APi Group Corporation

Good morning, ladies and gentlemen, and welcome to API Group's fourth quarter 2020 financial results conference call. All participants are now in a listen-only mode until the question and answer session. Please note this call is being recorded. I will be standing by should you need any assistance. I'll now turn the call over to Olivia Walton, Vice President of Investor Relations at API Group. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining our fourth quarter 2020 earnings conference call. Joining me on the call today are Sir Martin Franklin and Jim Lilly, our board co-chairs, Russ Becker, our president and CEO, and Tom Lydon, our chief financial officer. Before we begin, I'd like to remind you that certain statements in the company's earnings press release announcement and on this call are forward-looking statements, which are based on expectations intentions and projections regarding the company's future performance, anticipated events or trends, and other matters that are not historical facts. These statements are not a guarantee of future performance and are subject to known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. In our press release and filings with the SEC, we detail material risks that may cause our future results to differ from our expectations. Our statements are as of today, March 24th, and we have no obligation to update any forward-looking statement we may make. As a reminder, we have posted a presentation detailing our 2020 financial performance on our website. Our comments today will also include non-GAAP financial measures and other key operating metrics. The reconciliation of and other information regarding these items can be found in our press release and in our presentation. It is now my pleasure to turn the call over to Martin.

Thank you, Olivia. Good morning, everyone. 2020 was a year of unique milestones for the company. We became a listed company on the New York Stock Exchange, completed several complimentary acquisitions, and proactively managed the challenges of the pandemic while executing on our long-term goals for the business and delivering results for our shareholders. We believe that the resilience of our people as well as our recurring revenue services focused model have allowed us to continue to execute against our long-term strategies for the business. We are grateful for the focus and ongoing leadership efforts across the entire organization. We see significant opportunities for continued organic growth for API, whether it be through much needed infrastructure investment, providing retrofit and upgrade services for existing buildings, delivering the services required for new technologies such as 5G, or supporting the growth of life safety service contracts for existing customers. Equally as attractive as the organic growth prospects, We see multiple avenues for expansion through strategic acquisitions. The markets in which the company operates are highly fragmented. We believe that with thoughtful and disciplined M&A, we can accelerate the growth and service offerings of the business. With that, I'll hand the call over to Russ.

