Q2 2020 APi Group Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to <unk> groups second quarter 2020 financial results Conference call.
All participants are now in a listen only mode.
Later, you will have the opportunity to ask a question during the question answer session.
Please note this call may be recorded.
I will be standing by should you need any assistance.
I'll now turn the call over to reveal Walton Vice President of Investor Relations at a P.I. group. Please go ahead.
Thank you.
Good morning, everyone and thank you for joining our second quarter 2020 earnings Conference call. Joining me on the call. Today are served Martin Franklin and generally our board called cares.
Just back or our president and CEO and time widen our chief financial Officer.
Before we begin I'd like to remind you that certain statements in the Companys earnings press release announcements and on this call. Our 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.
And our press release and filings with the FCC, we detailed material risks that may cause our future results to differ from our expectations.
Our statements are as of today I, just 12, and we have no obligation to update any forward looking statement, we may make.
As a reminder, we have posted a presentation D detailing our second quarter 2020 financial performance on our website.
Our comments today will also include non-GAAP financial measures in other key operating metrics. The reconciliation of and other information regarding these items can be found in our press release and our presentation is now my pleasure to turn the call over tomorrow.
Thank you Olivia.
Since we completed the acquisition of Ipi on October for 2019 mattress truck spot in the World. However, I'm happy to say that our original investment thesis remains intact.
We believe that as a result with the evolution of the company towards building a recurring services focused.
Business model following the recession that began in 2008.
The company has built a more protective moat around itself.
Focus on recurring revenue makes us more economically Brazilian when headwinds such as the scope at 19 pandemic it the economy.
I'm grateful for the leadership in sacrifices across our organization during these unprecedented times.
We look to the future we believe that <unk> is very well positioned for success.
Well, we don't know what what the future impact to cope with 19 may be we remain focused on a pre cobot 19 objectives and long term opportunities in front of this.
Oh, I'm quoting cool over to rough rough.
Thank you Martin and good morning, everyone. Thank you for your continued interest in a P.I. I hope you and your families are staying healthy and see.
The safety health and wellbeing of all of our employees and consistent choose constituencies is our number one priority.
I am proud of how our team has rallied together to combat the cobot 19 challenges and continue to serve our customers. Despite the headwinds they were facing.
The resiliency sacrifices and commitment shown by approximately 15000 team members has been inspiring.
Thank them for the focus and ongoing leadership efforts during these unprecedented times.
I will start by providing a summary of our second quarter financial results and business update before turning it over to Tom who will walk you through the results in more detail.
As many of you know in March following the onset of the pandemic, we initiated a cost reduction plan to counteract the potential negative impact on topline results.
Well the pandemic give it did have a negative impact on net revenues across our three segments as expected our proactive approach to managing risk across our platform and the strength of our recurring revenue services focused business model yielded results.
For the second quarter and the and the first half of 2020, we exceeded street consensus consensus estimates for revenue adjusted EBITDA and earnings per share.
Key highlights from our performance for the three months ended June Thirtyth 2020 compared to the prior year include the following.
Primarily due to the impact to cool 19, adjusted net revenues declined by 14% to 14.2% or $141 million to $849 million compared to 990 million in the prior year period.
Continued success in our ongoing evolution towards achieving a profile that is more de cyclical in nature with a focus on growing recurring service revenue.
We define service as inspection testing maintenance and repair as well as work executed under our Master service agreements in blanket contracts service represents approximately 40% of our consolidated net revenues as expected we continue to see that our service revenue held up well.
Adjusted gross margin of 24%, which is an increase of 383 basis points with all three of our segments successfully driving margin improvements.
The increase was primarily driven by and our industrial services segment as a result of our strategic focus on improving margins as opposed to growing the top line combined with improved project management and favorable weather conditions in our safety and specialty services segments margin expansion was driven by mix of work increase.
These labor productivity and improved pricing.
Adjusted EBITDA margin expansion of 190 basis points, either primarily by gross margin expansion and who the execution of large.
In early execution of largely temporary cost containment efforts to counteract the negative impacts of cold in 19.
Adjusted diluted earnings per share of 32 cents exceeding street consensus consensus estimate by 143% or 19 cents per share.
In a challenging environment. We're volatility is the new normal I'm very pleased with our results our ability to execute immense ongoing cold in 19 related disruptions is a testament to the strength in resiliency of our employees the benefits of a geographically diverse business model within the U.S. in Canada our emphasis.
On growing recurring revenue with well capitalized customers across a variety of end markets and the relative variability of our cost structure to allow us to quickly flux with the changing market. We believe that our relentless focus on servicing inspection hopes build them more protective moat around the business.
The evidenced by our recent surgeon Keith Keith is the pandemic is far from over <unk>.
However, we remain confident in our ability to continue to execute on our long term goals for the business. We remain focused on achieving our adjusted EBITDA margin goal at 12%.
Key drivers of margin expansion include.
