APi Group Corporation (APG) Earnings Call Transcript & Summary

Hi. Good morning, everyone, and welcome to the second day of the UBS Global Industrials and Transportation Conference. My name is Markus Mittermaier, and I'm the multi-industrial analyst here at UBS, and I'm delighted to welcome you, kicking off the second day here, with APi Group. We have the 2 Co-Chairs of the Board with us this morning. Sir Martin Franklin and Jim Lillie. We have the CEO, Russ Becker, with us; we have Tom Lydon, the CFO; and the VP, Investor Relations, Olivia Walton with us as well. So a full team. Thanks so much for taking the time. And I know that Russ has some opening remarks that he's going to share with us. There should be some slides that you can access as well. And last service announcement from my side before I hand over to Russ. There is a little window where you can submit your questions, and I'll try to make this as interactive as possible. So feel free to type in those questions and I'll ask them for you. And with that, let me hand it over to Russ. Russ, go ahead.

Thank you, Markus. We appreciate you including us in the program today. Thank you, everybody, for taking the time to join us and having interest in APi. It really is a great company, and we feel fortunate to be able to share our story a little bit with you today. If you have the slide deck open in front of you, I'll start on Slide #5, which is just a high-level overview of the business. But we are a market-leading business services provider of Safety, Specialty, Industrial services. And the best part about our business is the statutorily mandated requirements specifically in our Safety Services business. But also like the contracted services, we have a strong base of long-standing customers across all industries in North America and Europe. I think one of the things that makes us unique is our purpose of building readers, and our culture has been built around our purpose. And we truly believe that all of our approximately 13,000 team members have the ability to be leaders. And this is very much a people-centered business, and individual as well as professional growth are a key ingredient to our long-term success, especially as the economy returns to a more robust place and the challenge for talent continues to increase. We believe that great leaders are a competitive advantage and really truly do create shareholder value. If you turn to Slide 6, you will see that we have a very broad geographic footprint, we believe that this is an advantage for us. We have over 200 locations worldwide, primarily in North America, with -- we have an expanding platform in Europe that came with the SK FireSafety acquisition in October of last year. So as you can see, our revenue split is roughly 90% in North America and 10% in Europe. This footprint also allows us to maintain relationships on a local level. Most decisions in our space are made on a local level, and we think that this is also an advantage for us. It also gives us the flexibility to provide national account services to some of our more national-based customers. We support margin growth by leveraging our scale and -- as we continue to work on standing up our procurement and enhancing our purchasing power. So we are truly a leader, a leading provider in the markets that we serve. If you look at Slide 7, this is -- this will give you a little bit of an idea of the diversification of our revenue across both geographies, end markets, customers, that we think is positive for us. We like the end markets that we serve. We think that this is an advantage for us, and it's one of the things that allowed us to work our way through COVID. The average project size for all 3 of our segments is less than $100,000, which helps to limit our exposure to increases in raw material costs. Our customers range from Fortune 500 companies with diverse worldwide operations to single-location companies. Another advantage for us is we have low customer concentration with no customer accounting for more than 5% of our total net revenues. And that basically, if it was customer A in 2020, it would be customer B in 2021 and it would be customer C in 2022. So that's an advantage for us. Our largest end market that we serve is telecom and utilities. This represented about 25% of our total net revenues. An example of our work with private and public utility customers with large committed capital programs for the replacement of existing natural gas and water distribution systems. We are -- we have a relentless focus on growing service revenue. We believe this was going to drive enhanced margins, greater growth in recurring revenue and more long-standing relationships with blue chip customers, which is a key to our long-term success. Our goal is 50% plus across all 3 of our segments. And once we hit 50%, we'll move the goalpost into 60%, and we'll continue to build our service business. On Slide #8, that will give you an overview of our Safety Services segment. This is our largest segment and our #1 priority for continued growth. We generated approximately $1.6 billion of adjusted net revenues at a 13.7% adjusted EBITDA margin in 2020. Revenue in our Safety Services segment is derived from 2 categories. First would be life safety. Second would be HVAC services. We are a leading services provider in the markets that we serve. We believe that the diversity of the end markets we serve and the regulatory-driven demand for our services provides predictable recurring revenue opportunities and helps to build the protective moat around the business. This is significant for this segment. The average project size is less than $10,000. This is driven by our focus in the inspection and the service side, specifically in the life safety component of the segment. The majority of our inspection and service work is done on a