Q3 2022 APi Group Corp Earnings Call

Speaker 1: last months of 2022 and as we're working through our budgets and business plans for 2023. A couple of things that give us that confidence, Andy, is first you know we have a very strong backlog at roughly 3.6 billion dollars so as we move into the year you know we feel good about about that. We continue to have you know kind of that you know above 10% growth in our inspection business which you know as if you recall you know every dollar of inspection revenue we generate we're going to add you know three to four dollars worth of service revenue and so as we continue to you know build out our inspection sales force we continue to grow inspection revenue we know we know we're bringing you know service service right alongside with that and you know our total service revenue now as a business is at roughly 51% of total net revenue so we feel really good about you know where we positioned business to as we move into to next year and I also I guess you know maybe that I'd finish by saying that the end markets we serve you know are just strong and they continue to provide you know robust opportunities for us as we move through it and the end markets that we primarily serve have been you know really provided great opportunities right through the pandemic right through you know some of the inflationary issues that we've we've been challenged with so you know we feel really good about where the business is at and the leadership you know at the company level has been really strong and you know we continue to make the changes that we need to in CHUB so that you know we can continue to deliver you know good results. Russ that's helpful and then maybe to your last point you know on CHUB maybe give us a little more color into what you're seeing you know in the business.

Speaker 1: you know, well overdue and getting the business, you know, positioned for growth. And we've shown organic growth, you know, through the three quarters of this year. And so as we continue to, you know, really transition the business to a branch-led model, which is, you know, how we've built our business, it gives me great confidence that we're going to be able to deliver a really solid, positive result in that business.

Speaker 2: It's helpful, Russ. And then maybe one for Kevin. You guys reported a good step up in cash flow in Q3. Can you give us some more color about the opportunity to get back to 80% conversion? What are you seeing, Kevin?

Speaker 1: Yeah, so as we talked, you know, we started out the year from a working capital standpoint with significant investment both in dollars and in rate. And what we've continued to do as we've moved through the year is make significant improvements in our working capital rate. And you saw that carry through Q2 now into Q3. And with the flatter volumes, Q2 to Q3, we were able to produce a good cash flow number. And we expect cash flow to continue to improve and conversion and continue to improve into Q4.

Speaker 1: as we traditionally see due to the seasonality in our North America business. As we go into next year we expect to continue to harvest the investment that we made in the first half of 2022 and return to more traditional free cash flow conversion levels. So an improvement off of 2022 on our way to that 80 percent approximate 80 percent target that we have out there. Appreciate it Gus.

Speaker 3: We'll take our next question from Julian Mitchell of Barclays.

Speaker 3: Hi, this is Kieran Patel-O'Connor on for Julian Mitchell. I just wanted to ask on organic growth, it was pretty strong in the quarter, up I think plus 16 percent. Were there any end markets that were particularly strong or weak that you would call out relative to that number?

Speaker 1: Well, I mean, I think that, you know, I mean, the end markets that we serve, you know, if you look at from a safety services perspective, you know, we're focused on, you know, data centers, semiconductors, you know, healthcare, you know, end markets that have shown great resiliency, you know, through the, you know, the last number of years and continue to actually provide, you know, opportunities for us. In specialty services, we do, you know, we have...

Speaker 1: You know, the telecom and, you know, fiber optics space, you know, continues to provide robust opportunities, you know, public utility, private utility, natural gas distribution, retrofit opportunities, potable water replacement opportunities. So we feel really positive about, you know, the end markets that we serve. And, you know, the reality of it is that the business doesn't have a tremendous amount of exposure to...

Speaker 1: to retail and hospitality. It doesn't mean we don't, you know, do work in those spaces, but it's just not a huge emphasis for us. And so as those businesses, you know, kind of cycle, we don't have a tremendous amount of exposure to the space. So I hope that's helpful.

Speaker 3: Yes, that is helpful, thanks. And then my follow-up would be just on supply chains. I know you're still calling out supply chain disruptions as a headwind to margins. Have you seen any improvement here relative to earlier in the year or anything to call out from that perspective? Yes, thanks

I think we've seen, I think you see a mixed bag there. I think you have some areas that you've seen improvement, not only from a supply chain and product availability, but also from a cost perspective. As an example, we track very closely hot rolled steel as it relates to, we buy a lot of pipe. And so we wanna know what's going on with pipe prices and pipe prices have actually come down. And that's, you know.

tried to source so you really have a bit of a mixed bag there and how that impacts the business.

