APi Group Corporation

Good morning, ladies and gentlemen, and welcome to API Group's second 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.

Thank you. Good morning, everyone, and thank you for joining our second quarter 2022 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. Before we begin, I would 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, August 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 second 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 in our presentation. It is now my pleasure to turn the call over to Martin.

Thank you, Olivia. Good morning, everyone. API delivered another strong quarter of results, including record net revenues, adjusted EBITDA, and adjusted diluted earnings per share in a volatile macro environment. Russ and Kevin will speak to the performance of the business in more detail, but I would add that in our view, API's continued execution against its goals to fight challenges faced in uncertain macro environments to the strength of the company's recurring revenue, services-focused business model, and the discipline of the organization and its leadership team. With the enormous amount of opportunities in front of us, the efforts of each and every leader across our organization is contributing to the achievement of both short-term and long-term goals. I'd like to recognize their extraordinary efforts in being integral to raising the bar of performance across the entire company. As you can see from the company's significant organic progression, including growth in organic net revenues of 14% year-to-date for the legacy API business, as well as Chubb delivering top-line growth, and the go-to-market strategies are working. Margins are rising, and the proportion of the business in mandatorily required safety services continues to grow towards our raised goal of 60% plus of revenue coming from inspection, service, and monitoring. API is a great company with great leaders in a great sector. I do not believe the public markets have remotely acknowledged this yet, but we are in the long game and know that over time this will change. We believe API has a clear path to make the most of the opportunities in front of the company, and we're excited about what lies ahead for the business as we continue to focus on shareholder value creation. With that, I'll hand over to Russ.

