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spk10: Good morning, ladies and gentlemen, and welcome to API Group's first quarter 2022 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.
spk00: Thank you. Hello. Good morning, everyone, and thank you for joining our first quarter 2022 earnings conference call. Joining me on the call today are Ross 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, May 4th, and we have no obligation to update any forward-looking statement we may make. As a reminder, we have posted a presentation detailing our first quarter financial performance on the Investor Relations page of our website. Our comments today will also include non-GAF 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 press presentation. Also, as a reminder, there's a presentation containing supplemental information relative to prior periods and other useful information for investors available in the presentation section of our website. It is now my pleasure to turn the call over to Martin.
spk09: Thank you, Olivia. We are proud of the approximately 26,000 leaders at API and focus and effort they put forth in navigating another complicated backdrop to the quarter. It was just over three years ago that we first met Russ and discussed building a business together, primarily based on our view that a statutorily required services strategy is economically resilient and that these activities were necessary no matter what the economic climate might be. Throughout the challenges since that initial meeting, from navigating the COVID-19 pandemic to dealing with supply chain disruptions and inflation to acquiring and integrating the Chubb platform, the team has never lost sight of serving our customers safely and efficiently. We're grateful for their unwavering commitment. The integration at Chubb is off to a good start, and the strategic rationale for the transaction is proving even stronger than initially anticipated. Our belief when acquiring the business was that the acquisition would not only position API well for continued success and improve the protective moat surrounding the business, but that it would also create significant upside for shareholders and employees. We believe that the combined business will offer customers more customized and proprietary offerings through our uniquely trained technicians, as they are called in the U.S., or engineers, as they're called in Europe. We believe that the skills of our technicians and engineers, combined with our suite of offerings, is a distinct competitive advantage. In addition, we believe that our scale will drive synergies and savings that can be redeployed back into the business to accelerate growth while enhancing margin expansion. We have great confidence in the business and the direction we're heading. We're excited about the opportunities for the company in the years ahead and look forward to updating you on our progress throughout the course of the year. With that, I'll hand over to Russ.
spk12: Thank you, Martin, and good morning, everyone. Thank you for taking the time to join our call this morning. I will begin my remarks by commenting on our strong start to 2022, the positive momentum we have across the entire business, and the key factors that we believe support the resilience of our business. I will then provide an update on our ongoing integration at Chubb before turning it over to Kevin to discuss our financial results and guidance in more detail. We saw continued robust demand in the first quarter across our key end markets. For the three months ended March 31st, 2022, net revenues increased on an organic basis by approximately 16%, driven strategically by healthy growth in inspection and service revenue across the majority of our markets and safety services, as well as general market recovery in safety and specialty services, compared to the prior year period, which was negatively impacted by the COVID-19 pandemic. We estimate that approximately two-thirds of this growth was driven by price and pass-through of material and labor costs, and one-third was driven by volume, which we measured through labor hours. It is important to note that this will shift over time based on our mix of work and macroeconomic factors such as inflation. This growth is tactical as we focus on margin expansion because on average, inspection and service revenues generate 10% plus higher gross margins, and monitoring revenues generate 20% plus higher gross margins than contract revenue. Going forward on an annual basis, we intend to provide detail on our consolidated backlog. While this metric has less relevance to API, Given our focus on inspection and service revenue and our goal of reducing our contract loss rate, it does provide a barometer of the trends in the markets we serve. Our consolidated backlog continues to build and was at a record high level of $3.6 billion as of the end of March, providing us with a solid foundation for growth as we move through the rest of the year. Backlog was up over 10% compared to the end of December 2021. including Chubb. It's important to note that while backlog is an important indicator of the positive momentum that we have in the business, we remain focused on discipline, project, and customer selection, and therefore, we do not expect to see backlog growth each quarter. We remain focused on running the business regardless of what's going on in the macro economy. Whether dealing with challenges faced in navigating supply chain disruptions, inflation, the COVID-19 pandemic, increased volatility in the economic climate, geographic anomalies, weather, or other, we believe that there are several key factors that strengthen the resiliency of our business and help to reduce the impact of an always volatile business environment. First is our people. Our core purpose of building great leaders continues to define who we are. It is our identity and our culture. We believe that it is the unifying principle that connects everyone within our business, regardless of their role. This purpose is particularly important as we integrate the Chubb team into API. You've heard me say that the Chubb business was somewhat neglected over the years under prior ownership. Bringing the team into the fold at API is a key part of the integration of the business. We believe that great leaders, among many things, create great shareholder value. As COVID-19 becomes more endemic, we recently held our first in-person two-day leader lab. It was an opportunity for 125 leaders across our global businesses to benefit from API's culture of organizational sharing of knowledge and best practices and collaboration across businesses. We have