Got it. Thanks.

We'll take our next question from...

Andrew Oben, your line is open, of Bank of America.

Can we get an update on the backlog trend in the third quarter?

Sure, so I think if you are backlog is roughly 3.6 billion, you know, right as it sits right now today, that's slightly down from 3.7 billion that we reported at the end of last quarter. That's very normal for us. Obviously, as we work through the summer months, we're, you know, with some seasonality associated with the business, we have a tendency to burn off backlog.

Our backlog is slightly down. It's not necessarily a bad thing. We continue to focus on improving the mix to inspection service and monitoring and don't have any concerns about really where our backlog is at right now today.

necessarily a bad thing. We continue to focus on improving the mix to inspection service and monitoring and don't have any concerns about you know really where our backlog is is that right now today.

But as a quick follow up when you think about pricing look the pass through costs they're going to be what they are. But the controllable pricing for you. Are you continuing to accelerate that. Is that kind of leveling out. How are you thinking about the controllable piece of price.

So we're continuing to take price wherever we can. I mean, I think that's something that inflation continues to really be a very hot topic. And so we continue to push price in every instance and every place we can. We also continue to push the utilization of fuel surcharges and such.

And so we really are focused on continuously trying to take price, you know, where we can. We also need to balance that with being fair to our customers and, you know, making sure that, you know, that, you know, we're doing right by them and continuing to, you know, provide the best opportunities, you know, for the company. One other point that I wanted, I should probably make regarding our backlog is an item of note that Olivia pointed out to me is that...

On a year-over-year basis our backlog is actually up 8% from this time last year. So our backlog is in a really strong spot.

Perfect, thank you very much.

Thank you.

We'll take our next question from Andy Whitman of Baird.

Hi, yeah, good morning. So I guess you had a comment about productivity in the specialty segment. Russ, I thought maybe you could just talk a little bit more about that. Was that driven by easing supply chain and just your guys could be more productive because they had the parts they needed, or was there something else driving that that was in your control?

Well, I mean, yeah, for sure. It's, you know, I mean, the comment was directly correlated to, you know, easing supply chain, you know, issues and in the segment, you know, I think that from an operational perspective, Andy, you know, every day we're focused on trying to be better and trying to be, you know, more productive and, you know, and how we manage and lead our work. And I think that's something that's, you know.

Like just the way we're wired is like, you know every day we want to be, you know better than yesterday and So some of that is just is driven by that. You also have you know, it's been a dry summer and So from a from a weather related Perspective that provides, you know a boost to your productivity when you're not dealing with rain days and rain outs and things like that so There's a few things that have contributed to to to that

Got it. And then I guess for my follow-up, I was hoping you could talk a little bit about

I call it net new business. If you could talk about the retention side of your recurring revenue businesses, as well as the new sales opportunities, both in the legacy, most of the US business, as well as in CHOB, which you're seeing there in terms of customer retention, the changes that you're making. And are they focused on, or does the environment today allow them for new sales, giving so much consternation, particularly in Europe , with what's going on there?

So what I would answer that with you is like I can't give you like a hard data point that we've got 93% you know customer retention or anything like that. What I can tell you is that we have not seen a tremendous amount of customer churn. And I think that you know like if you look at like the way we incent and pay our inspection sales folks, you know they're a piece of their compensation package is based on.

us actually, you know, probably

I don't know how to put it, but we're going to probably need to eliminate some of our customers in some of the markets that we serve in that business so that we can enhance margins by eliminating whether they're poor paying customers or whatever it is. And so we are going to bring that focus to that business. And so if you're able to attend our investor day, you'll see that a portion of our revenue growth strategy actually...

includes some, I guess, elimination of certain revenue with certain customers as part of that strategy.

if that makes sense.

That makes sense, addition by subtraction. Okay, and then just maybe just one quick leaf for Kevin. Do you have, now that we're kind of along the path here on Chump pretty far along, do you have an estimate what the cash costs are going to be to finish the integration on that?

We do, and we're going to walk through that as well as our updated thoughts around value capture at our November 17.

presentation.

All right, see you there.

Thanks, Andy.

We'll take our next question from Catherine Thompson of Thompson Research Group.

Hi, thank you for taking my questions today. First, just focusing on margin. You have given some colors today, but just a clarification on why safety margins were down but specialty up when they both seem to face the same tailwinds, mixed more service, and headwinds, inflation, supply chain issues.

