuing perimeter just requires making these impossible predictions, unmodelable, just basically unmoddable variables, wildfire weather patterns, fee dilution, MA reinvestment rates, and it just can vary all over the place.
• 51:53
  SPEAKER_01: So for these reasons, I will not be buying shares of perimeter solutions, and I am putting perimeter solutions squarely into the too hard pile.
• 52:05
  SPEAKER_00: I uh I I agree.
• 52:07
  SPEAKER_00: I just have to note down again that there is a lot of potential upside here as well.
• 52:13
  SPEAKER_00: Um but as we already repeatedly said, it's quite hard to model the amount of wildfires that's gonna happen.
• 52:19
  SPEAKER_00: But as soon as it happens, it's a it's a big catalyst for the company.
• 52:24
  SPEAKER_00: So just keep that in mind for people valuing or researching this company, I would say.
• 52:31
  SPEAKER_01: Yes, yes, yes.
• 52:32
  SPEAKER_01: And that wraps up our perimeter solutions deep dive for the month of July.
• 52:39
  SPEAKER_01: We hope you enjoyed this deep dive with Yub Dicken, analyst at Treso Capital.
• 52:44
  SPEAKER_01: You can find all the links to his socials or where you can reach him in the episode description.
• 52:51
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• 52:57
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• 53:03
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• 53:13
  SPEAKER_01: And we hope you enjoyed it and we'll see you in the next one.
• 53:17
  SPEAKER_01: Bye everybody.