APi Group Corporation

Good morning, ladies and gentlemen, and welcome to API Group's second quarter 2021 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 will now turn the call over to Olivia Walton, Vice President of Investor Relations at API Group. Please go ahead.

Thank you. Thank you. Good morning, everyone, and thank you for joining our second quarter 2021 earnings conference call. Joining me on the call today are Russ Becker, our president and CEO, Sir Martin Franklin and Jim Lilly, our board co-chairs, 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 from those 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, August 11th, and we have no obligation to update any forward-looking statements we may make. As a reminder, we have posted a presentation detailing our second quarter financial performance on the Investor Relations page of our website. Our comments today will help us identify financial measures and other key operating metrics. The reconciliation of and other information regarding these items can be found in our press release and our presentation. Before turning the call over to Martin, I'd like to thank everyone that joined our conference call on July 27th, announcing our agreed acquisition of the Chubb Fire and Security business from Carrier Global Corporation. A replay of the webcast is available, along with the presentation slides, on the Investor Relations page of our website. It is now my pleasure to turn the call over to Martin.

Thank you, Olivia. This is a very exciting time for API. On July 27th, we announced an agreement to acquire the Chubb Fire and Security business from Carrier Global Corporation. The transaction value is $3.1 billion, which is comprised of $2.9 billion in cash and approximately $200 million of assumed liabilities and other adjustments. The acquisition of Chubb, which we anticipate to close around year end, will transform API into the world's leading life safety services provider. Chubb operates in 17 countries, serves over 1.5 million customer sites, and has leading market positions in Australia, Canada, France, Hong Kong, Netherlands, and the UK, which comprise approximately 90% of its revenue. Chubb is operated as a non-core asset. It is a leading service company long buried inside manufacturing businesses from United Technologies to Carrier. We are the perfect partner for Chuck. We perform many of the same services for the same types of customers in complementary geographies. Our combined global reach as the world leader in life safety services will position us as the logical one-stop shopping choice for multinational clients. With 26,000 combined skilled team members, We believe we will be able to bring the best quality of service and attract, train, and retain the best talent. We believe the transaction will be highly accretive with compelling synergies, that it will complement revenue growth through cross-selling certain products and services, and that the opportunity for margin expansion is meaningful. We're extremely excited about the value creation opportunity the newly enlarged company represents. creating the worldwide leader in life safety and security while concentrating the vast majority of the business on recurring revenue, mandatorily required services. It's a thesis we had hoped to follow when we made our original investment in API. We have great confidence in the business and the direction we're going. And with that, I'll hand the call over to Russ.

