APi Group Corporation (APG) on Q1 2023 Results - Earnings Call Transcript

Operator: Good morning, ladies and gentlemen, and welcome to APi Group First Quarter 2023 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 Adam Fee, Vice President of Investor Relations of APi Group. Please go ahead. Adam Fee: Thank you. Good morning, everyone, and thank you for joining our first quarter 2023 earnings conference call. Joining me on the call today are Russ Becker, our President and CEO; Kevin Krumm, our Executive Vice President and Chief Financial Officer; and Sir Martin Franklin and Jim Lillie, our Board of Co-Chairs. Before we begin, I would like to remind you that certain statements in the company's earnings press release announcement 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 detail material risks that may cause our future results to differ from our expectations. Our statements are as of today, May 4, 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 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. The reconciliation of and other information regarding these items can be found in our press release and our presentation. It's now my pleasure to turn the call over to Jim. Jim Lillie: Thanks, Adam, and welcome to APi. In 2022, APi became the world's leading life safety and security services provider, with a global platform serving our customers in over 20 countries while delivering record financial performance. Today, we continue to be pleased with the momentum APi is building and with an outstanding quarter to start 2023. We have great confidence in the business and the direction we're heading. The company delivered record first quarter results to start 2023 for net revenues and adjusted EBITDA, while delivering margin-accretive double-digit organic growth across the platform. Our strong financial results speak to the consistent efforts of our 27,000 leaders and to the strength of APi's recurring revenue, statutorily-required services business model. While successfully growing the business with an inspection-first mindset, the team has never lost sight of serving our customers safely and efficiently, and we are grateful for their commitment. As we look at our road map for sustainable shareholder value creation, we believe that we can achieve outsized investor returns in the years ahead by focusing on our long-term 13/60/80 value creation targets, which include organic revenue growth above industry average; adjusted EBITDA margin of 13%, driven by our continued focus on generating 60% of our revenue coming from inspection, service and monitoring; adjusted free cash flow conversion of 80%; and a targeted net leverage ratio of 2x to 2.5x. We look forward to updating you on our progress throughout the course of this year. And with that, I'll hand the call over to Russ to walk you through our performance. Russ? Russ Becker: Thank you, Jim. Good morning, everyone. Thank you for taking the time to join our call this morning. Before we start, I too want to welcome Adam to our leadership team. We look forward to his contributions. Jim mentioned our 13/60/80 long-term shareholder value creation model that you see included in our presentation. We are relentlessly focused on driving the strategy through the organization and have distilled it down to an easy-to-remember and distinct phrase. I routinely speak to our field leaders about how they can help us deliver on this strategy when I'm visiting our locations around the world. Our leaders know what we want to achieve and how we intend to achieve it. Before we provide you with a summary of our record first quarter results, I would like to thank our approximately 27,000 leaders for their unwavering commitment to APi. The safety, health and well-being of each of our team members remains our number one priority. We remain grateful for their hard work and effort. We believe that taking care of our leaders results in our leaders taking care of our customers. This is one of the foundational principles from which we will continue to enhance shareholder value. This week marks APi's eighth straight year of celebrating Safety Week, which, like the Kentucky Derby, is always the first week of May. The theme this year is, I am a Safety Leader. At APi, we believe everyone, everywhere is a leader, and being a leader begins with the daily commitment to safety for ourselves, our teammates, our customers and the communities we serve. This commitment to safety drives industry-leading safety outcomes across the organization. At the end of 2022, our Total Recordable Incident Rate, or TRIR, was below 1, which is significantly better than the industry average. We continue to strive for zero recordable incidents and our leadership prioritizing safety makes APi a safer place to work, which contributes to our historically low turnover relative to industry benchmarks. Turning to the first quarter, I am pleased with the record results delivered by our global team as we continue to see robust demand across the business. Net revenues grew organically by 12.1%, reaching $1.6 billion for the three months ended March 31, 2023. This represents the eighth straight quarter of organic growth for APi, with all but two of these quarterly increases being double-digit organic growth. Safety Services has delivered double-digit organic growth in each of the last eight quarters, with over 20% organic growth in four of those eight quarters. This is a testament to our growth strategy, which includes strategic pricing initiatives, increasing share with existing customers through cross-selling as well as purposely expanding with new customers in the fragmented growing fire and life safety market. This quarter, organic growth in Safety Services was solid at 14.1% in the first quarter, with organic growth in U.S. Life Safety remaining strong at approximately 20%. As detailed at our November Investor Day, we are purposely managing our international growth in Safety Services, which came in at approximately 11% on an organic basis. We remain focused on solid growth at the right margin, managing customer and project selection and evolving away from certain customer relationships, when appropriate, when margins do not meet our targeted path for improvement. I want to take a minute to recognize the progress we have made in growing our inspection customer base, continuing to realize benefits from our commitment to have an inspection-first mindset and how that mindset has contributed to the outstanding organic growth in Safety Services. First, achieving double-digit inspection growth is not by accident. Over the last five-plus years, we have developed the organizational capability of selling inspections to existing facilities and have built what we believe is the best inspection sales organization globally focused on fire and life safety. To be clear, the growth in inspections driven by our sales team of leaders is achieved by taking share from competitors. Second, two weeks ago, we held a company-wide Inspection Sales Leader Summit. I had the chance to stop by and speak to the room full of inspection sales leaders in attendance, and it was awesome to see the sales teams across our operating companies making connections, sharing best practices and showing excitement for our common goal. Third, growing inspections has become increasingly within our control as we see the results of investing in our sales organization. March was the highest month of inspection revenue on record for APi. As a reminder, we estimate that every dollar of inspection revenue typically leads to approximately $3 to $4 of service revenue. On average, inspection and service revenue is 10% plus higher gross margin than contract revenue, and monitoring revenue is 20% plus higher than contract revenue. Finally, on top of this, growing our inspection customer base provides a larger installed base where we are often the first call for any repair or other service work. This inspection sales effort is the key pillar to achieving 60% of revenues from inspection, service and monitoring, which is a key driver for our -- for achieving our 13% adjusted EBITDA margin target for 2025. Back to the rest of the results. Adjusted gross margin grew nicely in the first quarter, up 40 basis points year-over-year. After easing up in the second half of last year, we saw inflation come back into play during the first quarter