Thank you, Martin. Good morning, everyone. Thank you for taking the time to join our call this morning. During today's call, I will begin my remarks by commenting on our strong second quarter and year-to-date results, as well as our continued forward progress towards delivering on our stated strategic goals in a macro environment that continues to be volatile. I will then provide an update on our ongoing integration progress at Chubb. and the positive momentum we have across the business before turning the call over to Kevin, who will walk through our financial results and guidance in more detail. As you have heard me say on prior calls, the safety, health, and well-being of each of our leaders remains our number one priority. This focus and other foundational priorities provide the platform from which we can continue to enhance shareholder value. I am pleased with our strong record results for the second quarter and the first half of the year. Revenue and adjusted EBITDA outperformed expectations despite FX headwinds, inflationary cost pressure, and supply chain disruptions. We do not anticipate these macro headwinds subsiding in the second half of the year. Therefore, we are laser focused on continuing the activities that helped us deliver a strong first half of 2022, including pricing activities, focused growth in inspection, service, and monitoring, strong spending controls, and disciplined project and customer selection. Key highlights from our performance for the three months ending June 30, 2022, compared to the prior year period, include the following. First, as expected, our revenue momentum continued into the second quarter, and we saw growth in net revenues on an organic basis of approximately 12%. and 14% on a year-to-date basis. As a quick reminder, the Chubb business will be excluded from our organic net revenues until 2023, one year following the completion of the acquisition. That being said, Chubb is experiencing organic growth and has solid organic growth in Q2. Importantly, and in line with our strategic initiatives, we saw a 20% plus increase in inspection, service, and monitoring revenue as we marched towards our goal of 60% plus as a percentage of total net revenues. This is important because the gross margin on this type of work is higher than the fleet average, as I'll detail in a moment, and improving the mix is one of our initiatives to drive overall EBITDA margins. Our consolidated backlog also continued to increase in the second quarter. providing us with a solid foundation for growth as we move through the rest of the year. Second, adjusted gross margins grew by 282 basis points driven by growing inspection, service, and monitoring revenue, as mentioned previously, which we believe helps to build a more protective moat around the business. As a reminder, on average, inspection and service revenue generates 10% plus higher gross margins And in monitoring, revenue generates 20% plus higher gross margin than contract revenue. In addition, we continue to offset short-term margin pressures from inflationary cost increases and supply chain disruptions through pricing actions, fuel surcharges, and procurement initiatives, all of which contributed to a solid quarter. I am very pleased with how our teams have passed on inflationary cost items and we'd like to remind everyone that our average project size in safety services is approximately $5,000, and the average durations of our projects is less than six months, which we believe allows us to reasonably manage inflationary variables in 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. Third, Adjusted diluted earnings per share increased by 27.6% or $0.08, driven by strong operational performance and the anticipated accretion from the acquisition of CHEP. Tactically, we continue to execute on initiatives in the quarter towards delivering on our key strategic objectives, such as disciplined project and customer selection, which we measure through our contract loss rate, and maintaining a safety culture that's grounded in our goal of zero incidents. An example of a metric we tracked relating to safety is our total recordable incident rate, or TRIR, which was 1.01, including CHUPS, as of June 30th. This compares to a U.S.-based industry average of 2.50. This is important not only from the human element, but also from the dollars and efficiency negatively impacted by these types of losses. Importantly, turnover on employees remains lower than industry benchmarks which supports operational efficiency, keeps retraining and hiring costs under control, and allows for growth from within. Our historical and continuing investment in our people pays dividends in times like these when some companies see employees look for better opportunities. Our technicians and engineers have wage and benefit packages that are very competitive, and we invest in their future and growth, resulting in our turnover being historically modest. Next, Chubb. The ongoing integration efforts at Chubb are going well, and the business continues to perform in line with our expectations. We continue to build up the depth of our team during the second quarter, with new hires bringing significant international integration experience. This includes adding Andrew White as CEO of Chubb, who joined us from Emerson Electric in early May. In Andrew's first 90 days with us, he visited 15 of the 17 countries in which Chubb operates. participated in 25 town halls, and conducted 50 detailed operating reviews where CHEF's transformation roadmap was discussed. He also onboarded several new senior leaders, including new country leaders, to help ensure we are well positioned to drive value capture opportunities across our global footprint. We believe that a key part of the integration is developing an empowered leadership culture throughout the organization as ultimately great leaders make better decisions, and those decisions drive incremental profitability, lead to enhanced margins across our platform, and create shareholder value. Our employees, technicians, and engineers have careers, not jobs, and we believe this investment reduces turnover, as I discussed earlier, aligns communications, and drives performance and productivity. Over the past several weeks, more than 2,200 Chubb employees have taken advantage of API's I am a leader learning module. This is an online learning opportunity available in seven different languages that introduces API's foundational leadership concepts. You will hear from Andrew directly later this year at our investor update when we detail many of the value capture opportunities we have identified and the actionable, measurable, and executable multi-year plans to leverage our combined global platform. As we noted on our last earnings call, we believe we see a clear path to value capture opportunities that are at least $40 million. And we expect this figure to continue to evolve and grow as we learn more. To that point, in the second quarter, we initiated and executed the first step of a multi-year restructuring program, including an initial charge of approximately $11 million relating to a G&A reduction in the removal of a significant amount of the above-the-branch costs across the business. Plans are also being developed that will achieve additional savings by consolidating multiple branches. and we have planned further savings opportunities relating to lease termination and other facility rationalization to name a few of the specific initiatives underway. We also believe that as we reduce organizational complexity and shift towards a more consistent branch-based operating model, we can capture savings through the elimination of duplicative costs. Progress isn't only about cutting costs and creating operational efficiency. It's about building a team, developing a meaningful strategic plan, focusing on organic growth and mix, and developing a culture that believes in the path forward and works together as a team with a common purpose and focus. It's what is happening at Chubb, and we look forward to detailing our progress with you. As we look ahead to the remainder of 2022, although the macro environment remains volatile, We believe that the resiliency of our services-focused business model strengthens the protective mode around the business, enabling us to continue our growth and execute on our long-term goals. We have and will continue to focus our efforts on growing the acyclical recurring service revenue aspects of our portfolio. We have intentionally shifted our mix of