APi Group Corporation

Good morning, ladies and gentlemen, and welcome to API Group's fourth 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. Good morning, everyone, and thank you for joining our fourth quarter 2021 earnings conference call. Joining me on the call today are Russ Becker, our president and CEO, Kevin Crum, our executive vice president and chief financial officer, and Sir Martin Franklin and Jim Lilly, our board co-chairs. 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 1st, and we have no obligation to update any forward-looking statement we may make. As a reminder, we have posted a presentation detailing our fourth quarter financial performance on the investor relations page of 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 our presentation. It is now my pleasure to turn the call over to Martin.

Thank you, Olivia. We're very pleased with API's progress achieved in 2021 and even more excited about the opportunities that lie ahead for the business. The completion of the acquisition of the Chubb Fire and Security business on January 3rd, 2022 was an exciting milestone as we continue our evolution and growth as a public company. Chubb is a business with significant strategic value to API and one with multiple levers for value creation. We view APIs and Chubb's strengths and skill sets as complementary. Just as our capabilities and scale will help drive growth at Chubb, by the same token, the addition of Chubb enriches our overall portfolio. Our combined global reach as the world's leading life safety services provider is already unlocking incremental opportunities for us with multinational clients. We are thrilled to welcome all of the Chubb team members to the API family as the business shifts from a non-core asset to a paramount strategic priority within API. As the bar is being raised at the operating level, so too is the bench of senior management. Multiple hires have been made to incorporate our growing scale, and we feel very energized with the quality of the team moving forward. We have great confidence in the business and the direction we're heading and look forward to updating you on our progress in the coming months. Before handing over the call to Russ, I'd like to acknowledge with a heavy heart the passing of Lord Paul Miners in January. Paul was an outstanding director for API and someone who made the world a more interesting and better place. He'll be greatly missed. With that, Russ.