as certain prices rose across our suppliers. In a challenging environment, I am pleased with leadership's commitment to driving gross margin improvements through pricing activities; implementing fuel surcharges; shifting business mix towards inspection, service and monitoring; procurement initiatives; and disciplined project and customer selection. As a reminder, our small project size averaging $5,000 in Safety Services and a short project duration of less than six months for the company gives us the flexibility to manage inflationary pressures in our supply chain. Finally, adjusted free cash flow came in flat for the quarter, in line with our expectations for Q1, and reflected an improvement of $47 million versus the prior year period. Our international operations continue to perform as expected. At Chubb, I am confident we now have the leadership teams in place to execute our strategy and move the business forward. In the first quarter, we continued to accelerate top-line growth in that business, marking the fourth straight quarter of organic growth after years of no growth prior to APi's ownership. In November and on our Q4 call, we went into detail on our strategy for Chubb and how we plan to execute our $100 million value capture plan by 2025. We are pleased with the team's progress, executing a multi-pronged strategy while delivering solid operational performance. In summary, we are exiting the first quarter with strong momentum. The business continues to perform well. Our consolidated backlog remains near-record highs and business activity across both Safety and Specialty Services remains robust. We are starting to see benefits of increased demand for our services, driven by federal funding flowing in the high-tech market within Safety Services and the infrastructure and utility markets we serve in Specialty Services. We challenged the team to remain focused on disciplined project and customer selection rather than growing for the safety growth, and I'm pleased that it's beginning to show through improved profitability of projects in our backlog. We believe our robust backlog, variable cost structure as well as the statutorily-driven demand for our services and the diversity of the global end markets we serve provide predictable, recurring revenue opportunities and build a protective moat around the business in any macroeconomic conditions. We remain focused on capitalizing on the opportunities in front of us while driving leverage to our targeted net leverage ratio of 2x to 2.5x, which we expect to achieve near year-end, even with a modest return to bolt-on M&A in 2023. The markets we operate in are highly fragmented, and we are excited about the robust pipeline of opportunities for Life Safety and Security Services businesses. I would now like to hand the call over to Kevin to discuss our financial results and guidance in more detail. Kevin? Kevin Krumm: Thanks, Russ. Good morning, everyone. I will begin my remarks by reviewing our consolidated results and segment level operating performance before turning to our guidance. Reported revenues for the three months ended March 31, 2023, increased by 9.7% to $1.6 billion compared to $1.5 billion in the prior year period. Net revenues increased organically from the same period by 12.1%, driven by double-digit growth in services revenues in both our Safety and Specialty segments. In 2022, approximately two-thirds of our growth was driven by price and pass-through of material and labor costs and one-third was driven by volume, which we measure through labor hours. This quarter, we saw this mix come in closer to 50-50, although we are keeping a close eye on the price of key inputs like pipe prices, which have been trending up in early 2023. Adjusted gross margin for the three months ended March 31, 2023, grew to 26.8%, representing a 40 basis point increase compared to the prior year period, driven by favorable mix impacts from outsized growth in our Safety Segment and services in both segments. These 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, 2023, and adjusted EBITDA margin was 9.1%, 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 $0.25 per share, representing a $0.02 per share increase compared to the prior year period. The increase was driven primarily by strong organic growth and margin expansion in both 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, increase 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, U.S. Life Safety was up organically 20.1% with our International Life Safety operations up organically 11%. The strong organic growth was driven by double-digit inspection service and monitoring revenue growth within our Life Safety businesses as well as continued pricing improvements. Adjusted gross margins for the 3 months ended March 31, 2023, was 35.1%, which was flat compared to the prior year adjusted gross margin, driven primarily by pricing strength in inspection service and monitoring revenue offset by inflation and unfavorable mix impact. Adjusted EBITDA increased by 18.5% on a fixed currency basis for the 3 months ended March 31, 2023, and adjusted EBITDA 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'll now discuss our results in more detail for our Specialty Services segment. Specialty Services reported revenues for the three months ended March 31, 2023, increased by 4.4% to $430 million compared to $412 million in the prior year period, primarily driven by increased demand in 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 EBITDA increased by 21.7% for the three months ended March 31, 2023, and adjusted EBITDA margin was 6.5%, 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, a $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 reaffirm our prior guidance of delivering free cash flow conversion at or above 65% for 2023 on the way to our long-term adjusted free cash flow conversion target of approximately 80%. At the end of Q1, our net debt to adjusted EBITDA was approximately 3.1x. We remain laser focused on cash generation and deleveraging to our stated long-term net leverage target of 2x to 2.5x, with current expectations to achieve approximately 2.5x near 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 top-line 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 $6.875 billion to $7.025 billion, up from $6.8 billion 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 EBITDA 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 billion to $1.78 billion. This guidance represents reported net revenue growth of approximately 6% to 8%. We expect Q2 adjusted EBITDA 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 24%. We expect our adjusted diluted weighted average share count for the year to be approximately 273 million. April marks APi's three-year anniversary of being listed on the NYSE. We're excited across this 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 on 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 two at our disposal now that this [window] (ph) has opened for the company. Overall, we are extremely pleased with the 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 Russ. Russ Becker: Thanks, Kevin. APi's 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 macroeconomic conditions. As we look to the years ahead, we believe we can create sustainable shareholder value by focusing on our 13/60/80 long-term value creation targets. These include above-industry average organic growth; adjusted EBITDA margin of 13% plus by 2025; 60% of revenue from service, 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. Operator: [Operator Instructions] We'll take our first question from Andy Kaplowitz from Citigroup. Operator: Our next question comes from Julian Mitchell from Barclays. Operator: Our next question comes from Kathryn Thompson from Thompson Research Group. Operator: Our next question comes from [Ian Wittmann] (ph) from Baird. Operator: Our next question comes from Chris Snyder from UBS. Operator: Our next question comes from Ashish Sabadra from RBC. Operator: Our next question comes from Andrew Obin from Bank of America. Operator: Our next question comes from Steve Tusa from J.P. Morgan. Operator: Our next question comes from Adam Wyden from ADW Capital. Operator: Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.
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APi Group’s Analyst Day Takeaways