Number one growing recurring services revenue. This is the best way for us to continue to strengthen the resiliency of Npis business and the key to our long term success.
Hi, guys operations are focused on end markets and services that often have a statutory requirement that tend to be economic economic cycle agnostic. Good examples of this dynamic or the inspection in service work, we perform in our safety services segment.
These inspections are required by law in already built facilities and our required regardless of whether the facility is filled to capacity are empty. Our go to market strategy of selling inspection work work first differentiates us from our peers and ultimately creates a stickier client relationship that leads to higher margins and growth opportunities.
Another. Good example is or is our work performed under Master service agreements with private and public utility customers with large committed capital programs in our specialty services segment.
Our long term goal is for 50% plus of our net revenues across all of our segments to come from recurring service revenue.
Second.
Organic growth through attracting new customers, increasing work from repeat customers increased demand for services in pricing opportunities. We are actively proposing on opportunities across all of our segments. While a pandemic has presented a variety of challenges. It is also presented an increase in opportunities in search certain areas.
Such as working with National Telecom providers on the race to Fiveg.
We believe that our customers maybe be seeking to extend their relationship with partners like us as we are well capitalize and have a strong balance sheet.
Third improved project in customer selection.
We continue to focus on thoughtful and profitable growth rather than growing for the sake of growth in risking profitability.
As I've stated on prior earnings calls, we're focused on reducing our contract loss rate, which refers to projects, where we have a negative margin in partnership with leaders across our individual businesses. We've we have evolved more robust formal go no go processes related to project selection, which.
We believe this will help us achieve our goals in this area.
For.
Divestiture of two industrial services businesses that we classified as assets held for sale at the end of 2019.
As I mentioned on our last earnings call. We completed the divestiture of one of these businesses in the first quarter. During July we completed the sale of the second of the two businesses.
These projects are now behind us in the benefit as reflected in our adjusted financials for the industrial services segment as well as in our consolidated results.
And lastly investment and back office infrastructure that we anticipate will help us leverage our skill. We continued to move forward with our business process transformation efforts to move towards more of a shirt shared services model. This major multiyear effort is designed to complete the foundation for eat the ice transformation from a.
World Class private company to a world class public company.
In addition to the organic growth drivers that I mentioned, we view M&A as an important complimentary tool to increase in accelerate shareholder value over time, we intend to continue to pursue small add on acquisitions, which has had success with historically, while also working with Martin and Jim to opportunistic.
Equally pursue larger acquisitions in our core segments evaluate strategic adjacent sees that we may answer through M&A. We are actively engaged in conversations on both fronts.
I'd now like to hand, the call over to Tom to discuss our financial results in more detail Tom.
Thanks, Ross and good morning, I will start by reviewing our consolidated financial results segment level level performance as well as our strong balance sheet and liquidity and conclude with providing some color on expectations for the remainder of 2020.
As Russ mentioned adjusted net revenues for the three months ended June 30, 2020 declined 141 million were 14.2% to 849 million compared to $990 million in the prior year period.
The decline was primarily attributable to negative impacts of coded 19, combined with improved project and customer selection, which led to a decrease in the volume of projects.
For the six months ended June 32020, total project net revenues declined by 162 million or 8.8% to 1.7 billion compared to 1.8 billion in the prior year period due to drivers I mentioned for the second quarter.
Adjusted gross margin for the three months ended June 30, 2020 was 20%, 24%, representing a 383 basis point increase compared to prior year. The increase was primarily due to our strategic focus on improving margins as opposed to growing the top line in their industrial services segment combined with improved project manager.
And favorable weather conditions in our especially in our safety and specialty services segment margin expansion was driven by mix of work increased by labor productivity and improved pricing.
For the six months ended June 30, 2020, adjusted gross revenue gross margin was 23% representing a 351 basis point increase compared to prior year due to the drivers I mentioned for the second quarter.
Adjusted EBITDA margin for the three months ended June 32020 was 11.9% representing 190 basis point increase compared to prior year aided primarily by gross margin expansion in early execution of our largely temporary SGN a cost containment efforts counteracting the negative impacts of coded 19.
For the six months ended June 32020, adjusted EBITDA margin was 9.8% representing 114 basis point increase compared to prior year due to drivers I mentioned for the second quarter.
While we're pleased with 190 basis point improvement in adjusted EBITDA margin for the quarter or SGT operating expenses reflect the impact of certain temporary cobot 19 cost savings measures. We expect a level of these expenses to return in the second half of the year.
Our strong cash generation has continued and our balance sheet liquidity profile remains strong.
For the six months ended June 32020, adjusted free cash flow was 230 223 million, representing a 201 million increase compared to prior year.
Of 22 million.
Our adjusted free cash flow conversion rate was approximately 137% exceeding our goal of 80%.
The increase in cash flow was primarily driven by the change in working capital levels as the decline in net revenues resulted in reductions in our accounts receivable and fluctuations in our working capital balances that drove positive cash flow generation.
