TIVP086 (Video): Perimeter Solutions (PRM): A Niche Monopoly, One Acquisition at a Time w/ Kyle Grieve and Shawn O'Malley

24:31But how about we look a little more at the specific advantages that this business has in the fire safety segment. And so you already mentioned that they signed a new five-year contract with Cal Fire. And so I like the length of that contract that definitely provides some earnings stability looking out. But I would like to know more about how the contract is structured and whether Perimeter has any sort of pricing power baked into that contract. Yeah. So given the five key characteristics that management looks for in new acquisitions, I think it really makes sense that some of these businesses would hopefully have some kind of, you know, mode-y characteristics.

25:06Now, let's start with your question here regarding the duration of the Cal Fire contract. So in Perimeter's latest presentation, they actually disclosed two contract wins, one with Cal Fire and one with the U.S. Defense Logistics Agency. Now, both of these contracts are five years in duration, which I also like. And I think this is a nice length as it locks Perimeter into some recurring revenue over that time period. But I'll focus more here on the Cal Fire contract. So it includes both a usage-based and a service-based revenue segment. Now, as for pricing, it specifically discloses that they can increase in prices in alignment with other large fire-retardant customers.

25:39Now, it's actually kind of tough to define what this actually means, but my assumption is that Cal Fire will pay similar prices to the U.S. Defense Logistics Agency, meaning that they may have gotten some volume-based discounts in the past, which are now increasing in price to parity with the Defense Logistics Agency. They do state that they have an annual price escalator with key customers, but they actually don't disclose exactly what those numbers are. It doesn't look like the fire safety segment then has as much pricing power compared with some of the prior businesses we've looked at on this show.

26:12Verisign, FICO, AMT come to mind. And so that doesn't mean the business isn't good, but it does mean that they have to find advantages in other areas. Yeah. And one advantage that I think they have in the fire safety is in the barriers to entry. So I mentioned earlier that the fire retardants products must pass the USDA Forest Services Qualified Products list. Now, to be approved, you must undergo a very rigorous evaluation process. So this includes things like toxicity checks, checking for corrosion, stability, and then field evaluations. Now, this process takes multiple years to complete and requires government sign off before an approved product is actually eligible to bid on contracts.

26:50So I would say that perimeter most definitely has a lead in this area, having been on that list now for a number of years and having that contract already with the US government. But they have a couple of other key competitive advantages too that I wanted to mention here. So one is switching costs. So I already discussed how an airbase is outfitted with Perimeter's own staff. Now switching would mean re-outfitting, getting accustomed to a new company's staff, reinstalling the necessary equipment, and then just aligning needs. Perimeter staffing only works with Perimeter's products. So there are embedded switching costs right there.

27:22Additionally, you can't breach the contract without some form of litigation. And Perimeter's customers have a high degree of trust in Perimeter's ability to perform at a pretty high level as people's lives really depend on the effectiveness of its product. And second here is emission-critical products and services. So as I mentioned, the fact that people's lives depend on fire retardants working as advertised is vital. If a fire starts, you can't make your way to the nearest Home Depot to go buy a fire extinguisher and call it a day. You need a properly planned logistics network. The retardant needs to be available quickly, and it needs to be able to be transported exactly to where it needs to go via aircraft or land-based vehicles.

27:59If a fire occurs, they will use as much fire retardant as necessary to protect people and property, which means more fire retardant is consumed, resulting in perimeter making more revenue. I think you're definitely selling me here on some of the advantages of the fire segment. And I do like the mission-critical nature of their products. It's always attractive from an investment perspective. And the fact that they have boots on the ground and over 150 air tanker bases in North America does imply to me that they probably understand very well what their customers want. They're getting a lot of face time with their customers.

28:31And replicating that logistics network would be not a very easy thing to do. And displacing them would probably be nearly impossible given the depth of these relationships that they clearly have with some very large customers. But how about we get into the specialty products side of things a little more? Let's talk some more chemicals. Let's do it, Sean. So I think the specialty products have some nice competitive advantages as well that complement the fire safety segment. So in terms of looking specifically at the oil additives or the PS, the legacy core business, they're basically in a duopoly both in the US and in Europe.

29:08So this means that there just isn't that much competition. And similar to the fire safety segment, this industry is highly regulated given the dangers of transporting the chemicals. So I think this business has some very high barriers to entry. Now, the way I see it, IMS might be the weakest segment of perimeter in terms of any true competitive advantages. Print circuit board manufacturers, in my opinion, are kind of a dime a dozen. It looks like at least IMS has customers who specifically depend on them. And then they have this heavy weighting towards aftermarket and replacement parts. But it's kind of hard to nail down a specific competitive advantage here that I could really easily defend.

29:43But if we go to the MMT segment, I think this is probably the business segment that most closely aligns with what Howley did at Transdime. So the industry is highly regulated, which offers it natural barriers to entry. And since this business doesn't just manufacture machines, but also services them as well as having this consumables angle, they're going to continue to generate more and more revenues from current customers instead of having to find new customers to try and generate revenue from. It's also important to consider that many of their products are proprietary. So any service and maintenance can't be offloaded to a third party.

