Good morning, ladies and gentlemen, and welcome to APi Group's Fourth Quarter 2020 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. [Operator Instructions] I will now turn the call over to Olivia Walton, Vice President of Investor Relations at APi Group. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining our fourth quarter 2020 earnings conference call. Joining me on the call today are Sir Martin Franklin and Jim Lillie, our Board Co-Chairs; Russ Becker, our President and CEO; and Tom Lydon, our Chief Financial Officer. 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, March 24, and we have no obligation to update any forward-looking statement we may make. As a reminder, we have posted a presentation detailing our 2020 financial performance on 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 is now my pleasure to turn the call over to Martin.

Thank you, Olivia, and good morning, everyone. 2020 was a year of unique milestones for the company. We became a listed company on the New York Stock Exchange, completed several complementary acquisitions and proactively managed the challenges of the pandemic, while executing on our long-term goals for the business and delivering the results for our shareholders. We believe that the resilience of our people as well as our recurring revenue services-focused model have allowed us to continue to execute against our long-term strategies for the business. We are grateful for the focus and ongoing leadership efforts across the entire organization. We see significant opportunities for continued organic growth for APi, whether it be through much needed infrastructure investment, providing retrofit and upgrade services for existing buildings, delivering the services required for new technologies, such as 5G, or supporting the growth of life safety service contracts for existing customers. Equally as attractive as the organic growth prospects, we see multiple avenues for expansion through strategic acquisitions. The markets in which the company operates are highly fragmented. We believe that with thoughtful and disciplined M&A , we can accelerate the growth and service offerings of the business. With that, I'll hand the call over to Russ.

Thank you, Martin. Good morning, everybody. Thank you for taking the time to join our call. The health and well-being of each of our employees and the communities in which we serve remains our number one priority. Our strong results for 2020 and solid outlook for 2021, reinforced the focus and commitment of our entire organization to serving customers safely and efficiently, despite macro headwinds faced in today's environment. I am proud of our team. We believe that the tough decisions and sacrifices made across the organization in 2020 strengthened the business and allowed us to continue to execute on our long-term goals. I will start by providing a summary of our financial results, drivers of margin expansion and key trends in each segment before turning the call over to Tom, who will walk you through our 2020 results and 2021 guidance in more detail. Key highlights from our performance for the year ended December 31, 2020, compared to the prior year period, include the following: one, primarily due to the negative impacts of COVID-19 and disciplined project selection, adjusted net revenues declined by 8% or $306 million to $3.5 billion. This compares to $3.8 billion in the prior year period. Second, continued success in our ongoing goal of growing recurring service revenue, which we believe helps to build a more protective moat around the business. Service represented approximately 40% of our consolidated net revenues. Third, adjusted gross margins of 24.2%, which is an increase of 260 basis points, with all three segments successfully driving margin improvements. In our Safety and Specialty Services segment, margin expansion was driven by a mix of work, increased labor productivity, job site conditions as well as improved pricing. Fourth, adjusted EBITDA margin expansion of 56 basis points, driven primarily by gross margin expansion and…

Thanks, Russ, and good morning. I'll start by reviewing our consolidated financial results and segment-level performance as well as our strong balance sheet and liquidity, and conclude by discussing our 2021 guidance. Adjusted net revenues for the three months ended December 31, 2020, declined by 5.5% or $51 million to $864 million compared to $925 million in the prior year period. The decline was primarily attributable to negative impacts of COVID-19 and disciplined project selection. For the year ended December 31, 2020, total adjusted net revenues declined by 8% or $306 million to $3.5 billion compared to $3.8 billion in the prior year period. The decline was primarily attributable to negative impacts of COVID-19, combined with disciplined project selection, which led to decrease in volume of projects. Adjusted gross margins for the three months ended December 31, 2020, was 25.4%, representing 183 basis point increase compared to prior year. The increase was primarily due to higher mix of service revenue and Safety Services and disciplined project selection and execution in Industrial Services. For the year ended December 31, 2020, adjusted gross margin was 24.2%, representing a 260 basis point increase compared to prior year, due to the drivers Russ mentioned earlier in the call. Adjusted EBITDA margin for the three months ended December 31, 2020, was 11.8%, which was consistent with prior year period due to gross margin expansion, offset by increases in costs associated with the transition to a public company. For the year ended December 31, 2020, adjusted EBITDA margin was 10.9%, representing a 56 basis point increase compared to the prior year, driven by the gross margin expansion and early execution of our largely temporary SG&A cost containment efforts counteracting the negative impacts of COVID-19. Our strong cash generation has continued, and our balance sheet and liquidity…

