Q3 2023 APi Group Corp Earnings Call
Statements in our press release and filings with the SEC, we detailed material risks that may cause our future results to differ from our expectations. Our statements are as of today November 2nd and we undertake no obligation to update any forward looking statements. We may make except as required by law. As a reminder, we have posted a presentation.
<unk> detailing our third quarter financial performance and 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. It is now my pleasure to turn the call over to Jim.
<unk>.
Sorry, I was on mute.
Thanks, Adam.
API delivered another strong quarter of results, including record third quarter net revenues adjusted EBITDA and adjusted diluted earnings per share and evolving macro and foreign exchange environment.
During our Investor day last year, Russ detailed our strategy of focusing on growing our service based recurring revenue, while slowing revenue growth in select businesses through improved project selection.
Our goal of evolving away from lower margin higher risk opportunities, while focusing investments on service revenue expansion is yielding the desired results. This strategy include improves margins, while simultaneously, reducing capital spending which in turn drives free cash flow generation.
<unk>.
The benefits of these initiatives as shown in Apis consistently strong and improving financial results.
These results are built on strong foundation of driving the company's recurring revenue services focused business model, while expanding the financial discipline of the organization and its leadership team.
The team's relentless efforts on adhering to our strategy are driving margin expansion and we believe there is a long runway of continued margin expansion beyond our established 2025 targets.
As we look forward, we believe our balance sheet is even stronger following our repricing and maturity extension and we expect to end the year below our targeted net leverage ratio of two five times X.
Since becoming a public company the team has enhanced their position as the number one provider globally in the growing highly fragmented fire life safety services market.
Going forward, we are excited to build on our track record of disciplined predictable and thoughtful decisions regarding capital allocation with a primary focus on tuck in M&A at accretive multiples.
We have great confidence in the business and we believe that our laser focus on our long term 13, 60 80 value accretion targets will generate continued exceptional performance through 2025 and beyond as.
As a reminder, our financial goals include long term organic revenue growth above the industry average.
Adjusted EBITDA margin of 13% or more in 2025.
Long term revenues of 60% from inspection servicing and monitoring.
And long term adjusted free cash flow conversion of 80%.
We look forward to continuing to update you on our positive momentum on margin expansion service revenue growth the opportunities for solid organic growth in 2024 and beyond our visibility on bolt on M&A at accretive multiples and our strong balance sheet with that I'm pleased to turn the call over to Russ for further deep.
<unk>.
Thank you Jim good morning, everyone.
Thank you for taking the time to join our call. This morning.
We truly remained grateful for the hard work of our 29000 leaders and their dedication to epi.
Safety health and wellbeing of each of our key needs is our number one value.
We will continue to invest in the men and women in the field as human beings and provide each of them with training leadership development and advancement opportunities because API only wins, when our branches and field leaders win.
Before getting into our results and our outlook I wanted to share our thoughts and support for our leaders in Lewiston, Maine, who were tragically impacted by the horrific shootings there last week.
Thankfully three of our API teammates who are present at the bowling alley were not harmed.
As I said, the health and safety of our team as our number one priority and this obviously extends beyond their workplace and into their personal lives as well.
Jim mentioned, our $13 60, 80 long term shareholder value creation model that you see once again included in our presentation.
As I continue to detail on our quarterly calls and at advanced Investor conferences. We are consistently focused on driving this strategy with a with a specific focus of achieving 13% adjusted EBITDA margins in 2025, while expanding the service recurring revenue mix of the business.
The team has made strong progress this year executing on our margin expansion initiatives, which has been accomplished by focusing on the following items pricing improved inspection service and monitoring revenue mix.
Disciplined customer and project selection.
Schuff value capture.
Procurement systems and scale.
Accretive M&A as well as selected business Ernie.
And as I like to say, we can always just be better.
We continue to see runway from these initiatives through 13% in 2025 and beyond.
Turning to the quarter Im again pleased with our record results delivered by our global team as we continue to see solid demand for the services, we offer and this is key.
We are focused on picking the right opportunities to deploy our field leaders and our highest margin work.
Net revenues grew organically by one 3% in the quarter and by approximately 7% year to date, reaching one $8 billion for the three months ended September 32023.
This lower organic growth in the quarter was primarily driven by our strategic focus and disciplined customer and project selection across the business, which drives improvement in margins and free free cash flow conversion.
