Q3 2021 APi Group Corp Earnings Call
Paul Please press Star zero.
[music].
Good morning, ladies and gentlemen, and welcome to API group's third 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.
I will now turn the call over to Olivia Walton Vice President of Investor Relations at API Group. Please go ahead.
Thank you.
Everyone and thank you for joining our third quarter 2021 earnings conference call joining.
Joining me on the call today are Ross Becker, our president and CEO.
Kevin from our executive Vice President and Chief Financial Officer, and Sir Martin Franklin and Jim Riley Our board co chairs before.
Before we begin I'd like to remind you that certain statements in the company's earnings press release announcements and on this call are forward looking statements, which are based on expectations intentions and projections regarding the company's future performance anticipated events or trends and other matters that are not historical facts.
These statements are not a guarantee of future performance and are subject to known and unknown risks uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by such forward looking statements 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 November 10th and we have no obligation to update any forward looking statement, we may make.
As a reminder, we have posted a presentation detailing our third quarter financial performance on the Investor Relations page of our website. Our comments today will also include non-GAAP financial measures and other key operating metrics the.
The reconciliation of and other information regarding these items can be found in our press release and our presentation.
Please note that the company no longer adjust gross profit selling general and administrative expense and net income for depreciation remeasurement associated with acquisitions.
Comparative periods have been recast to reflect the updated presentation.
There is no impact on future periods actual and adjusted amounts are approximately the same for the fourth quarter.
The supplemental information is available in the presentations section of our website.
It is now my pleasure to turn the call over to Mark.
Thank you Olivia.
We had another very productive quarter and I might add a very busy one.
Over the last 90 days or so since our last earnings call, we announced the planned acquisition of the Chubb fire and security business.
Add on to our term loan facility and equity offering and completed a very successful bond offering.
Each of these capital markets activities gave bras Gemini and now Kevin the opportunity to update current investors on the business and introduce new investors to the company.
We will welcome three new Bulge bracket analysts to all of you as they launched coverage on the company in the coming months as we continue to widen the audience network of API investors.
Having recently passed our two year anniversary since completing the acquisition of API on October five 2019, we're very pleased with the progress achieved company, while also being very focused on the future with the upcoming strategic acquisition of trouble.
The Chubb acquisition will open another new chapter for API. However, we also see it as a continuation of our original investment thesis and the value of creating the global leader in life safety services concentrating the majority of the business on statutorily mandated recurring revenue services.
Robin Kevin will speak to the performance of the business, but I would like but I would add that write off that in our view the strong performance of the business speaks to the leadership team discipline of the organization and the future opportunities for API as we continue our focus on shareholder value creation we.
We believe we have strong momentum and a clear path to make the most of the opportunities in front of us Ross and his team are doing the right things internally to build on our already solid foundation for a bright future with that I'll hand, the call over to Russ.
Thank you Martin and good morning, everyone. Thank you for taking the time to join our call. This morning.
As you heard from Martin and saw from our press release on September eight.
Delighted to welcome our new Executive Vice President Chief Financial Officer, Kevin Crump to EBIT Senior leadership team. He is the right person at the right time for API as we continue our evolution and our growth as a public company and plan for the acquisition and integration of the Chubb business around year end.
Kevin's deep operating and public company finance background, including substantial international integration experience is being immediately leverage as EPS against the next leg of its journey as the world's leading life safety services provider following the acquisition of Chubb.
As Martin said, we had another very productive quarter from the announcement on July 27th of our entry into an agreement for the transformational acquisition of the Chubb fire and security business through the completion of our common stock offering in September 17th and the expansion of our leadership team. This was an active three months.
In addition to executing on our ongoing business operations and delivering solid operational performance. Despite all of that activity the safety health and wellbeing of all of our meters remains our number one priority.
Before before we provide you with a summary of our strong third quarter financial results are positive outlook and an update on the acquisition of Chubb I would like to start by thanking our team for all of their hard work to support the ongoing evolution of the business.
I am pleased with our continued ability to execute in the third quarter amidst ongoing supply chain disruptions and inflationary pressures and continued COVID-19 impacts.
The supply chain disruptions and modest inflation caused some downward pressure on margins as expected our part our proactive approach to mitigating the impact through measures such as pricing combined with our disciplined approach to projects and customer selection and the strength of our recurring revenue services focused business model yielded results.
Yeah.
As we look to the future. We believe the company is well positioned to achieve our long term goals.
Our backlog is at an all time high and we have seen increases across all three of our segments relative relative to prior year levels backlog is up more than 20% for our safety and specialty services segments. We continue to see strong demand across our key end markets such as data centers fulfillment and distribution centers.
Health care and high Tech.
Last Friday Congress agreed to an infrastructure spending bill we expect this to be a net positive for us and we said as we have said on past calls we do not have anything built into our budget for an infrastructure bill or stimulus that would incentivize investment in the renovation of existing infrastructure we.
We do expect certain aspects of our business such as five G fiber renewable energy water and gas services to benefit due to existing core competencies combined with incremental opportunities.