Thank you, Martin. And good morning, everyone. Thank you for taking the time to join our call this morning. Before we provide you with a summary of our strong results for 2021, solid outlook for 2022, and an update on the acquisition of Chubb, I would like to start by thanking our team members who have remained focused on supporting our company and our customers. Their ongoing leadership efforts continue to demonstrate what I have known to be true since I was fortunate enough to be given the leadership role at API over 20 years ago. Our leaders are a competitive advantage and help drive shareholder value. The safety, health, and well-being of all of our leaders remains our number one priority. Like Martin, I would like to welcome all of the Chubb team members to the API family. As discussed at the investor conferences last week in Miami, 2021 was a watershed year in the development of API. Despite the many macro headwinds, I am proud of our team and how we achieved our stated strategic goals amidst ongoing supply chain disruptions, inflationary pressures, and COVID-19 impacts. These include the following highlights for the year ended December 31st, 2021. First, net revenues, excluding industrial services, increased on an organic basis by 16.1%, exceeding our initial guidance of 7%, driven by strong demand in our core safety and specialty services segments. Second, continued success in our ongoing goal of growing the acyclical recurring service revenue aspects of our portfolio, which we believe helps to build a more protective moat around the business. Service represented approximately 43% of total net revenues in our life safety businesses, up from approximately 41% of total net revenues in 2020. Third, within our safety services segment, we achieved our goal of growing inspection revenue 10% plus. We continue to drive our go-to-market strategy of selling inspection work first, which we believe will lead to further service revenue growth and ultimately drive margin expansion. Fourth, disciplined project and customer selection. We ended the year with a contract loss rate of less than 0.5%. This exceeds our goal of 0.7% or less. We will continue to resist lower margin, higher risk activity, and work to drive this towards zero. It is critical for us to maintain our focus on thoughtful and profitable growth rather than growing for the sake of growth and risking profitability as we strive to deliver on our margin expansion goals. The most exciting development during the year was the signing of the definitive agreement to acquire Chubb on July 26, 2021. With the closing of the transaction, we began 2022 as the world's leading life safety services provider. I would like to spend a few minutes providing you with an update on our progress over the past couple of months. As many of you have heard me say previously, Chubb is the center of the fairway transaction for us. We have built a branch-based business model similar to Chubb over the past 20 years since I've been at API. Our Powered by API structure provides us with the ability to leverage our scale while also being able to be nimble and opportunistic at the local level with minimal bureaucracy and overhead burden. We are excited to add Chubb to our family of market-leading service providers run by entrepreneurs with the backing of a large organization. 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 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 segment. We fully intend to leverage this approach to drive the growth of the newest member of the API family. We have now begun our three-year journey to accelerate organic revenue growth, leverage our scale, and drive margin expansion across our platform while focusing on free cash flow conversion and swiftly deleveraging and integrating the Chubb team and portfolio into API. The views we had shared regarding the Chubb business on previous conference calls were based largely on the due diligence we performed as part of the transaction. I'm delighted to say that after nearly two months of ownership, we see the opportunities to be at least as large, if not greater, than we had anticipated during our due diligence. Kevin will touch on synergies briefly in his remarks. On future conference calls, we intend to highlight in more detail the areas we have identified that will drive synergies and margin improvement for the future as we work towards achieving our 2025 goals. This is likely the last conference call where I will reference Chubb. Chubb is an important brand within API. For too long, in my opinion, under prior ownership, Chubb has been an orphaned asset, as we have called it. That ended on January 3rd. As we have started to integrate the business, we are combining teams and resources, servicing customers, developing action plans, and moving forward as one company and team with a unified set of goals and direction. As many of you know, and as we strongly believe at API, our success is dependent on people, and one of the intangibles in any transaction is the people. We have a team of people on the ground 24-7. We have built up the depth of our bench over the last several months to ensure that we are well positioned to integrate and manage our ever-expanding global footprint. We have added several leaders with significant international and integration experience across all disciplines of our organization. Since the closing of the Chubb transaction, Kevin, myself, and a number of our teammates have had the pleasure of traveling to numerous facilities to conduct operating reviews. Across the board, we have seen that there is genuine belief and desire that for the first time in many years, Chubb has found a stable home where the employees and their businesses can flourish and achieve their potential. As part of the API family, Chubb will benefit from API's culture of organizational sharing of knowledge and best practices, and collaboration across businesses, which ultimately drives cross-selling opportunities. I continue to be energized by the host of opportunities in front of us. As we look ahead to 2022, our record backlog continues to build and provides us with a solid foundation for organic growth. Underlying demand in our key end markets, such as data centers, fulfillment and distribution centers, healthcare, and high tech remains robust. As many of you have heard us say previously, while our business is not immune to macro marketplace disruptions related to the supply chain disruptions and inflationary cost pressures, we believe we have more tools to mitigate these pressures than our peers. The acquisition of Chubb has enhanced our overall competitive position and our protective mode around the business. Our average project size in our largest segment, Safety Services, is now approximately $5,000, and the average duration of our project is very short, which we believe will allow us to reasonably control inflationary variables and reasonably manage our supply chain. We believe these are competitive advantages as they allow us to stay focused on real-time pricing and operational efficiency to ensure true costs are reflected in the services we provide. In summary, I am pleased with our progress in 2021 and confident that the momentum will continue into the future. We intend to maintain our relentless focus on growing recurring service revenue, disciplined project and customer selection, pricing opportunities, leveraging our spend, driving operational excellence, and realizing synergies from the acquisition of Chuck. I would now like to hand the call over to Kevin to discuss our financial results and outlook in more detail. Kevin?