spent approximately $30 million on leadership development over the past five years, and plan to continue to invest in and support our leadership development culture, which we believe empowers the leaders across our businesses, drives business performance, and increases future cross-selling opportunities. This investment is unique in our industry, and we believe that it is a competitive advantage. Our employees, technicians, and engineers have careers, not jobs, and we believe this investment reduces turnover, aligns communications, and drives performance and productivity. This is a competitive advantage for API, particularly when many companies see team members opt for new opportunities. Second is our recurring revenue services-focused business model. The regulatory-driven demand for our services provides predictable, higher-margin recurring revenue opportunities. We liken this to a protective moat around API. Our go-to-market strategy in safety services is to sell inspection work first because we estimate that every dollar sold can lead to three to four dollars of subsequent service work. This strategy differentiates us from our peers and ultimately creates a stickier client relationship that we believe positions us as the preferred life safety and security services provider in the buildings where we perform the inspections. Following the completion of the Chubb acquisition, we achieved our previously stated goal of more than 50% of our revenue coming from inspection and service. As a result, we are now moving the goalposts to the right and have a new goal of 60% plus. Third is our revenue diversification across geographies and markets, customers, and projects. Our global footprint with approximately 500 plus locations in 20 countries allows us to maintain relationships with local decision makers while also having the ability to execute multi-site services for national and international account customers. We believe that our low customer concentration with no single customer representing greater than 5% of our revenue and the diversity of the end markets we serve help to build a protective moat around the business. We believe that this too is a competitive advantage. The last point I'd like to highlight is the relative variability of our cost structure, which provides us flexibility to effectively navigate the changing market. Our significant union labor force in the US and subcontract labor force internationally allows us to flex our workforce capacity as market conditions dictate without incurring significant trailing costs or severance. As we've discussed on prior calls, Our average project size is approximately $5,000 in our largest segment, safety services, and $75,000 in specialty services. In addition, the average duration of our projects is short, which we believe allows us to reasonably control inflationary variables and manage our supply chain. We remain focused on real-time pricing and operational efficiency to ensure true costs are reflected in the services we provide. As many of you heard us say previously, our business is not immune to macro marketplace disruptions related to supply chain disruptions and inflationary cost pressures. In general, we believe we've adjusted our project pricing models to pass through these inflationary pressures. With that, a significant step up in revenue related to pass-through pricing on project materials will compress our margins in the short term. That said, we remain laser focused on our long-term margin expansion levers, inspection visits, service revenue, monitoring accounts, and inflationary pricing on these recurring services, because we believe this focus will allow our margins to bounce back quickly as we move away from the current inflationary environment on the material side of our business. 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 margin expansion goal of 13% plus adjusted EBITDA margin by 2025. Before turning the call over to Kevin, I would like to provide an update on our ongoing integration at Chubb. We are pleased with the progress made so far in the four months post-close and are excited about the opportunities that lie ahead. We continue to build up the depth of our team to ensure we are well positioned to integrate and manage our global footprint. We have recently added resources with significant international and integration experience in areas such as human resources, procurement, accounting, finance, and IT. The first half of this year is focused on ensuring the steps are in place to remove the business from carrier's infrastructure bringing our branch-led operating model and metrics into our platform, validating synergy assumptions developed during the initial due diligence efforts, and evaluating the quality of the leadership team to ensure we have the right resources and right people in place moving forward. There has been a significant amount of time and effort spent across multiple functional areas to develop actionable, measurable, and executable multi-year plans to leverage our combined global platform. Our initial assessment prior to closing of the acquisition was that we believed we could capture $20 million in savings in a business that had been historically under-invested in. After having our team on the ground for the last 90 days and working with local leadership, I am pleased to report that we believe we now see a clear path to value capture opportunities that are at least $40 million. We expect this figure to continue to evolve and grow as we learn more and we believe that most of the projected value capture opportunities can be achieved within three years. It is our intent to reinvest some of the initial cost savings to help position us to maximize the opportunities that lie ahead. We plan to provide a more detailed report to investors of our plans and the opportunities for the business later in the year. There is significant work still to be done and we are in the very early days of this opportunity. The business is performing in line with our expectations. We've had no negative surprises, and more importantly, what we have found has only reinforced our excitement about the acquisition. The opportunities are there to not only reduce costs, but also to drive top-line growth, and I look forward to continuing to report on our progress. In summary, I am pleased with the forward progress of our businesses and what has been achieved in the first quarter. We feel good about the momentum we have across the board and the outlook for the balance of this year and the years ahead. I would now like to hand the call over to Kevin to discuss our financial results and guidance in more detail. Kevin? Thanks, Russ.
