Good morning, ladies and gentlemen, and welcome to APi Group’s Fourth 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. I will be standing by should you need any assistance. 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 2021 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 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, March 1, and we have no obligation to update any forward-looking statement we may make. As a reminder, we have posted a presentation detailing our fourth 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 is now my pleasure to turn the call over to Martin.

Thank you, Olivia. We’re very pleased with APi’s progress achieved in 2021, and even more excited about the opportunities that lie ahead for the business. The completion of the acquisition of the Chubb fire and security business on January 3, 2022 was an exciting milestone as we continue our evolution and growth as a public company. Chubb is a business with significant strategic value to APi and one with multiple levels for value creation. We view APi’s and Chubb strengths and skill sets as complementary just as our capabilities and scale will help drive growth at Chubb by the same token, the addition of Chubb enriches our overall portfolio. Our combined global reach is the world’s leading life safety services provider is already unlocking incremental opportunities for us with multinational clients. We’re thrilled to welcome all of the Chubb team members to the APi family, as the business shifts from a non-core asset to a paramount strategic priority within APi. As the bar is being raised at the operating level, so to is the bench of senior management. Multiple hires have been made to incorporate our growing scale, and we feel very energized with the quality of the team moving forward. We have great confidence in the business and the direction we’re heading and look forward to updating you on our progress in the coming months. Before handing over the quarter to Russ, I’d like to acknowledge with a heavy heart the passing of Lord Paul Myners in January. Paul was an outstanding director for APi, and someone who made the world a more interesting and better place. He’ll be greatly missed. With that, Russ?

Thank you, Martin, and good morning, everyone. Thank you for taking the time to join our call this morning. Before we provide you with a summary of our strong results for 2021, solid outlook for 2022, and an update on the acquisition of Chubb, I would like to start by thanking our team members who have remained focused on supporting our company and our customers. Their ongoing leadership efforts continue to demonstrate what I’ve known to be true since I was fortunate enough to be given the leadership role at APi over 20 years ago. Our leaders are a competitive advantage and help drive shareholder value. The safety, health and well-being of all of our leaders remains our number one priority. Like Martin, I would like to welcome all of the Chubb team members to the APi family. As discussed at the Investor conferences last week in Miami, 2021 was a watershed year in the development of APi. Despite the many macro headwinds, I’m proud of our team and how we achieved our stated strategic goals amidst ongoing supply chain disruptions, inflationary pressures, and COVID-19 impacts. These include the following highlights for the year ended December 31, 2021. First, net revenues, excluding Industrial Services, increased on an organic basis by 16.1%, exceeding our initial guidance of 7%, driven by strong demand in our core Safety and Specialty Services segments. Second, continued success in our ongoing goal of growing the acyclical recurring service revenue aspects of our portfolio, which we believe helps to build a more protective moat around the business. Service represented approximately 43% of total net revenues in our life safety businesses, up from approximately 41% of total net revenues in 2020. Third, within our Safety Services segment, we achieved our goal of growing inspection revenue 10%-plus. We continue…

Thanks, Russ. Good morning, everyone. I’ll begin my remarks by reviewing our consolidated results and segment level operating performance before turning to our outlook. Net revenues for the three months ended December 31, 2020 increased on an organic basis by 27.4% compared to the prior year period when excluding Industrial Services. For the year ended December 31, 2021, net revenues increased on an organic basis by 16.1% compared to the prior year period. This two is excluding Industrial Services. Adjusted gross margin for the three months ended December 31, 2021 was 24.6%, representing a 42 basis point decline compared to the prior year, driven by supply chain disruptions and inflation, which caused downward pressure on our margins. This was partially offset by outsized growth in our higher-margin Safety Services segment and an increase in inspection and service revenue. For the year ended December 31, 2021, adjusted gross margin was 24%, representing a 30 basis point increase compared to the prior year due to an improved mix of inspection and service revenue and outsized growth in our higher-margin Safety Services segment, which represented approximately 53% of adjusted net revenues in 2021, compared to approximately 47% in 2020. This was partially offset by supply chain disruptions and inflations, which have caused downward pressure on our margins. Adjusted EBITDA margin for the three months ended December 31, 2021 was 10.3% compared to 11.8% in the prior year period, driven by continuing supply chain disruptions and inflation, which caused downward pressure on our margins as well as lower contribution from joint ventures in our Specialty Services segment. This was partially offset by outsized growth in our higher-margin Safety Services segment and an increase in inspection and service revenue. For the year ended December 31, 2021, adjusted EBITDA margin was 10.3%, representing a 57 basis…