fixed-price basis. Given the relatively small average project size, we anticipate being able to adjust prices to pass on raw material inflation to our customers. We have the ability to embed raw material price movements into each new project, which occurs more frequently given our average project size versus our competitors who pursue larger projects. Slide #9 is one of the keys to truly understanding APi, and this is the differentiated business model that we have of selling the inspections first as it relates to pursuing project-related work first. We believe that focusing on selling the inspection first is a key component to our strategy and to our model. We believe this because we know that every dollar sold is going -- of inspection revenue that we generate is going to generate someplace between $3 and $4 of subsequent service work. And this is -- that's a beautiful thing. We also believe that if we do a great job on that inspection work and the service work, that we're ultimately going to create a more sticky relationship with our customers that's going to allow us to negotiate their project-related work at a higher gross margin. And that's a positive approach to the way we take our business to the market. Nearly all facilities that have existing life safety systems are required by law to have that system inspected on an annual basis, regardless of whether the facility is filled to capacity or empty. So the statutory nature of the work that we provide -- or the services we provide in this segment leads us to strong growth opportunities as we continue to look and take the business forward. On Slide #10, you'll see there's been an intentional evolution of the company from 2008 until now to drive towards a business services model. Inspection and service represented approximately 41% of revenue for our life safety businesses in 2020. Again, we have a goal of 50% plus. On average, inspection and service revenue generates 10% higher gross margins than our project or contract-related revenue. On Slide 11, this will give you a glance at our Specialty Services segment, This is our second-largest segment. We generated approximately $1.4 billion of adjusted net revenues at a 12.1% adjusted EBITDA margin in 2020. Revenue in Specialty Services comes from 3 categories: infrastructure and utility, fabrication and Specialty contracting. The work in this segment is typically executed under master service agreements or time and material type agreements, maintenance agreements, with our customers. This gives us a great level of visibility into our customers' capital spending programs. We are focused on partnering with well-capitalized customers who have projects that are more macroeconomically resilient. For those of you who are familiar with us, we talk constantly about the work in this segment is acyclical in nature to what's going on in the broader, say, U.S. or North American economy. As I mentioned earlier, an example of the work with private and public utility customers with large capital programs, where they're replacing existing natural gas systems, existing potable water systems. It's good, highly profitable work. The average project size in this segment is approximately $70,000. Given the relatively small average project size, we have some ability to adjust prices and pass on raw material inflation to our customers. On projects that are longer term in nature, our contracts typically have price escalators built into the initial proposal. If you move to Slide 12, this is Industrial Services. This is our smallest segment, representing less than 10% of our net revenues. Revenue in Industrial Services comes primarily from 2 categories, transmission and civil. We are focused -- in this segment, we are focused on growing the integrity side of pipeline transmission, which is statutorily driven as transmission companies are required by law to maintain their existing pipeline systems to ensure that they are safe. We have a strategic focus on improving margins as opposed to growing the top line. On Slide 13, we just give you a brief description of our disciplined acquisition strategy. We view M&A as an important complementary tool to increase and accelerate shareholder value over time. We've completed 70-plus accretive acquisitions since 2005. The markets that we operate in are highly fragmented and lend themselves to continued opportunistic acquisitions. Our pipeline of M&A targets is very robust, with opportunities sourced through multiple different channels. We continue to look at our M&A activity through 2 separate lenses. One would be the small add-on acquisitions that APi has had success with historically, while also working closely with Martin and Jim to opportunistically pursue larger acquisitions in our core segments and evaluate strategic adjacencies that we may enter through M&A. We remain really focused on the following criteria: alignment of culture, values and fit; history of strong free cash flow generation; experienced management and leadership team; service growth component; and it must be accretive to our financial profile. If you move to Slide 16. This is just simply our focus on long-term value creation. We have a number of bullet points, but we have a margin expansion goal of 13% by year-end 2025. It's our goal on average to have adjusted free cash flow conversion of 80%-plus. Our target long-term net leverage ratio of 2 to 2.5x. I think today, currently, we're slightly less than 1.8x. We want to generate high single-digit average earnings growth, and we want to deliver long-term organic revenue growth above the industry average. On Slide 17 is just a quick snapshot at the guidance that we've provided, adjusted net revenues of $3.65 billion to $3.75 billion and adjusted EBITDA of $405 million to $419 million. With that, Markus, I will return the call back over to you for Q&A.