Thank you, Martin. Good morning, everyone. Thank you for taking the time to join our call this morning. As Martin mentioned, This is a very exciting time for API. During today's call, I will provide a summary of our second quarter results and comment on our transformational acquisition of Chubb, explaining to you in more detail what I see as the opportunity in front of us, before turning the call over to Tom, who will then walk through our recent results and outlook in more detail. We are encouraged by the progress made towards recovery since the height of the pandemic at this time last year. As you have heard me say on prior calls, the safety, health, and well-being of each of our employees remains our number one priority. This focus and other foundational priorities provides a platform from which we can continue to enhance shareholder value. Key highlights from our performance for the three months ended June 30, 2021, compared to the prior year period include the following. First, net revenues of $978 million. above our previously communicated guidance of $925 to $950 million, primarily driven by continued growth of our inspection and service offerings, as well as general market recoveries in both safety and specialty services, is offset by the decline in industrial services contracts. Net revenues, excluding industrial services, increased on an organic basis by 21.1% compared to the prior year period. Second, Continued focus on our ongoing goal of growing recurring inspection and service revenue, which we believe helps to build a more protective moat around the business. And third, adjusted earnings per share of $0.31. As we have discussed throughout the quarter, COVID-19 continues to impact our business despite our team's agility as we manage the rise in the number of COVID-19 cases, coupled with supply chain disruptions and inflation. These supply chain issues impact our work and the work of others on certain projects and ultimately have an effect on our efficiency, causing downward pressure on markets. We expect these negative variables will be with us through the balance of the year. However, we do not believe they limit us in achieving our long-term goals. I am incredibly grateful for the leaders across our organization who remain dedicated to meeting robust demand across our key end markets. The significant growth in net revenues in our safety and specialty services segments was partially offset by a decline in net revenues in industrial services. This deserves some further explanation. In industrial services, net revenues for the three and six months ended June 30, 2021, declined on an organic basis by 49.6% and 60.3% respectively. This is due to the decreased volume resulting from the following facts. Number one, the roll-off of old projects and contracts that were not replaced or renewed in 2021. Second, decisions by our customers to delay and suspend certain projects. Third, difficult macro market conditions. While there have been some improvements in the energy sector over the last several months, the space in which we operate remains competitive. We are still seeing a lack of proposal activity on both the capital and integrity side of pipeline transmission work. Pipeline integrity is where we have focused the business over the last 18 months. We remain focused on being disciplined on project and customer selection and will continue to resist lower margin, higher risk activity. We expect this trend to continue for the remainder of 2021. This is the reason we have and will continue to focus our efforts on growing the acyclical, recurring service revenue aspects of our portfolio. Before turning the call over to Tom, I'd like to spend a few minutes discussing our recently announced acquisition of Chubb. As the CEO of this company, I'd like to give you all a very clear picture of why I felt we needed to shift our M&A focus to winning the Chubb sale process. We've already talked about the strategic fit and the global leadership position we will have as a result of this combination. But at the end of the day, all of this has to result in significant value creation for shareholders. And the map here is extremely compelling. We've already provided guidance to the investment community for revenue growth in line with our historical performance of 4% to 7% and adjusted EBITDA margin expansion to 13% by year-end 2025. With a Chubb baseline starting in 2021 at approximately $2.2 billion in revenue and adjusted EBITDA margin of approximately 10%, We expect Chubb's revenue to exceed $2.5 billion with an adjusted EBITDA margin approximating our projected fleet margins of approximately 13%, or standalone adjusted EBITDA of $315 to $335 million by the end of 2025. Excluding any further acquisitions, by the end of 2025, API should produce in excess of $800 million of adjusted EBITDA with revenue and earnings predominantly from statutorily mandated services. There will be a significant amount of operational focus to achieve this, but we have a direct line of sight to the steps required to execute on this objective. To be clear, this will still leave Chubb with an adjusted EBITDA margin below that of API's comparable business in the U.S., but we feel this sets a highly achievable baseline from which to build. We do not intend to lose focus on the small tuck-in opportunities in our global local markets. However, we feel there is much value to be created by simply focusing on the enlarged platform this combination represents. Anecdotally, some of our largest tech and data center customers have asked us if we can assist them in fire safety services for their global operating centers, and now we will have a solution for them. We believe there's a significant opportunity to leverage Chubb's 200-plus year history of providing statutorily required and route-based services through its internationally recognized brand. Similar to API, Chubb is a people-centered business. We look forward to welcoming Chubb's 13,000 employees to our family of businesses and supporting their development as leaders as the business shifts from a non-core asset to a paramount strategic priority within the API. We believe our combined leadership team will drive towards maximizing business performance and capitalizing on future cross-selling opportunities. Our aligned, incentivized, performance-based culture will help drive Chubb as it has at API. Another parallel between the Chubb business and API is that we have life safety businesses that deliver high teams-adjusted EBITDA margins, which means we also have businesses that are performing below the fleet average. We believe there is a significant opportunity to invest in regions with higher margins and provide increased support to the Chubb team in improving the businesses that are below fleet average to ultimately realize a financial profile in line with API safety services segments. I would now like to hand the call over to Tom to discuss our financial results and outlook in more detail. Tom?