Thank you, Martin. Good morning, everybody. Thank you for taking the time to join our call. The health and well-being of each of our employees and the communities in which we serve remains our number one priority. Our strong results for 2020 and solid outlook for 2021 reinforce the focus and commitment of our entire organization to serving customers safely and efficiently, despite macro headwinds faced in today's environment. I am proud of our team. We believe that the tough decisions and sacrifices made across the organization in 2020 strengthened the business, and allowed us to continue to execute on our long-term goals. I will start by providing a summary of our financial results, drivers of margin expansion, and key trends in each segment before turning the call over to Tom, who will walk you through our 2020 results and 2021 guidance in more detail. Key highlights from our performance for the year ended December 31st, 2020 compared to the prior year period include the following. One, primarily due to the negative impacts of COVID-19 and discipline project selection, adjusted net revenues declined by 8% or $306 million to $3.5 billion. This compared to $3.8 billion in the prior year period. Second, Continued success in our ongoing goal of growing recurring service revenue, which we believe helps to build a more protective moat around the business. Service represented approximately 40% of our consolidated net revenues. Third, adjusted gross margins of 24.2%, which is an increase of 260 basis points, with all three segments successfully driving margin improvements. In our safety and specialty services segments, Margin expansion was driven by a mix of work, increased labor productivity, job site conditions, as well as improved pricing. Fourth, adjusted EBITDA margin expansion of 56 basis points, driven primarily by gross margin expansion and early execution of largely temporary cost containment efforts to counteract the negative impacts of COVID-19. Fifth, adjusted diluted earnings per share of $1.22, exceeding street consensus estimates by 4.5% or $0.06 per share. Sixth, operating cash flow of $496 million represented 68.1% or $201 million increase from prior year. Our ability to execute amidst the ongoing COVID-19 pandemic and its related disruptions is a testament to a variety of factors as we discussed in our last call, including our differentiated leadership culture, relentless focus on growing recurring service revenue, the diversification across end markets, customers, and projects, compelling industry dynamics, relative variability of our cost structure, and our broad geographic footprint, which allows us to maintain close relationships with local decision-makers while also having the ability to execute for our national-based customers. We remain focused on our pre-COVID-19 objectives and will continue to focus on driving margin expansion through the following. First, improving our mix and continuing towards our long-term goal of 50% plus of our net revenues across all of our segments to come from recurring service revenue. As we have mentioned on prior calls, On average, we estimate that the gross margins on inspection and service revenue are approximately 10% higher than gross margins on contract revenue. Second, discipline project and customer selection with a continued focus on reducing our contract loss rate. Third, organic growth through attracting new customers and increasing work from repeat customers, increased demand for services and pricing opportunities. This includes increasing wallet share with our individual customers. As an example, when we bought SK Fire Safety Group, they provided services to defibrillators, which is something we didn't do in the U.S. Since we are already in their facilities, we are now implementing a process where we're going to start offering our customers the ability to service their defibrillators. Fourth, strategic M&A execution. Our pipeline of incremental M&A opportunities is robust, and we expect to continue to explore opportunistic acquisitions with Martin and Jim as we move through 2021. Our balance sheet is strong, and we have significant capacity to absorb additional accretive transactions. We view this as an important tool to increase and accelerate shareholder value. Fifth, driving margin expansion through what we refer to as our business process transformation project. This includes ongoing efforts to tie our technology platforms with improved business processes, which we expect will allow us to move closer to a true shared services model and ultimately allow for better leveraging of our SG&A. This also includes efforts to further leverage purchasing and procurement scale to drive margin expansion. We are excited about the opportunities that lie ahead for the business. We entered the year in 2021 with a strong backlog, which is slightly higher than it was a year ago. End markets that we serve, such as data centers, fulfillment and distribution centers, high tech, and healthcare, have continued to show their resilience through COVID-19, just like we feel our business has shown that resiliency. Safety services. In our largest segment, safety services, our number one priority is to grow inspection and service revenues. We continue to build a nationally coordinated inspection sales force to drive our go-to-market strategy of selling inspection work first, which we believe will lead to further service revenue growth. In most cases, our inspection work is covered by statutory requirements. Nearly all facilities that have existing life safety systems are required by law to have that system inspected on an annual basis, regardless of whether the facility is filled to capacity or empty. Historically, for every dollar of inspection revenue, we have the opportunity to generate between $3 and $4 of service work. We also know that if we execute well on our inspection and service work, that we will create a much secure relationship with our customers that allows us to negotiate and participate in higher margin project-related work in the future. Specialty services. In specialty services, Our goal is to partner with well-capitalized customers who have projects that continue to progress despite macro volatility, which contributes to the economic resiliency of our business. An example of this is our work with private and public utility customers with large committed capital programs for the replacement of existing natural gas and water distribution systems. We expect growth in this segment to be supported by secular tailwinds, including 5G infrastructure build-out, natural gas distribution, and grid modernization. The work in this segment is typically executed under master service agreements and provides us with a high degree of visibility. Lastly, industrial services. In industrial services, which we anticipate will represent less than 10% of our total net revenues, We have a strategic focus on improving margins through disciplined project selection as opposed to growing the top line. We are focused on growing the integrity side of pipeline transmission, which is statutorily driven as transmission companies are required by law to maintain their existing pipeline systems to ensure they are safe. I would now like to hand the call over to Tom to discuss our financial results in more detail. Tom?

