Q1 2021 APi Group Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to API group's first quarter 2021 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 and I will now turn the call over to Olivia Walton Vice President of Investor Relations and API Group. Please go ahead.
Thank you.
Everyone and thank you for joining our first quarter 2021 and earnings conference call joining.
Joining me on the call today are Sir Martin Franklin and Jim Lillie Alright.
<unk> co chairs Ross Becker, our president and CEO, and Tom White, and our Chief Financial Officer.
Before we begin I would like to remind you that certain statements and 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 company's future performance anticipated events or trends and other matters that are not historical facts.
These statements.
Our non 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 SEC, we detailed material risks that may cause our future results to differ from our expectations.
Our statements are as of today May 12, and we have no obligation to update any forward looking statement, we may make.
As a reminder, we have posted a presentation detailing our first quarter financial performance on the Investor Relations page of our website.
Our comments today and will also include non-GAAP financial measures and other key operating metrics. The reconciliation of and other information regarding these items can be found in our press release and on our presentation.
Before turning the call over to Martin I would like to thank everyone that participated in our first ever investor event on April 22nd.
A replay of the webcast is available along with the presentation slides on the Investor Relations page of our website. It is now my pleasure to turn the call over to Martin.
Thank you Olivia.
And then just passed the one year anniversary of our listing on the New York Stock Exchange I'm proud of what we've accomplished so far as a public company and I'm pleased to say that on our original investment thesis that I reviewed with all of you at our Investor event has proved to be progressing as well as we could possibly have hoped.
Our first quarter results speak to the strength of the company's recurring revenue services focused business model, which drives enhanced margins.
We're excited about the organic prospects for the business and also I believe there are significant opportunities to accelerate growth service offerings and margin expansion through continued strategic M&A.
As many of you know we have always maintained a disciplined approach when it comes to M&A.
That will continue to be the case here and we will remain focused on opportunities that will be accretive not just to the financial profile of the company, but also to the cultural story of API and its commitment to leadership development.
And as a hugely fragmented market space and we're very.
And well positioned to pursue a football selection of acquisition prospects with that I'll hand, the call over to Ralph.
Thank you Martin and good morning, everyone.
Thank you for taking the time to join our call. This morning.
I would also like to thank you again to those who participated in our first ever investor event, a few weeks ago.
We are pleased to deliver our first quarter results with net revenues slightly above and margins in line with our previously communicated guidance.
As you've heard me say on prior calls the health and wellbeing of each of our employees and the communities and which we serve remain our number one priority.
This focus and other foundational priorities provides the platform from which we can continue to enhance shareholder value.
During today's call I will provide a summary of our first quarter results the outlook, including key growth drivers and margin expansion opportunities and update on strategic M&A efforts before I turn the call over to Tom Tom will walk you through our most recent results and guidance in more detail.
Before I walk through the highlights from our first quarter results I would like to remind everyone that API did not begin to experience negative negative impacts from COVID-19 until mid to late March last year. Therefore, we are copying this Q1 against the Q1 largely free from COVID-19 last year.
Also as a reminder, our business ramps up as we move through the calendar.
Our revenue is typically lowest at the beginning of the year and during the winter months, because cold and snowy or wet conditions and caused delay with our delays with our work, particularly and our specialty and industrial services segments, where a majority of the activity is performed outdoors.
As the weather improves so too our opportunities.
During the first quarter of 2021, we experienced extreme weather conditions at several of our businesses, which tends to put pressure on margins and therefore, we also have a relatively tough margin comparison, driven by unfavorable year over year weather in certain markets we serve.
All of that being said I'm very pleased with our performance and execution and the first quarter key highlights from our performance for the three months ended March 31, 2021 compared to the prior year period include the following.
Number one net revenues increased on an organic basis by two 4% compared to the prior year period. This excludes the anticipated decline and industrial services.
Growth was driven by increased demand and timing of projects and our safety and specialty services segments offset by project delays and job site disruptions due to continued negative impacts of COVID-19, and unfavorable weather conditions.
Continued focus on our ongoing goal of growing recurring inspection and service revenue, which we believe helps build a more protective moat around the business.
Third adjusted gross margins grew to 23%, which is an increase of 72 basis points. This is due to the improved mix and safety services and disciplined project and customer selection and specialty services.
Fourth and adjusted EBITDA EBITDA margin expansion of approximately 20 basis points driven primarily by the factors I mentioned as drivers of gross margin expansion.