Thanks, Russ. Good morning, everyone. I'll begin my remarks by reviewing our consolidated results in segment-level operating performance before turning to our outlook. Net revenues for the three months ended December 31, 2020 increased on an organic basis by 27.4% compared to the prior year period when excluding industrial services. For the year ended December 31, 2021, net revenues increased on an organic basis by 16.1% compared to the prior year period. This, too, is excluding industrial services. Adjusted gross margin for the three months ended December 31, 2021 was 24.6%, representing a 42 basis point decline compared to the prior year, driven by supply chain disruptions and inflation, which caused downward pressure on our margins. This was partially offset by outsized growth in our higher margin safety services segment and an increase in inspection and service revenue. For the year ended December 31, 2021, adjusted gross margin was 24%, representing a 30 basis point increase compared to the prior year due to an improved mix of inspection and service revenue and outsized growth in our higher margin safety services segment, which represented approximately 53% of adjusted net revenues in 2021 compared to approximately 47% in 2020. This was partially offset by supply chain disruptions and inflations, which have caused downward pressure on our margins. Adjusted EBITDA margin for the three months ended December 31, 2021 was 10.3% compared to 11.8% in the prior year period, driven by continuing supply chain disruptions and inflation, which caused downward pressure on our margins, as well as lower contribution from joint ventures in our specialty services segment. This was partially offset by outsized growth in our higher margin safety services segment and an increase in inspection and service revenue. For the year ended December 31, 2021, adjusted EBITDA margin was 10.3%, representing a 57 basis point decline compared to the prior year due to the items I mentioned for the fourth quarter. As many of you know, one of API's historical strengths is its strong free cash flow, which creates opportunities to drive organic and acquisition growth, as well as flexibility to make the best capital allocation decisions, whether debt repayment, acquisitions, or otherwise. As we have noted on prior calls, our substantial growth in organic net revenues throughout 2021 increased working capital investment as we ended 2020. Q4 2020 was suppressed working capital levels primarily due to a reduction in volume during 2020 driven by the pandemic. For the year ended December 31, 2021, adjusted free cash flow was $223 million, representing a $220 million decrease compared to the prior year of $443 million, and our adjusted free cash flow conversion rate was approximately 57% or 55%, which was impacted by higher than anticipated, demand in the fourth quarter in our core safety and specialty services segment. I will now discuss our results in more detail for each of the three segments beginning with safety services. Safety services net revenues for the three months ended December 31, 2021 increased on an organic basis by 23%, primarily due to continued growth in inspection and service revenue across the majority of our markets. For the year ended December 31, 2021, net revenues increased on an organic basis by 17.6% due to continued growth in inspection and service revenue across the majority of our markets and general market recovery compared to the prior year period, which was negatively impacted by the pandemic. Adjusted gross margin for the three months ended December 31, 2021 was 30.9%. representing a 180 basis point decline compared to the prior year, driven by supply chain disruptions, which caused a decline in productivity. This was partially offset by an improved mix of inspection and service revenue for our life safety businesses. For the year ended December 31, 2021, adjusted gross margin was 31.5% compared to prior year adjusted gross margin of 31.9%, driven primarily by the factors mentioned as drivers for the fourth quarter. Adjusted EBITDA margin for the three months ended December 31, 2021 was 13.5%, representing a 12 basis point increase compared to the prior year due to the increase in inspection and service revenue, which was partially offset by certain supply chain disruptions. For the year ended December 31, 2021, adjusted EBITDA margin was 14%, representing a 32 basis point increase compared to the prior year due to an improved mix of inspection and service revenue. This was partially offset by the return of largely temporary cost containment efforts implemented to counteract the negative impact of the pandemic in 2020. I will now discuss our results in more detail for specialty services segment. Specialty services net revenues for the three-month end of December 31, 2021 increased on an organic basis by 36.6%, primarily due to increased demand and timing for fabrication and specialty contracting services. For the year ended December 31, 2021, net revenues increased on an organic basis by 18% due primarily to the factors mentioned as drivers for the fourth quarter. Adjusted gross margin for the three months ended December 31, 2021 was 18.1%, representing a 47 basis point increase compared to the prior year due to an increase in service revenue and improved productivity. This was partially offset by supply chain disruptions and inflation, which caused downward pressure on margins. For the year ended December 31, 2021, adjusted gross margin was 16.2%, consistent with prior year due to an increase in service revenue, disciplined project and customer selection, and improved productivity, which was partially offset by supply chain disruptions and inflation, which caused pressure on margins. Adjusted EBITDA margin for the three months ended December 31, 2021 was 12.5%, consistent with prior year, due to the items I noted for gross margin performance, along with lower contributions from joint ventures compared to the prior year period. For the year ended December 31, 2021, adjusted EBITDA margin was 11%, representing a 100 basis point decline compared to the prior year due to supply chain disruptions and inflation, which caused downward pressure on margins. The return of largely temporary cost containment efforts implemented to counteract the negative impact of the pandemic in 2020 and lower contribution from joint ventures compared to the prior year. These factors were partially offset by an increase in service revenue, disciplined project and customer selection, and improved productivity. I'll now discuss our results in more detail for our industrial services segment. Industrial services net revenues for the three months and full year ended December 31, 2021, declined on an organic basis by 6.9% and 41.7%, respectively, showing some recovery towards the end of the year. The decline was driven by our continued focus on disciplined project and customer selection, decisions by our customers to delay and or suspend certain projects, and difficult industry conditions. Adjusted gross margin and adjusted EBITDA margin for the three months ended December 31, 2021 was 13.6% and 7.4% respectively compared to 14.9% and 12.6% respectively in the prior year period. The decline was driven by unabsorbed costs for leases and equipment due to the lower volumes. This was partially offset by an improved mix of service revenue. For the year ended December 31, 2021, Adjusted gross margin and adjusted EBITDA margin was 7.9% and 4% respectively, compared to 16.3% and 13.6% respectively in the prior year period. The decline was primarily due to unabsorbed cost for leases and equipment due to the lower volumes. This was partially offset by an improved mix of service revenue, discipline project and customer selection, and certain cost reduction actions taken in the segment. Before I review our 2022 guidance in more detail, I would like to note that this will be the last time that we discuss results for the three segments as we have realigned our management reporting structure following the Chubb acquisition. Effective January 1, 2022, the historical industrial services and specialty services segments will be reported as one segment. Specialty services and the historical Chubb business will be reported within safety services. As a result, we will present financial information for two segments moving forward. The segments will be safety services and specialty services.

