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3Q25 Update.
Perimeter Solutions reported 3Q25 and the stock jumped +26%. YTD the stock is now +112%.
While the results were good, it was not clear what would warrant such a large move.
Net sales increased +9% y/y to $315mn for the quarter, driven by fire safety net sales increasing +9% y/y and specialty product revenues increasing +15% y/y.
Fire safety revenue increased because of a more normalized fire season and because the U.S. Forest Service has started to advise a more aggressive stance towards smaller wildfires in order to limit the spread earlier. This includes a larger use of fire retardant than was previously expended. They also gave more details on a recently announced 5-year agreement with the USDA to expand their partnership. We go into more details on this below.
In terms of the fire suppressant business, they noted that “the suppressants business continued their momentum in the third quarter with particularly strong volume performance from our profitable new business initiatives and meaningful top and bottom line impact from our productivity and value pricing efforts”. This business added $12.4mn in revenue y/y. As they get more clients in their installation base, revenue from replacing the product follows.
Their Specialty Product segment continues to be plagued by a poorly performing plant that is being operated by Private Equity firm Flexsys: “There was once again a substantial amount of unplanned downtime, which significantly impacted specialty products’ financial results in the third quarter”. As a reminder, Perimeter is currently in the process of trying to take control over the plant that makes their P2S5 product because their contract granted them the right to operate it should they prove to be inept at it. Not only has the plant suffered from downtime, but Perimeter has alleged Flexsys has been severely risking workers safety. They are currently in the midst of litigation.
To the positive, the IMS business more than offset this, contributing $10.8mn for the quarter. Withing the specialty product segment, this is a more important business for two reasons. 1) It is their first foray into a new vertical since acquiring Perimeter Solutions and so their success or failure here will say much about their ability to allocate capital beyond the fire safety business. 2) It is a larger growth opportunity to deploy more capital. The P2S5 business was a legacy business acquired in the original acquisition and is a more “average” quality business.
In total adjusted EBITDA was $329mn, representing a 52% adjusted margin, over 10 points higher than 5 years ago. CEO Haitham Khouri attributes operational improvements and investments as a key driver of this.
All in all this was a fine quarter for Perimeter Solutions, but something mentioned on the call could improve their business quality overtime.
Business Commentary.
At the beginning of September, they announced a 5-year contract with the USDA. At the time they gave sparse details though. In the press release they talked about cost savings for the fire departments but didn’t mention that it will include a full-service model in exchange for the reduced pricing.
Part of this contract is switching to a powder product (from a mix of powder and liquid) for all of their work with the USDA. The powder product is lower price and more efficient to handle than the liquid, which drives the cost savings. While this saves the USDA money, it also saves Perimeter Solutions money too because it is a lower cost product and has less complexity in manufacturing and distribution.
The other aspect of moving to a full service contract, combined with the cheaper product, is that more of their revenue will be derived from “fixed services” as opposed to the variable product revenue. This is key because the severity of a fire season drives how much product is used and creates very lumpy revenue for them. This contract effectively helps smooth out revenues.
There is a second aspect of this that helps decrease revenue variability and that is the new directive to be more aggressive early on in a fire spread. This means that more retardant will be used when the fire is smaller as opposed to waiting until it is larger. In other words, more retardant will be used when less acres are burned than previously. As noted on the call: “The acre’s benefit wouldn’t be as strong as it otherwise would have been because of the initial attack posture.”
To the negative (financially, not societally), if the early use of retardant efficiently stops a fire that otherwise would have gotten larger, then that does mean net less retardant is used in that incident.
Beyond North America though they are having good momentum internationally. CEO Khouri noted on the call: “Our business in Europe was excellent in Q3. Our business in the Middle East was excellent in Q3. Our business in Asia was strong in Q3. Our business in the Southern Hemisphere, both Australia and South America, was strong in Q3. Our international business really is firing on all cylinders. Part of that is self-help and strong execution. Part of it is it should be very strong. It’s very early in the adoption cycle. The economics of adoption make a whole lot of sense, and we’re riding that wave.”