As of June 32020, we had 607 million of total liquidity, comprising 377 million in cash and cash equivalents and 230 million of available borrowings under our revolving credit facility.
As of June 32020.
We had 1.2 billion of indebtedness outstanding under the term loan and no amounts outstanding under our revolving credit facility.
Our net debt to adjusted EBITDA ratio calculated in accordance with our credit facility was 2.2 to one as of June 32020.
I will now discuss the results in more detail of each of our three segments beginning with safety services.
Safety services net revenues for the three months ended June 32020 declined 16.4% or $73 million to 371 million compared to 444 million in the prior year period.
The decline was primarily due to negative impacts of cobot 19, such as building access restrictions and shelter in place orders along with the timing of demand for our mechanical services.
For the six months ended June 32020, net revenues declined by 75 million or 8.6% to 795 million compared to $870 million for the prior year period due to the factors I mentioned previously along with the timing of contract revenue.
Service represented approximately 40% of the segment's net revenues for the three months ended June 32020 up from approximately 36% in the prior year period service revenue outperformed relative to contract revenue as expected declining by 5.2% or $8 million to 149 million.
Compared to 158 million in the prior year period due to covert related matters.
For the six months ended June 30, 2020 service represented approximately 39% of segment net revenue up from 35% in the prior year period.
Service revenue increased by 1.5% were $5 million to 308 million compared to 303 million in the prior year period.
Adjusted gross margins for the three months ended June 32020 was 31.8%, representing a 253 basis point increase compared to prior year due to the impact.
Due to improved mix of service work and the increased efficiencies for the six months ended June 32020, adjusted gross margin was 30.9% representing 152 basis point increase compared to prior year, primarily driven by continued shift in mix of work towards inspection and service revenue.
On average we estimate that gross margins on inspection and service revenues are approximately 10% higher gross margins on contract revenue.
Adjusted EBITDA margins for the three months ended June 32020 was 12.7%, representing a 17 basis point decline compared to prior year as expected.
Selling general and administrative expenses in this segment did not decline as fast as net revenues as we continued to invest in growing our inspection service business model.
For the six months ended June 32020, adjusted EBITDA margin was 12.6%, representing a 41 basis point decline compared to prior year.
Specialty services net revenue for the three months ended June 32020 declined 15.7% were $65 million to 349 million compared to $414 million in the prior year period.
Decline was primarily due to negative impacts of cobot 19, such as project deferrals and job site disruptions along with the timing of demand.
From our customers and timing of projects for the six months ended June 32020, net revenues declined 51 million or 7.3% to 649 million compared to 700 million in the prior year period due largely to the factors I mentioned for the second quarter.
Adjusted gross margin for the three months ended June 32020 was 17.8% representing a 255 basis point increase compared to prior year due to increased labor productivity and improved pricing.
For the six months ended June 32020, adjusted gross margin was 14.9% representing 166 basis point increase compared to prior year due largely to the factors I mentioned for the second quarter.
Adjusted EBITDA margin for the three months ended June 32020 was 14.6% representing a 326 basis point increase compared to prior year, primarily due to improved pricing and increased efficiencies in the execution of our services for the six months ended June 32020, adjusted EBITDA margin was 10.6 per se.
Representing 163 basis point increase compared to prior year due to the factors I mentioned for the second quarter.
Moving onto industrial services.
Excluding business was classified as held for sale for divested as of June 32020, <unk> Industrial services adjusted net revenues for the three months ended June Thirtyth declined, 1.5% or $2 million to 133 million compared to 135 million in the prior year period for the six months ended June 30.
32020, adjusted net revenues declined by 35 million or 13.1% to 232 million compared to 267 million in the prior year period.
The decline was primarily due to decreased volume as a result of strategic focus on improving margins as opposed to growing top line.
Adjusted gross margin for the three months ended June 32020 was 18% representing a 1200 86 basis point increase compared to prior year, primarily different driven by productivity increases due to improved project customer selection project management and favorable job site conditions.
For the six months ended June 32020, adjusted gross margin was 17.7% representing 1400.
68 basis point increase compared to prior year due to the factors I mentioned for the second quarter.
Adjusted EBITDA margin for the three months ended June 32020 was 15% representing an 837 basis point increase compared to prior year, primarily as a result of our strategic focus on improved margins as opposed to growing the top line.
For the six months ended June 32020, adjusted EBITDA margin was 13.4% representing 1037 basis point increase compared to prior year due largely to the gross margin improvements mentioned earlier.
Before turning the call over to Jim.
I would like to provide some color on expectations for the remainder of 2020.
We had approximately $19 million of coated 19 related SGN a cost savings during the quarter.
The majority of which were due to temporary actions such as salary for one k. and compensation related benefits that we began to unwind in June.
As a result, you will likely see incremental expenses in the business results in the back half of the year.
Regarding full year guidance current street consensus estimates for 2020, our revenue of approximately 3.5 billion adjusted EBITDA of 337 million and adjusted earnings per share of 84 cents.
