Q1 2022 APi Group Corp Earnings Call
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Good morning, ladies and gentlemen, and welcome to API group's first quarter 2022 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.
Right.
Thank you good morning, everyone and thank you for joining our first quarter 2022 earnings conference call joining.
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 Lilly Our board co chairs.
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 may 4th and we have no obligation to update any forward looking statement, we may make.
As a reminder, we have posted a presentation detailing our first quarter financial performance on the Investor Relations page of our website.
Our comments today will also include non-GAAP financial measures and other key operating metrics.
A reconciliation of and other information regarding these items can be found in our press release and our presentation.
As a reminder, there's a presentation containing supplemental information relative to prior periods and other useful information for investors available in the presentations section of our website.
It is now my pleasure to turn the call over to Martin.
Thank you Olivia.
We are proud of the approximately 26000 meters at API focus and effort they put forth and navigating about the complicated back backdrop to the quarter.
It was just over three years ago that we first met Ross I discussed building a business together, primarily based on our view that a statutorily required services strategy.
Economically resilient.
These activities were necessary no matter, what the economic climate might be.
So all of the challenges since that initial meeting with navigating the COVID-19 pandemic to dealing with supply chain disruptions at inflation to acquiring and integrating the <unk> platform.
The team has never lost sight of having our customers safely and efficiently.
Grateful for their unwavering commitment.
The integration that Trump is off to a good start and the strategic rationale for the transaction is proving even stronger than initially anticipated.
Our belief when acquiring the business was the acquisition would not only positioned API well for continued success and improve the protective moat surrounding the business.
But it would also create significant upside for shareholders and employees.
We believe that the combined business will offer customers more customized and proprietary offerings through our uniquely trained technicians as they are cool I've got called in the U S or engineers is that cold in Europe .
We believe that the skills of our technicians and engineers combined with our suite of offerings is a distinct competitive advantage.
In addition, we believe that our scale will drive synergies and savings that can be redeployed back into the business to accelerate growth while enhancing margin expansion.
Great confidence in the business and the direction. We're heading we are excited about the opportunities for the company in the years ahead I look forward to updating you on our progress throughout the course of the year with that I'll hand over to Ross.
Thank you Martin and good morning, everyone.
Thank you for taking the time to join our call. This morning.
I will begin my remarks by commenting on our strong start to 2022.
Positive momentum, we have across the entire business and the key factors that we believe support the resilience of our business.
And then provide an update on our ongoing integration at Chubb before turning it over to Kevin to discuss our financial results and guidance in more detail.
Okay.
We saw continued.
Saw continued robust demand in the first quarter across our key end markets for the three months ended March 31, 2022, net revenues increased on an organic basis by approximately 16% driven strategically by healthy growth in inspection and service revenue across the majority of our markets and safety.
<unk> as well as general market recovery and safety and specialty services compared to the prior year period, which was negatively impacted by COVID-19 by the COVID-19 pandemic, we estimate that approximately two thirds of this growth was driven by price and pass through pass through of material and labor costs.
And one third was driven by volume, which we measure through labor hours.
It is important to note that this shift that this will shift over time based on our mix of work and macroeconomic factors such as inflation.
This growth is tactical as we focus on margin expansion because on average inspection and service revenues generate 10% plus higher gross margins and monitoring revenues generate 20% plus higher gross margins and contract revenue.
Going forward on an annual basis, we intend to provide detail on our consolidated backlog.
While this metric has less rebalances to API, given our focus on inspection and service revenue and our goal of reducing our contract loss rate. It does provide a barometer of the trends in the markets we serve.
Our consolidated backlog continues to build and was at a record high level of $3 6 billion as of the end of March providing us with a solid foundation for growth as we move through the rest of the year.
Backlog was up over 10% compared to the end of December 2021, including Chuck.
It is important to note that while backlog is an important indicator of the positive momentum that we have in the business. We remain focused on disciplined project and customer selection and therefore, we do not expect to see backlog growth each quarter.
We remain focused on running the business, regardless of what's going on in the macro economy, while they're dealing with challenges faced in navigating the supply chain disruptions inflation. The COVID-19 pandemic increased volatility in the economic climate geographic anomalies weather or other.
We believe that there are several key factors that strengthened the resiliency of our business and help to reduce the impact of an always volatile business environment.
First is our people our core purpose of building great leaders continues to define who we are it is our identity and our culture.
We believe that it is the unifying principle that connect everyone within our business regardless of their role.
This purpose is particularly important as we integrate the chubb team into API.
<unk> heard me say that the Chubb business was somewhat neglected over the years under prior ownership.
The team into the fold that API is a key part of the integration of the business. We believe that great leaders among many things create great shareholder value.
As COVID-19 becomes more endemic we recently held our first in person to date leader lap. It was an opportunity for 125 leaders across our global businesses to benefit from Apis culture of organizational sharing of knowledge and best practices and collaboration across businesses.
We have spent approximately $30 million on leadership development over the past five years and plan to continue to invest in and support our leadership development culture, which we believe empowers leaders across our businesses drives business performance and increase in future cross selling opportunities.
This investment is unique in our industry and we believe that it is a competitive advantage.