Thanks, Tom. Good morning, everybody. APi's execution against its goals, despite the pandemic and its ability to deliver on its financial goals, speak to the strength of the company's recurring revenue services-focused business model. Despite the challenges 2020 presented, the team's continued focus on driving higher-margin growth across all the segments continued to deliver results. We demonstrated the company's ability to generate cash and ended the year with a strong balance sheet and plenty of capacity to absorb additional accretive acquisitions. We are looking forward to holding our first Analyst and Investor Day on Thursday, April 22. We plan to highlight our commitment to driving strong free cash flow and earnings, outlining future growth and margin expansion opportunities, in addition to providing expanded discussion about the company and certain key strategic initiatives, including an update on the M&A environment. With the progress achieved in 2020, we remain confident in our previously stated long-term value creation targets, which, as a reminder, are: delivering long-term organic revenue growth above the industry average; continuing to leverage our SG&A; expand adjusted EBITDA margins to 12%-plus by fiscal year 2023; four, maintain adjusted free cash flow conversion of over 80%; generate high single-digit average earnings growth; and target long-term net leverage ratio of 2 times to 2.5 times. As you know, with the conversion of the warrants, while we ended the year slightly above 2 times, our current net to EBITDA -- debt-to-EBITDA ratio is about 1.8 times. I'd like to now turn the call back over to the operator, and open the call for Q&A.

[Operator Instructions] Our first question comes from the line of Andy Kaplowitz of Citigroup.

Russ, you mentioned that APi's backlog was slightly higher than a year ago at the end of the year, but you're forecasting into high single-digit organic growth for your major segments in '21. We know you've got easier comparisons, but can you talk about what is giving you confidence in forecasting the growth acceleration? And given we're already at the end of Q1, can you give us any update on whether Safety and Specialty has continued to recover in Q1?

Well, I mean, regarding Q1, we've provided guidance where we feel Q1 is going to fall. We're confident in the guidance that we've provided. We're dealing with -- we're still continuing to deal with COVID as well as some weather impacts in -- that we felt during the month of February, but we feel good about where we're at as we come and work our way through the rest of the quarter. As we look at the segments, as we moved into the beginning of the year, both Safety and Specialty Services backlogs were up and Industrial Services was down as was the plan all along as we continue to focus on the right project and customer opportunities for us in that segment, and we continue to try to drive the growth in the right mix, i.e., the integrity work associated with the transmission system. So -- also, Andy, I think if you recall, I had shared at one point, I think it was during our third quarter call, that inspection revenues in Safety Services on a year-over-year basis were up 6% at the end of the quarter. While I'm happy to share with everybody that inspection revenues ended the year up 8%. So we continue to show some growth and actually accelerated some of that through the fourth quarter, which is a positive momentum builder for us as we move into this fiscal year. Because, again, going back to some of our earlier remarks, we know that we're going to generate some place between $3 and $4 worth of service work off of that inspection work. And that's really where the focus and the emphasis for us is inside that segment. So those two, I guess, items, if you will, give us good confidence as we move into this year.

Russ. [indiscernible]

Andy, it's Jim. I know you would be disappointed if I didn't correct you on the fact that we have a good comp in front of us. I just want to remind everybody that we didn't have COVID in Q1. And so Q1 is actually a relatively tough comp as compared to last year. But as Russ said, I think there's a lot of quarter of progress. If you look at the PowerPoint presentation, relative to the earnings call, I believe service revenue represented about 44% in the fourth quarter. So certainly, we're seeing the focus of driving service revenue, which is a higher-margin profile, helping us as we move into this year.