I'm inspired and appreciative of the resiliency and commitment of our approximately 13000 team members, who remain focused on serving customers. Despite despite the headwinds both literally and figuratively that they were facing this quarter I'd like to thank them for their continued efforts there ongoing leadership efforts continues to demonstrate.
That our leaders are a competitive advantage and help drive shareholder value.
Before turning the call over to Tom.
To spend a few minutes discussing our outlook and opportunities within key end markets, followed by a summary of margin expansion opportunities to drive further value creation, including strategic M&A.
We believe that our revenue diversification across geographies and markets customers and project provides us with stable cash flows and a platform for organic growth.
And the average size of our projects, including all three of our segments is less and $100000, which helps our ability to pass on raw material cost on a timely basis.
Our average project duration is relatively short so we don't have the inflationary exposure to cost of goods sold or changes in labor labor expense and some of our peers may experience and an inflationary environment on contracts that are longer term and nature, such as our multiyear Master service agreements price escalators are typically built into <unk>.
Proposals.
And telecom and utilities, our largest end market, representing approximately 25% of our total consolidated net revenues. We continue to maintain strong direct customer relationships and are focused on growing service revenue through multiyear Master service agreements.
We believe we are well positioned to benefit from recently announced increases and capital expenditure guidance relating to the rollout of <unk> with two of our national Telecom customers.
These represent additional potential appeal wins as you know we have low customer concentration and typically no customer represents more more than 5% of our annual net revenues in any given year.
As I said at our Investor event, while we do not have anything built into our budget for an infrastructure bill or stimulus day would incentivize investment and the renovation of existing infrastructure.
There are certainly there are certainly aspects of our business such as <unk> fiber renewable energy potable water services natural gas services that would benefit from the passage of such legislation due to our existing core competencies combined with incremental opportunities.
We also we also continued to see strength and end markets, such as fulfillment and distribution centers healthcare high Tech. These represent these combined represent approximately 20% of our total consolidated net revenues. The work and these end markets is more complex and we are typically awarded work based on the level of service we.
Provide for customers as opposed to price.
During our recent Investor event, we provided an illustrative bridge of the drivers to reach our adjusted EBITDA margin expansion goal of 12% plus by 2023 as many of you have heard US say before these are all singles and doubles if any of these initiatives fall short we believe there are many other initiatives behind it.
To help propel growth and margin expansion.
As we continue to focus on improving our mix disciplined project and customer selection pricing opportunities leveraging our spend driving operational excellence and realizing synergies from future acquisitions, we are confident and establishing a new recently announced goal of 13% plus.
Adjusted EBITDA margin by year end 2025.
We believe that strategic M&A is an opportunity to accelerate the timetable to achieve our margin expansion objectives. We continue to build our global pipeline of opportunities to grow our family of market leading service providers are powered by API structure provides us with the ability to leverage our scale while also.
Remaining entrepreneurial nimble and opportunistic at the local level with reduced bureaucracy and overhead burden.
As I mentioned at our Investor event, we are reviewing approximately 15 traditional potential traditional API M&A opportunities with revenues up to $100 million.
And while also partnering with Martin and Jim to look at several larger opportunities with revenues ranging from low $100 up to $1 billion.
We look forward to closing on some of these opportunities as we move through the balance of the year and look forward to updating you on our expected progress I would now like to hand, the call over to Tom to discuss our financial results and more detail Tom.
Thanks, Russ and good morning.
I'll start by reviewing our consolidated financial results and segment level level performance as well as our strong balance sheet and liquidity.
As Russ mentioned earlier and the call net revenues, excluding industrial services increased on an organic basis by two 4% compared to the prior year period.
Adjusted net revenues declined by two 1% for $17 million to $803 million compared to $820 million and the prior year period, primarily driven by the anticipated decline and industrial services adjust.
Adjusted gross margins for the three months ended March 31, 2021 was 23% representing a 72 basis point increase compared to the prior year. The increase was primarily due to improved mix and disciplined project and customer selection offset by project delays and unfavorable job site conditions.
Adjusted EBITDA margin for the three months ended March 31, 2021 was seven 6% representing an approximately 20 basis point increase compared to the prior year due to the factors mentioned previously.
We continue to focus on driving strong free cash flow and our balance sheet and liquidity profile remains strong for the three months ended March 31, 2021, adjusted free cash flow was $23 million, representing a $30 million decrease compared to prior year of $53 million and our adjusted free cash flow conversion rate was approximately.
