Q4 2020 APi Group Corp Earnings Call
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Yeah.
Good morning, ladies and gentlemen, and welcome to API group's fourth quarter 2020 financial results Conference call. All participants are now in a listen only mode until the question and answer session. Please note. This call is being recorded I will be standing by should you need any assistance I will now turn the call.
All over to Olivia Walton Vice President of Investor Relations at API Group. Please go ahead.
Thank you.
Good morning, everyone and thank you for joining our fourth quarter 2020 earnings conference call.
Joining me on the call today are Sir Martin Franklin and Jim Lilly are born co chairs gross Becker, our president and CEO and Tom <unk>, Our Chief Financial Officer.
Before we begin I would like to remind you that certain statements in the company's earnings press release announcements and on this call are forward looking statements, which are based on expectations intentions and projections regarding the companys future performance anticipated events or trends and other matters that are not historical facts.
These statements are not a guarantee of future performance and are subject to known and unknown risks uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by such forward looking statements.
In our press release and filings with the SEC, we detailed material risks that may cause our future results to differ from our expectations.
Our statements are as of today March 24th and we have no obligation to update any forward looking statement, we may make.
As a reminder, we have posted the presentation detailing our 2020 financial performance on our website.
Our comments today will also include non-GAAP financial measures and other key operating metrics the.
A reconciliation of and other information regarding these items can be found in our press release and in our presentation.
It is now my pleasure to turn the call over to Martin.
Thank you Olivia and good morning, everyone.
2020, with the year of unique milestones for the company.
We became a listed company on the New York Stock Exchange completed several complementary acquisition and proactively manage the challenges of the pandemic, while executing on our long term goals for the business and delivering results for our shareholders.
We believe that the resilience of our people as well as all of our recurring revenue services focused model.
Have allowed us to continue to execute against our long term strategies for the business.
We are grateful for the focus and the ongoing leadership efforts across the entire organization.
We see significant opportunities for continued organic growth for API, whether it be true much needed infrastructure investment provide providing retrofit and upgrade the upgrade services for existing buildings delivering the services required for new technologies, such as five G or supporting the growth of life safety service.
Contracts for existing customers.
Equally as attractive as the organic growth prospects, we see multiple avenues for expansion through strategic strategic acquisitions.
The markets in which the company operates a highly fragmented we believe that with thoughtful and disciplined M&A, we can accelerate the growth in service offerings of the business with that I'll hand, the call over to Russ.
Thank you Martin.
Everybody. Thank you for taking the time to join our call the health and wellbeing of each of our employees and the communities in which we serve remains our number one priority.
I am proud of our team.
We believe that the tough decisions and sacrifices made across the organization in 2020 strengthened the business and allowed us to continue to execute on our long term goals.
I will start by providing a summary of our financial results drivers of margin expansion and key trends in each segment before turning the call over to Tom who will walk you through our 2020 results in 2021 guidance in more detail.
Yeah.
Key highlights from our performance for the year ended December 31, 2020 compared to the prior year period include the following.
One primarily due to the negative impacts of COVID-19, and disciplined project selection adjusted net revenues declined by 8% or $306 million to $3 5 billion.
This compared to $3 $8 billion in the prior year period.
Second <unk>.
Continued success in our ongoing goal of growing recurring service revenue, which we believe helps to build a more protective moat around the business service represented approximately 40% of our consolidated net revenues.
Third.
The adjusted gross margins of 24, 2%, which is in the increase of 260 basis points with all three segments successfully driving margin improvements.
And our safety and specialty services segments margin expansion was driven by a mix of work interest increased labor productivity jobs like the conditions as well as improved pricing.
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Adjusted EBITDA margin expansion of 56 basis points, driven primarily by gross margin expansion and early execution of largely temporary cost containment efforts to counteract the negative impacts of COVID-19.
Fifth <unk>.
Adjusted diluted earnings per share of $1 22 exceeding street consensus estimates by four 5% or <unk> <unk> per share.
Operating cash flow of $496 million represented 68, 1% or $201 million increase from prior year.
Our ability to execute against the ongoing COVID-19 pandemic and its related disruptions is a testament to a variety of factors as we discussed in our last call, including our differentiated leadership culture relentless focus on growing recurring service revenue.
The diversification across end markets customers and projects compelling industry dynamics relative variability of our cost structure and our broad geographic footprint, which allows us to maintain close relationships with local decision makers, while also having the ability to execute for our national based customers.