spk03: Good morning to those who have joined online. I'll begin my remarks by reviewing our consolidated results and segment-level operating performance before turning to our guidance. As a reminder, the Chubb business is reported within our safety services segment and will be excluded from our organic net revenues until 2023. Reported net revenues increased by 83% to $1.5 billion compared to $803 million in the prior year period. This was driven by acquisitions completed in safety services and strong organic growth in safety and specialty services. Adjusted gross margins grew to 26.4%. representing a 371 basis point increase driven by an improved mix of inspection and service revenue resulting from recent acquisitions completed in the safety services as well as organic growth and improved productivity in specialty services. These factors were partially offset by supply chain disruptions and inflation, which caused downward pressure on margins. Adjusted EBITDA margin was 8.7%, representing a 111 basis point increase compared to prior year period, driven by an improved mix of inspection and service revenue resulting from acquisitions completed in safety services, as well as strong organic growth. This was partially offset by supply chain disruptions and inflation, which caused downward pressure on margins. As Russ mentioned earlier on the call, net revenues increased on an organic basis by approximately 16% compared to the prior year period. Excluding the impact of acquisitions completed in safety services over the past 12 months, both gross profit margin and EBITDA margin improved on a year-over-year basis. Adjusted diluted earnings per share for the first quarter was $0.23, representing a $0.13 per share increase compared to the prior year period. The increase was driven primarily by strong organic growth in safety and specialty services and the accretion from the acquisition of Chubb. Our adjusted free cash flow for Q1 was a negative 47 million. While Q1 is traditionally our lowest cash flow quarter, Q1 2022 was further impacted by working capital build to cover supply chain disruptions and to support our strong revenue growth. Or said another way, in a world of supply disruptions and limited availability, we made the decision in Q1 to ensure we had supply in front of our work needs. We also saw cash use in acquisitions to rebuild working capital, where we took the offset benefit as a purchase price reduction. That said, we anticipate most of the supply chain-related working capital investments to be temporary and to be recovered by year-end, and we expect our adjusted free cash flow conversion for the year to be in excess of prior year levels on the way to our long-term average adjusted free cash flow conversion goal of 80%. I will now discuss our results in more detail for safety services. Safety services net revenues for the three months ended March 31, 2022 increased by 130% to $1.1 billion compared to $466 million in the prior year period, primarily driven by revenue from completed acquisitions. Net revenues increased on an organic basis by 14.6% compared to the prior year period driven by 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 COVID-19 pandemic. Adjusted gross margin for the three months ended March 31, 2022 was 31.5% compared to the prior year adjusted gross margin of 31.5%. This is primarily driven by an improved mix of inspection and service revenue, offset by supply chain disruptions and inflation, which caused downward pressure on margins. Adjusted EBITDA margin for the three months in March 31, 2022 was 11.8%, representing a 169 basis point decline compared to the prior year period, primarily driven by the impact of completed acquisitions, supply chain disruptions, and inflation, which caused downward pressure on our margins. These factors were partially offset by an improved mix of inspection and service revenue. I will now discuss our results in more detail for specialty services. Specialty services reported net revenues for the three months ended March 31, 2022. Sorry, specialty services reported net revenues for the three months ended March 31, 2022 increased on an organic basis by 19.8% to 412 million compared to 344 million in the prior year period. driven by an increased demand for specialty contracting services and general market recovery compared to the prior year, which was negatively impacted by the COVID-19 pandemic. Adjusted gross margin for the three-month end of March 31, 2022 was 12.1%, representing a 196 basis point increase compared to prior year, primarily driven by improved productivity and improved mix of service revenues. These factors were partially offset by supply chain disruptions and inflation, which caused downward pressure on margins. Adjusted EBITDA margin for the three-month end of March 31, 2022 was 5.6%, representing a 93 basis point increase compared to the prior year due to leverage on higher volume and an improved mix of service revenue. These factors were partially offset by supply chain disruptions and inflation, which caused downward pressure on margins. I will now discuss our guidance for 2022. While the macro environment became more uncertain during the quarter, the resiliency of our business and top line momentum give us confidence to increase our guidance expectations for net revenues and confirm our prior guidance for adjusted EBITDA. We now expect full year net revenues will range between $6.45 to $6.6 billion. up from $6.3 to $6.5 billion, and expect growth in net revenues on an organic basis at constant currencies will be between 8% and 9%. This is up from prior guidance to 6% to 7%. We remain confident in our full-year adjusted EBITDA guidance of $650 to $700 million, as provided in our February 23 press release. As we commented on our last call, Where we will end up within the range will largely be dependent on the speed with which we finalize and implement integration activities across our platform, the further impact of supply chain disruptions and inflationary pressures, our revenue growth, and exchange rate movements during the year. For the second quarter, we expect net revenues to be $1.65 to $1.7 billion, up from $1.5 to $1.625 billion. and adjusted EBITDA to be 170 to 180 million, which is consistent with our prior guidance. As mentioned on our last call, we anticipate interest expense for 2022 to be approximately 120 million, depreciation expense to be approximately 85 million, CapEx to be approximately 90 million, and our adjusted effective cash tax rate to be approximately 24%. From a capital allocation perspective, continue to target an average adjusted free cash flow conversion of approximately 80% and intend to use the cash generated to reduce net leverage to return to our targeted long-term range of 2 to 2.5 times over the next couple of years. As we have previously said, with a target of an average of 80%, some years may be closer to 70% and some may be closer to 90%, but on average we think 80% is a reasonable target over the long term. When we believe our own company represents the best available investment opportunity, we may repurchase shares. To that end, in March 2022, the board authorized the new stock repurchase program to purchase up to an aggregate of 250 million shares from time to time. This is reflective not only of our confidence in our ability to execute, but also in our ability to generate cash. Our adjusted diluted weighted average share count for the first quarter was 269 million, which is approximately 40 million higher than we had as of fourth quarter 2021. The increase is primarily driven by the dilutive impact of 333 million shares relating to the 800 million perpetual preferred equity financing used in connection with the Chubb transaction. Rather than trying to determine the probability of conversion from time to time, we think it makes sense to consistently reflect our adjusted results assuming the conversion. We expect our adjusted diluted weighted average share count for the second quarter to be approximately 270 million. I'll now turn the call over to Jim. Jim?