38%.
And we expected the expected decline and cash flow was primarily due to lower outstanding accounts receivable balances as we enter 2021 compared to 2020, resulting from lower revenue.
Higher compensation and benefit payments and higher capital expenditures.
As we have discussed as revenue rebound post COVID-19, we expect to use cash to fund working capital to drive increased service revenue and higher margins leading to increased shareholder value.
As I mentioned at our recent Investor event, we expect 2021 to be somewhat of a hybrid year. Since we are still dealing with the impacts of COVID-19.
As of March 31, 2021, we had $972 million of total liquidity comprised of $745 million and cash and cash equivalents and $227 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 credit facility was 175 times.
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 March 31, 2021 increased on an organic basis by one half a percentage primarily due to an increased demand and timing for HVAC services offset by continued negative impacts of COVID-19.
Adjusted gross margins for the three months ended March 31, 2021 was 31, 5%, representing a 112 basis point increase compared to the prior year due to improved mix of work towards inspection and service revenue combined with disciplined project and customer selection.
Adjusted EBITDA margin for the three months ended March 31, 2021 was 13, 5%, representing a 102 basis point increase compared to the prior year due to the factors I mentioned as drivers for the gross margin expansion.
Specialty services and specialty services net revenues for the three months ended March 31, 2021 increased on an organic basis by 7% primarily due to increased demand for the timing of our fabrication and specialty contracting services offset by project deferrals and job site disruptions driven by us.
Unfavorable weather conditions.
Adjusted gross margins for the three months ended March 31, 2021 was 12, 8%, which was relatively consistent with prior year period as leverage from higher volumes was offset by lower productivity due to unfavorable weather conditions.
Adjusted EBITDA margin for the three months ended March 31, 2021 was six 9%, representing an 85 basis point increase compared to the prior year, primarily due to leveraging overhead expenses with higher revenue and disciplined cost management.
Industrial services.
And industrial services net revenues from the three months ended March 31, 2021 declined as expected due to decreased volumes, primarily driven by our strategic focus and improving margins as opposed to growing top line.
As Russ detailed in our Investor event, we remained 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 and.
Adjusted gross margins.
And adjusted EBITDA margin for the three months ended March 31, 2021 was negative, 12% and negative 24%, respectively compared to $16, two and 10, 1%, respectively and the prior year period. The decline was primarily driven by unabsorbed cost per leases and equipment due to lower volume.
2000, and 'twenty one guidance as we confirmed during our recent investor event, our full year guidance for 2021 remains unchanged. We expect adjusted net revenues for 2021 to range between $3 65 billion and $3 75 billion as we focus on driving and inspection service revenue combined with our disciplined approach to project and <unk>.
Customer selection.
We expect adjusted EBITDA for 2021 to range between 405, and $419 million, we expect capital expenditures to be approximately $55 million and normalized depreciation approximately $60 million.
Our cost of capital is approximately 5% and our adjusted mid and long term effective tax rate remains approximately 21% and.
And our estimated fully adjusted diluted share count is approximately $205 million.
As we look at our guidance for the second quarter and as we said earlier. This year, we expect adjusted net revenues to range from 5% from $925 million to $950 million with adjusted EBITDA margin between 11, four and 12, 1%.
Before turning the call over to Jim I wanted to advise everyone that we plan to file two S. Three registration statements later today.
Yes, three completes our previewed the first S. III completes our previously disclosed registration rights commitment to Viking global and the second represents a universal shelf registration.
While we have no immediate plans to raise public equity or debt. We believe it is prudent to have the flexibility to access the capital markets on a timely and efficient basis as or when needed.
And when declared effective by the SEC the universal shelf will allow the company flexibility from time to time to offer to sell up to $500 million of public equity or debt.
Both filings are purely administrative undertakings and are not meant to foreshadow any known or anticipated activity.
I will now turn the call over to Jim.
Thanks, Tom Good morning, everybody.
We are pleased with our first quarter results, despite having a tough comparison relative to the first quarter in 2020 due to COVID-19, and the unfavorable weather conditions as Russ mentioned.
We're also very pleased that the team continues to execute against.
And against our long term strategic plans.
And I believe that those of you who joined US from our Investor day saw depth to our leadership bench and gained additional insight into the various opportunities we have to drive earnings and margin expansion, which we believe should drive multiple expansion.