As we move through the balance of the year engage the ongoing impact of Coca 19, we will modify our outlook on a regular basis.
However, based on our progress to date in 2020, we believe that adjusted net revenues for the year will range between 3.4 billion to 3.5 billion adjusted EBITDA will range between 345 to 355 million and adjusted earnings per share will range from 94 cents to $1 per se.
Share based on adjusted fully diluted share count of 174 million, excluding any impacts for warrants.
We expect capital expenditures for the year to be approximately 35 million and depreciation to be approximately 80 million.
Our cost of capital is approximately 5% and our adjusted mid and long term effective tax rate remains approximately 21%.
Ill now turn the call over to Jeff.
Thanks, Tom Good morning, everyone.
We believe that as truly expense reduction actions strong cash flow generation.
Conservative balance sheet and liquidity profile provide us with a stable foundation to continue to navigate the uncertain economic climates, while also providing us with flexibility to capitalize on the recovery and invest in strategic opportunities.
Although market conditions as a result of cobot 19 remain uncertain and visibility is still somewhat limited. We believe that we are well positioned to continue to execute on our long term goals.
The business has shown just resiliency and the leadership has shown us hands on approach to proactively and preemptively addressing challenges. It's a cultural approach to running the business that we are used to and products.
We believe that for those of you getting to know the company.
It has to do showing the strength of the proactive in protective mode and that's a business has shown this resiliency in a very challenging environment.
Well, we have not expected to be stress test. This quickly as a public company, we believe that our resort results support the investment thesis, we had when we first met Russ and the team.
As you know we're focused on making the right choices for the long term health of the business being opportunistic on M&A and remaining focused on creating sustainable shareholder value by focusing on our long term value accretion targets, which are one delivering long term organic revenue growth above the industry average to continue to.
Leverage our SGN today.
Three standing adjusted EBITDA margins to 12% plus by fiscal year 2023.
For adjusted free cash flow conversion of 80% plus.
Five generating high single digit average earnings growth and finally number six tug new long term net debt to EBITDA ratio of two to two and a half times.
With that update we'll turn the call back over to the operator and open the call for QNX.
Thank you Sir the floor is now open for questions. If you wish to ask a question at this time. Please press Star then the number one on your telephone keypad.
If at any point. Your question has been answered and you wish to remove yourself from the Q press the pound team.
Our first question comes from line of Andrew Wittmann of Baird.
Great. Thanks, Good morning, everyone. Thank you for taking my questions.
Just to understand the business trends in the that happened during the quarter a little bit better.
Either us or Tom I was hoping that you talk about what you saw as the quarter progress. Obviously, you gave us the update.
Kind of halfway a little bit more through the quarter here, but just kind of what I see that the month over month cadence or inorganic revenue trends and then certainly an update about what you've seen in July.
Mentioned some deferrals in the quarter are those deferrals are coming into action or the strip still deferred thanks, some commentary around that even by segment would be particularly helpful for everyone to understand what's happening with the business today.
Yes so.
Thank you for your question.
We have seen things, we track man hours by business and we've seen.
Man hours, you know slowly.
Continue to tick in an upward fashion really.
Across most all of our businesses.
If you look specifically at at safety services, one of the things that that we watch very closely because we're so focused on the the inspection and service component of the business as we watch our inspection man hours and our inspection man hours are actually up year to date.
About seven or 8%, which is a positive sign for us and so as as building as the shelter in place orders start to.
To relax and.
Business continues to open up we expect that.
The service component of our work will work closely follow so that's a that's a good positive key indicator for us as it relates to the the work in RCC services.
Specialty services, the cyclical nature of that business continues to show itself. We see if we look at our contract backlog in the other work associated that.
That we have in front of US we continue to see positive results there as well and we remain very optimistic about the opportunities that that are going to come you still see like we're still seeing some opportunities that we have slide to the right, but it seems to be.
Normalizing and starting to that's starting to to flatten out, but I think that we're going to continue to see some of that volatility.
Probably through throughout the course of the next year, which I think most most folks with Doug would concur with so and then industrial services, which is our.
Smallest piece of our business, we continue to focus our emphasis on the services side of the work that we're executing you know with that group and that so just to continued effort thats going to push of forward and something that we're going to need to continue to drive as as as the year progresses and moves on.
Great that's helpful.
Maybe just another way to add a little bit more color on that as my follow up question I wanted to touch on backlog I think you mentioned that in your answer there on one of the segments, but in terms of bidding pace.
And ability to put awards into the backlog.
Has that slowed down as well.
Are you still able to put things into backlog and not execute it could you talk maybe the best way to answer this would be to talk about kind of how the sequential performance in your backlog has held up during the quarter from last quarter to this quarter is it is up down.
That'd be helpful.
Yes. So number one is that we do not use the word bid at EPA and we propose on opportunities because we do not want to be selected.
