Q4 2021 APi Group Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to API group's fourth quarter 2021 financial results Conference call. All participants are now in a listen only mode until the question and answer session. Please.
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 fourth quarter 2021 earnings conference call.
Joining me on the call today are Ross Becker, our president and CEO , Kevin Krumm, Our executive Vice President and Chief Financial Officer, and Sir Martin Franklin and Jim Riley Our board co chairs.
Before we begin I would like to remind you that certain statements in the company's earnings press release announcements and on this call are forward looking statements, which are based on expectations intentions and projections regarding the companys future performance anticipated events or trends and other matters that are not historical fact.
Statements are not a guarantee of future performance and are subject to known and unknown risks uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by such forward looking statements.
In our press release and filings with the SEC, we detailed material risks that may cause our future results to differ from our expectations.
Our statements are as of today March 1st and we have no obligation to update any forward looking statement, we may make.
As a reminder, we have posted a presentation detailing our fourth 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.
A reconciliation of and other information regarding these items can be found in our press release and our presentation.
It is now my pleasure to turn the call over to Martin.
Yes.
Thank you Olivia.
We're very pleased with API progress achieved in 2021, and even more excited about the opportunities that lie ahead for the business.
The completion of the acquisition of the Chubb fire and security business on January <unk>.
2022 was an exciting milestone as we continue our evolution and growth as a public company.
Chubb is a business with significant strategic value to API and.
And one with multiple levers for value creation.
We view API strength and skill sets as complementary.
As our capabilities and scale will help drive growth Chubb by the same token. The addition of Chubb enriches our overall portfolio.
Our combined global reach as the world's leading life safety services provider is already unlocking incremental opportunities for us with multinational clients.
We are thrilled to welcome all of the Chubb team members to the API family as the business shifts from a noncore asset to a paramount strategic priority within API.
As the bar is being raised at the operating level. So too is the bench of senior management.
Multiple hires have been made to incorporate our growing scale and we feel very energized with the quality of the team moving forward.
We have great confidence in the business and the direction, we're heading and look forward to updating you on our progress in the coming months.
Before handing over the call to Ross I'd like to acknowledge with a heavy heart the passing of Nord pool miners in January .
Paul was an outstanding director for API, and someone who made the world a more interesting and better place youll be greatly missed.
With that Rob.
Thank you Martin and good morning, everyone.
Thank you for taking the time to join our call. This morning.
Before we provide you with a summary of our strong results for 2021.
Solid outlook for 2022, and an update on the acquisition of Chubb I would like to start by thanking our team members, who have remained focused on supporting our company and our customers.
Through ongoing leadership efforts continued to demonstrate what I have known to be true since I was fortunate enough to be given the leadership role at API over 20 years ago our.
Our leaders are a competitive advantage and help drive shareholder value.
The safety health and wellbeing of all of our leaders remains our number one priority.
Life, Martin I would like to welcome all of the Chubb team members to the API family.
As discussed at the Investor conferences last week in Miami 2021 was a watershed year in the development of API.
Despite the many macro headwinds I am proud of our team and how we achieved our stated strategic goals amidst ongoing supply chain disruptions inflationary pressures and COVID-19 impacts.
These include the following highlights for the year ended December 31 2021.
First net revenues, excluding industrial services increased on an organic basis by 16, 1% exceeding our initial guidance of 7% driven by strong demand in our core safety and specialty services segments.
Second continued success in our ongoing goal of growing the cyclical recurring service revenue aspects of our portfolio, which we believe helps to build a more protective moat around the business.
Service represented approximately 43% of total net revenues in our life safety businesses up from approximately 41% of total net revenues in 2020.
Third within our safety services segment, we achieved our goal of growing inspection revenue, 10% plus we continued to drive our go to market strategy of selling inspection work first which we believe will lead to further service revenue growth and ultimately drive margin margin expansion.
Fourth disciplined.
<unk> project and customer selection.
We ended the year with a contract loss rate of less than 5%. If this exceeds our goal of 7% or less we will continue to resist lower margin higher risk activity and work to drive this towards zero.
This is critical for us to maintain our focus on thoughtful and profitable growth rather than growing for the sake of growth and risking profitability as we strive to deliver on our margin expansion goals.
The most exciting development during the year with the signing of the definitive agreement to acquire Chubb on July 26 2021 with.
With the closing of the transaction. We began 2022 is the world's leading life safety services provider I would like to spend a few minutes, providing you with an update on our progress over the past couple of months.