In the quarter organic growth in our services business remained strong at 7%, while our projects business contracted as expected by approximately 4% as we continue to focus on disciplined customer and project selection to drive gross margin expansion.
U S life safety once again posted solid organic growth of approximately 5% in the quarter off a tough comp of 20% plus organic growth in Q3 2022.
This growth was led by consistent double digit double digit plus core inspection growth, which we have achieved in our U S life safety business each quarter since the start of the pandemic.
Importantly, our service revenue growth our service revenue grew organically by approximately 8% in the quarter.
Which both expands margins and strength strengthens the protected mode around the business.
The strength of inspection growth and the subsequent service work pull through continues to drive outsized growth in our higher margin inspection services and monitoring revenues when compared to our project revenues.
Yes.
On the project site and markets still matter and we are focused on choosing the right ones. We see continued momentum in data centers semiconductor electric vehicle manufacturing health care and critical infrastructure with manufacturing and data center construction expected to increase by double digits.
2024, depending on what source you are looking at.
Our backlog remains healthy and continues to grow in the areas we are not intentionally pruning.
All of this gives us confidence we can continue to grow our projects business organically in our margin.
A margin enhancing way, while still maintaining a focus on doing the right projects for the right customers and the right end markets.
In line with our strategic initiatives, we continue to see strong year over year improvements in adjusted gross margin in the third quarter up 270 basis points.
I am pleased with the leadership team's ongoing commitment to driving gross margin improvements through pricing activities growing higher margin service work and maintaining discipline and customer projects and end market selection.
The strong performance in gross margin led to led to third quarter adjusted EBITDA margin of 12, 6%, representing representing margin expansion of 190 basis points.
I'd like to take a minute to express my appreciation to all of our Union partnerships.
API as a partner to over 200 smaller local unions geographically spread across North America. These.
These 200, plus relationships create a stable pipeline of highly skilled technicians as well as a high level of diversification as.
As the leading employer for many of these unions.
We truly appreciate the opportunity to provide highly skilled field leader a career path at API.
Favors our labor is our largest variable cost and the labor rate visibility our union relationships provide allows API to drive margin expansion through its pricing activities.
Our relationships with our unions is very healthy with fair long term agreements in place that don't challenge our business the way the automotive industry has experience.
The international business continued to show progress with another quarter of organic growth. The business has delivered organic growth six straight quarters since our ownership. Despite the transformation underway from a culture go to market and branch led operational perspective are.
Leadership team and the international business continues to drive positive change and has done a great job with their focus on increasing profitability through driving price and by being intentional about targeting work that is additive to our achieving our 2025, 13% adjusted EBITDA margin target.
The opportunity in our international business continues to be substantial and we are in the early early innings of harnessing it the brand equity capabilities and technology. In this business are differentiated and we are actively addressing the operational efficiency of the organization through our through our 100 million dollar value.
Cash a plant which remains on track I expect that we will provide a more detailed update on our integration progress in the fourth quarter.
Moving on M&A.
As you have seen we have returned to accretive bolt on M&A with five closed transactions and our safety service segment. This year, while delivering on our deleveraging commitment.
Our leadership team has a long and successful track record of integrating businesses from both a cultural and operational standpoint, and our pipeline of opportunities in line with what we consider to be appropriate multiples is solid looks.
Looking forward, we will remain active buyers of businesses with the right culture values and strategic fit at the right multiples with a near term focus on U S.
On the U S life safety bolt on acquisitions.
The team continues their hardware prioritizing the most attractive opportunities and a robust M&A pipeline now.
And I remain excited to continue to add new businesses and their leaders to the API family.
We also continue to review, our existing businesses, where needed to where needed to evolve API into an even lower capex asset light business focused on high margin statutorily mandated services with an emphasis on our $13 60 80 value creation targets.
We don't spend much time talking about our ongoing reduction in capital spending as we shift the mix of the business, but to illustrate the improvement over the last five years, which we expect to continue there is a new slide in our earnings presentation.
Additionally, we continue we continue the intentional pruning of certain customers and loss, making contracts primarily in our specialty services, each Bac and international businesses.
This strategy has been a key driver of gross margin expansion, while also being a drag on reported organic growth.