We remain focused on our pre COVID-19 objectives, and we'll continue to focus on driving margin expansion through the following.
First improving our mix and continuing towards our long term goal of 50% plus of our net revenues across all of our segments to come from recurring service revenue.
As we have mentioned on prior calls on average we estimate that the gross margins on inspection and service revenue of approximately 10% higher and gross margins on contract revenue.
Second disciplined project and customer selection with the continued focus on reducing our contrast contract loss rate.
Third organic growth through attracting new customers and increasing work from repeat customers increased demand for services and pricing opportunities. This includes increasing wallet share with our individual customers. As an example, when we bought SK fire safety group they provided services to defibrillators.
Which of which is something we didn't do in the U S. Since we are already in their facilities. We are now implementing the process, where we're going to start offering our customers the ability to service their defibrillators.
Fourth strategic M&A execution, our pipeline of incremental M&A opportunities is robust and we expect to continue to explore opportunistic acquisitions with Martin and Jim as we move through 2021, our balance sheet is strong and we have significant capacity to absorb additional accretive transactions. We view this as an important.
Tool to increase and accelerate shareholder value.
Fifth driving margin expansion through what we've what we referred to as our business process transformation projects. This includes ongoing efforts to tie our technology platforms with improved business processes, which we will expect us with which we expect will allow us to move closer to a true shared services model and ultimately allow for better lever.
<unk> of our SG&A. This also includes efforts to further leverage purchasing and procurement scale to drive margin expansion.
We are excited about the opportunities that lie ahead for the business. We entered the year in 2021 with the strong backlog, which is slightly higher than it was the year ago.
And markets that we serve such as data centers fulfillment and distribution centers high Tech and healthcare have continued to show the resilience through COVID-19, just like we feel our business is showing that resiliency.
Safety services.
In our largest segment safety services, our number one priority is to grow inspection and service revenue. We continue to build the national and coordinated inspection sales force to drive our go to market strategy of selling the inspection work first which we believe will lead to further service revenue growth in most cases, our inspection work is covered.
The statutory requirements near the all facilities that have existing lifestyle of these systems are required by law to have that system inspected on an annual basis, regardless of whether the facility is filled the capacity or empty. Historically for every dollar of inspection revenue, we have the opportunity to generate between three and $4 of service work.
We also know that if we execute well on our inspection and service work that we will create a much stickier relationship with our customers that allows us to negotiate and participate in higher margin project related work in the future.
Specialty services and specialty services. Our goal is the partner with well capitalized customers, who have projects that continued to progress despite macro volatility which contributes to the economic resiliency of our business. The example of this is 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 expect growth in this segment to be supported by secular tailwind, including the <unk> infrastructure build out natural gas distribution and grid modernization the.
Work in this segment is typically executed under Master service agreements and provides us with the high degree of visibility.
Lastly, industrial services in industrial services, which we will of which we anticipate will represent less than 10% of our total net revenues. We are of strategic focus on improving margins through disciplined project selection as.
As opposed to growing the top line we.
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 they are safe.
I would now like to hand, the call over to Tom to discuss our financial results in more detail Tom.
Thanks, Russ and good morning.
I'll start by reviewing our consolidated financial results and segment level of performance as well as our strong balance sheet and liquidity and conclude by discussing our 2021 guidance.
Adjusted net revenues for the three months ended December 31, 2020 declined by five 5% or $51 million to $864 million compared to $925 million in the prior year period.
The decline was primarily attributable to negative impacts of COVID-19, and disciplined project selection for the year ended December 31, 2020 total adjusted net revenues declined by 8% or 306 million to $3 5 billion compared to $3 8 billion in the prior year period.
The decline was primarily attributable to negative impacts of COVID-19, combined with disciplined project selection, which led to decrease in volume of projects.
Adjusted gross margins for the three months ended December 31, 2020 was 25, 4%, representing a 183 basis point increase compared to prior year.
The increase was primarily due to higher mix of service revenue in safety services and disciplined project selection and the execution and industrial services.
For the year ended December 31, 2020, adjusted gross margin was 24, 2%, representing a 260 basis point increase compared to prior year due to the driver's Russ mentioned earlier in the call.
Adjusted EBITDA margin for the three months ended December 31, 2020 was 11, 8%, which was consistent with prior year period due to gross margin expansion offset by increases in costs associated with the transition to a public company.