Thanks, Kevin. APi’s execution against this goal despite supply chain disruptions, inflationary pressures and COVID-19-related disruptions speaks to the strength of the company’s recurring revenue services-focused business model, the discipline of the organization and its leadership team as we continue to focus on shareholder value creation. As Russ mentioned, we entered 2022 with positive momentum on many fronts, notably, the 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 markets, and they have an experienced leadership team. The acquisition significantly expands our geographical reach from 200-plus locations to 500-plus locations and strengthens our protective moat through greater statutorily required activities, recurring revenue with 50%-plus of our revenue now coming from service-related activities. As we begin the process of integrating Chubb, we are simultaneously investing in the growth of its platform and generating synergies across our combined platform. To help drive value and deliver on our commitments, we have enhanced our team with new global leaders adding depth to our bench as we plan for the future together as one team united by market-leading brands across the globe. As we move forward, we believe our combined leadership team will drive towards maximizing business performance and capitalizing on future cross-selling opportunities. Our aligned and incentivized performance-based culture will help drive Chubb as it has at APi. We are focused on making the right choices for the long-term health of the business, being opportunistic on M&A and remain focused on creating sustainable shareholder value. While we expected to be at a net leverage ratio of around 4.1 times at closing of the Chubb transaction, as Kevin mentioned, our net debt to adjusted EBITDA ratio was approximately 3.9 times following the close, and our revenue backlog remained at a record high level. Both of these metrics are great indicators of the positive momentum in the business. We have a very healthy balance sheet and strong organic revenue prospects for the year ahead. With that, I’d like to now turn the call back over to the operator and open the call for Q&A. Katherine?

[Operator Instructions] We’ll take our first question today from Markus Mittermaier with UBS. Your line is open.

Hi, good morning, everyone.

Hey, Markus, and congratulations on the baby.

Oh, thank you very much. Could I maybe start with Russ. I know that you visited a lot of sites of Chubb over the recent weeks. What’s your kind of impression compared to the expectations that you had during the due diligence now that you’ve actually seen the folks?

Yeah, thanks. Thank you, Markus. I would say better-than-expected. And I mentioned in my remarks that Kevin, myself and a number of our teammates, we spent really the first eight or nine days after the transaction closed, moving around to a number of different locations inside the Chubb organization. And I was impressed. And the branch leaders really grew up in the business. The – they’re really solid, good operators. I felt really good about the quality of the leadership, the country level leadership, both the UK was really solid, and I felt really positive about it. I think that one of the things that has been missing in the past was visibility from the company’s leadership in the businesses and in the branches. And that was really obvious as we moved around and really got a chance to interact with all of the different team members in the different locations that we’re at and how enthusiastic they were. We also – while we were there, we also had a town hall meeting that we opened up to every single one of the Chubb employees across the globe. And we had 2,700 people participated in that session. So doing that virtually was not the easiest and maybe not the most efficient, but the enthusiasm and the excitement that came across from our new teammates was fantastic. The chat line was like lit up and on fire, and it was really cool. And I personally came away from that trip really fired up and about the opportunities that are in front of us. And I think that our culture and purpose of building great leaders is exactly what’s missing. Those team members need investment in them as people just like we’ve been investing in the employees of APi, so better-than-expected.

That’s very helpful color. Thank you. And then maybe in terms of the revenue guide, the 6% to 7% organic, obviously, I guess, on the legacy APi business now, how should we expect these new additions on the Chubb site to develop? Should we expect some sort of revenue or project selectivity here in the first year? You mentioned that particularly in the Life Safety segment you have high-teens margin. How do you think about that? I know it’s early days, and you’re probably still going through the various P&Ls, but how big is the opportunity on the revenue selectivity side?

I think there’s a few things at play as it relates specifically to Chubb. Chubb had year-on-year revenue growth last year of roughly 5%, even though they were off in the fourth quarter, approximately 3% on a comparison to 2020. And most of that was driven by supply chain issues and the pandemic. We believe that once we kind of get moving forward with Chubb that we should be able to generate organic growth at a clip very similar to APi’s on traditional. We do need to spend more time understanding the end markets that they serve. They have more exposure to retail, as an example, than say our current business does. They don’t have a significant issue with collections and receivables, et cetera. But we will spend some more time on customer selection and project selection as we get involved. We have instituted our same kind of No-Go-Go policy that we use for APi when we’re proposing on larger opportunities inside of Chubb already. So we’ll start to see more of those kind of flow through the system as well. Chubb’s average project size happens to be smaller than the average project size for core APi. Their – the percentage of service that they do is roughly 60%. So that’s very complimentary to our portfolio. So we – we’re optimistic that we’re still kind of gathering information and evaluating [where they are at] [ph].