Our employees technicians and engineers have careers not jobs and we believe this investment reduces turnover Alliance communications and drive performance and productivity.
This is a competitive advantage for epi, particularly when many companies see team members up for new opportunities.
Second is our recurring revenue services focused business model.
The regulatory driven demand for our services provides predictable higher margin recurring revenue opportunities.
We like in March to a protective moat around API.
Our go to market strategy in safety services is to sell inspection work first because we estimate that every dollar sold can lead to three three to $4 of subsequent service work.
This strategy differentiates us from our peers and ultimately creates a stickier client relationship that we believe positions us as the preferred life safety and security services provider in the buildings, where we perform the inspections.
Following the completion of the Chubb acquisition, we achieved our previously stated goal of more than 50% of our revenue coming from inspection and service.
As a result, we are now moving the goalposts to the right and have a new goal of 60% plus.
Third is our revenue diversification across geographies and markets customers and projects.
Our global footprint with approximately 500 plus locations in 20 countries allows us to maintain relationships with local decision makers, while also having the ability to execute multi site services for national and international account customers.
We believe that our low customer concentration with no single customer representing greater than 5% of our revenue and the diversity of the end markets. We serve helped us.
A protective moat around the business, we believe that this too is a competitive advantage.
The last point I would like to highlight is the relative variability of our cost structure, which provides us flexibility to effectively navigate the changing market.
Our significant Union Labor force in the U S and subcontract Labor force internationally allows us to flex our workforce capacity as market conditions dictate without incurring significant trailing costs or severance.
As we've discussed on prior calls as we've discussed on prior calls our average project size is approximately $5000 in our largest segment safety services and $75000 and specialty services in.
In addition, the average duration of our projects is short, which we believe which we believe allows us to reasonably control inflationary variables and manage our supply chain. We remained focused on real time pricing and operational efficiency to ensure true costs are reflected in the services we provide.
As many of you heard us say previously our business is not immune to macro marketplace disruptions.
It related to supply chain disruptions and inflationary cost pressures in general we believe we have adjusted our project pricing miles to pass through these inflationary pressures with that significant step up in revenue related to pass through pricing on project materials will compress our margins in the short term that said.
Third we remain laser focused on our long term margin expansion levers inspection visits service revenue monitoring monitoring accounts and inflationary pricing on these recurring services because we believe this focus will allow our margins to bounce back quickly as we move away from the current inflationary environment on the materials side.
Of our business.
We expect these negative variables will be with us through the balance of the year. However, we do not believe they limit us in achieving our long term margin expansion goal of 13% plus adjusted EBITDA margin by 2025.
Before turning the call over to Kevin I would like to provide an update on our ongoing integration at Chubb.
We are pleased with the progress made so far in the four months post close and are excited about the opportunities that lie ahead.
We continue to build out the depth of our team to ensure we are well positioned to integrate and manage our global footprint.
We have recently added resources with significant international and integration experience in areas, such as human resources procurement accounting finance and it.
The first half of this year is focused on ensuring the steps are in place to remove the business from carriers infrastructure, bringing our branch led operating model and metrics into our platform validating synergy assumptions developed during the initial due diligence efforts and evaluating the quality of the leadership team to ensure.
Sure we have the right resources and right people in place moving forward.
There has been a significant amount of time and effort spent across multiple functional areas to develop actionable measurable and executable multiyear plans to leverage our combined global platform.
Our initial assessment prior to closing of the acquisition was that we believed we could capture $20 million in savings in a business that had been historically underinvested in.
After having our team on the ground for the last 90 days and working with local leadership I am pleased to report that we believe we now see a clear path to value capture opportunities that are at least $40 million.
We expect this figure to continue to evolve and grow as we learn more and we believe that most of the projected value capture opportunities can be achieved within three years.
It is our intent to reinvest some of the initial cost savings to help position us to maximize the opportunities that lie ahead.
We plan to provide a more detailed report to investors of our plans and the opportunities for the business later in the year.
There is significant work still to be done and we are in the very very early days of this opportunity.
The business is performing in line with our expectations, we've had no negative surprises and more importantly, what we have found has only reinforced our excitement about the acquisition. The opportunities are there to not only reduce cost, but also to drive topline growth and I look forward to continuing to report on our progress.
In summary, I am pleased with the forward progress of our businesses and what has and what has been achieved in the first quarter. We feel good about the momentum we have across the board and the outlook for the balance of this year and the years ahead.
I would now like to hand, the call over to Kevin to discuss our financial results and guidance in more detail Kevin.
Thanks Ross.
Morning to those who have joined online I'll begin my remarks by reviewing our consolidated results and segment level operating performance before turning to our guidance.
As a reminder, the chubb business as reported within our safety services segment and will be excluded from our organic net revenues until 2023.
Reported net revenues increased by 83% to $1 5 billion compared to $803 million in the prior year period. This was driven by acquisitions completed in safety services and strong organic growth in safety and specialty services adjusted gross margins grew to 26, 4% representing.
In a 371 basis point increase driven by an improved mix of inspection and service revenue, resulting from recent acquisitions.
Completed in the safety services as well as organic growth and improved productivity and specialty services. These factors were partially offset by supply chain disruptions and inflation, which caused downward pressure on margins. Adjusted EBITDA margin was eight 7%, representing a 111 basis point increase compared to <unk>.