For the year ended December 31, 2020, adjusted EBITDA margin was 10, 9%, representing a 56 basis point increase compared to the prior year driven by the gross margin expansion and early execution of our largely temporary SG&A cost containment efforts counteracting the negative impacts of COVID-19.
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Our strong cash generation has continued and our balance sheet and liquidity profiles remained strong for the year ended December 31, 2020, adjusted free cash flow was $443 million, representing 107 million increase compared to the prior year of $336 million and our adjusted free cash flow.
<unk> rate was approximately 116% exceeding our goal of approximately 80%.
The increase in cash flow was primarily driven by changes in working capital levels as the decline in net revenue resulted in reductions in our accounts receivable and other fluctuations in our working capital balances net drove positive cash flow generation, our operating cash flow for the year ended December 31, 2020 included 39.
Of benefit, resulting from the deferral of certain payroll taxes under the cares Act.
This will be repaid in two equal installments in the fourth quarters of 2021 and 2022.
During the fourth quarter, we deployed our cash flow prudently with a $30 million of accretive share repurchase.
As of December 31, 2020, we have $745 million of total liquidity comprising of $515 million in cash and cash equivalents and $230 million of available borrowings under our revolving credit facility.
We had approximately $1 4 billion of gross debt outstanding.
And our net debt to adjusted EBITDA ratio calculated in accordance with our borrowing agreement was 2424 times.
Subsequent to year end, we received approximately $230 million of cash proceeds, resulting from the exercise of approximately $60 million outstanding warrants, which further strengthened our liquidity profile.
I will now discuss our results in more detail for each of our three segments beginning with safety services.
Safety services net revenues for the three months ended December 31, 2020 declined on an organic basis by 8% primarily due to the negative impacts of COVID-19, such as building access restrictions and shelter in place orders along with the timing of demand for our mechanical services for the year ended December 31 2000.
'twenty net revenues declined on an organic basis by nine 8% due to the factors I mentioned for the fourth quarter.
Service revenues represented approximately 44 and 40% of segment net revenues for the three months and year ended December 31 2020, respectively.
Adjusted gross margins for the three months ended December 31, 2020 was 32, 7%, representing a 169 basis point increase compared to the prior year due to improved mix of service work.
For the year ended December 31, 2020, adjusted gross margin was 31, 9%, representing a 186 basis point increase compared to prior year, primarily driven by the mix of work towards the inspection and service revenue.
Adjusted EBITDA margin for the three months ended December 31.
'twenty was 13, 4%, which was relatively consistent with the prior year period.
For the year ended December 31, 2020, adjusted EBITDA margin was 13, 7%, representing a 55 basis point increase compared to prior year due to improved mix of service work and stronger project execution.
Specialty services net revenues for the three months ended December 31, 2020 declined on an organic basis by eight 8% primarily due to the negative impacts of COVID-19, such as project deferrals and job site disruptions along with the timing of projects for the year ended December 31 two.
<unk> net revenues declined on an organic basis by six 2%.
Due largely to the negative impacts of COVID-19, such as project deferrals job site disruptions and timing of projects.
Adjusted gross margins for the three months ended December 31, 2020 was 18, 8%, representing a 10 basis point increase compared to prior year for the year ended December 31, 2020, adjusted gross margin was 17, 5%, representing a 101 basis point increase compared to the prior year due to the.
The increase labor productivity and improved pricing.
Adjusted EBITDA margin for the three months ended December 31, 2020 was 12, 5%, representing a 45 basis point decline compared to the prior year due to the negative impact of COVID-19, and stronger contributions from our joint ventures in the prior year period.
For the year ended December 31, 2020, adjusted EBITDA margin was 12, 1%, representing a 48 basis point increase compared to the prior year due to continued focus on project selection pricing improvements and stronger contributions from our joint ventures in 2020.
Industrial services and.
In industrial services net revenues for the three months ended.
And the year ended December 31, 2020 declined on an organic basis by 19, 6% and 13, 9% respectively.
The decline in both periods was primarily due to decrease in volumes as a result of our strategic focus on improving margins as opposed to growing the topline and the negative impact of COVID-19.
Adjusted gross margin for the three months ended December 31, 2020 was 13, 8%, representing a 351 basis point increase compared to the prior year, primarily driven by disciplined projects.
And the customer selection.
Better project management, and favorable job site conditions, including weather.
For the year ended December 31, 2020, adjusted gross margin was 16, 3%, representing a 900 basis point increase compared to the prior year due to the the factors I mentioned for the fourth quarter.