30:15With MMT, I think it probably is going to become more clear over time what kind of competitive advantages they have once it's fully integrated. But we only really have a quarter here to look at so far. It makes sense here to contrast Perimeter somewhat with TransDime, as we've done a little bit implicitly and explicitly at the beginning of the episode, but they both face these barriers to entry due to regulatory constraints. They both have products that don't have multiple competitors vying for the same set of customers, which is an enviable position to be in. And once a customer is paying perimeter, they're unlikely to go elsewhere.

30:51So there's a stickiness to the customer relationship. But to be clear, there are definitely differences too. TransTime is a much larger business and perimeter with a market cap that is about 15 times as big. And because of this, they have an advantage that perimeter just can't quite fully make up for yet or take advantage of yet. And that's scale economies. And so there may come a day when perimeter has much more scale to use to their advantage, but it's kind of hard to tell exactly how much organic growth these businesses really have while inside of Perimeter? The scale issue is definitely an interesting point.

31:31And I agree that since Perimeter operates in these really niche industries, there may never be a point at which they can truly take advantage of economies of scale as a larger business such as Transime can. Now, since these businesses are disassociated from each other, there's also no cross-selling potential either. Although bolt-on acquisitions could definitely help increase maybe IMS or MMT's product offerings, bundling them might yield, you know, a little bit of cross-selling benefits within their respective business segments. But to be honest, I wouldn't be surprised if they never take a large advantage of economies of scale.

32:03But I think that's really okay because it appears that the business that they have today all have some degree of organic growth left in them. And if they can continue to accrue more and more cash, that money will be put to work buying even more businesses, buying even more bolt-ons, and then just adding value to their current businesses inside their portfolio or even buying back their own stock. Perimeter operates in highly niche industries, as we've said, where traditional SaaS-like scale economies or massive network effects like those underlying companies like Uber or Airbnb, they just don't apply in the same way since their business units are completely dissociated from one another.

32:42There is no real opportunity for cross-selling across the different segments within perimeter. And yeah, they can still achieve significant scale through disciplined capital allocation or serial acquisition, as we've alluded to a few times, rather than just pure operational expansion, as you might expect with Uber or Airbnb, where you sort of know exactly what their playbook is. And they're just incrementally expanding out into these different verticals that are closely related to or complementary of the core business that those companies run. So like Airbnb, for example, expanding out into services and experiences so that you can book a massage while you're away on your trip at an Airbnb.

33:26And so by focusing on asset-like business models that generate these sticky recurring revenue streams, they can accumulate a lot of cash, speaking about perimeter here, to fund value-add bolt-on acquisitions within their existing segments or to aggressively buy back stock, which you mentioned. And so it is sort of a different model for scaling, you know, cloned directly from the TransTime playbook, where the goal is long-term value creation through compounding cash flows in protected niches, rather than building a single massive platform, a super app in the way that Uber and Airbnb are taking that approach to organic growth.

34:07Yeah. And another competitive advantage that I see for Perimeter that isn't actually tied to any specific segment. And I'd say this is more of a corner resource. And that's just really the team that makes up the advisory team that makes these acquisitions. So they have clearly done just a really, really good job at creating shareholder value so far with shares compounding at nearly 25 % annually since it went public. This is a very, very good return for any business. So when I look at serial acquirers, I like to ask myself, okay, well, if they were to buy a business, why is it better that the serial acquirer owns it versus just leaving it alone and having the original owner or founder of that business own it.

34:43And so you kind of have to look at, okay, well, what are the value ads that the management of these serial acquires ads? And kind of the ones that I see here for Perimeter are three. So the first one is the ability to just buy really, really exceptional businesses. So the businesses that they do buy all generate EBITDA. They sell these mission-critical products. They solve challenging products for their customers, and they tend to be industry leaders and have attractive organic growth prospects. So, okay, I will admit this isn't necessarily a value add specifically for the business, but for the holding company as a whole, of course, I think it's a major value add.

35:16Now, looking specifically at the businesses that they buy, they are looking to basically target these 15 % returns and so far have exceeded that number. But on top of that, they're also focusing on businesses that are already profitable and that they can actually improve margins on by doing things like improving the efficiency of those businesses and finding ways to reduce costs. And then just by increasing or improving the pricing strategy that the businesses have, like we said with the fire segment, obviously they've moved more and more towards the recurring revenue segment. So that's an area where maybe you could make the argument that the original business wouldn't have done that, but perimeter solutions as it is now would do that.

35:52And then the third here is more again towards the parent company, and that's looking at decentralization. So by putting the right people in charge than just letting them do their thing, they've helped create autonomy that has clearly worked very, very well. And they've also done a good job of aligning incentives, which we're going to go to in a little more detail later today. So we've already discussed how Perimeter Solutions has been built out by M &A and sort of is in the process of building out its business through M &A. So how about we take a closer look at what those deals look like and the details of them in terms of how accretive they have been to shareholders?

36:29Great idea. So let's first look at exactly how they became Perimeter Solutions. So Perimeter Solutions, the fire segment, was purchased for about$2 billion back in 2021. So as SK Invictus actually owned 100 % of Perimeter Solutions, it was basically just a holdings company. So for full year 2021, the fire safety segment generated revenue of approximately$261 million and adjusted EBITDA of$118 million. This means the purchase price was somewhere in that 17 times adjusted EBITDA range. Now, keep in mind that the fire safety is a pretty good business to be in. And I hope that we've made abundantly clear today.