Prior year period, driven by an improved mix of inspection and service revenue, resulting from acquisitions completed in safety services as well as strong organic growth. This was partially offset by supply chain disruptions and inflation, which caused downward pressure on margins.
As Russ mentioned earlier on the call net revenues increased on an organic basis by approximately 16% compared to the prior year period.
Excluding the impact of acquisitions completed in safety services over the past 12 months, both gross profit margin and EBITDA margin improved on a year over year basis.
Adjusted diluted earnings per share for the first quarter was 23.
Representing a 13 <unk> per share increase compared to the prior year period. The increase was driven primarily by strong organic growth in safety and specialty services and the accretion from the acquisition of Chubb or.
Our adjusted free cash flow for Q1 was a negative $47 million. While Q1 is traditionally our lowest cash flow quarter Q1, 2022 was further impacted by working capital build to cover supply chain disruptions and to support our strong revenue growth or set another way in a world of supply disruptions.
In limited availability, we made the decision in Q1 to ensure we have supply in front of our work needs. Finally, we also saw cash used in acquisitions to rebuild working capital, where we took the offset benefit as a purchase price reduction that said, we anticipate most of the supply chain related working capital investments being.
To be temporary and to be recovered by year end and we expect our adjusted free cash flow conversion for the year to be in excess of prior year levels.
On the way to our long term average adjusted free cash flow conversion goal of 80%.
I will now discuss our results in more detail for safety services.
Safety services net revenues for the three months ended March 31, 2022 increased by 130% to $1 1 billion compared to $466 million in the prior year period, primarily driven by revenue from completed acquisitions net revenues increased on an organic basis by 14, 6%.
<unk> to the prior year period, driven by 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 COVID-19 pandemic adjusted gross margin for the three months ended March 31, 2022 was 31, 5%.
Compared to the prior year adjusted gross margin of 31, 5%. This was primarily driven by an improved mix of inspection and service revenue offset by supply chain disruptions and inflation, which caused downward pressure on margins.
Adjusted EBITDA margin for the three months ended March 31, 2022 was 11, 8%, representing a 169 basis point decline compared to the prior year period, primarily driven by the impact of completed acquisitions supply chain disruptions and inflation, which caused downward pressure on our margins. These factors were.
Partially offset by an improved mix of inspection and service revenue.
I will now discuss our results in more detail for specialty services.
Specialty services reported net revenues for the three months ended March 31 2022.
Sorry specialty services reported net revenues for the three months ended March 31, 2022 increased on an organic basis by 19, 8% to $412 million compared to $344 million in the prior year period. This was driven by an increased demand for our specialty contracting services and general market recovery compared to the prior year.
<unk>, which was negatively impacted by the COVID-19 pandemic adjusted gross margin for the three months ended March 31, 2022 was 12, 1%, representing a 196 basis point increase compared to prior year, primarily driven by improved productivity and improved mix of service revenues.
These factors were partially offset by supply chain disruptions and inflation, which caused downward pressure on margins adjusted.
EBITDA margin for the three months ended March 31, 2022 was five 6%, representing a 93 basis point increase compared to the prior year due to leverage on higher volume and an improved mix of service revenue.
These factors were partially offset by supply chain disruptions and inflation, which caused downward pressure on margins.
I will now discuss our guidance for 2022.
While the macro environment became more uncertain during the quarter, the resiliency of our business and top line momentum give us confidence to increase our guidance expectations for net revenues and income.
Confirm our prior guidance for adjusted EBITDA, We now expect full year net revenues will range between $6 45 to $6 6 billion up from six 3% to $6 5 billion and expect growth in net revenues on an organic basis at constant currencies will be between eight 9%. This is.
From prior guidance of 6% to 7% we remain confident in our full year adjusted EBITDA guidance of $650 to $700 million as provided in our February 23rd press release as we commented on our last call, where we will end up within the range will largely be dependent on the speed with which we finalized and implemented.
Integration activities across our platform that further impact of supply chain disruptions and inflationary pressures.
Our revenue growth and exchange rate movements during the year for the second quarter, we expect net revenues to be $1 65 to $1 7 billion up from one 5%.
$5 to 165 billion and adjusted EBIT EBITDA to be $170 million to $180 million, which is consistent with our prior guidance.
As mentioned on our last call. We anticipate interest expense for 2022 to be approximately $120 million depreciation expense to be approximately $85 million capex to be approximately $90 million and our adjusted effective cash tax rate to be approximately 24% from a capital allocation perspective continued.
<unk>, an average adjusted free cash flow conversion of approximately 80% and intend to use the cash generated to reduce net leverage to return to our targeted long term range of two to two five times over the next couple of years as we have previously.
Third with a target of an average of 80% some years may be closer to 70 than some may be closer to 90, but on average we think 80% is reasonable over the long term a reasonable target over the long term.
When we believe our own company represents the best available investment opportunity, we may repurchase shares to that end in March 2022, The board authorized authorized a new stock repurchase program to purchase up to an aggregate of 250 million shares from time to time. This is reflective not only of our confidence in our ability to execute but.