I will now discuss our outlook for 2022.

We began 2022 focused on delivering our midterm plan of continued healthy top-line growth in line with our average historical organic growth trend of 6% to 7% as we continue to focus on driving our adjusted EBITDA margin to 13% by 2025. As stated in our February 23 press release, we believe that net revenues for 2022 will range between $6.3 billion to $6.5 billion, driven by our relentless focus on growing recurring service revenue. We expect Q1 to be $1.375 to $1.43 million, Q2 to be $1.575 to $1.625 million, and the second half to be $3.35 to $3.445 million. In line with our historical performance for 2022, we expect growth in net revenues on an organic basis at constant currencies will be 6% to 7%. For 2022, we expect to deliver between $650 to $700 million of adjusted EBITDA. Where we end within this range will largely be dependent on the speed with which we finalize and implement certain integration activities across our platform, the impact of further supply chain disruptions and inflationary pressures, our revenue growth, and exchange rate movements during the year. As we've spent more time with the Chubb business post-close, the saving opportunities are becoming more tangible, and we believe we have line of sights delivering the 20 million of annualized opportunities we identified during our original diligence process. There's a lot of work left to do if we are to execute successfully on all these opportunities. While we expect the acquisition to be immediately accretive in 2022, excluding restructuring and one-time charges, we anticipate that most of the projected operating synergies will take 18 to 36 months to realize. We expect Q1 adjusted EBITDA to be $120 to $130 million, Q2 to be $165 to $185 million, and the second half to be $365 to $385 million. Depending on how interest rates move throughout the year, we anticipate interest expense for 2022 to be approximately $120 million. We expect appreciation expense to be approximately $85 million and capital expenditures to be approximately $90 million. As a result of the acquisition of Chubb, we anticipate our adjusted effective cash tax rate to increase to approximately 24%. Our adjusted diluted weighted average share count for the fourth quarter was $229 million and will be approximately $269 million for the first quarter in 2022. As discussed on prior calls, for the $800 million perpetual preferred equity financing in connection with the Chubb transaction, there is a 5.5% annual dividend payable on a quarterly basis in cash or at the company's option in kind by payment of additional shares of Karma stock. We will decide at the time the dividend is due whether we will pay in cash or stock based on the company's cash flows and balance sheet position. For the first quarter, we have communicated our intent to pay in cash. The annual dividend amount is expected to be approximately $44 million. and the perpetual preferred may be converted at any time by the holder in the common stock at a conversion price of $24.60. From a capital allocation perspective, our near-term focus remains on deleveraging through the high free cash flow conversion offered by our asset-light operating model. Following the close of the Chubb transaction on January 3rd, our net debt to adjusted EBITDA ratio was approximately 3.9. We expect to deliver on our average adjusted free cash flow conversion of approximately 80% over the coming years and intend to use the cash generated to reduce debt on average by approximately one turn annually to return to our targeted long-term range of 2 to 2.5 times. I will now turn the call over to Jim.

Thanks, Kevin. API's execution against its goal despite supply chain disruptions, inflationary pressures, and COVID-19-related disruptions speaks to the strength of the company's recurring revenue, services-focused business model, the discipline of the organization, and its leadership team as we continue to focus on shareholder value creation. As Russ mentioned, we entered 2022 with positive momentum on many fronts. Notably, the 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 they have an experienced leadership team. The acquisition significantly expands our geographical reach from 200 plus locations to 500 plus locations and strengthens our protective moat through greater statutorily required activities, recurring revenue with 50% plus of our revenue now coming from service related activities. As we begin the process of integrating Chubb, we are simultaneously investing in the growth of its platform and generating synergies across our combined platform. To help drive value and deliver on our commitments, we have enhanced our team with new global leaders adding depth to our bench as we plan for the future together as one team united by market-leading brands across the globe. As we move forward, we believe our combined leadership team will drive towards maximizing business performance and capitalizing on future cross-selling opportunities. Our aligned and incentivized performance-based culture will help drive Chubb as it has at API. We are focused on making the right choices for the long-term health of the business, being opportunistic on M&A, and remain focused on creating sustainable shareholder value. While we expected to be at a net leverage ratio of around 4.1 times at closing of the Chubb transaction, as Kevin mentioned, our net debt to adjusted EBITDA ratio was approximately 3.9 times following the close, and our revenue backlog remained at a record high level. Both of these metrics are great indicators of the positive momentum in the business. We have a very healthy balance sheet and strong organic revenue prospects for the year ahead. With that, I'd like to now turn the call back over to the operator and open the call for Q&A. Catherine?