37:06While it's not a SaaS business, there are fires literally every year. So there's a large component of both product revenue and recurring revenue. Now, the business additionally has had a very nice organic growth narrative that has happened since they bought it as well. So trailing 12-month revenue for this business segment is now about$500 million with adjusted EBITDA of about$290 million. So adjusted EBITDA margins have also expanded from about 45 % to 60 % as of the latest quarter. So they've done a really good job of improving this business. And I already mentioned that they've excelled at restructuring the contract.

37:37So they have this growing weighting towards more and more recurring revenue. But it's also important to keep in mind that fire safety margins definitely are volatile. So margins, if I've looked over the past few years, they fluctuated from 27 % to 65 % just in the past two years, if you look at it from a quarterly basis. So I don't want to hear anybody say that we're too focused on large cap tech stocks because today we're doing a deep dive into the fire retardant industry and fire safety. So we're not averse to flipping over a lot of different types of rocks to find intrinsic value. And the margin swing here does seem to be cyclical due to the nature of fire seasons where Q1 tends to be the weakest quarter.

38:21And then since the FIRE segment has these fixed costs, like maintaining the airbases, margins will suffer if they aren't using the product, they aren't using the FIRE retardant. And so basically there's a deleveraging that occurs. But looking back at the perimeter solutions deal, it does seem like it only happened at about seven times adjusted EBITDA today. So So that seems insanely cheap for a business that is a near monopoly in the US and dealing with a problem that probably has a long-term tailwind behind it in the sense that forest fires aren't going away. And if you ask a lot of people, they're likely to only increase with time.

39:04Yeah, that's exactly right, Sean. If you could find me another business trading at this low of a multiple today that has this much of a competitive advantage and barrier to entry, I would be very, very interested in learning more about that. So with that said, I want to go and look at the other business unit that we can look at in IMS. So I said earlier that I wasn't crazy about the segment specifically because it's kind of hard to view what type of competitive advantages it really has. But let's go over what the numbers actually tell us. So first, it was a little tougher to see where this business is today because IMS is consolidated specifically with the PS product as well as MMT.

39:39But let's go back to the end of 2024 when IMS was purchased by Perimeter Solutions for just about$33 million, so a pretty small acquisition. Now, interestingly, the business was actually purchased with no contingent considerations, which isn't very typical for many serial acquirers that I've looked at. Usually they structure the deal so that the existing management shares and some of the upside after they're acquired, which the hope is will ensure that the business continues to run smoothly after the acquisition is complete. Now, aside from the purchase price, it's really difficult to determine the multiple that they paid for the business as well.

40:10So in Perimeter's Q1 2025 earnings release, it was noted that specialty product sales increased by about$7.5 million due to the recent acquisition of IMS. Now, this implies about a 1.1 EV to revenue multiple, but we don't unfortunately get any of that data for adjusted EBITDA. So Perimeter has also made two additional tuck-in acquisitions for a combined$22 million. So this business segment looks to be pretty small, especially compared to the fire safety segment or even MMT, which was purchased more recently. So I know MMT, which is again, the medical manufacturing technologies business closed in Q4 2025.

40:46So that's very, very recent, but it is probably worth going over that acquisition in a little more detail. And it is after all the biggest driver right now in increasing this specialty product segment. Yeah. So the deal was announced in December of 2025 for$685 million in cash. Now, the assumptions for MMT were, as I mentioned, revenue of$140 million and$50 million in adjusted EBITDA. Now, this implies an adjusted EBITDA multiple of about 14 times, putting it in the same general field as the original Perimeter Solutions fire safety business. Now, I mentioned earlier that management says that the acquisition of MMT is going very, very well and exceeding their initial projections.

41:28So probably that gets the multiple down in the first year and who knows just how much lower that number will go in say three to five years from now. Now, this business looks like a major shift for Perimeter. It's helping to significantly increase the specialty product services revenue mix. So since the deal closed, revenue for the quarter and adjusted EBITDA have exploded by triple digits, while adjusted EBITDA margins have also expanded by mid-single digits. So it just looks really promising so far. However, as with other areas of this business, it's kind of hard to annualize these numbers until we get a full year of financials to look for, just given the cyclicality of some of the business segments.

42:02But my immediate reaction is this has been a very, very good acquisition. So all three of these businesses have helped increase the value of perimeter solutions as a company. I think we can say that fairly confidently. And the fact that the fire safety segment has clearly improved and compounded its value since was acquired is a great sign that management is going to be able to really optimize the performance of these different business units and generate organic growth over time, which is a wonderful thing for a serial acquirer as it effectively cheapens the purchase price of those acquisitions and allows the business to grow in other ways beyond just being so dependent on mergers and acquisitions of other businesses and ultimately gives the business more cash to redeploy into its existing business segments and into those new acquisitions.

42:51But what similarities would you say that you see between these three acquisitions? So I really love the organic growth that Perimeter was able to get from the fire safety segment. I think they just did a wonderful job on that. If they can do something even somewhat similar for MMT, then that acquisition will probably turn out to be cheap too. But we will need to wait and see as this is an entirely new industry that they're getting into. So a few things really stand out to me here though. First, you have the vertical integration of manufacturing. Then you have the fact that their products are mission critical and technically demanding niche industries.