As we move through the balance of the year and into 2022, we are closely monitoring supply chain constraints inflationary pressures and vaccine mandates and will remain proactive in our approach to mitigating risk through pricing and appropriate contract language for proposals.
We remain focused on achieving continued success within our existing core businesses and are also spending a considerable amount of time planning for the opportunities 2022 and beyond will bring.
As part of our annual budgeting process, we challenged each of our operating companies to develop a long term plan that addresses the opportunities as well as any potential challenges unique to their market and operations.
These plans are reviewed during strategic planning sessions with our segment leaders and include a detailed roadmap roadmap for organic revenue growth and margin expansion opportunities to drive towards our goal of achieving an adjusted EBITDA margin of 13% by 2025.
These include the following key initiatives as outlined at our Investor Day in April.
First improving our mis mix, we have a relentless focus on growing recurring recurring inspection and service revenue. We are on track to achieve our goal of growing inspection revenue by 10% plus in 2021.
Two disciplined project and customer selection our contract loss rate continues to improve we have made significant progress towards achieving our target of <unk>, 7% <unk> seven zero percent or less in 2021, we will continue to resist lower margin higher risk activity.
Third continued focus on pricing opportunities.
Fourth leveraging SG&A and cost of goods sold through areas such as shared services and procurement Kevin will provide an update on our business process transformation efforts later in the call and fifth and lastly, operational excellence as many of you heard me say previously there isn't one part of our <unk>.
They couldnt be better.
Before turning the call over to Kevin to cover our results and outlook in more detail I'd like to spend a few minutes, providing an update on our previously announced acquisition of Chubb.
Since announcing the transaction, which remains on track to close around year end the level of the level of excitement from our international customers and our teams about the opportunities. The combined platform will bring has continued to validate our belief that the transaction will be highly highly accretive with compelling synergies that it will come.
Implement revenue growth through cross selling certain products and services and that the opportunity for margin expansion is meaningful.
Most importantly, we couldnt be more excited about the prospects of working with such a talented international leadership team that carries the same values and focus we do at API.
As discussed on our last earnings call similar to Epi Chubb is a people centered business and.
In a people centered business individual growth both personal and professional is a key ingredient to our long term success.
We intend to leverage the best practices of both organizations across all aspects of the business and look forward to creating an environment in which the combined 26000 employees can continue to grow and flourish.
We believe great later, great leaders, our competitive advantage and drive shareholder value creation.
We have dedicated teams working intently on the integration.
You may have seen our press release on September 8th announcing senior leaders in charge of aspects of the integration. These teams are just a few of the many people focus on each functional area of the business working with their peers at Chubb planning the integration.
Kevin and I spent last week getting a firsthand view in London with the Chubb team and going through transformation plans designed to achieve our 2025 goals after which we will then set new and higher goals.
We look forward to providing more detail on our plans to drive operational improvements and capitalize on the synergies that exist between the two businesses. After the transaction is closed and budgets have been finalized.
In summary, I'm very pleased with how the business has performed this year and how we are dealing with the challenges and opportunities before us I'm excited to have Kevin on our team and I'm excited about the momentum we have in the business I would now like to hand, the call over to Kevin to discuss our financial results and outlook in more detail Kevin.
Thanks, Ross and good morning, everyone I'm excited to be here today for my first earnings call since joining API on September 20th I'll begin my remarks by reviewing our consolidated results followed by a discussion on our balance sheet position and segment level operating performance before turning to our outlook.
I will conclude by providing a brief update on our business process transformation efforts.
Net revenues for the three months ended September 32020 increased on an organic basis by 13, 4% compared to prior year. So this is excluding industrial services for the nine months ended September 32021, net revenues increased on an organic basis, 12% compared to the prior year again. This is excluding industrial services.
Adjusted gross margins for the three months ended September 32021 was 24, 3%, representing a 34 basis point increase compared to the prior year driven by outsized growth in our hiring and our higher margin safety services segment and improved mix of inspection and service revenue. This was partially offset by.
<unk> supply chain disruptions and modest inflation, which is causing downward pressure on margins for the nine months ended September 32021, adjusted gross margin was 23, 7%, representing a 50 basis point increase compared to prior year due to the items mentioned as drivers for the third quarter adjusted gross margin.
Adjusted EBITDA margin for the three months ended September 32021 was 11, 9% relatively consistent with prior year was driven by outsized growth in the higher margin safety services services segment, and an improved mix of inspection and service revenue.
Partially or this was offset by continuing supply chain disruptions modest inflation, which is causing downward pressure on margins as well as less contribution year on year from joint ventures, and our specialty services segment for the nine months ended September 32021, adjusted EBITDA margin was 10, 3% representing a 12.
Eight basis point decline compared to prior year due to the items mentioned as drivers for the third quarter EBITDA margin.
Adjusted earnings per share for the three months ended September 32021 was 35, which excludes the positive impact of <unk> due to the discontinuous discontinuance of the depreciation remeasurement adjustment adjustment in linear mentioned earlier on the call.
We continue to focus on driving strong free cash flow and our balance sheet and liquidity profile remains strong as.