Russ, thanks so much for the overview. Very, very helpful. Maybe I'll start with a question for Jim, given that we have him on the line as well here. Because I remember at this conference a year ago, Jim, you spoke about your original J2 investment thesis into APi. Could you reflect upon this? What worked? What was maybe more challenging than you originally anticipated?

Well, good question. I think the investment thesis for us remains robust, strong. We -- when we first met Russ and the team, it was about Russ and the team. It was the culture of the organization. We knew that the service side of the business would be a protective moat, all of our diligence spelled that out. We knew that there were margin expansion opportunities within the business. We saw, if you will, a strong glide path to organic revenue growth. And I think what we -- and I've said this before, obviously, we didn't expect the pandemic. But I do think for investor relation purposes, to have your thesis detailed to investors and then be so stress-tested literally almost the day we became a public company a year or so ago meant that their -- people can really see the business in action, could see Russ and the leadership team in action, being preemptive and proactive. And we had talked a lot about the statutory nature of the services that we provide across all 3 businesses, in transmission, in Safety and in Specialty, and I think that held up. I mean people had an opportunity to hear about the thesis and then see the investment case in work. And Martin can chime in, but I don't think that we could be more pleased with how the management and the leadership of the organization stepped in and really led by example. And you see it in the operating results. We just did probably $10 million less on a year-over-year basis. And remember, we sold off some assets during that period of time -- sorry, EBITDA remained strong, you saw margin expansion. And that's really the investment opportunity that we think will lead to multiple expansion. Martin, do you want to chime in?

Sure. I'd echo everything that Jim said. And I would tell you that if you asked me 1.5 years ago if 1.5 years into it we'd be sitting on $0.75 billion of cash and a leverage ratio of less than 2x, I would have said no way. So I think that the nice part of the story is not only have we managed to create a lot of value and seen good momentum in the business and proven its resiliency, we now are sitting in a really good position to take the company to the next stage of growth and development, and have the financial flexibility to do that is very encouraging. So yes, we -- I think in deals when you buy companies, you never quite know how things are going to turn out. But I think all of our instincts, on the people and the culture, have all played out and been exactly as we'd hoped, which is great.

Excellent. Great. That's very helpful. And maybe I can actually follow up on that because M&A was, I think, always part of the thesis and has been, quite frankly, in the DNA, I think, of APi also in the past, right, sort of between the smaller bolt-ons that Russ mentioned. Now with the cash that you alluded to, with the leverage profile, I think 1.8x, as you said, we know that markets at the moment aren't particularly cheap in historical context. How should we think about that more transformational M&A that you guys talked about also at the recent Investor Day? Sort of any updates there, be it geographically or any particular focus areas?

Maybe I'll start, Jim. If you think about it, beautiful thing about being a public company is you're not under pressure like a SPAC to put money to work. You're not under pressure like private equity because you're taking the fees from people while you wait. The beautiful thing about being in our position is we'll wait for the right things, and when it comes to scale, to make themselves available. So we don't count on M&A, but we're building -- if you like, the gun keeps on getting loaded as we continue to build cash while we hunt. But we're very disciplined about it. There's no question that multiples have gone up, particularly in some of the bulkier service businesses that are out there. But that's where discipline comes in. And Jim can attest that while we were building Jarden over 15 years, we went through many periods where multiples were very high, but we managed to always find opportunities that were good for our shareholders.

