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IP Company Profile: Perimeter Solutions: Fire Safety

We’ve been following TransDigm, the aerospace parts supplier, for around a decade and recently published a TDG Learning Journey curating our work on the company. Nick Howley, a chief architect of TransDigm, led the acquisition and listing of Perimeter Solutions, the specialty chemicals company, in late 2021. Howley and various TDG executives sit on Perimeter’s board.  

Today, Perimeter has a monopoly in aerial wildfire retardants. PHOS-CHEK and the aerial retardant market have somewhat similar characteristics to TransDigm's FAA-approved parts; a highly-regulated industry, mission critical products, an underrated operational moat, and low-cost-high-benefit to the customer. But PHOS-CHEK may be under a greater competitive threat than typical TransDigm parts.

This IP Company Learning Journey aims to help you navigate ~100 hours of our primary research on Perimeter’s Fire Safety business and is organized as follows:

Amazon Logistics: Regionalization, Cross-Docking & Fulfillment Cost Optimization

Over the last 5 years, Amazon has built out its middle and last-mile network to regionalize logistics. Counterintuitively, this aims to increase shipping speed and reduce cost. The number of Amazon sortation centres and delivery stations now matches Fedex and enables Amazon to stock product closer to customers.

This interview walks through how the network has evolved and how this impacts how the relationship and process with third-party vendors:

It used to be that a vendor would ship merchandise to one building, and Amazon would take care of it from there, shipping it internally in their network to the right place. Now, they are passing the responsibility to the 3P vendor, saying, "You need to ship your product to eight different DCs in our network." A lot of the inbound transportation costs are now being paid by the 3P vendor. Additionally, they need to respect min-max quantities at the item level at each of the eight stocking locations. If they fall below the minimum or go above the maximum, they will be charged a penalty. By dividing the US into eight regions, they are essentially multiplying a single safety stock by eight...Essentially, Amazon has restructured the network, and all the additional inventory assets and space needed are being financed by the 3P community. Amazon now has another 24 million square feet that they can leverage for their own 1P business, most of which is being paid for by the 3P community.

We've covered this topic various times over the last couple years:

Addtech & Lessons from 25 years at Leading Nordic Serial Acquirers

This interview explores timeless lessons from over 25 years scaling Nordic Serial Acquirers such as Addtech. We discuss comp structure for senior managers:

It aligns with the target KPIs of Addtech as a whole, which aims for a 15% growth annually. This includes both acquisitions and organic growth. However, to receive the full bonus, you need to increase the EBITDA by about 30%, I would say. We compare this to the average of the last two years, not just the previous year, to avoid fluctuations. It's a smart system designed to motivate CEOs to grow their EBITDA, not just maintain a fixed level. - Former Divisional Manager at Addtech

And how to balance capex and R&D with meeting profitability targets:

I think Addtech is quite flexible in finding bonus arrangements to ensure that the CEO doesn't avoid making investments just to secure their bonus for the next year. You can make any investment, but you need to present a business plan that shows how the investment will pay off over three to five years. Then, you adhere to that plan and create a bonus model accordingly. At least, that was my experience. Not everyone may be as flexible, but I believe flexibility is necessary in these situations. The share of R&D costs in Addtech companies isn't exceptionally high. However, there are production companies and product owners that need significant investment in R&D. Addtech tends to be cautious when considering acquisition candidates with high R&D costs, as it can complicate matters. Other companies might invest more in R&D, but I don't think it constitutes a large part of the costs. - Former Divisional Manager at Addtech

The interview goes on to explore the challenge with organising a holding company to scale effectively. This interview pairs nicely with multiple others we've covered on the scalability of these acquisitive models:

We plan to publish more research on driving organic growth and lessons from failed serial acquisition platforms.

Vitrolife: Product Portfolio & IVF Industry Structure

Vitrolife is a 2.8bn EUR market cap supplier of fertility consumables and equipment to IVF clinics. A Former Sales Manager at Vitrolife describes the industry structure and the strength of Vitrolife's core portfolio. 

Equipment falls under capex, so it goes into a different bracket. It gets messier now because many services like genomic services and embryo options are added in. If you take the core business of any of these companies, which includes basic consumables like dishes, pipettes, media, and cryopreservation, you're probably looking at maybe $250 to $300 per cycle. In the US, a cycle can cost anywhere between $10,000 and $20,000. Europe is a bit more fragmented, but you could take an average of around $4,000 to $8,000 per cycle, probably closer to $8,000 in the UK."

In various upcoming interviews next month, we will focus on the history and use of the EmbryoScope, how clinics select and switch suppliers, and the dynamics in US fertility clinics.

Sartorius: Cultural Changes & COVID Disruptions

In this interview, a Former VP of Product Development at Sartorius sheds light on top management's approach to building in-house products vs buying out competitors, how this affected employee churn at key positions, and business disruptions resulting from the COVID pandemic.

What really happened with Sartorius is similar to what happened with Rome; they became arrogant. This led to a couple of wrong decisions, really wrong and egoistic decisions, from either René Fáber or Joachim Kreuzburg, which were against all logic, I must say. There was also a lot of restructuring, especially when we joined the DAX. These changes in the structure really destroyed an absolute winning team. We can go into more detail later if you like. The real problem was that we were so busy restructuring that we ended up destroying innovation. Almost no innovation was reaching the market, especially in the FMT - Fluid Management Technology - areas where I was responsible. - Former VP of Product Development at Sartorius

Our recent work on Danaher's bioprocessing business pairs nicely with this interview.

Next week, we plan to publish our learnings on Danaher's downstream bioprocessing business and integration opportunities between Cytiva and Pall.

