APi Group Corporation Q1 2023 Earnings Call
Consistent bulk segments.
Factors were partially offset by inflation, which caused downward pressure on our margins adjusted EBITDA increased by 17, 6% on a fixed currency basis for the three months ended March 31, 23, and adjusted EBITDA margin was nine 1%, representing a 40 basis point increase compared to the prior year period.
Primarily due to the factors impacting gross margins adjusted diluted earnings per share for the first quarter was <unk> 25 per share representing a two penny per share increase compared to the prior year period the.
The increase was driven primarily by strong organic growth and expand and margin expansion in both the safety and specialty services. This is offset by an increase in interest expense compared to the prior year period.
I will now discuss our results in more detail for safety services.
Safety services reported revenues for the three months ended March 31, 2023 increased by 10, 9% to $1 2 billion compared to $1 1 billion in the prior year period net revenues increased organically by 14, 1% and as Russ mentioned earlier towards life safety was up organic.
With 21% with our international life safety operations up organically, 11% with strong organic growth was driven by double digit inspection service and monitoring revenue growth within our life safety businesses as well as continued price improvements.
Adjusted gross margins for the three months ended March 31, 2023 was 35, 1%, which was flat compared to the prior year adjusted gross margin driven primarily by pricing strengthened inspection service and monitoring revenue offset by inflation and unfavorable mix impacts adjusted EBITDA increased by $18.
5% on a fixed currency basis for the three months ended March 31, 2023, and adjusted EBIT da margin was 12, 3%, representing a 50 basis point increase compared with the prior year period, driven primarily by leverage of SG&A spend.
Across strong organic revenue growth.
I will now discuss our results in more detail sort of specialty services segment.
Specialty services reported revenues for the three months ended March 30, 123 increased by four 4% to $430 million compared to $412 million in the prior year period, primarily driven by increased demand and the infrastructure and utility markets.
Adjusted gross margin for the three months ended March 31, 2023 was 13, 3%, representing a 120 basis point increase compared to the prior year period, driven by strong organic growth a shift in mix towards higher margin service and disciplined project and customer selection.
Adjusted EBIT increased by 21, 7% for the three months ended March 31, 2023, and adjusted EBITDA margin was six 5%, representing a 90 basis point increase compared to the prior year period, primarily due to the factors impacting adjusted gross margins.
Turning to cash flow in line with our guidance and expectations. Our adjusted free cash flow for Q1 was flat to $47 million improvement over the same period last year. As a reminder, Q1 is traditionally our lowest cash flow quarter due to seasonality and timing of annual payments, we affirm we reaffirm.
From our prior guidance of delivering free cash flow conversion at or above 65% for 2023, all the way to our long term adjusted free cash flow conversion target of approximately 8% at.
At the end of Q1, our net debt to adjusted EBITDA was approximately three one times, we remain laser focused on cash generation and deleveraging to our stated long term net leverage target of two to two five times with current expectations to achieve.
<unk> two and two five times during the year end 2023.
I will now discuss our guidance for Q2 and full year 2023.
While some might argue the macro became more uncertain during the quarter the strength of our business, our topline momentum and the quality of our backlog gives us confidence to raise our prior full year guidance for reported net revenues and adjusted EBITDA.
We now expect full year reported net revenues of six 875 to $7.0 billion to $5 billion up from six 8% to $6 $95 billion.
At current currency expectations. This represents reported net revenue growth of approximately 5% to 7%.
We now expect full year, adjusted EBIT of $740 million to $780 million up from $735 million to $775 million, which represents reported adjusted EBITDA growth of 10% to 16%.
In terms of Q2, we expect reported net revenues of $1 75 to $1 78 billion.
This guidance represents the shortage net revenue growth of approximately 6% to 8%. We expect Q2, adjusted EBIT of $195 million to $205 million, which represents reported adjusted EBITDA growth of 11% to 16%.
For 2023, we anticipate interest expense to be approximately $145 million depreciation expense to be approximately $85 million.
Capital expenditures to be approximately $95 million and our adjusted effective cash tax rate to be approximately 4%.
We expect our adjusted diluted weighted average share count for the year to be approximately $273 million.
April marks API three year anniversary of being listed on the NYSE. We're excited in process, Mark with a stronger business stronger leadership team and record first quarter results.
With this three year anniversary and in conjunction with our filing of our 10-Q as a matter of housekeeping only we will also be updating our shelf registration statement. Later today. This update is not meant to imply any planned issuances of shares or other activity, but is merely allowing us to have another tool at our disposal now what is missing for the company.
Overall, we are extremely pleased with results delivered by our global team in the first quarter and look forward to sharing more updates as we progress throughout the year.
I will now turn the call over to Ralph.
Yes.
Thanks, Kevin.