Jim, that's exactly what I would follow up on. The service up 44% in Q4. Would you say you're really starting to take more share in terms of growing the number of like Safety Services contracts? And where do you think you could get that level of service to in 2021?

Russ, I'll leave that to you.

Well, I mean, again, we're continuing to try to grow that aspect of our business. I mean, I think we've shown 7% organic growth in our forecast for this year. And the reality of it is, some of that will be project-related growth, but it's our focus and our emphasis, and we want the lion's share of that to come from inspection and service work.

Great. And then just finally, Russ, you gave detail already on sort of expectations for sales and margin. But do you see margin growing relatively equally in 2021 for your two larger segments? And you talked about sort of the progress you're making on the structural cost out. Maybe you can give us a little more color there? And how much temporary cost headwind is coming back in '21?

Well, I mean, the reality is, regarding the cost, and Tom, you can complement my response, is that for the most part, other than travel and entertainment in those types of expenses, which really haven't normalized yet, most of the temporary cost cuts have been returned and the business is operating at a more normal capacity and a more normal level. And we expect that to maintain itself really probably through the lion's share of the year. There's certain travel and entertainment types of expenses that will probably never come back to the business, and that's a positive thing, and that's a good thing. But, in general, we're back to a much more normalized level. We're expecting to make general progress towards our margin expansion goals, again. And we've provided guidance that we expect this fiscal year to finish between 11% and 11.25% on an EBITDA basis, and we fully expect that we will achieve that.

Yes. I just would add, Andy, remember that we took the big SG&A cuts in Q2 last year. So on a comparative basis, we'll see that be the tougher comparable, and then Q3 and Q4 will be more natural, see the growth in that EBITDA as we march through the year and as we see COVID lessening the impact on our business.

Your next question comes from the line of Markus Mittermaier of UBS.

Maybe I'll just follow up on this margin element, and how you think about getting towards that 12% target by 2023? Appreciate the guide for this year at 11% to 11.25% from last year's just under 11%. If I think in the big bucket, Russ, that you mentioned in your prepared remarks, mix, project selection, business transformation, how would that sort of like incremental accretion on the margin sort of split between these different buckets, just roughly? And then as Tom said, you have $13 million in on the cost side for the business transformation out of the $50 million. How should we think about that over the next 2, 3 years here as you get towards that 12% target?

Well, we don't break out the, I guess, the individual buckets, if you will, of where we find the margin expansion. If you recall, for us, it's more around hitting singles than any one silver bullet. And that contribution is going to come from a number of places: number one, project selection and customer selection is one of the bigger factors that will lead to a reduction in our contract loss rate. So that's one area. Second would be continuing to improve our mix. And we reported that 40% of our -- approximately 40% of our revenue came from service, as we define it. And as we march towards 50 contributor to our margin expansion goals. Inside business process transformation, there's really two buckets. One is moving towards a shared service model, which will allow us to leverage our SG&A. And second would be, as we work to increase and stand up a true procurement department, if you will, and really try to leverage the scale of the business and drive the reduction in our costs across the entire enterprise. Next would be improved and increased pricing opportunities that we continue to work with the different businesses on. Follow that with strategic M&A and making sure that our M&A is accretive to our margin expansion goals. It's something that's very important to us. And then lastly, I would just say that we have the opportunity to just be better and improve our execution across the businesses. And I can't tell you -- look you in the eye and tell you that we're going to get 0.25 point from this or 0.25 point from that, but it's a combination of all of those efforts that's going to allow us to achieve that margin expansion goal of 12%, and we have very high confidence that we will achieve that.

Great. And then maybe just for Tom on that $13 million that you've mentioned on the cost that you had in 2020 already on business process. How should we kind of model the remaining 50 million -- or the total $50 million for the remaining $37 million or so over the next years?

Yes. I think as we look at that, we think the majority of it will come in 2021, and then the remainder in the first half to three quarters of 2022.

Okay. That's helpful. And then just briefly on grid. You flagged grid, obviously, an upside out of the potential infrastructure investments. How big is that for you today in your mix on the specialty side?