Thanks, Russ, and good morning. I will review our consolidated results, segment level performance, and strong balance sheet before turning to our outlook. As Russ mentioned earlier in the call, net revenues, excluding industrial services for the three months ended June 30, 2021, increased on an organic basis by 21.1% compared to the prior year. For the six months ended June 30, 2021, net revenues excluding industrial services increased on an organic basis by 11.7% compared to the prior year period. Adjusted gross margins for the three months ended June 30, 2021 was 24.2%, representing a 27 basis point decline compared to the prior year, driven by supply chain disruption and inflation causing downward pressure on margins. partially offset by improved mix in safety services. For the six months ended June 30, 2021, adjusted gross margins of 23.7%, representing a 27 basis point increase compared to the prior year due to the factors mentioned for the second quarter. Adjusted EBITDA margin for the three months ended June 30, 2021 was 10.8%, representing 106 basis point decline compared to the prior year due to supply chain disruption and inflation causing downward pressure on margins and less contribution from joint ventures in specialty services than the prior year period. For the six months ended June 30, 2021, adjusted EBITDA margin was 9.4%, representing a 39 basis point decline compared to the prior year due to the factors mentioned for the second quarter. We continue to focus on driving strong free cash flow, and our balance sheet and liquidity profile remains strong. As expected, given the comparative swings in COVID-related business cycle, as well as our normal historical experience, most of our cash from operations was absorbed by a rebuild in our working capital base. For the six months ended June 30, 2021, adjusted free cash flow was $20 million, representing in a $203 million decrease compared to the prior year of $223 million, and our adjusted free cash flow conversion rate was approximately 12%. As we discussed in our investor day in April, the decline in cash flow was expected as revenues rebounded post-COVID-19, and we used cash to fund working capital to drive increased service revenue and higher margins. Working capital increased in line with historical trends experienced during the first half of the year. In addition, the decline was driven by a $34 million increase in cash paid for income taxes, largely driven by the timing of a payment related to the prior year. As of June 30, 2021, we had $686 million in cash and cash equivalents and no outstanding borrowings under our $300 million revolving credit facilities. I will now discuss our results in more detail for our three segments, beginning with safety services. Safety services net revenues for the three months ended June 30, 2021, increased on an organic basis by 26.4%, primarily due to strong recovery of our HVAC services businesses and continued growth in inspection and service revenues across the majority of our markets. For the six months ended June 30, 2021, Net revenues increased on an organic basis by 12.6% due to the items mentioned for the second quarter. Adjusted gross margins for the three months ended June 30, 2021 was 31.8%, consistent with prior year period. For the six months ended June 30, 2021, adjusted gross margins was 31.7%, representing a 63 basis point increase compared to the prior year, due to improved mix of work towards inspection and service revenue combined with discipline, project, and customer selection. Adjusted EBITDA margin for the three months ended June 30, 2021 was 14.6%, representing 198 basis point increase compared to the prior year due to leveraging of our SG&A costs on the increase in revenues period over period. For the six months ended June 30, 2021, Adjusted EBITDA margin was 14.1%, representing 153 basis point increase compared to the prior year due to the leveraging of our SG&A costs on the increase in revenue period over period and factors I mentioned as drivers of gross margin. Specialty services. Specialty services net revenues for the three months ended June 30, 2021, increased on an organic basis by 18.9%. primarily due to increased demand and timing of our fabrication and specialty contracting services, partially offset by lower volumes in our infrastructure and utility businesses. For the six months ended June 30, 2021, net revenues increased on an organic basis by 13.4% due to the factors mentioned for the second quarter, as well as project deferrals and job site disruptions driven by unfavorable weather conditions in the first quarter. Adjusted gross margins for the three months ended June 30, 2021 was 17.1%, representing 180 basis point decline compared to the prior year due to supply chain disruptions and inflation causing downward pressure on margins. For the six months ended June 30, 2021, adjusted gross margin was 15.2%, representing 81 basis point decline compared to the prior year due to the reasons mentioned for the second quarter, and lower productivity due to unfavorable weather conditions in the first quarter. Adjusted EBITDA margin for the three months ended June 30, 2021 was 11.6%, representing a 305 basis point decline due to the impacts mentioned for gross margin and less contribution from joint ventures compared to the prior year period. For the six months ended June 30, 2021, adjusted EBITDA margin was 9.5%, representing 112 basis point decline compared to the prior year due primarily to the items noted for the second quarter. Industrial services. Industrial services net revenues for the three and six months ended June 30, 2021 declined on an organic basis by 49.6 and 60.3% respectively due to the factors Russ mentioned earlier in the call. Adjusted gross margins and adjusted EBITDA margin for the three months ended June 30, 2021 was 4.4% and 2.9%, respectively, compared to 18% and 15%, respectively, in the prior year period. The decline was primarily driven by unabsorbed costs for leased equipment due to lower volume. For the six months ended June 30, 2021, adjusted gross margins was zero and adjusted EBITDA margin was negative 4.3%. 2021 Guidance. Our full year guidance for 2021 remains unchanged and does not reflect any contribution from the upcoming SHUB acquisition. We expect adjusted net revenues for 2021 to range between $3.65 billion and $3.75 billion as we focus on driving inspection and service revenue, combined with a continuing but smaller decline in our industrial services segment and our disciplined approach to project and customer selection. Also, As we have said previously, while we do not have anything built into our budget for an infrastructure build or stimulus that would incentivize investment in the renovation of existing infrastructure, there are certainly aspects of our business that would benefit, and we are pleased to see the recent progress in the Senate towards such legislation. We expect adjusted EBITDA for 2021 to be at the lower end of our range, or approximately $405 million. primarily driven by supply chain disruptions and decrease in our industrial services segment and the ongoing impact of COVID-19 pandemic. We expect capital expenditures to be approximately $55 million, and normalized depreciation continues to be approximately $60 million. Our cost of capital is approximately 5%, and our adjusted mid- and long-term effective tax rate remains approximately 21%, and our estimated fully adjusted diluted share count is approximately $205 million. As mentioned earlier this year, we expect our adjusted free cash flow conversion rate for 2021 of approximately 70%. As we build working capital from the reduced prior year base, our back half cash flow build in 21 is consistent with that of our more traditional run rate. I will now turn the call over to Jim.