While they don’t break out international sales separately, this could be another leg of growth for the fire safety business.
LTM earnings after adjusting out amortization and the Founders Advisory Fee, which is notable this quarter as they receive a portion of the stock price appreciation, is $1.28. At today’s stock price of $26, that is 20x earnings. (This EPS figure does not adjust for future dilution from the founders shares).
After adjusting for the advisory shares, we estimate their market cap is around $4.1bn. They have $340mn in cash against $670mn in debt for an enterprise value of $4.4bn. On an EV/ NOPAT basis they are closer to 22x.
While it is hard to have strong visibility into their long-term growth as it is predicated on not just fire seasonality, which is hard to predict, but also their success with capital deployment in new verticals like IMS. Based off of their history and what management has suggested, investors would probably think a long-term high single digit topline growth rate is relatively conservative with the optionality that it is better with more opportunistic acquisitions.
If they really are going to copy the Transdigm model and have similar success, then we are still in very early innings. However, their ability to allocate capital outside of the fire safety area is less proven and it is possible that they make mistakes. So far though, they have been executing well.
Call Notes.
Revenue Variability
- Worked to decouple our revenue from fire activity as we renewed contracts. We have purposely shifted sales toward fixed services revenue and proportionally away from variable product revenue.
- The net effect is to make our revenue less sensitive to volume movements as was historically the case, thereby improving the quality of our revenue base and contributing to Q3’s strong performance.
Volume Declines Offset
- The increasingly aggressive initial attack strategy employed this year by our customers, coupled with an even distribution of acres over time and geography, almost fully offset the decline in volumes from fewer acres burned.
5 Year Contract
- Substantially all federal bulk bases which we serve with product will transition to our full service model, which we serve with our comprehensive solution spanning product, service, staffing, equipment, and maintenance. We capture meaningful operating efficiencies by incorporating these bulk bases into our full-service network and simultaneously drive savings for the customer as well as profitable new revenue streams and incremental productivity opportunities to Perimeter.
- Federal bulk bases are transitioning from a mix of liquid and powder product to an all-powder footprint
- Powder product is lower priced and more efficient to handle than our liquid product, which drives direct customer savings.
- The new contract enhances national wildfire preparedness and response. The contract’s unprecedented five-year term allows Perimeter and the U.S. Forest Service to jointly plan and invest behind meaningful multi-year initiatives such as the all-powder product conversion to safeguard future air tanker fleet uptime and reliability.
Litigation
- One Rock Partners purchased the Flexsys assets in 2021 not only continued but escalated. There was once again a substantial amount of unplanned downtime, which significantly impacted specialty products’ financial results in the third quarter
- Unfortunately, Flexsys and their parent One Rock Partners continue to fight our efforts to take operational control of the plant despite their clear contractual obligation to do so
IMS Acquisitions
- We again acquired new product lines during the third quarter. Our IMS acquisition team remains active
International
- Retardant products were strong in our markets outside North America, growing sales $5.5 million from the previous year. Historically, larger markets such as Australia and France had robust performance, while our team made progress on expanding into more nascent markets such as Italy, where the team focused on new applications for retardant products deployed along rail lines.
- Our business in Europe was excellent in Q3. Our business in the Middle East was excellent in Q3. Our business in Asia was strong in Q3. Our business in the Southern Hemisphere, both Australia and South America, was strong in Q3. Our international business really is firing on all cylinders. Part of that is self-help and strong execution. Part of it is it should be very strong. It’s very early in the adoption cycle. The economics of adoption make a whole lot of sense, and we’re riding that wave.
As a reminder, we named our research firm Speedwell Research after the ship that helped ferry passengers to the Mayflower. The idea is that we want to help you take your journey, but ultimately you are on your own in the decisions you make. An investor must judge for themselves whether they believe the opportunity is worth it and accepting the potential risks that could materialize.
*At the time of this writing, one or more contributors to this report has a position in PRM. Furthermore, accounts one or more contributors advise on may also have a position in PRM. This may change without notice.