<unk> record first quarter results speaks to the strong momentum balanced across our global platform.
Delivering the margin enhancing double digit organic growth, while improving backlog quality gives us the comfort to raise our full year guidance for the business.
As you've heard from all of US we have great confidence in the business and the direction. We are heading despite the macroeconomic environment that said, we remain agile adaptive and confident in our ability to take definitive and early actions in the face of a worsening of macro economic conditions.
As we look to the years ahead, we believe we can create sustainable shareholder value by focusing on our 13th 60 80 long term value creation targets. These.
These include above.
These include above industry average organic growth adjusted EBITDA margin of 13% plus by 2025, 60% of revenue from surface inspection and monitoring and adjusted free cash flow conversion of 80%.
Coming off a great first quarter I'm excited about the opportunities for the rest of 2023 and our ability to execute on our strategic plan in the years to come.
With that I would now like to turn the call back over to the operator and open the call for Q&A.
Yeah.
At this time, we will open the floor for questions.
Like to ask a question. Please press the star key followed by the one key on you touched on for Matt is there any time youre right to remove yourself from the question queue.
Again to ask a question please press star one.
We'll take our first question from Andy Kaplowitz from Citigroup.
Yes.
Russ obviously strong growth in your core America life safety business, when you talk to your customers and any sort of signs of.
Any vertical slowing and when you mentioned that you hasnt improved backlog quality, maybe you could give us some more color on what that means in your visibility going forward.
Yes, Thanks, Andy.
I appreciate you joining us this morning.
Sure.
I mean, you've heard me say this before but end markets without question matter and.
<unk> recently added a industry Association meeting, where I was able to interact with a number of different Ceos.
In the space and the folks that are.
And semiconductor data center.
Healthcare.
Aviation are.
I'd say manufacturing, specifically pharma and.
Food and beverage.
Those end markets continued to.
<unk> rock and roll and.
But if you're in Chicago and thinking about building a 50 story.
Condo tower that project is dead in the water and.
So you are seeing.
Developer led opportunities.
Efforts to burn off some of the lower margin.
Project related work in our <unk> business that was unable to keep up with inflation.
And we feel good that we've really worked worked our way through that as we continue with Ian even though we continue to work off some of that backlog this year.
Very helpful. And then you mentioned the increase in infrastructure utilities spending I just wanted to ask you that specialty.
Yeah.
[laughter].
I think most of your peers are pretty good at that too.
But.
So you're really not.
What our business leaders are feeding are Kevin and I were just about actually visiting one of one of our businesses that does that work just like three weeks ago, and we haven't actually pretty good conversation about what they're seeing their so and they're seeing like in Minnesota their theme opportunities in.
There's were happening there as it relates to the infrastructure Bill.
Seeing seeing those dollars are starting to flow into the system, but.
A lot of that work is cake designing effort engineering effort and so you're not really see the robust opportunities.
And then regarding telecom.
A number of the large telecom providers have reduced their capex budgets.
Reduce their capex budgets from Ginormous too enormous and so the work plans that we do we haven't seen any slowdown in our business with that and it continued to provide opportunities. So to answer ultimately answer your question, there's plenty of opportunity in front of us.
To be able to sustain.
The organic growth that we showed through the first quarter for us it's more about.
Really we want the buildings are business leaders to be super discipline and focus on gross margin and ultimately EBITDA margin.
That's how we're going to achieve our 13% goal is.
Have you put in may be rising commodity prices into your guidance is that the reason why you raised EBITDA, maybe a little less in revenue for the year.
Got it thank you.
Alright next question comes from Jillian Mitchell from Berkeley.
I just wanted to ask on Chubb, how the acquisition to.
Integrations proceeding in any updates to the synergy expectations for fiscal twenty-three.
<unk>. Thanks.
While we look we we basically look at Chubb and our international business together and I would answer that by saying we could be more pleased with how.
The integration efforts and we are progressing and.
As I mentioned in my remarks.
We feel like our leadership team has really come together.
Across all aspects of the business and.
So we feel really good about that and where we're at and where the business is going in.
We shared some information on organic growth internationally, we don't plan to do that on a quarter by quarter basis, but we wanted to just give some color on.
Really really solid progress that leadership and the businesses.
Been making.
We feel really good about the $100 million of value capture opportunity in front of us we have guided to $55 million to $65 million this year.
Most of it happening in the second half.
And.
I mean belonging the short of it is that we feel really good about where we're headed with that business disappear.
Disappointed clarification.
Really know update from a restructuring or synergy timing standpoint from our last call.
$55 million to $65 million at rest reference was restructuring charge that we anticipate this year.
For the the work we're doing their internationally and we would expect that charge to be later in the year and therefore any nine capture opportunity to come from the charge dealt with the back half loaded really really into 2024.