inspection, service, and monitoring revenue from approximately 15% of total net revenues in 2008 to 50% plus following the acquisition of Chubb. As you know, we are focused on driving towards 60% plus. It is very encouraging to see strong underlying demand for our services as reflected in our organic revenue growth, as well as our new record level backlog. This has given us momentum in the second quarter and provides us momentum as we move into the back half and plan for 2023. In summary, I am proud of our team and how we delivered on our commitments once again in the second quarter, despite the many macro headwinds. Our field leaders continue to do amazing work for us. They drive our existence. I am truly grateful for what each of them has done to get us where we are today. I would now like to hand the call over to Kevin to discuss our financial results and guidance in more detail. Kevin? Thanks, Russ. Good morning, everyone. I will begin my remarks by reviewing our consolidated results and segment-level operating performance for the second quarter before turning to our guidance. Reported net revenues for the three months into June 30, 2022 increased by 68.6% to $1.6 billion, compared to $978 million in the prior year period. This was driven by revenue from acquisitions completed in safety services and strong organic growth in safety and specialty services. Adjusted gross margin for the three months into June 30, 2022 was 26.7%, representing a 282 basis point increase compared to the prior year period, driven by an improved mix of inspection and service revenue and safety services, supplemented by acquisitions and safety services, as well as improved productivity and specialty services. These factors were partially offset by supply chain disruptions and inflation, which caused downward pressure on margins. Adjusted EBITDA margin for the three months into June 30, 2022 was 10.7% compared to prior year adjusted EBITDA margin of 10.8%. This was driven by an improved mix of inspection and service revenue and strong organic growth. This was offset by mix from completed acquisitions, 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 12%. This was driven by 20% plus growth in inspection service and monitoring revenue in our legacy businesses. 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. Adjusted diluted earnings per share for the second quarter was $0.37, representing an $0.08 increase compared to the prior year period. This increase was driven primarily by strong organic growth in safety and specialty services and the accretion from the acquisition of CHO. I will now discuss our results in more detail for safety services. For the three months into June 30, 2022, safety services reported net revenues increased by 124%. to $1.1 billion compared to $512 million in the prior year period, primarily driven by revenue from completed acquisitions. Net revenues increased on an organic basis 16% compared to the prior year period, driven by 20% plus increase in inspection, service, and monitoring revenue. Adjusted gross margin for the three months into June 30, 2022 was 30.6%, representing a 121 basis point decline compared to the prior year driven primarily by margin declines on contract revenue in our HVAC services business, which arose due to inflationary cost pressures on preexisting, longer-duration, in-place contracts where inflationary costs could not be absorbed or passed on. This reduction consumed strong gross margin expansion in our core life safety service offerings, which were helped by strong organic growth, pricing initiatives, and the improved mix of inspection service and monitoring revenue. Adjusted margins for EBITDA margins for the three months ended June 30, 2022 was 11.8%, representing a 287 basis point decline compared to the prior year driven primarily by SG&A leverage impacts from completed acquisitions and the reasons provided in the review of gross margins. I'll now discuss our results in more detail for specialty services. Specialty services reported net revenues for the three months into June 30, 2022 increased by 8.8% to $518 million compared to $476 million in the prior year period. This was driven by an increase in service revenue as well as increased demand at our infrastructure and utility businesses. Adjusted gross margins for the three months into June 30, 2022 was 17.4%, representing a 246 basis point increase compared to prior year, driven primarily by improved productivity and improved mix of service revenue. These factors were partially offset by supply chain disruptions and inflation, which caused downward pressure on margins. Adjusted EBITDA margin for the three months into June 30, 2022 was 11.6%, representing a 108 basis point increase compared to prior year due to leverage on higher volumes and improved mix of service revenue. These factors were partially offset by supply chain disruptions and inflation, which caused downward pressure on our margins. We continue to focus on driving strong free cash flow, and our balance sheet and liquidity profile remain strong. For the three months into June 30, 2022, adjusted free cash flow was strong at $63 million, with strong sequential performance in Q2 relative to Q1, which is consistent with historical trends. As expected, operating cash flows in Q2 were primarily impacted by the increase in required levels of working capital investment to support our strong revenue growth. API has historically generated the bulk of its free cash flow in the second half of the year, and we continue to anticipate most of this to be recovered by year-end and expect our adjusted free cash flow conversion for the year to be at or above 2021 levels on the way to our long-term adjusted free cash flow conversion target of approximately 80%. Our net debt to EBITDA ratio at the end of the second quarter was approximately 3.9 times, and the weighted average maturity of our debt was between five and six years, with the earliest maturity in 2026. During the second quarter, we entered into a forward-starting swap arrangement to be effective January 2023 that will shift the mix of our fixed-verse floating from approximately 50-50 to an estimated 70% fixed, 30% floating. I will now discuss our guidance for 2022. Before I get into the details, as a reminder, approximately 40% of our net revenues are generated outside of the United States following the acquisition of Chubb. Accordingly, going forward, we will provide details of our revenue and adjusted EBITDA on a constant currency basis and provide the impact of FX movements on our reported results and outlook. Our underlying operational expectations have not changed since the guidance provided in our Q1 earnings call. However, the strengthening dollar has negatively impacted our full-year outlook by approximately $90 million at net revenues and $10 million of adjusted EBITDA. Noting this, and based on exchange rates as of the end of the second quarter, we now expect our full-year guidance Out to range between revenue guidance to range between $6.4 billion to $6.5 billion. Expect adjusted EBITDA will range between $655 million to $675 million. Again, this is unchanged on a constant currency operational basis versus our prior guidance. We remain confident in our outlook of 8% to 9% growth in net revenues on an organic basis. For the third quarter, we expect net revenues to be between $1.675 billion to $1.725 billion and adjusted EBITDA to be between $175 million to $190 million. We expect adjusted free cash flow in the quarter to be between $110 million and $130 million. We anticipate interest expense for 2022 to be approximately $120 million, capital expenditures to be approximately $85 million, and our adjusted effective cash tax rate to be approximately 24%. We expect depreciation for 2022 to be between $80 and $85 million. From a capital allocation perspective, our near-term focus remains on deleveraging through our asset-like high free cash flow conversion operating model. We anticipate reaching a net leverage ratio of below 3.5 times by year end 2022 and approximately 2.5 as we move towards the end of 2023 and closer to our stated objective of two to two and a half times through reducing leverage by approximately one turn annually. We will also continue to repurchase shares when we believe our own company represents the best available investment opportunity. We expect our adjusted diluted weighted average share count for the third quarter to be approximately $270 million. I will now turn the call over to Jim. Thanks, Kevin.