Thanks, Russ, and good morning. I'll start by reviewing our consolidated financial results and segment level performance, as well as our strong balance sheet and liquidity, and conclude by discussing our 2021 guidance. Adjusted net revenues for the three-month end of December 31, 2020, declined by 5.5% for $51 million to $864 million, compared to $925 million in the prior year period. The decline was primarily attributable to negative impacts of COVID-19, and disciplined project selection. For the year ended December 31, 2020, total adjusted net revenues declined by 8%, or $306 million, to $3.5 billion, compared to $3.8 billion in the prior year period. The decline was primarily attributable to negative impacts of COVID-19, combined with disciplined project selection, which led to decrease in volume of projects. Adjusted gross margins for the three months ended December 31, 2020, was 25.4%, representing 183 basis point increase compared to prior year. The increase was primarily due to higher mix of service revenue and safety services and disciplined project selection and execution in industrial services. For the year ended December 31, 2020, adjusted gross margin was 24.2%. representing a 260 basis point increase compared to prior year due to the drivers Russ mentioned earlier in the call. Adjusted EBITDA margin for the three months ended December 31st, 2020 was 11.8%, which was consistent with prior year period due to gross margin expansion offset by increases in costs associated with the transition to a public company. For the year ended December 31st, 2020, Adjusted EBITDA margin was 10.9%, representing a 56 basis point increase compared to the prior year, driven by the gross margin expansion and early execution of our largely temporary SG&A cost containment efforts, counteracting the negative impacts of COVID-19. Our strong cash generation has continued and our balance sheet and liquidity profiles remain strong. For the year ended December 31st, 2020, Adjusted free cash flow was $443 million, representing a $107 million increase compared to the prior year of $336 million. And our adjusted free cash flow conversion rate was approximately 116%, exceeding our goal of approximately 80%. The increase in cash flow was primarily driven by changes in working capital levels. as the decline in that revenue resulted in reductions in our accounts receivable and other fluctuations in our working capital balances that drove positive cash flow generation. Our operating cash flow for the year ended December 31st, 2020 included 39 million of benefit resulting from the deferral of certain payroll taxes under the CARES Act. This will be repaid in two equal installments in the fourth quarters of 2021 and 2022. During the fourth quarter, we deployed our cash flow prudently with a $30 million of accretive share repurchase. As of December 31, 2020, we had $745 million of total liquidity, comprising of $515 million in cash and cash equivalents and $230 million of available borrowings under our revolving credit facility. We had approximately $1.4 billion of gross debt outstanding on the and our net debt to adjusted EBITDA ratio, calculated in accordance with our borrowing agreement, was 2.4 times. Subsequent to year end, we received approximately $230 million of cash proceeds resulting from the exercise of approximately $60 million outstanding warrants, which further strengthened our liquidity profile. I will now discuss our results in more detail for each of our three segments, beginning with safety services. Safety services net revenues for the three months ended December 31, 2020, declined on an organic basis by 8%, primarily due to the negative impacts of COVID-19, such as building access restrictions and shelter-in-place orders, along with the timing of demand for our mechanical services. For the year ended December 31, 2020, net revenues declined on an organic basis by 9.8%, due to the factors I mentioned for the fourth quarter. Service revenues represented approximately 44% and 40% of segment net revenues for the three-month and year-ended December 31, 2020, respectively. Adjusted gross margins for the three-month-ended December 31, 2020 were 32.7%, representing a 169 basis point increase compared to the prior year due to improved mix of service work. For the year ended December 31st, 2020, adjusted gross margin was 31.9%, representing 186 basis point increase compared to prior year, primarily driven by the mix of work towards inspection and service revenue. Adjusted EBITDA margin for the three months ended December 31st, 2020 was 13.4%, which was relatively consistent with the prior year period. For the year ended December 31st, 2020, adjusted EBITDA margin was 13.7%, representing a 55 basis point increase compared to prior year due to improved mix of service work and stronger project execution. Specialty services net revenues for the three months ended December 31st, 2020, declined on an organic basis by 8.8%, primarily due to the negative impacts of COVID-19, such as project deferrals, and job site disruptions, along with the timing of projects. For the year ended December 31st, 2020, net revenues declined on an organic basis by 6.2%, due largely to the negative impacts of COVID-19, such as project deferrals, job site disruptions, and timing of projects. Adjusted gross margins for the three-month end of December 31st, 2020 was 18.8%, representing a 10 basis point increase compared to prior year. For the year ended December 31st, 2020, adjusted gross margins was 17.5%, representing 101 basis point increase compared to the prior year due to the increased labor productivity and improved pricing. Adjusted EBITDA margin for the three months ended December 31st, 2020 was 12.5%, representing a 45 basis point decline compared to the prior year due to the negative impact of COVID-19 and stronger contributions from our joint ventures in the prior year period. For the year ended, December 31st, 2020, adjusted EBITDA margin was 12.1%, representing a 48 basis point increase compared to the prior year due to continued focus on project selection, pricing improvements, and stronger contributions from our joint ventures in 2020. Industrial services. In industrial services, net revenues for the three months ended and the year-ended December 31, 2020 declined on an organic basis by 19.6% and 13.9% respectively. The decline in both periods was primarily due to decrease in volumes as a result of our strategic focus on improving margins as opposed to growing the top line and the negative impact of COVID-19. Adjusted gross margin for the three months ended December 31, 2020 was 13.8%, representing a 351 basis point increase. compared to the prior year, primarily driven by discipline projects and customer selection, better project management, and favorable job site conditions, including weather. For the year ended December 31, 2020, adjusted gross margin was 16.3%, representing a 900 basis point increase compared to the prior year, due to the factors I mentioned for the fourth quarter. Adjusted EBITDA margin for the three months ended December 31, 2020, was 12.6%, representing 143 basis point increase compared to the prior year, primarily as a result of our strategic focus on improving margins as opposed to growing the top line. For the year ended December 31st, 2020, adjusted EBITDA margin was 13.6%, representing a 698 basis point increase compared to the prior year due largely to gross margin improvements mentioned earlier. Now I'll move to 2021 guidance. As detailed in our March 12 press release, we expect adjusted net revenues for 2021 will range between 3.65 billion and 3.75 billion. We expect adjusted EBITDA for 2021 will range between 405 and 419 million. We expect capital expenditures for 2021 to return to a more normalized level of approximately 55 million. And as previously mentioned, we are investing in our business process transformation systems, processes, and procedures, and we spent $13 million in 2020 of our total anticipated spend of approximately $50 million. I will now turn the call over to Tim.