RBC Capital analysts provided their key takeaways from APi Group Corporation (NYSE:APG) Analyst Day. According to the analysts, the company provided the building blocks to fiscal 2025 targets, focused on branch-level improvements increasing Chubb synergies to over $100 million (from $40mm and $20mm pre-close), where the Chubb deal is approximately $0.20 accretive to fiscal 2022 EPS.

The company outlined its path to fiscal 2025’s 13% EBITDA margin target driven by improved service mix, procurement, savings, and inflation offset, Chubb Value Capture, and systems scale and leverage bridging from the 10.5% base.

The analysts raised their price target to $20 from $18 while reiterating their Sector Perform rating.

What to Expect From APi Group Corporation’s Upcoming Q2 Earnings?

RBC Capital analysts released their outlook on APi Group Corporation (NYSE:APG) ahead of the company’s upcoming Q2 results, expecting a modest beat and full-year guidance reiteration.

The analysts expect quarterly revenue to be $1.67 billion, compared to the company’s guidance of $1.65-1.70 billion, and EBITDA of $175 million, compared to the guidance of $170–180 million, both roughly in line with the Street estimates.

For Q2 EPS, the analysts project $0.34, compared to the Street estimate of $0.35.

The analysts noted that the macro slowdown and supply chain disruption could potentially weigh on Safety installation businesses and Specialty services tied to cyclical end markets. Furthermore, FX headwinds could weigh on reported revenues, as approximately 40% of revenues are generated internationally, while higher rates could modesty weigh on interest expense (approximately 50% of debt variable).