Adjusted EBITDA margin for the three months ended December 31, 2020 was 12, 6%, representing a 143 basis point increase compared to the prior year, primarily as a result of our strategic focus on improving margins as opposed to growing the top line for.
For the year ended December 31, 2020, adjusted EBITDA margin was 13, 6%, representing a 698 basis point increase compared to the prior year due largely to the gross margin improvements mentioned earlier.
Now I'll move to 2021 guidance.
As detailed in our March 12 press release, we expect adjusted net revenues for 2021 will range between $3 65 billion and $3 75 billion. We expect adjusted EBITDA for 2021 will range between 405 and $419 million.
We expect capital expenditures for 2021 to return to more normalized level of approximately $55 million.
And as previously mentioned, we are investing in our business process transformation systems processes and procedures and we spent $13 million in 2020.
Of our total anticipated spend of approximately $50 million.
I will now turn the call over to Jim.
Thanks, Tom Good morning, everybody.
The execution against these goals, despite the pandemic and its ability to deliver on its financial goals.
Peak to the strength of the company's recurring revenue services focused business model.
Despite the challenges 2020 presented the team's continued focus on driving higher margin growth across all of the segments continued to deliver results. We demonstrated the companys ability to generate cash and ended the year with a strong balance sheet and plenty of capacity to absorb additional accretive acquisitions.
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We're looking forward of holding our first analyst and Investor day on Thursday April 22nd.
We plan to highlight our commitment to driving strong free cash flow and earnings outlined.
<unk> outlined the future growth and margin expansion opportunities. In addition to providing expanded discussion about the company and certain key strategic initiatives.
<unk> update on the M&A environment.
With the progress achieved in 2020.
Remain confident in our previously stated long term value accretion targets, which as a reminder, our.
The delivering long term organic revenue growth above the industry average.
Continuing to leverage our SG&A.
Expand adjusted EBITDA margin to 12% plus by the fiscal year 2023.
Four maintain adjusted free cash flow conversion of over 80%.
Generate high single digit average earnings growth and target long term net leverage ratio of two to two five times.
As you know with the conversion of the warrants while we ended the year of slightly above two times.
Current net to EBITDA debt to EBITDA ratio is about one eight times.
I'd like to now turn the call back over to the operator and open the call for Q&A.
Thank you at this time I would like to remind everyone. If you'd like to ask a question. Please press Star then the number one on your telephone keypad. If your question has been answered any of us to remove yourself from the queue press the pound key.
Our first question comes from the line of Andy Kaplowitz of Citigroup.
Hey, good morning, guys.
Good morning.
Russ you mentioned that API has backlog was slightly higher than a year ago at the end of the year, but you're forecasting mid to high single digit organic growth here of your major segments in 'twenty. One we know you've got easier comparisons, but can you talk about what is giving you confidence in forecasting the growth acceleration and given we're already at the end of Q1.
Can you give us any update on whether safety in the specialty is continuing to recover in Q1.
Well I mean regarding Q1, we've provided.
Guidance and where we feel Q1 is going to fall. We are confident in the guidance that we've provided we're dealing with we're still continuing to deal with the COVID-19.
As well as some weather impact in.
That we felt in the during.
During the month of February, but we feel good about where we're at sort of become work our way through the rest of the quarter.
As we as we look at the segments as we moved into the beginning of the year, both safety and specialty services backlogs were up and industrial services was down as well.
Was the plan all along as we continue to focus on the right project and customer opportunities for us in the.
That segment and we continue to drive try to drive.
The growth in the right mix I E. The integrity work associated with the transmission system. So.
Also Andy I think if you recall I shared and shared at one point on that I think was during our third quarter call that inspection revenues in safety services on of Europe year over year basis were up 6% at the end of the quarter, while I'm happy to share with everybody that inspection revenues.
It ended the year up 8%. So we can continue to show some growth and actually accelerated some of that through the fourth quarter, which is the positive momentum builder for us as we move into this fiscal year, because again going back to some of our earlier remarks, we know that we're going to generate some place between.
Three and $4 worth of service work off of that inspection work and Thats really where the focus and the emphasis for us is in inside that segment. So.
Those two of those too.
You know.
I guess items, if you will give us good confidence as we move into this year.
But the Indian Jeremy and Jim Andy It's Jim I know you would be disappointed if I didn't correct you on the fact debt.