Looking ahead to 2024 and 2025, we have a solid backlog with incremental opportunities for growth at appropriate margins and the right end markets.
Occasionally the pruning necessary to achieve our long term financial goals will also include operating businesses our branches.
Near the end of the quarter Epi reached an agreement to sell a traditional design bid build heavy civil contracting company without the complementary service opportunity, which we felt was not consistent with our long term targets. This.
This business delivered $52 million of revenue to API in the first nine months of 2023.
In summary, while we remain focused on executing in Q4 and into 2024 I am proud of our team and our record financial results achieved so far in 2023, our field leaders continued to be the driving force of our performance I am grateful for what each of them has done to get us to where we are today.
I would now like to hand, the call over to Kevin to discuss our financial results and guidance in more detail Kevin.
Thanks, Ross and good morning, everyone.
Reported revenues for the three months ended September 32023 increased by two 8% to $1 8 billion compared to $1 7 billion in the prior year period, driven by strong services revenue organic growth of 7% and modest benefits from favorable foreign currency exchange rates and M&A.
This was partially offset by our continued disciplined customer and project selection lower material costs and customer project delays and specialty services, leading to a 4% decline in our projects businesses versus the prior year on an organic basis revenues increased by one 3% off a 2022 comp of approximately.
16% organic growth.
Adjusted gross margin for the three months ended September 32023 grew to 29% representing a record gross margin and a 270 basis point increase compared to the prior year period, driven by continued price increases outsized growth in our higher margin services revenue as well as margin expansion for both.
Those are projects and services businesses across both segments.
Adjusted EBITDA increased by 19, 1% on a fixed currency basis for the three months ended September 32023, with adjusted EBITDA margin coming in at 12, 6%, representing a 190 basis point increase compared to the prior year period, primarily due to the factors impacting gross margin.
This was partially offset by investments to support ongoing revenue growth and the continued investment in building, our global capabilities and infrastructure.
I am pleased to report that adjusted diluted earnings per share for the second quarter was 48 reps.
Representing a 11% or 30% increase compared to the prior year period. The increase was driven primarily by strong continued margin expansion in both safety and specialty services.
Largely offset by an increase in interest expense, representing a <unk> <unk> headwind to adjusted diluted earnings per share in the quarter.
I will now discuss our results in more detail for safety services safe.
Safety services reported revenues for the three months ended September 32023 increased by five 5% to one to $1 7 billion compared to $1 154 billion in the prior year period, driven by double digit core inspection revenue growth, 8% organic growth in inspection.
Service and monitoring in the U S life safety segment as well as modest benefits from favorable foreign currency exchange rates and M&A. This was partially offset by flat growth in the projects business driven by planned customer attrition and our international businesses lower material costs and continued disciplined customer and project selection.
In our HVAC businesses on an organic basis safety services revenues increased by 3% off a 2022 comp of approximately 20% organic growth.
Adjusted gross margin for the three months ended September 32023 was 33, 3% representing a record high adjusted gross margin and a 260 basis point increase compared to prior year. Adjusted gross margin driven by continued price increases improved business mix of inspection service in March.
<unk> revenue as well as expansion in both our projects and services businesses adjusted EBITDA increased by 19, 9% on a fixed currency basis for the three months ended September 32023, and adjusted EBITDA margin was 13, 9%, representing a 190 basis points.
Increase compared to the prior year period, primarily due to the factors impacting adjusted gross margin, partially offset by investments made to support ongoing revenue growth.
I will now discuss our results in more detail for our specialty services segment.
In line with our plan to improve customer and project selection specialty services reported revenues for the three months ended September 32023 declined by three 6% to $565 million compared to $590 million in the prior year period, driven by a 14% decline in project revenues due to the aforementioned.
<unk> customer.
<unk>.
Disciplined customer and project selection lower material costs and customer project delays, primarily in the fabrication business. This was partially offset by a 10% growth in our service revenues.
Adjusted gross margin for the three months ended September 32003 was 19, 7%, representing a 220 basis point increase compared to the prior year period, driven primarily by disciplined customer and project selection driving margin expansion in both our projects and services business.
Adjusted EBITDA increased by 12, 2% for the three months ended September 32023, and adjusted EBITDA margin was 14, 6%, representing a 210 basis point increase compared to the prior year period, primarily due to the factors impacting adjusted gross margin.