spk08: Thank you, Kevin. Good morning, everyone. As everyone has said, we are grateful for the efforts of our leaders who navigated a complicated backdrop and drove strong results in the first quarter. We are pleased that the business has improved. what we believe is strong momentum despite a choppy macroeconomic environment. Clearly Russ and Kevin and the entire leadership team are focused on operational performance and successfully navigating all the macro turbulence since we became a public company two years ago. We couldn't be more pleased with the performance of the business to date and the trajectory of API. As co-chairs, Martin and I view our role as providing our unique resources and the benefit of our shared experiences to help API perform at the highest level and thereby drive shareholder value. From our perspective, the company is doing what it needs to do and is positioned well for success, having added new leaders to the bench with unique global skills to help drive performance. Additionally, new resources and tools are being added each month to improve efficiency and performance. We are pleased to provide the investment community new insights into the business on this call to help you understand the business better. We intend to continue to evolve the detailed information provided quarterly and look forward to providing more color on our strategic activities related to the acquisition of Chubb later in the year. We intend to maintain a relentless focus on recurring service revenue, disciplined project and customer selection, pricing opportunities, leveraging our spend, driving operational excellence, and realizing synergies from the acquisition of Chubb as we work towards our adjusted EBITDA margin goal of 13% plus by 2025. We will continue to remain responsive to opportunities within our business and to the macroeconomic environment in which we compete. We continually assess how the best to deploy our resources against our three primary growth drivers, optimizing the performance of our existing businesses, effectively managing our capital structure, and investing capital in our business, including evaluating opportunistic acquisitions. And with that, I'd now like to turn the call back over to the operator and open the call for Q&A.
spk10: At this time, if you'd like to ask a question, please press the 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 to ask a question. We'll take our first question from Andy Kaplitzewicz from Citigroup. Your line is open.
spk05: Close. Good morning, everyone. We'll just stick with Andy. Andy's fine. I've been called worse. So maybe first question, I know you just raised organic guidance to 8% to 9% versus the 6% to 7% that you had, Russ. Maybe you could talk about the assumptions in that increase. Is that all pass-through in pricing, or is there at all a volume increase in there? And then obviously, you grew mid-teens in Q1, and again, you talked about pass-through pricing. and pricing being two-thirds of that, it was still higher than our forecast. Again, was that all pricing and pass-through, or were there areas of your business that are outperforming your own expectations?
spk12: So, Andy, in my remarks, I said that two-thirds of that was, you know, pricing pass-through, and one-third of that was volume. You know, we track, you know, man hours by business unit actually on a weekly basis, and that's, you know, really how we keep our eye on the ball as it relates to the differing trends that we are seeing, you know, in the business. And so, you know, we've been, you know, really, I guess, forward in our conversations with our different business unit leaders as it relates to price and making sure that we're trying to stay out on the forefront on price. But it's, you know, really it's about two-thirds of that is price.
spk05: Okay. And then, Russ, maybe asking you about sort of Chubb in this context. Obviously, you know, going to $40 million of synergies looks good. Can you give us more color into where you're seeing the extra synergies as you're now on the ground? And then maybe talk about the probability that $40 million could, you know, move higher over time. And has the timeline changed at all from when you get these synergies? I think you had said 18 to 36 months.
spk12: Well, I think the 18 to 36 months is realistic. I mean, as we look at some of the different countries that we operate in, the processes that you have to go through to make some of the changes that will ultimately need to be made in these businesses takes more time than it would potentially in the U.S. And so I think thinking about things in that timeframe is really realistic, and it's not all going to happen in day one, and you're ultimately looking at having probably two phases of some of the changes. I would say that as we spend more time in the business and we start to focus on driving the business really towards a similar branch-built model that we currently have in our really core life safety business, that's where you start to see you get more visibility into some of the changes and what needs to be done to empower the branches and empower the branch leaders versus, say, having the business served from corporate. And so as we spend time in the business, and we've had a number of different visits to Western Europe, we can see it. Like, you can really see what needs to be done in this business. It actually gets me really excited because you have more and more clarity around, you know, what needs to be done as we continue to try to drive towards this branch-led operating model, which is exciting. We also get very excited when we look at the procurement opportunities. There's a You know, we felt like we weren't scratching the surface just as a core API from a procurement perspective. You know, and now as we're continuing to build out our procurement team here, you know, we see combined synergies between, you know, the scale of both businesses coming together. And we see really a nice opportunity for us to take advantage of that. And really, when we were talking a little bit about this yesterday, Kevin used the frame, we're scratching the surface on commercial opportunities. And we're just really getting going there. And there's going to be a number of opportunities for us to cross-sell with the existing business, take advantage of some of these multinational customers that we have that we're already starting to have some some dialogue with trying to tap into Blackstone's real estate portfolio. So there's a number of things that really give us great confidence that that $40 million is there, and it will continue to evolve, and we'll continue to keep you informed in that process.