We have a good comp in front of us I just want to remind everybody that we didn't have COVID-19. In Q1. So Q1 is actually a relatively tough comps compared to last year, but as Russ said I think there's a lot of quarter of progress. If you look at the Powerpoint presentation relatively earnings call I believe service revenue.
Represented about 44% in.
In the fourth quarter so.
Certainly we are seeing the the focus of driving service revenue, which is of higher margin profile.
Helping us as we move into this year.
Jim that's exactly what I would follow up on the service up 44% in Q4 would you say you're really starting to take more share in terms of growing the number of life safety service contracts and what do you think you can get that level of service too in 2021.
Russ ill leave that to you.
Well I mean.
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We're continuing to try to grow.
You know grow that aspect of our business I mean, I think we've shown 7% organic growth.
And in our forecast for this year and.
The reality of it is some of that will be project related growth, but it's our it's our focus on our emphasis and we want the lion's share of that to come from inspection and service work.
Great and then just finally rest of you gave detail already on sort of expectations for sales and margin, but do you see margin growing relatively equally in 2021 for your two larger segments and you talked about sort of.
And the progress you're making on the structural cost out.
Maybe you can give us a little more color there and how much temporary cost headwind is coming back in 'twenty one.
Well I mean, the reality of it is <unk>.
The cost and Tom you can complement my response is that.
For the most part other than <unk>.
Travel and entertainment and those types of expenses, which really havent normalized yet most of the temporary cost cuts have been returned and the business is operating at a more normal capacity in a more normal normal level and.
We expect that.
That to maintain itself really probably through the the lion's share of the year.
There are certain travel and entertainment and the types of expenses that will probably never come back to the business and that's a positive thing and that's the good thing.
But in general we're back to a much more normalized level.
Level, we're we're expecting to make general progress towards our margin expansion goals again, and we've provided guidance that we expect this fiscal year to finish between.
11, 11.25% on an EBITDA basis, and we fully expect that we will achieve that.
Yes, I just would add and you remember that we took the big SG&A cuts in Q2 last year. So on a comparative basis, we will see that the tougher comparable and in Q3 and Q4 will be.
More natural see the growth in that EBITDA as we March through the year and as we see COVID-19 lessening the impact on our business.
I appreciate it guys.
Your next question comes from the line of Marcus <unk> of UBS.
Yes, hi, good morning, everybody.
Maybe I'll just follow up on on this margin element.
How you think about getting towards that's both the same target by 2023.
I appreciate the guide for this year of 11 to 11 20.
<unk> 25 from last year's 211.
I think the big buckets that you mentioned in your prepared remarks, Nick project selection business transformation.
The sort of incremental accretion on the margin, but the split between these different buckets, just roughly and then.
As Tom said, you of $13 million in on the on the cost side for the business transformation of out of the 50, how should we think about the up over the next two three years as you get to what the purpose and target.
Well, we don't we don't break out the I guess the individuals.
Buckets, if you will of where we find the margin expansion if you recall.
For us, it's more around hitting singles than.
Any one silver bullet.
And that contribution is going to come from a number of places number one.
Thats one area second would be continuing to improve our mix and we reported debt 40% of our approximately 40% of our revenue came from service as we define it and as we March towards 50% that is going to be a big contributor to our margin expansion goals inside business process.
The transformation there is really two buckets.
One is moving towards a shared service model, which will allow us to leverage our SG&A.
The second would be as we work to increase and stand up a true procurement department. If you will and really try to leverage the scale of the business and drive a reduction in our cost across the entire enterprise next would be in <unk>.
Proved and increased pricing opportunities that we continue to work with the different business design.
Followed that with strategic M&A, and making sure that debt. Our M&A is accretive to our margin expansion goals of something that's very important to US and then lastly, I would just say that we.
Have the opportunity to just be better and improve our execution.
Cross the businesses and.
I can't tell you look in the eye and tell you that we're going to get.
A quarter of a point from this or a quarter of a point from that but it's the combination of all of those efforts that's going to allow us to achieve.
That margin expansion goal of 12% and we have very high confidence that we will achieve that.
Great and then maybe just for the home on the 13 million that you've mentioned on the cost.
In 2020 already on the business process.
How should the kind of model of the remaining 50 or the.
Total of 60 million. So the remaining 37 months of all over the next over the next years.
Yes, I think.
As we look at that we think the.
With Juruti of it will come in 2021.
And then the remainder in the first half to three quarters of 2022.
Okay.
Thanks, and then just briefly on grid.