As we commented on last quarter, our substantial growth in organic net revenues has required increased working capital investment on a year to date basis. As we ended Q4 2020 with suppressed working capital levels for the nine months ended September 32021, adjusted free cash flow was $85 million, representing a $216 million decrease compared to <unk>.
Prior year and our adjusted free cash flow conversion rate was approximately 29% our cash flow performance on a year to date basis was in line with expectations and our historical trends as we continue to build working capital from a room a reduced prior year base.
We expect to generate additional adjusted free cash flow in the fourth quarter to arrive at an adjusted free cash flow conversion rate for 2021 of around 70%.
As of September 32021, we had $1 1 billion in cash and cash equivalents and no outstanding borrowings under our $300 million revolving credit facility.
We expect to be at a pro forma net leverage ratio of four one times at closing of the Chubb transaction with the goal of returning to below three times net leverage expeditiously.
Our near term focus remains on closing the transaction and then deleveraging by approximately one turn annually. We will do this through the high free cash flow conversion offered by our combined asset light operating model and we will do this while continuing to invest in our leaders and business process improvements.
I will now discuss our results in more detail for each of the three segments beginning with safety services.
Safety services net revenues for the three months ended September 32021 increased on an organic basis by 22, 8% primarily due to continued growth in inspection and service revenue across the majority of our markets and general market recovery compared to the prior year period, which was negatively impacted by the pandemic for the nine months ended September <unk>.
32021, net revenues increased on an organic basis 15, 5%.
Due to the items mentioned as drivers for third quarter organic revenue growth.
Adjusted gross margin for the three months ended September 32021 was 31, 7%, representing a 97 basis point decline compared to prior year periods, driven by certain supply chain disruptions, resulting in a decline in productivity. This was partially offset by an improved mix of inspection and service revenue.
For the nine months ended September 32021, adjusted gross margin was 31, 7%, which is relatively consistent with prior year adjusted gross margin of 31, 6% <unk>.
Adjusted EBIT da margin for the three months ended September 32021 was 14, 3%, representing a 183 basis point decline compared to the prior year due to the return of largely temporary cost containment efforts implemented last year to counteract the negative impact of the pandemic. This was partially offset by an improved mix of <unk>.
Section in service revenue.
For the nine months ended September 32021, adjusted EBITDA margin was 14, 2%, representing a 40 basis point increase compared to prior year due to an improved mix of inspection and service revenue. This was partially offset by the return of largely temporary cost containment efforts implemented last year to counteract the negative impact of the Panera.
Of the pandemic I'm now going to discuss the results for specialty for our specialty services segment.
Specialty services net revenues for the three months ended September 32021 increased on an organic basis by 9%. This was primarily due to the increased demand and timing for specialty contracting services for the nine months ended September 32021, net revenues increased on an organic basis by 11, 7% due to the items.
I mentioned for the third quarter with <unk>.
Third quarter organic revenue growth with weather being an additional headwind to the business in Q1 2021 adjusted gross margins for the three months ended September 32021 was 17% representing a 78 basis point decline compared to the prior year due to expected supply chain disruptions and modest inflation and inflation, which has caused.
The downward pressure on margins. This was partially offset by an improved mix of service revenue and disciplined project and customer selection.
For the nine months ended September 32021, adjusted gross margin was 15, 4%, representing a 37 basis point decline compared to the prior year due to the items mentioned for the third quarter, along with lower productivity due to unfavorable weather conditions faced in the first quarter of 2021 adjusted.
Adjusted EBITDA margin for the three months ended September 32021 was 12, 4%, representing a 186 basis point decline due to the items noted for gross margin performance along with the return of largely temporary cost containment efforts implemented in the prior year to counteract the negative impact of the pandemic and.
Less contribution from joint ventures compared to the prior year period.
For the nine months ended September 32021, adjusted gross margin was 10, 6%, representing a 143 basis point decline compared to the prior year due to the items mentioned for third quarter adjusted EBITDA margins.
I will now discuss results for our industrial services segment.
And industrial services net revenues for the three and nine months ended September 32021 declined on an organic basis by 33, three and 49, 6% respectively. The decline was driven by our continued focus on disciplined project and customer selection decisions by our customers to delay and.
Certain projects as well as difficult industry conditions, adjusted gross margin and EBITDA margin for the three months ended September 32021 was 10, 7% and eight 7% respectively. This was compared to 16, 3% and 14, 4% respectively in the prior year period the dike.
Client was driven by Unabsorbed costs for leases and equipment. This is due to lower volume. This was partially offset by improved mix of our service revenue.
For the nine months ended September 32021, adjusted gross margin and adjusted EBITDA margin was five 6% and two 6% respectively. This was compared to 16, 6% and 13, 8% respectively in the prior year period.
The decline was due to the items I noted for the third quarter.
Margin performance.
I'll now move to our 2021 guidance.
Our full year revenue and adjusted EBITDA for 2021 remains unchanged and does not reflect any contribution from the upcoming Chubb acquisition, we continue.