With one full year as the New York Stock Exchange listed public company now behind US. We are proud of the track record of strong results, we've accomplished and and unprecedented and challenging macroeconomic environment.
Our strong performance speaks to the leadership team.
Strength of our business, our protective moat around the business driven by recurring revenue and our financial discipline as we continue to focus on shareholder value creation.
We believe that in addition to our strong organic revenue growth prospects and merchant expansion opportunities. We also have significant M&A opportunities and highly fragmented industries our conservative.
On the balance sheet and liquidity profile provides us with ample capacity to absorb additional accretive acquisitions.
As Tom mentioned.
We ended the quarter with nearly $715 million of cash and a net debt to adjusted EBITDA ratio of 175 times, which is below our target long term debt ratio of two to two five times.
As we've said before our priority for use of cash is to explore opportunistic acquisitions as we move through the rest of the year.
And we're excited about potential targets and areas, where we can leverage our.
And our existing competencies and infrastructure, such as fire and safety, while also evaluating opportunities to expand our menu of service offerings in areas such as elevator and escalator services. We believe there is value and being a one stop shop solution for building owners and operators.
As Martin said earlier and the call we will continue to remain opportunistic yet disciplined with M&A.
And if theyre not opportunities that meet our acquisition criteria, we are contempt to buyback our shares because we know the most about API and what its future offers we have great confidence and the business and the direction. We're heading we remain confident and our previously stated long term value accretion targets and are excited about our recently announced new goal of 13% plus.
Adjusted EBITDA margins by year end 2025.
With that and now I'd like to turn the call back over to the operator and open the call for Q&A. Thank you.
Thank you at this time I would like to inform 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 and you wish to remove yourself from the queue press the pound key.
Ask that you please pick up your handset to provide optimal sound quality.
Our first question comes from the line of Andy Kaplowitz of Citigroup.
Hey, good morning, guys.
Hey, Andy how are you.
Russ could you give us a little more color regarding your core safety services markets, you mentioned, the resiliency and Datacenters fulfillment and you've talked to that health care before driving your safety business, but are you seeing more general recovery at this point across your customer base is inspection and beginning to accelerate getting reopening and are you seeing customers.
Who pulled back and the pandemic starting to spend and spend again.
So, yes, I would see the <unk>.
Reality of it is Andy is that.
And our customers specifically are customers and data centers and semiconductor has really have not pulled back.
Moving through the course of the pandemic and in many situations have accelerated.
During the course of the pandemic as more and more people were working remotely and such.
There is a piece and president Biden proposed infrastructure build that was specific towards.
On the semiconductor space, we're seeing a lot of activity.
In that arena right now and I think the most important thing for us is to be prudent as we see these opportunities come forward because in.
And a people centered business like ours.
We need to make sure that we're deploying.
Our field leaders and our fashion that we can maximize the return for our shareholders.
And that means we can't be everybody's solution and we need to be super selective as we go forward.
Speaking specifically to your question around inspections, we saw.
And the good solid inspection growth.
And the first quarter north of 10% and so we feel really good about.
Our priority and our focus on continuing to growth and inspections, because we know that we're going to generate $3 to $4. A service from every dollar of inspection revenue that we generate so so.
So the answer to that question is yes, and we think that we're going to continue to accelerate that growth as we continue to build out our.
Our sales force under court and you broke guards leadership and.
Hopefully.
You got a chance to see the energy and the enthusiasm that she brings based on her 15 minutes or so during the Investor day.
She is outstanding.
And that's great to hear and inspection, so Russ or Tom maybe you can talk to us about how much weather impacted margin, especially and specialty services and then sales and industrial I know you had talked about industrial being down 30% for the year Q1, obviously was lower than that but do you have.
Industrial recovering and then can you give us the discreet impact on margin and specialty.
Well, we don't have it we don't have an itemized and broken out I mean really I mean, all I can tell you is that.
And.
It wasn't just Texas it was really across the sales and the southeast all the way up through New Jersey, and like we had a period of time and New Jersey, where we have a significant presence where there was 30 inches of snow that debt our people.
Dealing with and really the way, we generate revenue and make money is by burn and man hours and it was very difficult for us to get people to work and the field and the work and when we got people and the field it was very difficult for them to be productive and.
It would that would be nearly impossible for us to really truly quantify.
To be honest with you.
So I don't think it would be fair for us to do so.