Hi, Catherine. I'll take that.

So on safety, when you look at our safety margins, they were down year on year. Primary driver of that really is on the contract side of the business where we've continued to push and battle inflationary as well as availability of some product that drove some productivity shortfalls. We believe the productivity component to be primarily captive to the third quarter. Again, it was just on some of the contracts that we had, project businesses.

And we just didn't see that. We continued to, our teams continued to do a good job on the project side of the business on pushing through additional inflationary costs. Service was growing well in that business too, so we got a mixed pickup. And then also we had some volume pull through. The team did a really good job last year managing our cost structure in that business, and we're starting to see some benefit of that as we continue to push through higher volumes and specialty..

It was a great detail on the backlogs that you gave earlier. But as a follow-on to that, are you seeing any pockets of cancellation or softness related to projects, either on a new basis or with new projects? Thank you.

So, I mean, I guess I would answer by saying we've seen a handful of things slide out to the right, mostly like multifamily type project related work. We don't do a tremendous amount of that type of work. And so it's like it really doesn't affect our business. But we continue to keep an eye on it as a...

as a general comment, you know, we do very, very little residential, whether that's, you know, single family, you know, or multifamily housing, it's just not an area that

that really puts a lot of value on a company like ours that brings value and tries to sell value. Every day it's really just a price driven end market, and so we don't really play there. But we do some work, and we have seen a little bit with higher interest rates, we've seen some of those projects slide out a little bit to the right, whether they, I'm guessing that they'll happen based on the, that's primarily in North America, to be honest with you, in the US.

I would suspect that you'll see they'll eventually get built just because of the situation that the U.S. is in from a housing perspective, but with rising interest rates you're going to see, I think, people being a little bit more cautious on kind of developer-led type projects.

Okay, great. And then a final question for the day. Just discussion on how pricing discussions are going into 23 and dissecting surcharges, for instance, for transportation versus stickier pricing. Thanks very much.

you know, you're going to adjust as as you know, fuel costs, you know, continue to change. And again, I go back to my comment that we need to be fair, you know, with with our customers. I think in general, the price that we're taking is sticky. And I think that will be able to hold that as we move into 2023. We'll be able to hold that as we move into 2023.

I'm sure there'll be some situations where we have some customer pushback. Again, I'll just go back to, we want our leaders to be fair to their customers. We need to earn a fair margin and we need to deliver a superior service. And if we do that, I believe that the pricing that we've been able to take will stick.

Thank you very much.

Well, next question from John Tanwontang of CJS Securities.

Good morning, guys. Thanks for taking my questions. Really solid performance and good luck on results.

My first one, Kevin, I was wondering, do you have any expected currency headwind estimates for 2023? And following that, what is your projected interest expense after today's rates and rates forecast?

Projected interest expense job for 2022.

3. It's 123.

So we haven't provided guidance for 2023. I can tell you on the FX, we do. You know, FX is most acute in the back half of 2022, both from a revenue and from an EVA DA standpoint. And we expect, you know, at current rates to have a headwind in the first half of next year, sort of comparative to the back half of 2022. Thank you.

Okay, great. And then you mentioned just transitioning away from the backend at Carrier to your own at CHOP. Is there any specific step function and run rate saving expected there when you do that transition? Or is there going to be just an increase on your expense?

the next question. John I heard you ask about savings and then I didn't hear the last part of that question on the Q and A session for some of these groups at the meeting our first tier question and

Yeah, I was just wondering if there are any expected runway savings when you transition away from carriers back in?

Okay, I understand now. So first the transition continues to move along well. Our goal was to get out by the end of the year and we're on target. So the team's done a really good job there. On your question on incremental savings, I'll say or incremental costs, we don't foresee either. We think we're going to be able to manage in line with the charges that we've incurred that are in our run rate this year as we go to our own environment. Our goal has been to do it sort of at a cost.

Well, I mean, I would tell you that we see more opportunity, to be honest with you. I mean, I just continue to be really excited about what we see with the business. I mean, lots of examples. I mean, the cross-selling has really started. I mean, Chubb has a security client that has multiple facilities here in North America.