Thanks, Tom. Good morning, everybody. API's execution against its goals despite the pandemic and its ability to deliver on its financial goals speak to the strength of the company's recurring revenue, services-focused business model. Despite the challenges 2020 presented, the team's continued focus on driving higher margin growth across all the segments continued to deliver results. We demonstrated the company's ability to generate cash and end of the year with a strong balance sheet and plenty of capacity to absorb additional accretive acquisitions. We are looking forward to holding our first Analyst and Investor Day on Thursday, April 22nd. We plan to highlight our commitment to driving strong free cash flow and earnings, outline future growth and margin expansion opportunities, in addition to providing extended discussion about the company and certain key strategic initiatives, including an update on the M&A environment. With the progress achieved in 2020, We remain confident in our previously stated long-term value creation targets, which as a reminder are delivering long-term organic revenue growth above the industry average, continue to leverage our SG&A, expand adjusted EBITDA margins to 12% plus by fiscal year 2023, four, maintain adjusted free cash flow conversion of over 80%, generate high single-digit average earnings growth, and target long-term net leverage ratio two to two and a half times. As you know, with the conversion of the warrants, while we ended the year slightly above two times, our current debt-to-EBITDA ratio is about 1.8 times. I'd like to now turn the call back over to the operator and open the call for Q&A.

Thank you. At this time, I would like to remind everyone, if you would like to ask a question, please press star, then the number one on your telephone keypad. If your question has been answered and you wish to remove yourself from the queue, press the pound key. Our first question comes from one of Andy Kapolitz of Citigroup.

Hey, good morning, guys. Good morning. Russ, you mentioned that API's backlog was slightly higher than a year ago at the end of the year, but You know, you're forecasting into high single-digit organic growth through your major segments in 21. We know you've got easier comparisons, but can you talk about what has given you confidence in forecasting the growth acceleration? And given we're already at the end of Q1, can you give us any update on whether safety and specialty has continued to recover in Q1?

Well, I mean, regarding Q1, you know, we've provided, you know, guidance into, you know, where we feel Q1 is going to fall. We're confident, you know, in the guidance that we've provided. You know, we're dealing with, we're still continuing to deal with COVID as well as some, you know, weather impacts and, you know, that we felt, you know, during the month of February. But we feel good about where we're at as we come, you know, work our way through the rest of the quarter. As we look at the segments, as we moved into the beginning of the year, both safety and specialty services backlogs were up and industrial services was down, as was the plan all along as we continue to focus on the right project and customer opportunities for us. you know, in that segment, and we continue to try to drive, you know, the growth in the right mix, i.e., the integrity work associated with the transmission system. So, also, Andy, I think, you know, if you recall, I had shared at one point, I think it was during our third quarter call, that inspection revenues in Safety services on a year-over-year basis were up 6% at the end of the quarter, while I'm happy to share with everybody that inspection revenues ended the year up 8%. So, you know, we continued to, you know, show some growth and actually accelerated some of that through the fourth quarter. which is a positive momentum builder for us as we move into this fiscal year. Because again, going back to some of our earlier remarks, we know that we're going to generate some place between $3 and $4 worth of service work off of that inspection work. And that's really where the focus and the emphasis for us is inside that segment. So those two, I guess, items, if you will, give us good confidence as we move into this year.