Good morning, everyone. We are very pleased with how the business is performing in this volatile environment. As I said on our last call during the Q&A, API has been battling macro headwinds since its first day at the public company, yet continues to perform very well and continues to execute against its strategic plan.

We look forward to seeing how the business gets to perform when it gets even the slightest macro tailwind. Mark and I were in London last month, meeting with Russ and the leadership team of Chubb and getting a detailed review of the business and an update on the integration activity. Additionally, at our board of directors meeting earlier this week in Minneapolis, senior leaders from the business segments, including Chubb, detailed their year-to-day performance, outlook for the balance of the year, and long-term strategic plans. Various new corporate leaders outlined their strategic plans to us in such areas as procurement, IT, tax, ESG, and other key areas of the business. We are pleased with the efforts to develop meaningful global one company go forward plans. As Russ mentioned, we plan to hold an integration update call with investors later this year and look forward to updating investors on our progress and plans. We look forward to detailing the specific actions that have been taken, the initiatives that are underway, the savings achieved, the efficiencies captured, and the planned steps across the various regions in which we operate that will occur over the months and years ahead to drive savings, efficiencies, and most importantly, to drive organic growth. It's clear to us that our strategic focus on growing inspection, service, and monitoring revenue through our market-leading brands and working tirelessly to become more efficient in the way we do business is a winning formula whether the macro environment is for you or against you. The results of API over the last few years have proven this as a business has performed despite the challenges from navigating the COVID-19 pandemic to dealing with supply chain disruptions, inflationary cost pressures, or FX movements. The business has shown itself to be resilient in managing the macro economic challenges it has encountered over the last decade or so. Its business model has purposely evolved during that period of time, and it continues to be better positioned each year to measure macroeconomic volatility.

Should there be a recession or slowdown, we believe that the business is positioned well with a strong backlog and a leadership team that has done an excellent job maintaining a long-term strategic focus while also managing the business to navigate near-term volatility and deliver on our targets.

While we are always planning for tomorrow, we are also looking for storm clouds overhead. And while we are focused on integrating the Chubb acquisition, we remain opportunistic as we continually look at the business profile and are always evaluating opportunities before us to ensure that we are well positioned to drive shareholder value. Before I turn the call back over to Russ.

a little nuance change when we open the call for Q and A, but we're going to let the supply, the sell side, as well as the buy side, ask a few questions this time around. So both sides should be prepared to let the operator know if you're interested in asking questions.

And with that, I will now turn the call back over to Russ. Thank you, Jim. As we look ahead to the balance of the year, we will remain focused on continuing to deliver strong operating and financial performance while also executing on value capture opportunities in the beginning of the process of strategic planning, operational improvement, and budgeting process for 2023. I would now like to turn the call back over to the operator and open the call for Q&A.