43:21Then finally, they're all really just capital light businesses. Just to give you an idea of how capital light businesses, all of them are. In 2022, CapEx was about 2.4 % of revenue, which has steadily climbed to a still very, very low, in my opinion, 4.6 % in the latest quarter. So from a capital allocation perspective, this makes complete sense. You don't necessarily want to tie up your capital in your business segments just to keep generating very, very similar returns. If you don't need to reinvest much and can generate similar returns or even greater returns, then you're doing really good capital allocation.

43:53This is why Buffett likes a business like Seize County so much. You don't have to put much money back into the business and it just keeps generating more and more incremental cash. We've mentioned adjusted EBITDA a few times today, which is a metric I'm not crazy about. And one reason I'm not so fond of it is many businesses use this figure when they aren't turning a gap accounting profit. And from the looks of things, Perimeter does sort of fit that bill, right? With trailing 12-month net income coming in at negative$190 million. So it is worth noting that since the MMT deal closed, they have turned a gap profit.

44:32But still, is this a situation where they're using these manipulated non-gap numbers to make the business look more profitable than it actually is? Yeah, that's a great question. And this is probably as good of time as ever to discuss exactly why that is, because it's actually a big part of the thesis here. So just like you, I personally tend to stay away from businesses that overly rely on adjusted EBIT numbers. So when I first actually heard about Perimeter Solutions, it was way back in Omaha, in Berkshire in 2025. And the investor who was telling me about it basically said that the primary reason that he passed on investing on it was specifically because of this very unique incentive structure that Perimeter Solutions has called the founder's advisory fee.

45:21Now, this advisory fee is correctly added as an operating expense, but boy, oh boy, it's a large, large expense. So in the latest quarter, it was$76 million on$125 million in sales. So in order for this business to just turn a profit, they need to really scale up revenue or reduce the advisory fee. And you can really think of the advisory fee as a fixed expense. So having it go down is not really a function that is under their control, which I'll go over in a little more detail. Hopefully I haven't confused you too much. Gosh, I'm not sure I've ever seen a line item like that before. I would love to dig more into it.

46:00I think we will, but I also want to hear a little bit how you would get to an ROIC number or perimeter, right? Looking at the returns on invested capital and what direction that's been moving in when the reported net income is negative. Yeah, it's definitely a new line item for me as well. But yeah, so the founder's advisory fee is a massive drag on the P &L statement, even though it doesn't actually have anything to do with the ability for perimeters, solutions, ability to generate profits as it's a non-cash, non-operating fair value remeasurement. So the only way to really get a usable ROIC number is to just unfortunately use an adjusted number where we only use the cash that's settled in the advisory fee as it can be paid out both in shares and in cash.

46:43That's why it's a non-cash expense. So if we make this adjustment, NOPAT has actually risen steadily because management has been taking a larger and larger share of the founder's fees as shares rather than cash, as well as the business starting to get better and better and making more and more money. So we can argue all day whether the fee in options is a real expense. I would argue that it is. But for the sake of looking at ROIC, we kind of just have to rely on these adjusted numbers to get a number that's actually usable. So if we do that, then we get a ROIC of about 11 % for 2025. And this is trending up from about 9 % in 2024.

47:14But take these numbers with a grain of salt as the advisory fees obviously highly impact the numbers. It really does muddy the water. And from a capital allocation perspective, the sheer scale of the founder's advisory fee makes it incredibly difficult for us to assess the true return profile of the business. And when you have non-cash, non-operating, fair value, re-measurements that swing wildly based on the stock price, like the$200 million in 2024 and$400 million plus in 2025, I mean, that just completely distorts any generally accepted accounting principles, profit and loss, or income statement.

47:50And so traditional ROIC, traditional returns on invested capital, relies on a clear view of net operating profit. But here, the economic reality of their high-quality assets is really very heavily obscured by accounting noise if we haven't made that abundantly clear. And even if we use adjusted metrics to show an upward trend from 9 % to 11 % in ROIC, the lack of clarity remains a major issue. And so for a strategy built on disciplined capital allocation. Having to continuously adjust for hundreds of millions in management fees does make it tough for shareholders and potential shareholders to evaluate the true capital efficiency of the business.

48:31So that's a little bit of a rant. But on that note, maybe we should go over why the founder's advisory fee even exists in the first place and how it's structured. So the whole reason the founder's fee exists is basically to align management with shareholders as best as they thought. So basically, to give management more skin in the game, if they allocate capital well, and this bred the founder advisory agreement. So it has basically two pieces to it. So the first piece is a fixed annual advisory amount. So it's a flat fee equal to about 1.5 % of the shares set at the IPO. And this comes out to about 2.3 million shares per year.

49:06And it's payable in common stock or partly in cash, but it must be paid at least 50 % in stock. Second, you have this variable annual advisory amount. So this is based on the appreciation specifically in perimeter stock price. So if the stock price exceeds a specific minimum, they are also paid in stock or cash, again, with at least 50 % paid in stock. They're paid about 18 % of the increase in market value above$10. Now, the fixed annual advisory amount expires on December 31st, 2027. So I like the fact that it expires and hopefully isn't going to be continuing in perpetuity. The variable interest amount expires on December 31st of 2031.