Great, thanks so much. I’ll get back in queue. Good luck.

Thanks, Markus.

We’ll go now to Andy Kaplowitz with Citigroup. Your line is open.

Good morning, everyone.

Good morning, Andy. How are you?

Good. Russ, it seemed like you had a relatively big sequential acceleration in Q4, both in Safety and Specialty Services. I think you mentioned maybe a little bit of pent-up demand in Safety. But did you see project start to flow more regularly in Specialty? Or maybe you can comment on taking share? Could you give us a little more color in terms of reasons for the acceleration? And did it continue into Q1?

Yeah, I think you have a little bit – I think you have a number of things really at play there, Andy, specifically in safety services, that’s where our HVAC services businesses lie. They – if you go back to 2020, they had a number of their project-related opportunities slip out to the right. As I mentioned at your conference, we were fortunate that most of those opportunities did not get canceled, they just slid from a schedule perspective. And we saw some of that really start to flow through the system here, again, in 2021 right up through the end of the quarter. We also – if you switch to Specialty Services, we have our structural manufacturing business happens to be fortunate to call Amazon, a customer of ours, and the demand there has remained robust. And so we’ve been able to capture a number of nice opportunities there. We also have some larger project-related opportunities that really continued to be really strong right up through the end of the year. So, we just think it was just really fortunate for us with some of the project-related opportunity that we had on the books already.

That’s very helpful, Russ. And then, could you give us some more color, you gave us quarterly cadence now in sales and EBITDA, because it looks like you assume more normalized margin in Q2 versus Q1. So how are you thinking about labor pressure in supply chain on your margin versus your pricing? The – is it true that you’re assuming more normalized environment in Q2, or does the guide still incorporate some supply chain-related headwinds for the rest of the year?

Well, we expect supply chain to – supply chain issues to be, I guess, problematic through for sure, the second quarter. I would also tell you that just the mindset and the way we approach things here is that that’s our responsibility to manage. And so we can’t use that as a crutch as we continue to lead the business and that’s just part of the process. So we do expect to continue to battle supply chain and inflation. Obviously, some of the things that are happening in our world will continue to have impacts on that. Labor is tough, and there you have the – I view it as being more geographically market-specific. I also believe that our core purpose of building great leaders in the – and our willingness to invest, and the men and women that are actually getting the work done in the field at our customer sites is an advantage for us. And I think that that’s something that’s positive, where we – if we can retain our labor force first, then that allows us to continue to build and add. We’ve also done some really creative things like one of our businesses has created a – an apprenticeship program that’s actually certified and for fire alarm technicians. So we’re able to hire and grow our own fire alarm technicians, and we’re doing some things across the business. We’ve got some really interesting and unique hiring programs taking advantage of the men and the women that are exiting the military service. And so we continue to be creative as we look to complement and build out our workforce and because that’s something that’s very important to us as being in a people-centered business.

Russ, just a very quick last one, no exposure to Russia, Ukraine for legacy or new business?

None.

Thank you.

Thanks, Andy, and good conference.

We’ll take our next question from Julian Mitchell with Barclays. Your line is open.

Thanks very much. And, Jim, good to see you last week. And I hope you’ll say ours was a better conference. But in terms of perhaps that the free cash flow, first off, just wanted to talk about the expectations there. You had free cash flow, I think half last year, and then the conversion in the mid-50s. As we look at 2022, you’ve got maybe some easing of the working cap, headwind, but then Chubb’s cash flow coming in. So how do we think about free cash conversion in aggregate this year, or what sort of percentage increase?

Hey, Julian, this is Kevin, I’ll take that. Yeah. So just, as we’ve talked about previously, 2020 was a year where we consumed working capital, as revenue came down throughout that period because of the pandemic. So we ended 2020 with a very low working capital base. As we came back in 2021, we continue to invest in working capital. We talked on the last call about how Q4 was going to be a strong period for us, which is traditionally is the only difference there was we overdelivered from versus anticipate or expectations in Q4. So didn’t harvest as much from Q3 to Q4 as we thought, that’s still a very strong delivery in Q4 ending at 55%. When you – as we move into 2022, of course, there’ll be some additional investment. We’re going to continue to work on working capital rate. I’ll say the profile of Chubb’s free cash flow delivery is very much in line with our expectation in the delivery of our Safety Services segment. So we definitely and as we move into 2022, and for the year, we anticipate improving off that 55% number and working back towards our longer-term target, which we’ve talked a bit about, which is approximately 80%. And with Chubb, we’re not changing that expectation or benchmark.