To expect adjusted net revenues for 2021 of between $3 65 billion to $3 75 billion with continued growth in the fourth quarter and adjusted EBITDA for 2021 of approximately $405 million.
We continue to expect capital expenditures to be approximately $55 million, we expect depreciation to be approximately $75 million, which includes $15 million related to the recast of comparative periods previously adjusted as mentioned earlier on the call our cost of capital is approximately 5% or just the mid and long term effect.
Tax rate remains approximately 21% and our estimated adjusted diluted weighted average share count for 2021 is approximately $211 million.
As a reminder, the adjusted diluted weighted average shares outstanding for the third quarter is $210 million.
Before turning the call over to Jim I'd like to provide a brief update on our multi year business process transformation projects. This includes ongoing efforts to further tire technology platform with improved business processes, which we expect will allow us to move towards a true shared service model and ultimately allow for better leveraging of our SG&A.
This also includes efforts to further leverage purchasing and procurement scale to drive margin expansion. This is one of the contributors to our adjusted EBITDA margin expansion goal of 13% by year end 2025 mentioned by Russ earlier in the call the process as outlined at Investor Day in April continue to move forward as planned we are pleased with the continued progress.
Yes, as we have made.
The continued progress we've made is the overall plan is largely on budget and delivering key milestones in line with the deliverable schedule that was established at the start of the project.
We're making gradual improvements in the business that will allow us to enjoy the benefit for many years to come as we go through the planning budgeting and integration process with Chubb and gain a better understanding of their needs, we will reevaluate and re scope the business process transformation projects to ensure that we remain thoughtful and flexible in our core.
Chubb's needs, we intend to take advantage of the investments they've made so that in the end we have a meaningful global one company go forward plan. We look forward to updating you on this and all of our projects in 2022 once the Chubb transaction has closed.
I'll now turn the call over to Jim.
Thanks, Kevin.
We believe that the company is operating well in this environment.
Despite some of the site supply chain disruptions and inflationary cost pressure, we've seen in the industry.
Fortunately API has more tools to mitigate these issues and some businesses that have longer contract durations than ours and have more exposure to inflation, while API isn't immune to what is occurring in the marketplace. We do believe we have certain competitive advantages that protect and drive shareholder value.
Our team has always been a cost focused culture and they are skilled at proactively and preemptively preemptively minimizing these negative effects as.
As we've stated previously the average size of our projects, including all three of our segments is less than $100000.
Which helps to limit our exposure to increases in raw material costs.
In addition, the average duration of our projects is less than six months. So we have less inflationary exposure to cost of goods sold or changes in labor expenses and others may experience in an inflationary environment.
Our pricing is very much real time pricing as our business build the curve is very clear as we are quoting projects that are occurring in the near term.
We believe.
That these are competitive advantages that allow us to stay focused on real time pricing and operational efficiency.
To ensure true costs are reflected in each project that we take on the Chubb fire and safety and security business has a similar profile and we believe it will enhance our overall position rather than detract from it.
It's also very gratifying to see strong underlying demand for our services as reflected in our organic revenue growth in our core business segments and the elevated year over year backlog across all three of our segments.
This has given us momentum in the third quarter and provides us momentum as we move into the fourth quarter and plan for 2022, and the acquisition and integration of the Chubb fire and security business.
We're very excited by the near term and long term opportunities for API and believe there is significant future value creation as we combine our two organizations and realize revenue as well as cost synergies as you've heard from all of US we have great confidence in the business and the direction, we're heading and we look forward to reporting on our continued progress.
As we continue our focus on driving shareholder value.
And with that I'd like to go back to the operator and turn the call open for Q&A operator.
At this time, if you would like to ask a question press Star one now on your telephone keypad again that is star one on your telephone keypad to withdraw yourself from the queue you May press the pound key.
Take a question from John <unk> of CGS Securities.
Hi, all good morning, and thank you for taking my question.
Kevin Congrats on the appointment my first question is actually for you I wanted to circle back on the depreciation item you and Olivia mentioned earlier on the call is that purely an accounting change with no cash impact.
More on an apples to apples basis, what would have you adjusted EPS or net income has been compared to prior periods.
That was a consistent item.
Yeah, It's an accounting change I can answer that thank you John and it is.
It is also.
It's a noncash impact so it doesn't affect our adjusted cash I referenced it earlier, so it had a two penny impact.
Honest by removing it in the quarter suggest that would have been 37 versus the 30 fives.
Okay, great. Thanks for that color and then.
More broadly I was wondering if you guys could comment on the M&A environment. My understanding is that one of your peers service logic trading hands between private equity for a pretty big premium.
You, obviously have a record in for acquiring smaller smaller assets in the mid single digit EBITDA Chubb in SBA in the low teens can you help us understand how you're able to take these deals at substantially lower multiples for these assets, especially.
Given the current environment.
And what private equity is paying for these things these days.
Yes, so John I mean, well first I would start by saying that we we did take a slight pause.
In our kind of our bolt on M&A strategy as.
As we went through all of the financing activities associated with Chubb that was a very.