Thanks, Tom. Good morning, everybody. Our progress this year is meaningful. and we are even more excited by the long-term future of API following the strategic Chubb transaction. While COVID-19 continues to impact our business, as well as those of our customers and suppliers, we remain confident in our ability to execute on our long-term goals for the business. The announced Chubb acquisition meets our previously stated key strategic investment criteria. Chubb has a history of strong free cash flow generation, They are leaders in their niche markets and have an experienced leadership team. The acquisition will expand our geographical reach and will strengthen our protective mode through greater statutorily required recurring revenue with 50% plus of our revenue coming from service after the transaction closes. We are enthusiastic to invest behind the Chubb team and support their operations and supplement them with our existing operations. We believe there are significant future value creation opportunities as we combine our two organizations and realize revenue as well as cost synergies. In addition, we are excited to add Blackstone as a partner. As many of you know, Blackstone has a significant global property portfolio, which we expect to provide the combined company new customer opportunities in multiple markets. Blackstone's real estate total commercial portfolio is comprised of over 1.2 billion square feet of real estate globally, and we are excited to compete for their business. Before opening the call for Q&A, I'd like to provide some additional color regarding model assumptions for Chubb. As noted on our previous call, we look forward to sharing more details once the transaction has closed. As Martin mentioned, the transaction value is $3.1 billion, which is comprised of $2.9 billion in cash and approximately $200 million of assumed liabilities and other adjustments. some of which will be trued up at closing. These deductions include deductions for known and contingent liabilities, all of which have been quantified through our diligence process. For the trailing 12-month period ending March 31, 2021, despite headwinds faced in navigating the global COVID-19 pandemic and emerging supply chain disruptions, Chubb had revenue of approximately $2.2 billion and adjusted EBITDA of approximately $213 million, which we believe is a strong base from which we can build. The transaction is expected to close around year-end 2021 and is subject to a consultation process and standard regulatory approvals. It will be funded through a combination of cash on hand, perpetual preferred equity financing, and debt. For the $800 million Perpetual Preferred Equity Financing, there is a 5.5% annual dividend available on a quarterly basis in cash or, as a company's option, in kind by payment of additional shares of common stock. We will decide at the time when the dividend is due whether we pay in cash or stock based on the company's cash flows and dental sheet position. The annual dividend amount is expected to be approximately $44 million. The perpetual preferred may be converted at any time by the holder into common stock at a conversion price of $24.60. The company has the ability to force conversion at any time if the volume weighted average share price of our common stock exceeds 150% of the conversion price or $36.90 per share for 15 consecutive trading days. For the purposes of future modeling, it's important to reflect either one, the cash payment, or two, the preferred is converted to avoid double counting along the way. We expect to be at a pro-formatant net leverage ratio of around four and a quarter times at closing, with the goal of returning to below three times net leverage expeditiously. Our near-term focus will be on closing the transaction and then deleveraging through our asset-light, high-free cash flow conversion operating model, which this year we expect will deliver cash in excess of $275 million. We will do all of this while continuing to invest in our leaders and our business process improvements. I would now like to turn the call back over to the operator and open the call for Q&A before Russ concludes the call with an additional statement at the end of the Q&A period. Operator, please open the lines.