By any of our customers based on our price and so I don't meet I don't see that with our sarcasm I see that with sincerity I mean, I have literally told our people that we do not bid work and.
And there was it theres a difference in mindset to win when you think about that so.
So really answer your question.
The.
Our contract our backlog under contract is slightly ahead of where we were at this time last year, which is positive for us and.
So we.
We continue to see how robust.
Opportunities in our pipeline in than our funnel.
In some aspects we've seen.
A slowing of.
Maybe I'd call it decision, making from when that proposal gets to our client and that client makes a decision to move forward, but in general.
Our backlog has been very very solid and been than holding up very very well and.
Which is positive and for US you know I had alluded to in my remarks, the that we've implemented a more robust no go go no go process selection for the opportunities that we're going to pursue and so we've seen all that I could I can comfortably tell you that the quality of our backlog.
Has improved as well as just holding up so we're positive about that.
Great. Thanks, So just wanted to ask when kind of technical question here for Tom before I jump off and that was regarding the free cash flow is obviously very good in the quarter and you mentioned kind of the working capital.
As a result of revenues being down that makes sense, but just curious as to how much.
Free cash flow you were able to generate this quarter as a result of the federal payroll tax deferral and what's your expectations are for the year on that amounts just so that we can model that appropriately as that.
Get paid back next year and thereafter.
Yes, so roughly about $12 million in the quarter in you can ballpark.
Each quarter.
Thank you.
Our next question comes from the line of markets made a man of yes.
Yes, hi, good morning, everybody.
Good morning, good morning.
Maybe.
Briefly if I start up the with the guidance. Thanks first of portfolio for giving back some of many companies have done that.
If I look at so thus the cadence first half second half I wonder, what's your assumption sort of like on on topline because you did just on the 1.7. So the implied second half topline number is is roughly the same.
They said selectivity of on the industrial is that sort of conservatism you mentioned the backlog is it's looking okay.
Thank you get a bit of since for.
The assumptions you took some come up with the second half implied guides, let's start there.
Okay.
Yes, so in building that guidance, we go to our businesses that we can build it up.
From the ground up and based on what they were seeing at the time of putting that together.
And with still some of the headwinds with Covidien and some of the spikes that are coming back up.
We look at that and believe that Thats, a very appropriate place for us to be at this time, given the general macro economy.
Okay got it but it it coincided with the fair to assume that sort of from a underlying seasonality usually the second half is.
Better than the first half with Duffy would that be fair.
Yes that would be fair.
Okay great.
And then markets markets. It's yes, it's Jim yes, basically the front half in any given year is about 40% in the back half is about 60% give or take.
No no got it okay great.
And then maybe on cash flow just I get the point around sort of like the tax deferral and the impact on that but even if I exclude.
Obviously conversion is very strong boss was also seemed like a hit us the 80% in the first quarter.
How should we think about both these and also your longer term margin guide because.
Already now you're kind of the.
The quota.
That's very close to you as sort of medium to long term margin target I understand that there's some cost coming back but.
But do you see assume rig in the Incrementals in the second half in business stabilizing.
How should we really think about that's sort of like cash conversion.
Longer term east the 80% due to a reason that been lumber.
And also on the margin sites.
Maybe think about.
Whether there's a chance that we can get to that within target earlier than what you have previously communicated.
I'll, let Russ and Tom answer that but I. Appreciate you trying to change our long range guidance Mark as you know we want to we want to make sure that we deliver on the goals that I laid out in our comments, including getting to 12% plus by 2023, Nobody would have expected a pandemic when we initially gave.
About that guidance and so obviously, we'd rather be in a position under promising in over delivering but we're not going to change the long range guidance that we've given.
And with that ill, let Russ and Tom respond to the micro part of the question.
Yes, so marcus on on the.
EBITDA margin.
We made progress in the quarter, we're happy with what we did in the quarter, but there were things that were temporary in there and when we back those things out we're back into that 10% range.
Versus the other 11.9, so I think it's clear if you to think about it that way and we'll continue to make the progress as planned to 2023 with regards to cash conversion.
Because we think that that revenue decline has happened we wouldn't expect us to be in that 137% conversion in the second half, but we're comfortable with the 80% on a consistent mid and long term basis.
Okay got it thanks for that I get back in Q.
Our next question comes from the line of any kind limits of Citigroup.
Hey, good morning, guys evolves well.
Good morning Barney.
Yes, I wanted to follow up on the comments around inspection man hours up seven 8% as of now.
AIDS good to see the annual guidance out there.
Can you talk about what you're assuming in the guidance for surface inspection the second half of the year and because we don't have the second half of 19 actuals can you tell us approximately what you're assuming for organic revenue decline in the second half of the year versus the 14% decline you saw in Q2.
Yes so.
Like inspection man hours drive is going to ultimately drive our service revenue and I think we've provided.
David in the past that is for specifically in our life safety businesses that approximately 45% of the revenue comes from ins inspection and service. So you know as we you know we would be hopeful that that we can get.
