Q2 2021 APi Group Corp Earnings Call
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Good morning, ladies and gentlemen, and welcome to API group second 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 and will be feeling by should you need any assistance.
I will now turn the call 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 second quarter 2021 on your earnings conference call.
With me on the call today are Rob Becker, our president and CEO, Sir Martin Franklin and Jim Lally, Our board co chairs and Tom <unk>, Our Chief Financial Officer.
Before we begin I'd like to remind you that certain statements on 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.
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.
Play from that.
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 August 11, and we have no obligation to update any forward looking statement, we may make.
As a reminder, we have posted a presentation detailing our second quarter financial performance on the Investor Relations page of our website.
Our comments today.
The 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 our presentation.
Before turning the call over to Martin I would like to thank everyone that joined our conference call on July 27, announcing our agreed acquisition of the Chubb fire and security business from carrier Global Corporation or <unk>.
The webcast is available along with the presentation slides on the.
That's relations page of our website.
It is now my pleasure to turn the call over to Martin.
Thank you Olivia.
This is a very exciting time for API.
On July 27th we announced an agreement to acquire the Chubb.
Security business from carriers Global Corporation.
The transaction value was $3.1 billion.
Which is comprised of $2.9 billion in cash and approximately $200 million of a SKU.
Moving to our abilities and other adjustments.
The acquisition of Chubb, which we anticipate to close around year end will transform API into the world's leading life safety services provider.
Chop up from 17 countries.
For one 5 million customer site.
With leading market positions in Australia, Canada from Hong Kong, Netherlands, and the UK, which comprised approximately 90% of its revenue.
Capex upgrade kit as a non core asset exit the leading service company long buried inside manufacturing businesses from United Technologies carrier.
We are a perfect partner for China, We performed many of the same services for the same types of customers and complementary geographies on.
Our combined global reach at the World leader in life safety services will position us as the logical one stop shopping choice from multinational clients.
With 26000 combined skilled team members, we believe we will be able to bring the best quality of service and attract train and retain the best talent.
We believe the transaction will be highly accretive with compelling synergies that it will complement revenue growth through cross selling certain products and services.
The opportunity for margin expansion meaningful.
We're extremely excited about the value creation opportunity for newly enlarged company represents creating the worldwide leader with life safety and security while concentrating the vast majority of the business on a recurring revenue Mandatorily required services, it's a day.
We had hope to follow when we made our original investment in API.
We have great confidence in the business on the direction, we're going on with that I'll hand, the call over to Ross.
Thank you Martin good morning, everyone.
For taking the time to join our call. This morning as Martin mentioned this is a very exciting time for API.
During today's call I will provide a summary of our second quarter results and comment on our transformational acquisition of chart explaining to you in more detail what I see as the opportunity in front of us before turning the call over to Tom who will then walk through our recent results and outlook in more detail.
We are encouraged by the progress made towards recovery since the height of the pandemic at this time last year.
As you have heard me say on prior calls the safety health and wellbeing of each of our employees remains our number one priority.
This focus and other foundational prior priorities provides the platform from which we can continue to enhance shareholder value.
Key highlights from our performance for the three months ended June 32021 compared to the prior year period include the following.
First net revenues of $978 million above our previous previously communicated communicated guidance of $925 to $950 million, primarily driven by continued growth of our inspection and service offerings as well as general market recoveries in both safety and specialty services.
Offsetting the decline in industrial services contracts net revenues, excluding industrial services increased on an organic basis by 21, 1% compared to the prior year period.
Second continued focus on our ongoing growth goal of growing recurring inspection and service revenue, which we believe helps to build a more protective moat around the business.
And third adjusted earnings per share of <unk> 31.
As we've discussed throughout the quarter COVID-19 continues to impact our business. Despite our team's agility as we manage the rise in the number of COVID-19 cases, coupled with supply chain disruptions and inflation.
These supply chain issues impact our work and the work of others on certain projects and ultimately have an effect on our efficiency, causing downward pressure on markets.
We expect these negative variables will be with us through the balance of the year. However, we do not believe they eliminate limit us in achieving our long term goals.
I am incredibly grateful for the leaders across our organization, we remain dedicated to meeting robust demand across our key end.
The.