Certainly. At this time, if you would like to ask a question, please press star and 1 on your touchtone phone. You may remove yourself from the queue at any time by pressing the pound key. Once again, that is star and 1 if you would like to ask a question. And we will take our first question from Julian Mitchell with Barclays.

Hi. Good morning. Maybe just wanted to circle back to the free cash flow aspect, maybe give us a bit more clarity as to how the big working capital pieces will move in the second half to get that conversion up. And also perhaps when you're looking at 2022, assuming more normal working capital dynamics, assuming that Chubb is integrated early in the year, What sort of free cash flow conversion should we assume for next year?

Yeah, so, Julian, let me address the cash flow for this quarter. Right in line with our expectations is where we came in. And if you'd look back to 2019 that we shared with you last year, last year's second quarter was dramatically impacted by the COVID reduction in revenue as we brought down all of that working capital. So right in line with our historic flow and what we had budgeted, we came in at the end of the quarter. Historically, we see that the cash comes in through the second half, and that will happen as projects wrap up. And as our revenue in the fourth quarter, our projects are wrapping up, and you get run into the holiday weeks, et cetera. And so it's a normal time where our cash comes in. And we're expecting that same flow this year. I think you've seen – discussed in the past on Chubb's cash flow conversion rate at their disclosed amount is 90%, and we'll be blending theirs with ours and expect it to be consistent, but we'll have more details on that as we get closer to the closing.

Julian, it's Jim. I think, Tom, correct me if I'm wrong, but if memory serves me correct, We did about $11 million in free cash flow in the second quarter of 2019 versus the 20 this year, and I think our conversion rate was much higher.

Yeah, so second quarter, slightly different, Jim, but you're close. About $22 million conversion in 2019 versus 20 this year. So the rate online and a 13.9% conversion in 2019 versus 12% conversion this year. And when you think of the growth we've had because of coming off a lower COVID base this year, that's very, very positive for us.

And I think, Julian, you had a question about 2022. You know, we'll go through the budgeting process, but I think we said on our last call that Chubb historically had a 90% free cash flow conversion. Theirs was EBITDA minus CapEx divided by EBITDA. And so we don't see any real trending change in that. And our historical is 80% plus. So still very strong free cash flow conversion. But when we do the budget and we give guidance when the deal closes, we'll give you more color.

Thanks very much for that detail. And maybe my second question, just looking at the EBITDA margin. So I think the full year guidance implies EBITDA margins are up slightly year on year in the back half. Just wanted to check that. And more specifically within specialty services, you had the margin pressure in Q2. How substantially does the margin sort of swing around in the second half in your guidance?

I think that we're – Julian, this is Russ. I think we're going to continue to see margin pressure in specialty services through the remainder of the year, and we're going to be battling through, you know, cost of goods, you know, inflationary pressure, as well as supply chain disruptions that are going to continue to, you know, cause us some headaches and we're going to have to just keep on battling. I think that we feel really good about what we're seeing in safety services and see positive results there in improvement. But we're going to continue to battle through the second half.

Thanks, and the overall firm-wide adjusted EBITDA margin at the sort of guidance midpoint, that should be up slightly year-on-year in the second half. Is that fair?

Fair. Great. Thank you. Thank you.

And we'll take our next question from Marcus Mittermeier with UPS.

Hi. Good morning, everyone. Hey, Marcus. Hi. Good morning. Maybe I'll start with Job. Russ, thanks so much for providing your thoughts here on, you know, how you think this will develop to 2025. I think you said $2.5 billion getting the margins to sort of the, you know, current market. API fleet average of 13%. Can you comment a little bit on the sort of visibility you already have and know it's early days? Is this mostly kind of project and customer selectivity like we've seen you do obviously on the industrial side of your business, how to get that margin of that specific programs that you already think about? And then connect to that, obviously, it's still 100 basis points below where your current life safety business is. So, you know, how are you thinking about this and how much comfort do you have?