The service component of the inspection in service piece of our business you know rocket enrolling in the second half we haven't provided any guidance about where we specifically see that revenue coming from but we're we're optimistic because we've seen growth in the answer.
Affection component of the business that we will continue to see upward projections from a revenue perspective as associated with our service work.
All right. So I just want to follow up also on the comment that you made around this sort of 10% underlying margin.
Obviously, we know that you've had sort of temporary cost out and you have to give some or maybe all of that back but maybe you can talk about in a more normalized environment you didnt very strong margins specialty services.
Margin safety were good.
Industrial margins have been coming up over the last couple of quarters can you sustain these double digit margins in specialty service and industrial moving forward and then how do we think about you know these temporary costs out in the sense that can have discussed LP structural as you go forward.
Well I mean, you know we shared that we've saved about 19 million in in.
Operating expenses associated with kind of our cost containment efforts and which are positive and part of that is some pruning that was done inside these businesses and we haven't necessarily done the exact math to see how much of the pruning was the $19 million.
Versus you know salary reductions in furloughs and some of the expenses that that we expect to to return. So we're going to see a little bit of margin pressure.
You know as as we move forward into the second half.
Traditionally in the space you know you see wind and whenever there's a potential economic downturn, you see pricing pressure that works its way into the market. We have in so our discipline from our project selection and customer selection that that know that.
Go no go process that that weve implemented its going to be very very important for us to to be to maintain.
The margins that weve that we've been able to to execute on so.
A big part of that comes from this whole concept of being disciplined around you know, who we work for and in what projects that we pursue from as a company and but.
It's all possible and install doable.
Great and then just one more follow from me up for Russ maybe Jim amine as you give these temporary cost back.
And you think about M&A, then I mean is it sort of a balance here where in the second half the year, you've talked about sort of dusting off some of the M&A plans, but you have to sort of be careful what the environment. Obviously valuations are all over the place. So what do you see out there in terms.
Of M&A and focus that you have on it do we wait till all these costs come back or or can you start to get going here on that.
So I would say that we have Ah I put it into two buckets.
We have the ongoing M&A program that Ross and the Apiay team.
Have you know executed on in the smaller the smaller if you like bolt on opportunities those are continuing there's a pipeline.
There was a slow down really because of cove. It that is now if you like back India. We had a session on that in the last couple of days.
And then on sort of if you like.
You know more.
Addition, attitude M&A for slightly larger businesses.
That pipe prices also back up and running so we are.
Active in that process for opportunities for us so from my perspective.
There are opportunities out that I don't think pricing for what we're doing his <unk>. If you like out of control and it's consistent with ER.
What we see.
We.
We spent a lot of time with with the leadership organization on this and we've been we've put together a in Minnesota for the last few days going through that so there will be there'll be some opportunities you could use is the business is well positioned for it.
You know the cash production at <unk> in the business and you know the conservative balance sheet, we have plenty of capacity.
To take advantage of opportunities in front of us.
I appreciate it guys.
Thank you thanks.
Our next question comes from the line of Kathryn Thompson of Thompson Research.
Hi, Thank you for taking my questions today.
I wanted to follow up just to take a little bit deeper on the margin and just kind of the outlook for the look at segments in really primarily safety and specialty.
I really want to parse out.
What is more transitory sue will likely come back with increasing volume imbark versus more fundamental changes you know you addressed a portion of this earlier in the call, but really would likely get a better sense of some of the more fundamental changes that could have sustainable margin improvement. Thank you.
Well you don't Catherine Thank you for participating and.
No I mean.
No I don't want to oversimplify by any stretch it imagination right. So as we March towards our our.
Long term EBITDA goal of 12% by 2023, the areas that are going to have the greatest level of impact our number one disciplined project customer selection and reducing our loss rate. So if you recall, we had a publish loss rate last year of 1.5% we said.
Our goal this year was to cut that in half we've made progress on that we need to continue to make progress on that but thats a huge portion of the sustainability of of the margins. That's in my opinion, that's the lowest hanging fruit that we that we potentially could have we need to continue to drive the mix of our business and.
You know is we if we can continue to sustain.
Seven or 8% growth in our inspection business, we're going to drive continued to drive the growth of our service business, which drives that recurring revenue.
Mix goal to closer to 50% if you recall the gross margins for that work are typically 10, 10 points better and that's going to be a big big driver for US and then I would say.
Increased execution inside our businesses and we still have businesses that.
That we know can be better and they must be better and so we need to evaluate each of those businesses and be making the choices in the decisions that we can.
To improve prove those businesses and that that doesn't even talked about our business process transformation project, which you know we're hoping that.
That long term effort is going to allow us to really truly move to a shared services model and and help us to reduce our SG in a on a longer term perspective, and you know and then you couple that in was strategic M&A. So it's really is that if it is really truly hitting a bunch of singles.
You know versus stepping up to the plate knocking it out of the park with one one false flu so it.
