Good morning, ladies and gentlemen, and welcome to APi Group's Second Quarter 2021 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 second quarter 2021 earnings conference call. Joining me on the call today are Russ Becker, our President and CEO; Sir Martin Franklin and Jim Lillie, our Board Co-Chairs; 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, August 11, and we have no obligation to update any forward-looking statement we may make. As a reminder, we have posted a presentation detailing our second 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. Before turning the call over to Martin, I'd like to thank everyone that joined our conference call on July, 27, announcing our agreed acquisition of Chubb fire and security business from Carrier Global Corporation. A replay of the webcast is available along with the presentation slides on the Investor Relations page of our website. It is now my pleasure to turn the call over to Martin.

Thank you, Olivia. It's a very exciting time for APi. On July 27, we announced an agreement to acquire the Chubb fire and security business from Carrier Global Corporation. The transaction value was $3.1 billion, which is comprised of $2.9 billion in cash and approximately $200 million of assumed liabilities and other adjustments. The acquisition of Chubb, which we anticipate to close around year-end, will transform APi into the world's leading life safety services provider. Chubb operates in 17 countries, serves over 1.5 million customer sites, and has leading market positions in Australia, Canada, France, Hong Kong, Netherlands and the UK, which comprise approximately 90% of its revenue. Chubb is operated as a non-core asset, as the leading service company long buried inside manufacturing businesses from United Technologies to Carrier. We are the perfect partner for Chubb. We perform many of the same services for the same types of customers in complimentary geographies. Our combined global reach as the world leader in life safety services will position us as the logical one-stop shopping choice for multinational clients. With 26,000 combined skilled team members, we believe we will be able to bring the best quality of service and attract, train and retain the best talent. We believe the transaction will be highly accretive, with compelling synergies that will complement revenue growth through cross-selling certain products and services, and that the opportunity for margin expansion is meaningful. We're extremely excited about the value creation opportunities the newly enlarged company represents, creating the worldwide leader in life safety and security while concentrating the vast majority of the business on recurring revenue, mandatorily required services. It’s the thesis we had hoped to follow when we made our original investment in APi. We have great confidence in the business and the direction we're going. And with that, I'll hand the call over to Russ.

Thank you, Martin. Good morning, everyone. Thank you for taking the time to join our call this morning. As Martin mentioned, this is a very exciting time for APi. During today's call, I will provide a summary of our second quarter results and comment on our transformational acquisition of Chubb, explaining to you in more detail what I see as the opportunity in front of us, before turning the call over to Tom, who will then walk through our recent results and outlook in more detail. We are encouraged by the progress made towards recovery since the height of the pandemic at this time last year. As you've heard me say on prior calls, the safety, health and well-being of each of our employees remains our number one priority. This focus and other foundational priorities provides a platform from which we can continue to enhance shareholder value. Key highlights from our performance for the three months ended June 30, 2021, compared to the prior year period include the following: first, net revenues of $978 million above our previously communicated guidance of $925 million to $950 million, primarily driven by continued growth of our inspection and service offerings, as well as general market recoveries in both safety and specialty services. This is offset by the decline in industrial services contracts. Net revenues, excluding industrial services increased on an organic basis by 21.1%, compared to the prior year period. Second, continued focus on our ongoing goal of growing recurring, inspection and service revenue, which we believe helps to build a more protective moat around the business. And third, adjusted earnings per share of $0.31. As we’ve discussed throughout the quarter, COVID-19 continues to impact our business despite our team's agility, as we manage the rise in the number of COVID-19 cases, coupled…

Thanks, Russ, and good morning. I will review our consolidated results, segment level of performance and strong balance sheet before turning to our outlook. As Russ mentioned earlier in the call, net revenues excluding industrial services for the three months ended June 30, 2021, increased on an organic basis by 21.1% compared to the prior year. For the six months ended June 30, 2021, net revenues excluding industrial services increased on an organic basis by 11.7% compared to the prior year period. Adjusted gross margins for the three months ended June 30, 2021 was 24.2%, representing a 27 basis point decline compared to the prior year, driven by supply chain disruption and inflation causing downward pressure on margins, partially offset by improved mix in safety services. For the six months ended June 30, 2021, adjusted gross margins of 23.7%, representing a 27 basis point increase compared to the prior year due to the factors mentioned for the second quarter. Adjusted EBITDA margin for the three months ended June 30, 2021 was 10.8%, representing 106 basis points decline, compared to the prior year due to supply chain disruption and inflation causing downward pressure on margins, and less contribution from joint ventures in specialty services than the prior year period. For the six months ended June 30, 2021, adjusted EBITDA margin was 9.4%, representing the 39 basis point decline compared to the prior year, due to the factors mentioned for the second quarter. We continue to focus on driving strong free cash flow, and our balance sheet and liquidity profile remained strong. As expected, given the comparative swings in COVID-related business cycle, as well as our normal historical experience, most of our cash from operations was absorbed by a rebuild in our working capital base. For the six months ended June 30,…