We continue to focus on driving free cash flow conversion improvements year over year progressing towards our 2023 target of 65% plus adjusted free cash flow conversion for the three months ended September 32023, adjusted free cash flow came in at $146 million, reflecting an adjusted free cash flow.
Conversion of 65% for the first nine months of the year adjusted free cash flow was $237 million with conversion of 41%, representing an improvement of $55 million or 30% when compared to the first time in months of 2022.
Free cash flow generation has been and continues to be a priority across API and our performance in the first nine months of the year puts us in a position to achieve our 2020 through guidance at or above 65% adjusted free cash flow conversion as we head into the fourth quarter, which due to seasonality is traditionally our strongest.
Free cash flow conversion quarter.
On October 11th we closed a successful repricing of our term loans due 2026, and 2029, achieving a 25 basis point reduction in our borrowing rate with no change to our covenants, representing approximately 4 million of annual cash interest savings all while extending our weighted average maturity as part of.
The transaction ATI repaid $100 million of the term loan due 2026 and moved over 400 million for.
$400 million of it so the term loan due 2029, we expect to pay down an additional $150 million of the term loan due 2026 in the fourth quarter totaling approximately $450 million for the full year further reducing cash interest expense on a go forward basis at the end of the year, we expect to have $355 million.
Remaining on the term loan due 2026.
At the end of the third quarter, our net debt to adjusted EBIT da was approximately two seven times, even as we returned to margin accretive bolt on M&A, we remain laser focused on cash generation and deleveraging below our stated long term target of two five times by year end 2023, as we look forward to 2024, we expect to grow.
Our adjusted free cash flow as well as improve our cash flow conversion, providing us with a significant opportunity for value enhancing capital deployment.
I'll now discuss our Q4 and full year 2023 guidance.
As a reminder, our guidance is based on foreign exchange rates in effect at the time, We report our quarterly results during the third quarter. The dollar strengthened significantly diminishing the expected year over year tailwind from changes in foreign currency exchange rates in.
In the second half of 2023, the difference between actual and forecast rates impact impacted reported sales by approximately $20 million in the third quarter based on current exchange rates. We now expect full year reported net revenues of $6 nine to $6 95 billion down from 715 to <unk>.
<unk> 75 billion. This represents organic net revenue growth of approximately 5% to 6% we.
We are very pleased with the margin performance year to date, which gives us confidence to raise the bottom end of our prior full year guidance for adjusted EBITDA. Despite the foreign currency headwinds we saw during the quarter. We now expect full year adjusted EBITDA of $75 million to $75 million up from 76 five to $700.
$5 million, which represents adjusted EBITDA growth of approximately 15% to 16% on a fixed currency basis, and adjusted EBITDA margin of approximately 11, 3% at the midpoint.
In terms of the fourth quarter, we expect reported net revenues of $1 73 to $1 78 billion. This guidance represents organic net revenue growth of approximately 1% to 4%, we expect fourth quarter adjusted EBITDA of $200 million to $210 million, which represents adjusted EBITDA growth.
Of approximately 8% to 13% on a fixed currency basis.
For 2023, we anticipate interest expense to be approximately $147 million based on fourth quarter interest expense of approximately $35 million depreciation to be approximately $80 million capital expenditures to be approximately $90 million and our adjusted effective cash tax rate to be approximately 23% down.
One from 24%, we expect our adjusted diluted weighted average share count for the fourth quarter to be approximately 273 million shares.
As we look forward to 2024, while our outlook will be firmed up early in the year. We continue to expect high single digit organic services revenue growth and continued expansion and continued margin expansion and our projects business as we focus on driving the right work for the right customers and the right end markets.
I'll now turn the call back over to Ross.
Thank you Kevin.
Epi continues to deliver strong margin expansion across both segments, resulting in strong third quarter margins and positioning the business to achieve 13% adjusted EBITDA margins in 2025.
As I said last call I'm confident in our leaders' ability to build an historically strong execution by delivering consistent double digit core inspection organic growth as well as consistently driving margin expansion across the business.
We continue to deliver margin expansion by increasing higher margin inspection service and monitoring revenue pricing initiatives operational improvements and a relentless focus on customer and project selection.