And at this time, if you would like to ask a question, please press star and 1 on your touchtone phone. Again, that is star and 1 if you would like to ask a question. You can remove yourself from the queue at any time by pressing the pound key. We'll take our first question today from Marcus Mittermeier with UBS. Your line is open.

Hi. Good morning, everyone. Hey, Marcus. Hey, Marcus. Marcus, congratulations on the baby. Thank you very much. Could I maybe start with Russ? I know that you visited a lot of sites. of a job over recent weeks, what's your kind of impression compared to the expectations that you had during the due diligence now that you've actually seen the folks?

Yeah, thanks. Thank you, Marcus. I would say better than expected. And, you know, I mentioned in my remarks that Kevin, myself, and a number of our teammates, we spent really the first eight or nine days after the transaction closed moving around to a number of different locations inside the Chubb organization. And I was impressed, and the branch leaders, you know, really grew up in the business. They're really solid, good operators. I felt really good about the quality of the leadership. The country-level leadership, you know, both the UK was really solid, and I felt really positive about it. I think that, you know, one of the things that has been missing in the past was, visibility from the company's leadership in the businesses and in the branches, and that was really obvious as we moved around and really got a chance to interact with all of the different team members in the different locations that we were at and how enthusiastic they were. We also, while we were there, we also had a town hall meeting that we opened up to every single one of the Chubb employees across the globe, and we had 2,700 people participate in that session. So, you know, doing that virtually was, you know, not the easiest and maybe not the most efficient, but the enthusiasm and the excitement that came across from our new teammates was fantastic. The chat line was like lit up and on fire, and it was really cool. And I personally came away from that trip really fired up about the opportunities that are in front of us And I think that, you know, our culture and purpose of building great leaders is exactly, you know, what's missing. Those team members need investment in them as people, just like we've been investing in the employees of API. So better than expected.

That's very helpful, Carla. Thank you. And then maybe in terms of the revenue guide, the 6% to 7% organic, obviously, I guess on the legacy API business now, How should we expect these new additions on the CHAP side to develop? Should we expect some sort of, you know, revenue or project selectivity here in the first year? You mentioned that particularly, you know, in the life safety segment, you have, you know, high team margins. How do you think about that? I know it's early days and you're probably still going through the various P&Ls, but how big is that opportunity on the revenue selectivity side?

Well, I think there's a few things at play as it relates specifically to Chubb. Chubb had year-on-year revenue growth last year of roughly 5%, even though they were off in the fourth quarter approximately 3% on a comparison to 2020. Most of that was driven by supply chain issues and the pandemic. We believe that once we kind of get moving forward with Chubb that we should be able to generate revenue organic growth at a clip very similar to APIs on traditional. We do need to spend more time understanding the end markets that they serve. They have more exposure to retail as an example than, say, our current business does. They don't have a significant issue with collections and receivables, etc. But we will spend some more time on customer selection and project selection as we get involved. We have instituted our same kind of no-go-go policy that we use for API when we're proposing on larger opportunities inside of Chubb already. So we'll start to see more of those kind of flow through the system as well. Chubb's average project size happens to be smaller than the average project size for core API. You know, the percentage of service that they do is roughly 60%. So that's very complementary to, you know, our portfolio. So, you know, we're opportunistic, but we're still, you know, kind of gathering information and evaluating where they're at.

Great. Thanks so much. I'll get back to you. Good luck. Thanks, Marcus.

We'll go now to Andy Kaplowitz with Citigroup. Your line is open.

Good morning, everyone. Hey, Andy. How are you? Good. Russ, it seemed like you had a relatively big sequential acceleration in Q4, both in safety and specialty services. I think you mentioned maybe a little bit of pent-up demand in safety, but did you see projects start to flow more regularly in specialty? Or maybe you could comment on taking share. Could you give us a little more color into the reasons for the acceleration, and did it continue into Q1?