So I would start by saying we're very confident that we will be able to, you know, work with Chubb's leadership team and achieve these goals. We wouldn't put them out there if we didn't have great confidence. They are, under Anthony Brennan's leadership, they are really pushing to a branch-focused model, which is very, very similar to the focus in how we built our life safety and safety services business. having the ownership at the branch level and uh and so for for me um it is it is really a combination of a lot of different things but it's going to start with the individual branch leadership making sure that we have the right people you know leading these different branches and starting to make investments in their people as leaders they haven't had that level of investment We think that's something that we can bring to them very, very quickly as we come out of the gates here. So we have really good confidence that these margin expansion goals are achievable. And just like here, Marcus, when we achieve those goals, we're going to just move the goalposts and we're going to keep on moving. moving forward with improvements. But there's a tremendous amount of opportunity for us to really help the Chubb team improve the business.

Great, thank you. And then on the $200 million of contingent and known liabilities, just making sure here, What's being transferred over from carrier is the service business largely, not the underlying fire manufacturing. The background to the question is, you know, obviously around PFAS, how confident are you that there isn't sort of like a long-dated liability that moves over here with that transaction?

You are correct. We have purchased the services side of the business. They are keeping the, so to speak, manufacturing, the product manufacturing piece of the business. And the PFAS liabilities stayed with UTC back when the carrier was carved out of United Technologies.

So we're very comfortable with the, so to speak, environmental. Okay. Thank you very much. And we will take our next question from Andy Whitman with Barrett.

Great. Thanks, and good morning. I just wanted to clarify some questions from the prior Chubb call regarding the EPS accretion that you articulated. And correct me if I'm wrong, please, but I think you guys said there was going to be like, I think it was $0.35 of accretion. Maybe that number is wrong. But if you could, please, it would be helpful to understand the level of depreciation, interest expense, and the share count that underpins that, recognizing here that it gets complicated with the preferred dividend and the convertible share on that. I just think trying to understand that assumption would be helpful for everyone.

Did you repeat the question?

Yeah, I was just hoping that you could bridge this with a little bit more detail on the Chubb accretion that you articulated on the last conference call. If you could just comment again what that EPS accretion you're commenting as out-of-the-box. We understand your long-term numbers today, but I think you made some comments around out-of-the-box EPS accretion. And so depreciation, interest expense, and then the share count or the preferred dividend that underpins that $0.35 accretion I think would be helpful to understand.

I don't have to break down in front of me, but it was about, I think in the last call, we said it was about 25%, and it's actually, I think, in the 26%, 27% rate, it was 26%, 27%, but I think we said on the call, 25%. I'll have to come back and give you the breakdown of those figures because I just don't have them in front of me right now.

Well, their depreciation runs at about 18, their cap tax is about 18 million. And I would say they probably underinvested in the business to a certain degree.

But, Andy, I think going back to what we said, we were looking at approximately the 213 million of EBITDA. We were looking at our existing share count, and that's where we came up with the, again, I can't remember the number, but call it 34, 35, 36 cents. or so.

Okay. Um, that's, yeah, that's what I thought you said on the call with 35 and you just said 26. So I'm trying to, that's what I'm trying to get at. And 26%. 26% and 35 cents. Sorry. That was broke up a little bit. Was that what you said? Okay. Okay. Um, that makes sense then. Okay. So then, um, just then Russ on the, um, the inflation and supply chain challenges that you saw in the quarter. I've always thought of your projects as relatively short between the bidding and the execution of the projects. I understand inflation is rapid today. How much insulation do you get from inflation, just given the smaller average project size, as well as the proximity and bidding to execution of the jobs? Inside the backlog that you have today, how much of kind of older pricing is there for jobs that maybe had an extended duration between when they're bid and when they're executed? And if you could just talk a little bit about the nature of some of the supply chain disruptions, specific products that maybe are grabbing you and what you can do, if anything, about obtaining those products.