And that's where our focus and that's where our priority is and that's why I think Jim made the comment earlier about we're not changing our guidance as it relates to our long term objectives because.
You know as we returned some of these costs were going to have to continue to drive all of these other points, if we're going to be successful in achieving that goal.
Two follow ups to that after loss rate was half percent last year, where is it today and then the second is it fair to say that the margin upside in the quarter was more driven by fundamental changes and not just transitory, but that's.
Well I said another way I hear your headcount.
Well number one I don't have the what our loss rate is you know I'm sitting at the tip of my my tongue right now I mean, my Directionally know that it's improved and that's just because most of those those.
Most of the time.
If there is a problem that that rises to my attention and rises to my desk in so from that perspective, you know I'm speaking more directionally in intuitively and.
We need to evaluate that on a year over year basis.
Regardless, but we are making progress as it relates to that goal.
And I don't necessarily know, which when you when you talk about transitory.
So headcount cuts.
But is there a whole host company services companies that reported where you're able to cut costs, just by cutting headcount and that those costs will come back as volumes improved.
So it's really set fighting that out from some of the fundamental fundamentals that she is focused on as a company.
That makes sense. So yes, so so I mean, that's the beauty of our business right is the ability for us to flex our workforce up and down based on our customers' needs and demands that we see in the in the marketplace and.
You know I said this earlier, we took the opportunity to do some pruning and any business. It's been on you know really a positive Pete's tenure run ends up with.
I'll, just see less than average non performers in their business and so we wanted to make sure that.
We took advantage of you know the pandemic and made sure that we did pruning where that was appropriate but we also we're really focused on trying to.
First of what's right word preserve our our workforce so that as the market returned to more normal time that we were able to.
Being a position, where we could start rocking and rolling again, and so we actually used salary reductions in furloughs in job Sharings and things like that so that we would be able to maintain that workforce.
As as best we could as as as the market returned and we're in I think that's evidenced by the fact that we're seeing our man hours on a business by business case be north start to tick up.
Our field Workforces is primarily a union field force, we do have some non union businesses as well, but were primarily at union workforce in that provides us with additional flexibility to flex and.
Because there are no trailing severance costs and such for for the individuals that are members of the union. So as we is our work is our work needs flex up and down it gives us a much more flexible model to to work within so I hope that answers your question.
Yeah.
Yes, maybe I could just jumping also.
We talked about it.
Throughout the script, but.
The ongoing consolidation of back offices continues to evolve so thats a contributor.
The mix of the business is also a contributor you've got some things going against you. For example, we used to put two guys in the service fan, but because of co. Good.
Our expenses have gone up a bit because now two guys to two vans for co. Good reasons and so there's business process improvement there's mix improvement Theres continue to leverage scale and there were some headwinds and then obviously the temporary salary reductions, including Russell not taking us.
Right.
We'll need to come back in the form 10-K will need to come back in.
But ultimately we're comfortable with the levers that rather than the tumor pulling to drive the business forward and give us those margin goals in 2023.
That's helpful rounding out thanks, Im not sure karpinski on that on stepping back and looking at a bigger picture question and looking at the opportunities in the past couple of world well, let's services your segments could see gains and and but areas could be more at risk.
Well, we see the opportunity for gains I guess, you know essentially across across the deck.
Obviously, the opportunity to continue to grow inspection services and safety is like Thats. The number one priority for that for the company.
And we see.
Opportunities to you know to grow the business, primarily anything about specialty services and the race for Fiveg and the telecom industry.
And there is tremendous opportunities in that space as well and we're just trying to be disciplined in our approach as we as we look at some of these.
Additional.
Places, where we can grow the business you know and then in industrial.
There is an aspect where we've been very purposeful about.
I'm going backwards before we go forward in being focused on margins and you've seen that in our results and part of that is also making sure that we're focused on the.
Service side of.
That business and so you'll see us continue to be very very disciplined.
In focused less on revenue in industrial and more focused on on margin. So the primary places that were focused on growing are going to be in safety services first in specialty services second.
Okay are there any type, especially surfaces that you offer that specifically address some of that unethical changes.
As as we all are just too and new world with 'cause it.
So could you seems increased inspections because at that so you'd see that with other this this is too.
Really trying to understand but let those opportunities maybe.
Well I mean in specialty services, if you're if we're talking specifically there.
Well I'd say, there's three probably areas that just come to the front of mine mine one of them I talked about which is this race to fiveg in telecom. Yeah. You know obviously when you have situations like what happened in Baltimore. The other day, where you had the of the residential neighborhood that had the explosion due to the.
Existing natural gas distribution system in the and the reference right in the in a number of the articles that I read about it the.
The fact that the system is leaking as much as it is.
That creates a lot of opportunity for for us Unfortunately, and Thats an area of expertise, it's highly complicated work to do and.
It.
You need to have sophisticated protocols to be able to successfully do that work and so there's there's opportunities for us in that space as well and you know kogut is driving some HPC upgrades, we don't it's not a huge part of our business, but we've seen some some rise and opportunities for with our clients too.