Speaking of industrial services I, just want to start by reminding everybody that that is about 7% of our total our total revenue its a very very small piece of our business. It's probably the piece of our business debt. It's feast on some of the greatest headwinds because of COVID-19 and we have some unique opportunities for us.
And in front of US right now that we're continuing to work through and we remain optimistic that the back half of the year is going to be.
As guidance.
Wrestling and maybe ask you one follow up there like if I think about your guidance for the year you didn't change it on the revenue side does it may be slanted, a little bit more towards safety and safety doing a little bit better than you thought and industrial a little worse or should we just think status quo.
Well I would think about it from a status more of a status quo perspective on Andy but again I want to go back to.
Industrial is about 7% of our total revenue it's like it's just such a small piece of our business that.
And that.
We worked it we work every piece of our business, it's like having multiple children and your family right and.
I have heard Jim used this analogy and number of different times and every one of your kids as and a different place and.
And not every kid is as healthy as the other one and you still need to give them all of the right level of attention and and I think that's a really good analogy. When you look at a company like us with 20 plus businesses.
Across it and.
The <unk>.
<unk> services and specialty services, both have tremendous opportunities in front of them and backlogs are good.
And.
Really there is just one aspect of industrial services that is driving the you know the.
The majority of our attention that business, we are continuing to push towards the integrity side of the space and.
And.
That's like that's inertia and that takes some time to move there you don't just flip that switch and one day you are focused on seed capital and capital project related work and the next day Youre, 100% focused on integrity and service related work that takes it takes energy effort and pushing.
In order to get there and that's exactly what we're doing right now.
Thanks Ross.
Your next question comes from the line of markets and that are minor of UBS.
Yes, hi, good morning, everyone.
And Mark as Russ, maybe hey morning, and maybe I can just follow up here and I know you guys track labor hours.
Across your various businesses how did those developed throughout the first quarter and what was sort of the exit rates into.
So into the second quarter.
Well I mean labor hours, it's really interesting and I was I was looking this is and I'm not answering your question directly right now, but it is interesting and I was looking at.
The National Fire Sprinkler Association tracks Labor hours.
For the for the industry and I was looking at some of that data yesterday and how.
Hours continue to so to speak climb and.
Decline back, but haven't achieved C where they were at in 2019 and are ours are really tracking and a very similar fashion to that probably a little bit and in front of that.
We have aspects of our business that were more impacted by COVID-19 than than others. So like if you look at scale in Europe, and Scandinavia, and including the U K.
They're just starting to come out of really complete lockdown mode and.
And so they've been they've been further dampened by COVID-19 and say the U S Canada.
Specifically, Ontario, and Manitoba and not far behind just four weeks ago went into complete lockdown and as part of that locked down.
And even if you were deemed essential and there was even more restrictions from that standpoint, and I felt like our hours.
Held up.
Don't take this wrong way, but surprisingly there.
Were surprisingly solid even with the increased <unk>.
Lockdowns that we saw.
And in our Canadian business so.
Our hours are ticking up.
Got back to where we are in 2019, but we continue to show really good progress.
Great. That's helpful and then maybe one for Tom.
And you touched on it briefly in your prepared remarks around the.
Conversion rate on the on the cash flow 38%.
Can you maybe give us and Lindsay.
And the insight here on on the moving pieces I realized topics and stop a bit working capital, but is there anything especially related to industrials this quarter.
Because I would've expected that the positive trends that you've seen and safety and space since the initial project duration, particularly in safety net cash.
Cash would have been maybe on launch bedroom.
But maybe maybe help us out here and so that the moving pieces and then how you see that track maybe early in Q2.
Yes.
We generally anticipate that we will use cash in that first quarter and.
As a period, where we're taking care of.
Capital expenditures tend to be a little stronger net first quarter as we get ready for the year and so that we have all the equipment, we need for the for the peaks of second and third.
And first part of fourth quarter, so really tracked kind of where we thought it would be nothing really surprised us in the quarter related to our partners.
Okay got it I'll get back in queue. Thank you.
Your next question comes from the line of Andy Wittman of Baird.
Hi, guys and good morning, Thank you for taking my questions.
And I feel like we've talked to you guys a lot with kind of on an earnings call not that long ago Investor day. So.
Just maybe a couple of clarifications here today, and I guess, maybe I'll build on that on the free cash flow and constant typically and the in the prepared remarks. You said this is a bit of a hybrid year.
I don't know if term of ARPA and I'm not really familiar with that can you just describe what you mean by that understand that last year was really really strong and I. Thank you.