Thanks, Great obviously, the upside other fees essentially infrastructure investment hope peak and stops for you today.
On the specialty side. Thank you.
So let's wait for Congress to actually approve an infrastructure Bill and then we can give you some color.
Okay.
Okay. Thanks for trying to take the number of markets I appreciate it.
Okay.
Our next question comes from the line of Julian Mitchell of Barclays.
Hey, good morning, guys of the Trish Gorman on for Julien.
The one question on industrial it makes very good margin progress last year kind of 11, 2% to 13, 6%. So now margins are famous 18 higher than specialty can you guys just talk a little bit more about the rationale for the unwind in 2021.
The question.
Yeah.
Yes.
And your question, Chris just to confirm Youre, asking us about the rationale for divesting the two businesses in 2020.
Yeah, and just in the guide for industrial of why that why we're taking that down so much.
In light of the margin being the same as the 18 heightened specialty I think you guys had called out the project selection and everything but just wondering if you can get some more color there because of the margin seem like they performed well this year.
Well I think debt number one that was all by design and it was really bringing the increased focus too.
Project selection and customer selection and making sure that debt the contract terms and such that we were working under were favorable and.
The risk profile was sort of speak in the right place for us and so number one it was very much a purposeful approach to it.
Number two that is that is the.
There is one one business that we have in that segment that has some exposure to the oil and gas industry and as the as the of that market has tightened.
Forced us to be continue to be.
Really disciplined in our project selection and customer selection as.
As well and we also are taking the opportunity to really change our focus in making sure that we're emphasizing the integrity side of the transmission space and as that is sort of speak their version of service work and we continue to emphasize that so it's a combination of efforts that are happening.
Inside the segment to make sure that we can continue to perform as designed.
Got it that's helpful. Thank you and then maybe a follow up is on the cash flow outlook for this year I think you mentioned capex of $55 million near.
The near term in 2021 is 80% EBITDA conversion still kind of of the target and then maybe if you could talk more about the working capital movement through the year, if there's anything to call out there.
Yes, sure. So yes, we're very comfortable of that in the coming year at 80% target is good.
The working capital movements, if you think about it with the down lever that we had in revenue due to COVID-19, our receivables declined and net provided the cash flow positive as we March through the.
The 2021 here and see improving each quarter, we anticipate debt that will grow and thats a positive for us as we're adding more revenue and the profitability of that but it will get absorbed as we've put the working capital numbers back up to traditional levels.
But.
There is no unique call out to what's occurring the cash this year, just as business ramps up youll see more investment dollars and receivables growth go up.
Okay perfect. Thanks, guys.
Our next question comes from the line of Andy Wittman of Baird.
Okay, great and good morning, everyone.
Just.
I guess I was a little surprised that the corporate expense EBITDA was lower than expected in the quarter of at least lower than I thought we were looking for from previous conversations with you guys and so Tom I was just wondering if you could address if there was anything in the corporate EBITDA expense. This quarter that is notable for us.
Yes, no I think as we as we March through the year and we've got our segment team members all aligned.
And getting them into the actual segments, we had a little bit of move of course from the segment from the corporate two of the segments, where they are actually delivering their energies. So other than that I would look at our run rate that we think.
On a going forward basis would be a net 22.
As of quarter kind of ballpark you could think about.
Okay.
So I guess this quarter I'm looking at I think it's the 11 this quarter, if I'm not mistaken and then so.
<unk> to 'twenty two it seems like a big jump, what's what's the difference between what we've seen this quarter in the 'twenty. Two you were talking about today.
Yes, so what we're talking about the areas that we've restored some of the benefits to the year of the 400 10-K and some of those items were moved out of the corporate debt into the various allocations to the segments in the fourth quarter. So it was disproportionate down lever in that quarter, but it was picked up in the segments in the quarter.
Oh, Okay. Okay is this geography okay.
And then I guess.
Russ.
You mentioned.
Timing.
In safety, particularly particularly around the mechanical offerings that you provide I think you mentioned that last quarter as well or something very slow most of that last quarter. So I was just hoping you could give us a little bit of a discussion around what that means have these projects that were delayed in <unk>.
<unk> commenced here in <unk> or what are they waiting for to progress.
Yes.
So a lot of the deferrals that we had as it relates to our <unk> services and specifically to the project related work was in the health care space.
And.
Everything was kind of on hold in the health care sector.
Went through the middle part of of last year.