49:44Now, since management is required to accept a large portion of this compensation in shares, shareholders can absolutely be expected to be diluted. Now, the founders' advisory fees were especially large in 2024 and 2025, as you just alluded to, at$200 million and over$400 million respectively. But that was when the stock performed exceptionally well. So in a gigantic paradox, the better the stock does, the worse gap earnings is actually going to look because the company has to book a larger liability for that fee. I would say that the more companies I look at and the longer that I've been actively investing in individual stocks, the more strongly against significant dilution I feel, Kyle.

50:25So it probably doesn't surprise you to hear that this founder's advisory fee is very off-putting. And I think to be fair to you, I don't think you're exactly excited about it either. But from the looks of it, you're paying an 18 % fee structure, which is basically very similar to what you would pay a management team to manage funds in a hedge fund based on the AUM, which is a consistent management fee, the 1.5%, and performance over a hurdle rate, which is the 18%. But how has it affected the actual shares outstanding? Are we seeing a significant uptick in the number of shares spread across the shareholder base?

51:03Yeah. So you probably won't be surprised that, yes, I tend to agree with your sentiment on this advisory fee here. But getting to your question here, when you look at it, it's actually not as bad as you'd think. And that's because part of Perimeter's capital allocation policy is to use share repurchases as well, which definitely help to offset dilution. So if you look at diluted shares outstanding, they've gone from about$157 million at the IPO to$165 million today. This is actually much lower than I expected, given that management has been increasing its ownership stake specifically with these advisory fees.

51:33So just looking at buybacks a little bit more, they've been buying back shares basically on an annual basis since 2022, which has definitely helped offset the dilution from the advisory fee. And they currently are still buying back shares as they have a stock repurchase plan open right now to repurchase approximately$100 million in shares. With the amount of shares that management has gotten from this advisory fee, have they at least held on to them to have skin in the game? I mean, if they accepted the shares and just immediately sold them, I would not feel great about the alignment or really just the overall fee structure in general.

52:10Yeah, I wouldn't either, Sean. But Insiders actually own about 13 % of the business with their CEO, Hytham Khoury, owning about 3%, which I think is quite healthy. And the founders of Everarc all invested about$11 million each into this business before it merged. So they haven't gotten all of their stock from options. Some of it was owned as part of that merger. Base salaries for all executives are very reasonable, ranging between$350 ,000 and$700 ,000. They have a cash-based incentive program that's based on the adjusted EBITDA of the business and the individual performance of each executive.

52:40The compensation structure here, you know, not my favorite, given the advisory fee and the executive and the comp structure. You know, adjusted EBITDA tends to give a lot of room to get creative with numbers, as I think we've already outlined a lot here today. And it's not my favorite KPI to base performance on. And I think I can speak for you, Sean, that you think very similarly to me. Well, ironically, as William Thorndike discusses in his book, The Outsiders, metrics based on value creation for shareholders per share of stock are typically much more preferable because it's harder to manipulate the accounting than with something like adjusted EBITDA.

53:15And there's a reason Buffett called EBITDA utter nonsense. And so this is not just EBITDA, but it's adjusted EBITDA, whatever that means. And so we haven't spoken much though about cash flow. And that is really sort of at the heart of what EBITDA and adjusted EBITDA numbers are trying to capture. You're stripping out things like stock-based comp to get an idea for the operating cash flows of the business. And looking at permanent solutions, they have generated nearly$240 million in cash from operations as of within 2025. And given their latest acquisition of this medical manufacturing technologies business and the fact that it was paid in cash, I would assume that they raised debt for the deal.

54:02So how about we go over Perimeter's balance sheet in more detail and how you think about the debt? So currently, Perimeter has about$91 million in cash and cash equivalents, which is down from $325 million at the end of 2025. Now, I assume they drew down on this cash hoard as part of the MMT acquisition. Long-term debt is currently at about$1.2 billion. Now, since cash generation is pretty volatile right now due to the big acquisition kind of obfuscating some of their numbers, it's really hard to see if this business is getting below my three times debt to free cash flow number. But we do know they are surfacing their debt with an interest coverage ratio, three times.

54:37It's definitely not super high by any means, but I think it's somewhat manageable for now. As with all serial acquirers, I would assume that they're going to continue to always carry some form of debt as long as they have ideas to invest in. They should be able to fund these new deals with the cash that they already have on their books, cash generated from their current business, and then from leverage. With that interest coverage ratio three times, that is not a lot of room for error if the business hits really any turbulence. And so So ultimately, as shareholders, you want to know that they can service their debt without missing any payments because if they miss payments, then the whole business could be forced into bankruptcy and the equity of shareholders could be wiped out.

55:15And that's something that we don't want to be a part of. But given how volatile their operating profits are because of these founder fees that we're not super fond of, are you worried at all about their ability to grow, let's say, sustainably and safely? Yeah. So, I mean, we have to look at this kind of in their ability to access capital. And I think that they've been able to access it at some very reasonable rates. So if you look at their senior notes, they have interest rates that range from about 5 % to 6%, which I think is quite a reasonable cost of debt. And the fact that they were recently issued means that their lenders are probably willing to give them more money if another good acquisition were to come up.

55:54So with more cash generation likely to come online from the MMT acquisition, I think they are in a pretty decent position here to continue to grow. But given the size of the MMT deal, if they decide to make another one, well, they would certainly have to use leverage to continue building this business. So if you are uneasy with leverage, this probably isn't a business that you're going to find very interesting. Now, on the advisory fee volatility, that's going to unfortunately just continue to be a drag on earnings as long as the stock price is doing very, very well, which as we mentioned, pushes that advisory fee even higher.