Let's wait for Congress to actually approve an infrastructure bill, and then we can give you some color.

Your next question comes from the line of Julian Mitchell of Barclays.

This is Trish Gorman on for Julian. So just maybe one question on industrial. It made really good margin progress last year from 11.2% to 13.6%. So now margins are same as Safety and higher than Specialty. Can you guys just talk a little bit more about the rationale for the unwind in 2021?

Is your question, Trish, just to confirm, you're asking about the rationale for divesting the two businesses in 2020?

Yes. And just -- and the guide for industrial, why we're taking that down so much in light of the margins being the same as Safety and higher than Specialty? I think you had called out the project selection and everything, but just wondering if you can give some more color there because the margins seem like they performed well this year.

Well, I think that, number one that was all by design. And it was really bringing an increased focus to project selection and customer selection and making sure that the contract terms and such that we were working under were favorable and the risk profile was, so to speak, in the right place for us. And so number one, it was very much able approach to it. Number two, that is the -- there's one business that we have in that segment that has some exposure to the oil and gas industry. And as the -- that market has tightened, it's forced us to be -- continue to be really disciplined in our project selection and customer selection as well. And we also are taking the opportunity to really change our focus in making sure that we're emphasizing the integrity side of the transmission space. And as you -- that is sort their version of service work, and we continue to emphasize that. So it's a combination of efforts that are happening inside the segment to make sure that we can continue to perform as designed.

Got it. That's helpful. And then maybe a follow-up just on the cash flow outlook for this year. I think you mentioned CapEx around $55 million. Near term, in 2021, is 80% EBITDA conversion still kind of the target? And then maybe if you could talk more about the working capital movements through the year? If there's anything to call out there?

Yes, sure. So yes, we're very comfortable that in the coming year, the 80% target is good. The working capital movements, if you think about it, with the down lever that we had in revenue due to COVID-19, our receivables declined, and that provided the cash flow positive as we march through the 2021 here and see it improving each quarter. We anticipate that, that will grow, and that's a positive for us as we're adding more revenue, adding the profitability of that, but it will get absorbed as we put the working capital numbers back up to traditional levels.

But Trish, there's no unique call out to what's occurring in cash this year. Just as business ramps up, you'll see more investment dollars and receivables go up.

Your next question comes from the line of Andy Wittmann of Baird.

I just -- I guess, I was a little surprised that the corporate expense EBITDA was lower-than-expected in the quarter, at least lower than I thought we were looking for from previous conversations with you guys. And so Tom, I was just wondering if you could address if there was anything in the corporate EBITDA expense this quarter that is notable for us?

Yes. No. I think as we march through the year, and we've got our segment team members all aligned and getting them into the actual segments, we had a little bit of move of cost from the segment -- from the corporate to the segments where they're actually delivering their energies. So other than that, I would look at our run rate that we think, on a going-forward basis, we'll be in that $22 million a quarter kind of ballpark you could think about.

Okay. So I guess, this quarter, I'm looking at -- I think it's 11 this quarter, if I'm not mistaken. And then so to 22 seems like a big jump. What's the difference between what we've seen this quarter and the 22 you're talking about today?

Yes. And what we're talking about there is we restored some of the benefits to the year, the 401(k), and some of those items were moved out of the corporate and into the various allocations to the segments in the fourth quarter. So it was disproportionate down lever in that quarter, but it was picked up in the segments in the quarter.

Okay. And then I guess, Russ, you mentioned timing in Safety, particularly around the mechanical offerings that you provide. I think you mentioned that last quarter as well or something very similar to that last quarter. So I was just hoping you could give us a little bit of discussion around what that means? Have these projects that were delayed in 3Q, 4Q on time commenced here in 1Q? Or what are they waiting for to progress?

Yes. Well, so a lot of the deferrals that we had, as it relates to our HVAC services and specifically to the project-related work, was in the health care space. And everything was kind of on hold in the health care sector as we went through the middle part of last year, as the health care industry was, number one, just bracing for COVID and trying to sort that out, but then also the financial situations that they found themselves in. So we're seeing that activity start to ramp up. I would suspect that we'll see more of that in Q2 and Q3 than we will in Q1. But everything that we were planning on is -- from all appearances today, is moving forward.