spk08: Andy, if I could chime in. I mean, one of the things that I think what Russ and Kevin and the team are doing that I think is different than what has historically occurred under prior ownership is Russ is out there pounding the pavement, visiting places where senior leaders have never visited before. He's working with the leaders in individual countries and having them build bottom-up plans rather than being told top-down what to do and From those bottom-up plans, you know, you're getting ownership from country managers on what to do how to do it you know, it's their plan rather than someone in some other country just telling them what to do and And so there's a lot of buy-in on what needs to happen, when it needs to happen, who's accountable, and what the economic return is. And, you know, we're in early days of that, but it's really a team effort that Russ is driving rather than an administrative directive. Appreciate all the color, guys.
spk10: Our next question comes from Marcus Minimer from UBS.
spk07: Yes, hi, good morning, everyone. Maybe I, morning, hi. Maybe I'll follow up on the discussion you just had there. What's the cadence then to get to the bottom-up branch-led platform? What has to happen between now and then, sort of like if you think forward two years? So is it kind of ripping out the old IT platform, or what's the process to get there? Can you give us a bit more color on that?
spk12: Well, Marcus, good morning. Thank you for your question, and thanks for participating this morning. First and foremost, we have to carve this business out from Carrier, and that has to be our number one priority. And there is a lot of work to do there. Specifically, I would say probably the two biggest work streams would be in the area of IT and HR. And, um, you know, that needs to be the primary driver and the focus. Okay. So that is, that takes, you know, some resources and it takes, you know, the right talent, um, both from the Chubb side and, and our side, and we are prioritizing that. All right. So it's, it starts there and, uh, and that doesn't mean you can't make some changes that, that you need to, uh, to be making. And we've already started to, you know, to execute on that where it's appropriate. in some of the different countries. And so, I mean, it's just one of those things. It's like an ore freighter in Lake Superior. You don't change the direction of that ore freighter in a matter of minutes. It takes some time. And our branch-led business model, operating model, is somewhat different than the way You know, the Chubb business has been built over the many, many years with under, you know, UTC and carrier ownership and leadership. And so changing that and finding the right mix between, you know, their model and, you know, where we are from an operating perspective, you know, is ultimately going to take some time. And the other aspect of it, too, that we don't, most of us don't think about is that we still don't have access to Hong Kong. We still don't have access to China. as those countries continue to suffer from lockdowns associated with COVID. So we are diligently building plans. We are focused on being prepared to execute on our, so to speak, our phase one changes that we need to make and are already trying to take advantage of some of the procurement opportunities that are going to happen there. So I just go back to 18 to 36 months is a realistic timeframe, and we want to be realistic with you and what we share with you. But trust me, we are very active in the business, and we'll be attacking all fronts as we see that opportunity present itself.
spk07: That's very helpful. Thank you. And maybe one more on backlog, the $3.6 billion. I appreciate the update to the guidance here for the rest of the year. How should I think about that $3.6 billion? Obviously, a lot of projects in there. What's your ability to reprice once you put that into the backlog? And what's your visibility there on margin across that $3.6? Thank you.
spk12: So number one, that includes our contract installation backlog. It also includes larger time and material projects with our industrial maintenance customers. It would also include our anticipated work under certain master service agreements and blanket contracts. So it's not just, so to speak, fixed price, lump sum contract-related work. There is a variety of opportunities that's included in that $3.6 billion. And margins vary based on segment and based on individual company, to be totally honest with you, Marcus, inside that. We have confidence in the margins there. We've been preaching price. We've been preaching protecting yourself in your contract languages, which goes back to your original proposals. to make sure that you're protecting yourself from inflationary pressures associated with it. So we have really good confidence in the quality of the backlog that we have, but it would be extremely difficult for us to give you an exact margin percentage based on it would vary by segment and by business.
spk07: Got it. Okay, great. Thanks for the call. I'll get back into it.
spk10: Our next question comes from Julian Mitchell from Barclays.
spk06: Hi, this is Kieran Patel O'Connor on for Julian. You know, just looking at the 60% plus new target for inspection and service revenues, when do you think you'll be able to achieve that and what actions are you guys taking to reach that goal?
spk12: Well, I mean, you know, the reality of it is, you know, I can't tell you if we're going to get there, you know, in three or four years, to be totally honest with you, Kieran. So, you know, it's really driven by our relentless focus on growing the inspections. And, you know, our inspections, you know, were up again recently. you know, on a year-on-year basis, you know, for this quarter, which really gets us excited. We had really solid growth, you know, in that piece of the business. You know, we need to drive that inspection first mindset, you know, into the Chubb business so that, you know, they're thinking about things, you know, in a very similar fashion that we are. And as long as we continue to grow the inspection piece of the business, we know that we're going to grow the service piece of the business, which is the recurring revenue portion of it, and we're going to incrementally make gains on it each and every year, and that's what's positive for us. And that's where we're driving the business to, and that's what is our biggest focus. We still have work to do as we, you know, continue to build out our inspection sales team. And that is happening and ongoing, you know, every single day. And that's really our number one strategic priority, you know, across the business.
spk06: Got it. Thanks. And I have one follow-up. I'm just looking at, you know, the $40 million synergy, you know, number that you talked about. For the cost to achieve that, should we assume some sort of similar timeline, or how should we think about that?
spk12: Well, I guess we said that we believe that we're going to capture those synergies over an 18 to 36-month period of time. And that's where our focus is. As I said earlier in my remarks, You know, our number one focus right now is the separation from carrier, and that needs to continue to be our priority. But we believe that we see opportunities up to $40 million, and, you know, hopefully that's going to continue to evolve, but it's going to take us that period of time to capture.
