APi Group Corporation (APG) Earnings Call Transcript & Summary

Great. Well, hello, everyone, and thanks for joining the Barclays Industrial Conference. It's my pleasure to have up next for our fireside chat, APi Group. From APi, we have Jim Lillie, Co-Chair of the Board; Russ Becker, CEO and President; Tom Lydon, CFO, as well. So thanks, everyone, for joining. And I suppose to start with, I think, Russ may have a couple of prepared remarks. [Operator Instructions] So thank you very much, and Russ, hand it over to you.

Yes, thanks, Julian. I appreciate everybody taking the time to join us today as well and for your interest in the company. I also want to just mention that Olivia Walton, our VP of IR, is also with us here in the office in Minneapolis today as well. So for those of you that are not familiar with the story, I've been with the company for a long time now, and it's been a great journey and been a great ride and feel very good about the home that we found since the J2 team acquired the company almost 1.5 years ago now. And can be honest that as we experienced our first few years of public company, we did not forecast and anticipate a global pandemic and having to work our way through that with the -- all the other myriad of challenges that we were able to overcome and face. The company has been built with a services-first focus, specifically in our Safety Services segment and Specialty Services segment, which make up the lion's share of our book of business. And the reason that we like Safety Services is due to the statutory nature of the fire life safety space, and all of the facilities that we inspect in service have a statutory requirement that requires those life safety systems to be inspected annually -- at least annually, in some cases, biannually, quarterly in very high hazard situations even as frequently as monthly. We know that for every inspection dollar that we generate, we're going to typically generate $3 to $4 of service work. We also believe that if we execute well on both fronts that we are going to create a much stickier relationship with our customers that will lead to the opportunity for us to be involved with their expansion plans and opportunities. Specialty Services, the reason that we like that space is the acyclical nature of the services that we provide. And we work direct with our customers, public utilities, private utilities, the large telecom broadband providers across really North America. And the acyclical nature of their capital programs is very attractive to us, it's very visible. So we can plan accordingly and really take advantage of the opportunities that they come. If you had a chance to see our press release yesterday, we confirmed guidance from December on our fiscal 2020 results. We're working diligently to close up our books, and we also provided some guidance as it relates to what 2021 looks like -- potentially looks like for us, we're very excited about what 2021 brings to us. Our balance sheet is in a great place. We finished the year with about $500 million of cash on the balance sheet. We have a warrant conversion that's underway. We believe that in the -- over the course of the next 10 days, we'll have converted all of the warrants, which would be another roughly $245 million of cash. So as we move into fiscal 2021, we have $750 million on the balance sheet, which creates great opportunity for us in the M&A space. So again, very excited about 2021. I appreciate everybody taking the time to be with us today. And with that, Julian, I'll turn it over -- back over to you for questions.

Thank you very much, Russ. So yes, I suppose following on from your comments around the press release and the sort of financial update 24 hours ago. Maybe just help us understand, industrial services is the piece where there is a substantial amount of sort of organic rightsizing, I suppose, I would call it, in 2021 that's in your guidance. Maybe give us the context around what's led to that decision. And how the size and shape of that segment will look after this adjustment in '21? Could we see further scaling back or at that point, you might even look to build on it on that newer sort of lower or smaller but higher quality base?

Well, what I -- how I would start with is that I'd be focused less on the percentage of decline versus the absolute dollars because you're talking about roughly $125 million decline that is really planned and purposeful. As we focus on customer selection and project selection and making sure that we're doing -- focused on the right opportunities. Second, I would say that we view the pruning to be done, and we like the remaining businesses that we have sitting in that segment. And then lastly, really, the focus is on continuing to change focus and improve mix. The service side of our Industrial Services segment is an opportunity for us to continue to focus on and grow that piece of it. And so any future growth that you would see inside the segment is going to come from the services side of the business.

Thank you, Russell. What -- I think, if I sort of look at the implied sort of EBITDA margin in the full year guide for '21 sort of firm-wide, I think, it's around sort of 11% percent or so, again, enterprise-wide. What should it be in industrial services? I don't know whether you characterize it as the full year margin rate or maybe the exit margin rate from this year post the shrinkage. How should we think about the profitability there?