As many of you have heard me say previously Chubb is a center of the fairway transaction for US we have built a branch based business model similar to Chubb over the past 20 years since I've been at API.
Our powered by API structure provides us with the ability to leverage our scale, while also being able to be nimble and opportunistic at the local level with minimal bureaucracy and overhead burden.
We're excited to add Chubb to our family of market, leading service providers run by entrepreneurs with the backing of a larger organization large organization.
Another parallel between the Chubb business and API is that we have life safety businesses that deliver high teens adjusted EBITDA margin, which means we also have businesses that are performed performing below the fleet average.
We believe there is 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.
We fully intend to leverage this approach to drive the growth of the newest member of the API family.
We have now begun to our three year journey to accelerate organic revenue growth leverage our scale and drive margin expansion across our platform, while focusing on free cash flow conversion and swiftly deleveraging and integrating the chubb team and portfolio into API.
The views we had shared regarding the Chubb business on previous conference calls, we're based largely on the due diligence we performed as part of the transaction.
I am delighted to say that after nearly two months of ownership, we see the opportunities to be at least as large if not greater than we had anticipated during our due diligence Kevin will touch on synergies briefly in his remarks on.
On future conference calls, we intend to highlight in more detail. The areas. We have identified that will drive synergies and margin improvement for the future as we work towards achieving our 2025 goals.
This is likely the last conference call, where we're I will reference Chubb.
<unk> is an important brand within API.
For too long in my opinion under prior ownership Chubb has been an orphan asset as we have called it that ended on January <unk>.
As we have started to integrate the business, we are combining teams and resources servicing customers developing action plans and moving forward as one company and team with a unified set of goals and direction.
As many of you know and as we strongly believe that API. Our success is dependent upon on people and one of the intangibles and any transaction is the people.
We have a team of people on the ground 24, 7%, we have built out the depth of our bench over the last several months to ensure that we are well positioned to integrate and manage our ever expanding global footprint.
We have added several leaders with significant international and integration experience across all disciplines of our organization.
Since the closing of the Chubb transaction, Kevin myself and a number of our teammates have had the pleasure of traveling to numerous facilities to conduct operating reviews across the board. We have seen that there is genuine belief and desire that for the first time in many years Chubb has found a stable home where the employees.
And their businesses can flourish and achieve their potential.
As part of the API family Chubb will benefit from <unk> culture of organizational sharing of knowledge and best practices and collaboration across businesses, which ultimately drives cross selling opportunities.
I continue to be energized by the host of opportunities in front of US as we look ahead to 2022, our record backlog continues to build and provides us with a solid foundation for organic growth.
Underlying demand in our key end markets, such as data centers fulfillment and distribution centers healthcare and high Tech remains robust.
As many of you have heard US state previously while our business is not immune to macro marketplace disruptions related to the supply chain disruptions and inflationary cost pressures. We believe we have more and more tools to mitigate these pressures than our peers. The acquisition of Chubb has enhanced our overall competitive position and our <unk>.
Protective moat around the business our average project size in our largest segment safety services is now and the average duration of our projects is very short, which we believe will allow us to reasonably control inflationary variables and reasonably and reasonably manage our supply chain. We believe these are competitive advantages.
<unk> and operational efficiency to ensure true costs are reflect.
And the services we provide.
In summary, I am pleased with our progress in 2021 and confident that the momentum will continue into the future we intend to.
Maintain our relentless focus on growing <unk>.
<unk> service revenue.
Disciplined project and customer selection.
Pricing opportunities leveraging our spreads driving operational excellence and realizing synergies from the acquisition of Chubb.
I would now like to hand, the call over to Kevin to discuss our financial results and outlook in more detail, Kevin Thanks, Russ and good morning, everyone.
I'll begin my remarks by reviewing our consolidated performance before turning to our outlook.
Net revenues for the three months.
The December 31, 2020 increased on an organic basis by 27, 4% compared to the prior year period, when excluding industrial services for the year ended December 31, 2021, net revenues increased on an organic basis by 16, 1% compared to the prior year period. This too is excluding industrial services.
Adjusted gross margin for the three months ended December 31, 2021 was 24, 6%, representing a 42 basis point decline compared to the prior year driven by supply chain disruptions and inflation, which this was partially offset by outsized growth in our higher margin safety.
Services segment, and an increase in inspection and service revenue.
For the year ended December 31, 2021, adjusted gross margin was 24% representing a 30 basis points to an improved mix of inspection and service revenue and outsized growth in our higher margin.