Thank you. At this time, if you would like to ask a question, please press the star and one keys on your touchtone phone. You may remove yourself from the queue at any time by pressing the pound key. Once again, that is star 1 to ask a question. And our first question will come from Andrew Obin with Bank of America.

Hi, good morning. This is David Ridley laying on for Andrew Obin. So I appreciate the commentary on Chubb's organic growth. Wanted to see how is that going versus your internal plans, and obviously there's a lot of talk about European macro, anything that you're seeing in sort of pipelines or orders around that macro volatility there. Thank you.

Yeah, no, we're optimistic about what we see with Chubb. Chubb has a large base of service and recurring revenue that is going to support the business through any sort of macro recessionary headwinds. And so we feel pretty good about it and where they're able to go. They've got pockets like our Hong Kong and China business was a bit behind year to date from a revenue perspective, but that was mostly driven by COVID. Forecasts look really solid for the second half of the year. pending what potentially happens with Taiwan. So we continue to watch that very, very closely. But I would say that what we see inside Chubb has been very, very positive. Just as a reminder, our focus as it relates to Chubb is, number one, is to separate from Carrier. Number two, to take advantage of some of the initial above-the-branch cost reductions to right-size the business. And then we are now starting to turn our attention to how do we grow, and we see opportunities for us to continue to grow the business. So I'd say in line with expectations and optimistic about our ability to take the business forward.

Great. And if I could ask one follow-up, how are you seeing the inflationary pressures trend in the last couple of months? And do you think API's overall pricing is keeping pace or maybe a step ahead of the cost inflation you're seeing? Thank you very much.

Yeah, so, I mean, you know, on the service side of our business, we've done a very, very good job. In fact, I'd say that we've been out in front of inflation. We've seen actually margin improvements really across the entire portfolio, and that includes Chubb. And that part of it's been very positive. We've seen a little bit of a drag on some of our contract related work that longer term contracts that we haven't been able to recover some of the increased costs. But in general, I feel like we've done a really good job of keeping up to it. We expect to see some level of margin improvement as inflation subsides in certain products, such as pipe. We buy a lot of steel pipe, and we've seen the price of steel pipe start to decrease. But on the component side of the business, whether that's certain valves and sprinkler heads, et cetera, we have not seen any sort of reduction in the cost there yet. And so we'll continue to work hard to pass on those costs to our customers.

Great. Thank you very much. Thank you.

Our next question will come from Andy Kaplowitz with Citigroup.

Good morning, everyone. Hey, Andy. It seems like you are still seeing good strength across your legacy business. Obviously, there are some concerns out there, you know, slowing markets and warehousing. But I think you've told us in the past it's not a huge part of your business. So maybe you give us a little more color into what you're seeing. What are the biggest areas of strength driving the, you know, team's organic growth? And are you seeing any signs of weakness? How does your strong backlog position you for 23?

Yeah, I mean, our backlog's really strong for 2023, you know, and as we move into the second half. And, you know, we continue to push the businesses to be super focused on customer and project selection, make sure that they're deploying their resources in the right place. And, you know, I attribute that strength a lot to the end markets that we serve, you data centers continue to be strong and robust semiconductor is very strong robust healthcare telecommunications 5g our public utility private utility customers so the markets that we serve you know have seemed to just be super resilient and have pushed through, you know, any sort of headwind that's been forced on them. So that part of it's been really positive. And, you know, as it relates to the, you know, the Amazon effect of the world and what everybody's seen there, that has not been traditionally a big part of our business. We focus on the service side of those types of facilities. That's our number one focus. You know, our one manufacturing business that we have in specialty services has traditionally, you know, sort of speak done one in one project with them on an annual basis. So it's really just not a big deal for us as that end market slows down.

helpful russ and just want to focus on the previous margin question in one sense like you mentioned the lower hvac services margins would you expect that contract related pressure all year these just contracts that you kind of reset at the end of the year uh and maybe any more color around you know other you mentioned sort of metals getting better maybe uh you know how does that sort of trend over the next couple quarters should we see incremental improvements from here

Well, as it relates to the margin drag from our kind of the legacy HVAC contract where we feel like that's essentially behind us, we'll probably still have to battle it a little bit, but we feel like in general it's behind us, and that shouldn't be a real issue for us going forward. We actually think that we should see some margin lift um you know really specific to some of our safety services installation work because of um especially in the domestic piece of our business that um the mechanical side of the life safety space is a bigger part than it is say in chubb we expect to see some margin left because of pipe prices coming down but again I'll reiterate, a lot of the components, you know, the heads, devices, valves, those types of things, we haven't seen any sort of pricing relief on those types of products that we purchase.