Sure. A lot there. And I'm going to start by reminding you that we don't bid our work. We propose on our work because we want to make sure that we're being chosen by our customers because of the value that we bring to the table. You know, safety services I would say is more insulated than specialty services because the, you know, the average shop size in safety services is less than $10,000, so those are much quicker hitting. But steel pipe prices have basically doubled and we've had to make sure that we've protected ourselves in our proposals and in our contracts to make sure that we've got the right language built into those documents to allow us to get escalation when necessary. You know, in specialty services, even though, you know, we've been very proactive with our businesses in making sure, again, we're protecting ourselves in our proposals, oftentimes the materials are provided by our customers, and the lack of availability, like, say, for fiber optic cable and those types of things, has negative impacts on your ability to efficiently execute on your work. And managing your workforce and managing your people You know, when, you know, the product is showing up late or not showing up for, you know, when it's supposed to show up, it makes it very, very difficult to manage your work. And, you know, that's happening really on many, many fronts. You're seeing that with, you know, pipe. You're seeing that with, like I said, fiber optic cable. You know, we have one manufacturing business. Joyston Deck is out, you know, nine months. So, managing through those challenges, people have to be on their toes and they have to be very proactive as they're looking at their business. I can't quantify what in our backlog is, how much of that risk would be in our backlog from You know, our backlog turns very quickly. Our backlog has been very strong. And I'd like to, you know, believe that, you know, because we have been very proactive in talking with our businesses and giving our businesses guidance on where we think commodity prices are going, that we, you know, are protected and that we've done a good job. I'm sure there's instances that we haven't, but in general, I feel I'm really good about it.

Great. Then just I guess one final follow-up on that is, in the case where your customers are procuring your materials and they can't get them, do you have any recourse to the customer for change orders regarding the cost that you incur from their delays?

Yeah, for sure you do. But, you know, that's a delicate balancing act, too. You know, it's your customer, and so you have to make sure that you're being fair with them. You want to make sure that they're being fair with you. And so – but it is a balancing act. And, you know, you're inevitably going to have customers that are going to push back on you and try to make their problem your problem. But that's where, you know, it's so important for – Our business leaders, they have positive relationships with their customers so that they can work through those challenges. They need to be very proactive in leading their work versus just reacting to their work, and there is a significant difference there. But it ultimately comes down to the relationship you have with that client.

Got it. Okay, thank you very much. Have a good day. Thank you.

And we'll take our next question from Catherine Thompson with Thompson Research Group.

Hi, thank you for taking my questions today. Just first focusing on the specialty end market, the specialty services rather, could you give more color in terms of the end market demand and what is driving demand overall? Really looking for additional color from an end market, but also a regional standpoint. Thank you.

Well, our end markets in the segment remain strong. You know, we continue to provide services to public utilities, private utilities, telecom providers, and such. And, you know, really, we feel that the end markets we're serving remain very strong. even with some of the opportunities that we have in front of us sliding out to the right. So as an example, one of our businesses does a fair amount of what I would consider grounding and interconnecting work with wind farms. And, you know, a number of their project-related opportunities slid into 2022. And I think some of that just was some reticence with the new administration and you know, what was going to happen with certain tax credits and some of that work split. It's not going away, but it's going to push into 2022. So again, we feel very good about the end markets that we're serving. It's just that there's some choppiness on when we're going to be able to deliver those services. Kind of like the infrastructure bill as it comes, you know, comes forward and, you know, you look at, you know, where the buckets and, you know, there's going to be $65 billion in broadband investments. Well, that's going to be a positive for our business, but, you know, those dollars won't start flowing through, you know, into the system until the back half most likely of 2022. So, but we feel great about the end markets that we're serving in the segment.

Okay, any color or thoughts in terms of the infrastructure, proposed infrastructure plan, if it were to pass, what that may mean for API?

Yeah, so actually Olivia did a nice job of breaking down the buckets of the, I guess, the first Senate bill that passed on a bipartisan basis late yesterday versus the one that passed on a partisan basis on the middle of the night. But, you know, there's a number of opportunities in areas that will benefit us. You know, the electric grid and power infrastructure bucket, there's, you know, 70 plus billion allocated there. I just mentioned the broadband investments. There's going to be 55 billion allocated for water systems and infrastructure, which is you know, an area that we participate in the, you know, upgrading and the renewing of the existing, you know, potable water infrastructure that's in place primarily for us in the East Coast. And I also would tell you that, you know, a rising tide floats all boats, and the dollars that are being spent in other places, you know, where like ports and waterways is not a place that we participate in, but other firms will, you know, put their resources to work in other areas. parts of the infrastructure bill that will create opportunities for us to take more market share with our existing customers. So it's a positive in general for the industry, which will create, you know, an opportunity for us to do more work with some of our existing customers.