That was very thoughtful on decision on our part and something that we felt was the most prudent thing for the business, but we have a very robust pipeline.
Opportunities that we're continuing to evaluate we have sort of speak start restarted the engine and we still see opportunities in that 4% to six times range I would say that the difference for US is that we feel that we have a very compelling story to tell and that we are a very attractive.
Attractive.
I'm home for many of these smaller family owned businesses that are looking to <unk>.
Sell their company and sell their company not only.
To help them with a long term exit but also find the right place for their employees and.
So we like our story and we still see the opportunities for us to acquire businesses in the in that four to seven times range.
I'd also add this is Martin.
Youre right.
We've been seeing some of the larger transactions.
Particularly in the United States going in the high teens and will most of the mid twenties of EBITDA multiple.
We're clearly not going to play in that space, but it's.
In terms of comparative value it validates I think.
Thesis and our discipline and looking for opportunities that can be scaled like chubb.
We're in a unique position as a buyer and we feel we can get value at multiples that I think are much more palatable than some of the deals that are going on in this environment. So.
We're going to stay disciplined.
But there are definitely opportunities out there in.
And the tuck in well.
The original Formula that.
API successfully executed, but it does encourage us in terms of what the comparative multiples should be over time.
For us as a as a larger public company.
Got it Thanks, Ross Martin and then just last one from me.
Russ I know I've asked this a couple of times in prior calls, but now that the infrastructure Bill is passed on to them.
And much more.
Later stage, what's likely to be signed into law. At this point is it prudent to start budgeting forward or do you need to see it.
<unk> first and wait for your customers to announce what their plans are before you start thinking about what the impact could be.
Yeah, So I mean.
There's a lot of there's a lot there John.
First I'd start by saying, a rising tide floats all boats and the infrastructure Bill will certainly be have a positive impact on the industry in general it will take time.
Some of the spending programs to actually become a reality.
And we will factor those opportunities into our plans.
As we gain additional visibility theres, a few buckets that are interesting and potentially 10 directly impact us. There is as an example, there is roughly 65 billion for broadband Internet that would increase access for rural low income.
In Drybulk communities, we see an opportunity in that space. There is also approximately.
Approximately 55 billion for potable water infrastructure that would have a positive impact on aspects of our business. So there are some places there that we see that will ultimately be.
Positive for the company, but we want factored that into our plans until we have more clarity around the reality of the work programs actually happening.
Okay fair enough. Thank you guys.
Thanks, John Thanks, John.
Our next question is from markets Mittermeier of UBS.
Hey, Mark Hey, good morning.
Hi, good morning, everyone and welcome Kevin.
Q1 on.
On margins if I could.
Russ and Kevin you mentioned, obviously supply chain and inflation pressure understand upon the one small project sites and short duration, but can you elaborate a little bit on sort of like where you saw the download pressure how much pricing you were able to.
Put through and what that means for backlog margins, but I do you kind of say, 20% up in terms of backlog and safety.
Should we assume that margins today are protected I'm, just trying to reconcile a little bit that you that you hit gross margin, obviously relatively stable, but there seems to be some.
Movements here on our pressure on the on the segment margin you said all of that cost coming back that you alluded to withstand some inflation in Dallas about just if you could elaborate on that that would be great.
Yes, sure Markus and good morning, and thanks for participating today so.
I guess, there's a few things there I'd like to separate the supply chain disruptions from some of the inflationary cost issues that we're seeing in the business and as it relates to the supply chain.
Where the margin pressure comes in is that it makes it.
More difficult for us to be.
Efficient and productive in the execution of our work so it's not necessarily price related it is productivity related and being efficient as we execute our work plans and oftentimes, it's not even necessarily associated with us if somebody that is working in front of us have supply chain issues in <unk>.
Done a great job of managing our supply chain.
Can have a negative effect on the efficiency of our of our workforce and so we have to be very proactive from that standpoint.
Regarding the inflation I mean, I would I'd be a liar. If I told you that we did see some negative impact from rising steel prices and such but I would point you to the low average project size of the work. If you look at safety services. Our average project size is $10000 or specialty serve.
<unk>, our average project size is $70000 and so the work programs that we have a really quick turning quick hitting short duration and we're able to factor in that cost escalation for the most part.
Into our pricing.
We continue to move forward. So I feel good about the integrity of the margins in our backlog our market I think we've done a really good job of communicating with our businesses and in some of our larger installation work that we have for our service customers.
We have built in price escalation and protection.
Protection from rapid price escalation from a contract language perspective, and I feel like we've done a really nice job of staying out in front of it and communicating with the businesses to make sure that they are that they are well protected from from any sort of price increases.
That's helpful. Thank you.
<unk>.
For my second one more long term now with a few more months looking at Chubb I know that the 13% target that you have it's for you now.
All the IPA API so to speak.
How much confidence do you have that the combined entity is going to be at these levels or maybe even higher now that you've kind of looked at the asset for a few more months and sort of what are what are some examples.
Excited for that opportunity.
If you can share anything anything on that would be also helpful.