We believe we can create sustainable shareholder value by focusing on our $13 60, <unk> long term value creation targets with a near term laser focused on delivering adjusted EBITDA margins of 13% or more in 2025.
As we look to 2024 and beyond we have great confidence in the business our backlog our balance sheet and our ability to continue to evolve API into an EBIT, even lower capex asset light business focused on high margin statutorily mandated services.
With that I would now like to turn the call back over to the operator and open the call for Q&A.
At this time, if you would like to ask a question. Please press star one on your telephone keypad.
You may remove yourself from the queue at any time by pressing star channel.
Once again that is star one to ask a question.
We will pause for a moment to allow questions to queue.
Our first question comes from Andy Wittmann with Baird. Your line is open. Please go ahead.
Great. Good morning, gentlemen, appreciate you taking my question.
Hey, Ross I thought maybe I'd have you comment a little bit on the.
The project selection.
The impacts that you have here on the quarter.
And the profit dollars as expected I think really important point here.
Can you help us understand or quantify in some way the amount of work that you might be passing on versus maybe a couple of years ago. I don't know if thats. The number of proposals that are given an accepted or how you. How you think about that but so something to help us bound.
The real impact and the discipline that youre driving in that strategy and that strategy.
Hey, Andy Thanks for taking the time to join the call very much appreciate it.
Haven't seen that I used a lot and <unk>.
Volume is Vanity profit is sanity and.
I have really been super impressed with the discipline that we've shown from a project and customer selection really across all facets.
Of our of our business.
Quantifying it would be be really hard I mean proposal activity is really really strong.
I think that as we highlighted at the end markets that we're choosing to play in.
The activity there is solid I mean, there is more and more opportunity than really <unk> resources to deliver on so but I would just not be able to.
To quantify.
What we've been been passing up and.
I mean, I feel really good about our.
The profitability of the business I mean, we've we've over delivered EBITDA every quarter. This year and raised guidance every quarter. This year and we feel really strong as we go into the fourth quarter.
That will be able to continue to to do the same so.
But.
I, just I can't tell you enough hours.
Good I feel about it but it's just hard for me to quantify it.
Maybe maybe one way to address it is based on the comment that you had in your prepared remarks, you said the backlog is for the project businesses, which is probably where the project and customer selection that the most impactful piece of the backlog is healthy where youre not pruning.
Can you talk about like Directionally, where the backlog is.
In total then so that we can have a better sense of.
The pruning impact.
Yes, our backlog is probably it's probably slightly down from from last year, but we have two msas that were currently in negotiations to final and expect to finalize.
Before the end of the year. So I would tell you that the reality of it is on a year over year basis, our backlog is essentially sitting.
Right at the same spot than it was last year, it's just that the quality of the backlog continues to.
Improve.
Got it Okay last question for me if you would I guess you mentioned in your script.
Some customer delays.
Impacted your productivity and I guess.
Maybe if you could speak to some of those delays as to what's behind them.
The delay is it kind of economically driven is it interest rates need to pencil is it supply chain, which we didn't hear a lot of on this call, but certainly has been a fact over the past couple of years, but maybe just a little color to enlighten us on that and then I'll be done.
So the delays were primarily in our fabrication business that sits inside specialty.
And I would say that there were two fairly large delays one was driven by a redesign.
With one of our data center customers and the other one was driven by a.
A land purchase for a large.
Very large local retail customer you can probably do the math and figure out who that is.
That they had a land purchase fall through that.
Where they were going to build a large distribution center and it delayed it delayed.
Thank you.
The next question comes from Kathryn Thompson with Thompson Research Group. Please go ahead.
Hi, Thank you for taking my questions today.
Just following on the theme that we're hearing from other companies talk about the concept of that value over volume.
Which you have been in your journey.
Already for much of this year and last year.
As you go down that path its not just bidding on projects better and smarter, but could.
Could you clarify are you seeing any.
Changes in mix.
To improve that overall margin quality. So in other words are there certain areas.
Our segments and inspection and surface Scott you just decided as a firm hey, this isn't.
And or are there other areas, where you are increasing purpose <unk> capable.
Profitability.
So Kathryn no disrespect, but we do not use the word FID at API and under.
I understand if there's a if there is a word that I don't.
I don't like that would be number one on my list I have a few other ones that can share with you some time offline, but that would be one of them.