Great and improve the the quality of their air systems.
In the in their buildings, primarily and secondary education type institutions.
Okay, great. Thank you for taking my questions today.
Thanks Catherine.
Ladies and gentlemen, we have time for one more question. Our final question will come from the line of Don Templin.
CJ Securities.
Hey, good morning, guys. Congratulations on nice quarter. My first one maybe Russ I think you might have addressed I, especially want to get a little more solid answer how are trends in July versus June and maybe into August across the business lines and secondly.
From a Q3 versus Q4 perspective, which do you expect to be relatively stronger given the current activity and your assumptions around covered activity covert resurgence and your normal seasonality.
John Directionally, we expect July two two to hold up and we haven't seen anything that would send us any other sort of value of of a mixed message Tonight I guess I <unk> you know the single biggest indicator for US is is watching our man hours and and we watch man hours.
Again by business and watching where the trends.
You know for those man hours goal and there's nothing there that necessarily that sends us any sort of alarm our third quarter will be stronger than our fourth quarter.
Got it that's helpful. And then I just wanted to follow up on a man hours comment you said that inspection hours were up year over year.
I get the implication that maybe maybe the service that follows that where you generate I think it's like $45 on every expects and dollar.
Then quite catch up to that level I'm wondering is that the case number one and number two.
Is there a period of time, where you've done an inspection and maybe those results go stale and you have to do another inspection before we can actually generate the the surface telling us that you know some some color on that will be helpful.
Well I mean.
I mean, it's possible that.
You can do and inspection and you could make.
Make a proposal to a client with the deficiencies and they would choose not to do it for whatever reason.
That doesn't happen.
Is very often with our book of business because the end markets that that we're serving.
You know in my opinion are you know much in a much better position you know I've said this before we do not do a lot of business in the hospitality in the retail space, which had been harder hit end markets.
So I think that the reason that you see a little bit of above a bump for from us or you know when I say bump a drag theres really a better way to put it from a service perspective, it's just because of all the different shelter in place orders and the difficulty. It is and you don't getting access to some buildings and do you know them then environment is still.
Not easy to.
On to working and.
You are seeing the surge in the cases and so.
Trying to be efficient as we do that work is you know the other part of the challenge and so we suspect that because we feel good about our customer base at that work is all going to get done. It's just a matter of went the other part of it is that we typically see three to $4.
It is worth of service work driven off of every dollar of inspection work not four to $5 and.
So just to I guess provide better clarity and direction there for everybody. The l. sits on the call.
Got it. Thank you I appreciate that Chris and lastly from a from it just any comment on the competitive environment I know youve remain disciplined.
But I know you build activity is probably coming down our your appears in competitors in the field Singh your business model is more attractive maybe competing I'm on inspection side.
At this point in time or are there any other.
Trends or the puts and takes so we should be thinking about from a competitive aspect.
Yes. So you see you always see you always see in times like this you see people you know wake up one morning and thing to themselves you know jeez, we should be doing more inspection and service work and we should we should really get focused on that and then they try to they try to move into the space. The the challenge for them is that they don't have the info.
Restructure develop that we have and.
So this selling inspections first model for us.
The.
The I guess the intangible aspect of that is the is is the ability to build better and stickier client relationships. So we have developed in growth on a inspection salesforce that sits inside all of our branch offices across our business in those into.
Visuals.
They measure.
Customer touches and how often they're engaged with their customers and things like that and so you know for somebody to just walk in you know off the street and say Hey, I want to do your inspections. It's just not going to it's just it's just not going to happen and it's not the.
When you're dealing with reputable clients and in the right end markets. It's about the best value in its not about whether somebody can save them you know 220 bucks on their inspection and.
If you look at if you look at that segment of our business you know the average project size is under $10000 and that's because we're doing you know.
A good zillion inspections at a thousand Bucks a pop and so even if somebody goes in that says I can do it for 950 Bucks people don't care about the 50 Bucks to care about the quality of the work and making sure that it's done properly and everything else and so when you have that infrastructure already built in in place in function is very very difficult for somebody to.
Just walk in and and take that work away from you. So we feel good about the resiliency and we actually have you know aggressive growth goals and are going to continue moving that forward.
Got it takes a lot of us.
Ladies and gentlemen that was our final question I'd like to turn the floor back over to rest eco friendly additional closing remarks.
Well I would just like to take the the opportunity to to thank everybody.
For joining the call this morning and for having continued interest in any CPI.
We remain very proud of the leadership that are you know that are each of our businesses as shown and.
The the personal sacrifices that.
Each and every one of our employees has made on behalf of the company and they truly have put CPI first.
And themselves second and and I think Thats a testament to the results that we were able to share with you. This morning. So thank you again and we appreciate your long term interest in the company.
Thank you ladies and gentlemen, this does conclude today's conference call you may now disconnect.
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