Yeah, I think you have a little bit, I think you have a number of things really at play there, Andy. You know, specifically in safety services, that's where our HVAC services businesses lie. They, you know, if you go back to 2020, they had a number of their project-related opportunities slip out to the right. As I mentioned at your conference, we were fortunate that most of those opportunities did not get canceled. They just slid from a schedule perspective. And we saw some of that really start to flow through the system here, again, in 2021, you know, right up through the end of the quarter. We also, if you switch to specialty services, you know, we have – You know, our structural manufacturing business happens to be fortunate to call Amazon a customer of ours, and the demand there has remained robust. And so we've been able to, you know, capture a number of nice opportunities there. We also have some larger project-related opportunities that, you know, really continue to, you know – be really strong, you know, right up through the end of the year. So we just – I think it was just really fortunate for us with some of the project-related opportunity that we had on the books already.

That's very helpful, Russ. And then could you give us more color? You know, you gave us quarterly cadence now in sales and EBITDA because it looks like you assume more normalized margin in Q2 versus Q1. So how are you thinking about labor pressure, supply chain – on your margin versus your pricing? Is it true that you're assuming more normalized environment in Q2, or does the guide still incorporate some supply chain-related headwinds for the rest of the year?

Well, we expect supply chain issues to be, I guess, problematic, you know, through, for sure, the second quarter. I would also tell you that just the mindset and the way we approach things here is that that's our responsibility to manage. And so, you know, we can't, you know, use that as a crush, you know, as we continue to lead the business. And that's just part of the process. So we do expect to continue to battle supply chain and inflation. Obviously, some of the things that are happening in in our world will continue to have impacts on that. You know, labor is tough. And, you know, you have a, you know, I view it as being more geographically market specific. I also believe that our core purpose of building great leaders in our willingness to invest And the men and women that are actually getting the work done in the field at our customer sites is an advantage for us. And I think that that's something that's positive where if we can retain our labor force first, then that allows us to continue to build and add. We've also done, you know, some really creative things like one of our businesses has created a an apprenticeship program that's actually certified for fire alarm technicians. So we're able to hire and grow our own fire alarm technicians, and we're doing some things across the business. We've got some really interesting and unique hiring programs taking advantage of the men and the women that are exiting the military service. And, you know, so we continue to be creative as we look to complement and build out, you know, our workforce, because that's something that's very important to us as being in a people-centered business.

Russ, just a very quick last one. No exposure to Russia, Ukraine for legacy or new business?

None. Thank you. Thanks, Andy, and good conference.

We'll take our next question from Julian Mitchell with Barclays. Your line is open.

Thanks very much, and Jim, good to see you last week, and I hope you'll say ours was a better conference. But in terms of perhaps the The free cash flow, first off, just wanted to talk about the expectations there. You had free cash flow, I think, half last year, and then the conversion in the mid-50s. As we look at 2022, you've got maybe some easing of the working cap headwind, but then Chubb's cash flow coming in. So how do we think about free cash conversion in aggregate this year or sort of percentage increase?

Julian, this is Kevin. I'll take that. Yeah, so just as we've talked about previously, you know, 2020 was a year where we consumed working capital as revenue came down throughout that period because of the pandemic. So we ended 2020 with a very low working capital base. As we came back in 2021, we continued to invest in working capital. We talked on the last call about how Q4 was going to be a strong period for us, which it traditionally is. The only difference there was we over-delivered versus expectations in Q4. So didn't harvest as much from Q3 to Q4 as we thought, but still a very strong delivery in Q4, ending at 55%. As we move into 2022, Of course, there'll be some additional investment. We're going to continue to work on working capital rate. I'll say the profile of Chubb's free cash flow delivery is very much in line with our expectation and the delivery of our safety services segment. So we definitely, and as we move into 22 and for the year, we anticipate improving off that 55% number and working back towards our longer-term target, which we've talked a bit about, which is approximately 80%. And with Chubb, we're not changing that expectation or benchmark.

Got it. And so we should expect sort of year-end leverage at 2022 to be, what, around three times or so?

Yeah.

We ended at the close of Chubb, as Jim said, and I referenced, we were about 3.9 times. And You know, there's a couple factors that will depend on how we manage the year, but our expectation is we're going to manage down by approximately one time and target towards 2023 to get to that two to two and a half times.