Also in our ability to generate cash our adjusted diluted weighted average share count for the first quarter was $269 million, which is approximately $40 million higher than we had as of fourth quarter 2021. The increase is primarily driven by the dilutive impact of 333 million shares relating to the $800 million perpetual.
<unk> equity financing used in connection with the Chubb transaction.
Rather than trying to determine the probability of conversion from time to time, we think it makes sense to consistently reflect our adjusted result, assuming the conversion.
We expect our adjusted diluted weighted average share count for the second quarter to be approximately $270 million.
I will now turn the call over to Jim Jim.
Thank you Kevin good morning, everyone.
As everyone has said we are grateful for the efforts of our leaders who navigated a complicated backdrop and drove strong results in the first quarter. We are pleased that the business has what we believe is strong momentum despite a choppy macroeconomic environment.
Clearly Russ and Kevin and the entire leadership team are focused on operational performance and successfully navigating all the macro turbulence since we became a public company two years ago.
We couldnt be more pleased with the performance of the business to date and the trajectory of API.
As co chairs Martin I view, our role is providing our unique resources and the benefit of our shared experiences to help API perform at the highest level and thereby drive shareholder value.
From our perspective, the company is doing what it needs to do and is positioned well for success, having added new leaders to the bench with unique global skills to help drive performance. Additionally, new resources and tools are being added each month to improve efficiency and performance.
We are pleased to provide the investment community new insights into the business on this call to help you understand the business better.
We intend to continue to evolve the detailed information provided quarterly and look forward to providing more color on our strategic activities related to the acquisition of Chubb later in the year.
We intend to maintain our relentless focus on growing recurring revenue service revenue disciplined project and customer selection pricing opportunities leveraging our spin driving operational excellence and realizing synergies from the acquisition of Chubb as we work towards our adjusted EBITDA margin goal of 13%.
Plus by 2000 2025.
We will continue to remain responsive to opportunities within our business and to the macroeconomic environment in which we compete with.
We continually assess how the best to deploy our resources against our three primary growth drivers opt.
Optimizing the performance of our existing businesses.
Secondly, managing our capital structure and invest in capital in our business, including evaluating opportunistic acquisitions and with that I'd now like to turn the call back over to the operator and open the call for Q&A.
At this time, if you'd like to ask a question. Please press the star and one on your Touchtone phone you may remove yourself from the queue at any time by pressing the pound key once again that is star and wanted to ask a question. We will take our first question from Andy.
<unk> from Citigroup Your line is open.
Close and good morning, everyone.
When you stick with Andy Andy.
And it's fine.
Been called worse.
So maybe first question I know you just raised organic guidance to $8 to 9% versus the six to seven that you had Russ maybe you could talk about the assumptions in that increase is that all pass through in pricing or is there a volume increase in there and then obviously you grew mid teens in Q1, and again talked about pass through.
<unk> being two thirds of that it was still higher than our forecast again was that all pricing and pass you over there areas of your business that are outperforming your own expectations.
So any in my remarks, I said that two thirds of that was pricing pass through and one third of that was volume.
We track.
Man hours by business units actually on a weekly basis and Thats really how we.
Keep our eye on the ball as it relates to the differing trends that that we are seeing.
In the business and so we've been really.
<unk>.
I guess forward in our conversations with our different business unit leaders as it relates to price and making sure that we're trying to stay stay out on the forefront.
On price, but it's really it's about two thirds of that is price.
Okay, and then Russ maybe asking you about sort of Chubb in this context obviously.
Going to $40 million of synergies looks good can you give us more color into where you're seeing the extra synergies as you are now on the ground and then maybe talk about the probability of that 40 million could move higher over time and has the timeline changed at all and when you get these synergies I think you had said 18 to 36 months.
Well I think the 18 to 36 months as realistic as we look at.
Some of the different countries that we operate and the processes that you have to go through.
To make some of the changes that will ultimately need to be made.
In these businesses. It takes it takes more time than it would potentially in the U S and so I think thinking about things in that timeframe is really realistic and it's not all going to happen in day, one and do you ultimately looking at having.
Probably two phases of some of the changes I would say that as we spend more time in the business and we start to focus on driving the business really towards.
A similar branch build branch build model that we currently have.
In our really core life safety business, that's where you start to see.
You get more visibility into some of the changes and what needs to be done to empower the branches and empower the branch leaders.
Versus say, having the business served from corporate and so as we spend time in the in the business and we've had a number of different.
Visits to to Western Europe .
We can see it like you can you can really see what needs to be done in this business that actually gets me really excited.
Because you have more and more clarity around what needs to be done as we continue to drive try to drive towards his branch led operating model, which is exciting. We also get very excited when we look at the procurement opportunities there as well.
We felt like we werent scratching the surface just as a core API from a procurement perspective and now as we're continuing to build out our procurement team here, we see combined synergies between.
The scale of both businesses coming together and we see really a nice opportunity for us to take advantage of that and really when we were talking a little bit about this yesterday, Kevin used to use the frame we're scratching the surface on commercial opportunities.
And we're just really getting going there and theres going to be a number of opportunities for us to cross sell with the existing business take advantage of some of these multinational customers that we have that we're already starting to have some some dialogue with trying to tap into blackstone's real estate portfolio. So there is a number of things that really.