spk01: Got it. Thank you.
spk10: Our next question comes from Ashish Sababa from RBC Capital Markets.
spk02: Hi, this is John Mazzoni filling in for Ashish. Congratulations on the strong results. Given the higher international tensions, and I think you mentioned this previously on Hong Kong and China, could you just walk us through how you're navigating international risks and any of the actions you're doing perhaps in Europe on knock-on effects or any other things you're seeing in terms of just kind of the overall business environment. Thanks.
spk12: Well, I think, you know, when I think about, you know, navigating, you know, risk, you know, obviously, you know, we continue to watch, you know, how things continue to evolve in Ukraine with Russia. We have very little exposure to that. Our legal team has stayed on top of that, you know, looking at areas where We may have customer ties to Russia and what sort of impact that may or may not have on the business. But it's very, very low and it's been extremely small. As it relates to how things potentially evolve with China and the position China takes, that's something that we continue to keep our eye on. Our exposure in China is small. The majority of our business in Asia is focused in Hong Kong. And we continue to really just keep our eye on it and have open dialogue about any sort of risks and what sort of action planning that we may have to take if there is potentially additional problems and challenges there.
spk08: I think from Martin and I were talking the other day, You know, it's kind of funny that since we've been a public company, we've known nothing but headwinds. You know, we went public and so did COVID. And, you know, then we've had supply chain issues. And, you know, it'll be interesting when the world just calms down a little bit. But this company has performed amazingly well and put up the numbers that it has put up in what has been a crazy couple of years. And so it's just going to be interesting when the waters smooth out and you get a bit of a tailwind in what's going on in the macros. But look at how well we've performed over the last couple of years with global headwinds that have nothing to do with the business. I really think you really see the resiliency of how the business is set up and what we call the protective moat. And so, you know, we look forward for the day when the world just takes a breath.
spk02: Great. Thank you for the color. And maybe quickly, could you just remind us on labor and how the union workforce in the United States, the subcontracted workforce internationally helps? It sounds like the color around the 30 million spent over the past five years on leadership development is helpful, but just maybe around what you're seeing in the hiring environment and how you think you can pretty much navigate that as well, just because the issue of kind of the tough labor market today. Thanks.
spk12: Yeah, so there was a lot there in your question. So first, just to tackle the union component of it. So the majority of our workforce is union. That does a couple things for us. It gives us really good visibility into their wage rates and the cost structure associated with that. And even going through this kind of a challenging time from a people perspective, in our collective bargaining agreements that have come up for renegotiation, I would tell you that they've all been resolved and settled at very fair basically wage packages and escalation in those wage packages. I've been actually very impressed with the leadership of the union and how they have been reasonable in their expectations and haven't tried to take advantage of the hot labor market and situation there. The other aspect of the union aspect of it is when Friday afternoon comes and we don't have work for that individual on Monday, we can basically lay them off and send them to the union hall without any trailing severance costs. That's all built into their wage packages. And so that gives us much more flexibility to flex up and down as we need. What you see commonly in Western Europe, specifically around installation work, is the use of a lot of subcontract labor instead of having permanent employees. And that allows them greater flexibility to flex up and down based on what their needs are. And so you'll see them use subcontract labor more often than they would have, say, having full-time employees. Regarding the $30 million investment in leadership development over a number of years, I would just tell you that – you know, we have believed for almost 20 years now that investing, you know, in our people and investing in our people as leaders and as human beings is what's ultimately going to drive, you know, the greatest results in create shareholder value. And, you know, it's really proven itself true. The industry has done, the men and the women that are actually doing the work in the field, they've done them a disservice. And, They haven't made the level of investment in those individuals in the same way that, say, they have in their office personnel and staff. And from my perspective, that's an absolute shame. Almost 70% of our workforce is showing up on our customer sites every single day. And those men and women want to be invested in as human beings just like you and me. And I think that's one of the things that, you know, that we've done that's unique at API is that we've taken our leadership development efforts to those men and women. And I think that is something that creates a unique environment for us that people will want to be a bigger part of something that stands, you know, our purpose of building great leaders. I mean, that means something and it stands for something, you know, bigger than an individual self. And I think that's something that is unique to what we're trying to accomplish at API. And I think that's something that we can do and bring to the Chubb organization. We already have one individual from our team that we're planning to relocate to London. He was the individual that originally helped stand up our leadership development efforts way back in the early 2000s. and he's going to relocate to London and help bring that effort to Chubb. So we're already thinking about how are we going to bring that same energy and enthusiasm from a leader development perspective to the Chubb organization. And as I said in my remarks, I really think that that's going to be a big part of the integration and a big part of what makes the Chubb organization successful as we move this thing forward.
spk02: Great. Thank you so much for the caller.
spk10: Next question comes from John Tang Wong Ting from CJS Securities.
spk13: Hi. Good morning. Thanks for taking my question. My first one is, what gives you the confidence in reaching the target margins? Just given the pace of the inflationary environment we're seeing, I understand that, you know, you can grow profit dollars in line with the expectations or maybe a little bit better. But getting to the margin percentage just in this environment, what's driving that? Is it maybe an expectation of moderating inflation, more synergies, or something else that we should be thinking about?