Growth in net revenues and our safety and specialty services segments was partially offset by a decline in net revenue as an industrial services. This deserves some further explanation.
And industrial services net revenues for the three and six months ended June 32021 declined on an organic basis by 49, 6% and 63% respectively. This is due to the decreased volume, resulting from the following back on.
Number one the roll off of old projects and contracts that were not replaced the renewed in 2021.
Second decisions by our customers to delay and suspend certain projects.
Third difficult macro market conditions, while there has been some improvements in the energy sector over the last several months the space in which we operate remains competitive we are still seeing a lack of proposal activity on both the capital and integrity side of pipeline transmission work pipeline integrity is where we have focused the business over the last.
18 months, we remain focused on being disciplined on project from customer selection and we will continue to resist lower margin higher risk activity.
We expect this trend to continue for the remainder of 2021. This is the reason we have and will continue to focus our efforts on growing the cyclical recurring service revenue aspects of our portfolio.
Before turning the call over to Tom I'd like to spend a few minutes discussing our recently announced acquisition of Chubb.
As the CEO of this company I would like to give you all a very clear picture of why I felt we needed to shift our M&A focus to winning winning the tough sale process.
We've already talked about the strategic fit and the global leadership position, we will have as a result of this combination but at the end of the day. All of this has to result in significant value creation for shareholders and the map here is extremely compelling.
We've already provided guidance to the investment community for revenue growth in line with our historical performance of 4% to 7% and adjusted EBITDA margin expansion to 13% by year end 2025.
With the Chubb baseline starting 2021 at approximately $2.2 billion in revenue and adjusted EBITDA margin of approximately 10%, we expect chubb's revenue to exceed $2.5 billion with an adjusted EBITDA margin approximating our projected fleet margins of approximately 13%.
Our stand alone adjusted EBITDA of $315 million to $335 million by the end of 2025.
Excluding any further acquisitions by the end of 2025 API should produce in excess of $800 million of adjusted EBITDA with revenue and earnings predominantly from statutorily mandated services.
There will be a significant amount of operational focus to achieve this but we have a direct line of sight to the steps required to execute on this objective.
To be clear this will still leave chop with the net adjusted EBITDA margin below that of API comparable business in the U S. But we feel this debt the highly achievable baseline from which to build.
We do not intend to lose focus on the small tuck in opportunities and our global local markets. However, we feel there is much value to be created by simply focusing on the large platform. This combination represents.
Anecdotally some of our largest tech and data center customers have asked us if we can assist them in fire safety services for their global operating centers and now we will have a solution for that.
Okay.
We believe there is a significant opportunity to leverage chubb's 200, plus year history of providing statutorily required in route based services through its internationally recognized brand.
Similar to API Chubb is a people centered business, we look forward to welcoming chubb's 13000 employees to our family of businesses and supporting their development as leaders as the business shifts from a non core asset to a paramount strategic priority within the API.
We believe our combined leadership team will drive towards maximizing business performance and capitalizing on future cross selling opportunities are aligned incentivize performance based culture will help drive chop as it has in API.
Another parallel between the cash business and API is that we have life safety businesses that deliver high teens adjusted EBITDA margins, which means we also have businesses that are performing below the fleet average. We believe there is a significant opportunity to invest in regions with higher margins and provide increased support to the chubb team.
And improving the businesses that are below fleet average to ultimately realize the financial profile in line with API safety services segment.
I would now like to hand, the call over to Tom to discuss our financial results and outlook in more detail Tom.
Thanks, Ross and good morning.
I will review, our consolidated results segment level performance and strong balance sheet before turning to our outlook.
As Russ mentioned earlier in the call net revenues, excluding safety, excluding industrial services for the three months ended June 32021 increased on an organic basis by 21, 1% compared to the prior year for.
For the six months ended June 32021, net revenues, excluding industrial services increased on an organic basis by 11, 7% compared to the prior year period.
Adjusted gross margins for the three months ended June 32021 was 24, 2%, representing a 27 basis point decline compared to the prior year driven by supply chain disruption and inflation, causing downward pressure on margins, partially offset by improved mix and safety services for the <unk>.
Six months ended June 32021, adjusted gross margins of 23, 7%, representing a 27 basis point increase compared to the prior year due to the factors mentioned for the second quarter.