I think Martin said it perfectly, so I'm not even going to add anything.

Okay. Perfect. Perfect. So maybe if I can come back to the business. There's obviously been a lot of discussions around supply chains recently. And I'm wondering, it's not something that comes up sort of like immediately when I think about APi given the service nature of your business, But can you talk about that? Sort of are there indirect impacts that we should have on our radar screen? Or how should we think about supply chains in general and the issues that we see out there in the marketplace?

Well, I think you have kind of 2 issues built inside the 1 issue around supply chain. You've got the rapid escalation of material prices and you -- then you actually have the supply chain delivery challenges that the market is seeing today. And both are kind of in and of their own way different, but the same. And first, I would point to our average project size that we alluded to in my opening remarks, The average project size for us is small. Across the whole business, it's less than $100,000. Across our largest segment, it's less than $10,000. So the exposure there is relatively low. And most of the work, when you're thinking about inspection and service, most of it is actually labor and less, so to speak, as it relates to materials. And so the exposure that we have is relatively contained and we're able to manage that. We've also been communicating every single week with our businesses as it relates to where commodity prices are going and the impact that's going to be potentially having on the markets that we serve. And so we've been able to proactively build that escalation into our proposals. Now I'm not saying that we've been perfect on it. I'm sure that we're not, but we have been very proactive. I think one of the things that is potentially challenging is the impacts that others who maybe aren't as proactive managing their supply chain issues, especially around deliveries, on our project-related work, it's possible that we could get caught up and caught behind somebody that has supply chain issues and it could have a negative impact on our business. And the reality of it is that we just need to muscle through it and deal with it and make sure that we're proactively managing it. And I was at a roundtable meeting on the last 2 days for our industry, and that's one of the most common topics, is around supply chain, and I would say even more around availability and delivery dates and how people are managing that. And I think that the proactive nature that we've taken will minimize that negative effect. For us, anyways.

Got it. Okay. But that comment on the indirect impact is interesting. So is that when you come second in line, maybe an install job on a service job and someone ahead of you, you're waiting for them to complete their part of the job? Or how do I have to think about that in practice?

Well, it's completely possible that you could get delayed by somebody else that's in front of you as it relates to proper work sequencing on some of these project-related opportunities. It's just another reason for us to continue to focus on building and growing the service-related activities. The other aspect of it is you just need to be proactive in your planning so that, that doesn't have a negative impact on your work that you're trying to accomplish. But I think we're seeing some issues specifically in Specialty Services where, really, the clients are providing the majority of the materials and yet they're having availability issues. And so work that you had planned for, say, Q2 might get pushed into Q3, or work that you had for Q3 might be pushed into Q4, just because of their ability to access those materials. And then I think there's another kind of secondary impact where people are recognizing that there's potential delay issues and so they're, in their own way, trying to hoard materials, which means if you're on the wrong side of that, it can have an impact on you. So no question we're going to feel it, but we just have to grind our way through it. And like I said, I feel like we've been pretty proactive.

Okay. Great. No, thanks for that color there, very helpful. And maybe we can actually go through sort of business by business and start on the Safety Services side, if you don't mind. So 2 main parts of that business, 80% life safety, 20% HVAC. What are you seeing there in terms of dynamics, Q-on-Q, year-over-year? And then maybe let's start there and I have a specific HVAC question that I also wanted to ask you.

Yes. So you're seeing kind of a rebound as it relates to HVAC. So some of the project-related work that we had really on the books for 2020 that got slowed down dramatically because of COVID has started to kind of recover. And so you're seeing, I guess, a positive start there with the HVAC services work moving forward. Specific with our life safety business, the end markets that we serve are really positive and robust. And so we continue to see really good opportunities there. I had mentioned on our first quarter earnings call that inspection revenue was up on a year-over-year basis, about 10% or just north of 10%, which for us, in that piece of the business, that's kind of the bellwether for us because we know that $3 to $4 of service work is going to come from every $1 of that inspection revenue that we generate. So for us, the focus is growing inspection revenue in our life safety businesses. We do that by continuing to build out our inspection sales leaders across our business, which we continue to make good progress with. That work will never be done, but we continue to make really good progress there, and that's all a positive. And we continue to look to bolt on the right life safety businesses to complement our existing geographic footprint, and that's something that we continue to work hard at. So things are positive in the segment.