Thanks, Tom. Good morning, everybody. Our progress this year is meaningful, and we are even more excited about the long-term future APi, following the strategic Chubb transaction. While COVID-19 continues to impact our business as well as those of our customers and suppliers, we remain confident in our ability to execute on our long-term goals for the business. The announced Chubb acquisition meets our previously stated key strategic investment criteria. Chubb has a history of strong free cash flow generation. They are leaders in their niche market, and have an experienced leadership team. The acquisition will expand our geographical reach and will strengthen our protective mode to greater statutorily required recurring revenue, with 50% plus of our revenue coming from service after the transaction closes. We're enthusiastic to invest behind the Chubb team and support their operations and supplement them with our existing operations. We believe there is significant future value creation opportunity, as we combine our two organizations and realize revenue as well as cost synergies. In addition, we are excited to add Blackstone as a partner. As many of you know, Blackstone has a significant global property portfolio, which we expect to provide the combined company new customer opportunities in multiple markets. Blackstone's real estate total commercial portfolios comprised of over 1.2 billion square feet of real estate globally, and we're excited to compete for their business. Before opening the call for Q&A, I'd like to provide some additional color regarding model assumptions for Chubb. As noted on our previous call, we look forward to sharing more details once the transaction has closed. As Martin mentioned, the transaction value is $3.1 billion, which is comprised of $2.9 billion in cash and approximately $200 million of assumed liabilities and other adjustments, some of which will be chewed up at…

[Operator Instructions] And we'll take our first question from Julian Mitchell with Barclays.

Hi, good morning. Maybe just wanted to circle back to the free cash flow aspect. Maybe give us a bit more clarity as to how the big working capital pieces will move in the second-half to get that conversion up? And also, perhaps when you're looking at 2022, assuming more normal working capital dynamics, assuming that Chubb is integrated early in the year, what sort of free cash flow conversion should we assume for next year?

So Julian, let me address the cash flow for this quarter. Right in line with our expectations is where we came in. And if you'd look back to 2019, that we shared with you last year, last year's second quarter was dramatically impacted by the COVID reduction in revenue, as we brought down all of that working capital. So right in line with our historic flow and what we had budgeted, we came in at the end of the quarter. Historically, we see that the cash comes in through the second-half and that will happen as projects wrap up, and as our revenue in the fourth quarter, our projects are wrapping up and you get run into the holiday weeks, et cetera. And so it's a normal time where our cash comes in. And we're expecting that same flow this year. I think you've seen discussed in the past on Chubb’s cash flow conversion rate at their disclosed amount is 90%. And we'll be blending theirs with ours, and expect it to be consistent. But we'll have more details on that as we get closer to the closing.

Julian, it's Jim. I think, Tom correct me if I'm wrong, but if memory serves me correct, we did about $11 million in free cash flow in the second quarter of 2019 versus the $20 million this year, and I think our conversion rate was much higher.

Yeah. So second quarter slightly different, Jim, but you are close. About $22 million conversion in 2019 versus $20 million this year, so rate online and a 13.9% conversion in 2019 versus 12% conversion this year. And when you think of the growth we've had, because of coming off a lower COVID base this year, that's very positive for us.

And I think you had a question about 2022, we'll go through the budgeting process, but I think we said on our last call that Chubb historically had a 90% free cash flow conversion. This was EBITDA less -- minus CapEx divided by EBITDA. And so we don't see in a real trending change in that and our historical is 80% plus. So still very strong free cash flow conversion, but when we do the budget, and we give guidance when the deal closes, we'll give you more color.

Thanks very much for that detail. And maybe my second question, just looking at the EBITDA margin, so I think the full year guidance implies EBITDA margins are up slightly year-on-year in the back-half, just wanted to check that. And more specifically within specialty services, you had the margin pressure in Q2, how substantially does the margin sort of swing around in the second-half in your guidance?