It is the health care industry was number one just bracing for COVID-19 and trying to sort that out, but then also the financial situations of that.
They found themselves in so we're seeing we're seeing that activity starts to ramp up I would suspect that we will see more of that in Q2 and Q3 than we will in Q1.
But.
Everything that we were planning on.
As you know from from all appearances today is moving forward.
Okay got it and then I just had the final question I wanted to just touch base on the acquisitions that you did in particular, the the large European platform.
Should the slightly here on the call.
Europe has had.
Probably more of Lockdowns and we've seen here domestically, including some new ones that were announced just recently in Germany.
And I was just wondering what the impact to your business day or your new business there.
Is and how it's performing so far against the initial expectations that you had for it obviously you purchased it during COVID-19. So I had to think that your expectation included some COVID-19 impact but.
But that's the dynamic situation and these are fairly large acquisitions. So I thought it would be worth the an update from you.
Yeah. That's a fair question I would say that in the fourth quarter SK performed in line with expectations.
There is no question that.
They are being seen impacts.
Because of the increase of Lockdowns.
Starting to see a little bit we're not in Germany, we're primarily in the Benelux and up in Scandinavia.
We're actually starting to see a little bit of of relief as it relates to the the restrictions again the good part about the businesses north of 50% of the revenue comes from service and that that has been.
Progressing going forward, but there is no question that we're seeing a little bit of Choppiness, we feel really good about where they're going to land for the for the year. So that's very positive.
Yes, we're dealing with it just like the.
They are dealing with it over there just like we are dealing with it here so in general things have been.
In line with expectations.
Great. Thanks have a good day.
The two.
Your next question comes from the line of Jon <unk> of CJS Securities.
Hey, good morning, guys. Thank you for taking my question on net quarter and Youre considering the environment.
I just wanted to get a little more color on if youre seeing any inflationary pressures.
And your various end markets I know that people have been seeing steel prices or fuel prices rising the availability of pickup trucks is kind of low right now.
And maybe there's other components that then maybe.
The impacted by the.
Have you price the into that into your guidance and are you seeing any right now.
Yes.
Well so for sure right I mean.
Commodity prices.
Have been rising for us for some period of time I would point you of two a couple of factors that bode well for our business and our business model number one is our average project size. So if you look at safety services. Our average project size is $10000 and in specialty services at 60000.
And so very quick.
Quick hitting quick turn types of projects.
Youre not going to be.
The vulnerable to some of the rapid escalation specifically around steel pricing. So so that part of it's been positive for US. If you look at specialty services and even in the industrial services. Most of the material is really supplied by our customers and not necessarily being supplied by us and so we are.
Our.
Two of certain degree were somewhat immune to that with all of that being said we.
We've been tracking commodity prices on a weekly basis for a long time, we communicate on a regular basis with our businesses about where we see commodity prices going end of.
About how to properly protect themselves from rapid escalation.
And the proposals and in their contract documents. So we've been all over it for some period of time, but we feel really good about how we've managed it.
Okay, great. Thanks, Ross and then just from the M&A perspective, do you see any changes in your ability to drive at least the smaller tuck ins that your historical valuation levels.
<unk> five times EBITDA.
In the current environment, where acquisition multiples of.
Skyrocketing.
So we have a robust funnel of M&A opportunities in that typical API tuck in model and we continue to see and execute.
With multiples in that same four of five six times.
Range and we.
For the most part we're buying from family owned.
Businesses.
And.
Those sellers are focused on finding the right fit and the right home for their business and for their employees and.
So when you find that you have a much greater success rate as sort of speak as acquiring those businesses at lower multiples private equity owned firms not so much and so.
It's really who the ownership is in the.
The size of the business all of that stuff matters.
Okay, Great and then last one.
This is recent so I'm not sure if you have the view, but I believe of Intel is the very large customers of yours.
Meaningful of their announcement to increase their foundry investment in Arizona about $20 billion.
Did you build the facilities out of our service to them and kind.
How meaningful is that to you.
So Intel is a very good customer of ours, and we do do business at the Chandler, Arizona facility.
So.
Any sort of expansion announcements in those types of things typically is a positive for us.
Okay, great. Thank you very much.
We have time for one more question. Your final question will come from the line of Kathryn Thompson of Thompson Research.
Hi, Thank you for taking my questions today.
Industrial services I appreciated the color, you've given and you've done a great job.
With demonstrated margin improvement with GAAP selection.
Just point of shrink a little bit more how much more is there to go in terms of the margin opportunity.