Safety services segment, which represented approximately 53% of adjusted net revenues in 2021 compared to approximately 47% in 2020.
This was partially offset by supply chain disruptions and installations, which have caused downward pressure on our margins.
Adjusted EBITDA margin for the three months ended December 31, 2021 was 10, 3% compared to 11, 8% in the prior year period, driven by continuing to supply chain disruptions and inflation, which caused downward pressure on our margins as well as lower contribution from joint ventures, and our specialty services segment.
This was partially offset by outsized growth in our higher margin safety services segment, and an increase in inspection service revenue for.
For the year ended December 31, 2021, adjusted EBITDA margin was 10, 3%, representing a 57 basis points decline compared to the prior year due to the items I mentioned.
For the fourth quarter.
As many of you know one of the API historical strengths, which creates opportunities to drive organic and acquisition.
And growth as well as flexibility to make the best capital allocation decisions whether debt repayment as we have noted on prior calls our substantial growth in organic.
Net revenues throughout 2021 increased working capital investment 2020 was suppressed working capital.
The levels, primarily due to a reduction in volume during 2020, driven by the by the pandemic for the year ended December 31, 2021, adjusted free cash flow was $223 million.
Representing a $220 million decrease compared to the prior year of $443 million and our adjusted free cash flow conversion rate was approximately 57% or 55%, which was impacted by higher than anticipated.
<unk> in the fourth quarter in our core safety and specialty services segment.
I will now discuss our results in more detail for each of the three segments beginning with safety services.
Safety services net revenues.
2021 increased on an organic basis by 23% primarily due to continued growth in inspection and service revenue across the majority of our markets for the year ended December 31, 2021, net net revenues increased on an organic basis by 17, 6%.
Due to the continued growth in inspection service revenue across the majority of our markets and general market period, which was negatively impacted by the pandemic.
Adjusted gross margin for the three months ended December 31 2000.
Representing a 180 basis point decline compared to the prior year driven by supply.
Change disruptions, which caused.
A decline in productivity. This was partially offset by an improved mix of inspection and service revenue for our life safety businesses for the year ended December 31, 2021, adjusted gross margin was 31, 5% compared to prior year adjusted gross margin of 31, 9% driven primarily by the FX.
Factors mentioned as drivers for the fourth quarter.
Adjusted EBITDA margin for the three months ended December 31, 2021 was 13, 5%, representing a 12 basis point increase compared to the prior year due to the increase in inspection and service revenue, which was partially offset for the year ended December 30, <unk> EBIT margin was 14%.
Representing a 32 basis points.
The increase compared to the prior year due to an improved mix of inspection.
And service revenue this.
This was partially offset by the return of largely temporary cost containment efforts implemented to counteract the negative impact of the pandemic in 2020.
I'll now discuss our results in more detail for specialty services segment.
Specialty services net revenues for the three months ended December 31, 2021 increased on an organic basis by 36, 6%, primarily due to increased demand and timing for fabrication and specialty contracting services for the year ended December 31, 2021, net revenues increased on an organic basis by <unk>.
10% due primarily to the factors mentioned as drivers for the fourth quarter.
Adjusted gross margin for the three months ended December 31, 2021 was 18, 1%, representing a 47 basis point increase compared to the prior year due to an increase in service revenue and improved productivity.
This was partially offset by supply chain disruptions and inflation, which caused downward pressure on margins for the year ended December 31, 2021, adjusted gross margin was 16, 2% consistent with prior year due to an increase in service revenue disciplined project and customers, which was partially offset inflation.
Which caused pressure on margins.
Yes.
Adjusted EBITDA margin for the three months ended December 31 2021.
Was 12, 5% consistent with prior year due to the items I noted for gross margin performance, along with lower contribution from joint ventures compared to the prior year period.
For the year ended December 31, 2021, adjusted EBIT da margin was 11%, representing a 100 basis or due to supply chain disruptions and inflation, which caused downward pressure on margins.
The return of largely temporary cost containment.
Efforts implemented to counteract the negative impact of the pandemic in 2020 and lower contribution from joint ventures compared to the prior year. These factors were partially offset by an increase in service revenue disciplined project and customer selection and improved productivity.
I will now discuss our results in more detail for our industrial services segment.
Industrial services net revenues for the three months and full year ended December 31, 2021 declined on an organic basis by six 9% and 41, 7%, respectively, showing some recovery towards the end towards the end of the year. The decline was driven by our continued focus on disciplined project and customer selection.
Decisions by our customers to delay <unk> suspend certain project and difficult industry conditions adjusted.