Andy, it's Jim. I know you would be disappointed if I didn't correct you on the fact that, you know, we have a good comp in front of us. I just want to remind everybody that we didn't have COVID in Q1, and so Q1 is actually a relatively tough comp as compared to last year. But as Russ said, I think there's a lot of forward progress. If you look at the PowerPoint presentation, relatively earnings call, I believe service revenue represented about 44% in the fourth quarter. So, you know, certainly we're seeing the focus of driving service revenue, which is a higher margin profile, helping us as we move into this year.

Jim, that's exactly what I would follow up on, the service up 44% in Q4. Would you say you're really starting to take more share in in terms of growing the number of life safety service contracts and where do you think you could get that level of service to in 2021?

Russ, I'll leave that to you.

Well, I mean, you know, again, you know, we're continuing to try to grow, you know, grow that aspect of our business. I mean, I think we've shown 7% organic growth, you know, in our forecast for this year. And, you know, the reality of it is some of that will be project-related growth, but it's our focus and our emphasis, and we want the lion's share of that to come from inspection and service work.

Great. And then just finally, Russ, you gave detail already on sort of expectations for sales and margin, but do you see margin growing relatively equally in 2021 for your two larger segments? And you talked about sort of the progress you're making and the structural cost out. You know, maybe you can give us a little more color there and how much temporary cost headwind is coming back in scene 21.

Well, I mean, the reality is, you know, regarding the cost, and, Tom, you can compliment my response, is that, you know, for the most part, other than, you know, travel and entertainment and, you Those types of expenses which really haven't normalized yet, most of the temporary cost cuts have been returned and the business is operating, you know, at a more normal capacity and a more normal level. And, you know, we expect that to maintain itself, you know, really probably through the lion's share of the year. You know, there's certain travel and entertainment types of expenses that will probably never come back to the business, and that's a positive thing, and that's a good thing. But in general, we're back to a much more normalized level. You know, we're expecting to make general progress towards our margin expansion goals again, and we've provided guidance that we expect this fiscal year to finish between you know, 11 and 11.25% on an EBITDA basis, and we fully expect that we'll achieve that.

Yeah, and I just would add, you know, Andy, remember that we took the big SG&A cuts in Q2 last year, so on a comparative basis, we'll see, you know, that be the tougher comparable, and then Q3 and Q4 will be more natural, see the growth in that EBITDA as we march through the year and as we see COVID lessening the impact on our business.

Appreciate it, guys.

Thanks, Andy.

Our next question comes from the line of Marcus Mittermeier of UBS.

Yeah. Hi. Good morning, everybody. Maybe I'll just follow up on this margin element and, you know, how you think about getting towards that first percent target by 2023. Appreciate the guide for this year at 11 to 11.25 from last year's just under 11. If I think in the big buckets, Russ, that you mentioned in your prepared remarks, mix, project selection, business transformation, how would that sort of like incremental accretion on the margin sort of split between these different buckets just roughly? And then, you know, as Tom said, you have 13 million in on the cost side for the business transformation out of the 50. How should we think about that over the next, you know, two, three years here as you get to what's that first percent target?

Well, we don't break out the, I guess, the individual buckets, if you will, of where we find the margin expansion. If you recall, for us, it's more around hitting singles than any one silver bullet. And that contribution is going to come from a number of places. Number one, Project selection and customer selection is one of the bigger factors that will lead to a reduction in our contract loss rate. So that's one area. Second would be continuing to improve our mix. And, you know, we reported that approximately 40% of our revenue came from service as we define it. And as we march towards 50%, that is going to be a big contributor to our margin expansion goals. Inside business process transformation, there's really two buckets. One is, you know, moving towards a shared service model, which will allow us to leverage our SG&A. And second would be as we work to increase and stand up a true procurement department, if you will, and really try to leverage the scale of the business and drive a reduction in our costs across the entire enterprise. Next would be improved and increased pricing opportunities that we continue to work with the different businesses on. Follow that with strategic M&A and making sure that our M&A is accretive to our margin expansion goals is something that's very important to us. And then lastly, I would just say that, you know, we have the opportunity to just be better and improve our execution, you know, across the businesses and, you know, You know, I can't tell you, look you in the eye and tell you that, you know, we're going to get, you know, a quarter of a point from this or a quarter of a point from that. But it's a combination of all of those efforts that's going to allow us to achieve that margin expansion goal of 12%. And, you know, we have very high confidence that we will achieve that.

Great. And then maybe just for Tom on that $13 million that you've mentioned on the cost that you had in 2020 already on business process, how should we kind of model the remaining $15 million or the total $15 million of the remaining $37 million or so over the next years?