The adjusted free cash flow conversion was 115% is that basically implying that this year youre going to kind of equalize out can maybe the long term <unk> and targeted probably under that 8% target, maybe just a little bit more detail on what you mean by that.
I think Thats fair as we've talked about as we come back with stronger revenues as we've climbed back we're going to use that building working capital.
And so as we've talked it's kind of an average rate that 80% and we were so strong last year, we're going to be on the other side of that this year.
And so we will be building working capital as we as we March through the year, we do have activities in place to work to continue to improve our working capital by working on DSO, and our inventory our contract asset and liability processes as well as working with our vendors on our payable terms and to help mitigate what.
Will occur there naturally, but it's positive for us.
And that our working capital to grow and put some pressure on free cash flow this year.
Yes, I'm going to got it Andrew.
And Andrew I'm, just going to file on Tom's commentary like it's positive spike.
To me.
We want to be using some cash this year.
The business climbs back to a return to I guess normalcy and so it gets me a little bit excited when I see we monitor cash on a daily basis. So we see.
Across all aspects of our business Europe U S.
Canada, and so we see who is using who is not using et cetera, and it's exciting for us when we see.
A little bit of cash went out the door right now so you should view that as being positive.
Just wanted to make sure that we're understanding what youre trying to say there so that makes all the sense in the world.
I guess just a couple of other things so that I can understand where we can all understand the quarters results a little bit better.
The corporate EBITDA segment results was a little bit lighter than I think we talked to you about maybe we talk to you offline and it was going to be a little bit higher than this I was wondering Tom if there was anything on the corporate segment EBITDA coming into 18 million and this quarter.
That was unusually low this quarter and maybe what your expectations for the corporate expenses are going to be for the year. So we can model that correctly.
Yes, so we.
We still feel good about debt going forward.
You had a couple of things and the quarter, one Genie didn't come back as much as we had budgeted for as COVID-19 state stronger on US Russ mentioned, Canada and Europe in particular, very very strong lockdowns and we still had some restrictions here and the U S. So that didn't come back as strong. We also have some open.
Critical needs that we're looking to hire and various aspects here in our corporate cost structure and we have those budgeted coming in earlier in the quarter and with COVID-19, It's made hiring a little bit slower than normal and so that didn't come through as well.
And so those are the main drivers.
And so we would expect those.
But andy that $20 to $22 million a quarter is a good number just a little bit.
And our favor.
And as you pointed out.
Interest expense was a little bit higher in the quarter and I think our share count is probably also higher and the quarter that most of you had I think consensus is around 197 million, whereas the weighted average for the quarter was 200 million and.
And I think and Tom's comments.
Sure.
We're projecting that the weighted average share count will be about $205 million at year end.
Okay. Good.
Good.
I think that's all I have for now thanks Lucas.
Thank you.
Your next question comes from the line of Julian Mitchell of Barclays.
Hi, Good morning, maybe just wanted to understand a little bit the the EBITDA margin outlook. So I think in the first quarter. The EBITDA margin was up about 20 bps year on year.
And it looks like the guide for the year and beds around that level of increase as well.
At least at the midpoint.
So just wondered why you wouldn't see a biggest step up and the balance of the year.
And have less weather headwinds and less of a headwind from industrial winding down.
Easier comp.
Because you get into COVID-19 year on year comparison.
And it sounds like you have confidence on price costs, not being a big headwind.
So maybe help me understand kind of what the.
The headwinds are vessels, all those improvements relative to Q1 for the rest of the year.
Yes sure Great question.
Youll recall that we took significant actions last year in quarters, two and three and reduced people's compensation, and our 401, K benefits et cetera, and we put those all back in in Q4, So we're going to lap those quarters here and so thats. If you will be offsetting to all the good news that you spoke about.
Yeah.
I see and maybe help us on the sensitive the scale of that temporary costs.
So because for example, things like PMA expenses as he said they would they were narrower than you thought and Q1, probably narrow in Q2 as well.
So maybe help scale that for us.
Yes, So I think last year, we had in the second quarter, we had about $19 million that we had attributed to pullback of COVID-19, and and the third quarter about $13 million.
Thank you and if we look at the.
The second quarter guidance I didn't see much of a reference to that and do we assume that's unchanged.
Because you had such a tough period in Q1 with weather and I think you had a 60% sequential decremental EBITDA margin.