Adjusted EBITDA margin for the three months ended June 32021 was 10, 8%, representing a 106 basis point decline compared to the prior year due to supply chain disruption and inflation, causing downward pressure on margins and less contribution from joint ventures in specialty services than the prior year.
<unk>.
For the six months ended June 32021, adjusted EBITDA margin was nine 4%, representing a 39 basis point decline compared to the prior year due to the factors mentioned for the second quarter.
We continue to focus on driving strong free cash flow and our balance sheet and liquidity profile remains strong.
As expected given the comparative swings and COVID-19 related business cycle.
As well as our normal historical experience most of our cash from operations was absorbed by a rebuild in our working capital base.
For the six months ended June 32021, adjusted free cash flow was $20 million represent in a $203 million decrease compared to the prior year of $223 million and our adjusted free cash flow conversion rate was approximately 12%.
As we discussed on our Investor day in April the decline in cash flow was expected as revenues rebounded post COVID-19, and we used cash to fund working capital to drive increased service revenue and higher margins.
Working capital increased in line with historical trends experiencing experienced during the first half of the year.
In addition, the decline was driven by a $34 million increase in cash paid for income taxes, largely driven by the timing of a payment related to the prior year.
As of June 32021, we had $686 million in cash and cash equivalents and no outstanding borrowings under our $300 million revolving credit facility.
I will now discuss our results in more detail for our three segments beginning with safety services.
Safety services net revenues for the three months ended June 32021 increased on an organic basis by 26, 4%.
Primarily due to strong recovery of our HVAC services businesses and continued growth in inspection and service revenues across the majority of our markets for the six months ended June 32021, net revenues increased on an organic basis by 12, 6% due to the items mentioned for the second quarter.
Adjusted gross margins for the three months ended June 32021 was 31, 8% consistent with prior year period.
For the six months ended June 32021, adjusted gross margins was 31, 7%, representing a 63 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 June 32021 was 14, 6%, representing a 198 basis point increase compared to the prior year due to leveraging of our SG&A costs on the increase in revenues period over period.
For the six months ended June 32021, adjusted EBITDA margin was 14, 1%, representing a 153 basis point increase compared to the prior year due to the leveraging of our SG&A costs on the increase in revenue period over period and factors I mentioned as drivers of gross margin.
Specialty services.
Specialty services net revenues for the three months ended June 32021 increased on an organic basis by 18, 9%.
Primarily due to increased demand and timing of our fabrication and specialty contracting services, partially offset by lower volumes in our infrastructure and utility businesses for the six months ended June 32021, net revenues increased on an organic basis by 13, 4% due to the factors mentioned.
The second quarter as well as project deferrals of job site disruptions driven by unfavorable weather conditions in the first quarter.
Adjusted gross margins for the three months ended June 32021 was 17, 1%, representing a 180 basis point decline compared to the prior year due to supply chain disruptions and inflation, causing downward pressure on pressure on margins for the six months ended June 32021, adjusted gross margin was $15.
2% represented 81 basis point decline compared to the prior year due to the reasons mentioned for the second quarter and lower productivity due to unfavorable weather conditions in the first quarter.
Adjusted EBITDA margin for the three months ended June 32021 was 11, 6%, representing a 305 basis point decline due to the impacts mentioned for gross margin and.
And less contribution from joint ventures compared to the prior year period for.
For the six months ended June 32021, adjusted EBITDA margin was nine 5%, representing 112 basis point decline compared to the prior year due primarily to the items noted for the second quarter.
Industrial services.
Industrial services net revenues for the three and six months ended June 32021 declined on an organic basis by 49, six and 63% respectively. Due to the factors Russ mentioned earlier in the call <unk>.
Adjusted gross margins and adjusted EBITDA margin for the three months ended June 32021 was four 4% and two 9%, respectively compared to 18% and 15% respectively in the prior year period.
The decline was primarily driven by unabsorbed cost for leased equipment due to lower volume.
For the six months ended June 32021, adjusted gross margins was zero and adjusted EBITDA margin was negative four 3%.
2021 guidance, our full year guidance for 2021 remains unchanged and does not reflect any contribution from the upcoming Chubb acquisition, we expect.