Yeah, I think, you know, as we look at that, you know, we think the majority of it will come in 2021 and then the remainder in the first half. just three quarters of 2022.

Okay, that's helpful. Thanks. And then just briefly on grid, you flagged grid obviously as an upside out of the potential infrastructure investment. How big is that for you today in your mix on the specialty side? Thank you.

Let's wait for Congress to actually approve an infrastructure bill, and then we can give you some color. Okay. Thanks for trying to take the number up, Marcus. I appreciate it.

Our next question comes from the line of Julian Mitchell of Barclays.

Hey, good morning, guys. This is Trish Gorman. I'm for Julian. So just maybe one question on industrial. It made really good margin progress last year from 11.2% to 13.6%. So now margins are same as safety and higher than specialty. Can you guys just talk a little bit more about the rationale for the unwind in 2021?

Is your question, Trish, just to confirm, you're asking about the rationale for divesting the two businesses in 2020?

Yeah, and the guide for industrial, why we're taking that down so much in light of the margins being the same as safety and higher than specialty. I think you guys had called out the project selection and everything, but just wondering if you can get some more color there because the margins seem like they performed well this year.

Well, I think that, you know, number one, that was all by design, and it was really bringing an increased focus to, you know, project selection and customer selection and making sure that the contract terms and such that we were working under were favorable and appropriate the risk profile was, so to speak, in the right place for us. And so, number one, it was very much a purposeful approach to it. Number two, there's one business that we have in that segment that has some exposure to the oil and gas industry. And as that market has tightened, it's forced us to continue to be really disciplined in our project selection and customer selection as well. We also are taking the opportunity to really change our focus in making sure that we're emphasizing the integrity side of the transmission space. And that is, so to speak, their version of service work, and we continue to emphasize that. So it's a combination of efforts that are happening inside the segment to make sure that we can continue to perform as designed.

Got it. That's helpful. Thank you. And then maybe a follow-up just on the cash flow outlook for this year. I think you mentioned CapEx on $55 million. Near term in 2021 is 80% EBITDA conversion still kind of the target. And then maybe if you could talk more about the working capital movements through the year, if there's anything to call out there.

Yeah, sure. So, yeah, we're very comfortable that in the coming year, 80% target is good. The working capital movements, if you think about it, With the down lever that we had in revenue due to COVID-19, our receivables declined, and that provided the cash flow positive. As we march through the 2021 here and see it improving each quarter, we anticipate that that will grow, and that's a positive for us as we're adding more revenue, adding, you know, the profitability of that. But it'll get absorbed as we put the working capital numbers back up to traditional levels.

But, Trish, there's no unique call-out to what's occurring to cash this year. Just as business ramps up, you'll see more investment dollars and receivables go up.

Okay, perfect. Thanks, guys.

Our next question comes from the line of Andy Whitman of Baird.

Great. Good morning, everyone. I guess I was a little surprised that the corporate expense EBITDA was lower than expected in the quarter, or at least lower than I thought we were looking for from previous conversations with you guys. And so, Tom, I was just wondering if you could address if there was anything in the corporate EBITDA expense this quarter that is notable for us.

No, I think as we march through the year and we've got our segment team members all aligned, and getting them into the actual segments, we had a little bit of move of cost from the segment, you know, from the corporate to the segments where they're actually delivering their energies. So, other than that, I would look at our run rate that we think, you know, on a going forward basis would be in that 22, you know, million a quarter kind of ballpark you could think about.

Okay. So I guess this quarter I'm looking at, I think it's 11 this quarter, if I'm not mistaken, and then so to 22 seems like a big jump. What's the difference between what was seen this quarter and the 22 you're talking about today?

Yeah, and what we're talking about there is that we restored some of the benefits to the year of the 401K, and some of those items were moved out of the corporate and into the various allocations to the segments in the fourth quarter. So it was a disproportionate down lever in that quarter, but it was picked up in the segments in the quarter.

Oh, okay. Okay, so it's geography. Okay. And then I guess, Russ, you mentioned timing and safety, particularly around the mechanical offerings that you provide. I think you mentioned that last quarter as well or something very similar to that last quarter. Okay. I was just hoping you could give us a little bit of discussion around what that means. Have these projects that were delayed in 3Q, 4Q on time commenced here in 1Q, or what are they waiting for to progress?