Got it. And so we should expect sort of year-end leverage 2022 to be what around three times or so?

Yeah, we’re – we ended at or at the close of Chubb, as Jim said and I referenced, we’re about 3.9 times. And there’s a couple factors that will depend on how we manage the year. But our expectation is we’re going to manage down by approximately one time and target towards 2023 to get to that 2 to 2.5 times.

Julian, this is Jim. First of all, it was a lovely conference as well. So I don’t want you to feel slighted. But to – we’re going to continue to be opportunistic looking at M&A. And so we can – if we buy right at the right multiple with a company with good healthy M&A or EBITDA, then we can improve our debt to EBITDA ratio through M&A. But also we’re going to generate a lot Cash. But as Kevin pointed out, we’re going to also be improving revenue through the course of the year, which will eat into cash flow conversion. But we’re very bullish on our ability to delever fund the business. And as Kevin said, we expect, on average, to delever about one turn a year and be back down to our targeted range of 2, 2.5 times over the next three years or so.

That’s helpful, Jim. And so for the year as a whole, just to sort of summing up, we’re looking at adjusted free cash flow conversion, maybe in the sort of 70s or 80s percent or 70s, let’s say, percentage-wise, is that fair?

Directionally. Again, we’ll see how the year goes, but we’re redeploying cash back into the business. Two years ago, I want to say our free cash flow conversion was around 115%, 120%, which was out of the range. Last year, we were under the target of 80%. But on average, as you look at the business over a three or four-year period, mathematically, it will be about 80% per year.

That’s great. Thanks very much.

[Operator Instructions] We’ll go now to Kathryn Thompson with Thompson Research. Your line is open.

Hi, good morning, and thank you for taking my questions today. And always fun to have a spicy conference call during earnings season. Following on, I appreciated your commentary on the European situation, with no exposure in Ukraine, but pulling the string war and thinking about the unintended consequences or the domino effect that can happen from issues such as this, not only in Europe, but in Asia. How are you thinking about mitigating risk and also thinking about rising cost, including fuel? Thank you.

Yeah. So maybe I’ll take fuel first. I mean, we have been on top of rising fuel prices in communicating with our businesses, non-stop as we’ve seen some of the inflationary pressure coming forward. And wherever we possibly can, we’ve been adding fuel surcharges to our invoices, factoring it into our current proposals. And again, Kathryn, I would just point everybody to the small project size that we have. APi’s core business, the – our core life safety, safety services business, our average project size is less than $10,000. Chubb was approximately $2,500. In aggregate, we’re at $5,000. So, the cricketing nature of the work and the services that we provide allows us to factor all of those rising costs into our proposals and really pass them along. As we look at risk, our business in Hong Kong and China is high-performing business. We continue to communicate and with – we have a very, very solid leader in that business as well. And we continue to communicate with those individuals and monitor the situation. And what I can tell you is that, as we need to, we will adapt and adjust and take corrective action. And so we really are spending a lot of time. One of the biggest risks in business today is cyber. We have been putting a tremendous amount of effort into our cybersecurity and making sure that our business is really as best you possibly can be in this environment, protecting itself in building the right fences around the company. So that we can stay protected and it’s getting a tremendous amount of attention from not only our IT leadership, but from Kevin and me and all the way up to through the Board level. So, we are continuing to monitor the business and we will take corrective action where we need to.

Okay, very helpful. And I appreciate the reclassification of your operating segments. But just a follow on in terms of kind of your legacy Industrial Services has been a lesser portion of your overall business. Is there still right-sizing and trimming of assets that maybe perhaps you’re not the best owner, help us think about just some of those assets as you look forward for planning? Thank you.

Yeah. So first and foremost, we expect in those businesses that were formerly Industrial Services, we expect some bounce back in fiscal 2022. We’re seeing some of the right types of opportunities as we read the businesses – those businesses from a service perspective. And so we’re optimistic that going forward that we’re not only off the bottom, but we’re coming off the bottom and moving upward in the right direction. Regarding disposition of any of those assets, I would just say that across the entire book of business, that if we need to prune something, we will prune it. And this last year was not the time to prune any of those Industrial Services assets. We will take the time to evaluate that as we move forward to the year and those businesses show improved results. But I would tell you that that holds true for Safety Services and Specialty Services as well. We need to be constantly vigilant and looking at which businesses that we have are going to add to shareholder value.

Great. Thank you very much.