Julian this as Russ, I think we're going to continue to see margin pressure in specialty services through the remainder of the year. And we're going to be battling through cost of goods, inflationary pressure, as well as supply chain disruptions that are going to continue to cause us some headaches. And we're going to have to just keep on battling. I think that we feel really good about what we're seeing in safety services and [Technical Difficulty] to see positive results there and improvement. But we're going to battle through the second-half.

Thanks. The overall firm-wide adjusted EBITDA margin at the sort of guidance midpoint that should be up slightly year-on-year in the second-half. Is that fair?

Fair.

Great. Thank you.

And we'll take our next question from Markus Mittermaier with UBS.

Hi, good morning, everyone. Maybe I’ll start with Chubb. Russ, thanks so much for providing your thoughts here on how you think this will develop to 2025. I think you said $2.5 billion getting the margins to sort of current APi fleet average of 13%. Can you comment a little bit on the sort of visibility you already have? I know it's early days. Is this mostly kind of project and customer selectivity? Like we have seen, you do obviously, on the industrial side of your business, how to get that margin about specific programs that you already think about? And then connected to that, obviously, still 100 basis points below where your current life safety business is. So, how are you thinking about this? And how much comfort do you have?

So I would start by saying, we're very confident that we will be able to work with Chubb’s leadership team, and achieve these goals. We wouldn't put them out there, if we didn't have great confidence. They are under Anthony Brennan’s leadership, they are really pushing to a branch focused model, which is very, very similar to the focus in how we built our life safety and safety services business, and having the ownership at the branch level. And so for me, it is really a combination of a lot of different things. But it's going to start with the individual branch leadership, making sure that we have the right people leading these different branches and starting to make investments in their people. As leaders, they haven't had that level of investment. We think that's something that we can bring to them very, very quickly as we come out of the gates here. So, we have really good confidence that these margin expansion goals are achievable. And just like here, Markus, when we achieve those goals, we're going to just move the goalposts and we're going to keep on moving forward with improvements. But there's a tremendous amount of opportunity for us to really help the Chubb team improve the business.

Great. Thank you. And then on the $200 million of contingent and known liabilities, just making sure here, what's being transferred over from Carrier is the service business largely, not the underlying fire manufacturing? The background of the question is obviously around TSAT [ph] how confident are you that they and sort of like a long dated liability that moves over here with that transaction?

You are correct. We have purchased these services side of the business. They are keeping the so to speak manufacturing, the product manufacturing piece of the business, and the TSAT liabilities stayed with UTC, back when the Carrier was carved out of United Technologies. So, we're very comfortable with the so to speak environmental.

Okay. Thank you very much.

And we will take our next question from Andy Wittmann with Baird.

Great. Thanks and good morning. I just wanted to clarify some questions from the prior Chubb call regarding the EPS accretion that you articulated. And correct me if I'm wrong, please. But I think you guys said there was going to be like, I think was $0.35 of accretion. Maybe that number is wrong. But if you could, please, it would be helpful to understand the level of depreciation interest expense in the share count that underpins that, recognizing here that it gets complicated with the preferred dividend and the convertible share on that? I just think trying to understand that assumption would be helpful for everyone.

Can you repeat the question?

Yeah, I was just hoping that you could bridge us with a little bit more detail on the Chubb accretion that you articulated on the last conference call. If you could just comment again what that EPS accretion you're commenting as out of the box. We understand your long-term numbers today. But I think you made some comments around out of the box EPS accretion, and so depreciation, interest expense, and then the share count or the preferred dividend that underpins that $0.35 accretion, I think would be helpful to understand.

I don't have the breakdown in front of me, but it was about -- I think in the last call, we've said it was about 25%. And it's actually, I think, in the 26%, 27% rate. It was 26%, 27%, but I think we said on the call 25%. I'll have to come back and give you the breakdown of those figures because they just don't have them in front of me right now. Well, their depreciation runs at about 18%, their CapEx is about $80 million. And I would say they probably under invested in the business to a certain degree.

But Andy, I think it goes back to what we said, we were looking at approximately the $213 million of EBITDA. We were looking at our existing share counts. And that's where we came up with the – I still remember the number but call it $0.34, $0.35, $0.36 or so.

Okay. Yeah, that's what I thought. You said on the call it was $0.35 and you just said 26%. That's what I'm trying to get as to clarify.

No, $0.35 and 26%.

26% and $0.035, sorry, that was broke up a little bit. Was that what you said?