Gross margin and adjusted EBITDA margin for the three months ended December 31, 2021 was 13, 6% and seven 4%, respectively compared to 14, 9% and 12, 6% respectively in the prior year period.
The decline was driven by Unabsorbed costs. This was partially offset.
By an improved mix of service revenue.
For the year adjusted gross margin.
<unk>, 9% and 4%.
3% and 13.
6%, respectively in the prior year, primarily due to unabsorbed cost per leases and equipment due to lower volume.
An improved mix of service revenue.
Disciplined project and customer selection and certain cost reduction activities.
For a review our 2000.
Last call this will be the last time.
And that we discuss results for the <unk>.
Segments as we have realigned our management reporting structure following the Chubb Acme one 2022, the historical industrial services and specialty services segments will be reported as one segment specialty services and leases.
Within safety services.
All information for two segments moving forward.
This is in specialty services.
2022.
We began 2022 focused on delivering our mid term plan of continued healthy Tommy.
Client growth in line with our average.
To 7% as we continue to focus on driving our adjusted EBITDA.
As stated in our.
Our February 23 press release.
And 20 to a range between $6 3 billion to $6 5 billion driven by a relentless focus on growing recurring service revenue, we expect Q1 to be one $3 $75 million to $143 million Q2 to be 155 from one $6 million to $5 million in the second half to be <unk>.
335 to $344 5 million.
In line with our historical performance for 2022.
On an organic basis at constant currencies will be 6% to 7%.
For 2022, we expect to deliver between $650 to $700 million of adjusted EBITDA.
Where we end within this range will largely be dependent on the speed with which we finalize and implement certain integration activities across our platform. The impact of further supply chain disruptions and inflationary pressures, our revenue growth and exchange rate movements during the year.
As we've spent more time with the Chubb business post close the saving opportunities are becoming more tangible and we believe we have line of sight to delivering the $20 million annual $20 million of annualized opportunities. We identified during our original diligence process. There's a lot of work left to do if we are to execute successfully on all of these opportune.
While we expect the acquisition to excluding restructuring and one time.
I am charges, we anticipate that most of the projected operating synergies will take place 18 will take 18 to 36 months to realize.
We expect Q1 adjusted EBITDA to be.
$120 million to $130 million in Q2 to be $165 million to $185 million in the second half to be $365 million to $385 million.
Depending on how interest rates move throughout the year, we anticipate interest expense for 2022 to be approximately $120 million, we expect depreciation expense to be approximately $85 million and capital expenditures to be approximately $90 million.
As a result of the acquisition of Chubb, we anticipate our adjusted effective cash tax rate to increase to approximately 24% our adjusted diluted weighted average share count for the fourth quarter was $229 million and will be approximately $269 million for the first quarter in 2022.
As discussed on prior calls for the $800 million perpetual preferred equity financing in connection with the Chubb transaction. There is a five 5% annual dividend payable on a quarterly.
At the company's option in-kind by payment of additional shares of common stock.
We will decide at the time the dividend has do whether it's on the company's cash flows and balance sheet.
The position for the first quarter, we have communicated our intent to pay in cash the annual dividend amount is expected to be approximately $44 million in the perpetual preferred may be converted at any time by the holder into common stock at a conversion price of 24, 6%.
From a capital allocation perspective, our near term focus remains on deleveraging through the high free cash flow conversion offered by our asset light operating model. Following the close of the Chubb transaction on January three our net debt to adjusted EBITDA ratio was approximately $3 nine we expect to deliver on our average <unk>.
<unk> free cash flow conversion of approximately 80% over the coming years and intend to use the cash generated to reduce debt on average by approximately one turn annually to return to our targeted long term range of two to two five times.
I will now turn the call over to Jim.
Thanks, Kevin.
Epi is execution against this goal despite supply chain disruptions inflationary pressures and COVID-19 related disruption disruptions.
Thanks to the strength of the company's recurring revenue services focused.
Business model the discipline of the organization and its leadership team as we continue to focus on shareholder value creation.
As Russ mentioned, we entered 2022 with positive momentum on many fronts, notably the Chubb acquisition meets our previously stated key strategic investment criteria.
<unk> has a history of strong free cash flow generation they are leaders in their niche markets.
And we have an experienced leadership team the.
The acquisition significantly expands our geographical reach from 200, plus locations to 500, plus locations and strengthens our protective moat through greater statutorily required activities recurring revenue with 50% plus of our revenue now coming from service related activities.