Yeah, well, so a lot of the deferrals that we had as it relates to our HVAC services and specifically to the project-related work was in the healthcare space. And, you know, everything was kind of on hold in the healthcare sector, you know, as you went through the middle part of last year. You know, as the healthcare industry was, number one, just bracing for COVID and trying to sort that out, but then also the financial situations that they, you know, that they found themselves in. So, You know, we're seeing that activity start to ramp up. I would suspect that, you know, we'll see more of that in Q2 and Q3 than we will in Q1. But everything that we were planning on is, you know, from all appearances today is moving forward.

Okay. Got it. And then I just had my final question. I wanted to just touch base on the acquisitions that you did, in particular the large European platform. You mentioned it slightly here on the call. Europe has had probably more lockdowns than we've seen here domestically, including some new ones that were announced just recently in Germany. And I was just wondering what the impact to your business there, your new business there is, and how it's performing so far against the initial expectations that you had for it. Obviously, you purchased it during COVID, so I had to think that your expectation included some COVID impact. But But that's a dynamic situation, and these were fairly large acquisitions, so I thought it would be worth an update from you.

Yeah, that's a fair question. I would say that in the fourth quarter, SK performed in line with expectations. There's no question that they are, you know, being – seeing impacts – because of the increased lockdowns. They're starting to see a little bit, you know, we're not in Germany. You know, we're primarily in the Benelux up in Scandinavia. We're actually starting to see a little bit of relief as it relates to the restrictions. Again, the good part about the business is north of 50% of their revenue comes from service, and that has been, you know, progressing and going forward. But there's no question that we're seeing a little bit of choppiness. We feel really good about where they're going to land for the year, so that's very positive. But, yeah, we're dealing with it just like they – they're dealing with it over there just like we're dealing with it here. So in general, things have been in line with expectations. Great. Thanks. Have a good day. Thank you.

You too. For next question comes the line of John Tanwentang of CJS Securities.

Hey, good morning, guys. Thank you for taking my question on that quarter, and you're considering the environment. I just want to get a little more color on if you're seeing any inflationary pressures in, you know, your various end markets. I know that, you know, people have been seeing steel prices or fuel prices rising. The availability of pickup trucks is kind of low right now. And maybe there's other components that then may be, you know, impacted by this. Just have you pressed into that into your guidance and are you seeing any right now?

Yes. I mean, well, so for sure, right? I mean, commodity prices, you know, have been rising for some period of time. I would point you to a couple of factors that bode well for our business and our business model. Number one is our average project size. So if you look at safety services, our average project size is $10,000, and in specialty services, it's $60,000. And so very quick-hitting, quick-turn types of projects, and you're not going to – be vulnerable to, you know, some of the rapid escalation specifically around steel pricing. So that part of it's been positive for us. If you look at specialty services and even in industrial services, most of the material is really supplied by our customers and not necessarily being supplied by us. And so we are, to a certain degree, we're somewhat immune to that. With all that being said, we've been tracking commodity prices on a weekly basis for a long time. We communicate on a regular basis with our businesses about where we see commodity prices going and about how to properly protect themselves from rapid escalation in their proposals and in their contract documents. So we've been all over it for some period of time, but we feel really good about how we've managed it.

Okay, great. Thanks, Russ. And then just from the M&A perspective, do you see any changes in your ability to drive at least the smaller tokens at your historical valuation levels? You know, in the current environment where acquisition multiples have skyrocketed.

So, we have a robust funnel of M&A opportunities in that typical API tuck-in model, and we continue to see and execute with multiples in that same four, five, six times range. And we, you know, for the most part, we're buying from family-owned businesses, and we you know, those sellers are focused on finding the right fit and the right home for their business and for their employees. And so when you find that, you have a much greater success rate as, so to speak, as acquiring those businesses at lower multiples. Private equity-owned firms, not so much. And so, you know, it's really who the ownership is and the size of the business, all that stuff matters.

Okay, great. And the last one, this is recent, so I'm not sure if you have a view, but I believe Intel is a very large customer of yours. You know, how meaningful is their announcement to increase their foundry investment in Arizona by $20 billion? You know, did you build those facilities out or service them? And how meaningful is that to you?

So Intel is a very good customer of ours, and we do business at their Chandler, Arizona facility. So, any sort of expansion announcements and those types of things typically is a positive for us.

Okay, great. Thank you very much.

We have time for one more question. Your final question will come from the line of Katherine Thompson of Thompson Research.