And then I just had my final question. I wanted to just touch base on the acquisitions that you did, in particular, the large European platform, you mentioned slightly here on the call. Europe has had probably more lockdowns than we've seen here domestically, including some new ones that were announced just recently in Germany. And I was just wondering what the impact to your business there -- your new business there is? And how it's performing so far against the initial expectations that you had for? And obviously, you purchased it during COVID, so I had to think that your expectation included some COVID impact. But that's a dynamic situation, and these are fairly large acquisitions. So I thought it'd be worth an update from you.

Yes. That's a fair question. I would say that in the fourth quarter, SK performed in line with expectations. There is no question that they are being -- seeing impacts because of the increased lockdowns. They're starting to see a little bit -- we're not in Germany, we're primarily in the Benelux and up in Scandinavia. We're actually starting to see a little bit of relief as it relates to the restrictions. Again, the good part about the business is north of 50% of the revenue comes from service, and that has been progressing going forward. But there's no question that we're seeing a little bit of choppiness. We feel really good about where they're going to land for the year, so that's very positive. But yes, we're dealing with it, just like -- they're dealing with it over there, just like we're dealing with it here. So in general, things have been in line with expectations.

Your next question comes from the line of John Tanwanteng of CJS Securities.

I just want to get a little more color on if you're seeing any inflationary pressures in your various end markets? I know that people have been seeing steel prices or fuel prices rising, the availability of pickup trucks is kind of lower right now. And maybe there's other components that then maybe impacted by this. Just have you priced any that into your guidance? And are you seeing any right now?

Yes. I mean, well, so for sure, right? I mean, commodity prices have been rising for some period of time. I would point you to a couple of factors that bode well for our business and our business model. Number one is our average project size. So if you look at Safety Services, our average project size is $10,000. And in Specialty Services is $60,000. And so very quick hitting, quick turn types of projects, and you're not going to be vulnerable to some of the rapid escalation, specifically around steel pricing. So that part of it's been positive for us. If you look at Specialty Services and even in Industrial Services, most of the material is really supplied by our customers, and not necessarily being supplied by us. And so we are, into a certain degree, we're somewhat immune to that. With all that being said, we've been tracking commodity prices on a weekly basis for a long time. We communicate on a regular basis with our businesses about where we see commodity prices going, and about how to properly protect themselves from rapid escalation in their proposals and in their contract documents. So we've been all over it for some period of time, but we feel really good about how we've managed it.

And then just from the M&A perspective, do you see any changes in your ability to drive at least the smaller tuck-ins at your historical valuation levels, I think 4 times to 5 times EBITDA, in the current environment, where acquisition multiples have skyrocketed?

So we have a robust funnel of M&A opportunities in that typical APi tuck-in model, and we continue to see and execute in -- with multiples in that same 4 times, 5 times, 6 times range. And we -- for the most part, we're buying from family-owned businesses. And those sellers are focused on finding the right fit and the right home for their business and for their employees. And so when you find that, you have a much greater success rate as, so to speak, as acquiring those businesses at lower multiples. Private equity-owned firms, not so much. And so it's really who the ownership is and the size of the business, all that stuff matters.

And then last one. This is recent, so I'm not sure if you have a view, but I believe Intel is a very large customer of yours. How meaningful is their announcement to increase their foundry investment in Arizona by $20 billion? Did you build those facilities out or service them? And kind of how meaningful is that to you?

So Intel is a very good customer of ours, and we do business at their Chandler, Arizona facility. So any sort of expansion announcements and those types of things, typically is a positive for us.

We have time for one more question. Your final question will come from the line of Kathryn Thompson of Thompson Research.

On Industrial Services, I appreciated the color you've given, and you've done a great job with demonstrated margin improvement with job selection. Just pulling the strings a little bit more, how much more is there to go in terms of the margin opportunity? And could you give a little bit more color, perhaps a good example of a type of project where you are doing a better job at choosing projects? Just for those that are dialed in.