As we as we begin the process of integrating Chubb, we are simultaneously continuously investing in the growth of its platform and generating synergies across our combined platform.
To help drive value and deliver on our commitments, we have enhanced our team with new global leaders, adding depth to our bench as we plan for the future together as one team United by market, leading brands across the globe.
As we move forward, we believe our combined leadership team will drive towards maximizing business performance and capitalizing on future cross selling opportunities are aligned and incentivize performance based culture will help drive Chubb as it has at API.
We are focused on making the right choices for the long term health of the business being opportunistic on M&A and remained focused on creating sustainable shareholder value.
While we expect it to be at a net leverage ratio of around four one times at closing of the Chubb transaction as Kevin mentioned, our net debt to adjusted EBITDA ratio was approximately three nine times following the close and our revenue backlog remained at a record high level.
Are these metrics are great indicators of the positive momentum of the business.
We have a very healthy balance sheet and strong organic revenue prospects for the year ahead.
With that I'd like to now turn the call back over to the operator and open the call for Q&A Kathryn.
And at this time, if you would like to ask a question. Please press star and one on your Touchtone phone.
And that is star one if you would like to ask a question you can remove yourself from the queue at any time by pressing the pound Kim we'll take our first question today from Markus <unk> with UBS. Your line is open.
Hi, good morning, everyone.
Hey, Mark.
Hey money markets put congratulations on the baby.
Thank you very much.
Could I, maybe start with Ross.
I know that you've visited automotive side.
Shop over recent weeks, what's your kind of one question compared to the expectations that you had during the diligence.
<unk> actually seen seem to folks.
Yes, thanks, Thank you Marcus.
I would say better than expected.
No.
I mentioned in my remarks that Kevin myself and.
A number of our teammates we spent really the first eight or nine days after the transaction closed moving around too.
To a number of different locations inside the Chubb organization and.
I was impressed and the branch leaders really grew up in the business.
Were really solid good operators.
I felt really good about the quality of the leadership.
The country level leadership, both the U K.
Was really solid and I.
I felt really positive about it I think that.
One of the things that has been missing in the past was.
Visibility.
From the company's leadership.
In the businesses in the branches and that was really obvious as we moved around and really get a chance to interact with all of the different team members.
In the different locations that we're at and how enthusiastic they were.
We also while we were there we also had a town hall meeting that we opened up to every single one of the Chubb employees across the globe and we had 2700 people participate in that session.
So doing that virtually was not the easiest and maybe not the most efficient, but the the enthusiasm and the excitement that came across from from our new teammates was fantastic chat line was like lit up and on fire and it was really cool and.
I personally came away from that trip really fired up about the opportunities that are that are in front of us.
And I think that.
Our culture and purpose of building great leaders is exactly whats missing.
Those team members need.
Investment in them as people just like we have been investing in the employees of API sold better than expected.
That's very helpful color. Thank you and then maybe in terms of the revenue guide.
7% organic obviously I guess on the on the legacy API business now.
<unk>, Inc.
These new additions on the top side to develop should we expect some of those.
Revenue approaching cynic CVT here in this first you mentioned, but particularly in the life segment.
Like safety segment, yes.
Teen margin, how do you think about that I know, it's early days and you're probably still going through the various CNS, but of how big is that opportunity on the revenue selectivity side.
Well I think Theres, a few things at play as it relates specifically to Chubb Chubb had year on year revenue growth last year of roughly 5%, even though they were off in the fourth quarter.
<unk>, 3% on a comparison to 2020 and most of that was driven by supply chain issues and the pandemic.
We believe that once we kind.
Kind of get moving forward with Chubb that we should be able to generate.
Organic growth added.
Very similar to to Apis on traditional we.
We do need to spend more time understanding the end markets that they serve they have more exposure to retail as an example than say our current business does.
They don't have a.
Significant issue with.
Collections and receivables et cetera.
But we will spend some more time on customer selection and project selection as we get involved we have instituted are same.
Kind of no gold gold policy that we use for ATI, one we're proposing on larger opportunities inside of Chubb already.
So we will start to see more of those kind of flow through.
The system is well Chubb's average project size happens to be smaller than the average project size for core API.
The percentage of service that they do is roughly 60%.
So that's very complementary to our portfolio.
We were we're opportunistic, but we're still kind of gathering information and evaluating where we are there.
Yep.
Great. Thanks, so much I'll get back in queue and good luck.
Thanks Mark.
We'll go now to you Andy Kaplowitz with Citigroup. Your line is open.
Everyone.