Great. Maybe 2 follow-ups here on life safety specifically. So if inspections were up 10% and you mentioned sort of that 3 to 4x multiplier on the revenue side, right, so if I think into the summer, strong momentum, and then at some point, that you should get that extra impulse, if you will, from maybe that multiplier on the inspections. Is that how I should think about it if I look at the year-over-year trends?

Well, so you got to remember that the 3 to 4x service work is, I don't know, just north of 40% of the total revenue. It's not on the total pot of the revenue. And not all of that work, Markus, is going to -- it's not like it just happens the next day. And so some of that work might happen immediately, some of that work might happen in 4 months or it might happen in 6 months. And so I think you just have to continue to look at the body of work over a period of time. We've targeted organic net revenue growth of 8% in the segment. And I think if you look at it over -- over a -- that period of time, you'll see that, that will hold to be true.

Got it. Okay. Great. And then on HVAC, you mentioned that service is coming back strongly here. That fits also with what some of your peers in that space are saying. Is that a catch-up really from last year? Or is that sort of new demand as offices get reconfigured? Can you just help us a little bit, what you see on the ground there? What's the work that you're doing?

I would say that the majority of it is catch-up from last year. That being said, we have some opportunities where we're reconfiguring filtration systems. Like the largest privately held company in the world is based here in Minneapolis, we're fortunate to call them a customer. And just on their corporate office building alone, they have something like 50 make-up air units that all have to have enhanced filtration installed on it. And I suspect that once we're done and demonstrate success there, that we'll take that to the rest of their facilities. But for us, that's a component of it. It's not a huge piece of our overarching business, but there definitely is opportunity there. As it relates to office layouts being reconfigured, I think people are still trying to figure out what they're going to do. And they haven't necessarily landed on what they're going to do as it relates to if they're going to change their cubicle layouts and some of those types of things. People are just trying to get their feet back on the ground. For us, as we -- we've already started to bring our people back to the office. And the reality of it is, is that we've put enhanced filtration into both of the buildings on our corporate campus, but we don't feel that we need to get crazy as it relates to remodeling our office and everything else. And everybody that's coming back is vaccinated and feels safe.

Got it. Okay. No, that's helpful. And if I can touch maybe on the other key end markets or verticals in life safety. So you have commercial, education, entertainment, making up about 1/3; industrial, manufacturing, 18%; and distribution, fulfillment centers, 13%. Maybe touch upon each of those briefly, if there's any different pattern or any updates from the last time we spoke in the quarter.

Yes. So for us, I think the key -- if you flip to Slide 21 that show Safety Services revenue diversification, that's what Markus was alluding to, I think what I would point you to is the lack thereof of retail and hospitality. And we like the end markets that we serve. If you follow the space, the shortage of -- in semiconductors and the impact that that's having on automotive. Some of our customers have announced massive capital spending programs at facilities where we actually do the service work, which is obviously an advantage for us. So -- and we think that there's going to be robust opportunities in the space. Especially as we move forward, it's just going to take some of these -- from the time that one of our top-tier customers announces a major capital spending program, for them to get it in the ground and moving, doesn't happen as quickly as some might think. And again, it's like -- it's even like the infrastructure bill, and we don't have anything built into our budget as it relates to the impacts of the infrastructure bill. But the reality of it is, is that even if they do get an infrastructure bill, then by the time the work that comes, it's going to be 2 years out. And so people have to have the right perspective on the time frame for some of these things.