Adjusted net revenues for 2021 to range between $3.65 billion from 375 billion as we focus on driving inspection on service revenue combined with the continuing but smaller decline in our industrial services segment, and our disciplined approach to project and customer selection.
Also.
As we have said previously while we do not have any built into our budget for an infrastructure bill or stimulus that would incentivize investment in the renovation of existing infrastructure.
There are certain aspects of our business that would benefit and we are pleased to see the recent progress in the Senate towards such legislation.
We.
Adjusted EBITDA for 2021 to be at the lower end of our range or approximately $405 million, primarily driven by supply chain disruptions and decrease in our industrial services segment and the ongoing impact of COVID-19 pandemic.
We expect capital expenditures to be approximately $55 million and normalized depreciation continues to be approximately $60 million on.
Cost of capital is approximately 5% and our adjusted mid and long term effective tax rate remains approximately 21% and our estimated fully adjusted diluted share count is approximately $205 million.
As mentioned earlier this year, we expect our adjusted free cash flow conversion rate for 2021 of approximately 70%.
As we build working capital from the reduced prior year base, our back half cash flow build in 'twenty. One is consistent with that of a more traditional run rate.
I will now turn the call over to Jim.
Thanks, Tom Good morning, everybody.
Our progress this year is meaningful and we are even more excited by the long term future of API following the strategic Chubb transaction.
COVID-19 continues to impact our business as well as those of our customers and suppliers, we remain confident in our ability to execute on our long term goals for the business.
The announced Chubb acquisition meets our previously stated a key strategic investment criteria.
<unk> has a history of strong free cash flow generation they are leaders in their niche markets.
We have an experienced leadership team the.
The acquisition will expand our geographical reach and will strengthen our protective moat through greater statutorily required recurring revenue with 50% plus of our revenue coming from service after the transaction closes.
We are enthusiastic to invest behind the Chubb team and support their operations and supplement them with our existing operations. We believe there is significant future value creation opportunities as we combine our two organizations and realized revenue as well as cost synergies.
In addition, we.
We are excited to add Blackstone as a partner as many of you know Blackstone has a significant global property portfolio, which we expect to provide the combined company new customer opportunities in multiple markets.
Blackstone's real estate total commercial portfolios comprised of over $1.2 billion square feet.
Real estate globally, and we're excited to compete for their business.
Before opening the call for Q&A I'd like to provide some additional color regarding model assumptions for Chubb.
As noted on our previous call, we look forward to share more details once the transaction is closed.
As Martin mentioned the transaction value was $3.1 billion, which is comprised of $2.9 billion in cash and approximately $200 million from us.
Assume liabilities and other adjustments some of which will be chewed up at closing. These deductions includes deductions for known and contingent liabilities all of which have been quantified through our diligence process.
From the trailing 12 month period, ending March 31.2021.
Despite headwinds faced in navigating the global Covid, 19, pandemic and emerging supply chain disruptions.
Chuck had revenue of approximately $2.2 billion.
And adjusted EBITDA of approximately $213 million, which we believe is a strong base from which we can build.
The transaction is expected to close around year end 2021 net.
Subject to a consultation process and standard standard regulatory approvals.
It will be funded through a combination of cash on hand, perpetual preferred equity financing and debt.
For the $800 million perpetual preferred equity financing there is a five 5% annual dividend payable on a quarterly basis in cash for at the Companys option.
In kind by payment of additional shares of common stock.
We will decide at the time on the dividend as to whether we pay in cash or stock based on the company's cash flows and balance sheet position.
The annual dividend amount is expected to be approximately $44 million.
On the perpetual preferred may be converted at any time by the holder into common stock at a conversion price of $24.60.
The company has the ability to force conversion at any time.
Volume weighted average share price of our common stock exceeds 150% of the conversion price or $36.90 per share for 15 consecutive trading days.
For the purposes of future modeling, it's important to reflect either one the cash payment or to the preferred is converted to avoid double counting.
Along the way.
We expect to be at a pro forma net net leverage ratio of around four and a quarter times at closing with the goal of returning to below three times net leverage expeditiously.
Our near term focus will be on closing the transaction and then deleveraging through our asset light high free cash flow conversion operating model, which this year, we expect will deliver cash in excess of $275 million. We will do all of this while continuing to invest in our leaders and our business process.