Hey, Andy how are you good rest it seemed like you had a relatively big sequential acceleration in Q4, both in safety and specialty services.
Thank you mentioned, maybe a little bit of pent up demand.
In safety, but did you see project start to flow more regularly and specialty or maybe you could comment on taking share.
Could you give us a little more color into the reasons for the acceleration and did it continue into Q1.
Yes, I think you have a little bit I think give a number of things really at play there.
Andi specifically.
Specifically and in safety services, Thats, where our <unk> services businesses.
Hi.
<unk>.
If you go back to 2020, they had a number of there are project related opportunities slip out to the right.
As I had mentioned at your conference.
We were fortunate that most of those opportunities did not get canceled. They just split from a schedule perspective, and we saw some of that really start to flow flow through the system here again in 2021 right up through the end of the end of the quarter. We also.
You switch the specialty services.
Yes.
<unk>.
Our structural manufacturing business on happens to be fortunate to call Amazon I'm, a customer of ours and and the demand there has remained robust.
So we've been able to capture a number of nice opportunities. There. We also have some larger project related opportunities that.
We continued to.
The really strong right up through the through the end of the year. So we just.
It was just really fortunate for us with some of the some of the project related opportunity that we had on the <unk> on the books already.
That's very helpful. And then could you give us some more color you gave us quarterly gate cadence now in sales and EBITDA because it looks like you assume more normalized margin in Q2.
Q1, so how are you thinking about labor pressure as supply chain on your margin versus your pricing.
Is it true that you are assuming more normalized environment in Q2 or does the guide still incorporate some supply chain related headwinds for the rest of the year.
Well, we expect we expect supply chain to supply chain issues to be I guess problematic.
Through for sure the second quarter I.
I would also tell you that just the <unk>.
Mindsets and the way we approach things here is that that's our responsibility too.
To manage and so.
We can't.
Use that as a crutch.
As we continue to lead the business and Thats just part of the part of the process. So.
We do expect to continue to battle supply chain and inflation, obviously some of the things that are happening.
In our World will continue to have impacts on that labor is tough and.
You have the.
I view, it as being more geographically market specific.
I also believes that our core purpose of building, great leaders and the and our willingness to invest.
And the men and women that are actually getting the work done in the field at our customer sites.
As an advantage for us and I think that Thats, something thats positive, but if we can retain.
Our Labor Force first then that allows us to continue to build and add we've also done.
Some really creative things like.
One of our businesses has created a.
On the apprenticeship program that specialty certified and for a fire alarm technicians, so we're able to hire and grow our own our own fire alarm technicians, and we're doing some things across the business. We've got some really interesting and unique hiring programs taking advantage of the men and the women that are exit exiting.
The military service.
We continue to be creative as we look to complement and build out our workforce and because thats something thats very important to us as being in a people centered business.
Russ just a very quick last one no exposure to Russia, Ukraine for legacy or new business.
None.
Thanks, Andy and good conference.
Okay.
We will take our next question from Julian Mitchell with Barclays. Your line is open.
Thanks, very much and.
Jim Good to see last week, and I Hope Youll say Alastair is a better conference, but in terms of perhaps the.
The free cash flow.
First off I just wanted to talk about the expectations that you had free cash flow I think of last year and then the conversion in the mid fifties.
As we look at 2022.
Maybe some easing of the working cap headwind, but then chubb's cash flow coming in so how do we think about free cash conversion.
In aggregate this year rule sort of percentage increase.
Hi, Julien this is Kevin I'll take that yes, so just.
As we've talked about previously 2020 was a year, where we consumed working capital as revenue came down throughout that period because of the pandemic. So we ended 2020 with a very low working capital base. As we came back in 2021, we continued to invest in working capital we talked on the last call about how.
Q4 was going to be a strong period for us which is traditionally is.
The only only difference there was we over delivered.
Livered from versus anticipate our expectations in Q4.
So didn't parvis as much from Q3 to Q4, as we thought but it's still a very strong delivery in Q4, ending at 55% when you as we move into 2022.
Of course there'll be some additional investment we're going to continue to work on working capital rate I'll say the profile of chubb's free cash flow delivery is very much in line with our expectation and the delivery of our safety services segment. So we definitely and as we move into 'twenty, two and for the year, we anticipate improving.
Off that 55% number and working back towards our longer term target, which we've talked.
A bit about which is approximately 80% and with Chubb.
Not changing that expectation our benchmark.
Got it and so we should expect sort of yearend leverage okay 2020 to be what around three times or so.