Yeah.

Okay. That makes sense then. So then, just then Russ on the inflation and supply chain challenges that you saw in the quarter. I guess, I've always thought of your projects as relatively short between the bidding and the execution of the projects. I understand the inflation is rapid today. How much insulation do you get from inflation, just given the smaller average project size, as well as the proximity in bidding to execution of the jobs? And I guess, inside the backlog that you have today, how much of kind of older pricing is there for jobs that maybe had an extended duration between when they're bid and when they're executed. And if you could just talk a little bit about the nature of some of the supply chain disruptions, specific products that maybe are grabbing you and what you can do, if anything about obtaining those products?

Sure, a lot there. And I'm going to start by reminding you that we don't bid our work, we propose on our work. Because we want to make sure that we're being chosen by our customers, because of the value that we bring to the table. And, safety services, I would say is more insulated than specialty services, because the average shop size in safety services is less than $10,000. So those are much quicker hitting. But, steel pipe prices have basically doubled. And, we've had to make sure that we've protected ourselves and our proposals and in our contracts to make sure that we've got the right language built into those documents to allow us to get escalation when necessary. In specialty services, even though we've been very proactive with our businesses and making sure again, we're protecting ourselves in our proposals, oftentimes the materials are provided by our customers, and the lack of availability, like say for fiber optic cable and those types of things has negative impacts on your ability to efficiently execute on your work, and managing your workforce and managing your people, when the product is showing up late or not showing up for when it's supposed to show up makes it very, very difficult to manage your work. And, that's happening really on many, many fronts. You're seeing that with pipe, you're seeing that with, like I said fiber optic cable. We have one manufacturing business, joist and deck is out nine months. So managing through those challenges, people have to be on their toes, and they have to be very proactive, as they're looking at their business. I can't quantify what in our backlog is, how much of that risk would be in our backlog from -- our backlog turns very quickly. Our backlog has been very strong. And I'd like to believe that because we have been very proactive in talking with our businesses and giving our businesses guidance on where we think commodity prices are going, that we are protected, and that we've done a good job. I'm sure there's instances that we haven't quite done, in general, I feel really good about it.

Great. Then just I guess one final follow-up on that is, in the case where your customers are procuring your materials, and they can't get them, do you have any recourse to the customer for change orders regarding the cost that you incur from their delays?

Yeah, for sure you do. But that's a delicate balancing act too. It's your customer, and so you have to make sure that you're being fair with them, you want to make sure that they're being fair with you. But it is a balancing act. You're inevitably going to have customers that are going to push back on you, and try to make their problem, your problem. But that's where it's so important for our business leaders they have positive relationships with their customers so that they can work through those challenges. They need to be very proactive in leading their work versus just reacting to their work. And there is a significant difference there. But it ultimately comes down to the relationship you have with that client.

Got it. Okay. Thank you very much. Have a good day.

Thanks, Andy.

And we will take our next question from Kathryn Thompson with Thompson Research Group.

Thank you for taking my questions today. Just first focusing on the specialty end market, especially services rather. Could you give more color in terms of the end market demand, and what is driving demand overall? Really looking for additional color from an end market, but also a regional standpoint? Thank you.

Our end markets in the segment remain strong. We continue to provide services to public utilities, private utilities, telecom providers, and such. And, really, we feel that the end markets we're serving remain very strong, even with some of the opportunities that we have in front of us sliding out to the right. So as an example, one of our businesses does a fair amount of what I would consider grounding and interconnecting work with wind farms, and a number of their project related opportunities slid into 2022. And I think some of that just was some reticence with the new administration. And, what was going to happen with certain tax credits, and some of that work splits. It's not going away, but it's going to push into 2022. So, again, we feel very good about the end markets that we're serving. It's just that there's some choppiness on when we're going to be able to deliver those services. It's kind of like the infrastructure bill, as it comes forward and you look at where the buckets and there's going to be $65 billion and broadband investments. Well, that's going to be a positive for our business. But, those dollars won't start flowing through into the system until the back-half, most likely of 2022. But we feel great about the end markets that we're serving in the segment.

Okay. Any color or thoughts in terms of the infrastructure or proposed infrastructure plan, if it were to pass, what that may mean for APi?