<unk> give us great confidence.
That that $40 million is there and it will continue to evolve and there will continue to keep you informed.
In that process.
If I could chime in I mean, one of the things that I think what Russ and Kevin and the team are doing that I think is different than what has historically occurred.
Under prior ownership is.
Russ is out there pounding the pavement visiting places where senior leaders have never visited before and he's working with the leaders in individual countries and having them build bottom up plans rather than being told top down what to do and from those bottom up plans.
Youre getting ownership from country managers on what to do how to do it.
It's their plan rather than someone in some other country, just telling them what to do and so there's a lot of buy in on what needs to happen when it needs to happen who's accountable and what the economic return is and we're in early days of that but it's really a team effort that Russ is driving rather than an administrative <unk>.
<unk>.
I appreciate all the color guys.
Our next question comes from Markus <unk> from UBS.
Yes, hi, good morning, everyone.
Maybe.
Good morning, maybe a follow up on the discussion you just.
Had there so whats the cadence then to get to the bottom up Brian slipped.
Platform, what has to happen between now and then sort of legacy things forward two years.
Is it kind of ripping out the old platform looks or whats the process to get that kind of can you give us a bit more color on that.
Well Markus good morning. Thank you for your question and thanks for participating this morning.
First and foremost we have to carve this business out from from from carrier and that has to be.
Our number one priority and there is a lot of work to do there specifically I would say probably the two key the two biggest work streams would be in the area of <unk>.
And HR and.
That needs to be the primary driver in the focus okay. So that is that takes.
Some resources and it takes the right talent, both from the Chubb side and our side and we are prioritizing that alright. So it starts there and.
And that doesn't mean, you can't make some changes that you need to be making and we've already started to to execute on that where it's appropriate.
And in some of the some of the different countries and.
And so it's just one of those things it's like it's I can or freighter in Lake Superior you don't change the direction of that ore freighter.
In a matter of minutes. It takes it takes some time and.
Our branch.
Our branch led business model operating model is somewhat different than the way.
The Chubb business has been built over the many many years with under UTC and carrier ownership and leadership and so changing that and finding the right mix between their model and where we are from an operating perspective is ultimately going to take some time.
And the other aspect of it to that that we don't most of US don't think about is that we still don't have access to Hong Kong, we still don't have access to China.
As those countries continue to.
To suffer from Lockdowns associated with Covid. So.
We are diligently building plans we are.
Focused on.
Being prepared to make.
Execute on our on our so to speak our phase one.
Changes that we need to make and are already trying to take advantage of some of the procurement opportunities that are going to happen there. So.
I just go back to 18 to 36 months is a realistic timeframe.
And we want to be realistic with you and what we shared with you but trust me.
We are very active in the business and we will be attacking all fronts.
We see that opportunity present itself.
That's very helpful. Thank you and maybe one more on the backlog.
I appreciate the update to the guidance here.
Rest of the year.
How should I think about the $3 6 billion and obviously a lot of projects in there.
What's your ability to re price once you put that into the backlog and lots of visibility. They are all on margin across that three six.
Thank you.
And so so number one.
That is our contract in Stoke that includes our contract installation backlog. It also includes larger time and material projects with our industrial maintenance.
Customers would also include.
Our anticipated work under certain master service agreements and blanket contracts. So it's not just sort of speak fixed price lump sum.
Contract related work and so there is there is a variety of opportunities thats included in that three six.
Billion.
Margins vary based on segment and based on individual company to be totally honest with you Mark markets inside that we have confidence in the margins there we've been preaching.
<unk>, we've been preaching protecting yourself in your contract languages, which goes back to your original proposal to make sure that you are protecting yourself from.
Inflationary pressures associated with it. So we have we have really good confidence in the quality of the backlog that we have but it would be extremely difficult for us to come to give you an exact margin percentage based on.
It would vary by segment and by business.
Got it okay, great. Thanks for the color I'll get back in queue.
Our next question comes from Julian Mitchell from Barclays.
Hi, This is <unk> on for Julian.
I was just wondering looking at the 60% plus and our new target for session service revenues.
When do you think youll be able to achieve that and what actions are you guys taking to reach that goal.
Well I mean, the reality of it is.
Can't tell you, we're going to get there in three three or four years.
To be totally honest with you I am Karen so.
It's really driven by our relentless focus on growing the inspections and our inspections were up again.
On a year on year basis for this quarter, which really gets US excited we had really solid growth.
In that piece of the business, we need to drive that inspection first mindset into the Chubb busy.
Business so that.
We're thinking about about things in a very in a similar fashion that we are and is it as long as we continue to grow the inspection piece of the business. We know that we're going to grow the service piece of the business, which is the recurring revenue portion of it and we're going to incrementally make make gains on it.
Each in each and every year and that's what's positive for us and.
And that's what where we're driving the business to and Thats what is.
Our biggest focus we still have work to do as we continue to build out our inspection sales team and and that is happening in ongoing every single day.
And that's that's really our number one strategic priority across the business.
Yes.
Got it thanks, and I have one follow up.
Just looking at $40 million synergy.
You talked about.
And for the cost to achieve that should we assume some sort of similar timeline.