Julian, this is Jim. Well, first of all, it was a lovely conference as well, so I don't want you to feel slighted. But two, you know, we're going to continue to be opportunistic looking at M&A. And so, you know, we can – if we buy right at the right multiple with a company with good, healthy M&A or EBITDA, then, you know, we can improve our debt-to-EBITDA ratio through M&A. But also, you know, we're going to generate a lot of cash. But as Kevin pointed out, you know, we're going to also be improving revenue through the course of the year, which will eat into cash flow conversion. But we're very bullish on our ability to delever, fund the business. And as Kevin said, you know, we expect on average to delever about one turn a year and be back down to our targeted range of two, two and a half times over the next three years or so.

That's helpful, Jim. And so for the year as a whole, just to sort of sum it up, we're looking at an adjusted free cash flow conversion, maybe in the sort of 70s or 80s, or 70s, let's say, percentage-wise. Is that fair?

Directionally, again, we'll see how the year goes, but we're redeploying cash back into the business. You know, two years ago, I want to say our fleet cash flow conversion was around 115, 120%, you know, which was out of the range. Last year, we were under the target of 80%. But on average, as you look at the business over a three- or four-year period, mathematically, it'll be about 80% per year.

That's great. Thanks very much.

And as a reminder, that is star and one for your questions today. We'll go now to Katherine Thompson with Thompson Research. Your line is open.

Hi. Good morning. And thank you for taking my questions today. And always fun to have a spicy conference call during earnings season. Following on, I appreciated your commentary on the European situation with no exposure in the Ukraine, but pulling the string more and thinking about the unintended consequences or the domino effect that can happen from issues such as this, not only in Europe but in Asia. How are you thinking about mitigating risk and also thinking about rising costs, including fuel? Thank you.

Yeah, so maybe I'll take fuel first.

I mean, we have been on top of the rising fuel prices in communicating with our businesses nonstop as we've seen some of the inflationary pressure coming forward. And wherever we possibly can, we've been adding fuel surcharges to our invoicing, factoring it into our current proposals. And again, Catherine, I would just point everybody to the small project size that we have. You know, EPI's core business, our core life safety services business, our average project size is less than $10,000. Chubb's was approximately $2,500. And, you know, aggregate, we're at $5,000. The quick hitting nature of the work in the services that we provide allows us to factor all of those rising costs into our proposals and really pass them along. You know, as we look at, you know, risk, our, you know, our business in Hong Kong and China is, you know, is high performing business. We continue to, you know, communicate and We have a very, very solid leader, you know, in that business as well. And we continue to communicate, you know, with those individuals and monitor the situation. And, you know, what I can tell you is that, you know, as we need to, we will adapt and adjust and take corrective action. And so, you know, we, you know, really are spending a lot of time. One of the biggest risks in business today is cyber. You know, we have been putting a tremendous amount of effort, you know, into our cybersecurity and making sure that our business is really as best you possibly can be in this environment, protecting itself and building the right fences, you know, around the company so that we can stay protected. And it's getting a tremendous amount of attention. from not only our IT leadership, but, uh, from, you know, Kevin and me and all the way up to, um, through the board level. So, um, we are continuing to monitor, you know, the business and we will take corrective action where we need to.

Okay. Um, very helpful. And, uh, appreciate the reclassification of your, your operating segments. Um, but just to follow on, uh, in terms of kind of your legacy industrial services has been a, a lesser portion of your overall business, is there still right-sizing and trimming of assets that maybe perhaps you're not the best owner? Help us think about just some of those assets as you look forward for planning. Thank you.

Yeah, so first and foremost, we expect in those businesses that were formerly industrial services, we expect some bounce back in fiscal 2022. We're seeing some of the right types of opportunities as we reposition those businesses from a service perspective. And so we're optimistic that going forward that we're not only off the bottom, but we're coming off the bottom and moving upward in the right direction. Regarding disposition of any of those assets, I would just say that across the entire book of business that if we need to prune something, we will prune it. And, you know, This last year was not the time to prune any of those industrial services assets. We will take the time to evaluate that as we move forward through the year and those businesses show improved results. But I would tell you that that holds true for safety services and specialty services as well. We need to be constantly vigilant in looking at which businesses that we have are going to add to shareholder value.

Great. Thank you very much.

We'll go now to John Tonwanteng with CJS Securities. Your line is open.