And maybe just a quick one for Kevin then. Like, how heavy a lift is it to get cash flow at or above last year, this year, in 2022, given where you're starting from the first half?

Yeah, thanks, Andy. So just, we've talked about the first quarter and the first half of the year. So Q1, you know, historically is our lowest quarter. We also invested in Q1 and working capital, you know, on the rate side. And the second quarter, it's also a lower quarter for us. So traditionally, you're going to see The majority of our free cash flow will be delivered in the back half of the year. In the second quarter, as we mentioned in the first quarter, we continued to work down working capital on the rate side. So we saw improvement there. But the volume step up obviously consumed more investments. So as we go into the back half of the year, we're going to stay focused on working down. the rate side of things. And, you know, Q4 traditionally for us is, from a seasonality perspective, is a lower quarter. So those two things together give us confidence in our ability to deliver the number in the back half of the year. And, again, that's consistent with our historical profile of delivering the majority of our free cash flow in the back half of the year.

Appreciate all the coverage.

Thanks, Andy.

Thanks, Andy.

Our next question will come from Catherine Thompson with Thompson Research Group.

Hi, thank you for taking my questions today. You pointed out in today's PROS belief that monitoring business carries 20-plus percent higher margins versus contract revenues. A few questions on that monitoring business. What is the percentage of total sales, and do you have a go-to for this business as a percentage of total sales? And how has this business performed through various cycles, and how are supply chain constraints impacting this business versus other segments, in other words, the same, better, worse? Thank you.

Oh, the monitoring as a percent of our total revenue, Catherine, your question didn't come through super clear on our end. So is your question specific to monitoring?

Yes. So for monitoring, what is it a percentage of total sales? What is your bogey for that segment in terms of total sales? How has it performed through various cycles and color on how it has been impacted by supply chain constraints?

So, I mean, the monitoring is included, you know, in basically in our service and inspection, you know, figures. We don't break those figures out. The margins, you know, are substantially higher than our contract work, approximately 20%. And the reality of it is that that piece of our business hasn't been overly impacted by any sort of supply chain issues. I think there's an opportunity for us as we look at Chubb's business and our domestic safety business to potentially optimize the monitoring services that we currently are providing. And we have really kind of two different models. Right now, our domestic life safety businesses, we typically use outsourced third party services for our monitoring the work that we sell. And Chubb has a self-perform capability, and we're continuing to look at both approaches and see what we can take advantage of to make sure that we're operating the monitoring piece of our business in the most efficient fashion that we possibly can.

Okay. And the follow-up question is more on the macro concerns, be it a recession or just an extended period of sluggishness. When you look at your business, clarify the nature of your services that are required from a code standpoint and can't be delayed versus some delays where you can extend maintenance costs. Really bifurcating that, what can be kicked down the road and what is required when you look at your entire business and managing through a cycle.

I mean, I think Our business model, every day that goes by, becomes more and more resilient, and it's because we continue to focus on growing the services piece of the company. And if you look at the business today versus what the business looked like in 2008, it's just dramatically different. Really, 15% to 20% of our business in 2008 was inspection, service, and monitoring, and today it's almost 52%. and so we've continued to build build that resiliency you know in into the business you know a good data point for you um catherine would be you know how did the business perform in 2020 when the pandemic hit us you know our our net revenues in 2020 were um off on less than 10 percent and yet our margin um margins improved because the high variable cost structure that we have And we're able to, you know, really flex down very quickly when we see any sort of, you know, pressure on our revenues and the margin opportunities that we have with those revenues. So, I mean, I feel very good about, you know, the business and our business's ability to perform if we go into any sort of a recessionary time. And it's really driven by the fact that we've improved mix. We have a strong backlog, and we play in the right-end markets across the entire portfolio.

Okay, great.

Thank you very much. Thank you. Our next questions will come from Julian Mitchell with Barclays.