Yes, we're we ended at <unk> or at the close of Chubb as Jim said and I referenced we are about three nine times and.
There's a couple of factors that will do.
Depend on how we manage the year, but our expectation is we're going to manage.
Down by approximately one time and.
Target towards 2023 to get to that two to two five times.
Julien.
This is Jim well first of all it was a lovely conference as well. So I don't want you to feel slighted, but two we're going to continue to be opportunistic looking at M&A.
So we can if we buy right at the right multiple.
With a company with good healthy M&A. Our EBITDA, then we can improve our debt to EBITDA ratio.
M&A.
But also we're going to generate a lot of cash, but as Kevin pointed out.
We're going to also be.
Improving revenue through the course of the year, which will eat into cash flow conversion, but we're very bullish on our ability to delever and fund the business and as Kevin said, we expect on average to Delever about one turn of year and be back down to our targeted.
The range of two to five times over the next three years or so.
That's helpful, Jim and so for the year as a whole just to sort of sum it up we're looking at our adjusted free cash flow conversion may be in the sort of <unk> or <unk>.
To say that <unk> is let's say percentage wise is that fair.
Directionally again.
We'll see how the year goes, but we are redeploying cash back into the business.
Two years ago, I want to say, our free cash flow conversion was around 115% to 120%, which was out of the range last year, we were under the target of 80%, but on average as you look at the business over a three or four year period.
It will be about 80% per year.
That's great thanks very much.
And as a reminder, that is star and one for your questions. Today, We will go now to Kathryn Thompson with Thompson Research. Your line is open.
Hi, good morning.
And thank you for taking my questions today.
Always fun to have a spicy conference call during earnings season.
Following on I appreciated your commentary on the European situation.
Station, Ukraine, but pulling the string more and thinking about the.
Unintended consequences as a domino effect that can happen from.
Issues, such as this not only in Europe , but in Asia.
How are you thinking about mitigating risk.
And also thinking about rising costs, including fuel. Thank you.
Yes, so maybe I'll take fuel first I mean, we have.
And then on top of the rising fuel prices and communicating with our businesses.
Nonstop as we as we've seen some of the inflationary pressure coming forward and wherever we possibly can we've been adding fuel surcharges too to our invoices.
Factoring it into our.
Our current proposals and again, Kathryn and I would just point to everybody to the small project size that we have EPS core business.
Our core life safety safety services business. Our average project size is less than $10000 Chubb's was approximately $2500 in aggregate. We're at 5000. So the quick hitting nature of the work in the services that we provide allows us to factor all of those rising costs into our proposals and really on <unk>.
Pass them pass them along as.
As we look at risks are.
Our business in Hong Kong.
China is as high performing business, we continue to.
Communicate and with we have a very very solid leader in that business as well and we continue to communicate with.
With those individuals and monitor the situation and what I can tell you is that.
As we need to we will adapt and adjust and take take corrective action and.
So.
<unk>.
Really are spending a lot of time one of the biggest risks in business to date is cyber.
We have been putting a tremendous amount of effort into our cyber security and making sure that our business.
As really as best as you, possibly can be in this environment protecting itself and building the right defenses.
One around the company so that we can stay protected and it's gaining a tremendous amount of attention from not only our leadership, but from Kevin and me and all the way up to through the board levels. So we.
We are continuing to monitor the business and we will take corrective action, where we need to.
Okay very helpful.
I appreciate the reclassification.
Operating segments.
Just a follow on in terms of kind of your legacy industrial services has been a.
A portion of their overall business.
Is there still right sizing and trimming of assets that may be perhaps you are not the best owner help us think about just some of those assets.
As you look forward for planning.
Thank you.
Yes, so so first and foremost we expect in those businesses that were formerly industrial services, we expect.
Some bounce back in in fiscal 2022.
We're seeing some.
Some of the right types of opportunities as we reap the repositioning those businesses from a service perspective.
So we're optimistic that going forward that we're not only off the bottom, but we're coming off the bottom and moving upward in the right direction regarding.
Disposition of any of those assets I would just say that across the entire book of business that if we need to prune something we will prune it and.
This last year was not the time to prune any any any of those industrial services assets.
We'll take the time to evaluate that as we move forward through the year those businesses show improved results, but I would tell you that that holds true for.
Safety services and specialty services as well, we need to be constantly vigilant and looking at which businesses that we have are going to add to shareholder value.
Great. Thank you very much.
We'll go now to John <unk> with CJS Securities. Your line is open.