Hey, guys. Thanks for taking my questions, and congratulations on the nice end to the year. My first one, what are the puts and takes to driving the integration this year with Chubb? And I think if I read your prior press release correctly, the upper and lower bounds of your EBITDA guidance, I guess, you know, maybe what are the gating factors there, number one? And then number two, you know, if you could talk a little bit more about the upside opportunity. I think you've been very broadly positive on Chubb. Do you expect to revise the strategy, you know, upwards as we go through the year or maybe into next year?

Hey, Russ, it's Jim. Would you mind if I just jumped in on this? Because John's trying to take your number up. Okay. John, as many of you guys have heard, and for those that participated in the Barclays and City Conference, and as we've talked about pretty openly, Russ and the team did not have great access from a physical presence standpoint to get into the Chubb facilities and meet with the Chubb teams. And so while we did thorough and robust diligence, Blackstone had their perspective on integration, Alvarez-Marcells had their theories on integration, and so our approach to all of this has been, let's get in there, let's get our boots on the ground, let's remove the theories, let's validate integration ideas and concepts Let's involve the CHUB team along with our team. Let's build an action plan together during the first part of the year. Let's then assign projects to people, assign accountability, put incentive plans in place, and begin executing on those in the back half of the year, but make sure that we have ownership of those plans. and we validate them across the entire platform, across both sets of teams. And so, you know, we have $20 million built in the plan. You heard Kevin and Russ talk about You know, we see incremental opportunities, but we're going to do this thoughtfully. This is a three-year program to raise margins to 13% plus. Chubb is part of that. And so, you know, we'll be talking about it, but as you also heard Russ say, you know, Chubb is now a brand. We're one company, one team. And so, you know, together we will row the boat forward. But as Russ has also said, this is the center of the fairway transaction. And so, you know, the things that are going to be the variables are going to be supply chain, inflation, incremental COVID variation, you know, variants and things like that.

But that's life. Understood, Jim. Thank you.

And once again, that is star and one for your questions today. We'll go now to Indy Whitman with Baird. Your line is open.

Great, thanks for taking my questions. I guess maybe for Kevin, I mean, on the margin improvement initiatives you guys have done, you've improved the loss-making projects, the customer selection. There's various tick points that you guys have laid out over the years about how margins are going to go up. One of them was about putting new back office systems in, get on the same system, get more efficient that way, and I know that's an ongoing process. So I was hoping you could give us an update as to where you are in that process. and when you expect that IT integration to start delivering towards your margin expansion goals.

Hi, Andy. Thanks for the question.

Yeah, so as we look at our combined platform with Chubb, so we said last year at our investor conference that certainly this was one of the areas that we saw opportunity for leverage and productivity as we move forward here and to drive continued scale across our business and certain you refer to as back office functions and or potentially even procurement and some other areas. As we went through the back half of this year, we put that on hold, really looking at wanting to look at Chubb, too, and look at what we're doing in the context of those Chubb businesses. And so I shouldn't even have said hold. We paused it or slowed it down as we understood – what the Chubb transaction needed to look like and the work needed to look like in 2022. As we conclude on our Chubb planning here in the first half of the year, we are going to turn an eye back to that and look at how we can now build out a back office leverage program that includes Chubb in our legacy businesses as we go forward here. So I don't anticipate seeing anything on that in 2022, but the work will get back underway in the back half of the year that should help us as we move forward here.

Okay, that's helpful. I guess another one for you. You gave us all the pieces here walking from EBITDA down to EPS, but just make sure that my math is right. It sounds like at the midpoint you guys are thinking around $1.32 on adjusted EPS. Is that correct? Is that about right with the assumptions you gave us on the breakdown there, Kevin? Or what's the EPS range that's implicit with this guidance maybe?

Yeah, for 2022, yeah, we're at or around $1.32, $1.33 at the midpoint. Yeah.

Okay. That's all I had. Thanks a lot, guys, for your time.

Thanks, Andy. Thanks, Andy.

This will conclude our Q&A session. At this time, I'd like to turn it back to Russ Becker for closing remarks.

Thank you. In closing, I would first like to start by thanking all of our team members for their efforts in 2021. And I'm particularly proud of the progress that we've made, you know, in the midst of all the different challenges that the business faces. So I'm truly grateful for everyone's hard work and efforts. I'd also like to take the opportunity to thank each of you for joining the call this morning and your continued interest in API. We truly look forward to updating each of you throughout the year as we continue to cross many, many milestones and drive the business forward. So thank you and have a great rest of your day.

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