Okay, great. And then final question for the day, just a broader question for industrial services. In light of the proposed child acquisition, and also, as you noted today, the continued rightsizing of industrial services, where do you see this business as a percentage of mix going forward? And what are your mid to long term goals for this division? Thanks.

Yeah, thanks, Catherine. So, you know, we continue to be very, very disciplined with the opportunities and the work that we're pursuing in industrial services. And there's nothing worse than being slow and being slow with low performing, you know, work. And so we have been, you know, very discipline in how we're looking at the opportunities that are in front of us to make sure that the work that we do execute, you know, we can make a reasonable profit in gross margin on. My hope is that we are at the bottom and that we are going to start chipping away and demonstrating improved results and that we can get back to a spot where the business is complementary to our margin goals. And we need to continue to evaluate what's there and what we're doing there. And if we need to do some pruning, then we need to do some pruning. But we need to continue to, you know, be at the top of our game and looking at what's going on in that piece of the business.

Great. Thank you very much.

And we have time for one more question before turning it back to Russ for a closing statement. And we'll take our final question from John Tanawag with CJS Securities.

Hey, good morning, guys. Thank you for taking my questions. My first one, I don't know if anyone asked this before, but is there any color on the phasing of revenue and earnings as we head into the second half between Q3 and Q4? Should we expect more pressure on revenue and earnings in the near term as you deal with the COVID headwinds and things that are going on now and maybe more relief in the fourth quarter? Or if not, what are the puts and takes that we should be considering?

Yeah, great question, John. Typically, we've kind of seen third quarter be a 27% to 28% of our revenue quarter, and then 24% to 25% in the fourth. Just with the way things are moving and the supply chain things, those two quarters may be a little more balanced than we've seen in the past. And so we're working through that. And as we march through the quarter, we'll provide more insight to you as we have it.

Okay, that's very helpful. Thank you. And then second question. I was hoping you could dig deeper into the Blackstone opportunity a little bit more. What percentage of their portfolio do you cover today? And kind of what is the win rate usually when you approach a new property to get their business? How much of that can we expect you to cover over time?

Well, that's a tough question, but I'm going to give you an example. So in the Memphis marketplace, we currently provide inspection and service work at approximately 20 of their distribution facilities in that marketplace, and from what we know today, they have an additional 20. you know, facilities in that marketplace. Now, so we think in that one particular market, you know, there's an opportunity for us to do, so to speak, twice as much with them. But the caveat is that we need to go earn their business. We can't expect them to just give us their business. It's no different than with our other, you know, national-based and now international-based customers. Like, we need to go and earn it and win it. And We think the opportunity is huge. Blackstone has a great track record of opening up their, you know, portfolio companies to each other and working across, you know, sister company lines. And we think that that's an opportunity. But we're not afraid of the challenge, and we expect that we're going to go and we're going to win their business, not have it handed to us.

Okay, got it. Thank you for that, Collin. Thanks again. Thanks, John. I'm sorry, Alfred.

I think I just stepped on your feet and did your job. But since I've done it, Russ, we'll turn it over to you for one final comment.

Yeah. Thank you. Thank you, everybody. Before we say goodbye, this really is a personal message from all of us. It is with a very heavy heart. I have to inform you of the untimely death of Joel Walsh, our head of specialty services, who many of you met during our investor day. Our shared condolences go out to Joe's family and to all of those who were fortunate enough to know him. He was a widely respected man and was a quintessential API leader, and his presence will be missed. From an organizational standpoint, we have a succession plan in place. However, for now, our thoughts are with Joe's family and the entire API family as Joe's impact was far-reaching, both within our organization as well as throughout the industry. I want to thank everybody again for joining the call this morning. We very much appreciate you taking the time to be with us. Thank you for your continued interest in API. We look forward to keeping you updated as we move through the rest of the year. This is truly a very exciting time for the company. So thank you.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.