Their margin should ride it right along with the fleet average. And there's no reason that it can't or it won't.

Understood. And would Industrial Services at that point, let's say, entering 2022 then be a potential area to put M&A capital into?

Well, I mean, I suppose, Julian, every -- there's opportunity in every place but we've been very clear that our number one focus is going to be in Safety Services and specifically in the life safety space. There's other aspects of it, like that we like HVAC service and things like that, that you could see some investment in. And then it would -- then next would be Specialty Services. So it would have maybe, I guess, a really unique opportunity that got us interested in the Industrial Services space, but never is a very long time. And -- but that would not be where our focus is.

Fair enough. And as we look at the commentary and the guide around -- it's sort of -- I think, excluding the adjustments in industrial, the company, in its entirety, slated to grow maybe 7% in 2021, organically. Sort of help us understand what gives the confidence behind that forecast. Maybe talk about recent bookings or backlog momentum. Anything to give us a sense of how much of that plus 7% is kind of in the bag today versus...

Is it in the press release?

Yes, exactly right. Yes. Yes.

So 2 -- I would make, I guess, 2 points. Number one is that when you look at the statutory nature of the inspection work that we do in our life safety businesses, if you recall, at the end of the third quarter in our earnings release, we had shared that our inspection revenues were up, through the third quarter, 6% on a year-over-year basis. And I would share to you that, that -- while that is slightly short of our goal, we felt very positive about that, that we were able to grow those inspection revenues through the pandemic. And it's our hope when we get our fourth quarter numbers tightened up that we're going to be able to share a slightly better year-over-year growth figure than that. So number one, we know that we're going to generate $3 to $4 worth of service work off of every dollar of those inspection revenues. So we are still growing the inspection revenue component of the business, which is, in turn, helping us grow the service piece of the business. So that gives us really good confidence as we move into the year. We also shared that our backlog, even though we don't disclose the totality of it, was up roughly $100 million on a year-over-year basis. So we entered the year with a good quality backlog in addition to the fact that the key service and inspection component of our business is growing. So those are really 2 of the key benchmarks that I share that gives us confidence that the business is really well positioned for another really good solid year.

And when you think about the end markets, a lot of the work that APi does, it's in different types of commercial or nonresidential building, clients, offices, infrastructure, institutions, a very broad range. Where would you characterize that APi is most focused on winning sort of incremental share this year and medium term? And where do you think your positioning is strongest as it sits today?

Well, it clearly varies by segment, right? So if you look at specialty, there's opportunity in the whole race for 5G and things like that. We have some utility customers that have very robust natural gas distribution replacement programs underway. We really like those types of work. They're smaller opportunities that are quick hitting and those types of things. So we think there's opportunities there for us to grow. We like the fact that we're -- it's owner-direct, and we're not working through anybody. That's attractive to us. If you look at Safety Services, the end markets that -- we're very fortunate. Like, number one is we don't have a lot of exposure to hospitality, retail in some of the end markets that have been absolutely punished by the pandemic. We're in health care, and we're in data centers and high tech. And so end markets that have actually thrived as you've gone through the pandemic. Those are really the areas and places that we want to continue to focus our growth on. The needs of those clients are much more sophisticated and complex. And in an industry like ours, it's highly fragmented, and most of your regional competitors are small family-owned businesses that don't have the resources, whether that's the right engineers and those types of things, where we do because we've got scale. And so we want to continue to focus on those markets with those customers that are going to value the expertise that we bring to the table, and it's not about price, it's about value.

Perfect. And on that point on sort of value and managing for higher profitability over time, project loss rate is something that I think you and the rest of the management team are very focused on. Any sort of update on that specific metric as we look today?