Hi, this is Kieran Patello-Connor. Hey, this is Kieran on for Julian. I was wondering if you could give us some color on organic growth by region. Are you seeing any signs of a slowdown in Europe? And I think it was noted that, you know, APG's geographic mix is now 40% international. So it's just kind of hoping to give us some color on, you know, growth outside of the U.S.

Hi, Kieran. This is Kevin. Can we talk a little bit, you know, we talked about the sequential improvement in Chubb results. Obviously, Chubb is not the entirety of our international business, but on the international segment, we saw continued growth in the quarter. And you asked about Western Europe, you know, where our businesses in Western Europe also continue to perform well and improve sequentially versus Q1 in the quarter.

Got it. Thanks. And then just kind of looking a little more longer term on infrastructure stimulus, is APG seeing any signs of project or contract work picking up for that? Or when should APG start to see the impact from the U.S. infrastructure stimulus bill?

So how I would answer that, Kieran, is that number one, you really haven't seen the dollars from the infrastructure bills start to flow through the system. That most likely will happen, you know, in 2023. You're seeing some impact from a rural broadband perspective already that's helping aspects of our business, you know, as as the country tries to expand broadband capabilities to more remote parts of the country. And you're seeing some of that flow through right now. The reality of it is that a lot of the infrastructure work that will come as a result of the infrastructure spending bill It won't necessarily have a direct impact on our business. It's more of an indirect impact. It will create opportunities for other firms to pursue, which will create more opportunities for us with our existing customers as they flock towards some of that other work. And we'll take advantage of taking share, you know, with some of our existing customers as some of our competitors look elsewhere for other opportunities. But we won't see really those dollars flowing into the system in any sort of significant way until 2023. Understood. Thank you. Thank you.

Our next question will come from John Tanlinson with SCJS Securities.

Hi, good morning. Thank you for taking my question. I was wondering if you could talk about the portfolio management opportunities enabled by the CHF acquisition. You have a safety business that's stale now. Is there potential to do something with the specialty business or maybe the old industrial business to help the seller to be leveraging or unlock value somewhere else?

Well, I think, John, I think the way we've approached that is that every opportunity is an opportunity that we're going to continue to look at and review. And we will do what's best for the business, whether that's you know, individual pruning, whether that's closing branches, whether that's optimizing other aspects of the business, we will continue to look at each and every opportunity and make good decisions and choices that are in the long-term best interest of the shareholder. So everything is on the table. And we talked, we just had a board meeting. We had a lot of robust conversation and dialogue about you know, what's best for the business strategically. And as we continue, as our thinking continues to evolve, then we'll continue to take appropriate action, you know, in the business. Don, it's Jim. The last sentence of my script was said, you know, while we're focused on integrating the Chubb acquisition, we remain opportunistic as we look at our business profile, and we're always evaluating opportunities before us.

And while I applaud you for trying to get us to make some Wall Street Journal announcements on our conference call, we're just not there. Understood. Thank you, Jim. Kevin, I got a question for you. Just the expected swap from exploding to fixed, that 70-30 mix, is that inclusive of the preferred that you issued to the Viking and Blackstone, or is that just on the straight debt only? And what is the rate that you're expecting to pay today?

That is exclusive. So that's just on our current debt. And rate, your question is the rate, what our blended rate will be going forward? Correct. When that swap occurs. It's going to be around 3.5%, John. Great. Thank you so much, guys.

Thank you. Our next question will come from Justin Hawk with Baird.

Hi. Good morning, guys. I guess I wanted to go back to the restructuring program you guys talked about, the $11 million here in TQ. I was just hoping you could elaborate on kind of what you're seeing as kind of the total cost of that program going forward, and then how much SG&A savings do you think there is to come from it? And then just confirming, is that incremental, too, or is it part of kind of the margin targets you've laid out over the next couple of years? Thank you.

Hey, Justin. I'll take this one. To start, we've talked about value capture opportunities in the Chubb business where we've discussed $40 million as the number that we have currently that we're continuing to assess as we continue to put together our plans. The $11 million charge that we took in the quarter, you can think of that as phase one in terms of getting after that value capture initiative. We expect that to be the majority of our phase one restructuring charge. We could see a little more on that phase one charge as we move through the year, maybe $3 to $4 million. And then, yeah, we're going to continue to deliver against that initial number of $40 million. And with that, I would expect a further charge later as we continue to move against that value capture initiative.