56:24Now, I think it's kind of up to investors whether they want to include in their calculations. I think they can be adjusted for when looking at things like servicing debt, but should probably be removed when looking at the intrinsic value of the company. So if you adjust them for the fiscal year 2025, interest coverage ratio is about six times, which makes it a little bit better. And at least we're zooming out a little bit to see how they can service that debt. So as we're discussing their ability to balance debt payments, maybe you can paint some more color around the other key risks that stand out for you when you look at this business?

56:56So while it does have products in super niche industries, like we've already mentioned here, they are very regulated industries and that can pose some risk. But I actually don't think that's the biggest risk for the company. So to me, the biggest risk is really embedded in their business model. So since Perimeter is a relatively new business, it's going to need to venture into industries where Perimeter hasn't really operated in the past. So if we look at MMT, for instance, yes, okay, the business does look promising and it's for all intents and purposes from the information we have now looks like it's moving in the right direction, but we only really have a quarter to assess how that's going.

57:30And while MMT doesn't seem as cyclical as a fire safety segment, we can't rule out cyclicality in that business segment over shorter or longer time horizons because we just don't have that information yet. And then on top of that, to fund this acquisition, Perimeter effectively doubled its debt load just to enter an industry that it has limited previous experience in. Now, this is part of why larger, more diversifies here requires with a longer history of success are, in my opinion, attractive. You know, a business like Lifco, which recently made into our intrinsic value portfolio, is a great example.

57:58They have three primary segments that they've been operating in for a long time, and they have a very strong track record of success. They also have a wide range of expertise to draw on if they want to diversify into adjacent segments. And we've actually seen this recently with their addition of two new segments, which they accomplished by just splitting off parts of their system solution segment. It reminds me a bit of Uber testing out new business models and things like accommodations with their recent Expedia partnership, which is something we talked about on a YouTube live stream that we did recently.

58:27And my conviction is definitely low on that front, but I do still like Uber's business anyways. And so we can connect that back to Perimeter here by venturing into what is an entirely new industry. Obviously, that always carries execution risk. But the crucial differentiator here is that we at least know this asset will immediately produce solid top line revenue and EBITDA for perimeter. Right. And so the next risk that I will address is an area that I know, Sean, you like to spend time on. And this is kind of deals specifically with regulatory risk and then partly with legal risk. So there's currently an open suit alleging that perimeter along with other large businesses in the industry like 3M, DuPont, and Amorex have caused groundwater and drinking water contamination.

59:16Other things like damage to natural resources, injuries from exposure to chemicals specifically used in perimeters, foams, which are mainly from a chemical called fluorine. So my thing with lawsuits just in general is that sometimes they matter. Other times they don't really matter from an investor's perspective. For instance, I can't tell you how many stocks I've seen where the stock price goes down. And then you get these ambulance chaser law firms that look for a reason to do a class action lawsuit against some specific corporation. No, these are basically useless cases that don't really affect the underlying business.

59:46But if you have a lawsuit that will cost so much that it's going to destroy a company or drastically alter its business model, well, then that's definitely a strong signal and not just some useless noise. So I'm not an expert on this case by any means, but I will say that Premier appears to be moving away from using fluorine in its foam specifically to avoid further lawsuits in this area. Now, given the fact that they are still signing large contracts with governmental agencies, it doesn't seem like it's affected the business model all that much. The other potential risk from lawsuits is just how much money you have to spend and continually fighting them.

1:00:17And if you're in an industry exposed to many lawsuits, you almost have to maintain a steady stream of expenses just to fight these cases, which hurts margins and can do damage to the company's reputation. And so if you're digging through a company's income statement in an industry that is ripe with litigation, you might not want to write off some of those lawsuit expenses as just a one-time expense that you can ignore when you're trying to figure out what the normalized earnings of the business are going to be. Actually, that might be the normalized reality for that company. Yeah, it is completely a normalized reality for a lot of companies and it's unfortunate, but it's important to understand those fees because sometimes they are recurring in nature and unfortunately you just have to live with them.

1:01:04So if we look specifically back to perimeter here, so if we look at DuPont and 3M, they actually both had lawsuits that were settled with multi-billion dollar payouts. Now, obviously these businesses have different levels of scale and I don't know how exactly these were associated with exactly what perimeter is offering. But needless to say, that's a lot of money, right? We're talking about a business here that has a market cap of$5.5 billion. So So having to pay multi-billion dollars on a potential payout would not be good at all for perimeter. So kind of to your point there, just looking at the fees that perimeter is having to pay, it's kind of impossible to know.

1:01:42So if they had that, which they probably do, it's probably internal though, it would be in their SG &A line, which was at$77 million or so for 2025. So it's just kind of impossible to know how much exactly they are spending. And then to add additional risks to the fire safety segment, you also run into customer concentration risks. So revenue from the USDA Forest Services, the U.S. Bureau of Land Management, and the state of California represents a substantial portion of perimeters revenue. I think it's somewhere above 50%. And this concentration makes PRM subject to risks such as non-payment, non-performance, the renegotiation of terms, or even non-renewal.