So I'm very confident that our 13% EBITDA margin target for 2025 is achievable, even with the truck Chubb acquisition.
The more time that I spend with.
Chubb and the leadership team with Chubb.
With the people on our team PA Grunow Kristen short is that.
That are really working on the integration I get excited there's a tremendous amount of work associated with with with the integration.
And getting to the point, where we get the transaction closed we have very good visibility into the areas of opportunity that we see.
That we're going to be able to really take advantage.
From an from a margin improvement perspective inside of Chubb.
And like I've said in previous calls like I really feel like this is a center of the fairway transaction for us.
Branch lead ownership at the branch level model is exactly how we've built API and that's how we're going to really truly.
Transform the performance of Chubb is working directly with their leadership and improving the performance of the of the individual branches, while we're taking advantage of.
Procurements and in other areas that we can really really focus on enhancing the margin profile of the company. So I'm greatly confident.
Thank you.
Thanks markets.
Our next question is from Andy Wittman of Baird.
Great. Good morning, Thanks for taking my questions guys I have a few of them here and I just thought.
I'd start out by asking about the <unk>.
<unk> and the implied fourth quarter guidance in particular.
I think it's fair to say that the revenues in this quarter.
Pre released were trending at the high end of analysts expectations.
It seems like the backlog is clearly should be supportive here.
It feels like the revenue guidance in particular screens is a little bit conservative.
Am I thinking about that the right way.
Hey, Andy it's Jim.
I think consensus out there right now is at the high end of the range that we gave which implies around six or 7% growth.
And.
We've got your conference we got other conferences October just behind US we may give an update later in the quarter.
But we're comfortable with where consensus is right now which is that.
Towards the higher end of the guidance we gave.
So I wouldn't worry about.
Where the numbers are if you look at the words and listen to what we said, we're very comfortable with the momentum that we have in the third quarter and that coming into the fourth quarter and the momentum carrying in and if you listen or Russ said about the backlog but.
We like to under promise and over deliver and we just don't want the world getting too far out in front of us.
Got it fair enough.
I would ask my next question on free cash flow and I guess, you did say kind of what the number was going to be for the year and implies a pretty big fourth quarter. So I guess, maybe two part question maybe for Kevin would just be like.
The working capital it seems like it was a pretty significant draw here in the third quarter.
And just is there anything that we should know thats inside that customer disputes are the things that slowdown collections there that happened in the quarter and then maybe talk a little bit about the visibility you have into that fourth quarter.
The implication that it's a pretty big quarter for cash.
Yes, hi, Andy Thanks.
So a few things on cash flow just as a reminder, our base year last year was an anomaly for us from a free cash flow.
Conversion standpoint, we ended the year well above 100%.
It's also important to note that Q4 is usually our largest free cash flow quarter in any given year and we expect it to be that this year too, especially as we come off of our highest revenue quarter, which is traditionally Q3. So all of that said we ended last year Q4 with suppressed levels of working.
Capital.
Just because of where we were in the year with with backlog and everything else. So we ended the year with really suppressed levels. We built those back significantly in the first half of the year due to the significant organic revenue growth we had.
So on a year to date basis, our free cash flow conversion is around 30%.
This is in line with historical patterns using 2019 as a reference there. So 2019 you can you can probably look at it I think we're around 30% to 40% through the third quarter.
So all of that said, we anticipate Q4 this year to be our strongest free cash flow conversion quarter as well.
30% on a year to date basis, we are expecting significant conversion in Q4 as our revenue comes off those Q3 levels and therefore, that's why we're comfortable with the guidance provided around around that 70% number for the for the full year.
Alright, Thanks with respect go ahead.
And just any just there we do not have any significant disputes ongoing with any of our clients right. Now so yes, yes, I'm sorry, Andy Thanks, Ross for that we've actually seen a slight improvement in our key working capital metrics on a year to date basis, So DSO and <unk>.
Yes.
Your model because of the small projects usually doesn't lend it to that anyway, but I thought I'd ask just maybe the last question Russ in your commentary you didn't talk about labor availability labor cost issues changes that are happening there given that that is a pretty important macro theme that's happening out there thought it would be remiss if we didn't add.
Ask about what youre seeing and how youre dealing with that.
Yeah. So I think it's a fair question and a very good question.
I'm going to I'll talk about I guess the cost of labor first.
A reminder, that the majority of our field workforce is union by nature. So we have great visibility into the.
The wage escalation in the wage packages that our field leaders are being paid and so we're able to factor that into our pricing as.
As we continue to move forward.
Really pretty consistently and constantly.
Have certain pockets in certain markets, we're seeing more.
More tightness in labor as an example, Houston is a market that that we're seeing a little bit more.
Tightness and from a labor perspective, we have a large installation.
Opportunity in northern Minnesota that we're executing on that seen a little bit of a tightness from a labor perspective, but I'd also tell you that the investment that we make in all of our leaders, including the men and the women in the field, giving them opportunities to grow and develop as leaders and to grow.
Both personally and professionally as a differentiator for us and I think that one of the things that has been an advantage for us is that we've been able to retain our workforce.