And they used to work with a different firm, and now they're working with our company to provide those different services. We're doing the same for them. We integrated, we had a business in the UK that their expertise was really in the sprinkler space. We've integrated that business into Chubb. We believe that we're gonna be able to provide sprinkler inspection and service capabilities to Chubb.

and add that expertise, you know, to their business. And I just think that, you know, our branch operating model works, and it's solid. And as we continue to gain visibility, you know, into their business and bring that operating model to the business, it'll allow us to lean out a number, say, a bunch of corporate costs, if you will, and, you know, bring the, you know, kind of the...

business back to the branch. We want our branch leaders to be out selling work and executing work and spending time with their people and growing and developing their people. We don't want them sending reports up to corporate and we want them winning in their communities that they serve. And we're gonna bring that operating model to that business and...

We're on our way to doing that and it's I mean, I just like I can't tell you enough like I'm excited about it and we are the right owner for this business and Chubb has found the right home.

Great. Thanks, Bob.

Our next question is from Adam Wyden of ADW Capital. Hey guys, great performance. Two quick housekeeping questions. The first one is, you guys have been really aggressive on integrating CHUB. I know you guys were to quantify what the return is and the absolute dollar amount of cash costs. But is it fair to assume that the lion's share of the integration and restructuring is going to take place in 2022 and that we're...

to 2023, but suspect they won't carry much beyond 2023.

Got it. Okay. And then the second question is, and we're seeing this in a lot of our companies that have kind of cost plus contracts, that you get the increased revenue, but your margins come down because you don't get a margin. You don't really get margin on that increased cost. As you roll into 23, as the inflation comps get much easier, you know, you're not sort of chasing your tail. I mean, do you think that that's going to be a major driver of margin sort of over the next 12 months as you sort of...

get to keep that increase of cost, but you, you know, then are able to reprice the margin? Yeah, Adam, this is Kevin again. I think that's right. You know, we incurred a margin drag this year that we've talked about, and as costs flatten and or revert, like Russ talked about hot oil and coil as an example, we should see the lost margin in 2022 and we should see the loss margin in 2022.

as a pickup to our margin in 2023. Right, and in theory, some of that you might even not just get the lost margin, but you might actually get more margin as some of those costs don't, not some like that rebate to the customer, but in theory, some of them you'll actually get the peak. So in some theory, you'll get the margin that you lost this year and maybe even more so, right? Well, that would be ideal, Adam, but...

I was chuckling actually when you were asking your question, you talked about a major driver of margin. I mean, I think we're incrementally going to see a pickup in our margins, you know, as we move into 2023. And, you know, really, we should see some of that margin pick up in the fourth quarter of this year.

Excellent. Well, great, guys. Appreciate all the hard work.

Thank you. Thanks, Ed. Thank you.

We'll move next to Steve Tusa of JP Morgan.

Hi, good morning.

Good morning.

Just on the price, I'm not sure if you guys gave us, we've had a couple of earnings calls this morning, but what was price in the quarter?

Pricing was about two-thirds of our organic revenue growth.

Got it. And is that, I guess, kind of consistent with what you guys had in the second quarter? Have you guys put through incremental pricing here in the third quarter?

You know, generally what we've been seeing is that two-thirds, one-thirds relationship has really held through the year. I mean, as Russ said earlier, we continue to push pricing, and we will as we move into Q4. But the sort of the relative component of organic growth at two-thirds is really how we've seen it all year and it's how we would anticipate as we move into Q4. 48 3 A!!!

Got it. And then anything into next year? I'm not sure if you guys highlighted this kind of backlog stat that you put out there before. How is that trending in anything in the next year that we should be aware of? From the bridge, whether it's EBITDA or cash or anything like that, that should be a positive or negative swing for 23 at this stage?

No, I don't think so. I mean, like I said in my earlier remarks, you know, our backlog is, you know, at this point on a year on year basis is up 8%. And, you know, we typically burn off a little bit of backlog as we work through, you know, summer and early fall. And so where we're at as we move into the end of the year, it remains really solid and, you know, really should help set us up for a solid 2023..

Great. Congrats on the execution.

Thank you.

And there are no further questions at this time. I'd be happy to return the call to our host for any concluding remarks.

In closing, I want to make sure I take the opportunity to thank all of our team members for their continued support and dedication to our business. They really worked hard to deliver the results that we were able to present to you today. I would also like to thank our long-term shareholders as well as those who have recently joined API for their support. We appreciate your ownership in the company and look forward to updating you on our progress throughout the remainder of the year.

And we look forward to seeing many of you at our November 17th investor updates in New York City. So thank you everybody for joining the call this morning.

Thank you. This does conclude today's program. You may now disconnect your lines. And everyone, have a great day.

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