Do we expect kind of Super normal sequential Incrementals now in Q2 versus what you had guided before.
I would go with the guidance, we gave you I'm not sure I totally understand the question and I apologize, but the guidance we have factored in what we believe our total cost structure and this quarter and gives you a good comp to prior year.
I see so the Q2 guidance is exactly the same.
Yes, no change on our Q2 guidance.
Great. Thank you and just to qualify that or our full year guidance.
Thanks.
Your next question comes from the line of Kathryn Thompson of Thompson Research group.
Hi, Thank you for taking my questions today.
First of all on supply chain how are you.
Managing supply chain disruptions and just overall inflation for your businesses.
Hey, good morning, Katherine and thanks for taking the time to join the call today and.
So I guess I'm going to start by just referencing the small.
Project size average project size that our businesses have.
Safety and safety services on the average project size is $10000 specialty services is $70000 and industrial services, which is larger which is roughly $700000.
For the most part and industrial services and and specialty services the clients.
As providing the products for us to install and so we have very little risk from the <unk>.
Some of the rising commodity prices, if you look at specialty services and I'm, not saying that we don't have any exposure.
That would be not true.
But if you look at safety services that average project size.
<unk>.
From an inspection and service those those jobs are turning so fast that you don't have great exposure to the inflationary and nature of commodity prices that we're seeing today. The other aspect of it is that we track. This on a on a weekly basis and we've been providing.
Guidance to our businesses on a weekly basis. So we are we have been very proactive and protecting ourselves and our proposals and and our contracts.
And to make sure that we do have protection.
As it relates to two.
Rising costs associated with what's going on we really haven't been overly impacted by avere.
Availability.
I did see a note from one of our company presidents yesterday that the colonial pipeline packing situation is causing some direction disruption. There is certain as an example, Huntsville, Alabama has put some limitations in that you can only get 10 gallons of gas at a time and and so.
So our people are managing that from an availability standpoint, but that's a very short term situation but.
And I feel like our communication across the enterprise has been really solid and we've done a lot of really positive things to make sure that we're mitigating that risk.
Okay.
Net.
And then and then getting back to the office.
Companies prepare to combat Chiapas and anticipate we can take and issue.
Happen could you discuss how this is an opportunity for IPG. So it can be everything from our safety and HVAC or other categories that we may not have to take into consideration. Thank you.
Yes, so from an HVAC perspective.
Our HVAC.
Services companies are obviously.
And to provide additional filtration systems and expanded its filtration system. So they're different businesses like I can use our corporate campus as an example, we have.
And the Minneapolis feast HVAC services company that upgraded the filtration system and both of our corporate office buildings. We also had.
And one of the largest private companies and the World who is based in Minneapolis recently hire us to upgrade their complete.
Their corporate office facility and enhance their filtration system. So there is without question there is opportunities for us in that space and we're trying to do our best to take advantage of it you have to also remember, though with all that being said that <unk> services is not a huge piece of our business.
And so those.
Those opportunities and the scale of the company are somewhat limited.
There is.
There will be some opportunities as people really truly start bringing people back and they are retrofitting.
And the interior layouts of their office facilities.
And that will have an impact on their life safety systems, and the fact that their life safety systems will still need to meet code.
But we really haven't started to experience and see a tremendous a number of those opportunities, but we're anticipating that we will.
As the as people start being more proactive and getting people to work the governor of Minnesota, just as an example has just recently read on changed as stay at home order.
And made it and allowed businesses more flexibility to start bringing people back to work. So at our corporate campus, we have a mandate out that 50% of our employees need to be in the office next week and then we have our fees and plan to bring people back.
100% by August 15th hopefully that.
Goes smoothly and goes according to plan and we really only have one space that we have significant.
And concerns isn't the right way to look at it but we feel like we have to configure to make sure that we're providing a truly ESD and environment for all of our employees. So for two buildings and that's a relatively small add.
But we are definitely keeping our eyes on it and we do see some opportunity.
Okay, great. Thank you very much.
Your next question comes from the line of Jon <unk> of CJS Securities.
Hey, good morning, guys. Thank you for taking my question.
I was wondering whats your expectations for the industrial profitability. This year was to get back to profitability is still and just kind of what's in the pipeline for that segment.
Again, I'm going to start by reminding everybody that industrial services is about 7% of our of our total revenue.
We haven't changed our guidance as it relates to or our expectations on where those businesses are going to to be.
During the day.