Improvements.
I would now like to turn the call back over to the operator and open the call for Q&A before Russ concludes the call with an additional statement at the end of the Q&A period.
Operator, please open the lines.
Certainly at this time, if you would like to ask a question. Please press star one on your Touchtone phone you may remove yourself from the queue at any day by pressing the pound key.
Again that is star Antoine if you would like to ask a question. We will take our first question from Julian Mitchell with Barclays.
Hi, good morning.
Maybe just wanted to circle back to the free cash flow aspects maybe.
Maybe give us a bit more clarity as to how the big working capital pieces will move in the second half to get that conversion up and all.
So perhaps when youre looking at 2022.
Assuming more normal working capital dynamics, assuming that Chubb.
Is integrated.
In the year.
Free cash flow conversion should we assume for next year.
Yeah, So Julien let me address the cash flow for this quarter.
Right in line with our expectation is where we came in.
If you'd look back to 2019 net we share with you last year last year's second quarter was dramatically impacted by the Covid reduction in revenue as we brought down all of that working capital. So right in line with our historic work flow and what we had budgeted we came in at the end of the quarter historically, we see.
If the cash comes in through the second half and that will happen as projects wrap up and as as our revenue in the fourth quarter.
Sects are wrapping up and you run into the holiday weeks et cetera, and so it's a normal time, where our cash comes in.
And we're expecting that same flow this year I think <unk> seen.
Discussed in the past on chubb's cash flow conversion rate.
Yes.
<unk> disclosed amount is 90%.
And we will be blended with ours and expect it to be consistent but we'll have more details on that as we get closer to the closing.
Julian It's Jim I think Tom.
Tom Correct me, if I'm wrong, but if memory serves me correct.
We did about $11 million on free cash flow in the second quarter of 2019 versus the 20 of this year and I think our conversion rate was much higher yes, so second quarter slightly different Jim but you are close to about $22 million conversion in 2019 versus 'twenty. This year, so right on line and a 13, 9% conversion in 2000.
<unk> 19 versus 12% conversion this year and when you think of the growth we've had because they're coming off a lower COVID-19 base. This year, that's very very positive for us.
And I think Julien you had a question about 2022.
We will go through the budgeting process, but I think we said on our last call that <unk> historically had a 90% free cash flow conversion.
Was EBITDA less capex minus capex divided by EBITDA and so we don't see any real trending change in debt and our historical is 80% plus so still very strong free cash flow conversion, but when we do the budget and we give guidance when the deal closes we'll give you more color.
Thanks, very much for that detail on maybe my second question.
Just looking at the EBITDA.
EBITDA margin. So I think the full year guidance implies EBITDA margins are up slightly year on year in the back half just wanted to check that and more specifically within specialty services.
The margin pressure in Q2.
Substantially does the margin sort of swing around in the second half in your guidance.
I think that Julian this is Russ I think we're going to continue to see margin pressure in specialty services through through the remainder of the year on we're going to be battling.
Through.
Cost of goods and inflationary on.
Pressure as well as supply chain disruptions that are going to continue to progress on headaches and we're going to have to keep just keep on badly.
I think that we feel really good about what we're seeing in safety services and.
To see positive results, there and improvement, but we're going on we're going to continue to balance through the through the second half.
Thanks on the overall firm wide adjusted EBITDA margin at the sort of guidance mid point that should be up slightly year on year in the second half is that fair.
Fair.
Great. Thank you.
Thank you.
And we will take our next question from Markus <unk> with UBS.
Hi, good morning, everyone.
Hey, Marc maybe I'll tie.
Hi, good morning, maybe I'll start.
Job Ross Thanks.
Thanks, so much for providing your thoughts here on how you think this will develop to 2025 and I think it's at two and a half.
Billion getting the margins to sort of stop.
API fleet average of 13% can you comment a little bit on debt sort of visibility you already have in Lloyds.
Depending on project and customer selectivity like we've seen you do obviously on the industrial side of your business helped to get that margin up on that specific programs that you already think about.
And then connected to that.
You can see the 100 basis points below that you cant life safety business. So.
How are you thinking about this and.
And how much comfort do you have.
So I would start by saying we're very confident.