We don't have -- we don't have kind of our year-end numbers finalized yet. What I can share is that at the end of 2019, our loss rate was roughly 1.5%. We established a goal in 2020 to cut that in half. I don't know that we're going to 100% get there, but we definitely made good progress on that goal. And we will continue to make progress on that again through 2021 until that number is 0. And I think I've shared with people before that it makes me sick to my stomach when we talk about that. And to me, it's low-hanging fruit, and it's a great opportunity for us to be more disciplined, and it almost always comes down to who is the customer. And so we need to be very disciplined in who we choose to work for to make sure that we get paid and such. And it's very -- that's just critical for the success of the business.

Understood. And if we focus on the 2021 sort of margin outlook, in particular, bridging to that sort of 11% EBITDA margin for the company as a whole and the year as a whole, any sort of major puts and takes you'd call out within that. There's obviously the Industrial Services dynamic. Anything on price cost or the scale of temporary costs that may come back into the P&L year-on-year. And maybe along those lines, what's the sort of baseline operating leverage or incremental margin you're expecting in the Specialty and Safety Services segments.

Yes. So like the best way to talk about that is to talk about it in regard to our overall arching margin expansion goal of 12% EBITDA by 2023 that we think is very achievable. So we started it. There's really a number of different levers that we need to be continuously pulling on in order for us to achieve that. And we believe that, that objective is very realistic. We already talked about one and reducing our loss rate. The next is clearly improving our mix in the amount of service and inspection work or recurring revenue work that we do under our definition of service. The company currently is just north of 40% of our total revenue is coming from service as we defined it. We have a stated goal inside the organization to get that to 50%, and if we're going to move the needle, we need to continue on our March towards that objective. Next would be the work that's associated with what we call business process transformation. And our business process transformation work is really more of a -- it's a process improvement in IT project combined, and it's going to help the business on 2 fronts: First, it's going to allow us to move towards a more shared services model. So as an example, we are working on a payroll project that will allow us to implement a common payroll platform across the business, which will ultimately allow us to go to a Payroll Center of Excellence that will be able to support the entire business so we can start leveraging our SG&A more. Second part of that is we'll gain insight and visibility into our spend and which will allow us, from a procurement perspective, to start leveraging our scale to a much higher degree. And the organization is really ready for that and ready to take advantage of that opportunity and help us reduce our cost. Next is pricing and pricing being more formal and disciplined around how we price our work and making sure that we're getting price increases at the right times and everything else is something that we can we continue to be better at. Strategic M&A will be a big part of that. If we -- if we continue to look at acquiring businesses, both big and small, they have to be accretive to our margin expansion goal. That can't take us the other way if we're going to achieve this objective by the year 2023. And I would say lastly, Julian, it's -- we can just be better. And the example I like to share is that in Safety Services, we actually have 2 businesses that perform at 20% EBITDA, which means that we've got, theoretically, 2 businesses that are at 8% or 9%. And we know what it takes to improve the results in those businesses, and we need to stay disciplined and continue to focus on the individual results of our companies as we continue to march towards that 12% goal. That goal is totally achievable, and when we get there, we'll just -- we're going to move the goalpost and keep on marching.

Thank you, Russ, for that detail. I suppose one follow-up perhaps on the -- I think, the fourth lever that you'd mentioned around price. It is a sort of -- feels like we're going into more of an inflationary environment in general. How historically has that affected APi Group's margins or what impact could it likely have this year on the margins, if any?

Yes. It should have a minimal impact on our business. So if you recall, again, focusing on Safety Services and Specialty Services, our average project sizes and our average project durations are very small and very short. So like Safety Services, the average project size is $10,000. And then Specialty is $60,000. So the quick heating nature of the way our work flows in cycles, you don't have as much exposure to some of those commodity prices. Now that doesn't mean that we don't focus on it. It doesn't mean that we don't keep our eye on it. That we're not on top of our businesses. We want to make sure that that we're putting language in our proposals that protects us for some of this rapid escalation of pricing, especially with steel pipe prices that we've seen. But for the most part, we feel like we've been out in front of it and having enough dialogue with our different business leaders to make sure that we're minimizing any impacts to it.