How should we think about that.
Well I guess, we said that we.
We believe that we're going to <unk>.
Capture those synergies over an 18 to 36 months period of time, and that's where our focus is as I said earlier in my remarks, our number one focus right now is the separation from carrier and that needs to continue to be our priority, but we believe that.
We see opportunities up to $40 million and hopefully thats going to continue to evolve, but it's going to take us that period of time to to capture.
Got it thank you.
Our next question comes from <unk> <unk> from RBC capital markets.
Hi, This is Joe mazzoli filling in for Ashish congratulations on the strong results.
But given the higher international tensions and I think you mentioned this previously on Hong Kong and China could you just walk us through how you're navigating international risks and any of the actions you're doing perhaps in Europe on knock on effects or any other things you're seeing in terms of.
The overall business environment. Thanks.
Yes.
Okay.
So I think when I think about navigating.
Risk obviously, we continue to watch how things continue to evolve in the Ukraine.
Ukraine.
With Russia, we have very little exposure to that our legal team has stayed on top of that looking at areas where we.
We may have customer.
Customer ties to Russia, and what what sort of impact that may or may not have on the business, but it has been it's very very low and it's been extremely.
The small.
As it relates to how things potentially evolve with China and the position in China.
<unk>, that's something that we continue to keep our eye on.
Our exposure in China is small the majority of our business in Asia is focused in Hong Kong.
And we continue to really just keep our eye on it and have open dialogue about any sort of risk and what sort of action planning that we may have to take if there is potentially additional problems and challenges there.
I think from Martin and I were talking the other day.
It's kind of funny that since we've been a public company, we have no nothing but headwinds.
We went public and so did Covid and then we've had supply chain issues.
It'll be interesting when the world just calms down a little bit but this company has performed.
<unk>, well and put up the numbers that it has put up.
In what has been a crazy couple of years.
So it's just can be interesting when the water smoothed out and you get a bit of a tailwind and what's going on in the macros, but.
Look at how well we performed over the last couple of years with with global headwinds that have nothing to do with the business.
I really think.
You really see the resiliency of how the business is set up and what we call the protective moat and so we look forward for the day when the World just takes a breath.
Great. Thank you for the color and maybe quickly could you just remind us on labor and how the Union work force Statesville subcontracted workforce nationally helps it sounds like the color around the $30 million spent over the past five years on leadership development is helpful. But just maybe around what youre seeing on the hiring environment and how you think you can.
Ken.
Pretty much navigate that as well just because the issue of.
Kind of.
Labor market today. Thanks.
Yes. So there was there was a lot there in that in that in that in your question. So first just to tackle that.
The Union.
Component of it so the majority of our workforce is union that does a couple of things for us. It gives us really good visibility into their wage rates and the cost structure associated with that and.
Even even going through this kind of a challenging time from a from a people perspective.
And our collective bargaining agreements that have come up for renegotiation.
I would tell you that they've all been resolved and settled at.
Very fair.
Basically wage packages an escalation in those wage packages I've been actually very.
Impressed with the leadership of the Union.
And how.
They have been reasonable in their expectations and haven't tried to take advantage of the hot labor market and the situation there. The other aspect of the union aspect of it is.
When you have.
With Friday afternoon comes in we don't have work for that individual on Monday.
We can basically lay them off and send them to the Union hall without any trailing severance cost that's all built into their into their wage packages and so that gives us much more flexibility to flex up and down as as we as we need.
What you see commonly in western Europe , specifically around installation work is the use of a lot of sub contract labor.
Instead of having permanent employees and that allows them greater flexibility to flex up and down based on what their needs are and so youll see youll see them you subcontract labor more often.
And they would have.
Having full time employees.
Regarding the $30 million investment in leadership development over a number of years I would just tell you that.
We have believed for almost 20 years now that investing in our people and investing in our people as leaders and as human beings is what's ultimately going to drive the greatest results and create shareholder value and it's really proven itself true the industry has done the men and the women that are actually due.
The work in the field they've done done them, a dis service and they haven't made the level of investment in those individuals in the same way that say they have in their in their office personnel on staff and from my perspective, that's an absolute shame.
Almost 70% of our workforce is showing up on our customer sites every single day and those men and women want to be invested in as human beings. Just like you and me and I think thats one of the things that we've done that's unique at API is that we've taken our leadership development efforts too though.
These men and women.
And I think that is something that creates a unique environment for us that that people will want to be a bigger part of something that stance.
Our purpose of building, great leaders and that means something and it stands for something.
Bigger than bigger than an individual cells and I think thats something that is unique to what we're trying to accomplish.
At API and I think thats something that we can do and bring to the Chubb organization.
We already have one individual from our team that we're planning to relocate to London. He was the individual that originally stood help stand up our leadership development efforts way back in the early two thousands and he's going to relocate some London and helped bring that effort to to chubb's. So we're already thinking about how are we going to bring.
That same energy and enthusiasm from our leader development perspective to the Chubb organization and as I said in my remarks, I really think that that's going to be a big part of the integration and a big part of what makes.
The Chubb organization successful as we move this thing forward.
Great. Thank you so much of the color.
Next question comes from John Tang Wong Tang from C. J C. J S Securities.