We’ll go now to Jon Tanwanteng with CJS Securities. Your line is open.

Hey, guys, thanks for taking my questions, and congratulations on the nice end to the year. My first one, what are the puts and takes that driving the integration this year with Chubb? I think if I read your prior press release correctly, the upper and lower bounds of EBITDA guidance. I guess maybe what are the gating factors there? Number one. And then number two, if you could talk a little bit more about the upside opportunity. I think you’ve been very broadly positive on Chubb. Do you expect to provide a synergy upwards as we go through the year or maybe into next year?

Hey, Russ, this is Jim. Would you mind if I just jumped in on this because Jon is trying to take your number up. So Jon, as many of you guys have heard and for those that participated in the Barclays and Citi Conference, and as we’ve talked about pretty openly, Russ and the team did not have great access from a physical presence standpoint to get into the Chubb facilities and meet with the Chubb teams. And so while we did thorough and robust diligence, Blackstone had their perspective on integration, algorithm ourselves had their theories on integration. And so our approach to all of this has been let’s get in there. Let’s get our boots on the ground. Let’s remove the theories. Let’s validate integration ideas and concepts. Let’s involve the Chubb team, along with our team. Let’s build an action plan together during the first part of the year. Let’s then assign it projects to people, assign accountability, put incentive plans in place, and begin executing on those in the back half of the year. But make sure that we have ownership of those plans. And we validate them across the entire platform across both sets of teams. And so we have $20 million built in the plan. You heard Kevin and Russ talk about we see incremental opportunities, but we’re going to do this thoughtfully. This is a three-year program to raise margins to 13%-plus. Chubb is part of that. And so we’ll be talking about it. But as you also heard Russ say, Chubb is now a brand where one company, one team and so together we will grow the boat forward. But as Russ has also said, this is a center fairway transaction. And so the things that are going to be the variables are going to be supply chain, inflation, incremental COVID variation – variants and things like that, but that’s life.

Understood, Jim. Thank you

[Operator Instructions] We’ll go now to Andy Wittmann with Baird. Your line is open.

Great, thanks for taking the questions. I guess maybe for Kevin. I mean, you guys – on the margin improvement initiatives, you guys have done, you’ve improved the loss-making projects, the customer selection, there’s various tech points that you guys have laid out over the years about how margins are going to go up. One of them was about putting new back office systems in, get on the same system, get more efficient that way. And I know that’s an ongoing process. So I was hoping you could give us an update as to where you are in that process. And when you expect that IT integration to start delivering towards your margin expansion goals?

Hi, Andy, thanks for the question. Yeah, so as we look at our combined platform, which – so we said last year in our Investor Conference that certainly this was one of the areas that we saw opportunity for leveraging productivity, as we move forward here and to drive continued scale across our business. And certain you refer to as back office functions and/or potentially even procurement and some other areas. As we went through the back half of this year, we put that on hold, really looking at wanting to look at Chubb, too, and look at what we’re doing in the context of those Chubb businesses. And so I shouldn’t even said hold, we pause there, slowed it down as we understood what the Chubb transaction needed to look like and the work needed to look like in 2022. As we conclude on our Chubb planning here in the first half of the year, we are going to turn an eye back to that and look at how we can now build out a back office leverage program that includes Chubb in our legacy businesses as we go forward here. So I don’t anticipate seeing anything on that in 2022. But the work will get back underway in the back half of the year, that should help us as we move forward here.

Okay, that’s helpful. I guess the other one for you, just you gave us all the pieces here walking from EBITDA down to EPS, but just make sure my math is right. It sounds like at the midpoint, you guys are thinking around $1.32 on adjusted EPS. Is that about right with the assumptions you gave us on the breakdown there, Kevin? Or what’s the EPS range that’s implicit with this guidance maybe?

Yeah, for 2022, yeah, we’re at or around $1.30 to $1.33 at the midpoint.

Okay, that’s all I had. Thanks a lot, guys, for your time.

Thanks, Andy.

Thanks, Andy.

This will conclude our Q&A session. At this time, I’d like to turn it back to Russ Becker for closing remarks.

Thank you. In closing, I would first like to start by thanking all of our team members for their efforts in 2021. And I’m particularly proud of the progress that we’ve made in the midst of all the different challenges that the business face. So I’m truly grateful for everyone’s hard work and efforts, but also like to take the opportunity to thank each of you for joining the call this morning and your continued interest in APi. We truly look forward to updating you – updating each of you throughout the year as we continue to cross many, many milestones and drive the business forward. So thank you and have a great rest of your day.

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