And to me that's the first step that if youre going to be successful in.
Leading your business through a tight labor market as you need to keep keep your best people first and then those people will help you draw and attract additional talent to your organization. So.
We have our eye on it and we continue to keep our eye on it but we've been able to lead the business through the pinch right now and I would just supplement these are well paid jobs with high skilled people. This isn't a situation of should we pay people $15 an hour. Yes. These are well paid jobs and so.
Youre attracting.
A.
A higher caliber if you will different demographic.
That.
Isn't a transitory workforce.
Might be a fair way to say, yes, I mean these people these people did not.
There was no benefit for them to see go on unemployment because of the the you know.
Additional unemployment benefits provided by the federal government, because they're wage packages are well in excess of that and.
So that's been an advantage that we have as it relates to what our field workforce looks like.
Thanks, guys have a good day.
And just any of the commercial were looking forward to participating in the Baird Conference. This week.
We'll move next to Julian Mitchell of Barclays. Your line is open.
Hi, This is Kieran telecom here on for Julien.
I just had a question on industrial services.
Our margin improvement during the quarter can you help us think about what a normalized margin looks like for this business and when Youll return to top line growth in that segment.
Yeah. So we view that the that the segment has sort of speak to hit the bottom of the trough and.
Is beginning to rebound if you recall that is the one piece of our business and in particular 111 company inside that segment that has some exposure to the oil and gas space.
Obviously oil and gas is one of the sectors that was most heavily impacted by Covid and we're starting to see our customers.
Really spun their spending to increase we're also really working hard to reposition the business to take advantage of the service side of the transmission space, which we in our in our world recall that integrity work.
Transmission integrity work as government regulated and the transmission companies have expansive.
Spending programs and Thats really where we want to spend our time and our energy we believe that the margin opportunity, while I don't know that it will get back.
To fleet average in 2022, but we do believe that the opportunity for the work in this segment too.
The be at or near fleet average.
Got it. Thank you and then my follow up question.
Is on SaaS can you give us an update on how the SaaS integrations proceeding any surprises the upside there and is there anything you've learned that will help you.
To help inform the integration of Chubb.
Yes, so I would I would say that when you think about escape and from an integration perspective. If you go all the way back to.
A year ago, when we acquired the firm, we actually said that it would be more of a reverse integration opportunity and that we would potentially be.
Looking at whether it made sense to put our current <unk>.
UK business integrate that with with SK.
Obviously with Chubb that changes.
The outlook in the picture and that's something that our team is really working hard on right now and we'll have more to share as it relates to how we're going to look at integration of Sks business with chubb's business as we continue to build our budget and push into the first quarter of next year.
Certain aspects of <unk> business that outperforms chubb's chubb's business in the overlapping markets and we wanted to just make sure that we're making the right decisions about the business as it relates to the people.
That that are involved and so we think that there's an opportunity for us to to really you know the old adage of one plus one equals three.
We really see an opportunity as we move forward with the with the integration of <unk> business in general has met expectations. The battle Covid I would say.
You know.
It's had more impact I guess on their business.
And then say than our life safety businesses in the U S.
But we've battled through it and I would say that performance of the company is meeting expectations. It can always be better.
And we're actually pushing them to continue to grow and execute at a higher level.
Perfect. Thank you.
We'll take our next question from Kathryn Thompson Your line is open.
Hi, Thank you for taking my questions today.
On the just statistical materials and the procurement materials just to finish jobs.
You touched on it from today's prepared commentary Q&A, but.
If you could give an update on certain materials like structural steel and fiber optic cables that have been.
A little bit harder to get or at least they're farther out in terms of ability to take care.
And are there any other categories to keep an eye out for.
Yes, so from a from a structural steel perspective, we have the only manufacturing business. We have is the structural steel manufacturing business and the biggest area of impact there.
Would be in the supply of joist and deck and joist intellect, joist and deck deliveries have pushed out anywhere from six to eight months.
So it makes planning.
B very important.
We're fortunate that we're able to call Amazon as a customer of ours and Amazon has access to joist and deck.
Like nobody else does and so that's been an advantage for us.
In that business and we've been able to continue to work our way through it steel.
Steel pipe prices is probably the biggest area that we've seen rapid escalation I want to tell you that pipe prices from.
The beginning of the year to today.
Are probably up 250% or so.
Yes, I'm just going by the by the back in my memory, there Kathryn, but again I would just point you to the fact that our the short duration of our jobs were able to pass on those increases to our customers pretty efficiently and but that's probably the area that we've seen the greatest led.
Will of cost increases in steel pipe prices.
And then just a follow up on labor understanding that majority of your labor Union and you could have.
Five years visibility for.
Certain key metrics in terms of wages, but.
What type of feedback are.
Pushback are you getting.
From unions in terms of coming back and saying listen we are in unprecedented times.
We made two may need to be addressed.
What if any type of conversations are you having on that labor front of re addressing R&D.
Set conversations.
Yes, so we haven't had anybody come back to us to my knowledge, we haven't had anybody come back to us and ask us to reopen.