Hi, good morning, Thanks for taking my questions.
My first one is what gives you the confidence in reaching the market target margin.
Just given the pace of inflationary environment, we're seeing I understand it you can grow profit dollars in line with your expectations or maybe a little bit better.
But getting to the margin percentage just in this environment.
What's driving that is it may be an expectation of moderating inflation more synergies or something else that we should be thinking about.
John This is Kevin I'll take that one.
When we look at what's going on this year with the significant pass through that Russ talked about.
When you think about some of our businesses. If you take one of our businesses and our specialty services business.
Segment as a proxy.
Fabrication, there, obviously seen a significant run up in revenue due to what we're pushing through from a price standpoint related to steel.
That's going to compress margins. This year all of that said they continue to focus.
And you can use that company really as a proxy for our contract work in specialty and broadly they continue to focus on productivity initiatives.
And continuing to push more and more of our offerings to that service and recurring revenue. So in a year like this where we see the run up of course, it's going to compress margins, but as we continue to focus on the long term levers that we've talked about.
For the last couple of years.
And this inflationary pressures subside, we expect there to be a higher ramp, let's say next year and the following year and our margins.
As we see that work start to show up.
And as the material inflationary.
Inflationary impacts due to material costs subside.
Okay, Great I appreciate that and then second Kevin. This is actually for you. What is your expected interest expense for the year, just given the expectation of rising rates and are you comfortable keeping that on it.
Floating rate at this point.
Yes.
Expected full year interest expense right now is $120 million.
And we're comfortable with that if Thats your question.
We're forecasting as we do.
Based on.
The mix of fixed and floating.
That was great. Thank you.
Yes.
Our next question comes from Kathryn Thompson from Thompson Research.
Alright, Thank you Catherine.
Hey, How's it going.
Thanks for taking my questions today.
Just in terms of this is just a bigger picture understanding here and more services focused but against that backdrop. How are you thinking about managing inventories and just basic goods as the world shifts from a just in time to more of adjusting teams and how relevant is this trend really for API.
Yes.
Okay.
Catherine Kevin do on at all about that a little.
On our cash.
Yes.
No.
Yes, Catherine I think in the remarks, I mentioned this as well, but you see.
You saw the impact of I think you said it well instead of just in time, we are trying to get in this world where availability sort of gets you on defense a little bit we're doing what we can to get materials.
And our businesses into our jobs in time to do the work that we need and noting the growth rates that we're seeing that's become really really important.
Also in my mind, we saw that as a working capital investment here in the first quarter.
Obviously as we move through the year, we expect.
For that.
Work itself through and have less of an impact as we move from sort of Q2, three and into Q4. So we think the most significant impact we're going to see really is in the first half of the year and we expect to work a lot of that off in the back half of the year.
Okay, and what are you seeing in terms of.
Supply chain timing from others in the construction cycle.
And.
What's your next goal of 60% of your revenues coming from service how much of this is organic growth versus acquired.
So the majority is Catherine this is Russ good morning, the majority of your growth in inspection and service is going to be organic.
You might have some small M&A activity associated with buying customer accounts et cetera.
That will be additive to that but essentially you can count on most of that being being organic.
By nature and.
When you think about inspection and service.
Lions share of the work that's been done there is labor.
And so from a supply chain perspective, as we continue to grow that we become less and less.
Susceptible to supply chain supply chain related issues. I mean, you have component issues from a fire alarm perspective in security.
On the security side of the business that.
<unk> has been seen some challenges in the last number of months on pipe is also an item that we continue to keep a close eye on.
Pipe is a big part of what we do in all aspects of our business and so we continued to monitor monitor not only cost, but about availability, but as we continue to grow the.
Inspection services side of the business, we become less and less susceptible to those issues and challenges.
Okay.
Sequential trends are you seeing in terms of.
Types of projects that are in kind of in the proposal pipeline and then it gets importantly, who are you taking market share from.
Well I think that I think.
To address the first part of your question I think the end markets that we serve continued to be very strong and very robust do you think about.
The data center space and what companies like Facebook, Microsoft Google What Theyre doing is an investment that they are continuing to make.
Is really positive for us from from both a <unk>.
Installation, but more importantly, an inspection and service space semi conductor the Intel's of the world continue to provide robust opportunities.
For us I think that.
I think that Thats something that we need to continue to stay focused on is being in the right end markets and the opportunities from both an inspection and service perspective, and ultimately an installation perspective, we'll continue to.
To be robust.
What was the second half of your question on Catherine Im sorry.
Just really quick.
We're taking market share.
Okay.
In terms of taking market share because things happen.
Happening.
In a post Covid world is.
The big are getting bigger, but also it gets down to service.
No.
We see this as an opportunity to.
Sure.
It appears that you are from others that are just.
Don't have as good access to.
To products and people.
What are the big buckets, where you're seeing market share gains.
Well I mean the industry.
Is so fragmented and.
And I think that so we're going to be taking share from.
A lot of smaller more family owned type businesses in the regional and local communities that we serve and that's where our scale and technical capabilities are going to be ultimately.
A big advantage for us and something that we.
Continue to stay focused on and it's like anything you know you are right. Its about service and it's about your commitment to serving to serving your customers with flexibility safely efficiently and everything else associated with that.