That we will be able to work with chubb's leadership team and achieve these goals.
We wouldn't put them out there if we didn't have great confidence.
They are under Anthony Brendan's leadership, they are really pushing.
Two eight branch focused model, which is very very similar to the focus on how we built on our life safety and safety services business in <unk>.
The ownership at the branch level and.
And so for me it is.
Is it is really a combination of a lot of different things, but its going to start with the individual branch leadership, making sure that we have the right people, leading these different branches and starting to make investments in their people as leaders. They havent had that level of investment.
That's something that we can bring to them very very quickly as we come out of the gates here. So.
We have really good confidence that that these margin expansion goals are achievable and just like just like your markets. When we when we achieve those goals, we're going to just moved the goalposts and we're going to keep on.
Moving forward.
With improvements but.
There is there's a tremendous amount of opportunity for us to really help the chubb team improve the business.
Great. Thank you and then on the $200 million of contingent and non liabilities, just making sure here.
What's being transferred over from carrier.
Service business largely.
The underlying fire manufacturing debt the background of the question is on.
So on <unk> SaaS.
How confident are you that stays in sort of like on long dated liability that moves although with.
With that transaction.
You are correct, we have purchased the services side of the business. They are keeping the so to speak manufacturing the product manufacturing piece of the business and the DFAST liabilities stayed with UTC back when the carrier was carved out of United technologies. So we're.
We're very comfortable with the sort of seek environmental.
Okay.
Okay. Thank you very much.
And we will take our next question from Andy Wittmann with Baird.
Great. Thanks, and good morning, I just wanted to clarify some calls questions from the prior Chubb call regarding the EPS accretion that you articulated.
Correct me if I'm wrong, please but I think you guys said there was going to be like I think it was 35 cents of accretion maybe that number is wrong, but if you could please it would be helpful to understand the level of depreciation interest expense and the share count that underpins that recognizing here that it gets complicated with the preferred dividend in the convertible share on that.
Just trying to understand that assumption would be would be helpful for everyone.
Can you repeat the question.
Yes, I was just hoping that you could purchase a little bit more with a little bit more detail on the chubb accretion that you articulated on the last conference call. If you could just comment again, what that EPS accretion youre, commenting as out of the box we understand your long term numbers today, but thank you made some comments.
Round out of the box EPS accretion and so depreciation interest expense and then the share count or the preferred dividend that underpins that 35 cents accretion I think would be helpful to understand.
I don't have to breakdown in front of me, but it was about I think in the last call. We said it was about 25%.
And it's actually I think in.
On the 26, 27% rate was 26.27, but I think we said on the call 25.
I'll have to come back and give you the breakdown of those figures because they just don't have them in front of me right now with our depreciation runs at about 18, there are capex its about $18 million.
I would say that probably under invested in the business to a certain degree.
But Andy I think in going back to what we said we were looking at approximately $213 million of EBITDA, we're looking at our existing share counts.
And that's where we came up with the.
I can't remember the number but call it 34, 35% 36.
So.
Okay.
Yes, that's what I thought you said on the call it 35% and you just had 26 I'm trying to that's what I'm trying to get out is clear from 75.
And 26%.
26% and 35 cents.
Sorry that was broke up a little bit below what you said.
As for you guys.
Yes.
Okay.
That makes sense then okay. So then just then Russ on the.
The inflation and supply chain challenges that you saw on the quarter.
I guess.
I've always thought of your projects as relatively short between the bidding and the execution of the projects.
Understand that inflation is rapid today, how much installation do you get from inflation, just given the smaller average project size as well as the proximity and bidding to execution of the jobs and I guess.
Okay.
Inside the backlog that you have today.
Are you.
How much of kind of older pricing is.
Is there for jobs.
<unk> had an extended duration between when they were bid and when they are executed and if you could just talk a little bit about the nature of some of the supply chain disruptions.
Specific products.
That maybe are grabbing you and what you can do if anything about obtaining those products.
Sure, what's there and I'm going to start by reminding you that we don't bid our work we proposed on our work and because we want to make sure that.
That will be in <unk>.
Joseph by our customers because of the value that we that we bring to the table and.
Safety services I would say is more insulated.
And then specialty services because the the average shop sites in safety services is less than $10000. So those are much quicker hitting.