Interesting. That's actually a great segue to switching to Specialty because I wanted to talk about the infrastructure, but you kind of touched upon it. Almost 60% of your business in that segment being infrastructure and utility related. So if and when and whatever shape or form this takes, it sounds like this could be a clear positive, although that might be further out if -- in terms of any impacts, right? But what are the drivers do you see then maybe over the next year or 2 on the CapEx side? I think you alluded to those big customers probably in the semiconductor space, although that's probably more on the life safety side. But what other drivers do you see medium term then on Specialty?

Well, I mean, in Specialty a big part of it is the work that we provide to the telecom industry. The race to 5G, that's already raging. And that's got -- there will be additional funds coming out of the federal government to support rural broadband and those types of things that will have a positive impact on the business. A lot of the work that we're doing with our public and private utilities, they've already -- those capital programs are already passed through the Public Utility Commission. Most of those plans are 5-, 6-, 7-year programs. And they get to put them in the rate base, and so their incentive is to spend every dollar. And we've got great visibility into those capital programs, and that's one of the reasons that we like the space. And that work will continue to go forward regardless of what's happening with the economy, so to speak, on a macro basis in the United States.

Got it. Okay. And in terms of 5G, it's interesting that you comment on incremental funds there. What inning are we in on 5G CapEx if you think about the full program...

Yes. I think you're in the early innings. I mean, I think there's going to be continued opportunity in the space. And the reality it is, is that the next wave of technology will come and it will be kind of just a snowball that keeps on rolling. And so I think that we're definitely in the early innings of the space. And I think it's just important to be selective of who you're working for. Not every program is one and the same. I think you have to look at each one of those with discipline, and to make sure that the programs that you're taking on are going to be accretive to our margin expansion goals.

Got it. Okay. And then maybe switching to industrials. I know you guided this business down 30% on project selectivity and being a bit more deliberate there on margin also. Is that in the new level that you're comfortable with after the pruning is done in terms of thinking about a natural size of that business going forward?

Well, I think it's the bottom. That's the way I would look at it. And we're going to want to really continue to drive the focus on transmission integrity. I alluded to this in my remarks, but it's really regulatory-driven in that the federal government requires the transmission companies to maintain the integrity and the safety of those systems. And there's continuous -- the programs that the transmission companies have to do so are very robust. And it's kind of like an ore freighter on Lake Superior. It takes time to change the direction of that ore freighter, and that's really what we're focused on doing right now with the work that we provide in the segment. We're making progress on it. It just takes time. And hopefully, once we get through this year, we're going to be able to start driving back with positive growth in the segment. It's our third priority. We continue to push it. We believe that it can be complementary to our margin expansion goals. We just have to muscle through where we're at right now.

Okay. Got it. Then before I switch to margins, I know you guys track labor hours in quite some detail. Can you update us there? It sounds like they're up, but can you quantify that in any way?

Well, I don't have my sheet sitting here in front of me. I didn't know you were going to ask me that, to be honest with you. And -- but what I would share with the group is that our labor hours continue to tick up. We've kind of gotten through some of the seasonal part of the business. We're ahead of where we were last year. We are not back to, so to speak, where we were in 2019. So there are certain aspects of our business that continue to be impacted by COVID. Our European business is still impacted by COVID. Our Canadian business is still impacted by COVID. And the U.S. is probably third in that list, and people are seeing things continue to open up. So...

Okay. No, that helps in terms of directions. And then in terms of your margin targets, you mentioned that sort of 12% is the target to 2023, 13% to 2025 now on your business as is. Maybe can you quickly go through the levers here that you're pulling? And is 13% sort of the -- if you look at your peers, is that kind of where you feel comfortable that the business should be at? Or is there room above that in the longer term? And then just maybe as a quick follow-up, just looking at the time here. If -- maybe that's one for Tom on taxes, just given our U.S. exposure, I just wonder how to think about the tax rate going forward. Depending on what the outcome is there in Washington, how should we think about the 21% that you guide at the moment? Would any change kind of impact you one-for-one? Or how should we think about that? Maybe those 2 questions.