And could you give a little bit more color or perhaps a good example.
Of a type of project, where you are doing a better job of debt choosing projects.
Just for those sort of dialed in thank you.
Yeah.
Well I mean, I think there's margin opportunity in.
Every one of our segments not just industrial services.
Out debt industrial services as of the.
Relatively small piece of our business representing less than 10% of our of our total our total revenue so the.
The biggest thing for US is to again, just continuing to focus on the mix of the business that we do and focusing on the maintenance and integrity side of the existing transmission systems versus the so the new capital.
A component of our different customers.
<unk> so.
Really for Us Kathryn.
Again.
I think most of you probably heard me say this most of the time when we talked about customer selection of project selection, it's really customer selection and.
It's been prudent with who you work for.
And typically it's not it's not centered around a particular type of project if you will.
We have the capabilities to do the work it is making sure that we're working for the right customer and the right person. So we kind of lump it together when we talk about customer selection and project selection. So it can be a little bit deceptive.
You know what when we go through our go no go checklist process like.
Like the primary focus for me is who is the client and that is typically going to drive whether you have success or not have success as it relates to the to the work and the services that we offer and.
I'm not going to provide.
A negative customer experience if you will.
As part of as part of my dialogue.
But russ.
If I could supplement what you what you said I mean, one of the things that when we came on the scene with the API.
We're in the process of implementing modified contracts with customers. So that as an example, and this is just directional it's not meant to be factual per se, but how we treat the weather delays and who pays for that and do we get compensated when.
It's raining for five days.
Does it start getting do we can start getting compensated on the second day of the third day, because neither of US can control of the weather, but we shouldn't be penalized for that so the team has done a really good job we think of.
Looking at the negative variables that impact the margins in the business and modifying our contracts and there are certain customers that don't want to go along with that and there are others that are realistic and understand what's important.
So kudos to the team for recognizing the headwinds and putting things in contracts or trying to that address that and then help improve margins.
Okay helpful.
And periodically we spent a bit of time.
The ground talking to key players in the field, including the recently with the major non res contractor.
Of that focuses on a wide variety of maintenance in one of the interesting things that we're finding I wanted to see if you are also seeing this trend.
Is.
As people would peak in the coming back to where it can afford.
Consistent way.
They noted a uptick in fire alarm work in particular.
As the building managers are taking the opportunity to upgrade the systems.
In anticipation of more of it's coming back to work is this something that you're seeing and are you seeing or what type of work are you seeing that all of our.
Really drive that anticipation.
Covid World.
That's an interesting observation I wouldn't say that we have.
Seen that specifically in fire alarm.
We certainly like the fire alarm space and its of emphasis and a focus for us from a growth perspective.
But.
I can't say that we've specifically seen an uptick in fire alarm work, just because of being in a post COVID-19 world.
Okay great.
Final question, just inflation has been at the mood and focusing on going into 'twenty, one and that's journeys playing through.
Understanding of doing more inspection and services they use.
We will have to manage.
Certain aspects of inflation.
Maybe just a little bit more color in terms of.
How inflation may or may not be impacting your business now.
And thank you very much.
Well I think that.
I think that we've been fortunate to be able to pass those costs.
Along.
Workforces, primarily union so the the.
Wage rates are well established for for the men and the women that are doing the work for us in the field and so it's very easy for us to.
To understand when those escalation and when it's going to go into effect. So that's.
That's a big chunk.
You know of of our cost if you will in the services that we deliver to our customers.
And again I point to just the the small the small portion of.
Are the small job sizes that we have and the quick turnaround.
It's very easy for us to adjust our pricing.
We continue to.
Move along so.
Yeah.
The reality of it is it's it's baked into and factored into our forecast and guidance for the year end.
We don't anticipate having any substantive issues with managing the inflation in the in the horizon the commodity prices.
Thank you I will now return the call to Ross Becker for closing comments.
Well, thank you everybody and I just want to number one reiterate my grad.
Gratitude to all of the employees of API for their shared sacrifice and commitment and putting the company first during the course of this last year and.
They've delivered a great result, and that great results I hope our shareholders feel the.
The benefit of that Great result, Thank you everybody for taking the time to join US on the call. This morning, and we very much appreciate your continued interest in the company.
It's a great company and we look forward to sharing our journey with you.
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Thank you for participating in API group's fourth quarter 2020 financial results Conference call you may now disconnect.
Okay.
Okay.
Okay.