1:02:18Now, to argue against the concentration risk, I think we can look at perimeters past and specifically the allowance for doubtful accounts just to see if customers haven't paid them. But if we look at this, the figure has actually been immaterial both in 2025 and 2024. And even if we go back a few more years, it never actually exceeded a million dollars. So I think the renewal risk would be the biggest risk here over not really getting paid by their customers. So you mentioned earlier in the episode that the phosphorus pentasulfide product that we're referring to as PS has shown some weakness. And I think that weakness poses some sort of risk for Perimeter as well that we should probably talk about.

1:02:55So what can you add to the conversation on that front? Yeah. So in Perimeter's latest earnings call, they discussed the Sojit Illinois facility. Now, this facility experienced significant unplanned downtime, which reduced the PS product's performance. So basically, they just don't have a controlling interest in this location. It's actually a partner and they haven't been doing a good enough job in Perimeter's view at maintaining their performance levels. So from what I can tell about this event, Perimeter has basically attempted to actually take over operations of this plant as obviously they want to minimize this downtime.

1:03:28The downtime that they're referring to actually applies to some issues in safety as well as some operational challenges that the current operator is having. But when Perimeter tried to take it over, the transfer was actually blocked. And once again, unfortunately, Perimeter is engaged in litigation at some degree to try and fix this issue. So the main issue with that is that the Sajit facility in Illinois is actually their primary source in North America. So, you know, as long as it's underperforming, it's going to have negative effects on the PS products in North America. So in full year 2025 and the first quarter of 2026, they spent out a million dollars in legal fees on this issue.

1:04:05The PS product is it's still selling, you know, they're still making revenue. But they did note in their annual from last year that they had about a$2 million decrease in the specialty products specifically due to this downtime. So, you know, even if this issue persists, I think they're doing a decent job of diversifying their way out of the problem. And hopefully they can fix it, which hopefully will also give back a little bit of organic growth to that business segment. Next, I want to mention some potential for perimeter solutions. it's kind of a tough business to try and nail down an available market for, since they are diversifying into completely unrelated businesses.

1:04:38I think the TAM is going to be very wide, even when looking at deal sizes they've done. You know, they've got tiny ones with these tuck-in acquisitions for$10 million, and then they purchased that first fire safety business for$2 billion. So they not only operate across many industries, but also have a pretty wide ranges of a purchase price. Then on top of that, you know, this isn't a purely North American business. The FIRE segment is global, though I'd say most of its revenue comes from North America. The PES segment sells all over the world too. So this is a business where I think it's pretty much impossible to say just how many acquisitions they can make.

1:05:10But my best guess is the market is quite large. Basically, the entire world to some degree, depending on how many platforms they want to add, is part of their market. But the fact that they have these very, very stringent investing criteria of the business they want, obviously, is going to shrink it substantially. but in order to actually put a number on that, I honestly think it's completely impossible. So I didn't try doing it with this one. It's very interesting to me to contrast a business-like perimeter with some of our other portfolio holdings, like Uber, which I keep talking about for some reason today.

1:05:41With Uber, the addressable market and the core engine are much more transparent and let's say clearly bounded within their mobility, which is ride handling and delivery segments. And so we can pretty precisely track operational indicators of success like gross bookings and ride hailing expanding at a 20 % year-over-year clip or their cross-sell flywheel where you have multi-product users so people that are using both Uber ride hailing and Uber Eats which now make up a third of the customer base and spend three times more and so their growth follows a visible scaling marketplace playbook with a very long runway for merchant penetration and a subscription engine in Uber One that has driven tens of millions of memberships.

1:06:29And so by comparison, a serial acquirer like Perimeter is rolling up completely unrelated niche assets that vary pretty wildly across different sectors from fire safety to precision medical manufacturing machinery. And so that makes their true TAM virtually impossible to define or quantify. And so that means that as investors, we have to underwrite the management team's capital allocation framework rather than a clear single industry growth runway. Either you're bullish on ride hailing and food delivery or you're not. It's not as simple as that. And yeah, that just makes it, it puts more burden on us as investors, I would say.

1:07:13Yeah, I agree with you on that. And looking specifically at perimeter, I actually don't really think it's a weakness, that perimeter doesn't have a defined TAM. They clearly have a lot of options to move in whatever direction that they really want or wherever they're seeing really, really good opportunities. And so I think this will keep them adaptive. And if they can find high quality businesses and industries that maybe aren't a traditional fit for the business as is today, they can just add a new category or add a new platform, or they continue to make on more and more bolt on acquisitions to improve their current business segment.

1:07:41So the point being, they have a lot of optionality on what they can do in the future, but it's just kind of hard to put a number down on exactly what that looks like. Okay. All right. Well, it's the time of the episode where we try to figure out what the company is worth. So what is Perimeter Solutions intrinsic value? How do you go about thinking about answering that question? Yeah. So before we go over the intrinsic value, just let me give you some general thoughts on this business. So I think there's a lot to like about in this business itself. You know, they've made some very good acquisitions.

1:08:14They've paid pretty reasonable prices. They've compounded revenue at a high rate and they've maintained high and steady margins. Their systematic approach to making acquisitions is a business model that I really, really like as it feels repeatable. And as you can tell from the growth in their two segments, it's worked out well so far, especially in the fire safety segment. I'm a really big fan of decentralized businesses. And if you have the right compensation structure, you basically are allowing people that you trust to do the heavy lifting rather than micromanaging, which can often cause failure, not success, especially in businesses that scale up.