Understood. Thank you and then my follow up question I was just on the comments you made on returning to bolt on M&A.
Later in twenty-three what gives you confidence to return to just bolt on M&A is it is it strengthened casual later in the year and.
Should we expect the size of the deal to be in a relatively small and financed by cash on hand or.
Would you be willing to take on any additional debt Sir.
The right deal. Thanks.
Yeah. So we're focused primarily.
From a bolt on M&A smaller transactions that are accretive.
To our existing business, primarily in North America.
Not not going to happen, but the focus is primarily in North America, where we feel like the existing leadership has the capacity to integrate it.
Some some dollars so to speak into our cash flow forecast, though even as we talked about getting delevered too that two four to five times by year end, we've modeled in a modest amount of.
For bolt on M&A, So essentially you could do that with.
With cash on hand, and I suspect that if the right you know.
Larger transformational opportunity would come along I suspect that we would take a look at it but it would have to be you know.
Another kind of center of the fairway type of transaction for us that really really made made a lot of sense.
I will tell you that we are very very excited to kind of turned the bolt on M&A faucet get it going again, and we have some really really nice opportunities that that we're digging in on right now.
Got it thank you.
Thank you.
Hi, Thank you for taking my questions today.
This is just the first is a bigger picture question.
We look at four bake secular trends and packing the last in particular Reshoring assuring population sharp.
Increasing and focus on environmental and then government support for.
Action spending too I I J a function.
<unk> and chips.
Tip that when you look at those four big trends in the U S.
Holidays, API grit capitalize on these trends.
I'm thinking that we're hearing comments from peers and related companies.
The semiconductors were already in process of reassuring and the $30 billion has been allocated for that is just a drop in the bucket and really I don't even know if I would put it in the category of the necessary.
Spend.
Was really.
Over the top from from from that perspective.
I think for US you know.
As we.
Centered on our culture and purpose of building great leaders and when we think about.
The communities reserve, we feel that in a tight labor market that but only benefits.
Benefits, our company and our organization and positions us.
The business and I think the businesses that are really focused and centered on people first mindset are ultimately going to win and all of the other all the other stuff just becomes.
For for your efforts as you continue to look to to build your business and so when I think about ESG and some of the things that are associated with that I I really like where our businesses is positioned because it's positioned around people first and that includes diversity equity inclusion.
Question I have more it relates to.
In a restaurant that and one of the.
Areas that you're focusing on and start inspections first mindset chop.
Fairly today versus.
With that when you first acquired the company.
Well I would tell you that we're in like the bottom of the first eating really I mean.
You know it takes it takes energy and time and but it was really Super cool Uhm Kathryn is that.
I mean, there's just there's there's still the mindset of we're going to go in and installation job and then we're gonna at the end of the installation job, we're going to we're going to convert it through an inspection and service contract and.
That would be some there while there is an effort to transform our sales force going on in our international business right now.
Leader looking over the sales organization.
Implicit in your guidance for this year.
For the balance of the Earth's should be eating out a little bit, but not just comment on that and then just a point of clarification make sure. We're on the same page rescue mentioned that there was some dollars on the investment side for some Bolton M&A I just want to make sure that the EBITDA guidance. The revenue does not include any are the anticipated or unannounced. So I guess I would say M&A.
Okay, and then I guess just for US I thought your commentary and your prepared remarks on the sales for some investments and bringing a team and we're kind of interesting kind of got me thinking more about the company growing.
So nicely here.
And so for US you know that's an invest investment into the future in a place where we will continue to invest and build out about that build out that salesforce.
As you've gotten more experience with Chubb security business, how are you thinking.
Well, it's 100% an area of investment for us.
I mean like.
We.
We've said this from day, one that it's the center of the fairway deal for US we feel that same way today, we feel like we're the 100 per cent right owner and the right home for that business and we went to bothered if we weren't going to to invest in the business and.
For us, it's just really a matter of getting the business optimizing stabilized we feel very strongly we need to have a really rock solid foundation.
In order to start putting those building blocks and drawing drawing that that business as we as we move forward and there's there's the the market's that they serve or as fragmented as North America, when we talked about above that market as well so we want.
Hundred percent plan to invest in it now.
There's other opportunities inside that business as well so like Chavez uhm very strong security capabilities.
Less strong.
In North America from a security perspective, so we feel that there is an opportunity for us to take advantage of some of that extra cheese.
In our existing business here same thing for for our businesses. You know has much greater capability and strength from a sprinkler perspective on the mechanical side of life safety space. We think that we can bring that X level of expertise to to that business and so there's places for us to invest from probably an M.
Mana perspective, there's places for us to invest and grow the business from <unk> Org.
Organic.
Perspective, and there's also ways for us to continue to improve the business just from a best practice and knowledge sharing that will allow us to really increase the performance of the business end up we're very optimistic and very bullish on what what can be accomplished there and I think and I attribute a big part of you know so to speak.