So I mean.
This is also very much still a relationship based industry and space.
Think that our inspection first in the strategy that we've employed as it relates to how we sell inspections into the marketplace allows us to.
Three more solid sticky relationships with our customers. So that's a driver for us and our customers continue to consolidate and that's an advantage for us as our as our customers continue to consolidate and grow their businesses, that's going to create opportunities for us. If we're if we're delivering and we're executing.
And we're maintaining those those those key.
Relationships.
Okay. Thank you very much.
And we have time for one more question from Andrew Wittmann from Baird.
Great.
Thanks for taking my questions I guess I wanted to ask a little bit on the integration.
Maybe from two perspectives the first one.
I guess is I think I heard in the prepared remarks, obviously, the 20% to $40 million synergy, but I also heard that theres going be a level of reinvestment. So I was wondering.
What the expectation is for the net savings to the EBITDA would be after the Reinvestments and maybe.
Maybe for Kevin if you could talk a little bit about with this year's budget is for like acquisition and integration costs This quarter.
Adjusted reconciliation.
These large numbers for for the acquisition expenses, which makes sense in the quarter, where you actually close the deal.
But the integration and reorganization expenses were actually fairly modest.
So I was hoping to understand how that geography moves I would expect the integration and reorganization expenses to maybe go up in the acquisition expenses to go down but what's the net.
Budget, maybe for the year for those type of items. Just so we have an order of magnitude as to what they will cost this year.
Yes, I can take both of those.
I'll start on the ladder, Andrew and then you'll have to remind me I think the first one was.
The 20% to $40 million, but we'll have to come back to clarify that question. So on the acquisition. The onetime cost. Yes. You are right you saw about $24 million related to just closing the deal in the quarter and then you should have seen somewhere around.
Say $15 million to $20 million I think it was close to 17.
Just ongoing cost the majority of that cost that you saw in the first quarter was related to our continued investment in and carving out the chubb business from the carrier infrastructure. Okay. There's various things in there, but I'll say that was largely what was in there.
We are still working through the full year view to that so we're not ready to guide on it I think kasper a budgeted number.
But we will have two buckets, there one will be.
Cost to capture the value opportunities that we're talking about and the other is cost that we're going to continue to see for the year as we carved this business out of the carrier platform.
Okay. So the the costs you saw in Q1.
I think those will step up.
Slightly as we move through the year, but we are still in the planning phase of all of that and looking to conclude that here in the second quarter.
The first part of the question was if you've gone to 40 of gross synergies, what's a realistic expectation for the net benefit to EBITDA from cost synergies.
On that one and tell you that will be part of the update later in the year.
Okay.
Okay, and then I guess.
I was just curious with.
What is softening demand or what was seen the softening demand from some of the.
Large warehouses customers and when you look at it.
Amazon.
<unk> for the quarter clearly there was a pre build in COVID-19 related to home delivery services and it's not just Amazon is probably others as well I guess Russ given that this has been to my understanding a fairly large driver of your growth over the last couple of years are you seeing any signs of changing any expectations around what the longer term out.
Might be or the at least the energy the intermediate term outlook over the next couple of years could be on the specific end market.
Yes.
We do play in the space, but it's not it's not a significant component of our revenue mix by by any stretch of the imagination and I think that if you go back and look.
I have often commented that focuses on capturing the inspection and service work.
On the Amazon from the Amazons of the World. After the facilities are up and some of our competitors would rather chase those around.
<unk>.
Make them a chase.
Chase around the original installation work where if.
It's the right opportunity for us with the right with the right customers. The right relationship then we're going to be interested and willing to participate in that so I think that the diversity that we have Andy with with our customer base not only from individual customers, but from also from an end market perspective.
It gives me.
I'm not worried about it at all and we've been keeping an eye on it.
Our manufacturing business and specialty services does does some Amazon work, but <unk> got a number one they have a great backlog.
As we continue through 2022, and they also have great customer diversification, so that if Amazon does pull back and we do Miss out on one of their of their so to speak project related opportunities. It won't have any impact on our business and our and our results. So we.
We keep an eye on it we track it but we're more interested in the ultimate service and inspection work than we are on the original builds.
And then hey, Andrew.
Going back to the 20 to 40.
While we will give you color when we do the more fulsome presentation the back back half of the year.
The reinvestment really is a onetime event, whereas the synergy savings are perpetual so yeah.
You have to look at it that way as well.
Got it we will look forward to the update later this year and that thanks, guys for the perspective.
Okay.
So thank you sandy and nice to hear from you. So.
I'll wrap things up here and in closing I would be remiss, if I didn't take the opportunity to thank all of.
Our API and Chubb team members, who have remained focused on not only supporting our company, but company and customers, but also the communities in which we serve the safety health and wellbeing of each of our leaders remains our number one priority.
Thank everybody for taking the time to join the call. This morning. Thank you for your continued interest in API. We truly are excited about the opportunities that lie ahead, and really look forward to updating you on our progress throughout the course of the year and as we continue to cross key milestones. So thank you have a great.
Dave.
This does conclude today's program. Thank you for your participation you may disconnect at this time have a great day.
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