But you know steel pipe prices.
Basically doubled and we had to make sure that we've protected ourselves and our proposals and in our contracts to make sure that we've got the right language built into those documents to allow us to to get escalation.
Necessary.
In specialty and specialty services.
Even though we've been very proactive with our businesses and making sure again, we're protecting ourselves and our proposals oftentimes in the materials are provided by our customers and their lack of lack of availability like say for fiber optic cable in those types of things.
Negative impacts on your ability to efficiently execute on on your work and.
Managing your workforce and managing your people.
When the product is showing up late or not showing up for when it's supposed to show up it makes it very very difficult to to manage your work.
That's happening really on on many many fronts you've seen that with.
With <unk>.
Pipe Youre seeing that with like I said fiber optic cable we have one manufacturing business joist and deck. These out now.
Nine months, so managing through those challenges people have to be on their toes and they have to be very proactive as.
They're looking at their business I can't quantify.
What in our backlog as you know.
How much of that risk would be in our backlog from.
Our backlog turns very quickly our backlog has been very strong.
And I'd like to believe that because we have been very proactive in tau.
Talking with our businesses and giving our businesses guidance on where we think commodity prices are going.
That we.
Are protected and that we've done a good job Im sure Theres instances that we haven't clicked on general I feel really good about it.
Great and then just I guess one final final follow up on that is in the case for your customers are procuring your materials.
And they can't get them.
Have any recourse to the customer for change orders regarding the costs that you incur from their delays.
Yeah for sure you do but that's.
Thats a delicate balancing act to you.
It's your customer and so you have to make sure that youre being fair with them you want to make sure that they're being fair with you.
And so but it is a balancing act and.
You're inevitably going to have customers that are going to push back on you.
And try to make their problem youre problem, but that's where it is.
So important for our business leaders they have positive relationships with their customers. So that they can work through those challenges on the need to be very proactive in leading their work versus just reacting to their work and there is a significant difference there.
But it ultimately comes down to the relationship you have with that client.
Got it okay. Thank you very much have a good day.
Dan.
And we will take our next question from Kathryn Thompson with Thompson Research Research group.
Alright, Thank you for taking my questions day.
First focusing on the specialty end markets.
Especially in San Francisco are there could you give more color in terms of the end market demand.
And what is driving.
Demand overall.
Really looking for additional color from your end market, but also a regional standpoint. Thank you.
Well, our our end markets in this segment remains strong and we continue to provide services to public utilities private utilities telecom providers.
And such and.
So really we feel that the end markets. We're serving remains very strong even with some of the opportunities that we have in front of us sliding out to the right. So as an example, one of our businesses.
Does a fair amount of what I would consider grounding and interconnecting.
Work with wind farms and a <unk>.
Number of their project related opportunities slip into 2022, and I think some of that just was some reticence with the new administration and what was going to happen with certain tax credits and some of that work slate, it's not going away, but it's going to push into 2022. So again, we feel very good.
Good about the end markets that we're serving it's just that there is some choppiness on when we're going to be able to deliver those services, it's kind of like the infrastructure Bill as it comes it comes forward you look at where the buckets.
There's going to be $65 billion in broadband investments well, that's going to be a positive for our business, but those dollars won't start flowing through into the system until the back half most likely a 2022 so.
But we feel great about.
The end markets that we're serving in the segment.
Okay.
Any color or thoughts in terms of the infrastructure proposed infrastructure plan at <unk>.
Pass.
What that May mean for API.
Yes so.
Actually Olivia did a nice job of breaking down the buckets of the of the I guess, the first Senate Bill that passed on a bipartisan basis.
Late yesterday versus the one in the past on that.
On.
Partisan basis on the middle of the night, but.
There's a number of opportunities in areas that will benefit us on the electric grid and power infrastructure bucket, There's 70 plus billion allocated there I just mentioned the broadband investments, there's going to be 55 billion allocated for water systems and infrastructure, which is.
An area that that.
Debt, we participate in the upgrading in the day.
Renewing of the existing potable water infrastructure, that's in place primarily for us on the East coast.
And I also would tell you that a rising tide floats all boats and the dollars.
That are being spent in other places we're like ports and waterways does not non a place that we participate in but.