Looking at Kevin as I make this comment, but I'm I'm attributing a big part of our optimism to the leadership team that we built out there like we built out of first class leadership team there and.
And it starts with the leadership and the leadership will ultimately drive.
Superior results in my business and I have great confidence.
Got it and just a quick follow up I think the implication of some of the pricing commentary here is that you're you're saying an acceleration labor hours, just just the cleanest metric of volume.
The right read here.
Yeah, I would say that.
Varies across our businesses for sure.
But in general as we knew sort of back half 2022 in the first half or early 2023, I would say.
In the aggregate, we're not seeing it as an acceleration per se, but we're seeing sort of.
Growth that we saw last year and labor hours in the back half of the year continuing in the first part of 2023.
Got it thank you very much.
Thank you.
Our next question comes from Steve Steve's costs are from J P. Morgan.
<unk> good morning, and thanks for taking my question.
Are you so little impact of higher vacancy rates, particularly in office protocol.
I'm, sorry, I didn't I didn't hear you.
Can you hear me now.
Driving again.
Are you seeing any impact of higher vacancy rate, particularly an offer.
No no I mean, I mean, I think really.
Again, the inspections are statutorily required.
You know I think that.
So we're focused on the are already existing built environment and so for us.
That's that's an advantage.
We have and again, we don't we're not involved with a lot of you know developer led commercial office building and construction that's being shelled.
And so it just it doesn't have a material impact on our business and I think that we'd stay focused on the proper and market. So it hasn't had any sort of a material impact on our business at all.
Okay, great. Thank you.
Our next question comes from <unk> from a T. W. <unk>.
Hey, guys. Thank you for taking my call and no really nice job, obviously, the free cash flow conversion was a lot better and things of sort of normalize.
Sort of a more of a qualitative question.
People sort of reference API with all the construction company and then some people sort of danced around the issue all well those new construction down or as they can sit down and I think a lot of building service companies that sell them to sort of the enlarger thing that you <unk> like a watsco or in the oldest elevator they sort of give two numbers.
What is sort of recurring servicing recurring and then like what is replacement of nature.
I think earlier on and you're sort of IPO go public processes sort of spoke to the company being sort of 90 plus percent <unk>.
Recurring.
Recurring and replacement, so, Minnesota stuff that isn't directly leveraged to new construction, because when a new construction double stock is only worrying about 3% a year. So maybe it'd be helpful. Just sort of give people a sense of sort of how much of your businesses sort of contractual service how much of it is replacement and then how much of it is new elaborate to sort of new instant staring.
New buildings, so people can get a sense of sort of.
Macroeconomic sensitivity.
Yeah. So so Adam good morning, Thank you for for your interest and your support.
So the 90% that you referred to is really is directed towards a recurring customer base, maybe the screen what exactly.
Monthly relationships space.
Business and focus from from our team and so 90% of our of our revenue comes from a recurring basically the same customers on you're in and you're out and were super focused on retaining those customers.
We don't break out the exact figures as it relates to inspection service in monitoring, but we're north of 50% of our total revenue comes from inspection services monitoring.
And I think that if you feel bad b onion, a little bit further probably so.
So when you do some math and you can say while the other.
E 40 high <unk> percentages would be installation or project related work and and I would say of that probably someplace around and this is a guesstimate. So you can't really holding to it but I would say that is Broadway someplace around 20% to 25% of that.
Retrofit and kind of upgrade work that you wanted to you could probably bucket.
That service work that the way, we manage it we don't and so a.
A high a high percentage of our business.
Is very very economically resilient and again I just want to point everybody to the end markets that we serve like we're super focus on even in the right and markets semiconductor Datacentre healthcare.
Utility infrastructure.
Those are the end markets that we have really worked hard to push our business leaders too.
I think there's some work for us to continue to do that internationally, but I mean, I would say that from a leadership prospective were 100 per cent of lying on the end markets and it's just a matter of executing on that inside the business by feel really good about the resiliency of the company.
Yeah, I think that's really really helpful and obviously that we really in tears coming out of the numbers. So thanks. Thanks for all the work I appreciate it.
Thank you.
So.
In closing this morning, I would like to think again. Thank our team members will remain focused on supporting our company customers and the communities in which we serve the safety health and wellbeing of each of our leaders remains our number one priority I.
I would also like to thank our long term shareholders are new shareholders and those who have expressed interest in API. We appreciate your support we are excited about the opportunities that lie ahead, and really look forward to updating you on our progress throughout the course of the year. So thank you everybody again for taking the time to during the call and.
Super excited about what we are going to be able to demonstrate to each of you as we work our way through the year.
Thank you ladies and gentlemen. This concludes today's conference you may now disconnect.
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