Hi, thank you for taking my questions today. On industrial services, I appreciated the color you've given, and you've done a great job. with demonstrated margin improvement with job selection. Just to point the string a little bit more, how much more is there to go in terms of the margin opportunity? And could you give a little bit more color or perhaps a good example of a type of project where you are doing a better job at choosing projects, just for those that are dialed in?

Thank you. Well, I mean, I think there's margin opportunity in every one of our segments, not just industrial services. You know, I point out that industrial services is a relatively small piece of our business representing less than 10% of our total revenue. So, you know, the biggest thing for us is to, again, just continue to focus on the mix of the business that we do and focusing on the maintenance and integrity side of the existing transmission systems versus the, say, new capital, you know, component of our different customers' budgets. So, you know, really for us, you know, Catherine, again, and I think most of you have probably heard me say this, most of the time when we talk about customer selection and project selection, it's really customer selection, and it's being prudent with who you work for, And typically it's not centered around a particular type of project, if you will. You know, we have the capabilities to do the work. It's making sure that we're, you know, working for the right customer and the right person. So we kind of lump it together when we talk about customer selection and project selection so it can be a little bit deceptive. You know, when we go through our go, no-go checklist process, you know, like the primary focus for me is who is the client. And that is typically going to drive, you know, whether you have success or not have success, you know, as it relates to the work and the services that we offer. And I'm not going to provide, you know, a negative customer experience, if you will. as part of my dialogue.

But Russ, if I could supplement what you said. I mean, one of the things that when we came on the scene with KPI they were in the process of implementing modified contracts with customers so that, you know, as an example, and this is just directional, it's not meant to be factual per se, but, you know, how we treat weather delays and who pays for that and do we get compensated when, you know, it's raining for five days. You know, does it start getting – do we start getting compensated on the second day or the third day? Because, you know, neither of us can control the weather, but we shouldn't be penalized for that. So the team has done a really good job, I think, of looking at the negative variables that impact the margins and the business and modifying our contracts. And there are certain customers that don't want to go along with that, and there are others that are realistic and understand that's important. So, you know, kudos to the team for recognizing the headwinds and putting things in contracts you're trying to that address that and then help improve margins.

Okay, helpful. And periodically we spend a bit of time with boots on the ground talking to key players in the field, including more recently with a major non-res contractor that focuses on a wide variety of maintenance. And one of the interesting things that we're finding, I wanted to see if you are also seeing this trend, is as people are thinking about coming back to work in a more consistent way, They noted an uptick in fire alarm work in particular as building managers are taking the opportunity to upgrade these systems in anticipation of more folks coming back to work. Is this something that you're seeing, or what type of work are you seeing that really drive that anticipation of a post-COVID world?

That's an interesting observation. I wouldn't say that we have seen that specifically in fire alarm. We certainly like the fire alarm space, and it's an emphasis and a focus for us from a growth perspective. But I can't say that we've specifically seen an uptick in fire alarm work just because of being in a post-COVID world.

Okay, great. And final question, just inflation has been a theme we've been focusing on going into 21, and that certainly is playing through. Understanding you're doing more inspection and services, though you still have to manage certain aspects of inflation. Maybe just a little bit more color in terms of how inflation may or may not be impacting your business now. And thank you very much.

Well, I think that we've been fortunate to be able to pass those costs along. You know, our workforce is primarily union, so the wage rates are well established for the men and the women that are doing the work for us in the field. And so it's very easy for us to understand when those, you know, escalation and when it's going to go into effect. So that's, you know, that's a big challenge. chunk of our cost, if you will, in the services that we deliver to our customers. And again, I point to just the small portion of the small job sizes that we have in the quick turnaround. It's very easy for us to adjust our pricing as we continue to move along. You know, it's, I mean, the reality of it is it's baked into and factored into, you know, our forecast and guidance for the year. And we don't anticipate having, you know, any substantive issues with managing, you know, the inflation and the rise in the commodity prices.

Thank you. I will now return the call to Russ Becker for closing comments.

Well, thank you, everybody. And I just want to, number one, reiterate my gratitude to all of the employees of API for their shared sacrifice and commitment in putting the company first during the course of this last year. And, you know, they've delivered a great result. And that great result, I hope our shareholders feel the benefit of that great result. Thank you, everybody, for taking the time to join us on the call this morning, and we very much appreciate your continued interest in the company. It's a great company, and we look forward to sharing our journey with you. Thank you.

Thank you for participating in API Group's fourth quarter 2020 financial results conference call. You may now disconnect.