Yeah. Actually, Olivia did a nice job of breaking down the buckets of the, I guess, the first senate bill that passed on a bipartisan basis late yesterday, versus the one that passed on a partisan basis on the middle of the night. But, there's number of opportunities in areas that will benefit us. The electric grid and power infrastructure bucket, there's $70 plus billion allocated there. I just mentioned the broadband investments, there's going to be $55 billion allocated for water systems and infrastructure, which is an area that we participate in, in the upgrading and the renewing of the existing portable water infrastructure that's in place primarily for us on the east coast. And I also would tell you that, a rising tide floats all boats, and the dollars that are being spent in other places where like ports and waterways is not a place that we participate in, but other firms will put their resources to work in other parts of the infrastructure bill that will create opportunities for us to take more market share with our existing customers. So it's a positive in general for the industry, which will create an opportunity for us to do more work with some of our existing customers.

Okay, great. And then final question for the day, just a broader question for industrial services. In light of the proposed Chubb acquisition and also, as you noted, today, the continued rightsizing of industrial services, where do you see this business as a percentage of mix going forward? And what are your mid to long-term goals for this division? Thanks.

Thanks, Kathryn. So, we continue to be very, very disciplined with the opportunities in the work that we're pursuing in industrial services. And there's nothing worse than being slow, and being slow with low performing work. And so we have been very disciplined in how we're looking at the opportunities that are in front of us to make sure that the work that we do execute, we can make a reasonable profit and gross margin on. My hope is that we are at the bottom, and that we are going to start chipping away in demonstrating improved strong results, and that we can get back to a spot where the business is complementary to our margin goals. And, we need to continue to evaluate what's there and what we're doing there. And if we need to do some pruning, then we need to do some pruning. But we need to continue to be at the top of our game and looking at what's going on in that piece of the business.

Great. Thank you very much.

And we have time for one more question before turning it back to Russ, for a closing statement. And we'll take our final question from Jon Tanwanteng with CJS Securities.

Hey, good morning, guys. Thank you for taking my question. My first one, I don't know if anyone asked this before. But is there any color on the phasing of revenue and earnings as we head into the second-half between Q3 and Q4? Should we set more pressure on revenue and earnings in the near-term, as you deal with the COVID pandemic and things that are going on now and even more released in the fourth quarter? Or if not, what are the puts and takes that we should be considering?

Yeah, great question, Jon. Typically, we've kind of seen third quarter being 27% to 28% of our revenue quarter, and then 24% to 25% in the fourth. And just with the way things are moving and the supply chain things, those two quarters maybe a little more balanced than we've seen in the past. And so, we're working through that. And as we march through the quarter, we'll provide more insight to you as we have it.

Okay. That's very helpful. Thank you. And then second, I was hoping you could dig deeper into the Blackstone opportunity a little bit more. What percentage of their portfolio do you cover today? And kind of what is the win rate usually when you approach a new property to get their business? How much of that can we expect you to cover over time?

Well, that's a tough question. But I'm going to give you an example. So, in the Memphis marketplace, we currently provide inspection and service work at approximately 20 of their distribution facilities in that marketplace. And from what we know today, they have an additional 20 facilities in that marketplace. So we think in that one particular market, there's an opportunity for us to do, so to speak, twice as much with them. But, the caveat is that we need to go earn their business. We can't expect them to just give us their business. It's no different than with our other national base and now international base customers like we need to go and earn it and win it. And we think the opportunity is huge. Blackstone has a great track record of opening up their portfolio companies to each other, and working across a sister company in lines. And we think that that's an opportunity, but we're not afraid of the challenge. And we expect that we're going to go and we're going to win their business, not have it handed to us.

Okay, got it. Thank you for that color. And thanks again.

I'm sorry, operator. I've stepped on your feet and did your job. Well, since I've done it, Russ, we will turn it over to you for one final comment.

Yeah. Thank you. Thank you, everybody. Before we say goodbye, this really is a personal message from all of us. It is with a very heavy heart, I have to inform you of the untimely death of Joe Walsh, our Head of Specialty Services, who many of you met during our Investor Day. Our shared condolences go out to Joe's family and to all of those who are fortunate enough to know him. He was a widely respected man and was a quintessential APi leader, and his presence will be missed. From an organizational standpoint, we have a succession plan in place. However, for now, our thoughts are with Joe's family and the entire APi family, as Joe's impact was far reaching, both within our organization as well as throughout the industry. I want to thank everybody again for joining the call this morning. We very much appreciate you taking the time to be with us. Thank you for your continued interest in APi. We look forward to keeping you updated as we move through the rest of the year. This is truly a very exciting time for the company. So, thank you.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.