spk03: John, hey, this is Kevin. I'll take that one. You know, when we look at what's going on this year with the significant pass-through that Russ talked about, you think about some of our businesses. If you take one of our businesses in the specialty services segment as a proxy, you fabrication, you know, they're obviously seeing a significant run-up in revenue due to what we're pushing through from a price standpoint related to steel. You know, that's going to compress margins this year. All that said, they continue to focus, and you can use that company really as a proxy for our contract work especially and broadly. They continue to focus on productivity initiatives and continue to push more and more of our offering through that service and recurring revenue. So in a year like this where we see the run-up, of course it's going to compress margins, but as we continue to focus on the long-term levers that we've talked about, you know, for the last couple years and this inflationary pressure subside, we expect there to be, you know, a higher ramp, let's say, next year and the following year in our margins as we see that work start to show up and as the material or inflationary impact due to material costs subside.
spk13: Okay, great. Appreciate that. And then second, Kevin, this one's actually for you. What is your expected interest expense for the year just given the expectation of rising rates, and are you comfortable keeping that at a floating rate at this point?
spk03: Yeah, our expected full-year interest expense right now is $120 million. And we're comfortable with that, if that's your question. You know, we're forecasting as we do based on, you know, sort of the mix of fixed and floating that we have.
spk01: Okay, great. Thank you. Yep.
spk10: Our next question comes from Catherine Thompson from Thompson Research.
spk11: Hi, thank you for taking my... Hey, Catherine. Hey, how's it going? Thanks for taking my questions today. Just in terms of, this is just a bigger picture, you know, understanding you're more services-focused, but I guess a backdrop, how are you thinking about managing inventories and just basic goods as the world shifts from a just-in-time to more of a just-in-case? And how relevant is this trend really for API?
spk08: Kevin, do you want to talk about that a little bit on our cash flow?
spk03: Yeah, so, yeah, Catherine, I think in the remarks I mentioned this as well, but you see, you saw the impact of, I think you said it well, instead of, you know, just in time, we're trying to get in this world where availability sort of gets you on defense a little bit. We're doing what we can to get materials, you know, in our businesses and to our jobs in time to do the work that we need. And noting the growth rates that we're seeing, that's become really, really important. Also, in my mind, we saw that as a working capital investment here in the first quarter. Obviously, as we move through the year, we expect for that to work itself through and have less of an impact as we move sort of Q2, Q3, and into Q4. So we think the most significant impact we're going to see really is in the first half of the year, and we expect to work a lot of that off in the back half of the year.
spk11: Okay. And what are you seeing in terms of supply chain timing from others in the construction cycle? And with your next goal of 60% of your revenues coming from service, how much of this is organic growth versus acquired?
spk12: Catherine, this is Russ. Good morning. Majority of your growth in inspection and service is going to be organic. um, you know, you're, you might have some small, you know, M and a activity associated with buying customer accounts, et cetera, that, uh, that will, you know, be additive onto that. But essentially, you know, you can count on most of that being, being organic, um, you know, by, by nature. And, um, the, uh, you know, when you think about inspection and service, uh, the lion's share of the work that's being done there is labor. And, um, And so from a supply chain perspective, as we continue to grow that, we become less and less susceptible to supply chain related issues. I mean, you have component issues, you know, from a fire alarm perspective and security, you know, on the security side of the business that, you know, has been seeing some challenges, you know, in the last number of months. PICE is also, you know, an item that we continue to keep a close eye on. You know, we... Pipe is a big part of, you know, what we do in all aspects of our business. And so we continue to monitor not only cost but availability. But as we continue to grow the, you know, the inspection and service side of the business, we become less and less susceptible to those issues and challenges.
spk11: Okay. And what sequential trends are you seeing in terms of types of projects that are kind of in the proposal pipeline? And then I guess importantly, who are you taking market share from?
spk12: Well, I think that, you know, I think, you know, to try to address the first part of your question, I think the end markets that we serve, you know, continue to be very strong and very robust. You think about the data center space and, you know, what companies like Facebook, Microsoft, Google, what they're doing and the investment that they're continuing to make, you is really positive for us from, from both a, you know, installation, but more importantly, an inspection and service space, you know, semiconductor, the Intel's of the world, you know, continue to provide robust opportunities, you know, you know, for us. And I think that, I think that that's, you know, something that we need to continue to stay focused on is being in the right, you know, end markets and, the opportunities from both an inspection and service perspective and ultimately an installation perspective will continue to be robust. What was the second half of your question, Catherine? I'm sorry.
spk11: Just really, who are you taking market share? I mean, who are the big buckets in terms of taking market share? Because one of the things that's happening in a post-COVID world is the bigger getting bigger, but also it gets down to service. So we see this as an opportunity to take share, which it appears that you are, from others that just don't have as good access to products and people. So it's really one of the big buckets where you're seeing market share gains.