Okay. And that's part of – so that sounds like it's not incremental, too. It's part of the $40 million that you guys laid out initially. Yeah.

Yeah, that charge was associated with actions to deliver that $40 million. Got it.

And then I guess my second question here is just on the pricing, the two-thirds of the organic growth that came from pricing. You know, that was similar to what it was, I guess, last quarter. And just trying to understand that you don't have any surcharges in that pricing. So, I mean, that's more or less a permanent reset in terms of where your contract pricing is set. I just want to understand how sustainable it is.

Yeah, so I would tell you that some of that price increase is fuel surcharges. I wouldn't be able to, you know, give you an exact percentage of it, but there is going to be, you know, an incremental portion of it is going to be fuel surcharges that, you know, assuming that fuel prices, you know, reduce to a more moderate level that we will – it eventually eliminates them but uh in general um we should you know that our pricing should be solid and it should uh the price increases should should stay in effect thank you thank you as a reminder to ask a question please press star 1 on your telephone keypad and our next question will come from adam wyden with adw capital yeah thank you thank you uh i think a lot of the questions uh have been somewhat technical around inflation and i guess my question is a little bit more qualitative um you know as you know we've been journalists for a long time we've studied a lot of your competitors you know some of them smaller and i think the the resounding uh kind of comment around inflation among your private competitors is that you know it provides a little bit of a headwind um on your on service business because you locked in you know one two three year contracts But, you know, those contracts are not all signed at the same time. And so there's effectively a waterfall where those roll over. And, you know, in an inflationary environment, I think at least the private consensus is that you're able to increase prices in excess of your costs such that your margins in service and, you know, other parts of your fire business might end up being higher than than your pre-inflation margins.

Can you talk a little bit about that kind of that dynamic in terms of near-term and long-term and how you think about inflation affecting the margins of your business?

Well, so I guess in general, I agree with you, but to the one aspect of it, Adam, is that our margins in our safety business are up. And so, you know, we have done, in my opinion, we have done a very good job of keeping up with inflation and passing on those inflationary costs to our customers on, I guess, a faster basis, if that's the right way to put it. And so, you know, we I do agree with you that we should see some margin lift because our prices are higher. And as as as inflation. Right. We should see some margin improvement that's going to come back and help the business. But on the In general, our service margins are up, and so our businesses have done a nice job of taking price through a very, very difficult time, and that's positive. Again, as I said earlier, where we've had the pressure is on some of our more long-term installation work where we haven't been able to go back to our clients and recover some of the cost increases that we've had to deal with. So it's more on the fixed price installation front. Okay. But that will reset eventually anyways, right? I mean, as you bid out new contracts and whatnot, those will reprice to the normal world. So in a perfect world, if inflation starts abating, you guys should be able to – you know, you won't have that kind of, you know, kind of hamster wheel effect. Because, I mean, if I just look back at what your margins were in safety, and I know you bought Chubb, and that's a great opportunity. But, I mean, you guys were 15% or 16%.

So, I mean, ultimately, you will be able to catch up with this if things abate and kind of get back to those mid-teens margins.

We – yes, the way I would answer that. And we should see – we feel like, as I mentioned earlier in the call, we feel like the – some of the impacts and the drag that we've seen on the margins in our installation work that we proposed on, not did, that we have that behind us. And we'll probably have a few battles in front of us, but the big battles are behind us. And we should hopefully be seeing some improvement in margins on the installation work as well. Well, yeah, look, recession, people have to go back to the office. This should be, in general, good for commercial building and office and whatnot. So appreciate all the time and hard work, and that's it for me. Thank you, Adam.

At this time, there are no further questions in the queue, so I would like to turn the call back over to Russ for any additional or closing remarks.

Thank you very much. In closing, I would like to thank all of our team members for their continued support and dedication to our business. We believe our people are the foundation on which everything else is built. Without them, we do not exist. I'd also like to thank our long-term shareholders as well as those that have recently joined us for their support. We appreciate your ownership in API and look forward to updating you on our progress throughout the remainder of the year. And thank you again, everybody, for taking the time to join the call this morning. We're pleased to share our strong second quarter results with you. Have a great day.

Thank you, ladies and gentlemen. This does conclude today's conference, and we appreciate your participation. You may disconnect at any time.