Other firms will put their resources to work in other parts of the infrastructure build that will create opportunity for us to take more market share with our existing customers. So.
It's a positive in general for the industry, which will create an opportunity for us to do more work with our some of our existing customers.
Okay, Great and then final question for the day, just a product question for industrial services in light of day.
Chubb acquisition and also as you.
Net it today to continued right sizing.
Sizing of industrial services, what do you see this business as a percentage of mix going forward and what are your mid to long term goals for this submission.
Thanks.
Yeah. Thanks Catherine.
So we continue to be very very disciplined.
With the opportunities and the work that we're pursuing in industrial services and.
There is nothing worse than being slow and being slow with low performing work.
And so we have been.
Very disciplined in how we're looking at the opportunities that are in front of us to make sure that the work that we do execute.
We can make a reasonable profit and gross margin on.
My hope is that we are at the bottom and that we are going to start chipping away and demonstrating.
Improved results and that we can get back to.
Spot, where the business is complementary to <unk>.
Our margin goals and.
We need to continue to evaluate.
What's there and what we're doing there and if we need to do some pruning them, we need to do some pruning.
But we need to continue to be at the top of our game and looking at what's going on in that piece of the business.
Great. Thank you very much.
Okay.
And we have time for one more question before turning it back to Russ for closing statement.
We'll take our final question from John <unk> with CJ Securities.
Hey, good morning, guys. Thank you for taking my questions My first one.
I don't know if anyone asked this before but is there any color on the phasing of revenue and earnings as we head into two into the second half between Q3 and Q4 share.
Net more pressure on revenue and earnings in the near term.
As you deal with the Covid headwinds and things that are going on now and even more released in the fourth quarter or.
Or if not what are the puts and takes that we should be considering.
Yeah, Great question John.
Typically we've kind of seen third quarter via 27% to 28% of our revenue.
And then 24% to 25% in the fourth.
Just with the way things are moving in the supply chain things those two quarters, maybe a little more balanced than we've seen in the past.
And so we're working through that and as we March through the quarter, we'll provide more insight to you as we have it.
Okay. That's very helpful. Thank you and then second I was.
Hoping you could dig deeper into the Blackstone opportunity a little bit more.
What percentage of their portfolio to cover today and kind of what is the win rate usually when you approach new property to get their business.
Much of that can we expect you to cover over time.
Well that's.
Thats a tough that's a tough question, but.
I'm going to give you an example.
So in the Memphis marketplace. We currently provide inspection and service work at approximately up 20 of their distribution facilities in that marketplace and from what we know today they have on additional 20.
Facilities in that marketplace now.
We think in that one particular market there is an opportunity for us to do so to speak twice as much with them and but the caveat is that we need to go earn their business and we can't expect them to just give us their business is.
No different than with our other national base and now international based customers like we need to we need to go and earn it and win it.
We think the opportunity is huge Blackstone has a great track record of opening up their portfolio of companies on to each other and working across a sister company in lines, and we think that Thats an opportunity, but we're not afraid of the challenge and we expect that we're going to go and we're going to win their business and not have it.
Hand, it to us.
Okay got it. Thank you for that color then thanks again.
Thank you.
I'm sorry, operator.
Stepped on your feet and did your job.
Since I've done it Russ will turn it over to you for one final comment yes.
Thank you.
Thank you everybody before we say goodbye. This really is a personal message from all of us.
It is with a very heavy heart.
I have to inform you of the untimely death of Joe Walsh on.
Our head of specialty services, who many of you met during our Investor Day, Our chair condolences go out to Joe's family and to all of those who are fortunate enough to.
To know him.
He was a widely respected man and was a quintessential API leader and his presence will be missed from an organizational standpoint, we have a succession plan in place. However for now our thoughts are with Joe's family and the entire API family as Joe's impact was far routine on both within our organization.
<unk> as well as throughout the industry.
I want to thank everybody again for joining the call. This morning.
We very much appreciate you taking the time to be with US. Thank you for your continued interest in API and we look forward to keeping you updated as we move through the rest of the year on this is truly a very exciting time for the for the company. So thank you.
This does conclude today's program. Thank you for your participation you may disconnect at any time.
Okay.
Yes.
Okay.
Okay.
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Okay.