And the course of the year. So do we expect to make money of course, we expect to make money.
We are.
I guess I would hope that everybody has seen how proactive we are from a leading and managing our businesses and we are doing everything we can to ensure that all of the right levers have been pulled.
To enhance the profitability of every one of those businesses. So.
But.
We like the we like the company is we like the businesses.
And again I had mentioned earlier, we really have one business that we are facing more macro headwinds in this segment and they're getting plenty of attention and trust me.
Okay, great. Thank you for that color.
Roughly or maybe Martin and Jim.
The M&A markets have been hard to say the least but are you seeing any valuation stretching beyond maybe where you're comfortable.
And on the tuck in side or perhaps the more.
On larger and more adjacency transfer initial side that you've been working on.
And did it seem like you're going to pull the trigger now investing other company and go for these higher and higher multiples and maybe Conversely are you seeing more flow more people or are you going to cash and on the trend.
So.
Maybe.
I'll start maybe.
I think couple of things Festival.
Go back to our history of other companies and we built with acquisitions over the years for every deal people. The public. So they were probably 40 deal didn't happen most of which would pass because of valuation.
I don't think that will be much different here. This is a very fragmented space, there's a lot of.
If you'd like merchandise is different.
And is out there.
On that.
The gatekeeper for us will always be valuation.
Sure.
On a long on a call.
Boxes that have to be checked.
But there are always opportunities to find the right things and what we've found over the years and the frothy market like we're in now.
Some of the better companies do become available so we've bought businesses and both property market and more conservative one.
But I think.
There are plenty of opportunities out there.
And where the discipline comes in is not overstretching.
On.
To buy something.
Even if one from afforded.
We are very disciplined and intend to be that way.
And for the last 25 years I don't think it's going to change now.
And John if I could if I could supplement at.
At our Investor Day, we talked about how.
The weighted average price, including the acquisition of API itself.
And the average we've paid is about seven three times.
The larger transactions will cost more.
And we hope to balance those out with the more traditional deals that API has done under <unk> leadership.
Over the last decade decade, or so so you're going to get some price discrepancy with lower multiples paid for the smaller family owned businesses and higher multiples paid for perhaps assets owned by families or p/e firms.
And so our focus is to.
The opportunistic keep our eyes open and.
And make the right decisions as we move through things and be.
As disciplined as always.
Great.
Paul.
Yes, and John and John just because I need to chime in just to hear myself talk I guess.
The when you look at the.
The tuck in World If you will.
We're not it's it's reasonable that's just the best way to put it and.
So.
It's a combination of a lot of different things happening.
And the marketplace, but.
We continue to look at tuck in acquisitions, we find the multiples to be to be reasonable. We also think that we have something different and unique to that is attractive to many of these family owned businesses and that creates an opportunity for us.
Great that's good to hear.
Russ finally, if you could address just.
How are you set up to.
To deal with day infrastructure Bill it assuming one.
And it is just from a labor and unit perspective, and access to resources such as.
The things that the company and supply chain.
It's something that day comes down the pipe are you set up to take advantage of all of that at this point.
Yeah. So.
So like I like our chances John and the reason I say that is that our core purpose of building great leaders expands to the men and the women that.
Leading our efforts in the field with our customers on on a day to day basis and there is very few people in the space that are investing in their field leaders and the same fashion that we're investing and our field leaders and and.
Why does that matter it matters, because I think we.
And <unk>, our field leaders at a higher level than our peers and we have created an environment, where people want to come and be a part of our team and day part of the API family and Thats a unique.
Opportunity for US this is a super people centered.
And on business and.
And I think that the people that are investing and there in there and there Hugh.
<unk> capital.
We are going to have a unique advantage as the labor markets continue to tighten up and I really truly believe that and I do think that that is something that is unique for our company and I truly believe that it creates shareholder value.
Thank you that was our final question for today on our turn the call to Ross Becker for closing comments.
Thank you very much and I would just like to conclude.
Our call today by thanking each and every one of you for your interest in and API and.
And this is really a great company, we have so many fantastic people I look forward to the future for each of you to further get to know us, especially once we get on the backside of the pandemic and we can see each other face to face because I really believe that when you get a chance to experience the culture.
And the values of this organization you will see that this is a great long term investment and so again. Thank you for taking the time to join US today and thank you for your interest in API.
Thank you for participating and API group first quarter 2021 financial results Conference call you may now disconnect.
And.
Yes.