1:08:43But there are other issues I have. The first thing I think is going to be pretty obvious. It's the founder's advisory fee. You're essentially paying mutual funds just to own the stock. Now, I'm just not crazy about that. You can argue that the founders have earned that fee. For investors who bought at the IPO or when the price dropped to just$3 in 2023, they're not complaining about the founder's advisory fee at all. And then you have the lawsuits and the issues with the PS product in North America that I think you have to consider when you're underwriting this business? I'd say the founders view is easily the biggest issue I have, honestly, with the entire business, really.

1:09:16Yeah, no arguments there. But with all that said, let me go over my base case specifically for Primitive Solutions here. So I first assume that revenue grows at about 15%. Now, this is actually a pretty steep decline from historical growth rates that are actually really high at about 46 % since they IPO'd. Now, my assumption is simply that they rely maybe a little bit less on M &A growth and a little more on organic growth to just continue growing this business. I also know from owning several serial acquires that pipelines for M &A can be very, very bumpy. And if they land a number of maybe smaller acquisitions, then revenue growth can actually stall for longer periods of time than investors would like to believe.

1:09:53So I mentioned that adjusted EBITDA margins are very volatile. So for the base case, I'm just assuming that they stick somewhere around the midpoint of the historical numbers and reach around 51%. So they've gone over 60%. So I think this is a reasonably conservative number. If they can find a few more good acquisitions with higher margins, perhaps this climbs, but they already have pretty high margins. So I don't think that'll be a very easy task. Now, finally, I apply an exit multiple about 17 times EB to adjusted EBITDA. So today they're trading around 19 times, but I think that there's also some excitement about the corporation and the current multiple definitely seems a little higher than normal.

1:10:29So I think 17 times is reasonable for a business with growing recurring revenue stream that should continue to grow for many years to come. Now, with that said, I get a value of about $62 per share. With these assumptions and a 25 % margin of safety, I get an intrinsic value of about$46, which represents about a 7 % return from today's price. So what are some of the events that would factor into your bull and bear cases and have to be true for the company to either reach its most optimistic valuation or its most pessimistic valuation? So starting with the bear case here, I'm basically assuming that some of the litigation that they're dealing with maybe adds some more expenses, which makes them focus on areas outside of growing the business, which would then obviously impact things like revenue growth and margins.

1:11:13But I still assume that they're going to grow organically, make a few smaller acquisitions that maybe don't move the needle as much as something like an MMT deal. And if they were hit with a big lawsuit, that would also obviously mean a depressed multiple. So I decreased the multiple on that end. For the bull case, I assume that they continue making some just really good acquisitions. Maybe they decide to add a whole new platform outside of the fire safety and specialty products segment, which will obviously vastly open up their market to owning more and more businesses. Now, I also assume that they keep generating enough cash to buy back shares, but this time in a more meaningful way, which actually reduces their share count.

1:11:46And I think they can get to maybe a reduction of 10 million shares. So when I weigh all three of these scenarios, I get a price of about$53, which turns out to be a 10 % return. So not bad. But right now, the price, I think, just isn't right to meet our return hurdle for the intrinsic value portfolio. That said, this business does intrigue me. If you can factor in the dilution from the founder's fee, you can still make a return as they have so far. Now, while I'm not interested in current prices, if the business drops into the low 20s, I might consider opening a position, but I would probably have to continue you doing a little more work and getting more and more familiar with the business?

1:12:25It's not often that we totally write off a business as being 100 % in our too hard pile. And I don't think we should do that with perimeter solutions here and look away even if the stock declines significantly because there probably is a valuation where it becomes quite attractive. But generally for me, I tend to get most excited about businesses where I have a certain degree of consumer insights into them. And I can tangibly relate to and understand why the business is positioned well versus competitors and how they create value for customers. And so that is why I have my biases towards Uber and Airbnb.

1:13:01And also that's why they call them biases. I try to be aware of the fact that those are our biases. And that is sort of an investing pattern that I fall into for better or worse. And so obviously this is not an easy company to bring that mindset too. And when you layer over the debt and the founder's fee, on top of the fact that these are just obscure businesses that they run, I feel more comfortable opting out of this one. It's definitely a really interesting case study. Very cool to have the William Thorndike connection. We're big fans of his, but not a business I'd be hugely excited to own.

1:13:39Well, folks, that's pretty much all we have for you today. But as usual, I'd like to leave you with a quote, this one coming from William Thorndike. Two companies with identical operating results and different approaches to allocating capital will derive two very different long-term outcomes for shareholders. From the looks of it, Perimeter looks like a pretty good vehicle to allocate capital. And that's really what we're looking for. Businesses that can properly allocate capital and do so for long periods of time. Thanks for tuning in and I'll see you next time. Just a quick note before you go, this episode would not be possible if it weren't for our friends at Fiscal AI.

1:14:14It's our complete stock research terminal that Daniel and I use on every single episode and with every company we dig into, pulling 20 years worth of financials, digging into segment data, grabbing quotes from the latest earnings calls, and making use of real-time institutional-grade data all in one place. And if you want to try it yourself, well, head to fiscal.ai slash T-I-V-P. That'll include two weeks of Fiscal Pro for free and 15 % off if you upgrade to a paid plan. That's fiscal.ai slash T-I-V-P. Thanks for listening.

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