Richemont: Buccellati Acquisition & Luxury Jewellery

This interview with a 25-year luxury executive and Former VP at Buccellati, the jewellery brand owned by Richemont, explores growth dynamics and potential risks to high-end luxury brands:

Well, I think lab-grown diamonds are going to become a bigger deal, and nobody quite knows how. I have this friend, Joe Reese. He was the head investment banker for UBS for a long time. Now he has his own investment firm, and he's looking at investing in a lab-grown diamond company. But he's asked me, what do you do with them? That's what nobody really knows. The only way to make it work is to make jewelry, like a diamond bangle bracelet covered in lab-grown diamonds because the cost is significantly lower than one you would buy at Tiffany. But it's going to look the same. Somebody's got to brand that as a luxury brand, and somebody's going to do it. - Former Executive at Buccellati

Tesla: Culture & Manufacturing-Repair Feedback Loop

For the past few months, we have been studying Tesla's repair network strategy and unit cost and turnaround time of repairing vehicles.

At one end, Elon's vision of minimizing the total cost of ownership is steering Tesla toward owning its body shops. This allows the company to control costs and maintain a feedback loop between repair and manufacturing to adapt new car parts and minimize the time and money spent to repair the vehicles.

Tesla very much encouraged and congratulated them [Tesla technicians]. There were a couple of times when they gave away stock options. They had a particular problem with some taillights and couldn't figure it out. It was water ingress in the taillights. They sent out a memo to all technicians and repair facilities, saying, "Can you guys can help us figure this out?" These two or three technicians figured it out, and they split 10,000 shares of Tesla stock between the three guys. They ended up with 3,000 shares each. Can you imagine? Now, at the time, it wasn't worth much, but can you imagine having those shares now? What they'd be worth is crazy. - Former Operations Manager, Tesla

On the other end, such a vision doesn't necessarily align with non-Tesla body shops as they want to maximize the profit they make on vehicle repair. Combined with a high initial investment to become Tesla-certified, 10 to 20% of third-party body shops are reluctant to join Tesla's network.

Probably 10% or 15% pushed back and said, "No, I think Tesla is a joke, and I don't think aluminum is the future like people say." About 15%, or one or two out of 10, would say that. The rest were pretty receptive. They just maybe didn't want to make the investment at that time. About 10% or 20% were completely against it. Everybody else was pretty receptive. - Former Collision Manager, Tesla

In the coming weeks, we will be sharing our learnings on the importance of Tesla's vertical integrated strategy in its repair network to the company's moat.

Rolls-Royce: History and Outlook of Trent 1000 and UltraFan

This interview with a 40-year Rolls Royce engineer explores the history of the Trent 1000 and UltraFan programs and how recent CEO has changed its approach to R&D:

a lot of parts that have changed, requiring a lot of demonstration activity. This leads me to something we should discuss. From an investor perspective looking at R&D, my latter career focused on next-generation engines. Taking the Trent 1000 experience and other experiences, we looked at how to develop the next generation engine. This has to go through the process we briefly described, integrating with the airframer in the early stages to identify opportunities, reaching a point of mutual opportunity, and forming a contract agreement. As an engineer, I'm very conscious of the need for technology proving to get ready. The big dilemma - and I imagine this is the case for Tufan at the moment - is when to invest. When is the right time to invest because it costs a lot of money? - a Former Chief Engineer at Rolls-Royce

Evolution: Japan Online Casino, Payments & Government Policy

As highlighted in our IP Research on Evolution's Asia business, Japan is one of its largest end-markets. In this interview with a Japanese iGaming expert with 20 years experience, we explore how payments and government policy has evolved and its effect on GGR growth.

I think they will all have to become crypto because the government is very stringent on money movements now. At the moment, the LDP has elections within the party because the current prime minister will not stay as the leader of the LDP. They are going through a huge shuffling right now. One of the potential leaders is trying to link the national ID card number to everything, including credit card transactions and receiving pensions. They definitely want to track money transactions, whether domestically or internationally. They are even trying to regulate cryptocurrency trading."

Bally's, the owner of Vera & John and other popular Japan-facing brands that account for ~25% of the market, has reported slowing growth since the Japanese government has started its campaign against online casinos.

Bonesupport: History, Competition & Market Size

In this interview with a Former Sales Executive with a decade at Bonesupport, we dive deeper into the company's history, the strength of its IP and the potential market size for CERAMENT in the US.

in a very average hospital like Syracuse, there's a hospital there called Community General. There are 10 orthopedic surgeons there. Five of them or four of them will use it. All of a sudden, each doctor is doing 50 kits at $5,000, giving us $250,000 per doctor. And now I have five or four doctors. Every regional hospital in some town, USA, is worth $1 million. And what do I take into the account? Nothing. No kit, no hardware, no trials, nothing. No instrumentation. Zero. Just the CERAMENT kit, which is a small box. They open it, they inject it. And furthermore, you don't need to stay there for the entire procedure. You can just be there for 30 minutes and be gone."

The economics per doctor for CERAMENT BVF above gives an idea of the economics per account. According to the executive, the introduction of CERAMENT G unlocks both more cases and a higher value per case.

They're not just going to swap; they're going to take indications where they didn't think bone void filler would work and use CERAMENT G. Some procedures require three or four vials, making it a $20,000 case. Your average case will be around $7,000 to $8,000, so you'll see significant numbers quickly. Secondly, there are many doctors in the same account. When you talk about new accounts, a doctor might pick up CERAMENT G and say, "Very interesting, never heard of it. Tell me about it." Once they start using it, they might also use the bone void filler for standard tibial plateau fractures because they've bought into the bone biology and antibiotic concepts. So, let's discuss why other companies aren't making it."

The interview also walks through CERAMENTs potential moat and what entrants would require to compete.