Hey, guys. Thanks for taking my questions and congratulations on the nice end to the year.
First one.
What are the puts and takes the driving the integration this year with Chubb and I think if I read your prior press release correctly, the upper and lower bounds of your EBITDA guidance I guess, maybe what are the gating factors there number one and then number two if.
If you could.
Talk a little bit more about the upside opportunity I think you've been very broadly positive on chubb.
Do you expect to provide the synergy.
That upward as we go through the year or maybe into next year.
Hey, Ross, it's Jim would you mind, if I just jumped in on this because John is trying to take your number up.
Yeah.
Yeah.
John .
As many of you guys have heard and for those that participated in the Barclays and Citi Conference.
And as we've talked about pretty openly.
<unk> and the team did not have great access from a physical presence standpoint to get into the Chubb facility and meet with the Chubb teams and so while we did thorough and robust diligence.
Blackstone had their perspective on integration Alvarez and Marsal ahead there.
<unk> on the integration and so.
Our approach to all of this has been.
Let's get in there, let's get our boots on the ground, let's remove the theories led to validate integration ideas and concepts less involved the chubb team along with our team, let's build an action plan together during the first part of the year.
Then assign projects to people assign accountability the.
Put incentive plans in place and begin executing on those in the back half of the year, but mix that we have ownership of those plans and we validate them across the entire platform across both sets of teams.
And so we have $20 million built in the plan you heard Kevin and Russ talk about.
We see incremental opportunities, but we're going to do this thoughtfully. This is a three year program to raise margins to 13% plus chubb as part of that and so we'll be talking about it but as you also heard Russ.
Chubb is now a brand we're one company one team and so.
Gather we will grow the boat forward, but as Russ has also said this is a center of the fairway transaction.
So the things that are going to.
B the variables are going to be supply chain inflation incremental COVID-19 variation.
<unk> and things like that but that's life.
Understood. Thank you.
And once again that is star and one for your questions. Today, We will go now to Andy Wittmann with Baird. Your line is open.
Great. Thanks for taking my questions.
Yes, maybe for Kevin.
You guys on the on the margin improvement initiatives you guys have done you've improved the loss, making projects the customer selection.
Various checkpoints that you guys have laid out over the years about how margins are going to go up one of them was about putting new back office systems and get on the same system get more efficient that way and I know thats an ongoing process. So I was hoping you could give us an update as to where you are in that process and when you expect that.
Integration.
To start delivering towards our margin expansion goals.
Hi, Andy Thanks for the question.
Yes, so as we look at our combined platform with jobs. So we said last year at our Investor Conference that certainly this was one of the areas that we saw opportunity for leverage and productivity as we move forward here and to drive continued scale across our business and certain you referred to as back office functions.
And or potentially even procurement and some other areas.
As we went through the back half of this year, we put that on hold really looking at wanting to look at Chubb too and look at what we're doing in the context of those chubb businesses and so I shouldn't even instead hold we paused or slowed it down as we.
What the Chubb transaction needed to look like in the work needed to look like in 2022.
As we conclude on our chub planning here in the first half of the year.
We're going to turn it back to that and look at how we can now build out.
Back office leverage program that includes Chubb and our legacy businesses as we go forward here. So I don't anticipate seeing anything on that in 2022, but the work.
We'll get back underway in the back half of the year that should help us as we move forward here.
Okay. That's helpful.
I guess.
Another one for you.
You gave us all the pieces here walk from EBITDA down to EPS, but just to make sure that my math is right. It sounds like at the midpoint you guys are thinking around $1 32 on adjusted EPS does that sound about right with the assumptions you gave us on the on the breakdown there Kevin.
Or what's the EPS range Thats implicit with this guidance maybe for 2022, yes, we are.
At or around $1 30 to $1 33 at the midpoint.
Yes.
Okay. That's all I had thanks, a lot guys for your time.
Thanks, Andy Thanks, Andy.
This will conclude our Q&A session at this time I would like to turn it back to Russ Becker for closing remarks.
Thank you in closing I would first like to start by thanking all of our team members for their efforts in 2021, and I'm, particularly proud of the progress that we've made.
In the midst of all the different challenges that the business.
Face so I am truly grateful for everyone's hard work and efforts I would also like to take the opportunity to thank each of you for joining the call. This morning, and your continued interest in API, we truly look forward to updating you on updating each of you throughout the year as we continue to cross many many milestones.
To drive the business forward. So thank you and have a great rest of your day.
This does conclude today's program. Thank you for your participation you may disconnect at any time.
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