spk12: Well, I mean, the industry is so fragmented. And And I think that so, you know, we're going to be taking share from, you know, a lot of smaller, more family-owned type businesses in the regional and local communities, you know, that we serve. And that's where our scale and technical capabilities are going to be, you know, ultimately, you know, a big advantage for us and something that we you know, continue to stay focused on. And it's like anything, you know, you are right. It's about service and it's about your commitment, you know, to serving your customers with flexibility, safely, efficiently, and everything else associated with that. And so, I mean, this is also very much still a relationship-based, you know, industry and space. I think that our inspection first in the strategy that we've employed as it relates to how we sell inspections into the marketplace allows us to create more solid, sticky relationships with our customers. So that's, you know, a driver for us. And our customers continue to consolidate. And that's an advantage for us as our customers continue to consolidate their and grow their businesses, that's going to create opportunities for us if we're delivering and we're executing and we're maintaining those key relationships.
spk10: Great. Thank you very much. And we have time for one more question from Andrew Whitman from Baird.
spk04: Great. Excuse me. Thanks for taking my questions. I guess I wanted to ask a little bit on the integration maybe from two perspectives. The first one, I guess, is I think I heard in the prepared remarks, obviously, the $20 to $40 million synergy. But I also heard that there's going to be a level of reinvestment. So I was wondering what the expectation is for the net savings to EBITDA would be after the reinvestments. And maybe for Kevin, if you could talk a little bit about what this year's budget is for acquisition and integration costs. I know This quarter, in the adjusted reconciliation, there's large numbers for the acquisition expenses, which makes sense in the quarter where you actually close the deal. But the integration and reorganization expenses were actually fairly modest. So I was hoping to understand how that geography moves. I would expect the integration and reorganization expenses to maybe go up and the acquisition expenses to go down. But what's the net? budget maybe for the year for those type of items, just so we have an order of magnitude as to what they'll cost us here.
spk03: Yeah, I can take both those. I'll start on the latter, Andrew, and then you'll have to remind me. I think the first one was the 20 to 40 million, but we'll have to come back to clarify that question. So on the acquisition, the one-time cost, yes, you're right. You saw about 24 million related to just closing the deal. in the quarter, and then you should have seen somewhere around, you know, I'll say 15 to 20 million, I think it was close to 17, on just ongoing costs. The majority of that cost that you saw in the first quarter was related to our continued investment in carving out the Chubb business from the carrier infrastructure. Okay, there's various things in there, but I'll say that was largely what was in there. We are still working through the full year view to that. So we're not ready to guide on it. I think you asked for a budgeted number. But we'll have two buckets there. One will be cost to capture the value opportunities that we're talking about. And the other is cost that we're going to continue to see for the year as we carve this business out of the carrier platform. OK, so the cost you saw in Q1. I think you can, those will step up slightly as we move through the year, but we are still in the planning phase of all that and looking to conclude that here in the second quarter.
spk04: The first part of the question was, if you've gone to 40 of growth synergies, what's a realistic expectation for the net benefit to EBITDA from cost synergies?
spk08: I'll jump in on that one and tell you that'll be part of the update later in the year. Okay.
spk04: Okay. And then I guess I'm just curious with what is softening demand or what was seen as softening demand from some of the large warehouses, customers. I mean, you look at what Amazon's results were for the quarter. Clearly, there was a pre-build in COVID related to home delivery services. And it's not just Amazon. It's probably others as well. I guess, Russ, given that this has been, to my understanding, a fairly large driver of your growth over the last couple of years, are you seeing any signs or changing any expectations around what the longer-term outlook might be, or at least the intermediate-term outlook over the next couple of years could be on this specific end market?
spk12: Yeah, so we do play in the space, but it's not a significant component of our revenue mix by any stretch of the imagination. And I think that if you go back and look, you know, I've often commented that our focus is on capturing the inspection and service work from the Amazons of the world after the facilities are up. And some of our competitors would rather chase those around and, you know, make them a chase around the original installation work where, you know, if it's the right opportunity for us with the right customer, the right relationship, then we're going to be interested and willing to participate in that. So I think that the diversity that we have, Andy, with our customer base, not only from individual customers, but also from an end market perspective, gives me, you know, I'm not worried about it, you know, at all. And we've been keeping an eye on it, you know, Our manufacturing business and specialty services does some Amazon work, but number one, they have a great backlog as we continue through 2022, and they also have great customer diversification so that if Amazon does pull back and we do, say, miss out on one of their, so to speak, project-related opportunities, it won't have any impact on our business and our results. We keep an eye on it, we track it, but we're more interested in the ultimate service and inspection work than we are on the original builds.
spk08: Hey, Andrew, going back to the 20 to 40, while we'll give you color when we do the more fulsome presentation in the back half of the year, I mean, the reinvestment really is a one-time event, whereas the synergy savings are perpetual. So, you know, you have to look at it that way as well.
spk04: Got it. We'll look forward to the update later this year on that. Thanks, guys, for the perspective.
spk12: So, thank you, Andy, and nice to hear from you. You know, I'll wrap things up here. And in closing, I would be remiss if I didn't take the opportunity to thank all of our API and Chubb team members who have remained focused on not only supporting our company and customers, but also the communities in which we serve. The safety, health, and well-being of each of our leaders remains our number one priority. I want to thank everybody for taking the time to join the call this morning. Thank you for your continued interest in API. We truly are excited about the opportunities that lie ahead and really look forward to updating you on our progress throughout the course of the year and, you know, as we continue to cross key milestones. So thank you. Have a great day.
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