And I would say that.
When I look at the businesses there.
Like international.
We just have some poor performing.
Customer contracts and things like that so I would say that the focus there is more around the customer.
And in certain cases, we've had to be aggressive about taking price under prior ownership.
Werent.
It's focused on prices, we are focused on price.
So theres a little bit of there is a little bit of end market focus and there is also an element of just customer focus when I think about our international business and we should continue to be able to grow that business organically.
Even with some of that customer pruning that we've been doing in it and specialty I would say that it's more.
Because our offerings in specialty are very fairly diverse I would say that just across the board.
The end markets that we're in so I don't think it's an end market focus it's more about making sure that we're focused just on.
The right clients.
Thats going to value the services that we bring so that we can actually get paid a fair price.
The work that we do.
The reality of it is is that if we wanted to turn the spigot on we can turn the spigot on and we could do we could do.
More much more work and we are doing but the margins just wouldn't be in the same place and we would payment terms would be different and all that other stuff that comes with that and so for us.
An element of this is being focused on payment terms and making sure that we're getting out in front of some of those things. So that we can continue to to focus on not only the 13%, but also on the 60% and the 80% free cash flow conversion and that's a component of this as well.
And then when I think about our domestic safety business.
Hey, there its all about end markets and making sure that we're focused on the right place and and really dedicating our resources.
<unk> two data centers semiconductors healthcare.
Those end markets. So it's a little bit different based on those three kind of buckets, but thats really how were looking at it.
Great.
One follow up.
Something that we're finding with other companies broadly and the construction.
<unk> that with the Mega projects in the more complex.
Just construction by ensuing.
Service.
A certain metro products projects, including data centers.
You find that the cuts the end customer Candice.
Candidly just needs more complex needs.
Which means that there are only certain companies that are able to meet those needs.
Disproportionately benefiting certain types of companies versus others would you say that given.
Your overall range of surface and and high quality are you able to win more because of complexity of projects.
I would say that there is there is no question that the size and the magnitude and.
It's like I was on I was on like one of the one of our automotive customers sites, just a couple of weeks ago and when I when I think about it from a complexity perspective like I didn't think it was super complex I mean.
Sure.
There is other end markets that are more more complex, but what it is is the scale is so great.
And the resources that it takes two to manage.
In lead those types of projects is just totally different than what you. What you would have seen say 10.
10 years ago, even and and so.
The skill set that it takes two to lead those types of project related opportunities is just different and it takes different types of people.
And.
In a world where truly skilled labor is tight and you have to have the resources to be able to draw upon it so like in this particular.
On this particular opportunity.
We had people from.
This was this project opportunity was in the Detroit area.
And we had people that were coming up out of our South Bend, Indiana office and we're we're supporting our teams efforts on this particular site and so you have to have some of those types of capabilities and the ability to do.
Draw on it plus the resources out of different components of your business to support support those businesses and the last thing that I would say there Kathryn is that we want to continue to have our project related opportunities to come from the inspection service and monitoring relationships that we that we do.
<unk>, so we want to be in a situation where the relationship matters.
And that one we're proposing on these large programs.
It's not based on price because if they're going to base it on price.
That's probably the fastest way you can get yourself in trouble on some of these larger larger project options I know it ran a little bit I apologize yes.
That's helpful. Thanks, very much I really appreciate it.
The next question comes from Jon <unk> with CJS Securities.
Hi, Good morning, Thank you for taking my questions and really nice quarter and guidance.
First one is you mentioned strength in a number of end market data center, DVS et cetera, which is all great. I was wondering did you see any weakness in any of the segments or end markets.
<unk> consolidated growth expectations changed if at all especially as you prune some of these lower quality projects on that would be kind of the pipeline.
Well I mean, we've never really participated in played in real estate developer led type project opportunities obviously those.
From a project perspective commercial office buildings, I mean under a tremendous amount of pressure and.
Again for US, we're just fortunate that we really don't participate.
And in those types of <unk> and.
And markets.
You hear stuff like.
<unk>.
But some of the.
Telecommunications companies are pulling back a little bit on their capital spending and stuff it doesn't really impact us because number one we're diverse.
Geographically and number two we don't take these large.
$500 million programs, we're doing $30 million programs in different locations across the country. So it doesn't.