Well, I mean, I think there's margin opportunity in every one of our segments, not just Industrial Services. I'd point out that Industrial Services is a relatively small piece of our business, representing less than 10% of our total revenue. So the biggest thing for us is to, again, just continue to focus on the mix of the business that we do in focusing on the maintenance and integrity side of the existing transmission systems versus the, say, new capital component of our different customers' budget. So really, for us, Kathryn, again, and I think most of you probably heard me say this, most of the time, when we talk about customer selection and project selection, it's really customer selection. And it's being prudent with who you work for. And typically, it's not centered around a particular type of project, if you will. We have the capabilities to do the work. It's making sure that we're working for the right customer and the right person. So we kind of lump it together when we talk about customer selection and project selection, so it can be a little bit deceptive. But when we go through our go, no-go checklist process, like the primary focus for me is who is the client. And that is typically going to drive whether you have success or not have success as it relates to the work and the services that we offer. And I'm not going to provide a negative customer experience, if you will, as part of my dialogue.

But Russ, if I could supplement what you said, I mean, one of the things that when we came on the scene with APi, they were in the process of implementing modified contracts with customers so that, as an example, and this is just directional, it's not meant to be factual per se. But how we treat weather delays? And who pays for that? And do we get compensated when it's raining for 5 days? Does it start getting -- do we start getting compensated on the second day or the third day? Because neither of us can control the weather, but we shouldn't be penalized for that. So the team has done a really good job, I think, of looking at the negative variables that impact the margins and the business and modifying our contracts. And there are certain customers that don't want to go along with that, and there are others that are realistic and understand it's important. So kudos to the team for recognizing the headwinds and putting things in contracts, you're trying to that address that and then help improve margins.

And periodically, we spent a bit of time with bids on the ground talking to key players in the field, including more recently with a major non-res contractor that focuses on a wide variety of maintenance. And one of the interesting things that we're finding, I wanted to see if you're also seeing this trend, is as people are thinking about coming back to work in a more consistent way, they noted an uptick in fire alarm work, in particular, as building managers are taking the opportunity to upgrade these systems in anticipation of more folks coming back to work. Is this something that you're seeing? And are you seeing -- or what type of work are you seeing that are really drive that anticipation of a post-COVID world?

That's an interesting observation. I wouldn't say that we have seen that, specifically in fire alarm. We certainly like the fire alarm space, and it's an emphasis and a focus for us from a growth perspective. But I can't say that we've specifically seen an uptick in fire alarm work just because of being in a post-COVID world.

Okay. Great. And final question, just inflation has been, at the end, we've been focusing on going into '21, and that starts playing through. Understanding you're doing more inspection and services, though you still have to manage certain aspects of inflation. Maybe just a little bit more color in terms of how inflation may or may not be impacting your business now?

Well, I think that we've been fortunate to be able to pass those costs along. Our workforce is primarily union. So the wage rates are well-established for the men and the women that are doing the work for us in the field. And so it's very easy for us to understand when those escalation and when it's going to go into effect. So that's a big chunk of our cost, if you will, in the services that we deliver to our customers. And again, I point to just the small portion of -- or the small job sizes that we have in the quick turnaround, it's very easy for us to adjust our pricing as we continue to move along. So it's -- I mean, the reality of it is it's baked into and factored into our forecast and guidance for the year, and we don't anticipate having any substantive issues with managing the inflation in the rise in the commodity prices.

Thank you. I will now return the call to Russ Becker for closing comments.

Well, thank you, everybody. And I just want to, number one, reiterate my gratitude to all of the employees of APi for their shared sacrifice and commitment in putting the company first during the course of this last year. And they've delivered a great result in that great result. I hope our shareholders feel the benefit of that great result. Thank you, everybody, for taking the time to join us on the call this morning, and we very much appreciate your continued interest in the company. It's a great company, and we look forward to sharing our journey with you. Thank you.

Thank you for participating in APi Group's fourth quarter 2020 financial results conference call. You may now disconnect.