Any sort of collective bargaining agreement that has already been resolved we just resolve.
No if resolved is the right way to put it but we just recently settled.
One collective bargaining agreement in Los Angeles, I mean, I felt like this the wage settlement was more than fair for both sides.
<unk>.
The where we're at today the largest.
<unk> Union that we're signatory to we actually settled a five year agreement with that union that during the middle of the pandemic.
Basically.
PE pegged it to.
<unk> really consumer price increases and everything else. So it's a fair settlement, so as things move up and down their wage rates are moving up and down commensurately.
I don't think that we could have come up with a better solution. There. So I think that we really haven't seen any issues associated with that Kathryn and again I feel that that's an advantage for us so kathryn as Jim unrelated to API, but in my early part of my career I was a labor contract negotiator.
Careful what you ask where people don't like to open contracts because it goes both ways and so.
If you open it for one side than you started the ugly precedent of two years from now.
The other side wants to open it for something else and nobody likes doing that so it's a pretty rare event when those things happen.
Yes Catherine.
Catherine just one additional.
Additional point regarding steel price pipe prices kicked out Kevin whispered in my ear that they've actually come down.
Just a little bit over the course of the last couple of weeks. So hopefully we're at a plateau and we will see a downward trend from a from a steel pipe price increases.
Okay, Great and just final cleanup question.
Yes.
Great job on backlogs.
<unk> given some high level.
In terms of what is driving this demand, but if you could give maybe a little bit more granularity in terms of.
Geographic differences, we have some of the industry's makes sense, but are you seeing any differences in geographies and essentially anything to support that.
Population shift at the southeast southwest.
Thank you Les.
Well I would say Katherine debt in general.
We've seen really good opportunities across really most aspects of the business.
Surprisingly enough the market Thats, probably the most suppressed for US right now in Chicago.
And I suspect that that market will slowly show some additional recovery, obviously, the southeast and the southwest with the demographic shifts continue to provide great opportunity.
But we don't really do residential work and we don't play in markets such as that but you know like as an example, one of our largest customers is Intel they are a major expansion just happens to be going on in the Phoenix marketplace, which is a great market for us.
We'll continue to take advantage of those opportunities but in general.
Feel like our business has is seen really.
Positive opportunities across all aspects of it.
Across really North North America, and if I had to pick a market that was the softness I would pick Chicago.
Okay, great. Thanks for answering my questions that you have a great day.
Thanks Catherine.
We will take our next question from Adam <unk> of Thompson Davis.
Hey, good morning, guys.
We were asked I was hoping you could give a little more color on the bidding environment, because the leading indicators for non res construction dipped a bit during delta, but I would say they really reaccelerate. It in the past month or two just curious if you're seeing that in your in your bidding.
Well I'm going to start Adam and don't take offense to this but we do not use the word bid at API and.
When if.
When we when we bid work that that implies that our customers are only going to select us because we have the cheapest price and we want to be provide.
The best value to our customers so no offense, but.
I do not like the work yet.
I would tell you that.
Proposal activity for US has remained strong.
The area, that's probably starting to see the greatest level of bounce back is in our industrial services segment now everybody has to remember that industrial services is less than 10% of our total revenue. So it's not.
Anything to write home about but we are seeing some nice bounce back, but the rest of our businesses have really continued to.
See robust activity now we have seen some things in specifically in specialty services that have slid out to the right and so that's one of the reasons that our backlog remains really strong as we've been able to.
Generate revenue.
In each segment of our business, but we've also been able to build backlog as we move forward as some of those opportunities have slid out into the fourth quarter and actually into into 2022, but proposal activity has been has remained strong.
What are some of the.
Real pockets of strength within specialty.
Well I mean, I think that we're seeing.
We're seeing pockets of strength in that five G telecom fiber space.
But we're also seeing that's also an area, where we're seeing things slide just because of supply chain issues associated that our customers have.
Our customers provide.
Most of that product or a lot of that product and availability has been a little bit of a challenge we've seen good opportunities in our manufacturing business and a lot of that is associated with Amazon and the.
The distribution center.
<unk> place, we have a number of our industrial customers.
Have a really robust work plans that we've been able to take advantage of Florida power and light as an example.
Really recently came back to us because this is something that came as a result of the.
The winter storm in Texas last year, and the impact that it had on the utility space has come back and asked us to retrofit a number of their electric heat tracing.
In a number of their different facilities. So there is there is really just good opportunities across most aspects of our business.
It sounds good nice quarter. Thanks.
Thanks, Ed.
And this does conclude our question and answer session for today I'd be happy to return the call to Ross Becker for any final remarks.
Yes. Thank you very much I appreciate that and I just want to.
Number one I want to express my gratitude again to the men and the women.
At API, who continue to work hard and to deliver exceptional results for all of our shareholders I'm Grateful for your hard work and for your effort and I want to thank everybody for your continued interest in Epi, we have just begun our journey.
Going to be an exciting ride and we're fortunate to have each of you riding alongside us. So thank you and have a great day.
This does conclude today's conference call you may now disconnect your lines and everyone have a great day.
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