So I'll take the path to 13%, and then Tom can talk about taxes. So first, I would start with we need to continue to improve mix. And this will be one of the biggest drivers of our ability, so to speak, to achieve our margin expansion goal. And like I said, we -- when we get to 50%, we need to get to 60%, and we need to continue to drive mix and grow the inspection service component of the company. Second would be being disciplined with our project and customer selection. We call this our contract loss rate. We continue to make progress on reducing our contract loss rate. We still see an opportunity for us to continue to improve there. Pricing. Especially with the inflation that we're seeing in the economy today, we need to be super focused on pricing and making sure that we're pricing all of our opportunities in the right fashion. We are -- we have what we call our business process transformation project going on. And that project will provide, I guess, 2 levers for us as we move forward. Number one, it's going to really allow us to move towards a true shared services model where we're going to ultimately be able to leverage our SG&A. And second, we continue to focus on becoming more refined in our procurement practices, and so that we could truly reduce our cost of goods sold through a true procurement program. So there's an opportunity for us there as well. Obviously, M&A will play a role. We need to make sure that the M&A work and activity that we do, not only on the bolt-on side of it, but on the, say, larger, more transformational side of it, is going to be accretive to our margin expansion goals. And then operational excellence. And like I always say when I talk about this, I say we have the opportunity to just be better. And if you look at our different segments, like Safety Services as an example, we have 2 businesses that are 20%-plus EBITDA margins. Which means that if you look at the average, we've got businesses that are at 8% or 9%. And we know what it takes to improve the performance of those businesses, and so we need to stay super focused and just be better. And I think that's an opportunity for us. So do I think 13% is the ceiling? I don't. But we do need to put out targets that we can achieve, and we need to deliver on those targets and so that we can -- to meet expectations. And I think that's something that's very important for us before we get carried away of saying what's next. And -- but we are focused on it. We think it's realistic and it's our job to get us there. Tom, do you want to take taxes?

Yes, sure. So obviously, we don't have great line of sight to where the tax will end. To the extent that you've seen we're 90% U.S., 10% rest of world, if -- as the federal government increases its rate, we're going to have pressure there to that extent. And then we'll work to -- once we understand the actual law, and we're beginning to model some of this, Markus, currently as we've gotten some, what they call, the yellow or green books have come out recently on what Biden has proposed. And so we just began modeling some of that. We'll also have to look at what are the new tax planning strategies that open up when there's ever a tax bill increase that we have to also avail ourselves of. So too early to tell, but I think with our 90/10 split, you kind of have that sense.

Okay. Got it. And maybe I can squeeze one last in here, just connecting it back to where we started in the beginning with Jim and Martin around M&A. Noting sort of the relatively low leverage at the moment, the cash that you have on hand, which I think was just under $1 billion at the end of last quarter. I know we commented on this before, how high you would be willing to take leverage, in the sense, for a transformational deal. And I think you said 0.5 years ago at some point, that like 3x is the limit for sort of more short periods of time. Is that still how we should think about it? Or has that changed just given the amount of cash you have available at the moment?

So maybe I'll jump in and then Martin can close the door on it. But leverage to us is situational. And so if the right transaction came along and we said, look, our leverage ratio is going to be -- go from 1.7 to something larger than that, and here's the 2-year path to get us back down to the 2, 2.5x. I think as long as you have credibility and you communicate and manage expectations, I don't -- my conversations with investors, I think as long as they agree with the strategy, nobody is going to be overly concerned of a situation like you go up to whatever the number is and you have a path back down to where your target range is. So we're not changing our target range. But obviously, as you do larger deals, you may get more creative on how you finance these larger deals and what the outlook is. The goal remains the same. But if we just did something in November of this year, it would change this year's debt-to-EBITDA ratio, but then you'd have the EBITDA of the acquired business to start delevering right away. So Martin, do you want to enhance or improve what I just said?

No. Same as before, you said it all.

This sort of thing happens after 18 years with somebody.

Great. Okay. On that note, thank you very much, everyone, and it's always a pleasure to see you. Good luck, stay safe and hopefully talk soon. Thank you very much.

Thank you.

Thank you.