It really hasnt.
Impacted our business one of our data center customers went through a fairly substantial I talked about it as it relates to impacting our <unk>.
Fabrication business, but we also had like safety work on that particular project and so that impacted that component of our business and they went through a fairly significant redesign on a lot of datacenter work just because the cooling requirements.
Have changed.
As it relates to their facilities so.
I think that in general where the weakness is greatest is in is in the commercial real estate marketplace.
And there's going to be some weakness in retail in general.
And you've seen some pullback from bi.
By Amazon with their distribution centers and things like that but thats again not areas that we've really had a high participation rate.
Okay, Great and then just that so we expect a bigger focus on international M&A as you improve the structure. So what would be the timing of that number one and it's a pipeline of opportunities you see out there.
As good.
What you see domestically in terms of valuation a number of opportunities.
All that stuff.
So we've been really focused on the integration of the business. There has been some opportunities that come across the transom that we've passed on.
Some of that has to do with the distraction factor when we want them to stay laser focused on value capture plan of a $100 million, which is on track.
But the opportunities are equally as good in that market as they are here in the U S and I suspect that you'll see us get to be a little bit more active in this space as soon as next year.
Got it thank you.
Thanks, John.
The next question comes from Sandy Kaplowitz with Citi. Please go ahead.
Hi, good morning.
Solid bock on for Andy Kaplowitz.
So I was just wondering if you could provide a little color regarding your progress on improving cash generation.
Obviously, you are generating a lot more cash year to date.
Yes.
Free cash flow conversion.
Can you provide a little color.
So what you're saying.
Yeah.
The last of US part of that question. Good morning, Andy. This is Kevin was with supply chain I think.
If not then you can correct me at the end but.
So our cash flows profiles continue to improve this year, both from an absolute delivery standpoint, as well as the conversion standpoint, as we started the year. We are laser focused primarily on working capital right and to a lesser extent capex as we move through this year. The changes we made in the business that we've been talking about.
Whether it's a higher mix of service or continued disciplined customer and project selection.
Are bearing fruit both in working capital rate on a year to date basis sort of vis vis where we ended or vis vis prior year.
As well as conversion.
And from a supply chain standpoint, we are largely behind.
The impact of supply chain that we talked about last year in the first half of the year that drove a significant working capital rate investment.
Great. Thank you very helpful color.
The next question comes from parts to tell with J P. Morgan. Please go ahead.
Hi, good morning, Thanks for taking my question.
In specialty organic growth was down in the quarter on a tough comp.
The lowest pricing there and was there any impact from commodities going through.
So in the specialty business.
We did not break out organic growth this quarter.
Sort of volume versus price and price pass through the primary reason is.
While we continue to get pricing on the service side of the business.
The material cost the escalation that we saw year on year drove significant revenue rate reduction in the quarter. So we.
We faced year on year that material cost <unk>.
Installation drives a headwind at revenue right, which is what you saw in the quarter and the specialty business. So underlying we continue to get pricing, but on the service side of that business. We just face that headwind at revenue from a material cost escalation.
Great that's very helpful and then.
Just a follow up can you give an update on.
Some of your Big Union agreements I think the last one was negotiated back in 2020 and just any update there.
We're the largest the largest union agreement that we have is.
With the what they call the road for those local 669 and I think we have.
Another 18 months before that agreement will.
It will be.
Renegotiated.
We have no concerns about our ability to renegotiate that agreement and.
Feel really really really good about it so.
There are some smaller ones that are coming out.
You kind of cycle through them ever.
Every year there is.
Theres different agreements that come up but the biggest the largest one that we that were signatory to comes up in <unk>.
18 months roughly.
Great. Thank you so much.
And it appears we have no further questions at this time I will now turn the program back over to our presenters for any additional remarks.
Awesome. Thank you.
In closing I would like to again, thank all of our team members for their continued support and dedication to the business. We believe our people are the foundation on which everything else is built without them. We do not exist I would like to thank our shareholders. Our long term shareholders as well as those who have recently joined US for your support we appreciate.
Your ownership of API, and we look forward to updating you on our progress throughout the remainder of the year. Thank you all for taking the time to join the call. This morning everybody.
Yes.
This does conclude today's program. Thank you for your participation you may disconnect at any time.
Sure.
Yeah.